United States v. Koenig
| Decision Date | 19 August 1974 |
| Docket Number | No. 73 Crim. 554 (CHT).,73 Crim. 554 (CHT). |
| Citation | 388 F. Supp. 670 |
| Parties | UNITED STATES of America v. Harold P. KOENIG et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Paul J. Curran, U. S. Atty., New York City, for plaintiff; John M. Walker, Jr., W. Cullen MacDonald, Rodney K. Vincent, S.E.C., New York City, of counsel.
Rogers & Wells, New York City, for defendant Koenig; Norman S. Ostrow, Francis H. Wright, New York City, of counsel.
Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendant Krantz; Jay Greenfield, Mark A. Belnick, New York City, of counsel.
Orans, Elsen & Polstein, New York City, for defendant Mulligan; Sheldon H. Elsen, Leslie A. Lupert, New York City, of counsel.
Jerome F. Matedero, Westbury, N. Y., for defendant Reeves.
Defendants Harold P. Koenig, Byron S. Krantz, George V. R. Mulligan and Ernest Gene Reeves have been charged by the Government, in a multi-count indictment, with conspiracy to violate various sections of the Securities Laws, the Mail Fraud statute and a prior order of this Court and with substantive violations of those provisions. Defendants waived their right to a trial by jury and, with the consent of the Government, the case was tried to the Court. The action is now before the Court, at the close of the Government's case, on the motion of all four defendants for an order entering a judgment of acquittal pursuant to Fed.R.Crim.P. 29(a).
The Court, aware that the case presented serious questions of law as to the criminal responsibility of "outside" directors and attorneys under the Securities Laws and related criminal statutes, as well as complex factual issues, and being further cognizant of the time already expended and the expense incurred in the prosecution and defense of this case, adjourned the trial at the close of the Government's case to allow all parties to brief, and the Court to determine, the issues generated by the record. At this point in the case, after many months of pre-trial preparation and twelve weeks of actual trial, the Court is confronted with some 5,000 pages of testimony, many hundreds of voluminous exhibits and over 1,000 pages of legal and factual argument submitted by the Government and defendants.
After having carefully weighed and analyzed the evidence adduced at trial and the arguments submitted by all parties, the Court is convinced that the Government has failed to sustain its burden of proof with respect to all defendants and as to every count in the indictment and that it must, therefore, order that a judgment of acquittal as to all counts be entered in favor of defendants Koenig, Krantz, Mulligan and Reeves. By way of introduction to the opinion that follows, the Court would note that the evidence adduced will not permit a reasonable mind to find beyond a reasonable doubt that, inter alia, the defendants possessed the requisite criminal intent with regard to either the conspiracy or substantive counts; that, indeed, any conspiracy existed at all; and that, with respect to all counts, any scheme to defraud existed or that any material facts were misrepresented or omitted.
With this introduction in mind, the Court will now direct itself to the indictment as amplified by the bills of particulars, the law applicable to the present motion and the charges in the indictment, the relevant events preceding those upon which the present charges are based, and discussion of the particular charges themselves.
Count 1 of the indictment — the conspiracy count — alleges that all four defendants, together with co-conspirators Ecological Science Corporation ("ECO"), John Downs, Robert B. Carter, Ross Bohannon, Cesare DeFranceschini, Richard Grosh, Eugene Johnson, Edward J. Kahl and Earl Rader, between approximately January 1, 1971 and December 31, 1972, in this District and elsewhere, unlawfully, willfully and knowingly conspired2 to violate the Securities Exchange Act of 1934,3 the Rules and Regulations of the Securities and Exchange Commission ("SEC") issued thereunder,4 and the criminal contempt5 and mail fraud statutes6 of the United States.
The indictment claims the conspiracy had two purposes: first, to maintain the defendant Harold P. Koenig as chief operating officer of ECO and, second, to defraud ECO's creditors, stockholders, the public and the SEC. It goes on to identify four separate objects of the conspiracy:
1. To use and employ, in connection with the purchase and sale of securities of ECO and its subsidiaries, and by use of the means and instrumentalities of interstate commerce and the mails, deceptive devices and contrivances in violation of the rules and regulations promulgated by the SEC under § 10(b) of the Securities Exchange Act of 1934.
2. To unlawfully, willfully and knowingly make and cause to be made false and misleading statements with respect to material facts, and omit to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, in reports relating to ECO's financial condition and business operations required to be filed with the American Stock Exchange ("AMEX") and the SEC under §§ 12 and 13 of the 1934 Act.
3. To unlawfully, willfully and knowingly use the mails to deliver certain matter for the purpose of executing a scheme and artifice to defraud, and for obtaining money and property under false and fraudulent pretenses.
4. To unlawfully, willfully, knowingly and criminally disobey a lawful order of this Court namely, an order dated April 30, 1971 in the case of Securities and Exchange Commission v. Ecological Science Corporation and Harold P. Koenig, 71 Civ. 1928, by committing and carrying out the acts alleged in Counts 2 and 3 of the indictment. (Indictment, ¶ 17 and Bill of Particulars, ¶¶ 16, 17 and 50).
The indictment then specifies certain activities of the defendants and their alleged co-conspirators as being some of the means by which the conspiracy was carried out (¶¶ 18(a) through (i)). Actually, these activities, as alleged, fall into four separate categories:7
First, that defendants Koenig, Mulligan and Krantz, in order to cause the SEC and the AMEX to discontinue their investigations into the activities of defendants and co-conspirators, consented to the entry of the court order referred to above, and that all four defendants, from on or about May 1, 1971 to on or about December 1972, willfully disregarded and violated that order. (Indictment, ¶¶ 18(a) and (i)).
Second, that beginning in and about June 1971, defendant Koenig and others planned, and then effected, a secret recapitalization of certain ECO European subsidiaries by transferring voting control and certain dividend rights from ECO and its shareholders to an Italian partnership dominated and controlled by Koenig, and that this action was taken to (1) prevent the shareholders and creditors of ECO from removing Koenig from office, and (2) remove valuable ECO assets from the reach of ECO's American creditors. Next, it is alleged that, from in and about June 1971 up to and including August 1971, defendants Koenig, Mulligan and Krantz, and others concealed the recapitalization plan from ECO's creditors and shareholders, the SEC, the AMEX, ECO directors Grinnell Morris and Norman Davidson and the public. Finally, it is asserted that all four defendants, as well as co-conspirators Kahl, Carter, ECO and others, concealed this recapitalization from ECO's shareholders and the public from in and about September 1971 through the end of December 1972. (Indictment, ¶¶ 18(b) through (e)).
The third group of conspiratorial acts alleged is that, from in or about June 1971 to on or about October 31, 1971, all four defendants and co-conspirators Bohannon, Downs, ECO and others, for the purpose of (1) deceiving ECO's creditors who were considering removing Koenig as chief operating officer of ECO and (2) deceiving ECO's shareholders into supporting Koenig, falsely represented that dealings between ECO and a corporate "shell" known as Southwest Nuclear, Inc. ("SWN") were the most noteworthy single event in ECO's recent history without disclosing that SWN was being promoted by defendant Mulligan and co-conspirator Bohannon and was a shell corporation without assets or employees. (Indictment, ¶ 18(f)).
The fourth focal point of the conspiracy deals with the allegations that, from in or about June 1971 up to and including December 1972, all four defendants and co-conspirators Downs, Bohannon, ECO and others issued false and fraudulent representations of the financial condition and business operations of ECO and its subsidiaries in press releases, letters to ECO shareholders and creditors and other statements, and that the same defendants, with co-conspirators Carter, Kahl, ECO and others, made similar false and fraudulent representations in reports filed with the SEC and AMEX from in and about September 1971 up to and including approximately December 1972. (Indictment, ¶¶ 18(g) and (h)).
Count 2 alleges that from approximately June 1, 1971 to approximately the end of 1972, all four defendants, co-conspirators ECO and others, in connection with the sale and purchase of ECO securities and by use of instrumentalities of interstate commerce and the mails, directly and indirectly, employed a scheme to defraud the creditors and stockholders of ECO the AMEX and the public, and made false and misleading statements in connection with recapitalization of the European subsidiaries as alleged in ¶¶ 18(b) through (e) of Count 1 of the indictment.
Count 3 alleges a violation...
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