## Facts

- A nonprofit Arizona corporation operating an osteopathic hospital offered and sold 8% first-mortgage bonds secured by a first lien on hospital property and equipment.
- From July 1961 through November 1962, the hospital and two officer-directors used the mails and interstate communications to sell more than $1.3 million of bonds to out-of-state purchasers, including elderly and unsophisticated investors.
- No registration statement for the bonds was filed with, or effective at, the Securities and Exchange Commission during the offering.
- The two officer-directors were the only salaried directors and continued to receive salaries after the hospital opened.
- The officer-directors planned to retain 10% of bond proceeds as compensation for promotional and organizational efforts.
- The officer-directors had a substantial interest in the construction contractor building the hospital, creating a conflict affecting the use of offering proceeds.
- The SEC alleged, and the court found, that investors were not told material facts about promoters’ compensation and conflicts of interest in connection with the bond sales.
- The SEC filed an enforcement action for injunctive relief; the court entered a temporary restraining order supported by affidavits.
- Defendants did not appear or answer and were in default.

## Issues

1. Whether the offer and sale of the hospital’s bonds without an effective registration statement violated Securities Act § 5(a) and § 5(c).
2. Whether offering and selling the bonds using material misstatements or omissions—including nondisclosure of promoters’ profits and conflicts of interest—violated Securities Act § 17(a).
3. Whether permanent injunctive relief was warranted based on past violations and the risk of continued or recurring misconduct.

## Decision

- The court entered default judgment for the SEC and issued findings of fact and conclusions of law.
- The court held that defendants violated § 5(a) and § 5(c) by offering and selling bonds through interstate means without any registration statement in effect.
- The court held that defendants violated § 17(a) by engaging in a fraudulent scheme involving material misstatements and omissions, including failure to disclose promoters’ profits and conflicts of interest.
- The court permanently enjoined the hospital and the two officer-directors from further violations of §§ 5 and 17(a).

## Legal Principles

- Bonds issued to raise capital are “securities” subject to the Securities Act; an issuer’s nonprofit or charitable status does not, by itself, exempt a public offering from federal registration and antifraud requirements.
- An offer or sale of securities using the mails or interstate commerce without a registration statement in effect violates § 5(a) and § 5(c) absent a proven exemption.
- Under § 17(a), omitting material facts in connection with the offer or sale of securities—such as promoters’ intended compensation from offering proceeds and conflicts of interest tied to use of proceeds—can constitute a fraudulent scheme and unlawful deception.
- In SEC actions, a permanent injunction may issue where past violations are shown and the circumstances support a reasonable likelihood of continuation or recurrence.

## Conclusion

The court permanently enjoined a nonprofit hospital and its controlling officer-directors for selling unregistered mortgage bonds and for materially misleading investors by concealing promoters’ profits and conflicts of interest, holding that charitable status does not shield a securities offering from §§ 5 and 17(a) of the Securities Act.


Securities & Exchange Comm’n v. Children’s Hosp., 214 F. Supp. 883 (D. Ariz. 1963)