415 F.2d 589 (2nd Cir. 1969), 587, Hanly v. S.E.C.
|Docket Nº:||587, 588, 589, 590, 650, 33178, 33233, 33234, 33269, 33276.|
|Citation:||415 F.2d 589|
|Party Name:||Mortimer W. HANLY, Arthur Gladstone, Frederick C. Stutzmann, Jr., Steven Charles Paras, and Charles Arthur Fehr, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.|
|Case Date:||July 24, 1969|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued May 22, 1969.
[Copyrighted Material Omitted]
David Ferber, Solicitor, Securities and Exchange Commission, Washington, D.C. (Philip A. Loomis, Jr., Gen. Counsel, Paul Gonson, Asst. Gen. Counsel, Harvey L. Pitt, Atty., Securities and Exchange Commission, Washington, D.C., on the brief), for respondent.
James C. Sargent, New York City (Robert S. Newman, Jack I. Samet, Parr, Doherty, Polk & Sargent, New York City, on the brief), for petitioner Hanly.
Francis E. Koch, New York City (Andrew N. Grass, Jr., Windels, Merritt & Ingraham, New York City, on the brief), for petitioners Gladstone and Stutzmann.
Thomas A. Harnett, New York City (Thomas H. McManus, Harnett & Reid, New York City, on the brief), for petitioner Paras.
Harold I. Geringer, New York City (Lian & Geringer, New York City, on the brief), for petitioner Fehr.
Before LUMBARD, Chief Judge, FEINBERG, Circuit Judge, and TIMBERS, District Judge. [a1]
TIMBERS, District Judge:
Five securities salesmen petition to review an order of the Securities and Exchange Commission which barred them from further association with any broker or dealer. 1 The Commission found that petitioners, in the offer and sale of the stock of U.S. Sonics Corporation (Sonics) between September 1962 and August 1963, willfully violated the antifraud provisions of Section 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77q(a), Sections 10(b) and 15(c)(1) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78o(c)(1), and Rule 10b-5, 17 C.F.R. § 240.10b-5. Specifically, the Commission held that 'the fraud in this case consisted of the optimistic representations or the recommendations . . . without disclosure of known or reasonably ascertainable adverse information which rendered them materially misleading . . .. It is clear that a salesman must not merely avoid affirmative misstatements when he recommends the stock to a customer; he must also disclose material adverse facts of which he is or should be aware.' 2 Petitioners individually argue that their violations of the federal securities laws were not willful but involved at most good faith optimistic predictions concerning a speculative security, and that the sanctions imposed by the Commission exceeded legally permissible limits. The Commission, upon an independent review of the record before the hearing examiner, affirmed his findings as to individual violations, rejected his finding of concerted action, and increased the sanctions he had imposed. We affirm in all respects the order of the Commission as to each of the five petitioners.
The primary witnesses before the hearing examiner were customers of each of petitioners and the former president of Sonics. Since the Commission rejected the conclusion of the hearing examiner that petitioners had acted in concert in the conduct of their fraudulent activities, 3 we have considered separately the evidence against each petitioner and have considered the sanctions against each in the light of his specific alleged violations.
While we believe it neither necessary nor appropriate to set forth all of the evidence upon which the Commission's findings and order were based, we shall summarize sufficiently the background of Sonics and petitioners' individual violations to indicate the basis of our holding that there was substantial evidence to support the Commission's underlying finding of affirmative misrepresentations and inadequate disclosure on the part of petitioners.
U.S. Sonics Corporation
Sonics was organized in 1958. It engaged in the production and sale of various electronic devices. From its inception the company operated at a deficit. During the period of the sales of its stock here involved, the company was insolvent.
By 1962 the company had developed a ceramic filter which was said to be far superior to conventional wire filters used in radio circuits. Sonics' inability to raise the capital necessary to produce these filters led it to negotiate with foreign and domestic companies to whom Sonics hoped to grant production licenses on a royalty basis. Licenses were granted to a Japanese and to a West German company, each of which made initial payments of $25,000, and to an Argentine company, which made an initial payment of $50,000. License negotiations with
domestic companies continued into 1963 without success; negotiations terminated with General Instrument Corporation on March 20, 1963 and with Texas Instruments, Incorporated, on June 29, 1963. In addition, testing of the filter by prospective customers provided unsatisfactory results.
Merger negotiations with General Instrument and Texas Instruments likewise proved unsuccessful. Sonics' financial condition continued to deteriorate with the cancellation by the Navy of anticipated orders for hydrophones. On December 6, 1963 bankruptcy proceedings were instituted against Sonics, and on December 27, 1963 it was adjudicated a bankrupt.
During most of the relevant period petitioners were employed by Richard J. Buck & Co., a partnership registered as a broker-dealer. 4 Gladstone and Fehr were co-managers of the firm's Forest Hills, N.Y., branch office. Hanly was the manager of its Hempstead, N.Y., office. Stutzmann and Paras were salesmen in the Hempstead office.
Gladstone (along with Paras) first heard of Sonics in September 1962 during a conversation with one Roach who had been a sales manager for his prior employer, Edwards and Hanly. Roach compared Sonics to Ilikon, whose stock he had previously recommended and which had been highly successful. Sonics was praised for its good management, large research and development expenses and, most important, its development of a ceramic filter. In January 1963 Roach told Gladstone of the possibility of a domestic license and furnished him with a copy of an allegedly confidential 14 page report which predicted a bright future for the company. 5 In February Gladstone met with Eric Kolm, Sonics' president, who confirmed most of the statements in the report. During the spring of 1963 Gladstone learned of the licensing and merger negotiations mentioned above.
On the basis of this information and knowing that Sonics had never shown a year end profit since its inception, that it was still sustaining losses, and that the 14 page report was not identified as to source and did not contain financial statements, Gladstone told Hanly, Stutzmann and Paras about the company and made certain representations to his customers.
Evidence of affirmative misrepresentations by Gladstone to his customers regarding Sonics stock included the following: Sonics was a winner and would make money. It had a fabulous potential and would double or triple. It would make Xerox look like a standstill and would revolutionize the space age industry. Gladstone himself had purchased the stock for his own account and he would be able to retire and get rich on it. It had possibilities of skyrocketing and would probably double in price within six months to a year. Although it had not earned money in the past, prospects were good for earnings of $1 in a year. Sonics had signed a contract with General Instrument. The stock would go from 6 to 12 in two weeks and to 15 in the near future. The 14 page report had been written by Value Line. The company was not going bankrupt. Its products were perfected and it was already earning $1 per share. It was about to have a breakthrough on a new product that was fantastic and would revolutionize automobile and home radios.
In addition to these affirmative misrepresentations, the testimony disclosed that adverse information about Sonics' financial difficulties was not disclosed by Gladstone; that some customers had
received confirmations for orders they had not placed; and that literature about the company was not provided. Most of the customer-witnesses testified that they had purchased in reliance upon the recommendations of Gladstone.
Paras learned of Sonics during the same September 1962 conversation between Roach, Gladstone and Paras referred to above.
Evidence of affirmative misrepresentations by Paras to his customers regarding Sonics stock included the following: Sonics had a good growth possibility. It should double after three or four weeks (to one customer); it could double, i.e. increase 8 to 10 points, within four to six months (to another customer); and it would rise 10 to 15 points (to still another customer). Paras had bought the stock himself. The company was about to enter into a favorable contract for its filters with Texas Instruments and Texas Instruments might acquire Sonics.
In addition to these affirmative misrepresentations, Paras never mentioned Sonics' adverse financial condition; he never provided any literature about the company; and in at least one instance he sent a confirmation to a customer who claims not to have ordered the stock.
When asked by the hearing examiner why he recommended a stock like Sonics when the commissions he would receive would be negligible, Paras replied that on the basis of his reliable information he hoped that Sonics would make money for his customers who would refer others to him. 'It would be a feather in my cap to buy a stock at $8 and sell it at $29 or $30.'
Stutzmann learned of Sonics,...
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