ACCOUNTING-Continued

Held under foregoing circumstances premium should have been credited to paid-in surplus only after full payment of par and stated value of securities sold... Page 1062.

SCOPE OF AUDIT

Held that a thorough audit would have required inspection by accountants of registrant's plant and products and appropriate verification of inventory quantities... Page 850.

Held that the requirements of a thorough audit are not met by a review of books and records at a point so far removed from the scene of operations that personal contact with employees engaged in operations and those responsible for bookkeeping entries is not possible. . . Page 850.

Where analysis of development account of mining and smelting company would have disclosed freight charges for shipment of ore from the mine to the mill during a period when company was supposed to have been engaged in development only, and thus would have revealed efforts of management to conceal serious inventory shortage by capitalizing production costs as development, analysis of development account held an essential audit procedure, and failure of accountants to make such analysis held dereliction of duty . . . Page 850.

VALUATION OF PROPERTY

Character of Appraisal

Land

An appraisal of land which failed to take into account prior sales of the property, its assessed value or the sale prices of comparable tracts in the vicinity, held to be misleading... Page 926.

Water Rights

An appraisal of water rights for use by a distillery, where the examination is so cursory as not to disclose pollution of the water which renders it unfit for distillery purposes, held misleading . . . Page 926.

Where valuation of water rights is determined by assuming that an annual saving would result from use of creek water on property instead of city water, and then multiplying the anticipated savings by four, held appraisal reached by such procedure is arbitrary and misleading . . . Page 926.

MISCELLANEOUS

Assertions Regarding Importance of Financial Statements

Assertions improperly belittling the importance of the registrant's financial statements held to render the items in which they appear materially deficient ... Page 127.

Capital Stock Paid-up

Where stock sold in part for notes held until notes paid in full stock was not paid-up within the meaning of Item 19. . . Page 1062.

Estimates of Operating Costs

In the absence of sufficient operating experience, representations concerning estimated operating costs which were contrary to general experience, held to be materially false; also held to be materially misleading for failure to include estimated costs of all anticipated methods of mining property . . . Page 882.

Liabilities

ACCOUNTING-Continued

A finding of trial examiner that a liability of registrant whose maximum amount was $3,750 was "technical", held rejected in the case of a registrant in dire financial straits... Page 1028.

AFFILIATE

DEFINITIONS

Where same persons were controlling officials and/or controlling stockholders of several loan companies held all of such companies were affiliates... Page 1062.

CONTROL INFERRED FROM CONDUCT

"Control", as term is employed in registration statement, is not synonymous with direct operation of an enterprise. The existence of control may be inferred from the conduct of the parties although no direct evidence exists of an agreement by the controlled persons to take orders from the controlling person . . Page 1028.

MATERIAL CONTRACTS

A material contract is one concerning which an average prudent investor ought reasonably to be informed before purchasing the registered security. . . Page 926.

DESCRIPTION OF SECURITIES

MISREPRESENTATIONS CONCERNING SECURITIES TO BE OFFERED
Estimate of Maintenance Charges and Deductions

Where commission is computed on basis which is not in accordance with the ordinary meaning of the words used in the rule of the investment trust fund governing commissions, statement that management is governed by rules of fund held misleading... Page 127.

Where the rules governing the management of an investment trust fund provide that the manager shall be paid 10 percent of distributions from profits as commission and income, and where "profits" and "income" are not otherwise defined held they must be taken to have meanings as generally understood under accepted principles of accounting . . . Page 127.

Method of Determining Return on Investment

Statement that as distributions to holders of units have been in multiples of 25¢ per quarter, any amounts remaining undistributed will be reinvested for the benefit of all units, held to imply that total amount available for distribution will be paid out insofar as distribution can actually be made in multiples of 25¢, and held to be a material misstatement where more than 25¢ per unit of the amount available was retained. . . Page 127.

Statement that management determines the amount available for distribution in accordance with its formula, and then determines the "portion" of the available amount to be set aside for distribution held materially misleading where the "amount set aside for distribution" exceeds the amount "available for distribution" as determined by the formula . . . Page 127.

When determining profits and income of investment trust fund for purpose of cash distributions held "profits" cannot be created by means of an arbitrary formula, which considers only "trading profits" resulting from gains and losses on sales of securities acquired since 1932 and disregards as "capital" gains and losses on sales of securities acquired prior to that date. . . Page 127.

OFFERING PRICE

DISTRIBUTION OF SECURITIESA

Statement that underwritten securities will be offered to the public "at the 'market price'" held deficient where options were outstanding committing the underwriter to provide given numbers of shares at stated prices, even though the underwriter granting the option did not have the optioned shares in his possession at the date of giving options and had received no consideration therefor... Page 1028.

UNDERWRITING CONTRACT

Underwriter's Capacity to Perform

Where underwriter's financial position, known to the registrant, was such, at the effective date of the registration statement, that performance of the underwriter's obligations was "visionary", the bare recital of an underwriting contract, held misleading . . . Page 1028.

UNDERWRITING OF ISSUE

Discounts or Commissions

A statement that "The underwriters reserve the right to buy and sell shares of the stock for the long or the short account in the open market or otherwise," held misleading for failure to disclose an intent to make such purchases on the exchange for the purpose of creating an appearance of increased activity . . . Page 1028. Offering Price

Where stock to be sold in part for exchange of outstanding stock of corporation held misleading to state as price per unit a flat dollar figure as this implies that sales are to be for cash only . . . Page 1062.

Sales of Stock at Less Than Price to Public

Where registration statement calls for list of persons to whom securities are proposed to be offered at prices varying from prices to public, failure to disclose proposed sale of part of registrant's shares to a syndicate or individual at one-half the price to public, held material deficiency ... Page 926.

Underwriter-What Constitutes

One who actively participates in the distribution of securities, touting them to induce purchases, persuades existing security holders to withhold selling in order to facilitate distribution, supplies the names of dealers and "boosters" to the main underwriter, assists in obtaining extensions of a mortgage where foreclosure will embarrass the underwriting and is awarded a percentage of the proceeds to the registrant to be received from the main underwriter, held an underwriter ... Page 1028.

One who, by arrangement with the underwriters, makes purchases on the market in the course of a distribution of underwritten securities for the purpose of creating apparent market activity and maintaining or raising the price level of the security, held to be an underwriter . . . Page 1028.

One who enters into an agreement with the main underwriter constituting him "exclusive selling agent with the power to appoint sub-agents, dealers, and sell wholesale and retail” obligating him to take down specified amounts of shares, and permitting him to retain all proceeds of sales made by him save for an override of a specified amount per share, held to be an underwriter . . . Page 1028.

...

DISTRIBUTION OF SECURITIES-Continued

One who procures the assignment of an underwriting contract from an underwriter who is not able to meet his commitments, who participates actively in procuring listing of underwritten shares, and in the distribution of such shares, who engages in activity calculated to prevent the dumping of securities pending a distribution, and who participates actively in the selection of a president of the registrant and in the disposition of its property pending a distribution of underwritten shares, held to be an underwriter . . . Page 1028.

EXPERTS' REPORTS

FAILURE TO FOLLOW ACCEPTED ENGINEERING METHODS

Incidental panning of unrepresentative material without assay, held not to warrant assumption as to existence of claimed ore values. . . Page 882.

In the absence of standard practices in the production of concentrates, assays of products of concentration, held to be without any evidentiary weight to support assertions of crude ore values ... Page 882.

Lack of sufficient mine openings from which adequate sample-assay data of crude ore material could be derived, meager and nonsystematic sampling, failure to show continuity of ore content on the basis of assays, and absence of studied efforts to check-sample assays, held not to afford adequate basis for any representation of ore values . . . Page 882.

Representation that "a known large high-grade 50% chrome ore body" exists on property, held to be false and misleading where chrome on registrant's property was spotty, did not outcrop continuously, contained low grade areas, was sampled at intervals of one sample for every 20 acres, and claimed percentage of chrome was contradicted by assays .. Page 882.

Representation that alleged gold ore block contained a definite percentage of chrome, held to be materially misleading for absence of proper investigation... Page 882.

MISUSE OF Reports

Where an engineering report filed with the registration statement was based, in part, upon a repudiated report of another expert, registrant's use thereof without disclosing such repudiation, held to be materially misleading... Page 882. USE OF MISLEADING OR UNACCEPTABLE ENGINEERING TERMINOLOGY

Representations regarding "proven" and "probable" ore on registrant's property and estimates of its weight or volume, held to be without foundation and false where sampling was unscientific and unrepresentative in character, and the stage of development of property made adequate sampling impossible . . . Page 882.

WAIVER OF ENGINEER'S CONSENT ON BASIS OF "UNDUE HARDSHIP'

Where "impracticability" of obtaining consent was merely that of getting such consent in time for filing, and "undue hardship" the failure of registrant to receive a reply to its request made by one letter, held application for waiver of consent must be denied . . . Page 882.

WRITTEN CONSENT OF ACCOUNTANT

Omission to include written consent of accountants in registration statement, held materially defective under Section 7 of the Act and Rule 670 thereunder .. Page 926.

HISTORY AND BUSINESS

AFFILIATIONS BETWEEN MANAGEMENT AND BROKER

Where one brokerage firm, which has affiliations with management has had almost all of the brokerage business, statement that "the employment of brokers is entirely within the discretion of the management" held insufficient . . . Page 127.

CONTROL-WHAT CONSTITUTES

Where (1) board of directors of registrant failed to protest the issuance of securities in possible violation of the Act when such issuance was at the instance of the underwriters, (2) the president of the registrant nominated by the underwriters aided in the preparation of such certificates, (3) the president consented to turning over a stock list at the request of the underwriters, (4) the underwriters were able to manipulate a transaction in which shares were borrowed from a large stockholder to defray underwriting expenses so that primary liability for the loan devolved on the registrant, and (5) persons attempting to deal with the registrant dealt in fact with the main underwriter who indicated that the officers and directors of the registrant were "his nominecs", held underwriters controlled the registrant . . . Page 1028.

Where underwriters selected a new president for the registrant, paid him part of his compensation, instructed him to report to them, gave him instructions as to the operation of the business of the registrant and required him to furnish "good news" of field operations to aid in the distribution of underwritten securities, held failure to state that underwriters controlled issuer rendered registration statement materially false . . . Page 1028.

ESTIMATE OF DAILY OUTPUT

Statement that registrant proposes to mine by the hydraulic method "a total of 2,000 tons daily," held to have no rational basis and to be materially misleading where the tonnage which might be washed was limited, under registrant's application for a permit to appropriate and divert water, to a lesser daily tonnage... Page 882.

FAILURE TO DISCLOSE ADVERSE INTERESTS OF OFFICERS AND DIRECTORS

Where registrant and its affiliates were exploited by officers and directors to exact profits for themselves far in excess of profits of the corporations concerned held registration statement as a whole deficient in not disclosing this condition... Page 1062.

FINANCING

Refusal of Exchange to List

Where a former underwriter of the registered issue sold temporary certificates which provided that they could be exchanged for listed shares if listing should be obtained, and sales of such temporary certificates occurred after the exchange on which listing was proposed refused to list the securities, failure of the amended registration statement to set forth the full facts concerning these sales held materially misleading. Page 1028.

6 S. E. C.