Mr. CASEY. It is true that I was of that opinion.

Senator PROXMIRE. You gave that opinion as counsel for the firm? Mr. CASEY. Yes.

Senator PROXMIRE. Did you say your firm gave the opinion or you gave the opinion?

Mr. CASEY. It was self-evident to me, Senator, and our firm was doing the formal legal work. When I sat and talked about this I considered it would be a private offering and I worked on that assumption. Senator PROXMIRE. Your deposition says the following: "I gave the company an opinion that it wasn't necessary. It was a private offering and not a public offering." That is what your deposition says. Mr. CASEY. Yes, all right.

Senator PROXMIRE. Could Advancement Devices have made a public offering?

Mr. CASEY. I don't know. They wouldn't have been able to make it for this particular purpose. They needed money immediately.

Senator PROXMIRE. Your opinion was that they could or couldn't? Mr. CASEY. Probably not.

Senator PROXMIRE. Do you think the fact that you stood to benefit financially from a quick private stock offering might have constituted a conflict of interest when you admitted it was a private one?

Mr. CASEY. That I am afraid is a presumption which isn't true. I didn't stand to benefit anything financially. I was a 6-percent stockholder. I agreed to lend the money only on the basis this could be raised in a private offering. If it couldn't have been, I would not have offered the money. I didn't then give that opinion so I could get my money back. I wouldn't have made the loan unless I had that opinion, unless I had the assurance it could be done.

Senator PROXMIRE. You are saying that the sequence was that you made the judgment that there would be a private offering and offered that judgment before you loaned the money; is that right?

Mr. CASEY. Certainly. I made the judgment that the money could be raised and quickly in a private offering. Only on that basis did I put the money up so the firm could meet its immediate needs.

Senator PROXMIRE. As a matter of timing, the record would show that you communicated that view before you made the loan?

Mr. CASEY. When you say "the record," I don't know what you mean. I know that was a fact; I know I agreed to lend the money only after the Rothchild firm agreed to sell the stock and only after everybody had agreed and this was clearly the result of a private offering.

Senator PROXMIRE. Did you have a chance to see the prospectus material which was issued by Rothchild and Charles J. Thornton before it was issued?

Mr. CASEY. No, I did not.

Senator PROXMIRE. Reading from your deposition again, the question was: "I show you a document dated October 25, 1961. Are you familiar with that document ?"

You gave the answer: "I guess I saw this document, yes. I do know Thornton did prepare such a document and I guess that is it."

The question was, "Had you seen it?" You said, "Yes." The position was that you had seen it.

Mr. CASEY. At that time, yes, I did see it. I didn't see it before it went out. That memorandum which Rothchild sent out was not my

style, didn't have the standard of precision which I would have demanded if I had anything to do with it. This was a memorandum that Rothchild sent out on its own initiative to certain customers. I did not see it and certainly didn't approve it.

Senator PROXMIRE. As chairman of the board, as stockholder and principal creditor and counsel for the firm, didn't you have some responsibility for determining what was in a prospectus before it went out?

Mr. CASEY. I might have had some responsibility; the fact was I never had an opportunity to see it.

Senator PROXMIRE. You said in your deposition that you later saw it. At that point what was your judgment on the prospectus specification that a loss was an improbable event?

Mr. CASEY. I didn't think that the memorandum was adequate or adhered to the standards of disclosure of information that should be effected in a private or public offering.

Senator PROXMIRE. How about the statement that the military use of one of the company's developments should be very large? Mr. CASEY. That is just speculation.

Senator PROXMIRE. This was in the offering to the stockholders. That one specified contracting a loan could result in advancement devices becoming a big and highly profitable venture.

Mr. CASEY. I in no way defend that memorandum, Senator.

Senator PROXMIRE. I might point out that it also says success of scientific development being worked on should make advancement into one of America's top industries. This seems to be such a conspicuous contradiction of what should be required in any kind of an offering in terms of providing a clear and honest———

Mr. CASEY. I agree with you.

Senator PROXMIRE. Did you take any action? You were chairman of the board, counsel of the firm, princípal creditor; did you take any action to correct this kind of exaggerated statement?

Mr. CASEY. When I saw the document it had already gone out; the investors already made their investment and they didn't make it on the basis of this document. They all knew it was a speculative investment and they made it on the basis of their investigation in the company and the confidence of the people who were in it. It happens all of the investors who bought that stock at this time have stated that they have no complaint about the information they received. They understood it was a risk and a speculative investment and they had no complaints. Only Boggs made any complaint about this.

Senator PROXMIRE. Let me point out what else this prospectus indicates. In the written part they said the company enjoyed a 15-percent profit during the first 3 months of the year. That was in the written part of the prospectus although the balance sheet attached, the fine print indicated the company actually suffered losses throughout the remainder of the year. Do you think that would have met any kind of a standard, SEC or any other, for honesty?

Mr. CASEY. I don't think so.

Senator PROXMIRE. Incidentally, 1 year later the company was broke and the securities were valueless.

Mr. CASEY. Right.

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Senator PROXMIRE. The prospectus material mentioned 10 patents that were under development and when later developed the patents belonged to the investors who happened to work for the company.

Mr. CASEY. That is not true. There was an assignment in the files that shows these investors had assigned those patents to the company. Senator PROXMIRE. I will have to check my material on that. How long have you known the stockbroker who sold the stocks-Mr. Charles J. Thornton ?

Mr. CASEY. I believe I met Mr. Thornton in 1959 and 1960.

Senator PROXMIRE. So you have known him for a year or two?
Mr. CASEY. Yes.

Senator PROXMIRE. Is it a fact that you introduced Mr. Thornton to Mr. Doundoulakis who was president of the company?

Mr. CASEY. It is a fact that I called Mr. Doundoulakis and said Mr. Thornton wanted to see him.

• Senator PROXMIRE. Did you know Mr. Thornton was prohibited by the SEC from dealing with the public?

Mr. CASEY. No, I did not.

Senator PROXMIRE. Shouldn't you have known that?

Mr. CASEY. I doubt it very much. When a man is in business working with a reputable house, you don't check on his past record normally.

Senator PROXMIRE. You didn't know Mr. Thornton had been expelled from the investment community and had been allowed to participate only nonpublicly?

Mr. CASEY. No, I didn't know that.

Senator PROXMIRE. Wouldn't it have been a normal precaution to check out his background in view of the fact that he was in charge of offering the securities?

Mr. CASEY. It might have been a desirable precaution. The fact was I had been dealing with the Rothchild House for 2 or 3 years and I had no reason to believe that they weren't entirely reputable. The responsibility for this, incidentally, was with L. H. Rothchild & Co. Thornton was an employee of theirs. We are talking about an $80,000 transaction. We are talking about a little undertaking between a small group of people to raise a small amount of money for a very small venture.

Senator PROXMIRE. Well, the Rothchild firm it seems to me was involved in a violation of the Securities Act in 1960. You say this was a reputable firm? The Commission files disclose that.

Mr. CASEY. I don't know anything about that; I didn't know what the violation was; I don't know about it now.

Senator PROXMIRE. Well, it happened in 1960 and the deposition didn't take place until 1963. The Commission sustained the action of the NASD which they sent to Rothchild and fined them $1,200. It was based on a violation of NASD's rule of free practice. This involved the retail account of C. J. Thornton.

Mr. CASEY. I didn't know about that.

Senator BROOKE. Was this prior to this transaction or before? Senator PROXMIRE. Yes, the violation by Rothchild took place a year before the offering was made by Rothchild.

Senator TOWER. But the final disposition of the case was not made

Senator PROXMIRE. That is right.

Senator BROOKE. And Rothchild was still in business at this time? Senator PROXMIRE. Yes. They were censored by the SEC in 1960. Senator BROCK. Did L. H. Rothchild ever inform you that Mr. Thornton had been-had his registration revoked?

Mr. CASEY. No, I had no knowledge of that.

Senator BROCK. Did Rothchild tell you that Mr. Thornton had any restriction on his activities as an agent for them?

Mr. CASEY. No.

Senator BROCK. And you had no personal knowledge of it?
Mr. CASEY. Not until last Friday.

Senator BROCK. That is the first time you knew Mr. Thornton had his registration revoked by SEC?

Mr. CASEY. Yes.

Senator BROCK. That also is the first time you knew Mr. Thornton had a prohibition from Rothchild Co.?

Mr. CASEY. Yes.

Senator PROXMIRE. Did you call Mr. Thornton recently with respect to this case?

Mr. CASEY. He called me. He offered a congratulatory note and called me. I didn't discuss the case with him.

Senator PROXMIRE. A congratulatory note?

Mr. CASEY. Yes, he called me and wished me luck.

Senator PROXMIRE. Who were the investors who bought the stock offered by ADI? How many members of the board knew ADI and how many of them were secured by Mr. Thornton?

Mr. CASEY. To the best of my knowledge nine knew members of the board of ADI and two of them did not, and were secured by Mr. Thornton. However, of that number there were six who happened to be friends of mine in other ventures to whom Mr. Thornton sold stock without my knowledge.

Senator PROXMIRE. So nine were secured by Mr. Thornton? My time isn't quite up. I only have a few questions left. Did you consider the advice that you gave ADI, do you not consider it now on a mature reflection to have constituted a conflict of interest inasmuch as you were a creditor, a stockholder, director of the corporation, you certainly had to gain by a successful stock offering?

Mr. CASEY. Well, Senator, we already discussed the matter of a possible conflict between the directors and counsel. Here again I think the interest of both counsel and directors was running in the same direction. I already explained to you that I didn't become a creditor except conditionally upon this offering being possible and being undertaken as a private offering. I wasn't a creditor at the time this decision was made. I became a creditor on the basis of the commitment to sell the shares and I believed that this could be done on a private basis. Senator PROXMIRE. So you didn't consider this to be, even though you are chairman of the board and stockholder and you became a creditor, you didn't see that this constituted a conflict of interest No. 1, and although you introduced Mr. Thornton to the president of the company, Mr. Doundoulakis, and raised in effect the offering, you didn't know about Mr. Thornton, about the fact that he had been expelled and disciplined by the Securities and Exchange Commission; you didn't know that?

Mr. CASEY. I didn't know that, no. Senator, you are making some statements in your questions which aren't quite true. I didn't arrange the offering. Mr. Thornton met with Mr. Doundoulakis, the president of the company, and between them they worked out the arrangement to make the offering and they came to me to talk about it and came to me to lend this money conditional upon the offering being undertaken. Senator PROXMIRE. And finally, you say you saw the prospectus material but not until after it had gone out?

Mr. CASEY. That is correct.

Senator PROXMIRE. And you had not indicated, perhaps you can't indicate that you ever took any steps to correct the exaggerated and untrue impression that that material gave despite the statement that the losses were improbable and the inference that the patents would be enormously valuable, and so forth?

Mr. CASEY. I didn't take any such steps because I believed we were dealing with sophisticated investors who could judge it as well as I could.

Senator PROXMIRE. The man who brought suit was an expediter for General Electric, a high school graduate; he really had no experience as a investor, had he?

Mr. CASEY. Well, Senator, you are citing allegations in his law suit. He had been with Western Electric for 40 years. He worked with the president of the company on the Dew Line, a highly sophisticated elec tronic system. He spent a great deal of time at the company with the president before he made his investment. He made an investment of $5,000. Four months later after continuing contact with the company he made an investment of another $5,000.

Now, in connection with his becoming a director in the proxy statement of another company, on which he subsequently became a director, he was technologically sophisticated. He had invested in other risk ventures. In fact, I didn't meet the man until 6 months after he made his investment and during that period he cited it to me that his technological sophistication on the basis of 40 years at Western Electric as a reason why this company was so promising.

It does not follow that because a man is merely a high-school graduate he spent 40 years out in the world and he isn't sophisticated. Senator PROXMIRE. Well, it doesn't follow to me that a man is a good investor if he is a man of good judgment as my father was. He was a very able doctor but a worthless investor. This can happen to very able people. He had no record of making investments of the kind that a broker or banker might have or a man of your experience.

Mr. CASEY. The fact is a good part of American economic life depends on small groups of people getting together and pooling funds in a private fashion. This is contemplated by the securities and exchange laws, this is a very important part of the system. Prior to the time a company was matured so that it can be responsible in offering to the public and that is what we are dealing with here. A small group of investors, a requirement of $100,000, a group of 12 men were brought together in good faith, everybody had reason to believe these people knew what they were doing, they were sufficiently sophisticated to embark on a particular kind of venture and I would like to say this: The prospectus wasn't good, but we didn't think that it was really