SECURITIES AND EXCH. COM'N v. Glass Marine Industries, Inc.

• Decision Date: 31 August 1962
• Docket Number: Civ. A. No. 2276.
• Citation: 208 F. Supp. 727
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. GLASS MARINE INDUSTRIES, INC., a Delaware corporation, Defendant.
• Court: U.S. District Court — District of Delaware

208 F. Supp. 727

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. GLASS MARINE INDUSTRIES, INC., a Delaware corporation, Defendant.

Civ. A. No. 2276.

United States District Court D. Delaware.

July 23, 1962.

On Motion for a New Trial August 31, 1962.

COPYRIGHT MATERIAL OMITTED

Thomas B. Hart, John J. Enright and John W. Vogel, Chicago, Ill., for Securities and Exchange Commission.

James H. Conaway, Jr. (Morford, Young & Conaway), Wilmington, Del., and Lawrence A. Coles, Jr. (Thompson, Raymond, Mayer, Jenner & Bloomstein), Chicago, Ill., for defendant.

Hayden Leason, intervenor, pro se.

Arthur J. Sullivan (Morris, James, Hitchens & Williams), Wilmington, Del., and Saul S. Nevins, New York City, for special intervenor, Lancer Industries, Inc.

On Plaintiff's Motion for a New Trial August 31, 1962.

LEAHY, Senior District Judge.

I. Preliminary Matters

1. Judicial determination of these charges must rest on determination of intentions of Glass Marine and Hayden Leason which, at best, can only be proved by inference, by acts more convincingly consistent with a fraudulent scheme than a nonfraudulent plan. The basic question in the present cause is whether a pre-existing intent not to go into the boat business existed at the time the Prospectus was issued. Some years ago, in a somewhat similar situation,¹ I stated that:

"Such inference — that there was such a fraudulent plan — must be based on the state of mind of * * * the * * * directors. To ascertain the state of mind of any witness in the case at bar at a particular point in time, I think it plain one must consider facts for a period, for example, both prior and subsequent to * * * (the date of an allegedly misleading stockholder letter). Behavior rather than words among men and women is most significant in determining intent. Attorney General v. Drummond, 1 Drury & Warren 353, 368 (Lord Chancellor Sugden, `Tell me what you have done under such a deed, and I will tell you what that deed means'.) Although the parties are in dispute, I accept the thesis plaintiffs must show there was a preexisting intent to liquidate, etc. at the time of the * * * letter by a preponderance of the probabilities."²

The bulk of the evidence introduced by the SEC is deposition-evidence.³ Few persons, and none crucial to the cause, appeared and testified personally in court.⁴ This is unfortunate.⁵ For conflicting testimony abounds through the weighty depositions in this cause. Keenan Hanley, for example, is the inventor of the Hydrojet system of water propulsion, a director of the Company until the last annual meeting, and has a personal financial interest in the financial affairs of Glass Marine.⁶ Hanley and Hayden Leason are on poor terms.⁷ Hanley testified that on June 6, 1960, months after the Registration was filed and one month before the public offering became final, Hayden Leason stated at a meeting of Glass Marine's board of directors: "Well, if its going to cost this much (to make the boats) we might as well not go into it, in business with us, we are not going to make any profit on this thing. We might as well go right in and buy bonds with it or trade in the stock or something else."⁸ If truly made, this may be a striking rejoinder to Leason's claim he honestly intended to go into the boat business. Nicholas Savaiano, however, former president of Glass Marine, has also testified with respect to the meeting and recalled no such conversation.⁹ Leason himself denies the conversation.¹⁰

The decision as to whether the conversation took place or not is for the fact-finder, the trier of the case. But in a case so replete with deposition-evidence of the most crucial import, and so lacking in personal appearances before the Court of parties to the alleged comment of Leason, the fact-finding process is stymied.¹¹ Here, as too often throughout this case, no reasonable inference may be drawn as to whether this conversation did in fact take place. Decisions can, must, and will be made as to whom to believe, but with far less assistance to the decision-making process than had witnesses appeared in Court to be seen, heard, and personally evaluated.

2. A second preliminary problem should be noted. In an earlier opinion in this cause well over a year ago the Court overruled defendant's objections to admission of various investigatory transcripts. At that time, however, the Court noted its aversion to the "dump truck" method of trial practice adopted by plaintiff, and stated:

"If in plaintiff's main brief it makes reference to or an attempt to utilize any of the investigatory testimony or the ex parte writings in support of its allegations in its complaint, such portions so utilized must be supported by an admissibility argument."¹²

At various points in plaintiff's brief, investigatory testimony of certain of the parties is relied upon.¹³ Such testimony has been examined and evaluated, but no attempt will be made here to rule on the admissiblity of any particular portion of the testimony.^13a

II. The Registration Statement

3. The Registration Statement of Glass Marine became effective July 6, 1960. On July 7, 1960, the underwriting was commenced with Leason & Co., Incorporated, as managers, and Bala, Williams & Co. and William Robinson & Co., as underwriters. By the afternoon of that day the entire issue had been sold out through 22 participating dealers in 7 states.¹⁴ On July 13, 1960, Nicholas Savaiano, president of Glass Marine, went to the Chicago office of Leason & Co. to meet with Harvey Leason of that company and father of Intervenor Hayden Leason. The purpose of the meeting was to sign a cross-receipt for delivery to the underwriters of the 300,000 shares and the delivery to Glass Marine of the net proceeds of the offering in the amount of $451,000.¹⁵

A total of $451,000 was received by the Company from the investing public. Apparently, not over $1200 of the $100,000 ear-marked for plant construction was used for such purpose,¹⁶ and this only for the clearing of rubbish from the plant site which was done prior to the offering. Only $10,000 of the $50,000 allocated to a build-up of inventory was so expended. All this amount was for expenses incurred in the construction of the prototype boat for the Hydrojet.¹⁷ The Prospectus had stated that $120,000 would be expended for the acquisition or installation of production facilities; with the exception of "a few thousand dollars at best," no funds were so expended.¹⁸ No part of the $30,000 allocated to acquiring dies, jigs, and fixtures, or of the $50,000 allocated for grinders, drill presses, and other tools, or of the $23,000 for spraying equipment, or of the $41,000 for overhead conveyor equipment, was ever spent for any of such purposes.¹⁹ $150,000 was allocated to advertising and promotional items; from $7500 to $15,000 was expended for such purposes.²⁰

4. Plaintiff thus claims that a maximum of not over $26,200 of the $451,000 received from the investing public was actually utilized as represented and concludes that even this amount was expended in a manner more consistent "with the business of a further `promotion' than the promotion of the business."²¹ Defendants retort that the Registration Statement was actually filed on April 25, 1960 and that the backlog of statements filed caused its Statement to become effective as late as July 6 (instead of the statutory waiting period of 20 days after filing). By July, defendants claim, the boat industry had fallen into a violent and wholly unexpected downward spiral. The Annual Report for 1960 of the Bueler Corporation, one of the largest and best established companies in the field of water jet propulsion, states that an "unusually drastic and sudden decline in industry sales"²² caused its Turbocraft Division to contract its operations as rapidly as possible. Defendants maintain that these changed conditions brought about the changes in corporate policy from what the Prospectus had promised and that any and all acts by defendant corporation after the slump cannot be attributed to it at the time the Prospectus was issued.

Both contentions are credible. When a Prospectus is filed, followed as little as this one,²³ and deviated from as quickly as this one,²³ an inference of fraud may result. Too, changed business conditions immediately after a public offering is made may lead to a permissible degree of deviation of corporation action from that originally contemplated.²⁴ Detailed analysis is thus required of actions of the corporation and the Intervenor before and after July 6, 1960, to determine, as correctly as is possible, what intent existed at the time when the offer of stock became public.

III. Background to Registration

5. The SEC contends the machinations of four corporations must be studied before the nature of the allegedly fraudulent intentions of the defendants can be properly comprehended.

6. The first of these corporations is Amphibious Boats, Inc., a Texas corporation, which, by the fall of 1959, had commenced manufacture of both outboard powered boats and preparation of a land-sea "amphibion" boat.²⁵ In September, 1959, Hayden Leason entered into negotiations with the officers and directors of Amphibious with respect to the possible acquisition by him of both an Illinois distributorship for the company's boats and an interest in its capital stock.²⁶ By mid-November 1959, he had acquired substantial amounts of stock of Amphibious and in early December he was elected a director.²⁷

Among companies considered for acquisition by Amphibious was Glass Crafts Boats, Inc., of Humboldt, Iowa. Prior to January, 1960, however, the Amphibious directors abandoned their consideration of such direct acquisition upon their determination that they did not have sufficient liquid assets to utilize its assets.²⁸ By this time, however, a need for capital had become acute and the corporation continued to search for a source of funds. Between February 17, 1960 and March 5,...