Opposition — Randell v. United States

No. 80-5818 FEB 4 191

OFFICE OF THE ¢

|__ SUPREME |_ SUPREME cover RT, U.S,

IN THE SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1980

JOHN B. MUMFORD, PETITIONER

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE FOURTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

WADE H. McCREE, JR.

Solicitor General

PHILIP B. HEYMANN

Assistant Attorney General

JOHN F. DePUE

Attorney

De artment of Justice

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IN THE SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1980

No. 80-5818

JOHN B. MUMFORD, PETITIONER

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE FOURTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

QUESTION PRESENTED

Whether petitioner's criminal prosecution was barred by res

judicata or collateral estoppel after a district judge denied

injunctive relief in a civil proceeding that involved the same

misconduct.

OPINION BELOW

The opinion of the court of appeals (Pet. App. 2a-12a) is

reported at 630 F.2d 1023.

JURISDICTION

The judgment of the court of appeals was entered on October.

(2, 1980. The petition for a writ of certiorari was filed on

December 1, 1980. The jurisdiction of this Court is invoked

under 28 U.S.C. 1254(1).

STATEMENT

Following a jury trial in the United States District Court

for the Eastern District of Virginia, petitioner and a co-

defendant, Cortes W. Randell, were convicted on seven counts of

mail fraud, in violation of 18 U.S.C. 1341, five counts of secu-

rities fraud, in violation of 15 U.S.C. 77q(a) and 77x, four

counts of interstate transportation of securities and money

obtained by fraud, in violation of 18 U.S.C. 2314, and one count

of submitting a false statement to a United States agency, in

violation of 18 U.S.C. 1001. Petitioner was sentenced to three

years' imprisonment on the false statement count, with all but

six months of the term suspended, and to concurrent five-year

probation terms on all counts. The court of appeals affirmed

(Pet. App. 2a-12a).1/

1. The indictment alleged and the government's evidence

showed that throughout 1974 petitioner and co-defendant Randell

used their positions in two Virginia corporations, the National

Commercial Credit Corporation (NCCC), and the Federal Mortgage

Acceptance Corporation (FMAC), to obtain large sums from finan-

cial institutions and private investors by fraudulert represen-

tations. They also concealed from investors material facts as to

1/ Co-defendant Randell was sentenced to a total of seven years'

Imprisonment on the mail fraud counts. Imposition of sentence on

the other counts was suspended in favor of a five-year probation

term to run consecutively to the sentences imposed on the mail

fraud counts.

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the merits and value of their investments, and the extent of the

involvement of petitioner and Randell in the corporations (Pet.

App. 3a-5a). Both corporations dealt in second mortgages. Their

business involved the purchase of homes with assumable nortgages,

the sale of the homes for small down payments and a second trust

note or mortgage, and the use of these mortgages to obtain money

for further operations by selling them or pledging them as col-

lateral (id. at 3a-4a; Tr. 90-92, 228).

In 1973 Randell was hired by the two founders of NCCC for

the purpose of strengthening it and preparing it for a public

offering of its stock by raising additional capital. Shortly

thereafter, his wife loaned NCCC $140,000 and received as col-

lateral $205,000 worth of NCCC second mortgages whose value vas

subsequently increased to $279,000 (Tr. 93-96, 105-106). Through

such investments, Randell increased his control over NCCC, elimi-

nated both of the two founders from its management, and brought |

petitioner into the company as vice-president and one of its

directors (J.A. 154-156) .2/ Thereafter, petitioner administered

tne operations of NCCC--approving expenditures, determining the

movement and pledging of NCCC's second mortgage notes, and deal-

ing with financial institutions and investors (e.g-, Tr. 310,

315, 645, 786, 934).

In July 1974, Randell agreed to purchase from another par-

ticipant in NCCC certain second mortgage notes that the partic-

ipant had generated in Florida. NCCC purchased $139,000 worth of

the notes at 60% of their face value. Simultaneously, Randell

formed PMAC for the purpose of purchasing the remainder at 30% of

their face value (Tr. 228, 398-399). MAC was capitalized by use

of the $279,000 worth of second mortgage notes that had served as

_ collateral for the $140,000 loan by Randell's wife to NCCC: When

2/ "“J.A." refers to the joint appendix to the briefs in the

court of appeals.

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in July 1974 she called the loan due, NCCC elected to forfeit the

notes instead of repaying the loan. Mrs. Randell endorsed the

notin over to FMAC, which in turn, carried them as corporate

assets on its July 1974 balance shéet and endorsed them over to

the Maryland Industrial Finance Corporation to secure its capi-

talization (Pet. App. 4a; Tr. 585-586, 693-695) .2/

Despite the fact that these second mortgages were listed on

FMAC's balance sheets as assets, on petitioner's instructions

they continued also to be listed on NCCC's books as assets of

that company (J.A. 201).4/ In extending credit to FMAC and NCCC,

Maryland National Bank relied upon such documents, and was not

aware until 1975 that the notes were simultaneously listed as

assets on the books of both ventures (Tr. 671, 1210, J.A. 208-

210). It also relied upon the misrepresentations of petitioner

and Randell that Neco had been very successful and profitable,

and a 1973 year-end NCCC financial statement which overstated

that company's assets by $97,000 (Tr. 545, 552, 645, 651-652,

655) 2/

NCCC had also raised money from private investors. In 1971

it made a $300,000 bond offering for 10% bonds to be secured by

second trust mortgages equal to 125% of the amount borrowed. The

bond prospectus promised that the collateral "will be held in the

bank" (Pet. App. 5a; Tr. 97, 179, GX 3-B). In August 1974, peti-

tioner and Randell endeavored to persuade the secured bondholders

3/ Although Mrs. Randell had called the loan in July 1974, she

continued to receive $1,600 per month from NCCC as interest on it

throughout 1974 (Tr. 585).

4/ Notwithstanding these instructions, petitioner submitted the

July 1974 FMAC balance sheet listing the notes as FMAC assets as

part of his financial statement in applying for a home loan and

onc t ae (Tr. 729-730, GX. 5a). ("GX" refers to a government

exhibit.

ry By July 1975, Maryland National had loaned more than $600 ,000

o NCCC (Tr. 660). During 1974 it loaned more than $300,000 to

PMAC (Tr. 814-815). A Maryland National bank official stated

that absent the concealment and misrepresentations the loans

would not have been made (Tr. 690).

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to exchange their 10% secured bonds for unsecured 12% bonds. In

connection with this effort, the two drafted and mailed a letter

to bondholders detailing the conversion offer but onitting

certain material facts so that the offer was misleading. They

did not disclose the fact that petitioner was Simultaneously

president of NCCC and its competitor FPMAC, that Randell likewise

participated in the operations of both companies, that Randell's

wife had demanded payment of the NCCC loan and endorsed over to

FMAC the second trust mortgage notes which had been collateral on

the loan, and that she then owned 80% of the stock of FMAC and

25% of the stock of NCCC (e.g., Tr. 881-882, 898-899, 924-925).

To further reassure the bondholdurs considering the exchange, ,

petitioner and Randell met with several of then. Randell told -

one investor that NCCC was in sound financial condition, when, in

fact, it was not, and gave him a copy of the false financial

statement; petitioner assured another that NCCC was going to be

in good shape (Pet. App. 6a; Tr. 876, 894-896, 961).

In early 1974, Harold Brammer, one of the founders of NCCC,

discovered that the second mortgages that had been placed ina

bank safe deposit box to secure the 1971 10% bond issue were

missing (Tr. 101). After he filed a civil suit, he was permitted

to inspect bond collateral which, in the meantime, had been

assembled and placed in a safe deposit box to which petitioner

had sole access. Brammer discovered that the mortgage notes,

which ostensibly secured this issue, included some that previ-

ously had been declared worthless as collateral; others were

among those endorsed over to FMAC by Mrs. Randell; still others

were pledged to lending institutions as collateral for other

loans (Pet. App. 5a; Tr. 101-107, J.A. 257).

In the fall of 1975 petitioner sought a loan from Metropol-

itan Mortgage Fund, and a loan guarantee from the Veteran's

Administration to purchase a home. In connection with the

purchase he borrowed $20,000 from Mrs. Randell and secured it

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with a $27,000 deed of trust note on the property. On the appli-

cations, however, he indicated that he would rot be using funds

borrowed from other sources to purchase the home, thus concealing

from the Veteran's Administration the fact that he had executed

the $27,000 note on the property for which he was seeking the

- loan and guarantee (Pet. App. 6a; Tr. 751-752, 776-777).

2. On December 11, 1977, the Securities and Exchange Con-

mission filed a complaint in the United States District Court for

the Eastern District of Virginia seeking a permanent injunction

and ancillary relief against petitioner, Randell, and others

(Pet. App. 6a). The complaint alleges a fraud on investors, in

violation of the securities laws: it cited the repledging of the

collateral on Mrs. Randell's $140,000 NCCC loan to secure loans

to FMAC, the removal from the bank safe deposit box of the mort-

gages that secured ‘the 1971 bond issue, and the making of false

and misleading statements to investors (J.A. 535-545). During a

hearing on the complaint before Judge Oren B. Lewis®/ the govern-

ment was barred from presenting or proffering the testimony of

all but one of NCCC's investors, and was curtailed in its exan-

ination of NCCC employees (e.g., J.A. 564-565, 569, 573-576, 578-

579). Judge Lewis based his refusal to entertain such testimony

largely on the ground, that, in his view, the hearing focused

solely upon whether the requested injunctive relief should be

granted, and that he did not intend to reach the merits of the

charges concerning petitioner's past conduct (Pet. App. 8a; J.A.

568, 569, 581, 590, 598). Judge Lewis made it clear that he was

"not going to find * * * whether [petitioner] committed any

crimes or whether he has committed any specific wrongs" (J.A.

562-563). As a result, the only issue fully litigated in the SEC

proceeding was whether petitioner was likely to violate SEC laws

6/ Prior to the hearing, all of the defendants except petitioner

consented to the entry of a permanent injunction without

admitting or denying the SEC charges (Pet. App. 6a).

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in the future (e.g., J.A. 594, 598, 603-609; Pet. App. 8a).

Because Judge Lewis was Satisfied that petitioner was no longer

in the securities business, and had no intention of engaging in

securities-related activity in the future, Judge Lewis issued an

order denying an injunction (J.A. 608-609, 631-632).

Notwithstanding the limitations Judge Lewis had imposed on

the scope of the hearing, the order stated that the evidence

"falls far short of that necessary to find that [petitioner] had

willfully violated any of the SEC laws." [+ also provided that

"(t]he evidence further disclosed that [petitioner] has not

engaged in the sale of any securities or worked for any organi-

zation regulated by the SEC for the past three and one-half years

* * * and he has assured the Court that he has no intention of

engaging in any activity involving the sale of any regulated

securities or investients in the foreseeable future" (J.-A. 631-

632). It concluded that "[hjaving failed to prove that [peti-

tioner] has either violated or is likely to violate the SEC laws,

this suit must be dismissed * * *" (J.-A. 631-632) 2/

Pollowing the return of the indictment in this case, peti-

tioner filed a motion to dismiss on the ground that criminal pro-

ceedings were precluded by the civil judgment. The motion was

heard and denied by Judge Lewis, who explained that in the pre-

ceding civil action he had denied injunctive relief "strictly and

mainly on the grounds ‘that whatever he is supposed to have done,

* * * the evidence is conclusive, that he isn't doing it now"

(J.-A. 56). A similar motion ws denied following petitioner's

conviction by Judge Albert v. Bryan, Jr., the trial judge (J.A.

383-384).

7/ The court of appeals affirmed Judge Lewis' order on the sole

ground that "the SEC failed to establish the essential predicate

of injunctive relief--that there existed a reasonable likelihood

of future wrongdoing by (petitioner]." SEC vy. Mumford, No. 78

te ta Cir. Feb. 22, 1980). See 618 F.2d 104 (4th cir. 1980)

table).

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The court of appeals affirmed (Pet. App. 2a-12a), expressly

rejecting (id. at 7a-9a) petitioner's contentions that his prose-

cution was precluded under principles of res judicata and col-

lateral estoppel.

ARGUMENT

Relying upon the statement contained in the judgment entered

by Judge Lewis in the SEC injunctive proceeding, that the evi-

dence presented in that proceeding "falls far short of that

necessary to find that [petitioner] had willfuily violated any of

the SEC laws" (J.A. 632), petitioner contends (Pet. 7-9) that

under the doctrines of both res judicata and collateral estoppel,

that judgment precluded his prosecution for criminal offenses

based on the same misconduct.

Application of the concurrent sentence doctrine makes it

unnecessary for the Court to consider these preclusion arguments

(see Andreson v. Maryland, 427 U.S. 463, 469 n.4 (1976); Barnes

v. United States, 412 U.S. 837, 848 n.16 (1973);8/ but in any

event, the arguments are without merit. As the court of appeals

properly held (Pet. App. 7a-9a), the two proceedings involved

different causes of action and the issues that petitioner con-

tends are precluded in the second proceeding by collateral

estoppel were not fully litigated in the first proceeding or

8 In the injunctive proceeding, the SEC alleged that petitioner

ad engaged in the offer and sale of unregistered securities and

devised a scheme to defraud investors in the securities of

NCCC. Only ten of the counts of the criminal indictment--five of

the mail fraud counts (Counts 1, 3, 4, 6, and 7), and five of the -

securities counts (Counts 8-12)--pertained in whole or in part to

the defrauding of investors (J.A. 7-26). On those counts peti-

tioner was sentenced to concurrent five-year terms of probation

to run concurrently with the sentences on the other counts in the

indictment. Six of the other counts (Counts 2, 5, 13-16) alleged

mail fraud of financial institutions and interstate trans porta-

tion of monies fraudulently obtained from financial institutions;

these were not embraced by the allegations in the civil proceed-

ing (J.A. 19-27). Petitioner received an unsuspended sentence on

only one count (Count 17), which alleged making a false statement

to the Veteran's Administration--a crime wholly distinct from the

matters at issue in the SEC proceeding (J.A. 28). Thus, even if

petitioner's contentions were correct, the time he must serve

would not be affected in the least.

»

actually determined by the judgment therein. Moreover, because

the collateral estoppel issue involves only a dispute over the

proper construction of the district court's judgment in the par-

ticular SEC proceeding, considered in the light of the district

judge's statements made before and after entering it, the case is

of limited Significance.

1. Under the doctrine of res judicata, a final judgment on

the merits in one suit bars the parties or those in privity with

them from maintaining a second proceeding on the same cause of

. action. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5

(1979); Commissioner v. Sunnen, 333 U.S. 591, 597 (1948);

Cromwell v. County of Sac, 94 U.S. 351, 359 (1876). The two

proceedings involved here were not based on the same cause of —

action. The SEC proceeding was a civil, remedial action seeking

wholly prospective relief; the instant case is a criminal action

seeking punishment for past acts. The two types of proceedings

are markedly different and do not constitute the same claim or

cause of action. See United States ex rel. Marcus v. Hess, 317

U-S- 557, 548-549 (1943); Helvering v. Mitchell, 303 U.S. 391,

399 (1938). Therefore, the doctrine of res judicata is inap-

plicable.

Petitioner's claim (Pet. 7) that the decision of the court

below is inconsistent with Dranow v. United States, 307 F.24 545

(8th Cir. 1962),-is incorrect. In Dranow, as in this case, the

court of appeals held that res judicata did not bar a criminal

action following a civil proceeding involving the same subject

matter. Although the Dranow court stated (307 F.24 at 556) that

res judicata might apply to a criminal action even if the prior

proceeding was civil in character, it qualified this proposition

by holding (ibid.) that the doctrine applied only when "both

actions are based upon the same facts and both have as their

object punishment." Here, as in Dranow, the civil proceeding had

ro such object, so the criminal proceeding was not barred.

2. The doctrine of collateral estoppel, which concerns pre-

clusion of issues as opposed to preclusion of claims, may apply

even where the causes of action differ, e.g-, where one is civil

and nonpunitive and the other criminal. Allen v. McCurry, No.

79-935 (Dec. 9, 1980), Slip op. 4; Yates v. United States, 354

-U-S. 298, 335 (1956). But this doctrine precludes litigation

only of those issues which the parties had a full and fair oppor-

tunity to litigate, which the parties did actually litigate, and

which were necessary to the outcome of the first proceeding.

Allen v. McCurry, Supra, slip op. 4-5; Parklane Hosiery Co. v.

Shore, supra, 439 U.S. at 326 n.5; Montana v. United States, 440

U-S. 147, 153 (1979); United States v. Jacobson, 547 F.24 21, 23

(2@ Cir. 1976), cert. denied, 430 U.S. 946 (1977). Those

requirements were not met here .2/

The issue of petitioner's culpability for past violations of

securities laws was not fully litigated nor was a determination

of that issue necessary to Judge Lewis's decision not to issue an

injunction. Indeed, throughout the civil proceeding Judge Lewis

made it clear to the participants that he was not concerned with

whether petitioner had violated the SEC laws in the past, but

only whether the SEC was entitled to injunctive relief because

petitioner was likely to commit violations of the securities laws

2/ Since this Court in Yates v. United States, su ra, held only

at the doctrine of collateral estoppel "is not made inap-

plicable" by the fact that it is invoked in connection with a

criminal case and a preceding civil suit (354 U.S. at 335)--a

proposition accepted by the court of a peals (Pet. App. 8a)--

petitioner is incorrect in suggesting (Pet. 7) that Yates

conflicts with the decision here. Standefer v. United States,

No. 79-383 (June 9, 1980), on which petitioner also relies (Pet.

8), is similarly inapposite, since it held only that the doctrine

of nonmutual estoppel was inapplicable where the prior proceeding

was criminal, and suggested by negative inference that the

doctrine would be applicable where the prior proceeding was

civil. Here the doctrine was found generally applicable, but the

court found that under the particular circumstances of this case.

no estopping judgment was shown.

in the future (Pet. App. 8a; J.A. 562-563) .10/ Thus, all that

can be said to have been conclusively established by the civil

judgment is that petitioner did not have the type of ongoing

involvement in securities violations that would have warranted an

injunction.11/

, To be sure, Judge Lewis's order stated (J.A. 632) that the

evidence failed to show that petitioner had willfully violated

the securities laws, but another statement in the same order

(ibid.) revealed that, in denying the injunction, Judge Lewis was

' relying in part on his knowledge that "this matter" had been

"turned over to the United States Attorney for this District for

further investigation." Expecting that allegations of past

offenses by petitioner might be resolved in an action brought by

the United States Attorney is, of course, inconsistent with

making the judgment in the case before the court brought by

another government agency depend on a determination of those same

issues. Judge Lewis subsequent?y resolved the ambiguity in the

SEC order when, before denying petitioner's pretrial motion based

on res judicata and collateral estoppel theories, he charac-

terized his earlier judgment as one issued "strictly and mainly

on the grounds" that petitioner was no longer doing what he had

been accused of doing (J.A. 56) and when he noted that "it wasn't

necessary for me to determine whether he was doing it in the past

or not" (J.A. 57). This clarification, of course, was also

consistent with Judge Lewis's rulings constraining the SEC's

49/ See, e.g., J.A. 568 ("we are not proving fraud"); J.A. 569

we will not find whether it's a 10(b) violation"); J.A. 581 ("I

don't want to get into the merits of it"); J.A. 590 ("If I were

going to make a finding of specific violations, I would be hear-

ing the whole thing"); J.A. 558 ("I didn't let you prove the ~

scheme to defraud, because that is not the question").

i11/ Expectation that a prior wrong will not be repeated is a

sufficient ground to refuse to issue an injunction, particularly -

in a securities case where the likelihood that the wrong will be

repeated is "(t]he critical question for a district court in

deciding whether to issue a permanent injunction.” SEC v. Manor

Nursing Centers, Inc., 458 F.2d 1082, 1100 (24 Cir. 1972). ~

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' presentation of evidence in the injunctive proceeding and with

his frequent remarks during that proceeding that he had no inter-

tion of making findings with respect to the lawfulness of peti-

tioner's past conduct (see page 11; note 10, supra) .12/

In sum, in view of the unique facts of this case--the con-

straints on the litigation of the issue of liability for past

violations of the securities laws in the first proceeding and the

statements of the judge, made both before and after he entered

the judgment, with respect to what issues he intended to

determine--the court of appeals was correct in declining to find

the government collaterally estopped from trying petitioner on

criminal counts pertaining to the misconduct giving rise to the

first action.

42/ There is no merit to petitioner's contention (Pet. 7) that

was improper for the court of appeals to consider statements

made by Judge Lewis during the SEC case in order to determine the

collateral estoppel effect of the judgment. As shown, those

statements, taken in conjunction with Judge Lewis's explanation

of the judgment after he had issued it, merely clarified an

internally inconsistent order. Petitioner's reliance upon Herman

v- Hess Oil Virgin Islands Corp., 524 F.24 767 (34 Cir. 1975),

and Segars v. ientre Coast Line R.R. Co., 286 F.2d 767 (4th

Cir. TSely, is thus misplaced. n ose cases, parties had

attempted to attack apparently plain orders on the basis of .

"ambiguous" statements (Herman, supra, 524 P.2d at 772 n.11) ana

a "chance statement or observation” (Se ars, supra, 286 P.24 at

770), which were made by the judges before they entered the

orders in question and which lacked any subsequent confirming

explanation by those judges.

*

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CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

WADE H. McCREE, JR.

Solicitor General

PHILIP B. HEYMANN

Assistant Attorney General

JOHN F. DePUE

Attorney

FEBRUARY 1981