SEC v. Lund

• Decision Date: 16 September 1983
• Docket Number: No. CV-81-371-MML.,CV-81-371-MML.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Lavere Gilbert LUND, Defendant.
• Court: U.S. District Court — Central District of California

570 F. Supp. 1397

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Lavere Gilbert LUND, Defendant.

No. CV-81-371-MML.

United States District Court, C.D. California.

September 16, 1983.

COPYRIGHT MATERIAL OMITTED

Robert M. Romano, Gary Lynch, Alexander Weir, III, Div. of Enforcement, S.E.C., Washington, D.C., Michael Stewart, Regional Administrator, S.E.C., Los Angeles, Cal., for plaintiff.

Roderick M. Hills, Robert K. Burgess, Michael Chertoff, of Latham, Watkins & Hills, Washington, D.C., for defendant.

OPINION

LUCAS, District Judge.

This action arises under 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. Plaintiff, the Securities and Exchange Commission ("SEC"), contends that defendant Lavere Gilbert Lund ("Lund") purchased shares of a publicly traded company, P & F Industries, Inc. ("P & F"), after receiving material, nonpublic corporate information concerning the corporation. This information was allegedly given to Lund by his long time friend and business associate, Sidney Horowitz ("Horowitz"), a P & F insider. The SEC argues that Lund should have disclosed this information prior to purchasing the stock or refrained from trading in the stock and that, by not doing so, Lund violated § 10(b) and Rule 10b-5. Plaintiff seeks injunctive relief and an order requiring Lund to disgorge the profits he made from the purchase and subsequent sale of the stock.

Lund contends that he purchased the stock before receiving any information from Horowitz. Lund also argues that even if he is found to have purchased the stock after receiving information concerning P & F, the information was not material and/or was already public information. He further contends that even if the Court finds the material to have been material and nonpublic, his purchase does not constitute a violation of § 10(b) because he lacked the requisite scienter. Finally, Lund argues that, under these facts, § 10(b) does not prohibit him from knowingly trading on material, nonpublic information. Lund also asserts that, in any event, injunctive relief is not appropriate in this case.

The action was tried to the Court in a three day trial.¹ The court has carefully considered the testimony and other evidence presented by both parties as well as the briefs and oral argument of counsel and finds the facts during the relevant period of time to have been as follows.

Lund was the Chief Executive Officer, President, and Chairman of the Board of Directors of Verit Industries ("Verit"). Horowitz was also a member of Verit's Board and had been for at least seven years. Horowitz was also P & F's Chief Executive Officer and President as well as Chairman of its Board of Directors. Prior to the events at issue in this litigation, Lund regularly spoke with Horowitz and they often exchanged information about Verit and P & F.

Beginning in May or June of 1979, Horowitz, on behalf of P & F, entered into negotiations with the Jockey Club Casino Corporation ("Jockey Club") concerning a joint venture involving a gambling casino in Las Vegas. During the negotiations Horowitz told his family, the P & F Board of Directors, and Lund about a possible project involving gambling.

At some point in May or June of 1979 Lund spoke with Steven Antebi ("Antebi"), a stock broker with Bear, Stearns & Co. in Los Angeles and asked Antebi about P & F. Antebi stated that he was not familiar with the company. Lund, whose account at Bear, Stearns & Co. had been inactive for some time, made no purchase of P & F stock in connection with this conversation.

By the beginning of August, 1979, Horowitz was quite confident that the P & F/Jockey Club casino venture would go forward. On Thursday afternoon, August 2, 1979, Horowitz called Lund. Lund was not in his office at the time, however, so Horowitz left a message that he had called. Lund did not return the call on August 2, 1979. On Friday morning, August 3, 1979, Antebi called Lund. Remembering Lund's interest in P & F in May or June, Antebi wanted to inform Lund that P & F stock was trading heavily. He also asked Lund if he wished to purchase any P & F stock. Lund purchased no stock at this time. After the call from Antebi, Lund returned Horowitz' call. Horowitz told Lund about the negotiations with the Jockey Club in detail and asked if Verit² would be interested in providing a capital investment of $600,000 for the venture.³ He also stated that the final meeting with the Jockey Club representatives would be held on Monday, August 6, 1979. At this meeting the parties were to draft a formal letter of intent which would be presented to the P & F Board the same day. If the Board approved the joint venture, the letter of intent would be signed immediately following the Board meeting. Lund told Horowitz that he would consider the offer to participate in the joint venture.

After Lund talked to Horowitz, Antebi called again, this time with information concerning the size of the market for P & F stock. Lund then placed an order to purchase 10,000 shares.⁴ This was Lund's only purchase of P & F stock in approximately ten years. Lund's order was executed shortly after his conversation with Antebi at a price of $1.25 per share.

The joint venture with Jockey Club was approved by P & F's Board on August 6, 1979 and a letter of intent was signed on that day. The American Stock Exchange delayed opening of trading in P & F stock until 2:52 Eastern Time pending the public announcement of the joint venture. When trading opened, the trading volume and price of P & F stock rose dramatically and remained high for some weeks.

Horowitz called Lund late on the afternoon of Monday, August 6, 1979 to ask again if Verit was interested in participating in the casino project. During this phone conversation Lund told Horowitz that he was glad the letter of intent had been signed because he had purchased some P & F stock on Friday. Horowitz indicated to Lund that he did not think it was proper for Lund to have purchased the stock. Lund immediately volunteered to sell the stock and did so in two equal blocks over the next two days. Lund sold his shares at an average price of $2.50 per share. His total profit, therefore, was $1.25 per share, or $12,500.

The Court must now consider whether, under these facts, Lund's purchase constitutes a violation of § 10(b). As indicated above, this requires the Court to determine:

(a) whether the information Lund received was material, nonpublic information;

(b) whether Lund had the requisite scienter; and

(c) if the Court answers these initial questions in the affirmative,⁵ whether Lund's failure to disclose the information before trading is otherwise actionable under § 10(b).

The Court will address each of these issues in turn.

Information is material if there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976); Zweig v. Hearst Corp., 594 F.2d 1261, 1266 (9th Cir.1979). Certainly a reasonable investor would have considered P & F's participation in a joint venture involving a gambling casino to be important. Lund received specific information about a definite project. The proposed joint venture was a major undertaking for P & F which would have a significant effect on the value of its assets and its earnings potential.⁶ The fact that Lund purchased a substantial amount of P & F stock after receiving this information and that this was his only purchase of P & F stock in approximately ten years further indicates that the information was material. See SEC v. Shapiro, 494 F.2d 1301, 1307 (2d Cir.1974). Finally, the rapid increase in the trading volume and price of P & F stock following the disclosure of the joint venture confirms the conclusion that a reasonable investor would have considered this information to be important in making an investment decision with respect to P & F stock. The Court finds, therefore, that the information which Lund received from Horowitz was material information.

The Court also finds that this information was nonpublic. Lund was told on August 3, 1979 that the end of a negotiations period had been reached and that a definite agreement was imminent. He was told that a letter of intent would in all likelihood be signed on the next business day. There is no evidence that this specific information had been made public. The fact that some general information concerning the possibility of a P & F project involving gambling had been disclosed to a limited segment of the public in the previous months does not convert the very specific information which Lund received from Horowitz into public information.

Lund also argues that he lacked the requisite scienter to sustain a finding of liability under § 10(b). It is well established in this Circuit that § 10(b) proscribes only intentional or reckless misconduct. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); Pegasus Fund, Inc. v. Laraneta, 617 F.2d 1335, 1340 (9th Cir.1980); Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir.) cert. denied, 439 U.S. 970, 99 S.Ct. 464, 58 L.Ed.2d 431 (1978). Lund contends that he did not know and was not reckless in not knowing that the information he received from Horowitz was material, nonpublic information. Thus, Lund argues, he cannot be subject to liability under § 10(b). This argument is unsupported by the evidence presented at trial. The Court finds that Lund knew that the information he received from Horowitz was material, nonpublic information and that he purchased the P & F stock in order to take advantage of this information.

The Court must now address the more difficult issue raised by this litigation: Lund's contention that under these facts his failure to disclose the information he received or to refrain from trading in P & F...