U.S. v. Jensen

• Decision Date: 05 November 1979
• Docket Number: No. 78-1194,78-1194
• Citation: 608 F.2d 1349
• Parties: Fed. Sec. L. Rep. P 97,166, 5 Fed. R. Evid. Serv. 368 UNITED STATES of America, Plaintiff-Appellee, v. Bruce A. JENSEN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1349

608 F.2d 1349

Fed. Sec. L. Rep. P 97,166, 5 Fed. R. Evid. Serv. 368

UNITED STATES of America, Plaintiff-Appellee, v. Bruce A. JENSEN, Defendant-Appellant.

No. 78-1194.

United States Court of Appeals Tenth Circuit.

Argued Jan. 26, 1979.

Decided Nov. 5, 1979.

Harold G. Christensen, Salt Lake City, Utah (Richard K. Crandall, Salt Lake City, Utah, with him on the brief), of Snow, Christensen & Martineau, Salt Lake City, Utah, for defendant-appellant.

Max D. Wheeler, Asst. U. S. Atty., Salt Lake City, Utah (Ronald L. Rencher, U. S. Atty., Salt Lake City, Utah, with him on the brief), for plaintiff-appellee.

Before HOLLOWAY, BARRETT and LOGAN, Circuit Judges.

LOGAN, Circuit Judge.

This appeal is from a jury verdict that found defendant Bruce Jensen violated section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), by committing fraud in the sale of certain securities.

Jensen argues several issues on appeal, including contentions of 1) a fatal variance between proof and the indictment; 2) collateral estoppel (from a civil case involving nine of Jensen's allegedly defrauded investors); 3) erroneous evidentiary rulings; and 4) an erroneous ruling on a defense motion for production pursuant to Fed.R.Crim.P. 16.

During the pertinent times Jensen was the sole owner and principal of Associated Underwriters (Associated), formed to serve primarily as a stock brokerage firm dealing in put and call options. Essential to the operation was enlisting converter-investors whose funds would be utilized to "convert" calls into puts. Associated and the investors entered into a so-called conversion investment contract, which had the following elements. The investor's funds were to be utilized to purchase certain securities selected by Associated. Next, a "call" option was to be sold to someone who wanted an option to buy that security at a specified price, normally the price at which it was purchased. The premium paid for the call option was to be used to acquire a "put" option to sell the same number of shares of the same security on demand during a specified period, normally at the price the stock was purchased. Thus, assuming a writer of the put option financially able to perform the promise to buy, the investor's funds would not be subject to market loss, because the put writer could be forced to take the stock for the price specified in the agreement even though the market price has fallen. As an additional safety precaution, the put options were to be guaranteed. Under the conversion investment agreement the investors were to receive a fixed return on their investment.

All but two of the investors involved here had entered into their investment contracts with Associated more than five years before the return of the indictment against Jensen. Although the investors' moneys out-of-pocket were provided at the time the contracts were entered, funds in their accounts resulting from the conversion process were continually reinvested by Associated. Evidently the conversion process functioned smoothly during the first portion of the investors' involvement with Associated. In November 1972, however, Associated sustained a loss in excess of $300,000 from fraudulent activities of David Nemelka, one of its customers. After deciding the firm could continue in business, Jensen made various capital contributions. But the firm continued to experience financial difficulties and finally was adjudged to be bankrupt in August 1973.

During this period of financial instability the investment accounts were in the following shape. Stocks had been sold to the accounts at prices far in excess of their actual market values. Many of these stocks had been previously owned by Jensen as a consequence of the stock fraud perpetrated on him in 1972. With respect to such stocks Jensen, his wife, or one of his wholly-owned corporations served both as the writer of the put option and the buyer of the call option. The put options were not guaranteed by an independent third party, but by Associated. Thus, in effect Associated was guaranteeing its own legal obligations. Because of its financial difficulties and then bankrupt status, Associated was unable to perform on either the put options or the guarantees. The investors were left with stock that had no market value, losing more than $100,000.

I

Jensen's initial argument on appeal focuses on an alleged variance between the proof and the indictment. The indictment alleges fraud in the sale of those common stocks found in the investor's accounts at the time of Associated's bankruptcy. Jensen takes the position that the security actually sold to the investor was a three-part investment contract consisting of a put, a call, and the underlying stock, and was not the individual shares of common stock. He points out that the investors took no part in choosing which stocks would be used in the conversion process, but instead made only the initial financial commitment that he then continually reinvested. Jensen also argues that the government produced no evidence of fraud in the sale of the common stocks because they were not sold to the investors, and therefore no violation of section 17(a) was proved.

We do not accept this analysis. Customers often give brokerage firms great leeway in making investment decisions for their accounts; purchases on their behalf by the brokers are still sales to the customers. The key here is whether the customers owned the stocks in the accounts, or whether the obligation of Associated to the investors was simply that of debtor and creditor.

Jensen told the investors their money would be used to buy stocks, but in a way that would give a fixed return rather than a return subject to the risks of the market. The investors' money was used to buy specific stocks, which were then placed in the individual accounts, with each investor being notified what had been bought for his or her account. Upon bankruptcy, the investors received only the stocks in the accounts. This is not essentially different, in our view, from a regular brokerage account when the discretion over investment is vested in the broker. Each sale of stock to the accounts, therefore, must stand on its own and be judged in the context of the agreement with the investors.

Did the government prove fraud in the sale of the common stocks? To prove a violation under section 17(a)(2) or (3) the government must show the defendant sold a security,

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

Whether fraud within the meaning of the language of (2) and (3) existed is a fact question, and the jury found against defendant. There is ample evidence in the record to support this finding.

Jensen represented to the investors at the time the agreements were entered into that the investments would be "risk free," because of the put option safeguard and the guarantee by a financially secure institution such as a broker member of the New York Stock Exchange or a federally insured bank. This was the method of operation initially, but it changed as Jensen continued to reinvest the money. An investment based upon a guarantee by Associated of its own legal obligation at a time when it was facing financial trouble, and put and call options written by Jensen and his companies on essentially worthless stock, owned by Jensen and sold to the accounts, is very different from the one represented in the beginning. The investors testified they relied on the safeguard and guaranteed aspects of the scheme in entering into the transactions. Failing to inform the investors of the changes in the nature of the investment clearly constitutes a material omission.

A finding of a fraudulent course of business can also be supported. As indicated, Jensen took stock that he had been defrauded on in another deal and knew was worth little or nothing and sold it to the investors' accounts at high prices. He set up what was essentially a sham put and call option transaction because Jensen or entities under his control held both options, guaranteed the package, and then apparently used the converter's money to keep the business afloat.

Jensen raises a final question whether the fraud was in the sale of the common stock. He contends that "in the sale of" as used in section 17(a) must necessarily be narrower in scope than the "in connection with" language of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). He then argues that the fraud alleged here relates to the sale of the investment contract and does not have the requisite connection to the sale of stock, a peripheral transaction; therefore there is no violation of section 17(a) as alleged in the indictment.

We recognize that the "in connection with" phrase in section 10(b) has been relied upon to bring together instances of fraud and sales of securities which occur in separate transactions but are a part of a larger scheme. See Superintendent of Ins. v. Bankers Life and Cas. Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971); Smallwood v. Pearl Brewing Co., 489 F.2d 579, 594-95 (5th Cir.), Cert. denied, 419 U.S. 873, 95 S.Ct. 134, 42 L.Ed.2d 113 (1974). Some schemes may be beyond the purview of section 17(a), yet come within the broad scope of section 10(b). We believe, however, the present transaction fits comfortably within 17(a).

Both sections 10(b) and 17(a) were enacted to protect investors from fraudulent practices by requiring fairness, disclosure, and the highest ethical standards in the securities business. See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963); ...