SECURITIES & E. COM'N v. Charles A. Morris & Assoc., Inc.

• Decision Date: 01 February 1973
• Docket Number: Civ. A. No. C-72-368.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CHARLES A. MORRIS & ASSOCIATES, INC., formerly known as Morris Darley and Associates, Inc., and Tax Free Bonds, et al., Defendants.
• Court: U.S. District Court — Western District of Tennessee

386 F. Supp. 1327

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CHARLES A. MORRIS & ASSOCIATES, INC., formerly known as Morris Darley and Associates, Inc., and Tax Free Bonds, et al., Defendants.

Civ. A. No. C-72-368.

United States District Court, W. D. Tennessee, W. D.

February 1, 1973.

James E. Birchby, SEC, Washington, D. C., for SEC.

Hal Gerber and Eugene Berstein, Memphis, Tenn., for Charles A. Morris & Associates, Charles A. Morris, Edward Disbrown Morris, Ray Thomas Bauman and Charles T. Chicorelli.

Henry L. Klein, Memphis, Tenn., for Michael Patrick McTighe.

B. C. Clifton, Memphis, Tenn., for Claude Dean Dillard.

Jim Walker Cunningham, pro se.

Albert Boyd, Memphis, Tenn., for Ted L. Cutshaw.

Robert G. Gilder, Southaven, Miss., for Ronald Lee Epperson, and Roy G. Lovelace.

John William Ferrell, pro se.

Armistead F. Clay, Memphis, Tenn., for Gary Crizer Hottum.

Harold Weiss, Memphis, Tenn., for Steven Adams Lancaster.

Raymon Sauer, Memphis, Tenn., for Malcolm E. Ratliff.

Louis F. Allen, Memphis, Tenn., for Roger Charles Russell.

Donald Bryan Smith, pro se.

Olen C. Batchelor, Jr., Memphis, Tenn., for Roy Langston White.

MEMORANDUM DECISION

BAILEY BROWN, Chief Judge.

This action was brought by the Securities and Exchange Commission pursuant to § 20(b) of the Securities Act of 1933 and § 21(e) of the Securities Act of 1934. The Commission alleges that from March, 1971 to the present time, the defendants, a Memphis municipal bond firm and a number of its officers and employees, violated § 17(a) of the 1933 Act,¹ and also violated § 10(b) of the 1934 Act² and Commission Rule 10b-5³ promulgated thereunder. The Commission seeks injunctive relief and disgorgement of unlawful profits.

An extensive hearing was held solely on the plaintiff's motion for a preliminary injunction. In support of its motion, the plaintiff presented several documents filed by James E. Birchby, a Commission attorney who did much of the investigative work on this case. These documents included an extensive summary affidavit, a later supplement to the summary affidavit and a detailed trading analysis. The plaintiff also introduced the affidavits of various individual purchasers, as well as five affidavits submitted by experts in the municipal bond industry concerning pricing practices in that industry. Birchby was the only witness called by the plaintiffs to testify at the hearing.

In response to the motion, certain of the defendants submitted counteraffidavits. The defendants, Charles Morris, Edward Morris, McTighe and Dillard, testified at the hearing. In addition, G. L. Bartlett, a municipal bond dealer presently residing in Phoenix, Arizona, was called by some of the defendants to testify as to pricing practices in the municipal bond industry.

At the outset, we should point out that three of the original defendants, Hottum, Cutshaw and Russell, have consented to the entry of a permanent injunction against them. The defendant Hottum has, in addition, paid $915 into the Court in connection with the Commission's prayer for disgorgement of unlawful profits. In the remainder of this opinion, we shall set out the findings and conclusions supporting our decision to grant the plaintiff's motion for a preliminary injunction against all of the remaining defendants.

In Parts I and II of this opinion we have briefly described the individual defendants and the general character of the operation conducted by the defendants. The nature of the particular bonds involved in this action is the subject of Part III. In Part IV we deal with two threshold legal questions, and in Part V we describe the violative conduct in which the defendants have engaged. Finally, in Part VI, we explain why preliminary injunctive relief is appropriate in this case.

I. THE DEFENDANTS

Charles A. Morris & Associates, which deals exclusively in municipal bonds, had offices in Memphis and nearby Southaven, Mississippi. Incorporated in Mississippi in 1968, it has engaged in only limited activities since March, 1972. Prior to assuming its present name in February, 1972, the corporation operated under the names, Tax Free Bonds, Inc. and Morris-Darley and Associates, Inc. Its best known name is Tax Free Bonds and it will hereinafter be referred to as "Tax Free."

The defendant Charles Morris has been president, director and a principal shareholder of, as well as a trader for, Tax Free since its inception. He has been responsible for the supervision of all the corporation's activities. These included approving Tax Free's municipal bond transactions, determining the pricing practices of its salesmen, selecting with the defendant McTighe the bonds to be purchased and sold by the corporation and the hiring and firing of salesmen.

The defendant Michael McTighe served Tax Free as a vice-president, a manager and trader from July, 1971 through at least March 17, 1972. He was general manager of the "McTighe Division," a group of seven salesmen including the defendants Russell and White. McTighe had authority to hire and fire the salesmen in his division and to administer his division in all respects. During the relevant period, salesmen under McTighe's supervision, and occasionally other Tax Free salesmen, submitted to him for approval, on at least a daily basis, order tickets (or pencil slips) showing the terms for a sale of bonds which a customer had just agreed, over the telephone, to purchase. This document always reflected the sale price to the customer and often reflected the cost of the bonds to Tax Free. In 1972, McTighe left Tax Free to organize with Charles Morris and G. L. Bartlett a municipal bond firm named Valley Western Securities, Inc., now operating in Memphis.

The defendant Claude Dean Dillard was associated with Tax Free from May, 1971 to at least March, 1972. In addition to making some sales himself, he served as a trader, a vice-president and, from approximately August through December, 1971, he served as the manager of the Southaven office. While at the Southaven office, he supervised several salesmen, including the defendants Bauman, Chicorelli, Ferrell, Hottum, Cutshaw, Phillips and Smith. As a supervisor, he was required to approve the order tickets turned in by his salesmen. In his capacity as manager of the Southaven office, Dillard occasionally listened to the salesmen as they made sales presentations to investors over long distance telephone and advised the salesmen as to how they might improve their selling techniques. Beginning in January, 1972 Dillard and the salesmen at Southaven were brought to the Memphis office, and the Southaven office was closed. From then through March, 1972 Dillard continued to act as a supervisor and trader at Tax Free. At the present time, Dillard is employed at Universal General Securities, Inc., a municipal bond firm located in the Memphis area.

Edward Morris, younger brother of Charles Morris, has been a vice-president and director since approximately 1970. For some time, he has had an option to purchase fourteen per cent of the corporation's stock, but has never exercised that option. Morris engaged in his own personal sales activity and has been responsible, in part, for the training furnished Tax Free salesmen. During the Commission's investigation of this matter, Charles Morris testified, in a deposition, that Edward Morris occasionally approved the salesmen's order tickets. Edward Morris is presently employed as a bond salesman at Fidelity Security Corporation.

All of the above-named individual defendants — Charles Morris, McTighe, Dillard, and Edward Morris — regularly met together as Tax Free's top management personnel. As top management officials, they were all aware of the corporation's pricing policies and sales practices.

The remaining defendants — Bauman, Chicorelli, Cunningham, Epperson, Ferrell, Lancaster, Lovelace, Phillips, Ratliff, Smith and White — were employed, during at least a part of the relevant period, as municipal bond salesmen at Tax Free. At least Epperson, Lovelace, Ratliff and White are still in the municipal bond business.

II. GENERAL CHARACTER OF TAX FREE'S OPERATION

At the hearing on this motion there emerged the following picture of Tax Free's operation, as it existed during the relevant period. All of Tax Free's transactions were effected on a principal basis. Tax Free solicited its customers almost exclusively by long distance telephone. The investors contacted by the salesmen were generally financially secure and of middle to advanced ages. They included a substantial number of retired professionals and widows. For the most part, they consisted of people with limited investment experience and little or no knowledge of municipal bonds.

The entire system of telephone solicitations was geared toward inducing hasty investment decisions. In order to effect a sale, a salesman was disposed to tell the customer anything which might influence the investor to make up his mind. For example, the salesman often told the customer that there was a limited supply of the bonds sought to be sold or that a special bargain price was available only for a limited time. Such representations were almost always false.

Salesmen at Tax Free were generally put to work on the phone without adequate training. Most either received no training whatsoever or received limited training only after they had already commenced their telephone solicitations. The salesmen were under tremendous pressure to produce large profits. The threat of being fired loomed constantly. Also, special incentives spurred them to greater efforts. For example, a fleet of leased Cadillac and Lincoln Continental automobiles was maintained by Tax Free and made available to the salesmen for their use. The salesmen were advised, however, that if their sales production was not up to certain standards, they would have to pay the monthly rental or give up the use of the car.

In concluding this brief description of...