The opinion of the court was delivered by: WHIPPLE
This Court has had the benefit of an 18 day trial filled with voluminous testimony sharpened by expert direct and cross-examination and with eloquent and exhaustive oral argument. It has also received meticulous briefs and proposed findings of fact and conclusions of law from both the government and defense which press upon this Court the guilt or innocence of Walter H. Jones and Peter Moraites.
In essence Walter H. Jones and Peter Moraites have been accused of conspiring between themselves and with others to defraud the Englewood National Bank and Trust Company (Englewood) and its shareholders through a merger consummated in August of 1968 with Midland Bank and Trust Company (Midland). They also are accused of entering into a further conspiratorial scheme to defraud the shareholders of the newly merged bank in February 1969 incident to a recapitalization program. Both charges arise from an alleged failure to disclose and an alleged attempt to deliberately conceal the true status of ship loans on the books of the bank.
In particular Walter H. Jones is charged in Count 1 of the indictment, returned by a federal grant jury on August 25, 1971, of a conspiracy to violate 18 U.S.C. § 1341 (mail fraud), § 1343 (fraud by wire), 15 U.S.C. § 78ff(a) (penalty provision of the Securities and Exchange Act, 78(j) (manipulative and deceptive devices) and 17 C.F.R. 240.10b-5 promulgated thereunder and 18 U.S.C. § 1007 (Federal Deposit Insurance Corporation transaction). Count 2 charges a violation of the Securities Act. Count 3 charges the use of the mails to carry out the alleged scheme. Counts 4, 5, 6, 13, 14 and 16 charge mail fraud predicated on letters sent to or from Raymond Wessner, Deputy Commissioner, New Jersey Department of Banking and Insurance. Count 9 charges a conspiracy (18 U.S.C. § 371) to violate the Securities Act. Count 10 charges the substantive offense of violating certain provisions of the Securities Act. Counts 11 and 12 are predicated on a letter and enclosures sent to the stockholders of the Midland Bank and Trust Company, allegedly violative of 18 U.S.C. § 1341.
Peter Moraites stands charged with the same Counts of the indictment except a judgment of acquittal was entered as to him on Counts 7, 9, 10, 11, 12, 13, 14, 15 and 16 on October 29, 1973.
Judge Garth also dismissed Count 8 of this indictment as to both defendants on April 24, 1972 and this Court dismissed Count 7 of the indictment as to defendant Jones at the close of the government's case in chief on October 29, 1973.
Before this Court will address itself to the remaining Counts of the indictment outstanding as to both defendants, a controlling question of law must be analyzed and answered. Both in their briefs, delivered to the Court at the conclusion of the government's case in chief and at the conclusion of defendant Jones' case in chief, and in letters addressed to this Court on November 20, 1973 and November 26, 1973, the defendants and the government locked issue on the question of fraudulent intent. As I read the letters and briefs, it becomes apparent that the argument between the parties primarily centers on what weight the apparent absence of an actual injury in fact, in terms of loss of money or property, for the stockholders of the Englewood and Midland banks, is to have on the outcome of the case.
Initially no one seriously argues that the government need not show fraudulent intent to obtain a criminal conviction under the Securities Act, Rice v. United States, 149 F.2d 601 (10th Cir. 1945); Troutman v. United States, 100 F.2d 628 (10th Cir. 1938); United States v. Benjamin, 328 F.2d 854 (2d Cir.) cert. denied 377 U.S. 953, 84 S. Ct. 1631, 12 L. Ed. 2d 497 (1964), especially when it is yet seriously debated that such fraudulent intent is a prerequisite in proving even civil liability under the Act. Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951); Weber v. C. M.P. Corp., 242 F. Supp. 321 (S.D.N.Y.1965);
Kohn v. American Metal Climax, Inc., 458 F.2d 255 (3d Cir. 1972). There also can be no argument that the government need not prove that anyone was defrauded nor that investors suffered loss when prosecuting an indictment for mail fraud or securities fraud. Farrell v. United States, 321 F.2d 409 (9th Cir. 1963), cert. denied 375 U.S. 992, 84 S. Ct. 631, 11 L. Ed. 2d 478 (1964); Bobbroff v. United States, 202 F.2d 389 (9th Cir. 1953); United States v. Interstate Engineering Corp., 288 F. Supp. 402 (D.N.H.1967). If the defendants seek to move this Court to adopt a contrary argument, they have failed to do so.
The factual proof of injury is not irrelevant, however, to the government's successful prosecution of its case. Although it need not establish that actual injury occurred to make out a case of securities or mail fraud, the actual presence or absence of such injury does supply a factual foundation from which this Court can infer whether the defendants comported themselves with the fraudulent intent necessary for conviction under the Counts charged in the indictment. It is in this light, then, that the apparent absence of any actual injury in fact will be considered.
Further, it is clear to this Court that the government bears the burden of establishing the presence of fraudulent intent in these defendants beyond a reasonable doubt. Sitting now as trier of fact with 18 volumes of testimony and over 120 exhibits for the government and defense before me, I must find the defendants Jones and Moraites innocent, if I am unable to find, after drawing all inferences as consistent with their innocence as is reasonably probable, that they have committed the acts as charged in the indictment. Because I am now sitting as trier of the facts and because I am under an obligation to set forth a factual record on which I will base my ultimate legal conclusion of guilt or innocence I find:
Walter H. Jones and Peter Moraites have been political allies and friends since the 1940s. They became involved in a business relationship in 1958 when the Midland Bank was chartered. Peter Moraites was an original member of Midland's Board of Directors and Walter H. Jones was the bank's general counsel.
In fulfilling his role as a member of the Board, Peter Moraites, like others, was expected to bring business into the bank. Moraites was an attorney specializing in Maritime Law and naturally sought business for the bank in an area he knew best, ship financing. These loans were looked upon by him and others as lucrative and a good investment for the bank because they commanded a rate of interest higher than other commercial loans.
The first series of these loans were made in 1963 and 1964 in participation with New York banks that were specialized in this area. Subsequently, Midland began to make these ship loans on its own. The Midland Bank adopted an internal procedure whereby the Board of Directors established a ceiling which generally limited the overall amount of bank funds that could be extended in this type of lending and gave authority whether by formal resolution or custom, to President Pensec and Director Moraites to grant and approve shipping companies applying for these loans. This was an exception to its settled policies of having all loans of $25,000. or more, directly approved by the Board of Directors. The Board relied upon Pensec and Moraites to administer these loans efficiently.
In 1966 and 1967, thought was given to merging Midland with Englewood. Walter H. Jones, who always had been an investor in banking stock, and was a principal shareholder in the Midland bank both personally and through the instrumentality of Hoke, Inc., a corporation in which he owned a one-third interest, began to buy up shares in the Englewood National Bank in street name. This was done both because the stock in a merged and expanded bank was considered a good investment and because the ownership of this stock would enable him to insure that a merger would be accomplished.
The actual discussions which brought about the merger of the two banks and solidified the agreement between them were carried on by Donald Salmon and John Pensec on behalf of Midland, and by Joseph Skaller and Thomas Stagnitti, on behalf of Englewood. Salmon and Pensec were, respectively, the Chairman of the Board and President of Midland. Skaller and Stagnitti were, respectively, the Chairman of the Board and the President of Englewood. Ultimately an Agreement of Merger was drafted by Messrs. Weisenger, Liebowitz and Klinger, attorneys for the banks. Their aid was solicited because Walter Jones was general counsel for both banks and because Jones had been specifically excluded from the merger negotiations by Skaller.
Under the terms of the Agreement of Merger, stockholders of Midland and Englewood would each receive one share of stock in the merged bank in exchange for each share which they had held in Midland and Englewood. The Agreement of Merger provided for each party to make two further financial disclosures to the other party subsequent to the Agreement's execution: audited financial statements prepared by the certified public accountants of the respective banks were to be exchanged "in due course" and "cold comfort letters" prepared by such accountants were to be exchanged prior to closing. The Agreement of Merger provided that the audited Statement of Condition of Midland would be as of January 8, 1968, and that the audited Statement of Condition of Englewood would be as of November 4, 1967. No date was specified for the exchange of these Statements of Condition, but they were required to be submitted "in due course". The "cold comfort letters" had to cover the period from January 8, 1968 in the case of Midland, and November 8, 1967 in the case of Englewood, until the date ten days prior to the closing date. The closing date was subsequently set for August 16; accordingly the "cold comfort letter" covered the period up to August 6.
The Agreement of Merger contained no further provisions for exchange of financial information. Rather the ...