U.S. v. Smolar

• Decision Date: 26 May 1977
• Docket Number: Nos. 75-1214-75-1216,s. 75-1214-75-1216
• Citation: 557 F.2d 13
• Parties: Fed. Sec. L. Rep. P 96,069 UNITED STATES of America, Appellee, v. Howard SMOLAR, Edward Vanasco, and Sumner H. Woodrow, Defendants, Appellants.
• Court: U.S. Court of Appeals — First Circuit

Page 13

557 F.2d 13

Fed. Sec. L. Rep. P 96,069

UNITED STATES of America, Appellee, v. Howard SMOLAR, Edward Vanasco, and Sumner H. Woodrow Defendants, Appellants.

Nos. 75-1214-75-1216.

United States Court of Appeals First Circuit.

Argued Oct. 5, 1976.

Decided May 26, 1977.

Thomas J. Freedman, Boston, Mass., by appointment of the Court, for Howard Smolar, appellant.

Alexander Whiteside, II, Boston, Mass., by appointment of the Court, for Edward Vanasco, appellant.

Manuel Katz, Boston, Mass., for Sumner H. Woodrow, appellant.

Richard W. Beckler, Atty., Crim. Div., Dept. of Justice, Washington, D. C., with whom James N. Gabriel, U. S. Atty., Boston, Mass., and Mark S. Davidson, Atty., Crim. Div., Dept. of Justice, Washington, D. C., were on brief, for appellee.

Before COFFIN, Chief Judge, ALDRICH and McENTEE, Circuit Judges.

COFFIN, Chief Judge.

Appellants were charged, with two other individuals and two corporate entities, under a twenty count indictment alleging conspiracy and substantive violations of the federal securities laws. ¹ On motions at the close of the government's evidence and at the close of all the evidence, the court entered judgment of acquittal on many of the substantive counts. Of the counts that went to the jury, appellant Smolar was convicted on all six counts; appellant Vanasco was convicted on five counts and acquitted on one; and appellant Woodrow was convicted on two counts. Appellants raise numerous issues on appeal, not all of which merit discussion.

Background

Security Planners Associates was a registered broker-dealer. Among other activities, it acted under contract as investment advisor to a mutual fund known as the Technical Fund. By 1970 each of the appellants was associated with Security Planners in some capacity. Smolar was President of the firm and portfolio manager for the Technical Fund. Woodrow was an attorney who acted as counsel to both the individuals and the firm. Vanasco, who was under an SEC bar prohibiting him from being associated with any broker-dealer, did not hold an official position, but several witnesses testified that he was "running the show".

In 1970 it was determined that Security Planners Associates was having difficulties with its liabilities and bookkeeping that might endanger its registered broker-dealer status, and that a separate entity, Security Planners Limited, (Limited) should be spun-off to assume Associates' business. It is not alleged that this transaction was illegal. The government's theory of this case is that, between April, 1970, and September, 1972, appellants and others associated with Security Planners Limited filed false forms with the SEC and engaged in various fraudulent schemes to pump working capital into Limited in a desperate effort to keep it, and its broker-dealer registration, alive. The government claims that the primary object of this effort to sustain Limited was to milk the only valuable asset it had the Technical Fund. We shall recite more specific facts as necessary in discussing the various issues on appeal.

Instructions on the Use of Co-conspirator Hearsay Testimony

On the first day of trial, as soon as it appeared that testimony as to the out-of-court declarations of alleged co-conspirators was about to be elicited, the court on its own motion gave the jury a cautionary instruction limiting the use of co-conspirator hearsay testimony. The court asked if counsel had any additions or corrections to suggest, and no one questioned the content of the instruction. ² The identical instruction was read to the jury numerous times during the trial, and again in the final charge. At no time did any of the defense counsel suggest that the instruction was defective. Now, however, all three appellants join in the contention that the instruction did not meet the requirements set forth in United States v. Honneus, 508 F.2d 566, 576-77 (1st Cir. 1974), since it allowed the jury to consider "evidence as to the actions and declarations of all alleged participants" in determining whether the conspiracy existed. ³

In Honneus we held that failure to give a proper cautionary instruction before the introduction of any hearsay testimony would thereafter be considered plain error, and "result in reversal in any case where we believe the omission to have affected substantial rights." 508 F.2d at 577. ⁴ We said that the court should instruct the jury that the existence of a conspiracy and the defendant's participation in it must be established by independent non-hearsay evidence before the extra judicial statement of an alleged co-conspirator could be used against the defendant. It may be conceded that the instruction in this case failed to make clear that hearsay evidence could not be used in determining whether a conspiracy existed, but it did clearly require that each defendant's participation must be established by non-hearsay evidence, which is perhaps the more important element. We do not believe that Honneus compels the conclusion that this instruction was so plainly prejudicial that reversal is required. The failure to alert the jury, as hearsay testimony comes in, that its use is conditioned upon certain findings which must be based on non-hearsay evidence, creates a substantial risk that jurors, unschooled in the intricacies of the hearsay rule, will absorb all of the evidence and be unable to sort it out in accordance with a proper instruction at the close of the case. See United States v. Apollo, 476 F.2d 156, 163-64 (5th Cir. 1973). In the present case, however, the trial court took pains to focus the jury's attention on the difficult distinctions it would be called upon to make in using the hearsay testimony. We do not believe that the timely instruction in this case, although defective in one particular, created the same potential for prejudice to substantial rights that was present in Honneus and Apollo.

Moreover, it seems to us that framing an instruction that communicates to the jurors what they are required to do, without burdening them with so many subtleties that they cannot sensibly do it, is an extremely delicate task. The trial court solicited counsel's suggestions and, contrary to appellant's contention on appeal, there is no indication in the record that it would have been unreceptive to the arguments they now make. ⁵ The error now assigned could have been cured easily. While, as we said in Honneus, a timely cautionary instruction is a "minimum obligation on the trial judge in a conspiracy case", 508 F.2d at 577, quoting United States v. Apollo, supra, 476 F.2d at 163, this was not an invitation to counsel to ignore the contents of the instruction until appeal. We think that there is an obligation on defense counsel to give the trial court the benefit of their views on the subject, particularly when it has been the focus of considerable attention at trial. ⁶ Here the record makes clear that all defense counsel thought that the charge was a proper "Honneus instruction", and at one point actually referred to it as such. Under these circumstances, where the asserted defect was not just overlooked but was actually acquiesced in by counsel, we do not think justice requires a finding of reversible error. See United States v. DeJesus, 520 F.2d 298, 301 (1st Cir. 1975) (ambiguous instruction acquiesced in by counsel held not reversible error in pre-Honneus trial).

Finally, our review of the record indicates that the independent non-hearsay evidence that a conspiracy existed, consisting of each appellant's own actions and statements, and discussions at which all were present, was adequate by any standard. See United States v. Diaz, 538 F.2d 461, 464-65 (1st Cir. 1976). Since the jury was clearly instructed that only a defendant's own statements and actions could be used in determining whether he participated in the conspiracy, we think it is clear that the asserted defect in the instructions did not affect substantial rights. See id; United States v. Honneus, supra, 508 F.2d at 577.

Instructions on Count 11 Variance

Appellants Woodrow and Smolar challenge the court's instructions under count 11 of the indictment. The indictment charged that they, with others, ⁷ had defrauded the shareholders of the Technical Fund by causing

"the Fund to purchase from one, John Milliken 7,500 shares of unregistered Logic Corporation warrants, having little, if any, value at a price of approximately $29,400. The aforesaid defendants further caused $29,000 from the proceeds of the sale to be diverted into the capital account of Limited and further caused $400.00 from the proceeds of the sale to be paid to John Milliken as his compensation in the transaction."

The government's main witness on this count was John Milliken. He testified that at the time of the sale registered Logic stock had a value of $8 per share, and that the warrants he sold the Fund were options to buy unregistered stock at 13 cents per share. The purchase price was $29,400, which Milliken received in the form of a $29,000 note from Security Planners Limited and a check for $400. On cross-examination, Milliken testified that this price was about "half the market", and that some months after this transaction registered Logic stock was selling at approximately $15 per share, and that it reached a high of $32. ⁸

At the close of the government's case all defendants moved for judgment of acquittal on count 11 on the ground that the government had offered no evidence that the Logic warrants were "of little if any value" as charged in the indictment. The district court apparently agreed that there was no such evidence, ⁹ but denied the motions for acquittal: the court was of the opinion that, regardless of the actual value of the shares or ultimate harm to the Fund, the scheme was fraudulent and in violation of 15 U.S.C. § 78j and Rule 10b-5 if its purpose was to defraud the Fund. As the court put it in the course of argument on the motion, it believed that...