Timetrust v. Securities and Exchange Commission, 9823.

• Decision Date: 31 July 1942
• Docket Number: No. 9823.,9823.
• Citation: 130 F.2d 214
• Parties: TIMETRUST, Inc., et al. v. SECURITIES AND EXCHANGE COMMISSION.
• Court: U.S. Court of Appeals — Ninth Circuit

130 F.2d 214 (1942)

TIMETRUST, Inc., et al. v. SECURITIES AND EXCHANGE COMMISSION.

No. 9823.

Circuit Court of Appeals, Ninth Circuit.

July 31, 1942.

Keyes & Erskine and Louis Ferrari, all of San Francisco, Cal., for appellant Bank of America and another.

Dreher, McClellan & McCarthy, of San Francisco, Cal., for appellant A. P. Giannini.

John L. McNab, of San Francisco, Cal., for appellant J. M. Grant.

Bacigalupi, Elkus & Salinger and Claude N. Rosenberg, all of San Francisco, Cal., and Gumpert & Mazzera and Harry A. Mazzera, all of Stockton, Cal., for appellants Timetrust, Inc., et al.

Chester T. Lane, Gen. Counsel, C. Christopher M. Jenks, Asst. Gen. Counsel, and J. Leonard Townsend, Sp. Counsel, all of Philadelphia, Pa. (Douglas M. Orr

and H. Gardner Putnam, both of Philadelphia, Pa., of counsel), for appellee.

Before WILBUR, DENMAN, and MATHEWS, Circuit Judges.

WILBUR, Circuit Judge.

This action was brought by the Securities and Exchange Commission, a federal agency, to obtain an injunction prohibiting the appellants from continuing operating a plan denounced by the complaint as a "device, scheme or artifice to defraud", for the purpose of selling the capital stock of the appellant bank. Briefly stated, the plan permitted the purchase of such stock by pooling the monthly payments of the various purchasers, and the purchase on the market of such stock at market price, the payments to be made by a trustee, the Title Guarantee and Trust Company, the stock to be allotted pro rata to the various purchasers, title to be taken in the name of the trustee. The appellant Timetrust, Inc., was organized to promote the purchase of such bank stock. It employed a large number of salesmen to sell the plan to the prospective purchasers, issuing a certificate to the purchaser when the transaction was completed. Such certificate and passbook, or receipt book, showing monthly payments constituted the sole evidence of title in the hands of the purchasers.

The commission does not claim that the plan is inherently wrong or illegal, but that the literature issued by Timetrust, Inc., was so formulated that it lent itself to the actual misrepresentations made verbally by the salesmen.

In considering the relationship of the various parties defendant, it should be noted that this was not a scheme to promote a new and valueless stock by a promotion plan including the incorporation of the new company. In such a case it would be readily seen that all the persons engaging in the fraud would be equally responsible. Here the plan dealt with the stock of a long established bank with assets of over $2,000,000,000, and involved several corporations already incorporated and established. It is not claimed by the Commission that the stock was sold for more than it was intrinsically worth or for more than its market price. The Commission claims that the plan, although legal and honest on its face, was so set up and operated that the purchasers were in fact misled and defrauded and that this fraud was intended by those who participated in the plan. The defendants have appeared in two separate groups with different attorneys. One group, referred to as the main or principal defendants, consists of the new corporation Timetrust, Inc., and its officers, Meredith Parker, Ralph W. Wood and H. E. Blanchett, who actively controlled the salesmen and the operation of the plan. The other group, referred to in the briefs as aiders and abettors, consisted of the Bank of America Trust and Savings Association, and its president, L. Mario Giannini, and A. P. Giannini, who is Chairman of the Board of Directors of the bank.

Until July 15, 1937, 99.36% of the bank stock was owned by a corporation known as Transamerica. A. P. Giannini was Chairman of the Board of Directors of Transamerica, and his son L. Mario Giannini, was a member of its Board of Directors. Appellant John Grant, now deceased, was the President of Transamerica at the time of the transactions involved herein. This group of defendants and appellants claim that the plan approved by them was perfectly honest and that they cannot justly be charged with wrong because fraud crept into the operation of the plan by reason of the misconduct of salesmen employed by Timetrust, Inc. The officers of Timetrust, Inc., claim that all fraudulent practices of the salesmen were without authority and although no doubt conceding that they were civilly responsible for any misrepresentations of their agents they cannot justly be restrained from operating the plan in a legal and honest manner as it was intended by them to do.

It is evident that those concerned with the plan might well consist of those who honestly approved an honest plan and those who took advantage of the plan to commit fraud in its operation.

With this explanation it will clarify the situation to state the findings of the trial court which are as follows:

"1. The defendants A. P. Giannini, L. Mario Giannini, John M. Grant, Meredith Parker, Ralph W. Wood and H. E. Blanchett collaborated in the organization of the defendant corporation Timetrust, Incorporated, and in the formulation of the plan of its activities and its operations.

"2. The defendant Timetrust, Incorporated, was organized for the purpose of distributing to permanent investors stock of the defendant Bank of America National Trust & Savings Association, owned by the Transamerica Corporation, which was under the management of the defendants A. P. Giannini, L. Mario Giannini and John M. Grant.

"3. The distribution of the stock of the defendant Bank of America National Trust & Savings Association was effected by the remaining defendants through the medium of selling Timetrust certificates on installment payments; when received by the defendant Timetrust, Incorporated, such payments, after the deduction of certain charges and fees, were used for the purchase of stock of said Bank of America National Trust & Savings Association, at the market price then prevailing, and the account of each certificate purchaser making a payment credited with his proportionate share in the stock so purchased.

"4. Without so disclosing to the purchasers of Timetrust certificates, the defendants, through their activities in the market, stabilized the market price of stock of said Bank of America National Trust & Savings Association purchased by Timetrust, Incorporated, for the accounts of investors in its certificates.

"5. The defendant Bank of America National Trust & Savings Association afforded its facilities to its co-defendants in effecting sales of certificates of Timetrust, Incorporated, and in collecting the payments therefor; it distributed literature of Timetrust, Incorporated, and counselled with its salesmen and prospective purchasers of its certificates.

"6. The United States mails were used by the defendants in promoting and effecting sales of certificates of the defendant Timetrust, Incorporated.

"7. Untrue statements of material facts and omission to state material facts necessary to be stated in order to make statements made in the light of the circumstances under which they were made not misleading, as alleged in sub-paragraphs (a) to (c) inclusive, and (e) to (o) inclusive of Paragraph VIII of plaintiff's complaint, were made to prospective purchasers by salesmen of the defendant Timetrust, Incorporated, to induce the purchase of said certificates.

"8. After a prospective purchaser had made his first payment with his application to purchase a Timetrust certificate, he was furnished with a written certificate issued by Timetrust, Incorporated, which together with the `Agreement of Trust' expressly made a part thereof, fully and correctly described the investment plan of the defendant Timetrust, Incorporated.

"The defendants have sought to absolve themselves of any vice in the method of selling Timetrust certificates by disavowing and disclaiming any responsibility for the untrue statements alleged to have been made to prospective purchasers, contending that the entire transaction is contained in the written certificate and agreement of trust. The Court holds that the purpose of the Securities Act of 1933, 15 U.S.C.A. § 77a et seq., may not be so defeated. From the facts found by the Court, it holds that the conduct of the defendants is contrary to the Securities Act of 1933.

"It is therefore ordered, that the defendants be and they are hereby enjoined as prayed in the complaint."¹

These representations shown in footnote are that the Timetrust certificates are (a) similar to savings bank account but pay a higher rate of interest; (b) that money paid in would be available at all times, subject to a small fee; (c) that the plan was one for the accumulation of a definite sum; (d) * * *; (e) that the system provided for dollar averaging, a new and unique plan; (f) that the system of dollar averaging made certain a profit of from $50 to $300; (g) that it was not stated that dollar averaging only operates when a fixed sum is paid regularly; (h) that Timetrust is free from human errors; (i) that compound interest or dividends would be paid in addition to the principal; (j) that Timetrust provides for dividend accumulation or compounding; (k) that the purchaser would receive from 7 to 15% per annum income and appreciation which compounded would give for a $50 monthly payment for ten years ($6,000) a value of from $8,685 to $13,778; (1) that the insurance feature of the plan assured the beneficiary for the full amount of his certificate payable in cash; (m) that monthly payments would be invested in bank stock without substantial reduction whereas a large per cent was deducted from the first 18 months' payments; (n) that the purpose of the choice of the bank stock was because it was a fine investment, whereas it was selected to effect a distribution of the bank's stock; (o) that the purpose was to help provident minded people to secure the better things of life, whereas its...