Appeal by defendants from a judgment of the District Court for the Southern District of New York, Robert W. Sweet, Judge, 524 F. Supp. 866, in an action brought by the SEC, declaring that they had violated various sections of the Securities Act of 1933, the Securities Exchange Act of 1934, and the SEC's Rule 10b-5 and enjoining them against future violations. Affirmed.
Friendly, Kaufman and Pierce, Circuit Judges.
Defendants Martin Hecht and Inventel Corporation appeal from a judgment of the United States District Court for the Southern District of New York, Sweet, J., 524 F. Supp. 866 (1981), declaring that they had violated §§ 5(a), 5(c), and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77e(a), 77e(c) and 77q(a); § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); and Rule 10b-5 under the latter act, and enjoining them against future violations. Defendants concede that if the licenses they were promoting were "investment contracts", and therefore "securities" within the meaning of § 2(1) of the 1933 Act and § 3(a) (10) of the 1934 Act, the securities laws were violated in that no registration was effected and the promotional materials omitted material information and contained material misrepresentations. We affirm the district court's holding that the licensing scheme was an investment contract and therefore a security within the 1933 and 1934 Acts.
This case concerns a plan to manufacture and distribute new dental devices termed Steri Products. Inventor Arthur Kuris conceived of an improvement of the Cavitron -- a device that employs ultrasonic waves to dislodge plaque in the course of dental prophylaxis -- which would use sterile water in place of tap water in order to reduce the risk of contamination. Kuris had discussions with one of his friends, M. Joshua Aber, a lawyer, and two of Aber's partners, Leon Schekter and defendant Hecht. The latter three formed a professional corporation called Schekter, Aber and Hecht, P.C. (SAH), and together the group established four corporations: Aqua-Sonic and Ultrasonic, New York corporations; Dentasonic, a Netherlands Antilles corporation; and Inventel, a Delaware corporation. Aqua-Sonic and Ultrasonic were each wholly owned by their respective principal officers; Dentasonic was owned by the three attorneys until November, 1978, when Kuris acquired a 19% interest; Inventel was owned by the three attorneys until February, 1979, at which time it redeemed Schekter's and Aber's shares, leaving Hecht as the sole owner.
Upon incorporation, Dentasonic purchased from Kuris the patent and related rights to Steri Products for the United States and Canada for $406,500, payable in installments. Dentasonic in turn sold the United States manufacturing and marketing rights to Aqua-Sonic for $26 million, to be paid from a percentage of the proceeds from the sale by Aqua-Sonic of distribution licenses and from a percentage of the proceeds from the sale of Steri Products by Aqua-Sonic licensees. Until payment of the $26 million, Dentasonic retained numerous rights vis a vis Aqua-Sonic, including certain voting rights to all of Aqua-Sonic's stock.
The proposed method of operation was that Aqua-Sonic would sell licensees the right to sell Steri Products in certain geographical regions. Ultrasonic was described to potential licensees as an optional sales agent. Inventel entered into agreements with Aqua-Sonic wherein Inventel was to be paid $2.2 million, purportedly a finder's fee, for bringing about the arrangement between Dentasonic and Aqua-Sonic and for consulting services; Inventel was also to receive a portion of the proceeds from the sale of the licenses and from the sale of Steri products and related patents or trademarks.
The promotional materials used in discussion with potential licensees or their representatives varied over the course of the offering. From May through August of 1978, the package included:
(a) an Information Memorandum describing the Steri Products and the nature of the offering, with exhibits attached thereto including a tax opinion letter prepared by SAH and financial illustrations projecting sales of the products and revenues.
(b) the Aqua-Sonic license and security agreement and notes payable to Aqua-Sonic (prior to inclusion of the so-called Advertising Fund to be discussed below), and related instructions.
(c) a document entitled "An Offer to Act as Sales Agent."
(d) the Ultrasonic sales agency agreement, security agreements, and notes payable to Ultrasonic (prior to inclusion of the Advertising Fund), and related instructions.
(e) a reprint of [an] article . . . from the Journal of Periodontology [concerning the contamination ...