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SEC v. NORTH AMERICAN RESEARCH & DEV. CORP.

March 8, 1974

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
NORTH AMERICAN RESEARCH AND DEVELOPMENT CORP. et al., Defendants


Edward Weinfeld, District Judge.


The opinion of the court was delivered by: WEINFELD

EDWARD WEINFELD, District Judge.

This action was commenced in September 1967 by the Securities and Exchange Commission (SEC) against North American Research and Development Corporation (North American) and forty-two other defendants for a permanent injunction against continued violations of the registration *fn1" and antifraud provisions of the Securities Act of 1933 *fn2" and the Securities Exchange Act of 1934 *fn3" and the rules and regulations thereunder. *fn4" In essence, the defendants were charged, singly and in concert, with selling blocks of unregistered North American stock and with fraudulent conduct in the sale of the stock. As the case progressed from the commencement of suit, when plaintiff applied for preliminary injunctive relief, through an appeal and remand as to some defendants, permanent injunctions or other dispositions were entered as to all defendants except North American, Edward White, its chief executive officer, K. Ralph Bowman, its secretary-treasurer, and Alfred Blumberg, a stock broker who was president of an inactive brokerage firm and who had been engaged in various aspects of the securities business. As to the latter four, preliminary injunctive relief was in effect pending a trial on the merits. *fn5"

 Plaintiff's motion for preliminary injunctive relief was based upon extensive affidavits and testimony taken before then District Judge Walter R. Mansfield. The hearing extended over seven days in January 1968, during which twenty-four witnesses, including the defendants White, Bowman and Blumberg testified. Thereafter, in February 1968, Judge Mansfield rendered a decision and made extensive findings and conclusions of law to the effect that plaintiff had established a strong prima facie case. *fn6" Preliminary injunctive relief was granted against most defendants, including North American, White and Bowman; it was denied as to seven defendants, including Blumberg. Upon cross-appeals the order was upheld except insofar as it denied injunctive relief against Blumberg and others, and accordingly was remanded for further proceedings. *fn7" Upon remand, although afforded the opportunity to introduce additional evidence, Blumberg, as well as the others, elected to stand on the existing record. After hearing oral argument, Judge Mansfield found that Blumberg had violated the registration and anti-fraud provisions of the securities acts in the sale and distribution of North American stocks, and granted a preliminary injunction against him. In September 1972, Judge Motley granted summary judgment against the corporation, North American and Bowman, finding that each had violated the registration and anti-fraud provisions of the securities acts as alleged in the complaint, but reserved for trial the scope of injunctive relief, if any, to be issued against them. Thus, the unresolved issues now before the court are on plaintiff's application for final judgment against White and Blumberg, and if plaintiff sustains its burden of proof, the scope of the relief to be granted against them, North American and Bowman. *fn8"

 The key figure in the affairs of North American was the defendant Edward White, who conceived a scheme to acquire a worthless corporate shell through control of the issued stock of an inactive publicly-held corporation, North American, formerly Utah Fortuna Gold Company. White and the other defendants were charged with promoting distribution of the balance of the issued stock with a view of introducing it onto the over-the-counter market in the United States, creating a demand for it, instigating the trading of it, and running up its market price, all for the benefit of himself and a group working with him in the distribution of the stock. A thumbnail sketch of the scheme is succinctly set forth by Judge Mansfield:

 
"On April 27, 1967 White acquired control of such a worthless corporate shell, a Utah company called Utah Fortuna Gold Company, the name of which was later changed by him to North American. Although no market for its stock had existed for years, within three months, as the result of a carefully laid and executed plan of the White-Freeman-Naft trio, approximately 200,000 shares of its stock was distributed via Canadian accounts to broker-dealers and the public in the United States, trading of the stock was initiated on the over-the-counter market, and the price of the stock, as a result of the group's skillful promotion, was run up during the same short period from 1/2 cent per share over-the-counter to more than $6.00 per share, or more than 1200%, even though the corporation did not carry on any commercial operations during the period and its assets were of doubtful value. On July 20, 1967, the bubble burst when trading in the shares was suspended by the SEC." *fn9"

 The fraud charge centered about a "Progress Report" of North American and oral statements and representations made by individual defendants to dealers and investors. The charge was that the "Progress Report" omitted any financial information and was false and misleading in various other respects, including its portrayal of men working at the North American plant, which gave the impression that it was currently in operation in July 1967, when in fact the plant had not been operating or in production since 1964. The report was distributed to various stock brokers and investors in the United States and was one of the principal methods used to sell and distribute in the United States shares of North American.

 Plaintiff at the trial, pursuant to Rule 65(a) (2) of the Federal Rules of Civil Procedure, relied in large measure upon the substantial testimony of the twenty-four witnesses who testified and the numerous exhibits admitted in evidence during the seven-day hearing before Judge Mansfield on the motion for preliminary injunctive relief. This court has read and studied the voluminous transcript of that hearing. Plaintiff, in addition to the admissible evidence of the prior proceeding, called at this trial as witnesses defendants Blumberg and White, each of whom, as already noted, testified at the hearing on the motion for preliminary injunctions, at which they were represented by their respective counsel. *fn10" Judge Mansfield's decision was based, as he noted, not only upon the affidavits submitted by the parties, but upon his "observation and careful appraisal of the witnesses" *fn11" who testified before him with respect to disputed fact issues. This court, too, has had the opportunity to observe the demeanor of the two defendants White and Blumberg. Each impressed this court as evasive and at times nonresponsive, with a quick and glib explanation for questioned conduct. The printed record of the proceedings before Judge Mansfield also demonstrates in instance after instance evasiveness on the part of these witnesses and a lack of forthrightness in response to questions. Upon the entire record I find the plaintiff has fully sustained its burden of proof that the defendants White, Blumberg and Bowman each violated, and participated in the violation by other defendants of, the registration and anti-fraud provisions of the securities acts, as alleged in the complaint. Plaintiff accordingly is entitled to judgment on the merits.

 There remains the issue of the scope of relief. Plaintiff seeks to enjoin the defendants not only against continued violations as to North American securities, but also as to any other security. The defendants oppose any injunctive relief (1) upon the claim that since the SEC suspended trading with respect to North American stock in 1967 no sales have occurred, and (2) that as to other securities there is no showing defendants are likely to engage in illegal activities.

 As to the North American stock, which remains unregistered to this date, the record establishes such deliberate conduct in its sale and distribution, in violation of sections 5(a) and 5(c) of the Securities Act of 1933, *fn12" that there can be no serious question that plaintiff is entitled to the injunctive relief it seeks.

 As to other securities, the defendants' past actions and their pervasive conduct with respect to North American, which furnishes a clue to their general attitudes, justify such relief. The defendant Blumberg's violations were not isolated. He made fraudulent statements to a number of persons in the sale of the stock; he was active, in concert with other defendants, in promoting the sale of stock. Blumberg, in addition to acting as a conduit in the sale of shares, distributed copies of the "Progress Report."

 Similarly, Bowman was deeply involved as secretary-treasurer in the illicit distribution of the stock. He was instrumental in locating the shell corporation, and from the start was in on the scheme involving North American and worked closely with White and others. He played a major role in the preparation of the false and misleading Progress Report. Bowman, with respect to other securities, had previously been enjoined from violating sections 5 and 17 of the Securities Act of 1933.

 As to White, a self-styled promoter, principally of mining stocks, and a securities trader, he was the central figure, if not the master mind, of North American's illicit activities. He has engaged extensively in the promotion of other securities. He was chief executive of a Canadian securities underwriting corporation, whose license was revoked by the Canadian authorities. White continues to maintain a stubborn, even defiant attitude that the North American securities are exempt under section 3(a) (1) of the 1933 Act and also as to the probity of the Progress Report, despite express determinations by the Court of Appeals to the contrary -- an attitude that hardly betokens likelihood of compliance with the securities laws.

 Each defendant was an active participant with one or more of the other defendants who have heretofore been permanently enjoined from violations of the securities acts with respect to any security; no good reason appears why in the light of their activities the scope of the injunction issued against the current defendants should be less onerous than that imposed upon the codefendants. Nothing in the record as to the current defendants suggests recognition of the wrongfulness of past illicit conduct or offers the promise of future compliance with the securities laws. Under the circumstances, a permanent injunction against future violations of the securities acts is justified. *fn13"

 The foregoing, together with the following, shall constitute the Court's Findings of Fact and Conclusions of Law:

 FINDINGS OF FACT

 Acquisition of Control by White

 1. The defendant White, who had been an active promoter of mining stocks of companies controlled by him, manifested in March 1967 an interest in acquiring control of a corporate shell as the first step in a scheme already referred to, whereby he and others then promoted the sale of stock previously acquired, created a demand for it, and unloaded a substantial portion of their shares upon the purchasing public at greatly inflated prices by fraudulent and manipulative means. Actively associated with him in this scheme from the outset were Sam Freeman, a friend and a Toronto broker, and the defendant K. Ralph Bowman, through whose efforts the Utah Fortuna Gold Company, the empty corporate shell, was located.

 2. All but 600,000 shares of the 1,800,000 shares of this inactive company, which White admitted was "virtually worthless," were held by South Utah Mines. Robert A. Johnson, in March 1967, was an officer and director of both companies, as well as the transfer agent of Utah Fortuna Gold Company; he also exercised the "managerial and financial decisions" of Mrs. Mabel McGarry, who was the owner of approximately 75% of South Utah Mines.

 3. Johnson, in the latter part of March 1967, after obtaining authority from Mrs. McGarry to sell the 1,200,000 Utah Fortuna Gold Company shares held by South Utah, agreed to sell the control stock to Whitney, and through him to those whom Whitney represented; on April 27 the sale to Whitney was effected; Whitney immediately resold 1,000,000 shares to White and his nominee, Sonia Starr; as prearranged with Johnson, he also transferred 100,000 shares to his (Whitney's) brother and another 100,000 shares to one Glenn, as finders' fees.

 Acquisition of Publicly-Distributed Shares

 4. It was arranged between Freeman, White and Bowman that any additional shares (beyond those acquired by White) would be purchased by the Toronto brokerage firms of J.P. Cannon & Co. (Cannon) and Lars Hagglof & Co., Ltd. (Hagglof). Whitney's brother and Glenn, upon receipt of the finders' fees shares, sold them to Cannon in Toronto. At the same time, Freeman and Frank Naft, who were White's principal associates, instructed Cannon to purchase shares to be offered from Salt Lake City for the accounts of their wives and Freeman's mother-in-law. Subsequent instructions provided for purchases in the names of friends and other relatives.

 5. Thereafter, during the period from April 24 to June 6, 1967, through the activities of Bowman, Whitney and Johnson, 553,000 additional shares of Utah Fortuna Gold Company (later North American) were acquired from former stockholders, which shares, together with the 200,000 finders' fees shares, making a total of 753,000, were sold to Cannon and Hagglof as instructed by White, Freeman and Naft.

 By June 27, 1967, approximately 96.8% of the 1.8 million shares of the company outstanding was under control of the White-Freeman-Naft trio, including the one million shares held by White and his nominee Sonia Starr, and 753,000 shares acquired through Cannon and Hagglof held in the names of close friends and relatives of the trio. The methods and means of acquisition and the relationship between the White-Freeman-Naft trio and the parties in whose names the stock was held in Toronto indicate that the 753,000 shares were acquired in Toronto with a view to the distribution of all or a very substantial portion of it in the United States.

 Promotion and Distribution

 6. White and his associates took steps to effect a successful redistribution of the shares in the United States. Originally he had planned to transfer some Canadian mining claims to the corporation and then to promote trading in the company's stock; however, when in Salt Lake City in April 1967 to further his purchase of control of Utah Fortuna Gold Company's ...


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