The sanctions imposed by the Commission ranged from partial suspension of operations for 5 days to revocation of registration for the broker-dealer respondents and from censure to bar from broker-dealer association for the individual respondents.15

In Brand, Grumet & Seigel, Inc., the firm, two of its officers and a registered representative were charged, among other things, with manipulation of the market for the securities of L'Aiglon Apparel, Inc. which were listed and traded on the American Stock Exchange. The order charged that as part of the manipulative scheme, respondents effected transactions in L'Aiglon stock which involved no change in beneficial ownership and which raised the price of the stock and entered purchase and sale orders for such stock with the knowledge that orders of substantially the same size, at substantially the same time and price, for the sale and purchase of that stock had been or would be entered. It was alleged that respondents effected these and other transactions for the purpose of creating a false and misleading appearance of active trading in L'Aiglon stock and for the purpose of inducing others to purchase such stock. Pursuant to respondents' offer of settlement, in which they consented to findings of violations as charged without admitting or denying the allegations, the Commission revoked the firm's registration, suspended the individual respondents for periods of from 2 to 12 months and imposed additional restrictions on those respondents.16

The proceedings respecting J. H. Rapp Co. and its two principals involved among other things violations of registration and antifraud provisions of the Federal securities laws arising out of transactions in common stock of LesStuds Corporation (now Trans-Southern Holding Corp.). According to the Commission's decision,1 shortly after LesStuds' incorporation in June 1969, one of the respondents discussed with its president a method of making LesStuds a publicly-held corporation by having its shares transferred to a publicly-held company which would then "spinoff" those shares to its stockholders. Thereafter, 75,000 LesStuds shares were exchanged for shares of a wholly-owned subsidiary

15 See Securities Exchange Act Releases Nos. 8922 (July 2, 1970); 8963 (August 19, 1970); 8964 (August 19, 1970); 9018 (November 6, 1970); 9067 (January 27, 1971); 9106 (March 15, 1971); 9120 (March 30, 1971); and 9296 (August 19, 1971).

16 Securities Exchange Act Release No. 9106 (March 15, 1971).

17 Securities Exchange Act Releases Nos. 9209 (June 15, 1971) and 9343 (September 24, 1971). Respondents consented to the findings and to sanctions without admitting or denying the allegations in the order for proceedings.

of Atomic Fuel Extraction Corp., to which the respondent had referred the president of LesStuds. The subsidiary was formed for the sole purpose of effecting this exchange. The LesStuds shares were then distributed to the Atomic stockholders, and active trading in the shares began with no information on LesStuds being available to the investing public. As part of its trading in such shares, the Rapp firm purchased from officers of Atomic over 16,000 LesStuds shares received by them in the "spin-off", and resold such shares to customers and other brokerdealers.

Beginning in July 1969, the Rapp firm entered quotations for LesStuds stock in the pink sheets published by the National Quotation Bureau, Inc. at arbitrary prices which bore no reasonable relationship to the actual value of the stock. Respondents purchased LesStuds stock from persons engaged in its illegal distribution at prices far below those which respondents artificially maintained in the sheets, sold such stock and other shares of such stock to customers of the firm and others at such inflated levels, and used fictitious and nominee accounts to conceal the identity of buyers and sellers. In addition, respondents made materially false and misleading statements.

The Commission revoked the registration of the firm and barred its principals from association with any broker or dealer.

Judicial Review of Administrative Decisions.-In Jaffee & Co. and Wilton L. Jaffee, Jr. v. S.E.C.,18 the Court of Appeals for the Second Circuit affirmed that part of the Commission's order 19 which imposed sanctions on Mr. Jaffee for violations of Rule 10b-6 under the Securities Exchange Act. The court rejected Jaffee's contention that his purchases of Solitron Devices, Inc. stock in the course of a registered secondary offering of such stock held by him and other stockholders were not proscribed because he had no present intent to sell his registered shares immediately and so had not engaged in a "distribution" within the meaning of Rule 10b-6. The court held that Jaffee's "registration of shares owned by him implied an intention to sell or distribute...." The court also rejected his argument that no violation of the rule had been established because manipulative intent or fraudulent conduct had not been shown. It stated (446 F.2d at 391):

"The Commission need not have shown that Jaffee actually intended to defraud the marketplace through his purchases. The rule proscribes and

18 446 F.2d 387 (C.A. 2, 1971).

clearly defines a practice. . . . Where the rule applies, its prohibition is absolute."

Reversing that part of the Commission's order which imposed sanctions on Jaffee & Co., a registered broker-dealer in which Jaffee's interest exceeded 90 percent but which had not been in existence at the time of his violations, the court held that the order instituting the Commission's proceedings had not afforded Jaffee & Co. adequate notice that a sanction might be imposed against the firm solely on the basis of Jaffee's conduct.

In Sinclair v. S.E.C.,20 the Court of Appeals for the Second Circuit affirmed an order of the Commission 21 barring Edward Sinclair, who was an order clerk in the over-the-counter trading department of a registered broker-dealer, from further association with any broker or dealer. The court held that substantial evidence in the record supported the Commission's findings that Sinclair had violated the antifraud provisions of the federal securities laws when he interposed another broker-dealer between his firm's customers and the executing dealers, or market-makers, in certain over-the-counter securities, thereby causing customers to pay higher prices for securities purchased or to receive lower prices for securities sold than had he dealt directly with those dealers. The court also agreed with the Commission's holding that Sinclair's falsification of the names of executing dealers on order tickets was a violation of the recordkeeping requirements of the Securities Exchange Act. The court found no merit in Sinclair's contention that a commissioner had prejudged Sinclair's case by participating in an earlier Commission decision to accept an offer of settlement submitted by another respondent in the same administrative proceeding. The court noted that the settlement was based upon facts "stipulated by the parties solely for the particular settlement, just as is the practice in the negotiation of consent decrees" and that the Commission's decision accepting the offer of settlement stated that it was not binding on the other respondents.

In Levine v. S.E.C.,22 the Court of Appeals for the Second Circuit affirmed the Commission's holding that a broker-dealer firm, two of its officers and a salesman had violated antifraud provisions of the securities laws as a result of the sale of certain securities by material false representations including many contained in a brochure prepared by the issuer and distributed by the broker-dealer to its customers. The court rejected petitioners'

20 444 F.2d 399 (C.A. 2, 1971).

21 See pp. 112-113, supra.

argument that they had a right to rely on statements made by the management of the company concerning its business affairs, noting that one of the principals of the broker-dealer had personal knowledge of the company's financial affairs and indicating that certain of the matters discussed in the brochure could have been checked with others. The court also held that the hearing examiner had properly refused to allow petitioners to introduce the testimony of numerous investors that certain misrepresentations had not been made to them, stating that their testimony would not have negated the testimony of other investors who had testified that misrepresentations had been made to them. The court rejected a claim that the petitioners had been deprived of due process because their books and records had been subpoenaed by the New York State Attorney General and had been made available to the Commission's staff but not to the petitioners. It noted that the records were never in the possession of or under the control of the Commission and that the petitioners failed to show that they could not have examined the records at the Attorney General's Office.

In Stead v. S.E.C.,23 the Court of Appeals for the Tenth Circuit affirmed an order of the Commission imposing sanctions upon Stead, a securities salesman. The court sustained the Commission's finding that Stead had violated the registration provisions of the Securities Act by selling unregistered securities for an account controlled by the issuer. The fact that Stead called the transfer agent and was advised that the securities were freely tradeable was held to be "obviously not a sufficient inquiry." The court also sustained the Commission's finding that Stead willfully aided and abetted his firm's violations of the recordkeeping provisions of the Securities Exchange Act in connection with errors in Stead's trading account with the firm, of which he was aware. CIVIL PROCEEDINGS

Each of the several statutes administered by the Commission authorizes the Commission to seek injunctions in the Federal district courts against continuing or threatened violations of those statutes or the Commission's rules thereunder. During the past fiscal year the Commission instituted a total of 140 injunctive actions.24 A substantial number of these actions were designed to

23 444 F.2d 713 (C.A. 10, 1971), petition for certiorari pending.

24 In addition, the Commission instituted eight subpoena enforcement actions and two civil contempt proceedings in the U. S. district courts. More detailed statistics regarding the Commission's civil litigation activities are

restrain further violations of the registration or antifraud provisions of the Securities Act and Securities Exchange Act; others sought injunctions against operation of broker-dealers in violation of net capital or other investor protection requirements. In appropriate cases the Commission also sought ancillary relief, including the appointment of a receiver, or court orders requiring that rescission be offered to securities purchasers or that profits unlawfully obtained be disgorged.

The nature of some of the more noteworthy of these actions, developments in actions instituted in prior years, and certain appellate decisions in injunctive proceedings, are summarized below.

In S.E.C. v. Parvin Dohrmann Company,25 earlier aspects of which were discussed in the last annual report,26 the United States District Court for the Southern District of New York entered a final judgment in December 1970 against eight of the defendants, upon their consent, providing essentially all of the broad relief sought in the Commission's complaint. That complaint had alleged, among other things, that those defendants who were part of a group with Delbert W. Coleman 27 that controlled Parvin Dohrmann,28 were to receive a cash premium for their shares of the company's stock while the uninformed shareholders of the company were to receive shares of Denny's Restaurants, Inc. stock, worth substantially less.

The judgment required these defendants to disgorge virtually all of the company's shares they had purchased through Coleman, (and, as to defendant Edward Torres, who had not acquired his shares through Coleman, to disgorge approximately 1% of his shares-roughly corresponding to the premium he was to have received for the sale of his shares), such shares to be turned over to a court-appointed trustee for ultimate distribution to those beneficial shareholders of the company as of July 10, 1969 (the date of the alleged unlawful preference) who had no connection with Coleman, the other defendants, or any of the unlawful schemes alleged in the Commission's complaint. These defendants were permitted to keep an installment of the sale price they had received from defendant Butler that was roughly equivalent to

25 S.D.N.Y., 69 Civ. 4543 (ELP).

26 36th Annual Report, pp. 109-110.

27 In October 1969, the court entered a final judgment of permanent injunction against Coleman, upon his consent, providing all the relief demanded by the Commission against him in its complaint.