McDaniel v. COMPANIA MINERA MAR de CORTES, ETC.

• Decision Date: 16 October 1981
• Docket Number: No. CIV 78-281PHX-EHC.,CIV 78-281PHX-EHC.
• Citation: 528 F. Supp. 152
• Parties: Howard T. McDANIEL and Murlean F. McDaniel, his wife, Plaintiffs, v. COMPANIA MINERA MAR de CORTES, SOCIEDAD ANONIMO, INCORPORATED, a Texas corporation; Jack D. Myers, an individual; Ernest B. Myers, an individual; Marvin D. Hodges, an individual; and Bennett C. Cook, an individual, Defendants.
• Court: U.S. District Court — District of Arizona

528 F. Supp. 152

Howard T. McDANIEL and Murlean F. McDaniel, his wife, Plaintiffs, v. COMPANIA MINERA MAR de CORTES, SOCIEDAD ANONIMO, INCORPORATED, a Texas corporation; Jack D. Myers, an individual; Ernest B. Myers, an individual; Marvin D. Hodges, an individual; and Bennett C. Cook, an individual, Defendants.

No. CIV 78-281PHX-EHC.

United States District Court, D. Arizona.

October 16, 1981.

COPYRIGHT MATERIAL OMITTED

Frank C. Brophy, Jr., Phoenix, Ariz., for plaintiffs.

Westlyn C. Riggs, Smith, Riggs, Buckley & Farnsworth, Mesa, Ariz., for defendants.

MEMORANDUM OPINION AND ORDER

(FINDINGS OF FACT AND CONCLUSIONS OF LAW)

CARROLL, District Judge.

This matter came on for trial to the Court on March 16, 1981, and presentation of evidence was completed on March 23, 1981. The Court ordered the parties to submit proposed findings of fact and conclusions of law, and a post-trial memorandum addressing the legal issues.

The parties complied with the Court's order by May 1, 1981, and the case has been ready for disposition since that date.

NATURE OF ACTION AND JURISDICTION

This action was brought by plaintiffs as purchasers of stock of defendant Compania Minera Mar de Cortes, Sociedad Anonimo, Incorporated (Compania) for recission and damages claimed to result from alleged violations by defendants of the Securities Act of 1933, 15 U.S.C. § 77a et seq. (Securities Act), the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (Exchange Act) and the Arizona Securities Act, A.R.S., § 44-1801 et seq. (Arizona Act).

The specific federal regulations alleged are (1) registration violations arising under §§ 12 and 15 of the Securities Act, 15 U.S.C. §§ 77l and o, and (2) anti-fraud violations arising under §§ 12(1) and 17(a) of the Securities Act, 15 U.S.C. §§ 77l(1) and 77q(a), and § 10(b), 15 U.S.C. § 78j(b), Rule 10b-5, 17 C.F.R. Part 240.10b-5 (1979) and § 20(a), 15 U.S.C. § 78t(a) of the Exchange Act.

This Court has jurisdiction over the federal claims pursuant to 15 U.S.C. § 77v, § 22 of the Securities Act and 15 U.S.C. § 78aa, § 27 of the Exchange Act. This Court has pendent jurisdiction to determine the state claims arising under the Arizona Act. Robinson v. Penn. Central Co., 484 F.2d 553 (3rd Cir. 1973).

THE PARTIES

Plaintiffs Howard T. and Murlean McDaniel are residents of the State of Arizona. Mr. McDaniel (McDaniel) has a master's degree in accounting and spent approximately 25 years as an employee with the U.S. Army security agency engaged in accounting and computer operations. Following his retirement from government service in 1973, he engaged in the business of constructing residences in the area of Tappahannock, Virginia for several years. He was employed by defendant Compania in May, 1977, and moved to Phoenix, Arizona. McDaniel had no prior experience in mining engineering or metallurgy.

Defendant Compania is a corporation organized under the laws of Texas in 1975. The incorporators were friends or associates of defendants Jack Myers and Marvin Hodges. At all times relevant to this lawsuit, Compania's board of directors included defendants Jack Myers, Hodges, Ernest Myers and Bennett Cook.

Defendant Jack D. Myers (Jack Myers) is a Texas resident. He is a brother of defendant Ernest B. Myers. He served as an officer and a director of defendant Compania.

Defendant Marvin Hodges is a California resident. He has had some previous mining experience, although he does not have a college degree or certification as a mining engineer. In the early 1950s, he allegedly located several mineral deposits in an area approximately 120 miles northwest of Hermosillo, Sonora, Mexico. These properties were known as the Santa Cleotilde, Padre Kino, La Golondrina and San Juan. Although he professed to have expended approximately $1,500,000 in developing these properties prior to 1974, no substantial evidence was produced at trial which would support a finding that such amounts had been available to Hodges or had in fact been invested in the property. Hodges served as an officer and a director of defendant Compania.

Defendant Ernest B. Myers (Ernest Myers), previously an Arizona resident, is presently a resident of Nevada. He served as an officer and director of defendant Compania.

Defendant Bennett C. Cook (Bennett Cook) is a resident of Georgia. He served as an officer and a director of defendant Compania.

OTHER ACTORS

Robert Sobarzo Carranza (Sobarzo) is a Mexican national from Hermosillo, Sonora, Mexico. He associated with Hodges and Compania in the Mexican mining venture. Sobarzo represented that he was the owner and holder of the mining rights to the four mining concessions named above.

Charles Barnes is McDaniel's friend and former Baptist pastor. It was Barnes who first approached McDaniel concerning investment in Compania. McDaniel later transferred a portion of the Compania stock he acquired to Barnes for no remuneration. Although Barnes was an officer and director of both Compania and American Metalrock Corporation, he was never named as a defendant in this action.

Warren Zimmerman, a Dallas, Texas attorney, represented Compania and earlier corporations organized by one or more of the defendants in pursuit of their mining venture. He also prepared certain stock agreements involving plaintiff and Jack Myers.

American Metalrock Corporation (AMR), a Texas corporation, was organized in 1974. Original incorporators were Hodges, Jack Myers, Ernest Myers and Gibea Richey. AMR was intended to be involved in financing and equipping the proposed Mexican mining venture and to hold the allowed foreign interest in such properties.

Tennessee Metalrock Corporation (TMR) was incorporated in Tennessee in 1974. Ernest Myers was an incorporator and president until he resigned in June, 1976, to become president and chairman of the Board of Compania. TMR raised funds which were invested in AMR and later Compania.

Padre Kino, S.A. de C.V., a Mexican corporation (Padre Kino), was formed to hold any permitted interest in mining rights and property in Mexico. Compania owned approximately a 40% interest in Padre Kino.

Royce Latimer is a purported mining engineer, who prepared a preliminary geologic survey report regarding the Mexican mining properties and which was used in promoting the sale of limited partnership interests by TMR, the general partner.¹ Each limited partnership sold by TMR ($2,500) was represented as having an ownership of one percent (1%) of the common stock of Compania. TMR ultimately sold over 400 of these limited partnership interests as an allegedly private offering to knowledgeable and sophisticated investors.

WHAT OCCURRED

In the early 1950s, Hodges began the "development" of the Mexican mining properties. Jack Myers worked with him from time to time on the project.

In early 1974, AMR was formed to secure additional financing for the mining operations and to hold "title" to personal property and mineral interests as permitted by Mexican laws. The record is unclear regarding the nature and extent of the interest held by AMR in the Mexican mining properties. The testimony was that on January 9, 1970, Sorbarzo conveyed to Hodges his leasehold interest in the Santa Cleotilde and other existing claims. Such conveyance notwithstanding, there was further testimony that on February 5, 1974, Sorbarzo conveyed to AMR 49% of his right, title and interest in the four mining concessions. Whatever the implications of such ambiguities, for purposes of this opinion they need not be resolved.

In March of 1974, Ernest Myers and other persons active in the Southern Baptist Convention organized and incorporated TMR in Tennessee. Thereafter, TMR raised approximately $400,000 in 1974, which was then used by AMR to purchase equipment intended for use at the Mexican mine.

Additional capital was considered necessary to develop and operate the mining properties and as a part of this program, Jack Myers and Hodges arranged for Compania to be incorporated in Texas in November of 1975. Jack Myers and Hodges were named officers and directors of Compania. Ernest Myers and Bennett Cook became directors at a later date, with Ernest Myers becoming President and Cook a Vice-President. At the time of Compania's incorporation, Jack Myers, Hodges, Ernest Myers and Bennett Cook were 4 of the 5 shareholders in AMR.

On January 26, 1976, the Compania Board adopted a resolution authorizing the corporation to raise $1,500,000 "for exploitation and mining activities of the corporation's Santa Cleotilde Mine in the State of Sonora, Mexico," in which Compania represented it held a 49% ownership interest.

In April, 1976, the Compania Board adopted a further resolution to raise 1,500,000 through the sale of stock to TMR, as a general partner for various limited partnerships to be sold by TMR. Under this arrangement, the Compania stock would have been owned by the three entities in the following manner:

1. AMR would hold 1,713,000 shares of Compania common stock;²

2. TMR would hold 333,000 shares of Compania common stock; and

3. TMR-Limited Partnerships would equal 1,512,000 shares of Compania common stock.

The resulting total of issued and outstanding Compania common stock therefore, was 3,558,000 shares.

TMR, with the active participation of Compania, prepared and distributed material with respect to the offering of the TMR limited partnerships. These materials were drafted by Zimmerman based upon information furnished by Hodges and Jack Myers. It became necessary for TMR to make a recission offer with respect to the first limited partnership offering, and some of these interests were tendered back and redeemed.

A "Private Placement Memorandum" regarding the TMR interests was printed and distributed after November, 1976. The fund raising venture was to be a private offering of such limited partnership interests to knowledgeable and sophisticated investors "financially affluent to the degree that they are able to make...