United States v. Fradkin

• Decision Date: 09 December 1935
• Docket Number: No. 51.,51.
• Citation: 81 F.2d 56
• Parties: UNITED STATES v. FRADKIN.
• Court: U.S. Court of Appeals — Second Circuit

81 F.2d 56 (1935)

UNITED STATES v. FRADKIN.

No. 51.

Circuit Court of Appeals, Second Circuit.

December 9, 1935.

Osmond K. Fraenkel, of New York City (Osmond K. Fraenkel, John L. Lotsch, William T. Griffin, and James J. Doyle, all of New York City, of counsel), for appellant Fradkin.

Leo J. Hickey, U. S. Atty., of Brooklyn, N. Y. (Vine H. Smith, James G. Soileppi, and Frank J. Parker, Asst. U. S. Attys., all of Brooklyn, N. Y., of counsel), for the United States.

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

AUGUSTUS N. HAND, Circuit Judge.

The defendant James J. Fradkin was indicted with five other persons for using, and for conspiring to use, the mails in a scheme to defraud. Together with Julius Lehrenkrauss and Charles F. Lehrenkrauss he was convicted of substantive offenses under fifteen counts of the indictment and was also convicted under the conspiracy count. The defendant Fradkin alone appeals.

In the spring of 1932 Fradkin had several conversations with Julius Lehrenkrauss, who said the partnership of Lehrenkrauss & Sons needed additional working capital. As a result of these conversations it was decided to form the Lehrenkrauss Corporation, and in July, 1932, Fradkin was employed to take charge of the sales of the preferred stock of the new corporation under an agreement whereby he was to receive a compensation of 10% upon sales of that stock. He became sales manager for the Lehrenkrauss interests, opened offices for a sales promotion campaign, engaged a large number of salesmen, and took charge of the sales literature. In the course of his employment he sold 16,110 shares for $1,611,000. It was principally for participating in a scheme to defraud through the sale of the stock and for the use of the mails in order to carry out the scheme that he was convicted. The appellant does not question the fact that a scheme to defraud existed and that it was effected through the use of the mails, but insists that he was not a conscious participant in any fraudulent enterprise.

The firm of J. Lehrenkrauss & Sons was an old concern which had for many years done a large business in Brooklyn, N. Y. It owned or controlled various subsidiary corporations, among others J. Lehrenkrauss & Sons, Inc., engaged in life insurance business; Lehrenkrauss Mortgage Title & Guarantee Company, a company for insuring titles and guaranteeing mortgages; Omnis Corporation, a company for ownership of real estate; and Universal Tours, which was a travel agency. After the general depression set in, the Lehrenkrauss enterprises became embarrassed and finally in December, 1933, became bankrupt. The partnership endeavored to stem the tide by new sales of mortgages and mortgage participating certificates. In doing this it resorted to various frauds such as the sale of mortgages and certificates for larger sums than the assessed or market values of the mortgaged properties, guaranties of mortgages as first liens that were not such, and the hypothecation of mortgages against which participation certificates had been issued where the trust assignments had not been recorded. In order to raise still more money from the issue of securities, the Lehrenkrauss Corporation was formed in the summer of 1932. It was represented that this was to be a holding company that would control the Lehrenkrauss enterprises. As a matter of fact it did not exercise such control. It issued its stock to the public, and especially to customers who already held mortgages or participation certificates through exaggerated and fraudulent representations of its real condition. The holders of mortgages and certificates were persuaded to turn them over in exchange for shares of the preferred stock of the Lehrenkrauss Corporation, and they and others were likewise persuaded to purchase this stock for cash. From the sales of the preferred stock the Lehrenkrauss Corporation received cash or its equivalent amounting to $694,250 and mortgages and certificates amounting to $949,200 subject to certain deductions, making altogether the net sum of $1,611,000 already mentioned. Out of the above mortgages, certificates and cash received by Lehrenkrauss Corporation for its preferred stock, mortgages, certificates, and cash amounting to $929,110 were transferred to the partnership by the corporation in exchange for notes, approximating that total, drawn by Omnis Corporation to its own order, indorsed by it and thereafter indorsed by J. Lehrenkrauss & Sons. The portion of the receipts from sales of the preferred stock not transferred to the partnership through the mechanism of the Omnis notes was retained by the Lehrenkrauss Corporation for its own operations. By obtaining the mortgages and certificates the partnership was able to realize large sums through their sale or use as collateral for loans, but the Lehrenkrauss Corporation, in return for valuable mortgages and certificates, had only the notes of the Omnis Corporation. These notes were a mere device for effecting the transfer to the Lehrenkrauss partnership of mortgages, certificates, and cash received by the Lehrenkrauss Corporation upon sales of its preferred stock. The transfer benefited the partnership but left the Lehrenkrauss Corporation in an impaired financial condition by substituting for cash and mortgages accommodation notes of Omnis. These notes, indorsed by the Lehrenkrauss firm, were finally exchanged for a single note of $927,100 which lacked the indorsement. The Omnis Corporation was insolvent; its notes were supported by assets so inadequate that the purchasers of the preferred stock of the Lehrenkrauss Corporation incurred great losses through the substitution of those notes for cash and mortgages (Fols. 3089, 3594). This statement is warranted by the testimony of Hammel, by Radert's tabulations and estimates, as well as indicated by the large operating losses for the year 1932 which appear in the balance sheet (Exhibit 145) upon which Fradkin in 1933 sought to obtain a loan for the Lehrenkrauss Corporation from the Reconstruction Finance Corporation.

The government called as a witness Kate Woambach. She was a woman who had bought, in 1933, 1,000 shares of stock of the ...