Securities & Exchange Commission v. National Student Marketing Corp.

MEMORANDUM OPINION

This opinion covers the final act in a civil proceeding brought by the Securities and Exchange Commission (Commission or SEC) seeking injunctive sanctions against numerous defendants as a result of their participation in alleged securities laws violations relating to the National Student Marketing Corporation (NSMC) securities fraud scheme. 1 The original defendants included the corporation and certain of its officers and directors; the accounting firm of Peat, Marwick, Mitchell & Co. (Peat Marwick) and two of its partners; several officers and directors of Interstate National Corporation (Interstate); the law firm of White & Case and one of its partners; and the law *687 firm of Lord, Bissell & Brook (LBB) and two of its partners. ■ The majority of these > defendants are not now before the Court. As discovery progressed during the pre-trial stages of this litigation, NSMC and other principal defendants consented to the entry of final judgments of permanent injunction or otherwise reached a resolution of the charges against them. 2 The only defendants remaining are Lord, Bissell & Brook; its two partners, Max E. Meyer and Louis F. Schauer; and Cameron Brown, a former president and director of Interstate, and presently a director of and consultant to NSMC.

The focal point of the Commission’s - charges against these defendants is the corporate merger of Interstate with NSMC on October 31, 1969. The principal question presented is whether the defendants violated or aided and abetted the violation of the anti-fraud provisions of the federal securities laws in two instances: (1) consummation of the NSMC merger; and (2) the immediately following sale of newly acquired NSMC stock by former Interstate principals, including certain of the defendants. These transactions are alleged to have occurred despite the prior receipt by the defendants of information which revealed that NSMC’s interim financial statements, used in securing shareholder approval of the merger and available to the investing public generally, were grossly inaccurate and failed to show the true condition of the corporation. The information was included in a comfort letter prepared by NSMC’s accounts. The Commission contends that these violations demonstrate a reasonable likelihood of future misconduct by the defendants, thereby justifying the requested permanent injunctive relief.

The matter was tried without a jury. After reviewing the extensive record in this case, the Court concludes, for the reasons stated below, that while each of the defendants violated the securities laws in specific instances, the Commission has not fulfilled its obligation of demonstrating a reasonable likelihood that they will do so in the future. Accordingly, the Commission’s request for injunctive relief must be denied.

This opinion contains the findings of fact and conclusions of law required by Rule 52 of the Federal Rules of Civil Procedure. Initially it will present the background events of this proceeding, including details of the October 31 merger of Interstate and NSMC, and the stock sales by Interstate principals. The Court then will review the Commission’s allegations against the defendants in light of the applicable legal principles. Finally, the Court will address the factors involved in its determination that injunctive relief is not warranted in this instance.

I. BACKGROUND

A. The Companies

National Student Marketing Corporation was incorporated in the District of Columbia in 1966. The company enjoyed early prosperity; it grew rapidly and experienced a steady increase in assets, sales and earnings. Its common stock, which was registered with the SEC and traded on the over-the-counter market, rose from an initial public offering of $6 per share in the spring of 1968 to a high of $144 per share in mid-December 1969. 3 • The financial community held the company and its potential in high regard, and in anticipation of con *688 tinued high market performance, it was seen as a good “buy” prospect. Its management was considered aggressive, imaginative and capable; if there was a question of its integrity and honesty, it did not surface in the public arena until a later period. During this period, White & Case served as its outside legal counsel, with Marion J. Epley, III, as the partner immediately in charge of the firm’s representation. Peat Marwick served as its outside accountant.

Interstate National Corporation, a Nevada corporation, was an insurance holding company. Its principal assets were several wholly-owned subsidiary insurance companies. The company’s common stock was traded on the over-the-counter market and owned by approximately 1200 shareholders. Cameron Brown was president, chief executive officer, principal shareholder and a director of the company. 4 • Other Interstate principals and directors included Robert P. Tate, chairman of the board; William J. Bach, general counsel; Paul E. Allison, secretary; Louis W, Biegler; and Max E. Meyer. Between board meetings, all management authority was delegated to an executive committee composed of Brown, Tate, Bach, Allison and Biegler. • Max E. Meyer, a director and shareholder, was a partner in the Chicago law firm of Lord, Bissell & Brook, which had long represented Interstate and served as its outside legal counsel in all matters relating to the merger of the corporation with NSMC. Meyer, a personal friend and legal advisor to Cameron Brown, served as the contact partner for the Interstate account and was otherwise in overall charge of his firm’s representation. 5 Another partner of the firm, Louis F. Schauer, was also involved in the merger transaction due to his experience in corporate and securities law. Peat Marwick served as Interstate’s outside accountant during the period in question.

B. The Merger Negotiations

National Student Marketing Corporation developed a reputation for having a unique and successful marketing network for selling its own and other products to college and high school students. Commencing in 1969, it undertook a highly active program to acquire companies specializing in selling goods and services to students. It was in this connection that NSMC first approached representatives of Interstate.

Initially, NSMC discussed the possibility of acquiring an Interstate subsidiary that specialized in selling insurance to students. After Interstate indicated an unwillingness to dispose of a single subsidiary, NSMC expressed interest in acquiring its entire insurance holding company operation. Cortes W. Randell, NSMC’s president and chief executive officer, proposed a merger of the two corporations, offering one share of NSMC stock for every two shares of Interstate stock.

On June 10, 1969, NSMC representatives, including Randell and James F. Joy, a senior vice president and finance committee member, were invited before the Interstate directors to make a presentation concerning the proposed merger. The directors were provided with NSMC’s 1968 annual report and its financial report for the first half of 1969. Randell discussed the company’s acquisition program, reviewed several pending corporate acquisition commitments, and made certain earnings predictions for the fiscal year ending August 31,1969. He also increased the earlier offer to two shares of NSMC common for every three shares of Interstate common. When certain Interstate directors expressed a desire to sell a portion of the NSMC stock which they expected to acquire in the merger, Randell responded that a registered public offering was planned for the fall of 1969, at which time the former Interstate shareholders *689 could sell up to 25 percent of their shares. 6 Very few questions were asked by Randell or Joy about the business and financial affairs of Interstate, an aspect of the meeting which surprised several of Interstate’s representatives.

This meeting resulted in an agreement in principle for the merger. Essentially identical press releases were then issued by the companies, announcing the . agreed upon stock exchange ratio, the estimated value of the transaction as $37 million based on the current market value of NSMC stock, and the fact that the transaction represented approximately a 100 percent premium for the Interstate shares based on their market value at the time. 7 Representations were also made in the releases as to NSMC’s earnings for the first six months of fiscal 1969, which ended February 28, 1969.

The two corporations’ efforts to finalize the merger agreement were not uneventful. The initial proof of the Merger Agreement, prepared by NSMC’s outside counsel, failed to provide for parallel rights and obligations of the parties. In fact, as to such matters as warranties and representations, a comfort letter from independent accountants, and counsel opinion letters on legal aspects of the merger, far more was required of Interstate than of NSMC. After insistence by Interstate, however, there was agreement to substantially parallel and mutual provisions covering those matters. On August 12, the Interstate directors met to review the final version of the agreement. A copy of a report from White, Weld & Co. (White Weld), a stock brokerage and investment consultant firm retained by Interstate to prepare an in-depth study of NSMC and the proposed merger, was made available to each director. A White Weld representafive explained various aspects of the report, answered questions about NSMC’s accounting procedures, and recommended the merger. Following that presentation, Louis F. Schauer, who had broad experience in corporate and securities law, reviewed and explained the agreement. A proof copy of the NSMC proxy statement was also available and examined by the directors then present. Although prepared for use in connection with the merger, that statement contained no entries in the spaces for NSMC’s unaudited consolidated income statement for the nine-month period ending May 31, 1969. Because of the omission, Interstate’s board chairman, Tate, refused to sign the agreement. After numerous efforts at attempting to obtain the missing proxy statement data and satisfactory answers to questions concerning the omitted data, the information was finally received by telephone. The remaining directors, including Tate, then signed the merger agreement on August 15. The added information, however, was not then analyzed or reviewed to any extent by any Interstate representative.

The Merger Agreement set forth fully the terms and conditions of the understanding between the two corporations. Among other things, both corporations represented and warranted that the information “contained in Interstate’s and NSMC’s Proxy Statements relating to the transactions contemplated by this Agreement will be accurate and correct and will not omit to state a material fact necessary to make such information not misleading,” 8 and that the financial statements included among the provisions “are true and correct and have been prepared in accordance with generally accepted accounting principles *690 consistently followed throughout the periods involved.” 9 NSMC specifically referred to its 1968 year-end and May 31,1969, nine-month financial statements and represented that those statements:

fairly present the results of the operations of NSMC and its subsidiaries for the periods indicated, subject in the case of the nine month statements to year-end audit adjustments. 10

The Agreement also provided several conditions precedent to the obligations of the two corporations to consummate the merger. One required the receipt by NSMC of an opinion letter from Interstate’s counsel LBB to the effect, inter alia, that Interstate had taken all actions and procedures required of it by law and that all transactions in connection with the merger had been duly and validly taken, to the best knowledge of counsel, in full compliance with applicable law; a similar opinion letter was required to be delivered from NSMC’s counsel to Interstate. 11 Another condition was the receipt by each company of a “comfort letter” from the other’s independent public accountants. Each letter was required to state: (1) that the accountants had no reason to believe that the unaudited interim financial statements for the company in question were not prepared in accordance with accounting principles and practices consistent with those used in the previous year-end audited financials; (2) that they had no reason to believe that any material adjustments in those financials were required in order fairly to present the results of operations of the company; and (3) that the company had experienced no material adverse change in its financial position or results of operations from the period covered by its interim financial statement up to five business days prior to the effective date of the merger. 12 Although setting forth these specific conditions to consummation of the merger, the final paragraph of the Agreement also provided that:

Anything herein to the contrary notwithstanding and notwithstanding any stockholder vote of approval of this Agreement and the merger provided herein, this Agreement may be terminated and abandoned by mutual consent of the Boards of Directors of NSMC and Interstate at any time prior to the Effective Date and the Board of Directors of any party may waive any of the conditions to the obligations of such party under this Agreement. 13

Finally, the Agreement specified that “[t]he transactions contemplated herein shall have been consummated on or before November 28, 1969.” 14

Both NSMC and Interstate utilized proxy statements and notices of special stockholder meetings to secure shareholder approval of the proposed merger. Interstate’s materials included a copy of the Merger Agreement and NSMC’s Proxy Statement; the latter contained NSMC’s financial statements for the fiscal year ended August 31, 1968, and the nine-month interim financial statement for the period ending May 31, 1969. » Interstate shareholders were urged to study the NSMC Proxy Statement:

The NSMC Proxy Statement contains a description of each company, relevant financial statements, comparative per share data and other information important to your consideration of the proposed merger. You are urged to study the NSMC Proxy Statement, hereby incorporated as part of this Proxy Statement, prior to voting your shares. 15

*691 The boards of both companies recommended approval of the merger and at special shareholder meetings that approval was secured by large majorities. 16

In mid-October, Peat Marwick began drafting the comfort letter concerning NSMC’s unaudited interim financials for the nine-month period ended May 31, 1969. As issued by NSMC, those financials had reflected a profit of approximately $700,-000.

Soon after beginning work on the com-. fort letter, Peat Marwick representatives determined that certain adjustments were required with respect to the interim financials. Specifically, the accountants proposed that a $500,000 adjustment to deferred costs, a $300,000 write-off of unbilled receivables, and an $84,000 adjustment to paid-in capital be made retroactive to May 31 and be reflected in the comfort letter delivered to Interstate. Such adjustments would have caused NSMC to show a loss for the nine-month period ended May 31, 1969, and the company as it existed on May 31 would have broken even for fiscal 1969. Although Peat Marwick discussed the proposed adjustments with representatives of NSMC, neither the accountants nor NSMC informed Interstate of the adjustments pri- or to the closing. 17 A draft of the comfort letter, with the adjustments, was completed on October 30 and on the next day, the morning of the closing, it was discussed among senior partners of Peat Marwick.

C. The Closing and Receipt of the Comfort Letter

The closing meeting for the merger was - scheduled at 2 p.m. on Friday, October 31, at the New York offices of White & Case. Brown, Meyer and Schauer were present in addition to Interstate directors Bach, Allison and Tate. The representatives of NSMC included Randell, Joy, John G. Davies, their attorney Epley and other White & Case associates.

Although Schauer had had an opportunity to review most of the merger documents at White & Case on the previous day, the comfort letter had not been delivered. When he arrived at White & Case on the morning of the merger, the letter was still not available, but he was informed by a representative of the firm that it was expected to arrive at any moment.

The meeting proceeded. When the letter had not arrived by approximately 2:15 p. m., Epley telephoned Peat Marwick’s Washington office to inquire about it. Anthony M. Natelli, the partner in charge, thereupon dictated to Epley’s secretary a letter which provided in part:

[Njothing has come to our attention which caused us to believe that:

1. The National Student Marketing Corporation’s unaudited consolidated financial statements as of and for the nine months ended May 31, 1969:

a. Were not prepared in accordance with accounting principles and practices consistent in all material respects with those followed in the preparation of the audited consolidated financial statements which are covered by our report dated November 14, 1968;

b. Would require any material adjustments for a fair and reasonable presentation of the information shown except *692 with respect to consolidated financial statements of National Student Marketing Corporation and consolidated subsidiaries as they existed at May 31, 1969 and for the nine months then ended, our examination in connection with the year ended August 31, 1969 which is still in process, disclosed the following significant adjustments which in our opinion should be reflected retroactive to May 31, 1969:

1. In adjusting the amortization of deferred costs at May 31, 1969, to eliminate therefrom all costs for programs substantially completed or which commenced 12 months or more prior, an adjustment of $500,000 was required. Upon analysis of the retroactive effect of this adjustment, it appears that the entire amount could be determined applicable to the period prior to May 31, 1969.

2. In August 1969 management wrote off receivables in amounts of $300,000. It appears that the uncollectibility of these receivables could have been determined at May 31, 1969 and such charge off should have been reflected as of that date. >

3. Acquisition costs in the amount of $84,000 for proposed acquisitions which the Company decided not to pursue were transferred from additional paid-in capital to general and administrative expenses. In our opinion, these should have been so transferred as of May 31, 1969.

2. During the period from May 31, 1969 to October 28, 1969 there has been no material adverse change in the consolidated financial position of National Student Marketing Corporation and its consolidated subsidiaries, or any material adverse change in results of operations of National Student Marketing Corporation and its consolidated subsidiaries as compared with the nine month period ended May 31, 1969 after giving retroactive effect at May 31, 1969 of the adjustments disclosed above. 18

*693 Epley delivered one copy of the typed letter to the conference room where the closing was taking place. Epley then returned to his office.

Schauer was the first to read the unsigned letter. He then handed it to Cameron Brown, advising him to read it. • Although there is some dispute as to which of the Interstate representatives actually read the letter, at least Brown and Meyer did so after Schauer. They asked Randell and Joy a number of questions relating to the nature and effect of the adjustments. ■ The NSMC officers gave assurances that the adjustments would have no significant effect on the predicted year-end earnings of NSMC and that a substantial portion of the $500,000 adjustments to deferred costs would be recovered. Moreover, they indicated that NSMC’s year-end audit for fiscal 1969 had been completed by Peat Marwick, would be published in a couple of weeks, and would demonstrate that NSMC itself had made each of the adjustments for its fourth quarter. The comfort letter, they explained, simply determined that those adjustments should be reflected in the third quarter ended May 31,1969, rather than the final quarter of NSMC’s fiscal year. Randell and Joy indicated that while NSMC disagreed with what they felt was a tightening up of its accounting practices, everything requested by Peat Marwick to “clean up” its books had been undertaken. 18A

At the conclusion of this discussion, certain of the Interstate representatives, including at least Brown, Schauer and Meyer, conferred privately to consider their alternatives in light of the apparent nonconformity of the comfort letter with the re *694 quirements of the Merger Agreement. 19 Although they considered the letter a serious matter and the adjustments as significant and important, they were nonetheless under some pressure to determine a course of action promptly since there was a 4 p.m. filing deadline if the closing were to be consummated as scheduled on October 31. 20 Among the alternatives considered were: (1) delaying or postponing the closing, either to secure more information or to resolicit the shareholders with corrected financials; (2) closing the merger; or (3) calling it off completely.

The consensus of the directors was that there was no need to delay the closing. The comfort letter contained all relevant information and in light of the explanations given by Randell and Joy, they already had sufficient information upon which to make a decision. Any delay for the purpose of resoliciting the shareholders was considered impractical because it would require the use of year-end figures instead of the stale nine-month interim financials. Such a requirement would make it impossible to re-solicit shareholder approval before the merger upset date of November 28, 1969, and would cause either the complete abandonment of the merger or its renegotiation on terms possibly far less favorable to Interstate. The directors also recognized that delay or abandonment of the merger would result in a decline in the stock of both companies, thereby harming the shareholders and possibly subjecting the directors to lawsuits based on their failure to close the merger. The Interstate representatives decided to proceed with the closing. • They did, however, solicit and receive further assurances from the NSMC representatives that the stated adjustments were the only ones to be made to the company’s financial statements and that 1969 earnings would be as predicted. ' When asked by Brown whether the closing could proceed on the basis of an unsigned comfort letter, Meyer responded that if a White & Case partner assured them that this was in fact the comfort letter and that a signed copy would be forthcoming from Peat Marwick, they could close. Epley gave this assurance. Meyer then announced that Interstate was prepared to proceed, the closing was consummated, and a previously arranged telephone call was made which resulted in the filing of the Articles of Merger at the Office of the Recorder of Deeds of the District of Columbia. 21 Large packets of merger documents, including the required counsel opinion letters, were exchanged. 22 The closing was *695 solemnized with a toast of warm champagne.

Unknown to the Interstate group, several <■ telephone conversations relating to the substance of the comfort letter occurred on the afternoon of the closing between Peat Mar-wick representatives and Epley. The accountants were concerned with the propriety of proceeding with the closing in light of the adjustments to NSMC’s nine-month financials. One such conversation occurred after Epley delivered the unsigned letter to the Interstate participants but before the merger had been consummated. At that time Epley was told that an additional paragraph would be added in order to characterize the adjustments. The paragraph recited that with the noted adjustments properly made, NSMC’s unaudited consolidated statement for the nine-month period would not reflect a profit as had been indicated but rather a net loss, and the consolidated operations of NSMC as they existed on May 31, 1969, would show a break-even as to net earnings for the year ended August 31, 1969. Epley had the additional paragraph typed out, but failed to inform or disclose this change to Interstate. In a second conversation, after the closing was completed and the Interstate representatives had departed, Epley was informed of still another proposed addition, namely, a paragraph urging resolicitation of both companies’ shareholders and disclosure of NSMC’s corrected nine-month financials prior to closing. To this, he responded that the deal was closed and the letter was not needed. Peat Marwick nonetheless advised Epley that the letter would be delivered and that its counsel was considering whether further action should be taken by the firm.

The final written draft of the comfort letter arrived at White & Case late that afternoon. Peat Marwick believed that Interstate had been informed and was aware of the conversations between its representatives and Epley and of its concern about the adjustments. 23 Because of this belief and especially since the merger had been closed without benefit of the completed letter, Peat Marwick’s counsel perceived no obligation to do anything further about the merger. Nonetheless, a signed copy of the final letter was sent to each board member of the two companies, presumably in an effort to underline the accountants’ concern about consummation of the merger without shareholder resolicitation.

The signed comfort letter was delivered to the Interstate offices on Monday, November 3. It was first seen and read by Donald Jeffers, Interstate’s chief financial officer. He had not been present at the October 31 closing or informed of the adjustments to the interim financials. Concerned, he contacted Brown immediately and read the letter to him. Since a meeting with other Interstate principals was scheduled for the next morning the letter was added to the other matters to be discussed.

The signed letter was virtually identical to the unsigned version delivered at the closing, except for the addition of the following two paragraphs:

Your attention is called, however, to the fact that if the aforementioned adjustments had been made at May 31,1969 the unaudited consolidated statement of earnings of National Student Marketing Corporation would have shown a net loss of approximately $80,000. It is presently estimated that the consolidated opera *696 tions of the company as it existed at May 31, 1969 will be approximately a breakeven as to net earnings for the year ended August 31, 1969.

In view of the above mentioned facts, we believe the companies should consider submitting corrected interim unaudited financial information to the shareholders prior to proceeding with the closing. 24

The only other change was the reduction in the write-off to receivables from $300,000 to $200,000, making total negative adjustments to NSMC’s nine-month financials in the amount of $784,000.

At the meeting the following day, the matter was fully discussed by the former Interstate principals. Of particular concern were the additional “break-even” and “re-solicitation” paragraphs. 25 Brown explained what had occurred at the closing and the reasons for the decision to consummate the merger. He called Meyer at LBB, who by that time was also aware of the letter. After some discussion, it was decided that more information was needed. Brown and Jeffers agreed to contact Peat Marwick and Meyer agreed that his firm would contact Epley at White & Case.

On that afternoon, Schauer contacted Epley by telephone. Epley stated that he had not known of the additional paragraphs until after the closing. He added that in any case the additions did not expand upon the contents of the earlier unsigned letter; the “break-even” paragraph simply reflected the results of an arithmetic computation of the effects of the adjustments, and the “resolicitation” paragraph was gratuitous and a matter for lawyers, not accountants'. While Schauer disagreed, Epley again responded that the additional paragraphs made no difference and that NSMC regarded the deal as closed.

Brown and Jeffers fared no better with Peat Marwick. That company’s representative, Cormick L. Breslin, met briefly with several Interstate representatives on November 4. He could give no information concerning the matter other than that he had not seen a similar letter before and thought it was rather unusual. 26 Later, when contacted again by Brown, Breslin stated that the letter would have to speak for itself and his company would provide no additional information, comment or advice.

Over the next several days the Interstate directors continued their discussion of the matter, consulting frequently with their counsel, Meyer and Schauer. As they viewed it, the available options were to attempt to undo the merger, either permanently or until the shareholders could be resolicited, or to leave things as they were. The attorneys indicated that rescission would be impractical, if not impossible, since Interstate no longer existed and NSMC had indicated that it would oppose any effort to undo the merger. Meanwhile, the market value of NSMC stock continued to increase, and the directors noted that any action on their part to undo the merger would most likely adversely affect its price. By the end of the week, the decision was made to abstain from any action. • Thereafter, Brown issued a memorandum to all Interstate employees announcing completion of the merger. No effort was ever made by any of the defendants to disclose *697 the contents of the comfort letter to the former shareholders of Interstate, the SEC or to the public in general.

D. The Stock Sales

Early in the negotiations the principal i Interstate shareholders understood that they would be able to sell a portion of the NSMC stock received in the merger through a public offering planned for the fall of 1969. Various shareholders, including Brown, Tate, Allison, Bach and Meyer, intended to profit by this opportunity and sell up to 25 percent of their newly acquired stock. The opportunity did not materialize, however, because within several days of the merger the NSMC operating committee decided to postpone the registration. Brown was advised that the shareholders could still sell up to 25 percent of their shares in a private placement under SEC Rule 133. 27 If they so decided, he was urged to have all use the same broker to avoid upsetting the market for the stock.

Brown then contacted Henry Meers, a personal friend and a partner in the White Weld brokerage firm, advised him of their desire to sell and inquired as to whether he could handle the transaction. Meers reported back that his firm could proceed. Brown then received the necessary authorization from the other shareholders and agreed with Meers that the sale would take place on the day of the merger closing. Meers indicated that the sale price could only be determined the day before the closing due to price fluctuations and, on October 30, the two agreed on a price of $49.50 per share. 28

Two matters of significance to the stock sales occurred on thé day of the closing. First, certain of the Interstate principals, including Brown, were informed that the amount of NSMC shares they could sell following the merger was limited due to a restriction on their Interstate stock. As a result, Brown was limited to selling only about seven percent of his newly acquired NSMC stock instead of the 25 percent previously planned. 29 Second, NSMC’s in- *698 house counsel Davies told Schauer that NSMC wanted an opinion from LBB in connection with the stock sales. As outlined in a memorandum prepared by White & Case for NSMC, the requested opinion was to state that LBB had made initial factual determinations as to whether the sales comported with the requirements of Rule 133(d). 30 White & Case would then consult with NSMC and prepare its own final opinion letter as to the validity of the sales under the rule. After discussing the matter with Davies, Schauer indicated that there would be no problem delivering the letter in the form and language requested.

White Weld began processing the sales on the afternoon of October 31. It subsequently sold a total of 59,500 shares of NSMC stock. The gross received was slightly less than $3 million. Brown received approximately $500,000 for his shares and Meyer received approximately $86,000 for the shares he held, including $10,000 for shares he owned and the balance for shares he held in trust for the benefit of Brown and Brown’s family. White Weld was never informed of the comfort letter adjustments before it undertook the sale as agents for the Interstate principals.

Later that week a letter from Brown to NSMC and an opinion letter from LBB to NSMC, both of which addressed the Rule 133 matters, were drafted and delivered to NSMC. 31 Though prepared sometime dur *699 ing the week of November 3, the papers were dated October 31.

E. Subsequent Events

Following the acquisition of Interstate and several other companies NSMC stock rose steadily in price, reaching a peak in mid-December. ■ However, in early 1970, after several newspaper and magazine articles appeared questioning NSMC’s financial health, the value of the stock decreased drastically. Several private lawsuits were filed and the SEC initiated a wide-ranging investigation which led to the filing of this action.

II. THE PRESENT ACTION

[1] The Court has jurisdiction of this proceeding under § 22(a) of the Securities Act of 1933 (1933 Act) 32 and § 27 of the Securities Exchange Act of 1934 (1934 Act). 33 In seeking injunctive relief against the defendants, the Securities and Exchange Commission relies upon § 21(e) of the 1934 Act which in relevant part provides:

Whenever it shall appear to the Commission that any person is engaged or is about to engage in acts or practices constituting a violation of any provision of this chapter [or] the rules or regulations thereunder, ... it may in its discretion bring an action ... to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted . . . , 34

Section 20(b) of the 1933 Act, also relied upon by the Commission, is to the same effect. 35 Each statutory provision requires the Commission to make a “proper showing” that an injunction is warranted, a showing that the Commission attempts to make in this case by proving two instances of past violations by the defendants from which future violations can be inferred and injunctive relief justified. 36 / Specifically, the Commission alleges that the defendants, both as principals and as aiders and abettors, violated § 10(b) of the 1934 Act, 37 Rule 10b-5 promulgated thereunder, 38 and *700 § 17(a) of the 1933 Act, 39 through their participation in the Interstate/NSMC merger and subsequent stock sales by Interstate principals, in each instance without disclosing the material information revealed by the Peat Marwick comfort letter. 40

The Commission, in what appears to be typical fashion, see SEC v. Barraco, 438 F.2d 97, 99-100 (10th Cir. 1971), makes little effort to distinguish between principals and aiders and abettors in its charges against the defendants. Although the significance of the distinction between primary and secondary liability may be dwindling in light of recent developments, see Note, Rule 10b-5 Liability after Hochfelder: Abandoning the Concept of Aiding and Abetting, 45 U.Chi.L.Rev. 218 (1977), the distinction nonetheless provides a means by which the violations can be specified and the defendants’ conduct qualified. Thus, the Court will attempt to sort through the SEC allegations and delineate which charge principal violations of the antifraud provisions and which charge aiding and abetting.

The Commission charges Brown and Meyer with responsibility for proceeding with the merger of Interstate and NSMC. Since shareholder approval of the merger was secured in part on the basis of the nine-month financials which the comfort letter indicated were inaccurate, the SEC contends that Brown and Meyer should have refused to close until the shareholders could be resolicited with corrected financials. The Commission also charges the two directors with effecting the sale of NSMC stock following the merger, without first disclosing the information contained in the comfort letter. These allegations clearly constitute charges of principal violations of the antifraud provisions. See 3 A. Bromberg, Securities Law: Fraud § 8.5 (515) (1970). In addition, Brown is specifically charged with aiding and abetting sales of NSMC stock by Interstate principals through his issuance, with Schauer’s assistance, of the Rule 133 letter to NSMC.

Numerous charges, all of which appear to allege secondary liability, are leveled against the attorney defendants. Schauer is charged with “participating in the merger between Interstate and NSMC,” 41 apparently referring to his failure to interfere with the closing of the merger after receipt of the comfort letter. Such inaction, when alleged to facilitate a transaction, falls under the rubric of aiding and abetting. See Kerbs v. Fall River Industries, Inc., 502 F.2d 731, 739-40 (10th Cir. 1974). Both Schauer and Meyer are charged with issuing false opinions in connection with the merger and stock sales, thereby facilitating each transaction, and with acquiescence in the merger after learning the contents of the signed comfort letter. The Commission contends that the attorneys should have refused to issue the opinions in view of the adjustments revealed by the unsigned comfort letter, and after receipt of the signed version, they should have withdrawn their *701 opinion with regard to the merger and demanded resolicitation of the Interstate shareholders. If the Interstate directors refused, the attorneys should have withdrawn from the representation and informed the shareholders or the Commission." The SEC specifically characterizes the attorneys’ conduct in issuing the Rule 133 opinion as aiding and abetting, and because their alleged misconduct with regard to the merger also appears sufficiently removed from the center of that transaction, it too will be considered under a charge of secondary liability. See SEC v. Coven, 581 F.2d 1020 (2d Cir. 1978); SEC v. Spectrum, Ltd., 489 F.2d 535, 541 (2d Cir. 1973); 3 A. Bromberg, supra. And finally, LBB is charged with vicarious liability for the actions of Meyer and Schauer with respect to the attorneys’ activities on behalf of the firm. 42

Since any liability of the alleged aiders and abettors depends on a finding of a primary violation of the antifraud provisions, the Court will first address the issues relating to the Commission’s charges against the principals. If the evidence presented demonstrates that there was a violation in either instance the Court will then proceed to discuss whether the conduct of the various defendants also constituted aiding and abetting. / In determining whether the Commission has shown violations of the securities laws by the defendants, the Court will employ a preponderance of the evidence standard of proof. 43

III. PAST VIOLATIONS

The antifraud provisions effectuate the federal securities laws’ purpose of full disclosure and prevention of unfair practices by proscribing the sale or purchase of any security through fraud, or through the use of materially false or misleading statements or omissions. If the requisite level of culpability is demonstrated, any material misstatement or omission with a sufficient nexus to the transfer of a *702 security constitutes a violation. 44 Each of these principal elements will be examined separately in the context of the allegations made by the Commission. The requirement that there be a nexus between the defendants’ conduct and a sale of a security will be discussed first, followed by consideration of materiality and scienter.

A. Nexus with a Sale

For the SEC to prove a violation of the antifraud provisions, it must demonstrate that the alleged misconduct was “in the offer or sale” of a security under § 17(a) or “in connection with the purchase or sale” of a security under § 10(b) and Rule 10b-5. The Commission has made the requisite showing for each of the provisions with respect to the defendants’ activities leading to the closing of the merger. SEC v. National Securities, Inc., 393 U.S. 453, 467, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969); see SEC v. Savoy Industries, Inc., 190 U.S.App.D.C. —, at —, 587 F.2d 1149, at 1171 (1978). However, the defendants 45 contest the SEC’s evidence with respect to the nexus between the defendants’ conduct and the stock sales by Interstate principals, and between the defendants’ conduct during the week of November 3 and either of the “sales” alleged by the Commission.

The defendants’ principal argument is directed to the alleged nexus between their conduct and the stock sales. They contend there is no nexus between their actions and the stock sales since the Interstate principals committed themselves to sell the NSMC stock before receiving the unsigned comfort let