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August 19, 1974

United States of America
Koenig, et al.

Tenney, District Judge.

The opinion of the court was delivered by: TENNEY

TENNEY, District Judge:

Defendants Harold P. Koenig, Byron S. Krantz, George V. R. Mulligan and Ernest Gene Reeves have been charged by the Government, in a multi-count indictment, with conspiracy to violate various sections of the Securities Laws, the Mail Fraud statute and a prior order of this Court and with substantive violations of those provisions. Defendants waived their right to a trial by jury and, with the consent of the Government, the case was tried to the Court. The action is now before the Court, at the close of the Government's case, on the motion of all four defendants for an order entering a judgment of acquittal pursuant to Fed. R. Crim. P. 29(a).

 The Court, aware that the case presented serious questions of law as to the criminal responsibility of "outside" directors and attorneys under the Securities Laws and related criminal statutes, as well as complex factual issues, and being further cognizant of the time already expended and the expense incurred in the prosecution and defense of this case, adjourned the trial at the close of the Government's case to allow all parties to brief, and the Court to determine, the issues generated by the record. At this point in the case, after many months of pre-trial preparation and twelve weeks of actual trial, the Court is confronted with some 5,000 pages of testimony, many hundreds of voluminous exhibits and over 1,000 pages of legal and factual argument submitted by the Government and defendants.

 After having carefully weighed and analyzed the evidence adduced at trial and the arguments submitted by all parties, the Court is convinced that the Government has failed to sustain its burden of proof with respect to all defendants and as to every count in the indictment and that it must, therefore, order that a judgment of acquittal as to all counts be entered in favor of defendants Koenig, Krantz, Mulligan and Reeves. By way of introduction to the opinion that follows, the Court would note that the evidence adduced will not permit a reasonable mind to find beyond a reasonable doubt that, inter alia, the defendants possessed the requisite criminal intent with regard to either the conspiracy or substantive counts; that, indeed, any conspiracy existed at all; and that, with respect to all counts, any scheme to defraud existed or that any material facts were misrepresented or omitted.

 With this introduction in mind, the Court will now direct itself to the indictment as amplified by the bills of particulars, the law applicable to the present motion and the charges in the indictment, the relevant events preceding those upon which the present charges are based, and discussion of the particular charges themselves.



 Count 1 of the indictment -- the conspiracy count -- alleges that all four defendants, together with co-conspirators Ecological Science Corporation ("ECO"), John Downs, Robert B. Carter, Ross Bohannon, Cesare DeFranceschini, Richard Grosh, Eugene Johnson, Edward J. Kahl and Earl Rader, between approximately January 1, 1971 and December 31, 1972, in this District and elsewhere, unlawfully, willfully and knowingly conspired *fn2" to violate the Securities Exchange Act of 1934, *fn3" the Rules and Regulations of the Securities and Exchange Commission ("SEC") issued thereunder, *fn4" and the criminal contempt *fn5" and mail fraud statutes *fn6" of the United States.

 The indictment claims the conspiracy had two purposes: first, to maintain the defendant Harold P. Koenig as chief operating officer of ECO and, second, to defraud ECO's creditors, stockholders, the public and the SEC. It goes on to identify four separate objects of the conspiracy:

 1. To use and employ, in connection with the purchase and sale of securities of ECO and its subsidiaries, and by use of the means and instrumentalities of interstate commerce and the mails, deceptive devices and contrivances in violation of the rules and regulations promulgated by the SEC under § 10(b) of the Securities Exchange Act of 1934.

 2. To unlawfully, willfully and knowingly make and cause to be made false and misleading statements with respect to material facts, and omit to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, in reports relating to ECO's financial condition and business operations required to be filed with the American Stock Exchange ("AMEX") and the SEC under §§ 12 and 13 of the 1934 Act.

 3. To unlawfully, willfully and knowingly use the mails to deliver certain matter for the purpose of executing a scheme and artifice to defraud, and for obtaining money and property under false and fraudulent pretenses.

 4. To unlawfully, willfully, knowingly and criminally disobey a lawful order of this Court namely, an order dated April 30, 1971 in the case of Securities and Exchange Commission v. Ecological Science Corporation and Harold P. Koenig, 71 Civ. 1928, by committing and carrying out the acts alleged in Counts 2 and 3 of the indictment. (Indictment, P 17 and Bill of Particulars, PP 16, 17 and 50).

 The indictment then specifies certain activities of the defendants and their alleged co-conspirators as being some of the means by which the conspiracy was carried out (PP 18(a) through (i)). Actually, these activities, as alleged, fall into four separate categories: *fn7"

 First, that defendants Koenig, Mulligan and Krantz, in order to cause the SEC and the AMEX to discontinue their investigations into the activities of defendants and co-conspirators, consented to the entry of the court order referred to above, and that all four defendants, from on or about May 1, 1971 to on or about December 1972, willfully disregarded and violated that order. (Indictment, PP 18(a) and (i)).

 Second, that beginning in and about June 1971, defendant Koenig and others planned, and then effected, a secret recapitalization of certain ECO European subsidiaries by transferring voting control and certain dividend rights from ECO and its shareholders to an Italian partnership dominated and controlled by Koenig, and that this action was taken to (1) prevent the shareholders and creditors of ECO from removing Koenig from office, and (2) remove valuable ECO assets from the reach of ECO's American creditors. Next, it is alleged that, from in and about June 1971 up to and including August 1971, defendants Koenig, Mulligan and Krantz, and others concealed the recapitalization plan from ECO's creditors and shareholders, the SEC, the AMEX, ECO directors Grinnell Morris and Norman Davidson and the public. Finally, it is asserted that all four defendants, as well as co-conspirators Kahl, Carter, ECO and others, concealed this recapitalization from ECO's shareholders and the public from in and about September 1971 through the end of December 1972. (Indictment, PP 18(b) through (e)).

 The third group of conspiratorial acts alleged is that, from in or about June 1971 to on or about October 31, 1971, all four defendants and co-conspirators Bohannon, Downs, ECO and others, for the purpose of (1) deceiving ECO's creditors who were considering removing Koenig as chief operating officer of ECO and (2) deceiving ECO's shareholders into supporting Koenig, falsely represented that dealings between ECO and a corporate "shell" known as Southwest Nuclear, Inc. ("SWN") were the most noteworthy single event in ECO's recent history without disclosing that SWN was being promoted by defendant Mulligan and Co-conspirator Bohannon and was a shell corporation without assets or employees. (Indictment, P 18(f)).

 The fourth focal point of the conspiracy deals with the allegations that, from in or about June 1971 up to and including December 1972, all four defendants and co-conspirators Downs, Bohannon, ECO and others issued false and fraudulent representations of the financial condition and business operations of ECO and its subsidiaries in press releases, letters to ECO shareholders and creditors and other statements, and that the same defendants, with co-conspirators Carter, Kahl, ECO and others, made similar false and fraudulent representations in reports filed with the SEC and AMEX from in and about September 1971 up to and including approximately December 1972. (Indictment, PP 18(g) and (h)).


 1. Securities Fraud

 Count 2 alleges that from approximately June 1, 1971 to approximately the end of 1972, all four defendants, co-conspirators ECO and others, in connection with the sale and purchase of ECO securities and by use of instrumentalities of interstate commerce and the mails, directly and indirectly, employed a scheme to defraud the creditors and stockholders of ECO the AMEX and the public, and made false and misleading statements in connection with recapitalization of the European subsidiaries as alleged in PP 18(b) through (e) of Count 1 of the indictment.

 Count 3 alleges a violation of the same statute and regulations as Count 2 (15 U.S.C. §§ 78j(b) and 78ff(a); 17 C.F.R. § 240.10b-5; 18 U.S.C. § 2) with respect to certain representations concerning SWN as set forth in P 18(f) of Count 1.

 2. Reporting Violations

 Counts 4 through 16 deal with the individual reports filed with the SEC and the AMEX from September 17, 1971 up to and including the filing of the Second Quarter 1972 10-Q report on September 18, 1972. The principal defect found by the Government with respect to these filings is that the recapitalization of the European subsidiaries was inadequately described and, in particular, that they failed to properly disclose that voting control and a portion of the equity of ECO's European subsidiaries had been transferred from ECO to defendant Koenig and others, the reasons for such transfer, and the consequences thereof as they affected descriptions of ownership and control of the various subsidiaries.

 In addition, the Government has attacked the filings for inadequately describing (1) the Southwest Nuclear project, (2) ECO's debt in litigation and (3) other failures to adequately disclose material information which will be discussed infra with respect to the individual counts.

 3. Mail Fraud Counts

 Counts 18 through 29 allege particular mailings made in furtherance of a scheme and artifice to defraud. Of these, Counts 18, 19, 20, 23, 26 and 29 remain in the case, the others having been dismissed on April 25, 1974. The material mailed consisted of letters or reports which are also the subject of attack under other counts.


 The standard to be applied in determining the sufficiency of all the evidence on this motion is set forth in United States v. Taylor, 464 F.2d 240, 242-43 (2d Cir. 1972). The test is higher than that applied in a civil case and it is higher than a test of "clear and convincing evidence".

"The true rule, therefore, is that a trial judge, in passing upon a motion for directed verdict of acquittal, must determine whether upon the evidence, giving full play to the right of the jury to determine credibility, weigh the evidence, and draw justifiable inferences of fact, a reasonable mind might fairly conclude guilt beyond a reasonable doubt. If he concludes that upon the evidence there must be such a doubt in a reasonable mind, he must grant the motion; or, to state it another way, if there is no evidence upon which a reasonable mind might fairly conclude guilt beyond a reasonable doubt, the motion must be granted. If he concludes that either of the two results, a reasonable doubt or no reasonable doubt, is fairly possible, he must let the jury decide the matter." Curley v. United States, 81 U.S. App. D.C. 389, 160 F.2d 229, 232-33, cert. denied, 331 U.S. 837, 91 L. Ed. 1850, 67 S. Ct. 1511 (1947), cited in United States v. Taylor, supra, 464 F.2d at 243.

 This standard is applicable to Bench trials as well as trials by jury. United States v. Freeman, 498 F.2d 569 (2d Cir. 1974). Thus, the case must be dismissed at this point in the trial unless a reasonable mind might fairly conclude guilt beyond a reasonable doubt.


 Ecological Science Corporation (a Florida corporation) is the successor to Southern Gulf Utilities, formed in 1958 by Norman J. Davidson (a former president of the Curtis-Wright Corporation) and William Siegal to operate water and sewage utilities for new home developments in that state. The original company enjoyed a modest growth until 1967 when it achieved approximately $4 million in revenues. Commencing in 1966 Davidson, who had other financial and real estate investments, looked for an executive officer to take over operation of the company and give Davidson an opportunity to relax, golf, and attend to his other investments. The search culminated in November 1967 with the selection of Harold P. Koenig, by the Board of Directors of Southern Gulf Utilities, as President. Chief Executive Officer and a member of the Executive Committee. Davidson in turn became Chairman of the Board and a member of the Executive Committee, and, despite his intention to become less actively involved, continued to participate in the management of the business.

 There would not appear to be any question that Koenig, over those first years through 1969, increased the business and expanded the operations of the company which, in 1968, had changed its name to Ecological Science Corporation ("ECO"). The Executive Committee, consisting of Davidson and Koenig, received authority from the Board for acquisitions up to specified amounts without prior approval and both Koenig and Davidson subsequently effected acquisitions which did not receive Board approval until accomplished. Koenig, however, was not only a corporate builder, he was also a "salesman" and it was primarily this function that, in the latter part of 1969, started the dominoes tumbling.

 This was a time when "ecology" was becoming a popular word and an attractive cause and Koenig carried on a public relations campaign to exploit to the fullest the expanding position of ECO in that field. As a result, the American Stock Exchange ("AMEX"), in late November 1969, commenced an investigation into the public relations activities of ECO and, more specifically, Koenig. Clearly there was justification for that investigation since the market price of ECO common stock, of which approximately 3.5 million shares were listed on the AMEX and held in public hands, had doubled from $14 to $28 per share in the last few months of 1969 amid rumors that the company was going to report extremely good earnings for 1969, that a major acquisition was in the works, that ECO was meeting with many stockbrokers and analysts and that it was touting its stock. Indeed the AMEX regularly investigates whenever any listed security becomes unusually active, either as to volume or price.

 A preliminary investigation revealed that, in the preceding months, ECO had completed several acquisitions, including three Italian companies -- Usuelli-ECO, Gallieni Vigano E. Marraza, and Sella Spa (of whom we will hear more later) -- and had issued a great many press releases, all of which led the AMEX to conclude that further investigation was required. As a preliminary measure the margin on ECO stock was moved from 80% to 100%. This action, and the attendant publicity, precipitated a meeting, called at the request of Koenig, on December 3, 1969 at the AMEX. At that time Koenig advised the AMEX and its president, who was in attendance, that he was distressed that action had been taken without prior notification, that he sought a better relationship with the AMEX and that he was there in a constructive spirit. Shortly thereafter, the AMEX wrote to Koenig raising various questions about ECO's public relations activities, private placements and related matters following which it was agreed that during the AMEX investigation all press releases or corporate communications would be cleared by ECO's counsel -- a procedure which was followed all through 1970.

 Koenig, however, was obviously upset by the margin requirements and by what he considered to be the hostile attitude of the AMEX and its harassment of ECO. A further meeting was held at the AMEX in late February 1970 at which time the contents of various press releases, articles, brochures, speeches and other material relating to 1969 and the propriety of meetings with brokers and analysts were reviewed with Koenig. ECO had, at this time, retained new counsel who was to review its public relations activities. Still another meeting was held in late March 1970, at which Koenig was told that the staff of the AMEX felt that ECO had violated its listing agreement as to timely disclosure and publicity, that the AMEX was seriously considering delisting ECO and that ECO should submit a plan to the AMEX to show how these problems could be avoided in the future.

 Shortly after this meeting, the AMEX learned that ECO had again changed counsel. Of more importance, on April 11, 1970, only two weeks after his last meeting at the AMEX, Koenig prepared two memos to the AMEX file. One, entitled "Eco Strategy", set forth Koenig's plan to deal with the "Amex harassment and interference in Eco's operations" and declared that he had no intention of stopping what ECO had been doing. In the second memo, "Amex Wrongdoings", Koenig charged, among other things, that "the Amex is guilty of manipulating the price of ECO stock downward in violation of the Securities Act of 1934." These memos were temporarily retrieved by ECO's Board at its April 22, 1970 meeting but ultimately fell into the hands of the SEC. At this same meeting of April 22, 1970, ECO's Board received the newly issued AMEX disclosure guidelines and both the Board and Koenig took steps to see that these guidelines were complied with.

 On May 14, 1970, the AMEX requested ECO to prepare a letter to its stockholders in order to clear up and correct certain prior disclosures. By this time ECO had again acquired new counsel to handle its difficulties with the AMEX and much of the summer of 1970 was devoted to the preparation of many drafts of such a letter, which efforts culminated in a draft in September 1970 which was of the type the AMEX could approve. On September 18, 1970, the defendant George V. R. Mulligan, a Los Angeles management consultant, became a member of the ECO Board. With a letter to stockholders in the offing it appeared that the difficulties with the AMEX could be resolved.

 The SEC, however, which had been monitoring the AMEX investigation from time to time during 1970, commenced its own investigation of ECO by formal order on November 3, 1970. The likelihood that the SEC had come into possession of Koenig's "Eco Strategy" and "Amex Wrongdoings" cannot be discounted. The SEC then advised the AMEX not to approve the letter to stockholders or any other agreement with ECO. The SEC investigation came as a surprise to ECO and Koenig was directed by the Board to take all steps to have the investigation completed because of its effect on the ability of ECO to refinance its present short term obligations. Counsel for ECO met with the AMEX on November 3, 1970 and shortly thereafter the official in charge of the AMEX investigation recommended that ECO not be delisted on condition (1) that ECO continue to retain outside counsel having a thorough knowledge of the securities laws and AMEX disclosure policies (by this time yet another lawyer had been retained by ECO); (2) that Koenig not be involved with the corporate publicity and financial public relations aspects of the company; and (3) that the company form a publicity committee composed of one outside independent director, one outside independent counsel and the company's general counsel which committee would formulate guidelines and policies in the area of corporate publicity and public relations.

 It appears clear to the Court that ECO was not delisted because the AMEX could not produce adequate evidence proving that the past promotional activities of ECO involved misrepresentations, and because the company, over the period of the AMEX investigation, had responded to all questions, attempted to prepare a letter to stockholders, met with brokers only when accompanied by counsel, cleared all press releases, annual reports, etc. with the AMEX, and adopted guidelines covering disclosure. In short, ECO had complied with all of the AMEX's demands. The proposed conditions of the agreement with the AMEX were apparently acceptable to ECO, but the further condition of a consent decree in the SEC investigation was not received with any enthusiasm.

 It was around this time, in December of 1970, that the previously amicable working relationship between Davidson and Koenig began to unravel. Concededly Davidson had previously supported Koenig in the AMEX dispute and had also supported the acquisition and publicity activities of ECO which had brought on that dispute. Now, however, with the settlement of the AMEX dispute not fully resolved, the SEC investigation in progress, and his own personal involvement and liability threatened, Davidson accused Koenig of holding the company together on "chewing gum and string" and suggested that Koenig resign as chief executive officer and become chairman of the board. Contemporaneously with the growing rift between Koenig and Davidson, the SEC investigation proceeded despite prior indications that no action was contemplated. But now the investigation was expanded to inquire into the accuracy of ECO's financial statements prepared by Haskins & Sells ("H&S"). This came at a time when ECO was awaiting the completion of the 1970 audit -- the deadline being February 28, 1971 -- in time to file its 10-K due on March 31, 1971. ECO was in an extremely tight cash situation since permanent funds programmed for the fourth quarter of 1970 had not yet been funded due largely to the delay in the 1970 audit and the cloud hanging over the company as a result of the adverse SEC publicity. In April 1971, with the 1970 audit still not completed, proposed offers of settlement were again discussed with the AMEX and SEC, and Koenig and ECO agreed on a settlement as dictated by the AMEX and the SEC. On April 30, 1971, three documents were executed to effect this settlement.

 First, Koenig consented to the entry of a judgment of permanent injunction by the District Court for the Southern District of New York. Part I of the order enjoined ECO, Koenig and "their agents, affiliates, subsidiaries . . . employees . . . and all persons acting in concert or participation with them" from making material misstatements and omissions as set forth, from employing any device, scheme or artifice to defraud, as specified, and from engaging in any transaction, act, practice or course of business which would operate as a fraud and deceit upon any person as specified. Part II ordered ECO to file a restated Form 10-K for 1969 to (1) show the inclusion of earnings as of acquisition closing dates or such earlier appropriate dates acceptable to the Commission and (2) expense certain 1969 salaries which had previously been capitalized.

 Secondly, Koenig, on behalf of ECO, executed an understanding to the AMEX to (1) send out the letter to shareholders, (2) establish a publicity committee consisting of an independent director, a representative of an independent law firm and the company's general counsel to function as specified, (3) assign full control of publicity to an officer of the company to function as specified, (4) limit Koenig's public relations activities as specified, (5) continue to engage independent counsel "having a thorough knowledge of the securities laws", and (6) secure appointment of two "additional independent directors". In addition, ECO agreed to comply with the AMEX disclosure requirements, on the understanding that a breach of any of the foregoing could result in suspension or striking from listing or registration.

 Finally, Koenig executed a letter to shareholders dated April 30, 1971 to "discuss and report" upon the subject matters of the SEC and AMEX inquiries. In it, Koenig described the AMEX undertaking, reviewing the extent to which ECO was engaged in pollution control and made full disclosure concerning certain "product developments" and ECO's 1968 and 1969 publicity campaign, including the distribution of newspaper articles and brochures, the use of a public relations consultant and meetings with brokers and analysts.

 Whatever had been accomplished by the settlement of April 30, 1971 with regard to removing the threat to ECO was, however, short-lived, for soon ECO began to experience problems with its auditors. H&S had commenced work on the 1970 audit in October 1970 in anticipation of the filing of ECO's 10-K due on March 31, 1971. Just prior to that time, ECO had submitted its, and its domestic subsidiaries', six-month financial statements -- which were prepared in conformity with H&S past accounting practices -- to H&S for review and examination prior to their inclusion in an S-1 Registration Statement to be filed with the SEC in October 1971. Whether or not an actual "audit" was performed on those statements, it is apparent that H&S conducted a comprehensive review of the figures and, upon completion of the review, did not give any indication or warning to anyone that its prior accounting treatment of items such as the inclusion of the income of acquired companies, the recognition of income from uncompleted projects and the deferral of certain substantial costs were in any way suspect or subject to change -- a situation which was to drastically change within six months.

 While there may have been signs in February and March of 1971 that all was not well with the audit, it was not until April 21, 1971 that H&S advised ECO that significant adjustments might be necessary in the 1970 financial statements and it was not until May 19, 1971 that H&S submitted a detailed analysis of the proposed adjustments then amounting to approximately $4 million. Davidson had learned of the downward adjustments in mid-May and at H&S' suggestion, seconded by Davidson, H&S was invited to present their report on the situation at an ECO board meeting on May 20, 1971.

 It was at this meeting that a further change of counsel occurred, this time due to the resignation of then present counsel. Attending the meeting was a representative of Union Bank, Los Angeles ("Union Bank"), a major creditor, and also representatives of the prospective underwriters for a proposed "shelf" registration, i.e., a registration covering the ECO securities given as consideration for the purchase of various subsidiaries. It is not surprising then, in the light of H&S' prior approval (or at least tacit approval) of the 1970 six-months statements, that the Board was shocked and expressed disagreement with H&S' proposed adjustments. As a result, H&S was directed to confer with ECO management on the following day. The Union Bank representative then reported on ECO's total debt of $13-$14 million and pointed out that the bank had reached its legal limit on overdrafts.

 At the conclusion of the May 20 Board meeting Davidson moved for Koenig's removal as chief executive officer. Koenig responded by successfully moving a slate of directors for the forthcoming stockholders' meeting which excluded Davidson. Following the meeting Davidson called the AMEX and the SEC to inform them of the adjustments proposed by H&S. Trading in ECO stock was then suspended on May 20, 1971 by the AMEX and on May 25 by the SEC. With the exception of the period from August 9-17, 1971 when over-the-counter trading was resumed, the suspension of trading was to continue during the entire period covered by this indictment. On May 27, Davidson announced his intention to conduct a proxy fight against the current management. This action, following the revealed downward adjustments in the company's financial statements, opened the door to a creditor takeover of the company.

 The following months were to see the company beset by civil litigation and tottering on the brink of bankruptcy. Without detailing all that transpired over the summer of 1971, at least four events should be discussed, since three of these events led to press releases or reports which have been held to be misleading in the civil action herein, and the fourth relates to the alleged motive or purpose behind many of the actions attacked herein, i.e., to maintain Koenig in office. The three events which led to press releases or reports which have been held to be misleading in the civil action are: (1) the foreign recapitalization; (2) the matter of a loan to ECO from Teachers Insurance and Annuity Association ("Teachers"); and (3) the Southwest Nuclear, Inc. ("SWN") project. The event relating to the alleged motive or purpose attacked herein is a certain meeting in Los Angeles with Union Bank on June 29, 1971 attended by ECO's management, including most of its subsidiaries.

 It is the Government's contention that in June 1971 Koenig, his control of ECO threatened by both Davidson and ECO's creditors, hatched two fraudulent schemes directed at the various security holders of ECO; a voting control transfer with respect to ECO subsidiaries in Europe and a proposed deal with SWN. Of course, as should be emphasized at this time, it is not a federal crime for management, faced with a proxy fight for management control, to fight back, so long as the methods employed do not violate federal law.

 On June 29, 1971 a meeting was held in Los Angeles at Union Bank to discuss the current financial arrangements and the status of the as yet unfiled 1970 audit. At this meeting the heads of many of ECO's subsidiaries expressed their faith in Koenig and his ability to weather the current financial storm. The credible evidence does not indicate that such expressions were not made in good faith. The Court would note, at this point, that if management rallies to its support the heads of its subsidiaries this does not, in itself, constitute a case study in deceptive practices in violation of federal law. In June and July of 1971 the creation of an executive or finance committee proposed by Koenig to oversee the company's financial affairs was discussed with Union Bank as was the appointment of a management consultant designated by the bank and the raising of cash to pay the delinquent interest due Union Bank on its notes and/or ECO's overdrafts. While the company's relationship with Union Bank deteriorated, the proposed adjustments in ECO's financial statements caused serious concern over whether ECO's other principal lender, Teachers, would honor a previous commitment to lend ECO $4 million during 1971 which would be used to retire a "bridge loan" from Union Bank made in June 1970.

 July of 1971 was a month of increasing difficulties and pressures on ECO. It will be recalled that it had once been expected that the 10-K for 1970 would be filed when due on March 31, 1971 but that substantial proposed readjustments by H&S had made this impossible. As a result, months were expended by representatives of H&S and ECO in an attempt to reach some agreement on the final figures. The SEC advised ECO that if it did not file the 10-K by August 2, 1971 a criminal action or a contempt proceeding would be commenced against it. While work on the footnotes to the financials which had been drafted by H&S commenced on July 23, 1971, the report could not be finalized until the company's status with its major creditors was clarified. It should be noted that the situation with respect to Union Bank and Teachers was extremely fluid. H&S was attempting to determine if the funding by Teachers was necessary to keep the Union Bank loans from being in default and to determine what should be said, in the footnotes to the 1970 financials, about the status of the commitments, since it could not render an opinion while ECO remained in default under its present Union Bank loan agreements.

 On July 28, 1971, however, Union Bank amended its loan agreements so as to cure any events of default then existing, including any default under the $4 million bridge loan agreement with Union Bank, and waived, as an event of default, any failure by ECO to receive the $4 million commitment from Teachers on August 1, 1971. Moreover, by prior amendment of the agreement, the Union Bank loan could not be called until such time as the Teachers' commitment was actually received by ECO. The agreement of July 28, 1971 was relied on by both H&S and ECO in the 1970 10-K.

 Mention has been made of these events because the press release issued on August 3, 1971 in connection with ECO's filing of its 1970 10-K is the first of the press releases attacked by the Government as a misleading statement or omission under Rule 10b-5. While it is not the Court's purpose in this narrative to discuss seriatim the Government's contentions with respect to each and every press release, letter to stockholders, or periodic filing (particularly since the same charge is levelled in many cases against a variety of statements) a brief comment is in order with respect to this first "target" of the Government's attack.

 This release, and others to follow, announced what can only be characterized as "bad" news. It disclosed a loss of more than $2 million in 1970 compared with a profit of $1.7 million in 1969; it disclosed a $1.17 per share loss in 1970 compared with a 50 cents per share profit in 1969; it disclosed a decrease in book value; it disclosed a negative cash flow; it disclosed downward adjustments in the 1970 financials totalling nearly $7 million. Despite this, the Government contends that the release gave a false and misleading portrayal of ECO's financial condition as of August 3, 1971 in that it failed to disclose, inter alia, that ECO was then in default in certain provisions of its renegotiated loan agreement with Union Bank and that as of July 28, 1971 ECO had reason to believe that it would not receive the committed $4 million loan from Teachers which was to be used to pay the $4 million Union Bank demand loan.

 Whether or not the condition of the Union Bank loan and the Teachers' commitment were material developments, it is clear that on August 3, 1971 ECO was not in default of its loan agreement with Union Bank and, accordingly, it was immaterial whether Koenig or ECO had reason to believe that Teachers would not honor its commitment. It is interesting to note that as late as September 15, 1971 Teachers was still considering making funds available to ECO. Indeed, any statement in the press release such as the Government suggests should have been made, would not only have been misleading, but would also have been false. Finally, the Government asserts that the release was false and misleading because it failed to disclose a substantial projected cash flow deficit for the last five months of 1971. But nothing requires such a disclosure in a press release and, indeed, such disclosure is not required in the quarterly reports that must be filed with the SEC. Furthermore, the release did state that "the Company is experiencing a negative cash flow" and, on August 6, 1971 (three days later), whatever defect was present in the August 3 release regarding the amount of the cash flow deficit was cured by a press release giving the exact figure of a $4.7 million projected cash flow deficit for the balance of 1971, and repeated in a later release on August 19, 1971. Moreover, there is no evidence that this figure was known on August 3, 1971 by anyone at ECO, including the Publicity Committee which approved the August 3 release.

 Before discussing the "Publicity Committee", a brief further reference should be made to the 1970 10-K which was filed on August 2, 1971 under extreme pressure due, in part, to the fact that the final financials, footnotes and certification were not delivered to ECO in Florida until Saturday evening, July 31, with review and checking remaining to be done both in Florida and Washington, D.C. before the actual filing. Koenig had been far from satisfied with the adjustments made by H&S and had indicated that he would report not only H&S' adjustments but also what he believed the correct figures to be. As a result, H&S and the SEC were concerned that Koenig might disavow the financial statements either directly or indirectly. Accordingly, H&S waited until Koenig had agreed, in late July, to "accept" their figures before final preparation of the H&S opinion with respect to both the 1970 10-K and the restated 1969 10-K. Notwithstanding Koenig's agreement to the revisions, H&S nevertheless issued an opinion which was more harmful than helpful to ECO, since it stated that while the financial statements were prepared "on a going-concern basis" certain "uncertainties" existed, "the ultimate outcome of which could render invalid the assumption of a going concern". The effect of the revised financial statements and opinion of ECO's auditors on ECO's creditors will be considered after some general discussion of the Publicity Committee in connection with the press release and letters to stockholders which have been attacked by the Government herein.

 It will be recalled that the Publicity Committee was established pursuant to the undertaking of the AMEX, which was part of the settlement agreement of April 30, 1971 and which was designed to limit and check the public relations activities of ECO and Koenig as they had been practiced in 1969. The agreement provided that the Committee be composed of an independent outside counsel, an independent outside director, and the company's general counsel. Although the critical position, in the view of the AMEX, was the outside counsel, and not the company's general counsel who would presumably be under Koenig's control, the agreement did not specify the particular individuals who were required to fill any of these positions. The Publicity Committee was formally established by Koenig on June 1, 1971 and was originally composed of three lawyers: defendant Byron S. Krantz; Abner Sibal (and James Treadway) of the firm of Gadsby & Hannah in Washington, D.C. as outside counsel; and Peter Adolph, general counsel of ECO. Although Krantz, at this time of his appointment was not a director of ECO, he was subsequently elected as an outside director on July 14, 1971. Robert Carter, administrative vice-president, comptroller and secretary of ECO, who had previously been appointed as Officer in Charge of Corporate Publicity, and who was to leave ECO in October 1971, was designated a Secretary to the Committee, although Adolph actually functioned as such.

 The Committee first met on June 15, 1971 and agreed that it had a two-fold responsibility: (a) to edit and object to proposed press releases containing information not proper for a press release, and (b) to propose the release of information coming to its attention which it believed should be released. Releases were either reviewed by the members as a whole, or were discussed and reviewed by telephone. It is not clear whether there was always unanimity, but the AMEX undertaking itself did not require it. This process of review of all letters and releases issued by ECO continued throughout the summer of 1971. During the period that Sibal was on the Committee (he resigned as counsel in mid-September 1971), Koenig never sent out a release without it first going to Sibal for approval and all releases during this period, many of which are now attacked by the Government, were approved by all the members of the Committee. Furthermore, proposed releases were read to the SEC and copies of all releases sent to it, without any indication from the SEC that the releases were false or omitted any material facts. Indeed, the Government has failed to prove any of the releases or letters which it now asserts are criminally false and misleading were ever sent out without prior review and approval by the Publicity Committee. Incredibly, neither Sibal, Treadway nor Adolph are named as co-conspirators by the Government so that Krantz was, allegedly, the only one criminally involved in the distribution of misleading and deceptive information during this period, although he was in no position to control this Committee.

 After September 16, 1971 Murray Chotiner and defendant Reeves replaced Sibal's firm as outside counsel on the Committee and John Downs, a friend of Chotiner, also joined the Committee. Chotiner and Downs have both been named by the Government in its bills of particulars as co-conspirators. Although Downs did not become a director until March of 1972 and Krantz resigned as a director on October 20, 1971 (and did not rejoin the Board until March of 1972), for a period after September 16, 1971, the Committee consisted of Downs, Krantz and Adolph together with Reeves and Chotiner. While the Government claims that defendant Mulligan was a member of the Committee after September 16, 1971, there is no evidence linking him to the preparation or review of any press release, letter to shareholders or SEC filing issued during the period after September 16, 1971 except for the letters to stockholders of September 17, 1971 and February 23, 1972 and the first amended 10-K filed on July 11, 1972. The evidence does not establish that he was at any time a member of the Committee.

 Before continuing the chronological narrative of the facts, it is important to note once again that during the entire period in which the Government claims that misleading or false releases and statements were issued, these releases and statements were passed on and approved by persons who are not defendants in this case.

 ECO's real problems did not end with the filing of the 1970 10-K on August 2, 1971. The creditors, primarily Union Bank, faced with the increased adjustments in ECO's financial reports and the damaging opinion of its auditors, continued to push for Koenig's ouster and for control of the company. On August 6, and again on August 16, creditors' meetings were held. In the meantime, however, the Chase Manhattan Bank called its $500,000 loan and Union Bank in turn cancelled its cash arrangement reached with ECO in the latter part of July. At the creditors' meeting of August 16 the creditors jointly decided not to make any further funds available to ECO and, following the meeting, Union Bank called its $4 million bridge loan. In the face of imminent disaster, the ECO Board of Directors met on August 18. It was agreed that one of the causes of the company's deteriorating relationship with its creditors was the proxy fight instituted by Davidson and, in a peacemaking attempt, it was finally agreed that the Board should be divided by a formula which would give Davidson and Koenig equal 40% representation with the remaining 20% elected by the combined 80%.

 Despite this agreement Union Bank then called ECO's $9.3 million loan, asserting as an event of default the company's failure to pay the bridge loan. Although in the latter part of August Union Bank and Teachers met and agreed upon a conditional rescue plan for ECO -- conditioned principally on Koenig's resignation as chief executive officer and the establishment of a Board of Directors controlled by Union Bank and Teachers -- the situation was not one for optimism when the Board met on September 8, 1971. It was at this meeting that Koenig first reported on the progress of what has been referred to as the European recapitalization. Since it is this involved and complicated series of transactions that is the basis for almost all of the charges levelled against these defendants in the indictment and various bills of particulars, an analysis of the transactions is necessary at this time.

 ECO, on June 15, 1971, controlled 100% of the stock of ESSA (Ecological Science S. A.), a Swiss company formed in 1969. ESSA, in turn, controlled three Italian companies: (a) Usuelli, of whose stock ESSA controlled 100%; (b) Gallieni, of whose stock ESSA controlled 90% with 10% controlled by Sirpi, another Italian company, and (c) Sella, of whose stock ESSA controlled 90% with 10% controlled by an individual named Rollando Zanotto (through a holding company known as Zendall). ESSA had acquired this stock during 1969 or early in 1970. All three companies were involved in related ecological activities. Sella manufactured big valves for pipelines, Gallieni smaller valves and plumbing, and Usuelli air control devices, incinerators and similar products. The lawyer for ESSA was Claudio Camilli of the firm of Baker & McKenzie. In mid-1970, in order to maximize the tax benefits for the subsidiaries, ESSA was converted, in part, to an operating company in that it took over export sales for Sella so that ESSA could bill Sella's foreign customers and accumulate this money in Switzerland, thus escaping the high Italian taxes and obtaining the benefit of the lower Swiss taxes. ESSA would purchase the raw materials or semi-finished products, have them processed by Sella with ESSA receiving an invoice from Sella for the work done and ESSA would then bill the ultimate customer. It was contemplated that ESSA would repatriate this money to Sella in the form of loans or subscriptions to capital at a later date.

 Early in 1971, the concept of a partnership to handle engineering services in Europe in order to minimize Italian taxes was devised. In order to secure such minimization, Italian law required that an individual be the general partner and a foreign corporation be the limited partner of this new entity to be known as ECO-SAS. Accordingly, it was decided that Koenig would be the general partner and that Brown Fintube S. A. ("BFT(S)") would be the limited partner. BFT(S) was a Swiss company wholly owned by Brown Fintube, an American corporation which in turn was wholly owned by ECO.

 Recapitulating, then, as of June 15, ECO owned, through ESSA, the three Italian subsidiaries and the creation of the partnership in Italy, i.e., ECO-SAS, was well under way. As of that date, the board members of ESSA were Cesare DeFranceschini, an Italian citizen, Koenig, and three Swiss attorneys, and, at least as early as July or August 1971, the board of BFT(S) was the same. DeFranceschini was also the general manager of ESSA and BFT(S). Also, as of June 15, 1971, the board of Usuelli consisted of DeFranceschini, Koenig, the general manager of Usuelli, and Mr. Usuelli; the board of Gallieni consisted of DeFranceschini, Koenig, the general manager of Gallieni, and Mr. Gallieni; the board of Sella consisted of DeFranceschini, Koenig, the general manager of Sella, and Mr. Zanotto.

 On the same date, June 15, 1971, the annual meetings of the three Italian companies, i.e., Usuelli, Gallieni and Sella, were held and attended, among others, by Koenig, DeFranceschini and Camilli, ESSA's attorney. After these meetings, a further meeting was held and attended only by the last mentioned three individuals at which Koenig described the difficulties which had arisen with respect to the parent company, ECO, in the United States and its possible consequences for the European subsidiaries. Among the difficulties described, were the audit problem, the profitability tests in connection with loan agreements and the possible loss of expected financing. On the following day, June 16, an informal meeting was held and attended by DeFranceschini, Koenig, Camilli and two Swiss lawyers, Spiess and Cavazonni.

 Over the course of these two days of meetings, the various financial problems of the Italian operating companies were discussed. It should be noted that at that time ESSA was indebted to Union Bank, Switzerland (backed up by a letter of credit from Union Bank) in the amount of $2 million and that ESSA still owed payments to several individuals for the purchase of the Italian operating companies (including some $1.8 million to Zanotto for the purchase of Sella). ESSA was also indebted to ECO for approximately $3 million. Furthermore, the Italian banks, which were aware of ECO's problems and which had already withdrawn $700,000 in lines of credit previously extended, were now contemplating the withdrawal of working capital lines of credit. It should be noted that ESSA was carrying substantial accounts receivable (due from customers of Sella's products) and accounts payable (due to Sella for the manufacture of those products) under the arrangement discussed supra.

 Thus, there were four principal areas of concern discussed at these meetings: (1) that ECO's creditors might somehow attach the loan from ECO to ESSA and thus jeopardize the receivables which ESSA held; (2) that Union Bank Switzerland (or Union Bank through subrogation of the letter of credit) could jeopardize the same receivables by calling its loan; (3) that Zanotto would, upon default of the payment due him, execute upon the pledge of Sella stock which he held as a result of ESSA's purchase of Sella; and (4) that as a result of the foregoing, the Italian banks would withdraw their remaining lines of credit. All of these possible actions would have the same devastating consequence -- the failure of the Italian operating companies due to a lack of working capital. Thus, those in attendance at the meetings agreed that some "plan" was necessary to deal with these contingencies and save the operating companies.

 Various possible solutions were discussed at the meeting on June 15, 1971 and, as already noted, a further conference was held the following day at the request of Mr. Spiess, a Swiss attorney and one of the directors of ESSA, where the situation in the United States was again discussed. One idea, suggested by Camilli, was a personal assurance contract entered into by the management of the Italian subsidiaries. This was rejected by Koenig as not providing the stability required by the Italian banks because such a contract might easily be breached. Koenig himself had suggested that the subsidiaries give some sort of security to the banks in the form of mortgages on real estate owned by the subsidiaries or by pledging inventories or receivables. This, too, was rejected either because Italian law did not permit such transactions or because the banks simply did not do business that way. It was also proposed that several partnerships, consisting of management and the operating companies, be formed in order to create the "stability" required by the banks. This idea had more promise.

 After further discussion, it was generally agreed that what was required was not several partnerships but rather one Italian partnership which would exercise voting control of the Italian subsidiaries (which would be accomplished by creating different classes of stock in the operating companies). There also appeared to have been some discussion that ECO-SAS might be used as the Italian partnership in the plan. There was, however, no final agreement on the details of the plan and, indeed, it was discussed only in general terms. It was also agreed that the problem of the ESSA receivables and payables might be resolved by transferring them to BFT(S) and by restoring ESSA to holding company status and allowing Sella to do its own distributing. Further, with regard to BFT(S), Spiess was asked whether an arrangement similar to the one discussed for the Italian subsidiaries could be worked out for BFT(S). Spiess replied that he thought so but that a Lichtenstein Anstalt -- a business entity peculiar to Lichtenstein, the ownership of which is evidenced by a bearer certificate -- was a more appropriate vehicle. At any rate, the meetings ended with Koenig's instructions to work out the plan and report back to him.

 A week after the meetings of June 15 and 16, 1971 and after Koenig had returned to the United States, Camilli and DeFranceschini met again and discussed the use of the Italian partnership ECO-SAS, then in the process of formation, as a vehicle to acquire voting control of the three Italian subsidiaries through control of Usuelli, which in turn would acquire control of Gallieni and Sella. This was explained to Koenig by phone the following day. It is important to note that 100% of Usuelli was owned by ESSA so that a meeting to effect transfer of voting control of Usuelli to ECO-SAS could be accomplished rapidly. However, ESSA held only a 90% ownership in Gallieni and Sella which would necessitate calling board meetings and thereafter stockholders meetings to effect the transfer of voting control in these two companies to Usuelli. Also to be considered was the right of the minority stockholders of Gallieni and Sella to subscribe to any new stock that might be authorized, which could make it difficult to undo any recapitalization if it was later deemed inadvisable to go through with it.

 Accordingly, a shareholders meeting of Usuelli was held on June 25, 1971 at which time authority was granted to increase the capital of Usuelli by issuing 80,000 new shares, the prior authorization being for 200,000 shares. The total 280,000 shares were then split into two classes, Class A and Class B of 140,000 shares each with only Class A to have full voting rights and Class B to have voting rights only in case of amendment of the corporate by-laws or change in the structure of Usuelli. Class A had limited dividend rights with the major dividend rights in the Class B shares. It was understood that ESSA was to have 140,000 B shares and 60,000 A shares with 80,000 A shares to go to the new Italian partnership ECO-SAS. However, no actual subscription to the new shares was effected on June 25, 1971.

 On July 2, 1971 board meetings of Gallieni and Sella were held for the purpose of calling the necessary shareholders meetings. Also on July 5 a meeting was held between DeFranceschini, Camilli and Spiess to discuss the proposed recapitalization of BFT(S). This involved increasing the capital of BFT(S) by issuing shares having a par value which was one-tenth of the par value of the prior shares but which would have the same voting rights. The new shares were to be offered for subscription to the existing shareholders who were expected to waive their preemptive rights and the stock would thereafter be subscribed to by the Anstalt.

 On July 7, 1971 the formal papers for the creation of the partnership, ECO-SAS, were signed. Except for the creation of this new entity, the general status of the European subsidiaries remained the same. However, as has been indicated, the shareholders meeting of Usuelli had already been held, resulting in authorization for the increase of its capital, the issuance of new stock and the division of all the stock into two classes, one of which had full, the other limited, voting rights. Moreover, board meetings of Gallieni and Sella had also been held at which time stockholders meetings were scheduled for July 22, 1971. DeFranceschini, however, advised Camilli in mid-July that the situation with respect to creditors seemed to be improving in the United States and the stockholders meetings of Gallieni and Sella were adjourned until August ...

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