United States v. Naftalin

PETITIONER: United States
LOCATION: Congress

DOCKET NO.: 78-561
DECIDED BY: Burger Court (1975-1981)
LOWER COURT: United States Court of Appeals for the Eighth Circuit

CITATION: 441 US 768 (1979)
ARGUED: Mar 26, 1979
DECIDED: May 21, 1979

Joe A. Walters - for respondent
Stephen M. Shapiro - for petitioner

Facts of the case


Media for United States v. Naftalin

Audio Transcription for Oral Argument - March 26, 1979 in United States v. Naftalin

Warren E. Burger:

We'll hear arguments next in number 561, United States against Naftalin.

Mr. Shapiro, I think you may proceed whenever you're ready.

Stephen M. Shapiro:

Mr. Chief Justice, and may it please the Court.

This case is here on the Government's petition for certiorari to the United States Court of Appeals for the Eighth Circuit.

The Eighth Circuit set aside the District Court's judgment which had convicted the respondent on eight counts of securities fraud under Section 17 (a) (1) of the Securities Act of 1933.

The question presented in this case is whether Section 17 (a) (1) prohibits frauds practiced by customers on their brokers during the course of offering or selling securities.

We contend that Section 17 (a) (1) applies to all frauds occurring during the process of offering or selling, including those frauds that injure brokerage houses.

The facts of this case can be summarized rather briefly.

In July and August 1969, the respondent placed sell orders with five different brokerage houses.

Those orders in each case were for large blocks of either 500 or 1,000 shares of securities.

The respondent had cash accounts with each of these firms and was not permitted to make short sales.

In each of the sales, he either stated affirmatively that his position was long or he used words or phrases which would indicate that his position was long.

In fact, however, respondent did not own any of the stock that he sold. His position was short rather than long, contrary to his representation.

He planned to buy the stock at some later point in time in the declining market and to make a delayed delivery to the brokerage house.

His profit would be the difference between the price at which he originally sold and the price at which he later covered.

But contrary to his expectations, the price of all of these securities went up substantially and he was unable to make covering purchases and for that reason he never delivered any of the stock that he sold.

Under the SEC's rules the brokers were required to cover for respondent's sales.

At first when they were still expecting him to make delivery, they forwarded the borrowed securities on his behalf.

When he later confessed to the details of this scheme, the brokers were required to buy in the stock at their own expense, resulting in substantial losses.

Due to respondent's deception, the risk inherent in the short selling scheme was shifted from himself to the brokers.

Because they believed he was selling long, none of them obtained a margin deposit that would have protected them against the failure to make delivery on his part.

The District Court found that respondent's misrepresentations violated Section 17 (a) (1) of the statute and convicted him on all eight counts of the indictment.

The Court of Appeals agreed that the respondent had committed fraud and had injured the brokerage houses, but it concluded that Section 17 (a) (1) is not violated by the species of fraud which was practiced against brokers rather than purchasers of securities and on that theory the court reversed respondent's conviction on all of the counts of the indictment.

We contend that Section 17 (a) (1) applies to the species of fraud used here and we rely on the text of the statute in making that contention.

John Paul Stevens:

Mr. Shapiro, could this case have been prosecuted under the 1934 Act?

Stephen M. Shapiro:

It could indeed, Your Honor.

It might well have been filed under Section 10 (b) of the 1934 Act because there was fraud used in connection with the sale.

But a lot of --

John Paul Stevens:

Would it have made your position a little easier here had it --

Stephen M. Shapiro:

We don't feel that it would.