U.S. v. Blitz

• Decision Date: 25 March 1976
• Docket Number: 281 and 421,Nos. 259,D,262,s. 259
• Citation: 533 F.2d 1329
• Parties: Fed. Sec. L. Rep. P 95,484 UNITED STATES of America, Appellee, v. Eric BLITZ et al., Appellants. ockets 75-1237, 75-1240, 75-1241 and 75-1334.
• Court: U.S. Court of Appeals — Second Circuit

Page 1329

533 F.2d 1329

Fed. Sec. L. Rep. P 95,484

UNITED STATES of America, Appellee, v. Eric BLITZ et al., Appellants.

Nos. 259, 262, 281 and 421, Dockets 75-1237, 75-1240,

75-1241 and 75-1334.

United States Court of Appeals, Second Circuit.

Argued Sept. 23, 1975.

Decided March 25, 1976.

Elliot L. Evans, New York City (Paul K. Rooney, and Rooney & Evans, New York City, on the brief), for appellant Blitz.

Jerome T. Dorfman, New York City (Bernard J. Coven, New York City, on the brief), for appellant Horvat.

William L. Richman, New York City, for appellant Orpheus.

H. Elliot Wales, New York City, for appellant Drew.

Dominic F. Amorosa, Asst. U. S. Atty., New York City (Paul J. Curran, U. S. Atty., Michael B. Mukasey, Mark Marmaro, John D. Gordan, III, Asst. U. S. Attys., New York City, and Edward Levitt, Sp. Atty., Dept. of Justice, Washington, D. C., on the brief), for appellee.

Before LUMBARD, MANSFIELD and TIMBERS, Circuit Judges.

TIMBERS, Circuit Judge:

Appellants Eric Blitz, Peter Horvat, Richard Orpheus and William Drew ¹ appeal from judgments of conviction entered upon jury verdicts returned in the Southern District of New York on March 3, 1975 after a five week trial before Dudley B. Bonsal, District Judge, finding Horvat, Orpheus and Drew guilty of conspiring to violate the antifraud provisions of the federal securities laws and the mail fraud statute in violation of 18 U.S.C. § 371 (1970) (Count 1); ² finding Horvat, Orpheus and Drew guilty on substantive counts of fraud in connection with the purchase and sale of securities in violation of Sections 10(b) and 32 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78(ff) (1970), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1975), and of aiding and abetting such fraud in violation of 18 U.S.C. § 2 (1970) (Counts 7-13); finding Horvat and Orpheus guilty on substantive counts of mail fraud in violation of 18 U.S.C. § 1341 (1970) and of aiding and abetting such fraud in violation of 18 U.S.C. § 2 (1970) (Counts 14-18); ³ and finding Blitz, an affiliated person of a registered investment company and acting as an agent, guilty of accepting outside compensation for the purchase of property in violation of Sections 17(e) and 49 of the Investment Companies Act of 1940, 15 U.S.C. §§ 80a-17(e)(1) and 80a-48 (1970) (Count 19). ⁴

The essential claims of error raised on appeal are: (1) the evidence was insufficient to support the convictions of Horvat, Orpheus and Drew of either conspiracy or the substantive offenses; (2) Blitz and Horvat were entitled to severances; (3) the indictment was defective with respect to Blitz and Horvat because allegedly incompetent evidence was presented to the grand jury; and (4) the court erred in charging the jury and in its evidentiary rulings.

The twenty - five count indictment charged a conspiracy and substantive offenses to manipulate the price of the common stock of Elinvest, Inc. in order to obtain for defendants large profits on their holdings while defrauding public investors. Count 1 charged a conspiracy to violate the antifraud provisions of the federal securities laws and the mail fraud statute; as overt acts it alleged that the co-conspirators themselves made fraudulent sales of Elinvest stock, paid off brokers to sell the stock to their customers and to stimulate demand for it, and bribed an investment adviser to purchase a large amount of the stock on behalf of an investment company. Counts 2-13 and 14-18 charged substantive violations of the antifraud provisions of the securities laws and of the mail fraud statute, respectively, based on fraudulent sales and mailings by defendants, or aided and abetted by them. Count 19 charged that an affiliated person of a registered investment company accepted a $25,000 bribe to cause the company to purchase 25,000 shares of Elinvest stock. Count 20 charged certain defendants with interstate travel in furtherance of the illegal scheme. Counts 21-25 charged two defendants with perjury before the grand jury.

The government concedes that the evidence was insufficient to convict Orpheus and Drew on six of the seven substantive securities fraud counts (Counts 7-12), and that it was insufficient to convict Orpheus on four of the five mail fraud counts (Counts 14-17). We therefore reverse the convictions of Orpheus and Drew on those counts.

For the reasons below, we affirm the convictions of all appellants on all other counts upon which they were convicted. ⁵

I. FACTS

In view of the issues raised on appeal, including challenges to the sufficiency of the evidence, the following summary of events from March of 1971 until August of 1972 is believed necessary to an understanding of our rulings on those issues.

(A) Overall Conspiracy

There was evidence adduced by the government from which the jury could find that the core of this case was a large scale conspiracy. It was engineered chiefly by George Van Aken. Its purpose was to drive up the price of the common stock of Elinvest. After gaining control of the limited public market in Elinvest, Van Aken and his co-conspirators manipulated the supply and demand of the stock, paid off brokers to foist Elinvest shares upon their customers, and utilized deceit and threats of force to induce the public to invest in the stock. The object was to net Van Aken and his co-conspirators an enormous windfall on their stock interests in Elinvest at the expense of innocent public investors.

(B) Take-over of Elinvest Market

In March 1971, Van Aken ⁶ discovered that Elinvest common stock would make a good vehicle for stock manipulation. Elinvest was a shell corporation with virtually no assets. At that time its common stock, which was held by a small number of persons who had acquired it as a stock dividend, was selling for about $4 per share. Since there were only about 40,000 public shares which could be freely traded and they were in the hands of a relatively small number of shareholders, the price could easily be driven up.

Control of the small public market in Elinvest was accomplished by having several of Van Aken's business acquaintances, who had controlled Elinvest, cause that company to purchase the assets of the Leisure Time Marine Corp. (LTMC) in exchange for a distribution of Elinvest stock to LTMC shareholders. ⁷ Although Van Aken owned no LTMC stock himself, he was a large creditor of that corporation. He arranged for his father-in-law, John Bradley, to purchase 50,000 shares from LTMC for $50,000 ⁸ upon the understanding that Bradley would get the first $50,000 of any profit and Van Aken would get any profit beyond that. In addition, after the plan to acquire control of Elinvest had coalesced, Van Aken loaned one Steven B. Duke $7,500 with which to purchase 55,000 shares of LTMC stock.

The take-over of the Elinvest market was engineered by Van Aken and Steven Hill, a New York securities attorney and corporate counsel to LTMC. On April 26, 1971, the acquisition by Elinvest of LTMC's assets was consummated. Under the terms of the agreement, each LTMC shareholder received 1.4 shares of Elinvest for each LTMC share he had formerly held. Although there were approximately 48 LTMC shareholders at the time of the exchange, Hill and Van Aken arranged for all of the newly issued Elinvest shares which were distributed to LTMC shareholders to bear restrictive legends, except those issued to Bradley, Duke, Hill and Hill's two law partners. ⁹

In May 1971, Bradley received 70,000 freely tradable Elinvest shares in exchange for his LTMC stock and Duke received 77,000 unrestricted shares. All of the other outstanding Elinvest shares were restricted as to tradability, except those issued to Hill and his partners and the 40,000 shares publicly held by original Elinvest shareholders. This left Van Aken and his co-conspirators in effective control of the public market in Elinvest. The stage was set for manipulation of the price of the stock.

(C) Blitz and the Astron Fund

In May or early June 1971, Van Aken telephoned Blitz, vice-president and portfolio manager of the Astron Fund. ¹⁰ He offered Blitz $25,000 if he would cause the Fund to purchase 25,000 shares of Elinvest from Bradley at $5 per share. ¹¹ Blitz was noncommittal at the time. In a telephone conversation with Van Aken several days later, however, Blitz said he was interested in buying the 25,000 shares for the Fund and asked if the $25,000 offer was still open. Blitz said his brother was having legal difficulties and that he needed the money for legal fees. Van Aken told Blitz he would be paid the $25,000 after the Astron Fund's purchase of the Elinvest stock was completed.

On June 9, 1971, Blitz caused the Astron Fund to purchase 25,000 shares of Elinvest for $125,000 from Bradley through R. J. Rosan & Co. This was the New York brokerage firm of defendant Rosan where Van Aken had said the stock would be available. ¹² Several days later, Blitz came to New York. He telephoned Van Aken and said that he wanted to pick up the $25,000. Van Aken told Blitz he would have Bradley write a check. Thereafter Blitz and Van Aken met at a New York restaurant. Van Aken handed Blitz a $25,000 check drawn by Bradley to Blitz. Significantly this check was post-dated to June 18, 1971 the date payment was due for the 25,000 shares purchased by the Astron Fund.

In March 1972, when it had become apparent that the SEC was investigating the Elinvest trading, Van Aken telephoned Blitz and told him that he should return the $25,000 bribe to Bradley to protect them both. Blitz said he did not have the money at the time. He refused to accept Van Aken's subsequent telephone calls. Van Aken then asked Peter Rosenthal, a broker with Greenman & Co., to get the money back from Blitz. Rosenthal told Blitz that if he returned the money to Bradley he could claim that it was merely a loan. ¹³ In August 1972, Blitz sent Bradley a check for $26,700 accompanied by a letter which stated...