The opinion of the court was delivered by: MCLEAN
This is an action to enjoin alleged violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint contains four counts. Briefly stated, plaintiff Securities and Exchange Commission charges that all defendants have (1) sold unregistered stock of American Beryllium & Oil Corporation (ABO) in violation of Sections 5(a) and 5(c) of the 1933 Act (15 U.S.C. §§ 77e(a) and 77e(c)); (2) sold and offered to sell ABO stock by means of untrue statements of material facts and omissions to state material facts in violation of Section 17(a) of the 1933 Act (15 U.S.C. § 77q(a)); (3) done the same thing in violation of Section 10(b) of the 1934 Act (15 U.S.C. § 78j(b) and Rule 10b-5 thereunder); (4) while engaged in these activities, have purchased ABO stock for accounts in which defendants had a direct or beneficial interest, in violation of Section 10(b) of the 1934 Act (15 U.S.C. § 78j(b) and Rule 10b-6 thereunder).
Plaintiff moves for a preliminary injunction. The court held a hearing and took testimony on June 4, 5 and 6, 1968. At the conclusion of the hearing, plaintiff withdrew its motion as against defendant Davanzo. Meanwhile, two defendants, Tallman and Bornstein, who are securities salesmen employed by brokerage houses, consented to a permanent injunction. All other defendants have resisted the motion. Defendant Von Hesse, however, filed no opposing affidavit and defendant Williams filed none until the hearing was over, at which time the court permitted him to file one. Only one defendant, Burnett, took the witness stand.
The court will base its findings upon the facts developed at the hearing plus such of the facts in the voluminous moving papers as are not controverted by defendants.
The court deems it unnecessary on this motion to consider the fourth count in the complaint. There was little evidence on this charge and it is not an important aspect of the case. The other three counts in substance come down to two, i.e., selling unregistered ABO stock and selling ABO stock or offering it for sale on the strength of false representations. Although the complaint charges each defendant with both offenses, it is apparent from the evidence that not every defendant is involved with both. Indeed, plaintiff conceded as much at the conclusion of the hearing, for it then pressed the first charge only against defendants Aagaard, Von Hesse, Persoff, Gottlieb and Williams, although it asserted the second charge against all defendants. It is also apparent that some of the defendants charged with a violation of Section 17 of the 1933 Act and Section 10(b) of the 1934 Act in connection with the sale of ABO stock did not own any ABO stock and did not sell or offer to sell any. Hence, as to them, the charge comes down to one of complicity in the acts of the other defendants.
Broadly speaking, the activities complained of fall into two main categories: (1) activities of certain defendants carried on in late 1967 and early 1968 in an attempt to create an artificial market for ABO stock; (2) activities having to do with a potential sulphur mine on Isla Isabela, one of the Galapagos Islands, which involved an allegedly false press release issued on March 7, 1968, relating to proposed mining operations there. The testimony at the hearing was devoted primarily to the second of these subjects, i.e., the sulphur mine. Evidence on the first subject, therefore, must be found almost entirely in the moving papers. The moving affidavit is made by a Commission investigator who obviously has no first-hand knowledge of the facts. He has attached to his affidavit, however, copies of documents, affidavits of various persons and extracts from the testimony of various persons before the Commission. Many of the facts thus presented are uncontroverted.
The Section 5(a) and 5(c) charge
This charge involves defendants Aagaard, Von Hesse, Persoff, Gottlieb and Williams. The relevant facts are as follows.
ABO is a Nevada corporation incorporated in 1957 under the name of Great Divide Oil Corp. It changed its name to ABO in 1961. Its offices are in Salt Lake City. Defendant Aagaard is its president and a principal stockholder. According to its unaudited balance sheet, as of January 31, 1968 it had current assets of $12,610.22 and current liabilities of $81,222.48.
ABO's stock is not registered with the Commission. In 1957 the Commission granted it exemption from registration under Section 3(b) of the 1933 Act and Regulation A thereunder. Under this exemption, 141,487 shares of stock were sold to the public. On August 20, 1963, the Commission permanently suspended ABO's exemption, which it had previously suspended temporarily on July 23, 1962. It did so because ABO failed to disclose that Aagaard had been expelled from membership in the National Association of Securities Dealers.
In the late summer of 1967, Von Hesse and Williams, with Aagaard's knowledge and assistance and with the assistance of Aagaard's attorney, Walker, set up an escrow account in a Salt Lake City bank. Von Hesse employed Morris Kunz, a former associate of Aagaard, to communicate with stockholders of ABO with a view to inducing them to grant an option to Von Hesse and Williams to buy their ABO stock at a price of $1.125 per share. The stockholders were asked to deposit their shares in the escrow account, to be delivered to Von Hesse and Williams when the option was exercised. The stockholders were paid one cent per share as consideration for the option.
Kunz communicated with over 50 ABO stockholders. Approximately 31 of them granted the options and deposited their shares in the escrow account. A total of 52,950 shares of stock were so deposited.
On October 13, 1967, Aagaard's attorney, Walker, sent a letter to National Quotation Bureau, Inc., the publisher of the "pink sheets" of quotations for unlisted securities. The letter stated that ABO had filed three offering circulars with the Commission dated respectively March 19, 1959, January 29, 1960 and March 19, 1962 in accordance with the exemption from registration provided by Regulation A. On October 18, 1967, Aagaard wrote to National Quotation Bureau, Inc. enclosing copies of these circulars. Neither letter stated that ABO's exemption had been suspended by the Commission. The purpose of these letters was to provide the Bureau with background information on ABO as a foundation for future requests to the Bureau to list offers to buy and sell ABO stock in the pink sheets.
In October 1967, Williams told a broker, Danielson, that Williams' wife was interested in buying ABO stock. The broker had never heard of it. He inserted a bid in the pink sheets indicating that he was interested in buying the stock. On October 25, 1967, another broker, Francis I. duPont & Company, offered Danielson 2,000 shares of ABO stock at $1.25 per share. Danielson bought these on Mrs. Williams' instructions. She told him that she wished to "stay in the sheets." Shortly thereafter duPont offered Danielson another 2,000 shares of ABO stock at $1.50 per share. Danielson bought this for Mrs. Williams. Subsequently, Danielson bought for Mrs. Williams from duPont a third block of 2,000 shares at $1.50 per share.
The first block of 2,000 shares purchased by Mrs. Williams at $1.25 per share was sold by Russell Kunz, brother of Morris Kunz. The other two blocks of 2,000 shares each purchased by Danielson for Mrs. Williams' account at $1.50 per share were sold by Aagaard.
On or about October 31, 1967, Von Hesse placed an order with First Hanover Corporation, with which defendant Tallman was then connected, to buy 1,000 shares of ABO stock at $1.25 per share. First Hanover placed a bid in the pink sheets. This made the second indication in the pink sheets of buying interest in the stock.
On November 13, 1967, Aagaard sold 500 shares of ABO stock to Danielson who bought it for another customer. The price was $2.50 per share. Also on November 13, 1967, Aagaard sold 1,000 shares to First Hanover Corporation. The price of this block was $3.25 per share. On November 14, Aagaard sold 1,000 shares to another broker at $4.25 per share.
Between November 13 and November 24, 1967, Von Hesse sold three blocks of 1,000 shares each of ABO stock and one block of 500 shares at prices per share of $3.125, $4.00, $4.00, and $4.25 respectively. Three of these blocks were sold through defendant Bornstein. Between December 8, 1967 and March 18, 1968, Von Hesse bought 3,500 shares and sold 8,000 shares at prices per share ranging from $4.875 to as high as $16.00.
Williams sold 300 shares on December 11, 1967 at $5.375.
Gottlieb and Persoff (also known as Percell) were friends and associates of Von Hesse and Williams. They had a few transactions in ABO stock.
Between December 5, 1967 and February 5, 1968, Gottlieb purchased 1,000 shares and sold 3,400 shares at prices ranging from $5.00 to $8.50 per share.
Between December 13, 1967 and January 11, 1968, Persoff purchased 200 shares and sold 800 shares at prices ranging ...