Securities & Exchange Commission v. Pearson

• Citation: 426 F.2d 1339
• Decision Date: 22 May 1970
• Docket Number: No. 9975.,9975.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Appellant, v. Lyndon L. PEARSON, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

426 F.2d 1339 (1970)

SECURITIES AND EXCHANGE COMMISSION, Appellant, v. Lyndon L. PEARSON, Appellee.

No. 9975.

United States Court of Appeals, Tenth Circuit.

May 22, 1970.

David Ferber, Solicitor (Philip A. Loomis, Jr., Gen. Counsel, Edward B. Wagner, Asst. Gen. Counsel, Warren G. Stolusky, Atty., S. E. C., Washington, D. C., were on the brief) for appellant.

Cleeta John Rogers, Oklahoma City, Okl. (B. Cyril Rogers and A. Bob Jordan, Oklahoma City, Okl., were on the brief) for appellee.

Before MURRAH and PICKETT, Senior Circuit Judges, and HOLLOWAY, Circuit Judge.

HOLLOWAY, Circuit Judge.

The Securities and Exchange Commission (the Commission) brought suit in the District Court for preliminary and permanent injunctions against eight defendants, including appellee Pearson, to restrain violations of the registration and antifraud provisions of the federal securities laws.¹ Specifically the Commission charged that violations occurred by trading in unregistered stock; unlawful manipulations of the price of the stock; and fraudulent conduct by failure to reveal nonregistration and restrictions on transfer of the stock, among other things.

Other defendants consented to injunctions and only appellee Pearson is now involved. After a hearing on the application for the preliminary injunction and a motion to dismiss by appellee, the trial court made findings and conclusions favorable to appellee, denied the preliminary injunction and dismissed the complaint. A motion to amend the findings, to vacate the order and for other relief was denied, except for the making of one additional finding that appellee was specifically not guilty of any of the alleged violations. The Court entered judgment subsequently, stating that the Commission elected to stand on its complaint, and that the action was dismissed. This appeal is taken from the denial of the preliminary injunction and the dismissal of the action.

The findings and conclusions premising these rulings were as follows. The Court stated that appellee defended on the basis that he was innocent of the allegations and acted only in a manner approved and condoned by his associates in Andresen & Company (Andresen) of which appellee was an officer and partner until August, 1966. From the Commission affidavit, a stipulation admitting the essential facts in the affidavit, and testimony by appellee and his wife, the Court found that while conducting business for Andresen appellee became involved in transactions with officers of Community National Life Insurance Company (Community), some of which included trading in unregistered shares of Community; that in all such transactions appellee acted on behalf of Andresen as a partner, officer and associate of the firm; that the firm had knowledge of his activities, to which it had given its approval, so that his actions were those of the firm; and that appellee did not intentionally or knowingly act in any fraudulent manner, but at most made unbusinesslike decisions, which were admitted. It was further found that appellee was employed as a sales manager for a plastics company since September, 1966, and that he had no intention of returning to the stock brokerage business in the foreseeable future. A favorable finding was made concerning appellee's forthrightness, candor, demeanor and good reputation. The Court concluded that appellee was in no position and had no intention to commit any violation complained of, and that to enjoin him was unwarranted and unnecessary and would only place a stigma on him.

First we turn to the question whether the trial court properly denied the preliminary injunction. The Commission argues that the finding that appellee was not guilty of violations of the securities laws was clearly erroneous; that the Court applied incorrect legal principles in connection with other findings made; and that the trial court abused its discretion in denying the preliminary injunction.

We conclude that the evidence concerning the violations involved no material conflict. At the outset we must resolve the question whether appellee admitted the subsidiary facts stated in the Commission affidavit as to his actions. On review of the record we are convinced that by statements of counsel to the Court those basic facts were admitted and that the trial court so understood. The only reservations made in the record concerning the detailed Commission affidavit were that appellee did not concede that he was still engaged in the stock brokerage business and that he did not admit the legal conclusions of the affidavit.²

The facts detailed by the Commission affidavit, and not disputed by appellee's proof, were as follows. Appellee was a general partner of Andresen from about November, 1962, until about March, 1966, when Andresen changed from a partnership to a corporation and appellee became its executive vice president. Andresen was a broker and dealer in securities and a member of the New York Stock Exchange and appellee was in charge of Andresen's Birmingham, Alabama office.

Beginning in February, 1966, appellee had discussions with officers of Community about Community's acquiring stock of Richmond Life Insurance Company (Richmond). Appellee was a director of Richmond and Andresen had acted as underwriter of its stock for a public offering earlier. In May or June, 1966, appellee was authorized by Community to offer Richmond shareholders the opportunity to exchange their Richmond shares for Community Class A common stock on a share-for-share basis. Appellee told the Commission investigators that he was instructed to limit the number of exchanges to twenty Richmond shareholders or less to avoid registration, and that the Community officers agreed that Community stock would be issued in the name of a single Richmond shareholder as a nominee for a group of Richmond shareholders who would be treated as a single entity.

In June, 1966, appellee began soliciting Richmond shareholders to participate in the exchange and subsequently gave Community the names of "entities" to which the Community shares should be initially issued. Appellee stated to the Commission that he informed Community of arrangement for at least some of the "entities" to consist of a single Richmond shareholder acting as a nominee for a group. He said he gave Community the exact number of Richmond shares held by each member of such groups so that the newly issued Community certificates would be broken down into amounts corresponding to holdings of the Richmond shareholders and facilitating the distribution of Community shares to the beneficial owners of the Richmond shares.

When the Community certificates were brought to appellee's office they bore no notation of any restriction as to resale or transfer. Community officers also brought what they characterized as "investment letters," which were ten identical letters addressed to the Richmond shareholders. The letter stated that the Community shares were from the company's authorized but unissued capital stock and classified as restricted corporate capital stock. Appellee signed the letters on behalf of the ten Richmond stockholders, acknowledging receipt of the certificates and the letter, and returned them to the Community officer. He stated to the Commission that he did not show or send the letters to the Richmond shareholders or disclose to them the fact that he had signed such letters. The letters were the only documents received by Community as to the investment intent of the Richmond shareholders, and the Community officers admitted that they made no inquiry concerning such an investment intent.

Nevertheless appellee stated, and the Richmond shareholders confirmed, that the Richmond shareholders agreed to accept the Community shares for the purpose of being able to make immediate sale of them and appellee promised that he would begin to sell some of their Community shares for them as soon as the exchange was completed. Appellee admitted representing that the Community shares were resaleable and that he did not advise the Richmond shareholders that the Community shares were not registered. Appellee stated that the Community officers had told him that the Community shares could be sold in small amounts each week, so long as the sales did not depress the market.

Appellee also participated in efforts to increase and maintain artificially the price of Community stock in the over-the-counter market. Securities dealers were persuaded to enter bids in the bid sheets³ that were higher than the demand for Community stock would warrant bidding. This bidding was done with the knowledge that Brannon Fulps, an Oklahoma broker-dealer and a defendant below, would repurchase excess Community stock at a slightly higher price. In short the bid sheets indicated a broad and active market for Community stock when actually Brannon Fulps was the only substantial buyer. The Commission's affidavit showed without contradiction that there was virtually no retail demand for Community stock during August, 1966.

Furthermore the Commission's affidavit showed that appellee was responsible for inducing former Richmond shareholders to hold their new Community stock although they had intended to resell immediately. This was accomplished by issuing take-out letters and by verbal representations that Andresen or Community officers would repurchase the new Community shares. Appellee stated to the Commission that he did this because of warnings by Community officers that large sales on the market would lower the price of Community stock and adversely affect the planned acquisitions and mergers. There was no denial of these representations, although there were...