Petition — Anderson v. United States

MICHAEL RODAK, JR.. CLERK

IN THE

Supreme Court of the United States

Ocroser Term, 1975

No. — | 5 = 1 6 3 0)

>

Cart W. ANDERSON,

Petitioner,

—against—

Untrep States oF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

JEROME J. LonDIN

Counsel for Petitioner

10 East 40th Street

New York, N. Y. 10016

INDEX

Opinions Below

J urisdiction

Questions Presented

Constitutional Provisions, Statutes and Rules Involved

Statement of the Case

Genesis of the Case

Anderson’s Position at Orvis

The Exaggeration of Orvis’ Capital

A. Sale of Clinton Oil & Gas Units—Orvis Commis-

sions in a $791,000 Customer Account ................

Transfer of Realto Clinton’s Stock

Salesmen’s 40% Shares of Units Commission ....

4,344 Shares of Clinton Oil

5,000 Shares of Clinton Oil

$500,000 in Orvis Trading Account

80,000 Shares of Clinton Oil

Sale of International Controls Corp. Stock to

Fund of Letters

The H&S Audit and Review of Form X-17A-5 ......

nets oy | pw

PAGE

Reasons ror GRANTING THE WRIT:

a.

Il.

ITI.

IV.

A jail sentence may not be imposed under Sec-

tion 32(a), 15 U.S.C. §78ff(a), for filing a re-

port required by an SEC rule of which a defen-

dant is ignorant. Accordingly, petitioner’s con-

spiracy sentence of imprisonment is illegal ........

The indictment failed to allege the essential ele-

ments of an illegal hypothecation, and there

was no proof of one. After a conviction based

on the Trial Court’s erroneous holding that any

hypothecation of customers’ securities violates

Rule 8c-1, 17 C.F.R. $240.8¢-1, the Court of Ap-

peals erroneously affirmed petitioner’s convic-

tion for a non-existent crime under the con-

spiracy count—failure to “correct” a hypothe-

cation that did not violate the federal securities

laws—and in violation of the Fifth and Sixth

Amendments and Rule 7(c), Fed. R. Crim.

Proce.

The Fifth Amendment’s Due Process Clause

and Grand Jury Clause were violated by the

Government’s extensive exploitation in summa-

tion of the unexplained almost five-year pre-

indictment delay and its wilful failure to call

before the Grand Jury an attorney whose testi-

mony was neither cumulative nor privileged and

who directly contradicted on a crucial issue the

one witness without whom it concededly had no

case before the Grand Jury and at trial ............

There was no proof that petitioner conspired

to file any false report with the SEC

17

35

PAGE

ConcLUSsION . 43

Appenpix A:

Opinion of the United States Court of Appeals

for the Second Circuit la

Appenpix B:

Opinion of the United States District Court for

the Southern District of New York 18a

Appenpix C:

Constitutional Provisions, Statutes and Rules ........ 22a

Taste OF AUTHORITIES

Cases:

Brady v. Maryland, 373 U.S. 83 (1963) 37

Cramer v. United States, 325 U.S. 1 (1945) 34

Direct Sales Co. v. United States, 319 U.S. 703

(1943) 42, 43

Edington v. Fitemaurice (1885), 29 Ch. D. 459 .............. 41

Ex Parie Bain, 121 U.S. 1 (1887) 3, 32

Gaither v. United States, 413 F.2d 1061 (D.C. Cir.

1969) 3, 33

Ingram v. United States, 360 U.S. 672 (1959) -............42, 43

iv

PAGE

Johnson v. Superior Court, 124 Cal. Rptr. 32, 539 P.2d

792 (Cal. Sup. Ct. 1975) 37

M. Kraus & Bros. v. United States, 327 U.S. 614

(1946) 24, 25

Pereira v. United States, 347 U.S. 1 (1954) -.................. 42

Russell v. United States, 369 U.S. 749 (1962) -........... 3, 32, 33

Securities and Exchange Commission v. Otis & Co.,

18 F. Supp. 100 (N.D. Ohio 1936), aff'd, 106 F.2d 579

(6th Cir. 1939) —

Stirone v. United States, 361 U.S. 212 (1960) -.............. 32

United States v. Bass, 404 U.S. 336 (1971) 24

United States v. Calandra, 414 U.S. 338 (1974) ............ 37-38

United States v. Colasurdo, 453 F.2d 585 (2d Cir. 1971),

cert. den., 406 U.S. 917 (1972) 2°

United States v. Falcone, 311 U.S. 205 (1940) -.........0... 43

United States v. Hark, 49 F. Supp. 95 (D. Mass. 1943),

rev'd on other grounds, 320 U.S. 531 (1944) 0.0... 24

United States v. Koska, 443 F.2d 1167 (2d Cir.) (per

curiam), cert. den., 404 U.S. 852 (1971) 37

United States v. Marion, 404 U.S. 307 (1971) -............... 41, 42

United States v. Mersky, 361 U.S. 431 (1960) —.......... 24

United States v. Morgan, 118 F. Supp. 621 (S.D.N.Y.

1953) 24

United States v. Panzavecchia, 421 F.2d 440 (5th Cir.

1970) 3, 33

United States v. Pennsylvania Industrial Chemical

Corp., 411 U.S. 655 (1973) 24

United States v. Pincourt, 167 F.2d 831 (3d Cir. 1948) 24

United States v. Sloan, 399 F. Supp. 982 (S.D.N.Y.

1975) 1, 18, 19, 21

Van Liew v. United States, 321 F.2d 664 (5th Cir.

1963) 3, 33

Corstitutional Provisions:

United States Constitution

Fifth Amendment 4, 32, 35-37

Sixth Amendment 4, 32

Statutes and Rules:

P.L. 94-29, 89 Stat. 97 et seq. 2, 3, 4, 20,

26, 28, 30

Securities Exchange Act of 1934:

Section 8(c), 15 U.S.C. §78h(c) 3, 4, 25, 28-33

Section 13(a), 15 U.S.C. §78m/(a) 23

Section 16(a), 15 U.S.C. §78p(a) 23

Section 17(a), 15 U.S.C. §78q(a) -........... 2, 4, 5, 17, 19, 21

Section 23(a), 15 U.S.C. §78w(a) 31

Section 32(a), 15 U.S.C. §78ff(a) ..2, 3, 4, 17, 19,

20, 22, 23

Rule 8c-1, 17 C.F.R. §240.8¢-1 ..................3, 25, 26, 28-33

Rule 8e-1(a)(1), 17 C.F.R. $240.8e-l(a)(1) ..... 32

Rule 8c-1(a)(3), 17 C.F.R. §240.8¢e-1(a)(3) ....3, 26, 30,

31, 33, 34

Rule 17a-3, 17 C.F.R. §240.17a-3 2, 5, 17-20

Rule 17a-4, 17 C.F.R. §240.17a-4 2, 5, 17-20

PAGE

Rule 17a-5, 17 C.F.R. §240.17a-5 -...........2, 5, 17-20, 24,

: 26, 42

Rule 17a-5(c) (1), 17 C.F.R. §$240.17a-5(c)(1) ..... 17

Reg. T, 12 C.F.R. §220 ...12, 13

18 U.S.C. $1 20

18 U.S.C. $371 5, 17, 19, 20, 42

28 U.S.C. §$1254(1) 2

Fed. R. Crim. Proe., Rule 7(c) ; 32

Other Authorities:

ABA Standards, Prosecution Function and Defense

Function

Barucu, H., Watt Street—Security Risk, Acropolis

Books Ltd., Washington, D.C. (1971) 27

II Loss, L., Securrrms Recuuation (2d Ed. 1961) ....... 31

V Loss, L., Securirms Recutation (1969 Supp. to Vol.

II) 31

SEC Release 34-9388, Nov. 8, 1971, 2 CCH Fed. Sec.

L. Rep. 22,422, pp. 16,306-9 , 30

Weiss, E., RecisrraTion AND REGULATION OF BROKERS

AnD Deaters (BNA 1965) 30

IN THE

Supreme Court of the United States

Ocroser Term, 1975

eho

<>

Cart W. ANDERSON,

Petitioner,

—against—

Unrrep States or America,

Respondent.

—_

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

To the Honorable, the Chief Justice and Associate Justices

of the Supreme Court of the United States:

Petitioner, Carl W. Anderson, prays that a writ of cer-

tiorari issue to review the judgment of the United States

Court of Appeals for the Second Circuit entered in this

case on March 8, 1976.

Opinions Below

The United States District Court for the Southern Dis-

trict of New York denied Petitioner’s motion to set aside

the sentence of one year’s imprisonment imposed on his

conviction. The opinion of the District Court, printed in

Appendix B, is reported sub nom. United States v. Sloan,

399 F. Supp. 982 (S.D.N.Y. 1975).

2

The United States Court of Appeals for the Second Cir-

cuit affirmed the judgment against Petitioner. The opinion

of the Court of Appeals, printed in Appendix A, has not

yet been officially reported.

Jurisdiction

The judgment of the United States Court of Appeals

for the Second Circuit was entered on March 8, 1976. A

timely applicff%a for rehearing was made in the Court

of Appeals on March 22, 1976. The Court of Appeals de-

nied the motion on April 7, 1976. The jurisdiction of this

Court is invoked under Title 28, United States Code, Sec-

tion 1254(1).

Questions Presented

1. Section 32(a) of the Securities Exchange Act of 1934,

15 U.S.C. §78ff(a), the statute’s penal provision, forbids

the imposition of a jail sentence where the defendant had

no knowledge of the rule he violated.

Where the conviction arose from the making by others

of false business records in violation of Rules 17a-3 and 4,

17 C.F.R. §§249.17a-3, 4, promulgated by the SEC under

authority delegated by Section 17(a) of the Securities Ex-

change Act of 1934, 15 U.S.C. §78q(a)’—rules of which

petitioner was concededly ignorant—and the filing by inde-

pendent auditors with the SEC of a report (Form X-17A-5)

required not by the Exchange Act itself, but by Rule 17a-5,

17 C.F.R. §240.17a-5, promulgated thereunder by the SEC

pursuant to delegated authority, a rule of which petitioner

* Amended by P.L. 94-29, 89 Stat. 97 et seq.

was concededly ignorant, did the Court of Appeals cor-

rectly construe Section 32(a) in holding that imprisonment

is permitted?

2. Where the indictment tracked only part c* the lan-

guage of Rule 8c-1(a)(3), omitting an essential part there-

of, but tracked no other part of Rule 8c-1’s language, and

. there was also a failure to prove or to instruct the jury

as to Rule 8c-1(a)(3) or any other part of Rule 8c-1, and

the conviction was based on erroneous SEC “expert” testi-

mony (over objection)—which petitioner was not allowed

to controvert—that all hypothecation of customers’ securi-

ties was forbidden by Rule 8c-1,

(a) Did the Court of Appeals err in a crucial respect

in reading the relevant part of Rule 8ce-1(a)(3) when it

said: “Rule 8e-1, 17 C.F.R. §240.8e-1, prohibits the hypothe-

cation of securities, in language similar to that of 15 U.S.C.

§78h(c)”,? which delegates to the SEC the authority to

promulgate anti-hypothecation rules?

(b) Since there was nothing to “correct” in the absence

of an illegal hypothecation, did the Court of Appeals er-

roneously affirm a conviction for a non-criminal act under

the conspiracy count for failure to “correct” a hypotheca-

tion that did not violate the federal securities laws?

(c) Contrary to this Court’s teaching in Ex Parte Bain,

121 U.S. 1 (1887) and Russell vy. United States, 369 U.S.

749 (1962), and in conflict with two other circuits,’ did the

2 Subsection (c) has since been redesignated as subsection (b)

by P.L. 94-29. °

® United States v. Panzavecchia, 421 F.2d 440 (5th Cir. 1970) ;

Gaither v. United States. 413 F.2d 1061 (D.C. Cir. 1969); Van

Liew v. United States, 321 F.2d 664 (5th Cir. 1963).

4

Court of Appeals permit an indictment that did not inform

petitioner of the specific charge to be amended by prosecu-

torial and judicial interpretation of and gloss on the grand

jury’s indictment in violation of the Fifth and Sixth Amend-

ments and Rule 7(c), Fed. R. Crim. Proc.?

3. Were petitioner’s rights under the Fifth Amend-

ment’s Due Process Clause and Granc Jury Clause violated

by: (a) the Government’s extensive exploitation in sum-

mation of its unexplained five-year pre-indictment delay,

and (b) the Government’s wilful failure to call before the

Grand Jury an attorney whose testimony was not cumula-

tive or privileged and who directly contradicted on a crucial

issue the one witness without whom it concededly had no

case before the Grand Jury and at trial?

4. Was petitioner’s conviction for conspiracy to commit

an offense against the United States supported by sufficient

evidence?

Constitutional Provisions, Statutes

and Rules Involved

The applicable constitutional provisions, statutes and

rules are set out in Appendix C. Section 8(c) of the Se-

curities Exchange Act of 1934, 15 U.S.C. $78h(c), was re-

designated as subsection (b) by P.L. 94-29, which also

rewrote Section 17(a), 15 U.S.C. §78q(a), and amended

Section 32(a), 15 U.S.C. §78ff(a)—all effective June 4,

1975. All citations and quotations are to these statutes

prior to P.L. 94-29.

Statement of the Case

Genesis of the Case

This case arose from the Wall Street debacle of 1969-70,

during which approximately 100 New York Stock Exchange

(“NYSE”) member firms disappeared. It concerns one

such brokerage house, Orvis Bros. (“Orvis”) and its Form

‘*X-17A-5, the financial questionnaire submitted by Haskins

& Sells (“H&S”), its independent auditors of 20 years, to

the NYSE and the SEC on Oct. 16, 1969. Although the

Goodbody, Walston and other failures made far greater

incursions into the NYSE special fund, Orvis was singled

out for criminal sanctions although the public lost nothing.

Bill Anderson (“petitioner”) was convicted of conspir-

ing, in violation of 18 U.S.C. §371, to violate 15 U.S.C.

§78q(a) and Rules 17a-3, 4 and 5, 17 C.F.R. §§240.17a-3,

4 and 5, promulgated thereunder by the SEC, by making

false records and filing a false report (X-17A-5) with the

SEC. Notwithstanding his conceded ignorance of those

rules, he was sentenced to jail for one year.

Anderson’s Position at Orvis

Anderson joined Orvis in July 1966 as a 1% partner

with an investment of $25,000 (2417).* In early 1968 he

became head of corporate finance (115, 2419), which kept

him away from Orvis about two-thirds of the time (578,

582, 1574, 2420-1). Anderson had no involvement with the

back office (which handled record-making and reporting),

a very technical field not understood by the heads of many

brokerage houses (1112-13).

* References to a number only are to the trial transcript.

Sloan was the most powerful partner (591). From Janu-

ary 1969 he had complete control over day-to-day opera-

tions. He was the boss (627-8, 728-31), in full control of the

firm (857-8), and ran Orvis (1141). He was the top man in

command (1157).

In early 1969, when Sloan acquired this power as manag-

ing partner, Anderson became chairman of the executive

committee. The chairman’s function was thereupon reduced

by the committee from chief policy officer to implementing

policy made by the committee, a change effected by one of

the partners to limit Anderson’s power (1607-12, 1688; Gov.

Ex. 4, minutes of Mar. 20, 1969).

In Anderson’s absence, in May 1969, the executive com-

mittee voted three new partners into Orvis (733, 828-9,

1635; Ex. AA, AO, AP).

On May 6, 1969, in Anderson’s absence, the executive

committee stripped him of his underwriting power by limit-

ing his underwritings to those approved by managing part-

ner Sloan, research partner Mezzetta, and financial partner

Kilduff. Anderson could not act without their approval

(588-90, 1622-7, 2429-30; Ex. I, p. 2, no. 7). While he was

away, in June 1969, the executive committee discussed five

new underwritings having nothing to do with him (1636-8,

2430-1; Gov. Ex. 57).

The Exaggeration of Orvis’ Capital

The 1969 transactions involving false record-making

were all barred by the statute of limitations. They are

relevant only because the results were included in the Oct.

° The indictment was filed Sept. 10, 1974. Counts 2 through 7

were dismissed on pre-trial motion as statute-barred.

7

16, 1969 Form X-17A-5. The Court of Appeals referred to

the following:

A. Sale of Clinton Oil & Gas Unite—Orvis Commissions

in a $791,000 Customer Account*®

Orvis sold $17,000,000 of the units in 1969, at a 6% com-

mission—about $1,000,000 (177-9, 185, 2171-2, 2181). Orvis

~ earned its commission when it made the sale (180-1),’ and

Clinton would pay as the money came in (2229-30). The

money was payable: 10% on contract, 30% April 15th, 30%

July 15th, and 30% October 15th (2229-30; Ex. AH).

In March 1969 Sloan told Kilduff to take the commis-

sion payable into profit and loss (187-8). It was proper

to do this in the month of sale (629-30). Kilduff told Sloan

that it should be charged against capital if not receivable

within 30 days (190).* Anderson said nothing (191).

Contrary to the Court of Appeals, Anderson did not

know “early in 1969”, or at any other time, that the part

of the receivable that was over 30 days was treated as

current capital. The $797,100 receivable was placed on the

books in a customer’s cash account by Kilduff on his own.

No one told him to do it (223-6). The entry was made by

Kilduff on April 30th (632-3; Gov. Ex. 30), when Anderson

was away (2426). Kilduff never said Anderson told him

how to enter the receivable, nor did he say Anderson ever

knew it had been entered in a customer’s cash account.

* Charged in Count 2, dismissed on pre-trial motion under

statute of limitations.

™The Court of Appeals erroneously said the commissions were

unearned.

8 By March 40% was receivable within 30 days—the 10% on con-

tract and the 30% on April 15th.

8

Contrary to the Court of Appeals, even Kilduff did not

try to hide from H&S the true nature of the receivable.

On Aug. 5, 1969—before the H&S audit as of Aug. 31, 1969

—kKilduff instructed Michael, Orvis’ comptroller (879), to

accrue only one-third of what was by then $900,000 of com-

missions receivable on the sale of the units. But Michael

did not understand® and left $900,000 on the books instead

of $300,000 (888-9, 894-6; Gov. Ex. 44, Ex. Z).

Had Michael followed Kilduff’s written instructions there

would have been no material error in the account, because

$290,000 had actually been received and credited prior to

August 31st (243-4, 712). Moreover, even with Michael’s

error, as of the August 3lst audit 70%* of the commis-

sions—over $700,000—was then payable and was properly

computed in capital.

B. Transfer of Realto Clinton’s Stock"

Contrary to the Court of Appeals, Anderson did not

learn in September (or at any other relevant time) that

Realto Clinton’s stock was credited to this account; and,

contrary to the Court of Appeals, it was not “wrongfully”

done by those who did it. Kilduff and Eucker discussed it

with Sloan in August 1969 (243-6, 253-4). Kilduff said he

did not discuss it with Anderson (247).*?

® When Kilduff appointed Michael comptroller in the Spring of

1969, Michael said he was not qualified (879, 902-3).

010% on contract, 30% April 15th, and 30% July 15th were

already receivable—obviously in less than 30 days.

1 Charged in Count 4, dismissed on pre-trial motion under

statute of limitations.

12 Kilduff also testified that around September he had a conver-

sation with Anderson or Villani (247-8), at which Kilduff “would

bring out the various things that were used to prop up the

capital.”

9

This stock transfer was permitted under Realto Clin-

ton’s subordinated loan account, from which it was trans-

ferred. His subordinated loan agreement, Gov. Ex. 112,

allowed the stock to be dealt with as partnership property,

transferred, ete. (2242). Moreover, Orvis sent monthly

statements to its subordinated lenders (252-6), and it was

standard procedure for H&S to send him confirmations

‘showing the transfer, including a letter of explanation.

Clinton never disputed the transfer (650-2, 1364-71, 1373-5).

C. Salesmen’s 40% Shares of Units Commission

Kilduff suggested not accruing commissions due to sales-

men. Neither Anderson nor anyone else said anything

(240-2). Accordingly, the Court of Appeals was mistaken

in saying Anderson was aware of “[t]he decision not to

deduct these commissions.”

D. 4,344 Shares of Clinton Oil**

About March 3rd 4,344 shares of Clinton Oil were sent

by Realto Clinton to Orvis (Gov. Ex. 38). Sloan said they

were “for the partners.” Over objection, Kilduff said he

understood this to mean a purchase for a price he did not

know (263-7). Anderson said nothing (267-8).

The stock was posted in the Orvis trading account on

April 16th. Anderson had nothing to do with it (269-70,

272). The cost of the stock was posted in August and

charged against capital prior to the arrival of H&S for

its audit (294; Gov. Ex. 44). Kilduff told the executive

committee the cost had been charged to the trading account

and had hurt capital (296-8). The others said nothing (297).

18 Charged in Count 6, dismissed on pre-trial motion under

statute of limitations.

10

E. 5,000 Shares of Clinton Oil"

In May Sloan received 5,000 shares of Clinton Oil from

Realto Clinton. He gave them to Kilduff “for the partners.”

Eucker put the stock in the trading account without cost.

Anderson was not present at any of these times (286-8).

He was in Europe (2426). In August “this” was discussed.

Anderson said nothing (289-90, 292).

F. $500,000 in Orvis Trading Account’

On August 19, 1969 an additional loss of $500,000 was

found in the Orvis trading account by Kilduff’s department.

Kilduff told Sloan (337-40). Sloan reported it to the gen-

eral partners meeting on August 20th, and there was an

outery to fire Kane, who ran the account. In answer, Sloan

said that Orvis’ relationship with Realto Clinton would be

seriously impaired if Kane left, because Kane was very

close to Realto Clinton and was important to his stock in

which he made a market. Sloan said he had just phoned

Clinton, who would wire $500,000 cash to Sloan personally

as a loan to Sloan to add to the firm’s capital (174-5, 340,

343, 344, 701-2, 697-9; Gov. Ex. 61).

Clinton sent $500,000 to Sloan before the end of August

1969. Sloan told Kilduff and Eucker it was not a loan to

him, but part payment of the Units’ commission receivable.

Sloan told Kilduff to use it as capital. At Kilduff’s sug-

gestion it was put in the Kane trading account by Kilduff

and Eucker. Anderson was not present at the discussions

and had nothing to do with the entries (354-60). In early

September Kilduff told the executive committee he had

14Charged in Count 7, dismissed on pre-trial motion under

statute of limitations.

18 Charged in Count 3, dismissed on pre-trial motion under

statute of limitations.

11

put the $500,000 in ithe Kane trading account. Anderson

said nothing (261-4).

G. 80,000 Shares of Clinton Oil'*

Sloan was responsible for the sale by Orvis of the 80,000

shares to Clinton Oil (373-6, 380, 383, 722-4, 842-3). In

September, in Anderson’s presence, Kilduff and Eucker

asked Sloan about payment. Sloan said Clinton would take

care of it (383-4, 724). Kilduff thought it a good trade until

May 1970 (724-5). Villani thought it was a good trade

(2741). Anderson thought it was a good trade (2551-2).

Clinton had a real concern about Orvis’ large position

in Clinton Oil stock. When Gamelson (Clinton’s general

counsel) and Smith came to see Sloan on August 28th at

Clinton’s instructions (and were sent by a secretary to

Anderson), a very important purpose was to check Orvis’

inventory of Clinton Oil stock (1163-4) and to find out if

Orvis was dumping the stock (1196, 1214). This was the

first subject Gamelson and Smith discussed with Anderson,

because Clinton had expressed concern, using the word

“dumping”, and was worried about large selling in the

market by Orvis (1270-3).

Gamelson himself had 418,000 shares of Clinton Oil which

sold at 30 during mid-1969 (1188, 1204-5, 1215), worth over

$12,000,000 on paper. Clinton had over 1,000,000 shares

(1215). The sale of 80,000 shares would depress the price

by a couple of points at least (1115). If other brokers heard

Orvis was dumping, they would lower their bid, depressing

the value of the stock (1215-16). Clinton said Gamelson

was more concerned than he was (2235-7). Gamelson had

*° Charged in Count 5, dismissed on pre-trial motion under

statute of limitations.

12

offered to put money into Orvis. Anderson refused and re-

turned the stock Mr. and Mrs. Gamelson had offered to con-

tribute as a subordinated loan (1164, 1193), which was

25,000 shares at 30 worth $750,000 (1211). As Gamelson

said, Orvis controlled 600,000 to 700,000 shares at the time

—probably more than anyone else—and Orvis was also very

important to Clinton Oil, because Orvis was selling the

drilling ventures (Units) and maintaining a very active

market in the stock (1200-1).

H&S never received the spurious letter purporting to

deny the trade—Gov. Ex. 108, received over objection

(1173-6) and read to the jury (1175) on the presecntor’s

representation that Clinton would say he sent it (1397).

Clinton did not so testify. He could not recall (2197-9).

Vayda of H&S explained the procedure whereby excep-

tions to confirmation are logged, and said no exception was

received for the 80,000 share trade—or, for that matter,

in connection with Clinton’s subordinated loan or the Units

commission account 55-1400 (1364-71, 1373-5). He said

Gov. Ex. 108 was not received by H&S (1372-3, 1375).

H. Sale of International Controls Corp. Stock

to Fund of Letters**

Anderson effected a cross in unregistered ICC stock be-

tween Hoffman and Bull, as sellers, and the Fund of Let-

17 Gov. Ex. 108 is addressed to H&S at the post office box used

for the 1969 audit confirmations—P.O. Box 246, Wall Street

Station—indicating the Clinton entities had received the confirma-

tion requests.

18 Charged in Count 1 as part of a conspiracy to violate Reg. T,

12 C.F.R. §220, which allegation was stricken during the trial.

The Fund of Letters is a public closed-end investment com-

pany, now known as New America Fund, which at the time spe-

18

ters, as buyer, through a company named Viszcaya (the

Goulandris Family) which was to acquire the sellers’ un-

registered stock and resell to the Fund at a higher price

the same amount of Viszcaya’s shares with registration

rights (2468 et seq.). After a year of negotiations the Fund

rejected the trade because ICC would not register the stock

(505).

The indictment charged the transaction as part of a con-

spiracy to violate Reg. T. It was not charged as one of

the numerous allegedly false entries in Orvis’ records.

Realizing in mid-trial that it was not a Reg. T violation, the

prosecution over objection changed its theory, in effect re-

wrote the indictment, and charged it as part of the overall

conspiracy to file false records with the SEC (2437-41,

3028), in that its dollar total was included in customers’

cash accounts rather than customers’ partly secured ac-

counts.

Anderson had nothing to do with the way this 1968

transaction was recorded on Orvis’ books under customers’

cialized in the purchase of restricted or non-registered securities

—i.e., letter stock, hence its name (1690, 1720-1).

The prosecutor who presented the case to the grand jury (not

Government trial counsel) was ignorant of and misadvised the

grand jury concerning Reg. T, when he questioned a witness about,

inter alia, the b'und of Letters trade:

“Q. Did you have any discussion with anyone concerning

these accounts in which there were debit + oval regarding

possible Reg. T violations? A. No, sir.

“Q. Do you know what a Reg. T is? A. Specifically, no;

so you had better tell me.

“Q. You have debit balances in certain accounts, customer

accounts, which can be used as good capital for a certain

period of time of upwards to thirty days, but thereafter cer-

tain balances should not be used in computing a firm’s capital

position. A. You said debit balance?

“Q. Yes. A. No, I did not know that” (Gov. Ex. 3533 id.;

C.A. App. 166a).

14

cash accounts—where it indeed belonged at the time. There

was no testimony that Anderson at any time thereafter,

when it became a disputed trade, discussed with anyone

the place where the transaction should be recorded. In-

deed, the prosecution established that at first Anderson

discussed the transaction with no one at all, and that later

the entire firm was aware of it and was after him. On the

one occasion Kilduff claimed to have said—in the presence,

inter alia, of Musil, Villani and Anderson (who all denied

it)—that the four problem accounts (Bozeman, Martin,

Aquarius and Fund of Letters) were not being charged

against capital, Kilduff said: “I don’t recall him (Ander-

son] saying anything at that particular meeting, sir” (309-

10). And even then there was no discussion about where

on Orvis’ books the trade was recorded.

When H&S was told of it during the August 1969 audit,

they made no change in the accounting treatment except to

have Orvis double its reserve for uncollected customers’

accounts.”* Vayda of H&S knew of the four accounts—

Fund of Letters, Bozeman, Aquarius, and Martin—and that

they were carried as cash accounts, notwithstanding the

fact that they “were, as we called it, in deficit, partly se-

cured” (1327). Kilduff told Vayda “this was one of the ex-

posure areas of Orvis Bros.” (1328). Orvis’ records showed

the longstanding debits (492-3).*° H&S took this into ac-

count and, after doubling the reserve, “left them [the four

accounts, including Fund of Letters] in ‘cash accounts’ ”

(1328), footnoting Item 6-A of Form X-17A-5 as follows:

1® One of the Big Eight with decades of experience, H&S had

about 25 men directly involved in the audit and had been auditing

Orvis for 20 years (393-4, 396, 493).

20 The Fund trade date was Oct. 24, 1968, with an Oct. 31, 1968

settlement date (1722; Gov. Ex. 152).

15

“... A reserve has been provided for accounts con-

sidered doubtful of collection; ...”

Anderson should not go to jail for an accounting inter-

pretation of a NYSE rule made by acknowledged experts

who had audited Orvis for 20 years.

The H&S Audit and Review of Form X-17A-5

H&S had audited Orvis for 20 years (396). 25 of their

men spent over 1,000 hours in the 1969 audit (393-4, 2340).

Kilduff and Eucker were in charge for Orvis (395). When

H&S arrived they said hello to Sloan and Anderson, after

which they dealt with Kilduff and Eucker (396, 1320-1).

The diary of the H&S partner in charge, Sturgis (Ex. BO)

and his diary extracts (Gov. Ex. 74-B) contain no reference

to petitioner anywhere (2341-5, 2357).

Form X-17A-5 was reviewed at a meeting of Oct. 15th

attended by representatives of H&S and Orvis. The filing

of this report—the only SEC report mentioned in the en-

tire case by anyone—was the subject of a separate count of

which petitioner was acquitted. “The [Trial Court’s]

charge [to the jury] on this count required a specific find-

ing that the particular false filing had been within Ander-

son’s reasonable contemplation.” 399 F. Supp. at p. 985.

The jury’s acquittal of petitioner on the substantive false

filing count evidenced its refusal to believe petitioner was

even present when Form X-17A-5 was reviewed by Sturgis,

Taggart and Vayda of H&S witn Orvis.

The Government called Taggart and Vayda. Both testi-

fied that they along with Sturgis, the partner in charge

(2338-9), attended for H&S (1387, 1322). Taggart said

16

Sloan, Eucker and Kilduff represented Orvis (1388-9).

Vayda also named Sloan, Eucker and Kilduff, but could not

say Anderson was present (“it could possibly be that it

could have been [also] Mr. Villani or Mr. Anderson”

(1362-3) .”

The Government did not call Sturgis—the defense did.

Sturgis had listed the Orvis participants—Sloan, Eucker

and Kilduff-—in his diary, Ex. BO. He also listed them in

Gov. Ex. 74B, the extract from his diary prepared for the

prosecution during its investigation. According to Sturgis,

Anderson was not present (2344-5).

Only Kilduff placed Anderson at the meeting (412)—

and he got one of the H&S participants wrong too, omit-

ting Taggart and erroneously replacing him with one Pe-

trillo (411), who had nothing to do with the 1969 audit

(Ex. BN, 2339). Kilduff failed to attribute any statement

to Anderson at the audit review.

Anderson was not at Orvis that day. He was at the

World Series. He lived in Forest Hills and went directly

to Shea Stadium from home. After the game he went to a

meeting of Clinical Health Science, a company in New

Jersey (2632-3).

Form X-17A-5 was sent by H&S not only to the SEC,

but also to the NYSE (pursuant to its Rule 417) and vari-

ous states (1323, 1326). Only the covers and certificates are

different. Form X-17A-5, the questionnaire itself, does not

mention the SEC. Compare Ex. BP (sent to the NYSE)

*1 See also, Tr. 1322 (in which petitioner unsuccessfully objected

to allowing the jury to speculate about his presence), 1323, 1358-

60a. Vayda could nox recall the specifics of the review (1375-8,

1380-1).

17

with Gov. Ex. 74 (the same questionnaire sent to the SEC,

as permitted by Rule 17a-5(c)(1), 17 C.F.R. §240.17a-5(c)

(1)).*

REASONS FOR GRANTING THE WRIT

I.

A jail sentence may not be imposed under Section

32(a), 15 U.S.C. §78ff (a), for filing a report required

by an SEC rule of which a defendant is ignorant. Ac-

cordingly, petitioner’s conspiracy sentence of imprison-

ment is illegal.

Petitioner was convicted of conspiring, in violation of

18 U.S.C. §371, to violate 15 U.S.C. §$78q(a) and Rules 17a-3,

4 and 5, 17 C.F.R. $§240.17a-3, 4 and 5, promulgated there-

under by the SEC, by making false records and filing a false

report with the SEC. He was sentenced to one year’s im-

prisonment under the penal provision of the Securities Ex-

change Act of 1934, 15 U.S.C. §78ff(a).

That is what the original indictment charged in Count 1,

paragraphs 4 and 5 (App. lla).* That is what the ex-

22 Rule 17a-5(c) (1) provides in pertinent part:

“(1) Any member, broker, or dealer who is subject to the pro-

visions of paragraph (a) hereof may file in lieu of the report

required by that paragraph a copy of any financial statement

which he is, or has been, required to file with any national securi-

ties exchange of which he is a member, or with any agency of

any State as a condition of doing business in securities there-

re

28 References App. are to petitioner’s appendix in the Court of

Appeals. Paragraphs 4 and 5 read:

“4. It was further a part of said conspiracy that said defen-

dants and their co-conspirators unlawfully, wilfully and know-

ingly would, directly and indirectly, make, keep and preserve and

cause to be made, kept and preserved false and fraudulent books,

18

purgated indictment charged in identical language in para-

graphs 3 and 4 as the sole paragraphs under the heading

“Objects of The Conspiracy” (App. 24a-25a). That is how

the Trial Court charged the jury (App. 82a-83a; 3027-8,

Pet. 2d Cir. Br. fn. at pp. 36-7). That is precisely what

the Trial Court said in denying petitioner’s motion to set

aside his jail sentence. United States v. Sloan, 399 F. Supp.

accounts and other records of Orvis which purported to reflect

the true, accurate and current financial condition of Orvis, when

in truth and in fact as the defendants well knew, said books, ac-

counts and other records were materially false and fraudulent,

in contravention of Rules 17a-3 and 17a-4 (17 C.F.R. Sections

240.17a-3 and 240.17a-4), rules prescribed by the S.E.C. as neces-

sary and appropriate in the public interest and for the protection

of investors.

“5. It was further a part of said conspiracy that said defen-

dants and their co-conspirators unlawfally, wilfully and know-

ingly would, directly and indirectly, make and cause to be made

false and misleading statements in applications, reports and docu-

ments required to be filed with the S.E.C., which statements were

false and misleading with respect to a material fact or facts, in

contravention of Rule 17a-5 (17 C.F.R. Section 240.17a-5), a rule

prescribed by the S.E.C. as necessary and appropriate in the

public interest and for the protection of investors.”

24“The only crime charged is that these defendants are claimed

to have kept false records and to have filed false reports, to con-

ceal their imminent or actual insolvency.

What, then, is the particular section of the securities laws

which defendants are charged with violating and with having

conspired to violate?

It is a section of the 1934 Act which provides in pertinent part

as follows :

‘Every broker or dealer’—and obviously the firm of Orvis Bros.

was a broker and dealer—‘shall make, keep, and preserve such

accounts, correspondence, memoranda, papers, books and other

records and make such reports as the Securities and Exchange

Commission by its rules aad regulations may prescribe as neces-

sary or appropriate in the public interest or for the protection of

investors.’

The principal SEC regulation with which we must concern

ourselves is the one requiring brokers, such as Orvis Bros., pe-

riodically to file a questionnaire—that is what is called—setting

forth certain specified financial information.”

19

982 at 982-3 (Appendix B). And Rules 17a-3, 4 and 5, 17

C.F.R. §§240.17a-3, 4 and 5 are specified in petitioner’s

judgment and commitment order (App. 259a).

In the face of the foregoing and particularly the Trial

Court’s finding that petitioner was convicted of violating

15 U.S.C. §78q(a) and Rules 17a-3, 4 and 5 promulgated

thereunder, rules of which he was concededly ignorant,”

there can be no support for the Government’s claim, ac-

cepted by-the Court of Appeals, that petitioner’s conviction

is based solely on 15 U.S.C. §78ff(a).

With respect to Rules 17a-3 and 4 (record-making), there

was no claim that petitioner made or kept the false records.

With respect to Rule 17a-5 (SEC report), in a record of

3,000 pages of testimony and approximately 160 Govern-

ment exhibits and 70 defense exhibits, there is no evidence

that petitioner ever mentioned the SEC or that the SEC

was mentioned in his pres 2nce.

Anderson was sentenced under Count 1, the conspiracy

count. 18 U.S.C. §371 provides in pertinent part:

“If, however, the offense, the commission of which is the

object of the conspiracy, is a misdemeanor only, the

punishment for such conspiracy shall not exceed the

maximum punishment provided for such misde.

meanor.”

** “We may observe, however, that if this conclusion should be

found erroneous, we would find no persuasive reason for dis-

believing Anderson’s testimony that he had been unaware of the

specific requirements of 17 C.F.R. §240.17a-3, 4, and 5. Indeed,

the verdict of acquittal on the substantive count may have been

based on the jury’s acceptance—at least to the extent of creating

a reasonable doubt—of Anderson’s testimony in this general re-

gard. The charge on this count required a specific finding that

the particular false filing had been within Anderson’s ‘reason-

able contemplation.’” 399 F. Supp. at p. 985, Appendix C.

20

To determine whether “the offense, the commission of

which is the object of the conspiracy, is a misdemeanor

only,” we must look to 18 U.S.C. $1, which provides:

“Notwithstanding any Act of Congress to the con-

trary:

“(1) Any offense punishable by death or imprison-

ment for a term exceeding one year is a felony.

“(2) Any other offense is a misdemeanor.

“(3) Any misdemeanor, the penalty for which does

not exceed imprisonment for a period of six months or

a fine of not more than $500 or both, is a petty offense.”

Because Anderson concededly had no knowledge of Rules

17a-3, 4, and 5 (the rules he was convicted of conspiring to

violate), under 15 U.S.C. §78ff(a) he could not be impris-

oned for a substantive violation of such rules, but could

only be fined an amount not to exceed $10,000 because that

section then provided in pertinent part:

“ ... Shall upon conviction be fined not more than

$10,000, or imprisoned not more than two years, or both,

except that when such person is an exchange, a fine

not exceeding $500,000 may be imposed; but no person

shall be subject to imprisonment under this section for

the violation of any rule or regulation if he proves

that he had no knowledge of such rule or regulation.” **

Under the sentencing provisions of §78ff(a), as to Ander-

son, “the offense, the commission of which is the object of

the conspiracy, is a misdemeanor only,” as defined in 18

U.S.C. $1; and under 18 U.S.C. §371 “the punishment for

7° P.L. 94-29 increased the maximum jail sentence to five years.

21

such conspiracy shall not exceed the maximum punishment

provided for such misdemeanor”—a fine of $10,000.

However, accepting the Government’s contention, the

Trial Court upheld the jail sentence it imposed on the erro-

neous theory that petitioner

“was accused and convicted of conspiring to violate 15

U.S.C. §78q(a) which makes it a crime to make and file

false and inaccurate records and documents * * * The

‘no knowledge’ proviso was not intended to permit one

who knowingly conspires to violate the general stand-

ard of conduct set forth in 15 U.S.C. §78q(a) to claim

protection on the ground that he did not have knowl-

edge of some specific rule or requirement promulgated

thereunder.” 399 F. Supp. at pp. 984-5.

The Court was wrong. §78q(a) provides in substance that

certain entities are required to keep such records and to

make such reports as the SEC may prescribe by its rules

and regulations. Other than to set forth in general terms

the types of documents which the SEC may by its rules and

regulations require to be kept, the section imposes no re-

quirement whatsoever on any of the entities within its

ambit. Furthermore, §78q(a) does not specify any report

that is required to be made, other than those which the

SEC may require by its rules and regulations. Finally,

§78q(a) does not itself make any conduct unlawful, nor

does it impose any penalty whatsoever. Contrary to the

Court’s opinion, it makes nothing “a crime”, nor does it

contain “a general standard of conduct.”

Predictably, in the Court of Appeals the Government

abandoned the theory it had successfully pressed on the

Trial Court, now arguing with equal success that petition-

er’s jail sentence was legal because he had violated, not an

SEC rule, but 15 U.S.C. §$78ff(a) itself by filing a false

report. The argument does not survive a reading of §78

ff(a).

The penalty provision for violation of the 1934 Act is

set forth in 15 U.S.C. §78ff(a), Securities Exchange Act of

1934, Section 32(a). It makes unlawful, and prescribes the

punishment for, violations of the 1934 Act and any rules

or regulations promulgated thereunder the violation of

which is made unlawful or the observance of which is re-

quired under the terms of the Act.

The Court of Appeals misread §78ff(a)*’ in holding that

its “no knowledge” proviso is inapplicable to all false re-

ports. The section deals with two broad classifications of

reports: (1) those reports required to be filed expressly

by the statute itself (“this chapter”); and (2) those re-

ports required to be filed by “any rule or regulation there-

under”. Where the report is expressly required by the stat-

ute itself—Congressional enactment, as opposed to SEC fiat

—the “no knowledge” proviso is concededly inapplicable.

27 “878ff. Penalties

“(a) Any person who willfully violates any provision of this

chapter, or any rule or regulation thereunder the violation of

which is made unlawful or the observance of which is required

under the terms of this chapter, or any person who willfully and

knowingly makes, or causes to be made, any statement in any

application, report, or document required to be filed under this

chapter or any rule or regulation thereunder or any undertaking

contained in a registration statement as provided in subsection

(d) of section 780 of this title, which statement was false or

misleading with respect to any material fact, shall upon convic-

tion be . . . but no person shall be subject to imprisonment

under this section for the violation of any rule or regulation if he

proves that he had no knowledge of such rule or regulation.”

(Prior to P.L. 94-25 amendment.)

23

However, where, as here, the report is required by a rule

or regulation—SEC fiat, as opposed to Congressional en-

actment—the “no knowledge” proviso is applicable.

The legislative history of the 1934 Act contains clear

and frequent references to Congress’ intention that the

“no knowledge” proviso of Section 32(a), 15 U.S.C. $78

ff(a), was its way of ruling out imprisonment for a crime

created by the SEC’s administrative fiat, albeit under Con-

gressional authority to promulgate “rules and regulations

necessary and in the public interest for the protection of

investors”.

Accordingly, a prison sentence may be imposed for the

violation of §78ff(a) arising from the false filing with the

SEC of a report expressly required by “this chapter”. Ex-

amples of reports expressly required by statute (as opposed

to SEC rule or regulation), where only the form of the re-

ports are left to the SEC, are: current and annual reports,

required of certain publicly-held corporations by Section

13(a) of the 1934 Act (15 U.S.C. §78m(a)); and reports

of transactions in the securities of certain publicly-held

corporations by its “insiders”, required by Section 16(a)

of the 1934 Act (15 U.S.C. §78p(a)). See, e.g., United States

v. Colasurdo, 453 F.2d 585 (2d Cir. 1971), cert. denied, 406

U.S. 917 (1972), which involved, inter alia, convictions for

filing false current and annual reports.

On the other hand, where the conviction under 15 U.S.C.

§78ff(a) arises from the filing with the SEC of a report

nowhere referred to in the 1934 Act, but required only by

a rule or regulation promulgated by the SEC pursuant to

authority delegated by Congress, then the “no knowledge”

proviso is applicable, and a prison sentence may not be

24

imposed when the defendant had no knowledge of the ap-

plicable rule or regulation.

In Anderson’s case the report (Form X-17A-5) is re-

quired only by Rule 17a-5, 17 C.F.R. §240.17a-5, and is no-

where mentioned in the statute. Indeed, in pertinent part

the indictment charged a conspiracy to file a false report

with the SEC, “in contravention of Rule 17a-5 (17 C.F.R.

Section 240.17a-5)” (App. 25a). The Court found Ander-

son had no knowledge of the rule (App. 256a-257a). Ac-

cordingly, the prison sentence was illegal.

No reported case has been found authorizing imprison-

ment for a false SEC report required by a rule of which a

defendant was ignorant. In construing a criminal statute

any ambiguity should be resolved in favor of lenity. United

States v. Bass, 404 U.S. 336, 347 (1971).

It is fundamental that where an act of Congress pro-

hibits a generic class of conduct but explicitly delegates to

an administrative agency the power precisely to define the

scope of the prohibition by rule or regulation, the conduct

which is prohibited and thus punishable under the statute

(if made criminal by the statute) is that defined by the rule

or regulation. See, United States v. Mersky, 361 U.S. 431,

437-438 (1960); M. Kraus @ Bros., Inc. v. United States,

327 U.S. 614, 622 (1946); United States v. Pincourt, 167

F.2d 831, 833 (3d Cir. 1948); United States v. Morgan, 118

F. Supp. 621, 696 (S.D.N.Y. 1953) ; Securities and Exchange

Commission v. Otis € Co., 18 F. Supp. 100, 103 (N.D. Ohio

1936), aff'd, 106 F.2d 579 (6th Cir. 1939); United States v.

Hark, 49 F. Supp. 95, 97 (D. Mass. 1943), rev’d on other

grounds, 320 U.S. 531 (1944); and compare United States

v. Pennsylvania Industrial Chemical Corp., 411 U.S. 655

(1973).

25

In Kraus, supra, the Supreme Court reversed the con-

viction of a defendant who was charged with violating the

Emergency Price Control Act of 1942 (50 U.S.C. Appx.

§$$901 et seq.) and the regulations promulgated by the Price

Administration thereunder. In determining the scope of

the statute which punished a “violation of any regulation”

promulgated by the Administrator, Mr. Justice Murphy

wrote as follows (id., 327 U.S., at 622):

“The prohibited conduct must, for criminal purposes,

be set forth with clarity in the regulations and orders

which he [7.e., the Administrator] is authorized by Con-

gress to promulgate under the Act. Congress has

warned the public to look to that source alone to dis-

cover what conduct is likely evasive and hence to create

criminal liability.”

Il.

The indictment failed to allege the essential elements

of an illegal hypothecation, and there was no proof of

one. After a conviction based on the Trial Court’s erro-

neous holding that any hypothecation of customers’ se-

curities violates Rule 8c-1, 17 C.F.R. §240.8c-1, the

Court of Appeals erroneously affirmed petitioner’s con-

viction for a non-existent crime under the conspiracy

count—failure to “correct” a hypothecation that did

not violate the federal securities laws, and in violation

of the Fifth and Sixth Amendments and Rule 7(c), Fed.

R. Crim. Proc.

The indictment charged, inter alia: a substantive viola-

tion of the SEC’s anti-hypothecation Rule 8c-1, 17 C.F.R.

§240.8¢e-1, promulgated pursuant to authority delegated by

Section 8(c) of the Securities Exchange Act of 1934, 15

26

U.S.C. §78h(c) ;° a substantive violation of the reporting

Rule 17a-5, 17 C.F.R. §240.17a-5, in that the illegal hypothe-

cation was falsely claimed to have been corrected; and a

conspiracy to violate Rule 8c-1 and Rule 17a-5.

The indictment tracked part of the language of Rule

8e-1(a)(3), but erroneously omitted the crucial words,

namely, that the lien on the pledged securities was “for a

sum which exceeds the aggregate indebtedness of all cus-

tomers in respect of securities carried for their accounts.”

No other language of the Rule 8c-1 was mentioned. Pre-

trial, trial and post-trial motions attacking the insufficiency

of the indictment and evidence in this regard were uni-

formly denied.

Notwithstanding the Government’s contention that the

illegal hypotheeation was “the most successful way” peti-

tioner “agreed to hide the red and bleak financial picture of

Orvis Bros. from the SEC” *” and that it was “the crux

of the questionnaire” [Form X-17A-5] . . . the biggest

single item” (1096), the Government’s proof showed Ander-

son did not know of the allegedly illegal hypothecation

before Form X-17A-5 was filed by H&S, and the Trial

Court found that hypothecation was “not within the con-

templation . . . of the conspiracy” (417, 2310-11).

As submitted to the jury, the theory of the prosecution

was that this illegal but inadvertent hypothecation, which

was unknown to Anderson, was falsely claimed to have

been corrected. That is how “since corrected” was con-

strued—namely, that all hypothecation of customers’ se-

28 Redesignated a subsection (b) by P.L. 94-29, effective June

4, 1975.

2° Government’s Opening, 4/3/75, Transcript meh 15-17.

27

curities is “stealing” (2311), regardless of all customers’

aggregate indebtedness; and that if any customers’ free se-

curities remained as collateral for Orvis’ bank loans, re-

gardless of the sum of the aggregate indebtedness of all

customers, then the amount of the erroneous pledge had

not been corrected.

The Government was not required to prove that the

amount of customers’ securities pledged in error had not

been corrected when Form X-17A-5 was filed, in that the

lien still exceeded the aggregate indebtedness of all cus-

tomers. And Anderson was not permitted to show that the

amount of customers’ securities pledged in error had in fact

been corrected when Form X-17A-5 was filed, because the

lien did not exceed the aggregate indebtedness of all cus-

tomers.”

*° Available data demonstrates that the practice of pledging

fully paid for securities is common:

Customers’ Fuuiy Pap ror Securities

PLEDGED BY BroKERS AND BANKS

Customers’ Fully Paid

Firm Securities Pledged

Merrill Lynch $ 3,482,986

Bache —_ 24,896,949

duPont, Glore Forgan _ _..._-—«419, 850,736

Goodbody _.. 18,957,886

Hornblower 10,298,936

Paine, Webber 1,909,741

Walston - 5,049,415

E. F. Hutton , 2,519,269

Hayden, Stone 173,668

Dean Witter 303,431

Total $87,443,017

See, Baruch, H., Watt Streer—Securiry Risk, p. 36, Acropolis

Books, Ltd., Wash., D.C. (1971). . ”

* Indeed, the Government’s evidence established that the total

of the liens of pledgees on customers’ securities did not exceed

28

Indeed, an SEC “expert” erroneously testified for the

Government that: “It is rather a rule not to pledge cus-

tomers’ securities with banks. It is a rule of the New York

Stock Exchange and a rule of the Securities and Exchange

Commission” (1934), referring specifically to the SEC’s

Rule 8e-1 (1937). Anderson was barred from cross-examin-

ing on this subject on the ground that it was a previously-

decided question of law (1937-9).

Section 8(c) of the 1934 Act, 15 U.S.C. §78h(c),** makes

it unlawful, inter alia, for any broker or dealer:

“In contravention of such rules and regulations as the

Commission shall prescribe for the protection of in-

vestors to hypothecate or arrange for the hypotheca-

tion of any securities carried for the account of any

customer under circumstances * * * (3) that will per-

mit such securities to be hypothecated, or subjected to

any lien or claim of the pledgee, for a sum in excess

of the aggregate indebtedness of such customers in

respect of such securities.” (Emphasis supplied.)

Pursuant to the authority delegated by the statute, the

SEC promulgated Rule 8e-1 (17 C.F.R. §240.8¢-1) which

defines the conduct made unlawful. The pertinent provi-

sions of Rule 8e-1 are as follows:

the aggregate indebtedness of all of the customers in respect of

securities carried for their accounts. Gov. Ex. 74 and Ex. BP

(Form X-17A-5) demonstrate that the total amount of Orvis’ bor-

rowings ($18,521,300.00) was less than the aggregate indebtedness

of all of its customers on securities carried for their accounts

($21,398,719.14).

In response to a request for particulars as to “the aggregate

indebtedness of all of Orvis Brothers & Co. customers in respect

of securities carried for their accounts at the time of the alleged

hypothecation,” the Government stated that the request was “irrele-

vant and immaterial”, and the particulars were denied.

32 Redesignated as subsection (b) by P.L. 94-29.

29

“(a) General Provisions—No member of a national

securities exchange, and no broker or dealer who trans-

acts a business in securities through the medium of any

such member shall, directly or indirectly, hypothecate

or arrange for or permit the continued hypothecation

of any securities carried for the account of any cus-

tomer under circumstances—

“(3) that will permit securities carried for the ac-

count of customers to be hypothecated, or subjected to

any lien or liens or claim or claims of the pledgee or

pledgees, for a sum which exceeds the aggregate in-

debtedness of all customers in respect of securities car-

ried for their accounts;” (Emphasis supplied.)

It is plain that the statute (15 U.S.C. §78h) by itself

prohibits no specific conduct or act, but makes unlawful

only the “contravention of such rules and regulations as

the Commission shall prescribe.” Although Section 8(c)

of the 1934 Act, 15 U.S.C. §78h(c),** arguably would permit

the enactment of an SEC rule proscribing the hypotheca-

tion of a particular customer’s securities for a sum greater

than the aggregate indebtedness of that customer on those

securities, the existing SEC rule—which defines the only

conduct made unlawful by Section 8(c) of the Act—does

not do so. The SEC rule only limits the total amount which

can be borrowed on customers’ securities in relation to the

total indebtedness of all customers of a member firm on all

of their securities. It is only when the hypothecation is

“for a sum which exceeds the aggregate indebtedness of all

customers in respect of securities carried for their accounts”

that there is a contravention of the rule prescribed by the

58 Now subsection (b).

30

Commission and a violation of the statute. In this regard,

the rule whose violation is made a crime permits hypotheca-

tion to a far greater extent than its enabling 478h. The

Court of Appeals erred in a crucial respect in reading the

relevant part of Rule 8c-1(a)(3) when it said: “Rule 8c-1,

17 C.F.R. §240.8¢c-1, prohibits the hypothecation of securi-

ties, in language similar to that of 15 U.S.C. §78h(c).”

In commenting on present Rule 8c-1 and certain proposed

changes to it, Ezra Weiss, counsel to the New York

Regionai Office of the Securities and Exchange Commission

wrote in RecistraTION AND ReGuLaTion OF BROKERS AND

Dea.ers, p. 95, n. 5 (BNA, 1965):

“Paragraph (a)(3) of the rule. The Commission has

under consideration the recommendation of the Special

Study Report for rules requiring a ‘reasonable relation-

ship’ between the amount of each customer’s securities

that can be hypothecated or lent by a broker-dealer and

the amount of the particular customer’s indebtedness.

(Citations omitted.) The present rule is a restriction

on the overall amount which can be borrowed on cus-

tomers’ securities in relation to aggregate indebtedness

of all customers.” (Emphasis supplied.)

The proposed rule change was never implemented and

another proposed amendment, which would require a cus-

tomer’s specific written authorization given for fair and

adequate consideration for the pledge of his fully paid se-

curities, has been pending since 1961. SEC Release 34-9388,

Nov. 8, 1971, 2 CCH Fed. See. L. Rep. 22,422 at pp. 16,306-

9. See proposed Rule 8c-1(a)(4) and (5) at p. 16,307."

%* Notwithstanding the extensive amendments and revisions to

the federal securities laws effected by P.L. 94-29, effective June

4, 1975, no such change in Rule 8a-1 has been promulgated.

31

See also, II Loss, L., Securrrms Reeutation (2d Ed.

1961), in which Professor Loss distinguishes the New

York provision dealing with hypothecation of customers’

securities (former Penal Law $956, now G. eral Business

Law §339-e) as being in some respects more strict than

§8(c) of the Exchange Act, and points out that unlike the

New York statute the federal regulation does not prohibit

‘the hypothecation of particular customers’ fully paid for

securities :

“ «© * Whereas Clause (3) of §8(c) speaks in terms

of the aggregate indebtedness of all customers and

makes the customer’s consent irrelevant, the compar-

able New York provision prohibits the hypothecation of

a particular customer’s securities for more than the

amount of the broker’s lien on those particular securi-

ties unless the customer consents” (at p. 1200). (Em-

phasis as in original, footnote omitted.)

And V Loss (1969 Supp. to Vol. IT), substituting a new

note 41 to p. 1200 of Vol. II, states that “under 48(c)(3),

theoretically, a broker-dealer owed $100,000 in margin ac-

counts by all customers could hypothecate one customer’s

securities for that sum even though that one customer owed

a much lesser amount” (at p. 3204).

Aside from the plain language of the statute which pun-

ishes only the contravention of the Commission’s rules and

regulations, Section 23(a) of the 1934 Act, 15 U.S.C. §78w

(a), provides:

“The Commission * * * shall * * * have power to make

such rules and regulations as may be necessary for the

execution of the functions vested in them by this chap-

32

ter * * *. No provision of this chapter imposing any

liability shall apply to any act done * * * in good faith

in conformity with any rule or regulation of the Com-

mission * * * .”

Thus, the hypothecation of customers’ securities—even if

fully paid for—for a total amount less than the aggregate

indebtedness of all customers on all of their securities is

“in conformity with” Rule 8c-1 and cannot be violative of

Section 8 of the 1934 Act, 15 U.S.C. §78h.

In a display of confession and avoidance, on appeal the

Government conceded its error (Gov. Br. p. 70, footnote)

but invoked the commingling provision, Rule 8c-1(a) (1), al-

though it was not even charged in the indictment. The al-

legation of commingling does not appear in any form, nor

by any fair construction can it be found within the terms

of the indictment.** The matter was never even raised at

trial; there was no proof that the securities of any named

customer were commingled; and Anderson had no oppor-

tunity to defend against such charge.

This violates Anderson’s Fifth Amendment right to have

the Grand Jury consider the indictment, his Fifth Amend-

ment right under the Due Process Clause, his Sixth Amend-

ment right “to be informed of the nature and cause of the

accusation”, and the provisions of Rule 7(c), Fed. R. Crim.

Proc., enunciated in Ex Parte Bain, 121 U.S. 1 (1887), Rus-

sell v. United States, 369 U.S. 749 (1962), and Stirone v.

85 Indeed, when Anderson sought a bill of particulars with re-

spect to hypothecation, the Government refused any particulars

which would name any customer, the value of his hypothecated

securities, and the amount of the lien placed thereon, success-

fully arguing its lack of materiality (“completely irrelevant” and

“bereft of materiality”).

33

United States, 361 U.S. 212 (1960). See also United States

v. Panzavecchia, 421 F.2d 440 (5th Cir. 1970), cert. denied,

v. Panzavecchia, 421 F.2d 440 (5th Cir. 1970); Gaither v.

United States, 413 F.2d 1061 (D.C. Cir. 1969); Van Liew

v. United States, 321 F.2d 664 (5th Cir. 1963).

The teaching of Russell v. United States, 369 U.S. 749,

765 (1962) is that an indictment may not merely track the

language of the statute, but it must descend to particulars.

“* * * it is not sufficient to set forth the offence in

the words of the statute, unless those words of them-

selves fully, directly, and expressly, without any un-

certai> ‘y or ambiguity, set forth all the elements neces-

sary to constitute the offence intended to be punished;

. . . Uncoubtedly the language of the statute may be

used in the general description of an offence, but it

must be accompanied with such a statement of the

facts and circumstances as will inform the accused of

the specific offence, coming under the general descrip-

tion, with which he is charged.”

Here the indictment only set out in part the language of

subdivision (a)(3) of Rule 8c-l—which it now disclaims.

A fortiori, under Russell it cannot rely on its mere recital

in the indictment of the statutory and rule references, 15

U.S.C. §78h and 17 C.F.R. 240.8¢-1, to contend after trial

that it proved an unspecified commingling under another

subdivision of the rule, or some other violation.

In sum, there was no proof that Rule 8c-1(a)(3) was

violated, and Anderson was barred from showing it was

not. Therefore, there was no proof by the Government

that the customers’ securities erroneously pledged had not

been corrected by October 16, 1969. Moreover, commingling

34

violations, if any, may not support a conviction under

Russell. Finally, the hypothecation subdivision in issue,

Rule 8e-1(a) (3), permits far more extensive hypothecation

than its enabling statute.

The Court of Appeals permitted an indictment that did

not inform petitioner of the specific charge to be amended

by prosecutorial and judicial interpretation. Since there

was nothing to “correct” in the absence of an illegal

hypothecation, the Court of Appeals erroneously affirmed

a conviction for a non-criminal act under the conspiracy

eount for failure to “correct” a hypothecation that did not

violate the federal securities laws.

The verdict was a general one of guilty, without special

findings as to the acts on which it rests. Since it is not

possible to identify the specification under which Ander-

son was convicted, the conviction must be set aside if any

of the specifications submitted to the Jury was insufficient.

Cramer v. United States, 325 U.S. 1, 36, n. 45 (1945). The

hypothecation specification (“since corrected”) being le-

gally insufficient, the conviction must be reversed.

35

III.

The Fifth Amendment’s Due Process Clause and

Grand Jury Clause were violated by the Government’s

extensive exploitation in summation of the unexplained

almost five-year pre-indictment delay and its wilful fail-

ure to call before the Grand Jury an attorney whose tes-

timony was neither curiuiative nor privileged and who

directly contradicted on a crucial issue the one witness

without whom it concededly had no case before the

Grand Jury and at trial.

The lengthy pre-indictment delay deprived Anderson of

his Fifth Amendment right to Due Process. According to

the indictment, filed on Sept. 10, 1974, the conspiracy began

on Sept. 1, 1968. The overt acts were concentrated in the

Spring and Summer of 1969 (outside the period of limita-

tions). Although the Oct. 16, 1969 filing, the only overt

act submitted to the jury, satisfied the statute of limita-

tions by one month, the indictment should be dismissed

because of the inexcusable and prejudicial pre-indictment

delay.

There was simply no reason for the lengthy delay. By

the Summer of 1970 Orvis, to the SEC’s knowledge, was

in liquidation and had sought aid from the NYSE speciai

fund. Anderson testified before the NYSE on Oct. 23, 1970

and before the SEC on Sept. 22, 1971 and Oct. 1, 1971.

Most SEC interrogations of witnesses and prospective de-

fendants were completed in 1971, and the remainder were

completed by mid-1972. Even Robert Vesco was interro-

gated on April 18, 1972 (App. 190a-19la). The case was

referred to the Justice Department about 114 to 2 years

36

before the grand jury testimony began in mid-July 1974

(623-5).

The Government’s failure to call Peter Schmidt, Esq.

as a witness before the Grand Jury violated the Due

Process Clause of the Fifth Amendment as well as Ander-

son’s Fifth Amendment right to indictment by a Grand

Jury. On a crucial issue Mr. Schmidt’s testimony directly

contradicted Kilduff, the Government witness without

whom there concededly would have been no prosecution

case,** and it completely exculpated Anderson.” His testi-

86 According to the prosecution :

“ Mr. Kilduff effectively made this case. Without his

testimony there would have been no indictment and there

certainly would not have been any case here at all.” (Sentenc-

ing minutes, June 16, 1975, p. 29.)

87 It is apparent from Kilduff’s interrogation before the Grand

Jury on July 18, 1974 (Gov. Ex. 3501 id., p. 40) that the Assist-

ant had heard of Kilduff’s statements to Peter Schmidt (App.

193a-194a) :

“Q. Did you tell Peter Schmidt on that day, either dur-

ing the course of your walk back to his office, or during the

course of the luncheon, that you, in fact, had been responsible

for the falsifications of the firm’s books and records but that

none of the other members of the Executive Committee were

aware of what you had done and that you had done that out

of a desire to save the firm? A. No. I knew, for instance,

who else knew and was involved and whatnot in the months

that we had gone through various transactions.

“T was fully aware that other members of the Executive

Committee were fully aware of the various things that were

spoke about today, so there would be no logic in my saying

that to Peter Schmidt.

“But, no, I didn’t tell Tom Shaw and/or Peter Schmidt

that I was solely responsible for it. I might well have—I might

well have spoken of the fact that we did this, or that why did

I do that, or things of that nature. But in no way did I try

to eliminate other members of the Executive Committee from

the knowledge that they had.”

37

mony was not merely cumulative or an alternative to per-

missible hearsay already before the Grand Jury as in

United States v. Koska, 443 F.2d 1167, 1169 (2d Cir.) (per

curiam), cert. den., 404 U.S. 852 (1971), upon which the

Court of Appeals relied in affirming.

Moreover, in affirming, the Court of Appeals stated that

Mr. Schmidt’s testimony “would have been, to a large ex-

tent, privileged.” On the contrary, Kilduff, Mr. Schmidt’s

client, had waived all privilege when he testified in the

Grand Jury on the very subject matter of the testimony

the Government should have elicited from Mr. Schmidt be-

fore the Grand Jury. In addition, not knowing that Kilduff

had waived the privilege, Mr. Schmidt offered to testify

provided Kilduff waived the privilege (2624-5). The As-

sistant who presented the case to the Grand Jury did not

inform Mr. Schmidt that Kilduff had waived the privilege

and never called Mr. Schmidt as a witness.

The prosecutor should disclose to the Grand Jury any

evidence which he knows will tend to negate guilt. ABA

Standards Relating To The Prosecution Function And The

Defense Function: The Prosecution Function, Section

3.6(b), at p. 88. (Mr. Schmidt’s testimony went far beyond

“tend[ing] to negate guilt”—it exonerated Anderson.) The

failure to do so is a Fifth Amendment violation of the right

to indictment by a Grand Jury. With respect to the Due

Process Clause, it is analogous to a violation under Brady

v. Maryland, 373 U.S. 83 (1963). See also, Johnson v.

Superior Court, 124 Cal. Rptr. 32, 539 P.2d 792 (Cal. Sup.

Ct. 1975) (concurring opinion at 539 P.2d, pp. 796-807).

The teaching of United States v. Calandra, 414 U.S. 338

(1974) is that: A federal prosecution for serious crimes

can only be instituted by a grand jury. The grand jury’s

responsibilities include the protection against unfounded

criminal prosecutions. The scope of its powers reflects its

special role in insuring fair and effective law enforcement,

and it must determine whether criminal proceedings should

be instituted against any person. When the grand jury is

performing its investigatory function, society’s interest is

best served by a thorough and extensive investigation. A

grand jury investigation is not fully carried out until every

available clue has been run down and all witnesses ex-

amined in every proper way to find if a crime has been

committed (at pp. 343-4).

If the foregoing is to be given meaning, an indictment

based on the testimony of one co-conspirator witness may

not stand, where there was a wilful failure to inform the

grand jury of exculpatory evidence going to the credibility

of that one witness on the essence of the case.

Extensive prejudice occurred at trial when in summa-

tion the Government unabashedly exploited its failure

to call Mr. Schmidt before the Grand Jury and its unex-

plained 4 year, 11 month delay in prosecuting. The prose-

cution used the delay to dull the immediacy of Mr. Schmidt’s

testimony. Although aware of the exculpatory testimony

he would give (fn. 37 infra), deliberately and for its own

advantage (avoiding an attack on Kilduff’s credibility, thus

assuring an indictment and conviction), the prosecution

failed to call him as a grand jury witness in its long-delayed

investigation, thus combining delay with the pursuit of a

prosecutorial advantage. This precluded an earlier writ-

ten record of his sworn testimony favorable to Anderson,

enabling the prosecution to dispute its weight in summa-

39

tion by contrasting it with Kilduff’s much earlier-recorded

testimony (NYSE in April 1971 and the grand jury in July,

1974), and concluding:

“Who really knows exactly what was said in that ery-

ing sob scene in Schmidt’s office five years ago or,

excuse me, not five, three** years ago? Who can really

Say exactly what was said?” (2985).*

Relying heavily on the long unjustifiable delay that was

solely the Government’s responsibility, in summation the

prosecutor exploited Anderson’s prejudice by denigrating

the defense for “nit-picking” when it cross-examined pros-

** Actually, the event occurred on March 18, 1971—fo ears

before Mr. Schmidt’s testimony. =

** Kilduff testified that Mr. Schmidt was an honorable man and

that he had no reason to doubt his integrity or veracity (616).

The testimony of Mr. Schmidt was:

“He [Kilduff] said well, I will tell the truth but they won’t

believe me. He said, you heard what that guy said. They

won't believe me if I tell the truth because I did it and I

did it alone and he said, I want you to tell them that, I want

you to tell Fergus and Bill that I did it, I did it because

I tried to save the firm, I was sure that if we had some more

time our net capital problems would have been solved, he

said—he said they were too dumb to understand the net,

capital rules, that only he understood what they meant and

how they worked, and that he had tried to phony up the ree-

ords that were supplied to the Stock Exchange in order to

save this firm and save his job, and that they didn’t know

about this and they didn’t participate in it.

“That is the substance of what he said” (2460-1).

aan of Mr. Schmidt by the prosecution is quoted

in :

“Q. Mr. Schmidt, I take it during this entire conversati

with Mr. Kilduff on this last day, the lunch and during this

entire period that Mr. Kilduff was very upset and very emo-

tional, is that a fair characterization? A. He was upset

embarrassed and emotional, I would say, yes” (2464).

40

ecution witnesses as to their memories of crucial dates

and events “five, six, seven years ago” (2948, 2981-2).

About Zalduondo, he said: “He is getting old. He doesn’t

remember things the way he might have used to remember

them” (2995). About Mezzetta, who was precise on direct,

the Court observed in curtailing cross-examination: “The

man doesn’t remember anything” (1876-8).

And there was Vesco who in 1972 was amenable to

subpoena and testified before the SEC in its investigation

of this case. Because of the delay, not only was his testi-

mony unavailable, but the prosecution improperly and over

objection repeatedly exploited his very name to prejudice

Anderson (Opening, 4/3/75, Tr. meh 20-1; 127-8, 135-6, 141,

168, 230, 233, 281-5, 298-305, 313, 344, 549, 836, 1540-3, 1557-

60, 1688-9, 1699-1701, 1760-4, 1775-7, 1818-19, 1838-40, 2670-

2, 2674-5), e.g., “Carl Anderson was the major contact with

Robert Vesco . . . It was through Mr. Anderson’s efforts

that Robert Vesco comes into O-vis Bros. ... Carl Ander-

son goes out to California with Robert Vesco ...” (Tr.

meh 20-1); “Bill Anderson, who was very close with one

of the limited partners, Bob Vesco” (549); inserting the

name “Robert Vesco” where only “RV” appeared in a docu-

ment read to the jury (1557-60).

Throughout his direct and cross-examinations Kilduff

relied on a simple acronym to list those present at execu-

tive committee meetings when he claims improprieties were

diseussed—SAVE, for Sloan, Anderson, Villani and

Eucker. When asked if others were present, he invariably

said, “There could have been,” thus precluding any direct

attack on his credibility by Zalduondo, Mazzetta, and Musil

—all of whom denied hearing what Kilduff claims to have

said at any of the meetings they attended.

41

About Anderson’s inability to corroborate his where-

abouts on specific days in 1969, the prosecutor said:

“You can attack Thomas Kilduff’s recollection as you

want. Mr. Anderson can take the witness stand until

he is blue in the face and say on September 16 in

Chicago, August 2, Denver, November 5, Kansas. Who

says? Carl Anderson says, that’s all. No one else says

~ so. Carl Anderson flips through his diary and says

here I was in Cincinnati. Here I was in New York.

Who says so except Carl Anderson” (2983-4). (Empha-

sis added.)

And that is just the point. After so many years, who

but the defendant is available? Should he be expected to

span a continent and over half a decade to produce wit-

nesses? The delay was purposeful; the substantial preju-

dice was exploited at trial by the prosecution. Anderson

was denied his Fifth Amendment right to Due Process.

The indictment should be dismissed. United States v.

Marion, 404 U.S. 307 (1971). In Marion “the Government

concede[d] that the Due Process Clause of the Fifth Amend-

ment would require dismissal of the indictment if it were

shown at trial that the pre-indictment delay in [that] case

caused substantial prejudice to appellees’ rights to a fair

trial and that the delay was an intentional device to gain

tactical advantage over the accused.” Supra, at p. 324.

Whether the delay was “an intentional device” necessitates

inquiry into the state of the prosecution’s collective mind.

“The state of a man’s mind,” said Bowen, L.J. in Edginton

v. Fitemaurice (1885), 29 Ch. D. 459, 483, “is as much a

fact as the state of his digestion.” The intent may be seen

in the failure to call Mr. Schmidt before the grand jury

and in what the prosecution did at trial to exploit the delay.

42

However, even if the Court is persuaded of the Govern-

ment’s bona fides when it seeks to explain the delay, dis-

missal of the indictment is still required. In Marion the

Court left open the “delicate judgment” as to “when and

in what circumstances actual prejudice resulting from pre-

accusation delays requires dismissal.” Supra, at pp. 324-5.

Where, as here, most of the events in issue are over-six

years old, and the indictment was unjustifiably delayed

until one month before the statute of limitations ran on

the only overt act presented to the jury, and the prosecu-

tion forcefully exploited the delay in summation (faulty

memories and Anderson’s failure to produce additional wit-

nesses from distant places), no “delicate judgment” is re-

quired. The violation of Due Process is clear.

IV.

There was no proof that petitioner conspired to file

any false report with the SEC.

There was a total failure of proof that Anderson con-

spired to file any report with the SEC. It is conceded he

had no knowledge of Rule 17a-5, and there was no testi-

mony that he or anyone in his presence even mentioned the

SEC or filing a report with the SEC.

It is fundamental that a conviction for conspiracy under

18 U.S.C. §371 cannot be sustained unless there is proof

of an agreement to commit an offense against the United

States. Ingram v. United States, 360 U.S. 672, 677-8 (1959),

citing Pereira v. United States, 347 U.S. 1 (1954). An

essential ingredient of the proof is knowledge of that fed-

eral nexus, without which knowledge the intent cannot exist.

Ingram v. United States, supra, at pp. 678, 680, citing Direct

43

Sales Co. v. United States, 319 U.S. 703 (1943). Further-

more, to establish the intent, the evidence of knowledge

must be clear, not equivocal. This is because charges of

conspiracy are not to be made out by piling inference upon

inference, fashioning a diagnet to draw in all substantive

crimes. Ingram v. United States, supra, at p. 680; Direct

Sales Co. v. United States, swpra, at p. 711, citing United

States v. Falcone, 311 U.S. 205 (1940).

CONCLUSION

For the foregoing reasons, petitioner requests this Court

to grant the petition for a writ of certiorari.

Respectfully submitted,

Jerome J. Lonpin

10 East 40th Street

New York, N. Y. 10016

(212) 889-3600

Coumsel for Petitioner

Dated, New York, N. Y.

May 6, 1976

APPENDICES

la

APPENDIX A

Opinion of United States Court of Appeals

UNITED STATES COURT OF APPEALS

For tHE Seconp Crecuitr

>

Nos. 309, 313, 315—September Term, 1975.

(Argued October 22, 1975 Decided March 8, 1976.)

Docket Nos. 75-1246, 75-1280, 75-1303

—+-o->—

Unirep States oF AMERICA,

Appellee,

v.

Donatp Evcxer, Cart W. ANDERSON

and Frercus M. Swoan, JR,

Defendants-A ppellants.

Before:

Moore, Fernperc and Van GRAAFEILAND,

Circuit Judges.

ewe

— Se

Appeal from judgments of conviction for securities law

violations entered in the United States District Court for

the Southern District of New York against appellant

Anderson following a jury trial before Whitman Knapp,

District Judge, and appellants Sloan and Eucker follow-

ing pleas of guilty before Whitman Knapp, District Judge.

Affirmed as to appellants Anderson and Sloan and re-

manded as to appellant Eucker.

+o

Jerome J. Lonpin, New York, N.Y. (Carro,

Spanbock, Londin, Rodman & Fass, New

2a

York, N.Y., Kenneth A. Lapatine, of

Counsel), for Appellant Anderson.

MicuarL Rosen, New York, N. Y. (Saxe, Bacon

& Bolan, P.C., New York, N. Y.; Roy M.

Cohn, New York, N. Y., of Counsel), for

Appellant Sloan.

Srantey S. Arkin, New York, N.Y. (Stanley

S. Arkin, P.C., New York, N. Y., Mark S.

Arisohn, of Counsel), for Appellant Eucker.

Auprey Strauss, Assistant U.S. Attorney (Paul

J. Curran, U.S. Attorney for the Southern

District of New York, Robert J. Costello,

Assistant U.S. Attorney, John C. Sabetta,

Assistant U.S. Attorney, of Counsel), for

Appellee.

a al

Van Graarertanxn, Circuit Judge:

In June 1970, Orvis Brothers, a Wall Street brokerage

firm, closed its doors, leaving debts in excess of four mil-

lion dollars. On September 10, 1974, appellants, officers

of that company, were indicted in the Southern District of

New York, charged in nine counts with conspiracy and

substantive violations of the federal securities law. Only

Anderson went to trial,’ and he was convicted on the con-

spiracy count alone. Seven counts were dismissed by the

trial judge, and the jury acquitted Anderson on the eighth.

Sloan pleaded guilty to the conspiracy count, and Eucker

pleaded guilty to a substantive count charging illegal

hypothecation of customers’ securities, reserving his right

1 In addition to appellants, two other defendants were indicted. One

pleaded guilty to conspiracy and did not appeal. The other was tried

with Anderson and was acquitted.

=

3a

to appeal from the District Court’s refusal to dismiss this

count for failure to allege a crime.

Anderson appeals his conviction, asserting a number of

substantive and procedural errors. Sloan appeals from

District Judge Knapp’s denial of his motion to withdraw

his guilty plea, which motion was predicated upon the

prosecutor’s alleged failure to “go to bat” for Sloan with

the sentencing judge as had been promised. Eucker ap-

peals from the judgment based on his plea of guilty, in

accordance with his reservation of the right to do so.

The Background for the Charges

Appellants were partners in Orvis Brothers, which had

been in the securities business for many years. Sloan was

the managing partner; Anderson was chairman of the

Executive Committee, and Eucker, a member of the Execu-

tive Committee, was in charge of operations. In early

1969, Orvis was experiencing difficulty in maintaining the

20:1 capital ratio required by the rules of the New York

Stock Exchange,’ and its Executive Committee cast about

for means of increasing its apparent capital. According

to the Government’s proof, some members cast too widely.*

The Orvis account most susceptible to manipulation was

that of the Clinton Oil Company of Wichita, Kansas, whose

president, Realto Clinton, was a close friend of appellant

Sloan. Orvis was a broker for the Clinton Company in

the sale of oil and gas exploration investment units, for

which it received a six percent commission payable at the

time the fourth and final installment of the purchase price

2 Liabilities are not permitted to exceed twenty times the amount of

capital. N.Y.8S.E. Rule 325.

3 There is substantial dispute as to many of the facts recited herein;

but for purposes of this appeal, we must construe the proof most

favorably to the Government. McCarthy v. United States, 473 F.2d

300, 302 (2d Cir. 1972).

4a

of each unit was paid. Early in 1969, Orvis, at the sug-

gestion of Sloan and with the knowledge of Anderson, be-

gan treating projected commissions as current capital. A

fictitious customer account was created and $797,100 in

projected but unearned commissions was entered in this

account. To balance this unsecured debit, some stock of

Realto Clinton in the possession of Orvis was wrongfully

credited to the same account. Anderson learned of this

transfer in September 1969.

A second fictitious addition to capital was created out

of the sale of Clinton units by failing to record the forty

percent sales commission payable to Orvis’ employees. The

decision not to deduct these commissions was known to

Anderson and the other members of the Executive Com-

mittee.

In 1969, Clinton Oil Company sent Sloan 4,344 shares of

Clinton stock with directions that it be sold to partners

of Orvis, and Realto Clinton sent 5,000 shares for sale to

a third party. These shares were posted in the Orvis’

books as if they were a gift rather than a consignment,

and Anderson learned of this posting in August 1969.

In the same month, it was discovered that the firm’s

own trading account had sustained an unexpected loss of

$500,000, and Sloan called his friend Clinton to seek addi-

tional capital. Clinton agreed to, and did, forward $500,000.

However, this was in payment of commissions for sale of

Clinton oil and gas units and not as a loan to Sloan. De-

spite this fact, the money was placed in the firm’s trading

account, and no part of it was used to offset the $797,100

carried on the books as earned commissions. Although

Anderson played no part in this transaction, he was aware

of it.

In 1969, Orvis owned eighty thousand shares of Clinton

Oil Company stock which could be evaluated at only sev-

5a

enty percent of market value for capital ratio purposes

under the rules of the New York Stock Exchange. In

August, Sloan told his partners that this stock had been

sold to the Clinton Oil Pension Fund and recorded the sale

in the partnership books at one hundred percent o* value.

Although Clinton’s general counsel informed Orvis by tele-

gram that this “sale” had not occurred, and ne payment

was ever made, it remained on the books of Orvis as an

obstensibly valid transaction.

At the time that this purported sale was taking place,

general counsel for Clinton was in New York, attempting

to ascertain the financial situation at Orvis. Anderson ad-

vised him that “there is no problem with the company”

and that the capital ratio was “between 12 and 15 at that

time, that the auditing firm was there at the moment and

everything was all right.” Clinton’s counsel was not in-

formed of the “sale” of Clinton stock and did not learn

about it until his return to Kansas, at which time he

promptly disaffirmed it. On a second visit made in Decem-

ber 1969, Clinton’s counsel was again assured by Anderson

and Sloan that there was no cause for concern over the

financial condition of Orvis.

Machinations at Orvis were not confined to the Clinton

account. In the fall of 1968, Anderson attempted to nego-

tiate the sale of nineteen thousand shares of unregistered

International Controls Company stock from customers of

Orvis to a mutual fund called the Fund of Letters. After

Orvis had purchased the stock from its customers for

almost $500,000, the Fund of Letters refused to accept it

because International Controls Company would not register

the stock. Despite this refusal, the cost of the stock was

not charged against capital but was carried for fourteen

months on the books of Orvis as a customer cash account

with a settlement date of five business days.

6a

Also, during 1968 and 1969, Orvis began to use fully

paid for customers’ securities as collateral for partnership

bank loans. When Haskins & Sells, the company auditor,

was securing information required for Orvis’ October 1969

Form X-17A-5 report of financial condition to the New

York Stock Exchange and the Securities and Exchange

Commission (SEC), approximately six million dollars in

customers’ securities were so hypothecated. Haskins & Sells

was advised, however, that this was being corrected, and

so stated in its report. The advice and the report were both

erroneous. By May 1970, the hypothecation of fully paid

for customers’ securities exceeded six and one-half million

dollars. The Government introduced evidence that Ander-

son, by that time, was fully aware of what was being done

but urged that this knowledge be kept from the other mem-

bers of the Executive Committee.

Information concerning all of the manipulations outlined

herein was kept from Haskins & Sells, although the X-17A-5

report was reviewed in detail at a meeting with representa-

tives of the auditor which was attended by appellants. As

a result, the report which was filed indicated that Orvis

was not in any financial difficulty, and its capital ratio was

satisfactory.

The Statutes Involved*

15 U.S.C. § 78q(a) provides in part that every registered

broker shall keep “such accounts, correspondence, memo-

randa, papers, books, and other records, and make such

reports, as the [Securities and Exchange] Commission by

its rules and regulations may prescribe as necessary or

appropriate in the public interest or for the protection of

investors.”

4 The securities statutes referred to have since been renumbered. See

Pub. L. No. 94-29.

7a

15 U.S.C. § 78ff(a) provides in substance that anyone

“who willfully violates [§ 78q(a)] or any rule or regulation

thereunder the violation of which is made unlawful or the

observance of which is required,” or “who willfully and

knowingly makes, or causes to be made, any statement in

any application, report, or document required to be filed

under this chapter or any rule or regulation thereunder

. which statement was false or misleading with respect

to any material fact, shall upon conviction be fined. . .,

or imprisoned ..., or both.” This section further provides,

however, that no person shall be subject to imprisonment

thereunder “for the violation of any rule or regulation if

he proves that he had no knowledge of such rule or regula-

tion.”

15 U.S.C. § 78h(c) makes it unlawful for a broker, in

contravention of the rules and regulations of the SEC, to

hypothecate any customer’s securities “under circumstances

(1) that will permit the commingling of his securities with-

out his written consent with the securities of any other

customer, (2) that will permit such securities to be com-

mingled with the securities of any person other than a bona

fide customer, or (3) that will permit such securities to be

hypothecated, or subjected to any lien or claim of the

pledgee, for a sum in excess of the aggregate indebtedness

of such customers in respect of such securities.”

18 U.S.C. § 371 prohibits conspiracies to commit any

offense against the United States. It provides for a fine,

imprisonment or both, except where the offense, the com-

mission of which is the object of the conspiracy, is a mis-

demeanor only, in which event the punishment for the

conspiracy cannot exceed the maximum punishment pro-

vided for such misdemeanor.

The SEC has elaborated on the provisions of the

Securities Exchange Act with its own rules and regulations.

8a

Rules 17a-3 and 4, 17 C.F.R. §$§ 240.17a-3, 4, detail the

business records required to be kept and preserved by

securities dealers. Rule 17a-5, 17 C.F.R. § 240.17a-5,

requires that brokers file Form X-17A-5 financial reports

and specifies the contents of these reports. Rule 8c-1, 17

C.F.R. § 240.8c-1, prohibits the hypothecation of securities,

in language similar to that of 15 U.S.C. § 78h(c).

Anderson’s Appeal

Anderson was convicted of conspiracy to violate §§ 78ff

(a) and 78q(a) and Rules 17-a-3, 4 and 5. As reduced by

the trial judge, the charge of wrongdoing submitted to the

jury was that Anderson conspired to file an X-17A-5 report

with the SEC which was false, in that statements of the

accounts of Orvis and its customers were inflated and the

improper hypothecation of customers’ securities was

wrongfully stated to have been corrected.

Although appellant argues that he was not a member of

any conspiracy, but at most a silent onlooker, this argu-

ment is not persuasive. Where the goal of a conspiracy

ean be reached only through deception and concealment,

silence which is designed to conceal may indicate an inten-

tion to conspire. United States v. Colasurdo, 453 F.2d 585,

592-93 (2d Cir. 1971), cert. denied, 406 U.S. 917 (1972).

The trial court instructed the jury that to be an act in

furtherance of a conspiracy, “silence must be a planned

act” and that if intended to facilitate the conspiracy, it

can be an overt act in pursuance thereof. This was a

correct statement of the law. United States v. Freeman, 498

F.2d 569, 575 n. 10 (2d Cir. 1974); Forman v. United

States, 259 F.2d 128 (9th Cir. 1958), modified, 261 F.2d 181

(1959) (per curiam), aff’d 361 U.S. 416 (1960).

While the concealment which occurred in this case may

have been intended in part to deceive potential sources of

capital, it was also clearly designed to delude the New

9a

York Stock Exchange and the SEC. Unless Orvis could

maintain its capital ratio at 20:1 or better, it was not going

to continue long in operation. The sine qua non of the

fraud on these agencies was the filing of the false Form

X-17A-5, and the jury could well find that the concealment

of the true facts required for this report was as much a

part of its preparation as the writing on the document.

It could also decide that Anderson, who stood silently by

as the false contents of the X-17A-5 report were reviewed

with the company auditor in preparation for filing, was

not an innocent bystander.

Moreover, the Government established that Anderson

did more than simply remain silent. At a meeting of the

Executive Committee in April 1969, after he was told of

some of the improper bookkeeping practices, Anderson

instructed the partner in charge of financial operations to

make sure the firm stayed in business. Anderson also

deliberately misled Clinton Oil Company’s general counsel

concerning the financial position of Orvis. These, the jury

could find, were acts of a vocally active participant in the

alleged conspiracy. In short we find that there was sub-

stantial evidence in support of the jury’s verdict.

We find no error in the District Court’s evidentiary

rulings. Although the Government did not contend that

Anderson was aware of the allegedly improper hypotheca-

tion of customers’ securities at any time before the X-17A-5

report was filed, proof of such hypothecation was, none-

theless, properly admitted. If the filing of false informa-

tion concerning hypothecation was within the scope of the

conspiracy, Anderson, as one of the conspirators, cannot

avoid the consequences by claiming lack of knowledge.

United States v. Manton, 107 F.2d 834, 848 (2d Cir. 1939),

cert. denied, 309 U.S. 664 (1940). The Government con-

tended that the conspirators misrepresented to the SEC

that the situation involving hypothecation had been cor-

10a

rected, and it was necessary for the Government to estab-

lish that the correction had, indeed, not taken place.

Whether, as appellant now asserts, the Government failed

to prove that the hypothecation was unlawful is beside

the point; the SEC was entitled to truthful information.

The wrongful act charged was the filing of the false re-

port, not the hypothecation.

Similar reasoning supports the admissibility of evidence

concerning the Fund of Letters transaction. The alleged

conspiratorial act submitted to the jury was the false

handling of the Fund of Letters account as a secured cash

account in the X-17A-5 report, and proof of the underlying

facts was necessary to establish the falsity. Anderson’s

asserted lack of knowledge concerning bookkeeping details

did not require exclusion of this evidence.

Anderson contends that he was denied his Fifth Amend-

ment right to due process because he was not indicted until

just prior to the running of the five year statute of lim-

itations. Appellant did not raise this issue until after his

conviction and waived his right to do so. United States

v. Beigel, 370 F.2d 751, 757 (2d Cir.), cert. denied, 387

U.S. 930 (1967). A defendant cannot wait to see whether

the verdict is to his liking before arguing that he was

prejudiced by delay.

In any event, we would be disinclined to reduce the

period of limitations prescribed by Congress in the ab-

sence of some proof that the Government utilized the de-

lay as “an intentional device to gain tactical advantage

over the accused” and that defendant was prejudiced

thereby. United States v. Marion, 404 U.S. 307, 324 (1971).

Appellant failed to show any contrived procrastination by

the Government and could point to no prejudice established

beyond mere conjecture. We see no error here.

There is likewise no merit to Anderson’s contention that

he was further deprived of his Fifth Amendment rights by

lla

the Government’s failure to call before the grand jury a

witness whose testimony would have tended to weaken the

Government’s case. In advancing this argument, appellaut

pays little heed to the fact that the testimony of the wit-

ness, who was the attorney for another defendant, would

have been, to a large extent, privileged. Muoreover, he

ignores the well established rule that the Government

need not call all available witnesses before the grand jury.

United States v. Koska, 443 F.2d 1167, 1169 (2d Cir.) (per

curiam), cert. denied, 404 U.S. 852 (1971).

Anderson’s final claim of error relates to his sentence

of imprisonment. As pointed out above, 18 U.S.C. § 371,

the conspiracy statute, provides that where the object of

a conspiracy is a misdemeanor, the punishment for the

conspiracy cannot exceed the maximum punishment for

the misdemeanor. 15 U.S.C. §78ff(a) provides that no

person shall be subject to imprisonment thereunder for the

violation of any rule or regulation of which he had no

knowledge. This means that under 18 U.S.C. §1 the viola-

tion of an unknown rule or regulation of the S.E.C. can be

no more than a misdemeanor,’ and the violator can re-

ceive no more than a fine.

Anderson contends that he was convicted under § 78ff(a)

of a violation of Rules 17a-3, 4 and 5. The Government,

on the other hand, argues that he was convicted for a vio-

lation of the statute itself. The Government is correct. The

charge of wrongdoing submitted to the jury was not the

failure to keep and preserve records and file reports as

required by the rules; it was the making of false and mis-

leading statements in a feport, which conduct was spe-

cifically proscribed by § 78ff(a). Anderson is therefore not

5 Under 18 U.8.C. $1, offenses punishable by death or imprisonment

exceeding one year are felonies; all others are misdemeanors.

12a

entitled to rely on the “no knowledge” portion of that

statute. United States v. Colasurdo, supra, 453 F.2d at 594.

Sloan’s Appeal

The Assistant United States Attorney who represented

the Government on the trial promised Sloan that if he

pleaded guilty and cooperated in the preparation and pres-

entation of the case against Anderson, the Government

would “go to bat” for him. Thereafter, Sloan pleaded

guilty. However, his cooperation consisted of presenting

the prosecution with a version of the facts in which he

attempted to completely exculpate himself from any wrong-

doing. Under these circumstances the Government was

unwilling to vouch for his credibility and did not call him

as a witness. The prosecutor also did not “go to bat” for

him, because he did not consider Sloan’s willingness to

testify falsely to be cooperation.

The District Court found that this decision was made

in good faith and refused to permit Sloan to withdraw his

plea. The District Court’s determination was discre-

tionary, United States v. Giuliano, 348 F.2d 217, 221 (2¢

Cir.), cert. denied, 382 U.S. 939 (1965), and we see no rea-

soi to disturb it. Appellant cannot claim the benefit of an

agreement where he himself is in default. United States

v. Nathan, 476 F.2d 456, 459 (2d Cir.), cert. denied, 414

U.S. 823 (1973).

Eucker’s Appeal

Count Nine of the indictment, to which Eucker pleaded

guilty, charged that he:

unlawfully, wilfully and knowingly, did, directly and

indirectly, hypothecate and arrange for and permit the

continued hypothecation of fully paid for securities

carried for the account of customers of Orvis under

13a

circumstances that permitted such securities to be

hypothecated and subjected to liens and claims of

pledges in amounts up to $7,000,000.00. (Title 15,

United States Code, Sections 78h and 78ff and 17

... C.F.R. Section 240.8c-1; Title 18, United States Code,

Section 2.)

Eucker argues that this count fails to allege an essential

element of the crime charged, to wit, that the total amount

of securities hypothecated was in excess of the aggregate

customer indebtedness to Orvis with respect to such securi-

ties. In making this argument, Eucker assumes that he is

charged with violating subsection 3 of 15 U.S.C. § 78h(c).

The Government says, on the other hand, that it never

intended to proceed under subsection 3 and that it was

really proceeding under subsection 1, which prohibits the

commingling of a customer’s securities without his written

consent with the securities of any other customer.‘ The

Government also contends that the hypothecation of fully

paid for customers’ securities constitutes a fraud in viola-

tion of 15 U.S.C. §4 78j(b), 780(c) and 77q(a).

Because appellant Eucker admitted at the time of his

plea that he caused or permitted fully paid customers’

securities to be hypothecated as charged in the indictment,

we could on this appeal go directly to the merits of the Gov-

ernment’s contention. The statutory reference in the indict-

ment obviously includes all three subsections of § 78h(c).

With regard to the other statutes upon which the Govern-

ment now seeks to rely, if an indictment properly charges

an offense, it is sufficient, even though an inapposite statute

6 For some unknown reason, the Government makes no mention of

subsection 2 of 15 U.8.C. 78h(¢) which prohibits commingling regardless

of consent with the securities of anyone other than a bona fide

customer, i.¢., presumably with those of the broker /hintself.

l4a

is referred to therein. 1 Wright, Federa! Practice and

Procedure § 124 et seg. (1969); United States v. Calabro,

467 F.d 973, 981 (2d Cir. 1972), cert. denied, 410 U.S. 926

(1973). Clearly the Government is not required to rely

upon that statutory provision which the defendant chooses

to select.

However, a defendant’s plea should be n« » with an

understanding of the nature of the charge ~_«ainst him,

Irizarry v. United States, 508 F.2d 960, 963-66 (2d Cir.

1974), and there is a possibility that this did not occur in

this case. Pursuant to the authority given us by 28 U.S.C.

§ 2106, we are therefore remanding the case of the appel-

lant Eucker to the District Court so that appellant may

apply to that court for leave to withdraw his plea of guilty

on the ground that it was not knowingly made as required

by Fed. R. Crim. P. 11. If such an application is made, the

district court shall grant the motion upon appropriate con-

ditions if it finds, bearing in mind the Government’s con-

tentions, that appellant’s plea was made without knowledge

of the possible applicability of 15 U.S.C. §§ 78h(c)(1) and

(2), 78j(b), 780(c) and 77q(a). If this application is not

made within thirty days from the date of remand, however,

we will conclude that appellant’s plea was, in fact, made

with an understanding of the possible applicability of the

above sections. In the event that application is not timely

made, or if the District Court denies appellant’s motion

for leave to replead, the matter shall be returned to this

Court for a decision on the merits. If the motion is granted,

this appeal will be dismissed as moot.

Disposition of Appeal

The judgments of conviction of appellants Anderson and

Sloan are affirmed. The case of appellant Eucker is re-

ida

manded to the District Court for further proceedings in

secordance with this opinion.

-_—_ =

—

Moore, Circuit Judge (Concurring and Dissenting) :

I concur in the affirmance of Anderson’s and Sloan’s

convictions, but dissent from the majority’s decision to

remand as to Eucker.

A defendant should not plead guilty to charges of which

he is ignorant or about which he is confused. However, the

facts in this case belie any argument that Eucker was

either ignorant or confused at the time of his plea. Eucker

was a member of the Executive Committee of Orvis

Brothers, the partner in charge of operations, and a man

obviously sophisticated in his knowledge both of the

securities industry and its extensive regulation by the

federal government. Count Nine of the indictment ex-

pressly referred to 15 U.S.C. § 78h,' all three subsections

and its various subparts of 4 78h were obviously included

thereby.

Eucker was represented by counsel throughout the litiga-

tion at bar. He pleaded guilty on the express understand-

ing that he would appeal that very plea.? He made no

claim of ignorance or confusion before the district court*

1 Reference in the majority opinion, at p. 12, to §§ 78j(b), 780(¢), and

77q(a) is inapposite in view of the facts that Eucker was indicted

under and pleaded guilty to §78h; was convicted under §78h; and

has predicated his appeal on the sufficiency of the indictment’s recita-

tion of § 78h.

2 Appellant Eucker’s appendix at 50. All references to “appellant”

herein are to Eucker.

3 In urging that appellant be permitted an immediate appeal from his

plea of guilty, Eucker’s counsel argued that the statute was vague, an

argument which was given weight by the district court. [Transcript

of proceedings, March 14, 1975, Appellant’s appendix at 29: “...I

agree with your Honor that the statute is not a model of clarity .. . I

16a

or on appeal to this Court.‘ He has alleged only that the

Government failed to draft an indictment correct in all its

technical form and detail, thereby rendering that indici-

ment “fatally defective”’.’ Eucker does not claim that he

failed to understand the charges against him;* he merely

believe your Honor understands my intention with respect to the plea

that is to be offered today which is to have my client, Mr. Eucker, plead

to the indictment as drafted, and of course denying that the aggregate

net indebtedness of all the customers exceeded the amount of the

hypothecation, and then taking that up upstairs for a hopeful clarifica-

tion of what the statute means.”] However, it should be noted that

appellant has not raised that issue on appeal; on the contrary, he

fails even to cite it as a basis for the district judge’s decision respect-

ing appealability of the plea—a curious omission. [Appellant’s brief

at 6: “Eucker moved to dismiss Count 9 upon the ground that the

count failed to allege an essential element of the crime charged, to wit,

that the total amount of securities hypothecated was in excess of the

aggregate indebtedness to Orvis of all customers on all of their

securities carried for their account by Orvis. The motion to dismiss

Count 9 was denied.”] This, in addition to Eucker’s own statements

before the district court, see n. 5, infra, give to his counsel’s statements

about vagueness the distinct appearance of tactical maneuver as opposed

to the legitimate expression of any true “confusion” felt by Eucker

respecting the meaning of either § 78h or the charges brought hereunder.

4 See “Questions Presented”, Appellant’s brief at 1-2.

5 Appellant’s brief at 1.

6 The following excerpt from the proceedings before the district court

is instructive:

“By THE CLERK:

Q. Are you the Donald Eucker in the case presently before this

Court?

A. Yes, I am.

Q. Do you waive formal reading of the indictment in this matter?

A. Yes, I do.

Q. Do you fully understand the charges in Count 9 of this

indictment?

A. Yes, I do.

Q. How do you wish to plead to that count?

A. I wish to plead guilty.”

Transcript of proceedings, March 14, 1975, Appellant’s appendix at

37-38 (emphasis supplied).

17a

posits that the law should not apply to him because thie

text of the indictment preceding the citation to 4 78h was

largely taken from a subsection in the statute which could

not apply to his particular acts.

The majority properly concludes that the Government

is not compelled to abide by a defendant’s selective inter-

pretation of his indictment. However, by remanding the

case at this point, the majority undermines its own holding.

The remand prolongs this litigation unnecessarily, and its

effect is to clothe Eucker with an innocence which the facts

plainly refute. Eucker should not be given the opportunity

—at this late stage in the proceedings—to plead a state

of ignorance or helpless confusion which is disingenuous

and completely contrary to the record.

I would reach the merits of his appeal at this time and

would affirm his conviction on the grounds that the indict-

ment adequately set forth the charges to which he pleaded

guilty.

18a

APPENDIX B

Opinion of United States District Court

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

74 Cr. 859

UNITED STATES OF AMERICA,

Plaintiff,

-against-

FERGUS M. SLOAN, JR., et al.,

Defendants.

MEMORANDUM AND ORDER

WHITMAN KNAPP, District Judge.

Deiendant Carl W. Anderson moves to

set aside this Court’s sentence of impris-

onment imposed on June 16, 1975. He

argues that no imprisonment may be im-

posed under the circumstances of this

case because of the peculiar interplay of

the conspiracy statute, 18 U.S.C. § 371,

and the sentencing provision of the Se-

curities Exchange Act of 1934, 15 U.S.C.

§ 78ff(a). We disagree.

The defendant was convicted after a

month-long jery trial of conspiring to

violate the federal securities laws, par-

ticularly 15 U.S.C. § 78q(a) and three

Securities and Exchange Commission

regulations promulgated thereunder, 17

C.F.R. §§ 240.17a-3, 4, and 5. The cited

statute provides, in pertinent part, that

every broker or dealer

“shall make, keep, and preserve for

such periods, such accounts, corre-

spondence, memoranda, papers, books,

and other records and make such re-

19a

ports, as the Commission by its rules

and regulations may prescribe as nec-

essary or appropriate in the public in-

terest or for the protection of inves-

tors.”

The three SEC regulations here involved

—promulgated pursuant to that statute—

list the specific records and documents

that must be accurately made, preserved

and filed.

The charges in this case arose out of

the financial collapse of Orvis Brothers

& Co., a member of the New York Stock

Exchange. The motivation for the con-

spiracy, according to the guvernment’s

proof at trial, was a desire among cer-

tain partners at Orvis, including Ander-

son, to hide the fact of the firm’s deteri-

orating financial condition from the

Stock Exchange and the appropriate

regulatory agencies. The method for

achieving this purpose was the making

and filing of inaccurate records and doc-

uments, all in contravention of the secu-

rities laws.

The main issues litigated at Ander-

son’s trial were twofold: first, was

there a conspiracy among certain of the

partners at Orvis to maintain false rec-

ords and file false financial statements

with the SEC; and secondly, was the

defendant Anderson a knowing and wil-

ful participant in such an unlawful en-

terprise. The jury resolved both of

these issues against the defendant.

In arguing against the imposition of a

jail sentence, Anderson relies. as noted

above, on the interplay between the con-

spiracy section under which he was con-

victed, 18 U.S.C. § 371, and the penal

provision of the Securities Act, 15 U.S.

C. § 78ff(a).

The conspiracy provision, after defin-

ing the crime and prescribing the penal-

ty, contains a proviso which states:

“If, however, the offense, the commis-

sion of which is the object of the con-

1. 18 U.S.C. § 1 classifies offenses as follows:

“Notwithstanding any Act of Congress to

the contrary:

(1) Any offense punishable by death or

imprisonraent for a term excecding one

year is a felony.

spiracy, is a misdemeanor only, the

punishment for such conspiracy shall

not exceed the maximum punishment

provided for such misdemeanor.”

Anderson thus maintains that it is nec-

essary to determine whether the conspir-

acy of which he was convicted had as its

object the commission of an offense

which is solely a misdemeanor. This in-

quiry requires reference to 15 U.S.C. §

78ff(a), the penal provision of the 1934

Securities Act. This statute reads as

follows,

“(a) Any person who willfully vio-

lates any provision of this chapter, or

any rule or regulation thereunder the

violation of which is made unlawful or

the observance of which is required

under the terms of this chapter, or

any person who willfully and knowing-

ly makes, or causes to be made, any

statement in any application, report,

or document required to be filed un-

cer this chapter or any rule or regula-

tion thereunder or any undertaking

contained in a registration statement

as provided in subsection (d) of sec-

tion 780 of this title, which statement

was false or misleading with respect

to any material fact, shall upon con-

viction be fined not more than

$10,000, or imprisoned not more than

two years, or both, except that when

such person is an exchange, a fine not

exceeding $500,000 may be imposed;

but no person shall be subject to im-

prisonment under this section for the

violation of any rule or regulation if

he proves that he had no knowledge of

such rule or regulation.” (emphasis

added)

Under 18 U.S.C. § 1, the crime defined

is a felony. However, the quoted stat-

ute’s final clause (emphasized above)

carves out a special exception which

prohibits imprisonment of a person

convicted under 15 U.S.C. § 78ff(a)

(2) Any other offense is a misdemeanor.

(3) Any misdemeanor, the penalty for

which does not exceed imprisonment for a

period of six months or a fine of nut more

than £500, or both, is a petty offense.”

20a

for a violation of a rule or regulation of

which such person was wholly ignorant.*

Relying exclusively on this so-called

“no knowledge” proviso, Anderson

claims that because he was wholly igno-

rant of the specific requirements set

forth in SEC regulations 17 C.F.R. §§

240.17a-3, 4, and 5, he would only be

subject to punishment under 15 U.S.C. §

78ff(a) by a fine not to exceed $10,000.

Since any offense punishable by a fine

only is classified as a misdemeanor,’ An-

derson completes his syllogism by con-

cluding that he can only be fined up to

$10,000 on the conspiracy conviction.

The weakness in this argument is that

it is based on an inaccurate interpreta-

tion of the purposes of the “no knowl-

edge” proviso in 15 U.S.C. § 78ff(a).

This clause is rather unique in that it

permits a defendant prior to sentencing

to rebut the presumption that he had

knowledge of the rule or regulation of

which he had been convicted of violat-

ing. It was included in the 1934 Act as

a compromise measure to allay certain

fears in Congress that, by enacting a

vast new securities statute giving broad

rule-making authority to the SEC, and

by making violations of such rules crim-

inal, the legislators were subjecting to-

tally “innocent” people—persons who

might act without knowledge that their

conduct was now prohibited by a rule—

to possible incarceration. The compro-

mise impliedly recognized that under

such circumstances, strict adherence to

the presumption of knowledge of the law

would be unwarranted. See, Herlands,

Criminal Aspects of the Securities Ex-

change Act of 1934, 21 Virginia L.Rev.

139, 190-193 (1934); United States v.

Lilley (S.D.Texas 1968) 291 F.Supp.

2. As is apparent from a careful reading of

both 18 U.S.C. § 371 and 15 U.S.C. §

78ff(a), the “no knowledge” proviso may not

even apply to sentences under the conspiracy

statute. A violation of 15 U.S.C. § 7Sff(a),

for example. is not a “misdemeanor only”

since the crime is punishable by more than

ove year imprisonment. Secondly, the “no

989: United States v. Guterma (S.D.

N.Y.1960) 189 F.Supp. 265.

[1] It is equally clear, however, that

Congress did intend to maintain the

usual presumption of knowledge with re-

spect to the standards prescribed in the

securities acts themselves. The “no

knowledge” proviso is explicitly limited

to lack of knowledge of a “rule or regu-

lation”. Congress. did not intend that

the protcction of the “no knowledge”

clause would extend to persons who were

charged with knowing their conduct to

be in violation of law, but did not hap-

pen to know that it was also in violation

of a particular SEC rule or regulation.

See, United States v. Lilley, supra, 291

F.Supp. 989, 993.

[2,3] It is this latter situation that

we here encounter. Anderson is not a

totally innocent person who committed a

non-wilful technical violation of an SEC

rule or regulation. Anderson was ac-

cused and convicted of conspiring to vio-

late 15 U.S.C. § 78q(a) which makes it a

crime to make and file false and inaccu-

rate records and documents. In order to

convict him of this offense, the jury was

required to find that he had formulated

the deliberate intent to further an un-

lawful objective. Thus, the court in-

structed the jury that Anderson could

not be deemed a conspirator unless he

had (TR 3031-2):

“Knowledge of the basic unlawful ob-

ject of the conspiracy, in this case, de-

ceptive record keeping and deceptive

filing with the S.E.C. to conceal fi-

nancial weakness; and that it was his

deliberate intent to further that unlaw-

ful objective.”

Under these circumstances, it seems ir-

relevant whether Anderson knew of the

knowledge” proviso only modifies the felony

penalty if the defendant is “subject to im-

prisonment under thix section for the viola-

tion of any rule oc regulation” (emphasis

added). In the case at bar, Anderson is

beiug sentenced under 18 U.S.C. § 371 and

not 15 U.S.C. § TSif(a).

3. See, 18 U.S.C. § 1, supra, n. 1.

21a

specific rules which were violated. The

“no knowledge” proviso was not intend-

ed to permit one who knowingly con-

spires to violate the gencral standard of

conduct set forth in 15 U.S.C. § 78q(a)

to claim protection on the ground that

he did not have knowledge of some spe-

cific rule or requirement promulgated

thereunder. Such an _ interpretation

would go well beyond what Congress in-

tended when it inserted the “no knowl-

edge” proviso and would be wholly in-

consistent with the substantive law of

conspiracy, which makes one co-conspira-

tor liable for acts committed by other

co-conspirators done in furtherance of

the conspiracy, Pinkerton v. United

States (1946) 328 U.S. 640, 66 S.Ct.

1180, 90 L.Ed. 1489.

As we have now made clear, we deem

it immaterial whether or not Anderson

was aware of the existence of the partic-

ular rule which required the filing of

any particular record or document found

to have been false. We may observe,

however, that if this conclusion should

be found erroneous, we would find no

persuasive reason for disbelieving An-

derson’s testimony that he had been un-

aware of the specific requirements of 17

C.F.R. § 240.17a-3, 4, and 5. Indeed,

the verdict of acquittal on the substan-

tive count may have been based on the

jury's acceptance—at least td the extent

of creating a reasonable doubt—of An-

derson’s testimony in this general re-

gard. The charge on this count re-

quired a specific finding that the partic-

ular false filing had been within Ander-

son’s “reasonable contemplation.”

Accordingly, Anderson's motion to set

aside the sentence of imprisonment is

denied. Final judgment will enter with-

in five days. The execution of sentence

will be stayed pending appeal.

So ordered.

4. The charge given on the substantive count

was more favorable to Anderson than the

charge specifically approved in Pinkerton v.

United States (19486) 323 U.S. 6i0, 66 38.Cr.

309 F Supp. —62e

1180, 90 L.Ed. 1489. It comports to, what

ia our view, is the practice of this Circuit.

Cf. Pinkerton, 328 U.8. at GiT-IS, 06 S.Ct.

1180.

22a

APPENDIX C

Constitution

AMENDMENT V—CAPITAL CRIMES; DOUBLE JEOPAR-

DY; SELF-INCRIMINATION; DUE PROCESS; JUST

COMPENSATION FOR PROPERTY

No person shall be held to answer for a capital, or otherwise infa-

mous crime, unless on a presentment or indictment of a Grand Jury,

except in cases arising in the land or naval forces, or in the Militia,

when in actual service in time of War or public danger; nor shall

any person be subject for the same offence to be twice put in jeop-

ardy of life or limb; nor shall be compelled in any criminal case to

be a witness against himself, nor be deprived of life, liberty, or

property, without due process of law; nor shall private property be

taken for public use, without just compensation.

AMENDMENT VI—JURY TRIAL FOR CRIMES, AND

PROCEDURAL RIGHTS

In all criminal prosecutions, the accused shall enjoy the right to a

speedy and public trial, by an impartial jury of the State and district

wherein the crime shall have been committed, which district shall

have been previously ascertained by law, and to be informed of the

nature and cause of the accusation; to be confronted with the wit-

nesses against him; to have compulsory process for obtaining wit-

nesses in his favor, and to have the Assistance of Counsel for his de-

fence.

23a

STATUTES AND RULES

15 U.S.C. $ 78h. Restrictions on borrowing by members, brokers, and

dealers

It shall be unlawful for any member of a national securities exchange,

or any broker or dealer who transacts a business in securities through

the medium of any such member, directly or indirectly—

| ed

x * *”

(c) In contravention of such rules and regulations as the Commis-

sion shall prescribe for the protection of investors to hypothecate or

arrange for the hypothecation of any securities carried for the account

of any customer under circumstances (1) that will permit the com-

mingling of his securities without his written consent with the se-

curities of any other customer, (2) that will permit such securities to

be commingled with the securities of any person other than a bona fide

customer, or (3) that will permit such securities to be hypothecated,

or subjected to any lien or claim of the pledgee, for a sum in excess

of the aggregate indebtedness of such customers in respect of such

securities. (Prior to amendment by P.L. 94-29, effective

June 4, 1975 which redesignated subsection (c) as

subsection (b).)

15 U.S.C. § 78q. Accounts and records, reports, examinations of ex-

, changes, members and others

(a) Every national securities exchange, every member thereof, ev-

ery broker or dealer who transacts a business in securities throuza

the medium of any such member, every registered securities associa-

tion, and every broxer or dealer registered pursuant to section 750

of this title, shall make, keep, and preserve for such periods, such

accounts, correspondence, memoranda, papers, books, and other rec-

ords, and make such reports, as the Commission by its ruies and

reculations may prescrib2 as necessary or appropriate in the public

interest cr for the protection of investors. Such accounts, cor-

respondence, memoranda, papers, books, and other records shall be

subject at any time or from time to time to such reasonable periodic,

special, or other examinations by examiners or other representatives

of the Commission as the Commission may deem necessary or appro-

priate in the public interest or for the protection of investors.

(Prior to amendment by P.L. 94-29, effective

June 4, 1975.)

24a

§ 78ff. Penalties

(a) Any person who willfully violates any provision of this chapter,

or any rule or regulation thereundcr the violation of which is made

unlawful or the observance of which is required under the terms of

this chapter, or any person who willfully and knowingly makes, or

causes to be made, any statement in any application, report, or docu-

ment required to be filed under this chapter or any rule or regulation

thereunder or any undertaking contained in a registration statement

as provided in subsection (d) of section 780 of this title, which state-

ment was false or misleading with respect to any material fact, shall

upon conviction be fined not more than $10,000, or imprisoned not more

than two years, or both, except that when such person is an exchange,

a fine not exceeding $500,000 may be imposed; but no person shall be

subject to imprisonment under this section for the violation of any

rule or regulation if he proves that he had no knowledge of such rule

15 U.S.C.

or regulation.

Prior to amendment by P.L. 94-29,

effective June 4,

1975.)

Rule 8c-l(a), 17 C.F.R. §240.8c-1(a)

Rule 8c-l. Hypothecation of Customers’

Securities.

(a) GENERAL PRovIsions.— No member of

a national securities exchange, and no broker

or dealer who transacts a business in securi-

ties through the medium of any such member

shali, directly or indirectly, hypothecate or

arrange for or permit the continued hy-

pothecation of any securities carried for the

account of any customer under circum-

stances—

(1) that will permit the commingling of

securities carried for the account of any such

customer with securities carried for the

account of any other customer, without first

obtaining the written consent of each such

customer to such hypothecation ;

(2) that will permit such securities to be

commingled with securities carried for the

account of any person other than a bona fide

customer of such member, broker, or dealer

under a lien for a loan made to such mem-

ber, broker or dealer; or

(3) that will permit securities carried for

the account of customers to be hypothecated,

or subjected to any lien or liens or claim or

claims of the pledgee or pledgees, for a sum

which exceeds the aggregate indebtedness of

all customers in respect of securities carried

for their accounts; except that this clause

shall not be deemed to be violated by reason

of an excess arising on any day through the

reduction of the aggregate indebtedness of

customers on such day, provided that funds

or securities in an amount sufficient to

eliminate such excess are paid or placed in

transfer to pledgees for the purpose of

reducing the sum of the liens or claims to

which securities carried for the account of

customers are subjected as promptly as prac-

ticable after such reduction occurs, but before

the lapse of one-half hour after the com-

mencement of banking hours on the next

banking day at the place where thé largest

principal amount of leans of such member,

broker or dealer are payable and, in any

event, before sugh member, broker or dealer

on such day has obtained or increased any

bank loan collateralized by securities carried

for the account of customers.

25a ,

Rule 17a-5, 17 C.F.R. §240.17a-5

Rule 17a-5. Reports To Be Made By Cer-

tain Exchange Members. Brokers and

Dealers.

(2) (1) Frursc reports.—This rule shall

apply to every member of a national secu-

rities exchange who transacts a business in

securities directly with or for others than

members of a national securities exchange,

every broker or dealer (other than a mem-

TFR2

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be

filed not more than sixty (60) days after the

date of the report of financial condition; and

(C) reports for any two consecutive years

shall not be as of dates within four

months of each other; and, (D) the mem-

ber, broker or dealer shall on the date on

which a preliminary audit examination com-

mences, if the preliminary audit procedures

performed requires a report on Part III of

Form X-17A-5, notify in writing the Re-

gional Office of the Commission for the

region in which the member, broker or

dealer has its principal place of business that

such preliminary audit examination has com-

menced and shall file as required by sub-

paragraph (a) (2), not later than 45 days

thereafter, a duplicate original of Part II!

of Form X-17A-5, signed by an officer,

partner or principal, with such Regional

Office which shall be deemed confidential.

(a)(2) The reports provided jor in this

rule shall be filed in duplicate original with

the Regional Office of the Commission for

the region in which the member, broker or

dealer has his or its principal place of busi-

ness and except as provided for in subpara-

graph (b)(3) shall be available for exami-

nation at the principal office of the member,

broker or dealer.

(b) NaTuRE AND FORM OF REPORTS.—

Each report of financial condition filed pur-

suant to paragraph (a) hereof shall be pre-

pared and filed in accordance with the fol-

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(2) Attached to the report shall be an

oath or affirmation that, to the best knowl-

edge and belief of the person making such

oath or affirmation, (A) the financial state-

ment and supporting schedules are true and

correct and (B) neither the member, broker,

or dealer, nor any partner, officer, or direc-

(3) If the schedules furnished pursuant

to the requirements of items (a), (b) and

(c) of Part II are bound separately from

the balance of the report, they shall be

deemed confidential, except that they shall be

available for official use by any official or

employee of the United States or any state,

by national securities exchanges and national

securities associations of which the person fil-

ing such report is a member, and by any other

person to whom the Commission authorizes

disclosure of such information as being in

the public interest. Nothing contained in this

paragraph shall be deemed to be in deroga-

tion of the rules of any natioral securities

association or national securities exchange

which give to customers of a member,

broker, or dealer the right, upon request to

such member, broker, or dealer, to obtain

information relative to his financial condi-

tion.

(4) The member, broker or dealer shall

file with the report a supplemental report

and a certification of the independent public

accountant on the status of the membership

of the member, broker or dealer in the

Securities Investor Protection Corporation

(SIPC). The report shall cover the SIPC

annual general assessment reconciliation or

exclusion from membership forms, not pre-

viously reported on under this subparagraph,

which were required to be filed prior to the

date of the report required by paragraph (a)

of this rule. The supplemental report, which

shall be submitted in triplicate original, be

bound separately, be dated and be signed

manually, shall include the following:

A. A schedule of assessment payments

shall also show any overpayments applied

and overpayments carried forward includ-

ing: payment dates, amounts (state sep-

arately amounts of initial and general

assessment payments) and name of SIPC

collection agent to whom mailed, or

B. If exclusion from membership was

claimed for such year(s), a statement that

the respondent qualified for exclusion from

membership under Section 3(a) (2) of the

Securities Investor Protection Act of 1970

and the date and name of the SIPC col-

lection agent with whom a Certification

of Exclusion from Membership (Form

SIPC-3) was filed, and

C. Ar accountant’s certificate which

shall state that in his opinion either the

26a

assessments were determined fairly in

accordance with applicable instructions and

forms, or that a claim for exclusion from

membership was consistent with income

reported, however, if his examination of

the financial statements did not provide the

basis for issuing such a certification, the

accountant shall state the extent of his

review. If exceptions are noted, he shall

state any corrective action taken or pro-

posed. The accountant’s review on which

his certificate is based shall include as a

minimum the following procedures:

(i) Comparison of listed assessment

payments with respective cash disburse-

ments record entries,

(ii) Comparison of amounts reported

for the calendar year(s) on Form

X-17A-10 (or the equivalent form of a

national securities exchange or registered

securities association) with amounts re-

ported in the Annual General Assessment

Reconciliation (Form SIPC-7),

(iii) Comparison of adjustments re-

ported in Form SIPC-7 with supporting

schedules and working papers,

(iv) Proof of arithmetical accuracy

of the calculations refiected in Form

SIPC-7 and in the schedules and work-

ing papers supporting adjustments,

(v) Comparison of the amount of any

overpayment applied with the Form

SIPC-7 on which it was computed, or

(vi) If exclusion from membership is

claimed, the accountant shall review

Form X-17A-10 (or the equivalent form)

to ascertain that the Certification of

Exclusion from Membership (Form

SIPC-3) was consistent with the income

reported.-

(c) USE OF CERTAIN STATEMENTS FILED

WITH THE SECURITIES AND EXCHANGE COM-

MISSION, STATE COMMISSIONS AND NATIONAL

SECURITIES EXCHANGES.

(1) Any member, broker, or dealer who

is subject to the provisions of paragraph (a)

hereof may file in lieu of the report required

by that paragraph a copy of any financial

statement which he is, or has been, required

to file with any national securities exchange

of which he is a member, or with any agency

of any State as a condition of doing business

in securities therein: Provided, That (A)

the copy so included reflects his financial

condition as of a date not more than sixty

(60) days prior to the filing thereof with

the Commission; and (B) the report, as

filed with this Commission, meets the re-

quirements of this rule and form X-17A-5

and contains the information called for by

that form.

(2) At the request of any member,

broker, or dealer who is (A) an investment

company registered under the Investment

Company Act of 1940, or (B) a sponsor or

depositor of such a registered investment

company who effects transactions in securi-

ties only with, or on behalf of, such regis-

tered investment company, the Commission

will accept any statement of his financial

condition filed pursuant to sections 13 or 15

(d) of the Securities Exchange Act of 1934

or section 30 of the Investment Company

Act of 1940 and the rules and regulations

promulgated thereunder as a filing pursuant

to this rule. Such a filing shall be deemed

to satisfy the requirements of this rule for

any calendar year in which such a financial

statement is filed: Provided, That the state-

ment so filed meets the requirements of the

other rules under which it is filed with re-

spect to time of filing and content.

(d) EXTENSION OF TIME FOR FILING RE-

porTS.—In the event any member, broker, or

dealer finds that he cannot file his report for

any year within the time specified in para-

graphs (a) or (c) hereof without undue

hardship, he may file with the Commission

an application for an extension of time to

a specified date which shall not be more than

90 days after the date as of which his finan-

cial condition is reported. The application

shall state the reasons for the requested ex-

tension and shall contain an agreement to

file the report on or before the specified date.

The application shall be deemed granted

unless the Commission, within ten days after

receipt thereof, enters an order denying the

application.

(e) Exemprions.—Any “bank,” as de-

fined in section 3 (a) (6) of the Act, shall

be exempt from the provisions of this rule.

(f£) QUALIFICATIONS AND REPLACEMENT OF

ACCOUNTANTS.

(1) QUALIFICATIONS OF ACCOUNTANTS.—

The Commission will not recognize any

is not duly registered and in good

as such under the laws of his place of

dence or principal office.

will not recognize any

accountant who is not in good standing and

entitled to practice as such under the laws

4 fee aes a

ce.

ie

Er

27a

(2) REPLACEMENT OF ACCOUNTANT.—A

member, broker or dealer shall file a notice

with the regional office of the Commission

for the region in which its principal place of

business is located not more than 15 days

after:

(A) The member, broker or dealer has

notified the accountant who certified the

report of financial condition in the most

recent report filed under this rule that his

services will not be utilized in future en-

gagements; or

(B) The member, broker or dealer has

notified an accountant who was engaged to

certify a report of financial condition un-

der this rule that the engagement has been

terminated ; or

(C) An accountant has notified the

member, broker or dealer that he would

not continue under an engagement to certi-

fy a report of financial condition; or

(D) A new accountant has been en-

gaged to certify a report of financial con-

dition without any notice of termination

having been given to or by the previously

engaged accountant.

Such notice shall state (i) the date of noti-

fication of the termination of the engagement

or engagement of the new accountant as ap-

plicable and (ii) the details of any problems

existing during the 24 months (or the period

of the engagement if less) preceding such

termination or new engagement relating to

any matter of accounting principles or prac-

tices, financial statement disclosure, auditing

procedure, or compliance with applicable

rules of the Commission, which prob-

lems, if not resolved to the satisfaction

of the displaced accountant, would have

caused him to refer to them in his opinion.

The member, broker or dealer shall also re-

quest the displaced accountant to furnish the

member, broker or dealer with a letter ad

dressed to the Commission stating whether

he agrees with the statements contained in

the notice of the member, broker or dealer

and, if not, stating the respects in which he

does not agree. The member, broker or

dealer shall file three copies of the notice

and the accountant’s letter, one copy of

which shall be manually signed by the sole

proprietor, or a general partner or a duly

authorized corporate officer, as appropriate,

and by the accountant, respectively.

(g) ACCOUNTANT’S CERTIFICATE.

(1) TecuwnicaL requireMenTSs.—The ac-

countant’s certificate shall be dated, shall be

signed manually, and shall identify without

detailed enumeration the items of the report

covered by the certificate.

(2) REPRESENTATIONS AS TO AUDIT.—The

accountant’s certificate (A) shall contain a

reasonably comprehensive statement as to

the scope of the audit made, including a

statement as to whether the accountant re-

viewed the procedures followed for safe-

guarding the securities of customers, and

including, if with respect to significant items

in the report covered by the certificate any

auditing procedures generally recognized as

normal have been omitted, a specific desig-

nation of such procedures and of the reasons

for their omission; (B) shall state whether

the audit was made in accordance with gen-

erally accepted auditing standards applicable

in the circumstances; and (C) shall state

whether the audit made omitted any pro-

cedure deemed necessary by the accountant

under the circumstances of the particular

case.

(3) Nothing in this rule shall be con-

strued to imply authority for the omission

of any procedure which independent ac-

countants would ordinarily employ in the

course of an audit made for the purpose of

expressing the opinions required by para-

graph (h) of this rule.

(h) AccouNTANT’s CERTIFICATE — OPIN-

IONS TO BE EXPRESSED.—The accountant’s

certificate shall state clearly the opinion of

the accountant with respect to the financial

statement covered by the certificate and the

accounting principles and practices reflected

therein.

(i) AccounTANT’s CERTIFICATE — Exczp-

Tions.—Any matters to which the ac-

countant takes exception shall be clearly

identified; the exception thereto shall be

specifically and clearly stated; and, to the

extent practicable, the effect of each such

exception on the related item of the report

shall be given.

(j) (1) If a broker or dealer holding

any membership interest in and subject to

the capital rules of a national securities ex-

change whose members are exempt from

Rule 15c3-1, by sub-paragraph (b) (2)

thereof, ceases to be a member in good stand-

ing ®f such exchange, such broker or dealer

shall, within two business days after such

event, file with the Commission, as of the

date of such event:

(A) A proof of money balances of all

ledger accounts in the form of a trial bal-

ance ;

(B) A computation of aggregate in-

debtedness and net capital made in accord-

ance with Rule 15c3-1;

(C) An analysis of the aggregate mar-

ket value of fully paid securities in cus-

tomers’ security accounts not segregated

showing the location of such securities;

(D) Ledger net credit balances of

money borrowed from banks, trust com-

panies and other financial institutions and

from others, which are fully or partially

secured by securities carried for the ac-

count of any customer, showing, for each

loan, an analysis of the market value of

all collateral for such borrowings by

source of collateral, stating separately the

market value of: (a) securities carried for

the accounts of customers, (b) securities

owned by the broker or dealer or by any

general or special partner or any director

or officer of such broker or dealer, and

(c) any other securities, and

(E) The aggregate amount of cus-

tomers’ ledger debit balances.

The report shall be filed at the Commis-

sion’s principal office in Washington, D. C.

and in duplicate original with the Regional

Office of the Commission for the region in

which the broker or dealer has his of its

principal place of business: Provided, how-

ever, that such report need not be made or

filed if the Commission, upon written re-

quest or upon its own motion exempts such

broker or dealer, either unconditionally or on

specified terms and conditions, from such

requirement. Provided, further, that the

Commission may, upon request of the broker

or dealer, grant extensions of time for filing

the report specified herein for good cause

shown.

(2) Attached to the report required by

sub-paragraph (1) hereof shall be an oath

or affirmation that to the best knowledge

and belief of the individual making such

oath or affirmation the information contained

in the report is true and correct. The oath

or affirmation shall be made before a person

duly authorized to administer such oath or

affirmation. If the member, broker, or

dealer is a sole proprietorship, the oath or

affirmation shall be made by the proprietor ;

if a partnership, by a general partner, or if

29a

a corporation, by the chief executive officer,

or in his absence, by the person authorized

to act in his place.

(3) For the purposes of this paragraph

“membership interest” shall include the fol-

lowing: Full membership, allied membership,

associated membership, floor privileges, and

any other interest that entitles a broker or

dealer to the exercise of any privilege on an

exchange.

(A) for the purposes of this paragraph

and sub-paragraph (b) (2) of Rule 15c3-l,

any broker or dealer shall be deemed to

have ceased to be a member in good stand-

ing of such exchange when he or it has

resigned, withdrawn, or been suspended or

expelled from a membership interest in

such exchange or has directly or through

any associated person sold or entered into

an agreement for the sale of a member-

ship interest which would on consumma-

tion thereof result in the termination of

the broker or dealer’s membership inter-

est in such exchange.

(4) Whenever any national securities ex-

change whose members are exempt from

Rule 15c3-1 by sub-paragraph (b) (2) there-

of takes any action which causes any broker

or dealer which is a member of such ex-

change to cease to be a member in good

standing of such exchange or when such

exchange learns of any action by such mem-

ber or any other person which causes such

broker or dealer to cease to be a member in

good standing of such exchange, such ex-

change shall report such action promptly to

the Commission, furnishing information as

to the circumstances surrounding the event.

(k)(1) ADDITIONAL STATEMENTS TO BE

FURNISHED TO THE COMMISSION.—Except for

a broker or dealer who comes within sub-

paragraph (k)(2) of this rule, a member,

broker or dealer shall, not more than thirty

(30) days after the report required by sub-

paragraph (a)(1) hereof is required to be

filed, or, in the event of an extension granted

under paragraph (d) hereof, not more than

100 days after the date of the financial state-

ments, file with the Regional Office of the

Commission for the region in which he has

his principal place of business two (2) copies

of the statements specified in subparagraph

(k)(3) of this rule which shall be deemed

confidential.

(2) The requirements of subparagraph

(k) (1) shall not apply to a broker or dealer:

(A) who is exempt from Rule 15c3-1 under

the provisions of subparagraph (b) (3)

thereof, or; (B) whose activities are limited

to any combination of the following and

which are conducted in the manner pre-

scribed herein:

(i) as introducing member, broker or

dealer, the forwarding of all the transactions

of his customers to a clearing member,

broker or dealer on a fully disclosed basis:

provided that such clearing member, broker

or dealer reflects such transactions on its

books and records in accounts it carries in

the names of such customers and that the

introducing member, broker or dealer does

not hold funds or securities for, or owe

funds or securities to, customers other than

funds and securities promptly forwarded to

the clearing member, broker or dealer or

to customers ;

(ii) the prompt forwarding >f subscri

tions for securities to the issuer, underwriter

or other distributor of such securities and

of receiving checks, drafts, notes or other

evidences of indebtedness payable solely to

the issuer, underwriter or other distributor

who delivers the security directly to the sub-

scriber or to a custodian bank, if the broker-

dealer does not otherwise hold funds or

securities for, or Owe money or securities

to, customers ;

(iii) the sale and redemption of redeem-

able shares of registered investment com-

panies or the solicitation of share accounts

of savings and loan associations in the man-

ner contemplated by the $2,500 minimum net

capital requirement of Rule 15c3-1 under

the Act or the offering to extend any credit

to or participate in arranging a loan for a

customer to purchase insurance in connec-

tion with the sale of redeemable shares of

registered investment companies; and

(iv) conduct which would exempt the

broker-dealer from the provisions of Rule

17a-13 by reason of the provisions of para-

graph (a) thereof.

(3) The statements to be furnished the

Commission in accordance with subparagraph

(k)(1) are as follows: a balance sheet

based on the report of financial condition

required by paragraph (a) (1) of this rule;

a statement of income, a statement of

source and application funds, a statement of

changes in subordinated accounts, and a

statement of changes in sole proprietors’

capital or the aggregate of partners’ capital

accounts or each component of corporate

stockholders’ equity for the period since the

date of the immediately preceding report

filed pursuant to this rule. The report of

a newly registered member, broker or dealer

shall cover the period since the date of the

statement of financial condition included in

the application for registration on Form

BD unless such newly registered member,

broker or dealer is succeeding to and con-

tinuing the business of another member,

broker or dealer, in which event the report

shall cover the period since the date of the

immediately preceding report filed pursuant

to this rule by the predecessor member,

broker or dealer. The statements required

by this paragraph shall be governed as to

form and content by Regulation S-X and

shall be certified by a certified public ac-

countant or public accountant who shall be

in fact independent, unless the member,

broker or dealer meets the requirements for

exemption from certification in paragraph

(b) hereof.

(1) If within 90 days after the close of its

calendar or fiscal year a member, broker or

dealer files with the Commission certified

unconsolidated financial statements which are

equivalent to those required by subparagraph

(k)(3) of this rule, then such statements may

be used in lieu of the statements required in

paragraph (k).

(m) STATEMENTS TO BE FURNISHED CUS-

TOMERS.—Every member, broker or dealer

who is subject to paragraph (k) or (1) of

this 1ule shall send to its customers (as

defined in paragraph (0) hereof) the follow-

ing information at the same time as it files

with the Commission the information re-

quired by paragraph (k):

(1) An unconsolidated balance sheet

with appropriate notes including but not

limited to the nature, amounts and maturi-

ties of subordinated capitalization which

shall be certified if the financial statements

furnished in accordance with subparagraph

(k)(3) are required to be certified.

(2) A statement indicating the amount

of the firm’s net capital and its required

net capital, computed in accordance with

Rule 15c3-1 or the net capital rule of the

national securities exchange to which the

member, broker or dealer is subject, with

an explanation thereof;

(3) If in connection with the most

recent report on Form X-17A-5 the inde-

pendent accountant commented on any ma-

terial inadequacies found to exist in the

accounting system, the internal accounting

control, procedures for safeguarding securi-

ties or the procedures followed in comply-

ing with Rule 17a-13 there shall be a

statement by the member, broker or dealer

that a copy of such report and comments

is currently available for the customer’s

inspection at his or its principal office and

at the principal office of the Commission in

Washington, D. C. and the regional office

of the Commission in which the member,

broker or dealer has his or its principal

place of husiness;

(4) A statement indicating that Part I

of the most recent annual report of the

member, broker or dealer on Form X-17A-

5 is available for examination and copying

at the principal office of the member,

broker or dealer and at the regional office

of the Commission for the region in which

the member, broker or dealer has his or

its principal piace of business.

(n) Every member, broker or dealer who

is subject to paragraphs (k), (1) and (m)

of this rule shall furnish customers (as

defined in paragraph (0) of this rule) and

shall file with the Regional Office of the

Commission tor the region in which the

member, broker or dealer has his principal

place of business and with the national

securities exchange and the national securi-

ties association of which he is a member

(or, if he is not a member, only with the

Commission) not later than 285 days from

the date of the audited statements required

by paragraph (m) of this rule, an unaudited

statement containing the information speci-

fied in subparagraphs (m)(1) and (m) (2)

of this rule which shall be as of the date of

the member’s, broker’s or dealer’s fiscal

period which ends nearest to 6 months from

the date of the audited statements required

to be furnished to customers pursuant to

paragraph (m) of this rule.

(o) For purposes of paragraphs (m) and

(n) of this rule the term customer includes

any person (other than another member,

broker or dealer, but including a person who

is a customer of an introducing member,

broker or dealer who is exempted by clause

(b) (i) of subparagraph (k) (2) of this rule),

for or with whom a broker-dealer has effected

a securities transaction in a particular month,

which month shall be either the month of the

balance sheet date or a month following the

balance sheet date in which the statement is

sent and in addition, any person for whom

the member, broker or dealer holds securities

for safekeeping or as collateral or for whom

the member, broker or dealer carries a free

credit balance in the month in which custom-

ers are determined for purpos’s of this rule.

3la

18 U.S.C.

18 U.S.C.

32a

§ 1. Offenses classified

Notwithstanding any Act of Congress to the contrary:

(1) Any offense punishable by death or imprisonment for a term

exceeding: one year is a felony.

(2) Any other offense is a misdemeanor.

(3) Any misdemeanor, the penalty for which does not exceed im-

prisonment for a period of six months or a fine of not more than

$500, or both, is a petty offense.

§ 371. Conspiracy to commit offense or to defraud United

States

If two or more persons conspire either to commit any offense

against the United States, or to defraud the United States, or any

agency thereof in any manner or for any purpose, and one or more

of such persons do any act to effect the object of the conspirecr, each

shall be fined not more than $10,000 or imprisoned not more tkan

five years, or both.

If, however, the offense, the commission of which is the object

of the conspiracy, is a misdemeanor only, the punishment for such

conspiracy shall not exceed the maximum punishment provided for

such misdemeanor.

Rule 7(a), Fed. R. Crim. Proc.

Rule 7. The Indictment and the Information

* * *

(c) Nature and Contents.

(1) In General. The indictment or the information shall be a

plain, concise and definite written statement of the essential

facts constituting the offense charged. It shall be signed by

the attorney for the government. It need not contain a formal

ccmmencement, a formal conclusion or any other matter not

necessary to such statement. Allegations made in one count

may be incorporated by reference in another count. It may be

alleged in a single count that the means by which the defendant

committed the offense are unknown or that he committed it by

one or more specified means. The indictment or information

shall] state for each count the official or customary citation of

the statute, rule, regulation or other provision of law which the

defendant is alleged therein to have violated.

(2) Criminal Forfeiture. When an offense charged may re-

sult in a criminal forfeiture, the indictment or the information

shall allege the extent of the interest or property subject to for-

feiture.

(3) Harmless Error. Error in the citation or its omission

shall not be ground for dismissal of the indictment or informa-

tion or for reversal of a conviction if the error or omission did

nct mislead the defendant to his prejudice.