Opinion ID: 255084
Heading Depth: 2
Heading Rank: 2

Heading: The Broker Defendants

Text: 35 Gordon, Goldberg and Reicher, the stockholders in Philip Gordon & Co., Inc., all contend the proof against them was insufficient to warrant submission to the jury. Guilty verdicts on the three substantive counts and the conspiracy count from which they appeal all involve use of the mails to effect wilful and knowing sale of unregistered securities. The proof is clear that no Texas-Adams stock was ever registered — and that defendants knew that the particular certificates involved in Counts 46-8 were not registered. There were, however, opinion letters claiming the shares to be exempt from registration. Two basic elements thus remain: Were the shares exempt? If not, does the record adequately prove the necessary knowledge on the part of these defendants to support the element of wilfulness? We hold that, while the shares should have been registered, there was insufficient proof from which the jury legitimately could have inferred wilfulness and criminal intent. 36 All the stock involved in the three substantive counts here involved stems from the two million shares issued to Gully in connection with the Comigu transaction. Philip Gordon & Co., Inc. received them for sale from Castagna. The Mittelman legal opinion letters concerning these shares asserted the stock was exempt from registration and free for trading; the opinion was based on S.E.C. Rule 133 which provides that for purposes of the criminal statute dealing with sale of unregistered securities no sale shall be deemed to have been made so far as the stockholders of a corporation are concerned where    a plan or agreement for a statutory merger or consolidation or reclassification of securities, or a proposal for the transfer of assets of such corporation to another person in consideration of the issuance of securities is approved by a binding majority of the stockholders. This exemption, which has permitted the offering of literally billions of securities without registration 13 probably fits the circumstances of the Comigu transaction; this court has specifically held, however, that the Rule 133 exemption applies only to the original exchange in which stock is transferred to the merged corporation's stockholders — and not to later resales if they otherwise are within the registration requirement. Securities and Exchange Commission v. Culpepper, 2 Cir., 1959, 270 F.2d 241, 247-248; see also Securities and Exchange Commission v. Mono-Kearsage Consol. Mining Co., D.C.D.Utah 1958, 167 F.Supp. 248. 37 Similarly, none of the statutory exemptions are here applicable. 14 Philip Gordon & Co., Inc., and the individual defendants are clearly dealers within the purview of the Act; 15 their sales would have been exempt transactions, therefore, only if made more than forty days after the first date upon which the security was bona fide offered to the public. The purchases of these shares by Gordon & Co. were from Castagna, nominee for controlling interests of Texas-Adams, the issuer. The Act defines Castagna himself as an issuer under those circumstances — which fact, in turn, made the broker defendants technically underwriters. 16 Thus, by recourse to the definitional sections of the Act, we can circuitously, but inevitably, reach the otherwise immediately apparent truth — that the sales by Philip Gordon & Co., Inc. were the first public offerings of those shares, thereby rendering inapplicable the forty day exemption. Finally, since the defendants bought and sold the stock for their own accounts, the exemption accorded brokers' transactions is unavailable. 38 Since all of the government's evidence tending to tie the brokers into the overall conspiracy is relevant, in some degree, on the substantive counts for sale of unregistered securities, 17 the sufficiency of the evidence on both types of offenses may be treated together. Reicher was a 50% stockholder of the brokerage house, Gordon and Goldberg evenly dividing the remaining one half interest. Philip Gordon & Co., Inc. was not a big house and all three appellants were active in its management; Reicher and Goldberg supervised the sales force. 39 Chronologically, the government points first to the brokers' role in the sale of Texas-Adams to the McCarthy group. Although the proof failed to show directly that these defendants aided or knew of the arrangements by which they were paid out of the treasury of Texas-Adams, much is made of the fact that the buyers apparently used, two days running, the corporate seal in furtherance of their fraud. A Gordon & Co. employee testified that the seal was ordinarily kept in the office safe but he could not vouch for its presence at any one particular time. The attorney who handled the sale for the brokers could not remember whether he had given or loaned the seal to the buyers. 40 The second installment of $20,000 on the purchase price of Texas-Adams was raised through the sale of a large bloc of shares, for investment, to one Jack Baker. Part of this bloc, a certificate for 50,000 shares, was sold to Baker by Philip Gordon & Co. for the account of American Montana and the actual payment of the $20,000 was made directly from Baker to Goldberg. 18 41 Other evidence relied upon by the government includes the fact that Goldberg sanctioned the cashing of one check payable to Jannis although such was not the usual practice of the house; that Goldberg, in a hotel meeting with Kimmes and the chief officers of Texas-Adams, suggested a broker bonus arrangement to help stabilize the price of Texas-Adams shares near the one dollar mark; that Goldberg and Gordon questioned a salesman for a rival brokerage firm concerning the latter's source of cheap shares and that the salesman remarked that he smelled something rotten; and that the brokers, in pushing the sales of Texas-Adams stock, disseminated fraudulent literature put out by the alleged co-conspiratorial accountant and public relations firm. Finally, the government presses upon us the more than 500,000 shares sold to the public by Philip Gordon & Co., Inc. under various opinion letters — shares emanating from almost all of the various transactions of Texas-Adams — and insists that the extent to which the defendants did rely, or were entitled to rely, on the opinion of counsel was for the jury to determine. 42 The course of conduct of the three brokers in selling so many shares proves little 19 — it merely presents, in multiple instances, the same question posed by the three substantive counts here in issue: Were the brokers justified in selling unregistered stock on the representation of counsel that such shares or transactions were exempt from the registration requirement? 43 The evidence that the buyers used a Texas-Adams seal in implementation of the takeover fraud is far too weak a base from which to infer guilty knowledge on the part of these defendants. The gaps are too broad and substantial. To hold the defendants on this evidence, it must be inferred that it was the seal, rather than a facsimile, that was used by Crosby; that the defendants (or one of them, with the blessing of the others) gave the seal over to the buyers; and that it was done with the intent to aid and abet the fraud. The government's evidence concerning the second installment payment through the sale of 50,000 shares of Texas-Adams held by American Montana is similarly weak and insubstantial. Appellee argues that the brokers knew Texas-Adams legitimately could not have declared such a large stock dividend to controlling American Montana only a few weeks after acquisition — and that American Montana would have paid the brokers directly if it had funds. The fallacies in this reasoning are clear. There are numerous transactions which might have been the base for legitimate issuance of this stock to the parent corporation; to state only the most obvious, American Montana might have transferred property, which they were loath to liquidate, to Texas-Adams as a means of obtaining stock, in turn to obtain funds, to pay the brokers. 44 Since the broker appellants were a principal outlet for over the counter sales of Texas-Adams stock, there is nothing strange about hotel meetings with the top officers of the corporation. The two meetings testified to prove little. The testimony concerning the first of those occasions shows only a concern on the part of the defendants that the market in Texas-Adams, in which they had considerable personal stake, 20 was being seriously undercut by cheap stock from unknown (to them) sources. The effect of Goldberg's suggestion of a bonus share arrangement at the latter meeting is compromised by the fact that Gordon & Co. bought or sold none of the Empire stock in question and received none of the bonus shares. 21 Moreover, there was evidence that in this area of speculative mining, oil and uranium stocks in the over the counter market, the selling price of a security almost never has any relation to its intrinsic value and that substantial commission and bonus arrangements are the rule rather than the exception. 22 45 Concerning the mailing of the fraudulent literature furnished by McCarthy et al., the record shows that it was standard procedure in the over the counter market for mailings to emanate from the brokers rather than the corporation. Jealous guarding of customer lists by the brokerage houses caused this practice. The claim that the defendants, as ex-controllers of Texas-Adams, should have known of the falsity of one assertion in the Report to the Stockholders is more serious. We believe, however, the single sentence in question was sufficiently ambiguous so that defendants were not required, at the peril of criminal liability, to challenge its accuracy. 46 As to the substantive counts alone, evidence is similarly lacking to refute appellants' apparent reliance on the representations of counsel. It is key here that the government nowhere showed that the brokers knew the details of the alleged transfer from Gully to Castagna — or that they knew the latter's relation to and probable domination by McCarthy. 23 Thus there was no evidence that the brokers knew or should have known they were underwriters in terms of the Securities Act. Mittelman's original opinion letter to Philip Gordon & Co. concerning the Gully stock relied solely on Rule 133's special no-registration treatment for statutory mergers, etc.; his later letter to the brokers' counsel, however, stressed a combination of an original Rule 133 exemption and subsequent freedom to trade which allegedly arose because they were no longer control stocks. While such a theory is probably invalid in light of this court's decision in the Culpepper case, supra, we cannot say that on its face the legal opinions tendered were so patently erroneous as to permit the jury to speculate on the good faith of the defendants. 47 It is always a difficult task in a complicated omnibus conspiracy case like this one to decide at what point the government has produced enough evidence against individual defendants to put their fates in the hands of the jury. Because of the tremendous potential for collateral prejudice inherent in these cases, however, the courts must be extremely scrupulous in sorting out the evidence against single defendants and weighing the same — divorced from the all too often damning influence of the background conspiracy. The case against these three defendants presents a peculiarly difficult problem in this regard because the prime issue is one of guilty knowledge and criminal intent. It is undisputed that the brokers' acts in fact furthered the conspiracy; the claim is persuasively made, however, that they were merely doing business as usual and, to their best knowledge, according to acceptable standards of that business. The statutory and administrative regulatory scheme over this area is far from a model of clarity; such a situation is aggravated when, as here, criminal liability is based on the failure to comply with the law. We think it is all too facile an answer for the government to rely on the experience and supposed expertise of these brokers; the fact is that they purported to rely on opinion letters of an attorney, whose expertise is presumed to be even greater. The scanty extrinsic evidence produced by the government against these defendants implies guilt only if we first assume guilty knowledge and purpose; when used to prove that basic element of the crime it is neither substantial nor convincing. The trial court erred in not directing a verdict of acquittal on all counts for defendants Gordon, Goldberg, Reicher, and Philip Gordon & Co., Inc.