Securities and Exchange Commission v. Crofters, Inc.

Decision Date10 August 1972
Docket NumberCiv. A. No. 70-351.
Citation351 F. Supp. 236
PartiesSECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CROFTERS, INC., et al., Defendants.
CourtU.S. District Court — Southern District of Ohio

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John I. Mayer, William D. Goldsberry, William M. Hegan, and Donald Dreyfus, Securities & Exchange Commission, Chicago, Ill., for plaintiff.

John J. Chester, Lawrence D. Stanley, James S. Monahan, Jack R. Alton, George E. Tyack, Bradley Hummel, John D. Holschuh, Alvin J. McKenna, Alphonse P. Cincione, Columbus, Ohio, for defendants.

OPINION AND ORDER

CARL B. RUBIN, District Judge.

This matter comes before the Court on the motion for a preliminary injunction as against all defendants filed by plaintiff Securities and Exchange Commission (S.E.C.); the motions for summary judgment filed by defendants Crofters, Inc., Deegee Company, Regency Acceptance Corporation, Donahue, Griffith, Groban, Consolidated Oil & Gas, Inc., Trueblood, Kerr, Clark, Coffey and King Resources Company; and cross motions for summary judgment by S.E.C. against Consolidated, Trueblood, Kerr and Clark.1 Voluminous briefs and depositions have been submitted to and carefully considered by the Court. For the purposes of this Order the details of this matter, as colligated by the Court at this point of the proceedings, are as set forth below.

I Dramatis Personae

Defendant Crofters, Inc., is a corporation organized and incorporated under the laws of Ohio and has its principal place of business in Columbus, Ohio. Its principal shareholders and officers are defendants Donahue, Griffith and Groban all of whom reside in the Southern District of Ohio. Defendant Deegee Company (hereinafter Deegee) is a partnership composed of these same three individuals and Regency Acceptance Company (hereinafter Regency Acceptance) is a sole proprietorship owned by defendant Groban. Both Deegee and Regency Acceptance have their principal place of business in Columbus, Ohio.

Defendant Consolidated Oil & Gas, Inc., (hereinafter Consolidated) is a corporation organized and incorporated under the laws of the State of Colorado, and has its principal place of business in Denver. Its principal business functions are the exploration and sale of oil and gas and the development and drilling of oil and gas wells. Defendant Trueblood is chairman of Consolidated's board of directors.

Defendant King Resources Company (hereinafter King Resources) is a corporation organized and incorporated under the laws of the State of Maine, having its principal place of business in Denver, Colorado. During material times herein and at least until August, 1970, defendant John King was chairman of King Resources' board of directors and defendant Coffey was its executive vice-president. This company is now in reorganization proceedings under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. before the United States District Court for the District of Colorado. Defendant Colorado Corporation is a Colorado concern with its principal place of business in Denver, Colorado. It has been controlled by defendant King and his immediate family. Defendant Regency Income Corporation, (hereinafter Regency Income) a Colorado corporation having its principal place of business in Denver, Colorado, is a wholly owned subsidiary of Regency Management Corporation which, in turn, is a wholly owned subsidiary of defendant Colorado Corporation. Defendant Kerr was the president of both Regency Income Corporation and Regency Management Corporation during times material herein.2

Defendant Four Seasons Nursing Centers of America, Inc., (hereinafter Four Seasons) is a Delaware corporation having its principal place of business in Oklahoma City, Oklahoma. Its principal business function is the development and operation of health care centers. Four Seasons is currently in reorganization proceedings under Chapter X of the Bankruptcy Act, 11 U.S.C. § 501 et seq., before the United States District Court for the Western District of Oklahoma. Defendant Clark was the president of Four Seasons during times material to the complaint in this suit.

Defendant LCM Corporation is an Ohio corporation with its principal place of business in Columbus, Ohio. Defendant Lore is chairman of LCM's board of directors and was, until January 1970, investment officer and investment consultant to the School Employees Retirement System of Ohio (hereinafter SERS). Defendant Howard is an independent moneyfinder and works out of Los Angeles, California. By terms of a consent decree Howard and his company, R. R. Howard & Company, Inc., have been prohibited from registering as broker-dealers under Section 15(b) of the Securities and Exchange Act of 1934. See Securities Exchange Act Release No. 8009, December 20, 1966.

The plaintiff Commission is a federal regulatory agency charged with the enforcement of federal securities law. It has brought this action under Section 20(b) of the Securities Act of 1933, 15 U.S.C. § 77t(b) and Section 21(e) of the Exchange Act of 1934, 15 U.S.C. § 78u(e).3 The jurisdiction of this Court is properly invoked pursuant to Section 22(a) of the 1933 Act, 15 U.S.C. § 77v(a) and Section 27 of the 1934 Act, 15 U.S.C. § 78aa. SEC seeks to enjoin pursuant to its five count complaint, allegedly fraudulent and deceptive practices committed by the nineteen corporate and individual defendants.

II The Complaint

Count I of the complaint, directed against all of the defendants except LCM Corporation and Lore, alleges violations of Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), in the offer and sale of securities, in the form of corporate promissory notes.4 Specifically these defendants are charged with misrepresenting to the purchasers that the notes in question were rated prime by the National Credit Office (hereinafter N.C.O.), a division of Dun & Bradstreet. The purchasers allegedly misled by these misrepresentations include the Treasurer of the State of Ohio and the Industrial Commission of Ohio, acting for the account of Ohio's Disabled Workmen's Relief Fund. (Complaint, Paragraph 25). The plaintiff Commission further alleges in Count I that these same defendants omitted to state material facts in the course of the various note transactions which, in light of other statements made, rendered such omissions misleading. See Section 17(a)(2), Securities Act of 1933. The alleged omissions include, but are not limited to, the following: (1) Substantial portions of the monies obtained through the sale of the promissory notes in question were reloaned to various individuals and corporations; although the reloaning was agreed to before the notes were sold, this information was not brought to the purchaser's attention; (2) King Resources Company, at the time it sold the notes in question, was not meeting its current obligations to creditors as they matured; and (3) Four Seasons' income and sales for the six month period ending December 31, 1969, and for the first quarter (January, February and March) of 1970 were substantially overstated. (Complaint, Paragraph 26). Count II of the Complaint incorporates these same factual allegations within the legal context of Section 10(b), 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated thereunder, of the Exchange Act of 1934.5

Counts III and IV of the Complaint are directed against LCM Corporation, Lore and the Crofters defendants.6 Count III charges these defendants with violating Section 17(a) of the 1933 Act by misrepresenting to purchasers, including SERS, that certain promissory notes which were offered for sale were the notes of local housing agencies, when in fact they were not. (Complaint, Paragraph 29). The Crofters defendants are further charged under this Count with failing to inform the purchaser of these notes of the one-half interest they were to receive from the prospective real estate developments of certain borrowers, in addition to a customary fee. (Complaint, Paragraph 30). Count IV reiterates these factual allegations within the purview of Section 10(b) and Rule 10b-5.

Count V is directed solely against the Crofters defendants and charges them with conducting an interstate business as broker-dealers in securities, without registering with the S.E.C. under Section 15(b) of the 1934 Exchange Act, in violation of Section 15(a) of said Act. 15 U.S.C. § 78o(a) and (b). Plaintiff Commission now seeks an injunction against all defendants to permanently enjoin the aforementioned acts.

III Factual Setting of this Controversy

The factual pattern in this case is elaborate because of the large number of defendants and the numerous transactions in which they were involved. For the limited purpose of this Order, and on the basis of the parties' briefs and the depositions filed herein, the following will be assumed.

(a) General Background to the Loans

In August and September of 1969 defendants Donahue, Griffith and Groban formed defendant Deegee and incorporated defendant Crofters. Donahue, a Columbus attorney (as is Griffith), had been First Assistant Attorney General and Tax Commissioner of Ohio. Groban, prior to his association with Crofters, was involved with numerous enterprises including the financing business. Between the fall of 1969 and the spring of 1970 defendant Crofters helped arrange the sale of $22,000,000 of promissory notes of various corporations to the State of Ohio, through the State Treasurer's Office and Ohio's Workmen's Compensation Fund.

At the time these transactions were consummated both the Treasurer and the Fund were restricted by statute from utilizing the investment funds administered by them in certain types of investments. The Treasurer had legal authority pursuant to O.R.C. § 135.14, to invest no more than $50,000,000 of "interim funds" in commercial paper rated "prime" by N.C.O., a division of Dun & Bradstreet.7 Commercial paper is...

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