United States of America, Appellee, v. Arnold Nelson Mahler and Dean H. Ubben, Appellants, 579 F.2d 730 (2d Cir. 1978)

Appellants Arnold Nelson Mahler and Dean H. Ubben appeal from their convictions by a jury following a trial in the United States District Court for the Southern District of New York, Milton Pollack, Judge. Their earlier seven-week trial before Judge Marvin E. Frankel ended in a mistrial when one of the jurors suffered a heart attack during the deliberations. On the retrial approximately five months later on a superseding indictment which narrowed and simplified the original charges,¹  Mahler and Ubben were convicted on all counts.²  We affirm.

In the summer of 1972, Mahler and an associate named Zucker³  acquired control, in nominee form, of a publicly-tradeable but defunct corporation, Bell-Ko Film Corp., a shell with assets of $86. Ubben had meanwhile been retained as a consultant to International Industries, Inc. (International), a small private company in Colorado. International was the manufacturer of a purportedly revolutionary pneumatic industrial pump; the company was, however, virtually without sales and verging on bankruptcy.

In October of 1972 Mahler and Ubben agreed to reorganize these companies into a new corporation, Industries International Inc. (Industries), for the purpose of fraudulently manipulating the price of the company's publicly tradeable stock. Ubben and Mahler held the greater part of that stock in nominee name. Once the trading price rose Ubben and Mahler planned to dispose of their worthless stock at a substantial profit.

The fraudulent scheme was carried out by a series of questionable and often illegal acts. Ubben first induced International's president, Billy Lovejoy,⁴  to fire its outside accountants whose annual report would show a loss for the year ending September 30, 1972, and a net worth approaching zero, and to substitute Lawrence V. Bialek⁵  whom Ubben described as an accountant who "for $500" would "put anything into a statement . . . ." Trial Transcript 726-27. Bialek soon produced a false financial statement showing a profit and a substantial net worth on the part of International as well as a pro forma financial statement fraudulently showing the reorganization of International and Bell-Ko into Industries as creating a company with a net worth of no less than $456,278.

To effect the reorganization, Mahler had his attorney, Harold C. Herman,⁶  charter Industries as a new corporation, and cause it to issue 4 million shares of stock; 2.2 million of these were exchanged, on a 100 for 1 basis, for the existing 22,000 shares of International controlled by Billy Lovejoy. The remaining 1.8 million shares were for the most part controlled by Mahler, Ubben and Zucker under various nominee names,⁷  some of the nominees' names being used despite their refusal to participate in the scheme.

Mahler then caused Industries to acquire the "assets" of Bell-Ko by exchanging 664,000 of Industries' shares for the 664,000 shares of Bell-Ko in a manner which ostensibly complied with SEC Rule 133, 17 C.F.R. § 230.133 (repealed effective January 1, 1973),⁸  but which in fact fell outside of that Rule since, Inter alia, the reorganization was intended simply as a step toward the sale of the surviving company's stock to the public.

Ubben then sought to stimulate a demand for Industries stock. He first persuaded a number of investors, commencing with the most prominent, from Des Moines, Iowa, to purchase several hundred thousand shares of Industries stock at $1 per share by publishing a false newsletter which grossly inflated the company's prospects primarily by touting fictitious qualities of the company's pump. Ubben falsely represented that the proceeds of the sales of stock would be used for production expenses. In actuality, some of the proceeds were used to stave off immediate bankruptcy while at least 45% Of them were funneled to Ubben, Mahler and their accomplices. And Ubben promised that one of each of three shares purchased would be unrestricted, "free and tradeable" stock which could be resold once public trading began. This representation was fraudulent since Ubben had no such shares; he only had an illegal plan to turn Bell-Ko shares into free and tradeabale shares for these investors. With all this bait, Ubben was able to attract the fish in Des Moines before public trading had even begun.

In the meantime, Mahler and Ubben bribed a New York stock broker, William Wellens,⁹  to induce his firm to make a market in Industries stock. To lure other brokers into the market, a "two-martini" meeting for over-the-counter brokers was held in Manhattan. At the meeting complete with tape-and-slide show ("offering revolutionary products to a waiting world") the proxy statement with Bialek's false financial statements and an updated financial statement with even "better" figures appearing under the letterhead of a Denver firm which had not prepared the financials¹⁰  was distributed. Ubben and Lovejoy also made numerous gross misrepresentations of the firm's prospects. The next day Wellens had his brokerage firm list Industries in the national daily quotations the "pink sheets" furnished to over-the-counter brokers.

When trading opened on February 28, 1973, Industries stock traded at $1 per share. But since the demand generated in Des Moines could only be met through the limited supply of Rule 133 stock, Mahler and Ubben were able to manipulate the trading price so that it soon climbed to nearly $5 per share. Ubben and Zucker then sold at least 80,000 shares. The restrictive legend on the shares had been removed when Harold Herman prepared opinion letters based on false representations by Mahler directing the transfer agent to remove the legend. The appellants were seeking to "free up" another 180,000 shares by forged opinion letters and phony representations falsely attributed to six of their nominees when the transfer agent balked; an SEC investigation had become public knowledge.

On March 27, 1973, after the stock had reached nearly $7 per share, the SEC suspended trading. Soon thereafter, the company filed for bankruptcy. While Ubben and Mahler engaged in numerous other misrepresentations and acts, including a scheme to conceal their fraud, which involved backdating some and destroying other documents, rigging a postage meter and perjury, the foregoing sketch of the facts suffices to impart some the flavor of this "shellgame" securities fraud. We turn then to the legal points raised by Mahler and Ubben.

Mahler's most substantial point relates to the introduction into evidence by the Government of Mahler's prior convictions¹¹  pursuant to Rule 609(b)¹²  of the Federal Rules of Evidence. This evidence had previously been admitted in the Government's direct case, under Rule 404(b), for the limited purpose of proving knowledge and intent. See note 20 Infra. It was readmitted after Mahler took the stand, to impeach his credibility.

Mahler indicates that since his convictions were more than ten years old as measured by Rule 609(b), they were admissible only if their probative value substantially outweighed their prejudicial effect. The heart of the contention is that the determination of this balancing process must be an on-the-record finding supported by specific facts and circumstances and that no such finding was made. Mahler's pretrial motion to exclude the prior convictions for purposes of impeachment had been denied on the basis that the same motion had been considered and denied at the first trial by Judge Frankel and that no new facts warranted a change. However, Mahler rightfully points out that at the time of the first trial the convictions were less than ten years old whereas at the time of the second trial, they were more than ten years old. Consequently, their admissibility at the second trial was subject to the requirements of Rule 609(b) rather than Rule 609(a).

The Government urges in response that an on-the-record finding is not required either by the language or by the legislative history of the Rule. We disagree and conclude that when convictions more than ten years old are sought to be introduced pursuant to Rule 609(b), the district judge must make an on-the-record finding based on specific facts and circumstances that the probative value of the evidence substantially outweighs the danger of unfair prejudice. We reach this result for four reasons.

First, we believe that the language of the Rule clearly suggests such an on-the-record determination. The decision to admit such evidence must be "supported by specific facts and circumstances." If this wording did not contemplate an on-the-record finding by the district judge, it could simply be stricken from the Rule with no linguistic or syntactical harm to the rest of the sentence. The position espoused by the Government would make the language mere surplusage, totally devoid of meaning. Moreover, it is difficult to determine whether a ruling is indeed "supported by specific facts and circumstances" unless the basis of the ruling is carefully spelled out. The Government's suggestion that the notice requirement of Rule 609(b)¹³  serves as a surrogate factual predicate for review of district court rulings is not persuasive. The language of the notice requirement as well as the legislative history pertaining to it¹⁴  make absolutely clear that the limited purpose of giving notice was to avoid unfair surprise to a defendant and to afford him the opportunity in the words of the Rule to "contest the use of such evidence."¹⁵ 

Second, the legislative history of Rule 609(b), over and above that specifically related to the notice requirement, militates in favor of concluding that the Rule contemplates an on-the-record determination of admissibility. According to the House Report, the version of Rule 609(b) passed by the House would have barred the use of all convictions more than ten years old.¹⁶  Some eleven months later the Senate Report adopted a different position from that of the House. The Senate version would have permitted the use of convictions more than ten years old,

but only upon a determination by the court that the probative value of the conviction supported by specific facts and circumstances, substantially outweighs its prejudicial effect.

It is intended that convictions over 10 years old will be admitted very rarely and only in exceptional circumstances. The rules provide that the decision be supported by specific facts and circumstances thus Requiring the court to make Specific findings on the record as to the particular facts and circumstances it has considered in determining that the probative value of the conviction substantially outweighs its prejudicial impact. It is expected that, in fairness, the court will give the party against whom the conviction is introduced a full and adequate opportunity to contest its admission.¹⁷ 

The Senate version was ultimately adopted with the notice requirement added in Conference¹⁸  for the purpose of avoiding surprise and allowing the defendant to contest admission as the Senate evidently contemplated from its Report quoted above. The thrust of the legislative history then indicates that an on-the-record finding for convictions more than ten years old was contemplated by the Congress. The Senate said so explicitly. And the Senate view ultimately prevailed with the slight addition of the notice requirement, a modification which was clearly presaged by the Senate in its own report.

Third, the case law, while not entirely consistent, assumes that Rule 609(b) requires an on-the-record finding. See United States v. Little, 567 F.2d 346, 350 (8th Cir. 1977) (fourteen-year-old fraud conviction admitted under 609(b) after a "hearing on the defendant's motion In limine and after considering the arguments on both sides"); United States v. Shapiro, 565 F.2d 479 (7th Cir. 1977) (after on-the-record hearing judge admitted evidence of 38- and 24-year-old convictions; ruling reversed on appeal); United States v. Cohen, 544 F.2d 781, 785-86 (5th Cir.) ("(w)hile Rule 609(b) may envision a . . . proceeding with full findings setting forth the quality and nature of any possible prejudice to the defendant," failure to do so Here was not reversible error), Cert. denied, 431 U.S. 914, 97 S. Ct. 2175, 53 L. Ed. 2d 224 (1977); Cf. United States v. Mahone, 537 F.2d 922, 928-29 (7th Cir.) (future admission of prior convictions pursuant to Rule 609(a) (1) requires on-the-record determination), Cert. denied, 429 U.S. 1025, 97 S. Ct. 646, 50 L. Ed. 2d 627 (1976).

Finally, from a policy standpoint an on-the-record determination is a prudent requirement. The divergent positions initially adopted by the House and Senate to some extent mirror the controversy that surrounds the use of prior convictions. The House believed that convictions more than ten years old have very little or no probative value. See note 16 Supra. Yet the risk of convicting a defendant for his past transgressions always exists; consequently they should be used only "very rarely and . . . in exceptional circumstances." See note 17 Supra. In addition, an on-the-record determination will facilitate appellate review of 609(b) rulings. And the Government itself concedes that the rule advocated by Mahler "might be the better practice."¹⁹  We are certain that it is and therefore adopt the view that when convictions more than ten years old are sought to be introduced into evidence pursuant to Rule 609(b) the district judge should make an on-the-record determination supported by specific facts and circumstances that the probative value of the evidence substantially outweighs its prejudicial effect.

Having said all this, we are nonetheless persuaded that the error in this case was harmless. The convictions admitted pursuant to Rule 609(b) had, as we have said, already been properly introduced for a different purpose pursuant to Rule 404(b).²⁰  Thus any incremental prejudice flowing from the use of the convictions for impeachment purposes had to have been minimal.²¹  The overwhelming evidence of guilt in this case clearly dictates a conclusion of harmless error. United States v. Corey, 566 F.2d 429, 432 (2d Cir. 1977).

The remaining arguments raised by Mahler and Ubben merit only the most cursory discussion. Mahler's unfair trial claim stemming from the alleged hostility and bias of the district judge is unpersuasive. As part of this claim, Mahler points to what he considers to be indicia of the district judge's adverseness. For example, the judge denied Mahler's motion for a continuance following the superseding indictment of October 4, 1977. This ruling was entirely proper, however, since the new indictment merely streamlined the old. Mahler has not particularized a single substantive difference between the two indictments as they apply to him.²² 

Mahler also argues that Judge Pollack intervened on behalf of the prosecution to buttress their witnesses and to deflate defense witnesses. But this is an unfair distortion of what really transpired. The judge intervened very infrequently, asking probably no more than 2% Of all questions. Cf. United States v. De Sisto, 289 F.2d 833, 834 (2d Cir. 1961) (judge asked 3,115 questions, prosecution 1,381, and three defense counsel, 3,330). Moreover, the quality of the questions asked were primarily of a clarifying nature. See United States v. Natale, 526 F.2d 1160, 1169-70 (2d Cir. 1975), Cert. denied, 425 U.S. 950, 96 S. Ct. 1724, 48 L. Ed. 2d 193 (1976). Neither the level of intervention nor of judicial impatience in any way approaches the judge's interjections of himself into the trial in United States v. Nazzaro, 472 F.2d 302 (2d Cir. 1973).²³ 

As further evidence of what appellant Mahler calls the judge's bias, he claims that the district judge gave an unbalanced charge and never considered the defense's charge requests. However, Mahler's request for instructions, consisting of an annotated transcript of the 117-page charge delivered by Judge Frankel at the first trial, was not in proper form and he was so advised. Judge Pollack nevertheless actively solicited counsel's assistance in the preparation of his charge. The defense was, however, not responsive, relying on the annotated transcript. Mahler was in all respects accorded a fair trial.

Ubben's other contentions are all without merit. He argues first that Judge Pollack's failure to discharge the alternate jurors when the jury retired to deliberate requires a hearing to determine whether this procedure prejudiced the defendants. Since the judge was careful to assure that there was no contact whatsoever between the jurors and the alternates, no conceivable prejudice could have resulted from the decision not to discharge the alternates. United States v. Nash, 414 F.2d 234 (2d Cir.), Cert. denied, 396 U.S. 940, 90 S. Ct. 375, 24 L. Ed. 2d 242 (1969). Since there is nothing to indicate that prejudice could have resulted, a hearing is unnecessary.

Ubben's claim of improper limitation on the scope of cross-examination is similarly unpersuasive. Ivan Braverman, a Government witness who testified that the financial statements prepared by Bialek were both improper and not accidental, was cross-examined at length. He was excused and a luncheon recess followed. After lunch, Ubben sought to introduce Bialek's acquittal in the first trial to undercut Braverman's testimony, a request refused by the district judge. The refusal was proper since Bialek's acquittal was not relevant to Braverman's opinion that the manner in which Bialek prepared the financial statements was not accidental. Bialek's theory at the first trial, which the jury must have credited, was that he was duped by Ubben into thinking he was preparing projections for internal use. If anything, Bialek's acquittal might have been probative of Ubben's guilt; its exclusion therefore was not error.

Ubben's final contention is that his eight year sentence is disparate and excessive. His reliance on United States v. Ramos, 572 F.2d 360 (2d Cir. 1978), is, however, totally misplaced since that case stands for the proposition that resentencing will be required when a judge has relied upon improper considerations in the sentencing determination. Here, both Judge Frankel and Judge Pollack were satisfied that Ubben perjured himself; Judge Pollack could properly consider that in his sentencing. United States v. Hendrix, 505 F.2d 1233, 1237 (2d Cir. 1974), Cert. denied, 423 U.S. 897, 96 S. Ct. 199, 46 L. Ed. 2d 130 (1975). Ubben, of course, was one of the two most important figures in the fraud; thus a substantial sentence was in order. The eight year sentence was in conformity with sentences recently meted out for fraudulent "white-collar" schemes by courts across the country. E. g., United States v. McCord, Cr. 3-76-132 (N.D. Tex. 1976) (sentences of ten to fifty years for various defendants in mail fraud), Aff'd without opinion sub nom. United States v. Deaton, No. 77-5277 (5th Cir. 1977); United States v. Lofland, 75 Cr. 769 (fifteen year sentence for mail fraud), Aff'd without opinion, 535 F.2d 1244 (2d Cir. 1976). And finally, Judge Pollack was in the best position to determine an appropriate sentence for Ubben. United States v. Robin, 553 F.2d 8, 11 (2d Cir. 1977). His judgment was not an abuse of discretion since it was within the statutory maximum and did not rest upon improper considerations. United States v. Seijo, 537 F.2d 694 (2d Cir. 1976), Cert. denied, 429 U.S. 1043, 97 S. Ct. 745, 50 L. Ed. 2d 756 (1977).

The other points raised by the defendants warrant no discussion.

Convictions affirmed.