Opinion ID: 255084
Heading Depth: 2
Heading Rank: 3

Heading: Dynastic Operations

Text: 18 It is indeed difficult to telescope the fantastic activity of Texas-Adams and its controlling proprietors during the ten months or so after acquisition by McCarthy, Crosby and company in September of 1955. Texas-Adams' outstanding stock ballooned, during that period, from 750,000 to almost ten million shares; not one share, however, was at any time the subject of a registration statement filed with the S.E.C. 19 Many of the deals sought by Texas-Adams never reached fruition, usually for lack of necessary funds. Two of these were the so-called Longview, Texas acquisition and the Taylorcraft merger. An option to purchase the Longview properties (oil) for $275,000 was entered into in the name of one of the ever available corporate dummies, Sundown Oil Company of California. The search for this sum of money led McCarthy and Pettit to Alabama in November, 1955. There Paul Jones and Sterling Graham, a Pittsburgh broker and also a co-conspirator, were engaged in underwriting public issues of stock on two intrastate corporations, Warrior Products Company and Gypsy Mining Company, under the watchful eye of the Alabama Securities Commission. These corporations apparently were organized to buy some of Jones' seemingly boundless supply of mining properties. Graham told McCarthy that the Alabama commission would not allow a Texas-Adams merger with either of the local corporations and suggested a merger between Texas-Adams and Taylorcraft, a Pennsylvania manufacturer of light aircraft into which Warrior was to have been merged. 20 Taylorcraft, which was experiencing ready cash difficulties of its own, was not the answer to Texas-Adams' need for cash to close the Longview oil deal. 7 At this point, Jones came up with another, more suitable deal. He suggested that Texas-Adams buy from the Osage Mining Co. (another corporate repository for some of the Jones properties) a lease on a feldspar mine in Spruce Pine, North Carolina for 375,000 freely transferable Texas-Adams shares. Jones would accept only the proceeds from the sale of 75,000 of those shares while Texas-Adams would receive, for its use in Texas, the proceeds from public subscription of the remaining block. 21 McCarthy not only accepted this offer, but, in implementing it, went a long step farther. The actual purchase of the mining lease was made in the name of American Montana — which company agreed to resell the feldspar mine to Texas-Adams for 650,000 shares plus a cash payment of $75,000. Much of the rest of the Osage story is too obscure and complicated to be drawn out in detail here. It is enough to say, however, that the sale, kickback and resale procedure was used as a vehicle to sell to the public hundreds of thousands of unregistered Texas-Adams shares; the same certificate for 375,000 shares was caused to be broken down and issued by two different stock transfer companies; the feldspar mine in question was inactive, flooded with water, and worthless; and, finally, Texas-Adams never bothered even to take title on the lease. 22 While the Osage transaction is perhaps the most artful example of the McCarthy stewardship of Texas-Adams, passing mention may be made of other corporate depredations. More than 70,000 shares of stock were issued, without consideration, to George Jannis, a chauffeur, valet and handyman of Crosby's, for imaginary loans and services rendered. These shares were cleared for trading by defendant Mittelman's opinion letters and the proceeds, after token payments to Jannis, went to enrich appellant Crosby at least. 23 Mergers were accomplished with the Empire Drilling Company and the United States Sulphur Company. In the former transaction a purchase of Empire stock was misrepresented as a purchase of all the assets of that company. 8 Further, machinery was set up whereby creditors and interest holders in wells being developed by Empire could trade their interests in Empire for Texas-Adams stock. All told, 3,100,000 shares of Texas-Adams were issued for these purposes. Aside from the fact that the U. S. Sulphur properties appear to have been worthless, the government proved no real infirmity in that transaction. On top of the quarter of a million shares actually used to buy out the United States Sulphur Company, however, an additional 150,000 shares were issued under fraudulent circumstances, purportedly in connection with the Sulphur Company deal, to L. W. Ltd., a Canadian dummy corporation which Mittelman served as vice-president. 24 The final notable transaction was the so-called Comigu deal, in which Texas-Adams bought, for two million shares, twenty prospecting permits on supposed tantalum mining properties on the bank of the Sinn Marie River in French Guiana. The seller was acquitted defendant Guy Gully and, like Osage, the transaction apparently involved a substantial kickback of shares which were then sold to the public through Castagna, McCarthy's young brother-in-law. 9 Once again, as in the case of Osage, Texas-Adams never bothered to take title to the permits. 25 Although the aforementioned dealings were highly effective in keeping a steady flow of Texas-Adams shares entering the market, it was a key to the success of these schemes to maintain the price of those shares at a fairly high level. This was accomplished by a high pressure public relations campaign coupled with the use of patently fraudulent misrepresentations in the company's public reports. Within a week of the September 27, 1955 takeover of Texas-Adams, Crosby and McCarthy contacted co-conspirators W. Ware Lynch and Russell Birdwell Associates, Inc. to start rolling a publicity campaign. 26 Lynch obtained newspaper coverage on the change in Texas-Adams control and management; the McCarthy name was fully exploited. 10 Later, there was extensive reporting of the Empire merger which stressed tremendous growth in the assets of Texas-Adams to a false figure of more than nine million dollars. In November of 1955, a Report to the Stockholders was sent to brokers dealing in Texas-Adams. Among major misrepresentations there made were statements that prior to the new management Texas-Adams had a yearly income of $35,000; that acquisition of the Bonanza Field in Montana had been accomplished, with resultant additions to income of $33,000-$34,000 per month; that the new management had acquired, for $300,000 and 850,000 shares of stock, some east Texas oil acreage with $24,000 net monthly income and $4 million proven reserves in each of five well locations; that negotiations had been completed to take over Osage, replete with 300,000 in cash and a producing feldspar mine    [and] valuable samples of uranium and mica; and that Homestead, when merged, possessed cash totaling $140,000. 27 Many of the foregoing — and other — misstatements of fact were made more specifically in a series of Texas-Adams pro forma balance sheets issued with the aid of Herman Lubin, an accountant and co-conspirator, in February and March of 1956. What the original report to the stockholders lacked from a purely artistic standpoint was amply supplied by the production and dissemination of an attractive, pictorialized brochure which substantially mimed the bald misstatements of fact and gross overstatements of assets contained in the earlier literature. 28 Such methods were generally successful, in conjunction with active promotion by various brokers in New York, Pittsburgh and Denver, in keeping Texas-Adams common priced at an artificially high level. The government adduced proof, however, that in at least one instance more direct market manipulation was necessary. Mass unloading of stock by the former creditors and interest holders of Empire was threatening, in February of 1956, to deflate seriously the market in Texas-Adams. In response to this danger, those shareholders were urged to sell back to the corporation at a guaranteed rate of one dollar per share. To support this corporate extravagance, brokers in turn were induced to buy the shares from Texas-Adams and pass them on to the public at that price. The brokers were encouraged to enter into these dealings by an offer of two bonus shares of Texas-Adams for every share bought at an artificial level; 200,000 shares emanating from the Comigu-produced gravy were placed in escrow to provide this bonus stock.