Securities and Exchange Commission v. Coffey
| Decision Date | 28 March 1974 |
| Docket Number | 73-1397.,No. 73-1396,73-1396 |
| Citation | 493 F.2d 1304 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. William V. COFFEY, Defendant-Appellant, and John M. King, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Sixth Circuit |
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Jack R. Alton, Columbus, Ohio, for defendants-appellants; Lane, Alton & Horst, Columbus, Ohio, on briefs.
Paul Gonson, Asst. Gen. Counsel, Washington, D. C., for plaintiff-appellee; Lawrence E. Nerheim, Gen. Counsel, David Ferber, Sol., Martin S. Berglas, Atty., S.E.C., Washington, D. C., Donald Dreyfus, Atty., Chicago Regional Office, S.E.C., Chicago, Ill., on brief.
Before CELEBREZZE, Circuit Judge, McALLISTER, Senior Circuit Judge, and WILSON,* District Judge.
This case presents novel issues for this Circuit regarding the Securities and Exchange Commission's ability to enjoin corporate officials personally for alleged corporate violations of the federal securities laws, specifically, § 17(a)(1) and (3) of the 1933 Securities Act and § 10(b) of the 1934 Securities Exchange Act, and Rule 10b-5(1) and (3) promulgated thereunder. Appellants are the board chairman (John King) and the financial vice-president (William Coffey) of King Resources Company.1
The relevant events began when Crofters, Inc., an Ohio "money-finder" formed in 1969, offered to arrange loans totaling $22,000,000 from the State of Ohio to four companies charged in the SEC complaint.2
One of Crofters' clients was King Resources Company, a Maine corporation with its headquarters in Colorado, engaged in oil well drilling in over a hundred countries. In early 1970 King Resources was short of cash and was seeking loans from various sources. In February, 1970, Ronald Howard, an independent money-finder and a defendant in the proceedings below, approached William Coffey (then King Resources' financial vice-president) with the proposal that King Resources seek funds from the State of Ohio. Howard told Coffey that long-term arrangements were possible but that it was a legal pre-requisite to obtaining funds from the State that a company's commercial paper be rated "prime" by the National Credit Office, Inc. (NCO), a division of Dun & Bradstreet. Defendant Groban, a Crofters partner, contacted Coffey on February 19, 1970, and requested information that NCO would need to determine whether King Resources' commercial paper merited a prime rating. Coffey sent these materials to Groban. Groban then asked NCO to rate King Resources for the commercial paper market. Rudolph Merker, NCO's vice-president for commercial paper, requested further information of Coffey, which was forthcoming and is not alleged to have been false. NCO promptly rated King Resources prime for the commercial paper market, on February 26, 1970. Groban notified Ohio's Deputy Treasurer of King Resources' prime NCO rating, and the State bought from King Resources a two-year $3,000,000 note on April 17, 1970 and a two-year $5,000,000 note on May 1, 1970.
King Resources soon thereafter collapsed financially, rendering Ohio's notes virtually worthless. On November 16, 1970, the SEC sued to enjoin further violations of the securities laws by 17 defendants, including King Resources and Appellants Coffey and King. The SEC alleged three different categories of securities law violations, only one of which applied to King Resources and Appellants. The Commission alleged that King Resources had sold its notes by misrepresenting its prime rating on commercial paper as proof that its two-year notes were also rated "prime." It further alleged that King Resources had failed to disclose material facts concerning its financial condition and the proposed use of the loan proceeds, omissions which tended to mislead NCO and the State of Ohio.3
On the basis of depositions and briefs, the District Court disposed of Appellee's motion for summary judgment on its petition for a preliminary injunction on August 10, 1972, by issuing a temporary restraining order against all 17 defendants. In a lengthy opinion, it held:
On the state of facts now before us, the Court concludes that the defendants\' use of the word "prime", as defined by N.C.O. and the customs of the securities industry, in connection with notes of terms in excess of 270 days, constituted a violation of the standard promulgated in O.R.C. § 135.14. Further, that such use of the term "prime", in connection with non-commercial paper tended to operate as a "device, scheme, or artifice to defraud" within the meaning of Section 17(a)(1) and of Section 10(b) and Rule 10b-5(1) thereunder; and further constituted the engaging in a "transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser" within the meaning of Section 17(a)(3) and Section 10(b) and Rule 10b-5(3) thereunder. citations omitted. This conduct on the part of the defendants constitutes activity which should be enjoined by the equitable powers of this court.4
By restraining the 17 defendants, the District Court avoided the question whether the Defendants, particularly Groban, had omitted material information or had made false statements in representing the various companies' financial situations to Rudolph Merker of NCO:
These "directly participating" defendants included King Resources Company. Appellant King was enjoined as a "responsible officer" of King Resources.7 Appellant Coffey was enjoined as an "aider and abettor" in the scheme.8
King Resources Company was nonetheless dismissed from the case because the District Court held that a prior Colorado injunction against the company was res judicata as to the present case. The SEC has not appealed that part of the ruling.
Soon after the temporary restraining order was issued, fourteen defendants submitted to consent decrees. Appellants persisted in their opposition to the SEC complaint and were afforded a hearing on consolidated motions for a preliminary and permanent injunction. They were allowed to present evidence concerning all factual matters, though the District Court refused to hear argument on the matters of law it had decided on August 10, 1972. On December 29, 1972, the District Court adopted the findings and conclusions of its August 10 Order in permanently enjoining Appellants from violations of § 17(a)(1) and (3), § 10(b), and Rule 10b-5(1) and (3). It held that Appellants "engaged in or are legally responsible for acts, including those which culminated in obtaining for King Resources Company a rating of `prime' from NCO, which was substantially employed in connection with notes of term in excess of 270 days."9 Appellants attack this final judgment and order.
Before beginning a legal analysis of the District Court's actions, we confront a basic difference between the parties. Appellants argue that the District Court opinion tars them with the finding that they committed a fraud, thus jeopardizing their right to earn a livelihood. The SEC asserts in its Brief that injunctive relief is merely a "mild prophylactic," which requires "only that a defendant obey provisions of the law that he was already obliged to obey."
When the SEC brings an injunctive suit to protect the public interest in an open and honest securities market, courts will shape their relief flexibly to effectuate the purposes of the Act. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963); SEC v. Barraco, 438 F.2d 97, 98-99 (10th Cir. 1971). However, before an injunction will issue against a particular party in his personal capacity, it must be shown that he personally is about to commit, is committing, or has committed a securities law offense. The statutory authority of the SEC alone requires such a rule. See § 20(b) of the 1933 Act, 15 U.S.C. § 77t(b), and § 21(e) of the 1934 Act, 15 U.S.C. § 78u(e). In this case, all challenged activities have ended, so that the SEC has not based its request for relief on the assertion that defendants are "about to" commit a violation. Unless Appellants themselves violated the securities laws, there is consequently no basis to enjoin them for fear they will commit "further" violations. See SEC v. National Bankers Life Ins. Co., 324 F. Supp. 189, 197 (N.D.Tex.1971), 334 F. Supp. 444 (D.C.), aff'd, 448 F.2d 652 (5th Cir. 1971).
We are disturbed by the SEC's tacit suggestion that a Court may personally enjoin a corporate official whenever his company or one of its agents has committed a securities law violation. An injunction is effectively drawn when it enjoins violators and their "agents, servants, employees and those persons in active concert or participation with them who receive actual notice of an Order." This is precisely the clause used by the District Court to enjoin all of Appellants' cohorts, in issuing its permanent injunction against A...
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