order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) To engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."
Defendants challenge the applicability of this section to the case at bar because of the completely intrastate character of the transactions involved. It appears that all solicitations for the sale of the stock were made by intrastate use of the telephone. It also appears that the mails were used by defendants in transmitting confirmations of purchases, in sending out copies of the offering circular, and by the purchasers of the stock in remitting checks in payment therefor. It is clear that such use of the mails, even though wholly within the State of New Jersey, is sufficient to give this Court jurisdiction under the quoted antifraud provisions of the Act. Securities and Exchange Commission v. Timetrust, Inc. , 28 F. Supp. 34 (N.D. Calif. 1939); United States v. Monjar , 147 F.2d 916 (3 Cir. 1944); Northern Trust Co. v. Essaness Theatres Corp. , 103 F. Supp. 954 (N.D. Ill. 1952).
In addition to the foregoing, the Court is satisfied that the misrepresentations and omissions alleged to have been made by the defendants would constitute a violation of section 17(a) of the Act. However, the Court is not required at this time to finally determine the issues of fact or the issues of law involved in the case. It is enough if plaintiff makes out a sufficient prima facie case to justify the discretionary issuance of a temporary injunction. See Bowles v. Montgomery Ward & Co. , 143 F.2d 38 (7 Cir. 1944); Burlington Mills Corporation v. Roy Fabrics , 91 F. Supp. 39 (S.D.N.Y. 1950); Federal Trade Commission v. Rhodes Pharmacal Co. , 191 F.2d 744 (7 Cir. 1951); Hamilton Watch Co. v. Benrus Watch Co. , 206 F.2d 738 (2 Cir. 1953); Securities and Exchange Commission v. Boren , 283 F.2d 312 (2 Cir. 1960).
Section 20(b) of the Act, in pertinent part, reads as follows:
"Whenever it shall appear to the Commission that any person is engaged or about to engage in any acts or practices which constitute or will constitute a violation of the provisions of this subchapter, or of any rule or regulation prescribed under authority thereof, it may in its discretion, bring an action in any district court of the United States, * * * to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond."
Thus, the test laid down for injunctive relief is whether or not "a proper showing" of the need therefor has been made.
Professor Loss, in Securities Regulation , Vol. III, p. 1979 (2nd Ed. 1961), states that:
"Since SEC injunctions are creatures of statute, all that must be established is what the statute requires, without reference to proof of irreparable injury or the inadequacy of other remedies as in the usual suit for injunction".
Once the Court determines that SEC has presented a sufficient prima facie showing that defendants' past conduct constitutes a violation of the Act, another test must be applied, and that is, whether or not such past conduct indicates a reasonable likelihood of further violations in the future. And, of course, the voluntary discontinuance of the alleged unlawful activity in the face of SEC action would be no bar to injunctive relief in a proper case. Securities and Exchange Commission v. Torr , 87 F.2d 446 (2 Cir. 1937); Securities and Exchange Commission v. Universal Service Association , 106 F.2d 232 (7 Cir. 1939); Securities and Exchange Commission v. Okin , 139 F.2d 87 (2 Cir. 1943); Securities and Exchange Commission v. Culpepper , 270 F.2d 241 (2 Cir. 1959); Securities and Exchange Commission v. Scott Taylor & Co. , 183 F. Supp. 904 (S.D.N.Y. 1959).
On the basis of the present record, this Court is satisfied that SEC has made out a sufficient prima facie case against all three defendants. The relationship among the parties and FDC cannot be ignored. Bennett Davies and his son Frederick deny any wrongdoing. But both appear to have been actively engaged in the offer and sale of FDC stock by means which are alleged to have been in violation of the anti-fraud provisions of the Securities Act of 1933. As previously stated, it is not necessary for the Court to make a final determination of the facts, or to resolve the issues of law, at this time. Enough has been shown concerning defendants' past conduct to indicate a reasonable likelihood of further violations of the Act in the future. Under the circumstances, and pending a determination of a hearing of the case on the merits for a permanent injunction, the motion for a temporary injunction will be granted.
The language of the temporary injunction should follow that used in the "ORDERED" paragraph beginning on page 3 and ending on page 4 of the temporary restraining order dated May 21, 1962. There should be included a provision restraining defendants from directly or indirectly transferring, selling, assigning, pledging or otherwise disposing of all or any part of the assets of FDC, or of Bennett & Company acquired in connection with the sale of FDC stock, presently in their possession or control or which, in the future, may come into their possession and control, until the further order of this Court.
The application of SEC for the appointment of a receiver will be denied. The Court is asked to appoint a "receiver of all assets and property of or belonging to Bennett & Company under the control or in the possession of the defendants, and authorizing, empowering and directing such receiver to investigate, seize and marshal such assets and properties wherever they may be found, and to hold the same subject to the further order of this Court".
In support of this requested relief, SEC alleges defendants now have assets in their possession "which they may transfer, sell, assign, pledge or otherwise waste or dissipate so as to disable them from satisfying judgments that might be obtained against them by their defrauded customers and so as to cause immediate and irreparable loss and damage to persons to whom money or securities are owing * * *."
The law is now clear that under section 22(a) of the Act, 15 U.S.C. 77v(a), this Court has the power to appoint a receiver in a proper case. Los Angeles Trust Deed & Mortgage Exchange v. Securities and Exchange Commission , 285 F.2d 162 (9 Cir. 1960); Securities and Exchange Commission v. Simmons , 190 F. Supp. 432 (S.D.N.Y. 1961); Loss, Securities Regulation , Vol. III, pp. 1508-14 (2nd Ed. 1961). The cited cases involved corporations alleged to be insolvent. In both cases, a receiver was appointed to preserve the status quo and to prevent further diversion of corporate assets.
In the present case all of the money realized from the sale of Class A FDC stock (exclusive of the $.24 a share retained by Bennett & Company) is being held in escrow by a member of the Bar of this State with the consent of SEC. No claim thereto is being asserted by any of the defendants. There is no allegation here that Bennett & Company is insolvent, nor is there any indication of such condition. There is no evidence that any of the defendants have in the past diverted any funds belonging to others to their own use. There is only a bare allegation that this "may" happen. Any additional moneys collected by defendants from a sale of FDC stock will be safeguarded by appropriate language, as heretofore suggested, in the temporary injunction.
Under these circumstances, and with due regard to the amount of money involved and the escrow arrangement presently in effect, the Court does not feel, on the basis of the present record, that a receiver should be appointed for Bennett & Company.
This opinion shall constitute findings of fact and conclusions of law under Rule 52(a) of the Federal Rules of Civil Procedure.SEC is directed to submit an appropriate order, on notice to defendants, in conformity herewith.
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