Investor Louis Wolfson Is Convicted of Selling Stock Illegally

Date November 28, 1967

Louis Wolfson was a risk-taking businessman and one of Wall Street’s most successful investors when he was convicted of conspiring to sell shares of stock in Continental Enterprise, a company he controlled. These shares had not been registered with the Securities and Exchange Commission as required by the Securities Act of 1933. The case also led to the resignation of U.S. Supreme Court associate justice Abe Fortas.

Locale New York, New York

Key Figures

• Louis Wolfson (1912-2007), financier and businessman
• Elkin B. Gerbert (fl. 1960’s), Wolfson’s business partner
• John J. Morley (fl. 1960’s), Wolfson’s broker
• Abe Fortas (1910-1982), associate justice of the United States, 1965-1969

Summary of Event

On November 28, 1967, after a short trial, Louis Wolfson, Elkin B. Gerbert, and two others, were convicted of violating section 5 of the Securities Act of 1933, which prohibits the sale of unregistered shares of stock to the public. Wolfson was convicted largely on the basis of testimony provided by his broker, John J. Morley. All parties agreed that Wolfson sold shares in Continental Enterprises, a company he controlled. These shares had not been registered with the U.S. Securities and Exchange Commission as required by federal law.

Wolfson claimed that he was unaware of the legal requirement to register shares before selling them to investors. Morley testified that he had informed Wolfson of the requirement and that Wolfson had chosen to disregard his advice. Both Wolfson and Gerbert were convicted of securities fraud. Wolfson served ten months in a federal minimum-security facility at Elgin Air Force Base in Florida. He also paid a substantial fine.

Wolfson had always been a risk-taking businessman who preferred to play by his own set of rules. Even while attending the University of Georgia, he had demanded and received money to play on the university’s football team, a direct violation of rules pertaining to amateur athletes. He left the university before earning a degree.

Quick to spot and act on lucrative opportunities, Wolfson raised $10,000 and entered the business world. He made his first million dollars by the age of twenty-eight, when he purchased deeply discounted plumbing supplies and fixtures from the son of J. C. Penney, the department-store magnate. Wolfson then sold those fixtures at full price, earning a hefty profit. Such entrepreneurial talent allowed him to grow his small plumbing supply company, Florida Pipe and Supply, into shipyards in Jacksonville and Tampa, Florida.

Wolfson’s early financial success inspired him to acquire or take controlling interest in other companies, including Merritt-Chapman & Scott, a huge bridge-building company, and Universal Marion Company, which owned newspapers throughout Florida, as well as a film production unit. He tried but failed to gain control of the mail-order company and later department-store chain Montgomery Ward. Ward’s chief executive officer, Sewell Avery, accused Wolfson of making the move to enrich himself and his associates at the expense of all other shareholders.

Wolfson’s legal problems involving Continental Enterprises might have had their beginnings years beforehand, when he and a number of associates bought Capital Transit Company of Washington, D.C., the sole provider of bus and streetcar transportation into and within the city. When Wolfson took over control of Capital Transit in 1950, the company had a $6 million surplus, stable earnings, and a 50-cents-per-share annual dividend. Wolfson raised the annual dividend to $2 per share, which meant a $480,000 payment to himself, even though the company showed a net profit for the year of only $332,000. The following year, 1951, Wolfson raised the annual dividend to $4 per share. The D.C. Public Utilities Commission denied Wolfson’s request for a fourth rate increase to generate additional funds. Wolfson then denied his employees a 25-cent-per-hour pay raise. The workers went on strike as a result of his refusal.

The congressional committee responsible for overseeing public transportation in Washington, D.C., responding to vocal criticism from people forced to walk to work for several weeks, issued Wolfson a subpoena, to which he declined to respond. Enraged members of the U.S. Congress called Wolfson an “economic carpetbagger” and threatened to force him to relinquish the city’s public transportation franchise. Wolfson eventually complied with the subpoena, but he had made powerful enemies in Congress as a result of his initial refusal.

When Wolfson was indicted on securities fraud charges, some of these same angry members of Congress applied pressure to have Wolfson prosecuted to the fullest extent possible. Wolfson repeatedly claimed the securities law was misapplied in his case and that his prison sentence was unduly harsh for a first-time offense. His accusations may have had some validity.

Wolfson’s sale of unregistered shares of Continental Enterprises was not his only securities-related crime. Also in 1966, he was charged, along with others, with fraud in the purchase of stock in Merritt-Chapman & Scott and for perjury in filing false reports to the SEC (about this stock purchase). Just prior to the beginning of the two criminal cases against him, Wolfson had started a charitable foundation and hired Abe Fortas, a U.S. Supreme Court associate justice, as a consultant, for which he was paid $20,000 annually.

The legal proceedings did not end favorably for Wolfson, and he was sent to prison. Upon his release from prison, Wolfson appealed his convictions on a number of counts. One appeal reached as high as the Supreme Court. It was at this time that Justice Fortas’s business arrangement with Wolfson was discovered. Although the Court declined to hear Wolfson’s appeal and even though Fortas returned the money he received from Wolfson, public outcry over the retainer fee eventually led Fortas to resign from the Court in disgrace, the only Supreme Court justice in modern history to have done so.

Wolfson also reportedly tried to bribe President Richard Nixon’s attorney general, John Mitchell, to get him to review his conviction by giving radio personality (and now television talk-show host) Larry King $48,500 to pass on to Mitchell. As late as 1994, Wolfson continued to appeal his conviction. He unsuccessfully sued his former broker, Morley, in 1975, and sued to have documents from his original trial unsealed. Wolfson wanted his biographer to have access to all the court documents so he could write an accurate account of Wolfson’s life. The biography, official or otherwise, was never written. Wolfson was unsuccessful in getting these court documents unsealed and also was unsuccessful in having his conviction overturned.

Part of Wolfson’s sentence was a prohibition against working in the securities industry. Instead of securities, he became involved in horse racing through Harbor View Farm, his estate in Marion County, Florida. In 1978, one of his horses, Affirmed, won the elite Triple Crown. In 1985, Wolfson offered to buy Churchill Downs in Louisville, Kentucky, for $46 million, but his offer was declined.

Wolfson died on December 30, 2007, due to complications from Alzheimer’s disease and colon cancer. He was ninety-five years old. His philanthropic legacy includes the Wolfson Children’s Hospital and the Wolfson Student Center, as well as various community health facilities in Jacksonville, Florida.

Impact

While neither the courts nor the SEC agreed to unseal documents related to Wolfson’s trials on securities fraud charges, the SEC did eventually change its classification policies to make some legal documents more accessible to defendants. A defendant facing trial no longer had to sue to obtain access to documents to be used for his or her defense.

Despite being sentenced to a minimum-security facility and serving less than one year, Wolfson found the experience of incarceration horrible and humiliating. He began public advocacy for prison reform upon his release.

Bibliography

“Corporations, Liability of Directors: Directors Liable for Causing a Corporation to Contribute to a Proxy Fight Involving Another Corporation in Which It Is a Shareholder–Kaufman v. Wolfson.” Harvard Law Review 71, no. 7 (May, 1958): 1354-1357.

Saxon, Wolfgang. “Louis Wolfson, Central to the Fall of a Justice, Is Dead at 95.” The New York Times, January 2, 2008. Wolfson’s obituary in the respected, international newspaper of record.

Shapiro, Susan P. Wayward Capitalists: Target of the Securities and Exchange Commission. New Haven, Conn.: Yale University Press, 1984. Scholarly work that provides detailed information on how the SEC, formed in 1934, detects securities violations and prosecutes offenders.