The opinion of the court was delivered by: MCLEAN
This is an action to enjoin alleged violations of Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a)), and Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78j(b)), and Rule 10b-5 thereunder (17 CFR 240.10b-5). Plaintiff has moved for a preliminary injunction. The court held a hearing at which testimony was taken. Upon the basis of the evidence there introduced, and of statements in the moving affidavits not contradicted by defendants, the court finds the facts to be as follows:
Defendant Broadwall Securities, Inc. ('Broadwall') is a New York corporation with offices at 26 Broadway, New York, N.Y. It is engaged in buying and selling securities. Since November 3, 1962 it has been registered with the Securities and Exchange Commission as a broker and dealer in securities, pursuant to Section 15(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78o(b)).
Defendant Arnold Mahler ('Mahler') is president, secretary-treasurer and sole stockholder of Broadwall. Defendants Jack Einiger ('Einiger') and Alexander Lapidus ('Lapidus') are securities salesmen who have been employed by Broadwall since March 1963 and April 1964 respectively. Defendant Stanley Miller ('Miller') is a securities salesman who was employed by Broadwall from September 1963 to October 1964.
The security with which this action is concerned is the common stock of The Coast to Coast Company, Inc. ('Coast to Coast'), a Nevada corporation. Prior to October 1963 that company's office was in Boston, Massachusetts. In October 1963 a change in the management occurred. Philip Levy became its president, a position which he continued to occupy until September 1964. This is the period in which the sales of which plaintiff complains took place.
Levy is affiliated with Vogel's Dairy Products Co., which has its office at 145 Reade Street, New York. When he became president of Coast to Coast, that company purported to make its office in the Vogel's Dairy office at 145 Reade Street. In fact, Coast to Coast paid no rent. It had no employees on its payroll. As a practical matter, Levy, in the Vogel's Dairy office, carried on, on behalf of Coast to Coast, whatever business that company did.
The business of Coast to Coast is the distribution of packaged frozen lobsters. It purchases these lobsters from a Canadian corporation known as Sea 'n Surf, Ltd. ('Sea 'n Surf') located in Nova Scotia. Sea 'n Surf catches or breeds the lobsters, keeps them for a while in lobster pounds, then treats them, freezes them, packages them and sells them. Coast to Coast and Sea 'n Surf are wholly separate and independent companies. The only relation between them is that of buyer and seller. Coast to Coast has no exclusive arrangement with Sea 'n Surf for the marketing of its lobsters and no long-term contract with it. It merely buys lobsters from it from time to time.
Coast to Coast owns no lobster pounds. It owns no freezing process. It has no capital assets of any kind. It is merely a distributor.
According to an unaudited financial statement for the fiscal year ending October 31, 1963, Coast to Coast in that year made gross sales of frozen lobsters in the amount of $ 76,148.99. It had a gross profit of $ 19,994.62 and a net profit, after administration, general and selling expenses of $ 1,488.34 before taxes. As of October 31, 1963, it had assets having a book value of $ 25,671.78, including cash of $ 2,756.03 and accounts receivable of $ 12,879.34. It had current liabilities of $ 11,683.44. For the purposes of this motion, the court will assume that these figures are accurate.
For a time after Levy took over as president of Coast to Coast, the company did very little business. During the first four months of 1964 its gross sales were approximately $ 1,500. For the entire period from October 1963 to September 1964, its gross sales were approximately $ 30,000. Its net income for that period was approximately $ 2,000 before taxes.
During this period Coast to Coast had no term contracts with any customers for the purchase of lobsters. It sold them as best it could on an individual order basis. There is no evidence that it sold any lobsters to chain stores in 1964. It sold none to Howard Johnson's restaurants.
Coast to Coast has 4,000,000 shares of common stock outstanding. Of these, 700,000 shares were 'given' to Levy by Mandel who was president of the corporation prior to October 1963. Levy paid nothing for them. He testified that he 'turned them over' to Vogel's Dairy.
Although it is not entirely clear who originally owned the balance of this stock, it is apparent that one J. W. Kaufman owned a substantial quantity. Kaufman is in the securities business. He loaned money to the corporation when Levy became president, but he did not become an officer of it at that time. When Levy resigned as president in September 1964, Kaufman succeeded him.
On the basis of 4,000,000 shares of stock outstanding, the company's earnings of $ 2,000 before taxes for the period from October 1963 to September 1964 amounts to one-twentieth of a cent per share.
Between March 26, 1964 and July 20, 1964, Broadwall sold approximately 96,000 shares of Coast to Coast stock to various members of the public at prices ranging from 25 cents to 40 cents per share. Broadwall acted as principal in these transactions and sold the stock for its own account. Its source of supply of the stock was primarily Kaufman, although on a few occasions it purchased some from another broker. Broadwall paid prices ranging from 7 1/2 cents to 40 cents per share for the stock it purchased.
On July 20, 1964, defendants Mahler, Einiger, Lapidus and Miller testified at the New York Regional Office of the Securities and Exchange Commission as witnesses in an investigation of dealings in Coast to Coast stock which the Commission was then making pursuant to an order of the Commission dated June 8, 1964. For approximately two weeks thereafter Broadwall ceased selling Coast to Coast stock. It then resumed doing so and up to October 28, 1964 it sold approximately 20,000 additional shares of Coast to Coast to the public at prices ranging from 25 cents to 40 cents per share.
These sales were made primarily by telephone. Salesmen in Broadwall's office telephoned prospective buyers and suggested that it would be advantageous to them to purchase Coast to Coast stock. Confirmations of the sales were sent, and the securities were delivered, by mail. There is no doubt that in the sale of the stock defendants made use of the mails ...