Warren E. Burger: We will hear arguments next in 76-539, Dayton Board of Education v. Brinkman. Mr. Greer, I think you may proceed when you are ready.
David C. Greer: Mr. Chief Justice and may it please the court. I am David Greer and I am here representing the Dayton Ohio Board of Education. The paramount issue that we present involves the proper fashioning of an equitable remedy in a school desegregation case. The basic principle is clear. The nature of the violation determines the scope of the remedy. Our concern is with the application of that principle to a case where the finder of the facts determined that only limited segregatory practices exist as opposed to a dual system either mandated or under the keys standards. Our contention is that a system wide racial balance remedy as was mandated here by the Sixth Circuit cannot be justified equitably or constitutionally by such factual findings. Most of the factual contentions that were raised by the plaintiffs in this action were resolved after an extended trial, some five years ago in favor or the Board of Education. Three findings were determined by the finder of the facts that constitutes what it termed a cumulative violation of the constitution. Those three findings were a condition of racial imbalance in the schools of the Dayton system, the rescission of resolutions that had been enacted by a lame duck school board, and the existence of optional zones between certain schools in the system. The Trial Courts specifically found and in its opinion after the first remand in reviewing the keys decision, which came up while this case was in process, specifically found that at no time, did the defendant maintained a dual system of education and specifically found that this case does not involve actions taken on a school by school basis, but rather segregatory practices. The first finding that was made on this case, a condition of racial imbalance does not amount to a violation of the constitution of this country. The finding with respect to rescission of resolutions I think it is clear under the ruling of the Sixth Circuit in the law in this area can only be considered a violation of a constitutional duty to the extent that a constitutional duty to act existed at the time the original resolutions were adapted.
Speaker: Do I understand that you are saying, the finding that there was a lack of racial balance that is the schools if not each reflect the total composition of the community is an erroneous finding. You are attacking that finding are you?
David C. Greer: No, Your Honor, I do not mean to be understood. There is no question it was conceded at the outset that there is racial imbalance in the schools in the Dayton system. The issue is that the racial --
Speaker: You are attacking the conclusion that close from was from that finding, namely the constitutional violation?
David C. Greer: And it is clear under the case law that it is not a constitutional violation unless that condition exists because of intentional segregatory acts of the school board and the finding in this case was simply that there was a condition of racial imbalance and that it was consistent with the disbursement of the population in the Dayton area. In other words, the evidence referred to actual census tracks as to where the populations where located and that Trial Court specifically found that the racial imbalance that existed in the Dayton Schools reflected exactly what the residential racial imbalance in the community was. I would also point out in this regard; the court’s findings and they were facts that were as indisputable as the racial imbalance in the schools that the boundaries of the various schools in this area had seen no modifications to amount to anything for a period of some 20 years before the suit was filed. And that as the population in the Dayton area moved so changed the percentages of black to white students in the various schools serving the residential areas. What the point that I want to make with regard to the three findings in this case is that there is only one of those findings that is standing alone could be considered a violation of the equal protection clause of the constitution. The cracks or the keystone of the findings of fact in this case was the finding with respect to optional zones. Small areas between two schools where a student living in the area would have an option of going to either of those two schools. The findings of fact here were those optional areas and there were some 150 of them at one point in the history of the school were generally placed there because of the choice of walking one more block to school as opposed to going over railroad tracks or wolf creek or what have you. The court did find and mentioned four out of all these optional zones that may have had, I think was the court’s phrase, some racial significance at the time of their creation. The court found as a fact that the majority of these zones had no racial significance as the time of their creation and it further found that none of the elementary school optional zones had any racial significance of any kind at the time this lawsuit was filed. That left three of the four optional zones mentioned by the court as having any racial significance at the time of the filing of this lawsuit and as set forth in our brief and I will not try to go through all the factual arguments here or the factual findings, it is clear that the effect of these three zones which were high school optional zones was limited and minimal. The reason we are here before you this afternoon is that these factual findings have triggered off a system wide remedy in the Dayton School District by which each and every school in the system is required to reflect the system wide racial balance plus or minus 15%. In the brief which we filed, we were confident enough of our position to state not only that the remedy here must be rewritten, but also that the only way that the plaintiffs would hope to avoid a rewriting of the remedy would be to rewrite the factual findings and I submit that is exactly what this court has been requested to do in the various briefs that had been filed in opposition to our position. The plaintiff’s brief tacitly concedes our position. It does not attempt to justify the system wide remedy on the basis of the facts that were found. First it attempts to stretch the factual findings beyond their evidentiary content and second, the challenges, the failure of the Trial Court to adapt the plaintiff’s position on the other factual issue is presented. The Justice Department’s brief in a more straightforward manner explicitly and expressly concedes our position. The brief says and I have to quote to you because if I have to quote somebody, I like to quote my adversary when I can.
Byron R. White: If the brief was not the fact?
David C. Greer: The brief agrees with us that the three part cumulative violation that the court found would not support the remedy that --
Byron R. White: And the agreement ends there, I think.
David C. Greer: Then we get down to the point of rewriting the facts Mr. Justice White, and I would proposed to the court four separate reasons why you should not succumb to the temptation if it is a temptation to adapt that kind of an argument establish a whole new brand of law in this area and in essence what I think these four reasons should satisfy you, I hope is that you should accept the facts as found by the trier of the facts and adjust the remedy rather than accepting the remedy and adjusting the findings of fact. First, I would submit that the facts in this case, including the fact of a non-dual system and either the statutory or the key sense of the term have been determined as the law provides they should be determined and no appeal was taken by the plaintiffs from the Trial Court’s findings as to a non-dual system. Secondly, I would point out that there was not finding of intentionally segregative school board actions in a significant or meaningful portion of the school system and that there was therefore no basis for shifting the school authorities the burden of proving that racially imbalance schools within the system were not the result of intentionally segregative actions.
Byron R. White: What if we disagree with you on that?
David C. Greer: If you disagree with me I think you.
Byron R. White: Only on that particular point.
David C. Greer: On that particular point?
Byron R. White: Then what?
David C. Greer: That is the question of was it in a meaningful or significant section of the school then there would be a shift of burden and I think my response to that would be clear and that is really my third plight here, and that is that even if the burden were shifted, the school board did not sit silent through this three or four weeks of hearings. We did present evidence on each of these issues that was presented and the facts in the record, support a finding that even if the keys presumption had been called into effect of the presumption is after all a rebuttable presumption and the Trial Court found that the arguments that were made should be rejected and that the racial imbalance in the schools in the system was not the result of intentional segregatory actions by the school board.
Byron R. White: Would you think the United States challenges the rules of law applied by the District Court or the Court of Appeals?
David C. Greer: As I understand, the Justice Department’s position which I must confess I received in the fifth day of a trial that I am presently engaged in, in Cincinnati, after completely agreeing with all my position in this case, they would ask this court to look to the record making all new finding of fact, which is contrary to the findings of fact that has been made, taking historical practices that exist or historical situations that happened in 1926 or in 1933 and then by some leap of logic presumed by that there was in fact a dual system in Dayton as of 1954. This gets into a whole lot of factual arguments which has been made and I might find out that today, we did file with the clerk to supplement the record the brief that we have filed in the Sixth Circuit on our initial appeal in this case where we went through those facts.
Speaker: You meant three of your reasons, did you get to your report?
David C. Greer: I have not gotten to it, but I will do that right now, Your Honor. The fourth reason and I think this is as good reason as the other three is that if the remedial goal in a suit of this nature is as this court stated in Milliken to restore the victims of discriminatory conduct to the position they would have occupied in the absence of such conduct. A system wide remedy is inappropriate whereas here in Dayton, the evidence establishes that the racial composition of the schools reflected the changing racial composition of the neighborhoods that were serve by those schools and the attendance zones and boundaries of these schools met with no significant change over the 20 years that elapsed before the suit was filed. I submit to this court and anybody else who wants to ask me that there would have been no difference in the composition of the schools in the Dayton School system at the time this lawsuit was filed, regardless of how any act in 1926 or practice in 1933 or finding a fact in this case with regard to optional zones is characterized. Just to be specific on that point, the schools in the Dayton system as of 1954 when the Brown case was decided consisted of four schools that were composed of an entirely black student population. 24 schools that had a mixed population of black and white students, and 21 of white schools. During the 20 years that elapsed before the filing of this suit were no significant boundary changes and the schools needs various mixtures were affected only by population change. There is a little pocket in the eastside of Dayton, the Washington Elementary School serves that area and the composition of the student body in that school has been somewhere around 23 or so percent consistently through this entire 20-year period. Other schools during these 20 years were entirely white in their student bodies at one point or mixed at one point, and as population shifted, the composition of the school shifted. So that by the end of the period, certain schools were predominantly black and you can list them. So that this is my fourth point that I would present to the court that if the purpose of a remedy in this kind of a case is to restore a condition that would have exited but for constitutional violations, there is no basis here for a system wide remedy. Now, I am sure the court is going to have a lot of questions for me as well as for my opponents, those are our four main answers to what has been an effort as I see it to try to persuade this court to rewrite the facts. I do not think that is a request that should be accepted by this court. We are not here, it seems to me to determine the correctness of the Trial Court’s findings. What we are here to determine is to whether the findings of fact that had been made in this case support the remedy that has been imposed. It seems to me what the Department of Justice and what the plaintiffs in this case are asking is that this court designate itself and the Circuit Court of Appeals as fact finding commissions in every school desegregation case that is filed, that I submit is not a proper appellate function and that is, I submit the job of the prior of the facts the Trial Court who has the opportunity to develop those facts on a witness by witness basis through the pressure of cross examination and through examination of the witnesses. Now, as far as the historical facts that are attempted to be put together out of a cold record in the brief that was filed by Department of Justice. I would submit that those facts simply leave great logical gaps that were filled in at the trial of this case. There has not been any instance cited to this court because there is none available for citation where a student in the Dayton School system was ever excluded from any school because of his grades. There was an instance back in 1926 when a group of students at an Elementary School Garfield were taught in a separate building behind the main school that was a subject of a suit in 1926 and that practice was eliminated and that practice existed and was eliminated some four generations of students before this case was filed.
Speaker: Mr. Greer, you told us at the outset the three facts on which the District Court found a cumulative constitutional violation. First, the fact that the schools were racially imbalanced, the individual schools, two, the rescission of the resolution and three, the optional zones. And you submitted to us that the first and the second were not in themselves constitutional violations. What did the Court of Appeals of the Sixth Circuit say about the first and the second?
David C. Greer: They said essentially the same thing. They affirmed the finding that there was a cumulative violation.
Speaker: How can it be cumulative if there is only one?
David C. Greer: Your Honor, I am lost in that somatic problem myself, but I gathered that the sense in which they use the term cumulative is that the innocuous fact of racial imbalance coupled with an optional zone that could aggravate that racial imbalance between two schools when looked at together or cumulatively could be considered a constitutional violation. I think that is the sense in which the court meant to use that term. I think that makes some sense.
Speaker: And you concede, you tell me if I am mistaken in my understanding. I understood you concede that the optional zones at least some of them, with respect to some of the schools, some of high schools could validly be found then violated the Equal Protection Clause of Fourteenth Amendment.
David C. Greer: We are not challenging the findings of the trier of the fact which is the law, in the law. That is true. Our position is and we have set it forth in the brief there was only one of this that amounted to anything at all if you take the tables that are attached in the appendix as to the populations of these various schools. You will find even that optional zone which was between Roosevelt and Colonel White High Schools and existed essentially unchanged during this period, except for the addition of two city blocks at one point affected something like ½ of 1% or 1% of the black students in the entire system.
Speaker: So you do not concede that the optional zones which concededly violated the Equal Protection Clause resulted in this racial imbalance.
David C. Greer: We certainly do not concede but I think I have fly in the face of the record to suggest it Your Honor. I have reserve some time for my rebuttal if I may and I would like to take that time now. I just like to say one more thing with respect to the optional zones. The finding of intent here which we concede and then do not argue was that while most of these optional zones were placed there out of perfectly honest and neutral considerations. For example, if you even take the one that is the problem, the one between Roosevelt and Colonel White, we have got the Dayton Tire & Rubber Co. who we have got wolf creek, we have got railroad tracks, and we had it one time this Dayton stockyards that presented some problem for children going to the closer of those two schools. But the court found that in determining the optional zones, the school board did take into account feelings of the community whether they want it or not and in that respect, some insidious intent may have crept into the decision in these few zones. And certainly, what we do not concede is that there was any meaningful or substantial portion of this district effect.
Speaker: Well that would affect at the most in your submission the racial makeup of the student body in no more than two high schools.
David C. Greer: Three high schools.
Speaker: Three high schools.
David C. Greer: Because there is also the High School Kiser involved in another one of the optional zones where there was a finding.
Speaker: There is a Dunbar in there somewhere in there?
David C. Greer: Dunbar was an optional school which was not involved in this finding. Dunbar bar at the time of the suit was filed had its own district just like any attendance, boundary, just like any other school. There was a time when Dunbar was an optional school in the sense that any black student living anywhere in the city could have his choice of attending either of the school in his area or Dunbar High School.
Speaker: When did that practice cease?
David C. Greer: 1962, I believe it was.
Speaker: How many high schools are there in the Dayton School District?
David C. Greer: There are 10 at present.
William H. Rehnquist: What is the population of Greater Dayton? Does the record --
David C. Greer: I will probably be assassinated by the Chamber of Commerce if I concede that the population of Dayton changes by whatever means that they use to assess it whether it be the 90-minute marker or the exact boundaries of the city. The school population is at this relevant time set forth in the appendix and I will have to check it or use my brains that is either table here to give it to you precisely.
William H. Rehnquist: Where you served with the copy of the motion for leave to file a brief amicus?
David C. Greer: I received it in the middle of an opening statement last Friday Your Honor, yes and have no objection to their filing of amicus brief.
William H. Rehnquist: It is late you know.
David C. Greer: I realized it is late and I have not had a chance to --
William H. Rehnquist: So you do not oppose this?
David C. Greer: No, I do not oppose it.
Warren E. Burger: Mr. Lucas.
Louis R. Lucas: Mr. Chief Justice, may it please the court. Answering first the question Mr. Justice Rehnquist, I believe the population at least the biggest we had in our brief is 250,000.
Speaker: Does that go outside of Montgomery County at all or is it well within Montgomery County?
Louis R. Lucas: I believe the City’s attorney within Montgomery County, Your Honor.
Speaker: So how about the school district?
Louis R. Lucas: School district does go beyond the limits of the city, but not beyond the limits of the county.
Speaker: And there is 250,000 population figure you gave us was what for the school population or the total population of the school district or the population of the city?
Louis R. Lucas: That is the City of Dayton.
Speaker: From all ages and sexes?
Louis R. Lucas: That is correct, the pupil population is 45,000 people, slightly less than 15% of them were black. Our argument to this court is really in two basic parts. There was in Dayton, Ohio in 1954, had the jury segregated system, a dual system and that pre-round dual system was never dismantled until the district court finally ordered a system wide plan of non degradation.
Speaker: The District Court find to the contrary? I found that there was not a dual system I thought, as a fact.
Louis R. Lucas: Well, I think that the district courts, definition of dual is probably relevant and its definition is as suggested by the defendants and we have referred to it in our brief what they suggested was in order to have a dual system, it had to be required by state law.
Speaker: Well, did not the district court find that there was not a dual system?
Louis R. Lucas: I think in that context, yes he did Your Honor and I referred --
Speaker: Is not broader than that?
Louis R. Lucas: Yes sir, I think that the --
Speaker: It did not, they really find that the dual system had been dismantled?
Louis R. Lucas: Your Honor, I think you have to distinguish here between the facts that we are in dispute and called for the district court to resolve and the facts which were not disputed and which during this lengthy trial, that has been referred to, were not contested in anyway. There was no evidence offered to the contrary and if I may just quickly summarize --
Lewis F. Powell, Jr.: May I just ask quickly Mr. Lucas? Dayton does not object to the filing of this brief amicus by the United States, do you?
Louis R. Lucas: No, Your Honor, we do not. In Dayton in 1954, you had five schools to 100% black. There was the Garfield School, which we detailed, its establishment and which was not controverted at the trial. Garfield started out with the black, white students in a backroom and then in an annex in back when the black population grew, the Garfield School was converted. Whites were signed out and the faculty was flip-flopped in classic style so that it was all black. During that period of time, while there were black students in separate rooms in the Garfield school are in the annex and black teachers were not permitted to teach white children. That was the expressed stated policy which was a change from the previous policy to Dayton Board, which was not to hire blacks. That too, is not in dispute.
Lewis F. Powell, Jr.: What year was this?
Louis R. Lucas: That school was established in 1912, I believe and it continued forward Your Honor.
Speaker: And you are speaking as of 1954.
Louis R. Lucas: As of 1954, that is correct.
Speaker: So your response to Mr. Justice Powell is 1954.
Louis R. Lucas: It was a 100% black, but it is our -- go forward. The Will School is again another school where the black population increased, where black teachers were not permitted to teach white children and when a sufficient number of black students was in that school so that it became crowded in terms of black. Enrolment the white students were signed out.
Speaker: Can you give us some focus us to time and also as to when these particular events took place?
Louis R. Lucas: Garfield and -- well they are in the brief Your Honor, I am sorry I do not have the hand along that.
Speaker: Do you speak of 1954 or 1975?
Louis R. Lucas: I am saying these schools existed in 1954, but how they got to be black schools is detailed in the record and not controverted. There was no testimony that the flip-flopped of faculty did not take place. There was no testimony that the black annex out in back did not exist and the testimony by live witnesses who were in those schools when Ms. Lewis troy testified she had been in the system as a teacher for 40 years and never permitted to teach a white child.
Speaker: How many courts have intervened since then, that is in this case. You have had three district court opinions, had there been?
Louis R. Lucas: Well, include all the orders; I suppose four or five orders that are in the record. There are two really opinions and the third ruling on remedy after the second remand from the Court of Appeals. What I am saying to the court is that these matters were not in dispute. His counsel states at the time of Brown, there were the black schools. Now in Wagaman, this school in 1945 was built in conjunction with the Desoto Bass Housing Project which was a black housing project. The Dunbar School which has been discussed was in existence as a high school through 1962. Now it served more than the traditional high school grades, various times it served grade 7 through 12. That school had a black faculty assigned to it and now the Dayton’s rule, black teachers could not teach white children, so it was a citywide dual overlapping and again that was not contested and it set forth in the opinion of the District Court.
Speaker: Was that true at the time this lawsuit was brought?
Louis R. Lucas: That was true at the time of the lawsuit was brought with respect to a new school in Dunbar, that the old Dunbar School was closed in 1962 changed its name and became McFarland and at that time, two of the previous black elementary schools in that area were closed and those two schools were closed. They were assigned to the McFarland, which was the old Dunbar High School, a new Dunbar --
Speaker: This suit was brought when, 1971?
Louis R. Lucas: Yes, that is correct Your Honor.
Speaker: And at that time -- just want to be sure, are you telling us that at that time this suit was initiated, Dayton was operating in a dual school system in terms of racial segregation?
Louis R. Lucas: That is clearly our position, Your Honor.
Speaker: The District Court found that it was not, did not it?
Louis R. Lucas: I think the district court used the term dual in terms of mandate and segregation you have to consider the position taken by the defendants and I think the understanding of the District Court of that word dualism. The defendants argued in the court of appeals in the first appeal that the brown one duty applied only to those school districts where a dual system was compelled or authorized by statute and has the lack of ability where a statutory dual system has never existed. That was the context that the district court was talking about dualism.
Speaker: Well was it, are you telling us that 1971, at the time this litigation was commenced that the black teachers were not allowed to teach white children?
Louis R. Lucas: No, Your Honor, that was changed as a result of action taken by HEW where it vies the district that they had racially motivated assignment of teachers and staff; and an agreement was ultimately worked out and resulted in reassignment of faculty.
Speaker: Here is, as we have been told as I understood it in reading the briefs that there were three facts found as accumulated constitutional violations. One, racial imbalance in the schools as de facto; two, the rescission of a resolution by the school board, and three, certain optional attendance zones and in some of the high schools. But those were the three, you are telling us, do I misunderstand it that there were really in fact many, many more.
Louis R. Lucas: I like there were many more facts found and I think some of those facts go to make up the pattern of racially identifiable schools that the District Court noted and --
Speaker: But they were racially identifiable schools in terms of some of them being maybe all black or predominantly black and others all white or predominantly white, that is not argued about, I understand.
Louis R. Lucas: Well, it is our position I think the records are undisputed that those schools as of 1954 --
Speaker: No, were talking about this litigation.
Louis R. Lucas: At the time of trial. Your Honor, I think both in 1954 and we had a trial.
Speaker: Well, let us just confine ourselves to this lawsuit. Lots of things went on and --
Louis R. Lucas: I think this lawsuit at the time of trial we had unremedied pre 1954 violations and a dual system which both the duty on the school board from that point forward to disestablished the segregation that was expound at that time, we have continuing --
Speaker: But the District Court did find and yet Justice Stewart has asked you this twice and I still do not have your answer to it. The District Court did find that Dayton did not have a dual system, did it not? You are perfectly free to qualify your answer or respond anyway but surely you can give a yes or no answer.
Louis R. Lucas: Yes, Your Honor, the District Court did use those words and I think that that was it meant as I have already explained Mr. Justice Stewart and I did not mean to --
Speaker: What I understood you to say before, what was meant was a statutorily required dual system? I thought what I said was no dual system, that is what they were talking about.
Louis R. Lucas: That is correct, Your Honor.
Speaker: Is that what you meant?
Louis R. Lucas: That is exactly what I mean and I think that is exactly what the District Court was talking about, since that was the dispute.
Speaker: But there was in fact a dual you were saying.
Louis R. Lucas: That is correct.
Speaker: You said it was dual school system but it was not required by any statute or any law of Ohio. Is that it?
Louis R. Lucas: That is precisely.
Speaker: Well, there is no law since have ever, but certainly not since before the Civil War.
Louis R. Lucas: Then our position and that is why we did not understand the argument was constantly presented by the defendants that Brown Standards did not apply and could not refer to any of the Brown Cases in analyzing the facts in Dayton and applying the legal standard to those facts because there was no statutory dual system. We do not see that that is the law or correct application of it. If I may, the 1954 in addition to Dunbar as a citywide school, you have the Miami Chapel School, which was established in 1953. It is undisputed in this record that 1953, the Miami Chapel School was an all black school. So that you have a discreet un-contradicted policy of racial assignment of faculties that applied to every school in the system, that was system wide segregation. We had a system wide high school, a dual overlapping high school zone and the classic predation of blacks at Dunbar and also in 1952, reorganization, which is characterized in this record as the Westside Reorganization, there you had an expanding black population. In order to provide school space for that population, the defendants contracted the boundaries of the original black schools that made them tighter boxes, locked them in to those boxes and expanded the boundaries of the periphery schools, which already have substantial black enrolments inward to give them a larger share of that black population. At the same time, they cancelled their open transfer policy, which had permitted whites to get out of any situation where they did not want to stay, but instead substituted for it a series of optional attendance zones around the Westside stools on the white side of the periphery allowing whites to get out of those schools. Simultaneously with that and in the context of their policy on faculty, they began assigning black teachers to those schools, so that those schools eventually became identified as the new black schools.
Speaker: And when was this?
Louis R. Lucas: This happened in 1952, Your Honor.
Speaker: Are not we really concern about what the facts were in 1971, when this lawsuit was brought?
Louis R. Lucas: Your Honor, the facts in 1971 are a product of what happened in the establishment of the central black core.
Speaker: Well, least of this as a product of his heritage and of his environment whether it would be a human being or a societal entity, but we are concerned here with what the facts were in 1971 when this litigation was initiated, are we not?
Louis R. Lucas: That is correct and at the time of trial Your Honor, the Dayton Board had just ended as of 71 the racial assignment, racially motivated the assignment of faculty to schools, however, the effects of that racially motivated assignment still persisted because schools were still identified as white or black. At the time of trial, we have 69 schools, 49 of those schools were 90% of more black or white, there are 21 black schools and 28 white schools.
Speaker: Does not your black and white school argument depend on an underlying finding that there was a dual school system?
Louis R. Lucas: I think what is required is the finding that there was a pattern of the jury segregation and at the time of Brown or thereafter, or that the segregation that existed pre Brown, at the time of Brown and throughout this period has detailed and far more detailed than I can in this argument. Whether or not that affected substantially the districts so as to shift the burdens of it to go forward and demonstrate that the segregation is not its responsibility and I do not think it meant that burden.
Speaker: Was there anything unconstitutional as such I would say in 1926 about the school board’s segregating on the basis of race?
Louis R. Lucas: Yes, Your Honor there is because if it were not then in 1954, no school district can in the south which had segregated its schools pursuant to state law are in no pursuant to its own will. It was not defaulted at that same school remained in all black school in 1971 as it did when this --
Speaker: Well, but the law is requiring attendance of only one race to school would certainly be struck down by Brown.
Louis R. Lucas: That is correct. That the fact that it was done in 1929 whether it was done by the action of the school board in segregating that school in assigning students in a manner which created forcibly the segregation in that school would not be excused by the fact that it was done in 1929 if the effects of the original assignment persisted today.
Speaker: But you said then the act in 1929 was illegal and the school board in fact should have foreseen that 25 years later, Brown would have overruled Plessy.
Louis R. Lucas: I think that the action of the School Board in segregating students is illegal, but it was done in 1929 or 1971 or 1977. I think that is the teaching of Brown. I think that is the application of the Fourteenth Amendment. Otherwise, everybody who had acted before Brown is excused. I would like to detail if I can since I think it is particularly important in effects the district in the system wide way the facts with respect to faculty in the changing policy. The 1952, Board changed its policy only slightly, but did so in such a way I think to further maximize the racial insult of that policy. What it said was is that some whites reassigned to Negro schools where they previously were only Negro teachers, but there would be no assignments of whites to those schools against their will. Said that Negro teachers would be mixed in white schools, only where the whites evidence that they are “ready” to accept Negro teachers. That policy persisted in Dayton effectively until the 1969 agreement with HEW which went into effect in 1971. That is what system wide historic policy that is not disputed was intentional affects the ratio identifiability of every school in the system, it affects the kinds of decisions that were made and it is the exact environment for segregation that this court has talked about in Swann. The government argues and I think it tracks the argument in our brief that there are a number of undisputed facts in the record. In addition to the three specifics, whether they would be stated in summary form or be limited to just the words as they appear and I think you can, I think district judge was talking cumulatively and I think the Court of Appeals was speaking in general terms, not as precisely as this court might like or we might like, but nevertheless plaintiff.
Speaker: Do you agree with the government’s brief?
Louis R. Lucas: Yes, we do Your Honor.
Speaker: So are you disagree with the Court of Appeals?
Louis R. Lucas: We think that the Court of Appeals was not as precise as it might have done and all we think the Court of Appeals.
Speaker: What do you mean by that? Do you agree with it or do not you?
Louis R. Lucas: Well, I think that the Court of Appeals decision is --
Speaker: Well, I will put it this way, do you disagree with the Court of Appeals as much the government does?
Louis R. Lucas: Not as much, Your Honor because we do not read them --
Speaker: When you do not agree with the government?
Louis R. Lucas: I think it is a matter of emphasis, Your Honor. We agreed basically with the government’s position. What we do not agree with is that the Sixth Circuit misunderstood the facts and the record that was before them, the arguments that was presented, and thought that they were only ruling the ratio and balance.
Speaker: For you to win here, do you have to convince us that the Court of Appeals misunderstood the facts?
Louis R. Lucas: I do not think I have to convince this court that the Court of Appeals misunderstood the facts. I think for us to prevail, we have to show that the judgments and not all the language or all the reasoning of the Court of Appeals that the judgments they made are supported by the record, the undisputed evidence and the facts that were found by all of the courts below. I think the Court of Appeals has reversed the District Court and so far as the District Court thought that dual meant state imposed, or that they was not the jury segregation because the Court of Appeals spelled it out. They thought clearly enough when they said look, when we were talking about segregation , we meant the jury segregation, they said that on the segregation.
Speaker: You are disagree with the Court of Appeals to some extent? You think they apply the wrong legal standard?
Louis R. Lucas: I think they did not articulate the legal standard or the full basis for their opinion as clearly as they might and I think that is what the government is saying.
Speaker: Well, let us assume for the moment that the Court of Appeals did not articulate the right legal standard or view the facts in the light of the right legal standard. If we agreed with you, would not it normally we say what the right legal standard is and remand?
Louis R. Lucas: I think that the District Court --
Speaker: Would not we normally do that?
Louis R. Lucas: I think that normally, the Court of Appeals has applied the wrong legal standard thus vacate and remanded for applications correctly will stand in. I do not think that is what happened, I think what the Court of Appeals did was fail to spell out in detail all of the basis --
Speaker: You say they did apply the right legal standard but they did not spell out how they did it.
Louis R. Lucas: They did not articulate it as clearly.
Speaker: And they did not understand the facts very well, I think.
Louis R. Lucas: Well, I think they understood the facts very well. I think they have felt that it was not necessary to spell out everything that was admitted in request for admissions or everything that the parties were not in dispute about and therefore required no adversary findings by any court. I think that the record overwhelmingly supports it, and as the government points out, you are not going to get a stronger set of facts in a non-jury state if you will upon which District Court conveys a judgment. I think that the Court of Appeals has rendered the right decision and I think that any arguments that sort of plan is a racial balance plan falls on the face of the facts. We have the terminology problems, the District Court, or the Court of Appeals may have had, they do not support a finding that there was racial balance argued. It seems to be a problem if a district judge puts in his opinion a number today other than the page numbers at the bottom of the page then he is accused of watering racial balance and I do not know what they can do because a balance is between a 1 and 100%, and if they do not give some guidance to the school boards, the school boards come back and ask for them. They ask for some outlines, some parameters and the figures used here are not pulled out of the air, they are not some professes theory, they are based on the facts and the system and incidentally, the plan actually ultimately ordered by the District Court is quite similar to the plan adapted by the regional board before the new board came in and cancelled it. This is five years of litigation to get the plan that the Dayton Board have to studying itself and Board Members admitted the violations and the admissions are not out of whole clause. There is a basis in fact for those admissions and for us to say that has no effect, no probative value is to say that because a new board comes in then whatever the old board admitted, whatever statements they made, whatever policies they play, have no effect and I think this court’s opinions teaches otherwise.
Speaker: Mr. Lucas, is this decree of the District Court -- who was it, Judge Rubin?
Louis R. Lucas: Judge Rubin, yes sir.
Speaker: Provided that they are not being more than 115% deviation in any school.
Louis R. Lucas: Plus or minus, it is really 1/3, 2/3 range and the actual operation of the plan ended up with the broader range and we specified these statistics. I think it is 44% either way. But as I say, 1 to 100 is a range too.
Speaker: It certainly is but basically it was a 15% plus or minus in any school.
Louis R. Lucas: That was the target, the guideline to start with to work from.
Speaker: And as of a particular precise date or time, there was no continuing.
Louis R. Lucas: That is correct as a matter of fact, the Court of Appeals cautioned against any such interpretation even though they found no basis for the defendants suggestion that court had ordered some sort of annual adjustments are constant supervision by Federal Court. And Judge Rubin was very careful to tell the board if you have got any changes you want to make, you have got any problems, you have got any schools, you think should not be included in this plan, you have any practical problems, you come and show me. It was no such sensitive motions that are resided in the record most of which the court went along with. The only thing he did not go along with was allowing the board to delay these segregation another three years who face it in and I think that is entirely proper and consistent with the record.
Speaker: The decree did not provide or envision periodic review to maintain this sort of school population.
Louis R. Lucas: I would say that the District Court in this case was extraordinarily careful to say he did not want to be superintendent. He went out of his way to tell the defendants that they were going to run the schools and that he specifically said that he did no require them to maintain something now and forever or for his lifetime. There is no such problem in this case and I think he needs suggestion based on this record is just out of board. It just does not fit the facts.
Speaker: Do you think the racial balance 15% plus or minus is compatible with the standards laid down in Swann and reasserted in the first Milliken v. Bradley case?
Louis R. Lucas: I think the starting point which is all it is, is appropriate. It is no different as we compare it to the starting point in Swann and actually it permits and resulted in a broader range of assignments.
Speaker: When you say racial balance, 15% plus or minus, that does not sound like the starting point that was dealt within Swann. That sounds like the targets, does it not?
Louis R. Lucas: Well, I think we have basically a question of somatic. The District Court did not say, if it ever gets beyond this point, you have to come back to 15%, he just said look, this is a guideline, this is a starting point and as a matter of fact in his last two opinions, he specifically refers to the Swann language. It is not a case, he simply was not aware of it. He specifically referred to the Swann language and cites it in a lengthy footnote I believe in the second opinion. So he knew this court’s rule and I think he faithfully adhered to it and the working out of the plan is really the best proof and I think that is what this court said in Swann. I think this court said, if we thought that the court ordered an exact ratio, then we would strike it down and I think that is proper. I said, we look and see what happen and what the district judge has done and let us look at reality. This is a desegregated school system. It is by no means racially balanced. The facts are before the court and I think that the district judge is not in anyway suggesting some sort of annual reviews or fix adherence to a rigid racial ratio.
Speaker: Now, let us go back to Swann a minute and Swann as I recall the figures at least 71:29 and at the earliest stages of the litigation, this was identified as the problem. In the Swann, opinion the court said that if we thought he had said there is a target to achieve 71:29 that being the ratio or the population of the entire school system, we would reverse if there is no constitutional requirements to do that. Now is that relieved when you say 71:29 that you can deviate 15%?
Louis R. Lucas: I think all that district judge is really saying Your Honor, and is candid the way as possible and I think the parties understood it this way, is, look, if you get in the range you are going to be presumptively okay. You get outside of that you have got a problem what have you, what he was trying to do was eliminate a pattern that substantially disproportionate schools. And if you are talking about disproportion of schools rising out of constitutional violation then you have to have some measuring stick, and every school board I might add Your Honor (Inaudible) Swann. So they can have a target for their planning. Now, when you talk about working it out with buildings, with different capacities, with different enrolments and different grade levels, it never comes out that way. We say in our brief what we have is not racial balance. We have typical desegregation and it is working in Dayton. There are no headlines about Dayton. I think the school board has done a good job in trying to make it work and there are an awful lot of people in that community with the commitment to making it work and that is why you did not read about it in the headline. You did no have a lot of political posturing and posing. I think there is enough criticisms of school boards and when they do it wrong, it need not to be said, need not to be said by plaintiffs when they do it right as they finally did here.
Warren E. Burger: Do you have something further, you have a few minutes, six minutes left.
David C. Greer: Thank you.
Speaker: The optional zones have sometimes been referred to as a freedom of choice policy. In the early years after Brown as I recall that policy was thought to be compatible with the constitution. Do you recall when the Court of Appeals held for the first time that the policy was not valid and if you do, can you relate that to the creation of the optional zones involved in this case?
Speaker: I wish that I could and specifically I cannot, it has been a factor that has been involved in a number of cases the Detroit case comes to mind although it was merely one. There were much more serious situations found there.
Speaker: Excuse me, I thought the Green was placed.
Speaker: Thank you, right -- I think you are correct.
Speaker: I think Green was the first case of this court but my question was directed to the total field’s level.
David C. Greer: I cannot take you back past Green, I am sorry.
Speaker: Do you know whether any of these optional zones were created after Green was handed down in 1968?
David C. Greer: No, these were all prior to that time. A few points that I would like to touch upon that I think are responsive to points that were raised in Mr. Lucas’ argument. First of all, to be precise the date the suit was filed was in April of 1972 rather than a 1971. In fairness too, the finder of the facts in this case, I would like to have it clear on the record as to what his finding was with regard to a dual system. I think there was some question raised as to whether he had some mental confusion and was thinking of dual systems solely in the conducts of a statutory mandated dual system. I think you will find that it is clearly not the case and I would refer you to pages 75 and 77 of the Appendix where he specifically talks in one paragraph about a mandated dual system in the statutory sense and then goes on in another paragraph to talk about what we are talking about is activities that were segregative and that at no time, was there a dual system of education maintained, and on page 77 he again distinguishes, we do not deal with a mandated dual system and we do not deal with actions taken on the school by school basis, i.e. a keys type.
Speaker: Where are you now 77, and 78?
David C. Greer: Page 77 of the first volume of the appendix in the third paragraph. Now as to the situations that were cited as to Garfield and Willard you will find that the dates there are 1926 and of 1933 I believe it is. As far as assignment of black staffs, those events did occur at these schools after the schools had become black in their composition as far as the student composition was concerned, those events were 1936 for Garfield, 1936 for Willard and 1945 for Wagaman. Long, long before this and as far as the assignment of faculty is concerned that had nothing at all to do as the plaintiff’s own expert Dr. Green testified with the community perception of the schools and of course all occurred several generations prior to the filing of this suit. The policy is the teachers changed in 1950 and white teachers began to be assigned to black or mixed schools. There was a whole change in this policy until the year before the suit was filed. The faculty and the entire Dayton school system was balanced in a system wide ratio basis in all of the schools and a year before the suit was filed. I do not have time, I realized to go step by step through the intent. I would encapsulate it with Voltaire's (ph) axioms that history can be defined as a bag of tricks played by the dead upon the living. There was no trace of any of these practices at the time this suit was filed nor if we go back and inquire into intent as far as these various practice were concerned, was there any insidious intent at the time the practices occurred nor did any of them result any exclusion of any children from any school because of their race?
Speaker: Mr. Greer, the District Court’s decree has been effectuated and is now operative, is it?
David C. Greer: It is in effect.
Speaker: In other words, there was no stay in this case.
David C. Greer: No stay was granted.
Speaker: And what was the date of the decree?
David C. Greer: The decree was dated last March. I believe it is the date and then affirmed by the Sixth Circuit in June.
Speaker: So this is the first school year which has been effectuated.
David C. Greer: And I think Mr. Lucas is correct that the community here has done a commendable job. I do not think that is necessarily any reason to say that this plan is justified by the --
Speaker: Oh certainly not a reason for you to lose your case.
Speaker: Mr. Geer, precisely what relief do you ask?
David C. Greer: The relief that I ask in this case is that is I think I stated on the last page of my brief, I think at this point, this case should be dismissed that the violations that were found to have been occurred have been corrected. There are no optional zones in this system. The schools that were affected by those zones have either been eliminated or they have been structured so that they reflect the system wide racial balance. I think the school board should be free at this point to decide what additional programs they should retain, or reject, or modify in their attempt to make this a fine school system.
Warren E. Burger: Thank you gentlemen. The case is submitted.


Warren E. Burger: We'll hear arguments next in number 561, United States against Naftalin. Mr. Shapiro, I think you may proceed whenever you're ready.
Stephen M. Shapiro: Mr. Chief Justice, and may it please the Court. This case is here on the Government's petition for certiorari to the United States Court of Appeals for the Eighth Circuit. The Eighth Circuit set aside the District Court's judgment which had convicted the respondent on eight counts of securities fraud under Section 17 (a) (1) of the Securities Act of 1933. The question presented in this case is whether Section 17 (a) (1) prohibits frauds practiced by customers on their brokers during the course of offering or selling securities. We contend that Section 17 (a) (1) applies to all frauds occurring during the process of offering or selling, including those frauds that injure brokerage houses. The facts of this case can be summarized rather briefly. In July and August 1969, the respondent placed sell orders with five different brokerage houses. Those orders in each case were for large blocks of either 500 or 1,000 shares of securities. The respondent had cash accounts with each of these firms and was not permitted to make short sales. In each of the sales, he either stated affirmatively that his position was long or he used words or phrases which would indicate that his position was long. In fact, however, respondent did not own any of the stock that he sold. His position was short rather than long, contrary to his representation. He planned to buy the stock at some later point in time in the declining market and to make a delayed delivery to the brokerage house. His profit would be the difference between the price at which he originally sold and the price at which he later covered. But contrary to his expectations, the price of all of these securities went up substantially and he was unable to make covering purchases and for that reason he never delivered any of the stock that he sold. Under the SEC's rules the brokers were required to cover for respondent's sales. At first when they were still expecting him to make delivery, they forwarded the borrowed securities on his behalf. When he later confessed to the details of this scheme, the brokers were required to buy in the stock at their own expense, resulting in substantial losses. Due to respondent's deception, the risk inherent in the short selling scheme was shifted from himself to the brokers. Because they believed he was selling long, none of them obtained a margin deposit that would have protected them against the failure to make delivery on his part. The District Court found that respondent's misrepresentations violated Section 17 (a) (1) of the statute and convicted him on all eight counts of the indictment. The Court of Appeals agreed that the respondent had committed fraud and had injured the brokerage houses, but it concluded that Section 17 (a) (1) is not violated by the species of fraud which was practiced against brokers rather than purchasers of securities and on that theory the court reversed respondent's conviction on all of the counts of the indictment. We contend that Section 17 (a) (1) applies to the species of fraud used here and we rely on the text of the statute in making that contention.
John Paul Stevens: Mr. Shapiro, could this case have been prosecuted under the 1934 Act?
Stephen M. Shapiro: It could indeed, Your Honor. It might well have been filed under Section 10 (b) of the 1934 Act because there was fraud used in connection with the sale. But a lot of --
John Paul Stevens: Would it have made your position a little easier here had it --
Stephen M. Shapiro: We don't feel that it would. We think the most logical choice for this prosecution was 17 (a) (1). A -- a fraud was used in an offer and in a sale. And as the Blue Chips Stamps opinion points out, Section 10 (b) does not explicitly extend to frauds in an offer. The indictment here charged fraud in both the offer and the sale process and for that reason Section 17 (a) was the logical choice. 17 (a) is the traditional criminal law provision used in prosecutions based on fraudulent selling schemes. It's used in by far the larger part of the cases raising frauds in this particular context. Now, respondent admittedly committed fraud by making statements of the following kind: sell long 1,000 shares at market. When he made that statement, he was short rather than long and we say that this misrepresentation occurred in a sale because it was made by the seller at the very time that he placed the sale. The seller told a lie in the very same communication that triggered the contract of sale. The definitions in the statute make that conclusion emphatic. The statute says that a sale includes every disposition of a security for value, and the dictionary definition of disposition is simply the action of getting rid of something or parting with something. Now, giving these words their ordinary meaning, the respondent committed fraud in the disposition of securities when he placed fraudulent orders to sell those securities. The definition of offer contained in the statute is even more expansive than the definition of sale. An offer includes every attempt to dispose of a security for value. Now, when respondent called his brokers and ordered them to sell at market, he was obviously attempting to dispose of securities. And since this fraud occurred while he made that attempt to sell, we say that the fraud occurred in his offer and a violation of the statute resulted.
William H. Rehnquist: The District Court so found and the Court of Appeals intimated that it agreed on the factual issue, didn't it?
Stephen M. Shapiro: That's correct, Your Honor. There was no dispute about the facts in the case at all. It was strictly a question of the scope of Section 17 (a) (1).
John Paul Stevens: Who was the district judge, Judge Larson?
Stephen M. Shapiro: Yes, Your Honor, Judge Larson. A few more thoughts about the literal text of the statute may be helpful. Section 17 (a) (1) nowhere limits the class of victims. It extends to any scheme to defraud, like the mail fraud statute, which is the basis for Section 17 (a) (1). The victim can be anyone. Indeed, the case law makes it clear that there doesn't have to be any victim at all. The scheme to defraud is itself illegal if it is practiced in the protected medium, that is the process of offering or selling a security. And the statute does not say that the fraud must occur in a particular phase of the sale or in a particular phase of the offer. The sale transaction, of course, consists of a series of events. There is the order to sell, there is the execution, there is the confirmation, and in the ordinary course there is the delivery of securities and the payment of money. But the statute does not say that the fraud must occur at a particular point in this process, and it certainly does not say that it must extend all the way from the seller through the anonymous exchange process to the purchaser on the other side of the transaction. The common sense of our position is illustrated, I think, by a single example. If a broker acting merely as an agent committed a fraud on a customer in the process of selling, no one would doubt that that was a fraud in a sale within the prohibition of the statute. And we say that it makes no difference if you turn the case around and have a case of the customer defrauding the broker. The locus of the fraud is the same. It still occurs in the sale process, and we submit that there is no basis for the conclusion that brokerage firms participating as intermediaries in the sale process are not subject to the protections as well as the prohibitions of Section 17 (a) (1). The Court of Appeals, nonetheless believe that it was proper to narrowly construe Section 17 (a) (1) because of its view of legislative intent. The court thought that Congress' sole purpose in enacting this statute was to protect investors. We submit that that ignores numerous statements of legislative intent to the contrary and it ignores the economic problem that Congress was attempting to grapple with in 1933. This statute was passed in the depths of the depression as a means to revitalize the economy. The market crash of 1929 had left many investors penniless and had practically wrecked many American business firms, in the words of the Congressmen who debated this provision. Securities fraud contributed to these conditions and Congress --
William H. Rehnquist: Mr. Shapiro, do you have to delve very deeply into the legislative history if the statute is quite clear on its face?
Stephen M. Shapiro: I agree with Your Honor that you don't have to even scratch the surface. We think that the literal terms of the statute directly support our analysis, but for the sake of the completeness --
William H. Rehnquist: I realize the Court of Appeals took a different view.
Stephen M. Shapiro: That's correct. The Court of Appeals felt that the legislative history pointed the other way and we would like to point out it is supportive of our position. Congress intended to eliminate securities fraud in order to remedy the economic conditions that it pointed to in the debates on this measure. The beneficiaries of that prohibition were explicitly identified as follows, and I quote from the Senate Report, “The purpose of this bill is to protect the investing public and honest business.” The House Report stated that business injury was equally as significant as the loss suffered by investors. In short, Congress was trying to protect the national economy overall, including both public investors and the business firms that participated in our nation's economy. There is not a hint in any of the debates or the reports that Congress intended to protect investors only or that it was unconcerned with injuries suffered by business firms. Respondent's citation of legislative history showing that Congress intended to protect investors is quite beside the point, we respectfully submit. We would be the first to affirm that Congress intended to protect investors, but we deny that that was the only purpose and respondent cites nothing that suggests that it was. In recent securities cases, such as Hochfelder and Blue Chip Stamps against Manor Drug Stores, this Court has contrasted the statutory provision under consideration with other neighboring provisions to get a clear view on its coverage or its scope. That technique is helpful here. Section 17 (a) contains three separate subdivisions. They are each expressed in the disjunctive and each is a prohibition against fraudulent conduct. Section 17(a) (1) is the broadest provision, forbidding any fraud in an offer or in a sale. Section 17(a) (3), in contrast, is a more limited provision, dealing narrowly with fraud practiced on purchasers of securities. This difference shows that when Congress intended to cover purchaser fraud, it knew how to do so explicitly and it did do so explicitly. This Court's decision in the case of United States against Gilliland, which we have cited in our opening and reply briefs, demonstrates the proper analysis of this question. In that case, the Court considered a provision in the Criminal Code which prohibited the filing of any false report with a government agency. In the same sentence, and stated in the disjunctive, was a prohibition against filing any false claim or bill or voucher demanding money from the government. The defendant there made the same argument that the defendant makes here, that the general prohibition should be circumscribed by the narrower prohibition. This Court rejected that argument in words that are directly applicable here, and I quote: “The rule of ejusdem generis is a familiar and useful one. But it gives no warrant for narrowing alternative provisions which the legislature has adopted with the purpose of affording added safeguards.” That principle, we submit, is directly applicable here. Section 17 (a) (1) and 17 (a) (3) are alternative prohibitions which taken together provide comprehensive protection against fraud, and there is no justification for contracting these complementary provisions into a single narrow prohibition dealing only with fraud on purchasers. Respondent is perfectly candid in the position that he takes about the fraud in this case. He doesn't deny that he committed fraud. He doesn't deny that he injured the brokerage houses. And he doesn't even deny that he violated the federal securities laws. He contends, however, that the prosecutor made a mistake, that the prosecutor was duty-bound to pursue him under Section 10 of the 1934 Act, rather than Section 17 of the 1933 Act. But as I mentioned previously to Mr. Justice Blackmun, 17 (a) (1) was not only an allowable choice, it was the most logical choice. It deals squarely with the thing charged in the indictment, fraud in an offer and fraud in a sale. I don't mean to suggest by this analysis that respondent did not transgress various different provisions. I assume that he did. I think he violated Section 10 (b) when he used fraud in connection with a sale. I think he violated Section 10 (a) when he caused a short sale to be effected in a declining market, contrary to the SEC's rules, and I think he probably violated the mail fraud statute because he used a fraudulent scheme and caused the mails to be used in conjunction with it. But it is quite commonplace for a complex criminal scheme to run afoul of different statutory provisions, and when it does this Court's decisions teach that the discretion rests with the prosecutor to select the appropriate charge and that is a broad discretion according to the decisions of this Court. Respondent has also argued that the decision below must be affirmed because criminal laws should be construed with lenity, but the rule of lenity applies to statutes that contain serious ambiguities which do not afford fair notice to the accused. This statute clearly conveys the congressional purpose. This statute speaks in sweeping terms. It prohibits any device, any scheme or any artifice of fraud used directly or indirectly in an offer or in a sale. No person reading that statute could think that he was free to pick up the telephone and call his broker and deceive his broker in the process of selling a security, and there is no question here but that the deceit that was practiced was willful and knowing. The District Court found that and the Court of Appeals did not disagree about the clarity of the evidence showing fraud. Under these circumstances, we submit that the rule of lenity simply has no application. For these reasons and those that we have expressed in our opening and reply briefs, we respectfully request that the decision of the court below be reversed. And Mr. Chief Justice, I would ask your leave to reserve the balance of my time for reply.
Warren E. Burger: Very well, Mr. Shapiro.
Stephen M. Shapiro: Thank you.
Warren E. Burger: Mr. Walters.
Joe A. Walters: Mr. Chief Justice, and may it please the Court. When this case first came before this Court, the Government stated in its petition for certiorari that the decision of the Court of Appeals seriously impairs the ability of the United States and the Securities and Exchange Commission to enforce the securities laws in cases involving fraud practiced on the largest participants in the national securities markets. They also stated at page 12 of their petition for certiorari that because 17 (a) (1) authorizes not only criminal prosecutions but also civil remedies, the effect of the decision here is to abolish one of the Government's most effective weapons against the most serious forms of securities fraud practiced on members of the brokerage industry. And by the time we got through briefing this matter, on page 8 of the reply brief the Government says that the fact that respondent's conduct may have violated other provisions of the federal securities laws in addition to 17 (a) (1) is not material. And counsel stands up today and says that the conduct of this respondent violates 10 (a), violates 10 (b), violates the mail fraud statute, and I might say today violates Section 7 of the 1934 Exchange Act in connection with 7 (c). Now, having gotten into this Court --
Warren E. Burger: What difference does this make to the central issue, Mr. Walters?
Joe A. Walters: I think it makes this difference, Your Honor, as to whether or not this case would be before this Court here today. This is the first time in over 45 years of the administration of the Securities Act of 1933 that anyone has ever been indicted in connection with what's called a short selling scheme, and we maintain that there are plenty of laws available in order to corral this kind of activity and that this respondent was not properly charged. Now --
Warren E. Burger: Well, the only issue before us is whether he is properly charged under 17 (a) (1).
Joe A. Walters: Now, that we're here -- that is correct, Your Honor. Now that we are here, that is the issue. And I think in determining that issue we should remember that the Court of Appeals said that this respondent was not guilty of a violation of 17 (a) (1) because of the species of fraud practiced by the respondent, and I think that's a very important observation. What is the species of fraud practiced by the respondent? They say it is short sell, and they say it is defrauding the broker in that the respondent lied to him and misrepresented that he had stock to sell that he didn't then own. But the species of fraud really is the obtaining of illegal credit which when you're dealing with securities on the national securities exchanges is regulated by Section 7 of the Exchange Act of 1934.
William H. Rehnquist: Well, Mr. Walters, why does it make any difference which “species of fraud,” as you put it, he engaged in when 17 (a) (1) makes criminal the employment of any device, scheme, or artifice to defraud?
Joe A. Walters: It is our contention that the 1933 Act was directed towards the purchaser of securities, that it dealt with the offer or the sale of securities to the purchasers. It dealt with the distribution of securities in the marketplace. Whereas, the 1934 Securities Act dealt with the transactional situations in the marketplace, what was happening on the stock exchanges? And as some of the debate in the legislative history of the 1933 Act indicates, there was some disappointment on the part of some of the members of the House of Representatives that the 1933 Act did not outlaw transactional things such as short selling, selling against the box, washed sales. But they stated that they realized you couldn't do it all in one act, therefore the 1934 Act took care of transactions. Now, what did the 1934 Act do? It did not outlaw short selling. As one of the witnesses testified in this case, short selling is a common practice. Often the exchange, in dealing with the third market securities, the same securities that are traded on the exchange, if they are traded off of the exchange short selling is commonly done, it is a part of business.
William H. Rehnquist: But your client wasn't convicted of short selling, he was convicted of fraud.
Joe A. Walters: He was -- he was convicted of a species of fraud and I am directing the Court's attention to what is the fraud that he committed. This is not fraud. He did something. The fraud that he committed that the law said he shouldn't do was to get an extension of credit. He obtained an illegal extension of credit from the brokers. That is what he did. It wasn't short selling. That's not illegal. We are dealing with fungible commodities here. Short selling is occurring all the time.
William H. Rehnquist: But you concede that he did engage in fraud?
Joe A. Walters: I concede that he engaged in fraud in obtaining an illegal extension of credit, and I say that that is in violation of the 1934 Act and that it is not encompassed within Section 17 (a) of the 1933 Act. And I direct this Court's attention to the fact that we are dealing with a transaction that involves the exchange mechanism, that involves the very thing that the 1934 Act was passed to regulate, whereas the 1933 Act provisions were there for the purposes of regulating the distribution of securities. Now, the -- as the facts indicate, not one investor in any way was injured as a result of the transactions. The illegal extension of credit was in effect what the court found to be the specie of fraud, as they stated that the respondent took a free ride on the broker's money or credit and in so doing violated the 1934 Act. So consequently, in dealing with the particular problem that we have here, I believe that the Court of Appeals correctly analyzed what species of fraud was that's involved in this particular case, and in addition in looking at the 1933 Act on the one hand and the 1934 Act on the other, recognized the charge that should have been placed against this respondent did not fall under 17 (a) but rather fell under the 1934 Act.
John Paul Stevens: Mr. Walters, before you leave 17 (a), do you concede that the short sale was an offer or sale of a security within the meaning of the opening paragraph of 17 (a) (1)? Of 7 (a), I mean.
Joe A. Walters: No, I do not. I cannot --
John Paul Stevens: Would you say there was no offer or sale in the case?
Joe A. Walters: There was no offer or sale to the broker, that's correct.
John Paul Stevens: Well, but -- forget to the broker for a moment, because the statute doesn't have those in it. Was there in your view an offer or sale of any securities when your client made a short sale, representing it to be a long sale?
Joe A. Walters: My client employed a broker to make a sale of some securities.
John Paul Stevens: So you do concede there was an offer?
Joe A. Walters: Through his agent, he sold securities and they were delivered.
John Paul Stevens: I -- so you concede there was an offer of sale of securities and do you also concede there was a device, scheme or artifice to commit fraud?
Joe A. Walters: No. May I go back for a moment on the offer of sale? The trial judge, Judge Larson found that there was a sale. He never found anything about an offer. So I am not going to concede there was an offer because the trial judge in his own findings said no.
John Paul Stevens: But you do concede there was a sale?
Joe A. Walters: There was a sale to a customer and the securities were delivered to the customer and the customer paid his money for it and the brokerage house that represented the respondent hung onto the money, that's correct.
John Paul Stevens: So your -- what your basic – your statutory argument is that the words “deceit upon the purchaser” should be read into the entire section?
Joe A. Walters: That is correct.
John Paul Stevens: Statutory --
Joe A. Walters: I maintain that under the 1933 Act that the deceit on the purchaser should be read into subdivision (1) and subdivision (2) and subdivision (3) and I point out that if you look at Section 12 and you look at Section 11 of the 1933 Act, you will find it is only the purchaser that has standing to bring a cause of action for fraud, deception or anything in violation of the 1993 Act. And I believe that that is an indicator that that should be carried forth in 17 (a) provision, that it is really the fraud on the purchaser in connection with a sale that is governed by this particular section, and we have argued that in our brief, that you should re-read into it. Now, counsel has made the observation that the basis for the 17 -- Section 17 (a) was the mail fraud statute. According to the research we have done, it was a combination of the mail fraud statute and the Martin Act of the State of New York. The Martin Act was the blue sky act that New York State had adopted and the interpretations of the Martin Act by its Supreme Court limited violations to purchasers only, and when the 1933 Act was written and finally adopted, it was a combination of mail fraud and the Martin Act. And I still say that is in keeping, that 17 (a) is still limited to frauds and violations insofar as they direct its conduct towards the purchaser. And the conduct that the respondent here was involved in was not directed to the purchaser at all, it was directed in fact to the broker by way of obtaining illegal credit in violation of law, and that law was the 1934 Act and so if there was a violation that is where this man should have been charged.
Warren E. Burger: But subsection (1) doesn't say anything about the purchaser, does it?
Joe A. Walters: It -- it doesn't, but if you read (1) and you read (2) and you get down to (3) at the end, it talks about fraud on the purchaser.
Warren E. Burger: Isn't each one of them independent?
Joe A. Walters: I don't believe so. I believe that in interpreting (1), (2) and (3), that they should be read as though there was a fraud upon the purchaser in each case. I think that's the only way you give effect to the statute. I think it is clear. I mean, to me it is. I realize we are here on a difference of opinion on that, but I believe that is the correct interpretation of this provision. Now, before closing I would like to point out to the Court a statement made by the Government in its reply brief as an effort to overcome the fact that there was an offer made which the court found to be in violation of the law, and I refer the Court to page 3 of the Government's reply brief in its footnote number 3, in which the Government does not agree with the statement that we made on page 18, footnote 31 of our brief, in which we made the observation that the District Court found only fraud in the sale of securities. The Court of Appeals found fraud in neither offer nor sale, and offer and sale, of course, are distinct acts. Then the Government in its reply brief comes back and says that we are mistaken because of the fact that the District Court specifically found that as to each count of the indictment the defendant acted as charged, and what I want to point out is that the findings of the trial court which appear on page 28 of the petition for writ of certiorari, says, as to each count of the indictment, the court finds that the defendant acted as charged in the count willfully and knowingly. And I say that that is not a correct characterization by the Government, the court didn't find that the respondent was found guilty of everything as charged. What the trial court said was that insofar as the indictment said that what he did was willful and knowingly, I find that to be correct. And I think that is a far statement from saying that this respondent was found guilty of anything at all in connection with the offering of securities by the trial court, and, of course, we are here on the facts of this particular case. Thank you.
Warren E. Burger: Thank you. Do you have anything further? Oh! Excuse me, are you finished?
Joe A. Walters: I'm finished Mr. Chief Justice.
Warren E. Burger: Very well, Mr. Walters. Do you have anything further, Mr. Shapiro?
Stephen M. Shapiro: Just briefly, Your Honor. I think the last sentence in the District Court's opinion bears mention. It says that the court finds the defendant guilty of each count in the indictment and each count of the indictment explicitly charged fraud in an offer and fraud in a sale. The statutory definition of an offer is simply an attempt to dispose of a security for value. The evidence here showed that there was an attempt. That was the only purpose of calling the broker and telling him to sell the shares. We think that this finding of the District Court is sufficient to establish that there was fraud used in an offer as well as a sale.
John Paul Stevens: Mr. Shapiro, it is true, is it not, that if you read Judge Larson's opinion, he does refer to sale in each paragraph, and his next to concluding paragraph says they prove beyond a reasonable doubt that -- I have lost the language now, but he refers to fraud in the sale of securities and never mentions offer in so many words.
Stephen M. Shapiro: That's correct, Your Honor.
John Paul Stevens: So, he clearly found fraud in the sale and you are inferring that maybe also offer, but it is not nearly as clear.
Stephen M. Shapiro: Well, that's quite correct. He paraphrased the statute in terms of a completed sale, but in the process of making a completed sale there was an attempt to dispose of the security and we think that that is necessarily embraced within this finding.
John Paul Stevens: And in all events, doesn't the question whether it is an offer or not simply become a question of law?
Stephen M. Shapiro: That certainly is, and this Court could affirm or reinstate a correct District Court judgment on any applicable legal theory.
Potter Stewart: Mr. Shapiro, Mr. Walters just before he sat down called our attention to the finding under paragraph 11 by Judge Larson, saying that as to each count of the indictment, the court finds that the defendant acted as charged in the count willfully and knowingly. What do you suppose that last phrase means?
Stephen M. Shapiro: Willfully and knowingly?
Potter Stewart: Yes.
Stephen M. Shapiro: That is necessary to sustain a conviction under I believe it is Section 24 of the Act that requires scienter.
Potter Stewart: Uhmm.
Stephen M. Shapiro: And that was the reason for stating that he acted as charged in a willful manner and a knowing manner.
Potter Stewart: And as to each count of the indictment, was that charged, that it was done willfully and knowingly?
Stephen M. Shapiro: I believe that it was, Your Honor.
Potter Stewart: Including the offer as well as the sale?
Stephen M. Shapiro: I think that that's correct.
Potter Stewart: The indictment appears on page?
Stephen M. Shapiro: Pages 14 through 15. The -- the very beginning of the paragraph under Neal T. Naftalin, defendant here, willfully and knowingly did employ a scheme to defraud, and then it proceeds to describe the acts that constituted that fraud, stating that this was in the offer and sale of securities, on page 15, and that's repeated with respect to each count of the indictment. This argument was made that the misconduct here was simply obtaining credit illegally, and I think that bears pump rebut -- rebuttal to buy out the -- the basis of the charge here was fraud, a misstatement of the seller's position. The obtaining of credit was only the context in which the fraud took place. The basis of the indictment was misrepresentation. The argument was also made that the 1933 Act deals only with fraud in new issues. That -- that proposition is easy to rebut by examining any of the cases contained in the annotations under Section 17 (a). Fully two-thirds to three-quarters of these cases are cases involving fraud in the after-market. 17 (a) (1) applies to fraud in any sale or in any offer, not just in new distributions of securities.
Byron R. White: Well, Mr. Stephen M. Shapiro, tell me again -- I think you covered it in your initial argument -- if you lose this case, how will the commission's operations be hurt or crippled?
Stephen M. Shapiro: There is a practical consequence to the choice between 17 (a) and Section 10 (b). 17 (a) covers fraud in an offer as well as fraud in a sale. Section 10 (b) doesn't extend that far. For example, if fraud was used here in placing a limit order or a stop loss order that wasn't executed on the exchange. It couldn't -- it couldn't be affected on the exchange, and deception was used in that attempt to dispose of a security, which would violate section 17 (a) but it wouldn't violate section 10 (b).
John Paul Stevens: Well, is that quite clear, Mr. Shapiro? The Blue Chip case holds that only a purchaser or seller may sue for damages.
Stephen M. Shapiro: Right.
John Paul Stevens: But is it perfectly clear that only if there is an injury to a purchaser or seller is the statute violated? It is quite a different question.
Stephen M. Shapiro: I didn't mean to suggest that. I -- I think that part of the Court's analysis in Blue Chip referred to the fact that Section 10 (b) speaks only of fraud in connection with a purchase or a sale.
John Paul Stevens: Would you satisfy that requirement here if you find this to be a sale?
Stephen M. Shapiro: Well, that's quite correct.
Potter Stewart: But by contrast, this one refers also to an offer.
Stephen M. Shapiro: Offer and a sale, and that is the practical difference that Justice White was driving at.
Byron R. White: But if there is coverage here, what about private actions?
Stephen M. Shapiro: This Court has never decided whether there is a private action --
Byron R. White: Well, there wouldn't be if there wasn't coverage but --
Stephen M. Shapiro: Correct.
Byron R. White: If you lost, there wouldn't be, but what if you win, how about private actions, would it necessarily follow or not?
Stephen M. Shapiro: I don't think that it would necessarily follow that there would be a private action. This -- as the Court has pointed out, this is a judicial construct based on a number of different considerations and the Court has looked to various different factors in trying to decide whether an implied private right should exist. This is an express criminal law provision that we are relying on here. We are not relying on any judicially implied right of action. Unless the Court has further questions, I will conclude my argument. Thank you.
Warren E. Burger: Thank you, gentlemen. The case is submitted.