Securities & Exch. Com'n v. International Chem. Dev. Corp.
| Decision Date | 06 November 1972 |
| Docket Number | No. 72-1180 to 72-1183.,72-1180 to 72-1183. |
| Citation | 469 F.2d 20 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. INTERNATIONAL CHEMICAL DEVELOPMENT CORPORATION et al., Defendants, and Golden Rule Associates et al., Defendants-Appellants. |
| Court | U.S. Court of Appeals — Tenth Circuit |
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Richard E. Nathan, Asst. Gen. Counsel, S. E. C. (G. Bradford Cook, Gen. Counsel, David Ferber, Sol., and James J. Sexton, Atty., S. E. C., on the brief), for plaintiff-appellee.
M. Byron Fisher, of Fabian & Clendenin, Salt Lake City, Utah, for appellant John D. Smith.
Dean E. Conder, of Nielsen, Conder, Hansen & Henriod, Salt Lake City, Utah, for appellants Golden Rule Associates, Richard T. Cardall, Ray L. Pruett and Joseph A. Holman.
Frank J. Allen, Salt Lake City, Utah, for appellants Frank Lloyd Parks and John A. Syphers.
Before LEWIS, Chief Judge, and McWILLIAMS and DOYLE, Circuit Judges.
The defendants-appellants were enjoined in the district court pursuant to various sections of the Securities Act of 1933 and the Securities Exchange Act of 1934. Specifically, they were enjoined from further violations of the registration requirements, the antifraud provisions and reporting requirements provided for in these acts.1
The case was tried on its merits to the court, and following a three day presentation of evidence an injunction was entered enjoining the defendants from continued violations of the mentioned provisions.
Originally, there were 17 defendants. One of these was not served; two failed to answer and were defaulted; a consent decree was entered against one; and one agreed to an order based upon its stipulation. The defendants, International Chemical Development Corporation, Intermountain Chemical, Inc., MFTD Corporation, William L. Allen and James G. Macey, although enjoined by the court from violating one or more sections of the act, did not prosecute appeals. The defendants-appellants include Golden Rule Associates, Richard T. Cardall, Joseph A. Holman, Ray L. Pruett and Frank Lloyd Parks, all of whom were enjoined from continued violations of the registration, antifraud and reporting provisions. Appellant Syphers was enjoined from violating the registration and antifraud provisions; Smith was enjoined from further violations of the registration provision.
The SEC's theory of the case was that the defendants were engaged in a fraudulent stock promotion scheme which involved the use of a corporate shell which had no substantial assets, but which was given, according to the SEC, the appearance of substance so that stock which the corporation issued would have a market. It is claimed that the individuals and the corporation sold the stock, but failed to carry out the avowed objective of the corporation which was to develop the minerals in the Great Salt Lake.
There are numerous satellite corporations, none of which had any substance and which undoubtedly were formed with particular objects and purposes; it is not entirely clear how or the extent that they fit into the alleged fraudulent scheme.2 Nevertheless, some mention must be made as to the activities of these satellites because their presence did contribute at least in some degree to the acts complained of by the SEC in seeking injunctive relief.
The central corporation in the controversy is International Chemical Development Corporation. It is the stock of this company which was marketed and which was the basis for the filing of the complaint and the relief granted. Its history shows that throughout its relatively long life it has been a shell organization which from time to time has merged with other similar organizations and has been otherwise inactive except for changes in its name. The International Chemical Development Corporation was originally formed in September 1954 and was called American Duchess Uranium and Oil Company. It was formed under the laws of the State of Nevada. It distributed 281,635 shares of its stock to the public under a Regulation A exemption. It appears to have been inactive until 1958, at which time the name was changed to American Duchess Oil and Metals Company.
In 1964, this company issued eight million shares. Later these were reduced by means of a reverse split to 400,000 shares, so as to obtain a controlling interest in Great Western Motor Clubs; 100,000 shares were given to the defendant Holman for this interest.
In the year 1964, American Duchess merged with Horizen Products, Inc., exchanging 1,500,000 shares for 1,000 shares of Horizen. In connection with this, the defendant Cardall received 121,500 shares and Syphers, who was head of the corporate transfer agent for ICDC, received 120,000 shares.
The next year American Duchess' name was changed to International Land Development Corporation and later (in 1968) it became International Chemical Development Corporation. On the occasion of the change of name there were 2,181,635 shares of stock outstanding, but at no time was the stock of this company registered. There was a registration Regulation A offering, as previously noted, in connection with American Duchess Uranium and Oil Company, and the defendants at times relied on this in an effort to show some semblance of compliance with the registration requirements of the Act.
The events which the SEC regarded as significant which led up to the launching of International Chemical Development Corporation included the following:
Early in 1968, the defendants acquired stock of the International Land Development Corporation which was the immediate predecessor of International Chemical Development Corporation.
In February of 1968, defendant Allen purchased 60,000 shares in International Land Development Corporation from Syphers.
The defendant Smith purchased options on 200,000 shares and Allen purchased options on a total of 185,000 shares held by other shareholders.
Pruett purchased 50,000 shares and Cardall acquired 700,000 shares on behalf of a non-profit company which he had formed called Golden Rule Associates, one of the defendants.
One other corporation which requires mention is MFTD Corp. This was formed in the spring of 1968 by defendants Holman, Smith, Syphers, Cardall and Allen. Its purpose was to provide factoring service for the accounts receivable of doctors and dentists. It turned out to serve as an investment vehicle and as a depository for International Chemical Development Corporation stock. In February 1968, Allen, who was an officer of MFTD, purchased 60,000 shares on behalf of MFTD and Smith purchased options on 200,000 shares also on behalf of MFTD. Allen purchased a total of 185,000 shares and Pruett 50,000 shares. At about the same time, defendant Cardall acquired on behalf of the Golden Rule foundation some 700,000 shares of what later became Chemical company stock (then called Interland). These shares were all purchased prior to the activation of the chemical company and the acquisitions were for a few cents per share.
This illegal enterprise had its modern beginning in the summer of 1968, at which time a meeting was held to launch and activate the chemical company. Cardall, Allen, Macey, Holman, Pruett and Syphers had developed a plan to extract minerals from the Great Salt Lake. Holman, Pruett and Allen called a special meeting of Interland—the chemical company—at Elko, Nevada on October 8, 1968. At this shareholders meeting Allen was chairman and Holman was secretary. Also present were Cardall, Pruett and Macey. Macey, the owner of a solar evaporative process for extraction of lithium and potassium from the waters of the Great Salt Lake, spoke to the meeting explaining that he needed financing to construct evaporation ponds. He offered Interland an exclusive license to operate the properties and receive 90 percent of the proceeds. Interland would in turn issue a transfer of 2,500,001 shares to Intermountain Chemical, Inc. (ICI) which had been incorporated in April 1968 by Macey, Holman and Pruett to develop the evaporative process. The shareholders accepted this offer and at that meeting the name of Interland was changed to International Chemical Development Corporation. Defendant Macey, who was already president of ICI, was elected president, and Pruett was elected secretary-treasurer, an office which he held also in ICI. As of the time of this meeting Interland or International Chemical Development Corporation was clearly a shell. It had no corporate records and had no assets. The previously merged corporations had all gone out of business and there had been no filings with the SEC.
The next step was to develop a public market. In this connection, a September 1968 issue of Reader's Digest which had dealt with the mineral potentialities of the Great Salt Lake was widely used.
The defendant Parks, who resided in New York City, was mainly responsible for selling the largest block of stock, 500,000 shares. In November 1968, he agreed to purchase this stock from Golden Rule for a price of $650,000, and following this he actually sold his shares and paid the purchase price as sales were made. The shares were issued in connection with the individual sales. Parks had arranged for Macey to talk to broker dealers and investors, and through these efforts an over-the-counter market was created in various parts of the country.
In addition to the sale of the large block of the stock through defendant Parks, other defendants also made sales. Allen sold 50,000 shares through the defendant Cannon to a California broker dealer. In addition, there were pledges for the purpose of obtaining bank loans. The defendants Allen, Syphers, Holman and Smith exercised options to acquire 200,000 shares of ICDC stock on behalf of MFTD. The bulk of these...
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