Securities and Exchange Com'n v. Guild Films Co.

• Decision Date: 19 May 1960
• Docket Number: No. 267,Docket 26039.,267
• Citation: 279 F.2d 485
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Respondent, v. GUILD FILMS COMPANY, Inc., Santa Monica Bank, Southwest Bank of Inglewood, Hal Roach, Jr., Defendants-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

279 F.2d 485 (1960)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Respondent, v. GUILD FILMS COMPANY, Inc., Santa Monica Bank, Southwest Bank of Inglewood, Hal Roach, Jr., Defendants-Appellants.

No. 267, Docket 26039.

United States Court of Appeals Second Circuit.

Argued February 11, 1960.

Decided May 19, 1960.

Jacob Rapoport, New York City (Joel Arnold, New York City, of counsel), for defendants-appellants.

Thomas G. Meeker, Gen. Counsel, Securities & Exchange Commission, Washington, D. C. (Joseph B. Levin, Asst. Gen. Counsel, Washington, D. C., Arthur Goldman, New York City, and Frederic G. Gale, Washington, D. C., on the brief), for plaintiff-appellee.

Before MOORE, Circuit Judge, and SMITH and HERLANDS, District Judges.

MOORE, Circuit Judge.

This is an appeal under 28 U.S.C.A. § 1292(a) from an order by the district court, 178 F.Supp. 418, granting a preliminary injunction to restrain the sale of 50,000 shares of Guild Films Company, Inc. common stock by two of the appellants, the Santa Monica Bank and The Southwest Bank of Inglewood. Pending a final determination of this action, the preliminary injunction was issued "unless and until" a registration statement should be filed under the Securities Act of 1933, 15 U.S.C.A. § 77a et seq.

Section 5¹ of the Act makes it unlawful for anyone, by any interstate communication or use of the mails, to sell or deliver any security unless a registration statement is in effect. Section 4 provides, however, that "the provisions of section 5 * * * shall not apply to * * * (1) Transactions by any person other than an issuer, underwriter, or dealer." The banks claim that they come within this exemption to the registration requirements. The district court rejected this claim, holding that the banks were "underwriters" within the meaning of the Act. While the issue involved can be simply stated, a rather complete discussion of the facts is necessary.

The Original Loans by the Banks and the Security Therefor

On September 17, 1958, the Santa Monica Bank and The Southwest Bank of Inglewood jointly agreed to loan Hal Roach, Jr., $120,000, represented by two notes. An unverified, undated financial statement submitted by Roach was relied upon in making the loan. The money was deposited in a joint checking account in the name of Roach and Charles H. Meacham. Roach's note for $60,000 to the Santa Monica Bank, which was to manage the loan for both banks, was dated September 17, 1958, and his note to The Southwest Bank for the same amount was dated September 25, 1958. Both notes were treated as due on December 15, 1958, although the note to The Southwest Bank was actually payable 18 days earlier.

The loans were initially secured by 34,475 shares of the Scranton Corp. (valued at $15 per share) and 2,000 shares of F. L. Jacobs Co. stock (valued at $8 per share). As agreed, this collateral was soon replaced by 30,000 shares of Jacobs stock. Roach had used a large part of the proceeds of the loans to purchase a substantial number of the 30,000 Jacobs shares put up as collateral.

The Jacobs Stock and the Renewal Notes

Roach was an officer, director, and the controlling shareholder of F. L. Jacobs Co., of which Alexander L. Guterma was president. This company controlled the Scranton Corp. which owned Hal Roach Studios, which in turn owned both W-R Corp. and Rabco T. V. Production, Inc.

W-R Corp. and Guild Films, Inc. had made an agreement on January 23, 1959, under which W-R Corp. was to obtain 400,000 shares of Guild Films common stock (the registration of 50,000 shares of this stock is here in dispute) and a number of promissory notes in exchange for certain film properties. The stock was not registered with the S. E. C., but Guild Films agreed to use its best efforts to obtain registration. However, seeking to come within an exemption provided in section 4 of the Securities Act, the parties provided the following in their agreement:

"Stock Taken for Investment: W-R warrants, represents and agrees that all of the said 400,000 shares of Guild\'s common stock being contemporaneously issued hereunder, whether registered in the name of W-R or in accordance with the instructions of W-R, are being acquired for investment only and not for the purpose or with the intention of distributing or reselling the same to others. Guild is relying on said warranty and representation in the issuance of said stock."

On February 5, 1959, for reasons discussed below, Roach directed that 100,000 shares of the Guild Films stock be issued in the name of W-R Corp. and 100,000 shares (represented by two 50,000 share certificates) in the name of Rabco. Meacham, the treasurer of Guild Films, directed that the transfer agent stamp this restriction on the stock certificates:

"The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares have been acquired for investment and may not be sold, transferred, pledged or hypothecated in the absence of an effective registration statement for the shares under the Securities Act of 1933 or an opinion of counsel to the company that registration is not required under said Act."

The remaining 200,000 shares were not issued as the promised film properties were never transferred.

Although the Guild Films stock was issued "for investment only," the district court found that Roach "unquestionably" purchased it in order to have it resold. "In spite of the financial statement submitted by him to the Santa Monica Bank in September, 1958, Roach's financial position at that time was far from secure. A good part of the proceeds of the loan discussed below he had used to purchase Jacobs stock, in turn to post it as collateral for the loan and to fulfill other stock purchase commitments. Roach was financially pressed in December, 1958, when the Jacobs stock dropped to $5; he apparently had commitments to purchase more of this stock and no money with which to pay for it; he was indebted to the Pacific National Bank in the sum of $53,700 on a note which matured in March, 1959; he was unable to pay the Bank's notes as they matured. Although he sorely needed an extension of time in which to pay, he was unable to deliver sufficient collateral to accomplish this; he held his creditor at bay by promising additional collateral in the form of the Guild Films stock." These findings are uncontested.

On December 9, 1958, the Santa Monica Bank learned that the Jacobs stock had been suspended from trading on the New York Stock Exchange. That bank thereupon wrote to Roach asking him to liquidate the loan before December 15, 1958, because the Jacobs stock, which was then traded over-the-counter and had dropped in value to $5 per share, was "not now considered by our Loan Committee as acceptable collateral." After a number of conversations, the Santa Monica Bank agreed to renew Roach's note for 90 days upon deposit of 10,000 additional shares of Jacobs stock, or an equivalent in value in Scranton stock or upon payment of $30,000. A renewal note dated December 18, 1958 was sent to Meacham for Roach's signature, and interest on the matured note requested. The Santa Monica Bank agreed to renew on the same conditions. The notes were signed and returned, but Meacham requested "a few days in which to make up our minds" concerning the required additional collateral. Until the end of January, 1959, both banks were in constant communication with Roach, but no further collateral was deposited. On December 31, 1958, The Southwest Bank had informed him that its renewal would not be effective until additional security was supplied, and on January 28, 1959, it wrote to Roach demanding, by February 3, 1959, payment of the November 24, 1958 note, then more than six weeks overdue. On February 3, 1959, Roach telegraphed the Santa Monica Bank that he had "deposited $75,000 Guild Films, Inc. notes to your account at Chemical Corn Bank, New York. This best I can do till I return to Los Angeles next week." On the basis of this telegram, The Southwest Bank wrote to Roach agreeing to defer action until February 10th.

The Guild Films Stock

On that date Roach wired The Southwest Bank that he had sent 50,000 shares of Guild Films stock to the Santa Monica Bank. By a divided vote the Loan Committee of The Southwest Bank decided to renew the note, making it payable "On `Demand' if `No Demand' then all due March 18, 1959." On February 12th, one of the 50,000 share Guild Films certificates in the name of Rabco T. V. Productions was received by the Santa Monica Bank. The restrictive legend quoted above was stamped on the face of the certificate. Upon receipt thereof, the Santa Monica Bank authorized the Chemical Corn Exchange Bank in New York to release the Guild Films notes.

Subsequent Attempts by the Banks to Sell the Guild Films Stock

On February 12th, the Santa Monica Bank and The Southwest Bank learned that the Jacobs stock had been suspended from all trading by the S. E. C. The Santa Monica Bank immediately telegraphed Roach demanding payment by February 16th, and stating that otherwise the stock would be sold to liquidate the loan. Roach failed to pay and the banks attempted to sell...