Petition — Erickson v. United States

Supreme Court, U. ok

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IN THE

SUPREME COURT OF THE UNITED STATES

No. 79-356

HAROLD L. ERICKSON,

Petitioner,

Vv.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF

CERTIORARI TO THE SEVENTH

CIRCUIT COURT OF APPEALS

WILLIAM M. COFFEY

RANDALL J. SANDFORT

Attorneys for Petitioner

Suite 402

1100 West Wells Street

Milwaukee, WI 53233

(414) 278-7272

Page

OPINION BELOW---------------- 2

JURISDICTION----------------- 2

| QUESTION PRESENTED---------- 2

STATUTORY PROVISIONS--------- 2-5

: STATEMENT OF THE CASE-------- 5-7

i REASON RELIED ON FOR THE

; ISSUANCE OF THE WRIT---- 8-28

4

‘ CONCLUSION------------------- 28

TABLE OF CASES

Stromberg v. California,

(1931) 283 U.S. 359,

oa BeGe. $32, 75 Lb.

Ed. 1117---------------- 8,9,19,27

United States v. Baranski,

484 F.2d 556 (7th Cir.,

1973) ------------------- BRieadeat

United States v. Carman,

577 F.2d 556 (9th

CrP .x 1978) a ae ree et Fr

20,25,26

United States v. Dixon,

536 F.2d 1388 (2nd

Cir., 1976) ------------- 14

United States v. Papadakis,

910 F.2d 287 (2nd Cir.,

1975) cert. denied 421

U.S. 950, 95 S.Ct. IN THE

1682, 44 L.Ed 2d 104

(1975) ------------------- 26 SUPREME COURT OF THE UNITED STATES

United States v. Tanner, October Term, 1979

Fe t

Cit., 1972), cert.

denied, 409 U.S.

949, 93 S.Ct. 267, No.

34 L.Ed. 220 (1972) ------ 17

United States v. Tarnopol,

561 F.2d 466 (3rd Cir., HAROLD L. ERICKSON,

1977) -------------------- 15-16

Petitioner,

United States v. Wedelstedt,

5 P.2d 339 (8th Cir., Vv.

LS eck temsecipetrseehteelitiscloncmp 26

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF

CERTIORARI TO THE SEVENTH

CIRCUIT COURT OF APPEALS

The petitioner, HAROLD L. ERICKSON,

by his attorneys, WILLIAM M. COFFEY and

RANDALL J. SANDFORT, prays that a Writ

of Certiorari issue to review the

judgment and orders of the United States

Court of Appeals for the Seventh Circuit.

ii

OPINION BELOW

The opinion of the United States

Court of Appeals for the Seventh Circuit

is attached hereto.

JURISDICTION

The jurisdiction of this Court is

invoked under Title 28, United States

Code, §1254(1). The decision of the

United States Court of Appeals for the

Seventh Circuit was rendered June 22,

1979, a Petition for Rehearing was

filed on July 6, 1979, and the order

denying the petitioner's Petition for

Rehearing was dated August 3, 1979.

QUESTION PRESENTED

Did the Court of Appeals err when

it failed to reverse count 1 of the

indictment alleging a conspiracy to

commit two substantive crimes when a

general jury verdict was rendered and

one of the crimes was reversed as a

matter of law.

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STATUTORY PROVISIONS

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 to any act to

effect the object of the conspiracy,

each shall be fined not more than

$10,000 or imprisoned not more than

five years, or both.

If, however, the offense, the

commission of which is the object of

the conspiracy, is a misdemeanor

only, the punishment for such con-

spracy shall not exceed the maximum

punishment provided for such mis-

demeanor. Title 18, §371, U.S.C.

Title 15, §78m(a), U.S.C., states

in part:

(a) Every issuer of a security

registered pursuant to section 781

of this title shall file with the

Commission, in accordance with such

rules and regulations as the com-

mission may prescribe as necessary

or appropriate for the proper pro-

tection of investors and to insure

fair dealing in the security--

(1) such information and

documents (and such copies thereof)

as the Commission shall require to

keep reasonably current the information

and documents required to be included

in or filed with an application or

registration statement filed pursuant

to section 781 of this title, except

that the Commission may not require

the filing of any material contract

3

wholly executed before July l, 1962.

(2) such annual reports (and such

copies thereof), certified if required

by the rules and regulations of the

Commission by independent public

accountants, and such quarterly reports

(and such copies thereof), as the Com-

mission may prescribe.

Every issuer of a security registered on

a national securities exchange shall

also file a duplicate original of

such information, documents, and reports

with the exchange.

Title 15, §78ff, U.S.C., states in

part:

(a) Any person who willfully vio-

lates any provision of this chapter

(other than section 78dd-1l of this title),

or any rule or regulation thereunder

the violation of which is made unlaw-

ful or the observance of which is

required under the terms of this

chapter, or any person who willfully

and knowingly makes, or causes to be

made any statement in any application,

report, or document required to be

filed under this chapter or any rule

or regulation thereunder or any under-

taking contained in a registration

statement as provided in subsection

(d) of section 78q of this title or

by any self-regulatory organization in

connection. with an application for

membership or participation therein

or to become associated with a member

thereof, which statement was false

or misleading with respect to any

material fact, shall upon conviction

be fined not more than $10,000, or

imprisoned not more than five years,

4

~~

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.

STATEMENT OF THE CASE

On September 21, 1977, an eight-

count indictment was returned. That

indictment charged the petitioner in

count 1 with a violation of Title 18,

United States Code, §371. Count 2

alleged a violation of §78m(a) and

§78ff of Title 15, and §2 of Title 18,

United States Code. Counts 3 through

8 alleged violations of §1005 and

§2 of Title 18, United States Code.

In the conspiracy, count l, the

petitioner was charged with the co-

defendant with a conspiracy:

To willfully and knowingly

make and cause to be made a false

and misleading statement of

material facts in the filing of

Form 10-K of the Annual Report

Pursuant to §13 of the Securities

5

Exchange Act of 1934 of American Bank-

shares Corporation for the fiscal year

ending December 31, 1973, with the

Securities and Exchange Commission, in

violation of §78m(a) and §78ff of

Title 15, United States Code of Laws;

and

To willfully and knowingly make and

cause to be made false entries in the

books, records, reports and statements

of the American City Bank and Trust

Company, the deposits of which were then

insured by the Federal Deposit Insurance

Corporation, with intent to deceive the

officers of said bank, the comptroller

of the currency, the Federal Deposit

Insurance Corporation and its agents and

examiners appointed to examine the

affairs of said bank, in violation of

§1005 of Title 18, United States Code of

Laws.

On January 19, 1978, a jury trial

began which trial was concluded on

February 13, 1978. On February 17,

1978, the jury returned a verdict of

guilty with respect to each count in the

indictment. On April 12, 1978, the

petitioner filed an appeal to the United

States Court of Appeals for the Seventh

Circuit pursuant to Title 18, United

State Code, §3772, and Rule 4(b) of the

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Federal Rules of Appellate Procedure.

On June 22, 1979, the United States

Court of Appeals for the Seventh Circuit

issued a two-part decision reversing

counts 3 through 8 of the indictment and

affirming counts 1 and 2. The petitioner

thereafter filed, on July 6, 1979, a

Petition for Rehearing in the United

States Court of Appeals for the Seventh

Circuit alleging in part that the

petitioner should be awarded a new trial

on count 1 due to the reversal of counts

3 through 8. On August 3, 1979, the

United States Court of Appeals for the

Seventh Circuit issued an order modifying

in part the published opinion and denying

the petitioner's motion for a rehearing

without discussion. The petitioner seeks

review of the decision of the United

States Court of Appeals for the Seventh

Circuit pursuant to §1254(1), Title 18,

United States Code of Laws.

REASON RELIED ON FOR THE

ISSUANCE OF THE WRIT.

THE DECISION OF THE SEVENTH

CIRCUIT COURT OF APPEALS IS IN

CONFLICT WITH APPLICABLE DE-

CISIONS OF THIS COURT, OTHER

CIRCUITS AND OTHER DECISIONS

OF THE SEVENTH CIRCUIT.

In Stromberg v. California, 283

U.S. 359, 51 S.Ct. 532, 75 L.Ed. 1117

(1931), this Court held that a conviction

must be set aside where a verdict of

guilty did not specify the grounds upon

which it rested, the jury was instructed

that the verdict might be rendered with

respect to any one of three clauses of a

statute the violation of which was

charged, and one of the clauses was

unconstitutional. The Court stated:

The verdict against the appellant

was a general one. It did not specify

the ground upon which it rested. As

there were three purposes set forth in

the statute, and the jury was instructed

that their verdict might be given with

respect to any one of them, independently

considered, it is impossible to say

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under which clause of the statute the

conviction was obtained. If any one of

these clauses, which the state court has

held to be separable, was invalid, it

cannot be determined upon this record

that the appellant was not convicted

under that clause. .. . It follows

that instead of its being permissible to

hold, with the state court, that the

verdict could be sustained if any one of

the clauses of the statute were found

to be valid, the necessary conclusion

from the manner in which the case was

sent to the jury is that, if any of the

clauses in question is invalid under the

Federal Constitution, the conviction

cannot be upheld. 366 U.S. at 368-9.

In accordance with this Court's

holding in Stromberg, a number of the

circuits have held that given the invalidity

of one or more substantive counts alleged

to be the object of a conspiracy, that

conviction cannot stand if the jury

returned a general verdict. The

conflict among the Circuits over this

issue is most dramatically pointed out

in United States v. Carman, 577 F.2d

556 (9th Cir., 1978). In Carman, the

defendant was convicted of bribery,

Title 18, U.S.C., §201(b); interstate

transportation of money taken by fraud,

Title 18, §2314, four counts of securities

fraud under Title 15, U.S.C., §77q(a) and

§77x, as well as a conspiracy count

alleged under Title 18, §371. Upon

the reversal of the §2314 count, the

Ninth Circuit considered the validity

of the conspiracy count.

In Carman the appellant contended

that the reversal of the interstate

transportation counts also required

the reversal of his conspiracy con-

viction. The appellant was charged in

count 1 with conspiring with others to

commit each of the crimes with which

he was charged under the substantive

counts and the jury's verdict of

guilty with respect to the conspiracy |

count was a general verdict. The

appellant argued that under those

circumstances it was not possible to |

know which crime the jury found he

10

——

conspired with others to commit inas-

much as the jury was charged that a

conspiracy with respect to any one was

sufficient to enable a jury to convict

under count 1. The appellant con-

tended that the reversal of any sub-

stantive count on the ground that it

failed to state a crime compelled over-

turning the conspiracy conviction

because the jury might have concluded

that conviction for conspiracy was

proper only because of appellant's

participation in a conspiracy with

respect to the substantive offense,

the conviction for which was over-

turned. The appellant further as-

serted that this possibility demolished

the entire conspiracy conviction.

The Ninth Circuit stated:

We agree. The authorities

are divided on this issue. We held

en banc some years ago that a 'judg-

ment must be and is reversed because

it rests upon a general verdict which

11

may have been found upon the jury's

conclusion that a conspiracy existed

to violate any one, any two, or all

three United States laws, set up in

one count... ' (Cite).

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Nevertheless, our research indicates

that the Second and Sixth Circuits

very likely would reach a different

result. (Cites). .. . Seventh

Circuit decisions appear in conflict.

(Ci*es).

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The Third Circuit, however, appears to

support the result we reach. (Cites).

. « « SO likewise does the Fifth

Circuit. [Emphasis supplied]. United

States v. Carman, 577 F.2d at 566-567.

The Court further stated:

A determination that the con-

spiracy related to less than all the

substantive crimes mentioned in the

composite count can be the result of

either an explicit decision by the

jury or its failure to consider each

such crime after determining that

the conspiracy related to at least

one.

It is the possibility of this

inattention on the part of the jury

that produces difficulty when one of

the substantive coynt convictions is

overturned on appeal for failure to

state a crime. If the jury, when

considering the conspiracy count,

focused only on the crime embodied in

the subsequently overturned substantive

crime conviction the conspiracy con-

viction also should be overturned.

Of course, if it focused on other

crimes as well, the conspiracy con-

12

viction should be sustained. The one-

is-enough charge makes it impossible to

know precisely what the jury considered.

Not knowing, a reviewing court must

overturn the conspiracy conviction.

Criminal sanctions cannot rest on what

an appellate court thinks the jury

would have done had the issues put to

it been framed differently. [Emphasis

supplied]. United States v. Carman,

577 F.2d at 567-568.

The Court in Carman went on to state

that there were at least three ways

that the difficulty could be avoided

given an appropriate charge to the

jury. United States v. Carman, 577

F.2d at 568. The Court in Carman

correctly noted in fn. number 12

that it is possible for the conspiracy

conviction to stand in an indictment

even though the defendant has been

acquitted on all substantive counts,

because the crime of conspiracy is a

separate and distinct offense and is

established upon an agreement to

engage in criminal activity accom-

panied by an overt act committed in

13

furtherance thereof. United States v.

Carman, 577 F.2d at 567. The petitioner

agrees with this proposition of law,

but asserts that in this case, das in

Carman, the allegation of a conspiracy

to commit two substantive crimes, one

of which is invalid, requires the

reversal of the conspiracy count.

Carman is particularly applicable in

this case where the petitioner is

alleged to have conspired to commit

a violation of count 2, being a violation

of the Securities Act, ana a number of

substantive counts which are later

held to be invalid.

As was stated in Carman, there is

a conflict among the Circuits relative

to the issue presented by the petitioner.

In United States v. Dixon, 536 F.2d

1388 (2nd Cir., 1976), the defendant

was charged in a six-count indictment.

Counts 2 and 6 charged the defendant

14

with a violation under Title 15; counts

3, 4 and 5 alleged violations of the

mail fraud statute, 18 U.S.C., §1341l.

Count 1 alleged a violation of §371 of

Title 18, U.S.C. The Second Circuit

concluded that the mail fraud con-

victions could not stand but neverthe-

less upheld the conviction on the con-

Spiracy count.

In United States v. Tarnopol, 561

F.2d 466 (3rd Cir., 1977), the defendants

were charged in count 1 with a con-

Spiracy to commit a violation of the

Federal Mail Fraud Statute, 18 U.S.C.,

§1341, wire fraud in violation of 18

U.S.C., §1343, and fraud against the

United States in violation of 18 U.S.C.,

§371. The conspiracy count accordingly

had three objects of the conspiracy.

The jury rendered a general verdict of

guilty on the conspiracy count under

43

the instructions by the trial court.

The Court stated:

Under these circumstances, it

is impossible to determine whether or

not the jury based its verdict upon

less than all three of these activities

and, if so, upon which ones the verdict

was founded. In this situation, the

verdict of guilty on Count 1 cannot

stand if the indictment was insuf-

sicient in law in that any one of the

three objectives of the conspiracy

did not constitute a crime or if the

evidence was insufficient to sustain

a finding by the jury that any one

of these activities had been engaged

in. [Emphasis supplied]. United

Spates v. Tarnopol, 561 F.2d at

74.

The Court later held:

It follows that there was a

failure of proof with respect to this

particular alleged objective of the

conspiracy. Accordingly, since we

cannot know whether or not the jury

based its verdict upon this objec-

tive alone, the verdict of guilty

on Count 1 cannot stand. (Cite)

{Emphasis supplied]. United States v.

Tarnopol, 561 F.2d at 475.

In addition to the conflict among

the Circuits whether or not a con-

spiracy count is valid when on appeal,

one of the objects of the conspiracy

16

did not constitute a crime, or if the

evidence was insufficient to sustain

a finding by the jury that any one of

the activities had been engaged in,

there is also an apparent conflict as

noted in Carman in the decisions of

the United States Court of Appeals

for the Seventh Circuit considering

United States v. Tanner, 471 F.2d

128 (7th Cir., 1972), cert. denied

409 U.S. 949, 93 S.Ct. 269, 34 L.Ed. 2d

220 (1972), and United States v.

Baranski, 484 F.2d 556 (7th Cir.,

1973). As noted in Carman, the

Seventh Circuit held in Tanner that

a conspiracy conviction stands so long

as one of the objects of a conspiracy

is unchallenged, and this decision

appears to be in conflict with United

States v. Baranski, 484 F.2d 556 (7th

Cir., 1973). In Baranski, the

defendants were charged in a four-

17

count indictment with (1) willful

damage to governmental property; (2)

removal, mutilation, and destruction

of records; (3) interfering with the

administration of the military Selec-

tive Service Act; and (4) conspiracy

to commit the above offenses. The

jury acquitted the defendants on the

three substantive counts but con-

victed them on count 4. The Seventh

Circuit in Baranski stated:

- « « (T)he defendants here were

named in all substantive counts referred

to in count four, the conspiracy charge.

Because the jury returned a general

verdict on that count, we cannot know

which of the three statutes the

violations of which were the ‘'objects'

of the conspiracy the jury relied on

in convicting the defendant. The

trial court had instructed the jury that

actions taken to attain any of the

three alleged objects wou suffice

for a conviction.

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The simple fact is that we cannot

say with any certainty which of the

three objects was crucial to the jury's

determination.

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We are not unmindful of the general

18

one

statements in the cases to the effect

that proof of conspiracy to violate any

one of several statutes alleged in the

indictment will support a conviction.

See e.g., United States v. Mack, 112

F.2d 290 (2nd Cir., 1940). While we do

experience some conceptual difficulties

with this general statement, recognizing

again that the offense of conspiracy is

separate from the statutory offenses

constituting the objects of the con-

Spiracy and assuming arguendo the

correctness of the general statement, we

do not find the principle applicable in

the particular factual situation here

involved because of our inability to

state the basis of the jury's deter-

mination. We decline to speculate on

such a matter.

To the extent that an isolated

statement that there is 'no failure or

proof in the fact that one of its

objects alleged as unlawful may not have

been so, 'Moss v. United States, 132

F.2d 875, 878 (6th Cir., 1943), appears

to be inconsistent with the result we

have reached, we cannot accept the

implication as being applicable here,

and, if it is, we cannot accept it as

good law.

The controlling matter here, in our

opinion, is not the proof upon which the

jury might have convicted under the con-

Spliracy count but rather the proof upon

which the jury did convict. United

“Zates v. Baranski, 484 F.2d at 560-

561. [Emphasis supplied].

The Court thereafter in Baranski cited

extensively from this Court's decision

in Stromberg v. California, 283 U.S.

19

-

359, 51 S.Ct. 532, 75 L.Ed. 1117 (1931).

In this case, the allegation of

conspiracy as contained on pages two and

three of the indictment herein, allege a

conspiracy to commit a violation of

§78m(a) and §78ff of Title 15, U.S.c.,

as particularly set forth in count 2

of the indictment; and violations of

§1005 of Title 18, U.S.C., as set forth

in counts 3 through 8. On appeal, the

Seventh Circuit Court of Appeals held

that counts 3 through 8 must be reversed

because the allegations contained there-

in failed to state an offense because

the entries in the books and records of

the American Bankshares Corporation were

recorded exactly as they occurred and

therefore there was not a false entry

under Title 18, §1005. As such, counts

3 through 8 failed to state an offense

and as in United States v. Carman, 377

20

F.2d 556 (9th Cir., 1978), the sub-

stantive violations being invalid,

the conspiracy count cannot

Stand. United States v. Carman,

577 F.2d at 567.

In the present case, the government

argued that with reference to count he

the conspiracy, that it was, "almost a

pure intent statute." (R. 2187). The

government thereafter stated:

And in this case, to find the

defendant guilty of count one, (the

conspiracy count), all that you must

find is that Fran Wilson and Harold

Erickson came to an agreement, and that

agreement consisted of, of an agreement

to violate the law, specifically to

create false entries, and that term will

be defined for you by the Court, and

specifically to materially understate

the income of the bank for that year.

In other words, to cover up losses,

(R. 2188)

The government thereafter went on to

advise the jury that it was sufficient

to sustain the government's burden if

one of the overt acts alleged in the

21

conspiracy count were found have been

completed by the jurors. (R.

2188-9). The government thereafter

argued:

Well, the Court will instruct you

that if you find existence of a con-

Spiracy, specifically an agreement

between the two defendants to violate

the law, that is to hide losses, to

create false entries, to materially

understate the income of the bank, that

then the acts of these partners in crime

become admissible against each other.

(R. 2190).

The Court thereafter in a discussion

with counsel relative to the jury

instructions, stated, "I mean the Court s

view of the case is that the statute

1005 says it's against the law to file

false financial statements. Now, and

that's what they are being tried for."

(R. 2259). The government in response

to the defendant's request for certain

instructions, stated, "We're not dealing

with a situation where the, the govern-

ment or the S.E.C. or whomever need

22

ano Vee

promulgate a specific regulation spel-

ling out what overtrading is and why

it's illegal. The general language of

1005 covers it, and it prohibits a

matrix of possibilities." (R. 2260).

Further, the Court, in giving its

instructions to the jury with respect to

count 1, stated:

The evidence in the case need not

establish that all the means or methods

set forth in the indictment were agreed

upon to carry out the alleged con-

Spiracy, nor that all means or methods

were agreed upon were actually used or

put into operation, nor that all persons

charged have been members of the alleged

conspiracy were such. But the evidence

in the case must establish, again beyond

a reasonable doubt, is that the alleged

conspiracy was knowingly formed and that

One or more of the means or methods

described in the indictment were agreed

upon to be used in an effort to affect

or accomplish some object or purpose of

the conspiracy as charged in the in-

dictment, and that two or more persons,

including one or more of the accused,

were knowingly members of the conspiracy

as charged in the indictment. [Emphasis

Supplied]. (R. 2351).

The Court further charged the jury that

the defendants, including the petitioner,

23

alleged to have conspired to commit

offenses against the United States by,

"(o)ne to wilfully and knowingly make

and cause to be made a false and mis-

leading statement of material facts and

the filing of the Form l0-K, . . -; and,

two wilfully and knowingly make and

cause to be made false entries in the

books and records, and reports of the

American City Bank and Trust Company,

- + ee" (R. 2359). The jury was

further advisod that with respect to the

elements of a conspiracy count, the

government need to have proven that

there was some overt act which was

knowingly done in furtherance of,"some

object or purpose of the conspiracy as

charged." (R. 2360). The Court further

advised the jury that it need find an

overt act which, "must be knowingly done

in furtherance of some object or purpose

24

of the conspiracy charged in the

indictment." [Emphasis supplied].

(R. 2362). The Court further stated,

"Indeed, if you find any overt act,

whether it's specifically enumerated

under count one of the indictment or

not, was committed by any co-conspirator

in furtherance of a conspiracy, then the

statutory element of the overt act has

been satisfied as to each and every

member of the consp.sacy." [Emphasis

supplied]. (R. 2363).

As in Carman, the petitioner

respectfully asserts that the argument

of the government as well as the state-

ments of the Court, allowed the jury to

return a verdict of guilty with respect

to count 1 under a theory that a finding

of one of the alleged objects of the

conspiracy is "enough." Similarly, as

in Carman, counts 3 through 8 were

25

Se

overturned because of failure to state a

crime and the jury could have concluded

with respect to count 1 that the object

of a conspiracy was the false statements

as alleged in counts 3 through 8. Ac-

cordingly, the petitioner asserts that

the conviction should not stand.

Additionally, the conviction of the

petitioner should not be allowed to

stand because it is apparent from a

review of the entire record, as well as

the closing arguments of counsel for the

government and the instructions of the

Court, that an overwhelming amount of

the evidence was relevant only to counts

3 through 8 of the indictment which the

Seventh Circuit concluded as a matter of

law failed to state a crime. The

allegation of count 2 was merely the

composite of the allegations of counts

3 through 8 as well as other "false

statements" set forth as overt acts

26

“1 pgs

DLO LL SEP IE ONE Te E

but not specifically set forth as

substantive counts. Clearly the

petitioner was prejudiced by the amount

of evidence introduced against him with

respect to counts 3 through 8 held to be

invalid. As such the conspiracy count,

even in those Circuits which would allow

a “one-is-enough" conspiracy to stand,

should have been reversed and the

failure of the Seventh Circuit to do so

is in conflict with the decisions of

this Court. other Circuits, and its own

decisions. See e.g., United States v.

Papadakis, 510 F.2d 287 (2nd Cir.,

1975), cert. denied 421 U.S. 950, 95

S.Ct. 1682, 44 L.Ed. 2d 104 (1975); and

United States v. Wedelstedt, 589 F.2d

339 (8th Cir., 1978).

CONCLUSION

The petitioner was convicted in

count 1 of a conspiracy to violate two

substantive crimes, one of which was

held as a matter of law and not to

27

state a crime. The Circuits are clearly these reasons, it is respectfully urged

in a conflict as specifically stated in | that the Petition for a Writ of Certiorari

United States v. Carman, 577 F.2d 556 be granted.

(2nd Cir., 1978), whether or not under Respectfully submitted,

those circumstances the conviction on HAROLD L. ERICKSON

Petitioner

the conspiracy count can be upheld. The

, . , P BY:

inconsistency of the affirmation of

WILLIAM M. COFFEY

count 1 of the indictment and the RANDALL J. SANDFORT

reversal of counts 3 through 8 was P.O. Address:

pointed out to the Seventh Circuit in Suite 402

Fass . . 1100 West Wells Street

the Petition for Rehearing filed on July 6, Milwaukee, Wisconsin 53233

414) 278-72

1979. The derial of that Petition for ( es

Rehearing is in conflict with the

decision of this Court in Stromberg v.

California, 283 U.S. 359, 51 S.Ct. 532,

75 L.Ed. 1117 (1931); decisions of other

Circuits, specifically the Third and

Fifth Circuits; and in conflict with a

decision of the Seventh Circuit Court of

Appeals in United States v. Baranski,

484 F.2d 556 (7th Cir., 1973). For

28

—=we.tiv Ec i

JIN 25 197,

deVRIES, VLASAK & SCHALLERT, $.¢

in the

United States Court of Appeals

For the Seventh Cirrutt

Nos. 78-1511 and 78-1512

UNITED STATES OF AMERICA,

Plaintiff-A ppellee,

Vv.

HAROLD ERICKSON and FRANCIS WILSON,

Defendant-A ppellants.

Appeal from the United States District Court for the

Eastern District of Wisconsin.

No. 77-Cr-158—John W. Reynolds, Judge.

ARGUED JANUARY 5, 1979—DECIDED JUNE 22, 1979

Before TONE and Woop, Circuit Judges, and EASsT,

Senior District Judge.*

TONE, Circuit Judge. Defendants were convicted of

causing false entries to be made in the records of the

bank of which they were officers and of causing false

and misleading financial statements to be filed by an af-

filiated bank holding company, in violation of the False

Banking Entry Act and the Securities Exchange Act of

1934, and of conspiring to do the same. More specifical-

ly, they were found to have failed to disclose the effect

on the bank’s income account of certain “overtrades,”

i.e., security transactions executed at prices in excess of

* The Honorable William G. East, Senior District Judge of

the United States District Court for the District of Oregon, is

sitting by designation.

2 Nos. 78-1511 & 78-1512

the prevailing market prices. In this opinion, we con-

sider only the sufficiency of the indictment and the

evidence, leaving alleged trial errors to be dealt with in

a contemporaneously filed unpublished order. We affirm

the convictions on the conspiracy and securities law

counts but reverse on the banking entry counts.

Erickson was chairman of the board of directors of

both American Bankshares Corporation (Bankshares), a

holding company, and one of its subsidiaries, American

City Bank and Trust gg syed (the bank); he was also

president of Bankshares. Wilson was one of the bank’s

vice presidents and head of its Investment Department.

Securities in the Investment Department were held in

either a trading account or a portfolio account.

In early 1973 the bank, under Wilson’s direction, ex-

ecuted a series of federal security short sales with the

age sm that the market would continue to fall.

When this expectation was not realized, the short sales

had to be covered. Instead of borrowing the securities

needed for that purpose from a third party, Wilson caus-

ed the bank to borrow them from its own portfolio and

later purchase identical securities to replace them.

Wilson later caused the bank to sell these “replacement

securities” in the series of year-end overtrades described

more fully below.

In either July or August 1973, Ernst & Ernst, who un-

til 1974 was Bankshares’ independent auditor, gave

Erickson and Wilson the re mistaken advice

that because the “short sales” had been covered with the

bank’s own securities, they were completed transactions;

consequently the bank, and therefore Bankshares, would

have to recognize _ losses incurred on those transac-

tions.! This loss would have approximated $800,000, a

| Later, after the transactions on which the indictment is

based, Ernst & Ernst’s successor, Arthur Anderson & Co., dis-

agreed, reasoning that since the portfolio securities were

replaced by identical securities, the latter could be carried at

the “cost” of the original securities. Under this view, the port-

folio account would not have been required to recognize any

loss on the transaction; but Erickson and Wilson relied on

(Footnote continued on following page)

Sr err ee

Nos. 78-1511 & 78-1512 3

substantial amount in light of the bank’s profit of onl

about $1,000,000 the previous year. Wilson chinciel,

stating that “what he had done was common practice in

the industry, and that he would obtain letters from other

banks to support his position.” [Government Exhibit

(G.Ex.) 44, p. 2.] Ernst & Ernst expressed its willingness

to reconsider its position if Wilson could provide such

letters. After trying unsuccessfully to obtain the letters,

Wilson told Erickson that some of the “replacement

securities” had already been sold and most of the rest

could be sold above the current market price to avoid

the substantial loss threatened by the position taken by

Ernst & Ernst. [Jbid.]

With Erickson’s approval, Wilson then engaged in a

series of negotiated overtrades, whereby the bank sold

most of the remaining “replacement securities” not at

market prices but at inflated prices. The quid pro quo

for each of these sales was a concurrent agreement by

the bank to buy from the purchaser of the “replacement

securities” other securities of approximately equal value

at approximately equally inflated prices. The manner in

which these transactions were recorded, which avoided

recognition of loss,? forms the basis of the indictment.

The bank recorded these transactions as if the

purchases were unrelated to the sales and each side of

the transaction had been an independent arms length

sale and purchase. The premium received by the bank

1 continued a

Ernst & Ernst’s contrary view at the time in question. [Tr.

1194-1198; 1259.] The anticipated loss on the short sales is

— only because it provided the motive for what follow-

ed.

2 Wilson and Erickson apparently executed the overtrades on

the premise that if the “replacement securities” could be dis-

sed of by year-end and other securities substituted, using in-

ated prices for both sales and purchases, the loss threatened

by Ernst & Ernst’s ition on accounting for the short sales

could be avoided. [See G. Ex. 40, p. 1.] Sale of the “replace-

ment securities” at prices above market would avoid the an-

ticipated recognition of unrecorded depreciation. Purchase of

other securities at prices above market would establish an in-

flated cost basis for the new securities.

4 Nos. 78-1511 & 78-1512

on the sale of securities was included in the sale price

recorded, without reference to the agreement to pay a

similar premium on the reciprocal purchase of other

securities or the market value of the securities purchas-

ed. Similarly, the cost of the securities purchased by the

bank was recorded at the inflated purchase price in-

stead of their market value. Although even the inflated

selling price was usually a little less than the carrying

value of the securities sold, resulting in a recorded loss

to the bank, that recorded loss was much less than it

would have been if the price recorded had been the

market value of either the securities sold or the

securities purchased by the bank.

David Drought, the Ernst & Ernst audit supervisor

assigned to the Bankshares’ examination for the year

ending December 31, 1973, was understandably curious as

to why anyone would pay more for securities than the

prevailing market price. In a memorandum sum-

marizing a February 26, 1974 meeting with other Ernst

& Ernst personne! he explained:

The Money Center [the bank’s Investment Depart-

ment] had accomplished its goal of disposing of the

issues without substantial losses but the question

remained as to how other brokers could buy the

securities at such inflated prices without hurting

themselves.

[The bank’s] purchases of new and different issues

prior to year-end and, in some cases, the identical

issues after year-end from the same brokers, also at

inflated prices provided the answer. This was the

matter of concern in that the Bank appeared to

have sold the securities without loss by

manipulating prices and later replacing the

securities or equivalents so as to put themselves

back in the beginning position with substantial un-

recorded depreciation on the issues.

[G.Ex. 40, p. 2.}* Wilson’s explanation was that the bank

was able to dispose of the replacement securities at

3 The purchases of identical securities after year-end

referred to in Drought’s memorandum are to be distinguished

from the purchases of “new and different issues.” Only the

latter are involved in this case.

ee

~

: a aaa Te ance pce ce GA

Nos. 78-1611 & 78-1512 5

prices above the market price because, for these par-

ticular securities, there was a “seller’s market” and the

market prices reflected only a “thin and insufficient

market.” [G.Ex. 11, p. 2.] Erickson later made similar

re 5 eal the bank’s board of directors. [G.Ex.

; & 2.

Ernst & Ernst certified Bankshares’ consolidated

financial statements for 1973 without requiring any ad-

justments or explanation concerning these transactions,

apparently taking the position that the transactions

were “in substance” repurchase agreements, and

therefore no gain or loss need be recognized.‘ Ernst &

Ernst’s successor, Arthur Andersen, disagreed, however,

reasoning that since the bank had purchased securities

different from those sold, the transactions could not be

treated as repurchase agreements. Further, since the

transactions were closed, the full loss resulting from the

sale of the “replacement securities” had to be recogniz-

ed. Recognition of the loss was accomplished by writing

down the carrying value of the security acquired in each

overtrade to its market value on the day of the acquisi-

tion and making a ccrresponding adjustment in the in-

‘ According to the testimony at trial, a “repurchase agree-

ment” appears to be in substance a secured loan. It involves

little more than a “sale” of securities and an obligation to

repay the “sale price” plus interest on the sale epee at some

later date. As with any loan, the borrower would not include

the amount of money borrowed as income and the collateral

would not be treated as having been sold.

The Comptroller of the Currency requires banks to state

separately the value of all securities sold pursuant to

repurchase and similar agreements on financial statements

filed with the SEC. See, eg. 12 C.F.R. § 11.71: Balance

Sheet Instructions 5 (Assets), 16 (liabilities); Income State-

ment Instructions l(c —— e) (expenses); 12 C.F.R.

ireeahig Balance Sheet Instructions 4 (assets), 14 hoon

ncome Statement Instructions 1(c) (income), ne) (expenses);

see also 17 C.F.R. §§ 210.9-01(c), 10.9-05(a) (S regulations

concerning bank and bank holding company financial

statements). The transactions in question here were not

sepertes as repurchase agreements in Bankshares’ 10-K for

a = which Count 2 is based, but as unrelated purchases

and sales.

6 Nos. 78-1511 & 78-1512

come account reducing income, or increasing loss, in the

amount of the write-down.

Counts 3 through 8 of the indictment charge both

defendants with violating the False Banking Entry Act,

18 U.S.C. § 1005,5 by causing entries relating to the

purchases to be made in the bank’s records that were

‘inflated and false in light of the true market value” of

the securities when purchased, with the intent to deceivé

officers of the bank and others.

Count 2 charges each defendant with wilfully and

knowingly making and causing to be made false and

misleading statements of material fact in Form 10-K

filed with the Securities and Exchange Commission for

the year ending December 31, 1973, in violation of §§ 13

and 32 of the Securities Exchange Act of 1934, 15

U.S.C. §§ 78m(a), 78ff.6 Specifically, Erickson and

Wilson were alleged to have understated Bankshares’

losses fur the year —s December 31, 1973 by $423,-

946, about 16 per cent. The government’s theory under

Count 2 was that as a result of the overtrades the bank

5 In relevant part the statute provides that

Whoever makes any false entry in any book, report, or

statement of such bank with intent to injure or defraud

such bank, or any other company, body politic or cor-

porate, or any individual person, or to deceive any officer

of such bank, or the Comptroller of the Currency, or the

Federal Deposit Insurance Corporation, or any agent or

examiner appointed to examine the affairs of such bank,

or the Board of Governors of the Federal Reserve System

shall be fined . . . or imprisoned . . . or both.

6 Section 13 of the Exchange Act, 15 U.S.C. § 78m(a), re-

uires every issuer of a security registered under § 12 of the

ct, 15 U.S.C. § 781. to file certain reports, including an an-

nual report, with the SEC. Bankshares is such an issuer.

Section 32, 15 U.S.C. § 78if, provides in relevant part that

[A]ny person who willfully and knowingly makes or

causes to be made, any statement in any... , report,

. . . required to be filed under this chapter or any rule or

regulation thereunder . . . , which statement was false or

misleading with respect to e' material fact, shall upon

conviction be fined not ...ore than $10,000, or imprisoned

not more than two years, or both,....

k

;

t

6 ENT ee

a alta

AD FQ PRR TR Te rR REL re

Nos. 78-1511 & 78-1512 7

avoided recording the even greater losses that were in

fact incurred.

Count 1 of the indictment —— each or.

ith conspiring to commit the offenses Charge

Counts 9 t hae 8, in violation of 18 U.S.C. § 371.

I.

Sufficiency of the Indictment: Counts 1 and 2

Defendants challenge the indictment on the ground

that it fails to allege a crime. The gist of this argument

seems to be that by alleging that the defendants made

purchases of certain bonds at prices above their market

value with the intent to conceal the bank’s loss, 2.¢., for

the purpose of affecting income, the indictment alleges

“a non sequitur”; for, defendants argue, the purchase of

bonds in excess of their market price could not affect

the bank’s income, and “the requisite element of intent Is

lacking in the indictment.” As a further consequence,

say the defendants, the indictment did not apprise them

specifically “as to what burden they must be prepared to

meet at trial.”

The conspiracy alleged in Count 1 is described in

paragraph 12, which states as follows:

It was a part of the conspiracy and agreed upon

that HAROLD L. ERICKSON and FRANCIS M.

WILSON would cause the American City Bank and

Trust Company to engage in a series of deceptive

securities transactions, to-wit, the American. City

Bank and Trust Company would sell securities to

another party at prices in excess of market price,

and, by prior arrangement, the American City

Bank and Trust Company would purchase other

securities from the same persy at prices similarly in

excess of market price; the false and inflated value

of said purchased securities would be recorded and

reflected on the books, records and statements of

said bank, all for the purpose of avoiding full

recognition of losses to the American City Bank and

Trust Company on said books and records of said

bank.

8 Nos. 78-1511 & 78-1512

Count 1 goes on to allege a series of overt acts, which

consist of purchases of described debt securities at

prices that were “inflated and false in light of a true

market value” that on the date of purchase was lower

than the purchase price. In the case of each purchase,

the purchase price and the “true market value” are

specifically alleged, and it is further alleged that “the

net effect of said transaction was to conceal an increase

in the loss to said bank in 1973 in the amount of ap-

proximately” a specified amount.

The net effec: of each of the overtrade transactions

described in paragraph 12, in which the sale and

purchase were reciprocal, was realization of a loss on

the security sold. The alleged conspiracy was to engage

in the transactions and to record the false and inflated

value of the purchased securities in the records of the

bank “for the purpose of avoiding full recognition of

aoe to the [bank] on [the] books and records of said

ank.”

Defendants’ argument is that the recording of the

purchase side of the transaction could not affect income

or cause the recognition of losses to be avoided.

Paragraph 12, however, although it does not mention the

recording of the sale side of the transaction, describes

the entire transaction, and sufficiently conveys the gist

of the charge, which was overstating income. As the

evidence later showed, the recording of the purchased

securities at an inflated value was one aspect of the mis-

leading statement, the other being the overstatement of

income. When the statement was ultimately corrected, a

write-down of the purchased securities to their actual

value at the time of acquisition also required an entry

adjusting the income account by a like amount. The in-

dictment was not required to state all the intricacies of

the bookkeeping and accounting entries that would

result in a false and misleading statement. It was

enough that the defendants conspired to make such a

statement for the purpose of avoiding recognition of

losses the bank. had realized. me

Likewise, it was not fatal to Count 1 that each of the

overt acts alleged was the purchase side of the over-

trade. It would have been sufficient to allege a single

Nos. 78-1511 & 78-1512 9

overt act, and of course the overt act need not itself have

been illegal.

Defendants’ attack on Count 2 of the indictment is

similarly without merit. The respect in which that count

alleges that the Form 10-K was false and misleading

was in reporting an “income loss” of $2,523,645, and

omitting to include in the loss “an unrecorded loss on

securities in the approximate amount of $423,946, said

securities having been purchased by American City

Bank and Trust Company in 1973 at prices in excess of

market value.” Again, we cannot say that an adjustment

of the loss figure would not have resulted from adjusting

the purchase price of the securities to reflect their

market value at the time of purchase. In fact, as the

evidence showed, the proper accounting procedure re-

uired such an adjustment to reflect the lower value of

the securities purchased, which in turn required a cor-

responding entry in the income account reducing income

and thus reflecting the loss incurred in the overtrade

transactions.

Counts 1 and 2 are sufficient tor the foregoing

reasons. We need not consider the sufficiency of Counts

3 through 8, for we have concluded that the convictions

under those counts cannot stand for another reason, to

which we now turn.

II.

Sufficiency of the Evidence under Counts 3 through 8:

Falsity

Each of Counts 3 through 8 charges the defendants

with having made and caused to be made, with respect

to a specified overtrade transaction, false entries on the

bank’s “order form” that were reflected in the bank’s

records, reports, and statements, with the intent to

deceive officers of the bank and others. It is not alleged

that the bank paid less than the amount recorded.

Rather, the purchase price is alleged to have been

inflated and false in the light of the true market value”

on the date of purchase.

The bank records introduced in evidence in support of

these counts were (1) order forms, (2) confirmation

10 Nos. 78-1511 & 78-1512

advices from the sellers, (3) debit and credit forms, and

(4) pages from the general ledgers to which data from

the debit and credit forms were transferred. None of

these documents purports to show the market value of

the purchased securities or the substance of the

transactions.. They purport merely to show the price at

which the security transaction was executed.

Although entries recording fictitious transactions or

inaccurately recording actual transactions are false

within the meaning of 15 U.S.C. § 1005,’ an entry

recording an actual transaction en a_bank’s books

exactly as it occurred is not a false entry under that

statute even though it is a part of a fraudulent or

otherwise illegal scheme.’ The entries proved under

7 See, e.g., United States v. Giles, 300 U.S. 41 — (omission

of deposit slips ene in inaccurate balances); United

States v. Darby, 289 U.S. 224, 226 (1933) (forged signature on

romissory note); Agnew v. United States, 165 U.S. 36, 52-53

1897) (fictitious deposit); a v. United States, 162 U.S.

664, 683-685 (1896); United States v. Austin, 585 F.2d 1271,

1274-1278 (5th Cir. 1978) (recording worthless checks as cash

assets on books and in report); United States v. Sheehy, 541

F.2d 123, 128-129 (1st Cir. 1976) (recording of unsecured loan

as secured); United States v. Bevans, 496 F.2d 494, 498 (8th

Cir. 1974) (omission of certain overdrafts from report); United

States v. Mayr, 487 F.2d_ 67, 69 (5th Cir. 1974) (fictitious

veh ae United States v. nb 4 oom 445 F.2d 1194, 1200, 1200-

1201 (3d Cir.), cert. denied sub nom. Mischlich v. United States,

404 U.S. 984 (1971) (fictitious accounts receivable); Phillips v.

United States, 406 F.2d 599, 600-601 (10th Cir. 1969) (fic-

titious loans); United States v. Fortney, 399 F.2d 406, 407-408

ae 1968) (fictitious loans; false reporting of cash assets);

nited States v. Biggerstaff, 383 F.2d 675, 678-679 (4th Cir.

1967) (fictitious loans); United States v. Harter, 116 F.2d 51

(7th Cir. 1940) (fictitious loans); Billingsley v. United States,

178 F. 653, 661-663 (8th Cir. 1910) (fictitious sales and

deposits); Morse v. United States, 174 F. 539, 547-550 (2d Cir.),

cert. denied, 215 U.S. 605 (1909) (fictitious purchases and

loans; omission of stock held by bank in report).

8 See, e.g., Coffin v. United States, 156 U.S. 4382, 462-463

(1895); United States v. Manderson, 511 F.2d 179 (5th Cir.

1975); United States v. Bigperstalf supra, 383 F.2d at 678 (4th

Cir. 1967); Laws v. United States, 66 F.2d 870, 873 (10th Cir.

1933); Twining v. United States, 141 F. 41 (3d Cir. 1905);

(Footnote continued on following page)

ere eR SI TO EEE TE IEE ome en

Pe ea

Nos. 78-1511 & 78-1512 11

Counts 3 through 8 seem to fall within the latter

category.

The prosecution was limited to the theory of falsity

alleged in the indictment, Stirone v. United States, 361

U.S. 212, 218-219 (1960), which was that the entries

were false “in light of the true market value of the

securities.” As we have said, the disparity between the

price and market value did not make the entry

recording the purchase price false. The convictions

under Counts 3 through 8 of the indictment are

therefore reversed.

ITI.

Sufficiency of the Evidence Under Counts 1 and 2: Intent

The foregoing conclusion does not affect the con-

victions ha Counts 1 and 2, which did not depend

upon the proposition that the purchase orders and other

records were false in that they do not show the

difference between the purchase price and the market

value of the acquired securities. Because we know from

the jury’s verdict on Count 2 that the verdict on Count 1

did not rest solely on a determination that the defend-

ants conspired to commit the offenses charged in Counts

3 through 8, reversal of convictions on the latter counts

does not require reversal on Count 1. United States v.

Dixon, 536 F.2d 1388, 1401-1407 (2d Cir. 1976).

Defendants only challenge to the sufficiency of the

evidence under Counts 1 and 2 is that the requisite

criminal intent was not proved. In addressing that

subject in their brief, defendants do not discuss the

evidence supporting the verdicts; rather they rely on

other evidence and argue that the jury should have

acquitted them. Viewing the evidence presented in the

8 continued

United States v. Scoblick, 124 F.Supp. 881, 886 (M.D. Pa.

1954), affd, 225 F.2d 779 (3d Cir. 1955); United States v.

Young, 128 F. 111 (M.D. Ala. 1904). But cf. United States v.

Hart, 551 F.2d 738, 741 (6th Cir.), cert. denied, 434 U.S. 920

(1977).

12 Nos. 78-1511 & 78-1512

light most favorable to the jury’s verdicts, we think it

sufficient.

Count 1

Conviction under Count 1 required proof that the

defendants agreed to execute the sham transactions with

the intent necessary for commission of the substantive

crime of deception they allegedly conspired to commit.®

See, e.g., United States v. Feola, 420 U.S. 671, 686-696

(1975); United States v. Zarattini, 532 F.2d 753, 760 (7th

Cir. 1977). The evidence presented was sufficient to

support the inference that they acted with the intent to

cause the filing of financial statements that would not

disclose the sham nature of the overtrade prices and

thus with the intent to conceal losses that otherwise

would appear and thereby to deceive readers of the

financial statements. Defendants’ purpose and motive in

agreeing to execute the sham transactions was to

conceal the anticipated $800,000 loss on the short sales.!°

If successful, the scheme would necessarily result in

materially false financial statements; otherwise the

losses would not be concealed. Thus, the jury could well

have inferred the necessary intent from the nature of

the agreement proved.

Ironically, when it came time to issue financial

statements for 1973 and file the 10-K Report, the threat

of an $800,000 loss had disappeared and left in its wake

® The trial court instructed the jury that specific intent,

defined in the conventional way, see United States v. Aram-

basich, ..... F.2d ..... (7th Cir. 1779). was an element of both

substantive offenses charged. While something less was re-

uired for the Securities Exchange Act charge alleged in

ount 2, see United States v. Schwartz, 464 F.2d 499, 509 (2d

Cir.), cert. denied, 409 U.S. 1009 (1972), the distinction does

not affect the result here because we think the evidence sup-

ports the jury’s apparent finding that defendants acted with

the specific intent described in the judge’s instructions.

10 Defendants’ testimony that the purpose of the overtrades

was to increase the bank’s liquidity could properly have been

disbelieved by the e's That testimony was discredited by

evidence that many of the securities received in overtrades

matured later than the securities traded for them.

a

Nos. 78-1511 & 78-1512 13

another problem, viz., the effect that full disclosure of

the true nature of the overtrades would have on the

financial statements. Nevertheless, even when they

embarked on the conspiracy, the defendants could

hardly have intended such disclosure, for it would have

defeated the purpose of the overtrades. At least the jury

could have inferred that the defendant bankers were not

so unsophisticated as to believe that financial records

and statements that reported the purchases and sales at

sham figures without disclosing the real nature of the

transactions were not false, especially when their

purpose in doing so was to conceal what they believed

would otherwise appear as a substantial loss.

In addition, defendants’ own false explanations of the

overtrades could properly have been viewed as persuasive

evidence of their consciousness of wrongdoing. These

consisted of Wilson’s disingenuous “thin-market mem-

orandum to Ernst & Ernst, and Erickson’s later

explanation to the same effect to the bank’s board of

directors."

Defendants rely heavily on the difference of opinion

between Ernst & Ernst and Arthur Andersen as to what

kind of transaction can be deemed a repurchase agree-

ment. The overtrades were not recorded as repur-

chase agreements, however, and there is no suggestion

that either Wilson or Erickson regarded them as such

when the conspiracy was formed or when the overtrades

were executed. The later difference of opinion between

the two accounting firms is of little relevance to the

intent with which the conspiracy was entered _into.

Similarly, defendants argue that because Ernst & Ernst

knew of the overtrades before the 1973 financial

statements were filed, the jury could only conclude

that they acted in good faith reliance on the accountants.

As noted above, however, the defendants did not consult

Ernst & Ernst until after the overtrades were executed.

Whatever Ernst & Ernst’s position would have been had

1! Erickson couched the explanation in terms of what

“Wilson said.” But since he was well aware that the explana-

tion was not only misleading but blatantly inaccurate, the

jury would have hes justified in ignoring the attribution.

14 Nos. 78-1511 & 78-1512

defendants consulted them, it has little bearing on what

intent defendants had in agreeing to engage in over-

trading and to falsely report the transactions.

Count 2

Count 2 requires proof that defendants wilfully and

knowingly filed and caused to be filed a materially false

and misleading 10-K Report by understating the bank’s

losses for 1973. Much of what we have said applies to

this substantive count as well. Under this count,

however, the prosecution must prove that the actual filin

or the act of causing false or misleading financia

—— to be filed was done “wilfully and know-

ingly.” !2

The defendants argue that, although technically they

issued the financial statements, it was not they but

Ernst & Ernst who decided how to treat the overtrades

in the financial statements and who approved treatment

by giving its favorable opinion on the financial

statements. The judge had instructed the jury that a

— faith defense would be established by proof that

rnst & Ernst was selected in good faith as a competent

accounting firm and knew of the transactions, and that

defendants gave Ernst & Ernst the facts and relied on

that firm to make the proper'entries and adjustments

in the financial statements. The jury found that defend-

ants had not acted in good faith, and we think the

evidence [gta ee such a finding. There was, as we

have noted, evidence of specific misrepresentation by the

‘2 No proof of specific intent to violate the securities laws is

necessary. See United States v. Schwartz, 464 F.2d 499, 509 (2d

Cir.), cert. denied, 409 U.S. 1009 (1972).

It is not clear whether the requirement that defendants act

“knowingly” adds - at all to the requirement that they

act “wilfully.” See 3 Loss, Securities Regulation 1986-1987

(1961); ALI, Model Penal Code (Proposed Official Draft

2.02 (1962). But see, United States v. Lixon, supra, 536 F.2

at 1396, in which Judge Friendly suggests that the term

“knowingly” requires something akin to fraudulent intent.

Here the trial court instructed the jury that it does. See note

9, supra. The oes of intent is adequate even under the

stricter standard.

e-

Nos. 78-1511 & 78-1512 15

defendants concerning the nature of the overtrades.

Although Ernst & Ernst memoranda indicate that the

firm knew that overtrades had taken place, the jury

might properly have found that the firm was misled by

defendants’ misrepresentations as to the absence of a

reliable market ‘price, and this in turn influenced the

firm’s view of the materiality of the matter. The

accountants’ failure to require disclosure of the sham

character of the transaction, in view of the amounts

involved, is inexplicable if they were aware of the facts,

and so the jury might have believed.

Although certified by accountants as prepared in

accordance with generally accepted accounting prin-

ciples, the financial statements are nevertheless the

representations of management. See, a In the Matter

of McKesson & Robbins: Report on Investigation 423

(1940). If a company officer ‘knows that the financial

statements are false or misleading and yet proceeds to

file them, the willingness of an accountant to give an un-

ualified opinion with respect to them does not negative

the existence of the requisite intent or establish good

faith reliance, See United States v. Colasurdo,

453 F.2d 585, 594 (2d Cir. 1971), cert. denied,

406 U.S. 917 (1972). Here defendants knew that

they had in substance bartered: securities for other

securities. They knew they had _ recorded these

transactions as if they were genuine purchases and sales

at prices higher than the market prices of the securities.

They knew therefore that the cost of the acquired

securities and the vemivren gate loss on the sold

securities were not accurately reflected in the records of

the transactions. Thus, they knew that unless adjust-

ments were made on the financial statements to reflect

the foregoing facts the losses on the sales would be

understated and that the carrying value of the securities

purchased would be overstated. From all this the jury

could have inferred that defendants, knowimg that the

financial statements were false and misleading). wilfully

filed them with the intent to conceal the bank’s losses-On

its securities transactions. That Ernst & Ernst certified

the financial statements without requiring any adjust-

ments, did not alter the fact that defendants knew the

statements did not properly reflect the overtrade

transactions.

16 Nos. 78-1511 & 78-1512

As stated by the Second Circuit with respect to

similar facts in United States v. Colasurdo, supra, “the

question is ultimately one of honesty and good faith.”

453 F.2d at 594. There was evidence on the basis of

which the jury could properly find, notwithstanding the

Ernst & Ernst advice and certification, that defendants

knowingly and wilfully filed materially false and

misleading financial statements.

For the cin, uve reasons, aud because we find no

reversible trial error for the reasons stated in the

unpublished order filed with this opinion, the judgments

of conviction under Counts 1 and 2 are affirmed. The

judgments of conviction under Counts 3 through 8 are

reversed.

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

USCA 4412—Midwest Law Prinz:ng Co.. Inc., Chicago—6-22-79—300

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