Securities and Exchange Commission v. Manor Nursing Centers, Inc.

These appeals present again questions with respect to the scope of the anti-fraud provisions and of the prospectus-delivery requirement of the federal securities laws. Also involved is the type of ancillary relief necessary to effectuate the broad remedial purposes of the federal securities laws.

The Securities and Exchange Commission brought this action pursuant to Section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a) (1970), and Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa (1970). The complaint alleged violations of the anti-fraud provisions of both acts, Section 17(a) of the 1933 Act, 15 U.S.C. § 77q (a) (1970), Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b) (1970), and of Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1971); it also alleged violations of the prospectus-delivery requirement of Section 5(b) (2) of the 1933 Act, 15 U.S.C. § 77e(b) (2) (1970). After a five day non-jury trial in the Southern District of New York, Constance Baker Motley, District Judge, the court concluded that appellants had violated the antifraud provisions of the 1933 and 1934 Acts and the prospectus-delivery requirement of the 1933 Act. 1 Accordingly, the court permanently enjoined certain appellants from further violations of the antifraud provisions and the prospectus-delivery requirement; ordered all appellants to disgorge any proceeds, profits and income received in connection with the sale of the common stock of Manor Nursing Centers, Inc.; appointed a trustee to receive these funds and to distribute them to defrauded public investors; and ordered a freeze on the assets of all appellants until such time as they had transferred to the trustee the proceeds received from the sale. For the reasons stated below, we affirm in part, and reverse and remand in part.

I. Transactions Underlying Violations Charged

In order to understand the issues raised on appeal and our rulings thereon, we set forth the following statement of the events which culminated in this litigation — based on the district court’s findings which are supported by substantial evidence adduced at trial. 2

*1089 In 1968, appellant Ira Feinberg (“Feinberg”, to be distinguished from his father, Samuel Feinberg, another appellant) was the sole owner of a corporation known as 133 County Road, Inc., the only activity of which was the operation of a 64-bed nursing home in Tenafly, New Jersey. In that same year, Fein-berg met appellant Ivan Ezrine, a New York attorney specializing in securities laws. After several social and business meetings, Feinberg and Ezrine jointly decided to obtain public financing for Feinberg’s nursing home business.

As a first step in the process of selling shares to the public, a new corporation — appellant Manor Nursing Centers, Inc. (“Manor”) — was organized on March 19, 1969. Manor acquired all the assets of 133 County Road and issued approximately 1.2 million shares of 5 cents par value common stock to Feinberg who then sold 62,000 shares to certain of his relatives and friends — appellants Samuel Feinberg (his father), Gladys Halford (his mother-in-law), Suzanne Marnane (his employee) • and defendant Arthur Sutton (his friend). In addition, Feinberg acquiesced in Ezrine’s request that nearly 138,000 shares of Manor be sold to two corporations which Ezrine controlled 3 —appellants Glendale, Inc. (“Glendale”) and Atlantic Services, Inc. (“Atlantic”). 4

Ezrine and Feinberg then decided that Manor would offer 350,000 shares of newly issued 5 cents par value common stock to the public at a price of $10 per share. After expenses, this offering would raise approximately $3 million for the operation of Feinberg’s nursing home business. In addition, Ezrine and Fein-berg decided that 100,000 shares held by Manor’s stockholders would be offered at the same $10 price. After expenses, approximately $868,000 would then be paid to the selling stockholders in the following amounts:

Selling Shares Net Shareholder Offered Proceeds

Feinberg 62,500 $542,500

Glendale 15,000 130,200

Atlantic 10,000 86,800

Samuel Feinberg 2,500 21,700

Marnane 2,500 21,700

Halford 2,500 21,700

Sutton 5,000 43,400

Totals 100,000 $868,000

To Ezrine was entrusted the preparation of the registration statement and all other documents necessary to offer Manor shares to the public. Ezrine also selected the accountant for the offering as well as the underwriter, defendant Benjamin Werner & Company, of which defendant Benjamin Werner is the owner. The evidence showed, however, that Ezrine consulted with Feinberg when questions arose about the offering and supporting documentation.

With respect to the issues raised on this appeal, it is important to note several representations which Manor and its principals made concerning the terms of the offering. First, the offering was presented on an “all or nothing” basis. *1090 This meant, according to the prospectus, that:

“Unless all such 450,000 shares are sold to the public and the proceeds received therefrom within such sixty (60) day period (unless extended for an additional thirty day period), the offering will terminate and all funds will be returned, without interest, to subscribers.”

Secondly, the prospectus stated that “subscribers’ funds will be maintained in escrow [and] will not be available for other use . . . .’’In this connection, the prospectus represented that “[arrangements have been made with Chemical Bank for the escrow of the funds received during the course of such offering.” Thirdly, the registration statement indicated that shares sold in the offering would be sold only for cash. 5 Finally, the documents prepared in connection with the Manor offering did not disclose that certain purchasers and participating brokerage firms would be offered or would receive special compensation for their agreement to participate in the offering.

The offering of Manor shares began promptly on December 8, 1969, the effective date of the registration statement. Contrary to the representation made in the prospectus, however, Benjamin Werner, the underwriter, had not arranged for an escrow account for the proceeds of the offering. No such account was ever established.

From the very outset, Werner encountered difficulty in selling Manor shares and requested assistance from Ezrine and Feinberg. In response to Werner’s request, Ezrine and Feinberg personally solicited brokerage firms, various corporations and individuals in an attempt to interest them in the Manor offering.

As a result of his inquiries, Feinberg arranged to meet with representatives of a New Jersey-based brokerage firm, Carlton Cambridge & Co., Inc., and ultimately with one of its principals, appellant Christos Netelkos, who demanded special compensation as a condition to participating in the Manor offering. After conferring with Ezrine, Feinberg agreed to give Netelkos, at no cost, 15,-000 Manor shares, issued in the name of Lausanne Investment Company, a dormant company previously organized by Ezrine. 6 Feinberg also agreed to guarantee a $250,000 bank loan to Netelkos with funds received from the offering. In exchange for the free shares and the loan guarantee, Netelkos agreed that he and Carlton Cambridge would sell 142,-500 Manor shares. Of these 142,500 shares, 5,000 eventually were purchased by Carlton Cambridge for its customers and 40,000 were purchased by Orvis Brothers, another broker-dealer, for its customers. The remainder — 97,500 shares — were to be purchased by appellants Method Leasing Corporation and Upton Corporation, each of which was owned and controlled by Netelkos. As stated above, the Manor prospectus did not disclose the existence of any special compensation offers or agreements.

In an effort to find additional willing buyers, Ezrine arranged a meeting with defendant Deneso Corporation and its principals, defendants Joseph Delmonico and Jack Naiman. At the meeting which both Feinberg and Ezrine attended, Delmonico and Naiman refused to participate in the Manor offering without some form of special compensation. After several subsequent conversations, the Dene- *1091 so group agreed to purchase 170,000 Manor shares in exchange for an arrangement whereby Deneso would be protected from any loss as a result of its subscription and Ezrine would cause appellant Glendale to repurchase Deneso’s Manor shares at a substantial profit to Deneso. 7 This arrangement with Deneso was not disclosed in the Manor prospectus. Thus, at the same time that unsuspecting public investors were being offered and were buying Manor shares at the full price of $10 per share, Netel-kos and Deneso were purchasing Manor shares for substantially less than the price announced in the prospectus.

Needing the proceeds of the offering to take advantage of certain business opportunities, Manor ánd its principals decided to hold a closing of the offering on February 20, 1970, several weeks prior to the March 8 selling deadline. It soon became apparent, however, that not all of the 450,000 Manor shares had been purchased. Rather than cancel or postpone the closing, Feinberg and Ezrine attempted to dispose of all the remaining shares by engaging in a series of transactions which violated the terms of the offering.

As a first step, Carlton Cambridge was informed that its selling commission on the 142,500 Manor shares which had been allotted to it and Netelkos — $142,500— would be paid in securities rather than cash. Carlton Cambridge and Netelkos therefore subscribed to 142,500 shares but paid for only 128,250, despite the explicit provisions of the Manor offering that shares would be sold only for cash and that selling commissions could not and would not be paid until all 450,000 shares had been sold.

Even after disposing of these 14,250 shares, the Manor offering was not fully subscribed. Ezrine and Feinberg then participated in several transactions designed to “sell” an additional 39,200 Manor shares. First, Ezrine accepted 5,000 Manor shares in lieu of his $50,000 legal fee as special counsel to Manor for the offering, notwithstanding that the registration statement by its terms precluded sales of securities for consideration other than cash. In addition, appellants Glendale and Atlantic, the two corporations controlled by Ezrine which were selling stockholders, purchased a total of 21,700 shares. Contrary to the terms of the prospectus, however, these 21,700 shares were purchased with checks which were drawn against the proceeds of the offering — proceeds to which Glendale and Atlantic were not entitled until all the Manor shares had been sold and full payment had been received. Similar to Glendale’s and Atlantic’s premature use of the proceeds, Feinberg drew a check against the proceeds of the offering for $133,000 payable to Great Oil Basin, a corporation controlled by Ezrine, in purported repayment of a loan made by Great Oil Basin to Manor. Ezrine on behalf of Great Oil Basin then endorsed the check and purchased 12,500 Manor shares. It is clear that Ezrine purchased the Manor shares on behalf of his corporations knowing that each of these transactions violated the explicit language of the prospectus and registration statement which he had prepared.

The purchases by the corporations controlled by Ezrine did not result in the complete subscription of the Manor offering. Feinberg and Ezrine then permitted the distribution of over 14,000 Manor shares to certain of Manor’s trade creditors in full payment of outstanding indebtedness, notwithstanding that the registration statement stated that Manor securities would be issued only for cash.

*1092 Despite these various transactions which contravened the stated terms of the offering, there still remained 11,368 shares of Manor stock for which no purchaser had been found. Feinberg purchased these shares for his friends, with all but $200 of the total $113,368 coming from checks drawn against the proceeds of the offering.

Through the device of these various “bootstrap” transactions (purchasing shares by checks drawn against proceeds) and the issuance of shares for consideration other than cash, Manor and its principals were able to make it appear that all 450,000 shares had been sold. It is obvious, however, that Benjamin Werner, the underwriter, received far less than the $4.5 million in proceeds necessary to a valid closing. Moreover, through their participation in the various transactions outlined above, appellants Manor, Feinberg, Ezrine, Atlantic, Glendale, Netelkos, Method Leasing and Upton knew that a valid closing had not occurred.

Despite the fact that all the proceeds from the offering had not been received, Werner issued checks to Manor and the selling stockholders on February 20,1970. Apparently concerned about the risk involved in relying upon the large number of uncertified checks which he had received, Werner did advise the bank to delay payment on his checks for one day to permit clearance of the uncertified checks he had been tendered.

On February 24, 1970, the first business day after the purported closing, Ezrine caused a sticker amendment to the Manor registration statement to be filed with the Commission. 8 Although the amendment purported to disclose the full underwriter’s compensation Carlton Cambridge was to receive, it significantly omitted any mention of the additional compensation appellant Netelkos had demanded and received from Manor. The amendment also explicitly represented that the entire Manor issue had been sold. At no time thereafter was this representation amended to reflect that the issue was not sold. No further amendment to the registration statement was ever filed with the Commission.

On February 24, the same day the sticker amendment was filed, Werner learned that cheeks issued by Deneso and Netelkos at the closing, totaling approximately $2.5 million, had been returned for insufficient funds when presented for payment. Werner informed Ezrine and Feinberg of this development. Following Ezrine’s instructions, Werner stopped payment on the checks he had issued at the closing. Werner’s check to Feinberg, however, for more than $559,-000, the amount to which Feinberg was entitled if the offering had been completely subscribed, could not be stopped because Werner’s bank erroneously had certified the check to Feinberg’s bank. With this money, Feinberg purchased a $250,000 certificate of deposit with which to furnish collateral for the loan he had promised to guarantee for Netel-kos. 9

Upon the return of the Netelkos and Deneso checks for insufficient funds, it became painfully obvious to Feinberg and Ezrine that the distribution of the proceeds did not comply with the terms of the offering, since all of the proceeds had not been received. Nevertheless, rather than recapturing and returning the public investors’ money, Ezrine and *1093 Feinberg embarked on a frantic campaign either to collect the money from Deneso and Netelkos or, failing in that effort, to reoffer their shares.

Feinberg’s subsequent attempts to collect the $832,500 from Netelkos proved to be futile. Moreover, Netelkos defaulted on the $250,000 loan which Feinberg had guaranteed with proceeds from the offering, and Feinberg was called upon to repay the loan. Some months after the closing, Netelkos did give Fein-berg and Manor approximately $200,000. Netelkos also returned his 83,250 shares and the 15,000 shares issued in the name of Lausanne Investment Company. These 98,250 shares, which were retired by Manor, were never sold.

Ezrine likewise whs unable to collect on the Deneso check. In early March 1970, with the March 8, 1970 deadline fast approaching, Ezrine decided to re-offer the Deneso shares. On March 4, with Feinberg’s knowledge, Ezrine arranged to sell 60,000 Manor shares to a David Haber of New York City. The district court found that Haber’s purchase was induced by Ezrine’s oral promise to protect him against loss on his investment and to give him $60,000. On March 5, Haber returned the shares, and Ezrine renewed his promise to pay Haber the guaranteed profit of $60,000. 10

Between March 5, when Haber returned the 60,000 Manor shares, and March 8, the last offering date for sale of the shares, Ezrine was unable to find any purchasers. Ten days after the offering period had expired, however, Ez-rine arranged to sell 60,000 Manor shares to the Daytona Beach General Hospital. Any facade of compliance with the terms of the offering was now completely dropped. Not only were the shares sold after the selling deadline, but they were sold at a price of $11 per share, rather than the original price of $10. Ezrine also represented that Manor agreed to furnish Daytona with extra compensation. 11

Ezrine’s efforts thus resulted in the sale of only 60,000 of the 170,000 Deneso shares. The remaining 110,000 shares were retired by Manor. As a result of Netelkos’ and Deneso’s failure to pay for their shares, therefore, more than 200,-000 of the 450,000 shares involved in the Manor offering were never sold. Despite this, neither Ezrine nor Feinberg informed the SEC that, contrary to the representation made in the sticker amendment filed on February 24, 1970, the issue had not been completely subscribed. In addition, notwithstanding that all 450,000 shares had not been sold, appellants did not attempt to return the money obtained from the public investors. Moreover, while some appellants claim they derived no financial benefit from the offering, the evidence shows that Manor and the other appellants received and retained at least $1.3 million in cash proceeds from public investors. 12

There can be no doubt that Feinberg and the corporations which he controlled *1094 derived a substantial financial benefit from the offering. Feinberg received a valid check from Werner for $559,000 on the day of the purported closing. It is undisputed that from March 5, 1970 to May 1970 Manor received and retained more than $1 million in proceeds from the offering. Moreover, appellant Capital Cities Nursing Centers, Inc., which succeeded to the business and operations of Manor by virtue of a transaction in which Manor sold its assets to Capital Cities on July 27, 1970 and which, as the district court found, is “simply a new name for Manor,” also derived financial benefit from the offering by acquiring Manor’s assets which included some of the proceeds of the offering. In addition, the SEC presented evidence that appellant Manor Construction Company, a company controlled by Feinberg, accepted between $100,000 and $200,000 in proceeds from the sale of Manor stock.

Ezrine, as well as Glendale and Atlantic, claim that they retained no proceeds from the Manor offering. Sometime after the purported closing on February 20, however, Ezrine and an affiliated company, Great Oil Basin, sold 17,000 Manor shares to the public for $170,000. At least $125,000 of the money Ezrine used to make the original purchase of these shares came from the public investor funds received by Manor at the closing.

The SEC also presented evidence that appellants Samuel Feinberg, Marnane and Halford, as well as defendant Sutton, received in cash the money to which they would have been entitled had the issue been fully subscribed. The checks which originally had been issued by Werner on February 20, 1970 to these selling shareholders were not honored. More than a month later and after the March 8, 1970 selling deadline, however, Ira Feinberg drew checks totaling $108,-500 payable to the order of Samuel Feinberg, Halford, Marnane and Sutton. These appellants have not returned these funds; Sutton did consent, however, to an order requiring him to pay into the registry of the court the $43,000 received in connection with the Manor offering. See note 1 supra,.

Appellant Netelkos also has retained some proceeds from the offering. Fein-berg guaranteed a $250,000 loan for Netelkos by purchasing a certificate of deposit with some of the proceeds of the offering. When Netelkos defaulted on the loan, the bank called upon Feinberg to pay the loan. While Netelkos has paid some money to Feinberg, it does not appear that he has repaid the entire $250,-000.

II. Violations of Antifraud Provisions of 1933 and 1934 Acts

The conduct of appellants in connection with the public offering of Manor shares, upon analysis, demonstrates beyond a peradventure of a doubt that they violated the antifraud provisions of the federal securities laws — § 17(a) of the 1933 Act and § 10(b) of the 1934 Act.

The gravamen of this case is that each of the appellants participated in a continuing course of conduct whereby public investors were fraudulently induced to part with their money in the expectation that Manor and the selling stockholders would return the money if all Manor shares were not sold and all the proceeds from the sale were not received by March 8, 1970. It is undisputed that, as of March 8, Manor and the selling stockholders had not sold all the 450,000 shares and that all the proceeds expected from the sale had not been received. Moreover, it is clear that all appellants knew, or should have known, that the preconditions for their retaining the proceeds of the offering had not been satisfied. Nevertheless, rather than complying with the terms of the offering by returning the funds of public investors, appellants retained these funds for their own financial benefit. This misappropriation of the proceeds of the Manor offering constituted a fraud on public investors and violated the anti-fraud provisions of the federal securities laws. See Superintendent of Insurance of the State of New York v. Bankers Life & Casualty Co., 404 U.S. 6, 10 n. 7 *1095 (1971); Richardson v. MacArthur, 451 F.2d 35, 40-41 (10 Cir. 1971); A. T. Brod & Co. v. Perlow, 375 F.2d 393, 397 (2 Cir. 1967); Cooper v. North Jersey Trust Company, 226 F.Supp. 972, 978 (S.D.N.Y.1964). As we said in A. T. Brod & Co. v. Perlow, supra, 375 F.2d at 397: “We believe that § 10(b) and Rule 10b-5 prohibit all fraudulent schemes in connection with the purchase or sale of securities, whether the artifices employed involve a garden type variety of fraud, or present a unique form of deception.” In the instant case, we hold that the “misappropriation [of the proceeds] is a ‘garden variety’ type of fraud . . . .” Superintendent of Insurance of the State of New York v. Bankers Life & Casualty Co., supra, 404 U.S. at 10 n. 7.

All appellants also violated § 10(b) of the 1934 Act and Rule 10b-9 promulgated thereunder by making a misrepresentation with respect to the terms of an “all or nothing” offering. Recognizing the great potential for fraudulent conduct on the part of persons in connection with public offerings of securities on an “all or nothing” basis, 13 the SEC in 1962 adopted Rule 10b-9, which provides in relevant part:

“It shall constitute a ‘manipulative or deceptive device or contrivance,’ . . . to make any representation:

(1) to the effect that the security is being offered or sold on an ‘all- or-none’ basis, unless the security is part of an offering or distribution being made on the condition that all or a specified amount of the consideration paid for such security will be promptly refunded to the purchaser unless (A) all of the securities being offered are sold at a specified price within a specified time, and (B) the total amount due to the seller is received by him by a specified date. . . . ”

Here, it is clear that all appellants knew that the offering was presented on an “all or nothing” basis. Moreover, the evidence established that appellants knew, or should have known, that all of the shares had not been sold and that all of the proceeds had not been received by March 8, 1970. Under the circumstances, there can be no doubt that representing that the offering would be on an “all or nothing” basis violated Rule 10b-9. 13a

It also is clear that appellants violated the antifraud provisions of the federal securities laws by offering Manor shares when they knew, or should have known, that the Manor prospectus was misleading in several material respects. After the registration statement became effective on December 8, 1969, at least four developments occurred which made the prospectus misleading: the public’s funds were not returned even though the issue was not fully subscribed; an escrow account for the proceeds of the offering was not established; shares were issued for consideration other than cash; and certain individuals received extra compensation for agreeing to participate in the offering. These developments were not disclosed to the public investors. That these developments occurred after the effective date of the registration statement did not provide a license to appellants to ignore them. Post-effective developments which materially alter the picture presented in the registration statement must be brought to the attention of public investors. 14 *1096 “The effect of the antifraud provisions of the Securities Act (§ 17(a)) and of the Exchange Act (§ 10(b) and Rule 10b-5) is to require the prospectus to reflect any post-effective changes necessary to keep the prospectus from being misleading in any material respect . . . .” SEC v. Bangor Punta Corp., 331 F.Supp. 1154, 1160 n. 10 (S.D.N.Y.1971). Accord, Danser v. United States, 281 F.2d 492, 496-97 (1 Cir. 1960). See 1 Loss Securities Regulation 293 (2d ed. 1961, Supp. 1969).

While appellants admit that public investors were defrauded, they seek to exculpate themselves from liability for their acts by arguing that they acted in good faith. Appellants’ contention that their good faith should bar liability under the antifraud provisions of the federal securities laws, however, must be assessed in light of the Supreme Court’s admonition that securities legislation enacted for the purpose of avoiding frauds must be construed “flexibly to effectuate its remedial purposes.” SEC v. Capital Gains Bureau, 375 U.S. 180, 195 (1963). It is now well established that “ [b] efore there may be a violation of the securities acts there need not be present all of the same elements essential to common law fraud . . . .” Globus v. Law Research Service, Inc., 418 F.2d 1276, 1290-91 (2 Cir. 1969). Accord, SEC v. Capital Gains Bureau, supra, 375 U.S. at 193-95. Moreover, in an enforcement proceeding for equitable or prophylactic relief, such as the one here, we have held that mere negligence is a sufficient basis for liability. Hanly v. SEC, 415 F.2d 589, 597 (2 Cir. 1969); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 854-55 (2 Cir. 1968) (en banc), cert. denied sub nom. Coates v. SEC, 394 U.S. 976 (1969). 15 Accordingly, appellants’ claim that they acted in good faith, even if accepted, would not bar their liability under § 17(a) of the 1933 Act or § 10(b) of the 1934 Act.

We hold, however, that the evidence established that appellants, with the exception of Samuel Feinberg, Marnane and Halford, did not act in good faith. Feinberg, 16 as the district court properly found, has had considerable experience in complex financing arrangements. Thus, it would strain credulity to suggest that Feinberg did not know that the closing on February 20 was invalid. Any doubt about the invalidity of the closing, moreover, must have been completely dissipated by the news that the Netelkos and Deneso checks had been returned for insufficient funds. In addition, even assuming Feinberg reoffered the Netelkos and Deneso shares in good faith, he knew that neither he nor Ez-rine had been successful in selling them all and that more than 200,000 of the 450,000 shares involved in the offering were retired without having been purchased. Nevertheless, Feinberg did not attempt to return the proceeds of the offering until the SEC had begun its investigation. In view of these circumstances, it cannot be said that the district court was clearly erroneous in finding that Feinberg knowingly had participated in the fraud. As Judge Learned Hand said in a similar context, “. . . the cumulation of instances, each explicable only by extreme credulity or professional inexpertness, may have a probative force immensely greater than any one of them alone.” United States v. White, 124 F.2d 181, 185 (2 Cir. 1941).

Ezrine’s claim that he acted in good faith likewise is belied by the evidence adduced at trial. 17 As an experienced securities lawyer, he was well aware that failure to correct a misleading prospectus and retention of the proceeds even though *1097 the issue had not been fully subscribed constituted violations of the antifraud provisions of the securities laws. Indeed, Ezrine’s knowledge that the federal securities laws required public disclosure of developments which occurred subsequent to the effective date of the registration statement is indicated by his supplementing the Manor prospectus on February 24 to reflect Carlton Cambridge’s participation in the offering as an underwriter.

The district court also properly found that Netelkos knowingly violated the anti-fraud provisions. 18 While Netelkos admits that the prospectus was misleading in several material respects, he claims that he was under no duty to inform public investors that the prospectus did not present an accurate picture. The evidence shows, however, that Netelkos was actively involved in selling the issue and therefore was obligated to bring to the attention of offerees any developments which made the prospectus misleading in any material respect. Moreover, since Netelkos did not pay for his shares, it is clear that he retained some of the proceeds of the offering knowing that all of the 450,000 shares had not been sold and that all of the proceeds had not been received. 19

As for appellants Samuel Feinberg, Marnane and Halford, the evidence did not show, nor did the district court find, that they had acted in bad faith. Nevertheless, the court correctly held that these appellants had violated the anti-fraud provisions of the 1933 and 1934 Acts. Each of these appellants received signals which should have alerted them to the fact that the Manor issue was never fully subscribed. On February 20, 1970, all of the selling shareholders received checks from the underwriter representing the proceeds due them from their sales. Four days later, these appellants learned that payment on the checks had to be stopped because the underwriter did not have sufficient funds on deposit to honor the checks. At this point, these appellants should have inquired about the progress of the offering, for if the arrangements described in the prospectus had been followed and the entire issue had been sold, there would be no reason for the underwriter not to have had sufficient funds to cover the checks. Nevertheless, there is no evidence that these appellants even questioned any of the principal figures about the status of the offering. Samuel Feinberg, Marnane and Halford ultimately were paid the amounts of money to which each would have been entitled had the entire issue been sold. These appellants received checks drawn on Man- or’s account which were signed by Ira Feinberg. Rather than raising any questions as to why the first checks were not honored and why they subsequently were paid by checks drawn on Manor’s account, they simply accepted the money. In view of their failure to make any inquiry whatsoever, it is clear that these appellants deliberately closed their eyes to facts which they, as selling shareholders who were to receive a substantial financial benefit, were under a duty to see and to act accordingly. See United States v. Benjamin, 328 F.2d 854, 862 (2 Cir.), cert. denied, 377 U.S. 953 (1964). Whether their conduct be termed lack of due diligence or negligence, the district court properly held that these appellants violated § 17(a) of the 1933 Act and § 10 (b) of the 1934 Act.

*1098 III. Violations of Prospectus-Delivery Requirement of 1933 Act

In addition to concluding that appellants had violated the antifraud provisions of the federal securities laws, the district court also correctly held that they had violated the prospectus-delivery requirement of Section 5(b)(2) of the 1933 Act.

Section 5(b)(2) prohibits the delivery of a security for the purpose of sale unless the security is accompanied or preceded by a prospectus which meets the requirements of Section 10(a) of the 1933 Act, 15 U.S.C. § 77j(a) (1970). 20 To meet the requirements of § 10(a), a prospectus must contain, with specified exceptions, all “the information contained in the registration statement . . . . ” In turn, the registration statement, pursuant to Section 7 of the 1933 Act, 15 U.S.C. § 77g (1970), must set forth certain information specified in Schedule A of the 1933 Act, 15 U.S.C. § 77aa (1970). Among the items of information which Schedule A requires the registration statement, and therefore the prospectus, to contain are the use of proceeds (item 13), the estimated net proceeds (item 15), the price at which the security will be offered to the public and any variation therefrom (item 16), and all commissions or discounts paid to underwriters, directly or indirectly (item 17).

The Manor prospectus purported to disclose the information required by the above items of Schedule A. The evidence adduced at trial showed, however, that developments subsequent to the effective date of the registration statement made this information false and misleading. 21 Moreover, Manor and its principals did not amend or supplement the prospectus to reflect the changes which had made inaccurate the information which § 10(a) required the prospectus to disclose. We hold that implicit in the statutory provision that the prospectus contain certain information is the requirement that such information be true and correct. See SEC v. North American Finance Co., 214 F.Supp. 197, 201 (D.Ariz.1959); Eugene Rosenson, 40 S.E.C. 948, 952 (1961). 22 A prospectus does not meet the requirements of § 10 (a), therefore, if information required to be disclosed is materially false or misleading. Appellants violated § 5(b)(2) by delivering Manor securities for sale accompanied by a prospectus which did not meet the requirements of § 10(a) in that the prospectus contained materially false and misleading statements with respect to information required by § 10(a) to be disclosed.

*1099 Manor contends, however, that § 5(b) (2) does not require that a prospectus be amended to reflect material developments which occur subsequent to the effective date of the registration statement. This contention is premised on the assumptions that the prospectus spoke only as of the effective date of the registration statement and that the prospectus contained no false or misleading statements as of the effective date — December 8, 1969. Assuming the Manor prospectus was accurate as of December 8, 1969, appellants’ claim is without merit.

In support of their argument that the prospectus need not be amended or supplemented to reflect post-effective developments, appellants cite an administrative decision in which the SEC held that it will not issue a stop order with respect to a registration statement which becomes misleading subsequent to its effective date because of material post-effective events. Funeral Directors Manufacturing and Supply Co., 39 S.E.C. 33, 34 (1959). See also Charles A. Howard, 1 S.E.C. 6, 10 (1934). Under this line of SEC decisions, a registration statement need not be amended after its effective date to reflect post-effective developments. 23 These decisions, however, are not apposite here. Assuming that the registration statement does speak as of its effective date and that Manor did not have to amend its registration statement, 24 appellants were obliged to reflect the post-effective developments referred to above in the prospectus. Even those SEC decisions holding that the registration statement need not be amended to reflect post-effective developments recognize that the prospectus must be amended or supplemented in some manner to reflect such changes. See Charles A. Howard, supra,, at 10. In addition, as noted above in Part II of this opinion, the effect of the antifraud provisions of the 1933 and 1934 Acts is to require that the prospectus reflect post-effective developments which make the prospectus misleading in any material respect. There is no authority for the proposition that a prospectus speaks always as of the effective date of the registration statement. 25

*1100 We hold that appellants were under a duty to amend or supplement the Manor prospectus to reflect post-effective developments ; that their failure to do so stripped the Manor prospectus of compliance with § 10(a); and that appellants therefore violated § 5(b)(2).

IV. Injunctive Relief Granted

Having concluded that appellants had violated the federal securities laws, the district court permanently enjoined all appellants, except Samuel Feinberg, Marnane and Halford, 26 from further violations of the antifraud provisions of the 1933 and 1934 Acts; and also permanently enjoined appellants Manor, Feinberg, Ezrine, Glendale and Atlantic from further violations of § 5(b)(2) of the 1933 Act. Appellants’ claim that the district court abused its discretion in granting such injunctive relief is without merit.

In an action, such as the instant one, where the SEC sought injunctive relief under Section 20(b) of the 1933 Act, 15 U.S.C. § 77t(b) (1970), and under Section 21(e) of the 1934 Act, 15 U.S.C. § 78u(e) (1970), a district court has broad discretion to enjoin possible future violations of law where past violations have been shown, and the court’s determination that the public interest requires the imposition of a permanent restraint should not be disturbed on appeal unless there has been a clear abuse of discretion. SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1306-7 (2 Cir.), cert. denied, 404 U.S. 1005 (1971); SEC v. Culpepper, 270 F.2d 241, 250 (2 Cir. 1959). Moreover, the party seeking to overturn the district court’s exercise of discretion has the burden of showing that the court abused that discretion, and the burden necessarily is a heavy one. SEC v. Culpepper, supra, 270 F.2d at 250; United States v. W. T. Grant Co., 345 U.S. 629, 633 (1953). In the instant case, we hold that appellants have not sustained that burden, for the record amply supports the district court’s conclusion that the issuance of a permanent injunction was appropriate.

The critical question for a district court in deciding whether to issue a permanent injunction in view of past violations is whether there is a reasonable likelihood that the wrong will be repeated. SEC v. Culpepper, supra, 270 F.2d at 249; United States v. W. T. Grant Co., supra, 345 U.S. at 633. Here there were several factors which supported the district court’s conclusion that a reasonable likelihood of future violations existed. First, fraudulent past conduct gives rise to an inference of a reasonable expectation of continued violations, SEC v. Keller Corporation, 323 F.2d 397, 402 (7 Cir. 1963); SEC v. Culpepper, supra, 270 F.2d at 250; we believe that the drawing of such an inference was particularly appropriate here where appellants did not attempt to cease or undo the effects of their unlawful activity until the institution of an investigation. Secondly, having in mind that the nature of past violations has an important bearing on the reasonable expectation of future violations, SEC v. Culpepper, supra, 270 F.2d at 250; United States v. W. T. Grant Co., supra,