author: HILL, Circuit Judge.

text:
    Judy LEGGROAN, Petitioner-Appellee, v. Samuel W. SMITH, Warden, Utah State Prison, Respondent-Appellant.
    No. 73-1854.
    United States Court of Appeals, Tenth Circuit.
    June 11, 1974.

      M. Reid Russell, Asst. Atty. Gen. (Vernon B. Romney, Atty. Gen., on the brief), Salt Lake City, Utah, for respondent-appellant.
    D. Jay Gamble, Salt Lake City, Utah, for petitioner-appellee.
    Before PHILLIPS, HILL and SETH, Circuit Judges.
   HILL, Circuit Judge.

The State of Utah appeals from an order of the United States District Court for the District of Utah granting Judy Leggroan’s petition for a writ of habeas corpus.

Appellee was convicted in the District Court of Salt Lake County, Utah, in 1969, of second degree murder and was sentenced to a term of ten years to life imprisonment. Prior to selecting the jury she challenged the entire panel on the grounds it was selected from tax assessment rolls, thereby excluding non-property owners and prejudicially reducing the number of women, young people, poor people and members of minority races. This challenge, as was a subsequent challenge raised at the end of the trial, was denied.

The conviction was affirmed on appeal, the Utah Supreme Court finding that the jury selection process did not evidence any scheme or practice of systematic exclusion violative of petitioner’s constitutional rights. State v. Leggroan, 25 Utah 2d 32, 475 P.2d 57 (1970).

Thereafter, appellee petitioned the United States District Court for a writ of habeas corpus. The petition was denied because she had not exhausted all available state remedies. She then petitioned the District Court of Salt Lake County, Utah, for a writ of habeas corpus and, when this was denied, appealed the decision to the Utah Supreme Court. Finding that the identical issue already had been raised and decided on direct appeal, that court affirmed the decision. Leggroan v. Turner, 27 Utah 2d 403, 497 P.2d 17 (1972).

Having exhausted her state remedies, appellee once again petitioned the United States District Court for a writ of habeas corpus. She alleged that the exclusion of nonproperty owners from jury selection violated the Sixth Amendment to the United States Constitution, and the due process and equal protection clauses of the Fourteenth Amendment. Following a hearing, her petition was granted.

Appellee first contends Utah’s jury selection statute, U.C.A. § 78-46-17 (1953), itself established a prima facie case of purposeful and systematic discrimination because it excludes from jury service all persons who do not own real property. The statute, which has since been amended, provided that prospective jurors were to be chosen from the names of legal voters appearing on the county assessment rolls.

An examination of supporting statutes, however, reveals that the assessment rolls are not limited to real property. Section 59-8-1 provides for the recording of all property on the assessment roll, and § 59-3-1 further defines “property” to include personal property, the result being that prospective jurors were to be chosen from names appearing on both the real property and personal property lists. State v. Johnson, 25 Utah 2d 46, 475 P.2d 543 (1970); State v. Beasley, 22 Utah 2d 423, 454 P.2d 880 (1969). Such a selection method does not amount to a per se unconstitutional exclusion. Brown v. Allen, 344 U.S. 443, 73 S.Ct. 397, 97 L.Ed. 469 (1953); Clark v. Ellenbogen, 319 F.Supp. 623 (W.D.Pa.1970), aff’d mem., 402 U.S. 935, 91 S.Ct. 1615, 29 L.Ed.2d 104 (1971).

In cases where the United States Supreme Court has questioned jury selection procedures based on such assessment rolls, it has been because of the manner in which they were used, and not because of the assessment rolls themselves. Therefore we find the statute itself constitutionally valid.

Appellee nevertheless attacks the jury selection system used by the jury commissioners in Salt Lake County as unconstitutional. Such a claim necessarily requires a showing that a recognizable, identifiable class of persons, otherwise entitled to be jury members, has been purposefully and systematically excluded from jury service. Brown v. Allen, supra,. The burden of proof rests upon appellee. Once a prima facie case is established, however, that burden shifts to the state to rebut the facts presented and to offer a rational basis for the excluded classification. Whitus v. Georgia, 385 U.S. 545, 87 S.Ct. 643, 17 L.Ed.2d 599 (1967).

The record discloses that prior to 1960, Salt Lake County’s jury selection procedure complied with U.C.A. § 78-46-17. Names of prospective jurors were obtained through use of voters’ registration lists and automobile ownership (personal property) rolls. Beginning in 1960, however, real property assessment rolls were used in place of the automobile ownership rolls. Jury commissioners testified that persons were not considered for jury service unless they were registered voters whose names appeared on the real property assessment rolls. This procedure was utilized until late in 1969. Thereafter, names of prospective jurors were chosen only from voters’ registration lists.

Appellant contends this is not a sufficient showing because appellee has not established a purposeful discrimination against, or a systematic exclusion of, an identifiable group of persons. Such an argument is without merit. Appellee has shown that for approximately nine years all non-freeholders, an identifiable segment of the community, have been excluded from consideration for jury service. Because the Fourteenth Amendment’s equal protection clause reaches all exclusions which single out any class of persons for different treatment not based on a reasonable classification, Hoyt v. Florida, 368 U.S. 57, 82 S.Ct. 159, 7 L.Ed.2d 118 (1961); Hernandez v. Texas, 347 U.S. 475, 74 S.Ct. 667, 98 L.Ed. 866 (1954), the exclusion of an entire class from jury service establishes a prima facie case of systematic and purposeful exclusion which, if unsuccessfully rebutted, must prevail. See Annot.; Jury Selection — Group Discrimination, 33 L.Ed.2d 783 (1973).

The question, then, is whether the ownership of real property is a relevant qualification justifying such an exclusion. In this regard, we are not unaware of Gibson v. Mississippi, 162 U.S. 565, 16 S.Ct. 904, 40 L.Ed. 1075 (1896), wherein the Supreme Court, in dicta, held that states may confine the selection of jurors to freeholders. Subsequent decisions, however, have impliedly rejected this qualification. In Carter v. Greene County, 396 U.S. 320, 90 S.Ct. 518, 24 L.Ed.2d 549 (1970), it is stated: “The States remain free to confine the selection to citizens, to persons meeting specified qualifications of age and educational attainment, and to those possessing good intelligence, sound judgment, and fair character.” The freeholder qualification, however, is conspicuously absent.

Moreover, a close analogy exists in Supreme Court cases outlawing limiting public officers to owners of real property. There, as here, we are unable to discern any interest the distinction can rationally serve.

The only justification offered by appellant is that the qualification increased the likelihood that persons available would actually be present for jury duty. We do not believe this is a sufficient justification to outweigh the interests of those persons who are disadvantaged by the classification. Many poor people, blacks, women and young people, who cannot afford the high cost of a home, as well as persons who simply prefer apartment living, all pay real property taxes, either directly or indirectly, through rent payments.

Persons eligible for jury service are to be found in every stratum of society. Thiel v. Southern Pac. Co., 328 U.S. 217, 66 S.Ct. 984, 90 L.Ed. 1181 (1946). Yet the exclusion of a large segment of the community, as here, removes from the jury panel desirable qualities of human nature and experience. We find that no rational basis exists for such a discriminatory exclusion and that the jury selection method used was constitutionally improper.

The remaining issue to be decided, of course, is the effect this decision is to have. Initially, we note that the reliability of appellee’s verdict has not been questioned; nor has our decision been concerned with her actual guilt or innocence. Although a constitutionally improper method of jury selection mandates a reversal of her conviction, appellee need not go free if in fact guilty, and appellant may try her again.

Appellant argues the decision should not be retroactively applied because of the potential adverse effect upon the administration of justice. Our decision is so limited in scope, however, that its effects will be minimal. It applies only to those persons convicted in Salt Lake County during the period of time the improper jury selection system was used, and is further limited to persons who timely objected to their jury panel, because a defendant, by accepting a jury, waives his right to object to the panel. See Francis v. Southern Pac. Co., 333 U.S. 445, 68 S.Ct. 611, 92 L.Ed. 798 (1948); Hill v. Texas, 316 U.S. 400, 62 S.Ct. 1159, 86 L.Ed. 1559 (1942); 47 Am.Jur.2d Jury § 181 (1969).

The order of the district court is affirmed.

      . 78-46-17. Selection of names of persons. —It shall be the duty of the jury commissioners before the 15th day of December after their appointment to select from the names of the legal voters on the assessment roll of the county for the current year a written list of names from which the grand and trial jurors shall be drawn to serve in the district court of such county during the succeeding calendar year. In making the jury selection they shall choose only those who are not exempt from jury service, who are in possession of their faculties, who are not infirm or decrepit, who are well informed and free from legal exceptions, and, as far as is practicable, who were not returned on the jury list of the next preceding year. No person shall be selected as a juror who is known to them to be interested in or has a cause pending which may be tried by a jury to be drawn from the persons so selected, or who, either personally or otherwise, has solicited his selection as such.
      Pursuant to the 1971 amendment, jurors are now chosen only from the voter registration lists.

      . U.C.A. § 59-8-1 provides in part: “The county auditor . . . shall proceed to add the valuations, and enter the total valuation of each kind of property, and the total evaluation of all property, on the assessment book.”

      . See, e. g., Sims v. Georgia, 389 U.S. 404, 88 S.Ct. 523, 19 L.Ed.2d 634 (1967), assessment rolls listed taxpayers separately by race; Whitus v. Georgia, 385 U.S. 545, 87 S.Ct. 643, 17 L.Ed.2d 599 (1967), assessment rolls designated blacks by placing a “(c)” next to their names; Arnold v. North Carolina, 376 U.S. 773, 84 S.Ct. 1032, 12 L.Ed.2d 77 (1964), assessment rolls listed taxpayers separately by race.

      . See Clark v. Ellenbogen, 319 F.Supp. 623 (W.D.Pa.1970), aff’d mem., 402 U.S. 935, 91 S.Ct. 1615, 29 L.Ed.2d 104. “[I]f the statute limits jurors to taxpayers assessed as owners of real property, the statute must be deemed unconstitutional.”

      . See, e. g., Turner v. Fouche, 396 U.S. 346, 90 S.Ct. 532, 24 L.Ed.2d 567 (1970); Kramer v. Union Free School Dist., 395 U.S. 621, 89 S.Ct. 1886, 23 L.Ed.2d 583 (1969); Cipriano v. City of Houma, 395 U.S. 701, 89 S.Ct. 1897, 23 L.Ed.2d 647 (1969); Shapiro v. Thompson, 394 U.S. 618, 89 S.Ct. 1322, 22 L.Ed.2d 600 (1969). See also City of Phoenix v. Kolodziejski, 399 U.S. 204, 90 S.Ct. 1990, 26 L.Ed.2d 523 (1970), holding persons who do not own real property may not be excluded from voting on bond issues.


source: Caselaw Access Project

author:
LAY, Circuit Judge.
      VAN OOSTERHOUT and MATTHES, Senior Circuit Judges

license: Public Domain

text:
    UNITED STATES of America, Appellee, v. Jack Walter FALLEN, Appellant.
    No. 73-1882.
    United States Court of Appeals, Eighth Circuit.
    Submitted March 15, 1974.
    Decided June 10, 1974.
    Rehearing and Rehearing En Banc Denied July 5, 1974.

      Charles M. Shaw, Clayton, Mo., for appellant.
    Wesley D. Wedemeyer, Asst. U. S. Atty., St. Louis, Mo., for appellee.
    Before VAN OOSTERHOUT and MATTHES, Senior Circuit Judges, and LAY, Circuit Judge.
   LAY, Circuit Judge.

Defendant was convicted of engaging in the business of dealing in firearms without a license in violation of 18 U.S. C. §§ 922(a)(1) and 924(a). On appeal, defendant contends the trial court erred in denying defendant’s pre-trial discovery motion; in refusing to find a fatal variance between the indictment and the government’s proof; in not sustaining defendant’s defense of entrapment as a matter of law; and in its charge to the jury defining “reasonable doubt” in terms of “substantial doubt.” On review we find no prejudicial error and affirm the conviction below.

The government’s ease rested essentially on the testimony of two undercover agents of the Bureau of Alcohol, Tobacco and Firearms. The government proved that the defendant Fallen sold firearms to James A. Young, an undercover agent, at defendant’s place of business in Overland, Missouri, on April 7, 1972; May 11, 1972; September 13, 1972; September 18, 1972; October 5, 1972; December 7, 1972; and January 3, 1973. These sales were admitted by the defendant. The defendant asserts, however, that he was a victim of unlawful entrapment in that he was told by the undercover agent that the sale of a single firearm between private parties was not an unlawful act. It was stipulated that defendant did not have a federal license to engage in the business of dealing in firearms.

I. Pre-Trial Discovery of Defendant’s Statements

At trial, Agent Young testified that Fallen had told him that he could get four more pistols and that on another occasion Fallen stated he could get all the ,38s and ,25s Young wanted. Agent Young further testified that the defendant stated after one of the sales, “Don’t get caught with this firearm,” referring to a .38 revolver purchased April 7, 1972. In addition, Fallen allegedly told Agent Trice that he could get additional .38 and .32 caliber revolvers, and finally, that he was trying to get a “tommygun” for the agents.

Prior to trial defendant had moved pursuant to Rule 16(a)(1) of the Federal Rules of Criminal Procedure to inspect all relevant statements made by defendant concerning the crime charged. The government informed the court that it did not have any “statements” of the defendant and the court therefore denied the defendant’s pre-trial motion to so inspect.

It is the government’s contention that there existed no written or recorded statements of the defendant. Rather, the government urges that the oral statements of defendant about which the agents testified were the agents’ statements and that the agents’ written summaries' of their recollection of these conversations with the defendant were not statements within the purview of Rule 16(a)(1). After the agents had testified at trial, the government turned over their summaries to defense counsel for inspection under the Jeneks Act, 18 U. S.C. § 3500. The government additionally urges that whether or not such statements should be disclosed prior to trial is within the discretion of the trial court and that there is no showing of abuse of discretion here.

We think the government’s argument misses the mark in several respects. First and foremost, the question of whether the trial court properly exercised its discretion is not actually before us. The government’s representation to the trial court that no statements existed foreclosed the court’s exercise of any discretion. In open court, the court has the right to rely upon the truthfulness of the government’s statement. We do not find, nor does the defendant claim, that the government deliberately misled the court. The record indicates the government in good faith interpreted Rule 16(a)(1) to apply only to written or recorded statements of the defendant himself. The difficulty with this reasoning, however, is that in construing the statute the government attempted to become prosecutor and judge at the same time by representing to the court that no statements existed. Cf. United States v. Kasouris, 474 F.2d 689 (5th Cir. 1973); United States v. Wilkerson, 456 F.2d 57 (6th Cir.), cert. denied, 408 U.S. 926, 92 S.Ct; 2506, 33 L.Ed.2d 337 (1972). The proper approach under these circumstances is to reveal to the court what statements the government has, thus giving the court the opportunity to pass on the question of whether or not they come within the purview of Rule 16.

Second, the overwhelming authority is contrary to the government’s position. Defendant’s oral statements made to the agents prior to and at the time of the sales may constitute relevant statements under Rule 16(a)(1). Barring some showing of possible harmful effects flowing from disclosure, these statements should have been produced pursuant to the pre-trial motion. As Professor Moore observes:

The word “statements” as used in subdivision (a)(1) is nowhere defined in the Rule. Some courts have erroneously read into the Rule a qualification that statements discoverable should be “verbatim.” If interpretive aid is needed, resort should be had to common usage of the term “statements” in criminal practice, which applies broadly to almost any material elicited from the defendant, written or oral, inculpatory or exculpatory.

8 Moore’s Federal Practice ¶ 16.05 [1],

In United States v. Crisona, 416 F.2d 107 (2d Cir. 1969), cert. denied, 397 U. S. 961, 90 S.Ct. 991, 25 L.Ed.2d 253 (1970), the Second Circuit refused to accept the government’s interpretation of Rule 16(a)(1), but instead chose to follow the cases supporting defendant’s view :

The bases of these decisions have been that the language of amended Rule 16(a) is unqualified in contrast to the limited definition of “statement” in section 3500, that the Notes of the Advisory Committee indicate that the amended Rule was intended to apply even to pre-arrest statements made by a defendant during the course of his crime and was meant to broaden materially the scope of discovery available to a defendant, that such a statement is obviously of such vital importance to the defense that fairness compels its disclosure, and that guilty pleas will thereby be encouraged. This broad interpretation of “statement” in Rule 16(a) is supported by the recent recommendation of the ABA Project on Minimum Standards for Criminal Justice, Standards Relating to Discovery and Procedure Before Trial 62 (1969) that a defendant receive before trial all of his statements
regardless of to whom they were made — whether a prosecuting attorney, an investigator, a grand jury * * ", or anyone else. It is also intended that statements be discoverable regardless of how they are obtained, whether surreptitiously or voluntarily.
We agree with these conclusions and see nothing in the plain language of Rule 16(a) or the Notes of the Advisory Committee accompanying it which would justify imposing the limitation suggested by the Government.

Id. at 114-115. Accord, United States v. Isa, 413 F.2d 244, 249 (7th Cir. 1969); Loux v. United States, 389 F.2d 911, 922 (9th Cir.), cert. denied, 393 U.S. 867, 89 S.Ct. 151, 21 L.Ed.2d 135 (1968); United States v. Rosenberg, 299 F.Supp. 1241, 1245 (S.D.N.Y.1969); United States v. Lubomski, 277 F.Supp. 713, 721 (N.D.Ill.1967); United States v. Iovinelli, 276 F.Supp. 629, 631 (N.D.Ill.1967).

The language of Rule 16(a)(1) requires a defendant’s request to be for relevant material. This is the only showing that the defendant need make for production pursuant to this rule. In contrast, Rule 16(b) requires a specific showing of materiality. It cannot be disputed that defendant’s own statements meet the test of relevancy and in this instance should have been produced. As the court said in United States v. Isa, 413 F.2d 244 (7th Cir. 1969):

In our view, this subdivision clearly reveals that any showing authorizing the court to deny, restrict or defer discovery or inspection must be made by the government. It is only upon such a showing that there is lodged in a court the discretion to allow or deny a defendant’s motion under (a)(1). More bluntly stated, a defendant has the right to an order permitting him to inspect his own written or recorded statements or confessions in the custody of the government, absent a showing by the government under Subdivision (e). It is then that the court is vested with discretion to allow or reject defendant’s motion.

Id. at 248.

Nor do we agree with the government’s final argument that the summaries here fall within the work product exemption of Rule 16(b). See United States v. Scharf, 267 F.Supp. 19 (S.D.N.Y.1967); United States v. Reid, 43 F.R.D. 520 (N.D.Ill.1967).

We turn to the question of whether the erroneous denial of the defendant’s discovery motion constituted prejudicial error. Under the specific factual circumstances of this case, we find no prejudice. Defendant has made no showing of any possible harm flowing from the failure to produce the statements before trial. As indicated, the statements were given to defense counsel pursuant to the Jencks Act after the agents testified. At that time, defense counsel had ample opportunity to study the statements and thereafter engaged in a vigorous cross-examination of both agents in thich he was able to expose several discrepancies (most of a technical nature) in their testimony. It is apparent that defense counsel did the best he could to destroy the credibility of the agents. In certain cases, such late disclosure may well constitute prejudicial error. In the present case, however, the statements do not reveal any factual matter which might have been impeached by calling additional witnesses or by adducing proof of physical facts. Although we do not intend to diminish the importance of pre-trial disclosure under these factual circumstances, we fail to find here a specific showing of prejudice sufficient to overturn the conviction. See United States v. Battaglia, 410 F.2d 279, 283 (7th Cir.), cert. denied, 396 U.S. 848, 90 S.Ct. 73, 24 L.Ed.2d 97 (1969).

II. Variance Between the Indictment and the Government’s Proof

The indictment charged that the defendant knowingly engaged in the business of dealing in firearms without a license at 9409 Midland Avenue and No. 5 Wedgewood Estates, both in Overland, Missouri. At trial, the government presented no evidence relating to No. 5 Wedgewood Estates. In response to defendant’s pre-trial motion for a bill of particulars, however, the government limited its case to the alleged sales at 9409 Midland Avenue. We fail to see that the lack of proof concerning transactions at No. 5 Wedgewood Estates in any way prejudiced the defendant in the defense of his case.

III. Entrapment

Defendant urges that the evidence concerning entrapment was such that the court should have entered a verdict of acquittal as a matter of law. Upon review of the overall evidence we think it obvious that the issue of entrapment was one of fact for the jury. See United States v. Russell, 411 U.S. 423, 93 S.Ct. 1637, 36 L.Ed.2d 366 (1973).

IV. Reasonable Doubt Instruction

The defendant asserts error in that the trial court instructed the jury that “a reasonable doubt means a substantial doubt and not the mere possibility of innocence.” Trial in this case was held in the latter part of October, 1973. This court for the first time, on November 9, 1973, disapproved a similar instruction in United States v. Atkins, 487 F.2d 257 (8th Cir. 1973), holding that “[pjroof of guilt beyond a reasonable doubt would seem to require a greater evidentiary showing by the Government than proof of guilt beyond a substantial doubt.” This court found, however, that since the instruction in Atkins was not objected to at trial, as required by Rule 30 of the Federal Rules of Criminal Procedure, the giving of the instruction in the context of that case did not constitute plain error. Recently, in United States v. Byrd, 494 F.2d 1275 (8th Cir. April 16, 1974), we applied the same rule where no objection was made at the time of trial. In the instant case, counsel excepted to the instruction on the specific ground later enunciated in Atkins. The district court, not having the benefit of Atkins, overruled the objection, following our pre-Atkins decisions. See, e. g., United States v. Culp, 472 F.2d 459 (8th Cir.), cert. denied, 411 U.S. 970, 93 S.Ct. 2161, 36 L.Ed.2d 692 (1973).

In In re Winship, 397 U.S. 358, 90 S.Ct. 1068, 25 L.Ed.2d 368 (1970), the Supreme Court found a denial of due process when an accused in a criminal prosecution was convicted under a lesser standard than guilt beyond a reasonable doubt. There a juvenile was convicted on evidence which the court found to meet only the simple preponderance of evidence standard. Thus, it is clear that the reasonable doubt standard in a criminal case is of constitutional stature. If the holding of Atkins meant that the use of the phrase, “substantial doubt” creates a lesser standard of proof, then we would be confronted with a question of denial of due process. However, the Atkins court refused to find “plain error” in the use of the words “substantial doubt.” Under these circumstances, it should be clear that our court did not deem it significant to set it forth in its mensions. The instruction in Atkins was the same as that given here. We deem it significant to set it forth in its entirety:

This is a criminal case, as you know. The burden to make out the guilt of the defendant on trial in this case is upon the Government; that burden the Government assumes in the beginning and carries throughout to the end, until it has met it by showing to you the guilt of the defendant beyond a reasonable doubt. The law never imposes upon a defendant in a criminal case the burden or duty of calling any witnesses or producing any evidence.
All of the presumptions of the law, aside from the evidence, are in favor of innocence and the defendant is presumed to be innocent until proven guilty. This presumption of innocence attends and protects the defendant throughout the trial until it has been met and overcome by evidence coming forward in the case which shows and establishes the defendant’s guilt beyond a reasonable doubt. Unless you find the defendant guilty beyond a reasonable doubt, you shall acquit him.
It is not required that the government prove guilt beyond all possible doubt. The test is one of reasonable doubt. A reasonable doubt is a doubt based upon reason and common sense —the kind of doubt that would make a reasonable person hesitate to act. Proof beyond a reasonable doubt must, therefore, be proof of such a convincing character that you would be willing to rely and act upon it unhesitatingly. Putting it in another way, a reasonable doubt means a substantial doubt and not the mere possibility of innocence.

It is clear that the phrase “substantial doubt” was used only once. “Beyond a reasonable doubt” is otherwise explained as “the kind of doubt that would make a reasonable person hesitate to act” and “proof of such a convincing character that you would be willing to rely and act upon it unhesitatingly.”

Upon reviewing the instruction as a whole, as we must do, without isolating a single phrase or sentence, we conclude that the court conveyed the proper concept of reasonable doubt. This is not to detract from our holding in Atkins. In light of the overwhelming evidence of guilt in the present case, however, any error in the instructions we deem to be harmless since it could not in any way have influenced the jury in its finding of guilt.

Judgment affirmed.

VAN OOSTERHOUT and MATTHES, Senior Circuit Judges

(specially concurring).

We agree that the judgment of conviction should be affirmed. We concur in Judge Lay’s opinion on all issues except the issue relating to the interpretation of Rule 16(a)(1), Federal Rules of Criminal Procedure. On such issue, we agree with Judge Lay’s determination that no prejudicial error has been committed. We do not reach the issue of whether a non-verbatim oral statement of the defendant incorporated in the government agent’s report constitutes “written or recorded statements or confessions made by the defendant” as such words are used in Rule 16(a)(1). Such issue was not adequately briefed or argued. We believe the disposition of such controversial issue should await a situation where resolution of the issue is required to dispose of the case and the issue is fairly briefed and argued by the parties.

      . Rule 16(a)(1) of the Federal Rules of Criminal Procedure provides as follows: Upon motion of a defendant the court may order the attorney for the government to permit the defendant to inspect and copy or photograph any relevant (1) written or recorded statements or confessions made by the defendant, or copies thereof, within the possession, custody or control of the government, the existence of which is known, or by the exercise of due diligence may become known, to the attorney for the government ....

      . The proposed 1972 amendments to Rule 16(a) would substitute the word shall for the word may:

      Upon request of a defendant the government shall permit the defendant to inspect and copy or photograph: any relevant written or recorded statements made by the defendant, or copies thereof, within the possession, custody or control of the government, the existence of which is known, or by the exercise of due diligence may become known, to the attorney for the government; the substance of any oral statement which the government intends to offer in evidence at the trial made by the defendant whether before or after arrest in response to interrogation by any person then known to the defendant to be a government agent; and recorded testimony of the defendant before a grand jury which relates to the offense charged. . . . (emphasis added).

      . Rule 16(b) provides:
      Upon motion of a defendant the court may order the attorney for the government to permit the defendant to inspect and copy or photograph books, papers, documents, tangible objects, buildings or places, or copies or portions thereof, which are within the possession, custody or control of the government, upon a showing of materiality to the preparation of his defense and that the request is reasonable. Except as provided in subdivision (a)(2), this rule does not authorize the discovery or inspection of reports, memoranda, or other internal government documents made by government agents in connection with the investigation or prosecution of the case, or of statements made by government witnesses or prospective government witnesses (other than the defendant) to agents of the government except as provided in 18 U.S.C. § 3500.


author: CASTLE, Circuit Judge.

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Bruno Anthony PIET and Delmar L. Markham, Defendants-Appellants.
    Nos. 73-2137, 73-2138.
    United States Court of Appeals, Seventh Circuit.
    Argued April 19, 1974.
    Decided May 20, 1974.
    Rehearing Denied July 18, 1974.

      James D. O’Connell, Highland Park, Mich., Thomas H. Ramsey, Chicago, Ill., for defendants-appellants.
    James R. Thompson, U. S. Atty., Walter Jones, Jr., Asst. U. S. Atty., Chicago, Ill., for plaintiff-appellee.
    Before SWYGERT, Chief Judge, CASTLE, Senior Circuit Judge, and SPRECHER, Circuit Judge.
   CASTLE, Circuit Judge.

Defendants Bruno Piet and Delmar Markham appeal their jury convictions on one count of unlawfully possessing goods stolen from interstate commerce, a violation of 18 U.S.C. § 659. On appeal, Piet and Markham assert that the indictment was insufficient to state an offense, that the evidence was insufficient to prove that Piet possessed stolen goods, that the district court erroneously denied a motion to suppress the stolen goods from evidence, and that the government permitted a key witness to perjure himself in denying the existence of a plea bargain. We have considered these issues, and we affirm the convictions.

On March 19, 1973, Russell Johnson, a truck driver, while making a delivery to the Chippewa-McClain Motor Freight Co. of Bedford Park, Illinois, agreed to receive some Black and Decker lawn edgers from Bruno Piet, a Chippewa dock hand; the two men agreed to split the proceeds from Johnson’s planned sale of the edgers. Later, Johnson telephoned Delmar Markham to inquire whether he could “use” the edgers, and Markham directed Johnson to transport them to the Able warehouse. The men fixed the sale terms, and subsequently, Johnson found $124 at the location where he had asked Markham to deliver payment. One March 21, Markham telephoned Frank Smith, acting warehouse foreman, and requested that one-half of the edgers be separated; Markham picked up these edgers later that afternoon.

Piet claims that the indictment was insufficient to state an offense because it specified the precise location of the theft, rather than any particular facility enumerated in the statute. This court rejected a similar contention in United States v. D’Antonio, 342 F.2d 667 (7th Cir. 1965), in finding that “a dock of Day’s Transfer Co.,” referred to facilities set forth in the statute. Similarly, “Chippewa-McClain Motor Freight Company, Bedford Park, Illinois” connotes such statutory terms as “platform or depot,” “station” and “storage facility.” United States v. Knight, 451 F.2d 275 (5th Cir. 1971), cert. den., 405 U.S. 965, 92 S.Ct. 1171, 31 L.Ed.2d 240 (1972), a case indistinguishable from ours, found that an indictment specifying “Yellow Freight System terminal” was sufficient because there was no significant distinction between the words of the indictment and those of the statute. Accord, Dunson v. United States, 404 F.2d 447 (9th Cir. 1968), cert. den., 393 U.S. 1111, 89 S.Ct. 925, 21 L.Ed.2d 808 (1969). United States v. Manuszak, 234 F.2d 421 (3rd Cir. 1956), on which the defendants rely, is inapposite, for the indictment there failed to specify any specific facility or place from which the goods had been stolen. We find that the indictment sufficiently apprised the defendants of the nature of the crime with which they were charged. See, Hagner v. United States, 285 U.S. 427, 52 S.Ct. 417, 76 L.Ed. 861 (1932).

Piet also argues that his indictment represents an unwarranted extension of federal jurisdiction beyond the scope of congressional intent in drafting the statute. We cannot agree. “The language of section 659 evidences a clear purpose to reach depredations affecting any conceivable instrumentality by which the interstate transportation of freight may be accomplished.” Dunson v. United States, supra, at 448. That Congress is empowered to protect interstate commerce by proscribing possession of goods stolen from interstate shipment is beyond cavil, see, Wickard v. Filburn, 317 U.S. 111, 63 S.Ct. 82, 87 L.Ed. 122 (1942); whether such power was wisely exercised through the enactment of section 659 is clearly improperly addressed to this branch of government.

Piet next contends that the evidence was insufficient to establish that he was in actual possession of the lawn edgers; therefore the court improperly denied his motion for a judgment of acquittal. Viewing the evidence in the light most favorable to the government, Glasser v. United States, 315 U.S. 60, 62 S.Ct. 457, 86 L.Ed. 680 (1942), we find there was sufficient evidence for the jury to determine that Piet had possession of the edgers, as charged in the indictment. After determining on March 19, 1973 that Johnson would accept any merchandise which Piet might be able to supply to him, Piet learned from a coworker that a load of Black and Decker lawn edgers, marked “Richmond freight,” was lying on the dock. Piet then told Johnson that he would try to load the edgers on the back of Johnson’s trailer. Thereafter, Piet was seen loading the lawn edgers into a truck. From this evidence, the jury could properly infer that Piet had established the requisite dominion and control over the property at issue. Accord, United States v. Parent, 484 F.2d 726 (7th Cir. 1973); United States v. Catalano, 450 F.2d 985 (7th Cir. 1971), cert. den., 405 U.S. 928, 92 S.Ct. 980, 30 L.Ed.2d 802 (1972). The case is therefore distinguishable from United States v. Nitti, 444 F.2d 1056 (7th Cir. 1971), where the court expressly noted that the defendant had no knowledge of the stolen property.

Markham contends that his motion to suppress the lawn edgers from evidence was erroneously denied because (1) the March 23, 1973 FBI inspection of the Able warehouse storage room in which Markham’s goods were kept was unlawful, (2) that inspection tainted the March 26, 1973 search and seizure of Markham’s goods stored at the warehouse, and (3) Markham’s consent to the March 26 search was improperly induced. Respecting the first point, Markham asserts that Frank Smith lacked the authority to permit FBI agents to inspect a storage room at the warehouse in which Markham’s goods were commingled with those of others who leased space at the facility. In United States v. Matlock, 415 U.S. 164, 94 S.Ct. 988, 39 L.Ed.2d 242, 42 USLW 4252 (1974), the Supreme Court reiterated that permission to search may be obtained from a third party who possessed either common authority over or other sufficient relationship to the premises or effects. “The authority which justifies third-party consent does not rest upon the law of property . . . [but rather] on mutual use of the property by persons generally having joint access or control for most purposes.” Id. at 4254 n. 7, 94 S.Ct. 993. Frank Smith introduced himself as the warehouse foreman and stated that he was in charge in the owner’s absence. Smith also told the FBI agents that he had one of two keys to the common storage area where Markham’s goods were kept and that Markham did not have a key to the facility. Smith freely consented to the FBI search, and he led the agents to the area where Markham’s goods were stored. From the labels on the Black and Decker cartons, the agents ascertained that the boxes contained the stolen lawn edgers. The agents then left the warehouse. Whatever Smith’s position, it is clear that Markham was aware, as a practical matter, that Smith and the warehouse owner — who possessed the only keys to the common storage room — had access and control over the common area. We find, therefore, that Markham had no reasonable expectation of privacy respecting the storage of his goods, see, United States v. Eldridge, 302 F.2d 463 (4th Cir. 1962), and assumed the risk that the persons in charge of the facility might willingly and voluntarily grant permission for agents to enter and search the common storage area. See, United States v. Matlock, supra; Von Eichelberger v. United States, 252 F.2d 184 (9th Cir. 1958).

Markham further argues that as the March 26 search and seizure resulted from information gleaned from the allegedly unlawful March 23 search, evidence seized on March 26 must therefore be suppressed. Even if the March 23 search had been unlawful, that investigation would not have tainted the March 26 search and seizure of the edgers. Prior to the March 23 search, Johnson told FBI agents that Markham had directed him to deliver the stolen edgers to the Able warehouse. Thus, an independent basis existed to support the agents’ suspicion that Markham was storing stolen goods at the Able facility. Cf., United States v. San Martin, 469 F.2d 5, 8 (2d Cir. 1972), cert. den., 410 U. S. 934, 93 S.Ct. 1388, 35 L.Ed.2d 598 (1973).

Markham’s claim that he was improperly induced to consent to the March 26 search is apparently grounded on his assertions that the FBI agents told him that it would be futile to withhold consent to the search since the agents had already determined that the stolen merchandise was there and that it was unnecessary for Markham to call his attorney prior to granting consent. The FBI agents involved denied the first assertion and contended that they told Markham that he was free to call his attorney at which point he changed his mind. First, issues of credibility of witnesses are to be resolved by the trial court, which may observe the witnesses’ demeanor at first hand; such issues may not be relitigated at the appellate level. Second, even if the trial court had accepted Markham’s account, “the totality of all the circumstances” does not indicate that Markham’s consent was involuntary. See, Schneckloth v. Bustamonte, 412 U.S. 218, 93 S.Ct. 2041, 36 L.Ed.2d 854 (1973). Markham had previously been informed that he was a suspect in the case, and he had received his Miranda warnings. He voluntarily accompanied the agents to the warehouse. Most significantly, he was advised that he could refuse to consent to the search, yet he decided to execute the consent form. Even if the FBI agents had advised Markham that it was not necessary for him to consult with a lawyer in order to give his consent to the search and that the agents had already determined that he was storing stolen goods at the warehouse, these factually true statements do not evidence duress, coercion, chicanery or threats — factors which courts have traditionally examined to determine whether consent was freely and voluntarily granted. Moreover, we reject any suggestion in Higgins v. United States, 93 U.S.App.D.C. 340, 209 F.2d 819 (1954), that one claiming innocence cannot voluntarily consent to a search when he knows that that which is sought is certain to be found. Rather, we agree with the First Circuit that “the pressure exerted on a criminal by the realization that the jig is up is far different from the deliberate or ignorant violation of a personal right that renders apparent consent ineffective.” Gorman v. United States, 380 F.2d 158, 165 (1st Cir. 1967). Marham may well have believed that the seizure of the stolen goods was inevitable or that cooperation with the FBI would serve his interests. See, Leavitt v. Howard, 462 F.2d 992 (1st Cir. 1972).

Piet and Markham lastly contend that the record discloses evidence of plea bargaining between the government and its key witness, Johnson, despite Johnson’s denial under oath, which the government did not contradict. Had there been a promise to the witness prior to his testimony which was withheld from the jury by the witness and the government, Giglio v. United States, 405 U.S. 150, 92 S.Ct. 763, 31 L.Ed.2d 104 (1972), and Napue v. Illinois, 360 U.S. 264, 79 S.Ct. 1173, 3 L.Ed.2d 1217 (1959), would require reversal of the convictions. Moreover, if there is evidence of a plea bargain at some point in time, DeMarco v. United States, 415 U. S. 449, 94 S.Ct. 1185, 39 L.Ed.2d 501, (1974), would require remand to the district court to determine through an evidentiary hearing whether the plea bargain occurred prior to the giving of testimony. Unlike DeMarco, where the prosecutor’s remarks at the sentencing of the witness arguably established that a plea bargain was reached with the witness prior to his giving testimony, there is absolutely nothing in the record of the present case to even suggest that a plea bargain was reached between Johnson and the government. While steadfastly denying the existence of a plea bargain both at his own arraignment and at the trial of Piet and Markham, Johnson expressed his hope that the court would favorably consider his cooperation with the government in subsequently sentencing him. The mere expression of one’s hopeful (and not unreasonable) expectation cannot be equated with concrete indicia of an undisclosed plea bargain. Without any substantive claim that a plea bargain was struck, there would clearly be no basis for ordering an evidentiary hearing to determine the date of such an alleged agreement.

The judgment of the district court is affirmed.

Affirmed.

      . The appeals of Piet, No. 73-2137, and Markham, No. 73-2138, were consolidated for purposes of oral argument and this opinion.

      . This qusetion had been expressly left open in United States v. Hayward, 471 F.2d 388, 389 (7th Cir. 1972).


author: SCHWARTZ, District Judge:

text:
    Sam BITTER et al., Plaintiffs-Appellants, v. HOBY’S INTERNATIONAL, INC., a corporation, et al., Defendants-Appellees. Sam BITTER et al., Plaintiffs-Appellants, v. The ARIZONA BANK, a corporation, Defendant-Appellee.
    Nos. 72-1721, 72-1878.
    United States Court of Appeals, Ninth Circuit.
    May 8, 1974.
    Rehearing Denied July 11, 1974.
    Kenneth A. Winsberg (argued), Stephen T. Meadow, of Meadow, Cheche, & Thrasher, Phoenix, Ariz., for plaintiffs-appellants.
    Henry Jacobowitz (argued), Phoenix, Ariz., for Hoby’s International, and others.
    John C. Ellinwood (argued), Phoenix, Ariz., for Ariz. Bank.
    Before BARNES and CHOY, Circuit Judges, and SCHWARTZ, District Judge.

       Honorable Edward J. Seliwartz, United States sitting by designation.
      District Judge, Southern District of California,

   OPINION

SCHWARTZ, District Judge:

Appellants brought these actions for rescission and damages, alleging that the agreement for a hot roast beef restaurant franchise offered by appellees constituted an unregistered security under the federal security laws. The District Court rendered summary judgment against appellants. We affirm.

I

Hoby’s International, Inc. was incorporated in Arizona in December, 1967, by A. J. Roberts for the purpose of engaging in the hot roast beef restaurant franchising business. Its capitalization consisted of Roberts’ contribution of $20,000.00 in equity. Subsequently, Roberts also contributed a $60,000.00 loan to Hoby’s to finance building the company’s model store, which opened in Phoenix during July, 1968. By November, 1969, Hoby’s had serious financial problems and Roberts sold stock to an employee, had his own loan repaid and departed for Florida to run the company from there. During this same period, two key employees resigned. The corporation ceased operation in April, 1970.

The Hoby’s franchises were publicly advertised and a total of three were sold. The first franchise was sold in 1968 to Adam Beef, which opened its restaurant in Scottsdale that December. Bitter purchased the second franchise with a $15,000.00 down-payment in May, 1969. However, he failed to obtain additional financing and his restaurant never opened. Holman purchased a franchise which opened in Tucson in January, 1970. The Arizona Bank is involved because it allegedly participated in the sale of these franchises.

The sole issue presented is whether the franchise agreements entered into by appellants constitute an investment contract, and hence a security under § 2(1) of the Securities Act of 1933, 15 U.S.C. § 77b(1) or § 3(a)(10) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78c(a)(10).

II

Appellants contend that they retained no practical profit-influencing control over their respective investments because the franchise agreement imposed strict standards for operation, including standards for materials, merchandise, supplies, financial reporting, advertising and employee service, demeanor and appearance, as well as controls over hours of operation, advertisements, the painting of the building and installation of vending machines. Failure to meet Hoby’s standards could result in cancellation of the franchise. Nevertheless, the franchisee was to be responsible for the day to day management and operation of his own hot roast beef sandwich restaurant.

In S. E. C. v. W. J. Howey, 328 U.S. 293 at 298-299, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), the Supreme Court described two essential elements for an investment contract: (a) an investment in a common enterprise, and (b) reliance of the investor solely upon the efforts of the promoter or a third party to make the enterprise profitable.

In the context of a scheme involving pyramid contracts, this court recently held that a limited degree of investor participation, by way of introducing future prospects, was consistent with the definition of an investment contract. S. E. C. v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir. 1973), cert. denied 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973). In considering the purpose of the Securities Act of 1933, we held:

[T]hat in light of the remedial nature of the legislation, the statutory policy of affording broad protection to the public, and the Supreme Court’s admonitions that the definition of securities should be a flexible one, the word “solely” should not be read as a strict or literal limitation on the definition of an investment contract, but rather must be construed realistically, so as to include within the definition those schemes which involve in substance, if not form, securities. Id. at 482.
We went on to adopt a different test: [W]hether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise. Id. at 482.

Applying such standard, the focus here must be on the extent of participation the franchisee has under the franchise agreement. In Turner, the purported success of the investment depended primarily upon the selling efforts of the Turner employees and distributors, and not on the slight efforts of the investors. By contrast, the efforts required of the Hoby’s franchisee were qualitatively more substantial, entailing continuous operation of the restaurant, production and sale of roast beef sandwiches and related products, purchase of materials, merchandise and supplies from sources selected at his sole discretion, preparation of monthly operating statements, and employment of personnel to accomplish the foregoing.

The contractual restrictions on the discretion of the franchisee were designed merely to effectuate the purported benefits of standardization derived from participation in a restaurant chain. They did not render the franchisee’s efforts nominal. In spite of regulation, each franchisee’s active management was essential to the success of his retail restaurant. See Lino v. City Investing Co., 487 F.2d 689 (3rd Cir. 1973); Nash & Associates, Inc. v. Lum’s of Ohio, Inc., 484 F.2d 392 (6th Cir. 1973); Wieboldt v. Metz, 355 F.Supp. 255 (S.D.N.Y.1973); Mr. Steak, Inc. v. River City Steak, Inc., 324 F.Supp. 640 (D.Colo.1970), aff’d, 460 F.2d 666 (10th Cir. 1972).

This is not to say that the relative profitability of the investment would not be influenced by the success of the franchisor. However, the individual restaurant franchise operation was an integral economic entity, which could obtain supplies from sources other than the franchisor, and its success was not dependent upon the success of the franchise system. See Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971); Wieboldt v. Metz, supra at 260. Hence, the failure of the franchisor would not necessarily doom the franchisee’s investment. Cf. Mitzner v. Cardet International, Inc., 358 F.Supp. 1262, 1267-1268 (N.D.Ill.1973).

III

Alternatively, appellants contend the franchise agreement was a security because the franchisor was inadequately capitalized and may have relied upon franchise fees to provide the initial capital needed to adequately operate the business. This “risk capital” definition of a security was developed in Silver Hills Country Club v. Sobieski, 55 Cal.2d 811, 13 Cal.Rptr. 186, 361 P.2d 906 (1961). In that case a membership plan was established to finance a new country club. However, there was a substantial risk that the venture would fail because the country club was inadequately capitalized and would require additional memberships to survive. The California Supreme Court held the plan to be a security. Following the Silver Hills case, the California Attorney General indicated that he considered a security to be involved whenever an initially undercapitalized franchisor relies upon franchise fees to raise his initial capital. 49 Ops.Cal.Atty.Gen. 124 (1967).

We decline to adopt this view. As previously indicated, the franchise here is a relatively independent economic entity. The failure of the franchisor does not necessarily doom the success of the franchisee who significantly participates in the operation of the franchise. Such an individual franchise operator independently determines his own success or failure and is not the passive investor intended to be covered by the federal security laws. See Wieboldt v. Metz, supra. Therefore, Hoby’s possible under-capitalization is not relevant.

IV

Appellants finally contend that Hoby’s offered an investment contract, even if it did not sell one. See Howey, supra at 301. They point to the advertising brochure offering absentee ownership:

If you are an individual seeking his own business to operate, or invest as an absentee owner, here is your key to financial success. There is no experience required. We assist you every step of the way.

Read in the context of the entire brochure, it is clear that what was offered to the franchisee was the right to operate and control the franchise by his own effort, or through a manager of his own choice. See Chapman v. Rudd Paint & Varnish Company, 409 F.2d 635 at 640-641 (9th Cir. 1969).

Such a manager would not be a “third party”, as contemplated in the Howey definition of an investment contract. For the manager to be a “third person” within the meaning of the Howey test, the manager must be outside of the direct and immediate control of the franchisee. See Mr. Steak, Inc. v. River City Steak, Inc., supra at 642-645; cf. Continental Marketing Corporation v. S. E. C., 387 F.2d 466 (10th Cir. 1967), cert. denied, 391 U.S. 905, 88 S.Ct. 1655, 20 L.Ed.2d 419.

The judgment of the District Court is affirmed.


author: WILLIAM E. MILLER, Circuit Judge.

text:
    OHIO DRILL & TOOL CO. et al., Plaintiffs-Appellanfs, v. Fred H. JOHNSON et al., Defendants-Appellees.
    No. 73-1903.
    United States Court of Appeals, Sixth Circuit.
    Argued Feb. 11, 1974.
    Decided June 12, 1974.

      Lyman Brownfield, Columbus, Ohio, for appellants; Laurence E. Sturtz, Brownfield, Kosydar, Bowen, Bally & Sturtz, Columbus, Ohio, on brief.
    Thomas J. Moyer, Columbus, Ohio, for appellees; Crabbe, Brown, Jones, Potts & Schmidt, Charles E. Brown, Columbus, Ohio, on brief.
    Before CELEBREZZE, McCREE and MILLER, Circuit Judges.
   WILLIAM E. MILLER, Circuit Judge.

This is an appeal from a judgment of the district court in which all but one of several claims in the plaintiffs’ stockholders’ derivative action for the benefit of an Ohio corporation, Fidelity National Life Insurance Company, against certain of its officers and directors, were denied.

The defendants, Johnson, Woodward and Zink, directors of the Corporation, were also, respectively, the President, Vice President and Legal Counsel of Fidelity. Plaintiffs allege violations by defendants of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j, and Rule 10(b)(5), promulgated thereunder as well as certain state laws.

Defendant Johnson was involved in several challenged activities. In 1966, he received from Fidelity 4,300 shares of Fidelity stock as compensation for services rendered. Shortly thereafter, he sold the shares of stock back to Fidelity for $34,000.00. The district court found that:

While this transaction was apparently never disclosed to Fidelity’s stockholders, no evidence has been presented that Mr. Johnson received anything more by way of remuneration than he was entitled to. Nor does it appear from the evidence that any person other than the corporation itself realized profit from the open market resale of Fidelity stock.

Plaintiffs’ claim is that this transaction was a short swing sale in violation of Ohio Revised Code § 3901.31(B).

Johnson was also a director and. part owner of MacJay Enterprises, Inc. Pursuant to authorization by its board of directors, Fidelity entered into a five-year lease agreement with MacJay in which it sublet office space. A part of the profits realized from this lease presumptively went to Johnson, apparently without the knowledge of Fidelity’s directors or stockholders. Plaintiffs urge that the failure of Johnson to disclose fully his interest in the lease is a sufficient legal ground to require disgorgement of his profits to Fidelity under Ohio common law.

Johnson, Woodward and Zink were involved in challenged activities arising from the formation of Fortune National Life Insurance Company and alleged proxy non-disclosures, both of which will be discussed hereafter.

Woodward, the plaintiffs contend, made substantial profits by means of short swing sales of Fidelity stock from 1965 until his resignation as an officer some years later. The court below found that:

There is evidence in the record that Woodward did engage in repeated purchases and sales of Fidelity stock (Plaintiffs’ exh. 42). However, he always maintained a large reserve of stock held for more than six months. It is impossible to ascertain from exhibit 42 what amount of stock, if any, was held on a short-term basis. Furthermore, in May of 1970, during a proxy fight, Mr. Woodward gave to the Fidelity Board of Directors an accounting of his Fidelity stock transactions over a two year period, it was determined that a profit of $873.63 had been realized, and payment of such amount was accepted as “a complete release to Mr. Woodward on profits resulting from short swing transactions in shares of the [sic] corporation.” (Plaintiffs’ exh. 17, Minutes of May 7, 1970).

Defendant Zink, while a director and legal counsel for Fidelity, was also an insurance broker. He was the exclusive agent of record for AMVETS (American Veterans of World War II and Korea). In this capacity, he placed the business of AMVETS with Fidelity for which he received a commission. The AMVETS insurance contract, though it generated a positive cash flow, was, in the words of the district court, “in all likelihood, not a profitable business.” Fidelity divested itself of the AMVETS contract in 1971. The plaintiffs urge that Ohio Common Law requires disgorgement of the profits made by Zink because of a lack of complete disclosure of his involvement in the AMVETS contract.

During 1965 and 1966, Fidelity and some of its directors and officers sought to expand the company’s insurance business beyond Ohio into adjoining states. To this end, the Fortune National Life Insurance Company was organized in Pennslyvania for operation in that state since Fidelity could not legally qualify for a license to do business in Pennsylvania. The defendants, Johnson, Zink and Woodward, were prime movers in the promotion and organization of Fortune. To enable them, together with other directors, and other investors, to invest in stock of the Pennsylvania corporation, the defendants caused to be formed Central Investment Company. The corporate records of CIC were kept at least a part of the time, at the Fidelity offices. Fidelity did not invest directly in Fortune, but the Board of Directors apparently authorized an investment by Fidelity of $40,000 in CIC. This amount was later reduced to $34,000.

In the organization of Fortune, 300,000 shares of founders’ stock were authorized to be sold at $1.50 per share. 88,700 of these shares were acquired by CIC, of which 21,485 shares were to be distributed by Fidelity. CIC also received 25,000 warrants to purchase Fortune stock at $5 a share. When in 1966 the stockholders of CIC voted to dissolve the corporation, the warrants were distributed to investors. Although there was some unequal distribution of the warrants, this matter is not before us on the present appeal as the district court’s order concerning the distribution of warrants to plaintiffs was not appealed. In the distribution of the Fortune shares of stock, the plaintiffs complain, however, that there was a disparity of treatment as between Fidelity and the individual investors. Plaintiffs would have received 1,086 more of the Fortune shares, it is insisted, if the distribution to it had been on the same proportional basis per cash investment as the distribution to individual investors.

During the planning and organizational stages of the Fortune venture the expenses for travel, incorporation, attorney’s fees and the lease of office space, were paid by Fidelity and later reimbursed by Fortune without interest. The defendants also made use of Fidelity’s executive time and overhead that, according to the district court, was not billed to Fortune.

The plaintiffs seek to require the defendants to disgorge for the benefit of Fidelity all profits made by them on the Fortune transaction.

Finally, plaintiffs allege that the proxy statements mailed to the stockholders of Fidelity by the directors failed to disclose material information relative to the challenged activities of the defendants. The district court found this allegation “in the main true,” but denied any relief.

From this somewhat involved factual situation, five issues are raised on appeal.

The plaintiffs, seeking disgorgement of the profits made by the defendants on the Fortune transaction under Rule 10(b)(5) liability, urge that the district court applied the wrong standard of damages in denying recovery. The district court held that the measure of damages in a stockholders’ derivative action is limited to out-of-pocket losses suffered by the corporation. Since Fidelity actually made a profit on the venture there was, according to the district court, no damage. We disagree.

The proper standard of damages for either a defrauded seller or buyer under Rule 10(B)(5) is “disgorgement of profits.” In Janigan v. Taylor, 344 F.2d 781 (1st Cir.), cert. den., 392 U.S. 879, 86 S.Ct. 163, 15 L.Ed.2d 120 (1965), a seller’s action under Rule 10(B)(5) to recover the buyer’s profits, the court awarded the defrauded party the benefit of the defendant’s bargain. The court stated:

[T]here can be no speculation but that the defendant actually made the profit and, once it is found that he acquired the property by fraud, that the profit was the proximate consequence of the fraud, whether foreseeable or not. It is more appropriate to give the defrauded party the benefit even of windfalls than to let the fraudulent party keep them. . . . [7]i is simple equity that a wrongdoer should disgorge his fraudulent enrichment. [Emphasis added.] Id. at 786.

Both Janigan and a similar case, Myzel v. Fields, 386 F.2d 718 (8th Cir. 1967), cert. den. 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968), were cited with approval by the Supreme Court in Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). Although Janigwn was concerned with the disgorgment of profits remedy to the defrauded sellers, a recent Second Circuit case, Zeller v. Boque Electric Mfg. Corp., 476 F.2d 795 (2d Cir. 1973), extended the disgorgement remedy to defrauded buyers. In so doing, the court stated:

We do not consider the cited cases, or our own decision in Levine v. Seilon, Inc., supra, 439 F.2d at 334, as having established any such bright line between defrauded sellers and defrauded buyers as defendants urge.
The reason why the remedy has been applied for the benefit of defrauded sellers but not of buyers is not any decisive legal difference but the difficulty generally confronting the defrauded buyer in showing that the fraudulent seller has in fact reaped such a profit. Id. at 801-802.

The district court made no specific findings as to fraud in the Fortune transaction, laboring under a misapprehension with respect to the proper standard of damages. Its error in its determination as to the law on this issue, tainted its findings of fact. In consequence, the action must be remanded for a determination as to whether there was a Rule 10(B)(5) fraud in the Fortune National transactions. If such fraud is found, then the court must reconsider the question of damages in light of this opinion.

The plaintiffs also urge that under Ohio common law the district court should have impressed a constructive trust on any actual profits realized by the defendants on the Fortune transaction, including interest on Fidelity’s money and the value of the use of Fidelity’s executive time and overhead used in the formation of Fortune.

Clearly, directors who violate their fiduciary duty to the corporation are liable under Ohio law for any profits resulting from the breach. In Marcus v. Otis, 168 F.2d 649, 654 (2d Cir.), modified 169 F.2d 148 (2d Cir. 1948), a ease helpful to our analysis even though the facts are distinguishable from the case at hand, Judge Learned Hand observed :

Plainly the defendants violated their duty as directors, when they converted the company’s funds to buy their shares, and, like any other fiduciaries, they made themselves liable for all profits. That is so fundamental a doctrine as to fiduciaries of all sorts, that it is somewhat surprising to find it questioned. . . . The wrong is much simpler and more fundamental — the misappropriation of funds — and it is neither an excuse that they later repaid what they had taken, nor that they allowed “Automatic” to buy 25,000 shares at 57 cents. The bargain was voidable from the outset, no matter how favorable the terms might be, and “Automatic” can follow and reclaim the abstracted funds in any form they may take, however enhanced in value.

The district court, though making extensive findings of fact concerning the Fortune transaction, made no findings as to the breach of their fiduciary duty by the defendants in that transaction. Such findings must be made on remand before the district court can determine whether the defendants should be impressed with a constructive trust. It matters not that Fidelity suffered no loss if the directors breached their duty and profited from it.

The plaintiffs allege that the defendants were elected directors through the use of misleading proxy statements in violation of O.R.C. Section’ 3901.-31(D). In addressing itself to this allegation, the district court stated:

In the nature of a capsule summary, it is alleged finally by plaintiffs that proxy statements mailed to Fidelity shareholders during the years in question failed to disclose material information relative to each of the abuses claimed above: Zink’s status as insurance broker and the commissions he received on the Amvets contract; the results of the Amvets program; Woodward and Johnson’s stock transactions in Fidelity shares; Johnson’s alleged conflict of interest in the Mae Jay Enterprises transaction; and the participation of the three defendants in the promotion of Fortune and CIC. These allegations are, in the main, true. Information relating to these transactions was not disclosed in any proxy materials until about 1970, when dissidenee began to develop among a minority of Fidelity’s shareholders and disclosures were made.

After making these findings, the district court ruled against the plaintiffs on the proxy issue as a matter of law — holding that to be recoverable, losses must be shown to have resulted from non-disclosure. This too is a misapprehension of the law.

In Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), the Supreme Court in construing Sec. 14(b) of the Securities Exchange Act seemed less impressed by the result of the non-disclosures than by their materiality. The district court’s holding that the plaintiffs must show a causal relationship between the nondisclosures and the defendants’ election to office in addition to demonstrating the materiality of the non-disclosures would constitute a blow to proxy disclosure rules. As the Supreme Court stated in Mills:

Where there has been a finding of materiality, a shareholder has made a sufficient showing of causal relationship between the violation and the injury for which he seeks redress if, as here, he proves that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction. Id. at 385.

The question of causation aside, the district court’s disposition of this issue is correct in result. The typical remedy for elections of directors pursuant to materially misleading proxy statements is injunctive relief suspending or setting aside the tainted election. This remedy is not available here since Fidelity as a corporation is no longer extant, having been merged into the American Financial Corporation. The plaintiffs urge that disgorgement of the profits from the nondisclosed activities would be an appropriate remedy for proxy violations. We think not. The defective proxy statements may have resulted in the election of the defendants as directors but to apply a standard of damages that is similar to that applied in Rule 10(B)(5) fraud cases to proxy violations, merely because the normal remedy is not available, seems unsupported in precedent and logic. If a court is to look beyond the ordinary remedy in these cases, the district court’s out-of-pocket losses standard seems broad enough “to provide such remedies as are necessary to make effective the congressional purpose.” J. I. Case Co. v. Borak, 377 U.S. 426, 433, 84 S.Ct. 1555, 1560, 12 L.Ed.2d 423 (1964).

A further significant issue on the present appeal is whether the district court erred in not finding that Johnson and Woodward were involved in short-swing sales in violation of Ohio Revised Code Sec. 3901.31(B). As to Johnson, the district court’s findings of fact make it clear that he received shares of Fidelity stock as compensation for services rendered and then changed his mind, preferring to receive his compensation in cash. Unfortunately for Johnson, when the stock shares were issued in his name, he could be said to have purchased them with his services. When he returned them to Fidelity for cash, he was selling them. Under the federal interpretation of Sec. 16(b), the occurrence of the purchase and sale within a six-months period constitutes an illegal short swing sale. Sec. 16(b) establishes a clearly fixed rule of disgorgement of profits when an insider purchases and sells or sells and purchases securities of the corporation of the same class within six months, in order “to insure the optimum prophylactic effect.” Bershad v. McDonough, 428 F.2d 693, 696 (7th Cir. 1970).

To be required to disgorge the profits one must have realized a profit. The district court found that “no evidence has been presented that Mr. Johnson received anything more by way of remuneration than he was entitled to.” In light of the district court’s general “out-of-pocket” approach to damages, we believe that this finding is insufficient as a basis for determining the existence of liability for short-swing sales. On remand, the district court must determine if Johnson profited from the transaction. If he did, the remedy is clear.

As to Woodward, the district court denied any short-swing sales liability because Woodward maintained a large reserve of stock that had been held for more than six months, thus making it “impossible” to ascertain from the exhibits “what amount, if any, was held on a short term basis.” This holding-seems to disregard the language of the statute: . . any profit realized from . . . any sale and purchase, of any equity security of such company within ... six months,” Ohio Revised Code Sec. 3901.31(B) (language identical to Sec. 16(b)). Ah insider cannot obviate the purposes of the statute by the form of the transaction. In Petteys v. Butler, 367 F.2d 528, 532 n. 3 (8th Cir. 1966), the court stated:

Although it is not clear whether the shares sold were the same certificates acquired in the conversion, this point is immaterial. Equity securities are treated as fungible items. “[S]ince all shares of a corporation’s stock are alike and interchangeable, it is of no consequence whether those bought and sold are represented by the same certificates.” Walet v. Jefferson Lake Sulphur Company, 202 F.2d 433, 434 (5th Cir. 1953), cert. denied, 346 U.S. 820, 74 S.Ct. 35, 98 L.Ed. 346.

The courts recognize the broad remedial purposes behind this section. When a transaction has potential for abuse by an insider, the rule is liberally construed without regard to good faith, e. g., Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir.), cert. den. 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446 (1943). The district court’s concern over which specific shares of stock were sold is misdirected. The state statute would be emasculated if an insider were allowed to purchase a large reserve of stock in one’s own corporation, hold the shares for a period of time longer than six months, and then buy and sell additional shares of the corporation’s stock in a speculative manner without regard to any time limit, as long as the number of shares held in reserve never dropped below the number held for more than six months. Thus the district court’s determination that Woodward’s transactions did not constitute short-swing sales is erroneous. On remand, the district court must determine the amount of profit realized by Woodward in short-swing sales. The proper guidelines for this determination were enunicated in Western Auto Supply v. Gamble-Skogmo, Inc., 348 F.2d 736, 742-743 (8th Cir. 1965):

The issue is also raised that no one actually profited from the purchase of the shares transferred to the Trust Fund. True, these identical shares were not sold, but the segregation of the shares is not permissible under § 16(b). On the contrary, a proper construction of § 16(b) requires that purchases and sales be matched arbitrarily so as to disgorge the insider of a maximum profit under a rule of lowest-priee in and highest-price-out within six months, regardless of any intent with respect to a particular purchase or sale, and without limitation to a specific stock certificate. This rule was first enunciated in Smolowe v. Delendo Corp., supra, 136 F.2d at 237.

The plaintiffs also assert that the district court erred in not applying Ohio’s self-dealing rule to Johnson’s Me Jay lease transaction and to Zink’s AMVETS insurance contract transaction. As mentioned earlier in connection with the Fortune transactions, the law is clear that directors who violate their duties as fiduciaries are liable for any profits resulting from such a breach. However, unlike the Fortune transaction, concerning which the district court made no findings as to breach, the lower court held the neither Johnson nor Zink breached a duty owing to Fidelity in regard to the Mac Jay and AMVETS transactions. The distinction was justified on the ground that the latter were fair and sound business dealings for Fidelity.

The district court’s opinion reflects that it placed the burden of proving breach of the fiduciary duty on the plaintiffs — normally the place where the burden would belong. However, in this case, there was proof of non-disclosure to the stockholders of Fidelity and only partial disclosure to the directors of Johnson’s and Zink’s involvement in the two transactions. Had the directors’ self-interest been apparent for all interested parties to see, the plaintiffs would be required to carry the burden of proving breach of duty. Non-disclosure under the circumstances of this case, we believe, shifts the burden of proof on the issue of fiduciary duty to the defendants. In Nienaber v. Katz, 69 Ohio App. 153, 158, 43 N.E.2d 322, 325 (1942), the Ohio court stated:

The officer owes a certain duty to the corporation and it is his failure to perform that duty to his own enrichment that creates the liability. The secrecy is simply the cloak under which he has hidden his failure of duty and the personal profit he has thereby made.

Thus, when a cloak of secrecy is raised concealing the self-dealing transactions, the directors must prove that nothing is amiss behind the shield.

On remand, the district court must once again determine the propriety of the AMVETS and Mac Jay transactions. However, because of their failure fully to disclose these transactions, the defendant will have the burden of proving that they did not violate their fiduciary duty to Fidelity. If they did, as indicated earlier, disgorgement of profits is the proper remedy.

Accordingly, the judgment of the district court to the extent herein indicated is vacated and the action is remanded to that court for further proceedings consistent with this opinion.

      . Other directors and officers, originally named as defendants, were dismissed from the action after the claims against them were compromised and settled.

      . Actually there are four specific allegations of violations of state law. Two of the allegations concern violations of state statutes that are virtually verbatim reproductions of sections of the Securities Exchange Act, i.e., Ohio Revised Code, Section 3901.31(D), is modeled after Section 14(b) of the Securities Exchange Act, and Ohio Revised Code, Section 3901.31(B) is modeled after Section 16(b) of the Act. In light of these substantial similarities, federal precedent is helpful in interpreting the state statutes in the absence of Ohio case law.

      . The plaintiffs also allege misconduct by Johnson in selling Fidelity all of its insurance, such as bonds, casualty, liability and automobile coverage, without proper disclosure. The district court did not treat this issue nor do the plaintiffs make more than passing reference to it in their brief. Therefore, we do not consider this on appeal.

      . The plaintiffs also urge that Zink while a member of Fidelity’s Investment Committee, sold Fidelity policies to his clients and obtained loans from corporate funds for them without full disclosure. The district court did not address itself to this issue and the record does not reveal any proffer of proof that there was less then full disclosure of the transactions or that these transactions were not executed in the normal course of business.

      . C.I.C. was organized on advice from Fidelity’s legal counsel, the defendant Zink, that O.E.C. Sec. 3907.14(E) prohibited Fidelity from investing directly in Fortune’s stock.

      . This was an attempt to bring the amount of Fidelity’s investments within the maximum limits allowed for such investments by Ohio law.

      . The defendants in addition to organizing Fortune also participated in the investment. The district court’s memorandum goes into each defendant’s involvement in intricate detail. We find it unnecessary here to enter into an exact computation of each defendant’s interest.

      . At oral argument, there was some confusion as to the plaintiffs’ claim concerning the founders’ stock. For the sake of clarity we note that the plaintiffs’ argument that Fidelity received 1086 fewer shares of Fortune’s stock than it was entitled to receive and their argument concerning the disparity in the price paid for founders’ stock ($1.591 per share for Fidelity as opposed to $1.515 per share for each defendant) are in effect one and the same. Each is a different way of expressing the same charge — that the defendants profited on the issuance of the shares to the detriment of Fidelity.

      . Section 10(b) of the Securities Exchange Act does not by its terms make unlawful any conduct or activity, but confers rule making power on the S.E.C. to condemn deceptive practices in the sale or purchase of securities. Rule X-10B-5, which was promulgated by the S.E.C. pursuant to this authorization, provides: “It shall be unlawful
      “(a) To employ any device, scheme, or artifice to defraud
      “(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
      “(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”

      . The defendants seek to oppose the plaintiffs’ contention for Sec. 10(b) damages by citing Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. den. 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952). This case is only helpful in determining that fraud not “in connection with” the purchase or sale of securities is not a violation of Sec. 10(b).

      . In Nienaber v. Katz, 69 Ohio App. 153, 43 N.E.2d 322 (1942), an Ohio court cited Ohio Jurisprudence as authority for disgorgement of profits to the corporation in an appropriate case.
      Any secret profit obtained by an officer or director by reason of violation or disregard by him of obligations arising by reason of fiduciary relations existing between him and the corporation, cannot be retained, but must be accounted for to the corporation. 10 O.Jur. 704, § 519.

      . In Seagrave Corp. v. Mount, 212 F.2d 389, 397 (6th Cir. 1954), this Court in considering the extent to which equity will go in upholding a fiduciary obligation stated:
      Although good faith on the part of the directors and the disclosure of the material facts eliminate the question of actual fraud, equity will still act to enforce the fiduciary obligation under circumstances amounting to constructive fraud. Constructive fraud refers to acts which may have been done in good faith, with no purpose to harm the corporation, but which are clone by one who has placed himself in a position of conflict between a fiduciary obligation and his own private interest. In such a situation, by reason of the strict rule applicable to fiduciaries, equity will take appropriate action to prevent the harm resulting from such actions, regardless of the good intentions of the fiduciary. Levitan v. Stout, D.C.W.D.Ky., 97 F.Supp. 105, 117; Epstein v. United States, 6 Cir., 174 F.2d 754, 765-766; Hyams v. Calumet & Hecla Mining Co., 6 Cir., 221 F. 529, 542-543, 137 C.C.A. 239.

      . We should be vigilant to avoid the mechanical application of technical rules. As the court in Petteys v. Butler, 367 F.2d 528, 533 (8th Cir. 1966), stated:
      There is, however, a very different and difficult problem when a transaction falls within the literal boundaries of the Act, by giving a broad interpretation of the definitions of purchase as “any contract to buy, purchase or otherwise acquire,” 'and sale as “any contract to sell or otherwise dispose of,” yet due to the particular factual situation which makes unfair speculation impossible it is clearly beyond the' Act’s preventive purposes. In that situation the question arises, should the Act be literally applied without further inquiry and without regard to the purposes, or should the broad and arbitrary rules be applied only to situations which are capable of the abuse that the statute was designed to prevent? We believe that each case must be examined on its own facts and the Act only applied when these facts disclose the possibility of abuses that the
      Act were [sic] designed to prevent. Despite tlie somewhat unusual circumstances of Johnson’s transaction the potential for abuse of the interest the statute sought to protect is present. Whether there was actual abuse is not material. Therefore, finding a short swing sale violation by Johnson is not a blind application of the rule.

      . Woodward paid to the Board of Directors $873.63 for a complete release on profits “resulting from short swing transactions in shares of the corporation.” The district court mentioned this settlement in its memorandum opinion. The defendants urge that this ends all consideration of Woodward’s liability on the short swing sales. We disagree. The transaction was made during the 1970 proxy fight that brought many of the questioned activities of the defendants to the fore. This fact, coupled with the plaintiffs’ computation of the profits shown in exhibit 42, of $13,774.65, indicates that this “arms length transaction” is at least suspect, with a heavy i>resumption against its validity.

      . The Eighth Circuit enunciated the same reasoning in Western Auto Supply Co. v. Gamble-Skogmo, Inc., 348 F.2d 736, 743 (8th Cir. 1965):
      Shares of stock are fungible and each certificate denotes identical rights, [citations omitted] The segregation or matching of stock certificates cannot be countenanced without scuttling the remedial effects of § 16(b). To do otherwise would open wide the door for easy evasion of the purpose of the Act which the court in the Gratz case, supra, at 51, indicated was to treat short swing transactions and shares of stock indiscriminately as “ * * * sales and purchases, or purchases and sales, of gallons of oil in a single tank, or of bushels of wheat in a single bin, * * * the ascertainment of the particular shares bought or sold must be wholly irrelevant.”

      . Because of the district court’s misapprehension of the law of short swing sales, it did not find it necessary to give full treatment to the defendant Woodward’s defense to the short swing sales liability. Nothing in this opinion is to be construed as preventing the court below from fully exploring the merits of the short swing sales liability in light of any defenses offered by Woodward. In note 14 we only indicate that the existence of the release, in light of the circumstances of the case, is not sufficient to defeat the plaintiffs’ claim in the absence of proof, greater than presently appears in the record, to rebut the heavy presumption of invalidity.