U.S. v. Fields
| Decision Date | 14 February 1979 |
| Docket Number | No. 342,D,342 |
| Citation | 592 F.2d 638 |
| Parties | Fed. Sec. L. Rep. P 96,552 UNITED STATES of America, Appellant, v. Douglas P. FIELDS, Frederick M. Friedman, Peter S. Davis, Alan E. Sandberg, andEric Berge, Defendants-Appellees. ocket 77-1342. |
| Court | U.S. Court of Appeals — Second Circuit |
David A. Cutner, Asst. U. S. Atty., New York City (Robert B. Fiske, Jr., U. S. Atty., and Lawrence B. Pedowitz, Asst. U. S. Atty., New York City, on the brief), for appellant United States.
Louis Bender and Sandor Frankel, New York City, for defendants-appellees Fields and Friedman.
Gary P. Naftalis, New York City (Sheldon H. Elsen, Leslie A. Lupert, Gary H. Greenberg, and Orans, Elsen & Polstein, New York City, on the brief), for defendant-appellee Davis.
Norman S. Ostrow, New York City (Frank H. Wright, and Grand & Ostrow, New York City, on the brief), for defendant-appellee Sandberg.
Hochman, Salkin & DeRoy, and Stephen V. Wilson, Beverly Hills, Cal., filed a brief for defendant-appellee Berge.
Harvey L. Pitt, Gen. Counsel, Paul Gonson, Associate Gen. Counsel, Irving H. Picard, Asst. Gen. Counsel, and Lawrence A. Horn, Atty., SEC, Washington, D. C., filed a brief for Securities and Exchange Commission, amicus curiae.
Before FEINBERG, MANSFIELD and TIMBERS, Circuit Judges.
On this appeal by the United States 1 from an order entered in a Criminal action prior to trial in the Southern District of New York, Charles S. Haight, Jr., District Judge, (1977-1978 Transfer Binder) CCH Fed.Sec.L.Rep. P 96,074 (S.D.N.Y., June 2, 1977), which dismissed and struck substantial portions of a securities fraud indictment because of alleged misconduct by SEC employees in attempting to settle a Civil action brought by the SEC against defendants who later were named as defendants in the criminal action, the chief question is whether the district court abused its discretion. 2 We hold that it did.
We affirm in part, and reverse and remand in part, with directions to reinstate the unexpurgated indictment and to proceed with the case in the district court according to law.
The indictment which is the subject of the instant appeal was returned November 8, 1976. It named as defendants, all of whom are appellants herein, Douglas P. Fields, Frederick M. Friedman, Peter S. Davis, Alan E. Sandberg, and Eric Berge. The specific offenses charged against the respective defendants are summarized in the margin. 3
To the extent necessary to an understanding of our rulings on the legal issues presented, we summarize here the essential facts and fraudulent transactions charged in the indictment. 4 They occurred during the two year period from March 1971 to March 1973. They involved two publicly held corporations, TDA Industries, Inc. (TDA) and its subsidiary, Westcalind Corp. (Westcalind). Defendants were officers and directors of the two corporations, except that Davis, an attorney, was general counsel to TDA.
In March 1971, while Fields and Friedman were officers and directors of TDA, they caused Westcalind to pay a $50,000 "finder's fee" to a third party for services never performed. The "finder" retained $15,000 and kicked back the $35,000 balance to Fields and Friedman.
In April and May 1971, Friedman and Davis refused requests by a group of TDA shareholders to "free-up" their lettered stock for public sale. These defendants falsely represented to the stockholders that the stock in question could be transferred only by a private placement. They then arranged for a private placement of the stock to themselves at a $2 per share discount from the market price. As soon as they acquired the stock, and by a prearrangement not disclosed to the selling stockholders, they did "free-up" the stock and sold it on the open market. Seventy percent of the gross profit was kicked back to these defendants, resulting in a profit to them in excess of $300,000. This transaction defrauded the selling TDA stockholders of $435,000.
In November 1971, Fields paid certain co-conspirators to buy TDA stock on the open market immediately prior to a public secondary offering of the stock. This was intended artificially to inflate the offering price.
In February and March 1973, Friedman and Sandberg, each of whom was an officer and director of TDA, caused TDA to pay another sham "finder's fee", this time in amount of $100,000, to another third party for services never performed. The "finder" retained $18,000 and kicked back the $82,000 balance to Friedman and Sandberg.
In addition to the four transactions referred to above, the indictment charges the following other offenses:
Fields, Friedman and Davis prepared and filed an offering prospectus for TDA stock which failed to disclose the Westcalind kickback, the ERD kickbacks and the TDA price manipulation. They also solicited proxies from TDA stockholders without disclosing these matters in the proxy statements.
Fields, Friedman, Davis and Berge (the latter an officer and director of Westcalind) solicited proxies from Westcalind shareholders without disclosure of the Westcalind kickback, the ERD kickbacks and the TDA price manipulation.
Friedman and Sandberg violated the wire fraud and mail fraud statutes in connection with the Eagle Roofing kickback.
Berge gave false testimony under oath before the SEC about the Westcalind kickback.
Reiterating what we have said above, note 4 Supra, the foregoing summary is of offenses Charged in the indictment, not a summary of crimes proven. Nevertheless, for the purpose of evaluating the action of the district court in dismissing and striking substantial portions of the indictment and to understand our rulings on the legal issues presented, suffice it to say that the indictment charges each of the defendants with very serious offenses which, if proven, constituted a clear fraud on public investors.
We focus next on the sequence of events during 1974 and 1975 chiefly, certain negotiations between counsel for defendants and employees of the SEC's New York regional office upon which the district court based its order dismissing and striking substantial portions of the indictment. 5
Backing up for a moment, during 1974 and early 1975, the office of the District Attorney for New York County conducted an investigation of the Westcalind, ERD and Eagle Roofing kickbacks referred to above. The targets of this investigation were Fields, Friedman and Davis (represented by attorneys Milton S. Gould, Esq. and Saul S. Streit, Esq.) and TDA (represented by attorney Herbert C. Kantor, Esq.).
On January 9, 1975, Gould and Streit were informed by Assistant District Attorney Driscoll that his office had concluded that the three kickback transactions were not offenses cognizable under New York law. On the following day, January 10, anticipating that the District Attorney's office would refer the matter to the SEC's New York regional office, Gould telephoned William Moran, Esq., the SEC's New York regional administrator, and made an appointment to see him on January 14. Before telephoning Moran, Gould had advised Fields, Friedman and Davis that it would be preferable to take the initiative and bring the matter to the attention of the SEC before the District Attorney's office did. His clients agreed and authorized Gould to make the necessary disclosures to the SEC. Kantor received similar authority from the TDA board.
On January 14, Gould (representing Fields, Friedman and Davis) and Kantor (representing TDA) met in the SEC's New York regional office with Moran and members of his staff, including Jeffrey Tucker, Esq., a branch chief, and Stuart Perlmutter, Esq., a staff attorney. At this meeting Gould and Kantor disclosed to the SEC employees the three kickback transactions which had been under investigation by the District Attorney's office. They did not disclose to the SEC then, or at any other time, the scheme to manipulate the price of TDA stock referred to above. The upshot of the January 14 meeting was that Gould proposed negotiations looking toward a possible civil settlement of the transactions disclosed, on the assumption that the SEC's investigation would not turn up something new. Moran said that he first would have to obtain authorization from the SEC's Division of Enforcement for a formal investigation of the alleged Civil violations. Such authorization was granted on February 19.
The chief purpose of the disclosures which defendants' counsel made at the January 14 meeting was to avoid a criminal reference to the Department of Justice. 6 Defendants' counsel, being thoroughly experienced in SEC procedure and in criminal matters, recognized from the outset that defendants' activities constituted criminal offenses under the federal securities laws. Their best hope, so they urged, was to work out some sort of a package by which defendants would accept the imposition of civil sanctions in return for the avoidance of a criminal reference. Defendants' experienced counsel of course also were aware of the SEC's long standing and well known policy Against settling civil actions in a manner that would impair subsequent criminal prosecutions.
As the result of the SEC's investigation which had been authorized on February 19 and after a number of conversations between defendants' counsel and the SEC employees regarding a possible civil settlement, the SEC commenced a civil action on September 16, 1975 in the Southern District of New York, entitled SEC v. TDA Industries, Inc., Et al., 75 Civ. 4519-LWP. The complaint named as defendants TDA, Westcalind and the five individual defendants later charged in the instant indictment. The complaint was based on the three kickback transactions which Gould and Kantor...
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