Before Friendly and Smith, Circuit Judges, and Watkins, District Judge.*fn*
These are appeals pressed by a stock brokerage firm and seven individual defendants found guilty on various fraud and conspiracy charges of a fifty count indictment after a protracted jury trial of some fifteen weeks. Some appellants urge insufficiency of the evidence as grounds for reversal while others claim the case against them was rather weak and inconclusive - thereby magnifying the prejudicial effect of claimed misconduct and excessive zeal on the part of the prosecution and of alleged errors on the part of the Court. There is little choice, therefore, but to delineate in some detail the scheme or schemes charged to the appellants as developed in a trial transcript of approximately 9000 pages.
The only convicted defendant not appealing, Texas-Adams Oil Co., Inc. (Texas-Adams), was the central "glue" in the fraudulent schemes charged by the government. Count 1 was a so-called "wire fraud" count, 18 U.S.C. § 1343; in it defendants Crosby, McCarthy*fn1 and Pettit were accused of using interstate telephone wires in furtherance of a plan which resulted in the defendants "purchasing" control of Texas-Adams using that company's own funds as consideration, thereby defrauding the other stockholders. Counts 2-32 charged Crosby,*fn2 Meredith, Mittelman, Pettit and Texas-Adams with violations of 18 U.S.C. § 1341, the Federal "mail fraud" section. While each count was based on a separate alleged mailing, the "scheme or artifice" charged was the same in all cases. The government generally sought to prove that the defendants had made or knowingly sanctioned fraudulent misrepresentations to the investing public and to brokers and businessmen dealing with Texas-Adams; that defendants had engineered various corporate mergers and purchases, with little or no business substance, whose sole or principal purpose was the flooding of the market with worthless or overpriced Texas-Adams share certificates; and that defendants had fraudulently authorized the issuance of corporate stock without consideration in return for "kickbacks" from the proceeds of the sales of those shares. Further, the Count One "scheme" was incorporated by reference into these mail fraud counts.
The next seventeen counts charge all the aforementioned defendants, save Crosby, plus Goldberg, Gordon, Reicher and Philip Gordon & Co., Inc. with wilfully and knowingly using the mails to sell common stock of Texas-Adams - which stock was not covered by a registration certificate filed with the Securities and Exchange Commission, 15 U.S.C.A. §§ 77e(a) (1) and (2), 77x. Many of the mailings concerned a multi-colored brochure, allegedly containing many fraudulent misrepresentations, entitled "Texas-Adams - an industrial empire is under way."*fn3 The final count was the ever present conspiracy indictment. In it were accused McCarthy and all the appellants in addition to Joseph Castagna and Guy Gully, acquitted by the jury. Numerous co-conspirators, not defendants, were also named - many of whom testified at the trial. The thrust of the alleged conspiracy was the use of the mails to foster the sale of unregistered securities; all of the appellants were convicted on this count.*fn4
Relevant proof adduced by the government at trial actually went back in time several months before the principal "management" defendants obtained control of Texas-Adams. During the summer of 1955 McCarthy and Mittelman were engaged in negotiations with one Claget Sanders to purchase from the Ajax Oil Company concededly valuable oil producing properties in what were known as the Bonanza and Poplar fields in Montana and Wyoming. The price agreed upon was $1,250,000.
It was at about this time, in June, 1955, that the American Montana Oil & Gas Corporation, later used as a dummy buyer in the fraudulent takeover of Texas-Adams, was organized by Mittelman, a New York attorney; however, no organizational meeting was held until October, at which time Crosby, Pettit and McCarthy were elected its officers.
An early linking of appellant Crosby to McCarthy and Mittelman was shown by Basil Zavoico. He was a petroleum consultant approached by Crosby in May of 1955 to obtain engineering reports on the Bonanza and Poplar properties. A month later Crosby again retained him to prepare a statement reflecting the financial structure of a Dumont Airplane & Marine Instrument Co. after an anticipated purchase by that corporation of the Ajax properties. (Zavoico was told that American Montana held an option to purchase from Ajax - and would in turn sell to Dumont.) The terms of the projected Dumont-American Montana "sale" would have netted a $2 million profit for the latter company.*fn5
Apparently lacking funds to swing the Ajax purchase, McCarthy and Mittelman then concluded an agreement, in Denver, with Homestead Oil & Uranium Co. of Colorado. They told Holland, president of Homestead, that they already had control of Dumont - and agreed, in return for a loan of $50,000 to be used as partial payment for the Ajax properties, to merge Homestead into Dumont.*fn6 The instrumentality set up for this merger was still another penniless, dummy corporation, Sundown Oil Co. of Colorado, which had as officers and directors McCarthy, Mittelman and Paul R. Jones, a co-conspirator.
Although the record is silent on this point, plans for the acquisition of Dumont must have collapsed sometime that summer. Rather, an agreement was made between one Satiris Fassoulis and McCarthy whereby "groups" headed by those two men were to obtain control of Continental Car-na-var Corp. - at which time Continental would purchase all the stock of Sundown (which was to have acquired the Ajax properties). Holland and Homestead were in turn reassured by an agreement wherein Continental agreed to replace Dumont and merge with the uranium company.
The financial problems of McCarthy and Mittelman during this period are painfully obvious. The Ajax commitment called for 1 1/4 million dollars - the sole amount visibly raised was the $50,000 from Homestead in return for the promise of merger. The "McCarthy group" was to have produced $277,000 to purchase control of Continental in conjunction with Fassoulis; in order partially to meet their commitments in this direction, Mittelman was forced to go to Denver to obtain from Holland release of the same $50,000 which had been banked in Billings, Montana pending closing of the Ajax deal. This money was then forwarded to the New York attorneys of the Limestreet Corporation, from whom McCarthy and Fassoulis were purchasing control of Continental. In the end, both the Ajax and Continental deals fell through for lack of funds - but both of these episodes shed light on the eventual Texas-Adams machinations.
B. An "Industrial Empire" Is Begun
While Crosby's connections with the foregoing transactions can only tangentially be inferred, he here enters the scene, center stage. In August of 1955 he, with co-conspirator Lawrence Rosen, placed an ad in the Wall Street Journal seeking the controlling interest in a publicly held corporation. Among those responding to the ad were the controlling shareholders of Texas-Adams Oil Co., Inc., defendants Gordon, Goldberg and Reicher. They had incorporated Texas-Adams two years before and had financed it with a public issue exempt from registration under Regulation "A. " The" t/he company's headquarters were in the offices of the brokerage firm, Philip Gordon & Co., Inc. Texas-Adams had been relatively dormant during its short history - only in March of 1955 did it acquire an interest in some Texas oil producing properties which earned about $10,000 in gross income by the time of the sale of control to McCarthy and his associates in late September of that year.
Preliminary negotiations were held among Crosby, McCarthy and Goldberg and agreement was reached on the sale of 283,000 shares of Texas-Adams for $105,000 - $45,000 at closing, $20,000 in sixty days and $40,000 in ninety days; the lion's share of the stock certificates was to be escrowed pending payment on the time notes.
Closing of the transaction was twice postponed because of the buyers' financing difficulties, the second postponement being accompanied by a $1,000 check, on September 25, 1955, to evidence the continuing good faith of the McCarthy group. Defendant Pettit had by that time joined the purchasing group as that check was traced from his account in a Salt Lake City bank.
The closing was finally consummated on September 27, 1955. The buyers' arrangements for "financing" were most interesting. Crosby and McCarthy approached Joseph Spiotta, a New Jersey money lender, seeking $40,300 to meet the closing installment of $45,000. He agreed to furnish that sum on the strength of a representation that Texas-Adams would use the City National Bank & Trust Co. of Hackensack, New Jersey (where Spiotta was a director) as a repository for funds, and on the strength of a guarantee that Spiotta's account in that bank would be credited with $42,000 before he ever parted with his money.
The Texas-Adams bank account, some $60,000, had been kept with the Underwriters Trust Company in New York. When the buyers represented that they were going to move that account to the New Jersey bank, the sellers agreed to switch the funds, prior to closing, to the Chemical Corn Exchange Bank, scene of the closing and one of two New York banks serving as correspondent to the City National in Hackensack.
On September 26th, the buyers opened three new accounts in Hackensack in the names of Sundown, American Montana and Texas-Adams; a token deposit of $100 was placed in each account. Proper corporate resolutions and signature cards for all the companies were filed with the bank and the corporate seal of Texas-Adams was exhibited and used for that purpose. At the same time a set of checks and deposit slips was prepared reflecting a series of transfers to take place the next day. $51,700 was to be transferred from the Texas-Adams account at Chemical Corn to its City National account. Two Texas-Adams checks totaling $51,250 would then transfer funds to Sundown and American Montana; almost all of the amount deposited in Sundown's favor would be immediately credited to American Montana, the putative purchaser of Texas-Adams. Finally, an American Montana check for $42,000 was made out to Spiotta's account to "reimburse" that gentleman.
Next morning, the day of the closing (but before Texas-Adams changed hands), Crosby attempted to make a wire transfer to New Jersey. A Chemical Corn official refused to make that transfer because the resolutions and signature cards gave authority only to the "old" management. Crosby quickly cured that defect by executing new resolutions and signature cards - once again using the Texas-Adams seal. The money was wired to the City National and Spiotta, after personally checking by telephone to make sure his account was $42,000 richer, "loaned" American Montana the funds necessary for the purchase.
Only $42,000 of Texas-Adams funds was actually used in the purchase of control of the corporation; $9,250 remained in the American Montana account in Hackensack. This money too was quickly siphoned off, however. Pettit, whose $4,700 with Spiotta's $40,300 had made up the purchase price, was handsomely rewarded in the form of two American Montana checks, a total of $6,700, drawn by Crosby and credited to Pettit's Salt Lake City account. The remaining $2,550 Crosby paid to himself through a dummy and co-conspirator, George Jannis, about whom we shall hear more later. Thus the "buyers" successfully contrived not only to purchase Texas-Adams with its own money, but also enriched themselves, from the till, for their labors.
It is indeed difficult to telescope the fantastic activity of Texas-Adams and its controlling proprietors during the ten months or so after acquisition by McCarthy, Crosby and company in September of 1955. Texas-Adams' outstanding stock ballooned, during that period, from 750,000 to almost ten million shares; not one share, however, was at any time the subject of a registration statement filed with the S.E.C.
Many of the deals sought by Texas-Adams never reached fruition, usually for lack of necessary funds. Two of these were the so-called "Longview, Texas" acquisition and the Taylorcraft merger. An option to purchase the Longview properties (oil) for $275,000 was entered into in the name of one of the ever available corporate dummies, Sundown Oil Company of California. The search for this sum of money led McCarthy and Pettit to Alabama in November, 1955. There Paul Jones and Sterling Graham, a Pittsburgh broker and also a co-conspirator, were engaged in underwriting public issues of stock on two "intrastate" corporations, Warrior Products Company and Gypsy Mining Company, under the watchful eye of the Alabama Securities Commission. These corporations apparently were organized to buy some of Jones' seemingly boundless supply of "mining properties." Graham told McCarthy that the Alabama commission would not allow a Texas-Adams merger with either of the local corporations and suggested a merger between Texas-Adams and Taylorcraft, a Pennsylvania manufacturer of light aircraft into which Warrior was to have been merged.
Taylorcraft, which was experiencing ready cash difficulties of its own, was not the answer to Texas-Adams' need for cash to close the Longview oil deal.*fn7 At this point, Jones came up with another, more suitable deal. He suggested that Texas-Adams buy from the Osage Mining Co. (another corporate repository for some of the Jones "properties") a lease on a feldspar mine in Spruce Pine, North Carolina for 375,000 freely transferable Texas-Adams shares. Jones would "accept" only the proceeds from the sale of 75,000 of those shares while Texas-Adams would receive, for its use in Texas, the proceeds from public subscription of the remaining block.
McCarthy not only accepted this offer, but, in implementing it, went a long step farther. The actual purchase of the mining lease was made in the name of American Montana - which company agreed to resell the feldspar mine to Texas-Adams for 650,000 shares plus a cash payment of $75,000. Much of the rest of the Osage story is too obscure and complicated to be drawn out in detail here. It is enough to say, however, that the sale, kickback and resale procedure was used as a vehicle to sell to the public hundreds of thousands of unregistered Texas-Adams shares; the same certificate for 375,000 shares was caused to be broken down and issued by two different stock transfer companies; the feldspar mine in question was inactive, flooded with water, and worthless; and, finally, Texas-Adams never bothered even to take title on the lease.
While the Osage transaction is perhaps the most artful example of the McCarthy stewardship of Texas-Adams, passing mention may be made of other corporate depredations. More than 70,000 shares of stock were issued, without consideration, to George Jannis, a chauffeur, valet and handyman of Crosby's, for imaginary loans and services rendered. These shares were cleared for trading by defendant Mittelman's opinion letters and the proceeds, after token payments to Jannis, went to enrich appellant Crosby at least.
Mergers were accomplished with the Empire Drilling Company and the United States Sulphur Company. In the former transaction a purchase of Empire stock was misrepresented as a purchase of all the assets of that company.*fn8 Further, machinery was set up whereby creditors and "interest holders" in wells being developed by Empire could trade their interests in Empire for Texas-Adams stock. All told, 3,100,000 shares of Texas-Adams were issued for these purposes. Aside from the fact that the U.S. Sulphur properties appear to have been worthless, the government proved no real infirmity in that transaction. On top of the quarter of a million shares actually used to buy out the United States Sulphur Company, however, an additional 150,000 shares were issued under fraudulent circumstances, purportedly in connection with the Sulphur Company deal, to L.W. Ltd., a Canadian dummy corporation which Mittelman "served" as vice-president.
The final notable transaction was the so-called Comigu deal, in which Texas-Adams bought, for two million shares, twenty prospecting permits on supposed tantalum mining properties on the bank of the Sinn Marie River in French Guiana. The seller was acquitted defendant Guy Gully and, like Osage, the transaction apparently involved a substantial kickback of shares which were then sold to the public through Castagna, McCarthy's young ...