United States v. Dardi

Decision Date17 March 1964
Docket NumberNo. 187,Docket 28030.,187
Citation330 F.2d 316
PartiesUNITED STATES of America, Appellee, v. Virgil D. DARDI, Robert B. Gravis, Charles Rosenthal and Charles Berman, Defendants-Appellants.
CourtU.S. Court of Appeals — Second Circuit




Feldman, Kramer, Bam & Nessen, New York City (Maurice N. Nessen and Merton Sarnoff, New York City, of counsel), for appellant, Virgil D. Dardi.

Irwin L. Germaise, New York City (Bernard B. Polak, of counsel and Phillip C. Samuels, New York City, on the brief), for appellant, Robert B. Gravis.

John A. Vassallo, New York City, for appellant, Charles Rosenthal.

Gallop, Climenko & Gould, New York City (Milton S. Gould and Jonathan W. Lubell, New York City, of counsel), for appellant, Charles Berman.

Gerald Walpin, New York City (Robert M. Morgenthau, U. S. Atty., for the Southern District of New York, Peter H. Morrison, Robert J. Geniesse and Gerald Abrams, Asst. U. S. Attys., of counsel), for the United States of America.

Before MOORE, FRIENDLY and KAUFMAN, Circuit Judges.

MOORE, Circuit Judge.

Four defendants, Virgil D. Dardi, Robert B. Gravis, Charles Rosenthal and Charles Berman, appeal from judgments of conviction that followed a jury verdict in which they were found guilty of unlawfully participating in the distribution of unregistered shares of United Dye and Chemical Corporation stock. Appellant Dardi was President and a Director of United Dye, a company long traded on the New York Stock Exchange. Appellants Berman, Gravis and Rosenthal were broker-dealers who dealt in the sale of stock in the over-the-counter market.

The Indictment

The indictment, which named thirty-three defendants and seventeen co-conspirators, contained thirty counts arranged in three general categories: Conspiracy (Count 1), market manipulation (Counts 2-5) and sale of unregistered securities (Counts 6-30). Because of severances and pleas of guilty, of the thirty-three defendants only the four appellants and one corporate defendant participated in the trial to its completion.1

Count 1 charged a conspiracy, 18 U. S.C. § 371, by Dardi, Berman, Gravis, Rosenthal and others illegally to sell unregistered United Dye stock to the public in violation of specified sections of the Securities Act of 1933 (15 U.S.C. §§ 77e (a), 77e(c), 77q(a), 77x), the Securities Exchange Act of 1934 (15 U.S.C. §§ 78i (a), 78j(b) and 78ff(a)), Rules and Regulations promulgated under both acts by the Securities and Exchange Commission and the Mail Fraud Statute (18 U.S.C. § 1341), and to defraud the United States by impeding the functions of the Securities and Exchange Commission (SEC). The methods used to obtain control of United Dye, the use made of other companies such as Franklin County Coal Corporation and Handridge Oil Corporation, the illegal sale of unregistered stock and the illegal market manipulations were set forth in twelve detailed paragraphs and subparagraphs. The thirty-two overt acts alleged in the indictment included specific meetings and letters. Counts 2, 4 and 5 charged Dardi, Garfield, Pasternak and others with illegally pegging and stabilizing the price of United Dye stock on the New York Stock Exchange. In counts 6 through 30 the broker-dealers, Rosenthal, Berman, Gravis and others, were charged with the use of the mails in connection with specific sales of United Dye stock.

Each appellant was convicted on the first count. Dardi was convicted on each of three market manipulation counts under 15 U.S.C. §§ 78i(a) (2), (a) (6) and 78ff(a) and 18 U.S.C. § 2. Berman, Gravis and Rosenthal were convicted on counts charging the illegal sale of unregistered United Dye stock in violation of 15 U.S.C. § 77e(a) (1), 77x and 18 U.S.C.A. § 2.2


As an overture to an analysis of the many legal and factual grounds urged for reversal, it is necessary to describe in brief outline the factual background against which the case must be viewed. The Government's case was constructed principally on the testimony of Alexander L. Guterma, the Chairman of the Board of United Dye and the central figure in the complex chain of transactions which he described to the jury. The Government alleged, and the jury must have found, the existence of a single multi-stage conspiracy which had as its central purpose distribution to the public of unregistered United Dye stock. In the preliminary stages of the scheme, the conspirators gained control of United Dye and created a corporation with which it was later merged, Handridge Oil Company. As a result of the Handridge-United Dye merger, the conspirators obtained 575,000 "control" shares of United Dye stock. Shortly thereafter, through manipulation of the market on the New York Stock Exchange and misleading and fraudulent statements to customers the shares were sold in the over-the-counter market without the registration required by the federal securities laws. A resume of Guterma's testimony on direct examination supplies most of the details on which these ultimate facts were grounded.

Preparations for the Merger of United Dye and Handridge Oil

In June of 1955, Guterma joined defendants Samuel Garfield and Irving Pasternak in their efforts to acquire the Franklin County Coal Corporation. Guterma testified that his partnership with Garfield and Pasternak was for the purpose of merging Franklin, then owned by John and Clint Murchison, Jr., with a company listed on either the New York or American Stock Exchange and then selling the stock of the listed company as thus acquired. Franklin's two major assets, coal lands in Illinois, long inactive, and an oil pipeline in Wyoming, had been unable to muster a profitable return for several years. To effect the sale, Garfield and Pasternak gave their promissory note for $510,000 as the full purchase price, leaving the stock with the Murchisons as security. The only cash to change hands at this point was a loan of $800,000 from Garfield, Pasternak and Guterma to Franklin to redeem a like amount in mortgage debt to the Murchisons.

Since the Franklin stock was pledged with the Murchisons, and would be unavailable for a merger with a more substantial corporation, Guterma, Garfield and Pasternak found it necessary to improvise on their original plan. To this end Swann, their attorney, formed Handridge Oil Corporation to which Garfield and Pasternak conveyed their interest in Franklin. In exchange, the 500,000 shares of Handridge were transferred to Swann, "in trust" for the three partners. Guterma testified, however, that subsequently much of the Handridge stock was held by nominees, to disguise Guterma's, Garfield's and Pasternak's status as "control persons" under the 1933 Securities Act.

Meanwhile, Guterma had become acquainted with Dardi, already an officer and director of United Dye, and in the latter part of June, 1955, had agreed to purchase a block of 38,500 shares of United Dye stock through Dardi at ten dollars per share. There were at this time about 168,000 shares of United Dye outstanding. Soon thereafter, Guterma distributed about two-thirds of the 38,500 shares as follows: Pasternak, for himself and Garfield, bought 12,000 shares; 1,000 shares each went to co-conspirators Robert Eveleigh, a Guterma aide, and Robert Leonhardt, owner of McGrath Securities Corporation, a defendant brokerage house which was later to sell United Dye shares; and Dardi retained an option, later exercised, to buy 6,500 shares to complement the 17,700 shares he already held. By early September, 1955, Guterma had been elected Chairman of the Board, Dardi President, Eveleigh Treasurer, and Alexander Timm, one of Dardi's associates, Assistant Secretary.

While Guterma was establishing himself at United Dye, he discussed with Dardi the prospects of a merger between United Dye and Franklin County Coal. A committee of United Dye Directors, including Dardi, was appointed to look into the proposal. Originally, Guterma represented Franklin in the negotiations with the committee but when he became a director, he negotiated on behalf of United Dye with Pasternak and Swann. The proposed merger was also discussed with the Committee on Stock Lists of the New York Stock Exchange, which eventually granted United Dye's application to list the additional shares to be issued in the merger. In early December 1955, a merger agreement was executed under which United Dye was to issue 575,000 shares of its stock (then selling at approximately $30 per share) in exchange for the 575,000 shares of Handridge. Handridge was required to have at the closing, in addition to unencumbered Franklin shares, $750,000 in cash. Guterma testified that this $750,000 actually came from the sale of 75,000 Handridge shares to, among others, United Dye directors, including Dardi, who concealed their ownership through an escrow agent.

To Guterma the then inflated price of United Dye stock was not conducive to execution of the merger, and he discussed the situation with Dardi and Hyman Lehrich, also an officer and director of United Dye, as well as with Garfield and Pasternak in October 1955. To meet the problem without running afoul of the securities laws governing the sale of control stock, Guterma and Pasternak entered into a series of "loan" agreements with various "borrowers," in fact nominees, who immediately sold the "borrowed" stock reaping substantial profits in the process. The Government also adduced evidence that coincident with the sales of Guterma and Pasternak, Dardi through nominees disposed of the 6,500 shares he had purchased from Guterma under the June 1955 agreement. The cumulative effect of the sale of substantially the whole 38,500 share block achieved the desired result of driving the price of United Dye from a high of $38 per share in November 1955 to approximately $16 on May 1, 1956 when the merger was to close.


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