Citations
- 388 F.2d 486
Full opinion text
FRIENDLY, Circuit Judge:
Martin Frank, an attorney, appeals, 28 U.S.C. § 1292(a) (1), from a temporary injunction issued by Judge Tyler in the District Court for the Southern District of New York, in an action by the SEC with respect to alleged violations of the fraud provisions of the securities laws, § 17(a) of the Securities Act of 1933 and § 10(b) of the Securities Exchange Act of 1934. The order enjoined Frank pendente lite from “drafting or causing to be drafted any offering circular, prospectus or other document or writing containing any untrue statements of material facts, or omissions to state material facts necessary in order to make the statements made in the light of the circumstances under which they were made, not misleading, concerning Nylo-Thane Plastics Corp.’s principal product, a chemical additive ingredient purportedly designed to reduce the time required in curing rubber * *
Nylo-Thane, a defendant in this action, had acquired from Maurice Minuto, whose wife owned two-thirds of its stock, a chemical additive designed to accelerate the curing of rubber. During 1966 it sold 100,000 shares at $3 per share in what purported to be an intra-state offering, in connection with which Minuto had retained Frank to represent it. An offering circular dated October 31, 1966, and an amended offering circular dated March 9, 1967, contained, under the heading “Business of the Company,” references to the additive which are reproduced in the margin. Immediately after completion of the offering the stock rose as high as $17.50 per share.
On learning what it considered to be serious misrepresentations in the offering circular with respect to the additive, the SEC, on April 27, 1967, suspended trading in the stock. The company retained a new securities law specialist, who worked out with the Commission a letter correcting the misrepresentations. On May 26 the Commission instituted this action against the company, three officers or stockholders, a financial consultant, and Frank, to enjoin further misrepresentations. All the defendants save Frank, while neither admitting nor denying the allegations of the complaint, consented to entry of a permanent injunction. The Commission thereupon announced that it would not continue the suspension beyond May 27, when the current 10-day suspension order expired, advising investors to “consider carefully information made available by the company concerning its product and information made available in' connection with the Commission’s injunctive action before effecting transactions in this stock.” Securities Exchange Act of 1934 Release No. 8089.
Frank having declined to join the other defendants in consenting to an injunction, the Commission on June 20 moved for a temporary injunction against him. The motion was supported by numerous affidavits and extracts from testimony by Frank and others at an administrative hearing which were alleged to show that he had been aware of the falsity of representations concerning the additive. Frank countered with a notice to take the depositions of various employees of the Commission, as to which the Commission obtained a stay, and with answering affidavits of himself and others. His position, broadly stated, was that the portion of the offering circular alleged to misrepresent the additive had been prepared by the officers of Nylo-Thane and that his function had been that of a scrivener helping them to place their ideas in proper form. Further affidavits were filed by both sides and the SEC’s application was argued on July 19. Judge Tyler endorsed on the motion papers a memorandum opinion granting the injunction and this later issued.
Although Frank makes much of this being the first instance in which the Commission has obtained an injunction against an attorney for participation in the preparation of an allegedly misleading offering circular or prospectus, we find this unimpressive. As this court said in United States v. Benjamin, 328 F.2d 854, 863 (2 Cir.), cert, denied, 377 U.S. 953, 84 S.Ct. 1631, 12 L.Ed.2d 497 (1964), “In our complex society the accountant’s certificate and the lawyer’s opinion can be instruments for inflicting pecuniary loss more potent than the chisel or the crowbar.” A lawyer has no privilege to assist in circulating a statement with regard to securities which he knows to be false simply because his client has furnished it to him. At the other extreme it would be unreasonable to hold a lawyer who was putting his client’s description of a chemical process into understandable English to be guilty of fraud simply because of his failure to detect discrepancies between their description and technical reports available to him in a physical sense but beyond his ability to understand. The instant cas le quantities of the additive were made available by others to producers of rubber and rubber-like tires, bowling balls, battery cases, seals, gaskets, sheets, molded parts, extrusions, tubing, etc., for testing purposes. It was found that the use of the additive in compounds specified by these manufacturers resulted in finished products cured in fractions of the time currently deemed normal for this procedure. Moreover, it was found that the physical properties of the items produced with the additive included in the formulation were at least equal, and in numerous cases superior, to those of the same compounds when cured at longer time cycles without the additive, while increasing processing safety. The effect of this time-saving was, in each case tested, a substantial reduction in molding time costs; and, more importantly, also released the molds and presses for further production, thereby increasing the productive capacity of the manufacturer without capital investment of any kind whatsoever on his part. In short, the use of the additive was effectively shown, through practical factory testing, to make it possible for a fabricator of rubber or rubber-like products to turn out substantially larger quantities of such products without higher costs for plant, machinery or labor, by reason of the greatly reduced curing time effected by the use of such additive.
“According to available statistics from the United States Department of Commerce, upwards of five billion pounds of natural and synthetic rubber are processed annually in the United States. Practically all of such processing necessitates curing, so that the potential market for the additive, in view of its proven value in speeding and increasing production, appears to be of considerable proportions, even if only a small percentage of tlie rubber fabricators adopt its use in their formulations. It is, of course, highly speculative and quite impossible to estimate how much, if any, of this potential market will actually become users of the additive and customers of the Company. However, again assuming that even a small percentage of the manufacturers comprising this market will adopt the use of the additive on the basis of its proven productive value, the Company envisions potential sales of its product in quantities of millions of pounds, which, if realized, would result in a large volume of sales and a considerable potential profit. Management has tentatively fixed the sales price of its additive product to provide a reasonable return to the Company and at the same time should constitute an appealing cost to the prospective buyer, in view of the additive’s ability to raise productive capacity in a degree substantially exceeding the expense of its usage in production.”
“The Company's additive was subjected to various tests by the United States Army laboratory at Natick, Massachusetts as well as by a number of leading rubber companies. While the Company was extremely satisfied with the results, there is no assurance that the results of the tost will bring the Company any orders for the additive.”
. This was as follows:
“After hearing today, I am convinced that the affidavits of the Commission establish a likelihood of success in establishing knowing violations of Section 37a, of the Securities Act of 1933 and a need pending this litigation to prevent any further possible misstatements in offering circulars and writings relating to Nylo-Thane Plastics Corp. securities. A narrowly drawn injunction order as described by the Court during argument should be settled on notice.”
. “In all actions tried upon the facts with out a jury * * * the court shall find the facts specially and state separately its conclusions of law thereon * * * and in granting or refusing interlocutory injunctions the court shall similarly set forth the findings of fact and conclusions of law which constitute the grounds of its action. * * * ”
. Both section 20(b) of the Securities Act of 1933 and section 21(e) of the Securities Act of 1934 read 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 subehap-ter, 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 * *
. A familiar instance where these factors co-exist is an action by the United States for an emergency injunction under § 208 (a) of the Taft-Hartley Act. See United Steelworkers of America v. United States, 361 U.S. 39, 80 S.Ct. 1, 4 L.Ed.2d 12 (1959).
. While we have noted the contention of the. SEC that Frank waived any objection to the court’s proceeding on the basis of affidavits, our upholding his objection as to lack of findings makes it unnecessary for us to pass on this. In fact the two issues are interrelated; we are confident that if the judge had endeavored to frame findings, the inadequacy of the affidavits as a basis would have become apparent to him. However, there is merit to the position that if a party is unwilling to have the issuance of a temporary injunction decided on affidavits, he must make his objection known; he may not gamble on the judge’s accepting his affidavits rather than his adversary’s and then seek a reversal if the result is disappointing.