The Chief of the Bureau of Securities of the State of New Jersey seeks to enjoin the defendant, Mortimer L. Schultz ("Schultz"), from issuing, selling or engaging in the sale of securities. The complaint charges the defendant with having engaged in such activities without being registered as a broker-dealer or agent in this State, as required under N.J.S.A. 49:3-9, and further, that in connection with the offer, sale and assignment of securities, defendant directly and indirectly has employed and continues to employ devices, schemes, and artifices to defraud, contrary to the provisions of the Uniform Securities Law, N.J.S.A. 49:3-1 et seq.
Plaintiff obtained an order to show cause with an ad interim restraint. Defendant filed an answering affidavit which, in effect, constituted a general denial. A summary hearing was held, at which time the State produced several witnesses. Defendant did not produce any witnesses nor did he testify.
Defendant was engaged in the real estate syndication business. At all times mentioned herein defendant was the principal stockholder of Office Buildings of America, a New Jersey corporation (hereinafter referred to as "OBA"), holding 38% of the issued stock. Additionally, he was president, chairman of the board of directors, and the dominant personality in its over-all operation.
In most instances OBA entered into various contracts to acquire real estate, consisting of shopping centers and other income-producing properties in and without the State of New Jersey. Thereafter, limited partnerships were formed in New Jersey pursuant to N.J.S.A. 42:2-1 et seq. In each syndication, except High Point Gates Associates, Schultz was the sole general partner. Generally, the limited partnership supplied the necessary funds with which to close the title. Thereafter OBA conveyed the property to the limited partnership and entered into a net lease-back arrangement with it whereby the investors in the particular partnership were to receive a net annual return of 9% to 10% on their investment. In connection with out-of-state acquisitions, the procedure varied slightly in that the limited partnerships were not formed until the title passed to OBA, although the investors supplied OBA with the necessary funds.
First Jersey Securities Corporation (hereinafter referred to as "First Jersey"), registered as a broker-dealer under the Uniform Securities Law, issued a prospectus to the public at large, describing the various ventures in New Jersey and offering unit participations in the respective limited partnerships. Each prospectus was prepared and circularized under the direction and approval of Schultz. All the stock in this corporation was held by Rosanna Schultz, defendant's wife, as custodian for their four children.
Harold Stevens, sales manager for First Jersey, and other sales personnel actively solicited the general public to initially invest in New Jersey ventures and promoted and solicited resales of units in both New Jersey and out-of-state properties. In his operations he was guided, supervised and directed by Schultz.
In connection with out-of-state promotions such as San Mac Associates ("San Mac"), the initial investors were directly solicited by defendant and consisted of his business acquaintances and friends. Schultz also personally negotiated for the initial sale of participating units in New Jersey ventures as well as the assignments of the same.
First Jersey Servicing Company, a trade name for Schultz and described by Raymond F. White, Secretary of OBA, as the "Managing Agent" for the various syndications, was the conduit through which monthly distributions were made to holders of units in the limited partnerships. In effect, this servicing company, which received management fees from the limited partnerships, performed only an accounting function. At the end of 1962 First Jersey and First Jersey Servicing, at the behest of Schultz, were acquired by OBA.
Schultz, as chief executive for OBA, made all major decisions until his resignation on May 28, 1963. He masterminded the operations of First Jersey. As the sole general partner in all limited partnerships, except High Point Gates Associates, he was invested with the sole right of management and conduct of the partnership business.
Defendant owned 43 participation units in "San Mac" from the inception on September 28, 1960 until October 12, 1962. During this same period he transferred 65 units to the general public, retaining two units in his account.
The limited partnership, Wiss Building Associates ("Wiss"), owns property on Broad Street in Newark, N.J. Defendant owned 8 1/2 "Wiss" participation units between the dates November 1, 1960 and July 1, 1962. Within said period he transferred 38 1/2 participation units to the general public. In brief, he purported to sell units which he did not own in each of the respective limited partnerships.
In order to control and conceal the sale of these participating units beyond those which he owned, Schultz instructed OBA's assistant bookkeeper, Marie D. Hoynack, to prepare separate ledger accounts for these investors. Defendant ordered these special ledger sheets to be kept separate from the general partnership accounts and to allow no one access to them. Mrs. Hoynack further identified the special accounts and the checks sent to the investors representing their monthly distributions on these accounts by the symbol "X." Upon her termination of employment in the latter part of December 1961, the special accounts were maintained by
Sherman Hirschfeld, comptroller of OBA, under the supervision of Schultz.
Illustrative of defendant's manipulations in the sale of participation units were his transactions with William Marianni. On November 17, 1960 Marianni purchased 20 participation units of "San Mac" from Schultz for $35,000. However, Schultz credited Marianni with only ten units on the regular partnership books and debited his own account with ten units. Defendant created a special ledger or ...