The opinion of the court was delivered by: MOTLEY
Findings of Fact and Conclusions of Law
This action for injunctive and ancillary relief was commenced by the SEC on August 16, 1971 pursuant to 15 U.S.C. §§ 77t(b) and 78u(e). Jurisdiction is predicated upon 15 U.S.C. §§ 77v(a) and 78aa. The complaint alleges violations of the anti-fraud provisions of the Securities Laws as to all defendants. 15 U.S.C. §§ 77q(a) and 78j(b) and Rule 10b-5, 17 C.F.R. 240, promulgated pursuant thereto. It also alleges as to certain defendants a violation of the Securities Laws prohibiting sale of securities unaccompanied by a prospectus meeting the requirements of the law. 15 U.S.C. § 77e(b). It further charges as to the defendant underwriter, Benjamin Werner and Benjamin Werner & Co., that other provisions of the Securities Laws and Rules promulgated thereunder were violated. These prohibit fraudulent practices by a broker-dealer in connection with the sale of securities and require the establishment of an escrow account or a separate deposit of funds in connection with an "all or nothing" sale of an issue such as occurred here. 15 U.S.C. 78 o (c)(2) and Rule 15c 2-4, C.F.R. 240.
In addition to injunctive relief prohibiting future similar violations of the Securities Laws, the complaint prays for an order appointing a trustee of all of the proceeds of the "all or nothing" public offering involved in this case, including profits or income received by defendants from the use of such proceeds. A further order is sought directing defendants to relinquish to the trustee any funds received by them in the public offering, including income. The trustee, if appointed, would use his best efforts to seek out those members of the public who purchased the stock and return to them whatever monies may now be due such purchasers, plus interest.
Defendants have all appeared and answered the complaint except Deneso Corporation, Joseph Delmonico, and Jack Naiman. These defendants were duly served. Defendant Arthur Sutton consented to the entry of an injunctive order against him and the appointment of a trustee, if one should be appointed. He has deposited the proceeds which he received ($ 43,000) in the registry of the court pending the outcome of this case.*
The pivotal claims of the SEC in this action are as follows:
Certain defendants were selling shareholders along with Manor Nursing Centers, Inc., (Manor) of an issue of Manor common stock (450,000 shares at $10 per share) offered on an "all or nothing" basis pursuant to a registration statement and prospectus which became effective on December 8, 1969. It is claimed that these defendants fraudulently failed to amend the registration statement and prospectus to disclose that special compensation arrangements had been made with defendant Christos Netelkos and the three non-answering defendants to induce them to participate in the offering by purchasing shares themselves and by securing others to make purchases before the chaotic and wholly fraudulent closing which took place on February 20, 1970.
The closing was held about two weeks prior to the expiration of the 90 day selling period. At that time proceeds checks were issued to Manor and the selling shareholders by the underwriter although all of the purchasers' checks, most of which were uncertified, had not been cleared. At the closing the amounts of the checks received did not match the number of shares purportedly sold and calculations had to be made repeatedly in an attempt to match the two. Discrepancies persisted. Consequently, during the closing, certain of the selling shareholders purchased additional unsold shares for themselves or their friends, unknown, of course, to the latter, out of the proceeds which they had just received at the closing. Creditors of Manor were also paid at the closing in shares in an effort to make it appear that the issue had been sold.
A few days after the closing, checks presented by Netelkos and the non-answering defendants, totaling more than $2,500,000 "bounced." None of these defendants had any intention of paying for the shares which they purchased. They participated in the offering at the behest of Ira Feinberg (Feinberg) and defendant Ivan Ezrine (who were acting on behalf of the other selling shareholders as well as Manor) to make it appear that the entire issue had been sold.
The checks given to the defendant selling shareholders by the underwriter in turn "bounced", since the underwriter did not have sufficient funds in his account as a result of the original insufficient checks. Although checks from the underwriter bounced, the selling shareholders subsequently received payment for their shares from Feinberg, acting for Manor, out of proceeds which it had received from the underwriter from the sale of shares to the public. These selling shareholders included Feinberg and companies owned or controlled by Ezrine. Feinberg, however, was the only one whose check, received from the underwriter, did not "bounce". This was because, as Feinberg testified on the trial, he and Werner arranged to have the check which he had received for more than $500,000 credited to Feinberg's account at the closing so that he would have sufficient funds in his personal account with which to purchase the remaining unsold shares at the closing in the name of certain of his personal friends.
Feinberg and his counsel, Ezrine, without disclosing the fact by amendment, then frantically proceeded to re-offer the 170,000 shares which were to have been purchased by the non-answering defendants and to collect on the bad checks presented by Netelkos. Again, in connection with this re-offer after the closing, special compensation arrangements were made. The first was with a David Haber who purchased 60,000 shares. The second was with the Daytona Beach General Hospital which purchased 60,000 shares for $11 per share, the offering price being $10. A note was accepted from Netelkos, for the 82,320 shares which he had received for his worthless checks, which was never fully paid.
Thus, although the entire issue was not sold at the time of the closing (because of the fraudulent offer and reckless acceptance of uncertified checks which later "bounced" and as evidenced by the "bootstrap" purchase of unsold shares by Feinberg and Ezrine) the funds received from the public were never returned. Moreover, the underwriter failed to comply with the legal requirement and the requirement of the prospectus that all funds received by him prior to the end of the selling period be placed in a special account in the Chemical Bank so that the monies collected could be returned in the event that the entire issue was not sold within the 90 day selling period as occurred here.
When the complaint was filed the SEC sought and secured a temporary restraining order restraining defendants, among other things, from disposing of any of the funds or profits received by them as a result of the sale of Manor common stock, pending the hearing and determination of a motion made by SEC for preliminary injunctive relief. The hearing on the motion for such relief commenced on August 19, 1971, and was concluded on August 20, 1971.
Upon that hearing the SEC moved for an order advancing the date of trial and consolidating the hearing on the motion with the trial. The motion was denied. The parties were directed to serve and file proposed findings of fact and conclusions of law. Feinberg, president and chief stockholder of Manor, in addition to complying with this directive also filed further affidavits and other documents with the court purporting to show efforts he is making to sell certain real property assets of Manor and its successor, defendant Capital Cities Nursing Centres, Inc., (Capital Cities) for the purpose of raising liquid assets with which to reimburse certain of the public purchasers of the Manor offering. Repayment, however, under Feinberg's plan would be denied to certain purchasers on the ground that they were equally liable with Feinberg, as he sees it, or on the ground that such purchasers have brought their own lawsuit to recover monies expended by them. The court thereupon reconsidered the motion made by SEC to advance the date of trial and to consolidate it with the hearing on the preliminary injunction motion, reversed its prior decision, and set the trial for September 30, 1971. Rule 65, Fed. R. Civ. P. The trial commenced on the date set, continued on October 6, 1971 and was concluded on October 7, 1971.
The court finds and concludes that none of the defendants has offered an adequate defense to any of the SEC's claims, all of which have been proved upon the trial. The court, therefore, grants the relief sought as to all defendants except Samuel Feinberg, Suzanne Marnane, and Gladys Halford. As to these three defendants relief is limited to an order directing them to surrender forthwith to the court appointed trustee all monies received by them as a result of the sale of Manor common stock, together with all income or profits. Each of these defendants is directed to file with the court and with the trustee an affidavit setting forth the full amount received by each of them from the sale of their shares, the investments made by each of such amounts, and the income or profits realized from such investments. Defendant Sutton is directed to file a similar affidavit. Injunctive relief is denied as to defendants Samuel Feinberg, Marnane, and Halford as the SEC did not show them to be any more than the beneficiaries of Feinberg's perverted sense of largesse.
In support of the relief granted the court makes the following findings of fact and conclusions of law.
Manor is a Delaware corporation organized on March 19, 1969. On March 31, 1969, in return for 975,000 shares of Manor common stock, Manor acquired 133 County Road, Inc., a New Jersey corporation which owned and operated a 64-bed nursing home in Tenafly, New Jersey. Feinberg, who previously owned all of the shares of 133 County Road, Inc., became controlling shareholder of Manor by virtue of this transaction. Manor then continued to operate the nursing facility in Tenafly and maintains its business office at the County Road address. On July 27, 1970, defendant Capital Cities Nursing Centres, Inc., (Capital Cities) succeeded to the business and operations of Manor by virtue of a transaction in which Manor sold its assets to Capital Cities for 1,623,500 shares of Capital Cities preferred stock. This stock was then distributed on a 1 for 1 basis to the shareholders of Manor. Manor is now in the process of being liquidated.
Capital Cities was organized on March 3, 1969, under the laws of the State of Delaware. Feinberg and Ezrine were instrumental in organizing Capital Cities. Feinberg and defendant Glendale, Inc., which is owned by Ezrine's wife, received a total 120,000 shares of Capital Cities stock, enough to control the corporation. Capital Cities is, therefore, simply a new name for Manor. Feinberg is the principal shareholder and the president of Capital Cities.
Capital Cities owns various properties in New Jersey, and has 8 subsidiaries, including defendant Manor Construction Co., Inc. Ninety percent (90%) of Manor Construction's capital stock is owned by Capital Cities.
Feinberg is president and controlling shareholder of Manor and, by virtue of the transaction of July 27, 1970, is also president and controlling shareholder of Capital Cities. He is an officer of Manor Construction Co.
Defendant Samuel Feinberg is the father of Feinberg and an original shareholder of Manor, owning 10,000 shares of Manor common stock.
Defendant Gladys Halford is the mother-in-law of defendant Feinberg and an original shareholder of Manor, owning 5,000 shares of Manor common stock.
Defendant Suzanne Marnane was an employee of Manor prior to July, 1970, and an employee of Capital Cities thereafter, until December 1970. She was an original shareholder of Manor, owning 12,500 shares of Manor common stock.
Defendant Sutton was an original shareholder of Manor, owning 34,600 shares of Manor common stock. He originally went into the nursing business with Feinberg in April, 1967, with two other individuals, until Feinberg took over the entire business.
Ezrine has been an attorney at law since 1955. He acted as special counsel to Manor in connection with the public offering of Manor stock. He has been general counsel for Capital Cities since its inception. He resides and maintains his professional offices at 37 East 68th Street, New York, New York.
Defendant Atlantic Services, Inc. is a Delaware corporation with a business address at 37 East 68th Street, New York, New York, the home and office of Ezrine. At all times relevant, Ezrine exercised blanket authority in the matter of securities transactions in connection with the Manor offering for Atlantic Services. Atlantic Services offered 10,000 shares of Manor common stock to the public at $10 per share, pursuant to a registration statement which became effective on December 8, 1969.
Defendant Glendale, Inc. is a New York corporation whose shares are closely held by Ezrine and his wife. The business address of Glendale is also 37 East 68th Street, New York, New York. Glendale offered 15,000 shares of Manor common stock to the public at $10 per share pursuant to the registration statement.
Benjamin Werner & Co. is a sole proprietorship and is engaged in the business of a broker-dealer in securities. Werner & Co. served as the underwriter of the Manor public offering. Its offices are located at 19 Rector Street, New York, New York. Benjamin Werner is the owner of Benjamin Werner & Co.
Deneso Corporation is a New Jersey corporation whose address at the times relevant herein was 725 Park Avenue, East Orange, New Jersey. Deneso is engaged in the business of financing.
Joseph Delmonico is a principal of Deneso Corporation. He acted on behalf of Deneso Corporation with respect to Deneso's purchase of Manor common stock and issued three checks aggregating $1,700,000 for the purchase of Manor common stock. These checks were drawn against grossly insufficient funds.
Jack Naiman is a principal of Deneso Corporation and acted on behalf of Deneso Corporation with respect to Deneso's purchase of Manor common stock.
Christos Netelkos was a broker-dealer in securities. He agreed to arrange for the purchase of 142,500 shares of Manor common stock by Carlton-Cambrige in return for special remuneration and consideration.
Defendants Method Leasing Corp. and Upton Corp. were controlled by Netelkos and had subscribed for 83,250 shares out of the 142,500 shares arranged by Netelkos. These shares were never fully paid for by any subscriber.
In late 1968 or early 1969, Feinberg met Ezrine through their respective wives. The Feinbergs met with the Ezrines on several social occasions and, after several meetings, discussions were held as to the possibility of a public offering of Feinberg's company, 133 County Road, Inc. As a result of these meetings, it was decided to secure public financing for Feinberg's nursing home business. Feinberg and Ezrine disagree as to who initially suggested the public financing of the company, but the fact remains that the decision was reached to go public. A decision was also reached to organize Manor to acquire the assets or capital stock of the existing Tenafly nursing home and to have the new entity file a registration statement and go public. When Manor was organized, Feinberg and his relatives and friends and corporations controlled by Ezrine received newly issued stock as follows:
NAME shares owned
Defendant Feinberg 975,000
Defendant Glendale 127,500
Defendant Atlantic Services 10,000
Defendant Sutton 34,600
Defendant Samuel Feinberg 10,000
Defendant Marnane 12,500
Defendant Halford 5,000
Ezrine suggested that his companies, Glendale and Atlantic Services, received some of this stock because of all the work he was doing to effectuate the public offering. This work was being done on a contingency basis. It was also agreed that, in addition to the sales of common stock by Manor, which would raise money for the nursing home operations, monies would also be sought for Feinberg, Glendale, Atlantic Services, Sutton, Samuel Feinberg, Marnane and Halford, so that, as Feinberg put it, they could get something out of the public offering.
Accordingly, a registration statement was filed with the SEC whereby 350,000 original issue shares of Manor common stock would be offered to the public at a price of $10 per share for the purpose of raising, after expenses, approximately $3 million which would be applied to the nursing home operations of Manor. In addition, 100,000 shares then held by the original shareholders would be offered at the same $10 price for the purpose of raising, after expenses, approximately $868,000 which would be paid to such selling shareholders as follows:
Selling Shareholder Shares Offered Net Proceeds
Defendant FEINBERG 62,500 $ 542,500
Defendant GLENDALE 15,000 130,200
Defendant ATLANTIC SERVICES 10,000 ...