U.S. v. Bein, s. 357

• Decision Date: 13 February 1984
• Docket Number: D,360,Nos. 357,s. 357
• Citation: 728 F.2d 107
• Parties: 14 Fed. R. Evid. Serv. 1805 UNITED STATES of America, Plaintiff-Appellee, v. Calvin BEIN, Thomas DeAngelis, Albert Vitti, and Arthur Billups, Defendants-Appellants. ockets 83-1141 to 83-1144.
• Court: U.S. Court of Appeals — Second Circuit

Page 107

728 F.2d 107

14 Fed. R. Evid. Serv. 1805

UNITED STATES of America, Plaintiff-Appellee, v. Calvin BEIN, Thomas DeAngelis, Albert Vitti, and Arthur

Billups, Defendants-Appellants.

Nos. 357, 360, Dockets 83-1141 to 83-1144.

United States Court of Appeals, Second Circuit.

Argued Oct. 28, 1983.

Decided Feb. 13, 1984.

Thomas F. Liotti, Carle Place, N.Y., for defendant-appellant Calvin bein.

Jeremy G. Epstein, New York City, for defendant-appellant Thomas DeAngelis.

Barry M. Fallick, New York City, for defendant-appellant Albert Vitti.

Henriette D. Hoffman, New York City, for defendant-appellant Arthur Billups.

Victoria J. Meyers, Sp. Asst. U.S. Atty., N.D. Ill., Chicago, Ill. (Daniel W. Gillogly, Asst. U.S. Atty., Chicago, Ill., on brief), for plaintiff-appellee.

Before OAKES, KEARSE and WINTER, Circuit Judges.

WINTER, Circuit Judge:

Appellants Calvin Bein, Thomas DeAngelis, Albert Vitti and Arthur Billups were convicted on various counts for wire fraud, mail fraud and conspiracy in violation of 18 U.S.C. Secs. 1341, 1343 and 2 for their participation in a scheme to sell illegal commodity option contracts. Bein was also convicted of selling commodity options in violation of the Commodity Exchange Act as amended, 7 U.S.C. Secs. 6c(c) and 13b (1976). ¹ We affirm.

BACKGROUND

The convictions before us involve the activities of E-K Capital Corporation ("EKCC"), which was in the business of selling investments in gold and silver. Bein was President of EKCC, DeAngelis was Treasurer, and Robert Enchelmeyer, who testified for the government, was sole shareholder and Secretary. Bein and DeAngelis were responsible for sales and marketing while Enchelmeyer handled certain administrative functions and purchasing. The corporation's checks, which required the signatures of two of the three officers, were usually signed by Bein and either DeAngelis or Enchelmeyer. EKCC's business consisted of the sale of "deferred delivery" gold and silver contracts. From an unpartitioned salesroom with desks and telephones, sales personnel hired and trained by Bein and DeAngelis made usually unsolicited phone calls to potential buyers throughout the country. For a nonrefundable transaction fee (known as a "contango" fee) ranging from $1,000 up, the purchaser of an EKCC contract obtained the right to "control" a specified amount of gold or silver for a limited time at a fixed "strike" price set by the market price of the commodity at the time the contract was purchased.

If the price of gold or silver exceeded the strike price at the expiration of the contract, the purchaser could either buy the metal at the strike price or receive the profit in cash from EKCC. If the market price was below the strike price at the date of maturity, the purchaser was not required to execute the contract. In either event, the contango fee was unrecoverable by the purchaser. EKCC represented to customers in brochures and in telephone communications that all contracts would be backed by the company's inventory of precious metals or by commodity futures contracts. Purchasers were told that their only risk was loss of the nonrefundable contango fee.

Trade was brisk, and EKCC received $2.7 million from investors purchasing such contracts. However, EKCC did not cover most of the contracts. By February, 1980 the company owed $11 million in profits to its customers whose contracts had matured during a rising market. Bein and DeAngelis planned to defer payments until a hoped for decline in the market by convincing contract holders to roll over profits into new contracts.

Arthur Billups was hired as a salesman in October, 1979, but after January, 1980 his principal duties were to persuade customers to roll over their profits into new contracts. In tape-recorded conversations with customers, Billups made misrepresentations as to his position within EKCC, the extent of his clientele and the nature of the rolled-over investments.

Albert Vitti, a sales manager, had regular contacts with EKCC customers, in which he misrepresented himself as a buyer and as the "head trader." He sometimes used the alias "John Aren," and he sought to persuade clients to roll over their profits into new contracts by giving them false information about EKCC's inventory.

In January, 1980, when Enchelmeyer discovered that $220,000 had been transferred out of EKCC by Bein and DeAngelis, he demanded an audit of EKCC's books which Bein and DeAngelis refused. Enchelmeyer then transferred $134,000 of EKCC's funds to a checking account over which he had exclusive control. Enchelmeyer told Bein and DeAngelis that he would not return the funds until they agreed to an audit. Bein stated that EKCC could not withstand an audit and that Enchelmeyer, as sole shareholder, would be left holding the bag and would go to jail. Enchelmeyer responded that he would not go by himself, whereupon DeAngelis attacked and repeatedly punched him, choked him with his necktie and threw a liquor bottle at him, cracking his ribs. Shortly thereafter Enchelmeyer resigned from EKCC. EKCC ceased doing business when its offices were raided on March 20, 1980 by the FBI.

During the grand jury proceedings, Fred Stitt, an accountant, testified about meetings he attended where Bein, DeAngelis and two attorneys discussed the type of business EKCC wanted to do. At those meetings, the attorneys called attention to Commodity Futures Trading Commission v. United States Metals Depository, 468 F.Supp. 1149 (S.D.N.Y.1979), a decision holding that certain "deferred delivery" gold and silver contracts were illegal option contracts. After the meeting, Stitt read the case and, in a discussion with Bein outside the presence of the attorneys, recommended that EKCC not sell option contracts.

At trial, the conversations between Bein and DeAngelis and the attorneys were excluded on attorney-client privilege grounds. Stitt's conversation with Bein, however, was admitted against both Bein and DeAngelis. Also, at trial, the government called an expert witness who gave testimony defining and distinguishing between deferred delivery or futures contracts and commodity option contracts. Bein's counsel informed the district court that he too intended to call an expert, Ira Cobleigh, to support defendants' contention that they were selling legal deferred delivery contracts. In early February, Chief Judge Motley informed counsel that she intended to hold court on February 21, President's Day, if necessary. However, Cobleigh, who was not under subpoena, refused to appear that day because it was a holiday. Since he

was the only defense witness and the government had rested its case, defendants requested a stay until February 22. Chief Judge Motley denied the request, calling Cobleigh's refusal to appear "arbitrary" and indicating that she would instruct the jurors on the distinction between deferred delivery contracts and commodity options, as other courts had previously formulated the distinction.

DISCUSSION

On appeal, appellants raise many claims, five of which merit discussion. ²

1. The Contracts Sold by Bein

Bein contests his conviction on two counts of selling illegal option contracts, ³ maintaining that what he sold were legal deferred delivery or futures contracts.

In commodity futures markets, a deferred delivery or futures contract involves the sale or purchase of specified amounts of a commodity to be delivered in the future. The purchaser of a futures contract makes a down payment and is obligated to take delivery when the contract matures. By contrast, an option contract entitles a purchaser to buy or sell a commodity by some specified date at a fixed price, known as the "strike" price, British American Commodity Options v. Bagley, 552 F.2d 482, 484-85 (2d Cir.), cert. denied, 434 U.S. 938, 98 S.Ct. 427, 54 L.Ed.2d 297 (1977), determined by the market value of the commodity at the time the option is purchased. The grantor of an option is obligated to deliver if the purchaser exercises the option, but the purchaser has no obligation to exercise.

Because options can be sold by anyone willing to risk being able to cover obligations when and if purchasers decide to exercise their options, options markets may be entered by sellers having very little capital and willing to take such risks. Fearing such abuses, Congress has regulated the commodity futures markets in varying degrees since 1922. See S.Rep. No. 850, 95th Cong., 2d Sess., reprinted in 1978 U.S.Code Cong. & Ad.News 2087, 2097, 2099, 2100, 2102-03, 2112. Specifically, Congress amended the Commodity Exchange Act in 1978, 7 U.S.C. Secs. 1 et seq. ("Act") to prohibit all trade in commodity options except by certain exempted persons specified by the Commodity Futures Trading Commission ("CFTC"). Id. at 2121-22. Deferred delivery or futures contracts, however, remain legal although subject to regulation by the CFTC.

In Commodity Futures Trading Commission v. United States Metals Depository, 468 F.Supp. 1149 (S.D.N.Y.1979), Judge Weinfeld set forth the distinguishing features of option contracts in a discussion which we adopt:

Functionally, options are distinguishable from futures contracts and margin sales in at least three significant respects: (1) the initial charge for an option, sometimes called a "contango fee," is a nonrefundable premium covering the seller's commission and costs, in contrast to the "down payment" paid in a futures contract or a margin sale, which is applied against the ultimate sale price; (2) the option contract gives the purchaser the right to take physical possession of the commodity but does not obligate him to do so, as a futures or margin contract would; (3) a profit in an option contract accrues only if the price of the commodity rises enough to cover the contango fee (but losses are limited to the contango fee), while the futures or margin buyer profits if the sale price of his right to future delivery exceeds the purchase price (and suffers a...