Court Opinion

ID: 9642544
Source: CourtListenerOpinion
Date Created: 2023-08-22 18:02:03.360599+00
Date Added: 2024-06-11T11:52:50.885182
License: Public Domain

DENISON, Circuit Judge.
I concur in the affirmance; but there are some aspects of the case which I think should have comment.
The indictment was of the complicated and confused type which seems to be commonly used in these mail fraud cases, and which we have before criticized. That type puts upon the court the burden of extracting the vital point from the mass of more or less related statements, and finding out at the end of the trial what the offense charged really is. In this case, the fraudulent scheme was said to be to get money from stock purchasers by certain false and fraudulent representations as to the stock value. These false representations were thereupon recited. They were fifteen in number, and the truth of each such statement was then specifically denied; the falsity of any one might have been enough to sustain conviction. Several of them were as to matters of opinion, as to which the evidence was such that I think there was nothing justifying conviction. Several of them turned out to be perfectly true. The charge to the jury recited them all and left the jury at liberty to base a conviction on any one of the fifteen. In the common case, I would *139think that a conviction upon such a basis ought not to stand.
There were rulings upon the trial; some of which impress me as erroneous. For example : The financial condition of the corporation when these statements were made (April, 1925) was an issue. It appears without dispute that in previous years the business of this company and its predecessor, in promoting and underwriting the financing or refinancing .of manufacturing corporations, had been profitable and successful; that in the fall of 1925 this company failed and went into the hands of a receiver for liquidation. The liquidation continued two or three years; using such liquidation results upon the issue of solvency two or three years before is always unsatisfactory, and, in such a situation as this, I think it too remote to be admissible. Those who estimate the value of a going concern ought not, as a general rule, to be charged retroactively with knowledge of the small values which develop in a much later bankruptcy. Some of the admitted evidence also, concerning the amount finally realized on these assets, was, I think, only hearsay.
However, upon a study of the whole case, I am satisfied that no verdict excepting guilty could have been found by any carefully deliberating jury. This is so clear to me that I would treat the ease as we did Robinson v. U. S., 30 F.(2d) 25, 28, and for the reasons there stated, and say that the procedure and rulings which I have mentioned, and other errors if any there were, should be considered nonprejudicial. To my mind, the ease centers upon the inclusion in the balance sheet as assets^ of the $400,000 of stocks, and the use made of that inclusion. These were common stocks, which, during the previous year or two, the company had received as part of the consideration for its services in financing reorganizations. The practice was that a manufacturing enterprise needing refinancing, applied to the Hyney firm to bring this about. Thereupon, under the Hyney supervision, all of the assets of the enterprise were appraised. These appraisals were, or may be assumed to have been, made by appraisers of good reputation, and there is no reason to assume anything fraudulent about them. Thereupon, it was planned to issue bonds and preferred stock against these appraisals to provide such capital as the enterprise needed, and to issue common stock against the remainder of the assets. The book value of this common stock, was, therefore, as shown by these appraisals. The Hyney firm then underwrote these bonds and preferred stocks, agreeing to take them all at a stated price (e. g., 90 cents for the bonds and 80 cents for the preferred stock), and for their services in reorganizing the concern and marketing the securities, they received whatever profit they could make on the resale of bonds and preferred stock, and also an agreed amount of the common stock. To obtain funds to carry these details through, the Hyney firm borrowed large sums at the Chicago banks, pledging these bonds and preferred stocks. Then, when they sold the bonds or stock, they would take the purchaser’s money, redeem the necessary amount from the bank’s pledge and send the securities to the purchaser, or sometimes deliver the securities at first to him and then take down from the bank an equivalent amount to be free in their hands. In the spring of 1925, this business became “slow”; they doubtless believed the slow-up was temporary; there were several “prospects” which apparently would develop into business a little later; but they bad to have money to keep the business going and the banks would not lend any more on these securities, but, on the other hand, were pressing for reduction of these lines. These common stocks must, in all fairness, be considered generally as having substantial value; but the values were speculative and depended on the continuing ability of the various companies to earn more than their fixed charges. I think it not right to say that these stocks cost the Hyney firm nothing. On the contrary, they represented an unapportioned share of the agreed compensation which the Hyney firm had earned. The term “bonus,” as applied to them, is inappropriate and unduly derogatoxfor; but knowing this speculative character and their present lack of value as bank collateral, the Hyney firm had not entered them in its bookkeeping system as being assets. The accumulation of them represented, in the hands of the firm, hopes and expectations; they might eventually turn out to have large values; they might not. The Hyney firm had been succeeded by the Hyney corporation, with preferred and common slock. A minor part of the preferred had been paid in cash; the partners took all the common in exchange for their partnership interests. In this situation, and to meet the imperative need for the additional capital which they could not borrow from the banks, Ilyney and associates decided to sell to the public the unissued preferred stock in their eoi*poration and to give some common stock with it. How to make an attractive balance sheet was the question. *140Upon this corporate organization, it had apparently assumed to take over the preferred stocks and bonds as if. free from the bank debts, and accordingly the interest which it 'paid from time to time upon these bank debts was charged to the corporate predecessor, the firm. The total of this interest, accumulated to a large amount, would have appeared upon any statement from the existing books as an asset of the corporation. It was at once seen that since the firm really had no responsibility excepting as the partners had stock in the corporation, it would not do to use this debt against the partnership as an asset basis for selling stock. Accordingly, the plan was devised to enter these common stocks as an asset, in substitution (and beyond) for the debt against the firm. Under Hyney’s direction, his subordinates ascertained from the different stock issuing companies, or other customary sources, the present book value of these common stocks; and these figures were used in entering these common stocks on the books as corporate assets of the Hyney corporation. There was nothing in this of itself necessarily wrong. As between the corporation and the firm, they had a right to treat these assets in this way. Under the laws of some states, such á transaction, lacking actual fraud, might be treated as full payment of stock subscriptions so-that there.would be no further-liability therefor. A substantial or even a large.deficiency in these estimated values-as compared with future developments might not be a satisfactory basis upon which to base any charge of fraud.
Hyney’s trouble here comes not from the formalities of this transaction; it comes from the dominating amount of these speculative securities and the purpose for which he knew' their status as corporate assets was to be used. It must be clear that the president of a corporation who is directing and managing a campaign for selling its stock to the public, upon the basis of its balance sheet statement of assets and liabilities, knows that he is thereby representing to the public that the assets in that statement are included at not more than what may honestly be thought a fair and reasonable figure as a basis for stock selling, and knows that, if those assets are padded in value beyond anything that can be justified by an honest error of judgment in appraising them for public offer, he will thereby be misleading and deceiving those who become purchasers. If he were using this stated, valuation for any kind of .exchange for the speculative assets of some one else, that would be another question; but he was proposing to use this valuation as a basis for getting money from a class of people who would not be likely to examine below the surface, and who would accept the financial statement as having been based upon ordinary sound business practices and judgment.
The statement showed that the preferred stock which they were to offer was worth par and the common stock would have a book value of 1.20 on its par. The balance sheet showed a total surplus over current liabilities, which surplus would apply to the preferred and common stocks then outstanding, of about $260,000. The assets, relied upon to meet this liability for debts and for surplus, totaling about $725,000, were a little over $100,-000 in' current receivables, and $617,000 for “bonds and stock on the books.” From these figures it was evident that any deficiency in these stocks and bonds would at once impair the supposed value of 1.20 for the common stock, and before that deficiency reached $200,000 it would impair the value of the preferred stock already issued as well as of that which was to be sold for cash at par. It appears also of this $617,000, entered as stock and bond assets, $400,000 was made up of these common stocks of other corporations entered at their book value. I think that to make this stock offering upon this basis was so plainly fraudulent as to leave no room for two opinions. The fact was that of the stated values offered in exchange for the subscriber’s cash, two-thirds were made up of these speculative stocks, which had little value for sale or for collateral, and Hyney knew all these things perfectly well; indeed, he does not claim to have been ignorant of them excepting as to the details of the method by which his subordinates appraised these stocks. If a subscriber to be approached had been told that the company had capitalized these assets as a basis for selling stock because they were so speculative that the banks would not loan upon them, no one would have purchased; but this was the undisputed fact.
It is not seriously significant that shortly before the collapse Hyney invested $60,000 more of his own, or his wife’s, money. That indicates only that he had hope of saving the company; not at all that the balance sheet had'been true.
Under the doctrine of Horning v. District. 254 U. S. 135, 41 S. Ct. 53, 65 L. Ed. 185, the jury might have been instructed that, if they believed this undisputed testimony, it was their duty to convict.