United States v. Custer Channel Wing Corporation

• Decision Date: 12 November 1965
• Docket Number: Misc. A. No. 399.
• Citation: 247 F. Supp. 481
• Parties: UNITED STATES of America, Plaintiff, v. CUSTER CHANNEL WING CORPORATION and Willard R. Custer, Defendants.
• Court: U.S. District Court — District of Maryland

247 F. Supp. 481

UNITED STATES of America, Plaintiff, v. CUSTER CHANNEL WING CORPORATION and Willard R. Custer, Defendants.

Misc. A. No. 399.

United States District Court D. Maryland.

November 12, 1965.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Thomas J. Kenney, U. S. Atty., Robert W. Kernan, First Asst. U. S. Atty., Baltimore, Md., Clarance E. Beaver, Washington, D. C., for plaintiff.

Vincent L. Gingerich, Takoma Park, Md., and Keith L. Seegmiller, Washington, D. C., for defendants.

WINTER, District Judge.

By final judgment in Civil No. 13500, entered May 25, 1962, defendants, Custer Channel Wing Corporation (hereafter called "Channel Wing") and Willard R. Custer (hereafter called "Custer"), were permanently restrained and enjoined from directly or indirectly making use of any means or instruments of transportation or communication in interstate commerce, or of the mails, to offer to sell or sell the capital stock of Channel Wing unless and until a registration statement had been filed with the Securities and Exchange Commission in regard thereto. Excepted from this main command were any securities exempted by § 4 of the Securities Act of 1933, as amended, 15 U.S.C.A. § 77d, from the necessity of registration. Thus, defendants were enjoined from using the means of interstate commerce and from using the mails to sell stock of Channel Wing as part of a public offering, but were not so prohibited if such sales were part of a private offering.

On April 14, 1965, the United States of America, acting at the instance of the United States Attorney for the District of Maryland and the Securities and Exchange Commission, filed an application to institute contempt proceedings against the defendants. On the basis of allegations showing reasonable cause to believe that the injunction may have been violated, an order to show cause was entered. Defendants responded, alleging that they had sold no securities in violation of the May 25, 1962 injunction, since all sales had been made for investment only, at private sale and under circumstances not involving any public offering. The matter was set down for hearing. Extensive testimony on behalf of plaintiff and on behalf of defendants has been heard and numerous exhibits on behalf of both parties were admitted. The case has been argued and submitted for decision.

Since May 25, 1962 to and including February 16, 1965, 1,579,590 shares of Class B common stock of Channel Wing have been issued and sold. Channel Wing realized a sum in excess of $400,000 as a result thereof. No registration statement was in effect during any portion of this period.

Of total sales, 225,567 shares, in the aggregate, were issued from time to time to "J. Ben Parent Associates," 397,581 shares, in the aggregate, were issued from time to time to "Bruce Wallace Associates," and 163,294 shares, in the aggregate, were issued from time to time to "Ward Brooks Associates." The balance of the stock was issued and sold to various individuals.¹ The issuance of all of these shares was approved in writing by Custer, whose written authorization was directed to The Corporation Trust Company, transfer agent for Channel Wing; the stock was issued with the restrictive legend, "Resale or distribution of this stock is restricted. Details available at the office of the issuer," and with regard to most (but not all) of the stock, an investment letter was signed in substantially the form set forth in the margin² prior to issuance of the stock.

Further explanation of sales to "J. Ben Parent Associates," "Bruce Wallace Associates," and "Ward Brooks Associates" is required. J. Ben Parent, Bruce Wallace and Ward Brooks are individuals interested in the financial success of Channel Wing, and the certification and marketing of the aircraft embodying the principles set forth in a patent issued to Custer. J. Ben Parent has never had any formal association with Channel Wing other than that of an investor who was interested in its financial welfare. The same may be said concerning Ward Brooks. Bruce Wallace initially occupied a similar position, but on March 9, 1964, some months after purchases of Channel Wing stock had been made in the name of Bruce Wallace Associates, he became a director of Channel Wing and thereafter participated actively as a director in the management of its affairs. J. Ben Parent Associates, Bruce Wallace Associates and Ward Brooks Associates, respectively, are not corporations, partnerships or associations; they are simply names, devised probably at the instance of a certain Cecil Custer (now deceased), who was a brother of Custer and one of counsel to Custer and Channel Wing.

These names were used as conduits for the sale of stock to other individuals, viz.: In the names of J. Ben Parent Associates, Bruce Wallace Associates and Ward Brooks Associates bank accounts were opened and maintained under the direction and control of the individual permitting the use of his name. J. Ben Parent, Bruce Wallace and Ward Brooks actively solicited their friends, neighbors and business acquaintances to purchase Channel Wing stock. Bruce Wallace was aided in his solicitation by Wayman Cornelson, who also later became a director of Channel Wing on March 9, 1964, and Samuel Stoner who had been a director since December 26, 1959. Persons desiring to purchase original issuance stock of Channel Wing would subscribe for their stock by indicating the number of shares they desire to purchase and making a check therefor payable to the "Associate" through whom they desired to purchase (usually at the price of 25¢ per share). The Associate would then undertake to subscribe to stock of Channel Wing, sign an investment letter therefor, obtain a group of certificates in the denominations for which individual subscriptions had been accepted, endorse the certificate (which bore the restriction on transfer above recited), in blank, and, except in the case of Ward Brooks Associates, deliver the certificates to the persons who subscribed for the stock. By these means J. Ben Parent Associates obtained 204 stock certificates and delivered them to the individual purchasers thereof; Bruce Wallace Associates obtained 253 stock certificates and delivered them to the purchasers thereof; and Ward Brooks Associates obtained 21 stock certificates but, although they were endorsed in blank, did not deliver them to the purchasers thereof. J. Ben Parent resides in Lake Park, Florida; Bruce Wallace resides in Enid, Oklahoma; and Ward Brooks resides in Garberville, California. The mails and instruments of interstate transportation and communication were freely used in effecting the issuance of stock to the individuals named in footnote 1, the "Associates" and persons subscribing through the "Associates" as described above.

Based upon the facts stated and further facts to be found in connection with various points considered in this opinion, plaintiff contends that Channel Wing and Custer have wilfully, in criminal contempt of this Court, disobeyed and defied the injunction of May 25, 1962. Plaintiff prays that they be adjudged in criminal contempt of this Court and punished in such manner as the Court may deem proper. The basic questions for determination are whether the sales of stock under the circumstances outlined are in violation of the injunction and, if so, whether defendants, or either of them, wilfully participated in or carried out activities in connection therewith such that they should be adjudged in criminal contempt of court.

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The first question to be considered is whether the injunction has been violated, i. e., whether the sale of stock to which reference has been made was a public offering for which § 5 of the Securities Act of 1933 required registration or whether it was a private offering exempt from a registration under § 4. The proof shows that except for a Regulation A filing, long since revoked, none of Channel Wing's stock has been registered with the Securities and Exchange Commission, either before or after entry of the May 25, 1962 injunction.

The legal answer to what is and what is not a private offering is found in Securities & Exchange Comm'n v. Ralston Purina Co., 346 U.S. 119, 73 S.Ct. 981, 97 L. Ed. 1494 (1953). In that case the issuer made treasury stock available for purchase by certain of its key employees. Among those subscribing were employees with the duties of artist, bake shop foreman, chow loading foreman, clerical assistant, copywriter, electrician, stock clerk, mill office clerk, order credit trainee, production trainee, stenographer and veterinarian. The mails and other instrumentalities of interstate commerce were employed to effect the sales. The issuer argued that the transaction was a private offering, exempt from registration, because the offerees were limited to key employees.

After pointing out that the Securities Act nowhere defines the scope of the private offering exemption contained in § 4, and that the legislative history of the statute sheds little light on what was meant, the Court adopted as the test of what may be a private offering, "* * * the need of the offerees for the protections afforded by registration." Id. at 127, 73 S.Ct. at 985. The Court indicated that where it appears that an offering is limited to those persons who are able to fend for themselves, i. e. have access to the type of information that would be made available by a registration statement, the offering is exempt, as a private offering. But except for this limited circumstance, the offering is public and registration required. In arriving at this result, the Court specifically rejected as the sole test of what is a public offering the number of persons to whom stock was offered, the Court saying, "* * * nothing prevents the commission, in enforcing the statute, from using some kind of numerical test in deciding when to investigate particular exemption claims. But there is no warrant for...