U.S. v. Farris

• Decision Date: 26 November 1979
• Docket Number: Nos. 78-2514,78-2624 and 78-2905,s. 78-2514
• Citation: 614 F.2d 634
• Parties: UNITED STATES of America, Appellee, v. Jamie Matlick FARRIS, Appellant. UNITED STATES of America, Appellee, v. Marcus Theodore BAUMANN, Appellant. UNITED STATES of America, Appellee, v. Carl Richard TAMUTY, Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 634

614 F.2d 634

UNITED STATES of America, Appellee, v. Jamie Matlick FARRIS, Appellant.

UNITED STATES of America, Appellee, v. Marcus Theodore BAUMANN, Appellant.

UNITED STATES of America, Appellee, v. Carl Richard TAMUTY, Appellant.

Nos. 78-2514, 78-2624 and 78-2905.

United States Court of Appeals Ninth Circuit.

Nov. 26, 1979.

Rehearing Denied March 19, 1980.

Joseph R. Keilp, Asst. U. S. Atty., Phoenix, Ariz., for appellee.

Joseph B. Swan, Jr., Phoenix, Ariz., for appellant, Farris.

Atmore L. Baggot, Phoenix, for appellant, Baumann.

Barbara L. Caldwell, Phoenix, for appellant, Tamuty.

Appeal from the United States District Court for the District of Arizona.

Before CARTER ^* and GOODWIN, Circuit Judges, and PECKHAM ^**, District Judge.

GOODWIN, Circuit Judge:

Jamie Matlick (Kelly) Farris and Marcus Theodore Baumann appeal their convictions on two counts each of securities fraud in violation of 15 U.S.C. § 77q(a). Carl Richard Tamuty appeals his conviction on nine counts of mail fraud in violation of 18 U.S.C. § 1341. We affirm in part, and reverse in part.

I. FACTS

The appellants were among 23 individuals and firms indicted for securities fraud and mail fraud in connection with a Ponzi scheme which, for a time, produced a substantial cash flow from the interstate sales of real estate mortgage notes and connected instruments in Arizona.

The fountainhead of the scheme was the late William Steuer, founder of Cochise College Park, an investment company. Steuer died before the indictments in these cases were handed down. But the activities he set in motion resulted in criminal prosecutions for his individual and corporate associates.

In 1966 Cochise College Park acquired actual or paper interest in Arizona land, subdivided the land into lots and, during the next few years, sold lots. Each buyer supposedly made a down payment for a lot and signed a promissory note secured by a mortgage on the lot for the remainder of the purchase price. Cochise sold these notes and mortgages to dealers who sold them to the general public through brokers and salesmen.

Cochise sold the notes "with recourse". The investors received a three-part "Guarantee". If a lot buyer defaulted, the investor (if notified of the default) was told that he could choose to seek foreclosure, to accept the substitution of a valid, paying note of equal value, or to demand a cash refund by Cochise of the unpaid principal on the defaulted obligation.

As part of its arrangements with the investors, Cochise agreed to make all collections from the lot purchasers and all disbursements to the investors. Although a large number of putative purchasers in fact defaulted on their notes, Cochise did not inform the investors of defaults. Instead of affording the investors the choice agreed upon in the contracts, Cochise remained silent about the defaults and employed the money from new contracts to maintain, temporarily, the scheduled payments to the early investors at the established rate of return on their contracts. Money generated by down payments and by the sales of new notes provided well-publicized payments to investors. Publicity about these payments in turn attracted new investors and postponed the eventual but preordained financial debacle that resulted in these prosecutions.

When Cochise needed cash, which was virtually all the time, Steuer arranged to have employees create fictitious land-purchase notes by forging a purported lot buyer's name on a contract for a purported lot, or by having someone sign form contracts to purchase even though the signer (usually an employee) did not intend to, and was not expected to, pay off the contract. These fictitious notes were then sold through the sales organization to investors.

Martin Rose, a relative of Steuer, joined Cochise in 1968. In January of 1969, Steuer formed another corporation called Canyon State Properties and installed Rose as president. Canyon State was advertised to lot buyers as the resale agent of Cochise available to resell the buyers' lots at a future time if the buyers wished to sell. In fact, Canyon State had no assets and conducted no business.

In January of 1970, Rose signed 31 Cochise land purchase contracts in an aggregate face value of approximately $99,000, showing Canyon State as the purchaser. These contracts were sold to investors by means of assignments. Cochise thereafter for a time made the scheduled payments to the investors on these contracts. Cochise received no payment, however, and apparently expected none from Canyon State.

In 1969, Hal Ely joined Cochise as head of its collection department. Ely was placed in charge of collecting payments from delinquent purchasers. In March of 1972, Ely attempted to collect delinquent payments on contracts which, unknown to him, had been forged by Robert Burks, Cochise's vice president in charge of lot sales. Burks told Ely that the contracts had not been signed by the people whose names appeared on them, and directed him to cease his collection efforts on those contracts.

In May of 1970 Richard Curran merged his advertising agency with Cochise and formed a holding company named Inland Capital Corporation. Steuer and Curran each owned 50% of the outstanding stock of Inland Capital.

In January of 1971, Curran and Steuer purchased land purchase contracts (notes) which were then sold to investors to generate a cash flow of approximately $200,000. By this time Cochise had engaged Standard Land Title and Trust Agency to act as collecting and disbursing agent on new contracts. In order to keep Standard from learning that Cochise, and not Curran and Steuer, was actually making the payments on these contracts, Cochise issued its checks to Curran and Steuer who, in turn, issued their personal checks to Standard to cover monthly payments due investors under the assigned contracts.

In 1971 the principals of Cochise engaged the accounting firm of Laventhol, Krekstein, Horwath and Horwath to prepare a certified audit of Inland Capital. The team found Inland Capital's books wanting in several particulars.

A year earlier, in June or July of 1970, the Securities and Exchange Commission had started to investigate Cochise to determine whether the Cochise "paper" was exempt from registration requirements. In February of 1971, the SEC in Nebraska filed a civil action against Cochise. Thereafter the sales of Cochise paper declined, and in June of 1972 Cochise went into bankruptcy.

Appellants here were tried in the second of two groups. The first trial resulted in the convictions of seven of the participants in the Cochise scheme. Five of these seven appealed their convictions to this court. The convictions of two of the prior appellants were reversed for insufficient evidence that they "knowingly participated" in the scheme. The convictions of the three other appellants were affirmed. United States v. Hetrick, No. 77-2798 (9th Cir., Dec. 11, 1978) (unpublished mem.).

The defendants in the second trial were Farris, Baumann, Tamuty, and Marciano A. (Tony) Rivera, Jr. Farris was a dealer whose company, Investors Land Corp., purchased mortgage notes from Cochise and then sold them to Baumann and Baumann's company, Bankers Finance & Holding Co. Bankers Finance then sold these notes to the public, and it did not pay Investors Land until the sales to the public were completed. Farris and Baumann both earned commissions. Rivera and Tamuty were partners in R & T Investment Co., which also sold Cochise mortgage notes to the public. This company and its principals also received substantial commissions.

After the second trial, the jury convicted Farris and Baumann of two counts of securities fraud in violation of 15 U.S.C. § 77q(a), and Rivera and Tamuty of nine counts of mail fraud in violation of 18 U.S.C. § 1341. All four were fined and placed on probation. This appeal, in which Rivera does not join, followed.

II. INSTRUCTION ON SCIENTER

Farris and Tamuty urge that the trial court erred in its instructions to the jury on the requisite mens rea for the crimes of mail fraud and securities fraud. Both object to the judge's charge that the defendants could be held guilty if the alleged fraudulent statements were made "with reckless disregard as to (their) truth or falsity". They cite a number of cases from outside this circuit that contain language disapproving such instructions as confusing to lay jurors (e. g., United States v. Hanlon, 548 F.2d 1096 (2d Cir. 1977)). None, however, resulted in reversal. Moreover, the law of this circuit establishes the reckless disregard for truth or falsity is sufficient to sustain a finding of securities fraud or a conviction for mail fraud. Nelson v. Serwold, 576 F.2d 1332, 1336-37 (9th Cir. 1978), cert. denied, 439 U.S. 970, 99 S.Ct. 464, 58 L.Ed.2d 431 (1978) (securities fraud); United States v. McDonald, 576 F.2d 1350, 1358-59 (9th Cir. 1978), cert. denied, 439 U.S. 830, 99 S.Ct. 105, 58 L.Ed.2d 124 (1978) (mail fraud). There was no reversible error in the instructions on scienter.

III. SUFFICIENCY OF THE EVIDENCE

All three appellants argue that there was insufficient evidence to support their convictions. On appeal, this court draws all fair factual inferences in favor of the prevailing party. E. g., United States v. Kaplan, 554 F.2d 958, 963 (9th Cir.), cert. denied, 434 U.S. 956, 98 S.Ct. 483, 54 L.Ed.2d 315 (1977).

Farris and Baumann were convicted of securities fraud for causing letters to be sent from Baumann's company, Bankers Finance and Holding Co., to two victimized investors, Blanche LaFolette (Benton) and Faith Cochenos. The letters were dated April 12, 1972, and June 21, 1972, respectively. To sustain convictions for these offenses, the government did not need to show that the defendants personally mailed the letters. It is sufficient that the letters were mailed as part of a fraudulent scheme in which the defendants were active participants. The acts of all active parties to a...