Stevens v. Wallace

• Citation: 150 A. 835
• Parties: STEVENS, Atty. Gen v. WALLACE et al.
• Decision Date: 14 June 1930
• Court: New Jersey Court of Chancery

150 A. 835

STEVENS, Atty. Gen

v. WALLACE et al.

Court of Chancery of New Jersey.

June 14, 1930.

Syllabus by the Court.

In the case sub judice it appears the defendants were associated in conducting a business under the name of Wallace & Co., purporting to furnish impartial, expert, financial advisory service, for which they charged a stipulated fee. The so-called service furnished by the defendants was neither impartial nor expert, nor was their advisory service disinterested. On the contrary, it was solely intended as furnishing a medium through which they could unload various issues of worthless, or practically worthless, stock on unsuspecting and gullible subscribers and readers of a publication and weekly market survey which they circulated. It was a fraudulent enterprise within the purview of chapter 79 of the Laws of 1927", as amended, known as "New Jersey Securities Act," sometimes referred to as a "blue sky law." This court in the matter sub judice, under the authority of the act aforesaid, is authorized to appoint a receiver as auxiliary to an injunction issued herein. Syllabus by the Court.

The defendants having resorted to and practiced iniquity cannot appeal to a court of equity—of conscience—to exculpate them from their iniquity by means of their plea that the constitutionality of the legislation which prohibits the acts, the doing of which constitutes their iniquity, should be inquired into by the court in their behalf. A court of equity never lends its aid to the furtherance of schemes calculated to deceive and defraud the public, nor to the exoneration, directly or indirectly, of perpetrators of such schemes.

Suit by William A. Stevens, Attorney General, against James J. Wallace and others.

Decree advised for complainant.

Richard C. Plumer, of Newark, for complainant.

Lichtenstein, Schwartz & Friedenberg, of Hoboken, for defendants.

FALLON, Vice Chancellor.

The matter sub judice is based upon proceedings instituted by the Attorney General of New Jersey against the defendants under chapter 79 of the Laws of 1927 (P. L. p. 138), as amended, known as "New Jersey Securities Act," sometimes referred to as a "blue sky law." It appears that on or about June 1, 1929, the defendant, James J. Wallace, commenced business in the Odd Fellows building, Jersey City, N. J., under the trade-name of Wallace & Co. Associated with him were the defendants Alfred Leonard, George Clayton, and Gordon F. Allen. During the latter part of the year 1928 or the early part of 1929, and for approximately a year prior thereto, Wallace had been employed as office manager by one Charles Beadon in the city of New York in connection with two publications, one known as the "Stock Market Reporter" and the other known as "The Trend of the Market." Clayton had also been employed by Beadon at about the same period to write the daily market letter for the "Stock Market Reporter" and "The Trend of the Market." In 1928 proceedings were instituted against Beadon by the Attorney General of the state of New York under authority of article 23-A of the General Business Law of the state of New York (Consol. Laws, c. 20), and later an injunction was issued against him. Thereafter publication of the "Stock Market Reporter" and "The Trend of the Market" was discontinued, and in the early part of the year 1929 Beadon was indicted by the United States grand jury in the Southern District of New York for using the United States mails in furtherance of a scheme to defraud. I deem it unnecessary, for the purpose of my determination of the matter sub judice, to comment upon subsequent proceedings under said indictment.

The defendants, Wallace and Clayton, following their connection with Beadon in New York, located at the aforesaid address in Jersey City, where they were associated in conducting a business under the name of Wallace & Co., purporting to furnish impartial, expert, financial advisory service, for which they charged a stipulated fee. Their method of operation was to buy lists of names and addresses from firms established for the purpose of selling such lists, and thereby they were enabled to circularize their clientele. The magnitude of their business operations is indicated by the fact, established by proof herein, that between May 7, 1929, and September 6, 1929 (both dates inclusive) more than $40,000 was paid to the United States Post Office for postage. It also appears that another method employed by the defendants for making contact with their prospective customers was by telephone. The extent to which they made use of such medium of communication with their prospects is manifested by the fact, established by proofs herein, that during the period abovementioned the defendants' toll charges paid to the telephone company was approximately $30,000. It appears that ten trunk telephone lines and ten auxiliary telephone lines were installed in the offices rented and occupied by the defendants. It appears also that, when application was made by the defendants, in the name of Wallace & Co., for the furnishing of telephone service, the telephone company required, and received, a deposit of $5,000 as security for the payment of monthly telephone bills. In the month of July following they were required to increase the deposit to the sum of $10,000. The proofs disclose that another medium through which the defendants furnished the alleged impartial, expert, financial advisory service was a publication known as "The Tape and Ticker," which consisted of a daily market letter, a complete file of which was put in evidence, and a weekly market survey, a complete file of which was also put in evidence. The charge made by the defendants for the aforesaid service was $5 a month. The income derived by the defendants therefrom reached approximately $60,000 a month, from approximately 12,000 paying subscribers.

The proofs disclose also that 38,000 persons received the abovementioned publication gratuitously over varying periods, on trial. A scrutiny of the reading matter contained in such publication indicates that nothing was said therein which might lead the reader to believe that it was what may be termed a come-on-sheet, until the issue of June 20, 1929, when in "The Tape and Ticker'" the defendants, by means of such publication, called the attention of the subscribers and readers thereof to what was described as "A low priced sleeper," which was claimed to have been uncovered by them. Such was apparently contemplated for a subsequent spectacular market play. This was followed by similar statements in said publication until the issue of June 24. 1929, wherein particular attention was directed to a stock known as "American Electric Switch Common A," which stock was then listed on the New York Produce Exchange.

It is clearly manifest from the reading matter of said publication, and particularly of the issues hereinabove mentioned, that the defendants intended that subscribers and readers thereof should believe that a pool was operating in the shares of the aforesaid stock and that said pool was washing out a small floating supply of said stock in contemplation of active market operation therein. In subsequent issues of the daily bulletin of the Tape and Ticker, up to and including July 12, 1929, the defendants continued their recommendation of the purchase of the aforesaid stock at prices varying from $17 per share to $25 per share, and in the issue of July 12, 1929, published the following statement:

"American Electric Switch Common 'A': The president of this company in a recent interview stated that they are fast approaching a dividend basis and that a market above 30 should easily be maintained in these shares."

On the very date when the aforesaid statement was published, the above-described stock was stricken from the list of stocks traded in on the New York Produce Exchange. Such fact I regard as significant in my consideration of the matter sub judice. An illustration of the wide scope of the defendants' activities in the aforesaid stock is manifested by the affidavit, filed as proof herein, of Rev. John L. Brandt of 927 S. Gramercy Drive, Los Angeles, Cal. It appears therefrom that Rev. Brandt bought several shares of American Electric Switch Corporation common A stock, after having received letters and circulars from Wallace & Co., and also after a telephone call in which the defendants represented that the stock would be listed on the market (meaning the New York Curb Exchange, because it had already been stricken from the New York Produce Exchange) at $30 per share on August 15, 1929, and that the defendants had over 10,000 customers whom they were notifying, so that all of them could avail themselves of the advantage of purchase before the floating supply of stock was gone, and before the pool would control the market. It appears that said stock was never listed on the New York Curb Exchange. Another stock recommended by the defendants was New Mexico Copper & Manganese Corporation. The first mention of it was in an issue of the Tape and Ticker dated June 17, 1929, wherein it was stated that it was being quoted around $4.12 1/2 to $4.25 a share. No particular prominence was given thereto after such publication until the issue of July 11, 1929, when subscribers and readers were urged by divers means to buy said stock "for both the long pull and quick market play." The first recommendation of said publication was to purchase said stock at $1.70 a share. Subsequent publications recommended the purchase thereof at various prices. In an issue of...