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SEC v. S & P NATL. CORP.

March 30, 1967

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
S & P NATIONAL CORPORATION et al., Defendants



The opinion of the court was delivered by: MURPHY

THOMAS F. MURPHY, District Judge.

 THE INTERIM ACCRUALS.

 This aspect of the case presents questions concerning approval of accruals of interim compensation for services to the estate. The amounts involved are substantial.

 November 30, 1966, was the end of the corporate defendants' fiscal or tax year. The trustee, with the knowledge of the Court, made accruals, without payment, of compensation for services rendered by the attorneys for the corporate defendants, by the attorneys for the trustee, and by the trustee himself. After notice to all the parties, and to stockholders and creditors, the matter was heard upon the petitions, exhibits and testimony, including cross-examination of each of the petitioners.

 The trustee made the accruals for the services of his attorneys and himself in good faith and for the tax advantage of the estate. Thereafter he similarly made an accrual of compensation for the services of the attorneys for the corporate defendants, when they requested leave of the Court, which was granted, to enlarge the trustee's plan of minimization of taxes to include an accrual for them also. As will more fully appear elsewhere, much tax planning occurred in the last few days of operation before the expiration of the tax year, and it could not have been otherwise.

 The case started in receivership of the corporate defendants with consolidated cash of $10,479 on April 18, 1966. On November 30, 1966, their consolidated cash position was $2,756,159. On April 18, 1966, their consolidated asset position, after liabilities, was $770,656. On November 30, 1966, it was $2,105,604. Between those dates, the trustee made a profit of $2,029,934 (or $1,969,995.)

 The latter calculation excludes a reserve for valuation included in the former. But for this pleasing plenty and its not so pleasing tax consequences, the accruals would not have been made, and the thankless and delicate task of confirming them retrospectively would not have been imposed upon the Court.

 The contending parties are either adversaries in the main litigation or adversaries on the amounts in which the accruals should be confirmed. They all nevertheless agree that, in the unusual circumstances of this case, some part of the accruals should be confirmed because they would substantially lessen the corporate defendants' United States, New York State and New York City taxes for the fiscal year ended November 30, 1966.

 In respect of the United States income tax alone, 48 cents on every dollar not accrued for these expenses goes to the tax. The estimated tax saving which may result is approximately $15,000 upon the accrual for the attorneys for the corporate defendants, and about $80,000 upon those for the trustee and his attorneys. This is not to imply that fees shall be accrued as expenses merely to save taxes.

 The three accruals made for fees are: Shea, Gallop, Climenko & Gould, as attorneys for the corporate defendants, $35,000; Cleary, Gottlieb, Steen & Hamilton, as attorneys for the trustee, $50,000; Leslie Kirsch, as trustee and receiver (the "trustee"), $100,000.

 THE LITIGATION TO MAY 10, 1966.

 The Securities and Exchange Commission (the "Commission") is in this case arrayed as plaintiff against the three corporate defendants ("S & P," "Smith-Palmer," and "Southwest") and against the two individual defendants ("Milton" and "Still"). Milton is represented by Paul, Weiss, Rifkind, Wharton & Garrison, who have not requested an accrual of compensation for their services to him. Still is represented by Shea, Gallop, Climenko & Gould, who have excluded their services to him from their application in its relation to the corporate defendants.

 The history of the main litigation, to the extent that its complexities were initially revealed from its inception on February 21, 1966, to the determination of the first appeal on May 10, 1966, has already been written.

 Our opinion dated April 16, 1966, 265 F. Supp. 993; opinion of the Court of Appeals, (2d Cir.) 360 F.2d 741, dated May 10, 1966. It was decided that the Commission had made out a prima facie case and that the orders of the District Court should be affirmed with a modification as to tax considerations. The order affirmed were dated April 16, 1966, as amended April 20, 1966, and April 21, 1966.

 The amended order of April 16, 1966, prohibited the corporate defendants, pending the final hearing and determination of the action, from directly or indirectly selling or acquiring, by use of the mails or an instrumentality of interstate commerce, any security or any interest therein; from engaging in business in interstate commerce; and from disposing of any of their assets. It further prohibited them from filing with the Securities and Exchange Commission any report which is insufficient, false, or misleading in failing to disclosing the identities of all parents, controlling persons, and directors of S & P, or which discloses them in such a manner as to be insufficient, false, or misleading. It further prohibited all persons from doing any act interfering or tending to interfere with the jurisdiction of the Court or with the trustee.

 The order also appointed Leslie Kirsch as trustee and receiver of the books, records, and assets of the corporate defendants, pending the final hearing and determination of the action, to preserve their assets and to render effective the relief requested. It directed and empowered him: (i) to take possession and maintain the books, records, and assets of the corporate defendants; (ii) to ascertain the true state of their affairs and report thereon to the court and to the shareholders of S & P; (iii) to determine what persons are and have been directors and parents and controlling persons of S & P; and (iv) to cause the defendants to comply with the applicable provisions of the Investment Company Act of 1940 and the Securities Exchange Act of 1934 (the "1940 Act" and the "1934 Act").

 Included among the assets which the corporate defendants were thus prohibited from selling was a block of 479,730 shares of common stock of Great American Industries, Inc. ("GAI"). Nevertheless, upon the sale of this stock within the shortest possible time turned the fortunes of the corporate defendants. It was made the subject of the order of April 21, 1966, which will be discussed in connection with the services of the trustee.

 THE PARTIES' POSITIONS ON THE ACCRUALS.

 Although everyone was in agreement that there should be accruals, the amounts were disputed. Marvin E. Jacob, as attorney for the Commission, submitted in its name a memorandum in which it was recommended that the accrual for the attorneys for the corporate defendants should be eliminated, and that the accruals for the trustee's attorneys and the trustee should be reduced to $30,000 and $50,000 respectively.

 The attorneys for the corporate defendants presented recommendations in the name of George Zolotar, their recently elected president and director, that the trustee's attorneys accrual should be $30,000, and that the trustee's should not exceed an amount at the rate of $75,000 per annum.

 Mr. Zolotar had been a member of the Commission's New York staff. He had participated in the Commission's recommendations on allowances in reorganization cases in years past. Mr. Zolotar's recommendation on the accrual for his counsel, the attorneys for ...


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