SECURITIES & EXCH. COM'N v. Continental Tobacco Co. of SC

• Decision Date: 14 August 1972
• Docket Number: No. 71-2955.,71-2955.
• Citation: 463 F.2d 137
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. CONTINENTAL TOBACCO COMPANY OF SOUTH CAROLINA, Inc., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

463 F.2d 137 (1972)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. CONTINENTAL TOBACCO COMPANY OF SOUTH CAROLINA, Inc., Defendant-Appellee.

No. 71-2955.

United States Court of Appeals, Fifth Circuit.

June 2, 1972.

Rehearing and Rehearing Denied August 14, 1972.

COPYRIGHT MATERIAL OMITTED

Roderick Knott, Miami, Fla., Walter P. North, Associate Gen. Counsel, Frederick L. White, Atty., Richard S. Seltzer, Spec. Counsel, G. Bradford Cook, Gen. Counsel, Washington, D.C., for plaintiff-appellant.

Jeffrey Tew, Miami, Fla., for defendant-appellee.

Before THORNBERRY, COLEMAN and INGRAHAM, Circuit Judges.

Rehearing and Rehearing En Banc Denied August 14, 1972.

COLEMAN, Circuit Judge.

This is a case in which the District Court held that certain securities of the Continental Tobacco Company of South Carolina were exempt from registration under the Securities Acts of 1933 and 1934 in that they were not publicly offered, Securities and Exchange Commission v. Continental Tobacco Company of South Carolina, 326 F.Supp. 588 (S.D., Fla., 1971). We reverse and remand, with directions to enter judgment for the Commission.

Pursuant to § 20(b) of the Securities Act of 1933, as amended, 15 U.S.C., § 77t (b), and pursuant to § 21(e) of the Securities Exchange Act of 1934, as amended, 15 U.S.C., §§ 78u(e), the Commission brought suit on November 9, 1967, to enjoin Continental and others from engaging in acts and practices constituting violations of § 5(a) and § 5(c) of the Securities Act of 1933, as amended, and § 15(a) of the Securities Exchange Act of 1934, as amended. Count I sought an injunction for alleged violations of § 5(a) and § 5(c) of the Securities Act of 1933, 15 U.S.C., § 77e(a) and § 77e (c).

The complaint charged:

From about June 7, 1967, and continuing to the present date, the defendants, Continental Tobacco Company of South Carolina, Inc., James K. Sorenson, Heinrich Lorin, Kenneth V. Dawes, and Richard L. Hoffman have been and are now directly and indirectly making use of means and instruments of transportation and communication in interstate commerce and of the mails to sell and to offer to sell securities, namely, debenture bonds, warrants to purchase common stock and common stock of Continental Tobacco Company of South Carolina, Inc., and have been and are now carrying said securities and causing them to be carried through the mails and in interstate commerce by means and instruments of transportation for the purpose of sale and delivery after sale.

No registration statement is in effect nor has a registration statement been filed with the Securities and Exchange Commission with respect to said securities.

From about June 7, 1967, and continuing to the present date, the defendants, Kenneth V. Dawes and Richard L. Hoffman, are now and at all times herein alleged have been engaged in securities, not exclusively intrastate, and have been and are now making use of the mails and the means and instrumentalities of interstate commerce to effect transactions in and to induce the purchase and sale of securities (other than exempted securities, commercial paper, bankers\' acceptances or commercial bills) otherwise than on a national securities exchange, when such defendants were not and are not registered with the Securities and Exchange Commission as brokers and dealers in accordance with subsection (b) of Section 15 of the Securities Exchange Act of 1934, as amended 15 U.S.C. 78o(b).

On December 15, 1967, the District Court granted the application for preliminary injunction against Continental, James K. Sorenson, and Heinrich Lorin, their affiliates, agents, servants, employees, and attorneys, enjoining their use of any means or instruments of transportation or communication in interstate commerce or the mails to offer to sell, sell, or deliver after sale debenture bonds, warrants to purchase common stock, and common stock of Continental or any other security unless and until a registration statement had been filed with the Commission as to said securities. The District Court found that those enjoined had offered for sale, sold and delivered after sale, debentures and warrants to purchase the common stock of Continental, that all offers and sales by them in securities of Continental were undertaken at a time when there was no registration statement filed or in effect with the Commission as required by § 5(a) and § 5(c) of the Securities Act of 1933, and that there was a reasonable expectation that the policy of the Securities Act of 1933 would be thwarted unless by order of the Court they were preliminarily enjoined from engaging in the proscribed unlawful conduct.

On December 15, the District Court denied the application for a preliminary injunction against Kenneth V. Dawes and Richard L. Hoffman, finding that notwithstanding the fact that they had participated in the sale of unregistered Continental securities, there did not exist a reasonable expectation that they would thwart the policy of the Securities Act of 1933 and the Securities Exchange Act of 1934 by engaging in activities proscribed therein.

On June 2, 1970, and in an effort to bring the Court up-to-date on its activities since the Court's grant of the Commission's application for preliminary injunction in 1967, Continental sought and was given leave to file an amended answer. This answer set forth that on October 17, 1967, the District Court for South Carolina had confirmed its approval of a plan of arrangement between Continental and its creditors under Chapter XI of the Federal Bankruptcy Act; that pursuant to a management contract dated February 10, 1969, Continental was now under the management of Contoba Management Corporation, a Florida corporation; that under the guidance of Contoba Management Corporation Continental was discharged from bankruptcy, a new plant and executive offices leased, production facilities were installed, additional staff and executive management hired, and plans formulated for foreign and domestic distribution; that the United States Treasury Department has issued permit No. TP-118-SC for the manufacture of tobacco products; that Continental's current office and manufacturing facilities are located in leased premises at 1401 Leapart Street, West Columbia, South Carolina; that Continental has begun the sale of its cigarettes in the area of Columbia, South Carolina, and in Dade County, Florida; that Continental has entered into a distribution contract (for the distribution rights of Venture cigarettes in the State of Florida) with a corporation (Tenlin Corporation) to be formed and owned by two of Continental's stockholders; that Continental has been refinanced by the private sale of its common shares to individual and corporate investors (including a mutual fund), all of whom took their shares for investment only and not with a view to distribution; that the private sales of common stock were exempt from the registration provisions of the Securities Act of 1933; that Continental has changed its capitalization by a 1 for 3 reverse split of its outstanding common stock; that Continental has diligently and in good faith acted to protect the investment of its stockholders and bondholders; that Continental has not engaged in any activity since the date of entry of the temporary injunction which violated the Securities Acts of 1933 and 1934, and that there does not exist the danger that Continental will engage in any future activities proscribed by the Federal securities law.

Based on this answer, Continental contended that the entry of a permanent injunction against it was not warranted by the facts and would not serve to further the aims of the Federal securities law.

On September 21, 1970, the District Court entered by consent a permanent injunction against James K. Sorenson, enjoining him from making use of any means or instruments of transportation or communication in interstate commerce or the mails to offer to sell, sell, or deliver after sale, the securities of Continental, and further providing that such injunction entered against Sorenson would not apply to any security which is exempt from the provisions of § 5 of the Securities Act of 1933.

On October 22, 1970, the District Court granted summary judgment in behalf of Kenneth V. Dawes and Richard L. Hoffman and ordered that the Commission's complaint against them be dismissed with prejudice.

On February 16, 17, 18, 25, and March 3 and 10, 1971, a non-jury trial was held in the District Court on the Commission application for entry of a permanent injunction against Continental.

The Court made the following conclusions of law and entered the following order, all favorable to Continental:

Conclusions of law

* * * * * *

2. The offering of securities by the defendant, Continental, from June 1, 1969, to October, 1970, were transactions not involving any public offering, and are, therefore, exempt from the registration provisions of the Securities Act of 1933, as amended. S.E.C. v. Ralston Purina, 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494 (1953).

3. No permanent injunction shall issue against the defendant, Continental Tobacco Company of South Carolina, Inc. There is no reasonable expectation nor cognizable danger that this defendant will thwart the policies of the Securities Act of 1933, as amended, by engaging in the activities proscribed thereby. United States v. W. T. Grant & Co., 345 U.S. 629, 73 S.Ct. 894, 97 L.Ed. 1303 (1953); S.E.C. v. Culpepper, 270 F.2d 241 (2nd Cir.1959).

It is, therefore,

Ordered, adjudged and decreed:

1. That the preliminary injunction against the defendant, Continental Tobacco Company of South Carolina, Inc., entered December 15, 1967, be, and the same is, hereby vacated, set aside and held for naught.

2. That the plaintiff\'s prayer for a permanent injunction against the defendant, Continental Tobacco Company of South Carolina, Inc., be, and the same is, hereby denied, and the plaintiff\'s complaint against the

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