Court Opinion

ID: 4209915
Source: CourtListenerOpinion
Date Created: 2017-10-06 17:00:21.879966+00
Date Added: 2024-06-11T13:25:34.448684
License: Public Domain

United States Court of Appeals
                       For the First Circuit

No. 16-2120

                      UNITED STATES OF AMERICA,

                              Appellee,

                                 v.

                            RICHARD WEED,

                        Defendant, Appellant.

            APPEAL FROM THE UNITED STATES DISTRICT COURT
                  FOR THE DISTRICT OF MASSACHUSETTS

           [Hon. Douglas P. Woodlock, U.S. District Judge]

                               Before

                         Howard, Chief Judge,
                        Selya, Circuit Judge,
                   and McConnell, District Judge.*

     Thomas C. Frongillo, with whom Gus P. Coldebella, Caroline K.
Simons, and Fish & Richardson P.C. were on brief, for appellant.
     Patrick J. Massari and Erica L. Marshall on brief for amicus
curiae Cause of Action Institute.
     Alexander P. Robbins, U.S. Department of Justice, Criminal
Division, Appellate Section, with whom Kenneth A. Blanco, Acting
Assistant Attorney General, Trevor N. McFadden, Acting Principal
Deputy Assistant Attorney General, William D. Weinreb, Acting
United States Attorney, and Sarah E. Walters and Eric A. Forni,
Assistant United States Attorneys, were on brief, for appellee.

     *   Of the District of Rhode Island, sitting by designation.
October 6, 2017
          HOWARD, Chief Judge.    Richard Weed, a securities lawyer,

wrote false opinion letters so that his two co-conspirators could

sell stock to the public in a "pump and dump" scheme.1           In

connection with this conduct, he was convicted of securities fraud,

wire fraud, and conspiracy to commit both.     Following the jury's

guilty verdict, Weed moved for a judgment of acquittal.   He argued

that the evidence was insufficient to support his convictions,

relying on a novel interpretation of a particular Securities Act

provision. The district court denied Weed's motion. After careful

consideration, we affirm.

                                  I.

A.   Trial Evidence

          Because of the jury's guilty verdict, we review the

record "in the light most favorable to the prosecution."     United

States v. Manso-Cepeda, 810 F.3d 846, 847 (1st Cir. 2016).      The

trial evidence established that Weed participated in a pump and

dump scheme with two former stockbrokers, Coleman Flaherty and

Thomas Brazil.   From 2008 to 2013, these conspirators ran several

iterations of the scheme, using a public "shell" company that

Flaherty had acquired from Weed in 2008.

     1 "In a typical 'pump and dump' scheme, insiders inflate
demand for a stock by disseminating laudatory information about a
company—information that is usually false. If the market reacts
favorably, the insiders cash in their shares before the market
readjusts and the share price collapses." Garvey v. Arkoosh, 354
F. Supp. 2d 73, 76 n.4 (D. Mass. 2005).

                                 - 3 -
          First,    Flaherty   and     Brazil     would   identify    an

entrepreneur who owned a privately held target company and offer

to help take the target public through a "reverse merger" with the

shell company.2    Once the entrepreneur accepted the offer, Weed

would complete the legal work needed to carry out the merger.        The

resulting post-merger company would be publicly listed under the

target's name.

          On paper, Flaherty and Brazil would hold only debt in

the post-merger company, in the form of promissory notes, which

could be converted into shares of stock.        To make money, Flaherty

and Brazil would arrange for stock promoters to inflate the

company's value artificially by, for example, issuing glowing

press releases about the company's prospects.       Then — and this is

where Weed's expertise as a securities lawyer was critical —

     2 "A reverse merger is a transaction in which a privately-
held corporation acquires a publicly-traded corporation, thereby
allowing the private corporation to transform into a publicly-
traded corporation without the necessity of making an initial stock
offering. Often, . . . the public corporation is a shell company
with minimal assets and liabilities and no actual operations. To
effect the reverse merger, the shell public corporation will
exchange its treasury stock for all outstanding shares of the
privately-held corporation.    In consideration, the controlling
shareholders of the shell public corporation transfer a majority
of their shares to the owners of the private corporation. After
the transaction, the newly merged public corporation will assume
the identity and name of the former private company. Thus, the
private corporation is transformed into a publicly traded company,
without going through the complicated process of an initial stock
offering." SEC v. M & A W. Inc., 538 F.3d 1043, 1046-47 (9th Cir.
2008).

                               - 4 -
Flaherty and Brazil would convert their promissory notes into

freely tradable stock, sell their overvalued shares to an unwitting

public, and stop investing in the company, which would soon

collapse.      As Weed put it to Flaherty, "the deals are all vapor,

and they can't sustain themselves for six weeks."

              With Weed's help, Flaherty and Brazil ran through four

iterations of this scheme, making about $5 million in the process.

Weed was prepared to run the scheme a fifth time, but by then

Flaherty      had   begun   cooperating   with       the   Federal    Bureau    of

Investigation.      The conspiracy unraveled, and Weed was arrested in

November 2014.       He was ultimately indicted for securities fraud,

15 U.S.C. §§ 78j(b), 78ff(a); wire fraud, 18 U.S.C. § 1343; and

conspiracy to commit securities fraud and wire fraud, id. § 371.

B.    Securities Law Background

              Under the Securities Act of 1933 ("Securities Act"),

anyone seeking to sell a security must first register that security

unless   an    exemption    applies.      See   15    U.S.C.   §     77e.      This

registration requirement "protect[s] investors by promoting full

disclosure of information thought necessary to informed investment

decisions."      SEC v. Ralston Purina Co., 346 U.S. 119, 124 (1953).

Two exemptions from registration are of particular relevance to

this appeal.

              Section 3 of the Securities Act exempts certain "classes

of   securities"     from   registration.       15    U.S.C.   §   77c(a).      In

                                    - 5 -
particular, Section 3(a)(9) exempts "any security exchanged by the

issuer with its existing security holders exclusively where no

commission or other remuneration is paid or given directly or

indirectly for soliciting such exchange."                 Id. § 77c(a)(9).

               Section    4   of     the     Securities   Act    exempts       certain

"transactions."          Id. § 77d(a).         In particular, Section 4(a)(1)

exempts       "transactions     by     any    person   other     than    an    issuer,

underwriter, or dealer."              Id. § 77d(a)(1).      The statute defines

"underwriter" broadly to include anyone "who has purchased from an

issuer    .    .    .   [or   from]    any    person   directly     or    indirectly

controlling or controlled by the issuer" with "a view to . . . the

distribution of any security."               Id. § 77b(a)(11).     Recognizing the

breadth and complexity of this definition, the Securities and

Exchange      Commission      ("SEC")      promulgated    Rule    144,    17   C.F.R.

§ 230.144, "to provide greater certainty and security to issuers

and investors" by creating a "safe harbor" for the Section 4(a)(1)

exemption.         SEC v. Kern, 425 F.3d 143, 148 (2d Cir. 2005).                   As

relevant here, a seller can take advantage of this safe harbor if

he is a non-affiliate of the issuer and satisfies the other listed

criteria.      See 17 C.F.R. § 230.144(b)(1).

               In the present case, in order to dump their overvalued

stock on the public market, Flaherty and Brazil needed to convince

                                           - 6 -
a transfer agent3 to convert their promissory notes into freely

tradable, "unrestricted" securities.       Weed's role was essential

here:       he wrote opinion letters to the transfer agents invoking

Rule 144 and representing that "[n]one of the persons who have

elected to convert" the notes into stock "are affiliates of the

[i]ssuer."      But, as Weed now acknowledges, these statements were

"wrong."       Flaherty and Brazil were, in fact, affiliates of the

issuing companies, so they were ineligible for the Rule 144 safe

harbor.

C.      Procedural History

              Weed went to trial in May 2016.    At the close of the

government's case, he summarily moved for a judgment of acquittal

and declined to put on any evidence of his own.        Ultimately, the

jury convicted Weed on all counts. Weed retained new counsel after

the verdict and moved for both a post-trial judgment of acquittal

and a new trial.      See Fed. R. Crim. P. 29, 33.   In so doing, Weed,

for the first time, made the argument that is now the focus of his

appeal:      that irrespective of his knowing misstatements about Rule

144, Section 3(a)(9) of the Securities Act provided an alternative

ground to exempt all of the securities from registration.        Thus,

according to Weed, his "opinion letters were correct, even though

        3
       "A transfer agent is responsible for recording changes of
ownership of securities, canceling obsolete certificates, and
issuing new ones." Geiger v. SEC, 363 F.3d 481, 486 n.3 (D.C.
Cir. 2004) (citation omitted).

                                  - 7 -
for the wrong reason."     The district court rejected this argument

and denied Weed's motions.

                                    II.

           On appeal, Weed primarily argues that, in light of his

interpretation     of   Section   3(a)(9),    the     trial   evidence    was

insufficient to support his convictions.         He also claims that the

district   court   constructively    amended    the    indictment    in   its

instructions to the jury.     We address these arguments in turn.

A.   Evidentiary Sufficiency

           As an initial matter, the parties dispute whether Weed

preserved his Section 3(a)(9) argument for appeal.            Because Weed's

claims are easily disposed of on the merits, we decline to decide

this preliminary question and assume, favorably to Weed, that the

de novo standard of review governs.          In the Rule 29 context, the

operative question is "whether any rational factfinder could have

found that the evidence presented at trial, together with all

reasonable inferences, . . . established each element of the

particular offense[s] beyond a reasonable doubt."             United States

v. Richard, 234 F.3d 763, 767 (1st Cir. 2000).

           The bulk of Weed's appellate brief is devoted to arguing

that Section 3(a)(9) permanently exempts an entire "class[] of

securities," and thus is not a mere transactional exemption like

the ones found in Section 4.        15 U.S.C. § 77c(a).          If this is

correct, the provision would not only have applied to Flaherty and

                                  - 8 -
Brazil's initial conversion of their debt to common stock,4 but

also to all subsequent transactions in the resulting securities.

Weed's proffered interpretation of Section 3(a)(9) is, however,

contrary to the reading that the SEC has consistently employed for

more than eighty years.      See, e.g., Thompson Ross Sec., 6 S.E.C.

1111, 1118 (1940); Letters of Gen. Counsel Discussing Application

of Section 3(a)(9), Securities Act Release No. 646, 1936 WL 31995,

at *4 (Feb. 3, 1936).

           Even assuming for the sake of argument that Weed is right

about the meaning of Section 3(a)(9), that in itself would not

entitle him to relief.      This is so because Weed was not charged

with the sale of unregistered securities or conspiracy to commit

that offense.    Instead, he was charged with fraud based on his

opinion letters falsely stating that the Rule 144 safe harbor

applied.    On appeal, Weed raises two narrow arguments as to how

his view of Section 3(a)(9) entitles him to acquittal.        First, he

claims that, because the underlying securities were not required

to be registered, it was "legally impossible" for him to commit

the charged offenses.      Second, he contends that, because Section

3(a)(9)    provided   an   alternative   ground   for   exemption,   his

misstatements about Rule 144 were immaterial as a matter of law.

     4 In the district court, the government took the position that
the "Section 3(a)(9) exemption likely did apply" to this initial
conversion.

                                 - 9 -
            The first of these arguments need not detain us long.

Weed's legal impossibility defense is entirely predicated on a

misreading of the indictment, namely, Weed's assertion that "all"

of his convictions are "based on the theory that he conspired to

sell unregistered stock."               In Weed's view, because the shares at

issue     were    exempt        from       the     Securities    Act's   registration

requirement, "no statute prohibited" the activity in which he

planned to engage.             United States v. Fernandez, 722 F.3d 1, 32

(1st Cir. 2013).              But Weed does not adequately explain how the

purported        Section        3(a)(9)          exemption    negates    the    federal

prohibitions on fraud that the jury found him to have violated.

Even assuming that the exemption applied and the conspirators were

thus entitled to receive freely tradable shares, that fact would

not excuse Weed's resort to misrepresentations to help Flaherty

and Brazil obtain the stock.                     Indeed, an individual "who elects

. . . a course" of fraudulent "self-help may not escape the

consequences by urging that . . . the statute which he sought to

evade" did not apply.               Dennis v. United States, 384 U.S. 855, 867

(1966).    Ultimately, despite Weed's protestations to the contrary,

"[t]his is a prosecution directed at [Weed's] fraud[,] . . . not

an   action       to     enforce"          the     Securities    Act's   registration

requirement.       Id.

            The        crux    of    the    second     of    Weed's   Section   3(a)(9)

arguments is that the applicability of that exemption rendered his

                                            - 10 -
false statements about Rule 144 immaterial as a matter of law.

Materiality is a required element of both securities fraud and

wire fraud.    See Neder v. United States, 527 U.S. 1, 25 (1999)

(wire fraud); Flannery v. SEC, 810 F.3d 1, 9 (1st Cir. 2015)

(securities     fraud).        In     the     securities   context,   "[a]

misrepresentation is material if there is a substantial likelihood

that [it] would affect the behavior of a reasonable investor."

SEC v. Ficken, 546 F.3d 45, 47 (1st Cir. 2008).              This standard

presents a "mixed question of law and fact," involving "delicate

assessments of the inferences a 'reasonable [investor]' would draw

from a given set of facts and the significance of those inferences

to him."    TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450

(1976).     For this reason, the materiality issue is "peculiarly

one[] for the trier of fact" and may only be resolved "as a matter

of   law"   where   the   relevant    misstatements   "are   so   obviously

important [or unimportant] to an investor, that reasonable minds

cannot differ on the question."         Id. (citation omitted).

            Here, we need not resolve the parties' dispute about the

correct interpretation of Section 3(a)(9).5         This is because, even

if Weed's novel position is correct, a reasonable jury could

nonetheless find that his admitted lies about the applicability of

Rule 144 were material.      Weed fully acknowledges that his reading

      5
      And we similarly need not weigh in on what, if any, deference
is owed to the SEC's interpretation of that provision.

                                     - 11 -
of Section 3(a)(9), to apply not only to the initial exchange with

the issuer but also to all subsequent transactions in the relevant

securities,   contradicts   over    eighty   years   of   securities   law,

albeit in the civil enforcement context. We have little difficulty

concluding that a reasonable transfer agent,6 or a subsequent

purchaser of the shares for that matter, might be hesitant to rely

on such an untested theory.         Indeed, Weed fails to point to a

single case or other authority interpreting the Section 3(a)(9)

exemption in the manner that he now proposes.        And, moreover, Weed

concedes that "[e]ach . . . transfer agent" did, in fact, "rel[y]

on" his Rule 144 representations to issue the requested stock.

Thus, the district court's denial of Weed's Rule 29 motion was

correct, irrespective of the merits of his underlying position on

Section 3(a)(9).7

     6 Weed fails to develop any argument that, in order to be
convicted, his misstatements had to be material to investors, as
opposed to the transfer agents who were the direct recipients of
his opinion letters.    Any argument on this point is therefore
waived. Moreover, courts have interpreted the federal securities
laws to proscribe frauds against intermediaries, as well as those
perpetrated directly on investors. See United States v. Naftalin,
441 U.S. 768, 770 (1979) (holding that Securities Act "prohibits
frauds against brokers as well as investors"); see also 15 U.S.C.
§ 78j(b) (prohibiting "direct[] or indirect[]" fraud in connection
with a securities transaction).
     7 Weed also attempts to repackage his Section 3(a)(9) argument
to impugn the district court's denial of his motion for a new trial
under Rule 33. For the same reasons discussed above, we find no
"manifest abuse of discretion" and, accordingly, reject Weed's
claim.   United States v. Villarman-Oviedo, 325 F.3d 1, 15 (1st
Cir. 2003).

                                   - 12 -
B.      Constructive Amendment

               Weed's    final     plaint    is    that     the      district       court

constructively amended the indictment in its instructions to the

jury.    "[A] constructive amendment occurs when the charging terms

of an indictment are [effectively] altered . . . by prosecution or

court after the grand jury has last passed upon them."                             United

States    v.    Taylor,    848 F.3d 476,    495   (1st    Cir.    2017)      (first

alteration in original) (citation omitted); see also United States

v. Dowdell, 595 F.3d 50, 67 (1st Cir. 2010) (explaining distinction

between literal and constructive amendments).                     Because Weed did

not contemporaneously object, we review his claim for plain error.

See Taylor, 848 F.3d at 495.              Accordingly, in order to prevail,

Weed must establish that "an error occurred which was clear or

obvious and which not only affected [his] substantial rights but

also    seriously       impaired    the     fairness,     integrity,         or    public

reputation      of   judicial      proceedings."          Id.   at     488    (citation

omitted).        Weed falls well short of satisfying this exacting

standard.

               Weed bases his constructive amendment claim on a single

isolated remark made at the beginning of the court's instructions

on wire fraud, after the judge had already discussed the elements

of securities fraud and conspiracy.                The court directed the jury

to specific paragraphs in the indictment's "general allegations"

pertaining to the purposes of the charged conspiracies.                           It then

                                        - 13 -
noted, "[t]he government says one purpose of the conspiracy was to

offer and sell unregistered securities in violation of the federal

securities laws.     That is the Securities Fraud.          And then another

purpose was to engage in a pump-and-dump scheme . . . ."                  Weed

argues that this language constructively amended the indictment to

allow the jury to return a guilty verdict on the securities fraud

charges based solely on a finding that "Weed sold or offered to

sell unregistered securities."

             Viewed "in their totality," however, we are confident

that the court's instructions accurately conveyed the elements of

securities fraud.     United States v. Melendez, 775 F.3d 50, 58 (1st

Cir. 2014).     The statement to which Weed's complaint is directed

was merely an attempt to orient the jurors by distinguishing the

conspiratorial     object     that   the   court    had   already    discussed

(securities fraud) from the one that it was currently addressing

(wire fraud).      The stray remark did nothing to alter the court's

prior instructions on securities fraud, which did not so much as

mention "unregistered securities."            In fact, the court made clear

that the "guts of the Government's case" were Weed's alleged

"misstatements of material fact concerning control shares and the

distribution of control shares."           Weed utterly fails to explain

how,   in   this   context,    any   error     in   the   fleeting   statement

challenged on appeal "prejudiced his defense."              Taylor, 848 F.3d

at 496.     This omission dooms his constructive amendment claim.

                                     - 14 -
                    III.

For the foregoing reasons, we AFFIRM Weed's convictions.

                   - 15 -