United States v. Ross

• Decision Date: 05 July 1963
• Docket Number: No. 335,Docket 28033.,335
• Citation: 321 F.2d 61
• Parties: UNITED STATES of America, Appellee, v. Howard ROSS and Paul Gordon, Defendants-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

321 F.2d 61 (1963)

UNITED STATES of America, Appellee, v. Howard ROSS and Paul Gordon, Defendants-Appellants.

No. 335, Docket 28033.

United States Court of Appeals Second Circuit.

Argued May 27, 1963.

Decided July 5, 1963.

Certiorari Denied October 28, 1963.

COPYRIGHT MATERIAL OMITTED

Milton S. Gould, New York City (Gallop, Climenko & Gould, New York City, Alan J. Hartnick, New York City, of counsel), for appellant Howard Ross.

Jacob W. Friedman, New York City, for appellant Paul Gordon.

Thomas J. Cahill, Asst. U. S. Atty. for Southern District of New York (Robert M. Morgenthau, U. S. Atty. for Southern District of New York, Arnold N. Enker, Asst. U. S. Atty., on the brief, for appellee.

Before WATERMAN, FRIENDLY and SMITH, Circuit Judges.

Certiorari Denied October 28, 1963. See 84 S.Ct. 170.

FRIENDLY, Circuit Judge.

These appeals concern another episode in the fraudulent career of Kimball Securities, Inc., one phase of which has recently been recounted in United States v. Aronson, 48 F.2d 319 (2 Cir.1963). Indeed, the two trials sprang from the same indictment. A preamble to this charged, substantially in the language of § 17 of the Securities Act of 1933, 15 U.S.C. § 77q, that Kimball Securities, Inc., and numerous other persons, including Gordon and Ross, by the use of transportation and communication in interstate commerce and of the mails, employed a device, scheme and artifice to defraud, obtained money and property by untrue statements of material facts and omissions to state material facts necessary to make the statements not misleading, and engaged in transactions that operated as a fraud and deceit on purchasers of varions securities, including common stock of Mark, Inc. The trial of Gordon on three substantive counts and a conspiracy count and of Ross on two substantive counts and the conspiracy count was severed from that of the Aronsons. At the close of the Government's case, the judge dismissed two substantive counts against Gordon, one against Ross, and the conspiracy count against both. The remaining counts, which were submitted to the jury, were Count 3, charging Gordon and others with use of the mails to send a confirmation of a purchase of Mark, Inc. stock to Hazel, Mae & Sam King, Jr., in Conway, Arkansas, and Count 10, charging Ross and others with use of the mails to send a confirmation of a purchase of Mark, Inc. stock to William S. Mueller in Amherst, Mass., both acts alleged to be "in furtherance of said scheme and artifice to defraud." Verdicts of guilty, judgments of conviction, sentencing and appeals followed.

Kimball Securities, Inc. was a typical "boiler-room" operation. Joseph Kimball, its president and guiding light, who had pleaded guilty, gave a vivid description of its sales methods. The process would begin by sending to persons on various occupational lists, "such as doctors, plumbers, anything you want," which Kimball owned or would purchase, "teaser letters" describing the bright financial future afforded by low-priced stocks.¹ These were followed by sales literature touting some particular stock. Next would come a telephone call from a salesman called an "opener", who "would try and sell the prospect as much or as little as he could." This would be followed by more mail relating the "good news about the company," and then by the knock-out blow, a call from a "high-pressure salesman", colorfully characterized as a "loader", who would "try and increase the purchase of the stock."

One of the stocks to which Kimball turned its attention was that of Mark, Inc.; it arranged with one Cass, an officer of Mark, to sell this stock on a basis whereby the proceeds would be divided equally between Cass and Kimball. From July 21, 1958 to February 5, 1959, this was the only security — we rather hesitate to use that word — which Kimball sold; the price went from $1.50 to $2.35 per share; 258,000 shares were sold to 790 customers.

Sam King, a plumber living in Conway, Ark., testified that during July 1958, he received some literature from Kimball concerning Mark, Inc. About a week later he received a telephone call at his home, between 6 and 7 P.M. Central Standard Time, from a man who identified himself as Paul Gordon of Kimball Securities. A telephone company toll ticket established that on July 28, 1958, at 8:35 P.M. Eastern Daylight Saving Time (equivalent to 6:35 P.M. Central Standard Time), a call to King, lasting 20 minutes, was made from Gordon's home and charged to the Kimball number. King testified that the caller, who claimed he had been given King's name by a friend of King's, said that Kimball Securities had a block of shares in Mark, Inc. and he was getting some new customers, that Mark, Inc. "was an old reliable company and they were mining, and they were going to merge it with a helicopter firm, and the stock would double in probably thirty days, and that he would advise me when to sell and when to buy." King asked whether Kimball Securities was "anything like Merrill, Lynch, Pierce, Fenner & Beane." The caller, owning that "it was not as big an organization," said "it was just as reliable"; he also stated that if King didn't make any money, he couldn't either, and that he was staying late in his office to make calls to King and others. King bought 300 shares at $1.50 each. A man identifying himself as Gordon and having the same voice as the first caller telephoned later to urge further purchases. When King tried to sell the shares, he was informed by a Little Rock brokerage firm that no takers could be found at a price of 40 cents. Gordon did not testify.

Gordon's appeal raises no questions of identification worthy of discussion, since the toll ticket was ample evidence to support a finding that he was the man who telephoned King. We shall discuss his claim of error in refusing to strike the testimony of the witness Gentzel when we come to Ross' appeal. His major contention is that there was insufficient evidence of violation of § 17 of the Securities Act because he was warranted in relying on the information about Mark, Inc. given him by his employer. We should have the greatest difficulty in accepting that argument on the facts here. Even though Gordon was employed at Kimball's for only seven working days, the five that had elapsed before his call to King should have sufficed to teach anyone, particularly a man like Gordon, who had previously worked for a respected securities firm, exactly what was going on; moreover, the "literature" on Mark prepared by Kimball was suspicious on its face to anyone with the slightest financial knowledge.² The evidence against Gordon was far more damning than what we have held sufficient in revocation proceedings, see Berko v. S. E. C., 316 F.2d 137 (2 Cir. 1963). We are not here required to determine how far the principles set forth in that and other decisions apply also in criminal prosecutions. For the jury was warranted in finding, under the proper instructions it received, that Gordon knowingly lied when he made statements to King which were not based on information supplied by Kimball, such as that he had gotten King's name from a friend, that Kimball Securities was "just as reliable" as Merrill Lynch, that he would make no money unless King did, and that he was staying late in the office to make the call. It would have been justified also in finding that when Gordon stated his expectation that the stock would double in price in thirty days, he was voicing a belief that did not exist (unless it was based on the expected results of Kimball's high pressure sales campaign, in which event he was omitting "to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading"), and that when he agreed to advise King when to sell, he was making a statement he had no intention of carrying out. All these alleged misrepresentations were plainly frauds within statutes antedating § 17(a) (2), see Bentel v. United States, 13 F.2d 327, 329 (2 Cir.), cert. denied sub nom. Amos v. United States, 273 U.S. 713, 47 S.Ct. 109, 71 L.Ed. 854 (1926); Van Riper v. United States, 13 F.2d 961, 964-965 (2 Cir.), cert. denied sub nom. Ackerson v. United States, 273 U.S. 702, 47 S.Ct. 102, 71 L.Ed. 848 (1926); and within that section also, 3 Loss, Securities Regulation (2d ed. 1961) 1430-39, and authorities cited.³

Ross was in Kimball's employ for the last two weeks of November, 1958. The count against him that was submitted to the jury related to a call allegedly made to William S. Mueller, a research professor at the University of Massachusetts, which resulted in the sale of 100 shares of Mark, Inc. at $2.35 per share on November 26. The caller, identifying himself as Ross, told Mueller, who had previously received the "investment news letter" about Mark, that Mark "was a very sound investment, that he was quite certain that the stock would at least double in approximately six months, and that it might go as high as 10 to $14 a share within six months," and also that Kimball Securities "was a very reliable company, that they had hired stock analysts who were analyzing the various stocks so as to protect their customers." Ross testified that he could not remember whether or not he had called Mueller, that he had studied Kimball's literature about Mark for almost a day and thought it was "a good security" and "should be selling at a higher price" if all the reports were true, and that he left Kimball principally because he found someone else at his desk and the prospect cards assigned to him strewn about. Postponing questions as to the application of the hearsay and best evidence rules in connection with the identification of Ross as Mueller's caller, we shall first deal with other points raised on his appeal.

Over consistent objection by defense counsel, the prosecutor subjected Ross to extensive cross-examination on his career as a stock salesman. He...