Securities and Exchange Commission v. Koenig, No. 208

• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
• Writing for the Court: SMITH, KAUFMAN and HAYS, Circuit
• Citation: 469 F.2d 198
• Parties: SECURITIES AND EXCHANGE COMMISSION, Appellee, v. Harold P. KOENIG et al., Appellants.
• Docket Number: No. 208,Docket 72-1745.
• Decision Date: 03 November 1972

469 F.2d 198 (1972)

SECURITIES AND EXCHANGE COMMISSION, Appellee,
v.
Harold P. KOENIG et al., Appellants.

No. 208, Docket 72-1745.

United States Court of Appeals, Second Circuit.

Argued September 22, 1972.

Decided November 3, 1972.

469 F.2d 199

Theodore Sonde, Washington, D. C. (Walter P. North, Robert M. LaPrade, Frederick L. White, Rodney K. Vincent, Washington, D. C., on the brief), for appellee.

Murray M. Chotiner, Washington, D. C. (Delson & Gordon, New York City, and Reeves & Harrison, Washington, D. C., on the brief), for appellants.

Miller & Summit, New York City, on the brief, for amici curiae.

Before SMITH, KAUFMAN and HAYS, Circuit Judges.

HAYS, Circuit Judge:

This is an appeal from an order of the United States District Court for the Southern District of New York preliminarily enjoining and restraining defendants-appellants from violations of various provisions of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., § 78m, and certain Rules promulgated thereunder.¹ In addition, the court below appointed a limited receiver for the corporate defendant Ecological Science Corporation (hereinafter "ECO"). In its opinion, the district court noted that after an "exhaustive review of the entire record" it had based its conclusions of law on undisputed facts and for that reason it did not find it necessary to hold an evidentiary hearing. We affirm the order of the district court.

Defendant-appellant Koenig is president, chief executive officer and chairman of the board of directors of ECO, a Florida corporation the common stock

469 F.2d 200

of which is held by over 8,000 stockholders. ECO's stock is listed for trading on the American and Pacific Coast Stock Exchanges.²

The thrust of appellants' arguments is (1) that the district court's finding of three specific instances of federal securities law violations was in error; (2) that appellants were entitled to and were denied an evidentiary hearing; and (3) that the court below abused its discretion in appointing a limited receiver with the power, inter alia, to supervise ECO's public disclosures, investigate and make a public report on certain "secret securities transactions" brought about by the individual defendants in this case and make preparations for and hold a shareholders' meeting at which directors would be elected.

The complex financial foundation and the bitter legal battles underlying this proceeding are described in the opinion of the district court, Current CCH Fed. Sec.L.Rep. ¶ 93,536, and we adopt its statement of the background of this case. We will refer to certain particulars only for the purpose of illuminating our decision on the points raised by the appellants.

I. THE SECURITIES ACT VIOLATIONS

A. The Foreign Recapitalization Scheme

The district court found that between June 1 and September 1, 1971, defendant Koenig and another named defendant, Cesare De Franceschini, an ECO director, under the guise of "recapitalizing" four of ECO's European subsidiaries, effected the transfer of voting control of those subsidiaries to an Italian partnership created and controlled by Koenig and a Liechtenstein holding company controlled by De Franceschini. ECO's board of directors were not informed of the action taken by Koenig and De Franceschini and the transaction was not disclosed in any of the various reports ECO was required to file with the Securities and Exchange Commissions.³

The so-called recapitalization scheme occurred at a time of great internal strife among the management and directors of ECO. The corporation was experiencing financial difficulties and appellant Koenig was under pressure to resign his posts with the corporation. The transfer of voting control of four valuable and profit-making ECO subsidiaries to Koenig and his ally was obviously a material fact that a reasonable investor (or potential investor) in ECO would have considered important in making his investment decision. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-154, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968), cert. denied, Coates v. SEC, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). The failure to include this information in the annual report for 1971 and the quarterly reports for the year required by Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 to be filed with the Commission, was a material omission and constituted a violation of those provisions.⁴ See SEC v. Great American

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Industries, 407 F.2d 453 (2d Cir.), cert. denied, 395 U.S. 920, 89 S.Ct. 1770, 23 L.Ed.2d 237 (1969); Heit v. Weitzen, 402 F.2d 909 (2d Cir. 1968), cert. denied, 395 U.S. 903, 89 S.Ct. 1740, 23 L. Ed.2d 217 (1969)

B. The Teacher's Loan

On August 3, 1971, at a time when ECO was undergoing severe financial problems, the corporation, through Koenig its president, issued a press release to the Dow Jones wire service. The release stated in part:

"On July 28, 1971, the

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