Gates v. United States, 2243

• Decision Date: 10 October 1941
• Docket Number: 2246.,No. 2243,2243
• Citation: 122 F.2d 571
• Parties: GATES v. UNITED STATES. RICE v. SAME.
• Court: U.S. Court of Appeals — Tenth Circuit

122 F.2d 571 (1941)

GATES v. UNITED STATES.

RICE v. SAME.

Nos. 2243, 2246.

Circuit Court of Appeals, Tenth Circuit.

August 27, 1941.

Rehearing Denied October 10, 1941.

COPYRIGHT MATERIAL OMITTED

David Allen, of Denver, Colo., for appellants.

Thomas J. Morrissey, U. S. Atty., and Ivor O. Wingren, Asst. U. S. Atty., both of Denver, Colo., for appellee.

Before PHILLIPS and BRATTON, Circuit Judges, and FRANKLIN E. KENNAMER, District Judge.

FRANKLIN E. KENNAMER, District Judge.

The appellants perfected separate appeals from conviction under an indictment which charged them, and others, in fifteen separate counts, with violating Section 338, Title 18, United States Code Annotated, for separate acts of sending letters through the United States mail in furtherance of a scheme to defraud, and with violating Section 77q, Title 15, United States Code Annotated, known as the Securities Act of 1933, and for conspiring to violate the Statutes above named. Pleas of not guilty were entered separately by appellants, and they were tried to the court without a jury, a jury trial having been expressly waived.

The appellant Gates was found guilty and sentenced under counts 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 13, 15, 16 and 17, and the appellant Rice was adjudged guilty upon counts 1, 2, 4, 7, 10 and 16. Numerous assignments of errors were filed by appellants, but only ten of the assignments were relied upon in this appeal. Numerous propositions are urged for a reversal of the convictions, and, as the first proposition asserted therefor is that there was no substantial evidence before the court justifying the finding of appellants guilty, it will be necessary to briefly set forth the facts established by the evidence adduced at the trial of the case.

The indictments, with the resultant trial and conviction of appellants, revolve around the sale of stock in the International White Cement Company, warehouse receipts for barrels of cement, and feldspar. Appellant Gates organized the International White Cement Company, in October, 1933, with a capital stock, divided into $90,000 of 7% Cumulative Participating Preferred stock, each having a par value of $100 per share, and $5,000 of common capital stock, with a par value of one cent per share. All of the voting power was in the common stock, and all of the common stock was issued to appellant Gates, thus placing complete control of the company in him. The company acquired leases upon plants at San Pedro, California, which it held for a period of two months; it also had some sort of an interest, for a few days, in a plant at San Fernando; in 1933, it had 160,000 tons of unmined feldspar and some feldspar mining claims, which appellant Gates transferred to the company for all of its common capital stock, which had a stated value of $5,000. The unmined feldspar, for which the company exchanged $5,000 in stock, was set up on the books as having a value of $100,000. Although the company manufactured nothing during the years 1933, 1934 and 1935, the books showed that it paid dividends on the preferred stock for the year 1934, and the money for the payment of the dividend was donated to the company by appellant Gates. Nothing was manufactured by the company during the year 1935, but dividends were set up on the books as due upon preferred stock. During 1935, the International White Cement Company negotiated a lease with a chemical company for a part of its plant for a term of 5 years. The lease also gave permission to mine limestone from lime quarries of the lessor some 75 miles distant from the plant, at a 25¢ per ton royalty. The plant was not equipped to make cement, although some of the machinery necessary for the making of cement was in the plant. Shortly after the plant was leased, appellant Gates leased from the same lessor, a building for a warehouse, and in turn leased the building to the Lawrence Warehouse Company, a company engaged in the business of issuing bonded warehouse receipts. The lease on the building and the warehouse agreement were to aid appellant Gates in the sale of warehouse receipts. No rent was paid on the warehouse, nor was anything ever stored in the building excepting 35 or 40 tons of ground feldspar. Considerable money was spent on the plant, probably totaling $25,000, the exact amount not being in evidence. It was estimated that the cost of a plant to manufacture white cement, or any kind of cement, should be between $150,000 and $200,000. The evidence showed that during the time the plant last referred to was occupied by the company, it was not equipped to make white cement, or any cement, on a commercial basis, and that none was ever produced; that the plant was not equipped with proper grinding machines to grind the clinker, and it did not have any bins or other facilities for cooling the clinker after it came out of the kiln. A member of the faculty of the University of California, a cement expert, was employed by appellant Gates to test materials for the manufacture of cement, and raw materials were delivered to the laboratory, under an arrangement that his name was not to be used for publicity or promotion purposes. Laboratory tests resulted in a report that the materials were satisfactory for making white cement, and the college professor was thereafter notified by appellant Gates that he had a complete cement plant, and that operations were ready to begin. An employee of the professor was engaged to supervise starting operations. The professor and his assistant visited the plant, and testified that it was not fully equipped, and that the plant was not capable of manufacturing white cement, or any cement, commercially, and the professor's assistant was withdrawn from the plant.

During the time that appellant Gates was engaged in and about the so-called plant, he was disposing of stock in the International White Cement Company, warehouse receipts for cement that was not manufactured, and feldspar which he agreed to buy back from the purchaser. He represented that the plant was a going concern, manufacturing cement; that there was cement in the warehouse, and that the company had a great demand for feldspar, and in this manner he obtained at least $120,000. The evidence discloses that he approached former stockholders in his failed Gates Chemical Company, and gave them common stock in his asserted going concern, the International White Cement Company, for stock in the failed company, the Gates Chemical Company. In exchanging the stock, he displayed his pictures, samples, formulas and other selling devices, and sold preferred stock to such persons. He represented that the plant was operating and manufacturing cement, and that it was necessary to enlarge the plant; that the company had always paid dividends and that it had never failed in its dividends. The record is replete with evidence of the sale of the preferred stock of the company, under representations which are shown to have been false, wherein elderly women, aged men, spinster school teachers, and even a pastor in a foreign language church, were relieved of their money, valuable stocks in other going concerns, homes, lands, and anything of value which they possessed, and were given therefor preferred stock in the International White Cement Company, under representations and promises which appellants knew to be false and untrue. One witness presented was so deaf that she had to have two hearing aids, one on each ear, during the trial of the case; another witness was so infirm that she attended court in a wheel chair; another woman was well into her eighties; all of whom were sold stock in the company, as were a vast number of others. The record fully establishes that the International White Cement Company was not engaged in the manufacture, commercially, of white cement; that it had not sold any cement, and had no white cement, or cement of any sort, stored in a warehouse against which receipts could have been issued, but that during such time representations were made that it was engaged in manufacturing and selling white cement, and that it had cement stored in a warehouse, and preferred stock of the corporation was sold in said corporation, under misrepresentations of fact.

The first proposition relied upon for a reversal is that the evidence does not, as a matter of law, support the judgment of conviction. It was freely admitted that the United States mails were used and employed by appellants, and that letters, stock certificates and dividend checks were sent through the mails. It is insisted, however, that the appellants believed the statements made by them in the sale of the stock, and that they had no scheme to defraud; that if false statements were sent through the mails they were not knowingly and wilfully made, as appellants were in good faith. In other words, it is contended that there was no fraudulent intent, and for that reason no crime had been committed. This contention is without merit. The trial judge was the trier of the facts, and the evidence in behalf of the government was more than sufficient to establish the guilt of the defendants. The conduct of the defendants, together with the actual facts, are convincing that false and untrue statements were made to induce persons to buy preferred stock in the company. Such fraud and evasion of punishment cannot be dispensed with by the mere statement of appellants that they believed the representations they made, and that they, in good faith, intended to manufacture and sell white cement, and to afford the investors sound investments and the returns upon them. In the first place, fraudulent intent, as a mental element of crime, is often difficult to prove by direct evidence. In many cases it must be inferred from acts of the parties, and inferences may arise from a combination of acts, even though each act or instance, standing by itself, may seem unimportant. Aiken v. United States, 4 Cir., 108 F.2d 182. It is no defense to...