Allen v. United States, 12437.

• Decision Date: 19 February 1951
• Docket Number: No. 12437.,12437.
• Citation: 186 F.2d 439
• Parties: ALLEN v. UNITED STATES.
• Court: U.S. Court of Appeals — Ninth Circuit

186 F.2d 439 (1951)

ALLEN v. UNITED STATES.

No. 12437.

United States Court of Appeals Ninth Circuit.

January 4, 1951.

Rehearing Denied February 19, 1951.

R. Max Etter, William E. Cullen and Therrett Towles, all of Spokane, Wash., J. F. Emigh, Butte, Mont., James A. Murray, Washington, D. C., for appellant.

Harvey Erickson, U. S. Atty., Spokane, Wash., Donald J. Stocking, Spc. Asst. to U. S. Atty., Seattle, Wash., for appellee.

Before DENMAN, Chief Judge, and HEALY and POPE, Circuit Judges.

POPE, Circuit Judge.

The appellant, together with one Keane and one Grismer, were charged with devising and putting into execution a scheme to defraud purchasers and prospective purchasers of stock of two Idaho corporations, — the Lucky Friday Extension Mining Company, for brevity referred to as "Extension", and Pilot Silver-Lead Mines, Inc., here called "Pilot".

The alleged false and fraudulent pretences, representations and promises were found principally in the allegation that the scheme devised was "that defendants would and did cause these corporations to sell stock to investors upon the representation that the proceeds therefrom would be used by these corporations for the exploration and development of the mining properties of Extension and Pilot respectively; * * * that defendants * * * would and did conceal from the stockholders * * * information concerning the receipt and expenditure of moneys * * * that defendants would and did appropriate and divert from these corporations a large amount of such corporate moneys to their own use and benefit." Additional portions of the scheme were that the defendants "would and did conceal the fact that defendant Allen was promoter of these corporations or was to receive any part of the stock", that to conceal the true amount of stock issued to them they caused large blocks of stock to be issued to certain named persons "under the pretense that it was in payment of attorneys' fees, but with the arrangement that a portion of such stock or the proceeds from its sale would be turned back to defendants." It was also charged that it was part of the scheme that "defendants, in order to create an appearance of mining activity on the part of these corporations and to increase the market value of defendants' promotion stock of Extension and Pilot, would and did spend a small portion of the funds belonging to these corporations on the mining properties of Extension and Pilot, whereupon, defendants would and did dispose of their promotion stock by selling it on the market to the investing public, without disclosing the fact that large amounts of the funds of these corporations had been appropriated and diverted to defendants' own use and benefit."

The first three counts of the indictment charged offenses under Title 18 U.S.C.A. § 338 Revised § 1341, relating to the use of mails to defraud, in that the defendants for the purpose of executing this scheme, mailed certain described letters which were delivered at Spokane, Washington. In the next three counts it was charged that this scheme to defraud was designed and used by defendants in the sale of securities by the use of the United States mails in violation of Title 15 U.S.C.A. § 77q, relating to fraud in the sale of securities. The seventh count of the indictment, which was the one upon which appellant was convicted, charged the defendants named with conspiracy to commit the offences described in the first six counts, and alleged sundry overt acts in furtherance of the alleged conspiracy.

Keane and Grismer entered pleas of nolo contendere; Allen entered a plea of not guilty upon which he was tried, and this appeal is taken from the judgment entered upon the verdict of guilty.

There is no question upon the evidence but that extensive frauds were committed in and about the organization and operation of the two corporations mentioned, and that someone devised the schemes to defraud involving all of the fraudulent elements charged in the indictment. Nor does the brief or argument of appellant Allen take any position to the contrary. His position at the trial below, and presented to us upon this appeal is that Allen had no part in any of these schemes; that they were exclusively the enterprises of Keane; that although Allen sometimes discussed the objectives of the two corporations, he did so only because he was interested in seeing a large mining area which included the properties of these two companies developed for the general benefit of the whole community. In general, his contention is that in prosecuting this case against him (in which Keane testified as a witness for the Government), the Government is attempting to throw upon Allen the consequences of the iniquity of Keane. His primary specification of error is based upon his contention that the evidence is insufficient to sustain the verdict.

Wholly apart from the testimony of Keane, and of Grismer, there was much evidence tending to prove active participation by Allen in the alleged fraudulent enterprise, and in the organization and operation of the two corporations.

Thus it appears that in May, 1945, shortly after Extension was organized, Keane and Allen met Elmer Johnston, a Spokane lawyer in a hotel at Wallace, Idaho, and there discussed with him his proposed employment to prepare an issue of stock of the company for public sale under Regulation A of the Securities and Exchange Commission. In consequence of his employment then arranged, Keane, Allen, Grismer and their engineer, furnished Johnston with the necessary information to enable him to prepare a letter of notification under that regulation and to prepare and file with it a prospectus which Johnston insisted should accompany the letter. Johnston obtained the information from all three of the defendants, and in consequence of what they told him inserted in the prospectus the statement that all proceeds of the proposed public offering would be expended upon the company's mining property. In the course of these negotiations Keane, in Allen's presence, told Johnston that Allen had been enjoined, in some proceeding instituted by the Securities and Exchange Commission, from making use of the mails to sell any securities unless a registration statement was in effect; and that "Mr. Allen would have no active part in the handling of any projects until the injunction had expired."

The testimony of Johnston disclosed that Allen did have an active part at least in planning and projecting the corporation, and other evidence adduced by the Government tended to disclose that while Allen may have intended to create the impression that he was having no active part in the handling of the corporation, he did participate actively in the entire enterprise, and that this was true in respect to Pilot which was organized in like manner later in the same year. Thus Extension's first offering of stock, thus arranged for through Johnston, netted the company $100,000 which was remitted by the underwriting brokers and deposited in the company's bank account. In January, 1946, a second offering of Extension's stock was made which netted the company $78,000.

Throughout this period of time and at least as early as 1943, Keane and Allen together had substantial interests in a mining property near Neihart, Montana, first operated by Montana Leasing Company, a Montana corporation, and later by Lexington Silver-Lead Mines, Inc. Between July 28, 1945 and May 17, 1946, there was diverted from Extension and transferred to Montana Leasing-Lexington Silver, some $113,000. It will be noted this was the greater portion of Extension's entire cash receipts from stock sales. The fact of these diversions was proven by the bank accounts of the various corporations, and by the deposit slips and checks by which the diversions were accomplished.

Notwithstanding such diversions automatically operated to the advantage and benefit of Allen who was, as stated, actively and substantially interested in the Montana Leasing-Lexington Silver enterprise, it is suggested on behalf of Allen that it was not proven that he himself participated in this diversion. There was ample proof that he did so. Thus one Irene Vermillion, secretary to Keane, who was listed with the bank as one of the persons authorized to sign checks on Extension's account, testified that on August 7, 1945, Allen came to the office where she kept the company check book and had her sign in blank and deliver to him two checks from the company check book. Allen told her he would advise her later to whom the checks were made payable, and she then noted on the check stubs Allen's initials. When the checks finally were returned to the bank and...