Full opinion text
OPINION AND ORDER KELLAM, Chief Judge. This action for injunctive and ancillary relief is brought by the Securities and Exchange Commission (SEC) pursuant to § 20(b) of the Securities Act, 15 U.S.C. § 77t(b) and § 21(d) and (e) of the Exchange Act, as amended, 15 U.S.C. § 78u (d) and (e), against American Realty Trust (ART) and Thomas Broyhill (Broyhill). Jurisdiction is alleged under § 22(a) of the Securities Act, as amended, 15 U.S.C. § 77v(a), and §§ 21(e) and 27 of the Exchange Act, as amended, 15 U.S.C. §§ 78u(e) and 78aa. Defendant ART, 200 Jefferson Davis Highway, Arlington, Virginia 22202, is a real estate investment trust created under District of Columbia law pursuant to a Declaration of Trust dated July 14, 1961, with its principal office in Virginia. As of the date of the last available annual report for the year ending September 30, 1975, a substantial majority of the assets of ART was in the form of equity investments in hotels, motor inns and restaurant properties operated by lessee companies. Defendant Broyhill, 1475 20th Street, North Arlington, Virginia, is President and Chairman of the Board of ART. The Commission’s complaint filed on February 9, 1976 contains three counts against ART and Broyhill, alleging past and present violations of numerous securities laws and further alleging that unless the relief alluded to above is granted, defendants will continue to violate such laws. Count I alleges defendants violated the anti-fraud provisions of the Securities and Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78j(b) and Rule 10b-5 thereunder, 17 CFR 240.10b-5 and § 17(a) of the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77q(a) by using fraudulent devices to sell securities. More specifically the SEC alleges defendants violated the above cited provisions by their committing acts of fraud in the offer and sale of $15 million worth of nine and one-half per cent senior subordinated debentures due March 15, 1979. Count II alleges violations of § 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), Rule 13a-l thereunder, 17 CFR 240.13a-1 and Rule 12b-2 under the Exchange Act, 12 CFR 240.12b-20, which require the filing of certain reports with the Commission and further directing that they not be misleading. Count III alleges that defendants, by soliciting proxies by means of improper proxy material, violated § 14(a) of the Exchange Act, 15 U.S.C. § 78n(a) and Rule 14a-9 thereunder, 17 CFR 240.14a-9, which requires that proxy soliciting material be filed with the SEC and that it not be misleading. On the basis of these alleged violations, the SEC seeks an injunction permanently enjoining defendants from violations of the Securities Act and the Exchange Act and an order requiring Thomas Broyhill be removed from his positions of President, Director and Trustee of ART; that the Court appoint such additional trustees as it deems appropriate; that ART be required to conduct a complete investigation of all outstanding loans and receivables; that ART be required to file corrected annual reports, and requesting any other relief that this Court may deem just and proper. The basis for all three counts of plaintiff’s complaint is the alleged failure to disclose five transactions. Count I alleges that disclosure of the transactions was omitted from a prospectus used by ART to sell debentures in March, 1974. Count II alleges that the annual reports of ART on Form 10-K for the years ending September 30, 1974 and 1975 (1975 10-K and 1976 10-K) which were filed with plaintiff, were materially misleading because of their failure to disclose all the pertinent facts referred to in Count I above. Count III alleges that the proxy soliciting material used by ART did not disclose the transactions referred to in Count I. Immediately upon filing the complaint, the SEC moved for a preliminary injunction. An evidentiary hearing on the motion was subsequently consolidated, pursuant to Rule 65(a)(2), Fed.R.Civ.P., with an accelerated trial on the merits and the case was tried to the Court without jury on April 13 and 14, 1976. Each party requested the record be transcribed and they be permitted to file briefs. The briefs having now been filed, and the Court having considered the record, together with the briefs, submits its findings of fact and conclusions of law pursuant to Rule 52(a), Fed.R.Civ.P. FINDINGS OF FACT Offer and Sale of Securities Beginning on or about March 12, 1974 ART and Broyhill distributed or caused to be distributed to investors and prospective investors a prospectus purportedly describing in all material respects, the securities offered in connection with the offer of $15 million of ART nine and one-half senior subordinated debentures due March 15, 1979. Approximately $3.4 million worth of the debentures were eventually sold to the public. It is stipulated by all parties that in connection with the offer, purchase and sale of securities referred to in the preceding paragraph, ART and Broyhill made use of the means and instruments of transportation or communication in interstate commerce and of the means and instrumentalities of interstate commerce or of the mails. In addition, it is stipulated that on or about March 14,1975, ART and Broyhill, by use of the mails or by the means or instrumentalities of interstate commerce or of the facilities of a national securities exchange, solicited proxies or consents or authorizations with respect to ART’s securities registered pursuant to Section 12 of the Exchange Act, 15 U.S.C. § 781, by means of a proxy statement, form of proxy, and notice of meeting. Defendants filed or caused to be filed two annual reports with the SEC on Form 10-K, that also form part of the basis of this suit, the first on or about December 30, 1974 covering ART’s fiscal year ending September 30, 1974 and the second on or about February 5, 1976 for ART’s fiscal year ending September 30,1975. The annual report on Form 10-K filed on or about February 5 was not filed by the due date of December 30,1975, and the SEC had not extended the due date of the report. The Vouchers A large percentage of ART’s holdings in the fall of 1973 consisted of hotels and motels located in Virginia and the District of Columbia. ART had leased several of them to Virginia Hotel Management Company, Inc. (VHM) to operate since December 1, 1971, in order to preserve its tax status as a real estate investment trust. Under the leasehold agreements, VHM was responsible for the management of the hotels and any profits generated therefrom belonged to VHM. In return VHM paid monthly rental payments to ART for each of the properties it operated. The March 1974 prospectus of ART stated that VHM operated seven of ART’s nine hotels and motels. One of these hotels was the Williamsburg Hospitality House Motor Inn (Hospitality House) in Williamsburg, Virginia, which opened for business on April 15, 1973. According to the 1974 prospectus, VHM’s rental on the Hospitality House for the period April 15, 1973 to March 31, 1974 was $70,083.33 per month. For that same period of time, monthly rent on the other ART properties leased by VHM totaled $70,200.00 per month. In May of 1975 a series of parties were held in celebration of the grand opening of the hotel. The parties, which were held at the hotel, consisted of cocktails, dinner and dancing on both Friday and Saturday evenings, May 11 and 12, 1973, and a Sunday brunch. In addition, a large number of guests were provided rooms at the hotel on Friday and Saturday evenings, and a few of the organizers stayed at the hotel on Thursday evening. An itemized bill for $28,-100.87 from VHM was delivered to ART personally by Mr. Charles Simmons (Simmons), president of VHM. VHM subsequently received a check from DeLuca Construction Corporation (DCC) for $128,100.87, $100,000 of which represented payment of a consultant’s fee due DCC, and the remaining $28,100.87 of which was for the opening party at the Hospitality House. ART in turn reimbursed DCC for the expenses of the opening party and for the consultant’s fee to VHM. Both officials at ART and John DeLuca (DeLuca) believed the bill represented expenses for only one day of the opening celebration and therefore did not constitute payment in full for all costs incurred by VHM for the grand opening festivities. From June to September of 1973, VHM experienced difficulty in the management of the Hospitality House because business was poor. As a result, rent on the Hospitality House due ART was in arrears for three months on September 28, 1973, in the amount of some $210,000, and the September rent would be due in two days. During September 1973, representatives of ART were working with their underwriters in preparing for the eventual sale of a large quantity of senior debentures and the underwriters were encouraging ART to clear up the rent arrearages on the VHM leases. On September 28, John Rutledge (Rutledge), executive assistant to Broyhill, telephoned Terry W.. Vester (Vester), Vice President and Treasurer of VHM, requesting that VHM’s rental payments be brought up to date. Vester responded that only $210,000 of the $280,000 (including the September rent which was due and payable in two days) could be paid by VHM at that time. Vester, in his testimony at trial, suggested that Rutledge outlined a plan whereby Vester would submit fictitious or grossly inflated bills to ART for trustee functions and the grand opening parties that would amount to $70,000, the amount that VHM was unable to pay. The Court concludes that Vester did not prepare the bills at the direction of an employee of ART, but rather prepared the bills independently and submitted them to Simmons for delivery to ART for payment. Vester did not inform Simmons that the vouchers were erroneous in any respect, and ART promptly paid the bills, believing them to be justified. Accordingly, the Court finds no material omission in ART’s March 12, 1974 prospectus, ART’s annual report on Form 10-K for the year ended September 30, 1974, ART’s proxy statement dated March 14, 1975, and ART’s annual report on Form 10-K for the year ended September 30, 1975. The $368,000 Loan Transaction VHM continued to incur difficulty in making monthly rental payments to ART and by February 1974, VHM owed ART approximately $350,000 .in back rent. In fact, business was so poor that VHM was concerned if it could meet its February payroll of $18,000. During February the underwriters were proceeding with preparations for the March 1974 prospectus and warned ART that if the rent arrearages were not brought current, the prospects of the underwriting would be damaged. Broyhill subsequently telephoned Simmons at VHM and requested immediate payment of the rent arrearages. Simmons responded that this would not be possible in light of VHM’s financial condition. Broyhill then suggested that Simmons procure private financing in order to meet its rental obligation to ART, but Simmons countered that it would be highly unlikely that any financial institution would make such a loan in light of VHM’s financial balance sheet. At that point Broyhill stated that he would see if he could help in arranging financing so that the rent arrearages could be paid off and the February payroll met. Broyhill then asked John DeLuca if Arlington Ridge Road Associates (ARR) would lend the money to VHM. ARR is a Virginia partnership consisting of two partners, Joel Broyhill and John DeLuca, which was acting as a general contractor in building a condominium for the Trust. After obtaining the approval of his partner, DeLuca agreed to make a loan to VHM if ART would pay ARR the amount owed under the loan commitment and requisitioned by ARR for construction. The Board of Directors of the Hospitality House subsequently approved the loan application. On February 22, 1974, Simmons, responding to Broyhill’s invitation, went to the offices of ART where he and Vester submitted a number of checks payable to the order of ART, totalling $350,649.99, representing payment of rent arrearages. They were then given a check by DeLuca from ARR for $368,000, for which they signed a $368,000 promissory note and provided a substantial percentage of VHM stock or equivalent thereof as collateral. On the same date ART made payments to ARR for obligations outstanding and due on the condominium project, “The Representative.” One of the checks was drawn in the amount of $368,000 and the other was for $108,000. As broadly outlined above, both advances were pursuant to requests by ARR for draws on the loan commitment. The March 1974 prospectus of ART refers to this transaction in several places. See Pt. Ex. 2, pp. 3, 4, 21 and 35. The prospectus at page thirty five disclosed how much money had been advanced ARR: As of March 11,1974, $1,339,209 has been advanced ARR on an unsecured basis, which funds the Trust is advised has been used in part (emphasis added) by the partnership for construction costs. Immediately after disclosing the relatively poor financial condition of VHM, the prospectus states on page 21: “The Trust is advised that on February 22, 1974, Arlington Ridge Road Associates Limited Partnership (See ‘Equity Investments’ — ‘Arlington Ridge Road, Arlington, Virginia’ under ‘Present Investments of the Trust’), a limited partnership to which the Trust has leased certain land, and to which the Trust as of the date of this Prospectus had disbursed $1,339,209 under a construction loan commitment, loaned $368,000 to the lessee, which is repayable December 31, 1976. The loan to the lessee, part of the proceeds of which was used by the lessee to pay certain of its rent arrearages to the Trust in February, 1974, bears interest at an annual rate of 6%, payable at maturity. In the event of default the lessee could be obligated to issue to the limited partnership stock of the lessee corporation in an amount equal to 49% of that outstanding after the issuance. This stock would be in payment of the loan. The Trust is advised that its President, Thomas J. Broyhill, interceded in connection with the making of this loan.” Plaintiff asserts in paragraph 11(c)(3) of the complaint that the prospectus should have said that defendant Broyhill arranged the transactions. Although the language “interceded in connection with the making of this loan” (emphasis added) is subject to varying interpretations, the Court finds that the use of such language was not fraudulent or misleading. An average investor, i. e., a reasonably prudent investor, would not be misled by such subtle variations in terminology. Plaintiff also alleges that the transaction itself was fraudulent, but the Court finds that the checks drawn to the order of ARR from ART and delivered to ARR on February 22, 1974 represented payment for legitimate obligations due and payable on that date. Therefore, the money lent VHM by ARR was not the money of ART. Though not relevant to this action, the amount of the loan was repaid with interest by VHM within the proscribed period of time. The Lexington Hotel Construction Contract Plaintiff also alleges in paragraph 11(b) of the complaint that defendant Broyhill executed on behalf of ART a contract for the construction of a hotel in Lexington, Kentucky without the approval and contrary to the intentions of the Executive Committee or the Board of Trustees of ART and that he directed that the official minutes of the Trust be altered so as to indicate authorization of the contract’s execution by Broyhill. Plaintiff further alleges in subparagraph 11(b)(3) failure on the part of Broyhill and ART to fully disclose the circumstances surrounding the execution of the Lexington Hotel contract and the subsequent ratification of Broyhill’s action by the Board of Trustees. It is clear on the face of plaintiff’s allegations that the execution of the contract was at least subsequently approved by the Board of Trustees of ART. Plaintiff contends, however, that Broyhill did not have the authority to sign a contract for construetion of the Lexington Hotel on the date of execution. According to the prospectus of March 12, 1974 and stipulated to by the SEC, the Trust acquired the parcel of land in Lexington, Kentucky upon which the hotel was later to be built from the Urban Renewal and Community Development Agency of the City of Lexington. An excavation contract was let on July 10, 1973 and all excavation was complete by the middle of November, 1973. It is also undisputed that the officers of ART received authorization to advertise for bids on the construction of the hotel project. It is not as certain, however, whether Broyhill received expressed formal authorization to execute the construction contract before he signed it on behalf of ART on October 30, 1973. Defendants assert that even if no expressed formal authority was given, Broyhill, as President and Chairman of the Board, had implied authority to do so by virtue of Section 8.5 of ART’s Declaration of Trust. Plaintiff counters that the above cited grant of power does not give him such expansive authority. Plaintiff, however, put forth no evidence to substantiate that view, failing even to inquire of the Trustees of ART whether Broyhill had overstepped his bounds in executing the contract without prior expressed approval. In the absence of such testimony, there is no evidence that any member of the Executive Committee expressed disapproval of Broyhill’s “unauthorized” execution or made any attempt to discipline him or remove him from office. In any event, plaintiff argues that if the President possessed such broad authority by virtue of ART’s internal policy “to execute $5.8 million contracts without as much as even implied authorization from other trustees, then a general statement of this policy should have been disclosed to investors and potential investors of ART securities.” (Pt. Reply Brief at p. 11) This Court need not reach that issue because it finds that Broyhill received implied authority and quite possibly expressed authority from the Board of Trustees to execute the Lexington construction contract. Plaintiff submits that the contract was not formally approved prior to October 30, 1973. A close examination of the minutes of the Trustees’ Executive Committee meetings and the Quarterly Trustees meetings seems to support that contention. According to the minutes of September 10, September 24, and November 12, 1973, the Executive Committee of ART’s Board of Trustees discussed the Lexington project but did not “formally approve” the Lexington construction contract. Defendants have not asserted that these minutes are inaccurate. The minutes of the October 22nd Executive Committee meeting, as well as the minutes of the October 23rd quarterly Board of Trustees meeting, contain no reference to the Lexington hotel contract. Randolph Rouse, a trustee of ART, stated, however, that he thought the Lexington project was discussed at the October 23rd meeting, but he does not remember any formal vote being taken. The trustees at the October 23rd meeting did approve in one motion all actions taken by the Executive Committee since the last quarterly meeting of the trustees held on August 11, 1973. The records of the October 9,1973 Executive Committee meeting are a matter of substantial dispute. Plaintiff argues that Broyhill directed Chester Harding to alter the official minutes of the meeting to have inserted a resolution formally authorizing him to execute the construction contract. Plaintiff, however, has introduced no evidence that Broyhill himself directed Harding to do so or that another officer of ART directed Harding to do so per Broyhill’s directions. In fact, Broyhill testified in his deposition that he rarely ever examined the official record book of ART where all official minutes were placed, and that he signed copies of official minutes pro forma without examining them. In addition Harding admitted that he never indicated to Broyhill that he was signing a set of altered minutes. During this period of time the Executive Secretary of ART, Chester R. Harding, Jr., was responsible for preparing minutes of all formal Trust meetings, including those of the Executive Committee and the Board of Trustees. It was his practice to take rough notes of what transpired at the meeting and later prepare a formal set of handwritten minutes based on those rough notes for submission to a secretary for typing. After receiving the pro forma signature of Broyhill, the minutes were disseminated to the trustees and were usually approved by voice vote at the next meeting. Nowhere in Harding’s testimony at trial does he specifically state that he was directed to insert a formal resolution authorizing Broyhill to enter into the contract, and even if such testimony were present, the Court places little reliance on his testimony. It is clear, however, that the first set of minutes of the October 9, 1973 meeting distributed by Chester Harding, see Pt. Ex. 14-A, did not contain any reference to the Lexington project, nor do any of his rough notes, handwritten minutes, or the typed agenda. Harding later prepared a second set of minutes of the October 9th meeting in which he inserted a formal resolution authorizing Broyhill to execute the Lexington Hotel contract. See Pt. Ex. 15. Although it is possible that a vote on the contract would have been unanimous on that occasion, the Court finds it highly improbable that such a formal resolution was approved at that meeting. No trustee or officer of the Trust had any knowledge of any formal resolution regarding the Lexington deal being approved at that meeting. The Court, however, finds that the SEC, on the basis of all the evidence, has not proven its allegation of intentional cover-up on the part of Broyhill or by an officer under his direction. The only other Executive Committee meeting the subject of any testimony on this issue took place on November 27, 1973. The topic of the Lexington Hotel contract appeared on the agenda as item III. See Pt. Ex. 19. Harding wrote in his rough notes that Arthur Pomponio, another trustee of ART, reported to the committee that “the construction contract has now been signed.” Harding noted that Pomponio is “very mad,” and wanted to know “why it (was) put in the agenda.” Irwin Potter, according to Harding’s notes, suggested that they get out and put a stop to construction. Broyhill responded that he “would review the situation and see about holding off.” There is no other notation in his notes indicating that any other trustee expressed surprise that Broyhill had signed a contract with the lowest bidder for the construction of the hotel. The official typed minutes of the meeting stated: “A discussion was held in view of the energy crisis and its bearing on the convention and tourist attractions to Lexington, Kentucky. It was suggested by the Committee to review and study further the possible effect that the crisis will have on the profitability and feasibility of the Lexington Hotel.” A comparison of Harding’s rough notes and the formal minutes reveals some rather broad discrepancies. A reading of the minutes alone would not indicate to even the most discerning reader that the contract had already been signed and that the information was relayed to the Trustees. The language is very similar to that used in the official minutes of September 10 and September 24. Therefore, it is impossible to determine by mere examination of the minutes and notes alone whether Broyhill ever received expressed or implied authority to proceed with execution of the contract. After close examination of all the evidence in this action, however, the Court finds that Broyhill was given informal authority, whether that authority be expressed or implied, to proceed with the Lexington contract by accepting the lowest bid made by a responsible contractor. Because Broyhill possessed such authority, no formal approval of the construction contract was necessary before its execution. There are a number of items in the evidence that support the Court’s finding. As indicated on page 1156, supra, there is no dispute that the Trust authorized Broyhill to execute a contract for the purchase of the property for the purpose of building a hotel. An excavation and foundation contract was also approved by the Board. Mr. Cooper, a member of the Executive Committee, attended the official ground breaking ceremonies on behalf of the Trust. It is also not disputed by the SEC that the Executive Committee authorized open bidding on the construction contract, and that several bids were received by the Trust from reputable builders in the area. In addition, it is uncontroverted that C. E. Pennington, the general contractor who received the construction contract, was the low bidder on the project and enjoyed a reputation for being a dependable builder. The Court can certainly infer from these facts that Broyhill had informal approval to accept the lowest bid and proceed with execution of the contract. The SEC presented little evidence to dispute that inference. It did offer the testimony of several trustees who testified that they did not recall ever formally approving the Lexington contract in advance of its execution. However, only the testimony of one trustee, Irwin Potter, could arguably support their contention that Broyhill lacked even informal authorization, either expressed or implied. Potter, however, never flatly stated that Broyhill had no such authorization, but rather asserted that “I do not recall ever approving the construction contract for the Lexington Hotel.” On the other hand, there is additional evidence to support the inference that Broyhill possessed authorization, either expressed or implied, to enter into the contract on behalf of ART. Arthur Pomponio, while testifying that he never formally authorized the execution of the contract by Broyhill before its execution date, noted that Irwin Potter had submitted a favorable report to the Trustees regarding Lexington’s ability to float bonds for a Tourist and Convention Center, a project deemed essential by most to the success of the hotel. Pomponio was a persistent critic of the project almost from its inception, although he did vote in favor of purchasing the land. According to Pomponio, a formal vote authorizing approval of the Lexington construction contract did not come until after submission of his formal report. Unfortunately, the report was never submitted into evidence and the SEC offered no evidence to indicate its date. Pomponio was obviously confused about dates, stating at one time that he went to Lexington in the spring, while in fact, he went there sometime in the fall of 1973. Pomponio first received notice that the Lexington construction contract had been executed from John Rutledge as Pomponio was leaving the Trust’s headquarters on his way back to Lexington. He recalls attending a meeting of the Executive Committee a few days after his return from Lexington, although he cannot remember the date of the meeting. Although the minutes indicate that he knew of the contract’s execution at least by the November 27 meeting, Pomponio believes that he did not know about the contract at that time. The minutes of the December 10, 1973 Executive Committee meeting are not before the Court, but if the minutes of the January 14, 1974 Executive Committee meeting are correct, this was the only meeting of the Executive Committee held in December. There is no indication in the minutes of January 14 that the Lexington construction contract was discussed at that meeting, and the January 14, 1974 meeting was the last meeting prior to the February 5 meeting of the Committee, at which time the Lexington loan contract was approved. Though it is impossible to accurately determine, with any degree of certainty, the exact date that Pomponio reported to the Committee, it obviously occurred sometime in October, November or December, 1973. It is not necessary to do so, however, in light of Arthur Pomponio’s further testimony. Pomponio’s reaction at the meeting following the disclosure, by John Rutledge, of the contract’s execution was to articulate once again the reasons why the Trust should not build a hotel there. Upon further questioning, Pomponio stated that he indicated no dissatisfaction with Broyhill’s execution of the Lexington construction contract because he was told that Broyhill had been given authority to proceed by the Trustees: “Q. Do you recall whether at this meeting you indicated any dissatisfaction with Tom Broyhill? A. I was told that they had given Tom authority to proceed. Q. Who told you that, do you recall? A. As I recall, all the fellows said, ‘Well, you haven’t been here and you haven’t been privy to all of our discussions, and we respect your judgment, and since you were so vehement about this particular hotel, we delayed everything for you to investigate, and we did further investigate.’ And as I told you, Lee Potter investigated the financial ability of Lexington to pay off bonds. And they said, ‘We have recommended to Tom to go right ahead with it,’ you know.” (PD at p. 47) According to Pomponio, the final vote was taken in order to formally ratify the actions taken by Broyhill and informally authorized by the Trustees: “Q. What was approved at this point? A. The construction contract and all the actions that Tom had taken. Q. Do you recall, then, at that time were you ratifying the action that Mr. Broyhill had taken, that is, ratifying that he had already entered into the contract? A. I am sure it was ratifying his actions.” (PD at p. 62) In further clarifying what was ratified at the meeting, Pomponio testified in his deposition: . . [I] again vented my dissatisfaction with Lexington. But, as I recall it, the rest of the trustees had told me at that meeting that they had given Tom authority to proceed and negotiate everything that was necessary to get Lexington going. Q. Do you recall that all the trustees said that or one of them or did you learn at that meeting? A. I know this is what I was told, so that in order the records be straight again, they again reaffirmed and ratified Tom’s actions.” (PD at p. 63) At the February 5, 1974 meeting of the Executive Committee, Pomponio, in order to make the vote unanimous, voted in favor of approving the construction loan that Broyhill had arranged. Pomponio’s testimony substantially supports the finding of the Court that Broyhill received informal authority to proceed with the execution of the construction contract with the low bidder on the project, and that all his actions were subsequently ratified by the Trustees in order to “keep the record straight.” Pomponio was expressly told by the other Trustees that they informally authorized Broyhill to proceed. Pomponio’s failure to object to Broyhill’s “unauthorized” execution of the contract, either at a Trustee or Executive Committee meeting, or to Broyhill personally provides additional support for the premise that Broyhill possessed prior authorization. The Court views his failure all the more significant in light of his long history of objection to the project and his attempt at the same meeting to extricate the Trust from the project before a construction loan was signed. In addition, importance attaches to the fact that no other Trustee disapproved or objected at any meeting to Broyhill’s execution of the contract. The testimony of Carl Hengen, another Trustee and member of the Executive Committee, also supports the finding. He testified that he believed that the Trustees gave Broyhill authority to negotiate the construction contract, and that his actions were subsequently ratified by the Board. Finally, it should be noted that Irwin Lee Potter, Arthur Pomponio and Randolph Rouse all signed the March 12, 1974 prospectus which stated only that the Lexington construction contract was executed on October 30, 1973. All three reviewed the prospectus in detail with the Trust’s attorney, Mr. Scibelli, and none made any suggestions that the language regarding the Lexington hotel contract was incomplete or inaccurate, or that the language should reflect the fact that Broyhill had no authorization to execute the contract. On the contrary, all three were satisfied that the attorney had adequately prepared it. The Indemnification Agreements In 1971 ART, DeLuca and Joel Broyhill initiated negotiations for the development of property located on Arlington Ridge Road in Arlington, Virginia. Subsequently, DeLuca and Joel Broyhill, as a joint partnership entitled Arlington Ridge Road Associates, entered into an agreement with ART to build a condominium on the property owned by the Trust in Arlington and which also provided that ART would supply all the necessary financing. ART agreed to advance the capital necessary to build the condominium and it was further agreed that neither Joel Broyhill nor DeLuca would have to furnish any money for construction and development of the condominium, now known as “The Representative,” nor would they be liable on any of the loans that were obtained. DeLuca and Joel Broyhill appeared before the Board of Trustees of ART in November, 1973 before the agreement was signed and fully discussed the conditions of their approval. The Board agreed they should assume no personal liability on the loans. The only responsibility of ARR was to build the condominium and market it properly. In consideration for the above, ART was to receive profits anticipated to amount to approximately $1 million from the sale of the condominium in the sum of $5,000 per unit; ART was also to be paid 4% over prime interest rate on the loans, and in addition, was to receive $600,000 for the land. ART issued a commitment to lend ARR $10.8 million for construction of the condominium and work began on the project in September of 1973. A few months later ART began to experience difficulty in funding its loan commitment to ARR and entered into negotiations with Chase Manhattan Mortgage for its participation in the funding of the project. ART, ARR and Chase Manhattan executed a co-lending building agreement (see Pt. Ex. # 22) on February 25, 1974 that called for Chase Manhattan to lend ARR $10 million for the project. ART agreed to fund any remaining costs, and it was anticipated at that time that such costs would amount to approximately $2.5 to 3.2 million. ART, ARR and Chase Manhattan also executed a guaranty agreement whereby both ARR and ART unconditionally guaranteed due performance and payment under the terms of the note. The agreement was signed by Tom Broyhill and Arthur Pomponio for ART, and was also signed by both Joel Broyhill and his wife and John DeLuca and his wife for ARR. Therefore, both Joel Broyhill and DeLuca, along with their wives, were personally responsible under the terms of the guaranty agreement. The original agreement between ART and ARR, however, provided that Joel Broyhill and John DeLuca would incur no personal liability in the condominium construction project. ARR was advised by Chase Manhattan before the lending agreement was signed that their guaranty of the note was essential to Chase’s participation in the project. Joel Broyhill and DeLuca naturally wanted assurances that their original agreement with ART limiting their personal liability would be honored. As a result, Broyhill, on behalf of ART on February 20, 1974, entered into an agreement prepared by counsel for ARR whereby it was agreed that ART would indemnify Joel Broyhill and DeLuca or their wives for any liability incurred as a result of their guarantees to Chase Manhattan Mortgage Trust. It is apparent that Broyhill did not formally present the indemnification agreement to the Board of Trustees for their prior approval, nor did he expressly inform them of its existence after it had been executed. Since August, 1974, ART has been unable to fund its part of the loan commitment, and now contends that the indemnification agreement is null and void. Plaintiff contends that Broyhill had no authority to enter into the indemnification agreement while defendants claim that Broyhill possessed such authorization, or at a minimum, had inherent authority under the powers granted him in the Declaration of Trust to execute such an agreement on behalf of the Trust. The SEC further asserts that ART failed to disclose in the March 12, 1974 prospectus, the Annual Report on Form 10-K for the year ending 1974, and the proxy statement dated March 14, 1975 that Broyhill executed the February 20, 1974 agreement without the knowledge or authorization of the Board of Trustees or the Executive Committee. The Court need not determine if Broyhill had general authority under the terms of Section 8.5 of the Declaration of Trust, see footnote 10, supra, because it finds that Broyhill was given authority from the Trustees to enter into the indemnification agreement. John DeLuca testified that the indemnification agreement was entered into in order to live up to the original understanding that he and Joel Broyhill were to incur no personal liability on any funding of the condominium project, and would not be required to contribute any capital to the construction project. In fact DeLuca stated that he never would have entered into the loan agreement and guaranty agreement with Chase Manhattan if the indemnification agreement had not already been signed. Although two trustees state that they never saw the indemnification agreement and one trustee said that he never approved any such agreement, the entire Board was briefed by DeLuca personally of the conditions of his and Joel Broyhill’s participation in the project; namely, that they not be required to provide any capital, and that they incur no personal liability for any financing of the project. Although the discussion was related to the original loan agreement between ARE and ART, the Court believes Broyhill was reasonable in assuming that he had at least implied authority to maintain the initial understanding when the project was refinanced at that later date, barring some expressed directions to the contrary from the Board of Trustees or the Executive Committee. Furthermore, the Executive Committee on October 9, 1973, in a formal resolution (see Def. Ex. # 2) not included in the official minutes of the meeting but which has not been disputed by the plaintiff, authorized Broyhill and Arthur Pomponio to execute a lease on the property and to arrange a construction loan. In addition, the resolution stated: “Thomas J. Broyhill and Arthur R. Pomponio are hereby further authorized and empowered to execute such other instruments and to take such other actions as may be necessary or advisable in connection with entry of ART into said agreements.” (Def. Ex. # 2) The fact that Trustees were not aware of these specific agreements does not imply that Broyhill was unauthorized to execute them. Several Trustees professed ignorance of the guaranty agreement with Chase, yet the SEC makes no claim that the agreement entered into by Broyhill was unauthorized. It follows that all the documents associated with the Chase Manhattan loan were not closely scrutinized after their execution by the Board of Trustees. There is nothing unusual per se in that arrangement. In addition, plaintiff contends and defendants admit that the guaranty agreement with Chase Manhattan (Pt. Ex. # 23) and the indemnity agreement between ARR and ART were not disclosed in ART’s March 12, 1974 prospectus. The prospectus states that: “The Trust issued a construction loan commitment to Arlington Ridge Road Associates Limited Partnership in the amount of $12,500,000 relative to the construction of the condominium project, which loan would be secured by a first lien on the leasehold interest. On February 26, 1974, this commitment was increased to $13,200,000. The Chase Manhattan Mortgage and Realty Trust has agreed to participate in the construction loan to the extent of $10,000,000 on the condition that the Trust lend all additional funds necessary to complete the project. Based upon estimates prepared by Chase Manhattan Mortgage and Realty Trust, the project cost, based upon present price levels, will be approximately $13,200,000. There exists the possibility that if the cost of the project exceeds the estimate that the Trust may have to lend additional funds to the Partnership to complete the project.” (Pt. Ex. # 2) The Court concludes that the prospectus did fail to disclose such agreements and that the facts omitted were material in that they would have been important to the average investor. The Court also finds no reference to the February 20, 1974, and February 25, 1974 agreements in the Proxy Statement dated March 14, 1975. Plaintiff further argues that the Annual Report on Form 10-K for the year ended September 30, 1974 failed to mention the indemnification agreement. Defendants do disclose the guaranty agreement of February 25, 1974, in the 1974 report on page three, note three of cites to the financial statements: “On February 25,1974, the Trust entered into a co-lending building loan agreement with another lending institution to fund $3,200,000 of a $13,200,000 construction loan to Arlington Ridge Road Associates. Additionally, the Trust has agreed to loan ‘Ridge Road’ any or all funds in excess of the $13,200,000 construction loan necessary for completion. The Trust has also unconditionally guaranteed the due performance and prompt payment of all of the borrower’s obligations under the building loan agreement and the related note and mortgage.” Defendants contend that contingent liability is the same under both agreements, the indemnification agreement and the guaranty agreement. The Court is inclined to agree in so far as ART is concerned. Certainly, it is not the same with respect to Joel Broyhill and John DeLuca. But ART made no attempt to mislead the public by including their names as individuals also guarantying the performance and prompt payment of all the various obligations. Under these agreements ART is contingently liable for the entire amount, and the footnote adequately states that, even though not spelling out the precise agreements. The Court therefore finds that the 1974 report did not contain false or misleading statements or omissions regarding the Chase Manhattan loan. The Annual Report on Form 10-K for the year ended September 30, 1975 discloses' that: “By agreement dated February 20, 1974, the Trust, among other things, agreed to loan to ARR funds necessary to complete the construction of the condominium project in excess of funds provided in the construction loan and to indemnify and save harmless the general partners of ARR from any and all personal losses and/or liabilities incurred in the construction of the condominium and to indemnify said partners from any and all losses and/or liabilities incurred on loan payment deficiencies suffered as a result of the sale of the condominium units. In addition, the Trust agreed to indemnify and save harmless the title insurance company, insuring the aforementioned construction loan, from any and all mechanics’ liens that may be proven against the project. As part of the agreement to indemnify the general partners, the Trust agreed to take title to the property in the event it becomes necessary in order to prevent personal liability being asserted against the general partners.” The Court finds that this statement is not misleading, and that it adequately sets out the salient points an average investor would attach significance to. The Kincheloe Loan On February 25, 1973 Paul C. Kincheloe, Jr. (Kincheloe) and his wife, Linda, Sandra B. Aman and her husband, Herbert L. Aman, III, entered into a joint venture through an indemnification and trustee agreement for the purpose of acquiring and developing a tract of land in Prince William County, Virginia, known as “Rollingwood.” The agreement specified that the Kincheloes would proceed to secure a loan on the property and that title to the property would be taken in the name of Paul C. Kincheloe. Sandra Aman and her husband agreed that they would be responsible for one-half of all the financial obligations incurred in connection with the transaction. Paul and Linda Kincheloe were to become one-half beneficial owners of the property and Sandra Aman would be the beneficial owner of the remaining half of the property. Herbert Aman further agreed to guarantee the payment of any of the one-half liabilities that Sandra Aman was responsible for. Hersand Builders, whose officers consisted in part of Sandra and Herbert Aman, was chosen to contract in writing for the purchase of the building. Sandra Aman is the daughter of Thomas Broyhill. Kincheloe subsequently applied to ART for a loan and spoke with Tom Broyhill about arranging it. Although the sales contract between Hersand Builders, Inc. and the seller of the property was attached to the formal loan request of Kincheloe to Broyhill dated March 22, 1973, Kincheloe testified that he never presented a copy of the indemnification and trust agreement to Tom Broyhill and never mentioned it to him. Sandra and Herbert Aman’s signatures are on the sales contract, but Kincheloe expressly states in his letter to Broyhill that “[Although my name does not appear as purchaser on this contract, I am the beneficiary of same and will be the record owner and borrower from your company.” (emphasis added) Kincheloe also attached to his loan application statements of his net worth showing assets of approximately two million dollars. The loan agreement for $1.2 million was executed by Kincheloe and his wife and Tom Broyhill, representing ART. The loan was secured by the property, and both Kincheloe and his wife guaranteed payment of the loan. As of the date of trial, both Kincheloe and his wife were still subject to personal liability under the loan agreement. Neither Sandra nor Herbert Aman’s name appeared on the face of the loan agreement executed by ART. In addition, Broyhill testified in his deposition that he did not ask who Kincheloe’s partners were before making the loan because both Kincheloes were personally liable under the loan agreement. During the remainder of 1973 and 1974 Kincheloe and Broyhill met on several occasions to discuss the development of the Rollingwood property. Chester Hardy testified that Herbert Aman attended some of these meetings with Broyhill for varying lengths of time. He has no knowledge, however, of any of the conversations that took place, and Kincheloe testified that he never mentioned the role of Herbert Aman in the project and Broyhill never asked. Broyhill testified that Aman and he were good friends and that it was not abnormal for Aman to be privy to business discussions that Broyhill had in his office. On December 18, 1973 Kincheloe sent a letter to Broyhill requesting that the Trust pay a bill addressed to Herbert Aman for expenses incurred in the development of the Rollingwood property. The bill was for expenses incurred by the certified land surveyor of the property, John F. Schiller. Pursuant to prior arrangement, Kincheloe forwarded the invoices to ART for reimbursement. Because reimbursement was not made promptly on this occasion, Kincheloe sent another letter to Broyhill on January 24, 1974 reminding him of the bill. He enclosed with his letter a personal note to Broyhill from Herbert Aman requesting payment of the enclosed bill and another copy of the invoice. The note, however, was written on the copy of the bill and Kincheloe made no mention of it in his cover letter. Nor did he mention Herbert Aman’s name in his original letter of December 18,1973. Broyhill never inquired of Kincheloe why he was sending bills addressed to Herbert Aman to the Trust for payment. Broyhill testified, though, that he rarely perused the bills received by the Trust but rather simply signed checks in payment of bills as submitted by his secretary. In 1975 Kincheloe requested and received an extension from ART on the maturity date of the Rollingwood loan originally due May 30, 1975 until May 30, 1976. The SEC contends that the loan was executed by Broyhill in violation of an expressed policy of ART not to lend any money to relatives. The policy of ART is set forth in the March 1974 prospectus on page 47, under the title “Permissible Transaction with Management”: “[T]he Trust is not permitted to lend any assets or property of the Trust to . any Trustee, any officer or employee of the Trust ... or any affiliate of any of the foregoing persons, except that the Trust is permitted, if such transaction has been approved by the affirmative vote of a majority of the Trustees not so affiliated. . . . ” The Declaration of Trust does not define the term “affiliate”, but Rule 405 under the Securities Act, 17 C.F.R. 230.405(a), and Rule 12b-2 under the Exchange Act, 17 C.F.R. 240.12b-2, which defines terms used in the Exchange Act and rules and regulations enacted thereunder define affiliate as follows: “An affiliate of, or a person affiliated with, a specified person, is a person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.” Defendants contend there is no evidence that defendant Broyhill “controls, is controlled by or is under common control with his married daughter.” Plaintiff counters that two Trustees testified that it was their belief that loans to relatives were prohibited. However, no written provision expressly states that policy. Whether married daughters are included within the scope of the term “affiliate” need not be determinative, because the Court finds that Broyhill had no knowledge of his daughter’s interest in the property at the time the loan was arranged. Although there were numerous opportunities for Broyhill to discover Herbert Aman’s participation in the Rollingwood project, Kincheloe testified that he never told Broyhill about Sandra Aman’s interest and that Broyhill was genuinely surprised to later learn of her interest in the property. The testimony on this point is undisputed because neither Broyhill nor Sandra Aman was called to testify by the plaintiff. Mere knowledge of Herbert Aman’s participation does not violate the terms of the policy, even if it is construed to include married daughters, which is by no means clear. Kincheloe and his wife were the only two who signed the loan document except for ART, and both personally guaranteed the repayment of the loan. The March 12,1974 prospectus, the Annual Report of Form 10-K for the year ending September 30, 1974, and the proxy statement of March 14, 1974 do not disclose Sandra Aman’s interest in the Rollingwood property and in the loan. The Annual Report filed on February 5, 1976 for the year ended September 30, 1975 discloses that “[I]n January 1976, the Trust was informed that a previously undisclosed investor in a property on which the Trust holds two junior mortgages for a married daughter of the President and Chairman of the Trust.” (Pt. Ex. # 5, at p. F-31) Plaintiff charges that the above documents failed to disclose the interest of the Amans in the loan and that Broyhill failed to disclose these facts to the Board of Trustees when they approved the loan and subsequent extension as required by law. Certainly, however, Broyhill or the Trust could not report what they had no knowledge of. The Court has already found that Broyhill had no knowledge of his daughter’s interest in the property at the time the loan was executed. According to the testimony of Kincheloe, Broyhill at a much later date, inquired of his daughter’s participation and was surprised to learn of her interest. Kincheloe does not mention an exact date, and the SEC has failed to prove that he actually learned of her interest before the date indicated in the 1975 report, when the Trustees were informed of her interest. Accordingly, Broyhill did not fail to disclose material information in his possession regarding the loan that was required by law. CONCLUSIONS OF LAW The Court concludes that it has subject matter jurisdiction over the present action, 15 U.S.C. § 77v(a), 78aa, and the plaintiff Commission has standing to maintain the instant action. 15 U.S.C. § 77t(b). Alleged Violations of Anti fraud Provisions Plaintiff asserts that defendants violated § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) and 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, by their actions in the five transactions described, supra. Said Acts and Rule impose upon persons engaged in the sale of securities a duty of full disclosure and the intentional failure to disclose any material fact in relation thereto constitutes a violation of the provisions. More specifically they make it unlawful for any person in connection with the offer or sale or purchase of any security to make the statements made, in the light of the circumstances under which they were made, misleading, or to engage in any act, practice or course of business which operates as a fraud or deception upon any purchaser of any security. The basic test for materiality of misrepresentation or omission relied on in an action for fraud in violation of the Securities Act of 1933 and the Securities and Exchange Act of 1934 is whether a reasonable and prudent investor would attach importance to the facts or fact omitted or misrepresented in determining his choice of action in the transaction in question. Cf. SEC v. Texas Gulf Sulphur, 401 F.2d 833, 849 (2 Cir.), cert. denied, Coates v. SEC, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). See generally Affiliated UTE Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972); Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970). On the basis of the facts found relating to the $368,000 loan, bogus vouchers, Lexington Hotel contract and Kincheloe loan transactions, the Court concludes that there were no material omission or misstatements in the 1974 prospectus. Consequently, the Court holds that defendants committed no violations of the antifraud provisions with respect to these transactions. The Court, however, has already found that the defendants made a material omission by failing to include in the March 12, 1974 prospectus all the material facts relating to the Chase Manhattan loan arrangement. Though the omission was material, the Court nevertheless finds that defendants did not violate the antifraud provisions of the 1933 or 1934 acts because the plaintiff has failed to prove the requisite level of culpability. Although many previous opinions have held that mere negligence will suffice, e. g., SEC v. Management Dynamics, Inc., 515 F.2d 801 (2 Cir. 1975); SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2 Cir. 1972); SEC v. Texas Gulf Sulphur, supra, at 854-55, the Supreme Court recently held in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976) that scienter must be plead and proved in private actions under the Exchange Act’s antifraud provisions. In so holding, the Supreme Court found the language and history of 10(b) and Rule 10b-5 dispositive. If the language and history of 10(b) is dispositive as to a scienter requirement in private actions, it must also be so for SEC enforcement actions, since such suits are creatures of statute rather than implied rights of action. Only policy considerations which have traditionally been applied to distinguish the two kinds of cases, see Texas Gulf Sulphur, supra, at 868. (Friendly, C. J. concurring), could support a contrary result, but the Supreme Court in Hochfelder found no reason to even examine such considerations, since in its opinion the language and history of the Act were dispositive. The District Court in SEC v. Bauseh & Lomb, Inc., 420 F.Supp. 1226 (S.D.N.Y. 1976) so reasoned when it held that scienter is a necessary element in an action for injunctive relief under Section 10(b) and Rule 10b-5 of the Securities and Exchange Act. Both antifraud provisions — § 10(b) of the 1934 Act, and § 17 of the 1933 Act — contain almost identical language, a fact which even the SEC has admitted. See plaintiff’s brief at p. 20. Both provisions have similar purposes. Accordingly, the Court concludes that scienter — an intent to deceive, manipulate, or defraud — is also a necessary element in an action for injunctive relief brought by the SEC pursuant to § 17(a) of the Securities Act of 1933. A careful examination of the record in this case leads the Court to conclude that defendants did not possess the requisite intent to deceive, manipulate or defraud. The SEC has established but one instance in which defendants made a material omission or misstatement in any of the documents subject to SEC regulation. The omission was corrected in the 1974 and 1975 reports filed on Form 10-K. Consequently, the Court finds that defendants Broyhill and ART did not violate the antifraud provisions of the 33 and 34 Acts, § 10(b) and Rule 10b-5 of the 34 Act, and 17(a) of the 33 Act. Alleged Violations of Proxy Provisions Plaintiff also alleges defendants violated the federal proxy provisions, § 14(a) of the Exchange Act, 15 U.S.C. § 78n(a) and Rule 14a-9, 17 C.F.R. 240.14a-9. In J. I. Case Co. v. Borak, 377 U.S. 426, 431, 84 S.Ct. 1555, 1559, 12 L.Ed.2d 423 (1964), the Court defined the objective of § 14(a) as follows: “The purpose of § 14(a) is to prevent management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in proxy solicitation. The section stemmed from the congressional belief that ‘fair corporate suffrage is an important right that should attach to every equity security bought on a public exchange.’ H. R. Rep. No. 1383, 73d Cong., 2d Sess., 13. It was intended to ‘control the conditions under which proxies may be solicited with a view to preventing the recurrence of abuses which (had) frustrated the free exercise of the voting rights of stockholders.’ ” The Commission, in promulgating Rule 14a-9, has provided that no proxy solicitation shall be made that “is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading . . .” Therefore, the definition of materiality sets the threshold for the imposition of liability under Rule 14a-9. The Supreme Court in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2133, 48 L.Ed.2d 757 (1976), recently defined the general standard of materiality for Rule 14a-9 violations as follows: “An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. . . . What the standard contemplates is a showing of substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder.” In other words, said the Court, there must be a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Ibid. The Court, however, declined to consider what showing of culpability is required under § 14(a) to establish the liability of a corporation issuing a materially misleading proxy statement, or of a person involved in the preparation of a materially misleading proxy statement. The Court need not consider that question, because it determines that the findings of fact relating to all the transactions save the one involving the Chase Manhattan loan do not support a conclusion that the many statements made in the proxy statement or any of the omissions claimed by the SEC to hav