United States v. Dondich

• Decision Date: 11 September 1978
• Docket Number: Crim. No. 78-202 WHO.
• Citation: 460 F. Supp. 849
• Parties: UNITED STATES of America, Plaintiff, v. James H. DONDICH, Max H. Mortensen, Louis M. Mayo, Jr., Roger W. Osness and Roy J. Jackson, Defendants.
• Court: U.S. District Court — Northern District of California

460 F. Supp. 849

UNITED STATES of America, Plaintiff, v. James H. DONDICH, Max H. Mortensen, Louis M. Mayo, Jr., Roger W. Osness and Roy J. Jackson, Defendants.

Crim. No. 78-202 WHO.

United States District Court, N. D. California.

September 11, 1978.

G. William Hunter, U. S. Atty., Edmund D. Lyons, Jr., Asst. U. S. Atty., Mark N. Zanides, Sp. Asst. U. S. Atty., San Francisco, Cal., for plaintiff.

Richard L. Jaeger, San Francisco, Cal., for Dondich.

Claudia Wilken, Wilken & Leverett, Oakland, Cal., for Mortensen.

Steven Arian, San Francisco, Cal., for Mayo.

James E. Sharp, N. Richard Janis, Sharp, Randolph & Janis, Washington, D. C., Ralph R. Scott, Los Angeles, Cal., for Osness.

Marcus S. Topel, San Francisco, Cal., for Jackson.

OPINION

ORRICK, District Judge.

Charging that his Fifth Amendment right to be indicted by a grand jury was violated by the participation in the proceedings of a Securities and Exchange Commission ("SEC") lawyer who, having conducted a civil investigation and having obtained injunctive relief against him, allegedly had a conflict of interest, defendant Roger W. Osness moves to dismiss the indictment against him and four other defendants for federal securities law violations. For the reasons hereinafter set forth, the motion is denied.

I.

On April 27, 1978, the five defendants herein were indicted on eighteen counts for conspiracy, securities fraud, inducement to travel interstate in the execution of a scheme to defraud, mail fraud, and wire fraud. The charges arose from the sale of bond anticipation notes to finance development on Quimby Island, a State reclamation district located in the Sacramento River Delta. The indictment charges that defendants, having full knowledge that plans for the construction of recreational facilities on Quimby Island had been abandoned, continued to market securities through means of false and fraudulent misrepresentations to the investing public. Defendant Osness was president of a securities distribution firm which is alleged to have participated in the sale of Quimby Island notes.¹

Because defendant's attack on the indictment is grounded upon both an alleged actual conflict of interest and the appearance of such a conflict created by the dual role played by the SEC attorney, Mark N. Zanides, in the civil and grand jury proceedings, it is necessary to trace Zanides' participation in both proceedings.

On October 3, 1975, the SEC entered a Formal Order of Private Investigation initiating an agency inquiry into alleged improprieties in the sale of Quimby Island notes. Zanides was assigned to work on the project on December 5, 1975, and he continued to do so until its conclusion in May, 1976. His activities included the taking of testimony from two of the criminal defendants herein (not including defendant Osness), the issuance of administrative subpoenas, and the analysis of evidence. In May, 1976, Zanides recommended civil injunctive action against twenty-one individuals, including all five criminal defendants in this action.

An SEC complaint, which Zanides drafted and signed, was filed on June 16, 1976, against twenty-one civil defendants, including all five criminal defendants herein. By February, 1977, all but two had consented to the entry of final orders against them without admitting or denying the allegations of the complaint. Osness himself consented on August 31, 1976. The two remaining defendants, Dondich and Mayo, were defaulted in January and October, 1977, respectively.

On September 30, 1976, during the pendency of the civil action, Zanides received a letter from the Department of Justice Organized Crime and Racketeering Section requesting access to the SEC investigative files. Zanides responded that the files could not be released without formal SEC approval, which was sought and finally obtained on November 1, 1976. The SEC referral did not contain any recommendation for criminal prosecution. After notifying the Department of Justice that its request for access had been granted, Zanides had no further contact with the United States Attorney until June, 1977.²

The SEC investigation resulted in two additional sets of civil administrative proceedings, neither of which involved any of the criminal defendants herein. The first, involving five Florida defendants, was terminated by settlement in April, 1977. Zanides was consulted by the Miami branch office of the SEC, but did not actively participate in the proceedings. The second, involving four registered broker-dealers, was handled by the San Francisco branch office, and Zanides assisted in the preparation of documents submitted by the SEC in that action. This proceeding was effectively terminated by September, 1977.

In June, 1977, Zanides met for the first time with the Assistant United States Attorney assigned to the criminal investigation of the case. Zanides was appointed a Special Assistant to the United States Attorney on September 30, 1977, and during the period from October 13, 1977, to April 27, 1978, he assisted in the presentation of evidence to the grand jury, appearing on thirteen occasions for that purpose. During this period, Zanides remained on the staff of the SEC and worked on unrelated cases in that capacity. Zanides continues to assist in the present criminal prosecutions.

On January 5, 1978, during the period in which Zanides was assisting in the grand jury presentation, a third-party complaint was filed (in a separate, though related, civil suit) by one of the criminal defendants herein (Mortensen) naming Zanides, the SEC, and other public officials as defendants.³ Insofar as the SEC and Zanides were concerned, the complaint charged, in essence, that the civil injunctive actions against the Quimby Island Reclamation District ("District") had made it impossible to market District securities, hence causing District insolvency and resulting in civil actions against the officers thereof. No allegations were made of improprieties in the SEC civil investigation itself. Third-party plaintiff Mortensen stipulated to a dismissal of the complaint with prejudice on April 2, 1978. During the entire period in which the complaint was effectively pending, Zanides made no appearances before the grand jury.⁴

II.

Armed with the above facts, defendant argues, first, that the Sixth Circuit's recent decision in General Motors Corp. v. United States, 573 F.2d 936 (6th Cir. 1978), (hereinafter cited as "GM")⁵ compels dismissal of the pending indictment. There the court held⁶ that participation in a grand jury proceeding by an Internal Revenue Service ("IRS") attorney, who was active in a simultaneous civil investigation, created "the appearance of a conflict of interest" serious enough to vitiate the grand jury investigation. Id. at 942.

Second, defendant argues, without relying on GM, that Zanides' participation in the grand jury proceedings was improper because it enabled him to use "all the evidence and information * * * developed during the S.E.C. civil investigation for presentation before the grand jury" (defendant's brief at 11) and, therefore, the indictment must be dismissed. Neither argument has merit.

A.

The facts in GM are very different from those in the case at bar, thus making it totally inapposite here.

In GM, the IRS attorney in question, Meno W. Piliaris, had been active in a civil investigation involving prior-year tax returns filed by the General Motors Corporation. Following General Motors' refusal to submit to certain discovery, Piliaris drafted a letter to the Department of Justice recommending that a grand jury investigation be undertaken. This letter also made clear the fact that, at the appropriate time, the IRS intended to seek access to evidence produced by the grand jury for use in its concurrent civil proceedings. It was thus apparent that the IRS planned to handle the General Motors civil tax matter in coordination with the grand jury investigation.

Piliaris was subsequently designated a Special Attorney for the United States, empowered to assist in the presentation of evidence to the grand jury. In this role, he was privy to all evidence developed in the course of that proceeding. In addition, during the grand jury investigation, General Motors complained to prosecutors about allegedly abusive tactics and improper behavior by the IRS in the course of the civil investigation in which Piliaris had participated. Nevertheless, Piliaris continued to appear before the grand jury.

The court found that Piliaris' participation in the grand jury proceeding, in light of his prior role in the IRS investigation, created "the appearance of a conflict of interest," and that such an appearance required termination of the grand jury investigation. Id. at 942, 945. In reaching this conclusion, the Sixth Circuit emphasized three circumstances which, in its view, justified the result.

The court's most important objection was to the possibility that Piliaris could obtain evidence generated by the grand jury for use by the IRS in civil proceedings. Stressing the impropriety of "using criminal procedures to elicit evidence in a civil case,"⁷ the court indicated that Piliaris' access to secret grand jury hearings placed him "in a conflicting and intolerable position." Id. at 942, 943. The court appeared to view Piliaris' participation in the criminal proceeding as a means by which to further the IRS civil investigation—a role clearly at odds with his duties as a prosecutor.

Second, the court was concerned that Piliaris, who had actively participated in the IRS civil investigation, and had himself recommended a criminal investigation, might be excessively interested in having the grand jury return an indictment which could serve to justify his own actions. Id. at 943. Such a desire on Piliaris' part was inconsistent, in the eyes of the court, with the traditional function of grand jury and prosecutor "to protect citizens against unfounded criminal prose...