CIVIL LITIGATION UNDER THE SECURITIES ACT OF WHICH THE COMMISSION IS INFORMED

Continental Distillers and Importers Corporation.-Various purchasers of securities of the Continental Distillers and Importers Corporation sued the corporation and its directors in the District Court for the District of Columbia under Section 11 of the Securities Act, alleging that they had purchased these securities which were then registered under the Act, relying partly upon false and misleading representations in a prospectus filed with the Federal Trade Commission. Nineteen suits of identical nature brought in the District of Columbia against the same defendants were by agreement stayed pending the determination of a single such action by the Court of Appeals for the District of Columbia. On June 1, 1937, the latter court held in Martin v. Hull et al. that the standard of care which must be exercised by a director in submitting for filing with the Commission statements compiled on the authority of experts was one of reasonableness and was not "the high degree of care necessary in the protection of the interests of the stockholders of the corpora tion." A petition for re-argument was filed on June 14, 1937.

Lawrence Adams & Company.-Three bills were filed under Section 12 (1) and (2) of the Securities Act in companion suits in the District Court for the District of Columbia on May 8, 1936, by Arnold K. Balls, Charles A. Browne, and Marion E. Lapp against Lawrence Adams & Company and Clarence Falk to rescind certain sales of oil royalty interests. The bills alleged that the defendants in failing to register the interests sold had violated Section 5, and further alleged that the sales had been induced by certain misrepresentations in charts purporting to show the location of producing oil wells and in misleading omissions to disclose that the oil wells were not in condition to begin production. Lawrence Adams & Company moved to quash service made upon it in New York. This motion was overruled on the theory that a plea in abatement should have been filed. The case is pending.

II. THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED

MISCELLANEOUS INJUNCTION PROCEEDINGS

Archie M. Andrews et al.-On August 12, 1936, suit was instituted by the Commission in the southern district of New York to enjoin the defendants from effecting wash sales, matched orders, and other manipulative transactions in the capital stock of the Dictograph Products Company, Inc., in violation of the provisions of Section 9 (a) of the Securities Exchange Act of 1934. On September 24, 1936, one of the defendants consented to the entry of a permanent injunction. While the suit was pending as to the other defendants upon the bill,

answer, and plaintiff's motion for a preliminary injunction, the Commission by order dated November 11, 1936, authorized an investigation to determine whether unlisted trading privileges on the New York Curb Exchange in the Dictograph stock should be suspended or terminated. The plaintiff's motion for an injunction pendente lite was denied November 23, 1936. On the same date the defendants filed a cross bill seeking to enjoin the Commission from engaging in any activity or investigation with respect to the capital stock of Dictograph Products Company, Inc., and the trading therein, until final determination of the Commission's suit. The relief requested in the cross bill was predicated upon numerous grounds, among them the unconstitutionality of the Act. The Commission moved to dismiss the cross bill for lack of jurisdiction and failure of the cross bill to state a cause of action in equity. That motion was granted, and on November 25, 1936, defendants took an appeal from the entry of the order granting the motion. On March 1, 1937, the Circuit Court of Appeals of the Second Circuit affirmed the order dismissing the cross bill, on the ground that a suit against the Commission could only be maintained in the manner and upon the terms specified in the statute (88 F. (2d) 441). The time for filing an application for a writ of certiorari was extended to July 29, 1937, and the defendants' petition was pending before the Supreme Court on June 30, 1937.

Aaron S. Saphier et al.-On August 25, 1936, the Commission filed suit in the southern district of New York to enjoin the defendants from further violations of Sections 9 (a) (1), (2) and (4) of the Securities Exchange Act and 5 (a) and 17 (a) of the Securities Act. An injunction pendente lite was denied without prejudice by Judge Mack on December 19, 1936. The suit was dismissed on January 26, 1937, stipulation that the defendants would discontinue the practices of which complaint was made.

on

Northwest Gas and Oil Properties, Inc., et al.-This represents the first case in which an injunction was obtained against violation of Section 15 (a) of the Securities Exchange Act. A bill was filed March 5, 1937, in the western district of Washington, charging violations of Section 15 (a) of the Securities Exchange Act and of Sections 5 (a) and 17 (a) (2) of the Securities Act and a permanent consent injunction was entered on the same date.

Additional cases involving miscellaneous injunctions under the Securities Exchange Act are as follows:

Secs. 5 (b) and 17 (a) of 1933 act, and secs. 7 (c) (2) and 11 (d) (2) of 1934 act.

Sec. 17 (a) of the 1933 act and sec. 9 (a) of the 1934 act.

Sec. 17 of 1933 act, and sec. 9 of 1934 act.

Sec. 17 (a) (2) of 1933 act; secs. 9 (a) (1) (A) and 9 (a) (2) and (3) of 1934 act. Sec. 9 (a) (1) and (2)

Sec. 5 (a) of 1933 act: sec. 15 (a) of 1934 act. Sec. 15 (a).

Sec. 5 (a) of 1933 act; sec. 15 (a) of 1934 act.

Sec. 17 (a) (2) of 1933 act; sec. 15 (a) of 1934

Sec. 9 (a) (1) and (2)..

CRIMINAL PROSECUTIONS INVOLVING THE SECURITIES EXCHANGE ACT

Three criminal prosecutions were instituted during the fiscal year involving the Securities Exchange Act. Violations of Section 9 were alleged in each of these cases. Their status is as follows:

CASES INVOLVING SUBPENA POWERS

McMann v. Engel et al, Securities and Exchange Commission, intervener. On July 21, 1936, McMann filed suit in the District Court of the United States for the Southern District of New York to enjoin the defendant Engel and others, partners in the stock brokerage firm of Engel and Company, from producing statements of the plaintiff's account in response to subpenas issued by the Securities and Exchange Commission in the course of its investigation to determine whether the plaintiff and others were engaged or about to engage in manipulative and other fraudulent acts and practices in the stock of the Budd Wheel Company and Wil-low Cafeterias in violation of the Securities Act of 1933, and the Securities Exchange Act of 1934. The bill of complaint alleged that the transactions in question were confidential; that the information called for by the subpenas was privileged and protected by the fourth amendment; that the subpenas infringed the plaintiff's immunity against "unreasonable searches"; and that the statutes under which the subpenas were issued were unconstitutional and void. Engel and Company, the primary defendant, took a neutral position and the Commission