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UNITED STATES v. MANDEL

February 28, 1969

UNITED STATES of America
v.
Sol G. MANDEL, Defendant


Metzner, District Judge.


The opinion of the court was delivered by: METZNER

METZNER, District Judge.

Defendant moves to dismiss the indictment which contains one count charging a violation of § 10(a) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(a)) and Rule 10a-1(a) (2), adopted pursuant thereto by the Securities and Exchange Commission (17 C.F.R. § 240.10a-1(a) (2)).

 § 10(a) provides:

 
"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange --
 
"(a) To effect a short sale * * * of any security registered on a national securities exchange, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

 Rule 10a-1(a) (2) provides:

 
"(a) No person shall, for his own account or for the account of any other person, effect on a national securities exchange a short sale of any security * * * (2) at such price [the last sale in regular way] unless such price is above the next preceding different price at which a sale of such security, regular way, was effected on such exchange."

 A short sale is defined in Rule 3b-3 as "any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by or for the account of the seller." 17 C.F.R. § 240.3b-3.

 The indictment charges illegal short sales of 400 shares of Georgia-Pacific Corporation stock on April 7, 1966.

 The first contention is that the statute and regulation are void for vagueness. A criminal statute, to avoid a charge of unconstitutionality, must define the crime in such a way that a man of common intelligence can understand the type of activity proscribed by the statute and can conduct himself within the confines of the law. Connally v. General Construction Co., 269 U.S. 385, 391, 46 S. Ct. 126, 70 L. Ed. 322 (1926).

 A reading of the statute and rule does not show any vagueness as to the conduct prohibited. The import of the rule is that short sales may only be made at a price higher than the next preceding different price. This is to prevent speculation in a falling market. For example, if there were two successive sales of a stock at a price of $100 on an exchange, you may sell short at $100 only if the third preceding sale was at a price less than $100. If that third preceding sale was at $100 or over, you cannot sell short at $100.

 While there are many problems attendant on ascertaining a violation of this prohibition, they all go to questions of proof. It may well be that because of the practical workings of trading on a stock exchange it is highly unlikely that a conviction can ever be obtained for violating the prescribed procedure. However, that is a problem for the government and the trial court.

 Defendant attacks the constitutionality of the penalty provision with respect to the section and rule. § 32(a) of the Securities Exchange Act of 1934 (15 U.S.C. § 78ff(a)). The section provides:

 
"(a) Any person who willfully violates any provision of this chapter, or any rule or regulation thereunder the violation of which is made unlawful * * * shall upon conviction be fined not more than $10,000, or imprisoned not more than two years, or both * * *; but no person shall be subject to imprisonment under this section for the violation of ...

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