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United States v. McDermott

November 11, 1942


Author: Kerner

Before EVANS, KERNER, and MINTON, Circuit Judges .

KERNER, Circuit Judge .

This is an appeal from a judgment rendered on a verdict of guilty upon an indictment in 14 counts, 9 of which charged the defendant with the fraudulent use of the mails, and 5 charged the violation of § 7 (a) of the Securities Exchange Act of 1934, as amended, 48 Stat. 886-889, 15 U.S.C.A. § 78g, 78h. The first 9 counts charged that the defendant devised a scheme and artifice to defraud, for the purpose of obtaining money and property by means of false pretenses, representations, and promises from Marie Langen Sweeney and divers other persons whose names were to the Grand Jurors unknown, and that he unlawfully, wilfully, and feloniously used the United States mail for the purpose of executing said scheme. The last 5 counts charged that on certain dates the defendant, being a member of the New York Stock Exchange, unlawfully and in contravention of Regulation T of the Federal Reserve Board, extended and maintained credit and arranged for the extension and maintenance of credit in the accounts of certain customers on a designated issued security, then registered on a national securities exchange and not then an exempted security within the meaning of the Securities Exchange Act of 1934.

The jury having found the defendant guilty, we are bound to adopt the facts and all favorable inferences reasonably and naturally to be drawn therefrom in the light most favorable to the plaintiff. So viewed, it appears that on and prior to September 26, 1938, the defendant was a partner in a firm doing a brokerage business through the national securities exchanges, and that as manager of the firm's Indianapolis, Ind., office, after gaining the confidence of Mrs. Sweeney, who was unacquainted with business transactions and especially with stocks, bonds and the markets pertaining thereto, he induced her to open a securities account with the firm to buy, sell, and deal in stocks and bonds and to entrust him with certain moneys, stocks and bonds. The account was opened in the fictitious name of "K. K. Kado." Thereafter, in bad faith and in violation of his fiduciary duties, without regard to the market conditions and prices and without regard to the net worth of her account, the limitations of law and the rules of the New York Stock Exchange pertaining thereto, he bought and sold, at her risk, stocks and bonds and obligated her to pay, to his personal profit, commissions and fees.

About this time one James Allio also had an account with defendant's brokerage firm, in which, by permission of Allio, defendant was allowed to trade. There was no deposit of funds in the account except $556 made before May 1, 1938. That was soon dissipated in losses, and trading was carried on in the account by virtue of a system of buying securities and selling the same securities to pay for their purchase and concealing this by an exchange of checks in substantially equal sums. A witness described this practice as "matching checks," "kiting checks," and "free riding." Allio drew and received all checks going into and coming out of the James Allio account. No check drawn by him payable to defendant's firm could have been paid unless he received a check back from the firm in substantially the same amount, and defendant knew that to be a fact. In March 1939, the market declined, and on April 7, 1939, this account showed a loss of $11,090.43.Neither Allio nor the defendant could pay the loss. On that day the defendant induced Mrs. Sweeney to give him a number of bonds by telling her the Kado account "needed margin" and she gave him two United States Treasury bonds, 1199K, par value $5,000 and 31022B, par value $10,000. The defendant sold the $10,000 bond for $11,211.12 to Josephthal & Co. and sent it by mail to the purchaser in New York City, N.Y., and the proceeds were placed to the credit of James Allio. Thus the losses in the Allio account were paid.

By the same mail that the $10,000 bond, numbered 31022B, was sent to New York to be sold, the defendant mailed the $5,000 bond, numbered 1199K. This bond was also sold and the proceeds, $5,599.26, were credited to the account of defendant's wife. April 8, defendant's brokerage firm drew two checks payable to defendant's wife for the proceeds of the sale, one check for $5,000 and the other for $599.29. These checks were endorsed by defendant and deposited in the joint account of the defendant and his wife in a bank at Indianapolis, and the money derived from the sale of the $5,000 bond was used by the defendant to purchase an interest in certain lots in Marion County, Ind., and to pay defendant's indebtedness to another bank at Indianapolis.

The evidence further disclosed that from October 1, 1938, to May 26, 1939, the Allio account was a general margin account, and that on March 31, 1939, there had been purchased and were in the Allio account securities having a value of $29,679 and that the debit balance was $24,464.16. On that day a check for $8,000 was issued to Allio, leaving him owing $32,464.16, against the cost of securities valued at $29,679. On April 1 there was sold in the account 600 shares of stock for $12,778.23, which left the account owing $19,685.93 and securities in the account having a total market value of $9,400. That same day there was purchased in the account 300 shares of Montgomery Ward & Co. preferred stock for $13,926, payment for which was not made except by the sale of the 300 shares of Montgomery Ward & Co. stock on April 5, 1939. Deducting the $9,400 value from the debit balance of $19,685.93 left a deficiency in the account, before the purchase of the Montgomery Ward stock, of $10,285.93. There was also evidence tending to prove that the defendant had been frequently cautioned against the violation of "Regulation T."

The defendant denied all of the incriminating evidence and adduced the testimony of a number of witnesses that his reputation as a law abiding citizen was good, and now contends that there was not sufficient evidence to support the verdict. His counsel argues that there is no testimony in the record that the defendant induced Mrs. Sweeney to open and maintain an account; that the last five counts of the indictment are defective and the demurrer thereto should have been sustained. The argument is that the Securities Exchange Act of 1934, as amended, is indefinite and therefore invalid because it amounted to a delegation of legislative power by Congress to the Board of Governors of the Federal Reserve System to define criminal offenses; that the Regulation is indefinite and does not define any offense with sufficient certainty; and that neither of said five counts states facts sufficient to constitute a public offense.

The twelfth count of the indictment charged a violation of §§ 7 and 8 of the Securities Exchange Act of 1934, as amended, §§ 78g and 78h, Title 15 U.S.C.A., and also charged that the defendant, a member of the New York Stock Exchange, extended credit to James Allio in contravention of "Regulation T" of the Federal Reserve Board. The regulation will be found in "Code of F.R., Title 12, part 220, p. 115."

To be sure, laws which create crime ought to be so explicit that all men subject to them may know what acts it is their duty to avoid. Before a man can be punished, his case must be plainly and unmistakably within the statute. United States v. Brewer , 139 U.S. 278, 288, 11 S. Ct. 538, 35 L. Ed. 190. Much more does this principle apply to a case where it is sought to prescribe a criminal offense by a regulation, United States v. Eaton , 144 U.S. 677, 687, 12 S. Ct. 764, 36 L. Ed. 591.

The defendant in support of his contentions places reliance upon United States v. L. Cohen Grocery Company , 255 U.S. 81, 41 S. Ct. 298, 300, 65 L. Ed. 516, 14 A.L.R. 1045, and the Eaton case, supra.

In the Cohen Grocery case, § 4 of the Lever Act, c. 80, § 2, 41 Stat. 297, provided that it was unlawful for any person to make any unjust or unreasonable rate or charge in handling or dealing in or with any necessaries. The grocery company was charged with wilfully and feloniously making an unjust and unreasonable rate and charge in handling and dealing in a certain necessary.A mere reading of § 4 of the Lever Act makes it clear that Congress left the question of determining what might be an unjust or unreasonable rate or charge in handling or dealing with necessaries to the court and juries; consequently, the court held the statute void because "the section forbids no specific or definite act."

In the Eaton case, the question was whether a wholesale dealer in oleomargarine, who omits to keep the books or to render the returns prescribed by the regulation, was liable to the penalty prescribed by the Act authorizing the promulgation of the regulation. The statute provided that if any dealer in oleomargarine shall knowingly or wilfully omit any of the "things required by law" [144 U.S. 677, 12 S. Ct. 766, 36 L. Ed. 591] in the carrying on or conducting of his business, if there be no specific penalty or punishment imposed by any other section of this Act for omitting the thing required, he shall pay a penalty of one thousand dollars. The statute did not, however, provide that the omission to keep the books and make the monthly return would constitute an omission or failure to do a "thing required by law," nor did the statute contain any provision making a violation of the regulation a crime. The statute made a crime only the omission or failure to do a "thing required by law." Consequently the court held the regulation void and stated:

It is necessary that a sufficient statutory authority should exist for declaring any act or omission a criminal offense, and we do not think that the statutory ...

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