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United States v. Dukow

decided: July 31, 1972.


Gibbons and Hunter, Circuit Judges, and Becker, District Judge.

Author: Per Curiam


This is a securities fraud case. Defendant Albert N. Dukow ("Dukow") appeals from a judgment of sentence after conviction by a jury on charges of Securities Fraud and Mail Fraud.*fn1 Dukow is a certified public accountant and business promoter whose troubles stemmed from his activities in connection with the affairs of Champion Industries, Inc. ("Champion"), a Delaware corporation, of which he obtained control in 1962. His co-defendants, charged in the same indictment, were Thomas S. Crow and Saul Brourman, the executive officers of Crow, Brourman and Chatkin ("CBC"), a Pittsburgh over-the-counter brokerage house which dealt in Champion stock, and William J. Abbott, the CBC sales manager. The indictment charged Dukow and the co-defendants with scheming to defraud investors by the sale of Champion stock and using the mails in furtherance of the scheme.*fn2 The principal thrust of the government's case against Dukow was that, as the controlling party in Champion, he made deliberate misrepresentations and failed to state material facts about the condition of Champion to the CBC management and to its salesmen, who, as the record shows, sold substantial quantities of Champion stock to the investing public.

The sole question of substance before us is one of sufficiency of the evidence to sustain a conviction.*fn3 When sufficiency is at issue on appeal, it is fundamental that we must view the evidence in the light most favorable to the government. United States v. Hamilton, 457 F.2d 95 (3d Cir. 1972); United States v. De Cavalcante, 440 F.2d 1264, 1273 (3d Cir. 1971). It is apparent to us that, when the evidence is viewed in that light, it was sufficient to present a jury question and to support the verdict upon which Dukow was convicted. United States v. Kenny, 462 F.2d 1205 (3d Cir. 1972); United States v. Carlson, 359 F.2d 592, 597 (3d Cir. 1966). The record is voluminous, emanating from a six-week long trial. However, it is unnecessary to review the record in its entirety; the following facts which appear of record amply support the jury's verdict.

When Dukow acquired the controlling stock interest in Champion, it was a paper corporation with no assets of any substance. Shortly thereafter, Dukow, as the controlling party of Champion, initiated a series of financial maneuvers leading to the acquisition by Champion of the Forsberg Manufacturing Company ("Forsberg"), a Connecticut-based manufacturer of hand tools, by means of a so-called bootstrap operation.*fn4 After the acquisition, Forsberg's cash was used to pay the officers and staff of Champion. In fact, Forsberg was the only source of money for Champion, although, as the result of being acquired by Champion, it had the additional expense of a $150,000 mortgage to the lending firm resulting from the bootstrap operation (see n. 4). There was evidence that Forsberg defaulted on the mortgage notes, and that Dukow was aware of the default. There was also evidence that Champion failed to make payments on the $400,000 debt to Harold Forsberg from whom Champion had purchased the Forsberg stock, and that on October 26, 1962 was declared in default on the agreement of sale.

It is clear from the record that the financial condition of Forsberg was central to the condition of Champion and to the legitimacy of the representations made (see infra) by Dukow to the management and salesmen of CBC. Forsberg had been experiencing declining production and sales for several years before its acquisition by Champion; however there was evidence that its condition deteriorated still further after Dukow assumed control. For instance, Miss Catherine Toomey, Secretary-Treasurer of Forsberg, and its bookkeeper for some forty years, testified that, before Dukow assumed control of Forsberg, the company was paying 100% on its accounts payable each month; in August 1962, after Dukow took control, the company paid 75%; in November 60%; and by December, Forsberg was paying only 30% or 40%. According to Miss Toomey, Dukow was aware of this difficulty with creditors. Miss Toomey also testified that during November and December 1962, between sixty and eighty creditors sent certified dunning letters and the company received calls from attorneys demanding payment of outstanding bills. Every day she would give Dukow a list of those who had called, but he would reply, "Well, don't worry about it, I am getting money in." Some suppliers ceased supplying goods to the company. Late in November the payroll checks to the employees "bounced" and a Connecticut state official threatened padlock proceedings unless the checks were made good. Miss Toomey testified that in December Forsberg owed over $5200 to the Internal Revenue Service, and that in January the sum increased to over $12,000; Dukow was aware, according to Miss Toomey, that these sums were unpaid.

On the subject of Forsberg's sales, there was evidence that 1962 sales were below those of 1961, during which Forsberg had lost money. Dukow testified that production and sales actually increased during the period from July to December 1962, while he was in control of Forsberg.*fn5 However, the record also establishes that this increase followed a similar increase for the same period in 1961 but was below the increase for that period of 1961. And, there was evidence that, despite Forsberg's financial difficulties, salaries for officers rose substantially during the period of the Dukow management and that Forsberg rented two Lincoln Continentals, one of which was for Dukow's use. Moreover, despite the funneling of funds to it from Forsberg, Champion was constantly in dire need of cash.

Dukow had contemplated efforts to raise working capital to put Champion on a sounder financial base so as to make possible the acquisition of other subsidiaries, and it was in this connection that he approached CBC with respect to its sale over the counter of Champion stock. Dukow met with Abbott and Crow in October 1962. A meeting was then arranged for Dukow to speak to the CBC salesman in Pittsburgh on January 24, 1963 about the prospects of Champion. The record supports the conclusion that on this date Dukow was aware of all of the financial problems of Champion and its principal prop of operations, Forsberg, which we have recited. Yet, according to the government's testimony, Dukow represented to the CBC salesmen at the January 24th meeting that: (1) Forsberg was "in the black" and "making money"; (2) the book value of Champion was $1.78 a share; (3) Champion would show between $.22 and $.25 a share earnings in the coming (1963) year, with Forsberg doing up to $60-70 thousand a month in sales; and (4) Champion had a good line of credit. Based upon the facts adduced by the government including those we have set forth above, there was ample basis for the jury to infer that these representations were false.

The government introduced testimony that at the January 24, 1963 meeting, Dukow informed the CBC salesmen that Champion had already acquired Sterling Hardware, a wholesale firm in the midwest which would serve as an outlet for Forsberg products. However, the record contains evidence which would support the conclusion that this representation was false; the Dukow's contract to acquire Sterling had expired by January 24, 1963; that there was no second contract; and that Dukow was still seeking funds, as of that date, and as late as February 16, 1962, with which to acquire Sterling.

In addition to that misrepresentation about the Sterling Hardware acquisition, the record contains a transcript of messages sent from the CBC office in Pittsburgh to the CBC office in Florida which represented that Champion had already acquired Circle Air Products of New York, A&K Electric Corp. and Ultra-Dynamics Corp. Dukow conceded that no such acquisitions had been made but argues that there is no evidence connecting him with the (mis) representation contained in this transcript. However, a government witness, Brewster, formerly a bank vice president and loan officer, testified that, on February 16, 1963, Dukow had represented to him in the presence of Crow that Champion had acquired, inter alia, A&K Electric and Circle Air Products.

At the January 24th meeting, Dukow presented the CBC salesmen with a binder containing a collection of brochures and reports that he had personally prepared for distribution from time to time to the shareholders of Champion. These brochures were to be used by the salesmen to solicit sales for Champion stock. In addition to the evidence from which the jury could conclude that oral misrepresentations were made, the jury could also have concluded that the brochure contained false and misleading statements. The brochure contained a latter from Dukow to the shareholders of Champion dated October 29, 1962 in which Dukow made certain representations about the financial condition of Champion. The letter indicates that the net worth of Forsberg was $538,000 "giving effect to the refinancing and sale and leaseback of the real estate of the company" (Gov't ex. 84). However, there is evidence that there never was a sale and leaseback, although Brodsky testified that he was negotiating for one in the fall of 1962 and in February of 1963. Dukow claims that the August 1962 balance sheet reflecting the sale and leaseback was only a pro forma sheet, yet there is evidence that Dukow never informed the salesmen that this was the case. The October 29 letter also suggests that audited financial figures would soon be forthcoming. In fact, neither Mr. Forney, an accountant hired by Dukow to prepare a balance sheet for Champion, nor the national auditing firm of Arthur Andersen and Co. hired later, was ever able to supply an audited balance sheet since there was neither a general ledger nor any other books of original entry. When Arthur Andersen finally submitted figures to Champion in April, none of the figures were verified. The October 29 letter also stated that:

"Comparative sales figures have not been computed, but we can anticipate $800,000 sales volume for Forsberg Manufacturing Company and an estimated net profit of $50,000."

The record, on the other hand, shows that comparative sales figures had been computed, and the projection flies in the face of evidence that, on a comparative basis, sales were declining.

Supplementing the evidence of misrepresentations, the government introduced evidence that Dukow failed to disclose to the CBC salesmen many material facts of which he had knowledge. Several CBC salesmen testified that Dukow never told them that Champion was in default on the Forsberg notes. Yet, the record also shows that Harold Forsberg was threatening to repossess the plant,*fn5a and that, as of February 5, 1963, Dukow was trying to borrow money to prevent a repossession.*fn6 Indeed, Dukow never informed CBC of these matters until after Harold Forsberg took possession on February 20, 1963. Brourman testified that Dukow told him in March that he was making new financing arrangements to get Forsberg back. CBC stopped selling Champion stock for a short time after learning of the repossession but commenced selling it again on March 15, 1963 after reassurances from Dukow that ...

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