text:
    In re FOUR SEASONS SECURITIES LAWS LITIGATION. ARTHUR ANDERSEN & CO., Appellant, v. BANK OF AMERICA, Trustee of Transport Indemnity Company and Transport Underwriters Association Employee Profit Sharing and Retirement Plan PS-13901, Appellee.
    No. 73-1579.
    United States Court of Appeals, Tenth Circuit.
    Submitted Jan. 22, 1974.
    Decided Feb. 20, 1974.

      William G. Paul and Harry A. Woods, Jr., of Crowe, Dunlevy, Thweatt, Swin-ford, Johnson & Burdick, Oklahoma City, Okl. (Charles W. Boand and George W. Thompson of Wilson & Mcllvaine, Chicago, 111., of counsel, on the brief), for appellant.
    Clarence S. Hunt of Ball, Hunt, Hart, Brown & Baerwitz, Long Beach, Cal., for appellee.
    Before BREITENSTEIN, McWIL-LIAMS and DOYLE, Circuit Judges.
   WILLIAM E. DOYLE, Circuit Judge.

The sole question presented in the above appeal is whether the District Court correctly ruled that the Bank of America, appellee here, had effectively opted out as a member of the plaintiff class in a class action brought pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure. The trial court in a memorandum and order held that the Bank effectively elected to remove itself from the class and that it was not entitled to share in the settlement which had been arranged on behalf of the class and was not bound by the provisions of the judgment entered therein.

The result of a determination that the District Court ruled correctly would be that the Bank could pursue potential individual claims in private litigation involving securities transactions having to do with Four Seasons Nursing Centers securities.

The Bank of America is trustee for the Transport Indemnity Company and Transport Underwriters Association Employee Profit Sharing and Retirement Plan. The Plan had purchased securities in Four Seasons on the basis of advice given by certain investment counselors. Later, of course, the Four Seasons operation became involved in widespread litigation including a Chapter X proceeding under the Bankruptcy Act. There were several individual and class actions instituted on losses suffered in the purchase of Four Seasons stock. In November 1971, the members of the Plan, of which appellee Bank is trustee, filed suit in California against their investment counselors claiming damages arising out of advice given in purchasing Four Seasons securities.

The numerous actions having to do with Four Seasons in the federal courts were brought together by the Judicial Panel on Multidistrict Litigation, and on September 27, 1972, the Bank of America was designated as one of the members of plaintiff class in an action which was tried in the Western District of Oklahoma.

The September 27, 1972 order also approved the settlement arrangement reached between representatives of the classes and the defendant. Following this, a notice was sent out to the known members of the classes and it was published in the national Wall Street Journal. The Bank of America received the notice on October 10, 1972. It provided that members of each class wishing to be excluded were required to file a written request with the clerk of the court by November 1, 1972. The notice explained that the effect of the failure to request exclusion would be that the class members in not requesting it would be bound by any judgment of the court entered in the action. The notice also told the members that if they did not elect to opt out they had to file a proof of claim before January 3, 1973. This proof of claim form contained a general release of all potential claims arising out of the Four Seasons matter.

The letter relied on by appellee Bank of America as evidencing its request to opt out was dated October 23, 1972 and addressed to the Trustee for Four Seasons. (It is set forth as an appendix). In this letter the Bank expressed concern as to whether it could participate in the class recovery as a member of a class and also retain its cause of action which was already filed in the California state court. Copies of this letter to the Trustee were also sent to counsel for both plaintiffs and defendants.

The Trustee did not respond to the Bank’s inquiry, but forwarded its letter to one of plaintiffs’ attorneys here. A Mr. Young, one of the counsel for plaintiffs, wrote a letter to the Bank dated October 27, 1972, stating that he did not believe that the Bank’s proof of claim form could be modified so as to accord with the wishes of the Bank. On the same date the Bank received a telephone call from another of plaintiffs’ counsel indicating that the form submitted could not be modified. On November 2 counsel for the appellee wrote to the court-appointed Trustee requesting a form for exclusion from the class. On November 15 the Bank sent a purported proof of claim form which was modified to allow it to pursue its claim in the California state court. This also said that if the form as modified was not accepted, the Bank would regard itself as having opted out of the class. The court on entering its judgment on November 30, 1972, reserved authority to decide whether the Bank had opted out of the class. Following the Bank’s motion on December 26, 1972 that the court either accept the modified proof of claim or treat the Bank as having opted out, the court ruled as indicated above.

On this appeal the appellant argues that the trial court's findings as to the intent of the Bank and knowledge of plaintiffs’ counsel were clearly erroneous under Rule 52(a). They also assert that the trial court erred in determining that the Bank’s failure to make a timely request for exclusion constituted excusable neglect.

I.

Appellant’s argument proceeds in the following manner:

That the Bank received notice on October 10, 1972, but did not respond until October 23, and on November 1, 1972, the last day for filing their request, one of the Bank’s trust officers talked to one of the counsel for plaintiffs in the class action on the telephone. Both that call and another call from counsel advised the Bank that the modification was not possible. Notwithstanding this, the Bank failed to file a specific request for exclusion by November 1, 1972. This, it is contended, cannot be considered excusable neglect but, rather, a failure to make a decision. We disagree.

The Bank points out that its letter which is appended hereto is to be read as an election to be excluded unless it could pursue the claim and also continue the litigation. At most it says that it was not a deliberate attempt to delay or avoid the election but merely a mistake resulting from belated responses to its inquiry. In deciding this issue the trial court emphasized that counsel for the class plaintiffs knew that it was prior to the effective date that the Bank intended to opt out if it could not file a modified release. The failure to respond to the Bank’s inquiry delayed the formal action by the Bank. Based upon this finding, the trial court ruled that the Bank was to be regarded as having filed a timely election to opt out.

The trial court cited Rule 6(b) (2) as having allowed enlargement of time even after the effective date where the failure to act was the result of excusable neglect. We recognize that a finding of excusable neglect under Rule 6(b)(2) requires both a demonstration of good faith by the parties seeking the enlargement and also it must appear that there was a reasonable basis for not complying within the specified period. The facts support a finding of good faith on the part of the Bank. There is no indication that the tardiness was part of a strategy designed to gain a tactical advantage. The Bank was merely seeking to clarify its own position. Moreover, there was no prejudice suffered from the enlargement of time. Allowing the Bank to opt out did not deplete the sum reserved for outside claims. Inasmuch as there was no showing of bad faith or prejudice to the appellant, the trial court’s ruling enlarging the time under Rule 6(b)(2) was not erroneous.

II.

Nor do we consider the trial court’s ruling concerning the effectiveness of the notice of appellee Bank requesting to be excluded as erroneous. It was open to the trial court to find the facts on this and to determine the issue in accordance with the purpose of Rule 23(c)(2), which provides for the binding effect of a judgment on members of a class who have not expressly requested exclusion. The origin of this was to eliminate the practice of waiting to see if the adjudication was favorable to the class before deciding whether to enter it. This is not our situation. 7A Wright and Miller, Federal Practice and Procedure § 1787 (1972), p. 156 states:

Rule 23(c)(2) does not specify how the absentee is to request exclusion. It certainly would be an undue burden on class members to require them to retain counsel and prepare a formal legal document; on the other hand, allowing too much informality might pose problems of authenticity and ambiguity. Nonetheless, considerable flexibility is desirable in determining what constitutes an effective expression of a class member’s desire to exclude himself and any written evidence of it should suffice. For example, in Bonner v. Texas City Independent School District of Texas, the court held that the testimony of three teachers at trial that they did not desire to become associated with plaintiff’s action to compel the school district to offer teaching contracts was sufficient to constitute a request to be excluded from the action under Rule 23(c)(2) (A). To minimize uncertainty, the notice should inform the recipient exactly how to express his desire to opt-out, to whom it should be directed, and the date by which it must be received.

See also Bonner v. Texas City Independent School Dist. of Texas, 305 F.Supp. 600 (S.D.Texas 1969).

Counsel for appellant would have us lay down a rule that in order to opt out the request must be explicit. The trial court here ruled that the important question was whether notice was communicated. We consider this to be the correct judicial approach to the problem, since we are not construing a will, a deed or a contract. A reasonable indication of a desire to opt out ought to be sufficient. Here the Bank’s inquiries and expressions of its wish were adequate. As the authors of the treatise cited above indicate, flexibility is desirable in determining what constitutes an expression of a class member’s desire to exclude himself and any written evidence of it ought to be sufficient.

III.

We disagree with the final contention of appellant that the trial court made erroneous findings of fact. They maintain that the court was wrong in finding that plaintiffs’ counsel knew before the expiration date that the Bank wished to opt out; that it could not use a modified release; and that plaintiffs’ counsel failed to respond categorically to inquiries sent by counsel for appellee. We cannot say that the findings of the trial court were clearly erroneous.

The order and judgment of the trial court is affirmed.

APPENDIX LAW OFFICES Boll, Muni. Marl, Brown and Baerwilz 120 LINDEN AVENUE LONG BEACH, CALIFORNIA 90601 (213) 435-5631 ncvc»iv Hat's or rice aso nowtm noxounv OAIVC • CVCAI.Y MILLS, CAUfOONIA BOIlO (tl>| «7B-ISBO October 23, 1972 plcasc oiacct f»e*»LT to: P. O. Box 1287 Long Beach, CA-. 908f Mr. James R. Tolbert III, Trustee P. O. Box 26968 Oklahoma City, Oklahoma 73126 Re: Four Seasons Nursing Centers of America, Inc. et al., United States District Court For The Western District of Oklahoma, M.D.L. Docket No. 55 All Cases; Proceedings for the Reorganization of Corporations; Settlement of Certain Class Actions; Claim of Bank of America, Trustee of Transport Indemnity Company and Transport Underwriters' Association Profit Sharing and Retirement Plan._ Dear Mr. Tolbert: Under date of May 18, 1972, Bank of America, through its trust officer, J. E. Morrison, forwarded by mail a Class "G" Creditor Proof of Claim fc-rm covering 4,000 shares of Four Seasons Nursing Centers of America, Inc. common stock. A copy of the Proof of Claim as forwarded is enclosed herewith as Exhibit "A". Bank of America, as trustee, has received Notice to Persons, etc., from the.United States District Court for the Western District of Oklahoma in re Four Seasons Securities Laws litigation M.D.L. Docket 55, All'Cases, relative to the proposed settlement of certain class actions against Four Seasons Nursing Centers of America, Inc. and other companies referred to collectively as "Four Seasons Companies", enclosing a form of proof of claim described as "Proof of Claim Form A" with instructions for the filing of said claim, upon election to do so, by any class "G" creditor. A copy of this Proof of Claim Form A is enclosed herewi'-h as Exhibit "B". On October 7, 1971, Transport indemnity Company and others filed an action on behalf of the "Employee Profit Sharing and Retirement Plan" of Transport Indemnity Company and Transport Underwriters' Association against Financial Trust Company

and Financial Programs, Inc. et al. in the Superior Court, State of California, for the County of Los Angeles, No. C 13659, said action being an action for damages against defendants in connection with their purchase on behalf of the Employee Profit Sharing & Retirement Plan of certain common stocks, including common stock.of Four Seasons Nursing Centers, Inc., said purchases being the basis of the Class "G" Creditors Claim (Exhibit "A" attached to this letter). In reviewing the Proof of Claim Form A (Exhibit *’B" attached to this letter), it is noticed that the release clause is all inclusive and so broad as to probably include all persons in any- way havr.ng performed any acts or omissions relative to the Four Seasons Company. Bank of America, as trustee, is desirous of participating as one of the class of persons upon whose behalf certain class actions have been filed as referred to in the Notice relative to the settlement of certain class actions. However, Bank of America, as trustee, and the plaintiffs in said action, filed in the State Court of California, are fearful that the presentation of the Proof of-Claim Form A may be construed to constitute a bar against any further proceedings in the State Court action. On behalf of the Bank of America and Transport Indemnity and other plaintiffs re the Employee Profit Sharing and Retirement plan, I request you advise as to whether the "Proof of Claim Form A", insofar as the release clause is concerned may be-modified so as to clearly exclude from any release provisions the defendants in the State action, and if so, whether this may be done by interlineation on the Proof of Claim Form A. I request you give this your prompt and early consideration and advise. Very truly, yours, BALL, HUNT, HART, BROWN AND CSH:mO Enclosures cc. Messrs. Thomas W. Kelly, Esq., Charles W. Boand, Esq., Arthur F. Mathews, Esq., Marvin Cherner, Esq., Ira Jay Sands, Esg. and Robert B. Levin, Esq., J. Vernon Patrick, Esq., Harry A. Young, Jr., Esq.» Robert C. Bailey, Esq. Eldon R. Clawson, Neville Duvall, William Sundahl

      . Appellant Arthur Andersen & Co. was not one of the named defendants in the Plan’s California state action. Arthur Andersen’s connection with that suit apparently stems from the possibility that those defendants might institute third party liability or indemnity actions jeopardizing Arthur Andersen,

      . See 4 Wright and Miller, Federal Practice and Procedure § 1165 (1969) and the cases cited therein.

      . See Coady v. Aguadilla Terminal Inc., 456 F.2d 677 (1st Cir. 1972) ; Vandervelde v. Put and Call Brokers and Dealers Ass’n, Inc., 43 F.R.D. 14 (D.C.N.Y.1967).

      . Supermarkets General Corp. v. Grinnell Corp., 59 F.R.D. 512 (S.D.N.Y.1973) is not dispositive of the case at bar. There, the movant under Rule 6(b)(2) did not have a rational basis for its failure to make a timely request for exclusion and neither made inquiries nor asserted its intentions prior to the expiration date.


source: Caselaw Access Project

author: VAN DUSEN, Circuit Judge. ROSENN, Circuit Judge

license: Public Domain

text:
    Walter and Nancy JACOB v. UNITED STATES of America, Appellant.
    No. 73-1346.
    United States Court of Appeals, Third Circuit.
    Argued Dec. 18, 1973.
    Decided March 19, 1974.
    Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, William A. Friedlan-der and John A. Townsend, Attys., Tax Div., U. S. Dept, of Justice, Washington, D. C., Herbert J. Stern, U. S. Atty., D. N.J., for appellant.
    Albert G. Besser, Hannoch, Weisman, Stern & Besser, Newark, N. J., for ap-pellees.
    Before VAN DUSEN, ALDISERT and ROSENN, Circuit Judges.
   OPINION OF THE COURT

VAN DUSEN, Circuit Judge.

This case is before us on appeal by the Government from a district court judgment in favor of plaintiff-appellee taxpayer, Dr. Jacob, in a refund suit to recover federal income taxes paid by the taxpayer pursuant to a deficiency assessment for the taxable years 1964-1966. The issue presented by this appeal is whether groceries furnished to the taxpayer by his employer for consumption on the employer’s premises constitute “meals” within the meaning of Section 119 of the Internal Revenue Code, 26 U.S.C. § 119, so as to be excludable from the employee’s gross income'.

The taxpayer is the Executive Director of the Training School Unit of the American Institute for Mental Studies (hereinafter referred to as the “Institute”) in Vineland, New Jersey. The Institute is a home for approximately 300 mentally retarded individuals whose ages range from early childhood to over 60 years old. As Executive Director of the Institute, the taxpayer is primarily responsible for both the administration of the Institute and the content of its rehabilitative and educational programs. In addition to his routine administrative duties, the taxpayer has a number of special responsibilities which demand a great deal of his time. He must serve as a “father figure” to most of the students who reside at the Institute, particularly those who have no parents, and must be available at all times to provide counsel and guidance to his students. Also, in the absence of parents and relatives, the taxpayer is solely responsible for making all decisions which would otherwise require parental consent, such as major medical decisions, and he must handle all emergencies which arise at the Institute.

In light of the heavy personal demands upon the Executive Director, the Institute requires, as a condition of employment, that the taxpayer reside on the premises of the Institute and be available on a 24-hour-a-day basis. Therefore, in the taxable years in question, the taxpayer and his family resided on the premises of the Institute in a house provided by the Institute. In addition to the house, the Institute provided the taxpayer and his family with free groceries (including certain nonfood items such as napkins, soap, etc.) from the Institute’s commissary.

Upon audit of Dr. Jacob’s federal income tax returns for the taxable years 1964-1966, the Commissioner of Internal Revenue determined, inter alia that the cost value of the groceries provided by the Institute to the taxpayer without charge was includible- in the taxpayer’s gross income and that the groceries were not excludable as “meals” provided the taxpayer within the coverage of section 119. The taxpayer thereupon paid the deficiency in taxes resulting from this determination, filed a claim for refund, and, upon denial of the claim, filed the instant suit for refund in the district court. The district court held that the cost of the groceries was ex-cludable from the taxpayer’s gross income. The Government has appealed from that decision.

Section 119 of the Internal Revenue Code provides that “there shall be excluded from gross income of an employee the value of any meals . furnished to him by his employer for the convenience of the employer . if . . . the meals are furnished on the premises of the employer.” 26 U.S.C. § 119. Therefore, to be entitled to an exclusion from gross income under § 119, an employee must be (1) furnished meals by the employer (2) for the convenience of the employer (3) on the business premises of the employer.

The Commissioner contends that the furnishing of grocery items in the nature of unprepared foodstuffs does not constitute “meals” within the intendment of § 119. Specifically, the Commissioner contends that the furnishing of groceries does not further the statutory purpose underlying § 119, namely, to enable an employer to obtain the continuous presence of its employees at the site of employment by offering meals to its employees. Also, the Commissioner argues that the term “meals,” as used in § 119, should be given its plain and ordinary meaning and should be construed to apply only to prepared, ready-to-eat portions of food, such as those served in a restaurant. In support of this proposition, the Commissioner cites Tougher v. Commissioner, 51 T.C. 737 (1969), aff’d, 441 F.2d 1148 (9th Cir.), cert. denied, 404 U.S. 856, 92 S.Ct. 103, 30 L. Ed.2d 907 (1971), in which the Tax Court held that an FAA employee, who was required by his employment to live on a remote island in the Pacific Ocean, was not entitled to exclude from gross income the value of groceries purchased from an FAA commissary because such groceries did not constitute “meals” within the meaning of § 119.

After careful consideration, we reject the above contentions and hold that the furnishing of groceries to the taxpayer under the facts of this ease, where such groceries were furnished for the convenience of the employer on the premises of the employer and where such groceries were prepared into meals and consumed by the taxpayer on the employer’s premises, constitutes meals furnished within the meaning of § 119.

This narrow holding is not inconsistent with the basic purpose of § 119. As stated by the Government in its brief, such purpose “is to allow employees to exclude from income the value to them of meals furnished by the employer primarily for the convenience of the latter. As reflected in the pertinent Treasury Regulations and the Committee Reports, the convenience in question centers on the desire of the employer to have a more continuous presence of the employee at the job site and to have him be within reach even when eating.”

The above statutory purpose is not undermined at all in the instant case by the fact that the taxpayer-employee, rather than the employer, prepared the meals. To illustrate, rather than providing groceries to the taxpayer, the Institute could have furnished prepared meals to the taxpayer in its cafeteria. Assuming that such meals were furnished for the convenience of the Institute, the value of such meals would be excludable from the taxpayer’s gross income under § 119. Alternatively, the Institute could have prepared meals out of groceries supplied by its commissary and then served these meals to the taxpayer in the house provided the taxpayer by the Institute. Assuming again that such meals were furnished for the convenience of the Institute, the value of such meals would be excludable from the taxpayer’s gross income under § 119. The only difference between the above examples and the situation in the present case is that the Institute was relieved in this case of the intermediate expense and task of preparing the groceries into meals for the taxpayer. Except for this one difference, the end result is the same in each case. The taxpayer eats food provided by the employer on the employer’s premises so that the taxpayer is available on a moment’s notice during mealtime to carry out the responsibilities of his employment. If such food were not furnished, the taxpayer might leave the employer’s premises to eat elsewhere and thus be unavailable during mealtime. We see no logical reason why entitlement to the exclusion contained in § 119 should hinge upon who cooks the meal.

We also reject the reasoning of the Tougher case, supra, that the term “meals” should be given its ordinary-meaning of ready-to-eat servings of food and not extended to include groceries where the groceries are supplied by the employer and consumed on the employer’s premises. Our position finds support in the so-called “state trooper” cases, in 'which courts have held that state troopers are entitled to exclude under § 119 the amount of cash allowances for meals taken at roadside restaurants. See United States v. Keeton, 383 F.2d 429 (10th Cir. 1967); United States v. Morelan, 356 F.2d 199 (8th Cir. 1966); United States v. Barrett, 321 F.2d 911 (5th Cir. 1963); Saunders v. Commissioner of Internal Revenue, 215 F.2d 768 (3d Cir. 1954); but see Wilson v. United States, 412 F.2d 694 (1st Cir. 1969). While these cases are not exactly on point, they nevertheless show that courts have focused primarily on the “convenience of the employer” test in determining whether an employee is entitled to an exclusion under § 119 and have construed the term “meals” broadly in order to give effect to the basic purpose and spirit of § 119. We note that the Supreme Court has stated, in Commissioner of Internal Revenue v. Brown, 380 U.S. 563, 570-571, 85 S.Ct. 1162, 1166, 14 L.Ed.2d 75 (1965), that:

“Unquestionably the courts, in interpreting a statute, have some ‘scope for adopting a restricted rather than a literal or usual meaning of its words where acceptance of that meaning would lead to absurd results or would thwart the obvious purpose of the statute.’ . . . But it is otherwise ‘where no such consequence [would] follow and where ... it appears to be consonant with the purposes of the Act.’ ”

In holding that the furnishing of groceries" to the taxpayer in the instant case constitutes meals for the purposes of § 119, we emphasize that we are not confronted with a factual situation in which the groceries were furnished to an employee who then prepared the groceries into meals off the business premises. Our holding is confined to the facts of this case.

Since we have concluded that the furnishing of groceries constitutes “meals” for the purposes of § 119 in this case, we now ^consider whether the two other criteria of § 119 were also satisfied.

The second criterion of § 119 is that meals be furnished “for the convenience of the employer.” The issue of whether or not the meals are for the convenience of the employer is “primarily one of fact to be resolved by consideration of all the circumstances.” William I. Olkjer, 32 T.C. 464, 468 (1959). Treasury Regulation § 1.119-l(a), which pertains to meals, provides examples of the sorts of factual circumstances which fall within the “convenience of the employer” rule, one of which is the following: “If the employee is required to occupy living quarters on the business premises of his employer as a condition of his employment . . ., the exclusion applies to the value of any meal furnished without charge to the employee on such premises.” From this provision, it follows that the taxpayer, who is required to live on the business premises, is entitled to exclude from gross income the value of meals furnished free of charge which he eats in the house provided by the employer.

Further Treasury Regulation § 1.-119-l(a)(2) provides generally that:

“(i) Meals furnished by an employer without charge to the employee will be regarded as furnished for the convenience of the employer if such meals are furnished for a substantial non-compensatory business reason of the employer. If an employer furnishes meals as a means of providing additional compensation to his employee (and not for a substantial noncompen-satory business reason of the employer), the meals so furnished will not be regarded as furnished for the convenience of the employer. Conversely, if the employer furnishes meals to his employee for a substantial noncompen-satory business reason, the meals so furnished will be regarded as furnished for the convenience of the employer, even though such meals are also furnished for a compensatory reason . . . . ”

On the question of whether the taxpayer’s meals were furnished “for a substantial noncompensatory business reason,” the regulation gives the following example:

“(ii)(a) Meals will be regarded as furnished for a substantial noncom-pensatory business reason of the employer when the meals are furnished to the employee during his working hours to have the employee available for emergency call during his meal period. In order to demonstrate that meals are furnished to the employee to have the employee available for emergency call during the meal period, it must be shown that emergencies have actually occurred, or can reasonably be expected to occur, in the employer’s business, which have resulted, or will result, in the employer calling on the employee to perform his job during his meal period.”

The above-cited example fits the factual circumstances of the record in the instant case. The taxpayer’s meals were furnished in order that he would be available for emergency calls at the Institute during his meal period and such emergencies did in fact occur from time to time.

The final criterion of § 119, that meals be furnished on the business premises of the employer, was also complied with in the instant case since the house provided the taxpayer is part of the premises of the employer.

The Commissioner’s final contention is that, even if the furnishing of groceries is held to constitute meals, the value of non-foodstuff, such as napkins, toilet tissue, and soap, provided the taxpayer is not excludable under § 119. We disagree. The district court found that the value of the lodging furnished the taxpayer was excludable under § 119, and the non-foodstuffs are an integral part of either the lodging or the meals. The Government has made no contention with respect to a non-food item which is not an integral part of lodging or meals.

For the foregoing reasons, the judgment of the district court will be affirmed.

ROSENN, Circuit Judge

(concurring and dissenting).

I respectfully dissent as to all items which the majority deem deductible as “meals.”

Section 61(a) of the Internal Revenue Code of 1954 provides that “[ejxcept as otherwise provided in this subtitle, gross income means all income from whatever source derived. . . . ”

It is an established rule that exemptions from the broad definition of income in § 61 must be construed narrowly. Commissioner of Internal Revenue v. Jacobson, 336 U.S. 28, 49, 69 S.Ct. 358, 93 L.Ed. 477 (1949); United States v. Stewart, 311 U.S. 60, 71, 61 S.Ct. 102, 85 L.Ed. 40 (1940); Wilson v. United States, 412. F.2d 694, 696 (1st Cir. 1969); Estate of Walling v. Commissioner of Internal Revenue, 373 F.2d 190, 193 (3d Cir. 1967). It is also clear that words of the tax statute will be given their common and ordinary meaning in preference to a strained or distorted construction. Malat v. Riddell, 383 U.S. 569, 571, 86 S.Ct. 1030, 16 L.Ed.2d 102 (1966); Commissioner of Internal Revenue v. Brown, 380 U.S. 563, 570, 85 S.Ct. 1162, 14 L.Ed.2d 75 (1965); Hanover Bank v. Commissioner of Internal Revenue, 369 U.S. 672, 687, 82 S.Ct. 1080, 8 L.Ed.2d 187 (1962).

With these principles in mind, we must interpret § 119 of the Code, which excludes from the gross income of an employee “any meals . . . furnished to him by his employer for the convenience of the employer, but only if . the meals are furnished on the business premises of the employer.” The majority, by its construction of the term “meals” to include groceries, expands the scope of the exclusion beyond the clear language of the statute.

As noted by the majority, the § 119 exemption from income is directed at the situation where the employer desires “to have a more continuous presence of the employee at the job site and to have him within reach even when eating.” As is indicated by the statutory term “meals”, Congress had in mind situations where the employer would provide prepared meals to employees on its premises in order that the employees would be available for emergencies which might arise during the meal hour. As recognized in Tougher v. Commissioner, 51 T.C. 737 (1969), aff’d 441 F.2d 1148 (9th Cir.), cert. denied, 404 U.S. 856, 92 S.Ct. 103, 30 L.Ed.2d 907 (1971), the only case which has considered this issue,

The word “meals” connotes food that is prepared for consumption at such recognized occasions as breakfast, lunch, dinner, or supper, or the equivalent thereof. It does not ordinarily mean a bag of potatoes, a tin of coffee, a box of salt, a can of peas, 10 pounds of flour, a package of rice, a bottle of ketchup, a jar of mayonnaise, or an uncooked chicken.

51 T.C. at 745.

Had Congress intended that groceries be excluded from income under § 119, it could easily have chosen the broader word “food” rather than the more limiting word “meals” in that section. At first blush, it would appear that this distinction is insignificant and pedantic. Pragmatically, however, the distinction is significant and real. Were the term to be expanded by interpretation to include food generally as is suggested by the majority, new horizons could be opened for granting non-taxable income to the many thousands of employees in federal, state, municipal and private institutions. Therefore, I believe Congress used the term “meals” literally.

I do not, however, rest solely upon the use of the limiting word “meals” in § 119. I believe in addition that the requirement that meals be furnished “for the convenience of the employer” strongly militates against the exemption granted to the taxpayer by the majority in this case.

The taxpayer received an unlimited draw of free groceries for himself and his family from the employer’s commissary. In addition, he could place meat orders with the manager of the commissary, who would in turn place the orders with the Institute’s butcher without charge to the taxpayer. Concededly, the taxpayer’s job required that he generally eat the meals prepared from these groceries in his house on the premises. However, he rather than the Institute, had control over the time, duration, value, and content of the meals, and he could adjust these factors to suit his own convenience. On the other hand, in the typical case where an employer serves prepared meals to employees to have them on the premises during the meal hour, these factors are entirely within the control of the employer and can be adjusted to meet the employer’s own convenience. Supplying groceries, therefore, is inherently not for the convenience of the employer, at least not to the same extent as is supplying prepared meals. See Tougher, supra, 51 T.C. at 745-746.

The majority apparently considers these factors unimportant in light of the overriding benefit which the employer receives by having the employee on the premises while he eats meals prepared from the groceries supplied to him without charge. I believe, however, that even if the term “meals” includes groceries, the benefit to the employer from having the employee on the premises while he eats may not be taken into account in determining the convenience to the employer from supplying the groceries. The employer is supplying groceries, not prepared meals. The convenience to the employer, therefore, cannot be measured by the convenience to the employer of having the employee eat prepared meals on the premises instead of permitting him to leave during the meal hour. Rather, the convenience to the employer of supplying groceries must be measured solely by the advantage, if any, that the employer receives by having the employee on the premises during the time that he might otherwise take to purchase groceries off the premises.

The unusual situation might arise in which an employer could not even permit an employee to periodically leave the premises for a short period of time in order to purchase groceries, or in which there were simply no sources of food in an isolated area except for that supplied by the employer. In such a case, I might find that even groceries were furnished for the convenience of the employer.

The instant case, however, clearly does not present such a situation. The taxpayer testified at trial that he occasionally took trips away from the Institute for purposes such as fund raising, and he stated that he might typically attend a convention which lasted up to a week. There is no indication whatever in the record that the taxpayer was literally confined to the employer’s premises every minute of every day. Furthermore, the Institute was in the center of town, convenient to several grocery stores, and it would not have taken inordinately long to purchase a week’s supply of food. In any event, it was stipulated at trial that the taxpayer’s duties would not have been affected if his wife went to a grocery store to purchase food, instead of the family receiving free food delivered from the Institute commissary.

Under these circumstances, I do not believe that the groceries at issue in this case were furnished for the convenience of the employer.

I do not consider persuasive the majority’s reliance upon Treas.Reg. § 1.-119-1 (a), which states in part that

If the employee is required to occupy living quarters on the business premises of his employer as a condition of his employment . . ., the exclusion applies to the value of any meal furnished without charge to the employee on such premises.

My first objection to the majority’s reliance upon this provision of the regulation is that even if the statutory term “meals” is construed to include groceries, the regulations issued pursuant to that section clearly contemplated that “meals” only included prepared meals. I do not believe that it is proper to assume that whenever the term “meals” occurs in the regulations, the term should be broadly construed as “food.” The majority’s reliance upon the present regulations would require that groceries be deemed supplied for the convenience of the employer in every situation where prepared meals are presently deemed to be for the convenience of the employer.

Second, even if the majority is correct in relying on the present regulations, I believe that when the quoted provision is considered in context it merely means that although normally “meals” must be provided during the working hours of an employee, an exception to this rule is made for employees who live in employer-provided lodging. The regulation thus indicates that if groceries consumed by the taxpayer during his normal working hours would be deemed to be supplied for the convenience of the employer, the same would be true of groceries consumed during other hours of the day or other days of the week. I do not believe the provision helps, however, in determining whether any of the groceries here at issue were provided for the convenience of the employer.

For these reasons I would reverse the judgment of the district court and remand for a determination as to which household items (such as soap) are deductible as “lodging.”

       Nancy Jacob, the taxpayer’s wife, is a party to this case solely because of the joint return provision of 26 U.S.C. § 6013.

      . The district court stated the following in its opinion:
      “A member of the Board of Trustees, Mr. Bernard Shanley, testified, and I accept that Dr. Jacob’s job is 24 hours a day, seven days a week; and that unless he lived on or contiguous to the facility, and was therefore available at all times, the Trustees would not be able to keep him. Mr. Shanley gave the following reasons for this condition: Unless the Director were there, the Trustees felt that the children would not get the care and attention they are getting; and, secondly, the Trustees have a grave responsibility for these retarded children, and the Trustees have therefore put the entire responsibility on Dr. Jacob, and he must be on the job at all times in case of a crisis.”
      See Document No. 14 in D.N.J. Civil No. 566-71.

      . The Commissioner also determined that the value of the lodging provided taxpayer was includible in his gross income. The district court decided this issue in favor of the taxpayer, and the Government has not pursued this issue in this appeal.

      . The actual mechanics of the attempted exclusion was by a deduction, after the taxpayer had included the amount in income. Although the Tax Court noted that § 119 does not provide for a deduction, it nevertheless decided the case on the ground that groceries do not constitute meals. Despite this holding, we note that the facts in Tougher, involving a small, remote island in the western Pacific Ocean, are far different from the facts of the instant case.

      . See appellant’s brief at p. 12.

      . This result follows because the house provided the taxpayer is part of the employer’s premises.

      . Saunders, supra, involved facts arising prior to 1954 when § 119 was added to the Internal Revenue Code, but the reasoning of Saunders was followed in the above-cited post-1954 cases.

      . In the “state trooper” cases, the courts have focused principally on the meaning of the provision in Treasury Regulation § 1.-119-1 (c) (2) that “the exclusion provided by section 119 applies only to meals and lodging furnished in kind by an employer to his employee.” Despite this “in-kind” language, the courts have held that cash allowances for meals are excludable from the state troopers’ income. The Commissioner argues that this “in-kind” language nevertheless precludes a conclusion in the instant case that groceries can constitute meals. We disagree. If the furnishing of cash allowances is properly excludable under § 119, then the furnishing of groceries, under the facts of this case, should be excludable also.

      . In Saunders, supra, this court stated, in considering the principles which had evolved prior to the enactment of § 119, that “the rationale of the rule should make it applicable to determine the extent of gross income either when . . . meals are furnished in kind or cash is paid in lieu thereof.” 215 F.2d at 771. The court also stated that the convenience of the employer was the key criterion in determining whether the cash allowances were excludable. Id. at 772.

      . We reiterate that we do not decide whether this criterion would be satisfied in a factual situation where the groceries were furnished to the employee on the employer’s premises, but not prepared into meals or consumed on such premises.

      . At oral argument, the Government stated that it was withdrawing from the appeal the issue of whether the value of the groceries consumed by the taxpayer’s family was ex-cludable from gross income under § 119. This matter is presently under review by the Internal Revenue Service.

      . Treas.Reg. § 1.61-2, Compensation for services, including fees, commissions, and similar items, provides in part:
      (d) Compensation paid other than in cash * * * * (3) Meals and living quarters. The value of living quarters or meals which an employee receives in addition to his salary constitutes gross income unless they are furnished for the convenience of the employer and meet the conditions specified in section 119 and the regulations thereunder.

      . Tougher was decided adversely to the taxpayer. The majority in this case notes that “the facts in Tougher, involving a small, remote island in the western Pacific Ocean, are far different from the facts of the instant case.” I do not understand why the particular facts of a case determine whether the term “meals” is to be construed to include groceries. In any event, the facts of the instant case present a far less favorable case for the taxpayer than do the facts in Tougher. Unlike the situation in Tougher, the ready availability of supermarkets in the instant case would make it possible for the employer to require that the taxpayer purchase his own groceries off the premises. There is thus less reason in the instant case than in Tougher to hold that the employer furnished groceries for its own convenience, rather than for the benefit of the employee taxpayer.

      . Treas.Reg. § 1.119-1 (d) contains examples of the application of Section 119. Of the relevant examples, some refer to the arguably ambiguous term “meals”, while the rest refer specifically to meals furnished in a cafeteria.
      Particularly instructive is Example (7) which states:
      A construction worker is employed at a construction project at a remote job site in Alaska. Due to the inaccessibility of facilities for the employees who are working at the job site to obtain food and lodging and the prevailing weather conditions, the employer is required to furnish meals and lodging to the employee at the camp site in order to carry on the construction project. The employee is required to pay $40 a week for the meals and lodging. The weekly charge of $40 is not, as such, part of the compensation includible in the gross income of the employee, and under paragraphs (a) and (b) of this section the value of the meals and lodging is excludable from his gross income. [Emphasis supplied.]
      The example indicates that meals are furnished for the convenience of the employer in this situation, even though the employees are otherwise unable to supply their own food. This indicates that a distinction is indeed being made between the words “food” and “meals”, and that “meals” is intended to be restricted to prepared meals.

      . Treas.Reg. § 1.119-1 (a) (2) (i) provides in part:
      Generally, meals furnished before or after the working hours of the employee will not be regarded as furnished for the convenience of the employer, but see subdivision (ii) (d) and (f) of this subparagraph [referring to meals furnished immediately before or after the employee’s working hours] for some exceptions to this general rule. Meals furnished on nonworking days do not qualify for the exclusion under section 119. If the employee is required to occupy living quarters on the business premises of his employer as a condition of his employment . . . the exclusion applies to the value of any meal furnished without charge to the employee on such premises.


author: COFFIN, Chief Judge.

text:
    Lisandro RIVERA et al., Plaintiffs, Appellees, v. Antonio Gonzalez CHAPEL et al., Defendants, Appellants, Puerto Rico Farmers Association, Intervenor. Lisandro RIVERA et al., Plaintiffs, Appellants, v. Antonio Gonzalez CHAPEL et al., Defendants, Appellees, Puerto Rico Farmers Association, Intervenor.
    Nos. 74-1002, 74-1003.
    United States Court of Appeals, First Circuit.
    Argued Feb. 4, 1974.
    Decided March 29, 1974.
    Peter Ortiz, Deputy Sol. Gen., with whom Miriam Naveira De Rodom, San Juan, P. R. was on memorandum, for Antonio Gonzalez Chapel, and others.
    Pedro J. Varela, Hato Rey, P. R., for Lisandro Rivera, and others.

      Before COFFIN, Chief Judge, Mc-ENTEE and CAMPBELL, Circuit Judges.
   COFFIN, Chief Judge.

Plaintiffs are consumers of milk who, invoking 42 U.S.C. § 1983, challenged a Commonwealth-wide milk regulation (Milk Regulation I) which established a price increase in Puerto Rican milk and an automatic formula for basing monthly adjustments of price upon the price of animal feed. Plaintiffs obtained an injunction against the continuation of the system but failed to get a roll back in prices. Hence their appeal. Defendants, the Secretary of Agriculture and the Administrator of the Office of Milk Industry Regulation, appeal from the issuance of the injunction. We find it necessary to deal only with the latter.

The Milk Industry Regulation Act, Title 5 L.P.R.A. § 1092 et seq., confers upon the Administrator of the Milk Industry the power, after public hearings, to set milk prices and to regulate the milk industry in order to “protect the production and distribution of milk.” Before amending the questioned regulation, the Administrator held public hearings, at which the consumers were represented. After the hearings, he established a permanent increase of three cents a quart and imposed a formula on which to base monthly adjustments in price. This formula provided a mechanism for automatic change in the price of fresh milk in direct relation to the changes that the Secretary of the Department of Consumer Affairs would adopt for the price of animal feed.

The plaintiffs alleged that defendants exceeded their powers under the statute in allowing another agency in effect to bring about changes in the price of milk by determinations of the price of animal feed; that they violated another statute in not holding public hearings before amending Regulation I; that prices would rise without any intervention of defendants, contrary to the milk control statute; that the defendants did not consider all relevant factors, consult with an Advisory Board, or make findings of fact as required by the statute; that they did not file the amendment with the Puerto-. Rican Department of State as mandated by statute; that their action was arbitrary and confiscatory under the Fifth and Fourteenth Amendments; and that the regulation constituted a denial of equal protection.

The district court, after finding standing, and rejecting the defenses of non-exhaustion and abstention, held that while defendants had not acted arbitrarily, they had exceeded the statute in unlawfully delegating the power to fix milk prices and in allowing changes in price to be put into effect without prior public hearing.

The district judge, acting singly, did not convene a three-judge court — indeed none was requested — but considered the state claims which were pendent without reaching the federal claims raised. In order to support this approach, a preliminary determination must necessarily have been made that here was a substantial federal claim at issue which warranted the exercise of federal jurisdiction to consider the pendent claims. United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). Plaintiffs, in their brief in this court, have gone no further than to “contend that defendants have not complied with the statute in question, and their constitutional and statutory rights were thereby violated.”

We are unable to extract a federal question from the ore of plaintiffs’ allegations. As for the charge of impermissible delegation, even if it were delegation by the legislature, such would not be cognizable in federal court. Lombardi v. Tauro, 470 F.2d 798, 801 (1st Cir. 1972). In fact, it is a charge of excessive delegation by the Administrator, a matter solely for the Puerto Rican courts. As for the charge that the regulation was amended, contrary to a statute, without public hearings, such a violation would again be one of local law. Were this not so, every state agency could be hailed into federal court for violating a state administrative procedures act.

A similar allegation was made that the regulation, by removing the Administrator from participation in the automatic monthly price changes constituted a denial of due process. But it is only the statute which creates a right to such hearings. The consumers have established no property interest which can be protected by the Taking Clause of the Constitution. All price regulation which results in upward adjustments may be seen as reducing the potential purchasing power of the consumer. Potential purchasing power is not the kind of “property” which has been traditionally protected by this kind of procedural safeguard. Insofar as the Administrator is only a delegate of the legislature, the popular voice has theoretically already been considered. To require hearing prior to every price regulation by the legislature (as its delegate) would be to hamstring completely normal legislative processes. The Supreme Court has consistently upheld administrative and legislative authority to fix prices and rates. E. g., Yakus v. United States, 321 U.S. 414, 64 S.Ct. 660, 88 L.Ed. 834 (1944) ; United States v. Rock Royal Co-op, 307 U.S. 533, 59 S.Ct. 993, 83 L.Ed. 1446 (1939).

Plaintiffs’ equal . protection claim fares no better. The Constitution does not require that the legislative power be exercised only after all the possible interests of those affected, have been reflected into the legislators’ decision. “[T]he Fourteenth Amendment permits the States a wide scope of discretion in enacting laws which affect some groups of citizens differently than others. The constitutional safeguard is offended only if the classification rests on grounds wholly irrelevant to the achievement of the State’s objective.” McGowan v. Maryland, 366 U.S. 420, 425, 81 S.Ct. 1101, 1105, 6 L.Ed.2d 393 (1960). The legislative goal in this case is the protection of the production and distribution of milk. It cannot be said that the establishment of a price increase or of a base formula for future increases are irrational means of achieving this goal.

The remaining claims are that the failure to consult with an Advisory Board, to make findings of fact, and to file the amended regulation with the Puerto Rican Department of State, all in violation of statutes, swell somehow to constitutional dimensions. Our vision is poorer than plaintiffs’, for we are unable to see any claims that can be said to be substantial. Goosby v. Osser, 409 U.S. 512, 93 S.Ct. 854, 35 L.Ed.2d 36 (1973).

Judgment vacated; remanded with instructions to dismiss the complaint.


author: CELEBREZZE, Circuit Judge.

text:
    SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. William V. COFFEY, Defendant-Appellant, and John M. King, Defendant-Appellant.
    Nos. 73-1396, 73-1397.
    United States Court of Appeals, Sixth Circuit.
    Argued Dec. 4, 1973.
    Decided March 28, 1974.

      Jack R. Alton, Columbus, Ohio, for defendants-appellants; Lane, Alton & Horst, Columbus, Ohio, on briefs.
    Paul Gonson, Asst. Gen. Counsel, Washington, D. C., for plaintiff-appel-lee; Lawrence E. Nerheim, Gen. Counsel, David Ferber, Sol., Martin S. Ber-glas, Atty., S.E.C., Washington, D. C., Donald Dreyfus, Atty., Chicago Regional Office, S.E.C., Chicago, 111., on brief.
    Before CELEBREZZE, Circuit Judge, McALLISTER, Senior Circuit Judge, and WILSON, District Judge.

       The Honorable Frank W. Wilson, Chief Judge, United States District Court for the Eastern District of Tennessee, sitting by designation.

      . Section 10(b) of the Exchange Act of 1934 provides as follows :
      It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
      (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
      For a discussion of Rule 10b-5’s non-application to non-eulpable conduct, see Note, “Corporations — Rule 10b-5 — Nonparticipating Corporate Director Owes No Duty to Insure that all Material, Adverse Information is Conveyed to Prospective Purchasers,” 5 St. Mary’s L.J. 382, 387 (1967).

   CELEBREZZE, Circuit Judge.

This case presents novel issues for this Circuit regarding the Securities and Exchange Commission’s ability to enjoin corporate officials personally for alleged corporate violations of the federal securities laws, specifically, § 17(a)(1) and (3) of the 1933 Securities Act and § 10(b) of the 1934 Securities Exchange Act, and Rule 10b-5(l) and (3) promulgated thereunder. Appellants are the board chairman (John King) and the financial vice-president (William Coffey) of King Resources Company.

The relevant events began when Crofters, Inc., an Ohio “money-finder” formed in 1969, offered to arrange loans totaling $22,000,000 from the State of Ohio to four companies charged in the SEC complaint.

One of Crofters’ clients was King Resources Company, a Maine corporation with its headquarters in Colorado, engaged in oil well drilling in over a hundred countries. In early 1970 King Resources was short of cash and was seeking loans from various sources. In February, 1970, Ronald Howard, an independent money-finder and a defendant in the proceedings below, approached William Coffey (then King Resources’ financial vice-president) with the proposal that King Resources seek funds from the State of Ohio. Howard told Coffey that long-term arrangements were possible but that it was a legal prerequisite to obtaining funds from the State that a company’s commercial paper be rated “prime” by the National Credit Office, Inc. (NCO), a division of Dun & Bradstreet. Defendant -Groban, a Crofters partner, contacted Coffey on February 19, 1970, and requested information that NCO would need to determine whether King Resources’ commercial paper merited a prime rating. Coffey sent these materials to Groban. Groban then asked NCO to rate King Resources for the commercial paper market. Rudolph Merker, NCO’s vice-president for commercial paper, requested further information of Coffey, which was forthcoming and is not alleged to have been false. NCO promptly rated King Resources prime for the commercial paper market, on February 26, 1970. Groban notified Ohio’s Deputy Treasurer of King Resources’ prime NCO rating, and the State bought from King Resources a two-year $3,000,000 note on April 17, 1970 and a two-year $5,000,000 note on May 1, 1970.

King Resources soon thereafter collapsed financially, rendering Ohio’s notes virtually worthless. On November 16, 1970, the SEC sued to enjoin further violations of the securities laws by 17 defendants, including King Resources and Appellants Coffey and King. The SEC alleged three different categories of securities law violations, only one of which applied to King Resources and Appellants. The Commission alleged that King Resources had sold its notes by misrepresenting its prime rating on commercial paper as proof that its two-year notes were also rated “prime.” It further alleged that King Resources had failed to disclose material facts concerning its financial condition and the proposed use of the loan proceeds, omissions which tended to mislead NCO and the State of Ohio.

On the basis of depositions and briefs, the District Court disposed of Appellee’s motion for summary judgment on its petition for a preliminary injunction on August 10, 1972, by issuing a temporary restraining order against all 17 defendants. In a lengthy opinion, it held:

[ 0 ]n the state of facts now before us, the Court concludes that the defendants’ use of the word “prime”, as defined by N.C.O. and the customs of the securities industry, in connection with notes of terms in excess of 270 days, constituted a violation of the standard promulgated in O.R.C. § 135.14. Further, that such use of the term “prime”, in connection with non-commercial paper tended to operate as a “device, scheme, or artifice to defraud” within the meaning of Section 17(a)(1) and of Section 10(b) and Rule 10b-5(l) thereunder; and further constituted the engaging in a “transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser” within the meaning of Section 17(a)(3) and Section 10(b) and Rule 10b-5(3) thereunder, [ citations omitted ]. This conduct on the part of the defendants constitutes activity which should be enjoined by the equitable powers of this court.

By restraining the 17 defendants, the District Court avoided the question whether the Defendants, particularly Groban, had omitted material information or had made false statements in representing the various companies’ financial situations to Rudolph Merker of NCO:

What is actionable in this case is the use of prime ratings, regardless of how they were obtained, for a purpose which would tend to confuse and mislead the purchasers. Holding as we do, it is unnecessary to consider whether there was a material omission within the meaning of section 17(a)(2) and Rule 10b-5(2). Defendants had the obligation to insure that the ultimate use of the prime ratings did not violate other provisions of Section 17(a) and 10(b). This obligation on their part might well have cautioned them to reveal that the terms of the various notes they intended to issue were in excess of 270 days and therefore not properly submitted for'a prime rating. Deciding as we do, however, this determination is extraneous to the necessary grounds of our holdings.

The District Court enjoined

[T]he defendants who directly participated in obtaining prime ratings for Consolidated, Four Seasons and King Resources [who] knew or should have known that the notes ultimately issued were not properly described by the word “prime.”

These “directly participating” defendants included King Resources Company. Appellant King was enjoined as a “responsible officer” of King Resources. Appellant Coffey was enjoined as an “aider and abettor” in the scheme.

King Resources Company was nonetheless dismissed from the case because the District Court held that a prior Colorado injunction against the company was res judicata as to the present case. The SEC has not appealed that part of the ruling.

Soon after the temporary restraining order was issued, fourteen defendants submitted to consent decrees. Appellants persisted in their opposition to the SEC complaint and were afforded a hearing on consolidated motions for a preliminary and permanent injunction. They were allowed to present evidence concerning all factual matters, though the District Court refused to hear argument on the matters of law it had decided on August 10, 1972. On December 29, 1972, the District Court adopted the findings and conclusions of its August 10 Order in permanently enjoining Appellants from violations of § 17(a)(1) and (3), § 10(b), and Rule 10b-5(l) and (3). It held that Appellants “engaged in or are legally responsible for acts, including those which culminated in obtaining for King Resources Company a rating of ‘prime’ from [NCO], which was substantially employed in connection with notes of term in excess of 270 days.” Appellants attack this final judgment and order.

Before beginning a legal analysis of the District Court’s actions, we confront a basic difference between the parties. Appellants argue that the District Court opinion tars them with the finding that they committed a fraud, thus jeopardizing their right to earn a livelihood. The SEC asserts in its Brief that injunctive relief is merely a “mild prophylactic,” which requires “only that a defendant obey provisions of the law that he was already obliged to obey.”

When the SEC brings an injunctive suit to protect the public interest in an open and honest securities market, courts will shape their relief flexibly to effectuate the purposes of the Act. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963); SEC v. Barraco, 438 F.2d 97, 98-99 (10th Cir. 1971). However, before an injunction will issue against a particular party in his personal capacity, it must be shown that he personally is about to commit, is committing, or has committed a securities law offense. The statutory authority of the SEC alone requires such a rule. See § 20(b) of the 1933 Act, 15 U.S.C. § 77t(b), and § 21(e) of the 1934 Act, 15 U.S.C. § 78u(e). In this case, all challenged activities have ended, so that the SEC has not based .its request for relief on the assertion that defendants are “about to” commit a violation. Unless Appellants themselves violated the securities laws, there is consequently no basis to enjoin them for fear they will commit “further” violations. See SEC v. National Bankers Life Ins. Co., 324 F.Supp. 189, 197 (N.D.Tex.1971), 334 F.Supp. 444 (D.C.), aff’d, 448 F.2d 652 (5th Cir. 1971).

We are disturbed by the SEC’s tacit suggestion that a Court may personally enjoin a corporate official whenever his company or one of its agents has committed a securities law violation. An injunction is effectively drawn when it enjoins violators and their “agents, servants, employees and those persons in active concert or participation with them who receive actual notice of [an] Order.” This is precisely the clause used by the District Court to enjoin all of Appellants’ cohorts, in issuing its permanent injunction against Appellants. Furthermore, it is a basic equity principle that “whenever an injunction, whatever its nature may be, is directed to a corporation, it also runs against the corporation’s officers,” in their corporate capacities. 10 W. Fletcher, Private Corporations § 4875 (1970 ed.). To name individuals personally and to find that they committed a violation they did not commit would be an intolerable abuse of the judicial process. In practical consequence, it would damage the reputations of persons without reason to believe that they personally had violated the securities laws. Cf. SEC v. Frank, 388 F.2d 486, 489 (2d Cir. 1968). Such an arbitrary procedure would also deny named defendants basic constitutional rights in subsequent proceedings, since a personal injunction would be enforceable through contempt proceedings, even if a future violation were alleged that was based on activity wholly apart from the individuals’ corporate relationship. In a contempt proceeding, of course, the defendants would be deprived of the right to defend their actions before a jury. Unless an individual is about to commit, is committing, or has committed a securities law violation, he may not be enjoined in his personal capacity by the SEC. Cf. SEC v. International Camra-Corder Corp., CCH Sec. Law Rptr. para. 91,666 (S.D.N.Y. 1966).

The District Court found that Appellants had violated section 17(a)(1) and (3) of the 1933 Securities Act and section 10(b), specifically Rule 10b-5(l) and (3), of the 1934 Securities Exchange Act. In basic terms, these provisions make it illegal to employ a fraudulent scheme or to engage in a deceptive practice in connection with securities sales or purchases. The District Court did not make findings concerning alleged liability under section 17(a)(2) or Rule 10b-5(2), which prohibit false statements and omissions of material fact which would tend to mislead securities purchasers or sellers.

Were it the case that Appellants knowingly used King Resources’ “prime” rating on commercial paper as certification of prime quality for their two-year notes (which do not qualify as “commercial paper”), in a misleading manner and without a justifiable excuse, we would have no hesitation in affirming the District Court’s conclusions. We must reverse the holding below, however, because no fraudulent or deceptive scheme or practice has been established. We note that in reviewing this case, decided as it was primarily on the basis of depositions and briefs, we are in as good a position as the District Court to review the pleadings, affidavits, and depositions, and to arrive at conclusions of mixed law and fact. Dopp v. Franklin National Bank, 461 F.2d 873, 879 (2d Cir. 1972).

The basic factor which precludes a finding of liability under section 17(a)(1) and (3) and Rule 10b-5(l) and (3) is that King Resources’ use, as such, of its prime rating on commercial paper could not have been fraudulent or deceptive. Ohio law required as a precondition for borrowing funds that King Resources show a “prime” rating from NCO on its commercial paper, even though a loan being sought from the State of Ohio would extend beyond 270 days, thus taking it outside the category of commercial paper.

Section 135.14, Ohio Rev.Code, limits the entities in which the State Treasurer may invest “interim moneys” of the State to five categories, and limits the term of any obligation to two years. King Resources was eligible to borrow funds only under the following limitation :

“In addition to the investments specified in subparagraphs (A), (B), (C), and (D) of this section, the treasurer of state may invest interim moneys of the state in commercial paper notes issued by any corporation for profit which is incorporated under the laws of the United States, a state, or the District of Columbia, which such notes are rated prime by the National Credit Office, Inc., New York, or its successor, provided that the aggregate total amount of interim moneys invested in commercial paper at any time shall not exceed fifty million dollars.”

This section, taken literally, would bar investments of Ohio interim moneys in any corporate notes, outside those specified in paragraphs (A), (B), (C), and (D), which exceed 270 days in duration, since NCO rates companies only on their commercial paper, that is, notes of less than a 270-day duration.

Yet, King Resources offered and the State Treasurer bought notes of two years’ duration. If we assume that the investment was illegal under Ohio law, the error involved was by the Treasurer of the State, not a fraud practiced by King Resources upon the Treasurer. Under such a view of section 135.14, Ohio Rev. Code, both the Treasurer and King Resources knew exactly the terms of the sale, neither being excused from its ignorance of the fact that a two-year note would be improper under Ohio law. We need only conclude that it is not fraudulent to offer a two-year note so long as it is represented as such to determine that King Resources committed no fraud upon the Treasurer if the Treasurer was not authorized to purchase a two-year note.

If, however, we assume that section 135.14 authorizes the purchase of two-year notes from corporations such as King Resources, then we must make sense of the requirement that the notes be rated “prime” by NCO. More than a month after the Treasurer bought the King Resources notes, the Ohio Attorney General advised the Treasurer that a two-year note would be a proper investment if it were rated “prime commercial paper” by NCO.

The difficulty which this Opinion poses stems from a latent defect in section 135.14, which authorizes investments only in commercial paper rated “prime” by NCO. In fact, NCO does not rate notes. It only rates companies. If a company can show that it meets the criteria for a “prime” rating on commercial paper it might issue, NCO rates the company “prime” for the commercial paper' market. Only by implication may a particular note be considered to have a “prime” rating, since NCO does not rate individual issues of notes.

Thus, a company seeking funds from the State of Ohio is forced to proceed by submitting to the State a proposal of a note not exceeding two years in duration, coupled with a showing that the company itself is rated “prime” on its commercial paper by NCO. This is the only manner in which a company can establish its eligibility for an Ohio loan under § 135.14, Ohio Rev.Code, since NCO only rates companies on their commercial paper (notes of less than 270-day duration). It does not provide ratings which are necessarily valid in evaluating the quality of two-year notes.

Under these circumstances, we cannot characterize a company’s use of NCO’s “prime” rating on its commercial paper in seeking to sell two-year notes to the State of Ohio as a fraudulent scheme or a deceptive practice. King Resources’ use of its “prime” rating was mandated by state law as a pre-condition to selling its notes to the State, so that the State cannot, as a matter of law, have been defrauded by such use. Fraud or deceit presupposes the superior knowledge of one party over another. See Myzel v. Fields, 386 F.2d 718, 739 (8th Cir.), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968). The State was not in the position of an innocent purchaser, misled by an insider’s use of a prime rating on short-term paper to justify the quality of its longer term notes, since the State itself required precisely the showing it received. A section 17(a)(1) and (3) or Rule 10b-5(l) and (3) violation depends on one party’s taking unfair advantage of another party through a deceptive practice or fraudulent scheme. There is no duty to disclose information to one who reasonably should already be aware of it. Kohler v. Kohler Co., 319 F.2d 634, 642 (7th Cir. 1963); Arber v. Essex Wire Corp., 490 F.2d 414 at 420 (6th Cir. 1974). Since both King Resources and the State are held to the knowledge that NCO’s rating on commercial paper did not apply to two-year notes, it follows that no violation of these sections of the securities laws could have occurred.

The District Court’s finding of Appellants’ liability under section 17(a)(1) and (3) and section 10(b), specifically Rule 10b-5(l) and (3), therefore, is erroneous as a matter of law and must be reversed.

The District Court made no findings as to liability under section 17(a)(2) and Rule 10b-5(2), though much evidence was presented on this point. The SEC presented its entire case below and makes no claim that other evidence would be presented should we remand for findings under section 17(a) (2) and Rule 10b-5(2). On the record in this case, we conclude that a remand would be inappropriate in the case of John King, though the SEC should have the chance to show that William Coffey is liable under these provisions.

Section 17(a)(2) and Rule 10b-5(2) are directed against false statements and omissions of material fact in connection with securities sales and purchases. In the instant case King Resources’ agents may have omitted material facts both in obtaining a prime rating from NCO and in negotiating with the State of Ohio. The alleged omissions in obtaining NCO’s prime rating are that King Resources was planning to sell two-year (non-commercial) notes to Ohio, that the company was not meeting creditor obligations, and that it was planning to impair its ability to repay short-term loans by reloaning part of its borrowed funds. The alleged omissions in negotiating with the State of Ohio are that King Resources’ “prime” NCO rating did not apply to the two-year notes, that King Resources was not meeting obligations maturing at the time of sale, and that King Resources planned to reloan a substantial part of the proceeds of the Ohio borrowings.

As to Appellant Coffey, who personally sent financial information to NCO, a potential finding under Rule 10b-5(2) is that he omitted material facts necessary to make the statements made to NCO not misleading. If the SEC can prove that the alleged omissions represent facts which were known or should have been known by Coffey while dealing with NCO, that they were necessary to make the information forwarded to NCO not misleading, and that Coffey knew or should have known that the omitted information was significant to NCO within the principles of SEC v. Capital Gains Bureau, 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963), then Coffey may have violated Rule 10b-5(2). In addition to these factors, however, it is essential that the SEC show that Coffey’s inaction was in “wilful or reckless disregard for the truth.” The Second Circuit, sitting en bane, recently established this standard in regard to private damage actions in similar situations. Lanza v. Drexel & Co., 479 F.2d 1277, 1306 (2d Cir. 1973). Cf. Mader v. Armel, 461 F.2d 1123 (6th Cir.), cert. denied, 409 U.S. 1023, 93 S.Ct. 465, 34 L.Ed.2d 315 (1972). Although Lanza involved private plaintiffs, and the standards of culpability may be lower in SEC injunctive suits than in private damage actions, SEC v. Capital Gains Bureau, swpra, the reasoning of the Second Circuit in Lanza fully supports our conclusion that the SEC’s proof in an injunctive suit must meet the standard of showing “wilful or reckless disregard for the truth.”

Although the allegations in this case may make Coffey a direct participant in a Rule 10b-5(2) violation in his dealings with NCO, a different question arises as to Appellant King’s relationship to the Ohio and NCO contacts and as to Appellant Coffey’s relationship to the Ohio negotiations. In these three instances Appellants had no direct contact with the allegedly misled parties. The record shows that as Chairman of the Board, King attended both Executive Committee meetings where the Ohio loans were authorized. Between these meetings King met with Defendants Groban and Griffiths (of Crofters, Inc.) to discuss additional funds, with no evidénce of discussion of Groban’s representations to NCO or the State of Ohio. Coffey’s involvements in the Ohio loan negotiations were his participation in the meetings which approved the two Ohio loans, his signature on the notes, and his general oversight of King Resources’ financial affairs as its financial vice-president.

In considering whether King’s alleged involvement in either NCO or Ohio dealings (and Coffey’s as to the Ohio negotiations) violated section 17(a)(2) or Rule 10b-5(2), we start by noting the three categories of liability for which a person may be enjoined under the securities laws. First, a person may have directly participated in the deceit, endowing him or her with primary liability for the violation. Second, he or she may have knowingly assisted the commission of a violation by another party, making him or her secondarily liable for the violation. Third, a party may have been a “controlling person” of another who is liable for a securities law violation, so as to be liable under section 20 of the Securities Exchange Act of 1934.

We cannot find any evidence to support the contention that King was a primary participant in the alleged deception on NCO or the State of Ohio or that Coffey was a direct participant in the Ohio negotiations. Neither King nor Coffey had any contact with the officials negotiating for the State of Ohio, and King had no contact with NCO officials. Since in this case liability under section 17(a)(2) and Rule 10b-5(2) depends on proof of a deceptive omission in the context of deliberations with NCO or Ohio officials, only those individuals who had an affirmative obligation to reveal what was allegedly omitted can be held as primary participants in the alleged deception. A duty to disclose naturally devolved on those who had direct contacts with “the other side.” In the case of King and Coffey as to the Ohio officials and King as to NCO, we would have to imply a duty to contact the allegedly deceived officials and to disclose the allegedly omitted facts.

Here the duty which we would have to posit to find primary liability is the duty of a corporate board chairman and financial vice-president carefully to supervise the activities of a money-finder in its negotiations with a State Treasurer’s Office, and in the NCO case, a corporate board chairman’s duty to monitor his financial vice-president’s dealings with a credit-rating agency. Imposing such a duty would effectively make corporate officials primarily liable for any securities law violation by a subordinate. It would disrupt corporate systems of delegation of authority and accountability and would, sub silentio, repeal the protections contained in the “controlling persons” provision, section 20 of the 1934 Act. We refuse to impose such a duty. Our refusal is in accordance with other decisions which have declined to impose duties on persons not in a special relationship with a buyer or seller of securities. SEC v. Great American Industries, Inc., 407 F.2d 453, 460 (2d Cir. 1968) (en banc); Lanza v. Drexel & Co., 479 F.2d 1277 (2d Cir. 1973) (en banc); Mader v. Armel, 461 F.2d 1123 (6th Cir. 1972).

The second category under which Appellants might be held is that of secondary liability. This is the category in which the District Court seems to have placed Appellants, since it held King liable as a “responsible officer” of King Resources and described Coffey as an “aider and abettor.”-

Secondary liability is imposed under concepts borrowed from the common and the criminal law — “aiding and abetting” and conspiracy. We are aware of no other standard of secondary liability in securities law, aside from the “controlling persons” provision of section 20 of the 1934 Act (treated herein as a separate category).

A detailed discussion of conspiracy is unnecessary here, since no evidence of conspiracy existed. An essential element of conspiracy is an agreement to accomplish a wrongful purpose. Here the wrongful purpose would have been to omit material facts in dealing with NCO and Ohio officials. Casting Appellants’ inaction into a conspiracy with Crofters’ personnel to accomplish this purpose would stretch the usefulness of the conspiracy concept far beyond its proper elasticity.

Appellants’ actions are better analyzed under the aiding and abetting rationale. Aiding and abetting has been defined by courts considering securities law cases with reference to both the Restatement of Torts, § 876 (1939), and the criminal law, 18 U.S.C. § 2 (1969). Without meaning to set forth an inflexible definition of aiding and abetting, we find that a person may be held as an aider and abettor only if some other party has committed a securities law violation, if the accused party had general awareness that his role was part of an overall activity that is improper, and if the accused aider-abettor knowingly and substantially assisted the violation.

In this regard, we note that Coffey testified that he discussed the' terms of the Ohio loan with Groban of Crofters, Inc. Should the District Court find that through this contact Coffey became aware that Crofters’ personnel were misleading the State of Ohio, his knowledge that a violation was occurring would be established and his failure to take remedial action would be a form of aiding and abetting.

We find no evidence, however, that King knew that the personnel of Crofters, who conducted the actual negotiations with the State of Ohio, were misleading the State as to the terms of the loan, the meaning of the NCO prime rating, or King Resources’ financial condition. Nor do we find any evidence that King knowingly assisted any deception which Crofters’ personnel may have perpetrated on State officials. Inaction may be a form of assistance in certain cases, but only where it is shown that the silence of the accused aider and abettor was consciously intended to aid the securities law violation. SEC v. Timetrust, Inc., 142 F.2d 744, 745 (9th Cir. 1944); Brennan v. Midwestern United Life Ins. Co., 417 F.2d 147, 154-155 (7th Cir. 1969) cert. denied, 397 U. S. 989, 90 S.Ct. 1122, 25 L.Ed.2d 397 (1970); Fischer v. Kletz, 266 F.Supp. 180, 195 (S.D.N.Y.1967) (inaction claim dismissed as to financial statements accountants did not prepare); Wessel v. Buhler, 437 F.2d 279, 283 (9th Cir. 1971); SEC v. National Bankers Life Ins. Co., 324 F.Supp. 189, 195 (N.D.Tex.), 334 F.Supp. 444 (D.C.), aff’d, 448 F.2d 652 (5th Cir. 1971).

Normally, intent to commit a securities law violation does not require independent proof. Texas Continental Life Ins. Co. v. Dunne, 307 F.2d 242, 249 (6th Cir. 1962); SEC v. Capital Gains Bureau, 375 U.S. 180, 193, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963). Knowledge that a securities law violation would be furthered by one’s silence or inaction, however, must be proven by reliable and probative evidence, Pettit v. American Stock Exchange, 217 F.Supp. 21, 28 (S.D.N.Y.1963); SEC v. National Bankers Life Ins. Co., 324 F.Supp. 189, 195 (N.D.Tex), aff’d per curiam, 448 F.2d 652 (5th Cir. 1971), final judgment entered, 334 F.Supp. 444, 456 (N.D.Tex. 1971), aff’d, 477 F.2d 920 (5th Cir. 1973), though the evidence may be circumstantial as well as “direct.” SEC v. National Bankers Life Ins. Co., supra. Were such proof not required, a person who is not primarily liable for a violation could yet be held personally liable for the violation, even though he or she was unaware of the need to disclose information withheld by those primarily liable. The result would be to impose liability for an innocent omission, for non-eulpable inaction. This would stretch the application of Rule 10b-5 beyond its statutory limits, since section 10b of the 1934 Act does not impose liability for innocent acts but only for acts of fraud or deceit.

The same analysis leads to the conclusion that King could not be considered an aider and abettor to an alleged Rule 10b-5(2) violation committed in King Resources’ dealings with NCO. There is no evidence that King was personally aware of any omissions of material fact by Crofters’ personnel and Coffey in their dealings with NCO, and there is no indication that he had reason to suspect that a misrepresentation might be made. As we have pointed out above, he need not have doubted the propriety of seeking a “prime” rating, since King Resources needed it to place notes with the State of Ohio and to sell other commercial paper being prepared for sale in May 1970.

The third category of possible liability is contained in section 20 of the 1934 Securities Exchange Act. Section 20 provides:

(a) Every person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
(b) It shall be unlawful for any person, directly or indirectly, to do any act or thing which it would be unlawful for such person to do under the provisions of this title or any rule or regulation thereunder through or by means of any other person. 15 U.S.C. § 78t.

The District Court did not specifically anchor its finding of liability on this section. Yet, its reference to King as the “responsible officer” of King Resources suggests that this section might have been the source of its holding.

The Commission asserts that King was a controlling person within section 20(a) of the 1934 Act and that it may be inferred from the District Court’s holding that he failed to establish a “good faith” defense, since the District Court ruled against King.

We cannot assume that the District Court used section 20(a) to hold King liable. Whether a person “controls” another under section 20(a) is a complex factual question. Klapmeier v. Tele-check International, Inc., 315 F.Supp. 1360 (D.Minn.1970). But cf. Myzel v. Fields, 386 F.2d 718, 738 (8th Cir. 1967). There is no indication that the District Court made a factual finding to that effect or gave notice to King that he should establish a defense against such a finding.

Even had proper findings been made, however, we hold that section 20(a) of the 1934 Act may not be relied upon by the SEC in an injunctive enforcement action. Section 20(b) of the 1934 Act provides for the unlawful actions of controlling persons, and the SEC may only seek injunctions against unlawful actions. See section 20(b) of the 1933 Act, 15 U.S.C. § 77t(b); section 21(e) of the 1934 Act, 15 U.S.C. § 78u(e). Section 20(a) of the 1934 Act makes a controlling person liable “to any person to whom such controlled person is liable.” As a matter of legislative interpretation, we hold that the SEC is not a person under section 20(a), since section 20(a) was meant to specify the liability of controlling persons to private persons suing to vindicate their interests. Section 20(b) sets forth the standard of lawfulness to which a controlling person must conform, on penalty of liability in injunction to the SEC or criminal prosecution.

Under section 20(b), there must be shown to have been knowing use of a controlled person by a controlling person before a controlling person comes within its ambit. Without such a restriction, every link in a chain of command would be personally criminally and civilly liable for the violations of inferior corporate agents. This was not the congressional intent in enacting section 20(b). As we concluded above, King has not been shown to have had any knowledge of Crofters’ personnel’s dealings with either the State of Ohio or NCO, nor can we find a scintilla of proof that he “used,” directly or indirectly, Crofters’ personnel to carry out a violation.

We conclude that on the record as a whole King could not be held liable as a participant, as a secondary party, or as a controlling person for any possible section' 17(a)(2) or Rule 10b-5(2) violations of King Resources’ agents. Thus, the case must be dismissed as to him.

As to Coffey, we find the allegations of his role in obtaining a “prime” rating from NCO sufficient to warrant a hearing on Rule 10b-5(2) liability as a primary participant in omitting material facts in a misleading way. Further, we find that Coffey may be held liable as an aider and abettor under Rule 10b-5(2) if it should be proved that he was aware that actionable fraud was being perpetrated on State of Ohio officials and that he failed to take available remedial action.

Reversed and remanded for proceedings consistent with this Opinion.

      . These were Appellants’ position at the time of the alleged violations.

      . The loans of the four companies charged in the SEC’s complaint were made through the Ohio Workmen’s Compensation Fund and the Treasurer of Ohio. Both King Resources notes were purchased by the Treasurer.

      . The alleged omissions were that a large part of the funds to be obtained from the State was to be reloaned to other persons and that, at the time it issued its notes, King Resources was not meeting its obligations.

      . District Court Opinion and Order, printed at 351 F.Supp. 236, 254 (S.D.Ohio 1972).

      . Id. at 255-256.

      . Id. at 256.

      . Id.

      . Id.

      . District Court Order (S.D. Ohio, filed Dec. 29, 1972).

      . Final Judgment of Permanent Injunction (S.D.Ohio, filed Jan. 24, 1973). We note that the SEC sued Appellant King in his personal capacity in its Colorado suit against King Resources Co. The District Court of Colorado issued an injunction against “King Resources Company, and its officers, directors, agents, employees, assigns and attorneys, and those persons in active concert or participation with them.” This wording effectively enjoins King in his corporate capacity from participating in violations the Court found had been committed by the Company, without singling him out as having committed a violation. SEC v. King Resources Co., Civil No. C-2858 (D.Colo., filed Feb. 9, 1971). See Rule 65(d), Fed.Rules Civ.Proc.

      . The significance of naming an officer or director personally is that “otherwise he is bound only as long as he remains an officer or director, whereas if he is named he is personally enjoined without limit of time.” 6 L. Loss, Securities Regulation 4113 (1969, supp. to 2d ed.).

      . Section 17(a) of the 1933 Act, 15 U.S.C. § 77q, provides:
      (a) It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly—
      (1) to employ any device, scheme, or artifice to defraud, or
      (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
      (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
      Rule 10b-5, 17 C.F.R. 240.106-5, provides: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,
      (1) to employ any device, scheme, or artifice to defraud,
      (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
      (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deeit upon any person, in connection with the purchase or sale of any security.

      . We accept the District Court’s conclusion that “commercial paper” is “an unsecured promissory note with a maturity term not exceeding 270 days, the proceeds of which are used for working capital,” a definition used by NCO and accepted by Appellants and the securities industry generally. 351 F.Supp. at 252. See Handal, “The Commercial Paper Market and the Securities Acts,” 39 U.Chi.L.Rev. 362, 363-64 (1972).

      . There has been no allegation by any party that the investment was sanctioned by other provisions of Ohio law, though section 135.-14 may not be an exclusive authorization, since it only applies to the investment of “interim” moneys. Thus, we cannot reach the conclusion of the District Court which considered a similar loan, to a co-defendant in the instant case, to be outside the purview of § 135.14. See In re Four Seasons Nursing Centers of America, Inc., 329 F.Supp. 647, 651 (W.D.Okl.1971).

      . See n. 13, supra.

      . This is the apparent basis of the District Court’s holding in In re Four Seasons Nursing Centers of America, Inc., 329 F.Supp. at 651-52.

      . The Treasurer of the State of Ohio has an obligation to determine whether its investments accord with state law and, specifically, whether an item of commercial paper offered for sale has been rated prime by NCO. See Ohio Op. Att’y Gen. No. 70-067 (1970). We cannot describe the Treasurer’s failure to fulfill this elementary duty as a fraud practiced upon it by a securities offer- or.

      . Such an interpretation would require a finding that the Ohio legislature intended “commercial paper” to encompass notes of a duration more than twice that of the currently established definition, or that it intended to authorize NCO to determine the legal definition of commercial paper under Ohio law. Ohio Attorney General Opinion No. 70-067, supra, n. 17, adopts the latter view.

      . Id.

      . The criteria include such factors as liquidity position, bank credit line, net worth, and track record. See Handal, supra, n. 13, at 371-73.

      . A “prime” rating on commercial paper means that the rated company will most assuredly he able to pay off the short-term note through the proceeds of a product cycle which is financed by the short-term loan. A rating on a two-year loan would depend on quite different factors, such as the long-term viability of the enterprise and longer-range forecasts of business conditions.

      . Since NCO was not buying a security, liability cannot rest under section 17(a). Rule 10b-5, however, posits liability for deceptive practices “in connection with” a security sale. Since the NCO prime rating was an essential ingredient of the Ohio sale, there is a direct connection between obtaining the prime rating from NCO and the Ohio loan, and Rule 10b-5 comes into play.

      . See generally Ruder, “Multiple Defendants in Securities Law Fraud Oases: Aiding and Abetting, Conspiracy, In Pari Delicto, Indemnification, and Contribution,” 120 U.Pa.L.Rev. 597 (1972) ; A. Bromberg, Securities Law Fraud, § 8.5 (515-583), 208.5-.46 (1971).

      . Direct contacts may take many forms. An accountant or lawyer, for instance, who prepares a dishonest statement is a primary participant in a violation even though someone else may conduct the personal negotiations with a securities purchaser. See H. L. Green Co. v. Childree, 185 F.Supp. 95 (S.D. N.Y.1960) ; Fischer v. Kletz, 266 F.Supp. 180, 189-194 (S.D.N.Y.1967) ; SEC v. Spectrum, Ltd., 489 F.2d 535 (2d Cir. 1973) ; Hooper v. Mountain States Securities Corp., 282 F.2d 195 (5th Cir. 1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961).

      . Thus, we need not reach the thorny general question whether some form of scienter must be shown as a prerequisite to imposing liability or whether mere negligence or misrepresentation suffices to establish a violation.

      . See nn. 8, 9, supra.

      . See- generally Ruder, supra, n. 23, at 620-416. It is also imposed upon corporations whose agents commit violations, under the traditional concept of respondeat superi- or. See, e.g., Johns Hopkins Univ. v. Hutton, 297 F.Supp. 1165 (D.Md.1968), aff’d in part, rev’d in part and remanded, 422 F.2d 1124 (4th Cir. 1970).

      . Dasho v. Susquehanna Corp., 380 F.2d 262, 264, 267, n. 2 (7th Cir.), cert. denied sub nom. Bard v. Dasho, 389 U.S. 977, 88 S.Ct. 480, 19 L.Ed.2d 470 (1967).

        See Ruder, supra, n. 23, at 627, 631, 639. Prof. Bromberg describes a conspiracy in a securities law context as entailing “actions in different areas of responsibility of relatively equal importance.” A. Bromberg, Securities Law: Fraud, § 8.5(515), 208.6 (1971).

      . See Brennan v. Midwestern United Life Ins. Co., 259 F.Supp. 673, 680 (N.D.Ind. 1966), 286 F.Supp. 702 (N.D.Ind.1968), aff’d, 417 F.2d 147 (7th Cir. 1969) ; A. Bromberg, Securities Law: Fraud, § 8.5 (530), 208.20 (1971).

      . See SEC v. Timetrust, Inc., 142 F.2d 744, 746 (9th Cir. 1944) ; Fischer v. Kletz, 266 F.Supp. 180, 197 (S.D.N.Y.1967) ; Brennan, supra; Iroquois Industries, Inc. v. Syracuse China Corp., 417 F.2d 963, 970 (2d Cir. 1969), cert. denied, 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970) ; Nye & Nissen v. United States, 336 U.S. 613, 619, 69 S.Ct. 766, 93 L.Ed. 919 (1949) ; Ruder, supra, n. 23, at 626-38, 641-44; A. Bromberg, Securities Law: Fraud § 8.5(582), 208.45 (1971).
      We view the Second Circuit’s decision in SEC v. Spectrum Ltd., 489 F.2d 535 (2d Cir. 1973), as correct on its facts. There a lawyer was aware that his misleading opinion letter could be used to sell unregistered securities and failed to take timely steps to prevent such use. We do not believe that this application of a negligence standard to that situation compels us to apply a negligence standard in the very different case we confront. Here, there must be some showing that Appellants were aware of the Crofters’ personnel’s alleged misrepresentations. We note further that the attorney in Spectrum, Ltd. had committed three prior securities law violations, so that his argument of innocent knowledge was subject to doubt.

      . See Ruder, supra, n. 23, at 641-44, note, “Accountants’ Liability for False and Misleading Financial Statements,” 67 Colum.L.Rev. 1437, 1447-50 (1967).

      . In Fry v. Schumaker, 83 F.Supp. 476 (E.D.Pa.1947), for example, the Court held that a broker could be held liable for providing assistance to others only if he “knew” that doing so served essentially the fraudulent scheme.

      . King Resources had scheduled an issue of commercial paper through an established underwriter for May 1970.