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SEC v. PENN CENT. CO.

December 28, 1976

SECURITIES AND EXCHANGE COMMISSION
v.
PENN CENTRAL CO., et al.



The opinion of the court was delivered by: LORD, III

 The moving defendants are: Penn Central Co. ("Penn Central"), a Pennsylvania holding company which during the relevant period owned all of the stock of the Penn Central Transportation Co. ("Transportation Co."); William C. Baker, a past director and president of Macco Realty Co. ("Macco") and director and chief executive officer of Great Southwest Corp. ("GSC"); *fn1" David C. Bevan, a past officer of the Pennsylvania Railroad Co., *fn2" chairman of the finance committees of Penn Central and Transportation Co., director of Transportation Co. and director of GSC; H. L. Caldwell, a past officer of GSC and officer and director of Macco; William D. Ray, a past officer of GSC and officer and director of Macco; and Angus G. Wynne, Jr., a past president and chairman of the board of directors of GSC. Penn Central filed for reorganization under Chapter XI after this suit and the motions involved herein were filed. *fn3" An order staying all proceedings against Penn Central was entered on August 16, 1976. Therefore, we will not consider the motions of Penn Central at this time. Any reference hereafter to "defendants" shall be deemed to be the moving defendants exclusive of Penn Central.

 Plaintiff seeks a permanent injunction and disgorgement of allegedly unlawfully obtained money. Defendants argue that the SEC is not entitled to injunctive relief because there is no danger of future violations of the securities laws such as would be prevented by the injunctive relief sought. Defendant Wynne contends, in addition, that the injunctive relief sought by the complaint is moot. All defendants maintain that the SEC claims for disgorgement should be dismissed because such claims are ancillary to injunctive relief and, therefore, inappropriate because injunctive relief is improper in their cases. Defendants assert that the SEC's right to claim disgorgement is only secondary, the primary right belonging to private litigants. They also argue that the SEC's claims for disgorgement are a penalty or punitive in nature and thus should be denied. Defendants Wynne and Baker contend that the SEC is barred by laches from seeking disgorgement. Defendant Baker argues that the settlement of prior litigation between himself and GSC extinguishes and bars the SEC's suit herein. Defendant Wynne asserts that the complaint should be dismissed as to him for failure to comply with Fed. R. Civ. P. 9(b).

 I. Injunctive Relief

 Congress has given the SEC power to seek injunctive relief under both the Securities Act of 1933, 15 U.S.C. § 77t, and the Securities Exchange Act of 1934, 15 U.S.C. § 78u. Such a statutory grant must be construed in accord with "all those considerations of fairness and justice that have been the historic concern of the equity courts." SEC v. Harwyn Industries Corp., 326 F. Supp. 943, 955, 958 (S.D.N.Y. 1971). The critical question is whether there is a reasonable likelihood of future violations. United States v. W.T. Grant Co., 345 U.S. 629, 633, 97 L. Ed. 1303, 73 S. Ct. 894 (1953); SEC v. Shapiro, 494 F.2d 1301, 1308 (2d Cir. 1974). The fact that the defendants have committed violations of the securities laws, and for the purposes of a summary judgment motion we assume that is true, gives rise to the inference that there is a reasonable likelihood of future violations. SEC v. First American Bank & Trust Co., 481 F.2d 673, 682 (8th Cir. 1973); SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1100 (2d Cir. 1972); SEC v. Keller Corp., 323 F.2d 397, 402 (7th Cir. 1963); SEC v. J & B Industries, Inc., 388 F. Supp. 1082, 1084 (D. Mass. 1974). Cf. Tanzer v. Huffines, 408 F.2d 42, 43 at n.1 (3d Cir. 1969).

 A number of factors have been considered as bearing on the likelihood of future violations. These include: (1) the nature of the past violations, including the number, seriousness and novelty of the transgressions, the motive and intent of the perpetrators, and the time elapsed since the violations were committed, SEC v. Datronics Engineers, Inc., 490 F.2d 250, 255 (4th Cir. 1973), cert. denied, 416 U.S. 937, 40 L. Ed. 2d 287, 94 S. Ct. 1936 (1974); SEC v. Manor Nursing Centers, Inc., supra at 1100-01; SEC v. National Student Marketing Corp., 360 F. Supp. 284, 297-300 (D.D.C. 1973); (2) whether defendants have admitted their guilt or continue to maintain their past conduct was blameless, SEC v. First American Bank & Trust Co., supra at 682; SEC v. Manor Nursing Centers, Inc., supra at 1101; SEC v. MacElvain, 417 F.2d 1134, 1137 (5th Cir. 1969), cert. denied, 397 U.S. 972, 25 L. Ed. 2d 265, 90 S. Ct. 1087 (1970); (3) whether defendants discontinued the wrongful activity only at the threat of an investigation or after the filing of a complaint, SEC v. Manor Nursing Centers, Inc., supra at 1101; SEC v. Keller Corp., supra at 402; (4) the sincerity of defendants' assurances that they will not violate the federal securities laws in the future, *fn4" SEC v. Manor Nursing Centers, Inc., supra at 1101; SEC v. National Student Marketing Corp., 402 F. Supp. 641, 652 (D.D.C. 1975); and (5) defendants' opportunity to commit further violations, SEC v. Shapiro, supra at 1308; SEC v. Pearson, 426 F.2d 1339, 1343 (10th Cir. 1970); SEC v. National Student Marketing Corp., 360 F. Supp. at 300.

 Since all defendants have submitted affidavits regarding the propriety of injunctive relief, we will treat their motions to dismiss under Rule 12 and their motions for summary judgment under Rule 56 solely as motions for summary judgment under Rule 56. Where a movant initially sustains its essential burden of showing that there is no genuine issue of material fact, the opposing party, to avoid summary judgment, must present evidentiary facts in opposition or state by affidavit a legitimate basis for its inability to do so. Scooper Dooper, Inc. v. Kraftco Corp., 494 F.2d 840, 848 (3d Cir. 1974); United States ex rel. Tyrrell v. Speaker, 471 F.2d 1197, 1202-03 (3d Cir. 1971). "It is not enough to rest upon the uncertainty which broods over all human affairs or to pose philosophic doubts regarding the conclusiveness of evidentiary facts." Robin Construction Co. v. United States, 345 F.2d 610, 614 (3d Cir. 1965).

 We find that defendant Wynne has met his burden in establishing the justification for summary judgment on the issue of injunctive relief. Defendant Wynne submitted an affidavit, dated November 15, 1974, which states that "he is not an officer, director, or employed in any manner by a public company; that he is not currently engaged in business activities which involve publicly traded securities; that due to the state of his health * * * he is not likely to have officer or director relationship to a public company in the future." Two medical doctors supported defendant Wynne's claim of poor health. *fn5"

 Despite ample opportunity to dispute defendant Wynne's evidence, and without a legitimate excuse for failing to produce any facts to counter the contentions of Mr. Wynne, the government merely asserts that the defendant has the ability to violate the law and that it is reasonably likely that he will do so in the future. We disagree. We have no reason to doubt Mr. Wynne's evidence to the contrary. *fn6" Our position is similar to the court's in SEC v. National Student Marketing Corp., supra, 360 F. Supp. at 300, where the court entered summary judgment for two defendants who were retired and, with minor exceptions, were not connected with the securities field or with the management of any public corporation, and for a third defendant who still practiced law but had no involvement in any corporate or securities-related activity and was approaching retirement. All three defendants had claimed that they were not and did not expect to be directors or insiders in any public company.

 Defendants Baker, Bevan, Caldwell and Ray also have submitted affidavits regarding their current personal affairs in support of their motions. But given the allegedly heinous nature of their past violations and the fact that we are not convinced that these defendants will not have future opportunities to violate the securities laws, we will deny their motions for summary judgment.

 Within this group, defendant Bevan submitted the most convincing affidavit. He swore on June 20, 1974 that "he is sixty-eight years of age and virtually retired; that he is not an officer or employee of any corporation; that he is not a director or in control of any publicly held corporation; that he is a director (outside) of only one corporation which is a wholly-owned subsidiary of Transway International Corporation; and that he is not an officer, director or employee of Transway International Corporation." However, defendant Bevan did not state his intention not to serve as an officer or director in a publicly traded company in the future. We do not consider his age alone to be a sufficient showing that there is no reasonable likelihood that he will commit future violations of the securities laws. Indeed, at the time of the affidavit Bevan was serving as a director of a corporation.

 The Baker, Caldwell and Ray affidavits merely disclaim any present or intended future special knowledge of, relationship with or connection to the defendant corporations and their subsidiaries and affiliates. We have no reason to believe that these three defendants are not in positions or will not be in positions with other corporations where they can violate the federal securities laws. The motions of defendants ...


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