Evening star., 1949-06-01
AppeaIsC UphoIds
Otis Against SEC
In Kaiser Stock Case
Nv the Assceiotsd Press

iii NolSH yIVIk LdSe
by the Assceic.sd Press
The United States Court Of Ap.
peals held today there Is moi
enough evidence so far to support
Securities and Exchange Commis.
sion charges of a frame-up by
Otis g. Co. to get out Of q stock.
selling contract with the Kaiser.
Frazer Corp.
Unless new evidence Of collusior
with James Masterson. Philadel-
phia lawyer. is produced. the
court ruled, SEC cannot proceed
further on that ground in its
move to take away the broker
dealer registration Of the Cleve-
land investment firm. Loss OF
registration would put Otis out OF
business.
Directly at issue Is a suit filed
by Mr.. Masterson against Kaiser
Frazer, which Otis used as the
ground for, withdrawal from the
financing contract with the auto
mobile company.
Grew Out of Stock Issue.
That SEC proceeding. and
numerous other legal actions
grew out of the collapse Of a $10,-
100000 stock issue by Kaiser
Frazer. Otis 81 Co. was one OF
the underwriters. The contract
for handling the issue included a
clause permitting the underwrit-
ers to back out II there was pend
ing at the time Of the stock issue
any important suit affecting
Kaiser Frazer.
Mr.. Masterson sued as a stock
holder for an Injunction against
the stock issue, and Otis with
drew from the deal just before
the stock was to have been offered
to the public in February, 1948.
Among other pending actions
are suits and countersuits between
the motor-car manufacturer and
the investment firm involving
damage claims of at least $780,
100000.
Injunction to Be Issued.
The Court of Appeals said that
unless new evidence Of collusion
is produced by SEC. an Injunction
will be issued to stop the COM
mission from going on with any
action against Otis based on that
charge.
But SEC can proceed on
grounds other than the collusion
charge If it finds such grounds,
the appellate court said.
SEC contended that Cyrus 8.
Eaton, head Of the Otis firm. ar
ranged the. filing of the Master
son suit as a mean of lodging
the commitment to underwrite the
issue. The Otis 81 Co. official.
however, has contended no COL
fusion was involved and that, on
the contrary, Kaiser-Frazer ma
nipulated" the market prior to the
sale of the securities.
Phone Talks Crux Of Case. .
Crux of the SEC case has been
purported telephone conversations
between Mr.. Eaton andStwo attor-
neys-Maryin Harrison and Allen
Hull. Previously Judge James w.
Morris, in District Court, ruled
that their testimony would be a
violation of attorney-client priv
ilege and that they need not di-
vulge contents of their CONVERSE
tions with the f1nancier.
In today's decision, handed
down unanimously by the three
man tribunal. the appeals court
declared that the matter of al
legged fraud between Mr.. Eaton
and Mr.. Masterson was squarely
presented and distinctly deter
mined In the negative"
The decision further asserted:
ITO be substantial, evidence
must be strong enough to raise
q presumption of fact and must
be sufficient, when undenied, to
establish the fact. We have
heretofore noted that the District
Court decided. not whether fraud
had beeh perpetrated, but wheth-
er the public investigation devel-
oped prima facie proof surface
evidence) Of fraud; and that new
administrative hearings proposed
by Sec will examine the same
issue.
"But nianifestly the trial Judge
inadvertently failed to notice that
under the pleadings there would
and could be no new evidence in
the projected administrative pro-
ceedings."
Other possible SEC action
against Otis g. Co. could hinge on
so-called "gun-jumping"-th Of
fering of securities to favored Gus
toners before the effective date
of q registration.
The commission has informally
charged that such practices were
followed in the Kaiser-Frazer Of
fering, but the allegations have
never been pressed
Electric Service Halted
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