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Securities and Exchange Commission v. S & P National Corp.

decided: May 10, 1966.


Lumbard, Chief Judge, and Moore and Feinberg, Circuit Judges.

Author: Feinberg

FEINBERG, Circuit Judge:

This case raises the propriety of two orders of the District Court for the Southern District of New York entered at the instance of the Securities and Exchange Commission ("SEC"). One order granted a preliminary injunction restraining the three appellant corporations, inter alia, in the operation of their business as investment companies, and appointed Leslie Kirsch as receiver and trustee; the other authorized Mr. Kirsch to sell certain stock owned by one of the appellants. The ultimate issue before the court is whether the district court judge committed error in granting the equitable relief sought. Subject to a modification of the orders designed to give the corporations flexibility in dealing with a tax problem discussed below, the orders appealed from are affirmed.


The significance and propriety of the orders under attack are best assayed after a complete recital of the background and time table of the litigation to date. Appellants, defendants below, are S & P National Corporation ("S&P"), Smith-Palmer Machine Corporation ("Smith-Palmer"), and Southwest International Corporation ("Southwest"). Southwest is a wholly owned subsidiary of Smith-Palmer, and Smith-Palmer is a wholly owned subsidiary of S&P. Southwest and S&P are Delaware corporations; Smith-Palmer is an Illinois corporation. S&P, at the top of the corporate ladder, is a publicly owned corporation with approximately six hundred stockholders. Additional defendants, but not appellants, are David M. Milton and Ralph E. Still, both of whom have allegedly been intimately involved in the affairs of the corporations, as more fully set forth below.

On February 21, 1966, plaintiff SEC commenced an action praying for injunctive relief and the appointment of a receiver or trustee of the books, records and assets of the corporate defendants. The complaint alleged many long-continued and willful violations of the Investment Company Act of 1940 ("the 1940 Act"), 15 U.S.C. § 80a-1 et seq., and the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78a et seq. The first three counts of the complaint aver that the corporate defendants have been investment companies for many years within the meaning of the 1940 Act, have failed to register under that Act, and have transacted business in violation of section 7 thereof, 15 U.S.C. § 80a-7.*fn1 Count IV alleges violations of the reporting requirements of the 1934 Act, and the rules and regulations thereunder. Defendant S&P or its predecessor has been required since 1946 to file periodic reports with the SEC, pursuant to section 15(d) of the 1934 Act, 15 U.S.C. § 78o(d). Counts V through IX of the complaint allege derelictions by the individual defendants Milton and Still. This was not the first action brought by the SEC against some of these defendants. In March 1965, the SEC brought suit against S&P and various alleged officers and directors to compel S&P to file annual and semi-annual reports which were up to two years overdue. In June 1965, the SEC obtained a mandatory injunction granting the relief sought, and in August 1965, a contempt order directing S&P to comply with the 1934 Act.*fn2 The reports were filed thereafter.

In this action, by notice of motion, dated March 9, 1966 and returnable March 22, 1966, the SEC sought a preliminary injunction and appointment of a receiver. On March 11, 1966, while the SEC's motion was pending and prior to any stipulation of adjournment of the motion, Paul O. Buckley, a stockholder of S&P, filed a petition in the Delaware state courts.*fn3 The papers in that action referred to the SEC complaint in the court below and sought, inter alia, prompt election of directors under Delaware law, with a view towards liquidation of S&P assets and termination of its corporate existence.*fn4 It appears from the record in the court below that Buckley acquired his interest in S&P most recently and is a long-time associate of defendant Milton and others who, according to the complaint, have secretly exercised control over S&P for many years.*fn5 The SEC's motion below for a preliminary injunction and appointment of a receiver was adjourned by stipulation, dated March 21, 1966, until April 12, 1966. As part of the stipulation, the corporate defendants agreed to maintain the status quo with respect to corporate assets and other matters pending the lower court's determination of the SEC motion.

Prior to the adjourned return day of that motion, however, the corporations sought permission to sell 479,730 shares of stock of Great American Industries, Inc. ("GAI") owned by Southwest, the entity at the bottom of the corporate ladder. The shares are traded on the American Stock Exchange, and the market in the stock has been volatile. On January 31, 1966, the closing price of GAI was $2 3/4 per share; on February 28, 1966, $7 1/8 per share; and on March 30, 1966, $12 3/8 per share. Appellants' motion eventually came before Judge Murphy, who denied it on April 4, 1966, but advanced the return day of the SEC's motion from April 12 to April 8, 1966. A further hearing was held on April 6 at the request of appellants, who advised the court that they could not complete their papers in opposition to the SEC's motion until April 12. Accordingly, Judge Murphy reset the time of hearing on that motion for April 12. At the April 6 hearing, appellants also advised the court that a notice of annual meeting to the shareholders of S&P had been sent out, the meeting to be held in Dover, Delaware on April 12, 1966.

The meeting, indeed, took place on April 12, shortly before argument of the SEC motion for issuance of a preliminary injunction and appointment of a receiver. At the meeting, which was the first meeting of stockholders held in eleven years,*fn6 five directors and three officers were elected, including defendant Still in both categories. After hearing argument on April 12, Judge Murphy, in a fourteen-page opinion and order, dated April 16, 1966, granted the relief sought by the SEC. The order, inter alia, enjoined the corporate defendants, pending final hearing and determination of the SEC action, from selling or acquiring securities, engaging in business in interstate commerce or disposing of any of the assets of the companies; pursuant to section 42(e) of the 1940 Act, 15 U.S.C. § 80a-41(e), and the court's inherent equity power, it also appointed a receiver and trustee of the corporations. The court amended its April 16 order by an order, dated April 20, clarifying the powers of the receiver and restraining defendant corporations from taking any action tending to interfere with the jurisdiction of the court below except appropriate review in this court. The April 16 opinion and order, as amended, is one of the two orders under attack by appellants.

Shortly thereafter, the receiver sought permission from the court to sell the GAI stock because of its meteoric rise in an uncertain market. The receiver advised the court that after some effort he had been able to secure from the SEC a "no-action letter"*fn7 on the representation that he did not exercise any control or controlling influence over GAI and had no intention of doing so. On April 21, 1966, Judge Murphy authorized the receiver, in his discretion, to sell the GAI stock on the open market or at private sale. Appellants unsuccessfully urged the judge to insert certain provisions in the order, principally one allowing the corporations to adopt plans of liquidation conforming to the requirements of the Internal Revenue Code so that the tax impact of the GAI stock sale could be minimized. The order of April 21, 1966 is the second order appellants attack. Appellants appealed promptly from both orders and, on April 27, 1966, moved in this court for a stay of the April 16 order pending the appeal. The motion was returnable on May 2, at which time, in response to this court's suggestion, argument of the appeal from both orders on the merits was advanced to May 3, on the papers filed here on the motion for a stay, and on the briefs and record below.


Although a welter of issues emerge from the record below, it is helpful to recall that the questions on appeal are whether the court below made erroneous findings of fact, misconstrued or misapplied the law, or abused its discretion in (1) granting the injunction; (2) appointing a receiver; and (3) rejecting the conditions sought by appellants on the sale of GAI stock.

Issuance of an injunction

The court below concluded that a prima facie case had been made that at least from 1957, the three corporate defendants were investment companies within the meaning of the 1940 Act. It is not disputed by appellants that the status of the three corporations is judged together because the lower two on the corporate ladder are each wholly ...

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