Petition — Friedman v. United States

Supreme Court, Ua

LED

; IN THE mAR 27 1979

Supreme Court of the Wuited Mitneseo0sn, we, cuern

Octroser Term, 1978

No 78-1483

FREDERICK M, FRIEDMAN,

Petitioner,

- —agamst—

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SECOND CIRCUIT

Benver & FRANKEL

Attorneys for Petitioners

225 Broadway

New York, New York 10007

(212) 227-6000

Louis BENDER

Sanpor FRANKEL

Of Counsel

Adams Press Corp., 130 Cedar Street, N. ¥. 10006—(212) 233-1050

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TABLE OF CONTENTS

Oprnions BELOW

JURISDICTION

QUESTIONS PRESENTED

StatTuToRY AND REGULATORY PROVISIONS

Prior PROCEEDINGS IN THE Courts BELOW ................------

STATEMENT OF Facts

Reasons FoR GRANTING THE WRIT:

1. The Court of Appeals’ decision conflicts with

the decision of the United States Court of Ap-

peals for the First Circuit in United States v.

Rodman, 519 F.2d 1058 (1st Cir. 1975) on the

issue of whether a District Court may, in the

proper exercise of its supervisory powers, dis-

miss an indictment where the indictment re-

sults from misconduct perpetrated by SEC at-

torneys upon the target of an SEC investiga-

tion

2. The Court of Appeals’ decision in forbidding

a District Court to exercise its supervisory

powers to remedy a fraud perpetrated by a

governmental agency upon a citizen has de-

cided an important question of federal law

vital to the administration of the laws by the

SEC (and other governmental agencies) and

to the administration of criminal justice, a

question which has not yet been but should be

decided by this Court ee

PAGE

Oo -» F WH WH EF

18

ii TABLE OF CONTENTS

PAGE

3. The Court of Appeals, in upholding the valid-

ity of the SEC’s referral of this case to the

United States Attorney’s Office in violation of

the SEC’s published regulations governing

such referrals, has contravened controlling de-

|. SRA ea Ce 21

4. The Court of Appeals, in “correcting” its opin-

ion, ignored controlling decisions of this Court

and conflicted with decisions of other federal

Cireuit Courts of Appeals which have held

that a federal appellate court does not have

the power to ignore and override critical facts

which the parties have stipulated to and do not

even on appeal dispute ...... 26

5. The Court of Appeals’ decision reversing the

District Court’s dismissal of Counts 1-3 on the

alternative grounds overlooks controlling de-

cisions of this Court, decisions of other courts,

and the legislative purposes of the statute in-

volved 31

6. In reversing the District Court’s dismissal of

Count 4 (the proxy count), the Court of Ap-

peals departed from this Court’s opinions in

J. I. Case Co. v. Borak, 377 U.S. 426 (1964)

and Mills v. Electric Auto-Light Co., 396 U.S.

375 (1970) 36

ConcLusIon 40

Cases Cited

Aceardi v. Shaughnessy, 347 U.S. 260 (1954) 000... 21

Beisenbach v. Guenther, 588 F.2d 400 (3d Cir. 1978) 34

TABLE OF CONTENTS ili

PAGE

Adamo Wrecking Co. yv. United States, —— U.S.

scans, EG TAIRA CED, ciinensehcornsiveccctesiachernniternnoncincnnine 40

Birnbaum v. Newport Steel, 193 F.2d 461 (2d Cir.

1952) 35

Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

723 (1975) ; * 33

Dandridge v. Williams, 397 U.S. 471 (1970) ................ 6

Doe, Matter of, 410 F.Supp. 1163 (H.D. Mich. 1976) 17

Elkins v. United States, 364 U.S. 206 (1960) .............. 18

Epic Industries v. Brothers, 395 F.Supp. 773 ee

Okla. 1975) 37, 38

Financial Programs, Inc. v. Falcon Financial Serv-

ices, 371 F.Supp. 770 (D.C. Ore. 1974) .................. 35

Gambill v. United States, 276 F.2d 180 (6th Cir.

1960) _

Goldberg v. Meridor, 567 F.2d 209 (2 Cir. 1977) ...... 34

Hackfeld & Co. v. United States, 197 U.S. 442, 25

S.Ct. 456 (1905) 30

Halle & Stieglitz Filor, ete. v. Empress Intern, 442 F.

Supp. 217 (D.Del. 1977) ..38, 39

J. I. Case Co. v. Borak, 377 U.S. 426 (1964) ........ 36, 37, 39

Joyce v. Joyce Beverages, -Inc., 571 F.2d 703 (2d

Cir. 1978) 35

Ketchum v. Green, 557 F.2d 1022 (8d Cir. 1977) ...... 33

Mills v. Electric Auto-Light Co. 396 U.S. 375

(1970) idabaeiind 37

Oldfield v. Alston, 77 F.R.D. 735 (N.D.Ga. 1978) ....... 3

iv TABLE OF CONTENTS

PAGE

Osborne v. United States, 351 F.2d 111 (8th Cir.

1965) 30

tapaport v. Schneider, 29 N.Y.2d 396, 328 N.Y.Supp.

2d 431 (1972) 34

Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97

S.Ct. 1292 (1977) 33

Santobello v. New York, 404 U.S. 257 (1971) 200. 18

Schlemmer v. Provident Life & Ace. Ins. Co., 349 :

F.2d 682 (9th Cir. 1965) 30

S.E.C. v. Guild Films, 279 F.2d 485 (2d Cir. 1960) 35

Service v. Dulles, 354 U.S. 363 (1957) 21

Superintendent of Insurance v. Bankers Life & Cas.

Co., 404 U.S. 6 (1971) - 33

Tennaco Securities Litigation, In Re, 449 F.Supp. 528

(S.D.Tex. 1978) 39

TSC Industries v. Northway, 426 U.S. 438 (1976) ...... 3, 31,

32, 37

United States v. Campos-seserrano, 404 U.S. 293

(1971) 39

United States v. Carter, 454 F.2d 426 (4th Cir.

1972), cert. denied 417 U.S. 933 (1974) 18

United States v. Giordano, 416 U.S. 505 (1974) ....... 23

United States v. Minnesota Min. & Mfg. Co., 551 F.2d

1006 (8th Cir. 1977) 17,18

United States v. Naftalin, 579 Fed. 2d 444 (Sth Cir.

1978) , 35

United States v. Nixon, 418 U.S. 683 (1974) 20. 21

TABLE OF CONTENTS Vv

PAGE

United States v. Paiva, 294 F.Supp. 742 (D.C. D.C.

REE rey Sse SEAL rea ern eEe ON ON 18

United States v. Phillips Petroleum Co., 435 F.Supp.

622 (N.D. Okla. 1977) 18

United States v. Rodman, 519 F.2d 1058 (1st Cir.

I ei cciklisincncecclnniati sid 1, 7, 13-15, 17, 18, 20, 21

United States v. Russell, 411 U.S. 423 (1973) .......-... 21

United States v. Star Const. Co., Inc., 186 F.2d 666

(10th Cir. 1951) : 30

Utah v. United States, 394 U.S. 89 (1969) ...................- 30

Verkouteren v. District of Columbia, 346 F.2d 842

(D.C. Cir. 1965) .. ic 30

Vitarelli v. Seaton, 359 U.S. 535 acs rieeeisadstiencal 21, 22

Yellin v. United States, 374 U.S. 109 (1963) -.......... 22

United States Constitution Cited

Fifth Amendment ... = 3

Statutes Cited

Securities Exchange Act of 1935:

See. 17(a) Be AERC 3, 31-35

Securities Exchange Act of 1934:

See. 10(b) weedy OO

See. 10(b)-5 : ; 33, 34

See. 14(a) 3, 32, 37-39

vi TABLE OF CONTENTS

PAGE

18 U.S.C.:

i. i kU a. 8

28 U.S.C.:

PE ec ee ee! ce 2

Rule 14a-9

Supreme Court of the United States

October Term, 1978

No.

>.

—

FREDERICK M, FRIEDMAN,

Petitioner,

—against—

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SECOND CIRCUIT

Petitioner Frederick M. Friedman respectfully requests

that a writ of certiorari issue to review the judgment of

the United States Court of Appeals for the Second Circuit

entered on September 14, 1978.

Opinions Below

Copies of the opinion originally rendered by the Court

of Appeals (including a concurring opinion of Judge Mans-

field), not get officially reported but unofficially reported at

CCH Fed. See. Rep. Par. 96,552; the Court of Appeals’

“corrected” opinion; the judgment of the Court of Appeals;

the Court of Appeals’ decision on petitioner’s petition for

rehearing and suggestion for rehearing in bane; and the

memorandum opinion of the United States District Court

for the Southern District of New York (not yet officially re-

ported but unofficially reported at CCH Fed. See. Rep.

| 96,074), are printed in the Appendix being submitted

simultaneously by all petitioners in this matter.

Jurisdiction

The judgment of the Court of Appeals, entered Sep-

tember 14, 1978, was stayed by petitioner’s timely filing of

a petition for rehearing with suggestion for rehearing in

bane. This petition was denied by Order of the Court

of Appeals entered February 14, 1979, except that the

Court of Appeals did, in response to the petition, correct

certain “errors” in its original opinion (discussed infra,

pp. 26-30). By Orders dated February 26, 1979 and

March 7, 1979, the Court of Appeals stayed issuance of its

mandate until March 26, 1979 in order to permit the filing

by that date of this petition for a writ of certiorari. This

Court, by Order of the Hon. Thurgood Marshall, extended

until March 26, 1979 the date for filing of this petition.

The jurisdiction of this Court is invoked under 28 U.S.C.

§ 1254(1).

Questions Presented

1. Whether the Court of Appeals correctly held, in

direct conflict with the United States Court of Appeals

for the First Circuit in United States v. Rodman, 519 F.2d

1058 (1st Cir. 1975), that a District Court is without any

supervisory power to dismiss an indictment where the

indictment results from undisputed fraudulent misconduct

perpetrated by SEC attorneys upon the target of an in-

vestigation and where no remedy for that fraud other than

dismissal of the indictment is possible.

2. Whether the due process clause of the Fifth Amend-

ment to the United States Constitution, which has been

held by this Court to require all governmental agencies

to abide by their own published regulations, requires dis-

missal of an indictment where the indictment results from

the SEC’s criminal reference of a matter in clear-cut vio-

lation of its own published regulations.

3. Whether a Court of Appeals may reject a critical

stipulation of fact agreed to by all parties in both the

District Court and the Court of Appeals, where neither

party requests to be relieved of that stipulation and where

no evidence suggests any inaccuracy in that stipulation.

4. Whether the Court of Appeals was correct in holding

that under this Court’s decision in TSC Industries v.

Northway, 426 U.S. 488 (1976), counts of an indictment

(Counts 1-3) charged a federal offense under Section 17a

of the Securities Act of 1933 and Section 1001 of Title 18,

U.S.C., despite the absence of any connection between the

alleged corporate misconduct and the offer and sale of

the TDA securities and despite the charge in the indict-

ment that the shareholders alleged to have been defrauded

were sellers and not purchasers of the securities.

5. Whether the.Court of Appeals was correct in holding

that a count of the indictment (Count 4) charging a proxy

violation under Section 14a of the Securities Exchange Act

of 1984 by the omission of alleged corporate misconduct

charged a federal offense despite the absence of any “trans-

action causation” between the alleged misconduct and the

purposes for which the proxy was solicited.

4

Statutory and Regulatory Provisions

All relevant statutes and administrative regulations are

set forth in the appendix annexed to co-petitioner Fields’

petition.

Prior Proceedings in the Courts Below

By indictment filed November 8, 1976 petitioner and

others were charged with various violations of the federal

securities laws. Petitioner (and his co-defendants) filed

pre-trial motions seeking dismissal of the indictment and

alternatively dismissal of certain portions of the indict-

ment. Among the grounds raised in support of the mo-

tion to dismiss was petitioner’s contention that events

that occurred during the course of an_ investiga-

tion by the Securities and Exchange Commission (here-

inafter “SEC”) into the matters that formed the basis

of the indictment warranted dismissal. The District Court

held an eleven-day pre-trial hearing on this motion, after

which it granted petitioner’s motion, based on the fraudu-

lent misconduct of the SEC’s attorneys. Portions of the

indictment against petitioner were also dismissed on al-

ternative grounds"*.

The main ground relied upon by the District Court in

dismissing the indictment against petitioner was that SEC

attorneys, in settlement negotiations with counsel for peti-

* The effect of the District Court’s decision was dismissal of the

indictment in its entirety against petitioner and two of his co-defend-

ants, while leaving intact three counts against co-defendant Fields

carrying maximum sentences of five years’ imprisonment on each

count plus fines of $5,000. and $10,000., and exposin: co-defendant

Berge to trial on one count carrying a maximum sentence of five

years’ imprisonment plus a $10,000. fine.

5

tioner and his co-defendants arising out of an investiga-

tion concerning the matters that gave rise to this indict-

ment, “behaved improperly” and engaged in a “deplor-

able” course of conduct of “misleading counsel” and be-

cause “the SEC representatives in question engaged upon

a deliberate course of concealment, first of their inten-

tion to make a criminal reference, and then of the fact

that the reference had been made, in order to obtain civil

consent judgments imposing substantial sanctions upon the

defendants”; the District Court further observed, “It is

« sad irony that representatives of a governmental agency

dedicated to the prevention of fraudulent and misleading

statements fell into this particular pattern of behavior.”

(34a*-36a). The Government moved for rehearing and

reconsideration, and the District Court, while granting

rehearing and reconsideration, adhered to its original

"decision (75a et seq.).

The Government appealed. The United States Court

of Appeals for the Second Circuit reversed, rejecting all

grounds which the District Court had relied upon in dis-

iaissing the indictment (79a et seq‘. Cireuit Judge Mans-

field, in a coneurring opinion, recognized that the con-

duet of the SEC attorneys was “deceitful and duplicitous”

and violated an “ethical obligation” owed to petitioner

and his co-defendants (104a-105a). In addition, the Court

of Appeals sustained the District Court’s rejection of one

ground which petitioner had urged for dismissal in the

District Court, i.e., that the SEC’s criminal reference of

this case to the United States Attorney’s Office in viola-

* The letter “a” preceded by a number designates page reference

to the Appendix being filed simultaneously by all petitioners in this

matter.

tion of the SEC’s published regulations governing crim-

inal references required dismissal of the indictment.*

Petitioner filed a petition for rehearing and suggestion

for rehearing in bane. In response thereto, the SKC filed

a memorandum amicus curiae which advised the Circuit

Court, as the United States Attorney’s Office had earlier

done by letter immediately after the Cireuit Court had

rendered its opinion, that the criminal reference procedure

as described and relied upon in the Court of Appeals’

decision misinterpreted the record and was in other re-

spects materially wrong. The SEC suggested a series

of substantive revisions “of language” in the Court of

Appeals’ opinion. The Court of Appeals, while denying

the petition for rehearing, made the corrections urged by

the SEC in haec verba (108a et seq.).

Statement of Facts

The District Court, after conducting a lengthy eviden-

tiary hearing, made extensive findings of fact (set forth

at 7a-25a). The Government on appeal did not seek to

set aside any of those findings of fact. The Court of

Appeals purported to “assume, without deciding, the cor-

rectness of the district court’s findings.”** As the Dis-.

* Petitioner raised this ground in the Circuit Court pursuant to

the rule that “the prevailing party may, of course, assert in a review-

ing court any ground in support of his judgment, whether or not

that ground was relied upon or even considered by the trial court.”

Dandridge v. Williams, 397 U.S. 471, 475, n.6 (1970).

** 85a, n. 5. In determining the petition for rehearing, however,

the Court of Appeals implicitly rejected one crucia! such finding

with respect to the SEC’s criminal reference of this case, notwith-

standing that finding having been stipulated to by the parties and

' having been unequivocally found by the District Court; see Point 4,

infra.

rict Court’s findings are succinctly set forth in its opinion

they will not be restated herein. Rather petitioner re-

spectfully refers this Court to those findings as the fac-

tual basis upon which this petition is based. Familiarity

with those factual findings is hereinafter respectfully as-

sumed.

Reasons for Granting the Writ

1. The Court of Appeals’ decision conflicts with the deci-

sion of the United States Court of Appeals for the

First Circuit in United States v. Rodman, 519 F.2d 1058

(1st Cir. 1975) on the issue of whether a District Court

may, in the proper exercise of its supervisory powers,

dismiss an indictment where the indictment results

from misconduct perpetrated by SEC attorneys upon

the target of an SEC investigation.

The gross extent of the fraud perpetrated by the SEC’s

aitorneys* is highlighted by the following undisputed find-

ings of fact:

1. At the first meeting and at the subsequent meetings

between petitioner’s counsel (Gould) and the SEC’s at-

torneys, Gould made the SEC attorneys “fully aware that

defendants’ counsel had as one of their two primary ob-

jectives the avoidance of a criminal reference. . . . Gould

* Both SEC attorneys involved, Tucker and Perlmutter, were more

than low-level functionaries at the time of their misconduct. “Tucker,

although reporting to his superiors at the New York regional office,

was in operational command of the inquiry. Perlmutter was his top

assistant.” (See District Court’s finding of fact #20). During

the course of the SEC’s investigation in this case, Tucker became

acting assistant regional administrator of the SEC’s New York Re-

gional Office and Perlmutter became a branch chief (pp. 545-547

of Joint Appendix in Court of Appeals).

8

again made clear to the SEC representatives that one

of his primary concerns was to avoid a criminal refer-

ence* in respect to his individual clients (petitioner and

co-defendants Fields and Davis)” (F**16, 19, 24).

2. “On June 17, 1975, in separate telephone conversa-

tions, Tucker advised Gould and Kantor that the SEC

investigation was almost concluded; and that it appeared

that the January 14 disclosures had been substantially

complete and accurate.” (F 21).

3. The minutes of the meeting of TDA’s board of di-

rectors for July 18, 1975 state, inter alia:

“Mr. Kantor reported that on June 17, 1975, a

member of the SEC staff had informed him that

their investigation was 95 per cent complete and

that his staff would not refer the matter for crim-

inal prosecution.” (JA***401).

Fields and Friedman were present at this meeting and

heard the statement (JA 475).

* Testimony was given at the District Court hearing by William

Nortman, Esq., who at the time of the SEC’s TDA investigation

was Assistant ‘Regional Administrator of the New York Regional

Office and at the time of the hearing was Associate Regional Admin-

istrator of the SEC’s Atlanta Regional Office, that such negotiations

—a negotiated civil settlement on the understanding concurred in

by the SEC that the SEC would not make a criminal reference—

were appropriate and proper at the staff level. (Seg pp. 743-747

of Joint Appendix in Court of Appeals).

** The letter “F” followed by a number designates reference to

the District Court’s numbered findings of fact (all of which are set

forth at 7a-25a).

*** The letters “JA” followed by a number indicate page reference

to the Joint Appendix in the Court of Appeals.

9

4. Petitioner (and co-defendant Fields) resisted the

settlement terms initially demanded by the SIuC, but were

told by Gould “in response to their resistance that if

Fields and Friedman did not authorize him to attempt

to settle the case on the terms recommended by Gould,

then the SEC would not be bound by the agreement which,

in Gould’s expressed view, it had made with them not to

make a criminal reference.” (I 25).

5. On September 16, 1975, the SEC filed its civil com-

plaint. Gould believed this violated an agreement he

had reached with Perlmutter that its filing would be

deferred until the consent then being negotiated could be

finalized and filed with the complaint. Gould angrily up-

braided Perlmutter, and Perlmutter became “upset at the

incident.” (F 26).

6. Shortly after being upbraided by Gould, Perlmutter

telephoned Assistant United States Attorney Sorkin “to

urge that the United States Attorney’s office ‘investi-

gate the TDA matter.’ Perlmutter said that ‘we really

want to get TDA’, but advised Sorkin that he first wanted

to ‘wrap up’ the civil settlement before the United States

Attorney began its own inquiry. Perlmutter made several

other calls to Sorkin, of similar import, during October

and November.” (F 32).

7. On September 30, after Gould became ill and Judge

Streit, his law partner, took over the representation of

petitioner (and of co-defendant Fields), Judge Streit met

with Tucker and Perlmutter. At this meeting the SEC

attorneys announced that the money they would insist

the defendants pay to TDA in order to settle the case

had esealated to $585,000.00, “Judge Streit responded

that it was a ‘horrendous’ amount, and there were serious

questions concerning some of the figures, ‘but in light

10

of the fact that there is to be no criminal prosecution I

shall endeavor to obtain the money for you’ (Tr. 150-

153).” (F 27).

8. “Tucker and Perlmutter remained silent in the face

of [Judge] Streit’s comment.” (F 27).

9. “[Judge] Streit reported this meeting to Fields,

Friedman and Davis, including the above-quoted state-

ment that had been made by Judge Streit to which the

SEC representatives had not responded.” (F 28).

10. At subsequent meetings over the next several months

among Fields, Friedman, Davis, and their attorneys,

“Fields, Friedman and Davis resisted the terms that the

SEC was demanding for settlement of the civil case.

However, their resistance was overcome by their attorneys’

advice to them that the SEC had agreed that if a satis-

factory settlement was made of the civil action, there

would be no criminal reference.”. (F 28).

11. After Gordon, attorney for Mosler, was told sepa-

rately by Fields and by Kantor that as part of the set-

tlement the SEC had agreed not to make a criminal re-

ference, Gordon scheduled a meeting with Perlmutter for

the specific purpose of confirming it. At that meeting

“Gordon advised Perlmutter that he represented Mosler,

and stated to Perlmutter, among other things, that in

deciding whether to accept a directorship in TDA it was

important for Mosler to know whether there was going

to be a criminal reference of the case. Gordon further

stated to Perlmutter that Gordon understood there was

not going to be a criminal reference. Perlmutter assured

Gordon that there was not going to be a criminal refer-

ence. Gordon thereafter reported Perlmutter’s assurance

to Mosler and to Fields.” (F 29).

11

12. Tucker and Perlmutter falsely testified at the hear-

ing that the conversation to which Gordon testified did

not oceur (JA 575, SA*2!). The Court expressly re-

jected their denials (F 29, JA 68). Tucker and Perl-

mutter also testified falsely at the hearing when they

swore that Gould had been specifically told that there

was “no deal on criminal”. (F 24).

13. When Ostrow, counsel for co-defendant Sandberg,

concluded he could not persuade Tucker and Perlmutter

to pursue lightly, if at all, the complaint against Sand-

berg, “Ostrow agreed to recommend that Sandberg enter

into a settlement, stating to Tucker and Perlmutter that

settling would be ‘better than going over to the golden

dome’, a reference to the United States Courthouse across

the street from and visible from the window of the SEC’s

office. Ostrow’s reference to ‘going over to the golden

dome’ was intended by Ostrow to be a reference to facing

a federal indictment. Under the circumstances, it was

undoubtedly so understood by Tucker and Perlmutter,

who chuckled at the statement but said nothing.” (F 31).

14. On December 1, Gould and Judge Streit met with

Tucker and Perlmutter to discuss the collateralization of

petitioner’s (and his co-defendants’) substantial financial

obligations under the settlement then in its final stages,

and Gould told them they had “got a great settlement,

take it”, Right after Gould left, Tucker referred the case

to the United States Attorney’s Office (F 33; JA 205).

15. “At the time he made the criminal reference of the

TDA case, Tucker knew that avoidance of a criminal re-

ference was one of two primary objectives for Fields and

* The letters “SA” followed by a number designate page refer-

ence to the Supplemental Appendix filed in the Court of Appeals.

12

Friedman in the civil settlement negotiations (the other

being their retention as corporate officers), and the only

objective for Davis, an attorney who was not an officer

Notwithstanding that knowledge, Tucker at no time

disclosed to counsel for these defendants that a criminal

reference had in fact been made. That non-disclosure was

calculated and deliberate, not inadvertent. Tucker testi-

fied that he did not want to do anything that would jeo-

pardize the civil settlement (Tr. 1028-1029), and that, in

his view, the defendants

“. . . believed that there would be no criminal

ease growing out of this and that is why they en-

tered into a consent decree. (Tr. 1091).” (F 25)

(See also JA 634-JA 636).

16. “[H]ad [Gould] known, subsequent to December 1

but before execution of the consents to judgment, that a

criminal reference had in fact been made, he would have

recommended to his clients that they not enter into the

consents ... Such advice would have been accepted, so

that the SEC would have lost the civil settlement which

Tucker’s concealment of the criminal reference was speci-

fically designed to protect.” (F 37; see also F 28 and

F 39).

These undisputed facts* clearly show, as the District

Court found, a gross fraud perpetrated by the SEC’s at-

torneys upon petitioner—in the words of Circuit Judge

Mansfield in his concurring opinion, “deceitful and dup-

licitous” conduct by the SEC’s attorneys in violation of

* It is most noteworthy that the Court of Appeals* decision, while

not upsetting any of the District Court’s findings of fact, chose

simply to ignore virtually every one of the above highlights among

those findings.

13

their “ethical obligation” owed to petitioner. It was in

light of these and other findings of fact, none of which

was disputed on appeal by the Government or overtly

disturbed in any respect by the Court of Appeals, that the

District Court exercised what it believed to be its super-

visory powers and dismissed the indictment against peti-

tioner.

The Court of Appeals’ holding that the District Court

“abused its discretion” in dismissing the indictment in the

exercise of its supervisory powers clearly conflicts with

the decision of the United States Court of Appeals for the

First Cireuit in United States v. Rodman, 519 F.2d 1058

(1st Cir. 1975), which expressly held that under identical

circumstances the District Court’s dismissal of the indict-

ment was not an abuse of the District Court’s supervisory

powers.

In Rodman, the Court of Appeals for the First Cireuit

affirmed as “not an abuse of the [district] court’s super-

visory function’* the dismissal by the District Court of

an indictment where SEC attorneys had failed to honor

a commitment they had made to the defendant during

the SEC’s investigation that they would strongly recom-

mend that the United States Attorney not prosecute the

defendant. In both Rodman and the instant case the in-

dictments resulted from misconduct committed by SEC

attorneys against the targets of their investigation: In

Rodman the misconduct was the failure by an SKC at-

torney to honor a commitment to recommend against crim-

inal prosecution, and here the misconduct was fraudulently

inducing petitioner to consent to an extremely onerous civil

settlement on the understanding that there would be no

criminal reference of the case while the SEC attorneys

* 519 F.2d at 1060.

14

were at the very same time referring the case for criminal

prosecution. The District Court in each case dismissed

the indictment in the exercise of the District Court’s super-

visory powers; the First Cireuit Court of Appeals held

this not to be an abuse of the District Court’s supervisory

powers and the Second Cireuit Court of Appeals held this

to be an abuse of those powers.

The Second Circuit’s attempt to distinguish Rodman

from this case was limited to the following purported dis-

tinction: .

“The improper conduct here certainly was not as

egregious as that in United States v. Rodman, 519

F.2d 1058 (1 Cir. 1975), where the SEC not only

broke its promise but obtained incriminating evi-

dence from the defendant in reliance on that prom-

ise. Moreover, the promise there was to ‘strongly

recommend’ against prosecution.” (98a)

It is respectfully submitted that these purported distine-

tions are in fact non-existent and that upon analysis these

factors actually underscore the sharpness of the conflict be-

tween the decisions in Rodman and in this ease:

(a) As to the allegedly more “egregious” wrong in Rod-

man. In Rodman, SEC attorneys merely broke a promise

to the defendant; here, SEC attorneys committed the far

more serious misconduct of deliberately committing a

fraud against petitioner (and his co-defendants) by know-

ingly, wilfully, and fraudulently inducing him to consent

to extremely onerous civil sanctions based on what the

SEC attorneys knew to be the understanding of petitioner

and petitioner’s counsel that in exchange for these onerous

sanctions there would be no criminal reference of this case,

while at the very same time these same SEC attorneys

were continually referring the case to—indeed urging it

15

upon—the United States Attorney’s Office for criminal

prosecution. Violation of an agreement made with the

target of an investigation, as occurred in Rodman, is no

more “egregious” than is the wilful and deliberate perpe-

tration of a fraud and deceit upon the target of an inves-

tigation, as occurred here; to the contrary, the District

Court in Rodman did not question the SEC attorney’s good

faith in that case, while here the District Court repeatedly

found bad faith on the part of the SEC attorneys. The

courts have traditionally treated fraud as far more serious

misconduct than breach of an agreement. Moreover, the

fraud* committed by the SEC attorneys here was com-

pounded by the fact (as specifically found by the District

Court) that at the hearing in the District Court in this

ease those same SEC attorneys lied under oath concern-

ing the events in question (JA 575, SA 21, F 24).

(b) As to the fact that in Rodman incriminating evi-

dence was obtained. The Rodman record, which was in-

troduced in the District Court in this case, unequivocally

shows that in Rodman the prosecutor agreed, during the

course of the pre-trial hearing on Rodman’s motion to

dismiss the indictment, not to use any of Rodman’s state-

ments, and that the District Court in Rodman, in addi-

tion to its order dismissing the indictment, also alterna-

tively suppressed Rodman’s statements ‘in case some other

court disagrees with me on the matter of the motion to

dismiss” (JA 165). Thus in both Rodman and in the in-

stant case the defendant was not prejudiced in an evi-

dentiary sense, in that in both cases the defendant made

no statement which the Government could use against him.

In fact, in Rodman the defendant was not prejudiced at

* The fraud was committed not only by the SEC attorneys’ fraudu-

lent omissions but also by their affirmative fraudulent misstatements

(32a).

16

\

all in view of the Government’s consent to and the District

Court’s entry of an alternative order that all incriminating

statements he had made would be suppressed. In the instant

case, to the contrary, petitioner was incurably prejudiced in

a very practical sense. As the District Court found “it is

impossible, by reopening the civil consent judgments, to

restore the individuals concerned to the positions in which

they found themselves at the time of the non-disclosure

of the criminal reference, in December of 1975, and the

subsequent execution of the consent judgments.” (38a).

The onerous terms of the consent judgments, which the

SEC attorneys in charge of this investigation repeatedly

characterized during the District Court’s hearing as “su-

perb’*, involved payment by the defendants of over one-

half million dollars** and substantial ancillary relief in-

volving multi-year prohibitions from holding corporate

office, from holding corporate directorships, from voting

* JA601-JA611. The reason advanced by Circuit Judge Mans-

field for not dissenting—that the SEC would have received the case

from the District Attorney’s Office had the defendants not brought

it to the SEC’s attention themselves—misses the mark: if that had

occurred, and had the SEC attorneys not engaged in their fraud on

the defendants, then the defendants would not have consented to

these extremely onerous civil sanctions. In other words, the defend-

ants did not claim they were entitled to dismissal of the indictment

because they had made a voluntary disclosure to the SEC, but because

the SEC attorneys had (as the District Court found) defrauded them

during settlement negotiations to induce their consent to these im-

pressive civil sanctions. The SEC’s fraud would be equally outrage-

ous even if the D.A.’s Office had referred the matter to the SEC.

(Furthermore, there was no evidence that the District Attorney’s

Office did in fact refer this matter to the SEC.)

** An amount, as the Government conceded below, in excess of the

amount which the Government itself charged the defendants with

having unlawfully received.

17

privately owned stock, severe injunctive relief, and the

like; all of the terms are set forth at 22a-23a, fn. 2.*

(c) As to the “strong recommendation against prosecu-

tion” to be made in Rodman. In this case as in Rodman,

had the Government not committed its misconduct there

would have been no criminal case. The Government in

this case has conceded that this matter came to the atten-

tion of the United States Attorney’s Office only through

the criminal references by Perlmutter and Tucker (JA 8-

JA 9). Thus, had the SEC not perpetrated its fraud by

referring this case for criminal prosecution, as the SEC

attorneys knew was the petitioner’s understanding at the

time petitioner agreed to the onerous civil settlement here,

there would have been no criminal prosecution.

Accordingly, it is respectfully submitted that the deci-

sion by the Second Cireuit Court of Appeals in this case

squarely conflicts with the decision of the First Circuit

Court of Appeals in Rodman, and that only a decision by

this Court can resolve this important conflict.**

* Moreover, as one lower court has observed, the Government

should be compelled to honor commitments in the interests of “judi-

cial integrity and the interests of justice”, even where there is “no

prejudice, apart from that suffered by the administration of justice.”

Matter of Doe, 410 F.Supp. 1163, 1165, 1166 (E.D. Mich. 1976).

** Significantly, other federal circuit courts of appeals, when pre-

sented with a close parallel to the issue presented by this direct con-

flict between Rodman and the instant case, have resolved the issue

in favor of permitting District Courts, in the exercise of discretion,

to dismiss indictments. (See, e.g., United States v. Minnesota Min.

(Footnote continued on following page)

18

2. The Court of Appeals’ decision in forbidding a District

Court to exercise its supervisory powers to remedy a

fraud perpetrated by a governmentai agency upon a

citizen has decided an important question of federal

law vital to the administration of the laws by the SEC

(and other governmental agencies) and to the admin-

istration of criminal justice, a question which has not

yet been but should be decided by this Court.

The importance of the conflict referred to above is mani-

fest not only because it is a conflict but additionally be-

cause it leaves unresolved the significant issue of whether

a United States District Court, when confronted with an

indictment which results from fraudulent misconduct on

the part of the attorneys representing governmental agen-

cies, has the power to deter future governmental miscon-

(Footnote continued from preceding page)

& Mfg. Co., 551 F.2d 1006, 1112 (8th Cir. 1977) (“the remedy for

the breach of this promise rests in the discretion of the trial court

. and under the circumstances of this case “We cannot say that

the remedy of dismissing the indictment was undue or an abuse of

discretion”); United States v. Carter, 454 F.2d 426 (4th Cir. 1972),

cert. denied 417 U.S. 933 (1974)); this was the result mandated

by this Court in Santobello v. New York, 404 U.S. 257, 263 (1971)

(“the ultimate relief to which petitioner is entitled we leave to the

discretion of the state court”); and other District Courts have also

exercised their discretion in analogous situations in the same manner

as the District Court in this case. (See, ¢.g., United States v.

Phillips Petroleum Co., 435 F.Supp. 622 (N.D. Okla. 1977) ; United

States v. Paiva, 294 F.Supp. 742 (D.C. D.C. 1969)). The cases

cited in this footnote are analogous, not id itical (although cf.

Elkins v. United States, 364 U.S. 206 (1960)), as the misconduct

therein was perpetrated by the prosecuting arm of the Executive

Branch; Rodman and the case at bar, however, are identical and

indistinguishable, not merely analogous, as in both cases the miscon-

duct was perpetrated not by the prosecuting arm of the Executive

Branch, but by attorneys for the SEC. Rodman and this case are

absolutely irreconcilable.

19

duct and to grant reasonable redress to wronged parties

by dismissal of the indictment.

The SEC refers approximately 100 cases per year to the

Department of Justice for criminal prosecution.* This

Court may also judicially notice that numerous other ad-

ministrative agencies have the statutory authority to, and

do, refer cases to the Department of Justice for criminal

prosecution. There has been no dispute at any stage in

this case—by the United States Attorney’s Office, by the

SEC, or by the Court of Appeals—that the District Court’s

uncontested findings of fact clearly establish that the SIcC

attorneys wilfully perpetrated an outrageous fraud upon

petitioner and his co-defendants. This case thus presents

the question of whether when an administrative agency

perpetrates such an undisputed and adjudicated fraud upon

a target of its investigation, a District Court is completely

powerless to dismiss an indictment where no other remedy

exists which would restore petitioner to his pre-victimized

status.** This is, moreover, the second reported ¢ase

* See SEC amicus curiae memorandum in the Court of Appeals,

p. 13, n. 35.

** The District Court’s finding that “it is impossible, by reopening

the civil consent judgments, to restore the individuals concerned to

the positions in which they found themselves at the time of the non-

disclosure of the criminal reference, in December of 1975, and the

subsequent execution of the consent judgments” (38a) was amply

justified : petitioner was prevented for the full period dictated by the

the settlement from acting as director of TDA and Westcalind,

from serving as a chief executive officer of TDA and Westcalind,

and from voting his shares of TDA and Westcalind stock, and, of

course, paid out an enormous sum of money in settlement and was

subjected to other substantial injunctive relief. Nor did the Court

oi Appeals question this finding. Even the Government in its

appellate brief in the Court of Appeals abandoned the contention

it had made in the District Court that the petitioner could be “made

whole” by any remedy short of dismissal of the indictment.

20

within the last several years in which SEC attorneys

have violated their legal and ethical obligations to sub-

jects of SEC investigations.*

The importance of resolution by this Court of this

significant question concerning the extent of the super-

visory powers of federal District Courts under these

circumstances is highlighted by the fact that the SEC

has effectively announced that it will not undertake by

itself appropriate steps to prevent a recurrence of such

fraudulent misconduct by its attorneys. In the Govern-

- ment’s petition for rehearing in the District Court, the

SEC advised the District Court that “on the basis of

the factual findings contained in the opinion of the Court,

the Commission has undertaken an independent inquiry

in this matter at the conclusion of which the Commission

will take all action which it deems appropriate.” (JA 128).

However, the SEC subsequently decided (without advising

either the District Court or Cireuit Court) to “defer”

its inquiry until the conclusion of this very case (SA 1-

SA 4). The SEC by its promise of action followed by

its inaction has effectively served notice that only the

exercise of judicial supervisory powers will prevent a

repetition of this type of fraudulent misconduct.

Thus, the Court of Appeals’ decision in this case, if

permitted to stand, will not only stand in conflict with

the First Circuit Court of Appeals’ decision in Rodman,

but will also result in this type of misconduct remaining

uncorrected by the SEC, and will, further, be an open

invitation to all Government agencies and their attorneys

and other representatives to act as they wish, without

any fear that their fraudulent misconduct, supported later

by perjury, will be judicially dealt with in the strong

* The other reported case being United States v. Rodman, supra.

21

terms such misconduct merits and which the District

Court in this ease (and in Rodman). properly invoked.

This Court has observed that

“we may some day be presented with a situation

in which the conduct of law enforcement agents is

so outrageous that due process principles would

absolutely bar the government from invoking judi-

cial processes to obtain a conviction.” United

States v. Russell, 411 U.S. 428, 481-432 (1978).

We respectfully submit that in view of the gross fraud

perpetrated by the Government agents here, this is that

situation. i

3. The Court of Appeals, in upholding the validity of the

SEC’s referral of this case to the United States Attor-

ney’s Office in violation of the SEC’s published regula-

tions governing such referrals, has contravened control-

ling decisions of this Court.

This Court, relying upon the due process clause of the

Fifth Amendment, has often reiterated the principle that

the dictates of due process require a governmental agency

to comply with its own published regulations:

“So long as this regulation is extant it has the force

of law. . .. So long as this regulation remains

in foree the Executive Branch is bound by it, and

indeed the United States as the sovereign composed

of the three branches is bound to respect and to

enforce it.” United States v. Nixon, 418 U.S. 683,

696-697, 94 S.Ct. 3090, 3101-3102 (1974).

See also Accardi v. Shaughnessy, 347 U.S. 260 (1954);

Service v. Dulles, 354 U.S. 363 (1957); Vitarelli v. Seaton,

22

359 U.S. 535 (1959); Yellin v. United States, 374 U.S.

109 (1963).

The Court of Appeals’ decision in this case, in up-

holding the validity of the referral of this case by SEC

attorneys to the United States Attorney’s Office, plainly

viclated that principle. This becomes clear upon examina-

tion of (a) the statutes and administrative regulations

governing such referrals and (b) the nature of the re-

ferral made in this case.

(a) The statutes and administrative regulations governing

referrals of cases by the SEC to the Department of

Justice.

The applicable statutes and administrative regulations

governing referrals by the SEC to the Department of

Justice are set forth in the appendix annexed to co-

petitioner Fields’ petition. It is only the Commission

itself, or officials who are by duly published regulation

specifically delegated by the Commission (who may in

turn similarly delegate their responsibility by duly pu-

blished regulation), who may make such referrals. Yet

it is undisputed that neither Tucker nor Perlmutter, nor

any other attorney or employee on their level, has been

delegated to make such referrals.

These published regulations and their noticeable absence

of any delegation of any such tremendous power to at-

torneys at the level of Tucker and Perlmutter are con-

sistent with the position of the SEC as publicly and for-

mally expressed to the House of Representatives of the

United States Congress, where the SEC has assured the

Congress that there is a thorough and continuing series

of reviews at various “supervisory levels”, conducted

seriatim “by persons of increasing experience and au-

23

thority”, and that ultimately the Commission itself, act-

ing on recommendation of its general counsel, “must ap-

prove” the staff’s recommendation before a criminal refer-

ence is made* (JA 283-JA 289).

(b) The referral here.

The legal mode of referrals as set forth in the statutes

and regulations referred to above were wholly violated in

the instant case. Here, first Perlmutter, then Tucker,

referred this case to the United States Attorney’s Office—

without any legal authority to do so. The circumstance

under which Perlmutter made the first referral is in-

structive of the excellent reasons why the level of referral

is required legally to be by either the Commission

itself or by its highly-placed and experienced formally

delegated officials: shortly after having been upbraided

by petitioner’s counsel for having violated an agreement

to defer filing of the civil complaint until a consent judg-

ment had been finalized, Perlmutter in a pique simply tele-

phoned a friend of his in the United States Attorney’s

Office “to urge that the United States Attorney’s office ‘in-

vestigate the TDA matter.’ Perlmutter stated that “we

really want to get TDA’, but advised Sorkin that he first

wanted to ‘wrap up’ the civil settlement before the United

States Attorney began its own inquiry. Perlmutter made

several other calls to Sorkin, of similar import .. .”

(F 32). f

\

* This rationale comports with that of this Court-inthe analogous

case of United States v. Giordano, 416 U.S. 505, 515 (1974), spe-

cifically enforcing an Act mandating “the mature judgment of a

particular, responsible Department of Justice official . . . as a

critical precondition” to permissible action.

24

The Court of Appeals, confronted with these facts,

attempted to sustain the propriety of the criminal refer-

ence here by holding:

“It is important to bear in mind the distinctions,

under SEC procedure, between an informal investi-

gation (such as that here involved) and a formal

investigation; and between an informal criminal

reference (such as that here involved) and a formai

criminal reference.

With respect to the investigation procedure, the

mformal, or preliminary, investigation which was

utilized in the instant case does not require mem-

bers of the staff to obtain Commission authoriza-

tion before turning over public or nonpublic in-

vestigative materials to the United States Attor-

ney’s office. On the other hand, a formal investi-

gation of alleged criminal violations (not utilized

here), where issuance of process or compulsion of

testimony is necessary, does require Commission

authorization.” (90a-91a; emphasis in original (foot-

notes omitted) )

The difficulty with this line of reasoning is that its

entire premise—that an informal rather than a formal

investigation was being conducted by the SEC—was in-

controvertibly wrong: this error was brought to the Court

of Appeals’ attention subsequent to its decision by the

United States Attorney’s Office and by the SEC itself.*

The SEC’s formal order of investigation had been intro-

* The United States Attorney’s Office did so by a letter dated

October 10, 1978 to the Court of Appeals panel, and the SEC did

so by an amicus memorandum submitted to the panel some two and

a half months after petitioner’s petition for rehearing in the Court

of Appeals had been filed and was still pending.

25

duced into evidence in the District Court hearing as an

exhibit. The Court of Appeals’ above-quoted holding also

contradicted a concession contained in the SEC’s amicus

memorandum that “both a formal and informal criminal

reference require Commission authorization.”

Thus under the undisputed facts of this case the refer-

ral by the SEC attorneys to the United States Attorney’s

Office violated the SEC’s published regulatory scheme gov-

erning criminal references to the Department of Justice.

Accordingly, under this Court’s well-established holdings

previously referred to that regulations validly prescribed

by a governmental agency are binding law, dismissal of

the indictment was mandated (and the District Court’s

dismissal of the applicable portions of the indictment

should therefore have been affirmed) under the Court of

Appeals’ own reasoning. The only remedy in this case

for the SEC’s violation of its own published regulations

in referring this case to the United States Attorney’s

Office is to dismantle the result of that reference, i.e., to

dismiss the indictment.

The Court of Appeals avoided this result, when this

eritical factual error in its opinion was pointed out not

only by petitioner but also by the United States At-

torney’s Office and by the SEC, by ignoring and impliedly

rejecting a crucial and stipulated finding of fact, which

will now be discussed.

26

4. The Court of Appeals, in “correcting” its opinion, ig-

nored controlling decisions of this Court and conflicted

with decisions of other federal Circuit Courts of Ap-

peals which have held that a federal appellate court

does not have the power to ignore and override critical

facts which the parties have stipulated to and do not

even on appeal dispute.

As noted above, after the Court of Appeals rendered

its original opinion, in which it had acknowledged that

under the applicable statutes and published SEC regu-

lations a formal SEC investigation requires Commission

authorization to refer a case for criminal prosecution to

the United States Attorney’s Office, the Government and

the SEC (as well as petitioner) advised the panel in

writing that the factual cornerstone of the Court’s reason-

ing-—i.e., that the SEC’s investigation in this case had

been an informal rather than a formal one—was erroneous.

The SEC pointed out this error in an amicus memoran-

dum, which the Court of Appeals had not requested, after

petitioner’s petition for rehearing had been pending for

some two and a half months. In its amicus memorandum,

the SEC attempted to avoid the logical consequence of

the Court of Appeals’ critically erroneous premise by

arguing that although the SEC investigation had been

formal, and although there had been no approval by the

Commission or by any lawfully delegated Commission

official for referral of the case to the United States

Attorney’s Office, and although this case reached the

United States Attorney’s Office only through the recom-

mendation and active urging of SEC attorneys Tucker

and Perlmutter, this referral of the case was not a “crim-

inal reference” to the United States Attorney’s Office but

was merely a “preliminary communication” to that office,

a concept advanced by the SEC for the first time in its

27

amicus presentation on appeal* and which appears neither

in the statute nor in the SEC’s published regulations.**

The SEC therefore urged the Court of Appeals to “cor-

rect” its opinion by pointing out to that Court all refer-

ences (by page and line number) to “criminal references”

in the Court’s opinion and suggesting the substitution of

‘“nhraseology” referring to “preliminary communications”.

The Court of Appeals thereupon “corrected” its opinion

by adopting the SEC’s proposed “corrections” im hacc

verba (108a-111a).

Thus, with respect to the unauthorized criminal refer-

ence of this matter, the cornerstone of the Court of Ap-

peals’ opinion as “corrected” is now the statement of al-

leged fact that the referrals by Tucker and Perlmutter to

the United States Attorney’s Office were not “criminal

references” but were merely “preliminary communica-

tions”. But this factual premise in the Court of Appeals’

“corrected” opinion flatly contradicted a stipulation that

the Government had agreed to on the very first day of

the eleven-day hearing in the District Court, a stipulation

that formed the entire context for the hearing and for

the appeal, and which no party to this case, even to the

present day, has ever asked to be relieved of:

* This notwithstanding the fact that various SEC officials, in-

cluding Stanley Sporkin, Esq., Director of the SEC’s Division of

Enforcement in Washington, D. C., testified during the District

Court hearing.

** The concept of a “preliminary communication” as distinguished

from a “criminal reference” (formal or informal) appears to have

been coined by the SEC for use in this case for the first (and to our

knowledge only) time, and was, at that, coined for the first time in

the SEC’s amicus brief on appeal.

28

“Mr. Bender (Petitioner’s Counsel): . .. [Wle

would ask your Honor’s indulgence to ask the Gov-

ernment if it will stipulate with the Court and for

the record, that there isn’t any question, whatever,

that this case came to the United States Attorney’s

office in the first instance through a reference by

the Securities and Exchange Commission,

The Court: The so-called criminal reference re-

ferred to?

Mr. Bender: That is correct.” (Tr. 6-7; JA 297)

In response, the attorney for the Government, after out-

lining the Government’s version of what had factually oce-

curred, responded:

“(The Prosecutor, Mr. Cutner): To sum up, we

do not dispute in this hearing that the matter came

to the attention of the U. S. Attorney’s office from

the New York Regional Office of the SEC.

The Court: And I need not concern myself with

semantic subtleties as to whether or not what took

place was a ‘criminal reference’, you make no point

on that?

Mr. Cutner: I do not.[*]

* The inevitability of the United States Attorney's concession, in

the parties’ stipulation in the District Court, that a criminal reference

had been made here is apparent on the face of critical findings of

tact made by the District Court, not controverted on appeal by the

Government, and ignored by the Court of Appeals: the original

reference of this case to the United States Attorney’s Office was by

SEC attorney Perlmutter, who called a friend of his in the United

States Attorney’s Office, told him “we really want to get” the de-

fendants, but requested that the United States Attorney's Office

defer action because the SEC attorneys “first wanted to ‘wrap up’

the civil settlement”—a request repeated by Perlmutier to the As-

sistant United States Attorney several times over the next few

months (JA55).

29

The Court: Does that suit your purpose?

Mr. Bender: Yes.” (JA 299).

In view of this stipulation* it is not surprising that the

District Court found there to have been a criminal refer-

ence and that the United States Attorney’s Office—the only

Government agency which is a party to this case—did not

join or concur in the SEC’s amicus memorandum and did

not adopt and has not to this day adopted the SEC’s posi-

tion or asked to be relieved of its stipulation.** Indeed,

even as late as in its letter (see p. 24, fn.) sent to the

Court of Appeals on October 10, 1978, subsequent to that

Court’s original opinion, the United States Attorney’s Of-

fice reiterated its concession that the referral of this case

by Perlmutter and Tucker to the United States Attorney’s

Office had in fact constituted a “criminal reference.”

In basing its “corrected” opinion*** on this premise

which directly conflicted with the parties’ stipulation made

* This stipulation was pointed out to the Court of Appeals by

affidavit of petitioner’s counsel subsequent to the filing of the SEC’s

amicus memorandum and while the petition for rehearing in the

Circuit Court was still pending, but was ignored.

** Indeed, the position belatedly asserted in the SEC’s appellate

amicus memorandum contradicted the position actually taken by the

SEC during the course of the hearings in the District Court. In

the midst of that hearing, the SEC itself entered an order of referral

nunc pro tunc, some six months after the indictment, which would

have been completely unnecessary and inexplicable if what was in-

volved in this case was a mere “‘preliminary communication” requir-

ing no Commission approval (JA561, JA174, JA295).

*** Tt should be noted that the Court of Appeals’ original opinion

was rendered only after the SEC had submitted a prior amicus brief

which, at the Court of Appeals’ request, was “limited to a statement

of the criminal reference procedure, formal and informal, which was

in effect during the period involved in th[is] case.”

30

at the outset of the hearing nearly two years earlier in

the District Court and from which no party to this ap-

peal has ever asked to be relieved, the Court of Appeals

completely departed from the well-established principie of

appellate review enunciated by this Court (see, e.g., Hack-

feld & Co. v. United States, 197 U.S. 442, 25 S.Ct. 456

(1905) ; Utah v. United States, 394 U.S. 89, 89 S.Ct. 761

(1969) ) and by every other Federal Circuit Court of Ap-

peals that has ruled on the issue (see, e.g. Gambill v.

United States, 276 F.2d 180, 181 (6th Cir. 1960) (“the re-

viewing court may not set aside a verdict by interfering with

“a stipulation of fact which the trial court has recognized”) ;

Schlemmer v. Provident Life & Acc. Ins. Co., 349 F.2d

682, 684 (9th Cir. 1965) (“when parties have entered into

stipulations as to material facts, our [appellate] duty is

to treat such facts as having been established by the clear-

est proof”); Osborne v. United States, 351 F.2d 111, 120

(Sth Cir. 1965) (“Any available relief from a stipulation

should be sought in the trial court and request for such

relief should be timely. It is too late after the case has been

decided on appeal to seek such relief. . . .”); Verkouteren

v. District of Columbia, 346 F.2d 842 (D.C.Cir. 1965);

United States v. Star Const. Co., Inc., 186 F.2d 666 (10th

Cir. 1951)) that on review an appellate court may not up-

set facts stipulated to and relied upon the parties (in the

absence of extraordinary circumstances none of which are,

or have been even alleged to have been, present here).

Because of this sharp departure from this well-established

rule governing appellate review, a writ of certiorari should

issue.

31

5. The Court of Appeals’ decision reversing the District

Court’s dismissal of Counts 1-3 on the alternative

grounds overlooks controlling decisions of this Court,

decisions of other courts, and the legislative purposes

of the statute involved.

The Court of Appeals reversed the District Court’s dis-

missal of Counts 1-4 on alternative grounds. On Counts

1-3, the District Court was found to be in error in conclud-

ing as a matter of law that there was no Section 17(a)

violation because the alleged non-disclosure of the sale of

stock by a group of stockholders (ERD) in April or May,

1971 did not constitute a material non-disclosure in the

prospectus issued by TDA on November 10, 1971. Besides

holding that the non-disclosure had no impact on the finan-

cial condition of the company which could materially affect

a decision of a potential purchaser of TDA stock in 1971,

the District Court also concluded that (a) as charged in

the indictment, the victim of the alleged fraud was ERD,

not TDA, and that ERD was the seller and not a buyer

protected by Section 17(a), (b) the charge was an attempt

to evade the five-year statute of limitations on the crime

charged, and (c) the transactions which occurred in April

and May, 1971 had no causal connection with the offer and

sale of TDA securities in November, 1971.

The Court of Appeals addressed only the question of ma-

teriality, holding that under TSC Industries v. Northway,

Inc., 426 U.S. 438 (1976), “a sufficient basis of materiality”

has been shown by the Government to raise an issue of

fact. Such a showing was found to exist in the Govern-

ment’s claim that “the ERD kickbacks . . . may well be

immediately recoverable by TDA, Inc. as a short-swing

purchase and sale under 16(b) of the 1934 Act,” even

though the Court of Appeals noted that the “Defendants’

$300,000 profit on this transaction... ultimately [came]

out of the pockets of the defrauded stockholders”. (102a).

32

The Court of Appeals did not consider the additional

grounds upon which the District Court had concluded that

Counts 1-3 did not state a crime. In sustaining the suffi-

ciency of Counts 1-3, all of which related to the non-dis-

closure in the prospectus of the ERD stock transactions,

the Court of Appeals implicitly rejected the District

Court’s further grounds for dismissing the counts, i.e.,

that Section 17(a) was not intended to protect alleged

defrauded sellers of securities and, further, that the ERD

transactions which occurred in April and May of 1971,

some eight to nine months prior to the filing of the TDA

prospectus in November, 1971, had no connection with that

subsequent offer and sale of the TDA securities. In so

doing, the Court of Appeals, we submit, wrongly interpreted

this Court’s opinion in TSC v. Northway and broadened

the scope of Section 17(a) beyond what was intended by

Congress and by the decisions of this and other courts.

This Court’s opinion in Northway dealt with an alleged

proxy violation under Section 14(a). The constituent ele-

ments of a 17(a) or 10(b) action were not before this

Court or even considered. The Court of Appeals erred

in holding that under Northway a valid Section 17(a) claim

does not require that the misconduct alleged be in con-

nection with the offer and sale of the TDA securities is-

sued in November, 1971, and further erred in holding that

a violation was charged although the sellers of the secur-

ities rather than the purchasers were allegedly defrauded.

Section 17(a) prohibits specified schemes of fraud only

if they are “in connection with the offer or sale of a secur-

ity.” The alleged ERD transactions which took place eight

to nine months earlier played no part whatever in the

offer and sale of the TDA securities in November, 1971,

as found by the District Court. The District Court was

correct because the “in connection” requirement with a

stock transaction is an essential element for a violation,

33

as this Court noted in a Section 10(b) action in Super-

intendent of Insurance v. Bankers Life & Cas. Co., 404

U.S. 6, 92 S.Ct. 165 (1971), where it held a 10(b) viola-

tion to exist because the “deceptive practices [touched

upon] its sale of securities as an investor.” 404 U.S. 12-13.

Indeed, even, a more direct involvement in the offer and

sale of a security must exist under Section 17(a) than

under Section 10(b), as this Court noted in Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723, 733 (1975).

This “in-connection” requirement was re-emphasized by

this Court in Santa Fe Industries, Inc. v. Green, 480 U.S.

462, 97 S.Ct. 1292 (1977), where in declining to sanction

a cause of action under Section 10(b)-5 for alleged breach

of corporate fiduciary duty, the Court distinguished Super-

intendent of Insurance v. Bankers Life as an action in-

volving a “seller [of bonds] duped into believing that it,

the seller, would receive the proceeds.” 97 S.Ct. at 1301,

n. 15. The District Court correctly applied this

Court’s decisions, as have other courts which have

addressed the question and reached conclusions contrary

to that of the Court of Appeals below. In Ketchum v.

Green, 557 F.2d 1022 (3d Cir. 1977), the Court of Appeals

upheld the dismissal of a cause of action where the rela-

tionship between the alleged fraud and the securities trans-

action was too attenuated and remote to support a 10(b)-5

claim. The Court of Appeals appropriately stated:

“While the coverage of § 10(b) may well have been

intended by Congress to overlap somewhat with that

of certain state provisions, it is questionable whether

the scope of the statute should be extended to ali

phases of corporate operations and relationships

whenever they entail the incidental involvement of

securities. Realistically, there are a multitude of cor-

porate decisions and endeavors which implicate se-

curities in some fashion.” 557 F.2d at 1029

34

Similarly, in Biesenbach v. Guenther, 588 F.2d 400 (3d

Cir. 1978), a 10(b)-5 complaint was likewise dismissed

although it alleged that the corporate directors had failed

to disclose the true purpose of their authorization for ad-

ditional shares to be issued by the corporation, which was

allegedly to gain control of the corporation by reducing

the membership of the Board of Directors and which al-

legedly constituted a fraud upon the shareholders. The

Court of Appeals noted,

“In effect, appellants are stating that the failure to

disclose the breach of fiduciary duty is a mispre-

sentation sufficient to constitute a violation of the

Act. We refuse to adopt this approach which would

clearly circumvent the Supreme Court’s holding in

Santa Fe.” 588 F.2d at 402

As charged in the indictment, the ERD transactions, no

matter how characterized by the Government to evade the

five-year statute of limitations, were a classic example

of alleged internal corporate mismanagement for which

the State courts have provided a sufficient, adequate, and

exclusive remedy. See Rapaport v. Schneider, 29 N.Y.2d

396, 400, 328 N.Y.Supp.2d. 481, 435 (1972). The deci-

sion of the Court of Appeals, however, if permitted to

stand, converts a State claim of corporate waste or mis-

management into a Federal cause of action under Section

17(a) of the 1933 Act through the ruse of a conclusory

allegation of non-disclosure. Its action in this respect

is more in doubt in view of the division on this question

that_exists in the Court of Appeals for the Second Cir-

cuit: Thus in Goldberg v. Meridor, 567 F.2d 209 (2 Cir.

1977), Cireuit Judge Meskill in dissent appropriately

noted:

35

“Yet under the majority’s reasoning the failure to

inform stockholders of a proposed defalcation

gives rise to a cause of action under 10(b)(5). Thus,

the majority has neatly undone the holdings of

Green, Piper and Cort by creating a federal cause

of action for a breach of fiduciary duty that will

apply in all cases, save for those rare instances

where the fiduciary denounces himself in advance.

If the defendants have looted UGO in the same man-

ner alleged by the plaintiffs, a full recovery should

not be difficult to obtain. Under New York state

law, this would be a breach of the fiduciary duty

imposed upon directors.”

A similar division occurred in Joyce v. Joyce Beverages,

Inc., 571 F.2d 703 (2d Cir. 1978).

Moreover, a violation of Section 17(a), as the District

Court held below, requires a claim that the purchaser of

securities was defrauded. Here, the indictment alleged

that the seller (XRD) was defrauded and that the peti-

tioner through an intermediary did the defrauding. In-

deed, the Court of Appeals emphasized this in stating,

“Defendants’ $300,000 profit on this transaction .. . ul-

timately [came] out of the pockets of the defrauded stock-

holders”, i.e, ERD, the seller. Yet as noted in Birn-

baum v. Newport Steel, 193 F.2d 461, 463 (2d Cir. 1952),

“Section 17(a) [77q(a) of the 1933 Act] only made it

unlawful to defraud or deceive purchasers of securities.”

See also, S.E.C. v. Guild Films, 279 F.2d 485, 489 (2d

Cir. 1960); Financial Programs, Inc. v. Falcon Financial

Services, 371 F.Supp. 770, 775 (D.C.Ore. 1974). Cf. United

States v. Naftalin, 579 Fed. 2d 444 (8th Cir. 1978) where

the Court of Appeals in reversing a conviction charging a

scheme to defraud under Section 17(a) rejected the gov-

ernments contention that Section 17(a) does not require

36

that a purchaser be defrauded as long as someone is de-

frauded in the offer or sale of securities, cert. granted De-

cember 11, 1978, No. 78-561.

6. In reversing the District Court’s dismissal of Count 4

(the proxy count), the Court of Appeals departed from

this Court’s opinions in J. I. Case Co. v. Borak, 377 U.S.

426 (1964) and Mills v. Electric Auto-Light Co., 396

U.S. 375 (1970).

The Court of Appeals found that pursuant to Section

14(a) of the 1934 Act and Rule 14a-9, the ERD and

Westcalind transactions were required to be disclosed in

the TDA proxy of December 1971. In doing so, it implied-

ly rejected the holding of the District Court that there

was a complete absence of any connection between the

ERD and Westealind transactions and the matter for

which the proxy was solicited. The District Court had

held:

“. . + [NJone of these acts, all of which had been

accomplished prior to the stockholders’ meeting re-

ferred to in the proxy solicitation, bore any direct

relationship to the business sought to be accom-

plished at the meeting, and referred to in the proxy

statement. Accordingly, ‘transactional causation’ re-

sulting from the non-disclosure of those prior acts,

cannot be demonstrated.”

The District Court relied upon this Court’s opinion in

J. I. Case Co. v. Borak, 377 U.S. 426 (1964), where this

Court held:

“The purpose of Section 14(a) is to prevent man-

agement or others from obtaining authorization for

corporate action by means of deceptive or inade-

quate disclosures in proxy solicitation.” (Imphasis

added) 377 U.S. at 431

The District Court relied further on this Court’s opinion

in Mills v. Electric Auto-Light Co., 396 U.S. 375 (1970),

where this Court held that a violation of Section 14(a)

and Rule 14a-9 would exist where the misstatement or omis-

sion in the proxy statement was material, if “the proxy

solicitation itself was an essential link in the accomplish-

ment of the transaction.” 396 U.S. at 385. This principle

of “transaction causation”, established in Borak and Mills,

was reaffirmed by this Court in TSC Industries v. North-

way, supra.

In rejecting the District Court’s opinion, the Court of

Appeals failed to apply the principles of Borak, Mills, and

TSC Industries, and conflicts with a majority of deci-

sions that have likewise interpreted the requirements of

Section 14(a) and Rule 14a-9 as the District Court did

below. If allowed to stand, the Court of Appeals’ deci-

sion will result in a flood of actions in the Federal Court

without regard to whether the proxy solicitation was a

link in the accomplishment of the wrongs alleged. Numer-

ous decisions relying upon this Court’s opinions in Borak

and Mills reflect the error committed by the Court of Ap-

peals below.

In Epic Industries v. Brothers, 395 F.Supp. 773 (N.D.

Okla. 1975), a complaint charging violation of Section 14

(a) and Rule 14a-9 was dismissed for lack of “transaction

causation” notwithstanding the claim that the proxy state-

ment failed to disclose that management had approved an

illegal and unauthorized loan to an officer and director.

Although such an omission woulc violate Item 7(e)(4) of

Sch. 14A requiring disclosure by an officer or director of

“indebted[ness] to the issuer...” (a rule which the Court

C

-

of Appeals held was violated in the instant case), the Dis-

trict Court nevertheless held there was no violation because

“these actions [wrongful loans] were taken by virtue of

the defendants’ position in the corporation and not through

an authorization obtained through alleged false proxy

statements.” 395 F.Supp. at 776. Similarly, in Oldfield

v. Alston, 77 F.R.D. 735 (N.D.Ga. 1978), the District Court

dismissed a Section 14(a) claim for failure of “transaction

causation”, notwithstanding a claim that the defendants

failed to disclose in seeking election as directors that they

had been stealing from the very corporation they desired

to serve. The District Court said, “The alleged [wrong-

doings] ... were not the subjects of the challenged proxy

solicitations. ... If there were any violations by the de-

fendant-directors ... they represent a breach of the di-

rectors’ fiduciary duty to [the corporation] and its share-

holders rather than a violation of the proxy provisions

under the Securities and Exchange Act of 1934.” 77 F.R.D.

at 744. In Halle & Stieglitz Filor, etc. v. Empress Intern,

442 F.Supp. 217 (D.Del. 1977), the District Court dismissed

“the Section 14(a) claim because the alleged non-disclosure

of the cash tender offer (which was required to he disclosed

- under the regulations) “was not a link in the consummation

of the alleged coercive tender offer because the offer was

not authorized by a shareholders’ vote... at [the] annual

meeting.” 442 F.Supp. at 225. Even though the diree-

tors had concealed their intent to make a cash tender offer

“prior to soliciting proxies ... for the election of directors

at the annual meeting, they were under no duty to disclose

that fact in the proxy materials under Section 14(a) or

the rules thereunder . . . [because] the solicitation of prox-

ies ... was for the sole purpose of electing five directors

... and for ratifying the board’s election of independent

public auditors and was not for the purpose of voting upon

a contemplated tender offer. The law is well settled that

39

in order to constitute a proxy violation under Section 14(a)

and the rules thereunder, an omission or misrepresenta-

tion of a material fact must relate to the purpose for which

the proxies were solicited.” 422 F.Sup. at 223.

Similarly, in In Re Tennaco Securities Litigation, 449

F.Supp. 528 (S.D.Tex. 1978), a complaint under Section

14(a) was dismissed notwithstanding a charge that the

defendants failed to disclose in proxy solicitations for

the election of directors that the candidates for election

had dissipated corporate assets by making illegal pay-

ments in the form of foreign and domestic bribes and

political contributions. Relying on this Court’s opinion

in Borak, the District Court found no “transaction causa-

tion” between the alleged misconduct and the proxy solici-

tation. “. . . Assuming,” the District Court held, “that

such payments were made and... this would be a

material omission from the solicitation of an election

proxy, the materiality goes only to the election and not

to the making of the payments themselves.” 449 F.Supp.

at 531. Whatever injury the corporation suffered “ ‘[re-

sulted] from a breach of a fiduciary obligation owed as a

director or officer rather than from any shareholder vote

obtained by false proxy solicitation materials.’ Such acts

of corporate waste and breach of fiduciary duty form the

basis of state claims and do not state a claim under the

Federal Securities Laws.” 449 F.Supp. at 531.

In sustaining the Government’s position and reversing

the District Court, the Court of Appeals has violated the

general principle that statutes creating crimes are to be

strictly construed and before one may be punished it

must appear that his case is plainly within the statute.

Untied States v. Campos-seserrano, 404 U.S. 298, 297-298

(1971). This Court recently reaffirmed that principle in

reversing the Court of Appeals for the Sixth Circuit

40

and reinstating the dismissal of the indictment in Adamo

Wrecking Co. v. United States, —— U.S. ——, 98 S.Ct.

566, 572-573 (1978).

In addition to the foregoing, petitioner respectfully

adopts all arguments raised in the accompanying petition

of co-petitioner Fields.

CONCLUSION

For the above reasons it is respectfully submitted

that the petition for a writ of certiorari should be

granted.

Respectfully submitted,

Benver & FRANKEL

Attorneys for Petitioner

-Louvis BENDER

Sanpor FRANKEL

Of Counsel