United States v. Schaefer

• Decision Date: 16 March 1962
• Docket Number: No. 13278.,13278.
• Citation: 299 F.2d 625
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Carl D. SCHAEFER, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

299 F.2d 625 (1962)

UNITED STATES of America, Plaintiff-Appellee, v. Carl D. SCHAEFER, Defendant-Appellant.

No. 13278.

United States Court of Appeals Seventh Circuit.

February 14, 1962.

Rehearing Denied March 16, 1962.

COPYRIGHT MATERIAL OMITTED

George B. Collins, Chicago, Ill., for appellant.

James P. O'Brien, U. S. Atty., Robert F. Monaghan, Asst. U. S. Atty., Chicago, Ill., for appellee.

John Peter Lulinski, John J. Quan, Asst. U. S. Attys., Chicago, Ill., Thomas S. Howard, United States Securities and Exchange Commission, Chicago, Ill., of counsel.

Before HASTINGS, Chief Judge, and KILEY and SWYGERT, Circuit Judges.

SWYGERT, Circuit Judge.

Defendant, Carl D. Schaefer, was indicted and convicted on ten counts of using the mails in the employment of a scheme to defraud in the offer and sale of securities proscribed by Section 17(a) (1) of the Securities Act of 1933, 15 U.S.C.A. § 77q(a) (1), and on two counts of using the mails to deliver an unregistered security proscribed by Section 5 (a) (2) of the Securities Act of 1933, 15 U.S.C.A. § 77e(a) (2). He was sentenced to one year's imprisonment on each count, the first six counts to be concurrent with the last six for a total of six years, and was further sentenced to a fine of $1,000.00 on each count, for a total of $12,000.00 in fines. Defendant appeals primarily on the ground that the trial court, sitting without a jury, erred (1) in convicting on certain counts when there was no proof that defendant made misrepresentations to the investor involved in those particular counts, and (2) in preventing two of defendant's witnesses from testifying because of their presence in the courtroom after imposition of a rule requiring sequestration of witnesses. The pertinent facts follow.

Defendant claims he has invented a machine which can create steam with such small expenditures of energy that he believes it may eventually make atomic power obsolete. According to his assertions the steam is created by the action of shock waves in an enclosed body of water. The shock waves are set up by means of revolving plates which cause friction inside the water-filled casing, thus turning the water into steam. Presumptively, the only need for energy is the power needed to rotate the plates and with this small energy requirement such a machine would be a most economical source of heat and power.

Many witnesses testified the machine did produce large quantities of steam when demonstrated at defendant's shop. However, a government witness testified to the effect that the steam was not hot. Defendant offered to demonstrate the capabilities of the invention in the courtroom but this was not allowed. The court accepted the government's position that the merits of the invention were not in issue since there was no charge that misrepresentations as to the operating characteristics and workability of the machine were a part of the scheme to defraud.

The indictment sets forth twenty-two allegedly false representations comprising the scheme to defraud. None of the representations relate to the workability or the merits of defendant's steam-generating machine. The misrepresentations charged in the indictment as comprising the scheme consist of statements made to prospective investors in certain securities, to-wit: "investment contracts and evidences of indebtedness relating to completing the development by the defendant of a machine for generating steam through hydraulic forces." The allegedly false statements include representations that a number of manufacturers, Dow Chemical Company, the du Pont Company, Chrysler Corporation and General Motors, among others, had formed a syndicate to purchase defendant's rights to his invention and had placed ten million dollars in escrow with the Chase National sic Bank in New York City; that Fairbanks-Morse & Company and The Crane Company had each offered one million dollars for defendant's machine; and that the United States Navy was interested in buying defendant's machine.

The securities sold by these allegedly false representations consisted of contracts between the investors and defendant. By the terms of the contract the investor was assigned an interest, pro rata with other investors, in royalties and profits accruing to defendant as a result of the sale or lease of the patent rights to his invention. The investor's interest was limited to ten times his investment. When this ratio was reached the contract terminated. The contracts are securities within the meaning of the Securities Act of 1933, 15 U.S.C.A. § 77b.

Defendant admitted during the Securities and Exchange Commission's investigation prior to his being indicted that he had raised over $2,000,000 from several hundred investors. A number of these investors testified at the trial to misrepresentations and false pretenses made to them by the defendant. For example, defendant told one investor that the United States Navy wanted to buy his machine for millions of dollars and that a syndicate, interested in buying his machine, and consisting of Dow Chemical Company, Union Carbide Company, General Electric Company, General Motors Corporation, and the du Pont Company, had placed ten million dollars in escrow with the Chase National Bank of New York City on May 5, 1954, and that on November 6, 1954, this money would be transferred to an account at the Bank of Wilmette where it would be paid out to investors at the ratio of $10.00 return for every $1.00 invested after deducting $2,500,000 for payment to the government as taxes.

To another investor defendant represented that The Crane Company had offered him one million dollars for his invention and to others that Fairbanks-Morse & Company had offered a like amount for his machine. To other prospective investors defendant said that the United States Navy had approved his machine and was going to use it in submarines; that General Electric Company or Western Electric Company wanted to buy his machine; that General Motors Corporation wanted to buy his machine for millions of dollars; that a syndicate was to pay five million dollars down payment to defendant for his invention and that in a few months from June, 1954, the investors would be repaid $10.00 for every $1.00 they had invested.

A stipulation was signed by defendant during the trial that, if called, the testimony of various company officials and persons about whom representations were made by defendant would be as follows: The Chase Manhattan Bank had never heard of defendant, his machine, or any escrow agreement relating thereto; Chrysler Corporation, General Motors Corporation, Dow Chemical Company and E. I. du Pont de Nemours & Company had never entered into dealings with defendant nor placed money in escrow to purchase a machine from defendant; the United States Navy had not heard of defendant nor dealt with him; and General Electric Company, Fairbanks-Morse, Western Electric, and The Crane Company had no contact with defendant and knew nothing of his machine.

Defendant's answer was that he did not make the misrepresentations or, if he did, he had relied on what others told him without checking the accuracy of the reports. This ignorance of facts is unavailing as a defense "where the defendant, by the exercise of due diligence, could have become aware of his mistakes, especially where others may suffer a loss by his misstatements." Stone v. United States, 6 Cir., 113 F.2d 70, 75.

Defendant complains the scheme was established primarily by testimony of victims who are not mentioned in the counts. This argument has been answered in Frank v. United States, 10 Cir., 220 F.2d 559, 563 where the court said, "Since it is the use of the mails in furtherance of the fraudulent scheme that is prohibited rather than fraud upon any recipient of materials sent through the mails, the testimony of a victim is admissible to prove the scheme to defraud even if there has been no use of the mails in defrauding that party." Thus, the existence of a fraudulent scheme was properly shown and the evidence was ample to prove its existence.

The crucial question is whether the government proved as charged in counts one to ten that defendant employed this scheme in the sale of the "ten for one" contracts by the use of the mails.

Clearly it is only when the mails are used in employing the scheme that the scheme becomes a federal crime. The use of the mails need not be central to the scheme but may be entirely incidental, United States v. Cashin, 2 Cir., 281 F.2d 669, and the mail need not contain fraudulent representations, Cresswell-Keith, Inc. v. Willingham, 8 Cir., 264 F.2d 76.

Nevertheless, we hold that in order to sustain a conviction the government must show some impact of the scheme on the investor and that the mails were used in those instances where the impact occurred. To state our holding differently, even though a scheme to defraud in the sale of securities may have been devised and have been operative on certain investors, if a sale of these same securities would be legal absent the employment of the scheme and if the sales to those investors in which the use of the mails are charged is not tainted by the employment of the scheme, no offense has been proved. The statute is clear in this regard; the mail must be used in employing the scheme however incidental the mailing may be.

In the instant case the government contends the crime is established even though none of the alleged misrepresentations were made to the investors named in some of the counts. With this we cannot agree. The government has not challenged the workability of the machine and would not agree to its demonstration in court. Thus, we are forced to assume that any representations made as to the merits of the machine were not false. The investors fall into two classes: those to whom a fraudulent scheme was employed by way of misrepresentations as to financial backing and those to whom no such misrepresentations...