Date: 10-11-2017

Case Style:

Case Number: 16-2120

Judge: Howard

Court: United States Court of Appeals for the First Circuit on appeal from the District of Massachusetts (Suffolk County)

Plaintiff's Attorney: Alexander P. Robbins, Kenneth A. Blanco, Trevor M. McFadden, William D. Weinreb, Sarah E. Walters, Eric A. Forni

Defendant's Attorney: Thomas C. Frongillo, Gus P. Coldebella, Caroline K. Simmons

Description: Richard Weed, a securities lawyer,
wrote false opinion letters so that his two co-conspirators could
sell stock to the public in a "pump and dump" scheme.1 In
connection with this conduct, he was convicted of securities fraud,
wire fraud, and conspiracy to commit both. Following the jury's
guilty verdict, Weed moved for a judgment of acquittal. He argued
that the evidence was insufficient to support his convictions,
relying on a novel interpretation of a particular Securities Act
provision. The district court denied Weed's motion. After careful
consideration, we affirm.
I.
A. Trial Evidence
Because of the jury's guilty verdict, we review the
record "in the light most favorable to the prosecution." United
States v. Manso-Cepeda, 810 F.3d 846, 847 (1st Cir. 2016). The
trial evidence established that Weed participated in a pump and
dump scheme with two former stockbrokers, Coleman Flaherty and
Thomas Brazil. From 2008 to 2013, these conspirators ran several
iterations of the scheme, using a public "shell" company that
Flaherty had acquired from Weed in 2008.
1 "In a typical 'pump and dump' scheme, insiders inflate
demand for a stock by disseminating laudatory information about a
company—information that is usually false. If the market reacts
favorably, the insiders cash in their shares before the market
readjusts and the share price collapses." Garvey v. Arkoosh, 354
F. Supp. 2d 73, 76 n.4 (D. Mass. 2005).
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First, Flaherty and Brazil would identify an
entrepreneur who owned a privately held target company and offer
to help take the target public through a "reverse merger" with the
shell company.2 Once the entrepreneur accepted the offer, Weed
would complete the legal work needed to carry out the merger. The
resulting post-merger company would be publicly listed under the
target's name.
On paper, Flaherty and Brazil would hold only debt in
the post-merger company, in the form of promissory notes, which
could be converted into shares of stock. To make money, Flaherty
and Brazil would arrange for stock promoters to inflate the
company's value artificially by, for example, issuing glowing
press releases about the company's prospects. Then — and this is
where Weed's expertise as a securities lawyer was critical —
2 "A reverse merger is a transaction in which a privatelyheld
corporation acquires a publicly-traded corporation, thereby
allowing the private corporation to transform into a publiclytraded
corporation without the necessity of making an initial stock
offering. Often, . . . the public corporation is a shell company
with minimal assets and liabilities and no actual operations. To
effect the reverse merger, the shell public corporation will
exchange its treasury stock for all outstanding shares of the
privately-held corporation. In consideration, the controlling
shareholders of the shell public corporation transfer a majority
of their shares to the owners of the private corporation. After
the transaction, the newly merged public corporation will assume
the identity and name of the former private company. Thus, the
private corporation is transformed into a publicly traded company,
without going through the complicated process of an initial stock
offering." SEC v. M & A W. Inc., 538 F.3d 1043, 1046-47 (9th Cir.
2008).
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Flaherty and Brazil would convert their promissory notes into
freely tradable stock, sell their overvalued shares to an unwitting
public, and stop investing in the company, which would soon
collapse. As Weed put it to Flaherty, "the deals are all vapor,
and they can't sustain themselves for six weeks."
With Weed's help, Flaherty and Brazil ran through four
iterations of this scheme, making about $5 million in the process.
Weed was prepared to run the scheme a fifth time, but by then
Flaherty had begun cooperating with the Federal Bureau of
Investigation. The conspiracy unraveled, and Weed was arrested in
November 2014. He was ultimately indicted for securities fraud,
15 U.S.C. §§ 78j(b), 78ff(a); wire fraud, 18 U.S.C. § 1343; and
conspiracy to commit securities fraud and wire fraud, id. § 371.
B. Securities Law Background
Under the Securities Act of 1933 ("Securities Act"),
anyone seeking to sell a security must first register that security
unless an exemption applies. See 15 U.S.C. § 77e. This
registration requirement "protect[s] investors by promoting full
disclosure of information thought necessary to informed investment
decisions." SEC v. Ralston Purina Co., 346 U.S. 119, 124 (1953).
Two exemptions from registration are of particular relevance to
this appeal.
Section 3 of the Securities Act exempts certain "classes
of securities" from registration. 15 U.S.C. § 77c(a). In
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particular, Section 3(a)(9) exempts "any security exchanged by the
issuer with its existing security holders exclusively where no
commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange." Id. § 77c(a)(9).
Section 4 of the Securities Act exempts certain
"transactions." Id. § 77d(a). In particular, Section 4(a)(1)
exempts "transactions by any person other than an issuer,
underwriter, or dealer." Id. § 77d(a)(1). The statute defines
"underwriter" broadly to include anyone "who has purchased from an
issuer . . . [or from] any person directly or indirectly
controlling or controlled by the issuer" with "a view to . . . the
distribution of any security." Id. § 77b(a)(11). Recognizing the
breadth and complexity of this definition, the Securities and
Exchange Commission ("SEC") promulgated Rule 144, 17 C.F.R.
§ 230.144, "to provide greater certainty and security to issuers
and investors" by creating a "safe harbor" for the Section 4(a)(1)
exemption. SEC v. Kern, 425 F.3d 143, 148 (2d Cir. 2005). As
relevant here, a seller can take advantage of this safe harbor if
he is a non-affiliate of the issuer and satisfies the other listed
criteria. See 17 C.F.R. § 230.144(b)(1).
In the present case, in order to dump their overvalued
stock on the public market, Flaherty and Brazil needed to convince
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a transfer agent3 to convert their promissory notes into freely
tradable, "unrestricted" securities. Weed's role was essential
here: he wrote opinion letters to the transfer agents invoking
Rule 144 and representing that "[n]one of the persons who have
elected to convert" the notes into stock "are affiliates of the
[i]ssuer." But, as Weed now acknowledges, these statements were
"wrong." Flaherty and Brazil were, in fact, affiliates of the
issuing companies, so they were ineligible for the Rule 144 safe
harbor.
C. Procedural History
Weed went to trial in May 2016. At the close of the
government's case, he summarily moved for a judgment of acquittal
and declined to put on any evidence of his own. Ultimately, the
jury convicted Weed on all counts. Weed retained new counsel after
the verdict and moved for both a post-trial judgment of acquittal
and a new trial. See Fed. R. Crim. P. 29, 33. In so doing, Weed,
for the first time, made the argument that is now the focus of his
appeal: that irrespective of his knowing misstatements about Rule
144, Section 3(a)(9) of the Securities Act provided an alternative
ground to exempt all of the securities from registration. Thus,
according to Weed, his "opinion letters were correct, even though
3 "A transfer agent is responsible for recording changes of
ownership of securities, canceling obsolete certificates, and
issuing new ones." Geiger v. SEC, 363 F.3d 481, 486 n.3 (D.C.
Cir. 2004) (citation omitted).
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for the wrong reason." The district court rejected this argument
and denied Weed's motions.
II.
On appeal, Weed primarily argues that, in light of his
interpretation of Section 3(a)(9), the trial evidence was
insufficient to support his convictions. He also claims that the
district court constructively amended the indictment in its
instructions to the jury. We address these arguments in turn.
A. Evidentiary Sufficiency
As an initial matter, the parties dispute whether Weed
preserved his Section 3(a)(9) argument for appeal. Because Weed's
claims are easily disposed of on the merits, we decline to decide
this preliminary question and assume, favorably to Weed, that the
de novo standard of review governs. In the Rule 29 context, the
operative question is "whether any rational factfinder could have
found that the evidence presented at trial, together with all
reasonable inferences, . . . established each element of the
particular offense[s] beyond a reasonable doubt." United States
v. Richard, 234 F.3d 763, 767 (1st Cir. 2000).
The bulk of Weed's appellate brief is devoted to arguing
that Section 3(a)(9) permanently exempts an entire "class[] of
securities," and thus is not a mere transactional exemption like
the ones found in Section 4. 15 U.S.C. § 77c(a). If this is
correct, the provision would not only have applied to Flaherty and
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Brazil's initial conversion of their debt to common stock,4 but
also to all subsequent transactions in the resulting securities.
Weed's proffered interpretation of Section 3(a)(9) is, however,
contrary to the reading that the SEC has consistently employed for
more than eighty years. See, e.g., Thompson Ross Sec., 6 S.E.C.
1111, 1118 (1940); Letters of Gen. Counsel Discussing Application
of Section 3(a)(9), Securities Act Release No. 646, 1936 WL 31995,
at *4 (Feb. 3, 1936).
Even assuming for the sake of argument that Weed is right
about the meaning of Section 3(a)(9), that in itself would not
entitle him to relief. This is so because Weed was not charged
with the sale of unregistered securities or conspiracy to commit
that offense. Instead, he was charged with fraud based on his
opinion letters falsely stating that the Rule 144 safe harbor
applied. On appeal, Weed raises two narrow arguments as to how
his view of Section 3(a)(9) entitles him to acquittal. First, he
claims that, because the underlying securities were not required
to be registered, it was "legally impossible" for him to commit
the charged offenses. Second, he contends that, because Section
3(a)(9) provided an alternative ground for exemption, his
misstatements about Rule 144 were immaterial as a matter of law.
4 In the district court, the government took the position that
the "Section 3(a)(9) exemption likely did apply" to this initial
conversion.
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The first of these arguments need not detain us long.
Weed's legal impossibility defense is entirely predicated on a
misreading of the indictment, namely, Weed's assertion that "all"
of his convictions are "based on the theory that he conspired to
sell unregistered stock." In Weed's view, because the shares at
issue were exempt from the Securities Act's registration
requirement, "no statute prohibited" the activity in which he
planned to engage. United States v. Fernandez, 722 F.3d 1, 32
(1st Cir. 2013). But Weed does not adequately explain how the
purported Section 3(a)(9) exemption negates the federal
prohibitions on fraud that the jury found him to have violated.
Even assuming that the exemption applied and the conspirators were
thus entitled to receive freely tradable shares, that fact would
not excuse Weed's resort to misrepresentations to help Flaherty
and Brazil obtain the stock. Indeed, an individual "who elects
. . . a course" of fraudulent "self-help may not escape the
consequences by urging that . . . the statute which he sought to
evade" did not apply. Dennis v. United States, 384 U.S. 855, 867
(1966). Ultimately, despite Weed's protestations to the contrary,
"[t]his is a prosecution directed at [Weed's] fraud[,] . . . not
an action to enforce" the Securities Act's registration
requirement. Id.
The crux of the second of Weed's Section 3(a)(9)
arguments is that the applicability of that exemption rendered his
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false statements about Rule 144 immaterial as a matter of law.
Materiality is a required element of both securities fraud and
wire fraud. See Neder v. United States, 527 U.S. 1, 25 (1999)
(wire fraud); Flannery v. SEC, 810 F.3d 1, 9 (1st Cir. 2015)
(securities fraud). In the securities context, "[a]
misrepresentation is material if there is a substantial likelihood
that [it] would affect the behavior of a reasonable investor."
SEC v. Ficken, 546 F.3d 45, 47 (1st Cir. 2008). This standard
presents a "mixed question of law and fact," involving "delicate
assessments of the inferences a 'reasonable [investor]' would draw
from a given set of facts and the significance of those inferences
to him." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450
(1976). For this reason, the materiality issue is "peculiarly
one[] for the trier of fact" and may only be resolved "as a matter
of law" where the relevant misstatements "are so obviously
important [or unimportant] to an investor, that reasonable minds
cannot differ on the question." Id. (citation omitted).
Here, we need not resolve the parties' dispute about the
correct interpretation of Section 3(a)(9).5 This is because, even
if Weed's novel position is correct, a reasonable jury could
nonetheless find that his admitted lies about the applicability of
Rule 144 were material. Weed fully acknowledges that his reading
5 And we similarly need not weigh in on what, if any, deference
is owed to the SEC's interpretation of that provision.
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of Section 3(a)(9), to apply not only to the initial exchange with
the issuer but also to all subsequent transactions in the relevant
securities, contradicts over eighty years of securities law,
albeit in the civil enforcement context. We have little difficulty
concluding that a reasonable transfer agent,6 or a subsequent
purchaser of the shares for that matter, might be hesitant to rely
on such an untested theory. Indeed, Weed fails to point to a
single case or other authority interpreting the Section 3(a)(9)
exemption in the manner that he now proposes. And, moreover, Weed
concedes that "[e]ach . . . transfer agent" did, in fact, "rel[y]
on" his Rule 144 representations to issue the requested stock.
Thus, the district court's denial of Weed's Rule 29 motion was
correct, irrespective of the merits of his underlying position on
Section 3(a)(9).7
6 Weed fails to develop any argument that, in order to be
convicted, his misstatements had to be material to investors, as
opposed to the transfer agents who were the direct recipients of
his opinion letters. Any argument on this point is therefore
waived. Moreover, courts have interpreted the federal securities
laws to proscribe frauds against intermediaries, as well as those
perpetrated directly on investors. See United States v. Naftalin,
441 U.S. 768, 770 (1979) (holding that Securities Act "prohibits
frauds against brokers as well as investors"); see also 15 U.S.C.
§ 78j(b) (prohibiting "direct[] or indirect[]" fraud in connection
with a securities transaction).
7 Weed also attempts to repackage his Section 3(a)(9) argument
to impugn the district court's denial of his motion for a new trial
under Rule 33. For the same reasons discussed above, we find no
"manifest abuse of discretion" and, accordingly, reject Weed's
claim. United States v. Villarman-Oviedo, 325 F.3d 1, 15 (1st
Cir. 2003).
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B. Constructive Amendment
Weed's final plaint is that the district court
constructively amended the indictment in its instructions to the
jury. "[A] constructive amendment occurs when the charging terms
of an indictment are [effectively] altered . . . by prosecution or
court after the grand jury has last passed upon them." United
States v. Taylor, 848 F.3d 476, 495 (1st Cir. 2017) (first
alteration in original) (citation omitted); see also United States
v. Dowdell, 595 F.3d 50, 67 (1st Cir. 2010) (explaining distinction
between literal and constructive amendments). Because Weed did
not contemporaneously object, we review his claim for plain error.
See Taylor, 848 F.3d at 495. Accordingly, in order to prevail,
Weed must establish that "an error occurred which was clear or
obvious and which not only affected [his] substantial rights but
also seriously impaired the fairness, integrity, or public
reputation of judicial proceedings." Id. at 488 (citation
omitted). Weed falls well short of satisfying this exacting
standard.
Weed bases his constructive amendment claim on a single
isolated remark made at the beginning of the court's instructions
on wire fraud, after the judge had already discussed the elements
of securities fraud and conspiracy. The court directed the jury
to specific paragraphs in the indictment's "general allegations"
pertaining to the purposes of the charged conspiracies. It then
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noted, "[t]he government says one purpose of the conspiracy was to
offer and sell unregistered securities in violation of the federal
securities laws. That is the Securities Fraud. And then another
purpose was to engage in a pump-and-dump scheme . . . ." Weed
argues that this language constructively amended the indictment to
allow the jury to return a guilty verdict on the securities fraud
charges based solely on a finding that "Weed sold or offered to
sell unregistered securities."
Viewed "in their totality," however, we are confident
that the court's instructions accurately conveyed the elements of
securities fraud. United States v. Melendez, 775 F.3d 50, 58 (1st
Cir. 2014). The statement to which Weed's complaint is directed
was merely an attempt to orient the jurors by distinguishing the
conspiratorial object that the court had already discussed
(securities fraud) from the one that it was currently addressing
(wire fraud). The stray remark did nothing to alter the court's
prior instructions on securities fraud, which did not so much as
mention "unregistered securities." In fact, the court made clear
that the "guts of the Government's case" were Weed's alleged
"misstatements of material fact concerning control shares and the
distribution of control shares." Weed utterly fails to explain
how, in this context, any error in the fleeting statement
challenged on appeal "prejudiced his defense." Taylor, 848 F.3d
at 496. This omission dooms his constructive amendment claim.

Outcome: For the foregoing reasons, we AFFIRM Weed's convictions.

Plaintiff's Experts:

Defendant's Experts:

Comments: