Barnett v. United States

• Decision Date: 02 July 1963
• Docket Number: No. 17179.,17179.
• Citation: 319 F.2d 340
• Parties: Maurice BARNETT, Jr., and Investment Service Company, Petitioners, v. UNITED STATES of America and Orval L. Dubois, Secretary of the Securities and Exchange Commission, Respondents.
• Court: U.S. Court of Appeals — Eighth Circuit

319 F.2d 340 (1963)

Maurice BARNETT, Jr., and Investment Service Company, Petitioners, v. UNITED STATES of America and Orval L. Dubois, Secretary of the Securities and Exchange Commission, Respondents.

No. 17179.

United States Court of Appeals Eighth Circuit.

July 2, 1963.

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Haskell, Imes, Kansas City, Mo., for petitioners.

David Ferber, Associate Gen. Counsel, Securities and Exchange Commission, Washington, D. C., for respondent and Peter A. Dammann, Gen. Counsel, and Dolph B. H. Simon, Atty., Securities and Exchange Commission, Washington, D. C., were with him on the brief.

Before SANBORN and BLACKMUN, Circuit Judges, and STEPHENSON, District Judge.

STEPHENSON, District Judge.

This case is before the court on the petition of Maurice Barnett, Jr. and Investment Service Company for review of an administrative order of the Securities and Exchange Commission which order revoked the registration of Investment Service Company as a broker and dealer in securities and found Maurice Barnett, Jr. to be a cause of the revocation. The Commission's order was entered pursuant to Sec. 15(b)¹ and Sec. 15A(b) (4)², Securities Exchange Act of 1934 as amended.

Initially a hearing was held before a hearing examiner on charges that between November 1957 and November 1959 the registrant, Investment Service Company, together with or aided and abetted by Barnett, willfully violated anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 and rules thereunder, in that: (1) it made various false and misleading statements in connection with the offer and sale of the common stock of Westminster Corporation; (2) it sold stock of Colotah Corporation at prices in excess of prevailing market prices of such stock without disclosing such market price, and (3) it failed to execute a customer's order to sell Westminster stock. The hearing examiner submitted a recommended decision in which he found the willful violations charged and recommended that registrant's registration be revoked and that Barnett be found a cause of such revocation. Petitioners filed exceptions. The Commission thereafter entered its order and findings. The Petition for review pursuant to Section 25(a) of the Act, 15 U.S.C. § 78y(a) is now before us for determination.

Petitioner, Investment Service Company, was purchased on May 1, 1957 by Petitioner, Maurice Barnett, Jr., and since that time he has remained a major stockholder and was its president except for a brief period when he acted as chairman of the board. The company specialized in the purchase and sale of mining securities in the over-the-counter market. In connection with the charge of making various false and misleading statements in connection with the offer and sale of Westminster stock, the commission found that Barnett was approached in July 1957 by the president of Westminster who was interested in establishing a secondary market in Westminster stock. As a result of this conference and conferences with several other officers of Westminster, Barnett and Westminster agreed that Barnett would prepare and distribute a brochure recommending Westminster stock to broker-dealers and potential investors in exchange for $2,500 and 167,718 shares of Westminster stock which was 2/7 of the shares held by the management of Westminster. Barnett prepared 5500 copies of a 16 page brochure entitled "WE RECOMMEND FOR IMMEDIATE PURCHASE — THE WESTMINSTER CORPORATION" of which 5,000 copies were distributed. It is undisputed that the brochure contained false and misleading statements as to the value of the oil and mining properties which were the primary assets of Westminster. Petitioners do not disagree with the fact that the brochure contained false statements, but contend that the statements were based on facts given to Barnett by the officers of Westminster and which were relied upon by him as being true.

In the findings and opinion of the Commission it is stated: "Respondents deny that they had any knowledge of the fraudulent nature of the statements in the brochure. The record shows, however, that Barnett knew that many of these representations were false or misleading, and should have made diligent inquiry with respect to the accuracy and adequacy of a number of the other representations made." The Commission continues its opinion by setting forth a number of specific instances in which Barnett's connection with Westminster was such that Barnett knew or should have known of the fraudulent nature of the statements in the brochure. In addition to these specific statements which the Commission set out as being fraudulent and which the Commission found that Barnett either knew were false and misleading or should have known were false and misleading, the Commission made the following finding as to other statements in the brochure:

"With respect to the remaining statements, with the possible exception of those also appearing in the audited financial statements, the duty to exercise a high degree of care that rested on registrant and Barnett was not discharged by Barnett\'s asserted reliance on the self-serving statements by Westminster officials. Indeed, once Barnett became aware that some of the information furnished him was unreliable, he should have exercised the greatest diligence in verifying the other information he included in the brochure. He could do no less and still satisfy the duty owed to investors to make accurate and adequate representations in the brochure, and we find, under all the circumstances, that registrant and Barnett were grossly negligent or indifferent as to the truth and adequacy of such other information."

Petitioners claim that this finding by the Commission is not sufficient to support a revocation because the finding is just one of gross negligence and not one of actual knowledge to constitute willfulness as is required by the statute. It is noted, however, that the commission's finding of gross negligence goes only to the "truth or adequacy of such other information." The commission did find that Barnett knew that some of the representations in the Westminster brochure were false or misleading and in its conclusions as to violations the commission concludes "that registrant * * * willfully violated the statute and rules thereunder in the offer and sale of Westminster stock by means of false and misleading statements of material facts * * *."

To set aside the order of the Commission would require this court to upset the commission's finding of fact. This we cannot do as long as the facts are supported by substantial evidence. Securities Exchange Act, Section 25(a) (15 U.S.C. § 78y(a)). See Archer v. Securities and Exchange Commission, 8 Cir., 1943, 133 F.2d 795, at 799. An examination of the transcript clearly shows that there...