Opinion ID: 306553
Heading Depth: 1
Heading Rank: 1

Heading: the securities act violations

Text: 5 The district court found that between June 1 and September 1, 1971, defendant Koenig and another named defendant, Cesare De Franceschini, an ECO director, under the guise of recapitalizing four of ECO's European subsidiaries, effected the transfer of voting control of those subsidiaries to an Italian partnership created and controlled by Koenig and a Liechtenstein holding company controlled by De Franceschini. ECO's board of directors were not informed of the action taken by Koenig and De Franceschini and the transaction was not disclosed in any of the various reports ECO was required to file with the Securities and Exchange Commissions. 3 6 The so-called recapitalization scheme occurred at a time of great internal strife among the management and directors of ECO. The corporation was experiencing financial difficulties and appellant Koenig was under pressure to resign his posts with the corporation. The transfer of voting control of four valuable and profit-making ECO subsidiaries to Koenig and his ally was obviously a material fact that a reasonable investor (or potential investor) in ECO would have considered important in making his investment decision. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-154, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968), cert. denied, Coates v. SEC, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). The failure to include this information in the annual report for 1971 and the quarterly reports for the year required by Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 to be filed with the Commission, was a material omission and constituted a violation of those provisions. 4 See SEC v. Great American Industries, 407 F.2d 453 (2d Cir.), cert. denied, 395 U.S. 920, 89 S.Ct. 1770, 23 L.Ed.2d 237 (1969); Heit v. Weitzen, 402 F.2d 909 (2d Cir. 1968), cert. denied, 395 U.S. 903, 89 S.Ct. 1740, 23 L. Ed.2d 217 (1969).
7 On August 3, 1971, at a time when ECO was undergoing severe financial problems, the corporation, through Koenig its president, issued a press release to the Dow Jones wire service. The release stated in part: 8 On July 28, 1971, the Company renegotiated the terms of approximately $14 million in loans from the Union Bank, its prime lender. Under the renegotiated agreement, $4 million is due upon demand and the remainder is due on 4/15/72. The Company has other demand loans and overdraft privileges with various banks in the U. S. and Europe. If the $4 million loan is called by Union Bank or other demand loans are called by other banks, that event could give Union Bank the right to declare the remainder due immediately. Union Bank has stated that it has no present intention of calling the demand loan. 9 What the release failed to mention was that on July 28, 1971, Teacher's Insurance and Annuity Association informed ECO that it would not provide the corporation with a $4 million loan which ECO had planned to use to repay the demand loan from Union Bank. Moreover, the press release, while also discussing ECO's European prospects, did not mention the proposed transfer of voting control among its European subsidiaries. By reason of these failures to disclose material information, the press release violated Section 10 of the Act and Rule 10b-5. 5 See SEC v. North American Research & Development Corp., 424 F.2d 63, 75 (2d Cir. 1970). 10