S.E.C. v. Blatt

• Decision Date: 15 November 1978
• Docket Number: No. 76-2181,76-2181
• Citation: 583 F.2d 1325
• Parties: Fed. Sec. L. Rep. P 96,610 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Gerson BLATT, Barton S. Udell, and John Pullman, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1325

583 F.2d 1325

Fed. Sec. L. Rep. P 96,610

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Gerson BLATT, Barton S. Udell, and John Pullman Defendants-Appellants.

No. 76-2181.

United States Court of Appeals Fifth Circuit.

Nov. 15, 1978.

E. David Rosen, Miami, Fla., for Pullman.

Burton H. Finkelstein, Washington, D. C., Robert C. Josefsberg, Miami, Fla., David J. Levenson, David M. Lewis, Washington, D. C., for Blatt et al.

Mark A. Loush, Detroit, Mich., David Ferber, Sol., Irving H. Picard, Asst. Gen. Counsel, Frederick B. Wade, Atty., Alan Rosenblat, Asst. Atty. Gen., John P. Sweeney, Atty., S. E. C., Washington, D. C., David R. King, Atty., S. E. C., Salt Lake City, Utah, for plaintiff-appellee.

Appeals from the United States District Court for the Southern District of Florida.

Before CLARK and GEE, Circuit Judges, and LYNNE, District Judge. ^*

LYNNE, District Judge:

This appeal is from a final judgment entered by the District Court for the Southern District of Florida permanently enjoining appellants Gerson Blatt, Barton Udell and John Pullman from engaging in further conduct that would violate Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The judgment further ordered Pullman to disgorge the sum of $315,377.50, representing the profits that he had realized through violation of the Act, and taxed the costs of such disgorgement against Pullman and Blatt.

This action centers around two acquisitions of Corporation of the Americas Limited (COAL) stock by Exquisite Form Industries, Inc. (Exquisite). Appellant Blatt, principal counsel to COAL, was the predominant figure in both transactions.

1. The Pullman Sale

In 1967, COAL was a small Florida real estate company. Use of a paradoxical accounting system made COAL an attractive target for acquisition: COAL's financial statement reflected large profits while its tax returns showed substantial losses. ¹

In December, 1967, Exquisite acquired approximately 92% Of COAL's outstanding stock. At the time of the acquisition Exquisite's accountants concluded that 92% Ownership was sufficient to permit it to "pool" its assets with COAL's. Exquisite was anxious to accomplish "pooling of interests" because of COAL's much greater profitability, as reflected on its financial statement.

In February, 1968, Blatt solicited Richard Sadowski, who was formerly president of COAL, to secure the purchase of various blocks of COAL shares which he had previously sold or given away. Through various misrepresentations, Sadowski induced sixteen shareholders to sell 47,730 COAL shares. Blatt arranged for the purchase of these shares for $59,662 by a Lichtenstein trust known as Delami. Pullman, Blatt's long-time client, controlled Delami and was its beneficiary. ²

Exquisite's accountants determined that in order to give a "pooling-of-interests" accounting and tax treatment to the COAL acquisition in Exquisite's financial statements, it would be desirable for Exquisite to own 95% Of the outstanding shares of COAL, instead of 92%. In July and August, 1968, Blatt negotiated the sale of Pullman's COAL stock to Exquisite at a price of $375,000, a profit to Pullman of approximately $315,000 on his six month investment.

The trial court held that Blatt and Pullman violated Section 10(b) and Rule 10b-5 by their failure to disclose material facts to the sixteen shareholders who sold their stock to Pullman in February, 1968. The court found as a fact that Blatt and Pullman knew at that time that Exquisite would need the additional COAL shares for the purpose of "pooling" and held that nondisclosure was a material omission. ³

2. The Naitove Trust

For over two years after the 92% Exquisite acquisition the law firm of Blatt and Udell was counsel to COAL. Prior to June 9, 1969, Blatt and Udell were informed that Exquisite proposed a merger by which Exquisite would acquire 100% Of COAL's outstanding shares. The merger was approved at a meeting of COAL shareholders on June 30, 1969, upon the strong recommendation of COAL's management.

The Blatt and Udell law firm assisted in the formalities of the merger, including the incorporation of the surviving company and necessary filings with the Florida Secretary of State. Udell signed the merger certificate as secretary of the new company.

Until May 6, 1969, Blatt held 13,700 shares of COAL as trustee. Beneficial owners of the shares included Blatt himself, who owned 4,067 shares, and Udell, his law partner, who owned 2,033 shares. On May 6, 1969, Blatt transferred legal title to the 13,700 shares to Willard Naitove, as trustee. Blatt's explanation for the change of trustee was that he intended to object to the merger and he did not wish to embarrass Exquisite by having the objection entered in the name of COAL's counsel.

On June 26, 1969, Naitove, as trustee, filed a timely objection to the merger pursuant to the Florida dissenters' rights statute. Shareholders who did not object to the merger received one share of Exquisite stock for every three shares of COAL stock they owned. Eventually, Blatt negotiated a settlement of the Naitove trust objection by which the trust received one share of Exquisite stock for one share of COAL stock. ⁴

The trial court found that Blatt and Udell did not disclose their beneficial ownership of COAL shares held in the Naitove trust to Exquisite. The court held that such omission was of a material fact, and, therefore, that Blatt and Udell violated Section 10(b) and Rule 10b-5.

This appeal presents many issues, as appellants have attacked the trial court's findings of fact, conclusions of law and remedies. We affirm in part and vacate and reverse in part.

Turning first to the trial court's findings of fact, we reject appellants' challenges. Our review is limited by the rule that "(f)indings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge of the credibility of the witnesses." Fed.R.Civ.P. 52(a). Wolf v. Frank, 477 F.2d 467 (5th Cir.), Cert. denied, 414 U.S. 975, 94 S.Ct. 287, 38 L.Ed.2d 218 (1973). The Commission is entitled to the benefit of all reasonable inferences and to have the evidence viewed in the light most favorable to it. SEC v. Parklane Hosiery, 558 F.2d 1083 (3d Cir. 1977). ⁵

The first finding challenged concerns Blatt's and Pullman's knowledge in February, 1968, when Pullman purchased 47,730 COAL shares. The trial court found that they knew at that time that it would be desirable for Exquisite to acquire additional COAL shares for "pooling" purposes.

Evidence in the record supports the trial court's inference that Blatt had access to and used this inside information. Exquisite's chief financial officer, Robert H. Solof, testified that at the time of the 92% Acquisition of COAL, Exquisite's accountants would have preferred a 95% Acquisition. Blatt was intimately involved in the negotiations between Exquisite and insider shareholders of COAL that culminated in the 92% Acquisition on January 5, 1968. During the negotiations Exquisite's accountants used Blatt's law library and explained the "pooling" concept to him.

Certainly, the court could infer from these facts along with Blatt's subsequent actions that he learned of the Exquisite accountants' uneasiness about "pooling" with 92% Or less. In late 1967 Blatt approached Richard Sadowski, stating that his client needed a minimum of 50,000 shares to consummate a transaction with Exquisite. Contrary to Pullman's explanation that he simply felt that COAL was a good investment due to his confidence in COAL's president, Blatt's statement to Sadowski clearly indicates that Blatt had in mind a sale to Exquisite from the outset.

Blatt offered the shares in a letter to Exquisite on July 5, 1968. The letter stated in part that

During our negotiations at the end of last year, I recall several discussions with your staff regarding the advantages of acquiring sufficient stock in C.O.A.L. to permit a "pooling" and I believe the acquisition of these shares would enable the company to do so.

Blatt admits that he knew that Exquisite needed to acquire more stock for "pooling," but claims that he was informed in June of a new rule of the American Institute of Certified Public Accountants requiring a 95% Minimum. Significantly, Blatt offered no evidence of the existence of such a rule. Also, Blatt's letter to Exquisite made no mention of any new rule; instead, it implies that Blatt acquired his knowledge of pooling in late 1967.

Likewise, the court could infer that Blatt relayed his knowledge about pooling to Pullman. Pullman's testimony (by deposition) simply was not credible to the court. He testified that his first knowledge of COAL came from Blatt's telephone call, less than ten days before the purchase. In that call, according to Pullman, Blatt informed him merely that 47,730 shares were available at $1.25 per share; that Milton Pepper was president of the company; that the company "was going to earn approximately a dollar a share or thereabouts"; and that in Blatt's opinion it was a good buy. Pullman contends that with no further questioning of Blatt, his lawyer for over eleven years, he made the investment.

During the succeeding six months Pullman received no financial information or reports from COAL. He did not know whether the company's earnings had begun to approach one dollar per share, as predicted. Pullman's only knowledge about the company's progress came when he asked someone, presumably Blatt, "how is Milton doing?" The answer was "Fine. The company is doing great."

In July Blatt asked Pullman at what price he would sell his shares. Pullman arrived at an asking price of $400,000 based upon his belief that stock was worth at least seven times earnings and that COAL was going to earn $1.00 per share. When the sale was consummated for $375,000 Pullman realized a profit of approximately $315,000 on...