Securities & Exch. Com'n v. North American Research & D. Corp.
| Decision Date | 08 February 1968 |
| Docket Number | No. 67 Civ. 3724.,67 Civ. 3724. |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. NORTH AMERICAN RESEARCH AND DEVELOPMENT CORP. et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
Mahlon M. Frankhauser, Regional Administrator, Charles Snow, Assistant Regional Administrator, John J. Phelan, III, New York City, for plaintiff Securities and Exchange Commission New York Regional Office.
Glass & Greenberg, New York City, for North American Research and Development Corp., Edward White, Lewis Dillman and K. Ralph Bowman.
Arnold & Porter, Washington, D. C., for North American Research and Development Corp.
Saul Horing, New York City, for Donald Glenn, Norma C. Bowman, Ramon N. Bowman, Albert W. Conrad, Richard E. Whitney, Frank M. Whitney, Abby Whitney and Robert A. Johnson.
Robert W. Taylor, New York City, for Wellington Hunter, d/b/a Wellington Hunter Associates.
Feiner & Klaris, New York City, for Dunhill Securities Corp. and Guido Volante.
Gottlieb & Schiff, Esqs., New York City, and Donald Van Koughnet, Silver Springs, Md. for Lars Hagglof & Co., Ltd., Sidney Rosen and Redroof Trading Co.
Henry Malon, New York City, for Alfred Blumberg.
Colton & Pinkam, New York City, for Martin Orenzoff.
Harry Pollak, New York City, for Griffith C. Lindquist, d/b/a Lindquist Securities Co.
Acting pursuant to § 20(b) of the Securities Act of 1933 (15 U.S.C.A. § 77t (b)) and § 21(e) of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78u (e)), the Securities and Exchange Commission ("SEC" herein) seeks to enjoin North American Research and Development Corporation ("North American" herein) and 42 other defendants from committing further violations of the registration and anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, and the rules and regulations thereunder. However, as a result of default judgments, consents to the entry of preliminary injunctions, and failure to serve some of the named defendants, this decision on the SEC's motion for a preliminary injunction is confined to the remaining 21 defendants.1
On this motion, hearings were held over a period of seven days to resolve issues raised by the parties' affidavits, at which oral testimony of 24 witnesses was received, and this decision is based not only upon affidavit proof submitted by the parties but, where facts were disputed, upon the Court's observation and careful appraisal of the witnesses who testified with respect to disputed issues.
The central figure in the financial saga leading to the SEC's application is the defendant Edward White, who was the principal originator of, and driving force behind, a scheme to acquire control of the issued stock of an inactive publicly-held corporation, North American (formerly named Utah Fortuna Gold Company) and, with the defendants Sam Freeman and Frank M. Naft, to promote distribution of the balance of the issued stock with a view to introducing it onto the over-the-counter market in the United States, creating a demand for it, instigating the trading of it, and running up its market price, all for the benefit of himself and a group of friends engaged in distributing it. A 52-year old, self-styled promoter and securities trader who has in recent years dealt principally in Canadian mining securities, White, at the times here involved, maintained residences in New York and Toronto, where he also operated an office and had eight brokerage accounts in Canada, and three accounts in the United States. His success in earlier promotions had given him a substantial following among friends in both countries. Prior to his becoming heavily involved in the mining business, both as an officer of mining corporations and a person engaged in developing exploration of mining claims, White had been associated as a registered representative with Hilton Securities Corporation, a New York broker-dealer.
In March, 1967, White let it be known among some of his friends that he wanted to acquire a corporate "shell", i. e., a publicly-held, inactive corporation having neither assets nor liabilities. His immediate plan was to place some Canadian mining claims in the shell and then promote market interest in the stock of the corporation itself. Although he testified that he desired control of a publicly-held corporation rather than of a closed or privately-held one because he wished to develop liquidity for his estate and to avoid underwriting expenses, the Court, on the basis of all of the proof before it, including testimony of various other witnesses conflicting with that given by White, finds that from the outset his purpose and that of his immediate friends was to acquire and distribute the balance of the shares of the shell (other than those directly acquired by him), to promote trading in the stock, and to increase the over-the-counter price of such shares on the basis of his prospective development of the company, with a view to their making an interim profit on the purchase and resale of such shares and White's eventually being in a position to realize a profit on his acquisition.2
On April 27, 1967 White acquired control of such a worthless corporate shell, a Utah company called Utah Fortuna Gold Company, the name of which was later changed by him to North American. Although no market for its stock had existed for years, within three months, as the result of a carefully laid and executed plan of the White-Freeman-Naft trio, approximately 200,000 shares of its stock was distributed via Canadian accounts to broker-dealers and the public in the United States, trading of the stock was initiated on the over-the-counter market, and the price of the stock, as a result of the group's skillful promotion, was run up during the same short period from ½ cent per share over-the-counter to more than $6.00 per share, or more than 1200%, even though the corporation did not carry on any commercial operations during the period and its assets were of doubtful value. On July 20, 1967, the bubble burst when trading in the shares was suspended by the SEC. The underlying facts found by the Court are as follows:
Following White's advising his friends in March, 1967, of his interest in acquiring a publicly-owned shell, Sam Freeman, a Toronto stock trader,3 who had been a close friend of White for 15 or 20 years, located such a company through an acquaintance, the defendant K. Ralph Bowman, of Salt Lake City, Utah. Bowman had been engaged in the securities business with a family broker-dealer firm, Ned J. Bowman Corporation, and later with the broker-dealer firm of Jonathan & Co., Inc., and has repeatedly been enjoined from violating §§ 5 and 17 of the Securities Act of 1933, the last injunction having been entered by the United States District Court for the District of Utah on January 26, 1965, in connection with Bowman's sale of stock of Thermal Dynamics Corp.4 ("Thermal" herein), a company that had been engaged in 1964 in the construction and development of a pilot plant in Helper, Utah, for testing of a process for manufacture of coke that might be burned without air pollution. Thermal was later to play a major role in the activities of White and his group in promoting the distribution and trading of stock of North America (Utah Fortuna), the corporate shell acquired through Bowman.
Upon receiving Freeman's inquiry, Bowman, through a Salt Lake City friend and associate in the Thermal venture, one Richard Whitney5 ("Whitney" herein) and Whitney's friend Donald Glenn, also of Salt Lake City, was put in touch with one Robert A. Johnson of Salt Lake City, secretary-treasurer, director and transfer agent of an inactive, publicly-owned Utah corporation named Utah Fortuna Gold Company (later named North American). Utah Fortuna had been incorporated in January 1933. During 1964 the assets of the corporation were sold and proceeds distributed, leaving it a worthless, inactive, empty shell, with neither assets nor liabilities. In March, 1967, when Whitney met Johnson, Utah Fortuna had approximately 50 stockholders (Tr. 1082), largest of which was South Utah Mines ("South Utah" herein), another Utah corporation, the owner of 1.2 million of its 1.8 million outstanding shares. South Utah and Utah Fortuna were under the common control of Mrs. Mabel McGarry (who owned between 70% and 80% of the South Utah stock). Mrs. McGarry, Johnson and one Florence Williams were the officers and directors of both companies, and Johnson was the transfer agent for both.
Upon learning from Whitney of Freeman's interest (on behalf of his client White) in acquiring control of the shell and his willingness to pay $10,000 for it, Johnson advised that a sale of control could be arranged. Thereupon he informed Mrs. McGarry, president of South Utah, of the possibility of selling control and obtained from her authority to sell the 1.2 million Utah Fortuna shares owned by South Utah, or 66% of Utah Fortuna's outstanding stock at a price between $500 and $1,000.
Armed with authority to sell control of Utah Fortuna (North American), Johnson notified Whitney that he would provide him with an option for the 1.2 million Utah Fortuna (North American) shares, which represented control. It was agreed that 1 million shares, representing control, would be offered by Whitney to Freeman's client (White) for $10,000, and that if the sale was consummated, the proceeds would be distributed as follows: after Mrs. McGarry and South Utah were paid $1,000, the remainder of the fund, comprising $9,000 plus 200,000 shares, was to be divided:
Bowman $3,875.00
Whitney 2,501.25
Johnson 1,501.25
Glenn 1,501.25 plus 100,000 shares
Frank Whitney, 1,501.25 plus 100,000 shares...To continue reading
Request your trial
-
Pinter v. Dahl
...as individuals, and the need for a healthy economy constantly purged by full disclosure. See, e.g., SEC v. North American Research & Development Corp., 280 F.Supp. 106, 121 (SDNY 1968) (purpose of § 5 is to protect public investors through disclosure), aff'd in part and vacated in part on o......
-
Landy v. Federal Deposit Insurance Corporation
...covered under the rule. Crane Company v. Westinghouse Air Brake Company, 419 F.2d 787 (2d Cir. 1969); SEC v. North American Research & Development Corp., 280 F.Supp. 106 (S.D.N.Y.1968). This follows easily from the language of the rule and from its purpose to protect investors. Annot., 3 AL......
-
Securities and Exchange Com'n v. Texas Gulf Sulphur Co.
...by the District Court has been followed in the many cases that have considered the point. See SEC v. North American Research & Development Corp., 280 F.Supp. 106 (S.D.N.Y. Feb. 8, 1968); Puharich v. Borders Electronics Co., Inc., 1968 Fed.Sec.L.Rep. ¶ 92,141 (S.D.N.Y. Jan. 24, 1968); Howard......
-
In re Laser Arms Corp. Securities Litigation
...472, 475 (3d Cir.1973); Morse v. Peat, Marwick, Mitchell & Co., 445 F.Supp. 619, 623 (S.D.N.Y.1977); SEC v. North America Research & Dev. Corp., 280 F.Supp. 106, 125 (S.D.N.Y.1968), aff'd in part, vacated in part, 424 F.2d 63 (2d The common stock of Laser Arms was listed in the pink sheets ......