United States v. Haddy ( 1998 )

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit
1-21-1998
United States v. Haddy
Precedential or Non-Precedential:
Docket 96-5589
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Filed January 21, 1998
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 96-5589 and 96-5622
UNITED STATES OF AMERICA
v.
BRAD HADDY, a/k/a Bradley J. Haddy
Brad Haddy,
Appellant in No. 96-5589
(D.C. Crim. No. 93-cr-00558-3)
UNITED STATES OF AMERICA
v.
ERIC WYNN,
Appellant in No. 96-5622
(D.C. Crim. No. 93-cr-00558-1)
Appeal from the United States District Court
for the District of New Jersey
Argued October 20, 1997
Before: MANSMANN and GREENBERG, Circuit Judges,
and ALARCON, Circuit Judge.*
(Opinion filed January 21, 1998)
_________________________________________________________________
*Honorable Arthur L. Alarcon of the United States Court of Appeals for
the Ninth Circuit, sitting by designation.
David M. Rosenfield (ARGUED)
Special Assistant U.S. Attorney
Kevin McNulty
Assistant U.S. Attorney
Amy S. Winkelman (ARGUED)
Assistant U.S. Attorney
Faith S. Hochberg
U.S. Attorney
Office of United States Attorney
970 Broad Street
Room 502
Newark, NJ 07102
COUNSEL FOR APPELLEE
Robert A. Brunig, Esquire (ARGUED)
Moss & Barnett
90 South 7th Street
4700 Norwest Center
Minneapolis, MN 55402
COUNSEL FOR APPELLANT IN
NO. 96-5589
Alan Dexter Bowman, Esquire
(ARGUED)
Alan Dexter Bowman, PA.
Raymond A. Brown, Esquire
Brown & Brown, P.C.
Gateway I
Suite 105
Newark, NJ 07102
COUNSEL FOR APPELLANT IN
NO. 96-5622
2
OPINION OF THE COURT
MANSMANN, Circuit Judge.
Eric Wynn and Brad Haddy appeal from judgments in
criminal cases entered by the District of New Jersey after a
jury found them guilty of conspiracy to commit securities
fraud and of substantive crimes relating to manipulation of
the stock market. Wynn was also convicted of wire fraud.
After sentencing, Wynn and Haddy appealed, raising a
number of assertions of error. Two questions -- whether
the indictment contained duplicitous counts and whether
investor reliance is a requisite of proof to convict under
section 10(b) of the Securities Act of 1934 -- require
discussion. Several other issues, involving constructive
amendment of the indictment, statute of limitations,
severance, willfulness as an element of the securities law
violation, character evidence of a witness, prosecutorial
misconduct, admission of evidence, jury instructions,
competency and sentencing, are without merit and do not
warrant further discussion.1
_________________________________________________________________
1. In his brief, Haddy set forth these additional issues as:
1. The government failed to prove that he acted willfully, an
essential element of the crimes of securities fraud and conspiracy
to
commit securities fraud;
2. His right to a fair trial was prejudiced by the district court's
denial of his motion for a separate trial;
3. Prosecutorial misconduct, consisting of the unauthorized use of
a grand jury subpoena, offering testimony known to be untrue, lack
of a "good faith basis" for asking certain questions of a witness,
making baseless arguments that certain assumptions were
"incorrect and incomplete" or "misleading," offering a misleading
summary chart, and interfering with his attempts to interview
witnesses, prejudiced him and required a mistrial;
4. The district court erred in excluding testimony by opinion
witnesses who would impeach the credibility of a principal witness
for the prosecution and thus denied him his Sixth Amendment right
to compulsory process;
3
We will affirm the judgments entered. We concludefirst,
that the indictment does not suffer from the vice of
duplicity. The relevant statutory and regulatory language
allow charging an overall scheme to defraud in a single
count of an indictment. Second, criminal liability under
section 10(b) of the Securities Exchange Act does not
require deception of and reliance by an identifiable buyer or
_________________________________________________________________
5. The district court erred by admitting financial records obtained
pursuant to grand jury subpoena in direct contravention of the
Right to Financial Privacy Act;
6. The district court erred by admitting into evidence recordings
of
intercepted wire communications and evidence derived from these
communications;
7. The government failed to apply for or obtain authorization or
approval to use or disclose the contents of the intercepted wire
communications before the grand jury;
8. The district court erred in refusing to instruct the jury
concerning
the time at which a sale of a security is deemed complete, venue,
legal responsibility, and the need for showing deception and
investor
reliance; and erred in charging the jury that it might return a
verdict of guilty as to Count I (or Counts II, III and IV) without
finding unanimously that one of the overt acts charged in the
indictment occurred during the limitation period; and,
9. The district court erred in sentencing him by not reducing his
sentence to take into consideration that conspiracy is a "lesser
included offense" of the continuing criminal enterprise and by
incorrectly using the "gross gain secured by the conspiracy as a
whole, [by] the co-conspirators and those persons and accounts
which they controlled" to compute the amount of loss.
In Wynn's brief, these issues are described as:
1. The district court erred in permitting the government to
constructively amend the indictment by altering the theory of the
government presented to the grand jury that Wynn's conduct was
per se unlawful, to an urging before the petit jury that he engaged
in lawful activity with a corrupt and manipulative intent; and,
2. The district court erred in determining that the government met
its burden of proving Wynn's mental competency by concluding that
the panic disorder suffered by him did not render him unable to
assist in his defense.
4
seller of securities. The statute's objective of maintaining
the integrity of the stock market forbids deceitful practices
without mention of whether investors relied upon the
manipulative devices in connection with a securities
transaction.
Our jurisdiction is granted by 28 U.S.C. S 1291.
I.
We review the facts in a light favorable to the
government, the verdict winner.
A. The Scheme
In approximately 1987, Eric Wynn and Barry Davis
formed a company called Princeton Financial Consultants
to raise capital for companies and to promote stocks.
Through this entity, Wynn and Davis masterminded and
directed a number of securities trading scams by designing
a plan to artificially raise the prices of particular securities,
known as penny stocks. Penny stocks, generally valued at
under $5.00 a share, are traded on the over-the-counter
market through the National Association of Securities
Dealers Automated Quotation system (NASDAQ).
Princeton employees called on brokers and traders
throughout the country touting different stocks. The
participation of collaborating stockbrokers was essential to
the effectiveness of the scheme. One of the brokers who
followed the Princeton/Wynn recommendations was Brad
Haddy, who sold securities through the Minneapolis
brokerage firm of L'Argent Securities.
The manipulation involved four basic steps: (1) control
the quantity of stock available for trading; (2) generate
demand for the stock; (3) raise the price of the stock; and
(4) sell out at a large profit.
Control of the supply of securities was gained by "boxing"
the initial public offerings ("IPOs") of securities in particular
companies. Boxing refers to an allocation of almost all of
the available stock to accounts controlled by "players" --
those who had agreed to trade the stock per the direction
5
of Wynn. One directive required that when the after-trading
market commenced -- the public trading that occurs after
the close of the IPO -- the players could not sell the stock
until Wynn gave the go-ahead. With this restriction, Wynn
was able to control the supply of stock which, in turn,
enabled him to regulate the price of the stock.
Step two, generation of demand, was primarily
accomplished through bribery of brokers. Colluding brokers
sold securities to their customers at prices and from
brokerage firms designated by Wynn. The brokers were
then instructed to hold the particular stock off the market
for a period of time (usually six months). In exchange, the
brokers received various inducements, including cash,
stock below the market price, guaranteed profits and
promises of participation in future deals. Another way
Wynn created demand for a particular stock was by secretly
advising brokers of impending mergers of certain
companies before public announcement of the event.
The next step, the price increase, was realized through
pre-arranged and restricted trading in which selected
brokers bought stock at steadily increasing prices -- again,
as directed by Wynn.
Once the price of the manipulated securities rose to
certain levels, the inflated value was maintained through
deals with "market maker" brokerage firms. These firms
represent themselves to the investing public as being
willing to sell and trade risky securities. Wynn induced
certain market makers to set their buy (bid) and sell (ask)
for some securities at prices in accordance with his
instructions in exchange for guaranteed trading profits. By
manufacturing a demand for these securities, the
participants insured their personal profits occasioned by
transactions in these securities.
The manipulations detailed in the indictment concern the
use of the services of Sheffield Securities, a brokerage firm
in Fort Lauderdale, Florida. Sheffield was run by Ronald
Martini, who, despite being barred from participation in the
securities business, was a secret owner of Sheffield. Wynn
entered into an agreement with the principals of Sheffield
which allowed him to dominate the initial public offerings of
6
stocks in certain shell companies underwritten by Sheffield.
Wynn would also be permitted to direct the after market
trading in these particular securities.
Three security offerings in particular epitomize the scope
of the illegal activity and are the subjects of counts 2, 3 and
4 of the indictment.
B. Count 2 - Vista Capital Corp.
The first stock that Wynn and Davis manipulated
through Sheffield was Vista Capital Corporation, a company
engaged in an IPO. In filings with the Securities and
Exchange Commission, Vista was represented as a blind
pool, a company with no actual or anticipated business
operations. Vista's status was, however, misrepresented.
During the period of the IPO, Wynn arranged for a merger
between Vista and a film company called Bima
Entertainment.
Wynn's plan was to raise money for Vista through an
offering of its stock, as a result of which Vista would
become a public company. Wynn would then trade Vista
securities on the OTC market in a manner that would
insure that the price of Vista would rise, enabling the
players to make a substantial amount of money. As
planned, the price of Vista rose $.11 per share within the
first month of aftermarket trading.
In line with the four-step design, Wynn controlled the
supply of Vista stock by boxing the Vista IPO -- allocating
the securities issued to accounts set up at Sheffield.
Although the Vista prospectus stated that Sheffield, the
underwriter, would make the final decisions concerning
stock distribution during the IPO, it was actually Wynn who
directed the specifics of the offering. When investors outside
Wynn's affiliations requested Vista stock, they were denied
the opportunity to participate in the trading. Wynn was
able to regulate the trading in the Vista IPO stock partly
because Sheffield maintained control over the actual Vista
stock certificates. If a "non-playing" customer tried to have
Vista stock transferred and sold, Sheffield's clearing agent
would so advise Sheffield, who passed on the information to
Wynn. The only stock certificate transfers that Sheffield
7
authorized the clearing agent to effectuate were those
allocated to accounts associated with Wynn.
Wynn generated the demand for the Vista stock by
offering inducements or bribes to brokers to have their
customers buy the stock. One broker, John Marsala,
testified that Wynn asked him to have his customers buy
Vista stock and hold it off the market. In return, Marsala
was offered 100,000 Vista warrants2 for himself. Although
he opted out of participation, he observed another broker
putting a stock certificate into his briefcase. Wynn advised
Marsala that what he witnessed was a broker receiving the
same warrants that had been promised to Marsala if he had
participated in the Vista deal.
Bribes were not the only means by which Wynn induced
brokers to buy Vista stock. He also encouraged
participation by offering non-public inside information. In
the case of Vista, brokers, including Haddy, were told that
the company would be merging prior to the close of the IPO.
Wynn was able to represent the Vista/Bima merger as a
certainty because he had arranged the merger through his
consulting company, Skyline Capital Corp.
Although the Vista/Bima merger was arranged before the
close of the Vista IPO, the Vista prospectus was not timely
amended to disclose the information. An expert for the SEC
testified that if a blind pool company finds a probable
merger candidate before the close of its IPO, the company
must stop distributing its securities and file a post-effective
amendment with the SEC. Notice to the agency is required
because a potential merger would amount to a fundamental
change affecting decisions of investors.
Wynn, Davis and Haddy and other players eventually
sold their Vista stock at a large profit.
C. Count III - Castleton Investors Corp.
The second stock manipulated through Wynn's control of
Sheffield was Castleton Investors Corp., another shell
_________________________________________________________________
2. A warrant is a right to acquire stock at a defined future time and at
a specified price.
8
company. Castleton became a public company through an
IPO underwritten by Sheffield in 1986. In late June, 1988,
Wynn was advised that a security guard anti-terrorism
business owned by G. Gordon Liddy3 wanted to merge with
Castleton. Sheffield expressed its willingness to sell Liddy a
majority of the free-trading Castleton stock currently owned
by Sheffield customers.
Wynn took over the helm of the Liddy deal. His
consulting company, Skyline, entered into an agreement
with Liddy for a 30-day exclusive right to find a merger
candidate for the Liddy company.
Once Wynn lined up the expected merger of Castleton
and Liddy, he and his coconspirators began manipulating
the price of stock using the familiar four step process.
About 80% of the free-trading stock was acquired by the
"players" from Sheffield customers who were not told of the
merger.
Haddy was among the brokers promised Castleton stock
in exchange for agreeing to have his customers buy a large
block of the stock. Two days after a tape-recorded
conversation in which Wynn assured Haddy that he would
receive stock, Haddy and his L'Argent customers bought
500,000 shares of Castleton common stock.
Demand for Castleton stock was then created by
publicizing the intended merger between the company and
Liddy. The announcement resulted in additional buying.
Sheffield, acting in accordance with Wynn's instructions as
to bid and ask prices, then traded the stock in conformity
with the previously arranged deals. Profits were thus
guaranteed.
D. Count IV - Bellatrix Corp.
Count IV charged a manipulation scheme involving
securities from the Bellatrix Corporation, also a blind pool
company engaged in an IPO underwritten by Sheffield. The
pattern in the Bellatrix trading mirrored that of the Vista
_________________________________________________________________
3. There is no suggestion that Liddy was in any way involved in
wrongdoing.
9
stock manipulation -- "box" the IPO, manufacture demand,
raise the price through controlled trading, and sell out at a
profit. Similarly, the fact of Bellatrix' impending merger
with Gamenet, a computer company, was not disclosed to
the SEC.
The Bellatrix manipulation was interrupted on the second
day of after market trading when the FBI executed search
warrants at Wynn's home and, on the next day, at the
offices of Sheffield Securities.
E. The Prosecution
On November 15, 1993, a federal grand jury in the
District of New Jersey returned an indictment charging Eric
Wynn, Brad Haddy, Anthony Nandino, Irwin Frankel and
Perry Constantinou with conspiracy to commit securities
fraud contrary to 15 U.S.C. S S 77q(a) and 77x (Securities
Act of 1933) and 15 U.S.C. S S 78j(b) (section 10(b)) and 78ff
(Securities Exchange Act of 1934) and 17 C.F.R. S 240.10b-
5 (Rule 10b-5) in violation of 18 U.S.C. S 371 (Count I); and,
with execution of schemes to defraud in connection with
transactions in three different securities (Counts II through
IV). Wynn was charged in nine additional wire fraud
counts.
After a six-month trial, the jury returned guilty verdicts
against Wynn and Haddy on all charges.4 Post-trial motions
were denied.5 Haddy was sentenced to 27 months'
_________________________________________________________________
4. The jury found Nandino not guilty on Count IV but could not reach a
verdict on the remaining counts. Constantinou was acquitted of all
charges against him. Frankel pled guilty prior to trial.
Other coconspirators, Barry Davis, Ronald Martini, John LaSala, Allen
Weinstein, Ronald Spencer, Douglas Selander, Frank Grillo, and John
Marsala, entered cooperating plea agreements, prior to trial, to
informations stemming from the same investigation.
5. Prior to sentencing, Wynn requested a competency hearing nunc pro
tunc, alleging that he had suffered from a mental disability which had
prevented him from fully participating in his trial. At the government's
request, the district court appointed a psychiatrist to examine Wynn.
The district court then conducted a competency hearing with testimony
from the court-appointed psychiatrist and from the psychiatrist who had
10
imprisonment and ordered to pay a special assessment of
$200. Wynn was sentenced to 52 months' imprisonment,
followed by three years of supervised release. A $50,000
fine was also imposed on Wynn.
II.
We first address whether Counts II, III and IV of the
indictment, charging manipulation of the stocks of each of
the three public shell companies, were duplicitous. This is
a legal question requiring plenary review. United States v.
Bryan, 868 F.2d 1032, 1037 (9th Cir. 1989).
The indictment charged Wynn and Haddy with engaging
in a fraudulent scheme to design to manipulate the price of
Vista (Count II), Castleton (Count III) and Bellatrix (Count
IV) securities.6 Wynn and Haddy contend that each
individual transaction relating to the individual securities
should have been charged in a separate count. Charging an
_________________________________________________________________
treated Wynn during trial. After the hearing and argument, the district
court denied Wynn's motion to be declared incompetent nunc pro tunc.
The court also denied accompanying motions for a new trial based on
Wynn's alleged incompetence and additional post-trial motions brought
by both defendants.
6. The relevant portion of Count II reads:
From at least as early as in or about January 1988, to at least as
late as in or about December, 1988, in the District of New Jersey
and elsewhere, the defendants Eric Wynn . . . Brad Haddy . . . and
others . . . knowingly and willfully employed a scheme to defraud
in
connection with the purchase and sale of Vista Securities, through
the use of means and instrumentalities of interstate commerce and
of the mails, in that they took actions designed to manipulate the
price of Vista Securities, all as set forth in Count I of this
indictment.
In violation of Title 15, United States Code, Sections 78j(b) and
78ff, Title 18, United States Code, Section 2, and Title 17, Code
of
Federal Regulations, Section 240.10b-5.
Counts III and IV were identical except in the identification of the
particular security and dates involved. The stock manipulation related to
Castleton (Count III) and Bellatrix (Count IV) occurred between June and
December of 1988.
11
overall scheme, they argue, renders the indictment faulty
because of its duplicity.
Duplicity is the improper joining of distinct and separate
offenses in a single count. United States v. Starks, 515 F.2d
112, 116 (3d Cir. 1975). Duplicitous counts may conceal
the specific charges, prevent the jury from deciding guilt or
innocence with respect to a particular offense, exploit the
risk of prejudicial, evidentiary rulings, id. at 116-17, or
endanger fair sentencing. United States v. Shorter, 809 F.2d
54, 58 n.1 (D.C. Cir. 1987).
We must ascertain the allowable unit of prosection to
decide if the counts of the indictment properly charge a
violation of the pertinent statute. United States v. Amick,
439 F.2d 351, 359 (7th Cir. 1971), see also United States v.
Pollen, 978 F.2d 78, 85 (3d Cir. 1992) (multiplicity7 case
holding that indictment must follow statute creating
offense). Congressional intent dictates the proper unit of
prosecution. United States v. Cooper, 966 F.2d 936, 942
(5th Cir. 1992).
The starting point in determining the intent of Congress
is, of course, the language of the statute. 15 U.S.C. S 78j(b),
commonly known as section 10(b), by its title, proscribes
employment of manipulative deceptive devices in
connection with securities transactions. The section reads:
S 78j. Manipulative and deceptive devices.
It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality
of interstate commerce or of the mails, or of any facility
of any national securities exchange --
***
(b) to use or employ, in any connection with the
purchase or sale of any security registered on the
national securities exchange or any security not so
_________________________________________________________________
7. Indictments charging a single offense in different counts are
multiplicitous. Multiplicity may result in multiple sentences for a single
offense in violation of double jeopardy, or otherwise prejudice the
defendant. United States v. Cooper, 966 F.2d 936, 942 n.9 (5th Cir.
1992).
12
registered, any manipulative or deceptive device or
contrivance in contravention of such rules and
regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for
the protection of investors.
15 U.S.C. S 78j(b).
Under the authority of this section, the SEC promulgated
Rule 10b-5 to execute enforcement of section 10(b). The
regulation makes it unlawful for any person, in connection
with the purchase or sale of security, to (1) employ a device,
scheme or artifice to defraud; (2) make any false statement
of material fact; or, (3) engage in any act, practice or course
of business that operates as fraud or deceit upon any
person. The clear wording of the statute and the rule thus
emphasize the use of manipulative devices in describing the
offense. The phrase "in connection with the purchase or
sale of securities" positions the illegal activity within the
framework of the Securities Exchange Act; it does not
describe the prohibited conduct.
The Supreme Court has interpreted section 10(b) and
Rule 10b-5 expansively in accordance with its view of
Congress' intent in enacting the 1934 Act as a vehicle to
minimize fraud in securities trading. As the Court stated in
Affiliated Ute Citizens of Utah v. United States, 406 U.S.
128, 151 (1972), "These proscriptions, by statute and rule,
are broad and, . . . obviously meant to be inclusive." The
legislation is construed " `flexibly to effectuate its remedial
purpose,' " id. (quoting SEC v. Capital Gains Research
Bureau, Inc., 375 U.S. 180, 195 (1963)), not"technically
and restrictively." Id.
The particular counts of the indictment before us track
the statutory and regulatory language. They describe the
manipulative implementation of a securities trading
scheme, the precise activity described in the statute and
the implementing rule as illegal. Here, the device was a
four-part scheme in which the buying and selling of
securities was a segment. Without the boxing, the
generation of demand, the contrived rise of the price and
the sale at the profit, however, any particular transaction
might not be unlawful. Rather, the purchase or sale was
intended to further the manipulation of the stock price.
13
We thus conclude that the individual purchase or sale
was not the appropriate unit of prosecution here; these
retail events were only a step in the advancement of the
scheme as a whole. On the facts here, each count properly
charged a manipulation of the securities of each of the
three separate companies -- each involving a discrete
scheme.
In resolving this issue, we decline to dictate an inflexible
rule regarding the allowable unit of prosecution in a
securities fraud case. The Federal Rules of Criminal
Procedure require that an indictment be a "plain, concise,
and definite written statement of the essential facts
constituting the offense charged." Fed. R. Crim. P. 7(c)(1).
Here, the offenses charged were schemes designed to
manipulate the prices of securities. It may be that other
violations of the securities laws would lend themselves to a
differently enumerated indictment. For example, in a
multiplicity case, United States v. Langford, 946 F.2d 798(11th Cir. 1991), the issue was whether the use of multiple
mailings in furtherance of a conspiracy to commit securities
fraud in violation of section 10(b) and Rule 10b-5 could
form the basis of separate counts of an indictment. The
Court of Appeals for the Eleventh Circuit decided that it
could not. In so concluding, the Eleventh Circuit recognized
that the allowable unit of prosecution under section 10(b) is
the use of a manipulative device or contrivance. Id. at 803.
The court decided, however, that the overall scheme need
not be charged in a single count. Instead, any false
statement in connection with a discrete sale can be
considered an appropriate unit of prosecution. Id. Langford
does not mandate, however, that each sale must form the
basis of a count of the indictment. Rather, it clarified that
in addition to the allowable prosecution of a scheme to
defraud, it can be something less.
Finally, on this issue, we observe that even if the
indictments were duplicitous, the error would be harmless.
None of the concerns of duplicity have been implicated.
There is no allegation here that the integrity of the
prosecution was compromised by the particular structure of
the indictment. Therefore, we conclude that counts II, III
and IV of the indictment, each involving a course of activity
14
yet a single scheme, properly charged Haddy and Wynn
with violations of the securities laws.
III.
Reliance Requirement
Haddy and Wynn also argue that their convictions should
be reversed because the government did not prove that
investors actually relied upon fraudulent and manipulative
practices in purchasing or selling the subject securities.
The specific question is whether reliance is an element of
the crime of stock manipulation, proof of which is essential
to conviction. We hold that no such statutory requirement
exists.
The federal securities law were enacted largely in
response to the stock market crash of 1929. Congress
recognized the need for investors to be protected against
fraud, and that if regulatory control in the securities
industry had been in place, the turbulence created by the
crash may have, at least, been abated. S. Rep. No. 1445,
73d Cong., 2d Sess. 81 (1934). Thus, in the interest of
preventing practices that destabilized the securities market,
the Securities Act of 1933 and the Securities Exchange Act
of 1934 established systems requiring full disclosure of
material information by companies transacting in
securities. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 206
(1976). The Securities and Exchange Commission then
promulgated Rule 10b-5 in 1942 to achieve the remedial
purposes of the 1934 Act. As we mentioned above, the
Supreme Court has opined that these laws should be
flexibly applied. Affiliated Ute, 406 U.S. at 151.
We again look first to the statutory language to define the
contours of the offense. Neither the statute nor the rule
includes a reliance requirement. Instead, both section 10(b)
and Rule 10b-5 prohibit the employment of manipulative
and deceptive devices in connection with the purchase or
sale of securities.
Section 10(b)'s omission of reference to a particular
victim is compelling evidence that investor reliance is not
15
required for a securities fraud conviction. The language
does not proscribe deception on a purchaser or seller of a
security; instead it speaks to deceptive devices employed "in
connection with the purchase or sale of any security."
United States v. O'Hagan, 117 S. Ct. 2199, 2210 (1997).
Rule 10b-5 also prohibits deceptive devices "as necessary
or appropriate in the public interest or for the protection of
investors." Under this regulation, the SEC is authorized to
prohibit deceptive acts that it concludes would have
deleterious effect on the integrity of the securities market
and on investor confidence. See 15 U.S.C. S 78b (purpose of
Exchange Act is "to insure the maintenance of fair and
honest markets"). This clear language obviates the
necessity of identification of a specific victim who acted
upon the deception.
In United States v. Naftalin, 441 U.S. 768 (1979), the
Supreme Court rejected the contention that section 17a of
the Securities Act of 1933, which prohibits any device,
scheme or artifice to defraud in the offer or sale of any
securities, requires that the deception be perpetrated on the
individual purchasing the stock. In Naftalin, an investor
was prosecuted for falsely representing to a broker that he
owned certain stock. The brokers who were deceived
suffered losses, but not those investors who actually
purchased the shares. Naftalin argued that the 1933 Act's
prohibition against fraud "in" the offer of the sale of
securities was narrower than section 10(b)'s proscription
against deception "in connection with" the purchase or sale
and, accordingly did not encompass deception directed at
brokers. The Court expressed doubt that the phrases of the
two Acts had different scopes; but, even assuming a
narrower reach of the 1933 Act, the Court rejected the
argument that it was limited to fraud on investors. Id. at
773 n.4. The Court interpreted section 17a as requiring
only that the fraud occur "in" an offer or sale of securities.
Id. at 772-73. We read Naftalin, then, as teaching that if
fraud "in" a securities transaction, as prohibited by the
1933 Act, does not require fraud on an investor, then
deception "in connection with" a securities transaction per
the 1934 Act does not have such a requirement.
16
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723(1975) concerned a private right of action under the
securities laws, but is nonetheless instructive on the
question of reliance by identifiable victims in a criminal
case. In Blue Chips, the Court limited the class of persons
who may bring an action under section 10(b) and Rule 10b-
5 to those who would actually purchase or sell securities.
The Court imposed the purchase or sell requirement for
standing purposes - recognizing the danger of litigation by
investors who did not make an actual purchase but who
might later claim that they would have but for the alleged
deceptive conduct. Id. at 747. Significantly, in Naftalin, the
Court made clear that the purchaser-seller standing rule of
Blue Chips is "inapplicable" to a criminal prosecution. 441
U.S. at 774 n.6.
The statutory term "manipulation" also detracts from a
theory that specific investor reliance is required. In Santa
Fe Industries, Inc. v. Green, 430 U.S. 462, 476-77 (1977),
the Supreme Court offered that manipulation is virtually a
term of art in securities law and refers to conduct
artificially affecting market activity in order to mislead
investors. The activity described here falls within the
confines of this description. Wynn and Haddy devised a
scheme by which the prices of certain securities did not
reflect market trends, but rather, were induced by their
contrivances affecting the price of the stock. The allocation
of the stock, the controlled dissemination of insider
information, and the offering of bribes had the impact of
artificially influencing market activity. A particular
investor's reliance on the representations is the anticipated
response, but it is not an element of the offense.
The issue of investor reliance was recently decided by the
Supreme Court in O'Hagan in the context of a
misappropriation case. Under the misappropriation theory,
securities fraud is committed when a person, in connection
with a securities transaction, misappropriates confidential
information in breach of a duty to the source of the
information. 117 S.Ct. at 2207.
The O'Hagan defendant was a partner of a lawfirm
which had been retained as local counsel by a company
that was planning to acquire a second company. During the
17
preparation stages of the acquisition, O'Hagan purchased
call options for the target company stock, as well as shares
in the target company. Following the public announcement
of the tender offer, the lawyer exercised his call options,
liquidated his position and realized a profit in excess of four
million dollars. The Supreme Court upheld O'Hagan's
conviction under section 10(b) and Rule 10b-5 on a
misappropriation theory of securities fraud. The Court
noted that the theory comports with 10(b)'s language,
which requires deception "in connection with the purchase
or sale of any security," not deception of an individual
purchaser or seller. Id. At 2210. Thus, although O'Hagan
differs by virtue of the theory the prosecution pursued, it is
strong affirmation of the language of Nafatlin and Blue
Chips that convictions under the securities laws do not
require identification of or reliance by a particular victim.
What distinguishes misappropriation from manipulation is
the party to whom disclosure was not afforded. With
manipulation, it is the investors who are deceived. With
misappropriation, it is the source of the information, in
most instances, the corporation involved. This distinction
does not change the fact that the integrity of the free
market has been compromised.
We therefore conclude that reliance on the deceptive
practice by an identifiable victim participating in a
securities transaction is not required for conviction in the
type of stock manipulation case before us.8
_________________________________________________________________
8. United States v. Russo, 74 F.3d 1383 (2d Cir. 1996), is not to the
contrary. In Russo, the defendants were convicted in a stock
manipulation scheme which involved short sales of high value stocks by
a market maker to generate false credits in an account with a clearing
broker. The district court instructed the jury that in order to find the
defendants guilty of section 10(b) and Rule 10b-5 securities fraud, it
must find that the clearing broker was deceived. The Court of Appeals
for the Second Circuit held that the instruction was proper because "it
fairly apprised the jury of the essence of the defense theory...." Id. at
1393. The case did not hold, nor was it an issue, that reliance is a
required element in a securities fraud case.
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IV.
Conclusion
For the reasons above, we will affirm the judgments in
these criminal cases.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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