Regulation of Business – SEC Rule X-10B-5 – Recovery by Corporation Fradulently Induced to Issue Shares

Defendants, Mountain States Securities Corporation and former officers of Consolidated American Industries, Inc., organized a dummy corporation, the Mid-Atlantic Development Company. The defendants drew a formal contract whereby Mid-Atlantic agreed to transfer worthless Cuban insurance company stock and equally valueless Honduran oil exploration rights to Consolidated in exchange for 700,000 shares of Consolidated stock. Consolidated’s former secretary falsely certified a corporate resolution authorizing the issuance of the stock, and its former general counsel advised Consolidated’s stock transfer agent that the transaction was exempt from SEC regulation. Acting on these representations, the transfer agent issued the Consolidated stock. Since at this time Mid-Atlantic had been dissolved, the Consolidated stock was issued to Mid-Atlantic’s distributees who sold to individual investors throughout the world. The plaintiff, trustee in bankruptcy for Consolidated, brought the present action under section 10 (b) of the Federal Securities Exchange Act of 1934 and its implementing regulation, rule X-10B-5, to recover the value of the stock improperly issued. The district court dismissed, holding that the facts failed to state a cause of action under either the statute or rule X-10B-5. On appeal, held, reversed, one judge dissenting. Because the issuance of its own stock by Consolidated was a “sale” within the meaning of rule X-10B-5, plaintiff had a cause of action under the rule. Hooper v. Mountain States Sec. Corp., 282 F.2d 195 (5th Cir.), cert. denied, 365 U.S. 814 (1961).