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Securities and Exchange Commission v. Warren

decided: September 1, 1978.

SECURITIES AND EXCHANGE COMMISSION, APPELLANT
v.
WILLIAM K. WARREN, JR., AND THE WARREN FUND



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA D.C. Civil No. 73-0980

Before Seitz, Chief Judge, and Aldisert and Rosenn, Circuit Judges.

Author: Rosenn

Opinion OF THE COURT

This appeal by the Securities and Exchange Commission ("the Commission" or "SEC") is from an order of the district court for the Western District of Pennsylvania dissolving a permanent injunction entered by consent against William K. Warren, Jr., and the Warren Fund, appellees, restraining them from future violations of the margin requirements of the Securities and Exchange Act, 15 U.S.C. ยง 78g(d), and Regulation U promulgated thereunder.

I.

On November 15, 1973, the Commission filed an injunctive action against the defendant, William K. Warren, Jr., president of the Warren American Oil Co. ("WAOC") since 1956 and defendant, Warren Fund ("the Fund"), a limited partnership Warren had organized to conduct an investment business in securities. The suit sought to enforce the margin requirements contained in section 7(d)*fn1 of the Securities Exchange Act of 1934 ("the Act") and Regulation U.*fn2

In its complaint, the Commission alleged that on or about September 30, 1968, Warren obtained a three million dollar line of credit from a bank ostensibly for the use of WAOC; that on or about October 1, 1968, and January 20, 1969, he caused WAOC, a company he controlled, to borrow $1,000,000 against that line of credit in two transactions, each involving a $500,000 loan; that the two loans were secured by a pledge of margin securities; and that Warren represented on two statements (Federal Reserve Form U-1, Statement of Purpose of a Stock- Secured Extension of Credit by a Bank) required by law that the funds would be used for "corporate purposes" of WAOC whereas in fact the proceeds of the loans were to be used for the purchase of securities. Relying on its investigation which indicated that none of the borrowed funds had been used for the benefit of WAOC, the SEC alleged that, after misrepresenting the purpose of the loans, Warren transferred the funds through various conduits to the defendant Fund where the money was used to purchase margin securities in excess of the amounts allowable under the margin restrictions of the federal securities laws. Because of this conduct, SEC charged the defendants with aiding and abetting violations of the margin requirements of section 7(d) of the Act.*fn3

Each of the defendants immediately filed consents to the Final Judgment of Permanent Injunction which, with the exception of jurisdictional questions, constituted neither an admission nor denial of the allegations of the complaint. The consents agreed to the entry of a permanent injunction but provided that they were not to constitute any evidence nor any admission with respect to any issue or of any wrongdoing or liability for any purpose. The district court thereupon entered on November 15, 1973, without a hearing, its final judgment of permanent injunction. On January 27, 1977, the defendants moved to dissolve, suspend, or modify the permanent injunction pursuant to subsections (5) and (6) of Rule 60(b) of the Federal Rules of Civil Procedure.*fn4

The motion requested, in the alternative, that the operation of the injunction be suspended "pending the outcome of a full and complete trial on the merits of the allegations contained in plaintiffs' complaint . . .." In support of their motion, the defendants asserted, Inter alia, that the promulgation of Regulation X subsequent to the time the violations occurred, but prior to the entry of the injunction, is sufficient to protect the investing public from future violations; that the mandatory prohibitions of the final injunction are, therefore, no longer necessary because of the subsequent change in the securities law which forbade the very conduct previously enjoined; and that the continued existence and prospective application of the injunction constituted an extreme hardship and unreasonable burden on Warren, Jr. The Commission filed a number of motions to dismiss which were denied and the cause came on for evidentiary hearing before the district court to determine

(w)hether or not it is any longer equitable to continue the injunction or whether just reasons exist for its dissolution . . . .

Judge Snyder specifically directed that the hearing would not consider assertions that there was no violation of the federal securities laws at the time the injunction was issued. He permitted, however, background testimony and set forth the circumstances underlying the violations in his opinion, Securities & Exchange Commission v. Warren, 76 F.R.D. 405 (W.D.Pa.1977), and they do not require repetition.

The district court found the following facts pertinent to the issues raised on appeal. Both loans were repaid in approximately six months. No additional funds were ever borrowed by Warren, Jr., under the loan commitment with the Mellon Bank. Subsequent to the entry of the consent decree, an addition became necessary to the St. Francis Hospital in Tulsa, Oklahoma, which required in excess of $8,000,000 of public bonds. The St. Francis Hospital, costing over $11,000,000, was the product of the Warren Foundation founded by William K. Warren, Sr., and his wife. Because defendant Warren, Jr., was president of the Foundation at the time of the proposed bond issue, financial advisors indicated that the Commission should either remove the permanent injunction or offer some relief so that Warren, Jr., or the Foundation would not be required to disclose on the bond prospectus the outstanding permanent injunction against Warren, Jr., and the Fund. In order to expedite the hospital funding, Warren, Jr., resigned as chairman of the Foundation Board in July 1975, and the bonds were issued in January 1976.

The district court also found Warren had been a director of the Williams Companies, a corporation listed in the New York Stock Exchange, and had resigned in 1973 because of the SEC investigation then being conducted. He was also a director of the First National Bank and Trust Co. of Tulsa, Oklahoma, and resigned from its trust committee to avoid embarrassment because the committee dealt with stocks and bonds of the trusts it administered. Warren, Jr., was also a director of the Sooner Federal Savings and Loan Association of Tulsa and because it was contemplating going public, he also felt compelled to resign in August, 1974.

The district court found that although there was a diversion of funds in contravention of the statement made to the lender, the evidence suggests that Warren, Jr.

did not intend to violate Regulation U. He had no real reason to do so, for he, his family, and WAOC had other sufficient assets available to secure ...


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