The opinion of the court was delivered by: KNAPP
This criminal litigation arises out of the collapse of Orvis Brothers & Co., a New York securities brokerage firm and member of the New York and American Stock Exchanges. Defendant Sloan was the managing partner of Orvis and, as such, exercised overall responsibility for the company's operations. The other four defendants were all partners of Orvis and members of the firm's executive committee. The five defendants are accused in a multi-count indictment of conspiring to commit and actually committing numerous violations of the securities law of the United States. The pertinent statutes and regulations charged are 15 U.S.C. §§ 78g, 78h, 78j(b) , 78q(a) and 78ff; 12 C.F.R. 220; 17 C.F.R. §§ 240.8c-1, 240.10b-5, 240.17a-3, 240.17a-4, 240.17a-5.
All of the defendants have joined in a motion, primarily briefed by counsel for defendant Eucker, urging the dismissal of counts two through seven of the indictment. The defendants argue that the conduct charged in these six substantive counts do not constitute a violation of the statute and regulations in question. Alternatively, the defendants maintain that if the conduct charged does violate the statute, the counts must still be dismissed because of the bar of the statute of limitations. We hold that counts two through seven are barred by the statute of limitations, and therefore must be dismissed.
Counts two through seven charge the five defendants with the substantive crime of falsely making and maintaining certain records in violation of 15 U.S.C. § 78q(a) and the regulations thereunder, 17 C.F.R. § 240.17a-3 and 17 C.F.R. § 240.17a-4. On six separate occasions - each of them more than five years prior to the filing of the indictment - the defendants are accused of making false entries in books and records (required to be kept by the Securities and Exchange Commission) for the purpose of misrepresenting Orvis' financial condition.
15 U.S.C. § 78q(a) requires brokers and members of national securities exchanges to "make, keep, and preserve for such periods, such accounts, correspondence, memoranda, papers, books and other records, and make such reports as the Commission by its rules and regulations may prescribe. . . ." Regulation 17 C.F.R. § 240.17a-3 lists the types of books and records which the SEC requires brokers to "make and keep current." 17 C.F.R. § 240.17a-4 lists the period of time such records must be preserved (either three or six years depending on the type of the record). For the purpose of this motion, we assume that counts two through seven deal with records within the purview of 15 U.S.C. § 78q(a) and its regulations.
The defendants first argument in support of their motion to dismiss is without merit. The defendants contend that the conduct charged in the six counts do not amount to violations of the statute -- 15 U.S.C. § 78q(a). In essence, defendants argue that the statute only requires brokers to "make, keep and preserve" the records, and that it in no way proscribes the making of a false entry in a book or record which is then subsequently preserved.
This argument is specious, and, if accepted would completely undercut the purpose and value of the section and the regulations in question. The requirement that certain books and records be made clearly mandates that those records be made accurately and correctly. See, e.g. Sinclair v. SEC (2d Cir. 1971) 444 F.2d 399, 401; Stead v. SEC (10th Cir. 1971) 444 F.2d 713, 716, cert. denied 404 U.S. 1059, 30 L. Ed. 2d 746, 92 S. Ct. 739, Loss, Securities Regulation, Vol. II, p. 1346 n. 215 (2d Ed. 1961). Indeed, in the Sinclair case, the Second Circuit stated that evidence of falsification of the names of executing brokers on certain order tickets "is so clearly a violation of § 17(a) of the 1934 Act [15 U.S.C. § 78q(a)] and regulations issued thereunder that it hardly deserves comments."
Although it is clear therefore that counts two through seven do state a criminal offense, it seems equally apparent that prosecution for these charges is barred by the statute of limitations.
18 U.S.C. § 3282 provides that
"Except as otherwise expressly provided by law, no person shall be prosecuted, tried, or punished for any offense, not capital, unless the indictment is found or the information is instituted within five years after such offense shall have been committed."
It is undisputed that the Securities Exchange Act of 1934 does not "otherwise" provide a time period within which a violation of the statute must be charged. Hence, the five year statute of limitations is applicable. The issue upon which the defendants and the government disagree, however, is at what time the statute begins to run.
Defendants contend that the statute of limitations commenced upon the making of the specific false entry alleged in each of the six substantive counts at issue on this motion. All six of the entries were made between April 16, 1969 and August 28, 1969. Since the indictment was filed on September 10, 1974 -- more than five years after the making of each false entry -- the defendants contend that the six counts are time-barred.
The government analyzes the problem differently. It contends that the defendants are charged not only with making false entries but also with maintaining the inaccurate records. Since 17 C.F.R. § 240.17a-4 requires that the records be properly maintained for either three or six years, the government reasons that the crime would not be complete until that required preservation period elapsed. The statute of limitations, therefore, would not commence to run according to this theory until after the period during which the records had ...