614 F.2d 908 (3rd Cir. 1980), 79-1714, S.E.C. v. Bonastia

Docket Nº:SECURITIES AND EXCHANGE COMMISSION, Appellant in No. 79-1714
Citation:614 F.2d 908
Case Date:February 07, 1980
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

Page 908

614 F.2d 908 (3rd Cir. 1980)



BONASTIA, Peter J., Thomas C. Gaffney, Terrence C. Madden,

Monte Craviss, John T. Heine, Barry Simner, Robert

A. Petrallia, Robert B. Turk, Robert

DiConsiglio and Lawrence J. Stern.



BONASTIA, Peter J., Thomas C. Gaffney, Terrence C. Madden,

Monte Craviss, John T. Heine, Barry Simner, Robert

A. Petrallia, Robert B. Turk, Robert

DiConsiglio and Lawrence J. Stern.

Appeal of Terrence C. MADDEN, Appellant in No. 79-1715.

Nos. 79-1714, 79-1715.

United States Court of Appeals, Third Circuit

February 7, 1980

Argued Dec. 14, 1979.

As Amended Feb. 28, 1980.

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[Copyrighted Material Omitted]

Page 910

Linda D. Fienberg, Sp. Counsel (argued), David Ferber, Sol. to the Commission, Michael K. Wolensky, Asst. Gen. Counsel, Frederic Townsend, Securities and Exchange Com'n, Washington, D. C., for appellant in No. 79-1714 and cross-appellee in No. 79-1715.

John M. Burns, II (argued), New York City, for appellee in No. 79-1714 and cross-appellant in No. 79-1715.

Before ALDISERT, VAN DUSEN and HUNTER, Circuit Judges.


ALDISERT, Circuit Judge.

The major question for review in this civil action brought by the Securities and Exchange Commission against Terrence C. Madden is whether the district court misused its discretion by refusing to issue a permanent injunction against Madden after it had granted summary judgment in favor of the commission, determining that Madden had repeatedly violated various provisions of the federal securities laws. Madden has cross-appealed, attacking the appropriateness of the summary judgment. We conclude that summary judgment was proper but that the district court erred by not granting the commission the injunctive relief requested. We therefore reverse that portion of the district court's order denying the injunction and remand with a direction that an injunction be entered to prevent Madden from further engaging in conduct in violation of certain provisions of the securities laws.


Before filing a bankruptcy petition in 1977, Investors Economics Systems, a Delaware corporation, and its nine wholly-owned subsidiaries, were engaged in the sale of unregistered securities to the general public in the form of limited partnership interests in real estate ventures. Between 1971 and 1977 sales of these interests were made to thousands of investors for proceeds in excess of $40 million. Terrence C. Madden, cross-appellant in this court, was an executive vice president and a director of Investors and owned 67,000 shares of its stock. From 1972 through 1976 Madden was president of IES Management Group, the registered broker-dealer subsidiary of Investors, which acted as an investment advisor and received as fees for its services approximately one-third of the limited partners' original investments. From 1976 to 1977 Madden was also president of Westwood, Incorporated, another of Investor's subsidiaries, which served as general partner in fifty of the approximately eighty-eight limited partnerships syndicated by Management Group.

The limited partnerships were sold to the investing public primarily as means to provide tax shelters in real estate ventures. They were structured in such a way that the limited partners provided all the seed capital for the venture and owned approximately seventy-five percent of the partnership, while the general partner owned the remaining twenty-five percent. A certain amount of cash flow was guaranteed to the limited partners as well as up to 100 percent of the tax losses incurred by the partnership.

In the typical syndication sequence, an Investors employee would locate suitable residential or commercial property that was for sale. An officer of Investors, usually Madden, would negotiate the purchase. After a tentative agreement, Madden, or one of the other officers, would then meet with Investors' accountant and attorneys to discuss the preparation of disclosure documents. An offering memorandum setting forth the basic terms of the proposed offering would be prepared.

Frequently, however, the private placement memoranda released to the public contained fundamental inaccuracies, either because

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the terms of sale were modified after preparation of the memoranda or because unverified financial projections were used therein. Often the limited partners did not receive notice of the revisions. By the end of 1974, when a large number of the partnerships had experienced financial reverses and either voluntarily ceased operations or suffered foreclosure, an attempt was made to mollify the limited partners and retain them as investors. Madden and other officers of...

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