A federal judge in Norfolk has dismissed allegations by the Securities and Exchange Commission that American Realty Trust of Arlington defrauded investors by withholding information concerning sensitive loans and financial problems.
U.S. District Court Judge Richard B. Kellam, who issued the decision late last month, presided at a trial here last April on the SEC charges and the agency's request that company president Thomas J. Boyhill he removed from the real estate trust he founded in 1961.
Judge Kellam's action, revealed publicly yesterday, currently is under review by the SEC's general counsel. Paul F. Leonard, head of the agency's regional office is Arlington, said yesterday the full commission is expected to decide the question of a possible appeal within 15 days.
While there has been "no firm recommendation . . . I think we will appeal," Leonard said. An appeal of the District Court decision would be filed in the U.S. Court of Appeals for the 4th Circuit, in Richmond. The SEC initiated court action in February, 1976, following an investigation that lasted several months.
Broyhill who also is chairman of ART, said yesterday the court decision is "a significiant victory," which "vindicates our refusal to settle the action by signing a consent decree. We felt, and feel, that the charges were not justified, and rather than look for an easy way out, we elected to prove our integrity in court - and we won."
The ART chief also said the SEC investigation and newspaper reports on the probe had "seriously disrupted the trust's business relationships, and virtually paralyzed the trust for well over a year while we contested these unjustified charges."
A statement issued by the company said Broyhill had "particular resentment about the publicity given the case," much of which focused on Broyhill's relationship to cousin Joel T. Broyhill, a former GOP congressman from Northern Virginia.
The SEC alleged that some details surrounding an American Realty arrangement with Joel Broyhill, on construction of the Representative condominium apartments in Arlington, were not made public for investors. The Representative originally was a development of Joel Broyhill and John DeLuca, for which the trust approved a loan.
Judge Kellam found that Thomas Broyhill did not formally notify directors of American Realty about an indemnification agreement, under which Joel Broyhill and Deluca or their wives would be indemnified for liability connected with their quarrantees to Chase Manhattan Mortgage Trust, which ultimately became the project's prime lender.
"While this failure to communicate may not be consistent with good business practices, this court need not make any judgement on that because it does not, standing alone, constitute any violation of the federal securities laws," the judge said in a footnote to his decision.
The fact that certain directors were not aware of specific agreements does not imply that Thomas Broyhill was unauthorized to execute them, the judge added.
On another point, however, Judge Kellam said an American Realty prospectus in 1974, connected with a sale of debentures, did "fail to disclose" material facts on the indemnity agreement.
"Though the ommission was material, the court nevertheless finds the defendants did not violate the antifraud provisions of the 1933 and 1934 acts because the plaintiff has failed to prove the requisite level of cupability," Judge Kellam ruled.
A "careful examination" of the record indicated that Thomas Broyhill and ART "did not possess the requisite intent to develop, manipulate or defraud," he added.
On other SEC claims that Thomas Broyhill often acted alone, without approval from the trust's directors, Judge Kellam said the agency had not provided evidence to substantive those views.
Similarly, he ruled that agency had provided no proof that Thomas Broyhill knew that his daughter had an interest in a project for which the trust arrived a loan. Neither Thomas Broyhill nor his daughter were called to testify on this question, leading the court to conclude that the ART chief executive "was genuinely surprised to later learn of her interest . . ."
The judge also said that even if the SEC charges had been backed up by evidence, the court could not have granted the "expansive authority" to take over direction of the trust, requested by the agency - replacement of Thomas Broyhill, appointments of new directors.
Such steps "infringe on activities traditionally controlled by the states . . . Except in the most egregious cases, courts should not interfere with corporate democracy. Those circumstances are not present in the instant action."