US v. Lang, Crim. No. WN-90-0404.

• Court: U.S. District Court — District of Maryland
• Writing for the Court: Julian S. Greenspun, Richard S. Kraut and Storch & Brenner, Washington, D.C., for defendant Lang
• Citation: 766 F. Supp. 389
• Docket Number: Crim. No. WN-90-0404.
• Decision Date: 21 February 1991
• Parties: UNITED STATES of America v. Arthur G. LANG, III, and Thomas C. Trexler.

766 F. Supp. 389

UNITED STATES of America
v.
Arthur G. LANG, III, and Thomas C. Trexler.

Crim. No. WN-90-0404.

United States District Court, D. Maryland.

February 21, 1991.

766 F. Supp. 390

COPYRIGHT MATERIAL OMITTED

766 F. Supp. 391

Breckinridge L. Willcox, U.S. Atty., and Carmina S. Hughes, Asst. U.S. Atty., D. Md., Baltimore, Md., for the Government

Julian S. Greenspun, Richard S. Kraut and Storch & Brenner, Washington, D.C., for defendant Lang.

Stephen H. Sachs, Arthur F. Mathews, Michael E. Herde and Wilmer, Cutler & Pickering, Washington, D.C., for defendant Trexler.

MEMORANDUM AND ORDER

NICKERSON, District Judge.

On October 17, 1990, a federal grand jury sitting in the District of Maryland indicted defendants Arthur G. Lang, III ("Lang") and Thomas C. Trexler ("Trexler"), charging them with one count of making a false statement within the jurisdiction of a federal agency, 18 U.S.C. § 1001, twelve counts of securities fraud, 15 U.S.C. §§ 78j(b) and 78ff, 17 C.F.R. § 240.10b-5, and one count of conspiracy to make false statements and commit securities fraud, 18 U.S.C. § 371.

According to the indictment¹, defendants Lang and Trexler were at all relevant times officers of Insituform East, Inc. ("IEI"), a publicly-owned Delaware corporation head-quartered in Landover, Maryland and engaged in the business of underground sewer and pipeline rehabilitation and repair. IEI's common stock was registered with the Securities and Exchange Commission ("SEC") pursuant to Section 12(g) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78l (g), and was publicly traded "over the counter" on the NASDAQ, a national securities exchange. As a publicly traded company, IEI was required to make periodic filings with the SEC, including quarterly reports on Form 10-Q, to inform the public of its financial condition.

Count 1 of the indictment alleges that from September, 1985 to May 7, 1987, in the state of Maryland, defendants conspired to trade in the securities of IEI based upon material non-public information concerning IEI's earnings for the 1986 fiscal year, and that defendants accomplished the conspiracy in part by falsifying the books and records of IEI. The indictment alleges that the effect of this scheme was to "mask IEI's true financial condition to the public resulting in artificially increasing the market price of IEI stock owned by the defendants." (Count 1, ¶ 10) The indictment further alleges that "by trading when defendants knew that loss was imminent, defendants were able to sell their stock and amass large profits in a short period of time before the market responded to the public disclosure of the fourth quarter loss at which time the price of IEI stock dropped dramatically." (Count 1, ¶ 10)

Count 1 also alleges that defendants conspired to file false and fraudulent Form 10-Qs with the SEC in violation of 18 U.S.C. § 1001 and that defendants sold their IEI stock in 1986 armed with material non-public information concerning IEI's earnings for the 1986 fiscal year in violation of 15 U.S.C. §§ 78j(b), 78ff, and 17 C.F.R. § 240.10b-5.

Count 2 charges defendants with making and causing to be made a false statement

766 F. Supp. 392

to the SEC. The Count alleges that defendants filed a quarterly report on SEC Form 10-Q for the third quarter ending March 31, 1986 that contained false statements concerning IEI's income and expenses. Section 13(a) of the 1934 Act requires the filing of such quarterly reports to provide the investing public with information concerning the financial condition of public companies

Counts 3 through 14 charge defendants with selling IEI's securities between April and July, 1986 while in possession of confidential non-public information concerning IEI's earnings for the 1986 fiscal year. Each count lists the name of the seller, the IEI shares sold, the proceeds of the sale and the date of sale.

Defendants have filed several pretrial motions. Defendant Lang has filed a Motion to Dismiss Count 2 of the Superseding Indictment. Defendant Trexler has filed a Motion to Dismiss the Superseding Indictment and a Motion to Set a Pre-Trial Return Date For Fed.R.Crim.P. 17(c) Subpoenas Duces Tecum. Each defendant has adopted the other's motions. The United States of America (the "Government") opposes these motions, and the SEC has filed a Motion to Quash the Subpoena Duces Tecum.

After a careful review of the pleadings and after a hearing on the motions, the Court will deny the defendants' pretrial motions and grant the SEC's Motion to Quash the Subpoena. The Court will address each of defendants' motions separately below.

I. MOTION TO DISMISS THE INDICTMENT

A. Count 2

1. Liability under 18 U.S.C. § 1001 For Misstatements or Omissions in Informational Reports Filed under Section 13(a)

Defendants argue that Count 2 should be dismissed because the false statement statute, 18 U.S.C. § 1001, does not reach false material filings made in reports, such as those required under Section 13(a) of the 1934 Act to be filed with the SEC.² Defendants first argue that the false statement statute is preempted by Section 32(a) of the 1934 Act which imposes criminal penalties for violations of the Act's reporting requirements. Defendants assert that by charging them under 18 U.S.C. § 1001, rather than the more specific securities law provisions, the Government is seeking to circumvent the stringent requirements for false filing prosecutions under Section 32(a).

18 U.S.C. § 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.

This statute was designed "to protect the authorized functions of governmental departments and agencies from the perversion which might result from the deceptive practices described." United States v. Gilliland, 312 U.S. 86, 93, 61 S.Ct. 518, 522, 85 L.Ed. 598 (1941). To support a violation of Section 1001, the Government must establish that the defendant (1) made a false statement (2) of material fact with (3) fraudulent intent and (4) in relation to a matter within the jurisdiction of a department or agency of the United States. United States v. Race, 632 F.2d 1114, 1116 (4th Cir.1980).

766 F. Supp. 393

By contrast, Section 32(a)³ sanctions criminal penalties for misstatements or omissions in reports filed with the SEC only if they are made "willfully and knowingly" and are misleading "with respect to any material fact." See United States v. Dixon, 536 F.2d 1388, 1396 (2d Cir.1976). Section 32(a) also provides defendants with a "no knowledge" defense to imprisonment which is not available under 18 U.S.C. § 1001.

Defendants argue that Congress did not intend 18 U.S.C. § 1001 to reach misstatements or omissions in informational reports filed with the SEC under Section 13(a) of the 1934 Act. Defendants assert that the unique legislative history of Sections 1001 and 32(a) supports their argument. They point out that at the time Section 1001 was enacted—only 12 days after the 1934 Act was passed—it provided harsher penalties than Section 32(a), though the requirements for conviction under Section 1001 were less stringent. Defendants find it untenable that in passing the general false statements statute Congress intended to repeal the more detailed provisions of Section 32(a) that it had just enacted.

It is well settled that "when an act violates more than one criminal statute, the Government may prosecute under either so long as it does not discriminate against any class of defendants." United States v. Batchelder, 442 U.S. 114, 123-24, 99 S.Ct. 2198, 2204, 60 L.Ed.2d 755 (1979). Moreover, courts have permitted prosecution under Section 1001 despite the existence of other overlapping and more specific false statement statutes. United States v. Gordon, 548 F.2d 743, 744 (8th Cir.1977); see, e.g., United States v. Hartness, 845 F.2d 158, 162-63 (8th Cir.), cert. denied, 488 U.S. 925, 109 S.Ct. 308, 102 L.Ed.2d 326 (1988); United States v. Fern, 696 F.2d 1269, 1274 (11th Cir.1983); United States v. Grotke, 702 F.2d 49, 54 (2d Cir.1983); United States v. Eisenmann, 396 F.2d 565, 568 (2d Cir.1968).

In United States v. Bilzerian, 926 F.2d 1285 (2d Cir.1991), the Second Circuit rejected the same argument raised here by defendants. In that case, the Court held that the Government could prosecute under 18 U.S.C. § 1001 alleged false statements in reports filed under Section 13(d) of the 1934 Act. After reviewing the legislative history of Sections 1001 and 32(a), the Court found that the:

proximity of the enactments without more does not suggest that the application of the false statements statute was to be limited to the just-enacted securities law. Absent more explicit indicia of Congressional purpose to foreclose the use of § 1001, the general rule that criminal statutes may overlap controls. The fact that less proof is required for conviction under § 1001 does not amount—as defendant alleges—to overriding the requirements of § 32(a).

Id. at 1300.

In the present case, defendants have failed to point to any express indication that Congress intended Section 32(a) to preempt Section 1001. This Court, therefore, finds that the general canon of construction applies, and that the Government may prosecute the alleged false statements under either Section 32(a) or Section 1001.

Defendants further argue that Section 13(a) reports are not "within the jurisdiction" of the SEC because they simply provide information to the public, without requiring or contemplating any action by the SEC. In defendants' view, Section 1001...