Appeal from the District Court of the United States for the Southern District of New York.
Before MANTON, SWAN, and CHASE, Circuit Judges.
The two defendants who have appealed were indicted with eight others. The indictment contained thirteen counts. Each of the first twelve counts charged the fraudulent use of the mails in the same language, but alleged mailing to a different person. The thirteenth count charged conspiracy. Defendant Vause was found guilty on each count. Defendant Schuchman was convicted on the first six and the thirteenth count. Both appealed. Of the other defendants, some pleaded guilty, some were acquitted, and one was convicted but did not appeal.
There is no doubt of the use of the mails, and that feature of the case is not now an issue. The questions involved relate to numerous rulings on the evidence; to refusal to instruct the jury as requested; to the summation of the district attorney who tried the case, and his conduct during the trial; to refusal to grant defendant Vause a continuance and to grant a motion for a mistrial on the ground of the disqualification of a juror.
The scheme to defraud, alleged in the indictment and proved at the trial, consisted in the organization and operation of an investment corporation which solicited and accepted deposits of money in the guise of selling its so-called certificates of indebtedness and its stock. The misrepresentations were in statements that the company was solvent when it was known it was not; that its funds were being used to finance sound business ventures only after they had been thoroughly investigated, when in fact the defendants knew the money was being risked or squandered in highly speculative ventures, to pay the salaries of the men in control, to pay unearned dividends on the stock, and unearned interest on the certificates of indebtedness; that the corporation was a bank operated in accordance with the banking laws of the state of New York and the supervision of its banking department; that men in control were experienced, competent, and capable -- all of which was false as the defendants well knew.
The scheme was carried out as follows: The defendants Schuchman and Vause had had business relations with each other and with some of the other defendants. Schuchman was a trader in securities. Vause was a county judge. One of the other defendants was a private banker on the lower East Side; another was his brother; another the brother of Vause; and the others were useful friends. One of these friends controlled the charter of the Pharmaceutical Finance Corporation which had been organized under the laws of New York in 1925 and was not subject to supervision by the banking department. He contributed this charter. The name of the corporation was changed to Columbia Finance Corporation. Almost enough money was raised and made available to the Columbia Finance Corporation to obtain a place of business at 296 Grand street, New York, and to pay for equipping it so that it had an appearance similar to a bank. This office was opened December 17, 1927. The plan was to sell 7 per cent. stock of the Columbia Corporation and to sell its certificates of indebtedness which bore interest at the rate of 6 per cent. These certificates were printed to look like bonds, and were offered for cash and on an installment plan. When purchased on installments, a book in which payments were entered was given to each purchaser. These books looked like those issued to depositors by banks. They were the product of the brain of Vause. To accommodate purchasers who held such books showing payments made toward the purchase of certificates and who desired to withdraw all or part of their monay without causing the Columbia Finance Corporation outwardly, at least, to adopt a practice which would subject it to supervision by the New York banking department, a corporation called Columbia Factors, Inc., was organized with officers from the Columbia Finance Corporation and its place of business in the Columbia establishment. When a book holder wanted money on his book, he would present it at the Columbia office; Columbia Factors, Inc., using Columbia Finance funds, would take up the book, give the holder the money desired, and, if a balance still remained, Columbia Finance Corporation would issue a new book for that amount in the name of the original holder, and that would be delivered to him. Soon large amounts of money came in from numerous people. This was used to maintain the office, pay salaries, and make loans to the insiders, pay interest on the stock and on the certificates, and for investment in highly speculative business which did not turn out well. Columbia Finance Corporation was started without enough money to be solvent when it opened its doors for business and never was solvent and these defendants knew it. It seemed to prosper, however, because it could, and did, continue to take in money from the public for its stock and certificates which were falsely represented in circulars and other matter sent through the mails to be desirable and safe investments.
At the opening of the Grand street office Schuchman introduced Vause as one of those interested in the business and Vause made a speech.Another office was opened in the Bronx, and Vause contributed another speech in which he said that, if he had another $100,000 to invest, he would safely invest it in the corporation. He had not then, nor did he ever, invest a first $100,000, or, in fact, anything in the business. In March, 1928, another office was opened on Seventh avenue in Manhattan and another speech was contributed by Vause.
The Columbia Finance Corporation continued for some time to pay its expenses, its interest charges, and bear its losses out of money received from the sale of its stock and certificates. Vause was not an officer nor did he appear to be interested except as an investor. He was always behind the scenes, however, giving advice, knowing the facts, urging the visible actors on, drawing his salary in the name of his brother, and encouraging the others with the though that the failure of a business so conducted would amount to nothing but an ordinary commercial bankruptcy from which all would emerge with no other legal entanglement.
When the situation became desperate, a financial adventurer named Montgomery was given the chance to apply his methods. He was well known to Vause, who had been his attorney and interested in some of his ventures.The law firm in which Vause had formerly been a partner had unsuccessfully defended Montgomery in a criminal fraud action and he had for a time been a fugitive from justice. Vause, knowing all this, recommended Montgomery to his associates in the Columbia Finance Corporation as a good man to put in charge. Montgomery, of course, found the business hopelessly insolvent. He owned 80 per cent. of the stock in a corporation called the Western Pennsylvania Syndicate, which owned what had been, and could be, represented to be oil and coal bearing land in Pennsylvania. He transferred this stock to the Columbia for $2,000 in cash, and $13,000 of its certificates. This acquisition was then entered on the books of the Columbia as an asset valued at $455,000 without the use of anything but ink to make it that, and in this way the Columbia was made to appear solvent on the books. Schuchman, like Vause, drew a salary from Columbia and helped to do what was being done. He also drew his salary in the name of another. Columbia Finance Corporation did business for exactly two years from the date of the opening of its Grand street office. It was then closed by officials of the state of New York. It then had liabilities of $304,308.41 on its outstanding certificates of indebtedness, and sold stock to the amount of $90,047.50, and had practically no assets.
The history of this financial misadventure has been sketched only in the baret outline, but that will do for present purposes, with such amplification in spots as will be give to show the setting in the general scheme of the particular points raised in this appeal.
Of the men who were indicted with these defendants, Solomon Cruso, Abraham Rayman, and Joseph P. Barmak pleaded guilty and testified at the trial for the government. Cruso had stepped back to let Montgomery work out his schemes for relief when hope of financial salvation for the Columbia was placed on the efforts and methods of Montgomery. The unsavory reputation of the latter and the thorough knowledge Vause had of it when he urged placing the corporation's affairs in Montgomery's hands did, no doubt, tend to tar Vause and Schuchman somewhat with the same brush in the eyes of the jury. They both objected to evidence showing the kind of a man Montgomery was and Vause now urges especially what is termed error tainting the reception of such evidence. For instance, Rayman testified that he went to see Vause late in September or in October, 1929. He told Vause they had about $60,000 the week before and about 50,000 people taking out money, with no money coming in. Vause said to him: "Don't worry, money will still come in. Don't fear anything, nothing will happen, go back." A few days later, when there was $40,000 left, he went to Vause again and reported the situation. Vause then suggested putting a thirty-day withdrawal clause into effect. Rayman reported that to Barmak and Cruso, and it was done. No money came in, expenses continued, and, when the thirty days expired, book holders became insistent, and Rayman again went to Vause, who wanted to know if another thirty-day notice could be required. Upon being told that it could not, he told Rayman: "Don't fear, don't worry, go back to the office and stay like a soldier and fight, there is nothing serious and nothing terrible." Rayman went back and reported, but nothing else was done. A few days later he was sitting in the Seventh avenue office with Cruso when a bail bondsman named Eisenstein came in. Eisenstein had been associated with them and with Vause in another corporation, and when he was told the situation asked what Vause said. Upon being told that Vause advised staying and fighting, Eisenstein said he knew a man who could help out. He then called some one on the telephone and arranged with Rayman and Cruso to meet him, and this person, who was Montgomery, as he then told them, at Young's Restaurant on Broadway that evening. The appointment was kept. Rayman and Cruso were introduced to Montgomery by Eisenstein and told him the facts about Columbia Finance Corporation. Then Rayman was permitted to testify that Montgomery said, "Wait, a minute, I am going to call up Barney Vause;" that Montgomery then left the table and in a few minutes came back and said, "All right, boys, I just talked to Barney Vause and everything will be all right, I am going to do something for you that will save you." Eisenstein testified that Montgomery did not call any one on the phone from Young's Restaurant that evening, but that the next day, when Montgomery, Eisenstein, Cruso, Barmak, and Rayman were going over the books at the Seventh avenue office Montgomery did make a call on the telephone and then said to the others, "I just called up Judge Vause and asked Judge Vause what he thought of the proposition," and further that Vause told him he thought it was a good proposition and that he (Montgomery) could make some money out of it. Rayman testified that a few days later he went to see Vause and told him Montgomery was going into the proposition. Vause told him then that he thought Montgomery could run it all right and could make some money out of it. These conversations concerning the business at hand between men who were engaged in furtherance of the conspiracy charged in the thirteenth count of the indictment and similar conversations, which these defendants now rely upon to show error, between conspirators while so engaged, were clearly admissible against Vause, who had been abundantly shown to be one of the guiding spirits in the venture, and against another of the coconspirators, Schuchman. The bite of such evidence, if it had any, and certainly the basis of the objection to it, lies in its indirect effect in showing that Montgomery was on terms of close intimacy with Vause who did not wish to appear before the jury as a man who would stoop to such a level.
Closely akin to this class of exceptions to evidence which put Montgomery, Vause, and Schuchman into the category of co-workers was the evidence that Montgomery was known to be a man who could and would indulge in trickery and fraudulent financial schemes, and was an ex-convict because of his previous practices in that regard. When Montgomery was put upon the stand to testify for the government, the district attorney introduced him to the jury by questions and answers which brought out his real character. His credibility as a witness was an important matter for the jury to decide in order to get at the truth, and there is certainly no point in condemning the district attorney for frankly disclosing at the outset what would enable the jury to do its duty in that regard. The complaint now made rather savors of the thought that he stole a march on these defendants in not letting that phase of the matter wait until they could, if they saw fit, bring out the facts on cross-examination and make the most of their apparent desire to put the witness in his proper place and themselves show that the case against them rested in part on the word of a man of abandoned character. See People v. Minsky, 227 N.Y. 94, 124 N.E. 126.
During the direct examination of Eisenstein it appeared that he had borrowed $1,000 of Judge Vause in 1927. He testified that in December, 1929, he had a talk with Vause about this loan, and that Vause then told him the $1,000 was an investment Vause had made in the Spheric Corporation. This company had been organized before the Columbia Finance Corporation to market Roumanian clay under the name of Spheric Products Corporation and never did any business. It was in connection with its organization that Vause, through Eisenstein, first met Cruso, Rayman, and Schuchman. Nothing further appeared about the $1,000 during the direct examination. But in a lengthy cross-examination the following took place on that subject:
"Q. You told us about a check for $1,000 that was shown to you by Judge Vause and you said that in December of 1927 you borrowed $1,000 of Judge Vause? A. I did.
Q. You gave him your I.O.U.? A. I did.
Q. Where is that I.O.U.? A. I haven't got it.
Q. Did you ever get it back? A. I did not.
Q. Have you ever paid back this $1,000? ...