U.S. v. Cohen, s. 569

• Decision Date: 26 June 1975
• Docket Number: D,570 and 571,Nos. 569,s. 569
• Citation: 518 F.2d 727
• Parties: Fed. Sec. L. Rep. P 95,217 UNITED STATES of America, Appellee, v. Milton COHEN et al., Defendants-Appellants. ockets 74-2026, 74-2027 and 74-2065.
• Court: U.S. Court of Appeals — Second Circuit

Page 727

518 F.2d 727

Fed. Sec. L. Rep. P 95,217

UNITED STATES of America, Appellee, v. Milton COHEN et al., Defendants-Appellants.

Nos. 569, 570 and 571, Dockets 74-2026, 74-2027 and 74-2065.

United States Court of Appeals Second Circuit.

Argued Jan. 20, 1975.

Decided June 26, 1975.

Gerald A. Feffer, Steven A. Schatten, John D. Gordan III, Asst. U. S. Attys., Paul J. Curran, U. S. Atty., for appellee.

Frederick H. Block, S. Edward Orenstein, New York City, for appellant Cohen.

Marvin B. Segal, Segal & Hundley, New York City, for appellant Deutsch.

Morton S. Robson, Zissu, Lore, Halper & Robson, New York City, for appellant Duboff.

Before WATERMAN, HAYS and MULLIGAN, Circuit Judges.

WATERMAN, Circuit Judge:

Milton Cohen, Bernard Deutsch, and Stanley Duboff were convicted after a seven week jury trial in the United States District Court, Southern District of New York, on all counts of a four count information, filed April 23, 1974, and, on appeal, they seek to have the convictions reversed. Count 1 of the information charged that the defendants and fourteen named co-conspirators conspired in connection with the sale of the common stock of Richard Packing Company, Inc. (hereinafter "Richard Packing") to commit fraudulent acts in violation of various sections of the federal securities laws. Counts 2 and 3 charged the defendants with fraud in the offer and sale of certain securities in violation of 15 U.S.C. §§ 77q and 77x, and with aiding and abetting that fraud in violation of 18 U.S.C. § 2. Count 4 of the information charged the defendants with mailing a false and misleading offering circular for a public offering of Richard Packing common stock in violation of 15 U.S.C. §§ 77j, 77x, 17 Code of Federal Regulations 230.256, and with aiding and abetting the mailing of a false and misleading offering circular in violation of 18 U.S.C. § 2.

On July 12, 1974 the trial judge sentenced Deutsch to concurrent terms of three years imprisonment on each count, and on July 16, 1974 Duboff to concurrent terms of three years imprisonment on each count, and Cohen to concurrent terms of six months imprisonment on each count.

We affirm the convictions of each of the appellants.

Richard Packing was organized as a Minnesota corporation on July 19, 1967. It was a successor to a partnership organized in January 1967 by appellant Milton Cohen and his brother Henry D. Cohen. Richard Packing was primarily engaged in the business of processing and selling meat and meat products, and Milton Cohen was president of the company and served on its board of trustees. In August 1967 Richard Packing effected an underwritten public offering of 100,000 shares of its common stock at an initial offering price of $2.25 a share. At the time of this public offering the Cohen brothers owned 375,000 shares of stock, which was restricted and was reserved to Richard Packing management.

In 1968 Milton Cohen began to entertain thoughts of developing Richard Packing into a fast food franchising operation similar to McDonald's Corp., and he enlisted various people to promote this venture. Deutsch and Duboff, who were registered representatives employed by Jaffee & Co., a New York brokerage company, became financial consultants to Richard Packing. A management team of former McDonald employees was assembled. Status Marketing Corporation, a recently formed business, promoted by Richard Packing, whose only client was Richard Packing and on whose board of Directors Milton Cohen served, was entrusted with the dual tasks of developing a marketable franchising package and with the selling of franchises. The fast food franchises were for "Circus Wagon Restaurants", the trade-name developed for the outlets to be built by Richard at franchised locations. Some franchise agreements were closed and good-faith progress deposits made. The relationship between Richard Packing and Status Marketing was generally concealed during this period.

In the first quarter of 1968 the stock of Richard Packing, traded on the over-the-counter market, sold for a high bid price of 55/8. Thereafter and through the first half of 1970 the stock rose dramatically in value, reaching a high of 531/2. A second Regulation A offering of 10,000 shares of common stock was issued in March 1969. Three affiliated Mutual funds Financial Dynamics Fund, Financial Venture Fund, and Financial Industrial Fund (hereinafter collectively the Denver Funds) purchased great amounts of the publicly held shares available for trading and eventually acquired 75% of these shares. Then, during the summer of 1970 the price of Richard Packing shares fell precipitously and the Denver Funds unloaded their shares at approximately $1 a share.

During this same period the business operations of Richard Packing also soured. It had trouble obtaining adequate financing to fulfill real estate and construction contracts for its franchising commitments, and a number of franchise contracts were canceled, requiring return of the cash deposits. In the first half of 1970 Richard Packing was forced to sell some of its meat facilities in order to avoid reporting an operating loss for fiscal 1970. Status Marketing Corporation became bankrupt in early 1970. Notwithstanding these problems, however, Richard Packing advanced over a million dollars to a subsidiary company, Resort Products, which dealt in the leasing of dune buggies.

Throughout this period the defendants were striving to push up the price of Richard Packing stock and to maintain the image of a successful and rapidly developing company. Deutsch in the fall of 1968 interested Hugh Deane, a stockbroker with institutional accounts who was employed by Wood, Walker & Company, in Richard Packing. He accomplished this in part by giving earning projections of $1.00 a share in 1969, and $2.50 and $3.00 a share within the next two or three years. Cohen soon afterward confirmed these figures to Deane. In January 1969 Deane grew concerned over a drop in the price of Richard Packing stock, and Deutsch reassured him by reporting to him that there was a large private placement of unregistered and unissued shares which was about to be closed, and "I want the stock at 28 to 30 and ultimately much higher, and I suggest that you buy more and I am going to buy more behind you." Nevertheless, in late 1969 and early 1970 Deane became quite anxious about the financial condition of Richard Packing and he repeatedly called Cohen requesting information from Cohen about the contents of a 1969 annual report, as yet unpublished, and Cohen told him that the report would be forthcoming and that the delay in the report's publication was caused by the accountants.

Meanwhile, in February 1970, Deutsch told Deane:

Don't be concerned, Hugh. Forget the annual report. It is not significant. I have 15 to 20 million lined up to handle the 200 Richard the circus wagons that we have sold.

In April 1970 Deane received the Annual Report. Richard Packing never received the "15 to 20 million" for financing, nor had 200 Circus Wagon franchises been sold.

From September 1968 until March 1969 Kelly, Andrews & Bradley (KAB), a New York brokerage firm, traded 18,000 shares of Richard Packing stock. Bernard Shwidock was the president of KAB during this period. KAB had opened for business on September 12, 1968 with a purchase of Richard Packing stock on the recommendation of Deutsch and Duboff. In mid-September 1968 Deutsch and Duboff told Shwidock that "we don't give away all this business for nothing" and suggested a 50% kickback on the profits Shwidock was making from its trading in Richard Packing and other stocks. Shwidock later counter-offered a 30% kickback. Deutsch and Duboff accepted the 30% arrangement upon certain conditions: if the trading in the stock was done exclusively by Deutsch or Duboff; if they received at the end of each month their percentages of the net profits made by Shwidock's trading; if KAB engaged in no "front run" orders; and if the arrangement was secret. After this agreement had been made Deutsch or Duboff would telephone Shwidock and tell Shwidock that he had bought Richard Packing at a certain price from a certain broker, or that he had sold stock at a certain price to a certain broker, and Shwidock would then confirm the transaction. KAB made $50,000 from trading in Richard Packing over the next seven months, $15,000 of which went to Deutsch and Duboff. By a subsequent agreement the kickback money was paid to a Switzerland bank which in return provided KAB with worthless investment circulars. Also, Deutsch and Duboff controlled nominee accounts at KAB for Morginstin and Harris, who were Deutsch's brother-in-law and Duboff's father-in-law, respectively. These accounts were the most active accounts at KAB, and the purchases and sales in the accounts were wholly directed by Deutsch and Duboff.

KAB also played a central role in the second Regulation A offering which was effective March 11, 1969. Alvin Malmon, counsel to Richard Packing and a member of its board of directors, prepared the offering circular on information supplied by Cohen. Cohen also reviewed Malmon's final draft. The offering circular stated that the 10,000 share offering was "public," and that it was "not underwritten." The circular also stated that the price per share would depend on the market price of shares at the time of the sale, and that there was "no assurance" that any or all of the offering would be subscribed. All the representations in the circular were shown to be false; arrangements of private placement had been agreed to prior to the offering. Shwidock had met the defendants in New York, and Deutsch had introduced Shwidock to Cohen and identified Shwidock as the man who would send the proceeds of the offering at $28 per share to Cohen at Richard Packing. After this meeting Cohen then sent Shwidock a letter which said in part, "I would appreciate your handling of the sale. We would not expect to...