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INDEX-DIGEST

The following digest of decisions presents a consolidated summary of
the case headnotes arranged alphabetically according to topic headings.
The digest is divided into three parts: Part I, containing decisions under
the Securities Act of 1933; Part II, the Securities Exchange Act of 1934;
and Part III, the Public Utility Holding Company Act of 1935.

The case headnotes have not been carried over verbatim into this
digest. To facilitate the grouping together of decisions standing for a
similar proposition under a single digest heading, it has been necessary in
some cases to delete from the headnotes matter not pertinent to the general
proposition for which the headnote stood, i. e., the names of companies,
the principal amounts of security issues, etc. To the same end, certain
case headnotes have been entirely redrafted for the digest so as to conform
to a uniform statement of the general proposition. In a few instances,
case headnotes, which were not considered important for the purposes of
this digest, have been omitted from the digest altogether.

1037

5 S. E. C.

PART I

SECURITIES ACT* OF 1933

ACCOUNTING

ACCOUNTANT'S CERTIFICATE
Opinion of Accounting Procedure and Principles Followed by Registrant

Certificate of accountant which stated that financial statements were in accordance with accepted principles of accounting, but which omitted entirely any reference to accounting principles and procedures followed by registrant, held not to comply with Rule 651 specifying minimum contents of such certificates Page 60.

Failure to state clearly the opinion of the accountant in respect to the accounting principles and procedures followed by the registrant held a material deficiency ... Page 543. BALANCE SHEET Description of Security

Failure to Describe Certain Rights Balance sheet which failed to disclose that the liquidation preferences of stock proposed to be issued differed materially from its par value, and which failed to include an opinion of counsel as to whether there are any restrictions on surplus or on the declaration of dividends arising out of the preferences held to omit material facts . . . Page 287. COST OF PROPERTY (see also Option Agreement and VALUATION OF PROPERTY) Inclusion of Promoter's Fees

Proper accounting practice requires that shares issued for promotional services be listed separately from amounts representing consideration given for an intangible asset such as a formula . . . Page 60. Inclusion of Shares Issued and Concurrently Donated Back to Issuer

Inclusion in amount at which property is carried in balance sheet of par value of shares issued therefor and concurrently "donated back” to issuer held improper and misleading . . . Page 60.

Value of stocks issued for options and concurrently donated back to the issuer held improperly included in the original cost of the options . . Page 543. Notes to Balance Sheet

A note to explain an asset described in a balance sheet held misleading because of inclusion of optimistic statements therein without disclosure of other factors having an adverse effect . .. Page 982.

•The term "Act" as used in Part I of this Digest refers to the Securities Act of 1933, as amended.

1039

ACCOUNTING—Continued

Where a note explains a deferred charge against future crop operations, carried as an asset in the balance sheet, and indicates that crop operations after balance sheet date had been delayed by labor difficulties held omission to disclose increases in costs operations after balance sheet date resulting from settlement of labor difficulties not misleading under the circumstances of the case . . . Page 982. Option Agreement

Cost of Property Inclusion in balance sheet of asset of $420,000 as "purchase price of options to buy properties, plant, and equipment" held false and misleading where $170,000 of this amount represented the purchase price due on the property held under option . . Page 643.

Reflection of Liability Arising Thereunder in Balance Sheet Where option agreement contained no actual commitment to purchase held that it would be misleading to carry the full purchase price of the property upon the balance sheet as a liability ... Page 543.

If contract to purchase option contains binding promise by registrant to promoter to purchase property held under option, the $170,000 due on the property cannot be designated as a liability "due on options” . . . Page 543. EXPERTS Consent to Use of Report

Where accountants who certified financial statements filed as part of registration statement relied upon a report of other accountants, written consent of such other accountants to the use of their names held to be specifically required by Section 7 of the Act and Rule 670 of the General Rules and Regulations thereunder . . . Page 287. FINANCIAL STATEMENTS IN REGISTRATION STATEMENT AND PROSPECTUS Rule 821 (a)

Under Rule 821 (a) of the General Rules and Regulations under the Act such financial statements as are set forth in the prospectus must conform exactly with corresponding financial statements in the registration statement; condensing or summarizing financial statements required to be included in the prospectus is not permitted under the rule . . . Page 982. PROFIT-AND-LOSS STATEMENTS

Profit-and-loss statements held not misleading where no disclosure is made of probable effect of higher wages on cost of operations subsequent to end of period covered by statements . . . Page 982. SURPLUS (See alsoBALANCE SHEET—Description of Security) Shares Issued for Property and Concurrently "Donated Back" as Surplus

"Surplus” representing par value of shares issued to vendor for property and concurrently "donated back” to issuer held fictitious ... Page 60. VALUATION OF PROPERTY Assumption of Accutate Valuation Created by Use of Specific Sum

A dollar-and-cents figure set opposite an item of property implies that it was reached on some rational or precise basis . . . Page 60.

ACCOUNTING-Continued

Non-Disclosure of Relationship Existing Between Vendor and Vendee

Amount at which property was carried on balance sheet held misleading in absence of statement that it was arbitrarily fixed by registrant and vendor, who was the principal promoter, without arm's length bargaining, and without refer. ence to cost to vendor ... Page 60.

DESCRIPTION OF SECURITIES

FAILURE TO DESCRIBE CERTAIN RIGHTS

Where answer to item calling for description of voting rights, preferences, conversion, exchange rights, etc., was challenged because it failed to state that there were no exchange or conversion rights, held that absence of description of such rights implied a negation that such rights existed ... Page 60.

MISREPRESENTATIONS CONCERNING OUTSTANDING SECURITIES

Answer to item calling for information concerning stock authorized and outstanding held deficient for failure to disclose that 50,000 out of 150,000 shares listed as outstanding were treasury stock rather than stock outstanding in hands of public . . . Page 60.

MISREPRESENTATIONS CONCERNING SECURITIES TO BE OFFERED

Dividend Rate

Answers to items calling for dividend rate for each class of stock stating that dividend rate of class A stock was 35¢ held inadequate where it appeared that dividends were cumulative when earned, and only to extent earned . . . Page 60.

Security for Notes

Statement that "security shall consist of first mortgage on all present and future real estate, freehold and leasehold lands," held false and misleading where registrant does not presently own any real estate . . . Page 543.

DISTRIBUTION OF SECURITIES

PRICE

Basis of Exchange

Information concerning "the basis upon which the outstanding securities of the registrant are to be modified or exchanged" which failed to disclose effects of exchange of stock on cumulative dividends in arrears held to be materially deficient, and statement which did not make security holders aware of the possible effect upon the value of their securities resulting from the proposed exchange held to be incomplete in a material respect ... Page 287.

Information concerning the consideration to be received for stock to be issued under plan of recapitalization which merely disclosed amount of cash to be received upon exercise of stock purchase warrants, but failed to disclose that part of the new stock was to be exchanged for outstanding class A stock and that accrued and unpaid dividends on class A stock would be canceled held deficient .. Page 287.

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