Securities And Exchange Commission v. Fehn

97 F.3d 1276 (9th Cir. 1996)

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Nature of the Case

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Facts

CTI Technical, Inc. was incorporated in Nevada in January 1987. In June 1987, seeking to raise capital to acquire other businesses, CTI conducted a $200,000 'blind pool' initial public offering of securities (IPO). The offering was tainted by violations of state and federal securities lawS.CtI violated state blue sky laws by failing to register its securities with the states in which those securities were sold. CTI filed a Form S-18 registration statement with the SEC (P) that violated the Securities Act of 1933 and SEC regulations by failing to disclose that Wheeler was the promoter of the company and controlled its nominal directors. Finally, Wheeler and Stoneridge Securities, Inc., underwriter for the IPO, attempted to defraud investors by manipulating the price of the securities in aftermarket trading. D was retained to represent CTI and Wheeler, as well as CTI's underwriter and various CTI officers and directors. D is a California attorney who has specialized in securities law during nearly three decades of practice. He has represented clients in connection with the registration and offering of securities under the Securities Act of 1933, compliance with reporting and disclosure requirements under the Securities Exchange Act of 1934, and litigation of various securities matters. Prior to D's retention in connection with the P investigation, D's law firm had represented underwriter Stoneridge Securities during CTI's IPO. During P's investigation of CTI and Wheeler, D became aware that CTI was not in compliance with certain reporting requirements of the Securities Exchange Act of 1934. D advised Wheeler that CTI was required to file the quarterly Form 10-Q's and that it must disclose, in particular, the FDA's restriction of its Accupatch product. Wheeler flatly refused to make such disclosures. D later testified that he told Wheeler it was his professional opinion that such disclosures were unnecessary under the regulations, and furthermore could impair Wheeler's ability to assert his Fifth Amendment privilege against self-incrimination with respect to those earlier violations. Wheeler wished to limit CTI's expenses, and he had a non-lawyer employee of CTI - rather than D - draft the Form 10-Q's. D gave Wheeler a copy of Regulation S-K, which outlines disclosure requirements for Form 10-Q, an instruction booklet describing how to fill out a Form 10-Q, and a sample Form 10-Q. The employee prepared a draft of the Form 10-Q for the quarter ending March 31, 1988, which disclosed the FDA's ban on CTI's Accupatch product. The Form 10-Q mischaracterized Wheeler's true role in CTI, describing him as CTI's recently appointed CEO and president rather than the individual who in fact had promoted, incorporated, and controlled the company since its inception. The form also failed to disclose the potential civil liability stemming from Wheeler's and CTI's earlier violations of state and federal securities laws. D reviewed and edited the draft of the Form 10-Q, incorporating financial statements he had obtained from CTI's accountant. D maintains that he made no substantive changes to the document, and, in particular, did not delete from the report any information the SEC later contended was improperly omitted. D's secretary mailed the final Form 10-Q to the SEC, where it was filed in August 1988. Based on CTI's Form 10-Q for the quarter ending March 31, 1988, D's law firm prepared and mailed two other Form 10-Q's, for the quarters ending December 31, 1987, and June 30, 1988, respectively. These forms, too, mischaracterized Wheeler's relationship to CTI and failed to mention contingent liabilities stemming from CTI's and Wheeler's earlier securities law violations. P filed a complaint against D, alleging that in preparing and filing the three Form 10-Q's, Fehn had aided and abetted violations of Sections 10(b) and 15(d) and violations of Rules 10b-5, 12b-20, and 15d-13. P brought an action to permanently enjoin D from future securities laws violations. The district court found that D had aided and abetted violations of Sections 10(b) and 15(d) along with Rules 10b-5, 12b-20, and 15d-13. It found there was a reasonable likelihood of future violations on D's part and entered an order permanently enjoining D from future aiding and abetting violations of the securities laws. D appealed.