SEC v. Naftalin
| Citation | 460 F.2d 471 |
| Decision Date | 17 April 1972 |
| Docket Number | No. 20424.,20424. |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, William T. Dolan, Receiver, Appellee, v. Neil T. NAFTALIN, Defendant-Appellant. |
| Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
Joe A. Walters, O'Connor, Green, Thomas, Walters & Kelly, Frank J. Walz, Minneapolis, Minn., for defendant-appellant.
Gary C. Hoffman, Hyass, Weisman & King, Chartered, Robert J. King, Minneapolis, Minn., for plaintiff-appellee.
Before JOHNSEN, GIBSON and LAY, Circuit Judges.
A statutory suit under 15 U.S.C. §§ 78u(e) and 77t(b) was instituted by the Securities and Exchange Commission against Naftalin & Co., Inc., a registered broker and dealer in securities, and against Neil T. Naftalin individually, the corporation's president, majority stockholder and person controlling the business, to enjoin certain violative acts and practices which had been engaged in, and for the appointment of a receiver, on the ground of insolvency, to take charge of and hold all assets and property belonging to or in possession of the corporation, subject to the further order of the court. On a hearing, a receiver was so appointed. The appeal before us is one taken by Neil T. Naftalin, individually, from some orders entered against him in the receivership.
The situation which had prompted the Commission's suit arose primarily out of the actions of Neil T. Naftalin in having placed orders on behalf of the corporation with some 23 brokerage firms for the sale of various listed stocks totaling over $10,000,000 in amount, which were being sold "short", in that the corporation neither owned nor otherwise was in a position to make delivery of the stocks. The brokerage firms accepted the "sell" orders under confirmations which called for delivery of the stocks to be made to them within seven days. They proceeded to carry out the sale orders and, pending receipt of the certificates from the seller, "lent" stock for completing the transactions with the purchasers.
Neil T. Naftalin then stalled off the brokerage firms on the delivery of the stocks for approximately two months, with varying excuses, until it finally became necessary for him to call a meeting of the brokerage firms in New York and reveal to them that the corporation had not owned the stocks and had not at any time been able to make a delivery. The brokerage firms immediately "bought in" stocks to cover the situation and to enable them to wind up the transactions. What had happened was that after the "sell" orders had been placed, the stock market, instead of continuing its then downward-trend, as Naftalin had expected, began to rise. The result was that the brokerage firms finally wound up with aggregate losses from the transactions of some $1,200,000. Within a few days thereafter the Securities and Ec-change Commission instituted its protective suit.
Ten days prior to the meeting with the brokerage firms in New York, Neil T. Naftalin engaged in placing an order with another brokerage firm for the purchase on behalf of the corporation of United States Treasury bonds in the face amount of $670,000. Payment for the bonds was to be made from funds on deposit with the brokerage firm in the corporation's margin account. The bonds were to be sent to the First National Bank of Minneapolis for delivery to the corporation. Neil T. Naftalin took delivery of the bonds from the bank and then made transfer and delivery of them to himself, for application, he claimed, upon some loans which he had made to the corporation. After he thus had gotten the bonds, he joined with the corporation in filing an answer in the Commission's suit acknowledging that "the corporation is presently insolvent and is unable to meet its liabilities as they accrue and mature".
On a hearing held shortly after the court's appointment of a receiver, Naftalin testified, under interrogation by counsel for the Commission, that following the transfer of the bonds to himself he made delivery of all of them to six other persons, whose names he refused to state, "in satisfaction of my obligations to them". Later, he requested an opportunity to appear before the court to "clarify" this testimony. On such opportunity being accorded him, he testified that he had not in fact given the bonds to six other persons as he had previously sworn; that he had turned over bonds to only two persons—one a woman in Minneapolis to whom he had given an amount of $30,000, and the other his former New York counsel, to whom he had sent a number of the bonds but who had subsequently returned them to him; that he had thereafter sold a portion of the bonds in the face amount of $50,000, making a total of $80,000 which he no longer held; and that there thus remained in his possession only $590,000 of the $670,000 original amount. The court thereupon orally directed him "to retain in your possession the bonds that you presently have".
A few days later, involuntary petitions in bankruptcy were filed against the corporation by six of the 23 brokerage firms. Before any adjudication had occurred thereon, the Commission-suit receiver filed an application for an order requiring Neil T. Naftalin to deposit the remaining $590,000 bonds with the court. As basis for filing the application, he made showing that after the court's oral direction to Naftalin to retain possession of the bonds, Naftalin had gone to New York and placed an order with another brokerage firm to purchase $1,500,000 in stocks for him; that he had agreed to deposit the $590,000 bonds with the brokerage firm as collateral for payment of the stocks; and that such deposit was to be made within a period of three days.
The court set the application for immediate hearing. Naftalin made legal appearance through his attorney in resistance to the application. The application was granted and an order was entered requiring Naftalin to make deposit of the bonds with the Clerk of the Court by a fixed time. Copy of the order was immediately served upon Naftalin's attorney—Naftalin having chosen, as indicated, not to be present in the courtroom and to make legal appearance at the hearing through his attorney.
Naftalin failed to comply with the deposit order and the receiver then made application to have him held in civil contempt. At the hearing set thereon, Naftalin again chose not to be personally present, but as before, to make legal appearance through his attorney, seeking to have the receiver's application denied or alternatively to have the matter continued over until a challenge which had been made by the corporation in the bankruptcy proceeding to the charge of insolvency and to the capacity of the brokerage firms to constitute creditors had been disposed of in the bankruptcy court. The answer, however, which had been filed in the Commission's suit acknowledging the corporation's insolvency still stood without any attempted repudiation on the court records.
The court held Neil T. Naftalin to be in contempt for failing to comply with the previous bond-deposit order; granted him a short further time in which to make deposit of the bonds; and provided that "in default thereof, the United States Marshal in any District of the United States is hereby ordered and directed to arrest the said Neil T. Naftalin and produce him forthwith before the Court for further Order of this Court", with a certified copy of the order being made to constitute "sufficient warrant to the United States Marshal for such arrest and production before this Court".
Service of the contempt order was immediately made on Naftalin's attorney. Such service, in legal notice to Naftalin, was entitled to be made upon his attorney under Rule 5(b), Fed.R. Civ.P., both in respect to the application and to the civil contempt order. See Watkins v. Rives, 75 U.S.App.D.C. 109, 125 F.2d 33, 40 (1941), N.L.R.B. v. Hopwood Retinning Co., 104 F.2d 302, 305 (2 Cir. 1939), Wright & Miller, Federal Practice and Procedure: Civil § 1145. There is no claim that the attorney did not advise Naftalin of the existence and contents of the contempt order so as on that ground to have given rise to a possible question of due process from lack of actual knowledge and notice.
In fact, to the contrary, Naftalin thereafter filed a motion to have that part of the order providing for his arrest by a United States Marshal in any District of the United States vacated as being invalid in authorizing service of civil process beyond the territorial limits permitted by Rule 4(f), Fed.R.Civ.P., and as being violative of the prohibition of 28 U.S.C. § 1693 that "except as...
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