SECURITIES & EXCH. COM'N v. National Bankers Life Ins. Co.

• Decision Date: 11 March 1971
• Docket Number: Civ. A. 3-4432-B.
• Citation: 324 F. Supp. 189
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. NATIONAL BANKERS LIFE INSURANCE CO. et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

324 F. Supp. 189

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. NATIONAL BANKERS LIFE INSURANCE CO. et al., Defendants.

Civ. A. 3-4432-B.

United States District Court, N. D. Texas, Dallas Division.

March 3, 1971.

As Amended March 11, 1971.

COPYRIGHT MATERIAL OMITTED

Gerald E. Boltz, Robert F. Watson and Ernest Steve Watson, Ft. Worth, Tex., for plaintiff.

Morton Susman, Houston, Tex., for defendants.

HUGHES, District Judge.

Prior to the start of the hearing on the request for a preliminary injunction, the court established ground rules, some of which included the following:

(1) Plaintiff's affidavits, transcripts of testimony, exhibits thereto, and other supporting documents filed as exhibits to plaintiff's motion for preliminary injunction would be received by the court in support of plaintiff's motion for preliminary injunction.

(2) Affidavits, exhibits thereto and other supporting documents filed by the defendants in opposition to plaintiff's motion for preliminary injunction would be received by the court in response to plaintiff's motion for preliminary injunction.

(3) The court would permit oral testimony subject to reasonable limitations at the hearing.

Though not included as such in the formal order of proceedings, the court made it clear to counsel for the plaintiff that in those instances where defendants introduced affidavits challenging elements of the plaintiff's case, absent sufficient additional facts brought to light during the actual hearing, the court would not grant the requested relief solely on the basis of affidavits and exhibits already on file.

Defendants Carr and Ling filed controverting affidavits prior to the start of the hearing and defendant McCain filed an affidavit during the hearing.

Plaintiff offered no witnesses of its own though it did cross examine defendants' witnesses and did make available several of its investigators who were then called as witnesses by defendants.

Prior to and during the hearing a number of defendants entered into consent decrees as to the preliminary injunction. By the conclusion of the hearing only seven of the original 28 defendants had not entered consent decrees. Three entered consent decrees as to the permanent injunction, eighteen as to the preliminary injunction.

Findings of Fact

1. From about November 1967 until about July 1970, defendant John Osorio was president, a director and a member of the executive and finance committees of National Bankers Life Insurance Company, a trustee of National Bankers Life Employees Retirement Plan, a director of South Atlantic Company and continuing to the date hereof a controlling shareholder of South Atlantic Company and Nashwood Corporation. Defendant Osorio was likewise from about November 1967 until about July 1970 a controlling shareholder of City Bank & Trust Company and from about April 1969 until about July 1970 a controlling shareholder of Dallas Bank & Trust Company.

2. Defendant Waggoner Carr was, from about March 1969 until about July 1970, a controlling shareholder of Dallas Bank & Trust Company and City Bank & Trust Company and was from about March 1969 until late June 1970 a controlling shareholder of South Atlantic Company. He was a controlling person of Nashwood Corporation until the fall of 1970. Defendant Carr was from about April 1969 until July 1970 an officer and director of Ric International Industries, Inc. Defendant Carr has denied detailed knowledge of the operations of any of these entities except Ric and no evidence to the contrary has been introduced.

3. Defendant Michael F. Ling, as chairman of the executive committee of Ling & Company and as owner of 30 to 32 percent of its stock during the time covered by the complaint, exercised certain management functions, hired and fired employees, received monthly reports, attended board meetings, promoted the company's financial interests and received inventory reports.

4. The following transactions were made at a time when no effective registration statement pursuant to the Securities Act of 1933 was on file with the Securities & Exchange Commission:

(a) On or about December 31, 1969, defendant Nashwood purchased approximately 5931 shares of National Bankers Life (NBL) stock and pledged these shares as collateral for a loan from Dallas Bank & Trust Company which was used to make the purchase.

(b) On or about November 30, 1969, defendant Osorio sold approximately 1000 shares of Master Control, Inc., (MCI) stock to Ling & Company, Inc.

(c) On or about February 13, 1970, defendant Osorio sold approximately 1000 shares of MCI stock to Ling & Company, Inc. (d) In May 1970 defendant Hoover pledged more than 500,000 shares of Ric stock as collateral for loans at various banks in Texas. Part was pledged on behalf of South Atlantic Company and part in his own behalf. At the time of these transactions, South Atlantic Company owned controlling interest in Ric.

(e) In December 1969, defendant Nashwood pledged 66,666 shares of NBL stock as collateral for a loan from Sharpstown State Bank. These shares had been obtained directly from National Bankers Life.

(f) On or about October 22, 1969, defendant H. E. McCain sold approximately 800 shares of MCI stock to Ling & Company, Inc.

(g) On or about January 28, 1970, defendant McCain pledged approximately 3640 shares of NBL stock as collateral for a loan at Bank of Services & Trust which was used to purchase the stock.

(h) In about January 1970, defendant Hoover pledged 5000 shares of NBL stock as collateral for a loan at South Oak Cliff Bank which had been used to purchase the stock.

(i) In about March 1970, defendant Hoover pledged 5000 shares of NBL stock as collateral for a loan at Industrial Bank of Houston which had been used to purchase the stock.

(j) Between July 1969 and May 1970 Ling & Company purchased and sold approximately 384,000 shares of NBL stock; between September 1969 and May 1970, Ling & Company purchased and sold approximately 220,000 shares of Olympic Life Insurance Company stock; between October 1969 and October 1970, Ling and Company purchased and sold approximately 200,000 shares of MCI stock. Statements on file with the court, which are uncontroverted by affidavits or by Michael Ling's testimony, reveal that several employees at Ling & Company were handling these sales exclusively and that defendant Ling had some direct contact with these employees both to authorize market making activities and to discuss the accounts generally.

5. The absence of a number of defendants from the preliminary hearing because of consent decrees limited the evidence available on the question of employment of a scheme to defraud; however, the following acts by defendants contesting the preliminary injunction were established:

(a) Beginning in about July 1969, and continuing through about June 1970, Ling & Company made a market in the stock of defendant National Bankers Life. During that period Ling & Company constantly quoted NBL stock at ever-increasing prices, purchased NBL stock principally from brokers and sold the stock principally to customers, with the effect of manipulating the market price of stock upward. During this time to help out the market maker defendants Hoover, McCain, Nashwood and South Atlantic Company bought NBL stock with either loans obtained from financial entities controlled by the defendants in the case or backed by letters of guarantee from financial institutions controlled by defendants in the case. A number of similar transactions were entered into in the stock of Olympic Life and MCI; however, not all the above four defendants were involved in transactions in both of these stocks.

(b) In about March of 1970, NBL Employees Retirement Plan purchased approximately 22,500 shares of NBL stock from Ling & Company with money borrowed from Dallas Bank & Trust Company which at that time was owned by South Atlantic Company. The Plan paid $4.00 per share more than the then current market price.

(c) In about July 1970, the Plan sold 22,500 shares of NBL to the Jesuit Fathers of Houston at 28½ per share, at a time when the market price was $5.00 per share.

Conclusions of Law

The plaintiff SEC has approached this case solely in terms of complete joint liability on the part of all 28 defendants on both counts—sale of unregistered securities and fraudulent conduct. It has employed a conspiracy theory on the first count and on the second count a joint scheme theory which is comparable to conspiracy. However, in the opinion of this Court it must first be determined if any individual violations have been committed before determining joint liability under the theories of conspiracy or joint scheme.

1. There are four areas of individual violations that must be examined: (1) Being a principal in the sale of specified unregistered securities under Section 5 of the Securities Act of 1933; (2) Aiding and abetting the sale of specified unregistered securities; (3) Being a principal in fraudulent conduct under Section 17(a) of the 1933 Act or Rule 10(b) (5) of the 1934 Act; or (4) Aiding and abetting fraudulent conduct. As will be seen in the discussion below, aiding and abetting fraudulent conduct can yield total joint liability but it does not have to do so in all cases.

(a) Being a principal in the sale of specified unregistered securities: Liability arises when the person so participating falls into the category of "issuer" or "underwriter." The term "issuer" includes both the company issuing stock and control persons of that company. A control person is liable for his sales of stock in a company he controls even when his broker is able to claim an exemption. United States v. Wolfson, 405 F.2d 779 (2nd Cir. 1968). "Underwriter" has become a very broad category. As pointed out in Securities & Exchange Commission v. North American R & D Corp., 424 F.2d 63, 72 (2nd Cir. 1970) "the term `underwriter' is broadly defined to include anyone who directly or...