Appeal from a judgment of conviction entered after a jury trial in the United States District Court for the Southern District of New York, Inzer B. Wyatt, Judge, for filing a false Annual Report (10K) with the Securities and Exchange Commission. Affirmed.
Lumbard and Mansfield, Circuit Judges, and Gurfein, District Judge.*fn*
MANSFIELD, Circuit Judge:
Upon this appeal we have been required to review the 4300-page record of a five-week jury trial, which resulted in the conviction of a lawyer and two accountants for filing a false Form 10K Annual Report with the Securities and Exchange Commission ("SEC"), 15 U.S.C. §§ 78o and 78ff, to determine whether there is merit to any of the numerous claims of error asserted by appellants. The multi-count indictment under which appellants were tried charged first that they, along with two other defendants, conspired to file the false Annual Report for Microthermal Applications, Inc. ("Microthermal") with the SEC (Count 1); second, that appellants actually filed the false report with the SEC (Count 2); and third, that appellants Zane and Silverman obstructed the SEC's investigation into the filing of the false report (Count 3). The remaining counts, 6-12, charged that Zane perjured himself before the SEC during its investigation.*fn1 On June 12, 1973, the jury rendered not-guilty verdicts on Counts One, Three, Six, Seven, Nine, Ten and Eleven. After a supplemental charge and further deliberation, the jury on June 13, returned a guilty verdict on Count Two, the substantive offense, and reported itself unable to agree on the remaining counts, Eight and Twelve. Appellants were each sentenced to a two-year split sentence (four months to be served and the balance suspended) on the basis of their conviction on Count Two. After considering the many points raised on this appeal, we find none that warrants a reversal.
The action in this Byzantine plot began in 1969 when the organizers of Microthermal, a new publicly held venture with no operating history whose shares were traded on the OTC market, raised $800,000 from a public offering of its stock in July of that year. The prospectus indicated to the investors that at least $300,000 of the proceeds would be invested in relatively safe securities such as certificates of deposit, government bonds or other interest-bearing obligations. Morton Kaplan, president of Microthermal, had other plans in mind for these monies. Between October of 1969 and January of 1970 he made cloaked transfers of $480,000 of the newly raised funds to Peter Galanis and Akiyoshi Yamada, principal operators of a hedge fund known as Takara Partners, of which they were members.
No sooner had Kaplan completed these transfers as a loan in violation of the prospectus than he set about concealing that fact. After the first transfer in October, 1969, Robert Persky, secretary of Microthermal and partner in the law firm that acted as general counsel to Microthermal, drafted a contract that showed $240,000 of the $480,000 to have been invested in securities of the Delanair Corporation, which Takara Partners held in their portfolio. The purpose of this contract, according to Yamada, was to conceal the real nature of the transaction, which was to infuse money into Takara, a cash-poor company. In January, 1970, Kaplan transferred another $240,000 of Microthermal's money to Takara Partners, this time to bail out a personal investment he and Persky had made in the hedge fund.*fn2 This misuse of Microthermal's funds might never have been discovered if Takara Partners had been able to repay them. But repayment became impossible because the funds were dissipated, in this case through the purchase by Galanis and Yamada of high risk securities.
The moment of truth, when Microthermal would first face the necessity of disclosing the loss, loomed on the horizon as the time for filing Microthermal's Form 10K Annual Report with the SEC approached. (Microthermal's fiscal year ended on January 31, 1970.) That Report, which was due on May 31, 1970, required Microthermal to set forth the interest-bearing obligations in which it had presumably invested the $480,000, bearing the usual certificate of a certified public accountant to the effect that the statement reflected its audit made in accordance with generally accepted auditing standards and accounting principles. To satisfy this requirement Microthermal faced an audit by its accounting firm, Arthur Andersen & Co., which it was feared would not attach its certificate to the Report unless and until it was shown the securities representing the investment or other satisfactory evidence of Microthermal's ownership of them. Faced with this crisis, which was directly attributable to their own fraud, Kaplan and Persky sought to enhance their prospects of success in concealing the misappropriation of the funds by replacing Arthur Andersen & Co. with a firm that could be more "flexible" in its approach than generally accepted auditing standards and accounting principles would permit. They found such a firm in the persons of Philip Zane and Jerome Silverman. Over a series of meetings with Kaplan, Persky, Galanis and Yamada, the two accountants were introduced to the plot. They were asked to certify the existence of a certificate of deposit for the $480,000. Galanis for his part agreed to generate some documentation for the purported certificate.
Galanis proceeded to weave a tangled web of falsity. He enlisted the services of one Richard Kirschbaum who, in turn, approached Charles Fischer as a person who might be of assistance in creating evidence of a certificate of deposit which did not in fact exist. Fischer advised that it was impossible to borrow a certificate of deposit. However, he came up with a scheme that was to lead to the indictment in this case. In a nutshell this scheme was to purchase a certificate in Microthermal's name, obtain a letter from the seller confirming the purchase, and simultaneously sell the certificate to a third party, which would make immediate payment to the seller. If successful the plan would enable Microthermal to produce a letter from the seller confirming the sale to it, even though the sale would actually have been made to the third party. For such a plot expert timing, knowledge of the market, and acquaintanceship with the traders in it were essential. First Fischer called the Franklin National Bank on May 14, 1970, and under the name of Microthermal ordered a 90-day certificate of deposit (bearer form) for $500,000 to be delivered against payment at the Bank of New York. Meanwhile Fischer had convinced a friend and officer of the Neuwirth Fund, whose custodian bank was the Bank of New York, that he had a $500,000 certificate of deposit drawn on the Franklin National Bank for sale at a premium over the prevailing rate for such certificates. The officer of the Neuwirth Fund directed the Bank of New York to purchase the certificate for the Fund's account. Pursuant to Fischer's instructions the Franklin National Bank issued the certificate of deposit and delivered it to the Bank of New York. Upon the Neuwirth Fund's instruction the Bank of New York paid for the certificate and entered it in the Fund's account.
The Franklin National Bank all the while assumed that it had issued the bearer certificate to Microthermal as the purchaser. Indeed, Frank S. Woodruff, an officer of that bank, had written to Kaplan to confirm the purchase of the certificate for Kaplan's account at the Bank of New York. By letter dated May 18, 1970, Kaplan instructed the Bank of New York to deliver the $500,000 certificate to Persky's office. Understandably, the receipt of this letter was marked by some confusion at the Bank of New York where the only certificate in that amount had been purchased for the Neuwirth Fund, not for Microthermal. Gilbert Losurdo, the officer at the Bank of New York handling this certificate, spoke by phone with a man who represented himself to be Robert Persky and who again asked that the certificate be delivered to him. (At this point Persky, like Kaplan before him, apparently believed that a fraudulent certificate had actually been issued in Microthermal's name.) After hearing of the telephone call Galanis instructed Persky that the certificate was not held for Microthermal and that he should make no further calls to the bank that might upset their scheme.
Zane and Silverman played no role in procuring the certificate and the false documentation. But at a meeting after the certificate switch, which was attended by all the principals, the accountants' problem was discussed. At length it was decided that Zane and Silverman would certify the existence of the certificate of deposit on the basis of a letter from the Franklin National Bank to the effect that a $500,000 certificate of deposit had been issued to Microthermal. At the same time it was agreed that Zane and Silverman's fee for the audit, previously set at $6,000, would be increased by $5,000. The earlier letter sent by the Franklin National Bank to Kaplan was considered inadequate because it suggested that the certificate had been issued to Kaplan's personal account rather than to Microthermal. A new letter was sought. On June 10 the Franklin National Bank sent another letter which contained the same flawed language as the original. A second letter on June 10 corrected the problem by stating that the certificate had been issued for the account of Microthermal. On the basis of this second letter Zane and Silverman certified that a certificate of deposit had existed for Microthermal as of January 31, 1970. The Form 10K Annual Report filed with the SEC thus included the certified financial statements showing Microthermal's cash and cash items as $525,024 when in fact at least $500,000 of this cash did not exist in any form.
The serpentine course of the conspiracy was traced at trial largely through the testimony of Galanis and Yamada. The two stood accused of a series of other fraud and tax offenses and it can be supposed that it was more than a trace of self-interest that led them to cooperate with the government. The government also introduced testimony that Zane and Silverman's work papers were wholly inadequate to certify the existence of the certificate of deposit and the funds underlying that certificate. Zane and Silverman never attempted, for example, to verify whether Microthermal had an account at the Bank of New York or held a certificate there in its name. Their work papers did make an implausible attempt to cover the period from October 1969 through May 1970, when the Franklin National Bank certificate was supposed to have been issued to Microthermal, by showing several certificates of deposit as having been issued in October and January with maturity dates on May 14, 1970. There is, however, no evidence of any of these earlier certificates; indeed, Microthermal's books reflect neither their issuance nor their rollover at maturity on May 14. Furthermore, Silverman and Zane show these certificates as earning 6.75% interest through a government witness testified that during the relevant period banks were prohibited from paying any more than 6.25% interest on such certificates. Against these proofs Persky, Zane and Silverman offered only the defense that they believed in the existence of the $500,000 certificate of deposit and in the truth of the second Franklin National letter issued on June 10, 1970.
After deliberating for almost two days the jury acquitted all the appellants on Count One, the conspiracy charge; appellants Zane and Silverman on Count Three, charging the obstruction of the SEC investigation; and appellant Zane on various counts charging him with perjury before the SEC. The next morning the judge delivered a modified Allen charge to the jury. After further deliberation the jury returned a guilty verdict against all the appellants on Count Two, the substantive count which charged that they actually filed the false report with the SEC.
ISSUES RAISED BY ALL APPELLANTS
The first question to be considered is whether the jury's not-guilty verdict with respect to Count One (conspiracy to file the false Form 10K Annual Report) barred it from later entering a separate verdict of guilty with respect to Count Two (substantive offense of filing the false Form 10K Annual Report itself). The jury returned a partial verdict acquitting appellants on several counts, including Count One, and retired for the night without having rendered a verdict on Counts Two, Eight and Twelve. On the following morning the jury, after receiving a modified Allen charge from the court, retired for further deliberations. Shortly it sent a note to the judge indicating that one juror felt that he could not change his vote on Count Two without changing his vote on Count One. At this point counsel for the appellants moved for a mistrial. The court denied the motion and instructed the jury that it was too late to change on Count One (as to which a verdict had been entered), that Counts One and Two were separate and distinct offenses and that the jury should consider Count Two. Zane and Silverman objected to this instruction. Indeed, immediately after the partial verdict of acquittal they had moved that the remaining counts be dismissed since there was no rational way -- as far as they were concerned -- that the jury could return any verdict but not guilty on the other counts. They ...