FILED MAY 19 1998 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA SECURITIES AND EXCHANGE COMMISSION Plaintiff

, vs. GERALD A. DOBBINS, et al. Defendants. Case No. SA CV 98-229 GLT (EEx) FINDINGS ON ORDER TO SHOW CAUSE RE: PRELIMINARY INJUNCTION

Having reviewed the papers and considered arguments raised at the hearing, Plaintiff's Motion for a Preliminary Injunction is GRANTED. A Preliminary Injunction will issue in conjunction with the findings of fact and conclusions of law set out in this memorandum. The SEC has alleged Defendants acted in violation of � 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and � 17(a) of the Securities Act of 1933. Section 21(d) of the Exchange Act grants the SEC authority to bring an action against any person who "is engaged or is about to engage" in a violation, and provides "upon a proper showing" a temporary or permanent injunction may be issued. A proper showing is made when the Commission establishes an individual's conduct violates federal securities laws and a reasonable likelihood the violative conduct will recur unless the defendant is enjoined. SEC v. Murphy, 626 F.2d 633, 655 (9th Cir. 1980). The Commission is not required to make a showing of irreparable injury or lack of an adequate remedy at law. SEC v. Management Dynamics, 515 F.2d 801, 808 (2d Cir. 1975). I. Conduct in Violations of Federal Securities Laws

To state claim for violation of securities fraud under �10(b) and Rule 10b-5 of the Securities Exchange Act, or � 17(a) of the Securities Act, the SEC must provide evidence of (1) a misrepresentation or omission, (2) of material fact, (3) made with scienter amounting at least to recklessness, (4) in offer or sale, or in connection with purchase or sale of security. In opposition to the Preliminary Injunction, Defendants generally have raised two points. First, Defendants claim they made no material misrepresentations. The valuations which Defendants issued were allegedly "hypothetical" and as such "no reasonable investor could or should have relied upon" them. Opp. at 3. Second, Defendants note the Commission has provided no evidence that Fidelity and/or Dobbins engaged in the purchase or

sale of securities. Rather, the evidence shows Defendants only kept the bonds in custodial care for the rightful owners. A. Material Misstatements of Fact

The SEC must show Defendants' valuations misrepresented material facts and were made with scienter amounting at least to recklessness. A fact is material if there is a substantial likelihood that a reasonable investor would consider it important in making the investment decision. See Basic v. Levinson, 485 U.S. 224, 231-32 (1988). Here, the valuations which the SEC has logged with the Court appear on Fidelity Secured Deposit Corporations' letterhead and are signed by Gerald Dobbins. These valuations are material since they provide information a reasonable investor would consider important. [FN1] Additionally, the valuations are misstatements. The railroad bonds at issue here have only nominal value as historical documents. Although Defendants aver that their valuations were "hypothetical in nature," the valuations themselves are not labeled as such. The valuations before the Court state: "As of [date] the total dollar amount due and payable and value of each bond is [amount, all over $100,000,000]." As for scienter, a January 1997 letter advised Defendants the bonds had no intrinsic value. Yet, Defendants continued to issue inflated valuations after receipt of this letter. Thus, there is prima facie evidence the Defendants' valuations misrepresented material facts and were made with scienter. FN1. The SEC has failed to bring forward a single investor who relied upon these statements. However, investor reliance on any public material misrepresentations is presumed in securities fraud cases. 17 C.F.R. � 240.10b-5. B. Sale or Purchase of Securities

The SEC must also produce evidence of nexus, under � 10(b) and Rule 10b-5 the SEC must show Defendants made these material misstatements "in connection with" purchase or sales of securities. Under � 17(a) the SEC must show Defendants made these material misstatements in the "offer or sale" of securities. 1. Section 10(b) and Rule 10b-5

Section 10(b) of the Exchange Act and Rule 10b-5 prohibit fraud "in connection with" the purchase or sale of securities. The "in connection with" requirement looks for a nexus between the fraudulent conduct and a securities transaction. The courts have interpreted the requirement broadly, requiring only that the defendant's fraud "touch" a securities transaction. See SEC v. Rana Research. Inc., 8 F.3d 1358, 1362 (9th Cir. 1993). The nexus is satisfied whenever misstatements are made in a manner reasonably calculated to influence the investing public. Id. Here, the SEC has presented the deposition of Daniel Schneider. Based on Defendants valuations, Mr. Schneider told investors that the railroad bonds at issue were worth in excess

of $100 million. This is sufficient to show Defendants material misstatements were used in "connection with" the purchase or sale of securities. The SEC has made a prima facie showing of � 10(b) and Rule 10b-5 violations. 2. Section 17(a)

Section 17(a) of the Securities Act of 1933 makes it unlawful for any person to engage in fraud in the "offer or sale" of securities. The meaning of � 17(a)'s requirement, that the fraud be used in the "offer or sale" of securities, is unclear. Courts have considered, but have yet to hold, that "in the offer or sale of securities" covers a narrower range of activities than does the "in connection with" requirement of � 10(b). See Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 283 (1992) (O'Connor concurring) (discussing whether fraud in the "offer or sale'' of securities was intended to reach a narrower scope of conduct than section 10(b) 's fraud "in connection with"); cf. United States v. Bingham, 992 F.2d 975, 976 9th Cir. 1993) (leaving the question undecided). It appears to this Court that the scope of � 17(a) is narrower than � 10 (b). while � 10 (b) reaches conduct "directly or indirectly . . . in connection with" security purchase or sale, there is no similar broad language in � 17(a) . The stricter requirement of � 17(a) is that the party act "in the offer or sale" of securities. Here, the SEC has no evidence Defendants acted "in the offer or sale" of securities. Nor has the SEC cited authority where other courts have taken evidence similar to that alleged here and found it sufficient to support a violation of 17(a).[FN2] The Court finds the SEC has not made out a prima facie case under � 17(a). FN2. As other evidence becomes available, the parties are reminded of their obligation to update and supplement their discovery responses in accordance with Rule 26(e). II. Conduct Likely to Continue

The SEC must also show a reasonable likelihood the violative conduct will recur unless Defendants are enjoined. SEC V. Murphy, 626 F.2d 633, 655 (9th Cir. 1980). When determining the likelihood of future violations, a court should consider the degree of scienter involved; the isolated or recurrent nature of the infraction; the defendant's recognition of the wrongful nature of his conduct; the extent to which the defendant's professional and personal characteristics might enable or tempt him to commit future violations; and the sincerity of any assurances against future violations. Id. Here, the SEC has provided evidence Dobbins knowingly and continuously supplied inflated valuations after being informed the bonds had no intrinsic value. The Defendant could easily return to his valuations practice if no injunction were issued. The SEC has sufficiently shown a likelihood the conduct will continue without an injunction.

III.

Preliminary Injunction

The SEC has made a prima facie showing that Defendants conduct was in violation of � 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Moreover there is a reasonable likelihood the violative conduct will recur unless Defendants are enjoined. Plaintiff's Motion for a Preliminary Injunction is GRANTED. A Preliminary Injunction will issue. DATED: May 19, 1998

/s/ Gary L. Taylor GARY L. TAYLOR UNITED STATES DISTRICT JUDGE