Before MEDINA, LUMBARD and WATERMAN, Circuit Judges.
WATERMAN, C.J. - The appellants, Walter F. Tellier and Albert J. Proctor, were tried and convicted upon a thirty-six count indictment charging them with violations of the fraud section of the Securities Act of 1933, 15 U.S.C. 77q(a); with violations of the mail fraud statute, 18 U.S.C. § 1341; and with a conspiracy to violate each of these statutes, 18 U.S.C. § 371. The charges in the indictment arise out of the public sale of four series of debentures during the years 1951 through 1955. Tellier, who received concurrent sentences of four and one-half years on each count and was fined a total of $18,000, does not contest the sufficiency of the evidence against him. He does contend, however, that reversal is required because of allegedly erroneous rulings made by the trial judge during the course of the trial. Specifically, it is claimed that the trial court erred in permitting testimony Tellier alleges was a violation of the attorney-client privilege, and also erred in the following: (1) the admission into evidence of the corporate records of Alaska Telephone Corporation (ATC), (2) the exclusion of evidence pertaining to the financial condition of ATC at the time of trial, (3) the failure of the trial judge to order production of a report made by a government witness, and (4) the failure of the trial judge to give a requested instruction. Proctor, who received suspended concurrent sentences of nine months on each of the counts in the indictment, contests only the sufficiency of the evidence to support the verdicts against him.
ATC was formed in 1948 to acquire and operate independent telephone and electric power systems in Alaska. Among the promoters was the appellant Proctor, who, upon incorporation, was elected a director of the corporation and, in 1951, its secretary. Proctor enlisted the services of the defendant Elton B. Jones, a Seattle attorney, who was also elected a director and became the company's counsel. After its incorporation ATC acquired several telephone exchanges, with approximately 700 subscribers, located in small Alaskan towns. This property was obtained partly for cash and stock, and partly on credit subject to mortgages. The corporation had insufficient funds to meet operating expenses and accruing mortgage obligations, and it was unsuccessful in several attempts to raise the needed capital.
In April 1951, Major William Maxey, the president and general manager of ATC, together with D. Sherman Starr, the vicepresident, approached Tellier & Co., a securities firm located in New York City, concerning the possibility of raising needed funds. Tellier & Co. was owned and controlled by the appellant Tellier, who employed between twenty and thirty salesmen to sell over the telephone the securities handled by his firm. When Tellier was approached by the ATC representatives he retained Bernard D. Cahn, an attorney formerly employed by the Securities & Exchange Commission, to represent Tellier & Co. After some discussion between Tellier and the ATC representatives it was decided to offer for public sale an issue of securities of an amount less than $300,000. The reason for this limitation was SEC Regulation A, the General Exemption Regulation, which exempted from SEC registration certain issues of securities if the aggregate offering price of the issue did not exceed $300,000*fn1 At Tellier's suggestion, and over some objection by Cahn and the New York counsel for ATC, it was decided that the securities to be issued were to be convertible twenty year debentures carrying interest at an annual rate of 6% payable monthly. Tellier & Co. agreed to act as best-efforts underwriter for these debentures, labeled "Series A," and to receive therefor 20% of the face amount of the securities sold. In addition, it was to receive expenses in an amount not to exceed $20,000.
Cahn's objection to the sale of debentures, rather than of common stock, was based upon the failure of ATC to prove that it had earning capacity. An unaudited financial statement prepared by ATC representatives disclosed that the corporation had barely passed the break-even point durings the years 1948-1950*fn2 Nevertheless, the statement was used in the offering circular prepared by Cahn and registered with the SEC.Within several months of issuance all of the debentures, which had been offered at par, were sold by Tellier & Co. Subsequently, an independent accounting firm was hired to audit ATC's books. The audit revealed that the profit figures contained in the Series A offering circular were erroneous; and that, in fact, ATC had been losing money since its incorporation. The total deficit up to 1951 was about $40,000, with the result that ATC was insolvent. In 1951 ATC additionally lost in excess of $45,000. At Cahn's insistence the corrected information was sent out to all those who had purchased debentures.
In the meantime, Maxey and Starr had severed all connections with ATC, and Cahn who at one time had been elected a director of the corporation resigned his directorship. The need for additional capital continued to plague ATC, and Proctor and Jones spoke to Cahn about this. Cahn told them that additional public financing was inadvisable as long as the corporation continued to operate at a loss. At Cahn's suggestion attempts were made to obtain private financing. This project failed. ATC was now in debt to the Government for money withheld from employees' pay for employees' income taxes and for excise taxes which had been collected from subscribers. In addition, ATC had not turned over to Alaska Communications System long distance toll charges due it which had been collected from ATC subscribers. Finally, the trustee under the Series A trust indenture complained that, although sufficient deposits were made with it so as to enable it to make timely payment of the monthly interest charges, the corporation nevertheless was not maintaining a sufficient advance deposit to provide such payments for a six month period as it was required to do by the indenture.
In view of ATC's immediate need of funds and its inability to obtain them through a private financing, Proctor then approached Tellier to arrange additional public financing. Cahn repeated an earlier warning against public financing, but Proctor represented that ATC was reducing its losses, that it had reached the break-even point, and that the last quarter of 1952 would show a profit. Cahn's request for an audit was met with a reply by Proctor that this was not possible because ATC still owed the auditors a large fee. He insisted, however, that the corporation's financial status was considerably improved.
Over Cahn's objection it was then decided that ATC should issue additional debentures; and, to placate Cahn, it was agreed that common stock should also be sold. Cahn acquiesced, but urged upon Proctor and Tellier the importance of the representation that ATC was now operating at a profit. Proctor agreed to supply Cahn with the supporting financial statements, and several months later he did so. An offering circular was prepared by Cahn and Proctor which represented that ATC had reached the break-even point and that "Net proceeds of this issue will be used for expansion and new equipment and for working capital needed to continue operations." Debentures in the face amount of $150,000 were then issued and offered for sale at a 30% discount. These debentures, labeled "Series B," were in form substantially similar to those previously issued except that they matured in ten years rather than twenty.Tellier's underwriting fee was 10% of the face amount plus $10,000 for expenses. Within a month Tellier had sold all of the debentures, though he was unable to sell any substantial percentage of the 40,000 shares of common stock which had been offered at the same time. A later audit revealed that of the $150,000 face amount of these Series B debentures only $9,000 was expended for new equipment, and for working capital.
Then, before another month had passed, the anticipated audit report disclosed that ATC had not made the profit in the last quarter of 1952 that Proctor had represented would be made. In fact, its losses for that quarter were the greatest in its history, and its total loss for the year was nearly $100,000. In addition, contrary to Proctor's optimistic prediction, it lost money during the first quarter of 1953. This audit also showed, as of the date the report was made, that the Government had filed tax liens against substantially all of ATC's property.
So the proceeds of the Series B debentures appear to have benefited ATC no more than did the proceeds of Series A, and another year went by. Then, in December 1953 Proctor wrote Tellier, enclosing a financial statement for the first three quarters of that year, stating that there had "been little, if any, improvement over the previous period." After setting forth the financial difficulties which the company faced, Proctor again represented that "we believe the corporation is currently operating in the black, * * *"*fn3 and suggested a sale of additional securities so as to "obtain a breathing spell from the bond interest * * *." Tellier contacted Cahn about the possibility of selling additional debentures. Cahn refused to handle the transaction. He warned Tellier that ATC, with its consistent record of losses, was merely borrowing money as a substitute for earning money and suggested that the sale of new debentures to get money to pay interest on the old debentures might be a criminal fraud which could involve Tellier in "great trouble." Nevertheless, Tellier, Proctor and Jones decided to go ahead and issue additional debentures, this time in the face amount of $270,000. The arrangements for the underwriting and the terms of the debentures were substantially similar to those of Series B. The offering circular prepared in connection with the sale of these debentures, denominated "Series C," stated that the "Net proceeds of this issue will be used for expansion and new equipment, for working capital needed to continue operations, and to liquidate delinquent taxes." No mention was made of the tax liens that now had been filed by the Government, of any impending mortgage foreclosures, of the necessity of using a substantial portion of the proceeds for meeting delinquent interest prepayment under the Series A and B indentures, nor of the existence of the defaults under the prior debenture issues.
The last one of the Series C debentures was sold approximately two months after the issue was offered. Shortly thereafter, Proctor assumed the presidency of ATC, and Jones replaced Proctor as Secretary-Treasurer. At Tellier's request Proctor prepared a letter to all the debenture holders which optimistically reported ATC's financial position and informed them that their debentures could be converted into common stock "at a rather substantial premium." The report did not tell the debenture holders, as Tellier was subsequently told by Proctor, that "it was not possible to apply the funds as originally allocated." Nor did the report mention the company's insolvency or its continued operating losses. Less than two months after this report was sent out, ATC again went into default on the interest prepayments required to be deposited with the trustee under the Series A, B and C indentures. Also, by this time, the proceeds of the Series C issue were exhausted. Consequently, Proctor came to New York in October 1954 to arrange with Tellier for the issuance of a fourth series of debentures. So "Series D" came into being, consisting of ten-year, 6% convertible debentures in a total face amount of $158,000, interest payable monthly with the same prepayment deposit provisions as in Series A, B, and C. The offering circular for this series again stated that "Net proceeds of this issue will be used for expansion and new equipment, for working capital needed to continue operations, and to liquidate delinquent taxes." The circular did not mention, however, that a large portion of the proceeds of the issue were already committed to be deposited with the indenture trustee for interest prepayments required to be so deposited by the terms of all four indentures, and also were committed to pay the trustee its fees and expenses. The offering price of a $100 Series D debenture was $70, and although sales resistance was somewhat greater to this issue, within seven months Tellier had been able to dispose of practically all of this issue, also. ATC continued to lose money, as it had in every year of its existence. Finally, in the autumn of 1955, it filed under Chapter XI of the Bankruptcy Act. In November 1955 a receiver was appointed for the corporation by the United States District Court for the Western District of Washington. Later that month ATC filed an amended petition under Chapter X of the Bankruptcy Act and the receiver was appointed Trustee in Bankruptcy.
The chief witness for the Government was Cahn, Tellier's one-time attorney and one-time director of ATC. Cahn testified to numerous conversations and communications between Tellier, Proctor, Jones, himself and others. With one exception this testimony was admitted without objection by Tellier. The lone objection related to the telephone conversation between Cahn and Tellier in December 1953 in which Cahn warned Tellier against the proposed issuance of a third series of debentures. Tellier urges that this conversation, unlike the others to which Cahn testified, was intended as a confidential communication between an attorney and his client concerning the legal affairs of the client. Hence he contends reversible error was committed by the admission of this testimony into evidence. Proper evaluation of Tellier's position requires that we detail with greater specificity the circumstances relating to the conversation objected to.
On December 7, 1953 Proctor wrote Tellier outlining ATC's precarious financial position. He urged upon Tellier the necessity for obtaining additional funds and suggested another public sale of securities. Tellier, after reading Proctor's letter, sent it to Cahn with the following notation:
"Berney, see if we can put out more bonds. W.F.T."
And then under that is another notation:
"Another one hundred fifty thousand issue to net them ninety should do the trick or maybe two hundred thousand dollar issue. The common don't sell so it can be withdrawn or let die."
Upon receiving the letter, Cahn immediately telephoned Tellier, and warned him not to go ahead with any additional public offerings for to do so would involve him in "great trouble." He pointed out that Proctor's letter proposed to use the proceeds of the new issue for the same purposes that the Series B offering circular represented that the proceeds of Series B were to be used for, that the representation made in the Series B circular that ATC had reached the break-even point had proven false, that ATC was selling debentures as a substitute for earning money, and that "this selling of bonds to pay back interest by the sale of new bonds will involve you in a Ponzi scheme." Cahn concluded the conversation by informing Tellier that he would write a letter to Tellier, with copies for Proctor and Jones, substantially setting forth the telephone conversation and pointing out that for legal reasons there should not be any public sales at this time. Cahn prepared the letter, with copies, and ...