Opinion ID: 302963
Heading Depth: 1
Heading Rank: 3

Heading: Injunctive Relief Granted

Text: 54 Having concluded that appellants had violated the federal securities laws, the district court permanently enjoined all appellants, except Samuel Feinberg, Marnane and Halford, 26 from further violations of the antifraud provisions of the 1933 and 1934 Acts; and also permanently enjoined appellants Manor, Feinberg, Ezrine, Glendale and Atlantic from further violations of Sec. 5(b)(2) of the 1933 Act. Appellants' claim that the district court abused its discretion in granting such injunctive relief is without merit. 55 In an action, such as the instant one, where the SEC sought injunctive relief under Section 20(b) of the 1933 Act, 15 U.S.C. Sec. 77t(b) (1970), and under Section 21(e) of the 1934 Act, 15 U.S.C. Sec. 78u(e) (1970), a district court has broad discretion to enjoin possible future violations of law where past violations have been shown, and the court's determination that the public interest requires the imposition of a permanent restraint should not be disturbed on appeal unless there has been a clear abuse of discretion. SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1306-7 (2 Cir.), cert. denied, 404 U.S. 1005 (1971); SEC v. Culpepper, 270 F.2d 241, 250 (2 Cir. 1959). Moreover, the party seeking to overturn the district court's exercise of discretion has the burden of showing that the court abused that discretion, and the burden necessarily is a heavy one. SEC v. Culpepper, supra, 270 F.2d at 250; United States v. W. T. Grant Co., 345 U.S. 629, 633 (1953). In the instant case, we hold that appellants have not sustained that burden, for the record amply supports the district court's conclusion that the issuance of a permanent injunction was appropriate. 56 The critical question for a district court in deciding whether to issue a permanent injunction in view of past violations is whether there is a reasonable likelihood that the wrong will be repeated. SEC v. Culpepper, supra, 270 F.2d at 249; United States v. W. T. Grant Co., supra, 345 U.S. at 633. Here there were several factors which supported the district court's conclusion that a reasonable likelihood of future violations existed. First, fraudulent past conduct gives rise to an inference of a reasonable expectation of continued violations, SEC v. Keller Corporation, 323 F.2d 397, 402 (7 Cir. 1963); SEC v. Culpepper, supra, 270 F.2d at 250; we believe that the drawing of such an inference was particularly appropriate here where appellants did not attempt to cease or undo the effects of their unlawful activity until the institution of an investigation. Secondly, having in mind that the nature of past violations has an important bearing on the reasonable expectation of future violations, SEC v. Culpepper, supra, 270 F.2d at 250; United States v. W. T. Grant Co., supra, 345 U.S. at 633, the district court's conclusion below that there was a reasonable expectation of future violations was supported by its finding that appellants' violations were willful, blatant, and often completely outrageous. Thirdly, the fact that these appellants continued to maintain that their past conduct was blameless was a factor appropriately considered by the district court in assessing the need for a permanent injunction. See SEC v. MacElvain, 417 F.2d 1134, 1137 (5 Cir. 1969), cert. denied, 397 U.S. 972 (1970); Hecht Co. v. Bowles, 321 U.S. 321, 331 (1944). Finally, the district court had ample opportunity to evaluate the sincerity of appellants' assurances that they would not again violate the federal securities laws. In view of the inconsistencies in each appellant's testimony and the conflicting stories told by different appellants, the district court was justified in doubting the veracity of appellants' assurances. Under all the circumstances, it cannot be said that the district court abused its discretion in granting permanent injunctive relief. 57 Appellants argue, however, that the SEC must show more than a reasonable likelihood of future violations. They maintain that appellants must be shown to have a propensity or natural inclination to violate the securities laws. Appellants' reliance on SEC v. Bangor Punta Corporation, 331 F.Supp. 1154, 1163 (S.D.N.Y.1971), for this proposition is misplaced. There the district court, in concluding under the circumstances there presented that a permanent injunction should not issue, said: 58 Under all the facts and circumstances in this case, the Commission has failed to carry its burden to establish, with persuasive evidence, that Bangor Punta, its officers, directors and employees, have a propensity or natural inclination to violate the securities law. Securities and Exchange Commission v. Texas Gulf Sulphur Co., 446 F.2d 1301 (2d Cir. June 10, 1971). 331 F.Supp. at 1162-63. 59 In relying upon our decision in Texas Gulf Sulphur, which applied the reasonable likelihood standard, the district court demonstrated that it was not purporting to apply a new standard for the issuance of an injunction. In any event, we adhere to our well established rule and hold that the SEC has demonstrated the necessity for injunctive relief since there is a reasonable likelihood of future violations on the part of appellants. SEC v. Culpepper, supra, 270 F.2d at 249. 60 Appellants also maintain that the district court's abuse of discretion is shown by the fact that appellants had ceased any illegal activities prior to the institution of suit. It is well settled, however, that cessation of illegal activities in contemplation of an SEC suit does not preclude the issuance of an injunction enjoining violations. SEC v. Keller Corporation, supra, 323 F.2d at 402; SEC v. Boren, 283 F.2d 312, 313 (2 Cir. 1960); SEC v. Culpepper, supra, 270 F.2d at 250. As the Supreme Court said in an analogous situation: 61 The courts have an obligation, once a violation has been established, to protect the public from a continuation of the harmful and unlawful activities. A trial court's wide discretion in fashioning remedies is not to be exercised to deny relief altogether by lightly inferring an abandonment of the unlawful activities from a cessation which seems timed to anticipate suit. United States v. Parke, Davis & Co., 362 U.S. 29, 48 (1960). 62 Appellants Manor, Capital Cities and Feinberg claim that an injunction should not have been issued against them because of their good faith reliance on advice of their counsel, appellant Ezrine. As we have held in Part II of this opinion, however, the district court was not clearly erroneous in finding that these appellants knowingly had violated the federal securities laws. While good faith reliance on advice of counsel may be a factor to consider in deciding whether to grant injunctive relief, appellants' proven lack of good faith here precludes them from relying on this argument. Moreover, SEC v. Harwyn Industries Corporation, 326 F.Supp. 943 (S.D.N.Y.1971), upon which appellants strongly rely, is not to the contrary. Unlike the situation here, the court there found that defendants had relied in good faith on counsel's advice and that counsel's interpretation of the law was neither frivolous nor wholly unreasonable. 326 F.Supp. at 954. 63 Appellants Ezrine and Netelkos contend that the issuance of an injunction against them was inappropriate because of the resulting harmful impact on their professional reputations and legitimate business activities. True, in deciding whether to grant injunctive relief, a district court is called upon to assess all those considerations of fairness that have been the traditional concern of equity courts. Hecht Co. v. Bowles, supra, 321 U.S. at 328-30. Accordingly, the adverse effect of an injunction upon defendants is a factor to be considered by the district court in exercising its discretion. SEC v. Harwyn Industries Corporation, supra, 326 F.Supp. at 957; SEC v. Broadwell Securities, Inc., 240 F.Supp. 962, 967 (S.D.N.Y.1965). The record before us clearly demonstrates that the district court, having considered the harmful impact of injunctive relief on Ezrine's and Netelkos' professional reputations, nevertheless concluded that public investors needed the protection of an injunction. As we said in SEC v. Culpepper, supra, 270 F.2d at 250, The public interest, when in conflict with private interest, is paramount. Moreover, in view of the blatant nature of the violations found by the district court to have been committed by Ezrine and Netelkos and in view of their professional occupations which place them in positions where they could misappropriate public investor funds in other offerings, the district court's decision to enjoin them from further violations was not an unreasonable one. 64 Finally, appellants challenge the scope of the injunctive relief on two grounds. First, they contend that the district court abused its discretion in enjoining appellants from further violations involving any security, rather than just Manor securities. Secondly, appellants claim that the court erred in enjoining them from committing acts which bear little resemblance to their alleged illegal activities. While there is a dearth of authority squarely in point with respect to the appropriate scope of injunctive relief in SEC enforcement actions, we are satisfied that the district court's injunctive provisions are not overly broad under all the circumstances of this case. 65 The principles which we believe to be controlling in regard to the appropriate breadth of injunctive relief are those expressed in NLRB v. Express Publishing Co., 312 U.S. 426 (1941). See Hillsborough Investment Corporation v. SEC, 276 F.2d 665, 667 (1 Cir. 1960). In Express Publishing the Supreme Court said: A federal court has broad power to restrain acts which are of the same type or class as unlawful acts which the court has found to have been committed or whose commission in the future, unless enjoined, may fairly be anticipated from the defendant's conduct in the past. 312 U.S. at 435. In view of the principal appellants' conduct in the instant case, the district court was justified in believing that an injunction limited to violations involving Manor shares only would not adequately protect public investors. The violations of the federal securities laws committed by appellants Feinberg, Ezrine and Netelkos demonstrated their propensity to use various corporate entities to achieve unlawful objectives. While Feinberg and Ezrine decided to obtain public financing for Feinberg's nursing home business by offering Manor shares, coupled with a complex maze of transactions involving other entities, they could just as easily have decided to secure financing for Feinberg's business by issuing and selling shares in any number of corporations controlled by either or both of them. It is a fair inference, therefore, based on appellants' utilization of various corporate entities to attain their goals, that any future violations of the securities laws might well involve corporate entities other than Manor. This is buttressed by the fact that, for all practical purposes, Manor no longer exists. Capital Cities acquired all of its assets on July 27, 1970. If the district court were to enjoin fraudulent transactions involving only Manor and Capital Cities securities, it is not unlikely that yet another corporation controlled by appellants would acquire the assets of the nursing home business and would attempt to obtain public financing. Under the circumstances, it cannot be said that the district court abused its discretion in framing the injunction to cover not merely the security to which the proof directly related, but any security. See SEC v. Seaboard Securities Corporation, CCH Fed.Sec.L.Rep. p91,697, at 95,564 (S.D.N.Y.1966); SEC v. Keller Corporation, supra, 323 F.2d at 402-03. 66 We likewise find no merit in appellants' claim that the district court enjoined violations that bear little resemblance to those which appellants allegedly committed. With respect to the provision enjoining appellants Feinberg, Ezrine, Manor, Glendale and Atlantic from further violations of the prospectus-delivery requirement of Sec. 5(b)(2) of the 1933 Act, the district court's order merely parroted the language of that Section. There can be no abuse of discretion in framing an injunction in terms of the specific statutory provision which the court concludes has been violated. See Vanity Fair Paper Mills, Inc. v. FTC, 311 F.2d 480, 487-88 (2 Cir. 1962); 3 Loss, Securities Regulation 1978 (2d ed. 1961, Supp. 1969). As for that part of the injunction enjoining further violations of the antifraud provisions of the federal securities laws, the district court framed the order in language virtually identical to that of Rule 10b-5. In view of the various types of fraud committed by appellants, the court was justified in framing an injunction appropriately broad in scope. See SEC v. Keller Corporation, supra, 323 F.2d at 402; Los Angeles Trust Deed & Mortgage Exchange v. SEC, 285 F.2d 162, 181 (9 Cir. 1960); 3 Loss, Securities Regulation 1978 n. 19 (2d ed. 1961, Supp. 1969).