SEC v. Jos. Schlitz Brewing Co.

• Decision Date: 16 June 1978
• Docket Number: No. 77-C-497.,77-C-497.
• Citation: 452 F. Supp. 824
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. JOS. SCHLITZ BREWING COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

452 F. Supp. 824

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. JOS. SCHLITZ BREWING COMPANY, Defendant.

No. 77-C-497.

United States District Court, E. D. Wisconsin.

June 7, 1978.

As Amended June 16, 1978.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert M. Romano, Martin H. Aussenberg, Terry B. Dowd, Securities and Exchange Commission, Washington, D. C., for plaintiff.

Willkie, Farr & Gallagher by Anthony F. Phillips, Robert J. Kheel, Philippe M. Salomon, Paula J. Mueller, Robert E. Bartkus, New York City, and James M. Clabault, Milwaukee, Wis., Gen. Counsel, Jos. Schlitz Brewing, for defendant.

DECISION and ORDER

MYRON L. GORDON, District Judge.

I. INTRODUCTION

This action is before me on the defendant's motions (1) to dismiss the complaint pursuant to Rule 12(b)(1), Federal Rules of Civil Procedure, for lack of subject matter jurisdiction; (2) to dismiss the complaint pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure, for failure to state a claim upon which relief may be granted; or, alternatively, (3) for a stay of this action pending the resolution of certain criminal proceedings against Schlitz; and (4) to strike certain allegations from the complaint pursuant to Rules 11 and 12(f), Federal Rules of Civil Procedure. The motions will be denied.

This is an action brought by the Securities and Exchange Commission (Commission) against the Jos. Schlitz Brewing Company (Schlitz) pursuant to section 20(b) of the Securities Act of 1933, 15 U.S.C. § 77t(b) and sections 21(d) and 21(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78u(d) and 78u(e), to restrain and enjoin Schlitz from engaging in practices alleged to violate the federal securities laws. Schlitz is a Wisconsin corporation engaged in the business of selling beer and malt beverages whose securities are registered with the Commission and are publicly traded.

The complaint sets forth three causes of action. The first cause of action alleges violations of section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) and section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. 240.10b-5. Schlitz is alleged to have failed to disclose a nationwide scheme to induce retailers of beer and malt beverages to purchase Schlitz' products by making payments or furnishing things of value of at least $3 million in violation of federal, state and local liquor laws. It is also charged that the defendant failed to disclose its alleged participation in violations of Spanish tax and exchange laws in connection with transactions with certain Spanish corporations described as affiliates. Schlitz allegedly falsified its books and records with respect to these payments and transactions. By failing to disclose these matters, Schlitz' financial statements, registration statements, periodic reports and proxy solicitation materials filed with the Commission are said to be materially false and misleading. Schlitz is also charged with aiding and abetting violations of sections 17(a) and 10(b) by the public companies which allegedly received unlawful inducement payments.

The second and third causes of action incorporate the allegations of the first cause of action and allege, respectively, violations of section 13(a), 15 U.S.C. §§ 78m(a) and 14(a), 15 U.S.C. § 78n(a) of the Securities Exchange Act of 1934.

II. SUBJECT MATTER JURISDICTION

Schlitz contends that the Commission lacks the jurisdiction to bring this action because the acts and practices upon which the action is predicated fall outside its regulatory jurisdiction which is limited to "acts or practices which constitute or will constitute a violation" of the federal securities laws. 15 U.S.C. §§ 77t(b); 15 U.S.C. § 78u(d). The inducement payments which Schlitz is alleged to have made to its customers may violate the Federal Alcohol Administration Act, 27 U.S.C. § 201 et seq., the enforcement of which rests exclusively with the secretary of the treasury, through the bureau of alcohol, tobacco and firearms and the attorney general. On March 15, 1978, a federal grand jury sitting in the eastern district of Wisconsin returned an indictment charging Schlitz with, inter alia, conspiracy and substantive violations of the Federal Alcohol Administration Act. Accordingly, Schlitz contends that this action is an impermissible encroachment on and a duplication of the functions assigned by statute to the bureau of alcohol, tobacco and firearms and the attorney general.

I am unable to accept the defendant's characterization of this action as one to enforce the Federal Alcohol Administration Act. The Commission seeks by this action to enforce the disclosure requirements of the federal securities laws for the protection of shareholders and the investing public generally, a function clearly within the Commission's regulatory authority. Moreover, it is well established that more than one governmental agency may investigate the same conduct simultaneously and bring simultaneous civil and criminal actions based on such conduct so long as the respective remedies are not mutually exclusive and there is an otherwise rational basis for their individual proceedings. Federal Trade Commission v. Cement Institute, 333 U.S. 683, 693-695, 68 S.Ct. 793, 92 L.Ed. 1010 (1948); Warner-Lambert Co. v. Federal Trade Commission, 361 F.Supp. 948, 952 (D.D.C.1973). Since the basis for this action by the Commission is the alleged failure of Schlitz to disclose its potentially criminal marketing practices in its filings with the Commission, mailings to shareholders and press releases, I believe that the Commission has a rational basis for instituting this enforcement proceeding.

Attempting to demonstrate that the Commission is acting beyond its jurisdiction, Schlitz emphasizes that no statute, rule or regulation specifically requires that a corporation report its involvement in marketing or business practices that may at some future time be adjudicated to be illegal. The Commission argues in response that the reporting of such information is mandated by the philosophy of full disclosure upon which the federal securities laws are predicated. Securities and Exchange Commission v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963).

The parties are essentially in agreement that whether Schlitz' potentially illegal activities must be disclosed depends upon whether such matter is material information. This inquiry is the focus of Schlitz' motion to dismiss for failure to state a claim upon which relief may be granted and will be discussed in that regard below. To the extent that Schlitz' motion to dismiss for lack of subject matter jurisdiction is based on the purported immateriality of the undisclosed matters, I find no basis for finding that the Commission is acting beyond its authority. The securities laws must be interpreted "not technically and restrictively, but flexibly to effectuate their remedial purposes." Securities and Exchange Commission v. Capital Gains Research Bureau, supra, at 195, 84 S.Ct. at 285. When viewed under this standard, I believe that the instant enforcement action must be sustained as a proper exercise of the Commission's jurisdiction.

Schlitz also argues that the Commission's lack of jurisdiction in this case is demonstrated by the conflict between the disclosure requirements of the securities laws and the Fifth Amendment protections available to the agents through whom corporations act. Schlitz contends that acceptance of the Commission's theory of enforcement would compel all public companies to become agents of the Commission in ferreting out illegal activity of corporate employees.

In my opinion, Schlitz lacks the standing to invoke the possible Fifth Amendment deprivation of its employees as a defense to this action. It is settled that corporations cannot invoke the privilege against self-incrimination. Hale v. Henkel, 201 U.S. 43, 74-75, 26 S.Ct. 370, 50 L.Ed. 652 (1906). Since the corporation cannot avail itself of the privilege against self-incrimination, it cannot take advantage of an allegedly unconstitutional burden placed on its individual employees. Campbell Painting Corp. v. Reid, 392 U.S. 286, 288-289, 88 S.Ct. 1978, 20 L.Ed.2d 1094 (1968); Cf. United States v. Kordel, 397 U.S. 1, 90 S.Ct. 763, 25 L.Ed.2d 1 (1970). Furthermore, the self-policing burden placed on a regulated industry is a necessary and proper adjunct of the statutory scheme established by Congress. United States v. Stirling, 571 F.2d 708, 728 (2d Cir. 1978); United States v. Solomon, 509 F.2d 863, 870 (2d Cir. 1975). In sum, I am not convinced that the Commission is acting beyond its jurisdiction in initiating or maintaining this action.

III. MOTION TO DISMISS CLAIMS UNDER SECTIONS 10(b) and 17(a)

Schlitz argues that the complaint fails to state a claim under sections 10(b) and 17(a) because the business transactions alleged in paragraphs 9 and 10 of the complaint, the Spanish brewery transactions, and the press releases were unrelated to fraud "in connection with the purchase or sale" of securities, as required by the express terms of section 10(b) and Rule 10b-5, Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), and, with respect to 17(a), were unrelated to fraud "in the offer or sale" of securities. Schlitz suggests that the complaint charges "fraud in the purchase or sale of beer" rather than fraud in connection with the purchase or sale of securities.

In my judgment, this argument is flawed. The Commission bases the 10(b) and 17(a) claims on the premise that information concerning the questionable marketing practices and the transactions with the Spanish affiliate corporations should have been disclosed to the investing public and that the failure to so disclose such information in Schlitz' filings with the Commission and in its media releases rendered the assertions...