S.E.C. v. Savoy Industries, Inc.

• Decision Date: 28 September 1981
• Docket Number: No. 79-1947,79-1947
• Citation: 665 F.2d 1310
• Parties: , Fed. Sec. L. Rep. P 98,295 SECURITIES AND EXCHANGE COMMISSION v. SAVOY INDUSTRIES, INC., et al. Appeal of S. Mort ZIMMERMAN.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1310

665 F.2d 1310

215 U.S.App.D.C. 7, Fed. Sec. L. Rep. P 98,295

SECURITIES AND EXCHANGE COMMISSION v. SAVOY INDUSTRIES, INC., et al. Appeal of S. Mort ZIMMERMAN.

No. 79-1947.

United States Court of Appeals District of Columbia Circuit.

Argued Oct. 15, 1980.

Decided Sept. 28, 1981.

Appeal from the United States District Court for the District of Columbia (D.C. Civil Action No. 74-1711).

R. A. Dean Carlton, Washington, D. C., with whom Irving R. M. Panzer, Washington, D. C., was on the brief, for appellant.

Elisse B. Walter, Atty., Securities and Exchange Commission, Washington, D. C., with whom Jacob H. Stillman, Associate Gen. Counsel, Paul Gonson, Sol., Linda W. Otis, Sp. Counsel, and S. Lee Terry, Jr., Atty., Securities and Exchange Commission, Washington, D. C., were on the brief, for appellee. William A. Dietch, Atty., Securities and Exchange Commission, Washington, D. C., also entered an appearance for appellee.

Before ROBINSON, Chief Judge, and TAMM and WOOD, ^* Circuit Judges.

Opinion for the Court filed by Chief Judge ROBINSON.

ROBINSON, Chief Judge:

We are presented with still another chapter in the continuing struggle between S. Mort Zimmerman and the Securities and Exchange Commission (SEC). ¹ The District Court now has held Zimmerman in violation of several provisions of the federal securities laws and rules promulgated thereunder, and enjoined him from engaging in such misconduct in the future. Zimmerman challenges the court's conclusions, contending that its factual findings are in error and that the injunction entered against him is invalid. We affirm the findings of fact and, save for but one of its provisions, uphold the injunction as framed.

I. BACKGROUND ²

In 1969, Zimmerman embarked upon a course of action designed to obtain control of States General Life Insurance Company, Inc., a publicly-held corporation. He concentrated his efforts initially on direct purchases of States General stock, in combination with indirect acquisition of its shares through the use of tender offers by companies already under his control. When these stratagems failed, Zimmerman sought to achieve his objective more circuitously by acquiring stock in Savoy Industries, Inc., another publicly-held corporation controlled by its president, Louis Danenberg, his longtime friend and co-investor. Zimmerman planned to take over Savoy and use it to gain control of States General.

Zimmerman was afraid to attempt a takeover of Savoy openly, however, realizing that the history of his securities-law transgressions ³ could provoke opposition from Savoy's shareholders. To prevent his plans from being thwarted in this manner, Zimmerman organized a takeover group to function at his direction, although he was not formally a member. The group eventually consummated an agreement with Savoy by which it would obtain control. In order to insure the success of the effort, Zimmerman's participation was kept secret. Neither his role nor his future intentions for Savoy were disclosed in any of Savoy's various filings with SEC and the American Stock Exchange, in documents mailed by Savoy to its shareholders, or in papers filed with SEC by the takeover group.

In 1974, SEC sued Zimmerman, along with several other individual and corporate participants in the takeover effort, for infraction of various antifraud and reporting provisions of the federal securities laws and regulations. The District Court, in 1976, held that Zimmerman had violated a number of such provisions in a variety of ways: Sections 13(d)(1) and 13(d)(3) of the Securities Exchange Act of 1934 ⁴ by failing to file a Schedule 13D with SEC; Sections 10(b), ⁵ 13(d)(1) and 13(d)(3) of the 1934 Act and Rules 10b-5 ⁶ and 13d-1 ⁷ thereunder, and Section 17(a) of the Securities Act of 1933 ⁸ by filing, in the name of the takeover group, a Schedule 13-D concealing his membership in the group; Sections 10(b) and 13(a) ⁹ of the 1934 Act, Rules 10b-5, 13a-1, ¹⁰ and 13a-11 ¹¹ thereunder, and Section 17(a) of the 1933 Act ¹² through Savoy's filing of false and misleading documents with SEC at a time when the corporation was under Zimmerman's control; Section 10(b) of the 1934 Act, Rule 10b-5 thereunder, and Section 17(a) of the 1933 Act as a consequence of Savoy's filing of a false and misleading listing application with the American Stock Exchange and sending a false and misleading letter to Savoy's shareholders. On the basis of these conclusions, the District Court enjoined Zimmerman from engaging in conduct transgressing the laws and regulations he had infringed in the course of the Savoy takeover. The injunction restrained activity associated with the sale or purchase of the securities of Savoy or any other issuer, and forbade Zimmerman to engage in any other deceitful or fraudulent act against any person. ¹³

Zimmerman appealed that decision to this court. In 1978, we affirmed the District Court with respect to its holding that Zimmerman had violated Sections 13(d)(1) and 13(d)(3) of the Securities Exchange Act of 1934 and rules promulgated thereunder. ¹⁴ We remanded the remainder of the case, however, to the District Court for "a further illumination" of its findings as to the basis for Zimmerman's accountability under Sections 20(a) and 20(b) of the 1934 Act ¹⁵ for the documents filed with the American Stock Exchange or mailed to shareholders on behalf of Savoy. ¹⁶ We also requested the District Court reach a factual resolution on whether Zimmerman had acted with scienter, noting that the Supreme Court's decision in Ernst & Ernst v. Hochfelder, ¹⁷ holding that private parties must prove scienter in actions for damages under the antifraud provisions of Section 10(b) of the Securities Exchange Act, ¹⁸ had been announced after the District Court's original rulings. Confronted with the question whether proof of scienter was also required in actions brought by SEC itself, we withheld comment on that subject pending the District Court's determination as to the presence or absence of scienter in Zimmerman's instance. ¹⁹ Finally, we addressed the question of validity of the injunction entered against Zimmerman, and "(b)ecause there remain(ed) doubt as to the existence of some of the violations underlying the injunction, we (felt) that the issue concerning the proper scope of (its) language (was) best considered, if at all, (upon formulation of) a precise definition of all the violations." ²⁰ Consequently, "we remand(ed) with instructions to the district court to modify the second and third paragraphs of its injunction pendente lite, so as to encompass only the specific violations affirmed on appeal and so as to limit its scope to Savoy." ²¹

On remand, the District Court found that Zimmerman controlled both the takeover group and Savoy, through its officers and directors, during the period of dissemination of the false and misleading documents at issue in the litigation. ²² The court further found that Zimmerman had purposely "in bad faith, 'with scienter,' " caused the takeover group and Savoy wrongfully to omit from the documents filed with SEC and the American Stock Exchange and transmitted to Savoy shareholders any reference to his participation in the takeover. ²³ Accordingly, the court held Zimmerman responsible therefor under Sections 10(b), 13(a), 13(d), 20(a) and 20(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. ²⁴ On the basis of these conclusions, the District Court revived and re-entered against Zimmerman the earlier injunction which we had modified pendente lite. ²⁵ In 1979, after SEC requested amendment of the injunction, the District Court revised its order in some respects. ²⁶

Zimmerman now comes back to us on appeal from the District Court's last decision, alleging principally that the court's findings of fact are in error and that the injunction ultimately entered against him is illegal. ²⁷

II. THE DISTRICT COURT'S FINDINGS OF FACT

Zimmerman complains that the District Court's ruling that through his control of the takeover group and Savoy he intentionally violated the securities laws cannot possibly be correct. Specifically, he claims that the timing of the filing and dissemination of the Savoy documents precluded a finding that he was responsible for the false and misleading statements they contained because they were prepared and transmitted prior to the actual takeover of Savoy by the Zimmerman control group. ²⁸ In making this argument, Zimmerman attacks the logic and consistency of the court's conclusions rather than its basic underlying findings of fact. We have carefully considered the challenge from this perspective and have concluded that Zimmerman's objections are without merit.

The District Court held Zimmerman responsible for the takeover group's filing of a Schedule 13-D, for Savoy's filings of a Form 8-K Report, a Form 10-K and an American Stock Exchange listing application, and for the transmittal of a letter to Savoy shareholders, all of which contained false and misleading statements. Zimmerman's attempt to avoid liability on grounds that he did not control Savoy at the time when four of the five documents were disseminated must fail. First, we cannot understand how Zimmerman could escape blame for the Schedule 13-D on the ground of an alleged lack of control over Savoy. The District Court has clearly and consistently found that Zimmerman controlled the takeover group from its inception, ²⁹ and that is enough to subject him to the consequences of the false and misleading filing. Second, even if Zimmerman had not controlled Savoy prior to the date when the board of directors installed as a consequence of the takeover agreement assumed management of the corporation, the Form 10-K was filed more than a month after the change in directors. Thus, the filing of the false and misleading information contained in this document alone subjects Zimmerman to sanctioning under the securities laws, as the District Court h...