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The stock fraud scandal The Plot As written by the SEC Dallas It all started, according to the SEC, back in June, 1968, when Frank Sharp acquired a publiclyheld life insurance company, to wit, Olympic. This acquisition was financed by Sharp through a loan made in the name of his son-in-law. W. D. Haden II at SSB. Sharp’s involvement in the arena of publicly-held companies was further expanded in July of 1968 when he acquired more than 50% of NBL. This company, which had a rather shaky history \(it was once part of Billie Sol Estes’ from Allan Shivers, a reasonably successful life insurance company. John Osorio was president of the company when Sharp bought it and continued as president. Sam Stock, also a long-time NBL employee, continued with the company. After acquiring NBL, Sharp made Novotny a director of the company and a member of its executive and finance committees, along with Osorio and Stock. All three became trustees of the NBL Plan. The stock of NBL Sharp acquired, some 519,000 shares outstanding, was issued in the name of SRC. When Shivers sold the company to Sharp, part of the contract stated that the stock was investment letter stock not for resale. Soon after acquiring NBL, Sharp, acting through Novotny, Osorio and Stock, caused NBL to loan SRC $2 million. The collateral for this loan was 150,000 shares of SSB stock. Subsequently the Texas State Insurance Dept. indicated to the management of NBL that this was not a legal loan. In early 1969, Osorio approached Sharp concerning the acquisition of a controlling interest in SAC. SAC at that time was a holding company for 1,045,000 shares of Ric. Sharp, who was then negotiating with another public company, did not purchase SAC at the time. However, Osorio, Carr and Novotny did agree to purchase control of SAC from Southeastern Funding Co., a Florida corporation. To accomplish this, Osorio, on behalf of Carr and himself, borrowed $500,000 from CB&T, secured by 220,000 shares of SAC stock. Apparently at . this point, Novotny withdrew from the deal because he had been included originally in hopes of obtaining financing from SSB. Osorio, Carr and Audy Byram became officers and directors of Ric and operated that company. In the spring of 1970, Ric was named in an action in the Southern District of New York to enjoin Ric and its officers, directors and employees from further violation of the Securities Exchange Act of 1934 in connection with an alleged scheme to manipulate the market price of Ric stock on the American Exchange. Ric consented to the entry of a permanent injunciton in that case without admitting the allegations of the complaint. PRIOR TO March, 1969, Osorio, Carr, Byram and Tom Thomas were the control persons of CB&T. Osorio, Carr and Thomas were law partners. From time to time, the control group of CB&T changed, but Osorio, Carr, Byram and Thomas retained their interest in CB&T both directly and through Nashwood Corp. Soon after SAC was acquired by Carr and Osorio, SAC borrowed $2.8 million from SSB to acquire control of DB&T. The DB&T stock was pledged as collateral for this loan at SSB. Next the defendents had DB&T finance their ownership of CB&T. Bank regulatory authorities objected and the loan was moved to SSB. This act and others by the FDIC caused Sharp to become dissatisfied with FDIC regulation. He therefore suggested to Osorio that a bill be introduced in the Texas Legislature creating a state-chartered insurance corporation to insure state banks. Osorio’s and Carr’s firm drafted the bill and it was introduced in the House in September, 1969, during the special session. Prior to the introduction of the bill, SSB loaned large sums of money to Tommy Shannon, who sponsored the bill, Preston Smith, Gus Mutscher Jr. and Sr., Elmer Baum, Rush McGinty and F. T. Schulte. The proceeds of these loans were used to purchase NBL stock from Ling & Co. through Adams. The bill was passed by the Legislature on Sept. 9, 1969. On Sept. 11,1969, Shannon, Mutscher, Jr. and Sr., McGinty and Schulte sold 39,800 shares of their NBL stock to the Jesuit Fathers at a profit of from $6 to $8 a share. On Sept. 12,1969, Smith and Baum sold a portion of their stock to the Fathers at a similar profit. The market price of NBL stock at this time was approximately $5 under the price paid by the Fathers. On Sept. 29, 1969, Governor Smith vetoed the bill. In early 1969, Adams joined with Strange, Proctor, Farha and Ling to form a corporation named FLAP, Inc. This corporation was organized to buy and sell securities, primarily through Ling & Co. Before the actual incorporation papers these persons caused an account to be opened for FLAP at Ling & Co. and a bank account to be opened at CB&T. Prior to actually obtaining any loans from CB&T, several purchases of securities were made by FLAP at Ling & Co. which involved’ primarily check swaps, whereby FLAP would sell the securities purchased before making payment to Ling & Co. and used the proceeds from the sale to make good on checks. This conduct is in violation of several federal securities and banking regulations. In about March, 1969, Adams arranged for a series of loans at CB&T to be collateralized with securities purchased from Ling & Co. by FLAP, the proceeds of the loans to be used to pay Ling & Co. for these securities. The net result of FLAP’s transactions with CB&T is an indebtedness to CB&T from FLAP in excess of $165,000 secured primarily by shares of NBL and Olympic. IN THE SUMMER of 1969, Adams and Strange contacted their boss Michael Ling and demanded that they be permitted to make a market in certain securities, including NBL, MCI and Olympic. Ling acceded to this deMand. On July 11, 1969, Ling & Co., through Proctor who acted on instructions from Adams and Strange, began to purchase shares of NBL in the market at $5 a share. Between July 11 and Sept. 1, 1969, Ling & Co. purchased several thousand shares of NBL stock and sold, through Adams, most of the stock to persons financed by SSB. These persons purchased NBL stock primarily as a result of conversations with Sharp, Osorio and Adams, who also arranged for the financing of these purchases. In Sept., 1969, Adams took Proctor to Houston to meet with Sharp. At that time Sharp suggested to Proctor that Ling & Co. make a market in Olympic stock, which suggestion Proctor promptly carried out on his return to Dallas. At about this time the proposed merger to between Olympic and NBL was_announced to the public. In the meantime, NBL had announced that its shares of MCI, a computer service company servicing primarily NBL, would be distributed to NBL stockholders of record as of July 31, 1969. This distribution was made in October, 1969. At Adam’s suggestion Proctor began to make a market in MCI stock at Ling & Co. The initial purchase by Ling & Co. was 10,000 shares of MCI owned by Osorio, Thomas, Stock, Akins and others. Adams requested this stock to enable Ling & Co. to begin to make a market. Thomas advised Adams at the time of the transaction that Adams should cause copies of the MCI February 12, 1971 3