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SEC v. BROADWALL SECS.

May 15, 1981

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
BROADWALL SECURITIES, INC., Arnold Mahler et al., Defendants



The opinion of the court was delivered by: TENNEY

Arnold Mahler, acting pro se, moves to vacate a permanent injunction entered against him by this Court on January 12, 1967. The injunction, consented to by Mahler, restrains him from violating the anti-fraud provisions of the federal securities laws in connection with transactions in the securities of The Coast to Coast Company, Inc. ("Coast to Coast"). *fn1"

Background

 On December 29, 1964, the Securities and Exchange Commission ("SEC") commenced a civil injunctive action against Broadwall Industries, Inc. ("Broadwall") and four individuals associated with Broadwall, including its president, the defendant here. That action was based on allegations of fraudulent transactions in the securities of Coast to Coast in violation of Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. At the commencement of the action, a temporary restraining order was issued restraining the defendants from committing further violations of the statutes. A preliminary injunction was granted on March 8, 1965, and a permanent injunction was entered on January 12, 1967. Defendant agreed to the terms of the injunction without admitting or denying any of the allegations in the SEC's complaint.

 Defendant is currently serving a twelve year prison term for an October 1977 conviction for fraud and conspiracy. This conviction stemmed from transactions independent from those that gave rise to the injunction. United States v. Mahler, 76 Cr. 1047 (S.D.N.Y.), aff'd, 579 F.2d 730 (2d Cir. 1978).

 Contentions of the Parties

 Defendant's motion rests on the assumption that the injunction should be dissolved once its purpose has been served. Accordingly, defendant alleges that Broadwall ceased operations in or about 1966; that Broadwall's charter was revoked by the State of New York in or about 1967; that Coast to Coast ceased operations in or about 1967; that the stock of Coast to Coast stopped trading in or about 1967, and that the injunction, therefore, has no proscriptive application.

 Defendant also offers three technical grounds for vacating the injunction. He asserts that the original action should have been dismissed in 1966 when the SEC failed to take certain actions within a time limit specified by the court; that the court lacked both in personam and subject matter jurisdiction to enter the permanent injunction, and that the defendant was never served with a true copy of the order. Finally, relying on Aaron v. Securities and Exchange Commission, 446 U.S. 680, 100 S. Ct. 1945, 64 L. Ed. 2d 611 (1980), defendant argues that the permanent injunction should be vacated because the SEC failed to establish scienter as an element of the alleged violations.

 To refute defendant's assertions, plaintiff offers documentary evidence that Coast to Coast is currently a corporation in good standing in both Nevada, the state of its incorporation, and New York. Furthermore, plaintiff presents trade publications which show that at least nine firms will trade Coast to Coast securities over the counter, and that on March 6, 1981 at least one of those firms was quoting bid and asked prices on Coast to Coast securities.

 Plaintiff contends, on the basis of this evidence, that there is no change in circumstances that warrants vacating the injunction. As discussed below, plaintiff offers further arguments to counter defendant's technical contentions. Finally, plaintiff asserts that dissolution of the injunction would have an adverse effect on the ability of the SEC to enforce the federal securities laws.

 Discussion

 Rule 60(b) of the Federal Rules of Civil Procedure states in pertinent part:

 
On motion and upon such terms as are just, the court may relieve a party or his legal representative from a final judgment, order or proceeding for the following reasons: ... (5) the judgment has been satisfied, released or discharged, or a proper judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have proscriptive application; or (6) any other reason justifying relief from the operation of the judgment. *fn2"

 It is well settled that federal courts have the power to modify or revoke injunctions. The Supreme Court, in United States v. Swift & Co., 286 U.S. 106, 114, 52 S. Ct. 460, 462, 76 L. Ed. 999 (1932), stated that "(a) continuing decree of injunction directed to events to come is subject always to adaptation as events may shape the need." Furthermore, the Court stated that this rule applied to injunctions entered either after litigation or by consent. "(The consent is) not an abandonment of the right to exact revision in the future, if revision should become necessary in adaptation to events to be." Id. at 115, 52 S. Ct. at 462. Courts, however, will not wield that power lightly. In Swift, the movants sought to modify a consent decree that had been entered in an antitrust suit brought under the Sherman Act. The defendants claimed that the injunction should be modified because changed conditions made it unlikely that the defendants could resume their monopolistic practices. The Court rejected that argument. Noting that changes are inevitable, the Court stated that to modify an injunction, those changes must be "so important that dangers, once substantial, have become attenuated to a shadow.... Nothing less than a clear showing of grievous wrong evoked by new and unforeseen conditions should lead us to change what was decreed after years of litigation with the consent of all concerned." Id. at 119, 52 S. Ct. at 464. The Swift Court held that the defendants had not satisfied this heavy burden and refused to modify the consent decree. See United States v. United Shoe Machinery Corp., 391 U.S. 244, 248, 88 S. Ct. 1496, 1499, 20 L. Ed. 2d 562 (1968) ("Swift teaches that a decree ... may not be changed in the interests of the defendants if the purposes of the litigation as incorporated in the decree ... have not been fully achieved.").

 Following Swift, lower courts have continued to place a heavy burden on the moving party to show such circumstances that would warrant vacatur of an injunction. The Second Circuit, for example, in King-Seeley Thermos Co. v. Aladdin Industries, Inc., 418 F.2d 31 (2d Cir. 1969), held that a district court could modify an injunction which limited defendant's use of the word "thermos" upon a showing that "the detailed provisions of the decree seriously and needlessly impeded" the defendant's ability to achieve the results intended by the injunction. Remanding the case for further proceedings, ...


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