United States v. Crosby

• Decision Date: 22 August 1961
• Docket Number: Docket 26398.,No. 302,302
• Citation: 294 F.2d 928
• Parties: UNITED STATES of America, Appellee, v. Francis Peter CROSBY, J. Leonard Goldberg, Philip Gordon, Eugene Meredith, Leo B. Mittelman, Worth Pettit, Jr., Paul Reicher and Philip Gordon & Company, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

294 F.2d 928 (1961)

UNITED STATES of America, Appellee, v. Francis Peter CROSBY, J. Leonard Goldberg, Philip Gordon, Eugene Meredith, Leo B. Mittelman, Worth Pettit, Jr., Paul Reicher and Philip Gordon & Company, Inc., Defendants-Appellants.

No. 302, Docket 26398.

United States Court of Appeals Second Circuit.

Argued May 9, 1961.

Decided August 22, 1961.

COPYRIGHT MATERIAL OMITTED

Arnold N. Enker and George I. Gordon, Asst. U. S. Attys., S. D. N. Y., New York City (Robert M. Morgenthau, U. S. Atty., and Peter H. Morrison, Asst. U. S. Atty., S. D. N. Y., New York City, on the brief), for appellee.

Richard Owen, New York City, for appellant Francis Peter Crosby.

Menahem Stim, New York City (Allen S. Stim, John F. Kelly, New York City, M. Walter Hulkower, North Hollywood, Cal., on the brief), for appellant J. Leonard Goldberg.

Maurice Nessen, New York City (Rubino, Franken, Kramer, Bam & Nessen, New York City, on the brief), for appellant Philip Gordon.

Charles Greenbaum, New York City, for appellant Eugene Meredith.

Edward M. Garlock, New York City, for appellant Leo B. Mittelman.

Edward E. Rigney, New York City (Alexander & Green, New York City, on the brief), for appellant Worth Pettit, Jr.

Moses L. Kove, New York City (Menahem Stim, New York City, on the brief), for appellant Paul Reicher

Before FRIENDLY and SMITH, Circuit Judges, and WATKINS, District Judge.^*

SMITH, Circuit Judge.

These are appeals pressed by a stock brokerage firm and seven individual defendants found guilty on various fraud and conspiracy charges of a fifty count indictment after a protracted jury trial of some fifteen weeks. Some appellants urge insufficiency of the evidence as grounds for reversal while others claim the case against them was rather weak and inconclusive — thereby magnifying the prejudicial effect of claimed misconduct and excessive zeal on the part of the prosecution and of alleged errors on the part of the Court. There is little choice, therefore, but to delineate in some detail the scheme or schemes charged to the appellants as developed in a trial transcript of approximately 9000 pages.

The only convicted defendant not appealing, Texas-Adams Oil Co., Inc. (Texas-Adams), was the central "glue" in the fraudulent schemes charged by the government. Count 1 was a so-called "wire fraud" count, 18 U.S.C. § 1343; in it defendants Crosby, McCarthy¹ and Pettit were accused of using interstate telephone wires in furtherance of a plan which resulted in the defendants "purchasing" control of Texas-Adams using that company's own funds as consideration, thereby defrauding the other stockholders. Counts 2-32 charged Crosby,² Meredith, Mittelman, Pettit and Texas-Adams with violations of 18 U.S.C. § 1341, the Federal "mail fraud" section. While each count was based on a separate alleged mailing, the "scheme or artifice" charged was the same in all cases. The government generally sought to prove that the defendants had made or knowingly sanctioned fraudulent misrepresentations to the investing public and to brokers and businessmen dealing with Texas-Adams; that defendants had engineered various corporate mergers and purchases, with little or no business substance, whose sole or principal purpose was the flooding of the market with worthless or overpriced Texas-Adams share certificates; and that defendants had fraudulently authorized the issuance of corporate stock without consideration in return for "kickbacks" from the proceeds of the sales of those shares. Further, the Count One "scheme" was incorporated by reference into these mail fraud counts.

The next seventeen counts charge all the aforementioned defendants, save Crosby, plus Goldberg, Gordon, Reicher and Philip Gordon & Co., Inc. with wilfully and knowingly using the mails to sell common stock of Texas-Adams — which stock was not covered by a registration certificate filed with the Securities and Exchange Commission, 15 U.S. C.A. §§ 77e(a) (1) and (2), 77x. Many of the mailings concerned a multi-colored brochure, allegedly containing many fraudulent misrepresentations, entitled "Texas-Adams — an industrial empire is under way."³ The final count was the ever present conspiracy indictment. In it were accused McCarthy and all the appellants in addition to Joseph Castagna and Guy Gully, acquitted by the jury. Numerous co-conspirators, not defendants, were also named — many of whom testified at the trial. The thrust of the alleged conspiracy was the use of the mails to foster the sale of unregistered securities; all of the appellants were convicted on this count.⁴

I. The Texas-Adams Story

A. Pre-Natal Activity

Relevant proof adduced by the government at trial actually went back in time several months before the principal "management" defendants obtained control of Texas-Adams. During the summer of 1955 McCarthy and Mittelman were engaged in negotiations with one Claget Sanders to purchase from the Ajax Oil Company concededly valuable oil producing properties in what were known as the Bonanza and Poplar fields in Montana and Wyoming. The price agreed upon was $1,250,000.

It was at about this time, in June, 1955, that the American Montana Oil & Gas Corporation, later used as a dummy buyer in the fraudulent takeover of Texas-Adams, was organized by Mittelman, a New York attorney; however, no organizational meeting was held until October, at which time Crosby, Pettit and McCarthy were elected its officers.

An early linking of appellant Crosby to McCarthy and Mittelman was shown by Basil Zavoico. He was a petroleum consultant approached by Crosby in May of 1955 to obtain engineering reports on the Bonanza and Poplar properties. A month later Crosby again retained him to prepare a statement reflecting the financial structure of a Dumont Airplane & Marine Instrument Co. after an anticipated purchase by that corporation of the Ajax properties. (Zavoico was told that American Montana held an option to purchase from Ajax — and would in turn sell to Dumont.) The terms of the projected Dumont-American Montana "sale" would have netted a $2 million profit for the latter company.⁵

Apparently lacking funds to swing the Ajax purchase, McCarthy and Mittelman then concluded an agreement, in Denver, with Homestead Oil & Uranium Co. of Colorado. They told Holland, president of Homestead, that they already had control of Dumont — and agreed, in return for a loan of $50,000 to be used as partial payment for the Ajax properties, to merge Homestead into Dumont.⁶ The instrumentality set up for this merger was still another penniless, dummy corporation, Sundown Oil Co. of Colorado, which had as officers and directors McCarthy, Mittelman and Paul R. Jones, a co-conspirator.

Although the record is silent on this point, plans for the acquisition of Dumont must have collapsed sometime that summer. Rather, an agreement was made between one Satiris Fassoulis and McCarthy whereby "groups" headed by those two men were to obtain control of Continental Car-na-var Corp. — at which time Continental would purchase all the stock of Sundown (which was to have acquired the Ajax properties). Holland and Homestead were in turn reassured by an agreement wherein Continental agreed to replace Dumont and merge with the uranium company.

The financial problems of McCarthy and Mittelman during this period are painfully obvious. The Ajax commitment called for 1¼ million dollars — the sole amount visibly raised was the $50,000 from Homestead in return for the promise of merger. The "McCarthy group" was to have produced $277,000 to purchase control of Continental in conjunction with Fassoulis; in order partially to meet their commitments in this direction, Mittelman was forced to go to Denver to obtain from Holland release of the same $50,000 which had been banked in Billings, Montana pending closing of the Ajax deal. This money was then forwarded to the New York attorneys of the Limestreet Corporation, from whom McCarthy and Fassoulis were purchasing control of Continental. In the end, both the Ajax and Continental deals fell through for lack of funds — but both of these episodes shed light on the eventual Texas-Adams machinations.

B. An "Industrial Empire" Is Begun

While Crosby's connections with the foregoing transactions can only tangentially be inferred, he here enters the scene, center stage. In August of 1955 he, with co-conspirator Lawrence Rosen, placed an ad in the Wall Street Journal seeking the controlling interest in a publicly held corporation. Among those responding to the ad were the controlling shareholders of Texas-Adams Oil Co., Inc., defendants Gordon, Goldberg and Reicher. They had incorporated Texas-Adams two years before and had financed it with a public issue exempt from registration under Regulation "A." The company's headquarters were in the offices of the brokerage firm, Philip Gordon & Co., Inc. Texas-Adams had been relatively dormant during its short history — only in March of 1955 did it acquire an interest in some Texas oil producing properties which earned about $10,000 in gross income by the time of the sale of control to McCarthy and his associates in late September of that year.

Preliminary negotiations were held among Crosby, McCarthy and Goldberg and agreement was reached on the sale of 283,000 shares of Texas-Adams for $105,000 — $45,000 at closing, $20,000 in sixty days and $40,000 in ninety days; the lion's share of the stock certificates was to be escrowed pending payment on the time notes.

Closing of the transaction was twice postponed because of the buyers' financing difficulties, the second postponement being accompanied by a $1,000 check, on September 25, 1955, to evidence the continuing good faith of the McCarthy group. Defendant Pettit had by that time joined the purchasing group as that check was traced from his account in a Salt Lake City bank.

The closing was finally consummated on September 27, 1955. The buyers' arrangements for "financing" were most...