SEC v. National Student Marketing Corp.

Facts

National Student Marketing Corporation and Interstate National Corporation agreed to merge in 1969, with NSMC offering two shares of its stock for every three Interstate shares. The merger agreement required both companies to provide accurate financial statements and comfort letters from independent accountants. Interstate shareholders approved the merger based on NSMC’s nine-month financial statements showing approximately seven hundred thousand dollars in profit. At the October 31, 1969 closing, Interstate’s attorneys Meyer and Schauer received an unsigned comfort letter from Peat Marwick revealing significant negative adjustments totaling eight hundred eighty-four thousand dollars to NSMC’s nine-month financials, converting the reported profit into a net loss of approximately one hundred eighty thousand dollars. After brief discussion and receiving oral assurances from NSMC representatives, the Interstate directors including Brown and Meyer decided to proceed with the merger closing. The attorneys took no action to delay the closing or inform shareholders. Immediately following the merger, Brown, Meyer and other Interstate principals sold NSMC stock worth nearly three million dollars without disclosing the comfort letter information. A signed comfort letter arrived November 3 with additional paragraphs recommending shareholder resolicitation, but defendants took no remedial action and never disclosed the adjustments to shareholders or the public.