Pennaluna & Company v. Securities and Exchange Commission

Section 5 of the Securities Act of 1933 requires any person controlling an issuer of a security to register the security with the Securities and Exchange Commission (SEC) (plaintiff). Pennaluna & Company (defendant) was a broker-dealer that dealt in securities issued by mining companies. Pennaluna sold two large quantities of Silver Buckle shares acquired from Harry Magnuson (defendant), a part-owner of Pennaluna. The Silver Buckle shares were unregistered with the SEC. Magnuson had been holding only 2 percent of Silver Buckle’s outstanding shares, and he was not an officer or director of Silver Buckle. However, the SEC still found Magnuson to be a controlling person of Silver Buckle at the time Pennaluna sold the Silver Buckle shares. The SEC concluded that Magnuson was a controlling person with respect to Silver Buckle because of his significant prior relations with persons with clear and direct control over Silver Buckle. These prior relations included Magnuson’s connection with two of Silver Buckle’s subsidiary corporations, Silver Buckle’s reliance on Magnuson’s assistance, close relationships with members of Silver Buckle’s control group in other business ventures, and the control group’s belief that Magnuson would support them in any challenge to their control of Silver Buckle. Thus, the SEC found Pennaluna was an underwriter and in violation of SEC registration requirements. Pennaluna appealed.