United States v. Martin

• Decision Date: 05 December 1979
• Docket Number: Crim. No. H-78-13.
• Citation: 480 F. Supp. 880
• Parties: UNITED STATES of America v. Robert H. MARTIN, Charles H. Adams, Donald R. Bernard, and John V. Holden.
• Court: U.S. District Court — Southern District of Texas

480 F. Supp. 880

UNITED STATES of America v. Robert H. MARTIN, Charles H. Adams, Donald R. Bernard, and John V. Holden.

Crim. No. H-78-13.

United States District Court, S. D. Texas, Houston Division.

December 5, 1979.

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Robert G. Clark and D. McCarty Thornton, Washington, D. C., for plaintiff.

Jake B. Clegg and Bruce L. James, Sam L. Sterrett, Jr., Ralph A. Modad, and Gerald M. Birnberg, Houston, Tex., for defendants.

MEMORANDUM AND ORDER

STERLING, District Judge.

Presently pending before the Court are Defendants' motions in bar of prosecution and motions to dismiss the indictment. Defendants are charged with securities fraud, mail fraud, and conspiracy to defraud in connection with their activities in an alleged boiler room operation used to defraud purchasers of fractional working interests in oil and gas leases. This Court held a comprehensive evidentiary hearing on Defendants' motions. Based upon the evidence of the totality of the circumstances concerning the conduct of government attorneys from both the SEC and the U. S. Attorney's Office vis-a-vis these Defendants, this Court is of the opinion that the present indictment should be dismissed. Defendants' motions in bar of prosecution and to dismiss are based on (1) an alleged agreement with the SEC that they wouldn't be prosecuted; (2) the conduct of the U. S. Attorney's Office in bringing the indictment; and (3) a claim of collateral estoppel based on prior bankruptcy proceedings involving Tri-State Oil & Gas. (Defendants raised the issue of collateral estoppel after the evidentiary hearing was held by this Court.)

Defendants' motions in bar of prosecution as it pertains to the SEC are based on the entry of consent decrees in two SEC civil cases involving these Defendants: SEC v. Petco Oil & Gas and SEC v. Tri-State Oil & Gas. In Petco, a consent decree was entered into on May 3, 1976, by which Defendants Bernard and Holden were enjoined in a number of particulars from offering for sale oil and gas interests in connection with their activities with Petco. In Tri-State, a consent decree was entered into on September 22, 1976, by which Defendants Martin and Adams were enjoined from selling schedule D interests in connection with their activities with Tri-State Oil & Gas. The present indictment charges the Defendants, as owners, directors, officers, or as sales managers of Tri-State, with devising a scheme to defraud investors by obtaining funds for investment by means of false and misleading statements and then diverting large amounts of that money to their own use. Against this indictment, Defendants interpose an alleged agreement made between them and the SEC attorneys handling the Petco and Tri-State cases to the effect that by entering into consent decrees with the SEC, the Defendants could avoid potential criminal prosecution, and that the SEC would not make a criminal reference of the matter.

Courts have dismissed indictments brought in breach of an express agreement not to prosecute as a means of insuring that the criminal justice system is administered fairly. United States v. Minnesota Mining and Manufacturing Co., 551 F.2d 1106 (8th Cir. 1977); United States v. Rodman, 519 F.2d 1058 (1st Cir. 1975); United States v. Carter, 454 F.2d 426 (4th Cir. 1972); United States v. Phillips Petroleum Co., 435 F.Supp. 622 (N.D.Okl.1977). As the Phillips Petroleum court noted: "When the United States Government gives its word to or makes an agreement with one of its citizens, the Government must be held to that agreement and keep its promises." at 640.

In the analysis of agreements such as these, the principles of contract law are used to determine whether a binding agreement has in fact been made. The prerequisites to a legally binding agreement are satisfied when one party makes an offer and the party to whom the offer is made accepts. Ingrassia v. Shell Oil Co., 394 F.Supp. 875 (S.D.N.Y.1975). An "offer" is defined as a promise upon an act, forbearance or return promise being given in exchange for the promise or its performance. Interstate Industries, Inc. v. Barclay Industries, Inc., 540 F.2d 868 (7th Cir. 1976). The essence of any agreement is mutual assent and the existence of assent can only be reconstructed through evidence of words or deeds which objectively manifest the expression of assent. Hodgson v. First Federal Savings & Loan Association of Broward County, Florida, 455 F.2d 818 (5th Cir. 1972).

The evidentiary hearing conducted January 8 through 12 indicated that the conduct of the parties in both the Petco and Tri-State cases was nearly identical: an SEC civil suit was filed, extensive negotiations were had between the SEC attorneys and the attorneys for the Defendants; during the negotiations the Defendants' concern over possible criminal prosecution was discussed with the SEC attorneys; by entering into the consent decrees, these Defendants effectively took themselves out of the business of selling oil and gas interests; and all parties believed that the entry of the consent decrees would be dispositive of the whole matter and none of the parties anticipated that there would be a later criminal prosecution of these Defendants. In this last regard, the evidence produced at the hearing showed that the SEC attorneys in Petco promised Bernard and Holden that the entry of the consent decree would "wrap it all up" and that although neither of the SEC attorneys was in a position to offer a formal grant of immunity, that as a practical matter they did have the power over criminal referral. In the course of the Tri-State negotiations, the Chief SEC attorney told an SEC accountant who was pressing for criminal reference that the case was not an appropriate one for criminal prosecution. This statement was made in the presence of Defendants' attorney. A Tri-State SEC attorney testified that he considered the case closed with the entry of the consent decree.

In interpreting the meaning of an agreement, the language used by the parties must be examined in light of the surrounding circumstances existing at the time the terms are negotiated. Arnold Palmer Golf Co. v. Fuqua Industries, Inc., 541 F.2d 584 (5th Cir. 1976). Not only are such existing circumstances relevant in ascertaining the meaning of an agreement, but subsequent acts of the parties are also relevant to show the meaning of the words used. Newburgh v. Florsheim Shoe Co., 200 F.Supp. 599 (D.Mass.1961). These well established concepts of contract law, now embodied in the Uniform Commercial Code's terms of "usage of trade" and "course of performance" Tex.Bus. & Com.Code Ann. §§ 1.205(b) and 2.208(a), help flesh out the meaning of the language used by the SEC attorneys in negotiating the civil consent decrees.

At the time these consent decrees were entered into, the local SEC office had historically handled securities fraud cases via the civil injunctive decree route rather than by criminal prosecution. Robert Axelrod, one of the SEC Petco attorneys, testified that the local SEC office believed that the civil mechanism was the best way to protect the investing public. Walter Gill, one of the SEC Tri-State attorneys, testified that he knew of no other case in which a criminal prosecution followed the entry of a consent decree. Kenneth Morris, attorney for Defendants in Tri-State, submitted an affidavit that he was not aware of any other case in which criminal charges were brought against defendants who had earlier entered into a civil consent decree with the SEC. The Court finds that these circumstances make Defendants' reliance on the SEC as the final arbiter as to criminal prosecution more reasonable.

The subsequent course of SEC conduct is consonant with the theory that the entry of the consent decrees closed the cases as far as the SEC was concerned. The Petco decree was made on May 3, 1976. On August 25, 1976, the SEC filed suit against Tri-State, but charged only Martin and Adams in connection with the Tri-State activities, in spite of the fact that Bernard and Holden were actively involved in the Tri-State operation, as evidenced by the present indictment which charges them in connection with these activities. Mr. Gill testified that he was surprised that the SEC did not name Bernard and Holden in the Tri-State case. Although the SEC complaint in Tri-State focused on the entry of preliminary and permanent injunctions, it did allege diversion of money from investors and prayed for any "further relief as may be required in the interest of justice and equity." Thus, the omission of Bernard and Holden from an SEC lawsuit in which a possible remedy was restitution: a lawsuit charging the Tri-State operation with which Bernard and Holden were intimately involved is evidence that the SEC was acting in conformance with a deal that the SEC book on Bernard and Holden was considered closed. After the entry of the second consent decree, the SEC ceased all of its activities connected with Petco, Tri-State, and its officers. SEC attorneys, who had been in attendance at the Tri-State Chapter XI bankruptcy proceedings, ceased attending. The SEC attorneys involved in Petco and Tri-State did not make formal criminal referrals in those cases.

Based on the foregoing, the Court finds that the SEC attorneys did, in fact, make a deal with these Defendants. At a time when the SEC attorneys were aware of the Defendants' concern over possible criminal prosecution, the SEC attorneys promised the Defendants that by entering into consent decrees, the cases would be wrapped up. The Defendants reasonably believed that the SEC attorneys, as a practical matter, controlled the future course of any criminal prosecution. This belief was fostered by the past history of the local SEC office as well as the SEC attorneys handling the Petco and Tri-State cases. These Defendants bargained for a practical immunity from criminal prosecution and the SEC attorneys were aware of that intent,...