SECURITIES & EXCHANGE COM'N v. Beisinger Indus. Corp., Civ. A. No. 75-4660-M.

• Decision Date: 01 September 1976
• Docket Number: Civ. A. No. 75-4660-M.
• Citation: 421 F. Supp. 691
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. BEISINGER INDUSTRIES CORPORATION et al., Defendants.
• Court: U.S. District Court — District of Massachusetts

421 F. Supp. 691

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. BEISINGER INDUSTRIES CORPORATION et al., Defendants.

Civ. A. No. 75-4660-M.

United States District Court, D. Massachusetts.

August 5, 1976.

Supplemental Order September 1, 1976.

David Belkin, Jeffrey S. Rosen, SEC, Washington, D. C., for plaintiff.

Ronald F. Kehoe, Haussermann, Davison & Shattuck, Boston, Mass., for defendants.

MEMORANDUM IN CONNECTION WITH ORDER APPOINTING SPECIAL AGENT

FRANK J. MURRAY, District Judge.

This case under the federal securities laws came on to be heard on plaintiff's motion for appointment of a Special Agent. The plaintiff (SEC) brought the action in the United States District Court for the District of Columbia to enjoin defendants Beisinger Industries Corp. ("registrant"),¹ Beisinger Industries of Canada ("Canada"),² BIC International Establishment ("Establishment"),³ Court J. Beisinger and Jeanette H. Beisinger (the "Beisingers")⁴ from violations of the anti-fraud and reporting provisions of the federal securities laws. In addition the SEC sought appointment of a "Special Master",⁵ an accounting, and disgorgement of certain funds. On October 7, 1975 Judge Gesell entered a preliminary injunction, consented to by counsel for certain of the defendants,⁶ against the registrant, Canada and the Beisingers. Judge Gesell's order enjoined those defendants from fraudulent activities in connection with the purchase and sale of securities, mandated full and timely compliance with the disclosure provisions of the federal securities laws and prohibited certain transactions by the defendants pending final determination of the merits of this action.

On October 23, 1975 Judge Gesell transferred the case, pursuant to 28 U.S.C. § 1404(a), to this court. In his order transferring the case he stated:

The Court is of the view, based on the material presently before it, that some form of immediate additional relief to assure adequate supervision of defendants may be desirable to supplement the existing preliminary injunction, but the decision whether to appoint a special advisor or fashion other supplementary relief should rest with the transferee court.

During the October 22, 1975 hearing on the SEC's motion for a Special Agent, in which he indicated his intention to transfer this case, Judge Gesell observed: "I don't see the instant urgency (for the appointment of a Special Agent). There is a decree outstanding and there is a slight presumption even these days that a decree will be followed".⁷

This court set the matter down for argument on plaintiff's motion for appointment of a Special Agent on November 14, 1975. Thereafter, on the representations of counsel for certain defendants that efforts at settlement were being made the court postponed further hearings. After counsel informed the court that settlement negotiations had not been fruitful, the matter was set down for further hearing on March 18, 1976. At the conclusion of the March 18 hearing the SEC was instructed to file proposed findings of fact and conclusions of law. The court also granted the defendants similar opportunity. After reviewing the proposed findings and conclusions submitted by the parties, the court on May 6, 1976 ordered:

1) that on or before June 1, 1976 defendant Beisinger Industries Corp. file with the court a copy of its SEC Form 10-K for 1975, and thereupon 2) that on or before June 15, 1976 the plaintiff file any comments it has prepared regarding the compliance of Beisinger Industries Corp.'s SEC Form 10-K with the disclosure requirements of the Securities Exchange Act of 1934.

The parties have complied with the court's May 6 order and the defendants have filed a response to the SEC's comments. The SEC has in turn filed a reply to that response.

The SEC presents two claims in this case. First, the SEC contends that from 1973 to 1975 the defendants misappropriated $1,459,237 in the form of "advances" by the registrant to Beisinger International Corporation, S.A., Luxemburg ("International").⁸ This diversion of over one half of the registrant's assets together with an alleged failure to disclose the diversions and related transactions and events fully and fairly is said to be in violation of certain anti-fraud provisions of the federal securities laws. Section 17(a) of the Securities Act of 1933, as amended 15 U.S.C. § 77q(a), and Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") 15 U.S.C. § 78j(b) and SEC Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5. Second, the SEC contends that the defendants caused the registrant from 1973 to the present to fail to make timely and adequate filings as required under the periodic reporting requirements of the Exchange Act. Section 13(a) of the Exchange Act, as amended, 15 U.S.C. § 78m(a). Both claims were addressed by Judge Gesell's Order of October 7, 1975 which, inter alia, preliminarily enjoined continued violation of the anti-fraud and reporting provisions.

The SEC's motion for additional equitable relief must be considered in light of the operation of the preliminary injunction on the activities of the defendants. With respect to the first claim, violation of the anti-fraud provisions, no further allegations of misappropriation and diversion of the registrant's assets since Judge Gesell's October 7 Order was entered have been tendered by the SEC. However, the SEC does not concede that there have been no further improper transactions. Rather the SEC argues forcefully that in the absence of compliance with the reporting requirements by the registrant it is impossible to determine whether there have been additional violations of the anti-fraud provisions. Consequently it is in respect of the second SEC claim, violation of the reporting provisions, that the need, if any, for additional equitable relief at this time must be found.

The registrant is required under Section 13 of the Exchange Act to make certain periodic reports to the Securities and Exchange Commission.⁹ The reporting requirements were designed to insure that investors would have available adequate information upon which to base their judgment whether to buy, sell or hold a registrant's securities. The reporting is, in addition, of benefit to those creditors who are considering transactions with the reporting companies not involving the purchase and sale of statutory securities. The periodic reporting requirements, in short, are a crucial element in the federal government's efforts to maintain the integrity of the nation's financial markets. See generally Cohen, "Truth in Securities" Revisited, 79 Harv.L.Rev. 1340 (1966).

It is clear that prior to the imposition of the October 7 Order, the registrant had failed to provide timely reports to the SEC under the Exchange Act.¹⁰ Further, putting to one side at this stage the question whether the registrant's reports were materially misleading in connection with the SEC's anti-fraud cause of action, it is also clear that the registrant's annual reports were inadequate to meet the periodic reporting requirements because of their failure to provide fully audited financial statements.¹¹ These were not mere technical deficiencies but rather were serious violations of the periodic reporting requirements. The failures to provide timely reports and adequate financial information are offensive to the central purpose of the periodic reporting system Congress established through the Exchange Act. For the system to work properly the information reported must be both current and adequate. The registrant's filings prior to the imposition of Judge Gesell's October 7 Order mandating adequate disclosure on a timely basis were neither.

During the course of the hearings and in papers filed with the court, counsel for defendants maintained that the registrant's prior failures to comply with the reporting requirements had been caused, in part, by questionable advice rendered by their independent auditors. This difficulty, counsel contended, had been remedied by the engaging of a different firm of certified public accountants. To permit defendants a full opportunity to demonstrate their determination to remedy their own errors, the court reserved action on the motion for appointment of a Special Agent until it had an opportunity to examine the registrant's SEC Form 10-K for 1975, the first annual report to be submitted after the October 7 Order was entered. The court has examined the 1975 Form 10-K and determines that it also is neither timely nor adequate. The 1975 Form apparently was not filed until three months after the date it was due at the SEC and then only in response to a specific order of this court.¹² Further, the registrant continues to place restrictions on the accountants preventing a full audit of the corporation particularly with reference to the alleged misappropriations in the form of "advances" of over half the registrant's assets to Beisinger International Corporation.¹³ The registrant continues its pattern of conduct failing to comply with the reporting requirements. It is, in addition, now flouting an explicit court order requiring compliance. In light of the conduct of the defendants in derogation of the existing injunction, additional equitable relief is necessary.

There can be little doubt of the power of the court to fashion such remedial relief as may be required to effectuate the purposes of the federal securities laws and to provide effective enforcement of its decrees. See SEC v. Shapiro, 494 F.2d 1301, 1308-09 (2d Cir. 1974); Chris Craft Industries v. Piper Aircraft Corp., 480 F.2d 341, 390-91 (2d Cir.), cert. denied, 414 U.S. 910, 94 S.Ct. 232, 38 L.Ed.2d 148 (1973); see generally Comment, Court-Appointed Directors: Ancillary Relief in Federal Securities Law Enforcement Actions, 64 Geo.L.J. 737 (1976); Comment, Equitable Remedies in SEC Enforcement Actions, 123 U.Pa.L. Rev. 1188 (1975). However, the court shares the view of the Second...