North Carolina authorities have ordered E. F. Hutton & Co. Inc. to stop selling shares in a motion-picture-production partnership because the company allegedly failed to register the offering with the state securities commission.
But a Hutton official said the company did nothing wrong, and Hutton's outside law firm, which took responsibility, said it made a simple mistake.
At least 100 North Carolinians have spent a total of more than $2.4 million in recent weeks to invest in Silver Screen Partners II, a partnership offered through Hutton offices around the nation. The partnership is trying to raise $150 million to invest in 10 to 15 films to be made by Walt Disney Productions.
Hutton officials received Securities and Exchange Commission permission in mid-April to make the offering, and applied for similar approval from officials in all 50 states to offer shares in the partnership in each state.
North Carolina officials said they raised questions about some of the details of the offering, but never got any response from Hutton. State Securities Commissioner Daniel Bell said the state never even got a copy of the final prospectus for the offering, as is required. "We never received any information from them, we never received any attempt to satisfy the deficiencies we found in the application," Bell said.
Last week, however, Bell's office discovered that Hutton offices in the state were offering the partnerships. "From what we ascertained, they were all over the state, and they never properly notified us," Bell said. Stephen Wallace, an investigator for the state securities commission, went to a Hutton office in Raleigh last week posing as an investor and was given a full-scale pitch for the investment -- including a sales video featuring Disney star Mickey Mouse and a copy of the final prospectus -- the first state officials say they had seen.
Bell then ordered Hutton to stop selling the partnership shares and freeze the funds it received, pending an investigation.
Tom Rae, the head of Hutton's legal department, said his company had been told by its outside counsel that it had received clearance to sell the partnerships in North Carolina. "Hutton was acting in good faith," he said. "Apparently there was some breakdown in communications."
Steve Green, a partner at Cahill and Gordon, the law firm that was handling the offer for Hutton, said the fault lay with another lawyer in the firm, whom he did not identify, who apparently told Hutton prematurely that officials in North Carolina had approved the registration form. The lawyer then "dropped the ball" and didn't complete the negotiations with state officials, Green said.
A similar problem also occurred with the securities commission in Pennsylvania, he said, but that state has not taken action to stop sales of the partnerships. "Those were apparently the only two states where the ongoing dialogue hadn't been resolved," Green said.
He said Cahill and Gordon is now holding discussions with North Carolina and Pennsylvania officials to try to correct the oversight and clear the sale of the partnerships. Both he and Bell said one possible compromise might be to give those who already have invested in Silver Screen partnerships a chance to rescind the investments; Hutton could also decide to simply void all the sales in the two states and just accept money from investors elsewhere. Green said he hopes to clear up the situation within the next few days.
The episode is another embarrassment for Hutton, which recently pleaded guilty to federal charges of floating checks to obtain, in effect, interest-free loans from its banks. But Green said, "In this instance, Hutton is 100 percent blameless. . . . "
Wallace said he couldn't recall the last time a big securities firm ran afoul of North Carolina officials in this manner. And Bell said, "The magnitude of the problem is pretty grave, even though it would seem like a routine matter in which they dropped the ball."