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UNITED STATES v. YEAMAN

March 10, 1997

UNITED STATES OF AMERICA V. DAVID REX YEAMAN


The opinion of the court was delivered by: NEWCOMER

 Presently before this Court are defendant David Rex Yeaman's Motion to Strike Language, and the government's response thereto, and Yeaman's reply thereto, and the parties' supplemental memoranda thereto. For the following reasons, this Court will deny Yeaman's motion to strike language.

 I. Introduction

 The indictment charges defendant David Rex Yeaman and his co-defendants with having conspired to manipulate the prices of five stocks and then leasing those stocks to off-shore reinsurance companies for inclusion on their balance sheets as inflated assets. *fn1" Yeaman is charged with having a controlling influence over the issuers of three of the five stocks named in the indictment., namely, U.S. Card Investors, Inc. ("U.S. Card"), Omega Power, Inc. ("Omega"), and American Family Services, Inc. ("AFS"), through other companies Yeaman controlled. (Indictment at P 2(r)). The indictment further alleges that Yeaman failed to disclose his prior securities law violations in documents filed with the SEC and NASD and/or provided to market makers, which were documents available to the investing public.

  Yeaman moves to strike language from the indictment. Paragraph 6(o)(2) in the indictment alleges that Yeaman "did knowingly and intentionally cause documents to be held by market makers and filed with the SEC and NASD, which failed to disclose that defendant DAVID YEAMAN. . . (2) previously had been found to have violated securities laws . . . ." (Indictment at P 6(o)(2)). *fn2" Yeaman argues that he would be prejudiced if the jury is given the indictment because the language in paragraph 6(o)(2) contains irrelevant allegations. Yeaman contends that such allegations are irrelevant because (1) he had no duty to disclose the previous findings of securities violations (2) and/or there is documentary evidence in the possession of the United States government showing that the duty was discharged.

 The government responds that Yeaman's arguments are specious for the following reasons: (1) the requirement to disclose "material" information pervades the entire panoply of securities regulation and overrides the "guides" stated in Regulation S-K; (2) compliance with the guides in Regulations -- especially when only purported compliance -- cannot operate as a defense to violations of the anti-fraud provisions of the federal securities laws, especially in a criminal context; (3) the guides set forth in Regulation S-K relate only to registrants and not to other non-reporting companies whose stocks are publicly traded; (4) the five year provision in Regulation S-K is only a "guide" which does not set the outside limits on disclosure of historical information; (5) when Yeaman purported to make disclosure of prior securities laws violations, such disclosure was woefully inadequate; and (6) documents provided by Yeaman controlled companies to the NASD and to market makers to commence secondary trading markets contained material omissions by failing to disclose Yeaman's control over these stocks and his near 20-year long history as a securities violator.

 In reply, Yeaman contends that the government's arguments are lacking in merit because (1) due process prohibits the government from imposing criminal liability under Rule 12b-20 in the face of a specific rule governing the disclosure of legal proceedings and (2) all relevant documents complied with Regulation S-K or Rule 15c2-11(a)(5). *fn3"

 II. Standard for Motion to Strike Language

 Rule 7(d) of the Federal Rules of Criminal Procedure permits this Court to strike surplusage from the indictment upon defendant's motion. Fed. R. Crim. P. 7(d); United States v. Moya-Gomez, 860 F.2d 706, 762-63 (7th Cir. 1988). The purpose of Rule 7(d) is to protect a defendant against prejudicial allegations that are neither relevant nor material to the charges made in the indictment. United States v. Fahey, 769 F.2d 829, 841-42 (1st Cir. 1985); United States v. Ramirez, 710 F.2d 535, 544-45 (9th Cir. 1983). The motion should not be granted unless it is plain that the allegations in the indictment are not relevant to the charge made or contain prejudicial matter. Id. (citations omitted).

 III. Discussion

 In his motion, Yeaman argues that the language in paragraph 6(o)(2) prejudices him because it contains irrelevant allegations. More specifically, and raising broader issues, Yeaman contends that the language of paragraph 6(o)(2) must be stricken because he had no duty to disclose such former securities laws violations and/or that he did disclose the information required by relevant law. The government opposes Yeaman's position, arguing that Yeaman did have a duty to disclose such information under federal securities law and that Yeaman failed to fully disclose such information. In order to resolve this dispute, this Court must determine whether Yeaman had a duty to disclose, and if he did have a duty to disclose, whether he fully complied with his disclosure obligations.

 Not surprisingly, Yeaman and the government offer two differing views with respect to Yeaman's duty to disclose information under federal securities law. The government contends that Yeaman has a duty to disclose all information which is "material," as defined by case law addressing the anti-fraud statutes of the federal securities laws. *fn4" In the alternative, the government contends that Yeaman also made certain misleading statements, which required him to make further disclosures, and that Yeaman failed to comply with the specific disclosure requirements of Regulation S-K and Rule 15c2-11. See 17 C.F.R. § 229.401; 17 C.F.R. § 15c2-11(a)(5).

 In contrast, Yeaman contends that the general anti-fraud statutes of the federal securities laws do not impose a general duty to disclose all information that may be material. Instead, Yeaman contends that he is required to disclose only such information as required by specific statute, rule or regulation, namely, in this case, Regulation S-K and Rule 15c2-11. Thus, the questions posited at this point are whether the government's proposed standard or Yeaman's proposed standard of disclosure apply with respect to Yeaman's alleged past securities violations, and whether Yeaman complied with the proper standard of disclosure.

 The principal Count of the indictment charges Yeaman with conspiracy to violate the wire fraud statute and Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5. Section 10(b), the central anti-fraud provision of the Exchange Act makes it unlawful "for any person directly or indirectly":

 
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 Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

 15 U.S.C. § 78j(b).

 Rule 10b-5 further defines the conduct prohibited under Section 10(b), making it unlawful:

 
(a) to employ any device, scheme, or artifice to defraud,
 
(b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement 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 as a fraud or ...

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