APPENDIX VI LITIGATION INVOLVING STATUTES ADMINISTERED BY THE COMMISSION This appendix lists the court proceedings in which this Commission or the Acts administered by it have been involved. Included are those cases instituted during the period from June 30, 1936 to June 30, 1937, as well as those instituted before that date in which no final disposition had been made on June 30, 1936. The more important litigation is described at some length; the less important cases are indicated by a brief notation. Although the cases are grouped and discussed under three main headings with reference to the statute primarily in issue in the particular case and into subheadings depending on the principal topic in issue, each case is also classified under all statutes and subheadings which it involves. The status of litigation is described only as it existed as of June 30, 1937, no attempt being made to describe developments occurring subsequent to that date. I. SECURITIES ACT OF 1933, AS AMENDED Suits under the Securities Act of 1933, as amended, are considered under seven groupings: (1) Suits against the Commission under that Act to enjoin enforcement of its provisions; (2) miscellaneous proceedings instituted by the Commission pursuant to Section 20 (b) of the Act to enjoin violations thereof, generally violations of Sections 5 and/or 17; (3) suits against brokers and dealers operating "bucket shops"; (4) suits involving the use of the "sell and switch" device; (5) cases dealing with the definition of "security"; (6) criminal prosecutions; and (7) civil litigation between private parties involving the civil liability provisions of the Securities Act. SUITS TO ENJOIN ENFORCEMENT OF THE SECURITIES ACT Three suits brought directly against the Commission for the purpose of enjoining the enforcement of the Securities Act were pending during the fiscal year. The Commission was also forced to intervene in an action brought by one person to enjoin another from complying with subpenas issued by the Commission in the course of its investigations under the Securities Act and the Securities Exchange Act. These cases are: Benjamin L. Abraham v. Securi- R. R. Crawford v. Securities and McMann v. Engel et al., Securities and Exchange Commission, intervener. Suit dismissed without prejudice Preliminary injunction denied Mar. MISCELLANEOUS INJUNCTION PROCEEDINGS The majority of injunction proceedings instituted by the Commission under the Securities Act have been to enjoin violations of Sections 5 and/or 17. Section 5, subject to the exemptions therefrom provided in Sections 3 (a) and 4 and in the Commission's rules promulgated pursuant to Section 3 (b), prohibits in paragraph (a) the use of the mails or the channels of interstate commerce to offer, sell, or deliver after sale unregistered securities, and in paragraph (b) prohibits the use of the mails or facilities of interstate commerce to transmit a prospectus relating to registered securities unless it meets the requirements of Section 10, or to deliver registered securities after sale unless accompanied or preceded by such a prospectus. Section 17, in general, prohibits fraud in the sale of securities by the use of the mails or the channels of interstate commerce. McDowell Mines, Inc. et al. This action was instituted on April 16, 1937, in the District Court of the United States for the District of Colorado to enjoin defendants from violating the provisions of Section 17 (a) (2) in the sale of defendants' stock. The complaint alleged that the company, in the sale of its securities, had misrepresented the proven quality as well as the state of development of its mine, and that there had been omissions to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. The court, in an oral opinion rendered May 14, 1937, granted a permanent injunction against violation of Section 17 (a) (2). Otis & Company.-The Commission filed a bill in the District Court for the Northern District of Ohio on April 1, 1936, alleging that the defendants in the sale to its customers of stock of the Murray 159 Ohio Company had violated and would continue to violate Section 17 (a) (2) of the Securities Act and Section 9 (a) (2) of the Securities Exchange Act. The defendants in acquiring a block of approximately 5,000 shares of this stock had received agreements from the vendors thereof that they would withhold the balance of their stock, some 17,000 shares of a total issue of 60,000 shares, from the market for sixty days. During this period the price of the stock on the Cleveland Exchange was stimulated by a series of purchases made by the defendant. These purchases constituted approximately 90 percent of the trading. The Commission claimed that the failure of the defendants to disclose these facts in selling the stock to the public "at the market" constituted an "omission 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." On December 28, 1936, Judge West sustained this argument and granted an injunction against violation of Section 17 (a) (2) by such omissions. With respect to Section 9 (a) (2) of the Securities Exchange Act, the court held that the evidence was "insufficient to establish with the necessary degree of certainty to warrant an injunction" the claim that the defendants contemplated any future violation of that Section (18 F. Supp. 100). An appeal by the defendants is pending. Boise Petroleum Corporation and C. S. Hassler.-On April 15, 1937, the defendant corporation and its sales manager, C. S. Hassler, consented in the District Court for the District of Idaho to the entry of a permanent injunction restraining them from selling unregistered oil and gas leasehold interests in an area known as "Beacon Hills, Idaho", contrary to the provisions of Section 5 (a) of the Securities Act of 1933, and in the sale of these securities from obtaining money or property by means of certain untrue statements of material facts in violation of Section 17 (a) (2) of that Act. The decree also enjoined Hassler from acting as a broker or dealer in the sale of securities unless registered as such with the Commission in accordance with the requirements of Section 15 (b) of the Securities Exchange Act. Later, the Commission instituted criminal contempt proceedings against the corporation and Hassler on the ground that they were continuing to engage in the acts and practices against which the court had issued the injunction. The defendants in their answer admitted that since the entry of the decree, the mails had been used in the sale and delivery of the securities, but alleged as a defense that such sales and deliveries had been made solely within the State of Idaho. The court held that the use of the mails violated the injunction order, and on June 7, 1937, fined the corporation $500 and Hassler $300. This is the first case in which a penalty has been imposed in contempt proceedings for violation of an injunction obtained by the Commission. Other miscellaneous cases are: do.. do... Secs, 5 (b) and 17 (a) of 1933 act, and secs. 7 (c) (2) and 11 (d) (2) of 1934 act. Secs. 5 and 17.. .do.. ..do. New Jersey.... Oct. 14 Sec. 17. Stipulation to discontinue filed Oct. 30, 1936. Permanent injunction granted May 19, 1936. Appeal dismissed Sept. 18, 1936. Pending. Permanent injunction entered on order pro confesso on Dec. 9, 1936. On Jan. 11, 1937, the consent decree entered on June 14, 1935, was va cated on application of defendants. Hearing on merits scheduled for Dec. 15, 1937. Hearing on merits scheduled for Nov. 15, 1937. Motion for preliminary injunction scheduled for hearing in fall of 1937. No further action has been taken in suit for injunction pending dispo sition of criminal proceedings. Permanent injunction entered by consent of defendants May 19, 1937. Motion to vacate order to show cause and dismiss amended bill depied Mar. 30, 1937; defendants granted 10 days within which to plead further; bill taken pro confesso as to defendant corporation and 2 other defendants on May 10, 1937; case pending as to remaining defendants. Temporary injunctions granted Feb. 21, 1936: pending. Secs. 5 and 17 (a)...... A preliminary injunction Sec. 17 (a) of the 1933 act and Sec. 9 (a) of the 1934 act. was granted on Nov. 25, 1935, and a permanent decree of injunction was entered with the consent of the defendant on Feb. 2, 1937. A temporary injunction was granted May 4, 1936. An appeal was taken to the C. C. A. and the order was reversed on Jan. 18, 1937. On May 11, the hearing on the permanent injunction was adjourned to Oct. 4, 1937. Preliminary injunction as to all defendants entered on July 9, 1936; preliminary injunction vacated Feb. 17, 1937; amended bill filled June 10. 1937; case scheduled for hearing on merits on date to be fixed on mo tion. Temporary injunctions were granted June 15 and Sept. 12, 1936, case pending. Permanent consent in- Permanent injunction Permanent consent in- Permanent consent in- Permanent consent injunction entered as to 5 defendants and suit dismissed as to remaining 2 defendants, Nov. 2, 1936. Permanent consent injunction entered Nov. 5, 1936. Preliminary injunction denied Nov. 7, 1936; defendants' motion to dismiss suit granted June 30, 1937. Permanent consent injunction entered Nov. 21, 1936. Suit dismissed on Jan. 13, 1937, without prejudice on agreement of defendants to correct practices complained of. Secs. 5 (a) and 17 (a).. Permanent consent in _do_ Dec. 28 Sec. 5 (a). Washington. junction entered Dec. Permanent consent in- Permanent consent in- Permanent consent in- Permanent do. 3, 1937. consent in junction entered Feb. |