Kopald-Quinn & Co. v. United States, 8590.

• Decision Date: 16 February 1939
• Docket Number: No. 8590.,8590.
• Parties: KOPALD-QUINN & CO. et al. v. UNITED STATES.
• Court: U.S. Court of Appeals — Fifth Circuit

101 F.2d 628 (1939)

KOPALD-QUINN & CO. et al. v. UNITED STATES.^*

No. 8590.

Circuit Court of Appeals, Fifth Circuit.

February 16, 1939.

John M. Slaton, Hal Lindsay, and A. Walton Nall, all of Atlanta, Ga., for appellants.

J. Albert Woll, Sp. Asst. to Atty. Gen., Brien McMahon, Asst. Atty. Gen., and William J. Connor, Sp. Atty., Department of Justice, of Washington, D. C., and M. Neil Andrews, Atty., Securities and Exchange Commission, and Lawrence S. Camp, U. S. Atty., both of Atlanta, Ga.

Before FOSTER, HUTCHESON, and HOLMES, Circuit Judges.

HUTCHESON, Circuit Judge.

Appellants were indicted and tried with others upon an indictment in fifteen counts. Counts 1 to 7 charged them with "employing, by the use of the mails, a device, scheme or artifice to defraud" in violation of Sec. 17(a) of the Securities Exchange Act of 1933, as amended,¹ counts 8 to 14 inclusive charged them with using the mails to defraud in violation of the Mail Fraud statute,² and the 15th count charged them with a conspiracy to violate both acts.³

The theory of the indictment was that defendants named in it were all parties to a general scheme to defraud, in the sale of securities, originating some time prior to August 1, 1933 and continuing thereafter. The scheme part of the indictment is described in detail in Count 1, and is incorporated by reference in the other thirteen substantive, and in the 15th, the conspiracy count.

In pleading the scheme, device and artifice, and the things done to accomplish it, the indictment went into great and unnecessary detail, descending to particulars, many of which were not essential to the scheme. Stripped of its non-essentials, the scheme alleged was this: defendants would organize or acquire, operate or control investment firms and corporations, among them Kopald-Quinn & Co. and Gould & Co. and would maintain offices in various cities and places for the sale, at retail, and on the partial payment plan, 50% down, the balance to be paid and the stock to be delivered, within sixty or ninety days, of securities, usually common stocks, to be furnished from time to time for distribution to their customers, the persons to be defrauded.

It was a part of the scheme to induce persons to be defrauded to open accounts by having the company to represent that it was an investment house of good standing, serving and equipped to serve the welfare of its clients and customers, and that it was prepared to advise them how to make, and to make, profits for them through the purchase of recommended stocks; whereas in truth and in fact, these companies were not investment houses in good standing, equipped and operating to make money for their customers, but they would be plants concerned only in unloading on customers more or less worthless stocks, which they knew their customers as a whole would not and could not make money out of, but would certainly lose by it.

Having thus established and perfected their organization for distribution, they went about to and did make arrangements by which they would not only get more or less worthless stocks to distribute as they had planned, but would, through the mechanism of marketing operations, and a scheme for controlling the supply of the stock, create an illusion of market values to base their retail sales upon. In its operation the scheme, as alleged, would work this way.

Based upon the appearance of a market, they would sell their customers thousands of shares for which there was no real market at any price, much less at the price for which sold, and they would continue to do this as long as the market operations enabled the sales to go on. Then when the market would no longer support new sales in that stock, they would take up a new one, and the same process would be gone through with it. The scheme alleged, in short, was that those managing retail investment houses, like Kopald-Quinn Company, and Gould & Company, appearing in the guise of shepherds of the flock would gather as many investors as they could into the fold; then with the fold full, and as much fleecing as possible done in that stock, they would be shepherded into a new stock fold, and again fleeced, and the process would be repeated as long and as often as the money and confidence of the customers held out.

Extending over four months, and making up a record of some two thousand pages, the trial at last came to its end. Defendants' motions for a directed verdict were overruled, and there was a verdict finding Sutterman, Mendelson, Sherman, Ricebaum and Gould & Co. guilty on Count 1 and Count 15, of the indictment, and Kopald-Quinn & Co. guilty on all of its counts, except 5, 6, 7 and 10. Sutterman, Mendelson and Sherman were sentenced, on Count 1, to five, and on Count 15, to two years to run concurrently; Ricebaum on Count 1, to three years, and on Count 15, to two years, to run concurrently, while the sentence of Gould & Co. and Kopald-Quinn & Co. was a fine of $5000 on each of the counts on which each stood convicted. Kopald-Quinn & Company filed a two page brief, adopting the brief filed by Mendelson et al.

Here, while in a general sense making common cause upon points they have in common, Mendelson, Sutterman, and Sherman, on their part, and Ricebaum and Gould & Company on theirs, appear by separate briefs and counsel, each vigorously asserting that no case was made out as to them, and if there was, that the trial as to them was attended with prejudicial error requiring reversal.

The point they argue most is the general one, that they should have had an instructed verdict on both counts, because there was no evidence connecting them with any of the wrongs charged in either count; but they make specific points, too, against each of the counts.

As to the conspiracy count, they urge upon us that it charged a single general conspiracy or scheme, while if the proof showed them or either of them to have been engaged in any conspiracy, it was not the general one charged in the indictment, but a separate and distinct one with which they are not charged.

As to Count 1, they urge that, charging a violation of the Securities Exchange Act, it charged the use of the mails to effect sales of securities to one Spivey, the person named in the count, and the proof wholly failed to show this. They insist that all the proof showed that there was no use of the mails to effect sales to him, that such use of the mails as was proven in connection with the transactions with him, with which that count deals, were consequent upon and after the making of a sale to him, and merely incidental.

They urge, too, as to this count, that if the proof did make out a case under it against Kopald-Quinn, it did not make out one against them, for there was no evidence whatever that any of them had anything to do with the sale that count deals with. They insist that it was entirely a Kopald-Quinn transaction, the count letter having been admitted as to Kopald-Quinn, and excluded as to other defendants, except as affected by the admission against the corporation, and that there is no evidence whatever connecting these appellants with Kopald-Quinn Co.

The ruling of the court admitting testimony as to representations made by Kopald-Quinn's agents in the sale of stocks by that company through them, and its ruling admitting the testimony of Barr, Munch and others as to acts and declarations prior to August, 1933 before the offense charged in the first count was committed, and before the time charged for the beginning of the conspiracy, are also assigned as error.

Error is assigned, too, to parts of the general charge, to the failure of the court to give certain charges requested by appellants; and to the failure of the court on motion, to suppress evidence, and require the return, of records, files, books of account, correspondence, etc., of E. M. Burke & Company, John J. Burke & Company, Kopald-Quinn Company, and Gould & Company, and to the admission of the testimony of the Government witness, Carl A. Oleson, as to their contents.

The assignments as to the rulings on evidence, and as to the giving or refusal of instructions, will not be separately considered. They may and will be disposed of with the statement that the general charge, a model in its way, not only fairly, fully and correctly submitted the case as a whole to the jury, and in a meticulously painstaking way sent to it every theory on which defendants were entitled to a charge, but made it entirely clear, as had been done in repeated rulings throughout the case, that none of the evidence received was binding on any of the defendants, except the one directly concerned in it, unless it was shown to have been a part of the conspiracy, and then only as to such defendants as were shown to have been connected with and parties to the conspiracy.

We turn then to their substantial contentions for reversal.

As to the conspiracy count, it is primarily insisted that no conspiracy of any kind was shown, but that on the contrary, the evidence failed to show violations of either the Securities Act or the Mail Fraud Act, and indeed, as far as these defendants are concerned, showed only legitimate transactions conducted in a legitimate way. They insist that particularly was it not shown as charged in the indictment, (a) that the defendants had raised prices to sell stocks, in order only to depress them after they had been sold; (b) that defendants' scheme or plan was to prevent the customers from paying out their...