U.S. v. Brien

Decision Date28 April 1980
Docket NumberNos. 79-1164,s. 79-1164
PartiesUNITED STATES of America, Appellee, v. James A. BRIEN, Defendant-Appellant. UNITED STATES of America, Appellee, v. Thomas LABUS, Defendant-Appellant. UNITED STATES of America, Appellee, v. Robert Ralph ZOLLA, Defendant-Appellant. UNITED STATES of America, Appellee, v. Michael SHUSTER, Defendant-Appellant. UNITED STATES of America, Appellee, v. Stephen BUZZI, Defendant-Appellant. to 79-1168.
CourtU.S. Court of Appeals — First Circuit

Daniel J. Kornstein, New York City, for defendant-appellant, James D. brien.

Barry M. Fallick, New York City, with whom Platzer & Fallick, New York City, was on brief, for defendants-appellants, Thomas Labus and Michael Shuster.

Andrew Good, Boston, Mass., by appointment of the Court, for defendant-appellant, Robert Ralph Zolla.

Walter Munsen, Boston, Mass., with whom Jessica de Koninck and de Koninck & Munsen, Boston, Mass., were on brief, for defendant-appellant, Stephen Buzzi.

Michael A. Collora, Asst. U. S. Atty., Boston, Mass., with whom Edward F. Harrington, U. S. Atty., Boston, Mass., was on brief, for appellee.

Before CAMPBELL and BOWNES, Circuit Judges, BONSAL, * Senior District Judge.

BOWNES, Circuit Judge.

Defendants-appellants James Brien, Thomas Labus, Michael Shuster, and Robert Ralph Zolla, all former management employees of Lloyd, Carr & Company, appeal their convictions for conspiring 1 to commit mail 2 and wire 3 fraud in the sale of futures contracts in commodities traded on markets in London, England. The appellants are joined by Stephen Buzzi, a former Lloyd, Carr & Company salesman, in appeals of convictions for the commission of mail and wire fraud in the sale of London commodity options. We affirm all convictions.

There are five issues on appeal: (1) the validity of the search of a business premises and the seizure of business records; (2) whether the Commodities Futures Trading Act (CFTA) preempts or impliedly repeals the general mail and wire fraud statutes; (3) the correctness of the jury instructions; (4) a variance as to one count in the indictment; and (5) whether preindictment publicity was so prejudicial as to require dismissal of the indictment.

The Facts

Lloyd, Carr & Company (Lloyd, Carr) was founded in 1976 by Alan Abrahams, a/k/a James Carr, to sell London commodity options 4 to investors in the United States. Abrahams hired each of the defendants during 1976. All but Buzzi eventually assumed management positions with Lloyd, Carr. Thomas Labus, hired to head Lloyd, Carr's research department, also assumed responsibility for training new salesmen and served on Lloyd, Carr's Board of Directors. James Brien progressed from salesman to national sales manager and a member of the Board of Directors. Robert Ralph Zolla rose from salesman to sales floor supervisor of the Boston office, Lloyd, Carr's principal and largest office. Michael Shuster, originally hired as a salesman in Lloyd, Carr's Greenwich, Connecticut, office, became assistant manager of that office, and then manager of Lloyd, Carr's San Francisco office.

Lloyd, Carr sold commodity options through the use of "boiler room" 5 sales operations. Salesmen, attracted to Lloyd, Carr by advertisements containing inflated estimates of their commissions and other benefits, were hired without regard to their knowledge of the commodities market. Once hired, salesmen were trained for a few days in telephone sales techniques and the subtleties of selling commodities options. They were then given a desk and a phone in a large room filled with other salesmen, and instructed to call persons whose names were obtained from Dun & Bradstreet investor lists. The prospects were called "cold" and exhorted to purchase commodity options from Lloyd, Carr. Lloyd, Carr salesmen were required to make at least one hundred calls per day, which resulted on the average in one or two sales. During one month, more than 155,000 long distance calls were made from Lloyd, Carr's Boston office. Sales commissions ranged from eight to fifteen percent of the option price. Turnover in salesmen was high.

To assist its salesmen, Lloyd, Carr provided them with scripts of "canned" sales pitches for the initial or "set up" call and follow-up calls. The purposes of the "set up" call were to "qualify" the investor by determining the extent of his interest and financial resources and to stimulate his interest in London commodity options. Interest was aroused by making false, deceptive and misleading statements about the likelihood of large increases in the price of particular commodities, about the actual cost of dealing in commodity options, and by misrepresenting important facts concerning Lloyd, Carr's method of operations. Salesmen often claimed that Lloyd, Carr's market predictions were the product of a research department with a budget of one million dollars per year; in fact, a few part-time employees staffed the research department. Salesmen told investors that sales commissions were only ten to fifteen percent of the option price; in fact, while salesmen earned only that amount, Lloyd, Carr marked up the price of options in amounts ranging from seventy-two to five hundred percent of the market price and concealed that from investors. Salesmen informed investors orally and in writing that their funds would be placed in "customer segregated accounts" immune from attachment; in fact, no such accounts existed and Lloyd, Carr accounts were attached with increasing frequency as its legal difficulties mounted. Salesmen assured investors that options would be purchased on the day of the order; in fact, many options were not purchased until days or weeks after the order, thereby depriving investors of gains to be made in a rising market. Investors were frequently told that purchases had been made when they had not, and were denied the right to cancel orders on that basis. Although investors were told that their profits would be returned to them within forty-eight hours, many were forced to sue to obtain their profits.

Most importantly, Lloyd, Carr deceived investors as to how a profit could be made in commodity options. It repeatedly informed investors that they would realize a profit for every increase in the price of the commodity underlying the option. In fact, no profit could be realized until increases in the market price of the commodity also covered the cost of the purchase of the option. The cost of the purchase of the option included brokers' fees in addition to Lloyd, Carr's huge premiums. Lloyd, Carr often represented that its option prices were lower than its competitors; in fact, its enormous markups resulted in option prices three or four times larger than those of its competitors. Finally, despite the fact that Lloyd, Carr's pricing mechanisms increased the risk of the purchase of a type of option already generally recognized as risky, Lloyd, Carr told investors that commodity options presented only a limited investment risk.

After the "set up" call salesmen sent investors a mailing containing various pamphlets and sales literature. This material included false, deceptive, and misleading statements similar to those made in the "set up" call. A steady barrage of follow-up calls to qualified investors followed the mailing, which continued the established pattern of false, deceptive, and misleading statements and injected a new component high pressure salesmanship. In these calls, salesmen focused on the natural uncertainties of investors; the low risk, the huge return and Lloyd, Carr's record of success were emphasized in the context of the urgent need to invest immediately. Investors were also told that eighty-two percent of Lloyd, Carr's previous customers made money. In fact, nearly that percentage lost all of their investment. Often, when an investor hesitated, a second salesman was called to the phone to pose as an "expert" in the particular commodity and to corroborate the first salesman's claims.

Testimony at trial showed that this was the standard method of operation. The evidence also showed that the management of Lloyd, Carr intentionally created a pressurized "circus-like" atmosphere in which unusual and bizarre efforts to make sales became commonplace. Sales managers established quotas and fired those who failed to meet them. Prizes, including money, mopeds, and appliances were used to stimulate performance. Cash bonuses were paid to those who stood on their desks or removed their shoes, socks, ties, shirts or blouses while consummating a sale. Sales managers sometimes dressed in gorilla suits or drove mopeds around the floor to energize the sales force. Sales were celebrated by the ringing of gongs and cowbells and by cheering from the sales force. Fear, too, played a role. Firings were frequent and capricious. During one slow sales period, the names of salespersons were placed on slips of paper in a hat. Persons whose names were drawn from the hat were fired on the spot.

It is not surprising that the investors lost heavily. By December of 1977, eleven hundred persons had purchased London commodity options through Lloyd, Carr. 6 Only thirty-three persons, three percent of all investors, made a profit on their investments. Approximately fourteen percent of all investors lost part of their investments. Eighty-three percent of Lloyd, Carr's investors lost everything.

State and federal legal action began in January of 1978. Several of those actions are relevant to this case. After receiving numerous complaints from persons solicited by Lloyd, Carr, the Attorney General of the State of Michigan sought a preliminary injunction in state court. Lloyd, Carr removed the case to federal court and the Commodities Future Trading Commission (CFTC), the federal agency vested with exclusive jurisdiction over trading in commodity futures, intervened as a party plaintiff...

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