## Facts

- Pennaluna & Company, Inc. was a registered broker-dealer trading primarily mining securities, largely on a wholesale basis with other broker-dealers.
- Benjamin A. Harrison (majority owner) ran the Spokane office and supervised trading; Harry F. Magnuson (minority owner) ran Idaho offices and maintained company records.
- The SEC instituted administrative proceedings alleging violations of the Securities Act of 1933, the Securities Exchange Act of 1934, and SEC rules.
- A central charge concerned Pennaluna’s acquisition and public resale of a substantial block of unregistered Silver Buckle Mining Co. stock.
- The SEC found Magnuson to be a “controlling person” of Silver Buckle based on relationships with persons who controlled Silver Buckle and its subsidiaries, Silver Buckle’s reliance on his assistance, and expectations he would support the control group.
- Based on that control finding, the SEC treated Pennaluna as an “underwriter” participating in an unregistered distribution, and also found antifraud violations tied to certain trading activities and representations in mining shares.
- Petitioners admitted certain record-keeping violations but contested the registration/control finding and key antifraud determinations.
- The SEC ordered revocation of Pennaluna’s broker-dealer registration, bars against Harrison and Magnuson from association with any broker-dealer, and expulsion of Harrison from the Spokane Stock Exchange.
- Petitioners sought judicial review in the Ninth Circuit under Exchange Act § 25 (15 U.S.C. § 78y(a)).

## Issues

1. Whether substantial evidence supported the SEC’s determination that Magnuson was a “controlling person” of Silver Buckle, making Pennaluna’s unregistered resales an underwriter distribution violating Securities Act § 5.
2. Whether substantial evidence supported the SEC’s antifraud findings, as distinct from technical or negligent noncompliance.
3. Whether the severity of the SEC’s sanctions was lawful and appropriate given the violations sustained on review.

## Decision

- The Ninth Circuit set aside the SEC’s finding that Magnuson was a controlling person of Silver Buckle and rejected the related underwriter/registration-violation theory under Securities Act § 5.
- The court sustained only those antifraud-related findings supported by substantial evidence and rejected broader fraud conclusions not adequately supported.
- The court modified the SEC’s order and remanded for reconsideration of sanctions in light of the narrowed set of sustained violations.

## Legal Principles

- “Control” for federal securities-law purposes requires substantial evidence of actual power to direct an issuer’s management or policies; business relationships, influence, reliance, or expected loyalty, without more, do not establish control.
- Treating a broker-dealer as an “underwriter” in an unregistered distribution on a control-person theory requires proof of the alleged control and the broker-dealer’s participation in a distribution within Securities Act § 5.
- Antifraud liability must rest on specific evidence of deceptive conduct or material misstatements; courts distinguish fraud from sloppy practices, negligence, or technical regulatory violations when reviewing agency findings for substantial evidence.
- When key liability theories are reversed, sanctions premised on those theories may require reconsideration to ensure they are proportionate to the violations that remain.

## Conclusion

The Ninth Circuit curtailed the SEC’s use of relationship-based evidence to establish “control” for § 5 liability, upheld only those antifraud determinations supported by the record, and required the SEC to reassess severe industry sanctions after the principal control/registration theory was rejected.


Pennaluna & Co. v. SEC, 410 F.2d 861 (9th Cir. 1969)