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January 27, 1976


The opinion of the court was delivered by: PRATT

 Findings of Fact

 JOHN H. PRATT, District Judge

 1. Savoy Industries, Inc., (Savoy) is a private corporation organized under the laws of the State of Delaware, with its general offices at 24-15 43rd Avenue, Long Island City, New York, primarily engaged in the business of making and installing plastic processing equipment, manufacturing of cosmetics and toiletries, the operation of cemeteries, and real estate operations in Canada and on Grand Bahama Island. (Tr. 86, 161) Defendant Savoy has approximately 1,113,000 shares of its $.25 par value common stock outstanding. (P's Ex. 20) Such shares are listed on the American Stock Exchange. (Tr. 163-64) Savoy is subject to the reporting requirements of the Securities and Exchange Commission.

 2. Interstate General, Inc., (Interstate) is a private corporation organized under the laws of the State of Texas, with its offices at 530 Blanton Towers, 3300 W. Mockingbird Lane, Dallas, Texas. It has no reporting requirements to the Securities and Exchange Commission. (Tr. 443-44, 526)

 4. Phillip H. Weinkrantz (Weinkrantz) resides at 2711 Throckmorton Street, Dallas, Texas. At all times hereto, Weinkrantz was Vice President and Director of Interstate. (Tr. 67, 75, 203) He was also President and a Director of Savoy beginning on or about April 18, 1974 until September 18, 1974, a period of 153 days. (Tr. 35)

 5. Lee Mansdorf (Mansdorf) resides in Beverly Hills, California, and, through the Mansdorf Trust, a family trust, is primarily engaged in the business of real estate. (Tr. 239-40, 297)

 Phase I -- Southwestern National, Inc.

 6. Zimmerman, in 1969 or 1970, joined Donald Mopsick (an attorney in Dallas) and Leon Zetley (an investor in Dallas) in the purchase of common stock of a small life insurance company in Dallas named States General Life Insurance Company (States) (Tr. 340-41), a company in excellent financial condition. (Tr. 60-61) They continued to purchase States stock until about February, 1973, at which time Zimmerman owned 11,046 shares. (Tr. 340-42)

 7. Zimmerman, Mopsick and Zetley, about the year 1970, organized a corporation called Southwestern National, Inc. for the purpose of making it a vehicle to acquire (either by acquisition or through a tender offer) additional shares of States. (Tr. 343-45) Through their attorney, Edward Peterson, they made proposals in the name of Southwestern National, Inc., but those proposals were not accepted and subsequently the proposals were abandoned. (Tr. 344-45)

 Phase II -- The Formation of Interstate General, Inc.

 8. The rejection of the Southwestern National proposals left Zimmerman with 11,046 shares of States, the second largest block of States stock. The stock had a very thin public market, and a block of that size could not be sold without a substantial decrease in market price. Zimmerman considered his shares of States, for which he had invested close to $40,000, frozen, unless he could use them to acquire control of States itself. (Tr. 355-56)

 9. Therefore, Zimmerman developed another plan for acquiring control of States. (Tr. 58) According to the plan discussed at a meeting in 1972, Zimmerman, together with Weinkrantz and a Charles Holman, a Dallas insurance man, would form a new company, Interstate General, Inc. (Interstate). Zimmerman would transfer his 11,046 shares of States to Weinkrantz who, in turn, would place them into Interstate. (Tr. 57-58) Interstate would then make a new tender offer for the common stock of States. (Tr. 39, 45)

 10. Zimmerman and Weinkrantz are long-time friends. They have known each other for some 36 years. (Tr. 37, 339) However, Weinkrantz is clearly Zimmerman's inferior in business affairs. (Tr. 36, 363-64) Weinkrantz's entire past business experience was as a salesman of insurance and real estate. (Tr. 34-36) At one point, Zimmerman asked Weinkrantz if he would like to be president of an insurance company. Weinkrantz responded that he had no managerial experience and that he did not think that he was capable of running an insurance company. (Tr. 61-62) In 1971 or 1972, Weinkrantz had become, at the request of Zimmerman, a member of the Board of Directors of International, of which Zimmerman was still President and Chairman of the Board.

 11. Interstate was incorporated in March of 1973. (Tr. 38) Charles Holman was named President and Weinkrantz was named Vice President. (Tr. 179-83; D's Ex. 1) The directors were Holman, Weinkrantz, Charles Connolly, an actuary, James R. Alexander, a lawyer, and Sidney Lynn, a business consultant. (Tr. 74) Zimmerman was not named either as a director or as an officer of Interstate. The total issue of Interstate was 500,000 shares.

 12. Pursuant to the plan, Zimmerman transferred his 11,046 shares of States stock to Weinkrantz, in return for which Weinkrantz gave Zimmerman a promissory note for $88,368, representing a value of $8.00 per share. (Tr. 193) Zimmerman had paid only $4.00 a share for the stock, and Weinkrantz was aware of that fact. (Tr. 193, 365-67) The market value for the stock was $3.75 to $4.00 per share.

 13. Weinkrantz, upon their receipt from Zimmerman, transferred the 11,046 shares of States into Interstate and was issued 400,000 shares of Interstate in exchange. Weinkrantz, in turn, pledged the 400,000 shares of Interstate to Zimmerman as collateral to secure the $88,368 note. (Tr. 56-57, 359-60) These 400,000 shares of Interstate are currently in the custody of Zimmerman. (Tr. 47)

 14. Weinkrantz's estimated net worth at the time he received the States stock from Zimmerman was approximately $40,000 to $50,000. Weinkrantz could not then and cannot now pay off the $88,368 note to Zimmerman. The note, plus accrued interest, is currently outstanding to Zimmerman. (Tr. 59-60) The original copy of this note was torn up by Weinkrantz in the presence of and after discussion with Zimmerman after receipt of the Commission subpoena respecting the Savoy investigation. In July, 1974, a new note dated March 16, 1973 and payable in seven years, was typed by Zimmerman's secretary and executed by Weinkrantz.

 15. The remaining 100,000 shares of Interstate were issued to persons Zimmerman knew or was associated with as a purported finder's fee and for purported services rendered. (Tr. 187-88) Weinkrantz received 17,850 shares. (Tr. 186-87) Also among those receiving shares were Trans-Exchange Corporation, a Zimmerman holding company, and one Mort Tanzer. Weinkrantz did not know why Trans-Exchange was entitled to any shares, but knew only that Zimmerman had told him that the corporation deserved a finder's fee. (Tr. 216-17) Similarly, Weinkrantz did not know Tanzer, and he did not know what services Tanzer had rendered. Nevertheless, at Zimmerman's suggestion, Tanzer was paid a finder's fee of 14,575 shares of Interstate. (Tr. 217) Holman, Lynn, Alexander and Joseph Shoaf were among others who were recipients of Interstate shares. (Tr. 217)

 16. The offices of Interstate were located in Dallas in a back room in Zimmerman's suite of offices. (Tr. 68) Interstate used Zimmerman's telephones, office facilities, including copying machine and secretarial services. (Tr. 68) Interstate's accounting reports and tax returns were prepared by an accountant who was an employee of Zimmerman and who was suggested by Zimmerman. (Tr. 131-33) Interstate never paid for the services of this accountant, and it is readily to be inferred that Zimmerman paid for them. Zimmerman also provided Interstate with a cash advance of over $4,000 to cover additional expenses for such things as travel and postage. The advance was never evidenced by a note. (Tr. 69-70) Zimmerman also provided ideas for the operation of Interstate, and Weinkrantz sought Zimmerman's help when the company had any problems. (Tr. 73) At all times relevant hereto, Zimmerman was in control of Interstate.

 17. Interstate was unable to secure the capital or assets necessary to implement Zimmerman's plan for the acquisition ...

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