## Facts

- Manor Nursing Centers, Inc. conducted a combined primary and secondary public offering of 450,000 shares on an “all-or-none” basis.
- The offering required that all shares be sold within 60 days, that investor funds be held in escrow, and that funds be returned with interest if the conditions were not met.
- After the registration became effective, the issuer and insiders failed to implement and maintain the required escrow protections.
- The full 450,000 shares were not sold within the required period, but the offering was treated as completed and investor funds were not returned.
- Some shares were sold for consideration other than cash, contrary to what investors were led to expect.
- Participants received undisclosed additional compensation related to selling the securities beyond what was disclosed.
- The SEC brought a civil enforcement action alleging violations of Securities Act § 17(a), Exchange Act § 10(b) and Rule 10b-5, and Securities Act § 5(b)(2).
- After a bench trial, the district court found liability, issued permanent injunctions, ordered disgorgement, appointed a trustee to distribute funds to investors, and froze assets pending turnover.

## Issues

1. Whether the offering misconduct and related omissions and misstatements violated Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5.
2. Whether continued delivery of a prospectus that became materially misleading due to post-effective developments violated Securities Act § 5(b)(2) and required corrective disclosure.
3. Whether the permanent injunctions, including injunctions not limited to Manor securities, were a proper exercise of equitable discretion in an SEC enforcement action.
4. Whether the ancillary relief (disgorgement, trustee appointment, and asset freeze) was within the court’s equitable power and properly limited to remedial purposes.

## Decision

- The Second Circuit affirmed the findings that defendants violated the antifraud provisions and Securities Act § 5(b)(2).
- The court held that post-effective events that render a prospectus materially misleading require disclosure; continued delivery of an outdated prospectus can violate § 5(b)(2).
- The court upheld broad injunctive relief based on the seriousness and pattern of violations and the reasonable likelihood of future violations.
- The court approved ancillary equitable remedies, including disgorgement, appointment of a trustee to collect and distribute funds, and an asset freeze to prevent dissipation.
- The court reversed in part and remanded for modification of the disgorgement order to ensure it did not become punitive, particularly regarding “profits” on proceeds.

## Legal Principles

- Material misrepresentations or omissions concerning all-or-none terms, escrow protections, satisfaction of offering conditions, non-cash sales, and undisclosed selling compensation can violate Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5.
- When post-effective developments make a registration statement or prospectus materially false or misleading, the issuer must correct the disclosure; continued delivery of the misleading prospectus violates Securities Act § 5(b)(2) when read with the requirement that prospectus information be truthful and not misleading.
- In SEC actions, injunctive relief may issue upon a showing of a reasonable likelihood of future violations; a separate showing of “propensity” is not required.
- Federal courts may order ancillary equitable relief in SEC enforcement actions, including disgorgement, asset freezes, and appointment of a trustee, so long as the relief is remedial, causally related to the violations, and not a penalty.

## Conclusion

The Second Circuit sustained liability for fraudulent offering practices and for continuing to deliver a prospectus rendered misleading by post-effective events, and it confirmed broad equitable authority to enjoin future violations and order remedial restitutionary measures, while requiring disgorgement to be limited so it does not operate as punishment.


Securities & Exch. Comm'n v. Manor Nursing Ctrs., Inc., 458 F.2d 1082 (2d Cir. 1972)