APPEAL FROM the UNITED STATES DISTRICT COURT for the DISTRICT of NEW JERSEY. Crim. No. 74-536.
Adams and Garth, Circuit Judges, and Layton, Senior District Judge.*fn*
LAYTON, Senior District Judge:
Appellants were convicted of mail fraud under 18 U.S.C. § 1341.*fn1 The primary issue raised by each defendant in this consolidated appeal is whether there was sufficient evidence adduced at their joint trial to sustain the jury's verdicts against them. Because we conclude that there was not, we reverse.
Appellants Segal, Traister and Hannig were indicted along with three others for conspiracy and mail fraud. Count I of the thirty-four count indictment alleged that the six defendants, and a seventh unindicted confederate, conspired to use the mails for the purpose of executing a scheme to defraud. The allegedly fraudulent scheme involved the sale of distributorships for a direct-mail-marketing pen company organized by defendants Pearlstein and Trombetta, and by the unindicted co-conspirator, Gabriel Rudolph. Defendants Segal, Traister, Hurwitz and Hannig were salesmen employed by the pen company. Eighteen of the substantive mail fraud counts charged the defendant-salesmen, together with Pearlstein and Trombetta, with specified uses of the mails in furtherance of the fraudulent scheme. Only one salesman was charged per count, although each salesman was charged in several counts. The remaining fifteen substantive counts charged only Pearlstein and Trombetta. Each of the thirty-three substantive mail fraud counts was based upon a particular mailing to one of thirty-five allegedly-defrauded victims of the scheme.
Trombetta died prior to trial. Both Pearlstein and Hurwitz pleaded guilty to a reduced number of counts. A motion for separate trials was denied and the joint trial of the remaining defendants, Segal, Traister and Hannig, commenced on January 3, 1977, before the United States District Court for the District of New Jersey. Upon defense motions at the close of the Government's case, the trial court dismissed the conspiracy charge but refused to enter judgments of acquittal on the substantive mail fraud counts, and also denied a renewed severance motion. The case finally went to the jury on January 28 and three days later the verdicts were returned. Segal was convicted on two of the three remaining counts in which was charged; Traister on two of four; Hannig on two of three. The trial court denied defendants' renewed motions for judgments of acquittal and also refused to order new trials. Each appellant has been fined and sentenced to a term of imprisonment.
Although they challenge their convictions on numerous grounds, we find it necessary to treat only the primary issue raised by the appellants: whether the evidence presented at their trial was sufficient to support their convictions under 18 U.S.C. § 1341.
The scope of the federal mail fraud statute is quite broad. It generally proscribes any "scheme or artifice to defraud" which in some way involves the use of the postal system.*fn2 The essential elements of an offense under § 1341 are 1) the existence of a scheme to defraud; 2) the use of the mails in furtherance of the fraudulent scheme; and 3) culpable participation by the defendant. E.g., United States v. Tiche, 424 F. Supp. 996, 1001 (W.D. Pa.), aff'd mem., 564 F.2d 90 (3d Cir. 1977).
We carefully have reviewed the evidence in this case to determine whether each of those elements was established adequately with respect to each defendant. In so doing, we have been mindful that as an appellate tribunal we must view the evidence in the light most favorable to the Government, United States v. Crockett, 534 F.2d 589, 598 (5th Cir. 1976); United States v. Adamo, 534 F.2d 31, 36 (3d Cir. 1976), and must indulge all reasonable inferences in favor of sustaining the jury's verdicts. United States v. Caine, 441 F.2d 454, 457 (2d Cir.), cert. denied, 404 U.S. 827, 30 L. Ed. 2d 55, 92 S. Ct. 59 (1971). Viewing the record from this perspective, we must determine whether there is substantial evidence to support the convictions before us. Glasser v. United States, 315 U.S. 60, 80, 86 L. Ed. 680, 62 S. Ct. 457 (1942). Accord, United States v. Netterville, 553 F.2d 903, 909 (5th Cir. 1977), cert. denied, 434 U.S. 1009, 98 S. Ct. 719, 54 L. Ed. 2d 752 (1978). The trial court record in this case is far too lengthy to permit its detailed analysis here but we will discuss briefly the salient features of the alleged fraudulent scheme and each defendant's participation therein.
THE G. MARTIN FRANK, LTD./ELGIN PEN SCHEME
In the fall of 1969, Pearlstein, Trombetta and Rudolph were working as salesmen for Nelson James, Ltd., a California company involved in the direct mail marketing of pens. Impressed with the apparent success of their employers, the three salesmen decided to start their own pen company. As a result, G. Martin Frank, Ltd., was incorporated in New Jersey in February, 1970.
G. Martin Frank (GMF) was created as a virtual carbon copy of Nelson James. Writing instruments were sold to businesses through local distributorships, or franchises, under the label "Elgin Pen." The three GMF principals recruited and trained distributorship salesmen, and provided them with leads developed through newspaper advertisements. Using a sales kit prepared by the principals, the salesmen contacted prospects around the country, gave a standard sales pitch also developed by the principals, and signed persons to affiliate distributorship agreements. As part of these agreements, distributors purchased mailing lists from GMF, the size of which determined the commissions earned by the salesmen. GMF purchased the mailing lists from two national marketing research firms for about one-tenth the price it charged the distributors. In addition to the mailing lists, distributors received Elgin Pen promotional material, sample pens and order forms. They earned commissions on pen orders placed with GMF through mass mailing solicitations which they prepared using the mailing lists and other materials. GMF handled the actual sale and distribution of the pens and contracted with several companies for their manufacture under private labelling arrangements.
G. Martin Frank, Ltd., was notably unsuccessful. Although 141 persons invested almost a quarter of a million dollars in Elgin Pen distributorships, only $20,000 in pen orders were generated through the mass mailings and just $4600 in commissions were paid to distributors. Not one distributor came within $1000 of recouping his investment. In contrast, the GMF principals were able to draw substantial salaries and maintain healthy expense accounts despite the serious financial difficulties in which the company found itself. In August, 1971, the last Elgin Pen distributorship was sold and a few months later, G. Martin Frank, Ltd., was forced into bankruptcy by its creditors.
In determining whether the GMF/Elgin Pen operation was fraudulent in nature, there are no hard and fast rules of law to apply. The "scheme to defraud" element of the offense of mail fraud under § 1341 is not defined according to any technical standards. United States v. Bruce, 488 F.2d 1224, 1229 (5th Cir. 1973), cert. denied, 419 U.S. 825, 42 L. Ed. 2d 48, 95 S. Ct. 41 (1974). The scheme need not be fraudulent on its face, id., but must involve some sort of fraudulent misrepresentations or omissions reasonably calculated to deceive persons of ordinary prudence and comprehension. United States v. New South Farm & Home Co., 241 U.S. 64, 71, 60 L. Ed. 890, 36 S. Ct. 505 (1916); United States v. Serlin, 538 F.2d 737, 743-44 (7th Cir. 1976); Fabian v. United States, 358 F.2d 187, 193 (8th Cir.), cert. denied, 385 U.S. 821, 17 L. Ed. 2d 58, 87 S. Ct. 46 (1966); United States v. Bruce, supra at 1229; United States v. Schall, 371 F. Supp. 912, 916 (W.D. Pa. 1974), aff'd mem., 503 F.2d 1400 (3d Cir.), cert. denied, 420 U.S. 993, 95 S. Ct. 1432, 43 L. Ed. 2d 676 (1975). Furthermore, the term "scheme to defraud" connotes some form of planning or pattern. Fabian v. United States, supra at 192-93.
Throughout his testimony, Pearlstein maintained that G. Martin Frank, Ltd., was started as a legitimate enterprise and that it was only after the business began to sour financially that the GMF principals employed misrepresentations and deceptive practices in an attempt to salvage it. Although we do not view this question as without doubt, we conclude that there was ample evidence presented here from which the jury properly could have concluded that the GMF/Elgin Pen operation was fraudulently conceived.
Before any distributorship salesmen were hired, and occasionally thereafter, the GMF principals themselves contacted prospective distributors and made sales presentations. When they did so, Pearlstein and Trombetta used assumed names and presented Elgin Pen business cards which identified them as Martin Williams and Frank Anthony, respectively. These pseudonyms were also used by Pearlstein and Trombetta on GMF correspondence and in telephone conversations with Elgin Pen distributors. The use of aliases is circumstantial evidence of conscious deception. United States v. Cohen, 516 F.2d 1358, 1367 (8th Cir. 1975).
The use of fictitious names was not confined to Pearlstein and Trombetta. The GMF newspaper advertisement informed readers that interested, sincere and qualified persons were to write to "R. E. Bradley, Director, Public Relations." Those who responded to the ad received a packet of Elgin Pen promotional materials, including a "Recipe for Success" brochure, and a cover letter, both signed by R. E. Bradley. The GMF credentials sheet listed Russell E. Bradley as the vice president for public relations and gave a detailed professional background for him, including "fifteen years in managing industrial business advertising." In fact, Russell E. Bradley was Trombetta's son-in-law and at no time was a corporate officer or employee of G. Martin Frank, Ltd. The office manager, as well as the GMF principals, forged Bradley's signature on company correspondence and used his name on Elgin Pen brochures and in other promotional material. Furthermore, David Eldridge, president of the advertising agency retained by GMF, was listed falsely in the credentials sheet as Elgin Pen's marketing vice president, while Rudolph, one of the three incorporators of G. Martin Frank, Ltd., and the corporate officer actually responsible for advertising, was deliberately omitted from the list. Such a pattern of misrepresentations regarding the management of GMF/Elgin Pen, in conjunction with the continued use of aliases by its corporate officers, indicates that the enterprise was fraudulently conceived.
There also was significant evidence that GMF was operated in a deceitful manner. Although the first Elgin Pen distributorship was purchased in May, 1970, it was not until August of that year that the first pen order was placed, and by the end of the summer GMF was receiving complaints from its distributors about overdue materials. An office policy was established by the GMF principals to deal with such complaints: secretaries were instructed to calm down irate callers and put them off with various excuses, none of which had any basis in fact. The actual cause of the shipping delays was GMF's lack of capital: the principals had to await income from distributorship sales before ordering mailing lists, pens and other supplies. The complaints continued unabated into the fall of 1970 and eventually GMF sent letters to all Elgin Pen distributors, blaming the delay on a wildcat strike at the factory and promising shipment by late September. This excuse was a complete fabrication, as were all of the earlier ones, and their use as a lulling technique is a further indication of the fraudulent nature of the entire GMF/Elgin Pen operation. See United States v. Netterville, 553 F.2d 903, 910 (5th Cir. 1977), cert. denied, 434 U.S. 1009, 98 S. Ct. 719, 54 L. Ed. 2d 752 (1978).
The most crucial evidence of the fraudulent nature of the overall scheme lies in the false and misleading statements included in the GMF/Elgin Pen promotional material. To begin with, virtually every item used by GMF was directly copied from Nelson James, including the pitch book, or flip chart, used by the salesmen in making their presentations.
The flip chart was an essential part of the Government's evidence in this case. It consisted of approximately twenty items which constituted the standard sales pitch used by the salesmen with prospective distributors and much of it was false or misleading. For example, a sweepstakes contest was planned by the GMF principals as an incentive to pen customers and a copy of the sweepstakes brochure was included in the flip chart and was used by the salesmen in making their presentations. The brochure stated that "all winning numbers have already been selected by Cassidy-Richlar, Inc., an independent judging organization, by electronic computer." Pearlstein had contacted Cassidy-Richlar about conducting such a contest and a company representative had submitted a proposal and costs estimate. But no sweepstakes was ever conducted, despite the brochure's claim.
The flip chart also contained a letter, on Dun & Bradstreet stationery, purporting to be from one Walter Cleary, a district manager for that marketing research firm. The letter was directed to GMF and stated that Dun & Bradstreet had been most selective in developing mailing lists according to GMF's request, and offered a professional recommendation for Elgin Pen. Although GMF did purchase mailing lists from Dun & Bradstreet, the letter was a fake. It was dated June 10, 1969, more than six months before Pearlstein first contacted the company about buying mailing lists. Furthermore, the testimony of the regional sales manager who dealt with GMF indicated that there was no district manager named Walter Cleary; that the letter was not prepared according to the standard company format; and that such an offer of a professional recommendation specifically was prohibited by company policy. It appears that this letter also was directly copied from Nelson James and that the signature of Walter Cleary was forged.
At trial, the Government particularly stressed two items in the flip chart: the revenue projection sheet and the typical sales chart. They purported to show how much an Elgin Pen distributor could expect to earn, depending upon the amount he invested in a mailing list. Generally, the projections were based upon a one and one-half to three percent return from each mass mailing solicitation and an average pen order of $122.50. For example, if a distributor paid $1796 for a 4000-account mailing list, according to the projection sheet he could expect to net between $634.25 and $2,537 on one mailing, and between $2,798 and $10,148 on four mailings. Applying these figures, a prospective distributor would have been led to believe that he could recoup his investment, and quite possibly make a handsome profit, within one year. In fact, no Elgin Pen distributor came close to matching these projections which, like the rest of the flip chart materials, were taken directly from the Nelson James pitch book and never were independently authenticated.
According to the direct mail marketing expert who testified at the trial, the estimated one and one-half to three percent return was very liberal; one-quarter to one-half of one percent was more in line with industry experience. Furthermore, the expert stated, the projected average pen order of $122.50 was more than twice that experienced in two other similar pen promotions. Such claims would have been the crucial, if not the only, considerations for an investor in deciding whether to buy an Elgin Pen distributorship. Where these revenue projections were used by the GMF principals with an apparent reckless disregard for their validity, such use gives rise to an inference that the principals' intent was fraudulent. See United States v. Cohen, 516 F.2d 1358, 1367 (8th Cir. 1975).
The flip chart contained several sample order forms for Elgin Pens. At least four of these sample orders bore 1969 dates. Since GMF did not begin functioning until February, 1970, these sample pen orders, like the Dun & Bradstreet letter, antedated the company's existence and were patently false. Even those sample orders which were dated in 1970 predated any actual pen sales.
Perhaps the most significant misrepresentations in the flip chart involved the page entitled "The Facilities where Elgin Pens are Manufactured." Immediately above this caption was a drawing of a large building, apparently a factory, on which there was a sign proclaiming it to be "Elgin/Pen." Below this drawing were nine photographs of various stages of the pen production process and of several machines and operators. These pictures were taken at the Chemolene Industries plant in Bordentown, New Jersey. GMF had contracted with Chemolene to manufacture Elgin Pens under a private labelling arrangement. Chemolene had authorized GMF to use the photographs in the Elgin Pen promotion but the drawing was used without the company's approval or knowledge. According to Pearlstein, the drawing was inserted into the flip chart to make it appear that Elgin ...