Appeal from a judgment of conviction entered in the United States District Court for the Southern District of New York, after trial before Inzer B. Wyatt, Judge, and a jury, for criminal violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, in contravention of § 32(a) of the Act, 15 U.S.C. § 78ff(a). Affirmed.
Kaufman, Chief Judge, Smith and Meskill, Circuit Judges.
As Mark Twain once wrote, "there are two times in a man's life when he should not speculate: when he can't afford it, and when he can." The unfortunate truth of this observation led some forty years later to the passage of the Securities Exchange Act of 1934. As the facts underlying this appeal from a conviction*fn1 for violations of § 10(b) of that Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, demonstrate, however, there are still times when investors would do well to heed Twain's advice.
Throughout the period covered by the indictment in this case Robert S. Persky was a partner, specializing in securities law, in the 30-man Manhattan law firm which served as general counsel to Microthermal Applications, Inc. ("Microthermal"), a company organized to develop certain patents held by its president and majority stockholder, Morton S. Kaplan. Persky was Microthermal's Secretary, and kept in constant touch with Kaplan regarding the company's legal affairs.
Microthermal went public in July of 1969, netting $700,000 on its offering the prospectus for which, drafted by Persky, provided that the proceeds remaining after expenses and other specific allocations would be invested in certificates of deposit, government securities, or other interest-bearing obligations. Unfortunately for all concerned, Kaplan elected what he supposed would be a more remunerative investment. He turned the proceeds over without restriction to Takara Partners, a hedge fund run by John Peter Galanis and Akiyoshi Yamada, and Takara put the monies into highly speculative securities, ultimately leading to devastating results.
The first transfer to Takara, some $240,000, was made in October of 1969. In January of the following year, Galanis told Kaplan that an additional investment of $240,000 would be necessary to assure repayment of funds which Takara had borrowed from Kaplan's brother-in-law, Melvin Solomon. Since Kaplan and Persky had each personally guaranteed to repay Solomon up to 25% of the principal if Takara defaulted, Kaplan caused Microthermal to make the requested transfer.*fn2 This second $240,000 was also turned over without limitation, and the entire $480,000 was quickly dissipated.
Repeated demands by Kaplan and Persky for repayment resulted in the return of approximately $105,000 - leaving $375,000 still unaccounted for. Hoping that legerdemain would succeed where business judgment had failed, Persky tried to make Microthermal disappear by finding a merger partner. To achieve this end, he sought Galanis's aid. It was subsequently arranged that Microthermal would transfer all of its liabilities and assets - except for the nonexistent $375,000, purportedly invested in a certificate of deposit to which we shall refer shortly - to a wholly owned subsidiary, Waltech Corp., which would be spun off to Microthermal's stockholders. Galanis's merger candidate, Meridian Capital Corp., would then gain control of Microthermal by selling its assets and liabilities for a control block of newly authorized Microthermal stock. Finally, Microthermal would change its name to Meridian Capital, and Persky and Kaplan would resign as officers.
A formal agreement was drawn up at Persky's direction and signed on August 13, 1970. The October 26, 1970 closing was conditioned upon approval of the transaction by Microthermal and Meridian stockholders. A press release, prepared at Persky's instance and issued on August 14, 1970, announced the proposed Waltech transfer and spin off, stated that Microthermal's residual assets would then approximate $375,000, and described the substance of the Microthermal-Meridian agreement. Sent to various financial media, the press release was printed in its entirety in the O.T.C. Market Chronicle on August 27, 1970.
The fly in the ointment, of course, was that the $375,000 had been squandered by Takara. After repeated unavailing demands to see the certificate of deposit which was the basis of the proposed merger, Meridian's controlling shareholder, Robert Hagopian, decided not to consummate the agreement. Persky, however, had already arranged for notice to be sent on October 9 to all Microthermal stockholders, announcing over his name a special stockholders' meeting to approve the transfer from Microthermal to Waltech of "substantially all of the operating assets, except for approximately $375,000," and to ratify the agreement with Meridian. Galanis prevailed upon Meridian not to reveal the cancellation of the acquisition; and Hagopian agreed to go along with a cover-up story concocted by Persky which blamed the merger's failure on Meridian's inability to resolve an outstanding claim against it by a company known as Colorado Corporation. At the Microthermal shareholders' meeting on October 20, 1970 the Waltech and Meridian transfers were approved. The merger's collapse apparently was never announced to the stockholders. On October 23, 1970 another press release was issued under Persky's direction to all Microthermal stockholders, reporting that "Micro has transferred substantially all of its assets, except $375,000, to Waltech Corporation. . . ."
Persky was undaunted by the series of reverses and, soon after the failure of the Meridian merger, initiated the search for another solution to Microthermal's problems. Galanis this time introduced him to Ramon D'Onofrio, who controlled U.S. Secretarial Institute, Ltd., a small and essentially worthless closely held corporation. For a "fee" of $50,000 D'Onofrio agreed to have Secretarial buy the non-existent $375,000 certificate of deposit in return for 49% of the stock of his company. A formal agreement, drafted under Persky's supervision, was consummated on November 20, 1970 in Persky's office, where Secretarial's representative received an empty envelope purportedly containing a $375,000 bearer certificate of deposit. But this did not signal the termination of these complex and convoluted transactions.
In an attempt to relieve themselves of any continuing affiliation with Microthermal, Persky and Kaplan finally caused the corporation to be merged into Continental Engineering and Development, Inc., a closely held Washington corporation which had been seeking to acquire a public shell. In March of 1971 Persky supervised the drafting of the necessary documents and had them backdated to November 20, 1970.
The merger with Continental Engineering was not, however, the end of Persky's troubles. On March 1, 1973 he was indicted for filing a false Form 10K Annual Report with the Securities and Exchange Commission (SEC); for failing to file a current Form 8K for November of 1970; and for violations of § 10(b)*fn3 and Rule 10b-5.*fn4 The 10b-5 prosecution which sought to punish Persky for the false press releases and statements resulted in the conviction from which this appeal is taken.*fn5 Persky was sentenced to two years' imprisonment,*fn6 and two years' probation. He has already served his prison term.
Persky's primary contention on appeal is that § 10(b) and Rule 10b-5 are unconstitutionally vague. The focus of this claim has been that a defendant is given insufficient warning of the sorts of fraud contemplated by the statute. The law on vagueness has been well enunciated over the years. Prosecution under a criminal statute deprives a ...