The opinion of the court was delivered by: MUNSON
Memorandum-Decision and Order
The Securities and Exchange Commission has commenced this action pursuant to Section 20(b) of the Securities Act of 1933, 15 U.S.C. § 77t(b), and Section 21(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u(d). The complaint alleges that the defendants have violated the registration and antifraud provisions of both Acts, as well as Rule 10b-5. 15 U.S.C. §§ 77e(a), 77e(c), 77q(a), 78j(b), 17 C.F.R. § 240.20b-5. To remedy these violations the Commission seeks a permanent injunction barring the defendants from continuing to offer and sell unregistered securities, precluding them from engaging in fraudulent practices in connection therewith, and disgorgement of monies already obtained through such practices. In the interim, the Commission has applied for preliminary injunctive relief pursuant to F.R.Civ.P. 65. Paro and National Mail Order Consultants, Inc. have consented to such an order, and following a one-day hearing conducted to receive evidence in support of the Commission's application for a preliminary injunction, the Court has found that the S.E.C. will probably be successful in ultimately proving that the remaining defendants have violated the registration and antifraud provisions of the Securities Acts. The Court has also found that future violations are likely to recur if preliminary injunctive relief is denied. The defendants Ackerman, Carter and Haberle shall therefore be preliminarily enjoined from further violations of the Securities Acts and from taking any action which would preclude an effective final order of this Court.
As in most securities actions, a clear understanding of the underlying scheme is necessary for effective resolution of the legal issues presented. This degree of clarity is particularly important where, as here, the Court is called upon to consider the totality of the circumstances in determining whether the defendants' offering constitutes an "investment contract" within the meaning of the Securities Acts. For this reason, I have summarized my findings of fact in the following narrative which will hopefully dispel some of the confusion surrounding the legal issues in this case.
Gary Paro is one of the primary defendants in this action. He is the President and majority shareholder of National Mail Order Consultants, Inc. He also engages in mail order, advertising, and distribution ventures through vehicles known as The Copy Shop, Arrow Advertising and Publications, T.A.S. Investments, Paro Publications, and Sheperd Publications. National Mail Order Consultants, Inc. is the second principle defendant. It is the corporate vehicle through which "Dollar Power" and an investment scheme known as "co-op advertising" is offered. NMOC also employs the remaining defendants, with the exception of Richard Carter, who severed his ties with the organization during February of 1978.
During 1975, Paro organized a mail order promotions company known as T.A.S. Investments. He thereafter published newsletters and flyers announcing the "great success" of the T.A.S. "advertising professionals". As proof of its "brilliant" advertising expertise, T.A.S. Investments claimed profits exceeding 500% Of the cost of the advertising space. The flyers then offered investors an opportunity to participate in a unique profit sharing plan in which T.A.S. would guarantee profits ranging from 50% Within the space of thirty-six days to 100% Within the space of ninety days, depending upon the size of the investment. The T.A.S. offer was not, however, registered with the Securities and Exchange Commission, nor was it registered with the securities boards of the numerous states into which the T.A.S. investment brochures had been mailed. As a result, by May of 1978, injunctions or cease and desist orders had been entered against Paro and T.A.S. Investments in Arkansas, Michigan, Minnesota, New York, and Texas. In addition, the Securities and Exchange Commission had commenced an action against Paro and T.A.S. Investments in the Northern District of New York. This action culminated in a consent decree issued on July 20, 1977, barring Paro, T.A.S., and its affiliates or entities under their control from engaging in further violations of the registration and antifraud provisions of the Securities Acts. S.E.C.v. T.A.S. Investments, 77-CV-275.
Following entry of the consent decree, T.A.S. Investments was consolidated under National Mail Order Consultants, Inc. This organization was established to begin promoting Paro's next venture: The Reporter. Indeed, shortly after the restitution notices were mailed, Paro wrote to his followers, informing them of his latest undertaking with the following exhortations:
This little beauty (The Reporter) will bring profits larger than we ever forecasted In any of our past programs to individuals that have the foresight to become one of our advertisers in the pages of The Reporter. (emphasis in original)
However, after meeting and discussing their common business aspirations, Paro and his newly hired assistant, Carter, renamed The Reporter "Dollar Power" and began a vigorous interstate mailing campaign designed to solicit investments in a scheme vicariously labelled "co-op advertising".
The brochures published by the defendants are probably one of the best places to begin examining the economic realities of "co-op advertising". These brochures explained that investors could participate in the profits of NMOC's mail order business by simply mailing in their investment and waiting thirty days. The size of their investment was not measured by shares of stock. Rather, it was keyed to the size of the advertisement that the investor wished to sponsor, the number of copies of Dollar Power in which it was to appear, and the duration of its appearance. The investors did not select the products to be sold, they did not write the advertisements, they did not approve an advertising copy prior to publication, and they exercised no control over the content or layout of the advertisements. These details were all entrusted to the defendants' self-proclaimed brilliance and ingenuity in the mail order business.
Investors were merely encouraged to "trust Dollar Power" whose promoters and principals would "find you a product and write you an ad that will make a mail order fortune".
The investor was merely required to select the number of Dollar Power issues in which he desired an advertisement to appear, the total circulation he desired to attain, and the size of the advertisement which would be run. The promoters would then advise him of the product which they had selected and he would do nothing further until the defendants mailed him his monthly profits. As the defendants' brochures explained:
All orders that are received from your co-op advertisement will be professionally processed by us, and mailed from our Syracuse offices directly to your customers. You never handle any merchandise, fold flyers, or stuff endless envelopes. From each order we will deduct approximately 50% For the cost of the publication and shipping and handling. The remaining 50% Will be credited to your account each day. After publication, once each month we will mail you your share of the total sales generated along with a statement of your account which will be maintained on an IBM computer. Should any refunds be requested, they will be handled by DOLLAR POWER! and deducted from our share of the sales. DOLLAR POWER! Financial Publications will handle all replacement shipments, inquiries and refunds at no cost or obligation to our co-op advertiser!
The affidavits, depositions, and hearing testimony also reveal that similar claims were made regarding "co-op advertising" throughout the defendants' extensive interstate telephone solicitation program. During these conversations, investors were repeatedly told that Dollar Power and the "co-op advertising program" were doing "tremendously well" under Paro's astute leadership and that "co-op advertising" was a risk free investment. Investors were also assured that they would receive a prompt return on their investment or a full refund if their "co-op advertisement" did not yield a profit. However, the affidavits and testimony supplied by the Commission demonstrate that this "guarantee" was frequently, if not always, dishonored.
Furthermore, the credible evidence clearly demonstrates that Dollar Power did not have the circulation which the defendants claimed it had,
that no financial information concerning Paro or National Mail Order Consultants, Inc. was provided to investors, that investors were never informed of the risks inherent in "co-op advertising" or the fact that this Court, as well as several states, had issued injunctions or cease and desist orders against Paro's securities schemes.
Lastly, it is important to note that, based upon the evidence presently before this Court, there can be little doubt that the Commission will probably be successful in ultimately demonstrating that each of the defendants were well aware of the truth at the time that the preceding nondisclosures and misrepresentations were made. Moreover, there can be little doubt that each of them fully appreciated that investors would have been less likely to risk their earnings in "co-op advertising" if they had known the entire tale behind Paro's entrepreneurial endeavors, and the truth behind each of the facts which had been omitted or misrepresented.
By August of 1978, investor pressure for refunds had increased to the point that the defendants were forced to rescind the money-back guarantee which had been an integral part of their earlier promotional campaigns. Nevertheless, they continued to offer interests in a non-guaranteed "co-op advertising" program which was nearly identical to the earlier investment scheme. In fact, beyond the absence of a guarantee, the only significant difference was the concept that an investor's name would appear in the advertisement which the defendants had assigned to him, and the requirement that the investor thereafter forward each order which he received to NMOC together with 50% Of the purchase price. Yet despite these minor changes, responsibility for selecting the products still rested in the sole and exclusive discretion of the defendants, as did the responsibility for preparing the advertisements, maintaining the sales organization, shipping the merchandise, and handling the complaints. Consequently, there can be little doubt that these subsequent efforts to conceal the true character of this scheme have failed.
Inasmuch as the preceding findings were well documented by the investor affidavits and exhibits submitted in support of the Commission's application for a temporary restraining order, the defendants' "co-op advertising" program was suspended by this Court through a temporary restraining order issued on February 6, 1979. Eight days later the Court held a hearing to take testimony in support of the Government's application for a preliminary injunction. Paro and NMOC appeared through counsel and consented to a preliminary injunction barring future unregistered or fraudulent and misleading offerings of "co-op advertising". This preliminary order also precludes these defendants from taking any action which would make a final order ineffectual.
On the day designated for the Rule 65 hearing, neither Ackerman nor Haberle made an appearance. Carter did, however, appear through counsel and, in view of the preliminary consent agreement proposed by Paro and NMOC, the Commission agreed that the testimony thereafter presented would be offered only against Carter and the defaulting defendants. Accordingly, these findings of fact and the conclusions of law which follow apply only to Ackerman, Carter, and Haberle.
The Applicable Standard For Granting Preliminary Injunctive Relief:
The Commission's application for preliminary injunctive relief is governed primarily ...