People v. Eiseman

The defendants, J. J. Eiseman, Alexander R. Abrams, Holmes Ives, N. J. Whelan, and John I. Pankratz, were jointly indicted by the grand jury of the city and county of San Francisco for the crimes of conspiracy to violate and of having violated the California Corporate Securities Act (Stats. 1917, p. 673), which declares in part that “no company shall sell . . . , or offer for sale, negotiate for the sale of, or take subscriptions for any securities of its own until it shall have first applied for and secured from the commissioner a permit authorizing it so to do . . . ” (sec. 3); and that “every officer, agent, or employee of any company, and every other person who knowingly authorizes, directs, or aids in the issue or sale of, or issues or executes, or sells or assists in causing to be issued, executed, or sold, any security . . . contrary to the provisions of this act ... is guilty of a public offense. ...” (see. 12'.)

The indictment contained eight counts, the first charging a conspiracy to violate said act, and the seven subsequent counts charging unlawful sales of corporate .securities. .The defendants were tried jointly and during trial the charges against Pankratz were dismissed; as, to the other defendants the jury disagreed. Upon second trial Eiseman was convicted on all eight counts; Abrams was found guilty on seven counts charging actual violations of said act, but the jury disagreed as to the conspiracy charge; Ives was convicted on the conspiracy charge, the jury having failed to agree upon the remaining ones, and Whelan was convicted on the conspiracy charge and acquitted as to the others. All of the convicted defendants have appealed, and, with the exception of Ives and Whelan who join in their defense, are represented by different counsel and have filed separate briefs. The legal contentions advanced by the respective appellants are substantially the same, howeyer, and therefore the separate appeals may be considered together.

The transactions which eventually resulted in the indictment and conviction of appellants had their inception in a legitimate effort to aid in the financial affairs of an automobile tire company operating under California law, but developed into the consummation of a fraudulent scheme conceived by appellant Eiseman, in the promotion and profits of which his coappellants shared, whereby the worthless securities of a corporation organized by appellants in another state purposely to circumvent the effect of the California Corporate Securities Act, were, in violation of said act, brought into this state and sold to the stockholders of said tire company in particular, and to anyone else in general who might be induced to buy them.

During the year 1922 said tire company was and for some time prior thereto had been engaged in the manufacture and sale of automobile tires, Ives being its president, and Whelan its vice-president and chairman of the board of directors. It had issued and sold a large amount of its stock throughout California, but early in the year 1922, in order to increase its working capital, undertook a further stock selling campaign in which it enlisted the services of Eiseman, who at the time was a duly licensed stock broker. The campaign was not successful, and during the summer of 1922 Eiseman’s connection with the enterprise ended. He then went to Los Angeles where he followed the brokerage business in connection with establishments unrelated to the tire company until his certificate as a broker was revoked for cause by the state corporation commissioner. Having learned while selling stock for the tire company that its stockholders were generally dissatisfied with their investments, Eiseman returned to San Francisco and unfolded to

As part of the same transaction the directors executed a trust and escrow agreement pursuant to which the stock and debentures mentioned in the Eiseman agreement were afterward deposited with a San Francisco firm to be delivered to Eiseman upon payment or evidence of payment of sums equivalent to the agreed purchase price. Immediately thereupon the principal place of business and in fact everything belonging to the Delaware corporation was moved to California, where the “dummy” directors were succeeded by a new board consisting in part of Eiseman, Ives, and Whelan; Ives becoming president and Eiseman vice-president and managing director. In February, 1923, upon presenting the incorporation documents to the California Secretary of State for filing it was learned that the “Bankers Mortgage and Discount Company” could not be domesticated in this state because the local Bank Act (Stats. 1909, p. 87) prohibited the use of the word “Bankers” by a corporation engaged in a business not falling within the scope of such

Early in January, 192'3, Eiseman revealed to Carroll the method by which and the time when he expected to realize large sums of money from the operation of his enterprises. He stated that in April, 1923, the finance company would declare a “dividend” which he intended should be paid out of the money received from previous stock sales (which dividend was in fact declared and paid in part as planned) and that as a result of the “reload,” meaning as he said that those who had already bought securities would make further and greater, purchases, the “blow-off” would come and that with the large sums of money received he would be able to retire and live in Italy.

During the middle of December, 1922, which was prior to the date of the conversation just mentioned and before the date of the incorporation of the finance company in Delaware, and notwithstanding that said company was at that time wholly unauthorized to transact any business, plans were laid to sell its securities in this state and many sales were actually made in Santa Clara, Napa, and Sonoma Counties. A public meeting was held in San Jose which was attended largely by the tire company stockholders residing in the Santa Clara Valley in response to notices prepared and sent by Eiseman under the name of the tire company and Ives as president. An address, illustrated by moving pictures taken for that purpose, was delivered by Whelan regarding the operation of the tire company’s plant and the manufacture of its products, after which Eiseman elaborated

Among those purchasing in San Jose was one John Seherr, who, on account of illness, had been incapacitated from work for six years, making it necessary for his wife to earn the livelihood for both. Seherr and his wife were told that the finance company’s securities would pay dividends of six per cent every three months and that the profits the Scherrs would receive therefrom would soon be enough to make it unnecessary for Mrs. Seherr to work. The Scherrs turned in their one hundred shares of stock in the tire company and in addition Mrs. Seherr was persuaded to call in an outstanding seven per cent loan of $1,500 and invest that money in these securities. Later when a cheek for $90 was delivered to the Scherrs in payment of a “dividend” the agents told them that further “dividends” would be paid at intervals of about every three months, and that they would soon be able to purchase a fine automobile like the one the agents were then taking them to ride in. They were then asked if they had any other securities to invest, such as Liberty bonds, to which Mrs. Seherr replied that all they had left

A purchaser named Hitchings, residing in Santa Cruz, testified that Eiseman represented to him that the finance company was in process of formation, that it already had money in the treasury and would pay a dividend on April 1st; that the money received from the sales of class “B” stock was to be held until the “end of the financing period” and then returned; that subscribers for that stock were to be made associate directors of the company so as to keep in touch with the company’s affairs and if dissatisfied could withdraw and receive back the money and stock they had paid in. The real financing of the company, it was represented, was to come from the sale of class “A” stock and

Shortly after the trip to Santa Cruz a disagreement arose between Eiseman and Carroll, as a result of which Carroll severed his connection with the Eiseman schemes; but before doing so he threatened to advise Hitchings and others of the fraudulent character of Eiseman’s enterprises. Thereupon Eiseman wired Hitchings that Carroll had been discharged “for very good cause” and warning Hitchings of Carroll’s threat to “spread venomous propaganda,” and a few days afterward called upon Hitchings personally regarding the same matter. About this time Smith became seriously ill and withdrew from further' ássoeiation with Eiseman. His place as the broker for the finance company was filled by appellant Abrams, who had theretofore been sharing the Eiseman offices, although until Smith’s death apparently was not interested in the promotion of said finance company. He had been doing business pursuant to a broker’s license under his own name, Alexander E. Abrams, as well as under the fictitious names of Alexander and Company and Bankers Security Company. Under this latter designation and for an over-riding commission of two and one-half per cent on all sales he consented to act as the broker for the sale of the securities of the Bankers Mortgage and Discount Company.

Thereafter, about the middle of February, 1923, the active campaign for the sale of the finance company’s securities commenced. Salesmen were sent out with letters of introduction signed by Eiseman and Ives. Preparatory circular letters and prospectus were mailed to all stockholders of the tire company containing Ives’ indorsement of the new company and recommendations to purchase its securities. Sales were plentiful, the purchasers buying mostly ’units of class “A” stock and debentures for which they paid one-third cash or its equivalent in convertible securities, one-third in tire company stock at par and the balance in unsecured promissory notes. It was following Abrams' connection with the affairs of the finance company that the

Under date of February 18, 1923, Hitchings wrote to Ives about a phone message from Carroll in which Carroll had said that upon investigation he had ascertained that “the story that Mr. Eiseman was connected with the notorious Alexander and Company” was true; also that the finance company was not a California corporation, had not complied with laws of this state and consequently was without authority to sell any stock in California; that for those reasons he, Carroll, had withdrawn from the company and advising him, Hitchings, to protect himself. Hitchings added that “this story about Mr. Eiseman . . . had been circulating around town for some time” and was “bad for both companies,” and that he would like to have Ives send him “a plain statement of facts as he knew them regarding Eiseman’s connection with Alexander and Company,” also as to “ Eiseman’s reputation and standing in the financial and business world.” The reply to this letter was signed and mailed by Ives, but was in fact written by Eiseman on one of the tire company’s letter-heads, Ives having delivered Hitchings’ letter to Eiseman for that purpose. The reply was in part as follows: “My Dear Mr. Hitchings: Your personal letter to me bespeaks the acme of my desire. I have always been glad to hear from the stockholders directly. Eelative to your inquiry regarding Mr. Eiseman’s reputation and standing in the business world, it gives me great pleasure to inform you that I have personally known Mr. Eiseman for more than two years, during which time he has been in the active management of the finances of our company. The results that he brought us speak in the highest and most laudatory, terms for themselves. We have always found him honorable, truthful and unequivocally honest. His financial standing, personal and property liabilities would be jealously coveted by men much older than he. Before coming to our company I personally made an exhaustive research into his antecedents and the recommendations I received were of the highest. You, nor anyone else need have any apprehension over any dealings entered into with Mr. Eiseman. At any time that you should find it possible to visit with me at my offices, I shall be glad to go into

On March 23, 1923, the finance company passed a resolution declaring a “dividend” payable April 1, 1923. On April 2, 1923, under authority granted by the Corporate Securities Act, the corporation commissioner issued a subpoena directed to Bankers Mortgage and Discount Company, Alexander and Company, Bankers Securities Company and Coast Syndicate Company to appear on April 12, 1923, and report as to the securities issued and sold by Bankers Mortgage and Discount Company. Up to that time said companies had done no business whatever except to sell stock and debentures, but after the service of said subpoena there was a manifestation of business activity. On April 10, 1923, an account was opened in the Bank of California in the name of the California Mortgage and Discount Company and certain securities which had been theretofore received from purchasers of stock were placed in the bank for sale and to the credit of that account. On that same date two checks for $2,500 each were drawn against the account payable to the account of the tire company and on April 30th another check was drawn for $5,000 payable to the same company. The purpose of these payments was not disclosed by the evidence, but if made as loans no trade acceptances, notes, or other securities were ever received by said company as security nor did the tire company ever

¡Responding to said subpoena a verified return accompanied by a so-called “consolidated balance sheet” prepared by the finance company and its subsidiary company was filed by Abrams containing erroneous statements of operations and misrepresentations of the assets of said subsidiary company. There was also prepared and filed with said commissioner an application for a permit to issue and sell the securities of the finance company.

On May 25, 1923, the records of Eiseman and Abrams and of the finance company and its subsidiary, in San Francisco, were seized and their offices closed by the district attorney acting under the authority of search-warrants. It appears from the records thus seized that during the operation of these enterprises there had been sold to purchasers 1,439 units of the finance company’s securities aggregating a sale price of $431,700, of which amount $139,163.41 was accepted in unsecured purchase notes, $119,315 in tire stock at par and the balance was in cash and securities other than the notes and tire stock already mentioned. The total amount of all cash received as initial cash payments and from the sale of convertible securities was $148,035.83. In addition the receipts from sales of class “B” stock made up of cash, purchase notes, tire stock, and other securities amounted to $120,427, of which amount there was in cash and convertible securities $48,402.

In the meantime, and after the service of said subpoena, the subsidiary company issued a cheek for $2,000 payable to Ives, with no explanation being made therefor; Eiseman sold to said company an unsecured note given by one Peasley, a purchaser of class “B” stock; large sums of cash re

[1] One of the appellants’ principal contentions is that the plan adopted and executed by them in the organization of Bankers Mortgage and Discount Company and the subsequent sale of its stock and securities in this state, as such plan was established by the uncontroverted evidence adduced by the prosecution, did not constitute a violation of the Corporate Securities Act, and that therefore they are not guilty of the crimes of which they were convicted. This contention is based mainly upon the theory of a valid sale to Eiseman in the state of Delaware of the securities mentioned in the Eiseman agreement, to which the charges in the indictment

Even though it is assumed that appellants’ interpretation of the law of sales of personal property, with special reference to the question of passing title prior to the payment of the purchase price be correct, we are of the opinion that the rule contended for by them may not be revoked in a situation like the one here presented, where the evidence shows the object of the contract was not to provide for a .legitimate sale and transfer of title to property, but to all intents and purposes was to create a mere fiction of law, constructed upon a collusive and fraudulent intent and design to violate and defeat the provisions of a penal statute. ■Under such circumstances we do not believe that such a transaction can be resolved into a legal contractual relationship so as to be controlled by legal rules of ownership applying to legitimate contracts of sale. In all of the cases cited by appellants the contracts considered were founded upon bona fide sales, free from the element of a fraudulent intent to defeat the operation of an existing law, and the controversies were confined to the parties related to the contracts. Here the evidence shows that the purported sale of these securities was in effect one from Eiseman°to himself based upon no consideration whatever, and manifestly the product of a criminal design. [2] When such a contract is presented for recognition in this state, as being legally sufficient to place the parties claiming under it beyond the scope of the law of this state, the state itself becomes an .interested party to the contract to the extent at least of having the right to inquire into the bona fides of the transactions upon which the contract is founded. Fraud vitiates all transactions into which it enters (12 Cal. Jur. 721) and in view of the evidence disclosed by the record upon this subject it would scarcely be contended, we think, that in an appropriate proceeding instituted by an interested party the purported contract of sale in question would not be declared void. We believe therefore that by reason of the circumstances surrounding the purpose of this contract appellants may not shield themselves behind a salutary legal principle which ordinarily would be applicable to the case

The trial court carefully and correctly informed the jury that “evasion of the law in and of itself is not a crime,” but further stated that if it was proved beyond a reasonable doubt that the acts and conduct charged in the indictment were true, and “were instituted with intent of evading the law of California, and by such evasion to violate the Corporate Securities Act of California” (italics ours), then such acts and conduct were in violation of the penal statute under which appellants were being prosecutedalso that all of the acts proved should be considered by the jury in determining whether or not they constituted an entire or part of a scheme, system, plan, or design by which the Corporate Securities Act “was to be evaded and violated” (italics ours), and that if the jury entertained any reason

The recent case of People v. Pace, 73 Cal. App. 548 [ 238 Pac. 1089 ], cited by appellants, does not aid them. There the defendant, president of a California corporation actually engaged in the candy business, made a Iona fide purchase from the corporation for a cash consideration of certain unpaid promissory notes given to the company in payment of the purchase of stock, the stock for which the notes were given being held by the company as collateral for the payment of said notes. In accordance with the terms of the notes and upon default in the payment thereof the defendant dealt with the stock as though it were his own, disposing of at least a portion of it in different sales extending over a period of five months, without having a permit for that purpose. Briefly stated, the court held that to the extent that section 9 of the Corporate Securities Act attempted to require a natural person to secure a broker’s permit before he may sell his own securities, when he is not the issuer or underwriter of the same, it was unconstitutional. It is at once apparent that that case, being free from the element of fraud, is clearly distinguishable from the instant one upon the facts. ■

[3] After giving full consideration to all contentions made by appellants regarding this branch of the case we conclude that the evidence is sufficient to establish the offenses of which appellants were convicted.

Appellants also rely for reversal upon a number of alleged errors of law which they claim occurred during trial. Being too numerous to deal with singly, it may be stated

The question of the character of the so-called certificate issued and given in payment for class “B” stock is not a material matter because the charges in the indictment related to the securities covered by the Eiseman agreement; but even if material, said certificates must be construed as “securities” of said company within the meaning of the Corporate Securities Act (People v. McCalla, supra). The other errors urged in reference to the admissibility of proof are either unimportant or insufficiently presented (People v. McLean, 135 Cal. 306 [ 67 Pac. 770 ], and hence do not require discussion.

[7] As to the instructions, we have examined the entire charge of the court and also the instructions proposed by appellants which the court refused to give. Prom such examination we believe that when the court’s charge is considered as a whole the jury was fairly and fully instructed upon all legal subjects pertaining to the offenses for which appellants were on trial, and also upon such legal matters as were necessary for the guidance of the jury in the exer

Only a few of appellants’ objections regarding instructions require special attention. [8] They complain that in dealing with the subject of conspiracy the court in one part of its charge, upon the element of intent, instructed the jury that the question for it to pass upon was whether appellants “conspired to do the things which were in violation of law, not whether they had any knowledge that they were violating the law.” The legal principle thus stated was doubtless applicable to the charges of actual sales of securities. (People v. McCalla, supra.) If, however, as appellants contend, it be open to criticism when connected with the law of conspiracy, we do not believe the jury could have been misled by the instruction for the reason that the court as a part of the same instruction also stated to the jury explicitly that mere association of individuals with an innocent purpose or with honest intent is not a conspiracy as defined by law; also that in determining the guilt of appellants upon the conspiracy charge the jury should consider whether appellants “honestly entertained a belief that they were not committing a wrongful act” and whether or not they “were acting under a misconception or in ignorance, without any criminal motive ”; the court further stat

to give appellants’ proposed instructions emphasizing Bronson’s testimony as to the legal advice furnished appellants, and other like ones wherein different circumstances from which the question of intent was to he determined were narrated and dealt with in separate instructions, for the reason that a general instruction was given to the effect that in considering the question of intent the jury should “take into consideration all of the facts and circumstances disclosed by the evidence.” The proposed instruction relating to “common occurrences” of organizing corporations outside of the state to evade the California statute, was properly rejected as embodying an immaterial matter; likewise those instructions relating to the title to the class “B” stock. The remaining objections as to the instructions are of less importance and possess no merit.

[10] We find no error in the ruling disallowing a challenge for cause to Juror Seovel. The juror stated that while he entertained an opinion regarding violations of the Corporate Securities Act, the same as he did of violatons of other penal statutes, he had no opinion regarding the facts of this particular case. While later during his examination there may have been some slight confusion in his answers upon the point, he positively declared that if accepted as a juror he could and would “absolutely set aside that opinion,” which had been founded on press reports and rumor, and try the case fairly and impartially. “When such conflict occurs (in the answers of the juror) the trial court must decide, if possible, which of the answers most truly reveals the state of the talesman’s mind. In other words, the questions generally presented are those of fact and not of law. (People v. Loper, 159 Cal. 6 [Ann. Cas. 1912B, 1193, 112 Pac. 720 ].)

[11] Proof in support of venue as to counts three, four, five, six, and seven, while not as substantial as it might have

[12] The demurrer to the indictment was properly overruled. It was alleged in the indictment that the securities mentioned were issued by a purported foreign corporation and were brought into this state by Biseman and Abrams as the property of said corporation and sold by all of the appellants without a permit. It was not necessary, as appellants contend, to set forth the capacity in which Biseman and Abrams acted for the corporation in bringing said securities into the state, or whether they acted for it at all, nor does there seem to be anything anomalous or inconsistent in the situation that said corporation retained title to said securities, notwithstanding that it had “issued” the same and that they were in the constructive possession, at least, of Biseman and Abrams when brought into the state for disposal. The indictment was not subject to the objections raised and favorably ruled upon in People v. Barnard, 63 Cal. App. 562 [ 219 Pac. 756 ], for the reason that the conspiracy here was confined to the violation of the Corporate Securities Act.

[13] Appellants claim that there is no such crime in California as conspiracy to violate the Corporate Securities Act. Since the instant case was briefed and submitted, however, this precise question has been considered and the matter decided contrary to appellants’ views by the supreme court in the case of Doble v. Superior Court, 197 Cal. 556 [ 241 Pac. 852 ]. The decision therein completely answers all of appellants’ contentions made in this behalf.

Appellants also attack the constitutionality of the entire Corporate Securities Act upon some eight grounds, but in presenting them counsel say that the objections urged overlap one another, making it impossible to consider them separately. For the same reason it would seem equally im

[16] We cannot agree with appellants that there was a hiatus in the operation of paragraph 3 of section 2 of said act at the time of its repeal in 1923 (Stats. 1923, p. 87), during which time this indictment was found, for the reason that the existing law remained in force until the amendment took effect.

[17] The claims of Eiseman and Abrams that they were entitled to immunity because they gave evidence before the corporation commissioner on April 12, 1923, are without merit. Section 17 of the Corporate Securities Act provides in part that “No person shall be excused from testifying or from producing any book, document, or other thing bearing upon the ground that his testimony, or the book, document, or other thing required of him, may tend to incriminate him, or may have a tendency to subject him to punishment for a felony . . . ; but no person shall be prosecuted . . . , or subjected to any penalty . . . for or on account of any act, transaction, matter, or thing concerning which he shall have been so compelled to testify under oath, or to produce such documentary or other evidence ...” (Italics ours.) It is apparent, we think, that the law contemplates that the witness claims the privilege of not giving testimony or of not furnishing evidence against himself before he is entitled to the immunity provided for by the statute. It is conceded that such claim was not made by either Eiseman or Abrams; furthermore, the subpoena was not directed personally to either of them, but to the corporations. Their responses to the subpoena must consequently be considered as having been voluntary.

After a full review of the evidence in this case and a careful examination of the legal points presented, it is our opinion that the appellants were fairly tried and justly convicted. It is therefore ordered that the judgments of con

Tyler, P. J., and Cashin, J., concurred.

A petition for a rehearing of this cause was denied by the district court of appeal on July 1, 1926, and a petition by appellants to have the cause heard in the supreme court, after judgment in the district court of appeal, was denied by the supreme court on July 30, 1926.