misled the grand jury into thinking that the fee limitation applied to bond work in order to establish the "erroneous fee arrangement" which Rudi argues is the predicate for all the charges in the indictment.
The argument misses the thrust of the indictment. Rudi's alleged loss of the "buck-a-bond" fee is background, and may supply motivation. The crime is the secret kickback from First Fidelity and the false denial of its receipt.
Thus, the claimed error or omission in the government's explanation of that fee arrangement did not "substantially influence the grand jury's decision to indict" or raise "'grave doubt' that the decision to indict was free from the substantial influence" of the inaccurate presentation. Bank of Nova Scotia v. United States, 487 U.S. 250, 256, 108 S. Ct. 2369, 2374, 101 L. Ed. 2d 228 (1988).
Rudi's motion for inspection of the grand jury minutes and dismissal of the indictment is denied.
II. SECTION 10(b)
Rudi argues that count one of the indictment should be dismissed because (1) his alleged failure to disclose the kickback is not prohibited by the federal securities laws; (2) the sale of bonds from CCMUA to First Fidelity is not a sale within the meaning of section 10(b); (3) no use of interstate commerce, the mails or a national securities exchange is alleged; and (4) the additional $ 22,000 payment was not material to any investment decision and thus cannot support section 10(b) liability.
A. Scope of Section 10(b)
Section 10(b) of the '34 Act forbids any person to use, "in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe . . . ." 15 U.S.C. § 78j(b). Rule 10b-5 prohibits any fraudulent scheme, false statement or misleading omission, or any act or practice which "operates or would operate as a fraud or deceit upon any person." 17 C.F.R. § 240.10b-5.
Section 10(b) and Rule 10b-5 "'prohibit all fraudulent schemes in connection with the purchase or sale of securities, whether the artifices employed involve a garden type variety of fraud, or present a unique form of deception.'" Superintendent of Insurance v. Bankers Life and Casualty, 404 U.S. 6, 11 n.7, 92 S. Ct. 165, 168 n.7, 30 L. Ed. 2d 128 (1971) (quoting A.T. Brod & Co. v. Perlow, 375 F.2d 393 (2nd Cir. 1967)).
Rudi argues that his failure to disclose the compensation paid to him by First Fidelity was not done "in connection with" the 1990 Bonds and thus is not covered by section 10(b) and Rule 10b-5. He relies on the Second Circuit's statement in Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 943 (2nd Cir. 1984), that to establish the required nexus between the deception and the sale, "it is not sufficient to allege that a defendant has committed a proscribed act in a transaction of which the pledge of a security is a part."
In Chemical Bank, banks loaned money to a borrower in reliance on statements by the borrower's accountant regarding the borrower's financial strength. The loan was collateralized by a pledge of stock owned by the borrower. The court upheld the dismissal of the banks' claim under section 10(b) because the banks did not allege any misrepresentation regarding the value of the stock, with respect to which "the banks got exactly what they expected." Id.
The Chemical Bank court dismissed the section 10(b) claim because the alleged misrepresentation did not go to the value of the stock or the nature of the consideration: "The purpose of § 10(b) and Rule 10b-5 is to protect persons who are deceived in securities transactions--to make sure that buyers of securities get what they think they are getting and that sellers of securities are not tricked into parting with something for a price known to the buyer to be inadequate or for a consideration known to the buyer not to be what it purports to be." Id.
Unlike Chemical Bank, Rudi's alleged fraud did involve the consideration paid for the 1990 Bonds. Had an amount allocated for Rudi's payment not been included in the underwriting spread, the spread would have been smaller and the CCMUA would have received more from the bond offering. Rudi's actions thus tricked the CCMUA into parting with something for an inadequate price and a consideration which the buyer knew was not what it purported to be. See also S.E.C. v. Drysdale, 785 F.2d 38, 42 (2nd Cir. 1986) (Accountant's misrepresentation actionable under section 10(b) because it "pertained to a significant part of the consideration offered by" co-defendant.); Manufacturers Hanover Trust Co. v. Smith Barney, Harris Upham & Co., 770 F. Supp. 176, 180 (S.D.N.Y. 1991) (Relevant inquiry is "whether defendants' alleged fraud deprived plaintiff of information that might have been useful to it in deciding whether to purchase or sell securities which it actually did purchase or sell.").
Rudi also relies on two cases in which the alleged misrepresentations did not involve the securities themselves. The first is Trustees v. Amivest Corp., 733 F. Supp. 1180 (N.D. Ill. 1990), in which pension funds alleged that their former investment manager had concealed commissions and fees received from mutual funds. The court dismissed plaintiffs' claim under section 10(b) because the alleged fraud induced plaintiffs to hire the defendant to buy and sell securities on their behalf but was not related to a decision to invest in any particular security. Id. at 1185. The second is Manufacturers Hanover Trust Co., supra, in which a stock transfer agent sued its employee under section 10(b) for embezzling stock certificates. The court dismissed the claim, holding that the employee's "generalized misrepresentations" concerning his activities "would have implicated only [his employer's] decision to rely upon [him] as an employee" and not any decision to purchase or sell a security. Manufacturers Hanover, 770 F. Supp. at 182.
Here, by contrast, the indictment alleges that Rudi's fraud deceived the CCMUA and caused it to sell the 1990 Bonds for less than they would have brought but for the fraud: it occurred in connection with the sale of the bonds and is covered by section 10(b) of the '34 Act and Rule 10b-5.
B. Definition of "Sale"
Rudi contends that section 10(b) and Rule 10b-5 do not cover a sale from an issuer to its underwriter.
He argues that excluding such face-to-face transactions between parties who have a preexisting relationship best carries out Congress's sole intention in enacting the '34 Act--protecting the investing public.
The statutory language does not support that contention. The '34 Act defines a "sale" broadly, including "any contract to sell or otherwise dispose of," 15 U.S.C. § 78c(a)(14), and defines a "security" to include a bond. Id. § 78c(a)(10). By its terms, then, the '34 Act excludes neither sales from the issuer to the underwriter nor pre-distribution sales.
The congressional purpose in enacting the '34 Act does not require exclusion of face-to-face dealings between an issuer and its underwriter. Protection of investors was important, but it was not the sole purpose of Congress, which also intended to "achieve a high standard of business ethics . . . in every facet of the securities industry." United States v. Naftalin, 441 U.S. 768, 775, 99 S. Ct. 2077, 2082, 60 L. Ed. 2d 624 (1979); see also id., 441 U.S. at 776, 99 S. Ct. at 1083 ("Respondent's assertion that Congress' concern was limited to investors is thus manifestly inconsistent with the legislative history."). While Congress wanted to protect the integrity of the securities markets, section 10(b) is intended "'to prevent inequitable and unfair practices and to insure fairness in securities transactions generally, whether conducted face-to-face, over the counter, or on exchanges . . . .'" Shapiro v. Merrill Lynch, Pierce, Fenner & Smith Inc., 353 F. Supp. 264, 276 (S.D.N.Y. 1972) (citation omitted); see also Superintendent of Insurance v. Bankers Life and Casualty Co., 404 U.S. 6, 10, 92 S. Ct. 165, 168, 30 L. Ed. 2d 128 (1971) ("And the fact that the transaction is not conducted through a securities exchange or an organized over-the-counter market is irrelevant to the coverage of § 10(b).").
Rudi argues that because his alleged fraud occurred before distribution of the bonds to the public, section 17(a)
of the Securities Act of 1933 (the "'33 Act") covers his conduct. He contends that the '33 and '34 Acts do not overlap, and that the express '33 Act remedy precludes one under section 10(b) of the '34 Act.
The Supreme Court, stating that the Acts overlap, has rejected similar arguments. See Herman & MacLean v. Huddleston, 459 U.S. 375, 382-83, 103 S. Ct. 683, 687-88, 74 L. Ed. 2d 548 (1983) ("We see no reason to carve out an exception to Section 10(b) for fraud occurring in a registration statement just because the same conduct may also be actionable under Section 11 . . . It is hardly a novel proposition that the Securities Exchange Act and the Securities Act 'prohibit some of the same conduct.'") (citation omitted); Naftalin, 441 U.S. 768, 778, 99 S. Ct. 2077, 2084, 60 L. Ed. 2d 624 (1979) ("Respondent is undoubtedly correct that the two Acts prohibit some of the same conduct. But 'the fact that there may well be some overlap is neither unusual nor unfortunate.'") (citations omitted).
Furthermore, section 10(b) of the '34 Act and section 17(a) of the '33 Act are not coextensive: section 17(a) protects only purchasers, while section 10(b) protects both purchasers and sellers. Contrast 15 U.S.C. § 77q(a) ("It shall be unlawful for any person in the offer or sale of any securities . . . .") with id. § 78j(b) (It shall be unlawful for any person to "use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance . . . .").
The CCMUA's sale of the 1990 Bonds to First Fidelity was a sale within the meaning of the '34 Act.
C. Use of Interstate Instrumentalities
Rudi argues that the indictment fails to allege that he used any "means or instrumentality of interstate commerce or the mails, or of any facility of any national securities exchange" in connection with the alleged fraud. That argument is meritless.
An indictment "'need do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime.'" United States v. Stavroulakis, 952 F.2d 686, 693 (2nd Cir.) (quoting United States v. Tramunti, 513 F.2d 1087, 1113 (2nd Cir.), cert. denied, 423 U.S. 832, 96 S. Ct. 54, 46 L. Ed. 2d 50, 96 S. Ct. 55 (1975)), cert. denied, U.S. , 112 S. Ct. 1982 (1992).
The indictment alleges:
From in or about December 1989, through in or about May 1990, in the Southern District of New York and elsewhere, NICHOLAS A. RUDI, the defendant, unlawfully, wilfully and knowingly, by use of means and instrumentalities of interstate commerce and the United States mails, directly and indirectly did use and employ manipulative and deceptive devices and contrivances in connection with the purchase and sale of securities, namely, the CCMUA's sale and the underwriters' purchase of the 1990 CCMUA Bonds . . . .