Securities & Exch. Com'n v. National Bankers Life Ins. Co.

• Decision Date: 18 November 1971
• Docket Number: Civ. A. No. 3-4432-B.
• Citation: 334 F. Supp. 444
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. NATIONAL BANKERS LIFE INSURANCE COMPANY et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

334 F. Supp. 444

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

Civ. A. No. 3-4432-B.

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

November 18, 1971.

Robert Watson, Steve Watson, John High, James Sims, Lawrence Kiser, for plaintiff—Securities and Exchange Comm. Morton Susman, Houston, Tex., for Frank Sharp, Sharpstown Realty, Oak Forest Realty, Oak Forest Investment and Master Control.

Henry Strasburger and Fred Newberry, Dallas, Tex., for National Bankers Life and Olympic Life.

Frank Skillern, Dallas, Tex., for Sharpstown State Bank.

Louis Weber, Dallas, Tex., for NBL Plan.

Tim Timmins, Dallas, Tex., for J. Quincy Adams.

James Day and Gerald Waters, Dallas, Tex., for Audy Byram.

Charles Storey and Paul Adams, Jr., Dallas, Tex., for Waggoner Carr.

A. Don Crowder, Dallas, Tex., for James Farha.

Robert Cady, Dallas, Tex., for David Hoover.

Robert Jones, Dallas, Tex., for John Osorio.

Lewis Chandler, Dallas, Tex., for Phillip Proctor.

Gene Gardner, Lawton, Okl., for South Atlantic.

John Spinuzzi, Dallas, Tex., for Tom Thomas.

AMENDED JUDGMENT

HUGHES, District Judge.

The Securities and Exchange Commission filed this civil action to enjoin 13 corporations and 15 individuals from distributing unregistered securities and engaging in fraudulent and manipulative practices in connection with the sale of securities.¹ Before rendering the judgment, nine of the defendants had agreed to permanent injunctions and the SEC had dismissed five defendants without prejudice to refiling. The following defendants contested the issuance of an injunction: J. Quincy Adams, Audy Byram, Waggoner Carr, James Farha, David Hoover, John Osorio, Phillip Proctor, Tom Max Thomas, and South Atlantic Company SAC. Nashwood Corporation was in default. The following defendants did not actively contest the allegations of the complaint: Frank W. Sharp, Sharpstown Realty Co., Oak Forest Realty Co., and Oak Forest Investment Co.

This case considers multipartite dealings in the securities of National Bankers Life Insurance Company NBL, Olympic Life Insurance Company, Master Control MCI, RIC International Industries RIC and South Atlantic Company. The individual and collective effect of these transactions was the distribution of unregistered securities and the manipulation of their price in the over-the-counter market. The defendants accomplished these distributions of the unregistered securities by pledging the stock in their controlled companies at banks under their control and at other banks. In many instances the defendants obtained the funds for the purchase of the securities from one of the controlled banks. The defendants accomplished the manipulation of the stock of NBL, Olympic, and MCI by causing selective purchases calculated to decrease the "floating" supply with the market maker, Ling & Co., resulting in a corresponding rise in the value of the stocks. The defendants or the companies under their control made many of these purchases.

The central architect of the scheme to distribute and to manipulate the securities was Frank Sharp. The other defendants either worked with Sharp or for Sharp controlled entities or involved themselves in collateral activities related to the Sharp financial empire.

Sharp controlled Sharpstown Realty Company, Sharpstown State Bank, Oak Forest Realty, Oak Forest Investment Co., National Bankers Life, Olympic Life, and Master Control. Sharp exercised his control over the banking and insurance companies through Joseph Novotny and John Osorio. John Osorio was the president of NBL during the violations. Osorio with Waggoner Carr and Tom Thomas, who were all associated in the practice of law, exercised control over Dallas Bank & Trust, City Bank & Trust, Nashwood Corporation, and South Atlantic Co., which controlled RIC. Audy Byram was president of RIC during the violations. In an effort to secure capital for their companies and to support the market for their securities, certain of the defendants employed David Hoover in a scheme to pledge shares of RIC at numerous banks. The securities manipulations were accomplished through transactions at Ling & Co. J. Quincy Adams, an officer with Ling & Co., and director of City Bank & Trust, directed the market manipulation. In addition, Adams worked with Jim Farha and Phillip Proctor, representatives of Ling & Co., in promoting the manipulations.

The following is background and a brief outline of some of the more significant developments which were part of the overall scheme to violate the securities laws.

The Development of the Sharp Financial Empire.

In June of 1968 Sharp acquired control of Olympic Life Insurance Co. In July of 1968 Sharp acquired control of National Bankers Life. Sharp financed these acquisitions by securing loans from captive banks and then pledging the acquired stock as collateral. He would use the assets of the acquired companies to pay off the notes at the banks and thereby acquire the companies with their own assets. In addition, Sharp utilized the Jesuit Fathers of Houston, a non-profit corporation, as a source of funds. Sharp appropriated the Jesuit's financial resources and used them to build his empire. Sharp caused the Fathers to make large purchases of NBL stock at prices over the present market price to facilitate the manipulation of the stock and to cover certain aborted dealings. After assuming the control of the insurance companies and through Sharpstown Bank, Sharp funded numerous securities purchases and corporate acquisitions made by the defendants and their controlled companies.

South Atlantic Company and RIC International Industries Transactions

John Osorio and Waggoner Carr purchased control of South Atlantic Company which held as its principal asset control of RIC. Osorio and Carr financed the acquisition with a loan for $550,000 from City Bank & Trust with the SAC stock acting as collateral. Later they transferred the loan to Exchange Bank. Carr signed the note and the bank demanded additional guarantee which Osorio supplied personally and in the form of a take out commitment by NBL. Eventually NBL purchased the note after Exchange Bank kept demanding additional security and payment. During the time Carr and Osorio had the SAC stock pledged for their purchase loan, the stock of RIC, SAC's principal asset, was also pledged as collateral for loans at Bank of Louisville. In addition, the prior owner of SAC had a second lien on the stock.

In the spring of 1970, the defendant companies were in need of capital in order to sustain their business operations and the market. To secure the capital, the defendants arranged a scheme whereby they would pledge the unregistered shares of RIC owned by SAC through David Hoover. At this time Bank of Louisville held the 1,040,000 shares of RIC as collateral. To "free up" these shares, the defendants directed NBL to purchase control of Loyal American Life Insurance Company from Globe Capital Corporation. NBL financed the purchase of Loyal American at Bank of Louisville with the support of Sharpstown Bank.² NBL's purchase of Loyal American from Globe provided Globe with sufficient resources to pay an outstanding obligation to RIC. With these proceeds SAC paid off the RIC note at the Bank of Louisville and redeemed its 1,041,000 shares of RIC freeing them for further pledging.

The defendants then arranged for Hoover to pick up the RIC stock in Louisville and to bring it to Texas where he pledged the stock at numerous Texas banks.

Nashwood Corporation Transactions

Osorio, Carr, Thomas, and other defendants controlled Nashwood Corporation. Nashwood purchased control of West Virginia Life Insurance Company by borrowing $1,125,000 from Sharpstown Bank and pledging 30,000 shares of West Virginia Life stock. Later Nashwood and NBL merged West Virginia Life into NBL and Nashwood received 66,666 NBL shares which it substituted as collateral for its note at Sharpstown Bank.

In addition, Nashwood engaged in numerous purchases and sales of stock of the subject companies all of which furthered the manipulation of market price of the securities.

Throughout the period of the violations, the defendants made numerous securities transactions in which they arranged financing at institutions under their control and used the institutions to bail them out when the transactions became unsupportable. They repeatedly shifted assets of these companies, consolidated and transferred personal loans among the controlled entities, and converted the corporation assets for their personal gain. The transactions established by the evidence are replete with self dealing. Besides the fraudulent acts in dealing with these public companies, certain of the defendants attempted to influence State and federal officials in furtherance of their scheme.

Findings of Fact

A. This Court has jurisdiction of this action under Section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a) (1970), and Section 21(f) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u(f) (1970).

B. In connection with the transactions which are the subject of this action, the defendants made use of the instrumentalities of interstate commerce or of the mails.

C. At all times pertinent to the transactions which are the subject of this action, the defendants knew or in the exercise of ordinary care should have known that their acts tended to further the distribution of unregistered securities and the manipulation of these securities.

D. None of the transactions in the securities of National Bankers Life Insurance Company NBL, Olympic Life Insurance Company OLI, Master Control, Inc. MCI and RIC International Industries, Inc. RIC hereafter referred to involving defendants Frank W. Sharp Sharp, Sharpstown Realty Company SRC, Oak Forest Investment Company OFIC, John Osorio Osorio, Tom Max Thomas Thomas, Waggoner Carr Carr, John Quincy Adams Adams, David Hoover...