The opinion of the court was delivered by: BONSAL
Plaintiff, Securities and Exchange Commission ("SEC"), instituted this action pursuant to section 20(b) of the Securities Act of 1933 ("the Securities Act") (15 U.S.C. § 77t(b)) and section 21(e) of the Securities Exchange Act of 1934 ("the Exchange Act") (15 U.S.C. § 78u(e)) on April 2, 1974, seeking a preliminary and permanent injunction against alleged violations by the defendants of the federal securities laws and the rules promulgated thereunder, as set forth below. The defendants are: Geon Industries, Inc. ("Geon"); George O. Neuwirth, Geon's founder, chief executive officer, Chairman of the Board of Directors, and owner (together with other members of his family) of approximately 28% of the common stock of Geon; Frank Bloom, Geon's Secretary-Treasurer and Financial Vice President; James McMahon, Comptroller of a wholly-owned Geon subsidiary, Geon Intercontinental, Inc. ("GII"); Edwards & Hanly ("Edwards"), a broker-dealer in securities; Marvin Rauch, a registered representative at Edwards; and Roy and Irving Alpert, partners in a Long Island real estate firm and personal friends of George Neuwirth. Jurisdiction is alleged pursuant to section 22(a) of the Securities Act (15 U.S.C. § 77v(a), and section 27 of the Exchange Act (15 U.S.C. § 78aa).
By Notice of Motion filed on May 17, 1974 the SEC moved for a preliminary injunction to enjoin defendants Geon, Edwards, Neuwirth, Bloom, McMahon, Rauch, and the Alperts from alleged further violations of section 17(a) of the Securities Act (15 U.S.C. § 77q(a)), section 10(b) of the Exchange Act (15 U.S.C. § 78j(b), and Rule 10b-5 (17 C.F.R. § 240.10b-5) promulgated thereunder. The SEC also moved for a preliminary injunction to enjoin defendants Rauch and McMahon from alleged further violations of sections 7(a) and 7(f) of the Exchange Act (15 U.S.C. 78g(a.) and (f)), Regulation "T" (12 C.F.R. § 220), and Regulation "X" (12 C.F.R. § 224) promulgated thereunder. A hearing was held on June 17, 18, 19, 20, 21, and 27, 1974. Pursuant to an agreement among the parties, the SEC's motion for a preliminary injunction has been deemed consolidated with the SEC's prayer for a permanent injunction. On June 17, 1974 (the first day of the hearing), defendants Rauch, McMahon, Roy Alpert, and Irving Alpert advised the Court that they each would consent to the entry of a permanent injunction against them, and accordingly final judgments of permanent injunctions by consent were entered against McMahon and the Alperts on July 1, 1974 and against Rauch on July 30, 1974. Thus, the only defendants remaining in this action are: Neuwirth, Bloom, Geon, and Edwards.
Geon is a New York corporation with its principal offices located in Woodbury, New York. It is engaged primarily in the business of distributing automobile repair and replacement parts for imported cars and trucks. Its common stock is listed for trading on the American Stock Exchange ("AMEX"); approximately 2 million shares of common stock are outstanding.
In July, 1973 Geon retained Drexel-Burnham & Co. with a view to arranging discussions with Burmah Oil Co., Ltd. ("Burmah") concerning the possible merger of the two companies. Geon's and Burmah's representatives met at various times during August and September. During August, Geon furnished Burmah with a five-year earnings projection and other documentary information.
On October 15, 1973 defendants Neuwirth and Bloom went to London, England to attend an international motor show; during their two-week stay in England, they had meetings with representatives of Burmah's top management. On December 3, 1973 Geon announced that preliminary discussions between Geon and Burmah were under way, and on December 20, 1973 Geon announced that it had reached an agreement in principle with Burmah whereby Geon was to be acquired by Burmah for $36 million in cash (approximately $16.80 per share).
Following this announcement, Geon's and Burmah's representatives and their legal counsel began drafting the purchase agreement. On February 15, 1974, a meeting of Geon's Board of Directors was scheduled for February 21, 1974 for the purpose of obtaining the Board's formal approval of the written agreement. In preparation for the Board meeting, Bloom instructed his accounting staff to compile preliminary earnings figures for the year ended December 31, 1973. Bloom learned on the morning of February 21, 1974 that the reversal of a profit elimination from a previous period in the amount of $314,000 had been improperly reflected in income for the year 1973. Bloom also learned that preliminary figures indicated (even after correcting the $314,000 error) that Geon would have an earnings shortfall of approximately $800,000 or $900,000 for the year 1973.
At the Board meeting that afternoon, Bloom reported these preliminary figures to the Board of Directors, who deferred action. Bloom was instructed to review the earnings figures and report back to the Board on Sunday evening, February 24, 1974.
After the meeting on February 21, 1974, which was held at the offices of Geon's attorneys in Manhattan, Bloom returned to Geon's offices in Woodbury, Long Island. By 10:30 P.M. he had become certain that the $314,000 item had been improperly included in earnings, and he telephoned Neuwirth to report that to him. At the time he left the offices of Geon (after midnight), however, Bloom was still uncertain about the additional $800,000 or $900,000 shortfall in earnings. Defendant McMahon, who had been working with Bloom, also left the Geon offices after midnight, and later that night he telephoned his broker, defendant Rauch, and instructed him to sell all his Geon holdings. At 8:00 A.M. on February 22, 1974 Rauch telephoned McMahon to confirm the sell order. In that conversation McMahon told Rauch that he wanted out of Geon stock. Shortly after this conversation, a sell order was called in from the Hewlett, Long Island office of Edwards (where Rauch was employed) directly to the floor of the AMEX with respect to all the Geon stock in the accounts of McMahon and McMahon's father-in-law, Louis Maione. Because of an unusually large amount of sell orders, the AMEX floor official with responsibility for supervising the market in Geon stock decided not to open trading in Geon stock until the company had been contacted to determine if there was an explanation for the large number of sell orders. Randy Gromet (an official at AMEX) telephoned Bloom, who immediately telephoned Geon's attorneys before taking the call from Gromet. Bloom was advised to tell Gromet that Geon had no public announcement to make at that time. Shortly thereafter, at 10:33 A.M. trading opened in Geon stock at 14 3/8. Trading continued until 11:19 A.M. when the price fell to 11 7/8 on a volume of 46,000 shares.
On Sunday, February 24, 1974 the Board met and learned that in fact there was an approximate $800,000 shortfall in earnings for 1973 at Geon's branches.
This was later disclosed to the public by Geon in a press release issued on Monday morning, February 25, 1974. (In July, 1974, according to the press, Burmah terminated its agreement to acquire Geon, and Geon has instituted legal proceedings against Burmah.
Each of the defendants against whom the SEC seeks an injunction will be considered separately.
The SEC contends that during the period prior to December 3, 1973 defendant Neuwirth provided defendants Rauch and Roy Alpert with a "continuous flow of material non-public information regarding the fact and progress of the discussions (with Burmah);" that during January and February of 1974, Neuwirth continued to keep defendants Rauch and Roy Alpert apprised of the progress of the Burmah deal; that the Alperts made two pruchases of Geon stock (4625 shares from October 15 to October 18, 1973 and 3000 shares on December 19, 1973) and one sale of Geon stock (8000 shares on February 22, 1974) while in possession of material inside information from defendant Neuwirth. The SEC further contends that ...