Lockhart v. State

• Decision Date: 30 April 1924
• Docket Number: 7,8.
• Parties: LOCKHART v. STATE. SMITH v. STATE.
• Court: Maryland Court of Appeals

125 A. 829

145 Md. 602

LOCKHART v. STATE.

SMITH v. STATE.

Nos. 7, 8.

Court of Appeals of Maryland

April 30, 1924

Appeals from Criminal Court of Baltimore City; Charles F. Stein Judge.

Allen B. Lockhart, R. Tynes Smith, Jr., and others were convicted of conspiracy to cheat and defraud customers of stock and bond brokerage firm of which they were members, and the named defendants separately appeal. Judgments affirmed.

Argued before THOMAS, PATTISON, URNER, ADKINS, OFFUTT, and DIGGES JJ.

Robert R. Carman, of Baltimore (Keech, Deming, Kemp & Carman William Curran, and Harry W. Nice, all of Baltimore, on the brief), for appellants.

Thomas H. Robinson, Atty. Gen., and Herbert Levy, Asst. Atty. Gen. (Herbert R. O'Conor, State's Atty., of Baltimore, on the brief), for the State.

URNER J.

As members of the firm of Smith, Lockhart & Co. the appellants were engaged from August 1, 1920, to August 9, 1922, in the stock and bond brokerage business in the city of Baltimore. The business was owned principally by the appellants; only small proportionate interests being held by the three other members of the firm. The appellants and two of their copartners were charged by the indictment in this case with having conspired to cheat and defraud the firm's customers. All of the defendants were convicted and were sentenced to pay certain fines, and to be confined in the penitentiary for specified terms. The imprisonment provisions of the sentences were suspended as to the two defendants who had minor interests in the partnership, and they have not appealed.

The transactions of the firm with its customers were mainly conducted upon what was known as the partial payment plan. Purchasers of stocks or bonds who bought on that plan would make initial deposits on account of the price, and would pay the balance in monthly installments. In consideration of an extra commission the firm guaranteed the purchasers against any additional calls, if the monthly installments were regularly paid. It was agreed that the firm should retain title to the securities purchased until the monthly payments were completed. The securities were to be delivered to the purchasers upon their request. In the meantime the firm was at liberty to hypothecate the stocks and bonds so bought, but all dividends or interest payments received by the firm were to be credited to the buyers' accounts. In the event of the failure of a purchaser to make his initial or any stipulated monthly payment, the firm had the right after due notice, to close his account and to secure a settlement.

A booklet issued by the firm for the purpose of inducing investors to deal with it on the partial payment plan contained the assurances, among others, that its capital was "more than ample" to carry on a business of the kind described; that the firm would pay for and receive the securities ordered by its customers; that it would not sell them without giving the purchasers prior notice; and that they could direct the sale of securities at any time and obtain the profit from their appreciation, thus having "all the advantages of speculation without the attendant risk." The salesmen of the firm, in soliciting business, acted under instructions to tell prospective investors that the stocks or bonds bought by them would not be sold unless their accounts were not properly maintained or unless they ordered a sale.

The volume of the firm's business was large. It conducted about 125 stock and bond transactions daily. The number of its accounts approximated 2,500. During the two-year period we have mentioned its commissions amounted to $274,000 and its expenses to $182,000. When its operations ended on August 9, 1922, it was insolvent to the extent of more than $2,500,000. It was then accountable to its customers for 180,000 shares of stock, of which it had only about 57,000 shares, and for bonds of the par value of $1,273,400, which was $690,750 in excess of the par value of those it could have delivered. The serious losses thus incurred by the numerous patrons of the partnership were chiefly due to the fact that it was without the necessary capital to finance their purchases on the plan which it specially promoted. It bought on a marginal basis the securities required to fill the orders of its customers, and it was subject to calls for cash or collateral to cover depreciations. It was prevented by its agreement from having recourse to its customers to make additional payments because of any decrease in the value of stocks and bonds bought for their account. But the securities they had purchased, and on which they were making monthly payments, were utilized by the firm as the principal means of meeting the requirements of its marginal contracts. Compulsory sales of the securities pledged for that purpose resulted from a decline in their market value and from the inability of the firm to sufficiently protect the margins with cash or other collateral. The funds produced by the monthly payments of investors were applied, but were not adequate, to the purchase of securities to replace those which had been hypothecated and sold. An advance in market prices in the fall of 1920 placed the firm for a short time in a condition of solvency. Except during that brief period, its liabilities always largely exceeded its assets. The partnership began its existence on August 1, 1920, with an excess liability of $240,444.58. This was assumed by it as the successor of the corporation by which the business was previously conducted and which the appellants had controlled.

Notwithstanding the fact that securities bought for customers had been sold, amounts representing the dividends or interest thereon were regularly credited to their account with the firm. When a customer completed his monthly payments and asked for his securities, the firm would buy them in the market, if necessary, in order to make the delivery. The effect of this course of dealing was to leave the customer in ignorance of the fact that the securities he originally bought had been sold because the firm was unable to pay its debt for which they had been pledged. The operations of the firm were terminated on the withdrawal by its New York correspondent of the telegraphic quotation service upon which it was dependent. Its members thereupon applied for the benefit of the bankruptcy law.

The defendants were prosecuted upon the theory that the representations they made and the methods they employed in the prosecution of their brokerage business were in pursuance of a conspiracy to defraud by inducing their patrons to make investments under deceptive and unsafe conditions by which they were exposed and subjected to large pecuniary losses. It was insisted by the defendants that no such purpose was conceived or sought to be accomplished; that they made no sales of their customers' securities voluntarily; that they were not insolvent in the usual business sense of the term; and that but for the action of their New York correspondent their operations would have been continued, and a future improvement of market conditions might reasonably have been expected to retrieve all the losses which were sustained. It is with reference to the facts and theories which we have briefly indicated that many of the rulings questioned by the appeal must be considered.

There was a demurrer to the indictment. By our recent decision in the case of Archer and Wilson v. State, 125 A. 744, an indictment similar to the present one was held not to be demurrable. The reasons assigned for that ruling, in the opinion delivered by Judge Adkins, support our views that the demurrer in this case was properly overruled. It was argued on the present appeal that the indictment is defective in not alleging that the defendants knew of the insolvency which it describes during the course of the dealings to which it refers. This is not a well-founded criticism. The indictment in each of its counts charges that the defendants' firm was insolvent, and that, well knowing this fact, they conspired to defraud its customers by certain false pretenses. It is suggested also that in referring to the definition of insolvency in the former in dictment as surplusage we may have been influenced by the fact that a jury trial was waived in that case, and it is urged that such a theory of insolvency, which is said to be incorrect, was prejudicial to the defendants in the trial of this case before a jury. The sufficiency of the indictment must be considered without regard to the method of trial adopted. The allegation as to the financial condition of the defendants was material because of its relation to the other averments of the indictment. It was with reference to the defendants' alleged knowledge of the insufficiency of the firm's assets to pay its liabilities, and not with a view to any particular standard of insolvency, that the charges of conspiracy to deceive their customers by false pretenses was preferred. This is clearly explained in the prior opinion.

An application for a change of venue was made and refused. The grounds of the application were similar to those upon which a petition for the same purpose in the Archer and Wilson Case was based. It was held that the refusal of the trial court to grant that petition was not an abuse of its discretion. It is said, however, that the recent trial and conviction of Archer and Wilson in the same court, on a similar charge, probably had the effect of intensifying the feeling against these defendants which their petition for removal described. This was not one of the reasons assigned in the petition, but it may have been suggested to the court below when the petition was submitted. It does not, in our opinion, afford sufficient ground for a decision that the...