Puzzle Started

SEC lawyers and accountants have been toiling almost three years on a study of investment trusts, to be followed by a report to Congress, recommendations for a regulatory law, doubtless a permanent bureau staffed by SEC lawyers and accountants. One of SEC's aims is to prevent capture of one investment company by another (especially when the capture is financed with the captured company's assets), with disregard of minority stockholder's interests.

Right in SEC's face a month ago, the Continental Securities case exploded; in court April 23 (TIME, May 2), counsel declared Continental's $3,300,000 assets had dwindled to $20,000. Last week--as SEC was laboriously delving into another phase of its investment trust inquiry, the accounts of the old Founders companies --the Continental case exploded again.

Suit was filed against 91 defendants by Arthur Atwood Ballantine, onetime Under Secretary of the Treasury, now Continental's trustee under 77B. Charging a conspiracy to capture several investment trusts partly and indirectly bought with their own assets, Trustee Ballantine asked an accounting and return of $3,300,000 to Continental. Defendants included Vincent E. Ferretti, George H. Clayton, Phillip A. Frear, S. Leo Solomont, James A. Frear, George J. Mitchell Jr., George H. Clayton Jr., Thomas W. Morris, Ralph H. Robb, Fred A. Ross, Chester A. Dunham, Paine, Webber & Co., brokers; J. Henry Schroder Banking Corp.; four principal ex-stockholders of Reynolds Investing Co.

Defendants' method of capture, as described by Mr. Ballantine, more or less boiled down to these three main points: 1) Control of an investment trust called First Income Trading Corp. was bought with money borrowed from Paine, Webber and repaid from First Income's own assets. 2) Control of Continental was bought from the Schroder bank by the same methods, but in an involved transaction between a) an Ontario enterprise known as Fiscal Management Company Limited, b) First Income, c) Continental, d) Schroder, e) Paine, Webber. 3) Control of Reynolds was bought from the Reynolds family and an associate with money from First Income, Continental, and (more than a third) from Reynolds itself. The control stocks of Continental and Reynolds, said Mr. Ballantine, had no asset values, the prices were excessive and the sellers should have known that some raid on the companies' assets was planned. Further the bill of complaint specified other interesting uses of Continental's funds: to buy all stock of Corporate Administration, Inc., substantially the only asset of which was a management contract with Administered Fund Second, Inc.: to buy stock of an aircraft corporation regarded by the trustee as of little or no value; to buy a stock exchange seat for a customer's man; to make a loan (now defaulted) on two second-hand airplanes. Trustee Ballantine wants to return the Reynolds* and Corporate Administration stock, get back the money Continental paid for it.

Last week, Clarence K. and Richard S. Reynolds issued a statement that their family interest was sold in good faith and after investigation "to a member of a New York Stock Exchange firm, and an associate." Paine, Webber said that last October they were asked to make a loan against collateral which was to be liquidated, received the securities at a bank, and were furnished with a vote of the corporation authorizing the sale, which authorization they followed.

With these various elements as a starter, Federal and State authorities will spend the next few weeks completing their investigation of the whole affair; after that it is expected that David Schenker, loud, dramatic SEC attorney, will undertake to put together the entire Continental puzzle.

*When three stockholders of Reynolds Investing last week petitioned Judge Guy L. Fake in Newark for reorganization of that company under 77B, they listed its assets at only 95% of its liabilities.

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