Anderson, Oakes and Timbers, Circuit Judges.
These appeals present again questions with respect to the scope of the antifraud provisions and of the prospectus-delivery requirement of the federal securities laws. Also involved is the type of ancillary relief necessary to effectuate the broad remedial purposes of the federal securities laws.
The Securities and Exchange Commission brought this action pursuant to Section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a) (1970), and Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa (1970). The complaint alleged violations of the antifraud provisions of both acts, Section 17(a) of the 1933 Act, 15 U.S.C. § 77q(a) (1970), Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b) (1970), and of Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1971); it also alleged violations of the prospectus-delivery requirement of Section 5(b) (2) of the 1933 Act, 15 U.S.C. § 77e(b) (2) (1970). After a five day non-jury trial in the Southern District of New York, Constance Baker Motley, District Judge, the court concluded that appellants had violated the antifraud provisions of the 1933 and 1934 Acts and the prospectus-delivery requirement of the 1933 Act.*fn1 Accordingly, the court permanently enjoined certain appellants from further violations of the antifraud provisions and the prospectus-delivery requirement; ordered all appellants to disgorge any proceeds, profits and income received in connection with the sale of the common stock of Manor Nursing Centers, Inc.; appointed a trustee to receive these funds and to distribute them to defrauded public investors; and ordered a freeze on the assets of all appellants until such time as they had transferred to the trustee the proceeds received from the sale. For the reasons stated below, we affirm in part, and reverse and remand in part.
I. Transactions Underlying Violations Charged
In order to understand the issues raised on appeal and our rulings thereon, we set forth the following statement of the events which culminated in this litigation -- based on the district court's findings which are supported by substantial evidence adduced at trial.*fn2
In 1968, appellant Ira Feinberg ("Feinberg", to be distinguished from his father, Samuel Feinberg, another appellant) was the sole owner of a corporation known as 133 County Road, Inc., the only activity of which was the operation of a 64-bed nursing home in Tenafly, New Jersey. In that same year, Feinberg met appellant Ivan Ezrine, a New York attorney specializing in securities laws. After several social and business meetings, Feinberg and Ezrine jointly decided to obtain public financing for Feinberg's nursing home business.
As a first step in the process of selling shares to the public, a new corporation -- appellant Manor Nursing Centers, Inc. ("Manor") -- was organized on March 19, 1969. Manor acquired all the assets of 133 County Road and issued approximately 1.2 million shares of 5 cents par value common stock to Feinberg who then sold 62,000 shares to certain of his relatives and friends -- appellants Samuel Feinberg (his father), Gladys Halford (his mother-in-law), Suzanne Marnane (his employee) and defendant Arthur Sutton (his friend). In addition, Feinberg acquiesced in Ezrine's request that nearly 138,000 shares of Manor be sold to two corporations which Ezrine controlled*fn3 -- appellants Glendale, Inc. ("Glendale") and Atlantic Services, Inc. ("Atlantic").*fn4
Ezrine and Feinberg then decided that Manor would offer 350,000 shares of newly issued 5 cents par value common stock to the public at a price of $10 per share. After expenses, this offering would raise approximately $3 million for the operation of Feinberg's nursing home business. In addition, Ezrine and Feinberg decided that 100,000 shares held by Manor's stockholders would be offered at the same $10 price. After expenses, approximately $868,000 would then be paid to the selling stockholders in the following amounts:
Shareholder Offered Proc eeds
Samuel Feinberg 2,500 21,700
To Ezrine was entrusted the preparation of the registration statement and all other documents necessary to offer Manor shares to the public. Ezrine also selected the accountant for the offering as well as the underwriter, defendant Benjamin Werner & Company, of which defendant Benjamin Werner is the owner. The evidence showed, however, that Ezrine consulted with Feinberg when questions arose about the offering and supporting documentation.
With respect to the issues raised on this appeal, it is important to note several representations which Manor and its principals made concerning the terms of the offering. First, the offering was presented on an "all or nothing" basis. This meant, according to the prospectus, that:
"Unless all such 450,000 shares are sold to the public and the proceeds received therefrom within such sixty (60) day period (unless extended for an additional thirty day period), the offering will terminate and all funds will be returned, without interest, to subscribers."
Secondly, the prospectus stated that "subscribers' funds will be maintained in escrow [and] will not be available for other use. . . ." In this connection, the prospectus represented that "arrangements have been made with Chemical Bank for the escrow of the funds received during the course of such offering." Thirdly, the registration statement indicated that shares sold in the offering would be sold only for cash.*fn5 Finally, the documents prepared in connection with the Manor offering did not disclose that certain purchasers and participating brokerage firms would be offered or would receive special compensation for their agreement to participate in the offering.
The offering of Manor shares began promptly on December 8, 1969, the effective date of the registration statement. Contrary to the representation made in the prospectus, however, Benjamin Werner, the underwriter, had not arranged for an escrow account for the proceeds of the offering. No such account was ever established.
From the very outset, Werner encountered difficulty in selling Manor shares and requested assistance from Ezrine and Feinberg. In response to Werner's request, Ezrine and Feinberg personally solicited brokerage firms, various corporations and individuals in an attempt to interest them in the Manor offering.
As a result of his inquiries, Feinberg arranged to meet with representatives of a New Jersey-based brokerage firm, Carlton Cambridge & Co., Inc., and ultimately with one of its principals, appellant Christos Netelkos, who demanded special compensation as a condition to participating in the Manor offering. After conferring with Ezrine, Feinberg agreed to give Netelkos, at no cost, 15,000 Manor shares, issued in the name of Lausanne Investment Company, a dormant company previously organized by Ezrine.*fn6 Feinberg also agreed to guarantee a $250,000 bank loan to Netelkos with funds received from the offering. In exchange for the free shares and the loan guarantee, Netelkos agreed that he and Carlton Cambridge would sell 142,500 Manor shares. Of these 142,500 shares, 5,000 eventually were purchased by Carlton Cambridge for its customers and 40,000 were purchased by Orvis Brothers, another broker-dealer, for its customers. The remainder -- 97,500 shares -- were to be purchased by appellants Method Leasing Corporation and Upton Corporation, each of which was owned and controlled by Netelkos. As stated above, the Manor prospectus did not disclose the existence of any special compensation offers or agreements.
In an effort to find additional willing buyers, Ezrine arranged a meeting with defendant Deneso Corporation and its principals, defendants Joseph Delmonico and Jack Naiman. At the meeting which both Feinberg and Ezrine attended, Delmonico and Naiman refused to participate in the Manor offering without some form of special compensation. After several subsequent conversations, the Deneso group agreed to purchase 170,000 Manor shares in exchange for an arrangement whereby Deneso would be protected from any loss as a result of its subscription and Ezrine would cause appellant Glendale to repurchase Deneso's Manor shares at a substantial profit to Deneso.*fn7 This arrangement with Deneso was not disclosed in the Manor prospectus. Thus, at the same time that unsuspecting public investors were being offered and were buying Manor shares at the full price of $10 per share, Netelkos and Deneso were purchasing Manor shares for substantially less than the price announced in the prospectus.
Needing the proceeds of the offering to take advantage of certain business opportunities, Manor and its principals decided to hold a closing of the offering on February 20, 1970, several weeks prior to the March 8 selling deadline. It soon became apparent, however, that not all of the 450,000 Manor shares had been purchased. Rather than cancel or postpone the closing, Feinberg and Ezrine attempted to dispose of ...