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Senator STEVENSON. A quick reading of the California law indicates that the concern of California was with all of the stockholders of both companies. I also know, perhaps it is no longer the case, for a time at least, April 27, 1965, the California Corporations Commission office was very much concerned with the fairness of this offering. I have a memorandum which so indicates. Let me go on, though.

Was this transaction followed by a lawsuit filed by the minority stockholders?

Mr. McCALL. It was preceded by the lawsuit.

Senator STEVENSON. A lawsuit for mandamus enjoining the transaction.

Mr. McCALL. Yes.

Senator STEVENSON. Was a motion made for summary judgment in that lawsuit on behalf of the defendant?

Mr. McCALL. No, it is not true. The motion to which I believe the Senator may be referring is that a proposal was received to settle this lawsuit sometime ago for what we considered to be a nominal figure. There was an agreement between counsel and when the time came to effect the agreement the moving party behind the suit withdrew from the agreement and we thereupon asked the court to dismiss the suit. I think this would correspond to what you described as a motion for summary judgment.

Senator STEVENSON. That motion was denied?

Mr. McCALL. Yes.

Senator STEVENSON. Prior to that time had the court enjoined this transaction from proceeding?

Mr. McCALL. At no time did the court enjoin this transaction. The original complaint asked that the transaction be enjoined-and permit me to just state briefly that the stock in question was owned about 85 or 90 percent by six or so shareholders-and one of the objects of the transaction was to acquire the services of these shareholders. In order to bind them to Kalvar we were anxious to have this exchange made as soon as possible. There was nothing in the way of following up on the request in the original complaint to enjoin the transaction, and it was only after the transaction had been completed and about two and a half years later that this supplemental complaint was filed alleging the avoidance, as they termed it, of the jurisdiction of the California Commission.

Senator STEVENSON. Does that complaint also allege a violation of of the Federal Securities Act, specifically section 10 (b) (5) ?

Mr. McCALL. You name it and it is alleged in there, Senator. Senator STEVENSON. That is the only violation of the Federal Securities Act alleged; is that correct?

Mr. McCALL. Essentially, the alleged violation is the misrepresentation and failure to disclose, and I think that is a 10(b) (5) matter. Senator STEVENSON. Well, my time has expired again and I will conclude with one observation: This suit is still pending and it does charge violation of at least one of the securities acts. It concerns me very much. I don't know about the merits of the suit, but it may result in a judgment against the defendants, including Mr. Casey, as a result of which he would be adjudged guilty of violating the very act he would be entrusted with enforcing at the SEC.

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Mr. McCALL. Well, I don't know if you can say what a jury verdict means in all cases. I, too, am a defendant in this suit as are all the other directors of Kalvar Corporation. Suffice to say this suit was filed over 5 years ago and it has not actively progressed during that time. As all of you gentlemen who are attorneys know, plaintiffs do not understate their case, and there are some 25 alleged violations of one sort or another which are pleaded in this, and most of them in my opinion have no substance whatever. Because as I think Mr. Casey has testified, we registered this offer with the Securities and Exchange Commission and a copy of the prospectus was mailed to each and every shareholder of Kalvar Corporation.

The CHAIRMAN. Let me ask you a question, Mr. McCall. The original suit was filed on the 29th of March, 1965. That is almost 6 years

ago.

Mr. MCCALL. That date is correct, yes.

The CHAIRMAN. It is stated in the records.

Now, there have been several amendments, supplements, and change of plaintiffs. I believe. Maybe change of defendants to some extent. And nothing has been done since the last supplement was filed in 1968, I think.

Mr. McCALL. April 3, 1968.

The CHAIRMAN. April 3, 1968, is that not true.

Mr. McCALL. That is correct.

The CHAIRMAN. Let me state to the members of the committee, you will find it discussed fully on page 344.

Senator Proxmire.

Senator PROXMIRE. I would like to ask this: What seems outrageous to me on the face of it, and I haven't had a chance to go into it-I agree with Senator Stevenson, it is not so much the legal niceties but the ethical question involved.

This seems to me on the face of it what was being done. Kalvar, 20 thousand shares of Kalvar worth about $3,400,000 was being offered for-I see you are shaking your head, but let me get through with it---was being offered for stock of the SOS Corporation worth about $120 thousand. In other words, you were going to get 20 thousand shares of Kalvar, 60 thousand shares of SOS. The Kalvar people seem to be giving up a tremendous amount as compared to what the SOS people were providing. In addition to that you were going to get the services of some of the SOS officers.

The thing that concerns me is that the action taken by Mr. Casey in proposing, giving legal opinion that the stockholders of SOS should be flown out of the State to New Orleans is that this prevented a hearing on the merits of a case which on the face of it seems to be outrageously unfair. It would seem to me that hearing would certainly serve the public interest and protect what I understand is about 4,000 stockholders of Kalvar who would seem to be losing in this kind of transaction.

What is wrong with hearing, why isn't that ethical and proper and why isn't it unethical to frustrate a hearing with this kind of legal shenanigans?

Mr. McCALL. In the first place I don't understand there was any proposal to fly shareholders of SOS out from California to New

Orleans. As I stated the principal shareholders were to work for Kalvar and they were in and out of New Orleans in the regular performance of their duties. These were the people with whom the transaction was completed.

The reason we did not go through with the hearing before the California Commission was that we wanted to consummate this transaction, because Kalvar was bleeding to death.

The figures which have been supplied to you are, with all due respect, misleading. The figure was mentioned as to the accumulated deficit of SOS. According to the prospectus, the accumulated deficit of Kalvar as of December 26, 1964 amounted to $4,283,152. We were running out of cash and running out of it fast, and the hope was that by acquiring a marketing organization which was functioning that we would be able to stave off bankruptcy.

Senator PROXMIRE. That kind of argument can also be made; I don't see what is wrong with a hearing under these circumstances. If your case was as strong as this why wouldn't a hearing have been a logical way to handle it and an ethical way?

Mr. McCALL. We anticipated a hearing, Senator, and the reason we didn't go through with it was that the hearing would have delayed the consummation of this transaction beyond the point that we thought Kalvar could afford to stay afloat. That in essence is why we didn't go through with it.

Also we understood that this matter would be handled routinely. The plaintiffs in the suit sought to have a hearing and delay this matter, just as they sought to delay it in New Orleans and just as they sought to delay having the matter submitted to the shareholders of Kalvar Corp., which was done. The shareholders overwhelmingly approved it at an annual meeting.

Senator PROXMIRE. Well, I just say the plaintiffs had a right to a hearing. You seem to dispute without giving us facts that the figures which I gave, 82 bid and 84 asked, approximate value of $82 a share, 20,000 shares, $3,400,000, in return for shares that had a book value of $1.48, a three for one split would have been trading $3 million of Kalvar property for $120,000 of SOS. Is that wrong? If so, to what extent and what basis do you say it is wrong?

Mr. McCALL. The reason I shook my head is that the Kalvar stock was not worth that much. The market wouldn't have yield that on the sale of 20,000 shares.

Senator PROXMIRE. But you don't deny this is the bid and asked price?

Mr. McCALL. According to the prospectus, fourth quarter low bid and asked, 61 and 63, and high bid and asked, 94 and 95.

Senator PROXMIRE. Take the lowest figure: you are still giving up on the part of Kalvar 15 to 20 times as much as you were getting in

return.

Mr. McCALL. Well, you appear to be comparing book value with market value. If you compare the book value as set forth in the prospectus, the book value per share of Kalvar was $3.78.

Senator PROXMIRE. The point I made and was made by Senator Stevenson with respect to SOS is that it had losses and no record of profitability.

Mr. McCALL. So did Kalvar, even greater losses, $4 million.
Senator PROXMIRE. And no market value had been indicated.

Mr. McCALL. There was trading in the Kalvar stock, but whether you could have realized, say, $1,200,000

Senator PROXMIRE. But no trading in SOS stock and a low bid, you just told us of $61 a share for Kalvar. Well, it just seems to me on the basis of this testimony that a hearing would be logical, proper and fair. It would seem to me it is hard to understand the ethical justification for a lawyer saying they should meet in New Orleans when it would seem that the appropriate place would be where I understand the headquarters of the corporation are in California.

Mr. McCALL. Not Kalvar. That is a Louisiana corporation. Senator PROXMIRE. But the executives of SOS were in California? Mr. MCCALL. They had been until the time they came to work for Kalvar. I would be happy to give you any further facts on this that you consider to be pertinent because it would appear to me that somebody had given you some information that is not correct.

Senator PROXMIRE. Well, you can provide for the record anything you wish. I would be delighted to have it. My time is up.

The CHAIRMAN. All right, Senator Tower?

Senator TOWER. I will yield to Senator Brooke.

Senator BROOKE. Mr. Casey, what was your participation in Kalvar? Were you a director?

Mr. CASEY. At the time of this transaction, I was a director.
Senator BROOKE. Were you also general counsel?

Mr. CASEY. Mr. McCall was general counsel. I was chairman of the executive committee and our law firm handled the contracts and negotiations with the SOS people.

Senator BROOKE. Who gave the advice to Kalvar to hold the meeting and make the acquisition in Louisiana rather than California? Mr. CASEY. I would say that was the advice of our firm and Mr. McCall's firm and the firm in California.

Senator BROOKE. Then your firm did give legal advice to Kalvar? Mr. CASEY. Yes. We handled the registration of the Kalvar shares with the Securities and Exchange Commission and as chairman of the executive committee, I had negotiated the transaction.

Senator BROOKE. In addition to being director, you were counsel to Kalvar?

Mr. CASEY. Our firm was one of the counsel to Kalvar, yes.

Senator BROOKE. And your firm also joined in the advice to the Kalvar Corporation to make the acquisition in Louisiana rather than California?

Mr. CASEY. Yes; we did. It was never any question of making it in California. The natural thing was to make it in Louisiana. I am not a blue-sky lawyer. Senator Stevenson indicated he was something of a blue-sky lawyer, but it seems to me California law intends to protect California shareholders and any corporation which made an offering of shares would have to go through hearings in all the States that had shareholders. I am not aware of that occurrence.

Senator BROOKE. Didn't you attempt to make the acquisition in California? There was a sense of urgency and you couldn't make it and you then made the acquisition in Louisiana?

Mr. CASEY. That is right.

Senator BROOKE. Is that correct?

Mr. CASEY. We at no time intended to consummate the transaction in California. This was a Louisiana corporation. We intended to make the offer in California. It was decided not to make the offer in California.

Senator BROOKE. Why did you make the decision not to make the offer in California?

Mr. CASEY. Because to do so would require this hearing procedure which would have taken a period of time which would have made the transaction moot and the business judgment of the company and directors was that this would have impaired the position of the Kalvar shareholders.

Senator BROOKE. Was business judgment the sole consideration to changing the offering site from California to Louisiana?

Mr. CASEY. There was never any obligation to offer it in California. Senator BROOKE. You did intend to make the offer in California? Mr. CASEY. We intended to make it to all the shareholders; that is right. But we confined the offer to Louisiana; that is right.

Senator BROOKE. Were the minority shareholders injured as a result of this decision?

Mr. McCALL. Senator, may I respond to that, if you please?
Senator BROOKE. Yes.

Mr. McCALL. I would like to say while the ultimate decision was a business decision, it was made upon the advice of counsel that the offer did not have to be made in California. Responding to your question whether the California minority shareholders of SOS were prejudiced by the absence of the hearing, the gravamen of the suit is that they were not only not prejudiced, but that they were paid an excessive price for their SOS stock.

Senator BROOKE. What do you consider an excessive price?

Mr. McCALL. Under the circumstances, I do not personally believe that the price was excessive. I say this is the gravamen of the suit and the contention was that SOS was not worth $1.200.000.

Senator BROOKE. Well, we are here concerned with Mr. Casey's participation in this particular transaction. We have it now on the record that Mr. Casey was a director and we have it on the record that Mr. Casey's firm was counsel to the corporation.

Now, my question to you is, did you personally participate in this opinion with Kalvar Corp., to make the offer in Louisiana?

Mr. CASEY. Senator, I would have to take responsibility for it. I am a senior partner in the firm. I didn't personally participate in the work. I will take the responsibility for it and say that canon 7 of the American Bar Association Code of Professional Ethics requires a lawyer to serve his clients zealously to the full extent of the law. As counsel to a private client, it is a lawyer's duty and Mr. McCall's firm duty to advise his clients to the most applicable law useful to them. As Chairman of the SEC I would have broader interests, but as a lawyer it was my duty to recommend the most advantageous course to my client, provided it was within the law, providing it didn't damage anybody that had any rights against them.

Senator BROOKE. Well, Mr. Casey, you were in a dual role. You were private counsel to the firm but also senior partner of the law firm that was giving counsel to the corporation.

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