537 F.2d 341 (9th Cir. 1976), 75-1222, United States v. Charnay
|Citation:||537 F.2d 341|
|Party Name:||UNITED STATES of America, Appellant, v. David B. CHARNAY et al., Appellees.|
|Case Date:||May 07, 1976|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
Rehearing and Rehearing En Banc Denied July 8, 1976.
[Copyrighted Material Omitted]
David Ferber, Sol. (argued), Securities and Exchange Commission, Washington, D. C., for appellant.
Moses Lasky (argued), of Brobeck, Phleger & Harrison, San Francisco, Cal., for appellees.
Before BROWNING and SNEED, Circuit Judges, and JAMESON, [*] District Judge.
JAMESON, District Judge:
This appeal from an order dismissing the indictment presents the question of whether the indictment, alleging a market manipulation artificially depressing the market price of a security on a national securities exchange, was sufficient to charge the defendants-appellees with a conspiracy to violate, and the violation of, the antifraud provisions of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78ff, Rule 10-b promulgated thereunder, and the wire fraud statute, 18 U.S.C. § 1343. We conclude that the indictment was sufficient to allege a criminal offense and reverse.
Charges against Defendants-Appellees
Two indictments were returned against defendants-appellees. The first, filed December 27, 1973, alleged that conduct of Howard Hughes and his associates in taking over Air West, especially certain guarantees against trading losses given by Hughes, violated 15 U.S.C. §§ 78i(a)(2), 78j(b), 78ff and Securities and Exchange Commission (SEC) Rule 10b-5 (manipulation of security prices, employment of manipulative devices), and 18 U.S.C. §§ 2, 3, 4, 371 and 1343 (aiding and abetting, accessory after the fact, misprision of a felony, conspiracy, and wire fraud). This indictment was dismissed on January 30, 1974, for failure to state an offense. The Government did not appeal the dismissal. A second indictment was returned on July 30, 1974 charging that the appellees' conduct in the Air West acquisition was in violation of 15 U.S.C. §§ 78j(b), 78ff and Rule 10b-5 and 18 U.S.C. §§ 2, 371, and 1343, thus omitting reference to 15 U.S.C. § 78i(a)(2) (manipulation of security prices) and 18 U.S.C. §§ 3 and 4 (accessory after the fact, misprision of a felony). The second indictment was dismissed on November 13, 1974 and is the subject of this appeal.
The defendants were identified in the indictment, for the period in question, as
follows: Hughes was the sole stockholder and managing agent of Hughes Tool, a Delaware corporation. Davis was legal counsel for Hughes Tool. Maheu was chief executive officer of Hughes/Nevada Operations. Charnay was a principal stockholder of a private corporation authorized to purchase and sell stocks. Two unindicted co-conspirators were also identified: Herman Greenspun, a newspaper publisher and owner of stock in Air West, and George Crockett, an owner of Air West stock. Air West is a Delaware corporation whose stock was listed and traded on the American Stock Exchange (the AMEX).
Both indictments detailed essentially the same facts as a basis for the charges against appellees. These facts were well summarized by the district court:
"The background facts alleged in the Indictment are that in August of 1968, defendants made an offer on behalf of Hughes Tool Company to acquire all the assets of Air West at a price which would yield to the stockholders approximately $22 per share; that on December 28, 1968, a majority of the stockholders voted to accept the offer; that on the same day a majority of the directors voted to reject the offer; that in order to coerce the directors to change their vote, defendants would threaten the opposition directors with lawsuits, would file such lawsuits and would artificially depress the price of Air West stock on the American Stock Exchange by causing Charnay to sell 59,100 shares of Air West stock 'short,' by causing Herman Greenspun to sell 15,000 shares of Air West stock and by causing Crockett to sell 12,000 shares of Air West stock on the American Securities Exchange, and at the same time, guaranteeing to these sellers by secret understanding a recovery of $22 per share irrespective of the price obtained on the Exchange. It is alleged that these activities caused a decline in the market price of Air West stock on December 31, 1968 from $18 per share to $15.75 per share."
The Government contends that the "aftermath" of these activities was a reversal by Air West's directors of their earlier position and a decision on December 31 to sell Air West's assets to Hughes Tool.
The July 30, 1974 indictment contains four counts. The first ten paragraphs of Count I identify the parties and describe their roles in the corporate takeover. Paragraphs 11 through 13 allege that (1) the defendants and the unindicted co-conspirators willfully and knowingly conspired and agreed to violate the securities laws, 15 U.S.C. §§ 78j(b), 78ff and Rule 10b-5; (2) the defendants and co-conspirators used the instrumentalities of interstate commerce, the mails, and the facilities of a securities exchange to conduct a manipulative scheme in contravention of the securities laws; and (3) the conspirators transmitted by wire interstate communications to induce the directors who had voted against the Hughes Tool Company proposal of Air West to change their votes, thus depriving the directors and shareholders of the right to conduct their corporation free from undue influence, deceit, and fraud, in violation of 18 U.S.C. § 1343.
Paragraph 14 describes the means by which the conspirators would carry out their plan, i. e., that the defendants Hughes, Davis and Maheu would represent that unless the Hughes Tool offer was accepted, the price of Air West stock would decline substantially; that the defendants and co-conspirators would manipulate and cause a decline in the market of Air West stock, and cause the Air West stockholders who sold their stock to receive artificially depressed prices; 1 and that the defendants Hughes, Davis and Maheu would cause telegrams to be sent to the directors of Air West threatening lawsuits if they did not change their votes. Paragraph 14 also lists ten overt acts committed in furtherance of the conspiracy, including three interstate conversations and an unspecified number of
interstate telegrams, all in violation of 18 U.S.C. § 371.
The second count incorporates by reference the first ten paragraphs of Count I and alleges that the conduct described in Count I constituted violations of 15 U.S.C. §§ 78j(b), 78ff, 18 U.S.C. § 2 and Rule 10b-5, in that the defendants wilfully and knowingly employed a scheme to defraud, made untrue statements of material facts and omitted material facts necessary to make the statements made not misleading, and used instruments of interstate commerce to accomplish their scheme by placing a telephone call on December 31, 1968 to carry out their plan, all of which operated as a fraud and deceit upon purchasers and sellers of Air West stock.
Counts III and IV
Count III alleges that for the purpose of executing the scheme to defraud described in Count I, the defendants caused to be transmitted in interstate commerce telephone conversations between Charnay in Las Vegas, Nevada, and a securities salesman in New York City, and Count IV alleges telephone conversations between a brokerage firm in Las Vegas and the AMEX in New York City, all in violation of the wire fraud statute, 18 U.S.C. § 1343 and § 2, aiding and abetting.
Order Dismissing Indictment
In its order dismissing the indictment the district court noted that "the gravamen of the Indictment is that unlawful means were employed by agreement as part of the conspiracy to accomplish the ultimate objective . . ." of acquiring the assets of Air West, an obviously lawful purpose. The court recognized that "the conduct alleged, if true, is . . . reprehensible and an abuse of the power of great wealth" but felt forced to conclude that the indictment had not properly alleged a public offense. In reaching this conclusion the order reviewed each of the statutes alleged to have been violated in the various counts of the indictment.
Discussing 15 U.S.C. § 78j(b), which makes it illegal to use a manipulative or deceptive device in contravention of the SEC rules, the court considered the several 10b rules promulgated under the statute to determine whether the conduct described in the indictment could be said to be within their prohibitions. The court characterized Rule 10b-1 as the "basic section of the regulation", which it noted incorporates 15 U.S.C. § 78i(a), making illegal manipulation "for the purpose of inducing the purchase or sale of . . . securit(ies) by others." The court concluded that the indictment did not properly allege a § 78i(a)(2) violation (and thereby a Rule 10b-1 violation) since there was no allegation of a purpose to induce the purchase or sale of securities. 2
The court found other 10b rules defined more specific manipulative activities, none of which described the defendants, alleged conduct. 3 The court noted that Rule 10b-5 "is basically the antifraud provision of the regulations. It does not purport to define manipulative activity". A review of the regulations led the court to conclude:
"Nowhere in the regulations has the commission said that it is an unlawful manipulative or deceptive device to cause substantial blocks of a security to be sold on a national securities exchange for the purpose of artificially depressing the market price of the security and to secretly guarantee to sellers a profit or favorable return from the sales. That, in essence, is what this Indictment charges."
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