United States v. Tellier

• Decision Date: 06 May 1958
• Docket Number: No. 104,Docket 24665.,104
• Citation: 255 F.2d 441
• Parties: UNITED STATES of America v. Walter F. TELLIER, Albert Joseph Proctor, Defendants-Appellants, Elton B. Jones and Alaska Telephone Corporation, Defendants.
• Court: U.S. Court of Appeals — Second Circuit

255 F.2d 441 (1958)

UNITED STATES of America v. Walter F. TELLIER, Albert Joseph Proctor, Defendants-Appellants Elton B. Jones and Alaska Telephone Corporation, Defendants.

No. 104, Docket 24665.

United States Court of Appeals Second Circuit.

Argued December 10, 1957.

Decided May 6, 1958.

COPYRIGHT MATERIAL OMITTED

Richard J. Burke, J. Bertram Wegman, New York City, (Saul Gordon, New York City, Frederick Bernays Wiener, Washington, D. C., of counsel), for appellant Tellier.

Colton & Pinkham, New York City, Spencer Pinkham, New York City, for appellant proctor.

Cornelius W. Wickersham, Jr., U. S. Atty., E.D.N.Y., Brooklyn, N. Y. (Paul Windels, Jr., Sp. Asst. U. S. Atty., New York City, Julian Guy Linker, Asst. U. S. Atty., Brooklyn, N. Y.,) for appellee.

Before MEDINA, LUMBARD and WATERMAN, Circuit Judges.

WATERMAN, Circuit Judge.

The appellants, Walter F. Tellier and Albert J. Proctor, were tried and convicted upon a thirty-six count indictment charging them with violations of the fraud section of the Securities Act of 1933, 15 U.S.C.A. § 77q(a); with violations of the mail fraud statute, 18 U.S. C. § 1341; and with a conspiracy to violate each of these statutes, 18 U.S.C. § 371. The charges in the indictment arise out of the public sale of four series of debentures during the years 1951 through 1955. Tellier, who received concurrent sentences of four and one-half years on each count and was fined a total of $18,000, does not contest the sufficiency of the evidence against him. He does contend, however, that reversal is required because of allegedly erroneous rulings made by the trial judge during the course of the trial. Specifically, it is claimed that the trial court erred in permitting testimony Tellier alleges was a violation of the attorney-client privilege, and also erred in the following: (1) the admission into evidence of the corporate records of Alaska Telephone Corporation (ATC), (2) the exclusion of evidence pertaining to the financial condition of ATC at the time of trial, (3) the failure of the trial judge to order production of a report made by a government witness, and (4) the failure of the trial judge to give a requested instruction. Proctor, who received suspended concurrent sentences of nine months on each of the counts in the indictment, contests only the sufficiency of the evidence to support the verdicts against him.

ATC was formed in 1948 to acquire and operate independent telephone and electric power systems in Alaska. Among the promoters was the appellant Proctor, who, upon incorporation, was elected a director of the corporation and, in 1951, its secretary. Proctor enlisted the services of the defendant Elton B. Jones, a Seattle attorney, who was also elected a director and became the company's counsel. After its incorporation ATC acquired several telephone exchanges, with approximately 700 subscribers, located in small Alaskan towns. This property was obtained partly for cash and stock, and partly on credit subject to mortgages. The corporation had insufficient funds to meet operating expenses and accruing mortgage obligations, and it was unsuccessful in several attempts to raise the needed capital.

In April 1951, Major William Maxey, the president and general manager of ATC, together with D. Sherman Starr, the vice-president, approached Tellier & Co., a securities firm located in New York City, concerning the possibility of raising needed funds. Tellier & Co. was owned and controlled by the appellant Tellier, who employed between twenty and thirty salesmen to sell over the telephone the securities handled by his firm. When Tellier was approached by the ATC representatives he retained Bernard D. Cahn, an attorney formerly employed by the Securities & Exchange Commission, to represent Tellier & Co. After some discussion between Tellier and the ATC representatives it was decided to offer for public sale an issue of securities of an amount less than $300,000. The reason for this limitation was SEC Regulation A, the General Exemption Regulation, which exempted from SEC registration certain issues of securities if the aggregate offering price of the issue did not exceed $300,000.¹ At Tellier's suggestion, and over some objection by Cahn and the New York counsel for ATC, it was decided that the securities to be issued were to be convertible twenty year debentures carrying interest at an annual rate of 6% payable monthly. Tellier & Co. agreed to act as best-efforts underwriter for these debentures, labeled "Series A," and to receive therefor 20% of the face amount of the securities sold. In addition, it was to receive expenses in an amount not to exceed $20,000.

Cahn's objection to the sale of debentures, rather than of common stock, was based upon the failure of ATC to prove that it had earning capacity. An unaudited financial statement prepared by ATC representatives disclosed that the corporation had barely passed the break-even point during the years 1948-1950.² Nevertheless, the statement was used in the offering circular prepared by Cahn and registered with the SEC. Within several months of issuance all of the debentures, which had been offered at par, were sold by Tellier & Co. Subsequently, an independent accounting firm was hired to audit ATC's books. The audit revealed that the profit figures contained in the Series A offering circular were erroneous; and that, in fact, ATC had been losing money since its incorporation. The total deficit up to 1951 was about $40,000, with the result that ATC was insolvent. In 1951 ATC additionally lost in excess of $45,000. At Cahn's insistence the corrected information was sent out to all those who had purchased debentures.

In the meantime, Maxey and Starr had severed all connections with ATC, and Cahn who at one time had been elected a director of the corporation resigned his directorship. The need for additional capital continued to plague ATC, and Proctor and Jones spoke to Cahn about this. Cahn told them that additional public financing was inadvisable as long as the corporation continued to operate at a loss. At Cahn's suggestion attempts were made to obtain private financing. This project failed. ATC was now in debt to the Government for money withheld from employees' pay for employees' income taxes and for excise taxes which had been collected from subscribers. In addition, ATC had not turned over to Alaska Communications System long distance toll charges due it which had been collected from ATC subscribers. Finally, the trustee under the Series A trust indenture complained that, although sufficient deposits were made with it so as to enable it to make timely payment of the monthly interest charges, the corporation nevertheless was not maintaining a sufficient advance deposit to provide such payments for a six month period as it was required to do by the indenture.

In view of ATC's immediate need of funds and its inability to obtain them through a private financing, Proctor then approached Tellier to arrange additional public financing. Cahn repeated an earlier warning against public financing, but Proctor represented that ATC was reducing its losses, that it had reached the break-even point, and that the last quarter of 1952 would show a profit. Cahn's request for an audit was met with a reply by Proctor that this was not possible because ATC still owed the auditors a large fee. He insisted, however, that the corporation's financial status was considerably improved.

Over Cahn's objection it was then decided that ATC should issue additional debentures; and, to placate Cahn, it was agreed that common stock should also be sold. Cahn acquiesced, but urged upon Proctor and Tellier the importance of the representation that ATC was now operating at a profit. Proctor agreed to supply Cahn with the supporting financial statements, and several months later he did so. An offering circular was prepared by Cahn and Proctor which represented that ATC had reached the break-even point and that "Net proceeds of this issue will be used for expansion and new equipment and for working capital needed to continue operations." Debentures in the face amount of $150,000 were then issued and offered for sale at a 30% discount. These debentures, labeled "Series B," were in form substantially similar to those previously issued except that they matured in ten years rather than twenty. Tellier's underwriting fee was 10% of the face amount plus $10,000 for expenses. Within a month Tellier had sold all of the debentures, though he was unable to sell any substantial percentage of the 40,000 shares of common stock which had been offered at the same time. A later audit revealed that of the $150,000 face amount of these Series B debentures only $9,000 was expended for new equipment, and for working capital.

Then, before another month had passed, the anticipated audit report disclosed that ATC had not made the profit in the last quarter of 1952 that Proctor had represented would be made. In fact, its losses for that quarter were the greatest in its history, and its total loss for the year was nearly $100,000. In addition, contrary to Proctor's optimistic prediction, it lost money during the first quarter of 1953. This audit also showed, as of the date the report was made, that the Government had filed tax liens against substantially all of ATC's property.

So the proceeds of the Series B debentures appear to have benefited ATC no more than did the proceeds of Series A, and another year went by. Then, in December 1953 Proctor wrote Tellier, enclosing a financial statement for the first three quarters of that year, stating that there had "been little, if any, improvement over the previous period." After setting forth the financial difficulties which the company faced, Proctor again represented that "we believe the corporation is currently operating in the black, * * *"³ and suggested a sale of additional securities so as to "obtain a breathing spell from...