Appeal from judgments of conviction for securities law violations entered in the United States District Court for the Southern District of New York against appellant Anderson following a jury trial before Whitman Knapp, District Judge, and appellants Sloan and Eucker following pleas of guilty before Whitman Knapp, District Judge. Affirmed as to appellants Anderson and Sloan and remanded as to appellant Eucker.
Moore, Feinberg and Van Graafeiland, Circuit Judges. Moore, Circuit Judge (concurring and dissenting).
VAN GRAAFEILAND, Circuit Judge:
In June 1970, Orvis Brothers, a Wall Street brokerage firm, closed its doors, leaving debts in excess of four million dollars. On September 10, 1974, appellants, officers of that company, were indicted in the Southern District of New York, charged in nine counts with conspiracy and substantive violations of the federal securities law. Only Anderson went to trial,*fn1 and he was convicted on the conspiracy count alone. Seven counts were dismissed by the trial judge, and the jury acquitted Anderson on the eighth. Sloan pleaded guilty to the conspiracy count, and Eucker pleaded guilty to a substantive count charging illegal hypothecation of customers' securities, reserving his right to appeal from the District Court's refusal to dismiss this count for failure to allege a crime.
Anderson appeals his conviction, asserting a number of substantive and procedural errors. Sloan appeals from District Judge Knapp's denial of his motion to withdraw his guilty plea, which motion was predicated upon the prosecutor's alleged failure to "go to bat" for Sloan with the sentencing judge as had been promised. Eucker appeals from the judgment based on his plea of guilty, in accordance with his reservation of the right to do so.
The Background for the Charges
Appellants were partners in Orvis Brothers, which had been in the securities business for many years. Sloan was the managing partner; Anderson was chairman of the Executive Committee, and Eucker, a member of the Executive Committee, was in charge of operations. In early 1969, Orvis was experiencing difficulty in maintaining the 20:1 capital ratio required by the rules of the New York Stock Exchange,*fn2 and its Executive Committee cast about for means of increasing its apparent capital. According to the Government's proof, some members cast too widely.*fn3
The Orvis account most susceptible to manipulation was that of the Clinton Oil Company of Wichita, Kansas, whose president, Realto Clinton, was a close friend of appellant Sloan. Orvis was a broker for the Clinton Company in the sale of oil and gas exploration investment units, for which it received a six percent commission payable at the time the fourth and final installment of the purchase price of each unit was paid. Early in 1969, Orvis, at the suggestion of Sloan and with the knowledge of Anderson, began treating projected commissions as current capital. A fictitious customer account was created and $797,100 in projected but unearned commissions was entered in this account. To balance this unsecured debit, some stock of Realto Clinton in the possession of Orvis was wrongfully credited to the same account. Anderson learned of this transfer in September 1969.
A second fictitious addition to capital was created out of the sale of Clinton units by failing to record the forty percent sales commission payable to Orvis' employees. The decision not to deduct these commissions was known to Anderson and the other members of the Executive Committee.
In 1969, Clinton Oil Company sent Sloan 4,344 shares of Clinton stock with directions that it be sold to partners of Orvis, and Realto Clinton sent 5,000 shares for sale to a third party. These shares were posted in the Orvis' books as if they were a gift rather than a consignment, and Anderson learned of this posting in August 1969.
In the same month, it was discovered that the firm's own trading account had sustained an unexpected loss of $500,000, and Sloan called his friend Clinton to seek additional capital. Clinton agreed to, and did, forward $500,000. However, this was in payment of commissions for sale of Clinton oil and gas units and not as a loan to Sloan. Despite this fact, the money was placed in the firm's trading account, and no part of it was used to offset the $797,100 carried on the books as earned commissions. Although Anderson played no part in this transaction, he was aware of it.
In 1969, Orvis owned eighty thousand shares of Clinton Oil Company stock which could be evaluated at only seventy percent of market value for capital ratio purposes under the rules of the New York Stock Exchange. In August, Sloan told his partners that this stock had been sold to the Clinton Oil Pension Fund and recorded the sale in the partnership books at one hundred percent of value. Although Clinton's general counsel informed Orvis by telegram that this "sale" had not occurred, and no payment was ever made, it remained on the books of Orvis as an ostensibly valid transaction.
At the time that this purported sale was taking place, general counsel for Clinton was in New York, attempting to ascertain the financial situation at Orvis. Anderson advised him that "there is no problem with the company" and that the capital ratio was "between 12 and 15 at that time, that the auditing firm was there at the moment and everything was all right." Clinton's counsel was not informed of the "sale" of Clinton stock and did not learn about it until his return to Kansas, at which time he promptly disaffirmed it. On a second visit made in December 1969, Clinton's counsel was again assured by Anderson and Sloan that there was no cause for concern over the financial condition of Orvis.
Machinations at Orvis were not confined to the Clinton account. In the fall of 1968, Anderson attempted to negotiate the sale of nineteen thousand shares of unregistered International Controls Company stock from customers of Orvis to a mutual fund called the Fund of Letters. After Orvis had purchased the stock from its customers for almost $500,000, the Fund of Letters refused to accept it because International Controls Company would not register the stock. Despite this refusal, the cost of the stock was not charged against capital but was carried for fourteen months on the books of Orvis as a customer cash account with a settlement date of five business days.
Also, during 1968 and 1969, Orvis began to use fully paid for customers' securities as collateral for partnership bank loans. When Haskins & Sells, the company auditor, was securing information required for Orvis' October 1969 Form X-17A-5 report of financial condition to the New York Stock Exchange and the Securities and Exchange Commission (SEC), approximately six million dollars in customers' securities were so hypothecated. Haskins & Sells was advised, however, that this was being corrected, and so stated in its report. The advice and the report were both erroneous. By May 1970, the hypothecation of fully paid for customers' securities exceeded six and one-half million dollars. The ...