SEC v. Children's Hospita

214 F. Supp. 883 (D. Ariz. 1963)

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Nature of the Case

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Facts

D, an osteopathic hospital exclusively for children, was organized as an Arizona corporation in 1961. It was officially opened on July 8, 1962, and is currently in operation. It occupies a newly constructed building. Jennings (D) was a promoter of D and is now both its president and a member of its board of directors. Ross (D) was a promoter of D and is now both its secretary-treasurer and a member of its board of directors. D, Jennings, and Ross had been offering and selling 8% First mortgage bonds of D to residents of several states. They were responsible for advertisements in newspapers with interstate circulations. Additionally, the mails and other facilities of interstate commerce have been used in offering and selling the securities. The total face amount being offered was $1,650,000. Ds sold approximately $1,357,900 of such bonds, in units of $ 100 denominations and multiples thereof, to numerous investors residing in Arizona, Michigan, Illinois, Ohio, and other states. The proceeds were to finance the promotion, organization, construction and initial operation of D. There was no registration statement. Ds claim that the bonds are exempt from registration by virtue of Section 3(a)(4) of the Act, 15 U.S.C. § 77c(a)(4). Jennings and Ross had planned to withhold 10% of the proceeds from the sale of the bonds. A portion of that was to be retained by Jennings and Ross as compensation for their services. Under this arrangement, Jennings and Ross were to receive a profit of about $50,000. Jennings and Ross awarded the construction contract to Am-Kep, who eventually assigned the contract Summit Construction Company (Summit). Summit had been formed by Jennings for the sole purpose of taking over the contract for the construction of the hospital facility because Am-Kep was in financial trouble. Jennings and Ross selected the original officers of Summit. It was also arranged that the resulting profit of $ 80,000 on the $ 1,700,000 construction contract would go to two of the three officers of Summit, namely, Jennings and Ross. This was to be in lieu of the estimated $50,000 that Jennings and Ross were to have received for their efforts in selling the securities of D. Jennings and Ross have held two of the three positions on the board of directors of Children's, and each of them has drawn a salary of $ 1,000 per month. Jennings and Ross control D. P brought an action to enjoin the sale of the bonds for violating §17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a).