## Facts

- Franchard Corporation was a public real-estate holding and syndication company organized in 1960 by Louis J. Glickman, who retained effective control through supervoting Class B shares and senior management roles.
- Franchard filed three Securities Act registration statements with prospectuses for public offerings effective in 1960 and 1961.
- Two days after the first 1960 registration became effective, Glickman began transferring corporate funds to Venada Corporation, his wholly owned company, without disclosure.
- Within roughly two months, transfers totaled about $296,329; by the first 1961 registration’s effective date, Glickman had made 45 withdrawals totaling about $2,372,511.
- None of the 1961 prospectuses (and no effective amendments to the 1960 filing) disclosed the transfers, the outstanding balances, or Venada’s reliance on Franchard funds.
- During the same period, Glickman pledged large blocks of his Franchard shares—eventually all of his Class B control stock and much of his Class A stock—to secure personal borrowings totaling about $4,250,000, with reported effective interest rates as high as 24%.
- The 1961 registration statements did not disclose the pledges, the magnitude of the debt, or the resulting risk to corporate control and investors.
- Franchard’s board learned in 1962 of the withdrawals; Glickman promised to stop and repay with 6% interest but continued withdrawing, and later did not fully satisfy the amount he owed.
- As affiliated entities faced distress, Glickman resigned and disposed of his Franchard holdings, including selling all Class B shares.

## Issues

1. Whether Franchard’s registration statements and prospectuses omitted material facts about the controlling insider’s withdrawals of corporate funds to an affiliated, wholly owned company.
2. Whether Franchard’s filings omitted material facts about the controlling insider’s pledging of control stock to secure large personal debt, and the resulting control and market risks.
3. Whether omissions about conflicts of interest and the character and quality of dominant management rendered the offering disclosures misleading under the Securities Act.

## Decision

- The SEC found that Franchard’s offering materials omitted material facts concerning both (i) the undisclosed withdrawals/loans to Venada and (ii) the pledging of Glickman’s control stock to secure substantial personal debt.
- The SEC held these omissions made the registration statements and prospectuses misleading and not compliant with the federal securities laws governing registration and disclosure.
- The SEC rejected the claim that the information was merely “personal affairs” or immaterial in light of Franchard’s overall size, emphasizing investor relevance and the magnitude and risk of the transactions.
- The SEC treated the continuing nature of the withdrawals and the failure to correct or update disclosures across subsequent offerings as aggravating the misleading character of the filings.

## Legal Principles

- In Securities Act registration disclosures, material facts include significant conflicts of interest, self-dealing, and other information bearing on the loyalty, integrity, and reliability of a dominant insider who controls the issuer.
- A registrant may be required to disclose management-related facts—such as a controlling executive’s substantial misuse of corporate funds or precarious personal finances—when those facts would matter to a reasonable investor assessing the issuer’s risk and governance.
- An issuer cannot avoid disclosure by labeling information “personal” when the conduct involves corporate assets, affiliated transactions, or risks to corporate control.
- Significant pledges of control stock and large personal debt can be material where they create a meaningful risk of forced sales, control shifts, or other adverse consequences for investors.
- When adverse developments continue after an initial filing, later offering materials and amendments must not leave investors with a materially incomplete or distorted picture.

## Conclusion

The SEC concluded that Franchard’s public offering disclosures were materially misleading because they concealed a controlling insider’s substantial, ongoing withdrawals of corporate funds to an affiliated company and his extensive pledging of control shares to secure large personal debt, and it treated management conflicts and control-related risks as material information required in registration filings.


In re Franchard Corp., 42 S.E.C. 163 (1964)