SEC v. Carriba Air, Inc., Civ. A. No. C80-1918A.

• Decision Date: 27 February 1981
• Docket Number: Civ. A. No. C80-1918A.
• Citation: 516 F. Supp. 120
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CARRIBA AIR, INC.; Marvin Winograde; Gertrude Pollard; Richard Williams; and Frederick H. Rehm, III, Defendants.
• Court: U.S. District Court — Northern District of Georgia

516 F. Supp. 120

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CARRIBA AIR, INC.; Marvin Winograde; Gertrude Pollard; Richard Williams; and Frederick H. Rehm, III, Defendants.

Civ. A. No. C80-1918A.

United States District Court, N. D. Georgia, Atlanta Division.

November 17, 1980.

On Motion For Preliminary Injunction February 27, 1981.

COPYRIGHT MATERIAL OMITTED

Joseph L. Grant, Barton S. Sacher and Steven J. Gard, Atlanta, Ga., for plaintiff.

Martin Zerobnick, Brenman, Epstein, Zerobnick, Raskin & Friedlob, Denver, Colo., for defendants.

ORDER

ROBERT H. HALL, District Judge.

Plaintiff, Securities and Exchange Commission ("Commission"), has filed its Verified Complaint herein, seeking inter alia, a Temporary Restraining Order, Preliminary and Permanent Injunctions, and the imposition of a constructive trust, respecting defendants Carriba Air, Inc., Marvin Winograde, Gertrude Pollard, Richard Williams and Frederick H. Rehm, III, alleging violations of Section 17(a) of the Securities Act of 1933, as amended 15 U.S.C. § 77q(a) and Section 10(b) of the Securities and Exchange Act of 1934 15 U.S.C. § 78j(b) and Rule 10b-5 thereunder 17 C.F.R. 240.10b-5.

This cause arises and was heard, after due notice to defendants, on the motion of plaintiff for a temporary restraining order and for an order imposing a constructive trust over certain funds. Based upon the verified pleadings filed to date, the sworn transcripts of testimony of the individual defendants, and the Memorandum of Law filed in support of plaintiff's motion, this Court finds it has jurisdiction of the subject matter of this action and that venue is properly posited in this jurisdiction.

Based upon the brief and supporting documents filed by defendant Carriba Air, Inc., this Court finds that no immediate and irreparable injury, loss or damage will result to the public prior to the time this Court has a hearing on the motion for a preliminary injunction.

The motion of the plaintiff for a temporary restraining order and for an order imposing a constructive trust over certain funds is DENIED.

MEMORANDUM ORDER

On Motion For Preliminary Injunction

This cause was heard on January 12, 13 and 14, 1981, upon Plaintiff Securities and Exchange Commission's ("Commission") Motion for Preliminary Injunction against Defendants Carriba Air, Inc. ("Carriba"), Marvin Winograde, Gertrude Pollard, Richard Williams, and Frederick Rehm, seeking to enjoin Defendants from violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder by the Commission.

After considering the Commission's Verified Complaint, the sworn transcripts of testimony of the individual Defendants herein (taken with counsel of their choosing present who were afforded an opportunity to cross-examine), the oral testimony of two witnesses for the Commission and four witnesses who testified on behalf of Defendants (including Defendant Winograde), and the Exhibits which were introduced into evidence during oral examination conducted during the evidentiary hearing on the Motion for Preliminary Injunction, the Court enters its Findings of Fact and Conclusions of Law as follows:

1. BACKGROUND

Carriba was incorporated in Colorado in mid-1980, having succeeded Air West Indies, Inc., a Colorado corporation which succeeded to Air West Indies, Inc., a de facto corporation of Puerto Rico.¹ Carriba was formed for the purpose of conducting commuter airline and charter services from its base in San Juan, Puerto Rico to St. Thomas in the Virgin Islands and other Caribbean destinations.² Carriba was conceived and promoted by Defendants Winograde, Pollard and Williams.³ After establishing a basic business plan, these Defendants began hiring employees for Carriba and attempted to acquire aircraft and operating equipment.⁴ Defendant Rehm was hired as President of Carriba by Defendant Williams after consultations with Defendants Winograde and Pollard;⁵ and Defendants Winograde, Pollard and Williams hired Michael Smith to secure Carriba's operating certificate from the Federal Aviation Administration ("FAA"), to provide FAA regulatory compliance work and to assist in acquiring Carriba's aircraft.⁶ Defendant Williams and Smith located aircraft and executed acquisition contracts on behalf of Carriba with the permission of Defendants Winograde and Pollard,⁷ who comprised a majority of Carriba's three-person Board of Directors.⁸ Rafael Facundo was hired as Carriba's Director of Operations by Defendants Winograde, Pollard and Williams.⁹ Defendant Williams and Facundo began hiring operating personnel with the approval of Defendants Winograde and Pollard.¹⁰ Defendant Winograde became Carriba's Vice President, even though he resided in California.¹¹ Defendant Pollard became Carriba's Secretary-Treasurer.¹² During Pollard's periodic absences from Puerto Rico, and Winograde's continuing absence from the scene, Defendant Williams was primarily responsible for Carriba's operation.¹³ Defendants Winograde and Pollard contributed cash and services to Carriba's start-up which they valued as totalling $28,000.00.¹⁴ Thereafter, the individual Defendants, acting on behalf of Carriba, sought to secure financing through a public offering of equity securities.¹⁵ Through personal contacts they met with representatives of Securities Clearing of Colorado, Inc. ("SCCI"), a broker-dealer, and secured the representation of the law firm of Brenman, Epstein, Zerobnick, Raskin & Friedlob, P.C. ("the Brenman law firm"), both of which were located in Denver, Colorado.¹⁶ Carriba, acting through Defendants Pollard and Winograde, with the assistance of Defendant Williams, offered and sold common stock to investors through a private placement of securities pursuant to Commission Rule 146 in reliance upon the exemption contained therein from registration.¹⁷ The purpose of this private placement was to secure needed operating capital and the funds necessary to pay the fees and expenses which were needed for Carriba to offer additional common stock through a public offering.¹⁸ Carriba retained the Brenman firm, which consulted with the individual Defendants and others who provided the information necessary to prepare the private placement memorandum ("PPM"),¹⁹ and which then filed a Rule 146 Statement with the Commission. The PPM was circulated to private investors, who invested approximately $140,000.00 and received 3,500,000 shares of Carriba's common stock in return.²⁰ Winograde and Pollard continued as Carriba's majority shareholders, however, holding 16,649,054 shares of Carriba common stock.²¹

Defendant Pollard formed a Cayman Islands corporation, hired her son, Defendant Williams, as its principal employee and entered into a contract to perform management and sales services for Carriba.²² Defendant Winograde and Joseph Peatman, a business associate of Winograde, who had purchased Carriba stock in the private placement and became a Director of Carriba, entered into various contracts with Carriba relating to the purchase, sale and leaseback of Carriba's aircraft and provided the airplanes to Carriba.²³

Defendant Pollard's corporation, Aviation Management & Sales ("AM&S"), began to receive $3,600.00 per month, which was increased to $10,000 per month in June of 1980.²⁴ Defendant Winograde was to receive $3,000.00 per month for his services as Carriba's Vice President, plus additional amounts relating to the aircraft acquisition.²⁵

On May 30, 1980, Carriba filed a Form S-18 Registration Statement with the Commission's Atlanta Regional Office, thereby beginning the registration process necessary to issue securities for sale to public investors. The Form S-18 Registration Statement (Exhibit 5-4) and numerous Exhibits thereto (Exhibit 5-5) were prepared by the Brenman law firm in conjunction with SCCI, the proposed lead Underwriter. The Registration Statement closely resembled, and contained similar information to that contained in, the previously circulated Private Placement Memorandum. It was filed with the Commission and revised periodically during the registration process. Each of the individual defendants herein have testified that they supplied information to the Brenman law firm and SCCI, the Underwriter, for use in preparing the various legal documents necessary to effectuate a public issue of securities.²⁶ Moreover, each of the individual defendants testified that they received and reviewed each of these documents as they were periodically revised.²⁷ In addition, each of the individual defendants testified that they reviewed the final Prospectus which became effective and was circulated to the investing public on or about August 29, 1980.²⁸ Pursuant to the Underwriting Agreement contained within Exhibit 5-5, during the month of September 1980, 12,000,000 shares of Carriba common stock were offered and sold to members of the investing public.

In late September 1980, it came to the attention of the Commission's enforcement personnel in the Atlanta Regional Office that Carriba's Prospectus and Form S-18 Registration Statement may have been false and misleading. Very shortly thereafter, on September 30, 1980, Commission enforcement personnel assigned to this matter met with members of the Brenman law firm, who represented Carriba, and a partner of the Denver law firm representing SCCI, Carriba's underwriter. During this meeting, the attorneys agreed to produce the individual defendants herein for oral testimony on October 8 and 9, 1980. On those dates, the Commission enforcement personnel took the sworn testimony of defendants Winograde, Pollard, Williams and Rehm. Each witness was sworn by a Notary Public, was accompanied by a partner of the Brenman law firm (who were afforded an opportunity to confer with the witnesses during the examination and, further, to elicit questions upon cross-examination, which privilege was...