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SEC v. NATIONAL STUDENT MKTG. CORP.

October 21, 1975

Securities and Exchange Commission, Plaintiff,
v.
National Student Marketing Corporation, et al., Defendants


Parker, District Judge.


The opinion of the court was delivered by: PARKER

PARKER, District Judge:

 This matter concerns the legal responsibility and obligation of an attorney engaged in corporate and securities practice and his liability under the federal securities laws. The Securities and Exchange Commission (Commission or SEC) charges that the defendant Robert A. Katz, an attorney, violated and aided and abetted in the violation of the anti-fraud *fn1" and reporting *fn2" sections of the federal securities law by issuing legal opinions which he knew or should have known were materially false and misleading and which would be relied upon by third parties. Permanent sanctions are sought by the Commission restraining and enjoining him from engaging in acts or practices which operate as a fraud or deceit upon other persons and employing devices or schemes to defraud.

 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) *fn3" 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) *fn4" 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.

 I

 THE FACTUAL BACKGROUND

 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. *fn5" 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.

 During November of 1969, the terms of the Compujob transaction were negotiated between Katz, on behalf of his clients and John G. Davies, *fn6" 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.

 In their October 24, 1969 memorandum, Katz's clients indicated that if Compujob was acquired they had no desire to accept any management responsibility and that it should be contracted out. Accordingly, the separate Management Agreement drafted by Katz obligated NSMC to manage Compujob for fourteen months -- from September 1, 1969 to October 31, 1970. For that period NSMC was to provide all required working capital and was to be reimbursed for such advances and receive compensation for management services from Compujob's net profits, if any. However, payments to NSMC were restricted to only 60 percent of such profits. Further, a subsequent letter agreement provided that Miller and Swan would terminate Compujob's operations at any time during the fourteen month period upon request by NSMC. All expenses associated with such a decision would be paid by NSMC.

 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.

 Katz's Legal Opinions

 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 ...

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