SECURITIES AND EXCHANGE COMMISSION, Appellant, v. DATRONICS ENGINEERS, INC., Et Al., Appellees

ALBERT V. BRYAN, Senior Circuit Judge:

The Securities and Exchange Commission in enforcement of the Securities Act of 1933, § 20(b), 15 U.S.C. § 77t(b), and the Securities Exchange Act of 1934, § 21(e), 15 U.S.C. § 78u(e), sought a preliminary injunction to restrain Datronics Engineers, Inc., its of-' ficers and agents, as well as related corporations, from continuing in alleged violation of the registration and antifraud provisions of the Acts. The breaches are said to have been committed in the sale of unregistered securities, § 5 of the 1933 Act, 15 U.S.C. § 77e, and by the employment of false representations in their sale, § 10(b) of the 1934 Act, 15 U.S.C. § 78j, and Rule 10b-5 of the Commission, 17 CFR 240.10b-5.1

Summary judgment went for the defendants, and the Commission appeals. We reverse.

Specifically, the complaint charged transgressions of the statutes by Da-tronics, assisted by the individual defendants, in declaring, and effectuating through the use of the mails, “spin-offs” to and among its stockholders of the unregistered shares of stock owned by Da-tronics in other corporations. With exceptions to be noted, and since the decision on appeal rests on a motion for summary judgment, there is no substantial dispute on the facts. Datronics was engaged in the construction of communications towers. Its capital stock was held by 1000 shareholders and was actively traded on the market. All of the spin-offs occurred within a period of 13 months — from November 1, 1968 to December 31, 1969 — and the spun-off stock was that of nine corporations, three of which were wholly owned subsidiaries of *253Datronics and six were independent corporations.2

The pattern 3 of the spin-offs in each instance was this: Without any business purpose of its own, Datronics would enter into an agreement with the principals of a private company. The agreement provided for the organization by Datronics of a new corporation, or the utilization of one of Datronics’ subsidiaries, and the merger of the private company into the new or subsidiary corporation. It stipulated that the principals of the private company would receive the majority interest in the merger-corporation. The remainder of the stock of the corporation would be delivered to, or retained by, Datronics for a nominal sum per share. Part of it would be applied to the payment of the services of Datronics in the organization and administration of the proposed spin-off, and to Datronics’ counsel for legal services in the transaction. Da-tronics was bound by each of the nine agreements to distribute among its shareholders the rest of the stock.

Before such distribution, however, Da-tronics reserved for itself approximately one-third of the shares. Admittedly, none of the newly acquired stock was ever registered; its distribution and the dissemination of the false representations were accomplished by use of the mails.

I. Primarily, in our judgment each of these spin-offs violated § 5 of the Securities Act, supra footnote 1, in that Datronics caused to be carried through the mails an unregistered security “for the purpose of sale or for delivery after sale”. Datronics was actually an issuer, or at least a co-issuer, and not exempted from § 5 by § 4(1) of the Act, 15 U.S.C. § 77d as “any person other than an issuer”.

Datronics and the other appellees contend, and the District Court concluded, that this type of transaction was not a sale. The argument is that it was no more than a dividend parceled out to stockholders from its portfolio of investments. A noteworthy difference here, however, is that each distribution was an obligation. Their contention also loses sight of the definition of “sale” contained in § 2 of the 1933 Act, 15 U.S.C. § 77b. As pertinent here that definition is as follows:

“When used in this subchapter, unless the context otherwise requires — • * * * * •* *
“(3) The term ‘sale’ or ‘sell’ shall include every contract of sale or disposition of a security or interest in a security, for value. The term ‘offer to sell’, ‘offer for sale’, or ‘offer’ shall include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value. . . . ” (Accent added.)

As the term “sale” includes a “disposition of a security”, the dissemination of the new stock among Datronics’ stockholders was a sale. However, the appellees urged, and the District Court held, that this disposition was not a statutory sale because it was not “for value”, as demanded by the definition. Here, again, we find error. Cf. Securities and Exchange Commission v. Harwyn Industries Corp., 326 F.Supp. 943, 954 (S.D.N.Y.1971). Value accrued to Datronics in several ways. First, a market for the stock was created by its transfer to so many new assignees — at least 1000, some of whom were stockbroker-dealers, residing in various States. Sales by them followed at once — the District Judge noting that “[i]n each instance dealing promptly began in the spun-off shares”. This result redounded *254to the benefit not only of Datronics but, as well, to its officers and agents who had received some of the spun-off stock as compensation for legal or other services to the spin-off corporations. Likewise, the stock retained by Datronics was thereby given an added increment of value. The record discloses that in fact the stock, both that disseminated and that kept by Datronics, did appreciate substantially after the distributions.

This spurious creation of a market whether intentional or incidental constituted a breach of the securities statutes. Each of the issuers by this wide spread of its stock became a publicly held corporation. In this process and in subsequent sales the investing public was not afforded the protection intended by the statutes. Further, the market and the public character of the spun-off stock were fired and fanned by the issuance of shareholder letters announcing future spin-offs, and by information statements sent out to the shareholders.

Moreover, we think that Datronics was an underwriter within the meaning of the 1933 Act. Hence its transactions were covered by the prohibitions, and were not within the exemptions, of the Act. §§ 3(a)(1) and 4(1) of the 1933 Act, 15 U.S.C. §§ 77c, 77d. By definition, the term underwriter “means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking . . . . ” § 2(11) of the 1933 Act, 15 U.S.C. § 77b (11). Clearly, in these transactions the merger-corporation was an issuer; Datronics was a purchaser as well as a co-issuer; and the purchase was made with a view to the distribution of the stock, as commanded by Datronics’ preacquisition agreements. By this underwriter distribution Datronics violated § 5 of the 1933 Act — sale of unregistered securities.

II. The Commission charged a violation by Datronics and its officers of § 10(b) of the 1934 Act, 15 U.S.C. § 78j, and of Rule 10b-5. The breach occurred through untrue factual statements incident to the spin-offs. The District Court quite justifiably found that “in certain instances misleading statements were made by” Datronics and the individual defendants. This finding was reiterated by the District Court in discussing the announcements which were made to Datronics’ stockholders with each spin-off.

A common explanation of the distribution to its stockholders was that it was “impractical” for Datronics itself to run the merger-corporations. Of course, as the minority stockholder, Datronics could not do so. The District Court termed the explanation false and a “pure subterfuge”.

Since, however, the District Court was of the opinion that the distribution of the stock among Datronics’ shareholders was not a sale, it held that the “misleading statements” were not outlawed by § 10(b) or by Commission Rule 10b-5. These provisions condemn such misrepresentations only when they are used “in connection with the purchase or sale of any security”. Inasmuch as we believe there was a sale in each spin-off, we cannot agree with the District Court’s determination. See Securities and Exchange Comm’n v. Texas Gulf Sulphur Co., 401 F.2d 833, 860 (2 Cir. 1968 en banc), cert, denied, Coates v. Securities and Exchange Commission, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969).

This was one of the trial court’s reasons for not granting an injunction. Other grounds were that there was no indication that in the future the defendants might violate the statutes in suit; that the officers and agents who formulated and executed the spin-offs were no longer connected with Datronics; and that the present officers and agents assured the District Court that no more spin-offs of this kind would be indulged in. Moreover, the Court felt that by its interpretative releases the Commission had led Datronics and its codefendants to believe that spin-offs were not proscribed by these statutes. The Court *255was also persuaded by the failure of the Commission to act more vigilantly. While the issuance of an injunction is discretionary, it seems to us that overall, notwithstanding these considerations, the facts in this case warranted the grant of an injunction. See United States v. Parke, Davis & Co., 362 U.S. 29, 47, 80 S.Ct. 503, 4 L.Ed.2d 505 (1960).

Finally, a summary of the activities of Datronics is conclusively convincing that they violated the statutes in question, and' should now be restrained to prevent recurrences. To begin with, it is noteworthy that they were not isolated or minimal transgressions. There were, to repeat, nine sales and distributions of unregistered stocks in little more than a year. They were huge in volume, ranging from 75,000 to 900,000 shares. The distribution was not confined to a small number of recipients ; nor was it incidental to Datronics’ corporate functions. Concededly, none of the several distributions had a business purpose. In short, the spin-offs seemingly constituted the major operation of Datronics at the time.

We cannot read the releases or letters of the Commission or its abstention from earlier suits as evincing express or implied approval of the repeated and large-scale violations as are here. The releases do not approve or condone a campaign, such as Datronics engaged in, to develop means and opportunities to promote spin-offs. Indeed, one of Da-tronies’ agents was a “finder” of opportunities for spin-offs.

The dismissal order of the District Court will be vacated, and the cause remanded for the entry of a judgment sustaining the appellant’s motion for the preliminary injunction sought in its complaint.

Vacated with directions.

. Section 5 of the Securities Act of 1933, 15 U.S.C.

“ § 77e. Prohibitions relating to interstate commerce and the mails
“(a) Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly—
* * * :!: *
“(2) to carry or cause to be carried through the mails . . . any such security for the purpose of sale or for delivery after sale”.
Section 10 of the Securities Exchange Act, 15 U.S.C. § 78]:
“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
* * * :!: *
“(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
* :¡: * # *
“Rule 10b-5 — Employment of Manipulative and Deceptive Devices
“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
“(a) To employ any device, scheme, or artifice to defraud,
“(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
“(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceipt upon any person,
in connection with the purchase or sale of any security.”

. The subsidiaries were Multi-Media Engineering, Inc.; Compu-Reader, Inc.; Data-Call Systems, Inc., and the remaining six independent corporations were Hosco, Inc.; Bun & Burger International, Inc.; Daypac Industries, Inc.; Associated Data & Management Corporation; Cyclo-Shine Corporation, and The Laand Corporation.

. In one or two instances, there was some variation in these mechanics, but there was no deviation in principle from the plan.