The opinion of the court was delivered by: GRIESA
This is a criminal action arising from the financial misfortunes of Four Seasons Nursing Centers of America, Inc. ("Four Seasons"). The defendants named in the indictment occupied the following positions at the relevant times: Jack L. Clark, president and chairman of the board of Four Seasons; Thomas J. Gray, vice president of Four Seasons; James P. Linn, president of Four Seasons Franchise Centers, Inc. ("Franchise"); Gordon H. McCollum and Glenn R. Miller, officers of Walston & Co., investment bankers for Four Seasons; Kenneth J. Wahrman, Edward J. Bolka and Jimmie E. Madole, accountants with Arthur Andersen & Company.
Defendants McCollum and Miller have pleaded guilty to Counts 1, 16, 17 and 34 of the indictment, and have pleaded not guilty to the remaining counts. The other six defendants have pleaded not guilty to all the counts of the indictment.
There are a total of 65 counts in the indictment, although the basic charges of wrongdoing are really fewer. Count 1 charges conspiracy to violate Section 17(a) of the Securities Act of 1933 and Sections 10(b), 12 and 13 of the Securities Exchange Act of 1934, as well as S.E.C. Rules 10b-5 and 13A. Count 1 also alleges conspiracy to violate the mail fraud statute, 18 U.S.C. § 1341. Basically, Count 1 charges that beginning in 1967 there was a conspiracy to promote the stock of Four Seasons through the issuance of false financial reports and through other illegal means. It is alleged that a prospectus dated May 9, 1968 for 360,000 shares of Four Seasons stock was false and misleading. It is alleged that the audited financial statements for the fiscal year ending June 30, 1968, which were incorporated in a prospectus of November 26, 1968 for the sale of 400,000 shares of Four Seasons stock, were false and misleading. Count 1 asserts that in November 1968 certain of the defendants caused the creation of Four Seasons Equity Corporation ("Equity"), to which Four Seasons made substantial sales, which were in fact false and fictitious because Four Seasons controlled Equity. Count 1 asserts that in April 1969 another company was created -- Four Seasons Franchise Centers, Inc. -- which was later used to generate substantial fictitious earnings for Four Seasons. It is alleged that the audited financial statements for the fiscal year ending June 30, 1969 were false and fictitious as were the unaudited interim statements for the three months ending September 30, 1969 and the six months ending December 31, 1969. It is alleged that in July 29, 1969 a further corporation was created, Four Seasons Overseas N.V. ("Overseas"), which sold $15 million in debentures in Europe on the basis of the alleged false financial statements of June 30, 1969.
Counts 2-34 charge all eight defendants with substantive violations of Section 10(b) of the 1934 Act and S.E.C. Rule 10b-5. All of these counts incorporate by reference the allegations of Count 1 as to the basic alleged illegal conduct on the part of defendants. The breakdown into individual counts arises because it is alleged that the defendants caused various individual purchase confirmations and orders for Four Seasons stock to be mailed or telegraphed, thus involving use of instrumentalities of interstate commerce or the mails in violation of the statute.
Counts 35-55 allege violation of the mail fraud statute, 18 U.S.C. § 1341. Again the same basic charge of fraudulent conduct is repeated, and the individual counts arise from the allegation that defendants caused the mailing of various purchase confirmations for Four Seasons stock.
Count 56 charges all defendants, except McCollum and Miller, with mail fraud in connection with soliciting a loan for Four Seasons from the State of Ohio.
Counts 57-61 charge defendants Clark, Gray and McCollum with violation of Section 17(a) of the 1933 Act in connection with sales by them of Four Seasons stock.
Count 62 charges all defendants, except McCollum and Miller, with violation of Section 17(a) of the 1933 Act in connection with the offering and sale of the Overseas debentures.
Count 63 charges defendants Clark, Gray and Wahrman with violation of Sections 12 and 13 of the 1934 Act in connection with the filing of a Listing Application with the American Stock Exchange and the S.E.C. It is alleged that this Listing Application contained a false and misleading financial statement of Four Seasons for the fiscal year ending June 30, 1968.
Count 64 charges all defendants, except McCollum, with violation of Section 13 of the 1934 Act in connection with the filing of a Form 10K with the American Stock Exchange and the S.E.C. It is alleged that this 10K overstated earnings of Four Seasons for the fiscal year ending June 30, 1969.
Count 65 charges all defendants, except McCollum and Miller, with violation of Sections 12 and 13 of the 1934 Act, in connection with the filing of an annual report of Four Seasons with the American Stock Exchange and the S.E.C. It is alleged that this annual report overstated the earnings of Four Seasons for the fiscal year ending June 30, 1969.
Those defendants who have not pleaded guilty are vigorously defending the action and strongly deny the actions of wrongdoing against them. Numerous motions have been made, certain of which will be discussed in this memorandum.
Defendants Wahrman, Bolka and Madole have moved to dismiss Counts 2-34 on the ground that venue is improperly laid in the Southern District of New York. These same defendants have also moved under Criminal Rule 21(b) to transfer the entire case as to them to the Western District of Oklahoma, on the ground that Oklahoma is a far more convenient forum, and far more intimately connected with the transactions in question, than New York. Finally, defendants Wahrman, Bolka and Madole move for a severance under Criminal Rule 14 on the ground that the issues as to them are sufficiently separate as to warrant a separate trial.
Defendant Gray has moved for transfer to the Western District of Oklahoma under Rule 21(b). He has also moved for severance under Rule 14.
Defendant Linn has moved for transfer to the Western District of Oklahoma and for severance.
The Government and defendant Clark strongly oppose both transfer and severance. Defendant Clark urges that he should be tried with certain of the other defendants -- particularly the accountants -- on whom he relied in connection with the transactions in question. As to the transfer question, Clark asserts that he has been subjected to adverse publicity in the Western District of Oklahoma which might impair his ability to obtain a fair trial.
Motion to Dismiss for Improper Venue
As already indicated, defendants Wahrman, Bolka and Madole have moved to dismiss the substantive 10(b) counts, Counts 2-34, on the ground that venue does not lie in the Southern District of New York. This motion is denied.
The indictment contains sufficient allegations to indicate that the Southern District of New York is one of the districts where venue is proper for Counts 2-34. The introductory paragraphs to these counts allege in general the employment by defendants of manipulative and deceptive devices and contrivances, and allege that this was done "in the Southern District of New York and elsewhere." These counts incorporate by reference Paragraph 14 of Count 1 which alleges in some detail the means by which the fraud was allegedly generated and carried out -- the creation of Four Seasons and the other corporations, the preparation and certification of the false financial statements, the alleged fraudulant intercorporate transactions, etc. Oddly enough, Paragraph 14, which covers some eight pages of the indictment, says nothing about where these alleged acts took place. However, in the general introductory paragraph to Count 1, there is the statement that the conspiracy alleged in that count took place "in the Southern District of New York and elsewhere." Counts 2-34 after incorporating Paragraph 14 from Count 1, go on to allege that "in the Southern District of New York" defendants used and caused to be used means and instrumentalities of interstate commerce and the mails. Counts 2-17 allege that defendants were guilty of "sending or causing to be sent" various purchase confirmations for Four Seasons stock from New York to certain specified organizations and individuals in New York and in other states. Counts 18-34 allege that defendants were guilty of "causing orders to purchase Four Seasons stock to be transmitted by wire to the Southern District of New York for execution on the American Stock Exchange." There follows a list of orders allegedly transmitted from specified organizations and individuals in various states.
Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, provides:
"Any criminal proceeding may be brought in the district wherein any act or transaction constituting the violation occurred."
Also applicable is 18 U.S.C. § 3237(a), which provides:
"§ 3237. Offenses begun in one district and completed in another
(a) Except as otherwise expressly provided by enactment of Congress, any offense against the United States begun in one district and completed in another, or committed in more than one district, may be inquired of and prosecuted in any ...