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United States v. Schwartz

decided: July 17, 1972.


Hays and Oakes, Circuit Judges, and Clarie, District Judge.*fn*

Author: Clarie

CLARIE, District Judge:

The appellant was convicted after a trial by the court of having conspired to violate § 8(c) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78h(c),*fn1 and Rule 17 C.F.R. § 240.8c-1, which prohibit the unlawful hypothecation of securities by brokers or dealers, who transact a business through a national exchange. The trial court found that appellant had unlawfully caused Armstrong & Co., Inc., a broker-dealer, to hypothecate securities "carried for the account of" its customers, so that said securities were subjected to a lien in excess of the aggregate indebtedness of the customers on such securities. The appellant was sentenced to pay a fine of $2,500 pursuant to § 32(a) of the Act, 15 U.S.C. § 78ff, and 18 U.S.C. § 371. We affirm that conviction.

Armstrong & Co., Inc. (Armstrong) was organized in 1960 by Robert Edens and Bruce Armstrong,*fn2 and registered with the Securities and Exchange Commission (SEC) as a broker-dealer. Schwartz, an attorney, who had extensive experience in the securities field, acted as counsel for Armstrong which was the underwriter on several stock issuances. It was Schwartz's participation in the underwriting of a stock issuance for Triangle Instrument Co., Inc. (Triangle), that brought about this prosecution. Appellant was more than simply the firm's legal counsel; he was intimately involved in its business activities, even extending credit by exchanging checks with the firm on occasion, so that it would have needed deposits upon which it could draw.

Armstrong signed an underwriter's agreement with Triangle in which a Regulation A stock offering became effective September 15, 1961. It provided for the sale of 150,000 shares of Triangle stock at $2 per share, with "an all or nothing" proviso that required all of said shares to be sold within a 45-day period. In the event that this were not accomplished, all funds received from the shares were to be returned to the prospective purchasers without interest, and there would be no further obligation between the underwriter and the company. However, if the shares were sold within the required period, Armstrong was to pay over $230,000 to Triangle, and $70,000 was to be turned over to the underwriter to pay it a commission of 15% ($45,000) with the remaining $25,000 being used to cover expenses for accounting and legal fees.

The trial court found that at least 30,000 shares of stock were sold to individual customers of Armstrong and cash income in excess of $40,000 had been received for these shares. In addition, at least 70,650 shares were sold to brokers, who had not yet paid for them. At the end of the 45-day period, the Triangle issue had not been completely sold. When pressed by Triangle for a closing, Armstrong scheduled November 15, 1961, as the final date. Realizing that Armstrong did not have the $230,000 necessary to effect the closing, the appellant suggested that a loan be obtained from Sterling Factors. Principally through the efforts of defendant Schwartz, an agreement between Armstrong and Sterling was concluded for a loan of $115,000 secured by a pledge of the entire 150,000 shares of the stock with endorsements in blank. This agreement provided for repayment over a 4-week period, and for the release of the shares at the rate of $2 each. It was understood that all shares would be released, when the entire note had been paid.*fn3

Either prior to or at the closing, Armstrong paid over $40,000 directly to Triangle. This sum represented moneys which individual customers of Armstrong had paid for their purchase of Triangle stock. Schwartz was fully aware before the Sterling loan had been consummated, that Armstrong had sold a very substantial number of shares of this stock to customers other than broker-dealers, and that these stock customers had paid Armstrong in full.

Notwithstanding the Sterling loan, on November 15, the closing date, Armstrong was still short approximately $30,000 of the total sum due Triangle. Only by means of a loan subsequently negotiated by an officer of Armstrong was the necessary money finally obtained and the closing effected the following day. The trial court concluded that Schwartz's action in pledging all the shares of Triangle stock to Sterling Factors exposed the customers of Armstrong, who had paid full value for their shares of Triangle stock, to the risk that they might not receive the same, if Armstrong defaulted. In such event, they would be required to rely upon the general credit of Armstrong for the return of their money.*fn4

Appellant's Claims

Appellant challenges his conviction on several grounds: (1) that he was denied his sixth amendment right to a speedy trial; (2) that the phrase "transacts a business" is so indefinite as to render 15 U.S.C. § 78h void for vagueness; (3) that the hypothecated securities were not "carried for the account of" Armstrong customers as required for a violation of 15 U.S.C. § 78h(c); (4) that the Government failed to establish the element of intent necessary for a conviction under § 32(a) of the Act, 15 U.S.C. § 78ff(a); (5) that the indictment should have been dismissed, because of the absence of sufficient evidence before the Grand Jury, and (6) that the trial court erred in receiving into evidence certain books and records of Armstrong.

Discussion OF ISSUES

Denial of Speedy Trial

The appellant claims that his sixth amendment right to a speedy trial was violated both by the unreasonable length of time which elapsed between the commission of the offense and indictment, and by the inordinate delay between the indictment and trial. We first consider appellant's claim of unconstitutional preindictment delay.

The crime charged is alleged to have occurred between the dates October 10, 1961 and November 15, 1961, inclusive; however, the indictment was not handed down until November 14, 1966, one day prior to the running of the statute of limitations. 18 U.S.C. § 3282. In United States v. Marion, 404 U.S. 307, 92 S. Ct. 455, 30 L. Ed. 2d 468 (1971), the Court held that the sixth amendment is inapplicable to "pre-accusation delays." It indicated that the statute of limitations is the primary safeguard against the bringing of stale criminal charges but explicitly left open the possibility that the demonstration of "actual prejudice" stemming from pre-accusation delay might require a dismissal under the Due Process Clause.*fn5 404 U.S. at 324, 92 S. Ct. 455, 30 L. Ed. 2d 468.

The appellant claims that he was actually prejudiced by this pre-indictment delay. He represents that during the SEC investigation into Armstrong's activities, he was assured that there were no claims of wrongdoing against him, and that he was permitted to represent Armstrong as counsel in that administrative proceeding. He explains that he was lulled into a sense of security by the overall circumstances and the inordinate delay, so that he destroyed 50 to 60 Armstrong files some 1 to 2 years after the completion of the SEC investigation. He would now ask the court to believe that the loss of these files impaired his ability to properly prepare his defense against these criminal charges.

A review of the record discloses that the appellant has failed to factually establish that he has suffered any significant prejudice as a result of any delay which led to the destruction of the Armstrong files. United States v. Scully, 415 F.2d 680, 683 (2d Cir. 1969); see also, United States v. Iannelli, 461 F.2d 483, 485 (2d Cir. 1972); United States v. Capaldo, 402 F.2d 821 (2d Cir. 1968), cert. denied, 394 U.S. 989, 89 S. Ct. 1476, 22 L. Ed. 2d 764 (1969). There is no evidence to indicate that he was unable to credibly reconstruct the hypothecation transaction. United States v. Feinberg, 383 F.2d 60, 65 (2d Cir. 1967), cert. denied, 389 U.S. 1044, 88 S. Ct. 788, 19 L. Ed. 2d 836 (1968). It would appear that under the circumstances, the appellant should have preserved the files for the benefit of his client, Armstrong, with whom he was so intimately associated.

The evidentiary record indicates that appellant has also failed to demonstrate, that any memory lapses attributable to the time delay between the offense and the trial made "suspect" the "reliability of the proceedings for the purpose of determining guilt." United States v. Feinberg, supra, 383 F.2d at 66. Thus, he has not demonstrated material pre-indictment prejudice sufficient to warrant dismissal under the Due Process Clause of the fifth amendment.

An alternative aspect of the appellant's claim of unreasonable delay refers to the post-indictment period. The trial did not commence until March, 1971, approximately 4 1/2 years after the filing of the indictment.*fn6 The court has set out 4 factors, to consider when determining questions relating to a speedy trial; (1) length of the delay; (2) reason for the delay; (3) prejudice to the defendant; and (4) waiver by the defendant. United States ex rel. Solomon v. Mancusi, 412 F.2d 88, 90 (2d Cir. 1969), cert. denied, 396 U.S. 936, 90 S. Ct. 269, 24 L. Ed. 2d 236 (1969), followed in, e.g., United States v. Fitzpatrick, 437 F.2d 19, 26-27 (2d Cir. 1970), and United States v. Stein, 456 F.2d 844, 847-848 (2d Cir.), cert. denied, 408 U.S. 922, 92 S. Ct. 2489, 33 L. Ed. 2d 333 (1972).

The Supreme Court has recently held in Barker v. Wingo, 407 U.S. 514, 92 S. Ct. 2182, 33 L. Ed. 2d 101 (1972), that all of these factors should be weighed with each other and considered together with other relevant circumstances, recognizing that this places upon the courts a duty to "engage in ...

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