Baumel v. Rosen

• Decision Date: 03 May 1968
• Docket Number: 14014.,Civ. A. No. 14013
• Citation: 283 F. Supp. 128
• Parties: Milton J. BAUMEL, Plaintiff, v. Leonard ROSEN and Julius J. Rosen and Rosen Investment Corporation, Defendants. Earl R. WEINER and Anita L. Weiner, Plaintiffs, v. ROSEN INVESTMENT CORPORATION, Leonard Rosen and Julius J. Rosen, Defendants.
• Court: U.S. District Court — District of Maryland

283 F. Supp. 128

Milton J. BAUMEL, Plaintiff, v. Leonard ROSEN and Julius J. Rosen and Rosen Investment Corporation, Defendants.

Earl R. WEINER and Anita L. Weiner, Plaintiffs, v. ROSEN INVESTMENT CORPORATION, Leonard Rosen and Julius J. Rosen, Defendants.

Civ. A. Nos. 14013, 14014.

United States District Court D. Maryland.

February 29, 1968.

As Modified May 3, 1968.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert D. Klages, Morton E. Yohalem, H. Don Cummings, Washington, D. C., Zelig Robinson, Baltimore, Md., for plaintiffs.

Walter C. Mylander, Jr., and Charles C. W. Atwater, Baltimore, Md., for defendants.

WINTER, Circuit Judge (by designation):

Milton J. Baumel ("Baumel"), plaintiff in Civil Action No. 14013, and Earl R. Weiner and Anita L. Weiner ("Weiner"), plaintiffs in Civil Action No. 14014, sued Rosen Investment Corporation, Leonard Rosen and Julius J. Rosen seeking rescission of sales of stock of Gulf Guaranty Land and Title Company (now known as Gulf American Land Company, and hereafter referred to as "Gulf American") and/or damages. Jurisdiction is asserted under § 27 of the Securities Exchange Act of 1934. 15 U.S. C.A. § 78aa. Each complaint consists of two counts, the first alleging activities of the defendants which, it is claimed, constituted a violation of Rule 10b-5 of the General Rules and Regulations, Securities Exchange Act of 1934, 17 C.F.R. § 240.10b-5, and the second, common law fraud, which, because diversity of citizenship does not exist between the parties, is advanced under the pendent jurisdiction of the Court. The cases were consolidated for trial, non-jury. Since plaintiffs concede that the proof necessary to sustain the alleged cause of action under the first count would be only a part of the proof necessary to sustain the alleged cause of action under the second count, only the first count need be considered. If plaintiffs are entitled to recover on the first count, the measure of their recovery would be unaffected by whether they are also entitled to recover on the second count; and if plaintiffs have failed to prove such manipulative and deceptive devices as constitute a violation of Rule 10b-5, it follows that they have failed to prove common law fraud under the law of Maryland, the place where the sales were negotiated and consummated.

FACTS

Gulf American was incorporated under the laws of the State of Florida in July, 1957, to engage in the business of subdividing and selling real estate on installment contracts, and related businesses, in Florida and elsewhere. It has been engaged in that business from that date to the present.

Shortly after Gulf American was incorporated, Julius J. Rosen and Leonard Rosen each purchased 13,000 shares of its capital stock, of a par value of $2.00, for the sum of $26,000. This purchase represented 52% of Gulf American's stock originally authorized to be issued. Each also lent to Gulf American the principal sum of $25,000, taking five-year 6% notes as evidence of the loans. At a meeting of Gulf American's board of directors on August 23, the board granted options to a number of close business associates, relatives and friends of Julius and Leonard Rosen, including their accountant, George London, and their friend, Harold Stein, to purchase stock at its par value without the necessity of making a loan to Gulf American. At the same time, Gulf American's officers were authorized to sell additional shares of capital stock at its par value, on condition that the purchasers make loans to Gulf American, to be evidenced by promissory notes bearing interest at the rate of 10%.

Thereafter, on behalf of Gulf American, Julius and Leonard Rosen undertook a program of selling "units" of Gulf American's securities, a "unit" consisting of a $10,000 promissory note and 500 shares of capital stock, at and for a total purchase price of $11,000. To this end, Julius and Leonard Rosen enlisted the services of some of their close business associates and friends, including Harold Stein.

Because of their prominence in the business and political community and their wide acquaintanceships in the business and social community, Nathan S. Jacobson and Irvin Kovens were selected to assist in this sales effort. Also selected was Samuel J. Holtzman. By contract, dated October 30, 1957, Kovens and Jacobson agreed to sell 20 units of Gulf American securities, in consideration of which Gulf American agreed to issue them 3,000 shares of its Class A common stock.¹ Kovens and Jacobson sold in the aggregate seven and one-half units of Gulf American securities to Jerome Klaff, Milton B. Plant, Arnold L. Plant, Marvin S. Plant, Harold Effron and Irving Davison (hereafter called the "Klaff Group"). Harold Stein sold a unit of Gulf American securities to the plaintiff, Milton Baumel, in November, 1957. Leonard Rosen sold a unit of Gulf American stock to the plaintiff, Dr. Earl R. Weiner,² in November, 1957. Together with Samuel Holtzman, Leonard Rosen sold another unit of Gulf American securities to Sidney Poland.

Leonard and Julius Rosen were not only the principal promoters of Gulf American but, at all times since the formation of that company, had been its principal officers—president and/or vice president and chairman of the board— directors and, individually and through Rosen Investment Corporation, majority stockholders. They have been engaged on a day-to-day basis in the management of the affairs of Gulf American. At the time that Gulf American was organized, Leonard and Julius Rosen occupied a similar position with Charles Antell & Co., a manufacturer of cosmetic preparations, but, in December of 1958, the assets of that company were sold to an outside purchaser for $100,000 cash, plus the value of inventory and $750,000 in notes payable in equal monthly installments, the first of which was due March 1, 1959. Thereafter, the name of Charles Antell & Co. was changed to "Rosen Investment Corporation," the corporate defendant in the consolidated cases, and Leonard and Julius Rosen continued as the sole stockholders in equal shares.

In October, 1957, when the sale of securities of Gulf American began, a document entitled "Proposal," was prepared, which set forth the organization and financing of the projected land sales of Gulf American which were proposed to be undertaken. A copy of the "Proposal" was furnished to each person who became a stockholder of Gulf American, including the plaintiffs. Included in the statements contained therein was a projection of land sales from 1958 to 1961 in the aggregate amount of $12,000,000 which, together with home sales from 1958 to 1963 in the aggregate amount of $3,965,000, and after expenses and estimated taxes, would result in a net profit after taxes of $5,321,500. Specifically, land sales for 1958 were estimated to be $2,000,000; for 1959, $3,000,000; for 1960, $4,000,000; and for 1961, $3,000,000.

As disclosed by a prospectus, dated March 8, 1961, which was prepared when Gulf American made a public offering of additional securities, the results of operations far exceeded the original expectations as embodied in the "Proposal." Gulf American operates on a fiscal year ended August 31. For the fiscal year ended August 31, 1958, lot sales, net of cancellations, and house sales, amounted to $6,604,565. For the fiscal year ended August 31, 1959, net lot sales, house sales and motel, restaurant and other operating income amounted to $14,130,594, and the comparable figure for the fiscal year ended August 31, 1960 was $26,512,365.

An issue in the case is the proper method of accounting to determine the income from the sale of lots sold under installment contracts. The dispute revolves around whether the gross selling price of a lot should be treated as income in the fiscal period in which the contract of sale of the lot is executed (the "accrual" method of accounting), or whether there should be included in income only the installment payments made under such a contract, with an appropriate entry treating payments yet to be made as a species of deferred income (the "installment" method of accounting).

It suffices to say that, even under the method of accounting not objected to by the Securities and Exchange Commission which was employed in the prospectus, Gulf American showed consolidated net income after provision for taxes for the fiscal year ended August 31, 1958 in the amount of $404,605, for the fiscal year ended August 31, 1959, $1,446,986, and for the fiscal year ended August 31, 1960, $3,260,933.

The results of operations, including Gulf American sales, cancellations and collections, were known on a day-to-day basis to Leonard and Julius Rosen. Both were actual and self-acknowledged experts in making installment sales, and both had full appreciation of the fact, implicit in such business, that the greater the volume of sales the greater the need for additional capital to purchase land, to make improvements thereon, and to pay expenses in connection with such sales until such time as the total purchase prices under the installment contracts of sale were paid in full. Leonard Rosen also fully understood the difference between installment and accrual methods of accounting for a business of the type in which Gulf American was engaged. Conversely, Milton J. Baumel, who had experience only as a prize fighter and the operator of a restaurant, and Earl R. Weiner, who is a dentist, lacked this sophisticated business knowledge. In the operation of his restaurant, Baumel relies on Mrs. Baumel and an outside accountant to keep his books and records.

Very shortly after Leonard and Julius Rosen contracted to sell the assets of Charles Antell & Co. and before the first of the notes given in partial payment for such sale matured, Leonard and Julius Rosen embarked on a plan to acquire additional stock of Gulf American. Because of the ultimate conclusion of the Court that both devised an overall scheme to acquire for...