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Securities and Exchange Commission v. Parklane Hosiery Co.

July 8, 1977

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF-APPELLEE-CROSS-APPELLANT,
v.
PARKLANE HOSIERY CO., INC., HERBERT N. SOMEKH, DEFENDANTS-APPELLANTS-CROSS-APPELLEES



Appeal and cross-appeal from the United States District Court for the Southern District of New York, Kevin Duffy, Judge. Parklane Hosiery Co., Inc. and Herbert N. Somekh appeal from a judgment that the corporate defendant's premerger proxy statement was defective in three respects and that its public filings must be corrected. The Securities and Exchange Commission cross-appeals from the district court's denial of injunctive relief. Affirmed. Opinion below Waterman and Timbers, Circuit Judges, Mehrtens, District Judge.*fn*

Author: Mehrtens

MEHRTENS, District Judge:

This action was brought by the Securities and Exchange Commission against Parklane Hosiery Co., Inc. and Herbert N. Somekh under Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) and Sections 10(b), 13(a) and 14(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), 78m(a) and 78n(a) and the various rules promulgated thereunder.*fn1

At issue is whether the district judge erred in finding Parklane's proxy statement to be defective in three respects and in denying injunctive relief to the Commission.

We affirm the order of the district judge, reported at 422 F. Supp. 477 (S.D.N.Y. 1976).

In 1968, Parklane, a corporation of approximately 400 retail outlets selling women's apparel, sold 300,000 shares of common stock to the public at $9 per share. This case grew out of a merger consummated in October 1974 whereby Parklane was returned to its status as a private company, and its shares were repurchased at $2 per share. After a four-day hearing, the district judge held that the proxy statement seeking approval from Parklane's public shareholders for the merger which extinguished their stake in the company was materially false and misleading since it concealed from the shareholders that:

(1) the purpose of the transaction effecting their extinction was to enable Somekh, the president and principal shareholder of Parklane, to discharge his personal debts from the Parklane treasury;

(2) Parklane had engaged in negotiations suggesting that a leasehold held by the company might be saleable for an amount which would net Parklane $300,000; and

(3) the independent appraisal of Parklane's shares reflected in the proxy statement had been conducted without the benefit of several crucial pieces of information, including Somekh's personal plans for the company's assets and the potential cash windfall accruing from the leasehold.

Although the court ordered the defendants to correct the filings they had made with the Commission, which the court had found to be false and misleading, the court declined to grant the injunctive relief sought by the Commission. The defendants sought review of the district judge's findings with respect to their violations, and the Commission cross-appealed on the refusal to grant injunctive relief.

The standard for appellate review of factual findings of a court sitting without a jury is set forth in Rule 52(a) of the Federal Rules of Civil Procedure:

"Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses."

The burden is on the defendants, as the party attacking the findings of fact, to show that the findings are clearly erroneous. Hedger v. Reynolds, 216 F.2d 202 (2nd Cir. 1954). The Commission is entitled to the benefit of all reasonable inferences and to have the evidence viewed in the light most favorable to it. Stacher v. United States, 258 F.2d 112, 116 (9th Cir.), certiorari denied, 358 U.S. 907, 3 L. Ed. 2d 228, 79 S. Ct. 232 (1958); Crews v. Cloncs, 432 F.2d 1259 (7th Cir. 1970).

I. Somekh's Personal Indebtedness

The record supports the district judge's finding that the "overriding purpose" for the going-private scheme was to enable Somekh ...


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