Petition for Writ of Certiorari — Evans v. Securities & Exchange Commission

LIBRARY

suri -mMe COURT, U. 8S

In the

Supreme Court of the United States

OCTOBER TERM, 1974

No. 74-8109

SAMUEL C. EVANS,

Petitioner,

SECURITIES AND ExCHANGE COMMISSION,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

PuiLip I. PALMER, JR.,

2130 First National Bank Bldg.,

Dalllas, Texas 75202,

Counsel for Petitioner.

SOUTHWESTERN LAW PRESS —- DALLAS, TEXAS — (214) 742-4257

TABLE OF CONTENTS

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Reasons for Granting a Writ 20.00.0000... cceeteeeteeees 4

The Decisions below involve important prin-

ciples of Federal Law which should be resolved

by this Court.

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il List of Authorities

Cases: Page

Mitchell v. Pidcock (Sth Cir. 1962) 299 F. 2d 281 ¢

Securities and Exchange Commission v. ——

(2d Cir. 1959) 270 F. 2d 241 ees

Securities and Exchange Commission v. Hawyn In-

dustries Corp. (S.D. N.Y. 1971) 326 F. Supp. 983... .... 9

Securities and Exchange Commission v. Manor Nurs-

ing Centers, Inc. (2d Cir. 1972) 458 F. 2d 1082... 9

Securities and Exchange Commission v. Radio Hill

Mines Co. Ltd. (2d Cir. 1973) 479 F. 2d 4 000000... 8

United States v. E. I. DuPont DeNemours & Co.

(1961) 366 US. 316 ........ sep ks eu antes aarp maar re 8

United States v. W. T. Grant Co. (1953) 345 U.S. 629 ...... 9

In the

Supreme Court of the United States

OCTOBER TERM, 1974

SAMUEL C. EVANS,

Petitioner,

v.

SECURITIES AND EXCHANGE COMMISSION,

~ Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

——

To the Honorable Supreme Court of the United States:

The Petitioner, Samuel C. Evans, respectfully prays that

a Writ of Certiorari issue to review the judgment and opin-

ion of the United States Court of Appeals for the Fifth

Circuit entered on November 27, 1974.

OPINION BELOW

The Opinion of the United States Court of Appeals, not

reported, appears in the Appendix to this Petition. It adopts,

per curiam, the opinion of the District Court which appears

_ eee F. Supp. .........

9

~

JURISDICTION

This Court's jurisdiction is invoked under 28 U.S.C. §1254(]).

QUESTIG™ *RESENTED

1. The extent to which a person who relies in good faith

upon non-frivolous advice of competent legal counsel

upon close questions should later be punished by in-

junctive relief if that advice is proved wrong.

STATEMENT OF THE CASE

This was an action by the Securities and Exchange Com-

mission (SEC) for a permanent injunction arising from alleged

violations of the reporting requirements of the Securities Act.

In this action, the SEC contended that Petitioner Evans

was a “control” person of a public company, IMC Interna-

tional, Inc. (IMC), so that he was therefor obligated to file

certain forms (specifically a Form 3 and Schedule 13-D) when

he had made a purchase of stock in IMC and yet another form

(Form 4) when he later sold that same stock. This action

was begun only after a sixteen month investigation into sus-

pected fraud, manipulative practices and sale of unregistered

securities (Tr. 171, 419-420, IMC Exh. 1). The suit itself,

however, alleged no such fraudulent practices but was lim-

ited to delinquent filings. As to Petitioner Evans the Com-

plaint was specifically limited to the question of whether

the single purchase and sale did or did not trigger the legal

requirement of filing the three forms. This, in turn, depended

upon whether Petitioner was a “control” person of IMC within

the meaning of the Securities Act.

Petitioner Evans disputed the fact that he was ever such

3

a control person of IMC at both the trial and Appellate level.

The critical issue there was his wife’s stock, since Petitioner's

holdings, if added to those of his wife, would be more than

10%. The wife was not made a party to this action, pre-

sumably since she had filed the same forms (her holdings

alone exceeding 10%).

The facts are undisputed that Petitioner Evans was never

an officer or director of IMC, so that the sole requirement

for filing would have to come alone from his percentage of

ownership being in excess of 10%.

The general counsel for Petitioner Evans was Mr. Peter

Chaatillis (Tr. 337). He had represented public companies

in the past (Tr. 333) and was familiar with the SEC forms

involved here (Tr. 333). It was, in fact, he who prepared

the forms in the same transaction for the five directors of

IMC who sold the stock to Petitioner Evans. He testified he

did not also prepare forms for his own client at the same

time because he did not believe there was any obligation

upon Petitioner Evans to file (Tr. 337). He admits being

told by Petitioner Evans that he, Evans, wanted to “make

sure everything was properly takea care of” (Tr. 334).

It is conceded: that Petitioner Evans did not specifically

ask his attorney if he should file Forms 3, 4, or 13-D (Tr.

349) because Petitioner had never heard of those forms (Tr.

296, 338, 553). Mr. Chantillis also testified that he regularly

consulted with a securities specialist, a Mr. John Spinuzzi,

upon “all securities’ regulations matters” (Tr. 350). He spe-

cifically asked Mr. Spinuzzi as to whether Mr. Evans should

4

file any forms because of the above purchase (Tr. 337). Both

attorneys were called as witnesses by the SEC.

Mr. Spinuzzi formerly practiced with the Securities and

Exchange Commission and, since 1964, has been in private

practice specializing in securities matters. Mr. Spinuzzi was

especially definite and positive in his testimony both about

the advice which he had given and that he still believed it

to be legally correct.

He verified that Petitioner Evans had asked him for a

written legal opinion to the effect that “all disclosures re-

quired by law had been given” and that he had provided

such an opinion letter (Tr. 373-4). Mr. Spinuzzi also pre-

pared, at Petitioner’s request, an opinion letter as to the le-

gal aspects of the sale (Evans Exh. 16, Tr. 411-412). On

the issue of Petitioner's general attitude, Mr. Spinuzzi veri-

fied that Mr. Evans had a great deal of respect for the Se-

curities Laws, and definitely wanted all reports to be filed

when required.

REASONS FOR GRANTING A WRIT

In our age, the certainties of death and taxes are joined

by Governmental regulation of business. Invariably, such reg-

ulation begins to accomplish some laudable purpose. Normally,

an agency or commission is given a broad Congressional power

to enact and enforce regulations to accomplish its objective.

The pattern thereafter is very familiar, if only from its repe-

tition. The initial regulations are expanded again and again.

to plug loopholes, or expand into other areas and activities

which need to be reached to accomplish the original purpose.

5

Needless to say, this is not to imply some fault to the agency

for this inevitable growth fer the public is amply supplied with

members looking for just such loopholes. It is to say, howevez,

that it soon will reach the point that only highly specialized

legal technicians will dare venture into the areas.

The Securities and Exchange Commission has gone through

just such an evolutionary process. Its edicts, rules and regula-

tions are so phantasmagoricai that the leading securities le-

gal texts are all loose-leaf ‘n form, with weekly changes, nor,

is it enough simply to stay abreast of the regulations. In this

very case, no less a personage than the deputy regional ad-

ministrator told the trial court:

“. . . he wishes toe determine control by the letter of tiny

regulations, and we are concerned here with the spirit

of the law.” (Tr. 491).

Such a remark is similar to the now famous comment by

one of the Commissioners at a securitie:: seminar that the

real test applied by the SEC was the “smell test.”

Unfortunately, it is only those tiny littie regulations that

attorneys have to go by. It is one thing to punish a scoff-

law who ignores the regulations but it is something else to

enjoin a man who did his best to comply but apparenily

failed the smell test.

There is certainly nothing wrong in looking to the spirit

of the law to test the scope of the regulations. Indeed, the

sc called “mischief rule” of statutory construction does just

that and has been a valuable tool for centuries. The problem

here is that there is no contention whatever that the conduct

of Mr. Evans violated the spirit of either rule. Forms 3 and

€

4 are designed to expose insider ‘rading. In essence, insider

trading results in liability for all profits if, but only it, both

the sale and profit took place within a six month period. 15

U.S.C. § 78p. Here, all admit that Mr. Evans held his stock

longer than six months, so that such liability could 1iot apply.

By the same token, the mischief for which 13-d was created

was to force early disclosures of battles for corporate con-

trol. 15 U.S.C. § 78m(d). All also admit there was no such

battle.

Having been about the barn, we return to the basic ques-

tion, how far can the duty of care of the private businessman

extend beyond legal counsel. To be sure, we can quickly

require the attorney be qualified, perhaps even specialized.

We can require full, frank disclosure by the client, that iiis

all be done before the act in issue, and that the client scrup-

ulously follow the attorney's advice. Having done all of that,

and all of that was done here, how much farther can the client

go? Is he to be the absolute insurer of the accuracy of his

counsel? Is he to be relegated to a malpractice action? What

if, as here, the question answered by the attorney was a close

and difficult one upon which even experts differ.

While this particular case presents an issue with securities

regulation, the reliance problem cuts across the broad spec-

trum of the businessman and the government. It could as

easily be the Federal Trade Commission, Labor, Power, In-

ternal Revenue or a host of others. Today’s businessman

rarely deals with a single agency, but is forced to engage an

imposing army of specialists. If this case is to be the har-

binger that such prudence is not enough, then what are

7

the limits? Can we really operate in a society regulated only

by the smell test?

Certainly, no one has ever accused the SEC of erring too

far in the area of mathematical precision. After some forty

years of existence, no one was ever able to say just exactly

what a “public offering” really was, although nothing could

be more basic. Finally, after four decades, the SEC enacted

new rules to seek to fili that void. Already, however, it has

been branded as “unworkable” if it is to be taken literally.

Obviously, left unanswered is the ‘yuestion, if not to be

taken literally, then just what is the law that a citizen must

follow? For that matter, isn’t Mr. Evans really being pun-

ished for not filing forms which his attorney said he did not

need to file? Such a result does not leave one with a com-

fortable feeling that the interests of justice have been served.

Ji should be emphasized that this is not one of the cases

in which the attorney has withdrawn the opinion, cr in which

the attorney now claims he did not then know all of the

facts. To the contrary, Mr. Spinuzzi testified:

The Court: “What you are saying is you did not make

any determination or it is your opinion that he is

not a couitrol person.”

Answer: “Judge, based upon the information and the

facts which came out, frankly, during the investiga-

tion and sworn testimony, he is not a control per-

son.” (Tr. 396).

The Commission thereafter argued with Mr. Spinuzzi at

length, in the form of cross-examination, but Mr. Spinuzzi

8

stoutly defended both his position and his belief in its va-

lidity. (Tr. 396-398, 439-440).

It may be the pragmatic lessons for any businessman to

glean from this case is that (first) a zealous agency can bring

down for some reason any target it selects and (second) that

any resistence or prevention short of total withdrawal is futile.

With all due respect, the SEC has earned some reputation for

an ad hoc regulation by prosecution. See, for example, the re-

cent article, “Those Zealous Cops on the Securities Beat,” ap-

pearing in the December, 1974 edition of Fortune magazine,

dealing specifically with the enforcement arm of the SEC as it

exists in real life, aside from theory or rhetoric. It is, incidentally,

pointed out in an earlier article in the same magazine (Novem-

ber, 1974, Part I) that the SEC receives a considerable amount

of insincere compliments from knowledgeable people who Iit-

erally are afraid to express their true feelings publicly.

It should also be pointed out that the attorney’s opinion

obtained here was not something obtained after the fact was

done, nor after the investigation began. To the contrary,

they were sought and obtained in advance and at a time

when Petitioner did not know that he was destined to be-

come embroiled in the investigation that led to this suit.

There is no real dispute as to the basic legal principles

involved. The Commission has, at the outset of litigation, a

“considerable” or “heavy” burden of showing past illegal con-

duct. United States v. E. 1. DuPont DeNemours & Co., (1961)

366 U.S. 316; Securities and Exchange Commission v. Radio

Hill Mines Co., Ltd., (2d Cir. 1973) 479 F. 2d 4. If that

burden is met, then an equally heavy burden shifts to the

9

Defendant to prove there is no “reasonable likelihood” that

the wrong will be repeated. United States v. W. T. Grant Co.,

(1953) 345 U.S. 629; Securities and Exchange Commission

v. Manor Nursing Centers, Inc. (2d Cir. 1972) 458 F. 2d 1972.

No authority has been found rejecting reliance upon an

attorney in making this determination. Most authorities at

least acknowldge such to be at least a factor for considera-

tion, but reject it in the specific case sub judice because it

was rendered after the fact, based upon false or incomplete

facts or the like. Examples can be found in Securities and

Exchange Commission v. Manor Nursing Centers, Inc., (2d

Cir. 1972) 458 F. 2d 1082; Securities and Exchange Com-

mission v. Culpepper (2d Cir. 1959) 270 F. 2d 241; Securities

and Exchange Commission v. Harwyn Industries Corp., (S.D.

N.Y. 1971) 326 F. Supp. 983. See also, Mitchell v. Pidcock,

(Sth Cir. 1962) 299 F. 2d 281.

The subject of the extent to which a member of the busi-

ness community can ever seek safe harbor in an attorney’s

Office is a matter of significant importance deserving of delin-

eation by this Court. The record of this case presents the

point in sharp relief, and gives a very strong case for reli-

ance, if there be such a doctrine.

10

PRAYER

For the foregoing reasons, the Petition for Writ of Cer-

tiorari to the United States Court of Appeals for the Firth

Circuit should be granted.

Respectfully submitted,

PALMER, PALMER & COFFEE

Philip I. Palmer, Jr.

2130 First National Bank Bldg.,

Dalllas, Texas 75202,

Counsel for Samuel C. Evans.

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DEC 27 1974

MICHAEL ROOAK, JR.. CLES

—_——

In the

Supreme Court of the United States

OCTOBER TERM, 1974

wo. £47815:

SAMUEL C. EVANS,

Petitioner,

Vv.

SECURITIES AND EXCHANGE COMMISSION,

Respondent.

—

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

PHILIP I. PALMER, JR.,

2139 First National Bank Bldg.,

Dallas, Texas 752‘)2.,

Counsel for Petitioner.

SOUTHWESTERN LAW PRESS — DALLAS, TEXAS — (214) 742-4257

Le

{INDEX TO APPENDIX

Order of Permaneni Injunction

Notice of Appeal

Memorandum Opinion of District Court

Judgment of Fifth Circuit .

Certificate of Service

Page

16

A

IN THE UNITED STATES DISTRICT COURT

For the Northern District of Texas

Dallas Division

eG

Civil Action File No. CA-3-6166-C

a

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff

Vv.

IMC INTERNATIONAL, INC.

SAMUEL C. EVANS,

Defendants

ORDER OF PERMANENT INJUNCTION

IT APPEARING to the Court that the defendant IMC

INTERNATIONAL, INC. is engaged in acts and practices

which constitute and wil! constitute violations of Sections 1!3(a)

and 14(f) of the Securities Exchange Act of 1934, as amended

(15 U.S.C. 78m(a) and 78n(f)), and Rules 13a-1, 13a-i1,

13a-13 and 14f-1 promulgated thereunder (17 C.F.R. 240.-

13a-1, 240.13a-11, 240.13a-13, and 240.14f-1), and that

defendant SAMUEL C. EVANS has engaged in acts and

practices which constitute and will constitute violations of

Sections 13(d) (1) and 16(a) of the Securities Exchange Act

of 1934, as amended (15 U.S.C. 78m(d) (1) and 78p(a)), and

Rules 13d-1 and 16a-1 promulgated thereunder (17 C.F.R.

240.13d-1 and 240.16a-i), and the Court having heard argu-

ments of counsci, considered the pleadings, briefs and evidence

2

herein, and being fully advised of the law, facts, and premises:

IT IS HEREBY ORDERED, ADJUDGED and DECREED

that defendant IMC INTERNATIONAL, INC. and its officers,

directors, agents, servants, employees, attorneys, successors,

and assigns, and each of them, be and hereby are permanenlty

enjoined from, directly or indirectly, failing to file with the

plaintiff SECURITIES AND EXCHANGE COMMISSION

timely, accurate and proper reports and documents on Forms

10-K, 10-Q, and 8-K, or any other forms, in contravention

of Sections 13(a) and 14(f) of the Securties Exchange Act of

1934, as amended (15 U.S.C. 78m(a) and 78p(a)), and the

Rules and Regulations thereunder.

IT IS FURTHER ORDERED, ADJUDC =D and DE-

CREED that defendant SAMUEL C. EVANS and his agents,

servants, employees, attorneys, successors, and assigns, and

each of them, be and hereby are permanently enjoined from,

directly or indirectly, failing to file with the plaintiff SECURI-

TIES AND EXCHANGE COMMISSION timely, accurate

and proper reports, documents and statements of beneficial

owners!.ip on Form 3 and 4, or any other forms, in contra-

vention of Sections 13(d) (1) and 16a) of the Securities Ex-

change Act of 1934, as amended (15 U.S.C. 78m(d) (1) and

78p(a)), and the Rules and Regulations thereunder.

IT IS FURTHER ORDERED that a copy of this perma-

nent injunction shall be served by United States Marshal on

the defendants named herein.

IT IS FURTHER ORDERED that this Court will retain

jurisdiction of this cause for the purpose of such other and

3

further relief as may be required in the interests of justice and

equity and as the Court may deem necessary and proper.

ENTERED this 20th day of December, 1973.

William M. Taylor, !r.

United States District Judge

Northern District of Texas

IN THE UNITED STATES DISTRICT COURT

For the Northern District of Texas

Dalias Division

Civil Action File No. CA-3-6166-C

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff

Vv.

IMC INTERNATIONAL, INC.

SAMUEL C. EVANS,

Defendants

NOTICE OF APPEAL

Notice is hereby given that Samuel C. Evans, an above

named Defendant, hereby appeals to the United States Court

of Appeals for the Fifth Circuit from the Order of permanent

injunction entered in this action on the 20th day of December,

1973.

PALMER, PALMER, & COFFEE

By /s/ Philip I. Palmer, Jr.

2130 First National Bank Bldg.

Dallas, Texas 75202

(214) 748-1211

Attorneys For Defendant

SAMUEL C. EVANS

IN THE UNITED STATES DISTRICT COURT

For the Northern District of Texas

Dallas Division

_—

Civil Action File No. CA-3-6166-C

SECURITIES AND EXCHANGE COMMISSION,

Plaintifi

V.

IMC INTERNATIONAL, INC.

SAMUEL C. EVANS,

Defendants

MEMORANDUM OPINION

The Securities and Exchange Commission instituted this

action by filing its Complaint on August 8, 1972, seeking to

enjoin Defendant IMC INTERNATIONAL, INC. (“IMC”)

from failing to comply with the requirements of Sections 13(a)

and 14(f) of the Securities Exchange Act of 1934 (“Exchange

Act”), as amended 15 [U.S.C. 78m(a) and 78n(f)] and Rules

13a-f, ,13a-11, 13a-13, and 14f-1 promulgated thereunder

[17 C.F.R. 240.13a-1, 240.13a-11, 240.13a-13, and 240.14f-

1], and seeking to enjoin Defendant SAMUEL C. EVANS

(“EVANS”) from failing to comply with the requirements of

Sections 13(d) (1) and 16(a) of the Exchange Act, as amended

[15 U.S.C. 78m(d) (1) and 78p(a)] and Rules 13d-1 and

16a-1 promulgated thereunder [17 C.F.R. 240.13d-1 and

240.16a-1]. The Complaint alleged that the defendants had

wilfully failed to file with the Securities and Exchange Com-

6

mission timely, complete and accurate reports and documents

as required by the above cited provisions.

The plaintiff's Motion for Preliminary Injunction was consol-

idated with the trial on the merits, which was heard by the

Court on September 19 through 22, 1972. At the trial, the

defendants appeared personally and through their e*torneys.

several witnesses testified, numerous documents were admitted

into evidence, and the issues raised by plaintiff's Complaint

were explored before the Court. Subsequent to the evidentiary

portion of the trial, the parties submitted briefs summarizing

the evidence adduced and the law applicable thercto and _ pre-

sented final arguments on October 25, 1972.

Thereafter, plaintiff filed a Supplemental Complaint alleging

that IMC had continued its failure to comply with the report-

ing provisions of the Exchange Act and that IMC was insolvent

und requesting the appointment of an equitable receiver for

IMC. This Court entered an order appointing James S$. Mahon

as receiver on May 8, 1973. Shortly thereafter, a petition was

filed in this Court placing IMC into involuntary backruptcy.

After consideration of the pleadings, evidence adduced at

trial. arguments of counsel, and briefs exploring the issues

raised by plaintiffs Complaint, the Court entered an order on

December 20, 1973 permanently enjoining Befendants IMC

and EVANS from failing to file with the Securities and Ex-

change Commission timely, accurate and proper reports ard

documents in contravention of the above cited provisicns of

the Exchange Act. In support of this order, the Court hereby

finds as follows:

This Court has jurisdiction of the subject matter and

~

‘

the parties under Sections 21(f) and 27 of the Exchange

Act. as amended [15 U.S.C. 78u(f) and 78aal.

IMC is the issuer of a class of common stock that has

been registered with the Commission under Section 12

of the Exchange Act since March, 1970. Consequently.

IMC has been subject since that date to the reporting

requirements of Sections 13(a) and 14(f) of the Exchange

Act and the Rules promulgated thereunder. Likewise.

every person affiliated with IMC in the manner described

in Sections 13d) and 16(a) of the Exchange Act has been

subject to the filing requireraents of the Rules promulgated

under those sections since the date of IMC’s registration

» with the Commission.

EVANS was a control person of IMC from September

23. 1970 until August 31. 1972 through his ownership

of not less than approximately 30° of the outstanding

stock of IMC.

Section 13(a) of the Exchange Act requires the filing of

“(1) such information and documents . . . as the Com-

mission shall require to keep reasonably current the in-

formation and documents required to be included in or

filed with an application or registration statement filed

pursuant to Section 12...” and “(2) such annual

reports . . . and such quarterly reports . . . as the Com-

mission may prescribed.” IMC was required by Rule

13a-1 promulgated under Section 13(a) to file an annual

report on Form 10-K for each of the fiscal years foliow-

ing the effectiveness of its registration; it was required

by Rule 13a-13 (as amended on October 28. 1970. effec-

tive December 31, 1970) promulgated under Section | 3(a)

to file quarterly reports on Form 10-Q for the first three

quarters of each fiscal vear subsequent to the efective

8

date of the amendment; and it was required by Rule

13a-11 promulgated under Section 13(a) to file current

reports on Form 8-K for certain months containing mate-

rial information regarding recent corporate events.

From the inception of its reporting obligations to the

filing of this lawsuit, IMC demonstrated a marked in-

ability to comply with the reporting requirements of Sec-

tion 13(a). During that time, IMC was required to file two

annual reports on Form 10-K and five quarterly reports

on Form 10-Q. None of those reports were filed timely

and several of them were filed in excess of 200 days late

with the average delinquency approximating 128 days.

Likewise, none of the current reports required to be filed

on Form 8-K were timely filed by IMC.

The most flagrant untimely filing violation involved the

Form 8-K report of IMC for the month ended September

30, 1970. On September 29, 1970, IMC, under its pre-

decessor name, Humanics, Inc., issued 1,718,000 shares

of its stock in exchange for the assets and liabilities of

International Music Corporation, a Texas corporation

organized and controlled by EVANS. However the Form

8-K report disclosing this transaction was not filed until

February 1, 1971, thus depriving the investing public of

any information whatsoever concerning the change in

control of IMC for a total of 114 days.

As a result of this transaction, International Music

Corporation was dissolved and the stock of IMC (then

Humanics, Inc.) was distributed to its shareholders there-

by causing EVANS to become the beneficial owner of

approximately 30% of the outstanding stock of IMC.

On September 23, 1970, EVANS purchased 82,000

shares of IMC stock (then Humanics, Inc.) from control

9

persons of IMC for approximately $27,000, which pur-

chase represented approximately 14% of the then out-

standing stock.

In connection with the purchase by EVANS on Sep-

tember 23, 1970 and the issuance of IMC stock to In-

ternational Music Corporation on September 29, 1970,

EVANS caused an entire new board of directors to be

appointed and new officers to be elected.

On March 23, 1971, EVANS sold the 82,000 shares

of IMC stock to an individual investor for a considera-

tion of $123,000.

Section 14(f) of the Exchange Act provides that “If,

pursuant to any arrangement or understanding with the

persons are to be elected or designated as directors

subject to subsection (d) of Section 13 of this title, any

persons are to be elected or designated as directors

of the issuer, otherwise than at a mecting of security

holders, and the persons so elected or designated will

constitute a majority of the directors of the issuer .

then the issuer must file with the Commission certain

information designated by Rule 14F-1 promulgated there-

under. The purchase by EVANS on September 23, 1970

was a transaction subject to Section 13(d) of the Ex-

change Act. This fact, together with the facts that EVANS

caused a complete new board of directors to be installed

and no mecting of the sFareholders was called to approve

the new directors, triggered the provisions of Section

14(f) which required the iiling of a report. Yet this was

never done by IMC.

Section 13(d) {1} of the Exchange Act and Rule 13d-1

thereunder, and Section 16(a) of the Exchange Act and

Rule 16a-] thereunder, require every person who is the

pe etic rs

10

beenficial owner of more than a certain percentage of

any class of equity security which is registered pursuant

to Section 12 of the Exchange Act to file a report of his

transactions in such securities with the Commission con-

temperaneously with the time that he becomes such bene-

ficial owner and thereafter when changes in such owner-

ship occur. EVANS was clearly required to file a report

with the Securities and Exchange Commission concerning

his purchase of IMC stock on September 23, 1970 and

his subsequent sale of that stock on March 23, 197i.

Yet, no such reports were filed.

Defendant IMC continued to violate the reporting re-

quirements under Section 13(a) of the Exchange Act

after the institution of this lawsuit by failing to file a

timely annua! report on Form 10-K and two quarterly

reports on Form 10-Q.

The failure of timely disclosure by IMC and the non-

disclosure by EVANS constituted wilful violations in that

they were designed to present information in the light

most favorable to the company while omitting any infor-

mation of a detrimental nature about the background of

the company or its control persons and management.

This concealment deprived the investing public of facts

that were material in the sense that a reasonable investor

would have considered them important in making an

investment decision. Securities and Exchange Commis-

sion v. Koenig, et al., CCH F. 2d L. Rep. Para. 93,536

(S.D.N.Y., June 20, 1972), affirmed 469 F. 2d 198 (2nd

Cir., 1972). The evidence in this case indicates that IMC

and EVANS will, unless enjoined, continue to engage in

the acts and practices set forth in the Complaint.

The conclusions reached by the House Committee on

Interstate and Foreign Commerce emphasize the impor-

11

tant function of the reporting provisions of the Exchange

Act:

“The hiding and secreting of important information

obstructs the operation of the markets as indices of

real value . . . Delayed, inaccurate and mis'ead-

ing reports are the tools of the unconscionable

market operator and the recreant corporate official

who speculates on inside information . . . The re-

porting provisions . . . are a very modest beginning

to afford that long delayed aid . . . in the way of

securing proper information for the investors.” H. R.

Rep. No. 1383, 73rd Cong., 2nd Sess., p. 13 (1934).

The reporting provisions of the Exchange Act are clear

and unequivocal, and they are satisfied only by the filing

of complete, accurate and timely reports. It would be

hard to find a clearer record of continuous conscious

evasion than the one presented by the conduct of these

defendants in the instant case. SEC v. Golconda Mining

Co., 291 F. Supp. 125, 129 (S.D.N.Y., 1968.)

Once the Court determines that the plaintiff has proven

a violation of the statute, the proper test for the issuance

of a statutory injuction is whether there is reasonable ex-

pectation of further violations by such defendants SEC

v. Broadwall Securities, Inc., 240 F. Supp. 962, 969

(S.D.N.Y., 1965); SEC v. Culpepper, 270 F. 2d 241, 249

(2nd Cir., 1959); SEC v. Boren, 283 F. 2d 312 (2nd Cir.,

1960); U. S. v. Parke, Davis & Co., 362 U.S. 29, 48

(1960), 365 U.S. 125 (1961); SEC v. MacElvain 417 F.

2d 1134, 1137 (Sth Cir.. 1969), cert. denied. 397 U.S.

972 (1970).

Not only were the reports of IMC filed in an untimely

manner, but they also contained numerous inaccurate

12

and misleading statements. For example, while the re-

ports of IMC mentioned the prior association of certain

of its officers with another publicly held company, there

was no disclosure that that company had entered bank-

ruptcy and had been enjoined from violating the federal

securities laws. It is clear that information concerning

the background of management was required to be dis-

closed. It is equally clear that when a registrant includes

that information in the filing, there is an obligation to

set it forth accurately. In Re Emporia Gold Mines, Inc.,

2 SEC 209, 216 (1937); In Re Paper Sales Co. of Detroit,

Inc., 2 SEC 748, 754 (1937); In Rr Resources Corpora-

tion International, 7 SEC 689, 733 (1940); In Re Chain

Stores Depot Corp., 7 SEC 1015, 1022 (1940). Ancther

example of inaccurate reporting by IMC was its failure

to disclose the institution of a lawsuit against it in June,

1971 challenging the patent which formed the very basis

for its business activities. This was material fact which the

shareholders and the investing public had a right to know.

In Re Automatic Telephone Dealer, Inc., 10 SEC 698

(1941).

The Courts have consistently held that the continuous fail-

ure to comply with the Commission’s reporting requirements

warrants the grant of an injunctive decree. SEC v. Realty

Fquities Corp. of New York, CCH Fed. Sec. L. Rep., Para.

93,545 (D.C.D.C., June 15, 1972); SEC v. Atlas Tack Corp.,

93 F. Supp. 111 (D. Mass., 1950); SEC v. Union Corp. of

American, 205 F. Supp. 518 (E.D. Mo., 1962), affirmed, 309

F. 2d 93 (8th Cir., 1962) Not only may the threat of future

violations of the securities laws be properly inferred from

past violations, but such an inference is significautly strength-

15

ened, where, as here, no attempt is made by the defendants to

cease their violations even after the institution of an injunctive

action. U.S. v. Parke, Davis & Co., supra, at pp. 47-48; SEC

v. MacElvain, supra, at p. 1137.

This injunction serves only to require observance by the de-

fendants of the relevant provisions of the feceral securities

laws. It imposes no hardship or sanction whatsoever unless

compliance with the law is deemed to be a hardship or a sanc-

tion. Mitchell v. Pidcock, 229 F. 2d 281 287 (Sth Cir., 1962).

When it is clearly shown that violations have occurred, the

manifest difficulty of the Government's inspecting, investigat-

ing and litigating every complaint of a violation weighs heavily

in favor of enforcement by injunction in this circuit, particular-

ly since the statutory injunction is the basic tcol provided the

Commission for requiring compliance with the reporting provi-

sions of the Exchange Act. The continuing assertion by the

defendants of the correctness of their behavior and the in-

significance of the delinquent filing violations in the face of a

strong Congressional mandate to the contrary, demonstrates

even more clearly the need for injunctive reliet. Mitchell v.

Pidcock, supra at p. 287; SEC v. MacElvain, supra at p. 1137:

Goldberg v. Cockrell, 303 F. 2d 811, 813 (Sth Cir.. 1962):

SEC vy. Culpepper, supra at pp. 250-251.

IT IS HEREBY ORDERED, ADJUDGED AND DE-

CREED that this Memorandum Opinion shall be filed with

and annexed to the Order of Permanent Injunction entered by

the Court on December 20, 1973 and, to the extent required

by Rule 65(d), Federal Rules of Civil Procedure, may be con-

14

sidered as Findings of Fact and Conclusions of Law in support

of said Order.

ENTERED this 18th day of January, 1974.

/s/ William M. Taylor, Jr.

ee

William M. Taylor, Jr.

United States District Judge

15

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

ee E——eEeEE

No. 7+-1170

SECURITIES AND ZXCHANGE COMMISSION,

Petitioners-Appellee,

V.

IMC INTERNATIONAL, INC., ET AL.,

Defendants

SAMUEL C. EVANS,

Defendant-Appellant.

Ee

Appeal from the United States District Court for the

Northern District of Texas

SUE

(November 27, 1974)

Before GEWIN, AINSWORTH and GEE, Circuit Judges.

PER CURIAM:

For the reasons stated in the opinion of the District Court

herein, the judgment is

AFFIRMED.

16

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1974

No. 74-815

SAMUEL C. EVANS, PETITIONER

Vv.

SECURITIES AND EXCHANGE COMMISSION,

Respondent

CERTIFICATE OF SERVICE

All parties required to be served with copies of the .appendix

to the Petition for Writ of Certiorari have been served. Three

copies of the Appendix to the Petition for Writ of Certiorari

were served upon the Solicitor General by depositing same in

a United States Mail Box, with air mail postage prepaid ad-

dressed to Solicitor General, Department of Justice, Washing-

ton, D.C. 20530, on the 3rd day of January, 1975. Three

copies of the Appendix to the Petition for Writ of Certiorari

were served upon the Securities and Exchange Commission by

depositing same in a United States Mail Box, with air mail

postage prepaid addressed to Lawrence E. Nerheim, General

Counsel, Securities and Exchange Commission, Washington,

D.C. 20549, on the day of January 1975.

Cree eee eee eee

Philip I. Palmer, Jr.