626 F.2d 633 (9th Cir. 1980), 76-2299, S.E.C. v. Murphy
|Docket Nº:||76-2299, 78-3300.|
|Citation:||626 F.2d 633|
|Party Name:||SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Stephen MURPHY, Defendant-Appellant.|
|Case Date:||July 23, 1980|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
Argued and Submitted March 7, 1980.
Rehearing Denied Sept. 26, 1980.
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
James L. Currer, Jr., Currer & Kayaian, Los Angeles, Cal., on brief; William J. Currer, Jr., Los Angeles, Cal., for defendant-appellant.
Linda A. Schneider, David A. Sirignano, Atty., Washington, D.C., on brief; Rosalind Cohen, Sp. Counsel, Washington, D.C., for plaintiff-appellee.
Appeal from the United States District Court for the Central District of California.
Before, MERRILL and FERGUSON, Circuit Judges, and SMITH, [*] District judge.
FERGUSON, Circuit Judge:
Stephen Murphy appeals from a district court decision permanently enjoining him from violating the registration and antifraud provisions of the securities laws and requiring him to mail copies of the court's order to present and future business associates and investors. 1 The court first granted summary judgment for the SEC on the registration violations; 2 then, after a trial on the fraud counts in which defendant put on no evidence, the court entered judgment for the SEC on those counts. Murphy contends that there were disputed material facts which made the grant of summary judgment improper and that the entry of that judgment invalidated the fraud judgment as well. He also argues that the court erred in granting an injunction against registration violations without hearing testimonial evidence and that the court deprived him of due process when it denied his Fed.R.Civ.P. 41(b) motion for dismissal. We affirm.
I. FACTS AND PROCEEDINGS BELOW
Stephen Murphy formed Intertie, a California company that provided financing, construction, and management of cable television systems, in December, 1971, and he was its president and director until February, 1974, when he became vice-president, treasurer and director. In May, 1975, he resigned from these positions after an unsuccessful proxy fight, but he regained control of the company in August, 1975, and became chairman of the board.
Intertie's business involved the promotion of approximately 30 limited partnerships to which it sold cable television systems. Most commonly, Intertie would buy a cable television system, making a cash down payment and financing the remainder, and then sell it to a partnership for a cash down payment and non-recourse promissory notes in favor of Intertie and lease it back from the partnership. Murphy was the architect of this financing scheme, by which Intertie took in approximately $7.5 million from 400 investors. Intertie engaged International Securities Corporation (ISC), a securities brokerage firm, to sell most of these partnership interests, and it agreed that ISC would receive a 10 percent sales commission. ISC's president, Jack Glassford, and ISC shared a three percent commission override. From this three percent, starting in the summer of 1974, Murphy received a one-half percent commission on the sales of partnership interests.
Under ISC's sales program, representatives contacted potential investors to interest them in purchasing limited partnership shares in cable television systems. An ISC sales representative was usually the general partner in the venture. Intertie and ISC did not register the limited partnership interests as securities but relied on the private offering exemption of § 4(2) of the Securities Act, 15 U.S.C. § 77d(2) (1971), and on Rule 146, 17 C.F.R. § 230.146 (1979), which provides a "safe harbor" for private placements that meet certain specified conditions.
Intertie took no steps to assure that the offering and sale were directed only to a small number of sophisticated, informed investors; in fact, it did not even number its memoranda so that it could monitor the
volume of offers made. Moreover, Murphy in his deposition stated that he felt that information on qualifications of investors was often inadequate. Intertie relied on ISC to comply with the securities laws and agreed by letter to take whatever steps ISC requested for compliance. There was no written contract allocating this responsibility to ISC, however. Neither Intertie nor ISC assured that offeree representatives that the investors used were capable of providing informed advice, even though Murphy doubted the competence of many of the offeree representatives he met. 3 Some of the representatives were salesmen for ISC and a few acted as both salesman and general partner for a partnership.
ISC's salesmen promoted sales of the partnership interests with offering memoranda describing Intertie as "the undisputed industry leader" and a company which could purchase, construct and operate cable television systems "better, faster, more profitabl(y) and with less invested capital than ever before." The memoranda, the salesmen, and Intertie did not disclose that Intertie was losing money, had large short-term debt obligations in connection with the acquisition of the cable television facilities which it resold to the limited partnerships, and could not continue to meet obligations of existing partnerships without refinancing debts or obtaining capital from new partnerships. Nor did they disclose that Intertie was commingling the funds from the various partnerships.
Offering memoranda represented that Intertie had "only a limited history of operations" and did not reveal that Intertie had sold cable systems to at least eight or nine partnerships by January, 1974, and at least twenty by August, 1974. The memoranda also projected that sale and lease-back arrangements would generate from six to ten percent cash flow, but they did not reveal that this flow depended upon Intertie's ability to generate new funds through marketing additional systems, since the early revenues were sometimes inadequate to meet costs. 4 Often, projections for subscriber revenue significantly exceeded the amounts that Intertie later took in from a system.
The memoranda also stated that brokerage commissions would not exceed 10 percent and that tax benefits would arise from the partnership. Intertie continued to make the latter representations even after the Internal Revenue Service in 1974 questioned certain deductions taken in connection with a 1972 partnership. In addition, the memoranda described a negotiation and management role for the general partners that many of them did not assume, since most were ISC employees with little or no knowledge of the operation of cable systems.
Murphy participated heavily in the offerings. He prepared or reviewed Intertie's offering memoranda and sales brochures and sometimes revised language written by Intertie's lawyers; he drafted other materials for distribution to offerees of limited partnership interests; he met with ISC salesmen and with potential investors and their representatives, if any, to give them information about Intertie; and he presented the Intertie investment plan at sales seminars with broker-dealers.
Murphy did not make Intertie's financial statements available to the investors. In his deposition, he described Intertie's response to requests for financial information:
(S)ome guys called up particularly early in '74 and said, "I have a potential investor and want to see Intertie's financial statement," and they were told, "if that is a condition, we are not going to furnish it."
(After June, 1974) (w)e generally answered their request by indicating that we did not feel . . . the Intertie statement was . . . required under Rule 146 and that we did not have the financial strength to be the guarantor of the lease or give the investor any place . . . where they would be able to look for some degree of security and if that did not solve the problem and they pushed for it, generally we would comply with it. But only after that process. Frankly, we didn't want to give the thing out.
By September, 1974, the company had a serious working capital deficiency and a negative net worth of over $600,000; its current assets were.$2.3 million; its current liabilities were $6.4 million. Throughout 1974, Intertie used funds generated from new partnership offerings to meet Intertie's debt service obligations on prior systems. Included in those funds were investments from two limited partnerships for systems in New Mexico, which Intertie never built, although it prepared tax returns on behalf of the partnerships and took an investment tax credit and accelerated depreciation on the non-existent facilities. In December, 1975, Murphy filed a petition for Chapter XI bankruptcy for Intertie, and Intertie is now a debtor in possession with Murphy as president.
In 1975, the SEC brought suit against Murphy and other defendants, charging violations of the registration and fraud provisions of the securities laws, and seeking injunctive relief. On March 6, 1978, the district court granted summary judgment for the SEC on the registration count, § 5(a) and (c) of the Securities Act of 1933, 15 U.S.C. § 77e(a), (c) (1971). The court issued a permanent injunction against acts in violation of the registration provisions of the 1933 Act. The SEC then proceeded to trial on the fraud counts, § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (1970); § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970) and Rule 10b-5, 17 C.F.R. 240.10b-5 (1979), promulgated thereunder. Murphy moved for dismissal of the action under Fed.R.Civ.P. 41(b), arguing that the Commission had not shown a reasonable likelihood of future violations, a prerequisite to entry of an injunction against...
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