ings particularly paragraph 10 thereof on page 13 (Appendix A) and to the supplemental finding above relating to deficiencies in the response to item 4 of the registration statement.

In addition to paragraph 33 of the said stipulation of deficiencies existing in the accountant's certificate, I find it otherwise materially deficient in that it is undated as required by Rule 651 of the General Rules and Regulations under the Securities Act of 1933, as amended. Respectfully submitted.

6 S. E. C.

JOHN G. CLARKSON, Trial Examiner.

[No. 898]

IN THE MATTER OF

FRANKLYN J. V. STOWITTS

File No. 8-1. Promulgated October 26, 1939

BROKER-DEALER REGISTRATION.

Grounds for Refusal, Suspension, or Revocation.

Violation of Securities Act or Securities Exchange Act.

Willful violation of Section 5 (a) of the Securities Act in the sale of fractional undivided interests in oil, gas and other mineral rights held grounds for refusal of broker-dealer registration.

Where broker-dealer represented that corporation would deposit specified amount of proceeds from each sale in special account to be used "exclusively" for drilling and equipping wells, when he knew that this money was being dissipated for other purposes, held a willful misrepresentation.

Willfullness.

Where applicant was advised by counsel for the Commission that in their opinion the interests applicant was offering were securities within meaning of Act, and where steps were thereafter taken to bring issue within terms of exemption from registration but before complying with provisions of exemption applicant sold the securities to the public, held sale in violation of Act was willful. Where materially false statements are made, with knowledge of their falseness, held willful violation even though the factors rendering the statement false are beyond the control of the party making the statements.

APPEARANCES:

David Golden, of the Trading and Exchange Division of the Commission.

Lester Gutterman, for Franklyn J. V. Stowitts.

FINDINGS AND OPINION OF THE COMMISSION

This is a proceeding pursuant to Section 15 (b) 1 of the Securities Exchange Act of 1934, to determine whether or not registration as a broker or dealer should be denied to Franklyn J. V. Stowitts (hereinafter referred to as the "applicant"), whose application for

'The relevant provision of Section 15 (b) is as follows:

The Commission shall, after appropriate notice and opportunity for hearing, by order deny registration to . . . any broker or dealer if it finds that such denial is in the public interest and that such broker or dealer . . . (D) has willfully violated any provision of the Securities Act of 1933, as amended.

...

registration was filed on Form 3-M on April 5, 1939. The effective date of Stowitts' registration was postponed until May 20, 1939, by order of the Commission and was further postponed by stipulation between the applicant and the Commission to the termination of this proceeding.

This proceeding is based upon an order of the Commission dated May 4, 1939, which alleged that there were grounds for believing that the applicant had willfully violated the provisions of Sections 5 (a) (1), 5 (a) (2), and 17 (a) (2) of the Securities Act of 1933 in the sale of fractional undivided interests in oil, gas, and other mineral rights in property located in Warren County, Pa.

2

After appropriate notice, a hearing was held before a trial examiner in New York on May 15 and 16, 1939. The applicant appeared and testified on his own behalf. On June 7, 1939, the trial examiner filed an advisory report in which he found the facts to be substantially as charged in the order initiating these proceedings. The applicant filed exceptions to this report on June 19, 1939, and a memorandum in support of his exceptions, on June 28, 1939. We heard oral argument on July 6, 1939.

Early in April 1938, one C. Milton Smith acquired the oil, gas, and mineral rights to 209 acres in Warren County, Pa. Thereafter, Smith, Stowitts, and their associates organized the North Penn Oil Lands Corporation under the laws of New York, with a capitalization of 100 shares of common stock. All of these shares were originally issued to Smith in consideration of the transfer to the corporation of the oil, gas, and mineral rights to the Warren County property." Smith retained 52 shares of stock and transferred the balance to his associates in the enterprise. Applicant was the recipient of 12 shares

2 Section 5 (a) provides:

Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly

(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell or offer to buy such security through the use or medium of any prospectus or otherwise; or

(2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.

Section 17 (a) (2) provides :

It shall be unlawful for any person in the sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

The surface rights to this property are owned by the United States Government as a part of its forest preserve.

The purchase price of the rights which were acquired was $50 per acre, or a total of $10,450. Of this amount, $200 was paid in cash, and the balance was represented by a mortgage executed by the corporation to John P. and Ruth E. Ruggles, dated April 29, 1938.

under this arrangement. Thereafter, the applicant, Smith, and one C. E. Sedweek were designated the "sole and exclusive agents" of the corporation to sell undivided interests in the oil, gas, and mineral rights to the public. While the agency contract was nominally made by the corporation, the act of appointment by the corporation was a mere formality, for the three agents effectively controlled the corporation.

It

In the so-called agreement between the corporation and the three "sole agents," the latter covenanted "to enter into agreements, in form and substance satisfactory to and approved by the Company, with salespeople, wholesalers, dealers, etc., as from time to time may be required to assist and aid in the sale of the aforesaid property. was proposed that undivided interests in the oil, gas, and mineral rights held by the corporation would be sold to the public at $350 per quarter-acre, $700 per half-acre, and $1,400 per whole acre. The socalled agreement provided that each of the sole agents would receive 1⁄2 of the net receipts on all acreage sold after the deduction of the cost of the property to the corporation calculated at the rate of $50 per acre; $500 from the sales price of each acre "to cover the cost of drilling, equipping, constructing, and servicing of all wells, pumps, tankage, and power equipment"; 5 percent of gross sales receipts to cover office and administrative costs of the company; sales commissions paid to salespeople, wholesalers, dealers, etc., "employed through the sole agents"; 10 percent of gross sales receipts "to cover all other operating expenses of the company, including the building and installing of adequate storage tanks, power house and its equipment." Each of the three "sole agents," it appears, was entitled to a "net commission" on all sales, irrespective of who may have consummated those sales. Thus, where any of them sold undivided interests in an acre of property at $1,400, each would receive $213.33. The aggregate of $640 paid to all three of the "sole agents" in that situation would be more than 45 percent of the total sales price. If the sale were made by any salesman who had been "employed through" any of the "sole agents," the latter would receive a total of $640 less the commission paid the salesman.

The acreage acquired by the corporation was divided into blocks of 50 acres each, out of which 30 acres were to be sold to the public, and the remaining 20 acres retained by the corporation." Purchase orders prepared by the company contained an agreement by the company that it would drill up to a total of 5 wells upon the 50-acre block. More

So far as appears, applicant paid nothing for these 12 shares. None of the stock of the corporation was offered or sold to the public. It was

*The original plan called for the sale of 40 acres out of each 50-acre tract. modified to meet the exemption requirements under Regulation B of the Rules and Regulations promulgated by the Commission under the Securities Act of 1933.

over, in such purchase orders, the corporation "agreed and warranted" that it would "deposit at least $500 out of the $1,400 received by it for each acre sold, in a 'special account' at the Manufacturers Trust Company, New York, N. Y., said fund to be used exclusively by North Penn Oil Lands, Inc., for drilling, equipping, and servicing the wells..., and that it would "set aside a reserve of 15 percent of all cash received by it from the sale of this acreage, to be used by it for operating contingencies." Each purchaser was to receive his full pro rata share of the gross income from all sales of gas and oil by the corporation without deduction of operating and office expenses. Those expenses were to be paid out of the fund reserved from the original purchase price of the property.

Shortly after the organization of the corporation, the three "sole agents" embarked upon an active sales campaign. Prospectuses describing the company's "unusual plan," and offering undivided interests in the oil, gas, and other minerals which might be produced on a specified 50-acre tract, were widely distributed through the mails. A number of salesmen were hired "to assist" in the sale of the undivided interests. Between April 28, 1938, and December 5, 1938, when Stowitts severed his connection with the corporation, undivided interests in approximately 20 acres were sold to the public. In many instances, delivery of the instrument evidencing the undivided interests was effected through the mails. During this entire period, no registration statement covering the undivided interests was in effect, and no exemption from registration was available.

I. VIOLATIONS OF SECTIONS 5 (a) (1) AND 5 (a) (2)

In June of 1938, the applicant and Smith were advised by counsel to the Commission, at a conference held at the office of the Commission in New York City, that it was their opinion that the undivided interests which the applicant and Smith were offering for sale were securities within the meaning of the Securities Act of 1933, and that registration thereof was required unless those securities were exempted from registration. This opinion was confirmed in a letter dated June 16, 1938, written by W. J. Kenney, then Chief of the Oil and Gas Unit of the Commission, in response to a written inquiry by G. Kenneth Brown, attorney for the corporation. Applicant concedes that Brown informed him of the contents of the letter received from Kenney.

Thereafter, steps were taken to obviate the necessity of registration by qualifying the issue under Regulation B of the General Rules and Regulations under the Securities Act. A condition to the avail

Regulation B was promulgated by the Commission under Section 3 (b) of the Act, and affords an exemption to fractional undivided interests in oil or gas rights where the aggregate amount at which the offering is issued, offered, or sold does not exceed $100,000 and various specified conditions are met.