Full opinion text
THURMOND CLARKE, District Judge. In ruling in this matter, the Court wishes to alert the public to a problem of grave concern to many citizens. This trial has caused many of us to become aware of a serious situation in a very vital part of our economy — the home building industry. We have seen in great detail here the unscrupulous and entirely high-handed manner in which certain speculators mislead countless small investors, and countless other small home buyers, to the mutual detriment of both. These “10%ers” have developed an ingenious and a thoroughly devious scheme, relying upon what they think to be loopholes in the law regulating those entrusted with investment funds. It is their good fortune that this scheme has not yet come tumbling down around their heads, like the frail cardhouse structure it is, but instead has been arrested by the diligent efforts of the S. E. C. Aside from the unsoundness of the basic plan, this case has unearthed many totally unethical practices on the part of the individuals involved; practices which run a very close line between criminal prosecution and civil actions for fraud. The Court regrets that the processes of our law have worked so slowly, despite the best efforts of those concerned, and that the hearths of many innocent homeowners and the savings of many innocent investors have been placed in jeopardy. This is the indicated judgment of the Court; however this is not to be construed as an immediate judgment or order. The judgment of the Court will be entered on the basis of definite findings of fact and conclusions of law. The Commission is directed to lodge such findings of fact, conclusions of law, and proposed judgment by May 11, 1960, at 10:00 a. m. Final Judgment of Permanent Injunction and Order Appointing Receiver This action came on for hearing before the Court between October 6, 1959, and May 3, 1960, and the Court having considered all the evidence introduced in the course of the trial on the merits, and the arguments of counsel, and the Court having now entered Findings of Fact and Conclusions of Law to the effect that the evidence sustains the allegations of each Count of the Amended and Supplemental Complaint for Injunction and for Appointment of Receiver, and the Court having found that the Securities and Exchange Commission is entitled to a permanent injunction restraining and enjoining the defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Markets, David Farrell, Oliver J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr. and Stanley C. Marks from engaging in acts or practices which constitute or will constitute violations of Section 5(a) and (c) of the Securities Act of 1933, 15 U.S.C.A. § 77e(a) and (c), Section 17(a) of the Securities Act of 1933,15 U.S.C.A. § 77q(a), Section 15(c) (1) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78o(c) (1), and Rule 17 CFR 240.-15cl-2 thereunder, and Section 15(a) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78o(a), as demanded by the Securities and Exchange Commission, and that a receiver should be appointed for the defendants Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, and it appearing that the Court has jurisdiction of the parties hereto and the subject matter hereof— I It Is Ordered, Adjudged and Decreed that the defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Markets, David Farrell, Oliver J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr. and Stanley C. Marks, their officers, agents, servants, employees, attorneys, assigns, and each of them, and all persons acting in concert or participation with them, be and they hereby are permanently restrained and enjoined from, directly or indirectly— A) making use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell securities, namely, evidences of indebtedness, investment contracts or receipts for or guarantees of such securities, issued by the defendants Los Ange-les Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange or Trust Deed & Mortgage Markets, or any other securities, including trust deed or mortgage notes or other evidences of indebtedness created, issued or acquired by said defendants in connection with any investment plan, program or arrangement heretofore designated by the defendants as a Secured 10% Earnings Program, Secured 10% Earnings Reinvestment Program or Secured 10% Earnings Accounts, or any similar plan, program or arrangement (hereinafter throughout this decree designated as the Secured 10% Earnings Program), based upon the sale to members of the investing public of discounted trust deeds or mortgages covering residential or other real estate situated within the State of California or elsewhere, through the use or medium of a prospectus or otherwise; or B) carrying such securities or causing them to be carried through the mails or in interstate commerce, by means or instruments of transportation, for the purpose of sale or for delivery after sale, unless and until a registration statement as to such securities is in effect with the Securities and Exchange Commission; or C) making use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell such securities, through the use or medium of a prospectus or otherwise, unless and until a registration statement as to such securities has been filed with the Securities and Exchange Commission, or while a registration statement as to such securities is the subject of a refusal order or stop order issued by the Securities and Exchange Commission, or (prior to the effective date of such registration statement) any public proceeding or examination under Section 8 of the Securities Act of 1933, 15 U.S.C.A. § 77h. II It Is Further Ordered, Adjudged and Decreed that the defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Markets, David Farrell, Oliver J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr. and Stanley C. Marks, their officers, agents, servants, employees, attorneys, assigns, and each of them, and all persons acting in concert or participation with them, be and they hereby are permanently restrained and enjoined from, directly or indirectly— A) making use of any means or instruments of transportation or communication in interstate commerce or of the mails, in the offer or sale of the securities described in Section I hereof, to engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon the purchasers of such securities, by making through newspaper or other advertisements, radio or television broadcasts, brochures, pamphlets, sales letters or other literature, any incomplete, ambiguous, flamboyant, misleading, deceptive or untrue statement of material fact (by means of statistical data, charts, graphs, comparisons, or otherwise) meaning or intending to imply that the Secured 10% Earnings Program— a) makes it possible for investors “to enjoy the highest return obtainable with full protection and security offered by Deeds of Trust secured by Real Estate b) affords investors an opportunity “to buy an income for life without reducing [their] principal” through investments in “prime” deeds of trust; c) allows investors “an income from accumulated savings, earning [them] $100 per month on $12,000, or $50 a month on $6,000, or $25 on $3,000,” enabling investors “to build a nest egg for retirement,” or “build an estate”, with, for example, an investment of $1,000 with $100 added per month for 120 months accumulating to $20,484; d) assures investors of continuous “10% earnings from [their] savings;” e) virtually guarantees investors against loss; or making any untrue or misleading statement to the effect that— f) Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange or Trust Deed & Mortgage Markets are the oldest and largest institutions “in the world” or “in America” offering such an investment plan, with “years of experience” in charting the course of investors “to personal security and more enjoyment from life;” g) Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange or Trust Deed & Mortgage Markets are “Investment Bankers;” h) “the only legal difference between a first or second deed of trust is the fact that one was recorded prior to the other;” i) the “purpose of the ‘Exchange’ maintained by Los Angeles Trust Deed & Mortgage Exchange, is to provide a clean, ethical market place for or ‘exchange’ in which the public can buy and sell notes secured by deeds of trust, just as the ‘Stock Exchange’ does for stocks and bonds,” by means of a trading board and facilities similar to those employed by national securities exchanges, or that “just as the stock market has provided a liquid market for shares of stock in American corporations and changed the course of American business so the Trust Deed & Mortgage Exchange was started to provide a liquid market place for notes secured by deeds of trust;” j) the funds received from investors are “deposited in a separate trust account * * k) the books and records of Los An-geles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange or Trust Deed & Mortgage Markets are “audited monthly by an independent Certified Public Accounting firm which also acts as auditor for savings and loan associations,” or any other independent accountant; l) by continuously reinvesting their “10% Earnings”, investors may “build an estate” from $1,000 to $7,328.07 over 20 years, and by adding $100 monthly to their account they should experience a cumulative growth of $75,936.88 over 20 years; m) no investor has ever sustained a loss or failed to receive a “full 10% earnings;” n) Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets at all times use their own funds in order to acquire notes secured by deeds of trust for inventory or “warehouse” to be sold to investors, or that the funds of investors are never used to acquire such securities for “warehouse” or inventory; or any untrue or misleading statement of material fact concerning— o) the financial condition, liquidity or solvency of Los Angeles Trust Deed & Mortgage Exchange or Trust Deed & Mortgage Markets; p) the “liquidation value” or the “estimated liquidation value” of the accounts of investors; q) the appraised values of the real estate securing trust deed notes; r) the circumstances under which and the extent to which Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets are subject to or amenable to supervision by any state or federal regulatory agency; s) the adequacy of any “reserve for losses” or “contingency reserve” or any similar “reserve” established by said corporate defendants; t) the terms or conditions of any trust deed or mortgage, including its maturity or “anticipated term”, any subordination clause or agreement to which such obligation may be subject, or the nature and amount of any prior or subsequent lien applicable thereto; u) the quality of trust deeds sold to investors or introduced into their accounts, or the underlying equities of the owners of the real estate covered thereby; v) the use of funds entrusted to the defendants Los Angeles Trust Deed & Mortgage Exchange or Trust Deed & Mortgage Markets, in financing real estate subdivisions in which David Farrell or any other officer or director of said defendants has a direct or indirect “participation” or other interest; w) the debit balances in investors’ accounts ; or any other untrue or misleading statement of similar meaning, object or purport ; or B) in offering for sale or selling such securities, by the means and in the manner described in Section II A, omitting to state any material fact, with reference to such securities necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, concerning— a) the speculative nature of such investments ; b) the method used in arranging for the monthly reinvestment of investors’ funds, or the lack of certainty that monthly collections or additions to investors’ accounts can be continuously reinvested in “prime” deeds of trust, in order to establish a capital appreciation measured by “earnings” of 10% compounded monthly over' any substantial length of time ; c) the distinctions and differences between first deeds of trust and second deeds of trust; d) the distinctions and differences between trading in fungible securities listed and registered on national securities exchanges offering auction markets in such securities, subject to regulation and control by such exchanges and by federal and state regulatory agencies, including the Securities and Exchange Commission, and the “open market trading”, on an option basis, in notes secured by deeds of trust conducted by defendants through Los Angeles Trust Deed & Mortgage Exchange, or the entire lack of any correlation between them; e) the losses sustained by investors; f) the source of funds used by defendants to inventory or “warehouse” notes secured by deeds of trust; g) the financial condition or solvency of Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange or Trust Deed & Mortgage Markets; h) the circumstances under which the Securities and Exchange Commission brought this action in this Court charging all defendants with violations of the registration and anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, and the defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets with violations of the broker-dealer registration requirements of the Securities Exchange Act of 1934, the status- of such proceedings, or the findings or rulings of this or any other Court with reference thereto; i) the background, integrity or qualifications of the officers or directors of or personnel employed by the defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange or Trust Deed & Mortgage Markets, including the fact that C. W. Cannon, former comptroller of Los Angeles Trust Deed & Mortgage Exchange, has been convicted of grand theft and disbarred from the practice of law, and that David Farrell, controlling stockholder and managing officer of Los An-geles Trust Deed & Mortgage Exchange is a former bankrupt; or the omission of any other material fact of similar object or purport; or C) in offering for sale or selling such securities, by the means and in the manner described in Section II, soliciting or accepting funds from members of the investing public, through representations that all such funds are deposited in a special trust account and may be withdrawn only after the defendants have selected a note and deed of trust from inventory or “warehouse” for assignment to each investor and said investor has approved and accepted such selection, and that, pending such acceptance, funds so deposited by investors may be withdrawn by them at any time and the purchase authorization to defendants can-celled, when in fact, defendants do not so maintain investors’ funds in a special trust account, but on the contrary, said defendants commingle such trust funds with the general funds of the defendants Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, and misappropriate and otherwise misuse funds entrusted to said corporate defendants; or in so soliciting or receiving funds or deposits from investors, omitting or otherwise concealing the fact that the defendants Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets are insolvent or unable to meet their current liabilities, and the further fact that funds received by defendants from investors are constantly endangered and in jeopardy; or any other untrue or misleading statement of similar meaning, object or purport; or III in offering for sale or selling the securities described in Section II, by the means and in the manner stated therein, obtaining money or property by means of any untrue statement of material'fact or omission to state any material fact specified in Section II. IV It Is Further Ordered, Adjudged and Decreed that’ the defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, as brokers and dealers, their officers, agents, servants, employees, attorneys, assigns, and each of them, and all persons acting in concert or participation with them, be and they hereby are permanently restrained and enjoined from, directly or indirectly— making use of the mails or of any means or instrumentalities of interstate commerce to effect transactions in, or to induce the purchase or sale of, securities (other than commercial paper, bankers’ acceptances, or commercial bills) otherwise than on a national securities exchange, by means of any manipulative, deceptive, or other fraudulent device or contrivance— a) by engaging in any of the acts or practices specified in Section II; or b) by representing by the use of the word “Exchange” in the respective corporate designations of the defendants Los Angeles Trust Deed & Mortgage Exchange or Trust Deed & Mortgage Exchange, or in any other way, that either of such defendants is a securities exchange when such defendant is not a securities exchange. V It Is Further Ordered, Adjudged and Decreed that the defendants Los Angeles Trust Deed & Mortgage Exchange, Truist Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, as brokers or dealers (whose business is not exclusively intrastate), their officers, agents, servants, employees, attorneys, assigns, and each of them, and all persons acting in concert or participation with them, be and they hereby are permanently restrained and enjoined from, directly or indirectly— making use of the mails or of any means or instrumentalities of interstate commerce to effect transactions in, or to induce the purchase or sale of, securities (other than exempted securities or commercial paper, bankers’ acceptances or commercial bills) otherwise than on a national securities exchange, unless and until such defendants are registered with the Securities and Exchange Commission, in accordance with Section 15 (b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78o(b). ****** It Is Further Ordered, Adjudged and Decreed that Pat A. McCormick, of Los Angeles County, California, be and he hereby is appointed receiver of Los An-geles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, with directions to accomplish the orderly liquidation of Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, subject to his submission of a good and sufficient bond in the amount of $250,000, conditioned upon the faithful performance of his duties as said receiver, and having taken the oath required by law and being otherwise qualified. It Is Further Ordered, Adjudged and Decreed that said receiver shall take immediate custody, control and possession of all of the funds, property, premises and other assets of or in the possession or under the control of the defendants Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, wheresoever situated, with full power to sue for, collect, receive, and take into possession all goods, chattels, rights, credits, monies, effects, lands, books and records of account, and other papers and documents of said defendants, and of investors whose accounts have been established with such defendants under defendants’ Secured 10% Earnings Program or otherwise, which are now held or under the control of said defendants; to conserve, hold and manage all such assets, pending further order of this Court, in order to prevent irreparable loss, damage and injury to investors, to conserve and prevent the further withdrawal and misapplication of funds entrusted to said defendants; to obtain an accounting thereof; to determine, adjust and protect the equities of thousands of investors whose savings have been entrusted to Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets; and to prevent further violations by defendants, their officers, agents, servants, employees, attorneys and assigns of Section 5(a) and (c) of the Securities Act of 1933, 15 U.S.C.A. § 77e(a) and (c), Section 17(a) of the Securities Act of 1933, 15 U.S.C.A. § 77q(a), Section 15(c) (1) of the Securities Exchange Act of 1934, 15 U.S. C.A. § 78o(c) (1), and Rule 17 CFR 240.15c 1-2 thereunder, and Section 15 (a) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78o(a), as specified in Sections I, II, III, IV and V hereof. It Is Further Ordered, Adjudged and Decreed that said receiver be and he hereby is authorized to make such payments and disbursements from the funds so taken into his custody, control and possession or thereafter received by him, and to incur such expenses as may be necessary and advisable in discharging his duties as receiver. It Is Further Ordered, Adjudged and Decreed that the defendants Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, their officers, agents, managers and employees, be and they hereby are commanded and required to deliver over to said receiver possession and custody of all funds, securities, including trust deeds or mortgage notes, property, premises, and other assets, and all books and records of accounts, title documents, and other papers of said defendants, and all funds, trust deeds and mortgages, and other assets belonging to investors now held by said defendants under the Secured 10% Earnings Program, or otherwise, and said defendants, their officers, agents, managers and employees, be and they hereby are enjoined and restrained from interfering with said receiver taking such custody, control and possession, and from interfering in any manner, directly or indirectly, with such custody, possession and control by said receiver. It Is Further Ordered, Adjudged and Decreed that said receiver be and he hereby is authorized to engage and employ competent accountants and appraisers to audit and investigate the books, records and accounts of said defendants Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, and to evaluate the assets of said defendants and to submit suitable reports of such audit, appraisal and evaluation. The appointment of such accountants and appraisers and the nature of their compensation shall be subject to the approval of the Court. It Is Further Ordered, Adjudged and Decreed that said receiver shall have full power to resist and defend all suits, actions, claims and demands which may now be pending or which may be brought or asserted against the defendants Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets. It Is Further Ordered, Adjudged and Decreed that said receiver, and any counsel whom the receiver may select, subject to the approval of the Court, shall be entitled to compensation from the assets now held by or in the possession or control of, or which may be received by the defendants Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, in an amount or amounts commensurate with their duties and obligations in the circumstances. It Is Further Ordered, Adjudged and Decreed that the Court' reserves the right to make and enter such further orders or decrees, upon application of said receiver or otherwise, that may be necessary for the guidance of said receiver in his administration of the receivership herein established. It Is Further Ordered, Adjudged and Decreed that the Court reserves jurisdiction to determine whether Trust Deed & Mortgage Exchange shall be included within the receivership established herein, and, pending report to the Court by the receiver appointed for Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, the defendant Trust Deed & Mortgage Exchange, its officers, agents, attorneys and. employees, are hereby ordered and directed to cooperate with and assist said receiver for Los Angeles Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets in his administration of the receivership herein established. Findings of Fact and Conclusions of Law I BACKGROUND STATEMENT A. Pleadings 1. On March 24, 1958, the Securities and Exchange Commission (“SEC”) filed a complaint to enjoin Los Angeles Trust Deed & Mortgage Exchange (“LATD”), Trust Deed & Mortgage Exchange (“TD&ME”), Trust Deed & Mortgage Markets (“TD&MM”), David Farrell, Oliver J. Farrell, Roy A. Bonner and C. W. Cannon from engaging in acts and practices constituting violations of Section 5(a) and (c) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C.A. § 77e(a) and (c), (Count I); Section 17 (a) of the Securities Act, 15 U.S.C.A. § 77q(a), (Counts II and III); Section 15 (c) (1) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C.A. § 78o(c) (1), and Rule 17 CFR 240.15cl-. 2 thereunder, (Count IV), and Section 15(a) of the Exchange Act, 15 U.S.C.A. § 78o(a), (CountV). 2. The several defendants were charged in Count I of the original complaint with violating Section 5(a) and (c) of the Securities Act, 15 U.S.C.A. § 77e(a) and (c), in offering and selling, through the use and medium of a prospectus and otherwise, certain securities described as “evidences of indebtedness, investment contracts and receipts for and guarantees of such securities, issued by the defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, arising out of and in connection with the offering for sale and selling by the defendants of promissory notes secured by deeds of trust covering residential and other real estate situated within the State of California, in accordance with an investment plan and program involving various collateral agreements and undertakings by the defendants Los Angeles Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Exchange and Trust Deed & Mortgage Markets, designated by the defendants as a ‘Secured 10% Earnings Program’ and ‘Secured 10% Earnings Reinvestment Program,’ ” and in delivering such unregistered securities after sale. 3. The same defendants were charged in Count II with violating Section 17(a) (3) of the Securities Act, 15 U.S.C.A. § 77q(a) (3), in that in offering and selling the same securities they were engaging in “transactions, practices and a course of business which operates and would operate as a fraud and deceit upon the purchasers of such securities,” specifying ten areas of misrepresentation and four areas of concealment of material facts with respect to the investment plan and the securities offered thereunder. 4. The same defendants were charged in Count III with violating Section 17(a) (2) of the Securities Act, 15 U.S.C.A. § 77q.(a) (2), in obtaining money and property through the sale of the same securities by means of the untrue and misleading statements specified in Count II. 5. The same defendants were charged in Count IV with violating Section 15(c) (1) of the Exchange Act, 15 U.S.C.A. § 78o(c) (1), and Rule 17 CFR 240.15cl-2, in that they were engaging in “manipulative, deceptive and other fraudulent devices and contrivances,” by committing the acts and practices specified in Counts II and III, and, in using in the corporate designations of LATD and TD&ME, the term “Exchange.” 6. The defendants were charged in Count V with violating Section 15(a) of the Exchange Act, 15 U.S.C.A. § 78o(a), by engaging in business as brokers and dealers in securities without registration with the SEC, in accordance with Section 15(b) of the Exchange Act, 15 U.S. C.A. § 78o(b). 7. Counts I, II, III, IV and V each contained appropriate allegations that the violations alleged involved the use of the mails and the means and instrumen-talities of interstate commerce. 8. The complaint alleged jurisdiction in this Court under Section 22(a) of the Securities Act, 15 U.S.C.A. § 77v(a), and Section 27 of the Exchange Act, 15 U.S. C.A. § 78aa. 9. On April 9, 1958, the defendants filed an answer denying generally all allegations of the complaint, and setting forth certain affirmative defenses. 10. Pursuant to an order of Court, duly obtained, on October 8, 1958, the SEC filed an amended and supplemental complaint, elaborating upon the misrepresentations of material facts specified in Count II, and alleging for the first time that the corporate defendants were misappropriating funds entrusted to them by investors under the Secured 10% Earnings Program, that the corporate defendants were insolvent and unable to meet their current liabilities, and that funds received by them from “investors . . . have been and are in jeopardy.” 11. The amended complaint enlarged the demands made in the original complaint to include a request for the appointment of a receiver for the three corporate defendants. The amended complaint also named Thomas Wolfe, Jr. and Stanley C. Marks as additional defendants. 12. Count II of the amended and supplemental complaint specified fourteen areas in which the defendants have affirmatively misrepresented the Secured 10% Earnings Program: a) that it affords investors an opportunity to buy an income for life without reducing their principal through investments in “prime deeds of trust”; b) that it makes it possible for investors to enjoy the highest return obtainable with full protection and security; c) that through the “Magic of Compound Interest” it constitutes a safe and secure method of achieving rapid capital appreciation up to 632.8% over twenty years as compared with a growth of 81.4% on 3% bank deposits and 121.6% on 4% savings and loan deposits; d) that it enables investors to “build a nest egg for retirement,” with $100 a month invested for 20 years at 10% compounded monthly accumulating to $20,484, “if all principal and interest are kept fully working”; e) that it is sponsored and offered by the “oldest and largest” institution offering such an investment plan “with years of experience” in charting the course of investors to “personal security and more enjoyment for life”; f) that it offers a virtual guarantee against loss and a “full, firm return” ; g) that the only legal difference between a first and second trust deed is that one is recorded prior to the other; h) that it insures investors continuous 10% earnings on their savings; i) that it is sponsored by an “Exchange” providing a “clean, ethical market place” or Exchange “where trust deed notes may be bought and sold, just as the Stock Exchange does for stocks and bonds,” and which provides “just as the stock market does” a liquid market in trust deed notes; j) that it is sponsored by “Investment Bankers”; k) that it constitutes an arrangement under which investors’ funds are “deposited in a separate trust account . . .”; 1) that its sponsors are audited by an independent certified public accounting firm; m) that no investor has ever sustained a loss or failed to receive a full 10 % earnings; n) that the corporate defendants use their own, rather than the funds of investors, to acquire trust deed notes for inventory or “warehouse.” 13. Count II of the amended complaint also specified nine areas of concealment and omission of material facts with respect to the Secured 10% Earnings Program: a) the speculative nature of such investments; b) the method used in effecting reinvestments and the lack of certainty that investors’ funds can be continuously reinvested in prime deeds of trust; c) the legal distinctions between first and second deeds of trust; d) the distinctions between trading in fungible securities listed on regulated national securities exchanges and the defendants’ “open market trading” in trust deed notes; e) the losses sustained by investors; f) the sources of funds used to inventory or “warehouse” trust deed notes; g) the financial condition of the corporate defendants; h) the legal action brought by the SEC; i) the background, integrity and qualifications of officers and personnel of the corporate defendants. B. Preliminary Proceedings 1. The SEC, on October 8, 1958, filed a motion for a preliminary injunction and for the appointment of a receiver. On October 14, 1958, the defendants filed a motion for immediate trial, and the Court tentatively set the action for trial on the merits on December 9, 1958. By agreement, the hearing on the motion of the SEC was begun on October 17, 1958, and continued intermittently, as the calendar of the Court permitted, until November 7, 1958, when the Court granted the motion of the SEC. The defendants immediately filed notice of appeal. 2. The order of the Court entering a preliminary injunction and appointing a receiver was stayed first on November 10, 1958, by the Honorable Stanley N. Barnes, Judge of the United States Court of Appeals for the Ninth Circuit, pending a hearing before that Court on the motion of the defendants for a stay. On November 13, 1958, the Court of Appeals granted a further interim stay, and on November 17, 1958, entered an order staying the preliminary injunction and order appointing a receiver until its further order. The stay order specially assigned the appeal for hearing on the merits on January 23, 1959, and shortened the time for the filing of briefs. The stay order, like the two earlier interim stay orders, included an order restraining the defendants from withdrawing funds or assets, including trust funds, of the corporate defendants, except in the regular and ordinary course of business. 3. On February 17, 1959, the Court of Appeals reversed the order of this Court granting the motion of the SEC for a preliminary injunction and for the appointment of a receiver and remanded the matter for trial on the merits on the issues presented. 264 F.2d 199. The restraining order theretofore entered by the Court of Appeals was continued in effect. 4. Following disposition of a number of discovery motions, including a motion of the SEC, which the Court granted, for an order under Rule 37(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A., for the imposition of sanctions ■against the defendants LATD and David Farrell, including the striking of the answer as to those defendants and taking as established, as to them, of certain facts claimed by the SEC, because of the contumacy of the two defendants in refusing to comply with an order of the Court granting the SEC access to certain books and records of LATD, the trial of this action was begun on October 6, 1959. Two days later, on October 8,1959, the defendants, pursuant to leave duly granted, applied to the Court of Appeals for writs of prohibition and mandamus prohibiting this Judge from exercising any further jurisdiction in this litigation, commanding him to vacate his earlier order, entered after the remand from the Court of Appeals, striking affidavits of bias and prejudice filed .by the defendants David Farrell and Oliver J. Farrell, and commanding him to vacate his order under Rule 37(b). At the same time, the defendants filed notice of appeal to the Court of Appeals and a motion to stay further proceedings in this Court. Further proceedings before this Court were suspended pending action of the Court of Appeals. 5. This Judge filed a return with the ' Court of Appeals to the petition for writs of prohibition and mandamus, and designated counsel for the SEC to appear for him in opposition to the petition. On October 16, 1959, the Court of Appeals denied the motion to stay proceedings in this Court, denied the petition for a writ of prohibition and mandamus and dismissed, sua sponte, the “purported appeal” from the order of this Court under Rule 37(b), as being interlocutory and not constituting a final decision under 28 U.S.C.A. § 1291 or § 1292. 6. On October 23, 1959, this Court, on defendants’ motion, vacated its order under Rule 37(b). The considerations which impelled the Court to vacate the order are fully set forth in an opinion reported in 24 F.R.D. 460. After carefully weighing all the evidence received in the course of this lengthy trial, the Court is convinced of the soundness of the course which, as set forth in the opinion vacating the order under Rule 37(b), the Court felt compelled to follow, notwithstanding the contumacious conduct of LATD and David Farrell. 7. The trial on the issues before the Court was resumed on October 27, 1959. The trial consumed thirty-seven trial days. The trial transcript runs to 3,581 pages, exclusive of lengthy hearings on pre-trial motions. A total of 175 exhibits were introduced on behalf of the SEC, while the defendants introduced a total of 45 exhibits. It is on the basis of this extensive record that the Court enters the following findings of fact and conclusions of law. II THE DEFENDANTS A. Los Angeles Trust Deed & Mortgage Exchange 1. LATD is a corporation organized under the laws of the State of California on January 28, 1955, with an authorized capital of $500,000, represented by 500,-000 shares of common stock, $1 par value, of which 100,000 shares (including 50,-000 promotion shares issued to the defendant David Farrell) are issued and outstanding. David Farrell, President and Chairman of the Board, owns 77,400 of the 100,000 shares. Thomas Wolfe, Jr., who holds 1,050 shares, is the only other stockholder defendant. 2. Oliver J. Farrell, Thomas Wolfe, Jr., and Stanley C. Marks are, respectively, Vice-President and Secretary-Treasurer and Director, Assistant to the President, and Comptroller of LATD. Roy A. Bonner was a Vice-President and Comptroller of LATD until May, 1958, when he resigned. B. Trust Deed & Mortgage Exchange 1. TD&ME, also a California corporation, all of whose stock is held by David Farrell, is “national coordinator” of defendants’ Secured 10% Earnings Program, a plan based upon the sale to investors of discounted, negotiable promissory notes secured by second deeds of trust, or first deeds of trust subject to subordination to construction loans, covering real estate situated within the State of California. 2. TD&ME and LATD have the same officers and directors. TD&ME as “national coordinator” does not sell trust deed notes directly to the public, but grants franchises to subsidiaries and affiliates to offer the investment plan to members of the public. At the present time the only “franchised affiliates” are LATD, TD&MM, a wholly owned subsidiary of LATD, and Colorado Trust Deed & Mortgage Markets, all of whose stock is owned by David Farrell. 3. TD&ME receives 10% of the gross profits realized by its “franchised affiliates” from the sale of trust deed notes to members of the public for its services as “national coordinator” of the investment plan. All advertising of the program is done under the sig-cut or insignia of TD&ME. 4. TD&ME and LATD maintain executive and sales offices in Los Angeles, California, and have established sales offices in San Francisco, Oakland, San Diego, Santa Barbara, Pasadena and Beverly Hills, California, and Denver, Colorado. C. Trust Deed & Mortgage Markets 1. TD&MM is a California corporation, none of whose stock has been issued. If and when the stock of TD&MM is issued, it will become a wholly owned subsidiary of LATD. At this time, TD& MM is merely a department of LATD. 2. Until August, 1959, TD&MM was a mere corporate shell having neither assets nor liabilities. 3. In August, 1959, LATD “spun off" its out-of-state accounts to TD&MM, and since that time, except in Colorado, the offering of the Secured 10% Earnings Program outside of California has been carried out in the name of TD&MM. Ill THE SECURED 10% EARNINGS PROGRAM A. Introduction 1. From the outset of this litigation, the defendants have sought refuge in semantics. By deleting the words “program” and “plan” from their more current brochures and advertisements, they have sought to avoid classification of the instruments issued to investors as “investment contracts” within the definition of “securities” in Section 2(1) of the Securities Act, 15U.S.C.A. § 77b(1), and Section 3(a) (10) of the Exchange Act, 15 U.S.C.A. § 78c(a) (10). Similarly, the current brochure contains the naive caveat, describing the “Purchase Authorization” under which investors entrust their funds to LATD, “It is not an investment contract binding you to any definite length of time or any specific monthly amount”. 2. The current brochure even sedulously avoids the innocent word “account.” The managing officers of the corporate defendants have testified, with singular unanimity, that neither LATD nor TD&ME, the “national coordinator” of the Secured 10% Earnings Program, has any meaningful or integrated investment “program” or “plan,” and does not so represent to the investing public. They have even denied, with equal unanimity, under oath, that LATD establishes and maintains “accounts” for the 8,000 or more investors who have entrusted their funds to LATD, insisting that LATD does not establish “accounts” for investors, but merely accepts purchase authorizations from “customers,” and that each of the many thousands of investors has devised and is carrying out his own individual investment plan. These contentions would be merely ludicrous if it were not for the fact that, in testifying, the defendant officers repeatedly fenced with counsel for the SEC and evaded answering categorical questions for the sole reason that the questions, unavoidably, included the word “program,” “plan,” “investors” or “accounts.” They thereby delayed and interfered with the progress of the trial. 3. The defendants’ investment plan is referred to hereinafter as the Secured 10% Earnings Program. 4. It is absolutely clear, and the Court so finds, that nothing in the record, except the unwarranted assertions of counsel for the defendants, suggest that the SEC is attempting to control or regulate the entire mortgage loan industry, or to extend its jurisdiction beyond applicable statutory limitations. On the contrary, the evidence establishes that the SEC seeks only to test the character of the instruments evidencing the Secured 10% Earnings Program, a new and distinctive method of securing public financing of real estate subdivisions, by “the terms of the offer, the plan of distribution, and the economic inducements held out to the [investors],” and to measure the defendants’ offering to the public by “what [it is] represented to be.” The quoted language is from S. E. C. v. C. M. Joiner Leasing Corporation, 1943, 320 U.S. 344, 352, 353, 64 S.Ct. 120, 124, 88 L.Ed. 88. B. Essential Elements of the Program 1. The Secured 10% Earnings Program is made up of two interdependent and integrated elements. The first element of the investment plan, as described by the defendants in brochures, other selling literature and through newspaper, magazine, radio and television advertising, involves the offer and sale to members of the public of notes secured by deeds of trust covering residential and other real estate situated within the State of California. The deeds of trust securing the notes are either second deeds of trust subject to a first deed of trust, or first deeds of trust containing a subordination clause under which they are to be subordinated and become subject to obligations resulting from construction loans. 2. Under the Secured 10% Earnings Program, LATD sells a trust deed note to the investor at a price which the defendants represent to the investor will “earn” 10% per annum on the amount invested, based upon the interest rate stated in the note, the discount allowed the investor from the unpaid principal balance of the note, and the “anticipated term” of the note. A substantial number of the trust deed notes sold by LATD do not contain a fixed maturity date, but merely establish the principal sum due, the rate of interest, and the amount to be paid monthly, and provide that monthly installments shall continue until the entire obligation is satisfied. These are known as “until paid notes” and are identified on the confirmations sent by LATD to investors by the symbol “TP.” 3. LATD arbitrarily establishes within a framework of “anticipated term” such variables as the amount to be paid monthly, the principal amount due, and the interest rate, in calculating the discount to be allowed the investor in order that the amount invested will “yield” or “earn” 10% in accordance with its “earnings” formula. Nothing in the brochures, sales literature or other advertising contains any definition or explanation of the significance of the arbitrarily assumed “anticipated term” in the computation of yield, nor is the investor advised of the actual maturity of trust deed notes running until paid. 4. A substantial number of other trust deed notes sold under the Secured 10% Earnings Program are similar to the notes running “until paid,” but carry a definite maturity date, with the result that, at maturity, a large percentage of the principal amount becomes due and payable. This final sum is known as a terminal or “balloon” installment. When a note of this nature matures, the maker or trustor is required to liquidate the entire principal amount due or arrange for refinancing of the obligation, in order to avoid foreclosure. 5. A substantial number of the trust deed notes sold under the Secured 10% Earnings Program are known as “interest only” obligations. By the terms of such notes, the stated rate of interest is payable monthly or quarterly, with the entire principal amount due and payable at a stated maturity date. 6. A lesser number of the trust deed notes sold to investors by LATD are conventional notes, carrying a specified interest rate, to be amortized over a stated period of time. 7. Nothing in the brochures, other sales literature or advertising used by LATD or TD&ME contains any explanation or definition of “until paid,” “interest only” or “balloon” notes. 8. Sometime after receipt of an investor’s funds and a purchase authorization signed by him, LATD selects and confirms to the investor a trust deed note. The investor receives no information from LATD with respect to the trust deed note selected for and confirmed to him, except the abbreviated description given in the confirmation, unless he insists upon receiving a more specific description of the instrument and the underlying security. LATD does not furnish the investor an appraisal of the real estate or the equity securing the trust deed note. The investor is not consulted, in advance of the sending of the confirmation, with respect to the nature and quality of the trust deed note to be selected for his account. As stated in the current brochure describing the Secured 10% Earnings Program, the defendants represent that investors may depend upon the “careful screening and appraising by [LATD’s] Purchasing Department,” in order to minimize the risk incident to investing under the Secured 10% Earnings Program, and that “all Trust Deeds which we purchase for resale to our customers are carefully checked by our Title Department, and full advantage is taken of the protection provided by the California Civil Code. We are proud indeed of our record to date in handling Secured 10% Earnings Trust Deeds: None Of Our Customers Has Ever Sustained A Loss, Nor Has Any Customer Who Has Held A Trust Deed For At Least Six Months Failed To Receive His Full 10% Earnings.” 9. Although under the Secured 10% Earnings Program the investor may, if he chooses, buy a trust deed note outright and make his own collections of monthly or other periodic installments from the maker or trustor, the defendants recognize that it is not feasible for investors throughout the United States and in foreign countries to so service the trust deed notes which they purchase from LATD. Accordingly, the investor is encouraged to authorize LATD to service the note, without cost to the investor, by making installment collections, sending out necessary delinquency notices and, if necessary, effecting foreclosure in event of default. When LATD makes such monthly or other periodic collections, the sums received are remitted to the investor, or, at the option of the investor, applied by LATD to the purchase of a new trust deed note under the Secured 10% Earnings Program. 10. The second basic element of the Secured 10% Earnings Program involves the purchase of trust deed notes on “installment terms.” Under this plan, trust deed notes are sold to investors on an installment basis. The investor may remit a sum of money to LATD for the purchase of a trust deed note on an installment basis, with title to be retained by LATD until the entire purchase price is paid. The difference between the purchase price of the note and the amount paid in by the investor is established as a debit balance on the books of LATD, and any additions to the account made by the investor and collections received by LATD from the trustor are credited toward the purchase price of the trust deed note, with LATD carrying the debit balance and applying collections from the trustor and any additions to the account by the investor until the debit balance is liquidated. When the debit balance in the investor’s account is extinguished, he is entitled to have the trust deed note transferred to him. 11. While the account of the investor remains in debit balance, LATD retains title to the trust deed. Some 85% of the thousands of accounts on the books of LATD are in debit balance. This means that 85% of the investors are making monthly deposits with LATD, or having LATD apply collections on trust deed notes, which they own in full, to the purchase of a new trust deed note, or both, and that not more than 15% of investors are receiving monthly remittances from LATD. It is also a reasonable assumption from the evidence, although not made explicit in the record, that many investors whose accounts are not in debit balance allow their funds to remain on deposit with LATD. Thus, LATD, at all times controls millions of dollars of investors’ funds. 12. The reinvestment or “growth” plan is described in the basic brochure (p. 4) currently in use by LATD and TD &ME in the following terms: “You Can Build An Estate “The following tables show the growth of $1000.00 and $100.00 per month over specific years if earnings at 10% per annum are reinvested monthly. Now take a pencil and multiply (or divide) by your surplus money and by the amount you can afford to add monthly. You will be amazed to compare the results with the earnings you are now receiving. “The printing of this schedule is for information only and should not be construed as a guarantee or representation that any customer’s funds will actually grow to the projected total. No bank or savings institution can guarantee that their present rate of interest, dividends or earnings will be continued as many economic factors which cannot be accurately predicted affect growth and interest. Generally speaking, factors adversely affecting our business and trust deed ownership would exist only if the general economic climate changed so as to produce (a) large scale foreclosures on residential properties; or (b) a large scale drop in values of improved real estate. Another possibility is that we could not accommodate additional customers if a rise in price to par, or a figure close thereto, precluded the obtaining of sufficient qualified trust deeds at a discount which could be resold to yield 10%. Obviously, the continuity of 10% earnings for many years in the future, through a series of trust deeds yet to be purchased, must be predicated upon the assumption of present economic conditions prevailing. Qualified by the foregoing, however, we know of no reason why the above figures should not materialize just as they are set forth.” The foregoing excerpt from the current basic brochure corresponds to similar representations made in the first basic brochure issued in December, 1957, and the first revised brochure issued in July, 1958, except that in the two earlier brochures the “growth” tables were extended to 30 years showing $1,000 growing to $19,837.39, if invested at 10% compounded monthly, and a cumulative investment of $100 per month growing to $226,048.79. The first basic brochure contained no caveat following the “growth” tables. The ' first revised brochure contained the following caveat: “The printing of this schedule is for information only and should not be construed as a guarantee or representation that any account holder’s funds will actually grow to the projected total. No bank or savings institution can guarantee that their present rate of interest will be continued as many economic factors which cannot be accurately predicted affect growth and interest.” C. Discounts to LATD and Mark-ups to Investors 1. The discount formula used by LA TD in acquiring a group of second trust deed notes for sale to investors under the Secured 10% Earnings Program is evidenced by a letter agreement dated November 1, 1957, under which LATD agreed to purchase from Riverside Builders, Inc. 43 second trust deed notes in the face amount of $2,400 each, bearing interest at 7%, to be “created” as the homes then under construction were sold. By the terms of the letter agreement, LA TD was to purchase the trust deed notes at 60% of face value (a discount of 40%) where the notes were to be payable at the rate of 1% per month and have a maturity of five years, at 58% of face value (a discount of 42%) where the maturity was to be seven years, and at 55% of face value (a discount of 45%) where the notes were to run “until paid.” The letter agreement noted that it would be necessary for LATD to “earmark enough money to go through with our commitment.” 2. The evidence establishes that more recently LATD has acquired trust deed notes for sale to investors under the Secured 10% Earnings Program at average discounts of about 25% to 30% from face value, and sells such trust deed notes to investors at an average gross mark-up over cost of about 25%. 3. The trust deed notes are sold to investors at a price discounted to yield 10% per annum, taking into consideration the face amount of the note, the rate of interest, the amount of monthly payment, and the maturity date. LATD advertises that funds deposited by the twentieth of the month earn 10% from the first. In instances where the investor’s funds have remained uninvested for some time, LATD introduces the trust deed note into the account at a price which will reflect “earnings” of 10% from the date the investor’s funds were received. D. Instruments Evidencing Investments Under the Program 1. The investor under the Secured 10% Earnings Program whose account is not in debit balance receives from LATD an assignment, without recourse, of the trust deed note, an assignment of the trust deed, a policy of title insurance, an engraved Certificate of Registration and Ownership, certifying that his trust deed has been registered in his name (or in the name of LATD as Trustee) on the records of LATD. The Certificate of Registration and Ownership, which is designed to resemble an engraved share of stock or bond, and which bears the “great seal” of a “member of Trust Deed & Mortgage Exchange,” gives the trust deed number as registered on the books of LATD, the name of the registered owner, the description of the lot or unit of land securing the trust deed, the face amount, unpaid balance and terms of the note. 2. While all investors receive a “Certificate of Registration and Ownership” they are encouraged to leave title to their trust deeds in the name of LATD as Trustee. This, of course, gives LATD full dominion over their accounts. Some 30% or 40% of investors who hold fully paid for trust deeds have acquiesced in this arrangement. LATD retains title to all trust deeds sold on installment terms. IV METHODS OF ACQUIRING TRUST DEED NOTES A. Second Trust Deed Notes 1. LATD purchases second trust deed notes in substantial volume from subdi-viders and developers of residential real estate subdivisions (tracts), at discounts ranging above 40% of the principal balances due on the trust deed notes. LA TD enters into firm commitments with real estate subdividers to purchase second trust deed notes covering entire tracts. These • commitments by LATD are evidenced by letter and other more formal agreements, and are confirmed by LATD to the vendor or supplier by a separate “Buy Order.” The buy order sets forth the tract and lot number, a brief description of the dwelling to be completed on the lot, the net purchase price to be paid by LATD, the number assigned to the trust deed by LATD, the face amount of the note, the unpaid balance, the balance due, the amount to be paid monthly, rate of interest and maturity date. The buy order also describes the first lien against the specific lot. 2. Such arrangements commit LATD to. purchase second trust deed notes covering entire tracts, in advance of the actual construction of the homes, and in advance of the actual creation of the trust deed notes following construction and sale of the houses, and requires LA TD to apply the uninvested funds entrusted to it by investors under the Secured 10% Earnings Program in fulfilling its commitments to real estate sub-dividers. B. Subordinated First Trust Deed Notes 1. LATD purchases at substantial discounts and in large volume, for resale to investors under the Secured 10% Earnings Program, first trust deed notes which are executed by tract subdividers and developers and accepted by the owners of the land being subdivided in full or partial satisfaction of the purchase price of the land. These trust deed notes are known as subordinated notes since they contain a clause under which the subdivider may obtain a construction loan from a conventional lending institution, such as a bank, savings and loan association or insurance company, and upon the recording of the trust deed securing the construction loan the first trust deed accepted by the landowner is automatically subordinated to the construction loan and becomes a second trust deed. 2. ' The arrangement under which LA TD purchases subordinated first trust deeds is made contemporaneously with the execution of the trust deed notes by the tract subdivider, with the result that the landowner is assured of receiving the discounted price of the trust deed notes as agreed upon between the landowner, the subdivider and LATD. 3. LATD purchases such subordinated trust deed notes in advance of any construction, and in advance of the actual creation of the subdivision, and, at times, in advance of the filing of the subdivision map and notice of intention with the Real Estate Commissioner under Section 11010 of the Business and Professions Code of the State of California, which is required to obtain a Subdivision Public Report, in accordance with Section 11018 of the Code. 4. The funds entrusted to LATD by investors under the Secured 10% Earnings Program are applied by LATD to the purchase of such highly speculative subordinated trust deed notes for inventory or “warehousing” and resale to investors. 5. The evidence establishes that while investors are led to believe that LATD brings into inventory under the Secured 10% Earnings Program only “seasoned,” “prime,” “trouble-free” trust deeds which have been carefully “screened” and “appraised” by experts, and that such trust deeds are secured by substantial underlying equities representing the investments of homeowners, the true facts are that many thousands of trust deeds which have been introduced into the accounts of investors under the Secured 10% Ear