Full opinion text
McALLISTER, Chief Judge. This is an appeal by John A. Maxwell and the Algonac Manufacturing Company from a judgment of conviction in a criminal case. Mr. Maxwell was sentenced to three years’ imprisonment and fined $30,000.00. The company was also fined $30,000.00. After a consideration of the record on appeal, we are clearly of the view that the judgment of the District Court should be reversed, the convictions set aside, the fines cancelled, and appellant Maxwell discharged. Our determination in such a grave matter calls for the recapitulation of the evidence and the reasoning which compels us to our conclusion. At the outset, it is to be said that this is a factual case and our reversal of the judgment is based upon either the uneontradicted evidence, or the testimony of witnesses for the government. The background of the case is as follows: The Algonac Manufacturing Company, through its President, John A. Maxwell, in 1952, entered into eight contracts with the government to manufacture and deliver various metal cabinets and steel boxes, aggregating 49,922 units, of the total value of $1,427,355.42. Under one of the contracts, deliveries were made of 6,100 of the 6,900 cabinets ordered, of a value of $210,000.00, and, under another contract, $20,000.00 worth of items were delivered. It appears that there was some delay, at first, in production because of steel shortages and a steel strike; later, there were two tornadoes, which damaged the plant and necessitated clearing up the premises; this was followed by a fire at the Algonac plant which interrupted production for a period of from two to three months, and required a rebuilding of the plant. Commencing on October 2, 1953, the Algonac Manufacturing Company received notice from the government that certain contracts had been defaulted, and, later, notices of default on the other contracts were received, and Algonac was ordered to stop immediately all production. In the notices of default, the government stated that if it were subsequently determined that failure to deliver the items was due to causes beyond the eontrol of the company and without its fault or negligence, the notices of default could be deemed to have been issued pursuant to the provisions of the contract clause covering “termination for the convenience of the government.” At the time the first notice of default was received, it appeared not only that appellant Maxwell had invested considerable capital in the company, but that there were, then, current liabilities against the company of approximately $450,000.00. A conference was arranged with the Army Ordnance Department to discuss the matter. At the meeting with the government officials, Mr. Maxwell stated that he stood to lose a half million dollars, whereupon one of the representatives of the government replied that it would be cheaper for the government to pay a half million dollars rather than to take a million and a quarter dollars worth of materials which it did not need, as well as pay the freight and storage on them. After considerable discussion, the result was that the government, instead of terminating the contracts because of default of the Algonac Manufacturing Company, elected to proceed under the “termination for the convenience of the government” clause in the contract; and a letter was issued to this effect, informing the company that all the contracts would be lumped into one for procedural purposes. One of the simplest but most important considerations, in understanding this complicated case, is that the contracts entered into between the Algonac Manufacturing Company and the government were fixed-price contracts. The reason that this is such an important consideration is that the indictments and proof of the government rest largely on bookkeeping entries. If the contracts had been cost-plus contracts, the bookkeeping and accounting methods of the company would have been entirely different, inasmuch as it would have been necessary to prove the actual cost incurred in manufacture in order to secure the “plus” profit. In the instant case, if the company had been permitted to complete the contracts, it would have received from the government only the fixed price upon which the parties had previously agreed, and it would have been unnecessary to furnish the cost items such as the company would have been obliged to supply in the case of cost-plus contracts. As it was, the books of the company were not set up to show the cost of the various items manufactured. When the contracts were terminated “for the convenience of the government,” there were no items on the books of the company which would indicate the expense incurred for each of the different articles manufactured, and to be manufactured. The government did make payments for the materials actually delivered by Algonac in the amount of $220,000.00. Thereafter, Mr. Maxwell, on behalf of the company, filed a termination claim in which it was set forth that there was due to the company from the government the amount of approximately $469,000.00. The government paid $200,000.00 as a partial payment on account of the termination claim. Subsequently, the Algonac Manufacturing Company and Mr. Maxwell were indicted for making false statements in a balance sheet — after the contracts had been terminated — as part of the submission by appellants to the government of the termination claim and settlement proposal made for the purpose of securing payment of such claims against the company, in violation of Title 18 U.S. C.A. § 1001, and Title 18 U.S.C.A. § 2(a), as well as for conspiracy to file such false termination claim and settlement proposal in violation of Title 18 U.S.C.A., § 371. Appellants were first indicted on a four-count indictment, No. 34457, on August 26, 1954, charging that they falsified the records of the company, showing greater assets and less liabilities than was the actual fact, in a financial statement to the government; and that they falsely stated the company had a surplus, when it actually had a deficit. Thereafter, upwards of a year later, on July 29, 1955, appellants were again indicted in a nine-count indictment, No. 35038, charging that they doctored the books of the company, concealing the company’s financial condition, to indicate its assets were greater, and its liabilities less, than was actually the case; that they had used inferior materials and workmanship contrary to the specifications, and that they had made false financial statements, schedules of accounting, and settlement proposals. On March 9, 1956, an order was entered by the District Court, consolidating both indictments, No. 34457 and No. 35038, for trial purposes. After various motions made by appellants were denied, the case proceeded to trial before the court without a jury. Most of what the government charged could not be proved; and many counts and paragraphs of the indictments were, after the proofs, dropped by the government or dismissed by the court upon the motion of appellants. Thus, at the conclusion of the government’s case, the District Attorney announced that there would be no proofs offered in reference to any of the four counts in the first indictment, No. 34457, which was returned in 1954. With reference to the second indictment, No. 35038, returned in 1955, the District Attorney announced that no proofs would be offered as to counts 7 and 8 of that indictment. Appellants then moved for a judgment of acquittal; and the court entered such judgment as to appellants in all of the four counts of indictment No. 34457, as well as counts 7 and 8 of indictment No. 35038. The court further granted the motion of defendants for a judgment of acquittal on counts 1, 2 and 3 of indictment No. 35038, and, on motion of appellants, struck and dismissed sections (a), (b), (c), and (e) of paragraph 3 of count 6 of indictment No. 35038. Appellants then moved the court to strike further sections of the counts of indictment No. 35038 and the court granted such motion and dismissed subsections (b) and (c) of paragraph 4 of count 5 of such indictment. In brief, nine of the thirteen counts of the two indictments were dismissed, as well as five important sections of the remaining four counts. The case then proceeded to trial before the court without a jury. In a long and detailed verdict, the District Court found appellants Algonac Manufacturing Company and John A. Maxwell guilty of counts 4, 5, 6 and 9 of indictment No. 35038, and thereafter sentenced appellant Algonac Manufacturing Company to pay to the government a fine in the amount of $7,500.00 on each of the said four counts, and further sentenced appellant Maxwell to be committed to the custody of the Attorney General for a period of three years, and that he pay a total fine in the amount of $30,000.00. The government contends that appellant Maxwell submitted a false financial statement, a false schedule of accounting information, and a false settlement proposal, with intent to defraud the government, and conspiracy so to defraud. It is contended that the false financial statement was submitted by appellant Maxwell to the government on February 7, 1954; that the false schedule of accounting information was submitted by Maxwell to the government on March 31, 1954; and that the final settlement proposal containing the false statement was submitted to the government on March 31, 1954. It is Maxwell’s submission of these three alleged false statements, and conspiracy thereby to defraud the government, that constitute the four counts of the indictment upon which appellant Maxwell and the company were tried. The facts out of which these proceedings arise are necessary to an understanding of the issues and contentions of the parties: Appellant Maxwell bought the Algonac Manufacturing Company sometime in the early part of 1947. At that time it was a partnership, and Mr. Maxwell thereafter incorporated the business, and became the sole stockholder, as well as President and Treasurer. Edward Y. Howell, who had been associated with the partnership, remained with the company after its incorporation and subsequently became Secretary. John K. McDermott became associated with the company after its incorporation, and was elected Vice President. Appellant Maxwell had considerable experience in corporate management, having been prominently associated with the management of a number of other corporations prior to his purchase of the Algonac Manufacturing Company. He was a man of good reputation and standing in the business community of Detroit. During the course of the business of the Algonac Manufacturing Company, Maxwell constituted Howell Office Manager, in charge of the bookkeeping; and McDermott became the manager in charge of production. In performing its contracts with the government, the plant of the Algonac Manufacturing Company had to be adapted to manufacture the items contracted for. This required production of dies, tools, fixtures, and similar equipment, and preproduction labor costs, such as plant rearrangement, tables, racks, samples, and preliminary tooling to put the job in production. As a preliminary observation, it is to be repeated in this connection that when the contracts were terminated by the government, the ''Algonac Company’s current liabilities we're in the neighborhood of $450,000.00. On December 11, 1953, Algonac filed an application for partial payment, setting up a claim for $447,814.71, of which $247,990.60 was for tools, dies, jigs, etc. After Mr. Marino, a government expert, went out to the offices of the company and made an examination of the books, the government paid $200,000.00 to Algonac in partial payment of the claim. It is not now contended by the government that it did not owe this $200,000.00 to Algonac and it is not even suggested by the government that it does not owe Algonac — as claimed by Mr. Maxwell — several hundred thousand dollars more on this account, at this very time. The fact that the government paid Maxwell — or his company — $200,000.00 on a claim of $447,814.71 (embodying the item now claimed to be fraudulent) is not technically an answer to the government’s claim of Maxwell’s making a false statement as to the expense allocated to each item in the contracts. But we cannot escape wonderment that the government has never since claimed that the $200,000.00 which it paid Maxwell on the contracts was induced by fraud, or, further, that the government does not claim, at the present time, that it does not owe him, or his company, the balance now claimed by Maxwell in an amount of $318,180.57. We come, then, to the crucial question in the case — the claim of the government that Maxwell made a deliberately false statement to the government as to the time allocated by the company to the “dies, tools, jigs and fixtures.” Although, as said above, the government, after termination of the contracts, was sufficiently satisfied with the examination of Algonac’s books to make a partial payment of $200,000.00 on Algonac’s claim filed in December, 1953, in the amount of $447,814.71, and has never questioned that payment, or sought to recover it or any part of it, counsel for the government now contend that the financial statement of February 7, 1954, submitted by Maxwell on behalf of the company, was false in that Maxwell and the Algonac Manufacturing Company “did knowingly and wilfully falsify, conceal, and cover up, by trick, scheme or device, certain material facts; that is to say, they did falsify, conceal and cover up, and did cause to be concealed and covered up, and did aid, abet, counsel and induce the concealment, covering up and falsification of the fact that said statement was not true and correct and in accord with the books and records of the Company, in that Tools, Dies, Jigs and Fixtures are shown as $252,355.72, when in truth and in fact the Company’s books do not show such item.” The emphasis in the above language in count 4 of the indictment is upon the fact that the statement was not true and in accord with the books and records of the company and that the books do not show such item; and the same is to be said of the remaining counts, 5, 6, and 9, where the primary emphasis is on the fact that the statements therein contained were not only fictitious, but not in accord with the books and records of the company. It was admitted by Maxwell repeatedly on the trial that the books did not show that item; and it was explained over and over again by appellants’ witnesses, as well as the government witness, that, in the words of Harold Larsen, the government’s expert accountant, from the Federal Bureau of Investigation, that “as far as the records [of the Algonac Company] are concerned, they were maintained in, I believe, good order. (*), [For] the purposes of the company I think they were all right.” Mr. Larsen further testified: “Q. Do you think for the purposes of the company it was all right not to have any records which would show what the die cost on any particular job was going to be? A. For their purpose, when they had a straight fixed price contract, they took the contract on the assumption that they were going to complete the contract, and it would not make any difference to them, insofar as the costs of the individual dies were concerned, as long as at the conclusion of that contract they were able to show a profit. This is the ultimate objective in the business. “Q. * * * It was not necessary for them to keep the same type of books and the same type of cost accounting that they would have to keep if it were a cost-plus or a 10%, or something of that kind ? A. That is right. ****•*■» “Q. Could you find any place in any of the records of the Algonac Manufacturing Company where they kept any cost accounting, real cost accounting, so that they could tell the cost of the various items and various jobs? A. Insofar as being able to tell a unit cost, or the cost of a particular contract, my answer would have to be no. “Q. Did you ever find in their cost system a breakdown between the cost of dies and fixtures, and a breakdown between production work, production labor? A. Not according to their books, no.” There was no place in the books of the company where the so-called “die items” appeared — although it is admitted by the government that many thousands of dollars were properly attributable to these items. The fact that the tool and die item did not appear on the books of the company until the balance sheet “as of December 31, 1953” is of no significance whatever. Until the contracts were terminated for the convenience of the government, this item was simply charged off as expense, and there would be no need to show such an item, for if the government had permitted the performance of the contracts, it would have paid the company the contract price, with no requirement on the part of the company to show any costs incurred, since the contracts were on “a fixed-price basis.” Everyone in the case knew that this item was not on the books of the company. That fact could have been perceived by a novice bookkeeper in a superficial examination. Why, then, did it become necessary subsequently to show such an item? When the contracts were first defaulted by the government, Maxwell stated— and there is no reason to disbelieve him— that “it struck a panic” in him. He had invested a great deal of capital in the company and at that time its current liabilities amounted to $450,000.00. He, therefore, arranged a meeting with the responsible officials of the government to discuss the defaults; and it is undisputed that, at the meeting, he tried to convince the officials to allow him to finish the contracts; and he was interested in continuing with the contracts with them; he was not, at that time, even primarily interested in having the contracts changed from “default” to “termination for the convenience of the government.” Termination for the convenience of the government would entitle Maxwell’s company to the expenditures made on the contracts, with 10% profit. But completion of the contracts would not limit the profit to 10%, but would entitle the company to the profit on which it had counted when the contracts were executed. The government officials, however, felt that it would be better for the government to terminate. When, at the close of the conference, Maxwell stated that he stood to lose half a million dollars, Mr. Asquith, the Branch Chief of the Detroit Arsenal Department, remarked that it would be cheaper for the government to pay the half million dollars rather than take a million and a quarter dollars’ worth of materials they did not need and pay the freight and storage on it. At the meeting, Mr. Maxwell was informed by the government officials to forward a letter under the default “condition” of the contract, stating why the contracts should not be defaulted. After the meeting, a series of comprehensive letters were exchanged between the government and Algonac, with the result that Algonac finally received a letter on November 25, 1953, to the effect that the government had elected to proceed under the “termination for the convenience of the government” clause in the contract. In a subsequent letter, it was stated by the government that all of the contracts would be lumped into one for procedural purposes. Immediately after receiving the letter of November 25, 1953, in which the government had elected to proceed under the “termination for the convenience of the government” clause, Maxwell met with the officials of the Detroit Ordinance District. At this meeting which Maxwell attended on behalf of the Algonac Company, the government was represented by Mr. Stanley, Contracting Officer; Mr. Stone, of the Legal Department; Mr. Marino, of the Price Analysis Office, and Mr. McMullen. During the conference, Maxwell was given various forms to fill out and told to contact Mr. Stanley in the future if there was any phase of the matter he did not understand; and he was informed that, if there was any dispute or misunderstanding, “Mr. Stanley would be the last word.” Mr. Maxwell testified: “Q. Later on, did you have discussions with Mr. Stanley or anyone else in reference to the fact that you had no itemized die costs on your books? “A. I did. I had a discussion with Mr. Stanley at that time I picked up these forms, * * * and certain questions that were on the back of it, I said, ‘We can’t answer these questions’ and they said, ‘Answer them to the best of your ability. You are not required, or it is not a requirement that these answers be exactly as stated. If you think it, if you think you had certain things that are differentiated, let us know, and put in the answer to the best of your ability and there will be a conference, and this conference at the termination.’ This conference was supposed to be ultimately set, but which ultimately never was kept, they would discuss these differences, and wherever we varied we could make the adjustments; and then there was to be a last termination form, which was really never filed.” One of the printed requests, on the back of the form of the “Settlement Proposal” which the government officials gave to Mr. Maxwell, and which he referred to, in the foregoing testimony, was for information as to “other costs” in “Item 7.” Mr. Maxwell answered by filling the blank for such purpose as follows: “Preproduction labor cost, such as plant rearrangement, tables, racks, samples, preliminary tooling to put jobs in production included in item 7 (which consisted of dies, jigs, fixtures and special tools) or a total of $252,355.72. Engineering, etc. included in Burden of 103.6%.” In the “Termination Inventory Schedule” — a part of the “Settlement Proposal” documents — Maxwell attached a statement with reference to “Die Fixtures, etc.,” stating: “This is an estimated cost on all Tools, etc. as no individual cost on each die was kept and plant rearrangement, preliminary tooling, samples, assembly tables, special trucks and etc. is all in this figure of $252,355.72.” Mr. Stanley, the Assistant Contracting Officer of the Detroit Ordnance District, was called by the government in rebuttal of Mr. Maxwell’s testimony. Instead of rebutting anything that Mr. Maxwell had testified to, Mr. Stanley not only corroborated him, but augmented his testimony, and added considerable weight to everything Mr. Maxwell had said. Mr. Stanley, called as a government witness against Mr. Maxwell, displayed complete frankness, and testified that he had had under his supervision, as Contracting Officer, the eight contracts with the Algonac Manufacturing Company; that he had had numerous conferences with Mr. Maxwell, pertinent to the termination of the contracts, from the first part of October, 1953, until after January, 1954; that the subject matter of some of the conferences was with reference to questionable areas as to how to proceed under termination, and an endeavor on the part of Mr. Maxwell to get some guidance as to how to proceed in such questionable areas; that there were two matters which seemed to be bothering Mr. Maxwell, one item for die shoes, and the other, an item for attorney fees. Although the amounts of these items were not mentioned to Mr. Stanley, they aggregated $35,000.00 each. Mr. Stanley testified: “We followed the pattern of counseling with our contractors when they are involved in a termination in order to instruct them how to proceed. In this instance here, I recall advising Mr. Maxwell that if he felt strongly enough about those costs, and that they were directly allocable to the termination, that it would be satisfactory to put them in. There were no amounts discussed, but merely the items themselves. * * * I think on one occasion Mr. Howell was present when there was a discussion on either the die shoes or the attorney’s fees. I think it was at the time they were discussing the die shoes issue at the time. * * It is my recollection that the [attorney’s fees] item was mentioned in our various meetings and conversations; and in a general manner he was advised that such costs, if they pertained to the termination, were permissible to be submitted in the form of his claim; but no amounts were discussed at that time, but it was just the general treatment of the element. “The Court: He was advised similarly with respect to both the attorney fee item and the die shoes? “A. Yes, your Honor.” On cross-examination, Mr. Stanley further testified: “Q. Mr. Stanley, you stated that Mr. Maxwell went into the elements of the charges for the attorney fees and die shoes, which seemed to be bothering Mr. Maxwell, and you told him that if he felt strongly enough about those costs that he should put them in? A. That is correct, sir. “Q. Now, isn’t it true that anything that goes into a termination proposal is subject to adequate substantiation? A. That is right, sir. “Q. That means that if a settlement proposal is filed with your office that you have means and methods and people to check over every figure that goes into that, is that correct? A. We do, sir. “Q. Now, in the event that there is a dispute between the people who do the checking, a dispute between them and the company, do you have means for negotiations? A. Yes, we do. If I am permitted, I would like to cover that area. In the normal termination proceedings, any costs submitted by a contractor are subjected to a complete audit by Army. Now, in that process certain areas are bound to be discovered that cannot be fully substantiated at the time. Those are set aside for consideration by the contracting officer, and a basis for negotiation on those points. “Q. One other question. Suppose there is a dispute as to the question of dies. Suppose we have a die schedule here where you people accepted some and rejected others. Then, is the contractor given an opportunity of appearing before you? A. Yes, he has recourse to the disputes provision in the contract. “Q. That disputes provision in the contract was never utilized in this particular case? A. No, it never reached that stage. “Q. Was that due to the fact that your office received orders from higher echelon to discontinue negotiations with Maxwell? A. That is right, sir.” From the above, the conclusion is inescapable that Mr. Maxwell discussed the important items in this case relating to the attorney fee of $35,000.00 and the die shoe item of $35,000.00 and was advised that if he felt strongly enough about those costs and they were directly allocable to the termination, that it would be satisfactory to put them in his claim; that anything that goes into a termination proposal is subject to adequate substantiation and a checking over of every figure in the proposal, as well as a complete audit by the Army; and that if there is a dispute as to any questions such as the dies in this case, the contractor may have recourse to the “disputes provision” of the contract. Moreover, the Government Regulations applicable to the settlement of terminated fixed-price contracts provide: “A. S. P. R. 8-400. Scope of Part. This part establishes the guiding principles and policies in connection with that arriving at fair compensation for the settlement of terminated fixed-price contracts. * * * “A. S. P. R. 401. General Standards for Use of Cost Principles. “(1) The primary objective in negotiating a settlement is to agree on an amount to compensate the Contractor fairly and fully for the work done and the preparations made for the terminated portion of the contract, with such allowance for profit thereon as is reasonable under the circumstances. “(2) Fair compensation for termination is inherently a matter of judgment and therefore cannot be measured exactly. In a given case, various methods may be equally appropriate for arriving at fair compensation, and differing amounts, resulting from reasonable variations of method and of sound judgment, may all be regarded as constituting fair compensation. The ability to apply standards of business judgment as distinct from strict accounting principles is at the heart of a negotiated settlement. “(3) Cost and accounting data may provide guides for ascertaining fair compensation but are not rigid measures of it. Other types of data, criteria, or standards may furnish equally reliable guides to fair compensation. Settlement by agreement should be facilitated to the maximum extent feasible. The amount of record keeping, reporting, and accounting, in connection with settlement of termination claims, will be reduced to the minimum compatible with the reasonable protection of the public interest.” In another portion of the Regulations, A. S. P. R. 8.503.1, Subsection C, it is stated: “Where actual standard or average costs are not reasonably available, estimated costs may be used, providing the method of arriving at the estimate is reasonable and has the approval of the Contracting Officer. The Government will not require a Contractor to maintain unduly elaborate cost accounting systems for a fixed price contract merely because they may be terminated.” A reading of the government regulations discloses that in cases of fixed price contracts, it was assumed that the books of a company would be unlikely to reflect the contractor’s costs as to the various items in the contract and that, accordingly, settlements with the contractor would be based primarily upon his estimates, subject to adequate substantiation, and that such “settlements should be facilitated, by agreement, to the maximum extent feasible.” Under this general subject, it is to be noted that during the closing argument in the case, government counsel contended that Mr. Maxwell had made a false statement when he signed the following certification of the Settlement Proposal, as set forth in the government form provided for that purpose: “That he has examined the settlement proposal, and that to the best of his knowledge and belief the proposed settlement and supporting schedules and explanations have been prepared from the books of account and records of the contractor, in accordance with recognized commercial accounting practices. They include only these charges allocable to the terminated portion of this contract. They have been prepared with knowledge that they will or may be used directly or indirectly as the basis of settlement of a claim or claims against the United States or an agency thereof, and the charges as stated are fair and reasonable.” The trial court, in view of the evidence, then intervened: “The Court: Well, suppose he makes that statement, and yet the Government knows, when it is submitted, that that is not the case, they know the books do not show that, and they have had some talk about that. Would that be a false statement? “Mr. Jones: I do not think it would make it any less a false statement. “The Court: Well, suppose I take a statement to the Government, and I certify to certain things, and I hand it in, and I say, ‘Now, here, let me go over this with you. Now, I have got an item down here of so- and-so; it says, the form says here that it is according to the books and records; that is your form; of course, that is your Government form there’- “Mr. Jones: That is right. “The Court: (Continuing) * * And I put it in there ‘But my books do not show that. But I am just claiming that because I think that is right.’ Would that be a false statement? “Mr. Jones: Yes, I think it would.” We do not agree with government counsel, but, rather, in the light of the evidence, we are of the opinion that the proofs did not warrant Mr. Maxwell’s conviction for making a false statement in certifying the Settlement Proposal, under the given circumstances. In the light of our examination of the record of this case on appeal, it is- puzzling to arrive at a conclusion as to how this criminal prosecution arose. It apparently took by surprise not only Mr. Maxwell, but all of the Detroit Ordnance District officials concerned. Prom the evidence, it appeared that they all thought the matter was progressing toward a conference for settlement. The government officials in charge of the terminated contracts had invited Maxwell to sit down with them to negotiate the differences and disputes, after they had received all of the documents with respect to the contracts which Maxwell had filed with them, and after they had told Maxwell why they objected to the Settlement Proposal, stating that “the termination inventory schedule for dies, jigs, fixtures, and so forth is determined unacceptable, due to insufficient information contained thereon to permit this office to properly identify the items, tooling listed for allocability. Your company is hereby directed to provide the necessary manpower to open each die and tool for identification. Upon proper identification it will be necessary to stamp [required] information on each die or tool.” It was understood by all of the government officials in charge of the contracts that the proposals which Maxwell had made for settlement were based upon estimates. But while Maxwell was waiting for a date to be fixed for conference and negotiations looking to a settlement of the claim, “higher echelon” — whoever that is — ordered that no further discussions be carried on with Maxwell concerning the terminated contracts. Neither Mr. Maxwell nor the officials of the government in charge of the contracts know who “higher echelon” is, or why “higher echelon” broke off all negotiations with Mr. Maxwell while he was still claiming $318,180.57 from the government as due on the terminated contracts, and while the government officials in charge of the contracts were exchanging views and carrying on correspondence with Mr. Maxwell in relation to the claim. Someone in authority in the government — undisclosed up to the present time —evidently thought that because the books had not reflected the item of $252,-355.72, and because of a certain so-called “card changing” project (relating to subsequent chang-es in work and time cards), that Mr. Maxwell was trying in some wuy to defraud the government. As a result, a grand jury suddenly subpoenaed the books and records of the company, and, presumably, after examining them carefully under the tutelage of government counsel, it returned, on August 16, 1954, the first indictment against Maxwell and the company, containing four counts. Nothing in this indictment was ever proved. In fact, it was dismissed a year after it was returned. The above mentioned indictment was based on the charge that Mr. Maxwell had fraudulently concealed from the government the fact that the drawings and specifications of the steel tool cabinets which the company was making for the government had been changed without authority of the government; that inferior material was substituted in violation of contract drawings and specifications; that Mr. Maxwell had made a false statement on an invoice for $5,-589.00 for steel tool cabinets, and a further false statement in an invoice for $1,518.00 for other steel tool cabinets. When the case came on for trial, nothing in this indictment could stand up, and, as mentioned, the court, on motion of Maxwell’s counsel, dismissed the entire indictment for failure of the government to make any proof of its charges. Nearly a year after this first indictment, and on July 29, 1955, another indictment, in nine counts, was returned against Mr. Maxwell and the company by a grand jury. Most of the frauds charged were claimed to have been committed by Mr. Maxwell’s falsification of the books of the company, such as fraudulently decreasing the accounts payable by $40,000.00; falsely decreasing the surplus by $8,180.74; falsely showing $2,374.34 as cash on hand when, in fact, the bank account had been overdrawn; falsely increasing the inventories; making false statments as to surplus and deficits; falsely allocating steel to the terminated contracts; misrepresenting the steel as new, when, in fact, it was rusted and unusable; falsely misrepresenting the cost of dies manufactured by a subcontractor; falsely concealing that the items had not been made in accordance with the contract drawings and specifications, but had been made with inferior materials. These were all grave charges of crimes committed against the United States. All of the counts and paragraphs of counts containing these specific charges of criminal conduct were thrown out of the case by the District Court, when it dismissed such counts and sections charging the offenses above outlined in the preceding paragraph. There remained, then, virtually, only two charges against Maxwell: that he had falsely misrepresented, in the financial balance sheet, schedule of accounting information, and settlement proposal, that the cost of tools, dies, jigs, and fixtures aggregated the sum of $252,355.72; and that Mr. Maxwell and the company were guilty of conspiracy in falsifying the termination claim, financial statement, and accounting schedule. The government, in its brief before this court, and on the trial, continued to bear down hard on the argument that the “important false statements” which were made by Mr. Maxwell “relate to three large items, namely: “$252,355.72 for dies, jigs and fixtures “ 35,000.00 for die shoes “ 35,000.00 for legal fees.” The chief contention of fraud as to the so-called “die item” of $252,355.72 was that this item was not on the books of the company at the time the claim was made on the terminated contracts, and that it was subsequently inserted in the company’s books and was entirely fictitious. The government, in its brief on appeal, states, with emphasis: “It is undisputed that no such item was on the books of Algonac!” The government, in its brief, also quotes and emphasizes Howell’s testimony in this regard: “Q. Was there any such item on the books and records of the company at the time you made out this statement? “A. No, sir, there was not.” Finally, the government, in its brief, quotes the following testimony of Mr. Larsen,- Special Agent of the Federal Bureau of Investigation, as conclusive on the question of fraud, as follows: “An examination of the books of the company revealed that the company did not have an asset account for tools, dies, jigs and fixtures. The only account with that caption is a manufacturing expense account; and as of December 31, 1953 the balance in that account was zero. According to that, the company had increased the current assets of tools, dies, jigs and fixtures by the amount of $252,355.72.” All of the foregoing has the superficial and delusive quality of appearing to prove conclusively that Mr. Maxwell was guilty of criminal fraud; but the fact is that it proves nothing of the kind. The item for the dies, jigs, fixtures, die shoes, and legal fees customarily does not appear on the books of a company as assets, expenses, or costs, or under any other heading, in a “fixed price contract.” If the company had been permitted to perform the contracts, no one would ever have thought of such items, as they would have been completely unimportant. But as soon as the contracts were terminated for the convenience of the government, the costs of the dies, jigs, fixtures, the value of the die shoes, and legal expenses suddenly became of the utmost importance. For Algonac, although deprived of the profits it would have realized on the completed contracts, was immediately entitled to recover from the government the costs it incurred in carrying out the contracts up to the period of termination, together with a limited profit of 10%. Consequently, it is obvious that the expenditures for dies, jigs, and fixtures, as well as the value of the die shoes taken by the government and the legal expenses attendant on carrying out the contracts, were properly submitted as costs of the company, which the government was bound to pay, in spite of the fact that they had not theretofore appeared on the books. The circumstance that they had not previously appeared on the books of the company was completely irrelevant; and there could not be the slightest inference drawn that such items were fraudulently set forth in the settlement proposal, because of the fact that they had not theretofore appeared on the company’s books. Even the trial court was for a moment misled on this very question by the claims and arguments of the government. Mr. Howell, called as a government witness, on cross-examination, testified with regard to the “die items.” “Q. Kegardless of whether it was $252,000 or $126,000, they had some value, did they not? A. Yes, sir. “Q. And even though they had a value, you did not carry them on the books of your company, is that it? A. That is correct. “Q. But they were a part of the company’s assets? A. Yes, sir. -» » * * * * “The Court: Well, what became of the cost of the tools and dies ? He said they were made or purchased. Did they go in as an expense item immediately? Or how were they handled on the books and records? -x- #• -x- That was used as a cost, current expense [?] A. Yes, sir. “Q. When you were building these dies, to be used for these Government contracts, they were written off on your books as a manufacturing expense, were they not? A. Yes. * * * -X- * * “Q. But the moment the Government terminated your contract for the convenience of the Government, that became one item that the Government was going to reimburse you for, the cost of those dies? It that correct? A. Yes. “Q. That immediately became an asset of the company, did it not? A. Well, not any more than it had been previously. “Q. Do you mean to say, in connection with terminating these contracts, the Government was going to reimburse Algonac for the cost of these dies * '* * that Algonac had already written off the cost of? A. Yes, sir. * * * “The Court: You mean that Algonac is entitled to recover back the cost of dies they have already charged off? “Mr. Cohen: (Counsel for appellants) No, no. “The Court: All right. “Mr. Cohen: It is just a method of bookkeeping. When you start, if the Court please, and the dies are going to be used for only one job, they are a cost of the job. When you tool up on a job, you tool up for the entire contract. “The Court: All right, proceed. “Mr. Cohen: Later on, those figures, those very figures just went into making up the cost — they don’t get paid double; they just get paid once.” The government was beguiled into leaping to the conclusion that such items included in the settlement proposal in the amount of $252,355.72 were “false, fraudulent and improper in that [they were] not based on the books and accounts of the company, which show no supporting entries, but is an arbitrary unfounded figure.” Here it seems to us the government made its first mistake — in which it still continues — in its insistence that if, in a fixed price contract, items of cost do not appear on the books of the company contracting with the government, that fact is evidence of fraud if, on termination of the contracts for the convenience of the government, such items are inserted in the company’s records and submitted as costs which the company is entitled to recover from the government. In the plethora of repetition and computations extending over approximately 750 pages of the typewritten record, the trial court finally, after the proofs had closed, and during the concluding argument of government counsel, sought, in view of the fact that Mr. Maxwell’s figures were, admittedly, only estimates, to ascertain what the government was actually contending as to Maxwell’s claimed fraud in submitting to the government as costs the $252,355.72 item for dies, jigs, and fixtures; the item of $35,000.00 for legal fees; and the item of $35,000.00 for the value of the die shoes taken over by the government; and the replies of government counsel, and the evidence, are convincing of the absence of culpability on the part of appellants as to the criminal charges made against them in this case. With reference to the legal fees billed to Algonac by Mr. Bixler, an attorney, and the item of the value of the die shoes, the trial judge asked counsel for the government: “The Coui’t: The existence of the items was discussed, weren’t they, but not the amounts? Isn’t that it? * # * “Mr. Jones: The only discussion in the record as to those items with any representative of [Detroit Ordnance District] was the testimony of Mr. Stanley, and the testimony of Mr. Maxwell, that that was discussed. “The Court: Mr. Stanley testified they were discussed. * * * wasn’t it Mr. Stanley who testified that Maxwell told him that he owed Bixler, and that Stanley told him to put it in [the settlement proposal] ? “Mr. Jones: That is correct. Stanley testified that he did discuss with Mr. Maxwell the matter of an item of attorney fees. He said he does not recall that there was any amount specified, and it was a general discussion, and that he told Mr. Maxwell if he felt that strongly about it he should put it in and if he could substantiate it, it would be audited and examined in the records. “The Court: Is there any testimony here that that is not a proper fee? Not a proper charge? “Mr. Jones: Well, there is the testimony of Mr. Maxwell that he certainly did not recognize it as a proper charge. “The Court: But he is being sued; the testimony is that he is being sued for that and a lot more. “Mr. Jones: Yes, the Company is being sued for that and a lot more; and he has a set-off in the case too for that and a lot more. “The Court: Well you did not put in any proof, the Government offered no independent proof as to the validity of that fee, did you? “Mr. Jones: No, we offered no proof as to that. “The Court: What can I assume as to that? Here you have some conversation, at least, between Maxwell and the contracting officer about the existence of the fee. The contracting officer says, ‘Well, if you feel strong enough about it, put it in.’ He does put in a fee. Now he says that he has never recognized the validity of it, but yet he produces a bill and a letter from Bixler claiming the fee. You offer no proof from Bixler or anyone else about that matter. What am I to assume ? In other words, the Government knew about it before it was put in, some fee, maybe not the amount, but existence of the item, at least. “Mr. Jones: There was nothing on the books of the company in any proportion. There is nothing in the claim to show that the services of Mr. Bixler in any way related to the contract. “The Court: You would not put that on the books, would you? If you hire a lawyer, how would you find, it on the books? You would find an account, maybe, and attorney fees. You would not find anything on the books, would you, as to how it is itemized? “Mr. Jones: Well, I think you would find something in the lawyer’s statement referring to what the services were, rather than just a blanket amount for so many hours’ services. “The Court: Am I, in a criminal case, to hold a man guilty because something is not entered on his books in the right place and on the right form? * * * If he honestly believed that somebody might collect that money from him, whether he feels he owes it or not, that is not so much the point, but if he honestly believed somebody might collect that money from him, hasn’t he got a right to put it in as part of his costs? “Mr. Jones: Well, I think if he honestly believed that the services were rendered in connection with the contracts in any way, and if he honestly believed that there is a possibility of the collection of that item, even though he disputes it, I do not argue that he should not put it in, but it should be put on his books. * * * “The Court: Well, I am not so much concerned with the technicality or technicalities of this matter as I am the real facts. Just because it is not on the books in the right place, and so forth, does not concern me near as much as what was the intent of the defendant, and what the real facts are about it. After all, you can’t send a man to jail, or convict him in a criminal case just because he has some sloppy bookkeeping.” The trial court then proceeded to attempt to ascertain what the real claims of the government were with regard to the fraud charged as to the item of the die shoes. Amid all the discussion and testimony about the die shoes, it appears that the government officials didn’t even know what die shoes were. Mr. McDermott took the officials out to the plant and showed them the die shoes, and why they were necessary in using the dies. They were attached to the dies and held the die sections together. The company had them and required them, as part of its equipment to carry out the government contracts. Mr. Maxwell testified that the die shoes furnished to the government came from the company’s plant; that a set of die shoes “like the ones we are looking at now * * * costs, per set, about $130.00”; that “the prices are set by their sizes and weights, and however heavy they must be; * * * and I explained this to the auditors.” The trial court, even at the conclusion of the case, could not understand the general accusation of the government against Mr. Maxwell, with regard to the die shoes, and, accordingly, asked for an explanation of this item from government counsel, during the closing argument: “The Court: Well, we have discussed the fees for the attorney, the attorney fee item. Now I would like to have you discuss for me the die shoe item. “Mr. Jones: Well, the testimony of Mr. Howell was that the die shoe item was an arbitrary amount given to him by Mr. Maxwell, and that they broke it down for this 16-month period into $2,180 and some dollars for each of the months; that there was nothing on the books to substantiate the die shoe items. It was simply an arbitrary figure added in. “The Court: Well, let me go back to this. I am trying to get this straight in my mind. The testimony is quite clear, isn’t it, that the [Detroit Ordnance District] and the Government knew that Mr. Maxwell did not keep his books in condition to show these individual costs, for dies, die shoes, die fixtures, tools, and so forth, isn’t that right?” This was a most important question. It seems a simple enough inquiry, and susceptible of a direct answer. But government counsel seemed to think a direct reply would hurt his case. To the court’s question, counsel replied: “Mr. Jones: Well, you say [Detroit Ordnance District] knew it. You mean at the time? “The Court: Yes, isn’t there considerable testimony here that [Detroit Ordnance District] knew at all times here that Mr. Maxwell’s books and records— “Mr. Jones: Well, I do not think they knew it until after the termination of the contract, your Honor. “The Court: All right. “Mr. Jones: From then on, I will agree that they knew, or at least he represented to them that his books were inadequate as to costs, and so on. “The Court: Yes. Wasn’t that a fact? Isn’t it a fact that the books were not set up to show the cost of these die items? “Mr. Jones: That is right.” This was finally an answer to one of the crucial questions in the case. And immediately the court proceeded to what seemed to be the inexorable conclusion: “The Court: Well, then, how is it a false statement then to say that as to that item ? “Mr. Jones: Well, but in the statement they set it up as though it was an accurate and known amount. * * *” This answer is without foundation, and is contrary to the undisputed testimony. They — the company and Mr. Maxwell — did not set up the die item, “as though it was an accurate and known amount.” The books, as kept, admittedly did not, and could not, show such costs. Mr. Maxwell's testimony is not contradicted that he told the government officials in charge of the terminated contracts that he could not answer the questions “on the back of [the forms],” one of which, under the heading, “other costs,” was for the so-called die item of $252,355.72, and his testimony was uncontradicted when he stated that he was told to answer to the best of his ability and “there will be a conference at the termination.” Moreover, Mr. Maxwell further stated, in the documents filed with the government pertaining to such claim: “This is an estimated cost on all Tools, etc., as no individual cost on each die was kept and plant rearrangement* preliminary tooling, samples, assembly tables, special trucks and etc. is all in this figure of $252,355.72.” In addition, Mr. Stanley, the government official in charge, testified that everything that goes into a settlement proposal is subject to adequate substantiation, and when, after the costs, which are submitted on such proposal, are subjected to a complete audit by the Army, and items cannot be substantiated, they are set aside-for consideration by the Contracting Officer and a conference is arranged for negotiation of these points. Mr. Otto, an expert contract specialist, testified for the government that disputed items in settlement proposals are “inevitably negotiated”; that the statement contained in the settlement proposal declares that it will be used directly or indirectly as a basis of settlement of a claim against the government; and he further testified that the purpose of the proposal was that the contractor furnish to the government on forms provided by it, everything he-claims, and that then the government would check it; that it is understood the-contractor puts in everything he thinks, he is entitled to, and then the government checks the statement, and may say: “You are not entitled to your estimate”; and thereafter the contractor and the-government arrange a meeting for negotiation of their differences. To the foregoing must be added the-final admission of government counsel on the argument of the case in the District Court that: “The books were not set up to show the costs of these die-items.” With regard to the exact claim of' fraud as to the important item of $252,-355.72, the trial court was considerably confused — as would have been anyone trying to understand the contentions advanced with respect to this item; and, accordingly, the court continued in its questions to government counsel during the final argument: “The Court: Yes. Let me ask this: Do I understand correctly now that the Government complained only of these two $35,000 items as being an improper charge to this $252,000 item? “Mr. Jones: Well, we claim that the inclusion of those two items is an improper charge, yes. “The Court: I say, do you contend that the item is improper, that the $252,000 item is otherwise improper, except for the two $35,000 items, that is, the attorney fees and the die shoes? “Mr. Jones: Well, we contend that the $252,000 item is improper for two reasons: One is that the two $35,000 items were included in making up your 103.3 percent burden; and the other is that there is no basis for the hours which are included as die hours. They represented on dies, jigs and fixtures, actually what they have done is taken production time and other time in arriving at that. So that, it is our claim that the $252,000 is without foundation for that reason. “The Court: No, but how much of this $252,000 does the Government contend was an improper charge for the cost of dies? “Mr. Jones: Well, I do not know that I can answer your Honor in dollar amount. “The Court: Well, how can I answer it, if you can’t ? I cannot speculate. There is no doubt about that. I must have the evidence, and I must not only have the evidence, but I must find from the evidence beyond a reasonable doubt. “Mr. Jones: Well, the inclusion of the $35,000 die item increased materially the percentage of burden, by taking out that $35,000 item- “The Court: Is that all you’re claiming there for these two S35,000 items, that they inflated the burden rate? “Mr. Jones: That is one of the results, that they did inflate it. “The Court: Well, is there anything else? I want to know all of what you are claiming on. “Mr. Jones: Well, I claim that that inflated the burden rate, which, of course, affected the $252,000 item; and that they have no relation to or are not based on the books, and there is no showing of any relation to the dies, or the fair value of dies or die shoes which might have been used in the $252,000 figure. ***•»•»* “The Court: Well, what I am trying to find out here now is, insofar as the charges in this case, these remaining counts, whether the Government claims under any of these counts that the $252,000 item claimed was false, was a false claim made for that, for any reason other than these two $35,000 items, that is, one for the attorney fee, and one for the die shoes. “Mr. Jones: Well, as I say, the only other reason is the fact that some $124,000 or $125,000 of that is based on so-called die hours, which could not possibly be used for it. “The Court: Well now, where do you claim anything like that here in your indictment? “Mr. Jones: We do not set it up in that part of the indictment, no. “The Court: Your indictment does not cover that particular item, does it? “Mr. Jones: No, not that specific item. “The Court: And do you claim that these two $35,000 items affect anything except the burden rate and administrative expense ? “Mr. Jones: No.” And now comes a most analytical and perspicacious question, and a conclusive answer: “The Court: Does the indictment anywhere allege wrongdoing on the part of the defendants with respect to this $252,000 item, except as to the two $35,000 items? I want to get that clear in my mind. “Mr. Jones: I do not believe so, your Honor, as I look at it now.” On another occasion, during the course of the argument of government counsel, the court again showed special concern as to the item of $252,355.72. Counsel had declared, in his argument: “Both Mr. Maxwell and Mr. McDermott were well aware that the $252,000 was an estimated item, and that it had no relation to actual costs or actual value or even fair value.” The Court thereupon inquired: “Well, there is no evidence here that it was not a fair value, is there?” Mr. Maxwell had testified that this figure was in line with his original estimates when he put in a bid for the jobs, and that his estimate was based on his past experience. To the above question of the court, counsel answered: “Mr. Jones: Well, the only evidence of value is Mr. Laughlin’s testimony. “The Court: Yes, but he appraised the dies. Aside from his testimony as to the value of the dies, and specifically certain dies brought into Court here, which he valued at considerably less than the amount put on the settlement proposal, that is the only evidence of value, isn’t it, that the value is improper? “Mr. Jones: Yes, that is correct.” From the evidence in the case, Mr. Laughlin’s appraisal of the value of the dies is of no consequence whatever as showing fraud on Mr. Maxwell’s part in setting forth the “die item” of $252,355.-72 as his estimate. The item of $252,-355.72 is referred to throughout the government brief as the claimed cost for dies, jigs, and fixtures. This is misleading — unintentionally so, but very misleading. The item represented much more than dies, jigs, and fixtures. It included a great deal of preproduction costs — engineering work, such as laying out and designing all tools, dies, and fixtures necessary for work; the building of these tools, dies, and fixtures, rearranging the plant, setting up paint assembly lines, the initial costs of trying out the dies, losses resulting from new production methods and building prototypes, plus a figure of 103.6% added to all of the above costs as “burden and overhead.” And this was repeatedly set forth in the documents filed by Mr. Maxwell with the government. Moreover, die costs included work on dies that were discarded because they would not work. Mr. Laughlin’s appraisal could not conceivably include these dies, that probably were disposed of as junk, although the expense in making them would