Appendix — PHILLIPS v. UNITED STATES (Nos. 77-1761, 77-1612)

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APPENDIX A

UNITED STATES COURT OF APPEALS, SECOND CIRCUIT

Unrtep Srares of America, Appellee,

David Stiruinea, Jr., William G. Stirling, Harold M. Yano-

witch, Edwin J. Schulz and Rubel L. Phillips, Defend-

ants-A ppellants.

Nos. 33, 50, 66, 67, 68, Dockets 77-1140, 1141, 1144, 1177

and 1178

Argued Aug. 29, 1977.

Decided Feb. 2, 1978.

Before Lumsarp, Oakes and Meski1, Circuit Judges.

Mesku, Circuit Judge:

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

ing, 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. Frankel, Judge, after a

six-week jury trial. Appellants were convicted of securities

and mail fraud and conspiracy in connection with sales of

stock in the Stirling Homex Corporation (“Homex”). Spe-

cifically, appellants were convicted of violating and, under

18 U.S.C. § 371, conspiring to violate §§ 17 and 24 of the

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

U.S.C. § 1341. Appellants were also convicted of conspir-

2a

ing 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

construction site and installing them in a previously-con-

structed 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 considera-

ble 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 com-

mon stock. William G. Stirling was President, Chief Op-

erating 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 approximately 160,000

shares. Edwin J. Schulz was Senior Vice-President of Op-

erations, 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, direc-

tors, auditors and others in registration statements filed in

1970 and 1971 with the Securities Exchange Commission

(“SEC”) covering 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

—

3a

violation of 15 U.S.C. § 77q(a)* and 15 U.S.C. § 77x.? Count

Two charged that appellants willfully and knowingly made

and caused to be made untrue statements of material facts,

and failed to disclose material facts necessary to correct

the misleading statements, in the 1971 registration state-

ment 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

? 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 trans-

portation 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 materia!

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 busi-

ness which operates or would operate as a fraud or deceit upon

the purchaser.

* Section 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

willfully, in a registiution statement filed under this subchap-

ter, makes any untrue statement of a material fact or omits to

state any material fact required to be stated therein or neces-

sary to make the statements therein not misleading, shal! upon

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

more than five years, or both.

4a

of 1S U.S.C. § 1341.’ Specifically, appellants were charged

with mailing on separate occasions two prospect™.ses, 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. $1001 * and 15 U.S.C. § 78ff* as well as 18 U.S.C.

* 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

promises, 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 ve 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, shal! be fined not more than $1,000 or

imprisoned not more than five years, or both.

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

Statements or entries generally

Whoever, in any matter within the jurisdiction of any de-

partment or agency of the United States knowingly and will-

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

device a material fact, or makes any false, fictitious or fraudu-

lent 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.

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

Penalties

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

chapter, or any rule or regulation thereunder the violation of

which is made unlawful or the observance of which is required

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5a

§ 1341 and 15 U.S.C. §§77q(a) and 77x, such conspiracy

being in violation of 18 U.S.C. §371.° The jury found each

appellant guilty of each charged violation.’

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 un-

dertaking contained in a registration statement as provided in

subsection (d) of section 780 of this title or by any self-regu-

latory organization in connection with an application for mem-

bership 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.

* 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, and 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 im-

prisoned not more than five years, or both.

’ Judge Frankel sentenced the appellants as follows :

David Stirling, Jr—One year concurrent terms of imprison-

ment, 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 total-

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

Edwin Schulz—Suspended sentence on all charges, one year

supervised probation.

6a

The story is a complicated one, involving land transac-

tions that were not what they were claimed to be, labor re-

lations that were not only inappropriately “cozy” but un-

disclosed, contracts for module sales based upon guile and

trickery rather than agreement, and deceptive bookkeeping

practices for which appellants have finally been held ac-

countable. The record shows that appellants engaged col-

lectively in a caleulated and multifaceted plan to give the

investing public the false impression 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 com-

pany was bankrupt. The jury could permissibly have found

the following.

I. THe Founpations: Incorporation AND Gornc Pus.ic

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 Stir-

ling brothers were its founders, officers and principal own-

ers. Shortly after incorporation, Homex made a private

offering, selling 1.6 million shares at $1 each. It thus be-

gan as a relatively small concern, doing business primarily

with private residential projects developed by the Stir-

lings. It soon became clear, however, that it would be in the

best business interests of Homex to exploit the then-bud-

ding public housing market. Accordingly, Homex focused its

efforts on sales to public housing authorities in federally-

financed housing programs.

Rubel Phillips—Ten month concurrent terms of imprisonment,

one year of supervised probation, concurrent fines totaling

$5,000.

Each of the appellants is free on bail pending this appeal.

Ta

In late 1968, the Stirlings decided to explore the possi-

bility 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

eondition that Homex’s annual net earnings totaled $1 mil-

lion, as projected by the Stirlings. In January of 1969, when

the agreement with Pressprich was reached, Homex was

reporting profits at the end of the second quarter of ap-

proximately $390,000 from the sale of modules and gross

land sales totaling $4.7 million.

By April 30, 1969, however, the end of the third quar-

ter, it became obvious that year-end profits would fal! 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 part-

nership called Hollyrood Park Associates, located in Clay,

New York; the Stirlings were limited partners. In May,

1969, David Stirling 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 in-

dicated 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 economically reasonable package consist-

ing of both the purchase of the land for $325,000 and the

development by 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 main-

8a

tain control over the land and at the same time incur mini-

mal risk. Keee 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 principal 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 practi-

cal effect of the arrangement. He stated that if it had been

otherwise he would not have considered entering into it

at all. Under the agreement, if Thun were to decide that

the construction of a 330-unit apartment project would not

or could not be financially advantageous, he could merely

order the termination of mortgage payments and, while re-

linquishing all rights to the land, shed all mortgage respo.i-

sibilities. The mortgage itself included exculpatory lan-

guage of the sort commonly found in non-recourse loan

agreements. It provided that, upon default by Kece, the

Homex subsidiary could foreclose only on the property and

could not pursue Kece’s or Thun’s assets to satisfy the

mortgage. Thun viewed the arrangement as one in which he

paid money to control the land and, if the arrangement

proved ill-fated, one in which his liability was limited.

The transaction was closed on June 3, 1969. Subsequently,

appellant Yanowitch wrote a letter on behalf of Kabeth

Properties, Inc., another wholly-owned subsidiary of Ho-

mex, to Riverbend Estates, Inc., formed by Thun to hold

title to the land, confirming the understanding between Ka-

beth and Riverbend that the Homex units would be designed

and manufactured at published prices and that the cost of

installing them would be one that the parties agreed upon

in the future as reasonable. Thun, meanwhile, to!d the other

Hellyrood Park partners that he had purchased the land

at his own personal risk and that, if the apartment com-

plex materialized, he would sell the developed land to the

partnership at cost.

. il

9a

The Reseac Land Sale.

Also in June, 1969, appellant Yanowitch spoke to Cesare

Falcone, Donald Barbato and Dr. Morris Shapiro about

purchasing the parcel of Hollyrood Park II land that Peter

Thun did not want. Homex sought $435,000 for the parcel

and was willing to accept an $80,000 down payment and a

purchase-money mortgage. Yanowitch made assurances that

the land could be zoned so as to allow for the construction of

a financially productive shopping center. Added to these

generally favorable investment conditions was the fact that

Gulf Oil Corporation owned an option on % of an acre of

the parcel, the exercise price of which was $100,000. Still,

the prospective purchasers expressed reluctance. Yano-

witch, and eventually David Stirling, then assured them

that, if anything went “awry,” Homex would either repur-

chase the land or find another purchaser. In effect, the pur-

chasers 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 fa-

cilities the purchasers 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 indemnification 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 deeds 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 trans-

ferring $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 re-

quired for the first three years.

10a

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. HK F certified for in-

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

transaction and the $425,000 receivable from the Reseac

transaction. The inclusion of these two “sales” boosted

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

lion required for the Pressprich underwriting.

During the audit, Yanowitch told HKF that he had per-

sonal 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

mortgages. Yanowitch told HKF that the agreed-upon de-

sign 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 mod-

ules other than to say it would be reasonable. In other

words, he did not tell HK F 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 HK F that Homex and Reseac had no stock-

holders in common, he did not tell HKF that piomises had

been made to Falcone, Barbato and Shapiro that arrange-

ments would be made for them to purchase Homex stock at

the anticipated public offering for the issue price.

The 1970 Registration Statement.

On October 1, 1969, Homex filed a registration state-

ment with the SEC in connection with the issuance of

Homex common stock. It made scant mention of the Kece

and Reseac land transactions:

lla

Two sales of undeveloped iand acquired at the time

of organization of the Company accounted for ap-

proximately 18% of the Company’s net income dur-

ing its first fiscal year. The larger parcel was pur-

chased by a developer who subsequently entered into

an agreement with the company to purchase modular

housing for installation on such land.

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 approxi-

mately $20 million.

Il. Tue Scueme As AssemBLep: Stayine ‘‘Pustic’’.

HKF Audits the 1969-1970 Fiscal 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 ‘‘collec-

tible’’ 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 Sep-

12a

tember 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

approximately $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 construc-

tion of a clubhouse on Hollyrood Park property, approxi-

mately $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 Fennscott, thereby sim-

plifying 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 Mo-

bile 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, how-

ever, delivered that day. Instead, it was placed in escrow

until Thun confirmed to HKF the authenticity of the pur-

chase-money mortgage on the Kece-Riverbend property.

On October 5, 1970, Thun confirmed to HKF that the

mortgage was authentic. In effect, then, the same $90,000

that was used to purchase the Stirlings’ stock in Penn-

seott and Mobile Townes was used to satisfy the disputed

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

13a

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 arguably

collectible mortgage to support its recognition as income.*

Reseac Developments

The Kuveke letter to HKF also failed to reveal signi-

ficant background information regarding the Reseac land

transaction. On July 16, 1970, Gerald Beckerman, the at-

torney 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; Faleone, Barbato and Shapiro had become ‘‘quite

disillusioned’’ with the property and were no longer in-

clined 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 repurchase the land or

arrange for another purchaser.

Wren and Davis made it clear to Beckerman that, al-

though 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.

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

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

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

celled all of their interests in Hollyrood Park Associates. Peter

Thun then paid two notes held by the Stirlings totaling approxi-

mately $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.

l4a

Beckerman indicated that Falcone, Barbato and Shapiro

would be willing to continue in the arrangement as long

as there was a waiver by Homex of the mortgage pay-

ments, 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.’

Accounting Practices

The HKF audit of Homex’s 1969-1970 financial condi-

tion prompted Homex again to shade the truth, this time

in connection with the accounting methods utilized by the

corporation. Typically, a Homex contract would state one

price for the design and manufacture of modules and an-

other price for their installation. At one time, Homex

used sales contracts that transferred title and risk of loss

to the buyer upon delivery of the finished apartment mod-

ule 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 de-

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

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

ernment charged that Yanowitch coaxed Garrity and Frank into

purchasing the Reseac land by assuring them that Homex would

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

fact increase substantially.

15a

livered or installed, had been ‘‘manufactured 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, liomex 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 com-

plete, Homex now wanted HKF to recognize as income

that proportion of the installation price equal to the pro-

portion of the installation completed. The system of recog-

nition is called the ‘‘percentage of completion’’ method.

To support these methods of recognizing income, Schulz

contacted and eventually retained Dr. Joseph A. Mau-

riello, an accounting professor at the New York Univer-

sity Graduate School of Business Administration. As a

result of the conversations with Schulz, Dr. Mauriello

submitted to HKF an opinion supporting Ilomex’s income

recognition system, and HKF approved of its use. What

Schulz did not reveal to Dr. Mauriello, or to HKF, how-

ever, 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 Ilomex 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 cal-

culation’? 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 Ho-

mex 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 di-

vision.

l6a

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 Stir-

ling 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, Ka-

beth 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. Stirling then proposed

that Homex arrange financing in such a way as to enable

them to ‘‘purchase’’ the land without transferring any

money whatsoever to Homex, and went so far as to assure

sufficient husiness 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 Mar-

shall, former banker and then Homex employee, to ar-

range a bank loan to Route 57-31 Development Corpora-

tion (** Route 57-31’’), a shell corporation set up by Wynn

and Crago to take title to the property. He was instructed

to negotiate the loan with First National Bank of Roch-

ester, New York, and to assign the condemnation award

due Homex as collateral. First National then loaned

17a

$250,000 to Route 57-31, requiring the persona! 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 Gen-

eral 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 opin-

ion for use during the audit of the 1970-1971 fiseal year.

In particular they discussed SEC Accounting Series Re-

lease 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 transac-

tion was recorded.” Dr. Mauriello eventually advised

© 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 appro-

priate only when a bona fide sales transaction has taken place,

and then only to the extent that the consideration received in

the transaction can be reasonably evaluated. In some of the

situations coming before us it appears from the attendant cir-

cumstances 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 uncertainty 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 propriety of current recognition of profit :

1. Evidence of financial weakness of the purchaser.

18a

HKF that the sale of land by Homex to Route 57-31 was

a bona fide sale for which income could and should be

recognized as of the date of the sale. Neither the true

scope of the agreement between Homex and Route 57-31

nor the nature of the background financial arrangements

supporting the agreement was disclosed to Dr. Mauriello.

Nor were the Homex auditors, HKF and its eventual

successor, Peat, Marwick, Mitchell & Co. (“Peat Mar-

wick’’), told of those details.

In fact, David Stirling, Yanowitch 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 se-

curity for liabilities’’ and ‘‘[{t]hat the officers and direc-

tors 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

2. Substantial uncertainty as to 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., nonrecourse 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.

19a

Mississippi citizens into a non-profit public benefit cor-

poration 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 construction 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 un-

less and until Greater Gulf was successful in obtaining a

funding commitment from appropriate government agen-

cies.

Originally, the Greater Gulf projects were to be funded

by the United States Department of Housing and Urban

Development. By January, 1971, however, this plan was

changed and funding was sought from the Farmers’ Home

Administration of the United States Department of Agri-

culture (“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 Rich-

ardson, however, were unable to authorize the funding com-

mitment, a matter of some concern to Homex officials in

that Homex had already chosen Merrill Lynch, Pierce, Fen-

ner & Smith (“Merri!l Lynch”) to underwrite 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 certification by Homex auditors of the fi-

nancial records for the fiscal year up to January 31, 1971.

About that time, Homex discharged HKF and retained

Peat Marwick as auditors.

20a

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 backdating

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 Missis-

sippi. Phillips also gave a Caron a letter from Greater Gulf

to the FHA requesting a $15 miliion loan and a response

from the FHA, purportedly signed by Richardson, com-

mitting the FHA to the loan. Caron signed the FHA re-

sponse in order to accept the loan. Richardson’s signature

on the FHA commitment was in fact forged at Phillips’ in-

struction by his secretary. On the next day, February 25,

1971, Schulz instructed the Homex accounting department

to credit Homex with the sale to Greater Gulf of 566 mod-

ules for $6,786,900. Later in the year, still without a valid

contract or a genuine government funding commitment,

Homex assigned another 60 modules to the Greater Gulf

project in order to boost reported year-end revenues.

The forged commitment letter was kept by Yanowitch and

used to the benefit of Homex on three important vccasions.

First, it was used to “assist” Dr. Mauriello in arriving at

an opinion regarding the propriety of recognizing income

from the Greater Gulf transaction. Second, it was shown

to Homex’s commercial bankers. Third, it was shown to

Peat Marwick on March 19, 1971, to “aid” them in their

audit of the financial records for purposes of the approach-

ing issuance. The Greater Gulf sale was described to Peat

Marwick verbally and supported by the backdated Decem-

ber 28, 1970, contract. It was ulso supported by a contract

between Greater Gulf and the U.S. Shelter Corporation

(“U.S. Shelter”), a wholly-owned financing subsidiary of

2la

Homex, in which Greater Gulf agreed to pay a finder’s fee

of $300,000 to U.S. Shelter for securing the $15 million

federal funding commitment.

Accounting Practices During the 1970-1971 Fiscal Year.

Three incidents during the 1970-1971 fiscal year make it

clear that Homex accounting: practices during that time

were considerably less than straightforward. First, a sig-

nificant proportion of the modular sales recorded for the

first quarter was based upon the assignment of modules to

purported sales with housing authorities in Clay, New

York, and Southbridge, Massachusetts. These sales were

reported as income notwithstanding the fact that there

existed neither written contracts nor funding commitments

to support the assignments. The unaudited first quarter

earnings were supplied to various commercial and invest-

ment bankers, eventually leading to an offer to purchase

Homex debentures.

Second, beginning in December, 1970, Homex maintained

not only a computer file showing assignment of particular

modules to construction projects, but also a “special” or

“simulation” file. Formally, these files were known respec-

tively as File I and File Il; computer room employees, how-

ever, called the first file the “real world” file and the second

file the “Mickey Mouse” file. Mr. Wilbur Rumley, Schedul-

ing Coordinator for Homex Operations Control, testified

at trial that “on File I some apartments were assigned to

one project and on File II they were assigned to another.”

In other words, the Mickey Mouse file was used by Homex

to verify to its auditors that certain modules were assigned

to certain contracts, thus justifyiag the inclusion of the

price of those modules as income.

Finally, just prior to the filing of Homex’s 1971 registra-

tion statement, an ambiguous debt confirmation gave Peat

Marwick reason to question the inclusion by Homex of

$832,000 as an account receivable. Homex had reported the

22a

figure as income notwithstanding the fact that it had been

spent on the so-called “soft costs” of constructing the Mis-

sissippi plant, costs such as architectural and engineering

fees and site selection costs. Such costs may be capitalized

as costs of construction. Apparently on the theory that

Mississippi authorities would one day reimburse it for the

expenditures, Homex reported them under accounts receiv-

able. As a result of Peat Marwick’s inquiries, Homex shifted

the $832,000 from accounts receivable to costs of construc-

tion in process.

The 1971 Registration Statement.

On April 21, 1971, Homex filed with the SEC a registra-

tion statement intended to cover the sale of $1,025,000 shares

of Homex common stock. This was changed by amendment

on May 28, 1971, to a new issue of 500,000 shares of Homex

cumulative convertible preferred. On July 29, 1971, Merrill

Lynch sold and distributed 500,000 shares of Homex pre-

ferred stock at $40 per share, netting Homex $19 million.

Labor Relations

In draft, the section of the 1971 registration statement

dealing with the labor relations enjoyed by iiomex sum-

marized its various labor agreements and noted that:

The Company believes that the above-mentioned agree-

ments have contributed to its present satisfactory la-

bor relations, but it can give no assurances that it will

be free of labor problems in the future.

The final registration statement, however, contained no

caveat regarding future labor relations. Nor did it reveal

the intricate investment relationships that had developed

between Homex and labor and which no doubt contributed

to the “satisfactory labor relations.”

23a

In June, 1969, Homex entered into a labor agreement

with the United Brotherhood of Carpenters and Joiners of

America (“UBCJA”), the exclusive bargaining agent for

Homex production employees. This in itself was a matter

of some moment, for organized labor had expressed concern

about the possibility that Homex-type production techniques

would eliminate jobs in the housing and construction indus-

tries. Thus, Homex press releases described its relationship

with the UBCJA as “precedent-setting.” The government,

however, claimed that the relationship was more accurately

characterized as “cozy.”

For example, UBCJA members and officials had, in No-

vember of 1968, helped convince the Akron, Ohio, Planning

Commission Appeals Board, a municipal zoning authority,

and the Akron City Council, a prospective Homex customer,

that the Homex concept of housing construction was not

opposed by organized labor. The coziness of the Homex-

UBCJA relationship went considerably further than mere

collaboration, however. The record shows that the 1971

registration statement and other reports were materially

false and misleading in that they failed to disclose that

Homex officials had arranged for the sale of approxi-

mately $240,000 worth of Homex common stock to seven

officials and members of the UBCJA at approximately

$80,000 less than the stock’s market value. In addition,

when the market value fell, Homex arranged for the pur-

chase from those same union officials and members of ap-

proximately $64,000 worth of Homex common stock at

approximately $136,000 above the fair market value.

On October 1, 1969, Homex filed its registration statement

in connection with the issuance of the 1,175,000 common

shares. The prospectus made the following observation on

Homex’s labor relations:

[T]he modules are manufactured and dwellings are

erected completely by building trades union labor. The

24a

Company has had no strikes or interference with its

production or on-site erection of its dwelling units.

Freedom from work interruptions as a r- ult of labor

problems is important to the continued success of the

Company’s business. Although the Company believes

the above-mentioned agreements should contribute to

the continuation of its present satisfactory labor rela-

tions, it can give no assurance that the Company and

its subsidiaries will be free of labor problems in the

future.

During the following months, conversations regarding the

possible purchase by various UBCJA officials and mem-

bers of soon-to-be publicly offered Homex stock were pur-

sued. On January 6, 1970, Yanowitch asked the Homex legal

department to consider the legality * of designating union

officials as eligible to purchase Homex stock at the $16.50

issue price.'? The department did not find such designation

unlawful, but it did advise that the arrangeme™t would, if

made public, be bad for Homex’s image. Despite this advice,

and in anticipation of the February 19, 1970, offering, Ho-

mex submitted to Pressprich a list of several hundred

names as “issuer-designated subscribers,” including the

names of seven UBCJA officials. Kenneth Langone, Presi-

dent of Pressprich, questioned the propriety of designating

1! Section 180.15 of the New York Penal Law reads as follows:

A person is guilty of bribing a labor official when, with intent

to influence a labor official in respect to any of his acts, deci-

sions or duties as such labor official, he confers, or offers or

agrees to confer, any benefit upon him.

* According to the prospectus in use throughout the 90 day

delivery period for initial registrations, Pressprich had agreed to

Homex's designating 117,500 shares for sale to certain persons

‘*promptly upon the commencement of this offering and any shares

not so purchased will be reoffered to the public at the public offer-

ing price.’’

a

25a

labor union representatives as subscribers, arguing that

they were people with whom Homex was supposed to have

an arm’s length relationship. As a result, the names were

taken off the list.

On february 19, 1970, the Homex registration became

effective, and 1,175,000 shares were sold at $16.50. Within

minutes, Homex shares were being traded at $34 per share;

one month later the price was up to $52 a share. David

Stirling then contacted Langone and argued that the union

officials should have received the stock as had been dis-

cussed. Langone, having overcome his earlier reservations,

proposed backdating sales to the union representatives to

the $34 per share after-market purchase price. Stirling

agreed to this arrangement and instructed Charles Mar-

shall, then his banker at the Central Trust Company in

Rochester, to loan the purchase price of the stock to the

union officials. Stirling guaranteed repayment of the loan

under his personal line of credit, though at trial he claimed

the guarantee was a forgery. In sum, on March 20, 1970,

seven UBCJA officials “purchased,” effective February 19,

1970, and aided by a loan arranged and guaranteed by

Stirling, approximately $240,000 worth of Homex stock for

approximately $160,000.

On January 8, 1971, Homex’s annual report and proxy

statement were mailed. The annual report contained the

following comment on Homex labor relations:

Stirling Homex is pleased to have been the first mod-

ular housing manufacturer to sign a national labor

contract with the United Brotherhood of Carpenters

and Joiners of America (AFL-CIO) for both in plant

production and on-site installation.

A few days earlier, Homex’s chauffeur, William McCann,

acting on Yanowitch’s instructions, cashed six Homex

checks for $11,500. These checks were payable to cash, and

had been issued on the basis of false travel and enter-

tainment expense vouchers. The money was used to pay the

26a

interest due on the Central Trust Company loan to the

union officials. There was no mention of this in the annual

report or proxy statement.

Finally, in November, 1971, Homex went even further

to foster its “precedent-setting” labor relations. By then,

Homex stock had begun to fluctuate between $15.00 and

$18.00 per share. William and David Stirling, along with

Yanowitch, arranged for the repurchase of the union of-

ficials’ stock at $34.00 per share, the amount for which the

stock had been originally “purchased.” We note that the

labor contract with Homex expired at the end of Septem-

ber, 1971, and a new three-year contract was successfully

negotiated.

Kece, Reseac and Route 57-31 Revisited

The original 1971 registration statement included the

following representation regarding the Kece, Reseae and

Route 57-31 land transactions:

During the fiscal year ended July 31, 1969, the Com-

pany sold two parcels of undeveloped land [Kece and

Reseac] and during the seven months ended February

28, 1971 it sold one parcel [Route 57-31]. Trade sales

included $750,000 for the year ended July 31, 1969 and

$1,822,723 for the seven months ended February 28,

1971 in respect of these sales, which resulted in net

income for the respective periods of about $187,000

(18% of the total net income) and $556,000 (35% of

the total net income). All the sales of undeveloped

land provided for deferred payment of part of the

purchase price.

In addition, under “Notes to Consolidated Financial State-

ments,” the registration statement described in some de-

tail the Kece, Reseac and Route 57-31 arrangements as

“Long-Term Receivables.”

27a

The descriptions in the Notes had been brought about

by pressure on Homex from HKF to disclose the nature

of the transactions more accurately. In turn, these de-

scriptions prompted the SEC to inquire into the arrange-

ment and, eventually, to require an even more detailed

disclosure regarding the Route 57-31 arrangement. Despite

various intentional misrepresentations by Homex, the SEC

ultimately prohibited inclusion of the $2,100,000 Route 57-

31 “sale” as income. The registration statement as finally

amended and filed left the Kece and Reseac representa-

tions the same, but reported the Route 57-31 transaction

under “Inventories” as follows:

The Company has entered into a contract to sell a

parcel of land with costs of $673,017 for a price of

$2,100,000. The Company has received a down payment

of $210,000 which has been accounted for as an option

deposit.

Thus, Homex was finally forced to acknowledge that land

transactions of the sort it was engaged in were not honestly

characterizable as sales and income but rather as contracts

for possible subsequent sale—in other words, option con-

tracts.

Accounting Practices Revisited

Both the draft and final 1971 registration statements

represented that Homex recognized the sale of modules

“when the units are manufactured and assigned to specific

contracts.” This prompted the SEC to inquire whether in-

come was being recognized “too far in advance of the date

of billing to customers.” Homex, through Schulz, responded

by letter with the following information:

When the following conditions have been met, the

Company records as sales and charges costs with

the related costs of modules manufactured.

28a

1. The Company must be designated by the local hous-

ing authority, non-profit sponsor or other agencies

as the contractor for the project. This designation

is supported by a formal commitment from the cus-

tomer to the Company.

2. The customer must have obtained and submitted

evidence to the Company that a commitment of

monies to fund the project has been obtained from

the appropriate governmental agency under which

the project has sponsorship.

3. The numbers and types of modules and the general

site plan and improvements must be identified and

be the subject of the agreement between the Com-

pany and its customers.

4. The Company must assign the manufactured mod-

ule to a specific project and physically identify the

module as being assigned to and reserved exclu-

sively for that specific project and customer. (At

the present time this identification is physically at-

tached at the earliest stage of the manufacture of

the module.)

5. The module must be completed and be ready for

shipment to the customer.

When all these events have occurred, and only when

all these events have occurred, does the Company rec-

ognize income.

(emphasis added).

Clearly, “all these events” had not “occurred” with re-

gard to the Southbridge, Massachusetts, and Clay, New

York, projects. Similarly, they had not occurred with re-

gard to the Mississippi project. The Mickey Mouse file

hardly substantiates Homex’s claim that it relied solely

upon the existence of these events for income reporting.

In fact, large scale reassignment of modules to various con-

ee ee ee

29a

tracts seems to have taken place whenever it met Homex’s

needs. Had this practice been disclosed, it would have been

clear to Peat Marwick that, as one of its auditors testified

at trial,

Homex was not producing to a specific customer order

and exclusively reserving modules for contracts, but

rather manufacturing for inventory and therefore in-

stead of having those units in sales, those units would

have been in inventory, which would have had a sig-

nificant effect on the income recognition and the por-

trayal of the balance sheet.

The 1971 Annual Report.

On October 8, 1971, Homex mailed its Annual Report to

stockholders. As might be expected, it mentioned very little

of the story just told.

Ill. Banxruproy: THe ScHeme Co.uapses.

On July 12, 1972, the house of cards collapsed. Less than

one year after the sale of Homex preferred stock to the

investing public, and approximately two years after the

sale of Homex common stock, sales that totaled $39 million,

Homex filed a petition for reorganization under Chapter

X of the Bankruptcy Act. This was immediately preceded

by the posting of large losses for the early parts of the

1971-1972 fiscal year and the resignations of David and

William Stirling, Yanowitch, Schulz and Phillips.

IV. Appettants’ Lecan Cuarms.

We now turn to the various legal arguments advanced

by the individual appellants.

The Scope of the Indictment and the Sufficiency of the

Evidence.

David Stirling, Yanowitch and Schulz argue that the

district court committed reversible error by refusing to

30a

withdraw from the jury’s consideration various specific

allegations in the indictment as to which, they claim, there

was insufficient evidence.** They rely on this Court’s de-

cision in United States v. Natelli, 527 F.2d 311 (2d Cir.

1975), cert. denied, 425 U.S. 934, 96 S.Ct. 1663, 48 L.Ed.2d

175 (1976). Their argument is that the failure to withdraw

the allegedly unsupported allegations rendered the jury

verdict fatally ambiguous. We disagree. Their argument

depends upon an incorrect understanding of the law and

their claims of insufficient evidence are not well taken.

In United States v. Natelli, supra, this Court considered

an appeal by certified public accountants from convictions

for making materially false representations in proxy state-

ments filed with the SEC. They had been convicted under

a one-count indictment that alleged two separate and dis-

tinct criminal episodes. A single, unifying scheme to de-

fraud was not alleged; nor was there an allegation of a con-

spiracy. The district court had instructed the jury that a

finding of guilt under either specification was sufficient to

support a conviction; the jury found both defendants guilty.

With regard to one of the defendants, however, the Court

of Appeals held that there was sufficient evidence for con-

viction based on only one of the specifications. The Court

explained :

A difficulty does arise .. . if it is found as matter of

law that there should have been a directed verdict for

a defendant on one of the specifications for insuffi-

ciency of evidence. The verdict then becomes ambigu-

ous, for the jury could have rejected the specification

which the appellate court holds sufficiently proved,

and have convicted only on the specification held to be

insufficiently proved. In that event, there seems to be

‘® William Stirling made no request of the district court to strike

or narrow the indictment. We consider, infra, his argument regard-

ing the denial of his Rule 29 motion for acquittal.

3la

no alternative to remand for a new trial. That is the

general principle.

527 F.2d at 325. The Court noted further that “[w]hen

there is more than one specification as a predicate for

guilt, each dependent on particular evidence which is un-

related to the other, it would be sound practice to instruct

the jury that they must be unanimous on a particular spe-

cification to convict.” Jd.

In contrast, this case presents a different situation, one

more closely akin to that considered in this Court’s decision

of United States v. Amrep Corp., 560 F.2d 539 (2d Cir.),

cert. denied, —— U.S. ——, 98 S.Ct. 731, 54 L.Ed.2d 759

(1978). There the Court reviewed a conviction of twenty

counts of mail fraud and five counts of interstate land

sale fraud. The Amrep appellants argued, as appellants

do here, that, in proving a scheme to defraud by several

misrepresentations, the government must prove every mis-

representation charged in the indictment. They argued

further that the government’s failure to meet this burden

required a retrial. In rejecting this argument, the Court

made the following observation:

“[ Appellants] confuse the scheme to defraud, which

is the gist of the offense, with the means adopted to

effectuate the scheme.” A scheme to defraud may con-

sist of numerous elements, no particular one of which

need be proved if there is sufficient overall proof that

the scheme exists. Appellants’ reliance on United States

v. Natelli is misplaced. In that case, the defendant was

charged in a single count with violating the securities

laws by making false statements in a proxy statement.

Because the crime charged consisted of the making of

such statements, the erroneous failure of the trial

court to direct a verdict as to one of the alleged falsi-

ties, arising out of a separate state of facts, made the

jury’s verdict ambiguous and required a new trial.

Here, the crime charged was the scheme to defraud,

32a

and tie alleged false statements were merely means

for carrying it into eff ect.

560 F.2d at 546-47 (citations omitted; emphasis added).

This is precisely the situation here. In addition, the Homex

indictment charged a conspiracy which, under Pinkerton v.

United States, 328 U.S. 640, 66 S.Ct. 1180, 90 L.Ed. 1489

(1946), makes each conspirator substantively liable for the

foreseeable acts of his co-conspirators committed in the

furtherance of the conspiracy. Finally, even if this were

a Natelli rather than Amrep type case, the jury instruction

given by the district court was precisely the type of in-

struction suggested by the Natelli Court.

The real question, then, is not so much whether there

was sufficient evidence regarding each and every specifica-

tion but, rather, whether there was sufficient overall proof

ot the alleged scheme to defraud and conspiracy. Viewing

the evidence in the light most favorable to the govern-

ment, United States v. Glasser, 315 U.S. 60, 80, 62 S.Ct.

457, 86 L.Ed. 680 (1942), and “ ‘giving full play to the right

of the jury to determine credibility, weigh the evidence,

and draw justifiable inferences of fact,’” United States v.

Taylor, 464 F.2d 240, 243 (2d Cir. 1972), quoting, Curley v.

United States, 81 U.S.App.D.C. 389, 392, 160 F.2d 229, 232,

cert. denied, 331 U.S. 837, 67 S.Ct. 1511, 91 L.Ed. 1850

(1947), we have no doubt that there was sufficient evidence

to convict the appellants of the substantive crimes. In addi-

tion, with regard to the sufficiency of evidence for the con-

spiracy convictions, our deliberations are governed by the

following principles:

“[T}he gist of the offense [of conspiracy] remains the

agreement, and it is therefore essential to determine

what kind of agreement or understanding existed as to

each defendant.” In making this determination, courts

often look to knowledge and dependency as evidence

of an agreement. These factors, in turn, may be in-

33a

ferred from an assessment of the nature of the criminal!

enterprise and the defendants role in it... . For such

an inference to be drawn, however, it is necessary to

examine “the qualitative nature of the act or acts [of

each defendant] ... in the context of the entire con-

spiracy....”

United States v. Taylor, 562 F.2d 1345, 1352 (2d Cir.), cert.

denied, 432 U.S. 909, 97 S.Ct. 2958, 53 L.Ed.2d 1083 (1977)

(citations omitted).

As the recitation of the facts above makes clear, there

is no doubt regarding the existence of the alleged con-

spiracy. Each appellant played a central role in some if

not all of the various elements of the common scheme and

in the overall maintenance of its life. The purpose of the

scheme was apparent; the responsibility for the scheme

is also apparent. Collectively, the appellants did their best

to take advantage of the plan and to keep it alive. Quite

properly, they now share the consequences.

David Stirling was a central and motivating force in the

Homex frauds and conspiracy. Apart from his involvement

in and supervision of virtually every aspect of Homex

operations, he was shown to be directly and significantly in-

volved in the various land transactions and in the various

representations regarding recognition of income. He was

the key figure in the Reseac affair: he helped conceive the

idea, he participated in making the side promises, he ob-

served the deterioration of the transaction, and he did all

he could to keep it alive so that Homex could continue to

recognize income from it. He did this with full awareness

of the SEC standards regarding the reporting of income

from land transactions. See note 10 supra. In addition, he

told the SEC, the Homex auditors and the investing public

that income was recognized only when specific modules

were assigned to specific contracts, knowing full well the

reassignment practices and policies of the accounting divi-

34a

sion. Finally, he knew about and participated in the ad-

justment of Homex accounts by delaying the entry of cost

overruns in the installation department, reporting as in-

come the Greater Gulf-U.S. Shelter transaction, and at-

tempting to capitalize the $832,000. This is by no means

an exhaustive description of what David Stirling could

permissibly be found to have done during his association

with Homex, but it certainly constitutes convincing evi-

dence of his guilt.

The same can properly be said about Harold Yanowitch.

Quite apart from his constant presence and supervision,

he was shown to have been directly involved in the Kece

affair. He shielded from the auditors and Dr. Mauriello

the true nature of the Kece and Route 57-31 transactions,

even with full knowledge of the applicable SEC standards.

The jury was instructed and could have found that, where

Yanowitch did not know of the specific wrongdoings, he

must have “deliberately closed his eyes to what otherwise

would have been obvious to him and with a conscious pur-

pose to avoid learning the truth.” Although appellant

Schulz was primarily responsible for implementation of the

accounting policies of Homex, Yanowitch quite clearly

collaborated in the creation and furtherance of those de-

ceptions.

Finally, Schulz’ participation in the fraudulent account-

ing practices at Homex is clear. Although he may not have

participated in the negotiation of the various land trans-

actions, he was instrumental in the design and implementa-

tion of the accounting systems that made the extravagant

claims of Homex income possible. His frequent discussions

with Dr. Mauriello, the Homex auditors and the SEC, and

the misrepresentations he made to them, were essential! to

the maintenance of the Homex fraud.

Paragraph 16.

The Stirlings and Yanowitch argue that the district court

committed reversible error by denying their pre-trial mo-

tions to strike Paragraph 16 of the indictment.’* That para-

graph is based on the appellants’ failure to disclose in the

second registration statement the true nature of Homex’s

relationship with union officials. They advance three sepa-

rate bases in support of their argument: the privilege

against self-incrimination; the double jeopardy clause; and

the prejudice resulting from the allegedly inflammatory na-

ture of the paragraph itself.

Self-Incrimination.

The self-incrimination claim is essentially this: if ap-

pellants had disclosed to the SEC and the public the true

nature of the stock transactions with the UBCJA officials,

they would have been admitting facts sufficient to form the

basis for a criminal prosecution under the Taft-Hartley

Act, 29 U.S.C. § 186. Because of this, the argument goes,

the Fifth Amendment must operate to protect them from

prosecution for failing to make the disclosure in the first

** Indictment J 16 reads as follows:

16. It was further a part of said scheme to defraud that on

or about July 29, 1971, defendants David Stirling, Jr., William

G. Stirling, and Harold M. Yanowitch prepared and filed with

the SEC registration statements and other reports which de-

scribed Homex’s several relations with the United Brotherhood

of Carpenters and Joiners of America and its locals. Those

statements were materially false and misleading, because as the

defendants well knew, but failed to disclose, seven members and

officials of the United Brotherhood of Carpenters and Joiners

of America had had approximately $240,000 worth of Homex

common stock purchased for them at approximately $76,800

less than the fair market value, and afterwards, when the fair

market price had fallen, approximately $64,000 worth of Ho-

mex common stock sold for them at approximately $136,000

above the market price.

36a

place. Appellants rely on Marchetti v. United States, 390

U.S. 39, 88 S.Ct. 697, 19 L.Ed.2d 889 (1968), and Grosso v.

United States, 390 U.S. 62, 88 S.Ct. 709, 19 L.Ed.2d 906

(1968). Their argument, if accepted, would lead to the con-

clusion that securities misrepresentations would be consti-

tutionally protected if the true but undisclosed facts would

lead to criminal prosecution.

In California v. Byers, 402 U.S. 424, 91 S.Ct. 1535, 29

L.Ed.2d 9 (1971), the Supreme Court noted that when

“confronted with the question of a compelled disclosure

that has an incriminating potential, the judicial scrutiny

is invariably a close one.” 402 U.S. at 427, 91 S.Ct. at 1537.

It noted further that:

Tension between the State’s demand for disclosures

and the protection of the right against self-incrimina-

tion is likely to give rise to serious questions. Inevi-

tably 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 in-

terest can be treated lightly.

Id. The Court upheld as constitutional a California “hit

and run” statute that required the driver of a motor vehicle

in an accident to stop at the scene and give his or her name

and address. The Court held that compliance with an es-

sentially regulatory statute where (1) self-reporting is

essential to the fulfillment of its objective, (2) the burden

is placed upon the general public rather than a “highly

selective group inherently suspect of criminal activities,”

(3) the general activity is lawful and (4) the possibility

of incrimination is not substantial, does not violate the

Fifth Amendment privilege against seif-incrimination. 402

U.S. at 427-31, 91 S.Ct. 1535, 1539. See also Albertson v.

Subversive Activities Control Board, 382 U.S. 70, 86 S.Ct.

194, 15 L.Ed.2d 165 (1965).

37a

?

Significantly, the Byers Court cited a number of examples

of disclosure requirements in the commercial and indus-

trial sectors and made the following observation:

In each of these situations there is some possibility

of prosecution—often a very real cne—for criminal

offenses disclosed by or deriving from the information

that the law compels a person to supply. Information

revealed by these reports could well be “a link in the

chain” of evidence leading to prosecution and convic-

tion. But under our holdings the mere possibility of

incrimination is insufficient to defeat the strong policies

in favor of a disclosure called for by statutes like the

one challenged here.

402 U.S. at 427-28, 91 S.Ct. at 1538. See Shapiro v. United

States, 335 U.S. 1, 68 S.Ct. 1875, 92 L.Ed. 1787 (1948). The

same reasoning applies here.

This @gurt has considered a problem similar to the one

presented here in S.E.C. v. Radio Hill Mines Co., 479 F.2d

4 (2d Cir. 1973). There, as here, the appellant had been

charged with orchestrating an elaborate scheme which

violated the registration and antifraud provisions of the

securities laws. In upholding the validity of a preliminary

injunction that required disclosure of securities transac-

tions, the Court found it “clear that securities regulation

is an ‘essentially noncriminal and regulatory area of in-

quiry.’” 479 F.2d at 7. The Court also determined that the

information that was required to be disclosed related to

what was “generally a completely ‘lawful activity,’ ” quot-

ing California v. Byers, supra, 402 U.S. at 431, 91 S.Ct. at

1539, and that the disclosure was not an admission of an

“inherently suspect” activity, citing Albertson v. Subver-

sive Activities Control Board, supra, 382 U.S. at 79, 86 S.Ct.

194. We think the same is true for this case. We have no

doubt that the securities laws are “essentially noncrimina!

and regulatory” and that self-reporting is essential to the

38a

fulfillment of the central purpose of the statutory scheme.

Nor do we believe the people and enterprises making up

the commercial and investment sectors of our economy are

a “highly selective group inherently suspect of criminal

aci...ties.” In addition, the sale of stock and the mainten-

ance of peaceful labor relations are quite obviously, and

quite necessarily, lawful activities. Appellants chose to en-

gage in a lawful activity in an unlawful manner. That

unlawfulness cannot now be used to excuse them from regu-

latory disclosure requirements, even though such disclos-

ures could lead to criminal prosecution under cther statu-

tory schemes.

The Double Jeopardy Claim,

David Stirling and Yanowitch were indicted in the West-

ern District of New York for violations of the Taft-Hartley

Act, 29 U.S.C. §186(a)(1). Stirling pleaded guilty and

Yanowiteh pleaded nolo contendere.’ They argue here that

prosecution under Paragraph 16 of the indictment is barred

by the double jeopardy clause of the Fifth Amendment be-

cause it depends upon the same facts underlying the Taft-

Hartley prosecution. The district court properly rejected

this argument.

‘*On July 12, 1977, the United States District Court for the

Western District of New York, Harold P. Burke, Judge, granted

David Stirling and Yanowitch permission to withdraw their pleas

on the ground that the government had withheld exculpatory in-

formation. Stirling and Yanowitch made this motion just prior to

the trial which led to the convictions we consider on this appeal.

Judge Frankel and the government were informed of the with-

drawal motion. Neither the pleas nor the convictions entered in the

Western District were admitted as evidence in the Southern Dis-

trict. Appellants now request that we dismiss this appeal without

prejudice and remand it to the Southern District pending disposi-

tion of their contemplated motion for a new trial. We deny the

appellants’ motion. See Fed.R.Crim.P. 33; United States v. De-

Sapwo, 456 F.2d 644, 647 (2d Cir.), cert. denied, 406 U.S. 933, 92

8.Ct. 1776, 32 L.Ed.2d 135 (1972) ; United States v. Sposato, 446

F.2d 779, 781 (2d Cir. 1971).

39a

Even if the indictment in the Western District and the

indictment in the Southern District were the same “in fact,”

they certainly are not the same “in law.” The conduct of

Stirling and Yanowitch provided the basis for two separate

and distinct prosecutions based upon two separate and

distinct statutory schemes. The double jeopardy clause was

not meant to prevent such multiple but entirely distinet

prosecutions. See United States v. Armedo-Sarmiento, 545

F.2d 785, 792 (2d Cir. 1976), cert. denied, 430 U.S. 917, 97

S.Ct. 1330, 51 L.Ed.2d 595 (1977); United States v. Cala,

521 F.2d 605, 607 (2d Cir. 1975); United States v. McCall,

489 F.2d 359, 362 (2d Cir. 1973), cert. denied, 419 U.S. 849,

95 S.Ct. 88, 42 L.Ed.2d 79 (1974); United States v. Sebas-

tian, 428 F.Supp. 967, 970-72 (W.D.N.Y.1977).

The “Inflammatory and Prejudicial Nature” of

Paragraph 16.

The Stirlings and Yanowitch argue that Paragraph 16

of the indictment should have been stricken by the district

court prior to trial as being of an inflammatory and un-

fairly prejudicial nature and, during and after trial, for

failure of proof. We reject both arguments.

Paragraph 16 of the indictment originally charged that

the defendants knew but did not disclose that UBCJA of-

ficials “had been paid off by having” Homex stock pur-

chased for them at a low price and bought back from them

at a high price. Prior to trial, the Stirlings and Yanowitch

moved to strike the entire paragraph under Fed.R.Crim.P.

7(d). The district court ordered the deletion of the “paid

off” language; only the modified version was seen by the

jury. We think this decision by the district judge was

sound, and we see no reason why he should have gone

farther and deleted the entire paragraph. The redacted

paragraph was a rather bland statement of allegations re-

garding the failure to disclose the true nature of the rela-

tionship between Homex and UBCJA officials. See Fed.R.

40a

Crim.P. 7(c). This allegation was made in a noninflamma-

tory fashion and it was properly included in an indictment

for violation of securities laws and the mail fraud statutes.

The true nature of Homex’s labor relations was impor-

tant to a potential investor. Once Homex decided to make

representations concerning its labor relations, it should

have described them accurately. Corporate funds were

being used improperly to aid in the maintenance of peace-

ful 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.

The purpose of an indictment is to state the charge

against the accused. The accomplishment of that purpose is

to some extent inherently prejudicial. On the facts before

us, however, we conclude that the district court did not

abuse its discretion by deciding that the indictment was not

unfairly prejudicial. See United States v. Courtney, 257

F.2d 944, 947 (2d Cir. 1958), cert. denied, 358 U.S. 929, 79

S.Ct. 316, 3 L.Ed.2d 303 (1959).

Appellants also suggest that the district court erred by

not striking Paragraph 16 sua sponte, either during or after

trial. They claim that the facts necessary to support Para.

graph 16 could not have been and were not shown. We dis-

agree. The charge was properly included in the indictment

in the first place, and at trial the government presented

substantial evidence to support it. See United States v.

Stanchich, 550 F.2d 1294, 1299 (2d Cir. 1977) ; United States

v. Taylor, 464 F.2d 240, 242-45 (2d Cir. 1972).

Rule 11(e)(6).

Appellant Schulz was interviewed nine times at the

United States Attorney’s Office during the early stages of

the Homex investigation. At first, he maintained that there

4la

were no grounds for an indictment. He was unpersuasive.

In March, 1976, Assistant United States Attorney Mac-

Donald informed Schulz that an indictment was going to be

recommended. Schulz was not pleased with this news, and

he asked his attorney to meet with MacDonald. They met,

and MacDonald suggested that Schulz plead guilty and

testify for the government.

Schulz agreed to a negotiated plea agreement on July

15.** On July 16 he testified before the Grand Jury, giving

‘* The agreement provided in pertinent part as follows:

On the understandings specified below, the United States will

accept a guilty plea from Edwin J. Schulz to one count of an

Indictment charging a violation of 18 U.S.C. § 371 and ecarry-

ing a maximum sentence of 5 years imprisonment and a $10,000

fine. If he fully complies with these understandings, Mr. Schulz

will not be prosecuted by this Office for other existing charges

known to this Office hereinafter specified, or for potential

charges based upon information supplied to this Office by Mr.

Schulz himself. Such immunity specifically includes charges

related to securities, mail and wire frauds, perjury and false

statements.

The understandings are that Mr. Schulz shall truthfully dis-

close all information with respect to the activities of himself

and others concerning all matters about which this Office in-

quires of him, and, further, shall truthfully testify before the

Grand Jury and/or at any trial or other court proceeding with

respect to any matters about which this Office may request his

testimony.

@ oe @ € e@ eo

It is further understood that Mr. Schulz must at all times

give complete, truthful and accurate information and testi-

mony and must not commit any further crime whatsoever.

Should Mr. Schulz commit any further crimes or should it be

judged by this Office that Mr. Schulz has given false, incom-

plete or misleading testimony or information, or has otherwise

violated any provision of this agreement, this agreement shall

be null and void and Mr. Schulz shall thereafter be subject to

prosecution for any federal criminal violation of which this

Office has knowledge, including, but not limited to, perjury

42a

detailed and incriminating information regarding the activi-

ties he and his Homex colleagues had engaged in. Neither

a copy of the indictment nor a commitment as to what it

would contain was given to Schulz until after his Grand

Jury appearance. When the indictment was finally filed on

July 27, Schulz was apparently shocked that it charged

him with the same nine counts as the other defendants.

Apparently because of the scope of the indictment and

because the indictment did not charge the Homex auditors,

Schulz withdrew from the plea agreement, pleaded not

guilty and went to trial. His Grand Jury testimony was

admitted as evidence against him.

Schulz claims on appeal, as he did below, that his Grand

Jury testimony was made “in connection with” his offer

to plead guilty and therefore, under Fed.R.Crim.P.11(e)

(6),’" should not have been allowed as evidence. Judge

and obstruction of justice. Any such prosecutions may be pre-

mised upon any information provided by Mr. Schulz, and such

information may be used against him.

No additional promises, agreements and conditions have been

entered into other than those set forth in this letter and none

will be entered into unless in writing and signed by all parties.

‘* Rule 11(e) (6) provides as follows:

Except as otherwise provided in this paragraph, evidence of

a plea of guilty, later withdrawn, or a plea of nolo contendere,

or of an offer to plead guilty or nolo contendere to the crime

charged or any other crime, or of statements made in connec-

tion with, and relevant to, any of the foregoing pleas or offers,

is not admissible in any civil or criminal proceeding against

the person who made the plea or offer. However, evidence of a

statement made in connection with, and relevant to, a plea of

guilty, later withdrawn, a plea of nolo contendere, or an offer

to plead guilty or nolo contendere to the crime charged or any

other crime, is admissible in a criminal proceeding for perjury

or false statement if the statement was made by the defendant

under oath, on the record, and in the presence of counsel. (em-

phasis added).

43a

Frankel denied Schulz’ pre-trial motion, finding that his

“argument strains the language and purport of the Rule

{and} has no basis in policy or significant precedeut.” In

rejecting Schulz’ motion made during trial, Judge Frankel

added that Schulz had lost the protection of the plea agree-

ment by failing to plead guilty and that his suggested inter-

pretation of the rule would work “evil consequences” by

subjecting the Grand Jury and investigative processes “to

all kinds of deceptive and manipulating and misleading

uses.” We agree.

Rule 11(e)(6) has not been applied to Grand Jury testi-

mony given after formalization of a negotiated plea agree-

ment and before withdrawal from that agreement."* Nor will

we so apply it here. See generally 2 Weinstein’s Evidence

410-1 to 410-42 (1976) (discussion of the legislative history

of Rule 11(e)(6) and related authorities). The policy be-

The language of Fed.R.Crim.P. 11(e)(6) and F.R.Evid. 410 is

identical ; their legislative histories are interconnected and compli-

mentary. 8 Moore’s Federal Practice {] 11.08 (2d ed. 1977) ; 2 Wein-

stein’s Evidence J 410; Advisory Committee Note to Rule 11(e) (6),

reprinted in 62 F.R.D. 286 (1974) ; A.B.A. Standards Relating to

Pleas of Guilty § 3.4 (1968).

*%In Hutto v. Ross, 429 U.S. 28, 97 5.Ct. 202, 50 L.Ed.2d 194

(1976), rev’g Mobley ez rel. Ross v. Meek, 531 F.2d 924 (8th Cir.)

(petition for writ of habeas corpus from state conviction), the

Supreme Court considered the question whether a confession is per

se inadmissible in a criminal! trial because it was made after an

agreed upon plea bargain that did not call for such a confession

and before the withdrawal from the plea bargain. The Court held

that it was not, and ruled that the Court of Appeals had erred when

it determined that ‘‘any statement made as a result of a plea bar-

gain is inadmissible.’’ The Court also noted that the case did not

‘involve the admissibility in criminal trials of statements made

during the plea negotiation process,’’ referring to Rule 11(e) (6).

Id. 429 U.S. at 30 n.3; 97 S.Ct. at 203 n.3. The implication, of

course, is that not all statements made merely as a result of a plea

bargain are excludable under Rule 11(e)(6) as statements made

‘*in connection with, and relevant to’’ such a plea bargain.

44a

hind the rule is that, “for plea bargaining te work effec-

tively and fairly, a defendant must be free to negotiate

without fear that his statements will later be used against

him.” United States v. Herman, 544 F.2d 791, 796 (5th Cir.

1977); United States v. Ross, 493 F.2d 771, 775 (5th Cir.

1974); Advisory Committee Note to Fed.R.Evid. 410, re-

printed in 56 F.R.D. 229 (1972). Although it is true that the

language of the rule is capable of being read expansively,

so as to reach Grand Jury testimony given after the plea

bargain, it is just as true that “the primary concern of the

draftsmen ... was with fairly formal plea bargaining be-

tween the United States Attorney and counsel for defend-

ant after charges had been, or were about to be, made.” 2

Weinstein’s Evidence {410[07], at 410-40 (emphasis

added). The plea negotiation procedure between MacDonald

and Schulz’ attorneys was both fair and formal. We have

no doubt that Schulz gave his testimony voluntarily, albeit

because of the agreement. Thus, the rule was not meant to

reach Grand Jury testimony in circumstances such as these,

and we will not so extend it.”

Even the Court that has given the rule its most generous

interpretation, the Kighth Circuit in United States v. Her-

man, supra, would not likely immunize Schulz’ statements

in these circumstances. In Herman, the Court held that

“!s]tatements are inadmissible if made at any point during

a discussion in which the defendant seeks to obtain con-

'’* Judge Weinstein does suggest that a ‘‘grey area’’ exists re-

garding the admissibility under the rule of grand jury testimony

that follows a negotiated plea but precedes the withdrawal of that

plea when the defendant had negotiated the plea without benefit of

an attorney. He concludes, however, that even under such cireum-

stances ‘‘immunity seems unjustified.’’ 2 Weinstein’s Evidence

{ 410[07], at 410-41. Because Schulz had the benefit of an attorney

throughout the bargaining process, Le would have difficulty fitting

into even this grey area, if indeed one exists. See United States v.

Smith, 525 F.2d 1017 (10th Cir. 1975).

45a

cessions from the government in return for a plea.” 544

F.2d at 797. It simply cannot be said that Schulz was en-

gaged in a “discussion” with the Grand Jury in an attempt

to obtain concessions from the government in exchange for

his plea. Schulz himself concedes as much on appeal: “He

was under no illusion that his testimony might persuade

the grand jury not to indict him.” Brief for Appellant

Schulz at 34. The plea agreement had already been reached

by the time Schulz went before the Grand Jury. The nego-

tiations were over. All Schuiz had to do was live up to his

end of the bargain. His failure to do so justly exposed him

to prosecutorial use of his Grand Jury testimony.

We believe this is precisely the result contemplated by

the parties. The agreement provided as follows:

[S]hould it be judged by [the United States At-

torney’s] office that Mr. Schulz has . . . violated any

provision of this agreement, this agreement shall be

null and void and Mr. Schulz shall thereafter be sub-

ject to prosecution for any federal criminal violation.

... Any such prosecutions may be premised upon any

information provided by Mr. Schulz, and such infor-

mation may be used against him.

This language is hardly ambiguous. We agree with the

district court that Schulz agreed to plead guilty in ex-

change for the protections contained in the agreement. We

also think it apparent that the agreement contemplated

prosecutorial use of the information provided by Schulz

in the event that the guilty plea was not entered.

It may be true that Schulz would not have testified be-

fore the Grand Jury had it not been for the plea agreement,

but this is not in itself sufficient for suppression of that

testimony under Rule 11(e)(6). Schulz voluntarily nego-

tiated his plea agreement, voluntarily appeared before the

Grand Jury, and voluntarily decided to violate his plea

agreement. He could have relied on the agreement to pro-

46a

tect himself. See Santobello v. New York, 404 U.S. 257,

92 S.Ct. 495, 30 L.Ed.2d 427 (1971); United States v.

Scharf, 551 F.2d 1124, 1126 n. 4 (8th Cir.), cert. denied,

— US. —, 98 S.Ct. 70, 54 L.Ed.2d 81 (1977) (“There

is no question that a breach of a plea bargain by the gov-

ernment, if established, may entitle a defendant who has

pleaded guilty in reliance on the bargain to appropriate

relief.”). His breach of the agreement removed that pro-

tection. Such a result can hardly be said to undercut the

confidence and candor needed for successful and fair plea

negotiations. It simply means that once the agreement is

finalized its terms will be enforced.

Severance.

Appellant Phillips, the central figure in the Mississippi

Greater Gulf scheme, argues that the district court erred

by refusing to grant his mid-trial Rule 14 motion to sever

his trial from that of the other defendants.” Essentially.

he claims that the indictment charged, and the evidence

showed, multiple conspiracies rather than a single con-

spiracy; that he was, at most, involved in only one of those

conspiracies; and that the forced combination of his trial

with that of the others operated to his substantial preju-

dice. We disagree.

* Fed.R.Crim.P. 14 provides in pertinent part as follows:

If it appears that a defendant or the government is preju-

diced by a joinder of offenses or of defendants in an indict-

ment or information or by such joinder for trial together, the

court may order an election or separate trials of counts, grant

a severance of defendants or provide whatever other relief jus-

tice requires.

Phillips’ attorney broached the question of severance prior to

trial, but decided not to make the motion at that time. The record

shows that he believed the joinder of defendants under Fed.R.Crim.

P. 8 was probably appropriate, but that he wished to reserve the

possibility of moving for severance as the trial proceeded. The dis-

trict court authorized counsel to make the motion at a later time.

See Fed.R.Crim.P. 12(b) (5); 8 Moore’s Federal Practice J 14.02

[2] (2d ed. 1977).

47a

First, we reject Phillips’ argument that the indictment

charged, and the evidence showed, multiple conspiracies.

The indictment charged a single conspiracy, the “essential

nature” of which was the fraudulent inflation of Homex’s

reported income and the intentional concealment of ma-

terial information adverse to Homex. Compare United

States v. Rosenblatt, 554 F.2d 36, 38 (2d Cir. 1977). That

the indictment alleged a variety of devices intended to

accomplish this objective, devices carried out by a variety

of individuals, does not alter the fundamental! nature of the

indictment itself. Thus, the question is whether the gov-

ernment established the existence of the alleged conspiracy.

This is a matter “primarily for the jury, since it is a ques-

tion of fact as to the nature of the agreement.” United

States v. Finkelstein, 526 F.2d 517, 522 (2d Cir. 1975), cert.

denied, 425 U.S. 960, 96 S.Ct. 1742, 48 L.Ed.2d 205 (1976) ;

United States v. Armedo-Sarmiento, 545 F.2d 785, 789 (2d

Cir. 1976), cert. denied, 430 U.S. 917, 97 S.Ct. 1330, 51 L.Ed.

2d 595 (1977). “Our task on review is to determine whether

the legal standard given to the jury by the trial court in its

charge was correct and whether, viewing the proof in the

light most favorable to the Government, there was suffi-

cient evidence to permit the jury to find the single con-

spiracy alleged.” United States v. Taylor, 562 F.2d 1345,

1351 (2d Cir.), cert. denied, 432 U.S. 909, 97 S.Ct. 2958, 53

L.Ed.2d 1083 (1977). Here, Phillips did not even request

a jury instruction on the difference between single and

multiple conspiracies, nor did he object to the charge that

was eventually given. Moreover, the charge that was de-

livered was a fair one—it made clear that guilt was to be

found on an individual basis and it focused on the fact

that Phillips was not named in various specifications of the

indictment. Given this, and given the overwhelming mass

of evidence establishing the existence of a broad conspiracy

aimed at accomplishing an unlawful objective, we cannot

agree that there were multiple conspiracies or that Phillips

was entitled to severance on that basis.

48a

Thus, the real question is not whether there was a mis-

joinder under the liberal provisions of Fed.R.Crim.P. 8,”

but whether the refusal of the district court to sever Phillips

from the main trial was so unfairly prejudicial under Rule

14 as to constitute an abuse of discretion. This is a difficult

burden for Phillips to meet. “The determination of the

elusive criterion of prejudice rests in judicial discretion at

the trial level, and is virtually unreviewable.” 8 Moore’s

Federal Practice {| 14.02[1], at 14-3 (2d ed. 1977) (footnote

omitted). While we do not shirk our responsibility of re-

view, we are reluctant to overturn a conviction for denial

of a motion for severance unless there is a showing of sub-

stantial prejudice. United States v. Miley, 513 F.2d 1191,

1209 (2d Cir.), cert. denied, 423 U.S. 842, 96 S.Ct. 74, 46

L.Ed.2d 62 (1975). It is not sufficient merely to show that

the accused would have had a better chance for acquittal

at a separate trial. United States v. Corr, 543 F.2d 104°,

1052 (2d Cir. 1976); 8 Moore’s Federal Practice {| 14.04[1],

at 14-14.2 to 14-15 (2d ed. 1977).

Phillips was charged with playing a significant and

knowing role in the advancement of the objective of the

7 Fed.R.Crim.P. 8 provides as follows:

(a) Joinder of Offenses. Two or more offenses may be

charged in the same indictment or information in a separate

count for each offense if the offenses charged, whether felonies

or misdemeanors or both, are of the same or similar character

or are based on the same act or transaction or on two or more

acts or transactions connected together or constituting parts

of a common scheme or plan.

(b) Joinder of Defendants. Two or more defendants may be

charged in the same indictment or information if they are

alleged to have participated in the same act or transaction or in

the same series of acts or transactions constituting an offense

or offenses. Such defendants may be charged in one or more

counts together or separately and all of the defendants need

not be charged in each count.

49a

conspiracy. Although he was not charged with having par-

ticipated in every detail of that conspiracy, we have no

doubt that he was properly tried with the other conspira-

tors. He played the key role in orchestrating the most bla-

tant misrepresentation in the entire Homex drama, the

Greater Gulf project. The public interest in avoiding un-

necessarily multiplicious litigation was well-served by the

district court’s decision. We hold that Phillips was not

prejudiced by the denial of the motion, nor was its denial

an abuse of discretion.

William Stirling’s Motion for Acquittal.

William Stirling argues that the district court erred

by denying his Rule 29 motion for judgment of acquittal.

He claims that the evidence showed no more than that he

was “the head of production at Homex, a craftsman whose

talent ran to assembling prefabricated homes with cranes,

rather than the alleged fabricating of financial statements”

and that “all his alleged activities were more likely the

result of brotherly trust than a desire to defraud.” He

characterizes the evidence against him as “paltry.” The

district court belicved that this argument was non-frivolous

but determined that a jury question existed. We agree.

A motion for judgment of acquittal is governed by Fed.

R.Crim.P. 29, which provides that a judgment of acquitta!

shall be entered “if the evidence is insufficient to sustain

a conviction.” See generally 8A Moore’s Federal Practice

1 29.01 to 29.09 (2d ed. 1977). The question, therefore, is

whether the evidence was sufficient. See Id. § 29.06. We

determine this by asking

whether upon the evidence, giving full play to the right

of the jury to determine credibility, weigh the evidence,

and draw justifiable inferences of fact, a reasonable

mind might fairly conclude guilt beyond a reasonable

doubt.

50a

United States v. Taylor, 464 F.2d 240, 243 (2d Cir. 1972),

quoting, Curley v. United States, 81 U.S.App.D.C. 389, 392,

160 F.2d 229, 232, cert. denied, 331 U.S. 837, 67 8.Ct. 1511,

91 L.Ed. 1850 (1947). In Curley, the District of Columbia

Circuit said that if the district court “concludes that either

of the two results, a reasonable doubt or no reasonable

doubt, is fairly possible, [it] must let the jury decide the

matter.” 81 U.S.App.D.C. at 393, 160 F.2d at 233. This,

coupled with the requirement that we view the evidence in

the light most favorable to the government, Glasser v.

United States, 315 U.S. 60, 80, 62 S.Ct. 457, 86 L.Ed. 680

(1942), leaves us with no doubt that the district court was

correct.

William Stirling was founder, President, Chief Operating

Officer and Director of Homex. His participation in the

creation and management of Homex was constant and vom-

prehensive. Without going through the entire Homex story

again, we need only say that there was ample evidence to

warrant submitting to the jury the question whether Wil-

liam Stirling was an active and knowing participant in the

fraud schemes and conspiracy. See United States v. Amrep

Corp., supra.

The Prosecutor's Summation.

William Stirling argues that he should be granted a new

trial based upon allegedly prejudicial comments made by

the prosecutor during rebuttal summation. He claims that

the prosecutor misstated the testimony of two witnesses and

improperly raised the matter of his use of Homex expense

accounts. The district court went out of its way to compli-

ment all of the attorneys on their summations. Appellant

Stirling found no fault with the rebuttal summation when

it was given. We agree with the district court’s evaluation.

In our view, nothing in the prosecutor’s comments consti-

tutes plain error. Fed.R.Crim.P. 52(b); see United States

v. Canniff, 521 F.2d 565, 572 (2d Cir. 1975), cert. denied,

5la

423 U.S 1059, 96 S.Ct. 796, 46 L.Ed.2d 650 (1976);

United States v. Perez, 426 F.2d 1073, 1081 (2d Cir, 1970),

aff'd, 402 U.S. 146, 91 S.Ct. 1357, 28 L.Ed.2d 686 (1971):

Miscellany.

The Stirlings and Yanowitch make five additional argu-

mente that we now consider briefly. First, they argue that

the district court committed reversible error by telling the

jury that it might have heard perjury during the trial and

that it should consider the interests of the witnesses in

evaluating testimony. They argue that this remark was

directed to their testimony.

Specifically, they claim that the following portions of the

jury instruction constitute error:

Now to go to... the subject of credibility of wit-

nesses. That is a key problem for juries. I think it is

reasonably safe to suggest that you probably heard

more than once perjury from the witness stand in this

ease. Beyond that, of course, you have heard lots of

conflicting statements 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 accurate recreation of the events

upon which you will base an accurate and just decision,

and that is the problem of credibility.

Among interested people who testified you have

heard three of the defendants themselves, and you

would know without my saying that a defendant in a

criminal case has a deep and profound and abiding in-

terest in the outcome of that case. Obviously that is

among the factors you will take into account in ap-

praising the credibility of those witnesses.

In considering whether [cooperating witnesses] may

have sworn falsely in this respect, you may also take

into account that the cases at least where immunity

52a

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 im-

munity would end if the person was deemed to testify

falsely, and you may weigh that with and against the

several othér things that I have mentioned.

The district court prefaced its instruction with the remark

that it had no view on the issues and that its instructions

were not to be used as indicators of its opinion. Because no

objections to the charge were made by the appellants, they

are barred from raising them now. Fed.R.Crim.P. 30;

United States v. Nathan, 536 F.2d 988, 992 (2d Cir.), cert.

denied, 429 U.S. 930, 97 S.Ct. 337, 50 L.Ed.2d 300 (1976).

Even if objection had been made, the instruction was fair

and proper. See United States v. Cheung Kin Ping, 555 F.2d

1069, 1074 (2d Cir. 1977); United Staes v. Floyd, 555 F.2d

45, 47 (2d Cir. 1977); United States v. Lombardi, 550 F.2d

827, 829 (2d Cir. 1977) ; United States v. Tolkow, 532 F.2d

853, 859 (2d Cir. 1976). It was certainly not plain error.

Fed.R.Crim.P. 52(b).

Second, they argue that the charge given by the district

court regarding reliance on experts was erroneous. The

court charged as follows:

If an attorney or an 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 proceed-

ing 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 and not disclosed, the advice that the account-

ant or lawyer then gives can hardly be deemed to con-

stitute a basis for claiming good faith in going ahead

and actir.g on the basis of that uninformed and insuffi-

ciently implemented advice.

A

53a

Appellants claim they were entitled to an instruction that

the failure of Homex attorneys, auditors and labor experts

to ask them sufficiently probing questions releases them

from responsibility for whatever omissions and false state-

ments they made after consulting with those experts. Such

an instruction would stand the defense of good faith on its

head. The appellants’ experts had no obligation to ferret

out proof of wrongdoing. If they were not fully informed,

their lack of information can hardly be used as a defense

by those who chose to keep them uninformed. United States

v. Tolkow, supra, 532 F.2d at 857; United States v. Smith,

523 F.2d 771, 778 (5th Cir. 1975), cert. denied, 429 U.S. 817,

97 S.Ct. 59, 50 L.Ed.2a 76 (1976).

Third, they argue that they were prejudiced by the dis-

trict court’s decision to bar questions put by them to their

witnesses regarding the “normalcy” or “usualness” of cer-

tain Greater Gulf practices. The district court instructed

counsel not to ask witnesses about “the legal consequences

of things,” such as whether activities were “wrong,” “mis-

leading,” “proper,” or “ethical.” For example, in response

to a question from counsel for the appellants, a state court

judge from Mississippi testified that because prominent

people with good reputations were involved in Greater Gulf,

he assumed that it was “normal” for a nonprofit corpora-

tion to be used to implement the project. Such testimony

is not even arguably admissible. It would have been an

abdication of responsibility if the trial judge had not in-

terrupted, as he did, to instruct counsel not to ask such

questions. The “normalcy” of Greater Gulf practices was

irrelevant to the failure to disclose Homex’s relationship

with Greater Gulf. Even if it were relevant, the witness’

speculations, based the reputations of those involved,

would not be proba on that issue. Fed.R.Evid. 404. And

even if it were probative, such evidence should not have

been sought to be introduced through a sitting judge. Its

potential for unfair prejudice to the government quite

plainly outweighs its negligible probative value. Fed.R.

54a

Evid. 403. Finally, although counsel insisted on making un-

necessary “exceptions” to the district court’s instructions,

he completely failed to make an offer of proof as required

by Fed.R.Evid. 103(a)(2). The context in which the rulings

were made does not disclose the substance of any evidence

—aside from the inadmissible “normalcy” evidence that was

admitted in any event—that counsel wished to bring out.

Counsel’s explanation of his purpose was, at best, confus-

ing, and in view of the answer he had just obtained, it was

hardly a sufficient basis upon which to predicate a claim of

error.

Fourth, they argue that the district court erred by exclud-

ing Daniel Wind as a defense witness. They claim Wind

would have disclosed that, on the eve of the Homex bank-

ruptcy, he was negotiating with Homex on behalf of the

State of Israel for a purchase of modules. This testimony

apparently would have been used to respond to evidence

proffered by the prosecution tending to show that there were

at the time of bankruptcy “few if any viable projects in the

works.” We reject appellants’ claims. That negotiations

were taking place at the very close of Homex drama was

irrelevant—negotiations were apparently always taking

place. The point of Homex prosecution was not to deny the

existence of negotiations, even successful ones, but to show

that the investing public had been defrauded. The jury was

carefully reminded of the fact that Homex had indeed made

genuine sales.

Finally, they argue that the district court erred in ex-

cluding one Peter Turzik, a former UBCJA official, as a

surrebuttal witness. They claim that Turzik would have

testified that a prosecution rebuttal witness, Theodore

Kheel, had lied when he denied having arranged for the

purchase of Homex stock by UBCJA officials. Appellants

had a reasonable chance to challenge Kheel’s testimony re-

garding Turzik by confronting him with seemingly contra-

dictory grand jury testimony. In addition, the district court

55a

at the same time allowed Joseph Kirkland, one of the labor

officials who purchased Homex stock, to testify in surre-

buttal to much the same effect that Turzik would have.

Further evidence would have been cumulative. We can

hardly say that the district court abused its discretion in

this regard. See Fed.R.Evid. 403. Nor can we say that the

district court’s decision operated to appellants’ substantial

prejudice.

V. ConcLusion

The motion to dismiss the appeal and remand to the dis-

trict court is denied. See note 15 supra. Judgments of con-

viction are affirmed.

Lumsarb, Circuit Judge (concurring) :

I concur in the affirmance of all the convictions, substan-

tially for the reasons stated in Judge Meskill’s opinion. In

addition, I wish to state my views regarding Schulz’s com-

plaint about the government’s use at trial of his grand jury

testimony.

Schulz seeks reversal of his conviction on the ground that

it was error for the district court to submit into evidence

testimony Schulz had given to the grand jury prior to his

indictment. This testimony was given pursuant to an agree-

ment that Schulz, acting through his attorney, had entered

into with the prosecutor, under the terms of which Schulz

was to plead guilty and testify for the government both

before the grand jury and at trial. In addition, the agree-

ment specifically provided, as Judge Frankel found, that if

Schulz failed to perform as promised, then any informa-

tion he had given could be used against him.

In denying Schulz’s motion at trial to suppress his grand

jury testimony, Judge Frankel noted t.at Schulz had testi-

fied, “vountarily, for his own good, at a time when he had

agreed to plead guilty to one count.” Judge Frankel con-

cluded that under these circumstances. Fed.R.Crim.P. 11

56a

(e)(6) did not require suppression and that the government

had never agreed to suppression under any circumstances.

The record amply supports these findings.

Rule 11(e)(6) does not apply here. The written agree-

ment entered into by the government and Schulz’s attorney

prior to Schulz’s grand jury appearance plainly anticipated

that, should Schulz renege—as he did by going back on his

promise to plead guilty—then his testimony could be used at

his trial. The purpose of Rule 11(e)(6) is to encourage plea

negotiations leading to the prompt disposition of criminal

charges by means other than trial. See United States v.

Smith, 525 F.2d 1017, 1020 (10th Cir. 1975) ; 2 J. Weinstein

& M. Berger, Weinstein’s Evidence { 410[03]} (1976). Thus,

the rule has no application where a plea agreement has al-

ready been made which specifically addresses the question

of subsequent use of information given pursuant to the

agreement.

From the standpoint of the government, the obvious pur-

pose of such an agreement is to enable the prosecutor to

pursue his investigation and preparation for the presenta-

tion of evidence in such a way that the time and expense

spent in negotiations and discussions will not be fruitless.

Such safeguarding of government resources is all the more

necessary because the government must comply with the

increasingly stringent time schedule mandated by the

Speedy Trial Act of 1974, 18 U.S.C. § 3161 to § 3174.

Of course nothing turns on whether Schulz’s statements

were made before a grand jury. No matter where or how

made, any statements made by Schulz pursuant to the agree-

ment could have been used by the government at his trial.

For these reasons, the district court did not err in admit-

ting Schulz’s grand jury testimony.

lb

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

InpicrmMent 76 Cr. 685

Unitep Stares or AMERICA

Vv.

Davip Stiruine, Jr., Wiriuiam G. Srinuine, Harotp M.

Yanowircnu, Eowin J. Scuunz, and Rupeu L. Pansies,

Defendants.

Count One

The Grand Jury charges:

INTRODUCTION

1. At all relevant times, the Stirling Homex ( orpora-

tion (“Homex”) was incorporated under the laws of the

State of Delaware and maintained offices in the Southern

District of New York and elsewhere. Homex was principally

engaged in the business of manufacturing and installing

factory-built modular housing.

2. On or about February 19, 1970, Homex registered

1,175,000 shares of its common stock for sale with the Se-

curities and Exchange Commission (“SEC”), an agency of

the United States, and sold that stock to members of the

public for approximately $19,000,000; on or about July 29,

1971, Homex registered 500,000 shares of its preferred

stock for sale with the SEC and sold that stock to members

of the public for approximately $20,000,000; thereafter

there existed in New York, New York, and elsewhere, a

public over-the-counter market for Homex common and

preferred stock. Less than a year later, on July 12, 1972,

Homex was bankrupt.

2b

3. At all relevant times, defendant Davm Srtmuine,

Jr., was the chief executive officer of Homex, chairman of

its board of directors and the owner of a controlling block

of approximately 2,000,000 shares of Homex common stock.

On February 19, 1970, he sold 110,100 shares of his Homex

common stock for approximately $1,600,000.

4. At all relevant times, defendant Witiiam G. Srir-

LING was the president of Homex, a member of its board of

directors and the owner of a controlling block of approxi-

mately 2,000,000 shares of Homex common stock. On Febru-

ary 19, 1970, he sold 112,000 shares of his Homex common

stock for approximately $1,700,000.

5. Beginning in or about 1968 and at all relevant times

thereafter, defendant Epwin J. Scuuiz was an employee

of Homex, its chief accounting officer and the owner of

3,200 shares of ' omex common stock.

6. Beginning in or about 1969, and at all relevant

times thereafter, defendant Harotp M. Yanowrrcn, an at-

torney, was an employee of Homex, a member of its board

of directors, its chief legal officer and the owner of approxi-

mately 160,000 shares of Homex common stock.

7. Beginning in or about 1971, and at all relevant times

thereafter, defendant Ruse. L. Pxuwies, an attorney, was

an employee of Homex with an office in Jackson, Mississippi

and the owner of an option to purchase 40,000 shares of

Homex common stock.

l. Fraup ScuHeme

8. From on or about the lst day of January, 1968, and

continuously thereafter up to and including the date of the

filing of this Indictment, in the Southern District of New

York and elsewhere, Davin Sririine, Jr., WiiuiaM G. Srir-

LinG, Haroty M. Yanowrrcn, Epwin J. Scuutz and Rupe.

L. Puiuwips, the defendants, and others to the Grand Jury

known and unknown, did employ a device, scheme, and arti-

3b

fice to defraud Homex’s shareholders, officers, directors and

others including its auditors, in connection with the offer

and sale of securities, to wit, common and preferred stock

of Stirling Homex Corporation.

Il. THe Ossect or tHe ScuemMe

9. It was the object of said scheme deliberately to de-

ceive members of the public investing in Homex securities

by fraudulently inflating reported earnings and simultane-

ously falsifying and concealing materially adverse informa-

tion required to have been fairly and truly disclosed.

It]. Tae Means By Wauica tHE Fravp ScHEemMeE

Was Carriep Out

10. It was a part of said scheme to defraud that in

1969, the defendants Davin Sriruina, Jr., Wittiam G. Srir-

Linc, Harotp M. Yanowitcu and Epwin J. Scuutz falsely

inflated revenues and profits by arranging two “sales” of

land at artificially high prices that were induced by and

based upon side promises and guarantees given to the

buyers. In connection therewith, the defendants signed and

filed registration statements with the SEC which fraudu-

lently concealed the following essential facts, among others,

about these “sales” which accounted for 18% of net income

for the fiseal year ending July 31, 1969: (a) both “sales”

involved side promises and agreements given to the buyers

including limitations on and guarantees against losses; (b)

both “sales” required only minimal down payments with

the remainder of the purchase payment being largely post-

poned for several years; and (c) both “sales” were to fi-

nancially weak shell corporations without sufficient means

to meet the payment obligations.

11. It was further a part of said scheme to defraud

that during 1970 and 1971 the defendants Davin Sriruine,

Jr., Wituiam G. Stirtine, Harotp M. Yanowrrcn, and Ep-

win J. Scuutz, would prepare, file with the SEC, and dis-

4b

tribute to shareholders annual and interim reports which

fraudulently omitted to disclose, among other things: (a)

that such “sales” were not being consumated; (b) that in

one instance, persons affiliated with or controlled by Homex

were substituted as owners of the shell corporation and

were secretly guaranteed against Josses and indirectly pro-

vided with Ilomex funds to make periodic payments toward

the unpaid purchase obligation; and (c) that the payment

obligations arising from these “sales” were in fact un-

collectible.

12. It was further a part of said scheme to defraud

that in 1971 the defendant, Davm Sriruine, Jr., WiiamM

G. Srimtiye, Harotp M. Yanowitcn, and Epwin J. Scuvutz

falsely inflated revenues and profits by arranging a third

“sale” of land at an artificially high price that was induced

by and based upon secret promises and guarantees given

to the buyers. In connection therewith, the defendants pre-

pared and filed registration statements and quarterly re-

ports with the SEC which fraudulent concealed the follow-

ing essential facts, among others, about this “sale” which

accounted for nearly half of Homex’s earnings for the first

half of the fiscal year ending July 31, 1971: (a) that such

“sale” involved side promises and agreements given to the

buyers including guaraniees against losses; (b) that such

“sale” involved only a minimal downpayment, borrowed

through the use of Homex collateral, with the remainder of

the purchase payment being postponed several years; (c)

that such “sale” was at a price which had been artificially

raised; and (d) that such “sale” was to a financially weak

shell corporation, without sufficient means to meet the pay-

ment obligations, and which was owned by individuals asso-

ciated with a business which, in turn, had derived a material

portion of its past revenues from dealings with Homex.

13. It was further a part of said scheme to defraud

that in or about July 1971, defendants Daviw Srinuine, Jr.,

WituiaM G. Srirtinc, Harotp M. Yanowrtcu and Epwin

J. Scnuuz prepared, signed and filed with the SEC registra-

Sb

tion statements and other written representations which

falsely and fraudulently stated that Homex recognized

income from sales of modules when manufactured modules

were assigned to specific contracts. That representation was

false because, as the defendants well know, such assign-

ments had been repeatedly cancelled or reversed with the

modules then being reassigned from project to project until,

for example, by February 28, 1971, a total of approximately

$13,500,000 of such sales had been written on and off and

back onto Homex’s books of account. This history of mass

reassignments was deliberately withheld from both Homex’s

auditors and the SEC.

14. It was further a part of said scheme to defraud

that during 1971 defendants Davin Sriruine, Jr., WILLIAM

G. Srimume, Harotp M. Yanowircu, Enwin J. Scuvutrz,

and Ruset L. Putups fraudulently and falsely inflated

Homex’s sales and earnings by arranging for a purported

arms-length “sale” of modules for $15,000,000 which was

induced by and based upon a forged commitment letter and

by secret side promises and agreements given to the

buyers. In connection therewith, the defendants prepared

and filed registration statements and other reports with the

SEC which fraudulently concealed the following essential

facts, among others, about this “sale” which accounted for

more than half of Homex’s earnings for the nine-months

ended April 30, 1971, and all of its earnings for the six

months ended January 31, 1971: (1) that such “sale” was

based upon a back dated contract not entered into until on

or about February 24, 1971, well after the relevant account-

ing period had ended; (b) that, while said “sales” contract

was expressly conditioned on Homex’s manufacturing the

modules in Mississippi and Homex’s obtaining federal

funding, in point of fact, Homex had not satisfied either

condition; (c) that the purchaser was a financially weak

sheil corporation, without sufficient means to meet the pay-

ment obligations, which Homex had caused to be formed in

the first place; and (d) that, during March, 1971, the de-

6b

fendant Harotp M. Yanowircn, had employed the forged

commitment letter to defraud Homex’s auditors into certi-

fying its financial statements.

15. It was further a part of said scheme to defraud

that defendants Davin Stiruina., Jr., Witwiam G. Stir.ine,

Harotp M. Yanowircu, Epwin J. Scuuuz, and Ruseu L.

Puiturs fraudulently and falsely inflated and overstated

Homex’s publicly reported assets, revenues and earnings

while also fraudulently understating its liabilities, reserves

and expenses. In connection therewith, the defendants de-

liberately falsified and concealed from Homex’s auditors

material information as to adjustments in its accounts in-

cluding those relating to: (a) installation division revenues

and costs for the period ending July 31, 1970; (b) U.S.

Shelter revenues for the period ending February 28, 1971;

and (c) deferred, general and administrative expenses

for the period ending February 28, 1971.

16. It was further a part of said scheme to defraud

that on or about July 29, 1971, defendants Davip Stiauine,

Jr., WituiaM G. Stiriine, and Harotp M. Yanowitcu pre-

pared and filed with the SEC registration statements and

other reports which described Homex’s several relations

with the United Brotherhood of Carpenters and Joiners of

America and its locals. Those statements were materially

false and misleading, because as the defendants well knew,

but failed to disclose, seven members and officials of the

United Brotherhood of Carpenters and Joiners of America

had been paid off by having approximately $240,000 worth

of Homex common stock purchased for them at approxi-

mately $76,800 less than the fair market value, and after-

wards, when the fair market price had fallen, approximately

$64,000 worth of Homex common stock sold for them at ap-

proximately $136,000 above the market price.

7b

IV. Strarurory ALLEGATIONS

17. From on or about the ist day of January 1968, up

to and including the date of the filing of this Indictment, in

the Southern District of New York and elsewhere, the de-

fendants Davmw Sriruine, Jr., Jr., Winuiam G. Sriruine,

Harotp M. Yanowitcn, Enowin J. Scuuuz, and Ruse L.

Puiuuires, and others to the Grand Jury known and un-

known, unlawfully, wilfully and knowingly, by the use of

means and instruments of transportation and communica-

tion in interstate commerce and by the use of the mails,

directly and indirectly, in the offer and sale of securities,

to wit, the common and preferred stock of Stirling Homex

Corporation: (a) did employ devices, schemes and artifices

to defraud; (b) did obtain money and property by means

of untrue statements of material facts and omissions to

state material facts necessary in order to make the state-

ments made, in the light of the circumstances under which

they were made, not misleading; and (c) did engage in

transactions, practices and courses of business which op-

erated and would operate as a fraud and deceit upon the

purchasers of Stirliug i!0mex Corporation securities.

(Title 15, United States Code, Sections 77q(a) and 77x

and Title 18, United States Code, Section 2.)

Count Two

The Grand Jury further charges:

1. On or about July 29, 1971, in the Southern District

of New York, defendants Davin Stiruine, Jr., WriiiaM G.

Stirtinc, Harotp M. Yanowitcu, Epwin J. Scuvuiz and

Ruse. L. Pius, unlawfully, wilfully and knowingly made

and caused to be made untrue statements of materiai facts

in a registration statement and omitted to state-materia!

facts required to be stated therein and necessary in order

to make the statements therein not misleading.

8b

2. Said registration statement as amended covered

500,000 shares of Homex preferred stock and was required

to be filed and was filed with the SEC pursuant to Title 15,

United States Code, Sections 77e through 77h and 17 C.F.R.

§§ 230.400 to 230.499 and 239.11 promulgated by the SEC

thereunder.

3. Each of the allegations in Count One of this Indict-

ment is incorporated and realleged in this Count as if fully

set forth herein.

(Title 15, United States Code, Section 77x and Title

18, United States Code, Section 2.).

Counts Three Through Eight

The Grand Jury further charges:

1. From on or about January 1, 1968, up to and in-

cluding the date of the filing of this Indictment, in the

Southern District of New York and elsewhere, Davin Srir-

Ling, JR., Witwiam G. Srirtine, Harotp M. Yanowiren,

Epwin J. Scnunz, and Ruse. L. Pures, the defendants,

and others to the Grand Jury known and unknown, unlaw-

fully, wilfully and knowingly did devise and intend to devise

a scheme and artifice to defraud the purchasers of Stirling

Homex Corporation securities and other persons, and to ob-

tain money and property by means of false and fraudulent

pretenses, representations and promises and, for the pur-

pose of executing said scheme and artifice to defraud and

attempting so to do, did place and cause to be placed in

post offices and authorized depositories for mail matter,

did take and receive therefrom, and did cause to be de-

livered by mail according to the directions thereon certain

mail matter to be sent and delivered by the Postal Ser-

vice as hereinafter set forth.

2. Each of the allegations contained in Count One of

this indictment is repeated and realleged as though fully

9b

set forth herein as constituting and describing the means by

which the defendants committed the offenses charged in

Counts Three through Eight of this Indictment.

3. On or about the dates hereinafter set forth in Counts

Three through Eight of this Indictment, in the Southern

District of New York, said defendants unlawfully, wilfully

and knowingly did place and caused to be placed in post

offices and authorized depositories for mail and did cause to

be delivered by mail according to the directions thereon,

the matter hereinafter set forth:

Count Date Matter

3 8/2/71 Prospectus

+ 8/2/71 Prospectus

5 10/8/71 1971 Annual

Report

6 10/8/71 1971 Annual

Report

~]

12/6/71 Quarterly

Report to

Shareholders

Addressee

Peter R. Cottrell &

Mary Lee Cottrell,

JT TEN

115 Clinton Street

Mount Vernon, N.Y.

10552

Ronald J. Benice &

Doris P. Benice

25 Stewart Place

Mt. Kisco, N.Y.

Joseph Szymanski

200 West 18th St.

New York, N.Y.

Peter R. Cottrell &

Mary Lee Cottrell,

JT TEN

115 Clinton Street

Mount Vernon, N.Y.

10552

Joseph Szymanski

200 West 18th Street

New York, N.Y.

10b

Count Date = Matter Addressee

8 12/6/71 Quarterly Nobumitsu Fukui

Report to 53 Greene Street

Shareholders New York, N.Y.

10013

(Title 18, United States Code, Sections 1341 and 2.)

Count Nine

The Grand Jury further charges:

1. From on or about the first day of January 1968,

and continuously thereafter up to and including the date of

the filing of this Indictment, in the Southern District of

New York and elsewhere, Davin Srirnuine, Jr., Wituiam G.

Sriruinc, Harotp M. Yanow:tcu, Epwin J. Scuuiz and

Ruse L. Pxuruuies, the defendants, and others to the Grand

Jury both known and unknown, unlawfully, wilfully and

knowingly did combine, conspire, confederate and agree to-

gether and with each other to defraud the United States

and the SEC and to violate Sections 1001 and 1341 of Title

18 and Sections 77q(a), 77x and 78ff of Title 15, United

States Code.

2. It was a part of said conspiracy that the defend-

ants unlawfully, knowingly and wilfully, in matters within

the jurisdiction of departments and ayencies of the United

States, would and did falsify, concea! and cover up by trick,

scheme and device material facts, and make false, fictitious

and fraudulent statements and representations, and make

and use false writings and documents knowing the same to

contain false, fictitious and fraudulent statements and en-

tries in violation of Section 1001 of Title 18, United States

Code.

3. It was a further part of said conspiracy that the

defendants unlawfully, wilfully and knowingly, would and

did devise and intend to devise a scheme and artifice to de-

traud the purchasers of Stirling Homex Corporation securi-

llb

ties and other persons, and to obtain money and property

by means of false and fraudulent pretenses, representations

and promises and, for the purpose of executing said scheme

and artifice to defraud and attempting so to do, would and

did place and cause to be placed in post offices and author-

ized depositories for mail matter, take and receive there-

from, and cause to be delivered by mail according to the

directions thereon certain mail matter to be sent and de-

livered by the Postal Service in violation of Section 1341

of Title 18, United States Code.

4. It was further a part of said conspiracy that the

defendants unlawfully, wilfully and knowingly, by use of

means and instruments of transportation and communica-

tion in interstate commerce and by the use of the mails,

directly and indirectly, in the offer and sale of securities,

to wit, the common and preferred stock of Stirling Homex

Corporation: (a) did employ devices, schemes and artifices

to defraud; (b) did obtain money and property by means of

untrue statements of material facts and omissions to state

material facts necessary in order to make the statements

made, in the light of the circumstances under which they

were made, not misleading; and (c) did engage in trans-

actions, practices and courses of business which operated

and would operate as a fraud and deceit upon the purchasers

of Stirling Homex Corporation securities in violation of

Section 77q(a) of Title 15, United States Code.

5. It was further a part of said conspiracy that the

defendants unlawfully, wilfully and knowingly would and

did make untrue statements of material facts in registra-

tion statements required to be filed with the SEC and

omitted to state material facts required to be stated therein

and necessary in order to make the statements therein not

misleading in violation of Section 77x of Title 15, United

States Code.

6. It was further a part of said conspiracy that the

defendants unlawfully, wilfully and knowingly would and

12b

did make false and misleading statements with respect to

material facts in annua! and quarterly reports required to

be filed with the SEC in violation of Section 78ff of Title

15, United States Code.

Overt Acts

7. Each of the allegations contained in Count One of

this Indictment is repeated and realleged as though fully

set forth herein as constituting and describing some of the

overt acts by which the defendants committed the offense

charged in Count Nine of this indictment. In addition, in

furtherance of the said conspiracy and to effect the objects

thereof, the defendants did commit the following addi-

tional overt acts, among others, in the Southern District

of New York and elsewhere:

(1) On or about February 19, 1971, June 30, 1971 and

July 6, 1971, defendant Epwin J. Scuuuz attended meetings

in New York, New York.

(2) On or about March 1, 1971, defendant Haroxp M.

Yanowirca wired copies of forged and backdated documents

to Homex’s New York, New York offices.

(3) On or about August 5, 1971, defendant Harotp M.

YanowitcH attended a closing in New York, New York

where the $19,000,000 from the sale of the.preferred stock

was paid.

(4) On or about December 6, 1971, Davim Sriruine, Jr.,

and Wituiam G. Sriauine signed and caused to be delivered

in the Southern District of New York a quarterly report to

shareholders.

(Title 18, United States Code, Section 371.)

F’oREMAN Rosert B. Fisxg, Jr.

United States Attorney

le

APPENDIX C

UNITED STATES COURT OF APPEALS

SECOND CIRCUIT

(Filed April 13, 1978)

At a Stated Term of the United States Court of Appeals,

in and for the Second Circuit, held at the United States

Court House, in the City of New York, on the thirteenth

day of April, one thousand nine hundred and seventy-eight.

Present:

Hon. J. Epwarp Lumparp

Hon. James L. Oakes

How. Tuomas J. Meskiui

Circuit Judges.

Unitrep States or America, Plaintiff-Appellee,

v.

Davin Stravine Jr., Wieuiam G. Stirume, Harotp M.

YANOWITCH, Epwin J. Scuuuz, Ruse. L. Pumps,

Defendants-A ppellants.

77-1140, 77-1141, 77-1144, 77-1177, 77-1178

A petition for a rehearing having been filed herein by

counsel for the defendant-appellant, Rubel L. Phillips,

Upon consideration thereof, it is

Ordered that said petition be and hereby is denied.

/s/ A. Daniet Fusaro

A. Daniel Fusaro

Clerk