S.E.C. v. Hughes Capital Corp.

• Citation: 124 F.3d 449
• Decision Date: 13 June 1997
• Docket Number: No. 96-5401,96-5401
• Parties: Fed. Sec. L. Rep. P 99,516, 47 Fed. R. Evid. Serv. 1288 SECURITIES AND EXCHANGE COMMISSION v. HUGHES CAPITAL CORPORATION; F.D. Roberts Securities, Inc.; Howard Ackerman; Gilbert Beall; Dominick Fiorese; Frederick Galiardo; Sheldon G. Kanoff; John Knoblauch; Susan Lachance; Alan Lieb; Frederic Mascolo; John Perfetti; Lionel Reifler; Ira Victor, Lionel Reifler, Susan Lachance, and Howard Ackerman, Appellants. . Submitted Under Third Circuit Rule LAR 34.1(a)
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 449

124 F.3d 449

Fed. Sec. L. Rep. P 99,516, 47 Fed. R. Evid. Serv. 1288

SECURITIES AND EXCHANGE COMMISSION v. HUGHES CAPITAL CORPORATION; F.D. Roberts Securities, Inc. Howard Ackerman; Gilbert Beall; Dominick Fiorese Frederick Galiardo; Sheldon G. Kanoff; John Knoblauch Susan Lachance; Alan Lieb; Frederic Mascolo; John Perfetti; Lionel Reifler; Ira Victor Lionel Reifler, Susan Lachance, and Howard Ackerman, Appellants.

No. 96-5401.

United States Court of Appeals, Third Circuit.

Submitted Under Third Circuit Rule

LAR 34.1(a)

June 13, 1997.

Decided July 9, 1997.

Lucinda O. McConathy, Allan A. Capute, Jacob H. Stillman, Securities & Exchange Commission, Washington, DC, for Appellee.

Martin R. Raskin, Raskin & Raskin, Miami, FL, for Appellants.

Before: MANSMANN, NYGAARD, and ROSENN, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

The three appellants in the present matter were defendants in an action brought by the Securities and Exchange Commission (SEC) in the United States District Court for the District of New Jersey. The district court granted summary judgment in favor of the SEC against all the defendants on the issues of both liability and damages. ¹ Susan Lachance and Howard Ackerman, two of the defendants, appeal from both the judgment of liability and the disgorgement order; Lionel Reifler appeals only from the order of disgorgement. Although the appellants raise a number of issues, our principal concern is with their challenge to the district court's order of disgorgement. We affirm.

I.

Between 1968 and 1976, Lionel Reifler had six felony convictions for crimes including securities fraud, tax evasion, sale of unregistered securities and operation of an unregistered brokerage firm. His wife, Susan Lachance, is involved in a number of business ventures, independently and with her husband. She is the sole owner and president of Susan Lachance Industrial Design (SLID) and she is the president of Flat Rock Developers, Inc. (Flat Rock), a corporation formed by Lachance, Reifler, Gilbert Beall and Frederic Mascolo. Howard Ackerman, a bookkeeper, has been employed by Reifler since March, 1984; he shared a suite of offices with Reifler and Lachance and served as the bookkeeper for the Hughes Capital Corporation (Hughes) from its inception.

In 1985, Reifler and two other defendants, Beall and Mascolo, acquired Hughes, a Florida shell corporation, as a vehicle for a public stock offering. ² John Knoblauch became Hughes' "nominal owner and chairman of the board of directors." Reifler and the others amended Hughes' Registration Statement, changing the stock-to-warrant ratio from 1:3 to 1:21. Hughes then announced a public offering of the stock. The defendants, including Lachance and Ackerman, purchased at least 88% of the stock sold in the public offering.

In 1986, a public relations firm hired by the Reiflers issued press releases announcing Hughes' plans to purchase four other businesses; these press releases did not mention that the acquisition candidates were all owned and controlled by affiliates of Hughes. Among the companies named as acquisition candidates were SLID and Flat Rock. In one press release, Lachance represented, as president of SLID, that SLID was in good financial shape (in fact, it had only just emerged from bankruptcy) and was being acquired by Hughes, which had sufficient capital to purchase SLID and expand its business. In a press release issued on behalf of Flat Rock, Lachance, using her married name of "Susan Reifler," similarly represented that Flat Rock was an active concern (in fact, it was dormant and had no revenue at the time of the press release) and that Hughes had sufficient capital to acquire the business and to expand its real estate holdings. In neither press release did Lachance reveal her marital connection to Reifler or her status as a principal shareholder in Hughes.

Ackerman, as the bookkeeper, admits that he executed most of the transactions necessary to perpetuate the fraudulent scheme. He transferred money among the various bank accounts held by Reifler, Lachance and the other participants in the Hughes stock sale, although he acknowledged that many of these transactions had no legitimate business purpose. He obtained cashier's checks with money from some of these accounts to purchase stock and warrants for nominee accounts in the names of various Reifler associates, including himself, Reifler, Lachance, Lachance's minor daughter, and Reifler's housekeeper.

After the price of the stock rose, warrants were sold from the accounts controlled by Reifler and his cohorts into the public market. Ackerman deposited most of the proceeds of these sales, approximately $1.15 million, into various accounts held by himself, Reifler, Lachance and others. The money was then transferred from account to account and withdrawn in small amounts by Ackerman and the other participants in the stock fraud scheme. Eventually, the scheme was uncovered. A number of the participants, including Reifler, were criminally prosecuted; all of the participants were sued civilly, both by the SEC in the present action and in a class action suit brought by the defrauded purchasers of Hughes stock.

II.

We exercise plenary review over a district court's order granting summary judgment. Bieregu v. Reno, 59 F.3d 1445, 1449 (3d Cir.1995); United States v. Koreh, 59 F.3d 431, 438 (3d Cir.1995). "On review the appellate court is required to apply the same test the district court should have utilized initially." Goodman v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir.1976).

The standard for summary judgment is well-established: Summary judgment may be granted only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). When considering a motion for summary judgment, the court must view all evidence in favor of the non-moving party. Bixler v. Central Pa. Teamsters Health & Welfare Fund, 12 F.3d 1292, 1297 (3d Cir.1993). Additionally, all doubts must be resolved in favor of the non-moving party. Meyer v. Riegel Prods. Corp., 720 F.2d 303, 307 (3d Cir.1983). The party challenging the motion for summary judgment must be able to produce evidence that, "when considered in light of that party's burden of proof at trial, could be the basis for a jury finding in that party's favor." Kline v. First Western Gov't Sec., 24 F.3d 480, 485 (3d Cir.1994).

A.

In the present matter, the district court granted the SEC's motion for summary judgment on the charge that Lachance violated 15 U.S.C. § 77q(a)(2). This section, also known as Section 17(a)(2) of the Securities Act of 1933, provides in pertinent part:

(a) It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly

* * * * * *

(2) to obtain 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 in which they were made, not misleading.

Thus, this section bars the use of untrue statements or the omission of material statements of fact which are misleading. As the district court properly stated, omissions and misstatements are material if there is a substantial likelihood that the omitted or misstated facts would have been "viewed by the reasonable investor as having significantly altered the 'total mix' of information available." Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 983, 99 L.Ed.2d 194 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976)).

A violation of § 77q(a)(2) can be established by a showing of negligence. Aaron v. SEC, 446 U.S. 680, 701-02, 100 S.Ct. 1945, 1958, 64 L.Ed.2d 611 (1980); Finkel v. Stratton Corp., 962 F.2d 169, 175 (2d Cir.1992). Lachance concedes that she made false statements in the two press releases issued in relation to Hughes' purported acquisition of SLID and Flat Rock. Such information concerning Hughes' ability and intention to acquire two purportedly financially healthy corporations made Hughes' stock appear more attractive to prospective purchasers. She argues, however, that she believed these statements were true at the time she made them and that she did not act negligently in making them because she relied on the assertions of her husband and of other representatives of Hughes Capital. Thus, she argues that a genuine issue of material fact remains as to whether she was negligent in relying on information provided to her by her husband and others and this issue of material fact precludes summary judgment on the question of liability under § 77q(a)(2).

It is doubtful that Lachance makes this argument seriously. She stated in her deposition that she was involved in formulating the two press releases and that she edited them. She, as president of SLID and Flat Rock, knew she was misrepresenting the financial status of each of these companies. She also knew that she was using two different names in the press releases, lending an impression that the companies were utterly separate concerns. Clearly, she knew that she was married to one of the principal forces behind Hughes, and she should have known that this relationship would be of interest to the stock-buying public. Presumably, she knew about her husband's criminal past, and certainly a cautious woman with that knowledge would question her husband's assertion that his current business venture was not fraudulent. Thus, she was at least negligent in failing to mention her marriage to one of the principal backers of Hughes, her own personal stake in Hughes, and...