SEC. & EXCHANGE COM'N v. American Realty Trust

• Decision Date: 24 February 1977
• Docket Number: Civ. A. No. CA 76-104A.
• Citation: 429 F. Supp. 1148
• Court: U.S. District Court — Eastern District of Virginia
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. AMERICAN REALTY TRUST, Defendant.

429 F. Supp. 1148

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. AMERICAN REALTY TRUST, Defendant.

Civ. A. No. CA 76-104A.

United States District Court, E. D. Virginia, Alexandria Division.

February 24, 1977.

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Catherine Gallagher, Vernon J. Vander Weide, Michael A. Starr, S.E.C., Arlington, Va., for plaintiff.

Louis Koutoulakos, Arlington, Va., Philip N. Smith, Washington, D. C., for defendant.

OPINION AND ORDER

KELLAM, Chief Judge.

This action for injunctive and ancillary relief is brought by the Securities and Exchange Commission (SEC) pursuant to ? 20(b) of the Securities Act, 15 U.S.C. ? 77t(b) and ? 21(d) and (e) of the Exchange Act, as amended, 15 U.S.C. ? 78u (d) and (e), against American Realty Trust (ART) and Thomas Broyhill (Broyhill). Jurisdiction is alleged under ? 22(a) of the Securities Act, as amended, 15 U.S.C. ? 77v(a), and ?? 21(e) and 27 of the Exchange Act, as amended, 15 U.S.C. ?? 78u(e) and 78aa.

Defendant ART, 200 Jefferson Davis Highway, Arlington, Virginia 22202, is a real estate investment trust¹ created under District of Columbia law pursuant to a Declaration of Trust dated July 14, 1961, with its principal office in Virginia. As of the date of the last available annual report for the year ending September 30, 1975, a substantial majority of the assets of ART was in the form of equity investments in hotels, motor inns and restaurant properties operated by lessee companies. Defendant Broyhill, 1475 20th Street, North Arlington, Virginia, is President and Chairman of the Board of ART.

The Commission's complaint filed on February 9, 1976 contains three counts against ART and Broyhill, alleging past and present violations of numerous securities laws and further alleging that unless the relief alluded to above is granted, defendants will continue to violate such laws.

Count I alleges defendants violated the anti-fraud provisions of the Securities and Exchange Act of 1934 (Exchange Act), 15 U.S.C. ? 78j(b) and Rule 10b-5 thereunder, 17 CFR 240.10b-5 and ? 17(a) of the Securities Act of 1933 (Securities Act), 15 U.S.C. ? 77q(a) by using fraudulent devices to sell securities. More specifically the SEC alleges defendants violated the above cited provisions by their committing acts of fraud in the offer and sale of $15 million worth of nine and one-half per cent senior subordinated debentures due March 15, 1979.

Count II alleges violations of ? 13(a) of the Exchange Act, 15 U.S.C. ? 78m(a), Rule 13a-1 thereunder, 17 CFR 240.13a-1 and Rule 12b-2 under the Exchange Act, 12 CFR 240.12b-20, which require the filing of certain reports with the Commission and further directing that they not be misleading.

Count III alleges that defendants, by soliciting proxies by means of improper proxy material, violated ? 14(a) of the Exchange Act, 15 U.S.C. ? 78n(a) and Rule 14a-9 thereunder, 17 CFR 240.14a-9, which requires that proxy soliciting material be filed with the SEC and that it not be misleading.

On the basis of these alleged violations, the SEC seeks an injunction permanently enjoining defendants from violations of the Securities Act and the Exchange Act and an order requiring Thomas Broyhill be removed from his positions of President, Director and Trustee of ART; that the Court appoint such additional trustees as it deems appropriate; that ART be required to conduct a complete investigation of all outstanding loans and receivables; that ART be required to file corrected annual reports, and requesting any other relief that this Court may deem just and proper.

The basis for all three counts of plaintiff's complaint is the alleged failure to disclose five transactions. Count I alleges that disclosure of the transactions was omitted from a prospectus used by ART to sell debentures in March, 1974. Count II alleges that the annual reports of ART on Form 10-K for the years ending September 30, 1974 and 1975 (1975 10-K and 1976 10-K) which were filed with plaintiff, were materially misleading because of their failure to disclose all the pertinent facts referred to in Count I above.² Count III alleges that the proxy soliciting material used by ART did not disclose the transactions referred to in Count I.

Immediately upon filing the complaint, the SEC moved for a preliminary injunction. An evidentiary hearing on the motion was subsequently consolidated, pursuant to Rule 65(a)(2), Fed.R.Civ.P., with an accelerated trial on the merits and the case was tried to the Court without jury on April 13 and 14, 1976. Each party requested the record be transcribed and they be permitted to file briefs. The briefs having now been filed, and the Court having considered the record, together with the briefs, submits its findings of fact and conclusions of law pursuant to Rule 52(a), Fed.R.Civ.P.

FINDINGS OF FACT

Offer and Sale of Securities

Beginning on or about March 12, 1974 ART and Broyhill distributed or caused to be distributed to investors and prospective investors a prospectus purportedly describing in all material respects, the securities offered in connection with the offer of $15 million of ART nine and one-half senior subordinated debentures due March 15, 1979. Approximately $3.4 million worth of the debentures were eventually sold to the public.

It is stipulated by all parties that in connection with the offer, purchase and sale of securities referred to in the preceding paragraph, ART and Broyhill made use of the means and instruments of transportation or communication in interstate commerce and of the means and instrumentalities of interstate commerce or of the mails.

In addition, it is stipulated that on or about March 14, 1975, ART and Broyhill, by use of the mails or by the means or instrumentalities of interstate commerce or of the facilities of a national securities exchange, solicited proxies or consents or authorizations with respect to ART's securities registered pursuant to Section 12 of the Exchange Act, 15 U.S.C. ? 78l, by means of a proxy statement, form of proxy, and notice of meeting.

Defendants filed or caused to be filed two annual reports with the SEC on Form 10-K, that also form part of the basis of this suit, the first on or about December 30, 1974 covering ART's fiscal year ending September 30, 1974 and the second on or about February 5, 1976 for ART's fiscal year ending September 30, 1975. The annual report on Form 10-K filed on or about February 5 was not filed by the due date of December 30, 1975, and the SEC had not extended the due date of the report.

The Vouchers

A large percentage of ART's holdings in the fall of 1973 consisted of hotels and motels located in Virginia and the District of Columbia. ART had leased several of them to Virginia Hotel Management Company, Inc. (VHM) to operate since December 1, 1971, in order to preserve its tax status as a real estate investment trust. Under the leasehold agreements, VHM was responsible for the management of the hotels and any profits generated therefrom belonged to VHM. In return VHM paid monthly rental payments to ART for each of the properties it operated. The March 1974 prospectus of ART stated that VHM operated seven of ART's nine hotels and motels. One of these hotels was the Williamsburg Hospitality House Motor Inn (Hospitality House) in Williamsburg, Virginia, which opened for business on April 15, 1973. According to the 1974 prospectus, VHM's rental on the Hospitality House for the period April 15, 1973 to March 31, 1974 was $70,083.33 per month. For that same period of time, monthly rent on the other ART properties leased by VHM totaled $70,200.00 per month.

In May of 1975 a series of parties were held in celebration of the grand opening of the hotel. The parties, which were held at the hotel, consisted of cocktails, dinner and dancing on both Friday and Saturday evenings, May 11 and 12, 1973, and a Sunday brunch. In addition, a large number of guests were provided rooms at the hotel on Friday and Saturday evenings, and a few of the organizers stayed at the hotel on Thursday evening. An itemized bill for $28,100.87 from VHM was delivered to ART personally by Mr. Charles Simmons (Simmons), president of VHM. VHM subsequently received a check from DeLuca Construction Corporation (DCC) for $128,100.87, $100,000 of which represented payment of a consultant's fee due DCC, and the remaining $28,100.87 of which was for the opening party at the Hospitality House. ART in turn reimbursed DCC for the expenses of the opening party and for the consultant's fee to VHM.³ Both officials at ART and John DeLuca (DeLuca) believed the bill represented expenses for only one day of the opening celebration and therefore did not constitute payment in full for all costs incurred by VHM for the grand opening festivities.

From June to September of 1973, VHM experienced difficulty in the management of the Hospitality House because business was poor. As a result, rent on the Hospitality House due ART was in arrears for three months on September 28, 1973, in the amount of some $210,000, and the September rent would be due in two days.

During September 1973, representatives of ART were working with their underwriters in preparing for the eventual sale of a large quantity of senior debentures and the underwriters were encouraging ART to clear up the rent arrearages on the VHM leases.

On September 28, John Rutledge (Rutledge), executive assistant to Broyhill, telephoned Terry W. Vester (Vester), Vice President and Treasurer of VHM, requesting that VHM's rental payments be brought up to date. Vester responded that only $210,000 of the $280,000 (including the September rent which was due and payable in two days) could be paid by VHM at that time. Vester, in his testimony at trial, suggested that Rutledge outlined a plan whereby Vester would submit fictitious or grossly inflated bills to ART for trustee functions and the grand opening parties that would...