U.S. v. Scop

• Decision Date: 04 May 1988
• Docket Number: 391,Nos. 393,D,408 and 392,s. 393
• Citation: 846 F.2d 135
• Parties: , 26 Fed. R. Evid. Serv. 275 UNITED STATES of America, Appellee, v. Alan SCOP, Raphael Bloom, Herbert Stone and Jack Ringer, Defendants-Appellants. ockets 87-1255, 87-1261, 87-1262 and 87-1270.
• Court: U.S. Court of Appeals — Second Circuit

Page 135

846 F.2d 135

56 USLW 2692, 26 Fed. R. Evid. Serv. 275

UNITED STATES of America, Appellee, v. Alan SCOP, Raphael Bloom, Herbert Stone and Jack Ringer,

Defendants-Appellants.

Nos. 393, 391, 408 and 392, Dockets 87-1255, 87-1261,

87-1262 and 87-1270.

United States Court of Appeals, Second Circuit.

Argued Nov. 2, 1987.

Decided May 4, 1988.

Lawrence Iason, New York City (Sarah N. Chapman, Obermaier, Morvillo, Abramowitz & Iason, P.C., New York City, of counsel), for defendant-appellant Raphael Bloom.

Ira Lee Sorkin, New York City (Lawrence P. Eagel, Deborah R. Wolfe, Squadron, Ellenoff, Plesent & Lehrer, New York City, of counsel), for defendant-appellant Jack Ringer.

Michael L. Levine, New York City, for defendant-appellant Alan Scop.

Richard B. Lind, New York City, for defendant-appellant Herbert Stone.

Louis M. Fischer, Dept. of Justice, Washington, D.C. (Rudolph W. Giuliani, U.S. Atty. S.D.N.Y., New York City, Mitchell A. Mars, John J. Scully, Sp. Attys., Dept. of Justice, Chicago, Ill., of counsel), for appellee.

Before PIERCE, WINTER and MINER, Circuit Judges.

WINTER, Circuit Judge:

In 1980 and 1981, appellants Alan Scop, Raphael Bloom, Herbert Stone and Jack Ringer were variously involved in the initial offering and subsequent trading of the stock of an automobile dealership. Each was indicted for mail fraud in violation of 18 U.S.C. Sec. 1341 (1982), securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1982), and conspiracy to commit those offenses in violation of 18 U.S.C. Sec. 371 (1982). ¹ Appellants Bloom and Stone were also charged with making false declarations before a grand jury in violation of 18 U.S.C. Sec. 1623 (1982). After a jury trial before Judge Pollack, appellants were convicted on all counts.

Several investors in the dealership's stock testified at trial, but the government's case was based primarily upon the testimony of a co-conspirator who testified pursuant to a plea agreement and upon that of a government investigator who testified as an expert witness. On appeal, appellants argue inter alia that their mail fraud, securities fraud and conspiracy convictions are time-barred and that the government's expert witness was wrongly allowed to give opinions that embodied legal conclusions and were based upon his assessment of the credibility of the testimony of other witnesses.

Because we believe that the expert witness's opinions were inadmissible, we reverse all but the false-declaration convictions.

BACKGROUND

A. The Scheme

We of course view the evidence in the light most favorable to the government. In 1979, Gary Brustein, a manager of a teenage discotheque, was approached by Ringer about financing the teenage discotheque through a public offering of stock. Brustein, however, was more interested in the automobile business than in the discotheque. He suggested to Ringer that they confer with Keith Sheldon, an old friend in the car business, about forming a new company, European Auto Classics ("EAC"), to Money for the venture was to come from a public offering of stock in the new company. Because Brustein and Sheldon knew little about stock offerings or running a business, the decisions concerning the public offering and the start-up of the company were made by Ringer. Ringer brought in Martin Klein as vice-president to provide business experience while Ringer served as general manager, a job for which he was paid a weekly salary of about $275 and given the use of an automobile. Ringer selected the lawyer to handle the preparation and filing of the offering circular and other documents needed to take the company public. Because Ringer had "problems in the past with the SEC," however, these documents made no mention of his involvement. Finally, Ringer secured the services of Amfco Securities and Norbay Securities as co-underwriters for the public offering. Ringer was associated with Amfco, whose president and sole broker was Scop. Stone was a broker at Norbay.

sell foreign antique and classic cars to members of the affluent community of Great Neck, Long Island.

Meanwhile, EAC leased a showroom and began renovating it, largely with borrowed money. In February 1980, Amfco and Norbay opened the public offering of fifty million shares of EAC stock at one cent per share. When the offering closed on April 3, 1980, all fifty million shares had been sold, and EAC had achieved its goal of a total initial financing of $500,000.

As participants in the EAC public offering, Ringer, Scop and Stone were prohibited from purchasing any of the company's stock during the public offering period by SEC Rule 10b-6, 17 C.F.R. Sec. 240.10b-6 (1987). Nevertheless, Ringer and Scop attempted to circumvent this prohibition by the use of accounts in other names. For example, Ringer had his accounts in the name of his wife, brother-in-law and some friends, while Scop used the names of friends.

After the close of the public offering, EAC's stock was traded on the over-the-counter market through several brokerage firms acting as "market makers" willing to buy or sell EAC stock on a continuing basis. These included Amfco, Norbay and Jay W. Kaufmann & Co., a securities firm through which Bloom traded in the stock.

By May 1980, the price of the stock reached four cents per share although EAC had operated in the red from its inception. Ringer met that month with Sam Sarcinelli, later a key government witness, at a hotel in New York. At the time he testified, Sarcinelli had three previous felony convictions for tax, narcotics and firearms violations. He also had plead guilty to two counts of the indictment in the present case and had agreed to testify against the other defendants in return for the government's recommendation that his sentence be concurrent with those he was already serving. It came out at trial that in the early 1970's Sarcinelli had been barred by the SEC from dealing in securities and that he had lied under oath to the SEC in 1980.

At the time of the meeting with Ringer, Sarcinelli was involved in buying and selling stocks and cocaine. By all appearances he was a wealthy man, and Ringer originally approached him to obtain a loan, offering stock in EAC and other companies as collateral. According to Sarcinelli's testimony, the idea of a loan was soon superseded by a plan in which Sarcinelli would aid Ringer, Scop and Stone in "working" the EAC stock, artificially moving its price to a target of fifteen cents per share by means of a series of controlled purchases and sales at successively higher prices.

Sarcinelli also testified about another meeting with Ringer, Brustein and some of Sarcinelli's associates in a Los Angeles hotel in July 1980, at which the artificial inflation of the share price and a proposed misleading letter to EAC's stockholders concerning the company's prospects were discussed. According to Sarcinelli, he brought Bloom into the scheme a few weeks later.

Sarcinelli and his associates soon began bringing in customers for the stock and setting up "matched orders" or "matched trades" to be executed by Scop, Stone and Bloom. These "matched orders" involved Sarcinelli covering "both sides" of a transaction After Sarcinelli withdrew, attempts to inflate the price of the stock appear to have ceased, and the stock generally declined, eventually becoming worthless. Nevertheless, after July 22, 1981, the critical date for purposes of the statute of limitations, defendants' nominees sold shares of EAC stock at prices that were still higher than what they had paid, defendants mailed stock certificates for purchases made in the previous year, and Bloom and Stone told nervous customers to hold on to their shares. Promised financial information on the company was never sent to shareholders despite requests.

by providing the buyer, seller and price. Nevertheless, the stock price did not move as he had expected, reaching a price of no more than six cents per share. By late August or early September, Sarcinelli began to suspect that one of his partners was "back dooring" him by selling the stock on the open market, thereby undermining the scheme to control the stock's price. Sarcinelli severed all involvement in the scheme in November 1980.

B. Whitten's Expert Testimony

The government called Stanley Whitten, the chief investigator for the SEC regional office in Chicago, as its final witness. Whitten had been a stockbroker for eight years prior to joining the SEC as an investigator in its Enforcement Division in 1974. He had spent over one thousand hours during four years of working on the present case and had interviewed approximately seventy witnesses. He had also assisted in the preparation of the indictment.

Whitten did not testify at trial as a witness with personal knowledge of relevant events. Claiming to be an expert in securities trading practices, he purported to base his testimony not on information obtained from his four-year investigation, but solely on the testimony and documentary evidence introduced at trial.

Whitten was allowed to answer over defense objections a question concerning his opinion as to whether there was a scheme to defraud investors in EAC stock from 1979 to 1982. He answered, "It is my opinion that the stock of European Auto Classics was manipulated and that certain individuals were active participants and material participants in the manipulation of that stock. And that these individuals engaged in a manipulative and fraudulent scheme in furtherance of that manipulation." Whitten consciously used the same formulation throughout his testimony. For example, when asked to name the "participants" in the scheme and the roles that they played, he corrected himself in mid-sentence to include the same elements in his answer: "I believe that the role at the inception, in terms of the participants and the manipulation--excuse me, the fraudulent manipulative practices that were engaged...