S.E.C. v. Aaron
| Citation | 605 F.2d 612 |
| Decision Date | 15 October 1979 |
| Docket Number | D,No. 830,A-M,830 |
| Parties | Fed. Sec. L. Rep. P 96,800 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Peter E. AARON, Defendant-Appellant, and E. L. Aaron & Co., Inc., Lawn-at Chemical & Equipment Corp., Edward L. Aaron, Peter E. Aaron, Norman Lawrence Schreiber, Donald Darwin Jacobson, Daniel Dorfman, and Fernando Erazo, Defendants. ocket 77-6091. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Paul Gonson, Associate Gen. Counsel, S. E. C., Washington, D. C. (Harvey L. Pitt, Gen. Counsel, Jacob H. Stillman, Asst. Gen. Counsel, Angela M. Desmond and Glynn L. Mays, Attys., S. E. C., Washington, D. C., on the brief), for plaintiff-appellee.
Bert L. Gusrae, New York City (John B. Lowy, and Gusrae, Greene & Kaplan, New York City, on the brief), for defendant-appellant.
Before ANDERSON, FEINBERG and TIMBERS, Circuit Judges. *
On this appeal from a permanent injunction entered after an evidentiary hearing in the Southern District of New York, Lee P. Gagliardi, District Judge, (1977-1978 Transfer Binder) Fed.Sec.L.Rep. (CCH) P 96,043 , enjoining Peter E Aaron from violating the registration and antifraud provisions of the federal securities laws, we find the following to be the essential issues presented:
(1) Whether the district court erred in holding that Aaron's managerial and supervisory responsibilities with a broker-dealer firm, despite his lack of corporate title, made him subject to a permanent injunction enjoining him from violating the registration and antifraud provisions of the federal securities laws.
(2) Whether the district court erred in holding that Rule 144 under the 1933 Act does not provide an exemption from the registration provisions of that Act for controlling persons who sold shares, allegedly pursuant to Rule 144, to a broker who then sold them to a second broker for public sale without compliance with Rule 144.
(3) Whether the district court erred in holding that the SEC is not required to establish scienter as an element of a government enforcement action to enjoin violations of § 10(b) of the 1934 Act or of § 17(a) of the 1933 Act.
(4) Whether the district court erred in granting the permanent injunction under all the circumstances of this case.
For the reasons below, we agree in all respects with the district court's holdings on the essential issues stated above. We affirm in its entirety the permanent injunction as entered.
We assume familiarity with Judge Gagliardi's excellent district court opinion. We accept his adequate findings of fact, Fed.R.Civ.P. 52(a), and we agree with his conclusions of law. We summarize here only those facts necessary to an understanding of our rulings on the legal issues stated above.
During the period in question, appellant Peter E. Aaron ("Aaron") was employed by E. L. Aaron & Co. ("Aaron & Co." or "the firm"). Aaron & Co. was a broker-dealer registered with the Securities and Exchange Commission ("SEC"). The firm's principal office was in New York City. Aaron's father, Edward L. Aaron, was president and sole shareholder of Aaron & Co.
Aaron had been employed by the firm for 15 years. He served as his father's assistant. He was the firm's trouble shooter and the liaison between the firm's various departments, including operations, sales and the trading room.
Aaron maintained the so-called due diligence files for securities in which the firm made markets. In connection with his supervision of the firm's sales force, Aaron conducted sales meetings with registered representatives. At these meetings sales techniques were discussed. He also monitored the registered representatives' trading by advising them of their monthly production figures, by informing them when any of their clients were late in payment, and by discouraging the representatives from exceeding their individual selling capacities.
As compensation for his services, Aaron received salary, bonuses and expenses at a level comparable to that of his father, the firm's president. Aaron, however, was not registered with the National Association of Securities Dealers ("NASD") as a principal of Aaron & Co. He held no corporate office in the firm.
In November 1974, Aaron & Co. opened a branch in Roslyn Heights, New York. Norman Schreiber, a registered representative of Aaron & Co., was appointed branch manager of the new office. Donald Jacobson, also an Aaron & Co. registered representative, was assigned to assist Schreiber. The Roslyn Heights office was essentially a two-man operation.
From November 1974 through September 1975, Aaron & Co. made a market in the common stock of Lawn-A-Mat Chemical & Equipment Corp. ("LAM"). In doing so, Schreiber and Jacobson contacted stockholders of LAM and its franchise-dealers by phone and by mail to solicit orders for LAM stock. In the course of this promotion, Schreiber and Jacobson made false and misleading statements to prospective purchasers of LAM. Among the statements made were some to the effect that LAM was planning or in the process of manufacturing a new type of small car and a tractor. In fact LAM had no plans to manufacture a car or tractor. Schreiber and Jacobson also made projections of substantial increases in the price of LAM stock and misleading statements about LAM's financial condition. There was no basis in fact for these projections and statements, since LAM had experienced significant losses during the period involved.
Some of the persons contacted complained to LAM officers about these statements. The LAM officers informed both Schreiber and Jacobson that their statements were false.
When the false and misleading statements continued despite these warnings, LAM's attorney contacted Aaron. He did so twice by telephone during the period involved, informing Aaron of the continuing false and misleading statements by his sales representatives.
Since Aaron was in charge of LAM's due diligence files, he had ample independent reason to know that the information about LAM being disseminated by Schreiber and Jacobson was untrue. Although Aaron notified Jacobson of the LAM attorney's complaint, he did nothing whatsoever to stop the false and misleading statements being made by Schreiber and Jacobson.
In November 1974, a representative of Aaron & Co. telephoned Daniel Dorfman, who was then the president, principal stockholder and a director of LAM, to solicit the sale by Dorfman of 1,000 shares of LAM common stock. Since Dorfman was a controlling person of LAM, his shares could not be sold unless registered under § 5 of the 1933 Act or unless the sale of the unregistered shares qualified for an exemption from registration pursuant to Rule 144 under the 1933 Act. In view of the fact that Aaron & Co. precipitated the entire transaction by arranging for the sale of shares from Dorfman to J. W. Weller & Co., Inc. ("Weller") and by soliciting customers' buy orders in anticipation of the transfer of the shares from Weller to Aaron & Co., the sale of the shares to the public obviously did not qualify for a Rule 144 exemption, as we hold below.
In an attempt to enable Aaron & Co. to sell Dorfman's unregistered shares without qualifying for a Rule 144 exemption, the firm arranged the following transaction. Aaron contacted Weller, another broker-dealer, and suggested that Weller act as an intermediary for sales from Dorfman to Aaron & Co. The proposal was that Dorfman would sell his shares to Weller which, as "agent" of the selling shareholder, would sell the shares to Aaron & Co., which in turn would solicit buyers for the shares. Weller agreed. The transaction was consummated. Daniel Dorfman sold 1,000 shares.
Similarly, in February 1975, a representative of Aaron & Co. persuaded Fred Dorfman, who was then vice-president and a director of LAM, to sell 20,000 shares of LAM common stock in the same manner. As with Daniel Dorfman, Fred Dorfman was a controlling person. He was directed to transfer his shares to Weller, which in turn delivered them to Aaron & Co. for public sale.
The SEC commenced the instant enforcement action in the district court on February 26, 1976. It sought preliminary and final injunctive relief pursuant to § 20(b) of the 1933 Act, 15 U.S.C. § 77t(b) (1976), and § 21(d) of the 1934 Act, 15 U.S.C. § 78u(d) (1976). The complaint charged Aaron and three other defendants with violating, and aiding and abetting violations of, the registration provisions of §§ 5(a) and 5(c) of the 1933 Act, 15 U.S.C. §§ 77e(a) and 77e(c) (1976). The complaint also charged Aaron and seven other defendants with violating, and aiding and abetting violations of, the antifraud provisions of § 17(a) of the 1933 Act, 15 U.S.C. § 77q(a) (1976), § 10(b) of the 1934 Act, 15 U.S.C. § 78j(b) (1976), and Rule 10b-5 promulgated under the 1934 Act, 17 C.F.R. § 240.10b-5 (1978). The seven defendants other than Aaron consented to the entry of permanent injunctions against them.
After a three day evidentiary hearing, Judge Gagliardi on May 5, 1977 filed a comprehensive, well reasoned opinion, holding that Aaron had violated the registration and antifraud provisions as charged in the complaint; and that the SEC was entitled to a permanent injunction enjoining Aaron from further such violations.
From the final judgment entered on Judge Gagliardi's opinion, the instant appeal has been taken.
In the light of these facts and prior proceedings, we turn first to the question whether Aaron, despite his lack of official title, was properly enjoined pursuant to § 20(b) of the 1933 Act and § 21(d) of the 1934 Act 1 from violating the registration and antifraud provisions of...
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