SECURITIES & EXCH. COM'N v. Los Angeles Trust D. & M. Exch.

• Decision Date: 20 May 1960
• Docket Number: Civ. No. 261-58-TC.
• Citation: 186 F. Supp. 830
• Court: U.S. District Court — Southern District of California
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. LOS ANGELES TRUST DEED & MORTGAGE EXCHANGE, Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Markets, David Farrell, Oliver J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr., and Stanley C. Marks, Defendants.

186 F. Supp. 830

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. LOS ANGELES TRUST DEED & MORTGAGE EXCHANGE, Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Markets, David Farrell, Oliver J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr., and Stanley C. Marks, Defendants.

Civ. No. 261-58-TC.

United States District Court S. D. California, Central Division.

May 4, 1960.

Findings of Fact, Conclusions of Law and Judgment May 20, 1960.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Arthur E. Pennekamp, Regional Administrator, F. E. Kennamer, Jr., Chief Enforcement Atty., San Francisco, Cal., Milford A. Maron, Los Angeles, Cal., for Securities and Exchange Commission.

Paul J. Foley, Los Angeles, Cal., for Trust Deed & Mortgage Exchange and David Farrell.

Morgan Cuthbertson, Laguna Beach, Cal., for defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange Markets, Oliver J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr., and Stanley C. Marks.

THURMOND CLARKE, District Judge.

In ruling in this matter, the Court wishes to alert the public to a problem of grave concern to many citizens. This trial has caused many of us to become aware of a serious situation in a very vital part of our economyâ the home building industry. We have seen in great detail here the unscrupulous and entirely high-handed manner in which certain speculators mislead countless small investors, and countless other small home buyers, to the mutual detriment of both.

These "10%ers" have developed an ingenious and a thoroughly devious scheme, relying upon what they think to be loopholes in the law regulating those entrusted with investment funds. It is their good fortune that this scheme has not yet come tumbling down around their heads, like the frail cardhouse structure it is, but instead has been arrested by the diligent efforts of the S. E. C. Aside from the unsoundness of the basic plan, this case has unearthed many totally unethical practices on the part of the individuals involved; practices which run a very close line between criminal prosecution and civil actions for fraud.

The Court regrets that the processes of our law have worked so slowly, despite the best efforts of those concerned, and that the hearths of many innocent homeowners and the savings of many innocent investors have been placed in jeopardy.

This is the indicated judgment of the Court; however this is not to be construed as an immediate judgment or order. The judgment of the Court will be entered on the basis of definite findings of fact and conclusions of law. The Commission is directed to lodge such findings of fact, conclusions of law, and proposed judgment by May 11, 1960, at 10:00 a. m.

Final Judgment of Permanent Injunction and Order Appointing Receiver

This action came on for hearing before the Court between October 6, 1959, and May 3, 1960, and the Court having considered all the evidence introduced in the course of the trial on the merits, and the arguments of counsel, and the Court having now entered Findings of Fact and Conclusions of Law to the effect that the evidence sustains the allegations of each Count of the Amended and Supplemental Complaint for Injunction and for Appointment of Receiver, and the Court having found that the Securities and Exchange Commission is entitled to a permanent injunction restraining and enjoining the defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Markets, David Farrell, Oliver J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr. and Stanley C. Marks from engaging in acts or practices which constitute or will constitute violations of Section 5(a) and (c) of the Securities Act of 1933, 15 U.S.C.A. § 77e(a) and (c), Section 17(a) of the Securities Act of 1933, 15 U.S.C.A. § 77q(a), Section 15(c) (1) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78o(c) (1), and Rule 17 CFR 240.15c1-2 thereunder, and Section 15(a) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78o(a), as demanded by the Securities and Exchange Commission, and that a receiver should be appointed for the defendants Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, and it appearing that the Court has jurisdiction of the parties hereto and the subject matter hereofâ

I

It Is Ordered, Adjudged and Decreed that the defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Markets, David Farrell, Oliver J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr. and Stanley C. Marks, their officers, agents, servants, employees, attorneys, assigns, and each of them, and all persons acting in concert or participation with them, be and they hereby are permanently restrained and enjoined from, directly or indirectlyâ

A) making use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell securities, namely, evidences of indebtedness, investment contracts or receipts for or guarantees of such securities, issued by the defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange or Trust Deed & Mortgage Markets, or any other securities, including trust deed or mortgage notes or other evidences of indebtedness created, issued or acquired by said defendants in connection with any investment plan, program or arrangement heretofore designated by the defendants as a Secured 10% Earnings Program, Secured 10% Earnings Reinvestment Program or Secured 10% Earnings Accounts, or any similar plan, program or arrangement (hereinafter throughout this decree designated as the Secured 10% Earnings Program), based upon the sale to members of the investing public of discounted trust deeds or mortgages covering residential or other real estate situated within the State of California or elsewhere, through the use or medium of a prospectus or otherwise; or

B) carrying such securities or causing them to be carried through the mails or in interstate commerce, by means or instruments of transportation, for the purpose of sale or for delivery after sale, unless and until a registration statement as to such securities is in effect with the Securities and Exchange Commission; or

C) making use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell such securities, through the use or medium of a prospectus or otherwise, unless and until a registration statement as to such securities has been filed with the Securities and Exchange Commission, or while a registration statement as to such securities is the subject of a refusal order or stop order issued by the Securities and Exchange Commission, or (prior to the effective date of such registration statement) any public proceeding or examination under Section 8 of the Securities Act of 1933, 15 U.S.C.A. § 77h.

II

It Is Further Ordered, Adjudged and Decreed that the defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Markets, David Farrell, Oliver J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr. and Stanley C. Marks, their officers, agents, servants, employees, attorneys, assigns, and each of them, and all persons acting in concert or participation with them, be and they hereby are permanently restrained and enjoined from, directly or indirectlyâ

A) making use of any means or instruments of transportation or communication in interstate commerce or of the mails, in the offer or sale of the securities described in Section I hereof, to engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon the purchasers of such securities, by making through newspaper or other advertisements, radio or television broadcasts, brochures, pamphlets, sales letters or other literature, any incomplete, ambiguous, flamboyant, misleading, deceptive or untrue statement of material fact (by means of statistical data, charts, graphs, comparisons, or otherwise) meaning or intending to imply that the Secured 10% Earnings Programâ

a) makes it possible for investors "to enjoy the highest return obtainable with full protection and security offered by Deeds of Trust secured by Real Estate;"

b) affords investors an opportunity "to buy an income for life without reducing their principal" through investments in "prime" deeds of trust;

c) allows investors "an income from accumulated savings, earning them $100 per month on $12,000, or $50 a month on $6,000, or $25 on $3,000," enabling investors "to build a nest egg for retirement," or "build an estate", with, for example, an investment of $1,000 with $100 added per month for 120 months accumulating to $20,484;

d) assures investors of continuous "10% earnings from their savings;"

e) virtually guarantees investors against loss;

or making any untrue or misleading statement to the effect thatâ

f) Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange or Trust Deed & Mortgage Markets are the oldest and largest institutions "in the world" or "in America" offering such an investment plan, with "years of experience" in charting the course of investors "to personal security and more enjoyment from life;"

g) Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange or Trust Deed & Mortgage Markets are "Investment Bankers;"

h) "the only legal difference between a first or second deed of trust is the fact that one was recorded prior to the other;"

i) the "purpose of the `Exchange' maintained by Los Angeles Trust Deed & Mortgage Exchange, is to provide a clean, ethical market place for or `exchange' in which the public can buy and sell notes secured by deeds of trust, just as the `Stock Exchange' does for stocks and bonds," by means of a trading board and facilities similar to those employed by national securities exchanges, or that "just as the stock market has provided a liquid market for...