INTEGRATION OF OFFERINGS A determination whether an offering is public or private would also include a consideration of the question whether it should be regarded as a part of a larger offering made or to be made. The following factors are relevant to such question of integration: whether (1) the different offerings are part of a single plan of financing, (2) the offerings involve issuance of the same class of security, (3) the offerings are made at or about the same time, (4) the same type of consideration is to be received, (5) the offerings are made for the same general purpose. What may appear to be a separate offering to a properly limited group will not be so considered if it is one of a related series of offerings. A person may not separate parts of a series of related transactions, the sum total of which is really one offering, and claim that a particular part is a non-public transaction. Thus, in the case of offerings of fractional undivided interests in separate oil or gas properties where the promoters must constantly find new participants for each new venture, it would appear to be appropriate to consider the entire series of offerings to determine the scope of this solicitation. As has been emphasized in other releases discussing exemptions from the registration and prospectus requirements of the Securities Act, the terms of an exemption are to be strictly construed against the claimant who also has the burden of proving its availability. Moreover, persons receiving advice from the staff of the Commission that no action will be recommended if they proceed without registration in reliance upon the exemption should do so only with full realization that the tests so applied may not be proof against claims by purchasers of the security that registration should have been effected. Finally, Sections 12(2) and 17 of the Act, which provide civil liabilities and criminal sanctions for fraud in the sale of a security, are applicable to the transactions notwithstanding the availability of an exemption from registration. The facts in the instant case disclose that: 1. Plaintiff was not a member of a related group and was, in fact, one of a diverse group of uninformed individuals; 2. The services of an investment banker and a brokerage firm were used; 3. No investment letter was obtained from plaintiff, and 4. The company was contemplating filing a registration for a public offering. Clearly, under the facts of the instant case where securities were sold to plaintiff, an individual who had not received any formal education above high school; who was not a sophisticated investor; who was not a member of a related group; through the medium of an investment broker there was a public and not a private offering. Plaintiff was a member of the public and entitled to the protection of the Securities Act of 1933. THE NATURE OF THE LIABILITY UNDER SECTION 12 (1) OF THE SECURITIES The liability of defendant under Section 12(1) is virtually absolute. Plaintiff need only allege and prove: 1. That the defendant was a seller or under Section 15, a person in control of a seller. 2. That the mails were used in the offer or sale to plaintiff. 3. That the registration requirements were not complied with. 4. That the action is not barred by the statute of limitations. The only defense then available to the defendant is to allege and prove that the particular security and transaction was exempt from Section 5 (Loss Securities Regulations 2 ed. (1961) page 1693). "The seller's intent and knowledge of the violation though they may be relative to an administrative or criminal proceeding or perhaps even a Commission action for injunction based on the violation, are entirely irrelevant to an action under Section 12(1). See Petersen Engine Co., Inc., 2 SEC, 893, 902 (1937).” Loss, supra, page 1693. The burden of proving an exemption from the requirements of Section 5 is upon the defendant, SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953), citing S.E.C. v. Sunbeam Gold Mining Co., 95 F. 2d 699. 701 (C.A. 9. 1938): Gilligan, Will & Co. v. S.E.C., 267 F. 2d 461, 466 (Č.A. 2. 1959); S.E.C. v. Ralston Purina Co., 346 U.S. 119, 126 (1953); 8.E.C. v. Culpepper et al, 270 F. 2d 241, 246 (C.A. 2, 1959). Schlemmer v. Buffalo, Rochester and Pittsburgh Ry. Co., 205 U.S. 1, 10 (1907). Defendant knew that no registration statement was in effect and in fact, it was upon his opinion that Advancement Devices, Inc. did not file a registration statement (Casey deposition, page 11, 1. 4–13). The Second Circuit has held that: "the standards of disclosure required of a registered company are equally applicable (under Section 12(a)) to the prospectus of an unregistered company; that the court 'need not find that the prospectus contained untrue statements' if it was 'misleading'; and that 'Availability elsewhere of truthful information cannot excuse untruths or misleading omissions in the prospectus.' Dale v. Rosenfeld, 229 Fed. 2d, 855, 857, 858 (2d Cir. 1956)." THE PROSPECTUS INCLUDED UNTRUE STATEMENTS OF MATERIAL FACTS AND OMITTED TO STATE MATERIAL FACTS Even if defendant were not to have violated Section 5, the prospectus used by Advancement Devices, Inc. included untrue statements of material facts and omissions of material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. A comparison of the material constituting the prospectus in the instant case, and any prospectus actually filed with the Securities and Exchange Commission leads to the immediate observation that nowhere did the material used by Advancement Devices, Inc. contain material which would inform plaintiff of the speculative nature of the securities or of the status of the developmental items or of the dilution of his equity investment. In addition, the material used by Advancement Devices, Inc. stated that Advancement Devices was in good financial condition, had developed and owned diversified components and systems, and would be operating at a profit for the 1962 fiscal year, subject only to the receipt of the working capital from the sale of its securities. Plaintiff was not informed that Advancement Devices, Inc. was not operating at a profit or was unable to predict with any degree of certainty that it would operate at a profit for the 1962 fiscal year. Any one of the allegations is material enough to support a finding of a violation of Section 12(2). A mere reading of the material (Exhibits 1 to 6) leads to the inescapable conclusion that the prospectus material omitted many material facts concerning the financial condition of the company and its future financial prospects. Exhibit 24, written by the president of Advancement Devices, Inc. rebuts the statement contained in the prospectus material that many of the electronic and mechanical devices listed in the brochure had been developed by and were the property of Advancement Devices, Inc. DEFENDANT IS A CONTROLLING PERSON Defendant, by admission, was chairman of the board of directors and acted as secretary. In addition, although it is not perfectly clear from his testimony what percentage of the stock of Advancement Devices he owned it was between five and ten percent of the securities. Moreover, it may be that in fact he was the issuer of the securities since the Thornton letter clearly states that the proceeds will be used to repay loans made by defendant to the corporation. The term "controlled" is defined in Rule 405 issued pursuant to the Securities Act of 1933. The term is defined as follows: "The term 'control' (including the terms 'controlling', 'controlled by, and 'under common control with') means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise." Defendant's position as a director and "chairman of the board", as company counsel, and as one who participated in the affairs of the company, is sufficient as a matter of law to make him a controlling person. "It has been generally recognized since long prior to 1933 that practical control of a corporation does not require ownership of 51% of its voting securities or anything like that amount." (Securities Regulation-Loss 2d ed., page 770). It follows that control may rest with a group of persons, such as members of the corporation's management (both directors and officers). It is in this category that defendant falls. The defendant's own deposition reveals his participation in and control of ADI. Page 9, 1. 5-7, 22-25; page 11, 1. 16-24; page 8, 1. 10-12; page 10, 1. 1-6 CONCLUSION Plaintiff's motion for Summary Judgment should be granted. HAROLD, LUCA, PERSKY & MOZER, Attorneys for Plaintiffs Office & P. O. Address 160 Broadway, New York 38, New York. Dated: New York, New York, February 4, 1964. UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK (Civ. 62-3900) ROLAND H. BOGGS, PLAINTIFF, against WILLIAM J. CASEY, DEFENDANT. PLAINTIFF'S REPLY MEMORANDUM UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK (Civ. 62-3900) ROLAND H. BOGGS, PLAINTIFF, against WILLIAM J. CASEY, DEFENDANT. PLAINTIFF'S REPLY MEMORANDUM DEFENDANT IS A CONTROLLING PERSON Section 15 of the 1933 Act imposes liability on: "Every person who, by or through stock ownership, agency, or otherwise. . . or in connection... with one or more other persons by or through stock ownership, agency or otherwise, controls any person liable under section 12". The statutory language recognizes that control is usually vested in groups. Here the defendant was a member of the controlling group. The Act does not speak of controlling persons in the singular. The mere fact that other persons had a greater percentage of stock does not remove defendant from the control group. The 1933 statute recognizes control may exist even without stock ownership... "agency or otherwise". Defendant's brief (page 5) refers to the Investment Company Act of 1940. That statute is not in issue here and Section 2(a) (9) thereof is not applicable. Congress intended a broad application of Section 15. "The concept of control herein involved is not a narrow one, depending upon a mathematical formula of 51 percent of voting power, but is broadly defined to permit the provisions of the act to become effective wherever the fact of control actually exists." H.R. Rep. 85, 73d Congress, 1st Sess. (1933) 14. THE DEFENSE PERMITTED BY SECTION 15 Section 15 of the 1933 Act imposes liability. "... unless the controlling person had no knowledge of or reasonable grounds to believe in the existence of the facts by reason of which the liability . . . is alleged to exist." (italic suppiled) The first cause of action under Section 12 (1) alleges that no registration statement was filed. Defendant knew that none had been filed. His firm, in fact, gave the opinion that it need not be filed. (Casey deposition, p. 11, 1. 4-13.) The The second cause of action based on 12 (2) of the Act alleges material omissions. Defendant was Chairman of the Board and familiar with the financial condition of Advancement Devices. He, in fact, was responsible for the $75,000 loan which was repaid to him from the offering. He had resasonable grounds to know of the financial condition of ADI. Respectifully submitted. HAROLD, LUCA, PERSKY & MOZER, Attorneys for Plaintiff, 150 Broadway, New York 38, New York. Dated: New York, New York, March 23, 1964. UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK PLEASE TAKE NOTICE that upon the annexed affidavit of ROLAND H. BOGGS, duly sworn to the 31st day of January, 1964, and upon the pleadings herein, the exhibits annexed hereto, the pre-trial depositions and all the proceedings heretofore had herein, the undersigned will move this Court, at Room 506, on the 3d day of March, 1964, at 10 o'clock in the forenoon, or as soon thereafter as counsel can be heard, for an order under Rule 56 of the Federal Rules of Civil Procedure for summary judgment in favor of the plaintiff on each and every cause of action in the complaint and for such other and different relief as to this Court may seem just and proper in the premises. Pursuant to Rule 9 of the General Rules of the United States District Court for the Southern District of New York opposing affidavits and memoranda of law must be served no later than noon on February 28, 1964. Yours, etc. HAROLD, LUCA, PERSKY & MOZER, Attorneys for Plaintiff, 150 Broadway, New York, N.Y. TO HALL, CASEY, DICKLER, HOWLEY & BRADY, 122 East 42nd Street, New York, N.Y. UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK ROLAND H. BOGGS, PLAINTIFF against WILLIAM J. CASEY, DEFENDANT STATE OF NEW YORK County of New York, 88: ROLAND H. BOGGS being duly sworn, deposes and says: 1. That on or about October 28, 1961, I received, through the U.S. Mails, Exhibits 1 through 6 which were enclosed in Exhibit 7. 2. That on or about November 28, 1961, I received Exhibits 8 and 9 through the U.S. Mails which were enclosed in Exhibit 10. 3. That from on or about October 25, 1961 through November 30, 1961 I Rothchild & Co., Inc., a broker-dealer located at 52 Wall Street, New York, New 4. That as a result of receiving the material heretofore referred to and the 5. That on or about December 19, 1961, I received an acknowledgement letter 6. That on or about January 19, 1962, I received, through the U.S. Mails, the 8. That in or about the month of April, 1962, I received minutes of a meeting of 9. That as a result of reading all the material heretofore received by me I sent 10. On or about May 9, 1962, I received Exhibit 21, an acknowledgement of 11. In August of 1962 I received a promissory note annexed hereto as Exhibit 12. On or about October 31, 1962, I received the letter from George Doundoul- 13. On or about September 3, 1962, I received a letter annexed hereto as 14. That I have had no formal training or education above the high school 15. That my sole contact with Advancement Devices, Inc. prior to my purchase 16. That prior to my purchase of the securities in question I did not know 17. That the securities in question have no value. WHEREFORE, I respectfully request that this motion for summary judg- Sworn to before me this 31st day of January, 1964. ROLAND H. BOGGS. ROBERT S. PERSKY, Notary Public, State of New York, No. 31-8336405, Qual. in New York County, 1. Thornton covering memo. INDEX TO EXHIBITS 2. Thornton "prospectus" dated October 25, 1961. 3. Minutes dated September 18, 1961. 4. Financials dated October 16, 1961. 5. Doundouloukis "Prospectus". 6. Printed brochure. 7. Envelope postmarked October 27, 1961. 8. Covering memorandum dated November 28, 1961. 9. January-November projection. 10. Envelope postmarked November 28, 1961. 11. $5,000 check dated December 1, 1961. 12. Acknowledgement letter of December 18, 1961. 13. December 19, 1961 envelope postmarked December 19, 1961. |