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October 5, 1966

Securities and Exchange Commission, Plaintiff
Great American Industries, Inc., et al., Defendants

Ryan, Justice.

The opinion of the court was delivered by: RYAN

RYAN, Justice.

In this action the Commission seeks to enjoin all but defendant Mele from further alleged violations of Section 10(b) and Rule 10b-5; three defendants, Mack, Marren and Stolz, from further alleged violations of Section 13(a) and Rule 13a-11; and two defendants, Stolz and Mele, from further alleged violations of Section 16(a) and Rule 16a-1 of the SEA of 1934. The Commission also seeks a mandatory injunction directing Mack, Marren, Stolz *fn1" and Mele to comply with the provisions of the sections claimed to have been violated.

 Section 10(b) and Rule 10b-5, known as the anti-fraud sections of the Act, declare unlawful among other things the making of any untrue statement of a material fact necessary in order to make the statements not misleading in connection with the purchase and sale of a security. The Commission charges that violation of this Section and Rule occurred when the defendants Matusow, Pagnani, Beard, Lester and Seagraves, "the finder-defendants", together with and aided by the defendants Mack (chairman of the board), Marren (financial vice president and a director), and Stolz (general counsel and a director), "the corporate-defendants", in a series of transactions involving the purchase by Great American Industries, Inc. (GAI) of mining properties, obtained and attempted to obtain from GAI for little or no consideration a substantial number of the shares of GAI common stock paid or to be paid by GAI for the purchase by it of these mining properties. It is charged that in connection therewith the "finder defendants" made false and misleading representations to GAI concerning the true worth and potential of the mining properties while the "corporate defendants" caused GAI to prepare and issue press releases and to file with the Commission and the American Stock Exchange periodic reports on Form 8-K which were false and misleading. These press releases and filings it is charged were designed to and had the effect of (1) concealing from GAI and its shareholders the unlawful diversion of GAI common stock from the company to the "finder-defendants" and (2) causing the price of GAI common stock on the American Stock Exchange to rise and thereby increase the value of GAI common stock to be issued to and owned by these defendants. This was done, it is said, with respect to three transactions: (1) the acquisition of an option on certain California sulphur properties; (2) the acquisition of certain Arizona copper properties; and (3) the entry into a contract for the purchase of certain Nevada sulphur properties. Essentially, the SEC contends that these acquisitions were obtained by the issuance of substantial quantities of GAI stock and that the owners of the properties involved received a relatively small amount of such stock, the remainder going to alleged "finders".

 The alleged violations of Section 13(a) and Rule 13a-11 - which Section and Rule require that every issuer of listed securities file periodic reports on 8-K forms recording events relating to corporate affairs - occurred according to the Commission when the corporate-defendants filed the 8-K reports above mentioned.

 The alleged violation of Section 16(a) and Rule 16a-1 - which Section and Rule require that every officer or director file a statement with the Exchange showing any change in ownership of a security during any one month - occurred when defendant Mele, vice president and treasurer and a director of GAI, failed to file a statement showing a purchase of 2,000 shares of GAI stock on January 12, 1966.

 To place this action and this motion in proper perspective it is necessary to spell out what is not charged by the Commission.

 It is not charged that the corporate-defendants were to receive any part of the shares issued in payment of the properties acquired and allocated to the "finder-defendants". It is not charged that the sale or contract of sale and the issuance of securities to the Seller of the properties and the other defendants was not a bona fide sale but a mere vehicle for the issuance of GAI shares to the Seller and the "finder-defendants". Most important, it is not charged that the property acquired in exchange for the shares issued was not worth the value of the shares which were issued in payment therefor. In fact, this is emphasized by the Commission when it says:

"It is our position that the true value of the mining properties in question is not an issue before this Court. We do not know nor do we allege that these properties are without any value. In the same manner that we do not know the value or potential of the properties, neither do the defendants. It is simply our position that the defendants had no basis in fact for making the statements they did about the properties."

 It is charged that "since a substantial disproportionate amount of the company's shares would be diverted to persons who were not owners of the properties" defendants were engaged "in the systematic syphoning off from the company of large blocks of its common stock for little or nominal consideration" in fraud of the issuer. It is also charged that exaggerated claims made by defendants were in fraud of the investing public.

 The documentary facts are not in dispute. As charged, the shares of GAI stock were issued or contracted to be issued in the amounts stated in exchange for the properties named. The 8-K Forms and the press releases did report what the Commission charges they did. What is in dispute are the inferences of illegality drawn from these admitted actions by the Commission and its characterization of defendants' conduct as fraudulent and violative of the Statutes involved. In addition, defendants contend that in order to impute fraud to them, the Commission on this motion has done exactly what it has accused them of doing. Defendants charge the Commission has misstated or omitted to state in its papers facts which were known or should have been known to the Commission through its investigation, and which would negate and destroy the inferences drawn by it. Defendants also charge that the Commission has failed to make even a prima facie showing of defendants' guilt of the violations alleged, and that any injunction would be not only unwarranted and unnecessary and an injustice to the defendants but would be more harmful than beneficial to the public.

 The historical background of this action is as follows:

 According to the Commission, GAI first came to the attention of its investigative staff members during the period between January 13, 1966, the date GAI first issued a press release concerning its acquisition of an option to buy a sulphur property in California, and March 21, 1966, the date GAI issued a press release concerning further developments on the California property and its acquisition of an option to buy a copper property in Arizona. Trading in the shares of GAI on the American Stock Exchange rose from a volume on January 11, 1966 of 53,400 to a volume on March 21, 1966 of 352,100, and the price of the shares increased from a low of 1 3/4 on January 11, 1966 to a high of 9 on March 21, 1966. *fn2"

 The press release issued by the company on March 21, 1966 described the Arizona mining property as a "new mining strike of copper, silver, and gold ore", a "new discovery", a "mine" which would be "in production within 90 to 120 days".

 This is the first press release which the Commission says was false and misleading. It has not quoted the full text nor submitted the release in evidence.

 At about this time, a report on Form 8-K dated February 14, 1966, covering the month of January 1966, had been filed with the Commission wherein it was reported that GAI had acquired an option to acquire mining claims in California the purchase price of which were 1,600,000 shares of its common stock, plus $250,000 in cash. This is the first 8-K report charged by the Commission to be false and misleading, in that it did not disclose that a substantial part of the shares were to go to "finders" rather than the owner. It has not been fully quoted nor attached as an exhibit.

 To continue, the staff, it is claimed, ascertained on inquiry into this market that a number of reports and rumors were circulating in the financial community concerning the value and potential of the proposed mining property acquisitions. When it determined, after speaking with GAI management and through other investigative efforts, that in its opinion no factual basis existed for the reports and rumors and that no justification existed for the rapid rise in the price and volume of GAI shares, the Commission suspended trading in GAI's common stock on March 31, 1966. The Commission states that the purpose of the suspension was to permit clarification of the reports and rumors then circulating.

 On April 12, 1966, after discussions with the staff, GAI, at the urging of the staff, issued a release "clarifying" that of March 21, 1966, as follows:

"* * * It is not now known whether or not there is a commercially mineable ore body at the property. The Company has no reports establishing the existence of such an ore body (at the Arizona property). Only limited exploratory work has been done thus far, and further exploration is intended."

 The trading ban was lifted on April 15, 1966, and trading was resumed.

 The Form 8-K report, dated April 11, 1966, covering the months of February and March 1966, and received by the Commission on April 13, 1966, did not in its opinion conform to this press release of April 12, 1966 in that it referred to the property as a "mine" and indicated that it could be operating within "90 days", and anticipated that it might be operating at profits ranging from $50,000 per month to $3,000,000 per year. When the Commission expressed its dissatisfaction with this statement and pointed this out to defendants, the following day, April 14, 1966, an amended report was filed, which stated:

"* * * It is not now known whether or not there is a commercially mineable ore body at the property. The Company has no reports establishing the existence of such an ore body. Only limited exploratory work has been ...

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