SECURITIES & EXCHANGE COM'N v. Great American Indus., Inc.

• Decision Date: 23 December 1968
• Docket Number: Docket 31010.,No. 370,370
• Citation: 407 F.2d 453
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. GREAT AMERICAN INDUSTRIES, INC., Walter S. Mack, Jerome Matusow, Frederick J. Pagnani, William Thomas Beard, Emanuel Lester, Odie R. Seagraves, Bernard D. Marren, Irving Stolz, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

407 F.2d 453 (1968)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. GREAT AMERICAN INDUSTRIES, INC., Walter S. Mack, Jerome Matusow, Frederick J. Pagnani, William Thomas Beard, Emanuel Lester, Odie R. Seagraves, Bernard D. Marren, Irving Stolz, Defendants-Appellees.

No. 370, Docket 31010.

United States Court of Appeals Second Circuit.

Argued March 22, 1967.

Submitted May 2, 1968.

Decided December 23, 1968.

Certiorari Denied May 26, 1969.

Philip A. Loomis, Jr., Gen. Counsel, Walter P. North, Associate Gen. Counsel, Meyer Eisenberg, Asst. Gen. Counsel, David J. Myerson, Atty., Washington, D. C., for Securities and Exchange Commission.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, Simon H. Rifkind, Richard H. Paul and Thomas R. Farrell, Jr., New York City, of counsel, for defendants-appellees Great American Industries, Inc., Walter S. Mack, Bernard D. Marren and Irving D. Stolz.

O. John Rogge, New York City, for defendant-appellee Jerome Matusow; Weisman, Allan, Spett & Sheinberg, New York City, of counsel.

Walter Feldesman, New York City, Justin W. D'Atri, New York City, of counsel, for defendant-appellee Frederick J. Pagnani.

Leinwand, Maron & Hendler, New York City, Milford D. Gerton, New York City, of counsel, for defendant-appellee William Thomas Beard.

Before LUMBARD, Chief Judge, and WATERMAN, MOORE, FRIENDLY, SMITH, KAUFMAN, HAYS and ANDERSON, Circuit Judges.

Submitted to the in banc Court May 2, 1968.

Certiorari Denied May 26, 1969. See 89 S.Ct. 1770.

FRIENDLY, Circuit Judge:

This appeal by the SEC from an order of the District Court for the Southern District of New York, 259 F.Supp. 99, denying its motion for a temporary injunction with respect to alleged violations of § 13(a) of the Securities Exchange Act and of Rules 13a-11 and §§ 10(b), 10b-5 thereunder was initially heard by a panel consisting of Judges MOORE and HAYS of this court and Chief Judge Zavatt of the District Court for the Eastern District of New York. Since certain conclusions supporting the majority's decision to affirm ran counter to the position of the majority of the panel in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (1968), which was under advisement at the same time, we determined that this case also should be heard in banc upon the briefs already submitted and the opinions prepared by the panel.

The disposition of the motion for a temporary injunction on the basis of affidavits and of testimony at "private conferences" before the SEC, although apparently acquiesced in by all parties, illustrates the defects in that practice, which we subsequently condemned in SEC v. Frank, 2 Cir., 388 F.2d 486, 490-492 (1968). The SEC's application was supported by a long affidavit of one of its lawyers and a short one from its Chief Mining Engineer; the former gave mere excerpts from various of the press releases and reports of which the SEC complained rather than the full text. Cf. SEC v. Frank, supra, 388 F.2d at 489. Defendants answered with eight affidavits; some but by no means all of the relevant documents were annexed. No witnesses were heard but the SEC furnished the court with transcripts of the testimony it had taken. In his opinion Judge Ryan complained time and again that documents were not quoted in full text or presented as exhibits. As to certain issues the degree of knowledge possessed by corporate officers was critical, yet the judge had to determine this without seeing or hearing them, cf. 388 F.2d at 491. The disorganized record has similarly handicapped us in considering this appeal. We reaffirm our ruling in SEC v. Frank, supra, and further place the Commission on notice that even when exceptional circumstances may warrant dispensing with an evidentiary hearing on a motion for a temporary injunction or the defendants may agree to that course, the district courts are not to accept the kind of moving affidavit that was offered here; the Commission has sufficient facilities to enable it to present documents in full text.

The action concerned a number of press releases, reports, and failure to report and disclose during the winter and spring of 1966, relating to three mining ventures of a company somewhat extravagantly called Great American Industries, Inc. (GAI) — a sulphur property in California, a copper mine in Arizona, and a sulphur mine in Nevada. Mining was a new activity for GAI which had previously been engaged through subsidiaries in the manufacture and sale of a variety of less glamorous products such as cookies, crackers, rubber goods and soft drinks. From January 1, 1965 to January 1, 1966, the price at which GAI common stock traded on the American Stock Exchange never exceeded $2 per share; the average number of shares traded daily during 1965 was 8,500. In contrast, from January 13, 1966, when GAI announced its first venture into mining until the Commission suspended trading on April 29, 1966, an average of 185,000 shares was traded daily. During this period the price of the stock went as high as 14 5/8 on April 27 the closing price was 10 1/8.

The Commission's complaint alleges three categories of violations. The first is that in press releases and in 8-K reports to the SEC and the American Stock Exchange, GAI made untrue statements of material facts or omitted to state material facts "necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading," in violation of Rule 10b-5 as to the press releases and § 13(a) and Rule 13a-11 as to the reports. See also § 18(a). The second is that the corporation and its officers violated the same provisions by failing to disclose in press releases and 8-K reports that a substantial portion of the consideration for the three properties was known by them to be payable not to the owners but to intermediaries. The third is the opposite side of the latter coin; the SEC contends that in instances when the sellers failed to disclose the large participation of the finders to GAI, they violated Rule 10b-5. Before proceeding further we note that such of defendants' arguments as are based on a narrow construction of the phrase of § 10(b) of the Securities Exchange Act and Rule 10b-5, "in connection with the purchase or sale of any security," have been rejected by our decision in SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 847.

I.

The first press release of which the SEC complains was issued by Walter S. Mack, chairman of GAI, on March 21, 1966. Although a final paragraph dealt also with the California sulphur property, the SEC's criticism relates to a preceding one concerning the Arizona property which we reproduce in the margin.¹ Mack had acquired the option to the Arizona mine on the advice of Arthur D. Little, Inc., a reputed engineering firm, and later of another engineer, Dr. Edward Van Dornick. The Little report, dated March 18, 1966, had characterized the property as "a potentially promising ore deposit" which should be explored "to accurately determine its potential value." The report estimated the cost of such an evaluation at $72,000 plus the $50,000 down payment required to obtain an option.

While injunctive relief would hardly be warranted if this issue stood alone, the release, perhaps unintentionally, created an exaggerated impression. We refer particularly to the sentence, "Mr. Mack stated that he is advised that the mine can be in production within 90 to 120 days and will ship its concentrated ore to one of the large existing smelters in Arizona, at not too great a distance." Although literally true, this scarcely conveyed what was the fact, namely that GAI then had no intention of putting the mine in production unless the additional investigations during the 60-day period of the option showed that this would be warranted. The difference between what was said and what should have been is illustrated by a clarifying press release dated April 12, stimulated by the SEC's suspension of American Stock Exchange and over-the-counter trading in GAI stock on March 31. This attributed the SEC's action to reports and rumors emanating from others and made clear, "It is not now known whether or not there is a commercially mineable ore body at the property." The release went on to say that GAI had exercised its option, which had 45 days still to run.²

Despite the April 12 release GAI filed with the SEC on April 13 an 8-K report prepared by defendant Marren with the aid of defendant Stolz. After reciting the acquisition of all the stock of Basin Mining Company, the owner of the Arizona property, the report continued:

Investigation by Great American Industries, Inc., indicates that this mine can be operated within a period of 90 days on a basis which will produce an operating profit of approximately $50,000 a month. It is also anticipated that substantial ore reserves will be available for development on a larger basis which would involve the installation of equipment and an investment of more capital funds as a result of which the net profit may be increased to $3,000,000 a year.

Complaint by the Commission's staff resulted in a letter from the company's counsel on April 14 acknowledging that the statements concerning the Arizona property were inconsistent with the press release, claiming they were included "through inadvertence," and enclosing a substitute page which replaced the quoted passage by the following:

Investigation by Great American Industries, Inc. indicates that this mine can be operated within a period of 90 days. It is not now known whether or not there is a commercially mineable ore body at the property. The Company has no reports establishing the existence of such an ore body. Only limited exploratory work has been done thus far, and further exploration is intended.

The difference between the two versions is too great for rescue on the basis, advanced by the district judge, of being "not an admission of guilt but rather the act of prudent business men...