S.E.C. v. Spence & Green Chemical Co.

Decision Date27 February 1980
Docket NumberNos. 76-4017,77-1362,77-2600 and 77-3173,s. 76-4017
Citation612 F.2d 896
PartiesFed. Sec. L. Rep. P 97,301 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. SPENCE & GREEN CHEMICAL COMPANY and Andrew Spence, Sr., Defendants-Appellants.
CourtU.S. Court of Appeals — Fifth Circuit

Paul Gonsan, Atty., Securities & Exchange Commission, Washington, D. C., for plaintiff-appellee in no. 77-1325.

Lawrence J. Cohen, Chicago, Ill., for defendants-appellants.

Lynn N. Hughes, Houston, Tex., Trumbull Asphalt Div., Owens-Corning Fiberglas Corp., amicus curiae.

David Ferber, Sol., James H. Schropp, Asst. Gen. Counsel, Julie Allecta, Atty., Securities & Exchange Commission, Washington, D. C., for plaintiff-appellee.

Appeals from the United States District Court for the Southern District of Texas.

Before MORGAN, REAVLEY and HATCHETT, Circuit Judges.

REAVLEY, Circuit Judge:

Appellee, Securities and Exchange Commission (SEC), commenced this injunctive action against Spence and Green Chemical Company and two of its principal shareholders, Andrew Spence and James I. Farmer, alleging violations of registration and antifraud provisions of the Securities Act of 1933 (sections 5(a), (c) and 17(a)), 15 U.S.C. §§ 77e(a), (c) and 77q(a), and of the antifraud provisions of the Securities Exchange Act of 1934 and regulations promulgated thereunder (section 10(b) and rule 10b-5), 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5. Both Farmer and the company accepted consent judgments. The district court entered summary judgment against Spence. The court enjoined each defendant from further engaging in activities violating the registration and antifraud provisions of the federal securities laws. Spence, alone, presses this consolidated appeal from four adverse rulings handed down during the course of the litigation: (1) the order of November 22, 1976, granting summary judgment against Spence individually, (2) the order of September 13, 1976, entering judgment against the company based on the consent decree executed by its court-appointed receiver, (3) the order of May 10, 1977 denying defendant's motions for recusal of the trial judge and for reconsideration of the order of summary judgment against Spence, and (4) the order of August 17, 1977, denying a renewed motion for recusal and holding in abeyance, pending this appeal, Spence's motion to terminate the receivership. We agree with the bulk of the district court's decision and the entirety of its remedy and disposition, disagreeing only with that portion of the decision that found a violation of section 10(b) and rule 10b-5.

Andrew Spence, as founder, president, and controlling shareholder, has dominated Spence and Green Chemical Company ("Spence and Green" or "company") since its incorporation in 1956. The company, located in Crosby, Texas, was formed as a research and development concern to seek methods of converting low-grade industrial byproducts into commercially marketable commodities. Its undertakings in the recent past have broadened to include development of certain innovative petroleum refining techniques. Because of its overriding emphasis on research, the company had never shown a year-end profit from its inception to the beginning of this litigation. Despite this rather morbid financial background and the restricted and local nature of early sales of stock in the company, as of September 6, 1975, Spence and Green had issued about 1,586,000 shares of stock. Because of an active secondary market, these shares are now owned by over 800 stockholders, more than half of whom are not Texas residents.

In 1970 in order to raise capital for a particular project, Spence began preparations for the company to issue additional securities under the small offerings, exemption to the federal securities registration laws, 15 U.S.C. § 77c(b), and Regulation A thereunder, 17 C.F.R. §§ 230.251-64. Spence employed an independent accounting firm to produce certified financial statements, and he retained an attorney to furnish the accountants with an opinion as to the current legal status of the company. The attorney, after reviewing Spence and Green's records, advised Spence that certain past stock transactions could constitute violations of the securities laws and that the company faced substantial potential liability on those transactions. Spence, a chemical engineer, rejected this opinion, however, and declined to disclose it to the accounting firm, instead proffering his own opinion that all was in order and that no contingent liability existed. The accounting firm did not find all to be in order with Spence and Green's financial records, however, and withdrew after fifteen months, rendering no opinion as to the financial status of the company because of the inadequacy and confusion of its records. Undaunted, Spence arranged for Farmer, a director of the company who was a certified public accountant, to prepare the financial data required for the Regulation A offering.

In the spring of 1972 Spence then filed the required documents with the Ft. Worth regional office of the SEC, indicating an intent to offer 104,250 shares at $2.50 per share according to the provisions of Regulation A. The offering circular by which the shares would be marketed contained the financial statements prepared by Farmer, but did not disclose by whom they had been prepared, or that he was a director of the issuer. It also failed to disclose the negative opinions rendered by Spence's attorney and by the independent accounting firm. The SEC returned this filing on July 31, 1972, citing numerous deficiencies in the offering circular.

After several exchanges of correspondence with the SEC, Spence eventually withdrew the filing, but on October 31, 1972, attempted to market the shares by mail in the form of a subscription available only to Spence and Green shareholders. Accompanying the subscription offer were copies of the offering circular previously rejected by the SEC and the series of letters exchanged between Spence and the SEC. This correspondence, received by the offerees, included one letter in which Spence had predicted that within five years the stock in question would have a "value of Not $2.50 per share, but $250.00 to $400.00 per share." Though this offer ostensibly was made only to Texas shareholders the mailing also went to seventy-five brokers located throughout the country. Following this offering, the SEC permanently suspended any Regulation A exemption for Spence and Green after an administrative hearing (the transcript of which was considered by the court below and is part of the record on appeal). Nonetheless, on March 20, 1973, Spence again wrote, this time to all Spence and Green shareholders, seeking "private placement loan(s) with conversion privileges."

The SEC then filed this injunctive action on July 16, 1973. After Spence indicated an intent to issue further stock options to the company's creditors in the face of a preliminary injunction that, among other things, prohibited further trading of Spence and Green stock, the district court on May 24, 1974, appointed a temporary receiver to ensure compliance with the injunction, to manage the company and to conserve its assets. On October 27, 1975, the SEC moved for summary judgment against Spence and the company, defendant Farmer having accepted a consent judgment on July 27, 1973. Despite repeatedly having been directed to reply to the motion for summary judgment, Spence's only response was a motion for extension of time filed July 26, 1976. Soon thereafter, on August 27, the receiver executed a consent decree, agreeing to the proposed injunction against the company but admitting no violations; the court entered judgment on this decree on September 13, 1976. Finally, on November 22, 1976, the district court entered summary judgment against Spence on the basis of the SEC affidavits, depositions and hearing transcripts, having received no substantive response from Spence since the SEC's filing of the motion more than a year before.

Summary Judgment Against Spence

Though a court ordinarily will indulge in presumptions and inferences favorable to a party resisting summary judgment, where one party advances a properly supported motion for summary judgment, Fed.R.Civ.P. 56(e) expressly prohibits the resisting party from resting merely on the allegations and denials of his pleading. If he fails to answer by counter affidavits or otherwise, demonstrating specific facts showing there exists a genuine issue for trial, the court should enter that summary judgment which the law applied to the facts presented by the moving party will support. United Steelworkers of America v. University of Alabama, 599 F.2d 56, 61 (5th Cir. 1979). In this case despite at least two orders from the court and magistrate to answer, in over a year's time Spence filed no affidavits or memoranda to contradict the well-supported SEC motion.

One may forestall the mandate of rule 56(e), however, by presenting affidavits that contain specific facts explaining the failure to respond by counter affidavits demonstrating the existence of a genuine issue of fact; if justified by this explanation, the court may then grant a continuance to allow the resisting party to prepare its counter affidavits. Fed.R.Civ.P. 56(f). After having one motion for extension of time to answer denied orally from the bench, Spence's counsel again filed a memorandum requesting an extension of time to respond on July 26, 1976. Because the memorandum was sworn and because it attempted to justify Spence's failure to answer the SEC motion, the district court appropriately evaluated it as a rule 56(f) motion and affidavit. In the memorandum Spence's counsel made vague and conclusional claims that several unidentified conflicts appeared in the testimony contained in the hearing transcripts submitted with the SEC motion, argued that he had been allowed insufficient discovery to respond at...

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