rectors at the end of 1942, Rochelle, Hamilton and Thompson were recommended by Bennett, Blumenthal continuing to represent his interest. Bennett became president and a director of Red Bank following the reorganization of the company in July 1943, and Rochelle became vice-president.

In addition to the note for $216,000 of Red Bank, acquired in 1940, Bennett acquired further claims against Red Bank in 1941, 1942 and 1943 aggregating in excess of $200,000 principal amount plus a substantial amount of accrued interest."

RECAPITALIZATION IN 1943

The plan of reorganization, which had been contemplated by Bennett since he began his acquisition of Red Bank stock, notes and claims in 1940, was finally consummated in July, 1943. Common stock of Red Bank in the amount of 710,083 shares was issued in exchange for certain of Red Bank's outstanding indebtedness and the accrued interest thereon, bringing the total amount of common stock outstanding to 947,182 shares. The stock was issued as follows:

Creditors waived $29,525 in principal and accrued interest in connection with the reorganization; of this amount, $6,280 was waived by Bennett Investment Corporation. The total cost to Bennett of the 101,480 shares of Red Bank stock originally acquired by him and the $530,823 of notes, judgments and interest thereon was $175,904.12 Red Bank applied to the New York Curb Exchange in 1943 for listing and registration of the 710,083 additional shares issued under the recapitalization plan. The Exchange's Committee on Listing, in permitting the listing of such additional stock, required that the Bennett interests loan Red Bank, $30,000 cash on an 18 months' unsecured note to put the company in a position to meet its current obligations. Further conditions on the listing of the stock restricted the sale of certain stock owned by Bennett for a six months' period, and prohibited the sale of 200,000 shares owned by Bennett within a period of one year.

"These claims were acquired through Bennett Investment Corporation.

"However, Bennett had contracted to deliver 54,500 shares of the new stock in acquiring certain of the additional notes and judgments and to pay the previously mentioned finder's fee to Allen & Company.

ACQUISITION OF SUBSIDIARIES

Dallas Enameling Company (predecessor to Federal Steel Products, Red Bank Refining, and Seatex. The facts relating to the acquisition of these companies and to their operation are pertinent in considering certain of the deficiencies alleged in this proceeding.

(1) FEDERAL STEEL PRODUCTS CORPORATION

Dallas Enameling Company (predecessor to Federal Steel Products Corporation) was engaged before the war in the manufacture of wooden and steel tubular furniture and fixtures in a plant in Dallas, Texas. Early in 1943 Mrs. Bennett, Rochelle,13 and R. A. Meyers purchased the company for $3,000. In the latter part of 1943 negotiations were entered into for the purchase of the stock of the company by Red Bank. The company at this time was producing ammunition boxes and shell cases. Bennett stated he became interested in acquiring the company because of its high earnings and because of the tax saving that would result from filing consolidated returns with Red Bank. During their course the negotiations were broadened to include the acquisition by the Dallas company of Dedman Foundry and Machine Company of Houston, Texas. Bennett stated that the high earnings and absence of debt of the Dallas company made it possible to finance the purchase of the Dedman property, whereas this could not have been accomplished by Red Bank itself. Dedman Foundry and Machine Company, owned by H. W. Dedman, had been engaged in peacetime largely in the production of oil field equipment. In 1943 it was engaged mainly in manufacturing equipment for LSTS. Bennett stated that it also had high earnings and that Dedman was in the 90% tax bracket.

Three-way negotiations were conducted with Bennett and Hamilton representing Red Bank and a plan was agreed upon whereby the Dallas company acquired the Dedman property and Red Bank acquired all the stock of the Dallas company, the name of which was changed to Federal Steel Products Corp. In return for the stock of Federal Steel Products, Red Bank by contract dated December 1, 1943, agreed to deliver to the three stockholders of that company 150,000 shares of Red Bank stock 14 and to repay the $20,000 which they had advanced to Federal Steel.15 The purchase price of the Dedman properties was $575,000, of which $165,000 was to be paid immediately. Federal Steel borrowed $100,000 of this down payment from

"Rochelle at this time was president and a director of Red Bank.

"The Red Bank stock was not to be delivered until registered under the Securities Act. "The market price of the Red Bank stock ranged from 3% to 2% in the period from November 1, 1943 to December 1, 1943, reaching the latter figure at the latter date.

25 8. E. C.

San Andres Production Company and Red Bank guaranteed Federal Steel's note to San Andres. The balance of the purchase price was to be paid in accordance with the terms of a promissory note to Dedman for $410,000, secured by a mortgage, which provided for 5% interest and payment of the principal in 24 monthly installments. Dedman paid O. R. Seagraves and John Mills commissions for locating a buyer for his plant.16

(2) SEATEX OIL COMPANY

Seatex is a California corporation which was organized by Seagraves in 1940 to engage in oil production. Its property is located in Texas, primarily in the Mission River field in Refugio County, in southern Texas. In 1943 the company was under the control of Seagraves, Mills and William Morgan.

Bennett became interested in Seatex in the fall of 1943 and entered into negotiations with its principal stockholders in an endeavor to gain control of the company. Bennett personally conducted the negotiations and purchases beginning in September 1943 and continuing into 1944 were made through Bennett Investment Corporation and Frank W. Bennett & Company, Red Bank acquiring control as of November 1, 1943. Red Bank stock advanced by the Bennett interests for the account of Red Bank formed a large part of the consideration given for the Seatex stock acquired.17

As a total result of a series of transactions Red Bank acquired 326,739 shares of Seatex stock and in return became obligated to issue to the Bennett interests 209,970 shares of Red Bank stock in compensation for a like number of shares advanced. In addition, Red Bank paid $15,000 and $57,110 was advanced by Frank W. Bennett & Company for the account of Red Bank.18 To cover anticipated expenditures in the transactions Red Bank delivered to Frank W. Bennett & Company a note for $78,000. The transactions were not consummated on the terms originally anticipated and, as stated, the Bennett company advanced only $57,110. A contract was

16 John Mills, president of San Andres Production Company, is a half-brother of H. W. Dedman.

" Morgan, from whom Seatex stock was purchased, objected to receiving Red Bank stock in exchange and Bennett agreed to purchase the Red Bank stock from Morgan. Frank W. Bennett & Company thus purchased 50,000 of the shares which had been advanced for the account of Red Bank for $25,000. The market price of Red Bank stock at this time, September-October 1943, ranged from 1% to 3%.

18 Certain commissions paid in connection with the acquisition of the Seatex stock are included in the above figures. As a commission Seagraves received 15,067 shares of Red Bank stock and the $15,000 in cash paid by Red Bank, Mills received 1,667 shares of Red Bank stock, and Allen & Company in consideration for advances of funds received 25,000 shares of Red Bank stock.

In connection with the acquisition of Seatex stock, Frank W. Bennett & Company agreed to sell Seagraves 20,000 shares of Red Bank stock at $2 a share. The market price at this time, the week ending January 8, 1944, ranged from 2% to 2%.

An additional block of 10,000 shares of Seatex stock was purchased in 1945 by the Federal Corporation for $5,400.

entered into in October 1946, confirming the transactions as they had actually been consummated and Red Bank charged the difference of $20,890 against Frank W. Bennett & Company on open account.

Of the Seatex stock acquired. 35,579 shares were pledged with Continental Bank & Trust Company of New York to secure obligations of Frank W. Bennett & Company which Bennett stated had been incurred in connection with the acquisition of Seatex stock, 25,739 shares were pledged on the $100,000 note of Federal Steel Products to San Andres Production Company, and 175,000 shares were pledged with Frank W. Bennett & Company to secure Red Bank's note for $78,000. The latter company in turn pledged this block of Seatex stock to Allen & Company to secure a loan of $78,000. Bennett testified that $48,710 of the loan from Allen & Company was expended in the purchase of Seatex stock, while the balance was used in connection with the acquisition of the Lacy refinery. He stated further that this Seatex stock was released by Allen & Company, in August or September 1945, and that the entire block of Seatex stock owned by Red Bank was then pledged to The Federal Corporation and at the date of the hearing was in the physical possession of the latter company.

Seatex stock, other than that held by Red Bank, is widely distributed with the exception of a block of approximately 30,000 shares held by a group in Los Angeles, California, who were identified with the original underwriters of Seatex stock in 1940. An action was brought by this group of stockholders against Seatex, Red Bank and Frank W. Bennett in the U. S. District Court for the Northern District of Texas, asking for rescission, an injunction and damages in connection with the sale to Red Bank of rights under certain leases owned by Seatex for consideration alleged to be inadequate. It was further alleged that the board of directors of Seatex and Red Bank were under the domination of Frank W. Bennett, and that the transfer of the leases operated as a fraud on Seatex and its minority stockholders. The court action was dismissed in November 1944 on jurisdictional grounds, and was not filed again. The transaction which was the subject of dispute was rescinded on January 9, 1945, and Red Bank reassigned to Seatex the equipment and mineral rights involved.

(3) RED BANK REFINING COMPANY

In November 1943, Red Bank organized Red Bank Refining as a Texas corporation, and acquired all of its stock. One of the purposes for which Red Bank Refining was organized was to take over the Texas properties of Red Bank and thereby create a saving in franchise taxes. Another purpose was to operate the Roger Lacy oil re

finery at Kilgore, Texas. In October 1943 Red Bank had entered into an agreement to lease and ultimately purchase this property for $300,000. Initial payments amounting to $50,000 were made by Red Bank, such amounts being loaned to Red Bank by two of Bennett's companies, Frank W. Bennett & Company and Federal Oil Company. The lease and purchase agreement was assigned to Red Bank Refining by Red Bank in November 1943. In December 1943, however, this agreement was rescinded and Lacy paid Red Bank Refining $82,000 and took back the property, thus creating a profit of $32,000 (after taking into consideration the initial payment of $50,000) for Red Bank Refining on this transaction.

The foregoing findings present a factual background against which consideration of the specific deficiencies alleged in the notices and orders for hearing may be projected. The focal point of these deficiencies is to be found in the financial statements originally filed by the registrant, and accordingly the inadequacies and inaccuracies of such financial statements are considered first.

THE FINANCIAL STATEMENTS FILED

Our original notices and orders for hearings in these consolidated proceedings set forth a number of alleged deficiencies in the financial statements filed in Red Bank's registration statement and in its annual reports for the years 1940-44. As indicated above, in an earlier opinion in these proceedings we found that the accounting firm which had certified the corporate and consolidated financial statements of Red Bank was not independent with respect to Red Bank, and that its audits had not conformed to generally accepted auditing standards. As we stated in that opinion, an indication of that lack of independence was the failure of the accountants to disclose the background of transactions between Red Bank and its affiliates, particularly the Bennett interests, which gave rise to many of the items reported in the financial statements filed, and the failure to disclose as such the amounts owing to and from the Bennett interests. Revised financial statements have now been filed which disclose in informative detail the relationships and the nature and effect of the numerous transactions between registrant or its subsidiaries and the Bennett interests. They also give copious and informative details of substantial importance under the circumstances of this case as to the operating history and present financial condition of the business. These statements, certified by Arthur Squyres & Co., independent public accountants, stand in such marked contrast to those certified by the previous, nonindependent accountants, that we, therefore, do not attempt to indicate in detail all the deficiencies we have found in the original statements, but set forth certain of the more significant information supplied in the revised