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Estep v. United States Deluke

November 16, 1943



Before PHILLIPS, BRATTON, and MURRAH, Circuit Judges .

MURRAH, Circuit Judge .

Patrick T. Henry, Louis C. Deluke and William Estep appeal from convictions and sentences on various counts of an indictment containing 22 counts. The first 11 counts charged appellants and others with violations of the mail fraud statute (Sec. 215, Criminal Code, 18 U.S.C.A. § 338); the next 10 counts charged appellants and others with violations of the Securities Act of 1933, 48 Stat. 74, 15 U.S.C.A. 77q, and the twenty-second count charged the same parties with conspiracy to violate both the mail fraud and the Securities Act. Section 37, Criminal Code, 18 U.S.C.A. § 88.

The appellants Henry and Deluke were convicted by a jury verdict on counts 1 to 9, inclusive, and 11 and 12. Appellant Estep was convicted by a jury verdict on counts 3 to 8, inclusive, and 22. The appellants were acquitted on all other counts of the indictment, either by verdict of the jury, or by direction of the court, and other defendants named in the indictment were acquitted on all counts by direction of the court. Thus only the mail fraud and conspiracy counts are here on appeal.Henry and Estep were sentenced to a term of 18 months on each count, and Deluke was sentenced to a term of 2 years on each count, said sentences to run concurrently. The appeal is here on a common record, and appellants Henry and Deluke have submitted their cause by a joint brief, while appellant Estep has a separate brief in his behalf.

The first count in the indictment is long and detailed, but in substance it charged the appellants and others with having devised a scheme to defraud, and with obtaining money and property by means of false and fraudulent pretenses from certain named persons, by and through the sale of stock in five separate mining corporations, which appellant Henry organized, and to which he transferred certain mining claims owned by him, and located near Marysvale, Utah. As salesman for the stock of the various corporations, appellant Deluke is charged with having falsely represented to fellow members of his church, known as the National Church of Positive Christianity, that the mining claims owned by the various corporations were highly mineralized with gold and silver, and other valuable minerals, assaying as high as $5,000 per ton; that in a short time the mines would be producing and marketing high grade ore with tremendous profits to the investors; and that Henry did not need funds with which to operate the mines, but because his wife had been cured by the teachings of the Church, he wanted to aid the Church and its members. Accordingly, Deluke represented that if the members of the Church would invest in the venture, and donate 25% of the stock purchased to the Church, everyone would reap bountiful returns, and the Church would prosper and grow; that members of the church and other prospective investors were induced to visit the mining properties in Utah, for the purpose of inspecting the same, and while there, appellants Henry and Deluke made representations to the inexperienced that certain veins in the mines contained valuable gold and silver ore, and in order to further deceive the prospective investors, it is alleged that Deluke altered and substituted certain assay reports of samples taken from the mining properties. According to the indictment, appellant Estep, who was founder and leader of the National Church of Positive Christianity, actively and affirmatively assisted Deluke in the sale of the mining stock to the members of the Church, by introducing him to his Church school classes, and by otherwise encouraging the members to invest in the mining stock.

By this means, it is alleged that the appellant induced members of the National Church of Positive Christianity and others to invest large sums of money in the mining venture, with knowledge that the said properties were not highly mineralized; and that they were not productive of large quantities of valuable ore containing silver, gold, and other valuable minerals as represented. Each of the mail fraud counts, after incorporating by reference all of the allegations of the first, alleged a separate use of the United States mails in the execution of the alleged scheme. In conventional form, count 22 charged appellants and others with having formed a conspiracy to violate the mail fraud statute as alleged in the first count, and the Securities Act. Ten overt acts were charged in furtherance of the conspiracy.

The appellants challenge the sufficiency of the evidence to support the verdict of the jury on any count of the indictment, and our examination of the record evidence reveals the following pertinent facts. Appellant Henry was interested in certain mining claims near Marysvale, Utah, most of which had been previously explored and worked without profitable results. In 1938 and 1939, Henry organized five separate corporations known as the Rainbo Gold Mines Corporation, Valdasia Gold Mines Corporation, Trinity Gold Mines Corporation, Patrick T. Henry Development Corporation, and Carisa Gold Mines Corporation. Each of the corporations was capitalized for one million shares of stock, with a par value of $1. As president and managing officer of each of the corporations, Henry from time to time caused to be transferred to the corporations the mining claims which he either owned or acquired by purchase in the name of the corporation. He resided at Marysvale, where he supervised whatever mining operations were conducted on the properties. Early in 1938, he made arrangements with the brokerage firm of Maloney and McDaniel, in Wilmington, Delaware, for the sale of stock in the Rainbo Corporation. Through McDaniel, Deluke became a salesman for the mining stock, for which he received a commission of 20% in cash, and 20% bonus payable in stock. Deluke was a resident of Wilmington, Delaware, and was a member of the Washington branch of the National Church of Positive Christianity. He solicited and sold stock of the Rainbo Corporation to members of his church in Washington, by representing to them that the mining properties owned by the Rainbo Corporation contained great quantities of high grade ore, which, when fully developed and in operation, would yield enormous profits to the investors. He induced the members to donate 20% of the stock purchased to the Church, with the understanding the profits derived from the investments would not only enrich themselves, but would greatly aid the cause of the Church.

Deluke met Henry in Wilmington early in 1939; they discussed the mining properties, and soon thereafter Deluke visited the properties near Marysvale. He inspected and generally familiarized himself with the conditions there, obtaining his information from Henry and others who were in charge of the mining properties. As a result of this meeting, arrangements were made whereby Deluke agreed to sell the stock, first of the Rainbo Corporation, and later of the other corporations as they were formed, and Deluke's contacts thereafter were directly with Henry. Early in October 1939, Deluke traveled to the mines in Utah in an automobile with a prospective investor named Vattilana. Samples of ore were taken, and left with an assayer in Salt Lake City with directions to mail the reports to Deluke in Wilmington. Vattilana was apparently enthusiastic about the mining venture, and was anxious to learn the result of the assay. Deluke became apprehensive concerning the assay reports, and while en route, he called his niece by telephone, instructing her to "steam" open the envelope containing the assay reports.Upon arrival in Wilmington, Deluke removed the unfavorable parts of the assay reports, and altered some of the remaining ones, resealed the envelope and took it to the home of Vattilana where it was opened in his presence, leaving the impression that he had not previously seen the report. When Vattilana did not purchase any of the stock, Deluke wrote to Henry in part as follows, "Words cannot express my disappointment about Vattilana, his associates, and his slick lawyer. I did my best, but the cards were really stacked."

In November 1939, Deluke went to Chicago where he met his old friend, Estep, who was the founder and leader of the National Church of Positive Christianity, and at that time was conducting a course of lectures in the Chicago branch of the Church.After Deluke explained his proposition, Estep introduced him to his classes as his old friend and theological student, who had a proposition which might be of interest to the members of the Church. Whereupon, some of the members of the class met with Deluke in another room after adjournment, and Deluke gave them a vivid and colorful account of the history of the mining properties. He freely predicted that the mines would soon be producing valuable ore, and would yield enormous profits to the investors within a short period of time. As in Washington, D.C., he urged the plan of having the investors donate 25% of the stock purchased to Estep, as trustee for the Church, the profits of which were to inure to the benefit of the Church. Soon after he came to Chicago, two women who were members of the Church made a trip to Utah with Deluke for the purpose of inspecting the properties, and making a report to the Church membership. From what these women saw and were told by Henry and Deluke, they became highly enthusiastic over the venture; they permitted Deluke to sign their names to a telegram addressed to Estep in which they expressed their favorable impression of the mining properties, and their intention to purchase more stock, and Estep showed this telegram to members of the Church. Upon their return to Chicago from the mines, another meeting was held in which glowing pictures were painted of the mining properties by the women, and many of the members purchased stock either for the first time, or increased the purchases they had already made*fn1

In February 1940, Deluke journeyed to Milwaukee where he again contacted appellant Estep, who had preceded him there, and who was conducting lectures to his church membership. Estep again introduced Deluke to his classes as an old friend with an attractive proposition to present. Deluke followed the same sales tactics in Milwaukee as in Washington and Chicago, and with somewhat the same results. He sold stock to the members of the Church, and induced the investors and prospective investors to visit the mines, where they inspected them under the guidance and supervision of Henry and Deluke. Estep was also urged to, and did visit the mines early in June 1940 in company with other members of the Church. On this inspection tour, samples of ore were taken, and moving pictures were made of different mining properties.As a result of this trip, a number of members of the Church, including the wife of appellant Estep, were influenced to buy stock and to increase their holdings in the various corporations. The members of the Church were led to believe that the mining stock was offered exclusively to them, and they were admonished by Deluke not to reveal the plans to anyone.

During all this time, Henry and Deluke were in constant contact by means of letters, telephone, telegraph, and personal conferences. From time to time, Deluke made suggestions to Henry concerning the contents of letters which Henry would write to Deluke, and which were used by Deluke to fortify his representations concerning his operations at the mines and the prospects for early profits. The correspondence between Henry and Deluke indicates that it was a part of the sales psychology to create the impression that Henry did not need the money with which to develop and operate the mines, but that he was generously manifesting his appreciation and interest in the Church and its teachings which had greatly aided his wife's health. From the correspondence, it is also clear that Deluke and Henry were apprehensive of the regulatory authorities in Illinois, and other states where the stock was offered for sale, as well as the Better Business Bureau and the Securities and Exchange Commission, and that they sought to avoid the scrutiny of any regulatory agency. This apparently prompted the admonition of secrecy among the members of the Church concerning the entire venture. A competent mining geologist testified that the mining operations did not develop any ore capable of commercial or profitable mining, and extensive tests did not offer any favorable prospects for a profitable mining enterprise.

From these facts, the jury by its verdict concluded that the appellants devised a fraudulent scheme, and used the mails in the execution thereof. It also found that the appellants had formed a conspiracy to devise the fraudulent scheme, and that overt acts had been committed in furtherance thereof.

The appellants Henry and Deluke do not deny the substance of these representations and promises as charged, but rather assert that they were made in good faith, with the honest belief that they were true, and upon a trial of the case, they reasserted their faith in the potentialities of the mining properties, contending that further development of the mines would result in a profitable mining venture. They now point to the undisputed fact that the money obtained by the sale of the stock (with exception of commissions to Deluke) was used in the development and operation of the mines; and that the mines were operated efficiently and economically, and for the best interests of the investors. In other words, they interposed the defense of good faith and honest belief in the representations and promises made.

Appellant Estep denies that there was a fraudulent scheme or conspiracy, but if so, he contends that he was never a party to it, or a conscious participator therein. He contends that his interest was solely for the welfare of his Church and its membership, and whatever he did to encourage the sale of the stock was ...

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