S.E.C. v. First City Financial Corp., Ltd.

• Decision Date: 01 December 1989
• Docket Number: No. 88-5232,88-5232
• Citation: 281 U.S.App. D.C. 410,890 F.2d 1215
• Parties: , 58 USLW 2354, Fed. Sec. L. Rep. P 94,801, 29 Fed. R. Evid. Serv. 1055 SECURITIES AND EXCHANGE COMMISSION v. FIRST CITY FINANCIAL CORPORATION, LTD., et al., Appellants.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1215

890 F.2d 1215

281 U.S.App.D.C. 410, 58 USLW 2354, Fed.

Sec. L. Rep. P 94,801,

29 Fed. R. Evid. Serv. 1055

SECURITIES AND EXCHANGE COMMISSION v. FIRST CITY FINANCIAL CORPORATION, LTD., et al., Appellants.

No. 88-5232.

United States Court of Appeals, District of Columbia Circuit.

Argued Sept. 19, 1989.

Decided Dec. 1, 1989.

Appeal from the United States District Court for the District of Columbia (Civil Action No. 86-02240).

Arthur L. Liman, New York City, for appellants.

Paul Gonson, Sol., S.E.C., with whom Daniel L. Goelzer, Gen. Counsel, Jacob H. Stillman, Associate Gen. Counsel, Washington, D.C., Eric Summergrad, Asst. Gen. Counsel, Joseph A. Franco, Atty., S.E.C., were on the brief, for appellee.

Before EDWARDS, GINSBURG, and SILBERMAN, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

Concurring statement filed by Circuit Judge GINSBURG, in which Circuit Judge EDWARDS joins.

SILBERMAN, Circuit Judge:

Section 13(d) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78m(d), requires any person who has directly or indirectly obtained the beneficial ownership of more than 5 percent of any registered equity security to disclose within 10 days certain information to the issuer, the exchanges on which the security trades, and to the Securities and Exchange Commission ("SEC"). ¹ The SEC charged appellants, First City Financial Corporation, Ltd. ("First City") and Marc Belzberg, with deliberately evading section 13(d) and its accompanying regulations in their attempted hostile takeover of Ashland Oil Company ("Ashland") by filing the required disclosure statement after the 10 day period. The district court concluded that appellants had violated the statute; it then enjoined them from further violations of section 13(d) and ordered them to disgorge all profits derived from the violation. See SEC v. First City Financial Corp., et al. 688 F.Supp. 705 (D.D.C.1988). We think that the district court's findings were not clearly erroneous and that the injunction and disgorgement orders were lawful and appropriate remedies for appellants' violations. We therefore affirm.

I.

The SEC's case is based on its contention that on March 4, 1986 Marc Belzberg, a vice-president of First City, telephoned Alan ("Ace") Greenberg, the Chief Executive Officer of Bear Stearns, a large Wall Street brokerage firm, and asked Greenberg to buy substantial shares of Ashland for First City's account. Appellants claim that Greenberg "misunderstood" Belzberg: the latter intended only to recommend that Bear Stearns buy Ashland for its own account.

First City is a diversified Canadian corporation founded and controlled by the Belzberg family and engaged in, among other things, investing in the publicly-traded securities of United States corporations. Samuel Belzberg, Marc's father, is the Chairman and Chief Executive Officer of the company. Samuel Belzberg and his two brothers own at least 70 percent of the stock of First City. Marc Belzberg managed the company's fifteen-person New York City subsidiary. The New York office apparently evaluated potential investments for the parent First City.

On February 3, 1986, a New York stockbroker, Alan D. Alan, wrote a letter to Samuel Belzberg describing Ashland as a "sensational business opportunity" and stating that "the circumstances and timing could hardly be better for the 'Sam Belzberg Effect.' " (emphasis in original). In a second letter sent several days later, Alan presented Samuel Belzberg with additional financial information on Ashland, including its break-up valuation. After Marc Belzberg received copies of this information, he instructed two financial analysts in the New York office to begin to study Ashland and its component divisions. Armed with their favorable preliminary analysis, on February 11 Marc and Samuel Belzberg purchased 61,000 shares of Ashland stock for First City using Goldman Sachs, another large Wall Street investment banking house. Throughout the month, First City also steadily acquired large blocks of Ashland stock through Katz-Goldring, Alan's smaller brokerage firm. By February 26, First City had accumulated more than 1.3 million shares, approximately 4.8 percent of Ashland's total outstanding stock. Around the same time, Marc Belzberg discontinued purchasing Ashland stock through Katz-Goldring and began acquiring shares through Greenberg at Bear Stearns. Greenberg had enjoyed a longstanding business relationship with First City and Samuel Belzberg. Additional purchases of approximately 53,000 shares of Ashland stock through Greenberg between February 26 and 28 pushed First City's holdings to 1.4 million shares, or just over 4.9 percent of all Ashland stock.

During this period, First City employed several commonly accepted measures to maintain the secrecy of its purchases, since public knowledge that First City was acquiring a large stake in Ashland would likely drive up the price of the stock. For instance, First City bought the Ashland stock through nominee accounts ² established at Katz-Goldring specifically for the Ashland purchases. Confirmations of the stock purchases were mailed under the nominee name to the home of Robi Blumenstein, an officer in First City's New York subsidiary.

On Friday, February 28, First City received a favorable report from Pace Consultants, a Texas consulting firm hired to assess Ashland's petroleum-related businesses. Pace valued these segments of Ashland at $726 million. The following Monday, on March 3, Pace revised its estimate upward to $844 million. The next day, on March 4, Marc Belzberg telephoned Greenberg and engaged him in a short conversation that would be the centerpiece of this litigation. At his deposition, ³ Greenberg described the conversation in the following manner:

[Marc Belzberg] called me and said something to the effect that--something like, "It wouldn't be a bad idea if you bought Ashland Oil here," or something like that. And I took that to mean that we were going to do another put and call arrangement that we had done in the past.... I was absolutely under the impression I was buying at their risk and I was going to do a put and call. ⁴

While Greenberg interpreted Marc Belzberg's call as an order to purchase Ashland stock on behalf of First City, Marc Belzberg later claimed that he intended only to recommend that Greenberg buy stock for himself, that is, for Bear Stearns, and that Greenberg apparently misunderstood Belzberg. Immediately after the phone call, Greenberg purchased 20,500 Ashland shares. If purchased for First City, those shares would have pushed First City's Ashland holdings above 5 percent and triggered the beginning of the 10 day filing period of section 13(d). In that event, First City would have been obliged to file a Schedule 13D disclosure statement on March 14 with the SEC.

Between March 4 and 14, Greenberg purchased an additional 330,700 shares of Ashland stock for First City costing more than $14 million. Greenberg called Marc Belzberg periodically during those ten days to discuss various securities, including Ashland. In these conversations, Greenberg reported to Marc Belzberg the increasing number of Ashland shares Greenberg had accumulated. According to Greenberg, Belzberg replied to these reports by saying, " 'Fine, keep going,' or something to that effect." Greenberg also characterized Belzberg's response as "grunt[ing]" approvingly. Belzberg did not squarely deny that testimony; he testified that he, Belzberg, said "uh-huh, I think it's cheap." Over the March 15-16 weekend, Marc Belzberg met with his father and uncles in Los Angeles to discuss Ashland. On Sunday, March 16, Samuel Belzberg decided that First City should continue to buy Ashland stock. Marc Belzberg then advised his father that Greenberg had accumulated a block of Ashland shares that "First City could acquire quickly." Samuel Belzberg later testified that he had no prior knowledge of the Greenberg purchases. ⁵

Returning to New York the next morning, March 17, Marc Belzberg called Greenberg and arranged a written put and call agreement for the 330,700 shares Bear Stearns had accumulated. During that conversation, Marc Belzberg did not mention a price to Greenberg. Several days later, Marc Belzberg received the written agreement with a "strike price," or the price Bear Stearns was charging First City, of $43.96 per share. This price was well below the then market price of $45.37; thus, the total March 17 put and call price was almost $500,000 below market. Marc Belzberg apparently expressed no surprise that Bear Stearns was charging almost half a million dollars less than market value. He later testified that he believed that Bear Stearns was acting as a "Santa Claus" and that Greenberg was giving him "a bit of a break" to gain more business from First City in the future.

When Blumenstein, the officer responsible for ensuring First City's compliance with the federal securities laws, noticed the strike price, he immediately met with Marc Belzberg. Blumenstein recognized that the computation of the price reflected only the cost to Bear Stearns of acquiring the stock over the two week period before the written agreement (plus interest and commission), thus creating an inference that First City was the beneficial owner of the securities before March 17. After Blumenstein outlined the problem to Belzberg, the two men called Greenberg on a speakerphone. Belzberg later testified, "I informed Mr. Greenberg [during that conversation] that the letter [the written agreement] was incorrect, that I didn't care what the price of the stock was that he bought for himself, I didn't care what day he made the trades for himself, that I was buying stock from him as of today." Belzberg then testified that Greenberg said, "[Y]ou're right, the letter's wrong, I didn't read it before it went out, throw it out and I will send you a corrected copy." Greenberg, however, testified that Belzberg...