The Fourth Circuit Court of Appeals has ruled that American Reality Trust of Arlington violated Securities and Exchange Commission regulations and defrauded investors by with-holding information pertaining to sensitive loans and financial problems.
Reversing an earlier decision by a federal judge in Alexandria, the court, in an action announced yesterday, sent the case back to the U.S. District Court there and said an injunction against future violations of SEC laws should be granted.
American Realty Trust (ART) is headed by Thomas J. Broyhill, a cousin of former Northern Virginia Republican Rep. Joel T. Broyhill. The SEC's allegations against the firm were dismissed in February, 1977 by U.S. District Court Judge Richard B. Kellam, who said the agency had failed to adequataly substantiate its allegations.
But the appeals court opinion, written by Chief Judge Clement Haynsworth, concluded that three violations of SEC laws had occurred as a result of ART's failure to disclose material and important information, in a prospectus issued in connection with the sale of debentures, In two federally-mandated forms filed with the commission and in a proxy statement.
Although Judge Kellam concluded that no violations had occurred, in part because the agency could not show that prospectus information had been withheld knowingly, the appeals court strongly disagreed with his interpretation of fedetal statutes.
"Material misstatements and material omissions may be the product of negligence as well as of willfulness, and there is nothing in the language (of the law) to suggest that the congressional intent was to reach the one and not the other," Haynsworth said in his ruling.
Further, the appeals court ruled that to require proof of negligent misstatements or negligent ommissions in a prospectus "established an affront to the goal the statutes sought to achieve of open disclosure of all relevant information which a reasonable person would wish in deciding whether to buy or sell."
Regardless of whether the information was withheld willfully or negligently, "an injunction in such a case can provide substabtial assurance that the negligent issuer will take more pains the next time to avoid all falsity," the court rules.
Philip N. Smith, attorney for ART, said the firm was "disappointed" by the ruling but had not yet decided whether to petition for a rehearing or to ask the U.S. Supreme Court to hear the case.
According to the court record, Thomas and Joel Broyhill and a man identified as John Deluca entered into negotiations in 1971 for development of a condominium project on Arlington Ridge Road in Arlington.
The three formed a partnership, and ART made a loan commitment of $10.8 million with the understanding that neither Joel Broyhill nor Deluca were to have any personal liability for repayment of the funds advanced. When ART encountered difficulties raising funds it had agreed to commit to the project, Chase Manhattan Realty agreed to advance $10 million, with ART agreeing to advance any aditional funds required to complete the project.
But in a prospectus issued in March, 1974 in connections with issuance of new debentures, there was no disclosure that the partners in the Arlington Ridge Road project were not personally liable for repayment of the loan, nor that ART had become a quarantor of complete repayment of Chase Manhattan Realty's loan portion, the appeals court said.
A second SEC charge accused ART of failing to disclose in a prospectus all information pertaining to a $368,000 loan ART made to a hotel management company indebted to the firm.
The third SEC charge involved a development venture called Rolling Wood in which Thomas Broyhill's daughter, her husband and another couple were partners. ART lent $1.2 million to the latter couple to help finance construction of the development by a firm controlled by the Broyhill daughter and her husband. However, no disclosure of the daughter's interest in the project was made in a March, 1974 ART prospectus.