United States v. Herr

• Decision Date: 08 December 1964
• Docket Number: No. 14333.,14333.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Walter E. HERR and William O. Gillentine, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

338 F.2d 607 (1964)

UNITED STATES of America, Plaintiff-Appellee, v. Walter E. HERR and William O. Gillentine, Defendants-Appellants.

No. 14333.

United States Court of Appeals Seventh Circuit.

October 27, 1964.

Rehearing Denied December 8, 1964.

Luis Kutner, John M. Kaveny, Albert W. Dilling, Kirkpatrick W. Dilling, Chicago, Ill., for appellants.

Edward V. Hanrahan, John Peter Lulinski, John Powers Crowley, Robert S. Atkins, U. S. Attys., Chicago, Ill., Charles H. Turner, Asst. U. S. Atty., Donald W. McKenzie, Atty., United States Securities and Exchange Commission, of counsel, for appellee.

Before SCHNACKENBERG, CASTLE and SWYGERT, Circuit Judges.

SCHNACKENBERG, Circuit Judge.

Walter E. Herr and William O. Gillentine, defendants, have appealed from judgments of the district court adjudicating defendants guilty, on the verdicts of a jury, of the fraudulent sale of securities by mail, in violation of 15 U.S.C.A. § 77 q(a) and 18 U.S.C.A. § 1341,¹ and sentencing defendants to terms of two years as to Herr and three years as to Gillentine.

American Sales Training Research Associates, Inc. (herein referred to as ASTRA), an Illinois corporation, was formed on November 7, 1959, by Gillentine and two other persons. Defendant Herr became associated with the corporation as a salesman about March 1960.

Defendants sold what they designated as distributor agreements. Sales were made through personal interviews with investors, meetings at the ASTRA offices, and correspondence through the mail.

From March 1960 through February 1961, defendants raised and ASTRA received, a total of $152,074.90 from some 72 investors. These investors were known as inactive distributors and their investments in the corporation were evidenced by the distributor agreements they purchased.

Typical of representations by the defendants were those shown to have been made by Herr at a meeting of some 35 to 40 prospective investors in May 1960. Investor George Klett testified that at this meeting Herr stated ASTRA had a multimillion dollar future in all its meaning; that it would have representation in every city, coast-to-coast and throughout the English-speaking world; that investors would make anywhere from fifty to one hundred thousand dollars a year whether they participated actively or inactively, and that ASTRA had "exclusives" on the Earl Nightingale records and manuals. Klett further testified Herr stated an active distributor was one who purchased a number of projects consisting of the Earl Nightingale "Strangest Secret" records and success manuals and who then sold or disposed of them as he chose; that ASTRA was not concerned with how the active distributors disposed of the records and manuals; that an inactive distributor was one who did not have the time, or had reached the age where he was unable, to carry on a regular sales program; that, in this case, ASTRA "promised" they had a sales force to sell the records and manuals for the inactive distributors; that the expenses would be subtracted from the sales; that monthly earnings checks would then be distributed to the investors; and that profits were to be "huge", possibly around six per cent a month or more.

There were representations made at a meeting that investors' money would be refunded within five months after request; that they would receive additional money if they brought in other inactive distributors; that the return on the initial investment would be sixty per cent a year; that ASTRA would provide the investor with a second income; that it was going to be the biggest thing they ever encountered; that this investment was a good way to make earnings without additional duties; and that investors would receive a monthly income for life from their investment.

Although numerous investors, both orally and in writing requested that their investment be returned, none was ever returned. This was so in spite of the fact that as late as August, 1962, defendant Herr told investors Sundahl and Stoddard how well the company was doing; that their investment was earning six per cent interest and they should not worry about it. In June 1961 both defendants admitted to investors Edwin and Eleanor Joslyn that ASTRA had no money and could not refund their investment.

According to defendants, the evidence shows that ASTRA's business was "the sale of salestraining material, such as phonograph records, projectors, films and tape recordings * * *" including "records known as `Strangest Secret', `Think and Grow Rich' and `The Money Machine'. * * *" Also they point out that the evidence shows that a distributor was to hire and train his own salesmen, while inactive distributors "would purchase merchandise in large quantities and salesmen would sell it receiving the benefit of a large discount. * * *"

As stated in defendants' brief, inactive distributors "purchased" about $150,000 worth of records and manuals.

There was evidence that ASTRA received from inactive distributors $152,074.90 and that from May 1960 through February 1961, the total amount of earnings paid to them was $46,397.79; that the total amount of ASTRA's net merchandise sales from April 1960 through January 1961 was $42,024.76; that, according to its own books and records, it was not operating at a profit for the period from March 1960 through February 1961; that the exhibits introduced into evidence indicate that ASTRA had no earnings available for distribution to the inactive distributors; that it operated at a loss in every month beginning March 1960 and continuing through February 1961, with the total being $204,734.41.

1. 15 U.S.C.A. § 77b(1) provides:

"(1) The term `security\' means any * * * investment contract, * * *."

In S. & E. C. v. W. J. Howey Co., 328 U.S. 293, at 300, 66 S.Ct. 1100, at 1104, 90 L.Ed. 1244, the court said:

"Thus all the elements of a profit-seeking business venture are present here. The investors provide the capital and share in the earnings and profits; the promoters manage, control and operate the enterprise. It follows that the arrangements whereby the investors\' interests are made manifest involve investment contracts, regardless of the legal terminology in which such contracts are clothed. * * *"

Accordingly, regardless of the statement in the agreement involved in the case at bar that the relationship created thereby was that of vendor and purchaser, we construe it to be an investment contract. Significantly the facts here show that it was not the intention of either the defendants or the investors that the latter, themselves, were to actually resell the merchandise. They were described as and were actually inactive. They were led to believe that they could expect profits solely from the efforts of others.

To the same effect are S. & E. C. v. Bailey, S.D.Fla., 41 F.Supp. 647 (1941), and S. & E. C. v. Crude Oil Corp., 7 Cir., 93 F.2d 844, 848 (1937), which are both cited in Howey.

2. After judging the evidence in the light most favorable to the government, Glasser v. United States, 315 U.S. 60, 80, 62 S.Ct. 457, 86 L.Ed. 680, and relying on all inferences which may reasonably be drawn from that evidence, United States v. Hamilton, 7 Cir., 276 F.2d 96, 98 (1960), we are convinced that defendants employed...