Pennaluna & Company v. Securities and Exchange Com'n

• Citation: 410 F.2d 861
• Decision Date: 11 July 1969
• Docket Number: No. 22143.,22143.
• Parties: PENNALUNA & COMPANY, Inc., Benjamin A. Harrison, and Harry F. Magnuson, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

410 F.2d 861 (1969)

PENNALUNA & COMPANY, Inc., Benjamin A. Harrison, and Harry F. Magnuson, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 22143.

United States Court of Appeals Ninth Circuit.

April 10, 1969.

Rehearing Denied July 11, 1969.

COPYRIGHT MATERIAL OMITTED

Saxon, Maguire & Tucker, Washington, D. C., Paine, Lowe, Coffin, Herman & O'Kelly, Spokane, Wash., LeSourd & Patten, Seattle, Wash., Lowenstein, Pitcher, Hotchkiss & Parr, New York City, L. R. Small (argued), of Paine, Lowe, Coffin, Herman & O'Kelly, Spokane, Wash., for petitioners.

Walter P. North (argued), Associate Gen. Counsel, Philip A. Loomis, Jr., Gen. Counsel, Jacob H. Stillman, Asst. Gen. Counsel, Theodore S. Kaplan, Harvey A. Rowen, Attys., Washington, D. C., James E. Newton, Regional Adm., SEC, Seattle, Wash., for respondent.

Before CHAMBERS and MERRILL, Circuit Judges, and CROCKER, District Judge^*.

MERRILL, Circuit Judge:

Pursuant to § 25 of the Securities Exchange Act of 1934, 15 U.S.C. § 78y(a), petitioners seek review of an order of the Securities and Exchange Commission.

Pennaluna & Company was a corporation operating in Wallace and Kellogg, Idaho, and Spokane, Washington, as a registered broker-dealer in securities. It dealt primarily in securities issued by mining companies and for the most part traded on a wholesale basis with other broker-dealers. The company was owned by the two individual petitioners. Harrison owed 62½ per cent of the stock and served as president, operated the Spokane office, and was in charge of the company's trading activities. Magnuson owned 37½ per cent of the company, served as treasurer, managed the Wallace and Kellogg offices, and was in charge of the company records. He also operated a separate accounting business in Wallace. The company was incorporated in 1963. Prior to that time, throughout the period here involved, it existed as a partnership, with the interests of Harrison and Magnuson the same as their subsequent stock interests.

The Commission found violations of the Securities Act of 1933 and Securities Exchange Act of 1934 (together with certain Commission Rules) on the part of all petitioners. By its order it revoked the registration of Pennaluna as a broker-dealer, barred Harrison and Magnuson from being associated with any broker-dealer, and expelled Harrison from membership in the Spokane Stock Exchange. §§ 15(b) and 19(a) (3) of the Exchange Act, 15 U.S.C. §§ 78o(b) and 78s(a) (3).

Petitioners admit certain charged violations, dealing mainly with record-keeping. At issue in these proceedings are alleged violations of registration and antifraud provisions.

The charged violations arose out of three courses of events coinciding in point of time: 1. The acquisition by Pennaluna and Magnuson of shares in Silver Buckle Mining Co. (which were later resold to the public). These events relate particularly to the registration violations and will be discussed in that connection. 2. The acquisition by Silver Buckle of a controlling interest in West Coast Engineering Co. (resulting in its ultimate merger into West Coast) and West Coast's ultimate financial failure. 3. Pennaluna's trading activity in Silver Buckle shares during a spectacular bull market in those shares. The last two courses of events relate particularly to the antifraud violations and will be discussed in that part of this opinion.

I. VIOLATIONS OF REGISTRATION PROVISIONS.

This case does not involve a primary distribution by the issuing company. Rather, we are here dealing with alleged secondary distributions of stock by a controlling person through various underwriters, with none of the transactions registered as required by § 5 of the Securities Act of 1933.¹

A. Violations by Pennaluna.

With respect to the violations charged against Pennaluna the dispute centers in major part around two large blocks of unregistered Silver Buckle shares. On May 8, 1962, Oil, Inc., disposed of 600,555 shares. On September 29, 1962, a block consisting of 1,167,111 shares held by two corporations — New Park Mining Co. and East Utah Mining Co. — was disposed of.

Pennaluna is charged with being an underwriter as to shares acquired (and resold) by it from these blocks.

By the basic definition in § 2(11), one "who purchases from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security" is an underwriter. There is no question that Pennaluna purchased with a view to a resale to the public and thereafter sold to the public. The question is whether in so acting it dealt with an issuer. It did not purchase from or sell for Silver Buckle, the actual issuer. It is necessary, therefore, to determine whether Pennaluna purchased from or sold for a person included in the term "issuer" for the purpose of § 2(11): "any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer."²

The Commission found that at the time of the sales in question Magnuson was a person controlling Silver Buckle and was therefore an "issuer" as that term is used in § 2(11); that as to the stock in question he effected public distributions through Pennaluna; and that Pennaluna acted as underwriter in effecting these transactions. The petitioners dispute these contentions.

1. Burden of Proof.

At the outset, petitioners contend that the Commission erroneously imposed upon them the burden of establishing a lack of control by Magnuson.

It is well recognized as a general proposition that one who claims an exemption from the broad registration requirement of § 5 has the burden of proving that the exemption applies. SEC v. Ralston Purina Co., 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494 (1953); SEC v. Sunbeam Gold Mines Co., 95 F.2d 699 (9th Cir. 1938).

Petitioners do not dispute this as a general proposition. They would, however, limit it to a primary distribution where the shares come from the issuing company. They concede that in such a case the distribution carries a presumptive need for registration. Where the shares do not come from the issuing company, however, petitioners contend that there is no presumptive need and that the Commission should bear the burden of establishing that the shares came from a controlling person and thus of establishing the existence of an "issuer" under § 2(11).

The holding of SEC v. Culpepper, 270 F.2d 241 (2d Cir. 1959), is to the contrary and we agree with that holding. See also SEC v. Franklin Atlas Corp., 154 F.Supp. 395 (S.D.N.Y. 1957). Petitioners' result would place upon the Commission the burden of proving the need for registration in all secondary distributions. The congressional concern over such distributions, made clear from legislative history,³ strongly indicates that the presumptive need for registration implicit in § 5 extends to all secondary distributions not insignificant in their proportions:

While the congressional concern reached to all secondary distributions of significant proportions it was obvious that it could not impose upon a seller other than the issuing corporation the duty of registering his stock unless the shareholder was in a position to require the issuing corporation to seek registration. "Control" of the corporation thus became an essential factor in cases of secondary distribution.

In the light of this purpose a practical test for control has been suggested: "Is a particular person in a position to obtain the required signatures of the issuer and its officers and directors on a registration statement?" 1 L.Loss, Securities Regulations 557 (2d ed. 1961).

Where a secondary distribution of significant proportions is involved it is not unreasonable, in our judgment, to impose upon the seller the burden of establishing his inability to secure the necessary corporate action.

2. Magnuson's Control of Silver Buckle.

Silver Buckle was organized in 1947 with F. Scott, its organizer, serving as president and director throughout its corporate existence. Initially it had 7½ million shares outstanding, and issued 2 million more in mid-May to effect a share exchange with West Coast Engineering Co. Prior to the May 8, 1962, sale by Oil, Inc., Magnuson was the holder of 542 shares. He was not an officer or director. The SEC has found him to be a controlling person on that date and that his control continued throughout the life of Silver Buckle. Although conceding that he later occupied a position of control, petitioners strenuously assert that he was not in such a position in May 1962, or in September 1962, when the stock held by New Park and East Utah was sold.

"Control" is not to be determined by artificial tests, but is an issue to be determined from the particular circumstances of the case. Rochester Telephone Corp. v. United States, 307 U.S. 125, 59 S.Ct. 754, 83 L.Ed. 1147 (1939). Under Rule 405 (footnote 2, supra), it is not necessary that one be an officer, director, manager, or even shareholder to be a controlling person. Further, control may exist although not continuously and actively exercised. 2 L.Loss, Securities Regulations 776-81 (2d ed. 1961). See SEC v. Culpepper, supra; Koppers United Co. v. SEC, 78 U.S.App.D.C. 151, 138 F.2d 577 (1943); SEC v. Franklin Atlas Corp., supra.

By January 1963, Magnuson was unquestionably in a position of control of Silver Buckle through stock acquisition of his own and that of Golconda Mining Co., a company under his control. The Commission scrutinized his prior relations with those individuals who clearly constituted the Silver Buckle control group. It concluded that his connection with two important subsidiary corporations, the group's reliance upon his assistance, their close relationship in enterprises other than Silver Buckle and the freedom with which the group felt able to call upon him for assistance in their efforts to retain control supported the conclusion that he was a member of the Silver Buckle...