S.E.C. v. Parklane Hosiery Co., Inc.

• Decision Date: 08 July 1977
• Docket Number: 1290,Nos. 1395,D,s. 1395
• Citation: 558 F.2d 1083
• Parties: Fed. Sec. L. Rep. P 96,108 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee-Cross-Appellant, v. PARKLANE HOSIERY CO., INC., and Herbert N. Somekh, Defendants- Appellants-Cross-Appellees. ockets 77-6012 and 77-6023.
• Court: U.S. Court of Appeals — Second Circuit

Page 1083

558 F.2d 1083

Fed. Sec. L. Rep. P 96,108

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee-Cross-Appellant, v. PARKLANE HOSIERY CO., INC., and Herbert N. Somekh Defendants- Appellants-Cross-Appellees.

Nos. 1395, 1290, Dockets 77-6012 and 77-6023.

United States Court of Appeals Second Circuit.

Argued May 23, 1977.

Decided July 8, 1977.

Harvey L. Pitt, SEC, Washington, D. C. (Paul Gonson, Daniel L. Goelzer and Edward A. Scallet, SEC, Washington, D. C., on the brief), for plaintiff-appellee-cross-appellant.

Irving Parker, New York City (Joseph N. Salomon, Jeffrey I. Slonim and Jacobs, Persinger & Parker, New York City, on the brief), for defendants-appellants-cross-appellees.

Before WATERMAN and TIMBERS, Circuit Judges, and MEHRTENS, District Judge. ^*

MEHRTENS, District Judge:

This action was brought by the Securities and Exchange Commission against Parklane Hosiery Co., Inc. and Herbert N. Somekh under Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) and Sections 10(b), 13(a) and 14(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), 78m(a) and 78n(a) and the various rules promulgated thereunder. ¹

At issue is whether the district judge erred in finding Parklane's proxy statement to be defective in three respects and in denying injunctive relief to the Commission.

We affirm the order of the district judge, reported at 422 F.Supp. 477 (S.D.N.Y.1976).

In 1968, Parklane, a corporation of approximately 400 retail outlets selling women's apparel, sold 300,000 shares of common stock to the public at $9 per share. This case grew out of a merger consummated in October 1974 whereby Parklane was returned to its status as a private company, and its shares were repurchased at $2 per share. After a four-day hearing, the district judge held that the proxy statement seeking approval from Parklane's public shareholders for the merger which extinguished their stake in the company was materially false and misleading since it concealed from the shareholders that:

(1) the purpose of the transaction effecting their extinction was to enable Somekh, the president and principal shareholder of Parklane, to discharge his personal debts from the Parklane treasury;

(2) Parklane had engaged in negotiations suggesting that a leasehold held by the company might be saleable for an amount which would net Parklane $300,000; and

(3) the independent appraisal of Parklane's shares reflected in the proxy statement had been conducted without the benefit of several crucial pieces of information, including Somekh's personal plans for the company's assets and the potential cash windfall accruing from the leasehold.

Although the court ordered the defendants to correct the filings they had made with the Commission, which the court had found to be false and misleading, the court declined to grant the injunctive relief sought by the Commission. The defendants sought review of the district judge's findings with respect to their violations, and the Commission cross-appealed on the refusal to grant injunctive relief.

The standard for appellate review of factual findings of a court sitting without a jury is set forth in Rule 52(a) of the Federal Rules of Civil Procedure:

"Findings 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 the credibility of the witnesses."

The burden is on the defendants, as the party attacking the findings of fact, to show that the findings are clearly erroneous. Hedger v. Reynolds,216 F.2d 202 (2nd Cir. 1954). The Commission is entitled to the benefit of all reasonable inferences and to have the evidence viewed in the light most favorable to it. Stacher v. United States, 258 F.2d 112, 116 (9th Cir.), certiorari denied, 358 U.S. 907, 79 S.Ct. 232, 3 L.Ed.2d 228 (1958); Crews v. Cloncs, 432 F.2d 1259 (7th Cir. 1970).

I. Somekh's Personal Indebtedness

The record supports the district judge's finding that the "overriding purpose" for the going-private scheme was to enable Somekh to repay his personal indebtedness.

Before the merger, Somekh encountered pressure for payment of personal loans totaling $1,175,000. Lacking sufficient liquid assets to meet these demands for cash, he began to consider having Parklane go private. He first considered this in late June or early July of 1974. About a month later he began serious discussions with his attorneys regarding the feasibility of such a course.

In August 1974 Somekh had a meeting with his accountant and some creditors at which he indicated he intended to return Parklane to private status as an alternative means of liquidating his personal obligations. The proxy statement was issued as of September 24, 1974, and on October 14, 1974 the merger converting the company to privately owned status took place. Following the merger, at a December 30, 1974 meeting, Somekh's salary was increased from $90,000 to $150,000, retroactive to October 1973. The Board also authorized the corporate officers to purchase properties owned by Somekh for.$1.2 million. After the merger Somekh's creditors began receiving payments.

The Commission contended that the proxy statement inadequately disclosed Somekh's true intention and underlying purpose in proposing the merger to relieve his personal financial situation. The defendants asserted that it did adequately disclose the facts. ²

We find there was substantial evidence for the district judge to find, "It is clear to me that the overriding purpose for the merger was to enable Somekh to repay his personal indebtedness. Had his finances been otherwise, the merger may never have occurred. There is not so much as a hint of Somekh's huge debts in the proxy statement. The non-disclosure is clearly established."

II. Negotiations with the Federal Reserve Board of New York

The Commission also alleged that the proxy statement misrepresented the status of discussions concerning the cancellation of a lease of property by Parklane from the Federal Reserve Board of New York (FRB). Specifically, it claimed, and the district court found, that the assertion in the proxy statement that as to the FRB lease "there are no negotiations at present" is false and misleading as to a material fact.

Parklane had leased a parcel of land in New York City from the FRB. The land was, in turn, subleased to a franchisee of Parklane and to a third party, Jo-Ray Foods, Inc. The FRB was in the process of constructing a building on that block and hired Robert S. Curtiss to negotiate a termination of the lease. These discussions began in 1968 or 1969, and Jo-Ray Foods became a stumbling block in the conclusion of the dealings.

No significant activity transpired until October 4, 1974, when Curtiss telephoned Somekh to arrange a meeting concerning the leasehold. Curtiss testified that he and Somekh indicated their mutual desire to resolve the matter. Somekh reiterated his earlier position that $1,200,000 would be necessary to close the deal, and Curtiss indicated that he would recommend that figure to the FRB. Somekh agreed to accept $300,000 as Parklane's share of the transaction and to attempt to obtain assurances from Jo-Ray and the franchisees. On October 7, 1974 Curtiss recommended the Somekh offer to the FRB. No amendment to that effect was made to the proxy statement following the October 4th meeting.

The defendants argue that on October 4th Curtiss had no authority to make any offer on behalf of the FRB and that Somekh had no authority to make or accept an offer on behalf of Parklane's subtenants. Also, in a phone conversation within a week of the October 4th meeting, Curtiss informed Somekh that although he had recommended the $1,200,000 amount to the FRB, there were problems, and the building might not be built. Because of this, defendants argued that there was no reason to amend the proxy statement which was before the shareholders at their October 14, 1974 meeting.

The court found, and we concur, that the October 4th conference fell within the common usage of the term "negotiation," and thus, the unamended proxy statement was false when it stated that "there are no negotiations at present."

III. The Appraisal

The third area in which the court found a failure to disclose material facts relates to the appraisal conducted by one of two investment banking firms, Thomson & McKinnon, Auchincloss and Kohlmeyer, Inc. Somekh had retained the firm to appraise the Parklane shares in connection with the merger. The appraiser was not told and was not aware of Somekh's plans to use corporate assets to reduce his personal indebtedness, or of Somekh's intention to sell real property to the corporation. He also was not informed of the negotiations with the FRB with respect to the cancellation of the leasehold. The court found that there was a failure to disclose these facts to the appraiser and that the proxy statement did not disclose the defect in the appraisal to the shareholders.

Upon cross-examination the appraiser modified his statements and there is some evidence that the appraisal figure may have been diminished, rather than increased by the inclusion of some of the facts found to have been withheld. The district judge, however, had the opportunity to weigh the conflicting evidence and to consider the credibility of the witnesses. We find that his decision on this issue was not clearly erroneous.

IV. Materiality

Having affirmed the district court on its findings of misstatement and omission, the remaining issue is the materiality of those facts. A finding of materiality of the false or misleading facts or omissions must be found, pursuant to Rule 14a-9, before a violation of Section 14(a) of the Securities and Exchange Act of 1934 is found.

In TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S.Ct. 2126, 48 L.Ed.2d 757

(1976), the Supreme Court held that the test of the materiality of a fact depends upon a showing of a substantial...