Securities and Exchange Commission v. Manor Nursing Centers, Inc.
28 A.L.R. Fed. 781, 458 F.2d 1082, 1972 U.S. App. LEXIS 11689 (1972)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Misappropriating investor funds by failing to return them when the conditions of an 'all or nothing' offering are not met constitutes fraud under federal securities laws. Furthermore, delivering securities with a prospectus that has become materially false or misleading due to post-effective date events violates the prospectus-delivery requirement of Section 5(b)(2) of the 1933 Act.
Facts:
- Ira Feinberg and his attorney Ivan Ezrine organized Manor Nursing Centers, Inc. ('Manor') to take Feinberg's nursing home business public.
- Manor planned a public offering of 450,000 shares at $10 each, presented in its prospectus as an 'all or nothing' offering, meaning all shares had to be sold by a specific deadline or all funds would be returned to subscribers.
- The prospectus also stated that investor funds would be held in an escrow account, and that shares would be sold only for cash.
- When the offering struggled to attract buyers, Feinberg and Ezrine made undisclosed side deals to induce large purchases, including offering free shares, a loan guarantee, and a promise to repurchase shares at a profit to protect certain buyers from any loss.
- To create the appearance that the offering was fully sold by the closing date, the principals engaged in a series of non-compliant transactions, including accepting shares in lieu of legal fees, using offering proceeds to fund purchases of other shares ('bootstrap' transactions), and paying trade creditors with stock instead of cash.
- A purported 'closing' was held, but shortly thereafter, checks from the induced purchasers totaling approximately $2.5 million bounced for insufficient funds.
- Despite the offering's failure to sell all shares and collect all proceeds by the deadline, Feinberg, Ezrine, and the other appellants did not return the money collected from public investors, instead retaining over $1.3 million.
- Feinberg and Ezrine then attempted to resell the unpaid shares after the offering period had expired, with one block being sold at a different price ($11 instead of $10), but ultimately over 200,000 shares were never sold to the public.
Procedural Posture:
- The Securities and Exchange Commission (SEC) filed a civil action against Manor Nursing Centers, Inc., its principals, and others in the U.S. District Court for the Southern District of New York.
- The SEC's complaint alleged violations of the antifraud provisions (§17(a) of the 1933 Act, §10(b) of the 1934 Act, and Rule 10b-5) and the prospectus-delivery requirement (§5(b)(2) of the 1933 Act).
- After a non-jury trial, the district court (court of first instance) found that the appellants had violated these provisions.
- The district court entered a judgment that permanently enjoined the appellants from future violations, ordered them to disgorge proceeds and profits from the offering, appointed a trustee to administer the funds, and froze their assets.
- The appellants (Manor, Feinberg, Ezrine, et al.) appealed the district court's judgment to the U.S. Court of Appeals for the Second Circuit.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does misappropriating investor funds from a failed 'all or nothing' public offering and delivering securities with a prospectus that became materially misleading due to post-effective events violate the antifraud and prospectus-delivery provisions of the federal securities laws?
Opinions:
Majority - Timbers, Circuit Judge
Yes, misappropriating investor funds from a failed 'all or nothing' offering and delivering a materially misleading prospectus violates federal securities laws. The court reasoned that retaining investor funds after failing to meet the 'all or nothing' conditions is a 'garden variety' fraud that violates the antifraud provisions of §17(a) of the 1933 Act and §10(b) of the 1934 Act, including the specific prohibitions of Rule 10b-9. The court also held that post-effective developments—such as the failure to establish an escrow account, the undisclosed special compensation, non-cash sales, and the failure of the offering itself—materially altered the information in the prospectus. Issuers have a duty to amend or supplement a prospectus to reflect such material changes. By delivering securities with a prospectus they knew, or should have known, was materially false and misleading, the appellants violated the prospectus-delivery requirement of §5(b)(2) of the 1933 Act. The court rejected the appellants' good faith defense, noting that in an SEC enforcement action seeking equitable relief, mere negligence is a sufficient basis for liability, and in any event, the principal appellants acted with knowledge of their wrongdoing.
Analysis:
This case establishes a stringent duty for issuers in 'all or nothing' offerings to return investor funds immediately if the offering conditions are not met, treating the failure to do so as a direct fraudulent misappropriation. It is also a key authority for the principle that a prospectus is not a static document; issuers have a continuing duty to update it throughout the offering period to reflect any material developments. The decision reinforces the broad remedial power of federal courts in SEC enforcement actions, upholding ancillary relief such as disgorgement of proceeds to prevent unjust enrichment, while also setting a boundary by classifying the disgorgement of profits earned on those proceeds as an impermissible penalty.
