The opinion of the court was delivered by: TENNEY
Plaintiff, Securities and Exchange Commission (hereinafter the "Commission"), has applied for a permanent injunction enjoining Nagler-Weissman & Co., Inc. (hereinafter "Nagler-Weissman"), Robert Nagler (hereinafter "Nagler"), Adolph Weissman (hereinafter "Weissman") and Maxwell Forster (hereinafter "Forster") from further violations of the anti-fraud and antimanipulation provisions of the Securities Act of 1933 (hereinafter "Securities Act") and the Securities Exchange Act of 1934 (hereinafter "Exchange Act"), and also from further violations of the net capital and bookkeeping provisions of the Exchange Act. The background of this litigation is the public offering of the stock of Africa, U.S.A., Inc. (hereinafter "Africa").
It appears that in the summer of 1970, Africa, a Delaware corporation located in Fillmore, California, registered 150,000 shares of its stock with the Commission for sale to the public at $10 per share on a "best efforts, all or none" basis. The underwriter for the offering was Resch-Cassin & Co., Inc. (hereinafter "Resch-Cassin"). The registration statement was made effective by the Commission on October 21, 1970, and under the terms of the offering all 150,000 shares had to be sold within 60 days or the funds would be returned to the subscribers. Prior to the effective date of October 21, 1970, Resch-Cassin had engaged in efforts to sell the Africa issue. As part of this effort, a selling group was formed of which Yarnall-Biddle, Andresen & Co., New Dimension Securities, Pasternack Securities and Nagler-Weissman were members. Nagler-Weissman originally agreed to distribute 15,000 shares, which later was increased to 17,500 shares. The principal inducement employed by Resch-Cassin in building interest in the stock focused on the anticipated after-market price. For example, Solon Patterson of the Alpha Fund of Atlanta, Georgia, which purchased 10,000 shares, was told both orally and in writing by defendant George Resch, Jr. (hereinafter "Resch") that the after-market price was expected to be well over $20 per share and increased its order on the basis of this representation; Irby Bright, vice president of the First American National Bank in Nashville, Tennessee, which also purchased 10,000 shares, was told by defendant Michael Cassin (hereinafter "Cassin") that the after-market price would be at least $22 per share.
On Friday, October 23, 1970, trading commenced in Africa stock. Resch-Cassin, however, was having severe difficulty in completing the underwriting.
Yarnall-Biddle, a member of the selling group, indicated prior to October 21, 1970, that it wanted 2,500 shares but cancelled this order shortly thereafter. It subsequently purchased 8,500 shares -- on October 30, 2,500 shares; November 11, 1,500 shares; and November 13, 4,500 shares -- at a time when the stock was trading at levels above the $10 offering price and still prior to the closing of the original offering.
It was, of course, crucial to Resch-Cassin that the after-market open at a premium in order to fulfill the promises made to Bright and Patterson and in order to induce purchasers such as Lloyd Zeiderman (hereinafter "Zeiderman") and Yarnall-Biddle's customers to buy the unsold portion of the issue. Zeiderman and Leo Kolack, partners of Kaufman, Kolack & Co., financial advisers and accountants for Africa, purchased 15,000 shares through the Bank of New York on the effective date, October 21, 1970. Subsequent to this purchase, Zeiderman attended four or five abortive closings starting on November 13, 1970, at each of which funds to close the issue were unavailable. In order to establish the price at the desired level, on Friday, October 23, 1970, Resch asked Peter Lewitin (hereinafter "Lewitin"), a trader at Smith, Jackson & Co., Inc. (hereinafter "Smith Jackson"), to trade the Africa stock, and Resch-Cassin gave Lewitin an order to buy 3,000 shares at $20 per share. As a result of this order, Lewitin made his "pink sheet"
market at $18 bid and $21 asked. At the same time other brokers were also trading in Africa stock. Among these were Mandelbaum Securities (hereinafter "Mandelbaum") and A.P. Montgomery & Co., Inc. (hereinafter "Montgomery"). The trader at Mandelbaum, Jeffrey Greenstein (hereinafter "Greenstein"), learned about Africa stock from Lewitin and, after meeting with Resch and Cassin, decided to trade. At approximately noon on October 23, 1970, Greenstein received a call from Lewitin who informed him that the stock was "ready for trading" and that his market was $18-$21 by reason of the buy order for 3,000 shares at $20 referred to above. Lewitin also informed Greenstein that Greenstein could sell him at $19 3/4 any stock he was able to purchase. Therefore, Greenstein's opening quote for Africa was also $18-$21.
During the first day of trading, October 23, 1970, both Lewitin (Smith Jackson) and Greenstein (Mandelbaum) received only sell orders for Africa stock.
As a result of large sell orders and lack of demand for Africa stock, they both continued to buy Africa stock, each time lowering their market, so that Lewitin quoted the stock as low as $14 bid, and Greenstein bought stock at as low as $14. Although Lewitin had limited experience he realized that there was something wrong with the way the stock was trading, and discontinued his efforts after only a half-hour or forty-five minutes, during which time the bid price had dropped from $18 to $14. He also had some apprehension about Resch-Cassin's ability to pay for the $60,000 worth of Africa stock they had ordered from Smith Jackson. Richard Friedman (hereinafter "Friedman"), president of Montgomery and an expert in the new issue field, noted very little public demand, his opening being based on the market of $18-$21 established by Lewitin (Smith Jackson). Since the latter was supplying most, if not all, of the demand for Africa stock, Lewitin's decision to stop trading the issue, together with the absence of any other demand, caused the market for the stock to collapse; by the close of the market on Friday, October 23, 1970, it was selling at the $11 level.
On Tuesday morning, October 27, 1970, the pink sheets reflected prices of $9 1/2 to $11 and $9 to $12 with only two market-makers in the sheets. Unless Resch-Cassin wanted to abandon the Africa underwriting and return whatever funds had been raised to the subscribers, a trader had to be found who could establish and maintain the price of Africa stock at a sufficient premium to induce the public to purchase the unsold portion of the issue at the $10 offering price stated in the prospectus. Therefore, on either Monday, October 26, or Tuesday, October 27, Resch approached defendant Forster, the trader for Nagler-Weissman, and asked him if Nagler-Weissman would become a market-maker in the Africa stock. Resch had had prior dealings with Forster in a security called Systems Liaison. Forster had been anxious to trade the Africa stock and, furthermore, Resch-Cassin shared offices with Nagler-Weissman, which would minimize the chances of any misunderstandings arising in the trading and would enhance Resch-Cassin's ability to control it. Before Forster agreed to become a market-maker in Africa, however, he discussed the situation with Weissman who gave his approval. On Monday, October 26, trading in Africa stock had been slight with only 1,100 shares traded and these all purchased by Montgomery at prices ranging from $10 to $11 per share. By the next morning, Tuesday, October 27, trading activity decreased even further. Between the opening of the market at 10:00 A.M. and 1:00 P.M. there were only two trades: at 11:18 A.M. Hornblower & Weeks-Hemphill Noyes bought 100 shares at $11 from Montgomery, and at 12:16 P.M. Montgomery bought 100 shares at $10 1/2 from Pasternack Securities. Thus, as of the morning of October 27, 1970, the price of Africa stock remained depressed.
Resch followed the same pattern he had with Smith Jackson by giving Nagler-Weissman a purchase order on October 27, 1970, this time for 1,000 shares of Africa stock for the account of Elsie Himes, a customer of Resch-Cassin. In fact, Mrs. Himes had ordered only 500 shares from Resch-Cassin.
Resch-Cassin turned this customer order over to Nagler-Weissman and gave up the commission. With this order, Forster (Nagler-Weissman) could go into the market to buy Africa stock.
Starting at 1:14 P.M. on October 27, 1970, Forster made his first trade in Africa stock, purchasing 100 shares at $11 from Associated Investors. Following this transaction, he continued to buy the stock and between 1:16 P.M. and 1:50 P.M. he purchased 900 additional shares at prices ranging from $11 1/2 to $16, the final price. Thus he moved the price from $11 to $16 in 34 minutes. All but 300 shares of the 1,000 were purchased from Montgomery, Forster always purchasing at the price offered by Montgomery without attempting to negotiate a better price. Indeed, only two minutes after Forster purchased 300 shares from Montgomery at $16, the latter was able to purchase 200 shares at $14 per share. Furthermore, Forster did not need the stock quickly. Although Resch told Forster that he wanted a good price for the stock, he gave no instructions as to time, nor were there any special instructions from the customer, Mrs. Himes.
On the morning of Tuesday, October 27, 1970, there were only two brokers, Montgomery and Associated Investors, quoting Africa in the pink sheets. The next day there were five. From then until the beginning of December Associated Investors, Nagler-Weissman, M.H. Meyerson (hereinafter "Meyerson") and Axelrod & Co. (hereinafter "Axelrod") consistently quoted the stock in the pink sheets. In addition, Montgomery was in the sheets until the middle of November, and Austin James & Co. and Martin-Joel commenced to quote Africa stock from the middle of November onward. On October 28, the day after the Himes order was filled, Nagler-Weissman appeared for the first time in the pink sheets on Africa stock with a quote of $15-$17. On this date, the other market-makers in the sheets were Montgomery, $14-$16; Associated Investors, in name only; Budin Phillip S & Co., in name only; and Grimm & Davis, $10,-$12. Although Nagler-Weissman's bid price for Africa stock was $15, the highest price it paid on this date was $14 a share. On October 29, when Nagler-Weissman appeared in the pink sheets at $15-$17, the other market-makers were Montgomery, $12-$14; Associated Investors, $11-$14; and Dominick & Dominick, Inc., $13-$15. Again, although its bid price was $15, Nagler-Weissman paid a high of $14. Despite the fact that Nagler-Weissman was the high bidder on October 28 and 29, it made no sales of Africa to anyone on these days. During the five trading days from October 30 through November 5, Nagler-Weissman was the high bidder on each day in the pink sheets on Africa stock, and on each day that it traded during that period the high price that it paid was below its quoted bid price.
Nagler-Weissman was responsible for Meyerson and Axelrod being in the sheets in Africa since Forster had asked them to enter.
Axelrod's first quote for Africa stock was on November 4, 1970, although Meyerson commenced quoting from October 30, 1970. It is interesting to compare the quotes when all three were in action:
Date Nagler-Weissman Meyerson Axelrod
11/4 13-14 12-14 12-13 1/2
11/5 12 1/2-14 12-13 1/2 12-13
11/6 12-13 11 1/2-12 1/2 11 3/4-12 3/4
11/9 12-13 12-13 11 1/4-12 1/4
11/10 12 1/4-13 1/4 11 1/2-12 1/2 12-13
11/11 14-15 13 1/2-14 1/2 14-15
11/12 15-16 15-16 14 1/2-15 1/2
11/13 16 1/2-17 1/2 16 1/4-17 1/4 15 1/2-16 1/2
11/16 17-18 16-17 16 1/2-17 1/2
11/17 17-18 1/2 17-18 17-18
11/18 17 1/2-18 1/4 17 1/2-18 1/2 17-18
11/19 17 1/2-18 3/4 17-18 17-18
11/20 17 1/2-18 1/2 17-18 17-18
11/23 17 1/2-18 1/2 17-18 17-18
11/24 17 1/2-18 1/2 17 1/2-18 1/2 17-18
11/25 15 1/2-17 1/2 14 1/2-15 1/2 17-18
On each day either Meyerson or Axelrod would quote the stock from 1/4 to 1 point below Forster's bid. As Forster's bids became higher, they followed suit. Over a period of 25 trading days from October 22, 1970, on 17 days Nagler-Weissman had the high bid in the pink sheets, and on 5 other days it equalled the high bid. On the offer side, Nagler-Weissman was high on 8 days and equal to the high offer on 7 other days.
Despite the "activity" created by Forster (Nagler-Weissman) there was, in fact, a lack of interest in purchasing Africa stock both by the public and by other broker-dealers throughout October, November and December, 1970. Records of the trading show that the only public buying between October 27, 1970, and November 23, 1970, was the following:
October 27 -- 1,000 shares (Elsie Himes' order)
November 2 -- 500 shares (of a total market of 4,000)
November 9 -- 400 shares (of a total market of 2,000)
Yet, during this period the stock traded at a premium, never falling below the $10 offering price. That this occurrence must be attributed to the aggressive campaign conducted by Nagler-Weissman seems clear. Between October 27 and December 7, 1970, Nagler-Weissman purchased a total of 36,600 shares of Africa. The aggregate of all other market-makers purchased a total of 31,400 shares. The public purchased 3,500 shares (including the 1,000 shares sold to Elsie Himes). The shares purchased by other brokers included 10,300 shares bought by Meyerson, of which Nagler-Weissman repurchased 8,165, and 2,900 bought by Axelrod, of which Nagler-Weissman in turn bought 2,850. Of the 36,600 shares purchased by Nagler-Weissman, a total of 33,065 shares were in turn sold to Resch-Cassin at higher prices, resulting in a gross (unrealized) profit to Nagler-Weissman of $23,915 or approximately 70 cents per share. These sales to Resch-Cassin were not pursuant to specific orders that Resch-Cassin had left with Nagler-Weissman, but Resch never refused to take a block of Africa stock offered to him by Forster. By virtue of its purchase of approximately one-half of the market between October 28, 1970, and November 10, 1970, Nagler-Weissman was able to control and maintain an orderly market. During this period, Nagler-Weissman purchased a total of 8,600 shares from $11 1/2 to $14 while other brokers purchased 8,700 shares from $10 3/4 to $16. By November 10, 1970, the issue was supposedly preparing to close. On November 13, the contemplated closing date, Weissman advised Carlos Correa, who had purchased 2,500 shares of Africa stock from Nagler-Weissman at $10 per share, that he needed the money for this purchase due to the impending closing. When Correa could not produce the money, Weissman borrowed $25,000 to pay for the purchase.
This was an unsecured personal loan to Weissman with no co-signers. Forster also acquired a stake in the continued success of Africa, for on November 10, 1970, he purchased 1,300 shares in his wife's account at Nagler-Weissman at $12 and $12 1/4 per share, which shares he sold on November 24, 1970, at a profit. Although the November 13 closing date was aborted, it is interesting to note the activities of Nagler-Weissman immediately prior and subsequent to that date.
On November 11, it raised its quote in the pink sheets from $12 1/4 to $13-$14; on November 10, to $14-$15. On that date November 11, it purchased 1,500 of the 2,100 shares traded, the high purchase being $15 1/4 by Nagler-Weissman.
On November 12, it raised its quote to $15-$16 and purchased 100 shares at $15 1/2, 100 shares at $15 3/4, and 100 shares at $16. On this same date other market-makers were purchasing Africa at $15, $15 1/4 and $15 1/2.
On Friday, November 13, the anticipated closing date, it raised its quote to $16 1/2 to $17 1/2. The total trading in Africa stock was three 100 share purchases by it at prices of $16 1/2, $17 and $17. Nobody else purchased Africa stock on this date.
On Monday, November 16, the next trading day, it raised its quote to $17-$18 and bought 1,000 shares at prices ranging from $16 1/2 to $18. The other market-makers bought 800 shares. With the exception of Resch-Cassin, no other broker paid more than $17.
On November 18, it purchased 1,600 shares in seven transactions, each purchase at $17 1/4, and on November 20, an additional 100 shares at the same price. Finally, on November 23, the date of the eventual closing, it purchased 1,550 shares of which 200 were bought at $17 3/4 and the remainder at $17 1/4.
During the three trading days from November 18 through November 20, the only purchasers of Africa stock were Nagler-Weissman, Axelrod and Meyerson. During this period Axelrod purchased 1,000 shares in ten separate transactions at $17 per share, and Meyerson purchased 900 shares in four separate transactions at $17 per share. Between November 18 and 23, Axelrod sold the 1,000 shares to Nagler-Weissman in five separate transactions at $17 1/4, and Meyerson on November 18 and 19 sold all 900 shares to Nagler-Weissman in four transactions, also at $17 1/4 per share. It is interesting to note that Carlos Correa, whose stock purchase had been funded by Weissman through a personal loan, also sold his stock to ...