Fed. Sec. L. Rep. P 97,937mary S. Krech Trust and Mark Marks, Plaintiffs,mary S. Krech Trust, Plaintiff-appellant, v. the Lakes Apartments et al., Defendants-appellees, 642 F.2d 98 (5th Cir. 1981)

The first question we are asked to decide in this appeal is whether one can successfully plan and execute a private offering of a security by following the guidelines prepared by the Securities and Exchange Commission and our recent decision in Swenson v. Engelstad, 626 F.2d 421, (5th Cir., 1980). Answering that question in the affirmative, we move to the second inquiry, whether or not the evidence in the record of this case supports the jury's conclusion that such a plan was completed as designed. Again we answer in the affirmative.¹  Recognizing the rigid requirements surrounding private offerings,²  we hold that here ample justification exists for reasonable persons to conclude that such tests were met, and we affirm the entry of final judgment upon jury verdict.

In 1974, the original owners of The Lakes Apartments, Ltd., caught in an interest squeeze and out of construction money, contacted Envicon Development Corporation (Envicon Development), a real estate company, to determine whether syndication was possible. After an investigation, Envicon Development decided to syndicate and approached Wachovia Bank for funds. Wachovia agreed to advance construction money but required a guarantee from Erving Wolf, majority shareholder of Envicon Development.³ 

Prior to offering any units in the Lakes limited partnership, Envicon Equities Corporation (Envicon), a subsidiary of Envicon Development, was formed to put together the syndication. Envicon undertook a formidable research project called a "due diligence" investigation which would generate the kind of information that would ordinarily go into a registration statement. The syndicators envisioned an offering of twenty limited partnership units and intended to structure their offering to meet the requirements of Rule 146.⁴  Ultimately, fifteen persons were offered units. Among the thirteen purchasers of units was appellant Mary S. Krech Trust (the Trust).

During this same time period, the Trust, acting through its trustees Chapin Krech and Dr. Shepard Krech, found itself in the enviable position of owning a surplus of shares of Exxon stock. Although the market price per share of the stock was high, the yield was relatively low, and the trustees had determined to sell. Realizing that the tax consequences of a sale of part of the stock would be great, the trustees began looking for a tax shelter investment. Chapin Krech, himself a former partner in a New York Stock Exchange brokerage firm, contacted his broker, David Williams. This contact began the chain linking the defendants-appellees to the Trust.

Williams was employed by defendant Bache Halsey Stuart Shields, Inc. Williams' boss at Bache contacted defendant Steven Blank, head of Bache's tax shelter department in New York City. Blank brought Krech and Williams into contact with defendant Donald Gary, vice president of Envicon Development. Gary was in charge of the syndication of the Lakes.⁵ 

Although it had purchased the investment primarily as a tax shelter, apparently the Trust anticipated income from positive cash flow by the end of the second quarter of 1975. When no income was realized, Chapin Krech initiated an investigation which led to the present lawsuit. The Trust sought relief under eight counts. Counts I, IV, V and VI alleged violations of the Securities Act of 1933, §§ 5, 12(1), 12(2), 17(a) (15 U.S.C. §§ 77l (1), 77l (2), 77q(a)). Count V alleged violation of § 10(b) (15 U.S.C. § 78j(b)), Securities Exchange Act of 1934 and Rule 10(b) (5) (17 C.F.R. 240.10b-5). Counts II, III, VII alleged violations of Florida Statutes §§ 517.07, 517.21 and 517.301. Count VIII alleged fraud and deceit under Florida common law. Counts II and III were severed before trial,⁶  and Counts V and VIII were voluntarily dismissed. Following jury trial, judgment was entered for the defendant-appellees. The jury, using special verdict forms, found that the offering was exempt from registration requirements, that there were no material misrepresentations or omissions making the sale misleading, and that there was no fraud or deceit upon the Trust in connection with the "break-even" statement.

In Swenson v. Engelstad, 626 F.2d 421 at 425 (5th Cir. 1980) we reviewed four factors found useful in determining whether an offering can be exempt from registration under section 4(2) of the Securities Act of 1933 (15 U.S.C. § 77d(2) (1976)). The factors are: 1) the number of offerees and their relationship to the issuer; 2) the number of units offered; 3) the size of the offering; and 4) the manner of the offering. See also SEC v. Continental Tobacco Co. of South Carolina, 463 F.2d 137, 158 (5th Cir. 1972). These factors are not litmus paper tests but guidelines to use in effectuating the rule in Hill York Corporation v. American International Franchises, Inc., 448 F.2d 680, 687 (5th Cir. 1971) that whether an offering is public or private is a question of fact which must be resolved in the light of the particular circumstances. "The design of the statute is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions." S. E. C. v. Ralston Purina Co., 346 U.S. 119, 124, 73 S. Ct. 981, 984, 97 L. Ed. 1494, 1498 (1953). The bottom line issue in allowing the private offering defense is "whether the particular class of persons affected needs the protection of the Act." Id. at 125, 73 S. Ct. at 984, 97 L. Ed. at 1498.

Under Rule 146, in order to be considered a private offering, the offering must: 1) not be made by any means or form of general solicitation or advertising; 2) be made only to those persons whom the issuer has reasonable grounds to believe are of knowledge and experience which would enable them to evaluate the merits of the issue or who are financially able to bear the risk; 3) be made only to those persons who have access to the same kind of information as would be contained in a registration statement. Under this rule, the issuer must have reasonable grounds to believe, and must believe, that there are no more than thirty-five purchasers from the issuer.⁷  Transfer of shares is limited in order to prevent and exempt private offering from becoming a mere conduit for a public offering without a registration statement. The Preliminary Notes to the Rule make it clear that the purpose is to provide objective standards upon which businessmen may rely in raising capital under the 4(2) exemption, 15 U.S.C. § 77d(2), but failure to satisfy all conditions of the Rule does not raise the presumption that the offering cannot be exempt.

In the instant case, the appellees designed a multi-step procedure for making the offering. A select list of Bache brokers, experienced in tax shelters and specializing in counseling a clientele of wealthy and knowledgeable investors, was compiled by nominations from Bache branch managers. This select group was given a Project Fact Sheet containing information for their own use in determining which clients would be suitable. If a broker had a client he thought was interested, he could obtain from Envicon the Private Placement Memorandum and Project Analysis Financial Analysis. Before he could receive these materials, however, the broker was questioned with regard to his client's suitability for the placement. The potential investor reviewed the documents, was given an opportunity to ask questions, and was then asked to fill out the offeree's questionaire requiring him to set forth his net worth and financial sophistication. These offeree questionaires were reviewed by Mr. Gary, and only those persons to whom he was willing to sell were given offers. He testified that his determination was based on whether they met the qualifications of Rule 146(d).

The details of this plan were offered through the testimony of Gary and Blank. Offeree questionaires, Project Fact Sheets, list of brokers and other documents demonstrating the general control exercised by appellees were offered into evidence at trial. The list of the fifteen offerees was received in evidence. The jury was instructed:

The ultimate test is whether the persons to whom the offering is made are in such position with respect to the issuer that they either actually have such information as a registration itself would have disclosed, or they have access to such information.

Stated otherwise, the ultimate test is did the offerees know or have a realistic opportunity to learn facts essential to an investment judgment.

Now on that question, if a preponderance of the evidence establishes that the offering in this matter was exempt, then your answer to that question would be yes. If there is no such preponderance of the evidence, your answer would be no.⁸ 

R. VII, 27, 28.

It is clear from the record that there was sufficient evidence from which the jury could conclude that the offering was exempt. As an appellate court, we are required to accept evidence in favor of the verdict as true and to give such evidence the benefit of inferences sustaining the jury's findings. Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 684 (5th Cir. 1971); Little v. Green, 428 F.2d 1061, 1066 (5th Cir. 1970). This case differs from SEC v. Continental Tobacco Co. of South Carolina, 463 F.2d 137 (1972) and from Swenson v. Engelstad, 626 F.2d 421 (5th Cir. 1980) in which we held that in proving the private offering defense, failure to prove the number or identity of the offerees was fatal to the defense. Here, the defendants established number and identity, in addition to financial wealth and the full information required as to all offerees.

In attacking the jury's finding that there were no material misrepresentations, appellant appears to be asking this court to retry an issue of fact.⁹  We are bound by the jury's findings unless appellant can show an absence of probative facts to support the jury's findings. Lavender v. Kurn, 327 U.S. 645, 653, 66 S. Ct. 740, 744, 90 L. Ed. 916, 922 (1945); Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 691 (5th Cir. 1971). Chapin Krech testified that he merely missed the discussion of the thirty-day leases, a factor in income production, and that he read and understood the risk factors. (R. XXIII, 809-25). Gary testified that Chapin Krech and his attorney met with him and the documents were discussed and questions asked. (R. XII, 116-118). Credibility questions are to be resolved by the fact finders. This jury heard and evaluated the witnesses with expert guidance from the trial judge. Although the issues can be described as fairly complex, we conclude they were fairly tried and the conclusions amply supported.

Judgment of the trial court upon jury verdict is AFFIRMED.