Fed. Sec. L. Rep. P 93,507 Securities and Exchange Commission v. Continental Tobacco Company of South Carolina, Inc.

delivery purpose of sale after sale. THORNBERRY, Before COLEMAN Judges. INGRAHAM, registration Circuit in ef- No statement registration nor fect has statement Judge. filed and Ex- COLEMAN, been with the Securities Circuit change respect Commission with This a case in which the District said securities. Court securities of the held certain con- Company From about June Continental Tobacco of South tinuing date, present de- exempt Carolina were fendants, and Rich- under 1933 and Kenneth V. Dawes the Securities Acts of Hoffman, they publicly are and at all not of- ard L. now were finding Hoffman, Richard alleged en- L. have been herein times they exclusively notwithstanding in- the fact gaged securities, not unregistered participated trastate, are now sale been and and have securities, not ex- there did making the means the mails and use of expectation that ist a reasonable interstate instrumentalities policy would thwart of the Securi- transactions to effect commerce Ex- of se- ties Act 1933 and the and sale to induce the change by engaging exempted (other ac- securi- than curities proscribed paper, ac- tivities therein. bankers’ ties, commercial bills) other- ceptances or commercial 1970,. and in effort On June an ex- on a national than wise bring up-to-date on its activi- Court change, such defendants when grant since the of the Com- ties Court’s registered Se- with the and are not application preliminary mission’s Exchange Commission as curities sought junction and dealers accordance brokers given an- to file amended leаve (b) the of Section 15 of subsection swer. This set forth that on answer 1934, Exchange Act as of 17, 1967, for Court October the District 78o(b)]. amended U.S.C. [15 ap- Carolina had confirmed its South 1967, 15, the District proval plan arrangement On December of a of between pre- granted application for Court the its under Continental and creditors against Continental, liminary injunction Bankruptcy Chapter XI of the Federal Lorin, Sorenson, Heinrich Act; management K. and pursuant James that to a affiliates, agents, servants, 1969, em- February their 10, dated Conti- contract attorneys, enjoining ployees, management their and nental was under now any of Management use of means instruments Corporation, of a Contoba transportation in in- or communication guid- corporation; Florida that under the to offer Management terstate commerce or mails Corpora- ance Contoba sell, sell, after sale deben- discharged deliver tion Continental from bonds, purchase bankruptcy, ture com- plant warrants and a new executive stock, mon and Conti- common stock production leased, offices facilities were any security nental or other installed, unless additional staff and executive registration management until a been hired, plans statement formulated foreign distribution; filed with the Commission as se- to said and domestic curities. The Court that District found Depart- Treasury that United States enjoined sale, those had offered for sold permit ment has issued No. TP-118-SC sale, and delivered after debentures and products; for the manufacture tobacco warrants stock that Continental’s current office and that all offers and sales manufacturing facilities located are by them securities premises Street, Leapart leased 1401 were undertaken at time when there Carolina; Columbia, West South that registration was no begun statement filed or Continental has the sale its cigarettes effect with re- the Commission as Columbia, in the area of South by quired 5(a) 5(c) § of the Se- Carolina, Florida; and in Dade County, 1933, curities Act of and that there was that has entered into a dis- expectation policy reasonable that (for tribution contract distribution of the rights Securities Act cigarettes of Venture in the State by order Florida) thwarted unless Court corporation (Tenlin preliminarily enjoined were Corporation) from to be formed and owned engaging proscribed con- unlawful by stockholders; two of Continental’s duct. that Continental been has refinanced private sale of its common shares On December the District Court corporate (in- application denied individual and preliminary for a investors injunction against cluding Kenneth Dawes fund), V. a mutual of whom all standing tal law. nental, took law. nental injunction Acts ther or communication means sions nental will ties were that holders tended does Court since liver injunction injunction or the mails to offer injunction against enjoining On Based on this exempt from the protect has the facts Securities Act proscribed not with the exempt from the after of 1933 their not exist of the Securities the date September 21, entered has diligently and further private aims of the instruments him from which violated the apply the investment of against sale, engage shares entered has bondholders; 3 reverse a view engaged answer, would changed entry sales entry stock; the Federal consent a James provisions providing interstate danger any security securities making 1933. against 1970, registration Federal ofAct of of common not serve to fur- investment aof Continental con- good faith sell, split of its out- not warranted transportation its future K. distribution; any the that Conti- that Conti- use of 1933; sell, permanent permanent temporary capitaliza- commerce Continen- that such securities Sorenson, Sorenson District activity activi- or de- Conti- which provi- stock- acted there only 5 of sions order, proscribed pectation tal Tobacco tal issue W. T. tions lina, amended, by engaging in the activities be, and the same lina, C. v. E.C. v. Ralston curities defendant, 1,1969, Cir. ing, set The Court S.Ct. 3. No 2. 1. It Ordered, permanent aside and held for S.Ct. Tobacco defendant, Continental, of law all favorable to Continental: ^[*] defendant will 1959). is, against Inc. Inc., entered December against 894, 97 L.Ed. 1303 not That That Culpepper, Grant & therefore, Conclusions Act of Securities Act are, nor permanent involving October, 1970, There made thereby. Continental Tobacco and entered adjudged the Company Company therefore, injunction cognizable danger 97 L.Ed. (cid:127)» plaintiff’s prayer Purina, Co., provisions defendant, Continen- defendant, Continen preliminary 270 F.2d 241 is, hereby vacated, thwart no reasonable any public United States of securitiеs 345 U.S. following ^[*] and decreed: naught. injunction of South Caro of law 346 U.S. amended. (1953); exempt South against -x- from June following transac policies 629, (1953). injunc- conclu- offer # Caro- Com- 1967, shall (2nd S.E. Se ex 73 v. S. pany Carolina, Inc., be, and of South 22, 1970, On October the District denied, is, hereby the same granted summary judgment Court in be- complaint against plaintiff’s de- half Kenneth V. and Richard Dawes fendant, Compa- Continental Tobacco L. Hoffman ordered that Com- Carolina, be, ny Inc., of South complaint against mission’s them be dis- is, hereby preju- dismissed with same prejudice. missed plaintiff. dice to February 16, 17, 18, 25, On and March Exchange Commission 10, 1971, non-jury 3 and held Company trial was of South Continental Tobacco (D.C., Carolina, F.Supp. in the District Court 326 592 on the Commission Fla., 1971). application entry permanent of a in- junction against appeals. Continental. The Commission and when it entered junction had sold ed; of the Securities Act When both preliminary X- The 1967 From about Continental Securities against instances [December issued X- had offered to injunction, X Offering found July 7, its in violation ^[*] preliminary order 1967] ^[*] vacating sell amend- others Court X- until 5§ ston fendants ent public to and Lorin are concerned. 97 L.Ed. 1494] rants able tinuing promises. There is a reason- fendants lawful conduct. ed unless 8. The insofar X Purina, 346 U.S. expectation engaging are honor X- are make facts, however, order expected preliminarily (1953). X- Continental, good upon 1933 will be thwart- outstanding X- Court proscribed [73 policy X- are These their S.Ct. these de- Sorenson enjoined general differ- of the » war- con- un- de- filing approximate of the As to the 1967 of Continental dаte securities, complaint, Court District Commission’s said: Hoffman, Lorin, Sorenson, Dawes and [May 12, 1971] sale, and delivered offered for sold In the summer James through sale use of the mails after Sorenson, Lorin, Heinrich Kenneth and means and instruments of trans- Dawes, offered, and Richard Hoffman portation and in inter- communication sale, sold and delivered for debentures commerce, five-year, state subordi- 6% Company, for Continental Tobacco nated debentures purchase with warrants entitling warrants of Continental hold- attached, to investors in Broward ers debentures County, Florida. At that time Soren- shares of common stock of Continental son and Lorin were officers Conti- $1,000 a share $5.05 for each Company. nental Tobacco The deben- held, debentures and common stock and tures the warrants attached were in Continental. registered with the and 4, All of the offers and con- sales Exchange provided Commission as by parties ducted of by the 1933, Securities Act of Continental were undertaken at amended, and the Securities and Ex- registration time when there no change promulgated Commission rules statement filed or in effect with the under said No statute. evidence was required by Commission as Sections availability introduced to show the of 5(a) 5(c) and of the Securities Ex- exemption registration an from such change Act of 1933. 15 Sec- U.S.C. occurring as to these debenture sales 77e(a) 77e(c). tions Similarly, and and, therefore, the Court application registration no of finds these sales and offers to Dawes or Hoffman as а broker or sell were in violation of Section of dealer has ever been filed become Act amend- effective with the Commission ac- ed. provisions cordance with the of Sec- 15(b) of the Securities II 77o(b). 1934. U.S.C. Section Background Activities and *X* # $r -X* -X- fact, point In incorporated the defendants Continental was under proved have not April to date their entitle- laws of South Carolina ‘private ment offering’ exemp- principal and maintained its of- tion from require- Highway (Highway fice at 7340 Sumter ments 76) of the Act. Columbia, See v. Ral- S.E.C. No. South Carolina. Baroody, incorporated organized Mr. and Besides Gore Mr. It was Gore, meeting engaging present Ted manufac- at were purpose of Wright, Brady, Gore, Guy cigarettes. Con- Until late Tom Bob ture prod- Walker, MeMann, James its efforts Thomas Walter had devoted tinental Sorenson, Lorin, and one other. Heinrich research. uct at- Heinrich Lorin James Sorenson Through K. Sor- of James the efforts Continental as officers of tended Lorin, at who and Heinrich enson presentation. conducted the sales officers were time objective apparent towas Continental’s through Hoff- Richard L. efforts quality and unusual feature outline the Dawes, were who Kenneth V. man cigarettes; product, of its Venture for a Fort Lauder- registered brokers marketing program, Co.), explain (Scheffmeyer & broker-dealer dale present in invest- interest investors sought the summer Continental ing in Continental. acquire new financial months by support for sale in Broward of a presentation сonsisted The main unregistered five-year County, Florida, involving unique strips of film series warrants attached debentures with 6% product, qualities of Ven- Meetings at- common stock. strip cigarettes. such film One ture purchasers prospective tended inhaling smoke from mice showed the Gov- at conducted cigarette the tobacco of Venture Lauderdale; Hotel, Fort Club ernor’s of another brand tobacco house, brokerage at offices strip cigarette. Moreover, film Scheffmeyer Company, Lauder- & Fort microscopic compari- that a showed later ; Hayden the offices of dale at lungs the test mice revealed son of Stone. inhaled the smoke the mice which maintained rather tobacco the Venture A. lungs, clear while mice which inhaled cigarette other tobacco the smoke from Meeting at the Governor’s lungs. acquired discolored con- This was Hotel Club “a sidered Mr. Gore have been George During great presentation”. the summer Gore, attorney ‍​‌​​‌‌‌‌‌‌‌‌​‌‌​‌​‌​‌‌​​​‌‌‌​‌​‌‌​‌‌​‌‌​​‌‌‌‌‌‌​‍specializing in tax H. prospects sale As to the for the future probate, and law and estate and trust cigarettes, Mr. Sorenson stat- Venture Baroody, Thomas a stock A. broker difficulty in ed that be no there would Ex- of the New York member Stock selling cigarettes and that Venture change, presentation attended the sales hope was the that Venture involving held Continental’s debentures cigarettes ultimately garner .8% Club Governor’s cigarette of the market the United Hotel. $57,000,000. or States annual sales meeting As held Furthermоre, stated that Mr. Sorenson Hotel, Governor’s Club we note Mr. cigarette and its Venture meeting Gore’s characterization of the competing would no trouble with opera- as “somewhat of a boiler room larger cigarette established manu- follows; tion”, explained as facturing cigarette companies and their operation general- A boiler room products companies because those al- ly ready understood to be supply to do a —have had an abundant of tobacco securities, generally with the storage sales under conditions standard you go telephone, over or companies because those un- be room, you phones, (even they see all or- tried) acquire sup- of these if able being there, placed, ders ply type necessary orders of the tobacco everything guess gets manufacturing cigarette else. like Venture going cigarette. the term from the noise that It seems the tobacco on. by grown used Continental under growers, B. special special conditions pesticides stored use of without the Meeting The at the Offices of at a warehouses cer- conditioned air Scheffmeyer Company & humidity point and at a certain tain Si,mons, According presen- temperature. Kuehl, R. L. Mrs. Mr. Lucille growing special persons tation, ten other method and more than present were presentation prevented development of at the sales tobacco involving leaves, which, on tobacco when the dеbentures of Continental molds down, mycotoxy. produced brokerage and held at house, broken the offices of the being Scheffmeyer Company. Again, mycotoxy ac- & was described This consump- presentation tually harmful in human the sales more was conducted every- tion than tars and nicotines James and Heinrich Lorin. Sorenson Of causing present, only testimony one blamed for cancer. those Kuehl Mrs. included in Simons is Following presentation, the main Appendix Joint filed this Court. with thing only de- offered for sale were the According meeting, bentures Continental. At the method Continental’s Sorenson, operation prospective Mr. Lorin and the deben- Mr. sales unregistered, product, pro- ciga- were tures and the Venture unregistered rettes, discussion, Following ceeds from the sale of such were discussed. going buy debentures all in were used attendance were offered pay opportunity through more pur- tobacco and the Federal invest cigarettes already Revenue Tax chase of Continental’s debentures. marketed. i,n The evidence the record shows that pur- both Mrs. and Mr. Simons Kuehl Approximately times, or four three chased debentures of a di- Continental as meeting interrupted by long distance presentation rect result of sales con- phone calls either Mr. Sorenson brokerage ducted at the office of the Lorin, they for Mr. meeting each left the house, Scheffmeyer Company. & Not- room once twice. Once Mr. withstanding any he had not seen Sorenson returned and mentioned thаt financial statements of just he had checked New York notwithstanding that he lacked ex- cigarettes office and some perience industry in the tobacco or in just ordered Columbus mycotoxicology, the field of Kuehl Mr. upon returning, market. Another time purchased debentures of Continental. it was mentioned either Mr. Sorenson Moreover, conceded before or Mr. Lorin that Gloria Swanson the District Court that Mr. Kuehl cigarettes reordered a carton and that unsophisticated was an Mr. investor. smoking her ciga- all of friends were purchased Kuehl received the debentures quote preferred Once a rettes. through (It the mail. was later admit- was mentioned. ted that all debentures were delivered meeting As a only result of the through mails.) George between roody, Gore and Thomas Ba- ultimately Gore invested in the C. Although debentures of Continental. Meeting at the both Offices Baroody Mr. Gore and Mr. admit- Hayden Stone ted that had access to a financial previous statement year, they of Simons, surgeon de- R.Dr. a retired nied that had Simons, access to the of kind husband of Mrs. Lucille of- information registra- testimony found presenta- a fered toas sales Also, tion statement. involving Gore testified that Conti- debentures of experience he working had no nental knowl- conducted in 1967 Mr. James edge cigarette of manufacturing Sorenson and busi- Mr. Heinrich Lorin at the ness or of mycotoxicology. Hayden of Stone. offices exchanged $130,000 of Conti- Company shown meeting, was Dr. Simons At the debentures, attach- warrants with nental mаking Continen- of strip on the filma 130,000 ed, shares for he cigarettes, product, Venture tal’s Compa- Scheffmeyer and stock. common to Con- relative given presentation was actively participated in the ny cigarette had prospects as a future tinental’s unregistered se- offering Continental meet- at the Also, either manufacturer. debentures, acquired the had curities unaudited an ing subsequently he saw attached, of re- a result with warrants for Continental statement financial against brought suits scission year. previous unregistered Con- purchasers purchased debentures R. Dr. Simons tinental securities. deben- He received the of Continental. through the mail. part- tures Ultimately, member the eleven Company Scheffmeyer nership stockholdings dissolved, and the D. to be partnership in Continental Decision the 1967 View Our Aldredge, retir- Mr. J. distributed. foregoing toas evidence 52,000 From ing partner, shares received difficulty no offering, 52,- we stock. Another common Continental agreeing District Court [on with the common stock 000 shares 12, May 1967, 15, and on remaining partners, December was issued to the 1971,] Continental bro- to continue in the who had decided with warrants attached its debentures Foster business Lee ker-dealer 5 of the violated Moreover, § firm of Cot- the law World. regis 1933, no Tew, as amended. There for ton Tew and Thomas counsel filed or effect tration statement ever Scheffmeyer, law and the York New respect World, Continental securities of firm, for Lee Foster and counsel Instruments part legal offered and sold each received as a their fee of interstate commerce or the mails were shares of Continental 13.000 employed in connection trans with these stock. actions. Continental sold or offered February 10, by majority 1969, On no sell its securities. There is evidence stockholders, vote of its en- Continental supporting exemption in the record an management tered into a contract with provi Continental from the Management Corporation, Contoba sions of 5 of the Securities Act of § corporation. Florida Contoba was own- as amended. (who ed Cotton than Tew more thirty years engaged had been III sales, management, business of sales Offering The 1969-1970 Con- training in sales insur- the field life tinental’s Securities Miami) franchising ance and and his son, Tew, Thomas Flori- member of the Subsequent entry to the of the Dis- practicing attorney da bar in Miami. trict 15, 1967, Court’s December or- management Under the con- terms preliminarily enjoining der Continental tract, granted option, Contoba was ex- from further violations of 5 of the piring February Securities Act of the District Court of Continental’s shares approved (August South 500.000 stock, Carolina par value, per share. $.10 1968) $1.00 (October 1968) and confirmed In option, return for this Contoba was preliminarily der enjoining given duty power February until tal and Chapter its creditors under 11 of 10, 1971, completely manage the af- Bankruptcy the Federal Act. Pursuant Continental, appoint fairs of all offi- plan, issued shares of cers and directors of and to its common stock to its creditors in ex- change revitalize Continental’s business aсtivi- plan, debt. Under broker-dealer Scheffmeyer firm of ties. previous spring se- Beginning of 1969 and well aware of in Continental’s ending refinanc- curities violations. of the fall in primary ing ob- was offering planned and at- Prior to the Hopefully, fi-

jective new Contoba. of tempted of to sale its common stock strength for was nancial prospective purchasers, ap- gained purchasers of Continen- from sought parently lay foundation purchasers stock, of from common tal’s exemption for an of such common promissory notes, and Continental’s registration provisions from options of from offerees First, of Act it had 1933. common Since the Continental’s stock. prepared prospects, a brochure Appendix testimony in relates Joint cluding unaudited statements financial involving purchasers only to transactions period ending May 15, for the As 1969. stock, of common we deal changed, Continental’s circumstances background only under- with the factual updated brochure in the months of lying offering of the 1969-1970 Conti- February and June of and the un- undisputed common It is nental’s stock. up- audited statements financial that no statement was filed period ending dated to the December or in effect with the and Ex- 1969. The front cover of the brochure change Commission. following legend: carried the The shares offered in this Private Primarily, strength financial sought for Con- Replacement registered have not been purchasers tinental was of Exchange with the Securities and Continental’s common For stock. under Commission Act the Seсurities beginning period spring in of amended, and are offered ending in the an offer- fall specific exemption under a which de- ing attempted 200,000 sale of shares pends upon the Intent of Investment ($.10 par Continental common stock Purchasers shares. these per share) value, planned. $1.00 Secondly, Continental had a standard planned This 1969-1970 of Con- Subscription Agreement and Investment tinental’s common stock was be co- prepared. Letter contemplated It was by ordinated Cotton Tew and Thomas Subscription Agreement that the and In- Tew, attorneys, both whom were both vestment Letter would be executed all substantially of whom were interested investors common stock of Conti- nental.1 Continental, and both whom were Subscription Agreement circumstances, Invest reason of some inter- provided vening contemplation, ment Letter ixx as follows: event now Company disposi- Continental Tobacco has which occurred makes such necessary. Carolina, South Inc. Columbia, being South I is- understand the shares Carolina registered sued to me have not Gentlemen: been hereby _ I subscribe to under shares the Securities your exemp- company’s unregistered amended, specific reason of a provision price per stock at share tion under the of the Act which $1.00 for my $_. depends aggregate upon In intent. investment purchase by connection, I In connection with the me understand your stock, of shares of I here- view of the Securities statutory represent you being basis for such that such are Commission my acquired exemption present for and not would not be if investment my to, representation merely or for meant view resale connection present with, such stock such shares. intention was hold distribution period By capital gains representation I months’ such mean that I the six sale, statutes, for a deferred intend to hold such for investment of the tax shares rise, my account, if the mar- own for a for a sale I do not market year rise, any part dispose or ket does not intend of all period unless, until, future. such I deter- other fixed shares my personal change the Com- the view of mine that some realize that all stamped Apparently, each of these Lastly, riott Hotel. Before meetings red a were held common stock of certificate legend attend- Court, reading some District as follows: the meeting toas what testified at each ants sold, may not be These Continental’s com- transpired relative to hypothecated transferred, pledged, or stock. mon registered they have first been unless meeting Probably, held the earliest of 1933 or the Act under of Dr. by in the home the Tews occurred satisfactory to the Com- unless counsel Testifying to this as Mrs. Simons. regis- opinion given pany has an Kuehl, meeting R. particular L. applicable or under said Act tration Simons, and Dr. Simons. Lucille Mrs. required. sky is not laws blue offering During of Continen- the 1967 Meetings the Tews with were held pur- warrants debentures with tal’s through help prospective purchasers, the attached, all three common chase legal pro- in and contacts the оf friends purchased and all debentures had such business, broker-dealer fession by rescission three had since recovered through support of investors. money they had invested. suits testimony replete The record is with primary interest testified that his Kuehl describing, explaining illustrating, and attending meeting curiosi- in was his each of these aids to 1969-1970 offer- happen going ty as now to what was ing of of stock Continental. Although he was relative to Continental. apparently in a distributor- interested A. ship cigarettes, was not he Venture Meetings Prospective Tew Pur- with buying any interested chasers the Common Stock of stock of Continental. home, meeting in At the the Simons’ ciga- topics As to the 1969-1970 of discussion included Continental, product common stock of the reor- Continental, record rette arranged ganization shows that the ings the transition Tews meet- management manage- prospective purchasers with from old to new management Simons; ment, planned home of Dr. and Mrs. how the new Tendrich; product, home of Dr. Max to merchandise Continental’s Balti- more, Maryland; management in at the and how the new the fu- Galt Ocean Mile planned Lauderdale, Hotel in Fort ture As at a Continental. Mar- finance purchase company mission now with an intent the officers of the and counsel any company concerning to resell reason of for foreseeable the business specific contingency anticipated or an the com- and financial statements change values, your pany any in market or and have access to been offered industry, company condition and I or or in and all records of contemplated liqui- any connection with a do information not desire further your any company. concerning or dation settlement or loan obtained data you acquisition you may, me for the if so de- of such I consent shares pledged sire, permit which such the shares shares were transfer of represent my only security, herein name referred to out of request my my rep- an with intent transfer is ac- inconsistent with when opinion you, companied resentation to of coun- the Commission either might regard disposition such or to the effect that neither the sale nor a sale sel proposed exemp- as a deferred sale to which a violation results amended, tion is or not available. X understand the nature of the no-action letter from the commission invest- being respect proposed ment made and transfer. the financial risks may your copy agree legend thereof. I have I this effect received a prospectus including placed written certifi- unaudited on the certificate May 15, financial statements as cates delivered me substitute by Clarkson, Gantt, Harden & Certified therefor. truly yours, Very Public I have Accountants. read and questioned reviewed same According strength of cluded financial statements. Conti- financial to the future “everyone “they testimony, to Tendrich’s nental, Dr. indicated Tews opportunity questions per- feelers, looking oth- had an to ask putting out were * * taining company to the аnd the fact people to make investments er bankruptcy, it in was topics had been what discussion in included Not being bankrupt- “pri- done to take out the term home was at the Simons’ although cy”. group Moreover, decision of to As placement”. vate Continental, in testimony invest Dr. Tendrich testi- the record in there was fied as fold- follows: them had with effect that the Tews them, in neither own meeting, again, meeting, beginning I at the but this At all again representing intro- persons to talk to them about Continental wanted again. by that, they explained it themselves, then over that and went and duced agreement they taking Conti- over were spot in If was weak there they employed Furthermore, had nental. *' * naturally, selling, and it was accounting expertise and a man in know, time, you I I at that knew but salesmanship experience in and an- some taking chance, I either would was something knew about other man who making possibly mon- lose it all or be growth processing of tobacco. and They ey, say so we did not too much. said, you’ they representa- During meeting, left. ‘Thank and superi- asserted the Continental tive of Approximately in October, 1969, and ority cigarettes, showed the of Venture meeting Baltimore, Maryland, a fourth the cut of tobacco difference between by prospective purchasers with was held cigarettes that in and found Venture particular time, the At Tews. this cigarette, in and found another brand Benjamin Tews met with Mr. Rosen- growth process- slides showed gentlemen bloom two or three other ciga- ing of in tobacco used .Venture meeting arranged at a that had been According to Alexander’s rettes. Mr. by Mr. them Willis Burnside. Accord- representative deposition, Conti- ing Tew, deposition to of Cotton “the pur- and its nental said Continental meeting purpose bring to Mr. cigarette speculative “a constituted er date, up Rosenbloom to because he They promises made no firm venture. group quite heavily his had in invested they selling; they profit, but had meeting, the old Continental”. At the anyone stock available for who wanted the Tews told Mr. and the Rosenbloom meeting, to After Mr. it”. people present that been representative Alexander told the of Con- discharged bankruptcy, Conti- tinental he to think would have trying get cigarette nental was man- purchasing his about Continental com- ufactured, manage- and that the new mon stock. trying put ment was Continental back meeting, thereafter, on feet. Soon At the close of Alexander invested plans Cotton Tew “told them about the for 100 shares Continental com- $100 private placement to make a and that mon stock. In deposition, his Alexander they (for private would be contacted explained purchase. his ultimate placement) at a later date Mr. Burn- thought I about it and called side”. me once twice when he was in town Lastly meetings say, as to the ‘I’m held would I’ll town. be involving Blayton. stop Tews over to see Mr. I 1969-1970 Could you.’ the common stock of I told him if I talk deposition anything of T. M. Alexander invest at all it be not reveals .would transpired early what late 1969 or more than that time $500 meеting possibility held at the he discussed me Marriott and viously heretofore, mentioned Devitt and ask- opening a warehouse themof accompanied Buehrer to the estate vited me, real I since ed meeting held the Tews at the Galt try a site. and find business, I subsequent finding Ocean Mile Hotel. Sometime and he site succeeded I meeting, $10,000 I Buehrer invested occasion on one in town came hand, said, On the other Mrs. Continental. and he out to the site him carried good. You Pettit first while heard ‘Well, pretty looks visiting lawyer lease’, the law office her I did. me a send adviser, and financial Mr. Mrs. Devitt. just time, I’m decided I All that $10,000 Pettit invested in the common of stock going worth take $100 gave check stock Continental and her give my you check now’. now and ‘I’ll for that amount to Devitt. Mrs. Pet- Mr. buy I said, some I ‘If decide later I tit testified offi- that she met none of the may said, ‘Well, He will’. prior cers or directors of Continental ‘Well, said, share’, and dollar one her investment the common stock my if I de- chances I’ll take Also, did Continental. she not remem- buy later’, any; buy I’ll some cide signing ber an investment letter. my gave him check at and so I * * * Frank Brennan’s involvement in the time. 1969-1970 of com- Continental’s com- 100 shares of mon stock was alluded into the testimo- by purchased Alexander were stock mon ny Ellis, Baker, of M. Jeff and Theodore Company and to T. M. Alexander issued April ‍​‌​​‌‌‌‌‌‌‌‌​‌‌​‌​‌​‌‌​​​‌‌‌​‌​‌‌​‌‌​‌‌​​‌‌‌‌‌‌​‍King. of Con- the President Ellis, employee Mr. prior an tinental, ICS, with At no time testi- Cotton Tew. arrangements fied request toas purchase 100 shares he made or after his of to meeting of Brennan relative to did Alex- a commоn stock

of Continental’s Upon room for prospectus request Continental. of Con- access to a ander have Brennan, of Moreover, secretary representative Ellis and his ar- tinental. ranged meeting a for room notified Alexander Continental of Continental later at a local hotel and ordered and their decision to lease the site coffee of not for sandwiches service Alexander. meet- recommended ing. Mr. meeting Ellis attended the The evidence reveals that Cotton and testified that people about fifteen other Thomas Tew their for investors search present. were also in the common stock of Continental were Baker, representative Jeff legal profes- sales assisted friends in the for sion the broker-dealer business. Mutual Company, Fund Life Insurance Devitt, friends These included James buying selling active Brennan, attorney, and Frank President securities for customers, testified that Capital of Investors Services OTC he first heard of Continental Bren- from only record not Securities. The reveals September nan in October, 1969. At that served Thomas Tew as an ICS time, explained that Brennan Conti- that vestigator lawyer, but that one ICS very speculative nental “was a stock August jointly Tews the trade over the counter would take it purchased $20,000 promissory a note of bankruptcy out money and raise some Continental with one Devitt and one cigarettes”. to Furthermore, make Bren- Moreover, pur- Brennan. OTC Securities selling nan stated that Continental was July promis- 11, 1969, $5,000 chased on a According Baker, lettered stock. “let- sory note of Continental. tered stock” is stock that is non-tradable non-registered. Subsequent very to his Mr. Devitt was instrumental leading Brennan, initial with Baker discussion Robert Buehrer and Mrs. E. Pet- pre- met one Tews. tit the Tews and Continental. As name, $10,- in his issued he sold stock of Continental Also, that testified Baker sign let- an investment did of Continental and that he stock common 000 of King. or not However, friend, to whether Theodore ter. old-time to his were letter tes- in the investment King, further Baker assertions the sale As to i,t signed “No, I true, King King testified: that some told that he tified carefully. It was read it avail- I did not but of Continental stock common ex- purchase; that he careless”. him able com- King that plained to King being shareholder, a than Other nature; i,n speculative mon stock any relationship special claimed no any King kind did show he kind with Continental. Continental; he at prospectus about King to request asked Brennan Subsequent to his letter; he wit- sign an investment common 10,000 of Continental’s shares let- King signing the investment nessed King Tew stock, to Cotton his stock sold King had asked read it and ter after The terms and Thomas Tew. it; re- he pertaining to questions sixty $5,000 or nine- sale cash a $10,000 King a check remaining $5,000. ceived ty day for the note Continental; re- he made out longer King the common no owns signed investment check and turned stock Continental. paid Brennan, and that he was letter purchased for those who As trustee Ac- Brennan. a finder’s $500 fee following prior Baker, cording to this Brennan home, presentation at his held sales everytime him that had told sale having and as interest one substantial $10,000 block of distributorship corporation in a sold, there would be stock was 5% cigarettes, Max Ten- Dr. Venture representative. to the sales commission very and enthusi- drich was a interested Frank Lastly, as to involvement Sometime astic investor Continental. offering of Brennan with the 1969-1970 meeting following previous in his stock, A. Theodore Continental’s common purchases of which resulted in his home King attending party a testified as to stock, family the common nine of his evening hearing one a be- discussion members, and of his friends four Brennan and Baker relative to tween Jeff bought business stock. associates According Continental’s common stock. During the summer of Mrs. King, his com- to interest Baker, the of- assistant Susan dental evening mon stock aroused that was Tendrich, gave Dr. Ten- fice of Dr. Max Later, expressed his interest. he presence her drich in Tew Cotton that Baker came evidence shows purchase price check for as the for $600 King’s again and mentioned to him office 600 shares of common stock. She At that Continental’s stock. heard at the office first time, King said, Jeff, you “Well, if can prospectus she testified that get me some it or hear it let about everywhere in Dr. Continental was me know”. re- Tendrich’s office. Baker never Mrs. According Ultimately, King 10,000 any purchased ceived stock certificates. Tendrich, purchased shares of the common to Dr. Baker stock of Conti- Mrs. purchase, King with nental. As to his testi- the common stock of Continental gave understanding $10,000 fied him that he his check with that if Baker; prior pur- sour, to all to or his stock she not lose after went prospectus money chase he did not a Fur- receive her that she had invested. Continental; prior purchase thermore, to he that Mrs. the evidence shows pur- any longer did not see statements of Baker no owns the stock she financial Continental; during that he received common summer chased money Tony DeGirolamo Mrs. Baker. her back Susan received she essence, testimony In constituted a Tony DeGirolamo, of hers his a friend Although explanation response to and their tes- patient of Dr. Tendrich’s. timony. requested Tew previously Cotton she had back, give did. he never her $600 participation purchase toAs his by Tony of Continental’s common stock DeGirolamo, Anthony patient of Dr. DeGirolamo, testimony of Dr. Ten- Tendrich, investing in the testified as drich reveals that he discussed com- hav- after common stock of Continental period mon stock of Continental over ing informed of been made visits Dr. Ten- DeGirolamo to prospects Dr. Tendrich. vestment office; drich’s that Dr. Tendrich intro- During office to Dr. Tendrich’s a visit during duced DeGirolamo to Cotton Tew cleaned, his teeth DeGirolamo visits; one his that DeGirolamo de- of his informed Dr. was Tendrich purchase cided Conti- stock prior com- investment in Continental’s meeting nental with Cotton time, mon stock. At DeGirolamo Tew, and that Dr. Tendrich received the Tendrich “that he would like told Dr. purchased by DeGirolamo his it and think over a little look into name as trustee To DeGirolamo. April gave Dr. DеGirolamo later”. On question why stock certificate buy Tendrich “consent that he would name, issued his Dr. Tendrich an- gave some, it”. he him a check for swered : ownership common stock of As to his Why my was the stock in name? testified: DeGirolamo time, Because stock at like own, paper here. That is all I this my original were, purchases we knew my name, It out was made but stock, that this non-tradable I guess counter, so, not on the I it is had informed DeGirolamo that private along I stock. Dr. went stock, awas non-tradable that I would Tendrich. I don’t know much too act as it, trustee and he indicated my about the stock. have all faith willingness so, do he because trust- Dr. Tendrich. me, only way ed and I said that was the I could for him. this stock physician Sackett, Dr. Walter and sur- Furthermore, testimony of Dr. geon, personal physi- and Dr. Tendrich’s Tendrich reveals DeGirolamo later cian, purchased revealed that he “$500 give posses- asked Dr. to Tendrich him worth” of Continental’s common stock on sion his stock certificate and that Dr. August 18, pur- Relative to his signed Tendrich certificate sent chase, the evidence shows that Sack- Dr. it to DeGirolamo. during ett first heard of physical given patient examination After Dr. his Tendrich sent the certifi- Tendrich; Dr. Dr. DeGirolamo, that to Sackett was cate Dr. Tendrich receiv- phone management called Dr. Tendrich on once ed a letter from that there Continental; split. twice about Dr. that be a would reverse stock As a re- subsequent Sackett to his sult, conversations Dr. “told Tendrich DeGirolamo Mr. with please Dr. Tendrich оf- was visited at his that return stock certificate to (him)” fice Cotton that Tew and Dr. in order that Sackett another certificate during meeting gave gotten. may Again, Tew a check for be in- DeGirolamo payable made $500 Questioned Continental. sisted that new stock certificate be relationship According as to in his with issued his name. to the stockholder, testimony Tendrich, Continental besides that of of Dr. DeGirolamo’s replied: Ventures, Dr. following Sackett “I request smoke in satisfied if relationship that ais ?” manner: * * * Dr. Tendrich talking was recalled to the wit- I was to Cotton following testimony ness stand Tew, they and Cotton Tew told me that very happy that certificate to show this issue have been prospectus could not anybody DeGirolamo, because look Mr. would who name * * you office, any my patients it call at it what would was again ** * * * give courtesy, stock that non-salable would me so she many they shares take some of the had a chance to read this times. could but holding my always open, textbook, name This was like bankruptcy then, fact, just my course, and issue from the stock DeGiro- with her shares of lamo, stock Mr. conversations pany, about the com- perfectly think, became, pretty him and I told it was I she right. going all aware what was on here— certainly not unaware. Also, Dr. Tendrich was familiar purchase of previously As herein, mentioned Mrs. assistant, his dental Mrs. Susan Baker sold her later stock to DeGirolamo. purchase, time Mrs. Baker. At the On examination cross relative worked for Dr. Tendrich for Baker had questions pertаining prospectus cog- years, fully approximately two lying left around office, his Dr. happening nizant of Dr. Tendrich what was prospectus testified that was left Tendrich’s office relative to Continen- lying only on private his desk in his stock, always and had tal’s been office, business he no idea how making interested many people prospectus, saw the Question- common stock Continental. always enjoyed showing he prospec- ed as to what he had told or had shown patients tus to interested and friends. Mrs. Baker about Dr. Ten- replied: drich During period beginning approxi- always kept prospectus We in the mately June, 1969, ending October, office, and I when first became and under the facts and circum- company, keep terested in the I explained preceding stances several prospectus open. I would it paragraphs, show the 1969-1970 everybody I it, who could bore with the common stock of Continental raised very because I was $140,450. interested and I interroga- In answer to the happen posed enthusiastic about some- Commission, tories to it thing this, like I because feel it ais Continental set forth the names each product, got purchaser wonderful I the more of Continental’s common stock it, into the better I period liked it. abovementioned, This why it, running test that we are dollar amount and number of shares time, so would be purchased, purchase: better all so and the date of following

[See illustration] 154 requiring registration of 1967 of cer

We have set forth the activities vestors great concerning tain information 1969-70 detail. We the securi approach, sale, done this the meth- ties offered A. because the C. Frost Company Corpo ods, periods results in are v. Coeur both D’Alene Mines 38, 40, strikingly ration, therefore, feel, 312 U.S. similar. We S.Ct. (1941), Ex not be L.Ed. 500 activities should change allowed stand in And Commission v. Guild Com isolation. Films Cir., 1960, though pany, true even un- 279 F.2d Continental was nom, management cert. denied sub Bank der different Santa Monica S.E.C., period. 364 U.S. 81 S.Ct. 5 L. latter Decisive us is (1960). Ed.2d management fact the latter injunction preliminary aware of the well These com statutes constitute a which had been entered because prehensive plan protect investors 1967 activities. filing requiring registration of a IV containing statement facts material Applicable The Law bearing upon the investment merit of se publicly are which The Securities or Acts offered of 1933 1934 curities through are directed protection toward the of in- sold the use of the or mails

155 practical no inter transactions where there through instrumentalities application Lynn Caraway, for or where the 252 need commerce, v. state remote”, H.R.Rep. (D.C.La., 1966), are too No. 858, af benefits F.Supp. 862 85, 943, Cong., (1934), 2nd 5 Katz Cir., denied 73rd Sess. F.2d cert. 5 379 firmed Cir., Company, 951, v. Treat and 2 373, L.Ed.2d Amos 21 89 S.Ct. 393 U.S. 1969, 1046, 411 F.2d 1053. 362.2 “exempted registration transactions” are complywith the Failure to 4 of Act enumerated the Securities provisions Act of § 5 of the § 1933, liability U.S.C., 15 may 77d. Securities and under § result in civil 1933 Exchange Horn, U.S.C., Commission 771(1); v. Van 7 12(1), criminal 15 § liability § Cir., 181, 1966, 24, U.S.C., 77x, 371 F.2d 187. These or under 15 § § “exempted enumerated injunctive 20, transactions” 15 U. action under § narrowly since the 77t(b). must be viewed Se S.C., § legisla curities Act of 1933 is remedial Generally, 5 of thе Securities § construction, tion entitled to a broad any 1933 “forbids the use means Corporation Hill York American In v. commerce or of mails to interstate Inc., Franchises, Cir., 1971, ternational 5 or securities without sell offer sell 680, 448 F.2d 690. having registration first filed a statement 4(2) Section Act of Securities and Com 1933, U.S.C., 77d(2) provides: 15 § mission”, United States Custer Chan Wing Corporation, 1967, Cir., provisions nel 4 F. 376 “Section 4. The of sec- 675, 677, denied, apply 2d 88 tion 5 cert. 389 U.S. to— shall not passing prohibition against S.Ct. However, this “broad and all-encom 19 L.Ed.2d 119. use involving any “(2) ^[*] transactions ^[*] public -X- by an offering.” -x- (cid:127)» issuer not -X- or mails means of interstate com prima The establishment of a unregistered merce to sell against securities must facie case for the conjunction be read in alleged with the claimed required 5 § violations exemptions which are in the prove nature the Commission three essential exceptions overriding purposes (1) registration elements no statement Act”, Wolfson, United States v. 269 was in securities, effect (2) as to the F.Supp. 621, (D.C., N.Y., 1967), 626 af defendant or sold offered to sell these firmed, denied, securities, F.2d cert. (3) transpor interstate U.S. 89 S.Ct. 22 L.Ed.2d 479 tation or communication and the mails (1969). The Securities Act of 1933 were used in connection with or sale “carefully exempts application from its offer of sale. See Lennerth v. Menden types certain hall, F.Supp. and securities (N.D., Ohio, 1964); Act of Section use or medium of through the merce, by any otherwise; sale. cation in mails to sell struments of statement transportation, rectly Section 5. (2) (1) shall be purpose to make use or 5(a) indirectly— carry interstate is in effect unlawful of sale or for mails or in transportation such (a) means or instruments of U.S.C., 5(c) Unless a security through cause to be carried commerce or of the any prospectus such any of the Securities any interstate 77e, provides: delivery means or in- security or communi- registration person, security, after com- di- or 771i or while the order or proceeding medium of ment or offer son, commerce or of the mails to offer to sell portation any ^[*] (c) any subject of this security, directly has It shall be unlawful means or instruments (prior or communication in interstate been ^[*] or examination under section any prospectus title. of a refusal order or or unless buy through registration filed as to such to the effective date of indirectly, statement) !{! registration ^[*] statement or otherwise to make use the use or any public of trans- any per- security, state- ^[*] stop

156 expectation (2nd there “is no reasonable Regulation 1693 that Loss, III Securities danger cognizable that defend- Corporation nor this v. 1961); York Hill ed. Inc., policy Franchises, ant will thwart Securi- International American engag- 1933, amended, Act of ties supra. thereby”. proscribed ing in the activities proved ele- all three Commission The injunctive Hence, relief was denied. prima facie made It thus out ments. “clearly ‍​‌​​‌‌‌‌‌‌‌‌​‌‌​‌​‌​‌‌​​​‌‌‌​‌​‌‌​‌‌​‌‌​​‌‌‌‌‌‌​‍The mandate of errone- application the statute. case for ous” which Court in its rule binds this accomplished, that was Once findings of District Court of fact review prove Continental’s burden became Supreme discussеd Court ex claimed to the entitled that it was Gypsum United States v. United States public e., no emption, that i. there Company, 364, 394-395, 333 U.S. 68 S. regis offering of the 541, 525, (1948): Ct. 92 L.Ed. 746 required, S.E. not otherwise tration was prescribes findings That rule 119, Purina, 73 346 U.S. C. Ralston v. jury fact actions tried without (1953); 981, 1494 Gilli 97 L.Ed. S.Ct. clearly ‘shall not be set aside unless gan, Ex v. Will & Co. Securities erroneous, regard and due shall be Cir., Commission, 1959, change F. 2 267 given opportunity trial 896, denied, 461, 466, 2d cert. 361 U.S. judge credibility court to of the 152; 200, York 80 4 L.Ed.2d Hill S.Ct. intended, witnesses.’ It was in all Corporation American v. International upon tried actions the facts without a Franchises, supra; Lively Inc., v. jury, applicable pre- to make the then Cir., 1971, Hirschfeld, 440 F.2d 10 vailing equity practice. judicial Since Cir., 1969, 632; Dunn, Chapman 6 v. findings review trial courts does Pedroni, 153, 159; 414 F.2d Strahan v. statutory or constitutional Cir., 1967, 732; 5 United 387 F.2d findings by limitations of administra- Wing Corpora States v. Custer Channel agencies jury, tive Court this supra; Exchange tion, Securities may findings reverse a trial fact supra; Horn, Commission v. Van Gar ‘clearly court where erroneous.’ The Cir., Strain, field F.2d v. practice equity prior present 116, 119; Wright, Cir., Woodward v. Rules Civil Procedure was that 108, 115; 1959, 266 F.2d findings court, of the trial when de- Commission v. Sunbeam pendent upon testimony oral where the Cir., 1938, Company, 9 Gold Mines credibility candor and of the witnesses F.2d Pur 702. Under Ralston judged, great best be had necessary ina standard that Conti it was weight appellate with the court. prove prac nental there existed no findings were conclusive, never how- application tical need for the 5 of finding ‘clearly ever. A is erroneous’ Act of 1933 to its 1969-70 although when there is evidence to public or that benefits suppоrt it, reviewing court on the any application be derived entire evidence is left with defi- proof Act were too remote. nite and firm conviction that a mis- exact, “explicit, and not built take has been committed. conclusory statements” of Lively Hirschfeld, supra. v. Speaking Chaney for this Court City Galveston, Cir., 368 F.2d Our Standard Review 774, 776, Judge amply Ainsworth ex- plained “clearly erroneous” mandate The District Court found as a fact 52(a), of Rule Federal Rules of Civil public offering there had been no Procedure: securities here involved. It held finding clearly A erroneous transactions involved although litigation when, exempt there is were thus evidence from the it, support reviewing provisions court on the of the Securities wi,th Act of entire evidence left a definite amended. It further held concerning receipt a the has ed of brochure mistake a that firm conviction and corporation and unaudit- which included the evidence Where committed. been statements”; way, that “the testi- ed financial either support a conclusion purchasers mony the common stock judge by between trial the choice a Continental, weight called who were as witness- of the permissible views two erroneous, by plaintiff, clearly es the established these that is not evidence had written and totally investors both judge re- the fact that reeei.ved the and concerning corpora- oral information the impeaches nei- jected opposed view an tion, they that had and access propriety impartiality nor the ther his they might rejec- information additional which total Such his conclusions. they required requested, and that impugn in- the itself tion cannot personal had had contacts with the offi- trier tegrity of the confidence corporation”; of the defendant cers that that in order settled It well fact. “these witnesses further testified that reviewing court to set aside for a find- they investments, sitting risk of their knew the by ings a trial court of fact they regis- clearly that knew stock not jury, it must be a without tered, they purchased findings and had that are that such demonstrated evidentiary stock with intent tó hold support the stock for adequate without ; by record, investment not to resell it” that induced or were “the evidence law, also showed that the stock of the erroneous view findings original has showing remained hands that burden of purchasers i,s clearly defendant, that one at- Con- erroneous are tinental, findings tacking dis- refused to of a allow transfer of The them. unregistered stock”; lightly this not, therefore, and that “the trict court are experience background aside, Ap- for the Court these to be set they vestors were facts, such that peals trier of and does were a position judgment to make an its own informed not substitute investment e., decision, i. could of the trial court. fend for them- selves”. key present to our situation is The language, foregoing “were found Furthermore, Court found that by induced an erroneous view persons offered common “the who were law”. stock, purchase stock, options to promissory notes defendant Did Transactions Constitutе pro- corporation were furnished and/or Offering Public Securities? type and same kind vided access of information that would have other- District Court concluded a mat- as registration provided wise been ter of of securi- law “the pursuant filed to Securities statement defendant, Continental, from ties amended, Act of rules June, October, were trans- regulations thereunder”. involving any public actions not offer- ing, therefore, exempt Commis- are, from the In Securities supra, Company, provisions of the Ralston Purina sion v. Securiti.es treasury made Apparently, unregistered amended”. stock pur- District Ralston Purina Court arrived conclu- available key employees. by finding approximate- sion “from certain of chase ly subscribing June, Among October, were em- 1969 until those defendant, artist, ployees bake offered common the duties foreman, foreman, loading persons, shop stock of which sold com- chow writer, assistant, persons”; copy mon stock to 35 electri- “almost clerical clerk, agree- clerk, all of cian, these office order investors executed an stock mill pri- trainee, corporation production ment with trainee, the defendant ste- credit or to the of their Pu- Ralston nographer, and veterinarian. (‘investment letters’) acknowledg- argued offerees which rina that because Channel Custer In United States employees trans- key limited supra, Wing Fourth Corporation, exempt offering, private awere actions question “The Circuit concluded Supreme Court registrаtion. The * * * stock was the sale and whether Act of discussed the regis- offering, public required to be offering exemption: private its tered with pro- design is to statute of the The offering private ex- Commission, aor dis- by promoting full tect investors registration by empted 4 section thought neces- information closure Supreme (1), Court’s is controlled decisions. investment sary to informed Co., Purina v. Ralston decision S.E.C. pri- interpret way to natural The 1494 97 L.Ed. 73 S.Ct. 346 U.S. light exemption offering inis vate (1953)”. exempt statutory purpose. Since , to as which those are transactions have four relevant cited Courts (the for practical need determining ‘there is no being helpful in factors as applicability of bill’s) application,’ the pub whether an of securities is 4(1) on whether turn should private: § lic or persons affected particular class and their 1. The number of offerees An protection of the Act. need the offering relationship to to each other to are shown to those who the issuer. for to fend themselves able be 2. The number of offered. units involving any public ‘not transaction offering. 3. The size offering.’ offering. 4. manner The of the holding Purina’s In Ralston Corporation Hill York American v. key employees did transactions with its Franchises, Inc., supra; International Chapman exemption not an from the constitute Dunn, supra; v. Garfield v. registration requirements 5 of Section Strain, supra; Pedroni, Strahan v. 1933, the of the Su- Securities Act of supra. preme Court concluded: test, The course, ultimate Keeping broadly re- in mind the particular persons whether the class of purposes medial of federal securities protection Act, affected need the legislation, imposition of the burden Company, S.E.C. v. Ralston Purina proof plead on an issuer would who supra. exemption seems to us fair and From the evidence recited in the be- Buffalo, R. reasonable. Schlemmer v. ginning opinion of this we are left with' Co., & 10 P. U.S. R. abiding conviction that Continental 407, 408, S.Ct. [27 681]. L.Ed. carry failed to its burden. Agreeing, thought the court below primarily The record does not burden met because of establish that each respondent’s singling relationship offeree had purpose out with Conti- giving key employees offerings. nental access to for stock the kind of in- registration exemption But formation once it is seen would have question knowledge disclosed. The turns on the offers of common dentists, physicians, were to offerees, motives, housewives, the issuer’s lauda- though men, they may be, ble ir- business who had no fade into relation- ship with inquiry relevance. The focus other should than that purchases be shareholder on the need once the of the offerees for the were protections registration. purchasers None of any made. afforded had opportunity employees inspect actual The here shown Continen- tal’s verify records or access to kind of information themselves statements made them which disclose. inducements purchases. opportunities pressure obvious Some pur- of chasers imposition never met made it advisable that officers of cоmpany prior compliance be entitled acquiring the stock. test purchasers must take for investment. adhere to must We Loss, Regulatipn [653], this Court announced heretofore Merger Corp. In Corporation v. American 665-672. Mines See York Hill 1943), Inc., supra: (9 Grismer, Franchises, 137 F.2d 335 Cir. ternational denied, 320 U.S. 64 S.Ct. cert. to which of a class The definition (1943); Mono 88 L.Ed. 478 S.E.C. v. can made in an offer of (D.C.Utah Kearsarge, F.Supp. offering exemp- private reliance 1958)”. accordingly, may, be summarized lawyers, about tion ties where the their to a ferees suer as follows: where ties. able the issuer and offeree does not create then the facilities tionship example, must refer tion about stitute versely, members of special stantially different remote Also to be considered is the rela- privileged relationship offering ^[******] diverse and unrelated unnecessary knowledge the issuer is so advantages obtain grocers, exemption if the the class their between the offerees the issuer and its securi- to all limited the would have the term acquiring present offering all public would public relationship of each for their persons plumbers, offerings in the offerees sub- necessary the number from the is ‘public available. interest make knowledge they may con- with the having information other. being large group, protection, of securi- etc., then status offering’ registra- informa- between appear- is of of- to be Corporation, made Court entered its Con- such i. e. For not is- of vate one no ment, sufficient securities of a securities siоn’s brief nental’s sion of be satisfied for establishment United “The offerees who were offered com- mon sion of curities with the intention to hold their a view to distribution or resale of their stock, and its the entitlement of Continental’s leged relationship private offering toAs securities expressed challenge by the Commis stock, options purchase standing alone, however, fact that offerees States the second condition securities Our unless to render an * * * promissory supra. reading of investment v. the instant and for District Court’s conclu the the conclusion Custer Channel has been “purchased thei,r between Continental purchasers exemption purpose Conclusive evidence first condition for purchase establishment of offering the Commis met case reveals the District required of aof of not of Conti fact offering by invest * * is § a privi- Wing pri not se of ”, tion from the Wing Corporation, cuit, facing in an vestment cial risks copy cers company. cluding countants. en, same ny In and financial statements formation tions I understand the * * * 5 as a and do United States company ^[*] investment letter of the May 15, 1969 (to unaudited your Gantt, prevent being ^[*] private thereof. I contentions that or data I have not have company registration requirements ‘these are concerning written ^[*] desire made supra, Certified Public illegal questioned financial ‍​‌​​‌‌‌‌‌‌‌‌​‌‌​‌​‌​‌‌​​​‌‌‌​‌​‌‌​‌‌​‌‌​​‌‌‌‌‌‌​‍statements offering, v. Custer Channel read and I nature ^[*] concerning your and counsel have Clarkson, assured and the any prospectus distributions) of the only precau- the business ^[*] Fourth Cir- further held: received of the assertions reviewed compa- exemp- finan- Hard- ^[*] offi- Ac- in- in- ultimately prove that ard Tenth tion istration and the Continental ceived both there that all offerees of have additional ferees of its securities had ' sured, no matter what stances, by giving tained it same information that noted. though without guards 1969). curities In implies concerning Continental, required was a Lively Circuit Ralston Purina ‘ * * * in a and sanctions.’ Regulations omega, information did not lack of written that v. held that under or Hirschfeld, supra, requested, protections as Professor its securities public affirmatively prove and oral 2632 each offeree exemption which says much if the issuer must statutory to all would be con- need for IV access (2d the circum- and that all too that of the Act. they might statement Loss, ed. Loss has informa- offerees had re- stand- all Supp. safe- reg- any Se- as- of- personal offerees regarded of its securities had and are not to be as a basis contacts exemption registration.’ with officers of Continental. for signing The The evidence shows that neither Theo- investment letter King dore nor T. M. Alexander imprinting legend ever had of a on prospectus, access to one of Continental’s stock certificates are not sufficient * * * King and that neither offering nor Mrs. Pettit constitute prior private i,n their had occasion to proof one the absence of purchasers meet with that officers of actually Continental. had ac- i,s i,s can find there ex- no that we But no to the There evidence evidence as perience Appendix buyers of the than all other in the Joint plaintiffs. had purchasers And of Continental securities there is no evidence many additional informa- as to how access to offers were actual made to concerning they persons, experience Continental which other tion or the might required requested. persons. those defendants did testify they had made no other Therefore, Conti we hold that offers. Without such evidence in the failed sustain burden nental record the Court cannot determine affirmatively proving of the of that all protection. whether the needed class enjoyed a relation ferees It was incumbent on the defendants to making registra ship submit this evidence. Since did unnecessary. not, they consequenc- must suffer the inquire Commis- into the Secondly, we es. evi- that Continental’s contention sion’s See, also, Bryant Uland, F.Supp. of- of actual number dence as (D.C., Tex., 1971); Nicewarn woefully re- short “was ferees Bleavins, er v. 244 F.Supp. (D. 261, 265 establishing private quirement” C., 1965). Colo., exemption. Specifically, present To the Commission’s conten- despite the contends that Commission tion, Continental contends that “it ap- finding “From Court’s District evidence, clear from the October, and the trial June, proximately until found, thirty court so there were defendant, Continental, offered 1970, the * * * * eight ”, offerees but we persons, it of which to 38 common stock * * testimony no or evidence introduced ”, persons find sold common made no transcript proceedings Dis- of- other than those desсribed in the fers is barren evidence on trict Court evidence entered on the Com- identity offerees. exact number behalf of evidence, the lack mission.. of such Because reach contends that we could Commission application Upon of the control result as District Court the same the ling legal principles the evidence ad to Rees, 898, F.Supp. Repass in 174 904 v. compelled record, in are duced this we (D.C., Colo., 1959), in and this Court hold to dis that failed Continental Corporation In- American York v. Hill establishing charge “pri a its burden of Franchises, supra. Inc., Per- ternational offering exemption”. vate contention, tinent to the Commission’s Moreover, applying Ralston the Repass in the District Court said: failed to standard, Purina plaintiffs Here the shown that there proving its burden sustain experienced both businessmen and be appli practical need for no existed them, experienced investors. As to this Act of of5 Securities cation § they Court feels that did not need the offering of securi its 1969-70 1933 to protection of the act in relation pub prove that the did it Neither ties. purchases. However, these the burden registra from derived be lic benefits to showing public the lack need were too remote. protection claiming is on the one exemption, here the defendants. Enjoined? Be Should supra; Wright, Woodward v. v. S.E.C. 20(b) Act of Securities Section Co., Cir., 1938, Sunbeam Gold Mines 9 1933, U.S.C., 77t(b) provides: 15 95 F.2d 699. The defendants testi- appear to the fied it that sold in shall Whenever any person first transaction to en- no than that is more nine Cоmmission persons. any engage gaged acts And to in no than or about to more four persons practices or will the second transaction. or which constitute 162 States, 1928, provi- Co. v. United viplation & Swift a constitute 311, 314, any 326 S.Ct. [48 rule 276 U.S. subchapter, or of this sions course, and, of it be can L.Ed. 587] authori- 72 prescribed under regulation or showing discretion, utilized without a may even in its ty thereof, wrongs. moving party past any But bring court district action satisfy is court relief must or United States of the United States necessary enjoin determination needed. The any Territory, such court cognizable upon proper some there exists practices, a or acts violation, danger temporary of recurrent some- showing permanent thing restraining possibility than shall more the mere injunction order keep granted which serves the case alive. without bond.

be The chancellor’s decision is based provision, interpreting the Sec- In circumstances; his discretion all Exchange ond Circuit strong necessarily broad and show- Cir., Culpepper, 2 Commission v. ing of abuse must be made to reverse F.2d reasoned that there- 270 it. To considered are bona fides be question “The for the court under * critical expressed comply, intent ** is a reasonable is whether there the effectiveness of discontinuance expectation the defendants will and, cases, in some character by engaging policy thwart past violations. thereby”. proscribed This activities detailed, See, also, the definitive dis- reasoning by the Circuit Second arose cussion in Com- lаnguage from the found United Griffin, F.Supp. 883, 886- mission Company, States v. T. Grant & W. (S.D., Miss., 1968). 894, 97 U.S. 73 S.Ct. L.Ed. 1303 (1953): already [Page stated We of the se violation ante] may be moot The case nevertheless man new Continental’s curities laws demonstrate that if the defendant can during not be agement 1969-70 should expectation that ‘there is no reasonable apart those and considered isolated wrong wi,ll repeated.’ [United occur Continental which violations America, 2 v. Aluminum States Co. of resulted in red which Cir., page F.2d 416 448]. injunction. temporary issuance heavy the de- burden is a one. Here management knew of new Continental’s fendants told the court the inter- injunction temporary the reasons longer no and disclaimed locks existed entry. the 1969- Yet behind its intention revive them. Such securities, profession does not to make a suffice management es the new although it is case moot one sentially procedures. the 1967 followed determin- factors to be considered in should must hold that Continental We ing appropriateness granting an enjoined from further violation be against injunction the now-discontinu- provisions of the Securi ed acts. 1933, Act of Securities and ties 1969, Cir., MacElvain, 5 Commission v. Along power hear 1134, 1137, denied 397 F.2d cert. grant case, power in- the court’s 1087, 265. 25 L.Ed.2d 90 S.Ct. U.S. junctive discontinuance relief survives illegal conduct. Hecht Co. v. foregoing necessarily fol- From the 321, 64 S.Ct. judgment Bowles U.S. [321 the District lows Mfg. supra; 754], 88 L.Ed. Goshen the case re- reversed and Court must Mfg. Myers Co., entry appropriate v. A. for the Co. Hubert manded junctive relief. 105, 61 37 S.Ct. U.S. injunc- purpose direc- L.Ed. 248. remanded with Reversеd violations, tions. prevent future

16B REHEARING FOR PETITION ON REHEAR- FOR PETITION

AND BANC EN

ING CURIAM:

PER Rehearing denied The Petition Judge panel nor no member of also, F.Supp. D.C., 334 961. See regular Court on the active service

having Court be requested that banc, (Rule rehearing en

polled on Procedure; Appellate Rules Federal 12) Peti- Rule Fifth Circuit Local Rehearing denied. En Banc is tion for America,

UNITED STATES Appellee, al.,

Marvin R. COLE et Defendants- Appellants. 817-819,

Nos. Dockets 72-1075 72-1077.

United Appeals, States Court of

Second Circuit. May

Argued 12, 1972.

Decided June 1972.

Certiorari Denied Oct. See 93 S.Ct. 238. with their notes ers * * * Well, the after Mr. Tew Kuehl, Simons, Dr. Simons Mrs. or Mr. left, had discussed amount of we looking they or at recalled testified that par- stock. We felt all wanted to we seeing prospectus of Continental. ticipate in that it this. We knew was unregistered stock, that we could not not the Tews offered As to or whether trade, but we all felt that we were meeting stock at the the common to sell getting ground in the floor of a com- he Kuehl testified that great pany potential, that had and we According they did not recall that did. investment, decided to make an and at Simons, those to Mrs. present the Tews asked time, group I decided that they in- whether not were would them, be the trustee for Ias investing in terested Continental. you knowledge, know, had some small meeting Lastly, spring as to the knowledge of the stock market. home, testified the Simons’ Dr. Simons present not if that they those were asked Mr. Robert Buehrer attended the meet- buy wished to ing occurring with the Tews at the Galt However, Continental. Dr. did Simons Ocean Mile Hotel Fort Lauderdale. testify “it or less was more taken Mr. Buehrer first learned of Continental that if were account were interested attorney, from his James Devitt. Mr. meeting, after this we let them wоuld Buehrer accompanied was invited to and know that we would like to invest”. meeting to the with the Tews Mr. Quite clearly, the evidence the rec- Devitt. As best as Mr. Buehrer could remember, ord shows that present the summer of meeting at the were large very presentation 1969 a Devitt, Tew, Mr. relative Tew, Tom Cotton Dr. to the common stock Tendrich, Max Continental was and Frank Brennan. held in the home of Dr. Max Tendrich, a After meeting, approached Buehrer meeting dentist. Present at ‍​‌​​‌‌‌‌‌‌‌‌​‌‌​‌​‌​‌‌​​​‌‌‌​‌​‌‌​‌‌​‌‌​​‌‌‌‌‌‌​‍the to view again Tom Tew to they discuss how were presentation Tendrich, were Dr. Max planning to product sell Continental’s family, nine Dr. members of Tendrich’s possibility discuss the Buehrer Mr. and six of Dr. Tendrich’s friends and investing money in Continental. Accord- business associates. ing Buehrer, Tew, Tom after discuss- presentation The was conducted ing plans their selling Continental’s Cotton represented Tew. Mr. Tew product, “Well, said: we will come over conducting private Continental was your you, office and you talk to placement of the common stock and he buy can you the stock then if so desire”. wanted to present if know those participate. like to present Approximately To days aid those later, one or two making their minds whether or evidence shows that up Cotton Tew participate gentleman private placement another came Buehrer’s of- stock, fice. Continental’s common At that gave Mr. Tew time Buehrer them explaining $10,000 showed a movie a check for purchased 10,000 Continental’s growing method of producing shares Cоntinental’s safer common stock. cigarette, Although and he pres- given showed to Buehrer those was then a Con- ent prospectus prospectus, tinental which in- he testified that he pur- leading subsequent his in- it. As to later read to his facts did not He stock of Continental in Continental. of the chase vestment $100 meeting. office, meeting Buehr- held his and invited and the was called called as follows: or not he was er testified Whether Blayton meeting Mr. vited by * * * I Again, I went over he the officers one of product. I thought they a fine had purpose to remember. unable was great possibilities. thought it had meeting New “to discuss the only concerned how * * * ”. Venture explained They going it. to sell

Notes

tion would have disclosed or cision, cess supra, within the tions must be must have such v. Custer executive officers of the issuer who an terized as a ance know each other and of course have similar offering According offering “In such interests and being F.Supp. would more order for an exemption Channel to the information private to a select met. information public District Court’s de- Wing offering. First, knowledge likely group offering; and, United States Corporation, two condi- be charac- secondly, have ac- registra- offeree to fall high but prior ters executed mon sertions curities, otherwise been ties Act of defendant portant and/or and kind of information that would have District Court regulations statement stock Commission), provided conclusion of fact entered from included in the investment (who corporation purchasers by apparently fi.led were called provided thereunder”. access to the same as some of testimony pursuant amended, and from Continental’s were furnished notes arose from as- in a the investors Continental’s to Securi- witnesses and rules This im- registra- the com- by type Dis- let- se- information that kind of to the type cess finding as to Court’s trict registration statement Conti- included information kind disclosed. brochure. nental’s Dis- clear alone, it is Taken pointed Com As out finding that evidentiary Court’s trict mission, it were assumed that “Even if executed investors of these all “Almost provided prospectus those Continental’s corpo- defendant agreement with it was disseminated offerees to whom their purchase of prior to the ration registra information with all the letters’) (‘investment disclose, not suf this would tion would receipt acknowledge of brochure which requisite relation fice to establish corporation and which concerning the company”. ship of those offerees to statements” financial unaudited cluded mere That disclosure the same justify District itself did not contained in information would be conclusion abovementioned Court’s does assure a exemption statement Conti- Quoting pertinently fact. emphasised this Court Agreement In- Subscription nental’s International in Franchises, York American Hill the assertions as to Letter vestment (Footnote 5). Inc., supra, receipt infor- therein relative However, mere disclosure concerning future mation required ain information as is same registration stated: prospects, letter alpha not the statement

Case Details

Case Name: Fed. Sec. L. Rep. P 93,507 Securities and Exchange Commission v. Continental Tobacco Company of South Carolina, Inc.

Court Name: Court of Appeals for the Fifth Circuit

Date Published: Aug 14, 1972

Citation: 463 F.2d 137

Docket Number: 71-2955

Court Abbreviation: 5th Cir.