SECURITIES & EXCHANGE COM'N v. Manor Nursing Ctrs., Inc.

• Decision Date: 19 October 1971
• Docket Number: No. 71 Civ. 3627.,71 Civ. 3627.
• Citation: 340 F. Supp. 913
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MANOR NURSING CENTERS, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

340 F. Supp. 913

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MANOR NURSING CENTERS, INC., et al., Defendants.

No. 71 Civ. 3627.

United States District Court, S. D. New York.

October 19, 1971.

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William D. Moran, Associate Regional Administrator Securities and Exchange Comm. by William Nortman, and Thomas R. Beirne, New York City, for plaintiff.

Bernard Jay Coven, New York City, for defendants Netelkos, Method Leasing, and Upton.

Gifford, Woody, Carter & Hays by Charles L. Trowbridge, and Michael J. McAllister, New York City, for defendant Sutton.

Weiss, Bronston, Rosenthal, Heller & Schwartzman by Richard F. Horowitz, New York City, for defendants Ezrine, Glendale, and Atlantic.

Stanley Kligfeld, New York City, for defendants Benjamin Werner & Co., and Benjamin Werner.

Lawson F. Bernstein, New York City, for defendants Manor Nursing, Capital Cities Nursing Centers, Ira Feinberg, Manor Construction Co., Samuel Feinberg, Marnane, and Halford.

MOTLEY, District Judge.

OPINION

Findings of Fact and Conclusions of Law

This action for injunctive and ancillary relief was commenced by the SEC on August 16, 1971 pursuant to 15 U.S.C. §§ 77t(b) and 78u(e). Jurisdiction is predicated upon 15 U.S.C. §§ 77v(a) and 78aa. The complaint alleges violations of the anti-fraud provisions of the Securities Laws as to all defendants. 15 U.S.C. §§ 77q(a) and 78j(b) and Rule 10b-5, 17 C.F.R. 240, promulgated pursuant thereto. It also alleges as to certain defendants a violation of the Securities Laws prohibiting sale of securities unaccompanied by a prospectus meeting the requirements of the law. 15 U.S.C. § 77e(b). It further charges as to the defendant underwriter, Benjamin Werner and Benjamin Werner & Co., that other provisions of the Securities Laws and Rules promulgated thereunder were violated. These prohibit fraudulent practices by a broker-dealer in connection with the sale of securities and require the establishment of an escrow account or a separate deposit of funds in connection with an "all or nothing" sale of an issue such as occurred here. 15 U.S.C. 78o(c) (2) and Rule 15c 2-4, C.F.R. 240.

In addition to injunctive relief prohibiting future similar violations of the Securities Laws, the complaint prays for an order appointing a trustee of all of the proceeds of the "all or nothing" public offering involved in this case, including profits or income received by defendants from the use of such proceeds. A further order is sought directing defendants to relinquish to the trustee any funds received by them in the public offering, including income. The trustee, if appointed, would use his best efforts to seek out those members of the public who purchased the stock and return to them whatever monies may now be due such purchasers, plus interest.

Defendants have all appeared and answered the complaint except Deneso Corporation, Joseph Delmonico, and Jack Naiman. These defendants were duly served. Defendant Arthur Sutton consented to the entry of an injunctive order against him and the appointment of a trustee, if one should be appointed. He has deposited the proceeds which he received ($43,000) in the registry of the court pending the outcome of this case.^*

The pivotal claims of the SEC in this action are as follows:

Certain defendants were selling shareholders along with Manor Nursing Centers, Inc., (Manor) of an issue of Manor common stock (450,000 shares at $10 per share) offered on an "all or nothing" basis pursuant to a registration statement and prospectus which became effective on December 8, 1969. It is claimed that these defendants fraudulently failed to amend the registration statement and prospectus to disclose that special compensation arrangements had been made with defendant Christos Netelkos and the three non-answering defendants to induce them to participate in the offering by purchasing shares themselves and by securing others to make purchases before the chaotic and wholly fraudulent closing which took place on February 20, 1970.

The closing was held about two weeks prior to the expiration of the 90 day selling period. At that time proceeds checks were issued to Manor and the selling shareholders by the underwriter although all of the purchasers' checks, most of which were uncertified, had not been cleared. At the closing the amounts of the checks received did not match the number of shares purportedly sold and calculations had to be made repeatedly in an attempt to match the two. Discrepancies persisted. Consequently, during the closing, certain of the selling shareholders purchased additional unsold shares for themselves or their friends, unknown, of course, to the latter, out of the proceeds which they had just received at the closing. Creditors of Manor were also paid at the closing in shares in an effort to make it appear that the issue had been sold.

A few days after the closing, checks presented by Netelkos and the non-answering defendants, totaling more than $2,500,000 "bounced." None of these defendants had any intention of paying for the shares which they purchased. They participated in the offering at the behest of Ira Feinberg (Feinberg) and defendant Ivan Ezrine (who were acting on behalf of the other selling shareholders as well as Manor) to make it appear that the entire issue had been sold.

The checks given to the defendant selling shareholders by the underwriter in turn "bounced", since the underwriter did not have sufficient funds in his account as a result of the original insufficient checks. Although checks from the underwriter bounced, the selling shareholders subsequently received payment for their shares from Feinberg, acting for Manor, out of proceeds which it had received from the underwriter from the sale of shares to the public. These selling shareholders included Feinberg and companies owned or controlled by Ezrine. Feinberg, however, was the only one whose check, received from the underwriter, did not "bounce". This was because, as Feinberg testified on the trial, he and Werner arranged to have the check which he had received for more than $500,000 credited to Feinberg's account at the closing so that he would have sufficient funds in his personal account with which to purchase the remaining unsold shares at the closing in the name of certain of his personal friends.

Feinberg and his counsel, Ezrine, without disclosing the fact by amendment, then frantically proceeded to re-offer the 170,000 shares which were to have been purchased by the non-answering defendants and to collect on the bad checks presented by Netelkos. Again, in connection with this re-offer after the closing, special compensation arrangements were made. The first was with a David Haber who purchased 60,000 shares. The second was with the Daytona Beach General Hospital which purchased 60,000 shares for $11 per share, the offering price being $10. A note was accepted from Netelkos, for the 82,320 shares which he had received for his worthless checks, which was never fully paid.

Thus, although the entire issue was not sold at the time of the closing (because of the fraudulent offer and reckless acceptance of uncertified checks which later "bounced" and as evidenced by the "bootstrap" purchase of unsold shares by Feinberg and Ezrine) the funds received from the public were never returned. Moreover, the underwriter failed to comply with the legal requirement and the requirement of the prospectus that all funds received by him prior to the end of the selling period be placed in a special account in the Chemical Bank so that the monies collected could be returned in the event that the entire issue was not sold within the 90 day selling period as occurred here.

When the complaint was filed the SEC sought and secured a temporary restraining order restraining defendants, among other things, from disposing of any of the funds or profits received by them as a result of the sale of Manor common stock, pending the hearing and determination of a motion made by SEC for preliminary injunctive relief. The hearing on the motion for such relief commenced on August 19, 1971, and was concluded on August 20, 1971.

Upon that hearing the SEC moved for an order advancing the date of trial and consolidating the hearing on the motion with the trial. The motion was denied. The parties were directed to serve and file proposed findings of fact and conclusions of law. Feinberg, president and chief stockholder of Manor, in addition to complying with this directive also filed further affidavits and other documents with the court purporting to show efforts he is making to sell certain real property assets of Manor and its successor, defendant Capital Cities Nursing Centres, Inc., (Capital Cities) for the purpose of raising liquid assets with which to reimburse certain of the public purchasers of the Manor offering. Repayment, however, under Feinberg's plan would be denied to certain purchasers on the ground that they were equally liable with Feinberg, as he sees it, or on the ground that such purchasers have brought their own lawsuit to recover monies expended by them. The court thereupon reconsidered the motion made by SEC to advance the date of trial and to consolidate it with the hearing on the preliminary injunction motion, reversed its prior decision, and set the trial for September 30, 1971. Rule 65, Fed.R.Civ.P. The trial commenced on the date set, continued on October 6, 1971 and was concluded on October 7, 1971.

The court finds and concludes that none of the defendants has offered an adequate defense to any of the SEC's claims, all of which have been proved upon the trial. The court, therefore, grants the relief sought as to all defendants except Samuel Feinberg, Suzanne Marnane, and Gladys Halford. As to these three defendants relief is limited to an order directing them to surrender forthwith to the court appointed trustee all...