U.S. v. Stirling

• Decision Date: 02 February 1978
• Docket Number: 67,Nos. 33,D,68,66,50,s. 33
• Parties: Fed. Sec. L. Rep. P 96,308, 2 Fed. R. Evid. Serv. 1257 UNITED STATES of America, Appellee, v. David STIRLING, Jr., William G. Stirling, Harold M. Yanowitch, Edwin J. Schulz and Rubel L. Phillips, Defendants-Appellants. ockets 77-1140, 1141, 1144, 1177 and 1178.
• Court: U.S. Court of Appeals — Second Circuit

Page 708

571 F.2d 708

Fed. Sec. L. Rep. P 96,308, 2 Fed. R. Evid. Serv. 1257

UNITED STATES of America, Appellee, v. David STIRLING, Jr., William G. Stirling, Harold M Yanowitch, Edwin J. Schulz and Rubel L. Phillips Defendants-Appellants.

Nos. 33, 50, 66, 67, 68, Dockets 77-1140, 1141, 1144, 1177 and 1178.

United States Court of Appeals Second Circuit.

Argued Aug. 29, 1977.

Decided Feb. 2, 1978.

William B. Lawless, New York City (Allen P. Rosiny, Hawkins, Delafield & Wood, New York City, of counsel), for defendants-appellants David Stirling, Jr. and William G. Stirling.

Bernard S. Meyer, Mineola, N. Y. (William B. Lawless, Allen P. Rosiny, Hawkins, Delafield & Wood, New York City, Meyer, English, Cianciulli & Peirez, P. C., Mineola, N. Y., of counsel), for defendant-appellant Harold M. Yanowitch.

Douglas F. Eaton, New York City, for appellant Edwin J. Schulz.

Michael B. Mukasey, New York City (Robert P. Patterson, Jr., W. Peter Burns, Patterson, Belknap, Webb & Tyler, New York City, of counsel), for appellant Rubel L. Phillips.

Angus MacBeth, Asst. U. S. Atty., Southern District of New York, New York City (Robert B. Fiske, Jr., U. S. Atty., for the Southern District of New York, W. Cullen MacDonald, Frederick T. Davis, Asst. U. S. Attys., Southern District of New York, New York City, of counsel), for the United States of America.

Before LUMBARD, OAKES and MESKILL, Circuit Judges.

MESKILL, Circuit Judge:

This is an appeal by David Stirling, Jr., William G. Stirling, Harold M. Yanowitch, Edwin J. Schulz, and Rubel L. Phillips from judgments of conviction entered on March 11, 1977, in the United States District Court for the Southern District of New York Marvin E. Frankel, Judge, after a six-week jury trial. Appellants were convicted of securities and mail fraud and conspiracy in connection with sales of stock in the Stirling Homex Corporation ("Homex"). Specifically, appellants were convicted of violating and, under 18 U.S.C. § 371, conspiring to violate §§ 17 and 24 of the Securities Act of 1933, 15 U.S.C. §§ 77q(a) and 77x, and 18 U.S.C. § 1341. Appellants were also convicted of conspiring to violate 15 U.S.C. § 78ff and 18 U.S.C. § 1001. We affirm.

Homex manufactured and assembled prefabricated multi-family modular housing. Its operations consisted of mass-producing individual apartment units, or "modules," using assembly-line production techniques, shipping them to a construction site and installing them in a previously-constructed concrete and steel frame so as to form multi-unit apartment buildings. Each of the appellants served Homex in one or more official capacities, and each had a considerable stake in Homex's financial success. David Stirling, Jr., was Chairman of the Board and Chief Executive Officer; he owned approximately two million shares of Homex common stock. William G. Stirling was President, Chief Operating Officer and a member of the Board; he, too, owned approximately two million shares. Harold M. Yanowitch was Executive Vice-President, Chief Legal Officer and a member of the Board; he owned approximately 160,000 shares. Edwin J. Schulz was Senior Vice-President of Operations, Controller and Principal Accounting Officer; he owned 3,200 shares. Rubel L. Phillips was Southern Region Vice-President; he owned an option to purchase 40,000 shares.

Count One of the nine-count indictment charged that the appellants defrauded Homex shareholders, officers, directors, auditors and others in registration statements filed in 1970 and 1971 with the Securities Exchange Commission ("SEC") covering the public offer and sale of common and preferred Homex stock. The government charged that this was accomplished by inflating reported earnings and by falsifying and concealing adverse material information in violation of 15 U.S.C. § 77q(a) ¹ and 15 U.S.C. § 77x. ² Count Two charged that appellants wilfully and knowingly made and caused to be made untrue statements of material facts, and failed to disclose material facts necessary to correct the misleading statements, in the 1971 registration statement filed with the SEC covering the public offer and sale of Homex preferred stock, also in violation of 15 U.S.C. § 77x. Counts Three through Eight charged that appellants devised a scheme to defraud Homex securities purchasers and others, to obtain money and property by means of fraudulent representations, and to implement the scheme by using the United States Postal Service, all in violation of 18 U.S.C. § 1341. ³ Specifically, appellants were charged with mailing on separate occasions two prospectuses, two annual reports and two quarterly reports to shareholders. Finally, Count Nine charged that appellants conspired to defraud the United States and the SEC and to violate 18 U.S.C. § 1001 ⁴ and 15 U.S.C. § 78ff ⁵ as well as 18 U.S.C. § 1341 and 15 U.S.C. §§ 77q(a) and 77x, such conspiracy being in violation of 18 U.S.C. § 371. ⁶ The jury found each appellant guilty of each charged violation. ⁷

The story is a complicated one, involving land transactions that were not what they were claimed to be, labor relations that were not only inappropriately "cozy" but undisclosed, contracts for module sales based upon guile and trickery rather than agreement, and deceptive bookkeeping practices for which appellants have finally been held accountable. The record shows that appellants engaged collectively in a calculated and multifaceted plan to give the investing public the false impression that Homex was in a sound and steadily improving financial position and at the same time withhold adverse information that was material to an accurate appraisal of the company's prospects. The enterprise began in 1968; in 1970 and 1971 Homex stock was sold to the public for a total of $39 million; in 1972 the company was bankrupt. The jury could permissibly have found the following.

I. THE FOUNDATIONS:

INCORPORATION AND GOING PUBLIC

Homex was incorporated as a close corporation in Delaware in 1968; its principal offices and factory were located in Avon, New York, a suburb outside Rochester. The Stirling brothers were its founders, officers and principal owners. Shortly after incorporation, Homex made a private offering, selling 1.6 million shares at $1 each. It thus began as a relatively small concern, doing business primarily with private residential projects developed by the Stirlings. It soon became clear, however, that it would be in the best business interests of Homex to exploit the then-budding public housing market. Accordingly, Homex focused its efforts on sales to public housing authorities in federally-financed housing programs.

In late 1968, the Stirlings decided to explore the possibility of "going public" and approached R. W. Pressprich & Co. as a prospective underwriter. Pressprich agreed to underwrite the public sale of Homex common stock on the condition that Homex's annual net earnings totaled $1 million, as projected by the Stirlings. In January of 1969, when the agreement with Pressprich was reached, Homex was reporting profits at the end of the second quarter of approximately.$390,000 from the sale of modules and gross land sales totaling $4.7 million.

By April 30, 1969, however, the end of the third quarter, it became obvious that year-end profits would fall far short of the $1 million required for the underwriting, third quarter gross sales totaling only $900,000. At this point Homex arranged two "sales" of land holdings in order to boost total sales and profits to the amount required for the Pressprich underwriting.

The Kece Land Sale.

Peter Thun was the general partner of a limited partnership called Hollyrood Park Associates, located in Clay, New York; the Stirlings were limited partners. In May, 1969, David Stirling offered Thun two parcels of land owned by a Homex landholding subsidiary, Hollyrood Park II, Inc. Thun had a right of first refusal on both parcels. He indicated that he was interested in only one of the parcels the one adjacent to his Hollyrood Park project but only if it were part of an economically reasonable package consisting of both the purchase of the land for $325,000 and the development by Homex of a plan to build a 330-unit modular apartment building. In other words, he was interested in the land only if apartment units could profitably be built on it. Because Stirling was unable to quote a price for the development of such an apartment complex, Thun arranged to have the land purchased by Kece Associates, Ltd., a newly-formed shell corporation, in such a way as to maintain control over the land and at the same time incur minimal risk. Kece Associates made a 10 percent down payment, assumed existing mortgages on the property and gave a purchase-money mortgage that required interest payments and an annual principal reduction of $10,000 for the first five years.

In practical effect, as the government suggests, this $325,000 "sale" was a purchase by Thun of an "option" on the land. Indeed, Thun himself so characterized the practical effect of the arrangement. He stated that if it had been otherwise he would not have considered entering into it at all. Under the agreement, if Thun were to decide that the construction of a 330-unit apartment project would not or could not be financially advantageous, he could merely order the termination of mortgage payments and, while relinquishing all rights to the land, shed all mortgage responsibilities. The mortgage itself included exculpatory language of the sort commonly found in non-recourse loan agreements. It provided that, upon default by Kece, the Homex subsidiary could foreclose only on the property and could not pursue Kece's or Thun's assets to satisfy the mortgage. Thun viewed the arrangement as one in which he paid money to control the land and, if the arrangement proved ill-fated, one in which his liability was limited.

The transaction was closed on June 3, 1969. Subsequently, appellant Yanowitch wrote a letter on...