# Petition — Stirling v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1002%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1978 - **Citation:** 439 U.S. 824 ## Text 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, v 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 zs 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 20 22-23 3,10,17 37,38,42,43 2,15,22-24 37 2,14,19-20 18 17,36 25-26 41 22 18 42 39 3,17,36,41 2,20,21 40 16,26-28 39 iv 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) ee 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, a 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 30 29 29 28 28 29 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 2 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 3 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); (c) is contrary to this Court’s decision in Loper v. 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). 4 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 5 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. 6 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. 8 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. ee pe eae aan een a EE Tr 9 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. 10 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. 12 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. 13 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, 14 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 15 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 16 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 : : | 17 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 18 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> — = 19 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. 20 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- 21 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. 22 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 23 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. 24 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 25 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. 26 “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. — 27 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. 28 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. 29 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. . .” 30 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. 31 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. 32 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). 33 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. 34 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 35 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. 36 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 (c) conflicts with this Court’s holding in Loper v. Beto, 405 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 37 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). 38 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. ee 39 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. ) 40 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.” ) — 41 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. (c) The ruling below is in conflict with the 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.” 42 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.” 43 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. 44 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 EE la 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, V. 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 2a 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. 3a 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. 4a § 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. Sa 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. 6a 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. 7a 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 8a 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 9a 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 commitmen [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1002%3A1. Public record. Not legal advice.