F. L. JACOBS CO.

(See U.S. v. Guterma et al., 281 F. 2d 742 (CA 2, 1960).)

In 1956 Alexander Guterma and his associates acquired control of F. L. Jacobs Co., whose stock was listed on the New York Stock Exchange. Thereafter, they set out to loot and divert for their own use the assets of F. L. Jacobs and to use its credit as collateral for loans, the proceeds of which were diverted to Guterma's own use and benefit. Since the transactions did not involve the offer or sale of securities, they were not required to be disclosed by any of the provisions of the Securities Act of 1933. However, the transactions were required to be reported on the company's annual and current reports on forms 10-K and 8-K.

A Commission investigation showed that Guterma and his associates failed to comply with these reporting requirements or to disclose their transactions in F. L. Jacobs' stock, as required by section 16(a) of the act. These efforts to conceal their manipulations and other transactions in the company's securities and their wholesale looting of its assets led to criminal prosecutions. After a 7-week trial Guterma and an associate were convicted of violations of the reporting requirements of the Exchange Act. Both defendants received jail sentences.

H. L. GREEN CO., INC.-THE OLEN CO., INC.

(See SEC Lit. Rel. No. 1361 (1958).)

In 1958, H. L. Green Co., whose securities are listed on the New York Stock Exchange, filed a proxy statement with the Commission. That proxy statement sought approval of a merger of the Olen Co. into H. L. Green. The merger was approved by Green stockholders and consummated. As required by the Commission's rules, the proxy material contained certified financial statements.

In connection with the preparation of H. L. Green's annual report for the year 1959, the certifying accountants detected certain discrepancies in the Olen division's financial statements, which statements had been prepared by the same accountants who had certified the Olen statements that were incorporated in the proxy material. Further investigation revealed that these financial statements understated Olen's accounts payable by more than $2,700,000, and that the financial statements of the Olen division proposed to be included in the annual report for 1959 would have understated its accounts payable by $2,700,000 and overstated inventories by $3,300,000.

As a result of this investigation, the former president of the Olen Co. was convicted for filing false statements with the Commission.

ULTRASONIC CORP.

(See SEA Rel. No. 3742 (1955).)

A registration statement for Ultrasonic Corp. became effective on June 22, 1954, in connection with a public offering of 200,000 shares of common stock at $12.75 a share, warrants to purchase 89,154 shares of common stock to be offered in exchange for old warrants, and 126,900 additional shares of common stock to be issued upon the exercise of options and conversion of certain outstanding bonds and debentures. The 200,000 shares of common stock were sold by a group of 44 principal underwriters throughout the United States. A large portion of the new warrants were also sold and other shares of the registered common stock were issued upon conversion of the debentures.

The financial statements contained in the registration statement contained an unaudited income statement for the 6-month period ended March 31, 1954, showing a net income for the period of $49,750. At the end of 1954 the company filed a 10-K report for the fiscal year ending September 30, 1954, showing a loss of $3 million for the year. The discrepancy between these financial statements initiated an investigation which revealed that, the profit figures shown in the registration statement for the 6-month period ended March 31, 1954, were, in fact, false and erroneous and that the company should have shown losses of approximately $900,000. As a result of this investigation, the Commission issued a stop order against the registration statement, and the president of the Company was subsequently convicted of violations of the Securities Act of 1933.

UNITED DYE & CHEMICAL CORP.

(NOTE. The following article appeared in the Wall Street Journal, Jan. 23, 1963. The five defendants referred to were subsequently convicted and sentenced.)

LONGEST CRIMINAL TRIAL: CASE OF FIVE ACCUSED OF FRAUD IN SALE OF UNITED DYE STOCK NEAR CLIMAX

(By Ed Cony, Staff Reporter of the Wall Street Journal)

A climax is nearing in a stock fraud trial described by Government attorneys as the longest criminal trial in U.S. history.

Lawyers for five defendants, who allegedly defrauded the public with stock of United Dye & Chemical Corp., began their summations in U.S. District Court in New York yesterday, 330 days after the trial began.

The trial got off to a sensational start last March when Gerald Walpin, the assistant U.S. attorney prosecuting the case, charged that the late Senator George Bender (Republican, Ohio) was paid $100,000 while he was an Assistant Secretary of the Interior to "quash an investigation" into the alleged stock fraud conspiracy.

Imprisoned financier Alexander Guterma, listed as a coconspirator but not a defendant, also made headlines in the early days of the trial when he testified that in December 1955 Edward T. McCormick, then president of the American Stock Exchange, was his guest at a Miami hotel when Guterma and two defendants in the case were meeting at the hotel to work out plans to rig the price of United Dye stock. He said, however, Mr. McCormick wasn't present at any of the meetings at which they discussed the proposed manipulation. United Dye at the time was listed on the New York Exchange.

NINE PLEADED GUILTY

In the 11 months since the trial began, 9 of the 16 original defendants have pleaded guilty to one or more of the 30 counts returned by a Federal grand jury, a 10th defendant has pleaded no contest, and an 11th has suffered a heard attack and been severed from the case. The remaining five defendants continue to pro

fess their innocence.

What is the Government's case about?

Prosecutor Walpin has told the jury this story: The 16 defendants entered into a conspiracy, or "criminal partnership," to sell shares of United Dye to the public without giving the information about the stock required by the law. They avoided giving this information by failing to file with the Securities and Exchange Commission a registration statement covering the stock. They proceeded "to lie to and misinform the public" about this unregistered stock, selling it by high-pressure, or "boiler room" tactics, the prosecutor charged. And, while they were selling it, they manipulated the market "to keep the price up illegally," the jury was told.

The scheme hardly could have worked better, according to the Government. In all, the group managed "to sell to the duped public" over 400,000 shares of United Dye at a price of over $5 million, the Government says. After the group had unloaded these shares, the price of United Dye nosedived, and many of the unsuspecting buyers sold the stock at less than one-tenth what they'd paid for it, the prosecution states.

In identifying the various defendants and alleged coconspirators in the complex case, Mr. Walpin divided them into four separate groups. The "Eastern group" consists of certain former top officials of United Dye. Among them : Guterma, former chairman, and Virgil Dardi, former president and one of the five defendants who haven't changed their pleas to guilty.

In Mr. Walpin's "Western group" are two of the kingpins in the alleged conspiracy, both of whom have pleaded guilty since the trial began. They are Samuel Garfield and Irving Pasternak, identified as "partners in the oil business." Garfield and Pasternak are both known to be associated with individuals active in Nevada's legalized gambling industry.

THE "LAS VEGAS" GROUP

In fact, the term "Western group" appears to be a euphemism for "the Las Vegas group." A third member of this group, according to Mr. Walpin, is Allard Roen, described in the indictment as a major owner of two Las Vegas hotels.

In Nevada records, Mr. Roen is listed as executive vice president of United Resort Hotels Corp., which operates the Stardust, and the Desert Inn, two luxurious gambling hotels in Las Vegas. He also appears in Nevada records as secretary-treasurer of Karat, Inc., which operates the gambling casino at the Stardust. Mr. Roen, who is described by the Government in its United Dye case as "a protege and partner" of Garfield and Pasternak, has pleaded guilty to the conspiracy charge.

Mr. Walpin's third grouping consists of seven brokerage firms and their principal owners. He labeled this group "the boiler rooms." His fourth and final category: "the manipulators." These are people he said bought and sold stock in order to rig the market.

With his large cast of defendants and alleged coconspirators categorized, Mr. Walpin proceeded to outline to the jury what he hoped to prove.

His contentions follow:

There were six steps in the successful scheme. First, Guterma and his two principal partners, Garfield and Pasternak, gained control of United Dye. In the summer of 1955, Guterma bought 38,500 of United Dye's total of 150,000 common shares at $10 a share from Lowell Birrell, who is currently a fugitive in Brazil. Mr. Dardi set up this opportunity for Guterma to gain effective control of United Dye, and was guaranteed a percentage of the profit for his pains, the Government maintains.

"AVOIDED CASH OUTLAY"

At about the same time, acting in concert with Guterma, Garfield and Pasternak acquired Franklin County Coal Corp. "from the Murchisons of Texas, who were very happy to sell (it) to the conspirators." The price was $519,000; but, by giving the Murchisons a promissory note, the conspirators avoided any immediate cash outlay, the Government charges. Franklin County Coal had a pipeline and a coal mine "that had not been mined in years," and not much else in the way of assets. But the conspirators figured it looked attractive enough to anyone not thoroughly familiar with the company to help them in their complicated plan, according to the Government.

Their ultimate object, so the Government says, was to cause United Dye to issue more stock-and to get their hands on the additional United Dye shares. Franklin County Coal was to play a vital role in accomplishing this.

In Mr. Walpin's account, step three was taken when Franklin County Coal was put into a corporate shell called Handridge Oil, which was owned by Garfield and Pasternak. Once they breathed a little life into Handridge, via the acquisition of Franklin County Coal, according to the Government's charges, the conspirators were ready for step four: They had United Dye acquire Handridge and pay them by issuing 575,000 shares of United Dye as the merger price. Thus, the conspirators got the stock they wanted in what seemed to the casual observer to be a legitimate transaction.

But what had actually resulted was that they had acquired United Dye stock worth over $5 million at market prices then prevailing in return for a noncash outlay of only $519,000 according to the Government.

Step five consisted of selling most of these $75,000 shares through "over-thecounter boiler rooms," Mr. Walpin said. While they sold those shares to the public, the defendants allegedly engaged in step six: They allegedly rigged the market on the New York Stock Exchange to prevent the price of United Dye stock from falling before they could unload their big block of stock via the boiler rooms, the Government maintains. To do this they bought United Dye stock on the exchange at the same time they were selling much larger quantities over the counter, according to the prosecution.

The five defendants who haven't pleaded guilty don't agree, of course, with this version of Mr. Walpin's as to what happened. Besides Mr. Dardi, they are Charles M. Berman, Robert B. Gravis, Charles Rosenthal-all of whom are being charged by the Government with being principals in boiler rooms that distributed United Dye stock-and R. B. Gravis, Inc., one of the alleged boiler rooms.

GUTERMA TESTIMONY DISPUTED

Yesterday, Mr. Berman, who in serving as his own counsel, characterized Guterma as the Government's chief witness against him, and he tried to discredit Guterma's testimony: "This main is in jail. He wants to get out of jail. He told the story the Government wanted to hear."

Mr. Berman was an owner of G. F. Rothschild & Co., one of the brokerage houses Mr. Walpin cited in his list of "boiler rooms" that sold United Dye stock. Denying that he or his firm ever used any "high pressure methods" to

sell United Dye stock, Mr. Berman yesterday said the Government had failed to produce any witness who testified he gave Rothschild salesmen any "improper instructions" concerning the sale of United Dye stock. Of brokers making phone calls to sell stock, he said: "There's nothing wrong or indecent with urging people to buy a stock listed on the New York Stock Exchange."

Philip Samuels, attorney for Mr. Gravis and R. B. Gravis, Inc., also attacked the credibility of Guterma and two other witnesses he said the Government relied on to substantiate its conspiracy charge against his clients. He characterized them as "three pitiful witnesses, three admitted perjurers," and he said there were "discrepancies in the testimony they gave here."

APPENDIX C

Representative sampling of fraud cases before the Commission concerning insurance companies securities traded in the over-the-counter market

NATIONAL UNION LIFE INSURANCE CO.

(SEC Lit. Rels. 1204, 2058 (1961))

National Union Life Insurance Co. was organized under the laws of the State of Alabama in 1949. In 1953 it moved its home offices to Miami, Fla. It has assets of approximately $3 million, and 2,350 stockholders. In 1955, at the request of the State of Alabama, the company relocated its home offices to Montgomery, Ala. During the period of operations in Florida, the company was the subject of an investigation of the Dade County grand jury, which investigation led to the indictment of several of its officers for participation in a fraudulent scheme in the sale of National's stock.

Several techniques were used in furtherance of the scheme. National's stock was purchased on the market at prices of from $2 to $40, and resold at from $5 to $63.50. Since the supply of stock was limited, the corporate insiders who engineered this fraud caused the company to issue 10,000 shares of stock, purportedly for the purchase of an office building. Rather than going to the vendor of this building, the stock was acquired by one of the insiders. The purpose of this transaction was to defeat the preemptive rights of existing shareholders of the company. In addition, the insiders caused the company to issue 5,000 shares of stock to be exchanged for certain mortgages. In fact, the mortgages were never received by the company, and the stock was acquired by the insiders for resale. Having guaranteed themselves a supply of stock, these same insiders then manipulated the market by engaging in transactions among themselves and others; by arbitrarily raising the price of the stock with the collusion of brokerdealers; by causing the company to declare a 25-percent stock dividend, which they knew could not be paid; and by publishing and distributing false and fraudulent information about the company, including misinformation about the Company's earnings, management, and financial condition.

A regulation A filing made with the SEC regional office in Atlanta brought this case to attention of the Commission when its examination disclosed irregularities in the company's financial statements, and its description of the aforementioned transactions.

In July 1961 convictions were obtained against the defendants in the criminal case, and they were fined a total of $15,000.

National Union is not a reporting company, but would be, under the standards of S. 1642. Had it been reporting at the time of the fraudulent distributions, compliance with sections 13, 14, and 16 would not only have caused the disclosure of the insider transactions, or a false filing, but would have provided such current accurate financial information as would have made the falsity of these representations apparent to investors.

AMERICAN FOUNDERS LIFE INSURANCE CO.

(SEC Lit. Rels. 1254 and 1278 (1958); 1482, 1527, and 1681 (1959); 2005 (1961)) The American Founders Life Insurance Co. of Denver, Colorado ("AFL") is a Colorado corporation organized in October 1955 with an authorized capital stock of 2 million shares. Within a few months of its organization, 1 million shares of the company were sold to the public at a price of $2 per share by an underwriter under the control of the management of AFL. The shares were sold in reliance upon the availability of the intrastate exemption.

The remaining 1 million shares of authorized stock were issued to a group of insiders in exchange for notes collateralized by the stock issued to the insiders. Following completion of the public offering, the insiders began to sell large blocks of their shares to the public at prices of $2, $4, and $6 per share. These sales continued through 1958. Purchasers were advised that the proceeds of their purchases would be received by AFL, but those who paid $4 and $6 per share were not told that AFL would issue the shares to the insiders at the rate of $2 per share and that the excess paid by the public would inure to its insiders. During the course of the distribution of the insiders' stock, numerous misrepresentations were made concerning, among other things, the financial condition of AFL, the market price of the securities, the use to be made of the proceeds of the sale of securities, the interest of the insiders in the securities of the issuer and in organizations which had contractual arrangements with the issuer, the financial success of other securities, and the profits that would have been made by investors in these securities. In 1956 the company stated that it had several thousand shareholders and represented that it had assets of over $3.5 million. Registration of the securities of this company would have been required by the provisions of proposed section 12 (g) at least by the end of its fiscal year in 1956. The attention of the Commission was focused on this case by an attorney representing a group of defrauded stockholders.

In 1959 the Commission secured a permanent injunction against the company, its officers, directors, employees, and agents for violations of the registration and antifraud provisions of the Securities Act of 1933. Subsequently, permanent injunctions were also obtained against certain of the individual officers and directors of the company.

NATIONAL RESERVE LIFE INSURANCE CO.

(SEC Lit Rel. 2450 (1962))

National Reserve Life Insurance Co. was organized in 1921, and the present company resulted from a merger between National Reserve and another company in 1951. As of December 31, 1962, National Reserve had assets totaling $81,701,587.67 and its shareholders numbered about 5,340. In 1961 the management caused the company to make two exchange offers with the stockholders of National. They also caused the company, by means of its profit-sharing pension trust, to purchase scrip from the stockholders at far below the market value of that scrip. The effect of these three transactions was to solidify the voting control of existing management to the financial detriment of National's stockholders. In June of 1961, the company offered to exchange 3,000 shares of its nonvoting preferred stock to its then holders of 42,000 shares of voting common stock. All of such 3,000 preferred shares were taken up by the holders of 3,000 shares of the common stock. In December of 1961, the company offered to exchange 10,000 shares of nonvoting preferred stock with the holders of 39,000 shares of voting common stock on a share-for-share basis. Of the preferred stock 2,820 shares were taken up by the holders of 2,820 shares of the common. The shareholders of the company were not informed by the company of the true value of the common stock they held and the company represented in its dealings with the shareholders that the exchange was executed at a fair value. A check of the over-the-counter market as to the common stock of National indicated that the common stock was selling for approximately $200 per share at the time of the first exchange and $300 at the time of the second exchange. There were some differences between the preferred stock offered in the two exchanges, but the maximum value of the preferred was in each case about one-half that of the common. Both in June and December of 1961 there were four broker-dealers making an active market in National's common.

Commencing on August 21, 1961, the company acquired from other stockholders, at a price of $70 per full share, an aggregate of about 930 shares of common stock through purchase of stock scrip resulting from the exchanges. During the time the stock scrip was being acquired from stockholders at a price of $70 per full share, the stock had an active market range of between $170 and $310 per share.

The case was brought to the attention of the SEC by an anonymous person, who, on June 7, 1961, submitted to the headquarters office in Washington, D.C., a form letter of National Reserve Life Insurance Co., dated June 7, 1961, describing the exchange offer.