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SEC v. Datronics Eng'rs, Inc. - 490 F.2d 250 (4th Cir. 1973)

Rule:

The term "underwriter" means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security or participates or has a direct or indirect participation in any such undertaking." Section 2(11) of the Securities Act of 1933, 15 U.S.C.S. § 77b(11).

Facts:

From November 1, 1968 to December 31, 1969, Datronics Engineers, Inc. (“Datronics”) effectuated, through the use of the mails, "spin-offs" to and among its stockholders of the unregistered shares of stock owned by Datronics in other corporations. Thereafter, the Securities and Exchange Commission (“SEC”) sought a preliminary injunction to restrain appellee corporation, its officers, and agents from continuing in alleged violation of the registration and antifraud provisions of the Securities Act of 1933, 15 U.S.C.S. § 77e, the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j, and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. Summary judgment was entered in favor of Datronics and SEC challenged the decision. 

Issue:

Did the district court err in its decision to grant summary judgment in favor of Datronics Engineers, Inc.?

Answer:

Yes.

Conclusion:

The appellate court vacated the lower court's dismissal and remanded the cause for an entry in SEC’s favor for the preliminary injunction originally sought. The court found that the "spin-offs" violated § 77e of the Securities Act of 1933. The court further found that the transactions were considered to be sales. According to the court, Datronics had made misleading statements and, since the transactions were deemed to be sales, the misleading statements were outlawed by § 78j of the Securities Act of 1933 and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5.

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