redemption orders from the Funds' bank custodian, transferred them from the custodian bank account to SSC's bank account, and then transferred them to fund shareholders who redeemed their shares. SEC claims that SSC and Steadman did not maintain those monies in accounts in the name of SSC as agent or trustee for the funds, and failed at any time prior to 1990 to arrange for a verification of Fund monies in SSC's custody or for certification of that verification.
Defendants argue that SSC's custody of monies in the SSC subscription account and the SSC redemption account is not subject to the provisions of Rules 206(4)-2(a)(2)(A) and (a)(5), because the Funds have no beneficial interest in those monies. However, it is unclear who does have an interest in subscription or redemption monies if not the Funds. Defendants do not dispute that no surprise verification or certification took place. See 1990 Tr. I at 96. Instead, defendants argue that § 80b-6(4) can only be violated where an adviser intended to defraud, manipulate, or deceive its clients. Defendant cites no authority for this proposition. The statute on its face states that "it shall be unlawful . . . (4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative." 15 U.S.C. § 80b-6. Moreover, Rule 206(4)-2(a) explicitly defines what acts "shall constitute" fraudulent, deceptive, or manipulative practice. Thus, the statute and the rule are each worded so as to suggest that intent is not required. Accordingly, SSC, aided and abetted by Steadman, violated § 206(4) of the Advisers Act.
In the seventh count, SEC alleges that SSC, which was registered with the SEC as an investment advisor, failed to file a Form ADV with the SEC between March 31, 1986 and July 15, 1988. Rule 204-1(a)(1), promulgated pursuant to Section 204 of the Adviser's Act, requires every investment advisor registered on January 1, 1986 to file a complete Form ADV not later than March 31, 1986. See 15 U.S.C. § 80b-4; 17 C.F.R. § 275.204-1(a)(1). Defendants concede that no form was filed prior to July 15, 1988, but assert that the SEC has not alleged that any delay in filing the form deceived or injured any person. However, nothing in the statute or regulation indicates that injury or deception must be shown and defendants cite no authority for that proposition. Accordingly, SSC violated § 204 of the Adviser's Act and Rule 204-1(a)(1) promulgated thereunder.
Rule 17Ad-13(a), 17 C.F.R. § 240.17Ad-13(a), promulgated pursuant to section 17A(d)(1) of the Exchange Act, 15 U.S.C. § 78q-1(d)(1) provides that:
every registered transfer agent, except as provided in paragraph (d) of this section, shall file annually with the Commission . . . a report . . . prepared by an independent accountant concerning the transfer agent's system of accounting control and related procedures for the transfer of record ownership and the safeguarding of related securities and funds.
In count eight, SEC alleges that SSC is registered with the SEC as a transfer agent for the Funds, is not subject to any exemption provided in subsection 13(d), and failed to file any report conforming to the requirements of subsection 13(a) as required from June 10, 1984 until October, 1990. SSC does not dispute that Rule 17Ad-13(a) applies to it and concedes that it did not file transfer agency reports as required under the rule for the years 1984-1989. See 1990 Tr. I at 97-98. SSC asserts that its accountant at Coopers & Lybrand audited its system of accounting of control each year and found no deficiencies, and again, that its practices did not deceive or injure any person. Nevertheless, SSC violated 15 U.S.C. § 78q-1(d)(1), and 17 C.F.R. § 240.17Ad-13(a).
Injunctive relief for securities violations is appropriate where there is a likelihood that a violation of the securities laws will be repeated. See United States v. W. T. Grant Co., 345 U.S. 629, 633, 97 L. Ed. 1303, 73 S. Ct. 894 (1953). The standard for injunctive relief is "quite different from the common law equity bases for an injunction and no showing of irreparable injury is required." SEC v. General Refractories Co., 400 F. Supp. 1248, 1254 (D.D.C. 1975). A likelihood of future violations of securities laws can be inferred from fraudulent past conduct. See SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1100 (2d Cir. 1972); SEC v. Washington County Utility District, 676 F.2d 218, 227 (6th Cir. 1982); SEC v. Keller Corp., 323 F.2d 397, 402 (7th Cir. 1963). And voluntary cessation of securities violations, though relevant, is not determinative of whether such repetition is likely. See, e.g., W. T. Grant Co., 345 U.S. at 632-33; Hecht Co. v. Bowles, 321 U.S. 321, 327, 88 L. Ed. 754, 64 S. Ct. 587 (1944); Walling v. Helmerich & Payne Inc., 323 U.S. 37, 43, 89 L. Ed. 29, 65 S. Ct. 11 (1944).
Our Court of Appeals has directed district courts deciding whether to grant injunctive relief for securities violations to consider "whether a defendant's violation was isolated or part of a pattern, whether the violation was flagrant and deliberate or merely technical in nature, and whether the defendant's business will present opportunities to violate the law in the future." SEC v. First City Financial Corp., 890 F.2d 1215, 1228 (D.C. Cir. 1989). Defendants knowingly failed to register under state Blue Sky laws for seventeen years and recklessly omitted from the Funds' financial statements any liabilities or disclosure of potential liabilities resulting from their failure to register under state law. SSC, aided and abetted by Steadman, also failed to file required reports with the SEC, failed to obtain approval of an investment advisory contract as required, and failed to arrange for surprise verification of accounts in which client funds were maintained. Defendants have violated securities laws in the past. See Steadman v. SEC, 450 U.S. 91, 67 L. Ed. 2d 69, 101 S. Ct. 999, reh. denied 451 U.S. 933, 68 l. Ed.2d 318, 101 S. Ct. 2008 (1981). Therefore, defendants' violations are not isolated nor merely technical in nature. Defendants continue to manage the Funds. Accordingly, even though defendants now recognize some liabilities resulting from their failure to register under state Blue Sky laws and have filed reports as required with the SEC since the SEC's investigation of them, there is "some cognizable danger of recurrent violation, something more than the mere possibility which serves to keep the case alive." W.T. Grant Co., 354 U.S. at 633.
The decision whether to grant injunctive relief "is addressed to the sound discretion of the district court," SEC v. Caterinicchia, 613 F.2d 102, 105 (5th Cir. 1980), but the evidence must be viewed in the light most favorable to the SEC. See. e.g., SEC v. Warner, 674 F. Supp. 836, 840 (S.D. Fla. 1987). The evidence set forth in the affidavits and adduced through oral testimony entitles the SEC to injunctive relief to prevent defendants from committing future violations of federal securities laws. An accompanying order issues judgment for plaintiff on all claims and requests further submissions regarding the form of a permanent injunction.
EDITOR'S NOTE: The following court-provided text does not appear at this cite in 798 F. Supp. 733.
ORDER - February 27, 1991, Filed
For the reasons stated in the accompanying Memorandum, it is this 27th day of February, 1991, hereby
ORDERED: that judgment for plaintiff should be, and is, hereby GRANTED; and it is further
ORDERED: that plaintiff shall submit a proposed permanent injunction on or before March 10, 1991; and it is further
ORDERED: that defendants may respond to the proposed permanent injunction on or before March 20, 1991; and it is further
ORDERED: that plaintiff may reply on or before March 27, 1991.