## Facts

- The Securities and Exchange Commission (SEC) brought a civil enforcement action seeking injunctive relief against Jos. Schlitz Brewing Company (Schlitz), a publicly traded issuer with securities registered under federal securities laws.
- The complaint alleged Schlitz ran a nationwide program of unlawful inducement payments and other things of value to retailers to increase sales, totaling at least $3 million, allegedly violating liquor laws.
- The SEC alleged Schlitz failed to disclose these payments in registration statements, periodic reports, financial statements, and proxy materials, rendering those filings materially false or misleading.
- The SEC also alleged Schlitz participated in violations of Spanish tax and exchange laws through transactions involving Spanish entities characterized as affiliates, and falsified its books and records concerning those transactions.
- Based on these alleged omissions and falsifications, the SEC asserted violations of:
  - Securities Act § 17(a);
  - Exchange Act § 10(b) and Rule 10b-5;
  - Exchange Act § 13(a) (periodic reporting);
  - Exchange Act § 14(a) (proxy solicitations).
- A federal grand jury had indicted Schlitz for conspiracy and substantive violations of the Federal Alcohol Administration Act (FAAA) arising from related conduct.
- Schlitz filed pre-answer motions to dismiss for lack of subject-matter jurisdiction and for failure to state a claim, alternatively to stay the civil case pending the criminal proceedings, and to strike portions of the complaint.

## Issues

1. Whether the court lacked subject-matter jurisdiction because the alleged inducement payments were primarily regulated and enforced under the FAAA, making the SEC action an improper attempt to enforce liquor laws.
2. Whether the complaint failed to state claims under Securities Act § 17(a), Exchange Act § 10(b) and Rule 10b-5, and Exchange Act §§ 13(a) and 14(a).
3. Whether the civil enforcement action should be stayed pending completion of related criminal proceedings.
4. Whether portions of the complaint should be struck as improper or prejudicial under Rules 11 and 12(f).

## Decision

- The court denied Schlitz’s motion to dismiss for lack of subject-matter jurisdiction.
- The court denied Schlitz’s motion to dismiss for failure to state a claim, concluding the complaint adequately pleaded securities-law violations based on alleged material misstatements and omissions and related record falsification.
- The court denied Schlitz’s motion to stay the SEC action pending the criminal case.
- The court denied Schlitz’s motion to strike allegations from the complaint.

## Legal Principles

- The SEC may seek injunctive relief under the federal securities laws even when the alleged underlying conduct is also regulated by other statutes; overlapping subject matter does not defeat jurisdiction where the pleaded theory is nondisclosure or misrepresentation to investors.
- Alleged illegal payments and foreign-law violations may be material to investors and, if omitted or misrepresented in SEC filings, can support claims under Securities Act § 17(a) and Exchange Act § 10(b)/Rule 10b-5.
- At the pleading stage, well-pleaded allegations of deliberate record falsification and materially misleading public filings may support an inference of the state of mind required for antifraud claims.
- Parallel civil enforcement and criminal proceedings may proceed at the same time; a stay is discretionary and requires a concrete showing of substantial prejudice.
- Motions to strike are disfavored and are generally denied where challenged allegations bear on the asserted claims and are not clearly irrelevant and unfairly prejudicial.

## Conclusion

The court permitted the SEC enforcement case to proceed, holding that alleged nondisclosure and falsification involving unlawful inducement payments and foreign-law violations could constitute securities-law fraud and reporting and proxy violations, and rejecting jurisdictional, pleading, stay, and striking challenges at the pre-answer stage.


Securities & Exchange Commission v. Jos. Schlitz Brewing Co., 452 F. Supp. 824 (E.D. Wis. 1978)