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05/26/89 Thomas M. Svalberg, v. Securities and Exchange

May 26, 1989

THOMAS M. SVALBERG, PETITONER

v.

SECURITIES AND EXCHANGE COMMISSION, RESPONDENT; C. BROCK LIPPITT, PETITIONER,

v.

SECURITIES AND EXCHANGE



UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

COMMISSION, Respondent 1989.CDC.180

Date Decided: May 26, 1989, Petitioners for Review of an Order of the Securities and Exchange Commission.

APPELLATE PANEL:

Wald,. Chief Judge, Edwards, Circuit Judge, and Parker,.. District Judge. Opinion for the Court filed Per Curiam.

PER CURIAM DECISION

In these two consolidated cases, Thomas M. Svalberg and C. Brock Lippitt petition for review of an order of the Securities and Exchange Commission ("SEC" or "the Commission") affirming sanctions imposed upon them as principals in a now-defunct securities brokerage firm, Security Traders, Inc. , by the National Association of Securities Dealers . Because the record before us clearly supports the SEC's judgment on the violations found and the sanctions imposed, we deny the petitions for review. I. BACKGROUND

In 1983, the District Business Conduct Committee of the NASD found petitioners guilty of violating Article III, § 1, of the NASD Rules of Fair Practice, which requires members to "observe high standards of commercial honor and just and equitable principles of trade" when conducting business. The DBCC found the petitioners guilty of violating this standard because of their actions involving SCI's underwriting of an issuance of stock of the SanAnCo Energy Corporation. The stock had been offered on an "all-or-nothing" basis, whereby no shares are sold unless a specified minimum is sold within a limited time period, and the underwriter receives a commission only if the offering is successful. Just before the closing of the SanAnCo offering, SCI's four principals decided to purchase a little under two percent each of the SanAnCo shares because of their fear that the offering might otherwise fail due to a weak market. The DBCC found, and the NASD affirmed, that this action violated Article III, § 1, because, rather than returning investor funds as promised in the prospectus, petitioners fraudulently created the impression that the minimum number of shares had been sold to the public.

On appeal to the SEC pursuant to section 19(d)(2) of the Securities Exchange Act ("the Act"), 15 U.S.C. § 78s(d)(2) (1982), the Commission affirmed the NASD's finding that the petitioners had violated the NASD rules by "[creating] the facade of a successful offering" in contravention of the conditions under which they had sold the stock to investors. C. Brock Lippitt, 48 S.E.C. 524, 528 (1986). The SEC found it "well established that undisclosed purchases by underwriters or their affiliates, arranged for the purpose of closing an unsuccessful 'all-or-none' . . . offering, are fraudulent." Id. at 526 (citing, inter alia, A.J. White & Co. v. SEC, 556 F.2d 619, 623 (1st Cir.), cert. denied, 434 U.S. 969, 54 L. Ed. 2d 457, 98 S. Ct. 516 (1977); SEC v. Coven, 581 F.2d 1020, 1028 (2d Cir. 1978), cert. denied, 440 U.S. 950, 59 L. Ed. 2d 640, 99 S. Ct. 1432 (1979)). Although the SEC set aside one of the NASD's findings of violation, the Commission nonetheless affirmed in full the sanctions imposed by the NASD. See 48 S.E.C. at 528. These sanctions included barring petitioners from serving as principals in any NASD member firm, suspending them for two weeks from association with member firms in any capacity, and imposing a $15,000 fine on each. II. ANALYSIS

Lippitt and Svalberg now petition this court for review of the SEC's order pursuant to section 25(a) of the Act, 15 U.S.C. § 78y(a) (1982). *fn1 With respect to the finding of violations, they allege that their activity was neither deceptive nor fraudulent because their purchase of the SanAnCo stock was a "bona fide investment." In the alternative, petitioners claim that there is no evidence that they acted with an intention to deceive investors; they also contend that the nondisclosure of their purchase of SanAnCo shares cannot be viewed as material to any charge against them. Finally, petitioners argue that the sanctions imposed were excessive in light of the violations found. We reject these contentions for the reasons outlined below.

A. The Findings of Violations

All-or-nothing underwritings were developed in order to provide buyers with somewhat greater security in the purchase of risky offerings. The all-or-nothing provision serves not only to ensure that the issuing firm has sufficient funds to complete its project, but also to give investors some reasonable indication that they are paying a fair market price for their investment. Closing an all-or-none offering before the required minimum number of shares has been sold to the public is therefore fraudulent. This point was aptly explained by the First Circuit in A.J. White & Co. v. SEC: "[In] . . . an offering of shares in a new company, one of the investors' major concerns will be whether the price they are paying for the securities is a fair market price. The inability of the underwriter to sell the specified minimum to bona fide investors may well indicate that the market judges the offering price to be too high." 556 F.2d at 623.

It is not seriously disputed that petitioners purchased the SanAnCo stock for the purpose of closing the underwriting; indeed, petitioners' briefs basically admit as much. See, e.g., Svalberg Brief at 5, 12. The mere fact that petitioners retained their stock rather than selling it immediately did not ameliorate the damage done outside investors who lost an assurance that a given number of other outside investors shared their assessment of the stock's value. Even if petitioners purchased the stock partially as an investment and partially to close the offering, this still distorted the information available to the public about the quality of the offering. A principal who purchases with mixed motives may be willing to pay more than a reasonable price to ensure the success of the offering; whereas outside investors normally will buy the stock only for bona fide investment reasons. In this case, petitioners acted to create a false impression that the required minimum number of shares had been sold to the public; therefore, their purchases of SanAnCo with a purpose of closing the underwriting simply cannot be viewed as bona fide investments.

It is also clear that petitioners' failure to inform investors that stock could be purchased by persons associated with the underwriter is "material" to the charges against them. "An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important" in making a decision regarding the stock. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976). Petitioners contend that the number of shares they purchased (i.e., less than seven percent of the minimum offering) was too small to be material. But this argument misses the point. Petitioners' stock purchases were made in the face of what they believed to be a deteriorating market; their actions were material because they purchased the final unsold block of securities with a purpose and effect of closing what appeared to be a weak underwriting. No matter the amount of stock petitioners purchased, shareholders clearly would consider it "important" that principals were acting on their own to close what appeared to be a weak underwriting.

Petitioners' final argument that they lacked the requisite scienter is also flawed. In the context of this case, scienter does not mean that the subject believed his action to be illegal. Rather, "[a] knowledge of what one is doing and the consequences of those actions suffices." SEC v. Falstaff Brewing Corp., 203 U.S. App. D.C. 28, 629 F.2d 62, 77 (D.C.Cir.), cert. denied, 449 U.S. 1012, 101 S. Ct. 569, 66 L. Ed. 2d 471 (1980). Petitioners acted as licensed professionals in the securities field, and they certainly knew -- as the SEC found -- that they were "closing the SanAnCo offering although the ...


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