United States v. Simon
| Decision Date | 12 November 1969 |
| Docket Number | Dockets 32828-32830.,No. 562-564,562-564 |
| Citation | 425 F.2d 796 |
| Parties | UNITED STATES of America, Appellee, v. Carl J. SIMON, Robert H. Kaiser and Melvin S. Fishman, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Second Circuit |
COPYRIGHT MATERIAL OMITTED
Peter E. Fleming, Jr., Asst. U. S. Atty. (Robert M. Morgenthau, U. S. Atty. for the Southern District of New York, Charles P. Sifton, Asst. U. S. Atty., of counsel), for appellee.
David W. Peck (Sullivan & Cromwell, New York City, Marvin Schwartz and Thomas E. Patton, New York City, of counsel), for defendants-appellants.
Covington & Burling, Washington, D. C. (David B. Isbell, James F. Strother and J. Peter Luedtke, Washington, D. C., of counsel), for the American Institute of Certified Public Accountants, amicus curiae.
Before WATERMAN, FRIENDLY and SMITH, Circuit Judges.
Certiorari Denied March 30, 1970. See 90 S.Ct. 1235.
Defendant Carl Simon was a senior partner, Robert Kaiser a junior partner, and Melvin Fishman a senior associate in the internationally known accounting firm of Lybrand, Ross Bros. & Montgomery. They stand convicted after trial by Judge Mansfield and a jury in the District Court for the Southern District of New York under three counts of an indictment charging them with drawing up and certifying a false or misleading financial statement of Continental Vending Machine Corporation (hereafter Continental) for the year ending September 30, 1962. After denying motions for acquittal or a new trial, the judge fined Simon $7,000 and Kaiser and Fishman $5,000 each.
Count One of the indictment was for conspiracy to violate 18 U.S.C. §§ 1001 and 1341 and § 32 of the Securities Exchange Act of 1934, 15 U.S.C. § 78ff. Section 1001 provides:
"Whoever, in any matter within the jurisdiction of any department or agency of the United States knowingly and willfully falsifies, conceals or covers up by any trick, scheme, or device a material fact, or makes any false, fictitious or fraudulent statements or representations, or makes or uses any false writing or document knowing the same to contain any false, fictitious or fraudulent statement or entry, shall be fined not more than $10,000 or imprisoned not more than five years, or both."
Section 1341 makes criminal the use of the mails in aid of "any scheme or artifice to defraud." Section 32 of the Securities Exchange Act renders criminal the willful and knowing making of a statement in any required report which is false or misleading with respect to any material fact. Counts Three and Six charged two mailings of the statement in violation of 18 U.S.C. § 1341. Nothing turns on the different phrasings of the test of criminality in the three statutes. The Government concedes it had the burden of offering proof allowing a reasonable jury to be convinced beyond a reasonable doubt not merely that the financial statement was false or misleading in a material respect but that defendants knew it to be and deliberately sought to mislead.
While every criminal conviction is important to the defendant, there is a special poignancy and a corresponding responsibility on reviewing judges when, as here, the defendants have been men of blameless lives and respected members of a learned profession. See United States v. Kahaner, 317 F.2d 459, 467 (2 Cir.), cert. denied, 375 U.S. 836, 84 S.Ct. 74, 11 L.Ed.2d 65 (1963). This is no less true because the trial judge, wisely in our view, imposed no prison sentences. On the other hand, as we observed in the Kahaner opinion, our office is limited to determining whether the evidence was sufficient for submission to the jury and, if so, whether errors prejudicial to the defendants occurred at the trial.1
The trial hinged on transactions between Continental and an affiliate, Valley Commercial Corporation (hereafter "Valley"). The dominant figure in both was Harold Roth, who was president of Continental, supervised the day-to-day operations of Valley, and owned about 25% of the stock of each company.2
Valley, which was run by Roth out of a single office on Continental's premises, was engaged in lending money at interest to Continental and others in the vending machine business. Continental would issue negotiable notes to Valley, which would endorse these in blank and use them as collateral for drawing on two lines of credit, of $1 million each, at Franklin National Bank ("Franklin") and Meadowbrook National Bank ("Meadowbrook"), and would then transfer to Continental the discounted amount of the notes. These transactions, beginning as early as 1956, gave rise to what is called "the Valley payable." By the end of fiscal 1962, the amount of this was $1,029,475, of which $543,345 was due within the year.
In addition to the Valley payable, there was what is known as the "Valley receivable," which resulted from Continental loans to Valley. Most of these stemmed from Roth's custom, dating from mid-1957, of using Continental and Valley as sources of cash to finance his transactions in the stock market.3 At the end of fiscal 1962, the amount of the Valley receivable was $3.5 million, and by February 15, 1963, the date of certification, it has risen to $3.9 million. The Valley payable could not be offset, or "netted," against the Valley receivable since, as stated, Continental's obligations to Valley were in the form of negotiable notes which Valley had endorsed in blank to the two banks and used as collateral to obtain the cash which it then lent to Continental.
By the certification date, the auditors had learned that Valley was not in a position to repay its debt, and it was accordingly arranged that collateral would be posted. Roth and members of his family transferred their equity in certain securities to Arthur Field, Continental's counsel, as trustee to secure Roth's debt to Valley and Valley's debt to Continental. Some 80% of these securities consisted of Continental stock and convertible debentures.
The 1962 financial statements of Continental, which were dismal by any standard,4 reported the status of the Valley transactions as follows:
ASSETS
Current Assets
* * * * * * * * *
Accounts and notes receivable
* * * * * * * * *
Valley Commercial Corp., affiliate
(Note 2) $2,143,335
* * * * * * * * *
Noncurrent accounts and notes receivable
Valley Commercial Corp., affiliate
(Note 2) 1,400,000
* * * * * * * * *
LIABILITIES
Current Liabilities
* * * * * * * * *
Long-term debt,
portion due within one year $8,203,788
* * * * * * * * *
Long-term debt (Note 7)
* * * * * * * * *
Valley Commercial Corp., affiliate
(Note 2) 486,130
* * * * * * * * * *
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. The amount receivable from Valley Commercial Corp.
(an affiliated company of which Mr. Harold Roth is an
officer, director and stockholder) bears interest at 12%
a year. Such amount, less the balance of the notes payable
to that company, is secured by the assignment to
the Company of Valley's equity in certain marketable securities.
As of February 15, 1963, the amount of
such equity at current market quotations exceeded the
net amount receivable.
7. * * * The amounts of long-term debt, including the
portion due within one year, on which interest is payable
currently or has been discounted in advance, are
as follows:
* * * * * * * * * *
Valley Commercial Corp., affiliate $1,029,475
The case against the defendants can be best encapsulated by comparing what Note 2 stated and what the Government claims it would have stated if defendants had included what they knew:
2. The amount receivable from Valley Commercial Corp. (an affiliated company of which Mr. Harold Roth is an officer, director and stockholder), which bears interest at 12% a year, was uncollectible at September 30, 1962, since Valley had loaned approximately the same amount to Mr. Roth who was unable to pay. Since that date Mr. Roth and others have pledged as security for the repayment of his obligation to Valley and its obligation to Continental (now $3,900,000, against which Continental\'s liability to Valley cannot be offset) securities which, as of February 15, 1963, had a market value of $2,978,000. Approximately 80% of such securities are stock and convertible debentures of the Company.
Striking as the difference is, the latter version does not reflect the Government's further contention that in fact the market value of the pledged securities on February 15, 1963, was $1,978,000 rather than $2,978,000 due to liens of James Talcott, Inc. and Franklin for indebtedness other than Roth's of which defendants knew or should have known.
Although the facts set forth up to this point were uncontroverted, there were some sharp disagreements concerning just what defendants knew and when they learned it. Issues of credibility, however, were for the jury, and we here set forth what the jury could permissibly have found the further facts to be.
Roth engaged the Lybrand firm as Continental's auditors in 1956. George Shegog was the partner in charge; Simon was "second partner" but had no responsibility save for the review of SEC filings. Upon Shegog's death, early in 1960, Simon became the partner in charge....
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