Securities & Exchange Com'n v. Fifth Ave. Coach Lines, Inc.

• Decision Date: 26 July 1968
• Docket Number: No. 67 Civ. 4182.,67 Civ. 4182.
• Citation: 289 F. Supp. 3
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. FIFTH AVENUE COACH LINES, INC., Victor Muscat, Edward Krock, Thomas A. Bolan, Roy M. Cohn, Defendants.
• Court: U.S. District Court — Southern District of New York

289 F. Supp. 3

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. FIFTH AVENUE COACH LINES, INC., Victor Muscat, Edward Krock, Thomas A. Bolan, Roy M. Cohn, Defendants.

No. 67 Civ. 4182.

United States District Court S. D. New York.

July 26, 1968.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Frank E. Kennamer, Jr., Asst. General Counsel, Meyer Eisenberg, Asst. Gen. Counsel, David M. Butowsky, Asst. Chief Enforcement Atty., Theodore Sonde, Attorney, Washington, D. C., for plaintiff; Philip A. Loomis, Jr., Gen. Counsel, Walter P. North, Associate Gen. Counsel, of counsel.

Millard & Greene, New York City, for defendants Fifth Avenue Coach Lines, Inc. and Bolan; Myron J. Greene, Michael E. Mooney, Howard R. Udell, New York City, of counsel.

Goldstein, Judd & Gurfein, New York City, for defendant Muscat; Murray I. Gurfein, Albert D. Jorden, William M. Guttman, New York City, of counsel.

Garrity, Connolly, Lewis & Grimes, William R. Grimes, New York City, James Lawrence Garrity, New York City, of counsel; and William J. Kenney, Washington, D. C., for defendant Krock; Pincus, Bernstein & Seeman, New York City, for defendant Cohn; Lawson F. Bernstein, New York City, of counsel.

OPINION

McLEAN, District Judge.

This action, begun on October 27, 1967, is brought by the Securities and Exchange Commission pursuant to Section 20(b) of the Securities Act of 1933 (15 U.S.C. § 77t(b)), Section 21(e) of the Securities Exchange Act of 1934 (15 U.S.C. § 78u(e)) and Section 42(e) of the Investment Company Act of 1940 (15 U.S.C. § 80a-41(e)). The complaint seeks an injunction and the appointment of a receiver for defendant Fifth Avenue Coach Lines, Inc. (Fifth). When the action was begun, the complaint named as defendants Fifth and three present or former officers and directors of Fifth, Victor Muscat, Edward Krock and Thomas A. Bolan. In February 1968 the complaint was amended to add as defendant Roy M. Cohn, a lawyer who is "of counsel" to the law firm of Saxe, Bacon & Bolan, of which Bolan is a member. That firm is general counsel for Fifth.

Plaintiff moved for a preliminary injunction. Pursuant to Rule 65(a) (2), the court advanced the trial of the action and consolidated the hearing on the motion with the trial itself. The combined hearing and trial was originally set for January 8, 1968, but adjournment proved to be necessary because of the magnitude of the task of preparation. The trial finally got under way on March 25, 1968 and was concluded on May 6, 1968.

Although no preliminary injunction has been issued, the court has maintained some control over the affairs of Fifth pending the determination of this action on the merits. At the outset of the litigation, the parties stipulated in substance that defendants would not enter into any significant transaction without first offering the Securities and Exchange Commission an opportunity to object. In addition, the court required that the net proceeds in the sum of $1,883,482.44 of the sale by Fifth in February 1968 of 113,014 shares of the common stock of Austin, Nichols & Co. Inc. be deposited in a bank account subject to withdrawal only upon order of the court. Since then the court has approved requests from time to time for withdrawal of sums for the purpose of paying tort claims and judgments against Fifth and the payment of pensions to former employees of Fifth.¹

The complaint contains eleven counts. Ten of them are based on the premise that since October 1966 Fifth has been and still is an investment company within the meaning of the Investment Company Act and that it should have registered with the Commission under that Act but failed to do so. The complaint charges that since October 1966 Fifth, in one way or another, has violated five different sections of the Investment Company Act, Sections 7(a), 17(a), (d), 21(b), 36 and 37, and that the individual defendants have caused it to do so. At least six separate transactions are complained of. They are claimed to have violated specific sections of the Act. Other transactions are referred to here and there in the complaint and are said to have been improper. In addition, count 2 charges in general terms that since October 1966 Fifth has bought and sold securities and engaged in interstate commerce in violation of section 7 of the Act, and counts 10 and 11 repeat all previous allegations of the complaint and charge defendants with gross abuse of trust and with conversion, in violation of sections 36 and 37, respectively, of the Act.

Count 1 differs from all other counts in that it is based, not on the Investment Company Act, but on Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a)) and Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)), and Rule 10b-5 thereunder. In brief, this count charges defendants with fraud in the purchase and sale of securities and with making untrue statements of material fact and omitting to state material facts in connection with the purchase and sale of securities. The transactions complained of are the same as those which form the basis of the Investment Company Act counts, plus one additional transaction.

The complaint is lengthy, the testimony is extensive and repetitious, and the exhibits are numerous. Nevertheless, despite the complexity of the case, many of the basic facts are undisputed and indeed, a good many of them are stipulated. The controversy lies mainly in the inferences to be drawn from the undisputed facts and in the legal effect of what occurred. Defendants maintain that Fifth is not and never has been an investment company and hence, although concededly it has never registered as such, it was not obligated to do so. They assert, therefore, that the counts which rest upon violations of the Investment Company Act must necessarily fail. As to count 1, defendants maintain that the various transactions referred to do not constitute violations of the 1933 and 1934 Acts for the reason, among others, that these transactions do not involve the purchase or sale of "securities" within the meaning of those statutes.

Before taking up the specific transactions and the legal questions to which they give rise, a summary of background facts, most of which are uncontroverted, is essential.

Fifth and Its Subsidiaries

Fifth is a New York corporation. It has only one class of stock, common stock of a par value of $10, of which 950,000 shares are authorized and 882,575 shares are issued and outstanding. It has some 2,300 stockholders. Its stock was traded on the New York Stock Exchange until January 1966 when the Stock Exchange suspended trading in the stock. Since then, it has been traded on the over-the-counter market.

Surface Transit, Inc. (Surface) is a wholly-owned subsidiary of Fifth. Westchester Street Transportation Company, Inc. (Westchester) is a wholly-owned subsidiary of Surface. VIP Metered Transportation Corporation (VIP) is a wholly-owned subsidiary of Fifth.

Until March 1962 Fifth and Surface each operated bus lines in New York City. Westchester operated bus lines in Westchester County. VIP, a company which provides individual limousine service, was not then in existence.

The Condemnation Proceeding

In March 1962 the City of New York acquired by condemnation all the bus lines of Fifth and Surface. Those of Westchester, being beyond the city limits, were not condemned. They are still owned and operated by Westchester.

Fifth and Surface sought compensation in the condemnation proceeding for the properties which had been taken from them. That litigation has continued ever since and is still not finished. It raises questions which have a bearing upon the issue presented in this case as to whether Fifth is an investment company.

Fifth claimed compensation in the sum of $48,000,000 and Surface claimed $44,500,000. On August 14, 1964, the Supreme Court, New York County, awarded Fifth $16,317,297 and Surface $13,915,197, a total of $30,232,494. The court allowed interest on the awards at 4 per cent. In re Fifth Avenue Coach Lines, Inc., 46 Misc.2d 14, 259 N.Y.S.2d 313 (Sup.Ct.N.Y.Co., Hecht, J., 1964)

On July 22, 1965, the Appellate Division, one justice dissenting, affirmed the awards. In re Fifth Avenue Coach Lines, Inc., 23 App.Div.2d 463, 261 N.Y. S.2d 784 (1st Dept. 1965)

On July 7, 1966, the Court of Appeals, three judges dissenting, affirmed the awards but remanded the case to Special Term "for a determination of the value of the going concern assets as an addition to the amount heretofore awarded." Matter of City of New York (5th Ave. Coach Lines), 18 N.Y.2d 212, 273 N.Y.S. 2d 52, 219 N.E.2d 410 (1966)

The court held that the amount already awarded was "sufficient only as compensation for the value of the tangible property taken" (18 N.Y.2d at 218, 273 N.Y.S.2d at 53, 219 N.E.2d at 411), and that the trial court had "improperly rejected the evidence proffered by the claimants as to the value of intangible going concern assets" (18 N.Y.2d at 220, 273 N.Y.S.2d at 55, 219 N.E.2d at 412). As examples of such assets, the court referred to "coach routes, operating schedules, operating records and systems of procedures and trained personnel" (18 N.Y.2d at 221, 273 N.Y.S.2d at 56, 219 N.E.2d at 413). The court held that these assets, as well as franchises, were "all going concern assets for which claimants must be duly compensated" (18 N.Y.2d at 224, 273 N.Y.S.2d at 58, 219 N.E.2d at 415).

After this decision the City took the position that no separate judgment could be entered on the award for tangibles and hence that this award could not be paid until the conclusion of further proceedings with respect to an award for intangibles. Thereupon, Fifth moved in the Court of Appeals to amend the remittitur so as to permit the entry of a separate judgment on the award for tangibles. The court, again with three judges dissenting, granted the motion on September 29, 1966. In the Matter of the...