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United States v. Carl

decided as amended december 7 1973.: November 26, 1973.



McLaughlin, Van Dusen, and Rosenn, Circuit Judges.

Author: Rosenn


ROSENN, Circuit Judge

This appeal involves a conviction for a violation of the criminal anti-fraud provisions of the federal Securities Act of 1933 growing out of intrastate offerings and sales of securities. Appellant, Carl Benson, appeals from a conviction and sentence of the district court for the Western District of Pennsylvania for a violation of Section 17(a) of the 1933 Securities Act, 15 U.S.C. ยง 77 q(a). United States v. Benson, Opinion of March 13, 1973 (Crim. No. 68-202, W.D. Pa.).

Benson was president and principal stockholder of C. A. Benson & Co., Inc., a Pennsylvania corporation registered with the U.S. Securities and Exchange Commission (SEC) as a broker-dealer in securities. He and six salesmen of his company were indicted and tried to a jury on 33 counts for violation of Section 17(a) of the 1933 Act by wilfully perpetrating a scheme to defraud in the offer and sale of securities by use of the mails. They were also charged and tried for 23 counts of mail fraud and one count of conspiracy. After a trial of approximately eight weeks, the salesmen were acquitted on all counts; Benson was acquitted on all counts except one count of fraud in the sale of securities. After sentencing, this appeal followed.

The charges against Benson stem from the efforts of Benson & Co., Inc., as underwriter and broker-dealer for the Home Makers Savings Corporation (HMS). HMS was incorporated in Pennsylvania in 1961 to sell and distribute household appliances. By 1962, however, the corporation became concerned solely with the merchandising of natural vitamin products. In mid-year it undertook the marketing of "Mr. Enzyme," purported to be a food supplement to aid the human digestive process. Beginning in January 1963 the marketing of "Mr. Enzyme" became the sole business of HMS. Norwich Pharmaceutical Company became the sole distributor of the product; Strong-Cobb-Arner, Inc., its sole supplier.

Benson & Co., Inc., served as underwriter for two intrastate offerings of HMS stock. The first offering was made in January 1962 and consisted of 35,000 shares at $3.00 per share; the second was made in September 1962 and consisted of 20,000 shares at $5.00 per share. As a result, Benson & Co., Inc., raised $205,000 on behalf of HMS. Of that sum, $157,440.94 was received by HMS; the remainder was paid to Benson & Co., Inc.

Since 1962, Benson had maintained close ties to the HMS corporation. In that year he was elected to the board of directors. Commencing June 20, 1962, he additionally served as the company's vice-president and president and later was retained as a paid financial consultant.

From its inception, HMS never operated at a profit. In its effort to develop a market for "Mr. Enzyme," HMS spent in excess of $75,000 for advertising during the first quarter of 1963. During the same period, its net sales were $73,760.68. As of April 30, 1963, total liabilities of the company exceeded total assets, a condition which became aggravated with the passage of time. As of May 31, 1963, the corporation had an accumulated operating deficit in excess of $200,000.

In mid-1963 the difficulties of HMS were exacerbated by proceedings, instituted by both the federal government and the state of Pennsylvania, to check what was alleged to be misbranding and false and misleading advertising of the "Mr. Enzyme" product. On May 18, 1963, the state of Pennsylvania embargoed approximately 38 cases of "Mr. Enzyme." On May 27, 1963, the United States District Court for the Western District of Pennsylvania, pursuant to the federal Food and Drug Acts, ordered the seizure of 78 cases of the product. Seven days later the U.S. Marshal, accompanied by officials of the Food and Drug Administration, executed the seizure.

Immediately following the seizure, the manufacturer of "Mr. Enzyme" informed HMS that it would not make any further shipments of its product and that it was discontinuing all production. All advertising of the product ceased. On June 17 Norwich notified HMS that it would not continue further distribution. Norwich was replaced by the B.W. Mansfield Corporation, a small distributor with outlets only in California.

The financial condition of HMS continued to deteriorate. It was able neither to meet its liabilities nor to secure further bank loans. Its net sales for the last seven months of 1963 amounted to slightly in excess of $6,000. By the end of the same year, its accumulated deficit amounted to $227,531.80. Its net sales for the year 1964 amounted to approximately $8,000. In May 1964 HMS vacated its offices and the landlord seized its furniture and fixtures to secure back payment of rent. By June 1964 the company had no full time employees.

Benson was indicted on October 7, 1968. Count 1 of the indictment, upon which he was convicted, charged that he:

The Government produced evidence which, if believed, showed that on various occasions in 1963 and early 1964 Benson called John Gillen, the alleged victim in Count 1, about the activities and prospects of HMS, and suggested that Gillen purchase HMS stock; that Gillen, although aware that the company was not making money at the time he purchased the HMS stock, was not advised that it had a deficit or that it could not meet its bills as they came due. Gillen's purchases were made on November 12, 1963, December 6, 1963, and February 25, 1964. There was also evidence, if believed, that Gillen was not informed of the FDA action against "Mr. Enzyme" and that not until after his last purchase did he learn that the product was under state and federal investigation; that it was not until late 1964 or early 1965, when he approached Benson to sell the stock, that Gillen first learned of the governmental embargoes of "Mr. Enzyme" and that "there was no market" in the stock. Gillen's testimony indicated that he made no independent investigation of the stock but relied upon Benson in making the purchases.

On this appeal, Benson alleges a number of trial errors, including:

1. Prejudicial remarks of the prosecutor in his summation to the jury;

2. Cross-examination of Benson as to determinations of administrative agencies not resulting in criminal conviction;

3. The introduction of expert testimony as to custom and usage in the securities industry; and

4. Violation of his rights to a speedy trial and to due process of law.

Benson also complains that the evidence was insufficient to sustain the verdict and that the verdict was inconsistent and conjectural. After a careful ...

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