Securities v. World-Wide Coin Investments, Ltd.

MEMORANDUM OPINION AND ORDER

This is a securities fraud action in which the Securities and Exchange Commission (SEC) seeks a permanent injunction against World-Wide Coin Investments, Ltd. (WorldWide) and the individual defendants 1 as well as an order for a full accounting and disclosure of wrongfully received benefits. In an order entered March 29, 1983, this court directed the clerk to enter judgment for the SEC on all counts of the complaint and further directed defendants Hale and Seibert to (1) retain an independent auditor to perform a full accounting of World-Wide of all receipts and disbursements of cash and all purchases and sales and other acqui *729 sitions and dispositions of inventory and assets since July 1, 1979, and (2) return whatever shares of World-Wide stock they might hold to World-Wide. Finally, the court ordered World-Wide to make a full disclosure to its present shareholders with respect to all material information relating to its operations since July 1, 1979. The following memorandum opinion will constitute this court’s findings of fact and conclusions of law as required by Fed.R.Civ.P. 52(a).

Factual Background

World-Wide Coin Investments, Ltd., is a Delaware corporation with its principal offices in Atlanta, Georgia, and is engaged primarily in the wholesale and retail sale of rare coins, precious metals, gold and silver coins, bullion, and, until 1979, in the retail sale of camera equipment. Its operations also include the sale of Coca-Cola collector items and certain commemorative items. Its inventory of rare coins comes from its purchases of collections from estates and private individuals, purchases from dealers, purchases on domestic commodities exchanges, and purchases at coin shows. Sales are transacted at the Atlanta office and at many major coin shows held in the United States. For some time it published a trade journal, The Coin Wholesaler, which carried both news and feature stories of special interest to coin collectors and investors, who comprised the majority of subscribers. Until August 1979, through its subsidiary World-Wide Camera Fair, Inc., 2 World-Wide operated retail stores in Augusta, Athens, Savannah, Columbus, Georgia, and Jacksonville, Florida, selling camera and photographic equipment. All five stores were sold during the first quarter of fiscal year 1980.

World-Wide’s common stock is registered with the SEC pursuant to the Securities Exchange Act of 1934, 15 U.S.C. § 787(b), and until late 1981 was listed on the Boston Stock Exchange. Prior to July 1979, the company’s assets totaled over $2,000,000, and it had over 40 employees. In August 1981, the time of the filing of this lawsuit, the company’s assets amounted to less than $500,000, and it had only three employees.

Defendant Joseph H. Hale took over the management and control of World-Wide on July 24,1979, as the controlling shareholder, chairman of the board, chief executive officer, and president. 3 He was formerly a national bank examiner with the United States Treasury Department and was employed as an accountant and auditor for General Motors and the Glidden Company, where he obtained an understanding of the *730 importance of internal controls and the concept of “GAAP” (generally accepted accounting principles). Following these experiences, he became a broker-dealer and is registered with the National Association of Securities Dealers (NASD) and the New York Stock Exchange.

Defendant Floyd Seibert is an employee of Health-Care International, Inc., a member of the board of directors of Florafax, Inc., and in September 1979 became a member of World-Wide’s board of directors; he also constitutes World-Wide’s one-man audit committee.

I. HALE’S TAKEOVER OF WORLD-WIDE

Prior to 1979, World-Wide was managed by John Hamrick, who held the positions of president, chief executive officer, and chairman of the board. During his tenure at World-Wide, Hamrick was involved in the rare coin business and operated two subsidiaries, World-Wide Camera Fair and Chattanooga Coin and Stamp, both of which significantly contributed to World-Wide’s profits. Hamrick met Hale in 1979, when Hale made an offer of 25$ a share to purchase control of World-Wide. This offer was not accepted, but Hale subsequently increased his offer to 75$ a share, and on July 24, 1979, Hale acquired 51% of the common stock of World-Wide from Ham-rick, approximately 290,000 shares. Ham-rick then resigned as chairman of the board, president, and chief executive officer, and Hale was elected as his successor at a board meeting of the company on that date. Shortly thereafter, the remaining directors of World-Wide resigned, and on September 1, 1979, Hale appointed Jones and Seibert to comprise, in addition to himself, the three member World-Wide board.

As part of Hale’s purchase of the controlling block of World-Wide stock, he and Hamrick entered into a consulting agreement, which contained the following terms and conditions: (1) World-Wide would pay Hamrick a consulting fee of $1,000 per month for 15 months, (2) in consideration of this consulting fee, Hamrick’s employment contract with World-Wide would be can-celled, and Hamrick would provide Hale with information concerning World-Wide on an as needed basis during the 15-month consulting agreement, (3) Hamrick would resign as the chairman of the board, chief executive officer, and president of WorldWide, (4) Hamrick would remain on the World-Wide payroll at the rate of $5,000 per month until certain loans from him to World-Wide were repaid in full, and until his name was removed from certain guarantees, (5) Hamrick would not open any type of retail coin or bullion business in the five county Atlanta area comprising Fulton, DeKalb, Cobb, Gwinnett, and Clayton Counties for a period of 24 months, and (6) Hamrick would not hire any of World-Wide’s current employees for a period of 24 months.

Prior to Hale’s acquisition of the controlling shares of World-Wide stock, he met with Robert Whitley, a securities attorney who had assisted Hamrick during his years at World-Wide. In a letter dated July 11, 1979, 4 Whitley set forth the requirements under the federal securities laws with respect to Hale’s planned takeover. In that letter, Whitley advised Hale that a Schedule 13D form 5 would have to be filed with *731 respect to the purchase of stock and the proposed tender offer, as well as a Form 3 and Form 4 regarding the change in ownership of stock, a Form 8K 6 and a press release. With respect to the tender offer, a Form 14D 7 would have to be filed, and Whitley enumerated some of the information that Hale would have to disclose. Notwithstanding this advice, Hale failed to file a Scheduled 13D form with the SEC. He did file a Form 3 statement as required by section 16(a) of the 1934 Securities Exchange Act 8 ; however, it was filed a month late. World-Wide did not file a Form 8K to disclose a change in control of ownership, nor did it file with the SEC or transmit to World-Wide shareholders the information required by section 14(f) of the 1934 Act 9 , indicating that the three directors had been selected without shareholder approval. In his letter to Hale, Whitley also set forth his billable rate and other information should Hale wish to retain him and his law firm as counsel for World-Wide. Hale did not retain Whitley as counsel, and he testified at trial that the company did not have a lawyer on retainer until the initiation of the instant lawsuit.

In addition to acquiring control of WorldWide on July 24, 1979, Hale also persuaded the board of directors to adopt a resolution that authorized the issuance of 300,000 additional shares of common stock at the price of $225,000 (75$ per share). Hale stated that he would pay for the stock in cash, coins, or rare medals and that if he paid in coins or medals they would be appraised by two outside appraisers.

The minutes of this meeting 10 state that George Humphries, one of the former World-Wide directors, made the motion to *732 approve this swap of stock for medallions and that the motion was seconded and approved. Humphries, now a coin dealer marketing silver medallions, testified at trial that these minutes are incorrect and that there was no vote on the swap of medallions for stock. When asked who recorded the minutes, Humphries stated that no one took them, although Sue Woods is listed as secretary for the meeting. Humphries also testified that he did not recall any discussion of the proposed appraisal of the medallions. Daniel Anderson, also a former World-Wide director and an investor in rare coins and medallions, testified that although he attended the July 24,1979, meeting, he did not recall anyone taking the minutes. With respect to the swap of medallions for stock, Anderson testified that no action or vote was taken by the directors on this proposal. The possibility that these minutes were falsified is further substantiated by Hamrick, who testified that no approval was given for the medallion/stock swap while he was present; if a vote was taken by the board, it was done after he had resigned his position with World-Wide. There is substantial testimony to support a finding that the minutes of this July 24, 1979, directors’ meeting were falsified, and this court is convinced that approval of the stock swap was expressly conditioned on Hale’s obtaining an outside appraisal of the value of the medallions.

On or about September 15, 1979, Hale sold certain bicentennial and other commemorative medals to World-Wide in consideration for the issuance of the 300,000 shares of World-Wide common stock. Hale valued these medals at $225,000, but the testimony at trial revealed that this figure was extremely inflated. Furthermore, Hale never complied with the board’s express requirement of obtaining an accurate, outside appraisal of these medals.

The medallions that Hale presented to the company had initially been purchased by East Coast Coin Company in 1976, with the expectation that they could be marketed through various state organizations who were celebrating the bicentennial and the inauguration of President Jimmy Carter. East Coast Coin was not, however, able to sell these medals during the three year period from 1976 to 1979.

Prior to the transfer of the medallions to the company’s inventory, Hale was advised by Jerry Bickers, a World-Wide vice president and numismatist, that there was no market for these medallions and that they were worth significantly less than $225,000, since their only worth was in scrap value (the value of an item after it has been melted down). Furthermore, Bickers had advised Hale that there was no “after market” for these commemorative medals and that there was no indication that they would ever be collectors’ items. With respect to the value of the medallions, Daniel Anderson testified that they had no resale or market value, their only value being the actual value of the medal itself, which was approximately % of the value proposed by Hale. George Reid, an employee in the sales department of East Coast Coin and World-Wide, testified that certain commemorative medals such as the 1933 Roosevelt medal could be very valuable, but the majority of medallions are difficult to market after they have been struck.

Hale failed to have the medallions officially appraised as required by the board of directors. He sent a listing of the WorldWide inventory of medals to two coin dealers 11 requesting them to place a value on each type of medallion on the list. The medallions themselves were not sent to these dealers. 12 In a letter to Hale dated *733 June 18, 1980, 13 Chris Johnson of the Connecticut appraisal firm gave Hale a listing of the current retail market value for the medallions, but this does not constitute an official or accurate appraisal. In a letter dated September 20, 1979, Malvin K. Hoffman, president of the Connecticut Mint, Inc., in Dallas, Texas, told Hale that his evaluations of the medals might be invalid because of the fluctuations in the gold and silver markets.

Neither of these price lists purported to value or price the items as to what a coin dealer would pay for the entire collection, nor was the condition of the collection described, observed, or considered. However, after Hale received the price list from the dealer in Texas, he prepared a tabulation of all the medallions and assigned the retail market as approximated by the dealer as the actual value of each medallion. Hale did not allow anyone to verify either the quality or quantity of the medallions. Marie Smith Bennett, a former World-Wide employee whose responsibilities included receiving inventory purchased by the company, testified that Hale instructed her, contrary to normal policy, not to write a purchase order when the medallions were received. Hale ordered Bennett to initial tabulations of the medals that he had prepared that contained the “appraised” values, giving the impression that Bennett had inspected these medallions, allegedly valued at $225,000. 14

By the time that the medallions became a part of World-Wide’s inventory, only the gold and silver medallions, which were valued by Hale at approximately $30,000, had been sold for their scrap value. The remaining bronze medallions, which were valued by Hale at $195,000, have not been sold. May, Zima & Company (May, Zima), the independent auditors that prepared WorldWide’s financial statements for its 1980 10K 15 did not accept the values that Hale placed on the bronze medallions, and, after obtaining the opinion of a third party numismatist, wrote down the value of the remaining medallions from $195,000 to $60,-000. The director of advertising at WorldWide attempted, pursuant to.Hale’s instructions, to sell the remaining medallions, but the best offer that was given for the medallions was from 10 $ to 15 $ on the dollar or approximately $19,500. Thus, it appears that Hale overstated the value of the bronze medallions by $135,000 to $175,000, knowing that they were worth substantially less than $225,000.

It further appears that Seibert, who was a World-Wide director at the time Hale sold the medallions to the company, knew that Hale was not authorized to sell the medallions for 300,000 additional shares of common stock, knew that the medallions had not been appraised as required, and knew that the medallions were substantially overvalued since there was little, if any, market for them.

II. HALE’S PUBLIC TENDER OFFER

On July 30, 1979, Hale commenced a tender offer to purchase the remaining common shares of World-Wide stock for 75$ per share on or before September 27, 1979. 16 In connection with this tender offer, Hale directed World-Wide’s transfer agent, the National Bank of Georgia, to mail an offering circular that he had per *734 sonally prepared without the assistance of counsel to the remaining 401 shareholders of World-Wide. By way of this tender offer, Hale subsequently acquired approximately 10,000 additional shares from World-Wide public shareholders.

A review of the tender offer circular reveals omissions and misrepresentations in the following respects. (1) The circular stated that the board of directors unanimously approved the issuance of 300,000 new shares to Hale in exchange for cash or a combination of gold and silver coins and medals. The circular made no mention that there was some dispute regarding this swap of medallions for stock and made no mention of the requirement that the medallions be independently appraised. (2) The circular failed to state the effect that the issuance of 300,000 additional shares would have on the approximately 400 minority shareholders of World-Wide. (3) The circular failed to disclose Hale’s purpose with respect to the tender offer, stating that he was an “investor,” implying that he was making the tender offer for investment purposes only. (4) The circular failed to disclose the understanding between Hale, Hamrick, and others regarding the composition of the board of directors. (5) The circular stated that if the number of WorldWide shareholders became less than 300, the registration of its stock under the 1934 Securities Exchange Act could be terminated, when, in fact, in order for the company to terminate its Exchange Act reporting requirements, it would be necessary for the company to discontinue its registration on the Boston Stock Exchange as well. (6) The circular stated that Hale had filed the required Schedule 14D tender offer statement with the SEC when, in fact, he had not. (7) The circular stated that the sale of World-Wide Camera Fair would be completed within “a reasonable number of days” and that after the sale, a substantial portion of the company’s debts would be eliminated since the company would obtain $100,000 in cash. Hale knew that this transaction would probably not be consummated, and, in fact, the transaction did not close. Within 45 days of the commencement of Hale’s tender offer, however, the assets of Camera Fair were sold to John Hamrick, former president and controlling shareholder of World-Wide, and another person in a transaction different than discussed in the tender offer circular, at terms considerably less advantageous to WorldWide.

Although Robert Whitley had previously advised Hale as to the requirements under the federal securities laws with regard to tender offers, Hale did not make the necessary filings with the SEC. He was required to prepare and file a Schedule 14D form with the SEC, but he did not. He did file this form with the Boston Stock Exchange, but it contained virtually none of the required information. Furthermore, when Hale acquired the approximately 10,000 additional shares of stock pursuant to the tender offer from World-Wide shareholders, he should have filed a Form 4 with the SEC, but he did not. With respect to his failure to file these forms with the SEC, Hale testified at trial that it was true that he did not file a Form 4, but he did not think he had to. He testified he did not file a Form 3 in 1979 reflecting his total purchase of shares, stating that he owned some of the shares beneficially rather than directly, and therefore he did not consider it necessary to report this to the SEC. He admitted that he wrote the tender offer circular himself without any attorney’s advice and testified that World-Wide had no' lawyer on retainer until the initiation of this action.

III. EVENTS FOLLOWING HALE’S TAKEOVER

Prior to Hale’s obtaining control of the company in July 1979, the accounting firm of Kanes, Benator & Co. (Kanes, Benator) was retained as World-Wide’s independent auditor and prepared the company’s 10K *735 report for fiscal year 1979. 17 Also prior to the takeover, World-Wide apparently had an adequate system of internal accounting controls, since the company kept books and records which accurately reflected its transactions and dispositions of assets in reasonable detail. Furthermore, all employees followed internal control procedures, and the company had a policy of requiring supporting documents to be prepared for all transactions. It is the deterioration of WorldWide’s internal controls and accounting procedures that constitutes the primary thrust of the SEC’s complaint. The SEC contends that the combination of late filings, lack of internal controls, transactions unsupported by adequate documentation, and a total disregard for proper accounting procedures resulted in the precarious position of the company at the time the lawsuit was filed. This court will attempt to examine each of the various problems of the company from 1979 through 1981.

A. 1979 10K Report and Related Events

Soon after Hale acquired control of World-Wide, he terminated the chief financial officer of the company, and for the next month or so, the company’s accounting books were virtually ignored. General ledgers and general journals were not kept, and the checks written on World-Wide’s five checking accounts were not reconciled.

In early October 1979, Hale hired Patricia Allen as a bookkeeper to set up the books and to take full responsibility for maintaining the books and records of World-Wide. Another part of her responsibilities included preparing the 10Q reports to be filed with the SEC. 18 Ms. Allen was not a high school graduate; her only experience for this position consisted of five months of vocational school training and seven years of bookkeeping for a privately held lumber company.

The only other person in the company’s accounting department was Seibert, the one-man audit committee, who was also Ms. Allen’s theoretical supervisor. Seibert had no experience with a publicly held company such as World-Wide and in fact was not a paid employee of the company, since he was a full-time employee of Health Care, one of World-Wide’s subsidiaries. As a result, he was rarely available to advise Ms. Allen on any bookkeeping matters.

On November 5, 1979, Kanes, Benator wrote a letter to Hale 19 following a routine, required evaluation of World-Wide’s system *736 of internal controls, expressing grave concern over certain accounting procedures and lack of internal controls that Kanes, Benator considered to be detrimental to the company. In this letter, Kanes, Benator noted the following material weaknesses and conditions: (1) An evaluation of the company’s internal controls during the period subsequent to the fiscal year ending July 31, 1979, disclosed that an adequate segregation of duties between employees was not properly maintained. One employee was posting the cash receipts journal, the disbursements journal, the general ledger, and the accounts receivable subsidiary ledger, filing all sales invoices, making bank deposits, reconciling bank statements, and issuing disbursement checks. (2) Numerous transactions recorded on the company books by general entries were not properly explained nor accompanied by readily available documentation. (3) The accounting records in general were not properly filed nor available for proper inspection. (4) The accounting and other staff familiar with the company’s procedures were not available to assist the auditors at the requested or even at a prearranged time.

This letter from Kanes, Benator officially notified World-Wide of its deficiencies in its internal accounting controls and further stated that these deficiencies would be considered by Kanes, Benator in its examinations of the company’s financial statements in the future. Even with this official notice that improvements were needed, Hale and Seibert did nothing to remedy the situation, and the criticisms of Kanes, Benator were virtually ignored. Kanes, Benator was dismissed as the company’s auditor following this 1979 audit, and May, Zima & Co. was selected as the replacement on May 6, 1980. A form 8K disclosing this change was filed with the SEC on August 13, 1980, over two and a half months after it was due.

With respect to the 10K report 20 filed for fiscal year 1979, Hale, Seibert, and Jones prepared it themselves without the assistance of counsel, and it contained the following misrepresentations: (1) the report stated that “two new outside directors had been elected” to the company’s board, and (2) the report stated that, in consideration of the additional 300,000 shares of common stock to Hale, $225,000 in additional equity in the form of inventory had been added to WorldWide. With respect to the statement concerning outside directors, neither Jones nor Seibert could have been considered outside directors, since they were, at that time, employees of Hale’s other private corporations. Furthermore, Seibert and Jones were not “elected” to World-Wide’s board of directors, since Hale simply appointed them to the board. With respect to the statement concerning the addition of $225,-000 to World-Wide’s equity, this court has already examined the fact that the commemorative medallions were not marketable because of their lack of intrinsic value and were worth substantially less than $225,000. These two statements were also contained in the company’s 1980 10K report.

B. 1980 10K Report and Related Events

The company’s problems increased in 1980, mostly resulting from its chaotic bookkeeping practices and total disregard for an adequate internal control system. World-Wide’s problems in this regard will be emphasized in the following subsection of this order; the focus of this subsection will be the misrepresentations and omissions contained in the 1980 10K report. May, Zima & Co., World-Wide’s independent auditor for its 1980 10K report, declined to give an opinion with respect to the company’s 1980 financial statements 21 stating:

[T]he company was advised of an uncertainty relating to a possible violation of *737 the provisions of the Foreign Corrupt Practices Act of 1977. The ultimate outcome of the implications of the violations of the federal act cannot be determined and no provision or any liability that may result has been made in the 1980 financial statements.

The company had significant deficiencies in internal controls including the lack of detailed records and certain supporting data which were not available for our examination. Therefore, we were not able to obtain sufficient evidence in order to form an opinion on the accompanying financial statements including whether the inventory at July 31, 1980 ($450,750) was stated at the lower of the cost or market or whether the detailed subscription revenue ($60,878) is an adequate estimate for the applicable liability....

Because of the significance of the matters discussed in the preceding paragraphs, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the accompanying financial statements and related schedules.

This 1980 10K report, also prepared by Hale and Seibert without assistance of counsel, indicated that the company was in the process of correcting the deficiencies in its internal accounting controls because of May, Zima’s disclaimer opinion. It soon became apparent, however, that no substantive improvements were ever made.

In addition to the misrepresentations discussed above, a substantial amount of material was not disclosed in this 1980 10K: (1) The 10K failed to disclose that Hale was not supervising World-Wide’s day-to-day operations of the company, although it did disclose that he was the president and chairman of the board. This should have been disclosed, since on or about August 1, 1980, Hale took over the control of Florafax, spending nearly all of his time in Tulsa, Oklahoma, being at World-Wide’s offices no more than one or two days a month. Since that time until April 1981, Jones managed the operations of the company with the assistance of Seibert. (2) The report stated that World-Wide had purchased 42,000 shares of Florafax stock at a cost of over $164,000 and that Hale did not own controlling interest in Florafax at the time that World-Wide purchased the stock. The report did not disclose, however, that prior to World-Wide’s initial investment in Flora-fax, Hale had purchased approximately 8% of its outstanding stock and that he was also making purchases of Florafax stock, intending to obtain control of the company. The report did not disclose that Florafax had been having financial problems since 1978 and that it was in need of cash. Furthermore, Florafax had not paid a dividend in over five years, but this was not disclosed in the 10K report. (3) The report contained certain statements with respect to the value of the medallions sold to the company in 1979, indicating that their value had decreased since Hale had sold them to the company; however, the truth was that Hale had knowingly overvalued them when they were first placed in World-Wide’s inventory-

C. Problems with Internal Controls and Accounting Procedures

On November 5, 1979, Kanes, Benator, as World-Wide’s independent auditor, warned *738 Hale and World-Wide that a good and sound internal accounting control system was necessary to ensure the safeguarding of assets against losses from unauthorized use of dispositions and of financial records for preparing financial statements and maintaining accountability for assets. Although the company was notified of the importance of a good system of internal controls, this warning was ignored, and any control system that had existed at WorldWide ceased to exist. The problems that occurred at the company with respect to internal controls and accounting procedures can be divided into three areas: (1) inventory problems, (2) problems with separation of duties and the lack of documentation of transactions, and (3) problems with the books, records, and accounting procedures of the company.

(1) Inventory Problems

The safeguarding of World-Wide’s physical inventory was one of its most severe problems; there was considerable testimony at trial to the effect that the company’s vault, where most of the rare coins were kept, was unguarded and left open all day to all employees. Furthermore, no one employee was responsible for the issuance of coins from the vault, according to the accountants from May, Zima, who performed the 1980 audit. Scrap silver and bags of silver coins were left unattended in the hallways and in several cluttered, unlocked rooms at World-Wide’s offices. During the trial, Hale admitted that he was worried about thefts due both to faulty record-keeping and the system of safeguarding the assets.

Hale also failed to initiate an adequate system of itemizing World-Wide’s physical inventory. Rather than maintaining a perpetual inventory system, the company relied on a manual quarterly system, which, in light of the company’s inadequate securities measures, was not effective in safeguarding the assets or in keeping an accurate account of the inventory. WorldWide’s system made it relatively simple for an employee to improperly value and/or misappropriate large items of inventory undetected. Furthermore, employees were allowed to take large amounts of inventory off the premises of World-Wide for purposes of effecting a sale without giving a receipt.

An accuration valuation of World-Wide’s inventory was never accomplished, and Clifford Haygood, the accountant from May, Zima who performed the field work for the 1980 audit, testified that a major reason for the disclaimed opinion in 1980 was the inability to determine the valuation of the cost inventory. Haygood also testified that he was unable to determine the cost of inventory, since World-Wide failed to have adequate purchase orders as documentation to determine the correct cost. 22

Haygood, along with Robert Nofal, a coin expert hired by May, Zima to determine the value of World-Wide’s coin inventory, inspected the offices of World-Wide for approximately 4/2 days beginning July 30, 1980. After Nofal’s examination of the coins, Haygood concluded that the value of inventory by Hale required a substantial write-down of 10% of the value at which they were being carried on World-Wide’s books. With respect to the $225,000 “appraisal” of the medallions involved in the 1979 stock swap, Haygood stated that no actual appraisal was ever done since the items were never actually physically inspected, which is necessary for an accurate appraisal.

Nofal testified that he could not determine how much was actually paid for the coins in World-Wide’s inventory, since there were no backup documents and only a few *739 coins were cost-coded. 23 Nofal further testified that there was no organization of the inventory and that the vault was open without a guard when he came into the store.

(2) Separation of Duties

The lack of qualified personnel working in World-Wide’s offices and the company’s policy of allowing one individual to accomplish numerous transactions was another primary reason for May, Zima’s disclaimed opinion, and was a major concern of Kanes, Benator in its letter of November 5, 1979. This court has previously noted the lack of supervision over the accounting department, managed by Patricia Allen, and her lack of expertise in the area. World-Wide maintains no separation of duties in the area of purchase and sales transactions, and valuation procedures for ending inventory. For instance, a single salesperson can do all the following tasks without supervision or review by another employer or officer: appraise a particular coin offered for purchase by a customer, purchase that coin with a check that the salesperson alone has drawn, count that same coin into inventory, value the coin for inventory purposes, and sell the coin to another purchaser.

Employees, none of whom was bonded, were also allowed to take large amounts of inventory off the company’s premises for purposes of effecting a sale without giving a receipt, as well as being given cash to purchase the precious metals and coins at various locations, also without giving a receipt. Nor were employees required to write source documents relating to the purchase and sale of coins, bullion, and other inventory, making it impossible, as Hay-good testified, to ascertain whether a particular inventory item had been sold at a profit or loss, or whether it had even been sold. Although pre-numbered invoices could have been used to help alleviate this problem, they were not; there was a compíete lack of control over any retail counter-sales, and Haygood testified that he could not match cash coming in or out with the merchandise going out. The company apparently did have a daily report of cash coming in, but there was no record of items purchased or sold. Hale himself admitted that he told his employees to write down the sales of total bullion rather than writing receipts for individual coins.

Additionally, there were no procedures enforced with respect to writing checks; for instance, no system has been implemented to ensure that the purpose for which a check is written can be ascertained. Since employees have been allowed to write checks without noting the purpose of the transaction on the instrument or on any other document, source documents for most checks do not exist. All employees have had access to presigned checks, and there has been no dollar limit over which an employee cannot write a check. Furthermore, employees have not been required to get approval before writing a check. These policies have caused World-Wide to bounce over 100 checks since Hale took over the management of the company. Because of World-Wide’s propensity for having their cheeks returned due to insufficient funds, the National Bank of Georgia, the company’s transfer agent, requested World-Wide to close its account and take its business elsewhere.

Evidence introduced at trial further revealed that approximately $1.7 million worth of checks were written to Hale, his affiliates, or to cash, all without supporting documentation or any indication of the purpose of the checks. Hale testified that approximately $250,000 worth of these checks were repayments of loans he had personally made to the company, but he failed to introduce any executed promissory notes or any document to support that claim. The SEC also introduced various checks to and/or *740 bills from local bars and restaurants written by Hale and reimbursed by either World-Wide or East Coast Coin. Numerous checks written to Hale on World-Wide’s account were superimposed over purchase orders, supposedly as source documentation for the transactions.

(3) Books and Records

The lack of qualified accounting personnel not only created problems with WorldWide’s inventory but also resulted in completely inaccurate and incomplete books and records. World-Wide, Hale, and Seibert have failed to make and keep books, records, and accounts which accurately and clearly reflect the transactions and dispositions of World-Wide’s assets. As discussed previously, World-Wide employees have not been required to write purchase orders or any source document relating to the purchase and sale of coins and bullion, rendering it impossible to arrive at an accurate count or valuation of the inventory.

During his inspection of World-Wide’s offices, Haygood stated that the records of operations for Hale’s subsidiaries, such as World-Wide Camera Fair, were scattered throughout the office and were not in any order. Although Haygood was aware of the existence of World-Wide Camera Fair following a review of Kanes, Benator’s work papers from 1979, he stated that he was unsure about the documentation and the sale of other companies such as WorldWide Rare Metals and Chattanooga Coin and Stamp. With respect to this latter subsidiary, Haygood was unable to identify it as a separate and existing corporation since it had been merged into World-Wide’s balance sheet, making it impossible to differentiate between the good will of WorldWide and that of Chattanooga Coin and Stamp. Furthermore, this failure to consolidate the subsidiaries into the form and financial statements rendered the 10Q reports incorrect for fiscal year 1980.

Haygood also testified the company’s books were chaotic with respect to the deferred revenue received from subscriptions to the company newspaper, The Coin Wholesaler. There were no accurate records setting out the dates of subscriptions; therefore, the amount of deferred revenue simply had to be estimated on the company’s books.

During May, Zima’s inspection at the premises, on July 31, 1980, Haygood and other representatives from May, Zima met with Jones and Seibert to express their concern about the state of World-Wide’s control procedures and accounting methods. Each item of concern was discussed in detail including questions from Seibert and Jones relative to the evaluation of the potential effects on the company and the continued trading of the common stock. May, Zima explained the position of Robert Nofal and offered to have a second opinion in order to confirm his initial evaluation that the grading policy and inventory values were significantly higher than was appropriate. Seibert and Jones acknowledged the problems noted and agreed that a totally separate inventory would be prepared by Nofal and later compared to the inventory prepared by the company’s employee with appropriate reconciliation of differences in order to establish an acceptable, reasonable valuation of inventory. Robert Johnson, a partner at May, Zima, suggested that the company immediately obtain and consult with a securities attorney relative to the necessary action that should be taken as a result, of the information May, Zima provided concerning its evaluation of the company’s internal accounting control system and the effect on May, Zima’s opinion. Johnson further indicated that there was a possible violation of the Foreign Corrupt Practices Act and that World-Wide should seek advice concerning that possibility. Johnson explained that the May, Zima would be willing to assist World-Wide through further discussions of these matters and/or offer suggestions to remedy the situations noted. Furthermore, Haygood offered to go to the Securities and Exchange Commission with the company to resolve their problems, but Seibert stated that he would rath *741 er take his chances and not contact the SEC in the hope that the SEC would not contact him.

World-Wide eventually agreed to retain the law firm of Jones, Bird & Howell and met with Frank Bird of that firm on August 18,1980. At that meeting, there was a discussion of how World-Wide should communicate to the SEC. Bird agreed that the disclosure should be made immediately and that a Form 8K should be filed on the report received from the company’s auditors advising it of a possible problem with the provisions of the Foreign Corrupt Practices Act, a possible disclaimer of opinion on the company’s financial statements and the effects on the company’s estimated net income resulting from the write-off of investments and subsidiaries. Seibert agreed to draft a Form 8K to disclose these items and to make a press release on the revised estimated income.

Following the initial meeting on July 31, 1980, May, Zima wrote a letter to WorldWide on August 21, 1980, detailing the weaknesses noted in its system of internal accounting controls. 24 In this letter, May, Zima listed the following deficiencies: (1) a lack of supervision in the accounting department, (2) a lack of reliability in the bookkeeping department because of no supervision, (3) a lack of segregation of duties in the accounting department, emphasizing that the segregation of duties would allow for proper checks and balances in the company’s accounting system, (4) a lack of control over retail counter sales in that there were no prenumbered invoices and the company could not match cash coming in with merchandise going out, (5) a lack of segregation of duties in the department of purchases and sales of coins, (6) the lack of determined value on some of the items of inventory such as the Coca-Cola memorabilia, (7) problems with “related-party” transactions (transactions between World-Wide and insiders or stockholders).

On October 22, 1980, May, Zima wrote a memorandum to the board of directors of World-Wide, setting forth certain recommendations of procedures which the accounting firm felt would improve and strengthen the company’s present system. May, Zima suggested (1) a change in the company’s system of cash received and disbursements, suggesting that a listing of mail receipts be prepared by the individual who opens the mail and compared to the bank deposit slip and amounts recorded in the cash receipts journal, (2) petty cash reimbursements should be drawn to the petty cash custodian and not to cash, (3) aging accounts receivable should be reviewed on a periodic basis by an appropriate official separate from the accounting department, (4) an improvement in the safeguarding of the assets of the company, and a provision for regular inspection of the assets, (5) routine procedures to be developed providing for prompt and adequate reporting to the accounting department of sales and/or disposals of property and equipment, (6) utilization of prenumbered inventory tags to facilitate accounting for, and control of, the inventory, (7) obtaining cancelled notes payable from creditors when paid, (8) the maintenance of personnel files for all employees and the rotation of the distribution of payroll checks among appropriate officials, (9) the bonding of employees who receive, disburse, or handle cash or who have access to assets and records, (10) full documentation of travel and entertainment expenses, and (11) a mathematical check for sales and vendor invoices.

Although notified of a possible violation of the Foreign Corrupt Practices Act and of severe problems in the company’s internal controls system and accounting procedures, World-Wide did little, if anything, to change its methods of operation. Steve Watson, a staff accountant with the SEC, reviewed World-Wide’s accounting records in September 1981 and concluded that there was still inadequate documentation to support purchases made and that the internal controls of the company were inadequate. *742 Watson indicated at trial that the company currently issues receipts for cash sales and has started taking quarterly inventories but that the controls of the company are still inadequate since there are no controls over the inventory itself. He further stated that he was unable to determine the cost of inventory in accordance with generally accepted accounting principles.

IV. PROXY STATEMENT PROBLEMS

A. March 1980

On or about March 31, 1980, World-Wide mailed to all World-Wide shareholders proxy soliciting materials, consisting of a proxy statement, an annual report, and a notice that the annual meeting would be held on May 6, 1980. The primary purpose of this mailing was to solicit proxies to elect directors to World-Wide’s three-person board of directors. Greg Jones, neither a lawyer nor an accountant, prepared the material for mailing. Hale admitted at trial that these materials were not filed with the SEC but stated that he was unaware of a filing requirement or that he was required to disclose certain matters required by Schedule 14A. The SEC contends, and evidence presented at trial revealed, that these materials were replete with misrepresentations and omissions.

For instance, the proxy statement indicated that both Jones and Seibert were employed by International Systems, Inc. (ISI) and Health Care respectively and that they were not employed by World-Wide, creating the impression that they were “outside directors” and therefore able to exercise independent judgment with respect to corporate decisions. The statement did not disclose, however, that both ISI and Health Care were privately held companies wholly owned by Hale and doing business with World-Wide; since Jones and Seibert received no other income in addition to their salaries from these companies, they would not, as a practical matter, exercise the kind of independence that was expected from an outside director. The proxy statement further failed to disclose that Hale had appointed Jones and Seibert to the board as directors of World-Wide, rather than their being elected by the company’s shareholders.

The annual report contained in the materials indicated that the net worth of WorldWide had increased substantially since year end but did not disclose that most of this increase was due to Hale