SECURITIES & EXCHANGE COM'N v. RJ Allen & Assoc., Inc.

• Decision Date: 29 November 1974
• Docket Number: Civ. A. No. 74-1273-Civ-CF.
• Citation: 386 F. Supp. 866
• Court: U.S. District Court — Southern District of Florida
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. R. J. ALLEN & ASSOCIATES, INC., et al., Defendants.

386 F. Supp. 866

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. R. J. ALLEN & ASSOCIATES, INC., et al., Defendants.

Civ. A. No. 74-1273-Civ-CF.

United States District Court, S. D. Florida.

November 29, 1974.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Michael J. Stewart and Michael K. Wolensky, S. E. C., Miami, Fla., for plaintiff.

Marx & Squitero, Miami, Fla., and Lionel Barnet, Miami Beach, Fla., for defendants.

MEMORANDUM OPINION

FULTON, Chief Judge.

The plaintiff Securities and Exchange Commission ("Commission") filed its Complaint herein against the corporate and individual defendants on October 1, 1974, seeking injunctive and ancillary relief for alleged violations of Section 17(a) of the Securities Act of 1933, as amended, ("Securities Act") 15 U.S.C. § 77q(a) and Section 10(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act") 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder 17 CFR 240.10b-5.¹ The Commission sought a Temporary Restraining Order and Preliminary and Permanent Injunctions pursuant to Section 20(b) of the Securities Act 15 U. S.C. § 77t(b) and Section 21(e) of the Exchange Act 15 U.S.C. § 78u(e), also sought an accounting, disgorgement, appointment of a receiver, and establishment of a trust over the defendants' assets as additional equitable relief to effectuate the remedial purposes of the federal securities laws and to protect those investors allegedly defrauded by the defendants.

On October 2, 1974, the Court, on the Commission's application, entered a 10-day Temporary Restraining Order prohibiting further violations of the aforementioned anti-fraud provisions of the federal securities laws after having considered the Complaint and sworn affidavits filed therewith and having heard testimony showing a reasonable expectation that the defendants would thwart the policy of the securities acts based upon their prior activities. As a part of that Order, the Court appointed David Hughes as temporary equity receiver for the defendant R. J. Allen & Associates, Inc. ("R. J. Allen") and established a trust over the assets of all of the defendants to prevent their dissipation, concealment or disposition and the destruction or alteration of any books and records. By the terms of the Order, the individual defendants were permitted to use their personal funds for ordinary and necessary living expenses.

Subsequently, at a hearing on October 4, 1974, the attorneys for R. J. Allen were ordered to turn over to the Receiver all books and papers of R. J. Allen in their possession except for personal documents of the individual defendants which were ordered to be sealed and placed with the Court for in camera inspection. At that time, a hearing on the Commission's motion for a preliminary injunction was set down for October 11, 1974.

That hearing commenced on October 11, 1974, and lasted until Octover 18, 1974. All of the defendants were present and were represented by counsel except for Thomas A. Preston ("Preston"), who appeared pro se. During the course of the hearing, by stipulation of the parties and Order of the Court, the hearing on the preliminary injunction was consolidated with the trial on the merits pursuant to Rule 65(a)(2) of the Federal Rules of Civil Procedure. On October 11, 1974, for good cause shown, the Temporary Restraining Order was extended for a 10-day period, or until further Order of the Court, whichever was the lesser, to permit the Court to resolve the matter on the merits while maintaining the status quo under that Order. Also, on October 11, 1974 during the course of the hearing, the Commission moved to dismiss as to the defendant Lee Ridgley (a/k/a Dorothy Maxine Ridgley) its prayer for disgorgement and the trust over her personal assets. At the same time, a stipulation and consent to a permanent injunction, without admitting or denying the allegations of the Complaint, was filed by Ridgley and the Commission and an Order based thereon permanently enjoining her from violations of the anti-fraud provisions in connection with the offer, sale or purchase of any security was entered on October 18, 1974. The Court entered an Order ore tenus on October 18, 1974, in contemplation of this Memorandum Opinion and hereby adopts and incorporates that Order herein.

Pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, this Memorandum Opinion shall constitute the Court's Findings of Fact and Conclusions of Law which the Court does hereby adopt. All pending Motions are hereby integrated into and resolved by this Memorandum Opinion.

JURISDICTION

At the outset, the defendants challenged the jurisdiction of the Court over the subject matter of the Commission's Complaint and the parties alleging that their activities were exempt from the provisions of the Securities Act sought to be enforced by this action. The Court, having considered the motion, has determined that it has jurisdiction over the parties to and the subject matter of this cause pursuant to the anti-fraud provisions of the federal securities laws: Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Even though Congress provided certain exemptions from the registration provisions of the Securities Acts, there are no exemptions from the anti-fraud provisions cited above. Section 17(c) of the Securities Act 15 U.S.C. § 77q(c) makes this clear. Section 17(a) of the Securities Act and its analogous provision in the Exchange Act — Section 10(b) and Rule 10b-5 — apply to the transactions involved herein. See, S. E. C. v. Charles A. Morris & Associates, Inc., 386 F.Supp. 1327 (W.D.Tenn., 1973) CCH Fed.Sec.L.Rept. ¶ 93,756. The evidence clearly shows, and the defendants do not contest, that in connection with their activities, the defendants employed the mails and the means and instrumentalities of interstate commerce and communication. Therefore, this Court has jurisdiction of this action pursuant to Section 22(a) of the Securities Act 15 U.S.C. § 77v(a) and Section 27 of the Exchange Act 15 U.S.C. § 78aa.

The defendants R. J. Allen, Robert J. Allen ("Allen"), Howard W. Alexander ("Alexander"), Charles J. Diaz ("Diaz") and Preston are and have been inhabitants of the Southern District of Florida. All have transacted business within the District, were duly served with process herein and have entered a general appearance in this action. Therefore, the Court has personal jurisdiction over the parties to this action with venue properly lying in this District.

FACTUAL BACKGROUND

R. J. Allen, a Florida corporation organized in August, 1972 under the laws of the State of Florida, maintains offices in Ft. Lauderdale, Florida. Prior to February 26, 1974, when the company's name was changed by charter amendment, it was known as Alexander and Allen, Inc. From about November 1972 to October 1974, R. J. Allen, under the direction, control, and management of Allen and Alexander, engaged in the securities business and, in particular, in the offer and sale of securities commonly referred to as "municipal bonds." R. J. Allen was registered as a broker-dealer with the State of Florida but not with the Commission.

The defendant Alexander has been president, a director and a principal shareholder of R. J. Allen from its inception until late November, 1973. He, along with other principals, was responsible for the management and control of the firm's activities. These included the approving of transactions with customers, directing the salesmen to make representations regarding insurance on the bonds being sold, execution of repurchase agreements, and negotiations of underwriting agreements with issuers, among others.

The defendant Allen served as executive vice-president and later president, a director and was a principal shareholder of R. J. Allen. He was responsible for certain of the firm's activities, including the approval of customer transactions, control of all bookkeeping activities and negotiation for insurance and underwriting agreements. The evidence was manifest that Alexander and Allen totally controlled the activities of R. J. Allen.

Diaz was executive vice-president and sales manager for R. J. Allen. His duties included the hiring and firing of salesmen, approval of customer transactions, the conducting of "training sessions" for salesmen of R. J. Allen and the closing of difficult sales with customers who were hesitant about investing. In addition, Diaz personally engaged in sales activities with his own customers and demonstrated the telephone selling techniques employed by the firm to new salesmen.

The defendant Preston was a salesman for R. J. Allen during the period from January, 1973 through approximately March, 1974. At that time, Preston left R. J. Allen to take over Coral Ridge Investments, Inc., another "municipal bond" dealer located in Ft. Lauderdale, Florida. He is still in the securities business.

As a part of its business, R. J. Allen, through its principals Allen and Alexander, and certain salesmen, including Diaz and Preston, engaged in the offer, sale, and underwriting of Industrial Development Revenue Bonds ("IDR's") of numerous issuers. These bonds, while generally included in the class of "municipal bonds" are of a particular type in that they are not general obligation bonds of a political entity, nor are they backed by the full faith and credit of any municipality, state, or local taxing unit. Rather, their viability depends in full measure upon the ability of the company funded by the proceeds from the bond sales to generate sufficient revenues to meet the principal and interest payments due on the bonds. As such, IDR's are speculative, high-risk securities includable in the class of "municipal bonds" only because of the tax-exempt feature of the interest payments made to the investors in them.

With this background, the Court will now address itself to the sales practices employed by the defendants...