The opinion of the court was delivered by: WEINFELD
Findings of Fact and Conclusions of Law
WEINFELD, District Judge:
The Securities and Exchange Commission ("Commission") instituted this action for preliminary and permanent injunctive relief against seven defendants, charging them with violations or aiding and abetting violations of the registration provisions of the Securities Act of 1933
and the anti-fraud provisions of that Act
and the Securities Exchange Act of 1934.
Thereafter, dispositions were made in the instance of five defendants
and the action remained against Amswiss International Corp. ("Amswiss"), a registered broker-dealer, and Glenn Woo, its president, dominant executive and owner of 50% of its stock.
The alleged violations occurred in 1971 and early in 1972 in connection with the underwriting and aftermarket trading in Meridian Fast Food Services, Inc. ("Meridian"), a corporation engaged in the operation and franchising of "drive-thru" retail dairy stores.
The stipulation of facts by the parties set forth in the pre-trial order together with the evidence presented upon the trial abundantly establishes that defendant Ramon D'Onofrio, convicted on a bankruptcy fraud charge in July 1971 in the Eastern District of New York and on a federal securities fraud charge in this District in late 1974, engaged in manipulative practices relating to the purchase and sale of Meridian stock.
The issue before this Court is whether co-defendants Amswiss and Woo knew or should have known of D'Onofrio's improper activities and whether they aided and abetted his manipulative practices and other violations of the securities laws. Based upon all the evidence, including particularly the demeanor of Woo at the trial, I find that the SEC has sustained its burden of proof. I find that Woo was, to understate it, not a credible witness. As the Court observed several times during his testimony, it was difficult to determine whether his answers were founded on imagination, assumption or conjecture. Indeed, his own attorney acknowledged that portions of his testimony were so contradictory that some "clarification" was required. Woo was ready with glib but implausible explanations for questionable transactions. A careful word-by-word reading of the trial transcript not only confirms the Court's observation at the time of trial, but reveals a calculated and cunning attempt by Woo, sophisticated in the ways of the securities market, to cover up his role as an active participant and an aider and abetter of D'Onofrio's practices. His entire course of conduct reflects a conscious purpose to obscure his knowing participation in D'Onofrio's fraudulent activities. Indeed, the irreducible minimum finding must be that he deliberately closed his eyes to obvious facts readily observable with respect to the transactions which were at the core of the manipulative practices.
In late 1968 or early 1969, defendant Leonard Cooper, Meridian's president, asked Woo and Amswiss to underwrite a public offering of 60,000 shares of Meridian's common stock. In May 1969, Woo, on behalf of Amswiss, consented to be named an underwriter, but later withdrew, despite the urgings of his friend D'Onofrio, because the fast food industry and franchise area no longer was glamorous and because Meridian's financial reports were "terrible".
Cooper then sought the assistance of defendant Richard Kirschbaum,
D'Onofrio's partner, and through Kirschbaum's efforts, Norbert Associates, Inc. became the underwriter of Meridian's March 22, 1971 offering of 60,000 shares at $5 per share. The offering was not registered pursuant to a claimed Regulation A exemption
from the requirements of the Securities Act.
Under the terms of the underwriting agreement, 22,000 shares had to be sold by June 22, 1971, failing which the underwriting would be withdrawn and all funds received would be returned to subscribers.
By June 11, Norbert Associates had not sold a single Meridian share to the public. Cooper again sought, and this time obtained, Woo's assistance. Woo sent Meridian's offering circular to fifteen broker/dealers and formed a selling group composed of Amswiss and six other firms. Cooper solicited many of his friends, relatives and business acquaintances to purchase Meridian, as a result of which twenty-four purchasers bought, in varying amounts, 6,300 shares. All of these orders were executed by Amswiss. Cooper also submitted the names of other potential customers to Woo, who referred them to various members of the selling group, indicating the number of shares to be purchased by these individuals. These other members of the selling group executed the sale of an additional 1,200 shares to Cooper's friends, relatives and business acquaintances. The selling group generated no sales on its own. Another 1,600 shares were sold, of which 1,100 shares were acquired by D'Onofrio's brother, sister and four of his friends.
Four days before June 22, the end of the offering period, only these sales totaling 9,100 shares had been made, less than one-half the minimum number of 22,000 shares, failing which the underwriting would be withdrawn. Efforts were thereupon intensified to close the gap. Cooper succeeded in getting his friend and business associate, Richard Hartman, a lawyer, to purchase 13,500 shares through Amswiss.
Thus, with the help of Woo and Amswiss, 22,600 shares were sold by June 22, 1971, of which 20,400, involving thirty purchases, were executed by Amswiss. All but 500 shares were sold to thirty-seven acquaintances of either Cooper or D'Onofrio. Upon the closing of the offering, Meridian received only $38,363 from the net sale proceeds of $75,363, after payment of expenses and certain debt obligations, which still left it insolvent. Amswiss, as a member of the selling group, received $7,140.
THE AFTERMARKET TRADING IN MERIDIAN
With the underwriting completed, Woo arranged for two broker-dealers to make a market for the over-the-counter trading in Meridian. The trading in the aftermarket demonstrates conclusively that forces other than supply and demand were at work.
In a thirty-day period between July 30 and August 30, 1971, all of Cooper's friends, relatives and business acquaintances, with the notable exception of Hartman, sold their shares through Amswiss at prices of $5 to $5 3/4 per share. About August 11, Woo advised Cooper that some Meridian shares could be sold and thereafter, at Cooper's instructions, Amswiss executed virtually all the aforementioned sales. Then, during the ten-day period from August 31 to September 10, Hartman liquidated his entire stock block of 13,500 shares at prices ranging between $6 1/2 and $7 per share through in-house crosses by Amswiss (i.e., Amswiss was broker for both the buyer and seller), despite the fact that shortly before this time Woo had told Hartman that the market would not absorb any sizeable block, much less his holding of over half Meridian's publicly traded shares.
Amswiss sold 11,900 of Hartman's shares to a Swiss bank, the Bank Vom Linthgebiet ("Bank"), that had shown no interest in the offering itself. This sudden interest by the Swiss Bank in Meridian's shares was no accident. In the background was D'Onofrio, who Woo knew had a firm in Switzerland and whose partner was a shareholder in the Bank. Despite Woo's typically evasive statements, there can be no doubt that the Bank's purchases were stimulated by D'Onofrio, who Woo knew was "semiinterested" or "semi-active" in Meridian. Moreover, Woo knew that ...