U.S. v. Wenger

• Decision Date: 26 October 2005
• Docket Number: No. 04-4022.,04-4022.
• Citation: 427 F.3d 840
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Jerome M. WENGER, also known as Jerome Maxell Wenger, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

427 F.3d 840

UNITED STATES of America, Plaintiff-Appellee, v. Jerome M. WENGER, also known as Jerome Maxell Wenger, Defendant-Appellant.

No. 04-4022.

United States Court of Appeals, Tenth Circuit.

October 26, 2005.

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Jerome H. Mooney, Mooney Law Firm, Salt Lake City, UT (Vincent L. Verdiramo, Verdiramo & Verdiramo, Jersey City, NJ, with him on the briefs), for Defendant-Appellant.

Diana Hagen, Assistant United States Attorney (Paul M. Warner, United States Attorney, with her on the brief), Office of the United States Attorney, Salt Lake City, UT, for Plaintiff-Appellee.

Before HARTZ, ANDERSON, and TYMKOVICH, Circuit Judges.

TYMKOVICH, Circuit Judge.

INTRODUCTION

Defendant-Appellant Jerome Wenger published a newsletter called The Next SuperStock and hosted a syndicated radio program of the same name. After failing to inform his listeners that he had been receiving compensation from certain companies in exchange for touting their stocks on his show, he was indicted and convicted of securities fraud under Section 17(b) of the Securities Act of 1933, 15 U.S.C. § 77q(b), which makes it unlawful to publicize a stock for consideration from an issuer, underwriter, or dealer without disclosing the fact and amount of the payment. In addition, for failing to inform readers of The Next SuperStock newsletter that he was selling his shares in the companies he had been recommending they buy, he was convicted under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), which makes it unlawful to employ any manipulative or deceptive device in connection with the sale of securities.

On appeal, Wenger challenges his convictions on the grounds that (1) Section 17(b) violates the First Amendment, (2) Section 17(b) is unconstitutionally vague, (3) his convictions were against the weight of the evidence presented at trial, (4) the district court impermissibly admitted evidence of a prior consent decree with the SEC, and (5) the district court failed to send the indictment to the jury room along with the jury instructions.

Accepting jurisdiction under 28 U.S.C. § 1291, we affirm.

BACKGROUND

In 1984, Wenger began publishing Penny Stock News, a newsletter that gave investment advice concerning "penny stocks," or shares of small companies with large numbers of shares outstanding. After the Securities and Exchange Commission determined that Wenger's Penny Stock News had violated the disclosure requirements of Section 17(b) and Section 10(b) because he received money from companies he recommended, Wenger and the SEC entered into a consent decree that stipulated he would disclose the full value of any consideration he was receiving from any issuer about which Penny Stock News was giving advice.

Ten years later, Wenger began publishing a similar newsletter called The Next SuperStock and also began hosting a radio program based in Salt Lake City. To further these ventures, Wenger approached a company called PanWorld Minerals International, Inc. and told its management that he could help publicize its stock. After PanWorld expressed interest, Wenger offered to provide certain "consulting" services for a standard fee of $15,000. Because PanWorld could not compensate Wenger in cash, Wenger agreed instead to accept 5.5 million shares of PanWorld, of which he had received 2.1 million by April 1994.

In early 1994, Wenger consulted with a law firm to determine how he could comply with Section 17(b)'s disclosure requirements. In a letter dated June 28, 1994, the firm recommended a two-stage disclosure, according to which Wenger would first state on the air that he was a paid consultant to some of the companies mentioned, and second send details regarding his compensation to listeners upon request. Sometime in 1994 Wenger began to tell listeners that they could request a list of his stock holdings. In response to such requests, he would send a form letter, which stated, "I presently charge a company $16,000 for services which may include introducing them to market makers and stock brokers, introduction to newspaper and magazine writers, introduction to newsletter writers and exposure through the radio." The letter then stated that "[a]s far as my portfolio is concerned the following stocks I bought," among which was listed PanWorld.

PanWorld employees also appeared on Wenger's radio program several times in 1994. On June 18, 1994, Wenger stated on his show that PanWorld "is trading at book value and has a great direction to go, and that's north." On the same day, when interviewing PanWorld consultant David Hesterman, Wenger stated that "I know I've been doing some consulting and helping you to get more of a better broker network in place and you've seen a lot more people come on the sheets for you and do some significant trading." Hesterman and PanWorld president Robert Weeks, both of whom had appeared several times on Wenger's show, testified at trial that they had never heard Wenger disclose that he was being paid in PanWorld stock. Six regular listeners also testified that they had never heard Wenger disclose the amount of stock he was receiving from PanWorld.

In June 1994, Wenger's newsletter published an article listing several reasons to buy PanWorld stock. The newsletter contained a standard fine print disclosure stating that The Next SuperStock or its employees "may purchase, sell, or have a position in the stocks discussed and may have a paid consulting arrangement with the companies." Wenger never disclosed in his newsletter that he had received 2.1 million shares in PanWorld or that he had contracted to receive up to 5.5 million shares.

By April 1994, Wenger had already begun selling the stock he had received from PanWorld. By the end of the summer he had sold over a million shares for a total of more than $100,000. In August, two of his brokerage accounts were oversold in PanWorld. Because "short selling" of a penny stock was illegal at the time, Wenger's broker bought enough stock to cover the short position at a lower price. Several listeners to Wenger's program testified that they bought PanWorld stock as a result of Wenger's recommendations. They also testified that had Wenger disclosed he was selling his PanWorld stock, they would not have bought any shares in PanWorld.

After the SEC began investigating Wenger's activities, Wenger's attorney submitted a letter to the SEC dated November 18, 1996. The letter included a partial transcript of the June 18, 1994 broadcast, and argued that Wenger's statement that he "had been doing some consulting" for PanWorld was an adequate Section 17(b) disclosure. On November 27, 1996, after the SEC requested copies of all broadcast tapes in which PanWorld was discussed, counsel sent the SEC a second letter. This letter enclosed taped portions of the June 18, 1994 broadcast and a February 22, 1994 broadcast, and stated that "[i]t is our understanding that Mr. Wenger has conducted a diligent search and he has located no other tape recordings or transcripts thereof that refer or relate to PanWorld."

Wenger was indicted in 1999.

DISCUSSION

We first must resolve a threshold issue posed by Wenger: Was his conduct protected from prosecution by the First Amendment. In other words, is Section 17(b) constitutional as applied to his speech?

Section 17(b) makes it unlawful for any person

to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.

15 U.S.C. § 77q(b) (emphasis added). According to Wenger, this provision unconstitutionally compels him to speak by requiring government-mandated disclosures as a part of his communications with his readers or listeners. We review First Amendment challenges de novo, Phelan v. Laramie County Cmty. Coll. Bd. of Trustees, 235 F.3d 1243, 1246 (10th Cir.2000).

I. THE FIRST AMENDMENT

Wenger first claims that Section 17(b) impermissibly regulates non-commercial speech and thus should be subject to strict scrutiny review under the First Amendment. He claims that, as applied to him, this exacting scrutiny prohibits the government from compelling speech—the disclosures—required by Section 17(b). We disagree.

A. Section 17(b) Regulates Commercial Speech

The initial question we must resolve is whether Section 17(b)'s reach is limited principally to commercial speech. If so, according to Supreme Court precedent it is subject to judicial review under the standard set forth in Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n of N.Y., 447 U.S. 557, 100 S.Ct. 2343, 65 L.Ed.2d 341 (1980).

Neither the Supreme Court nor any of our sister circuits have addressed this question explicitly. Two circuit courts and one district court have upheld Section 17(b) against First Amendment attack, however. In 1971, the Seventh Circuit, although without explicitly determining what level of scrutiny it was applying, held that "[t]he substantial interest of the investing public in knowing whether an apparently objective statement in the press concerning a security is motivated by promise of payment is obvious. We see no significant abridgement of freedom of the press in requiring disclosure of a promise of payment if there has been one." United States v. Amick, 439 F.2d 351, 365 (7th Cir.1971).

Similarly, in SEC v. Wall Street Publ'g Inst., 851 F.2d 365, 372-73 (D.C.Cir.1988), the District of Columbia Circuit upheld the constitutionality of Section 17(b) under the federal government's broad powers to regulate the securities industry, without expressly linking its holding to the First Amendment.¹ As an aside,...