Appendix — Davis v. United States
Supreme Court brief1976
Ask Donna
What actually matters in this document.
Text
IN THE MICHAEL RODAK, JA_CLERE
Supreme Court of the United States
OcTOBER TERM, 1976
No. 76-337
Cuester C. Davis, Petitioner,
V.
UNITED STATES OF AMERICA, Respondent.
APPENDIX TO
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR
THE NINTH CIRCUIT
(‘ARLES ALAN WRIGHT
2500 Red River
Austin, Texas 78712
Moses Lasky
Bropeck, Puiecer & Harrisos
111 Sutter Street
San Franciseo, California 94104
Telephone: (415) 434-0900
EK. Barrett PrerrymMan, Jr.
SuHerwin J. MARKMAN
JosepH M. Hasserr
HoGan & HARTSON
815 Connecticut Avenue, N.W.
Washington, D. C. 20006
Telephone: (202) 331-4500
Maxwe.w EK, Cox
Davis & Cox
One State Street Plaza
New York, New York 10004
Telephone: (212) 425-0500
Attorneys for Petitioner
ee _ Ee S_______ _________ __________________ —___ —
Press or Byron S. Apams Parntine, Inc., Wasntncton, D. C.
INDEX TO APPENDIX
Page
Constitutional Provisions, Statutes, and Regulations
PIPED cccccnccescvcccevecscsscnccesoeceeses la
Excerpts from Transcript of Proceedings on Janu-
ary 30, 1974, on the Motion to Dismiss the First
PE 66.566 deKdne 650 6nndsecsdsicvedececes 4a
Indictment returned July 30, 1974 ........... seuss 6a
Excerpts from Transcript of Proceedings on October
25, 1974, on the Motion to Dismiss the Second
Dh h'0-0-0- 60 00.06 655 0550600064600045000008 l6a
Order of the United States District Court for the Dis-
trict of Nevada dismissing the Indictment ...... 19a
Excerpt from Appellant’s reply brief filed in the Court
OE GI hack dnb wecedsdaceusceeesesikdnceses 25a
Opinion of the Court of Appeals .................4. 27a
Order of the Court of Appeals denying the petition
for rehearing and rejecting the suggestion for
Se Ge SD dnoun de euncsdeeneeniseseesds 58a
ee ee
la
APPENDIX
CONSTITUTIONAL PROVISIONS, STATUTES, AND
REGULATIONS INVOLVED
The Constitution of the United States:
AMENDMENT V
No person shall be held to answer for a capital, or
otherwise infamous 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 jeopardy of life or limb; nor shall be com-
pelled in any criminal case to be a witness against him-
self, nor be deprived of life, liberty, or property, with-
out due process of law; nor shall private property be
taken for public use, without just compensation.
AMENDMENT VI
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 con-
fronted with the witnesses against him; to have com-
pulsory process for obtaining witnesses in his favor,
and to have the Assistance of Counsel for his defence.
United States Code, Title 15:
§ 78i. Manipulation of security prices.
(a) It shall be unlawful for any person, directly or
indirectly, by the use of the mails or any means or in-
strumentality of interstate commerce, or of any facility
2a
of any national securities exchange, or for any mem-
ber of a national securities exchange—
(1) For the purpose of creating a false or mis-
leading appearance of active trading in any security
registered on a national securities exchange, or a
false or misleading appearance with respect to the
market for any such security, (A) to effect any trans-
action in such security which involves no change in
the beneficial ownership thereof, or (B) to enter an
order or orders for the purchase of such security
with the knowledge that an order or orders of sub-
stantially the same size, at substantially the same
time, and at substantially the same price, for the
sale of any such security, has been or will be entered
by or for the same or different parties, or (C) to
enter any order or orders for the sale of any such
security with the knowledge that an order or orders
of substantially the same size, at substantially the
same time, and at substantially the same price, for
the purchase of such security, has been or will be
entered by or for the same or different parties.
(2) To effect, alone or with one or more other
persons, a series of transactions in any security
registered on a national securities exchange creating
actual or apparent active trading in such security
or raising or depressing the price of such security,
for the purpose of inducing the purchase or sale of
such security by others.
$ 78}. Manipulative and deceptive devices.
It shall be unlawful for any person, directly or in-
directly, by the use of any means or instrumentality of
interstate commerce or of the mails, or of any facility
of any national securities exchange—
3a
(b) To use or employ, in connection with the pur-
chase or sale of any security registered on a national
securities exchange or any security not so registered,
any manipulative or deceptive device or contrivance
in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate
in the public interest or for the protection of investors.
Code of Federal Regulations, Title 17:
§ 240.10b-5. Employment of manipulative and deceptive
devices,
It shall be unlawful for any person, directly or in-
directly, by the use of any means or inst rumentality of
interstate commerce, or of the mails or of any facility
of any national securities exchange,
(a) To employ any device, scheme, or artifice to de-
fraud,
(b) To make any untrue statement of a material fact
or to omit to state a material fact necessary in order
to make the statements made, in the light of the cir-
cumstances under which they were made, not mislead-
ing, or
(ec) To engage in any act, practice, or cours: of busi-
ness which operates or would operate as a fraud or
deceit upon any person,
in connection with the purchase or sale of any security.
4a
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEVADA
Honoras_e Bruce R. THompson, J uDGE
Unitep States or Amentca, Plaintiff
v.
Howarp Hucues, Davin B. Cuarnay, Cuester C. Davis,
Rosert A, Manev, James H. Naw, Defendants
No, LV-2843-BRT
Motions To Dismiss Indictments
Reno, Nevada, Wednesday, January 30, 1974, 9:30 o’clock
A.M.
APPEARANCES:
For the Plaintiff:
V. DeVoe Heatoy, Esa.,
United States Attorney,
Lawrence J. SemenzA, Eso,
Assistant United States Attorney,
Paut 8. Gotpman, Ese,
Assistant United States Attorney,
Dean VERNON, Esa.,
Assistant United States Attorney,
United States Courthouse,
300 Booth Street,
Reno, Nevada 89502
. . *
The Court: Are there any facts that indicate those are
crimes?
Mr. Heaton [United States Attorney]: Excuse me, your
Honor?
5a
The Court: Are there any facts that indicate those are
crimes? What if Hank Greenspun did sell his stock?
Mr. Heaton: Your Honor, in response to that, every act
that has been done here, that has been spoken of here,
could have been performed lawfully. But that is not the
contention, obviously. It is no crime for Mr. Greenspun or
Mr. Crockett or Mr. Charnay to sell stock. But if that stock
is sold under a promise that they would be reimbursed for
any loss, and to sell it on a certain day, in other words to
dump a certain number of shares on the market on a cer-
tain day, with a promise that they would be reimbursed for
any loss that tiey took, and this for the purpose of coerc-
ing the directors in order to change their mind, change their
position, then what otherwise might be a very legitimate,
lawful and innocent act, can carry criminal consequences.
The Court: What Federal statute does that violate?
The Court: And I think it should be said that in all
my experience, this is the worst criminal pleading I have
ever encountered.
a o _
6a
[U. S. District Court
District or NEVADA
FILED
July 30, 1974
JouN A. Porter, Clerk]
V. DeVor Heaton
United States Attorney
300 Las Vegas Boulevard South
Las Vegas, Nevada 89101
385-6336
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
Criminal LV 74-129
Unirep Srates or America, Plaintiff,
v.
Davip B. Cuarnay, Cuester C. Davis, Howarp R. Hucues,
and Rosert A. Maunevu, Defendants.
INDICTMENT for violation of Title 18, United States Code,
Sections 371, 1343 and 2; Title 15, United States Code, Sec-
tions 78j(b) and 78if (Conspiracy: stock manipulation: wire
fraud; aiding and abetting)
Tue Granp Jury CHaARGEs:
Count!
1. From on or about July 1, 1968, up to and including
the date of this indictment, the defendant Howarp R.
Hvucues was the sole stockholder and the managing agent
responsible for, and controlling the operation of, the
Hughes Tool Company (now known as Summa Corpora-
tion), a Delaware corporation (hereinafter referred to as
‘*Hughes Tool’’).
2. The defendant Cuester C. Davis, from on or about
July 1, 1968, up to and including the date of this indict-
a was an attorney who acted as counsel for Hughes
ool.
7a
3. The defendant Rosert A. Mauev, from on or about
July, 1968, up to and including December, 1970, was chief
executive officer of Hughes/Nevada Operations (herein-
after referred to as Hughes/Nevada) which was controlled
by defendant Hlowarp R. HuGues and Hughes Tool.
4. The defendant Davm B. Cuarnay, from on or about
July 1, 1968, up to and including August, 1969, was author-
ized to purchase and sell securities on behalf of Continental
General, Inc., a private corporation in which defendant
Davip B. Cuarnay was a principal stockholder.
5. Herman ‘‘Hanx’’ Greenspun (hereinafter referred
to as ‘‘Greenspun’’), named herein as a co-conspirator but
not as a defendant, from on or about July 1, 1968, up to
and ineluding April, 1970, was the owner and publisher of
the Las Vegas Sun, a newspaper of general circulation in
Las Vegas, Nevada. On or about December 31, 1968,
Greenspun owned or controlled approximately 15,000
shares of common stock of Air West, Inc. (hereinafter re-
ferred to as ‘‘Air West’’).
6. Grorce Crockett (hereinafter referred to as “Crock-
ett’’?) named herein as a co-conspirator but not as a de-
fendant, had various dealings with Hughes Tool in 1968
and 1969. On or about December 31, 1968, Crockett owned
or controlled approximately 12,000 shares of Air West com-
mon stock,
7. From on or about July, 1968, up to and ineluding
March, 1970, Air West was a corporation organized under
Delaware law whose common stock was registered and
traded on the American Stock Exchange (hereinafter re-
ferred to as ‘‘the AMEX’’), a national securities exchange
as defined in Section 3(a)(1) of the Securities Exchange
Act of 1934, Title 15, United States Code, Section 78c
(a) (1).
8. On or about August, 1968, defendant Howarp R.
Hvaues did instruct defendants Rosert A. MAnev and
8a
Cnester C. Davis to make an offer on behalf of Hughes
Tool to acquire the assets of Air West for cash at a price
allegedly designed to yield the stockholders of Air West
approximately $22.00 per share.
9. On or about August 12, 1968, the Hughes Tool pro-
posal was publicly announced.
10. On or about December 28, 1968, at a special meet-
ing of the stockholders of Air West called by the Board of
Directors of that corporation to consider and act upon the
Hughes Tool proposal, Air West stockholders voted to au-
thorize the acceptance of the Hughes Tool proposal by an
approximate majority of 52%. On December 28, 1968, the
members of the Board of Directors of Air West voted to
oe the Hughes Tool proposal by a vote of thirteen to
eleven.
11. From on or about December 28, 1968, to on or
about December 31, 1968, in the District of Nevada and
elsewhere, Howarp R. Hucues, Davin B. Cuarnay, CHESTER
(, Davis and Rosert A. Manev (hereinafter referred to as
the defendants) and George Crockett and Herman Green-
spun, named herein as co-conspirators but not as defend-
ants, and others to the Grand Jury known and unknown,
unlawfully, wilfully and knowingly did combine, conspire,
confederate and agree together and with each other to
commit certain offenses against the United States, to wit:
to violate Title 15, United States Code, Sections 78j(b),
78ff and Rule 10b-5 (17 Code of Federal Regulations, See-
tion 240.10b-5), promulgated thereunder by the United
States Securities and Exchange Commission and Title 18
United States Code, Section 1343.
12. It was part of the conspiracy that the defendants
and co-conspirators, unlawfully, wilfully and knowingly,
directly and indirectly, in connection with the purchase and
sale of Air West securities, by the use of the means and
instrumentalities of interstate commerce and by the use of
—_
9a
the mails and of the facilities of a national securities ex-
change, would use and employ manipulative and deceptive
devices and contrivances, in contravention of 15 U.S.C.
78j(b), 78ff and Rule 10b-5 (17 Code of Federal Regula-
tions, Section 240.10b-5), a rule promulgated thereunder by
the United States Securities and Exchange Commission as
necessary and appropriate in the public interest and for
the protection of investors.
13. It was a part of the conspiracy that the defendants
and co-conspirators, would unlawfully, wilfully and know-
ingly transmit and cause to be transmitted in interstate
commerce by means of wire communications certain writ-
ings, signs, signals and sounds for the purpose of execut-
ing a scheme and artifice to defraud whereby the defend-
ants would acquire for the Hughes Tool Company the as-
sets of Air West by fraudulently attempting to induce and
inducing the directors of Air West, who had voted against
the Hughes Tool Company proposal, to change their votes
and accept the proposal before it was due to expire on
midnight December 31, 1968, thereby depriving the direc-
tors and shareholders of Air West of their right to have
the business of Air West, that is, the consideration and
decision concerning the acceptance of the Hughes Tool
Company proposal as well as other offers, conducted im-
partially, unimpaired, unhampered and free from improper
and undue influence, deceit, craft, trickery and fraud, in
violation of Section 1343, Title 18, United States Code.
14. Among the means by which the defendants and co-
conspirators would carry out the conspiracy were the fol-
lowing:
a. Defendants Howarp R. Hvuenes, Cuester C.
Davis and Rosert A. Manev would represent to stock-
holders of Air West and others that if the Hughes Tool
proposal was not accepted by Air West, the price of the
common stock of Air West would decline substantially.
10a
b. Defendants Howarp R. Huenes, Cuester C.
Davis, Rosert A. Manev and Davin B. Cuarnay, aided by
co-conspirators Greenspun and Crockett, would manipulate
and cause a decline in the market price of Air West com-
mon stock on the AMEX in the following manner:
(1) Defendants Howarp R, Hueues, Cuester C.
Davis and Rospert A. Manev entered into an agreement on
December 31, 1968, with defendant Davin B. CHarnay
whereby defendant CHarnay would sell Air West stock
‘*short’’ on the AMEX and the defendants Howarp R.
Hvucues, Cuester C. Davis and Roperrt A. Manev would
pay and cause to pay the defendant Cuarwnay for his assist-
ance and reimburse him for any losses he might sustain
for his ‘‘short’’ sales.
(2) Defendants Howarn R. Hucues, Cuester C,
Davis and Roserr A. Manev would enter into agreements
on or about December 31, 1968, with co-conspirators Green-
spun and Crockett whereby said co-conspirators would sell
their Air West stock on the AMEX and defendants Howarp
R. Hvueues, Cuester C, Davis and Rospert A. Manev would
pay and cause to pay them for their assistance and would
assure them $22 per share for selling their Air West stock
regardless of the price they would receive for selling such
stock on December 31, 1968.
e. As a result of their manipulative activities, de-
fendants Howarp R. Hvenes, Cuester C. Davis, Ropert A.
Manev and Davip B, Cuarnay and co-conspirators Green-
spun and Crockett, among other things: (1) caused and
contributed to the decline in the market price of Air West
common stock on the AMEX on December 31, 1968, from
an opening price of $18.00 per share to a price of $15.75
per share as of the same day, and (2) caused the Air West
stockholders who sold their stock in the declining market
to receive the proceeds from their sales at artificially de-
pressed prices.
lla
d. On or about December 31, 1968, defendants
Howarv R. Hvucnues, Cuester C. Davis and Roperr A.
Manevu would cause telegrams to be sent to Air West di-
rectors who had voted against the Hughes Tool proposal
urging them to change their vote to a vote in favor of
accepting that proposal and threatening said directors with
lawsuits in the event they did not do so.
e. For the purpose of coercing the Air West direc-
tors who had voted against the Hughes proposal to change
their votes, defendants Howarp R. Huenes, Cuester C,
Davis and Roserr A. Manev, on or about December 31,
1968, would cause lawsuits seeking damages to be filed by
Air West shareholders and directors against the Air West
directors who had voted against the Hughes Tool proposal
alleging, among other things, that these directors had
breached their obligations to the Air West shareholders by
refusing to accept the Hughes Tool proposal and further
would cause court orders to be entered against these same
directors, ordering that the Air West common stock of said
directors be seized and held by the court.
Overt Acts
In furtherance of said conspiracy and to effect the ob-
jects thereof, the defendants and their co-conspirators com-—
mitted and caused to be committed the following overt acts,
among others, in the District of Nevada and elsewhere:
a. On or about December 28, 1968, defendants Rosert
A. Manev and Cuester C. Davis in San Francisco, Cali-
fornia, had an interstate telephone conversation with co-
conspirator Greenspun in Las Vegas, Nevada.
b. On or about December 29, 1968, defendant Roserr
A. Manev had a telephone conversation in Las Vegas,
Nevada, with co-conspirator Crockett.
ce. On or about December 29, 1968, defendant Crester
C. Davis had a conversation in Las Vegas, Nevada, with
an attorney from Wilmington, Delaware.
12a
d. On or about December 30, 1968, defendant Roserr
A. Manev caused a list of Air West directors who had
voted against the Hughes Tool proposal to be delivered to
co-conspirator George Crockett in Las Vegas, Nevada.
e. On or about December 31, 1968, the defendants
caused co-conspirator Herman Greenspun in Las Vegas,
Nevada, to place an order to sell 15,000 shares of Air West
stock.
f. On or about December 31, 1968, defendants Howarp
R. Hvucues and Ropert A. Manevu caused co-conspirator
George Crockett in Las Vegas, Nevada, to send interstate
telegrams to directors of Air West who had voted against
the Hughes proposal.
g. On or about December 31, 1968, the defendants
caused co-conspirator George Crockett in Las Vegas, Ne-
vada, to place an order to sell 12,000 shares of Air West
stock on the AMEX.
h. On or about December 31, 1968, defendants Roserr
A. Manev, Cuester C. Davis and Davin B, Cuarnay met at
defendant Manevu’s home in Las Vegas, Nevada.
i. On or about December 31, 1968, defendant Davm B.
Cuarnay, in Las Vegas, Nevada, placed orders by inter-
state telephone with a securities salesman in New York,
New York, to sell ‘‘short’’ approximately 59,100 shares of
Air West stock of which 19,100 shares were sold ‘‘short’’
on the AMEX.
j. On or about December 31, 1968, the defendants
caused representatives of Hughes Tool to enter into a
contract with representatives of Air West to acquire the
assets of Air West, Ince.
All in violation of Title 18, United States Code, Section
371.
13a
Count IT
(15 U.S.C. 78j(b))
1. The Grand Jury realleges and incorporates by ref-
erence herein each and every allegation set forth in para-
graph 1 through 10 of Count I of this indictment as though
fully set forth herein.
2. From on or about December 28, 1968, to on or about
December 31, 1968, in the District of Nevada, Howarp R.
Hvucues, Daviy B. Coarnay, Cuester C. Davis and Rosert
A. Manev defendants herein, and George Crockett and
Herman Greenspun, named herein as co-conspirators but
not as defendants, did unlawfully, wilfully and knowingly,
in connection with the purchase and sale of securities, to
wit, the common stock of Air West, directly and indirectly,
by the use of the means and instrumentalities of interstate
commerce and the mails and the facilities of a national
securities exchange, (a) employ a device, scheme, and arti-
fice to defraud, (b) make untrue statements of material
facts and omit to state material facts necessary in order
to make the statements made, in the light of the cireum-
stances under which they were made, not misleading, and
(c) engage in acts, practices and courses of business which
operated as a fraud and deceit upon purchasers and sellers
of Air West securities.
3. The allegations contained in paragraph 14a through
14e of Count I of this indictment are realleged as though
fully set forth herein as constituting and describing the
means by which the defendants committed the offense
charged in paragraph 2 of this count.
4. On or about December 31, 1968, in the District of
Nevada, defendants Howarp R. Hucues, Davin B. Cuarnay,
Cuester C. Davis and Rospert A. Manev, did unlawfully,
wilfully and knowingly use and caused to be used means
and instrumentalities of interstate commerce, in connec-
tion with sale of the above said securities by causing an
l4a
interstate telephone call to be made by George Crockett
from Las Vegas, Nevada, to a securities salesman in
Phoenix, Arizona, for the purpose of placing an order to
sell 12,000 shares of Air West common stock; all in viola-
tion of Title 15, United States Code, Sections 78j(b) and
78ff; 17 C.F.R. 240, 10b-5, and Title 18, United States Code,
Section 2.
Count III
(18 U.S.C, 1343)
1. The Grand Jury realleges and incorporates by ref-
erence herein each and every allegation set forth in para-
graphs 1 through 10 of Count I of this indictment as though
fully set forth herein.
2. From on or about December 28, 1968, to on or about
December 31, 1968, in the District of Nevada, Howarp R.
Hvucues, Davm B. Cuarnay, Cuester C. Davis and Ropert
A. Marev, defendants herein, and Herman Greenspun and
George Crockett, named herein as co-conspirators but not
as defendants, did devise and intend to devise a scheme
and artifice to defraud the directors and stockholders of
Air West, which said scheme and artifice to defraud is set
forth more fully in paragraphs 13 and 14a through 14e of
Count I of this indictment, all of which are incorporated
by reference herein as though fully set forth herein.
3. On or about December 31, 1968, in the District of
Nevada, defendants Howarp R. Hueues, Davin B. Cuarnay,
Cnester C. Davis and Ropert A. Manev, for the purpose
of executing the aforesaid scheme and artifice to defraud,
and attempting to do so, did transmit and cause to be trans-
mitted in interstate commerce by means of a wire commu-
nication, that is, a telephone conversation between defend-
ant Davin B. Cuarnay in Las Vegas, Nevada, and a securi-
ties salesman in New York City, New York, certain signs,
signals, and sounds; all in violation of Title 18, United
States Code, Sections 1343 and 2.
15a
Count IV
(18 U.S.C. 1343)
1. The Grand Jury realleges and incorporates by ref-
erence herein each and every allegation set forth in para-
graphs 1 through 10 of Count I of this indictment as though
fully set forth herein.
2. From on or about December 28, 1968, to on or about
December 31, 1968, in the District of Nevada, Howarp R.
Hvuoues, Dav B. Cuarnay, Cuester C. Davis and Rosertr
A. Manevu, defendants herein, and Herman Greenspun and
George Crockett, named herein as co-conspirators but not
as defendants, did devise and intend to devise a scheme
and artifice to defraud the directors and stockholders of
Air West, which said scheme and artifice to defraud is set
forth more fully in paragraphs 13 and 14a through 14e of
Count I of this indictment, all of which are incorporated
by reference herein as though fully set forth herein.
3. On or about December 31, 1968, in the District of
Nevada, defendants Howarp R. Hucues, Davin B. Cuarnay,
Cnester C. Davis and Ropert A. Manev, for the purpose
of executing the aforesaid scheme and artifice to defraud,
and attempting to do so, did transmit and cause to be trans-
mitted in interstate commerce by means of a wire commu-
nication, that is, a ielephone conversation between the
brokerage firm of Goodbody and Company, in Las Vegas,
Nevada, and the AMEX in New York, New York, certain
signs, signals and sounds; all in violation of Title 18,
United States Code, Sections 1343 and 2.
A True Buu:
Gwinn B. Armstrone
Foreman of the Grand Jury
V. DeVoe Heaton
United States Attorney
l6a
IN THE UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
No. 74-129 BRT
Tue Unrrep States, Plaintiff,
Vv.
Davin D. Cuarnay, Cuester D. Davis, Howarp R. Hvenes,
and Roperr A. Manev, Defendants.
PROCEEDINGS
Friday, October 25, 1974
10:00 o’clock a.m.
Appearances:
For the United States: V. DeVoz Heaton,
United States Attorney,
Las Vegas, Nevada.
Jeremian Hanpy,
United States Attorney,
Western District of Nevada.
Lawrence J. Semenza,
Assistant United States Attorney,
Reno, Nevada.
Mr. Handy [United States Attorney]:
It is my view in this particular ease—and the authorities
so hold. As a matter of fact, the Texas Gulf Sulphur case
is abundantly clear that 10(b) was passed for the purpose,
as it says in Texas Gulf Sulphur, in connection with the
purchase or sale of any security, intended only that the
device employed, whatever it might be, be of a sort that
would cause a reasonable investor to rely thereon, and in
connection therewith, and so relying, cause them to pur-
chase or sell a corporation’s securities.
17a
That is the crux. In the indictment, we are directing our
attention toward the se'lers of Air West stock. It is al-
leged in both Count II, and it is also alleged in Paragraph
14-c, I believe. And that is who the fraud and deceit is
being practiced upon: those people who are unaware of the
activities of these defendants, at the time and place, during
December of 1968. And the focus of the Court must be not
on defendants or the co-conspirators that are alleged in
the case and their selling of the stock, but the other sellers
of Air West securities.
In the indictment, it says: To engage in acts and prac-
tices and courses of business which operated as a defraud
and a deceit upon the purchasers and sellers of Air West
securities.
That is the allegation. Directly following that, it goes
to Paragraph 3, and it incorporates by reference 14-a
through e. And in particular in 14-c—I believe | am cor-
rect on that—we are talking about the Air West stock-
holders,
In 14-c, we inake two allegations: one, caused and con-
tributed to the decline in the market price of Air West
common stock on the AMEX on December 31st, of 1968;
two, caused Air West stockholders, who sold their stock in
a declining market, to receive the proceeds from the sales
at artificially-depressed prices.
Now, when the defendants would make the representa-
tions as set forth in 14-a, it would be reasonably foresee.
able to them that this conduct which is prohibited by
10(b)-5 would cause those other people in the marketplace
to sell their stock at an artificially-depressed price. That
conduet occurred. These were the means that these gentle-
men used in order to acquire the assets of Air West. That
is the focal point, as I see it, in this particular case,
The allegations are there. We are saying in this indict-
ment that those people were caused to sell their stock.
18a
We define the class, because it was Air West stockholders.
We did not say who they were, but that may be properly
the subject of a bill of particulars.
In my view, in this particular case, the stockholders, we
have alleged that they did sell their stock at depressed
prices, The lie and the deceit, the fraud being practiced,
is that these gentlemen got together, made a representation
in the following manner: that they would represent to the
stockholders of Air West—which is all of them—and others,
that, if the Hughes Tool proposal was not accepted by Air
West, the price of the common stock would decline sub-
stantially. 3
They knew at that time. That is the allegation that is
directed at a certain class of people, and at that time the
following acts were done, as alleged in B1 and 2, whereby
Charnay would sell short; Greenspun and Crockett would
dump their shares into the open market.
They could reasonably foresee that this conduct would
decline the price of stock to the detriment of the other
stockholders of Air West who are not aware in any manner
that this conduct was going on, and were not aware in any
manner that there were any guarantees, as pleaded in this
indictment, to these gentlemen that they wouldn’t sustain
any loss and would be made whole, and, therefore an
offense has been charged.
19a
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEVADA
Cr. No. LV-74-129 BRT
Unrtep States or AMERICA,
Plaintiff,
vs.
Davin B. Cuarnay, Cuester C. Davis, Howarp R.
Hvuones and Roserr A. Manev,
Defendants.
Order Dismissirne Indictment
This imposing Indictment, comprising more than nine
pages, suffers from a fatal disease. It fails to state a
public offense.
The Indictment is in four counts. Count I charges de-
fendants Charnay, Davis, Hughes and Maheu with an un-
lawful conspiracy to acquire the assets of Air West, Inc.
Admittedly, the overall purpose of the effort was lawful.
The gravamen of the Indictment is that unlawful means
were employed by agreement as part of the conspiracy in
order to accomplish the ultimate objective. The unlawful
means were the employment of a scheme or artifice to de-
fraud by means of wire communication in violation of 18
U.S.C. § 1343 and the use of the mails and instrumentalities
of interstate commerce and facilities of a national securities
exchange in the employment of manipulative and decep-
tive devices in violation of 15 U.S.C. §78b, 15 U.S.C.
§ 78ff, and 17 CFR § 240.10b-5.
Count II of the Indictment charges the employment of
a manipulative or deceptive device or contrivance in vio-
lation of 15 U.S.C. § 78)(b).
Counts III and IV charge the use of interstate wire
communications to effectuate a scheme and artifice to de-
fraud the directors and stockholders of Air West, Inc. in
violation of 18 U.S.C. § 1343.
20a
The background facts alleged in the Indictment are that
in August of 1968, defendants made an offer on behalf of
Hughes Tool Company to acquire all the assets of Air West
at a price which would yield to the stockholders approxi-
mately $22 per share; that on December 28, 1968, a major-
ity of the stockholders voted to accept the offer; that on
the same day, a majority of the directors voted to reject
the offer; that in order to coerce the directors to change
their vote, defendants would threaten the opposition diree-
tors with lawsuits, would file such lawsuits and would arti-
ticially depress the price of Air West stock on the American
Stock Exchange by causing Charnay to sell 59,100 shares
of Air West stock ‘‘short,’’ by causing Herman Greenspun
to sell 15,000 shares of Air West stock and by causing
Crockett to sell 12,000 shares of Air West stock on the
American Securities Exchange, and at the same time,
guaranteeing to these sellers by seeret understanding a re-
covery of $22 per share irrespective of the price obtained
on the exchange. It is alleged that these activities caused
a decline in the market price of Air West stock on
December 31, 1968 from $18 per share to $15.75 per share.
The Government frankly concedes that unless these
activities were unlawful under 15 U.S.C. §78j(b), the In-
dictment does not allege a conspiracy to use unlawful
means to acquire the assets of Air West and does not
allege a scheme and artifice to defraud. The section cited
provides:
‘Tt shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality
of interstate commerce or of the mails, or of any
facility of any national securities exchange—
‘;*® * *
‘*(b) To use or employ, in connection with the
purchase or sale of any security registered on a na-
tional securities exchange or any security not so regis-
tered, any manipulative or deceptive device or con-
21a
trivance in contravention of such rules and regulations
as the Commission may prescribe as necessary or ap-
propriate in the public interest or for the protection
of imvestors.’”’ 15 U.S.C. §78j(b). (Underlining
added. )
In implementation of this statute, the Commission has
adopted rules and regulations to which we must turn to
determine what manipulative or deceptive devices or con-
trivaneces have been declared unlawful. The basic section
of the regulations is section 240.10b-1 (17 CFR § 240.10b-1).
‘‘The term ‘manipulative or deceptive device or
contrivance,’ as used in section 10(b) (48 Stat. 891;
15 U.S.C. 78j(b) ), is hereby defined to include any
act or omission to act with respect to any security
exempted from the operation of section 12(a) 48 Stat.
892; 15 U.S.C. 78L(a) ) pursuant to any section in
this part which specifically provides that this section
shall be applicable to such security. If such act or
omission to act would have been unlawful under sec-
tion 9(a) (48 Stat. 889; 15 U.S.C. 78i(a) ), or any
rule or regulation heretofore or hereafter prescribed
thereunder, if done or omitted to be done with respect
to a security registered on a national securities ex-
change, and the use of any means or instrumentality
of interstate commerce or of the mails or of any facility
of any national securities exchange to use or employ
any such device or contrivance in connection with the
purchase or sale of any such security is hereby pro-
hibited.’’
The first portion of this definition of manipulative or
deceptive device or contrivance incorporates section 9(a)
of the Act (15 U.S.C. § 78i(a) ), which provides, in per-
tinent part:
‘*(a) It shall be unlawful for any person, directly
or indirectly, by the use of the mails or any means or
instrumentality of interstate commerce, or of any
22a
facility of any national securities exchange, or for any
member of a national securities exchange—
‘(es * *®
**(2) To effect, alone or with one or more other
persons, a series of transactions in any security regis-
tered on a national securities exchange creating actual
or apparent active trading in such security or raising
or depressing the price of such security, for the pur-
pose of inducing the purchase or sale of such security
by others.’’ 15 U.S.C. § 78i(a)(2).
This Indictment does not allege a violation of this statute
because it does not allege that the purpose of the trading
activity was ‘‘of inducing the purchase or sale of such
security by others.’’ On the contrary, the Indictment
affirmatively alleges that the purpose was to persuade the
opposing directors to change their votes so that the pur-
chase by Hughes Tool Company of the assets of Air West
could be consummated.
The second portion of 17 CFR § 240.10b-1 defines as an
unlawful manipulative or deceptive device or contrivance
an act made unlawful by a specific regulation. The succeed-
ing sections define such unlawful conduct. Some of the
regulations are readily understandable to a person not
versed in the operations of a national securities exchange
and some are not. They do quite plainly, however, define
activities engaged in to artificially manipulate the market
price of securities. For example: Section 240.10b-4
proscribes the short tendering of a security by a person
who does not own such security; Section 240.10b6 pro-
scribes certain trading activities by an issuer or under-
writer; Section 240.10b-7 proscribes bidding or purchas-
ing to peg, fix or stabilize the price of a security to facili-
tate an offering of such security. There are many other
examples. The importance of these regulations is this:
The Commission has, responsive to 15 U.S.C. §78j(b),
23a
undertaken to define unlawful manipulative and adeceptive
devices and contrivances. Nowhere in the regulations has
the Commission said that it is an unlawful manipulativée Or
deceptive device or contrivance for a person or group oof
persons to cause substantial blocks of a security to be
sold on a national securities exchange for the purpose of
artificially depressing the market price of the security and
to secretly guarantee to the sellers a profit or favorable
return from the sales. That, in. essence, is what this In-
dictment charges.
The Government suggests that 17 C.F.R. § 240.10b-5
abjures such conduct. It provides:
‘‘Tt shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality
of interstate commerce, or of the mails or of any faci-
lity of any national securities exchange,
‘‘(a) To employ any device, scheme, or artifice to
defraud,
‘*(b) To make any untrue statement of a material
fact or to omit to state a material fact necessary in
order to make the statements made, in the light of
the circumstances under which they were made, not
misleading, or
‘*(c) To engage in any act, practice, or course of
business which operates or would operate as a fraud
or deceit upon any person, in connection with the
purchase or sale of any security.’’
This section is basically the anti-fraud provision of the
regulations. It does not purport to define manipulative
activity. In view of the many regulations which do pro-
scribe a variety of activities engaged in to manage or
artificially fix the price of securities on a national exchange,
Rule 10b-5 cannot be relied on as a definition of unlawful
manipulation. The thrust of Rule i0b-5 is to abjure
24a
fraudulent representations, false statements and _half-
truths in the purchase or sale of a security. Supt. of
Insurance v. Bankers Life & Casualty Co., 404 US. 6
(1971). Rule 10b-5 is the Commission’s definition of ‘‘de-
ceptive’’ in 15 U.S.C. §78j, not’ ‘‘manipulative.’’ The
instant Indictment alleges no false representation or half-
truth or omission to state material facts made in connec-
tion with the purchase or sale of a security.
It is a basic tenet of criminal law that: ‘‘Penal statutes
are construed narrowly to insure that no individual is
convicted unless ‘a fair warning (has first been) given
to the world in language that the common world will under-
stand of what the law intends to do if a certain line is
passed.’ ’’ McBoyle v. United States, 283 U.S. 25 (1931).
See also, F.C.C. v. American Broadcasting Co., 347 U.S.
284 (1954).
Inasmuch as we can find no statute or regulation which
renders the alleged conduct of the defendants criminal, the
Indictment must be dismissed. This is not to say that the
conduct alleged, if true, is not reprehensible and an abuse
of the power of great wealth. It is also not to say that
such activity does not expose the actors to possible civil
liability. We hold only that criminal misconduct has not
been alleged. Accordingly,
Ir Heresy Is Orverep that the Indictment returned in
the action entitled above is hereby dismissed.
Dated: November 13, 1974.
/s/ Bruce R. Tompson
United States District Judge
25a
No. 75-1222
IN THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
Unrrep States or America, Appellant,
v. |
Davi B. Cuarnay, Cuester C. Davis, Howarp R. Hucues,
Rosert A, Manev, Appellees.
Appeal from the United States District Court
for the District of Nevada
Reply Brief for Appellant
“" LAWRENCE SEMENZA
United States Attorney
Las Vegas, Nevada
Victor D. Stone
Attorney
Department of Justice
Washington, D. C. 20530
Davip FersBer
Solicitor
Jacos H. StrtuMan
Assistant General Counsel
Securities and Exchange Commission
Washington, D.C. 20549
I. Tue InpictmEeNT ALLEGES Vio.aTions or Rue 10b-5 ano
THe Wire Fravup Stature.
The Government urged, in its main brief, that the indict-
ment alleges violations of Rule 19b-5 and the wire fraud
statute in that (a) it alleges a market manipulation and
(b) it alleges that there were misrepresentations and
omissions. Defendants challenge both of these claims of
violation.
26a
A. Market Manipulation
By repeatedly misstating the allegations of the indict-
ment and the arguments made in the Government’s brief,
defendants set up ‘‘straw-man’’ theories which the Govern-
ment is not urging, and then, by way of challenging these
self-created, non-existent theories, devote considerable ef-
fort to the task of arguing matters which are not in dis-
pute. Thus, the defendants, after attributing to the Gov-
ernment the view that defendants are charged with having
engaged in artificial or sham sales, argue that only actual
or true sales are alleged in the indictment (Br. 16, 17, 20).
But the Government did not argue that the sales were arti-
ficial or sham. The Government argued, as the indictment
alleged, that there were ‘‘artificially depressed prices’’
(emphasis added) (R. 5; main brief, p. 8).
Defendants further characterize the allegations of the
indictment and the arguments in the Government’s main
brief as resting on the proposition that it is an unlawful
manipulation merely to guarantee others against loss on
stock sales which have the effect of depressing the market
price of the stock (Br. 3, * * *).
27a
UNITED STATES COURT OF APPEALS FOR THE
NINTH CIRCUIT
No. 75-1222
Unrrep States or America, Appellant,
v.
Davin B. Cuarnay, Cuester C. Davis, Howarp R. Hues,
Rosert A, Manev, Appellees.
[May 7, 1976],
Appeal from the United States District Court
for the District of Nevada
Opinion
Before: Browntne and Syeep, Circuit Judges, and
Jameson,* District Judge.
Jameson, District Judge:
This appeal from an order dismissing the indictment
presents the question of whether the indictment, alleging
a market manipulation artificially depressing the market
price of a security on a national securities exchange, was
sufficient to charge the defendants-appellees with a conspir-
acy to violate, and the violation of, the antifraud provisions
of Section 10(b) of the Securities and Exchange Act of
1934, 15 U.S.C. 78j(b) and 78ff, Rule 10-b promulgated
thereunder, and the wire fraud statute, 18 U.S.C. § 1343.
We conclude that the indictment was sufficient to allege a
criminal offense and reverse.
Charges against Defendants-A ppellees
Two indictments were returned against defendants-
appellees. The first, filed December 27, 1973, alleged that
conduct of Howard Hughes and his associates in taking
* Honorable W. J. Jameson, United States District Judge for
the District of Montana, sitting by designation.
28a
over Air West, especially certain guarantees against trad-
ing losses given by Hughes, violated 15 U.S.C. $$ 78i(a) (2),
78j(b), 78n and Securities and Exchange Commission
(SEC) Rule 10b-5 (manipulation of security prices, em-
ployment of manipulative devices), and 18 U.S.C. §§ 2, 3, 4,
271 and 1343 (aiding and abetting, accessory after the fact,
misprision of a felony, conspiracy, and wire fraud). This
indictment was dismissed on January 30, 1974, for failure
to state an offense. The Government did not appeal the
dismissal. A second indictment was returned on July 30,
1974 charging that the appellees’ conduct in the Air West
aequisition was in violation of 15 U.S.C. $$ 78j(b), 78ff and
Rule 10b-5 and 18 U.S.C. §§ 2, 371, and 1343, thus omitting
reference to 15 U.S.C. § 78i(a)(2) (manipulation of secur-
ity prices) and 18 U.S.C. §$3 and 4 (aecessory after the
fact, misprision of a felony). The second indictment was
dismissed on November 13, 1974 and is the subject of this
appeal.
The defendants were identified in the indictment, for the
period in question, as follows: Hughes was the sole stock-
holder and managing agent of Hughes Tool, a Delaware
corporation. Davis was legal counsel for Hughes Tool.
Maheu was chief executive officer of Hughes/Nevada Oper-
ations. Charnay was a principal stockholder of a private
corporation authorized to purchase and sell stocks. Two
unindicted co-conspirators were also identified: Herman
Greenspun, a newspaper publisher and owner of stock in
Air West, and George Crockett, an owner of Air West
stock. Air West is a Delaware corporation whose stock
was listed and traded on the American Stock Exchange
(the AMEX).
Both indictments detailed essentially the same facts as
a basis for the charges against appellees. These facts were
well summarized by the district court:
‘*The background facts alleged in the Indictment are
that in August of 1968, defendants made an offer on
29a
behalf of Hughes Tool Company to acquire all the
assets of Air West at a price which would yield to the
stockholders approximately $22 per share; that on
December 28, 1968, a majority of the stockholders
voted to accept the offer; that on the same day a ma-
jority of the directors voted to reject the offer; that
in order to coerce the directors to change their vote, de-
fendants would threaten the opposition directors with
lawsuits, would file such lawsuits and would artificially
depress the price of Air West stock on the American
Stock Exchange by causing Charnay to sell 59,100
shares of Air West stock ‘short,’ by causing Herman
Greenspun to sell 15,000 shares of Air West stock and
by causing Crockett to sel] 12,000 shares of Air West
stock on the American Securities Exchange, and at the
same time, guaranteeing to these sellers by secret un-
derstanding a recovery of $22 per share irrespective
of the price obtained on the Exchange. It is alleged
that these uctivities caused a decline in the market
price of Air West stock on December 31, 1968 from $18
per share to $15.75 per share.’’
The Government contends that the ‘‘aftermath’’ of these
activities was a reversal by Air West’s directors of their
earlier position and a decision on December 31 to sell Air
West’s assets to Hughes Tool.
The Indictment
Count I
The July 30, 1974 indictment contains four counts. The
first ten paragraphs of Count I identify the parties and
describe their roles in the corporate takeover. Paragraphs
11 throngh 13 allege that (1) the defendants and the unin-
dicted co-conspirators willfully and knowingly conspired
and agreed to violate the securities laws, 15 U.S.C.
§$§ 78j(b), 78ff and Rule 10b-5; (2) the defendants and co-
conspirators used the instrumentalities of interstate com-
30a
merce, the mails, and the facilities of a securities exchange
to conduct a manipulative scheme in contravention of the
securities laws; and (3) the conspirators transmitted by
wire interstate communications to induce the directors who
had voted against the Hughes Tool Company proposal of
Air West to change their votes, thus depriving the direc-
tors and shareholders of the right to conduct their cor-
poration free from undue influence, deceit, and fraud, in
violation of 18 U.S.C. § 1343.
Paragraph 14 describes the means by which the conspira-
tors would carry out their plan, i.e., that the defendants
Hughes, Davis and Maheu would represent that unless the
Hughes Tool offer was accepted, the price of Air West
stock would decline substantially; that the defendants and
co-conspirators would manipulate and cause a decline in
the market of Air West stock, and cause the Air West stock-
holders who sold their stock to receive artificially depressed
prices ;' and that the defendants Hughes, Davis and Maheu
would cause telegrams to be sent to the directors of Air
West threatening lawsuits if they did not change their
votes. Paragraph 14 also lists ten overt acts committed
in furtherance of the conspiracy, including three interstate
conversations and an unspecified number of interstate tele-
grams, all in violation of 18 U.S.C. § 371.
Count II
The second count incorporates by reference the first ten
paragraphs of Count I and alleges that the conduct de-
seribed in Count I constituted violations of 15 U.S.C.
s§ 78j(b), 78ff, 18 U.S.C. §2 and Rule 10b-5, in that the
defendants wilfully and knowingly employed a scheme to
defraud, made untrue statements of material facts and
omitted material facts necessary to make the statements
made not misleading, and used instruments of interstate
1 The indictment does not list the stockholders who sold at the de-
pressed prices.
3la
commerce to accomplish their scheme by placing a tele-
phone call on December 31, 1968 to carry out their plan, all
of which operated as a fraud and deceit upon purchasers
and sellers of Air West stock.
Counts IIl and IV
Count IIT alleges that for the purpose of executing the
scheme to defraud described in Count I, the defendants
caused to be transmitted in interstate commerce telephone
conversations between Charnay in Las Vegas, Nevada, and
a securities salesman in New York City, and Count IV
alleges telephone conversations between a brokerage firm
in Las Vegas and the AMEX in New York City, all in
violation of the wire fraud statute, 18 U.S.C. § 1343 and
§ 2, aiding and abetting.
Order Dismissing Indictment
In its order dismissing the indictment the district court
noted that ‘‘the gravamen of the Indictment is that un-
lawful means were employed by agreement as part of the
conspiracy to accomplish the ultimate objective . . .”’ of
acquiring the assets of Air West, an obviously lawful pur-
pose. The court recognized that ‘‘the conduct alleged, if
true, is... reprehensible and an abuse of the power of
great wealth’’ but felt forced to conclude that the indict-
ment had not properly alleged a public offense. In reach-
ing this conclusion the order reviewed each of the statutes
alleged to have been violated in the various counts of the
indictment.
Discussing 15 U.S.C. § 78j(b), which makes it illegal to
use a manipulative or deceptive device in contravention of
the SEC rules, the court considered the several 10b rules
promulgated under the statute to determine whether the
conduet described in the indictment could be said to be
within their prohibitions. The court characterized Rule
32a
10b-1 as the ‘‘basie section of the regulation’’, which it
noted incorporates 15 U.S.C. §78i(a), making illegal
manipulation ‘‘for the purpose of inducing the purchase or
sale of . .. securit(ies) by others.’’ The court concluded
that the indictment did not properly allege a § 78i(a) (2)
violation (and thereby a Rule 10b-1 violation) since there
was no allegation of a purpose to induce the purchase or
sale of securities.”
The court found other 10b rules defined more specific
manipulative activities, none of which described the de-
215 U.S.C. § 78i(a) provides in pertinent part:
‘‘(a) It shall be unlawful for any person, directly or in-
directly, by the use of the mails or any means or instrumen-
tality of interstate commerce, or of any facility of any na-
tional securities exchange, or for any member of a national
securities exchange—
‘(se * *
‘*(2) To effect, alone or with one or more other persons, a
series of transactions in any security registered on a national
securities exchange creating actual or apparent active trading
in such security or raising or depressing the price of such
security, for the purpose of inducing the purchase or sale
of such security by others.’’
SEC Rule 10b-1, 17 C.F.R. § 240.10b-1 states:
‘“The term ‘manipulative or deceptive device or contrivance,’
as used in section 10(b) (48 Stat. 891; 15 U.S.C. 78j(b)), is
hereby defined to include any act or omission to act with re-
spect to any security exempted from the operation of section
12(a) 48 Stat. 892; 15 U.S.C. 781(a)) pursuant to any sec-
tion in this part which specifically provides that this section
shall be applicable to such security, if such act or omission
to act would have been unlawful under section 9(a) (48 Stat.
889: 15 U.S.C. 78i(a)), or any rule or regulation heretofore
or hereafter prescribed thereunder, if done or omitted to be
done with respect to a security registered on a national secur-
ities exchange, and the use of any means or instrumentality
of interstate commerce or of the mails or of any facility of any
national securities exchange to use or employ any such device
or contrivance in connection with the purchase or sale of any
such security is hereby prohibited.’’
83a
fendants, alleged conduct.’ The court noted that Rule
10b-5 ‘‘is basically the antifraud provision of the regula-
tions. It does not purport to define manipulative activity’’.
A review of the regulations led the court to conclude:
‘‘Nowhere in the regulations has the commission
said that it is an unlawful manipulative or deceptive
device to cause substantial blocks of a security to be
sold on a national securities exchange for the purpose
of artificially depressing the market price of the se-
curity and to secretly guarantee to sellers a profit or
favorable return from the sales. That, in essence, is
what this Indictment charges.’’
Noting the Government’s concession that unless the al-
leged conduct was proscribed by the securities law, the
other statutory violations could not stand,* the district
court held that the Government had not met its burden to
properly allege the defendants’ criminal misconduct in any
of the counts of the indictment.
Contentions of Parties
In contending that the indictment alleges a violation of,
and conspiracy to violate, Rule 10b-5 under 15 U.S.C.
78}(b), and the wire fraud statute, 18 U.S.C. § 1343, the
Government argues that (1) ‘‘a manipulation of the market
which interfere with the free and open interplay of supply
’ The court noted that Rule 10b-4 proscribes the short tendering
of a security by a non-owner, Rule 10b-6 proscribes fraudulent
trading activities by an issuer or underwriter, and Rule 10b-7
makes illegal bidding to peg or manipulate the market. The court
found, and we agree, that none of the activities alleged to have
been committed by appellees come within the conduct forbidden
by these rules.
* The Government admits that its counsel made this concession,
but contends that it was erroneous and ‘‘ignored the practice of
the Government to prosecute manipulative conduct even prior to
enactment of the Federal securities laws and regardless of whether
a securities violation is charged’’, (opening Brief, p. 14, n. 3).
34a
and demand constitutes fraud within the meaning of both
Rule 10b-5 and the wire fraud statute’’; and (2) the alle-
gations in the indictment of a market manipulation were
cufficient to charge an offense.
Appellees contend that the district court properly dis-
missed the indictment for failure to state an offense under
cither Rule 10b-5 or § 1343 because the ‘‘indictment does
not allege facts which show any false statement or half-
truth, any failure to disclose anything to anyone, any facts
essential to a charge of manipulation, or any intent to
deceive anyone, and the indictment does not otherwise allege
facts which show how or in what manner conduct which is
lawful in itself was false or fraudulent or intended to be
so.’’® Appellees contend further that the indictment shows
on its face that the conduct occurred beyond the five-year
statute of limitations prescribed by 18 U.S.C. § 3822 and
fails to plead facts which invoke 18 U.S.C. § 3288, which
provides for reindictment within six months after an indict-
ment has been dismissed.
Rule icb-5 and Market Manipulation
Section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b), provides that it is:
‘‘unlawful for any person, directly or indirectly, by the
use of any means or instrumentality of interstate com-
merce or of the mails, or any facility of any national
securities exchange...
(b) To use or employ, in connection with the pur-
chase or sale of any security registered on a national
securities exchange or any security not so registered,
any manipulative or ueceptive device or contrivance
5 As noted supra, the district court held in effect that Rule 10-b
and the wire fraud statute proscribing fraudulent conduet did not
purport to include manipulative or deceptive activity. On this
appeal the appellees ‘‘do not contend that a manipulation cannot
be a fraud or a part of a fraud’’ but contend that the indictment
fails to allege facts which ‘‘state a crime of manipulation or
fraud’’. (Appellees’ Brief, p. 4).
35a
in contravention of such rules as the [SEC] may pre-
scribe as necessary or appropriate in the public inter-
est or for the protection of investors.’’
Rule 10b-5, 17 C.F.R. § 240.10b-5, adopted by the SEC in
1942, states:
‘*Employment of manipulative and deceptive devices.
It shall be unlawful for any person, directly or in-
directly, by the use of any means or instrumentality of
interstate commerce or of any facility of any national
securities exchange,
(a) To employ any device, scheme, or artifice to
defraud,
(b) To make any untrue statement of a material
fact or omit to state a material fact necessary in order
to make the statements made, in light of the cireum-
stances under which they were made, not misleading,
or
(c) To engage in any act, practice, or course of busi-
ness which operates or would operate as a fraud or
deceit upon any person,
in connection with the purchase of any security.’’
In the first Supreme Court decision involving Rule
10b-5 and 15 U.S.C. §78j(b), SEC v. National Securities,
Inc., 393 U.S. 453 (1969), the Court observed that ‘‘§ 10(b)
and Rule 10b-5 may well be the most litigated provisions
in the federal securities laws ...’’. 390 U.S. at 465. The
Court concluded that ‘‘Section 10(b) and Rule 10b-5 to-
gether constitute one of the several broad antifraud pro-
visions contained in the securities laws’’.® Id. at 466.
*The Court held that in light of the broad antifraud purposes
of Section and Rule, which ‘‘apply in connection with the purchase
or sale of any security’’, exchanges by shareholders of a corpora-
tion of their old stock for shares in a new company were ‘‘pur-
chases’’ within the meaning of the statutory language. 393 U.S.
466-468.
36a
Unfortunately for purposes of this case, there has been
very little litigation concerning the application of the Rule
to market manipulations in corporate takeovers, and no
eases at all involving the specific conduct in which the
appellees are alleged to have engaged. We therefore turn
to the legislative, administrative and judicial history of
the Securities Exchange Act and Rule 10b-5 in determin-
ing whether the appellees’ alleged conduct, if true, con-
stitutes an indictable offense.’
In Section 2 of the Securities Exchange Act, 15 U.S.C.
§ 78b, Congress explained that one of its primary objec-
tives in formulating the Act was ‘‘to insure the mainten-
ance of fair and honest markets’”’ in transactions conducted
on the securities exchanges. The House Report on the
Act, H.R. Rep. No. 1383, 73rd Cong., 2d Sess., p. 10 (1934)
gives further evidence of Congress’ concern:
‘To insure to the multitude of investors the main-
tenance of fair and honest markets, manipulative
practices of all kinds on national exchanges are banned.
The bill seeks to give investors markets where prices
may be established by the free and honest balancing
of investment demand with investment supply.’’ *®
Senate Report No. 1455, 73rd Cong., 2d Sess., p. 81 (1934),
similarly states:
‘‘The purpose of the Act is... to purge the securities
exchanges of those practices which have prevented
them from fulfilling their primary function of furnish-
7 For the purposes of ascertaining the validity of an indictment
the facts alleged by the Government are assumed to be true.
United States v. Howard, 352 U.S. 212, 214-215 (1957).
* The same report also states on p. 11 that:
‘*The idea of a free and open public market is built upon the
theory that competing judgments of buyers and sellers as to
the fair price of the security brings about a situation where
the market price reflects as nearly as possible a just price.’’
37a
ing open markets for securities where supply and
demand may freely meet at prices uninfluenced by ma-
nipulation or control.’’
The language of the section and its legislative history
leave little doubt that Congress intended §78j(b) to
operate, after rule making by the SEC, as a broad prohibi-
tion against deceptive devices.* This manifestation of
Congressional intent was recognized in Supt. of Insurance
v. Bankers Life € Cas. Co., 404 U.S. 6, 12 (1971), where
the Court, quoting from H.R. Rep. No. 1383, 73d Cong.,
2d Sess., 7, said in part: ‘‘Since practices ‘constantly vary
and where practices legitimate for some purposes may be
turned to illegitimate and fraudulent means, broad discre-
tionary powers’ in the regulatory agency ‘have been found
practically essential’... . Section 10(b) must be read
flexibly, not technically and restrictively’’. In light of this
background it is not surprising that the broad language of
Rule 10b-5 has been applied by the courts and the SEC
as the principal Rule under §78j(b) for prohibiting the
multitude of deceptive and manipulative devices which
continually appear in the securities markets, including
activities directed, as the conduct of the appellees is alleged
to have been designed, toward the manipulation of securi-
ties prices for personal gain.
The utilization of Rule 10b-5 to reach a wide range of
deceitful securities trading practices was given impetus
by early cases holding that the Act and the Rule provide
an implied right of private action in favor of an injured
party to enforce the Rule’s sanctions. See, e.g., Karden v.
National Gypsum Co., 69 F.Supp. 512 (E.D. Pa. 1946).
*Even before the enactment of the Securities Exchange Act
market manipulations seeking to create artificial prices were con-
sidered to be unlawful and contrary to public policy. See, e¢.g.,
Harper v. Crenshaw, 82 F.2d 845 (D.C. Cir. 1936) citing early
English and American cases which held that contracts for the pur-
pose of creating fictitious securities prices were unenforceable.
38a
This principle was affirmed by the Supreme Court in
Bankers Life € Cas. Co., supra, 404 U.S. at 10. Much of
the case law on Rule 10b-5 has, therefore, developed in civil
rather than criminal litigation. In SEC v. Joimer Corp.,
320 U.S. 344, 355 (1943), the Court indicated that the
primary difference between criminal and civil prosecutions
under the securities laws is the burden of proof required
for a verdict. As noted in United States v. Clark, 359
F.Supp. 128, 130 (S.D.N.Y. 1973), ‘‘there is no reasonable
basis for holding that some different interpretation [of
Rule 10b-5] should apply to a criminal action’’ than in a
civil action. We agree that precedents established in civil
eases interpreting Rule 10b-5 are applicable in criminal
prosecutions under the Rule, as here.
Civil eases holding manipulative and deceitful devices
violative of § 78j(b) and Rule 10b-5 include Mutual Shares
Corp. v. Genesco, Inc., 384 F.2d 540, 546-547 (2 Cir. 1967),
where the court found that the statute and rule made un-
lawful a majority stockholder scheme to reduce dividends
in order to force down the market price of stock and cause
minority shareholders to sell out at depressed values. In
reaching its conclusion the court observed that ‘‘ {d]eceit-
ful manipulation of the market price of publicly-owned
stock is precisely one of the types of injuries to investors
at which the Act and Rule were aimed’’. 384 F.2d at 547.
In Crane Co. v. Westinghouse Air Brake Co., 419 F.2d
787, 792-798 (2 Cir. 1969), the court was presented with
a factual situation somewhat resembling the case before
us. The court held that Rule 10b-5 was violated by the
scheme of one corporation seeking a merger and attempt-
ing to block a tender offer by another corporation in which
it bought large blocks of shares of the target corporation
in the open market, thus driving the market price up while
at the same time financing these purchases by disposing
of the newly acquired stock at a loss in secret and unre-
ported sales. The court found that these activities oper-
39a
ated as a deceit on those in the investing public who were
misled by the trading activities as well as on the other
corporation whose tender offer was blocked by the scheme.
Recently in Schlick v. Penn-Dixie Cement Corp., 507 F.2d
374, 378-381 (2 Cir. 1974), the court found a market ma-
nipulation in which one party to a corporate merger al-
legedly caused the market price of the other corporation
to increase in order to obtain a more favorable exchange
ratio to be prohibited by the provisions of Rule 10b-5.
These cases are illustrative of the extent to which
§ 78j(b) and Rule 10b-5 have been applied to a broad range
of manipulative practices.” As stated in Herpich v. Wal-
lace, 430 F.2d 792, 801-802 (5 Cir. 1970):
‘‘(T]he Section [78j(b)] reflects the design of the
Exchange Act as a means for preventing inequitable
and unfair practices on securities exchanges and over-
the-counter markets and for insuring fairness and
honesty in securities transactions generally . . . Con-
gress sought to protect persons ‘who would be engaged
in buying and selling and trading in * * * securities as
broadly defined in the Act.’ ... It did not make section
[78j(b)], self-exeeuting, nor did it limit the section’s
application to the manipulative and deceptive devices
or contrivances known in 1934. Instead, it wrote the
Section as a ‘catch-all’ meant to reach practices em-
ployed in connection with the purchase or sale of
securities which were contrary to the public interest or
the interest of investors.
1 The SEC has utilized Rule 10b-5 to halt market manipulations
in eases which have not reached the courts. In Delafield & Dela-
field, CCH Fed. SEC. L. Rep. § 77,648 (1968), for example, the
-Commission issued a consent order finding a broker in violation
of Rule 10b-5 for his activities in manipulating stock prices down-
ward in order to induce a shareholder to sell his substantial hold-
ings at a reduced price to the broker’s customers.
40a
‘*Together the section and the rule aim at reaching
‘misleading or deceptive practices, whether or not they
are precisely and technically sufficient to sustain a
common law action for fraud and deceit,’ . . . carried
on ‘in connection with’ the purchase or sale of securi-
ties. They are not intended as a specification of par-
ticular acts or practices that constitute ‘manipulative
or deceptive devices or contrivances,’ but are instead
designed to encompass the infinite variety of devices
that are alien to the ‘climate of fair dealing,’...’’™
Appellees argue that the cases applying Rule 10b-5 to
market manipulations are distinguishable because the
courts found either insiders with an affirmative duty to
disclose due to their relationship with corporate manage-
ment or defendants with a purpose to induce the purchase
or sale of securities by deceit. While we recognize that
none of the factual situations in the cases discussed supra
are identical to that present here, we do not believe that
the cases interpreting Rule 10b-5, or the Rule itself may be
read as restrictively as appellees suggest. It is true that
much of the Rule 10b-5 litigation dwells on the special duty
1! Recent cases concerning frauds in corporate take overs have
concentrated on deceitful tender offers and have utilized § 78n(e),
enacted by Congress in 1968, to deal specifically with such prob-
lems after some courts had found difficulty in finding standing
for individual plaintiffs to bring actions under Rule 10b-5 in
tender offer cases. See, e.g., Mutual Shares Corp. v. Genesco, Inc.,
supra, 384 F.2d at 545. It is doubtful that the facts here come
under § 78n(e), especially where the acts complained of com-
menced before the statute became effective. In a criminal prose-
cution, the standing problem is, of course, not present and Rule
10b-5 is applicable if the conduct charged falls within the Rule’s
prohibitions. We note, however, that Rule 10b-5 has been held to
cover tender offer frauds despite the more specific provision of
§78n(e). See, e.g., Smallwood v. Pearl Brewing Co., 489 F.2d 579,
589-595 (5 Cir. 1974); but see contra, H. K. Porter Co., Ine. v.
Nicholson File Co., 482 F.2d 421, 425 (1 Cir. 1973). See generally,
Securities Exchange Act-Tender Offers, 6 ALR Fed. 906 (1971).
4la
of insiders to disclose information. However, the lan-
guage of the Rule provides no basis for concluding that
only ‘‘insiders’’ are subject to its requirements. As noted
in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 858-862
(2 Cir. 1968), cert. denied sub nom. Coates v, SEC, 397
U.S. 976 (1969), the duty to disclose material information
is based upon a potential manipulator’s duty to the invest-
ing public as a whole as well as to particular shareholders.
Moreover, it should be noted that clauses (a) and (c) of
Rule 10b-5 are not aimed at failures to disclose. Rather
they are flat prohibitions of deceitful practices and market
manipulations.
Concerning the necessity of alleging and proving a pur-
pose to induce others to trade in securities under Rule
10b-5, there is simply no requirement under the Rule, as
there is under §78i(a), for such pleading or proof. Neither
§78j(b) nor the Rule make any reference to a specific
intent to induce trading by others.
As the court noted in Landy v. F.D.I.C., 486 F.2d 139, 161
(3 Cir. 1973), ‘‘A scheme deliberately calculated to manipu-
late the market value of a stock would be covered under
the rule.’’ Here the Government has alleged that the ap-
pellees in selling their Air West stock purposely sought to
depress the market for the stock, and in fact achieved this
result, with the object and effect of deceiving the share-
holders and directors of Air West in Hughes’ takeover at-
tempt . Such conduct falls within the type of activity which
Congress sought to prohibit in enacting the Securities Act
and which Rule 10b-5 explicitly prohibits. It constitutes
an indictable offense.
12 Loss, Securities Regulations 1445 (2d Ed. 1961) observes that
‘Rule 10b-5, like §17(a) of the Securities Act, is not limited to
corporate insiders—however that term may be defined. The rule
may be invoked whenever any person, insider or outsider, indulges
in fraudulent practices, misstatements or half-truths in connec-
tion with the purchase of securities.’’
42a
Validity of the Indictment
Appellees contend that even if the conduct in which they
are alleged to have engaged is proscribed by the securities
laws, the indictment must nevertheless fail due to numer-
ous fatal defects in pleading. We turn now to appellees’
specific challenges to the various counts.
Count I
The first count of the indictment charged the appellees
with conspiring to violate the securities laws, specifically
Rule 10b-5, and the wire fraud statute, 18 U.S.C. § 1343.
Under 17 U.S.C. § 371, the conspiracy statute which is the
basis for Count I, it is necessary to allege those three ele-
ments which are said to be the gist of the offense: the
agreement, the unlawful object towards which the agree-
ment is directed, and an overt act in furtherance of the
conspiracy. United States v. Falcone, 311 U.S. 265, 210
(1940); United States v. Offutt, 127 F.2d 336, 338 (D.C.
Cir. 1942); United States v. Wilson, 356 F.Supp. 463, 464
(D. Md. 1973). Count I meets these requirements. It is
alleged that appellees and their unindicted co-conspirators
agreed to a scheme whereby they would coerce and de-
fraud the directors and shareholders of Air West; that the
object of the conspiracy was in violation of both the secur-
ities laws and the wire fraud law; and that the appellees
and their co-conspirators undertook ten overt acts in fur-
therance of their scheme. It is apparently appellees’ posi-
tion, however, that any defect in Count I occurs not in
failing to properly allege a conspiracy, but in the under-
lying assumption that the substantive offenses charged in
the remaining counts of the indictment are in fact illegal.
We believe that Count I is adequate to charge a conspiracy
and, as explained below, the substantive counts, upon which
Count I is based, are sufficient to state an offense.
43a
Count II
Appellees direct their attack primarily at Count II, which
alleges that the conduct described in Count I violated the
securities laws and the aiding and abetting statute. They
contend that the count fails because it (1) does not allege
that ‘‘stock was sold [by appellees] for the purpose of
inducing the sale of such stock by others and in a deceitful
manner designed to achieve such a purpose’’;"* (2) fails
to allege any failure by the appellees to disclose material
facts; and (3) does not allege that appellees acted with
an intent to defraud.
With respect to the argument that a market manipula-
tion charged under Rule 10b-5 requires an allegation of
the defendants’ purpose to induce the sale of securities by
others, as noted supra, we find nothing in the language
of either § 78j(b), § 78ff, or Rule 10b-5 which implies this
requirement. Had the Government charged appellees
under § 78i(a) an allegation of a purpose to induce would
have been essential. However, §78i(a) is not a basis for
any of the charges here and cannot be read as a limitation
on Rule 10b-5. The legislative and judicial history of
§ 78j(b) make it clear that the statute and rules promul-
gated thereunder are to operate independently of other
securities laws provisions."* As the court noted in Texas
Gulf Sulphur, 401 F.2d at 859, ‘‘from its very inception,
Section 10(b) [§ 78j(b)], and the proposed sections .. .
from which it was derived, have always been acknowledged
as catchalls’’ for manipulative activities which the SEC
finds detrimental to the interests of investors and which
are not covered by other provisions of the securities laws.
8 Appellees’ brief, p. 13.
ae Appellees’ argument implies that § 78i(a) rather than Rule
10b-5 is the section under which market manipulations should be
charged. The language of Rule 10b-5 and its history, however,
undercut the validity of this argument.
44a
Had Congress or the SEC intended that a specific purpose
to induce others to trade was a requirement under
§78j(b), this requirement would have been specified, as
it was in § 78i(a).”
Appellees’ argument that Count IT must fail because it
does not allege any omission by appellees to disclose ma-
terial facts we reject for two reasons: First, Rule 10b-5
prohibits manipulative activities per se and not only those
activities resembling common law fraud. As we note above,
clauses (a) and (c) of the Rule make no reference to a
requirement that defendants charged under the rule must
fail to disclose material facts for their conduct to be
proscribed. That conduct is covered by clause (b). Sec-
ond, our reading of Counts I and IT persuade us that the
indictment does adequately allege material misrepresen-
tations and omissions. The description of appellees’ ac-
tivities in representing to Air West stockholders and direec-
tors that the market would decline if the Hughes tender
offer were rejected and their subsequent conduct in driv-
ing down the market price without revealing that the de-
cline was not due to the free operation of market forces
constitutes a sufficient allegation of a misrepresentation and
omission.” As the court observed in O’Neill v. Maytag,
' Appellees, quoting from a 1941 opinion of the Commission's
General Counsel, 2 CCH Fed. See. L. Rep. { 22,565, point out that
the SEC has indicated that the Exchange Act does not prohibit
trading activity which may advance or depress the market. It
may be noted first that this opinion was issued before the adoption
of Rule 10b-5. In any event, the appellees are not charged with
trading activities which had the effect of changing market prices
(as might any large scale transactions). Rather, appellees are
charged with deliberately depressing market prices—a different
matter entirely from incidentally depressing prices through trad-
ing activities.
*© The indictment states in Count I, para. 14:
‘‘(a) Defendants Howard R. Hughes, Chester C. Davis,
and Robert A Maheu would represent to stockholders of Air
45a
339 F.2d 764, 768 (2 Cir. 1964) (quoted with approval in
Mutual Shares Corp. v. Genesco Inc., supra, 384 F.2d at
546), ‘‘deception may take the place of verbal acts.’’™”
Failure to disclose that market prices are being artificially
depressed operates as a deceit on the market place and is
an omission of a materia! fact.
Nor do we find merit in appellees’ contention that the in-
dictment is fatally defective because it fails to allege spe-
cific intent to defraud. In construing §§ 78j(b) and 78ff in
United States v. Pelz, 433 F.2d 48, 54 (2 Cir. 1970), Judge
Friendly says in part: ‘‘The language makes one point
entirely clear. A person can willfully violate an SEC rule
even if he does not know of its existence. This conclusion
follows from the difference between the standard for vio-
lation of the statute or a rule or regulation, to wit ‘‘will-
fully’’, and that for false or misleading statements, namely
‘*willfully and knowingly’’. In considering ‘‘what mental
state’’ must be proved Judge Friendly refers to an article
by Judge Herlands in 21 Va.L.Rev., and continues at 433
F.2d at 55:
‘‘The Herlands article concluded it was necessary only
that ‘the prosecution establishes a realization on the
defendant’s part that he was doing a wrongful act,’ 21
Va.L.Rev. at 149. We accept this with the qualifica-
West and others that if the Hughes Tool proposal was not
accepted by Air West, the price of the common stock of Air
West would decline substantially,
‘*(b) Defendants Howard R. Hughes, Chester C. Davis,
Robert A. Maheu, and David B. Charnay, aided by co-conspira-
tors Greenspun and Crockett, would manipulate and cause a
decline in the market price of Air West common stock on the
AMEX in the following manner: .. .’’
17 The court continued: ‘‘And it need not be deception in any
restricted common law sense; one of the central purposes of federal
securities legislation would otherwise be seriously vitiated’’. The
court recognized, however, that ‘‘there must be allegation of facts
amounting to deception in one form or another; conclusory alle-
gations of deception or fraud will not suffice’. 339 F.2d at 768.
46a
tions, doubtless intended by the author, that the act be
wrongful under the securities laws and that the know-
ingly wrongful act involve a signi..cant risk of effecting
the violation that has oceurred.’’ *
The indictment was sufficient to meet these tests. It alleges
a knowing participation by all of the defendants in the
perpetration of the manipulation which created the arti-
ficially depressed market price and consequent fraud and
deceit. It was sufficient to allege a violation of § 78j(b)
and Rule 10-b.”*
Counts III and IV
With respect to Counts III and IV charging violation of
the wire fraud statute, 18 U.S.C. § 1343,” appellees con-
18 See also United States v. Dardi, 330 F.2d 316, 331 (2 Cir.
1964) and Securities Laws—Scienter, 20 ALR Fed. 227 (1974).
The ALR article notes one case, United States v. Van de Carr,
CCIT Fed See. L.Rep. § 93481 (C.D. Cal. 1972), which appears
to reach a contrary result. The authority of Van de Carr, how-
ever, is questionable since it was concerned with violations of
Federal Reserve Board regulations rather than SEC rules.
19 United States v. Piepgrass, 425 F.2d 194 (9 Cir. 1970) cited
by appellees is distinguishable. It did not specifically consider the
question presented in this case and involved a prosecution under 15
U.S.C. § 77q(a). The court did recognize that, ‘‘Intent to defraud
may be inferred from one’s knowledge that the scheme operated
in a deceitful manner’’, but held that ‘‘the latter knowledge must
be possessed by each individual’’, 425 F.2d at 199. It was so alleged
in this case.
© § 1343 provides in pertinent part:
‘*Fraud by wire, radio or television
Whoever, having devised or intending to devise any scheme
or artifice to defraud, or for obtaining money or property by
means of false or fraudulent pretenses, representations, or
promises, transmits or causes to be transmitted by means of
wire .. . communication in interstate .. . commerce, any writ-
ing, signs, signals, . . . or sounds for the purpose of executing
such scheme or artifice, shall be fined not more than $1,000 or
imprisoned not more than five years, or both.’’
47a
tend that the Government has failed to allege adequate
facts to show the nature of the fraud and how it was to be
accomplished. We agree with the general principle relied
on by appellees that an indictment under the wire fraud
statute must ‘‘set out clearly what the artifice was wherein
the fraud consisted, and how it was to be accomplished’’.
Etheredge v. United States, 186 F. 434, 437 (4 Cir. 1911).
We conclude, however, that the facts alleged in the indict-
ment were sufficient to meet this requirement.
Count I, which is incorporated by reference into Counts
III and IV, describes in some detail the operation of the
allegedly manipulative scheme and its purpose. Counts
III and IV state that the object of this activity was to de-
fraud the shareholders and directors of Air West. Count I
gives the approximate dates during which the scheme was
in effect. Counts III and IV give the specifie dates on
which appellees are alleged to have used interstate wire
facilities to accomplish their objective. The counts charg-
ing appellees with wire fraud appear to be sufficiently spe-
cific under the standards cited by appellees.
In Hagner v. United States, 285 U.S. 427, 431 (1932),
the Supreme Court stated:
‘‘The true test of the sufficiency of an indictment is
not whether it could have been made more definite and
certain, but whether it contains the elements of the
offense intended to be charged, ‘and sufficiently ap-
prises the defendant of what he must be prepared
to meet, and, in case any other proceedings are taken
against him for a similar offense, whether the record
shows with accuracy to what extent he may plead a
former acquittal or conviction.’ [citations omitted]’’ ™
We conclude that each count of the indictment meets this
test. If the defendants desire more definite infc. mation,
they may obtain it through a bill of particulars.
*1 Accord, United States v. Debrow, 346 U.S. 374, 376 (1953).
48a
Statute of Limitations
18 U.S.C. § 3282 provides that no person shall be prose-
cuted for any offense, not capital, ‘‘unless the indictment
is found or the information is instituted within five years
after such offense shall have been committed’’. The first
indictment against appellees was returned on December
27, 1973, within five years after December 31, 1968, the
final date of the manipulation alleged in the indictment.
The first indictment was dismissed on January 30, 1974, and
the second indictment was returned on July 30, 1974, after
the five year period had elapsed. Obviously the action
would be barred, except for 18 U.S.C. § 3288, which pro-
vides that ‘‘a new indictment may be returned . . . within
six calendar months of the date of the dismissal of the
indictment or information . . .’’™
Appellees contend, however, that § 3288 is inapplicable
for four reasons: (1) the second indictment attempts to
charge different offenses than those charged in the first,
in contravention to judicial interpretations of § 3288; (2)
§ 3288 cannot apply to the conspiracy count of the first in-
dictment because that count was dismissed before the
statute of limitations had run and not after the period, as
provided in § 3288; (3) the second indictment must recite
2218 U.S.C. § 3288 reads:
‘‘ Whenever an indictment is dismissed for any error, defect,
or irregularity with respect to the grand jury, or an indict-
ment or information filed after the defendant waives in open
court prosecution by indictment is found otherwise defective
or insufficient for any cause, after the period prescribed by
the applicable statute of limitations has expired, a new indict-
ment may be returned in the appropriate jurisdiction within
six calendar months of the date of the dismissal of the indict-
ment or information, or, if no regular grand jury is in session
in the appropriate jurisdiction when the indictment or in-
formation is dismissed, within six calendar months of the
date when the next regular grand jury is convened, which
new indictment shall not be barred by any statute of limita-
tions.’’
49a
the existence and dismissal of the first indictment for ‘‘jur-
isdictional’’ purposes; and (4) § 3288 applies only where
the dismissal of the original indictment was defective due
to some grand jury defect or irregularity and not where
the indictment is dismissed for failure to state an offense.
Section 3288 in its present form was enacted in 1964.
Prior thereto a very similar statute, passed in 1934, was in
effect.* In United States v. Durkee Famous Foods, 306
U.S. 68, 71 (1939), the Supreme Court found that Congres-
sional intent concerning the section was best summarized
by the following letter written by the United States At-
torney General:
‘*. .. legislation is recommended providing that in any
ease in which an indictment is found defective or in-
sufficient for any cause, after the period prescribed
by the statute of limitations has run... a new indict-
ment may be returned at any time during the first
succeeding term at which the grand jury is in session.’’
Congress’s primary purpose in changing the language
of the statute in 1964 was to correct a ‘‘loophole’’ in the
law which occurred when it became possible to charge by
information as well as indictment. As Senate Report No.
1414, 2 U.S. Code Cong. and Admin. News 3257-3258 (1964)
explained :
‘*The purpose of the proposed legislation is to amend
sections 3288 and 3289 of title 18, United States Code,
so as to provide that the provisions of those sections
will extend to felony proceedings instituted by infor-
% This statute, 18 U.S.C. § 587, reads:
‘* Whenever an indictment is found defective or insufficient for
any cause, after the period prescribed by the applicable stat-
ute of limitations has expired, a new indictment may be
returned at any time during the next succeeding term of court
following such finding, during which a grand jury thereof
shall be in session.’’
50a
mation as well as by indictment. The sections con-
cern cases where a new indictment is returned after
a prior indictment has been dismissed because of an
error, defect, or irregularity with respect to the grand
jury, or because it has been found otherwise defective.
The amendments would therefore permit reindictment
in similar cases where an information was filed after
the defendant waived in open court prosecution by
indictment.”’
There is nothing in the legislative history of § 3288 to
indicate that Congress had any intention of otherwise
altering the meaning or application of the section. Apply-
ing this legislative history and the judicial interpretations
of the pre-1964 version of the statute we conclude that
appellees’ contentions must be rejected.
Concerning appellees’ contention that the second indict-
ment should be dismissed because it charges different
offenses, we find nothing in the cases cited by appellees
or the lanenage of § 3288 to require this conclusion. The
correct interpretation of § 3288 was stated by this court
in Mende v. United States, 282 F.2d 881, 883-884 (9 Cir.
1960): ‘*[the] underlying concept of § 3288 is that if the
defendant was indicted within time, then approximately
the same facts may be used for the basis of any new indict-
ment within the next term, if the earlier indictment runs
into legal pitfalls.’’ Here, a reading of the two indict-
ments shows that essentially the same facts were used to
charge almost identical offenses. The indictments differ
primarily in the omission in the second indictment of the
charge that 18 U.S.C. § 78i(a) was also violated by appel-
lees’ activities. Allowing a second indictment to remedy
leval deficiencies present in the first is the very purpose
for which $3288 was enacted.
Under § 3288 the dismissal of the first indictment must
occur ‘‘after the period prescribed by the applicable stat-
5la
ute of limitations has expired’’. Appellees argue that
§ 3288 cannot be applied to the conspiracy count because
the statute of limitations had not run on that count until
April, 1974 while the dismissal occurred on January 30,
1974— before the statute had run. This argument appears
to be based on a misunderstanding of the prevailing rule
used in computing periods of limitation in conspiracy
eases. As this court stated in Bergschneider v. Denver,
446 F.2d 569 (1971), ‘‘the statute of limitations starts to
run on the date of the last overt act alleged to have caused
the complainant injury’’. The last overt act alleged in the
first indictment was alleged to have occurred on December
31, 1968—almost a month before the first indictment was
dismissed.™
Appellees next contend that the second indictment
should have contained an allegation with respect to the
first indictment and its disposition. We find no support
for this argument in the cases cited by appellees. While
it is true that criminal statutes of limitation have been
characterized as jurisdictional (Walters v. United States,
528 F.2d 739, 743 (10 Cir. 1964)), nothing would be gained
by requiring a second indictment to allege the disposi-
tional history of the first. The fact that the first indict-
ment was dismissed is part of the record of the case
before the court. As was recognized in Sanseverino v.
United States, 221 F.2d 714, 715 (10 Cir. 1963), ““The gov-
ernment had no burden to offer formal proof of that which
appears in the ease record of the court for such is the
cornerstone of judicial notice ...’’* Similarly, we see
In any case, 18 U.S.C. § 3289 provides that a new indictment
may be returned within six calendar months where the defect is
found before the expiration of the period of limitations.
°° In Sanseverino, an indictment filed May 17, 1962 charged the
filing of a false return on April 9, 1956. The Government offered
no formal proof that the six-year statute of limitations had been
tolled, but the court records showed that a complaint had been
filed on March 30, 1962.
52a
no need to plead information which is obviously a part of
the case record.
In their final challenge to the applicability of § 3288,
appellees cite two district court cases, United States v.
Moriarity, 327 F. Supp. 1045, 1047-1048 (E.D. Wis. 1971),
and United States v. Distefano, 347 F.Supp. 442, 444-445
(S.D. N.Y. 1972), holding that where an indictment is dis-
missed for failure to prosecute, reindictment is not pos-
sible once the statute of limitations expires. In each case
the court recognized that when an indictment is dis-
missed because of technical defects or irregularity in the
grand jury, a new indictment may be returned. In neither
ease did the court consider the precise situation here
presented, i.e., where the court found the first indictment
legally defective.
While the first clause of § 3288 appears to be aimed at
dismissal resulting from irregularities in the grand jury,
the second clause is much more general. It states that a
new indictment or information may be refiled where the
second ‘‘indiciment or‘information filed after the defend-
ant waives in open court prosecution by indictment is
found otherwise defective or insufficient for any cause.”’
The same language (in italics), absent the words inserted
in the 1964 amendment providing for proceedings com-
menced by information (in regular face type), was inter-
preted in United States v. Main, 28 F.Supp. 550 (8.D.
Tex. 1939). There the court rejected an argument identi-
cal to that raised by appellees. Quoting from United
States v. Strewl, 99 F.2d 474, 476 (2 Cir. 1938), the court
observed that the purpose of the statute was ‘‘to prevent
the escape of those who had been seasonably indicted but
whose indictment was bad because of some corrigible mis-
take.’’ 28 F.Supp. at 553.
Main and the dicta from Strewl were the prevailing
law for almost thirty years until the 1964 amendment to
53a
§ 3288. As noted previously, the purpose of Congress in
modifying the statute was to expand its provisions to
cover proceedings initiated by informations and not to
change existing law in any other manner. We conclude
from the language of § 3288, as well as from the section’s
history, that a second indictment may properly be returned
within the prescribed six-months period where the dis-
missal of the first indictment is due to a legal defect, as
well as in those cases where the dismissal results from
defects or irregularities in the grand jury.
Conclusion
In summary, we conclude that (1) the market manipu-
lation artificially depressing the market price of a security
on a national securities exchange was an indictable offense
under 15 U.S.C. 78j(b) and SEC Rule 10-b; (2) while the
indictment was by no means a model pleading it was
sufficient to charge the elements of the offense, and fur-
ther information may be obtained through a bill of par-
ticulars; and (3) the statute of limitations prescribed by
18 U.S.C. § 3282 was tolled by the provisions of § 3288,
Reversed and remanded for further proceedings con-
sistent with this opinion.
Sweep, Circuit Judge: (Concurring)
I concur in Judge Jameson’s opinion which is written
with his usual clarity and thoroughness. The law, as I
read it, supports his conclusions.
However, I cannot let pass this opportunity to draw at-
tentiou to the fact that so-called ‘‘ public welfare offenses”’ '
do not generally, and clearly not in this case, encounter the
same demanding constitutional and interpretive standards
applicable to other criminal offenses.
* See Morissette v. United States, 342 U.S. 246, 255 (1951);
Sayre, Public Welfare Offenses, 33 Cou. L. Rev. 55 (1933).
54a
As Judge Jameson’s opinion makes clear, neither section
10b of the Securities Exchange Act, 15 U.S.C. § 78j(b),
nor Rule 10b-5, 17 C.F.R. § 240.10b-5, are interpreted nar-
rowly when employed as a basis for criminal prosecution,
even though a narrow interpretation is ordinarily consid-
ered proper with respect to statutes defining crimes. United
States v. Campos-Serrano, 404 U.S. 293, 297 (1971); United
States v. Braverman, 373 U.S, 405, 408 (1963). In this case,
for example, we find an indictable offense charged in the
indictment despite the fact that there exists no case, not
even one imposing civil liability, in which substantially
similar facts have been treated as a violation of section
10b and Rule 10b-5. These provisions have been applied
herein to the conduct of the defendants no differently than
they would have been in a civil action. The expansive in-
terpretation necessary ‘‘to insure the maintenance of fair
and honest exchanges,”’ section 2 of the Securities Ex-
change Act, 15 U.S.C. § 78b, employed in civil actions is
employed by us in this criminal case. Majority opinion,
supra at 10-11. This is done even though Professor Brom-
berg cites only eight cases in which violations of section
10b and Rule 10b-5 have served as the basis of criminal
prosecution. 3 A. Bromperc, Securitres Law: Faavn,
§ 10.3 at 241 (1975). Professor Loss cites only a handful
more. 3 Loss, Securttrres Reeviation, at 1449 n.15 (1961).
Also it is done even though the Supreme Court, speaking
through Mr. Justice Rehnquist, recently observed :
‘‘When we deal with private actions under Rule 10b-5
we deal with a judicial oak which grew from little more
than a legislative acorn. Such growth may be quite
consistent with the congressional enactment and with
the role of the federal judiciary in interpreting it, see
J. 1. Case v. Borak, supra, but it would be disingenu-
ous to suggest that either Congress in 1934 or the Se-
curities and Exchange Commission in 1942 foreor-
dained the present state of the law with respect to Rule
55a
10b-5.’’ Blue Chip Stamps v. Manor Drug Stores, 421
U.S. 723, 737 (1975).
‘*Employment of manipulative and devious devices’’ has
a breadth, we assert, which permits us to find an indictable
offense when it is necessary to do so ‘‘to insure the main-
tenance of fair and honest markets.’’ The resemblance
from an analytic viewpoint between our approach and that
employed in Shaw v. Director of Public Prosecutions,
2 A.E.R. 452 (1961), where the House of Lords recognized
that the common law crime of corrupting public morals
requires a residual power to proscribe unanticipated wick-
edness contra bonos mores, strikes me as disturbingly close.”
To protect and preserve honest markets we assert the re-
sidual power derived from a broad statute and rule to pro-
scribe conduct surrounding a corporate takeover never
heretofore branded improper by judicial decision, Commis-
sion rule or determination, or explicit Congressional act.
And yet I am convinced that our assertion of this authority
is in keeping with existing law.
The concern to avoid the taint of ex post facto applica-
tion of a statute, a concern evidenced by the Supreme Court
in Bouie v. City of Columbia, 378 U.S. 347 ( 1964), where
the Court refused to permit the application of a new and
unusual interpretation of a state criminal statute to con-
duct taking place prior to the new interpretation, only
feebly survives in the area of section 10b criminal prose-
cution. In this case, we are untroubled by the fact that
never before has the section and rule been applied to a
similar situation. Furthermore, in fixing criminal liability
under section 10b and Rule 10b-5, we attach reduced im-
portance to assertions of vagueness. The fact that men of
common intelligence—or lawyers and judges for that mat-
ter—‘‘must necessarily guess at its meaning and differ as
* Hart, Law, Limerty, ann Morawiry, (1963 : ,
cussion of Shaw and related problems. rs ) contains 0 die
56a
to its application,’’* does not require that we declare this
section 10b void for vagueness. Cf. Coplin v. United States,
88 F.2d 652 (9th Cir. 1937), cert. denied, 301 U.S. 703 (1937)
(very similar language of section 17(a) of the Securities
Act of 1933 held not vague); Hughes v. SEC, 139 F.2d 434
(2d Cir, 1943) (section 17(a) not vague). We heed not the
command :
‘No one may be required at peril of life, liberty, or
property to speculate as to the meaning of penal stat-
utes. All are entitled to be informed as to what the
state commands or forbids.’’
Lanzetta v. New Jersey, 306 U.S. 451, 453 (1939).
Rather we respond to stern and demanding fatalism re-
flected in this passage appearing in Nash v. United States,
229 U.S. 373, 377 (1913):
“(T]he law is full of instances where a man’s fate
depends on his estimating rightly, that is, as the jury
subsequently estimates it, some matter of degree. If
his judgment is wrong, not only may he incur a fine or
a short imprisonment ... ; he may incur the penalty
of death.’’
Finally, all these things we do while fully aware that un-
der section 32(a) of the Securities Exchange Act of 1934,
15 U.S.C. § 78ff(a), the intent necessary to support a con-
viction is merely that of intending to do the acts prohib-
ited, rather than intent to violate the statute. United
States v. Schwartz, 464 F.2d 499, 509 (2d Cir. 1972). Proof
of an ‘‘evil motive’ appears unnecessary. /d. at 510, citing
Loss, Securrries Reautation. Moreover, it has been held
8 See Connally v. General Construction Co., 269 U.S. 385, 391
(1926).
a
57a
that to avoid imprisonment on the ground of ‘‘no knowl-
edge of such rule or regulation’’ ante more than the
defendant merely asserting that he did not know that his
manipulative activity was fraudulent under Rule 10b-5.
See United States y. Lilly, 291 F.Supp. 989 (S.D. Tex.
1968). The propriety of eliminating scienter or mens rea
in statutes designed to serve a regulatory purpose has
again been recognized by the Supreme Court in a recent
decision. See United States v. Park, 421 U.S. 658 (1975).
An expansive statute under which the prosecution en-
counters such reduced obstacles imposes a heavy responsi-
bility upon the prosecutor. Many are his potential targets
= — — a which the exercise of his dis-
can be measured, See Grayned v. City of Rock
408 U.S. 104, 108-9 (1972). His decision ys oa gp
less than his failure to prosecute, may subject him to
legitimate criticism. Whatever his decision, it is likely to
be one in keeping with the political realities within which
he functions. This is a part of the price that this type of
statate compels us to pay.
Thus, although I have no choice but to joi
join my brothe
I find no satisfaction or pleasure in doing so. Jae Nai
[ Frep
July 8, 1976
Emm. E. Metrt, Jr.)
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
No. 75-1222
Unrrep States or America, Appellant,
v.
Dav B. Cuarnay, Cuester C. Davis, Howarp R. Hucuess,
Rosert A. Manev, Appellees.
Order
Before: BrowntNe and Syeep, Cireuit Judges, and
* Jameson, District Judge
Appellees Charnay, Davis and Maheu have petitioned for
a rehearing, contending, inter alia, that the decision of this
court entered May 7, 1976, is in direct conflict with the de-
cision of the Supreme Court in Ernst € Ernst v. Hochfelder,
96 S.Ct. 1375, entered March 30, 1976. Prior to filing its
opinion this court considered the effect of Ernst & Ernst
and concluded that our opinion was not in conflict with the
holding in that ease. After re-examination of the opinion
in Ernst & Ernst in the light of the petition for rehearing,
we reach the same result, but deem it advisable to enter
this supplemental order explaining and clarifying the rea-
sons for our conclusion.
Ernst & Ernst v. Hochfelder was a civil action for dam-
ages for alleged negligent conduct. The issues before the
* Honorable William J. Jameson, Senior United States District
Judge, District of Montana, sitting by designation.
59a
Court and its conclusions are summarized in the following
excerpts from the Court’s opinion:
We granted certiorari to resolve the question whether
a private cause of action for damages will lie under
§ 10(b) and Rule 10b-5 in the absence of any allegation
of ‘‘scienter’’—intent to deceive, manipulate, or de-
fraud. 421 U.S. 909, 95 S.Ct. 1557, 43 L.Ed.2d 773
(1975). We conclude that it will not and therefore we
reverse. [96 S.Ct. 1381]
Use of the word ‘‘manipulative”’ is especially signifi-
cant. It is and was virtually a term of art when used
in connection with securities markets. It connotes in-
tentional or willful conduct designed to deceive or de-
fraud investors by controlling or artificially affecting
the price of securities. [96 S.Ct. 1384]
When a statute speaks so specifically in terms of ma-
nipulation and deception, and of implementing devices
and contrivances—the commonly understood terminol-
ogy of intentional wrongdoing—and when its history
reflects no more expansive intent, we are quite unwill-
ing to extend the scope of a statute to negligent con-
duct.
Recognizing that § 10(b) and Rule 10b-5 might he
held to require proof of a more than negligent non-
feasance by Ernst & Ernst as a precondition to the
imposition of civil liability, respondents further con-
tend that the case should be remanded for trial under
whatever standard is adopted. Throughout the lengthy
history of this case respondents have proceeded on the
theory of liability premised on negligence, specifically
disclaiming that Ernst & Ernst had engaged in fraud
or intentional misconduct. In these circumstances we
think it inappropriate to remand the action for further
proceedings. [96 S.Ct. 1391]
60a
This case obviously involves more than negligent con-
duct. Appellees argue, however, that in holding that the
indictment was not fatally defective by reason of its pur-
ported failure to allege a specific intent to defraud our
decision is contrary to the holding in Ernst & Ernst. Ap-
pellees misconstrue the basis of our disposition of this
issue.
Although we did state that the cases have held that there
is no requirement of proof that a defendant knew he was
violating a particular S.E.C. rule, we did not hold that
scienter per se was not a required element of the offense.
Rather we noted that it was necessary for the prosecution
to show an intentional act with ‘‘a realization on the de-
fendant’s part that he was doing a wrongful act.’’ Simi-
larly, Judge Sneed in his concurring opinion noted that
‘“the intent necessary ... is merely that of intending to
do the acts prohibited, rather than intent to violate the
statute.’’? These statements are consistent with the hold-
ing in Ernst & Ernst.
Specific allegations in the indictment charging the requi-
site mental state and scienter include the following:
Count II charges that the defendants and their co-
conspirators ‘‘did unlawfully, wilfully and knowingly,
in connection with the purchase and sale of securities,
to wit, the common stock of Air West, directly and
indirectly, by the use of the means and instrumentali-
ties of interstate commerce and the mails and the fa-
cilities of a national securities exchange, (a) employ
a device, scheme, and artifice to defraud, (b) make
untrue statements of material facts and omit to state
material facts necessary in order to make the state-
ments made, in the light of the circumstances under
which they were made, not misleading, and (c) engage
in acts, practices and courses of business which oper-
ated as a fraud and deceit upon purchasers and sellers
of Air West securities.”’’
6la
Count III charges that the defendants and thei
conspirators ‘*did devise and intend to Aevise a mo sie
and artifice to defraud the directors and stockholders
of Air West, which said scheme and artifice to defraud
is set forth more fully in paragraphs 13 and l4a
through 14e of Count I of this indictment.”?
Paragraph 13 of Count I describes th i
e means by which th
conspiracy would be carried out. Paragraph 14 lists seen
acts committed in furtherance of the conspiracy.
We conclude that these and other simi i
ec similar allegations in
the indictment are sufficient to charge the requisite intent
and scienter under Ernst & Ernst.
The panel as constituted in this case has voted to deny
the petition for rehearin : ;
> g and to reject th
a rehearing in bance, ’ e suggestion for
The full court has been advised of the suggestion for in
bane rehearing, and no judge of the court has requested a
vote on the suggestion for rehearing i
> man. earing in bane. Fed. R. App.
The petition for rehearing i '
. g is denied and the su
for a rehearing in banc is rejected. suggestion
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.