U.S. v. Mahler

• Decision Date: 26 June 1978
• Docket Number: 960,D,Nos. 912,s. 912
• Citation: U.S. v. Mahler, 579 F.2d 730 (2nd Cir. 1978)
• Parties: 3 Fed. R. Evid. Serv. 90 UNITED STATES of America, Appellee, v. Arnold Nelson MAHLER and Dean H. Ubben, Appellants. ockets 77-1484, 78-1048.
• Court: U.S. Court of Appeals — Second Circuit

Page 730

579 F.2d 730

3 Fed. R. Evid. Serv. 90

UNITED STATES of America, Appellee, v. Arnold Nelson MAHLER and Dean H. Ubben, Appellants.

Nos. 912, 960, Dockets 77-1484, 78-1048.

United States Court of Appeals Second Circuit.

Argued May 2, 1978.

Decided June 26, 1978.

N. Richard Janis, Washington, D.C. (James E. Sharp, A. Raymond Randolph, Jr., Washington, D.C., of counsel), for appellant Mahler.

David Blackstone, New York City, for appellant Ubben.

Jed S. Rakoff, Asst. U.S. Atty., New York City (Robert B. Fiske, Jr., U.S. Atty. for the Southern District of New York, Pamela R. Chepiga, Frederick T. Davis, Audrey Strauss, Asst. U.S. Attys., New York City, of counsel), for appellee.

Before MOORE, OAKES and GURFEIN, Circuit Judges.

OAKES, Circuit Judge:

Appellants Arnold Nelson Mahler and Dean H. Ubben appeal from their convictions by a jury following a trial in the United States District Court for the Southern District of New York, Milton Pollack, Judge. Their earlier seven-week trial before Judge Marvin E. Frankel ended in a mistrial when one of the jurors suffered a heart attack during the deliberations. On the retrial approximately five months later on a superseding indictment which narrowed and simplified the original charges, ¹ Mahler and Ubben were convicted on all counts. ² We affirm.

I. Facts

In the summer of 1972, Mahler and an associate named Zucker ³ acquired control, in nominee form, of a publicly-tradeable but defunct corporation, Bell-Ko Film Corp., a shell with assets of $86. Ubben had meanwhile been retained as a consultant to International Industries, Inc. (International), a small private company in Colorado. International was the manufacturer of a purportedly revolutionary pneumatic industrial pump; the company was, however, virtually without sales and verging on bankruptcy.

In October of 1972 Mahler and Ubben agreed to reorganize these companies into a new corporation, Industries International Inc. (Industries), for the purpose of fraudulently manipulating the price of the company's publicly tradeable stock. Ubben and Mahler held the greater part of that stock in nominee name. Once the trading price rose Ubben and Mahler planned to dispose of their worthless stock at a substantial profit.

The fraudulent scheme was carried out by a series of questionable and often illegal acts. Ubben first induced International's president, Billy Lovejoy, ⁴ to fire its outside accountants whose annual report would show a loss for the year ending September 30, 1972, and a net worth approaching zero, and to substitute Lawrence V. Bialek ⁵ whom Ubben described as an accountant who "for $500" would "put anything into a statement . . . ." Trial Transcript 726-27. Bialek soon produced a false financial statement showing a profit and a substantial net worth on the part of International as well as a pro forma financial statement fraudulently showing the reorganization of International and Bell-Ko into Industries as creating a company with a net worth of no less than $456,278.

To effect the reorganization, Mahler had his attorney, Harold C. Herman, ⁶ charter Industries as a new corporation, and cause it to issue 4 million shares of stock; 2.2 million of these were exchanged, on a 100 for 1 basis, for the existing 22,000 shares of International controlled by Billy Lovejoy. The remaining 1.8 million shares were for the most part controlled by Mahler, Ubben and Zucker under various nominee names, ⁷ some of the nominees' names being used despite their refusal to participate in the scheme.

Mahler then caused Industries to acquire the "assets" of Bell-Ko by exchanging 664,000 of Industries' shares for the 664,000 shares of Bell-Ko in a manner which ostensibly complied with SEC Rule 133, 17 C.F.R. § 230.133 (repealed effective January 1, 1973), ⁸ but which in fact fell outside of that Rule since, Inter alia, the reorganization was intended simply as a step toward the sale of the surviving company's stock to the public.

Ubben then sought to stimulate a demand for Industries stock. He first persuaded a number of investors, commencing with the most prominent, from Des Moines, Iowa, to purchase several hundred thousand shares of Industries stock at $1 per share by publishing a false newsletter which grossly inflated the company's prospects primarily by touting fictitious qualities of the company's pump. Ubben falsely represented that the proceeds of the sales of stock would be used for production expenses. In actuality, some of the proceeds were used to stave off immediate bankruptcy while at least 45% Of them were funneled to Ubben, Mahler and their accomplices. And Ubben promised that one of each of three shares purchased would be unrestricted, "free and tradeable" stock which could be resold once public trading began. This representation was fraudulent since Ubben had no such shares; he only had an illegal plan to turn Bell-Ko shares into free and tradeabale shares for these investors. With all this bait, Ubben was able to attract the fish in Des Moines before public trading had even begun.

In the meantime, Mahler and Ubben bribed a New York stock broker, William Wellens, ⁹ to induce his firm to make a market in Industries stock. To lure other brokers into the market, a "two-martini" meeting for over-the-counter brokers was held in Manhattan. At the meeting complete with tape-and-slide show ("offering revolutionary products to a waiting world") the proxy statement with Bialek's false financial statements and an updated financial statement with even "better" figures appearing under the letterhead of a Denver firm which had not prepared the financials ¹⁰ was distributed. Ubben and Lovejoy also made numerous gross misrepresentations of the firm's prospects. The next day Wellens had his brokerage firm list Industries in the national daily quotations the "pink sheets" furnished to over-the-counter brokers.

When trading opened on February 28, 1973, Industries stock traded at $1 per share. But since the demand generated in Des Moines could only be met through the limited supply of Rule 133 stock, Mahler and Ubben were able to manipulate the trading price so that it soon climbed to nearly $5 per share. Ubben and Zucker then sold at least 80,000 shares. The restrictive legend on the shares had been removed when Harold Herman prepared opinion letters based on false representations by Mahler directing the transfer agent to remove the legend. The appellants were seeking to "free up" another 180,000 shares by forged opinion letters and phony representations falsely attributed to six of their nominees when the transfer agent balked; an SEC investigation had become public knowledge.

On March 27, 1973, after the stock had reached nearly $7 per share, the SEC suspended trading. Soon thereafter, the company filed for bankruptcy. While Ubben and Mahler engaged in numerous other misrepresentations and acts, including a scheme to conceal their fraud, which involved backdating some and destroying other documents, rigging a postage meter and perjury, the foregoing sketch of the facts suffices to impart some the flavor of this "shellgame" securities fraud. We turn then to the legal points raised by Mahler and Ubben.

II. Discussion

A. Rule 609(b)

Mahler's most substantial point relates to the introduction into evidence by the Government of Mahler's prior convictions ¹¹ pursuant to Rule 609(b) ¹² of the Federal Rules of Evidence. This evidence had previously been admitted in the Government's direct case, under Rule 404(b), for the limited purpose of proving knowledge and intent. See note 20 Infra. It was readmitted after Mahler took the stand, to impeach his credibility.

Mahler indicates that since his convictions were more than ten years old as measured by Rule 609(b), they were admissible only if their probative value substantially outweighed their prejudicial effect. The heart of the contention is that the determination of this balancing process must be an on-the-record finding supported by specific facts and circumstances and that no such finding was made. Mahler's pretrial motion to exclude the prior convictions for purposes of impeachment had been denied on the basis that the same motion had been considered and denied at the first trial by Judge Frankel and that no new facts warranted a change. However, Mahler rightfully points out that at the time of the first trial the convictions were less than ten years old whereas at the time of the second trial, they were more than ten years old. Consequently, their admissibility at the second trial was subject to the requirements of Rule 609(b) rather than Rule 609(a).

The Government urges in response that an on-the-record finding is not required either by the language or by the legislative history of the Rule. We disagree and conclude that when convictions more than ten years old are sought to be introduced pursuant to Rule 609(b), the district judge must make an on-the-record finding based on specific facts and circumstances that the probative value of the evidence substantially outweighs the danger of unfair prejudice. We reach this result for four reasons.

First, we believe that the language of the Rule clearly suggests such an on-the-record determination. The decision to admit such evidence must be "supported by specific facts and circumstances." If this wording did not contemplate an on-the-record finding by the district judge, it could simply be stricken from the Rule with no linguistic or syntactical harm to the rest of the sentence. The position espoused by the Government would make the language mere surplusage, totally devoid of meaning. Moreover, it is difficult to determine whether a ruling is indeed "supported by specific facts and circumstances" unless the basis of the ruling is carefully spelled out. The Government's suggestion that the notice requirement of Rule 609(b) ¹³ serves as a surrogate factual predicate for review of district court rulings is not...