shown that he concealed anything from those outside advisors. Moreover, Credit's outside counsel testified that Stuken frequently offered them information in addition to that which they had requested to prepare the pertinent filings, and never suggested that any information be withheld from the public. Stuken was not the drafter of the statements in the SEC filings, although his input was significant in their preparation and, like Wills, he reviewed them prior to issuance. The Court is unable to find on the preponderance of the evidence that Stuken intended to deceive or acted recklessly.
In considering whether or not an injunction is appropriate in these circumstances, the Court is greatly handicapped by a lack of information as to the role and intent of various other individuals apparently involved. When the complaint was filed it also named Russell E. Kemmerer, President of Credit, and Marvin F. Hartung, an outside attorney, as defendants. Both of these men accepted without admission a standard SEC consent decree enjoining future violations. Mr. Kemmerer ran Credit on a day-to-day basis, and managed Credit's cash accounts. Mr. Hartung played a critical role in preparing Credit's public filings with the SEC. His part in the relevant events is particularly significant because every businessman must rely to some extent on the advice of outside counsel and auditors as to the appropriate contents of filings with the SEC. Although reliance on such advice can rarely, if ever, rise to the level of a defense to a securities law violation, it has to be deemed relevant on the appropriateness of injunctive relief. See Hawes & Sherrard, Reliance on Advice of Counsel as a Defense in Corporate and Securities Cases, 62 Va.L.Rev. 1, 94-102, 147 (1976), and the cases cited therein. In this case, the defendants relied to a considerable extent on the direction of outside counsel and auditors, who spent a good part of their time on GAC's affairs. For instance, both of the latter apparently knew about the development guarantees, but deemed them insufficiently material to require their disclosure, and as a consequence did not suggest to Credit that they be disclosed. Outside counsel and auditors also knew that Credit was transferring all of its cash receipts to the GAC cash pool as a matter of course.
It should be noted that both Wills and Stuken are no longer connected with the GAC complex of companies now in bankruptcy. Stuken works for a bank and Wills is a semi-consultant in real estate matters in Florida. It is reasonable to assume that both men may well become engaged with concerns subject to SEC regulation at some later date. There is no proof that leads the Court to believe either of them will, if this occurs, intentionally misrepresent or omit material information. Their violations may have been repeated, but were not flagrant or outrageous. It is not the role of equity to punish. Lacking requisite proof of a threat of future wrongdoing, the Court in its discretion finds no basis for entering the harsh injunction sought.
The SEC has also requested that the Court require the defendants to disgorge the compensation they received from GAC during 1974 and 1975. The amounts in question were received in return for the services they rendered GAC during the time period at issue in this case.
Disgorgement is one of several remedies which a court of equity has at its disposal to redress a securities law violation. See Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a) (1976) and Section 27 of the Exchange Act, 15 U.S.C. § 78aa (1976); SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1103-04 (2d Cir. 1972). The objective of such an order is to deprive a securities law violator of the fruits of his illegality. Accordingly, the cases permit the disgorgement of "illicit profits" or "proceeds," SEC v. Manor Nursing Centers, Inc., supra, 458 F.2d at 1104, such as those derived from a fraudulent stock offering, Id.; those derived from a fraudulent exchange offer, Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 390-91 (2d Cir.), Cert. denied, 414 U.S. 910, 94 S. Ct. 231, 38 L. Ed. 2d 148 (1973); and those derived from trading in securities through the use of inside information, SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1307-08 (2d Cir.), Cert. denied, 404 U.S. 1005, 92 S. Ct. 561, 30 L. Ed. 2d 558 (1971); SEC v. Shapiro, 494 F.2d 1301, 1309 (2d Cir. 1974).
The Commission has failed to demonstrate the appropriateness of such a drastic remedy here. It is not necessary to decide the precise nature of the causal link which the SEC must show between defendants' violations and the profits in question; in this case plaintiff has failed to demonstrate any reasonably close link between defendants' 1974 and 1975 corporate compensation and their illegal conduct. In order to make such a showing, particularly in the absence of any proof of scienter or fraud, the SEC would at least have had to demonstrate the following: (1) that, had the required disclosures been made, some likelihood existed that the defendants would have lost all or part of their jobs, And the point in time when this would in all probability have occurred; Or (2) the extent to which the defendants' compensation during 1974 and 1975 can be attributed to their securities law violations as distinguished from those legitimate services which they did render to the GAC complex. The SEC offered no evidence at trial on these points and, in fact, now contends that the defendants bore the burden of first coming forward with evidence relating to this matter. This last contention is totally devoid of merit. See Collins Securities Corp. v. SEC, 183 U.S.App.D.C. 301, 562 F.2d 820 (1977).
When the amounts to be disgorged cannot be related with sufficient certitude to defendants' securities law violations, the SEC's disgorgement request takes on the character of a plea for punitive relief. The cases, however, are unanimous in refusing to accede to such a demand. See, e.g., SEC v. Manor Nursing Centers, Inc., supra, 458 F.2d at 1104-05; SEC v. Texas Gulf Sulphur Co., supra, 446 F.2d at 1308.
In this regard, the Court is also greatly troubled by the fact that the SEC's disgorgement request first appeared in this case shortly before trial. It was not contained in the SEC's original complaint. Only after the present defendants refused to succumb to a consent judgment did the SEC bring up the disgorgement request. The Court is cognizant of the rule that "he who seeks equity must do equity." No injunction or disgorgement will be entered.
For the foregoing reasons, the Court finds that the defendants violated Sections 13(a) and 14(a) & (e) of the Exchange Act, Sections 5(b)(1) and 17(a) (3) of the Securities Act, and Rules 13a-1, 13a-11 and 14a-9. The Court finds no violation of Section 10(b) of the Exchange Act or Rule 10b-5. Finally, the Court rejects the SEC's request for final injunctive and disgorgement relief.
1. April to December 1974
Between April and December 1974, Credit's monthly financial statements (as found in GAC's internal books of account ("Gold Books"), in Credit's 1974 10-K, and in various of defendants' trial papers) reflected ownership of the following assets other than land installment contract receivables (in dollars):1a
The contemporaneous net purchases (sales) of installment land contract receivables apparently were:
2. January June 1975
Between January and June 1975, Credit's balance sheets reflected ownership of the following assets other than land installment contract receivables:
During the same period, net purchases (sales) of installment contract receivables by Credit from (to) Properties amounted approximately to:
Credit retired, through open-market purchases, approximately $ 20.3 million of its 1975 and 1977 debentures during 1974 and the first quarter of 1975.
Significant Relevant Disclosures
A. Disclosures in the 1974 10-K
1. The "business" of Credit
The first page of the 1974 10-K stated that:
The principal business of the Registrant since 1970 has been to provide financing for (Properties) by purchasing instalment land contracts arising from sales of land by Properties. The business of the Registrant is governed by an Operating Agreement . . .. (p. 1)
A fuller exposition of Credit's business was made at a later point:
. . . . the Registrant owns the greater part of the receivables which have been generated by Properties land sales operations. The Registrant receives cash from the collection of these receivables, payment of which to Properties or any other real estate subsidiaries of GAC is restricted, under the terms of the Operating Agreement and the indentures . . ., to payment for additional Eligible Receivables, release of withheld reserves against receivables collected, unpaid balances with respect to contracts purchased or as dividends or other payments with respect to its common stock within limitations prescribed by the foregoing indentures. . . . In the event of a protracted decline in GAC's retail land sales and consequent lack of Eligible Receivables available for purchase by the Registrant, the foregoing restrictive provisions could materially limit Registrant's ability to pay over cash collections on a day-to-day basis. (p. 2)
The 10-K also explained how funds flowed in relation to Eligible Receivables:
(Credit sometimes holds) receivables for which payment had not been made to Properties. The Registrant from time to time makes payments to Properties against this balance, and Properties from time to time advances funds to the Registrant which are credited to the balance payable to Properties. (p. 3).