Petition — Stirling v. United States

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47-1612

wme Court, U. &

FILED

' MAY 11 1978

IN THE

Supreme Court of the Wnited States

OctTosper Term, 1977

Davip STIRLING, Jr... WILLIAM G. STIRLING.

AND HaROLD M. YANOWITCH,

Petitioners,

UNITED STATES OF AMERICA,

Respondent.

Petition for a Writ of Certiorari to

the United States Court of Appeals

for the Second Circuit

ERWIN N. GRISWOLD

THomaS F. CuLLen, Jr.

LinpDa K. SMITH

BERNARD S. MEYER

Jerrrey G. STARK

Attorneys for Petitioners

Of Counsel:

Jones, Day, Reavis & POGUE

1100 Connecticut Avenue, N.W.

Washington, D. C. 20036

Meyer, ENGLISH, CIANCIULLI

& Periz, P.C.

160 Mineola Boulevard

Mineola, New York 11501

eMMICHAEL RODAK, JR. C

'_ =e.

TABLE OF CONTENTS

Ee ne anna ee aE ED 2

STII iicilinnctntiaicinniaiabeneuaeniontdigiiantemmausaneniniininin 2

ET Sane er ee 2

Constitutional and Statutory Provisions Involved.... 4

ee icitnsinicitinictiiciiititciinhiiminaiciiiteiaiaaias 3

(1) Stock Purchases by Union Officials ............ j

I Ricinendisiinescsnttnisnsunintmannesnn 10

I icrictensisesrntenniinnemionniaitinipmnats 1]

(4) Accounting Methods .........................eeeeeeee 12

I inrcisiatitaetincieiitantnianeniinieniimennrapetiibiainians 13

Summary of Reasons for Granting the Writ............. 13

Reasons for Granting the Writ............................00000 17

1. The conviction below erroneously construed

the bas*c provision of the securities statute

sO tnat » (a) violates the petitioners’ nght

againsi self-incrimination because they have

been convicted of failure to make a direct

confession of crime, and (b) violates the

double jeopardy clause because two of the

petitioners were tried twice for the same

SETI cciscssccihiapelinscciitehniiianadastetiadiateianaateniainsinaieniiibinndiatinie 17

2. There was no proper finding of materiality,

and the conviction of petitioners is an im-

proper expansion of the criminal jurisdiction

re et i irerscciieeirnntnciintieension 24

3. The charge to the jury on credibility of

witnesses and reliance on experts was in

conflict with the presumption of innocence,

and the scienter requirements of the secu-

SII iicitsidnchistiddindtieiinmsnninnaciplinamiiiiaanninibbatinn 30

Conclusion

4. The ruling of the trial court that Harold

Yanowitch’s plea of nolo contendere and

David Stirling’s plea of guilty, entered in the

Western District, could be used for im-

peachment (a) contravenes the provisions

of Fed. R. Evid. 410 and Fed. R. Crim. P.

11(e)(6), (b) results in a conflict not only

with these federal rules, but also with the

holdings of the Court of Appeals for the

Fifth Circuit, and (c) conflicts with this

Court’s holding in Loper v. Beto, 405 U.S.

473 (1972)

eet ted tte eee eee eee ee ee ee

FSO EEE EES SEES ETE SHEE SEES E SEES EEE SHEE EEE SESE SEEOES

Table of Authorities

CASES

Albertson v. Subversive Activities Control

om hte &® 6.)

Blockburger v. United States, 284 U.S. 299

Ios cicriacilen i hcciaialelhdeahicaetiarinlanniehideadiidmsinn

Brown v. Ohio, 432 U.S. 161 (1977) .............

Bruton v. United States, 391 U.S. 123

Pe i nsiterennnttitnnsiniennienmennpesmiinanennenente

Gerstle v. Gamble-Skogmo, Inc., 478 F.2d

ee II, OUT iistissininidesincietunicchinpritanion

Harris v. New York, 401 U.S. 222 (1971).....

Harris v. Oklahoma, 433 U.S. 682 (1977) ....

International Association of Machinists v.

Street, 367 U.S. 740 (1961 ) .............ccceceeees

Jackson v. Denne, 378 U.S. 368 (1964)........

Kercheval v. United States, 274 U.S. 220

Loper v. Beto, 405 U.S. 473 (1972) -ccccssssose-v

Marchetti v. United States, 390 U.S. 39

RNY Pisciincvicaenaitensninusiimeasncenescouminmierunamnen

N.A.A.C.P. vy. Federal Power Commission,

425 U.S. 662 (1976) ..........++. bee Cte he

Parker vy. North Carolina, 397 U.S. 790

22-23

3,10,17

37,38,42,43

2,15,22-24

2,14,19-20

17,36

25-26

3,17,36,41

2,20,21

16,26-28

Pfotzer v. Aqua Systems, Inc., 162 F.2d 779

(BG Ga. FEGF D ececetstnionisitisnsemadandaiannene 40

Quercia v. United States, 289 US. 466

( FOB D .cesscessssesncinnniniesassaneeaniamamnnnae 3,16,31,32,33

Schneider v. Smith, 390 U.S. 17 (1968)........ 18

Starr v. United States, 153 U.S. 614 (1894). 32

TSC Industries, Inc. v. Northway, Inc., 426

CS. GO € FID Pccrrcuisssctinninieiiaiaaiieaanl 3,15,24-26

Ultramares Corp. v. Touche, 225 NY 170,

Piopt Tlie} ee 36

United States v. Cisneros, 491 F.2d 1068

et. L? BL | er 3,16,32,33

United States v. Crosby, F.2d (2d Cir.

1961), cert. denied sub nom. Mittelman v.

United States, 368 U.S. 984 (1962)........... 35

United States v. Delaware Hudson, Co. 213

TES Tt, |, ee 18

United States v. Fischer, 531 F.2d 783 (5th

0 | NN 3,16,32,33

United States v. Franicevich, 471 F2d 427

t Le | ene 39

United States v. Freed, 401 U.S. 601 (1971) 15

United States v. Goichman, 547 F.2d 778

@ Le 3. | ee ee 32

United States v. Harriss, 347 US. 612

( BEG D .xnsssscecevssssssusicicemmannanaienaaaee 18

United States v. Koenig, 338 F.Supp 670

(ty | 35

United States v. Martinez, 555 F.2d 1273

tLe Fo, | eee 39

United States v. Morrow, 537 F.2d 120 (Sth

Cir. 1976 ), rehearing denied 54| F.2d 282

(5th Cir. 1976), cert. denied, 430 U.S. 956 3,40,41

United States v. Musgrave, 444 F.2d 755

(Sth Cir. 1971), cert. denied, 414 US.

1023 (1973)

STATUTES AND RULES

15 United States Code § 77q............cccccccceeeeee

15 United States Code § 77% ..................00000-

15 United States Code § 78ff..........................

18 United States Code § 371.......................00

18 United States Code § 1001........................

18 United States Code § 1341........................

28 United States Code § 1254(1)..................

29 United States Code § 186..........................

Federal Rules of Criminal Procedure, Rule

SEL

MISCELLANEOUS

American Law Institute, Federal Securities

Code—Proposed Draft, §293 (March 15,

Mann, “Watergate to Bananagate— What

Lies Beyond” 31 Bus. Lawyer 1663

lions acrccarnssnpnasenssnanncscocccse

Note, Disclosure of Corporate Payments

and Practices: Conduct Regulation

through the Federal Securities Laws, 43

Brooklyn L. Rev. 681 (1977).........c:cccceeee

Report of the Advisory Committee on Cor-

porate Disclosure to the Securities and

Exchange Commission ( 1977) ...........0000+

Securities Act Release No. 33-5466 [1973-

74 Transfer Binder] CCH Fed. Sec. L.

Rep. 479, 699 ( March 8, 1974) ............0006.

Securities Act Release No. 33-5627 [1975-

76 Transfer Binder} CCH Fed. Sec. L.

Rep. 980, 310 (October 14, 1975).............

Sommer, “The Slippery Slope of Material-

ity,” P.L. 1. Address (1975) ..........cccccceeeees

— ———————E << LLL

ae" oe. - - ee

- o~ - ree SS RR i et er

IN THE

Supreme Court of the United States

OcTOBER TERM, 1977

No.

Davip STIRLING, Jr., WILLIAM G. STIRLING,

AND HaROLD M. YANOWITCH,

Petitioners,

Vv.

UNITED STATES OF AMERICA,

Respondent.

Petition for a Writ of Certiorari to

the United States Court of Appeals

for the Second Circuit

Petitioners, David Stirling, Jr., William G. Stirling

and Harold M. Yanowitch, pray that a writ of certiorari

issue to review the judgment of the United States Court of

4 Appeals for the Second Circuit entered in this case on

February 2, 1978, with respect to which a petition for

rehearing was denied on April 13, 1978.

nA 0 ta en

OPINIONS BELOW

The opinion of the Court of Appeals (Pet. App. A,

pp. la-54a)' has not yet been reported.

JURISDICTION

The judgment of the Court of Appeals was entered on

February 2, 1978. (Pet. App. B, pp. 55a-56a.) A petition

for rehearing was denied on April 13, 1978. (Pet. App. C,

p. 58a) The jurisdiction of this Court is invoked under 28

U.S.C. 1254(1).

QUESTIONS PRESENTED

1. Whether the courts below properly construed the

word “material” in 15 U.S.C. §77q, when the construction

given raises serious constitutional doubts with respect to

the privilege against self-incrimination, and double jeop-

ardy, and is essentially contrary to this Court’s decisions in

California v. Byers, 402 U.S. 424 (1971), and Marchetti v.

United States, 390 U.S. 39 (1968), with respect to self-

incrimination, and Brown v. Ohio, 432 U.S. 161 (1977),

with respect to double jeopardy.

2. Whether the court below improperly upheld the

charge of the trial court with respect to materiality,

although the trial court charged that the information

' The appendices to this petition will be cited as Pet. App. A, etc.

Throughout this petition references noted by letter “A ” are

references to the joint Appendix submitted to the court of appeals

below. References to government and defense exhibits below will be

made as “GX” and “DX” respectively. Reference to the Exhibit

volume will be made as E

omitted was material if it “would or might” (emphasis

supplied) have affected the reasonable investor, directly

contravening this Court’s decision in 7SC Industries, Inc.

v. Northway, Inc., 426 U.S. 438 (1976).

3. Whether the trial court’s charge improperly imp-

lied that the defendants were lying, contrary to this

Court’s holding in Quercia v. United States, 289 U.S. 466

(1933), and in conflict with the decisions of the Fifth

Circuit in United States v. Cisneros, 491 F.2d 1068

(1976), and United States v. Fischer, 531 F.2d 783

(1976).

4. Whether the ruling of the trial court that pleas of

two of the defendants in another case, in the Western

District of New York, could be used for impeachment—

(a) contravenes the express provisions of Rule

410 of the Federal Rules of Evidence, and Rule

11(e)(6) of the Federal Rules of Criminal Procedure;

(b) is in conflict with the decision of the Fifth

Circuit in United States v. Morrow, 537 F.2d 120,

rehearing denied, 541 F.2d 282 (1976), cert. denied,

430 U.S. 956 (1977);

Beto, 405 U.S. 473 (1972).

—particularly when the pleas were later authorized to be

withdrawn by the court in the Western District on the

ground that the prosecution had withheld exculpatory

material in violation of Brady v. Maryland, 373 US. 83

(1963).

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

The constitutional and statutory provisions involved

in this petition are quoted in full in Petitioners’ Appendix

E.2

STATEMENT OF THE CASE

Petitioners were indicted in the Southern District of

New York on nine counts, eight counts charging mail and

securities fraud, and one count alleging conspiracy to

defraud by the means alleged in the other eight counts.

Petitioners David Stirling, Jr. and his younger broth-

er, William, had been carpenters and house builders in

Canada. They immigrated to the United States and

became construction contractors in upstate New York,

doing business as the Stirling Brothers, Inc. Neither had

more than a tenth grade education. In 1968, the Stirlings

(and two others) incorporated Stirling Homex Corpo-

ration (““Homex”) and placed its stock privately. The

corporation was formed to develop the Surlings’ idea of

mass preducing prefabricated modules for apartments on

a factory production line for shipment to a building site

where the modules would be combined into Single or

2 See infra pp. 7la-77a.

3 The indictment alleged fraud in the sale of securities of the

Stirling Homex Corporation (““Homex”), in violation of 15 U.S.C.

§§ 77q(a) and 78ff; that false statements in the filing of a 197]

Registration Statement for the sale of these securities had been made,

in violation of 15 U.S.C. § 77x; mail fraud, in violation of 18 U.S.C.

§ 1341; that false information had been provided to the government

in violation of 18 U.S.C. § 1001: and that petitioners had violated 18

U.S.C. § 371, by conspiracy to violate the statutes cited above. The

indictment is set forth in Pet. App. D. pp. 59a-70a.

’ ee ee

multi-family homes. This mode of production was both

faster and less expensive than the traditional method of

on-site construction. David Stirling, Jr., became chairman

of the board of Homex and its chief executive officer.

William Stirling became president and a director.

Petitioner Harold M. Yanowitch had practiced law in

Rochester with a three-man firm. He was engaged in a

general practice with emphasis on real estate, and was not

knowledgeable about the securities laws. He met the

Stirlings through doing their personal legal work. Mr.

Yanowitch joined Homex as general counsel and vice

president in 1969.

Initially, Homex modules were sold primarily to

residential projects being developed by the Stirlings. With

the increased availability of federal funds for housing

projects and increased demand for the modules, it became

apparent that Homex should seek public financing and

government contracts in order to expand the business.

Petitioners engaged outside and in-house experts to assist

them with the accounting,‘ labors and Securities and

Exchange Commission (“SEC”)® problems raised by

being a new company in a new industry.’

4 Harris, Kerr, Foster & Co. (“HKF”) was the accountant for

Homex until 1971, when Merrill Lynch, then the underwriter for

Homex preferred stock, requested the retention of a “Big Eight

accountant. Peat Marwick Mitchell & Co. (““-PMM”’) then replaced

HKF. Professor Joseph A. Mauriello of the New York University

School of Business Administration served as an accounting consultant.

5 Theodore W. Kheel, a !abor lawyer of national reputation, was

a member of the board of directors, and served as the expert on labor

relations.

6 The law firm of Shea, Gould, Climenko & Kramer, specifically

senior partner Allan Kramer, served as the expert on SEC matters.

7 In-house counsel knowledgeable in securities regulation, gov-

ernment contracts and housing development programs were also

hired.

Homex filed a registration statement with the SEC in

October, 1969, which was amended in 1970. It covered

1,175,000 shares of Homex common stock. Stock was first

offered for public sale in 1970 at $16.50. At the end of the

first day of trading the stock closed at $34 per share, and

after six weeks, rose to $52 per share. In July, 1971,

Homex filed a registration statement with the SEC for

500,000 shares of preferred stock, and issued a prospectus

in August, 1971. Later that year, Homex filed its annual

report for 1971, which, along with a quarterly report, was

also sent to shareholders.

In essence, the indictment derives from the fact that

stock in Homex was offered to the public in 1971, rose and

fell in price, and that in 1972, when various banks called

in their loans, Homex was bankrupt.

The central issue at trial was whether Homex labor

relations, land transactions, and module sales were hon-

estly characterized by petitioners in Homex statements

and reports. The petitioners contended that they tried in

good faith to provide adequate disclosure and had relied

on experts in the fields of accounting, labor relations, and

securities laws to determine proper characterizaticn under

the circumstances. The government on the oth hand

focused mainly on omissions from the informatic . pro-

vided in contending that the petitioners had willfully set

out to deceive their experts as well as the public. (The

record is devoid of proof that petitioners ever refused

information sought by the experts.) The main areas of

factual contention are summarized below, and the govern-

ment’s contentions in regard to them are noted, in order to

provide a background for assessment of the legal issues

presented herein.

aaa a a pe

(1) Stock Purchases by Union Officials.

In June, 1969, Homex entered what the undisputed

testimony established was an arm’s length agreement®

fairly negotiated with the United Brotherhood of Carpen-

ters and Joiners of America (“UBCJA”) for in-plant

production and on-site installation of Homex modules.

(A. 448). The president of E. M. Pressprich Co., the

underwriter for the initial Homex stock offering, testified

that in approximately January, 1970, David Surling re-

quested that some people, including representatives of

labor unions, be added to the original stock issue list, and

that when he was told this was not appropriate, Stirling

dropped the subject.® (A. 175, 176, 180).

The Homex prospectus, issued in February, 1970,

stated:

“Freedom from work interruptions as a

result of labor problems is important to the

continued success of the Company’s business.

Although the Company believes that the above-

mentioned agreements should contribute to the

continuation of its present satisfactory labor rela-

tions, if can give no assurance that the Company

and its subsidiaries will be free of labor problems

in the future.” (E. 51-52; emphasis added. )

® The government devoted great effort at trial and on brief below

to cast suspicion on Homex labor relations, but virtually all of the

evidence related to the period well before any stock sales to union

officials had taken place or there was any allegation of an improper

we Ne UBCIA official ever bought Homex stock at the $16.50

original issue price, or below.

The government alleged that this statement in the

prospectus was materially misleading because it failed to

disclose that labor relations might be affected by unre-

vealed relationships with union officials, particularly that,

after the initial sale of Homex stock, David Stirling had

arranged for bank loans to be made to union officials to

enable them to purchase Homex stock. (See Indictment.

Pet. App. D, pp. 59a-70a. ) 1°

The government's theory in this connection rested on

three contentions: (1) that after the initial issuance of

stock, David Stirling had asked if it would be proper for

union Officials to purchase stock at the after-market price,

and when told by the underwriter’s president that this was

permissible, asked him to arrange the sale; (2) that David

Stirling arranged for and personally guaranteed the bank

loans to union officials to purchase the stock; and (3) that

failure to disclose these purported transactions was mate-

rially misleading and violated the securities laws. How-

ever, David Stirling denied requesting the stock purchases

or guaranteeing the loans. (A. 454, 457.) He further

testified that Homex’ labor expert, Theodore Kheel. told

him such purchases were not unlawful and that Kheel

himself designated union officials to receive Homex

stock."

‘© Petitioners, prior to trial, pursuant to Fed. R. Crim. P. 7(d),

moved to strike this count on the grounds that it was imr->terial.

inflammatory, and prejudicial. The motion was denied.

. "' The petitioners contended that Mr. Kheel had endorsed and,

in part, directed the sales of stock to union officials. Mr. Kheel denied

this on rebuttal, but, Joseph Lane Kirkland, an official of the AFL-

CIO directly contradicted Mr. Kheel’s tesumony and an official of the

UBCJA was prepared to testify to the same effect: that Kheel had

personally urged them to take the stock, assured them there was no

conflict of interest and personally arranged the purchases.

pe eae aan een a EE Tr

Six labor union officials testifed.‘2 No union official

said that Homex received special treatment by virtue of

his stock holdings; the government did not present any

evidence linking the stock purchases to Homex’s actual

labor relations or any impact on corporate operations or

profits.

Five months prior to the filing of the indictment, in

January, 1976, David Stirling and Harold Yanowitch

pleaded in connection with a separate indictment in the

Western District of New York based on these stock

transactions, respectively, guilty and nolo contendere, to

charges of violating section 186 of the Taft-Hartley Act for

“having caused things of value to be given to” union

officials..* One month before trial in the present case,

petitioners were permitted to examine the grand jury

testimony in the Western District, and one day before trial

were provided with some critical SEC testimony. On the

basis of this evidence, and still prior to trial below,

petitioners had moved to withdraw their pleas on the

ground that the prosecution had withheld exculpatory

material which created reasonable doubt of their guilt, in

12 Five stated they had not discussed purchasing Homex stock

with any of the petitioners. (A. 182-184, 198-199, 201-202, 205-206,

209-212.) One testified that he had a discussion with the Stirlings, but

that he had no financial or stock dealings with them. (A. 183, 190-

191, 203-204, 208.) The one Stirling-Homex official about whom

there was any testimony concerning dealir.gs with officials of the

international union in regard to stock purchases was not called by the

government. ;

‘2 The government did present instances of union cooperation

with Homex—largely appearances before bodies of local govern-

ment—( GX 734), but the union officials testified that the cooperation

in question, which preceded any stock purchase by more than two

years, was in the union interest to alleviate chronic winter unemploy-

ment.

4 David Stirling and Harold Yanowitch were sentenced and

fined.

violation of Brady v. Maryland, 373 US. 83 (1963). At

trial, over objection, the trial court ruled that the prose-

cution could use these pleas in cross-examination of David

Surling and Harold Yanowitch, and the government did

so in regard to David Stirling.*s

(2) Three Land Sales.

| In the early stages of Homex’s development, the

Surlings and Homex were, as noted above, involved in

changing the nature of their business from developing

residential projects on their own land to sale of the

modules to developers or development authorities. In

order to do so, Homex sold three parcels of property to

development corporations on a small downpayment, de-

ferred Payment basis. Although Homex clearly noted in

its registration statements and reports the extraordinary

nature of any such sales in terms of impact on corporate

profits, and the deferred payment terms of the sales.*6

these sales were the other principal focus of the govern-

ments contentions of inadequate or misleading disclosure.

In each instance, the government contended that the

transactions were shams, or “options,” with no real pur-

chaser obligation to pay because (1) the purchasers were

shell corpordtions; (2) the downpayments were between

10% and 20% of the purchase prices; (3) principal

Payments were deferred; and (4) there were purportedly

various side arrangements between Homex and the pur-

chasers to induce and motivate purchase. (For example,

'S Petitioner Yanowitch elected not to testufi is i

this issue as a

result of the trial court’s ruling that hi Jue

meng tt at g that his contested nolo contendere plea

_ ©The registration papers stated that “the C

anucipate that land sales will be a significant part be Armed a

future.” The deferred payment as

pects of the sales

10 [GX 1], E. 87 [GX 8], GX 10 at 8.) Sales were revealed. (E.

ee ee eo ae

——S ee

a calcein ema.

Homex had in connection with one sale agreed to build

modules on the property at list price (A. 387); in con-

nection with another, Harold Yanowitch purportedly told

the purchasers he would help them find a buyer if the deal

did not develop as planned (A. 230); and in connection

with a third, David Stirling told the purchasers “you won't

get hurt by this deal” (A. 237a) after the agreement was

made (A. 265-66).)

The petitioners presented evidence of the bona fides

of the sales, including testimony from purchasers, apprais-

als, and evidence of consultation with experts,’7 and

offered to present evidence that the terms were the usual

and customary terms in development contracts. "®

(3) Mississippi Sales.

The government alleged that Rubel L. Phillips, an

attorney in Mississippi for Homex, forged a $15 million

commitment letter from the Farmers Home Adminis-

tration (FMHA) to Greater Gulf Coast Housing Devel-

opment Corporation, a Missouri non-profit corporation, in

connection with Greater Gulf’s purchase of Homex modu-

les. The commitment letter was “signed” by William T.

Richardson, FMHA’s assistant state director for Mis-

sissippi. Phillips denied knowing the letter was forged; his

secretary, who was alleged by Richardson at trial (con-

trary to his earlier testimony to the SEC) to have signed it,

denied doing so.'® The Mississippi sales of Homex modu-

17 It was the government's theory that the experts were misled,

but see A. 311-14 (testimony of a Homex attorney, and prosecution

witness, who dealt with Peat Marwick and Professor Mauriello that he

was never instructed to withhold information).

18 The trial court excluded this evidence over objection. A. 320-

325.

19 No evidence linked William Stirling in any way to the letter;

David Stirling and Harold Yanowitch knew of the existence of the

letter but had no reason to question its genuineness.

les purportedly resulting from the forged commitment

letter were argued to have been improperly included in

Homex financial and registration statements.

(4) Accounting Methods.

The government contended that ihe accounting on

which the Homex registration statements and reports were

based was misleading and inadequate. Specifically, the

government alleged that filings with the SEC of statements

recognizing income when modules were assigned to a

specific contract were misleading, because, according to

the prosecution, the assignments had been cancelled,

revised or reassigned from project to project. The issue

was whether the proper practice of assignment had been

abused. (Indictment, Pet. App. D, pp. 59 a-70a). Dr.

Mauriello testified for the prosecution that it was per-

muissible accounting practice to reassign modules until the

last day of the quarter at which time the assignment of a

module to a contract had to become set. A. 368. A

Prosecution witness also testified that Peat Marwick had

seen all entries as to reassignments, each of which, by

footnote, was shown to be a reassignment of the module.

A. 345-347.20 The actual auditing partner of Peat Marwick

was never called as a witness.

20 The balance of the indictment invol charges:

overstatement of 1970 earnings resulting oom an ae a

overrun; (2) improper recording of a fee due Greater Gulf from U.S

Shelter Corporation, a Homex financing subsidiary, and (3) inclusion

of an expenditure for the preparation of a plant in Mississippi which

ultimately was not built. No tesumony showed that petitioners had

any knowledge of these matters, and a Peat Marwick partner testified

that the latter charge involved no impropriety.

Petitioners, after a jury trial, were convicted on all of

the nine counts in the indictment. On appeal, the United

States Court of Appeals for the Second Circuit affirmed

the convictions.

INTRODUCTION

The several issues involved in this case and their

overall impact on the ultimate fairness of the trial as it was

conducted in the district court make it impossible to

prepare this petition in the brief compass usually found in

petitions for certiorari. In this situation, the reasons for

granting the writ are presented as concisely as possible

while adequately setting forth the issues which the peti-

tioners believe make this case worthy of review.

As an aid to the Court, however, a “Summary of

Reasons for Granting the Writ” is included preceding the

more complete discussions.

SUMMARY OF REASONS FOR

GRANTING THE WRIT

The ultimate issue in this case is whether, under all

the circumstances, the petitioners have had a fair trial.

The several errors which were made at the trial present

novel, significant and recurring issues concerning proper

construction of the securities law, proper appreciation of

petitioners’ constitutional protections against double jeop-

ardy and self-incrimination, and proper protection of

petitioners’ presumption of innocence. Each of these

errors standing alone presents a significant issue, worthy

of review. However, even if no one of these questions

alone would be worthy of review, their cumulative effect,

it is submitted, was to deprive the petitioners of a fair trial

by inflating the petitioners’ alleged violation of the Taft-

Hartley Act into a basis for a criminal fraud conviction

under the securities and mail fraud statutes.

Petitioners were convicted below for not disclosing, or

inadequately disclosing, their re!ationship with union offi-

cials, specifically, giving things of value to union officials.

an offense for which two of the petitioners were charged in

a separate proceeding in the District Court for the Western

District of New York. The government contends that the

undisclosed particulars of Homex labor relations were

“material” to the investing public, and thus that the

petitioners had to make a confession in securities filings of

all that they had done. The government also contends

that, once convicted of Taft-Hartley violations, the peti-

toners could be convicted again for failing to reveal them.

The government contends further that petitioners’ pleas of

guilty and nolo contendere with regard to the Taft-Hartley

violations can be used for impeachment although the

pleas were improperly obtained. To support the decision

and conviction below the government must be right on

each of these points, but it is wrong on every one.

|. The courts below never faced the crucial issues in

the proper construction of the securities statutes which

make a “material” omission the basis for a criminal

charge. In particular, the court gave no weight to the long

established rule that a criminal statute should be con-

— in such a way as to eliminate serious constitutional

oubt.

(a) Under California v. Byers, 402 US. 424

(1971), when an _ individual constitutional claim

i ee

Se eA ret ong WW a en ee eee eh Ret ne OP a a « m

a S

against self-incrimination is confronted by a regu-

latory need for information, the interests of the indi-

vidual and the government must be assessed, bal-

anced, and reconciled. The courts below failed to

accord proper importance to the constitutional issues

and badly misconceived the weight of the regulatory

interest.

The conviction below nullifies the petitioners’ privi-

lege against self-incrimination by holding that the federal

securities statutes require a direct confession of crime

without an adequate regulatory justification, or any

protection of petitioners’ interest, such as use immunity.

Compare United States v. Freed, 401 U.S. 601 (1971)

(use immunity provided in statute ).

(b) Basing materiality, the gist of the offense

under the securities statutes, on the illegality under

Taft-Hartley of petitioners’ labor relations, makes the

securities “fraud” the same offense as the Taft-Hartley

violation in the terms of double jeopardy established

in Brown v. Ohio, 432 U.S. 161 (1977). The fact that

the alleged securities offense is totally derivative from

the Taft-Hartley offense emphasizes both the super-

fluousness and the unfairness of securities prosecution

under these circumstances.

2. There was no proper finding that the information

at issue here was material. (a) The trial court’s instruction

flatly contravenes this Court’s holding in TSC Industries,

Inc. v. Northway, Inc., 426 U.S. 438 (1976), by allowing

the defendants to be convicted if information which was

not detailed in materials filed with the SEC or sent to

shareholders ““would or might” (emphasis supplied ) have

affected the reasonable investor. (b) The court of appeals

apparently took the view that any illegality was material

per se under the securities laws. This approach makes

securities disclosure into an inquisitorial device, and grants

to the SEC the authority which this Court denied to a

regulatory agency, in another context, in NAACP vy

Federal Power Commission, 425 US. 662 (1976): the

power to enforce other statutes not directly related to the

agency's charter on the basis of its conception of the public

interest.

3. The trial court’s improper instruction on credibility

of witnesses and reliance on experts deprived the petition-

ers of their proper presumption of innocence, placed the

government's burden of proof on the petitioners, and

allowed the defendants to be convicted on the basis of

good faith reliance on and good faith disclosure to experts.

(a) The charge to the jury improperly impli

that the defendants in the poi oan ving. oo

travention of this Court’s holding in Quercia v. United

States, 289 U.S. 466 (1933), and in conflict with the

holdings of the Fifth Circuit in United States v

Cisneros, 491 F.2d 1068 (1974), and United States v.

Fischer, 531 F.2d 783 (1976). |

(b) The charge to the jury by the trial court held

the petitioners to expert knowledge of securities

labor, and accounting requirements by charging that

they were strictly liable for complete disclosure of

material” matter to their experts and lawyers

though any omissions may have been innocent, or the

petitioners may have lacked the expertise to recognize

the materiality of their knowledge. United States v

Crosby, 294 F.2d 928 (2d Cir. 196] ), cert. denied sub

nom. Mittleman v. United States, 368 US. 984

( 1962). Securities markets cannot function properly

if one cannot rely on experts in attempting to comply

with complex legal requirements. Cf. Ernst & Ernst v.

Hochfelder, 425 U.S. 185 (1976).

4. The ruling of the trial court that Harold Ya-

nowitch’s plea of nolo contendere and David Stirling’s

plea of guilty, entered in the Western District, could be

used for impeachment (a) contravenes the provisions of

Fed. R. Evid. 410 and Fed R. Crim. P. 11(e)6, (b) results

in a conflict not only with these federal rules, but also with

the holdings of the Court of Appeals for the Fifth Circuit,

and (c) conflicts with this Court’s holding in Loper v.

Beto, 405 U.S. 473 (1972). The “manifest injustice” of

using a plea obtained in violation of Brady v. Maryland,

373 US. 83 (1963), as the pleas here were, is just as

compelling when the pleas are used in collateral proceed-

ing involving the same offense.

REASONS FOR GRANTING THE WRIT

1. The conviction below erroneously construed the

basic provision of the securities statute so that it (a)

violates the petitioners’ right against self-incrimination

because they have been convicted of failure to make a direct

confession of crime, and (b) violates the double jeopardy

clause because two of the petitioners were tried twice for the

same offense.

The basic statute involved here is 15 U.S.C. §77q

which makes unlawful an “omission to state a material

fact.” The meaning of “material” in this context is an

important question of construction which is controlling in

this case. In the absence of more specific language, the

statute should not be construed in a way that raises

substantial constitution questions. As this Court said in

International Association of Machinists v. Street, 367 U.S.

740, 749-750 (1961):

‘‘Federal statutes are to be construed so as to

avoid serious doubt of their constitutionality.”

This is particularly true in the case of a penal statute.?'

The defendants were convicted below in large part on

the basis of their failure to reveal “giving things of value”

to union officials, in materials filed with the SEC and

mailed to investors.22 The court of appeals below has held

that the impropriety of these payments makes them

material and thus that failure to disclose the situation

made the Homex representations about labor relations

materially misleading.?3

(a) The construction given the statute by the court

of appeals, convicting the petitioners for failure to

21See also United States v. Delaware & Hudson Co., 213 US.

366, 408 (1901); Crowell v. Benson, 285 U.S. 22, 62 (1932); United

States v. Harriss, 347 U.S. 612, 618 (1954); Schneider v. Smith, 390

U.S. 17, 26 (1968). ;

22 All nine counts of the indictment alleged the misrepresentation

of or failure to disclose the particulars of stock ownership by UBCJA

officials as instances of the alleged securities and mail fraud. See Pet.

D, infra, which sets forth the indictment.

23“The true nature of Homex’s labor relations was

important to a potential investor. Once Homex decided to

make representations concerning its labor relations, it

should have described them accurately. Corporate funds

were heing used improperly to aid in the maintenance of

peaceful labor relations, a fact that investors did not know.

Knowledge of the true machinations would have given a

prudent investor considerable pause—labor relations

would not have looked as normal as they were made to

appear nor would the corporate financial practices have

appeared so sound.” Pet. App. A., p. 38a; emphasis added.

RE EES ng, ge - o> —

make a direct confession of crime, raises serious

questions with respect to their privilege against self-

incrimination.

As this Court pointed out in California v. Byers, 402

U.S. 424, 427 (1971) (per Burger, C.J., for the plurality ):

“Tension between the State’s demand for dis-

closures and the protection of the right against

self-incrimination is likely to give rise to serious

questions. - Inevitably these must be resolved in

terms of balancing the public need on the one

hand, and the individual claim to constitutional

protections on the other; neither interest can be

treated lightly.”

Neither the court of appeals below nor the trial court

applied this test correctly because both the individual

claim and the public need were badly misassessed.

California v. Byers, 402 U.S. 424 (1971) makes it

clear that the crucial first question in reconciling the right

against self-incrimination with the regulatory information

needs of the government is the “testimonial” nature of the

response required or, in Justice Harlan’s analysis, how

explicitly incriminating is the response required.24 Both

courts below ignored this issue completely, despite the

pretrial motions and repeated arguments of the petition-

ers.

The Byers Court upheld the compulsory reporting

scheme at issue there,25 and Byers’ conviction, because of

24402 U.S. at 429-431 (plurality); id. at 436, 454-458 ( Harlan,

J., concurring ). of

25 Byers had been prosecuted for refusal to comply with a

California statute which required*ihose involved in automobile acci-

dents resulting in property damage to stop and give their names and

addresses.

the relative weakness of the personal interest at stake.

The admission required only established involvement in

an automobile accident, an admission, in effect, of

membership in a broad, non-suspect group. The admis-

sion was, at most, a “link in the chain” of evidence of

possible wrongdoing. 402 U.S. at 427-428. Both the

plurality and Justice Harlan’s concurring opinion empha-

sized that the information required did not, considered by

itself, establish either the existence of a crime, or the guilt

of the information provider.

Here, by contrast, the admission which the petiuioners

are being prosecuted for not making is a direct admission

of criminal behavior under the Taft-Hartley Act: giving

things of value to labor officials. The testimonial and

incriminating nature of the admission is clear. Moreover,

the information is allegedly material becc use it reflects

illegal or improper actions.

Where the admission required is direct confession of

a crime, it is immaterial to the constitutional inquiry that

the disclosure requirements are more broadly directed as

well, to other disclosure and less suspect activities.26

26 In Marchetti v. United States, 390 U.S. 39, 47 (1968), and

Albertson v. Subversive Activities Control Board, 382 U.S. 70, 79

( 1965), this Court upheld refusal to comply with regulatory reporting

statutes directed at “suspect” classes in an area “permeated with

criminal statutes,” because compliance would automatically place one

in a suspect group. This narrow description of “suspect groups” and

“permeated areas” was meant to avert the danger that assertion of a

feigned or subjective anticipation of criminal prosecution would allow

an individual to insulate himself from prosecution for failure to

comply with the regulatory scheme. The Marchetti Court did not

purport to set out the “indispensable foundation of a fifth amendment

claim.” California v. Byers, supra, 402 U.S. at 469-471 (Brennan, J.,

dissenting ); see also, 402 U.S. at 427, 434 n.6 ( Burger, C.J., for the

four-justice plurality), and 402 U.S. at 437-438, 454-458 ( Harlan, J.,

concurring ).

et e-

In the present case the individual claim is com-

pelling: the petitioners were convicted of failing to make a

direct confession of crime.2” The regulatory interest in the

information involved is the interest in keeping the in-

vesting public fully apprised of the “material” facts about

publicly held companies. The petitioners provided the fair

overall assessment of labor relations when they said that

relations were currently stable, but that no assurances

about the future of such relationships could be given; nor

were any such assurances given at any time. See p. 7,

supra.

The balance of interest, therefore, is between a clear

constitutional right not to be required to implicate oneself

in crime, and the SEC’s interest, or ultimately the interest

of the investing public, in the additional details of Homex’

labor relations. If regulatory interest in additional infor-

mation is, as in Marchetti, “tenuous,” because the facts are

determined to be not “material” or because the securities

laws are being applied beyond their proper bounds, then

Marchetti should control ‘this case, and the petitioners’

Fifth Amendment rights must be vindicated by reversal of

27 Petitioners do not, of course, contend that disclosure require-

ments of the securities law are universally or even generally invalid or

inquisitorial, or that, as the court of appeals below colorfully put it,

“securities misrepresentations would be constitutionally protected if

the true but undisclosed facts would lead to criminal prosecution.”

Pet. App. A. p. 34a. The position here is far more narrow. The

petitoners do not controvert their duty under the securities laws not to

make misrepresentations of material fact. But the petitioners assert

that their representation of labor relations was true, if not com-

prehensive in detail. The question is whether additional detail may be

held “material” simply because it is criminal, and whether it is

necessary Of appropriate to impose criminal penalties under the

securities laws as well as corporate liability, personal civil securities

liability, and criminal liability for the substantive undisclosed offense.

the conviction below. If on the other hand, the regulatory

interest in the additional information were to be deter-

mined to be a strong one, then this is a case of first

impression in which this Court must reconcile compelling

Fifth Amendment considerations and strong regulatory

interests.

(b) The construction of the statute adopted by the

court of appeals placed Harold Yanowitch and David

Stirling in double jeopardy contrary to the Fifth

Amendment, and Brown v. Ohio, 432 U.S. 161 (1977).

At the time of the trial below, David Stirling and

Harold Yanowitch had pleaded guilty to Taft-Hartley

violations in the separate proceeding in the Western

District of New York. Specification of nondisclosure of

the petitioners’ union activities, as a means of fraud, when

they had already been separately convicted of Taft-

Hartley violations based on those activities, violates the

double jeopardy provision of the Fifth Amendment, and is

in direct conflict with the principles of Blockburger v.

— United States, 284 U.S. 299 (1932), and Brown v. Ohio,

432 U.S. 161 (1977).

The Blockburger rule, as initially stated and affirmed

throughout the years, states that a defendant cannot be

put twice in jeopardy for the same actions unless each

crime of which the defendant is charged requires proof of

an element not required for the other crime. 284 US. at

304. Brown v. Ohio affirmed this test and made it clear

that it precludes separate prosecutions of a defendant for

both a greater and a lesser included offence. See also

Harris v. Oklahoma, 433 U.S. 682 (1977).

In functional terms, this is precisely the situation here.

The petitioners were convicted by plea of violation of the

Taft-Hartley Act. They were tried below for failing to

disclose that violation. While the fraud judgment below

required elements of proof which were not required in the

previous prosecution, the previous prosecution did not

involve any elements which were not involved in the

prosecution below. The labor union relations of Homex

are allegedly “material” precisely because they were

illegal or improper, as established by the Taft-Hartley Act

violation. Since the SEC offence is totally derivative of the

Taft-Hartley offence, the government has attempted “to

secure additional punishment after a prior conviction and

sentence.” 432 U.S. at 166.

The device of resting the materiality of actions on

their illegality means that every time a corporate mis-

demeanor is committed, the officials responsible are to be

prosecuted once for doing it and once for failing to confess

in documents required to be filed with the SEC. In this

case for example, failure to confess a misdemeanor makes

each of the petitioners a felon. This is a stiff price tag for

failure to make a confession that is only arguably mate-

rial.28

The court of appeaf§ below ignored the inquiries

established as relevant in BlockSurger and Brown in favor

28 The government argued in its brief before the court of appeals

that petitioners had waived any double jeopardy claim. Govt. Br. at

84. Even if there was such a waiver of the double jeopardy claim in

itself this should not erase double jeopardy issues insofar as they are

relevant to sound construction of the securities statutes, the point

pressed here. Moreover, although the petitioners did not claim

double jeopardy at the time of their indictment, David Stirling's

counsel did move for mistrial on the basis of the prejudicial effect of

the allegations of Taft-Hartley violations (A. 459-468) at the later

tuume when it became clear that the illegality of Homex’s labor

relations was the sole basis for the government's contentions con-

cerning materiality. It was only then that the double jeopardy

involved became clear.

of a mechanical recitation that for double jeopardy to

attach the offences charged must be the “same in fact and

law.” (Pet. App. A, pp. 36a-37a). As Brown makes clear

the required double jeopardy inquiry is not so restrictive.29

Plenary review is required not only to prevent prejudice to

petitioners and subversion of the securities laws, but also

to elucidate the reach of this Court’s recent holding in

Brown.

2. There was no proper finding of materiality, and the

conviction of petitioners is an improper expansion of the

criminal jurisdiction of the securities laws.

‘“*Materiality” of disclosures and nondisclosures is the

crux of the petitioners’ alleged liability under the federal

securities laws. But both the trial court and the court of

appeals misapplied the concept in a way which is directly

in conflict with this Court’s recent decision in TSC In-

dustries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).

(a) The instruction was erroneous: The jury was

repeatedly instructed that it could find a statement or

Omission material if it “would or might” (emphasis

supplied ) have induced an investor to act or not act.%

29 Compare this Court’s statement in Brown, 432 US. at

164:

“It has long been understood that separate statutory crimes

need not be identical —either in constituent elements or in

actual proof—in order to be the same within the meaning

of the constitutional prohibition. | J. Bishop, New Crimin-

al Law § 1051 (8th ed. 1892); Comment, Twice in Jeop-

«fdy, 75 Yale L.J. 262, 268-269 ( 1965).”

30“This means that if you find a particular statement

of fact to have been untruthful or a particular omission to

be such that it made statements untruthful, before you can

find that statement or omission to be material you must

footnote continued

As Justice Marshall said in the TSC case (426 US. at

448-449), relying on Judge Friendly’s leading Second

Circuit opinion in Gerstle v. Gamble-Skogmo, Inc., 478

F.2d 1281, 1301-1302 (2d Cir. 1973):

“The potential liability for a Rule |14a-9 violation

can be great indeed, and if the standard of

materiality is unnecessarily low, not only may the

corporation and its management be subjected to

liability for insignificant omissions or mis-

Statements, but also management’s fear of ex-

posing itself to substantial liability may cause it

simply to bury the shareholder in an avalanche

of trivial information—a result that is hardly

conducive to informed decisionmaking. Pre-

cisely these dangers are presented, we think, by

the definition of a material fact adopted by the

Court of Appeals in this case—a fact which a

reasonable shareholder might consider impor-

tant. We agree with Judge Friendly, speaking

for the Court of Appeals in Gerstle, that the

footnote continued

also find that the statement or omission was of such a

nature that it would or might reasonably have induced the

Person to act or not to act, and in this case specifically to

purchase or not to purchase the stock of Stirling Homex.

“As I say, the same is true with statements and with

omissions. If you find that information which was with-

held or omitted would, if disclosed, have significantly

changed the nature of the information that was given and

would have changed the information so that the effect on

the decision to act or not to act would or might have been

different, then the omission was material.

“If you find that the addition of the omitted information

wouldn't have made any difference, then you may not find

that the omission was a material one.” (Emphasis added. )

A. 597-98.

“might” formulation is ‘too suggestive of mere

possibility, however, unlikely.” 478 F.2d, at

1302.”3"

The instruction below—which related to all of the secu-

rities counts and all the alleged “means of fraud” and

representations of the petitioners—was plain error. It was

clearly prejudicial for the reasons set forth in the 7SC and

Gamble-Skogmo opinions: this formulation of materiality

allowed the petitioners to be convicteu on a “mere

possibility” that the nondisclosures in question would have

affected a reasonably prudent investor.22 Review by this

Court is necessary because affirmance of such an instruc-

tion erodes the holding of 7SC and dramatically escalates

the risks of entering the market for capital.

(b) Jilegality is not material per se: The govern-

ment has in effect urged, and the court of appeals

below adopted, a per se definition that illegality or

impropriety by management relating to the sale or

issuance of stock is necessarily “material.” This posi-

tion is directly in conflict with this Court’s recent

holdings in 7SC Industries, Inc. v. Northway, Inc.,

426 U.S. 438 (1976), and NAACP v. Federal Power

3' Although the TSC case dealt specifically only with materiality

as it related to proxy solicitations, the basic reasoning of the Court

would seem applicable to materiality generally as that issue arises

under the securities acts, and particularly in a criminal provision of

those acts. See also American Law Institute, Federal Securities

Code—Proposed Official Draft, § 293 at 125-126 (March 15, 1978)

adopting the TSC definition as the general definition of materiality.

32In the absence of a proper instruction based on the TSC

formulation of materiality, there is no proper finding on this record

that the facts in question were indeed material. The prejudice to the

nghts of the defendants on all counts of the indictment in question is

direct and compelling, and the regulatory interest in requiring the

disclosure has simply not been adjudicated or established.

—

Commission, 425 U.S. 662 (1976), affirming 520 F.2d

432 (D.C. Cir. 1975).

In the TSC case this Court overturned a summary

judgment on the issue of materiality and held that mate-

riality must be assessed as a factual matter in light of all

the circumstances.%3 A flat holding that the illegality of the

petitioners’ conduct is material as a matter of law would

be improper in any case and is doubly so in a criminal

case.

In this case, as the opinion of the Second Circuit

below makes clear, it is the “impropriety” of the facts

“withheld” by the petitioners (as measured by other

statutes or by the general public interest), not their

economic size or any concrete, undisclosed impact on

corporate operations, which renders them “material” for

disclosure purposes. See p. 18, n.23, supra. The SEC’s

authority to compel disclosures—based on the need to

ensure a free flow of information, and protect the reliabi-

33 “In considering whether summary judgment on the

issue is appropriate, we must bear in mind that the

underlying objective facts, which will often be free from

dispute, are merely the starting point for the ultimate

determination of materiality. The determination requires

delicate assessments of the inferences a ‘reasonable share-

holder’ would draw from a given set of facts and the

significance of those inferences to him, and these assess-

ments are peculiarly ones for the trier of fact. Only if the

established omissions are ‘so obviously important to an

investor, that reasonable minds cannot differ on the ques-

tion of materiality’ is the ultimate issue of materiality

appropriately resolved ‘as a matter of law’ ky summary

judgment. Johns Hopkins University v. Hutton, 422 F.2d

1124, 1129 (C.A.4 1969). See Smallwood v. Pearl Brewing

Co., 489 F.2d 579, 604 (C.A.5 1974); Rogen v. Ilikon

Corp., 361 F.2d 260, 265-267 (C.A.1 1966).” 426 U.S. at

450.

lity of capital markets—is expanded to include authority

to enforce other criminal statutes by self-reporting.

But a general admonition to promote the public

interest in a grant of regulatory authority does not give an

agency ful! license to pursue “public interest” issues not

entrusted to its jurisdiction by statute. In NAACP v.

Federal Power Commission, supra, this Court rejected the

NAACP’s attempt to force the FPC to adopt anti-

discrimination rules for its regulatees, and a complaint and

enforcement scheme to implement such rules. The FPC

was held to be properly concerned with discrimination

issues Only so far as they had an impact on fair and

reasonable electricity rates or other explicit statutory

duties of the Commission.

The SEC itself has in the past rejected broad author-

ity to promote aspects of the public interest which are

unrelated to the protection of investors, for reasons similar

to those set forth in NAACP v. Federal Power Commis-

sion. Almost three years after the Homex prospectus was

filed in July 1971, the SEC was still taking the position

that while a conviction for illegal contributions to a

political campaign was a material fact, the “disclosure of

campaign contributions that may be illegal but have not

yet become the subject of a formal proceeding” could be

left to the discretion of management. See SEC Securities

Act Release No. 33-5466 [ 1973-74 Transfer Binder] CCH

Fed. Sec. L. Rep. 979,699 (March 8, 1974). See Note,

34 As recently as 1975, the SEC stated that the existence of a

statutory framework prohibiting certain types of corporate conduct

did not mandate disclosure of the corporation’s failure to comply with

those statutes. See SEC Securities Act Release No. 33-5627, [1975-76

Transfer Binder} CCH Fed. Sec. L. Rep. 980,310 (October 14, 1975).

Significantly, one of the items rejected as a per se subject of disclosure

was “compliance with the Fair Labor Standards, Occupational Safety

and Health and National Labor Relations Act.” Jd. at 85,724, n.72.

Disclosure of Corporate Payments and Practices: Conduct

Regulation through the Federal Securities Laws, 43

Brooklyn L. Rev. 681 (1977). The petitioners are being

held criminally liable for not complying with a dubious

notion of materiality which the SEC has itself rejected.

The recent Report of the Advisory Committee on

Corporate Disclosure to the Securities and Exchange

Commission (1977)35 (A. Sommer, ex-commissioner,

Chairman ) is clear and emphatic that attempts to broaden

the purview of the SEC in the manner presented in this

case are inconsistent with its authority and destructive of

its function. In the recorimended statement of objectives

for the Commission, the concluding statement is ( p. 307):

“The Commission should not adopt disclosure

requirements which have as their principal

objective the regulation of corporate conduct.”

35 The Advisory Committee on Corporate Disclosure was ap-

pointed by the SEC itself to undertake a thorough study of the SEC’s

responsibilities and functions in the area of disclosure. Its report was

based on twenty-one months of effort by the 17 appointed experts

(later 16 with the appointment of Harold Williams to be Chairman of

the SEC) supported by SEC staff and resources. The report has been

submitted to both the SEC and the House Committee on Interstate

and Foreign Commerce.

36 The Committee emphasized that the SEC should not put itself

in the position of arbitrating among the interests which seek informa-

uon beyond that which is relevant to investment or suffrage decisions.

It said (id. at 312):

“This is a role the Commission is neither authorized nor

qualified to fill.”

Moreover, attempting to satisfy all these interests would result in the

useless “avalanche” of trivia which this Court feared in TSC. Jd.

See also Sommer, “The Slippery Slope of Materiality,” P.L.I

Address, at 21, 1975: “If the enforcement of the disclosure laws

becomes in effect a substitute for the enforcement of other substantive

laws, then I would suggest that the Commission will have been

diverted from its true mission. . .”

The costs, therefore, of the sort of disclosure requirement

at issue here include impact on the proper statutory

functions of the SEC. as well as upon the individual rights

of the petitioners. See also, Mann “Watergate to Banana-

gate: What Lies Beyond,” 31 Bus. Lawyer 1663 (1976).

3. The charge to the jury on credibility of witnesses

and reliance on experts was in conflict with the presumption

of innocence, and the scienter requirements of the securities

laws.

(a) The trial court’s charge to the jury improperly

implied that petitioners had committed perjury, and

thus were guilty.

In the charge to the jury in regard to the credibility of

witnesses, the trial court stated:

““Now to go to a subject much less technical and

perhaps much more critical in the end, the

subject of credibility of witnesses. That is a key

problem for juries. J think it is reasonably safe to

suggest that you probably heard more than once

perjury from the witness stand in this case.

Beyond that, of course, you have heard lots of

conflicting stdtements about what happened or

didn’t happen, about what was said or was not

said, and you are relying on the net effect of

those witnesses in the last analysis for your

discovery of the truth, for your accurate recrea-

tion of the events upon which you will base an

accurate and just decision, and that is the prob-

lem of credibility.” (A.657; emphasis added. )

The trial court went on to imply further that the

anonymous perjurers were in fact the petitioners:

“Among interested people who testified you

have heard three of the defendants themselves.

and you would know without my saying that a

defendant in a criminal case has a deep and

profound and abiding interest in the outcome of

that case. Obviously that is among the factors

you will take into account in appraising the

credibility of those witnesses.” (A.659-60. )37

The court below held that because no objection had

been raised by petitioners to the charge, the issue could

not be raised on appeal, but that in any event, the

instruction was fair and proper and not plain error. ( Pet.

App. A, p. 49a.) This conclusion is incorrect.%¢ In addition,

it conflicts with the principles of Quercia v. United States,

289 U.S. 466 (1933) and the view taken by the Fifth

Circuit of the extent to which a trial court may comment

on the veracity of a defendant’s testimony without causing

37 The trial court implied that witnesses who had been given

immunity would, in contrast to the defendants, be particularly truth-

worthy witnesses. The court charged:

“In considering whether they may have sworn falsely in

this respect, you may also take into account that the cases

at least where immunity has been granted, the immunity

has been conditioned on the undertaking of the witness to

tell only the truth here and elsewhere with the stipulation

that the immunity would end if the person was deemed to

testify falsely, and you may weigh that with and against

the several other things that I have mentioned.” (A.660-

61.)

38 The cases relied on by the court below support the proposition

that an instruction which points out the defendant’s interest in the

outcome is not necessarily unfair in itself; those cases do not reach the

impact of such an instruction when given in close conjunction with a

suggestion of perjury and an emphasis on the agreement of the

immunized witnesses to testify truthfully. Pet. App. A., p. 49a.

the defendant to lose the presumption of innocence to

which he is entitled.39

As this Court noted in Quercia v. United States, 289

U.S. 466, 470 (1933), “hostile comment of the judge

should not render vain the privilege of the accused to

testify in his own behalf.” The Court found that the trial

court’s comment that the accused’s wiping his hands was

“almost always an indication of lying” was reversible

error, not cured by a cautionary instruction that the jury

was not bound by his view of the evidence. 289 U.S. at

472. Because “the influence of the trial judge on the jury

‘is necessarily and properly of great weight’ and ‘his

lightest word or intimation is received with deference, and

may prove controlling,’ ” 289 U.S. at 470, quoting Starr v.

United States, 153 U.S. 614, 626 (1894), the effect of the

trial court’s words was inherently prejudicial to petition-

ers.

In two recent cases, United States v. Cisneros, 491

F.2d 1068 (Sth Cir. 1974) and United States v. Fischer,

531 F.2d 783 (Sth Cir. 1976), the Fifth Circuit has taken

the position that comments by the trial judge that a

defendant is not telling the truth require reversal and

remand.* In Fischer, the defendant had testified con-

39 See also United States v. Goichman, 547 F.2d 778, 784-785

(3d Cir. 1976), where the court concluded that although there was

some doubt, the judge’s comment that the reason why the defendant

was chosen for prosecution of criminal tax evasion “was simple as

ABC” did not constitute reversible error based on the entire record. A

remark of this kind is simply not analogous to the instruction here.

40In Cisneros, the trial judge had stated “somebody is lying.”

This remark, coupled with a comment on the demeanor of a witness,

was too harmful to be cured by a cautionary instruction, particularly

when the instruction occurred well before the prejudicial remarks.

491 F.2d at 1075. Indeed, even a comment on defendant’s character

has been held to constitute plain error. United States v. Musgrave,

444 F.2d 755 (Sth Cir. 1971).

cerning the attire of various individuals at the time of the

alleged crime and the trial court charged the jury (531

F.2d at 786):

“I feel constrained to point out that someone

obviously didn’t tell the truth from the witness

stand in this case. Use your own common sense

to aid you in determining who did and who

didn’t. Consider, if you can remember what you

wore a week ago Tuesday, let alone what every-

one in the room wore eight months ago when

you had reason to remember such details.”

The Fifth Circuit held that “the trial judge’s com-

ments unduly trespassed upon the jury’s function of

determining the credibility of witnesses.” Jd.

The conflict between Quercia, Cisneros, and Fischer +

on the one hand, and the view of the court below, on the other,

can only be resolved by this Court.

(b) The trial court’s instruction on reliance on

experts allowed the petitioners to be convicted despite

good faith disclosure and good faith reliance.

It was the prosecution’s burden to prove the absence

of good faith as a crucial element of the offenses. The

instruction on reliance on experts improperly reversed this

burden. It deflected the attention of the jury away from

the crucial inquiry, the petitioners’ willfulness, into an

41 The trial court in Fischer refused to give an instruction that the

jury was not bound by the judge’s comments, but the absence of this

instruction was not dispositive. It is true, however, that the trial court

below did tell the jury that nothing he said should suggest how the

jury was to decide an issue. However, as in Cisneros, that instruction

preceded the prejudicial remarks by some 100 pages or two hours.

Therefore, under Cisneros, the instruction could not cure the prejudice

to petitioners of the judge’s suggestion of perjury.

erroneous inquiry into the objective completeness of dis-

closure. The instruction provided:

If an attorney or accountant has a full

account of the facts of what you are doing and

what you intend to do and then says it is proper,

it is lawful, your proceeding on that basis might

serve as a Strong indication that you were acting

in good faith and not in bad faith.

“On the other hand, you will realize that if

some of the important facts are misstated to the

accountant or lawyer or if some of the important

information is withheld or not disclosed, the

advice that the accountant or lawyer then gives

can hardly be deemed to constitute a basis for

claiming good faith in going ahead and acting on

the basis of that uninformed and insufficiently

implemented advice.” (A.601-02. )42

The portion of the charge addressed to reliance upon

experts failed to encompass the possibility that any

“important information” which the petitioners may not

42 With respect to reliance on experts, the Stirlings and Ya-

nowitch had jointly requested the following charge:

“You should ask yourself whether it would be likely that

he would have personal knowledge of the fact he related

or whether it was more likely that he obtained his informa-

tion secondhand in reliance on the statements and opinions

of others who were closer to the pertinent affairs of the

company. For example, even if you find that a financial

statement which a defendant mailed, or caused to be

mailed, was false as charged, if you find that the defendant

relied in good faith on the expertise of the accountant who

furnished the statement and that he therefore personally

believed the statement to be truthful, you must acquit the

defendant charged with fraud in that instance.” Request

No. 21 (A. 145.)

te oO aR ne ee ee Oe

have disclosed was not “withheld,” except in the sense

that the nonexpert defendants were not aware of its

materiality and that Allan Kramer, Peat Marwick, and

Th .Jore Kheel—a labor lawyer and a Homex director at

the relevant times—all did not bother to pose the ques-

tions that should have been asked.

The petitioners were in effect held to an expert

standard of culpability—to know and disclose all relevant

facts, even those which they were not aware were relevant.

In United States v. Crosby, 294 F.2d 928 (2d Cir.

1961), cert. denied sub nom. Mittelman v. United States,

368 U.S. 984 (1962), the court reversed the conviction of

brokers who had relied upon the advice of securities

counsel in connection with the sale of unregistered secu-

rities, even though the attorneys giving the opinion had

not been given all the facts essential to the determination.

The court, in terms equally applicable to the case at bar,

noted that (294 F.2d at 942):

“The statutory and administrative regu-

latory scheme over this area is far from a model

of clarity; such a situation is aggravated when, as

here, criminal liability is based on the failure to

comply with the law. We think it is all too facile

an answer for the government to rely on the

experience and supposed expertise of these bro-

kers; the fact is that they purported to rely on

opinion letters of an attorney, whose expertise is

presumed to be even greater.”

Criminal intent and not mere innocent misstatement

or mistake is required to violate the fraud provisions of the

securities laws, see, e.g., United States v. Koenig, 388

F.Supp. 670,712 (S.D.N.Y. 1974). The instruction below

allowed criminal intent to be bypassed.

To maintain a properly functioning securities market,

in which businessmen can seek necessary capital with

confidence, it is necessary: a) that experts be held to a

high standard of competence, and b) criminal charges rest

firmly on a finding of willful violation. In Ernst & Ernst v.

Hochfelder, 425 U.S. 185 (1976), this Court rejected mere

negligence as a basis for civil liability under Rule 10b-5

for reasons which should apply even more strongly here.

This Court (425 U.S. at 214-215, n.33) quoted from Chief

Judge Cardozo’s opinion in Ultramares Corp. v. Touche,

255 N.Y. 170, 174 N.E. 441 (1931), concerning the

hazards of indeterminate liability for negligent conduct

“The hazards of a business conducted on these

terms are so extreme as to enkindle doubt wheth-

er a flaw may not exist in the implication of a

duty that exposes to these consequences.”

The instruction concerning reliance on experts

presents a novel and recurring issue, resolution of which is

necessary for proper interpretation of criminal wilfulness

under the securities statutes and for protection of the

fundamental concept that defendants are to be presumed

innocent.

4. The ruling of the trial court that Harold Ya-

nowitch’s plea of nolo contendere and David Stirling’s plea

of guilty, entered in the Western District, could be used for

impeachment (a) contravenes the provisions of Fed. R.

Evid. 410 and Fed. R. Crim. P. 11(e)6, (b) results in a

conflict not only with these federal rules, but also with the

holdings of the Court of Appeals for the Fifth Circuit, and

U.S. 473 (1972).

The trial court had been apprised that a motion had

been made to withdraw David Stirling’s plea of guilty and

ee ee 5 RE OO ee

Harold Yanowitch’s plea of nolo contendere in the West-

ern District, which had resulted from the prosecution’s

failure to provide exculpatory material in violation of

Brady v. Maryland, 373 U.S. 83 (1963), and that this

motion was pending before the court in the Western

District. On the opening day of trial, the trial court ruled

that petitioners’ pleas (of nolo contendere and guilty), in

regard to the charge that each had caused things of value

to be given to union officials, could be used for purposes of

impeachment, as “admissions made at the time in direct

contradiction to what is being said [by petitioners on

direct examination] as prior inconsistent statements.”

As a result of this ruling, petitioner Yanowitch did not

testify on this issue. Petitioner David Stirling, who did not

testify with respect to any specific matters covered by the

Western District indictment, denied that he or his brother

ever did “willfully, intentionally and unlawfully conspire

to or otherwise violate the securities laws of the United

States.”’ As a result of the trial court’s ruling, tue Govern-

ment was able to ask petitioner Stirling whether, on

January 21, 1976 (the day he pleaded guilty) he had

admitted causing things of value to be delivered to union

officials identified in the Western District indictment.

Stirling conceded that he had made this admission on that

date.43 In short, he was forced to admit guilt.‘ Later, after

43 The impression on the jury was heightened by the prosecutor’s

handing the witness a copy of the transcript of the Western District

proceeding and asking him to examine it. (Tr. 4186-87.)

44Use of the guilty plea of David Stirling to impeach was

prejudicial not only to him, but also to William Stirling and Harold

Yanowitch, because as alleged co-conspirators, each was bound by

the admission of David Stirling that he had caused things of value to

be given to union officials. Thus, each of the petitioners could (and

did) appeal on this ground. Bruton v. United States, 391 U.S. 123,

135-137( 1968).

the trial below, petitioners’ pleas were permitted to be

withdrawn pursuant to Fed. R. Crim. P. 32(d), to prevent

manifest injustice because the prosecution had violated

the standards of Brady.45

(a) The ruling below is in conflict with the Federal

Rules of Evidence and Criminal Procedure.

The ruling of the trial court and the use of a plea of

guilty or nolo contendere for impeachment contravenes

the provisions of Fed. R. Evid. 410 and Fed. R. Crim. P.

11(e)6.46 See Pet. App. E, pp. 76a-77a.

Any reading of these rules makes clear that a plea of

nolo contendere is not admissible. A guilty plea later

withdrawn, is also not admissible.47 In this case, the

grounds for withdrawal of the guilty plea existed at the

time the ruling of admissibility was made, and the trial

court was apprised of the pending motion to withdraw

45 The government has filed a motion for reconsideration of this

ruling which is still pending in the Western District.

46 The last sentence of each rule does not apply in this case. That

sentence refers to the use of “statements” made in connection with

pleas. In this case, there were no statements made in connection with

petitioners’ pleas. Petitioners stated only “I plead guilty” and

“Defendant Yanowitch tenders and pleads nolo contendere to those

counts.” Thus, it was not petitioners’ statements, but their bare pleas,

that were ruled admissible. The trial court’s ruling supports this

conclusion. What was ruled admissible were petitioners’ “‘admis-

sions,” or, in other words, their pleas. The court of appeals noted only

that the pleas and convictions based on them were not admitted as

evidence and denied petitioners’ motion for dismissal of the appeal

without prejudice and for remand. (Pet. App. A, p. 36a, n. 15).

es The Joint Explanatory Statement of the Conference Com-

mittee, states: “The Conference agrees that neither a plea nor the offer

of a plea ought to be admissible for any purpose.” H.R. Rep. No. 414,

94th Cong., Ist Sess. 10, reprinted in [1975] U.S. Code Cong. & Ad.

News 713-714.

and the grounds for it. The plea was permitted to be

withdrawn to prevent the manifest injustice which would

have resulted by its use. It contravenes the federal rules

cited above to hold, as the court of appeals did, that the

plea could be used merely because no ruling had yet been

made on its withdrawal.4* The pleas, which cannot be used

to procure conviction in one context because their ex-

clusion was necessary to prevent manifest injustice, cannot

be used in another context without manifest injustice.*9

If guilty and nolo contendere pleas can be used in

contravention of Fed. R. Crim. R. 11(e)6 and Fed. R.

48 It is, of course, highly prejudicial to introduce even a con-

viction “arising out of the identical factual circumstances and in-

volving many of the identical elements as the offense on trial.” United

States v. Martinez, 555 F.2d 1273, 1277 (Sth Cir. 1977) (reversible

error and abuse of discretion to permit impeachment in charge of

conspiracy to distribute cocaine by conviction for aiding and abetting

distribution of cocaine. ) The court noted that the “defendant’s right to

have the jury determine that the government has properly proven

every essential element beyond a reasonable doubt was improperly

prejudiced by the introduction of the former conviction.” 555 F.2d at

1276-1277.

49]t will doubtless be argued that petitioners’ pleas were not

introduced as evidence against them but were merely used for

impeachment of them, pursuant to Fed. R. Evid. 609. Fed. R. Evid.

609 provides that “For the purpose of attacking the credibility of a

witness, evidence that he has been convicted of a crime shall be

admitted... only if the crime (1) was punishable by death or

imprisonment in excess of one year... or (2) involved dishonesty or

false statement, regardless of punishment.” The fallacy in this argu-

ment is that the rule requires a conviction, and the pleas were

withdrawn and the convictions based on them invalidated. Cf. United

States v. Franicevich, 471 F.2d 427, 429 (Sth Cir. 1973) (in the

interest of fairness, witness permitted to explain that prior conviction,

used for impeachment, was though not yet reversed, on appeal.) But

see Kercheval v. United States, 274 U.S. 220, 223 (1927) (“A plea of

guilty differs in purpose and effect from a mere admission or an extra-

judicial confession; it is itself a conviction.”) and Parker v. North

Carolina, 397 U.S. 790, 801 (1970) (“...a guilty plea is more

serious than a confession because it is tantamount to a conviction.”’)

(Emphasis added. )

Evid. 410, the use of plea agreements will be undermined.

This is particularly true if a plea withdrawn because of

manifest injustice can be used to impeach.

(b) The ruling below is in conflict with the Fifth

Circuit.

There is a conflict between the circuits in regard to

the admissibility of a plea of nolo contendere for impeach-

ment. As shown by this case, despite the fact that a nolo

contendere plea is not an admission of guilt,5° the Second

Circuit permits impeachment based on the plea. See also

Pfotzer v. Aqua Systems, Inc., 162 F.2d 779, 784-785 (2d

Cir. 1947). The Fifth Circuit does not. United States v.

Morrow, 537 F.2d 120 (Sth Cir.), rehearing denied 541

F.2d 282 (Sth Cir. 1976), cert. denied, 430 U.S. 956

(1977). Defendants’ rights should not vary with the

circuit in which they are tried.

In Morrow, “the improper introduction of the nolo

contendere pleas by the Government had a substantial

effect on the deliberations of the jury.” 537 F.2d at 145.

Thus, the court concluded that, in the circumstances of the

50 Further, the ruling of the trial court fails to take into account

the distinction between a plea of nolo contendere and a plea of guilty.

As the Advisory Committee on Rules points out, a plea of nolo

contendere “cannot be used against a defendant as an admission in a

subsequent criminal or civil case.” Indeed, this is the reason for

making such a plea. However, the ruling of the court below that the

nolo contendere plea was admissible for impeachment as an admis-

sion allows what cannot be done by the front door to come in through

the back door. It is unwarranted to say that the nolo contendere plea

is not an admission and yet to use it to force the admission which it

cannot in and of itself be considered. Cf. Mickler v. Fahs, 243 F.2d

515, 517 (Sth Cir. 1957) (“The same reasons which make the

evidence of a plea of nolo contendere inadmissible as an admission

will exclude it in a jury trial when offered for the purposes of

impeachment.” )

—

case, where the evidence was sufficient but not over-

whelming, introduction of the nolo contendere pleas was

not harmless error.’

If introduction of a valid plea of nolo contendere

cannot be considered harmless error, a fortiori, the deci-

sion to introduce an invalid plea, withdrawn because of

prosecutorial misconduct and to prevent manifest in-

justice, must be plain error.

principle of Loper v. Beto.

In Loper v. Beto, 405 U.S. 473 (1972), this Court

held that the use of a prior void conviction for impeach-

ment purposes to support guilt deprives a criminal defend-

ant of due process of law.s2 Even assuming arguendo that

it was the conviction rather than the pleas of petitioners

that were to be used here for impeachment, these prior

51 Here, in conflict with the holding of the Fifth Circuit in

Morrow, the nolo contendere plea was ruled to be admissible and the

‘court of appeals below has explicitly affirmed the ruling as correct

without assessing the impact of the error.

52 The prior invalid convictions were used here as they were in

Loper, “simply in an effort to convict [defendant] by blackening his

character and thus damaging his general credibility in the eyes of the

jury.” 405 US. at 482, n. 11. David Stirling’s direct testimony was

only that he and his brother did not violate the securities laws. Thus,

also like Loper, “this is not a case where the record of a prior

conviction was used for the purpose of directly rebutting a specific

false statement made from the witness stand.” Jd. The trial court

evidently, and erroneously, believed the case was not like Loper but

like Harris v. New York, 401 U.S. 225 (1971), because he stated that:

“If he [David Stirling, Jr.] is going to say that he didn’t do

some of the things that he admitted doing before [the

Western District], I think I will be disposed to let that

admission come in.”

convictions were voided because the prosecution had

withheld exculpatory material in violation of Brady v.

Manyland, supra. They should therefore not have been

used to impeach.

Withholding exculpatory material is a strategem de-

signed to coerce a plea, or confession of guilt, by restric-

ting the information available to the defendant and

inflating the appearance of invulnerability of the Govern-

ment’s case so as to make defense seem hopeless; it is as

patent a violation of due process as other means of

coercion. Thus, petitioners’ pleas were not voluntary, but

two sets of convictions were based on them and only one

set has been voided.

This Court said in Jackson v. Denno, 378 U.S. 368,

376 (1964):

“It is now axiomatic that a defendant in a

criminal case is deprived of due process of law if

his conviction is founded, in whole or in part,

upon an involuntary confession, without regard

for the truth or falsity of the confession, Rogers v.

Richmond, 365 U.S. 534, and even though there

is ample evidence aside from the confession to

support the conviction.”

The pleas here amounted to coerced confessions derived

by withholding exculpatory information, and were in-

admissible for impeachment under Loper. Were this not

so, the Government would be encouraged to violate

Brady, safe in the knowledge that a conviction so obtain-

ed, while it might later be invalidated, could nonetheless

be used in a later proceeding “to support guilt.”

In Brady v. Maryland, 373 U.S. at 87, this Court said

that:

“Society wins not only when the guilty are

convicted but when criminal trials are fair; our

system of the administration of justice suffers

when any accused is treated unfairly.”

In order to fulfill this mandate of fairness, this Court

should review the decision below.

CONCLUSION

For the reasons stated above, the petition should be

granted so that the Court on full review may determine

the fairness and correctness of the petitioners’ trial and

resolve the novel and significant issues of securities law,

constitutional law, and criminal procedure presented.

Respectfully sus mitted,

ErRwWIN N. GRISWOLD,

THOMAS F. CULLEN, JR.

LINDA K. SMITH

BERNARD S. MEYER

JEFFREY G. STARK

Attorneys for Petitioners

Of Counsel:

JONES, Day, REAVIS & POGUE

1100 Connecticut Avenue, N.W.

Washington, D.C. 20036

MEYER, ENGLISH, CIANCIULLI

& Peiriz, P.C.

160 Mineola Boulevard

Mineola, New York 11501

May, 1978

APPENDIX A

OPINION OF THE COURT OF APPEALS

United States Court of Appeals

For THE SECOND CIRCUIT

Nos. 33, 50, 66, 67, 68-September Term, 1977.

(Argued August 29, 1977 Decided February 2, 1978.)

Docket Nos. 77-1140, 1141, 1144, 1177, 1178

UNITED STATES OF AMERICA,

Appellee,

DAVID STIRLING, JR., WILLIAM G. STIRLING,

HAROLD M. YANOWITCH, EDWIN J. SCHULZ

and RuBEL L. PHILLIPS,

Defendants-Appellants.

Before:

LUMBARD, OAKES AND MESKILL,

Circuit Judges.

Appeals from judgments entered in the United States

District Court for the Southern District of New York, Marvin E.

Frankel, Judge, after a six-week jury trial, convicting appellants

of securities and mail fraud and conspiracy in connection with

sales of stock in the Stirling Homex Corporation. The govern-

ment charged that Homex’s reported earnings had been fraudu-

lently inflated and that material information adverse to Homex

had been withheld from the investing public. 15 U.S.C.

§§77q(a), 77x, 78ff, 18 U.S.C. §§371, 1001, 1341.

All convictions are affirmed.

WILLIAM B. LAWLESS, New York, New York (Allen P. Rosiny,

Hawkins, Delafield & Wood, New York, New York, of

counsel), for Defendants- Appellants David Stirling, Jr. and

William G. Stirling.

BERNARD S. MEYER, New York, New York ( William B. Law-

less, Allen P. Rosiny, Hawkins, Delafield & Wood, New

York, New York, Meyer, English, Cianciulli & Peirez, P.C.,

Mineola, New York, of counsel), for Defendant-Appellant

Harold M. Yanowitch.

DouGLas F. Eaton, New York, New York, for Appellant

Edwin J. Schulz.

MICHAEL B. Mukasey, New York, New York (Robert P.

Patterson, Jr., W. Peter Burns, Patterson, Belknap, Webb &

Tyler, New York, New York, of counsel), for Appellant

Rubel L. Phillips.

ANGUS MACBETH, Assistant United States Attorney, Southern

District of New York (Robert B. Fiske, Jr., United States

Attorney for the Southern District of New York, W. Cullen

MacDonald, Frederick T. Davis, Assistant United States

Attorneys, Southern District of New York, of counsel), for

the United States of America.

MESKILL, Circuit Judge:

This is an appeal by David Stirling, Jr., William G.

Surling, Harold M. Yanowitch, Edwin J. Schulz, and Rubel L.

Phillips from judgments of conviction entered on March 11,

1977, in the United States District Court for the Southern

District of New York, Marvin E. Franke, Judge, after a six

week jury tiral. Appellants were convicted of securities and

mail fraud and conspiracy in connection with sales of stock in

the Surling Homex Corporation (“Homex”). Specifically,

appellants were convicted of violating and, under 18 U.S.C.

$371, conspiring to violate §§17 and 24 of the Securities Act of

1933, 15 U.S.C. §§ 77q(a) and 77x, and 18 U.S.C. § 1341.

Appellants were also convicted of conspiring to violate 15

U.S.C. §78ff and 18 U.S.C. §1001. We affirm.

Homex manufactured and assembled prefabricated multi-

family modular housing. Its operations consisted of mass-

producing individual apartment units, or “modules,” using

assembly-line production techniques, shipping them to a con-

struction site and installing them in a previously-constructed

concrete and steel frame so as to form multi-unit apartment

buildings. Each of the appellants served Homex in one or more

official capacities, and each had a considerable stake in

Homex’s financial success. David Stirling, Jr., was Chairman of

the Board and Chief Executive Officer; he owned approximately

two million shares of Homex common stock. William G.

Stirling was President, Chief Opearting Officer and a member

of the Board; he, too, owned approximately two million shares.

Harold M. Yanowitch was Executive Vice-President, Chief

Legal Officer and a member of the Board; he owned approxi-

mately 160,000 shares. Edwin J. Schulz was Senior Vice-

President of Operations, Controller and Principal Accounting

Officer; he owned 3,200 shares. Rubel L. Phillips was Southern

Region Vice-President; he owned an option to purchase 40,000

shares.

Count One of the nine-count indictment charged that the

appellants defrauded Homex shareholders, officers, directors,

auditors and others in registration statements filed in 1970 and

1971 with the Securities Exchange Commission (“SEC”) cov-

ering the public offer and sale of common and preferred Homex

stock. The government charged that this was accomplished by

inflating reported earnings and by falsifying and concealing

adverse material information in violation of 15 U.S.C.

§ 77q(a)’ and 15 U.S.C. §77x.2 Count Two charged that

appellants wilfully and knowingly made and caused to be made

untrue statements of material facts, and failed to disciose

material facts necessary to correct the misleading statements, in

the 1971 registration statement filed with the SEC covering the

public offer and sale of Homex preferred stock, also in violation

of 15 U.S.C. § 77x. Counts Three through Eight charged that

appellants devised a scheme to defraud Homex securities

purchasers and others, to obtain money and property by means

of fraudulent representations, and to implement the scheme by

using the United States Postal Service, all in violation of 18

‘Section 77q(a), Title 15 U.S.C., provides as follows:

Fraudulent interstate transactions

(a) It shall be unlawful for any person in the offer or sale of

any securities by the use of any means or instruments of

transportation or communication in interstate commerce or by

the use of the mails, directly or indirectly—

(1) to employ any device, scheme, or artifice to

defraud, or

(2) to obtain money or property by means of any

untrue statement of a material fact or any Omission 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

(3) to engage in any transaction, practice, or course of

business which operates or would operate as a fraud or

deceit upon the purchaser.

2Section 77x, Title 15 U.S.C., provides as follows:

Penalties

Any person who willfully violates any of the provisions of

this subchapter, or the rules and regulations promulgated by the

Commission under authority thereof, or any person who will-

fully, in a registration statement filed under this subchapter,

makes any untrue statement of a material fact or omits to state

any material fact required to be stated therein or necessary to

make the statements therein not misleading, shall upon con-

viction be fined not more than $10,000 or imprisoned not more

than five years, or both.

U.S.C. § 1341.5 Specifically, appellants were charged with

mailing on separate occasions two prospectuses, two annual

reports and two quarterly reports to shareholders. Finally,

Count Nine charged that appellants conspired to defraud the

United States and the SEC and to violate 18 U.S.C. § 10014 and

3 Section 1341, Title 18 U.S.C., provides as follows:

Frauds and swindles

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 pro-

mises, or to sell, dispose of, loan, exchange, alter, give away,

distribute, supply, or furnish or procure for unlawful use any

counterfeit or spurious coin, obligation, security, or other article,

or anything represented to be or intimated or held out to be such

counterfeit or spurious article, for the purpose of executing such

scheme or artifice or attempting so to do, places in any post office

or authorized depository for mail matter, any matter or thing

whatever to be sent or delivered by the Postal Service, or takes or

receives therefrom, any such matter or thing, or knowingly

causes to be delivered by mail according to the direction thereon,

or at the place at which it is directed to be delivered by the

person to whom it is addressed, any such matter or thing, shall

be fined not more than $1,000 or imprisoned not more than five

years, or both.

4Section 1001, Title 18 U.S.C., provides as follows:

Statements or entries generally

Whoever, in any matter within the jurisdiction of any

department or agency of the United States knowingly and

willfully falsifies, conceals or covers up by any trick, scheme, or

device a material fact, or makes any false, fictitious or fraudulent

statements or representations, or makes or uses any false writing

or document knowing the same to contain any false, fictitious or

fraudulent statement or entry shall be fined not more than

$10,000 or imprisoned not more than five years, or both.

15 U.S.C. § 78ff as well as 18 U.S.C. § 1341 and 15 U.S.C.

§§ 77q(a) and 77x, such conspiracy being in violation of 18

U.S.C. § 371.6 The jury found each appellant guilty of each

charged violation.’

5 Section 78ff, Title 15 U.S.C., provides as follows:

Penalties

(a) Any person who willfully vioiates any provision of this

chapter, or any rule or regulation thereunder the violation of

which is made unlawful or the observance of which is required

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

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

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

chapter or any rule or regulation thereunder or any undertaking

contained in a registration statement as provided in subsection

(d) of section 780 of this title or by any self-regulatory organiza-

tion in connection with an application for membership or

participation therein or to become associated with a member

thereof, which statement was false or misleading with respect to

any material fact, shall upon conviction be fined not more than

$10,000, or imprisoned not more than five years, or both, except

that when such person is an exchange, a fine not exceeding

$500,000 may be imposed; but no person shall be subject to

imprisonment under this section for the violation of any rule or

regulation if he proves that he had no knowledge of such rule or

regulation.

6 Section 371, Title 18 U.S.C., provides as follows:

Conspiracy to commit offense or to defraud United States

If two or more persons conspire either to commit any

offense against the United States, or to defraud the United

States, or any agency thereof in any manner or for any purpose,

any one or more of such persons do any act to effect the object of

the conspiracy, each shall be fined not more than $10,000 or

imprisoned not more than five years, or both.

7 Judge Frankel sentenced the appellants as follows:

David Stirling, Jr.—One year concurrent terms of imprisonment,

one year of unsupervised probation, concurrent fines totaling

$10,000, suspended sentence on the conspiracy charge.

William G. Stirling—Six month concurrent terms of imprison-

ment, one year of unsupervised probation, concurrent fines

totaling $5,000, suspended sentence on the conspiracy charge.

Harold Yanowitch—One year concurrent terms of imprison-

ment, one year of supervised probation, concurrent fines totaling

$2,000, suspended sentence on the conspiracy charge.

The story is a complicated one, involving land transactions

that were not what they were claimed to be, labor relations that

were not only inappropriately “cozy” but undisclosed, contracts

for module sales based upon guile and trickery rather than

agreement, and deceptive bookkeeping practices for which

appellants have finally been held accountable. The record

shows that appellants engaged collectively in a calculated and

multifaceted plan to give the investing public the false impres-

sion that Homex was in a sound and steadily improving

financial position and at the same time withhold adverse

information that was material to an accurate appraisal of the

company’s prospects. The enterprise began in 1968; in 1970

and 1971 Homex stock was sold to the public for a total of $39

million; in 1972 the company was bankrupt. The jury could

permissibly have the found the following.

I. THE FOUNDATIONS: INCORPORATION AND GOING

PUBLIC

Homex was incorporated as a close corporation in Dela-

ware in 1968; its principal offices and factory were located in

Avon, New York, a suburb outside Rochester. The Stirling

brothers were its founders, officers and principal owners. Short-

ly after incorporation, Homex made a private offering, selling

1.6 million shares at $1 each. It thus began as a relatively small

concern, doing business primarily with private residential pro-

jects developed by the Stirlings. It soon became clear, however,

that it would be in the best business interests of Homex to

exploit the then-budding public housing market. Accordingly,

Homex focused its efforts on sales to public housing authorities

in federally-financed housing programs.

In late 1968, the Stirlings decided to explore the possibility

of “going public” and approached R. W. Pressprich & Co. as a

prospective underwriter. Pressprich agreed to underwrite the

public sale of Homex common stock on the condition that

Homex’s annua! net earnings totaled $1 million, as projected by

the Stirlings. In January of 1969, when the agreement with

Pressprich was reached, Homex was reporting profits at the end

of the second quarter of approximately $390,000 from the sale

of moduies and gross land sales totaling $4.7 million.

By April 30, 1969, however, the end of the third quarter, it

became obvious that year-end profits would fall far short of the

$1 million required for the underwriting, third quarter gross

sales totaling only $900,000. At this point Homex arranged two

“sales” of land holdings in order to boost total sales and profits

to the amount required for the Pressprich underwriting.

The Kece Land Sale.

Peter Thun was the general partner of a limited partner-

ship called Hollyrood Park Associates, located in Clay, New

York; the Stirlings were limited partners. In May, 1969, David

Surling offered Thun two parcels of land owned by a Homex

landholding subsidiary, Hollyrood Park II, Inc. Thun had a

right of first refusal on both parcels. He indicated that he was

interested in only one of the parcels—the one adjacent to his

Hollyrood Park project—but only if it were part of an econom-

ically reasonable package consisting of both the purchase of the

land for $325,000 and the development of Homex of a plan to

build a 330-unit modular apartment building. In other words,

he was interested in the land only if apartment units could

profitably be built on it. Because Stirling was unable to quote a

price for the development of such an apartment complex, Thun

arranged to have the land purchased by Kece Associates, Ltd.,

a newly-formed shell corporation, in such a way as to maintain

control over the land and at the same time incur minimal risk.

Kece Associates made a 10 percent down payment, assumed

existing mortgages on the property and gave a purchase-money

mortgage that required interest payments and an annual princi-

pal reduction of $10,000 for the first five years.

In practical effect, as the government suggests, this

$325,000 “sale” was a purchase by Thun of an “option” on the

land. Indeed, Thun himself so characterized the practical effect

of the arrangement. He stated that if it had been otherwise he

would not have considered entering into it at all. Under the

agreement, if Thun were to decide that the construction of a

330-unit apartment project would not or could not be finan-

cially advantageous, he could merely order the termination of

mortgage payments and, while relinquishing all rights to the

land, shed all mortgage responsibilities. The mortgage itself

included exculpatory language of the sort commonly expressed

reluctance. Yanowitch, and eventually David Stirling, then

assured them that, if anything went “awry,” Homex would

either repurchase the land or find another purchaser. In effect,

the purchasers were assured that they would not lose money on

their investment. This assurance was repeated prior to closing

when complications developed regarding a zoning ordinance

that prohibited the type of shopping center facilities the pur-

chasers were interested in constructing. Yanowitch assured

them that a variance would be obtained. Yanowitch also told

them that they would be “getting some stock in Stirling when it

went public.” Homex declined to enter into a written in-

demnification agreement, but it is clear that Falcone, Barbato

and Shapiro believed that, if they agreed to enter into the

purchase agreement, Homex would protect them from losses.

The deal was closed on August 18, 1969, after the end of

the fiscal year; the decds were back-dated to June 30, 1969.

Falcone, Barbato and Shapiro had created Reseac Realty, Inc.

(*“‘Reseac”’), to purchase the land, which it did by transferring

$80,000 as down payment, assuming $30,000 and $13,000

mortgages on the property and granting a $302,000 purchase-

money mortgage. No principal payments were required for the

first three years.

HKF Audits the 1968-1969 Fiscal Year.

On August 27, 1969, the accounting firm of Harris, Kerr,

Foster & Company (“HKF”) certified the Homex financial

records for the 1968-1969 fiscal year. HKF certified for

inclusion as income the $325,000 receivable from the Kece

transaction and the $425,000 receivable from the Reseac

10a

transaction. The inclusion of these two “sales” boosted

Homex’s net income after taxes slightly above the $1 million

required for the Pressprich underwriting.

During the audit, Yanowitch told HKF that he had

personal knowledge of Reseac’s ability to honor its mortgage

commitment and that, in the event of a default by either Kece

or Reseac, the land could easily be sold to satisfy the mort-

gages. Yanowitch told HKF that the agreed-upon design and

manufacture of modules for the Kece Property would be at

published prices; he failed to tell HKF that the parties had not

agreed upon the cost of installing the modules other than to say

it would be reasonable. In other words, he did not tell HKF

that the completion of the “sale” depended upon certain

conditions being met by Homex in the future. Yanowitch also

neglected to tell HKF of the assurances made to Reseac

regarding the zoning restriction and of the commitment by

Homex to repurchase the land or arrange for a purchaser if

anything went wrong. Finally, although he told HKF that

Homex and Reseac had no stockholders in common, he did not

tell HKF that promises had been made to Falcone, Barbato

and Shapiro that arrangements would be made for them to

purchase Homex stock at the anticipated public offering for the

issue price.

The 1970 Registration Statement.

On October |, 1969, Homex filed a registration statement

with the SEC in connection with the issuance of Homex

common stock. It made scant mention of the Kece and Reseac

land transactions:

Two sales of undeveloped land acquired at the time of

organization of the Company accounted for approximately

18% of the Company’s net income during its first fiscal

year. The larger parcel was purchased by a developer who

subsequently entered into an agreement with the company

to purchase modular housing for installation on such land.

lla

The registration statement became effective on February 19,

1970, for a total sale of 1,175,000 shares of Homex common

stock at $16.50 per share, netting Homex approximately $20

million.

Il. THE SCHEME AS ASSEMBLED:

STAYING “PUBLIC”.

HKF Audits the 1969-1970 \iscal Year.

During August and September, 1970, HKF again met with

Homex, this time to certify the financial records of Homex for

the 1969-1970 fiscal year. In connection with this audit, Paul

Kuveke, then Executive Vice-President and Treasurer of

Homex, wrote a letter to HKF stating that, although both the

Kece and Reseac mortgages were in default in the amount of

$559,624 as of the end of the fiscal year, Homex nevertheless

considered them “collectible” and properly recognizable as

income for auditing purposes. He cited as reasons for this belief

the receipt from Kece on September 27, 1970, of a payment

that brought its obligations up to date; the expectation that a

Reseac payment would also be received, given what appeared

to be favorable business conditions for Reseac; and a recent

appraisal of the parcels that placed the fair market value of the

Kece land at $310,000 and the Reseac land at $403,650.

The Kece Mortgage Payment

The Kuveke letter failed to disclose to HKF the rather

complicated set of transactions that “facilitated” the September

27, 1970, Kece mortgage payment. Thun and the Stirlings were

involved in a number of enterprises besides Hollyrood Park

Associates. Among these were Fairway Associates, the owner

of an apartment development in Rochester, New York; Mobile

Townes Corporation, the owner of a mobile home park in

Syracuse, New York; and Pennscott Properties, a management

company for Mobile Townes.

In September, 1970, a dispute arose regarding claims by

Homex that Thun and his various enterprises owed approxi-

l2a

mately $90,000 to Homex and its subsidiaries. From the

record, it appears that this $90,000 consisted of approximately

$34,000 due Homex for the construction of a clubhouse on

Hollyrood Park property, approximately $35,000 on a demand

note held by Homex and, apparently, approximately $23,000

due on September 2, 1970, as mortgage payment on the Kece-

Riverbend parcel. It was Thun’s opinion that the best way to

clear up the confusion was for his enterprises to buy out the

Stirlings’ interests in Mobile Townes and Pennscott, thereby

simplifying the ownership of the various corporations and at the

same time providing payment to the Stirlings.

Jack Doerge, a director of Mobile Townes, indicated to

Thun that he was interested in acquiring additional Mobile

Townes stock and would transfer $90,000 for that purpose.

$90,000 was delivered to Al Bartz of Homex in exchange for

Pennscott and Mobile Townes shares held by the Stirlings. The

Mobile Townes stock was not, however, delivered that day.

Instead, it was placed in escrow until Thun confirmed to HKF

the authenticity of the purchase-money mortgage on the Kece-

Riverbend property. On October 5, 1970, Thun confismed to

HKF that the mortgage was authentic. In effect, then, the same

$90,000 that was used to purchase the Stirlings’ stock in

Pennscott and Mobile Townes was used to satisfy the disputed

$90,000 indebtedness. At the same time, and in the same

transaction, ownership of valuable stock was transferred,

$90,000 worth of debts was forgiven, and Homex could present

to its auditors a confirmed and therefore arguable collectible

mortgage to support its recognition as income.®

8 This same pattern of behavior recurred in the spring of 1971,

this time in response to an audit being done by Peat, Marwick,

Mitchell & Co., Homex’s new auditors. The Stirling brothers can-

celled all of their interests in Hollyrood Park Associates. Peter Thun

then paid two notes heid by the Stirlings totaling approximately

$35,000 as well as $22,000 on the Kece mortgage and, on March 16,

1971, signed a confirmation of the Kece mortgage to be forwarded to

PMM.

l3a

Reseac Developments

The Kuveke letter to HKF also failed to reveal significant

background information regarding the Reseac land transaction.

On July 16, 1970, Gerald Beckerman, the attorney for Falcone,

Barbato and Shapiro, met with Carl Wren, Homex’s Director of

Market Research, and Ruben Davis, assistant to Yanowitch, in

an effort to resolve problems that had developed regarding the

property sold to Reseac. The problems were considerable:

contrary to Homex’s assurances, the zoning restriction had not

been lifted; Falcone, Barbato and Shapiro had become “quite

disillusioned” with the property and were no longer inclined to

develop or retain it; Reseac had no cash and could not make

the interest payment due on July 1, 1970; and, finally, Reseac

could not pay the real estate taxes or the obligations on the

assumed mortgages. In short, Falcone, Barbato and Shapiro

wanted Homex to make good on its promises either to repur-

chase the land or arrange for another purchaser.

Wren and Davis made it clear to Beckerman that, although

the land was considered to be a good financial value, Homex

would not repurchase it. They did, however, offer to assist in

the sale or development of the property. Beckerman indicated

that Falcone, Barbato and Shapiro would be willing to continue

in the arrangement as long as there was waiver by Homex of

the mortgage payments, a condition that Homex found

unacceptable. The meeting was amicable, but it clearly met

neither the hopes nor the expectations of the Reseac principals.

Kuveke’s letter mentioned none of this.9

% Ultimately, the Reseac principals sold the land to Yanowitch’s

former law partners, John Garrity and Bernard Frank. The govern-

ment charged that Yanowitch coaxed Garrity and Frank into pur-

chasing the Reseac land by assuring them that Homex would send

them more legal work. Their legal fees from Homex did in fact

increase substantially.

l4a

Accounting Practices

The HKF audit of Homex’s 1969-1970 financial condition

prompted Homex again to shade the truth, this time in con-

nection with the accounting methods utilized by the corpo-

ration. Typically, a Homex contract would state one price for

the design and manufacture of modules and another price for

their installation. At one time, Homex used sale contracts that

transferred title and risk of loss to the buyer upon delivery of

the finished apartment module to an independent carrier.

When this contract was used, Homex recorded income from the

sale of the module as of the moment the module was delivered

to the carrier. During the 1969-1970 fiscal year, however,

Homex changed to a “turn key” contract under which Homex

retained title and risk of loss until installation was complete and

a closing had occurred. Thus, the sale was not complete until

after the closing, when the new owner could actually claim

possession and “turn the key.” For obvious reasons, waiting to

recognize income until the day that the key was turned troubled

Homex officials. Homex, through Schulz, wanted HKF to

certify as income the value of sales contracts for modules that,

although not yet delivered or instalied, had been “manufac-

tured and assigned to specific contracts.” This method of

calculation allowed Homex to recognize the manufacture price

of a module as income long before it actually received any cash

for that module.

During the 1969-1970 fiscal year, Homex also changed the

provisions of its contracts dealing with installation. Where once

Homex had not recorded any portion of the installation price as

income until the installation was complete, Homex now wanted

HKF to recognize as income that proportion of the installation

price equal to the proportion of the installation completed. This

system of recognition is called the “percentage of completion”

method.

To support these methods of recognizing income, Schulz

contacted and eventually retained Dr. Joseph A. Mauriello, an

accounting professor at the New York University Graduate

lSa

School of Business Administration. As a result of the conversa-

tions with Schulz, Dr. Mauriello submitted to HKF an opinion

supporting Homex’s income recognition system, and HKF

approved of its use. What Schulz did not reveal to Dr.

Mauriello, or to HKF however, was the so-called “Christman

Incident.” Earlier in 1970, David Christman, an assistant

controller in Homex’s installation division, had discovered that

profits for the installation phase of Homex operations were

going to be one-half million dollars less than what they had

been projected to be. Schulz instructed Christman to “delay

recordation of the accounting entry embodying that calcu-

lation” until after the close of the fiscal year. This delay

prevented the reduction of the installment division’s 1969-1970

profits by 60 percent and the reduction of Homex profits for

that period by 11 percent. According to Dr. Mauriello, had the

delay been disclosed to him, it would have altered his opinion

regarding the propriety of the income reporting methods of the

installation division.

The Route 57-31 Land Sale.

In December, 1970, Harold L. Wynn, Jr., and William

Grago, Jr., partners in the Empire Pipeline Corporation, and

their attorney, Carmen Grasso, met with David Stirling to

discuss the purchase of 138 acres of land at the intersection of

routes 57 and 31 in Clay, New York. The land was owned by

Homex’s land-holding subsidiary, Kabeth Properties, Inc. The

purchase price of the land was $2.1 million. A 30-acre portion

of the land was then the subject of a state condemnation

proceeding, for which an award of $1 million was anticipated.

Wynn told Stirling that, although the purchase price

seemed fair, the three of them could not afford to make the

investment. Stirling suggested that the condemnation award

could go toward the purchase price and that he would accept a

10 percent down payment of $210,000 and a purchase-money

mortgage with no principal or interest due for five years. Wynn

responded that they could not even afford the down payment.

l6a

Stirling then proposed that Homex arrange financing in such a

way as to enable them to “purchase” the land without transfer-

ring any money whatsoever to Homex, and went so far as to

assure sufficient business activity to enable payment of obliga-

tions that did arise. Although Stirling declined to give a

requested corporate guarantee against any investment losses, he

did give his personal guarantee to that effect. The parties

agreed.

In order to facilitate the “sale” without the transfer of

funds, Stirling and Yanowitch instructed Charles Marshall,

former banker and then Homex employee, to arrange a bank

loan to Route 57-31 Development Corporation (“Route 57-

31”), a shell corporation set up by Wynn and Grago to take

title to the property. He was instructed to negotiate the loan

with the First National Bank of Rochester, New York, and to

assign the condemnation award due Homex as collateral. First

National then loaned $250,000 to Route 57-31, requiring the

personal guarantees of Wynn and Grago on the note. This was

in turn paid over to Kabeth Properties. No closing occurred

and no deed was transferred.

On January 6, 1971, Yanowitch, Schulz and Ruben Davis,

then Assistant Vice President and Associate General Counsel of

Homex, met with Dr. Mauriello to discuss recognizing as

income the $1.4 million profit on the “sale” of land to Route

57-31 for $2.1 million. The purpose of the meeting was to

secure Dr. Mauriello’s favorable opinion for use during the

audit of the 1970-1971 fiscal year. In particular they discussed

SEC Accounting Series Release No. 95, which commented on

the propriety of real estate transaction accounting methods that

recognized as income any profits not received at the time the

17a

transaction was recorded.'° Dr. Mauriello eventually advised

HFK that the sale of land by Homex to Route 57-31 was a

10 The SEC statement noted that:

The recognition of profit at the time of sale in accordance

with generally accepted accounting principles is appropriate if it

is reasonable to conclude in the light of all the circumstances that

a profit has been realized. Profit is deemed to be realized when a

sale in the ordinary course of business is effected, unless the

circumstances are such that the collection of the sales price is not

reasonably assured. Thus recognition of profit is appropriate

only when a bona fide sales transaction has taken place, and then

only to the extent that the consideration received in the transac-

tion can be reasonably evaluated. In some of the situations

coming before us it appears from the attendant circumstances

that the sale of property is a mere fiction designed to create the

illusion of profits of value as a basis for the sale of securities.

Moreover, even in bona fide transactions the degree of uncer-

tainty as to ultimate realization of profit may be so great that

business prudence as well as generally accepted accounting

principles would preclude the recognition of gain at the time of

sale.

Circumstances such as the following tend to raise a question

as to the property of current recognition of profit:

1. Evidence of financial weakness of the purchaser.

2. Substantial uncertainty as to the amount of cost and

expenses to be incurred.

3. Substantial uncertainty as to amount of proceeds to

be realized because form of consideration or method of

settlement, e.g., monrecourse notes, noninterest-bearing

notes, purchase of stock and notes with optional settlement

provisions all have indeterminable value.

4. Retention of effective control of the property by the

seller.

5. Limitations and restrictions on the purchaser’s

profits and on the development or disposition of the

property.

6. Simultaneous sale and repurchase by the same or

affiliated interests.

7. Concurrent loans to purchasers.

8. Small or no down payment.

9. Simultaneous sale and leaseback of property.

18a

bona fide sale for which income could and should be recog-

nized as of the date of the sale. Neither the true scope of the

agreement betweer. Homex and Route 57-31 nor the nature of

the background financial arrangements supporting the agree-

ment were disclosed to Dr. Mauriello. Nor were the Homex

auditors, HFK, and its eventual successor, Peat, Marwick,

Mitchell & Co. (“Peat Marwick”), told of those details.

In fact, David Surling, Yanowiich and Schulz tailored the

Route 57-31 “sales contract” so as to avoid possible auditor

objections, and ultimately represented that there were no

undisclosed “assets pledged or assigned as security for lia-

bilities” and “[t]}hat the officers and directors of [Homex] had

no direct or indirect relationship with Route 57 and 61 [sic]

Development Corporation.”

The Greater Gulf Coast Housing Development Corporation.

In late 1970, appellant Rubel Phillips, a Mississippi at-

torney, helped organize on Homex’s behalf a group of Mis-

SiSSippi citizens into a non-profit public benefit corporation that

would be eligible for federal, state and local financing of

housing projects. The corporation was called the Greater Gulf

Coast Housing Development Corporation (“Greater Gulf”).

In December, 1970, Greater Gulf and Homex entered into two

agreements. The first, for $100 million, called for the construc-

tion of a 5,000-unit housing project over a 6-year period, and

was conditioned upon the modules being constructed in a

Mississippi factory. The second, for $15 million, called for the

construction of an 800-unit modular housing project over an 18-

month period. These agreements, however, were effectively

worthless unless and until Greater Gulf was successful in

obtaining a funding commitment from appropriate government

agencies.

Originally, the Greater Gulf projects were to be funded by

the United States Department of Housing and Urban Devel-

opment. By January, 1971, however, this plan was changed

and funding was sought from the Farmers’ Home Adminis-

19a

tration of the United States Department of Agriculture

(“FHA”). During February, Phillips arranged for two FHA

officials, S.B. Wise and W.T. Richardson, to visit Avon, New

York, and to discuss with Yanowitch and David Stirling the

commitment of FHA funds to Greater Gulf for the purchase of

Homex modules. Wise and Richardson, however, were unable

to authorize the funding commitment, a matter of some concern

to Homex officials in that Homex had already chosen Merrill,

Lynch, Pierce, Fenner & Smith (“Merrill Lynch”) to under-

write a July, 1971, issuance of Homex stock. This issuance

required the filing of a second registration statement with the

SEC, which in turn required a certificate by Homex auditors of

the financial records for the fiscal year up to January 31, 1971.

About that time, Homex discharged HFK and retained Peat

Marwick as auditors.

On February 24, 1971, Phillips secured the signature of

Greater Gulf's volunteer President Kenneth Caron on a series

of documents, including a sales contract between Homex and

Greater Gulf which was backdated to December 28, 1970.

Phillips explained to Caron that the back-dating was merely for

funding purposes. Phillips also told Caron that the contract was

the same as an earlier $100 million agreement that Caron

actually had signed in December, 1970, except that it provided

for fewer units. Phillips did not call to Caron’s attention the

absence of the contract clause requiring the modules to be

manufactured in Mississippi. Phillips also gave Caron a letter

from Greater Gulf to the FHA requesting a $15 million loan

and a response from the FHA, purportedly signed by Richard-

son, committing the FHA to the loan. Caron signed the FHA

response in order to accept the loan. Richardson’s signature on

the FHA commitment was in fact forged at Phillips’ instruction

by his secretary. On the next day, February 25, 1971, Schulz

instructed the Homex accounting department to credit Homex

with the sale to Greater Gulf of 566 modules for $6,786,900.

Later in the year, still without a valid contract or a genuine

government funding commitment, Homex assigned another 60

20a

modules to the Greater Gulf project in order to boost reported

year-end revenues.

The forged commitment letter was kept by Yanowitch and

used to the benefit of Homex on three important occasions.

First, it was used to “assist” Dr. Mauriello in arriving at an

opinion regarding the propriety of recognizing income from the

Greater Gulf transaction. Second, it was shown to Homex’s

commercial bankers. Third, it was shown to Peat Marwick on

March 19, 1971, to “aid” them in their audit of the financial

records for purpose of the approaching issuance. The Greater

Gulf sale was described to Peat Marwick verbally and sup-

ported by the backdated December 28, 1970, contract. It was

also supported by a contract between Greater Gulf and the U.S.

Shelter Corporation (U.S. Shelter”), a wholly-owned financ-

ing subsidiary of Homex, in which Greater Gulf agreed to pay a

finder’s fee of $300,000 to U.S. Shelter for securing the $15

million federal funding commitment.

Accounting Practices During the 1970-1971 Fiscal Year.

Three incidents during the 1970-1971 fiscal year make it

clear that Homex accounting practices during that time were

considerably less than straightforward. First, a significant

proportion of the modular sales recorded for the first quarter

was based upon the assignment of modules to purported sales

with housing authorities in Clay, New York, and Southbridge,

Massachusetts. These sales were reported as income notwith-

standing the fact that there existed neither written contracts nor

funding comminmtnts to support the assignments. The unau-

dited first quarter earnings were supplied to various commercial

and investment bankers, eventually leading to an offer to

purchase Homex debentures.

Second, beginning in December, 1970, Homex maintained

not only a computer file showing assignment of particular

modules to construction projects, but also a “special” or

“simulation” file. Formally, these files were known respectively

as File I and File Il: computer room employees, however,

2la

called the first file the “real world” file and the second file the

“Mickey Mouse” file. Mr. Wilbur Rumley, Scheduling

Coordinator for Homex Operations Control, testified at trial

that “on File I some apartments were assigned to one project

and on File II they were assigned to another.” In other

words,the Mickey Mouse file was used by Homex to verify to its

auditors that ccertain modules were assigned to certain con-

tracts thus justifying the inclusion of the price of those modules

as income.

Finally, just prior to the filing to Homex’s 1971 registration

statement, an ambiguous debt confirmation gave Peat Marwick

reason to question the inclusion by Homex of $832,000 as an

account receivable. Homex had reported the figure as income

notwithstanding the fact that it had been spent on the so-called

“soft costs” of constructing the Mississippi plant, costs such as

architectural and engineering fees and site selection costs. Such

costs may be capitalized as costs of construction. Apparently on

the theory that Mississippi authorities would one day reimburse

it for the expenditures, Homex reported them under accounts

receivable. As a result of Peat Marwick’s inquiries, Homex

shifte. the $832,000 from accounts receivable to costs of

construction in process.

The 1971 Registration Statement.

On April 21, 1971, Homex filed with the SEC a registration

statement intended to cover the sale of 1,025,000 shares of

Homex common stock. This was changed by amendment on

May 28, 1971, to a new issue of 500,000 shares of Homex

cumulative convertible preferred. On July 29, 197), Merrill

Lynch sold and distributed 500,000 shares of Homex preferred

stock at $40 per share, netting Homex $19 million.

Labor Relations

In draft, the section of the 1971 registration statement

dealing with the labor relations enjoyed by Homex summarized

its various labor agreements and noted that:

The Company believes that the above-mentioned agree-

ments have contributed to its present satisfactory labor

22a

relations, but it can give no assurances that it will be free of

labor problems in the future.

The final registration statement, however, contined no caveat

regarding future labor relations. Nor did it reveal the intricate

investment relationships that had developed between Homex

and labor and which no doubt contributed to the “satisfactory

labor relations.”

In June, 1969, Homex entered into a labor agreement with

the United Brotherhood of Carpenters and Joiners of America

(“*UBCJA”), the exclusive bargaining agent for Homex pro-

duction employees. This in itself was a matter of some

moment, for organized labor had expressed concern about the

possibility that Homex-type production techniques would elimi-

nate jobs in the housing and construction industries. Thus,

Homex press releases described it relationship with the UBCJA

as “precedent-setting.”” The government, however, claimed that

the relationship was more accurately characterized as “cozy.”

For example UBCJA members and officials had, in

November of 1968, helped convince the Akron, Ohio, Planning

Commission Appeals Board, a municipal zoning authority, and

the Akron City Council, prospective Homex customers, that the

Homex concept of housing construction was not opposed by

organized labor. The coziness of the Homex UBCIJA relation-

ship went considerably further than mere collaboration, how-

ever. The record shows that the 1971 registration statement

and other reports were materially false and misleading in that

they failed to disclose that Homex officials had arranged for the

sale of approximately $240,000 worth of Homex common stock

to seven officials and members of the UBCJA at approximately

$80,000 less than the stock’s market value. In addition, when

the market value fell, Homex arranged for the purchase from

those same union officials and members of approximately

$64,000 worth of Homex common stock at approximately

$136,000 above the fair market value.

On October |, 1969, Homex filed its registration statement

in connection with the issuance of the 1,175,900 common

23a

shares. The prospectus made the following observation on

Homex’s labor relations:

{Tjhe modules are manufactured and dwellings are

erected completely by building trades union labor. The

Company has had no strikes or interference with its

production of on-site erection of its dwelling units.

Freedom from work interruptions as a result of labor

problems is important to the continued success of the

Company’s business. Although the Company believes the

above-mentioned agreements should contribute to the

continuation of its present satisfactory labor relations, it

can give no assurance that the Company and its subsi-

diaries will be free of labor problems in the future.

During the following months, conversations regarding the

possible purchase by various UBCJA officials and members of

soon-to-be publicly offered Homex stock were pursued. On

January 6, 1970, Yanowitch asked the Homex legal department

to consider the legality'' of designating union officials as

eligible to purchase Homex stock the $16.50 issue price. '2

The department did not find such designation unlawful, but it

did advise that the arrangement would, if made public, be bad

for Homex’s image. Despite this advice, and in anticipation of

the February 19, 1970, offering, Homex submitted to Pressprich

a list of several hundred names as “issuer-designated sub-

Section 180.15 of the New York Penal Law reads as follows:

A person is guilty of bribing a labor official when, with

intent to influence a labor official in respect to any of his acts,

decisions or duties as such labor official, he confers, or offers or

agrees to confer, any benefit upon him.

2 According to the prospectus in use throughout the 90 day

delivery period for initial registrations, Pressprich had agreed to

Homex’s designating 117,500 shares for sale to certain persons

“promptly upon the commencement of this offering and any shares

not so purchased will be reoffered to the public at the public offering

price.”

24a

scribers,” including the names of seven UBCJA officials. Ken-

neth Langone, President of Pressprich, questioned the propriety

of designating labor union representatives as subscribers,

arguing that they were people with whom Homex was supposed

to have an arm’s length relationship. As a result, the names

were taken off the list.

On February 19, 1970, the Homex registration became

effective, and 1,175,000 shares were sold at $16.50. Within

minutes, Homex shares were being traded at $34 per share; one

month later the price was up to $52 a share. David Stirling

then contacted Langone and argued that the union officials

should have received the stock as had been discussed. Lan-

gone, having overcome his earlier reservations, proposed

backdating sales to the union representatives to the $34 per

share aftermarket purchase price. Stirling agreed to this

arrangement and instructed Charles Marshall, then his banker

at the Central Trust Company in Rochester, to loan the

purchase price of the stock to the union officials. Stirling

guaranteed repayment of the loan under his personal line of

credit, though at trial he claimed the guarantee was a forgery.

In sum, on March 20, 1970, seven UBCJA officials “pur-

chased,” effective February 19, 1970, and aided by a loan

arranged and guaranteed by Stirling, approximately $240,000

worth of Homex stock for approximately $160,000.

On January 8, 1971. Homex’s annual report and proxy

statement were mailed. The annual report contained the

following comment on Homex labor relations:

Stirling Homex is pleased to have been the first modular

housing manufacturer to sign a national labor contract

with the United Brotherhood of Carpenters and Joiners of

Ameiica (AFL-CIO) for both in plant production and on-

site installation.

A few days earlier, Homex’s chauffeur, William McCann, acting

on Yanowitch’s instructions, cashed six Homex checks for

$11,500. These checks were payable to cash, and had been

25a

issued on the basis of false travel and entertainment expense

vouchers. The money was used to pay the interest due on the

Central Trust Company loan to the union officials. There was

no mention of this in the annual report or proxy statement.

Finally, in November, 1971, Homex went even further to

foster its “precedent-setting” labor relations. By then, Homex

stock had begun to fluctuate between $15.00 and $18.00 per

share. William and David Stirling, along with Yanowitch,

arranged for the repurchase of the union officials’ stock at

$34.00 per share, the amount for which the stock had been

originally “purchased.” We note that the labor contract with

Homex expired at the end of September, 1971, and a new three

year contract was successfully negotiated.

Kece, Reseac and Route 57-31 Revisited

The original 1971 registration statement included the

following representation regarding the Kece, Reseac and Route

57-31 land transactions:

During the fiscal year ended July 31, 1969, the Company

sold two parcels of undeveloped land [Kece and Reseac]

and during the seven months ended February 28, 1971 it

sold one parcel [Route 57-31]. Trade sales included

$750,000 for the year ended July 31, 1969, and $1,822,723

for the seven months ended February 28, 1971 in respect

of these sales, which resulted in net income for the

respective periods of about $187,000 ( 18% of the total net

income ) and $556,000 (35% of the total net income). All

the sales of undeveloped land provided for deferred

payment of part of the purchase price.

In addition, under “Notes to Consolidated Financial State-

ments,” the registration statement described in some detail the

Kece, Reseac and Route 57-31 arrangements as “Long-Term

Receivables.”

The descriptions in the Notes had been brought about by

pressure on Homex from HKF to disclose the nature of the

26a

transactions more accurately. In turn, these descriptions

prompted the SEC to inquire into the arrangement and,

eventually, to require an even more detailed disclosure regard-

ing the Route 57-3! arrangement. Despite various intentional

misrepresentations by Homex, the SEC ultimately prohibited

inclusion of the $2,100,000 Route 57-31 “sale” as income. The

registration statement as finally amended and filed left the Kece

and Reseac representations the same, but reported the Route

57-31 transactions under “Inventories” as follows:

The Company has entered into a contract to sell a parcel of

land with costs of $673,017 for a price of $2,100,000. The

Company has received a down payment of $210,000 which

has been accounted for as an option deposit.

Thus, Homex was finally forced to acknowledge that land

transactions of the sort it was engaged in were not honestly

characterizable as sales and income but rather as contracts for

possible subsequent sale—in other words, option contracts.

Accounting Practices Revisited

Both the draft and final 1971 registration statements

represented that Homex recognized the sale of modules “when

the units are manufactured and assigned to specific contracts.”

This prompted the SEC to inquire whether income was being

recognized “too far in advance of the date of billing to

customers.”” Homex, through Schulz, responded by letter with

the following information:

When the following conditions have been met, the Com-

pany records as sales and charges costs with the related

costs of modules manufactured.

1. The Company must be designated by the local

housing authority, non-profit sponsor or other agencies as

the contractor for the project. This designation is sup-

ported by a formal commitment from the customer to the

Company.

27a

2. The customer must have obtained and submitted

evidence to the Company that a commitment of monies to

fund the project has been obtained from the appropriate

governmental agency under which the project has

sponsorship.

3. The numbers and types of modules and the general

site plan and improvements must be identified and be the

subject of the agreement between the Company and its

customers.

4. The Company must assign the manufactured

module to a specific project and physically identify the

module as being assigned to and reserved exclusively for

that specific project and customer. (At the present time

this identification is physically attached at the earliest stage

of the manufacture of the module. )

5. The module must completed and be ready for

shipment to the customer.

When all these events have occurred, and only when all

these events have occurred, does the Company recognize

income.

(emphasis added ).

Clearly, “‘all these events” had not “occurred” with regard

to the Southbridge, Massachusetts, and Clay, New York,

projects. Similarly, they had not occurred with regard to the

Mississippi project. The Mickey Mouse file hardly substantiates

Homex’s claim that it relied solely upon the existence of these

events for income reporting. In fact, large scale reassignment of

modules to various contracts seems to have taken place when-

ever it met Homex’s needs. Had this practice been disclosed, it

would have been clear to Peat Marwick that, as one of its

auditors testified at trial,

Homex was not producing to a specific customer order and

exclusively reserving modules for contracts, but rather

28a

manufacturing for inventory and therefore instead of hav-

ing those units in sales, those units would have been in

inventory, which would have had a significant effect on the

income recognition and the portrayal of the balance sheet.

The 1971 Annual Report.

On October 8, 1971, Homex mailed its Annual Report to

stockholders. As might be expected, it mentioned very little of

the story just told.

Ill. BANKRUPTCY: THE SCHEME COLLAPSES.

On July 12, 1972, the house of cards collapsed. Less than

one year after the sale of Homex preferred stock to the

investing public, and approximately two years after the sale of

Homex common stock, sales that totaled $39 million, Homex

filed a petition for reorganization under Chapter X of the

Bankruptcy Act. This was immediately preceded by the posting

of large losses for the early parts of the 1971-1972 fiscal year

and the resignations of David and William Stirling, Yanowitch,

Schulz and Phillips.

IV. APPELLANTS’ LEGAL CLAIMS.

We now turn to the various legal arguments advanced by

the individual appellants.

The Scope of the Indictment and the Sufficiency of the

Evidence.

David Stirling, Yanowitch and Schulz argue that the

district court’ committed reversible error by refusing to with-

draw from the jury’s consideration various specific allegations

in the indictment as to which, they claim, there was insufficient

evidence. '3 They rely on this Court’s decision in United States v.

13 William Stirling made no request of the district court to strike

or narrow the indictment. We consider, infra, his argument regarding

the denial of his Rule 29 motion for acquittal.

29a

Natelli, 527 F.2d 311 (2d Cir. 1975), cert. denied, 425 U.S. 934

(1976). Their argument is that the failure to withdraw the

allegedly unsupported allegations rendered the jury verdict

fatally ambiguous. We disagree. Their argument depends

upon an incorrect understanding of the law and their claims of

insufficient evidence are not well taken.

In United States v. Natelli, supra, this Court considered an

appeal by certified public accountants from convictions for

making materially false representations in proxy statements

filed with the SEC. They had been convicted under a one-count

indictment that alleged two separate and distinct criminal

episodes. A single, unifying scheme to defraud was not alleged;

nor was there an allegation of a conspiracy. The district court

had instructed the jury that a finding of guilt under either

specification was sufficient to support a conviction; the jury

found both defendants guilty. With regard to one of the

defendants, however, the Court of Appeals held that there was

sufficient evidence for conviction based on only one of the

specifications. The Court explained:

A difficulty does arise ... if it is found as a matter of law

that there should have been a directed verdict for a

defendant on one of the specifications for insufficiency of

evidence. The verdict then becomes ambiguous, for the

jury could have rejected the specification which the appel-

late court holds sufficiently proved, and have convicted

only on the specification held to be insufficiently proved.

In that event, there seems to be no alternative to remand

for a new trial. That is the general principle.

527 F.2d at 25. The Court noted further that “[w ]hen there is

more than one specification as a predicate for guilt, each

dependent on particular evidence which is unrelated to the

other, it would be sound practice to instruct the jury that they

must be unanimous on a particular specification to convict.” Jd.

In contrast, this case presents a different situation, one

more closely akin to that considered in this court’s decision of

30a

United States v. Amrep Corp., 560 F.2d 539 (2d Cir.), cert

denied, 46 U.S.L.W. 3436 (U.S. Jan. 10, 1978). There the

Court reviewed a conviction of twenty counts of mail fraud and

five counts of interstate land sale fraud. The Amrep appellants

argued, as appellants do here, that, in proving a scheme to

defraud by several misrepresentations, the government must

prove every misrepresentation charged in the indictment. They

argued further that the government's failure to meet this

burden required a retrial. In rejecting this argument, the Court

made the following observation:

“| Appellants] confuse the scheme to defraud, which

is the gist of the offense, with the means adopted to

efiectuate the scheme.” A scheme to defraud may

consist of numerous elements, no particular one of

which need be proved if there is sufficient overall

proof that the scheme exists. Appeilants’ reliance on

United States v. Natelli is misplaced. In that case, the

defendant was charged in a single count with viola-

ting the securities laws by making false statements in

a proxy statement. Because the crime charged con-

sisted of the making of such statements, the er-

roneous failure of the trial court to direct a verdict as

to one of the alleged falsities, arising out of a separate

state of facts, made the jury’s verdict ambiguous and

required a new trial. Here, the crime charged was the

scheme to defraud, and the alleged false statements

were merely means for carrying it into effect.

560 F.2d at 546-47 (citations omitted; emphasis added ). This

is precisely the situation here. In addition, the Homex in-

dictment charged a conspiracy which, under Pinkerton v.

United States, 328 U.S. 640 (1946), makes each conspirator

substantively liable for the foreseeable acts of his co-

conspirators committed in the furtherance of the conspiracy.

Finally, even if this were a Navelli rather than Amrep type case,

the jury instruction given by the district court was precisely the

type of instruction suggested by the Natelli Cour.

3la

The real question, then, is not so much whether there was

sufficient evidence regarding each and every specification but,

rather, whether there was sufficient overall proof of the alleged

scheme to defraud and conspiracy. Viewing the evidence in the

light most favorable to the government, United States v.

Glasser, 315 U.S. 60, 80 (1942), and “ ‘giving full play to the

right of the jury to determine credibility, weigh the evidence,

and draw justifiable inferences of fact,’” United States v.

Taylor, 462 F.2d 240, 243 (2d Cir. 1972), quoting, Curley v.

United States, 160, F.2d 229, 232 (D.C. Cir.), cert. denied, 331

U.S. 837 (1947), we have no doubt that there was sufficient

evidence to convict the appellants of the substantive crimes. In

addition, with regard to the sufficiency of evidence for the

conspiracy convictions, our deliberations are governed by the

following principles.

“[ T]he gist of the offense [of conspiracy] remains

the agreement, and it is therefore essential to deter-

mine what kind of agreement or understanding ex-

isted as to each defendant.” In making this determi-

nation, courts often look to knowledge and depend-

ency as evidence of an agreement. These factors, in

turn, may be inferred from an assessment of the

nature of the criminal enterprise and the defendants

role in it .... For such an inference to be drawn,

however, it is necessary to examine “the qualitative

nature of the act or acts [of each defendant] .. . in

the context of the entire conspiracy ....”

United States v. Taylor, 562 F.2d 1345, 1352 (2d Cir.), cert.

denied, 97 §.Ct. 2958 (1977) (citations omitted ).

As the recitation of the facts above makes clear, there is no

doubt regarding the existence of the alleged conspiracy. Each

appellant played a central role in some if not all of the various

elements of the common scheme and in the overall mainte-

nance of its life. The purpose of the scheme was apparent; the

responsiblity for the scheme is also apparent. Collectively, the

ee —s

32a

appellants did their best to take advantage of the plan and to

keep it alive. Quite properly, they now share the consequences.

David Stirling was a central and motivating force in the

Homex frauds and conspiracy. Apart from his involvement in

and supervision of virtually every aspect of Homex operations,

he was shown to be directly and significantly involved in the

various land transactions and in the various representations

regarding recognition of income. He was the key figure in the

Reseac affair; he helped conceive the idea, he participated in

making the side promises, he observed the deterioration of the

transaction, and he did all he could to keep it alive so that

Homex could continue to recognize income from it. He did this

with full awareness of SEC standards regarding the reporting of

income from land transactions. See note 10 supra. In addition,

he told the SEC, the Homex auditors and the investing public

that income was recognized only when specific modules were

assigned to specific contracts, knowing full well the reas-

signment practices and policies of the accounting division.

Finally, he knew about and participated in the adjustment of

Homex accounts by delaying the entry of cost overruns in the

installation department, reporting as income the Greater Gulf

U.S. Shelter transaction, and attempting to capitalize the

$832,000. This is by no means an exhaustive description of

what David Stirling could permissibly be found to have done

during his association with Homex, but it certainly constitutes

convincing evidence of his guilt.

The same can properly be said about Harold Yanowitch.

Quite apart from his constant presence and supervision, he was

shown to have been directly involved in the Kece affair. He

shielded from the auditors and Dr. Mauriello the true nature of

the Kece and Route 57-31 transactions, even with full know-

ledge of the applicable SEC standards. The jury was instructed

and could have found that, where Yanowitch did not know of

the specific wrongdoings, he must have “deliberately closed his

eyes to what otherwise would have been obvious to him and

with a conscious purpose to avoid learning the truth.” Although

33a

appellant Schulz was primarily responsible for implementation

of the accounting policies of Homex, Yanowitch quite clearly

collaborated in the creation and furtherance of those decep-

tions.

Finally, Schulz’s participation in the fraudulent accounting

practices at Homex is clear. Although he may not have

participated in the negotiation of the various land transactions,

he was instrumental in the design and implementation of the

accounting systems that made the extravagant claims of Homex

income possible. His frequent discussions with Dr. Mauriello,

the Homex auditors and the SEC, and the misrepresentations

he made to them, were essential to the maintenance of the

Homex fraud.

Paragraph 16.

The Stirlings and Yanowitch argue that the district court

committed reversible error by denying their pre-trial motions to

strike paragraph 16 of the indictment.'4 That paragraph is

based on the appellants’ failure to disclose in the second

registration statement the true nature of Homex’s relationship

with union officials. They advance three separate bases in

14 Indictment 916 reads as follows:

16. It was further a part of said scheme to defraud that on or

about July 29, 1971, defendants DAVID STIRLING, JR..,

WILLIAM G. STIRLING, and HAROLD M. YANOWITCH

prepared and filed with the SEC registration statements and

other reports which described Homex’s several relations with the

United Brotherhood of Carpenters and Joiners of America and

its locals. Those statements were materially false and mis-

leading, because as the defendants well knew, but failed to

disclose, seven members and officials of the United Brotherhood

of Carpenters and Joiners of America had had approximately

$240,000 worth of Homex common stock purchased for them at

approximately $76,800 less than the fair market value, and

afterwards, when the fair market price had fallen, approximately

$64,000 worth of Homex common stock sold for them at

approximately $136,000 above the market price.

34a

support of their argument: the privilege against self-

incrimination; the double jeopardy clause; and the prejudice

resulting from the allegedly inflammatory nature of the para-

graph itself.

Self-Incrimination.

The self-incrimination claim is essentially this: if appellants

had disclosed to the SEC and the public the true nature of the

stock transactions with the UBCJA officials, they would have

been admitting facts sufficient to form the basis for a criminal

prosecution under the Taft-Hartley Act, 29 U.S.C. §186. Be-

cause of this, the argument goes, the Fifth Amendment must

operate to protect them from prosecution for failing to make the

disclosure in the first place. Appellants rely on Marchetti v.

United States, 390 U.S. 39 (1968), and Grosso v. United States,

390 U.S. 62 (1968). Their argument, if accepted, would lead to

the conclusion that securities misrepresentations would be

constitutionally protected if the true but undisclosed facts would

lead to criminal prosecution.

In California v. Byers, 402 U.S. 424 (1971), the Supreme

Court noted that when “confronted with the question of a

compelled disclosure that has an incriminating potential, the

judicial scrutiny is invariably a close one.” 402 U.S. at 427. It

noted further that:

Tension between the State’s demand for disclosures and

the protection of the right against self-incrimination is

likely to give rise to serious questions. Inevitably these

must be resolved in terms of balancing the public need on

the one hand, and the individual claim to constitutional

protections on the other; neither interest can be treated

lightly.

Id. The Court upheld as constitutional a California “hit and

run” statute that required the driver of a motor vehicle in an

accident to stop at the scene and give his or her name and

address. The Court held that compliance with an essentially

35a

regulatory statute, where (1 )self-reporting is essentiel to the

fulfillment of its objective, (2) the burden is placed upon the

general public rather than a “highly selective group inherently

suspect of criminal activities,” (3) the general activity is lawful

and (4) the possibility of incrimination is not substantial, does

not violate the Fifth Amendment privilege against self-

incrimination. 402 U.S. at 427-31. See also Albertson v.

Subversive Activities Control Board, 382 U.S. 70 (1965).

Significantly, the Byers Court cited a number of examples

of disclosure requirements in the commercial and industrial

sectors and made the following observation:

In each of these situations there is some possibility of

prosecution—often a very real one—for criminal offenses

disclosed by or deriving from the information that the law

compels a person to supply. Information reviewed by

these reports could well be “a link in the chain” of

evidence leading to prosecution and conviction. But under

our holdings the mere possibility of incrimination is in-

sufficient to defe2t the strong policies in favor of a dis-

closure called for by statutes like the one challenged here.

402 U.S. at 427-28. See Shapiro v. United States, 335 US. |

(1948). The same reasoning applies here.

This Court has considered a problem similar to the one

presented here in S.E.C. v. Radio Hill Mines Co., supra. There,

as here, the appellant had been charged with orchestrating an

elaborate scheme which violated the registration and antifraud

provisions of the securities laws. In upholding the validity of a

preliminary injunction that required disclosure of securities

transactions, the Court found it “clear that securities regulation

is an ‘essentially noncriminal and regulatory area of inquiry.’ ”

479 F.2d at 7. The Court also determined that the information

that was required to be disclosed related to what was “generally

a completely ‘lawful activity,’ ” quoting California v. Byers,

supra, 402 U.S. at 431, and that the disclosure was not an

admission of an “inherently suspect” activity, citing A/bertson v.

36a

Subversive Activities Control Board, supra, 382 U.S. at 79. We

think the same is true for this case. We have no doubt that the

securities laws are “essentially noncriminal and regulatory” and

that self-reporting is essential to the fulfillment of the central

purpose of the statutory scheme. Nor do we believe the people

and enterprises making the commercial and investment sectors

of our economy are a “highly selective group inherently suspect

of criminal activities.” In addition, the sale of stock and the

maintenance of peaceful labor relations are quite obviously,

and quite necessarily, lawful activities. Appellants chose to

engage in a lawful activity in an unlawful manner. That

unlawfulness cannot now be used to excuse them from regu-

latory disclosure requirements, even though such disclosures

could lead to criminal prosecution under other statutory

schemes.

The Double Jeopardy Claim.

David Stirling and Yanowitch were indicted in the West-

ern District of New York for violations of the Taft-Hartley Act,

29 U.S.C. §186(a)(1). Stirling pleaded guilty and Yanowitch

pleaded nolo contendere.'S They argue here that prosecution

under Paragraph 16 of the indictment is barred by the double

jeopardy clause of the Fifth Amendment because it depends

$On July 12, 1977, the United States District Court for the

Western District of New York, Harold P. Burke, Judge, granted

David Stirling and Yanowitch permission to withdraw their pleas on

the ground that the government had withheld exculpatory informa-

tion. Stirling and Yanowitch made this motion just prior to the trial

which led to the convictions we consider on this appeal. Judge

Frankel and the government were informed of the withdrawal

motion. Neither the pleas nor the convictions entered in the Western

District were admitted as evidence in the Southern District. Appel-

lants now request that we dismiss this appeal without prejudice and

remand it to the Southern District pending disposition of their

contemplated motion for a new trial. We deny the appellants’ motion.

See Fed. R. Crim. P. 33; United States v. DeSapio, 456 F.2d 644, 647

(2d Cir. ), cert. denied, 406 U.S. 933 (1972); United States v. Sposato,

446 F.2d 779, 781 (2d Cir. 1971).

37a

upon the same facts underlying the Taft-Hartley prosecution.

The district court properly rejected this argument.

Even if the indictment in the Western District and the

indictment in the Southern District were the same “in fact,”

they certainly are not the same “in law.” The conduct of Stirling

and Yanowitch provided the basis for two separate and distinct

prosecutions based upon two separate and distinct statutory

schemes. The double jeopardy clause was not meant to prevent

such multiple but entirely distinct prosecutions. See United

States v. Armedo-Sarmiento, 545 F.2d 785,792 (2d Cir. 1976),

cert. denied, 97 §.Ct. 1330 (1977); United States v. Cala, 521

F.2d 605, 607 (2d Cir. 1975); United States v. McCall, 489 F2d

359, 362 (2d Cir. 1973), cert. denied, 419 U.S. 849 (1974):

United States v. Sebastian, 428 F.Supp. 967, 970-72

(W.D.N.Y. 1977).

The “Inflammatory and Prejudiciai Nature” of Paragraph 16.

The Stirlings and Yanowitch argue that Paragraph 16 of

the indictment should have been stricken by the district court

prior to trial as being of an inflammatory and unfairly prej

udicial nature and, during and after trial, for failure of proof.

We reject both arguments.

Paragraph 16 of the indictment originally charged that the

defendants knew but did not disclose that UBCJA officials “had

been paid off by having” Homex stock purchased for them at a

low price and bought back from them at a high price. Prior to

trial, the Stirlings and Yanowitch moved to strike the entire

paragraph under Fed. R. Crim. P. 7(d). The district court

ordered the deletion of the “paid off” language; only the

modified version was seen by the jury. We think decision

decisison by the district judge was sound, and we see no reason

why he should have gone farther and deleted the entire

paragraph. The redacted paragraph was a rather bland

statement of allegations regarding the failure to disclose the

true nature of the relationship between Homex and UBCJA

officials. See Fed. R. Crim. P. 7(c). This allegation was made

38a

in a non-inflammatory fashion and it was properly included in

an indictment for violation of securities laws and the mail fraud

Statutes.

The true nature of Homex’s labor relations was important

to a potential investor. Once Homex decided to make repre-

sentations concerning its labor relations, it should have de-

scribed them accurately. Corporate funds were being used

improperly to aid in the maintenance of peaceful labor rela-

tions. a fact that investors did not know. Knowledge of the true

machinations would have given a prudent investor considerable

pause—labor relations would not have looked as normal as

they were made to appear nor would the corporate financial

practices have appeared so sound.

The purpose of an indictment is to state the charge against

the accused. The accomplishment of that purpose is to some

extent inherently prejudicial. On the facts before us, however,

we conclude that the district court did not abuse its discretion

by deciding that the indictment was not unfairly prejudicial.

See United States v. Courtney, 257 F.2d 944, 947 (2d Cir.

1958), cert. denied, 358 U.S. 929 (1959).

Appellants also suggest that the district court erred by not

striking Paragraph 16 sua sponte, either during or after trial.

They claim that the facts necessary to support Paragraph 16

could not have been and were not shown. We disagree. The

charge was properly included in the indictment in the first

place, and at trial the government presented substantial evi-

dence to support it. See United States v. Stanchich, 550 F.2d

1294. 1299 (2d Cir. 1977); United States v. Taylor, 464 F. 2d

240, 242-45 (2d Cir. 1972). RULE 11(e) (6).

Appellant Schulz was interviewed nine times at the United

States Attorney’s Office during the early

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