FINDINGS AND OPINION OF THE COMMISSION This is a proceeding pursuant to Section 15 (b) of the Securities Exchange Act of 1934 to determine whether or not the registration of Patrick A. Trapp as a broker and dealer should be revoked. After appropriate notice, hearings were held before a trial examiner. Counsel for the Trading and Exchange Division submitted a request for findings and a supporting brief. The trial examiner filed his advisory report and findings of fact, on the basis of which he concluded that the respondent willfully vio lated Sections 5 (a) and 17 (a) of the Securities Act of 1933, and Sections 15 (c) (1) and 17 (a) of the Securities Exchange Act of 1934 and certain rules issued thereunder. The examiner recom mended that the registration of respondent be revoked. Respondent filed no exceptions to the examiner's report and no brief, and did not request oral argument before the Commission. Under Rules X, XI and XII of our Rules of Practice, we may accept the examiner's findings of fact as conclusive. We have, however, made an independent review of the record and we adopt the findings of the examiner, which we find are fully supported by the evidence. These findings fully cover numerous matters which include, in brief, the following: Respondent has been a retail dealer in landowners' oil royalty interests since his registration with us on January 15, 1940. Respondent sold certain oil royalty interests as to which no registration statement was in effect under the Securities Act of 1933, under conditions which made inapplicable the exemptive provisions of Regulation B.1 Such sales violated Section 5 (a) of the Securities Act. Respondent in numerous instances made false representations to customers in the sale of oil royalty interests to them. He stated (among other things) that these securities were "gilt-edged" or a "20% investment" or "selected," or comparable to government securities, or would pay better interest than a bank, or would return the principal and a profit, when in fact he had no reasonable grounds to believe such statements were true. He distributed to several customers a pamphlet containing false and misleading statements to the same or similar effect. To some of his clients respondent stated or implied that the maximum offering price was fixed by the government and that he was offering a bargain by quoting a price lower than the maximum offering price. 2 In selling securities on the basis of such representations respondent violated Section 17 (a) of the Securities Act of 1933 and the provisions of Section 15 (c) (1) of the Securities Exchange Act of 1934 as defined in Rule X-15C1-2 thereunder. 1 Regulation B, if its provisions are complied with, exempts oil royalty interests from the registration requirements of Section 5 of the Act where the maximum offering price of the entire issue is $100,000 or less. Respondent did not comply with the conditions prescribed by Regulation B in that (among other things) he made several sales prior to the effective date of the offering sheet, and in connection with these sales, the reports he filed with us on Form 1-G falsely stated that "a fully effective offering sheet" had been delivered to the customer and that the sales had been made after its effective date. 2 Such a statement is wholly false. Cf. Lawrence R. Leeby, 13 S.E.C. 399 (1943). Respondent in numerous instances charged his customers prices bearing no reasonable relationship to the contemporaneous wholesale price, without disclosing this fact to them. His percentages of mark-up ranged as high as 89.2 percent. Transactions of this character operated as a fraud on customers in violation of Section 17 (a) of the Securities Act of 1933 and the provisions of Section 15 (c) (1) of the Securities Exchange Act of 1934 as defined in Rule X-15C1-2 thereunder. 3 Respondent executed transactions with customers without sending written confirmations to them, in contravention of Section 15 (c) (1) of the Securities Exchange Act of 1934 and Rule X-15C1-4 thereunder. Respondent failed to keep proper books and records as required by Section 17 (a) of the Securities Exchange Act and Rules X-17A-3 and X-17A-4 thereunder. The foregoing violations occurred in transactions which were effected otherwise than on a national securities exchange and were effected by respondent by the use of the mails and means or instrumentalities of interstate commerce. We find that such violations were willful. In view of the circumstances under which these repeated violations occurred we find further that revocation of the respondent's registration as a broker and dealer is in the public interest. An appropriate order will issue. By the Commission: (Chairman Purcell and Commissioners Healy, Pike, O'Brien and McConnaughey). 3ld. Cf. also Charles Hughes & Co., Inc., 13 S.E.C. 676 (1943), affirmed 139 F. (2d) 434 (C.C.A. 2, December 10, 1943). 15 S. E. C. [No. 2002] IN THE MATTER OF CENWEST CORP., DEBTOR Filed January 31, 1944 (In Proceedings for the Reorganization of a Corporation) REPORT OF THE COMMISSION (On the Trustee's Proposed Plan of Reorganization as Amended and the Amendments Suggested Thereto) This is an advisory report of the Securities and Exchange Commission on a plan of reorganization of Cenwest Corp. (referred to herein as the "debtor") proposed by Francis J. Quillinan, trustee, dated August 23, 1943, as amended November 10, 1943. The amended plan, together with amendments thereto suggested by other parties, was referred to this Commission by order of the court dated November 18, 1943, for examination and report pursuant to the provisions of Chapter X of the Bankruptcy Act. It is the conclusion of the Commission that the plan proposed by the trustee as amended is feasible within the applicable statutory and judicial standards, and that it is fair within such standards provided the second mortgagees' interest is treated substantially as recommended in this report. It is also the conclusion of the Commission that the amendments suggested by other parties should not be approved, with the exception of certain features of some of the amendments, the approval of which is recommended herein. I. HISTORY AND NATURE OF DEBTOR'S BUSINESS The debtor was organized in July 1937 under the laws of the State of New York to own and operate the premises known as 101 Central Park West, in the city of New York, in order to carry into effect a plan of reorganization approved by an order, dated June 14, 1937, of the United States District Court for the Southern District of New York. The debtor emerged from that reorganization with a first mortgage of $3,500,000 which represented the senior interest in a previous mortgage of $4,000,000. Junior interests in such previous mortgage, totaling $500,000, were canceled. The mortgage of $3,500,000 against which participating certificates had been issued and guaranteed to the public by The Prudence Company, Inc. was extended to mature January 1, 1943 and the interest 15 S. E. C.- -C. R.-59 rate thereon was reduced to 4 percent per annum. Under the terms of the extended mortgage, certificates of the face value of $8,750 were to be redeemed quarterly, commencing April 1, 1939, in reduction of said mortgage. The plan of reorganization provided that the guaranty of The Prudence Company, Inc., securing the certificates, should not be deemed in any manner realized or discharged. The present issue continues to retain that guaranty and some small distributions have been received from the trustees of the reorganized guarantor.1 The mortgage was subsequently reduced to $3,438,748 by the redemption of certificates in the amount of $61,252. The plan of reorganization also required the delivery of a new second mortgage of $200,000 to the trustees of The Prudence Company, Inc. and Realty Associates Securities Corporation 2 in equal shares. The new second mortgage was to mature on January 1, 1948, and was to bear no interest until maturity but was to bear legal interest thereafter. According to the trustee, the books of the debtor indicate that on December 1, 1938 said mortgage was reduced to $180,079 by agreement between the parties concerned. A proof of claim in this proceeding has been filed by Prudential Equity Corp. for $100,000 and by Realty Associates Securities Corporation for $80,079 on account of the second mortgage. Of the 100 outstanding shares of stock of the debtor, 50 shares are owned by Prudential Equity Corp., and 50 shares by Realty Associates Securities Corporation. Following defaults in the payment of real estate taxes and interest on the first mortgage, both of which were due on October 1, 1940, the then indenture trustee, Empire Trust Company, obtained from the debtor an assignment of rents, and from about November 1, 1940 until June 15, 1942 operated the premises. On or about February 21, 1942 the indenture trustee commenced an action in the Supreme Court of New York County to foreclose its first mortgage. Action towards foreclosure was stayed by the filing on March 17, 1942 of an involuntary petition instituting this proceeding for the reorganization of the debtor under Chapter X of the Bankruptcy Act. The reorganization trustee assumed possession and management of the premises on June 15, 1942. The present capitalization of the debtor is: 3 First mortgage 4% participation certificates due January 1, 1943 $3, 438, 748 180, 079 100 1 Two small distributions on the guaranty agreement, aggregating $14.48 per $1,000 of principal, were made in 1940 and 1942, and the trustee of the debtor has stated that he has been advised that further distributions will be small. (Report of trustee pursuant to Section 167 (5), page 2.) 2 The stock of this company, a former affiliate of The Prudence Company, Inc., is indirectly owned by Reconstruction Finance Corporation. Realty Associates Securities Corporation now in reorganization under Chapter X. 3 In the above-mentioned foreclosure action the indenture trustee declared the unpaid principal due and payable, thereby accelerating the above stated maturity of the mortgage. The Indenture trustee filed a proof of claim in this proceeding for $3,438,748 and interest at 4% from July 1, 1940. The only other claims which have been filed are for small amounts due the city of New York, the State of New York, and the Empire Trust Company, the indenture trustee. The income of the debtor is derived solely from operation of its property at 101-110 Central Park West, consisting of land owned in fee and a 17-story, basement and penthouse apartment building of the so-called luxury type. The building is located on the west side of Central Park West between 70th and 71st Streets, and was erected in 1930. It is constructed of brick, limestone, steel and concrete and is rated as 100 percent fireproof. It contains 104 rentable apartments with 795 rooms. Apartments range in size from 3 to 14 rooms and 1 to 6 baths, with those in the 6-room to 9-room groups predominating. The assessed value of the property for the 1943-44 tax year is $2,900,000. Mark Rafalsky & Company have been managing agents for the building since 1932. The debtor had a segregated account at the Sterling National Bank which amounted to $57,700.14 at November 24, 1943. The trustee had cash on hand as of the same date in the amount of $128,161.23 arising from his operation of the premises. Subsequently an interest distribution at the rate of 22%, or $85,968.70, was paid pursuant to court order on the first mortgage certificates. II. SUMMARY OF THE TRUSTEE'S PLAN AS AMENDED Under the provisions of the trustee's plan, as amended, the prior claims of the city of New York, State of New York and the Empire Trust Company will be paid in cash. The premises and remaining assets of the debtor will be transferred to a new corporation, subject to a first mortgage bond issue in the amount of $687,749.60, which will be distributed to the present first mortgage certificate holders of the debtor, along with the common stock of the reorganized company. Under the plan, as amended, holders of first mortgage certificates will receive the entire issue of new income bonds, at the rate of $20 for each $100 principal amount of old certificates held. In addition, they will receive the entire proposed issue of 68,775 shares of common stock, at the rate of one share for each $50 of old certificates. Any cash remaining after the payment of the expenses of the debtor in reorganization, provision for certain other expenses and $10,000 for working capital will be distributed pro rata to the old first mortgage certificate holders. No provision is made for participation by the holders of the debtor's stock. The second mortgage bondholders are to share pro rata with any deficiency claim of the old first mortgage certificate holders in any free assets. B. PROVISIONS OF THE NEW SECURITIES The principal provisions of the proposed new securities are as follows: Income Bonds-The bonds will be secured by mortgage lien on all of the real property of the reorganized company. The bonds |