Louisiana (U. S. v. R. B. Brough et ano.); a popcorn vending machine company in Ohio (U. S. v. F. E. Backmeier et al); an automotive patent venture in Los Angeles (U. S. v. 0. F. Lundelius et ano.); an oil and gas lease promotion covering land in Texas and Oklahoma (U. S. v. H. R. Edwards); a mining company in Colorado (U. S. v. Amos Downs et al); and an industrial plant in Carrollton, Ohio (U. S. v. Z. A. Gilbert et al). Even the religious beliefs and social proclivities of prospective investors have been utilized as a basis for promotional ventures which were made the subject of prosecution. For example, there is the Universal Order of Plenocrats in Chicago (U. S. v. C. F. Davis et al); and the Mantle Club, centering in Wilmington and fanning out all over the country (U. S. v. H. B. Monjar et al). Many of these cases involved nation-wide solicitation of investments. In the Brough case, in which convictions were obtained in Oklahoma and five-year prison sentences Inposed, more than $700,000 had been obtained by the defendants from about 1,400 investors residing in many different states. In the Monjar case, involving the Mantle Club, a socio-fraternal organization, investments had been obtained from people residing from Baltimore, Maryland to Portland, Oregon. In the Downs case, the stock of a mining company was sold in almost every state of the Union, as well as in the District of Columbia and in Canada. The defendants were tried and convicted in federal court at Denver. The current prosecutions included a number involving efforts to evade the provisions of the securities laws by casting the enterprise into a form calculated to appear to be something other than an investment in securities as defined by the Act. For example, in the Brough case it was made to appear that the investors were purchasing pecan orchard acreage; in the Backmeier case that they were purchasing vending machines; in the Davis case that they were subscribing to memberships in a divinely inspired farm program; and in the Monjar case that they were contributing to some transcendental program for the moral, as well as the financial, benefit of the members of the Mantle Club. Also during the fiscal year a large number of convictions obtained in similar cases were affirmed by the appellate courts. These included the affirmance of convictions in Seattle for fraud in the sale of oil and gas leases (J. F. Simons et al v. U. S.); convictions in Denver for fraud in the sale of stock of a cement company (E. S. Gates v. U. S.; C. S. Rice v. U. S.); a conviction in Detroit for fraud in the sale of stock of a company making beer barrels (J. K. Edlin v. U. S.); convictions in California for the sale of oil leases, and interests therein, on properties in California (A. Atherton et al v. U. S.); a conviction for fraud in the sale of notes and trade acceptances issued by a whiskey rectifying company in Florida (A. F. Fisher v. U. S.); a conviction for fraudulent sale of securities of a mortgage company in Nebraska (L. S. Holmes v. U. S.); a conviction in New Mexico for the sale of stock in an insurance shares corporation (S. c. Pandolfo v. U. S.); and the conviction in New York of a certified public accountant for complicity in the fraudulent sale of stock of an industrial service company (M. H. White v. U. S.). In many of these cases only a few of the defendants appealed. In all of these cases the convictions were affirmed by the appellate courts. SECURITIES EXCHANGE ACT OF 1934. Of the more outstanding of the prosecutions during the past year which arose from investigations under the 1934 Act, three involved stock market manipulations. In U. S. v. Ery Kehaya et al. convictions were obtained in New York on charges of manipulating the New York Stock Exchange market for the common stock of Standard Commercial Tobacco Company in order to permit the defendants to unload large blocks of the stock upon the unsuspecting public investors. It was charged that this was accomplished by means of the well known manipulative devices of wash sales, matched orders, and "touting" of the stock. Similar manipulative activity, this time on a regional stock exchange, was involved in U. S. v. Raymond R. Taylor where a prison sentence of approximately two years was imposed on Taylor for violations involving the market on the Detroit Stock Exchange for stock of Mid-West Abrasive Company. In U. S. v. David Smart et al., the manipulation involved a well known publishing concern, Esquire-Coronet, Inc. tions were obtained in Chicago against executives of the publishing concern and securities brokers of New York City, all of whom were charged with conspiring to raise artificially the price of the company's stock on the New York Curb Exchange in order to unload at the manipulated prices 200,000 shares of stock belonging to two of the defendants. Another extremely important case which arose under the 1934 Act was that of U. S. v. Russell W. McDermott, a securities broker of Indianapolis, who was convicted of violations of the margin rules, fraud in over-the-counter transactions in securities with his own customers, and fraud perpetrated by means of excessive trading in a discretionary account. During the year the conviction of G. A. Gantz, a securities broker of St. Louis, on charges which involved operation of his business while insolvent and unauthorized use of customers' money, was affirmed by the Circuit Court of Appeals. OTHER ACTS. Convictions were obtained during the year against Union Electric Company of Missouri on charges of making political contributions, made unlawful by Section 12 (b) of the Public Utility Holding Company Act of 1935. Louis H. Egan, former president of the company, was found guilty of conspiracy to violate the same section, which makes it unlawful for a holding company or subsidiary thereof to make political contributions. The company was fined $80,000 and Egan was sentenced to two years' imprisonment, in addition to a fine of $10,000. Union Electric Company is a subsidiary of The North American Company. The indictment charged the defendants with setting up a "slush fund" accumulated through kick-backs from legal fees, payments to contractors and insurance agents, and the padding of expense accounts. The conviction of Frank J. Boehm, former vice president of Union Electric Company, on charges of perjury was affirmed by the Circuit Court of Appeals, and the Supreme Court denied certiorari. The conviction was based upon perjury committed by Boehm while testifying before officers of the Commission in an investigation involving alleged violations of the anti-political contribution section of the 1935 Act. The appeal of Howard G. Hopson, former president of the Associated Gas & Electric Company, was dismissed during the past year. He had been convicted of fraud in connection with the operation of the huge Associated Gas & Electric System. An indictment was returned against one of the largest of the investment companies for an alleged fraud in the sale of 215,000 investment certificates in the face amount of $600,000,000 through an organization which extended into at least twenty-nine states. The indictment alleged that the defendants made use of deceptive financial statements, concealed artificial write-ups of securities values, manipulated trust funds, engaged in stock market manipulation, and operated while insolvent. The indictment was returned in Detroit. (U. S. v. Fidelity Investment Association et al.) An appeal during the year involved charges of defrauding an investment company by a controlling person, Wallace Groves, whose conviction was affirmed by the Second Circuit Court of Appeals. The indictment had charged him with defrauding the General Investment Company in connection with sales to it of its own securities and payment of fictitious commissions on transactions pretended to be beneficial to the company. The conviction of George S. Groves was reversed. The Supreme Court denied certiorari to Wallace Groves. COMPLAINTS AND INVESTIGATIONS During the fiscal year ended June 30, 1942. the Commission received approximately 11,638 items of mail classified as "complaint-enforcement". The major part of this mail consisted of letters from the general public seeking information, complaining of fraudulent or other illegal practices, and seeking various types of aid. The Commission has carefully considered and replied to every inquiry sent in by the public and investigated every complaint over which it has jurisdiction. The complaint correspondence is a fruitful source of information for the Commission; it is mainly from this source that the Commission obtains important leads on securities violations. Other clues to irregularities in the investment field are obtained by the Commission from investigations made by its own staff or from other governmental or voluntary agencies. The following chart gives some indication of the extent of the Commission's investigatory activities: Investigations and legal cases developed there from under the a/ Investigations carried on through correspondence and limited field work. b/ Investigations assigned to field investigators. c/ Includes 243 informal and 137 formal docketed investigations. d/ Includes 37 informal and 124 formal docketed investigations. Through these investigations, and with the helpful assistance of such other agencies, the Commission has compiled a very extensive Securities Violations File which serves as a clearing house for information which is made available to those officials and agencies directly concerned with the eradication of illegal practices in the securities field. of June 30, 1942, the Commission had assembled data concerning 41,065 persons and corporations against whom State or Federal action has been taken in connection with the sale of securities. During the past fiscal year approximately 5,170 items of information pertaining to existing files and 3,134 new names were added to those files. INTERPRETATIVE AND ADVISORY SERVICE The Commission has always recognized that the technical nature of the statutes it administers requires an interpretative and advisory service by the Commission to provide attorneys and the general public with prompt advice concerning problems arising under these statutes. Inquiries are handled by correspondence as well as personal and telephone conferences. The jurisdiction of the Commission does not extend to private disputes of a civil nature arising under the securities laws. Therefore, the Commission cannot advise litigants concerning the prosecution or defense in such cases. Where a civil suit between private parties has involved a disputed question of law under the Acts administered by the Commission, however, the Commission has on occasion filed a brief with the court as amicus curiae in order to advise the court of its interpretation of the law as the agency administering it. ACTIVITIES OF THE COMMISSION IN THE FIELD OF ACCOUNTING AND AUDITING Effect of the War Effort During the past year, accountants have been faced with many new and serious problems arising from the war effort and the earlier National Defense program. The Commission likewise, because of the importance which it attaches to financial statements, has had to give careful consideration to these problems and to the need for all appropriate adjustments. The Commission, in common with the accounting profession, has been especially interested in the maintenance of appropriate auditing standards. Fortunately, all concerned are agreed that the high standards of present practice should not be foregone. A principal difficulty has been the loss by most public accounting firms of much trained personnel to other phases of the war effort. Furthermore, a similar loss of accounting personnel by private business, coupled, in many instances, with a large new volume of war work, has meant that internal accounting and auditing controls, upon which the public accountant must rely in many respects, have in many instances suffered and hence, with a smaller or less experienced staff, the public accountant is often faced with the necessity of being even more painstaking in his audit. Members of the Commission's staff have cooperated with registrants and public accountants in exploring various means of meeting the situation. As a result, registrants have been encouraged to change their fiscal periods from a calendar year to a "natural business" year in an effort to lessen the year-end burden so as to utilize the public accountant's services more efficiently. In Accounting Series Release No. 30, the Commission outlined a special procedure and method of disclosure to be followed by registrants and their accountants where the press of war production prevented normal inventory-taking. It has also been indicated that lack of personnel could provide a proper basis for requesting an extension of time for filing annual reports with this Commission. Study of these problems is being continued and informal conferences are held as occasion warrants with individual accountants and with the appropriate committees of professional societies. The Commission has also cooperated with various Federal war agencies through consultation and through utilisation of its expert help for specialized work. Cooperation with Professional Societies The Commission has sought to cooperate with the accounting profession and to add its full influence to that of the professional societies and others in a joint effort to maintain and raise accounting and auditing standards. As he efore, the Commission, in its promulgation of rules or opinions on accounting has, wherever The complaint correspondence is a fruitful source of information for the Commission; it is mainly from this source that the Commission obtains important leads on securities violations. Other clues to irregularities in the investment field are obtained by the Commission from investigations made by its own staff or from other governmental or voluntary agencies. The following chart gives some indication of the extent of the Commission's investigatory activities: Investigations and legal cases developed there from under the a/ Investigations carried on through correspondence and limited field work. b/ Investigations assigned to field investigators. c/ Includes 243 informal and 137 formal docketed investigations. d/ Includes 37 informal and 124 formal docketed investigations. Through these investigations, and with the helpful assistance of such other agencies, the Commission has compiled a very extensive Securities Violations File which serves as a clearing house for information which is made available to those officials and agencies directly concerned with the eradication of illegal practices in the securities field. As of June 30, 1942, the Commission had assembled data concerning 41,065 persons and corporations against whom State or Federal action has been taken in connection with the sale of securities. During the past fiscal year approximately 5,170 items of information pertaining to existing files and 3,134 new names were added to those files. |