from the evidence so adduced that the allocation of charges was inequitable.

In view of the stipulation hereinabove referred to, the Commission is of the opinion that there is reasonable assurance of ultimate compliance by such company with the standards established by the Act and the rules, and further that in view of the circumstances, the temporary order requested should issue, effective only until a Commission order shall issue disposing of the pending mutual service company application and conditioned upon those matters to which the applicant has so stipulated.

By the Commission: Commissioner Healy and Commissioner Eicher were absent at the time of the Commission's consideration of this case and did not participate therein.

5 S. E. C.

[No. 796]

IN THE MATTER OF

INVESTMENT CORPORATION OF NORTH AMERICA

File No. 2-3877. Promulgated July 11, 1939

UNTRUE OR MISLEADING STATEMENTS OR OMISSIONS.

Parents of Registrant.

Where voting trustees ceased to control registrant by reason of expiration of voting trust agreement and control vested in two holders of majority of voting trust certificates, who had acted jointly to cause fundamental changes in policies of the registrant, failure to disclose such holders to be the "parents" of registrant held an omission to state a material fact.

CHARACTER OF BUSINESS.

Misrepresentation and Nondisclosure of Past Activities.

A description of nature of enterprise and an outline of the general development of registrant's business which failed to disclose (1) registrant's intention to become an underwriter of securities and of corporate reorganizations, (2) changes in character of investments from securities listed on national securities exchanges to loans to corporations in promotional stage in which registrant's management was interested, and (3) the inaccuracy of registrant's assertion that it "purchases, retains for investment and sells domestic and foreign securities," held to be materially deficient.

SALE OF SECURITIES.

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 part.

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. ACCOUNTING.

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.

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 Securities Act and Rule 670 of General Rules and Regulations.

PRACTICE AND PROCEDURE.

Post-Effective Amendments.

Where proposed post-effective amendment appeared incomplete and inaccurate on its face, statute held to require denial of registrant's motion to declare such amendment effective and to dismiss stop order proceeding.

FINDINGS AND OPINION OF THE COMMISSION

This is a proceeding under Section 8 (d) of the Securities Act of 1933 to determine whether a stop order should issue suspending the effectiveness of a registration statement filed by the Investment Corporation of North America.

The statement covers an issue of $1 par value prior participating preference stock, 17,514 shares of which are to be exchanged for outstanding securities and 21,892.5 shares of which are to be offered through purchase warrants exercisable at $2.50 per share on or before March 1, 1939. Originally filed on November 22, 1938, on Form A-2, this registration statement became effective on January 11, 1939. On the same day this proceeding was instituted by due service of notice.1 It was alleged that the statement appeared to contain untrue statements of material facts and to omit statements of material facts in Items 4 (b), 5, 6, 7, 24, 27, 33, 41, 45, the balance sheet and the prospectus. It was also alleged that the requirements of Section 7 of the Securities Act of 1933, and Rule 670 of the General Rules and Regulations under the Securities Act, and Special Rule 1 as to the use of Form A-2 appeared not to have been complied with.

After a hearing held in Washington on January 25 and 26, 1939, the trial examiner found that the statement was deficient in certain of the alleged particulars. Exceptions were taken by counsel for the registrant; none were taken by Commission counsel. Briefs have been filed by both counsel. Since neither side requested it, there was no oral argument.

On March 13, 1939, and after the filing of the trial examiner's report, the registrant sought to amend its statement and moved to quash the pending proceedings. We, however, determined to review the entire record before passing upon this request.

1 The notice was supplemented by a more detailed description of the charges in a statement of matters to be considered mailed on January 12, 1939.

The registrant was incorporated under the laws of Delaware on April 6, 1927, as an investment trust of the general management type. Prior to the series of events which led up to the filing of the registration statement here in question, the registrant's authorized capital consisted of 10,000 shares of class A common stock, 2,502 of which were outstanding, and 10,000 shares of class B common stock, 3,162 shares of which were outstanding. The class A stock was entitled to cumulative dividends of $1.75 a share. The class B stock, which possessed the sole voting rights, had been deposited in a voting trust which was to expire on November 28, 1938.

The registrant had not prospered. The market value of its assets had declined from $132,000 in 1927 to about $52,000 in October of 1938. On July 1, 1938, the accumulated and unpaid dividends due to holders of class A common stock amounted to $31,744.12.

On July 8 there was submitted to the stockholders a comprehensive program for a recapitalization of the company. This plan included the waiver of accumulated dividends on the class A stock, the reduction of dividends from $1.75 to $1 a share, and an increase of the class A stock from 10,000 to 40,000 shares. These changes were authorized by the majority of the holders of both class A and class B stock on August 1, 1938.

The plan was modified in November to provide for the exchange of seven shares of a new issue of prior participating preference stock of $1 par value for every share of the old class A common. The new issue is to carry preferred cumulative dividends of 15¢ a share. Holders of class A stock would also receive for each share exchanged one-sixth of a share of class B common stock and one warrant entitling the holder to subscribe for 84 additional shares of prior participating preferred at $2.50 a share. The class B common stock would continue to be the voting stock. It would be entitled to receive dividends after payment of the preferences on the prior participating preference stock, and the class A common stock which should not consent to the exchange. Dividends on the class A common would cease to be cumulative after October 31, 1938, and the stock would no longer participate in earnings after its preference had been met. This amended plan was also approved by a majority of the holders of both classes of stock.

3

To compensate for the waiver of accumulated dividends, holders of class A stock were to receive one new share of class B stock for each six shares of class A then held, plus a stock subscription warrant to purchase additional class A common. Furthermore, the class A stock was given a larger participation in the earnings above the cumulative dividend payment.

The class B common stock and the prior participating preference stock will share any remainder after the payment of cumulative dividends on the basis that two-fifths will go to the class B stock as a class and three-fifths to the participating preference stock as a class.

The proposed plan, insofar as the class A stockholders accept the exchange of prior preference stock, would eliminate $32,369.62, as of October 31, 1938, of unpaid accumulated dividends which made the chances of the class B stock to participate in earnings unlikely for an indefinite time. Moreover, it should be noted that under the new preferences, the participation of the class B stock in the earnings, quite apart from the accumulated dividends, would be increased so long as the earnings remained below $10,000, a figure which they had never even remotely approached.*

The registration statement covers the proposed issue of prior participating preference stock and warrants to be offered pursuant to the plan above outlined.

The principal deficiencies alleged by counsel for the Commission arise from the registrant's failure to reveal a change in the ownership of the class B stock and an important change in the investment policy of the corporation effected by the new management. It is also alleged that the statement is deficient in that it fails to disclose fully the significance of the proposed recapitalization.

The evidence is that J. M. Doroshaw is president of a company called First Mid-Continental Corporation, and that S. Harvey Greenspau has been associated with him in the management of this and other business endeavors over a period of years. In February of 1938, Price, Waterhouse & Co., at the request of Doroshaw, reported to the First Mid-Continental Corporation on the registrant's financial condition and operations. After receiving this report Doroshaw and Greenspau each took options to purchase 3,660 voting trust certificates for class B stock. Together their options covered 73.2 percent of the total then outstanding. At the annual meeting held on April 4, 1938, Doroshaw and Greenspau suggested to the voting trustees names of men willing to serve as directors and "in a position to build up the working capital of the corporation." No action was taken, however, and the meeting was adjourned to April 29, 1938. On April 28, 1938, Doroshaw and Greenspau exercised their options. The following day Doroshaw and those whom he and Greenspau had suggested" were elected directors. On or about the same date Doroshaw also became one of the voting trustees for the class B stock. On May 1, 1938, the offices of the corporation were moved from Washington,

• Without the plan the class B stock would not begin to participate until $4,378.50 (plus accumulated dividends) had been paid. Under the plan, assuming complete exchange, participation at a lesser percentage begins when $2,627.10 has been paid.

These were Fred Fidanque and Emanuel Goldstrich, who had previously been voting trustees; Samuel R. Mell, a partner of Mell & Mell Department Store, and Jack L. Finer, president of Beckman Mills Corporation. Mell and Finer ceased to be directors before the registration statement was filed.