author: DYER, Circuit Judge:

text:
    Hoyt AYERS, on behalf of himself, etc., Plaintiffs-Appellees, v. Rick WOLFINBARGER et al., Defendants, Maurice Olen, Crown Services Corporation, United Services Association of Alabama, Inc., Defendants-Appellants.
    No. 73-1700.
    United States Court of Appeals, Fifth Circuit.
    March 14, 1974.
    Rehearing and Rehearing En Banc Denied May 6, 1974.

      Morris K. Sirote, Birmingham, Ala., for defendants-appellants.
    J. Vernon Patrick, Jr., Marvin Cherner, Birmingham, Ala., for plaintiffs-appellees.
    Before BELL, DYER and SIMPSON, Circuit Judges.
   DYER, Circuit Judge:

In this derivative and stockholders class action, which sought damages for violations of the federal and state securities laws, Crown Services Corporation and United Services Association of Alabama, Inc., two companies controlled by Maurice Olen, were alleged to be underwriters and controlling persons of Diversoco, Inc., the shares of which were ultimately sold to the plaintiffs through fraudulent misrepresentations and omissions. From a judgment for the plaintiffs, entered upon jury verdicts, Olen, Crown and United appeal. We conclude that there was insufficient evidence to sustain the verdicts and judgment and accordingly reverse.

On February 1, 1966, The First National Financial Corporation of Alabama was granted a corporate charter under the laws of Alabama with an authorized capital of one million shares with a par value of ten cents per share. On February 2, 1966, the corporate name was changed to. Second National Financial Corporation of Alabama. Crown, a Florida corporation, and United, an Alabama corporation, were the organizers of First National and Second National. Olen was president of and controlled both Crown and United. Crown purchased 100,000 shares and United purchased 145,250 shares of Second National at ten cents per share. United also subscribed to an additional 255,000 shares.

Second National filed a registration statement with the Alabama Securities Commission and on July 15, 1966, made a public offering under its prospectus to sell 400,000 shares at one dollar per share to residents of Alabama. From that date to November 2, 1966, Second National sold about 28,000 shares to twenty-six residents of Alabama at one dollar per share.

In September 1966, Olen was indicted and pled guilty to violations of the federal securities and mail fraud laws in matters unrelated to the Second National offering. Because the Second National prospectus showed Olen to be in a position to control the company’s affairs, his counsel advised him to terminate the offering made by Second National in the prospectus of July 15, 1966, by either selling Crown’s and United’s stock in Second National, coupled with a requirement that the purchaser make a tender offer to the other stockholders to purchase their interests for the price paid by them for the stock, or by making a refund to all stockholders of Second National for the full amount of the purchase price paid by them.

In October 1966, Olen discussed with Wolfinbarger his desire to dispose of the stock held by Crown and United in Second National. Wolfinbarger was then Chairman of the Board of First American Life Insurance Company of Mobile, Alabama. The Insurance Commissioner of Alabama had declared the capital of First American to be impaired and had prohibited, it from selling insurance or selling its stock. Among First American’s stock salesmen were Withrow, Marine and Niesen. Wolfinbarger and the three stock salesmen discussed a proposed purchase of the Second National stock held by Crown and United that Wolfinbarger had negotiated with Olen. It was finally agreed however, that Wolfinbarger would draw from the transaction and that Withrow, Marine and Niesen, none of whom knew Olen, would acquire the stock of Second National from Crown and United.

On November 2, 1966, a stock purchase agreement was entered into, by the terms of which United sold 144,750 shares and Crown sold 100,000 shares of Second National to Withrow, Marine and Niesen for ten cents per share or a total of $24,475.00. Of this total purchase price $5,075.00 was payable in cash, and the balance of $19,400.00, together with interest at six percent, was evidenced by a promissory note payable in the amount of $2,400.00 on November 16, 1966, and beginning on December 12, 1966, in monthly installments of $1,463.-13 until the note was satisfied. As security for the payment of the unpaid purchase price the agreement provided for the escrow of the stock and further provided inter alia:

4. Security for Payment of Purchase Price.
* * * * * *
All rights in connection with or incident to the ownership of such shares of stock shall be vested solely in the Buyers, subject to the provisions of the Escrow Agreement and the rights of the Sellers as pledgees.
* * * * * *
In the case of default ... by the Buyers, the Sellers shall have the rights as heretofore outlined as well as all rights contained in the promissory note, but strictly subject to Sellers giving Buyers written notice of any such default in the terms and conditions of the aforesaid promissory note by Certified Mail . . ., and further provided that if said payment is made within ten (10) days of the receipt by Buyers of such Certified Mail notice it shall be accepted by Sellers without penalty, acceleration of said promissory note or forfeiture of any security hereby pledged;
9. Representations of Buyers. The Buyers do hereby warrant and agree with the Sellers that:
(a) Each of the Buyers is a bona fide resident of the State of Alabama.
(b) The Buyers will, at closing, make an offer in writing to all parties that purchased stock of the Company by public offering made by Company to purchase from them immediately for cash their shares of stock in the Company and their outstanding subscriptions to stock of the Company on the basis per share they paid for such stock. Buyers agree to make the same offer to the original Directors of the Company.

The promissory note executed by the purchasers contained the ten-day notice requirement provided in the stock purchase agreement.

The escrow agreement permitted stock to be withdrawn by the purchasers in proportion to the payment of any installment of the purchase price, provided that 50,750 shares would not be released until the last monthly payment was made.' So long as they were not in default, the purchasers were given the right to vote the stock held by the escrow agent.

At the time of closing on November 2, 1966, Withrow, Marine and Niesen also executed and delivered to United a promissory note for $25,525.00 payable in monthly installments of $542.36 beginning on December 12, 1966, the consideration for which was an assignment by United to the purchasers of United’s right to purchase 255,250 shares of Second National for ten cents per share. Contemporaneously, by an exchange of letters dated November 2, 1966, With-row, Marine and Niesen agreed to pay Second National ten cents per share on all sales by them of either the subscription rights assigned to them by United, or upon the exercise by them of the subscription rights resulting in the issue of Second National stock to them. This payment was in addition to the payment of the $25,525.00 to United for the assignment of United’s subscription rights to 255,250 shares of Second National stock. United, on the other hand, agreed that if Withrow, Marine and Niesen, the purchasers of the subscription rights, notified it in writing that Second National had canceled the subscription rights and relieved United from any liability for the payment of its subscription obligation, United would, in turn, declare the remaining sums at that time due and owing under the promissory note as having been paid and satisfied.

All of the officers and directors of Second National resigned on November 2. 1966, and thereafter took no part in its affairs. New officers and a new board of directors were elected, none of whom had any connection with Crown, United or Olen. Subsequently, the name of Second National was changed to Diversoco, Inc., and the home office of the company was moved from Mobile to Birmingham, Alabama.

Twenty-six stockholders had subscribed to 28,725 shares in Second National subsequent to the publication of the July 15, 1966, prospectus and before the November 2, 1966, stock purchase agreement for which shares they had paid to the company $14,725.00. On November 3, 1966, these stockholders were informed by letter of the stock purchase agreement, and an offer was made to purchase all of the shares owned by them in Second National at their per share cost. An offer was also made to assume the obligation of these stockholders under the terms of any outstanding subscription agreement which they might have made with Second National. Although the record is not entirely clear, it appears that between 10,000 and 16,000 shares were repurchased from the stockholders at their actual cost by Withrow, Marine and Niesen, shortly after November 3,1966.

The 244,750 shares purchased by Withrow, Marine and Niesen from Crown and United were held in escrow for over two years and were never sold to the public. During the escrow period the purchasers were late in making the installment payments on two or three occasions, but the sellers gave no notice of default. All of the shares were finally released to the purchasers on March 2, 1968.

Once the purchasers gained control of Diversoco, Inc., they exercised their subscription rights bought from United (for which they were obligated to pay United and Diversoco ten cents each per share) and sold as a secondary offering 226,707 shares at fifty cents per share or $113,353.00. Principally on the basis of a Diversoco prospectus dated September 30, 1967, the primary issue of 400,000 shares was sold to the public for one dollar per share.

On and after November 2, 1966, when Withrow, Marine and Niesen took over the affairs of the corporation, there is not the slightest doubt that they were controlling persons of Diversoco, Inc. (formerly Second National) and that as sellers of its stock they committed wholesale violations of the securities acts. The prospectus issued by Diversoco on September 30, 1967, was misleading and omitted material facts; the stock was sold publicly without having been registered as required; and at the same time the public was paying one dollar per share, Withrow, Marine, Niesen and later Liddell were selling an insider secondary issue for fifty cents per share. In view of these violations the question is then whether Crown, United and Olen are liable for what occurred after November 2,1966.

Since the jury found the defendants liable, “[this Court is] ‘duty bound to accept all evidence in favor of the verdict as true and to give such evidence the benefit of all' permissible inferences that would help sustain the jury’s decision!’ Little v. Green, 428 F.2d 1061, 1066 (5th Cir. 1970). See also Southern Pacific Co. v. Jordan, 395 F.2d 209 (5th Cir. 1968); Fidelity and Casualty Co. of New York v. Funel, 383 F.2d 42, 44 (5th Cir. 1967).” Hill York Corp. v. American Internat’l Franchises, Inc., 5 Cir. 1971, 448 F.2d 680 at 684.

Plaintiffs contend that Crown, United and Olen are liable as sellers of Diversoco stock. Plaintiffs’ argument is based on the following thesis: Wolfinbarger, an acquaintance of Olen, was president of First American Life Insurance Company, the capital of which had become impaired and which was prohibited from selling insurance or its own capital stock. Olen, through Crown and United, owned the stock of Second National. Olen was indicted for stock fraud so he arranged through Wolfinbarger to sell the Second National stock to three former stock salesmen of First American— Withrow, Marine and Niesen—and thus put paper between himself and Second National, but without actually losing control of the company.

Since obviously after November 2, 1968, there is no direct evidence that would support a finding that Crown, United or Olen was a seller or a controlling person, plaintiffs argue that circumstantially the evidence suffices to prove continuing control and that the sale by Crown and United was a device for selling Olen’s stock after he was in-dieted.

Preliminarily plaintiffs point out that Withrow, Marine and Niesen did not, at the time of closing the purchase, have sufficient funds to pay the total amount of the purchase price for the stock and subscription rights, and that Withrow had no source of income other than commissions from stock sales. The implication is, of course, that if Olen knew that the stock purchasers were unable to pay him and would engage in false or misleading representations to sell unregistered stock to the public so that the purchasers could pay off the balance owing to Olen with the proceeds of these unlawful sales, then Olen would be liable as a co-conspirator or as an aider and abettor. If we accepted this implication as being supported by evidentiary proof, the case would end in favor of the plaintiffs, because “ * * * it is well settled that parties may be liable for violations of the Act and Rule 10b-5 as long as they engage in fraudulent activity ‘in connection with’ the sale or purchase of securities or in a fraudulent ‘course of business.’ ” Buttrey v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 Cir. 1969, 410 F.2d 135, at 144. But the record does not support such a conclusion.

In Hill York, supra, we had occasion to formulate a test to determine who may be a seller. There we said,

“The law is settled that a purchaser may only recover from his immediate seller. Thus if * * * [Withrow, Marine and Niesen] have violated Section 5, the plaintiffs could recover from them. The law is not settled, however, as to who may be a seller. It is clear that a seller is not required to be the person who passes title. * * * This Circuit has implicitly rejected the strict privity concept on at least two prior occasions. Strahan v. Pedroni, 387 F.2d 730 (5th Cir. 1967); Lynn v. Caraway, 252 F.Supp. 858 (W.D.La.1966), aff’d per curiam, 379 F.2d 943 (5th Cir. 1967). Although the term ‘seller’ has sometimes been accorded a broader construction under Section 12(2) than under Section 12(1), we adopt a test which we believe states a rational and workable standard for imposition of liability under either section. Its base lies between the antiquated ‘strict- privity’ concept and the overbroad ‘participation’ concept which would hold all those liable who participated in the events leading up to the transaction. See Wonneman v. Stratford Securities Co., Inc., CCH Fed.Sec.L.Rep. ¶ 90,923 (S.D.N.Y.1959) and Wonneman v. Stratford Securities Co., Inc., CCH Fed.Sec.L.Rep. ¶ 91,034 (S.D.N.Y. 1961). We hold that the proper test is the one previously forged by the court in Lennerth v. Mendenhall, [D. C.Ohio, 234 F.Supp. 59] supra. ‘ * * * the line of demarcation must be drawn in terms of cause and effect: To borrow a phrase from the law of negligence, did the injury to the plaintiff flow directly and proximately from the actions of this particular defendant?’ 234 F.Supp. at 65. See also Nicewarner v. Bleavins, supra, 244 F.Supp. [261] at 266.”

Id. 448 F.2d at 692, 693.

Applying this test to the case sub judice, it is manifest that there is no evil under the securities laws in the sale of securities merely because a part of the deferred purchase price is secured by a pledge of the shares sold. There is a critical absence of any showing that at the time of sale or thereafter Olen knew or should have known that the purchasers would violate the securities laws in the sale of the secondary issue, it being undisputed that they sold to the public none of the stock purchased from Olen. Nor can Olen be incriminated because Withrow, one of the three purchasers, had no source of income other than commissions from stock sales with which to pay the deferred installments. There is not an iota of evidence to indicate that this was known to Olen, who met With-row, Marine and Niesen for the first time when the sale was closed on November 2, 1966. Moreover, it is uncontradicted that the purchasers from time to time loaned money to Diversoeo, and that on one occasion Withrow loaned the company $10,000 that he had borrowed in his home town. Apparently his credit during this time was unimpaired.

The plaintiffs next contend that, since the purchasers were obligated to pay ten cénts per share to United when they exercised their assigned subscription rights to 255,250 shares of Diversoco, Olen was in some manner made liable for whatever fraud the purchasers thereafter perpetrated on the public. Aside from the utter lack of evidence that Olen participated in the purchasers’ decision to exercise or not to exercise their assigned subscription rights, Olen agreed at the time of closing on November 2, 1966, that if the purchasers obtained from Diversoeo a cancellation of the subscription rights assigned to them by United, the latter in turn would cancel the purchasers’ note for $25,520, representing the purchase price for the subscriptions. Such an agreement is antithetical to an intent on Olen’s part to bilk the public by the sale of subscription rights, because this arrangement gave his purchasers the right to cancel the entire secondary issue.

In an attempt to show a continuing tie-in between Olen and the purchasers the plaintiffs point to the fact that on occasion the installment payments due to Crown and United from the purchasers were paid by checks drawn on the account of Diversoeo, Inc., thus imparting knowledge to Olen, it is argued, that the source of the money paid to him was either from commissions owed to the purchasers for the sale of Diversoeo stock or from funds borrowed by the purchasers from the company’s treasury. Even if Olen were to have guessed that the source of the payments to him was commission money or borrowings from the company by the purchasers, there was no showing that this was wrongful or unlawful. In fact, most of the installment payments by the purchasers to Crown and United were made by personal checks. The three checks drawn on Diversoeo for payments of $1,000.00, $542.00 and $546.36 respectively were each charged back to the personal account of the drawer on the books of the company to offset accounts already due or to become due to the drawer of the check. This argument is devoid of merit.

Next, plaintiffs submit that the defendants were controlling persons within the meaning of 15 U.S.C.A. § 77o (1971) (Section 15) which reads:

§ 77o. Liability of controlling persons
Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 771 of this title, 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 had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.

If Withrow, Marine and Niesen violated Section 5 and the defendants “controlled” them, then the defendants are liable under Section 12(1). As we have noted, there is no doubt about the violations occurring after November 2, 1966, for which the three purchasers were responsible.

The statute is broadly stated to include control by stock ownership, agency or otherwise, and the SEC further defines “control” in Rule 405 as follows:

“(f) Control. The term ‘control’ (including the terms ‘controlling,’ ‘controlled by,’ and' ‘under common control with’) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. 17 C.F.R. § 231, 405(b) (1971).”

The plaintiffs urge that, because of the default provisions contained in the escrow agreement, continued control was vested in the sellers. Bearing in mind that the plaintiffs had the burden of establishing control, Hill York, supra,, at 694, we summarily dismiss this argument as being without merit. We are unwilling to extend the definition of “controlling person” to a situation where, as here, stock is simply pledged as security for deferred payments, and particularly where the reinstatement provision after default is so favorable to the purchaser.

As a further indication that Olen and his corporations continued to be controlling persons, the plaintiffs offered evidence that on May 20, 1968 (a year and a half after the sale of Second National), Withrow, acting for Diversoco, purchased for $5,665.00 investment letter stock of Atlantic National Corporation, which was owned by Overseas Commercial Company, Ltd. and controlled by Olen; but there is nothing in the record to show that this purchase was anything but an arm’s-length transaction, the consideration for which is not challenged. Furthermore, the purchase was made by Diversoco so that the Atlantic National stock, together with stock of Diversoco owned by Withrow and Marine, could be tendered to two Diversoco stockholders, Witcher and Clark, to satisfy a note of $20,000 given by Second National to those Stockholders in May of 1966 for the purchase from them of Budget Finance Co. stock. There is no suggestion of a violation of the securities acts in the purchase of Budget Finance by Second National in 1966 in exchange for stock in Second National and the issuance by the latter of the promissory note that was satisfied by the 1968 transaction.

We conclude that the plaintiffs wholly failed to prove that Crown, United or Olen were controlling persons within the purview of the Act.

Finally, the plaintiffs assert that, prior to the sales agreement of November 2, 1966, Second National engaged in a public offering by its prospectus of July 15, 1966, and failed to disclose either that it was losing money or that the sale of its unregistered stock violated the securities laws. We are unpersuaded that there was a material omission in the prospectus. It correctly showed that the corporation had been recently formed and that its total earnings were $597.08; that the company had no business but sought capital for business which it would endeavor to engage in at a future time. The prospectus proclaimed that there was no established market for Second National stock, the price for which was stated as having been arbitrarily set by the company and not based on earnings; that the offering was speculative and that there were no representations that the stock could be resold for the offering price of one dollar per share.

The evidence is clear that the acquisition of the original issue of Second National stock by Crown, a Florida corporation, and the Alabama stockholders was nothing more than organizational stock. The sale of stock to the promoters of Second National was a private offering which was exempt from the registration requirements of Section 77e within the meaning of Section 77d(2). See SEC v. Ralston Purina Co., 1953, 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494; SEC Release No. 4552. The fact that Crown was a non-resident incorporator is irrelevant under Section 77d(2). Furthermore, the sales of stock to twenty-six Alabama residents after the July 15, 1966, prospectus and prior to November 2, 1966, did not require registration under the Securities Act because no “means or instruments of transportation or communication in interstate commerce or of the mails” were used to sell the stock. In any event, at Olen’s insistence his purchasers were required to, and did give, every stockholder who purchased stock in Second National prior to November 2, 1966, the opportunity at that time to resell his stock and any subscription rights for the original purchase price. This requirement imposed by Olen was patently inconsistent with any intent on his part to defraud the stockholders who had purchased shares in the company at a time when he was admittedly in control.

Olen disclaimed any connection, directly or indirectly, with Diversoco after the sale of stock by Crown and United on November 2, 1966. It is undisputed that he never visited the offices of Diversoco either in Mobile or Birmingham; he had nothing to do with the preparation or publication of the prospectus of November 2, 1966, and September 30, 1967; he participated in no way in the sale of the primary and secondary issues of Diversoco stock; he had no right to and did not manage or direct the company; he had no connection with the purchase of First American Life stock by Diversoco; he had no right to vote and in fact did not vote the stock sold by Crown and United to Withrow, Marine and- Niesen which was held in escrow. Crown and United made no profit on the 244,750 shares sold by them on November 2, 1966, and this stock was never sold to the public. Finally, it appears that the directors who served on the Diversoco board after November 2, 1966 (except Withrow, Marine and Niesen), and who were called as witnesses for the plaintiffs, were unacquainted with Olen and were certain that he had nothing to do with the affairs of the company.

We must be guided by the “familiar canon of statutory construction that remedial legislation should be construed broadly to effectuate its purposes,” Tcherepnin v. Knight, 1967, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564; Herpich v. Wallace, 5 Cir. 1970, 430 F.2d 792, 800, but we decline to permit blame to be based solely on conjecture in the guise of inference. Moore v. Chesapeake & Ohio Ry., 1951, 340 U.S. 573, 71 S.Ct. 428, 95 L.Ed. 547. Considering all of the evidence, together with all reasonable inferences most favorable to the plaintiffs, the facts and inferences here point so strongly and overwhelmingly in favor of the defendants that reasonable men could not have arrived at a contrary verdict; thus defendants’ motion for a directed verdict should have been granted. Boeing Co. v. Shipman, 5 Cir. 1969, 411 F.2d 365.

The judgment of the district court is reversed and judgment is rendered for Crown Services Corporation, a Florida corporation, United Services Association of Alabama, Inc., an Alabama corporation, and Maurice Olen.

Reversed and rendered.

      . The federal and state securities acts relied on by the plaintiffs are the anti-fraud provisions of Section 10(b) and SEO Rule 10b-5, Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b) ; Sections 12(2) and 17, Securities Act of 1933, 15 U.S.C.A. §§ 77Z(2) and 77q; Section 18 of the Securities Act of Alabama, Title 53, Code of Alabama § 45; and the provision proscribing the sale of unregistered securities, Section 5, Securities Act of 1933, 15 U.S.C.A. § Tie.

        . Defendants Wolfinbarger and Insurance Capital Corporation failed to appear and defend the action. In accordance with the jury’s verdicts, final judgments were entered against each of them. Neither defendant appealed.
      After suit was instituted a settlement was effected with defendants Withrow, Marine, Niesen, Liddell, Price, Aderliolt, Wyatt, Tucker, Simmons and Diversoco, Inc., and they were dismissed with prejudice. Diversoco, Inc. was realigned as a plaintiff.

      . Not included were stockholders Witcher and Clark, who had received 10,000 shares of Second National in exchange for the stock of Budget Finance, which they owned, and which transaction occurred prior to the July 15, 1966, prospectus.

      . Much of this stock was sold to “advisory directors” on the basis of one dollar per share and the gift of one share, which thus averaged the cost to fifty cents per share. The advisory directors had no duties or responsibilities.

      . Section 15 of the Securities Act of 1933, 15 U.S.C.A. § 77o.

      . Section 12(1) of the Securities Act of 1933, 15 U.S.C.A. § 77Z(1).

      . Section 12 of the Securities Act of 1933, 15 U.S.C.A. § 77Z(2).

      . Section 5 of the Securities Act of 1933, 15 U.S.C.A. § 77e.

      . Section 17 of the Securities Act of 1933, 15 U.S.C.A. § 77q; Section 10 of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b) ; SEO Bule 10b-5.

      . Section 5 of the Securities Act of 1933, 15 U.S.C.A. § 77e(a) (1).


source: Caselaw Access Project

author: PER CURIAM:

license: Public Domain

text:
    Jacob SCHEIN and Marvin H. Schein, Plaintiffs-Appellants, v. CAESAR’S WORLD, INC., et al., Defendants-Appellees.
    No. 73-3702
    Summary Calendar.

    United States Court of Appeals, Fifth Circuit.
    March 15, 1974.
    Bruce M. Lyons, Bruno L. DiGiulian, Fort Lauderdale, Fla., Mitchell A. Kramer, Philadelphia, Pa., for plaintiffs-appellants.
    Robert E. Venney, Miami, Fla., for Caesar’s.
    Guy C. Quinlan, New York City, Bernard S. Mandler, Miami Beach, Fla., for Perlman, and others.
    William R. Glendon, Rogers & Wells, New York City, for defendants-appellees.

      Before COLEMAN, DYER and RO-NEY, Circuit Judges.

       Rule 18, 5 Cir.; see Isbell Enterprises, Inc. v. Citizens Casualty Company of New York et al., 5 Cir., 1970, 431 F.2d 409, Part I.

   PER CURIAM:

Upon full consideration of the records and briefs in this case, the judgment of the District Court is affirmed on the memorandum opinion of Judge Peter T. Fay, dated September 12, 1973, hereto attached.

Affirmed.

APPENDIX

Opinion of District Court

FAY, District Judge.

Presented for judicial disposition at the instant stage of this derivative action litigation is the Motion for Summary' Judgment of the individual defendants, who are officers and directors of defendant Caesar’s World, Inc., on whose behalf this cause was instituted. Antedating the Court’s decision on defendants’ motion has been an extensive review and analysis of plaintiff shareholders’ grievances, as defined in their amended complaint and in oral argument before the Court, all discovery material and legal memoranda submitted by the parties to this cause, and, finally, a thorough study of the case law pertinent to the liability of corporate officers and directors for failure to use the care required of them by virtue of their corporate position. Mandated by such review and analysis is the granting of defendants’ Motion for Summary Judgment.

Initially, it is to be noted that the management of corporate business is vested in the directors of a corporation, the directors having wide discretion in the exercise of business judgment in the performance of their duties. F.S.A., § 608.09. While directors are required to discharge their duties with the diligent care and skill which ordinarily prudent men would exercise under similar circumstances in like positions, they incur no liability to the corporation for issues of business expediency which they resolve through the mere exercise of their business judgment. See e. g. Yarnall Warehouse and Transfer, Inc. v. Three Ivory Bros. Moving, Fla.App., 226 So.2d 887 (1969); Citizens Nat. Bank of St. Petersburg v. Peters, Fla.App., 175 So. 2d 54 (1965). Thus, it is to an application to plaintiffs’ cause of these controlling principles that this order now turns.

Plaintiffs, through their amended complaint, attribute “diminution and/or wasting of Corporation assets” to the individual defendants as a result of defendants’ alleged “negligence, inattention, carelessness, lack of diligence, lack of care, lack of skill of an ordinary prudent man, lack of ordinary care, failure to properly discharge fiduciary or quasi-fiduciary duties, and mismanagement . .” (Amended Complaint, para. 16) The genesis of such purported corporate waste and this lawsuit is a written “Equipment Lease” executed March 2, 1971, by Centronics Data Computer Corporation and Desert Palace, Inc., a wholly-owned subsidiary of defendant Caesar’s World, Inc.

Pursuant to the lease, Centronics undertook to install a computerized casino system in the Caesar’s Palace Casino operated by Desert Palace. Under the lease, either party had the right to terminate the agreement prior to the end of a six month’s rent-free period commencing when “sufficient equipment and accessories” were “installed and opei’ating . . . .”

Simultaneously with, and as an inducement to, the execution of the Equipment Lease, Centronics assigned to Ceasar’s World an option to purchase 510,000 shares of Centronics stock. The right to recapture fifty percent of the stock, however, was retained by Centronics in the event of the termination of the equipment lease prior to the end of the six month period. While Centronics was endeavoring to install an operable casino system, the price of its stock began to rise. Consequently, Caesar’s World exercised its option and purchased the 510,000 shares in September, 1971.

Relevant portions of the “Equipment Lease” provide as follows:

5. TRIAL PERIOD AND AGREEMENT AS TO RENT:
(a) Lessee shall use the equipment and accessories being leased to it under this agreement without charge for a period of six months beginning on the day there is installed at the locations set forth and operating sufficient equipment and accessories to make the system . . . operate at least one twenty-one table and at lease one craps table. .
(b) Unless Lessee notifies Lessor prior to the end of the six month trial period that Lessee does not want to continue to use the equipment and accessories being leased hereunder, prior to the end of the six month period, Lessee and Lessor will execute and affix to this equipment lease, an Exhibit “C” setting forth a monthly rent for the equipment and accessories being leased hereunder. Neither Lessee nor Lessor will be required to execute such Exhibit “C” except that if Lessee will execute an Exhibit “C” calling for a rent of at least $10,000 per month, Lessor will be required to execute such Exhibit “C” calling for a rent of not more than $5,000 per month, Lessee will be required to execute such Exhibit “C”.
(c) If prior to the end of the six month trial period either party notifies the other that it does not wish to continue operating the equipment and accessories . . . (i) promptly upon receipt of such notice Lessor will remove all such equipment and accessories, (ii) Lessor will reimburse Lessee for all costs ... in excess of $3,500 reasonably incurred by Lessee in restoring the property and fixtures . ; and (iii) except as provided in clauses (i) and (ii) neither Lessee nor Lessor shall have any further obligations under this Equipment Lease or otherwise relating to the system .

It is undisputed that, because of unforeseen technical problems, the equipment and accessories comprising the subject casino system were never placed in operation. However, it is plaintiffs’ simplistic position that because of the rise in value of Centronics’ stock, defendants breached their corporate fiduciary duty by not acting—under 5(b) of the lease—to fix the rent under the Equipment Lease in an effort to extinguish Centronics’ right to recapture its stock. Presumably, plaintiffs would have had the corporate directors obligate Caesar’s World to pay $10,000 per month for the full period of the lease for equipment which was not functional at the time and may never have been made operable.

Defendant directors did, in fact, offer to execute such an agreement. However, such offer was refused by Centronics, and, rather than insisting upon what plaintiffs now assert the rights of Caesar’s World to have been under the Equipment Lease, the defendant directors settled a dispute between Caesar’s and Centronics—which dispute arose in April, 1972, following the sharp increase in the price of Centronics stock—as to each corporation’s rights under the lease and assignment agreements. Under the compromise agreement, Centronics was permitted to purchase 100,000 shares out of the 250,000 it had claimed, waiving any claim to the remainder of the shares and agreeing—which it had previously refused to do—to register the stock, a prerequisite to Caesar’s World’s ability to sell the volatile stock.

It is patently obvious to this Court that in executing the compromise agreement, the directors of Caesar’s World fulfilled their corporate duties with the diligent care and skill which ordinarily prudent men would exercise under similar circumstances in like positions. While not passing on the merit of the contention, a persuasive argument could be made that Caesar’s right to require execution of “Exhibit C”, thus foreclosing Centronics from recapturing one-half of its stock, did not ripen until the commencement of the six month trial period. Under the terms of the Equipment Lease, the trial period was commenced :

beginning on the day there is installed at the locations set forth and operating sufficient equipment and accessories to make the system . . . operable .

Since it is undisputed that the subject equipment and accessories were never in operation, Centronics could have legitimately contended that its right to recapture the stock was absolute in view of the lease’s provision that either party could terminate its contractual obligations upon notice to the other party at any time “prior to the end of the six month trial period . . . .” Further, even the execution of “Exhibit G” by Centronics under the circumstances heretofore delineated could have subjected that instrument to attack on the basis of fraud or overreaching by Caesar’s World.

Thus, faced with the prospect of protracted litigation—in which Caesar’s World might not prevail'—over the contractual rights of the parties to unregistered volatile stock whose value might plummet as spectacularly as it has risen, the defendant directors executed a compromise agreement with Centronics. (While it is not dispositive of the issue at bar, it is noteworthy that an immediate profit of $6,767,000, on a $1,700,000 investment, accrued to Caesar’s World as a result of the compromise.)

Vested with the management of the business of Caesar’s World, it was incumbent upon, the corporate directors to evaluate the relative risks of alternative courses of action. Accordingly, the decision of the defendant directors was indisputably a sound exercise of their business judgment which, absent any allegations or showing of bad faith or fraud, is not judicially reviewable. These principles were recently enunciated as follows:

The management of corporate business is vested in the directors of the corporation, and Courts in Florida have given to directors wide discretion in the exercise of business judgment in the performance of their duties. A Court of equity will not attempt to pass upon questions of mere business expediency or the mere exercise of business judgment, which is vested by law in the governing body of the corporation. Yarnall Ware & Tr., Inc. v. Three Ivory Bros. Mov. Co., supra, 226 So.2d at 890-891; Citizens National Bank v. Peters, Fla.App.1965, 175 So.2d 54; Orlando Orange Groves Co. v. Hale, 119 Fla. 159, 161 So. 284; 18 C.J.S. Corporations § 520; 7 Fla.Jur., Corporations §§ 158, 281.

Thus, plaintiffs have been accorded the opportunity to present their cause and offer testimony and evidence as to their claims. A thorough review of all presentations of the parties, in addition to all depositions and pleadings filed, conclusively establishes the lack of any factual issues to be tried in this litigation. Accordingly, summary judgment is hereby granted in favor of the defendants, Caesar’s World, Inc., Clifford S. Perlman, Stuart Z. Perlman, William H. McElnea, Jr., Jay E. Leshaw, Harold E. Campbell, Jr., Bertin J. Perez, Richard A. Sheehan, Jr., L. John Polite, Jr. and Melvin Chasen, and against the plaintiffs, Jacob Sehein and Marvin H. Schein, defendants being so entitled as a matter of law.


author: MOORE, Circuit Judge:

text:
    In the Matter of MIMSHELL FABRICS, LTD., Bankrupt. NEW YORK CREDIT MEN’S ADJUSTMENT BUREAU, INC., Trustee, Appellant, v. C.I.T. CORPORATION et al., Appellees.
    No. 51, Docket 72-1804.
    United States Court of Appeals, Second Circuit.
    Argued Oct. 30, 1973.
    Decided Jan. 25, 1974.
    Herbert Ash, New York City (Hahn, Hessen, Margolis & Ryan, Frederick C. Stern, New York City, of counsel), for appellant.
    Mendel Zueker, New York City (Goldschmidt & Zueker, New York City, Joel Ifcher, New York City, of counsel), for appellee The Singer Co.
    Sheldon Engelhard, New York City (Vladeck, Elias, Vladeck & Lewis, New York City, of counsel), for appellee Speizman Knitting Machine Corp.)

      Alexander H. Rockmore, New York City (Samuel Gutterman, New York City, of counsel), for appellee Monarch Knitting Mills and C. I. T. Corp.
    Before MOORE, FEINBERG and MANSFIELD, Circuit Judges.
   MOORE, Circuit Judge:

New York Credit Men’s Adjustment Bureau, Inc. (hereafter New York Credit), appellant in this action, is trustee in bankruptcy for Mimshell Fabrics, Ltd. (hereafter Mimshell), a contract knitting firm. Mimshell was adjudged a bankrupt on August 30, 1971, and New York Credit, as trustee, represents its general creditors. The several appellees in this action are firms that supplied Mimshell with machines used in its business pursuant to conditional sales contracts. The security interests formed by these contracts were filed with the Secretary of State of New York in Albany. These filings were sufficient to perfect the respective security interests only if Mimshell had a place of business in more than one county in the State. N.Y.U.C.C. § 9-401(1) (c). If this was not the case, namely, if it had a place of business within only one county, then duplicate filing in Albany and in the county filing office, is required for perfection. If the security interests were perfected, then they could be enforced against.the trustee and the appellees would have a right to reclaim the machines. If the security interests were not perfected, then they would be cut off by the bankruptcy and there would be no right of reclamation. The Referee in Bankruptcy granted the petition to reclaim, after finding that Mimshell had had more than one place of business during the period involved. The trustee sought review, which was denied. This appeal is from the denial of the petition to review.

The Facts

Mimshell’s business consisted of knitting yarn into cloth on a consignment basis. The yarn would be supplied by, and the cloth returned to, other companies, known as converters. These companies would give the cloth out to other jobbers Who perform other steps in the manufacturing process such as dyeing and sponging. Mimshell originally started its operations in 1967 in Brooklyn and, late in 1968, transferred its processing operations along with its books and records to Suffolk County. However, in March of 1970, the principal stockholders of Mimshell, Marc Perl-man and Jerome Barnett, organized a company, M.B.S. Fabrics, Ltd. (hereafter M.B.S.), to engage in the business of textile conversion and obtained offices for that company in New York County at 1407 Broadway. Later M.B.S. moved to 108 West 39th Street in Manhattan. The Referee, crediting the testimony of Marc Perlman, found that between “February or March, 1970, and June, 1970, a sales room for both M.B.S. and the bankrupt [Mimshell] were operative at 1407 Broadway.” This sort of joint arrangement continued at several other places where M.B.S. did business in Manhattan. The chief difficulty in this case arises from the fact that Mimshell’s representatives were not particularly open about its connection with M.B.S. There were no outside physical indicia of Mimshell’s presence in M.B.S.’s offices—no letterhead, no telephone listing or entry in a building directory. Although various Mimshell representatives were known to frequent M.B.S.’s offices, their presence there would not have excited comment since they also formed part of the M.B.S. staff. The reasoning behind this style of behavior was simple: Mimshell and M.B.S., although separate corporate entities, were run by the same people, and M.B.S. was a competitor of Mimshell’s customers; thus, in order not to confuse potential customers, it was thought necessary to keep Mimshell’s presence in New York City quiet. Nevertheless it was testified that Mimshell’s multiple places of business were known to the people with whom Mimshell dealt. This fact was accepted by the Referee, and led to his conclusion that Mimshell had places of business in two counties for the purposes of N.Y.U. C.C. § 9-401(1)(c).

Appellant initially argues that the Referee’s findings should be discarded as “clearly erroneous”. A comparison of the testimony and the findings forbids such a conclusion. The Referee’s determinations should be given especial weight when the credibility of witnesses is at issue. In re Gurinsky, 196 F.2d 296 (2d Cir. 1952). In re Re-Bo Mfg. Co., Inc., 90 F.Supp. 388 (S.D. N.Y.1950). In the present case, the Referee found that Marc Perlman, Mimshell’s president, testified with “exceptional candor.” The Referee was entitled to believe him and his testimony supports the findings of fact.

To buttress the contention that the findings were clearly erroneous, appellant claims that several of the findings were unfounded. Most of these claims run contrary to the testimony found in the record and are unpersuasive. One that merits some attention is the claim that the Referee confused the term “place of business” with “doing business”. The meanings of the two terms; although related, are admittedly distinct. As appellant points out (Appellant’s Br. p. 21), a company may “do business” in a place without having a “place of business” there. It would appear, however, that the Referee had the distinction in mind for he clearly framed the issue correctly in stating: “The question presented ... is whether or not . . . the bankrupt maintained places of business. . . . ” (223a) and again “I conclude that the bankrupt is held to have had places of business. (220a).” Merely because he gave consideration to the “doing of business”—a fact necessary to the determination of the issue of place of business, In re Bethlehem Concrete Corp., 306 F.Supp. 1047 (E.D.Pa.1969) —is no ground for error.

The second argument appellant .raises is that to have a “place of business”, the use of the premises must be “frequent and notorious”. As to frequency of use, there was sufficient testimony upon which to make that finding not “clearly erroneous”. It is argued, however, that the relative secrecy of Mimshell’s operations in Manhattan should prove fatal to the appellees’ cause. But this argument runs afoul of the Referee’s finding that Mimshell’s presence was known to those “in the trade” (Finding No. 3), a finding supported in the record. There is no doubt that the purpose of N.Y.U.C.C. § 9-401(1) (c) was to preserve the convenience of local filing for the benefit of potential local creditors as indeed the “Official Comments” to that section suggest. This convenience has been strictly protected by this court. In re P.S. Products Corp., 435 F.2d 781 (2d Cir. 1970). However, it seems sufficient for perfection that the class of probable potential creditors know of the second place of business. Thus, the fact that .Mimshell had New York City operations was widely known among those who dealt with Mimshell which is sufficient to make the M.B.S. offices a “place of business” for the purposes of § 9-401(1) (c). The fact that the building manager and the elevator starter did not know of its presence is of less significance.

In one minor respect, however, there is error and, on this point alone, there must be reversal. The security interest currently owned by Singer in one machine, PIP/96-# 22406, was created on December 4, 1969. On this date it was admitted by the president of Mimshell that Mimshell had no office in New York City. Absent proof of the maintenance of a “place of business” in New York City at that time, this security interest was not perfected before the bankruptcy, and must fall to the trustee’s attack.

The decision of the Referee is affirmed except with respect to machine PIP/96-#22406 owned by Singer as to which it is reversed.

      . We do not face an alternative possibility—namely, two places of business in one county in the State.


author: TAMM, Circuit Judge:

text:
    Les ASPIN, Appellant, William B. Broydrick et al. v. DEPARTMENT OF DEFENSE, Melvin R. Laird, Secretary of Defense, et al.
    No. 72-2147.
    United States Court of Appeals, District of Columbia Circuit.
    Argued Sept. 24, 1973.
    Decided Nov. 26, 1973.
    Benny L. Kass, Washington, D. C., for appellants.
    David G. Larimer, Asst. U. S. Atty., with whom Harold H. Titus, Jr., U. S. Atty., John A. Terry and Michael A. Katz, Asst. U. S. Attys., were on the brief, for appellees.
    Before TAMM, MacKINNON and ROBB, Circuit Judges.
   TAMM, Circuit Judge:

Honorable Les Aspin appeals from an order of the United States District Court for the District of Columbia, granting appellees’ motion for summary judgment in a suit brought pursuant to § 552 of the Administrative Procedure Act, 5 U.S.C. § 552(a)(3) (1970) Appellant Aspin asks that appellee release a document entitled “Department of the Army Review of the Preliminary Investigations into the My Lai Incident.” This document is commonly known as the “Peers Commission Report” because it was written by Lieutenant General William R. Peers, U.S.A. We will follow this practice and refer herein to the “Peers Commission Report.” The trial court held that the entire Peers Commission Report was exempt from FOIA disclosure because: (1) it was an investigatory file compiled for law enforcement purposes, thus exempt under 5 U.S.C. § 552(b)(7) (1970) ; and (2) it was an intra-agency memorandum within the exemption from. disclosure created by 5 U.S.C. § 552(b)(5) (1970). For the reasons stated below, we affirm.

I. The Facts

In 1969 Mr. Ronald Ridenhour, a former Army enlisted man, wrote to the Secretary of Defense and others inquiring into alleged atrocities committed by elements of the 23rd Army Division during the period 16-19 March 1968. On November 26, 1969, as a result of Mr. Ridenhour’s communication, Stanley R. Resor, then Secretary of the Army, and General William C. Westmoreland, then United States Army Chief of Staff, directed Lieutenant General William R. Peers to begin an investigation to determine:

the nature and the scope of the original U.S. Army investigation(s) of the alleged My Lai (4) incident which occurred 16 March 1968 in Quang Ngai Province, Republic of Vietnam. Your investigation will include a determination of the adequacy of the investigation(s) or inquiries on this subject, their subsequent reviews and reports within the chain of command, and possible suppression or withholding of information by persons involved in the incident.

Affidavits submitted to the trial court reveal that the focus of the investigation was to be “primarily directed toward discovering and toward obtaining evidence of possible offenses under the Uniform Code of Military Justice . . . with a view toward prosecution if warranted.” Pursuant to this directive, General Peers, conducted an extensive investigation during the period from December 1969 to March 1970. The Commission interrogated many witnesses and assembled documentary evidence. While the inquiry was primarily concerned with the depth and adequacy of the investigation of the My Lai incident conducted by officers of the 23rd Division, it was also necessary to investigate the alleged criminal conduct occurring during the My Lai operation itself.

The Peers Commission Report, here sought by appellant, is the end product of these investigations. The report, submitted March 14, 1970, consists of forty-two bound books which are arranged into four volumes. Volume I, comprising twelve chapters and three annexes, contains the actual Report of Investigation. Volume II consists of thirty-three books of verbatim transcripts of witnesses’ testimony. Volume III is comprised of seven books of documentary evidence {e.g. reports, maps, photographs etc.). Volume IV contains statements received by Army criminal investigators as part of the Peers Commission investigation or other criminal investigations.

We note that certain portions of the Report bear the security classification “Confidential” or “Secret.” They were so classified by General Peers pursuant to authority delegated to him under Executive Order No. 10501, 3 C.F.R. 280 (January 1, 1970), as amended. Certain portions of the Peers Commission Report were released to the public in March 1970, and are contained in the record before us. The entire Peers Commission Report was given to the Armed Services Committees of both houses of Congress.

The Army, relying upon evidence compiled by General Peers and contained in his report, brought charges against fifteen officers for violations of the Uniform Code of Military Justice. One of these prosecutions, that of First Lieutenant William L. Calley, culminated in a conviction of murder. Lieutenant Calley’s appeal is now pending before the Court of Military Appeals.

Appellant, on February 18, 1972, wrote to then Secretary of Defense Melvin Laird, requesting public release of the entire report pursuant to FOIA. On March 1, 1972, Mr. Robert W. Berry, General Counsel of the Army, replied stating that it was the opinion of the Army that release to the public would not be possible at that time. Appellant then commenced this action, as a private citizen, for public release of the entire Peers Commission Report.

II. The Trial Court Ruling

The trial court, in granting appellees’ motion for summary judgment, found that “[t]he documents sought are investigatory files compiled for law enforcement purposes and are exempt from disclosure because of specific exemptions provided in the Freedom of Information Act. 5 U.S.C. § 552(b)(7).” In so holding the court stated that the proper test for determining whether the investigatory files exemption of § 552(b)(7) applies is “whether the files sought relate to anything that can fairly be characterized as an enforcement proceeding.” An examination of the Berry, Westmoreland and Ryker affidavits was found persuasive of the fact that the report “figured prominently in the initiation of subsequent court-martial proceedings.”

The trial court also found that Volume I of the Peers Commission Report enjoyed additional exemption from disclosure as an intra-agency memorandum within the meaning of 5 U.S.C. § 552(b)(5). Volume I was held to satisfy § 552(b)(5) because it was made up “principally of internal working papers in which opinions are expressed and policies formulated and recommended.” Having found that Volume I was so exempt, the trial court held that because it viewed all other volumes as “appendices to Volume I,” the remaining material would “share the same protection accorded [Volume I].”

II.

Appellant urges that the trial court erred in its holding that the Peers Commission Report constituted “investigatory files compiled for law enforcement purposes” within the meaning of FOIA § 552(b)(7). Two distinct errors are asserted: (1) that the report is not an “investigatory file”; and (2) that even if it were once an “investigatory file”, the report is no longer entitled to § 7 exemption because no courts-martial are to be held in the future; i.e. that a § 7 exemption cannot, apparently as a matter of law, continue as to documents which were involved in prior law enforcement proceedings.

In support of the first alleged error, appellant directs this court’s attention to the letter which Lieutenant General Peers received from his superiors directing him to commence an investigation. There it was said:

Your investigation will be concerned with the time period beginning March 1968 until Mr. Ronald L. Ridenhour [plaintiff in this action] sent his letter, dated 29 March 1969 to the Secretary of Defense and others. The scope of your investigation does not include, nor will it interfere with, ongoing criminal investigations in progress.

Further, appellant points to language in the Affidavit of General Westmoreland:

4. General Peers subsequently expanded the scope of his inquiry to include allegations of criminal offenses at My Lai (4). Notwithstanding such expanded scope, however, the inquiry remained independent of investigative efforts of the CID.

Relying upon the emphasized text supra, appellant argues in conclusory fashion that:

It would appear that this language is quite clear on its face. General Peers was not directed to make an investigation for law enforcement purposes; rather, he was instructed to investigate the investigation, so as to satisfy the Army, the Congress, and indeed the public that the Army was able to keep its own house in order.

It is our opinion that appellant’s attempt to characterize the Peers Commission activities as an “investigation] of the investigation” is but a frivolous semantic device. The trial court’s duty in FOIA cases is clear. It must examine the total record to determine “whether the files sought . . . relate to anything that can fairly be characterized as an enforcement proceeding.” Bristol-Myers Co. v. FTC, 138 U.S.App.D.C. 22, 424 F.2d 935, 939, cert. denied, 400 U.S. 824, 91 S.Ct. 46, 27 L.Ed.2d 52 (1970). In the recent case of Weisberg v. United States Department of Justice, 160 U.S.App.D.C. __, 489 F.2d 1195 (1973) this court, sitting en banc, held that a trial court’s determination must focus on “how and under what circumstances the files were compiled . . . .” Weisberg, supra, at __, 489 F.2d at 1202.

Our own careful review of the entire record, Vaughn v. Rosen, 157 U.S.App.D.C. 340, at 345, 484 F.2d 820, at 825 convinces us that the trial court was correct in holding that the Peers Commission Report met the criteria of the § 7 exemption. The detailed affidavits submitted amply demonstrate the stated purposes of the investigation, the manner in which it was conducted, and its results.

The purpose of the investigation appears clear: to determine the adequacy of the United States Army’s investigation of the My Lai incident to ascertain whether any officers involved suppressed or withheld information. General Westmoreland stated that General Peers was to conduct an inquiry:

primarily directed toward discovering and toward obtaining evidence of possible offenses under the Uniform Code of Military Justice . . . including but not limited to violations of general orders and/or dereliction of duty (10 U.S.C. § 892), with a view toward prosecution if warranted.

We view the language cited by appellant as meaning simply that General Peers’ investigation was to be an ind-pendent one; he was not to interfere with the activities of the Criminal Investigation Division [CID] which was investigating the activities at My Lai during the period in question. General Peers was to focus on the later investigation of the incident by the officers responsible for such an inquiry.

The manner in which General Peers conducted his investigation clearly reveals that he perceived that his investigation was to be the ultimate basis for courts-martial for violations of military law. Affidavits reveal that each witness who appeared was warned of his constitutional right to remain silent. Further, persons suspected of violations received more extensive warnings as to the nature of the charges against them, their right to remain silent, and their right to counsel. Finally, and perhaps most important, the Peers Commission Report was the direct evidentiary basis for the courts-martial of fifteen individuals.

Therefore, to reiterate, we find after examination of the record, that the trial court was correct in concluding that the entire Peers Commission Report was produced as an “investigatory file compiled for law enforcement purposes.” Thus it is entitled to exemption under FOIA § 552(b)(7).

Appellant’s second contention raises the question of whether the exemption from disclosure of matter contained in an “investigatory file” which was compiled and actually utilized by an agency in law enforcement proceedings applies after these enforcement proceedings have terminated Appellants attempt to rely upon the decision of this court in Bristol-Myers v. FTC, 138 U.S.App.D.C. 22, 424 F.2d 935, cert. denied, 400 U.S. 824, 91 S.Ct. 46, 27 L.Ed.2d 52 (1970). Appellant cites the following language:

[T]he agency cannot, consistent with the board disclosure mandate of the Act, protect all its files with the label “investigatory” and a suggestion that enforcement proceedings may be launched at some unspecified future date. Thus the District Court must determine whether the prospect of enforcement proceedings is concrete enough to bring into operation the exemption for investigatory files, and if so whether the particular documents sought by the company are nevertheless discoverable.

424 F.2d at 939-940 (emphasis added). From this language appellant argues that the “prospect of enforcement proceedings” could not be “concrete enough” because the courts-martial have already been held. We find this reliance misplaced. In Bristol-Myers the Federal Trade Commission had made a conscious decision not to maintain any enforcement proceeding at least two years prior to suit to compel disclosure of the documents. 424 F.2d at 939. The question in that case was, therefore, whether the bare assertion by an agency that files were compiled for law enforcement purposes when no enforcement proceedings were in fact ever prosecuted, would be enough to preclude disclosure. The court held that such an assertion was not sufficient, and remanded for further consideration in the trial court. 424 F.2d at 939.

To prevent the unauthorized use of a § 7 exemption by agencies as a shield against disclosure, there must be some method of assuring that the exemption is being properly invoked. Here 15 individuals were in fact already court-martialed on the basis of the Peers Commission Report, a showing which goes beyond the bare allegation that proceedings were merely contemplated at the time the files were compiled. Where, as here, enforcement proceedings have in fact resulted, there can be little doubt that files were compiled for law enforcement purposes. Frankel v. SEC, 460 F.2d 813 (2d Cir.), cert. denied, 409 U.S. 889, 93 S.Ct. 125, 34 L.Ed.2d 146 (1972) is more closely in point. In Frankel, the Securities and Exchange Commission commenced an investigation to ascertain whether a corporation had violated § 10(b) of the Securities and Exchange Act of 1934. The Commission compiled a substantial file, and on the basis of materials contained in this file, commenced a civil action against the corporation and its president. These proceedings culminated in a consent decree. Corporate shareholders then commenced a FOIA suit demanding release of the Commission’s investigatory file. The trial court held since the investigation and prosecution terminated on the date of the consent decree, the § 7 exemption also terminated at that time. Frankel v. SEC, 336 F.Supp. 675., 678 (S.D.N.Y. 1971). The Court of Appeals for the Second Circuit reversed stating clearly “the § 552(b) (?) exemption from disclosure applies even after an investigation and an enforcement proceeding have been terminated . . . .” 460 F.2d at 817.

The Frankel court’s analysis of the purposes behind the § 7 exemption was well reasoned and persuasive. The court concluded that legislative history revealed that Congress evidenced a twofold purpose in enacting the § 7 exemption for investigatory files.

to prevent the premature disclosure of the results of an investigation so that the Government can present its strongest case in court, and
to keep confidential the procedures by which the agency conducted its investigation and by which it has obtained information

460 F.2d at 817. Our reading of the pertinent legislative history, reproduced in the margin, convinces us that the reasoning in Fmnkel is correct. Appellants cite no legislative history which would compel a contrary view. It is clear that if investigatory files were made public subsequent to the termination of enforcement proceedings, the ability of any investigatory body to conduct future investigations would be seriously impaired. Few persons would respond candidly to investigators if they feared that their remarks would become public record after the proceedings. Further, the investigative techniques of the investigating body would be disclosed to the general public.

The Second Circuit elaborated on the undesirability of post-proceeding disclosure, saying:

If an agency’s investigatory files were obtainable without limitation after the investigation was concluded, future law enforcement efforts by the agency could be seriously hindered. The agency’s investigatory techniques and procedures would be revealed. The names of people who volunteered the information that had prompted the investigation initially or who contributed information during the course of the investigation would be disclosed. The possibility of such disclosure would tend severely to limit the agencies’ possibilities for investigation and enforcement of the law since these agencies rely, to a large extent, on voluntary cooperation and on information from informants.

460 F.2d at 817-818. See also, Evans v. Department of Transportation, 446 F.2d 821, 824 (5th Cir. 1971), cert. denied, 405 U.S. 918, 92 S.Ct. 944, 30 L.Ed.2d 788 (1972); Clement Brothers Co. v. NLRB, 282 F.Supp. 540, 542 (N.D.Ga.1968), aff’d, 407 F.2d 1027 (5th Cir. 1969).

We note also that the recent en banc decision of this court in Weisberg v. ,US. Department of Justice, supra, is consistent with our decision in this case. While the court in Weisberg expressly limited the question there to the application of the § 7 exemption to “Federal Bureau of Investigation files” (slip op. at 8), the point remains that a § 7 exemption was there upheld as applied to files almost ten years old where no prosecution was ever conducted. This squarely rebuts appellant’s broad argument that when there is no longer any prospect for future enforcement proceedings (necessitated in Weisberg by the death of the only suspect) the § 7 exemption from disclosure must terminate as well.

We therefore hold that an exemption under § 552(b)(7), as investigatory files compiled for law enforcement purposes, remains available after the termination of investigation and enforcement proceedings. The entire Peers Commission Report, being a report entitled to protection under § 552(b)(7), continues to be protected under that exemption.

Since we have concluded that the entire Peers Commission Report is exempt from disclosure under FOIA § 522 (b)(7), we find it unnecessary to consider, nor do we express any opinion on, whether the report is entitled to additional exemption as an intra-agency memorandum under § 552(b)(5). Likewise, we have no need to consider a third exemption here urged by appellee but not ruled upon by the trial court, that portions of the report classified “Confidential” and “Secret” are exempt under § 552(b)(1). See Environmental Protection Agency v. Mink, 410 U.S. 73, 93 S.Ct. 827, 35 L.Ed.2d 119 (1973).

IV.

For the reasons stated supra, the decision of the trial court is

Affirmed.

      . Appellant Aspin is a member of the House of Representatives.

      . This section of the Administrative Procedure Act is well known as the Freedom of Information Act [hereinafter “FOIA”]. FOIA § 552(a) (3) provides:
      Except with respect to the records made available under paragraphs (1) and (2) of this subsection, each agency, on request for identifiable records made in accordance with published rules stating the time, place, fees to the extent authorized by statute, and procedure to be followed, shall make the records promptly available to any person.

      . § 552(b) (7) provides in pertinent part:
      (b) This section does not apply to matters that are—
      * * * *
      (7) investigatory files compiled for law enforcement purposes except to the extent available by law to a party other than an agency;

      . § 552(b) (5) provides in pertinent part:
      (b) This section does not apply to matters that are—
      * * * * *
      (5) inter-agency or intra-agency memoran-
      dums or letters which would not be available by law to a party other than an agency in litigation with the agency;

      . Peers Commission Report, Vol. I, ch. 1.

      . Affidavit of General William C. Westmoreland, ¶ 5, Brief for Appellee, Appendix at 29; Affidavit of Robert W. Berry, General Counsel, Department of the Army, ¶ 6, Brief of Appellee, Appendix at 31.

      . Peers Commission Report, Vol. I, ch. 1.

      . Affidavit of General William C. Westmoreland, ¶¶ 3, 4, Brief for Appellee, Appendix at 28-29.

      . Affidavit of Mr. Bland West, Deputy General Counsel of the Army, ¶¶ 5-9, Brief of Appellee, Appendix at 24-26.

      . The classified material includes all of Volume I not released to the public (Confidential) ; Vol. II, books 31 and 32 (Confidential) ; Vol. II, book 33 (Secret) ; and certain pages of Vols. III and IV. Id. ¶¶ 7-10.

      . Id. ¶ 11. Executive Order No. 10501, as amended, is now superceded by Executive Order No. 11652, 37 Fed.Reg. 5209 (effective June 1, 1972).

      . The material released consists of the bulk of chapters 1, 3, 4, and 9 of Vol. I. Chapter 1 summarizes the nature and purposes of the investigation; chapters 3 and 4 contain summaries of the evidence compiled; chapter 9 is a discussion of the applicable official directives concerning treatment of non-combatants. Peers Commission Report, Vol. I, chs. 1, 3, 4, 9.

      . Affidavit of Lieutenant Colonel George C. Ryker ¶¶ 2-4, Brief for Appellee, Appendix at 35.

      . Appellant is a member of the House Armed Services Committee, and received the entire report in that capacity.

      . Aspin v. Department of Defense, 348 F.Supp. 1081, 1082 (D.D.C.1972).

      . Id.

      . Id.

      . Id.

      . Id.

      . Letter from General Westmoreland and Secretary Resor to Lieutenant General Peers, 26 November 1969; Plaintiff’s Exhibit E to Plaintiff’s Motion for Summary Judgment. (Emphasis added by appellant.)

      . Affidavit of General William Westmoreland, ¶ 4, Brief for Appellee, Appendix at 29. (Emphasis added by appellant.)

      . Brief of Appellant at 4-5.

      . Peers Commission Report, Vol. I, ch. 3, at 6.

      . Affidavit of General William Westmoreland, ¶ 5, Brief for Appellee, Appendix at 29.

      . Affidavit of Mr. Bland West, ¶ 7(b), Brief of Appellee, Appendix at 26.

      . Affidavit of Mr. Robert W. Berry, ¶ 6, Brief of Appellee, Appendix at 31; Affidavit of Lieutenant Colonel George C. Ryker, ¶¶ 2-4, Brief of Appellee, Appendix at 34.

      . We note the Government’s contention that this is not a case where all enforcement proceedings have terminated because one prosecution, i. e. that of Lieutenant William Calley, is still in appeal. Brief of Appellee at 12, n. 17. It is not clear from the record, however, to what extent Lieutenant Calley’s court-martial for specific wrongful conduct at the scene (rather than subsequent failure to investigate) was based on the Peers Commission Report. We therefore do not base our holding today on the pendency of Lieutenant Calley’s appeal.

      . The court also noted that Bristol-Myers was demanding the production of the “studies and reports” which the Federal Trade Commission had cited as the basis for a proposed rule. If the investigative files withheld by the Commission were among the documents thus publicly cited it could be argued that they had lost their protected status.

      . The Senate Report, discussing FOIA’s purpose, stated:
      It is also necessary for the very operation of our Government to allow it to keep confidential certain material, such as the investigatory files of the Federal Bureau of Investigation. S.Rep.No.813, 89th Cong., 1st Sess. 3 (1965).
      In discussing the investigatory file exemption, the House Report stated :
      This exemption covers investigatory files related to enforcement of all kinds of laws, labor and securities laws as well as criminal laws. This would include files prepared in connection with related Government litigation and adjudicative proceedings. S. 1160 is not intended to give a private party indirectly any earlier or greater access to investigatory files than lie would have directly in such litigation or proceedings. H.R.Rep.No.1497, 89th Cong., 2nd Sess. 11 (1966).

      . Brief for Appellee at 9, n. 13.

      . FOIA § 552(b) (1) provides:
      (b) This section does not apply to matters that are—
      (1) specifically required by Executive order to be kept secret in the interest of the national defense or foreign policy;