author: HIRAM H. WARD, District Judge.

text:
    OCCIDENTAL LIFE INSURANCE COMPANY OF NORTH CAROLINA, Appellee, v. PAT RYAN & ASSOCIATES, INC., Appellant. OCCIDENTAL LIFE INSURANCE COMPANY OF NORTH CAROLINA, Appellant, v. PAT RYAN & ASSOCIATES, INC., Appellee.
    Nos. 73-2227, 73-2228.
    United States Court of Appeals, Fourth Circuit.
    Argued March 5, 1974.
    Decided May 8, 1974.

      Richard M. Phillips, Alan J. Berkeley, Gilbert C. Miller, and Gregory T. Diaz, Washington, D. C. (Hill, Christopher & Phillips, P. C., Washington, D. C., George R. Ragsdale, Ragsdale & Liggett, Raleigh, N. C., on briefs), for Occidental Life Ins. Co. of North Carolina.
    Reuben L. Hedlund, Garrett B. Johnson, Thomas J. O’Brien, Chicago, 111., J. Melville Broughton, Jr., and Charles P. Wilkins, Raleigh, N. C. (Kirkland & Ellis, O’Brien & Ruken, Chicago, 111., Broughton, Broughton, McConnell & Boxley, P. A., Raleigh, N. C., on briefs), for Pat Ryan & Associates, Inc.
    Before CRAVEN and WIDENER, Circuit Judges, and WARD , District Judge.

       M.D.N.C., sitting by designation.

   HIRAM H. WARD, District Judge.

This is a timely appeal by Occidental Life Insurance Company of North Carolina (Occidental) and cross appeal by Pat Ryan Associates, Inc. (Associates) from judgment of the district court rendered after the second trial to a jury of this matter.

The particular controversy here concerns the sale of stock to Associates by Occidental. The sale involved all of the outstanding shares of Virginia Surety Company, Inc. (Virginia Surety). Until right before the sale to Associates, Virginia Surety was owned by Occidental Fire and Casualty Company (Occidental Fire). Occidental Fire is a wholly-owned subsidiary of Occidental. Both Occidental Fire and Virginia Surety were primarily engaged in insuring long-haul trucking liability. Virginia Surety held licenses to write this insurance in forty-nine states and the District of Columbia. In the early part of 1969, it was decided to sell Virginia Surety without its agency plant and portfolio of insurance business. Virginia Surety was to be prepared so that it would have no liabilities and only have assets consisting of its charter, state licenses, and bonds on deposit with the insurance commissioners in the various states. The decision to sell was ostensibly made because Occidental Fire had by then acquired licenses in most of the states where Virginia Surety also had licenses.

Associates’ interest in Virginia Surety arose because it wanted to move into other states. Since Associates was primarily engaged in writing credit life, health, accident and disability insurance in a limited number of states, it would have to amend Virginia Surety’s licenses in order to use that company’s licenses to expand its business to other states. Nevertheless, Associates evidently felt that it could more readily move into other states if it only needed to amend the existing licenses of Virginia Surety, than if it had to secure approval of the insurance commissioners by making an initial application.

On September 18, 1969, Virginia Surety was sold to Occidental, and in turn, on October 22, 1969, Occidental and Associates agreed to sales terms. Associates was to pay Occidental $1,-527,000 in cash and three annual payments of $250,000 in the form of reinsurance premiums which Associates would place with Occidental, and which Occidental would immediately reinsure with other companies designated by Associates. The sale price was actually higher than Occidental was asking. The reason for this was because Associates proposed to use the reinsurance plan in order to reduce the amount of cash it would have to pay. “Since Ryan Associates was already producing this business for others in states where it was not licensed, it would cost Associates nothing more to produce this business for Occidental instead, since its expenses would remain the same.” (Associates Brief, p. 16). If the reinsurance provisions were not performed, Associates was to make the payments in cash. Later, Associates also agreed to make an additional payment of $20,000 in premium income to cover finders’ fees incurred by Occidental. The closing took place on October 30, 1969.

Associates failed to provide Occidental with the reinsurance payments, and Occidental filed a breach of contract action in state court. The action was removed to federal court, where Associates answered and counterclaimed for breach of warranty and fraud. Nearly two years thereafter, and only ten days before the date set for the first trial, Associates moved to amend its counterclaim in order to assert violations of federal securities laws, and included a request for rescission. The district court granted the motion at the conclusion of the evidence, but denied the request for rescission.

In regard to its counterclaim, Associates alleged that before it purchased Virginia Surety the National Association of Insurance Commissioners made an examination of Virginia Surety which showed that the capital of the company was substantially impaired. In September and early October of 1969, Occidental Fire made a contribution to make up the deficit. On October 27, 1969, Virginia Surety accepted the report of the examiners which showed that as of December 31, 1968, Virginia Surety’s capital was impaired to the extent of $2,942.04 and that Occidental Fire had made a voluntary contribution to the surplus of the company. Associates claims that misrepresentations and nondisclosure of these facts caused it damage in that after the sale, the State of Connecticut revoked Virginia Surety’s license based, at least in part, on the triannual examination report. In February, 1970, the State of Maryland followed Connecticut’s lead and also revoked Virginia Surety’s license, although it later converted the action to a suspension.

Associates also presented evidence of other misrepresentations or nondisclosures which purportedly affected the .value and usefulness of Virginia Surety. In June of 1969 the Insurance Commissioner of North Carolina learned that Virginia Surety might be sold. He renewed the license with the understanding that if the company were sold, the new owner would have to requalify. In December 1969, Associates also learned that Virginia Surety had agreed, in October 1969, not to write any new or old renewal insurance in California or Michigan. The two states procured this consent as a condition in order that Occidental Fire could qualify in those states. Thereafter, Associates had to borrow $500,000 to be used to increase the capitalization of Virginia Surety before the two states let that company write insurance.

In both the first and second trials the district court granted Occidental's motion for a directed verdict on its breach of contract claim in the amount of $770,000. It also denied Associates’ claim of rescission. In both trials, the jury found that Occidental had violated the securities laws and in the first trial awarded damages in the amount of $797,000. The district court set that verdict aside as being grossly contrary to the weight of the evidence and shocking to the conscience of the court. It directed a new trial on all issues. At the second trial, the jury returned a verdict for Associates in the amount of $370,000.

Occidental challenges the district court’s refusal to direct a verdict in its favor in regard to Associates’ counterclaim, and the admission of evidence on the damage issue. Associates asks us to reinstate the first jury verdict and contests the instructions on damages in the second trial. Associates also attacks the directed verdict in favor of Occidental on its breach of contract claim, the district court’s denial of rescission, and the award of interest.

I.

THE SALE OF VIRGINIA SURETY CONSTITUTED A SALE OF A “SECURITY” WITHIN THE PROVISIONS OF THE SECURITIES EXCHANGE ACT OF 1934

Occidental contends that the district court erred in holding that the sale of the stock of Virginia Surety constituted a sale of a “security” as that word is used in Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and defined in Section 3(a)(10) of the Exchange Act, 15 U.S.C. § 78c(a)(10). It does concede that the sale included an instrument literally covered in Section 3(a)(10), which states: “The term ‘security’ means any note, stock, treasury stock, bond, . . . .” It claims that Section 10(b) has the purpose of protecting investors, and thus it is not sufficient to merely show a sale of an instrument literally covered by Section 3(a) (10). Instead, it is said that the transaction must contain some investment element before a sale falls within the purview of Section 10(b). With respect to the sale of Virginia Surety, Occidental contends that it sold a corporate shell including the corporate charter and licenses and deposits in the . various states. It says that this alleged sale of business assets does not and should not be the subject of federal securities regulation.

The fact that the instruments used in this transaction involve stock and thus come within the literal definition of a “security” creates a strong presumption that the transaction is covered by Section 10(b). It is not necessary for purposes of Section 10(b) that every instrument used in a sale transaction meet the definition of an “investment contract” as Occidental seems to contend. As stated in Tcherepnin v. Knight, 389 U.S. 332, 339, 88 S.Ct. 548, 554, 19 L.Ed.2d 564, 571 (1967) :

Clearly, then, the petitioners’ with-drawable capital shares have the essential attributes of investment contracts as that term is used in § 3(a) (10) and as it was defined in Howey. But we need not rest our decision on that conclusion alone. “Instruments may be included within any of [the Act’s] definitions, as matter of law, if on their face they answer to the name or description.” S. E. C. v. C. M. Joiner Corp., supra, [320 U.S. 344], at 351 [64 S.Ct. 120, at 123], 88 L.Ed. [88] at 93. The petitioners’ shares fit well within several other descriptive terms contained in § 3(a) (10).

That case indicated that Section 3(a) (10) should be read broadly in order to fulfill the remedial purposes of the Securities Exchange Act.

Nevertheless, Occidental contends that the sale of business assets is solely a matter of state law concern, that the stock transferred in this case was a mere vehicle used to effectuate the sale of assets, and that the alleged fraud involved the value of those assets but did not directly concern the stock. Thus it says that despite the literal coverage, the sale here was not within the spirit of Section 10(b), which it says is to protect investors in stock, and not buyers of businesses.

However, it is inescapable that the sale of Virginia Surety by Occidental was accomplished by the transfer of stock and that there was evidence of fraud in connection with the transfer. The fact that the transfer could have been accomplished in a different way has no significance. Nor does the Court find persuasive the argument that ordinary commercial transactions should be left to the protection of state laws. As stated in Supt. of Insurance v. Bankers L. & C. Co., 404 U.S. 6, 10-12, 92 S.Ct. 165, 168, 30 L.Ed.2d 128, 133-134 (1971):

The fact that the fraud was perpetrated by an officer of Manhattan and his outside collaborators is irrelevant to our problem. For § 10(b) bans the use of any deceptive device in the “sale” of any security by “any person.” And the fact that the transaction is not conducted through a securities exchange or an organized over-the-counter market is irrelevant to the coverage of § 10(b). Hooper v. Mountain States Securities Corp., [5 Cir.,] 282 F.2d 195, 201. Likewise irrelevant is the fact that the proceeds of the sale that were due the seller were misappropriated. Hence we do not read § 10(b) as narrowly as the Court of Appeals; it is not “limited to preserving the integrity of the securities markets” (430 F.2d [355], at 361), though that purpose is included. Section 10(b) must be read flexibly, not technically and restrictively. Since there was a “sale” of a security and since fraud was used “in connection with” it, there is redress under § 10(b), whatever might be available as a remedy under state-law. (Emphasis added).

That case involved the sale of a corporation’s Treasury bonds by an officer, who converted the proceeds. While eonceding this was not the type of fraud ordinarily associated with the purchase or sale of securities, the Supreme Court made clear that coverage under Section 10(b) should not be read restrictively.

We need not speculate as to the result if this transaction did not involve the sale of stock, but rather a simple transfer of assets. That situation is not before us. In this case Occidental sold stock which literally fits the definition of a security. The fact that Associates purchased all of the outstanding stock of Virginia Surety, rather than a small fractional share, cannot serve as a basis for granting or denying coverage under Section 10(b). Bailey v. Meister Brau, Inc., 320 F.Supp. 539 (N.D.Ill. 1970); but see Chiodo v. General Waterworks Corporation, 380 F.2d 860, 864 (10th Cir. 1967) (dictum). In both instances, Associates would be making an investment. In this case, Associates sought more than a corporate charter and licenses and deposits in the various states. It needed an on-going corporate enterprise with a good business reputation so that it could expand its business. The application of Section 10(b) cannot depend on whether the purchaser of stock buys a small interest, a controlling interest, or all of the stock, of a corporation. Such a standard would be difficult to apply and create a capricious basis for dispensing the protection of Section 10(b). The Court finds no reason for reading the Securities Exchange Act in a manner that provides coverage of the small investor, but not the large one. Such a construction would fly in the face of the remedial purposes of the Act. In one sense the large investor has a more pressing need for protection to the extent that he has expended a greater amount of his resources. It is entirely irrelevant that the parties could have conducted their business transaction without the use of the stock. The plain fact is that they did choose to use the stock. The transaction literally falls within the terms of Section 10(b), and thus Associates is entitled to the protection of that section. Supt. of Insurance v. Bankers L. & C. Co., supra. This transaction not only comes within the letter of the law, but within the spirit of it also. The district court properly submitted the counterclaim of Associates to the jury.

We further conclude that there was sufficient evidence to support the jury’s verdict on Associates’ counterclaim. Whatever degree of reliance is needed to prove a Section 10(b) case, see Johns Hopkins University v. Hutton, 488 F.2d 912, 914-915 (4th Cir. 1973), the evidence taken in a light most favorable to Associates, the prevailing party on the issue, amply supports the finding of the jury on Associates’ counterclaim. Also, the district court did not commit prejudicial error in admitting expert testimony as to Associates’ damages. Occidental had ample opportunity to cross-examine Associates’ experts and have them explain their testimony. The district court’s instruction, as will be discussed later, set out the appropriate standard in regard to damages with which the jury could properly evaluate the expert testimony.

II.

THE DISTRICT COURT DID NOT COMMIT REVERSIBLE ERROR IN SETTING ASIDE THE VERDICT OF THE FIRST TRIAL AND GRANTING A SECOND TRIAL

It is a well-established rule that a district court may set aside a verdict and grant a new trial based on the fact that the damage award of the jury is either excessive or inadequate. However, our review of that decision is limited to ascertaining whether the decision amounts to an abuse of discretion. Simmons v. Avisco, Local 713, Textile Workers Union, 350 F.2d 1012 (4th Cir. 1965); Rachesky v. Finklea, 329 F.2d 606 (4th Cir. 1964); and Young v. International Paper Company, 322 F.2d 820 (4th Cir. 1963). After examining the record in regard to the evidence on damages, we cannot conclude that the district court abused its discretion. Associates’ own experts testified that the difference in value of Virginia Surety because of the defects amounted to about $200,000. This amount constituted the major portion of Associates’ damages. Thus we cannot find the district court abused its discretion in finding that the first verdict of $797,000 was excessive.

III.

THE DISTRICT COURT CORRECTLY INSTRUCTED THE JURY ON THE ISSUE OF DAMAGES

Associates challenges the district court’s instructions on damages in the second trial. The basic contention is that the district court erred in placing the value of a defect-free Virginia Surety at $2,297,000, the price the parties had themselves set. Associates contends that Virginia Surety was not worth what Associates itself had determined to be the market value of Virginia Surety without defects. It sought to prove that the fair market value, without defects, was less than the contract price. Thus it claims the court should have let the jury redetermine the market value of the defect-free Virigina Surety, and that in no event should Occidental have been allowed to recover more than that amount. Associates contends that by using the supposedly inflated contract price set by the parties, Occidental will get a windfall and thereby profit by its own wrongdoing. This, Associates claims, Occidental may not do. In support of this contention, it cites the following language in Affiliated Ute Citizens v. United States, 406 U.S. 128, 155, 92 S.Ct. 1456, 1473, 31 L.Ed.2d 741, 762 (1972):

In our view, the correct measure of damages under § 28 of the Act, 15 USC § 78bb(a), is the difference between the fair value of all that the mixed-blood seller received and the fair value of what he would have received had there been no fraudulent conduct, . . ., except for the situation where the defendant received more than the seller’s actual loss. In the latter case damages are the amount of the defendant’s profit. See Janigan v. Taylor, 344 F.2d 781, 786 (CA1 1965), cert. denied, 382 U.S. 879, 86 S.Ct. 163, 15 L.Ed.2d 120 (1965). (Emphasis added).

In Janigan v. Taylor, 344 F.2d 781, 786 (1st Cir. 1965), cited and relied upon by the Supreme Court as quoted above, the court appears to make the disgorgement of windfall profits theory applicable only to the case of the defrauded seller, and not a defrauded buyer like Associates. However, in Zeller v. Bogue Electric Manufacturing Corporation, 476 F.2d 795, 801-802 (2nd Cir. 1973) (Friendly, C. J.), the court cast doubt on that rule, stating:

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.

Nevertheless, even under the rule in Zeller, Associates has not shown, as it must, that Occidental gained a benefit from the transaction that it would not have been in the position to secure had there been no fraud. Zeller, supra,, n. 10 at 802. Associates’ real quibble is that it paid an allegedly inflated price for a defect-free Virginia Surety. That may show poor business acumen on Associates’ part, but utterly fails to prove any windfall profits. The standard for damages applicable to Associates’ counterclaim is the difference in the real value of Virginia Surety and the price paid. The district court so instructed.

IV.

THE DISTRICT COURT DID NOT ERR IN DIRECTING A VERDICT ON OCCIDENTAL’S BREACH OF CONTRACT CLAIM

Associates claims that the district court erred in directing a verdict for Occidental because Section 29(b) of the Securities Exchange Act, 15 U.S.C. § 78cc(b), precluded Occidental from maintaining its action for breach of contract due to its violation of the securities law. Section 29(b) reads in part:

(b) Every contract made in violation of any provision of this chapter or of any rule or regulation thereunder, and every contract (including any contract for listing a security on an exchange) heretofore or hereafter made, the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter or any rule or regulation thereunder, shall be void (1) as regards the rights of any person who, in violation of any such provision, rule, or regulation, shall have made or engaged in the performance of any such contract, and .... (Emphasis added)

We do not think Section 29(b) has such a devastating meaning. In Pearlstein v. Scudder & German, 429 F.2d 1136, 1149 (2nd Cir. 1970), Judge Friendly, in his dissent, suggests that the section

was a legislative direction to apply common-law principles of illegal bargain, enacted at a time when it seemed much more likely than it might now that courts would fail to do this without explicit legislative instruction. . . . There has been a conspicuous lack of judicial enthusiasm for the doctrine thus incorporated when there has been performance by the violator; the reasons are clearly set forth in Bruce’s Juices, Inc. v. American Can Co., 330 U.S. 743, 752-757, 67 S.Ct. 1015, 91 L.Ed. 1219 (1947), and Kelly v. Kosuga, 358 U.S. 516, 519-521, 79 S.Ct. 429, 3 L.Ed.2d 475 (1959). (Emphasis added)

This view gains credence from the Supreme Court’s opinion in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 387-388, 90 S.Ct. 616, 623, 24 L.Ed.2d 593, 603-604 (1970), where it said of Section 29(b):

This language establishes that the guilty party is precluded from enforcing the contract against an unwilling innocent party, but it does not compel the conclusion that the contract is a nullity, creating no enforceable rights even in a party innocent of the violation. The lower federal courts have read § 29(b), . . . as rendering the contract merely voidable at the option of the innocent party. This interpretation is eminently sensible. The interests of the victim are sufficiently protected by giving him the right to rescind; to regard the contract as void where he has not invoked that right would only create the possibility of hardships to him or others without necessarily advancing the statutory policy of disclosure. (Emphasis added)

Thus it would appear that Section 29(b) is more properly viewed as an adjunct to the other remedies provided by the Securities Exchange Act of 1934 and that it should be read as complementing those remedies available to injured parties and not as being antagonistic. The situation here is analogous to that in A. C. Frost & Co. v. Coeur D’Alene Mines Corp., 312 U.S. 38, 61 S. Ct. 414, 85 L.Ed. 500 (1941), which involved a claim that a contract to sell unregistered securities in violation of the Securities Act of 1933 was void and unenforceable. There the court recognized the doctrine of illegal bargains but stated:

Here the clear legislative purpose was protection of innocent purchasers of securities. They are given definite remedies inconsistent with the idea that every contract having relation to sales of unregistered shares is absolutely void; and to accept the conclusion reached by the Supreme Court [of Idaho] below would probably seriously hinder rather than aid the real purpose of the statute. (312 U.S. at 43, 61 S.Ct. at 417, 85 L.Ed. at 505.)

While the court in Frost noted that the Securities Act of 1933 did not contain a provision making contracts involving unregistered securities void, that distinction does not have a determining importance. Section 29(b) itself is but a general provision which codified the common-law principles already recognized in Frost. Thus we feel the better view of Section 29(b) is that stated by Judge Friendly. Section 29(b) merely makes explicit that which is implicit, i. e., the recognition of the doctrine of illegal bargains in the application of the securities laws.

In deciding how to fashion a remedy in the area of illegal bargains, the type and degree of illegality become highly important factors. A. L. Corbin, Corbin on Contracts, Vol. 6A, § 1534, pp. 816-20 (1962). The violation of the securities laws in this case did not involve a contract that was illegal per se. Nor did it involve a criminal act. Here the illegality involved a matter collateral to the agreement to sell stock, i. e., the misrepresentations and nondisclosures by Occidental. Moreover, Associates has an ample variety of remedies, both legal and equitable, in order to vindicate the wrong done to it and the public in general. We do not doubt that there may be some eases where public policy would call for enforcement according to the explicit terms of Section 29(b). However, in this case where Associates has remedies under both the 1933 and 1934 Acts, it would not advance the purposes of the securities laws to permit Associates to obtain an unexpected windfall the amount of which depends on the fortuitous factor of how much of a down payment it has made. Such an application of Section 29(b) would serve to nullify those other remedies and substitute a penalty provision.

It is our view, however, that Section 29(b) should be read as being in pari materia with the other remedies available under the securities laws, and, as stated in Baumel v. Rosen, 412 F.2d 571, 576 (4th Cir. 1969), concerning Section 10(b), “[i]t must be recalled that while a defrauding party is not to be excused, neither is he to be punished.” If we should treat the contract as void, Associates would stand to gain double its amount of damages. The re-suit would hardly be equitable. Unless the public interest requires, we are reluctant to nullify a contract which has been executed, and this is especially true where the parties have other remedies at their disposal which will produce an equitable result.

Associates attempts to ameliorate the harsh result of treating the contract as void under Section 29(b) by suggesting that we could award Occidental some additional compensation. It suggests that the value of Virginia Surety be redetermined and that Occidental recover that amount rather than the contract price. In reality this approach sounds in quasi-contract where the contract is implied and recovery is determined by the reasonable value of the benefit conferred on the purchaser. The fact that we have determined that there is a valid and enforceable contract compels rejection of that theory. “There cannot be an express and an implied contract for the same thing existing at the same time.” 66 Am.Jur.2d Restitution and Implied Contracts § 6 at 948 (1973). Simply stated, this case presents no basis for use of a quasi-contract theory of recovery. Associates had the option to affirm the contract and sue for damages, or it could elect to rescind.

V.

RESCISSION

Associates claims error in the district court’s denying its alternative requested relief of rescission. It asserts that the basis of its claim for rescission rested on Section 12(2) of the Securities Act of 1933 which it says provides a statutory, as opposed to an equitable, right to rescission, and thus the district court did not have discretion to bar it. Associates further claims that mere passage of time cannot preclude rescission under Section 12(2), and, in any event, Occidental’s failure to raise the defenses of waiver and estoppel precludes consideration of those defenses.

The recently reported case of Johns Hopkins University v. Hutton, supra, 488 F.2d 912 (4th Cir. 1973), provides a ready answer to most of Associates’ contentions. Associates’ reliance on Section 12(2) is misplaced. To be entitled to relief under that section, an action must be commenced “within ‘one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence’ as required by Section 13 of the ’33 Act.” Hopkins, supra, at 914. Moreover, a party must also act with “reasonable dispatch” if he seeks rescisión under Section 10(b) or under Section 17(a) of the Securities Act of 1933. Hopkins, supra, at 917. Since Associates had the burden of proving reasonable dispatch as an essential element for its action of rescission, Occidental was not required to plead estoppel or waiver as an affirmative defense. Hopkins, supra, n. 12 at 915-916. •

Associates was clearly aware of the problems relating to Virginia Surety by at least the early part of 1970. By the summer of 1970, Associates had held meetings with Occidental concerning these problems, and thus was chargeable with notice of the misstatements and concealments of Occidental. Yet the first mention of rescission took place in Associates’ motion to amend its answer and counterclaim in November of 1972. Associates has not met the one year rule of Section 13, nor can the passage of two and one-half years be deemed to show reasonable diligence. In Baumel v. Rosen, supra, the waiting of three years after the agreement and eighteen' months after the party was chargeable with knowledge was held to terminate the right to rescission. The delay in this case is particularly onerous since Associates continued to run Virginia Surety as it saw fit. As stated in Baumel v. Rosen, supra, at 575:

Further rationale for the requirement of immediacy is that every day’s lapse renders more difficult the very aim of rescission: to return the parties to statu quo ante. That obviously is well exampled here.

The district court correctly denied Associates’ request for rescission.

VI.

INTEREST AWARD

Associates challenges the award of interest. The district court awarded Occidental interest on the payments due it according to the contract on December 31 of the years 1970, 1971, and 1972. From that sum was to be deducted the interest on Associates’ counterclaim award of $370,000. The interest on the counterclaim award was to run from the date of the jury’s verdict which was April 28, 1973.

It has been well established, at least in Section 16(b) cases involving short swing profits, that an award of prej'udgment interest lies within the discretion of the trial court and such interest is not awarded as a matter of course. Gold v. Sloan, 486 F.2d 340 (4th Cir. 1973). This same rule has been held applicable to Section 10(b) cases. Wolf v. Frank, 477 F.2d 467, 469 (5th Cir. 1973); Wessel v. Buhler, 437 F.2d 279, 284 (9th Cir. 1971).

Here the violations of the securities laws involved fraud, an element not necessary to a Section 16(b) case. Thus while an award of prejudgment interest in a Section 10(b) case is,not automatic, it would seem much more likely to occur than in a Section 16(b) case. (See footnote 6 of this opinion on the measure of damages in a 10(b) case.)

Considered separately, it would not be unreasonable to award Occidental prejudgment interest on its liquidated damage claim, nor to deny Associates’ prejudgment interest, as done in the court below. However, when combined, it does appear to be inequitable to reward Occidental for its wrongdoing by awarding it interest on that part of the sale price which it cannot recover because of the jury verdict in favor of Associates. This is especially true when it is recalled that we refused to void the contract pursuant to Section 29(b) in order to avoid a harsh inequitable result. Thus if Occidental is to have prejudgment interest, then equity demands that Associates, the innocent party, be accorded no less. We do not think that this decision seriously departs from the district court’s own view. Although it did not state the reasons for its award of interest, it is significant that it assessed the costs one half against each party. We, therefore, conclude that Associates should be awarded interest on the amount of the jury verdict from the date of the sale, which was October 30. 1969.

While we affirm the judgment of the district court, we remand the case in order that the award of interest may be amended as we have indicated.

Affirmed, as modified, and remanded.

      . Associates claimed that Occidental violated Sections 12(2) and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 771(2) & 77q(a), and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.-10b-5.

      . Section 10(b) provides :
      It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
      (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
      Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated pursuant to Section 10(b), provides:
      It shall be unlawful for any person directly or indirectly, by the use of any means or instrumenttality of interestate [sic] commerce, or of the mails or of any facility of any national securities exchange,
      (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.

      . This line of reasoning is not without some support. Thus in Lino v. City Investing Co., 487 F.2d 689 (3rd Cir. 1973) the court held that the personal promissory note given by the buyer in order to purchase franchise licensing agreements did not bring the transaction within the Securities Exchange Act’s coverage, although literally the transaction would appear to be covered. The court pointed out that the definitional sections of the act, such as Section 3(a) (10), 15 U.S.C. § 78c(a) (10) contained the qualification: “unless the context otherwise requires.” Using this language, the court held that the commercial context of the case before it compelled a finding of no coverage under Section 10(b). It emphasized that the notes were the personal promissory notes of a private party who was the one who claimed to be defrauded, and that the note was not for sale to the public and was not obtained for investment or speculation. It voiced concern that a contrary ruling could bring nearly every retail credit transaction under control of the federal securities laws. (It noted that other courts have reached differing conclusions on whether the purchase or sale of notes between private parties constitutes a sale of securities. See n. 11-13, at 694. It said that none of those cases, where jurisdiction was found to exist, contained all of the factors present in its case.)
      None of these special circumstances appear in the instant case. Rather the sale of Virginia Surety more closely resembles an ordinary stock transaction. The stock of Virginia Surety involved stock which any member of the public could own. Occidental was ready to offer Virginia to any member of the public who would purchase it. The injury caused by the alleged fraud directly affected the value of the stock. Finally, as will be discussed later, Associates’ purchase of Virginia Surety involved an investment. Without approving the decision in Lino v. City Investing Co., supra, those facts sufficiently distinguish this case from it so as to make that decision inapplicable to the facts here.

      . Some courts have held that the sale of assets with a concomitant use of instruments that literally meet the definition of a “security” in Section 3(a) (10) is sufficient to predicate liability under Section 10(b). See cases cited in n. 11, Lino v. City Investing Co., supra, at 694. Thus in Alberto-Culver Company v. Scherk, 484 F.2d 611, 615 (7th Cir. 1973), the court held:
      This mandate [stated in Tcherepnin v. Knight, supra1 to construe broadly the term “security” compels our conclusion that the agreement to incorporate the SEV entity, and to transfer the assets of the SEV, FLS, and Lodeva entities in exchange for cash and promissory notes involves a “security” within the meaning of the Securities Exchange Act of 1934. Movielab, Inc. v. Berkey Photo, Inc., 452 F.2d 662 (2nd Cir. 1971); Lawrence v. Securities and Exchange Comm., 398 F.2d 276 (1st Cir. 1968).
      See also Vincent v. Moench, 473 F.2d 430 (10th Cir. 1973).

      . The court’s instruction, in pertinent part, was as follows:
      The measure of damages is the difference between the price paid by the buyer on the basis of the facts known to him and the price he would have paid had he known of the misrepresentations.
      In other words, you must determine how much less than the agreed price, Virginia Surety was worth to the defendant had it known of the omissions and misrepresentations of the plaintiff.
      This part of the charge is substantially the same as that given without objection in the first trial, and substantially the same as Associates’ own requested instruction numbers 25 and 26. Associates did, however, object to the district court’s instruction in the second trial.

      . In that case, the court set out the standard for recovery as follows :
      With respect to damages we draw a distinction between cases where, by fraud, one is caused to buy something that one would not have bought or would not have bought at that price, and where, by fraud one is induced to convey property to the fraudulent party. In the former case the damages are to be reckoned solely by “the difference between the real value of the property at the date of its sale to the plaintiffs and the price paid for it, with interest from that date, and, in addition, such outlays as were legitimately attributable to the defendant’s conduct, but not damages covering ‘the expected fruits of an unrealized speculation.’ ” [Citations omitted] On the other hand, if the property is not bought from, but sold to the fraudulent party, future accretions not foreseeable at the time of the transfer even on the true facts, and hence speculative, are subject to another factor, viz., that they accrued to the fraudulent party. It may, as in the case at bar, be entirely speculative whether, had plaintiffs not sold, the series of fortunate occurrences would have happened in the same way, and to their same profit. However, there 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.

      . There has been some thought that Section 29(b) may only apply to contracts that by their own terms violate the securities laws. Naftalin & Co. v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 469 F.2d 1166, 1182, n. 25 (8th Cir. 1972). See A. C. Frost & Co. v. Coeur D’Alene Mines Corp., supra, 312 U.S. at 42, 61 S.Ct. at 417, 85 L.Ed. at 505, where the court thought it important that “the challenged contract bears no evidence of criminality and is fair upon its face, . . ..” In light of our ultimate disposition, we do not reach that issue. Nevertheless, those factors may be considered in balancing the equities in deciding how to enforce the parties’ rights under an illegal bargain.

      . Serzysko v. Chase Manhatten Bank, 290 F.Supp. 74 (S.D.N.Y.1968), aff’d per curiam, 409 F.2d 1360 (2nd Cir. 1969), and Cooper v. Union Bank, 354 F.Supp. 669 (C.D.Cal. 1973) — both cases involved the making of loans by a bank in violation of Regulation U, promulgated pursuant to Section 7 of the Securities Exchange Act of 1934, 15 U.S.C. § 78g. The banks were not permitted to recover the outstanding balance due on the loans. But see Goldman v. Bank of Commonwealth, 467 F.2d 439 (6th Cir. 1972), where the court considered that the equities of the situation dictated that it grant rescission thereby allowing the bank to recover the principal amount of the loan it made, but not the interest.

      . As will be discussed in the next section of this opinion, Associates by its dilatory action has lost its right to rescission. We are not disposed to grant Associates under Section 29(b) that right which it has already lost. Principles of equity, like estoppel and waiver, apply equally to actions brought under Section 29(b), as well as those brought under Section 10(b). Royal Air Properties, Inc. v. Smith, 312 F.2d 210 (9th Cir. 1962).


source: Caselaw Access Project

author: BRIGHT, Circuit Judge.

license: Public Domain

text:
    Lucien V. AMOS, Appellant, v. UNITED STATES of America, Appellee.
    No. 73-1819.
    United States Court of Appeals, Eighth Circuit.
    Submitted March 12, 1974.
    Decided May 15, 1974.
    Rehearing and Rehearing En Banc Denied June 4, 1974.

      Robert G. Duncan, Duncan & Russell, Gladstone, Mo., for appellant.

      Mary A. Schneider, Asst. U.S. Atty., Kansas City, Mo., for appellee.
    Before GIBSON, BRIGHT and STEPHENSON, Circuit Judges.
   BRIGHT, Circuit Judge.

Luden V. Amos appeals his conviction on all counts of a 14-count indictment charging him with willfully aiding and assisting in the preparation of false and fraudulent income tax returns of various taxpayers in violation of 26 U.S.C. § 7206(2). He makes these contentions: (1) that the trial judge, Judge Paul X Williams, committed error in coercively questioning one juror during a poll of the jury; (2) that the trial judge erred in permitting the prosecution to introduce evidence showing that prior to the dates covered by the indictment Amos had committed other crimes relating to income tax matters; and (3) that the trial judge erred in instructing the jury. We reject these claims and affirm the conviction.

Although Amos raises no claim of insufficiency of the evidence to support the convictions, we believe it helpful to briefly relate the factual background. Amos is a retired railroad postal service worker, who for several years has engaged in the practice of assisting taxpayers in the preparation of their federal income tax returns. Generally, these taxpayers were wage earners of modest incomes. The evidence disclosed that as to each count, Amos made false claims for deductions from the taxpayers’ income. The false deductions ranged from a low of about $500 on the return covered by count one to a high of about $2,700 on the return covered by count four. In all but one instance, the various taxpayers who signed the returns were unaware of the false deductions. When some of these returns were audited by the Internal Revenue Service, Amos attempted to cover up some false deductions by submitting falsified receipts in support of the deductions.

With this background, we turn to the issues raised on appeal.

I

THE JURY POLL

After deliberating for about an hour and fifteen minutes the jury returned with its verdict finding Amos guilty on all counts. The court then proceeded to poll the jury. The eighth juror polled, Mr. Crockett, stated that he did not join in the verdict of guilty as to all counts. Thereupon the following colloquy occurred :

THE COURT. Did you join in the verdict in any of the Counts ?
MR. CROCKETT. Yes, sir.
THE COURT. The jury will retire to re-consider its verdicts, then as soon as you have reached unanimous verdicts — return the forms to Mr. Betts [jury foreman], there has been a misunderstanding. As soon as you have reached unanimous agreement, now - - - Now, Mr. Foreman, in as much as there are fourteen counts if there is unanimous consent on any counts indicate the ones on which it is unanimous because the Court would be inclined to receive that verdict that is unanimous as to a count; that would leave the jury to consider the ones that are not, am I making myself clear ?
MR. BETTS. Yes, sir.

Since the jury had been instructed that its verdict on any one count should not control the verdict on any other count, Judge Williams proceeded to inquire of juror Crockett whether he agreed with his fellow jurors, who had already responded, on any one count. Crockett indicated his disagreement with his fellow jurors’ verdict on all counts except as to a guilty verdict on count four. The judge then questioned the remaining four jurors as to whether each agreed with the guilty verdict on count four. Upon receiving affirmative replies, the court announced that it would receive the verdict only on count four and that it would send the jury back to reconsider the remaining counts. At that point, counsel for Amos requested a further poll relating to count four. Accordingly, the court proceeded to re-poll the jury on count four. In responding to the court’s further query, juror Crockett said, “I don’t think the one that prepared the income tax, the preparer, was guilty.”

At this point, the trial judge declined to accept any verdict and in part instructed :

Ladies and gentlemen of the jury, none of these verdicts will be received. This is not a unanimous verdict and we cannot receive it.

The jury returned after 25 minutes with another guilty verdict. Again the court polled the jury, but this time all 12 agreed with the foreman’s pronouncement of guilt. Thereafter the court further inquired of juror Crockett, who responded as follows:

THE COURT. Now, since we have had the matter of the identity, Mr. Crockett, are you certain you understand ?
MR. CROCKETT. I am certain I understand.
THE COURT. You intend to return a verdict of guilty on each of the fourteen counts?
MR. CROCKETT. Yes, sir.
THE COURT. Mr. King [Amos’ attorney], do you desire to address any questions to the members of the jury?
MR. KING. No, Your Honor.

Amos now asserts that the interrogation in requiring a juror to disclose his vote in open court on each count and in thereafter directing that the jury retire to reconsider its verdict coerced a verdict in violation of Rule 31(d), Fed.R. Crim.P. which, in pertinent part, reads:

(d) Poll of Jury. When a verdict is returned and before it is recorded the jury shall be polled at the request of any party or upon the court’s own motion. If upon the poll there is not unanimous concurrence, the jury may be directed to retire for further deliberations or may be discharged.

This rule specifically grants the trial judge a measure of discretion in determining either to require the jury to deliberate further or to grant a mistrial if it appears that the verdict was not unanimous. See United States v. Brooks, 137 U.S.App.D.C. 147, 420 F.2d 1350, 1353 (1969). In this case, Judge Williams directed that the jury retire for further deliberation after learning that juror Crockett did not concur in the finding of guilt on any of the counts. Whether that ruling constitutes error depends on whether it is likely that the proceedings conducted by the trial court coerced the juror in arriving at his final verdict. Compare United States v. Bendicks, 449 F.2d 313, 315 (5th Cir. 1971); Williams v. United States, 136 U.S.App.D.C. 158, 419 F.2d 740, 744-747 (1969) (en banc); United States v. Brooks, supra at 1351-1354 (verdicts sustained as not coerced), with United States v. Sexton, 456 F.2d 961, 964-967 (5th Cir. 1972); United States v. McCoy, 139 U.S.App.D.C. 60, 429 F.2d 739, 741-742 (1970); Matthews v. United States, 252 A.2d 505, 506-507 (D.C. Ct.App.1969) (verdicts found to be coerced) .

We need note a distinction between a case where the trial judge interrogates the jury to clarify the confusion engendered by a juror’s response to a poll which is inconsistent with the foreman’s announcement of the verdict, as in the present case, and one in which the court requires a jury to reveal its decision when no verdict has been returned, as in Brasfield v. United States, 272 U.S. 448, 47 S.Ct. 135, 71 L.Ed. 345 (1926). In the latter circumstances, the court’s actions will be deemed coercive. But in the former, Rule 31(d) gives the court some latitude in polling of the jury to clear up an apparent confusion. Williams v. United States, 419 F.2d at 746.

Moreover, in evaluating the trial court’s polling procedure, since the trial judge is present on the scene, we must pay due deference to his views on whether the recalcitrant juror’s ultimate acquiescence in the verdict came freely, without pressure from the court. United States v. Brooks, 420 F.2d at 1353; Jackson v. United States, 128 U.S.App. D.C. 214, 386 F.2d 641, 643 (1967).

Applying these principles, we hold that this record demonstrates that Judge Williams interrogated juror Crockett to dispel any confusion. When juror Crockett on the second interrogation, which was requested by Amos’ counsel, indicated an apparent change of mind as to guilt on count four, Judge Williams promptly refused to receive the verdict and directed that the jury resume deliberations, adding this comment:

I hope you are able to arrive at a verdict. If you are well and good, if you are not well and good.

Additionally, after the jury returned its verdict, Judge Williams ascertained from juror Crockett that he understood the import of the verdict and that he agreed with the guilty verdict on all counts.

We think it significant, too, that Amos’ attorney voiced no objection to the court's procedures in polling the jury or questioning of juror Crockett. This lack of objection by counsel permits an inference that the procedures utilized did not appear coercive at the time. See United States v. Brooks, 420 F.2d at 1353-1354.

In denying Amos’ post-trial motion to arrest judgment or for a new trial, Judge Williams stated that “the inquiries were essentially neutral and not calculated to affect the juror’s judgment.” We find no error of law or fact in this determination and, accordingly, affirm this ruling.

II.

ALLEGED ERRORS DURING THE TRIAL

Amos’ contention that the trial court erred in admitting evidence of other crimes relating to income tax matters rests on evidence introduced showing that defendant had claimed false deductions for at least one taxpayer commencing as early as 1964, although the indictment covered the tax returns prepared for the years 1968 to 1971, and the Government’s introduction of certain exhibits showed that Amos attempted to verify false deductions with false documentation. The trial court rejected this same contention noting that the questioned evidence bore on intent and was logically connected with proof of elements of the crime charged, citing United States v. Fidanzi, 411 F.2d 1361 (7th Cir.), cert. denied, 396 U.S. 929, 90 S.Ct. 265, 24 L.Ed.2d 227 (1969); United States v. Turner, 423 F.2d 481 (7th Cir.), cert. denied, 398 U.S. 967, 90 S.Ct. 2183, 26 L.Ed.2d 552 (1970), and United States v. Edwards, 443 F.2d 1286 (8th Cir.), cert. denied, 404 U.S. 944, 92 S.Ct. 295, 30 L.Ed.2d 259 (1971). We agree that the Government’s proof was proper. The admission of such evidence fell within the trial court’s discretion.

Amos also challenges certain instructions and comments to the jury. In particular, appellant directs an objection to the court’s limitation in its explanation of charitable deductions under the Internal Revenue Code to amounts “actually paid during the taxable year by the taxpayer to religious, charitable, educational and similar non-profit organizations.”

While the instructions did not specifically incorporate such items as out-of-pocket expenses which taxpayer might have incurred, the instruction in a general way appropriately explained the law in the context of the case since taxpayers testified that Amos did not receive information from them justifying the charitable contributions listed in various returns. The failure to further explain this deduction in light of the record at best must be deemed harmless error.

Finally, during the reading of the instructions the trial court erroneously misread the text of his instructions, stating that:

Several documents have been offered in this trial which the defendant contends are false and fraudulent. You are instructed that the defendant, Lucien V. Amos, was not charged with the submission of these documents and they are only allowed into this trial for purposes of showing the defendant’s intent at the time he prepared the tax returns which are the subject matter of the indictment.

The italicized word should have read “Government.”

Although the court apparently misspoke, we hold that the error must be deemed harmless. As Judge Williams aptly observed in his post-trial ruling on this issue:

It is not reasonable to assume that anyone (after four days of testimony in this trial) would not understand that it was the Government’s and not the defendant’s contention that the documents were false and fraudulent. Any question raised by this minor misstatement was clarified by the balance of the instructions.

We agree.

Judgment affirmed.

      . Of tlie Western District of Arkansas sitting by special assignment in the United States District Court for the Western District of Missouri.

      . In his testimony, Amos contended that errors appeared in the questioned returns because of liouest mistakes made in their preparation or as the result of erroneous information received from the taxpayer. The jury resolved any dispute in the testimony in favor of the Government.

      . Generally, in the cases upholding verdicts as not coerced, the trial courts have questioned the polled juror to resolve any questions and then returned the juries for further deliberations. In the cases finding verdicts to be coerced, the trial courts had demanded in-eourt categorical responses from jurors who expressed reservations or recaícitrance when polled, instead of returning the juries for additional deliberations. Cf. Bruce v. Chestnut Farms-Chevy Chase Dairy, 75 U.S.App.D.C. 192, 126 F.2d 224, 225-226 (1942) (civil suit).

      . Amos’ counsel made no objection to the questions asked by the trial court but, after the jury had retired to further consider their verdict, did move for a mistrial at the suggestion of the trial court to protect the record. Counsel in agreeing to the court’s suggestion added nothing to the record by way of specific grounds for the requested relief.

      . In reviewing the transcript, we must note that the court reporter has failed to index the exhibits offered and received by designating the place in the transcript where any such exhibit was marked and where any such exhibit was either received or refused admission. This court finds it very difficult to review claims of error without such an index. Court reporters in fulfilling their duties to the court in preparing transcripts must properly index the materials contained therein including a listing of the exhibits as marked, received, or rejected.


author: CLARK, Circuit Judge:

text:
    Louis FLANAGAN, Petitioner-Appellant, v. C. Murray HENDERSON, Respondent-Appellee.
    No. 73-2451.
    United States Court of Appeals, Fifth Circuit.
    July 12, 1974.

      James E. Franklin, Jr., Shreveport, La., for petitioner-appellant.
    William J. Guste, Atty. Gen., Baton Rouge, La., Thomas A. Self, Dist. Atty., Parish of DeSoto, Many, La., LeRoy A. Hartley, Sp. Counsel, and Asst. Atty. Gen. of La., New Orleans, La., for respondent-appellee.
    Before WISDOM and CLARK, Circuit Judges, and GROOMS, District Judge.
   CLARK, Circuit Judge:

Louis Flanagan was convicted by a jury in the 11th Judicial District Court of the State of Louisiana of aggravated rape and was sentenced to life imprisonment. His right of direct appeal to the Supreme Court of Louisiana was substantially harmed, if not effectively thwarted, by the failure of one of his two retained counsel to perfect an appeal on the basis of the numerous Bills of Exception taken during the trial court proceedings. The effect of this failure was to limit the appeal record to the minute entries made by the trial court clerk. The Supreme Court of Louisiana affirmed his conviction with one justice dissenting. When Flanagan initially sought federal habeas corpus relief, he was required to exhaust his state habeas corpus remedy. He did so and then reasserted the present action in the court below, which denied him relief. On the present appeal Flanagan asserts: (1) denials of due process, in the prosecution’s refusal to produce several items of exculpatory evidence and the trial judge’s refusal to sequester the prosecuting witness; (2) deprivation of effective counsel because of the failure of his retained attorneys timely to perfect a meaningful appeal from his conviction; and (3) procedural error by the federal habeas court in denying him an evidentiary hearing. Agreeing with the last contention, we vacate the order denying the writ and remand.

Both the state and federal habeas proceedings were based upon the record generated by the State trial court. This consists of three volumes which contain pleadings, minute entries by the State district court clerk, various orders entered by the State trial judge and a series of abbreviated excerpts from the court reporter’s notes which relate to the 108 Bills of Exception assigned during pre and post trial proceedings and during the trial itself.

The particular evidentiary deprivations that Flanagan asserts as violative of due process are as follows: the refusal to allow pretrial study by an expert employed by defendant of a latent fingerprint taken from the prosecutrix’s automobile (in which the rape took place); the assertion of a State law privilege to thwart the disclosure of an investigative report prepared by the corporation that employed both the prosecutrix and Louis Brooks, the person she originally accused of this crime; the refusal, under a similar claim of privilege, to produce an affidavit given by the prosecutrix charging Brooks with the rape, despite testimony by the prosecutrix that she had not made such an implicating statement or affidavit; and finally, the unavailability of a sample of sperm taken by the parish coroner from the body of the prosecutrix on the night of the crime.

In denying relief without a hearing, the court below found the record disclosed that one of the attorneys who had represented Flanagan during his trial had previously represented Louis Brooks when he was suspected of the crime; and that the prosecutrix had been subject to full cross-examination as to the facts and circumstances surrounding her initial misidentification and all factors related to her present identification of Flanagan. Additionally it found that the prosecution’s refusals to furnish the items of information sought prior to trial were not prejudicial, did not amount to a deprivation of constitutional right and, if error, were harmless. The court further found the record before it disclosed that the prosecutor did not withhold any evidence favorable to petitioner prior to or during the trial and that the petitioner knew all of the information he sought to acquire.

If, as alleged by Flanagan, the prosecution deliberately kept from his attorneys evidence in its possession which was favorable to his acquittal, a denial of due process has resulted. Brady v. Maryland, 373 U.S. 83, 83 S.Ct. 1194, 10 L.Ed.2d 215 (1963). Mooney v. Holohan, 294 U.S. 103, 55 S.Ct. 340, 79 L.Ed. 791 (1935); Guerrero v. Beto, 384 F.2d 886 (5th Cir. 1967); Annotation: Withholding or Suppression of Evidence By Prosecution, 34.A.L.R.3d 16. Since the record before us does not contain the affidavit of the prosecutrix, the challenged fingerprint, the report of the employer or more than brief excerpts from the testimony of the prosecutrix, the coroner or any other witness who appeared at the trial, there is no factual basis upon which to judge whether the allegations are well taken or not.

In Townsend v. Sain, 372 U.S. 293, 83 S.Ct. 745, 9 L.Ed.2d 770 (1973), the Court stated:

Where the facts are in dispute, the federal court in habeas corpus must hold an evidentiary hearing if the habeas applicant did not receive a full and fair evidentiary hearing in a state court, either at the time of the trial or in a collateral proceeding. In other words a federal evidentiary hearing is required unless the state-court trier of fact has after a full hearing reliably found the relevant facts.

See also 28 U.S.C. § 2254(d).

It well may be that the entire record transcript of the State trial is still available and that it alone will afford a fact finding procedure which is adequate to afford a full and fair hearing. However, no such transcript is now a part of the record in this cause and no fair appraisal of the reliability of the resolutions of those fact issues which have been developed by the petition can be made from the bits and pieces of the trial transcript which formed the record examined by the court below. Such a record is inadequate. Flores v. Estelle, 492 F.2d 711 (5th Cir. 1974). The court did not have before it the testimony of those who could accurately describe the facts. Cf. Swanson v. Estelle, 492 F.2d 115 (5th Cir. 1974).

Notwithstanding his undoubted good faith, the prosecutor’s unsupported assertion that the items sought were not exculpatory is no answer. Nor is it sufficient for counsel to describe the proof as totally overwhelming where the whole record is not presented. Similarly, the assertion by the prosecutor that the item sought is privileged under State law cannot end the inquiry into a defendant’s constitutional right to its production or disclosure. If the supplementary record developed after remand does not conclusively establish its character or the lack of defendant’s need for it in his defense, such physical evidence —which the petitioner has never seen-— must be subjected to an in camera examination by the court. Williams v. Dutton, 400 F.2d 797 (5th Cir. 1968), cert. denied, 393 U.S. 1105, 89 S.Ct. 908, 21 L.Ed.2d 799 (1969).

On remand, the district court must require the production of a record which will furnish a reliable basis for resolving the disputed issues of fact. The extent to which further evidentiary proceedings in that court will be required depends upon the availability of the trial transcript and the use of other fact development procedures, the precise course of which is left to the district court.

Since the cause must go back for additional fact development, we consider it appropriate to comment on an issue which is bound to recur. While the result of the default of Flanagan’s counsel in perfecting a meaningful appeal has become final under. Louisiana law — an appeal on a record limited to clerical notations^ — -it is not final as a matter of Sixth Amendment right.

If an appointed counsel should altogether fail to take an appeal which a defendant requests, precedent in this circuit establishes that such neglect amounts to ineffectiveness per se. See Bailey v. Ault, 490 F.2d 71 (5th Cir. 1974); and the cases discussed in Lumpkin v. Smith, 439 F.2d 1084 (5th Cir. 1971). Appointed counsel error which leaves a defendant with only an abbreviated right of review has also been held to deny a constitutional right. Entsminger v. Iowa, 386 U.S. 748, 87 S.Ct. 1402, 18 L.Ed.2d 501 (1967). Although the standard by which minimal competence of retained counsel is to be judged is similar, any errors of Flanagan’s privately employed counsel cannot be automatically charged to the state. However, since the default of one of his attorneys in properly perfecting a full appeal was promptly made known to the trial judge in the form of a request for extension of time to perfect a regular appeal, state involvement unquestionably is present here. When a court discovers that an attorney has been derelict in the performance of a court duty which could forfeit a legal right accorded to a defendant in a criminal case is significant as the right to an appeal on the merits, disciplinary measures against the attorney — rather than deprivation of the defendant’s rights — may be the only constitutional remedy. At least that is true in this case. Therefore, the district court must include in the record developed sufficient information to demonstrate whether the defendant personally waived his right to appeal upon a record comprised of his Bills of Exception. The right to this form of appeal, which had been fully perfected throughout the trial proceedings (and which the State, through court and prosecutor, knew had been so perfected) is one which his retained attorneys cannot waive for him. Collier v. Estelle, 488 F.2d 929 (5th Cir. 1973).

The trial judge’s discretionary action in permitting the prosecutrix to remain in the courtroom during the trial does not appear to present an issue of constitutional dimensions.

The cause is remanded to the district court for further proceedings not inconsistent with this opinion.

Remanded.

      . State v. Flanagan, 254 La. 100, 222 So.2d 872 (1969).

      . In addition to these Bills of Exception, counsel for petitioner filed more than ,30 motions for various forms of pre and post trial relief. These motions and all orders thereon also form a part of this record.

      . La.Rev.Stat. § 44:3 (1940).

      . During the prosecution’s case the coroner testified that in the course of his examination of the prosecutrix on the night of the rape a sample of male sperm had been taken from her vagina. On cross-examination the coroner stated he did not know whether such a sample could reveal the blood type of the rapist but promised to consult others and testify later. He subsequently informed the court that such typing was medically possible but that he could not locate the sample.

      . Brooks, who was arrested shortly after the rape was reported, remained in Parish prison for over one month before petitioner was accused.


text:
    UNITED STATES of America, Plaintiff-Appellee, v. Robert Waring MARRIFIELD, John Hobart McEarchern, Roy Wayne Nelson, Sam Lee Presley, Joseph Paul Poulos, Jr., and Albert Lowry Slaughter, Defendants-Appellants.
    No. 73-3464
    Summary Calendar.

    United States Court of Appeals, Fifth Circuit.
    July 12, 1974.

      Thomas M. Haas, Mobile, Ala. (Court-appointed), for Marrifield, Mc-Earchern, Poulos, and Slaughter.
    Charles S. White-Spunner, U. S. Atty., Mobile, Ala., for plaintiff-appellee.
    Before GEWIN, GODBOLD and CLARK, Circuit Judges.

       Rule 18, 5th Cir.; see Isbell Enterprises, Inc. v. Citizens Casualty Co. of N. Y. et al., (5th Cir. 1970), 431 F.2d 409, Part I.

   CLARK, Circuit Judge:

Defendants were jointly indicted for unlawfully conducting a gambling business in a mobile home-casino located in a remote section of Baldwin County, Alabama near the Florida border. In a single proceeding, the six persons indicted as confederates were convicted upon pleas of not guilty before a jury and assessed various terms of imprisonment for violation of 18 U.S.C.A. § 1955 (Supp.1974). Because we have concluded that their consolidated specifications of error in the proceedings below are devoid of merit, we affirm.

In passing Section 1955 into law as part of Title VIII of the Organized Crime Control Act of 1970, Pub.L. 91-452, 84 Stat. 922, Congress sought to employ its commerce clause powers to foreclose a major source of power and revenue to organized crime by proscribing any gambling business, which

(i) is a violation of the law of a State or political subdivision in which it is conducted;
(ii) involves five or more persons who conduct, finance, manage, supervise, direct, or own all or part of such business; and
(iii) has been or remains in substantially continuous operation for a period in excess of thirty days or has a gross revenue of $2,000 in any single day.

18 U.S.C.A. § 1955(b)(1) (Supp.1974).

It is now well settled, either explicitly or implicitly, in this and at least seven other circuits that Section 1955 passes constitutional muster as a valid exercise by Congress of its legislative powers under the commerce clause. United States v. Pacheco, 489 F.2d 554 (5th Cir. 974); see, e. g., United States v. Smaldone, 485 F.2d 1333, 1342 & cases cited (10th Cir. 1973); United States v. Bobo, 477 F.2d 974 (4th Cir. 1973); United States v. Palmer, 465 F.2d 697 (6th Cir. 1972), cert. denied, 409 U.S. 874, 93 S.Ct. 119, 34 L.Ed.2d 126 (1973); see also Perez v. United States, 402 U.S. 146, 91 S.Ct. 1357, 28 L.Ed.2d 686 (1971). Furthermore, it is also clear that “[c]onvictions under § 1955 do not require a showing in each individual case that the gambling activities of a particular defendant have affected commerce . . . . ” Schneider v. United States, 459 F.2d 540, 541 (8th Cir.), cert. denied, 409 U.S. 877, 93 S.Ct. 129, 34 L.Ed.2d 131 (1972), quoted in United States v. Meese, 479 F.2d 41 (8th Cir. 1973); see United States v. Hunter, 478 F.2d 1019 (7th Cir.), cert. denied, 414 U.S. 857, 94 S.Ct. 162, 38 L.Ed.2d 107 (1973).

In addition to asserted infirmities in the indictment and the trial court’s charge to the jury, defendants spin off various challenges to the trial proceedings from their central contention that the nature of their felonious enterprise fails to satisfy the federal statute’s jurisdictional prerequisite of criminal involvement by five or more individuals. Although the proof adduced at -trial showed that the individual defendants freely interchanged their roles, it was established that the gambling operation generally consisted of a banker, who handled the poker chips and money at the green, felt-covered gaming table, a stickman, who wielded an L-shaped instrument to clear the table of dice and poker chips, a blackjack dealer and a manager. Despite the fact that over a seven month period FBI agents and other witnesses had observed each of the six defendants to be engaged in the illicit business on various occasions, the record did not demonstrate that at any time there were more than four of the collaborators actually present and working in the establishment. From this factual foundation defendants advance the proposition that their gambling venture lies outside the ambit of 18 U.S.C. § 1955(b) (1) (ii).

Defendants argue that (1) the prosecution failed to establish that their enterprise was an illegal gambling business within the purview of Section 1955, (2) the district court improperly denied their consolidated motions to suppress physical evidence seized during an FBI raid of the establishment because the affidavit supporting the search warrant did not allege sufficient facts or demonstrate probable cause to establish a violation of the Act, (3) their motions for judgments of acquittal were erroneously overruled since the evidence was insufficient as a matter of law to support their convictions, and (4) the trial judge improperly instructed the jury that Section 1955 prohibited a gambling business of a size which reasonably required or involved the active participation of five or more persons.

Because the degree of participation intended to be proscribed as criminal by Section 1955 is nowhere therein defined, courts considering this issue have looked for guidance to the legislative history behind a parallel, simultaneously enacted provision of the Organized Crime Control Act, 18 U.S.C. § 1511, which describes an “illegal gambling business” in identical terms. These two statutes have been construed to be in pari materia. See, e. g., United States v. Becker, 461 F.2d 230 (2d Cir. 1972); United States v. Harris, 460 F.2d 1041 (5th Cir. 1972), cert. denied, 409 U.S. 877, 93 S.Ct. 128, 34 L.Ed.2d 130 (1973); United States v. Riehl, 460 F.2d 454 (3d Cir. 1972).

[Section 1511] applies generally to persons who participate in the ownership, management, or conduct of an illegal gambling business. The term ‘conducts’ refers both to high level bosses and street level employees. It does not include the player in an illegal game of chance, nor the person who participates in an illegal gambling activity by placing a bet.

H.R.Rep.No.91-1549, 91st Cong., 2d Sess. (1970), 1970 U.S.Code Cong. & Admin.News p. 4029. As the Second Circuit has declared,

[t]hus Congress’ intent was to include all those who participate in the operation of a gambling business, regardless how minor their roles and whether or not they be labelled agents, runners, independent contractors or the like, and to exclude only customers of the business.

United States v. Becker, supra, 461 F.2d at 232. The strained statutory construction urged by the defendants runs counter to the stated legislative purpose and would effectively emasculate the Act. The fact that only four of these defendants were engaged at any particular time in running a business which contemplated and required the active participation of six persons is clearly of no decisional significance here. On this record, therefore, the jury’s verdict that each defendant was guilty of conduct condemned as criminal by the plain words of Section 1955 was entirely proper. Likewise impervious to appellate attack are the trial judge’s charge to the jury and his actions in denying defendants’ motions to suppress and for judgments of acquittal. United States v. Bobo, supra; United States v. Harris, supra.

18 U.S.C.A. § 1955(c) (Supp. 1974) provides:

If five or more persons conduct, finance, manage, supervise, direct or own all or part of a gambling business and such business operates for two or more successive days, then, for the purpose of obtaining warrants for arrests, interceptions, and other searches and seizures, probable cause that the business receives gross revenue in excess of $2,000 in any single day shall be deemed to have been established.

The presumption raised by this subsection does not overstep. constitutional boundaries, see United States v. Fino, 478 F.2d 35 (2d Cir. 1973); United States v. Palmer, supra, and the affidavit supporting the search warrant amply demonstrated probable cause to believe the defendants’ gambling enterprise violated Section 1955 without resort to the statutory presumption. The record discloses ample proof to support each of these convictions.

Defendants finally contend that contrary to the ruling below, the indictment should not have withstood their motions to dismiss. They assert that the general allegation of a violation of the Alabama Criminal Code, which is an essential element of the federal charge, did not sufficiently inform them of the specific charges they were called upon to defend. Certainly, the grand jury’s crimination that the defendants “did knowingly and wilfully conduct ... an illegal gambling business, to wit, a business for placing bets on dice and cards” not only set forth a violation of Alabama law but was adequate to place them on notice of the accusations they confronted. Further factual allegations were unnecessary to make out an offense against the State of Alabama. The indictment fully and adequately set out the essential elements of the federal offense and fairly provided sufficient notice to defendants of the government’s charges. See Hagner v. United States, 285 U.S. 427, 52 S.Ct. 417, 76 L.Ed. 861 (1932); United States v. McGhee, 488 F.2d 781 (5th Cir. 1974); United States v. Figueredo, 350 F.Supp. 1031 (M.D.Fla.1972); 1 C. Wright & A. Miller, Federal Practice and Procedure §§ 123-25 (1969).

The decision of the district court is

Affirmed.

      . On the night of the FBI raid, defendant McEarchern had allegedly become sick and was asleep in an adjoining trailer while four of his co-defendants continued to conduct the business in his absence.

      . . . . Congress deleted the word “participate” from the original wording of the statute. The legislative history shows that the language was deleted because the word “participate” might be construed so as to include mere bettors in making up tlie statutory five persons required for a conviction under the Act. The language “involves five or more persons who conduct, finance, manage, supervise, direct or own all or part of such business,” was used instead of “participate.” United States v. Bobo, supra, 477 F.2d at 989.

      . Contrary to the government’s assertion, our recent decision in United States v. Bridges, 493 F.2d 918 (5th Cir. 1974), does not control the issue of statutory interpretation at hand. In Bridges, this court held that “Congress intended an illegal gambling business, as defined in [§ 1955] (b)(1), to be one which operates with a minimum of five persons for a period in excess of thirty days.” 493 F.2d at 922. We reversed the § 1955 convictions of five Bridges defendants as outside the proscriptions of the Act because the fifth confederate was involved in the illegal gambling business for no longer than eighteen days, a period not in excess of that enumerated in § 1955(b) (1) (iii). The instant case involved the six defendants for more than the statutorily prescribed period.

      . The district court also instructed the jury that the evidence demonstrated the gambling business was not licensed as required by Albania state law. We find no error in this charge. See United States v. Thaggard, 477 F.2d 626, 631 (5th Cir. 1973); see also United States v. Romano, 482 F.2d 1183 (5th Cir. 1973).

      . The indictment charged, in pertinent part, that the defendants “did knowingly and willfully conduct ... an illegal gambling business, to-wit, a business for placing bets on dice and cards, . . . said business being in substantially continuous operation for a period of time in excess of 30 days and involving five or more persons in its conduct, management, supervision and direction, being in violation of the Code of Alabama, Title 14, Section 265; all in violation of Title 18, United States Code, Section 1955.”
      Code of Alabama, Tit. 14, § 265 (Recomp. 1959) provides:

        Keeping gaming table. — Any person who keeps, exhibits, or is interested or concerned in keeping or exhibiting any table for gaming, of whatsoever name, kind, or description, not regularly licensed under the laws of this state, shall be guilty of a misdemeanor, and, on conviction thereof, shall be fined not less than two hundred dollars nor more than five hundred dollars, and shall also be sentenced to hard labor for the county for not more than twelve months, and on a second or any subsequent conviction, shall be imprisoned in the penitentiary for not less than two nor more than five years.

      . 18 U.S.C.A. § 1955(b) (1) (i) (Supp.1974).


author: AINSWORTH, Circuit Judge:

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Curtis TATUM, a/k/a Lonnie, Defendant-Appellant.
    No. 73-3614
    Summary Calendar.

    United States Court of Appeals, Fifth Circuit.
    July 12, 1974.

      H. Gilman Hudnall, Atlanta, Ga. (Court-appointed), for defendant-appellant.
    John W. Stokes, Jr., U. S. Atty., John M. Turner, Jr., Asst. U. S. Atty., Atlanta, Ga., for plaintiff-appellee.
    Before BROWN, Chief Judge, and THORNBERRY and AINSWORTH, Circuit Judges.

       Rule 18, 5 Cir.; see Isbell Enterprises, Inc. v. Citizens Casualty Company of New York at al., 5 Cir. 1970, 431 F.2d 409.

   AINSWORTH, Circuit Judge:

Defendant Curtis Tatum was tried before a jury and was convicted on all counts of a four-count indictment. Three counts alleged separate incidents of unlawful heroin distribution, in violation of 21 U.S.C. § 841(a)(1), and the fourth count alleged unlawful possession of heroin, in violation of 21 U.S.C. § 844(a). We affirm.

Two of the counts charging unlawful distribution involved transactions in which informers participated along with Government agents. The other two counts did not. During the trial, defendant requested the identities of the informers and was told by the Government that the identities of the informers would be made known. Shortly thereafter during the trial, defendant requested that the informers appear as witnesses. The Government provided defendant with the names of the informers and their last known locations, but was unable to give their present locations because the Government had lost contact with them. However, after defendant was unable to produce authority demonstrating a duty of the Government to produce informers as witnesses in addition to disclosing their identities, the court denied defendant’s motion for production and proceeded with the trial. Prior to the court’s ruling on the issue, defendant did not request a continuance in order to attempt to locate either of the informers.

On appeal, defendant contends that the Government was under a duty to produce the informers as witnesses, that the trial court erred in not granting a continuance during which defendant could attempt to locate and subpoena the informers, and that the Government's failure to produce the informers constituted a denial of his Sixth Amendment right to confront the witnesses against him. We are not persuaded. The Government is under no duty to call witnesses even if they are informers. United States v. Prieto-Olivas, 5 Cir., 1969, 419 F.2d 149, 151; Clingan v. United States, 5 Cir., 1968, 400 F.2d 849, 851; Washington v. United States, 5 Cir., 1960, 275 F.2d 687, 690; Wilson v. United States, 9 Cir., 1969, 409 F.2d 184, 187, cert. denied, 395 U.S. 983, 89 S.Ct. 2146, 23 L.Ed.2d 771; United States v. Cimino, 2 Cir., 1963, 321 F.2d 509, cert. denied, 375 U.S. 967, 84 S.Ct. 486, 11 L.Ed.2d 416 (1964). This is particularly true in the case before us because a careful review of the record reveals that testimony by the informers was not essential to the Government’s case. See United States v. Prieto-Olivas, supra. The direct participation of the Government agents in the drug transactions rendered unnecessary the presence of the informers as witnesses at the trial. We also reject defendant’s argument that the trial court erred in not granting a continuance, for, as we have noted, no motion for a continuance was made. We can find no basis, moreover, for defendant’s Sixth Amendment claim. The Government had provided defendant with the names and last known locations of the informers. The Government was under no duty to do any more; and no continuance was sought by defendant so that he might find the informers. In addition, the Government agents testified only as to what they observed of the circumstances of the criminal transactions and the informers’ roles therein; the agents related no statements by the informers that might have been hearsay testimony. See Wilson v. United States, supra.

Defendant also contends that his motion for judgment of acquittal as to the first two counts should have been granted. Two arguments are presented. First, it is claimed that the motion should have been granted because the district court failed to strike the testimony by a Government agent as to a drug transaction not charged in the indictment. This testimony, however, was relevant to a determination of defendant’s intent to distribute a narcotic drug, as well as to an explanation of the arrangement of the drug transactions for which defendant was indicted. See United States v. Bryant, 5 Cir., 1974, 490 F.2d 1372, 1377; Weiss v. United States, 5 Cir., 1941, 122 F.2d 675, 682-688, cert. denied, 314 U.S. 687, 62 S.Ct. 300, 86 L.Ed. 550. At any rate, no objection to the admission of the testimony was made at the trial, and the objection was thus never before the trial court as a ground for granting the motion for judgment of acquittal. Defendant’s second point with respect to the trial court’s denial of his motion for judgment of acquittal is that there was insufficient evidence for the case to go to the jury. We disagree. There was more than enough such evidence. See United States v. Kohlmann, 5 Cir., 1974, 491 F.2d 1250, 1253; United States v. Ducker, 5 Cir., 1974, 491 F.2d 1190, 1192.

We have considered all of defendant’s contentions and find them to be without merit.

Affirmed.

      . In the trial court, defendant termed his motion a motion for a directed verdict. Motions for directed verdicts have been abolished since promulgation of the Federal Rules of Criminal Procedure on March 21, 1946. See Fed.R.Criru.P. 29(a). Defendant’s motion is, therefore, treated as a motion fo“r judgment of acquittal. See United States v. Pyle, 9 Cir., 1970, 424 F.2d 1013, 1014-1015 and n. 1.


author: BELL, Circuit Judge: GOLDBERG, Circuit Judge

text:
    Fred COOPER et al., etc., Plaintiffs-Appellees, v. Honorable Enoch T. NIX, etc., et al., etc., Defendants-Appellants.
    No. 73-3276.
    United States Court of Appeals, Fifth Circuit.
    July 18, 1974.
    Rehearing Denied Aug. 27, 1974.
    Wm. J. Guste, Jr., Atty. Gen., Baton Rouge, La., Tom Matheny, Asst. Atty. Gen., Hammond, La., Fred G. Benton, Jr., Baton Rouge, La., for defendants-appellants.
    Donn Moss, Ray Lamonica, Baton Rouge, La., for plaintiffs-appellees.
    Before BELL, GOLDBERG and CLARK, Circuit Judges.
   BELL, Circuit Judge:

This appeal grows out of a suit over regulations at Southeastern Louisiana University which require student on-campus residence with some exceptions. The basic regulations were promulgated by the Louisiana State Board of Education. These regulations, Schedules 44 and 45, were upheld by a three-judge district court in Pratz v. Louisiana Polytechnic Institute, W.D.La., 1970, 316 F.Supp. 872, Aff’d 401 U.S. 1004, 91 S.Ct. 1252, 28 L.Ed.2d 541 (1971), in the face of a claim that they were facially unconstitutional. Ample space being available on campus at Southeastern, only Schedule 44 is here involved:

“. . . that all unmarried, full-time undergraduate students, regardless of age or whether or not emancipated, are required to live in on-campus residence halls as long as space is available.”

The suit here was brought by students who wished to reside off campus. The gist of their cause of action, assertedly local in nature so as to avoid the convening of a three-judge district court, Cf. Sands v. Wainwright, 5 Cir., 491 F.2d 417, cert. den., - U.S. -, 94 S.Ct. 2403, 40 L.Ed.2d 771 with Moody v. Flowers, 1967, 387 U.S. 97, 87 S.Ct. 1544, 18 L.Ed.2d 643, was that Southeastern was implementing Schedule 44 in an unconstitutional manner through exempting all undergraduate students age 23 and over as well as members of two social fraternities. They maintained that these practices violated the equal protection clause of the Fourteenth Amendment to the Constitution. The district court agreed. We affirm in part and reverse in part.

There were three stages to the litigation in the district court. First, a temporary restraining order was granted ex parte. Next, a preliminary injunction was granted from the bench after an evidentiary hearing. Subsequently, extensive written findings of fact and conclusions of law were entered by the district court on the motion for preliminary injunction. Cooper v. Nix, W.D.La., 1972, 343 F.Supp. 1101. Lastly, a permanent injunction was granted on motion of plaintiffs some months later. There was no further hearing.

There was a clear holding in the district court on the granting of the preliminary injunction that there was an equal protection violation as to those plaintiffs wishing to reside in Cardinal Newman Hall, an off-campus housing facility operated and supervised by The Roman Catholic Church of the Diocese of Baton Rouge, vis-a-vis those students residing off campus in fraternity houses. While it does appear that Cardinal Newman Hall and the two fraternities may be similarly situated with respect to having had a regulatory and supervisory nexus to Southeastern prior to the adoption of Schedule 44 and thus that their residents should be treated similarly, we do not reach any question with regard to this phase of the controversy. This is for the reason that this appeal entails only the permanent injunction and it is limited to disparity in treatment based on age — the 23 year old and above exemption. Plaintiffs took no cross-appeal and thus may not' raise matters outside the context of the final order. Defendants have no cause to complain although they seem to be under the mistaken impression that such an issue inheres in the case.

The claim based on age had its genesis in a regulation adopted by Southeastern which regulation exempted all students age 23 and over from the requirements of Schedule 44. The regulation was apparently in aid of administering Exemption B, Fn. 1, supra, to Schedule 44. This regulation was repealed after this litigation began but the district court found as a fact that Southeastern continued the practice, merely substituting deed for name. This finding of fact is not contested.

The equal protection violation found by the district court was in the disparity between the treatment of students in the age groups 21 and 22 and those 23 and over. There was no claim as to students under age 21. The district court found the disparity in treatment to be without a rational basis and thus arbitrary. This finding is sustained on the record before us. Indeed, there is no basis whatever in the record before us to justify the disparate treatment. We thus turn to the scope of the injunction in question. It provides in operative part:

“IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the preliminary injunction heretofore entered herein be made permanent and final, to-wit:
“Defendants, their agents, employees and all other persons, firms, corporations or institutions acting or claiming to act in their behalf, or in concert or participation with them are hereby enjoined and prohibited from requiring twenty-one year old and older students at Southeastern Louisiana University to live on campus.”

It is noted that the wrong, i. e., the exemption of age 23 and above students is not enjoined. Rather the exemption is expanded to include other age groups. Schedule 44 was, in effect, rewritten by Southeastern to exempt the age 23 and over group and by the district court to exempt the age 21 and 22 groups. We hold that the scope of the injunction must be narrowed.

The Supreme Court has pointed out that in suits involving claims of constitutional deprivation, judicial power may be exercised only on the basis of a constitutional violation. And, in formulating remedies in such cases, as in any equity case, the nature of the violation determines the scope of the remedy. Swann v. Charlotte-Mecklenburg Board of Education, 1971, 402 U.S. 1, 16, 91 S. Ct. 1267, 28 L.Ed.2d 554, 566-567.

It is plain to us that the nature of the wrong here requires only the remedy that the wrong be enjoined, i. e., the 23 year old and over exemption. The order of the district court is reversed to the extent that it exceeded this remedy. The effect of this is to leave Schedule 44 intact at Southeastern, complete with the age exemption set out in Exemption B, fn. 1, supra.

Affirmed in part; reversed and remanded in part.

GOLDBERG, Circuit Judge

(concurring in part and dissenting in part):

I concur in everything in my Brother Bell’s opinion up to and including his determination that, in light of the nature of the wrong, the scope of the district court’s injunction should be narrowed. I cannot give my unqualified endorsement to the majority opinion, however, because the majority has merely substituted one unsatisfactory remedy for another.

The district court found that defendants had failed to show any rational basis for the disparity between the treatment of students under age 23 and those 23 and over. I agree with my Brothers that the record before us sustains that finding. In order to correct that disparity the district court enjoined and prohibited defendants “from requiring twenty-one year old and older students at Southeastern Louisiana University to live on campus.” As the panel majority-notes, this injunction did not eliminate the distinction based on an arbitrary age level, but merely shifted the distinction to another age level, which the evidence might or might not prove to be arbitrary. Moreover, the injunction fails to consider the possibility that the University might prefer simply to discontinue its practice of exempting students age 23 and older from the on-campus living requirement — a preference which, if it can be shown to be substantially related to the educational process, has been specifically sanctioned by the three-judge court decision in Pratz v. Louisiana Polytechnic Institute, W.D.La.1970, 316 F.Supp. 872, aff’d mem., 1971, 401 U.S. 1004, 91 S.Ct. 1252, 28 L.Ed.2d 541.

In my view this Court could have eradicated the errors in the district court’s order simply by modifying it to provide that for so long as defendants continue to exempt students age 23 and older from the on-campus living requirement, they may not enforce the requirement as to students under the age of 23. This would give the University the options (assuming substantial relationship to the educational process) of simply rescinding the present unwritten exemption, of granting relief to students under age 23, or of proposing a new pattern of exemptions and priorities with a more rational basis than the present one.

The solution proposed by the panel majority — which, as I understand it, instructs the University to stop granting exemptions to students age 23 and older on the basis of age — is unsatisfactory for several reasons. Neither side in this litigation sought to require students age 23 and older to live on campus, and neither side is likely to be pleased with this resolution of the issue. Students under age 23 who felt that their freedom and privacy were being unduly limited by the on-campus living requirement are not apt to derive much comfort from the knowledge that their elder classmates must now suffer the same restriction. Defendants may be equally dissatisfied because of the housing shortage they are likely to face, in view of the district court’s finding that “the reason for class selection of dormitory residence is here directly related to the number of dormitory vacancies or potential students rather than to any particular academic or ‘living and learning’ status.” (Appendix, pp. 75-76). Of course, those most certain to take exception to the remedy substituted by the majority are the students age 23 and older who until today have enjoyed what many of them must consider to be a substantial benefit. The panel has stripped them of that privilege in a proceeding in which they were not even represented.

I recognize that the law sometimes requires that issues be resolved in ways not entirely satisfactory to any of the litigants. This, however, is not such a case. Here we have a class of plaintiffs who assert that they are being required to live on campus for reasons not “substantially related to the educational process” and who, as support for their contention, show that the University has imposed arbitrary age classifications. The panel majority would answer their claim by saying, in effect, that once the older students are denied permission to live off campus, the requirement that students under age 23 live on campus will automatically be vested with substantial educational merit. I cannot accept that reasoning.

A blanket requirement that all students live on campus, with only the narrow exemptions written- into Schedule 44 (see footnote 1 of Judge Bell’s opinion), might be justifiable in 1974 at Southeastern Louisiana University as it was in 1970 at Louisiana Polytechnic Institute; and the University should be given every opportunity to demonstrate that it is justifiable, if that is the course the University wishes to pursue. In my opinion, however, this Court should neither instruct the University that it must pursue that particular course nor assume, on the basis of a record developed without consideration of that alternative, that such a course would pass constitutional muster.

The only wrong thus far demonstrated in this case lies with the drawing of an arbitrary and unjustified distinction at age 23. I would enjoin the defendants from continuing to make that distinction, and leave it to the various elements of the University community to work together to achieve a reasonable and equitable alternative. I therefore dissent from the remedy proposed in the majority opinion.

      . The following are the Schedule 44 exemptions from this requirement:
      A. In any case where it appears that a full-time undergraduate student will otherwise suffer significant hardship or because of sufficient financial, medical or other good and sound reasons shown.
      B. In the case of older students, as, for example, (i) a returning military veteran; (ii) a previously married person where Proper Officials make a finding of fact that such individual is by virtue of age and experience incompatible with the educational objectives and values sought to be provided by on-campus residence herein outlined.

      . The district court denied defendants’ request for a further hearing. Defendants moved to disqualify the district judge on due process concepts. The order denying that motion, also a part of this appeal, is affirmed.

      . In upholding the application of Schedule 44 at Louisiana Polytechnic Institute, the three-judge court majority in Pratz, supra, emphasized the proven dedication of Polytechnic to the living and learning center concept, the availability of adequate and suitable on-campus housing, and the broad adherence in educational circles at that time to the view that “the living and learning center concept is a very valuable educational tool.” The record before us in the. present case provides no basis on which to judge whether that concept continues to enjoy such extensive approval among prominent educators. The district court’s findings, however, cast serious doubt upon the availability of adequate housing at Southeastern as well as upon the dedication of Southeastern officials to the living and learning center concept. Cf. Mollere v. Southeastern Louisiana College, E.D.La.1969, 304 F.Supp. 826.