FILED MAY 19 1998 
 
UNITED STATES DISTRICT COURT 
 
CENTRAL DISTRICT OF CALIFORNIA 
 
SECURITIES AND EXCHANGE COMMISSION 
 
	Plaintiff, 
 
vs. 
 
GERALD A. DOBBINS, et al. 
	Defendants. 
 
Case No. SA CV 98-229 GLT (EEx) 
 
FINDINGS ON ORDER TO SHOW CAUSE RE: PRELIMINARY INJUNCTION 
 
 
 
	Having reviewed the papers and considered arguments raised 
at the hearing, Plaintiff's Motion for a Preliminary Injunction 
is GRANTED. A Preliminary Injunction will issue in conjunction 
with the findings of fact and conclusions of law set out in this 
memorandum. 
 
	The SEC has alleged Defendants acted in violation of  10(b) 
and Rule 10b-5 of the Securities Exchange Act of 1934 and  17(a) 
of the Securities Act of 1933. Section 21(d) of the Exchange Act 
grants the SEC authority to bring an action against any person 
who "is engaged or is about to engage" in a violation, and 
provides "upon a proper showing" a temporary or permanent 
injunction may be issued. A proper showing is made when the 
Commission establishes an individual's conduct violates federal 
securities laws and a reasonable likelihood the violative conduct 
will recur unless the defendant is enjoined.  SEC v. Murphy, 626 
F.2d 633, 655 (9th Cir. 1980). The Commission is not required to 
make a showing of irreparable injury or lack of an adequate 
remedy at law. SEC v. Management Dynamics, 515 F.2d 801, 808 (2d 
Cir. 1975). 
 
I.	Conduct in Violations of Federal Securities Laws 
 
	To state claim for violation of securities fraud under 
10(b) and Rule 10b-5 of the Securities Exchange Act, or  17(a) 
of the Securities Act, the SEC must provide evidence of (1) a 
misrepresentation or omission, (2) of material fact, (3) made 
with scienter amounting at least to recklessness, (4) in offer or 
sale, or in connection with purchase or sale of security. 
 
	In opposition to the Preliminary Injunction, Defendants 
generally have raised two points. First, Defendants claim they 
made no material misrepresentations. The valuations which 
Defendants issued were allegedly "hypothetical" and as such "no 
reasonable investor could or should have relied upon" them. Opp. 
at 3. Second, Defendants note the Commission has provided no 
evidence that Fidelity and/or Dobbins engaged in the purchase or 
sale of securities. Rather, the evidence shows Defendants only 
kept the bonds in custodial care for the rightful owners. 
 
	A.    Material Misstatements of Fact 
 
	The SEC must show Defendants' valuations misrepresented 
material facts and were made with scienter amounting at least to 
recklessness. A fact is material if there is a substantial 
likelihood that a reasonable investor would consider it important 
in making the investment decision. See Basic v. Levinson, 485 
U.S. 224, 231-32 (1988). 
 
	Here, the valuations which the SEC has logged with the Court 
appear on Fidelity Secured Deposit Corporations' letterhead and 
are signed by Gerald Dobbins. These valuations are material since 
they provide information a reasonable investor would consider 
important.  [FN1]  Additionally, the valuations are 
misstatements. The railroad bonds at issue here have only nominal 
value as historical documents. Although Defendants aver that 
their valuations were "hypothetical in nature," the valuations 
themselves are not labeled as such. The valuations before the 
Court state: "As of [date] the total dollar amount due and 
payable and value of each bond is [amount, all over 
$100,000,000]." As for scienter, a January 1997 letter advised 
Defendants the bonds had no intrinsic value. Yet, Defendants 
continued to issue inflated valuations after receipt of this 
letter. Thus, there is prima facie evidence the Defendants' 
valuations misrepresented material facts and were made with 
scienter. 
 
FN1. The SEC has failed to bring forward a single investor who 
relied upon these statements. However, investor reliance on any 
public material misrepresentations is presumed in securities 
fraud cases. 17 C.F.R.  240.10b-5. 
 
	B.    Sale or Purchase of Securities 
 
	The SEC must also produce evidence of nexus, under  10(b) 
and Rule 10b-5 the SEC must show Defendants made these material 
misstatements "in connection with" purchase or sales of 
securities.  Under  17(a) the SEC must show Defendants made 
these material misstatements in the "offer or sale" of 
securities. 
 
		1.     Section 10(b) and Rule 10b-5 
 
	Section 10(b) of the Exchange Act and Rule 10b-5 prohibit 
fraud "in connection with" the purchase or sale of securities. 
The "in connection with" requirement looks for a nexus between 
the fraudulent conduct and a securities transaction. The courts 
have interpreted the requirement broadly, requiring only that the 
defendant's fraud "touch" a securities transaction. See SEC v. 
Rana Research. Inc., 8 F.3d 1358, 1362 (9th Cir. 1993). The nexus 
is satisfied whenever misstatements are made in a manner 
reasonably calculated to influence the investing public. Id. 
	Here, the SEC has presented the deposition of Daniel 
Schneider. Based on Defendants valuations, Mr. Schneider told 
investors that the railroad bonds at issue were worth in excess 
of $100 million. This is sufficient to show Defendants material 
misstatements were used in "connection with" the purchase or sale 
of securities. The SEC has made a prima facie showing of  10(b) 
and Rule 10b-5 violations. 
 
		2.  Section 17(a) 
 
	Section 17(a) of the Securities Act of 1933 makes it 
unlawful for any person to engage in fraud in the "offer or sale" 
of securities. The meaning of  17(a)'s requirement, that the 
fraud be used in the "offer or sale" of securities, is unclear. 
Courts have considered, but have yet to hold, that "in the offer 
or sale of securities" covers a narrower range of activities than 
does the "in connection with" requirement of  10(b). See Holmes 
v. Securities Investor Protection Corp., 503 U.S. 258, 283 (1992) 
(O'Connor concurring) (discussing whether fraud in the "offer or 
sale'' of securities was intended to reach a narrower scope of 
conduct than section 10(b) 's fraud "in connection with"); cf. 
United States v. Bingham, 992 F.2d 975, 976 9th Cir. 1993) 
(leaving the question undecided). 
 
	It appears to this Court that the scope of  17(a) is 
narrower than  10 (b). while  10 (b) reaches conduct "directly 
or indirectly . . . in connection with" security purchase or 
sale, there is no similar broad language in  17(a) . The 
stricter requirement of  17(a) is that the party act "in the 
offer or sale" of securities. 
 
	Here, the SEC has no evidence Defendants acted "in the offer 
or sale" of securities. Nor has the SEC cited authority where 
other courts have taken evidence similar to that alleged here and 
found it sufficient to support a violation of 17(a).[FN2]  The 
Court finds the SEC has not made out a prima facie case under  
17(a). 
 
FN2.  As other evidence becomes available, the parties are 
reminded of their obligation to update and supplement their 
discovery responses in accordance with Rule 26(e). 
 
II.	Conduct Likely to Continue 
 
	The SEC must also show a reasonable likelihood the violative 
conduct will recur unless Defendants are enjoined. SEC V. Murphy, 
626 F.2d 633, 655 (9th Cir. 1980). When determining the 
likelihood of future violations, a court should consider the 
degree of scienter involved; the isolated or recurrent nature of 
the infraction; the defendant's recognition of the wrongful 
nature of his conduct; the extent to which the defendant's 
professional and personal characteristics might enable or tempt 
him to commit future violations; and the sincerity of any 
assurances against future violations. Id. 
 
	Here, the SEC has provided evidence Dobbins knowingly and 
continuously supplied inflated valuations after being informed 
the bonds had no intrinsic value. The Defendant could easily 
return to his valuations practice if no injunction were issued. 
The SEC has sufficiently shown a likelihood the conduct will 
continue without an injunction. 
 
III.  Preliminary Injunction 
 
	The SEC has made a prima facie showing that Defendants 
conduct was in violation of  10(b) and Rule 10b-5 of the 
Securities Exchange Act of 1934. Moreover there is a reasonable 
likelihood the violative conduct will recur unless Defendants are 
enjoined. Plaintiff's Motion for a Preliminary Injunction is 
GRANTED. A Preliminary Injunction will issue. 
 
DATED:  May 19, 1998 
 
/s/ Gary L. Taylor 
GARY L. TAYLOR 
UNITED STATES DISTRICT JUDGE