Appendix — A.D.M. Corp. v. Thomson

Supreme Court brief1983

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Iu the Supreme Court of the United States

OCTOBER TERM, 1983

A.D.M. CORP.

Petitioner

against

ARTHUR J. THOM SON

and

FROST CONTROLS, INC.

Rest ongents

UNITED ELECTRONICS COMPANY

Petitioner

against

ARTHUR J. THOM SON

and

FROST CONTROLS, INC.

Respondents

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES

COURT OF APPEALS

FOR THE FIRST CIRCUIT

ANGELO M. TORRISI

Attorney for Petitioners

123 Main Street

P.O. Box 395

Tuckahoe, New York 10707

(914) 779-1404

APPENDIX

TABLE OF CONTENTS

Page

Opinion - Court of Appeals,

First Circuit: entered

May 24, 1983 A-1

Judgment - Court of Appeals

entered May 24, 1983 A-9

Petition for Rehearing

In Banc A-10

In Re: A.D.M. Corp.,

Petitioner A-1i11

In Re: United Electronics

Ce. ¢(Del?d,

Petitioner A-22

Order - Court of Appeals

denying Petition for

Rehearing In Banc:

entered June 17, 1983 A-24

Opinion - USDC Mass.

(Zobel, D.J.):

entered July 4, 1982 A-25

Judgment - USDC Mass

entered July 7, 1982

Complaint

Complaint - Addition of

Sixth Cause of Action

PART 230 - GENERAL RULES

AND REGULATIONS SECURITIES

ACT OF 1933

PART 239 - FORMS PRESCRIBED

UNDER THE SECURITIES ACT OF

1933

Definition of Terms

"Underwriter" nd

"Brokers' Transactions"

Background and Purpose

Synopsis of the Rule

OPERATION OF THE RULE

Page

A-60

A-64

A-71

Page

Related Rules and

Other Amendments A-84

SECTION 230 144

PERSONS DEEMED NOT TO BE

ENGAGED IN A DISTRIBUTION

AND THEREFORE NOT UNDER-

WRITERS : A-&9

SECTION 239.144

FORM 144 FOR NOTICE OF

PROPOSED SALE OF

RESTRICTED SECURITIES

PURSUANT TO SECTION

230.144 OF THIS CHAPTER A-10¢4

FRCP - Rule §2 A-i06&

S$ U.S.C. $81 Definitions A-1C09

$ U.S.C. $53 Rule Making A-1i11

253 U.8.2 Section 77a

Short Title A-1

uU.$.¢ Section 7756

Definitions

U.S.C. Section 774

Exempted Transactions

y.§.¢ Section 77e

Prohibitions relating

to interstate commerce

and the mails

y.§$.C Section 77s

Special powers of

Commission

Proposed Findings of Fact

Page

A-112

A-116

A-119

A-120

A-122

UNITED STATES COURT OF APPEALS

For the First Circuit

No. 82-1618

Plaintiff, Appellant,

‘

ARTHUR J THOMSO

FROST CONTROLS I

Defendants, Appellees,

GENERAL ELECTRONICS, INC., ET AL,

Third-Party Defendants, Appellees

No 82-1619

UNITED ELECTRONI*®S COMPANY,

Plaintiff’, Appeilant,

ARTHUR J. THOMSON,

FROST CONTROLS, INC,

Defendants, Appellees,

CENERAL ELECTRONICS, INC., ET AL,

Third-Party Defendants, Appellees.

APPEALS FROM THE UNITED STATES

DISTRICT COVART

FOR THE DISTRICT OF MASSACHUSETTS

Ciion. Rya W. Zotel

ys Drstrict Judge)

Before

Coffin, Chief Judge

Breyer, Gircuit Judge

and Maletz,* Senior Jucge

Angelo M. Torrisi, for A.D.M. Cocp..,

United Electronics Company, and General

Electronics, Inc

Mishael 3 Cacsdene:. with whom

Mintz, Levin, Conn, Ferris, Gisvaky&

Popeo, P © was on brief, for Arthur J

Thomson and Frost Controls, inc

BREYER, Crrocuit Judge The

plaintifts im this case include a firm

known as United Electronics Co of

Delaware (‘VUED), which swned the stock of

cy company ssiginally called Frost

Controls cCocp (Prost) VED pledged its

Frost stock to a lender called Factors

and Note Buyers (Factors) When the

loan went into default, Factors fore-

closed on the collateral, offering it

for sale publicly and then buying it

itself Thomson, Frost's president, then

e Of the United States Court of

International Trade, sitting by

designation.

formed a@ new company anc Bought Frost's

assets on behalf of that corporation

VED and Frest's Successcer have sued

Thomson and his new company They claiz

that title to Frost's assets did not

pass to Theazson's company and that

Thomson breached a fiduciary duty to

thez wher he formed the new company and

bought the Frost assets

1. Whatever plaintiffs’ theory, it

is clear that they cannot prevail unless

VED, not Factors, owned the Frost stock

at the time of the saie of Frost's

assets Thus, they have tried to show

that Factors's foreclosure sale (to

itself) ef the Frest stecck was invalid

To deo this, they argue on appeal that

Factors, in offering the Frost stock for

sale, was an “underwriter within the

meaning of the Securities Act of 1533

iS U.S C. Section 77a et geg Section

2¢11) of the Act defines “underwriter”

broadly to include one who has

purchased from an issuer Cor from one

who controls an issuer) with a view to

the Gistribution of any security as

well as cne who "sells for an issuer Cor

for one who controls am issuer)." J]¢ at

Section 77b(11) Factors, they claizn,

is one who took fron, or sold for,

persons (namely, VED) who controlled the

“assuer"™ (Frost) Since the Frost stock

was unregistered, they argue that the

public foreclesure sale viclated Section

S of the Act, gd at Section 77e, and

thus the courts should set it aside

The district court, believing that

Factors was met an underwriter and that

Section 4¢(1) of the Securities Act, jd,

at Section 77d(1), therefore exexpted

the sale, found for defendants

Plaintiffs appeal

There is considerable Support for

the district court's view that Ps good

faith piedcgee who gseiis snregisterced

shares at a foreciscsure saie is not aa

snderwriter The Securities 4

Exchange Commi ton itself aould not

racommend enforcement proceedings in the

cirscumstan.es present here se22

~ohSumercs rw Co.» 193i Fed Sec L

Rep Paragrap! 76,709 (Oct é, 1780),

American Securit k, 1980 Fed Sec

L Rep Farcagrcaph 76,407 (May 2? 1930),

Coventry Cate. [ne No-Action Letter

(June 14 Pave Azt£r9 Manufasct yeti n

Te No-Action Letter Sec 14 19786);

Iotecnational Electronics ose...

No-AStion Letter Sept 22 1978),

YVoited Prosecties of America, 1978_ Fed

Sec L Rep Paragraph 81,4627 June 9,

1978), Yock Terrase Lessee Venture,

No-Action Letters (Nov ii, 29793); Banees

Pubiishers ins... No-Action Letter Oct

14, 1975), Hi-Poct Industries. inc... No

Action Letter (Oc a 1975); Elijwall

Deveizsment Ltd. No-Action Letter (July

is. 1974), Nacda Mictogwave Fore...

No-Action Letter ‘(Dec is, 1972), Nagrda

Mictswave Porn., No-Action Letter (Jan

24, Bea tH Vogue Instrument 252. :

No-Action Letter (Dec 7. 1771)

Nonetheless, our research indicates

circuit court dicta to the contrary

See SEC v. Guild Films Co... 379. F.38

435, 487-99 (2d Ci¢.d, seers d

- &

,_ 4"

ee)

a i~

Sowards, YSiT i ns, Section

4.910316) 4 Cel, has been frequently

repeated, se@, 2 G.. McCiuce v. Eiszst

A-5

National Bank of Lubbock 4°97 F.2¢4 4390,

493 (Sth Cie eae bP cert denied, 426

Us 930 (1975), SEC v. Nationaj Bankers

Lite Insurance €o., 334 F Supp. 444,

456 (N.D. Tex Iv7id,. afe'a, 477 F.2¢é

920 (Sth Cir. 1973); §£C v National

Bankers Life Insurance €co., 324 F. Supp

1869, 194 (N.DB Tex.), aft'd, 446 F.2d

652 (Sth Gig .2971); in re Franchard

Corp... 42 S 2. 263; ita B25; Ci-964> ;

In re Associated I[rvestors Securities,

ins... 43 6.8:.¢ 160, i165 (1962), In ge

Skiatron Electronics 6 Television Gores .,

40 $§.E.C 236, 245 (1960) We need not

decide this controverted and

potentially far-reaching issue

regarding the coverage of the Securities

Act, however, for plaintiffs lose even

if Section $ of the Act applies

The Securities Act does mot by its

terms automatically invalidate sales of

unregistered securities im violation of

Section 5 Rather, when unregistered

securities are sold illegally, the Act

Simply grants the buyer 2 remecy in

Section 12¢1) is VW.8s.¢ Section

ae SS Morecver, the courts have

consistently held that a geiler Gannct

set aside his own unlawful contract

where the contract's enforcement does

mot threaten public ¢ cy as manifested

in the Act itself A Frost é Co v

Coeur d'Alene Mines Core.,., 312 US 36,

44 (1941) (where "3t definitely appears

that enforcement of a contract

Cviolating Section §] will not be

followed by injurious results,

generally, at least, what the parties

have agreed to ought mot to be struck

down") Compare Kaiser-Frazer Core -

Otis § Co, 195 F.2d 838, 843 (24 Cir.)

(A. Hand, J.), gert. denied, 344 U.S

8$6 (1952), with Judson *. Buckley, 130

F.2d 174, 179-80 (2d C¢

J. 3 San5 denied, 317 U.S

S22 a1l32 Syrcnes ¥ Faulk

awkins §&

(24 Cir

Missourct

¢ v. 8h , $46 F.2d

( h Cie 1976), Henderson ¥

Hayden, Stone Inc., 461 F.2d 1069, 1072

(Sth Cire 972) As Judge Augustus Hand

pointed out, whether or not a court

inv t:

774, 734

should rcetuse to enforce “contracts made

in viclation ) the Securities Aet”

depends upon whether ‘they are

culated to damage the investing

public,” and “each case sust be judged

upon 3tS own elias facts - on v

aus i d6 at 189

sverwhelmingly

treating the

he district court

t Factors did not

dge arcangement with

Ling the Frost shares

~~ ef

jo w&

rd ce

; the shares ended

actors’ own hands The contract

is not executory, the sale is complete,

all parties have celied spon its

Lidity, and no investor has been

injured by th lack of a registration

statement If there is a public policy

good faith piledgees offering

atercal (consisting of unregistered

ata foreciosure sale to the

t is not a strong one As

noted above, the SEC presently allows

such public sales under similar circum-

stances, and the Uniform Commercial Code

encourages public sales, s2e2, y:c.c.

Section 7-$94(3) Under these circum-

stances, whether or not the pledgee's

sale was illegal under Section § of the

rt should not void

z request | ~

£E

d'Alene Mines

Securities act, aco

the sale at pledgor'

Erost é -t-) v Cce

Corp, supra

2. The defendant Thomson appeals the

district court's decision that he is not

entitled tc indemnificaticn by the

corporation formerly controliing Frost

Cincluding A plaintiff corporation) for

his ezpenses in this suit Thomson

introduced evidence that on of these

corporations has a@ by-law which provides

for indemnification of “any person who

mey have served at this corporation's

request ac a director or officer of

another corporation in which thi

‘

corporation owns shares © stock if

that individual incurred expenses by

reascn of being cr having beer

Can] officer of such other

corporation, "™ as long as he was not

adjudged to have been negiigent or to

have engaged in misconduct The other

corporaticn apparentiy has 2 Similar

by-law

In our view the corporations

by-laws must be read in light of the

relevant law of the states in which the

corpecrations were incorporated See.

ie. if ] her Cyc] i f th Law

¢ nh Sections 6045 1-6045.3

(1960) New Jersey, one of those

states, specifically requires any of its

corporations tc "indemnify a corporate

agent againget expenses tc the extent

that such corporate agent has been

successfu! im any proceeding” involving

his “by reason of his being or having

been such a corporate agent," so long as

the agent “acted in good faith and in a

Banner he reasonably believed to be in

or not opposed ¢

the corporation

Section 14A 3-5

‘corporate agent

one who setves a

employee or

enterprise, secv

request of

corporation

14A:3-S(1)¢a)

relevant incorpo

similar statute.

Fh: 8, Secti

Delawacte Zeneral

& tr

A-8

Ann

o the

" N.J

interest

Stat

agent

ing as

the

any other

such at the

indemnifying

pT at Section

Delaware, th eather

rating state, very

See Del Ann

145, E The

98-9?

has a

Code

Folk,

Law

(1972), Mereitt-¢

Corsocation

haoman § Scott tore. v

Wolfson, 321 A

1774) ‘Cpresident

to emnificats9o

KRomson fits

tatutes H

-~se

wie

breach of

ai expens

ing" an

oh te of

LaA

chagman

3-5

the

ling corpor

‘o

24 138, i141 (Del

of subsidiary

pacent)

within the

was asxed

from

scope of

to manage

arcesident of both

tions He was sued

ary duty; thus

“by reason of

employee

Stat. Ann

(4), ass

v Wolfson,

ficer,

) to

Oro.

Wie oe

E's pee Sy

merits

findings

that

hit?

mterests

tat Ann

Sonsequenti

reversed in

indemnification,

remanced for a

amount of an appt

In light

unnecessary work

in a manner

Se was successful

the district

legitimacy of

preclude the

n acted in bad

“opposed to the

of the corporation.”

Section 14 A 3-5(2) 4

y: the judgment below

so far as it disallows

and the case is

determination of the

opriate award

of the additional

to which defendants

’ 7

the

and

have been put by plaintiffs ' brief on

appeal, dcuble costs are awarded to

defendants with respect to the

plaintiffs’ appeal Ordinary costs are

awarded to Thomson with respect to his

Own appeal See Fed. R. App. Proe 3€,

GCrevicck Glen Corp v unit v

Bank, 636 F.2¢6 1, $ (ist Cig oe fe Be

The jiudgsent of the district court

is affirmed, except that the portion of

the judseent dealing with the appeal of

Arthur J Thenmson is reversed and

remanded

CCOURT OF APFEALE - CAFTION)

These causes came on to be heard on

oral argument from the United States

District Ccurt fer the District of

Massachusetts and was argued by counsel

Upon consideration wherecf, It is

row here erdered, adjudged, and decreed

lows

The judgment of the District Court

firmec except that portion of the

judgment Gealing with the appeal of

Arthur J. Thomason is reversed and that

part of the judgment is remanded to the

District Court for further proceedings

consistent with the opinion filed this

day

Double costs are awarded to

defendants with respect to the

plaintiffs appeal Ordinary costs are

awarded to Thorsen with respect to his

Own appeal

Ey the Court

Francis FP Scigliano

Clerk

A-190

CCOURT OF APPEALS - CAPTICNI

FETITION FOR REHEARING IN GANS

BY PLALLIiTIEFF-APFPELLANTS A.D if - RP

AND UNITED ELECTRONICS COMPANY,

SY THIRD PARTY CEFENDANT-APPELLEE

SENERAL ELECTRONICS, INC

IN BANS REQUEST

The appeliants A.DM CORP and

UNITED ELECTRONICS COMPANY and appellee

GENERAL ELECTRONICS, INC respectiully

request this Court, under Ruie 35 of the

Federal Ruies of Appellate Proecedure, a)

nhearc his Petition foc Reheacing Sy tie

Court sf Appeals in Gane

it is celieved that this request

should be acceded ts

foc the reasons that in the matter

aft the appeal by A.O.M. Corp. (#82-1618)

several questions of unusual importance

ar2 involved

Is the public offer tor sale by

a good faith piedgee in

foreclosuce of collateral of

inregisterced shaces af an

issuer an illegal offer to sell

said shaces in violation of

Sectisn Sic) of the Securities

Act ef 1933, 13 V.$.¢G Section

77¢e?

Does such public offer for sale

by a pledgee to sell publicly

the unregistered shares of an

issuer without either compli-

ance or an @kemption from the

disclosure requircements of

Section $ contravene the public

policy cf the Securities Act of

1933?

A-i1

Is a good faith pledgee who

offers to seil publicly the

unregistered shares of an

issuer an underwriter within

the meaning of Section 2¢(11) of

the Securities Act Of. i73e5 42

V.8.¢ Section 77b(i1)?

and for the further reasons that in

the matter of the appeal by United

Electronics Company (#62-1619)

consideration by the full court is

necessary to secure or maintain

uniformity of its decisions as to Fed

R Civ ?.32; that Getermination of

findings cf fact are the function of the

tribunal court, if the findings are

inadequate or insufficient, the

Appellate Court will remand for further

findings See United Shoe Machinery

Corporation v. Kamborian et al, 160 F.2d

613 C€Cist Gist 1947)

IN THE MATTER OF A.D.M. CORP

PLAINTIFF-APPELLANT, (62-1618)

POINT t

FNE'S PUBLIC OFFER FOR SALE

OF FROST CORP.'S SECURITIES

ON OCTOBER 21, 1973 WAS A

PRIMA FACIE VIOLATION OF SECTION Sic)

In June 1973 VU E Co (Del) pledged

its wholly owned Frost Corp securities

with FNB, a commercial lender In

Octcber 1973 4FNB, upon default, sought

to foreclose upon the collateral held by

it and on October 21, 1973, FNE publicly

offered for sale the unregistered shares

of plaintiff ADM Corp (Frost Corp )

A-12

h C

’ 3 I

I ni 3 i ly ated

essential elements of the Section Ss

violation as f{sllcws

a ae In order to establish a

prima facie case for a Section

5 violation, a plaintiff? must

prove three elements First,

it must be shown that no

registration statement was in

effect as to the securities

Second, it must be established

that the defendant sold or

offered to sell these

securities, and finally, the

use of interstate trans-

portation or communication or

of the mails m connection with

the sale must be proved See

Lennerth v Mendenhall, 234 F.

Supp $7 (N.D Ohio 1964); It!

Loss, Securities Regulation

1473 24d ed hve.

POINT if

THE FACT THAT FNB WAS A BONA FIDE

PLEDCEE SCES NOT RELIEVE IT

FROM COMPLIANCE WITH

REGVUIREMENTS OF SECTION §

The District Court found that in

June 17973 FNB accepted in good faith the

pledge of the Frost Corp unregistered

securities, which appellants do not

dispute

Appellants contend that the bona

tide role of FNB as of June 1973, when

it accepted the pledge, is not

controlling noe is at an important

A-13

consideration determinative of the

legality of its public offer to sel! the

pledged shares on October 21, 1973

In the Guild Filgs ge 4 the

pledgee banks strongly urged their role

as good faith pledgees as determinative

of their rights to sell the piedged

securities free of the registration

requirements. The 2d Cireuit Court

succinctly disposed of this by stating

at page 490.

"C€4] The banks have contended

that they were “bona fide

pledgees" and therefore

“entitled upon default to seil

the stock free of restric-

tions." They assume that “good

faith" in accepting the stock

is a sufficient defense See

Loss, Securities Regulation,

346 (1981) But the statute

dces not impose such a "good

faith' criterion. The exemp-

tion in Secticn (1) was

intended to permit private

sales of unregistered

securities to investors who are

likely toc have, or who are

likely to obtain, such

information as is ordinarily

disclosed in registration

statements See S.8.¢ v

Ralston Purina Co, 1953, 346

vu §s 139, 73 #$.Ct 981i, 97

L.Ed. 1494 The “good faith"

of the banks is irrelevant to

"SEC wv. Guild Files Co., 279 F.2¢

465, 469-90 (2d Cit)», gest denied

Sub nom Santa Monica Esrk v SEC,

3464 U S&S B19 (1966)

this pucpsose it would be of

lattie solase 2 gurchasercs of

thiess stock to learn that

the seiiecs Rad acted “in good

faith Regardless 3 g20d

faith, the banks engaged in

steps necessary to this public

saie and cannot be exempted

Also in the Guild Films Co at page 489

the Court noted that Congress had

proposed originally a provision which

would have given bona fide pledgees such

cights, but said provision was not

included in the Securities Act of 1933

as adopted

THERE EXISTS A STRONG PUBLIC POLICY

TO PROHIBIT A PLEDOCEE

FROM OFFERING TO SELL PUBLICLY

UNREGISTERED SHARES OF AN [ISSVER,

UNLESS THERE [8S EITHER COMPLIANCE

WITH SECTION $ OR AN EXEMPTION

) ? At? :

i=] £ SR head

Py *

Strength of the underlying public

policy of the Securities Act celated to

public sale by bona fide pledgees has

been challenged sericusly by this

Court In this connection at page 7 of

its decision, it concluded

~EE there is a public policy

against good faith pledgees

offering collateral (consisting

of unregistered shares) at a

foreclosure sale to the public,

it is not a strong one.”

The Circuit Court recites a series

of 13 No-Action Letters by the S.E.C to

A-15

selling pledgees as suggestive of a

possibly ‘sympathetic’ or a possibly

‘condoning public policy attitute' by

the S E Cc towards public sales by bona

fide pledgees. The public policy of the

$.£.C. is strong. and very clear, at

substantial administrative effort it

established Rule 144, which permits a

procedure for public sale of

securities by pledgees under

rigidly controlled conditions

protective of the public interest and

its need for adequate information.

However, $.£.¢ Rule 144 is not the

exclusive means of public sale and the

$.£&.C continues, now as before, to

provide advisory services through its

No-Action letters in appropriate

instances not covered by Rule 144 The

very existence of the need by selling

pledgees for these 13 No-Action letters

confirms public recognition by the

securities industry at large of the need

to assure itself against possible

prosecution by the $.&.C. in support of

its avowed positive public policy

The No-Action letters are

conditioned upon assurance that the

proposed sales be made as private sales

to either the selling pledgee or to

financially sophisticated members of the

public, either of whom would acquire

same for investment use and not to be

resold, except upon compliance with the

provisions of the Securities Act of 1933

as amended

Contrawise, the §.EvCc. has affirnm-

atively expressed its public policy by

aggressive litigation seeking injunctive

relief in Section S(c) violations. In

Guild Films Co. (supra) the bona fide

A-16

bank pledgees were enjoined from future

public offer for sale of their pledged

shares unless auch sales be in

compliance with the provisions of

Section 5 of the Securities Act or

exempted therefrom To the same effect

the §.&.C vigorously prosecuted to

injunction an offer for sale by an

issuer in violation of Section S$(¢) in

Ss £_S v. ruch $ w 8

Enforcement efforts of the S§.E.C.

have been vigorous and of long standing,

gt is cespectfully ucged that unless

is court affirms that a strong public

policy does in fact exist to require

stciet sompliance with Securities Act

disclosure reguirements oY seirting

pliedgees, the floodgates to distriSution

of unregistered securities would be

spened and the pudlic offer for sale by

bona fide pledgees “would afford a ceady

method of thwarting the policy of the

law and evading its provisions.” See

| ee 5 Chinese Senevolent

Agsosi ation

POINT IV

ON OCTCBER 21,1773 FNB OFFERED TO SELL

FUBLICLY THE UNREGISTERED FROST CORP

SECURITIES FOR U.E.CO. (DEL), ISSUER

BY THIS ACT FNB WAS AN UNDERWRITER

WITHIN THE MEANING OF SECTION 2(11)

OF THE SECURITIES ACT OF _ 1933

As to the definition of the tern

“underwriter” the District Court focuses

c; 187 Fed Sup 824 Cusoc ($.90.¢.D

Cale 1937332.

. €ie., £961 ,- 486 8.236 736;

certiorari denied, 1942, 314 _

as8 62 8. 6¢. 066, O64 1: GR. BP.

A-17

its

definition of

attention solely

"Section 2

“underwriter”

who has

issuer with

distribution

security. rs

Section 2¢11)

to that part of the

which reads

(11) The term

means any person

a view to the

of any

(Underscoring

supplied.)

and this court has supported this

narrow, restricted interpretation of

Section 2(¢11)

Firstly, it must be noted that this

portion of Section 2¢1i1i> is subjective

and was intended to protect from the

role of “underwriter” an innocent

purchaser from an issuer, it was never

the intent of Congress to penalize an

innocent purchaser

Secondly,

this nacrow

interpretation

of Section 2¢11) is imapplicable to the

facts at bar and in conflict with the

District Court's own affirmative

findings that the FNB was 9 2

purshaserc, the District Court found that

FNB was merely a good faith pledgee who

did not take "with aview to distribu-

Tien” .

The District Court should have

applied the other portion of Section

2¢11) which reads:

"Section 2¢11) The term

“underwriter” means any person

who.. offers of sells for an

issuer in connection with the

distribution of any

seeesity...*

supplied.)

(Underscoring

A-18

This portion of the definition is

unequivocal and clearly defines the role

of FNEB as an “underwriter” On October

21, 1973 FNB offered ‘for sale’ for the

account of U.E.Co (Del), issuer, in

connection “with the distribution

of...C€the Frost Corp } - securities".

This portion of the definition is clear,

unambiguous, and not subjective; it was

intended to apply to just such an

offerer as FNE under the circumstances

Further, the scope of Section 2411)

of the Securities Act is better

understood when cone notes that the words

“offers or “did not appear in the

Securities Act of 1933 as originally

enacted Congress in its wisdom

expanded the definition of underwriter

to include one who “offers or" before

the word “seils” by the enactment of

Public Law $77, 63rd Congress.

sme. 603-8. 8.6 has expended great

administrative efforts to develop the

definition of “underwriter” and its has

embodied the results of its extensive

efforts in S.8.6. Rule 144.

Unequivocally, the §.E.C. reiterates

many times throughout the rule that the

definitions above noted must be read

disjunctively.

Prior to this amendment me 8.8.¢.

could not act in enforcement of the

public policy until after occurrence of

illegal Sales of securities; subsequent

to the amendment the §.E.C. could avoid

injuries to the public and enforce

public policy by enjoining the

preliminary illegal offers necessary to

final sales.

A-19

UNDER APPLICABLE NEW JERSEY LAW,

FNB'S PURPORTED SALE TO ITSELF

WAS INEFFECTIVE AND DID NOT SERVE

TO TRANSFER TITLE TO FNB

OF THE FROST CORP SECVURITIES

On October 21, 1973, FNB publicly

offered for sale many items of

collateral which included machinery,

inventory, tangible property, and also

the Frost Corp unregistered

securities. The validity of the offer

for sale and subsequent sale of the

machinery, inventory, equipment, and

other tangible property is not

challenged, the validity of the public

offer for sale of the unregistered Frost

Corp securities is challenged as being

in violation of Section Se)

On October 24, 1973, FNB conducted

the propcsed sale and at that time it

presented a successful bulk Bid for all

items offered There is no dispute that

title to the machinery, inventory,

2qu:pment, and other tangisle property

passed to FNB at the making of its bulk

Sid Appellants dispute the transfer of

title to the Frost Corp. securities

As to the Frost Corp. securities,

NE's act of cfifer for sale on October

1, 1773 was illegal, im violation of

ection S(c)d; having initiated the sale

y its own illegal offer to sell the

Courts of Equity of New Jersey would not

allow FNB to take advantage of its

illegal act, nor would they permit FNB

to compound its prior illegal act by

commission of a further illegal act,

crMmMunns

A-20

namely, the purportes sale to itself in

violation of Section Sa) See Whitney

v Lett

ArT"? ,?

FO ih? VI

THE PURFORTED SALE ON OCTOEER 72¢, 1973

BY FNBE TO ITSELF OF THE FROST CORP

SECURITIES WAS ILLEGAL, EXECUTORY,

AND INCOMPLETE;

IT DID NOT SERVE TO TRANSFER TITLE

OF THE FROST CORP SECURITIES TO FNE

SIMILARLY, THE S.E.C IN GUILD FILMS

CO. STRUCK DOWN BY INJUNCTION AND

PREVENTED TRANSFER OF TITLE

TO THE GUILD FILMS CO SECURITIES

PURSUANT TO THE OUTSTANDING, ILLEGAL

EXECUTORY, INCOMPLETE SALES ACREEME!

The Frost Corp certificate by its

own terms and by Massachusetts Law was

transferable only on the books of Frost

Corp... which at all times were in the

possession of VE Ce (Del)

The evidence at trial established

clearly that following the purported

sale of October 26, 1973, FNB never

sought nor did it obtain transfer of

title to its name of the Frost Corp

securities

The purported sale of October 26,

1973 continued as executory and

incomplete from that date to June 1975,

at which time it was annulled ab initio

upon consent of all parties and the

possession of Frost corp securities

which were returned to its rightful ane

T3134 N.J. Eq. $86, 36A 24 888.

A-21

record owner, J.E.Co ‘Del) The

putported executory agreement of sale

was annulled by the parties themselves

in ,973, long before commencement of

piaintiff{'s action

From the evidence at trial it is

clear that if FN had sought to obtain

transfer of title of the Frost Corp.

securities to itself, this effort would

have been opposed vigorously by U.E.Co

(Del) and transfer would have been

refused

The Securities Act and the courts

have consistently supported imnocent

purchasers a5 to consensual contracts

made with sellers acting in viclation of

Section §

, ilg Films Co., in

5? the Santa Monica Bank

f Guild Films Co

ci ms l

Septenmter

sold 9,300 shares

securities and in aptember 24, 1959

sold 19,50 shares Neither of the

sales were completed by transfer of the

steek; the $.8.¢C commenced its action

an sStained a permanent injunction

against transfer whereupon the executory

neomplete sales were by said injunction

There is nothing inconQquous or

inconsistent between the foregoing and

the court's reference to A.C. Frost §

- ‘ , Ma

Co. ¥ 22) M : The

Securities Act of 1933 and the courts

have consistently supported imnocent

purchasers of securities sold by sellers

acting in violation of Section 5,

holding that a violating seller cannot

312 U.S. 38, 44 (1941).

seek avoidance of its own illegal sale

as against an innocent purchaser In the

case at bar, FNB was not an innocent

purchaser, But was in fact perpetrator

of the illegal act There was no arms '

length nor consensual relationship

between FNEB, purchaser, and VU.E.Co

(Del), seller, in fact, as stated above,

as of the commencement of this action,

there was no contract between the

parties, executory or otherwise, that

would require avoidance of same by the

District Court

POINT Vil

AT TRIAL, BY UNDISPUTED EXHIBITS,

U.E.CO. (DEL) ESTABLISHED A PRIMA FACIE

CASE OF BREACH OF FIDUCIARY DUTIES

OWED IT BY THOMSON,

THE BURDEN TO SHOW FAIRNESS

SHIFTED TO THOMSON, WHICH HE

DID NOT ATTEMPT TO SUSTAIN

THE DISTRICT COURT FAILED OR OMITTED

TO MAKE ANY FINDINGS OF FACT ESSENTIAL

TO V.E.CO. (DEL)'S CLAIMS

AS REQUIRED BY F.R. CIV. P. $2

THIS CIRCUIT COURT HAS FAILED TO

REMAND TO THE DISTRICT COURT FOR

ESSENTIAL AND SUBSTANTIAL FINDINGS

As of November 1973 plaintiff

U.E.Co (Del) commenced efforts to

regain control of the Frost Corp.

securities to itself

As of October 26, Be gb ie Thomson

began an entire course of action,

secretive, concealed, hostile, and

inimicable to the interests of his

principal, V.E.Co (Del), whereby he

A-23

sought to acquire Frost Corp.'s assets

to hiaself,; also, Thomson engaged in

self dealing acts, took advantage of

corporate opportunities, used and

diverted corporate assets to his own

selfish purposes and use

The District Court's Opinion fails

to disclose any findings whatsoever as

to amy of the foregoing This Court in

compliance with Rule $2 was obliged to

cemand for essential findings, but

failed to do so in breach of its

obligations under Rule $2

DATED Tuckahoe, New York

June 6, 17833

ANGELO M. TORRIS!

. See United Shoe Machinery

Corporation vy Kamborian et al, 160

F.2d 461 Cist Cie. 1947), See SA

Moore's Federal Practice Paragraph

$2.96013,€23; See State Comm'rs v.

Jackson €1931)> 283 WE $237. $4 8 Ct

$70, 75 L ed 1248.

A-24

CCOURT OF APPEALS - CAFTION)

ORDER OF COURT

Entered June 17, 1983

Upen consideration of “Petition for

Rehearing In Banc" by plaintiff

appellants, A DOM Corp and United

Electronics Company, and by Third Party

defendant appellee, General Electronics,

Inc., which document was submitted to

the wembers of the panel and to the

judges of the Court who are in regular

active service, and no judge who was a

member of the panel nor any judge in

regular active service having requested

a vote on the suggestion for rehearing

en banc,

it is ordered that the suggestion

for rehearing en banc is hereby denied

By the Court

Francis FPF. Scigliano

Clerk

COISTRICT COURT CAPTION - 76-41502]

ZOBEL, D.J.

This ts an action to set aside the

sale of the assets of Frost Controls

Corp. ("Frost Cese."? 5 now named ADM

Cortp., te Frost Controls, [ne ("Frost,

tne. ”) Plaintiffs also allege that

Arthur J. Thomson, while an officer of

Frost Cocp., improperly took a

Management bonus and that he violated a

fiduciary duty by keeping a corporate

2pportunity for himself They 52ek

recovery of the bonus and the proceeds

decived from the transaction which gave

rise to the claim of breach of fiduciary

duty Defendants have counterclaimed

for damages under Mass. Cen.Laws Chapter

973A and for indemnification. They also

assert third-party claims against

Factors and Note Buyers, Inc ("FNB"),

the sole stockholder of Frost Corp at

th time of the sale of assets for

breach of contract, against Alexander D

Matathias, the principal of FNS, and

Marvin Schondort, its counsel, for

misrepresentation and negligence,

against Ceneral Electronics, Inc. ("G.E

inc."), the parent of plaintiff United

Electronics Company for indemnification,

and against Michael T. Gasparik, the

guiding hand of plaintiffs, and GeE

Ine for abuse of process and violation

cf Chapter 993A

The following shall constitute my

findings of fact and conclusions of law.

A-26

Michael T Casparik, an ngineer and

lawyer by training, has been since 19S9

the presidert anc treasurer and 4

Girectcr of GE Iinc., &@ publicly traded

conglomerate He has heid the same

office in wsost of the wholly-owned

subsidiaries of E Inc including

United Electronics Company of Delaware

C7 we aen. 2 and its sister company,

United Electronics Company of New Jersey

Bes RS te

In February 1971, V.E. Del acquired

with a binder bid of $105,000, at a

bankruptcy saie, the assets of four

subsidiaries of Fairfield Technology

Corporation One { these subsidiaries,

Frost Electronics, Ine was then being

run by defendant Thomson, and Gasparik

hig to

Frost

asked

business

located in

was engaged in

electric

sensitive relays

Gasparik causec

Electronics, Ine

continue to

Bellinghas,

mechanisms

manage the

Electronics, BRE <2

Massachusetts,

the manufacture of photo-

and resistance-

In March $971,

the assets of Frost

be transferred to

Frost Controls Corp., @ new corporation

organized under the laws of

Massachusetts The mew corporation

issued $,000 shares to it Del

Thomson was named president and

Gasparik, treasurer Thomson managed

the company well

Gasparik's

weekly operational

597s.

i ee

having

bank

In June

Gasparik,

from FNE,

from any

that

guaranty,

request,

under

been

obligation and,

pledged certain equipment and

and profitably and, at

sent the latter

reports

the direction of

$75,000

to borrow

guaranteed

the

borrowed

unable

Del.

in support of

A-27

all of the stock of Frost Corp The

parties executed a security agreement,

FNB filed a UCC financing statement and

paid to V.E. N.J $73,090, plus $15,000

in connection with two other trans-

actions only indirectly related to the

loan UE Del endorsed in Blank and

delivered to FNB the cer ificate for

Frost Corp. shaces Thomson was

informed of neither the financial

problems of Frost Corp.'s parent and

grandparent, nor the pledge of the stock

of the company of which he was

president

In August 1973, the Chase Manhattan

Bank terminated an accounts receivable

financing agreement with VUE N.J by

October, the company had difficuity

meeting its payroll, was unable to pay

notes about tocome due, and owed $12,090

to $13,000 for withholding taxes, and

$16,000 to a commercial creditor When

Matathias, the principal of FNB,

informed CGasparik that V.E. N.J. was in

default,*® Gasparik told hia that he

(Matathias) “would have to do what he

had to do" to realize on the

collateral A secured party sale was

conducted on October 26, 1973 by ee OF

Willner, an experienced auctioneer.

Gasparik knew the sale was going to take

place and knew that the stock of Frost

Corp. would be sold He assisted in the

®The Security agreement between the

parties provided “The following shall

constitute a default by Debtor i or

any act of the Debtor which imperils the

prospect of full performance or

satisfaction of the Debtor's obligation

herein."

A-28

preparations for the sale and attended

the sale at the premises of V.E. Del.,

as did counsel for U.f Del, Sanford

Silverman Ail of the collateral,

including the Frost Corp stock, was

sold to FNE on a bulk bid of $55,000

Thomson learned of the sale initially

from an employee of CE Inc after it

had taken place I credit Thomson's

testimony that in a conversation with

Gasparik, on October 26, 1973, the

latter told him that Frost Corp was no

longer the property of V.E. Del.; that

it was owned by FNE

From time to time, since the

purchase cf the assets of Frost

Electronics, Inc by V.E. Del , Thomson

had tried to negotiate an equity

position in the company After the

secured party sale and some initially

desultory discussions with Matathias,

FNE, as sole stockholder of Frost Corp.,

voted to sell the assets of Frost Corp

to Frost, Inc., & Company organised by

Thomson for this purpose That sale was

closed on October 21, 1974

In early 1975, the Securities and

Exchange Commission commenced an

investigation into GCasparik's

activities One month later, Casparik

caused VE. Del. to sue FNB in the New

Jersey state court. That action was

settled in May or June 1975 and FNB, as

part of the settlement, returned to U.E.

Del. the stock of Frost Corp., which had

changed its name to ADM Corp. at the

time of the sale of its assets FNB

also paid to V.E Del a sum in excess

of $200,000 which allegedly represented

the net proceeds of the sale of the

assets by Frost Corp UE. Del. again

A-29

the sole stockholder of ADM Corp., joins

with its subsidiarcy in bringing this

lawsuit to recover the latter's assets

which FHBE had sold to Frost, Ine or, as

Gasparitk described it in the May 1975

Fors 3K, "the enrichment and excess

asset values received " by Thomson and

Frost, Ine

Plaintiffs claim that FNB did not

acquire title to the stock of Frost

Corp at the secured party sale and

could not, therefoce, as sole stock-

holder, vote to sell the assets of that

corpocation They assect, in support of

their clain, first, that Gasparik and

Matathias agreed at of after the sale

that the Frost corp stock was not

included in the sale; second, that the

sale violated Secticn $ of the

Securities Act of 1933, is V.$.¢c.

Section 77e@e, and, third that the sale

was not ommercially reasonable

The first contention is easily

disposed of. The only evidence of an

alleged agreement between Gasparik and

Matathias to exclude the stock from the

sale is Caspacrik's testimony, which I

find totally incredible. I find that

Casparik knew that the stock would be

and was included with other collateral

for sale, and he knew that the stock had

been sold to FNB He told the Board of

Directors of GE Ine, on October 30,

1973, that the stock had been sold He

signed and caused to be filed with the

SEC a Form 8K, dated November 130, 1973,

which stated that all of the stock had

been sold to FNB He c4@ased listing

Frost Corp as a subsidiary in

A-30

subsequent @K filings * Certain of the

books and records of V.E Del showed

that it no longer owned Frost Corp

Although Thorson, after the sale,

stopped sending Gasparik the weekly

financial reports, the latter never

protested nor did he ever ask for thes

He did not seek return of the stock

certificate which had been turned over

to FNB as collateral In sun, the

evidence is overwhelming that the stock

was included in the sale, that Gasparik

knew it, and that no agreement existed

between Matathias and Gasparik to

exclude the stock from the sale or to

return it to VU E. Del

Plaintiffs next contend that the

sale violated Section $ of the

Securities Act, apparently because FNE

offered for public sale “securities of

an issuer as statutory underwriter

without benefit of the exemption of

Section 4(1) Cand) without registration

“ (Plaintiff's post-trial brief,

p.76) I find that the stock of Frost

Corp was not, in fact, registered

However, FNE was not an underwriter

within the meaning of the Act Section

2¢11) defines an underwriter as

including “any person who has purchased

{rom an issuer with a view to. ..the

distribution of any security...."

Although the June 1973 pledge of stock

may be construed to be a “purchase,” SEC

Films £ [6e.. 176 F.Supp 4186

(6 D. N.Y. 1989), gphti'd, 279 F.2¢ 485,

*The May 1975 Form 68K again lists “ADM

Corp. (formerly Frost Controls Corp >”

and explains the settlement of

Litigation with FNB

A-31

sect. denied, 344 U.S 419 (3960), and

V.E. Del was an “issuer, Sy virtue of

its ownership of a controlling interest,

FNB ceceived the stock as a bona fide

piedge and with the expectation of

repayment of the loan V.E NJ

undoubtedly had financial problems in

June 1973 when it borrowed {com FNB, but

there is no evidence to suggest that it

did not, at that time, intend to redeem

the stock or that FNB accepted the col-

lateral with the expectation of selling

it On the contrary, the evidence of

Gasparik's continued efforts, through

July and into August, to borrow oper-

ating funds pecmits the inference, which

I draw, that he intended all along that

the loan from FNB be repaid According-

ly, I find that FNB accepted the stock

as a bona fide pledge and not "with a

view .. to the distribution of Cthat)

BeGEEOSEs ese” EF Src. my Guild Filas

Co.. guora. FNB was not, therefore, an

“underwriter” and the sale was exempt

under Section 4(1) of the Act

Plaintif{'s third and last conten-

tion is that the sale was not commer-

cially reasonable, as required by Sec-

tion %-$04(3) of the Uniform Commercial

Code, N.J. Stat Section 12A.9-504(3)

I find that this was a public sale which

had been advertised in the Newark Star

Ledger The notice of sale included the

date, time and place of sale, and it

identified the collateral to be sold *

"Plaintiffs argue that FNB had ne

detailed information as to several of

the intangible assets iisted, but it

cites no authority for the proposition

that such detail is required to be

disclosed in the notice of sale

A-32

The sale took place at the premises of

the debtor and guarantor companies where

ail their beoks, tax returns, and

financial statements were located Tt

was conducted by A.J Willner, an

auctioneer of Sixty years’ experience

with whom Gasparik was well acquainted

The auctioneer at first offered the

collateral in bulk and then, in an

effort to obtain a better price, in

lots Casparik, who was present at the

sale, at no time before, during, or

after the sale, objected to any of the

procedures used

Whether the sale was conducted ina

commercialiy reasonable manner i. 2

question of fact, gee, @o2@=.¢g., biberty

National gank 6 Trust Company of

QCkrlahowa City vw Acme Tool Division of

Bucske: Company. $40 F.2d 1378, 13861-1382

(10th Cir 1976), and the reasonableness

of the sale is deternined not solely by

the price obtained But by the smanner in

which the sale is conducted Mt. Vernon

Bank, 18 Wash.App. $69, $70 P.2d 702

CERF 7 0.2 First National Bank & Trust Co

of Enid vw Holston, $59 F.26 440, 464

(Okia 1977), James Talcott, Inc. iv

. 165 Mont 404, $29 P.2d 352,

354-355 (1974) Although subsequent

events proved the price to be low, I

find that the spethod, manner, time,

place, and terms of the sale were

commercially reasonable

Piaintiff{s hawe not challenged FNB's

right to fereciose on the collateral

pledged as security for FNE's loan.

Because I find (1) that the stock of

Frost Corp was imciuded in the sale,

(2) that the sale of the stock did not

A-33

violate the Securities Act of 1933; and

(3) that the sale was commercially

reasonable, title to the stock passed to

FNB upon acceptance of its bulk bid,

which was the highest bid FNB, as sole

stockholder, had every right thereafter

to authorize the corporation to sell its

assets. .

Plaintiffs assert against Thomson a

claim that he, while an officer of Frost

Corp., failed to disclose to FNB and

wrongfully appropriated to himself, a

corporate opportunity which belonged to

Frost Corp. At a closing on October 21,

1974, Frost Corp consummated the sale

of all of its asset@# to Frost, Ine., a

Rhode Island Corporation formed by

Thomson for this purpose mn February

3, 1975, Frost, Inc sold to Sigma

Industries, Inc ("Sigma") certain of

its assets and Thomson entered into a

consulting agreement with Sigma The

transactions with Sigma constitute the

alleged corporate opportunity which

plaintiffs contend belongs to ADM,

formerly Frost Corp

A person in a fiduciary relationship

to a corporation may not take advantage

of an opportunity for personal gain in

derogation of the interests of the

corporation, and its shareholders

Durfee v. Durfee § Canning Company. 323

Mass 187, 196, 80 N.E.2d $322, $27

(1948). That doctrine is based on

standarcds of equity and fairness, and

its application depends upon the

particularc facts of each case iId.. 323

Mass. at 199, 80 N.E 2d at 52? In this

case, resolution of plaintiffs’ charges

requires a determination of the nature

of the relationship between Thomson on

A-34

one hand and Frost Corp and FNE, its

scle stockholder, on the other The

next question is whether, under all the

circumstances, Thomson's failure to

disclose the approach by Sigma was

unfair and inequitable

I find that FNB was in the business

of lending and financing Neither

Matathias, its principal, nor anyone on

his behalf took any interest at any time

in the operation of Frost Corp

Matathias' object, after the secured

party sale, was to liquidate all of the

collateral FNEB had purchased Indeed,

between October 26, 1973, the date of

the acquisition of the stock by FNE, and

October 21, 1974, the date of the sale

of the assets of Frost Corp., Matathias'

conversations with Thomson related

almost exclusive to the sale of the

corporation or its assets by FNB

The parties met on November 20,

1973, and Thomson informed Matathias of

his interest im purchasing the company

Matathias told hin to continue to

operate the company and that Matathias

would let him know of FNB's intentions

when a decision had been made

In May 1974, Matathias requested a

review of the books of the company by

his accountant Although permission was

ultimately given, the accountant never

appeared

On August 8, 1974, Matathias and

FNE's counsel, Marvin Schondorf, met

with Thomson and his personal counsel,

Ralph P. Semonoff, at the office of

Frost Corp. in Bellinghaa, Massachu-

setts. They toured the plant to get an

A-35

idea of value and then met at a

restaurant where Matathias first

conducted a stockholder meeting He

named himself and one Melvin S Goldberg

as directors Schondortf was named

secretary-treasurer, and Thomson

declined the invitation to be elected

president.* Matathias and Thomson then

discussed the sale of the assets by

Frost Corp. and Matathias told Thomson

if the latter was not interested or they

could mot agree on a price Matathias

would liquidate the assets by auctioning

then In fact, the parties did at that

meeting agree that Frost Corp would

sell the assets to Thomson at a price of

$229,009 cash, and that Thomson would

assume liabilities in the amount of

appromimately $18,000 Thereafter

counsel prepared the requisite

documentation, and the formal closing

took place on October 21, 1974. As a

result of earlier inquiries, Thomson did

have, at the time of the August meeting,

a commitment letter from the Old Stone

Bank, Providence, Rhode Island, for such

financing as he would need to complete

the purchase

Plaintiff ceased being a director of

Frost Corp. on August 8, 1974 On that

day also, Matathias and Thomson had

reached a meeting of the minds

concerning the sale of the assets.

Matathias considered it an excellent

deal. Although Thomson continued to

manage the business nominally for Frost

Corp. until the closing, Matathias, a

alt | credit Thomson's testimony in this

regard although he is shown as president

in the Seller's Certificate.

A-36

man experienced in corporate matters and

finance, knew that Thomson was, during

the interregnum, acting on his own

behalf and he no longer regarded Thomson

as having any fiduciary duty to Frost

Corp. or FNB I find that Thomson, in

fact, owed no fiduciary duty to Frost

Corp or FNB after August 8, 1974 and

that he, therefore, had no obligation to

disclose to FNB or Matathias the

meetings with officers of Sigma in

September and early October, and their

inquiries concerning a purchase of some

of the assets, even it those initial

inquiries were to be deemed a corporate

opportunity. *

Plaintiffs’ last claim, for recovery

of a bonus paid to Thomson in March

1974, is barred by the release given by

Frost Corp. at the October 21, 1974

closing. The evidence is undisputed and

I find that Matathias knew, as of the

August meeting, that Thomson had taken a

bonus. It is also undisputed and I find

that Matathias, who was duly authorized,

did, on behalf of Frost Corp... release

Thomson “from any and all claims,

demands, actions and causes of action of

every kind and nature which Frost now

has or might have against Thomson and

especially from any claims arising out

of compensation, including bonuses,

received from Frost by Thomson."

Plaintiffs suggest no reason or

authority why this explicit release does

not determine the issue of the bonus.

®No agreements were reached with Sigma

until several weeks after the closing of

the sale by =FNB. The sale to Sigma was

not closed until February 1975.

Since there was full cisciosure and

Since Matathias was properly authorized

to execute {he release, plaintiffs are

Bound thereby That claim for recovery

of the bonus paid to Thomson is

accordingly denied

Defendants have counterclained fer

dameges (1) fer alleged violations cf

Mass Cen. Laws ch. 93A; (2) for abuse of

process, (3) for indemnity, and (4) for

Breach cf contract They also clainz

against GCasparik for violations of ch

9$3A ané abuse cf process The third and

fourth claime are based on the agreenmert

cf seie Between Frost Corp and Frost,

Inc The 933A and abuse of precess

Claits ate premisec on the assertion

thet Cesperikb imstituted this lawsuit

sclely to buttress his cgefense to an

imvestigeticn into his activities By the

SEC

; of the Messachusetts

Congunes Protection Act, Mass Ger Laws

ch $3A, provides that “Cadny persen whe

engages in the conduct of any trade of

commerce and who suffers any loss as é

result of the use by ancther person

who engages im any trade cr commerce

of an unfair of deceptive act or

practice 4 may recover damages

Defendants assert that bringing a

frivolous lawsuit is such ar. unfair act

ot practice

Apart {ron the fact that this

section cf the statute adctresses unfaic

practices in the conduct cf commerce and

net any isolated transaction unrelated

to the business of the parties, see

bantner vv £Caison. 374 Mass 60é, 373

N E£ 26 973 (1978), defendents have not

established the

of an wnftaie act

the statute

defendants rely

laticns

al Trad

tion

made

ofc

art

uniawful

=tionecrs

A-38

mmission by plaintiffs

thin the meaning of

The 2ases on ahich

imappos They

ch FIA Section

Commissi Act,

43%,

repeated

a i

ere th

threats

ends, la te

Ass'n, F : C

where

cundle

chasers

is V9

brought

against

In se Aut

respondent repeatedly

ss taxpayer suits

com its competitors,

ting Mashine Coce.. 47

i BS i

angaged

against

foruns,

C1931

eaett

tde2b

7 where lenders

ce lawsuits

tors savenient

) Se $49

on rT

“7 Be on U

374 N.E.24

plaintiffs’ action

less, which I do

it had been Srought

SEC investigation

probably one

the filiag

lawsuit do

b a

patteca, av.

defendants ord

sf manufacturing

F.2d

and

not v

i. ©

ut sir.gie

’

Cafendants

pro:ess aiso fa

140

£f the mot

proses

lawsuit,

imacy

(1 Even

wholly ground-

mot find, and even if

in response to the

Gasparik, which was

ivatia factors,

wtioc of this

nal .

This is

were

ate ch 9

at is

Susine

ectrcical rela

for abuse of

sustain a cause

*Section «2

intent of

iatertpretiag the

courts be guided

given to Section 5¢

the

~ ¢

ch 933A expresses the

lagisilature that, in

Massachusetts statute,

by interpretations

adci)d of the Federal

Trade Commission Act

of action for abuse of process,

plaintiffe eust show “that the process

was used to accomplish some vuiterior

urpose for which it wes net designed cof

intended, or which was not the

legitinste wurpose cf the particular

precess enmplcyec.“ Cabkrie! x Borowy,

224 Mass 231i, 236, 6S N.£.2¢ 4335, 439

(1949); Quarante v Ei lverseac., 34S Mess

423, 426, 187 W.2£.26 699. 861 C1968);5

Jones ¥ Brockton Public Meskets. Ins...

349 Mass 387, 34G N.E.2¢ 464, 4&5

¢2973) Although plaintiffs used the

precess cf this court tc institute the

action, they used it fcr the purpose for

which Se is intendec--toe istigate the

rights cf the parties to the assets of

Frest Corp That plaintiffs may aisc

heve been ercouraged tc litigate because

cf the SEC investigaticn of Gasparik

does not render improper the use of

process tc determine rights in cispute

Defendants' claigs fer indemnity

ageinst piaintitfts reguires considet-

ation of several of th cicsing docu-

ments executed in connection with the

czle cf essets cn Octcber 23, 1974

Frost Cor; (now plaintiff ADM Corp.,.?

agreec in & Purchase Agreement tec seli

ali cf its assets as cf the close of

business that day to Froest, Inc It

alse certified that all cf its stock was

then ewned by FNE and that FNE. as sole

stockhoider, had voted to seli the

assets Tt further executed ar.2

deitivered a Eil!l of Cale and Assignuent

transferring the assets to Frest., Inc

The FPurchise Agreement provides that

each cf the parties thereto agrees tc

indemn:fy the other for any claims,

damages or expenses, including reason-

able ettorneys’ fees, sustained by the

indeani £

and/ 4i

sseld

shar

lsez

ean

- .

efen

nein

ment

‘

@e2

o:e¢e

wag

~-— «= 6

a |

‘

tions

trporati

aitlable

“

~o.

A-40

pacty. resuiting from "any

isleading tcepresentation of

de Sy the indemnitzying pacty

Sing out sf oc by virtue of

tance with or breach of any

ments contained herein to Se

the tndemnifying Party %

ts assert that ADM Corp., by

his action, has breached the

and warranties contained

ad that gefendants are,

ntitled t indemnity The

the indemnification ciause

scetched so far There is no

t Feost Corp did caccy out

-9n3s undarc the agreenent and

ived up t2 the warranties

fsund in the first part of

dua The Later unsuccessful

7 the corporation that the

ider at the time of saie was

cannot detract from the fact

>| fully complied with the

The counterclains for

2 denied

the action is not wholly”

i or frivolous, defendants’

torcneys fees, pursuant to

s ch 231 Section 6éf, is

also claims indemnification

nses against VU.E Del. and

That claim is grounded on the

4 those corporations which

indemnification sf officers

cs Since Thomson was not

son of Being or having Seen”

9¢ discector, But cather for

Llegedl, inimical to the

indeznification is not

A-41

Since defendants prevail with

respect to plaintiffs’ claims concerning

the sale of assets, the cross-claigs

against FNB, Matathias, and Schondorf

are mgot.

Judgment may be entered for

defendants on the complaint and for

plaintiffs on the counterclaiz

Judgment may also be entered fer GE

tue. on the cross-claim by Thomson and

for Gasparik on the cross-claim by

Thomson and Frost, Inc Defendants’

cross-claims against FNE, Matathias and

Schondorf may be dismissed as moot

July 6, 1982 Rya W. Zobel

DATE DISTRICT JUDGE

CDISTRICT COURT - CAPTION 76-41502)

NA {ENT

ZOBEL, D.J

In accordance with the Memoranduz of

Decision dated July é, 19682, it is

ORDERED that judgment is hereby entered

for the defendants on the complaint, and

for the plaintiffs on the counterclaiz.

Judgment is entered for General

Electronics, Inc on the Cross-claim by

Arthur J. Thomson, and for Michael ye

Gasparik on the cross-claims by Arthur

J. Thomson and Frost, Inc Defendants’

cross-claims against Factors and Note

Buyers, EMC. » Alexander D Matathias,

and Marvin Schondorf are hereby

dismissed.

By the Court,

Nina Singer

Deputy Clerk

Date: July 7, 1982

A-42

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

NO. 76-4150

A.D.M CORP and

UNITED ELECTRONICS

COMPANY,

Plaintiffs,

vs COMPLAINT

ARTHUR J. T' ‘SON and

FROST CONTRe ww, INC.,

Defendants

i i i i i a ee

Plaintiffs, complaining of

Defendants, allege the following Causes

of Action

ELRST CAVSE OF ACTION

i Jurisdiction is conferred on this

Court by the diversity of citizenship

between the parties, and an amount in

controversy exceeding Ten Thousand

($10,000) Dollars exclusive of interest

and costs, v.8.¢ Title 28, Section

1332. Jurisdiction exists within the

District of Massachusetts by virtue of

the provisions of the Massachusetts Long

Arm Statute, Massachusetts General Laws

Chapter 223A, Section 3, as amended;

more particulacly Massachusetts General

Laws Chapter 223A, Section 3 subsections

cad, (0), (eo), (d). Jurisdiction is

also present with authority for process

to issue outside of the district by

virtue of the provisions of the Federal

Rules of Civil Procedure, Rule 4(4)(7)

2. Plaintiff, A.OM. CORP, is ao

A-43

corporation organized and existing under

the laws of the Commonwealth of

Massachusetts, a citizen and resident

thereof, having its principal place of

business in the City of Fall River,

Commonwealth of Massachusetts

e. Plaintiff, UNITED ELECTRONICS

COMPANY, is a corporation organised and

existing under the laws of the State of

Delaware, having its principal place of

business in the City of Newark, New

Jersey

4 Defendant, ARTHUR J. THOMSON, is

a citizen and resident of the State of

Rhode Island

bs] Defendant, FROST CONTROLS, INC,

is &@ corporation organised and existing

under the laws of the State of Rhode

Island, a citizen and resident thereof,

having its principal place of business

at One Angell Road, Cumberland, in the

State of Rhode Island

6 From the date of its incorpo-

ration, March 3, 1971, until October 21,

1974, Plaintiff A O.M CORP. maintained

its principal place of business at 26

Pearl Street, Bellinghaw, Massachusetts

02024 where it had its office, manufac-

turing plant, equipment, inventory, and

other personal property, all subject

matter of the acts of conversion, trans-

fer, sale or disposition on October 21,

1974 by or to the Defendants as herein-

after alleged.

oF From inception until October 21,

1974, Plaintiftt was known as Frost

Controls Corp at which time Defendants

caused its name to be changed to A DM

CORP.

A-44

8 From the date of incorporation

through to the close of the business day

on October 2i, 1974, Defendant, ARTHUR

J THOMSON, was the President, chief

executive and operating officer of

Plaintiff A.D.M CORP., and a member of

its Board of Directors.

9 On March 1s, 1971, Plaintitt

A D.M CORP (at that time Frost

Cont ols Corp.) authorized issuance of

Certificate 61 for $,000 shares of its

common stock to Plaintiff UNITED

ELECTRONICS CO., representing all ot

Frost Controls (today "A D.M.") Corp.'s

issued and outstanding stock This

certificate remains in full force and

effect, and since said date UNITED

-LECTRONICS CO., as reflected upon the

nooks and records of Plaintiff A.O.M

CORP. , has remained continuously as sole

registered stockholder of Plaintiff

A.D.M. CORP.

10. On of about June 14, 1973,

United Electronics Co. (NJ) borrowed

$75,000 from Factors and Note Buyers

Inc which it secured by a security

agceement covering all of its production

machinery, equipment, and inventory, and

also the accomodation guarantee of its

sistec corporation, Plaintiff United

Electronics Co. (Del), and delivery in

pledge of Certificate 1 of Frost

Controls Corp. for $,000 shares common

stock as then owned by Plaintiff United

Electronics Co (Del), said shares being

all of the outstanding shares of Frost

Controls Corp.

11 Factors and Note Buyers Ine.

subsequently deciared the loan of United

Electronics Co (NJ) to be in default

A-45

and as secured party caused a sale to be

conducted on October 26, 1973 at which

sale Factors and Note Buyers Inc was

the successful bidder At this sale,

Factors and Note Buyers Inc. purported

to buy all the machinery, equipment, and

inventory of United Electronics Co (NJ)

and the $,000 shares of stock of Frost

Controls Corp.; Factors and Note Buyers

Inc. thereafter did not cause to be

transferred to itself the said $,000

shares of the common stock of Plaintiff

A.D.M. CORP. (Frost Controls Corp.) on

the books and records of Plaintiff

A.D.M. CORP. (Frost Controls Corp ?

12 The sale and all acts thereunder

were challenged and were disputed by the

Plaintiff UNITED ELECTRONICS CO. and the

Plaintiff A.D.M. CORP as to legality,

right, and propriety, with notice of

challenge and dispute to Defendant

ARTHUR J. THOMSON. The illegality and

the impropriety of the sale and the acts

complained of were well known at all

times to the Defendant ARTHUR J

THOMSON.

13 Plaintiffs are informed and

believe that Factors and Note Buyers

Inc. did conspire together with

Defendant ARTHUR J. THOMSON and

Defendant FROST CONTROLS, INC. in a plan

to defraud, despoil and deprive

Plaintifts of their assets and to

divide same between Factors and Note

Buyers Inc. and Defendant FROST

CONTROLS, INC.

be 14. This plan involved the following

actions by the Defendants.

a. The Defendant ARTHUR J. THOMSON

did cause the Defendant FROST CONTROLS,

INC., to be organized as a corporation

under the laws of Rhode Island on

October 9, 1974, for the purpose of

establishing avehicle to purchase and

acquire the assets of Frost Controls

Corp., the plaintiff now known as A. D.M.

CORP, by collusive action with Factors

and Note Buyers Inc Plaintiffs believe

that this corporation is substantially

owned and controlled by the Defendant

ARTHUR J THOMSON, who was elected its

President, Treasurer and sole Director

b The Defendant THOMSON, acting

Simultaneously as both the principal

executive eftfticer of Frost Controls

Corp (the predecessor name of the

Plaintiff A O.M CORP.) and as principal

executive officer of the newly formed

corporation FROST CONTROLS, INC, did in

breach of his fiduciary duty to Frost

Controls Corp., purport ‘to act for and

on behalf of both corsorations in a

variety of conflicting matters. These

matters involved the purported sale in

October, 1974, and distribution of all

assets and good will including the name

of “Frost Controls” to FROST CONTROLS,

INC., the corporation principally owned

and operated by the Defendant THOMSON.

Defendant FROST CONTROLS, INC. thereby

acquired not only the physical assets of

Frost Controls Corp., but also all of

its good will, contractual rights,

corporate opportunities and other

property These acts by ODOefendant

THOMSON were to his personal advantage

and constituted wrongful and willful

breaches of his ti®uciary obligations to

both ADM CORP. and UNITED ELECTRONICS

COMPANY, Pilaintitts

c The pian of division and

despoliation provided in essence that

Factors and Note Suyers Inc. would

A-47

receive in cash @ sum equal in substance

to the cash balances then existing in

Plaintiff A.OM.'s bank accounts plus

the valwe of its accounts receivable and

‘other liquid assets Defendant FROST

CONTROLS, INC would receive all of the

good will, a release of Plaintiff's name

-~-FROST CONTROLS--, all the intangibles,

all of the inventory, machinery, plant,

tooling and equipment, work in process,

and all of the cash in bank, accounts

receivable, which it would use to raise

the moneys to be paid to Factors and

Note Buyers Inc

d The instrument of fraud as

devised and contrived by Defendants and

by Factors and Note Buyers Inc was in

the form of a sham and fraudulent

contract of sale which nominally

transferred all of the assets of

Plaintiff A.D.M CORP. to Defendant

FROST CONTROLS, INC, and nominally

provided for payment to Plaintiff A DM

CORP. of a stated cash consideration of

$220,000.

e. On or about October 21, 1974 at a

closing, Defendant FROST CONTROLS, INC

did issue a check payable to Plaintiff

--then named Frost Controls Corp. -- for

$218,884. The foregoing sum was raised

from Plaintiff ADM. ‘s own assets

directly or indirectly, by means devised

and contrived by Defendants Con-

currently Defendant FROST CONTROLS, INC.

received a transfer of all Plaintiff's

assets

f Plaintiffs believe that immedi-

ately following the closing Factors and

Note Buyers Inc. reduced to its own pos-

session the $218,884 nominally received

in the name of Plaintiff A.D.M. CORP.

g. At or concurrent with the

closing, Defendant ARTHUR J. THOMSON as

A-48

President fraudulently and in further-

ance of the plan of division and

despoliation executed an Article of

Amendment to change the name of

Plaintift from Frost Controls Corp to

A.D.M CORP., which change of name

Defendant ARTHUR J. THOMSON did there-

upon cause to be filed in the office of

the Secretary of the Commonwealth of

Massachusetts

15 Following completion of all of

the acts necessary and essential to the

plan of despoilment and division of the

assets of Plaintiff A.D.M CORP .,

Defendant ARTHUR J THOMSON resigned as

President and Director of Plaintiff

A.D.M CORP., effective as of the close

of business, October 21, 1974.

16 Subsequent to the aforesaid

closing, Plaintiff UNITED ELECTRONICS

COMPANY instituted Litigation in the

Courts of the State of New Jersey

against Factors and Note Buyers Inc.

challenging the legality and propriety

of the Secured Party Sate of October 26,

1973 and all acts thereunder. Factors

and Note Buyers Inc. pursuant to

judgment entered therein, among other

relief, surrendered to UNITED

ELECTRONICS CoO. the Certificate @1 for

$3,000 shares of the common stock of

Plaintiff and paid to Plaintiff, A.D.M.

CORP., the sum of $206,211.05

1? By reason of the foregoing,

Plaintiff A.D.M. CORP. was deprived of

all of tis assets having a fairc market

and reasonable value of at least

$750,000.

18. The defrauding of Plaintiffs and

, " ‘

A-49

the taking from A D.M. CORP all of its

goods, wares, and assets was willful,

intentional, and wpalicious with gross

Gisregard of Plaintiffs’ rights and well

being- Piaintiffs are entitled to

recover from Defendant FROST CONTROLS,

INC $759,000 as damages for the

willful, wrongful and illegal acts on

the part of Defendant FROST CONTROLS,

INC hereinabove referred to.

SECOND CAUSE OF ACTION

ig’ Plaintiffts repeat and reallege

each and every allegation contained in

Paragraphs i through 16 of this

Complaint as if the same were more fully

set forth herein at length, and

incorporate the same in this Second

Cause of Action

20. The actions of Defendant ARTHUR

J. THOMSON were in breach of the fiduci-

ary duty which he owed to Frost Controls

Corp. (the Plaintiff A.DLM CORP.) as

the president of that corporation. In

conspiracy with Factors and Note Buyers

inc., he and Defendant FROST CONTROLS,

INC. acted to his own personal advantage

in flagrant abuse of his corporate

position and amounted te fraud for which

Plaintiffs seek recovery.

ae. By reason of the foregoing,

Plaintiff A.D.M. CORP. was deprived of

all its assets having a fair market and

reasonable value of at least $750,000.

22. The defrauding of Plaintiffs and

the taking from A.D.M. CORP. all of its

goods, wares, and assets was willful,

intentional, and malicious with gross

disregard of Plaintiffs’ rights and well

being Praintiftts are entitled to

recover from Defendant FROST CONTROLS,

INC. $750,000 as damages for the

willful, wrongful and illegal acts on

the part of Defendant FROST CONTROLS,

INC hereinabove referred to.

THIRO CAVSE OF ACTION

23. Plaintiffs repeat and reallege

each and every allegation contained in

Paragraphs 1 through 18 of this

Complaint as if the same were more fully

set fomth herein at length, and

incorporate the same in this Third Cause

of Action

24. Plaintiffs say that the actions

of the Defendant FROST CONTROLS, INC.

constituted unfair methods of

competition and unfair and deceptive

trade practices, such conduct being a

violation of Massachusetts General Laws,

Chapter 93A, section 2, as amended.

a9 . As a direct result of Defendant

FROST CONTROLS, [me.°s actions herein

complained of, the Plaintiffs have

sustained great harm as evidenced by the

loss of both money and property, both

tangible and intangible, in the form of

lost business, damaged good will,

misappropriated property consisting of

valuable product designs, trade secrets,

tools, equipment, and other items of

great worth which belonged to Frost

Controls Corp.

26. Such conduct on the part of

Defendant FROST CONTROLS, INC. was both

willful and knowing on its part. The

Plaintiffs pray that this Honorable

Court award the Plaintiffs three times

the mount cf Gazages which they

ustained, tegether with rezsonebie

attorneys’ fees, costs and smnierest, tec

te assesses against the Defencant FROST

CONTROLS, INC

2? Fiaintiffs repeat and reallege

each and every allegation contained in

Peragreshs i threugh rae of this

Comsiaint as if the seze wete more fuliy

set fort> hereit at length, and

ircorpcraete the same in this Fourth

zuse cf Astsion

c& Pisintift{s sey thet the actions

of the Defendant ARTEUR J THOMSON con-

stitute unfair metheocs of competition

ar.d unfair and deceptive trade prac-

tices, such cenduct Leing @ vioiation of

Massachusetts General Laws, Chapter 3A,

section 2, ss amendec.

29 As a direct resuit of Defendant

ARTHUA J THOMSC?!:' s actions herein

compiained of, the Plaintiffs have

sustained great harm as evidenced by the

loss of beth money and property, both

tangible and intangible, in the form of

lost business, damaged good will,

misappropriated property consisting of

valuable product designs, trade secrets,

tcols, equipment, and other items of

great worth which belonged to Frost

Controls Corp.

20 Such conduct on the part of De-

fendant ARTHUR J. THOMSON was both will-

ful and knowing on his part The Plain-

tiffs pray that this Honorable Court

award the Plaintiffs three times the

amount of damages which they sustained,

together with reasonable attorneys'

fees, cost and interest to be assessed

against the Cefendant ARTHUR J. THOMSON.

FIFTH matte 0 A =“

33 Plaintiffs repeat and reallege

each and every allegatzyon contained in

Paragraphs i through 18 of this

Complaint as if the same were more fully

set forth herein at length, and

incorporate he same in this Fifth Cause

of Action

32. At some time during late 1973 or

eacly 1773, Defendant ARTHUR J. THOMSON

wrongfully took from Plaintiff A.D.M.

CORP., and converted to his own use and

benefit, the sum of Thirty-two Thousand

Two Hundred Eighty-five ($32,285)

Dollars which Defendant THOMSON caused

to be identified improperly on the books

and cecords of Plaintiff A.D.M. CORP. as

2 “management bonus" Said taking of

$32,285 by Defendant THOMSON was without

the knowledge of the Soard of Directors

of Plaintiff A OM CORP , the matter of

the alleged ‘Management bonus" having

been neither acted upon nor authorized

by Plaintiff's Board of Directors

33. The taking ty Defendant THOMSON

of the $32,235 from Plaintiff A.D.M.

CORP. was without Plaintiff's knowledge

and consent, wrongful, willful, in-

tentional and malicious with gross

disregard to Plaintiff's rights and well

being Plaintiff a.0.8. CORP is

entitled to recover $32,285 from

Defendant ARTHUR J THOMSON as damages

for the willful. and malicious acts on

the pact of said Defendant

A-53

WHEREFORE FLAINTIFFS FRAY that this

Honorable Court adjucge, ceclare and

decree that

os The Defendant FROST . CONTROLS,

INC. be held liable to the Plaintiffs

for damages sustained because of the

Defendant's actions conplained of in the

First Cause cf Acticn in the amount cf

$750,006 together with interest and

costs

2 The Defendant ARTHUR J THOMES?H

te heitd liabie to the Piaintifts for

damsges sustz2ined because cf the

Defendant's actions complained of in the

Second Cause of Action in the azcunt of

$750,050 togethe: with interest and

costs

3 The Deferdant FROET CONTROLS,

INC te ‘held liable to the Plaintiffs

for treble damages beceuse of the

Defendant's actions complained of in the

Thire ceuse of Acticn in the amount of

$2,250,000, together with reasonabie

attorneys fees, interest anc costs

4. The Defendant ARTHUR J. THOMSON

be heitd lizetle to the Plaintiffs for

treble demeges because of the

Defendent's actions complained of in the

Fourth Cause cof Action in the amount of

2,250,000, together with reasonable

attorneys’ fees, interest and coests.

S The Defendant ARTHUR J. THOMSON

be held Liable to the Plaintiits for

damages because of the Defendant's

actions complained of in the Fifth Cause

ef Action in the amount of $32,285

together with interest and costs.

‘4 The Plaintiffs be awarded such

further relieéf as this Honorable Court

may deem proper and necessary

ADM. CORP

By Mishael 7 Gasparik, PRES

UNITED ELECTRONICS COMPANY

By Michael T. Gasparcik,. PRES.

Suftoix, s5 Boston, Massachusetts

November 197, 1976

Thea personally appeared MICHAEL T

GASPARIK whe made sath that the fore-

going statezents are true cr are made on

information and Selief and therefore

believed to be true

”

GBefo<c

Margarets) M Havgiin

Nctasy PudSlic

My Commission Eupices:

‘ -

EPSTEIN, SALLOWAY & KAPLAN

Stanley M Epstein

13% State Stree0at

Esston, Massachusetis

¢219°

617) 742-3430

A-5S5

CSISTRICT COURT - CAPTION 76-4156)

PLAINTIFF'S AMEKDED COMPLAINT

BY ADDITION OF SITE CAVSE SE ACTIN

34. Plaintiffs repeat anc realilege

each and every allegation contained in

Paragraphs 1 through ié of this

Complaint as if the sane were fully set

forth at length and incorporate the saze

in the Sixth Cause of Acticn

33. Upen information and belief that

in the early part of Septembe: 1974

defencart Thomson, as President of

Plaintiff (Frost Controls Cerp ‘ was

solicited by Sigma Instruments, inc. as

to the possible purchase cf a portion ef

Plaintiff£{'s (Frost Controls Corp.) relay

business, mamely, its general purpose

reley switching device Business, he

manufacturing and trade secrets, the

jigs. dies, tcols and fixtures related

therets

36 That defendant Thogecn informed

Sigma Instruments, re + that the assets

whose purchase was then sclicited by

Sigma Instruments, Inc. were then anced

there owned by Plaintiff (Frost Contrcis

Corp.?).

37. That defendant Thomsen further

advised that he, Thomson, was

negotiating to acqtire the assets

solicited by /Sigma Instruments, Inc.

38. That defendant Thomson furthe:

advised and informed Sigma Instruments.

Inc, that, when and as if, the proposed

purchase were to be effected that he,

-56

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properties and

Stt a (Frost Controls

Corp.) relay business fcr the sux of

$290,000 and concurrently Sigma

Instruments, Inc. agreed to execute a

separate consultant's agreement with

Arthur J Thomson for an additional

$10,600 for a five month period to

follow closing

47 On February 3, 1975 at a

closing held at 40 Westminster Street,

in Providence, Rhode Island, Frost

Controls, Ine purported to sell and

Sigma Instruments, Inc. purported to

purchase the relay portion of

Pracut eet” ss (Frost Controls Corp

business and assets which had been

acquired by Frost Controls, Inc on

October 2i, 1974 2 hereinbefcre

alieged

yn Febru , ERPS the Old

Stone Eank as agent of Frost Controls,

I ceived that portion of the con-

sideration then paid by Sigma Instru-

n ‘ namely $260,000, which it

on oe

ae)

tely applied to pre-payment in

full of the then remaining unpaid

principal of $122,250 on the five-year

term loan made Ey Old Stone Eank to

defendant Frost Controls, Inc. on

October y a 1974 and concurrentiy Old

Stone Bank released and discharged the

security lien which it then held on

riatatitc- ss machinery, equipment,

inventory, furniture, fixtures and

accounts receivable.

WHEREFORE, Plaintiffs pray

i That defendant Thomson be ordered

to give an accounting to the Plaintiffs

of all gains, profits and advantages

derived by defendant Thomsen in the

operation of Frost Controls, Inc. and in

the utilization of any cf the assets or

corporate opportunities of Frost

Controls Corp. (now A.D.M. CORP.)

2. That defendant Thomson be ordered

to pay to the Plaintiffs such damages as

the Plaintiffs have sustainéd by reason

of the wrongful acts of defendant

Thomson complained of above including

costs and attorneys' fees.

3 For such other and further relief

as this Honorable Court may deen

mecessary and appropriate

Plaintifts,

Michael T. Gasparik

President

UNITED ELECTRONICS COMPANY

Michael T. Gasparik

President

PAR

ne fee

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Relee

158447 and

contains

background,

of the

(Release No.

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rule

ate

A-60

(January 14, 1

33-5222

‘re

~—-

ES ACT

‘he!

i -

230-GENERAL

SECUR)

ES A

”-

1933

MS PRESCRIBED

TIES ACT OF 1933

OTe

f wae

= Terms de

ro ce" Teaneact

Exchange

adcption

the

e- Pe

30 O®

“o

o~-

cman CO

om mf Mm

further

ations in

received

Series"

49°?

interpre

e comments

Ss, the re

ct Release

6 Rule 144 (Securities

$087 and $186; 35 F.R

1€Sé5S) This notice

general discussion of the

purpose and general effect

to assist in a better

tle.

cme

A-61

understanding of ct. A brief analysis

of each secticn of the rule is also

included However, attention is

directed to the rule itself for a more

complete undecstanding of its

provisions Furthec, the cule has been

adopted in the contest of and in

conjunction with several, cules and

amendments to rules and forms which the

Commission has adopted or rescinded

including:

: Form 144 ¢17 CPR 239.244), Netiece

of Proposed Sale of Securities Pursuant

to Rule 144;

2 Amendments to Forms !°-K (17? CFR

249 3190) and 10-Q@ (17 CFR 249 .308a)

under the Securities Exchange Act of

1934 (Exchange Act) (Exchange Act

Releases Nos 9442 and 7443, a7 FR

600.601),

3 Amendments to Regulation A (17

CFR 230.281-230 .263) under Section 3(6b)

of the Act (Securities Act Release No

$225 a oe ee Se

14. Rule 1Se2-11 (17 CFR 240.iS$c2-11)

unde: the Exchange Act (Exchange Act

Release No SatS; Se E.R. 366123

5 Rescission of Rule 1355 (17 CEFR

18S) under the Act,

6 Rescission of Rule 234 ¢€i17 CFR

230.1854) under the Act;

? Publication of a celease relating

to the applicability of the antifraud

provisions of the securities acts to

certain practices in connection with

transactions by issuers and others not

involving any public offering

(Securities Act Release No $226 and

Exchange Act Release No 9444 coe re ¥

600); and

8 Rule 237 (17 CFR 230 237)-under

section 3(b) of the Act (Securities Act

Release No. 522 (37 F.R. $90).

A-62

The Comm: ssion is hereby

specifically withdrawing its previously

proposed "160 Series” of rules

(Securities Act Release No. 4997 (35

Pc. “Saeer ih t..

Rule 144 will become {fective on

and after April 15, 1972.

In brief, the rule provides that any

affiliate or other person who sells

restricted securities of an issuer for

his own account, or any person who sells

restricted or any other securities for

the account of an ateiiiete of the

issuer, is not deemed to be engaged in a

distribution of the securities, and

therefore is not an underwriter as

defined in section 2(11) of the Act, if

the securities are sold in accordance

with all the terms and conditions of the

rule. The rule requires, among other

things, that the restricted securities

must hseve been beneficially owned for a

period of at least 2 years by the person

for whose account they are sold; that

the amount sold shall not exceed i

percent of the class outstanding, or if

traced on an exchange, the lesser of

that amount or the average weekly volume

on all such exchanges during the 4 weeks

preceding the sale; and that the

securities must be sold in brokers '

transactions. In addition, there must be

adequate information available to the

public in regard to the issuer of the

securities and notice of the sale (Form

144) must be filed with the Commission

concurrently with the sale.

A number of persons have commented

that it is not clear whether the rule,as

proposed, was intended to be the

exclusive means for selling restricted

securities without registration under

the Securities Act. In this connection,

A-63

certain commentators asserted that the

Commission does not have the statutory

authority to adopt such an exclusive

rule while o\hers stated that the

Commission had such power and urged it

to adopt an exclusive rule The

Commission does not believe it is

necessary to reach these ° questions

relating to its statutory authority at

this time, since the rule as adopted is

not exclusive However, persons who

offer or sell restricted securities

without complying with Rule 144 are

hereby put on notice by ‘the Commission

that in view of the broad remedial

purposes of the Act and of public policy

which strongly supports registration,

they will have a substantial burden of

proof in establishing that an exemption

from registration is available for such

offers ofr sales and that such persons

and the brokers and other persons who

pacticipate in the transactions do so at

their risk

Moreover, with respect to restricted

securities acquired after the effective

date of the rule, the staff will not

issue "“no-action" letters relating to

resales of such securities Further, in

connection with such resales, the

Commission hereby puts all persons

including brokers and attorneys on

notice that “the change in circusa-

stances” concept should no longer be

considered as one of the factors in

determining whether a person is an

underwriter. The Commission recognises

that this concept has been in existence

in one form or another for a long period

of time. However, administrative

agencies as well as courts from to time

change their interpretation of statutory

provisions in the light of new

A-64

considerations and changing conditions

which indicate that earlier inter-

pretations of such provisions are no

longer in keeping with the statutory

objectives Thus, the “change in

circumstances" concept in the

Commission's opinion fails to meet the

objectives of the Act, since the

circumstances of the seller are

unrelated to the need of investors for

the protections afforded by the regis-

tration and other provisions of the Act

Further, with respect to restricted

securities acquired after the effective

date of the rule But not sold pursuant

to the provisions of the rule, the

Commission hereby gives notice that in

deciding whether a person is an under-

writer, the length of time the

securities have been held will be

considered but the fact that securities

have been held for a particular period

of time does not by itself establieh the

availability of an exemption fron

registration

In order to assist in a better

understanding of this rule, the release

contains a general discussion of its

background, purpose and general effect

BACKGROUND AND PURPOSE

Congress, in enacting the Federal

securities statutes, created A

continuous disclosure system designed to

protect investors and to assure the

maintenance of fair and honest

securities markets. The Commission in

administering and implementing the

objectives of these statutes has sought

to coordinate and integrate this

disclosure systen, and the rule and

other related rules and amendments area

further effort in this direction.

A-65

Rule 144 is designed to implement

the fundamental purposes of the Act as

expressed in its preamble

“To provide full and fair disclosure

of the character of the securities sold

in interstate commerce and through the

mails, and to prevent fraud in the sale

thereof * 2 2 "

The rule would also operate to

inhibit the creation of public markets

in securities of issuers concerning

which adequate current information is

not available to the public At the

same time, where adequate current

information concerning an issuer is

available to the public, the rule would

permit the public sale in ordinary

trading transactions of Limited

quantities of securities owned by

persons controlling, controlled by or

under common control with the issuer

(hereinafter “affiliate") and by persons

who have acquired restricted securities

of the issuer

This approach is consistent with the

philosophy underlying the Act, that a

disclosure law would provide the best

protection for investors In other

words, if the investor had available to

him all the material facts concerning «a

security, he would then be in a position

to make an informed judgment whether or

not to buy. In order to provide such

information to investors, Congress de-

termined that a distribution of securi-

ties requires the filing of a registra-

tion statement with the Commission and

the delivery to investors of a prospec-

tus containing accurate and current

information concerning the issuer and

its securities.

A-66

Exemptions from the registration

requirements were provided for certain

types of securities and securities

transactions where there was no

practical need for registration or where

the benefits of registration were too

remote.

Among these exemptions is that

provided by section 4(2) of the Act for

transactions by an issuer not involving

any public offering (private place-

ments) This exemption was Originally

intended to permit an issuer to make a

specific or isolated sale of its securi-

ties to &@ particular person, such as

an insurance company The exemption is

available for offerings to persons

having access to substantially the same

information concerning the issuer which

registration would provide gnd who are

able to fend for themselves.

Resales of securities acquired in

private placements are frequently made

under claims of an exemption pursuant to

section 4(1) of the Act, that is, a

transaction by 2 person other than an

issuer, underwriter, or dealer This

section was intended to exempt only

trading transactions between individual

investors with respect to securities

already issued and not to exempt

distributions by issuers or acts of

other individuals who engage in steps

necessary to such distributions

“HH Rep No.85, 73d Cong. first

sess, (1933) p.S.

214 at 15-16

Susec v. Ralston Purina Ce..." 346

U.S..119 (1953)

Securities and Exchange

Commission v. Chinese Consol. Benev.

aee*n..* 8423806 F2d 738 (2d Git. 1941),

certiorari denied, 314 U.S. 618.

A-67

Generally, the majority of questions

arising under this Section have dealt

with whether the seller is an

“underwriter. " The term underwriter is

broadly defined in Section 2(11) of the

Act to mean any person who has purchased

from an issuer with a view to, or offers

or sells for an issuer in‘ connection

with, the distribution of any security,

or participates or has a direct or

indirect participation in any such

undertaking, or participates or has a

participation in the direct or indirect

underwriting of any such undertaking

The interpretation of this definition

has traditionally focused on the words

“with a view to" in the phrase

“purchased from an issuer with a view to

distribution." Thus, an investment

banking firm which arranges with an

issuer for the public sale of its

securities is clearly an “underwriter”

under that Section. Not so well

understood is the fact that individual

investors who are not professionals in

the securities business may be

“underwriters” within the meaning of

that term as used in the Act if they act

as links in a chain of transactions

through which securities move from an

issuer to the public. It is difficult

to ascertain the mental state of the

purchaser at the time of his acquisi-

tion, and the staff has looked to

subsequent acts and circumstances to

determine whether such person took with

a view to distribution at the time of

his acquisition. Emphasis has been

placed on factors such as the length of

time the person has held the securities

("holding period") and whether there has

been an unforeseeable change in circua-

stances of the holder. Experience has

A-68

shown, however, that reliance upon such

factors as the above has not assured

adequate protection of investors through

the Maintenance of informed trading

markets and has led to uncertainty in

the application of the registration

provisions of the Act

Moreover, the Commission hereby

emphasizes and draws attention to the

fact that the statutory language of Sec-

s2en 2(23.): i6in the disjunctive. Thus,

it is insufficient to conclude that a

person is not an underwriter solely

because he did not purchase securities

from an issuer with a view to their

distribution It must also be estab-

lished that the person is not offering

or selling for an issuer in connection

with the distribution of the securities

and that the person does not participate

or have a participation in any such

undertaking, and does not participate or

have a participation in the

underwriting of any such undertaking.

Rule 144, together with the other

related rules and amendments, is

designed to provide full and fair

disclosure of the character of

securities sold in trading transactions

and to create greater certainty and

predictability in the application of the

registration provisions of the Act by

replacing subjective standards with more

objective ones

Explanation and Analysis of the Rule.

In view of the legislative history

statutory language and judicial inter-

pretations of Sections 2(11), 441), and

4(2) of the Act, and in light of the

many helpful suggestions and comments

received on the proposed "160 Series" of

A-69

rules and thereafter on proposed Rule

144, the Commission is of the view that

"distribution" is the significant

concept in interpreting the statutory

term “underwriter.” In determining when

a person is deemed not to be engaged in

adistribution several factors must be

considered. :

First, the purpose and underlying

policy of the Act to protect investors

requires, in the Commissions's opinion,

that there be adequate current

information concerning the issuer,

whether the resales of securities by

persons result in a distribution or are

effected in trading transactions

Accordingly, the availability of the

rule is conditioned on the existence of

adequate current public information

Secondly, a holding period prior to

resale is essential, among other reason,

to assure that those persons who buy

under a claim of a Section 4(¢2)

exemption have assumed the economic

risks of investment, and therefore, are

not acting as conduits for sale to the

public of unregistered securities,

directly or indirectly, on behalf of an

issuer. It should be noted that there

is nothing in Section 2(11) which places

a time limit on a person's status as

underwriter The public has the same

need for protection afforded by

registration whether the securities are

distributed shortly after their purchase

or after a considerable length of

time.

Sthe Commission is aware that

certain commentators have asserted that

the absence of a cut-off period would

constitute an unreasonable cestraint on

A-70

A third factor, which must be

considered in determining what is deemed

not to constitute a “distribution, "™ is

the impact of the particular transaction

or transactions on the trading markets

(Cont'd) the alienation of

personal property. Generally speaking,

the Commission does not concur in this

view. As mentioned below, the rule

would operate prospective.y and permits

limited resales of securities in trading

transactions consistent with the

purposes of the Act Such limitation is

reasonable since the holder of

unregistered securities may resell his

securities to persons who have access to

adequate and current information

concerning the issuer, and who do rot

need the protection of registration or

he may contract for registration or for

filing under Regulation A for subsequent

resales, if he desires to distribute his

restricted securities In addition, as

discussed below, the Commission has

adopted Rule 237 under Section 3(b) of

the Act which permits non-controlling

persons who have owned for five years or

more securities of an issuer, which is

actively engaged in business as a going

concern, to make offerings of such

securities im amounts not exceeding the

lesser of the gross proceeds from the

sale of one percent of the securities of

the class outstanding or $868,000 in

aggregate gross proceeds during any

twelve-month period by filing a Simple

notification with the approp-iate

regional office of the Commission,

provided the securities are sold in

negotiated rather than trading

transactions.

A-71

It is consistent with the rationale of

the Act that Section 4(1) be interpreted

to permit only routine trading trans-

actions as distinguished from distri-

butions Therefore, a person reselling

securities under Section 4¢(1) of the Act

must sell the securities in such limited

quantities and in such a manner so as

mot to disrupt the trading markets. The

larger the amount of securities

involved, the more likely it is that

such resales may involve methods of

offering and amounts of compensation

usually associated with a distribution

rather than routine trading trans-

actions Thus, solicitation of buy

orders or the payment of extra compen-

sation are not permitted by the rule

In summary, if the sale in question

is made in accordance with all the

provisions of the rule, as outlined

below, any person who sells restricted

securities shall be deemed not to be

engaged in a distribution of such

securities and therefore not an under-

writer thereof The rule also provides

that any person who sells restricted or

other securities on behalf of a person

in. ft control relationship with the

issuer shall be deemed not to be engaged

in a distribution of such securities and

therefore not to be an underwriter

thereof, if the sale is made in

accordance with all the conditions of

the rule

SYNOPSIS OF THE RULE

Preliminary Note.

A preliminary note has been added to

the rule in order to provide a

convenient reference to assist in

A-72

understanding and interpreting its

provisions.

ini ns

The term “restricted security" is

defined to mean securities acquired

directly or indirectly from an issuer,

or from a person in a control relation-

ship with such an issuer (an affiliate)

in 4 transaction or chain of trans-

actions not involving any public

offering

The definition of the term “person”

has been revised in light of comments

received on the proposed rule. Broadly

speaking, the term "person" is defined

to include certain relatives of the

seller, certain trusts and estates in

which the seller and such relatives

collectively own 10 percent or more of

the beneficial interest and corporations

or other organizations in which the

foregoing, collectively, are the

beneficial owners of 10 percent or more

of any class of the equity securities or

10 percent or more of the equity

interest. The specific definition in

the rule should be borne in wind in

construing the various provisions of the

rule and in preparing the required

notice on Form 144.

vai ili f li nf

The rule provides that there shall

be available adequate current public

information with respect to the issuer

of the securities. This provision is

deemed satisfied if an issuer has been

subject to the reporting requirements of

Section 13 or 15(d) of the Exchange Act

for a period of at least 90 days

A-73

immediately preceding the sale of the

securities and has filed all reports

ceqguiced by that Act and the cules and

cegulations thereunder and in addition

has fited the most rcecent annuai report

reqguiced to Se filed thereunder

Jnder concurrently adopted amend-

ments to Forns 10-K and 19-a, issuers

arte required to state in their aanual

and quacterly reports whether they have

filed all the reports reguiced by

Section 13 or 134) of the Exchange Act

durciag the 99-day period preceding the

date of the report ad in addition have

filed he most recent annual report

taguiced to te filed tn) 6 6lt ght sf

comments received, the cule has seen

ravized to provide that the pecan

picposing to sell securities oc the

broker through whoa they are to be sold

all be entitled to rely upon the

suecr's statement is the latest such

report that all required rceporcts have

- wo

been filed of spon a we ten statement

com the issuec that a such ceports

Rave bean filed, unless & knows of haa

reason to Selieve that the issuer has

not complied with such requirements

The Commission rcecognizes that small

panies m3y experience difficuity in

¢on

eccazplying with the cegistration cequirte-

sants o the Exchange Act, pacticularcly

n furnishing audited financial

tatements for three fiscal years as

q¢9

teguiced by Form 19 CFR 247 . 330).

The Commission, however, tbelleves that

it would be tn the interest of

protection of investors for such issuers

to)6hOfUéb ee ceporting cczpanies undec the

Exchange Act, and therefore, encourages

such issuecrs to registes securities

voluntarily, if they are in a position

t> otherwise comply and continue to

A-74

rovisions of the Eu-

his regard, Rule 125-21

1) and Instruction i5

Fanancial Statements

he Exchange Act permit

n information subject

ions.

anies which are not

orting requirements of

») of the Exchange Act,

QGuirement is deemed to

be & there & publicly available

with t pect the issuer, the

inforssa on required by clauses (1) to

(14), i ve, and clause (16) of

parag: f Rule 15¢2-11 (17 CER

246.15 der the Exchange Act

(Release No 9319) This information

inciud other th.ngs,. the exact

name of th the address of its

principai ve offices, the exact

title and c £ the security, the

number of s s or tetal amount of the

secur ing. the mature ne

exte s s facilities and

Service offered, anc

erning the

ecent balance

Ey statenent,

¢ rent In

s adcpted, has been

Pp e that in the case of

mpaenies which are not

Os. t Guirezents of

(d), the information

t ©

“nm >}

on On” oF

se Sf

to specifie ¢

In case of cox

subject to the re

Section 33 ct a

the inforsation t

‘ ‘

- @onunwvwvvw ae ww OC

“rr

-e- @ ©

”

ov o

r ©o

” ©

- @

oo oT

‘+ ~~ ew ween * .

~ne€ pevuwww * -

s .

- .

i -

‘

a“

ba]

m oOo

met if the

ted with the

otity of the company's

~- I

Securities scold in reliance upon the

A-75

rule must have been beneficially owned

and fully paid for by the seller for a

holding pacsiod af at least two years

prior to his sale as specified Selow

This condition is designed to assure

that the registration provisions of the

Act are not circcuavented by persons

acting directly or indirectly, as

sonduits for an issuer in connection

with resales of scestricted securities

In order to accomplish this, the rule

provides that such persons be subject to

the ful aconomic risks of investment

during tha holding perio Accordingly.

the rule provides that giving the person

froa whoa the securities vere purchased

aromisarty stes of other oSligations to

pay he purchase price, of entering ints

an instalimnent purchase contract with

g'22h person, will not constitute payszent

of the pucchase price unless certain

conditions are net hese conditions

ace that the promissory note, obligation

oc esatrac must provide for full

recourse against the purcchasec of the

securities, must Se adequately secured

by collatecal other than the securities

purscshased and must have been discharged

Sy payrent in full prior to the saie of

the securities

There have been various holding

perciods provided for in proposed cules

and applied over the years by

administrative interpretations. After

reexamination and reconsideration, the

Commission believes, in keeping with the

purposes of the Act in preventing the

Jistribution of wunregisteced securities

to the public, that the holding period

should be 2 yeacs in th context of the

othec provisions of the rule The

Sefinitive holding period provided in

the

te way be relied on only in

A-76

connection with sales made pursuant to

the rule

Fer the purpose of the rule, the

doctrine of “fungibility’ wiil not

apply. That is, the acquisition during

the two-year period of other securities

ef the same issuer, whether restricted

or nonrestrictedcd, will not start the

holding period running anew. However, 4

new provision has been added tc the rule

dealing with short sales, puts of other

options to seil securities The

provision requires that if the

securities sold are equity securities

there shall Be excluded in ¢determining

the holding period any period during

which the seller had a short position

in, or any put or other option to

dispose of, any securities of the sane

class or any securities convertible inte

securities of such class Tf the

securities sold are nonccnvertible debt

securities, there must be excluded any

period during which the seller hac a4

short position in, of any put or other

option to dispose of, any nonconvertibie

debt securities of the same issuer

Certain securities acquired in

connection with, of as a result of,

ownership or acquisition of other

securities, are deemed to have been

acquired when such other securities were

acquired These include stock dividends

(including stock dividends on securities

initially acquired as stock dividends),

stock splits, stock acquired in

recapitalizations, conversions or

contingent issuances of securities The

rule, as adopted, includes provision for

contingent issuance of securities in @

stock for stock transaction as well as

in the stock for assets transaction

provided for in the rule as proposed.

the

securities has

respect

provisions

price:

with

the

convertible

all

acguired

for

7 +-

, »_w

~i€5

‘

perta:

securi

‘-

sin

‘.

ments

exchange,

any

traced

the amount

piece

are

one percent

lesser

A-78

the class outstanding as shown in the

most recent teport 2c statesrent

published by the issuer, oc the average

weekly reported volume of trading on all

such exchanges over the f{sur-week pe. od

prior to the date cf the segeirced not ¢

of sale described below The av

weekly ported volume standard has

seilecte purposes of computing the

amount than the 1 t

reporte sme during

ts & eas + a

at wWeencs

atnr

“a

cunt mw

-- ® ©

”

]

‘

re.

0“

’

‘i

(rie. th wu we

ra &

ira

‘

wo PF

‘

ise

*. Ge

oa n

“ »

t .

a =

iT) en

‘

* .

mS om ih

a e

[a]

}- .

e- oO

wee

n~ o

’

‘

") we

ss ©

aw d's (su@i. re be pp ‘oe

: &

or jp

psssciahed Sy tie issues

Live liwitatioa on the amoun

Securities £053 in peivate

y a registrat

. =

an - OD

o :

“* 7? ce

b= |

under the Act C pi

exezption under Regulation

t are not included. However, any

sales pursuant to Rule 237, discussed

low, would be aggregated.

Tn Light of the comments receiv

the provisions of the cule, 3 p

ting tc aggregaticn of the sai

resicicted securities Sy vacious

persons, the aggregation provisions of

the cule, as adopted, have been cevised.

7 uw

)

- &

A-79

The rule provides that, if a holder of

restricted securities sells such

securities in a private placement, the

purchaser's resales can only be sade

following a new two-year holding period

and need not be aggregated with any

amount of securities sold by the seller

after that period. However, resales of

restricted securities by all persons

agreeing to act im concert shall be

aggregated. Amounts sold by a donee or

trust, during any period of siz sonths

within two years after the acquisition

of the securities by the donee or trust,

shall be aggregated with those sold by

the donor or settlor Amounts of

securities sold for the account of 2

pledgee or purchaser of pledged

securities during any period of Siz

months within two years after a default

in the obligation secured by the pledge,

shall be aggregated with the amount of

securities sold by the pledgor Since

the donee, trust and pledgee stands in

the "shoes" of the donor,settlor, and

pledgor, the former persons are subject

to the latter persons' limitations under

the rule The purpose of limited

aggregation is consistent with the

objectives of the Act, for otherwise a

distribution or redistribution may be

effectuated by such means as gifts,

pledges and trusts

In computing the amount of

securities an affiliate may sell

pursuant to the rule, sales of

nonrestricted securities would be

aggregated with sales of restricted

securities Further, resales of

securities by affiliates who agree to

act in concert with respect to such

securities shall be aggregated.

Should reliable volume figures

A-80

become publicly available through the

automated quotation service of NASD,

Ine (NASDAQ), the Commission will

consider amending the rule relating to

over-the-counter companies to base the

amount of securities which may be sold

on such volume, as in the case of

securites listed on exchanges.

The rule permits sales within suc-

cessive 6-month periods, but no accumu-

lations would be permitted. For ezan-

ple, the holder of restricted securities

of an over-the-counter company may sell

up to one percent in every successive 6

months, subject to the aggregation pro-

visions where applicable, but he cannot

skip 6 months and then sell an accumu-

lated two percent in the following 6

months

Manner of Sale

The rule provides that the

securities shall be sold in brokers'

transactions within the meaning of

section 4(494) of the Act, and that the

person selling the securities shall not

solicit or arrange for the solicitation

of buy orders or make any payment in

connection with the sale other than to

the broker who executes the sell order

Brokers' transactions are defined in

the rule to include transactions in

which a broker does no more than execute

a sell order as agent and receives no

more than the usual and customary

commission The broker may not solicit

buy orders, but he may inquire of other

brokers or dealers who have indicated an

interest in the ecurities within the

preceding 460 days.

“The eiSee Series" and Rule i144, as

In addition, the rules provides that

the broker shall make a reasonable

inquiry to ascertain whether the seller

as engaged in a distribution

Reasonable inquiry should include, among

other matters, inquiry as to the length

of time the seller has held the

securities; the amount of securities the

seller and “chargeable” persons have

sold in the past siz months; whether he

intends to sell securities of the same

class through any other means; the

number of shares of the class

outstanding or the relevant trading

volume; and whether the seller has

solicited or made any arrangement for

the solicitation of buy orders, or has

made any payment to any other person in

connection with the proposed

transaction

Because Rule 144 covers “brokers'

transactions" in Section 4(49) of the

Act, Rule 154 (17 CFR 230.184) has been

rescinded

Notice of Of fering.

The rule requires that a person

desiring to sell securities in reliance

upon the rule must file with the

Commission a notice to that effect The

notice must be transmitted to the

Sicont' a) initially proposed,

would also have permitted the broker to

insert quotations in an inter-dealer

quotation service. However, such a

provision would raise questions of

conflict with the anti-manipulative

provisions of Rule 100-6 under the

Exchange Act and accordingly has been

deleted.

A-82

Commission concurrently with the placing

with a Broker of an order for the sale

of the securities A form of notice is

attached If all of the securities

mentioned in the notice are not sold

within 90 days after the filing of the

notice, an amended notice must be

transmitted to the Commission

concurrently with the commencement of

any further sales of the securities.

The notice will be a public document. a

notice is not required to be filed with

respect to transactions during any

period of siz months involving not more

than $00 shares or other units or

$10,300 whichever is less.

In order to avoid persons filing any

notice of offering “for the shelf," the

rule provides that a person shall have a

bona fide intention to sell the

securities within a reasonable time

after the filing of the notice.

OPERATION OF THE RULE

The rule will apply on a prospective

basis to transactions in restricted

securities acquired after the effective

date of the tule With respect to

restricted securities acquired by a

non-controlling person prior to the

effective date of the rule, such persons

would have the choice of complying with

the new rule or the administrative

interpretations in effect at the time of

his resale Brokers who act as agents

for controlling persons in connection

with the sale eof restricted and other

securities acquired prior to the

effective date of the rule, will be

required to comply with the provisions

of the new rule in order for their

transactions to be exempt from

registration pursuant to Section 4(4) of

the Act. The provisions of the rule

would be strictly construed and persons

selling pursuant to the rule would have

the burden of proving its availability

The staff will not issue no-action

letters with respect to resales of

securities acquired after the effective

date of the rule, but would issue inter-

pretative letters to assist persons in

complying with the new rule. In

connection with securities acquired

prior to tie adoption of the rule, the

staff would - ntinue to issue no-action

letters In this regard, Release

No. $186 proposing Rule 144 stated that

the staff would no longer give weight to

the “change in circumstances” concept in

issuing “no-action" letters This has

been reconsidered and it has been

determined that solely with respect to

securities acquired prior to the

adoption of the rule, the staff will

continue to consider “changes in

circumstances” in issuing “no-action”

letters for to do otherwise at this time

appears unfair due to the retroactive

effect. As to the aplication of the

“change in circumstances" concept to

resales of restricted securities

acquired subsequent to the effective

date of this rule, attention is drawn to

the Commission's position previously

stated on page 3 of this release.

In view of the objectives and

policies underlying the Act, the rule

shall not be available to any individual

or entity with respect to any transac-

tion which, although in technical

compliance with the provisions of the

rule, is part of a plan by such

individual or entity to distribute or

redistribute securities to the public

In such case, registration is required

While Rule 144 relates to

transactions exempted by Sections 4(1)

and 4°04) of the Act from the

registration provisions of Section $, it

would not provide an exemption from the

anti-fraud provisions of the securities

laws or the civil liabilities provisions

of Section 12¢2) of the Act or other

provisions of the securities laws

It should be recognized that the

rule is in the nature of an experiment

and the Commission will observe its

operation to determine whether it is

consistent with the objectives of the

Act If experience with the rule

indicates that it is not operating for

the protection of investors, it will be

rescinded or appropriately amended

RELATED RULES AND OTHER AMENDMENTS

Rule 237

The Commission recognized that

noncontrolling persons owning restricted

securities of issuers which do not

satisfy all of the conditions of Rule

144 might have difficulty in selling

those securities due to circumstances

beyond their control. Accordingly, in

order to avoid unduly restricting the

liquidity of such investments, the

Commission has adopted Rule 237 under

Section 3¢(b) of the Act. Under that

rule any person satisfying the

conditions of the rule will be permitted

to sell an amount of securities not

exceeding the lesser of the gross

proceeds from the sale of one percent of

A-85

the securities of the class cutstanding

or $$0,000 during any twelve sonth

period, reduced by the amount of any

other sales pursuant to an exemption

under Section 3(b) of the Act oF Rule

144 duting the period. Those conditions

are

1 The person’ is not an issuer,

an affiliate of the issuer cr a broker

or dealer,

2 The person has owned and fully

paid for the securities for five or wore

years;

3 The issuer is a domestic

organization which has been actively

engaged in business as a going concern

for at least the last five years.

4 The securities are solic in

negotiated transactions otherwise than

through a broker or dealer; ane

Ss The person files the required

notice with the appropriate regional

office of the Commission at least 10

days before the sale, indicating, among

other things, his name, the name cof the

issuer, the amount of securities to be

soid and the amount sold within the past

12 months

egu t n_A

The Commission has adopted

amendments to Regulation A so that an

offering not to exceed $100,000 can be

made by non-controlling persons, or an

aggregate of $300,000 by all such

persons, during any one year without

offseting such amounts against the

amount available to the issuer under 4

*Detined as in Rule 144¢a)(2)

above

A-86

Regulation A offerir; This broadening

of the availability sf Regulation A will

provide a means by which noncontrolling

investors in small businesses may resell

their restricted securities

Amendments to Form 10-K and Fora 10-Q.

As mentioned previously, the

Commission has adopted amendments to

Forms 10-K and 10-G to require a

statement by the registrant that all

filings required to be made have been

made during the preceding 90 days and in

addition that the registrant has filed

the most recent annual report required

to be filed

The Commission has adopted further

amendments to these forms requiring

certain information relating to the

issuance of unregistered securities in

reliance upon an exemption from

registration under the Act.

Applicability of the Anti-Fraud

Provisions to Sales of Restricted

Securities

Although private offerings are

exempt from the registration provisions

of the Act by virtue of Section 4(2),

that exemption does not apply to a

public resale of the securities by the

purchaser The Commission is

particularly concerned about the

position in which purchasers of such

securities find themselves when they

later desire to resell the securities

The anti-fraud provisions of the

Securities Act, including Section 17a)

of the Act and Section 10(¢5) of the

Exchange Act and Rule 106-5 thereunder,

make it unlawful, in connection with the

purchase or sale of a security, to make

misleading statements or to omit the

disclosure of material facts, and

prohibit other fraudulent or deceptive

practices The Commission is of the

opinion that these provisions are

violated when an issver, an affiliate of

the ‘issuer, or other persons, in

connection with A private placement of

securities, fail to infors the purchaser

fully as to the circumstances under

which he is required to take and hold

the securities and the limitations upon

their resale A more detailed release

concerning these matters has been issued

im connection with the adoption of Rule

144 and the relatec rules and

amendments

Use of Legends and Stop-Transfer

instructions

Precautions by issuers are essential

to assure that a public offering does

not result frou resale of securities

imitially purchased in transactions

claimed to be exempt under Section 4(2)

of the Act (Attention is directed to

Securities Act Release No $121 which

discusses the use of legends and

stop-transfer instructions as evidence

of a non-public offering ? Although

such assurance cannot be obtained merely

by the use of an appropriate legend on

stock certificates or other evidences of

ownership, or by appropriate instruc-

tions to transfer agents these devices

serve s useful policing function, and

the use of such devices is strongly

suggested by the Commission and will be

considered a factor in determining

whether in fact there has been a private

placement

Issuers, Srokers, dealers, private

placees and other holders of restricted

securities are hereby put on notice that

the Commission deems it appropriate that

such persons when acquiring such

securities, should consider contracting

for registration or other rights, so

that, if they desire to distribute their

securities rather than reseli in trading

transactions pursuant to the rule, they

can do so ina manner consistent with

the provisions of the Act, Be PA by

filing a tegistration statement or a

motification under Regulation A If the

issuer does not f{:le reports pursuant to

Sections 13 or iS¢d) of the Exchange

Act, such persons should consider

obtaining an agreement by the issuer to

that Ru! 144 may be available

ober Fis 1969, the Commission

gave notice of proposed revisions to

Rule 133 (17 CFR 230.133) and Form S-14

(17 CFR 23% 23), of proposed new Rules

1S3A (17 CFR 230 iS3A) and 181 (17 CFR

230 181) under the Act and of proposed

amendment to Rule 14a-2 (17 CFR

240 i14a-2) of Regulation 14A under the

Excha”-:e Act (Release No 8711; 34 ay 2

17:80 comments have been received and

the staff is currently preparing its re-

commendations for submission to the Com-

Mission for decision in the near future

Short Form Registration Under the

Securities Act .

The Commission has amended Form S-7

A-89

(17 CFR 239 26) to enpand its coverage

and has recently proposed amendments to

Forms S-16 (17 CFR 239.27; see 36 FR

23256) which simplifies registration of

secursties offered by persons other than

the issuer, securities offered in

certain conversions and securities to be

issued on the exercise of certain

warrants The Commission is observing

the operation of these forms, and may at

a later date broaden their availability

if it appears to be in the public

interest and consistent with the

protection of investors

Commission Action

I Part 230 of Chapter 11 of Title

17 of the Code of Federal Regulations is

amended by adding thereunder a new

Section 230 144 to read as follows and

by rescinding Sections 230.154 and

230.155

SECTION 230.144 PERSONS DEEMED NOT TO

BE ENGAGED IN A DISTRIBUTION ANC

THEREFORE NOT UNDERWRITERS

PRELIMINARY NOT

Rule 144 is designed to implement

the fundamental purposes of the Act, &a$

expressed in its preamble, “Teo provide

full and fair disclosure of the

character of the securities sold in

interstate commerce and through the

mails, and to prevent frauc in the sale

thereof sa The rule is designed to

prohibit the creation of public markets

in securities of issuers concerning

which adequate current information is

mot available to the public At the

same time, where adequate current

information concerning the issuer is

A-90

available to the public, the rule

permits the public sale in ordinary

trading transactions of limited amounts

of securities owned by persons

controlling, controlled by or under

common control with the issuer and by

persons who have acquired restricted

securities of the issuer

Certain basic principles are

essential to an understanding of the

requirement of registration in the Act

oo. If any person utilises the juris-

dictional means to sell any non-exempt

security to any other person, the

security must be registered unless a

statutory exemption can be found for the

transaction

2 In addition to the exemptions

found in Section 3, four exemptions

applicable to transactions in securities

are contained in Section 4 Three of

these Section 4 exemptions are clearly

not available to anyone acting as an

“underwriter” of securities (The

fourth, found in Section 4(4), is

available only to those who act as

brokers under certain limited circum-

stances An understanding of the term

“underwriter” is therefore important to

anyone who wishes to determine whether

or not an exemption from registration is

available for his sale of securities.

The tera underwriter is broadly

defined in Section 2(11) of the Act to

mean any person who has purchased from

an issuer with a view to, or offers or

sells for an issuer in connection with,

the distribution of any security, or

participates or has a direct or indirect

participation in any such undertaking,

or participates or has a participation

in the direct or indirect underwriting

of any such undertaking The

interpretation of this definition has

traditionally focused on the words “with

aview to" in the phrase “purchased fron

an issuer with a view to distri-

bution, ' Thus, an investment banking

firm which arranges with an issuer for

the public sale of its securities is

clearly an “underwriter” under that

Section Individual investors who are

not professionals in the securities

business may also be “underwriters”

within the meaning of that term as used

in the Act if they act as links in a

chain of transactions through which

securities move from an issuer to the

public Since it is difficult to ascer-

tain the mental state of the purchaser

at the time of his acquisition, subse-

quent acts and circumstances have been

considered to determine whether such

person took with a view to distribution

at the time of his acquisition

Emphasis has been placed on factors such

as the length of time the person has

held the securities and whether there

has been an unforeseeable change in

circumstances of the holder Experience

has shown, however, that reliance upon

such factors as the above has not

assured adequate protection of investors

through the maintenance of informed

trading tarkets and has led to

uncertainty in the application of the

registration provisions of the Act

It should be noted that the statu-

tory language of Section 2¢11) is in the

disjunctive Thus, it is insufficient

to conclude that a person is not an

underwriter solely because he did not

purchase securities from an issuer with

aview to their distribution It must

also be established that the person is

not offering or selling for an issuer in

A-92

connection with the distribution of the

securities, does not participate or have

a direct or indirect participation in

any such undertaking, and does not

participate or have a participation in

the direct or indirect underwriting of

such an undertaking

In determining when a person is

deemed not to be engaged in a

distribution several factors must be

considered

First, the purpose and underlying

policy of the Act to protect investors

requires that there be adequate current

information concerning the issuer,

whether the resales of securities by

persons result in a distribution or are

effected in trading transactions

Accordingly, the availability of the

rule is conditioned on the existence of

adequate current public information

Secondly, a holding period prior to

resale is essential, among other

reasons, to assure that those persons

who buy under a claim of a Section 4(2)

exemption have assumed the economic

risks of investment, and therefore are

not acting as conduits for sale to the

public of unregistered securities,

directly or indirectly, on behalf of an

issuer It should be noted that there

is nothing im Section 2(¢11) which places

atime limit on a person's status as an

underwriter The public has the same

need for protection afforded by

registration whether the securities are

distributed shortly after their purchase

or after a considerable length of time

A third factor, which must be

considered in determining what is deemed

not to constitute a "distribution", is

the impact of the particular transaction

or transactions on the trading markets

A-93

Section 4(1) was intended to exempt only

routine trading transactions between

individual investors with respect to

securities already issued and not to

exempt distributions by issuers or acts

of other individuals who engage in steps

necessary to such distributions There-

fore, a person reselling securities

under Section 4(1) of the Act must sell

the securities in such limited

Quantities and in such a@ manner as not

to disrupt the trading markets. The

larger the amount of securities

involved, the more likely it is that

such resales may involve methods of

offering and amounts of compensations

usually associated with a distribution

rather than routine trading transac-

tions Thus, solicitation of Buy orders

or the payment of extra compensation are

mot permitted by the rule

In summary, if the sale in question

is made in accordance with all of the

provisions of the cule, as set forth

below, any person who sells restricted

securities shall be deemed not to be

engaged in a distribution of such

securities and therefore mot an under-

writer thereof The rule also provides

that any person who sells restricted or

other securities on behalf of a person

in a control relationship with the

issuer shall be deemed not to be engaged

im a distribution of such securities and

therefore not to be an underwriter

thereof, if the sale is made in

accordance with all the condition of the

rule

(a) Definitions ‘ The following

definitions shall apply for the purposes

of this rule.

(1) An “affiliate” of an issuer is a

A-94

a person that directly, or indirectly

through one or more intermediaries,

controls, or is controlled by, or is

under common control with, such issuer

(2) The term “person” when used with

reference to a person for whose account

securities are to be sold in reliance

upon this rule includes, in addition to

such person, all of the following

persons

(i>) Any relative or spouse of such

person, or any relative of such spouse,

any one of whom has the same home as

such person;

5-8-7 ny trust or estate in which

such person or any of the persons

specified in CA) collectively own ten

percent or more of the total beneficial

interest or of which any of such persons

serve as trustee, executor or in any

Similar capacity; and

Ciiid Any corporation or other

organization (Cother than the issuer) in

which such person or any of the persons

specified in (A) are the beneficial

owners collectively of ten percent or

more of any class of equity securities

or ten percent or more of the equity

interest

(3) The term “restricted securities"

means securities acquired directly or

indirectly from the issuer thereof, or

from an affiliate of such issuer, in a

transaction or chain of transactions not

involving any public offering

(b>) Conditions to be met Any af-

filiate or other person who selis re-

stricted securities of an issuer for his

own account, or any person who sells re-

stricted or any other securities for the

account of an affiliate of the issuer of

such securities, shall be deemed not to

A-95

be engaged in a distribution of such

securities and therefore not to be an

underwriter thereof within the meaning

of Section 2¢11) of the Act if all of

the conditions of this rule are met

Ce) Current Public Information

There shall be available adequate

current public information with respect

to the issuer of the securities Such

information shall be deemed to be avail-

able only if either of the following

conditions is met:

(1) Filing of Reports. The issuer

has securities registered pursuant to

Section 12 of the Securities Exchange

Act of 1934 and has filed the reports

required to be filed by Section 13 of

that Act for a period of at least 90

days immediately preceding the sale of

the securities and in addition has filed

the most recent annual report required

to be filed thereunder, or has securi-

ties registered pursuant to the Securi-

ties Act of 1933 and has filed the

reports required to be filed by Section

1S¢d) of the Securities Exchange Act of

1934 for a period of at least 90 days

immediately preceding the sale of the

securities and in addition has filed the

most recent annual report required to be

filed thereunder The person for whose

account the securities are to be sold

shall be entitled to rely upon a state-

ment in whichever is the most recent

report, quarterly or annual, required to

be filed and filed by the issuer that

such issuer has complied with such

requirements, unless he knows or has

reason to believe that the issuer has

not complied with such requirements

Such person shall also be entitled to

rely upon a written statement from the

A-9%6

issuer that it has complied with such

reporting requirements unless he knows

or has reason to believe that the issuer

has not complied with such requirements

(2) Other Public Information If

the issuer is not subject to Section 13

or iS¢(d) of the Securities Exchange Act

of 1934, there is publicly available the

information concerning the issuer

specified in subdivision (id to (Criv),

inclusive, and subdivision (zvi) of

paragraph (a)d(4) of Section 240 15c¢c2-i1

of this chapter or, if the issuer is an

insurance company, the information

specified in section 12(g)(¢2) (G)¢a) of

that Act

(dé) Holding Period for Restricted

Securities If the securities sold are

restricted securities, the following

provisions apply

(1) General Rule The person for

whose account the securities are sold

shall have been the beneficial owner of

the securities for a period of at least

two years prior to the sale and, if the

securities were purchased, the full

purchase price or other consideration

shall have been paid or given at least

two years prior to the sale

(2) Promissory Notes, Other

Obligations or Installment Contracts

Giving the person from whom the securi-

ties were purchased a promissory note or

other obligation to pay the purchase

price, or entering into an installment

purchase contract with such person,

shall not be deemed full payment of the

purchase price unless the promissory

note, obligation or contract--

C43 Provides for full recourse

against the purchaser of the securities;

(ii) Is secured by collateral, other

A-97

than the securities purchased, having a

fair market value at least equal to the

purchase price of the securities

purchased; and

(iirid Shall have been discharged by

payment in full prior to the sale of the

securities.

(3) Short Sales, Puts or Other

Options to Sell Securities. In

computing the two-year holding period

the following periods shall be excluded

oe a If the securities sold are

equity securities, there shall be

excluded any period during which the

person for whose account they are sold

had a short position in, or any put or

other option to dispose of, any equity

securities of the same class or any

securities convertible into securities

of such class; and

€tii? F£2 the securities sold are non-

convertible debt securities, there shall

be excluded any period during which the

person for whose account they are sold

had a short position in, or any put or

other option to dispose of, any non-

convertible debt securities of the sane

issuer.

(4) Determination of Holding

Period. The following provisions shail

apply for the purpose of determining the

period securities have been held:

(i>) Sto vidend Li n

Recapitalizations. Securities acquired

from the issuer as a dividend or pur-

suant to a stock split, reverse split or

recapitalization shall be deemed to have

been acquired at the same time as the

securities on which the dividend or, if

more than one, the initial dividend was

paid, the securities involved in the

split or reverse split, or the securi-

ties surrendered in connection with the

A-98

recapitalization,

ese Conversions If the securities

sold were acquired from the issuer for a

consideration consisting solely of other

securities of the same issuer surren-

dered for conversion, the securities s0

acquired shall be deemed to have been

acquired at the same time as the

securities surrendered for conversion,

(iii) Contingent Issuance of

Securities Securities acquired asa

contingent payment of the purchase price

of an equity interest in a business, orf

the assets of a business, sold to the

issuer or an affiliate of the issuer

shall be deemed to have been acquired at

the time of such sale if the issuer or

affiliate was then commited to issue the

securities subject only to conditions

other than the payment of further con-

sideration for such securities An

agreement entered into in connection

with any such purchase to remain in the

employment of, or not to compete with,

the issuer or affiliate or the rendering

of services pursuant to such agreement

shall not be deezed to be the payment of

further consideration for such

securities

(iv) Pledged Securities Securities

which are bona fide pledged by any

person other than the issuer when sold

by the pledgee, or by a purchaser, after

a default in the obligation secured by

the pledge, shail be deemed to have been

acquired when they were acquired by the

pledgor, except that if the securities

were pledged without recourse they shall

be deemed to have been acquired by the

pledgee at the time of the pledge or by

the purchaser at the time of the

purchase.

A-99

NOTE Securities sold by the

pledgee shall be aggregated with those

sold by the pledgor, as provided in

paragraph (e)(3)¢ii) of this section

(vw) Gifts of Securities Securities

acquired from any person, other than the

issuer, by gift shall be deemed to have

been acquired by the donee when they

were acquired by the donor;

NOTE Securities sold by the donee

shall be aggregated with those sold by

the donor, as provided in paragraph

(ed)(3)Ctiid of this section

(vi? Trusts Securities acquired

from the settlor of a trust by the trust

or acquired from the trust by the

beneficiaries thereof shall be deemed to

have been acquired when they were

acquired by the settlor,;

NOTE Securities sold by the trust

shail be aggregated with those sold by

the settlior of the trust, as provided in

paragraph (ed)(3)Civd of this section

(vii) Estates Securities held by

the estate of a deceased person or

acquired from such an estate by the

beneficiaries thereof shall be deemed to

have been acquired when they were

acquired by the deceased person, except

that no holding period is required if

the estate is not an affiliate of the

issuer or if the securities are sold by

a beneficiary of the estate who is not

such an affiliate.

NOTES: (a) Securities sold by the

estate shall be aggregated with those

sold by the deceased person, as provided

A-100

in paragraph (ed(3d(v> of this section,

if the estate is an affiliate of the

issuer

(b>) While there is no holding period

or amount limitation fer estates and

beneficiaries thereof which are not

affiliates of the issuer, paragraphs

Ce), es. (g), (h), and (i) of the

section apply to securities sold by such

persons in reliance upon the section.

Ce) Limitation on Amount of

Securities Sold Except as hereinafter

provided, the amount of securities which

may be sold in reliance upon this rule

shall be determined as follows

(1) Sales by Affiliates If

restricted or other securities are sold

for the account of an affiliate of the

issuer, the amount of securities sold,

together with all sales of restricted

and other securities of the same class

for the eccount of such person within

the preceding Siz months, shall not

exceed the following

(i) If the securities are admitted

to trading on a national securities

exchange, the lesser of (a) 1 percent of

the shares or other units of the class

outstanding as shown by the most recent

report or statement published by the

issuer, or (Bb) the average weekly

reported volume of trading in such

securities on all securities exchanges

during the 4 calendar weeks preceding

the filing of the notice required by

paragraph Ch) of this section, or if no

such notice is required the receipt of

the order to execute the transaction by

the broker; or

(iid lf the securities are not

traded on a national securities ez-

change, 1 percent of the shares or other

A-101

units of the class outstanding as shown

by the most recent report or statement

published by the issuer

(2) Sales by Persons other than

Affiliates The amount of restricted

securities sold for the account of any

person other than an affiliate of the

issuer, together with all other sales of

restricted securities of the same class

for the account ef such person within

the preceding 6 months, shall not exceed

the amount specified in subparagraph (1)

(i) or (ii) of this paragraph, whichever

is applicable.

(3) Determination of Amount. For

the purpose of determining the amount of

securities specified in subparagraphs

(1) and (2) of this paragraph, the

following provisions shall apply

(i) Where both convertible

securities and securities of the class

into which they are convertible are

sold, the amount of convertible

securities sold shall be deemed to be

the amount of securities of the class

into which they re convertible for the

purpose of determining the aggregate

amount of securities of both classes

sold;

(iid The amount of securities sold

for the account of a pledgee thereof, or

for the account of a purchaser of the

pledged securities, during any period of

6 months within 2 vearcs after a default

in the obligation secured by the pledge

and the amount of securities sold during

the same 6-month period for the account

of the pledgor shall not exceed, in the

aggregate, the amount speci ied in sub-

paragraph (1) or (2) of this paragraph,

whichever is applicable,

(iii) The amount of securities sold

for the account of a donee thereof

A-102

cguring any period of 6 months within 2

years after the donation, and the amount

of securities sold during the same

é-month period for the account of the

donor, shall not exceed, in the

aggregate, the amount specified in sub-

paragraph (1) or (2) of this paragraph,

whichever is applicable;

(iv) Where securities were acquired

by a trust from the settlor of the

trust, the amount of such securities

sold for the account of the trust during

any period of 6 months within 2 years

after the acquisition of the securities

by the trust, and the amount of

securities sold ¢Guring the same é-month

period for the account of the settlor,

shall mot exceed, in the aggregate, the

amount specified in subparagraph (1) or

ee of this paragraph, whichever is

applicable;

(v) The amount of securities sold

for the account of the estate of a

deceased person, or for the account of a

beneficiary of such estate, during any

period of 6 months and the amount of

securities sold during the same period

for the account of the deceased person

prior to his death, shall not exceed, in

the aggregate, the amount specified in

subparagraph (1) or (2) of this

paragraph, whichever is applicable.

Provided, That no limitation on amount

shall apply if the estate or beneficiary

thereof is not an affiliate of the

issuer,

(vid) When two or more affiliates or

other persons agree to act in concert

for the purpose of selling securities of

an issuer, all securities of the same

class sold for the account of all such

persons during any period of 6 months

shall be aggregated for the purpose of

A-103

determining the Limitation on the amount

of securities sold; and

(vii) Securities sold pursuant to an

effective registration statement under

the Act or pursuant to an exemption

provided by section 4(2) of the Act or

by Regulation A under the Act need not

be included in determining the amount of

securities sold in reliance upon this

section

(ff) Manner of Sale The securities

shall be sold in “brokers' transactions"

within the meaning of Section 4(4) of

the Act and the person selling the

securities shall not (1) solicit or

arrange for the solicitation of orders

to buy the securities in anticipation of

or in connection with such transactions,

or (2) make any payment im connection

with the offering or sale of the

securities to any person other than the

broker who executes the order to sell

the securities.

(g) Brokers’ Transactions The term

"“brokers' transactions" in Section 4(4)

of the Act shall for the purpose of this

rule be deemed to include transactions

by a broker in which such broker--

(1) Does no more than execute the

order or orders to sell the securities

as agent for the person for whose

account the securities are sold; and

receives no more than the usual and

customary broker's commission,

(2) Neither solicits nor arranges

for the solicitation of customers'

orders to buy the securities in anti-

cipation of or in connection with the

transaction; provided, that the fore-

going shall not preclude inquiries by

the broker or other brokers or dealers

A-104

who have indicated an interest in the

securities within the preceding 60 days;

and

(3) After reasonable inquiry is not

aware of circumstances indicating that

the person for whose account the securi-

ties are sold is an underwriter with

respect to the securities or that the

transaction is a part of a distribution

of securities of the issuer. Without

limiting the foregoing, the broker shall

be deemed to be aware of any facts or

statements contained in the notice

required by paragraph (h) below

NOTES (i) The broker, for his own

protection, should obtain and retain in

his files a copy of the notice required

by paragraph (h)

(12) The reasonable inquiry required

by paragraph (g)¢3) above should

include, but not necessarily be limited

to, inquiry as to the following matters

(a) The length of time the

securities have been held by the person

for whose account they are to be sold

If practicable, the inquiry should

include physical inspection of the

securities.

(b) The nature of the transaction in

which the securities were acquired by

such person;

(ec) The amount of securities of the

same class sold during the past Si

months by all persons whose sales are

required to be taken into consideration

pursuant to paragraph (e) above;

(ad) Whether such person intends to

sell additional securities of the same

class through any other means;

(e) Whether such person has solic-

ited or made any arrangement for the

solicitation of buy orders in connection

A-105

with the proposed sale of securities,

(f) Whether such person has made any

payment to any other person in con-

nection with the proposed sale of the

securities; and

(g>) The number of shares or other

units of the class outstanding, or the

relevant trading volume.

(hh) Notice of Proposed Sale. Con-

currently with the placing with a broker

of an order to execute a sale of any

securities in reliance upon this rule,

there shall be transmitted to the

Commission, at its principal office in

Washington, ms wu 0 for filing three

copies of a notice on Form 144 (Section

239 #144 of this chapter) which shall be

signed by the person for whose account

the securities are to be soid: Provided,

That such a notice need not be filed if

the amount of securities to be sold

during any period of siz months does not

exceed 500 shares or other units and the

aggregate sale price thereof does not

exceed $10,000 If all of the

securities for which a notice is filed

are not sold within 90 days after the

filing of such notice, an amended notice

shail be transmitted to the Commission

concurrently with the commencement of

any further sales of such securities.

Neither the filing of such notice nor

the failure of the Commission to comment

thereon shall be deemed to preclude the

Commission from taking any action it

deems necessary or appropriate with

respect to the sale of the securities

referred to in such notice.

2 et Bona Fide Intention to Sell.

The person filing the notice required by

paragraph (h) shall have a bona fide

A-106

intention to * sell the securities

referred to therein within a reasonable

time after the filing of such notice

SECTIONS 230.154, 230.155 CRESCINDED)

II Part 239 of Chapter I! of Title

17 of the Code of Federal Regulations is

amended by adding thereunder a new

Section 239.144 reading as follows:

SECTION 239.144 FORM 144, FOR NOTICE

OF PROPOSED SALE OF RESTRICTED

SECURITIES PURSUANT TO SECTION 230.144

OF THIS CHAPTER

(a) This form shall be filed in

triplicate with the Commission by each

person desiring to make an offering of

restricted securities in reliance upon

Section 230.144 of this chapter at least

10 days prior to the commencement of

such otfering. This form shall also be

completed and filed by such person, if

all such securities are not sold within

90 days after the filing of the initial

notice on this forn, as an amended

notice of such proposed re-offering at

least 10 days prior to any further sales

of such securities. An amended Form i144

shall be filed at the expiration of each

90-day period following the prior filing

if any unsold securities are to be

reoffered thereafter, and at least 10

days prior to the commencement of the

reoffering of such securities.

(b) The notice on Form 144 is not

required to be filed with respect to

transactions in which the initial

offering of restricted securities

involves not more than $00 shares or

other units or $10,000, whichever is

less.

A-107

NOTE Copies of Form i144 have been

filed with the Office of Federal

ditiona copies will Be ava:ilabd! upon

guest from the Securities and Exchange

maissicn, Washington, D.C. 20849

The adoption of Rule i44 and Fors

and the recission of Rul i$4, are

144,

effective April iS, 1972 The recission

ef Rule i1S$$ is aiso effective April i$,

1972, except that 3 shall rezain in

effect with respect to securities

acqguiced prior to the effective date of

Rule 144 and not solid thereafter in

accordance with ail the provisions of

Ruie i144

The foregoing sticon was taken dy

th Commission purrs net to its authority

snder the Secsuritie Act of 1933 pat-

ticularly section 19 Cad tM SOAZJUARCLION

with sections 2¢%1) a¢3) 4(2), anc

444)

Sec. i9 a) 12 Stat 8s; Sec 207, 48

Stat 798

By the Commission

CSEALI

RONALDO F UNT,

Secretary.

CFR Doc .72-862 Fited 1-13-72, 89:46 amd

A-i108

F.R.C.P. - Rule $2

Rule 52. Findings by the Court.

(a) Errect. In all actions tried upon the facts without

a jury or with an advisory jury, the court tha ll find the

facts specially and state separately its conclusions of law

thereon, an de judgment shall] be entered pursuant 0 Rule 58; ;

and in granting or sera interlocutory ea nections th

court ft ll Milan's set forth the findings of fact and con-

clusions of law which constitute the grounds of its action.

Requests for findings are n ‘ necessary for purposes of

view. Findings of fact sball not be set aside unless

, Ve. yr aT : ‘5 ° ‘ , * ~ o

early erroneous, and due ae shall he given to the of

: } ee a ‘: :

I’ ‘ init oF thie trial court t J iuee of the credi bility o2

the witnesses. The findings of @ master, to the extent that

aes : , a OF 1. &

the court adopts them, shall be consi ‘dered as the Endings

of the court. If an opinion or memorandum of decision is

}. oe es ‘+ Ry . a?

filed, it will be suficient if the fndings of fact and conclu

sions of law appear therein. Findings of fact and conclu.

. . ?

wre m% 94909 P . sere . 9° .

ons of law are unnecessary on decisions of m tone nek

eelae Ds e e -¢@.- :

Rules 12 or 56 or any other motion except as provided in

Rule 41 (b).

(b) ‘cacuyiaiti Upon motion of a party made not

dae : e * } . ,

later than 10 days after entry of judement the court may

a s 3° . . * .

only its findings or make additional findings and mar

St end the want nt according! ¥. The ae iow may be

made with a motion for a new trial pursuant to Rule 59.

When fidings of fact are made in actions tried by the

court without a jury. the question of the sufficiener of the

evidence to support the findings may thereafter he raised

wheth ‘yor not the party raising the quest as made in

the district court an objection to such fudings or has made

a metion to amend them or a motion for judgment.

-T

. .

tea? :

sites fe

A-i0%

5 §551

Definitions

. For the purpose of this subchapter—

(1¥ “agenz;"’ means each authority of the Government of the

United States, whether or not it is within or subject to review

by another agency, but does not include—

(A) the Congress;

(B) the courts of the United States;

the United States;

(D) the government of the District of Columbia;

or except as to the requirements of section 552 of this title—

(E) agencies composed of representatives of the parties

or of representatives of organizations of the parties to the

disputes determined by them;

(F) courts martial and military commissions;

(G) military authority exercised in the field in time of

war orin occupied ter-itory; or

(H) functions conferred by sections 1738, 1739, 1743, and

1744 of title 12; chapter 2 of title 41; or sections 1622,

1884, 1891-1902, and former section 1641(b) (2), of title 50,

appendix;

(2) “person” includes an individual, partnership, corporation,

associ: tion, or public o> private organization other than an

agency;

(3) “party” includes a person or agency named or admitted

as a party, or properly seeking and entitled as of right to be ad-

mitted as a party, in an agency proceeding, and a person or

agency admitted by an agency as a party for limited purposes;

(4) “rule” means the whole or a part of an agency statement

of genera] or particular applicability and future effect designed

to implement, interpret, or prescribe law or policy or describing

the organization, procedure, or practice requirements of an

agency and includes the approval or prescription for the future

of rates, wages, corporate or financial! structures or reorganiza-

tions thereof, prices, facilities, appliances, services or allow-

ances therefor or of valuations, costs, or accounting, or prac-

tices bearing on any of the foregoing:

(5) “rule making’ means agency process for formulating,

amending, or repealing a rule;

A-110

5 §551

5) “order” means the whole or a part of a final disposition,

whether affirmat ve, negative, injunctive, or declaratory in

form, of an agency in @ matter other than rule making but in-

cluding licensing;

(7) “adjudication” means agency process for the formulation

of an order;

(8) “license” includes the whole or a part of an agency per-

mit, certificate, approval, registration, charter, membership,

statutory exemption or other form of permission;

(9) “licensing” includes agency process respecting the grant,

renewal, denial, revocation, suspension, annulment, withdrawal,

limitation, amendment, modification, or conditioning of a li-

cense;

(10) “sanction” includes the whole or a part of an agency—

TA) probibition, requirement, limitation, or other condi-

tion affecting the freedom of a person;

(‘B) withholding of relief;

D) destruction, taking, seizure, or withholding of prop-

erty;

(E) assessment of damages, reimbursement, restitution

compensation, costs, charges, or fees;

(F) requirement, revocation, or suspension of a license;

(G) taking other compulsory or restrictive action;

(11) “relief” includes the whole ora part of an agency—

(A) grant of money, assistance, license, authority, ex-

emption, exception, privilege, or remedy;

(B) recognition of a claim, right, immunity, privilege, ex-

emption, or exception; or

of, and beneficial to, a person;

(12) “agency proceeding” means an agency process as de-

fined by peragraphs (5), (7), and (9) of this section;

(13) “agency action” includes the whole or a part of an agen-

cy rule, order, license, sanction, relief, or the equivalent or de

nial thereof, or failure to act; and

(14) “ex parte communication” means an oral or written

A-111

5 §551

communication not on the public record with respect to which

reasonable prior notice to all parties is not given, but it shall

not include requests for status reports on any matter or pro

ceeding covered by this subchapter.

§ 553. Rule making

(a) This section applies, according to the provisions thereof, ex-

cept to the extent that there is involved—

(1) a mulitary or foreign effairs function of the United

States; or

(2) a matter relating to agency management or personne! or

to public property, loans, grants, benefits, or contracts.

(bo) Genera! notice of proposed rule making shal! be published in

the Federal Register, unless persons sabject thereto are named and

either personally served or otherwise have actua! notice thereof in

accordance with law. The notice shal! include—

(1) a statement of the time, place, and nature of public rule

making proceedings;

(2) reference to the lega) authority under which the rule is

proposed; and

(3) either the terms or substance of the proposed rule ora

description of the subjects and issues involved

Except whe. notice or hearing is required by statute, this subsec-

tion does not apply—

(A) to interpretative rules, general statements cf policy, or

rules of agency organization, procedure, or practice; or

(B) when the agency for good cause finds (and incorporates

the finding and a brief statement of reasons therefor in the

rules issued) that notice and public procedure thereon are im-

practicable, unnecessary, or contrary to the public interest.

terested persons an opportunity to participate in the rule making

through submission of written data, views, or arguments with or

without opportunity for oral presentation. After consideration of

the relevant matter presented, the agency shall incorporate in the

rules adopted a concise genera! statement of their basis and pur-

pose. When rules are required by statute to be made on the record

after opportunity for an agency hearing, sections 5565 and 557 of

this title apply instead of this subsection.

A-112

) The required publication or service of a substantive rule shal!

ade not less than 30 days before its effective cate, except—

(1) a substantive rule which grants or recognizes an exemp-

tion or relieves a restriction;

2) interpretative rules and statements of policy; or

3) as otherwise provided by the agency for good cause

found and published with the rule.

(e) Each agency shall give an interested person the right to peti-

tion for the ‘ssuance, amendment, or repeal of a rule.

Securities Act of 1933, §1, 15 U.S.C. §77a

§ 77a. Short title

This subchapter may be cited as the “Securities Act of 1933.”

Securities Act of 1933, §2, 15 U.S.C. §77b

§ 77b. Definitions

When used in this subchapter, unless the context otherwise re-

quires—

(1) The term “security” means any note, stock, treasury

stock, bond, debenture, evidence of indebtedness, certificate of

interest or participation in any profit-sharing agreement, collat-

eral-trust certificate, preorganization certificate or subscrip-

tion, transferable share, investment contract, voting-trust cer-

tificate, certificate of deposit for a security, fractional undivid-

ed interest in oil, gas, or other mineral rights, or, in general,

A-113

15 § 77b

any interest or instrument commonly known az a “security’, or

any certificate of interest or participation in, temporary or in-

_ terim certificate for, receipt for, guarantee of, or warrant or

right toaubscribe to or purchase, any of the foregoing.

(2) The term “person” means an individual, a corporation, a

partnership, an association, a joint-stock company, a trust, an)

unincorporated

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