The opinion of the court was delivered by: PARKER
In an Amended Complaint detailing an involved securities fraud scheme the Commission alleges in four claims that certain officers, directors, accountants and legal advisors of the National Student Marketing Corporation (NSMC)
and others were parties to a series of transactions involving the preparation and dissemination of false and misleading financial statements which artificially inflated the price of NSMC stock. The defendant is named only in the Fourth Claim which charges that he aided and abetted in the issuance of such financial statements by rendering two legal opinions which falsely represented the sale to his clients of Compujob, Inc. (Compujob), a subsidiary of NSMC, when in fact a bona fide purchase and sale had not taken place. The complaint recites that Katz's opinions were used and relied upon by the accountants Peat, Marwick, Mitchell & Co. (PMM)
in the preparation for NSMC of materially false and misleading financial statements, a violation of the securities laws. The Commission contends that Compujob had not in fact been sold and that relevant documents were backdated in order that a profit would be reflected in NSMC's annual financial reports.
The parties have filed motions for summary judgment. Katz asserts that the record developed at this point, including relevant documents, depositions and affidavits, clearly shows that there is no genuine factual issue and that there is no legal justification for the Commission's application for injunctive relief against him. In its cross-motion for summary judgment the SEC asserts that the undisputed material facts form a solid basis for the defendant's liability and that the requested sanctions are clearly warranted. After considering the parties' memoranda of points and authorities, the exhibits, affidavits and transcripts of testimony before the Commission, and the oral argument of counsel, this Court concludes that the defendant's motion for summary judgment and the plaintiff's cross-motion for summary judgment should both be denied.
The material factual details which form the basis of the Fourth Claim are free of any significant dispute. Compujob was organized in late 1967 by Tanfield C. Miller and Edward Swan, Jr. while they were graduate business school students. The company was to furnish to potential employers, for a fee, computer printouts of student resumes. In August 1968 the two enterprising students sought and secured financial backing for their venture from National Student Marketing. An agreement was then finalized and their company was sold to NSMC for 2,000 shares of NSMC stock and a right to share in Compujob's earnings for the subsequent five years.
Miller and Swan also became employees of NSMC, concerned principally with the promotion and development of Compujob. This employment was soon terminated when in January 1969, they formed a resort development company based in the Virgin Islands, Strider Oceanic, Inc. (Strider). Their attention and efforts were then directed to this newly formed venture.
Compujob proved to be a disappointment to NSMC and in late October 1969, approximately one year after its acquisition, NSMC's Executive Committee authorized the sale of Compujob and of a second problem subsidiary, Collegiate Advertising, Ltd. (CAL), a Canadian corporation. These subsidiaries had incurred substantial losses and represented a significant cash drain for the fiscal year ending August 31, 1969. This together with other factors would cause NSMC's earnings to be well below the level which they had publicly projected and predicted. Confronted with this problem, NSMC officials contacted Miller and Swan regarding the possibility of selling Compujob back to them. The declared objective was to dispose of Compujob so as to remove or offset its losses from NSMC's soon-to-be-released 1969 financial statements. It was at this point that Miller and Swan, well aware of NSMC's predicament, retained the defendant, with whom they had had prior but limited dealings, to represent their legal interests in the purchase negotiations. In an October 24, 1969 memorandum to Katz, Miller noted: " NSMC's failure to meet their estimated earnings will damage their reputation in Wall Street. . . . They want the deal badly . . . . They need the earnings; they will agree to reach the swiftest possible agreement."
During November of 1969, the terms of the Compujob transaction were negotiated between Katz, on behalf of his clients and John G. Davies,
who represented NSMC. Katz requested that his fee for the services rendered to Miller & Swan be paid by NSMC as part of the transaction. This was acceptable to NSMC. His services included the drafting of several basic documents: a sales agreement, a collateralized promissory note, a management agreement and a letter agreement. With the exception of the letter agreement, all of the documents were backdated to late August 1969. The Purchase and Sale Agreement was "made as of August 27, 1969." By its terms Miller and Swan purchased all outstanding shares of Compujob in return for their collateralized promissory note of $225,000. The note dated August 29, 1969, excluded their personal liability and was without recourse. The collateral supplied to secure the note, 4500 shares of NSMC stock, was furnished by Cortes W. Randell, NSMC's president. In turn, Randell received from Miller and Swan 25 percent of the outstanding stock of Strider. Randell had little, if any, hard facts or knowledge as to the full worth of the Strider stock. He had not seen any financial statements and had no knowledge of any of its financing commitments or land purchase contracts. The recently formed company had no history of operations upon which any informed judgment could be based.
As previously noted, in 1968 when Miller and Swan originally sold Compujob in exchange for NSMC stock they were also entitled to a fraction of Compujob's profits over a period of five years (pay-out agreement). In the resale of Compujob back to Miller and Swan, the previous pay-out agreement was terminated in exchange for 4000 shares of NSMC stock issued to them. However, at the time of the termination agreement Compujob had not accumulated any earnings, and thus Miller and Swan were not entitled to any payments under this provision for fiscal 1969.
The letter agreement was the only document drafted by Katz which bore a true contemporaneous date, November 19, 1969. By its terms NSMC: (1) agreed to undertake promptly a private placement of the 4500 shares of its stock supplied as collateral and to apply the proceeds to pay any income taxes incurred by Miller and Swan in connection with their receipt of those shares from Randell, to pay the franchise taxes of Strider from the date of its incorporation, to apply the balance against the Miller-Swan $225,000 collateralized nonrecourse promissory note, and (2) promised to indemnify Miller and Swan and hold them free and harmless from any loss or damage incurred in connection with their agreement with Randell and the sale of Strider stock to Randell.
The legality of the backdating of the Compujob transaction was the subject of two opinion letters prepared by Robert Katz at the request of Davies, NSMC's general counsel. The opinions were prepared at the instigation of Peat, Marwick, Mitchell & Co., NSMC's outside auditors, who, as Katz was told, had to approve any agreement for the sale of Compujob, especially with regard to the August 1969 effective date. Although PMM had specifically requested an opinion by White & Case, Davies requested an opinion from Katz, as counsel for the purchasers of Compujob. Katz prepared one opinion, dated November 19, 1975, which stated in pertinent part:
3. As of August 29, 1969, the date of the Closing specified in the Agreement, title to all of the issued and outstanding capital stock of [Compujob] and all of the risks and benefits of ownership thereof passed to the Purchasers.
On November 26, 1969, Katz issued a second opinion to NSMC elaborating on his earlier conclusions:
Notwithstanding that the Closing of the Agreement took place subsequent to August 29, 1969, the parties explicitly intended that it be effective as of said date. I am of the opinion that, under the laws of the state of New York, where the Agreement was made and performed, title to all of the issued and outstanding capital stock of Compujob, Inc. and all of the risks and benefits of ownership thereof ...