Western Federal Corp. v. Erickson

• Decision Date: 11 April 1984
• Docket Number: No. 83-2302,83-2302
• Citation: 739 F.2d 1439
• Parties: Fed. Sec. L. Rep. P 91,611 WESTERN FEDERAL CORPORATION, an Arizona corporation, and James Guaclides, Plaintiffs-Appellees, v. Einar C. ERICKSON and Georgia Erickson, husband and wife, Defendants, and Gregory Davis and Kathy Davis, husband and wife; and Gila Mines Corporation, a Nevada corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1439

739 F.2d 1439

Fed. Sec. L. Rep. P 91,611

WESTERN FEDERAL CORPORATION, an Arizona corporation, and James Guaclides, Plaintiffs-Appellees, v. Einar C. ERICKSON and Georgia Erickson, husband and wife, Defendants and Gregory Davis and Kathy Davis, husband and wife; and Gila Mines Corporation, a Nevada corporation Defendants-Appellants.

No. 83-2302.

United States Court of Appeals Ninth Circuit.

Submitted April 11, 1984. ^*

Decided Aug. 10, 1984.

William K. Whissen, Paul Tutnick, Phoenix, Ariz., for plaintiffs-appellees.

Brent E. Leavitt, Leavitt, Graves & Leavitt, Las Vegas, Nev., James J. Farley, Susan R. Bolton, Kenneth C. Sundlof, Jr., Shimmel, Hill, Bishop & Gruender, Phoenix, Ariz., for defendants-appellants.

Appeal from the United States District Court for the District of Arizona.

Before SNEED and FLETCHER, Circuit Judges, and QUACKENBUSH, ^** District Judge.

SNEED, Circuit Judge:

Promoters of a silver mining venture suffered a summary judgment entered by the district court on the ground that the sale of interests in the venture violated the registration requirements of the Securities Act of 1933. The district court ordered the promoters of the venture to provide restitution and awarded attorney's fees to the plaintiff-purchasers. The promoters, other than Einar Erickson, appeal. We affirm.

I. FACTS

Einar Erickson, a geologist, and Gregory Davis, an accountant, were the promoters of a silver mining venture called the "Gila Canyon Project." Investors could purchase a "unit" in the Project for $240,000, payable in $80,000 cash and the remainder by a promissory note. Erickson was to stake out and record mining claims in the Gila Canyon area of Nevada, and then assign these claims to the investors. After Erickson developed the silver mines, defendant Gila Mines Corporation (GMC) was to assume their operation. Davis is the president, chairman, and principal shareholder of GMC. Sixty-six investors acquired full or partial units in the Project; defendants received approximately $3 million in cash and $5.6 million in notes receivable. Each investor executed a promissory note and a "development agreement" with Erickson. Investors also individually entered into "mining contracts" with GMC.

This lawsuit arises from a falling out among business associates. Davis was a shareholder in, and did accounting work for, plaintiff Western Federal Corporation (WFC), a precious metals broker. John Etz, the president and second largest shareholder in WFC, solicited investors for the Gila Canyon Project. Plaintiff James Guaclides is the chairman and principal shareholder of WFC. In December 1979, Davis met with clients of WFC at WFC's offices and discussed the Project. Subsequently, Guaclides and WFC each purchased one unit in the Project. In August 1980, after silver production in the Project failed to reach projected levels, Erickson and Davis agreed to terminate Erickson's involvement in the Project and to substitute GMC. The investors were not parties to this agreement.

Guaclides maintains that he first learned of difficulties with the Project in the summer of 1980. In November 1980, he met with Erickson, who provided him with various information about the Project. Erickson told Guaclides that he had paid Davis more than $400,000 for services in connection with the Project. In December 1980, Guaclides demanded rescission of the purchase agreements for himself and WFC and refund of the initial cash investment. Defendants did not comply with this demand, and Guaclides filed suit in federal district court seeking relief under the federal securities laws.

On February 23, 1983, the district court awarded summary judgment against the defendants. The court found that the sale of interests in the Project violated the registration requirements of section 5 of the Securities Act of 1933, 15 U.S.C. Sec. 77e (1982). Plaintiffs were also entitled to relief, the court held, under sections 15 and 29(b) of the Securities Exchange Act of 1934, 15 U.S.C. Secs. 78o, 78cc(b) (1982). The district court ordered the repayment of the initial cash investment plus prejudgment interest and awarded attorney's fees for $20,000. The order determining damages and awarding fees is published at 553 F.Supp. 818 (D.Ariz.1981). The court also ordered the cancellation of the promissory notes, the "development contracts," and the "mining contracts."

II. DISCUSSION

Appellants raise three issues on appeal: (1) whether the district court erred in granting summary judgment for violations of the securities laws, (2) whether the district court erred by not reducing the judgment by the amount of tax benefits received by the appellees, and (3) whether the district court abused its discretion in awarding attorney's fees to the appellees under 15 U.S.C. Sec. 77k(e). We affirm on each issue.

A. Summary Judgment on the Section 5 Claim

Section 5 of the 1933 Act, 15 U.S.C. Sec. 77e (1982), forbids the offer or sale of unregistered securities in interstate commerce. Appellants do not challenge the district court's finding that appellees stated a prima facie case for violation of section 5. Instead, appellants raise an affirmative defense that the relevant transactions were exempt from the registration requirements as a private offering under section 4(2) of the Act, 15 U.S.C. Sec. 77d(2) (1982). Appellants admit that the offering did not qualify for the "safe harbor" provided by Rule 146. ¹

Summary judgment is proper when there is no genuine issue of material fact and the moving party is entitled to prevail as a matter of law. See Fed.R.Civ.P. 56(c). Once the movant has met the initial burden of showing that his motion is properly supported, the adverse party must come forward with specific facts showing that there remains a genuine factual issue for trial. See Fed.R.Civ.P. 56(e). The opponent may not rest on his pleadings; instead, he must offer "significantly probative" evidence as to any fact claimed to be disputed. E.g., SEC v. Murphy, 626 F.2d 633, 640 (9th Cir.1980).

Our analysis of the propriety of the grant of summary judgment must commence with the flexible test we have endorsed for determining if the private offering exemption under section 4(2) is available. This test considers: (1) the number of offerees, (2) the sophistication of the offerees, (3) the size and the manner of the offering, and (4) the relationship of the offerees to the issuer. See Murphy, 626 F.2d at 644-45. The party claiming the exemption must show that it is met not only with respect to each purchaser, but also with respect to each offeree. Id. at 645. The first and fourth factors noted above established that the district court properly awarded summary judgment. ²

The number of offerees was too uncertain. To claim the private offering exemption, evidence of the exact number and identity of all offerees must be produced. See, e.g., SEC v. Continental Tobacco Co. of South Carolina, 463 F.2d 137, 161 (5th Cir.1972). Appellants could not do this. They note that Davis asserted in an affidavit that the offerees were recorded through the use of numbered offering memoranda and that the total number of offerees was ninety-one. This number is not firm, however, because appellants steadfastly refused to identify the offerees. Appellees introduced the affidavit of Charles Jones, who purchased a fractional interest in a "unit" through John Etz. Jones stated that he had never completed an offeree questionaire, but that he had traveled to Nevada with Etz and Davis to examine the mine site. Once appellees presented evidence that no control was placed on the number of offerees, it became incumbent on appellants to rebut that evidence. See Murphy, 626 F.2d at 645. Appellants did not meet this burden; they did not introduce significantly probative evidence concerning the number and identity of the offerees. ³ Cf. Ruffin v. County of Los Angeles, 607 F.2d 1276, 1280 (9th Cir.1979) (conclusory statements in single affidavit did not satisfy burden of significantly probative evidence), cert. denied, 445 U.S. 951, 100 S.Ct. 1600, 63 L.Ed.2d 786 (1980).

Turning to the fourth factor of the Murphy test, the relationship of the offerees to the issuer, the appellants fare no better. The exemption from the registration requirements allowed by section 4(2) applies only where the offerees do not need the protection of the Securities Act. See SEC v. Ralston Purina Co., 346 U.S. 119, 125, 73 S.Ct. 981, 984, 97 L.Ed. 1494 (1953); Murphy, 626 F.2d at 644. Lack of need exists only if all of the offerees have available the sort of information about the issuer that registration reveals. See, e.g., Murphy, 626 F.2d at 647. Such information is "available" only if it is in fact disclosed or if the offerees have effective access to it. Doran v. Petroleum Management Corp., 545 F.2d 893, 903 (5th Cir.1977); cf. McDaniel v. Compania Minera Mar de Cortes, 528 F.Supp. 152, 164 (D.Ariz.1981) (failure to produce evidence that all offerees had access to or disclosure of information was fatal to private offering exemption).

Appellants argue that the offering memorandum contains all the information required by Schedule A of the Securities Act, 15 U.S.C. Sec. 77aa (1982). This is not true. The offering memorandum omits important information about GMC and Davis. ⁴ This deficiency cannot be eliminated by arguing that no corporation was an "issuer" of the Project "units" and therefore Schedule A information concerning GMC was not required. GMC was crucial to the organization and success of the Project, and was an "issuer" for purposes of the private offering exemption. See Murphy, 626 F.2d at 642-44; see also SEC v. Holschuh, 694 F.2d 130, 138-39 (7th Cir.1982) (corporate entity that was key to success of limited partnerships was "issuer").

It follows that the information actually disclosed was inadequate. The remaining question thus becomes whether the offerees, by virtue of their relationship to the issuer, had...