SECURITIES AND EXCHANGE COM'N v. National Securities, Inc.

• Citation: 387 F.2d 25
• Decision Date: 14 November 1967
• Docket Number: No. 21146.,21146.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Appellant, v. NATIONAL SECURITIES, INC., a corporation, et al., Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

387 F.2d 25 (1967)

SECURITIES AND EXCHANGE COMMISSION, Appellant, v. NATIONAL SECURITIES, INC., a corporation, et al., Appellees.

No. 21146.

United States Court of Appeals Ninth Circuit.

November 14, 1967.

Philip A. Loomis, Gen. Counsel, David A. Ferber, Edward B. Wagner, M. D. Newman, W. Stevens Tucker, Attys., S.E.C., Washington, D. C., Arthur E. Pennekamp, Regional Adm., S.E.C. San Francisco, Cal., for petitioner.

Lewis, Roca, Scoville, Beauchamp & Linton, John Frank, Phoenix, Ariz., for appellees.

Before JERTBERG and MERRILL, Circuit Judges, and TAYLOR, District Judge.

JERTBERG, Circuit Judge:

Before us is an appeal under 28 U.S.C. § 1291 by the plaintiff below and appellant in this court, Securities and Exchange Commission, from a final judgment of the United States District Court for the District of Arizona granting judgment on the pleadings for the defendants below, appellees here. The action was brought pursuant to Section 21(e) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78u(e), to enjoin violations of the antifraud provisions of that Act. Sec. 10(b), 15 U.S.C. § 78j(b), and Rule 10b-5 of that Act, 17 CFR 240.10b-5, and for other relief.

Appellant sought to undo the merger of two stock life insurance companies on the ground that the proxy solicitation material mailed to the stockholders of the two firms contained positive misrepresentation of material facts, and also failed to state material facts necessary to make the statements therein not misleading in light of the circumstances under which they were made.

Appellee National Securities, Inc. is a Colorado corporation doing business in Arizona as a holding company owning a controlling interest in the stock of National Life & Casualty Insurance Company, an Arizona corporation. Appellees Wallace, Bohannan, Saffert, Wilkins, Barrett, Setter and Large are officers of the appellees National Securities, National Life, or another subsidiary of National Securities.

Appellee Producers Life Insurance Company is an Arizona corporation which conducts a life insurance business in Arizona and other western states.

As of April 27, 1964, Producers Life had approximately 14,000 stockholders with 880,000 shares of common stock issued and outstanding, including 50,203 treasury shares. Of that total, 66,320 shares were owned directly by a group consisting of Richard G. Johnson, Ernest A. Richards, William A. Reedy, Bonnie B. Bilbrey, and Producers Thrift & Loan Company, an Arizona corporation, whose stock was owned by Johnson, Richards, Reedy, Bilbrey and one other person, the first four being referred to in this litigation¹ as the "selling directors." The selling directors, together with J. Grant Iverson, Jess E. Hunter, and John J. Falconer, made up Producers Life's board of directors. In addition, the selling directors other than Bilbrey held voting proxies for about 565,000 shares.

The amended and supplemental complaint in substance alleges that since March 15, 1964, appellees and the selling directors have made use of means and instrumentalities in interstate commerce and the mails to advance a scheme by manipulative and deceptive devices in connection with the purchase and sale of stock in Producers Life and National Life to defraud Producers Life and its stockholders by making false and misleading statements, and that since that date appellees have effected various arrangements with the ultimate purpose of merging Producers Life with National Life in derogation of the rights of Producers Life's stockholders, and contrary to the fiduciary responsibilities of the selling directors and appellees Wallace, Saffert, Wilkins, Barrett, and Large.

The complaint sets forth in detail the various acts, transactions and occurrences which transpired, leading up to the consolidation agreement of November 27, 1964, between National Life and Producers Life. The agreement provided for the submission of the agreement to the stockholders of Producers Life and National Life.

Beginning in August, 1964, appellees National Securities, National Life, Bohannan, Wallace, Saffert, Wilkins, Barrett, Setter and Large conducted a proxy solicitation campaign by mailing communications to Producers Life's 14,000 stockholders throughout the United States. It is the alleged material misstatements and the alleged omission of material facts in these proxy solicitation communications of which appellant complains.

The complaint then alleges, in detail, numerous misstatements and omissions of material facts.

A special stockholders' meeting was held on April 19, or 26, 1965, at which the shareholders approved and confirmed the merger.

The complaint further alleges that following the stockholders meeting, the appellees sent false and misleading statements to the shareholders of Producers Life. It is further alleged that the consolidation agreement is void as an essential element of a fraudulent scheme and because it had never been validly approved by the requisite two-thirds majority of the stockholders.

It appears that the merger agreement was submitted to the Arizona Director of Insurance on May 7, 1965, and approved by him on July 9, 1965. It further appears that since that time the National Group has conducted the affairs of National Life and Producers Life as a single operation.

In the court below, appellant prayed for the following relief:

1. that the alleged occurrences be adjudged fraudulent and in violation of § 10(b) and Rule 10b-5;

2. that a preliminary and permanent injunction be entered against appellees to restrain them from further violations of § 10(b) and Rule 10b-5 in connection with any plan of reorganization, merger, etc., or with the solicitation of proxies to accomplish such plan;

3. that appellees rectify the consequences of their wrongful conduct and restore Producers Life, National Life, their stockholders, and appellees to their status and economic condition as it existed prior to April 27, 1964;

4. that appellees make an accounting for their unjust enrichment and the damage to the stockholders;

5. that the equities of appellees and the stockholders of Producers Life be adjusted on a fair and equitable basis including, if necessary, the subordination of National Securities\' interests in National Producers; and

6. any other relief which the court may deem just and equitable.

On September 1, 1965, appellees filed a motion for judgment on the pleadings or, in the alternative, for summary judgment. The district court granting the motion for summary judgment on the pleadings,² stated inter alia:

"7. Even if it be assumed that § 10 (b) would otherwise be applicable to proxy solicitations citations omitted, and that a shareholder-approved corporate consolidation and reorganization is a `purchase or sale\' of securities within the meaning of § 10(b) and Rule 10b-5 citations omitted, there still remains the question of whether the McCarran Act 59 Stat. 33, 15 U.S.C. §§ 1011-1015 does not preclude the application in this case of § 10(b), as implemented by Rule 10b-5;

"8. 15 U.S.C. § 1012(b) states, in part:

`No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance * * *\';

"9. The law of Arizona requires that any proposed merger of stock insurance companies be submitted to the Director of Insurance for his approval in accordance with the criteria set forth in A.R.S. § 20-731, which reads as follows:

`A. A domestic stock insurer of any kind may merge or consolidate with another domestic or foreign stock insurer by complying with the provisions of general law governing the merger or consolidation of stock corporations formed for profit, but subject to subsection B of this section.

`B. No such merger or consolidation shall be effectuated unless in advance thereof the plan and agreement therefor have been filed with and approved in writing by the director of insurance. The director shall give his approval within a reasonable time after filing unless he finds the plan or agreement:

1. Is contrary to law.

2. Inequitable to the stockholders of any domestic insurer involved.

3. Would substantially reduce the security of the service to be rendered to policyholders of the domestic insurer in this state or elsewhere.\';

"10. Arizona law further provides for an appeal to the State courts from a decision of the Director of Insurance made under the authority of A.R.S. § 20-731 see A.R.S. §§ 20-161-20-166;

"11. Moreover, the remedies which the Securities and Exchange Commission may seek in this Court are governed by § 21(e) of the 1934 Act, which provides:

`Whenever it shall appear to the Commission that any person is engaged or about to engage in any acts or practices which constitute or will constitute a violation of the provisions of this chapter, or of any rule or regulation thereunder, it may in its discretion bring an action in the proper district court of the United States or the United States courts of any Territory or other place subject to the jurisdiction of the United States, to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond. The Commission may transmit such evidence as may be available concerning such acts or practices to the Attorney General, who may, in his discretion, institute the necessary criminal proceedings under this chapter.\' 15 U.S.C. § 78u(e); and

"12. The allegations of the Amended and Supplemental Complaint at bar, if taken to be true, are insufficient to warrant issuance of an injunction against future violations of § 10(b) and Rule 10b-5, since the requested relief of invalidation by this Court of the corporate merger, now finally approved by the Arizona Director of Insurance pursuant to A.R.S. § 20-731, would at least `impair\', if not `invalidate\' or `supersede\', laws enacted by the State of Arizona `for the purpose of regulating the

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