the stock of Compujob to Miller and Swan. He cites New York cases to the effect that management of property by another does not vitiate the title held by the owner. E.g., Lowery v. Erskine, 20 N.E. 588, 113 N.Y. 52 (1889). As to the argument that Miller and Swan paid no consideration to obtain title to Compujob, because they only parted with 25 shares of Strider, which had no established market value, Katz relies again on New York law to the effect that even the slightest consideration can create a binding obligation. E.g., Mencher v. Weiss, 306 N.Y. 1, 114 N.E.2d 177 (1953). Of the several cases cited by Katz, however, none dealt with a transaction with the Compujob adornments which transferred bare title in order to create the false impression with the investing public that a company had more assets than it actually had. Moreover, the Commission is not contending that NSMC did not make a valid and binding contract with Miller and Swan -- the real issue is whether the terms of that transaction were such that the public would be misled about NSMC's financial position.
Thus, this Court rejects the proposition that a member of the bar can seek refuge behind a legal technicality, elevating form over substance, when he is a party to and fully familiar with the circumstances which indicate that an illusory transaction is being undertaken which could be utilized to mislead third parties. Katz's focus on the narrow legal questions on which he opined is unrealistic in view of his participation in the total transaction which obviously had the possibility for misleading outsiders.
Did Katz Aid and Abet a Violation of the Securities Laws ?
There are three prerequisites to a finding that one has aided and abetted a securities law violation: (1) a primary violation has occurred; (2) knowledge of or a duty of inquiry with regard to the primary violation by the person charged; and (3) a necessary contribution to the underlying scheme by the person charged.
The Court assumes for the purpose of deciding this motion that a primary violation has been established, based on the false and misleading characterization of the Compujob abandonment as a sale which resulted in a gain to NSMC in fiscal 1969, as discussed above. As to the second factor, there is some conflict in the case law as to whether an aider and abettor must have actual knowledge of the primary violation or whether he may be guilty of aiding and abetting through mere negligence, i.e., a failure to make reasonable inquiries.
The traditional view, relied upon by Katz, is that one acting solely as an attorney will not be held in violation of the securities laws as an aider and abettor unless he had actual knowledge or acted in willful or reckless disregard of a fraudulent scheme in which he played an essential role. See SEC v. Frank, 388 F.2d 486 (2d Cir. 1968). In a more recent case, the Sixth Circuit held that a person may be liable as a securities fraud aider and abettor only if "the accused party had general awareness that his role was part of an overall activity that is improper." SEC v. Coffey, 493 F.2d 1304, 1316 (6th Cir. 1974), cert. denied 420 U.S. 908, 42 L. Ed. 2d 837, 95 S. Ct. 826 (1975).
Both the Second and Seventh Circuits have shown a willingness to characterize professionals as aiders and abettors for simple negligence, i.e., failure to perform a duty of inquiry, rather than requiring a showing of knowing participation or recklessness.
The Ninth Circuit has rejected both the actual knowledge ("scienter") and the negligence standards, and has substituted the "flexible duty" standard in securities fraud cases, under which the factfinder must examine the circumstances of each case in order to determine the defendant's duty. White v. Abrams, 495 F.2d 724 (9th Cir. 1974).
This Court need not reach the issue of which is the correct standard for assessing the activities of aiders and abettors of securities frauds, however, because it can be inferred from the factual circumstances of this case that Katz either knew that NSMC planned to issue a false financial statement, or he ignored what should have been evident to him as a lawyer with some expertise in corporate mergers and acquisitions.
In Katz's pleadings and at oral argument, he is portrayed as a professional who had only minimal contacts with the principal participants in the alleged fraud; that he issued a narrow legal opinion which was technically correct, and was completely relying upon the independent auditors to ensure that the transaction was properly accounted for in the financial statements. The defendant's position as an outsider is similar to that of the attorney in the Spectrum case, supra, n. 13, who was contacted by a stockbroker for whom he issued two opinion letters on the marketability of unregistered shares. The Second Circuit held that an attorney, even an outsider who makes no profit other than his ordinary fee, will be enjoined if he negligently issued an opinion which ultimately is deemed false and misleading to the investing public. In another case, an attorney who prepared a misleading opinion letter was enjoined because his statements "went beyond mere mistakes in legal judgment." SEC v. Century Investment Transfer Corp., CCH Fed. Sec. L. Rep. para. 93,232 (S.D.N.Y. 1971).
Thus, there is ample precedent for regarding an attorney as an aider and abettor based upon the issuance of a false and misleading opinion letter. The defendant's assertion that he had no idea that the Compujob transaction would be fraudulently accounted for is belied by his intimate acquaintance with the entire transaction which revealed a transparent attempt to make it appear that Compujob had been sold for value in fiscal 1969 whereas in actuality, Miller and Swan had been paid to take a disappointing subsidiary off the hands of the parent corporation, as a result of negotiations which occurred months after the close of the fiscal year.
Katz, with knowledge that the auditors were relying on the opinion of counsel,
stated that all "risks and benefits of ownership" had passed to Miller and Swan as of the end of fiscal 1969, whereas he knew, from having drafted the documents, that the "sale" of Compujob had no real substance and that any reported gain would falsely enhance the financial posture of NSMC. The fact that PMM may also have violated the securities laws in the course of drafting the financial statements does not relieve the defendant of all responsibility. He cannot credibly claim that he was unaware that NSMC was planning to mislead investors when at the very outset of the negotiations, he had in hand an analysis of the situation, furnished him by his clients in their October 24 memorandum. Thus, Katz either actually knew that a fraudulent scheme was envisioned by NSMC, or else he recklessly ignored what should have been readily apparent.
The third element of aiding and abetting, i.e., that Katz made a necessary contribution to the principal violation, has clearly been met. Although he was not an insider in the sense of personally profiting from the scheme, he was a central participant in negotiating and drafting the Compujob transaction. He also knew that PMM was relying on counsel's opinion in order to account for the transaction as a gain in fiscal 1969.
Thus, contrary to Katz's assertions, the SEC has made out a substantial case against him as an aider and abettor to a securities fraud scheme. Based on the Court's evaluation of the evidence thus far presented, Katz's motion for summary judgment should be denied.
THE COMMISSION'S CROSS-MOTION FOR SUMMARY JUDGMENT
The Commission has marshalled a strong case against defendant Katz with regard to the Fourth Claim of the Amended Complaint. Nonetheless, the Court is of the opinion that it is inappropriate at this stage of the National Student Marketing litigation to grant the Commission's cross-motion for summary judgment and injunctive relief against Katz. Seven other defendants including White & Case and a member of that firm who were also involved in the Compujob transaction, are still vigorously pursuing their defenses.
One of the purposes of the summary judgment procedure is to conserve judicial resources by avoiding unnecessary trials. Granting summary judgment against Katz at this time, however, would not appear to serve this purpose because the same factual and legal issues will be presented by the parties who are not involved in the immediate motions. Additional matters relating to the Compujob transaction may be developed through discovery, which is and has been under way, or evidence might be presented by the other participants which could throw a different light on the role played by Katz and the other defendants.
To grant an injunction against Katz, who was only one of several participants in the Compujob scheme, would constitute piecemeal adjudication which is inappropriate.
There is a dearth of authority for civilly enjoining a defendant on summary judgment in a securities fraud case. The Commission has cited only one case where an injunction was granted in an enforcement proceeding on the basis of documentary evidence alone.
Furthermore, other courts have strongly recommended an evidentiary hearing in cases where although there is little dispute as to the raw facts, the parties are absolutely at odds as to the inferences to be drawn from them and as to the applicability of the governing securities fraud statutes.
This Court agrees with Judge Friendly of the Second Circuit that where
issuance of an injunction on the ground of fraud turns on the knowledge and intent of an individual during a short period of time, [there is] no basis for dispensing with the evidentiary hearing normally required simply because the plaintiff is a government agency.