United States v. Wolfson

• Citation: 405 F.2d 779
• Decision Date: 27 December 1968
• Docket Number: Docket 31993.,No. 411,411
• Parties: UNITED STATES of America, Appellee, v. Louis E. WOLFSON and Elkin B. Gerbert, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

405 F.2d 779 (1968)

UNITED STATES of America, Appellee, v. Louis E. WOLFSON and Elkin B. Gerbert, Defendants-Appellants.

No. 411, Docket 31993.

United States Court of Appeals Second Circuit.

Argued April 4, 1968.

Decided December 27, 1968.

Certiorari Denied April 1, 1969.

COPYRIGHT MATERIAL OMITTED

Charles P. Sifton, New York City, (Robert M. Morgenthau, U. S. Atty., for the Southern District of New York, David M. Dorsen, Jay Gold, Lars I. Kulleseid and Abraham D. Sofaer, Asst. U. S. Attys., of counsel), for appellee.

William O. Bittman and Milton V. Freeman, Washington, D. C. (Shea, Gallop, Climenko & Gould, New York City, Arnold & Porter, Washington, D. C., Milton S. Gould and Ronald H. Alenstein, New York City, on the brief), for appellants.

Hogan & Hartson, Washington, D. C., for defendant-appellant Wolfson; Austin S. Mittler, Washington, D. C., Chester Bedell, Jacksonville, Fla., Edgar H. Brenner, Washington, D. C., of counsel.

Bedell, Bedell, Dittmar & Smith, Jacksonville, Fla., for defendant-appellants Gerbert and Wolfson.

Before MOORE, WOODBURY^* and SMITH, Circuit Judges.

Certiorari Denied April 1, 1969. See 89 S.Ct. 1275.

WOODBURY, Senior Circuit Judge:

It was stipulated at the trial that at all relevant times there were 2,510,000 shares of Continental Enterprises, Inc., issued and outstanding. The evidence is clear, indeed is not disputed, that of these the appellant Louis E. Wolfson himself with members of his immediate family and his right hand man and first lieutenant, the appellant Elkin B. Gerbert, owned 1,149,775 or in excess of 40%. The balance of the stock was in the hands of approximately 5,000 outside shareholders. The government's undisputed evidence at the trial was that between August 1, 1960, and January 31, 1962, Wolfson himself sold 404,150 shares of Continental through six brokerage houses, that Gerbert sold 53,000 shares through three brokerage houses and that members of the Wolfson family, including Wolfson's wife, two brothers, a sister, the Wolfson Family Foundation and four trusts for Wolfson's children sold 176,675 shares through six brokerage houses.

Gerbert was a director of Continental. Wolfson was not, nor was he an officer, but there is ample evidence that nevertheless as the largest individual shareholder he was Continental's guiding spirit in that the officers of the corporation were subject to his direction and control and that no corporate policy decisions were made without his knowledge and consent. Indeed Wolfson admitted as much on the stand. No registration statement was in effect as to Continental; its stock was traded over-the-counter.

The appellants do not dispute the foregoing basic facts. They took the position at the trial that they had no idea during the period of the alleged conspiracy, stipulated to be from January 1, 1960, to January 31, 1962, that there was any provision of law requiring registration of a security before its distribution by a controlling person to the public. On the stand in their defense they took the position that they operated at a level of corporate finance far above such "details" as the securities laws; as to whether a particular stock must be registered. They asserted and their counsel argued to the jury that they were much too busy with large affairs to concern themselves with such minor matters and attributed the fault of failure to register to subordinates in the Wolfson organization and to failure of the brokers to give notice of the need. Obviously in finding the appellants guilty the jury rejected this defense, if indeed, it is any defense at all.

The appellants assert numerous claims of error. We shall dispose of the claims more or less in the order of their importance.

Section 5 of the Act, 15 U.S.C. § 77e, in pertinent part provides: "(a) Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly —

"(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell or offer to buy such security through the use or medium of any prospectus or otherwise; * * *."

However, § 4 of the Act, 15 U.S.C. § 77d, exempts certain transactions from the provisions of § 5 including:

"(1) Transactions by any person other than an issuer, underwriter, or dealer."

The appellants argue that they come within this exemption for they are not issuers, underwriters or dealers. At first blush there would appear to be some merit in this argument. The immediate difficulty with it, however, is that § 4(1) by its terms exempts only "transactions," not classes of persons, see SEC v. Culpepper, 270 F.2d 241, 247 (C.A.2, 1959), and ignores § 2(11) of the Act which defines an "underwriter" to mean any person who has purchased from an issuer with a view to the distribution of any security, or participates directly or indirectly in such undertaking unless that person's participation is limited to the usual and customary seller's commission, and then goes on to provide:

"As used in this paragraph the term `issuer\' shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the `issuer.\'" (Italics supplied.)

In short, the brokers provided outlets for the stock of issuers and thus were underwriters. United States v. Re, 336 F.2d 306, 309 (C.A.2, 1964), cert. denied 379 U.S. 904, 85 S.Ct. 188, 13 L.Ed.2d 177 (1964). Wherefore the stock was sold in "transactions by underwriters" which are not within the exemption of § 4(1), supra.

But the appellants contend that the brokers in this case cannot be classified as underwriters because their part in the sales transactions came within § 4(4), 15 U.S.C. § 77d(4), which exempts "brokers' transactions executed upon customers' orders on any exchange or in the over-the-counter market but not the solicitation of such orders."¹ The answer to this contention is that § 4(4) was designed only to exempt the brokers' part in security transactions. Stadia Oil & Uranium Co. v. Wheelis, 251 F.2d 269, 275 (C.A.10, 1957). Control persons must find their own exemptions.

There is nothing inherently unreasonable for a broker to claim the exemption of § 4(4), supra, when he is unaware that his customer's part in the transaction is not exempt. Indeed, this is indicated by the definition of "brokers' transaction" in 17 C.F.R. § 230.154, commonly known as Rule 154 which provides:

"(a) The term `brokers\' transaction\' in Section 4(4) of the act shall be deemed to include transactions by a broker acting as agent for the account of any person controlling, controlled by, or under common control with, the issuer of the securities which are the subject of the transaction where:

"(4) The broker is not aware of circumstances indicating * * * that the transactions are part of a distribution of securities on behalf of his principal."

And there can be no doubt that appellants' sale of over 633,000 shares (25% of the outstanding shares of Continental and more than 55% of their own holdings), was a distribution rather than an ordinary brokerage transaction. See Rule 154(6) which defines "distribution" for the purpose of paragraph (a) generally as "substantial" in relation to the number of shares outstanding and specifically as a sale of 1% of the stock within six months preceding the sale if the shares are traded on a stock exchange.

Certainly if the appellants' sales, which clearly amounted to a distribution under the above definitions had been made through a broker or brokers with knowledge of the circumstances, the brokers would not be entitled to the exemption. It will hardly do for the appellants to say that because they kept the true facts from the brokers they can take advantage of the exemption the brokers gained thereby.

The appellants' argument that §§ 4 and 5 of the Act are unconstitutionally vague does not call for extended discussion. It will suffice to say that the appellants' defense was not that they misunderstood or misinterpreted the statute but that it was beneath their notice and they knew nothing about it. Under these circumstances we need say no more than that any possible uncertainty in the statute need not trouble us now. There will be time enough to consider that question when raised by someone whom it concerns. United States v. Re, 336 F.2d 306, 315 (C.A.2, 1964), cert. denied 379 U.S. 904, 85 S.Ct. 188, 13 L.Ed.2d 177 (1964), and cases cited.

The further argument of the appellants that the concept of "control" stock is unconstitutionally vague and indefinite was considered and rejected in United States v. Re, supra 316. And as already pointed out Wolfson himself on the stand admitted that he was in control of Continental within the ordinary and accepted meaning of that term.

The appellants assert that the government's proof is legally insufficient as to all counts, but particularly as to the substantive ones, for the reason that mere proof of the mailing of sales confirmation slips from the brokers to Wolfson or his agent was not a use of the mails "to sell" unregistered securities within the meaning § 5(a) (1) of the Act. We do not agree.

Section 5(a) (1) quoted hereinabove categorically forbids the direct or indirect use of the mails "to sell" securities not registered as the law requires through the use or medium of any prospectus or otherwise. By this language "* * * Congress meant to exert its power to the full constitutional extent permitted by the commerce clause and the postal clause." Schillner v. H. Vaughan Clarke & Co., 134 F.2d 875, 878 (C.A.2, 1943). But this court in that case in holding that delivery by mail of stock certificates to a buyer pursuant to an oral contract of sale was within the statutory definition of "sell" in § 12 of the Act, 15 U.S.C. § 77l by dictum conceded, page 878, that the word "sell" "may have a narrower meaning in section 5...