The opinion of the court was delivered by: COOPER
In this action the Securities and Exchange Commission (hereinafter SEC) seeks to have the Court enjoin the six defendants from further violations of various provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules and regulations promulgated by the SEC thereunder.
Since the inception of these proceedings, one defendant, Benjamin Perlen, has consented to the entry of final judgment against him, and as to three others, L.J. Forget & Co., Ltd. (hereinafter Forget), L.J. Forget (Bahamas), Ltd. (hereinafter Forget Bahamas), and Farrell Vincent, default judgments have been entered against them.
We now consider the issue whether, on the basis of the present record, this Court should grant, in whole or in part, the SEC's motion for the issuance of a preliminary injunction enjoining (a) defendant Willard J. LaMorte (hereinafter LaMorte) from offering for sale and selling and delivering after sale the stock of Shattuck Denn Mining Corporation in further violation of section 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e (a) and 77e (c); (b) defendants LaMorte and Shattuck Denn Mining Corporation (hereinafter Shattuck) from further violating the antifraud provisions of section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and rule 10b-5, 17 CFR 240.10b-5, thereunder; (c) defendant LaMorte from further violating the reporting requirements of section 16(a) of the Securities Exchange Act, 15 U.S.C. § 78p(a), and ordering him to file revised form 4's to accurately reflect changes in his ownership of Shattuck stock.
On a motion for a preliminary injunction it is necessary for the Court to find that the "petitioning agency has presented a strong prima facie case to justify the discretionary issuance of the interlocutory restraint." SEC v. Boren, 283 F.2d 312, 313 (2d Cir. 1960); SEC v. Broadwall Securities, Inc., 240 F. Supp. 962 (S.D.N.Y. 1965); Cf. SEC v. Bennett & Co., 207 F. Supp. 919 (D.N.J. 1962) ("sufficient prima facie case"). A showing of threatened irreparable injury is not required. SEC v. Torr, 87 F.2d 446 (2d Cir. 1937); SEC v. Broadwall Securities, Inc., supra; SEC v. General Securities Co., 216 F. Supp. 350 (S.D.N.Y. 1963); SEC v. Mono-Kearsarge Consolidated Mining Co., 167 F. Supp. 248 (D. Utah 1958); But see, SEC v. Capital Gains Research Bureau, Inc., 300 F.2d 745 (2d Cir. 1961), reversed on other grounds, 375 U.S. 180, 11 L. Ed. 2d 237, 84 S. Ct. 275 (1963).
In deciding whether an injunction should issue, the critical question for the Court is whether there is "a reasonable expectation" of further violations in the future. SEC v. Culpepper, 270 F.2d 241, 249 (2d Cir. 1959). The cessation of the alleged illegal activities does not preclude the issuance of a preliminary injunction. See, SEC v. Boren, supra; SEC v. Culpepper, supra; SEC v. Keller Corp., 323 F.2d 397 (7th Cir. 1963); SEC v. Broadwall Securities, Inc., supra; SEC v. General Securities Co., supra.
(a) The Registration Provision
The SEC contends that from August, 1966 through March, 1967, LaMorte delivered 78,078 shares of Shattuck stock to defendants Forget, a Canadian broker-dealer, and Forget Bahamas, a Bahamian broker-dealer; that 68,800 of these unregistered shares were in turn distributed to various brokers and dealers in the United States for further sale to the investing public; and for the reason that LaMorte, Shattuck's director-president, was "in control of Shattuck" (LaMorte's Memorandum of Law, p. 10), Forget and Forget Bahamas were underwriters within the meaning of sections 2(11), 15 U.S.C. § 77b(11), and 4(1), 15 U.S.C. § 77d(1), of the Securities Act.
LaMorte, while agreeing that 78,078 shares of Shattuck stock
were delivered to brokerage accounts with Forget and Forget Bahamas, asserts that these transfers were made "to take advantage of the more liberal margin requirements in those areas," and not for the purpose of sale (LaMorte's Affidavit, p. 3). LaMorte further alleges that, except for the unauthorized sales of 13,200 shares,
he has no knowledge of the sale of any stock from the Forget or Forget Bahama accounts. To support this contention, LaMorte has set forth both the status and physical locations of all shares, as of October 31, 1967, in which he has a beneficial interest, including those not transferred to the Forget firms
(SEC's Exhibit Z; LaMorte's Affidavit, p. 6). It is his position that a registration statement was not required since he did not engage in a distribution of his Shattuck stock.
We are therefore confronted with the SEC's allegation that its investigation has disclosed sales of 68,800 shares of Shattuck stock while LaMorte apparently contends that, with the exceptions previously noted, no sales did in fact occur. Whether a violation of the registration provision has occurred "turns on what happened and that is in sharp dispute; in such instances, the inappropriateness of proceeding on affidavits attains its maximum . . . ." SEC v. Frank, 388 F.2d 486 (2d Cir. 1968). Resolution of the factual issues raised must await a trial. While defendant LaMorte has requested a hearing (Court Exhibit 2), the SEC and defendant Shattuck have taken the position that none is required (Court Exhibits 3 and 4).
Considering the papers before us, we find that the SEC fails to present a strong prima facie case justifying the issuance of a preliminary injunction. Accordingly, this phase of the motion is denied.
(b) The Anti-Fraud Provisions
The press release of December 28, 1966
On December 28, 1966, LaMorte, Shattuck's director-president,
a press release confirming that Shattuck "is currently involved in negotiations looking toward the acquisition of a large, domestic, independent oil refining company" (SEC's Exhibit L). The news was carried on The Dow Jones Broad Tape ...