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Katz v. Treat

denied: May 16, 1969.


Lumbard, Chief Judge, and Waterman and Friendly, Circuit Judges.

Author: Friendly

FRIENDLY, Circuit Judge:

This is one of those appeals where the briefs read as if addressed to different cases. According to the plaintiff, defendants engaged in the sale of unregistered stock and in tactics typical of the "boiler room" operations with which this court has had all too much occasion to become familiar. According to the defendants, plaintiff's own showing demonstrated his knowing and eager participation in all that was done. In such cases each side usually has presented its version of what occurred and the differences have received needed resolution by the trier of the facts, in this case a jury. Here that was aborted by a judgment dismissing the complaint at the close of the plaintiff's case.*fn1 We hold this to have been error with respect to four of the appellees, although correct concerning the other two.

Plaintiff, Dr. Solomon Katz, is a dentist by profession and an operator in securities by avocation. The defendants with whom we are concerned are Amos Treat & Co., a stock brokerage corporation; Amos Treat, its president; Donald Nardone, a customer's man; James Earley and A. Thomas Ewbank, who were directors and high officers of Delka Research Corp. during the period in which its stock was sold to Katz; and Earl J. Wofsey, special counsel for Delka and attorney for Amos Treat & Co. in connection with its proposed underwriting of Delka's stock. Count I of the complaint, filed on January 29, 1963, alleged that in September 1960, defendants had sold plaintiff 20,000 shares of Delka stock for $50,000 and in April and May 1961, 60,000 such shares for $100,000, and that such shares were not registered although § 5 of the Securities Act required them to be; defendants were therefore alleged to be liable under § 12. The remaining five counts, based on §§ 12(2) and 17(a) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, and common law, alleged various fraudulent misrepresentations, of which more hereafter.*fn2

I. Plaintiff's Version of the Facts

Katz was the main witness on his own behalf.*fn3 He was an active customer of Amos Treat & Co., as well as of many other brokerage firms. Nardone, who had been servicing his account at Treat for some two years, had told him of a "privileged group" consisting of friends of Amos Treat and "special customers," who were let in on stock "before it zoomed." In late August 1960, Nardone informed Katz by telephone that his lucky time had arrived. Nardone had "come across a situation that really looks tremendous." Amos Treat & Co. was supposed to underwrite a new issue which Treat thought "one of the best issues that he ever had," and on this occasion Katz was to be allowed among the favored few. Katz was interested. Nardone later advised that the company was in the plastic coating business; that it had "a special process that nobody else could invent"; and "that it looked very, very promising." A few days thereafter Nardone invited Katz to attend a meeting of stockholders and prospective investors at the company's plant in New Jersey. Mr. Treat had allotted $100,000 worth of securities to Nardone, who inquired whether Katz' brother-in-law, Pinson, might not also be interested.

Upon the appointed day Nardone drove Katz and Pinson to the plant. When Katz expressed some misgivings about investing in companies before a public issue, Nardone reassured him that "we do it all the time." About 60 people were assembled when one Walsh introduced himself as Delka's new president and welcomed the friends who he hoped would become stockholders. Katz was assigned to a group, which included Treat and generally Nardone, who were conducted through the plant by company officers. They saw machinery and were told that the company was "growing by leaps and bounds" and would need plants all over the country. Workmen in a shipping area appeared to be busily packing cartons, and company officers said they couldn't keep up with the orders. After further displays and conversation, and evasion by Walsh of what seems to have been the only intelligent inquiry propounded -- a request by Pinson, a certified public accountant, to look at the books -- Katz and Pinson joined the others for a luncheon meeting. Walsh modestly acknowledged that the prospective investors had "seen a show that is one of the most stupendous things that will ever be set forth in American society"; he was sure those hearing him would be interested "in our prospectus * * * that Mr. Treat will be doing."

On the drive back to New York, Nardone said he could take care of $25,000 of the $100,000 of immediately available stock that Treat had allotted him; Katz and Pinson offered to provide like amounts. Nardone asked Katz whether he could not interest friends in the $25,000 balance. Katz got $15,000 from another brother-in-law, Dr. Edward Marcus, and, under pressure from Nardone, the final $10,000 from a number of patients and friends. Pending receipt of the latter sum Amos Treat & Co. had apparently issued its own check to Delka; in any event Katz' $10,000 check to "Amos Treat & Co. as agent for Delka Research" was deposited in the brokerage house's account. Throughout these proceedings Nardone had cautioned Katz that the securities should be kept in Katz' name, as Nardone was doing with the $15,000 of his share representing investment by others. The reason was that too many names would complicate the later filing of registration statements, and Wofsey, the lawyer, "doesn't like that."

Katz became concerned over the delay in the underwriting and his lack of papers to evidence his payments but was assured by Treat and Nardone that all was well. In early December 1960, Katz received a letter from Wofsey's office which stated it was enclosing letters from the president of Delka of New Jersey and Delka of Delaware, acknowledging the receipt of $50,000 from him, the issuance of 20,000 shares of the New Jersey corporation in his name, and the exchange of these for 20,000 shares of the Delaware corporation. Katz was asked to execute an enclosed stock power for the assignment of his shares in the New Jersey corporation to the Delaware corporation.*fn4 The letter also stated that in view of the proposed public offering it would be necessary for the lawyer to hold the securities in escrow until the registration statement became effective. The letter said, "This is our customary procedure and conforms to the policy and requirements of the Commission." Also enclosed was a letter to the Delaware corporation which Katz signed. This stated that in consideration of the issuance of 20,000 shares of the Delaware corporation "to be held by the undersigned for investment," Katz assigned all rights to the $50,000 advance. The company's acceptance advised that Katz' shares were evidenced by Certificate No. 12, which was in the custody of Wofsey "pending processing of a Registration Statement relating to the proposed public offering of our Common Stock." When Katz called Nardone and complained that the letter "just doesn't make sense," Nardone replied that he had received the same letter and had spoken to Wofsey and Treat; he explained "It is just customary procedure to sign it."

Several times in February 1961, Katz inquired of Treat what was happening to the registration statement. On the first occasion Treat assured him there was only "a little technical problem" about the registration, that "Everything is just coming along fine," and that he wouldn't be a bit surprised if "this stock opens up at $10 a share." At the end of the month, there were again "just little problems with the SEC," but Treat confided that Delka required money "because they need some new equipment, business is so good." Treat was having a few friends work on this. A week later Treat professed anger that his friends were being so slow and threatened that if they didn't perform promptly, he might let Katz and the latter's friends take their place. Before long, Treat was urging Katz to raise $100,000 among friends, for which he would get 50,000 or 60,000 shares. When Katz expressed surprise at the lowering of the price for the Delka bonanza, Treat said he wasn't "so sure I can get it, but I think I can swing it all right," but that Katz would have to "take care" of Nardone and that each person should pay at least $10,000.

Katz raised the money from about 20 people, who were told the certificate had to be in Katz' name. He priced the shares at figures ranging from $4 to $2.50, so that while all the funds were put up by the new investors, Katz could keep a considerable number of shares for himself. When Treat asked for the money, Katz sought assurances about the registration and was referred to Wofsey. The latter advised there were some problems and Katz had better wait a few weeks. A fortnight later, in mid-April 1961, in response to another call, Wofsey said everything had been worked out in principle and it was "just a formality of going up to some law firm and just signing the name"; he now thought it would be all right for Katz to give Treat half the money. Treat called and said he would send Ewbank, then president of Delka, to pick up the check. Katz gave him one for $50,000 with an endorsement "30,000 shares of Delka Research Corporation." Next day Ewbank phoned that Treat didn't want any endorsement on the check, and sent for a new $50,000 check to the order of Delka.

On Friday, April 21, Katz called on Wofsey, who inquired what he wanted to know. Katz said that Treat had told him Delka was the greatest issue he had ever underwritten and inquired whether Wofsey felt that way. The lawyer answered, "I hear it is a good one and I know it is okay." When asked about the registration, he said "it is just a perfunctory thing of getting the financial figures and putting in the accountant's reports and everything is all set." Katz then inquired whether Wofsey thought it was safe to give Treat the balance of the money. Wofsey responded that it "would help the registration" and thought "it would be all right." On the following Monday, Treat called Katz, referred to the meeting with Wofsey, and said he needed the money fast. By May 10, 1961, it was all paid and a certificate for 60,000 shares was issued that day.

Passing over the testimony of Marcus and other purchasers of Delka stock, we come to the evidence of Joseph Fleish, a partner in the accounting firm of Peat, Marwick, Mitchell & Co. Their report of the condition of Delka as of May 31, 1961, and its operations for the eleven months then ended showed a loss of $407,847. Net sales had amounted to only $28,101. The report explained that while inventories had been priced at the lower of cost or replacement market, "realization depends upon ultimate sales of the product for which no substantial market has yet been established as the greater part of the sales originally made during the eleven months ended May 31, 1961 were eventually returned." Although current liabilities substantially exceeded current assets, Delka had invested $175,000 in convertible debentures of Magna-Bond, Inc. to which Delka had granted an exclusive sales franchise, and which had a negative book value at March 31, 1961.*fn5

Needless to say, the registration statement was never filed. On January 30, 1962, Wofsey's office wrote Katz that since the proposed public offering was no longer being considered, the continued holding of the certificates for 80,000 shares in his name was not necessary, and offered to deliver them upon receiving a receipt and release. Katz did not sign this. On December 21, 1962, Wofsey dispatched the certificates without having obtained the desired release; in his letter ...

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