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July 26, 1968

Securities And Exchange Commission, Plaintiff
Fifth Avenue Coach Lines, Inc., et al., Defendants

McLean, District Judge.

The opinion of the court was delivered by: MCLEAN

MCLEAN, District Judge:

This action, begun on October 27, 1967, is brought by the Securities and Exchange Commission pursuant to Section 20(b) of the Securities Act of 1933 (15 U.S.C. § 77t(b)), Section 21 (e) of the Securities Exchange Act of 1934 (15 U.S.C. § 78u(e)) and Section 42(e) of the Investment Company Act of 1940 (15 U.S.C. § 80a-41(e)). The complaint seeks an injunction and the appointment of a receiver for defendant Fifth Avenue Coach Lines, Inc. (Fifth). When the action was begun, the complaint named as defendants Fifth and three present or former officers and directors of Fifth, Victor Muscat, Edward Krock and Thomas A. Bolan. In February 1968 the complaint was amended to add as defendant Roy M. Cohn, a lawyer who is "of counsel" to the law firm of Saxe, Bacon & Bolan, of which Bolan is a member. That firm is general counsel for Fifth.

 Plaintiff moved for a preliminary injunction. Pursuant to Rule 65(a) (2), the court advanced the trial of the action and consolidated the hearing on the motion with the trial itself. The combined hearing and trial was originally set for January 8, 1968, but adjournment proved to be necessary because of the magnitude of the task of preparation. The trial finally got under way on March 25, 1968 and was concluded on May 6, 1968.

 Although no preliminary injunction has been issued, the court has maintained some control over the affairs of Fifth pending the determination of this action on the merits. At the outset of the litigation, the parties stipulated in substance that defendants would not enter into any significant transaction without first offering the Securities and Exchange Commission an opportunity to object. In addition, the court required that the net proceeds in the sum of $1,883,482.44 of the sale by Fifth in February 1968 of 113,014 shares of the common stock of Austin, Nichols & Co. Inc. be deposited in a bank account subject to withdrawal only upon order of the court. Since then the court has approved requests from time to time for withdrawal of sums for the purpose of paying tort claims and judgments against Fifth and the payment of pensions to former employees of Fifth. *fn1"

 The complaint contains eleven counts. Ten of them are based on the premise that since October 1966 Fifth has been and still is an investment company within the meaning of the Investment Company Act and that it should have registered with the Commission under that Act but failed to do so. The complaint charges that since October 1966 Fifth, in one way or another, has violated five different sections of the Investment Company Act, Sections 7(a), 17(a), (d), 21(b), 36 and 37, and that the individual defendants have caused it to do so. At least six separate transactions are complained of. They are claimed to have violated specific sections of the Act. Other transactions are referred to here and there in the complaint and are said to have been improper. In addition, count 2 charges in general terms that since October 1966 Fifth has bought and sold securities and engaged in interstate commerce in violation of Section 7 of the Act, and counts 10 and 11 repeat all previous allegations of the complaint and charge defendants with gross abuse of trust and with conversion, in violation of Sections 36 and 37, respectively, of the Act.

 Count 1 differs from all other counts in that it is based, not on the Investment Company Act, but on Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q (a)) and Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j (b)), and Rule 10b-5 thereunder. In brief, this count charges defendants with fraud in the purchase and sale of securities and with making untrue statements of material fact and omitting to state material facts in connection with the purchase and sale of securities. The transactions complained of are the same as those which form the basis of the Investment Company Act counts, plus one additional transaction.

 The complaint is lengthy, the testimony is extensive and repetitious, and the exhibits are numerous. Nevertheless, despite the complexity of the case, many of the basic facts are undisputed and indeed, a good many of them are stipulated. The controversy lies mainly in the inferences to be drawn from the undisputed facts and in the legal effect of what occurred. Defendants maintain that Fifth is not and never has been an investment company and hence, although concededly it has never registered as such, it was not obligated to do so. They assert, therefore, that the counts which rest upon violations of the Investment Company Act must necessarily fail. As to count 1, defendants maintain that the various transactions referred to do not constitute violations of the 1933 and 1934 Acts for the reason, among others, that these transactions do not involve the purchase or sale of "securities" within the meaning of those statutes.

 Before taking up the specific transactions and the legal questions to which they give rise, a summary of background facts, most of which are uncontroverted, is essential.

 Fifth and Its Subsidiaries

 Fifth is a New York corporation. It has only one class of stock, common stock of a par value of $10, of which 950,000 shares are authorized and 882,575 shares are issued and outstanding. It has some 2,300 stockholders. Its stock was traded on the New York Stock Exchange until January 1966 when the Stock Exchange suspended trading in the stock. Since then, it has been traded on the over-the-counter market.

 Surface Transit, Inc. (Surface) is a wholly-owned subsidiary of Fifth. Westchester Street Transportation Company, Inc. (Westchester) is a wholly-owned subsidiary of Surface. VIP Metered Transportation Corporation (VIP) is a wholly-owned subsidiary of Fifth.

 Until March 1962 Fifth and Surface each operated bus lines in New York City. Westchester operated bus lines in Westchester County. VIP, a company which provides individual limousine service, was not then in existence.

 The Condemnation Proceeding

 In March 1962 the City of New York acquired by condemnation all the bus lines of Fifth and Surface. Those of Westchester, being beyond the city limits, were not condemned. They are still owned and operated by Westchester.

 Fifth and Surface sought compensation in the condemnation proceeding for the properties which had been taken from them. That litigation has continued ever since and is still not finished. It raises questions which have a bearing upon the issue presented in this case as to whether Fifth is an investment company.

 Fifth claimed compensation in the sum of $48,000,000 and Surface claimed $44,500,000. On August 14, 1964, the Supreme Court, New York County, awarded Fifth $16,317,297 and Surface $13,915,197, a total of $30,232,494. The court allowed interest on the awards at 4 per cent. In re Fifth Avenue Coach Lines, Inc., 46 Misc. 2d 14, 259 N.Y.S. 2d 313 (Sup. Ct. N.Y. Co., Hecht, J., 1964)

 On July 22, 1965, the Appellate Division, one justice dissenting, affirmed the awards. In re Fifth Avenue Coach Lines, Inc., 23 App. Div. 2d 463, 261 N.Y.S. 2d 784 (1st Dept. 1965)

 On July 7, 1966, the Court of Appeals, three judges dissenting, affirmed the awards but remanded the case to Special Term "for a determination of the value of the going concern assets as an addition to the amount heretofore awarded." Matter of City of New York (5th Ave. Coach Lines), 18 N.Y. 2d 212, 273 N.Y.S.2d 52, 219 N.E.2d 410 (1966)

 The court held that the amount already awarded was "sufficient only as compensation for the value of the tangible property taken" (18 N.Y. 2d at 218), and that the trial court had "improperly rejected the evidence proffered by the claimants as to the value of intangible going concern assets" (18 N.Y. 2d at 220). As examples of such assets, the court referred to "coach routes, operating schedules, operating records and systems of procedures and trained personnel" (18 N.Y. 2d at 221). The court held that these assets, as well as franchises, were "all going concern assets for which claimants must be duly compensated" (18 N.Y. 2d at 224).

 After this decision the City took the position that no separate judgment could be entered on the award for tangibles and hence that this award could not be paid until the conclusion of further proceedings with respect to an award for intangibles. Thereupon, Fifth moved in the Court of Appeals to amend the remittitur so as to permit the entry of a separate judgment on the award for tangibles. The court, again with three judges dissenting, granted the motion on September 29, 1966. In the Matter of the City of New York - 5th Ave. Coach Lines, Inc., 18 N.Y. 2d 741, 274 N.Y.S.2d 349, 221 N.E.2d 174 (1966).

 A separate judgment was then entered and on October 17 and 18 the award to Fifth and Surface for tangibles, including interest, was paid by the City. According to the parties' stipulation, the amount so paid was approximately $32,700,000. According to the closing statement, which is in evidence, the amount was $34,727,121.53. The discrepancy is unimportant, for it is undisputed that the lion's share of the total was paid directly by the City to creditors of Fifth and Surface who had filed liens against the award. After these liens were satisfied, Fifth and Surface were left with a total of $11,576,424.32.

 In due course hearings were held in the Supreme Court, New York County, in accordance with the Court of Appeals' direction, with respect to the claim for an award for intangibles. On April 18, 1967, the court awarded Fifth $1,257,500 and Surface $1,320,000, a total of $2,577,500. Matter of City of New York (5th Ave. Coach Lines, Inc.), N.Y.L.J., April 18, 1967 p. 18 (Hecht, J.)

 On January 23, 1968, the Appellate Division affirmed this award, one justice dissenting. In re Fifth Avenue Coach Lines, Inc., 29 App. Div. 2d 638, 287 N.Y.S. 2d 454 (1st Dept. 1968).

 Thereupon both Fifth and Surface and the City appealed to the Court of Appeals. The appeal has not yet been decided by that court.

 The Change in Fifth's Circumstances

 From March 1962, when their operating properties were taken by the City, until October 1966, when the award for tangibles was paid, Fifth and Surface, who, as a practical matter, may be considered as one, were hard pressed for cash. They had obligations which had to be met, notably bonds and other indebtedness, claims and judgments for personal injuries arising out of the operation of the bus lines prior to 1962, and pensions to ex-employees. Fifth borrowed money from Mastan to pay some of these obligations. The Mastan loans outstanding as of October 17, 1966, totalled over $9,000,000. Interest and carrying charges on these loans ran over $80,000 per month.

 During this period, Fifth had no real business. Its principal activity was attempting to dispose of old tort claims. Most of its few employees devoted their time to that work. Fifth substantially reduced its office staff and eventually gave up its New York City office altogether. Thereafter, it used as its office the second floor of a garage in White Plains which housed Westchester's buses.

 When the award was received, however, poverty was transformed into affluence. Fifth then found itself in possession of over $11,500,000, free and clear.

 Both the period before October 1966 and the period thereafter are involved in this case. Some of the transactions which plaintiff attacks occurred before October 1966. Most of them, however, occurred afterward. The earliest transaction with which we are concerned occurred in September 1965. The latest occurred in August 1967. Thus, the entire time span involved in this case is only approximately two years.

 Control of Fifth

 The situs of control of Fifth's stock is a key fact in this case. There is no doubt that prior to July 1966, control rested with a triumvirate consisting of Muscat, Krock and Robert L. Huffines, Jr. These three men had been closely associated since 1958 or thereabouts. They controlled a number of different companies.

 In July 1966 Cohn bought out Huffines and assumed his position in the triumvirate. In 1967 Krock seems to have had a falling out with the other two, as a result of which he resigned his positions as officer and director of several of the companies with which the three were connected, including Fifth.

 The control existed by virtue of an interlocking complex of corporations which was intricate, to put it mildly. The facts as to the stock ownership of these companies at various dates are stipulated, however, so that there is no dispute about it. The ownership remained substantially constant throughout the two-year period with which we are concerned here.

 At the top of the pyramid was Defiance Industries, Inc. (Defiance). Muscat owned 27.3 per cent of the voting stock of Defiance on December 1, 1965 and still owned 25.2 per cent on August 31, 1967. Until July 6, 1966, Huffines owned or controlled 82,809 shares of Defiance, constituting approximately 9 per cent of the 892,894 shares outstanding.

 On July 6, 1966 Huffines sold his Defiance stock to William P. Ruffa, an attorney in Saxe, Bacon & Bolan, who acted merely as nominee. Muscat acquired 20,000 of these shares, Bolan acquired 10,000 and Cohn acquired the balance, i.e., 52,809. Shortly thereafter Cohn purchased the 20,000 shares from Muscat, thereby giving him at that point a total of 72,809. Shortly thereafter Cohn sold some of the shares on the market, with the result that as of December 12, 1966, when Defiance reported these facts to the Securities and Exchange Commission, Cohn owned 64,109 shares constituting approximately 7 per cent of the total. Thus, between them, Muscat and Cohn owned approximately 34 per cent of Defiance.

 Defiance owned approximately 32 per cent of BSF Company (BSF), a registered investment company. BSF owned 9 per cent of Fifth. It also owned 20 per cent of Gray Line Corporation (Gray Line), an inactive company, which in turn owned 23 per cent of Fifth.

 Surface, Fifth's wholly-owned subsidiary, owned 33 per cent of Gray Line, and Fifth itself, at least until August 1966, owned 45 per cent of Gray Line. Hence, the combined holdings in Gray Line of BSF, Fifth and Surface came to 98 per cent, while BSF and Gray Line between them owned 32 per cent of Fifth. *fn2"

 Huffines also sold his holdings in BSF on July 6, 1966. These amounted to 18,735 shares. Bolan purchased 2,000 of these shares and Cohn purchased the remainder, i.e., 16,735 shares.

 Other Companies in the Complex

 Defiance owned substantial interests in other corporations which figure in this case, including 64 per cent of TelePro Industries Incorporated (TelePro), 50 per cent of Guaranty Bank and Trust Company (Guaranty), and 15 per cent of Mercantile National Bank of Chicago (Mercantile). Moreover, BSF, itself controlled by Defiance, owned, in addition to its holdings in Fifth and Gray Line, 8 per cent of Mercantile and 57 per cent of American Steel and Pump Corporation (American Steel).

 Krock, the third member of the triumvirate, owned comparatively little stock. He owned only one per cent of Defiance and BSF, both of which he sold in 1966. He owned few or no shares of the other companies. Krock's function in the triumvirate, as will later appear, was that of a lender, rather than an investor.

 Muscat and Krock were directors and officers of many of these companies. Muscat was usually the president or chairman, or both, and Krock was usually the treasurer, although he was president of Gray Line and American Steel, and chairman of Mercantile. Until July 1966, Huffines was also an officer or director of many of the companies, including Fifth. In general, Muscat looked after the operations of the companies, Krock concerned himself with financing, and Huffines attended to public relations and dealings with accountants and attorneys.

 Krock resigned his posts in these companies in late 1967 and early 1968. Huffines resigned all his positions when he sold his Defiance stock. Bolan succeeded Huffines in several of these positions, as a result of an agreement reached at a conference attended by Muscat, Krock and Cohn in early July 1966.

 Cohn was not an officer or director of Fifth at any time relevant here. Nevertheless, there is no doubt that he actively participated in its affairs. Saxe, Bacon & Bolan was general counsel for most of the companies, including Fifth.

 Fifth's Officers and Directors

 On January 12, 1965, Muscat, who had been chairman of the board of Fifth, was elected president. He thereafter held both offices. Bolan was elected secretary. Krock became treasurer shortly thereafter. These three continued to hold these offices until 1967. They also constituted the executive committee of the board.

 The officers of Surface, an inactive company, were the same. Muscat was president of Westchester. He also became president of VIP when that company was acquired by Fifth in 1965.

 The board of directors of Fifth at the beginning of 1966 consisted of ten members. In addition to Muscat, Krock and Bolan, they consisted of Dr. George Moore, John L. Brunner, Robert L. Langdon, Raymond D. Murphy, Solomon S. Silbert, Edward J. Spellman and Jack L. Wolfson. Murphy was controller of Westchester. Brunner was vice president and controller of American Steel, one of the companies in the group. Silbert was a stockholder of Fifth who had been a director for some years. Langdon was a broker who was also a director of American Steel and BSF. Spellman was an officer of a textile firm. Dr. Moore was Krock's personal physician and Wolfson was Krock's son-in-law. They both lived in Worcester, Massachusetts, where Krock had his office, and participated very little in the affairs of Fifth. Indeed, Dr. Moore seems to have attended almost no meetings and evidenced no understanding whatever of the company's problems.

 The same directors were re-elected at the annual stockholders' meeting held in August 1966. There has been no stockholders' meeting since. Consequently, the 1966 board continues in office, except for resignations, of which there have been some. The most important are those of Muscat and Krock.

 In the spring of 1967 Muscat tendered his resignation as chairman, president and director of Fifth. It was dated March 27, 1967. It was accepted by Fifth's board of directors on May 11, 1967. Bolan was then elected chairman and president to succeed Muscat. Silbert took Bolan's place as secretary.

 Muscat did not resign as president of Westchester and was still serving in that capacity at the time of the trial. On June 28, 1967, Fifth's board of directors fixed his salary as president of Westchester at $25,000 per year. Since the trial, the court has been advised by letter from counsel dated July 12, 1968 that on July 11, 1968, Muscat "was replaced as officer and director" of Westchester. *fn3"

 There is a certain mystery about the resignation of Krock. His written resignation as a "Director and Officer of Fifth Avenue Coach Lines, Inc." was dated December 7, 1966. However, the evidence establishes that he continued to act as treasurer and continued to sign checks on Fifth's bank account long after that date.

 There are two sets of minutes for the meeting of Fifth's board of directors held on May 11, 1967. One version recites the acceptance of the resignations of Muscat and Krock. The other version refers only to Muscat's resignation, without any reference to Krock's. However, on June 28, 1967, the board resolved that Krock's salary, "as financial consultant for Fifth and all its subsidiaries," be fixed at $50,000. Even after this date, Krock continued to sign checks on Fifth's bank account for several months. He submitted a written resignation as consultant under date of December 13, 1967.

 The Transactions Complained Of

 Three of these occurred before Fifth came into its money in October 1966. The others occurred thereafter. Clarity will be furthered by treating them chronologically, regardless of the order in which they are set forth in the complaint. Only the essential facts in each transaction will be related, and details which are unnecessary to an understanding of the issues presented for decision will be omitted.

 The Loan from Krock to Fifth in 1965

 When Krock was appointed treasurer of Fifth in early 1965, he opened an account for Fifth in Worcester County National Bank (Worcester), an institution in Krock's home town with which he enjoyed cordial relations. Krock was authorized to sign checks on this account without any co-signatories. The bank obeyed Krock's instructions with respect to Fifth's account without question. Krock received the cancelled checks from the bank and was in no hurry to forward them to Fifth's office in White Plains or to advise Fifth's accountants as to what was going on. This arrangement led to some curious results, the first of which, in point of time, involves the 1965 loan.

 In April 1965 Fifth cashed a certificate of deposit which had been issued to it by Mercantile in the sum of $1,000,000. On the instructions of Muscat as Fifth's president, Mercantile transmitted the $1,000,000 to Worcester. Worcester, on Krock's instructions, credited $10,000 of it to Fifth's checking account and issued its certificate of deposit for $990,000 dated May 3, 1965 payable to Fifth one year after date, with interest at 4 per cent. Worcester delivered this certificate to Krock who in July 1965 returned it to Worcester for safekeeping.

 On July 9, 1965 Worcester, on Krock's instructions, loaned $500,000 to Fifth repayable on April 30, 1966. As security for this loan Fifth pledged with and delivered to Worcester a certificate of deposit in the sum of $500,000 issued by American Fletcher National Bank payable to Fifth on April 30, 1966.

 At a meeting of Fifth's board of directors held on September 26, 1965, Muscat advised the board that Fifth needed money to meet current obligations. Either he or Krock, who according to the minutes was at the meeting, said in substance that the certificate of deposit issued by Worcester in favor of Fifth was not assignable, that it could not be pledged for a loan, and that it could not be paid before maturity. *fn4" According to the minutes, Krock then advised the board that he personally would lend Fifth the necessary funds. Thereupon the board adopted the following resolution:

"RESOLVED, that the corporation accept Mr. Krock's offer of a loan in a sum not to exceed $900,000, which sum was to be drawn down at various times and in varying amounts as required by the corporation, it being clearly understood that on the maturity of this certificate at the Worcester County Bank, Mr. Krock would be repaid."

 On October 25, 1965, Krock personally borrowed $990,000 from Worcester, payable on May 3, 1966, with interest at 4 3/4 per cent. Out of the proceeds of this loan Krock, on October 27, 1965, deposited $885,944.45 in Fifth's account in Worcester. This was Krock's loan to Fifth.

 Worcester's certificate of deposit for $990,000 in favor of Fifth matured on May 3, 1966. The amount payable to Fifth, which included interest, was $1,030,150. The loan which Worcester had made to Krock individually matured on the same day. On Krock's instructions, Worcester applied the proceeds of Fifth's certificate of deposit first to the payment of the principal of Krock's personal loan in the amount of $990,000 and second to the payment of interest on that loan in the amount of $24,688.12. After so doing, there was a balance of proceeds of $15,461.88. Worcester paid this to Krock by cashier's check. Krock deposited it in his own account.

 Krock thereupon treated his loan to Fifth as paid, as indeed it was. At this point Krock had received $1,030,150 of Fifth's money against his loan of $885,944.45. But this was not all. On May 2, 1966, Worcester received from American Fletcher National Bank the proceeds of the certificate of deposit which that bank had issued to Fifth. These proceeds amounted to $520,277.78. Worcester applied these proceeds first to the payment of the loan which it had made to Fifth in the amount of $500,000 and next to the payment of two days' interest on that loan in the sum of $145.83. *fn5" This left a balance of proceeds of $20,131.95. Worcester paid this sum to Krock who deposited it in his individual account.

 Thus, for the lending of $885,944.45 for a period of approximately six months, Krock received moneys otherwise payable to Fifth aggregating $1,050,281.95. This exceeded the principal amount of his loan by $164,337.50.

 The board's resolution of September 26, 1965 said nothing about the rate of interest to be paid on Krock's loan. Fifth represented to the Securities and Exchange Commission in its annual 10-K report for the fiscal year ended December 31, 1965 that the rate of interest was to be 10 per cent. Assuming the correctness of this representation, interest at 10 per cent on $885,944.45 for a period of approximately six months would be approximately $44,297. Deducting this from the $164,337.50 leaves $120,040.50. This is the so-called "premium" which Krock received for his loan.

 Krock gave a completely different version of this transaction in the course of his testimony. He testified in substance that he had purchased Fifth's certificate of deposit for $885,944.45 by agreement with Muscat and that therefore he was entitled to the full proceeds of the certificate. He denied that he was present at the board meeting on September 26, 1965 when the board approved a borrowing, not a sale, of the certificate. He had no satisfactory explanation of why he was also entitled to retain the $20,131.95 otherwise payable to Fifth from the proceeds of the American Fletcher certificate. The court does not credit this testimony which is not only at variance with all the documentary evidence in the case, but also with Krock's own affidavit filed at an earlier stage of this action.

 Fifth's Note for $85,000 to Saxe, Bacon & Bolan

 On July 21, 1966, Fifth, which had not yet received its award from the City, made its promissory note for $85,000 payable ninety days after date to the order of Saxe, Bacon & Bolan. The note was signed by Muscat as president of Fifth. Saxe, Bacon & Bolan discounted this note with Security National Bank of Huntington, Long Island (Security). To induce Security to discount it, Gray Line guaranteed payment of the note and delivered to Security as collateral 51,100 shares of Fifth's stock which Gray Line owned.

 The arrangements were made by William P. Ruffa, an attorney employed by Saxe, Bacon & Bolan, who was an officer of Gray Line. Some of the documents bear Bolan's name, but the testimony is that it was Cohn who signed Bolan's name, in accordance with a standing arrangement between them. Bolan does not seem to have had any hand in this transaction at the time, as far as appears.

 Security deposited the proceeds of the discounted note in the checking account maintained by Saxe, Bacon & Bolan with Security. On July 26, 1966, Ruffa sent to Security two checks drawn on Saxe, Bacon & Bolan's account and signed on behalf of Saxe, Bacon & Bolan by Daniel J. Driscoll, a member of the firm. Each check was to the order of Cohn in the amount of $25,000. One check was endorsed by Cohn to the order of Muscat. The other was endorsed by him to the order of Krock. Ruffa's letter instructed the bank to deposit the checks in the accounts of the respective endorsees. The bank did so, and charged Saxe, Bacon & Bolan's account accordingly.

 The payments thus made by Cohn to Muscat and Krock represented part of what he owed them for advances which they had made to him to enable him to buy Huffines' stock in Defiance and BSF, which he had purchased earlier that month. *fn6"

 On November 2, 1966, which was after it had received its award from the City, Fifth paid the amount of its note, with interest, to Security.

 The minutes do not indicate that this transaction was ever approved by Fifth's board of directors. Moreover, the evidence is by no means convincing that Fifth received any consideration for making this payment. Bolan testified that the $85,000 was a fee to Saxe, Bacon & Bolan for work which it had done for Fifth on the condemnation suit. But no bill to support this fee was ever produced, and Saxe, Bacon & Bolan's fees for this work appear to have been fully paid by other bills which will be referred to hereafter.

 The confusion which has surrounded this transaction from the beginning is evidenced by the fact that almost to the eve of trial, Fifth's accountants believed that this $85,000 was a payment by Fifth for the account of Gray Line to pay a bill rendered by Saxe, Bacon & Bolan to Gray Line for services performed for that corporation. It is now clear, however, that this explanation is erroneous, for the evidence shows that the bill to Gray Line was not rendered until June 1, 1967, and that it was paid by a wholly separate check dated May 4, 1967 drawn on Fifth's account in Worcester and signed by Krock. The amount of this bill and check was $85,000, hence the confusion between the two items. This latter payment was treated by Fifth as an advance to Gray Line.

 The Loan to Gray Line in 1966 and the $175,000 Mistake

 In 1966 Gray Line was indebted to Hertz Corporation in the sum of $601,196.26 on a debenture due on September 1, 1966. Hertz sued Gray Line and Fifth. On March 25, 1966, a stipulation was entered into in that action which provided in substance that Gray Line would pledge its 102,202 shares of Fifth's stock as security for the payment of its obligation. The stipulation further provided that if Gray Line paid this debt on September 1, 1966, the action would be discontinued, otherwise Hertz would be free to enforce its rights.

 Neither Gray Line nor Fifth had the necessary $601,196.26. Muscat and Krock were eager to raise the funds to pay this obligation, despite the fact that Gray Line, which had no business and little or no assets other than its stock in Fifth, was in itself unimportant. They wished to avoid a foreclosure by Hertz on Gray Line's stock in Fifth which would have caused them to lose control over Fifth. After apparently some procrastination, Saxe, Bacon & Bolan, on behalf of Gray Line, on August 29, 1966, attempted to borrow $601,000 from Mercantile. Mercantile declined to lend it. Guaranty, a bank 50 per cent of whose stock was owned by Defiance, agreed to advance $147,000. Krock agreed to put up the rest.

 On September 1, 1966, Guaranty transmitted its $147,000 to Krock's account at Worcester. The difference between the $601,196.26 which was needed and the $147,000 provided by Guaranty, was $454,196.26. On September 1, 1966, Gray Line executed a ninety-day note to the order of Morrill & Co., the nominee of Worcester's trust department which acted as custodian of the funds of Krock's minor children. The amount of the note was not $454,196.26, it was $561,196.26. The note was secured by Gray Line's 102,202 shares of Fifth's stock.

 On September 1 Worcester transmitted to Bankers Trust Company $601,196.26 for the account of Ruffa. Ruffa received the $601,196.26 and immediately paid it to Hertz in satisfaction of Gray Line's obligation. On October 20, 1966, a few days after it received payment of the condemnation award, Fifth paid Morrill & Co. the amount of the note, i.e., $561,196.26. Fifth also paid back the $147,000 loan from Guaranty. Fifth charged both payments on its books as an advance to Gray Line.

 Thus, Fifth paid $561,196.26 plus $147,000, a total of $708,196.26 in order to satisfy Gray Line's obligation of $601,196.26. The difference is $107,000. This was the "premium." As Muscat put it, Krock was "to be paid back $561,000 . . .. There is a $107,000 premium in the 561 . . . so he was actually going to lend $454,000."

 According to Gray Line's minutes, Gray Line's directors, consisting of Muscat, Krock, Langdon, Spellman and Wolfson, at a meeting held on August 31, 1966, authorized the borrowing of the $147,000 from Guaranty and the $561,196.26 from Morrill. The minutes do not refer to any premium. Muscat testified that the directors knew that the obligation to Hertz was only approximately $601,000 and since they authorized the borrowing of a total of $708,000, they must have known that the difference of $107,000 was a premium.

 Muscat testified that he realized that there would be a premium. He said that he did not consider it excessive because it might turn out that Fifth did not receive payment of the award for some two years and hence could not pay back Morrill for two years, in which event the $107,000 would be reasonable interest for a loan for that period. Of course, the Court of Appeals had affirmed the award for tangibles almost two months before this transaction occurred. It is true, however, that it was not until after the transaction, i.e., on September 29, 1966, that the Court of Appeals directed immediate payment of the award. There is thus this much plausibility to this explanation.

 The $175,000 mistake was a bit of confusion which came about because Muscat made a belated effort to join Krock in advancing the funds to Gray Line to pay Hertz. He did so, according to his testimony, because he did not think it fair that Krock should have "the whole burden of what he and I both felt were undesirable loans."

 On or about September 15, 1966, some two weeks after Hertz had been paid, Muscat sent to Fifth three checks totalling $175,000. One was signed by his mother and the other two were signed by the trustees of employees profit sharing trusts of two corporations owned by Muscat. Muscat requested Fifth to transmit the $175,000 to Krock as Muscat's share of the Morrill loan "because I was substituting my money for theirs." Fifth sent to Krock a check to the order of Morrill for $175,000 and Krock turned it over to Morrill. *fn7"

 When Fifth paid Morrill $561,196.26 on October 20, 1966, as previously related, it did not deduct the $175,000. Thus, all in all, Fifth paid Morrill (i.e., Krock) $175,000 too much. Krock eventually recognized that there had been a "duplicate payment." He repaid the $175,000 to Fifth shortly after this action was begun.

 Krock, of course, knew that Muscat had contributed $175,000 to the loan. When the loan was paid off by Fifth, Krock first paid back the $175,000 to Muscat. Subsequently, he paid Muscat the latter's share of the premium, apparently approximately $39,000. Fifth's 10-K report to the Securities and Exchange Commission for the year ended December 31, 1966, in briefly describing this transaction, states that "Victor Muscat and Edward Krock received a premium of approximately $102,000 [sic] in proportion to their respective participation in the loan."

 The Deposits in Geoffrey's Bank, Belgium, and Banco Suizo-Panameno, Panama

 When, in October 1966, Fifth found itself in possession of approximately $11,500,000 free cash as a result of the receipt of the condemnation award, it proceeded promptly to distribute this cash among various banks. The greater part, approximately $7,500,000, was deposited in Worcester, subject to Krock's control. The balance of some $4,000,000 was deposited in the first instance in a number of different banks. Two of these deposits, which were arranged by Cohn, have provoked considerable controversy in this action, although neither is made the subject of a separate count in the complaint.

 The first of these was a deposit of $500,000 in Geoffrey's Bank, Belgium, made on October 18, 1966, the very day that Fifth received the money from the City. An officer of Geoffrey's Bank is A. Newman, a friend of Cohn's with whom he had had certain business dealings. A few days after this deposit, i.e., on October 31, 1966, Geoffrey's Bank transmitted $100,000 to Cohn who deposited this sum in his personal bank account. The coincidence of dates not unnaturally aroused the suspicions of the Securities and Exchange Commission. But Cohn testified that the $100,000 was a payment of a fee due him from Newman on some other transaction, and there is no evidence to the contrary.

 At an early stage of this action, the court directed Fifth to authorize Geoffrey's Bank to inform the Securities and Exchange Commission as to the status of the $500,000 deposit. The result was a letter from Geoffrey's Bank, signed by Newman, dated March 19, 1968, addressed to the Belgian Banking Commission and forwarded by it to the Securities and Exchange Commission. The letter states that the $500,000 is on deposit to Fifth's credit in the bank for a period of two years at six per cent interest and that no withdrawals have been made from the account.

 The other deposit, in the amount of $250,000, is more mysterious. Although a great deal of testimony was devoted to this subject, it was never fully explained.

  It appears that Walter Germann owned or controlled a bank in Switzerland named Bank Germann which controlled a bank in Panama named Banco Suizo-Panameno (Suizo). In August 1966, Germann was held in contempt and fined by this court for failure to appear as a witness before the grand jury which was investigating Bank Germann and Suizo with a view to determining whether these banks were lending their facilities to United States citizens to facilitate frauds upon the United States with respect to income tax laws and security regulations. Cohn knew of this, for on September 23, 1966, he was served with an order of this court restraining him from transferring any property of Germann in his possession. He was also served with a subpoena requiring him to report whether or not he possessed any property of Germann. He filed a negative response to this subpoena on October 3, 1966.

  On November 15, 1966, Cohn, on behalf of Fifth, caused to be delivered to one E. A. Morales a cashier's check of Guaranty in the sum of $250,000 payable to "E. A. Morales, Vice President." Morales was apparently a vice president of Suizo at the time. The endorsement on this check shows that it was deposited in the Union Bank of Switzerland in Basel. Morales delivered to Cohn a letter dated November 15, 1966 which purported to acknowledge receipt of the $250,000 as a deposit by Fifth in Suizo. The letter is garbled and part of it makes no sense.

  Plaintiff contended that this transaction was not in fact a deposit in Suizo, but rather was a payment of Fifth's money to Germann. The evidence is insufficient to prove this contention. It appears that although the check was deposited in Switzerland and apparently eventually reached Bank Germann there, Bank Germann in December 1966 instructed Suizo to credit Fifth with $250,000. Thereafter Germann committed suicide. His Bank Germann failed and eventually Suizo also failed and an "interventor," Obarrio, was appointed for it by a Panamanian court on April 13, 1967. Obarrio testified that although Suizo received the credit advice from Bank Germann, it never received the $250,000. This testimony is contrary to Obarrio's letter dated July 11, 1967 to Fifth's accountant which referred to a deposit by Fifth of $250,000 "in our bank." *fn8" In any case, the least that can be said is that as of the moment, it is highly uncertain whether Fifth will ever recover this $250,000.

  Fifth's $300,000 Loan to Saxe, Bacon & Bolan

  On November 4, 1966, which was some two weeks after Fifth received the condemnation award, Saxe, Bacon & Bolan made and delivered its promissory note, signed by Bolan, in the sum of $300,000 payable to the order of Fifth ninety days after date with interest at 5 3/4 per cent. On November 8 Muscat, as president of Fifth, instructed National Bank of Secaucus, where Fifth then had an account, to issue its cashier's check to Fifth in the sum of $300,000. The bank did so. The check was deposited in Fifth's account in Security. On November 9 Fifth drew a check on its account in Security, signed by Muscat, to the order of Saxe, Bacon & Bolan for $300,000. On November 9 Muscat wrote to Security instructing it to deposit this check in the account of Muscat. Apparently Security did not comply but instead deposited the check in the account of Saxe, Bacon & Bolan.

  On the next day, November 10, Saxe, Bacon & Bolan drew a check signed by Bolan on its account in Security for $300,000 payable to the order of Cohn. Cohn endorsed the check to the order of Muscat and delivered it to Muscat. It was then deposited in Muscat's account in Security. There is no doubt whatever that this payment was made by Cohn to repay a loan which had been made to him by Muscat to enable Cohn to buy Huffines' Defiance and BSF stock.

  Saxe, Bacon & Bolan has never paid any part of its note to Fifth in cash. Instead, the firm has made charges to Fifth for legal services from time to time and has offset these against its obligation on the note. On February 1, 1967 Saxe, Bacon & Bolan rendered a bill to Fifth in the amount of $75,000 for services rendered in December 1966 and January 1967 in connection with Fifth's acquisition of stock of Mercantile. *fn9" On May 1, 1967 the firm rendered a bill to Fifth in the amount of $35,000 for services rendered in the spring of 1967 with respect to conferences with Fifth's accountants and the Securities and Exchange Commission.

  In addition, on May 2, 1967, Saxe, Bacon & Bolan instructed Murphy (who handled accounting matters for Fifth) to credit against the firm's note a charge of $93,000 for Fifth's fee for its work on the condemnation case. This was the full amount of the fee to which Saxe, Bacon & Bolan was entitled under the terms of its written retainer. The total of these bills and charges is $203,000. Taking them at face value, this leaves $97,000 still owing on the principal amount of the note. There is nothing to indicate that Saxe, Bacon & Bolan has ever paid Fifth any interest on the note.

  Fifth's Sale of Gateway Stock to Gray Line

  On December 15, 1966, Fifth entered into a written agreement with William C. Howell and others to purchase from them 26,080 shares of the common stock of Gateway National Bank of Chicago (Gateway) at a price of $27.50 per share, making a total of $717,200. The agreement was signed for Fifth by Ruffa as vice president. These shares constituted more than 60 per cent of Gateway's outstanding stock. The agreement provided for an immediate closing to take place on December 15 and further provided for an immediate meeting of Gateway's board of directors at which the board would elect Bolan and Brunner directors of Gateway.

  The closing took place and Fifth acquired the stock. Thereafter Saxe, Bacon & Bolan decided that since Fifth already owned or was about to acquire a sizable block of stock in another national bank, Mercantile, federal laws (i.e., the Bank Holding Company Act, 12 U.S.C. §§ 1841, 1842) prohibited it from owning Gateway stock as well. Thereupon, on January 9, 1967, Fifth entered into a written agreement with Gray Line to sell the 26,080 shares of Gateway to Gray Line at $27.50 per share, the same price that Fifth had paid for it. This agreement was signed for Fifth by Krock as treasurer and for Gray Line by Ruffa as vice president. Gray Line, a company which, as previously related, had no business and no substantial assets except for its holdings of Fifth's stock, agreed to pay Fifth the purchase price of $717,200. No time for payment was fixed. No provision for security for payment was made.

  Fifth delivered the stock to Gray Line. Gray Line did not pay for it.

  On July 13, 1967, an amendatory agreement was made between Fifth and Gray Line, signed for Fifth by Murphy and for Gray Line by Ruffa. This agreement provided that Gray Line would pay the price by paying $71,720 in cash and by delivering ten promissory notes, payable semi-annually, for the balance of $645,480. Gray Line did not pay the cash and did not deliver the notes.

  This was how matters stood when this action began. Thereafter, on December 19, 1967, a further amendatory agreement was entered into, signed for Fifth by Bolan and for Gray Line by one Goldstick. This document recited that Gray Line "is not in a position to make payment in accordance with the terms of the amendment of July 13, 1967." It went on to provide that Gray Line would deliver to Fifth the 26,080 shares of Gateway stock as security for the payment of the purchase price. It further provided ...

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