## Facts

- Continental Enterprises, Inc. had 2,510,000 shares outstanding; Wolfson, his immediate family, and Gerbert owned 1,149,775 shares (over 40%), with the remainder held by about 5,000 public shareholders.
- Although not a formal officer or director, Wolfson exercised de facto control over Continental’s officers and policy decisions.
- From August 1, 1960 to January 31, 1962, Wolfson sold 404,150 shares through six brokerage houses; Gerbert sold 53,000 shares through three brokerage houses.
- During the same period, Wolfson’s family members and related entities (including trusts and a foundation) sold 176,675 shares through six brokerage houses.
- Collectively, Wolfson, Gerbert, and family interests sold over 633,000 shares (about 25% of the outstanding shares) into the public over-the-counter market.
- No registration statement was in effect for the Continental shares sold during this period.
- The government charged willful violations of the Securities Act registration provisions and conspiracy; a jury convicted Wolfson and Gerbert, and they appealed.

## Issues

1. Whether sales of large blocks of unregistered Continental stock by a controlling shareholder through brokers constituted a distribution by an issuer through underwriters in violation of Securities Act § 5.
2. Whether the evidence supported treating the intermediary brokers as “underwriters” under Securities Act § 2(11).
3. Whether defendants could defeat criminal liability by claiming ignorance of registration requirements or reliance on subordinates and brokers, including as to willfulness.

## Decision

- The Second Circuit affirmed the convictions.
- The court held that Wolfson’s control made him an “issuer” for § 2(11) purposes when distributing substantial blocks to the public.
- The court held that brokers who acquired shares from Wolfson with an understanding that the shares would be resold to the public qualified as “underwriters.”
- The court rejected the claim that broker status alone prevents underwriter classification in these circumstances.
- The court found the evidence sufficient for the jury to conclude defendants willfully participated in an unregistered distribution and could not avoid liability through asserted ignorance or delegation.

## Legal Principles

- A controlling shareholder may be treated as an “issuer” under Securities Act § 2(11) when selling substantial blocks of stock into the public market.
- Intermediaries, including brokers, who purchase from an issuer (including a controlling person) with a view to public resale may be “underwriters” under § 2(11), bringing the transaction within § 5’s registration requirement.
- The presence of brokerage intermediaries does not, by itself, remove a transaction from § 5 when the intermediaries function as underwriters in a distribution.
- In criminal prosecutions under the Securities Act’s registration provisions, defendants cannot avoid liability through claimed ignorance of the registration obligation or by attributing responsibility to intermediaries when the proof supports knowing participation in an unregistered distribution.

## Conclusion

The court affirmed that large-scale sales of unregistered shares by a controlling person through brokers can constitute a public distribution requiring registration, and that brokers used to place the shares into the market may be treated as underwriters, supporting criminal liability where the scheme is found willful.


United States v. Wolfson, 405 F.2d 779 (2d Cir. 1968)