426 F.

2d 1339

SECURITIES AND EXCHANGE COMMISSION, Appellant,

v.
Lyndon L. PEARSON, Appellee.
No. 9975.

United States Court of Appeals, Tenth Circuit.

May 22, 1970.

David Ferber, Solicitor (Philip A. Loomis, Jr., Gen. Counsel, Edward B.

Wagner, Asst. Gen. Counsel, Warren G. Stolusky, Atty., S. E. C.,
Washington, D. C., were on the brief) for appellant.
Cleeta John Rogers, Oklahoma City, Okl. (B. Cyril Rogers and A. Bob
Jordan, Oklahoma City, Okl., were on the brief) for appellee.
Before MURRAH and PICKETT, Senior Circuit Judges, and
HOLLOWAY, Circuit Judge.
HOLLOWAY, Circuit Judge.

The Securities and Exchange Commission (the Commission) brought suit in the
District Court for preliminary and permanent injunctions against eight
defendants, including appellee Pearson, to restrain violations of the registration
and antifraud provisions of the federal securities laws.1 Specifically the
Commission charged that violations occurred by trading in unregistered stock;
unlawful manipulations of the price of the stock; and fraudulent conduct by
failure to reveal nonregistration and restrictions on transfer of the stock, among
other things.

Other defendants consented to injunctions and only appellee Pearson is now

involved. After a hearing on the application for the preliminary injunction and
a motion to dismiss by appellee, the trial court made findings and conclusions
favorable to appellee, denied the preliminary injunction and dismissed the
complaint. A motion to amend the findings, to vacate the order and for other
relief was denied, except for the making of one additional finding that appellee
was specifically not guilty of any of the alleged violations. The Court entered

judgment subsequently, stating that the Commission elected to stand on its

complaint, and that the action was dismissed. This appeal is taken from the
denial of the preliminary injunction and the dismissal of the action.
3

The findings and conclusions premising these rulings were as follows. The
Court stated that appellee defended on the basis that he was innocent of the
allegations and acted only in a manner approved and condoned by his
associates in Andresen & Company (Andresen) of which appellee was an
officer and partner until August, 1966. From the Commission affidavit, a
stipulation admitting the essential facts in the affidavit, and testimony by
appellee and his wife, the Court found that while conducting business for
Andresen appellee became involved in transactions with officers of Community
National Life Insurance Company (Community), some of which included
trading in unregistered shares of Community; that in all such transactions
appellee acted on behalf of Andresen as a partner, officer and associate of the
firm; that the firm had knowledge of his activities, to which it had given its
approval, so that his actions were those of the firm; and that appellee did not
intentionally or knowingly act in any fraudulent manner, but at most made
unbusinesslike decisions, which were admitted. It was further found that
appellee was employed as a sales manager for a plastics company since
September, 1966, and that he had no intention of returning to the stock
brokerage business in the foreseeable future. A favorable finding was made
concerning appellee's forthrightness, candor, demeanor and good reputation.
The Court concluded that appellee was in no position and had no intention to
commit any violation complained of, and that to enjoin him was unwarranted
and unnecessary and would only place a stigma on him.

First we turn to the question whether the trial court properly denied the
preliminary injunction. The Commission argues that the finding that appellee
was not guilty of violations of the securities laws was clearly erroneous; that the
Court applied incorrect legal principles in connection with other findings made;
and that the trial court abused its discretion in denying the preliminary
injunction.

We conclude that the evidence concerning the violations involved no material

conflict. At the outset we must resolve the question whether appellee admitted
the subsidiary facts stated in the Commission affidavit as to his actions. On
review of the record we are convinced that by statements of counsel to the
Court those basic facts were admitted and that the trial court so understood. The
only reservations made in the record concerning the detailed Commission
affidavit were that appellee did not concede that he was still engaged in the
stock brokerage business and that he did not admit the legal conclusions of the

affidavit.2
6

The facts detailed by the Commission affidavit, and not disputed by appellee's
proof, were as follows. Appellee was a general partner of Andresen from about
November, 1962, until about March, 1966, when Andresen changed from a
partnership to a corporation and appellee became its executive vice president.
Andresen was a broker and dealer in securities and a member of the New York
Stock Exchange and appellee was in charge of Andresen's Birmingham,
Alabama office.

Beginning in February, 1966, appellee had discussions with officers of

Community about Community's acquiring stock of Richmond Life Insurance
Company (Richmond). Appellee was a director of Richmond and Andresen had
acted as underwriter of its stock for a public offering earlier. In May or June,
1966, appellee was authorized by Community to offer Richmond shareholders
the opportunity to exchange their Richmond shares for Community Class A
common stock on a share-for-share basis. Appellee told the Commission
investigators that he was instructed to limit the number of exchanges to twenty
Richmond shareholders or less to avoid registration, and that the Community
officers agreed that Community stock would be issued in the name of a single
Richmond shareholder as a nominee for a group of Richmond shareholders
who would be treated as a single entity.

In June, 1966, appellee began soliciting Richmond shareholders to participate in

the exchange and subsequently gave Community the names of "entities" to
which the Community shares should be initially issued. Appellee stated to the
Commission that he informed Community of arrangement for at least some of
the "entities" to consist of a single Richmond shareholder acting as a nominee
for a group. He said he gave Community the exact number of Richmond shares
held by each member of such groups so that the newly issued Community
certificates would be broken down into amounts corresponding to holdings of
the Richmond shareholders and facilitating the distribution of Community
shares to the beneficial owners of the Richmond shares.

When the Community certificates were brought to appellee's office they bore no
notation of any restriction as to resale or transfer. Community officers also
brought what they characterized as "investment letters," which were ten
identical letters addressed to the Richmond shareholders. The letter stated that
the Community shares were from the company's authorized but unissued capital
stock and classified as restricted corporate capital stock. Appellee signed the
letters on behalf of the ten Richmond stockholders, acknowledging receipt of
the certificates and the letter, and returned them to the Community officer. He

stated to the Commission that he did not show or send the letters to the
Richmond shareholders or disclose to them the fact that he had signed such
letters. The letters were the only documents received by Community as to the
investment intent of the Richmond shareholders, and the Community officers
admitted that they made no inquiry concerning such an investment intent.
10

Nevertheless appellee stated, and the Richmond shareholders confirmed, that

the Richmond shareholders agreed to accept the Community shares for the
purpose of being able to make immediate sale of them and appellee promised
that he would begin to sell some of their Community shares for them as soon as
the exchange was completed. Appellee admitted representing that the
Community shares were resaleable and that he did not advise the Richmond
shareholders that the Community shares were not registered. Appellee stated
that the Community officers had told him that the Community shares could be
sold in small amounts each week, so long as the sales did not depress the
market.

11

Appellee also participated in efforts to increase and maintain artificially the

price of Community stock in the over-the-counter market. Securities dealers
were persuaded to enter bids in the bid sheets3 that were higher than the
demand for Community stock would warrant bidding. This bidding was done
with the knowledge that Brannon Fulps, an Oklahoma broker-dealer and a
defendant below, would repurchase excess Community stock at a slightly
higher price. In short the bid sheets indicated a broad and active market for
Community stock when actually Brannon Fulps was the only substantial buyer.
The Commission's affidavit showed without contradiction that there was
virtually no retail demand for Community stock during August, 1966.

12

Furthermore the Commission's affidavit showed that appellee was responsible

for inducing former Richmond shareholders to hold their new Community
stock although they had intended to resell immediately. This was accomplished
by issuing take-out letters and by verbal representations that Andresen or
Community officers would repurchase the new Community shares. Appellee
stated to the Commission that he did this because of warnings by Community
officers that large sales on the market would lower the price of Community
stock and adversely affect the planned acquisitions and mergers. There was no
denial of these representations, although there were variations in appellee's
statements to the Commission and to the Court as to his authority from
Andresen to issue the letters. When he resigned from Andresen appellee signed
a statement that such transactions in Community, Richmond and other company
shares occurred without the knowledge or consent of Andresen and were for his
own personal benefit. Appellee signed a hold harmless agreement with

Andresen for claims arising from such transactions and agreed to arrangements
securing Andresen against such claims.
13

The gist of appellee's testimony in court was as follows. He said that in the
spring of 1966 the adjusted book values of Community and Richmond stock
were virtually the same and that merger of the companies appeared very
natural. He testified that he did not intentionally defraud anyone and did not
know until the last of August, 1966, that the Community stock was unregistered
(although earlier statements to the Commission investigators were to the
contrary). He said he had discussed the take-out letters with some Andresen
officers (despite earlier admissions to the Commission that Andresen had not
authorized the letters). And appellee testified that Community officers had told
him that the "entity" arrangements for distribution of Community stock were
not improper.

14

These and other similar explanations were made without denying appellee's
participation in the transactions detailed in the Commission's proof. However,
appellee did not agree with the legal conclusions in the affidavit. He testified he
had not been in the brokerage business since August, 1966, and was a sales
manager for a plastics company. The Commission stipulated that appellee had
been out of the brokerage business since August, 1966.

15

We conclude that the finding that appellee was not guilty of the violations was
clearly erroneous. 4 There was no dispute as to the basic facts concerning
appellee's participation in the transactions. No assessment of credibility was
required as to proof of the violations. Proof of scienter or intent to defraud is
not required to show violations justifying preliminary injunctive relief under
such statutes. See S. E. C. v. Capital Gains Research Bureau, Inc., 375 U.S.
180, 84 S.Ct. 275, 11 L.Ed.2d 237; S. E. C. v. VanHorn, 371 F.2d 181, 186
(7th Cir.). Moreover, any showing by appellee that Andresen knew of or
authorized his acts was no defense.5 We are left with the definite and firm
conviction that viewed as an ultimate finding of fact or a conclusion of law, the
determination was clearly erroneous. Zenith Corporation v. Hazeltine, 395 U.
S. 100, 123, 89 S.Ct. 1562, 23 L.Ed.2d 129; United States v. United States
Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948).

16

There are, however, other findings of the Court that are clearly supported. We
refer to the findings that appellee was employed since September, 1966, as a
sales manager of a plastics company in Alabama; that he had not been in the
stock brokerage business since August, 1966; and that he had no present
intention of returning to such business in the foreseeable future. The Court
made a further finding favorable to appellee on his forthrightness, candor,

demeanor and good reputation. The preliminary injunction was said to be an

extraordinary remedy to be issued where necessary to protect the public. It was
concluded that since appellee was in no position to commit the violations, the
injunction was unnecessary and would accomplish nothing but placing a stigma
on appellee. This we view as the primary basis for denial of the preliminary
injunction.
17

Without doubt the trial court might have exercised its discretion to issue the
preliminary injunction although the violations had ceased. See Swift & Co. v.
United States, 276 U.S. 311, 48 S. Ct. 311, 72 L.Ed. 587. However, where the
likelihood of any continuing menace to the public does not in reason exist, it
has been recognized that the extraordinary measure of a preliminary injunction
is not justified. S. E. C. v. Torr, 87 F.2d 446, 449-450 (2d Cir.); S. E. C. v.
Franklin Atlas Corporation, 171 F. Supp. 711 (S.D.N.Y.); Federal Maritime
Commission v. Atlantic & Gulf/Panama Canal Zone et al., 241 F. Supp. 766,
777-778 (S.D.N.Y.). We are obliged to give great weight to the supported
findings including the trial court's conviction that appellee did not intend
further participation in the stock brokerage business in which he had not
engaged for over a year before the hearing. See S. E. C. v. Franklin Atlas
Corporation, supra 171 F.Supp. at 718. While we are persuaded that certain
findings were clearly erroneous, we cannot say that there is a showing of abuse
of the trial court's discretion in denial of the preliminary injunction and affirm
that ruling. See Alabama v. United States, 279 U.S. 229, 231, 49 S.Ct. 266, 73
L.Ed. 675; Continental Oil Co. v. Frontier Refining Co., 338 F.2d 780, 781
(10th Cir.); Copra v. Suro, 236 F.2d 107, 110 (1st Cir.); Celebrity, Inc. v. Trina,
Inc., 264 F.2d 956, 958 (1st Cir.).

18

The second issue is whether the trial court was correct in dismissing the action.
In its order denying the preliminary injunction the trial court also sustained
appellee's motion to dismiss the complaint. Subsequently, the Court entered a
judgment stating that the Commission elected to stand on its complaint and that
the action was dismissed. However, the only hearing conducted was that held
on the preliminary injunction. The only further pertinent proceedings were the
consideration of a motion to amend the findings and the making of the
additional finding that appellee was not guilty of the violations. Otherwise there
were no further proceedings or hearings prior to dismissal of the action.

19

We conclude that the dismissal was premature and improperly granted. There
was no consolidation of the hearing on the preliminary injunction with trial on
the merits pursuant to Rule 65(a) (2), F.R.Civ.P. In such circumstances
although the trial court may conclude on the hearing for interlocutory relief
that the suit must fail, a final dismissal is not warranted. Sooner State Dairies,

Inc. v. Townley's Dairy Co. et al., 406 F.2d 1328 (10th Cir.); Brown v.
Quinlan, 138 F.2d 228 (7th Cir.). The complaint clearly stated a claim on which
relief could be granted and none of the procedures had been invoked under
which a final dismissal might have been proper. Compare Sooner State Dairies,
Inc. v. Townley's Dairy Co. et al. supra.
20

For these reasons the denial of the preliminary injunction is affirmed; the
dismissal of the action is reversed; and the cause is remanded for further
proceedings.

Notes:
1

Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, as amended (15
U.S.C.A. 77e(a) and (c) and 77q(a)), and Section 10(b) of the Securities
Exchange Act of 1934, as amended (15 U.S. C.A. Section 78j(b), and Rules
10b-5 and 10b-6 thereunder (17 C.F.R. 240.10b-5 and 240.10b-6). The action
was brought pursuant to Section 20(b) of the Securities Act of 1933, as
amended (15 U.S.C.A. 77t(b)), and Section 21(e) of the Securities Exchange
Act of 1934, as amended (15 U.S.C.A. Section 78u (e))

There was also a qualification as to the data from the affidavit of Mr. Mac
Clary, one of Andresen's employees. However, this evidence was admitted in
affidavit form and the testimony of appellee does not dispute the facts stated by
Mr. Mac Clary as to appellee's participation in the transactions

Bid sheets, also known as "pink sheets," are published during each trading day
Monday through Friday by the National Quotation Bureau, Inc. They reflect an
indication of the wholesale prices at which securities dealers are willing to buy
or sell a given over-the-counter security in transactions with other dealers. They
are commonly relied on by investors as reflecting a bona fide market in the
stock

We note that appellee testified in court that he did not know until August 29,
1966, that the Community stock was unregistered, despite earlier statements to
the contrary to the Commission investigators. The trial court apparently
credited the testimony and it supports the general finding of no intentional fraud
in these transactions in connection with the failure to disclose the
nonregistration of the Community stock. Nevertheless, such proof may not
support the general finding that statutory violations did not occur for the
purposes of this injunction suit, since fraudulent intent is not a prerequisite for
findings justifying injunctive relief, as is shown below

The statutes are directed at a violation by "any person," see 15 U.S.C.A. 77t
(b) and 78u(e), and no authority is cited for such a theory. General agency law
principles would not support the theory. See Restatement of Agency, 2d 348