The opinion of the court was delivered by: RYAN
The Commission seeks to enjoin the defendants from selling and delivering, after sale, shares of the common stock of Guild Films Company, Inc., in violation of Section 5(a) of the Securities Act of 1933, 15 U.S.C.A. § 77e(a).
These shares of stock had been delivered in February, 1959, to the Santa Monica Bank by defendant Roach as purported collateral on a note in default and the sale was made by the Santa Monica Bank in payment of the loan. However, the Guild Film Company, Inc., refused to transfer the shares on its books and the Bank, in September, 1959, brought suit against it in the New York Supreme Court to compel such transfer. This suit terminated in a judgment entered on September 18, 1959, in the Bank's favor directing the transfer on a determination by that Court that the stock was exempt from the registration provisions of the Act. The Santa Monica Bank following this judgment ordered the sale of some 9,500 shares. Upon learning of this sale, the Commission, which had not been a party to the State Court suit, notified the Bank, Guild Film and the transfer agent that the stock could not be sold without registration. Counsel for the Santa Monica Bank then requested an opinion from the Commission. But, despite an opinion from it that the stock was not exempt, the Santa Monica Bank proceeded to sell an additional 10,500 shares on September 24, 1959. It was then that the Commission filed this suit to restrain the delivery of these shares and the sale of the balance of the stock.
There appears to be no substantial dispute as to the events leading up to the sale.
On September 17, 1958, defendant Roach obtained a loan from the Santa Monica Bank and the Southwest Bank of Inglewood in the total sum of $ 120,000, represented by two separate notes, the Santa Monica Bank managing the loan for both banks. The first note, that to the Santa Monica Bank in the sum of $ 60,000, was dated September 17, 1958 and payable December 15, 1958; the second, that to the Southwest Bank of Ingle-wood also in the sum of $ 60,000 was dated September 25, 1958 and payable November 24, 1958.
At the time, Roach executed a collateral agreement and secured the loan by a deposit of stock as collateral with the Santa Monica Bank as follows:
On September 17, 1958, he deposited 34,475 shares of the Scranton Corp. and 2,000 shares of F. L. Jacobs Co. stock valued at $ 15 1/2 and $ 8 respectively, with the understanding that the Scranton stock would be replaced by more Jacobs stock; on September 23, 1958, he deposited 8,500 shares of Jacobs stock; on September 25, 1958, he deposited another 6,500 shares -- at which time Roach received the Southwest Bank advance; on September 29, 1958, he exchanged the 34,475 shares of Scranton Corp. stock for 10,000 shares of the same corporation; and on October 10, 1958 by agreement these were replaced by 13,000 shares of Jacobs stock. So that as collateral for a loan of $ 120,000, the Bank held a total of 30,000 shares of Jacobs stock in a street name valued at $ 8 a share. The proceeds of the loan were deposited to a joint checking account in the name of Roach and Meacham, the treasurer of Hal Roach Studios which Roach owned, and which was a subsidiary of Scranton Corp. of which Roach was an officer and director. At the time of the making of the loan, the Bank relied on an unverified, undated personal financial statement submitted by Roach, which showed him to have a net worth of $ 797,750 and no outstanding debts. It was not until several weeks after the making of the loan that the Bank obtained Dun & Bradstreet reports on the Jacobs and Scranton companies in which Roach was a controlling stockholder. Although the Bank had never transacted any business with Roach before this, its officers knew him for many years and made no further investigation into his personal financial standing.
On December 9, 1958, the Bank learned that the Jacobs stock had been suspended from trading on the New York Stock Exchange. The bank wrote to Roach asking him to liquidate the loan before December 15, 1958, as the suspended stock had dropped in value from $ 8 to $ 5 and was no longer acceptable collateral. Although the Southwest Bank note had matured on November 24, 1958, the entire loan was treated as due and payable on December 15, 1958, the maturity date of the note of the Santa Monica Bank. After several conversations with Roach, the Santa Monica Bank on December 18, 1958 wrote to Meacham informing him that it would renew Roach's note for an additional ninety days on the posting of additional collateral in the amount of 10,000 additional shares of the Jacobs Corp. or the equivalent number of shares of Scranton Corp., or on the payment of $ 30,000; on the understanding that Roach would do so, it enclosed a renewal note dated December 18, 1958 due March 18, 1959 in the amount of $ 60,000 for Roach's signature and requested payment of $ 775, the interest on the matured and past due note. On the same day, the Southwest Bank wrote to the effect that it was anxious to remove the past due note from the file prior to the end of the year and that it would renew its note on the payment of $ 699.97 interest and on the conditions agreed upon with the Santa Monica Bank, and enclosed a renewal note which bore the notation 'Renewal -- Secured by stocks held for out account by Santa Monica Bank'. On December 19, 1958 Meacham returned the new notes executed by Roach and asked for time in which to decide with which of the alternate conditions imposed Roach would comply. Meacham also wrote that they assumed that a few days in which to make up their minds would not be disturbing to the Bank. Thereafter, although the Santa Monica Bank was in constant communication by phone with Roach and Meacham, no collateral was immediately posted or payment made on the principal past due amount. On December 31, 1958, the Southwest Bank wrote to Roach informing him that they would not negotiate the renewal note of December 18, 1958 until such time as he performed the conditions agreed on by him. Finally, on January 28, 1959, the Southwest Bank sent a letter to Roach demanding payment by February 3, 1959 of the note of November 24, 1958, which was now more than two months in default.
The Santa Monica Bank did not send a demand letter but it was in constant communication with Roach whom it was trying to help; he had requested them not to sell the Jacobs stock and promised to obtain for the Bank some Guild Film notes or stock if it gave him more time.
All this had been going on for more than a month. On February 3, 1959, Roach sent a telegram to the Santa Monica Bank informing it that he had deposited $ 75,000 Guild Film notes to the Santa Monica Bank account with the Chemical-Corn Exchange Bank in New York, which would be replaced by 50,000 shares of Guild Film stock at $ 2.50 per share. He stated that this was the best he could do until he returned to Los Angeles. The deposit of these 50,000 shares did not take place until February 12, 1959, at which time the Santa Monica Bank note was almost two months in default and the note of the Southwest Bank two and one-half months in default, with no principal payment whatsoever having been made.
The Guild Film stock deposited was represented by one certificate in the name of Rabco T.V. Productions, Inc., dated February 5, 1959; on its face at the very top of the certificate, it bore the following legend:
'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.'
It was accompanied by a stock power executed by an officer of Rabco dated February 20, 1959, but no copy of a resolution authorizing the execution of the power was attached. The Santa Monica Bank never inquired as to this, although it was customary to require such evidence of authority. At the time it received this stock certificate, it directed the release of the notes of Guild Film which Roach had deposited with the Chemical-Corn Exchange Bank, which Santa Monica Bank had never seen or investigated.
The notes and stock of Guild Films had been acquired by Roach under an agreement made on January 23, 1959 between W-R Corporation (a wholly owned subsidiary of Roach) and Guild Films, under which Guild Films conveyed 400,000 shares of its common stock and several promissory notes to W-R in exchange for certain film rights; performance by W-R was guaranteed by Roach Studios.
In paragraph 4 of this agreement, Guild agreed to use its best efforts to cause the 400,000 shares of common stock issued pursuant to the agreement to be duly registered under the Securities Act of 1933 as promptly as possible. However, in order to obtain the exemption of a ...