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United States v. Dubrin

December 6, 1937

UNITED STATES
v.
DUBRIN ET AL.



Appeal from the District Court of the United States for the Southern District of New York.

Author: Hand

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

This is an appeal from a judgment of conviction for using the mails in furtherance of a scheme to defraud and for a conspiracy so to do. The scheme alleged in the indictment was inducing persons to purchase stock of Public Service Holding Corporation through false representations.

In 1927, one Haugh filed an application for letters patent upon a vehicle actuated traffic control device consisting of a pressure sensitive electrified detector imbedded in the hgihway which records the passage over it of vehicles and by means of resulting electrical impulses automatically sets the traffic signal at the next intersection against cross-traffic. The signal does not stop the traffic along the main highway except when there is cross-traffic. The system has gone into substantial use both in America and Europe.

Garland, a defendant in the present case, who was convicted but did not appeal, and one Stirlen, who had been associated with him in various enterprises, obtained an assignment from Haugh of his application to Automatic Signal Corporation which Garland and Stirlen organized under the laws of the state of Delaware in 1927. One hundred shares of its stock were then issued to Haugh and the remaining fourteen hundred to the Stirlen Corporation, which was organized by Garland and Stirlen as a holding company. Within a short time after the formation of Automatic Signal Corporation, it transferred various patent rights relating to the signal device to a corporation controlled by Garland, known as Engineering & Research Corporation, and received therefrom an exclusive license to manufacture and sell the device, but the license contained the provision that, in the event of bankruptcy or the appointment of a receiver of Automatic Signal Corporation, the license was to expire and all other rights under the contract to terminate.

During the year 1930 the business of the licensee had increased, but the outgo necessary for its expansion was increasing much more, and there was a deficit of about $700,000 with the prospect of a required expenditure of $1,000,000 for the ensuing year. By March 28, 1931, there was a deficit of about $1,000,000. Stirlen and Garland disagreed on the method of continuing to conduct the business in the face of the deficit and Stirlen at last sold out his interests to Garland about June, 1931. Shorlty before this the Public Service Holding Corporation was incorporated by Garland and one Mason to take the place of the Stirlen Corporation as the main holding company for Automatic Signal Corporation and its subsidiary companies. The assets of the Stirlen Corporation, including stock control of Automatic Signal Corporation and its affiliated companies, were acquired by Public Service Holding Corporation in exchange for a block of the latter's stock. The authorized capital stock of Public Service Holding Corporation consisted of 10,000 shares of 7 per cent. cumulative preferred stock $50 par value; 30,000 shares common voting stock of no-par value; and 300,000 shares Class A common nonvoting stock. The voting stock was controlled by Garland at all times, who thus controlled the Automatic Signal Corporation and its various affiliates. In July, 1932, Garland entered upon the stock-selling campaign which ultimately resulted in the indictment. His purpose was to obtain money for the manufacture and marketing of the signal device.

Moscou, a defendant who pleaded guilty to the indictment, had a call on 2,000 shares of Public Service Holding Corporation class A common nonvoting stock which he had obtained from Garland and had been unable to sell. He was introduced by the defendant Weinstein to Henriques & Co., a brokerage concern doing business at 76 Beaver street. There he met the defendants Harry Klein, Dubrin, and Franco. Moscou was a broker with an office at 400 Madison avenue. He afterwards sold out his business there to defendant Arthur Elliott Myers, who continued business there under the name of Elliott Myers & Co. Moscou arranged to have Garland and Masongo down to the office of Henriques & Co., where they met Harry Klein, Weinstein, Dubrin, Toomey, and Henriques and discussed terms for marketing the Public Service Holding class A common nonvoting stock. There was evidence that Henriques was president, and Toomey vice-president, of Henriques & Co., and that Harry Klein, Dubrin, Weinstein, Henriques, and Toomey were interested in the concern. Henriques & Co. sold the Public Service Holding stock under an arrangement that netted Garland$5 per share, out of which he had to pay a commission of 50 cents per share to Moscou. The price obtained from the public was, however, $24 per share. It was thought that in case of an investigation by the New York Attorney General there would be a criticism of the spread between$5 and the brokers' selling price of $24 per share. Accordingly a "show" contract was drawn up and executed indicating that the selling price to Henriques & Co. was$16 instead of $5. Likewise the parties caused a so-called "kick back" contract to be executed by means of which the difference of $11 was returned to Henriques & Co. Henriques & Co. arranged with Harvey W. Sieg & Co., Inc., and Elliott Myers & Co., Inc., to market stock of Public Service Holding Corporation which Henriques & Co. had contracted to take. There was also proof that Joseph Winfield sold the stock at the same price of $24 and used the same method of sale as Henriques & Co. had done and employed on his staff men who at times were handling Public Service Holding stock transactions for Henriques & Co. and Elliott Myers & Co., Inc. Elliott Myers & Co., Inc., provided for "show" prices in ways similar to those employed by Henriques & Co. A "show" contract of Elliott Myers & Co., Inc., was actually exhibited to the agents of the State Attorney General after Elliott Myers & Co., Inc., was raided in 1933. After October, 1932, they had been dealing with Garland directly, and their "show" contract was intended to cover up the spread between the price of $5 which they paid to Garland and the price of $24 which they obtained from their customers.

The method of inducing purchases of Public Service Holding Corporation stock was to circularize persons holding stock in well-known corporations and to offer to advise them about their holdings. The advice in the end was that they should dispose of their stocks and invest in stock of Public Service Holding Corporation. Telephone salesmen using fictitious names worked in rooms of the brokerage offices. They induced customers to purchase listed securities, often more of the very ones the customes already held. Finally, they advised the customers to exchange their stock for that of Public Service Holding Corporation. The arrangements were concluded by other salesmen who interviewed the customers personally, using the fictitious names which had previously been given over the telephone. Thereupon the original stocks of the customer were sold by the brokerage houses and the proceeds credited to his account against his purchase of stock of Public Service Holding Corporation.

The earnings of Automatic Signal Corporation from the date of its organization to July 31, 1934, were only about $85,000. During that period its patent licenses, which had been at one time set up on its books at $32,500,000, were written down to $5,000,000, and the latter valuation was further reduced, by charging against it a deficit aggregating $1,095,000, to$3,905,000. The Automatic Signal Corporation is still selling its products at a small profit, but is the only one of the affiliates having a business of any value. Approximately one month before the trial of the present action the Automatic Signal Corporation declared its first and only cash dividend at the rate of three cents a share, which resulted in a dividend of 5 cents per share on the class A common stock to the stockholders of Public Service Holding Corporation. The Public Service Holdinhg Corporation between the time of its organization in February, 1931, and February, 1935, had total net earnings of only$4,984.09. It paid out during the same period cash dividends on its preferred stock amounting to $11,145.76, stock dividends on its preferred stock amounting to $4,989, stock dividends on its class A nonvoting common stock amounting to $709,692.84, and stock dividends on its voting common stock of $106,327.62. On financial statements issued by the corporation during the period from February, 1932, to February, 1935, the capital and earned surplus items appeared at $360,785.44 for the first year, $675,993.10 for the second year, and $398,425.59 for the third year. In each year less than $5,000 consisted of earned surplus. The capital surplus consisted wholly of an arbitrary increase in valuations placed upon stock of subsidiary and affiliated companies.

The misrepresentations made to the purchasers of stock of Public Service Holding Corporation were that it would be listed on the New York Stock Exchange; that it would be listed at various figures from $30 up to $50 per share; that it would pay cash dividends; that it paid 6 per cent. dividends; that it would increase in price to $40 per share; that it was a good investment; that it was a better investment than National Dairy Company; that it was a better investment than Public Service Corporation of New Jersey; that it was a part of Public Service Corporation of New Jersey; that it could be sold by the purchasers at any time they desired for$24 a share; that George Henriques was a member of the New York Stock Exchange; and that he at one time had been president.

The shares were being sold at $24 per share out of an issue carried on the books at $18 per share and actually yielding the company but $5 per share and earning practically nothing.

The relation of the various appellants to the enterprise ...


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