S.E.C. v. Carriba Air, Inc.

• Decision Date: 02 August 1982
• Docket Number: No. 81-7461,81-7461
• Citation: 681 F.2d 1318
• Parties: Fed. Sec. L. Rep. P 98,766, 10 Fed. R. Evid. Serv. 1636 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. CARRIBA AIR, INC., et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1318

681 F.2d 1318

Fed. Sec. L. Rep. P 98,766, 10 Fed. R. Evid. Serv. 1636

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. CARRIBA AIR, INC., et al., Defendants-Appellants.

No. 81-7461.

United States Court of Appeals Eleventh Circuit.

Aug. 2, 1982.

Martin Zerobnick, John B. Lynn, Thomas D. Birge, Denver, Colo., for defendants-appellants.

Barton S. Sacher, Atlanta, Ga., Rosalind C. Cohen, Jacob H. Stillman, Robert Lipsher, Washington, D. C., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before TUTTLE, RONEY and CLARK, Circuit Judges.

CLARK, Circuit Judge:

The instant case is an appeal from the issuance of a preliminary injunction by the United States District Court for the Northern District of Georgia. Marvin Winograde and Carriba Air, two of a number of defendants below, contend that the injunction was improper. We have considered all their contentions and we affirm. 516 F.Supp. 120.

Carriba Air is an attempt to create a new commuter airline in the Caribbean. It is descended from Air Caribbean, a venture in which virtually all the principals involved in the instant case were associated and which went bankrupt approximately one month prior to the formation of Carriba Air.

Carriba Air was formed on February 13, 1980, under Colorado law as Air West Indies, Inc. Its name was changed in May 1980 to Carriba Air, Inc. Carriba Air was to fly basically the same routes as Air Caribbean and employ essentially the same employees as Air Caribbean. Marvin Winograde and Gertrude Pollard received 16,649,054 shares of Carriba common stock plus 1,000,000 warrants to purchase additional shares. Winograde was to be vice president and Pollard was to be secretary-treasurer. Frederick H. Rehm, III, was to be Carriba's president, although his work was to be part-time and primarily directed towards public relations.

In early 1980, Carriba was in need of interim working capital. Through a private offering, Carriba sold 250,000 shares of common stock and 100,000 warrants to purchase common stock for $140,000. On May 30, 1980, Carriba filed a registration statement with the Atlanta regional office of the Securities and Exchange Commission. Carriba planned to sell to the public 12,000,000 shares of common stock at five cents per share. On August 29, 1980, the registration statement was declared effective and the 12,000,000 shares were offered and sold to the public.

The offering's underwriter received the money from the various investors. It deposited the funds in an escrow account at the Metro National Bank of Denver. These monies were refunded to the investors after the SEC initiated an investigation into the affairs of Carriba and Carriba decided to terminate the offering. On October 24, 1980, Carriba filed with the SEC's Atlanta regional office an amendment to its registration statement requesting leave to withdraw the registration statement. The SEC denied this request.

The court below found that the Carriba prospectus was false and misleading and issued a preliminary injunction against Carriba, Winograde, and the other defendants prohibiting them from:

A. In the offer or sale of common stock of Carriba Air, Inc., or any other security, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails:

(1) Employing any device, scheme, or artifice to defraud;

(2) Obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or

(3) Engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon any purchaser of such securities.

B. In connection with the purchase or sale of common stock of Carriba Air, Inc., or any other security, by the use of any means or instrumentalities of interstate commerce or of the mails:

(1) Employing any device, scheme, or artifice to defraud;

(2) Making any untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or

(3) Engaging in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

Record at 254. From this order Winograde and Carriba Air bring their interlocutory appeal.

This court has jurisdiction over the interlocutory appeal. Under 28 U.S.C. § 1292(a)(1), the Court of Appeals has jurisdiction over appeals from interlocutory orders of district courts granting injunctions. ¹

Second, another preliminary point must be dealt with. The district court in the instant case has essentially enjoined a crime. Early in the development of the common law, equity did enjoin criminal activity. ² This function was taken over by the Star Chamber until its abolition by the Parliamentarians during the reign of Charles I. ³ After the tragic and tumultuous events of the 1640s, the Chancellor withdrew from the business of enjoining criminal activity. Thus, the famous maxim "equity will not enjoin a crime" came into being.

To the present day, "equity will not enjoin a crime" is one of the principles of Anglo-American jurisprudence. It is not, however, an ironclad rule. During the eighteenth century, an exception was established for public nuisances that were also crimes. ⁴ See, e.g., Attorney Gen. v. Richards, 145 Eng.Rep. 980 (1794).

In enacting 15 U.S.C. § 77t, Congress specifically authorized an injunction to issue to prohibit the violation of the securities laws. This was no dramatic departure from previous doctrinal development. Violations of the securities laws are analogous to public nuisances. Thus, under 15 U.S.C. § 77t, criminal activity may be enjoined by the district court. ⁵

The appellants claim that the district court committed reversible error in failing to require positive proof that there was a likelihood of future violations of the securities laws by Winograde and Carriba. We are required by Securities and Exchange Commission v. Blatt, 583 F.2d 1325 (5th Cir. 1978), to consider several factors in determining whether the injunction was properly issued:

Such factors include the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations.

583 F.2d at 1334, n.29. The standard of review on this point is that of abuse of discretion. Securities and Exchange Commission v. MacElvain, 417 F.2d 1134, 1137 (5th Cir.), cert. denied, 397 U.S. 972, 90 S.Ct. 1087, 25 L.Ed.2d 265 (1970).

We conclude that the trial court did not abuse its discretion in issuing the injunction. The SEC had demonstrated a pattern of past and present questionable business practices. Blatant and inexcusable violations of the securities laws occurred. The appellants knowingly made material misrepresentations and at least recklessly made material omissions on documents submitted to the SEC. The appellants took no action to correct these misrepresentations and omissions. Indeed, the public offer was withdrawn only after the SEC launched its investigation. It is further likely that the appellants will remain in a position where opportunities for future violations of the securities laws will be abundant. Therefore, the factors enunciated in Blatt, supra, are virtually all present in the instant case.

The appellants' offer to cease the conduct in question is not dispositive. In analogous situations under the Fair Labor Standards Act, this circuit has stated that assertions on the part of the defendant that he would cease his wrongful conduct are by no means dispositive. See, e.g., Mitchell v. Pidcock, 299 F.2d 281, 286-87 (5th Cir. 1962); Mitchell v. Raines, 238 F.2d 186, 188 (5th Cir. 1956). We believe that the trial judge could properly have concluded that absent an injunction there was a reasonable likelihood of securities law violations in the future despite the mea culpas and protestations of reformation on the part of the appellants. Therefore, the issuance of the injunction was proper.

The appellants contend that venue was improper in the Northern District of Georgia. They assert that the filing of the registration statement in the SEC's Atlanta office was not "an act or transaction constituting the violation" sufficient to confer venue under 15 U.S.C. § 78aa:

The district courts of the United States, and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder. Any criminal proceeding may be brought in the district wherein any act or transaction constituting the violation occurred. Any suit or action to enforce any liability or duty created by this chapter or rules and regulations thereunder, or to enjoin any violation of such chapter or rules and regulations, may be brought in any such district or in the district wherein the defendant is found or is an inhabitant or transacts business, and process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found. Judgments and decrees so rendered shall be subject to review as provided in sections 1254, 1291, and 1292 of Title 28. No costs shall be assessed for or against the Commission in any proceeding under this chapter brought...