United States v. Bruce

• Decision Date: 18 March 1974
• Docket Number: No. 73-1398.,73-1398.
• Citation: 488 F.2d 1224
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Robert B. BRUCE et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

488 F.2d 1224 (1973)

UNITED STATES of America, Plaintiff-Appellee, v. Robert B. BRUCE et al., Defendants-Appellants.

No. 73-1398.

United States Court of Appeals, Fifth Circuit.

December 18, 1973.

Rehearing Denied January 25, 1974.

Rehearing and Rehearing Denied March 18, 1974.

H. A. Stephens, Jr., Atlanta, Ga. (court-appointed), for Bruce.

Charles D. Read, Jr., Decatur, Ga., Gerald M. Birnberg, Houston, Tex., for Walker.

John W. Stokes, U. S. Atty., P. Bruce Kirwan, William P. Gaffney, Asst. U. S. Attys., Atlanta, Ga., for plaintiff-appellee.

Before BELL, COLEMAN and RONEY, Circuit Judges.

Rehearing and Rehearing En Banc Denied March 18, 1974.

COLEMAN, Circuit Judge:

Judge Edenfield, of the United States District Court for the Northern District of Georgia, sitting without a jury, convicted these appellants on various counts of securities fraud, 15 U.S.C., § 77q(a), mail fraud, 18 U.S.C., § 1341, sale of unregistered securities in interstate commerce, 15 U.S.C., § 77e(a), and conspiracy to violate the aforesaid statutes, 18 U.S.C., § 371, with individual variations, all counts basically charged the defendants with the unlawful use of the mails in the execution of a fraudulent scheme to sell certain securities.

The appellant, Walker, was convicted on twelve counts and sentenced to serve concurrent terms of three years.

Bruce was convicted on two counts and sentenced to concurrent terms of two years, of which six months must be spent in a penal institution.

Blackwood, an attorney, was convicted on three counts and sentenced to consecutive terms of five years, suspended, with three years probation, as Blackwood was by that time already in prison on other charges.

Except as to Blackwood's conviction on Count 14, which will be reversed, the judgment of the District Court is affirmed.

On appellate review this Court must view the evidence and the reasonable inferences to be drawn therefrom in that light most favorable to the verdict and must determine as a matter of law whether there is substantial evidence, direct or circumstantial, to support the verdict, Glasser v. United States, 315 U.S. 60, 62 S.Ct. 457, 86 L.Ed. 680 (1942); United States v. Jacobs, 5 Cir., 1971, 451 F.2d 530. In circumstantial evidence cases, the trier of fact must "reasonably find that the evidence excludes every reasonable hypothesis, except that of guilt", United States v. Sidan-Azzam, 5 Cir., 1972, 457 F.2d 1309. If a conviction is attacked on the ground that the evidence was insufficient to support it there will be an affirmance if it is evident that the findings are not clearly erroneous, United States v. Davis, 5 Cir., 1971, 443 F.2d 560, cert. denied, 404 U.S. 945, 90 S.Ct. 298, 30 L.Ed.2d 260 (1971); United States v. Graves, 5 Cir., 1970, 428 F.2d 196, cert. denied, 400 U.S. 960, 91 S.Ct. 360, 27 L.Ed.2d 269 (1970).

In one way or another, each appellant challenges the sufficiency of the evidence.

The Fraud

The alleged scheme in this case is predicated upon the incorporation and operation of American Capital Corporation hereafter referred to as American or as the Company. The defendants were either officers of the Company or professionally retained by it. The list included those responsible for the drawing of the two prospectuses which the prosecution contends were false and misleading. Defendant Walker was the primary incorporator and also the President of American.

On December 13, 1966, American was incorporated in Atlanta, Georgia. To avoid coming within the provisions of the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq., and to aid in the composition of the required prospectus, Walker retained Robert A. Blackwood, an Atlanta attorney. Georgia laws and regulations required the prospectus to contain an elaboration upon the financial condition of the Company by way of certain certified statements. To meet this condition, Walker first approached an accountant with a national accounting firm. After ascertaining what Walker wanted in the financial statement, this accountant turned Walker down because the policy of his firm toward the use of appraisal values in financial statements for newly formed companies would not allow him to do what Walker wanted. The particular controversy surrounding the use of certain appraisal values will be discussed later. Walker then contacted Defendant Robert B. Bruce, at the time a C.P. A. in Florida, who agreed to do the necessary accounting work. The first prospectus was offered to the public on January 31, 1967.

As a means of obtaining capital funding, the Company offered two types of securities to the general public: common stock and interest-bearing investment certificates. Initially, the incorporators (and others close to them) received 47% of the stock. On its face, this was not illegal. The problem arises from the fact that while the stock was selling to the general public for $2 a share, the insiders received stock for "incorporation services" amounting to 285,000 shares in return for evaluated consideration of only $20,000.

In the very first year, American went from a surplus to a deficit net worth. In the early part of 1968, the Georgia Securities Commission forbade American to sell any more securities until a new prospectus had been filed. On or about April 5, 1968, a new prospectus, dated June 1, 1968, was submitted to the Commission and offered to the public. On the face of the financial statements contained in the new prospectus, it was obvious that the Company was insolvent. Finally, in May of 1969, the Company went out of business.

The Government concedes that neither the 1967 nor the 1968 prospectus was false per se, but it does contend that they were deliberately and fraudulently misleading.

In the Bench trial below, the hotly contested issues seemed to center around the commissions paid to the securities salesmen, the use of the proceeds received from the sale of the securities, the way the cash assets were presented, certain notes receivable, the value of the land in Florida, listing of unaudited values of a subsidiary alongside audited values, certain footnotes in the prospectuses, and the failure to list certain assets and debts.

The first prospectus represented that the expense of the sale and distribution of the securities would be no higher than 4% for the certificates and 15% for the stock. In actuality, the salesmen received 20% on the certificates and 33 1/3% on the stock.

Next came the use of the proceeds of the securities sales. The prospectus showed that the Company would engage in the investment banking business by purchasing commerical paper, making secured loans, and purchasing securities of other companies. In actuality no funds were ever advanced toward the stated purposes — although American did assume certain obligations in the acquisition of the assets in Babee-Tenda Products Corporation, a wholly owned subsidiary of American. Instead, many loans were made to insiders, totalling $54,499, of which only $33,415 was ever repaid.

The third alleged misrepresentation concerns the cash assets stated in both prospectuses. In the first, the financial statement was drawn on the 13th day of December, 1966. Two days later, but before the prospectus was completed, a disbursement of $15,000 was made and recorded on the company's books as an exchange item. This item was later removed by an adjusting entry against capital.

In the second prospectus, the cash entry in the financial statement showed $42,809.25. The chief accountant with the Atlanta Regional Office of the Securities and Exchange Commission, the government's expert witness, testified that $40,000 of the sum was borrowed from a bank, placed in a savings account, and then pledged as collateral for the original loan. About a month later, the loan was repaid, and the savings account was closed. A footnote was included explaining this loan but when told such had to be included Walker asked that it not be the first one.

Another irregularity in the case was the failure of Bruce to include an outstanding check for $2,000 which was written prior to the date of the statement. This $2,000 was given as a down payment for an airplane which was not included in the assets of the Company, nor was the debt thus incurred included in the liabilities. Had the prospectus clearly reflected these items, the cash would have actually been $809.35, not $42,809.35.

The next questionable entry concerned a note for $20,000 given to American by Blackwood as payment for 40,000 shares of stock. The government contends that the entry and accompanying footnote were misleading. A footnote stated that Blackwood owed the Company $20,000 on a note receivable bearing 6% interest on or before December 8, 1967. It stated further that the only security for the note was 40,000 shares of American Capital Corporation. In actuality, the note contained a stipulation on the back that it could only be satisfied from the 40,000 shares and did not represent a general indebtedness on the part of Blackwood. The government contended that this was not a valid, enforceable note and should not have been included as such.

The biggest dispute arose over the use of a MAI appraisal for the value of the land American had title to in Florida. This property was purchased from Diversified Enterprises of Florida by incurring obligations amounting to $380,387.74 and issuing 35,000 shares of American stock. The government contended that the true value of the entire parcel did not amount to any more than the debt against it.

The value in the prospectus, based upon a MAI appraisal while the land was still in the hands of Diversified, was listed at $1,076,600. The government produced a witness who aided in the composition of the report and who stated that the report was an aggregate value based upon total sale of the individual lots, plus certain additions to the land which were to be made. He stated it did not represent the current value of the...