The opinion of the court was delivered by: WYATT
This is a motion by defendant Weisscredit Banca Commerciale E D'Investimenti (Weiss) to dismiss the indictment on the ground that it fails to allege an offense by movant. Fed. R. Crim. P. 12(b) There is an alternative ground that the government has failed to give movant "fair warning that it is subject to the laws it is charged with violating". The motion must be denied in all respects.
The indictment was returned on January 14, 1970 and has five counts. The movant is named in the first four counts, along with two other defendants, Rolando Zoppi and Andre Backar.
On January 23, 1970, defendant Backar was arraigned for pleading on the indictment before Judge McLean and pleaded not guilty. Bail was fixed at a $20,000 unsecured personal recognizance bond, and such a bond was filed with the Clerk on January 26, 1970.
On March 13, 1970, Weiss appeared by counsel and pleaded not guilty to the indictment before Judge Ryan. The government's application for a bench warrant for the arrest of Rolando Zoppi was denied at that time by Judge Ryan with a direction that the warrant would issue on June 9, 1970, the return date then set for any motions to be made by Weiss, if Zoppi did not submit himself to the jurisdiction of the Court by that date.
On June 9, 1970, the government renewed its application for a bench warrant for Rolando Zoppi, and at the direction of this Court the bench warrant issued. It has not been executed, evidently because Mr. Zoppi has remained outside the territorial jurisdiction of the United States.
The statute principally here involved is Section 7(c) of the Securities Exchange Act of 1934 (15 U.S.C. § 78g(c); the "1934 Act").
Before considering the indictment in any detail, the background and purpose of this statute should be noted, together with the relevant Board regulations.
1. The 1934 Act; Margin Requirements; Regulation T
The 1934 Act provided for control of stock exchanges. It was made unlawful to use the mails or any other means of interstate commerce to effect any transaction in a security through a stock exchange unless that exchange was registered as a "national securities exchange". Such registration was with the Securities and Exchange Commission (SEC). It was also made unlawful to effect any transaction in any security on a national securities exchange unless a registration was effective "as to such security for such exchange" (15 U.S.C. § 78 l (a)); securities as to which such a registration is effective are sometimes called "registered securities".
As part of the 1934 Act, Congress provided for regulations by the Board of Governors of the Federal Reserve System ("the Board") of the amount of credit which might be extended or maintained on registered securities; by amendment effective July 29, 1968, the provision was broadened so that the credit regulations would apply to "any security", registered or not (15 U.S.C. § 78g). These regulations are often called "margin requirements".
Having in mind the 1929 collapse of the stock market and the depression years which followed, Congress was anxious to use credit control to prevent undue fluctuations in the securities market. At the same time, Congress hoped to protect the investor, especially the small investor, by making it impossible to buy securities on too small, or "thin", a margin.
The 1934 Act (Section 7(a); 15 U.S.C. § 78g(a)) directed the Board to prescribe rules and regulations covering the amount of credit which can be extended and maintained on securities.
The 1934 Act (Section 7(c); 15 U.S.C. § 78g(c)) made it unlawful "for any member of a national securities exchange or any broker or dealer who transacts a business in securities through the medium of any such member, directly or indirectly, to extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer -- * * * on any security * * * registered on a national securities exchange, in contravention of the rules and regulations which the Board of Governors of the Federal Reserve System shall prescribe * * *".
By amendment effective July 29, 1968, this prohibition of the Act was made applicable to "any broker or dealer", whether or not transacting business "through the medium" of a member of a national securities exchange. The amendment, as earlier noted, also extended control to credit on "any security", whether or not registered on a national securities exchange.
The 1934 Act defines "broker" and "dealer" (15 U.S.C. § 78c(a)(4) and (5)). A "broker" is one "engaged in the business of effecting transactions in securities for the account of others". A "dealer" is one "engaged in the business of buying and selling securities for his own account". The terms "broker" and "dealer" do not include a "bank" but "bank" is defined to mean only domestic institutions (15 U.S.C. § 78c (a)(6)).
Congress thus gave power to the Board to determine what margin must be required for securities purchases. The amount of margin required by regulations of the Board has varied from time to time. After November 6, 1963, the required margin was 70% of current market value; after June 8, 1968, the required margin was 80% of such value; since May 6, 1970, the required margin has been 65% of such value. The period covered by the indictment is from September 1, 1966 to return of the indictment on January 14, 1970.
Under the 1934 Act, the Board has issued three separate sets of regulations dealing with extension and maintenance of credit on securities. Each set is applicable to a different category of persons or institutions. At the period relevant to this indictment, the titles of the three sets of regulations were as follows:
(1) Regulation G- "Credit by Persons Other than Banks, Brokers, or Dealers For Purpose of Purchasing or Carrying Registered Equity Securities" (12 CFR § 207.1 and following);
(2) Regulation T- "Credit by Brokers, Dealers, and Members of National Securities Exchanges" (12 CFR § 220.1 and following); and
(3) Regulation U- "Credit by Banks for the Purpose of Purchasing or Carrying Registered Stocks" (12 CFR § 221.1 and following).
The principal effect of these regulations is to fix the margin requirements for buying and carrying securities; the amount of the margin fixed has been already stated for the period since November 6, 1963.
Regulation T is cited in this indictment, specifically four sections published as 12 CFR §§ 220.3(b), 220.4(b), 220.7(a), and 220.8.
The scheme of Regulation T is, in summary, that (subject to specific exceptions) all financial relations between a broker or dealer and his customer be included in a "general account"; that no transaction be effected for a customer which causes the debit balance in the "general account" to be more than the "maximum loan value" of the securities in that account; and that the Board determine from time to time the "maximum loan value" of securities.
Section 220.3(b) contains the prohibition against effecting any transaction which causes the debit balance in the "general account" to exceed the "maximum loan value".
Section 220.4(b) authorizes a member of a national securities exchange to have a "special omnibus account" for a special type of customer. Prior to July 8, 1969, the special type of customer was defined in the section as follows:
"* * * a broker or dealer from whom the member accepts in good faith a signed statement to the effect that he is subject to the provisions of this part (or that he does not extend or maintain credit to or for customers except in accordance therewith as if he were subject thereto) * * *"
and from whom two written notices were received. The significance of the "special omnibus account" seems to be that, because of the special type of customer involved, the ordinary margin requirements are inapplicable. Before July 8, 1969, the special type of customer had to be a "broker" or "dealer" who himself enforced the margin requirements in respect of his own customers; this being so, there was no occasion to enforce the margin requirements as between such broker or dealer and the member of a national securities exchange with whom he had a special omnibus account. The broker or dealer enforced the margin requirements either because he was subject to them (because he transacted "a business in securities through the medium of" a member of a national securities exchange, see 12 CFR § 220.1) or because he gave the signed statement described within parentheses in the quotation above from Section 220.4(b). Since July 8, 1969, the special type of customer has been defined in the section (as amended) as follows:
"* * * another member of a national securities exchange or a broker or dealer registered with the Securities and Exchange Commission * * *"
and from whom the same two written notices are received. The amendment restricted the special omnibus account to those brokers or dealers who were registered with the SEC (15 U.S.C. § 78 o) while an amendment at the same time to Section 220.1 made Regulation T applicable to "every broker or dealer" (whether or not transacting "a business in securities through the medium of" a member of a national securities exchange). A part of the Board's press release at the time is instructive (CCH Fed. Sec. L. Rep. pp. 83,640-41):
"After the effective date of the amendments, credit not subject to margin requirements will be available through a special omnibus account only to members of national stock exchanges and brokers and dealers registered with the SEC. Under the present Regulation T, this type of credit can be extended to persons, including foreign firms, who merely certify that they observe the regulation even though they are not subject to it.
"By use of a special omnibus account, a member of an exchange may make wholesale transactions for other brokers without regard to margin requirements. These transactions involve securities on which margin requirements have already been imposed at the retail level.
"Under the amendments, the privilege of using the special omnibus account will no longer be available to organizations, including foreign financial institutions and others, that prefer to remain unregistered. Most firms borrowing in special omnibus accounts will not be affected by the amendments. In the case of accounts of unregistered persons, no further substitutions of collateral will be permitted after 90 days from the effective date of the amendments. Credit extended in such accounts will have to be brought up to margin requirements within a year.
"Last December, the Department of Justice and the SEC presented to the House Banking and Currency Committee evidence of abuses whereby special omnibus accounts had been used by some foreign ...