SEC v. First City Financial Corp., Ltd.

• Decision Date: 15 June 1988
• Docket Number: Civ. A. No. 86-2240.
• Citation: 688 F. Supp. 705
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. FIRST CITY FINANCIAL CORPORATION, LTD., and Marc Belzberg, Defendants.
• Court: U.S. District Court — District of Columbia

688 F. Supp. 705

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. FIRST CITY FINANCIAL CORPORATION, LTD., and Marc Belzberg, Defendants.

Civ. A. No. 86-2240.

United States District Court, District of Columbia.

June 15, 1988.

COPYRIGHT MATERIAL OMITTED

Barry R. Goldsmith, Leo F. Orenstein, Daniel H. Rubenstein, S.E.C., Div. of Enforcement, Washington, D.C., for S.E.C.

D. Scott Wise, Davis Polk & Wardell, New York City, for First City Financial Corp.

Arthur L. Liman, Max Gitter, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Marc Belzberg.

MEMORANDUM OPINION

BARRINGTON D. PARKER, Senior District Judge:

The Supreme Court reaffirmed only recently that a fundamental purpose of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78a et seq. ("1934 Act" or "Act") was "to protect investors against manipulation of stock prices" and to implement a "philosophy of full disclosure." Basic Inc., et al. v. Levinson, et al., ___ U.S. ___, 108 S.Ct. 978, 982, 99 L.Ed.2d 194 (1988). In delivering the ruling, Justice Blackmun was addressing problems of false statements and materiality under section 10(b) of the Act. The same underlying principle applies to litigation arising under section 13(d) of the Act which imposes strict disclosure requirements where there are large scale accumulations of equity securities affecting corporate control.

This litigation presents troublesome questions as to whether defendants complied with the disclosure provisions of the 1934 Act, when they arranged to purchase equity shares of Ashland Oil Company ("Ashland"), a Kentucky-based corporation. Ashland is the largest independent refiner in the United States. Acquisition of Ashland shares was part of a carefully orchestrated corporate takeover attempt to evade disclosure by purchasing stock through third party nominee accounts. The Securities and Exchange Commission ("SEC" or "Commission") charged defendants with deliberate efforts to disregard mandatory disclosure requirements of the Act in failing to reveal the extent of their purchases. The takeover bid ultimately failed. Nonetheless, the events triggered an investigation by the SEC which ultimately led to this civil proceeding.

I. INTRODUCTION

The Commission complaint alleged that defendants First City Financial Corporation ("First City") and Marc Belzberg, its vice president, engaged in unlawful activities, when they acquired 1.4 million in equity shares of Ashland. Defendants were charged with violating section 13(d) of the 1934 Act, 15 U.S.C. § 78m(d)(1) and the complementing regulations, 17 C.F.R. §§ 240.13d-1 and 13d-3. Section 13(d) of the Act requires public disclosure within 10 days of acquisition of five percent of the beneficial ownership of a publicly traded equity security. Rule 13d-3 defines "beneficial ownership" to include power "to vote or direct the vote" of the relevant shares or "investment power" over the shares.

Defendants purchased by far the bulk of their Ashland shares through Bear Stearns, a leading Wall Street securities brokerage and investment banking firm. While no securities law violations were charged against that firm, its well known chief executive officer, Alan "Ace" Greenberg, worked almost on a daily basis, particularly between March 4th and 17th, 1986, amassing Ashland shares for First City. The Commission's complaint alleged that First City failed to report and to file timely disclosures that it had acquired more than five percent of Ashland stock. The report was filed, but according to the Commission, quite belatedly—on March 26, 1986, well after the required date of March 14. The theory of the Commission complaint was that defendants concealed their real investment intentions in Ashland through a carefully planned and unlawful "parking arrangement." Because of defendants' actions, public investors were not informed of potential changes in corporate control. Defendants were thus able to purchase Ashland shares at prices far below what they would have paid had they made the required disclosure.

Early in the proceedings, defendants' counsel moved for summary judgment, contending that what was involved was no more than "an honest undisputed misunderstanding between Marc Belzberg an investor and Alan Greenberg his stockbroker." Because the Court found that there were disputed factual matters concerning the existence of an "understanding" particularly regarding the intentions of Marc Belzberg, the defendants' motion for summary judgment was rejected until all facts—contested and uncontested—could be fully presented.

The Court has considered and reviewed the entire record, beginning with the Commission's administrative proceedings, and ending with the trial proceedings. In doing so, the credibility of the parties and their witnesses has been assessed, and reasonable inferences have been drawn from all that has been presented.

For the reasons set forth below the Court finds that defendants acquired Ashland shares for First City without following the proscriptions of the Securities Exchange Act of 1934. The Court also determines that appropriate declaratory and injunctive relief are warranted, and that defendants should be required to disgorge all wrongfully gained profits. The reasons supporting the Court's findings and conclusions are set forth below.

II FINDINGS

Background

First City, a Canadian corporation, was formed 40 years ago by three wealthy, knowledgeable, and astute businessmen— Samuel, William and Hyman Belzberg. Operating at all times as a tightly controlled and highly successful family business, the three brothers, senior members of the family, own at least 70 percent of the company's stock. First City shares are traded on the Toronto Stock Exchange. An active part of its business involves investing in publicly-traded securities of United States corporations, listed on the national exchanges.

Their Vancouver, British Columbia-based business is a multi-million dollar diversified holding and investment company with valuable investments scattered throughout Canada and parts of the United States. On various occasions, the company has been described in the national press and financial journals as having mounted aggressive, if not always successful, investment and takeover attempts.¹

Samuel Belzberg is First City's President, Chairman of the Board, and Chief Executive Officer. Even though the brothers are regarded as equals in all business matters, the trial testimony clearly showed that Samuel is the patriarch of the family businesses and is, indeed, First City's financial impresario. As described by his counsel, he takes a "hands-on" approach to First City's securities-related activities.

Defendant Marc Belzberg, his son, is vice president of First City. For some time he has directed and conducted various corporate affairs from New York City, working with a First City subsidiary—The First City Capital Corporation ("First City Capital"). He serves as a director of First City Capital. The New York subsidiary evaluates investments in the United States for First City. In testimony before the Commission on May 29, 1986, he described his responsibilities as "reviewing potential corporate acquisitions ... stock investments, ... and venture capital investments" as well as placing orders to buy and sell securities for First City. (MB-I at 6.) (emphasis added)²

At the time of the SEC investigation, the subsidiary First City Capital, was staffed by a limited and carefully selected group of professional and clerical employees. Several members of that staff played an important role in the events leading to this litigation.

The Initial Interest in Ashland—Events of February, 1986

The Belzbergs' interest in Ashland was kindled in early 1986 when on February 3, Alan Alan, a New York stockbroker and a recently formed acquaintance, addressed a letter to Samuel Belzberg at his Vancouver, B.C. office. Alan's letter (Px. 37), written with rhetorical flourishes and an excess of optimism, turned Belzberg's attention to a "sensational investment opportunity ... Ashland .... an exclusive opportunity which I haven't discussed ... with any other investor." (emphasis added.) The letter continued in part:

Nothing is perfect, and Ashland is no exception. But the situation is as near perfect as anything we're likely to see in this environment.

* * * * * *

In the past 4 or 5 weeks, ASH's stock moved up from the 34-35 area to about 42½ (on January 21st, the stock was 41¾) and then swung back to around 36..... In the past couple of sensational market sessions, the stock has crept back up only a couple of points to around 38.

For ASH, I would like to suggest that the circumstances and timing could hardly be better for the "Sam Belzberg Effect." (Emphasis in original).

* * * * * *

Several days later, Alan addressed a second letter to Samuel Belzberg presenting a critique and an analysis, including his "break-up valuation" of Ashland. At the father's request, copies of the documents and other materials were forwarded to Marc Belzberg at the New York office. Marc immediately directed two financial analysts in the New York office, Gordon Wolf and Jeffrey Perry, "to begin working full-time in analyzing Ashland, its components and the refining industry." (GW at 91.) The assignment was given a priority rating since Marc anticipated further discussions with his father within several days.

From the outset, Marc and his father regarded Ashland as an attractive investment opportunity. Within several days, and fortified by the preliminary analyses of Wolf and Perry, Marc and his father made a decision to purchase Ashland Oil. Initially, they purchased 61,000 shares through the Goldman Sachs brokerage firm. Beginning with that purchase and continuing through the end of February, the two consulted almost daily about the company. Their interest never waned and as Marc recounted in his initial investigative testimony before the Commission: "our...