612 F.2d 896 (5th Cir. 1980), 76-4017, S.E.C. v. Spence & Green Chemical Co.

Docket Nº:76-4017, 77-1362, 77-2600 and 77-3173.
Citation:612 F.2d 896
Party Name:SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. SPENCE & GREEN CHEMICAL COMPANY and Andrew Spence, Sr., Defendants-Appellants.
Case Date:February 27, 1980
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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612 F.2d 896 (5th Cir. 1980)





Nos. 76-4017, 77-1362, 77-2600 and 77-3173.

United States Court of Appeals, Fifth Circuit

February 27, 1980

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Paul Gonsan, Atty., Securities & Exchange Commission, Washington, D. C., for plaintiff-appellee in no. 77-1325.

Lawrence J. Cohen, Chicago, Ill., for defendants-appellants.

Lynn N. Hughes, Houston, Tex., Trumbull Asphalt Div., Owens-Corning Fiberglas Corp., amicus curiae.

David Ferber, Sol., James H. Schropp, Asst. Gen. Counsel, Julie Allecta, Atty., Securities & Exchange Commission, Washington, D. C., for plaintiff-appellee.

Appeals from the United States District Court for the Southern District of Texas.

Before MORGAN, REAVLEY and HATCHETT, Circuit Judges.

REAVLEY, Circuit Judge:

Appellee, Securities and Exchange Commission (SEC), commenced this injunctive action against Spence and Green Chemical Company and two of its principal shareholders, Andrew Spence and James I. Farmer, alleging violations of registration and antifraud provisions of the Securities Act of 1933 (sections 5(a), (c) and 17(a)), 15 U.S.C. §§ 77e(a), (c) and 77q(a), and of the antifraud provisions of the Securities Exchange Act of 1934 and regulations promulgated thereunder (section 10(b) and rule 10b-5), 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5. Both Farmer and the company accepted consent judgments. The district court entered summary judgment against Spence. The court enjoined each defendant from further engaging in activities violating the registration and antifraud provisions of the federal securities laws. Spence, alone, presses this consolidated appeal from four adverse rulings handed down during the course of the litigation: (1) the order of November 22, 1976, granting summary judgment against Spence individually, (2) the order of September 13, 1976, entering judgment against the company based on the consent decree executed by its court-appointed receiver, (3) the order of May 10, 1977 denying defendant's motions for recusal

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of the trial judge and for reconsideration of the order of summary judgment against Spence, and (4) the order of August 17, 1977, denying a renewed motion for recusal and holding in abeyance, pending this appeal, Spence's motion to terminate the receivership. We agree with the bulk of the district court's decision and the entirety of its remedy and disposition, disagreeing only with that portion of the decision that found a violation of section 10(b) and rule 10b-5.

Andrew Spence, as founder, president, and controlling shareholder, has dominated Spence and Green Chemical Company ("Spence and Green" or "company") since its incorporation in 1956. The company, located in Crosby, Texas, was formed as a research and development concern to seek methods of converting low-grade industrial byproducts into commercially marketable commodities. Its undertakings in the recent past have broadened to include development of certain innovative petroleum refining techniques. Because of its overriding emphasis on research, the company had never shown a year-end profit from its inception to the beginning of this litigation. Despite this rather morbid financial background and the restricted and local nature of early sales of stock in the company, as of September 6, 1975, Spence and Green had issued about 1,586,000 shares of stock. Because of an active secondary market, these shares are now owned by over 800 stockholders, more than half of whom are not Texas residents.

In 1970 in order to raise capital for a particular project, Spence began preparations for the company to issue additional securities under the small offerings, exemption to the federal securities registration laws, 15 U.S.C. § 77c(b), and Regulation A thereunder, 17 C.F.R. §§ 230.251-64. Spence employed an independent accounting firm to produce certified financial statements, and he retained an attorney to furnish the accountants with an opinion as to the current legal status of the company. The attorney, after reviewing Spence and Green's records, advised Spence that certain past stock transactions could constitute violations of the securities laws and that the company faced substantial potential liability on those transactions. Spence, a chemical engineer, rejected this opinion, however, and declined to disclose it to the accounting firm, instead proffering his own opinion that all was in order and that no contingent liability existed. The accounting firm did not find all to be in order with Spence and Green's financial records, however, and withdrew after fifteen months, rendering no opinion as to the financial status of the company because of the inadequacy and confusion of its records. Undaunted, Spence arranged for Farmer, a director of the company who was a certified public accountant, to prepare the financial data required for the Regulation A offering.

In the spring of 1972 Spence then filed the required documents with the Ft. Worth regional office of the SEC, indicating an intent to offer 104,250 shares at $2.50 per share according to the provisions of Regulation A. The offering circular by which the shares would be marketed contained the financial statements prepared by Farmer, but did not disclose by whom they had been prepared, or that he was a director of the issuer. It also failed to disclose the negative opinions rendered by Spence's attorney and by the independent accounting firm. The SEC returned this filing on July 31, 1972, citing numerous deficiencies in the offering circular.

After several exchanges of correspondence with the SEC, Spence eventually withdrew the filing, but on October 31, 1972, attempted to market the shares by mail in the form of a subscription available only to Spence and Green shareholders. Accompanying the subscription offer were copies of the offering circular previously rejected by the SEC and the series of letters exchanged between Spence and the SEC. This correspondence, received by the offerees, included one letter in which Spence had predicted that within five years the stock in question would have a "value of Not $2.50 per share, but $250.00 to $400.00 per share." Though this offer ostensibly was made only to Texas shareholders,

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the mailing also went to seventy-five brokers located throughout the country. Following this offering, the SEC permanently suspended any Regulation A exemption for Spence and Green after an administrative hearing (the transcript of which was considered by the court below and is part of the record on appeal). Nonetheless, on March 20, 1973, Spence again wrote, this time to all Spence and Green shareholders, seeking "private placement loan(s) with conversion privileges."

The SEC then filed this injunctive action on July 16, 1973. After...

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