The opinion of the court was delivered by: COOPER
The Securities and Exchange Commission (SEC), moving pursuant to 15 U.S.C. § 77t(b) and 15 U.S.C. § 78u(e), seeks to enjoin alleged violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint in essence charges that all defendants
have (1) sold unregistered stock of American Beryllium & Oil Corporation (ABO) in violation of Sections 5(a) and (c) of the 1933 Act (15 U.S.C. § 77e(a) and (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)) and of Section 10(b) of the 1934 Act (15 U.S.C. § 78j(b) and Rule 10b-5 thereunder); (3) purchased ABO shares while engaged in a distribution of ABO stock in violation of Section 10(b) of the 1934 Act and Rule 10b-6 thereunder.
Plaintiff moves for summary judgment, pursuant to Rule 56, F.R. Civ. P., against defendants Gottlieb and Hesse. Alternatively, plaintiff seeks an order under Rule 37(d), F.R. Civ. P., striking Hesse's answer for failure to appear and testify at a duly noticed deposition. As a further alternative, plaintiff moves pursuant to Rule 37(b), F.R. Civ. P., for an order either striking both defendants' answers and rendering judgment by default against them, or precluding said defendants from directly or indirectly introducing in evidence documents, objects or things previously ordered produced by Judge MacMahon of this Court pursuant to Rule 34, because of defendants' failure to produce same.
Defendants cross-move for summary judgment against plaintiff. Their motions are patently frivolous and without basis, and are accordingly denied without separate discussion. See SEC v. American Beryllium & Oil Corp., 303 F. Supp. 903 (S.D.N.Y. 1968) (Judge McLean granted a preliminary injunction herein).
We see no purpose served in a complete restatement of the factual allegations, largely uncontested, herein involved, particularly in view of the recital contained in Judge McLean's opinion of July 3, 1968 granting a preliminary injunction against defendants Hesse and Gottlieb among others. Id.
If defendants Hesse and Gottlieb are established to be control persons or members of a control group with regard to ABO, then based upon the uncontested facts before us there would appear to be no obstacle to holding that they violated § 5(a) and (c) by virtue of an unregistered secondary distribution of stock.
See United States v. Wolfson, 405 F.2d 779 (2d Cir. 1968). Accordingly, whether there is a genuine issue as to defendants' control status is determinative of plaintiff's motion for summary judgment as to this count.
Control cannot be precisely defined, but it is understood generally to mean "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through ownership of voting securities, by contract, or otherwise." Securities Act Rule 405, 17 C.F.R. 230.405(f). It is a factual determination which cannot be resolved by the use of mathematical formulae; rather, resolution of the issue of control depends upon a careful appraisal of the overall effect of the various relationships and other circumstances present in the particular case. See Rochester Telephone Corp. v. United States, 307 U.S. 125, 145-56, 83 L. Ed. 1147, 59 S. Ct. 754 (1939); United States v. Re, 336 F.2d 306 (2d Cir. 1964); United States v. Wolfson, 269 F. Supp. 621 (S.D.N.Y. 1967).
Control may rest with a group of persons. See 2 Loss, Securities Regulation 779-81 (2d ed. 1961). Professor Loss continues:
"It does not follow, however, that one member of such group controls in all contexts. For example, whether a secondary distribution by one member requires registration under the Securities Act raises essentially a question of fact in each case whether the person has enough influence with the group to be able to obtain the issuer's signature on a registration statement. Hence, it is for the jury when a jury sits." Id. at 780-81.
See also, SEC v. Micro-Moisture Controls, Inc., 148 F. Supp. 558, 562 (S.D.N.Y. 1957), reargument denied, CCH Fed. Sec. L. Rep. P 90, 805 (S.D.N.Y. 1957), final injunction, 167 F. Supp. 716 (S.D.N.Y. 1958), aff'd sub nom. SEC v. Culpepper, 270 F.2d 241 (2d Cir. 1959).
ABO's founder and president Aagaard is clearly a controlling person within the meaning of the Securities Act of 1933. See SEC v. American Beryllium & Oil Corp., 303 F. Supp. 903 (S.D. N.Y. 1968). Conversely, it appears unlikely that Hesse or Gottlieb could be found to be controlling persons except by virtue of their association with Aagaard.
The evidentiary materials presented by the SEC strongly indicate that after establishing an escrow account whereby they held options on over 50,000 shares of ABO stock, Hesse and others, including to a lesser extent Gottlieb, created a market for long-dormant ABO stock, and purchased and sold such stock as part of a manipulative scheme to raise its price and profit therefrom. Other factual allegations, largely uncontested, tend towards the conclusion that Aagaard was closely associated with this group and was acting in concert with them in this secondary distribution of ABO stock.
Both Hesse and Gottlieb submit affidavits denying that they were members of any control group or closely associated with defendant Aagaard.
See Hesse Affidavit, April 3, 1969, pp. 3-4; Gottlieb Affidavit, February 3, 1969, pp. 5-6. If the uncontested underlying facts asserted by the SEC clearly establish defendants to be control persons, then defendants' conclusory protestations would be insufficient. However, the underlying evidence properly before us
merely tends toward a finding in plaintiff's favor on the ultimate question of control; it does not foreclose a finding that Hesse and Gottlieb were not control persons. Where, as here, the inferences to be drawn from underlying facts are fairly in dispute summary judgment is inappropriate. See Empire Electronics Co. v. United States, 311 F.2d 175 (2d Cir. 1962).
Rule 10b-6, 17 C.F.R. 240. 10b-6, proscribes as a manipulative device purchases of securities by one engaged in a ...