# Petition — Anderson v. United States

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_2347%3A1

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1976
- **Citation:** 429 U.S. 822

## Text

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

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_2347%3A1. Public record. Not legal advice.