Appeal by the United States from an order entered in a criminal action prior to trial in the Southern District of New York, Charles S. Haight, Jr., District Judge, [Current] CCH Fed. Sec. L. Rep. P96,074 (S.D.N.Y., June 2, 1977), which dismissed and struck substantial portions of a securities fraud indictment because of alleged misconduct by SEC employees in attempting to settle a civil action brought by the SEC against defendants who later were named as defendants in the criminal action. Affirmed in part; reversed and remanded in part, with directions to reinstate the unexpurgated indictment.
Before Feinberg, Mansfield and Timbers, Circuit Judges.
On this appeal by the United States*fn1 from an order entered in a Criminal action prior to trial in the Southern District of New York, Charles S. Haight, Jr., District Judge, (1977-1978 Transfer Binder) CCH Fed.Sec.L.Rep. P 96,074 (S.D.N.Y., June 2, 1977), which dismissed and struck substantial portions of a securities fraud indictment because of alleged misconduct by SEC employees in attempting to settle a Civil action brought by the SEC against defendants who later were named as defendants in the criminal action, the chief question is whether the district court abused its discretion.*fn2 We hold that it did.
We affirm in part, and reverse and remand in part, with directions to reinstate the unexpurgated indictment and to proceed with the case in the district court according to law.
The indictment which is the subject of the instant appeal was returned November 8, 1976. It named as defendants, all of whom are appellants herein, Douglas P. Fields, Frederick M. Friedman, Peter S. Davis, Alan E. Sandberg, and Eric Berge. The specific offenses charged against the respective defendants are summarized in the margin.*fn3
To the extent necessary to an understanding of our rulings on the legal issues presented, we summarize here the essential facts and fraudulent transactions charged in the indictment.*fn4 They occurred during the two year period from March 1971 to March 1973. They involved two publicly held corporations, TDA Industries, Inc. (TDA) and its subsidiary, Westcalind Corp. (Westcalind). Defendants were officers and directors of the two corporations, except that Davis, an attorney, was general counsel to TDA.
In March 1971, while Fields and Friedman were officers and directors of TDA, they caused Westcalind to pay a $50,000 "finder's fee" to a third party for services never performed. The "finder" retained $15,000 and kicked back the $35,000 balance to Fields and Friedman.
In April and May 1971, Friedman and Davis refused requests by a group of TDA shareholders to "free-up" their lettered stock for public sale. These defendants falsely represented to the stockholders that the stock in question could be transferred only by a private placement. They then arranged for a private placement of the stock to themselves at a $2 per share discount from the market price. As soon as they acquired the stock, and by a prearrangement not disclosed to the selling stockholders, they did "free-up" the stock and sold it on the open market. Seventy percent of the gross profit was kicked back to these defendants, resulting in a profit to them in excess of $300,000. This transaction defrauded the selling TDA stockholders of $435,000.
(C) Manipulation of Price of TDA Stock
In November 1971, Fields paid certain co-conspirators to buy TDA stock on the open market immediately prior to a public secondary offering of the stock. This was intended artificially to inflate the offering price.
(D) Eagle Roofing Kickback
In February and March 1973, Friedman and Sandberg, each of whom was an officer and director of TDA, caused TDA to pay another sham "finder's fee", this time in amount of $100,000, to another third party for services never performed. The "finder" retained $18,000 and kicked back the $82,000 balance to Friedman and Sandberg.
(E) Other Offenses Charged
In addition to the four transactions referred to above, the indictment charges the following other offenses:
Fields, Friedman and Davis prepared and filed an offering prospectus for TDA stock which failed to disclose the Westcalind kickback, the ERD kickbacks and the TDA price manipulation. They also solicited proxies from TDA stockholders without disclosing these matters in the proxy statements.
Fields, Friedman, Davis and Berge (the latter an officer and director of Westcalind) solicited proxies from Westcalind shareholders without disclosure of the Westcalind kickback, the ERD kickbacks and the TDA price manipulation.
Friedman and Sandberg violated the wire fraud and mail fraud statutes in connection with the Eagle Roofing kickback.
Berge gave false testimony under oath before the SEC about the Westcalind kickback.
Reiterating what we have said above, note 4 Supra, the foregoing summary is of offenses Charged in the indictment, not a summary of crimes proven. Nevertheless, for the purpose of evaluating the action of the district court in dismissing and striking substantial portions of the indictment and to understand our rulings on the legal issues presented, suffice it to say that the indictment charges each of the defendants with very serious offenses which, if proven, constituted a clear fraud on public investors.
We focus next on the sequence of events during 1974 and 1975 chiefly, certain negotiations between counsel for defendants and employees of the SEC's New York regional office upon which the district court based its order dismissing and striking substantial portions of the indictment.*fn5
Backing up for a moment, during 1974 and early 1975, the office of the District Attorney for New York County conducted an investigation of the Westcalind, ERD and Eagle Roofing kickbacks referred to above. The targets of this investigation were Fields, Friedman and Davis (represented by attorneys Milton S. Gould, Esq. ...