United States v. Piepgrass, 23348

• Decision Date: 13 May 1970
• Docket Number: No. 23348,23495,23496.,23348
• Parties: UNITED STATES of America, Appellee, v. Melvin Douglas PIEPGRASS, Tom H. McCandless and Wayne Hofhines, Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

425 F.2d 194 (1970)

UNITED STATES of America, Appellee, v. Melvin Douglas PIEPGRASS, Tom H. McCandless and Wayne Hofhines, Appellants.

Nos. 23348, 23495, 23496.

United States Court of Appeals, Ninth Circuit.

February 16, 1970.

As Modified on Denial of Rehearing May 13, 1970.

Kenneth G. Berquist, Boise, Idaho, for appellants.

Sherman F. Furey, U. S. Atty., Clarence Suiter, Asst. U. S. Atty., Boise, Idaho, Jack Bookey, Seattle, Wash., for appellee.

Before HAMLIN, MERRILL, and ELY, Circuit Judges.

As Modified on Denial of Rehearing in Nos. 23348 and 23495 May 13, 1970.

ELY, Circuit Judge:

Three individuals, jointly tried in the District Court, appeal from their respective convictions for fraud and conspiracy. The case involved several rather complex factual issues centering around an alleged conspiracy to commit fraud in the sale of securities. Each appellant asserts, in various contexts, that the evidence was not sufficient to support his conviction. From our review of the record, we have concluded that the judgments of conviction of two of the appellants must be affirmed and that the judgment as to the third, Hofhines, must be reversed.

It would be helpful, we think, first to outline the basic nature of the alleged conspiracy before discussing the evidence as it bears upon the individual appellants.

THE BASIC SCHEME

On January 24, 1964, a corporation called Dairy Snow, Inc. (hereinafter DS) was organized under the laws of Idaho by M. D. Piepgrass, Vernon K. Smith, and Henry D. Scott, who were the incorporators and first directors. Piepgrass is one of the three appellants here, Smith was a leading Idaho attorney who is now deceased, and Scott was an insurance agent who was not charged as a defendant in that case. Piepgrass held two-thirds of the stock of the corporation, and Smith owned the other one-third.

Within a few days of the formation of DS, the same parties formed a second corporation, Dairy Snow Products, Inc. (hereinafter DSP). Three days later, the two corporations entered into a licensing and franchising agreement under which DSP was given permission to manufacture and market ice cream and related confections under tradenames claimed by DS. DS further agreed to provide services to DSP in planning and constructing production facilities and to furnish future tradenames, packages, and recipes. In return DSP issued to DS two blocks of securities:

(1) One million shares of DSP common stock, giving DS control over DSP.

(2) A block of 2,000 "units," each unit consisting of a $100 bond of DSP, 100 shares of common stock, and an option on 100 shares of common stock at $1 per share. These units are referred to throughout as "301" units, 301 being the number of the certificate by which they were transferred.

On the same day that the licensing-franchising agreement was signed, the Board of Directors of DSP officially decided to make a public offering of DSP securities. It is the Government's contention that the scheme at this time consisted of a plan to sell DSP securities to the public and use the proceeds to pay off the debentures held by DS. The result of this scheme, if successful, would be to divert the funds of investors directly into the hands of the promoters.

The Government also contends that a similar scheme was instituted with respect to sale of the "301" units to the public under the guise of selling unissued securities. There were several "bonus" plans through which the appellants and others could obtain units for their personal accounts. Many of these particular units, part of the "301" block, ultimately found their way into the hands of the public. The economic effect of selling these personally held securities as if they were original-issue securities would be to siphon off company funds contrary to representations made to investors. These sales would also operate to create commissions and salaries in excess of the represented amounts set forth in the prospectus.

By the end of the year 1964, the sales campaign was considered completed, half of the DSP units having been sold to the public and the other half having been subscribed, some of these latter subscriptions apparently having been given by insiders who never paid them. At this time, it was determined to declare the first public offering closed and to make a second offering of DSP stock and stock options. The appellant Hofhines quit his association with the company at this time, apparently with some bitterness over his commissions, although the Government claims that he had continued to participate in an ongoing conspiracy.

The second offering consisted of "A" units (stock and stock options) as opposed to the "B" units involved in the original offering (the so-called "301" units were of the "B" type). The same sales group carried over from the original offering with the exception of Hofhines and the addition of one Mike Boulds, who ultimately became a Government witness. At the same time, however, Piepgrass formed a new corporation by the name of Investor Services, Inc. (hereinafter ISI), which was chartered as a securities brokerage office. The salesmen wrote some purchase orders through ISI for DSP "B" units, although that offering had been declared complete. The "B" units so sold were purportedly some that had become eligible for public sale because of defaults by subscribers. Many of those sold, however, were actually bonus units belonging to appellants Piepgrass and McCandless. This operation forms the basis for the Government's argument that the original 1964 conspiracy carried over through 1965.

The Government relies on one other type of transaction employed in marketing the "A" units to show that the entire series of events constituted a continuing conspiracy. In mid-1965 the first interest payments on the DSP debentures came due, but the company was desperately short of funds. Salesmen were sent out to deliver the interest checks with the hope of convincing the holders to reinvest the interest in more securities. This procedure allowed the company to remain in business after it actually became unable to meet its debts as they came due.

The extreme shortage of funds to which we have referred could be attributed to several factors, including the unrepaid advances to Piepgrass and the salesmen, as well as the diversion of funds through sale of the bonus units. The slight amount of dairy production that had begun in early 1965 ceased altogether by the end of that year. In September of 1966 the company was forced into bankruptcy.

THE PROCEEDINGS BELOW

The indictment was filed against M.D. Piepgrass (an appellant herein), Lee Piepgrass, McCandless, Hofhines, and Boulds. Smith had died before the indictment was returned. The indictment consisted of seventeen counts: ten counts for fraud in the sale of securities 15 U.S.C. § 77q(a), six counts for mail fraud 18 U.S.C. § 1341 and one general count for conspiracy 18 U.S.C. § 371. The conspiracy count charged a single conspiracy, from January 1964 to February 1966, to commit securities and mail fraud as set forth in the first sixteen counts and alleged as overt acts the transactions enumerated in those counts plus an additional ten overt acts.

At the conclusion of the Government's case, the trial court dismissed several counts as to Lee Piepgrass and appellant Hofhines. On motion of the Government, the court also dismissed two counts, as against all defendants, for failure of proof. The ultimate disposition of all counts, as to each of the accused, is set forth in the margin.¹

PIEPGRASS

Appellant Piepgrass makes two related contentions on this appeal. Both are concerned with his intent and criminal knowledge. By referring to a few specific incidents in the course of the two years covered by the indictment, he attempts to demonstrate good faith and lack of guilty intent sufficient to negate inferences of criminal knowledge that could be drawn from the record. His second contention is that he relied on the advice of counsel in all the transactions during this period, and this also relates to his knowledge and intent.

The function of the reviewing court in determining the sufficiency of the evidence in a criminal conspiracy case was explicitly set out by the Supreme Court in Glasser v. United States, 315 U.S. 60, 62 S.Ct. 457, 86 L.Ed. 680 (1942):

"It is not for us to weigh the evidence or to determine the credibility of witnesses. The verdict of a jury must be sustained if there is substantial evidence, taking the view most favorable to the Government, to support it. Participation in a criminal conspiracy need not be proved by direct evidence; a common purpose and plan may be inferred from a `development and collocation of circumstances.\'" (Citations omitted.) Id. at 80, 62 S. Ct. at 469.

The basic facts outlined above, pertaining to the formation of the two corporations, the transfer of DSP securities to DS, the structure of the bonus plan from the "301" units, the sale of those units for the benefit of the individuals, are all undisputed facts. It is also undisputed that these activities operated as a fraud.

Attempting to negate his guilty intent, however, Piepgrass emphasizes several transactions claimed by him to demonstrate his good faith and honest intentions. We have carefully considered the evidence relating to each of these transactions. While it might have supported the interpretation urged by Piepgrass, it is at least as consistent, if not more so, with the existence of a scheme to defraud as it is with Piepgrass' alleged good faith in attempting to begin a new enterprise. Moreover, even if these isolated incidents did positively demonstrate Piepgrass' good faith in certain respects they would not necessarily negate the existence of that criminal intent impliedly found by the jury in connection with the transactions upon which Piepgrass' convictions were based.

On the question of his reliance on advice of counsel, Piepgrass testified that he first...