United States v. Deutsch

• Citation: 451 F.2d 98
• Decision Date: 21 September 1971
• Docket Number: No. 995,Dockets 35468,996,71-1180.,995
• Parties: UNITED STATES of America, Appellee, v. Jerome DEUTSCH, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

451 F.2d 98 (1971)

UNITED STATES of America, Appellee, v. Jerome DEUTSCH, Appellant.

Nos. 995, 996, Dockets 35468, 71-1180.

United States Court of Appeals, Second Circuit.

Argued August 9, 1971.

Decided September 21, 1971.

Certiorari Denied January 10, 1972.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John Van Voorhis, New York City, for appellant.

Jack Kaplan, Asst. U. S. Atty., New York City (Whitney North Seymour, Jr., U. S. Atty., Jay S. Horowitz, Richard J. Davis and Ross Sandler, Asst. U. S. Attys., New York City, on the brief), for appellee.

Before FEINBERG, MULLIGAN and TIMBERS, Circuit Judges.

Certiorari Denied January 10, 1972. See 92 S.Ct. 682.

TIMBERS, Circuit Judge :

This appeal presents questions of first impression under the Investment Company Act of 1940 (the Act). It involves the first criminal prosecution charging violations of § 17(e) (1) of the Act, 15 U.S.C. § 80a-17(e) (1)(1964), during the thirty years the Act has been on the books—willful violations of the Act being punishable by a fine of not more than $10,000 and/or imprisonment of not more than two years. 15 U.S.C. § 80a-48 (1964).

Jerome Deutsch appeals from a judgment of conviction entered upon a jury verdict after a six day trial in the Southern District of New York, Charles M. Metzner, District Judge, finding him guilty, in violation of 18 U.S.C. § 2 (1964), of aiding and abetting one Frank D. Mills in knowingly accepting compensation from the issuer of certain securities while Mills was acting as agent for certain registered investment companies, in violation of 15 U.S.C. § 80a-17(e) (1) (1964). Deutsch also appeals from Judge Metzner's order denying his post-conviction motion for coram nobis relief, 321 F.Supp. 1356. Finding no reversible error, we affirm.

OFFENSES CHARGED

Deutsch was tried on one count of a seven-count indictment charging violations of § 17 of the Act, 15 U.S.C. § 80a-17(1964),¹ and of 18 U.S.C. § 2(1964).

Counts One and Two charged Detusch's co-defendant, Frank D. Mills, with knowingly effecting purchases of securities for his personal account and for the accounts of two registered investment companies of which he was an affiliated person, Puritan Fund, Inc. and Fidelity Trend Fund, Inc., in violation of § 17(d) of the Act, 15 U.S.C. § 80a-17(d) (1964). Counts Three and Four charged Deutsch with aiding and abetting these crimes, in violation of 18 U.S.C. § 2 (1964).

Count Five charged Mills with knowingly accepting compensation from Realty Equities Corporation in New York, the issuer of the securities, while Mills was acting as agent for the registered investment companies, in violation of 15 U.S.C. § 80a-17(e) (1) (1964). Count Six charged Deutsch with aiding and abetting this crime.

Count Seven charged both defendants with use of the mails in making false statements and omitting material statements regarding the transactions between Realty Equities and the investment companies with which Mills was affiliated, in violation of the Securities Exchange Act of 1934, 15 U.S.C. § 78j (b) (1964), and of 18 U.S.C. § 2 (1964). The government consented to a dismissal of Count Seven prior to trial.

Mills pleaded guilty to Count One on April 7, 1970. After Deutsch's trial, Mills was fined $7,500 on May 19, 1970, and Counts Two and Five were dismissed. Trial of Deutsch alone commenced April 20 and ended April 27, 1970. Counts Three and Four were dismissed at the close of the government's case. The jury found Deutsch guilty on the remaining count, Count Six. Deutsch was fined $10,000 on August 4, 1970.

TRANSACTIONS UNDERLYING OFFENSES CHARGED

Before discussing the claims raised on appeal, a narration of the events beginning in the summer of 1967 and culminating in the indictment returned April 11, 1969 is necessary to an understanding of the rather sophisticated crimes with which Mills and Deutsch were charged. Upon the record before us, the jury could have found as follows.

During the summer of 1967, Deutsch was executive vice-president and a member of the three-man board of directors of Realty Equities Corporation in New York, a real estate investment company listed on the American Stock Exchange. Realty had been founded by Deutsch and others in 1959. By 1968 it had consolidated assets of $137 million.

In the summer of 1967, Realty anticipated a forthcoming merger in connection with which it needed to raise a substantial amount of capital. Realty decided to finance the merger by a private placement, limited to institutional investors only, of $12 million in promissory notes with warrants attached. This security was to be issued in units of $500,000. Each unit was to consist of a $500,000 7½% 15-year promissory note, a warrant for the purchase of 37,500 shares of Realty stock at a gradually ascending price, and the right to use the note in lieu of cash when exercising the warrant. The purchase price of the unit was to be the face amount of the note. The initial exercise price of the warrant was to be the market price of Realty stock on the day before the first closing.

Deutsch was in charge of selling the issue. His initial efforts met with failure. As of December 4, 1967, he had not succeeded in selling a single note. While peddling this issue, however, Deutsch had his first contact with the co-defendant, Frank D. Mills, a contact which resulted in the first sale of Realty notes.

During the summer of 1967 and throughout 1968, Mills was a senior officer of Fidelity Management and Research Company in Boston, and of twelve mutual funds for which it acted as investment adviser. Mills was a member of the six-man investment committee of all the funds, whose aggregate assets exceeded $3.5 billion and whose combined stockholders numbered over 500,000. As such, he participated in the preparation of periodic guidelines listing securities and maximum dollar values which the fund account managers could buy or sell without approval; he also was one of the two men whose approval was needed for any transaction outside the guidelines. Mills was the account manager of one of the funds, the Puritan Fund, and, as such, he had authority to buy or sell up to $2 million in any bond and up to the guideline limits for approved stocks. Mills also was vice-president of eight of the funds, including Puritan Fund and Fidelity Trend Fund. It is undisputed that Puritan and Fidelity Trend were registered investment companies and that Mills was an affiliated person of each of them within the meaning of the Act. 15 U.S.C. §§ 80a-2(3), 80a-3, 80a-8 (1964).

Deutsch's first contact with Mills occurred as a result of Deutsch's attempt, in the summer of 1967, to sell some of the issue to Massachusetts Mutual Life Insurance Company in Boston. Homer Chapin, executive vice-president in charge of investments, was also a director of Fidelity Management and the chairman of its investment committee. He told Deutsch that state insurance law barred Massachusetts Life from purchasing that type of security ; but a few days later, Chapin recommended the issue to Mills, saying that from what he knew Realty was satisfactory in every way and that if he were interested he should contact Deutsch directly. The first sale of Realty notes ensued.

On December 8, 1967, Mills committed the Puritan Fund to purchase two notes. This first sale appeared to be the shot in the arm that Realty needed. With Mills' permission, Deutsch used Puritan's prestigious name in talking to prospective buyers. As Deutsch testified at trial, this was "a good sales pitch" and "very helpful." The entire offering was soon fully subscribed, and an additional $5 million in notes was authorized. This offering, too, was fully subscribed, with Puritan itself taking an additional $700,000 on June 14, 1968, bringing its investment up to the statutory limit of 10% of the offering. By August 9, 1968, Realty had thus succeeded in borrowing $17 million.

On August 29, 1968, Deutsch again called Chapin who had recently joined Realty's board of directors at Deutsch's invitation. Realty had contracted to repurchase five units from Republic National Life Insurance Company in Texas, one of the original subscribers, and had an option to repurchase seven more, the balance of Republic's interest, at prices which were advantageous in view of an appreciable rise in the market price of Realty stock.² Meanwhile, Massachusetts law had changed, and the notes were now permissible purchases for insurance companies. Deutsch was thus able to offer to sell Massachusetts Life some of the Republic National Life units. Deutsch did not disclose the repurchase contract between Realty and Republic National Life. He led Chapin to believe that the seller was Republic National Life and that the price had not yet been negotiated. Deutsch pointed out to Chapin that the exercise price was 15¼ whereas the stock was trading at 32. Chapin said he was interested and asked for more information.

On September 11, Richard Dooley, a Massachusetts Life securities analyst to whom Chapin had referred the matter, told Deutsch that Massachusetts Life was rejecting the offer because of house counsel's opinion that the price was so advantageous it gave the transaction the appearance of being a corporate gift in view of Chapin's interlocking directorships.³ Deutsch renewed the offer at a higher price, 7¾ premium per warrant instead of 3, saying that it brought the price into line with what he was told was the customary discount.⁴ Counsel for Massachusetts Life still thought the price was too advantageous. On September 25, Dooley relayed his company's final rejection.

Some time between September 23 and September 26, Chapin told Mills about Realty's exceptional offer and suggested that Mills call Deutsch. However, unknown to Chapin, Mills already knew about Deutsch's offer and had taken steps to seize the opportunity for himself. On September 16, five days after the initial rejection by...