U.S. v. Brown

Decision Date16 May 1977
Docket NumberNo. 1034,D,1034
PartiesFed. Sec. L. Rep. P 96,052 UNITED STATES of America, Appellee, v. James Leonard BROWN, Defendant-Appellant. ocket 77-1033.
CourtU.S. Court of Appeals — Second Circuit

Jacob Laufer, Asst. U. S. Atty., New York City (Robert B. Fiske, U. S. Atty., S. D. N. Y., Frederick T. Davis, Asst. U. S. Atty., New York City, of counsel), for appellee.

Michael B. Pollack, New York City (Charles L. Weintraub, New York City, of counsel), for defendant-appellant.

Before CLARK, Associate Justice, * MOORE and MULLIGAN, Circuit Judges.

MULLIGAN, Circuit Judge:

The only issue of any substance raised on this appeal is whether the elaborate fraudulent scheme admittedly perpetrated by the appellant James L. Brown constitutes a violation of the antifraud provisions of the federal securities laws. We hold that it does and therefore affirm the conviction. Other claims of error by the trial judge are clearly frivolous and not worthy of comment here.

After an eight-day trial before District Judge Charles S. Haight, Jr. and a jury, a judgment of conviction was entered against Brown on December 23, 1976 in the United States District Court for the Southern District of New York. Brown was convicted on one count of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and on eight counts of substantive violations of the federal securities laws, 15 U.S.C. §§ 77q(a) and 77x; 18 U.S.C. § 2. Following Brown's conviction, Judge Haight sentenced him on the conspiracy count to five years imprisonment, with execution of all but six months suspended, and four and one half years probation commencing upon the termination of incarceration. On the remaining counts sentence was suspended and Brown was placed on periods of four and one half years probation, each to be served concurrently with the period imposed on the conspiracy count. At the time of this appeal, Brown was incarcerated under a sentence imposed for a prior unrelated conviction.

I

The government established by abundant proof at trial principally through the testimony of other conspirators the following facts which are not denied on this appeal. Sometime in March 1972 Brown met with Chester Gray, John Krappman and Harvey Axelrod, all of whom testified for the government, for the purpose of concocting and executing a scheme whereby American Home Products Corporation (AHPC) common stock certificates would be counterfeited. After considerable difficulty, phony stock certificates were finally produced bearing the forged signature of one Gerald L. Smith, an AHPC stockholder. The next step was to exchange the counterfeit AHPC certificates through the transfer agent of AHPC, Manufacturers Hanover Trust Company (MHTC), where Krappman was employed, for genuine certificates in smaller denominations. Axelrod had opened a trading account at Seed Capital Corporation (Seed), a brokerage firm where his relative, Benigno, was employed. The account was in the name of Gerald L. Smith. During October 1972, Seed accepted into the unauthorized Gerald L. Smith trading account 13,000 shares of the newly issued AHPC certificates which while genuine were derived from those which had been counterfeited and forged. Seed then sold the certificates to and through New York brokerage houses. It sold 6,000 shares directly to Weeden & Co. which mailed to Seed written confirmation of the purchase. Seed then sold 6,500 shares through Schweickart & Co. which also mailed confirmations to Seed. The final 500 shares were sold through Ferkauf & Co. which had its clearing operations handled by Loeb Rhoades & Co.

Seed ultimately delivered the certificates thus spawned through the counterfeit shares bearing the forged name of Gerald L. Smith against payment by the brokerage houses in the total amount of.$1.4 million. The money was deposited to Seed's account and its checks totalling close to that amount were delivered to Axelrod by his relative, Benigno. Axelrod then forged Gerald L. Smith's endorsement signature on the back of the checks. Benigno subsequently cashed checks at the Irving Trust Co. receiving payment in cash. The money was split up into shares among the swindlers, Brown receiving 50% of about.$1.4 million.

II

On this appeal, Brown argues that since the scheme set forth was designed to defraud the transfer agent MHTC and not the investors who purchased genuine stock certificates, for whose protection the Securities Act was intended, it is not within § 77q(a). While this court has noted that the primary purpose of the 1933 Act was to protect investors, SEC v. Guild Films Co., 279 F.2d 485, 489 (2d Cir.), cert. denied, 364 U.S. 819, 81 S.Ct. 52, 5 L.Ed.2d 49 (1960); Gilligan, Will & Co. v. SEC, 267 F.2d 461, 463 (2d Cir.), cert. denied, 361 U.S. 896, 80 S.Ct. 200, 4 L.Ed.2d 152 (1959), appellant has not cited and we have not found any case holding that this was its sole purpose and that unless the ultimate purchaser of securities is injured or defrauded the criminal provisions of § 77q(a) are not violated. The language of that section set forth in the margin 1 broadly condemns the employment of "any device, scheme, or artifice to defraud" or the engagement "in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser." There can be no doubt that there was established on trial a device, scheme or artifice to defraud. Stock certificates were counterfeited, the name of an innocent investor, Gerald L. Smith, was forged and the transfer agent was duped into issuing replacement certificates which while facially legitimate were produced as the result of the fraudulent scheme.

The argument that neither the ultimate investors nor Smith were in fact defrauded is based on the proposition that under § 8-311 of the Uniform Commercial Code the investors owned the securities free of any adverse claims of the original owner Gerald L. Smith. Moreover, it is argued that Smith was not injured because under § 8-104 MHTC had the fiduciary obligation of restoring him to his original position by buying identical securities reasonably available on the market as a replacement. The argument is unpersuasive. The fact that Smith might have a civil remedy to replace the stock which defendant Brown and his colleagues converted by...

To continue reading

Request your trial
22 cases
  • Chemical Bank v. Arthur Andersen & Co., 109
    • United States
    • U.S. Court of Appeals — Second Circuit
    • January 20, 1984
    ...Congress enacted the Securities Acts to "[protect] the integrity of the marketplace in which securities are traded", United States v. Brown, 555 F.2d 336, 339 (2d Cir.1977), and to "achieve a high standard of business ethics ... in every facet of the securities industry." United States v. N......
  • United States v. Winans
    • United States
    • U.S. District Court — Southern District of New York
    • July 24, 1985
    ...10b-5 context on a wide variety of fact patterns. Newman, supra, 664 F.2d at 18-19; Chiarella, 588 F.2d at 1369; United States v. Brown, 555 F.2d 336, 339-40 (2d Cir.1977); United States v. Persky, 520 F.2d 283, 286-88 (2d Cir.1975); SEC v. Shapiro, 494 F.2d 1301, 1308 (2d Cir.1974). Defend......
  • Fry v. UAL Corp., 90 C 0999.
    • United States
    • U.S. District Court — Northern District of Illinois
    • August 11, 1995
    ...Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6, 12, 92 S.Ct. 165, 168-69, 30 L.Ed.2d 128 (1971); United States v. Brown, 555 F.2d 336, 339 (2d Cir.1977); cf. United States v. Naftalin, 441 U.S. 768, 774, 99 S.Ct. 2077, 2082, 60 L.Ed.2d 624 (1979) (noting that investor pro......
  • U.S. v. Reliant Energy Services, Inc.
    • United States
    • U.S. District Court — Northern District of California
    • February 28, 2006
    ...in point."'" (quoting United States v. Ingredient Technology Corp., 698 F.2d 88, 96 (2d Cir.1983) (quoting United States v. Brown, 555 F.2d 336, 339-40 (2d Cir. 1977)))). To be sure, a gap of two generations between enactment of a statute and prosecution under that statute is certainly a su......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT