The opinion of the court was delivered by: MACMAHON
MacMAHON, District Judge.
This is an action for damages for fraud brought under the anti-fraud provisions of the federal securities laws
and the common law.
Plaintiff alleges that defendants, Stein, Rubinson and Feiffer ("the Stein group"), while secretly holding an option to buy 50,000 unregistered shares of Radio Hill Mines Co., Ltd. ("Radio Hill"), at $1.50 per share, conspired in a fraudulent scheme to induce plaintiff to purchase through brokers 40,000 shares of Radio Hill as their nominee, at an average price of approximately $3.25 per share. Plaintiff claims that defendants concealed the existence of their option and that they induced him to act as nominee by falsely representing that defendants would own and pay for the stock. Throughout, it is alleged, defendants exploited plaintiff's dependence upon the Stein group for the latter's assistance in financing plaintiff's own failing business, Blank Equipment Leasing Co. ("Blank"). Defendants refused to pay for the Radio Hill stock, and plaintiff was held liable for the purchase price in judgments obtained against him by brokers.
This action, commenced in 1970, was transferred to us on January 19, 1977
and tried without a jury from April 25 to April 29, 1977. We render judgment for plaintiff for the reasons below.
Radio Hill is a Canadian corporation engaged in the exploration and development of mineral resources in Canada and South America. Its shares have never been registered with the Securities and Exchange Commission ("SEC"). In 1969, Michael Gardner was the company's controlling person and chairman of the board, and Leonard Varah was its president.
Varah testified that in March 1969, he was negotiating for the purchase of an onyx mine, when defendant Stein called, claiming to be the finder on the onyx deal and demanding a commission in the form of an option to buy 50,000 shares of Radio Hill, to be issued in defendant Feiffer's name. Varah agreed, and on April 22, 1969, at Stein's request, granted an option in Feiffer's name to buy 50,000 shares of Radio Hill, at $1.50 per share. Certain conditions surrounded the option; Varah would retain possession of the shares underlying the option until buyers were found, and, upon a sale, Varah would retain $1.50 per share and pay the balance to Feiffer.
Although Stein has consistently asserted that the option was solely Feiffer's, we must reject his contention. Varah's testimony establishes that the option was made in Feiffer's name, at Stein's insistence, for services performed by Stein. Furthermore, Feiffer testified that the option was the property of the Stein group. We do not credit Stein's testimony to the contrary, given the evasive and unresponsive nature of his answers, as well as his prior conviction for perjury relating to this very scheme.
Option now in hand, Stein, working closely with his cohorts Rubinson and Feiffer, concocted a scheme to conceal their option on Radio Hill shares, induce third parties to buy Radio Hill stock through brokers, and falsely represent that the third party would only be a nominee for the defendants who would own and pay for the stock when payment became due to the brokers. Varah, drawing on the option stock, would supply the shares to the duped nominees and remit the net proceeds to defendants after deducting the option price of $1.50 per share. When the brokers pressed the nominees for payment, defendants would disclaim liability and refuse to pay, leaving the nominees liable for the purchase price.
Their scheme hatched, defendants sought a victim "nominee." Plaintiff proved an easy mark. He was president and sole owner of Blank, an office equipment company which needed financing, and he had begun a business and confidential relationship with the Stein group in July 1968, when Feiffer, whom plaintiff had met socially some months earlier, introduced plaintiff to Stein and Rubinson, who represented that they might be of some help to the company. In October 1968, plaintiff and defendants reached an agreement whereby defendants acquired 50% of Blank in exchange for 25,000 shares of Calculator Computer Leasing Corp.
In early 1969, plaintiff and defendants discussed the possibility of making a public offering of Blank stock. Plaintiff thereafter became dependent upon the Stein group for both interim financing and the effectuation of the plan for a public offering. Feiffer and Rubinson introduced plaintiff to an attorney, whom plaintiff retained to prepare a Regulation A filing and offering circular. Defendants also introduced plaintiff to Gardner and various other underwriters in an attempt to find someone to handle the issue. Gardner's company, Gardner Securities Corp., eventually became the underwriter for Blank's Regulation A offering.
The testimony of Feiffer establishes that he and Stein had a discussion in April 1969 in which Feiffer suggested plaintiff as a possible target for the scheme to exploit the Radio Hill option. Plaintiff seemed an easy mark because he was beholden to the defendants for their efforts expended to save Blank and because plaintiff at this time was still dependent upon the Stein group for continued interim financing and for the promotion of Blank's proposed public offering.
Plaintiff testified that on April 25, 1969, in the midst of the Blank plight, he received a telephone call from Feiffer requesting that he do Stein a favor. Stein then got on the telephone and asked plaintiff to buy 15,000 shares of Radio Hill as his nominee because he did not want to purchase it in his own name. Stein assured plaintiff that he would pay for the stock when payment became due. Stein did not disclose that he and the other defendants had an option on the stock. Although Stein denies participating in this conversation or promising to pay for the stock, Feiffer, in testimony we accept, corroborated plaintiff. The same day (April 25, 1969), pursuant to Stein's instructions, plaintiff placed an order for 10,000 shares of Radio Hill through H. Hentz & Co. ("Hentz"), a Miami brokerage firm. Hentz purchased the shares on the open market, although Varah was probably the ultimate source.
After making the initial purchase, plaintiff called Stein and Feiffer, advising that another 15,000 shares might be available through another brokerage firm. Stein directed plaintiff to purchase the additional shares, and plaintiff did so, placing an order for 15,000 shares of Radio Hill through Dishey, Easton & Co. ("Dishey"), a New York brokerage firm. Dishey's representative informed plaintiff that yet another 15,000 shares were available, advising plaintiff that the shares were coming from a principal of the company.
Plaintiff relayed this last bit of information to Stein, and Stein directed plaintiff to purchase the additional 15,000 shares, stating that he did not care where the stock came from. All told, by the close of trading on April 25, 1969, plaintiff had purchased a total of 40,000 shares on that day. Dishey had purchased the final 30,000 shares through L.J. Forget & Co., a Canadian broker. We accept Varah's testimony that he supplied these shares under the option.
Feiffer also testified that he was present when Stein, in furtherance of the scheme to exploit the option, induced Harry Silbur, a business acquaintance, to order 25,000 shares of Radio Hill as Stein's nominee, on or about April 23, 1969. Varah's testimony establishes that Stein called him from Las Vegas on April 24, 1969, claiming funds due him under the option agreement. Varah, at Stein's insistence, sent to M & R Investment Co. in Las Vegas $20,000 in Canadian funds on April 24, 1969, and $20,000 in American funds on April 25, 1969. At least a portion of those funds were attributable to Silbur's purchase of Radio Hill stock on April 23, 1969.
Feiffer testified that Stein sent him to Toronto on April 28, 1969 to claim additional monies from Varah under the option agreement. Varah corroborated Feiffer's testimony that he gave Feiffer $30,000 in Canadian funds in cash on April 28. Although Stein denies receiving any of this money, we credit Feiffer's testimony that this sum was later divided equally between Feiffer, Stein and Rubinson.
On or about May 2, 1969, Hentz and Dishey sought payment from plaintiff for the Radio Hill stock, and plaintiff, in turn, called Stein and Feiffer and asked for money. Claiming insufficient funds, Stein told plaintiff he needed more time to raise cash and in order to get time he told plaintiff to instruct the brokerage firms to send the stock to plaintiff's bank against payment. Reluctantly, plaintiff consented, and, upon plaintiff's instructions, the brokerage firms sent the stock to plaintiff's bank.
Payment became due on or about May 20, 1969. That same day, at a meeting in plaintiff's offices, Stein, Rubinson and Feiffer each counseled plaintiff not to pay for the stock.
The knowing participation of Stein, Rubinson and Feiffer in the illegal and manipulative scheme we have described is solidly established by tape recordings of a series of telephone conversations from May 20, 1969 to July 9, 1969.
The tapes reveal that defendants induced plaintiff to adopt various means to avoid paying for the stock. In a May 20, 1969 telephone conversation, Stein instructed plaintiff to attempt to get the Radio Hill stock from the bank without paying for it, to take it to New York, and then to sell it short. In the same conversation, Rubinson told plaintiff to tell the bank that there was an improper delivery of the stock because it was not in plaintiff's name. He advised plaintiff somewhat circularly that plaintiff would never have to pay for the stock unless it were in plaintiff's name, that it could not be put in plaintiff's name until plaintiff paid for it, and, consequently, that plaintiff would never have to pay for it. When plaintiff informed Stein, in a telephone conversation on May 21, 1969, that Hentz was threatening to sell out the Radio Hill stock, Stein instructed plaintiff to tell the attorney for Hentz (a) that plaintiff had retained a lawyer from a Miami law firm, although this was not true; (b) that he would countersue for selling an unregistered stock; and (c) that, if they did anything to hurt his credit or good name, he would report it to "the authorities."
Hentz subsequently sold out the Radio Hill stock. When plaintiff asked Feiffer, in a telephone conversation on June 4, 1969, if he wanted to take down the information on the sale, he responded that details were ...