SECURITIES EXCHANGE ACT OF 1934
RELEASE NO. 46538 / September 24, 2002
ADMINISTRATIVE PROCEEDING
FILE NO. 3-10898
In the Matter of Basic Capital Management, Inc., Nevada Sea Investments, Inc., International Health Products, Inc., One Realco Corporation, TacCO Financial, Inc. and Gene E. Phillips, Respondents. |
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ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING A CEASE- AND-DESIST ORDER |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate that administrative proceedings be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondents Basic Capital Management, Inc. ("Basic Capital"), Nevada Sea Investments, Inc. ("Nevada Sea"), International Health Products, Inc. ("International Health"), One Realco Corporation ("One Realco"), TacCO Financial, Inc. ("TacCO Financial") and Gene E. Phillips ("Phillips").
In anticipation of the institution of these administrative proceedings, each of the Respondents has submitted an Offer of Settlement which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings set forth below, except as to the jurisdiction of the Commission over the Respondents and over the subject matter of these proceedings, which the Respondents admit, each of the Respondents by its or his Offer of Settlement consents to the entry of this Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order ("Order").
II.
Accordingly, IT IS HEREBY ORDERED that proceedings pursuant to Section 21C of the Exchange Act are instituted.1
III.
On the basis of this Order and the Offers of Settlement, the Commission makes the following findings:
Facts
A. Summary
Between May 1996 and June 1997, Respondents Basic Capital, Nevada Sea, International Health, One Realco and TacCO Financial, together with a publicly-held real estate investment trust advised by Basic Capital (the "REIT"), collectively purchased over one million shares of Greenbriar Corporation ("Greenbriar"), a company listed on the American Stock Exchange.2 Respondent Gene E. Phillips had substantial contact with the management of Basic Capital and had a significant influence on its advisory services and investment decisions as well as the investment decisions of the other respondent entities and the REIT. Although none of the Respondents purchased more than five percent of Greenbriar's outstanding shares, their holdings together with the holdings of the REIT in the aggregate exceeded five percent of those shares by July 1996 and amounted to approximately 16.1% by June 1997.
Throughout the period in question, the respondent entities deposited their Greenbriar shares in margin accounts and borrowed against those margin accounts to fund additional stock purchases. International Health, One Realco and TacCO Financial also used funds drawn from lines of credit with Basic Capital to finance their Greenbriar stock purchases.
Because Basic Capital and/or Phillips had the ability to influence investments made by the other Respondents and the REIT, the Respondents collectively constituted a group for purposes of Section 13(d) of the Exchange Act. Accordingly, the Respondents should have filed a Schedule 13D within ten days after they and the REIT collectively acquired five percent of Greenbriar's outstanding shares in July 1996. Thereafter, the Respondents should have made amendments to that filing each time they and the REIT collectively acquired an additional one percent or more of Greenbriar's outstanding shares. The Respondents did not file a Schedule 13D, however, until April 9, 1998. Accordingly, the Respondents violated Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 promulgated thereunder.
By their failure to comply with Section 13(d) on a timely basis, the Respondents misled the broker-dealers who extended them margin loans secured by Greenbriar stock. The broker-dealers who extended such loans did so without knowing that the Respondents controlled as much as 16.1% of Greenbriar's outstanding shares. This information was material because it would have affected the manner in which the broker-dealers evaluated the market for Greenbriar shares and the liquidity of the shares pledged as collateral for the margin loans. Although the broker-dealers did not suffer any losses as a result of the margin loans extended to the Respondents, the Respondents' failure to provide the broker-dealers with the information required by Section 13(d) constituted a violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
B. Respondents
Basic Capital Management, Inc., whose offices are located in Dallas, Texas, is a privately owned advisory company that manages investments for three publicly traded real estate investment entities. Basic Capital is owned by Realty Advisors, Inc., which in turn is owned by the May Trust, a trust established for the benefit of the children of Phillips. During the period in question, Basic Capital owned approximately 52% of the outstanding securities of the REIT, a publicly held real estate investment company whose shares then traded on the New York Stock Exchange. The REIT later merged with another entity whose shares now trade on the New York Stock Exchange.
Gene E. Phillips formerly served as the chief executive officer of both Basic Capital and the REIT. Although Phillips has not been an officer or director of Basic Capital or any of the publicly held real estate entities advised by Basic Capital since 1992, Phillips continues to have substantial contact with the management of Basic Capital and has a significant influence on its advisory services and investment decisions as a representative of the May Trust.
Nevada Sea Investments, Inc. is a wholly-owned subsidiary of Basic Capital that invests in securities and real estate.
International Health Products, Inc. is a private company owned by the Martin Trust, another trust established for the benefit of the children of Phillips.
One Realco Corporation (formerly Davister Corporation) and TacCO Financial, Inc. (formerly Institutional Capital Corporation) are private companies that are owned by different parties but share the same principal place of business and the same principal office as International Health. They are managed by the same personnel who manage International Health and other private companies owned by Phillips or his family trusts.
C. Greenbriar Stock Purchases
Greenbriar, located in Dallas, Texas, develops and operates assisted living facilities. Greenbriar's chairman and chief executive officer is a former business associate of Phillips. In a series of transactions occurring in 1991 and 1992, the former business associate acquired control of Greenbriar by purchasing Greenbriar stock from entities controlled by Phillips in return for a promissory note in the amount of $5.7 million from the former associate's personal holding company. As of May 1996, the $5.7 million promissory note and 1,210,000 Greenbriar shares pledged as collateral for that note were held by TacCO Financial.
On May 20, 1996, TacCO Financial began to buy shares of Greenbriar on the open market. Thereafter, at various dates between May 30 and July 16, 1996, Basic Capital, Nevada Sea, One Realco and the REIT each began to buy shares of Greenbriar on the open market. The orders to purchase shares on behalf of Basic Capital and Nevada Sea as well as the REIT were made by Basic Capital's treasurer. The orders to purchase shares on behalf of TacCO Financial and One Realco were made by individuals who managed both of those entities as well as International Health.
By July 26, 1996, Basic Capital, Nevada Sea, One Realco and TacCO Financial together with the REIT collectively held 327,196 shares of Greenbriar, an amount that was more than five percent of the total number of shares outstanding at that time. In light of these holdings, the Respondents should have filed a Schedule 13D report within ten days, but no such report was filed.
The Respondents continued to purchase Greenbriar shares after crossing the five percent threshold on July 26, 1996. By December 31, 1996, the Respondents and the REIT held 606,096 shares of Greenbriar, or approximately 9.2% of the total number of shares outstanding at that time. During January 1997, the Respondents and the REIT purchased an additional 216,000 shares of Greenbriar. In February and March 1997, the personal holding company of Greenbriar's chairman and chief executive officer transferred a total of 237,149 Greenbriar shares to TacCO Financial in payment of accrued interest and to reduce the principal amount of the $5.7 million note. On June 24, 1997, the date on which the Respondents made their last Greenbriar stock purchase, the Respondents and the REIT collectively held 1,054,345 shares of Greenbriar stock. This represented approximately 16.1% of the total number of shares outstanding.
Between May 1996 and June 1997, the Respondents and the REIT accounted for approximately 54% of the total trading volume in Greenbriar stock. On particular days during that period, the Respondents bought all the Greenbriar stock traded.
D. Financing for the Greenbriar Stock Purchases
Prior to June 1996, Basic Capital had provided lines of credit to TacCO Financial, One Realco and International Health. Each of those entities financed their initial Greenbriar stock purchases with funds advanced by Basic Capital under these lines of credit.
Each of the Respondent entities also maintained margin accounts with various broker-dealers. The Respondent entities pledged their Greenbriar shares as collateral for margin loans in these accounts, thereby obtaining funds to use for additional stock purchases. The increase in Greenbriar's stock price, which rose to prices as high as $23.50 in June 1997, also provided the Respondent entities with additional purchasing power.
The market price for Greenbriar shares declined throughout the second half of 1997 and throughout 1998 and 1999. As a result, the Respondent entities were required to pay down their margin loans secured by Greenbriar stock. The Respondent entities repaid all of these loans in full, without selling any of the Greenbriar shares.
E. Schedule 13d Filings
The Respondents and the REIT initially filed Schedule 13D reports with respect to their investments in Greenbriar on April 6, 1998, after the staff's formal investigation had commenced. These initial filings disclosed the Greenbriar stock purchases and the relationships between the parties, but disclaimed any status as a "group" for purposes of Section 13(d). On November 9, 1998, the Respondents and the REIT filed an amendment to the Schedule 13D and acknowledged that they may be deemed to constitute a group. The amended filing also disclosed that TacCO Financial, One Realco and International Health had financed their Greenbriar stock purchases with funds drawn down from lines of credit with Basic Capital.
IV.
Discussion
Violations of Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 Thereunder
Pursuant to Section 13(d) of the Exchange Act and Rule 13d-1, persons who are directly or indirectly the beneficial owners of more than five percent of the outstanding shares of a class of voting equity securities registered under the Exchange Act are required to file a Schedule 13D within ten days of the date on which their ownership exceeds five percent. The Schedule 13D filing requirement applies both to individuals who pass the five percent threshold and to groups which acquire, or own when formed, more than five percent of the shares of a class of equity securities.
Given the interrelationships that existed among the Respondents in this case, including the ability of Phillips to influence the conduct of each of the other Respondents and the lines of credit extended by Basic Capital so that other Respondents could purchase Greenbriar shares, the Respondents constituted a group for purposes of Section 13(d). Accordingly, the Respondents should have filed a Schedule 13D with respect to their Greenbriar holdings within ten days after their collective holdings crossed the five percent threshold on July 26, 1996. Thereafter, they were required to promptly file an amendment upon the occurrence of any material change to the information outlined therein. Pursuant to Rule 13d-2(a), any increase in beneficial ownership in an amount equal to one percent or more of the class of securities in question is deemed to be a material change. This means that the Respondents should have filed at least ten amendments to a Schedule 13D between August 1996 and June 1997. Because they did not file the Schedule 13-D or the amendments in a timely manner, Respondents violated Section 13(d) of the Exchange Act and Rule 13d-1 and 13d-2 thereunder in connection with their acquisitions of Greenbriar stock.
Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder
The duty to file under Section 13(d) creates the duty to file truthfully and completely. SEC v. Savoy Indus., 587 F.2d 1149, 1165 (D.C. Cir.1978), cert. denied, 440 U.S. 913 (1979). A false or misleading material statement or material omission on a Schedule 13D, if made with scienter, may violate the antifraud provisions of the securities laws, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. See United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir.), cert. denied, 502 U.S. 813 (1991). "[T]he fact that the information is required to be revealed under Section 13(d) is evidence of its materiality." Bilzerian, 926 F.2d at 1298.
The information that the Respondents should have timely disclosed on Schedule 13D was material. By reason of the Respondents' failure to make timely filings pursuant to Section 13(d), the broker-dealers who extended them margin loans secured by Greenbriar stock did so without realizing that the Respondents controlled more than five percent of the outstanding shares of Greenbriar. The Respondents' failure to make timely filings also created the impression that the market for Greenbriar shares was deeper and more liquid than it was in fact.3 As a result, the broker-dealers who extended margin loans to the Respondents would have been exposed to a considerable risk of loss if the Respondents had failed to meet their obligations under the margin loans. For all these reasons, the information that the Respondents did not disclose in a timely manner on Schedule 13D was material.
The Respondents were aware that Section 13(d) imposes reporting requirements on persons who acquire more than five percent of the outstanding shares of a class of equity securities registered pursuant to Section 12 of the Exchange Act, and the pattern of their trading indicates that they took steps to avoid having any individual person or entity cross the five percent reporting threshold. Moreover, given the relationships and the financing arrangements that existed among them, the Respondents knew or were reckless in not knowing that they were required to aggregate their holdings as a group for purposes of Section 13(d).4
Respondents' material omissions were in connection with the purchase or sale of a security within the meaning of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. When securities are pledged as collateral for a margin loan, the broker-dealer acquires an interest in the securities equal to the amounts loaned on margin. U.S. v. Kendrick, 692 F.2d 1262, 1265 (9th Cir. 1982); see also Rubin v. U.S., 449 U.S. 424 (1980) (pledge of stock as collateral for a bank loan is an offer or sale of a security within the meaning of Section 17(a) of the Securities Act of 1933). When this interest is created, a sale occurs. Kendrick, 692 F.2d at 1265. Thus, misrepresentations or omissions made when obtaining a margin loan are "in connection with" the purchase or sale of a security. Id. at 1266. Accordingly, the Respondents violated Section 10(b) and Rule 10b-5 thereunder by obtaining margin loans secured by Greenbriar stock at times when the material fact of their collective ownership of more than five percent of Greenbriar's outstanding shares was not disclosed.
V.
Based on the foregoing, the Commission finds that Basic Capital, Nevada Sea, TacCO Financial, One Realco, International Health and Phillips violated Sections 10(b) and 13(d) of the Exchange Act and Rules 10b-5, 13d-1 and 13d-2 promulgated thereunder.
VI.
Accordingly, the Commission deems it appropriate to require Respondents to cease and desist from committing or causing violations and any future violations of Sections 10(b) and 13(d) of the Exchange Act and Rules 10b-5, 13d-1 and 13d-2 promulgated thereunder, as specified by Respondents in their Offers of Settlement.
VII.
Therefore, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act that Basic Capital, Nevada Sea, TacCO Financial, One Realco, International Health and Phillips are required to cease and desist from committing or causing any violation and any future violations of Sections 10(b) and 13(d) of the Exchange Act and Rules 10b-5, 13d-1 and 13d-2 promulgated thereunder.
By the Commission.
Jonathan G. Katz
Secretary
| 1 | On the date of this Order, the Commission filed a complaint in U.S. District Court for the District of Columbia together with consents of Basic Capital and Phillips to the entry of a judgment ordering them to pay civil penalties to resolve claims arising from the matters also described in this Order. |
| 2 | Greenbriar effected a twenty-five for one reverse stock split on December 1, 2001. All share totals and percentages in this Order reflect amounts prior to the reverse stock split. |
| 3 | For example, a comparison of the information that should have been disclosed in Item 5(c) of an amended Schedule 13D with publicly available trading data would have shown that during January 1997 three of the Respondents and the REIT collectively purchased 126,000 shares of Greenbriar stock, which represented 76% of total reported volume. During this period the price of the stock rose from $13? per share on January 2 to $18? (an increase of over 30%). |
| 4 | In connection with the Respondents' acquisition in the second half of 1997 of more than 5% of the outstanding common stock of another issuer that was registered under Section 12 of the Exchange Act and listed on the New York Stock Exchange, Retirement Care Associates, Inc., they also did not make the required disclosures on Schedule 13D until April 9, 1998. |