Stephens v. United States, 5775.

• Decision Date: 02 June 1930
• Docket Number: No. 5775.,5775.
• Citation: 41 F.2d 440
• Parties: STEPHENS et al. v. UNITED STATES.
• Court: U.S. Court of Appeals — Ninth Circuit

41 F.2d 440 (1930)

STEPHENS et al. v. UNITED STATES.

No. 5775.

Circuit Court of Appeals, Ninth Circuit.

June 2, 1930.

Raymond Benjamin, of San Francisco, Cal., and Otto Christensen, of Los Angeles, Cal., for appellant Stephens.

Benjamin F. Bledsoe, of Los Angeles, Cal., for appellant Wells.

Wright & McKee and C. M. Monroe, all of San Diego, Cal., David H. Cannon, of Los Angeles, Cal., and Morrison, Hohfeld, Foerster, Shuman & Clark, of San Francisco, Cal., for other appellants.

Before DIETRICH and WILBUR, Circuit Judges, and NETERER, District Judge.

DIETRICH, Circuit Judge.

The six appellants, Stephens, Spicer, Wotkyns, Hallawell, Wells, and Steward, were convicted upon all counts but one in an indictment returned May 24, 1928, charging them on each of the first seventeen counts with using the mails to defraud (Cr. Code, § 215, 18 USCA § 338), and in the eighteenth count with a conspiracy to commit such offenses. On motion of the district attorney the seventh count was dismissed and reference hereinafter made to the first seventeen counts will be understood as excluding this one. The charges all have to do with the transactions of inter-related partnerships and corporations of which appellants were officers or agents. The period covered thereby was from about January 1, 1919, to the latter part of December, 1926, at about which latter date the concerns became bankrupt. Generally speaking, they were engaged in California in purchasing issues of corporate stocks and bonds and selling such securities in small lots to the public. Essentially the fraud charged consisted in false representations made to the public in respect of these securities, and also touching sales of the stock of the corporations themselves and in the use by the defendants of the funds of the corporations.

Very briefly but adequately for present purposes, the defendants in their brief have summarized the features of the alleged scheme to defraud as set forth in the first 17 counts of the indictment, as follows:

"(A) Failure by the defendants to deliver and intent of the defendants to take the money of the investors and never to deliver any securities whatever, as set out in paragraphs (1), (8), (9) and (10), and failure to return securities deposited as collateral, as set out in paragraph (5) supra.

"(B) Delivery by the defendants of securities, bonds, stocks and interim receipts of no value whatever, as set out in paragraphs (2), (3) and (4), supra.

"(C) Promises to purchase stock of Stephens & Company, from the investors and failure of both the defendants and the corporations to ever repurchase any of said stocks, as set out in paragraphs (6) and (11), supra.

"(D) Circulation of false financial statements and payments of dividends not from net earnings but from capital and false statements as to the earnings and profits; and that the investment in the stock of the corporation was a safe and profitable one, as set out in paragraph (12), supra.

"(E) Conversion of more than $200,000.00 by the defendants, the said defendants making no return or payment whatever therefor to the said corporations, as set out in paragraph (1), supra.

"(F) The false representations as to the value of the stock of Stephens & Company inasmuch as the stock was of little or no value, as set out in paragraph (13), supra.

"(G) The use of money and property of the said corporation (causing such assets to be diminished and depreciated) for the financing of the defendants' own private dealings, as set out in paragraph (14), supra."

The business originated with appellant Stephens, who soon thereafter associated with him the appellant Spicer, under the name of Stephens & Company. This was in 1909. In 1911, the business was incorporated under the name of Stephens & Company, with a capital stock of 250 shares of the par value of $100 each. As the business grew the capital stock was increased from time to time, in 1914 to $100,000, in 1919 to $1,000,000, with both common and preferred stock, and in 1922 to $2,000,000. Up to 1919 the stock was all owned by Stephens and Spicer. The company had an extensive organization covering the state of California, with offices in San Diego, Los Angeles, and San Francisco, and branch offices at Oakland and Pasadena. It had correspondents in eastern and European money centers, with private wire connections to New York, and held seats on the stock exchanges in Los Angeles and San Francisco. Because of certain restrictions of these exchanges, in 1917 a partnership was formed between Stephens and Spicer for the purpose of handling the brokerage branch of the business. About 1919 another corporation was formed, known as the "Public Lien & Realty Company," to which, under a permit from the corporation commissioner of the state, the assets of Stephens & Company were transferred, subject to all its debts and liabilities, in exchange for all the authorized capital stock of the transferee. It is to be inferred that the properties so transferred were, in the main, what are called "frozen assets." This course was pursued, so it is contended by appellants, to enable Stephens & Company to carry on its brokerage and investment banking business with greater facility and unhampered by these nonliquid assets.

In the latter part of 1922, or early in 1923, a new corporation was organized called Stephens and Company, under a recently enacted law of California permitting the organization of corporations with stock of no par value. It is the contention of appellants that the old company found itself in need of more capital to carry on its increasing business, and the purpose was to transfer all of the property and business interests of the old company to the new, and to acquire additional capital by selling the stock of the latter. However, efforts to have all of the stockholders of the old company exchange their stock for that of the new company were unsuccessful and, for that reason, the corporation commissioner would not permit the transfer of all of the assets of the old company to the new. The two, therefore, continued to do business until they collapsed and became bankrupt in December, 1926. In the record these companies are referred to as No. 1 and No. 2 and, during the life of the latter, they were apparently operated virtually as a single corporation, with the same personnel, but the old company, No. 1, was the more active, and in its name practically all of the business was transacted. In volume the business grew from $750,000 in 1911 to $22,000,000 in 1922, and the average volume during the period covered by the indictment was between $18,000,000 and $20,000,000 each year.

The transactions covered by the evidence did not, strictly speaking, constitute brokerage business; that is, the company did not act as a mere agent in the purchase and sale of stocks for its clients. Its general course of business was to purchase the whole or a large part of an issue of corporation stocks or bonds and then, through its agents, make sales of small parcels thereof to the investing public. Instead of delivering the stock or bonds thus sold to a purchaser, it accepted the purchase price and issued what is referred to as an "Interim Receipt," entitling the purchaser to the delivery of the specific stocks or bonds described therein. In many cases these interim receipts were never honored, the aggregate amount thereof outstanding at the time of the bankruptcy proceedings being approximately $400,000; but upon receiving the purchase price it was by the company deposited to its credit and used in carrying on its business. It would seem from the testimony that at one time or another during the period covered by the indictment the company acquired title to the securities so sold, sufficient in kind and quantity to make the deliveries called for by these receipts, but, as at least one of the reasons why it did not make delivery, the appellants contend that in carrying on its business and in taking over large issues of such bonds and stocks, it became necessary to borrow funds from banks and in doing so it deposited such securities in block with the banks as collateral, with the result that it lost control of them and deliveries thereof could not immediately be made. As charged in the indictment and as is contended by the government, one element of the alleged fraudulent scheme was that the company would thus sell securities with knowledge that it could not make, and had no intention of making, delivery to the purchaser.

During all, or a part, of the period covered by the indictment, Stephens, Spicer, Wotkyns, and Hallawell were officers of the company. Stephens, president of the company, was the manager at San Francisco, where the administrative offices and the "control books" of the business were maintained. Spicer, a vice president, continued in charge of the original offices at San Diego. Wotkyns, also a vice president, was manager of the Los Angeles office. Hallawell, beginning as a bookkeeper in 1919, became the secretary in December, 1924. Steward began to work for the company in 1922 and later became manager of the branch office in Oakland. Wells began as a salesman in 1922 and later became manager of the branch office in Pasadena.

The transcript of the record is very voluminous and the briefs are of unusual length, many questions being discussed; and the problem of adequate treatment within the reasonable compass of an opinion is attended with great difficulty. The brevity of our comment on any particular specification must therefore not be taken as indicative of inadequacy of consideration.

In both form and substance the indictment and the several counts thereof are thought to be sufficient. The principal contention under this head relates to the conspiracy charge and particularly the averment of the overt acts. As is the common practice, after a description of the conspiracy, this count sets forth that "in pursuance of * * * and for the purpose...