Petition for Writ of Certiorari — Sylvanus v. United States

[ DEC 31 195)

Fomen ES

IN THE

Supreme Court of the United States

Ocroser TERM, 1951.

No. 507

ALFRED SYLVANUS, ARCADIA NATIONAL

INSURANCE COMPANY anv VOYLE

CLARK JOHNSON,

Petitioners,

vs.

THE UNITED STATES OF AMERICA,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SEVENTH CIRCUIT AND BRIEF IN SUPPORT

THEREOF.

Rocrer SHERMAN,

Henry F. Tenney,

S. AsHLey GuTHRIE,

120 So. La Salle Street,

Chicago 3, Illinois,

Attorneys for Petitioners.

S. AsHiey GuTHRIE,

Of Counsel.

THE GUNTHORP-WARREN PRINTING COMPANY,

INDEX.

A.

PAGE

Petition for Writ of Certiorari to the United States

Court of Appeals for the Seventh Circuit ......... 1-21

Summary Statement of Matters Involved............ 2-13

ee ee en eee 2-3

The Basic Question of Federal Law Involved: Is

This Prosecution Barred By The McCarran Act

Delegating Exclusive Right of Regulation of the

Insurance Business to the States, and Providing

That No Act of Congress Not Specifically Re-

lating to Insurance Shall Invalidate, Impair or

Supersede a State Law Exercising That Right? 3-5

ON Wc ss ea aatga wana toa gwbus ek 6

The Insurance Policies and Advertising; the Com-

prehensive Nature of the Provisions of the State

Law Relating Thereto; and the Supervision by

State Authorities Under That Law ........... 8-11

Questions of Federal Law Involved in Determin-

. ing the Sufficiency of the Conspiracy Count... .11-13

The Basis on Which the Jurisdiction of This Court

et TR Se AS ET ERPS PRUE Wie a WOE A ABs Lo A 13-14

Reasons Relied on for Allowance of the Writ of Cer-

hci i aba hie ois Rom ebid RAa ca ON wes ak 17-21

1, The Question of Construction of the McCarran

BE bc iaSAK Tes ATED Wiis isaac Lakeaeeks 17-18

2. Conflict Between the Decision in the Instant

Case and the Decision of the Court of Appeals

for the Eighth Circuit Construing the McCar-

WIE TI a asc ko eeies 99 CRE RESETRl cee 18-19

il

3. Question of Construction of the Statute Relat-

ing to Conspiracies as to Sufficiency of the

Overt Acts Charged and the Application of the

Statute of Limitations Thereto...............

4. The Conflict in the Decisions of the Circuit

Courts of Appeal With Respect to the Obliga-

tion of a Policyholder to-Read His Policy in

Order to Determine the Conditions and Limita-

RN aN ae haat ticle erin ie BS > bale 20-21

Brief in Support of Petition for Writ of Certiorari. . 22-40

Opinion of the Court of Appeals (incorporated by ref-

erence to pages 919 to 936 of the Reeord).......... 22

INNER sin cu ca wawtivtieweecedionses 22-23

I ead whe kicin us en ise se yee'a an 6 oe 24-40

I. The Motion to Dismiss the Indictment Should

Have Been Sustained Because This Prosecution

Is Barred by the McCarran Act.............. 24-35

A. The Scheme to Defraud, Charged in the In-

dictment, Involves Only the Issuance of In-

surance Policies and Advertising Matter

Subject to Regulations Imposed by State

Law; Under the McCarran Act the Mail

Fraud Statute Cannot Be Construed to

Cover That Scheme, Beeause, if so Con-

strued, It Would Invalidate, Impair, or Su-

persede the State Law................... 24-27

B. A Conviction Under the Mail Fraud Statute

Necessarily Involves an Assumption of Fed-

eral Jurisdiction Over the Conduct of an In-

surance Business in Illinois, and Thus Ren-

ders Ineffective the Regulations Imposed by

State Law Relating Thereto............. 28-30

ee

C. The McCarran Act Is Not Restricted in Its

Operation to Statutes Passed Under the

Commerce Clause; by Its Terms, It Excludes

from Application of All Acts of Congress

(Not Expressly Relating to Insurance) Mat-

ters Connected With a State-Reeulated In-

ge er ere

D. The Question of Federal Law Involved in

Construction of the MeCarran Act Has Not

Been, But Should Be, Decided by This

Court; and the Conflict Between the Deci-

sions of the Cireuit Courts of Appeal Should

FREE ee S|

II. None of the Supposed Overt Acts Set Forth in

the Conspiracy Count Is Sufficient to Sustain the

Charge of Conspiracy and the Motions to Dis-

miss or for Aecquittal on That Count Should

eee rere,

III. The District Court and the Court of Appeals

Should Have Held That It Was the Duty of the

Insured to Read His Policy in Order to Ascer-

tain the Conditions Contained Therein, and the

Jurors Should Have Been Instructed Accord-

ES SO er ee

Appendices 1, 2 and 3........................... i-XXVii

(following p. 40)

Appendix 1:

Excerpts from Tllinois Insurance Code of 1937 (Ch.

ng | AER eater pale a rele ng a eR A a i-vii

Appendix 2:

Synopsis of Insurance Policies in Suit........ Vill-xiii

Appendix 3:

We PO sso s Steels Ove veeecKedds ok XiV-XXvii

, a

D.

TaBLe oF AUTHORITIES.

ee SS rrr 29

Bowers v. Washington Times Co., 65 Fed. (2) 200....

ERTL ULE ETT CC ere TT ee eee 15, 20, 38, 39

Brady v. U.S., 24 Fed. (2) 399 (404-5) (C. A.8)....... 36

Connecticut Light and Power Co. v. Federal Power

Commission, 324 U. S. 515 (528).................. 34

Ex Parte Collett, 337 U. S. 55 (61).................. 32

Fiswick v. U. S., 329 U. S. 211 (216-7).............. 13, 37

Helvering v. City Bank Farmers Tr. Co., 296 U. S. 8&5

oo Ee ery ie Sen RRA SSL ai ie 32

Hendrey v. U. S., 233 Fed. 5 (8) (C. C. A. 6)........ . 30, 36

Jerome v. U. S., 318 Ill. 101 (105).................. 19, 30

Krulewitch v. U. S., 336 U. S. 440 (445-6)............ 37

Mutual Benefit Health and Accident Association v.

Blaylock, 87 A. L. R. 679 (Miss.)................. xix

North Little Rock Trans. Co. v. Casualty Reciprocal

Exchange, 181 Fed. (2) 174 (Cer. Den. 340 U. S. 823)

upd LON e eS eee eed Ons uae bee eed bees 5, 14, 18, 19, 34

O’Hara v. U. S., 129 Fed. 551 (C. C. A. 6)........... 29, 30

Panhandle Eastern Pipeline Company v. Public Service

Commtenstin, 308 0. BH. G00... onc ccc cccccccccccce 34

Prudential Insurance Co. v. Benjamin, 328 U. 8. 408.. 33

Reilly v. Pinkus, 338 U. S. 269 (276)................. 39

U. S. v. Britton, 108 U. S. 199 (204-5)................ 35

U.S. v. Cohen, 145 Fed. (2) 82 (C. C. A. 2).......... 13

U. S. v. MeLaughlin, 169 Fed. 302 (307), (D. C. D,

DUE sa asi aledesinclucsescnvcameuerbcaden te 36

Vv

U.S. v. Rosenblum, 176 Fed. (2) 321 (332) (C.C. A.7) 37

U. S. v. Southeastern Underwriters Assn., 322 U. S.

WE k4e oe FA CA Wed Shek Re wabheen’ tedoixcasken ates. 19, 31

Worthington v. U. S., 64 Fed. (2) 936 (941) (C. C.

Ded ac aus Keenec cxeudacauhiaaked bn tateates el. 28

E.

TABLE or STaTUTEs.

Petns. Appen-

Brief dices

Illinois Insurance Code of 1937: °

Sec. 4 (Classes of Insurance)............. i

Sec. 132 (Examinations).................. i

Sec. 141 (Exclusive Agency Contracts).... ii

Sec. 143 (Policy Forms—Life, Accident and

SEE hia Sanda ceed dee en ckaieeexdae’ 8,9,26 ii

Sec. 149 (Misrepresentation Prohibited). . .9, 26 iii

Sec. 254 (Scope of Article)................ ili

Sec. 261 (Documents to be Delivered to the

EY nt 0655s VAN AC et Cha oka Ka we iii

Sec. 267 (Subscription Requirements—Sur-

NE a eee es Pog a he ee iv

Sec. 268 (Guarantee Fund)............... iv

See. 355 (Accident and Health Policies—

i GS rcin we scaseh delet « 26 Vv

See. 356(1)(d) and (f) (Form and Content

Oe Ses 6555 Sas hase ecaGbhs va takacss v

See. 357(4) and (5) (Standard Provisions) . vi

Sec. 401 (General Powers of Director)..... 27 vi

See. 407 (Court Review of Orders and Deci-

Pee Be ae ee ee RD Vii

Sec. 446 (Penalties)...................0.. 27 vii

Sec. 371 (formerly Sec. 88), Title 18, U. S. C.

(Conspiring to Commit Offense Against

PO Diss Kian sk¥aadidcaevenieus cc 2, 35

i ae

Petns, Appen-

vi

Brief

Sees. 1011-5, Title 15, U.S. C. (MeCarran Act) .4, 17-19

22, 25

See. 1254(a), Title 28, U.S. C. (Issuance of Writs

INE bead incdiciin ae hy Heebnwiiedviwn 13, 22

See. 1541 (formerly Sec. 388), Title 18, U. S.C.

(Using Mails to Promote Frauds)........... 2, 28

Sec. 3282, Title 18 U. S. C. (Statute of Limita-

Ne Ree io itek hh ais ac ceudecwe’s 37

See. 3731, Title 18 U. S. C. (Right of Appeal to

ET ey Oren i)

.

dices

Supreme Court of the United States

Octoser Term, 1951.

Reo

ALFRED SYLVANUS, ARCADIA NATIONAL

INSURANCE COMPANY axnp VOYLE

CLARK JOHNSON,

Petitioners,

vs.

THE UNITED STATES OF AMERICA,

_ Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SEVENTH CIRCUIT.

To the Honorable Chief Justice and Associate Justices of

the Supreme Court of the United States:

Alfred Sylvanus, Areadia National Insurance Company

and Voyle Clark Johnson, defendants in the trial court, and

Petitioners here, pray that a writ of certiorari be issued

by this Court for review of judgments (R. 938-939) entered

in this ease on December 1, 1951, by the Court of Appeals

for the Seventh Circuit.*

*The opinion of the Court of Appeals appears at pp. 919-37 of

the Record.

Summary STATEMENT or Matters INVOLVED.

The Nature of the Case.

The judgments of the Court of Appeals, sought to be

reviewed, affirm a judgment of the United States District

Court for the Northern District of Illinois, Eastern Divi-

sion, entered on the verdict of a jury finding the Petitioners

guilty: (1) of using the mails to execute a scheme to

defraud by issuance of allegedly deceptive accident and

sickness insurance policies, and by circulation and publica-

tion of allegedly misleading advertising matter relating

thereto; and (2) of a conspiracy to commit the same offense.

Sylvanus was sentenced to 3 years; the Insurance Company

was fined $10,000; and Johnson was sentenced to 18 months.

The statutes under which the defendants were convicted

are, so far as material, as follows:

‘‘Whoever, having devised or intending to devise

any scheme or artifice to defraud, or for obtaining

money or property by means of false or fraudulent pre-

tenses, representations, or promises * * * shall

for the purpose of executing such scheme or artifice or

attempting so to do, place, or cause to be placed, any

letter, postal card, package, writing, circular, pamphlet,

or advertisement * * * in any post office * * *

or authorized depository for mail matter, * * * or

shall take or receive any such therefrom * * *- shall

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

than five years, or both.’

See. 1341 (formerly 338), Title 18, U. S. C.

‘If two or more persons conspire either to com-

mit any offense against the United States, cr to defraud

the United States in any manner or for any purpose,

and one or more of such parties do any act to effect the

object of the conspiracy, each of the parties to such

conspiracy shall be fined not more than $10,000, or im-

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

See. 371 (formerly 88), Title 18, U.S. C.

a ee ee TN

3

The offense charged has two elements:

(1) The existence of a scheme to defraud by issu-

ance of the fraudulent policies and advertising matter ;

and

(2) The use of (or conspiracy to use) the mails

to execute the scheme.

While the use, or contemplated use, of the mails is what

gives the Federal Court jurisdiction, the conviction depends

on the existence of the fraudulent scheme which is to be

executed by their use—in this case, on an adjudication by

the Federal Court that the insurance policies and adver-

tising matter are deceptive and misleading, so that their

issuance and publication would constitute a fraud.

The Basic Question of Federal Law Involved: Is This

Prosecution Barred by the McCarran Act Delegating Ex-

clusive Right of Regulation of the Insurance Busimess

to the States, and Providing That No Act of Congress Not

Specifically Relating to Insurance Shall Invalidate, Im-

pair or Supersede a State Law Exercising That Right?

The insurance policies and advertising matter on which

the prosecution is based, were issued and published in the

conduct of an insurance business regulated by a statute of

Illinois, known as ‘‘The Illinois Insurance Code,’’ the mate-

rial provisions of which are set forth in Appendix 1, at-

tached hereto. That statute prescribes the form of insur-

ance policies to be issued; requires their approval by the

State Department of Insurance before issuance; prohibits

misleading statements in advertising; and prescribes penal-

ties for its violation.

The insurar -e policies in suit were specifically approved

in form and substance by the State Insurance Department

(R. 171-2) and were issued pursuant to state authority.

The purpose and effect of the prosecution were thus to

4

convict the defendants, under the Federal statutes relating

to mail fraud and conspiracy, for acts done in the conduct

of an insurance business wholly regulated by state law.

The result was, as we contend, to nullify and to supersede

that law and the regulations imposed thereby, insofar as

they relate to the insurance policies and advertising matter

in suit.

By Act passed in 1945, known as ‘*The MeCarran Act”

(Sees. 1011-1015, Title 15 U. S. C.), Congress declared that

regulation of the insurance business by the states is in the

public interest and that ‘‘no act of Congress not specifically

relating to the business of insurance’’ shall be construed

to invalidate, impair or supersede any law enacted by any

state for the purpose of regulating the business of insur-

ance.’’

The McCarran Act, so far as material, reads as follows:

‘“‘An Act to express the intent of Congress with

reference to the regulation of the business of insurance.

[Laws of 79th Congress, 1st Session; Public Law 15.]

‘‘See. 1—Congress declares that the continued regu-

lation and taxation by the several States of the busi-

ness of insurance is in the public interest, and that

silence on the part of Congress shall not be construed

to impose any barrier to the regulations or taxation

of such business by the several States. [Sec. 1011,

Title 15 U. S. C.]

See. 2—(a) The business of insurance, and every

person engaged therein, shall be subject to the

laws of the several States which relate to the regula-

tion or taxation of such business.

(b) No act of Congress shall be construed to in-

validate, impair, or supersede any law enacted by

any State for the purpose of regulating the business

of insurance, or which imposes a fee or tax upon such

business, unless such Act specifically relates to the

business of insurance. * * * [See. 1012, Title 15,

ey”

~YT

pA I 1 On Ade WSN i A RRA Di HPN ANION M PSNR Ne EBB ASAT ve NES HL

5

The basie question in this case is whether, in view of the

McCarran Act, this prosecution under the mail fraud and

conspiracy statutes, or a similar prosecution under any

Federal statute, not by its terms relating to the conduct of

an insurance business, can be maintained—. e., whether or

not the MeCarran Act leaves to the states the right to

regulate and control the conduct of an insurance business,

and excepts from the application of every Federal statute

(not expressly relating to insurance) all matters pertain-

ing to an insurance business over which the state, by appro-

priate legislation, has assumed jurisdiction.

This question was raised in the District Court on motion

{o dismiss the indictment, which was overruled (R. 25, 27).

If the motion to dismiss had prevailed, the Government

would have had the right to appeal directly to the Supreme

Court (See. 3731, Title 18 U. 8. C.). The defendants have

no corresponding right of appeal, but the question of statu-

tory construction involved is important and, we submit,

should be passed upon by this Court. It relates to the method

of regulation of, and the power to regulate, the business of

all insurance companies throughout the country that

sell insurance policies by mail and by public advttising,

rather than by personal solicitation.

The decision of this Court is further called for because

of the conflict in principle between the decision of the Court

of Appeals of the Seventh Cireuit here sought to be re-

viewed, and the decision of the Court of Appeals for the

Kighth Cireuit in North Little Rock Trans. Co. v. Casualty

Reciprocal Exchange, 181 Fed. (2) 174 (Cer. Den. 340

U. S. 823), holding that the McCarran Act barred a suit

to enforce the provisions of the Sherman Act (otherwise

clearly applicable) for acts done in the conduct of an in-

surance business which was regulated by the Arkansas

law, and therefore, by virtue of the McCarran Act, subject

to exclusive state jurisdiction.

; =

The Parties.

Arcadia Mutual Casualty Company was organized in

1938 by Petitioner, Alfred Sylvanus, and a group of asso-

ciates. Sylvanus had been general agent of Minnesota

Mutual Life Insurance Company. His associates were

mostly school teachers and had not been theretofore con-

nected with the insurance business (R. 159).

On October 1, 1945, Arcadia Mutual Casualty Company

combined with another company to form Arcadia Life &

Casualty Company under Article XVI of the Illinois Insur- -

ance Code (R. 399-400). On December 1, 1946, the articles

of incorporation of the last-named company were amended

and the name was changed to Arcadia National Insurance

Company, defendant and Petitioner here (R. 400, 401).

Alfred Sylvanus was president of each of the insurance

companies mentioned (R. 170).

The Company always maintained the required reserves

and its financial condition was uniformly approved in the

reports of examination of the Illinois Insurance Depart-

ment (R. 768, 773, 775-6, 790-1, 807, 825).

Petitioner, Voyle Clark Johnson, became connected with

the other defendants through execution on February 24,

1944, of the agency contract with Arcadia Mutual Casualty

Company, whereby he became agent for sales of the ‘‘Se-

curity’’ or limited coverage policy (R. 458-468). Johnson

operated his agency under the name of ‘‘United States

Insurance Agency.’’

The Alleged Scheme to Defraud.

The supposed ‘‘scheme to defraud’’ was alleged (R. 2-3) :

to have been to induce prospective policyholders to buy

one or the other of two sickness or accident policies, known

as the ‘‘Security Policy,’’ offering limited coverage and

SUITES SOAS RO iG Wie. Se OT ey REE SL DPT ATI I EME AGEN IOS IN ILS ENS EEN: p *

‘we it i a e EMEC ET

7

the ‘‘American Sentinel Policy,’’ offering comprehensive

coverage.

The policies are set forth at page 469 of the record and

are summarized in Appendix 2, attached.

The premium on each policy was $1.00 per month, or

$11.00 per year. With two exceptions, all the policies in-

volved in this suit were of the Security Policy type.

The policies were advertised by circulars and published

advertisements, each offering to submit the policy adver-

tised for examination. The policies were issued only on

application to the Insurance Company by the policyholder.

There was no personal solicitation.

The device by which it is alleged the fraud was to be

completed, comprised two elements:

(1) The circulation or publication of advertisements

(each asking prospects to send for the policies for ex-

amination) which were alleged to emphasize maximum

benefits payable but to omit reference to qualifying

limitations and exceptions that might reduce the bene-

fits or result in denial of claims on the policies; and

(2) The issuance of the policies, which (although

approved by the State as to both form and substance)

were alleged to have been ‘‘cunningly worded’’ and

composed ‘‘in an ambiguous manner,’”’ and otherwise

to have been arranged and worded so as to mislead the

policyholders or prospects to whom they were ten- .

dered (R. 8-10, 172).

Of the 22 policyholders testifying, only 7 identified any

advertising seen before purchase of the policy.

The charge of fraud rests primarily, therefore, on the

alleged deceptive character of the state-approved policies.

There is no contention that claims were not paid in accord-

ance with the policy provisions, or that anyone profited by

the supposed fraud. The evidence shows that the sup-

porters of the enterprise were continually putting money

a ELL LOF REE PLAS PIE ING DF ie Be et EPS EOD ION eer pee. - - e . “ _—_——

8

into it through purchase of guaranty certificates (payable

only from earned surplus after reserves for policyholders

had been fully provided for) so that the Company should

be adequately financed (R. 825). No money was withdrawn

to pay those certificates. They were never paid (R. 185).

When the conviction of the Petitioners in this case made

it impracticable for the defendant Insurance Company to

carry on its business, arrangements were made with another

company to take over outstanding policy liabilities so that

no policyholder would suffer any loss (R. 48).

The Insurance Policies and Advertising; the Comprehensive

Nature of the Provisions of the State Law Relating

Thereto; and the Supervision by State Authorities Under

That Law.

The material provisions of the Illinois Insuranee Code

regulating the conduct of the insurance business in Illinois

are set forth in Appendix 1, hereto attached.

Section 143, of the Illinois Code, relating to issuance of

insurance policies of the class here involved, is as follows

(Ch. 73, Il. R. S. Par. 755) :

**(1) No company transacting the kind or kinds of

business enumerated in Class 1 of section 4 shall issue

or deliver in this State a policy or certificate of insur-

ance, * * * or use an application blank, in this

State until the form and content of such policy, certifi-

eate, * * * or application blank has been filed with

and approved by the Director. Jt shall be the duty

of the Director to withhold approval of any such policy,

certificate * * * or application blank fiied with him

if it violates any provisions of this Code, contains in-

consistent, ambiguous or misleading clauses, or con-

tains exceptions and conditions that unreasonably or

deceptively affect the risk purported to be assumed in

the general coverage of the policy. In all other cases

’

RELA LL OIE EEL OT ET EL TES LOE ICC NRE ENE I A BAS AE Bee stam ee TMD MOR OE Maar a

al “=

9

the Director shall give his approval. Failure of the

Director to act within thirty days after submission

shall constitute approval. * * *”

[Italics are ours here and elsewhere unless other-

wise stated. |

The insurance policies issued in the instant case (R.

469; summarized Appendix 2 attached) which were al-

leged to be so ‘‘cunningly worded’’ as to be in them-

selves a fraud (R. 8)—and upon which the conviction

rests—were all submitted to and approved by the Illinois

Insurance Department, as required by the above-quoted

section of the state statute (R. 171-2). In fact, the origi-

nal Security Policy issued in 1939 was drawn by an inde-

pendent actuary from forms in use by other companies, as

suggested by the Illinois Department of Insurance (R.

171).

Section 149 of the Illinois Insurance Code relating to

advertising matter, reads as follows (Ch. 73, Ill. R. S. Par.

761):

**(1) Nocompany * * * and no officer, director,

agent, clerk or employee thereof * * * or any other

person, shall make, issue or circulate * * * any

* * * illustration, cireular, or verbal or written

statement of any sort misrepresenting the terms of any

policy issued or to be issued by it or any other company

or the benefits or advantages promised thereby * * *.

**(4) Any * * * person who violates any of the

provisions of this section * * * shall be required to

pay a penalty of not less than one hundred dollars,

nor more than one thousand dollars. * * *,’’

All advertising matter circulated or published and here

involved was subject to the foregoing statute, and if it

was misleading, it was the duty of the state authorities so

to find, and to prosecute the offenders for publishing it.

That the State Insurance Department was mindful of

that duty is evidenced by its letter of November 27, 1940,

_ —_— NT NEEL L INE LOGE LEVITON OE NEN IE ETN TN RNR IA LEY a NO SORBELES SO SEI eR N RSE

=

approving certain samples of advertising matter submitted,

and concluding with the admonition that the Department

was not ‘‘waiving any of its duties with respect to the en-

forcement of the provisions of the Illinois Insurance Code

concerning advertising which misrepresents the terms of the

policies advertised’’ (R. 764-5).

In many instances, the advertising matter thereafter cir-

culated and published differed from the samples referred

to in the last-mentioned letter from the State Department,

in that the advertising did not characterize certain acci-

dents for which benefits were payable as ‘‘publiec carrier

accidents’’ or refer specifically to minimum as well as to

maximum benefits payable.

10

The advertisements did, however, as suggested by the

Illinois Insurance Department, refer the reader to the

policies advertised for information as to specif~ 'imita-

tions, and tendered the policies for examination before their

final acceptance. Most of the so-called ‘‘puffing’’ state-

ments to which objection was made in the course of the

trial were in the circular letters approved (R. 760-764).

A detailed review of the advertising matter is not ealled

for here. A summary of the advertising with particular

reference to the comments thereon in the opinion of the

Court of Appeals, is set forth in Appendix 3 attached.

Despite close supervision of the business for the entire

period up to the return of the indictment, the State De-

partment of Insurance made no complaint as to the ad-

vertising.

From 1941, through 1948, the Illinois Insurance Depart-

ment made periodic examinations of the business of the

defendant Insurance Company and of its predecessor com-

panies, and filed exhaustive reports covering every phase

of that business, with extensive comments and suggestions

thereon (R. 767-842).

AEM PII AAP NO BE GEM RAN Lyla ZOE SE MEY ket LE LEA LON TEE BELO SLIT CLOTS OSB PREIS Petes May — _#

a Sewer ort a

11

Notwithstanding the admitted duty of the Department

of Insurance to review the advertising matter, there is no

adverse comment thereon in any report. The last report,

filed on November 22, 1948, after return of this indictment,

comments favorably on the Company’s reserves and opera-

tions and concludes with the statement that ‘‘policy claims

appear to be paid promptly and in accordance with policy

provisions’’ (R. 825).

It is thus a fair inference that the advertising matter, as

well as the insurance policies, was approved by the State

authorities. But whether approved or not, the advertising,

as well as all other phases of the business, was admittedly

subject to state supervision and control.

And even if the policies and advertising were mislead-

ing and fraudulent, the offense was one for the state

authorities to pass on and to punish. Whether or not

the Petitioners had issued deceptive policies or advertising

and if so, what their punishment should be therefor,

were for the state authorities to determine. The fed-

eral statute, and the penalty imposed thereby for the

fraud committed, could not be substituted for the state

statute, and for the penalty imposed thereby, without im-

pairing and superseding the state statute.

If, as we contend, the McCarran Act should be construed

to prohibit that result, then the judgment below cannot

stand.

Questions of Federal Law Involved in Determining the

Sufficiency of the Conspiracy Count.

The indictment has 18 counts. The first count charges

that the three Petitioners jointly devised a scheme to

defraud policyholders, or prospective policyholders by issu-

ance of deceptive insurance policies and advertising matter

and in execution of the scheme, Petitioners sent or received

—— AIK, LIEBE NE EERE EI ASTOR EE IR SM On tes et et

ARRON TRS ANS De ARADI ata et Nant me

12 7

through the mails a communication to or from the supposed

victim. Each of the next 16 counts adopts the allegations of

the first count as to the scheme and alleges a different

mailing (R. 2-16).

The 18th Count also adopts the first count by reference

and charges that the joinder between the parties to devise

the scheme is also a conspiracy separately punishable (R.

16-19).

The indictment was returned on September 10, 1948.

Fifteen so-called overt acts are charged, all of which, ex-

cept the last four, were committed more than three years

before the return of the indictment. The supposed overt

acts referred to (R. 17-19) are thus summarized:

(1-2) On October 14, 1938, the incorporation of

Arcadia Mutual Casualty Company and election of

Sylvanus as director.

(3) On October 14, 1940, approval by the State of

the Security Policy, Form L-102.

(4) On May 1, 1942, opening of insurance com-

pany office at 221 North La Salle Street, Chicago.

(5) On December 18, 1943, purchase of $1,091 in

guaranty fund certificates by defendant Voyle Clark

Johnson.

(6) On December 18, 1943, purchase of $860 in

guaranty fund certificates by defendant Sylvanus.

(7-8) On February 24, 1944, execution of agency

contract with defendant Johnson and receipt of pre-

miums by him thereafter.

(9-11) On December 29, 1944, and again on March

29, 1945, and again on April 23, 1945, the purchase

by Johnson of guaranty fund certificates, totaling

$19,909.

(12) On October 1, 1945, incorporation of Arcadia

Life and Casualty Company by Sylvanus.

(13) On October 1, 1945, election of Sylvanus as

a director in that company.

PURER MULIS STARE AEE HERI LNB OR CTR TET A Ae dre ee Den ato ute Kaan _-s

13

(14) On January 1, 1947, incorporation of defend-

ant Arcadia National Insurance Company.

(15) On January 1, 1947, election of Sylvanus as a

director in that company.

None of the alleged overt acts is sufficient to support a

conspiracy charge, because none commits the supposed

conspirator to the criminal act alleged to have been con-

templated. But if the 3-year statute of limitations applies,

none but the last four acts could be considered in any

event, and each of them is insufficient to constitute an

‘‘overt act’’.

The Court of Appeals held, citing U. S. v. Cohen, 145

Fed. 2d 82 (CCA 2) that the Statute of Limitations did

not bar prosecution on the Conspiracy Count, even if there

was no allegation of a sufficient overt act occurring within

3 years before the indictment (R. 931).

That holding is contrary to the decision of this Court in

Fiswick v. U. S., 329 U. S. 211 (216-7).

The decision of this question is important because the

Judge charged the jury that if a conspiracy was estab-

lished and the jury found ‘‘beyond any reasonable doubt

that any of the overt acts described in the indictment took

place either prior to or during said defendants’ connection

with the conspiracy’’ the jury must find the defendants

guilty (R. 371).

A separate motion was made to dismiss the conspiracy

count (R. 155, 269-270) so that the point was properly

raised.

Tue Basis oN WHICH THE JURISDICTION OF THIS CouRT

Rests.

The jurisdiction of the Supreme Court of the United

States in this case is derived from Section 1254 (a), Title

28, U. S. Code, conferring jurisdiction on this Court to

a Se ee

14

issue writs of certiorari to review decisions of the United

States Courts of Appeal.

The decision sought to be reviewed rests wholly on fed-

eral law, and the questions raised are as to the correct con-

struction of the federal statutes involved.

Statements of the questions presented and of the reasons

why writ of certiorari should be issued are set forth in the

next two subdivisions of this petition.

Tue Questions PRESENTED.

1. The first question presented is whether or not, under

a correct construction and application of the McCarran Act

(Sec. 1011-1015, Title 15, U. S. C.) this prosecution under

the Acts of Congress, relating to mail frauds and con-

spiracies (Secs. 1341 and 371, formerly Secs. 338 and 88,

Title 18, U. S. C.) can be maintained, in view of the fact

that the fraudulent scheme charged involves only the is-

suance of insurance policies and the circulation of ad-

vertising matter in the conduct of an insurance business

regulated by Illinois law.

As a corollary, a question is raised as to which of the

following conflicting decisions as to construction and appli-

cation of the McCarran Act is correct:

(a) The decision of the Court of Appeals for the

Seventh Cireuit (R. 920-1), in the instant case, hold-

ing that the McCarran Act does not remove from

purview of a general federal statute (in this case the

statute relating to mail fraud and conspiracy) passed

pursuant to constitutional authority, acts performed

in the conduct of a state-regulated insurance business ;

or

(b) The contrary decision of the Court of Ap-

peals for the Eighth Cireuit in North Little Rock

Trans. Co. v. Casualty Reciprocal Exchange, 181 Fed.

(2) 174 (Cer. Den. 340 U. 8. 823) holding that the

McCarran Act was a bar to a suit to enforce the penal

15

provisions of a general federal statute (in that case the

Sherman Act—also passed purusant to constitutional

authority) for acts in the conduct of an insurance

business that would otherwise have been a violation

of that Act.

The question as to the construction and application of

the McCarran Act was raised in the District Court by mo-

tion to strike the indictment (R. 25) and by motions for ac-

quittal at the close of the Government’s evidence and at the

close of all the evidence (R. 155-7; 269-70); and in the

Court of Appeals on appeal from the judgment of convic-

tion (R. 876).

2. The second question involved is as to whether or

not, under a correct construction of the federal statute, re-

lating to conspiracies, (Sec. 371, formerly Sec. 88, Title

18, U. S. C.) and of the applicable statute of limitations

(Sec. 3282, Title 15, U. S. C.), the alleged overt acts set

forth in the conspiracy count are sufficient to sustain a

prosecution under that statute. This question was raised

in the District Court on the motion to dismiss the con-

spiracy count at the close of the Government’s evidence

(R. 155) and at the close of all the evidence (R. 270) on

the ground that a conspiracy was not shown.

3. The third question raised is as to which of the fol-

lowing conflicting decisions is correct:

(a) The decision of the Court of Appeals for the

Seventh Circuit in the instant case (R. 936) that it is

not the duty of an insured to read his policy in order

to ascertain the conditions contained therein, even

though the advertising complained of tenders the pol-

icy to him for examination before acceptance, and

refers to the policy for the specific limitations and

conditions affecting the iasurance; or

(b) The decision of the Court of Appeals for the

District of Columbia in Bowers v. Washington Times

Co., 65 Fed. (2) 200, applying a contrary principle in

a civil suit to recover the maximum benefit advertised.

16

The question as to the duty of the insured to read his

policy and as to the extent to which he was bound by the

policy provisions was raised on motions for acquittal at

the close of the Government’s evidence and at the close

of all the evidence (R. 155-7; 269-70), and also by instrue-

tion tendered and refused that it is the duty of the insured

to read his policy of insurance, to ascertain the conditions

therein contained, and if such policy is unsatisfactory, to

object thereto at the time (R. 273).

The question was raised in the Court of Appeals on

appeal from the judgment of conviction (R. 876-7; 883).

LUA LON AID INO OIL AIN POE REET AN ORNL ANS ent Ram AS gta pg

se ay OS ACR RAGA ENED INA BERS LEED cb GEE hai AINE ILNE 0 ENSUE By aOR Gi

17

Reasons RELIED ON FoR ALLOWANCE OF THE Writ oF

CERTIORARI.

We submit that a writ of certiorari should be granted

in this case for the following reasons:

1. The Question of Construction of the McCarran Act.

The decision of the Court of Appeals rests on a con-

struction of the MeCarran Act. The opinion admits that

the right to determine what policies may be issued, what

advertising may be published and circulated, whether or

not the policies or advertising are misleading, and what the

punishment shall be if they are misleading, are all exelu-

_ sively with the state (R. 920-1).

The Court holds, however, that if coupled with the issu-

ance of the policies and advertising, there is a use of the

mails, the Federal Court may determine independently and

without regard to state jurisdiction whether or not the

policies and advertising are fraudulent and whether or not

the issuer thereof should be punished (R. 921).

The reason give by the Court is that Congress has power

under the Constitution to regulate the mails, and hence a

statute enacted in exercise of that power should not be

limited in its operation because of jurisdiction of the state

over the subject matter of the fraud (R. 921).

The reason stated ignores both the wording and the

intent of the McCarran Act.

Every valid act of Congress is passed in the exercise

of some Constitutional power. If Congress so desires, it

may extend that power over the conduct of a state-regu-

lated insurance business. But the MeCarran Act declares,

that unless Congress, in a statute exercising its consti-

SV Oe Oa 9 Re PP ne POL FDL a LI LAN ih et a IN b DADO A ANSE SIDE a Sith

18

tutional power, sets forth that the statute shall apply to

the conduct of an insurance business, it will not be extended

to that business.

The title of the McCarran Act is ‘‘ An act to express the

intent of Congress with reference to the regulation of

the business of insurance.’’ The inention expressed is that

the regulation shall be left wholly to the states, and thus

to except from the purview of any federal statute not made

expressly applicable to the insurance business, all matters

pertaining to the conduct of that business that are subject

to state regulation.

The statute relating to mail frauds does not, by its terms,

apply to the acts performed in the conduct of an insur-

ance business, and hence under a literal construction of

the McCarran Act, could not be construed to cover those

acts.

In holding to the contrary, the Court of Appeals held, in

effect, that, despite the McCarran Act no one carrying on

an insurance business can rely on the state law regulating

that business, or on the directives of the state authorities

. acting thereunder, for determination of what policies or

advertising he may issue or circulate.

The question of federal law raised is important and has

not been determined by this Court. It is in the public in-

terest that it be determined.

2. Conflict Between the Decision in the Instant Case

and the Decision of the Court of Appeals for the Eighth

Circuit Construing the McCarran Act.

The construction of the ‘MeCarran Act in the instant

case is based on a principle contrary to that on which the

decision was based in North Little Rock Transp. Co. v. Cas-

ualty Reciprocal Exchange, 181 Fed. (2) 174. In that case,

North Little Rock Transportation Co. sued the Casualty

Reciprocal Exchange for triple damages under the Sher-

19

man Act. The defendants had clearly engaged in a com-

bination in restraint of interstate commerce within the

meaning of the Sherman Act and the principle laid down

in U. S. v. Southeastern Underwriters Assn., 322 U. S. 533,

holding insurance to be interstate commerce.

The defense was that the conduct complained of was reg-

ulated by the laws of Arkansas, ‘‘and that because of the

Act of March 9, 1945 * * * 15 U. S. C. A. Sees. 1011-1015,

known as the McCarran Act, the Sherman Act did not ap-

ply to the insurance business so far as it is regulated by

the state.’’

In sustaining that defense, the Court said (181 Fed.

(2d), at p. 176):

‘‘The purpose of the McCarran Act was to permit

the States to continue the regulation of the business

of insurance, unhampered, to the extent provided by

the Act, by federal legislation relating to interstate

commerce.”’

The same principle would apply to ‘‘federal legislation”’

relating to use of the mails. But the Court of Appeals

for the Seventh Circuit refused to follow that principle

here.

There is, therefore, a conflict between the decision of

the Circuit Court of Appeals in the instant case and the

decision of the Eighth Circuit Court of Appeals in the

North Inttle Rock Transportation Co. ease, on substantially

the same question of construction of the McCarran Act,

and for that reason, this Court should grant the writ.

This is another reason for granting a writ of certiorari.

As the Court said in Jerome v. U. S., 318 U. S. 101 (102)

in stating the reason for granting a writ where the ques-

tion was whether the word ‘‘felony’’ as used in Act of

Congress applied to a State, as well as to a federal offense:

‘‘We granted a petition for a writ of certiorari be-

cause of the importance of the problem in the adminis-

tration of justice and because of the diversity of views

20

which have developed as respects the meaning of :

felony. ’’

3. Question of Construction of the Statute Relating to i

Conspiracies as to Sufficiency of the Overt Acts Charged —

and the Application of the Statute of Limitations Thereto. ~

This question has been fully stated at pages 11-13 and 15, @

ante. We contend that none of the overt acts is sufficient to _

commit the actor to the perpetration of the contemplated

crime of using the mails to execute the fraudulent scheme

so that he could not withdraw and be innocent. And

this is particularly true if only the acts within the three-

year period prior to the indictment are considered.

In view of the tendency to use the conspiracy statute

as a means of charging the same offense a second time,

and of relieving the prosecution from the necessity of ad-

hering to rules of evidence in proving it, the question raised

is important and should be passed upon.

4. The Conflict in the Decisions of the Circuit Courts of

Appeals With Respect to the Obligation of a Policyholder

to Read His Policy in Order to Determine the Conditions

and Limitations Thereof.

This question is also stated at pages 15-16, ante.

The opinion of the Court of Appeals in the case at bar

holds that there is no conflict in principle between this case

and Bowers v. Washington Times, 65 Fed. (2) 200, decided

by the Court of Appeals for the District of Columbia, be-

cause, as the opinion states, the last-mentioned case was a

civil case (R. 936).

The distinction is not sound because in both cases the

question was whether the prospective policyholder can rely

on the advertising to the exclusion of the policy, notwith-

standing the fact that the advertising refers the reader to

the policy for a specific ‘statement of the limitations and

conditions attached to payment of the risk. The adver-

PN TE EUAN JEN BR Na NN NE HOF RES at Ne

21

tising in the Washington Times case was similar to that

most complained of in the instant case, in that it stated

the maximum benefit payable without stating the limita-

tions and conditions under which the policyholder would

receive it, and thus left the policyholder to read the policy

itself for determination of what those limitations were. The

decision in the Washington Times case that the policy-

holder was bound by the policy, at least insofar as it was

supplementary to and not in conflict with the advertising

(which was true in every instance in the case at bar) was

based on a principle exactly contrary to that applied here,

where the jury was instructed that a policyholder was

not even required to read his policy.

The conflict in decisions on this point is an additional

reason why this Court should grant this petition for a writ

of certiorari.

For the reasons above stated Petitioners pray that a

writ of certiorari be issued by this Court for review of the

judgments entered in this case on December 1, 1951, by

the Court of Appeals for the Seventh Circuit.

Aurrep Sytvanus, Arcapra Nationau In-

SURANCE Company, and VoyLe CLarK

JOHNSON,

Petitioners,

By Rocrer SHerman,

Henry F. Tenney,

S. Asuiey Guturm,

Attorneys for Petitioners.

S. Asuitey GuTnrie,

Of Counsel.

22

BRIEF IN SUPPORT OF PETITION

FOR WRIT OF CERTIORARI.

The opinion of the Court of Appeals is not yet reported.

It is set forth in full at pages 919 to 937 of the Record.

The jurisdiction of this Court is invoked under Section

1254(a), Title 28, United States Code, conferring jurisdic-

tion on this Court to issue writs of certiorari to review

decisions of the United States Circuit Court of Appeals.

The essential points of the case have been sufficiently

stated in the foregoing petition for writ of certiorari and

in the appendices hereto.

SPECIFICATION oF ERRors.

We rely here on the following assignment of error:

1. The Court of Appeals erred in sustaining the action

of the trial Court in overruling the defendants’ motion

to dismiss the indictment, made on the following ground:

The conduct of the insurance business in Illinois, is regu-

lated exclusively by state law. Under the McCarran Act

(Sees. 1011-1015, Title 15, U. S. Code), the laws of Congress

on which this prosecution is based, do not apply to the

acts alleged in the indictment. (R. 25.)

2. The Court of Appeals erred in sustaining the action

of the trial Court in not granting defendants’ motions for

acquittal at the end of the Government’s evidencé and at

the end of all the evidence. The motions should have been

granted because:

(a) The evidence did not show that the defendants

had any fraudulent or criminal intent.

TEER PRER SCR ERNIE ERENT Be ORR R te te A OR OR eae Oot ROSANA SMR ge a5 aah ey aero Sag

BE este ent A Re ”

<a

OOS

Pe

#

SL BS a URNS Be

23

(b) The insurance policies complained of are not

ambiguous or misleading. They were prepared by an

independent actuary and are in form and substance

as specified and approved under the Illinois law.

(c) The advertisements published or circulated in

connection with the issuance of the policies did not

make the issuance of the policies fraudulent. The ad-

vertisements were substantially in form approved by

the State Department of Insurance, but in any event

they did not misstate any material fact. They tendered

and referred to the policies for the specific provisions

thereof with promise of refund if the policies were

unsatisfactory.

3. The evidence does not sustain the conviction of any

of the defendants for the conspiracy charged in the

eighteenth count and the separate motions to dismiss or

for acquittal on that count made at the close of the Gov-

ernment’s evidence, and at the close of all the evidence

should have been granted, because:

(a) The ‘‘conspiracy’’ set forth in the eighteenth

count is the same as the ‘‘scheme to defraud’’ set

forth in the earlier,counts. The conspiracy count can-

not stand, if the other counts fall.

(b) The overt acts charged and relied on do not

bea: any proxima‘ relation to attainment of the ob-

ject of the couspiracy and do not sustain conviction

on the conspiracy count.

4. The Court of Appeals erred in sustaining the rftl-

ing of the trial Court that a prospective policyholder was

not required to read his policy to determine the terms and

conditions thereof, and was not bound by what the policy

would have disclosed by reading it, and in refusing a ten-

dered instruction to the jury to that effect.

Aca ioee

a tit, tk ale ema a on oe Pee REESE SCR ESE EEO SHR OS AN A TARE Rp nt Rane meena REECE

24

I.

THE MOTION TO DISMISS THE INDICTMENT

SHOULD HAVE BEEN SUSTAINED BECAUSE

THIS PROSECUTION IS BARRED BY THE McCAR-

RAN ACT.

A.

Tue Scueme to Derraup, CHarcep 1x THE INDICTMENT,

Invotves ONLY THE IssvaNcrE or INSURANCE PoLictEs AND

Apvertisinc Matrer Sussect to RrGuLations IMPOSED

BY State Law; Unpver tue McCarran Act THe MalL

Fraup Statute Cannor Be Consrrurep to Cover THAT

Scuemr, Because, Ir So Construep, Ir Wovutp Invatt-

DATE, IMPAIR, OR SUPERSEDE THE STATE Law.

The ground on which the Court holds that the MeCarran

Act does not bar this prosecution is thus stated in the

opinion (R. 921):

‘“* * * it cannot be properly said that this indict-

ment has to do with the regulation of insurance busi-

ness in Illinois. Rather it has to do with the question

of whether defendants have used the mails in pursu-

ance of a scheme so to manipulate their authorized

regulated business in Illinois as to result in fraudulent

deception of its prospective policy holders. The charge

is not that the corporate charter should be ignored

or that the administrative officers of Illinois may not

perform their statutory duties and supervise and

regulate the company’s insurance business in Illinois,

but goes to the use of the mails, over which the Con-

gress has, by the Constitution, paramount power and

authority.’’ (Italics are ours here and elsewhere un-

less otherwise stated)

We submit that the ground stated is not sound, and that

the decision based on it should not be adhered to.

;

| 25

It is true that Congress has power to control the mails,

and may exercise that power along with other constitu-

tional powers, so as to control a state-regulated insurance

business, provided Congress expressly elects to do so. But

Congress, by the McCarran Act (Title 15, Sec. 1011-2, U. S.

Code, Mar. 9, 1945) has elected not to do so. Instead, it

has provided that a general statute shall not be extended

to apply to a state-regulated insurance business, unless

the intention so to extend it is specifically set forth in the

statute.

The McCarran Act provides:

(1) That ‘‘the continued regulation and taxation

by the several states of the business of insurance is

in the public interest, * * *;’’

(2) That ‘‘the business of insurance and every

person engaged therein shall be subject to the laws of

the several states’’; and

(3) That ‘‘no act of Congress shall be construed

to invalidate, impair or supersede any law enacted by

any state for the purpose of regulating the business

of insurance, * * * unless such Act specifically relates

to the business of insurance: * * *

The McCarran Act thus creates an exception to every

general statute theretofore or thereafter passed by Con-

gress (whether in exercise of its power to control the

mails, or in the exercise of its power to control interstate

commerce, as in the Sherman Act, or in the exercise of

any other power), removing from the purview of such

RAAT

26

statute all matters pertaining to the conduct of a state-

regulated insurance business, unless the intent that the

statute shall apply to that business is expressly stated

therein.

The words, ‘‘invalidate,’’ ‘‘impair,’’ and ““supersede,”? —

are thus defined in Webster’s Dictionary:

Invalidate—to render invalid or null; to weaken or |

destroy the force of. :

Impair—* * * to diminish in quantity, value or

strength.

Supersede—to cause to be set aside, forced out of

use * * * to take the place, room, or position of;

to replace.

By use of the three words, the McCarran Act provided

that no federal statute (unless stated to be applicable to

the insurance business) should be extended in its appli-

cation so as to weaken, or lessen the value of, or take the

place of, any provision of ‘‘any law enacted by any state :

for the purpose of regulating the business of insurance.’’ _

The Illinois Insurance Code is a state law enacted ‘‘for

the purpose of regulating the business of insurance,’’ and _

is directly within the exception created by the McCarran

Act to the application of all general federal statutes.

The Illinois Code requires policies and advertising to

conform to specified standards, and provides penalties for

non-conformance with those standards. The pertinent

provisions of the Code are set forth in Appendix 1, at-

tached hereto.

Section 143 of the Illinois Insurance Code (Ch. 73, Ill. R.

S., Par. 967), prohibiting the issuance of any policy not

approved by the State Insurance Department, or contain-

ing any misleading statement or unfair condition, and

Section 149 of the Code (Ch. 73, Ill. R. S., Par. 761) pro-

ae fees Sa RY Oy tis ee

SPR Shs 3

a ae

9

:

3

VERIO EMRE

27

hibiting circulation of misleading advertising and provid-

ing penalties therefor, are set forth at pages 8 and 9, ante.

Section 401 (Ch. 73, Ill. R. S., Par. 1013) provides for

supervision and periodic examinations of the conduct of

the business by the Director of Insurance; and Section 446

(Ch. 73, Ill. R. S., Par. 1058) provides penalties for any

violation of the law for which no other specific penalty

is provided in the Code.

The statute relating to mail frauds cannot, under the

McCarran Act, be extended so as to weaken the force of,

or to render inapplicable, or to take the place of, any of

the foregoing regulations of The Illinois Insurance Code

with respect to policies and advertising, and with respect

to the penalties prescribed for violation of those regula-

tions.

This is so, whether or not the Illinois law has been vio-

lated or whether or not the Federal Court deems the pen-

alty prescribed by the state law to be inadequate.

If the Illinois law has not been violated, then a convic-

tion under the federal statute would result in substitution

of the federal regulation for the state regulation and in

the imposition of a punishment by the Federal Court for

acts that are authorized under the state law. And if the

Illinois law has been violated, such conviction would result

in an imposition of a federal penalty for the violation,

in place of or in addition to the state penalty, and would

constitute a like assertion by the Federal Court of juris-

diction over a transaction which the McCarran Act de-

clares, as a matter of public policy, is left wholly to the

control and jurisdiction of the states. In either event, the

force of the Illinois law, relating to the conduct of an in-

surance business, is destroyed and that law is impaired

and superseded by the federal statute.

28

B.

A Conviction UNvER THE Matin Fraup Statute NECESSARILY

InvoLves An ASSUMPTION OF FEDERAL JURISDICTION OVER

THE Conpuct or An InsuRANcE Business 1n ILLINOIS,

AND Tuus ReENpvers INEFFECTIVE THE REGULATIONS IM-

POSED BY StaTE Law ReEuatinc THERETO.

It is said, in answer to the foregoing argument, that the

conviction under the federal statute is for use of the mails

and not for the fraudulent scheme.

That is not true under any fair analysis of the issues.

The crime defined in the mail fraud statute comprises

two elements: (1) the devising of ‘‘a scheme or artifice

to defraud, or for obtaining money or property by means

of false or fraudulent promises’’; and (2) the use of the

mails to execute the scheme (Sec. 1341, formerly Sec. 338,

Title 18, U. S. C.).

While it has been said that the use of the mails is ‘‘the

gist of the offense,’’ in the sense that it gives the Federal

Court jurisdiction, the scheme or artifice to defraud is the

essential element, the very basis of the crime.

As said by the Court of Appeals for the Seventh Cir-

cuit, in Worthington v. U. S., 64 Fed. (2) 936 (941):

“‘In a mail fraud action such as the one we are

considering, a fraudulent scheme is an essential ele-

ment of the crime. While federal authority is exer-

cised because of the use of the mails by the wrong-

doer, the wrong—namely, the fraudulent scheme—is

an essential and often is the only controverted issue

involved.’’

The scheme to defraud, charged in the indictment, con-

sists of (1) the issuance of insurance policies alleged to

have been ‘‘composed in an ambiguous and confusing man-

ner’’ and to be ‘‘cunningly worded, arranged and set up,”’

ne a eee

Pe ad het ee ee

Lb

.

Fa

iy

a

+

on

‘

i

in

:.

sy

:

Ee

is

be

ly

%

-s

— - -

29

so as to be in themselves misleading and fraudulent; and

(2) the circulation of misleading advertisements with re-

spect to those policies (R. 5-10).

In order to sustain a conviction on any of the substantive

counts, or on the conspiracy count, the indictment must

charge, and the evidence must prove, the existence of this

fraudulent scheme, namely, that the policies and the ad-

vertising relating .to them, issued or contemplated, were

fraudulent and misleading. Otherwise there would be no

scheme to defraud that could be executed by the use of

the mails or with respect to which any conspiracy could

exist.

The question as to whether a fraudulent scheme was

eharged and proved was the principal issue in this case.

It is the issue to which all the evidence, argument and the

review on appeal were directed. If (because of the Mc-

Carran Act) the mail fraud statute does not extend to

that scheme, the indictment does not state a case.

The opinion of the Court of Appeals cites Badders v.

U.S., 240 U. S. 391 and O’Hara v. U. S., 129 Fed. 551 (C.

A. 6), on the proposition that a prosecution under the

mail fraud statute may be maintained even though the

scheme charged relates to transactions regulated or for-

bidden by state law (R. 921).

Neither case is in point.

- There is no question but that (in the absence of a statute

like the McCarran Act taking the transaction in question

out of the purview of general federal statutes) one may be

punished under the federal law for performing an act in

a transaction that is also subject to state law, and for

which he may also be punished under the state law.

But it has long been recognized that it is contrary to

sound public policy to extend a federal statute to matters

RRA UNAS Reh OAL DES ENS 2B SONA

30

primarily subject to state jurisdiction, if such construction

of the federal statute can be avoided.

Jerome v. U. S., 318 U.S. 101 (105).

And in Hendrey v. U. S., 233 Fed. 5 (7-8) (C. C. A. 6),

decided by the same Court that decided the O’Hara case,

the Court reluctantly held that the fact that the alleged

fraudulent scheme was subject to regulation by, and was

an offense punishable under, the state banking laws, was

not a defense against a prosecution under the mail fraud

statute. The Court stated that the liability to double

punishment might well be against sound publie policy, but

that only Congress could remedy that situation. As to

this, the Court said (pp. 7-8) :

‘“* * * the practical effect of this situation is to call

upon the laws or courts of the United States to punish

citizens of a state for violating the laws of that state

** *. If it be true, as it is sometimes thought, that

there was no deliberate intent to extend so far the

federal criminal jurisdiction, restriction can come

only from Congress.’’

The McCarran Act supplies the restriction from Con-

gress suggested in the above quotation, necessary to pre-

vent conviction under a general federal statute for acts

in the conduct of an insurance business subject to state

law, and for which the action is punishable under the state

law if any intent to mislead or defraud a prospective

policy holder is shown. As Congress declares in the Me-

Carran Act, ‘‘it is in the public interest’? to leave the con-

trol of the insurance business to the states.

If the Illinois law is not severe enough, that gives no

right to the federal court to interfere. It is a matter to

be addressed to the legislature for correction.

ae

C.

THe McCarran Act Is Nor Restrictep 1x Its Operation

ro Starutres Passep Unper THE ComMERcE CLAUSE; BY

Irs Terms It Exciupes rrom Application oF ALL ACTS

oF Concress (Not Expressty Retatinc to Insurance)

Matrers ConnecTEp WitH a SrTaTE-REGULATED INsUR-

ANCE BUSINESS.

Be ee

PELE AM ee

It was argued by the Government in the District Court

that the ‘‘ Acts of Congress’’ which the McCarran Act de-

elares shall not apply to the insurance business are in-

tended to include only Acts of Congress enacted under the

commerce clause of the Constitution.

is, Beh

There is no warrant in the statute for such restrictive

interpretation.

The necessity for legislation to prevent federal contr.

_ of the insurance business became apparent when this Court

held, in U. S. v. Southeastern Underwriters, 322 U. 8. 533,

_ that transactions across State lines in the conduct of an in-

surance business were interstate commerce and were there-

fore subject to the criminal provisions of the Sherman

Act, even though the conduct of the business was subject

to state regulation and control.

The effect of the McCarran Act was to remove from

the purview of both the criminal and civil provisions of

the Sherman Act, all fransactions connected with a state-

3 regulated insurance business; but the McCarran Act was

not limited in its application to the Sherman Act, or other

acts passed under the commerce clause.

| An act of Congress passed under a constitutional grant

of authority to regulate the mails, or under any other

constitutional grant, may interfere with the conduct of an

insurance business to the same extent as an act of Con-

gress passed under constitutional grant of authority to

regulate interstate commerce. A criminal prosecution un-

ae i

ak Cea

eer

32

der the mail fraud statute is as effective in nullifying and

superseding the state law as is a similar prosecution under

the Sherman Act.

The statutory language is clear and it is neither neces-

sary nor proper to go into the legislative history or to

the debates in Congress to determine its meaning or to

engraft on the act a purpose or restriction not expressed

in it.

‘*The short answer is that there is no need to refer

to the legislative history where the statutory language

is clear.’’

Ex Parte Collett, 337 U. S. 55 (61).

See also Helvering vy. City Bank Farmers Tr. Co., 296

U.S. 85 (89).

The legislative history, however, supports the conclu-

sion that the McCarran Act is intended to prevent inter-

ference of all acts of Congress with state regulation of

the insurance business.

As stated by the House Committee on Judiciary in its

report recommending passage of the bill:

‘*Already many insurance companies have refused,

** * to comply with * * * State regulations, on the

ground that to do so, when such laws may subse-

quently be held unconstitutional in keeping with the

precedent-smashing decision in the Southeastern Un-

derwriters case, will subject insurance executives to

both civil and criminal prosecutions * * *,

The committee has therefore given immediate con-

sideration to S. 340, together with a similar measure,

H. R. 1973, so that the several States may know that

Congress desires to protect the continued regulation

and taxation of the business of insurance by the sev-

eral States, and thus enables insurance companies to

comply with State laws.’’ U. S. Code Congressional

Service, 1945, p. 671.

Pe ali ARR SLI ” seit Pie ita " sea

«

33

There is nothing in the report indicating an intent to

restrict the meaning of ‘‘Acts of Congress,’’ which Sec-

tion 1012 declares are not to interfere with state insurance

regulations, to Acts of Congress enacted under the com-

merce clause.

The McCarran Act made no distinction, but provided

that ‘‘no Act of Congress’’ (unless it expressly relates to

insurance) should be extended so as to apply directly or

indirectly to any transaction involved in the conduct of a

state-regulated insurance business.

D.

Tue Question or FeperaL Law Invo.vep 1x Construction

or THE McCarran Act Has Nor Breen, Bur Suovtp Be,

Decipep sy Tus Court; anp THE Conruict BETWEEN

THE Decisions or THE Circuit Courts or APPEAL SHOULD

Be ReEso.vep.

The McCarran Act first came before this Court for con-

struction in Prudential Insurance Co. v. Benjamin, 328

U. S. 408 in which the Prudential Insurance Company

attacked the validity of a South Carolina statute regulat-

ing the conduct of the business of insurance and imposing

a tax on this business in South Carolina, even though the

transaction extended across state lines. The Court sus-

tained the South Carolina statute; held the MeCarran

Act constitutional; and further held that the effect of the

act was to confer power on the state to regulate and tax

insurance transactions even though interstate in character.

The only other case involving construction of the Me-

Carran Act, here important, is North Little Rock Trans.

Co. v. Casualty Reciprocal Exchange, 181 Fed. (2) 174,

abstracted at pages 18-19, ante. In that case, the Court

held the McCarran Act was effective to remove insurance

transactions from the purview of the Sherman Act and

fo 8 on team yee 6 nee a

34

to bar a suit under that act for treble damages for injury

done to the plaintiff by combination between insurance

underwriters permitted under the state law.

The question at issue in the last-cited case is not essen-

tially different from that in the case a bar—if we substi-

tute ‘‘mail fraud statute’ for the ‘‘Sherman Act.’? But

the decisions are exactly contrary.

The decision in the North Little Rock Trans. case is more

in line with the principles applied by this Court in eon-

struing similar statutes.

Thus in Connecticut Light and Power Co. v. Federal

Power Commission, 324 U. 8. 015, this Court reversed a

decision of the Court of Appeals holding accounting prac-

tices of the defendant utility subject to the jurisdiction

of the Federal Power Commission, despite a statutory

exemption of State regulated utilities from the Act there

in question. As to this, the Court said (pp. 528, 532):

‘“‘It is hard for us to believe that Congress meant

us to read ‘shall have jurisdiction’ where it had eare-

fully written ‘but shall not have jurisdiction.’ The

command ‘thou shalt not’ is usually rendered as to

forbid and we think here it was employed without

subtlety or contortion and in its usual sense. * * *

‘Where a federal agency is authorized to invoke an

overriding federal power except in certain prescribed

situations and then to leave the problem to tradi-

tional state control, the existence of federal authority

to act should appear affirmatively and not rest on

inference alone’.’’

And see also:

Panhandle Eastern Pipeline Company v. Public

Service Commission, 332 U. S. 507.

We submit that the question as to the construction of

the McCarran Act should be passed upon by this Court;

|

) 35

that under a proper construction of that act the issuance or

contemplated issuance of insurance policies and advertis-

ing matter, charged in the indictment to comprise a fraudu-

lent scheme, are excluded from the purview of the stat-

utes relating to mail frauds and conspiracies; and hence

that the motion to dismiss the indictment should have been

sustained.

It follows that the motions for acquittal should also

have been granted because of the insufficiency of the in-

dictment and because approval by state authorities of the

policies issued is conclusive, that their issuance was not

contrary to public policy and that they were neither un-

fair nor deceptive.

Il.

NONE OF THE SUPPOSED OVERT ACTS SET FORTH

IN THE CONSPIRACY COUNT IS SUFFICIENT TO

SUSTAIN THE CHARGE OF CONSPIRACY AND

THE MOTIONS TO DISMISS OR FOR ACQUIT-

TAL ON THAT COUNT SHOULD HAVE BEEN

GRANTED.

The act relating to conspiracies require, as a necessary

element of the offense, that one of the parties to the con-

spiracy ‘‘do any [an] act to effect the object of the con-

spiracy.’’ (Sec. 371, Title 18, U. S. C.)

The purpose of the requirement of an overt act is thus

stated:

‘‘The provision of the statute, that there must be

an act done to effect the object of the conspiracy,

merely affords a locus poenitentiae, so that before the

act is done either one or all of the parties may aban-

don their design, and thus avoid the penalty prescribed

by the statute.’’

U.S. v. Britton, 108 U.S. 199 (204-5).

36

The overt act must be some positive, active step ‘‘to

effect the object of the conspiracy.’’

U.S. v. McLaughlin, 169 Fed. 302 (307) (D. C. D.,

Minn.).

In practice, the only overt act that could so tend to

reflect the design to use the mails, is an actual use of the

mails. Hence, it is almost invariably a use of the mails

that is charged as an overt act in a count for conspiracy to

use the mails to defraud. For example, see Hendrey v.

U. S., 233 Fed. 5 (12) C. A. 6); Brady v. U. S., 24 Fed. (2)

399 (404-5) (C. A. 8).

The acts charged in the indictment here to be ‘‘overt

acts’’ (R. 17-18) are set forth at pages 12-13, ante. They

may be thus summarized:

Acts performed more than 3 years prior to the in-

dictment :

1-4: The organization of Arcadia Mutual Cas-

ualty Company; the appointment of Sylvanus as

director; the procuring of authorization to do

business; and the establishment of an office to do

business.

5-11: The entry of the company into the in-

surance business; the appointment of Johnson as

agent; the receipt of premiums; and the making of

subscriptions to the guaranty fund required by

statute to finance the business.

Acts performed less than 3 years prior to the in-

dictment :

12-15: The organization of the successor in-

surance companies and the appointment of Sy1-

vanus as officer and director.

None of the acts referred to could be classed as an irrev-

ocable step toward commission of the crime of using the

mails to defraud.

37

' But in any event, only the last four acts charged are

: within the three-year limitation period (Sec. 3282, Title 18,

; U. S. C.) and since they are insufficient, the entire count

falls.

4 Fiswick v. United States, 329 U. S. 211 (216-7).

4 The decision by the Court of Appeals in the instant case

_ (R. 931) that the three-year limitation does not apply, is

in conflict with the decision in the Fiswick case last cited.

The question was raised on separate motions for judg-

ment on the conspiracy count (R. 155, 269-270). The mo-

tions were overruled and the District Judge instructed the

jury that if they found that the defendants (Petitioners)

committed any of the acts charged, the jury should convict

them (R. 371).

The conspiracy charged in the 18th Count is hardly dis-

tinguishable from the substantive offense charged in each

of the other counts.

The use of a loose conspiracy count to relieve the prose-

cutor from restrictions imposed by the hearsay rule and

thus to procure a conviction, has been strongly condemned

as a threat to the fair administration of justice.

Krulewitch v. United States, 336 U. S. 440 (445-6).

U.S. v. Rosenblum, 176 Fed. (2) 321 (332) (C. C.

A. 7).

We submit that the Court should pass on the question

here raised and that the conspiracy count cannot stand.

; If that count and .the evidence offered under it had been

d excluded, the case presented would have been essentially

4 different, and there may have been no conviction on the

‘ other counts.

ERP ELA EME, ISTEP S RRR TSE IN. SG hse ™

x oy a eee, WPT PIM BO Re PAGE T E ARE IRS ren Ne SCR oR ren artnet

38

III.

THE DISTRICT COURT AND THE COURT OF AP-

PEALS SHOULD HAVE HELD THAT IT WAS THE

DUTY OF THE INSURED TO READ HIS POLICY

IN ORDER TO ASCERTAIN THE CONDITIONS

CONTAINED THEREIN, AND THE JURORS

SHOULD HAVE BEEN INSTRUCTED ACCORD-

INGLY.

The Government’s fundamental objection to the cireu-

lar letters and advertisements is that they state maximum

benefits without setting forth the conditions and limita-

tions that may reduce those benefits or affect the risks

covered.

But the advertisements or letters do not purport to in-

clude all terms of the policies. The reader is referred to

the policy for specification and amplification. The appli-

cant is bound by the limitations in the policy, and if the

policy fairly states them, there is no fraud.

Thus, in Bowers v. Washington Times Co., 65 Fed. (2)

200 (C. A. D. C.), the advertisement read as follows:

‘*One dollar provides protection for $10,000 to sub-

seribers of the Washington Times. * * * For loss of

life, $10,000. For loss of both eyes, $10,000. * * *

With other provisions.”’

The policy provided (as does the Security policy here)

that the maximum benefit (in that case $10,000) was to be

paid on the insured’s death only if caused by wrecking

of a railroad passenger car, steamship, ferry, street car,

elevated or subway car. Otherwise the indemnity for death

would be $500.

The insured was killed in an automobile accident. The

Court held that his beneficiary could recover only $500

ON OE Rye eee Re eh PROS

39

and that there was no fraud in the advertising or in the

policy. The Court said (p. 202):

‘*The advertisement sets out in a prominent man-

ner that the policy in question would contain other

provisions. The insured was thereby notified that he

should examine the policy in order to fully acquaint

himself with its terms.

It appears that the policy which was tendered to ap-

pellant after the death of decedent was of the stand-

ard type and form issued by the defendants in sneh

transactions and referred to in the receipt which de-

cedent received in his lifetime. There was no fraud

or concealment in the character of the policy, such as

to mislead any reasonably careful person.’’

The Court of Appeals in its opinion, in the instant ease,

refused to follow Bowers v. Washington Times Co. on the

ground that that was a civil case (R. 936).

The distinction is not valid.

The suit in the Bowers case was not for recovery on the

policy, but for recovery of the $10,000 indemnity advertised,

which was greater than the amount payable in the pol-

icy for the particular loss sustained. The plaintiff denied

(as here) that the insured did not have to read his policy,

but could rely on the advertising. The suit was based on

a fraud rather than on a contract. The question involved

is the same as that involved in the case at bar, and the

two decisions cannot be reconciled.

In view of the fact that the policies here had been ap-

proved by the State Department of Insurance, which had

sole jurisdiction over them, it cannot be properly con-

tended that they are deceptive or misleading or that their

issuance showed the actual intent to defraud, that is essen-

tial to a conviction.

Reilly v. Pinkus, 338 U. S. 269 (276).

The question presented is important, and the Court

40

should resolve the difference between the decisions thereon

by the Court of Appeals for the 7th Cireuit in this case,

and by the Court of Appeals for the District of Columbia

in Bowers v. Washington Times Co.

If this question is resolved in favor of the Court of Ap-

peals of the District of Columbia, it follows that the Dis-

trict Court erred in the instant case in not granting the

motion for acquittal and in any event, in refusing to give

to the jury the tendered instruction stating that it was the

duty of the insured to read his policy and if it was un-

satisfactory, to reject it (R. 273).

We submit that the Court should grant a writ of cer-

tiorari in this case and that the decision of the Court of

Appeals herein should be reversed.

Respectfully submitted,

Rocer SHERMAN,

Henry F. Tenney.

S. Asuiey GutTurir,

Attorneys for Petitioners.

S. AsHLey GurTarir,

Of Counsel.