The opinion of the court was delivered by: MUIR
On March 16, 1978, a 14-count indictment was handed down charging Pray with violations of 15 U.S.C. §§ 78h(b) & 78j(b), 17 C.F.R. § 240.8c-1 and 240.10b-5, and 18 U.S.C. §§ 2, 1341, 1961, 1962(c), 1963 & 2314. On April 11, 1978, Pray filed a motion for the extension of the time period set forth in para. 3.6 of the Order of this Court dated March 20, 1978 which governs the filing of briefs in support of pre-trial motions. On April 12, 1978, the Court granted Pray's motion and directed that if he filed pre-trial motions, his supporting brief would be due within 15 days of the date of the filing of the motion rather than the time set forth in the practice order. On the same day, Pray filed a motion pursuant to F.R.Crim.P. 12(b) to dismiss the indictment or for such other relief as the Court deems appropriate. On May 1, 1978, Pray filed his brief in support of that motion. The United States filed a responsive brief on May 11, 1978. Pray filed a reply brief on May 15, 1978.
Pray's brief in support of his motion to dismiss the indictment should have been filed on or before April 27, 1978 according to this Court's order issued on April 12, 1978. The brief was filed two days late. The United States correctly asserts that according to para. 3.6 of the Order of this Court dated March 20, 1978 in the above-captioned case the Court has the authority to deny the motion. The Government has requested, however, that the motion be considered on the merits and has addressed all of Pray's contentions in its brief. Because the briefing on the motion to dismiss the indictment has been completed, the Court will reluctantly consider the motion. However, the Court is disturbed by counsel's late filing of his supporting brief.
The indictment returned by the grand jury in this case charges Pray with the following violations of federal law. Count 1 alleges that Pray, a securities broker-dealer doing business in Lewisburg, Pennsylvania and a member of the National Association of Securities Dealers, engaged in a pattern of fraudulent conduct through which he obtained money from his customers purportedly for investment in securities but which in fact was converted to Pray's own use, that from time to time he mailed his customers checks supposedly representing interest or dividends on their investment when in fact such checks were mailed in order to conceal the fact that he had converted their money to his own use, that he sent letters authorizing the liquidation of certain mutual fund holdings belonging to one of his customers without the knowledge and consent of the customer, that he diverted the proceeds of such sales to his own use, and that he concealed the transactions from his customers. Count 1 then states that in violation of 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5 (hereafter Rule 10b-5) Pray received $75,000 from Phoebe J. Yeager, invested $50,008.51 of that sum in securities, converted the remainder to his own use, and mailed a letter to Mrs. Yeager containing a check for $1,000.00 in furtherance of his scheme to defraud her. Count 2 alleges that Pray received $26,000 from Harry R. Garvin for the purpose of purchasing securities and converted the entire sum to his own use and that he sent two checks to Mr. Garvin purportedly representing interest on Mr. Garvin's investment. Count 3 alleges that on January 6, 1976, Pray by letter authorized the sale of 3,000 shares of Decatur Fund Securities belonging to Adelaide M. Hill, one of his customers, without her knowledge and consent. Count 4 alleges that the mailing of the letter which was part of the scheme to defraud Mrs. Hill set forth in Count 3 violated the mail fraud statute, 18 U.S.C. § 1341. Count 5 alleges that Pray caused the check for $30,000 representing the proceeds of the sale of Mrs. Hill's stock to be placed in the mail, knowing the same to have been stolen, converted, or taken by fraud. Count 6 alleges that on September 20, 1976, Pray authorized the sale of 1264.755 shares of Mrs. Hill's Decatur Fund securities by letter without her consent. Count 7 sets forth the mailing of the letter which authorized the sale of the stock and Count 8 charges Pray with causing the transportation of a check representing the proceeds of the sale which he knew had been obtained by fraud. Count 9 alleges that on December 2, 1976, Pray caused the sale of two other blocks of Mrs. Hill's stock by letter without her knowledge and consent. Counts 10 and 11 charge Pray with the transportation of two different checks representing the proceeds of that sale which Pray knew had been obtained by fraud. Counts 12 and 13 charge Pray with the hypothecation of securities belonging to two of his customers, Carl D. Hockenbury and Carl D. Bitler, Jr. Count 14 alleges that the violations set forth in counts 1 through 13 constitute a pattern of racketeering activity which is proscribed by 18 U.S.C. §§ 1961, 1962 & 1963.
Pray raises several objections to the indictment. He claims that counts 1, 2, 4, 6, 7, 9, 12, and 13 fail to specify that Pray engaged in conduct and violation of federal law. Pray also asserts that Counts 1 through 4, 6, 7, and 9 are barred by the statute of limitations and that those counts, together with counts 12 and 13 are barred because of earlier civil proceedings involving the same transactions. Pray asserts that the securities laws, specifically 15 U.S.C. §§ 78h(b) & 78j(b) and 17 C.F.R. §§ 240.8c & 240.10b-5 define criminal conduct too broadly and that they contain an improper delegation of Congress's authority to an administrative agency. Pray also asserts that the entire indictment should be dismissed because the testimony presented to the grand jury was hearsay and he contends that certain counts of the indictment are duplicative and cannot legally be set forth in separate counts. The Court will deal with Pray's contentions seriatim.
Pray claims that certain counts of the indictment do not set forth criminal conduct with the required specificity. An indictment is sufficient to withstand such a challenge so long as it both contains the elements of the offense charged and fairly informs a defendant of the charge against which he must defend. See Hamling v. United States, 418 U.S. 87, 117, 41 L. Ed. 2d 590, 94 S. Ct. 2887 (1974). Pray states that although Count 1 is sufficient to apprise him of the charges, the facts as set forth in that Count do not state an offense under federal law. He objects to Count 2 on the same grounds. It is the Court's view that both counts 1 and 2 do set forth a cause of action under the applicable federal statutes.
Count 1 charges that Pray's actions violated 15 U.S.C. § 78j(b) and Rule 10b-5. The former section provides that it is unlawful for any person by the use of the mails to employ any manipulative or deceptive device in connection with the purchase or sale of any security in contravention of rules and regulations prescribed by the Securities Exchange Commission. Rule 10b-5(c) prohibits any person from engaging in an act of business which operates as a fraud upon any other person in connection with the purchase or sale of any security. Pray contends that counts 1 and 2 which allege the receipt of money from his customers for the purchase of securities and conversion of all or a portion of that money to his own use, followed by the mailing of sums of money which were represented to be dividends earned on the investment are insufficient because the first act, converting moneys for his own use, may constitute a fraud but has no connection with either the mails or interstate commerce, and that the second act, the mailing of the checks, constitutes the use of the mails but has no relation to either the purchase or sale of securities. Therefore, Pray argues that a violation of the securities law has not been set forth.
It is clear that at least in the context of a civil action brought to enforce § 78j(b) and Rule 10b-5 the deceptive or manipulative practice must be "in connection with" the purchase or sale of any securities. The Supreme Court has held that persons who neither purchased nor sold securities have no standing to maintain a private cause of action for money damages under Rule 10b-5 even if a fraudulent practice, such as concealing the favorable terms of a merger in order to induce such persons not to purchase securities, has been employed by the Defendants. Blue Chip Stamps vs. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975). See also Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied 343 U.S. 956, 96 L. Ed. 1356, 72 S. Ct. 1051 (1952). The Blue Chip-Birnbaum standing rule is not applicable in this case, however, because the money procured by Mr. Pray was intended by the customer to be used in the purchase of securities. Pray's contention is only that the mailing of checks to Mrs. Yeager and Mr. Garvin was neither a purchase nor a sale of securities. However, it is not necessary that the mailings themselves, which serve primarily to confer jurisdiction upon the federal court, constitute a sale or purchase of securities in and of themselves but only that the mailings be part of a general scheme to defraud which has a connection with the sale or purchase of securities. The Courts have recognized that an entire scheme to defraud may include the mailing of so-called "lulling" letters such as the ones allegedly mailed by Pray in this case which conceal the fraudulent device from the person against whom it is utilized. See, e.g., United States v. Pollack, 175 U.S. App. D.C. 227, 534 F.2d 964, 972 & n. 6 (1976). All that need be shown is that the mails have been used in furtherance of the alleged fraud and there is no requirement that any fraudulent representation inducing a sale or purchase of securities be by way of the mails so long as the requisite connection between a scheme to defraud and the use of the mails is made out. See Rude v. Cambell Square, Inc., 411 F. Supp. 1040 (D.S.D. 1976); see also Boone v. Baygh, 308 F.2d 711 (8th Cir. 1962). Therefore, counts 1 and 2 do set forth a violation of the securities laws over which this Court has jurisdiction.
Pray next claims that counts 4 and 7 are deficient and that no specific conduct is alleged in either count with respect to any individual so that the count does not apprise Pray of the charges against him. However, he concedes that the defect can be cured by a bill of particulars. A bill of particulars may be directed to be filed by the Government in the discretion of the Court if the indictment itself is not adequate to inform the defendant of the nature of the charges brought against him and if it is necessary to enable him adequately to prepare his defense. United States v. Addonizio, 451 F.2d 49, 63-64 (3d Cir. 1972). It is the view of the Court that a bill of particulars is not required in this case because the indictment is not defective. Count 4 alleges that on January 6, 1976, Pray mailed a letter to the Delaware Management Company in Philadelphia in furtherance of the scheme set forth in Paragraphs 1 through 5 of Count 1. The letter clearly is the same one referred to in Count 3 which authorized the Delaware Management Company to liquidate securities belonging to one of Pray's customers, Adelaide M. Hill. Count 4 differs from Count 3 in that it alleges a violation of the mail fraud statute, 18 U.S.C. § 1341, rather than of the securities laws. Similarly, count 7 alleges that on September 20, 1976, Pray mailed another letter to the Delaware Management Corporation of Philadelphia. This letter is the same one referred to in Count 6 which authorized the sale of two other blocks of securities belonging to Mrs. Hill. Counts 4 and 7, therefore, are sufficient to apprise Pray of the charges against him and to enable him to prepare an adequate defense. Therefore, the Court will not direct that a bill of particulars be filed on each count.
Pray asserts that Counts 6 and 9 which allege that Pray caused sales of a customer's securities without her consent are deficient because although they apprise Pray of the charges against him they constitute only simple theft rather than a fraud or manipulative device which violates the federal securities laws. Fraud as defined by the securities statute is not limited to the common law elements of deceit. Kubik v. Goldfield, 479 F.2d 472, 476 n. 6 (3d Cir. 1973). Any practice or course of business which operates as a fraud violates § 78j(b). See Blackie v. Barrack, 524 F.2d 891, 903 n. 19 (9th Cir. 1975). It is the Court's view that the unauthorized liquidation of a customer's mutual fund holdings without that customer's knowledge or consent by use of the mails constitutes a practice or course of business which is sufficiently fraudulent to state a violation of federal law. Therefore, counts 6 and 9 do set forth a violation of the securities laws.
Pray also contends that his prosecution is barred both because the statute of limitations has run with respect to certain counts of the indictment and that earlier civil proceedings involving the same alleged scheme to defraud have been conducted. However, Pray briefed neither of these contentions. Rather, he has requested the Court to leave the contentions open until evidence is produced at trial. The Government contends that because Pray failed to brief the points, they should be dismissed. In his reply brief, Pray argues that dismissal of the issues is inappropriate because briefing at this point is impossible without the disclosure of further evidence and that he should not be deemed to have waived the issues by failing to brief them.
F.R.Crim.P. 12(b) states that any defense which is capable of determination without the trial of the general issue may be raised before the trial by motion and Rule 12(f) states that failure to raise those defenses constitutes waiver. It may be that defense counsel could make a showing that two defenses which he raises, the statute of limitations and the earlier civil proceeding, are not capable of determination without the trial of the general issue so that the defenses need not be raised prior to trial. In addition, there is authority to support the proposition that the defense of the statute of limitations may be raised at the trial stage. See Askins v. United States, 102 U.S. App. D.C. 198, 251 F.2d 909, 913 & n. 6 (1958). If either of the defenses relate to the jurisdiction of the Court, they may be raised at any time. It is the view of the Court that Pray's failure to brief the issues, however, necessitates the dismissal of his claims at this time. The dismissal is without prejudice to Pray's right to raise those claims at a later time assuming that whenever they are raised they are timely.
Pray next alleges that the securities laws are deficient because the provisions relied upon by the Government, 15 U.S.C. § 78j(b) and 78h(b), are too broad in their remedial provisions with respect to defining a criminal offense. Pray claims that although such broad remedial provisions may be permissible in the context of civil liability, criminal activity must be more narrowly proscribed. Assuming, however, that the rules promulgated by the Securities and Exchange Commission (SEC) under the statutes, Rule 10b-5 and 17 C.F.R. § 240.8c-1, define the prohibited activity with the required specificity, Pray argues that Congress rather than the SEC has the responsibility of defining criminal conduct and that it would be improper for Congress to delegate that responsibility to an administrative agency. Pray raises this objection with respect to counts 1 through 3, 6, 9, 12 and 13, all of which set forth violations of the securities laws, as well as Counts 4 and 7 which allege a violation of 18 U.S.C. § 1341, the mail fraud statute. Pray did not brief the latter contention, namely that the mail fraud statute, to the extent that it relates to securities laws violations, is unconstitutional, and the Court will deem that that contention has been withdrawn.
Pray is in essence making a two-step attack on the securities laws. He argues first that the laws without reference to any regulations promulgated thereunder are too vague so that a person convicted of a violation thereof is not sufficiently apprised that his conduct was in violation of the law. If the administrative regulations cure the vagueness of the securities laws, however, Pray contends that in that event there has been an unlawful delegation of Congress's power ...