United States v. Brown, 463.

• Decision Date: 29 July 1935
• Docket Number: No. 463.,463.
• Citation: 79 F.2d 321
• Parties: UNITED STATES v. BROWN et al.
• Court: U.S. Court of Appeals — Second Circuit

79 F.2d 321 (1935)

UNITED STATES v. BROWN et al.^*

No. 463.

Circuit Court of Appeals, Second Circuit.

July 29, 1935.

Phillips, Mahoney, Leibell & Fielding, of New York City (Walter Bishop, Jeremiah T. Mahoney, and P. E. Conforti, all of New York City, and Sidney Masone, of Brooklyn, N. Y., of counsel), for appellants.

F. W. H. Adams, U. S. Atty., of New York City (Jacob J. Rosenblum, Asst. U. S. Atty., Craigh Leonard and Richard Delafield, all of New York City, of counsel), for the United States.

Before L. HAND, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

L. HAND, Circuit Judge.

Brown and McCarthy were indicted on October 3, 1930, with four others who were not tried. The crime charged was the use of the mails in a scheme to defraud, section 338, title 18, U. S. Code (18 USCA § 338); and the indictment was in nine counts, each charging the posting of a separate letter, to which was added the usual count in conspiracy. The cause came on for trial in November, 1933, after a demurrer had been overruled, and was concluded in January, 1934, by a verdict against the defendants upon eight of the nine posting counts (one being withdrawn), and upon the conspiracy. On January 19, 1934, the court sentenced them to a term of five years upon all the counts, together with fines amounting to $18,000.

The facts developed upon the trial and really undisputed were as follows: In December, 1929, Brown had bought 43,400 shares in a company known as the Manhattan Electrical Supply Co., Inc., of which he was president, he had an option upon 27,500 more at $27.50, and a somewhat indefinite arrangement with one Anderson affecting an added 20,000. The company had 125,000 shares outstanding, listed on the New York Stock Exchange, which had been actively traded in, and whose price had before this period fluctuated with great violence due to the manipulation of an earlier pool two years before. McCarthy became associated with Brown in December and both determined to work off the shares at constantly rising prices. To accomplish this they opened ninety-one accounts with fifty-two different brokers, in their own names and those of their wives, and in the names of others who were their creatures. A single set of books contained all the purchases and sales, and the defendants furnished the bulk of the money to carry the shares, which were bought on margin. The most serious of the frauds practised were bribing brokers and their assistants to recommend the stock, and "washing" sales in it. Brokers have managers, clerks and so on who deal directly with their customers, and on their advice the customers rely in investing; these employees are called "customers' men," and the defendants either paid them salaries or a commission for advising the purchase of Manhattan shares. "Washing" sales was made possible by the numerous accounts controlled by the defendants between whom transactions could be cancelled. In addition to these frauds the defendants put out false statements of the earnings of the company; e. g., that for the year 1930 it had earned between six and ten dollars a share and would soon pay a dividend, though in fact it had lost money during the first quarter of 1930. They also declared that the company had large contracts in prospect. By these means they forced up the price to 55 on May first, when it became apparent that the end was at hand. Trading closed until the seventh when the stock opened below 20 and never recovered. The public was successfully gulled, and during the four months while the plan was afoot rushed in to buy the shares in great quantity. The defendants do not argue that all this did not make a case for the jury; they rest their appeal upon points of law as follows: First, they say that the indictment did not charge a crime at all. Second, that certain damaging newspaper articles were improperly received in evidence against them. Third, that the testimony of those who had bought the shares and lost their money, was irrelevant and damaging. Fourth, that a juror had misconducted himself during the trial. Fifth, that the judge misdirected the jury on the law, and assumed too strict a control over their decision upon the facts. We shall take these up seriatim.

The challenge to the indictment, first raised by demurrer, was in two parts; that one allegation was too indefinite, and that as a whole it did not lay a crime. The first rests upon this passage: "It was a part of said scheme * * * that the defendants would form a pool * * * for the purpose of artificially manipulating the market in the stock * * * so as to artificially advance and inflate the price thereof without regard to the real value * * * from approximately twenty dollars per share to several times its then selling price." The objection is that there is no allegation of what the "real value" was. The excerpt is only a small part of the scheme which included bribing the "customers' men," a somewhat defective effort to allege "wash" sales, and misstatements about the company's earnings, the prospect of a dividend and the prospective contracts. It is doubtful whether the whole passage alleges any fraud at all, and if so, it is bad regardless of the point raised on the appeal. What does "artificially" mean, or "manipulated"? What misstatements of existing fact do they charge? No doubt a rhetorical implication of dishonesty hangs about them, but is that enough? We need not answer, for the language quoted was in any view surplusage, and might be disregarded. For the same reason we need not enter into a general discussion of the lawfulness of stock "pools," as the judge did below. There are various kinds of these; some merely hold a block of shares off the market for a season; some "peg" the price, buying when it falls, selling when it rises; others resort to less innocent methods. We leave the matter open, for the indictment contained enough else, as we have just said.

The objectionable newspaper articles were admitted under the following circumstances: Brown, who was the principal in the enterprise, employed a writer, named Lawn, to prepare favoring articles about the stock for insertion in newspapers and other publications, hoping to keep the public well disposed and to maintain a buyers' market. The New York Sun and the New York Journal published articles in their financial columns at the very end of April, 1930, just before the bubble burst, in which they severely criticized the methods used by the pool in disposing of the shares, intimating that the price had been raised far beyond the value by false "publicity." Lawn, being concerned about the effect of these, showed them to Brown and along with them answers which he had got up for publication. Brown read them and Lawn's proposed answer and told him not to use it; but he sent out a short answer of his own deprecating the attacks. Later one Deschler, a buyer of shares, spoke to Brown about one of the articles and Brown told him not to be troubled and not to sell his shares. The articles taken alone were of course incompetent; to be admissible at all they must become admissions of Brown. It was not enough that he merely learned of them; it was necessary that some reasonable inference relevant to the facts should be possible from his subsequent action or inaction. His direction to Lawn not to publish Lawn's answer cannot be taken as an admission of the truth of the charges; that would be a dreadful penalty for silence in the face of irresponsible attack. But his own answer was different; it was clearly to induce customers to buy, or at least not to sell; an effort to soothe the alarm which the articles might arouse, and the articles were essential to its understanding. This is especially evident in the interview with Deschler, who was troubled and thought of selling out. Brown reassured him and perhaps succeeded in keeping his shares off the market. Myers v. U. S., 223 F. 919, 923 (C. C. A. 2); Rice v. U. S., 35 F.(2d) 689, 695 (C. C. A. 2).

A more serious matter was the testimony of those who had lost money by buying the shares. To my own knowledge it has been a custom for over twenty-five years in the Southern district of New York to admit such testimony in this class of cases; it is extremely telling, especially as the prosecution invariably selects the most pitiful cases. Yet it is difficult to see what bearing it can have upon the crime. The prosecution need not prove damage Linn v. U. S., 234 F. 543 (C. C. A. 7); Stunz v. U. S., 27 F.(2d) 575 (C. C. A. 8); Foster v. U. S., 178 F. 165, 173 (C. C. A. 6), and the evidence concerns nothing else. No doubt buyers may be asked whether they received letters and other communications from the accused; these are the false utterances and are necessary to the liability. Conceivably it may be relevant to show that after purchase the shares collapsed in value, on the theory that this helps to prove that they had no value when the accused recommended them; though it must be confessed that the probative force is not very great. Be that as it may, we have twice sustained the admission of such testimony Rice v. U. S., 35 F.(2d) 689 (C. C. A. 2); U. S. v. Shurtleff, 43 F.(2d) 944 (C. C. A. 2), and although we once protested against its excess Myers v. U. S., 223 F. 919, 922 (C. C. A. 2), we shall adhere to our former ruling until the Supreme Court decides otherwise. But we have never held that the witnesses should be allowed to go to such lengths as...