UNITED STATES of America, Appellant, v. David B. CHARNAY et al., Appellees.
No. 75-1222.
United States Court of Appeals, Ninth Circuit.
May 7, 1976.
Rehearing and Rehearing En Banc Denied July 8, 1976.
537 F.2d 341
The trustee characterizes the state‘s claim under § 24049 as the levy of a tax lien against the assets of the bankrupt estate, the state characterizes it as mere regulation of a property interest, the liquor license, subject to the requirements of the section as an inherent part of the property interest itself. Of the two, the trustee‘s interpretation seems more in accord with the position of the Court in Perez that state laws must yield to the bankruptcy statutes if the state laws frustrate the full effectiveness of the federal provisions. Perez, supra, 402 U.S. at 652, 91 S.Ct. at 1712, 29 L.Ed.2d at 244. Section 64 orders wage earners be paid first, § 24049 that the state come first, regardless of § 64.
The liquor license is no more a state created property which the state may regulate and control without regard to the bankruptcy laws than was the driver‘s license in Perez. I would reverse.
Moses Lasky (argued), of Brobeck, Phleger & Harrison, San Francisco, Cal., for appellees.
OPINION
Before BROWNING and SNEED, Circuit Judges, and JAMESON,* District Judge.
JAMESON, District Judge:
This appeal from an order dismissing the indictment presents the question of whether the indictment, alleging a market manipulation artificially depressing the market price of a security on a national securities exchange, was sufficient to charge the defendants-appellees with a conspiracy to violate, and the violation of, the antifraud provisions of
Charges against Defendants-Appellees
Two indictments were returned against defendants-appellees. The first, filed December 27, 1973, alleged that conduct of Howard Hughes and his associates in taking over Air West, especially certain guarantees against trading losses given by Hughes, violated
The defendants were identified in the indictment, for the period in question, as
Both indictments detailed essentially the same facts as a basis for the charges against appellees. These facts were well summarized by the district court:
The background facts alleged in the Indictment are that in August of 1968, defendants made an offer on behalf of Hughes Tool Company to acquire all the assets of Air West at a price which would yield to the stockholders approximately $22 per share; that on December 28, 1968, a majority of the stockholders voted to accept the offer; that on the same day a majority of the directors voted to reject the offer; that in order to coerce the directors to change their vote, defendants would threaten the opposition directors with lawsuits, would file such lawsuits and would artificially depress the price of Air West stock on the American Stock Exchange by causing Charnay to sell 59,100 shares of Air West stock “short,” by causing Herman Greenspun to sell 15,000 shares of Air West stock and by causing Crockett to sell 12,000 shares of Air West stock on the American Securities Exchange, and at the same time, guaranteeing to these sellers by secret understanding a recovery of $22 per share irrespective of the price obtained on the Exchange. It is alleged that these activities caused a decline in the market price of Air West stock on December 31, 1968 from $18 per share to $15.75 per share.
The Government contends that the “aftermath” of these activities was a reversal by Air West‘s directors of their earlier position and a decision on December 31 to sell Air West‘s assets to Hughes Tool.
The Indictment
Count I
The July 30, 1974 indictment contains four counts. The first ten paragraphs of Count I identify the parties and describe their roles in the corporate takeover. Paragraphs 11 through 13 allege that (1) the defendants and the unindicted coconspirators willfully and knowingly conspired and agreed to violate the securities laws,
Paragraph 14 describes the means by which the conspirators would carry out their plan, i. e., that the defendants Hughes, Davis and Maheu would represent that unless the Hughes Tool offer was accepted, the price of Air West stock would decline substantially; that the defendants and coconspirators would manipulate and cause a decline in the market of Air West stock, and cause the Air West stockholders who sold their stock to receive artificially depressed prices;1 and that the defendants Hughes, Davis and Maheu would cause telegrams to be sent to the directors of Air West threatening lawsuits if they did not change their votes. Paragraph 14 also lists ten overt acts committed in furtherance of the conspiracy, including three interstate conversations and an unspecified number of
Count II
The second count incorporates by reference the first ten paragraphs of Count I and alleges that the conduct described in Count I constituted violations of
Counts III and IV
Count III alleges that for the purpose of executing the scheme to defraud described in Count I, the defendants caused to be transmitted in interstate commerce telephone conversations between Charnay in Las Vegas, Nevada, and a securities salesman in New York City, and Count IV alleges telephone conversations between a brokerage firm in Las Vegas and the AMEX in New York City, all in violation of the wire fraud statute,
Order Dismissing Indictment
In its order dismissing the indictment the district court noted that “the gravamen of the Indictment is that unlawful means were employed by agreement as part of the conspiracy to accomplish the ultimate objective . . .” of acquiring the assets of Air West, an obviously lawful purpose. The court recognized that “the conduct alleged, if true, is . . . reprehensible and an abuse of the power of great wealth” but felt forced to conclude that the indictment had not properly alleged a public offense. In reaching this conclusion the order reviewed each of the statutes alleged to have been violated in the various counts of the indictment.
Discussing
Nowhere in the regulations has the commission said that it is an unlawful manipulative or deceptive device to cause substantial blocks of a security to be sold on a national securities exchange for the purpose of artificially depressing the market price of the security and to secretly guarantee to sellers a profit or favorable return from the sales. That, in essence, is what this Indictment charges.
Noting the Government‘s concession that unless the alleged conduct was proscribed by the securities law, the other statutory violations could not stand,4 the district court held that the Government had not met its burden to properly allege the defendants’ criminal misconduct in any of the counts of the indictment.
Contentions of Parties
In contending that the indictment alleges a violation of, and conspiracy to violate, Rule 10b-5 under
Appellees contend that the district court properly dismissed the indictment for failure to state an offense under either Rule 10b-5 or
Rule 10b-5 and Market Manipulation
unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or any facility of any national securities exchange —
* * *
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may pre-scribe as necessary or appropriate in the public interest or for the protection of investors.
Rule 10b-5,
Employment of 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 any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
In the first Supreme Court decision involving Rule 10b-5 and
In Section 2 of the Securities Exchange Act,
To insure to the multitude of investors the maintenance of fair and honest markets, manipulative practices of all kinds on national exchanges are banned. The bill seeks to give investors markets where prices may be established by the free and honest balancing of investment demand with investment supply.8
Senate Report No. 1455, 73d Cong., 2d Sess., p. 81 (1934), similarly states:
The purpose of the Act is . . . to purge the securities exchanges of those practices which have prevented them from fulfilling their primary function of furnishing open markets for securities where supply and demand may freely meet at prices uninfluenced by manipulation or control.
The language of the section and its legislative history leave little doubt that Congress intended § 78j(b) to operate, after rule making by the SEC, as a broad prohibition against deceptive devices. This manifestation of Congressional intent was recognized in Supt. of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6, 12, 92 S.Ct. 165, 169, 30 L.Ed.2d 128, 134 (1971), where the Court quoting from H.R.Rep. No. 1383, 73d Cong., 2d Sess., 7, said in part: “Since practices ‘constantly vary and where practices legitimate for some purposes may be turned to illegitimate and fraudulent means, broad discretionary powers’ in the regulatory agency ‘have been found practically essential.’ . . . Section 10(b) must be read flexibly, not technically and restrictively“. In light of this background it is not surprising that the broad language of Rule 10b-5 has been applied by the courts and the SEC as the principal Rule under § 78j(b) for prohibiting the multitude of deceptive and manipulative devices which continually appear in the securities markets, including activities directed, as the conduct of the appellees is alleged to have been designed, toward the manipulation of securities prices for personal gain.
The utilization of Rule 10b-5 to reach a wide range of deceitful securities trading practices was given impetus by early cases holding that the Act and the Rule provide an implied right of private action in favor of an injured party to enforce the Rule‘s sanctions. See, e. g., Kardon v. National Gypsum Co., 69 F.Supp. 512 (E.D.Pa. 1946). This principle was affirmed by the Supreme Court in Bankers Life & Cas. Co., supra, 404 U.S. at 10, 92 S.Ct. at 167, 30 L.Ed.2d at 132. Much of the case law on Rule 10b-5 has, therefore, developed in civil rather than criminal litigation. In SEC v. Joiner Corp., 320 U.S. 344, 355, 64 S.Ct. 121, 125, 88 L.Ed. 88, 95 (1943), the Court indicated that the primary difference between criminal and civil prosecutions under the securities laws is the burden of proof required for a verdict. As noted in United States v. Clark, 359 F.Supp. 128, 130 (S.D.N.Y. 1973), “there is no reasonable basis for holding that some different interpretation [of Rule 10b-5] should apply to a criminal action” than in a civil action. We agree that precedents established in civil cases interpreting Rule 10b-5 are applicable in criminal prosecutions under the Rule, as here.
Civil cases holding manipulative and deceitful devices violative of § 78j(b) and Rule 10b-5 include Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 546-547 (2 Cir. 1967), where the court found that the statute and rule made unlawful a majority stockholder scheme to reduce dividends in order to force down the market price of stock and cause minority shareholders to sell out at depressed values. In reaching its conclusion the court observed that “[d]eceitful manipulation of the market price of publicly-owned stock is precisely one of the types of injury to investors at which the Act and Rule were aimed“. 384 F.2d at 547. In Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 792-798 (2 Cir. 1969), the court was presented with a factual situation somewhat resembling the case before us. The court held that Rule 10b-5 was violated by the scheme of one corporation seeking a merger and attempting to block a tender offer by another corporation in which it bought large blocks of shares of the target corporation in the open market, thus driving the market price up while at the same time financing these purchases by disposing of the newly acquired stock at a loss in secret and unreported sales. The court found that these activities operated as a deceit on those in the investing public who were misled by the trading activities as well as on the other corporation whose tender offer was blocked by the scheme. Recently in Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 378-381 (2 Cir. 1974), the court found a market manipulation in which one party to a corporate merger allegedly caused the market price of the other corporation to increase in order to obtain a more favorable exchange ratio to be prohibited by the provisions of Rule 10b-5.
These cases are illustrative of the extent to which § 78j(b) and Rule 10b-5 have been applied to a broad range of manipulative practices.10 As stated in Herpich v. Wallace, 430 F.2d 792, 801-802 (5 Cir. 1970):
[T]he section [78j(b)] reflects the design of the Exchange Act as a means for preventing inequitable and unfair practices on securities exchanges and over-the-counter markets and for insuring fairness and honesty in securities transactions generally . . . Congress sought to protect persons “who would be engaged in buying and selling and trading in * * * securities as broadly defined in the Act.” . . . It did not make section [78j(b)] self-executing, nor did it limit the section‘s application to the manipulative and deceptive devices or contrivances known in 1934. Instead, it wrote the section as a “catchall” meant to reach practices employed in connection with the purchase or sale of securities which were contrary to the public interest or the interest of investors.
* * *
“Together the section and the rule aim at reaching ‘misleading or deceptive activities, whether or not they are precisely and technically sufficient to sustain a common law action for fraud and deceit,’ . . . carried on ‘in connection with’ the purchase or sale of securities. They are not intended as a specification of particular acts or practices that constitute ‘manipulative or deceptive devices or contrivances,’ but are instead designed to encompass the infinite variety of devices that are alien to the ‘climate of fair dealing,’ . . .”11
Appellees argue that the cases applying Rule 10b-5 to market manipulations are distinguishable because the courts found either insiders with an affirmative duty to disclose due to their relationship with corporate management or defendants with a purpose to induce the purchase or sale of securities by deceit. While we recognize that none of the factual situations in the cases discussed supra are identical to that present here, we do not believe that the cases interpreting Rule 10b-5, or the Rule itself may be read as restrictively as appellees suggest. It is true that much of the Rule 10b-5 litigation dwells on the special duty of insiders to disclose information. However, the language of the Rule provides no basis for concluding that only “insiders” are subject to its requirements.12 As noted in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 858-862 (2 Cir. 1968), cert. denied sub nom. Coates v. SEC, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969), the duty to disclose material information is based upon a potential manipulator‘s duty to the investing public as a whole as well as to particular shareholders. Moreover, it should be noted that clauses (a) and (c) of Rule 10b-5 are not aimed at failures to disclose. Rather they are flat prohibitions of deceitful practices and market manipulations.
Concerning the necessity of alleging and proving a purpose to induce others to trade in securities under Rule 10b-5, there is simply no requirement under the Rule, as there is under
As the court noted in Landy v. F.D.I.C., 486 F.2d 139, 161 (3 Cir. 1973), “A scheme deliberately calculated to manipulate the market value of a stock would be covered under the rule.” Here the Government has alleged that the appellees in selling their Air West stock purposely sought to depress the market for the stock, and in fact achieved this result, with the object and effect of deceiving the shareholders and directors of Air West in Hughes’ takeover attempt. Such conduct falls within the type of activity which Congress sought to prohibit in enacting the Securities Act and which Rule 10b-5 explicitly prohibits. It constitutes an indictable offense.
Validity of the Indictment
Appellees contend that even if the conduct in which they are alleged to have engaged is proscribed by the securities laws, the indictment must nevertheless fail due to numerous fatal defects in pleading. We turn now to appellees’ specific challenges to the various counts.
Count I
The first count of the indictment charged the appellees with conspiring to violate the securities laws, specifically Rule 10b-5, and the wire fraud statute,
Count II
Appellees direct their attack primarily at Count II, which alleges that the conduct described in Count I violated the securities laws and the aiding and abetting statute. They contend that the count fails because it (1) does not allege that “stock was sold [by appellees] for the purpose of inducing the sale of such stock by others and in a deceitful manner designed to achieve such a purpose“;13 (2) fails to allege any failure by the appellees to disclose material facts; and (3) does not allege that appellees acted with an intent to defraud.
With respect to the argument that a market manipulation charged under Rule 10b-5 requires an allegation of the defendants’ purpose to induce the sale of securities by others, as noted supra, we find nothing in the language of either
Appellees’ argument that Count II must fail because it does not allege any omission by appellees to disclose material facts we reject for two reasons: First, Rule 10b-5 prohibits manipulative activities per se and not only those activities resembling common law fraud. As we note above, clauses (a) and (c) of the Rule make no reference to a requirement that defendants charged under the rule must fail to disclose material facts for their conduct to be proscribed. That conduct is covered by clause (b). Second, our reading of Counts I and II persuade us that the indictment does adequately allege material misrepresentations and omissions. The description of appellees’ activities in representing to Air West stockholders and directors that the market would decline if the Hughes tender offer were rejected and their subsequent conduct in driving down the market price without revealing that the decline was not due to the free operation of market forces constitutes a sufficient allegation of a misrepresentation and omission.16 As the court observed in O‘Neill v. Maytag, 339 F.2d 764, 768 (2 Cir. 1964) (quoted with approval in Mutual Shares Corp. v. Genesco, Inc., supra, 384 F.2d at 546), “deception may take the place of nonverbal acts.”17 Failure to disclose that market prices are being artificially depressed operates as a deceit on the market place and is an omission of a material fact.
Nor do we find merit in appellees’ contention that the indictment is fatally defective because it fails to allege specific intent to defraud. In construing
“The Herlands article concluded it was necessary only that ‘the prosecution establishes a realization on the defendant‘s part that he was doing a wrongful act,’ 21 Va.L.Rev. at 149. We accept this with the qualifications, doubtless intended by the author, that the act be wrongful under the securities laws and that the knowingly wrongful act involve a significant risk of effecting the violation that has occurred.”18
The indictment was sufficient to meet these tests. It alleges a knowing participation by all of the defendants in the perpetration of the manipulation which created the artificially depressed market price and consequent fraud and deceit. It was sufficient to allege a violation of
Counts III and IV
With respect to Counts III and IV charging violation of the wire fraud statute,
Count I, which is incorporated by reference into Counts III and IV, describes in some detail the operation of the allegedly manipulative scheme and its purpose. Counts III and IV state that the object of this activity was to defraud the shareholders and directors of Air West. Count I gives the approximate dates during which the scheme was in effect. Counts III and IV give the specific dates on which appellees are alleged to have used interstate wire facilities to accomplish their objective. The counts charging appellees with wire fraud appear to be sufficiently specific under the standards cited by appellees.
In Hagner v. United States, 285 U.S. 427, 431, 52 S.Ct. 417, 419, 76 L.Ed. 861, 865 (1932), the Supreme Court stated:
“The true test of the sufficiency of an indictment is not whether it could have been made more definite and certain, but
whether it contains the elements of the offense intended to be charged, ‘and sufficiently apprises the defendant of what he must be prepared to meet, and, in case any other proceedings are taken against him for a similar offense, whether the record shows with accuracy to what extent he may plead a former acquittal or conviction.’ [citations omitted]”21
We conclude that each count of the indictment meets this test. If the defendants desire more definite information, they may obtain it through a bill of particulars.
Statute of Limitations
Appellees contend, however, that
Section 3288 in its present form was enacted in 1964. Prior thereto a very similar statute, passed in 1934, was in effect.23 In United States v. Durkee Famous Foods, 306 U.S. 68, 71, 59 S.Ct. 456, 458, 83 L.Ed. 492, 495 (1939), the Supreme Court found that Congressional intent concerning the section was best summarized by the following letter written by the United States Attorney General:
“. . . legislation is recommended providing that in any case in which an indictment is found defective or insufficient for any cause, after the period prescribed by the statute of limitations has run . . . a new indictment may be returned at any time during the first succeeding term of court at which a grand jury is in session.”
Congress‘s primary purpose in changing the language of the statute in 1964 was to correct a “loophole” in the law which oc-
“The purpose of the proposed legislation is to amend sections 3288 and 3289 of title 18, United States Code, so as to provide that the provisions of those sections will extend to felony proceedings instituted by information as well as by indictment. The sections concern cases where a new indictment is returned after a prior indictment has been dismissed, because of an error, defect, or irregularity with respect to the grand jury, or because it has been found otherwise defective. The amendments would therefore permit reindictment in similar cases where an information was filed after the defendant waived in open court prosecution by indictment.”
There is nothing in the legislative history of
Concerning appellees’ contention that the second indictment should be dismissed because it charges different offenses, we find nothing in the cases cited by appellees or the language of
Under
Appellees next contend that the second indictment should have contained an allegation with respect to the first indictment and its disposition. We find no support for this argument in the cases cited by appellees. While it is true that criminal statutes of limitation have been characterized as jurisdictional (Walters v. United States, 328 F.2d 739, 743 (10th Cir. 1964)), nothing would be gained by requiring a second indictment to allege the dispositional history of the first. The fact that the first indictment was dismissed is part of the record of the case before the court. As was recognized in Sanseverino v. United States, 321 F.2d 714, 715 (10th Cir. 1963), “The government had no burden to offer formal proof of that which appears in the case record of the court for such is the cornerstone of judicial notice . . .”25 Simi-
In their final challenge to the applicability of
While the first clause of
Main and the dicta from Strewl were the prevailing law for almost thirty years until the 1964 amendment to
Conclusion
In summary, we conclude that (1) the market manipulation artificially depressing the market price of a security on a national securities exchange was an indictable offense under
Reversed and remanded for further proceedings consistent with this opinion.
SNEED, Circuit Judge (concurring):
I concur in Judge Jameson‘s opinion which is written with his usual clarity and thoroughness. The law, as I read it, supports his conclusions.
However, I cannot let pass this opportunity to draw attention to the fact that so-called “public welfare offenses”1 do not generally, and clearly not in this case, encounter the same demanding constitutional and interpretive standards applicable to other criminal offenses.
As Judge Jameson‘s opinion makes clear, neither section 10(b) of the Securities Ex-
“When we deal with private actions under Rule 10b-5 we deal with a judicial oak which has grown from little more than a legislative acorn. Such growth may be quite consistent with the congressional enactment and with the role of the federal judiciary in interpreting it, see J. I. Case v. Borak, supra, but it would be disingenuous to suggest that either Congress in 1934 or the Securities and Exchange Commission in 1942 foreordained the present state of the law with respect to Rule 10b-5.” Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737, 95 S.Ct. 1917, 1926, 44 L.Ed.2d 539, 550 (1975).
“Employment of manipulative and devious devices” has a breadth, we assert, which permits us to find an indictable offense when it is necessary to do so “to insure the maintenance of fair and honest markets.” The resemblance from an analytic viewpoint between our approach and that employed in Shaw v. Director of Public Prosecutions, 2 A.E.R. 452 (1961), where the House of Lords recognized that the common law crime of corrupting public morals requires a residual power to proscribe unanticipated wickedness contra bonos mores, strikes me as disturbingly close.2 To protect and preserve honest markets we assert the residual power derived from a broad statute and rule to proscribe conduct surrounding a corporate takeover never heretofore branded improper by judicial decision, Commission rule or determination, or explicit Congressional act. And yet I am convinced that our assertion of this authority is in keeping with existing law.
The concern to avoid the taint of ex post facto application of a statute, a concern evidenced by the Supreme Court in Bouie v. City of Columbia, 378 U.S. 347, 84 S.Ct. 1697, 12 L.Ed.2d 894 (1964), where the Court refused to permit the application of a new and unusual interpretation of a state criminal statute to conduct taking place prior to the new interpretation, only feebly survives in the area of section 10(b) criminal prosecution. In this case, we are untroubled by the fact that never before has the section and rule been applied to a similar situation. Furthermore, in fixing criminal liability under section 10(b) and Rule 10b-5, we attach reduced importance to assertions of vagueness. The fact that men of common intelligence — or lawyers and judges for that matter — “must necessarily guess at its meaning and differ as to its
“No one may be required at peril of life, liberty or property to speculate as to the meaning of penal statutes. All are entitled to be informed as to what the State commands or forbids.” Lanzetta v. New Jersey, 306 U.S. 451, 453, 59 S.Ct. 618, 619, 83 L.Ed. 888, 890 (1939).
Rather we respond to stern and demanding fatalism reflected in this passage appearing in Nash v. United States, 229 U.S. 373, 377, 33 S.Ct. 780, 781, 57 L.Ed. 1232, 1235 (1913):
“[T]he law is full of instances where a man‘s fate depends on his estimating rightly, that is, as the jury subsequently estimates it, some matter of degree. If his judgment is wrong, not only may he incur a fine or a short imprisonment . . .; he may incur the penalty of death.”
Finally, all these things we do while fully aware that under section 32(a) of the Securities Exchange Act of 1934,
An expansive statute under which the prosecution encounters such reduced obstacles imposes a heavy responsibility upon the prosecutor. Many are his potential targets and few are the standards by which the exercise of his discretion can be measured. See Grayned v. City of Rockford, 408 U.S. 104, 108-9, 92 S.Ct. 2294, 2298-2299, 33 L.Ed.2d 222, 227-228 (1972). His decision to prosecute, no less than his failure to prosecute, may subject him to legitimate criticism. Whatever his decision, it is likely to be one in keeping with the political realities within which he functions. This is a part of the price that this type of statute compels us to pay.
Thus, although I have no choice but to join my brothers, I find no satisfaction or pleasure in doing so.
ON PETITION FOR REHEARING
Appellees Charnay, Davis and Maheu have petitioned for a rehearing, contending, inter alia, that the decision of this court entered May 7, 1976, is in direct conflict with the decision of the Supreme Court in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668, entered March 30, 1976. Prior to filing its opinion this court considered the effect of Ernst & Ernst and concluded that our opinion was not in conflict with the holding in that case. After re-examination of the opinion in Ernst & Ernst in the light of the petition for rehearing, we reach the same result, but deem it advisable to enter this supplemental order explaining and clarifying the reasons for our conclusion.
Ernst & Ernst v. Hochfelder was a civil action for damages for alleged negligent conduct. The issues before the Court and
“We granted certiorari to resolve the question whether a private cause of action for damages will lie under § 10(b) and Rule 10b-5 in the absence of any allegation of ‘scienter’ — intent to deceive, manipulate, or defraud. 421 U.S. 909, 95 S.Ct. 1557, 43 L.Ed.2d 773 (1975). We conclude that it will not and therefore we reverse.” [96 S.Ct. 1381]
“Use of the word ‘manipulative’ is especially significant. It is and was virtually a term of art when used in connection with securities markets. It connotes intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities.” [96 S.Ct. 1384]
“When a statute speaks so specifically in terms of manipulation and deception, and of implementing devices and contrivances — the commonly understood terminology of intentional wrongdoing — and when its history reflects no more expansive intent, we are quite unwilling to extend the scope of the statute to negligent conduct.
Recognizing that § 10(b) and Rule 10b-5 might be held to require proof of more than negligent nonfeasance by Ernst & Ernst as a precondition to the imposition of civil liability, respondents further contend that the case should be remanded for trial under whatever standard is adopted. Throughout the lengthy history of this case respondents have proceeded on a theory of liability premised on negligence, specifically disclaiming that Ernst & Ernst had engaged in fraud or intentional misconduct. In these circumstances, we think it inappropriate to remand the action for further proceedings.” [96 S.Ct. 1391]
This case obviously involves more than negligent conduct. Appellees argue, however, that in holding that the indictment was not fatally defective by reason of its purported failure to allege a specific intent to defraud our decision is contrary to the holding in Ernst & Ernst. Appellees misconstrue the basis of our disposition of this issue.
Although we did state that the cases have held that there is no requirement of proof that a defendant knew he was violating a particular S.E.C. rule, we did not hold that scienter per se was not a required element of the offense. Rather we noted that it was necessary for the prosecution to show an intentional act with “a realization on the defendant‘s part that he was doing a wrongful act.” Similarly, Judge Sneed in his concurring opinion noted that “the intent necessary . . . is merely that of intending to do the acts prohibited, rather than intent to violate the statute.” These statements are consistent with the holding in Ernst & Ernst.
Specific allegations in the indictment charging the requisite mental state and scienter include the following:
Count II charges that the defendants and their coconspirators “did unlawfully, wilfully and knowingly, in connection with the purchase and sale of securities, to wit, the common stock of Air West, directly and indirectly, by the use of the means and instrumentalities of interstate commerce and the mails and the facilities of a national securities exchange, (a) employ a device, scheme, and artifice to defraud, (b) make untrue statements of material facts and omit to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and (c) engage in acts, practices and courses of business which operated as a fraud and deceit upon purchasers and sellers of Air West securities.”
Count III charges that the defendants and their coconspirators “did devise and intend to devise a scheme and artifice to defraud the directors and stockholders of Air West, which said scheme and artifice to defraud is set forth more fully in paragraphs 13 and 14a through 14e of Count I of this indictment.”
We conclude that these and other similar allegations in the indictment are sufficient to charge the requisite intent and scienter under Ernst & Ernst.
The panel as constituted in this case has voted to deny the petition for rehearing and to reject the suggestion for a rehearing in banc.
The full court has been advised of the suggestion for in banc rehearing, and no judge of the court has requested a vote on the suggestion for rehearing in banc. Fed.R.App.P. 35(b).
The petition for rehearing is denied and the suggestion for a rehearing in banc is rejected.
Notes
SEC Rule 10b-1,(a) It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, or for any member of a national securities exchange —
* * *
(2) To effect, alone or with one or more other persons, a series of transactions in any security registered on a national securities exchange creating actual or apparent active trading in such security or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.
Hart, Law, Liberty, and Morality (1963) contains a discussion of Shaw and related problems.The term “manipulative or deceptive device or contrivance,” as used in section 10(b) (48 Stat. 891; 15 U.S.C. 78j(b)), is hereby defined to include any act or omission to act with respect to any security exempted from the operation of section 12(a) 48 Stat. 892; 15 U.S.C. 78l(a)) pursuant to any section in this part which specifically provides that this section shall be applicable to such security, if such act or omission to act would have been unlawful under section 9(a) (48 Stat. 889; 15 U.S.C. 78i(a)), or any rule or regulation heretofore or hereafter prescribed thereunder, if done or omitted to be done with respect to a security registered on a national securities exchange, and the use of any means or instrumentality of interstate commerce or of the mails or of any facility of any national securities exchange to use or employ any such device or contrivance in connection with the purchase or sale of any such security is hereby prohibited.
“(a) Defendants Howard R. Hughes, Chester C. Davis, and Robert A. Maheu would represent to stockholders of Air West and others that if the Hughes Tool proposal was not accepted by Air West, the price of the common stock of Air West would decline substantially,
“(b) Defendants Howard R. Hughes, Chester C. Davis, Robert A. Maheu, and David B. Charnay, aided by co-conspirators Greenspun and Crockett, would manipulate and cause a decline in the market price of Air West common stock on the AMEX in the following manner: . . .”
Fraud by wire, radio, or television
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined not more than $1,000 or imprisoned not more than five years, or both.
Whenever an indictment is dismissed for any error, defect, or irregularity with respect to the grand jury, or an indictment or information filed after the defendant waives in open court prosecution by indictment is found otherwise defective or insufficient for any cause, after the period prescribed by the applicable statute of limitations has expired, a new indictment may be returned in the appropriate jurisdiction within six calendar months of the date of the dismissal of the indictment or information, or, if no regular grand jury is in session in the appropriate jurisdiction when the indictment or information is dismissed, within six calendar months of the date when the next regular grand jury is convened, which new indictment shall not be barred by any statute of limitations.
Whenever an indictment is found defective or insufficient for any cause, after the period prescribed by the applicable statute of limitations has expired, a new indictment may be returned at any time during the next succeeding term of court following such finding, during which a grand jury thereof shall be in session.