677 F.2d 1289 (9th Cir. 1982), 79-3818, S.E.C. v. Seaboard Corp.
|Citation:||677 F.2d 1289|
|Party Name:||SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. The SEABOARD CORPORATION, etc., et al., Defendants. ADMIRALTY FUND, and Admiralty Fund Growth Series Litigation Trust, Cross-Claimant/Appellant, v. Lewis JONES, Cross-Defendant/Appellee.|
|Case Date:||May 24, 1982|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
Argued and Submitted Sept. 8, 1981.
[Copyrighted Material Omitted]
Stephen H. Marcus, Greenberg, Bernhard, Weiss & Karma, Los Angeles, Cal., for cross-claimant/appellant.
Brian G. Gough, MacDonald, Halsted & Laybourne, Los Angeles, Cal., for cross-defendant/appellee.
Appeal from the United States District Court for the Central District of California.
Before WRIGHT and WALLACE, Circuit Judges, and EAST, [*] Senior District Judge.
EUGENE A. WRIGHT, Circuit Judge:
This is an appeal of a summary judgment for cross-defendant Lewis Jones. We reverse in part and remand for trial because we find material issues relating to the statute of limitations and to Jones' scienter.
The transaction that provides the factual background for this appeal is Admiralty Fund's (hereinafter AF) purchase of stock of Oceanography, Inc.
In count 2 of its second amended cross-claims, AF alleged that Jones had participated in a scheme to defraud it in this purchase in violation of §§ 12(1) and 12(2) of the 1933 Securities Act (15 U.S.C. §§ 77l (1) and 77l (2) ), § 10(b) and Rule 10b-5 thereunder (15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5,) § 25401 of the California Corporations Code, and the rules of common law fraud. 1 The basic facts upon which these claims are based are not in dispute.
Jones was the attorney for Oceanography, Inc., which in 1971 had no substantial assets. The company was controlled by George Caleshu, who engaged Harry Turner and John Rawlings to find it new capital. Turner and Rawlings introduced Caleshu to Jerome Randolph, then president and director of Seaboard and the Funds. Randolph agreed to arrange the purchase of Oceanography shares by AF. 2
To avoid registration requirements, the purchase of Oceanography shares was to occur via Information Communications Applications, Inc. (hereinafter ICA). ICA held an Oceanography convertible debenture that was in default, and it had threatened litigation.
After negotiation, ICA agreed to exchange its defaulted debenture, which was convertible into 300,000 common shares, for one convertible into 600,000. AF would then purchase 400,000 of the shares from ICA through a broker for $200,000. ICA would retain $30,000 of the $200,000 and reinvest the balance in Oceanography in exchange for two new debentures with face amounts totalling $200,000. Broker for the sale would be P. N. MacIntyre & Co.
These arrangements were made at meetings between ICA and Oceanography. Jones was in attendance.
The defaulted debenture held by ICA had been placed under an exemption to the registration requirements of the 1933 Act and bore a restrictive legend. ICA queried Oceanography management whether the legend could be removed. For this purpose, Jones' opinion was sought.
By a letter of September 30, 1971, he expressed the opinion that, because the debenture had been held for more than two years, and investment intent had thereby been demonstrated, Oceanography management could comply with ICA's request and remove the legend.
The next day, ICA presented its debenture for conversion to a new, delettered debenture, which was immediately exchanged for 600,000 shares of Oceanography common.
On October 4, 1971, a meeting was held at the offices of the broker and its counsel where final arrangements for the sale were made. In addition to Jones, representatives of Oceanography, ICA, and the broker attended. Though no AF representatives were there, the confirmation of the sale stated that MacIntyre was acting as broker for both parties. At the meeting documents were prepared to record the sale.
A letter from ICA to MacIntyre & Co. contained direction and agreement to sell the stock "as agent for (ICA) only through a private sale that is exempt pursuant to the Securities Act of 1933." Other letters were prepared to acknowledge receipt of the stock, to request transfer of the stock into street name, and to give instructions to an escrow agent for the transfer of Oceanography's new debentures in exchange for ICA's reinvestment of funds. One of the new debentures was also prepared and executed. It bore a restrictive legend.
Confirmation of the sale of the 400,000 shares to AF issued the next day. Approximately one year later, AF sold them for $1.00.
The essential allegation of its cross-claim against Jones is that he, as attorney for Oceanography, participated in a scheme to sell it worthless, restricted stock. This was contrary to Randolph's expectations, consistent with AF policy, that he was receiving nonrestricted stock in the purchase. Jones was therefore alleged to be a direct violator, a coconspirator, and an aider and abettor of federal and state securities law violations.
Jones moved for summary judgment based on these grounds relevant to this appeal: (1) he could not be held liable under §§ 12(1) or 12(2) because claims under those sections were barred by the statute of limitations; (2) alternatively, he could not be held liable under § 12 or Cal.Corp.Code § 25401 because he was not a "seller"; and (3) the § 10(b) and common law fraud claims were insufficiently pleaded because there was no allegation of scienter.
In response to the motion, AF argued generally that the whole transaction had been formulated and executed with the intent of deceiving AF into believing that it was getting freely tradeable stock. It rehearsed the benefits derived from the transaction by all but AF. Oceanography was able to issue 600,000 shares of unregistered stock. ICA was able to exchange a $100,000 defaulted debenture for one with twice the face value and $30,000 of ready cash. MacIntyre...
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