665 F.2d 1310 (D.C. Cir. 1981)
We are presented with still another chapter in the continuing struggle between S. Mort Zimmerman and the Securities and Exchange Commission (SEC).
The District Court now has held Zimmerman in violation of several provisions of the federal securities laws and rules promulgated thereunder, and enjoined him from engaging in such misconduct in the future. Zimmerman challenges the court’s conclusions, contending that its factual findings are in error and that the injunction entered against him is invalid. We affirm the findings of fact and, save for but one of its provisions, uphold the injunction as framed.
In 1969, Zimmerman embarked upon a course of action designed to obtain control of States General Life Insurance Company, Inc., a publicly-held corporation. He concentrated his efforts initially on direct purchases of States General stock, in combination with indirect acquisition of its shares through the use of tender offers by companies already under his control. When these stratagems failed, Zimmerman sought to achieve his objective more circuitously by acquiring stock in Savoy Industries, Inc., another publicly-held corporation controlled by its president, Louis Danenberg, his longtime friend and co-investor. Zimmerman planned to take over Savoy and use it to gain control of States General.
Zimmerman was afraid to attempt a takeover of Savoy openly, however, realizing that the history of his securities-law transgressions
could provoke opposition from Savoy’s shareholders. To prevent his plans from being thwarted in this manner, Zimmerman organized a takeover group to function at his direction, although he was not formally a member. The group eventually consummated an agreement with Savoy by which it would obtain control. In order to insure the success of the effort, Zimmerman’s participation was kept secret. Neither his role nor his future intentions for Savoy were disclosed in any of Savoy’s various filings with SEC and the American Stock Exchange, in documents mailed by Savoy to its shareholders, or in papers filed with SEC by the takeover group.
In 1974, SEC sued Zimmerman, along with several other individual and corporate participants in the takeover effort, for infraction of various antifraud and reporting provisions of the federal securities laws and regulations. The District Court, in 1976, held that Zimmerman had violated a number of such provisions in a variety of ways: Sections 13(d)(1) and 13(d)(3) of the Securities Exchange Act of 1934
by failing to file a Schedule 13D with SEC; Sections 10(b),
13(d)(1) and 13(d)(3) of the 1934 Act and Rules 10b-5
and 13d-l
thereunder, and Section 17(a) of the Securities Act of 1933
by filing, in the name of the takeover group, a Schedule 13-D concealing his membership in the group; Sections 10(b) and 13(a)
of the 1934 Act, Rules 10b-5, 13a-l,
and 13a-
thereunder, and Section 17(a) of the 1933 Act
through Savoy’s filing of false and misleading documents with SEC at a time when the corporation was under Zimmerman’s control; Section 10(b) of the 1934 Act, Rule 10b-5 thereunder, and Section 17(a) of the 1933 Act as a consequence of Savoy’s filing of a false and misleading listing application with the American Stock Exchange and sending a false and misleading letter to Savoy’s shareholders. On the basis of these conclusions, the District Court enjoined Zimmerman from engaging in conduct transgressing the laws and regulations he had infringed in the course of the Savoy takeover. The injunction restrained activity associated with the sale or purchase of the securities of Savoy or any other issuer, and forbade Zimmerman to engage in any other deceitful or fraudulent act against any person.
Zimmerman appealed that decision to this court. In 1978, we affirmed the District Court with respect to its holding that Zimmerman had violated Sections 13(d)(1) and 13(d)(3) of the Securities Exchange Act of 1934 and rules promulgated thereunder.
We remanded the remainder of the case, however, to the District Court for “a further illumination’’ of its findings as to the basis for Zimmerman’s accountability under Sections 20(a) and 20(b) of the 1934 Act
for the documents filed with the American Stock Exchange or mailed to shareholders on behalf of Savoy.
We also requested the District Court reach a factual resolution on whether Zimmerman had acted with scienter, noting that the Supreme Court’s decision in Ernst & Ernst v. Hochfelder,
holding that private parties must prove scienter in actions for damages under the antifraud provisions of Section 10(b) of the Securities Exchange Act,
had been announced after the District Court’s original rulings. Confronted with the question whether proof of scienter was also required in actions brought by SEC itself, we withheld comment on that subject pending the District Court’s determination as to the presence or absence of scienter in Zimmerman’s instance.
Finally, we addressed the question of validity of the injunction entered against Zimmerman, and “[b]ecause there remain[ed] doubt as to the existence of some of the violations underlying the injunction, we [felt] that the issue concerning the proper scope of [its] language [was] best considered, if at all, [upon formulation of] a precise definition of all the violations.”
Consequently, “we remand[ed] with instructions to the district court to modify the second and third paragraphs of its injunction pendente lite, so as to encompass only the specific violations affirmed on appeal and so as to limit its scope to Savoy.”
On remand, the District Court found that Zimmerman controlled both the takeover group and Savoy, through its officers and directors, during the period of dissemination of the false and misleading documents at issue in the litigation.
The court further found that Zimmerman had purposely “in bad faith, ‘with scienter,’ ” caused the takeover group and Savoy wrongfully to omit from the documents filed with SEC and the American Stock Exchange and transmitted to Savoy shareholders any reference to his participation in the takeover.
Accordingly, the court held Zimmerman responsible therefor under Sections 10(b), 13(a), 13(d), 20(a) and 20(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
On the basis of these conclusions, the District Court revived and re-entered against Zimmerman the earlier injunction which we had modified pendente lite.
In 1979, after SEC requested amendment of the injunction, the District Court revised its order in some respects.
Zimmerman now comes back to us on appeal from the District Court’s last decision, alleging principally that the court’s findings of fact are in error and that the injunction ultimately entered against him is illegal.
Zimmerman complains that the District Court’s ruling that through his control of the takeover group and Savoy he intentionally violated the securities laws cannot possibly be correct. Specifically, he claims that the timing of the filing and dissemination of the Savoy documents precluded a finding that he was responsible for the false and misleading statements they contained because they were prepared and transmitted prior to the actual takeover of Savoy by the Zimmerman control group.
In making this argument, Zimmerman attacks the logic and consistency of the court’s conclusions rather than its basic underlying findings of fact. We have carefully considered the challenge from this perspective and have concluded that Zimmerman’s objections are without merit.
The District Court held Zimmerman responsible for the takeover group’s filing of a Schedule 13-D, for Savoy’s filings of a Form 8-K Report, a Form 10-K and an American Stock Exchange listing application, and for the transmittal of a letter to Savoy shareholders, all of which contained false and misleading statements. Zimmerman’s attempt to avoid liability on grounds that he did not control Savoy at the time when four of the five documents were disseminated must fail. First, we cannot understand how Zimmerman could escape blame for the Schedule 13-D on the ground of an alleged lack of control over Savoy. The District Court has clearly and consistently found that Zimmerman controlled the takeover group from its inception,
and that is enough to subject him to the consequences of the false and misleading filing. Second, even if Zimmerman had not controlled Savoy prior to the date when the board of directors installed as a consequence of the takeover agreement assumed management of the corporation, the Form 10-K was filed more than a month after the change in directors. Thus, the filing of the false and misleading information contained in this document alone subjects Zimmerman to sanctioning under the securities laws, as the District Court held.
We do not rest our affirmance solely on the Schedule 13-D and the Form 10-K, however, for we think that the court’s finding that Zimmerman was responsible for the remaining three filings is well supported. The court obviously did not believe Zimmerman’s claim that he had nothing to do with these documents. It found that though Zimmerman had not physically handled or prepared any of the documents himself, he had “with a complete lack of good faith, induced ... the false and misleading [filings].”
Contrary to Zimmerman’s contention that the timing of these documents precludes holding him accountable for their contents, the District Court’s underlying findings buttress its conclusion in two ways. First, the court found that Zimmerman controlled Savoy, through its president, Louis Danenberg, when he, among others, agreed to the mechanics of Zimmerman’s takeover scheme.
The court further found that Danenberg was motivated to go along with Zimmerman, with whom he had frequently engaged in business dealings in past years, because the scheme presented him with an opportunity to withdraw from Savoy in an acceptable manner. At the time, Danenberg was conscious of his advancing age and ill health, and he hoped to find a way to “get out” free of SEC reporting requirements.
Considering Danenberg’s motives, his acceptance of Zimmerman’s scheme, and Danenberg’s active role in procuring Savoy’s agreement to the takeover,
the court reasoned that Zimmerman controlled Danenberg’s actions with respect to Savoy;
and from this followed the deduction that “[c]ontrol of Danenberg meant control of Savoy.”
The court rested this latter finding on incontrovertible facts: Danenberg was president of Savoy,
as well as chairman of its board and a major stockholder;
and he appeared to possess power to act virtually alone on behalf of the corporation,
undertaking, for example, to negotiate the takeover for Savoy, to hire a new director at Zimmerman’s request, and to change accounting firms on Zimmerman’s command.
Moreover, the District Court found that Zimmerman transformed his de facto control into “legally enforceable” power in 1974 when Savoy and the takeover group signed the takeover agreement.
Although the new board nominated by the takeover group did not assume control until three months later, the court found that during the interim Savoy functioned pursuant to obligations imposed by the takeover agreement, thus further enhancing Zimmerman’s already strong control of Savoy.
It was during this interval that the Form 8-K, American Stock Exchange listing application, and the letter to Savoy shareholders were issued.
We are satisfied that the District Court’s conclusions are firmly supported by the underlying facts. The timing of the dissemination of the documents in question interposed no barrier to the court’s holding that Zimmerman bore responsibility for their contents since at all times relevant he controlled the entities that transmitted the documents.
Zimmerman also contends that the injunction entered against him by the District Court violates Rule 65(d)
of the Federal Rules of Civil Procedure because, he says, it is overbroad, lacking in specificity, and cast in language closely parallelling the statutes and SEC rules under which the District Court held him liable.
The critical portions of the injunction follow:
IT IS ORDERED, ADJUDGED AND DECREED, that defendant S. Mort Zimmerman (Zimmerman), his agents, servants, partners, assigns and those persons in active concert or participation with him, are hereby restrained and enjoined from, directly or indirectly, making use of the means or instrumentalities of Interstate commerce or of the mails, in connection with the purchase or sale of securities of Savoy Industries, Inc. (Savoy) or any other issuer, to make any untrue statements of material facts or to omit to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading and to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person; and it is further
ORDERED, ADJUDGED AND DECREED, that defendant Zimmerman, his agents, servants, partners, assigns and those persons in active concert or participation with them, are hereby restrained and enjoined from directly or indirectly filing or causing Savoy or any other company to file any annual, periodic or other reports with the Securities and Exchange Commission containing untrue statements of material facts or omitting to state material facts necessary to make the statements made in light of the circumstances under which they were made not misleading or to omit information required to be stated therein, and from failing to file or causing the failure to file said reports on a timely and current basis....
We agree that, to a very limited extent Zimmerman’s objections are well taken. In our view, the last clause of the first ordering paragraph of the injunction must be eliminated.
We do not, however, accept his arguments with respect to the remaining provisions. To be sure, the Supreme Court has cautioned on a number of occasions that an injunction may not be so broad or imprecise as to leave one subject to it in doubt as to the conduct actually prohibited; as the Court stated in Hartford-Empire Co. v. United States,
“[t]he decree must not be ‘so vague as to put the whole conduct of the defendants’ business at the peril of a summons for contempt,’ [nor may it] enjoin ‘all possible breaches of the law’ ....”
We are mindful, too, that courts have struck down injunctions which effectively have ordered the defendant simply to refrain from violating the law “in any particular”
or from breaching a general duty.
It does not follow, however, that a broadly-phrased injunction may never be valid, nor that a prohibition of future transgressions, even in relatively wide-ranging terms, of a law already broken by the defendant is necessarily invalid. For example, in McComb v. Jacksonville Paper Co.,
the Supreme Court upheld an injunction which “[b]y its terms ... enjoined any practices which were violations of [particular] statutory provisions,”
recognizing that “[d]ecrees of that generality are often necessary to prevent further violations where a proclivity for unlawful conduct has been shown.”
As the Court has stated elsewhere, “[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.”
The occasion for injunctions of the type approved in McComb frequently arises when serious wrongdoing in the securities area has been proven. A number of the courts of appeals have rejected challenges to injunctions extending their prohibitions to dealings in all securities issues rather than simply to those which the defendant’s unlawful activities involved. In SEC v. Manor Nursing Centers, Inc.,
for instance, the Second Circuit upheld an injunction encompassing all issues, reasoning that
the district court was justified in believing that an injunction limited to violations involving ... shares [of the corporation connected with the illegal conduct] would not adequately protect public investors. The violations of the federal securities laws committed by appellants ... demonstrated their propensity to use various corporate entities to achieve unlawful objectives.
We think that the same thing may be said of the injunction entered against Zimmerman. Given his complex machinations, the number of individuals and entities he implicated in the Savoy-States General scheme, and his prior history of both civil and criminal infringements of the federal securities laws, we think that the District Court was completely justified in framing its injunction against Zimmerman in terms of “any issuer.”
We also uphold the District Court’s use in the injunction of language similar to that of the statutes violated by Zimmerman. As noted earlier, in McComb the Supreme Court specifically approved injunctions so worded.
The few cases we have found invalidating injunctions utilizing statutory phrasing involved very broad legislative proscriptions, such as Section 2 of the Sherman Act.
In the securities field, however, we have not encountered any instances in which a federal appellate court has struck down an injunction formulated in language closely parallelling the statute transgressed by the defendant; indeed, several courts have flatly rejected pleas to do so.
While we need not decide whether the language of all sections of the federal securities laws is amenable to reproduction in an injunction, we hold that the statutory wording employed by the District Court in this case is sufficiently specific to pass muster.
Our affirmance of the injunction does not extend, however, to the clause ordering Zimmerman not “to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person.”
This interdiction could embrace nearly any sort of violation of the securities laws, and possibly reach out even beyond the securities area. To allow this provision to stand could subject to the federal civil contempt power future acts by Zimmerman that may be completely unrelated to his lawbreaking in the past. In short, this part of the injunctive order is in our view “ ‘so vague as to put the whole conduct of [Zimmerman’s] business at the peril of a summons for contempt.’ ”
Consequently, it must be stricken.
For the reasons set forth, the factual findings of the District Court are affirmed. The injunction entered against Zimmerman by the court is modified to eliminate from the first ordering paragraph the words “and to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person.” As so modified, the injunctive order is affirmed.
So ordered.