FRIENDLY, Circuit Judge.
This appeal concerns another of those sickening financial frauds which so sadly memorialize the rapacity of the perpetrators and the gullibility, and perhaps also the cupidity, of the victims. It is unusual in that the vehicle, American Equities Corporation, owned nothing at all — and, in a happier sense, in that the SEC was able to nip the fraud quite early in the bud. The appellants are Milton Mende, the principal promoter, Martin Benjamin, his lawyer, and Bernard Howard, a certified public accountant. After trial in the District Court for the Southern District of New York before Judge Palmieri without a jury, all three were convicted of conspiring willfully by use of interstate commerce to sell unregistered securities and to defraud in the sale of securities, in violation of the Securities Act of 1933, §§ 5 (a) and (c), and 17(a), 15 U.S.C. §§ 77e (a) and (c), and 77q(a), sections which are implemented criminally by § 24 of the Act, 15 U.S.C. § 77x. Mende and Benjamin were convicted also on three substantive counts for using the mails in furtherance of the fraudulent schemes in violation of 18 U.S.C. § 1341. As their sentences on the latter counts were the same as those on the conspiracy count and run concurrently with them, and as we are satisfied that their conspiracy conviction was proper, we need not concern ourselves with the mail fraud counts. Lawn v. United States, 355 U.S. 339, 362, 78 S.Ct. 311, 2 L.Ed. 2d 321 (1958).
Since the principal claim of Howard and Benjamin relates to the sufficiency of the evidence against them, it is necessary to give some description of what went on. The scheme began in December, 1960, when Mende, then in Nevada, arranged to be put in touch with a Reno attorney, McDonald, who was reported to
He was especially attracted by a 1919 shell, then bearing the rather appropriate name of Star Midas Mining Co., Inc. Authorized to issue 1,500,000 shares with a par value of 10¢ per share, Star Midas had approximately 964,000 shares outstanding, nearly all owned by a so-called "Mahoney group." It had no assets. After arranging to purchase the Mahoney holdings for $5,000 plus a $1,500 fee, Mende instructed McDonald to change the corporate name to American Equities Corporation and to increase the authorized capital to $1,500,000 by raising the par value to $1 per share. Before closing the purchase, the funds for which were not yet available, Mende, with McDonald's cooperation, bought stock certificates and a seal reflecting these changes. The purchase was not completed until February 23, 1961, when McDonald, having previously caused appropriate resolutions to be adopted and new officers and directors of Mende's selection to be named, turned over to Reiss and Kovaleski, as Mende's representatives, the books and records of the corporation and stock certificates for the 890,000 shares owned by the selling group. At this time the name of the corporation was changed.
Mende had not waited to acquire the American Equities shares before starting to sell them. In mid-January, 1961, he ordered an additional supply of stock certificates from a Los Angeles printer. By entering a bid to buy shares he arranged for American Equities to appear in the pink and white sheets of the National Quotation Service at a price of something over $5 per share. Robert Drattell, president of Lawrence Securities, Inc., which was inactive because of financial difficulties, testified that Benjamin then sought to interest him in selling shares of a corporation whose alleged assets corresponded with those later shown in statements of American Equities. Benjamin indicated that if Drattell would cooperate, he might be in a position to find some way to make capital available to Lawrence Securities. Later in January, Benjamin had Drattell come to a New York hotel to meet Mende, who told Drattell and Reiter, another broker, in Benjamin's presence, that American Equities "was a holding corporation that had property, various types of property all over the United States, assets of about six and a half million dollars, liabilities of about three million dollars." Mende whetted Drattell's appetite, as Benjamin had already done, by indicating he would help to get Lawrence Securities back on its feet. Drattell said he "would need letters of opinion" and "certified financial statements," and also would need to see the transfer records which, Mende told him, were kept by "a certified public accountant out on the Coast."
Benjamin speedily filled one of Drattell's demands by handing him a signed opinion, dated January 28, 1961, headed "To Whom It May Concern: American Equities Corporation." It recited that the corporation was organized in May, 1919, "and there was at that time issued to the public, 963,067 Shares." It went on to say that in Benjamin's opinion "the aforesaid shares are presently free and tradeable pursuant to" § 3(a) (1) of the Securities Act which it quoted, and reiterated:
Reiter and Parks had also brought from California copies of a paper with a printed cover entitled "American Equities Corporation." This contained an unidentified "Pro Forma Balance Sheet" as of November 30, 1960, in fact prepared by Reiss,
In mid-January, Benjamin invited Howard, a certified public accountant who had served Benjamin and his clients, to do some work for American Equities. Howard testified he received the November 30, 1960, "Pro Forma Balance Sheet," a yellow handwritten sheet of paper listing certain real estate holdings in Detroit, and balance sheets of corporations which Mende and Benjamin claimed were "owned or controlled" by American Equities. From these materials and without any examination of books and
The paper has a cover, on the stationery of Howard as a Certified Public Accountant, which bears the legend:
AMERICAN EQUITIES CORPORATION DECEMBER 31, 1960
This is followed by a two-page letter in which Howard advises the company that "After an examination of the books and records of the diversified holdings of your corporation for the period ended December 31, 1960," he is submitting a report of the company as at that date, consisting of "Exhibit `A' — Pro-forma Balance Sheet as at December 31, 1960." Next comes a section entitled "COMMENTS" informing the company that it is "a diversified investment corporation with the following holdings." These were substantially the same as in the description accompanying the November 30 statement, with the Outpost Inn, Biesmeyer, Stanford and also California Molded Products now clearly listed among them. The comment on California Molded Products anticipates 1961 sales of $2,000,000 with gross profit margin in excess of 30% and a net of better than 4%, but omits to limit the company's interest in these riches to 68%, the most that was claimed by the November 30 balance sheet. The comments say that "The statement which is pro-forma includes the disposition of $500,000 which a group of stockholders propose to advance to the corporation as a long term loan"; that $150,000 of this was to be advanced to subsidiaries for working capital and $71,000 "to repay an officer for the purchase of the assets of the Outpost Inn, Inc."; that "The assets are shown at actual cost and are calculated at the most conservative value," although "A recent appraisal of the real estate in Detroit shows an increase of approximately $2,500,000.00 over book value, which has not been reflected in the statement"; that "The accounts receivable, loans receivable, loans payable, and mortgages payable were not verified by direct communication" and inventories were taken as submitted by the management; and, finally, that "The statement reflects an accurate and true picture of the corporation's net worth after taking into consideration the proposed loan by the officers." The "Pro-Forma Balance Sheet as at December 31, 1960" showed total assets of $7,769,657.11 and a net worth of $3,681,049.70 — this including $963,067.00 in the capital stock account. Howard received $200 for his two days of service in preparing the report.
During February, Mende asked Howard to investigate a possible acquisition, on which Howard made a negative recommendation, and Howard discussed the statements of Plametron Corporation with its owner, Frankl, who had previously offered a half interest for $150,000 and was desirous of selling to Mende. In Howard's presence Mende gave Frankl a copy of Howard's December 31 Auditor's Report. There was evidence also that Drattell, whom Howard knew to be a broker interested in American Equities stock, telephoned him to discuss this report. Toward the end of February Mende asked Howard to come out to California; Mende's promise of a $200 advance remained unfulfilled despite Howard's repeated requests but Mende gave him a one-way air ticket. He stayed with Benjamin from February 27 to March 7 at the Beverly Hilton Hotel, which cut off food and telephone service for non-payment of bills and threatened to hold his baggage on departure. While in California, he made some examination of the books and records of California Molded Products, without investigating whether American Equities in fact owned 68% of the stock, and also of J. S. Lane & Co. which Mende said he was interested in buying for American Equities. Howard was given a copy of a statement, dated August 31, 1958, of Verdi Development Corporation; Kovaleski
Under date of March 6, 1961, after the cut-off of food and telephone service, Howard rendered a second "Auditor's Report," which he left with Benjamin. This purportedly reflected "an examination of the books and records of the diversified holdings of your corporation for the period ended January 31, 1961." Although generally similar to his previous "Auditor's Report," it differed in some significant respects: Biesmeyer Boat and Plastic Co. and Stanford Trailer and Marine Supply Co. were no longer included; as Howard was later to tell the grand jury, the two boat companies "went down the river." Nevertheless the list grew from five to six through three additions. Plametron Corporation was included, without any investigation of its acquisition on Howard's part despite the personal knowledge he had gained. So also was J. S. Lane & Co.; Mende and Benjamin had been negotiating for the purchase of this company for $1,100,000 as Howard well knew since only a few days previously he had examined its books "to determine if the price they were offering was adequate * * *." As seems generally to have been the case, Howard's pro-forma report apparently makes no provision as to the acquisition cost. The comments also note the inclusion in the balance sheet of "Verdi Development Company * * * a mining company with various mills and claims in California, Utah and Nevada"; despite the age of Verdi's financial statement and what Kovaleski had told him, Howard reported as an asset "Unrecovered Development Costs" of $707,554.21, this being a major factor in the remarkable increase in American Equities' net worth from $3,681,049.70 to $4,609,560.07 in a single month. In addition to the $2,500,000 increment in the Detroit real estate from an appraisal previously reported, there is now an added $500,000 increase in the value of equipment. Nowhere was it suggested, unless by the naked word "pro-forma," that American Equities' acquisition of the mentioned companies had not yet been accomplished. To the contrary, a new paragraph recited:
This was supported by an exhibit entitled
American Equities stock continued to be sold until March 22, 1961, when, as a result of the SEC's action, trading stopped.
Howard's principal claim is that the evidence against him was insufficient to show the state of mind required for a criminal conviction. He says he was performing an accountant's duties innocently if inefficiently — and for a negligible compensation, that he sheltered himself with the label "proforma," and that he did not know his reports were to help in stock peddling but thought they were to be used solely for management purposes. His own testimony belies the last claim; he admitted knowing that the promoters intended to use the stock as collateral for loans or as part of or collateral for the purchase price in various acquisitions and that his statements were shown to prospective lenders or sellers. Since his reports were little more than a regurgitation of material handed him by the "management" and related to properties that, as
The argument that reports which depicted American Equities as owner of properties and companies it neither owned nor had any firm arrangements to acquire were not false because they were stated to be "pro forma" involves a complete misconception of the duties of an accountant in issuing a report thus entitled. Although pro forma statements "purport to give effect to transactions actually consummated or expected to be consummated at a date subsequent to that of the date of the statements," "auditors consider it proper to submit their report and opinion on such statements only when the nature of the transactions effected is clearly described in the statements, and when satisfactory evidence of their bona fides is available, such as actual subsequent consummation or signed firm contracts." Montgomery, Auditing Theory and Practice (6th ed. 1940), 62-63; see also Prentice-Hall Encyclopedic Dictionary of Business Finance (1960), 485. It would be insulting an honorable profession to suppose that a certified public accountant may take the representations of a corporation official as to companies it proposes to acquire, combine their balance sheets without any investigation as to the arrangements for their acquisition or suitable provision reflecting payment of the purchase price, and justify the meaningless result simply by an appliqué of two Latin words.
It is true that the Government had not merely to show that the statements were false but to present evidence from which the judge could be convinced beyond reasonable doubt of Howard's culpable state of mind. But, as Judge Hough said for this court years ago, "when that state of mind is a knowledge of false statements, while there is no allowable inference of knowledge from the mere fact of falsity, there are many cases where from the actor's special situation and continuity of conduct an inference that he did know the untruth
These and other items we could mention — and this in a setting where, at the very time that Howard was delivering his second report extolling the prospects of this $8,700,000 company, he had been unable to obtain a $200 advance and the hotel had turned off food and telephone service for nonpayment of bills — were quite sufficient to convince a trier of the facts beyond a reasonable doubt that Howard had actual knowledge of the falsity of his reports and deliberately conspired to defraud investors. As Judge Learned Hand said in a similar context, "* * * the cumulation of instances, each explicable only by extreme credulity or professional inexpertness, may have a probative force immensely greater than any one of them alone." United States v. White, 124 F.2d 181, 185 (2 Cir. 1941).
In fact, however, the Government was not required to go that far. "Willful," the Supreme Court has told us, "is a word of many meanings, its construction often being influenced by its context." Spies v. United States, 317 U.S. 492, 497, 63 S.Ct. 364, 367, 87 L.Ed. 418 (1943), citing United States v. Murdock, 290 U.S. 389, 394-396, 54 S.Ct. 223 78 L.Ed. 381 (1933). We think that in the context of § 24 of the Securities Act as applied to § 17(a), the Government can meet its burden by proving that a defendant deliberately closed his eyes to facts he had a duty to see, compare Spurr v. United States, 174 U.S. 728, 19 S.Ct. 812, 43 L.Ed. 1150 (1899) and American Law Institute, Model Penal Code, § 2.02(7), commentary in Tent. Draft No. 4, pages 129-30 (1955), or recklessly stated as facts things of which he was ignorant. Judge Hough so ruled in Bentel v. United States, supra; although that case and the similar ruling in Slakoff v. United States, 8 F.2d 9 (3 Cir. 1925), were under the mail fraud statute, § 215 of the then Criminal Code, 35 Stat. 1130 (1909), the ancestor of 18 U.S.C. § 1341, which does not use the
Much of what we have said as to Howard is relevant also to Benjamin's claim of insufficiency of the evidence as to his culpable state of mind. Benjamin brought Howard into the scheme; he had written out the list of assets which Howard later used in his first report; as Howard testified, Benjamin had told him to take the statements of the various companies "and just put them into a consolidated form"; and his work in connection with several of the proposed "acquisitions" gave him actual knowledge of the falsity both of the November 30 statement and of Howard's reports. But there was much more than this. His opinion letter made a positive statement that he believed all the shares of American Equities were exempt from registration, although he must have known that control of the corporation, not yet even named "American Equities Corporation," was being acquired by Mende and that the statute explicitly denied exemption to any new offerings by persons in control, a limitation of which his testimony before the SEC showed he was well aware. Yet there is abundant evidence that Benjamin knew Mende was putting American Equities shares on the market. Among the instances was the transaction outlined above with Drattell in late January wherein Benjamin received a confirmation of a purchase of 5,000 shares from "Martin Benjamin Trustee" for $9,000 — at a time when the pink sheets were quoting the stock at $5 per share or more — and the distribution of part of the proceeds to Mende and his wife; yet Benjamin prepared a letter whereby the transfer agent certified these shares to be "free stock and * * not investment stock." In another transaction, not previously mentioned, wherein Mende had a nominee, Mrs. Tanner, sell American Equities shares to relatives and friends of Paul Reicher, her father, on a basis whereby she retained $2 per share for her pains, she received a letter signed by "Martin Benjamin Trustee" acknowledging the sale of 11,000 shares to her and the receipt of $4.75 per share. Benjamin's role was far more than that of an attorney. He told Drattell he was acting as a "trustee" for some of the principals and, when Drattell sought elucidation, explained that "as a trustee and as an attorney * * * licensed in the State of New York, * * * he was not obligated to reveal any of the sources and it is enough for anyone to accept a legal document from a trustee who was an attorney and the trustee was not required to reveal the source of the legal document or who the principals were behind the legal document" — surely a novel contribution to the law of trusts. His proffer of financial aid if Drattell would undertake some distribution of American Equities afforded further basis for inferring knowledge
Howard and Benjamin make the complaint, standard in appeals of this sort and buttressed by the inevitable citation of Kotteakos v. United States, 328 U.S. 750, 66 S.Ct. 1239, 90 L.Ed. 1557 (1946), that although the indictment alleged a single conspiracy, the proof showed separate ones to sell unregistered securities and to defraud. The argument could not avail Benjamin in any event since the evidence clearly implicated him in both aspects of the scheme. See United States v. Agueci, 310 F.2d 817, 827-828 (2 Cir. 1962), cert. denied, 372 U.S. 959, 83 S.Ct. 1016, 10 L.Ed.2d 12 (1963). But the point is wholly without merit. The fraudulent acts and the unlawful failure to register information which would uncover them were essential steps in a single scheme to dupe; the limited scope of Kotteakos was explained in Blumenthal v. United States, 332 U.S. 539, 558-559, 68 S.Ct. 248, 92 L.Ed. 154 (1947) and its inapplicability to an integrated financial fraud like this was affirmed by us in United States v. Crosby, supra, 294 F.2d at 944-945. It is thus immaterial that the evidence may not have shown awareness by Howard of the part of the scheme that involved the sale of unregistered shares, United States v. Agueci, supra, and cases there cited.
Mende, as the central figure in the scheme, has not challenged the sufficiency of the evidence introduced against him. He raises several points on appeal; all seem so patently without substance as not to require discussion. We here mention only his claim that McDonald's testimony should have been excluded under the attorney-client privilege, and we do that solely to state its complete lack of merit. The relation between Mende and McDonald was not that of client and attorney but of buyer and seller; what Mende was seeking from McDonald was not legal advice but a pre-1933 corporate shell.