United States v. Bronson

• Decision Date: 14 December 1944
• Docket Number: No. 39.,39.
• Citation: 145 F.2d 939
• Parties: UNITED STATES v. BRONSON et al.
• Court: U.S. Court of Appeals — Second Circuit

145 F.2d 939 (1944)

UNITED STATES v. BRONSON et al.

No. 39.

Circuit Court of Appeals, Second Circuit.

December 14, 1944.

Robert E. Manley, of New York City, for appellant.

Thomas F. Murphy, James B. M. McNally, U. S. Atty., and David Hartfield, Jr., Asst. U. S. Atty., all of New York City (Irving J. Galpeer, Atty., Securities and Exchange Commission, of New York City, of counsel), for appellee.

Before L. HAND, SWAN, and CLARK, Circuit Judges.

L. HAND, Circuit Judge.

This case comes before us upon appeals by Bronson and two companies — Coronado Development Corporation and Wetherbee Process Corporation — from a judgment of conviction upon thirteen counts of an indictment in twenty counts. The first seven counts on which the appellants were convicted were the usual charges for using the mails to defraud; another count — Fifteen — was for the same crime, though it was laid under the Securities Act of 1933, 15 U.S.C.A. § 77q.; four counts — Sixteen, Seventeen, Eighteen and Nineteen — were for using the mails for the distributions of securities, not registered as required under that act; and the last — Count Twenty — was for a conspiracy to commit the crimes charged in the earlier counts. Bronson was sentenced to eighteen months imprisonment under each count, the sentences to run concurrently; he was also sentenced to pay a fine of $1,000 under each of Counts One, Five and Fifteen, and a fine of $2,000 under Count Twenty. The Coronado company was sentenced to pay a fine of $1,000 under Count One, a fine of $1,000 under Count Five, a fine of $1,000 under Count Fifteen, a fine of $2,000 under Count Twenty, and a fine of one dollar upon each of the other counts. The Wetherbee company was sentenced to pay a fine of one dollar on each count, and the fine was "remitted." We will take up the appeal of Bronson first. He complains: first, that the evidence was insufficient to sustain the verdicts; second, that the prosecution should not have been allowed to sever the trial as to a co-defendant, Thomas; third, that there were numerous errors in admitting and excluding evidence and in the court's charge. The most important of these errors is the first, to the understanding of which it is necessary to state the evidence at some length.

In 1927 Bronson was a director of, and the owner of a number of shares in, a copper company in Arizona, known as the Arizona Bagdad Corporation, which in that year was reorganized as the Bagdad Copper Corporation. The Arizona company transferred all its assets to the Bagdad company in exchange for 4,000,000 of that company's one dollar shares, which were issued to the shareholders of the Arizona company, who, as part of the same transaction, returned 2,800,000 shares to the Bagdad company, to be held as "treasury shares." The business did not prosper, and by 1930 the Bagdad company had substantially shut down the mine. However, in the autumn of 1935 Bronson and a mining engineer, named Thomas, conceived the notion of reviving it, and set about getting the necessary funds by the sale of stock. This they proposed to do in an exceedingly roundabout way. Bronson had already organized two other corporations, the other appellants at bar: the Coronado company and the Wetherbee company. The Wetherbee company was a mere shell; the Coronado company was a holding company for Bronson and his family, and was completely under his control; it held some of his Bagdad shares. On March 31, 1935, the Bagdad company reduced its capital from 4,000,000 to 800,000 shares, but increased the par value from $1 to $5. After this change the "treasury shares" were 340,000, and the holdings of the Coronado company were 65,000. Bronson then arranged with a broker, named Phillips, for a stock selling drive. For this he prepared as follows. In December, 1935, the Coronado company agreed to sell to Phillips 13,700 shares of Bagdad stock at $2.20 a share, for which Phillips was to pay by March 31st. On January 28, 1936, the Wetherbee company agreed to pay from the Bagdad company, at $2.20 a share, 13,756 shares, which that company had purchased in the market and held in its treasury. The Wetherbee company was to pay for these shares by March 13th, and, if it did, it would get an option from the Bagdad company, good until January 13, 1937, to buy 140,000 of that company's "treasury shares" at prices varying from $3 to $7. Phillips then paid the Coronado company the purchase price of the 13,700 shares of stock, and the Coronado company turned about and lent this money to the Wetherbee company. That company thereupon paid the borrowed money to the Bagdad company to take up its own purchase of 13,576 shares; pledged the shares to the Coronado company for the loan, and delivered them to the Coronado company which held them thereafter. Since this purchase was a performance of the Wetherbee company's contract with the Bagdad company, the Wetherbee company became entitled to purchase the 140,000 of the new company's "treasury shares" under the option. (Incidentally the Coronado company was entitled to half of the optioned shares in the case of any default by the Wetherbee company upon the loan.) At the end of all these transactions Phillips had therefore 13,700 shares of the Bagdad shares; the Coronado company held 13,756 shares as pledgee which came from the Bagdad company's treasury; and the Wetherbee company had an option upon 140,000 other shares of Bagdad "treasury stock." These optioned shares the Wetherbee company then agreed to sell Phillips: 50,000 at $4; 50,000 at $3.50; 40,000 at $7 — the same prices as those fixed in the contract between itself and the Bagdad company.

So armed, Phillips began to sell the 13,700 of Bagdad shares in December, 1935; but he had not disposed of many before January 27, 1936. By that time he had, however, put up the market price from less than $2 to $3.75; and by the end of March he had succeeded in selling all the shares at average prices well over $4, and at times as high as $4.50. Although these shares all came from the Coronado company, as we have seen, the result was the same as though they had come directly from the treasury of the Bagdad company; for, when Phillips took them from the Coronado company, that company as pledgee got the same number — 13,756 to be accurate — from the Bagdad company through the Wetherbee company, which, even more than the Coronado company, was a mere dummy of Bronson. After he had sold these 13,700 shares, Phillips began selling from the 140,000 optioned shares, the right to which the Wetherbee company had transferred to him, as we have said. The first 50,000 he sold during April, May, June, and the first ten days of July; for these the Bagdad company received $3 a share. Phillips's prices averaged a little over $4 in April, about $4.50 in May, about $6 in June, and $7 for July. He then sold 25,000 of the second instalment of the optioned shares, for which he paid $3.50 to the Bagdad company. His prices for these were between $7 and $8.50 a share, until in July, 1936, an investigation of the Securities and Exchange Commission caused him to stop.

Bronson had been privy to this whole plan, as is indeed obvious from its structure; indeed, the jury might have found that he had devised it. The buyers of all these shares did not of course know that they were buying shares which — after the paraphernalia of contracts and dummy companies was cleared away — came out of the Bagdad treasury; and Phillips and Bronson naturally did not tell them. The spread between the price received by the Bagdad company and what they paid was also of course unknown to them. There was also testimony that Bronson went much further than this; that on several occasions he affirmatively declared that the shares were not "treasury stock": once, in a letter to a customer, named Luckeish; a second time, in a statement to a broker, named Banigan; a third, in answer to an inquiry made at a hearing of the Pennsylvania Securities Commission. So much for the stock selling.

The Bagdad company issued a balance sheet of its assets as of December 31, 1935, which was distributed during the drive. On this the current assets were about $157,000, of which about $22,000 were in cash and bonds, $3,300 in supplies, and $131,000 were set down as "Other Securities at Cost." This item was in two parts: the 13,700 shares of Bagdad stock, which later went to the Coronado company, and an investment in a rolling mill in Sandusky, Ohio. On March 12, 1936, Bronson wrote to his engineer, Thomas, that the Sandusky mill should have been written off altogether, its value having disappeared; yet in May, 1936, he told one Mellgren — of whom more later — that the item of $31,000 had been composed of securities in the Anaconda and Kennecott companies, which had since been turned into cash; and at the same time he also told him that the investment in the Sandusky rolling mill would show a loss of about $40,000.

A firm of brokers, — Charles H. Jones & Co. — became interested in selling Bagdad shares, but wished information about the company and the mine, and applied to Bronson. At his suggestion, their employe, Mellgren, went to Arizona, where he spent three days at the mine. Thomas, the engineer on the spot, showed him about, and it was from Thomas that he got a greater part of the material, which he afterwards put into a report to Banigan. He ...