S.E.C. v. Blavin

• Citation: 760 F.2d 706
• Decision Date: 30 April 1985
• Docket Number: 83-1399,84-1150 and 84-1151,Nos. 83-1292,s. 83-1292
• Parties: Fed. Sec. L. Rep. P 92,021 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Larry D. BLAVIN, d/b/a Providence Investment Advisory, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 706

760 F.2d 706

Fed. Sec. L. Rep. P 92,021

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Larry D. BLAVIN, d/b/a Providence Investment Advisory Defendant-Appellant.

Nos. 83-1292, 83-1399, 84-1150 and 84-1151.

United States Court of Appeals Sixth Circuit.

Argued Feb. 11, 1985.

Decided April 30, 1985.

Geoffrey A.D. Smereck (argued), Detroit, Mich., for defendant-appellant.

Mark A. Loush, S.E.C., Detroit, Mich., Rosalind C. Cohen (argued), S.E.C., Jacob H. Stillman and Allyn Shepard, Washington, D.C., for plaintiff-appellee.

Before MARTIN and JONES, Circuit Judges, and CELEBREZZE, Senior Circuit Judge.

PER CURIAM.

In these consolidated appeals, defendant-appellant Larry D. Blavin, individually, and doing business as Providence Investment Advisory, first appeals from the district court's grant of summary judgment against him. The district court found that Blavin repeatedly violated the anti-fraud provisions of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. The district court also found that Blavin had sold investment advice to the public without registering as an investment adviser, as required by the latter Act. Blavin maintains that his own affidavits raised material issues of fact that rendered inappropriate a grant of summary judgment. Blavin also appeals from the disgorgement orders and procedure by which the district court ordered that he relinquish wrongful profits. Upon consideration of Blavin's contentions, we affirm the district court.

I.

At the time of the events at issue, Blavin was a pharmacist doing business in Farmington Hills, Michigan. Since at least April 1981, he owned Providence Investment Advisory, an unincorporated investment advisory service. From April through November 1981, Blavin authored and published six issues of a newsletter under Providence's name, each discussing a different company and recommending the purchase of its stock. Without registering with the Commission as an investment adviser, Blavin distributed these newsletters to at least 2,080 subscribers who resided in 40 states and Canada, charging them a $30 annual fee. Blavin also mailed copies of his newsletters to other persons in order to solicit additional subscriptions.

In May 1981, Blavin distributed his newsletter to approximately 5,500 subscribers and prospective subscribers. The newsletter recommended the purchase of the securities of Alanda Energy Corporation, a small Canadian company engaged in oil and gas exploration and production. The newsletter contained numerous material misstatements of fact concerning Alanda's present and projected cash flow, its current assets, projected earnings, actual drilling activities, and the anticipated production from Alanda's projected drilling projects. These factual representations were not based upon information Blavin gathered from Lawrence Brophy, an Alanda representative. They also do not appear in other published reports to which Blavin refers in his affidavits.

Blavin's May newsletter also represented Providence as a "chartered and registered service," at a time when it was not registered as an investment advisor with the Commission or any state. The May newsletter contained a disclaimer that "Providence Investment Advisory may trade for its own account." That disclaimer also included the statement that "[t]he security portfolio of our employees, officers or affiliated companies may, in some instances, include securities mentioned in this issue." The disclaimer did not reveal that Blavin was the sole owner and alter-ego of Providence. The newsletter did not reveal that during April and May 1981, Blavin had purchased over 10% of the shares available for public trading. During June and July, 1981 Blavin sold his entire Alanda holdings for a profit of at least $76,127.

The Commission's staff learned of the May newsletter and contacted Blavin in June, 1981. Blavin admitted that, despite the representation in his newsletter, he was not registered as an investment adviser under the Investment Advisors Act. Ten days later, Blavin filed an application to register with the Commission. While his application was pending, Blavin published another issue of the Providence newsletter in July. At the Commission's request, on August 3, Blavin consented to delay the effective date of his registration. Nevertheless, Blavin authored and distributed issues of the Providence newsletter in August, October, and November 1981.

The October newsletter recommended purchase of the stock of Velvet Exploration, Ltd., a Canadian company engaged in mineral and gas production. From June through September 1981, Blavin had purchased approximately 25% of the publicly available shares of Velvet stock. The October newsletter also failed to disclose that Blavin had recently purchased a large block of the stock he was recommending. The October newsletter portrayed Velvet's Mexican mining operation, in partnership with the Mexican government, as covering 200 acres of land. In fact, the company's partner was a Mexican national, as required by Mexican law, and the mine covered twenty-two acres. Blavin admitted including non-oil income when he computed the $384,000 figure which the October newsletter represented as the company's annual income from its oil operations.

Blavin asserted in his affidavit that he had received a package of seventy-five documents, including press releases and financial statements from Velvet's president. According to Blavin, he used those materials in preparing the October newsletter about Velvet, because he found them "especially trustworthy." The materials did not, however, contain any of the misrepresentations that appeared in the Providence newsletter. Blavin testified by deposition, for example, that Velvet's president told him the company's current liabilities were "nil." Blavin testified that he selected an "arbitrary" figure of $15,000 to report, because "it seemed to me there had to be some liability." A March 31, 1981 Auditor's Report, which was released three months before the October newsletter, revealed current liabilities of $145,322. During October and November 1981, Blavin sold Velvet shares for a net profit of $268,542.

On or about November 6, 1981, Blavin distributed a Providence newsletter that recommended purchase of I.R.E. Financial Corporation securities. From June to November, 1981, Blavin had purchased approximately 10% of the publicly traded shares of I.R.E. His November newsletter did not disclose this ownership of the recommended stock. Blavin's affidavit contends that he prepared the November newsletter primarily from research reports, newspaper articles, and annual reports of the company. The misrepresentations that appear in the Providence newsletter do not appear in these primary materials. Blavin's newsletter overstated both I.R.E.'s projected earnings per share and its cash on hand. The newsletter attributed to I.R.E. the ownership of franchise properties which the company did not own. The newsletter stated that a 168-unit condominium project, which I.R.E. did own, was "sold out" at a net profit of "over $12,000 per unit." In fact, the project was not sold out and the $12,000 figure was overstated.

The Commission filed its complaint in this action on November 17, 1981. On November 18, 1981, the district court entered an order restraining and enjoining Blavin from trading any security that had previously been mentioned in "any analysis report or newsletter issued or distributed by him." Yet, the district court found, Blavin sold approximately 115,740 shares of I.R.E. between November 18, 1981 and January 29, 1982. On the latter date, the district court entered a preliminary injunction that ordered Blavin to disgorge $179,000 and his remaining shares of I.R.E. stock. On September 20, 1982, the district court found Blavin guilty of criminal contempt for violating both the November 18, 1981 order and the January 29, 1982 order. On appeal, this Court affirmed that judgment.

The district court granted summary judgment to the Commission on its claims against Blavin under the antifraud provisions of the Securities Exchange Act and the Investment Advisers Act. The district court also found that Blavin was operating as an investment adviser without having registered as required by the Investment Advisors Act, that failure to register is a strict liability violation, and that his affidavits raised only an estoppel defense that was legally inapplicable because estoppel does not apply against the Commission in enforcement actions. Finally, the district court entered a permanent injunction enjoining Blavin from future violations of the Acts, and ordered disgorgement of Blavin's profits gained through securities law violations.

On October 27, 1983, the district court appointed a retired state judge as escrow and distribution agent to implement and administer a disgorgement plan. The district court held a hearing on January 25, 1984, to consider the plan proposed by the agent and to hear argument regarding the amount of disgorgement. On February 1, 1984, the court entered an order establishing the amount of disgorgement and an order approving the escrow agent's plan.

The first order directs Blavin to disgorge all profits from trading in Alanda, Velvet and I.R.E. stock, and fees paid by subscribers to the Providence Investment Advisory newsletter. The final figure includes profits from Blavin's own I.R.E. sales and I.R.E. sales by the court-appointed trustee. In calculating subscription fees, the court found that Blavin had 2,080 subscribers and charged a $30 annual subscription fee. Recognizing, however, that there may have been some rate of non-payment, the court reduced Blavin's liability for fees by 10%.

The court approved disgorgement plan requires the agent to mail notices to all known Providence subscribers, inviting them to submit claims for subscription fees and for trading losses in Alanda,...