Freidus v. United States

• Decision Date: 24 February 1955
• Docket Number: No. 12058.,12058.
• Citation: 223 F.2d 598,96 US App. DC 133
• Parties: Jacob FREIDUS, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

96 US App. DC 133, 223 F.2d 598 (1955)

Jacob FREIDUS, Appellant, v. UNITED STATES of America, Appellee.

No. 12058.

United States Court of Appeals, District of Columbia Circuit.

Argued December 1, 1954.

Decided February 24, 1955.

Mr. Thurman Arnold, Washington, D. C., for appellant. Mr. William D. Rogers, Washington, D. C., also entered an appearance for appellant.

Mr. John D. Lane, Asst. U. S. Atty., with whom Messrs. Leo A. Rover, U. S. Atty., Lewis Carroll, William Hitz and Alfred Hantman, Asst. U. S. Attys., were on the brief, for appellee.

Before WILBUR K. MILLER, BAZELON and WASHINGTON, Circuit Judges.

BAZELON, Circuit Judge.

Appellant was convicted of submitting a false financial statement to the Reconstruction Finance Corporation in violation of the false statement statute.¹ Chief among many contentions for reversal is that the evidence is insufficient to support the conviction.² The test, as stated by this court in Curley v. United States, is whether the evidence is such that "a reasonable mind might fairly conclude guilt beyond reasonable doubt".³

The evidence showed that in 1947 appellant and two associates formed a corporation, originally called General Television Corporation, now called Starrett Television Corporation,⁴ for the marketing of television sets. Appellant invested the entire capital of $15,000. For this he and his wife received 51 percent of the 200 shares of no-par capital stock then authorized by the corporation's charter and certificate of incorporation; the associates received the rest.

By the end of September 1949, appellant had loaned about $500,000 to the corporation. In order to reduce this indebtedness, the stockholders agreed that as of September 30, 1949, the corporation's charter would be amended to permit issuance of 200 shares of preferred stock in the amount of $339,800 to appellant and his wife, and that the remainder of appellant's loan, $160,000, would be contributed to surplus. On November 1, 1949, the stockholders and directors passed a resolution authorizing amendment of the charter to permit issuance of the preferred stock. The corporation's attorney was instructed to submit a petition so amending the charter to the Division of Corporations in the office of the Secretary of State of New York. Before the charter amendment was approved, however, Starrett's accountant prepared a financial statement, dated "as at September 30, 1949," showing the preferred stock and surplus items in the amounts agreed upon. The State's approval was not received until October or November 1950. The delay resulted from the return of the petition to the corporation's attorney on two separate occasions for correction of technical errors.

Between September 30, 1949, and February 28, 1950, appellant made additional loans to the corporation totalling $270,000. In May 1950, the two minority stockholders transferred their common stock to appellant, and he agreed to donate these additional loans to surplus. A certified public accountant prepared a letter authorizing Starrett's accountant to transfer these loans to the surplus account as of February 28, 1950.

Thereafter, Starrett's accountant prepared the financial statement underlying this prosecution. In August 1950, that statement, dated "as at February 28, 1950," was submitted to the R.F.C. in connection with a bid to purchase certain manufacturing facilities.⁵ R.F.C. regarded the statement as not sufficiently recent and, therefore, never actually considered it. No later statement was ever supplied, and for that and other reasons, the purchase was never consummated.

The statement was alleged to be false in reflecting (1) preferred stock of the value of $339,800, when in fact the corporation's stock consisted solely of common stock; (2) a surplus of $109,400,⁶ when in fact the corporation was operating at a deficit; and (3) loans payable of $28,450, when in fact this item amounted to $637,300.

As the Government says, appellant sought "to arrive at a financial statement more palatable to creditors."⁷ But that purpose in no way reduces the Government's burden under the false statement statute; it must still prove that the specified entries were objectively false, and were made, willfully and with knowledge of falsity, in a material matter within the jurisdiction of a department or agency of the United States.⁸

We think the proof on (A) materiality of the financial statement, and (B) objective falsity, scienter, and criminal intent, was inadequate under the standard of the Curley case, supra, to take the case to the jury.⁹ The conviction must therefore be reversed.

A. Materiality of the financial statement.

One portion of § 1001 refers to willfully and knowingly falsifying, concealing or covering up "a material fact." On the other hand, the part here involved, without expressly mentioning materiality, prohibits "any false, fictitious or fraudulent statements or representations." We think, however, that this highly penal statute must be construed as requiring a material falsification. The legislative purpose strongly implies that only material false statements were contemplated, i. e., statements that could affect or influence the exercise of a governmental function.¹⁰ That purpose, as expressed by the Supreme Court in United States v. Gilliland, was "to protect the authorized functions of governmental departments and agencies from the perversion which might result from the deceptive practices described."¹¹ No perversion of a governmental function could possibly result from a false statement that was incapable of affecting or influencing such function. And the greater weight of authority in the federal courts supports the view that materiality is an essential element of the offense described by § 1001.¹² The Government does not deny that proof of materiality is essential under § 1001. Instead, it argues only that "the false representations were material."¹³

The financial statement submitted was materially false only if it misrepresented Starrett's ability to repay a loan by misstating profitability, assets, or liabilities. Since the statement here involved was a balance sheet, not an income statement, it made no representation as to profitability.¹⁴ No charge is made that assets were falsely listed. Hence the only question is whether the liabilities were falsely stated. The answer depends on whether appellant subordinated his loans of about $600,000, as the balance sheet indicated, or whether, as the indictment charged, the loans payable account was understated by that amount.

The specification relating to the liabilities item charged that Starrett's loans payable account was understated by the difference between $637,300 and $28,450. This difference represents the sum of $270,000, contributed to surplus on May 3, 1950, "as at February 28, 1950," and $339,800, transferred from loans payable to preferred stock as at September 30, 1949.

(a) The record incontrovertibly establishes that appellant transferred $270,000 from loans payable to surplus "as at February 28, 1950."¹⁵ Indeed, the Government appears to have abandoned the contention, made at the trial, that no such transfer occurred.¹⁶

(b) Formal authorization to issue additional capital stock was not secured until after the financial statement was submitted to the R.F.C. Although, for that reason, the preferred stock had not been issued de jure, the question remains whether the $339,800 allocated to preferred stock was, in fact a loan payable to appellant. That it was not a loan payable clearly appears from every relevant corporate act and account from November 1949 to October 1950.¹⁷ The minutes of the stockholders' meeting held November 1, 1949, contained a resolution authorizing issuance of the preferred. Starrett's ledger as of December 31, 1949, showed a preferred stock account, and there was a supporting journal entry. The financial statement prepared "as at September 30, 1949" by Starrett's accountants reflected issuance of the preferred, as, of course, did the statement of February 28, 1950, which is here involved. These acts and accounts amount to representations, to the R.F.C. and to others, that appellant was a preferred shareholder and not a creditor of Starrett.¹⁸ Under familiar principles of estoppel, he could never have successfully asserted a claim upon Starrett as against one who extended credit in reliance thereon.¹⁹ Since appellant's loans were effectively subordinated, the financial statement was not materially false.

B. Objective falsity, scienter, and criminal intent.²⁰

(a) As we have seen, preferred stock had not been issued de jure. But it was necessary that there be evidence from which the jury could have found beyond a reasonable doubt that when the statement was filed with the R.F.C. appellant knew the corporation's charter had not been amended. Although appellant appears to have been active in the affairs of Starrett, guilty knowledge cannot be inferred from that fact alone. The record makes clear that all correspondence with the Secretary of State of New York relating to the amendment of the charter was carried on by Starrett's attorney. There is no evidence that he kept in touch with Starrett's officers on the matter; indeed, Government witness Fein, vice-president and secretary of Starrett during the relevant period, testified that he had no knowledge that the preferred stock had not been issued. Moreover, as we have seen, Starrett's records uniformly reflected issuance of the preferred stock.²¹ Nor was there any convincing showing of motive to falsify. As we have already indicated, appellant could not — and it would therefore be unreasonable to believe that he intended to — deny his status as a preferred stockholder for the purpose of asserting creditor's rights to the detriment of R.F.C.

In light of these circumstances, the one item of evidence the Government points to as showing the requisite knowledge was clearly insufficient to take...