In The Matter Of Franchard Corporation

42 S.E.C. 163 (1964)

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Nature of the Case

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Facts

Glickman was a large-scale real estate developer, operator, and investor. Glickman acquired control of real estate by means of 'syndication' arrangements. These arrangements involved the acquisition by Glickman, through purchase, contract or option, of an interest in real estate; the organization of a legal entity, usually a limited partnership but in some instances a corporation, in which Glickman retained a controlling position, and in which interests were sold to the public for cash; and the acquisition by this entity of the property interest in question. Glickman conducted some of these syndication activities and certain other phases of his real estate business through a number of wholly owned corporations, one of which was Venada Corporation. In May of 1960, Glickman caused Franchard to be formed in order to group under one entity most of the publicly owned corporations and limited partnerships under his control. The stock was divided into two classes, Class A common and Class B common, with the B stockholders given the right to elect 2/3 of the directors until 1971, when all outstanding B shares become A shares. Glickman acquiring 450,000 of its 660,000 authorized B shares for $1 per share. Glickman exercised a dominant role in the management of the affairs as president at the time of its formation and later as its first chairman of the board. Three registration statements are at issue. The 1960 prospectus stated that Glickman had from time to time advanced substantial sums to the partnerships and corporations that were about to become subsidiaries of Franchard. Two days after the effective date of the 1960 filing - Glickman began secretly to transfer funds from Franchard to Venada, his wholly owned corporation. Within two months these transfers amounted to $296,329. By the effective date of Franchard's first 1961 filing, Glickman had made 45 withdrawals which amounted in the aggregate to $2,372,511. Neither the 1961 prospectuses nor any of the effective amendments to the 1960 filing referred to these transactions. Glickman also began to pledge his shares to finance his personal real estate ventures. By August 31, 1961, all of Glickman's B and much of his A stock had been pledged to banks, finance companies, and private individuals. These pledges aggregated about $4,250,000. The effective interest rates on these loans ran as high as 24% annually. Glickman retained the right to vote the pledged shares in the absence of a default on the loans. The two 1961 filings made no mention of Glickman's pledges or the loans they secured. An auditor eventually uncovered the transfers. Glickman agreed to repay all of the then known unauthorized withdrawals with interest at the rate of 6%. The directors soon discovered that Glickman had made other withdrawals. The directors retained a former judge to determine the full facts and liabilities. The judge concluded that Franchard was entitled to additional interest from Glickman and Venada in the amount of $145,279. Franchard has not been able to collect. Glickman continued to make unauthorized withdrawals after he had promised to desist from so doing. Glickman and his wife had pledged all of their shares of the Franchard and Venada stock and resigned from his corporate positions. (In January 1963, the name was changed to Franchard Corporation). The SEC commenced these proceedings to determine whether Franchard had properly disclosed Glickman’s involvement in both Franchard and Venada.