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September 12, 1967

Securities And Exchange Commission, Plaintiff
S & P National Corporation, Smith-Palmer Corporation, Southwest International Corporation, David M. Milton and Ralph E. Still, Defendants

Murphy, District Judge.

The opinion of the court was delivered by: MURPHY

- I -

MURPHY, District Judge:

 The case is now before the court upon an application for judicial approval of a Plan of Settlement and Reorganization ("the Plan"), and for an order that it be consummated. The Plan is intended to resolve the welter of issues between the plaintiff Securities and Exchange Commission ("the Commission"), the corporate defendants ("S & P", "Smith-Palmer" and "Southwest"), and the individual defendants ("Milton" and "Still"). It is also intended to effect a settlement of a projected lawsuit by the trustee in behalf of the corporate defendants and their subsidiaries against Milton, Still, and others. After due notice by mail and publication, a hearing was held at which all persons having any interest were given an opportunity to present their views and evidence concerning the Plan.

 The origin and nature of the case and the developments from its inception on February 21, 1966, to the end of the corporate defendants' fiscal year on November 30, 1966, are stated in Securities and Exchange Commission v. S & P National Corporation, et al., (S.D.N.Y. 1966) 265 F. Supp. 993, affirmed with a modification relating to a tax problem, id., 360 F.2d 741, 2d Cir., followed by a decision on other developments, id., 267 F. Supp. 562. The trustee's first report dated March 30, 1967, contains a survey of the case to a time proximate to that date. In the part most material to adjudication of the Plan, a summary follows of what went before.

 S & P owns all the stock of Smith-Palmer, which owns all the stock of Southwest, which owns a majority of the stock of Kraftville Corporation ("Kraftville"). Southwest also owned all the stock of Wellit Corporation ("Wellit"), until the sale by the trustee of part of such stock and the liquidation and dissolution of Wellit.

 The Commission's complaint alleged that the corporate defendants were investment companies which violated provisions of the Investment Company Act of 1940 ("the 1940 Act") by failing to register as such with the Commission; that the individual defendants Milton and Still controlled S & P, individually or as a member or representative of persons acting in common; that Milton had statutory relationships of parent, affiliate, director, or control of S & P, which were not disclosed in reports which S & P had filed with the Commission under requirements of the Securities Exchange Act of 1934 ("the 1934 Act"); that such non-disclosures made the reports materially insufficient, false and misleading; and that Milton and Still knowingly and wilfully caused or procured the acts of the corporate defendants, which constituted the violations of law. The Commission also alleged that contracts and transactions by the corporate defendants with persons controlled by or affiliated with them or with other persons, were void or voidable under provisions of the 1940 Act, and are subject to rescission or recovery of damages therefor. The Commission's complaint demanded preliminary and final injunctive relief to remedy the violations of law which it alleged, and the appointment of a trustee under the 1940 Act and of a receiver under the 1934 Act. The defendants' answers denied the material allegations of the Commission's complaint, alleged defenses, and demanded that the complaint be dismissed.

 This court found that the Commission had established a prima facie case, granted its motion for preliminary injunctive relief, and appointed Leslie Kirsch as trustee and receiver ("the trustee") of the defendant corporations and of their books, records and assets. The Court of Appeals affirmed.

 The trustee took possession and control of the corporate defendants and stock control of Kraftville and Wellit. He caused S & P, Smith-Palmer and Southwest to be registered with the Commission as investment companies under the 1940 Act. Between April 18, 1966, when the trustee began to function and November 30, 1966, a gain of $2,029,962 was realized upon sales of stock of Great American Industries, Inc. ("GAI"); consolidated net assets were increased from $770,656 to $2,094,019; and consolidated cash or its equivalent was increased from $10,479 to $2,891,739.

 The trustee's first report dated March 30, 1967, described the corporate apparatus as follows:

"Above S & P is a complicated congeries of corporations and individuals, named and unnamed, purporting to culminate in a trust (the 'Upper Structure'). Excluding a bank's mortgage on Kraftville's property, components of the Upper Structure and two related companies held an estimated 90% or more of the creditor position against S & P and its subsidiaries which constitute the Lower Structure. That large creditor position may now be held by Cross Islands Corporation, N.V., a Curacao corporation ('Cross Islands') . . . It is suspected that a relationship exists between Cross Islands and the Upper Structure or the control of the Lower Structure, but the nature of such relationship is not now known.
"Components of the Upper Structure held 100% of the outstanding Series E Preferred Stock, 88.97% of the Class A Stock, and 78.71% of the Common Stock, of S & P. The charter documents provide that the Series E Preferred Stock is entitled to cumulative dividends of $2 per share per annum and to $50 per share on liquidation. They also provide that the Class A Stock is entitled to $20 per share on liquidation.
"As of a recent date, S & P had 431 holders of its Class A Stock and 552 holders of its Common Stock. Many or most of them are public investors."

 The trustee's statement of consolidated net assets of $2,094,019 as at November 30, 1966, was after deduction of $877,833 of debt claims upon notes and accounts payable to companies which investigations might disclose were affiliates under the 1940 Act. The decision of the Court of Appeals noted the Commission's interest in transactions with affiliates in violation of Section 17, which might be void under Section 47, of the 1940 Act. It also noted the trustee's interest in equitable subordination of insiders' claims against the assets of S & P to the claims of public investors in S & P. Securities and Exchange Commission v. S & P National Corporation, et al., 360 F.2d 741, 752, and footnotes 15 and 21 (2d Cir.).

 The trustee, his attorneys and accountants, made investigations. Discovery proceedings, by examinations under oath, were conducted. Shortly after the publication of the trustee's first report on March 30, 1967, and before the complaint in the trustee's projected lawsuit was presented to the ...

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