United States v. Hughes

• Decision Date: 14 July 1961
• Parties: UNITED STATES of America v. Paul M. HUGHES, impleaded with Louis P. Brady, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

195 F. Supp. 795

UNITED STATES of America v. Paul M. HUGHES, impleaded with Louis P. Brady, et al., Defendants.

United States District Court S. D. New York.

June 21, 1961.

Adhered to on Reargument July 14, 1961.

Robert M. Morgenthau, U. S. Atty., for Southern Dist. of New York, New York City, for U. S., Peter H. Morrison, Asst. U. S. Atty., New York City, of counsel.

Edward S. Friedland, New York City, for defendant Louis P. Brady.

DIMOCK, District Judge.

These are motions by defendant Louis P. Brady for dismissal of the indictment, for discovery and inspection pursuant to Rule 16, F.R.Crim.P., and for a bill of particulars.

The indictment contains thirty-two counts and names twelve individual defendants and one corporate defendant. Counts 1-18 charge that, in the offer and sale of securities by the use of the mails, (a) defendants employed a scheme to defraud, (b) obtained money by means of untrue statements and (c) engaged in transactions which operated as a fraud in violation of section 17(a) of the Securities Act of 1933, 48 Stat. 84, as amended 68 Stat. 686, 15 U.S.C. § 77q(a). Counts 17-24 charge the use of the mails to sell unregistered securities in violation of section 77e(a) (1) of title 15 U.S.Code. Counts 25-31 charge the mailing of unregistered securities for the purpose of sale and for delivery after sale, in violation of section 77e(a) (2) of title 15 U.S. Code. Finally, count 32 charges a conspiracy to violate the provisions of law cited in the substantive counts as well as the Mail Fraud Statute, 62 Stat. 763, as amended by 63 Stat. 94, 18 U.S.C. § 1341. All the alleged offenses stemmed from transactions in the securities of Western Financial Corporation, the name of which was successively changed to Diversified Financial Corporation of America and Consolidated American Industries, Inc.

I shall first consider the motion to dismiss and the grounds urged in its support.

(1) Defendant Brady contends that counts 1-18, each of which charges (a) a scheme to defraud, (b) the obtaining of money by means of untrue statements of material facts and omissions to state material facts necessary to render the statements made not misleading, and (c) the engaging in transactions, practices and a course of business which operated and would operate as a fraud and deceit upon purchasers, do not state an offense against him because they lack any showing of his participation in the alleged offenses. I hold that the indictment on its face does allege offenses by Brady in counts 1-18. Paragraph 3 of each of those counts enumerates untrue statements of material facts allegedly made by "the defendants", while paragraph 4 of those counts specifies omissions by "the defendants" to state material facts necessary in order to render the statements made, in the light of the circumstances under which they were made, not misleading. Finally, each of counts 1 through 18 specifies mailings knowingly caused by Brady and other named defendants in furtherance of the alleged violations.

(2) Defendant contends that counts 1 to 18 inclusive all charge one and the same offense. Each alleges that all defendants caused to be carried through the mails on a certain date certain matter enclosed in an envelope bearing a certain address. They differ only in that each alleges a different mailing.

The statute in section 17(a) makes it unlawful "in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, * * * to employ any device * * *" or "to obtain money * * *" or "to engage in any transaction * * *" (emphasis supplied).

Under the Mail Fraud Statute, 62 Stat. 763 as amended by 63 Stat. 94, 18 U.S.C. § 1341, each of the eighteen mailings would have constituted a separate crime. Badders v. United States, 240 U.S. 391, 36 S.Ct. 367, 60 L.Ed. 706; Mitchell v. United States, 10 Cir., 142 F. 2d 480, certiorari denied 323 U.S. 747, 65 S.Ct. 49, 89 L.Ed. 598.

That statute, which is quoted in the margin,¹ proceeds upon a theory opposite to that of section 17(a) of the Securities Act in that it is the fraud which gives color to the offense but it is the act of mailing that is made punishable. It reads, "Whoever, having devised or intending to devise any scheme or artifice to defraud * * * for the purpose of executing such scheme or artifice or attempting so to do, places in any post office * * * any matter or thing * * shall be fined * * *."

The mail fraud statute was carefully distinguished from section 17(a) of the Securities Act in United States v. Cashin, 2 Cir., 281 F.2d 669. There the court held that venue of a case brought under section 17(a) in Alabama was proper although the mailings took place in New York. Chief Judge Lumbard said at page 673:

"The gist of the crimes charged in the indictment, as in most Securities Act cases, is the fraudulent scheme employed in the sale of securities. See United States v. Robertson, D.C.S.D.N.Y.1959, 181 F.Supp. 158; United States v. Monjar, supra D.C. 47 F.Supp. 421. The purpose of the requirement that there be a use of the mails or other facilities of commerce is solely to create a basis for federal jurisdiction, Creswell-Keith, Inc. v. Willingham, 8 Cir., 1959, 264 F.2d 76; Schillner v. H. Vaughan Clarke & Co., 2 Cir., 1943, 134 F.2d 875; United States v. Robertson, supra."

Since the gist of the crime is the fraudulent scheme and the purpose of the requirement that there be a use of the mails or other facilities of commerce is solely to create a basis for federal jurisdiction, the multiple mailings in carrying out the scheme do not constitute separate crimes.² Each device to defraud or each obtaining money by false statements or each transaction which operates as a fraud may be a separate crime but not each use of the mails or interstate commerce.

Each count here alleges a device to defraud and the obtaining of money by false statements and the engaging in transactions which operated as a fraud but there is nothing to show that the crime charged in any one of them differs from that charged in the others. The allegation in each that in the course of the commission of the crime matter was sent by mail to a named person who in most cases differs from the other addressees does not constitute an allegation that there was a different device, obtaining of money or engaging in a transaction with respect to each named person. It is true that sixteen of the first eighteen counts allege that the addressee was sent a confirmation of purchase and one of the others alleges that the addressee was sent a stock certificate but these allegations do not amount to statements of seventeen instances of obtaining money or property. The allegation that the addressee paid for the stock is conspicuously absent in each case. For all that appears, all eighteen mailings were in a single fraudulent course of conduct alleged and realleged eighteen times in the indictment.

Where a multiplicity of counts charges the same crime it is proper to consolidate them and dismiss all but the first as separate counts.³ United States v. Universal C. I. T. Credit Corp., 344 U.S. 218, 220-221, 73 S.Ct. 227, 97 L.Ed. 260. I direct, therefore, that counts 2 to 18 inclusive, be consolidated with count 1 and be dismissed as separate counts. It is true that the Universal Corporation case involved an information rather than an indictment but the course that I have directed with respect to the indictment does not do violence to the act of the grand jury. The net effect is that their true bill stands but the court has ruled that there can be conviction of but one crime in place of eighteen.

(3) Defendant challenges counts 19-24 of the indictment, each of which charges that a confirmation of purchase of unregistered securities was mailed by defendants to a named person. Defendant's position is that section 5(a) (1) of the Securities Act of 1933, 15 U.S.C. § 77e(a) (1), interdicts the use of the mails to sell securities only when the use is through the medium of a prospectus. Section 5(a) (1), as amended August 10, 1954, 68 Stat. 684, provides:

"5(a) (1) Prohibitions relating to interstate commerce and the mails

"(a) Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly—

"(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise;"

I hold that the term "otherwise" adds to the prospectus class a class that includes confirmations of purchases.

Quite understandably no point is raised that counts 19 to 24 and 25 to 31 are repetitious. The statutes on which they are based, sections 77e(a) (1) and 77e(a) (2) of title 15 U.S.Code, unlike section 77q(a) on which counts 1 to 18 are based, clearly make each mailing the gist of the crime.

(4) Defendant claims that the indictment is deficient because it fails to allege necessary facts to properly vest venue in the Southern District of New York. There are sufficient allegations to vest venue in this District. The introduction to the indictment places the situs of the violations of counts 1-18 "in the Southern District of New York and elsewhere". All of the substantive counts allege that defendants in this District caused to be carried through the mails specified matter. The indictment on its face cannot therefore be effectively attacked on the basis of improper venue.

(5) Defendant contends that the indictment is barred by the five year statute of limitations, 18 U.S.C. § 3282. The indictment was filed on November 18, 1960. Clearly, count 32, which alleges a continuing conspiracy, is not time-barred. See United States v. Grunewald, 353 U.S. 391, 396-397, 77 S.Ct. 963, 1 L.Ed.2d 931. Counts 1 to 18 (now consolidated) allege a course of conduct made unlawful by the statute and extending from...