After appropriate notice, hearings were held before a hearing officer. Proposed findings and briefs were submitted by the Division of Trading and Exchanges and the registrant, and the hearing officer filed a recommended decision in which he recommended that registrant's registration be revoked. Exceptions were filed by registrant and we heard oral argument. Our findings are based on the basis of an independent review of the record.

INLAND STOCK TRANSACTIONS

In May 1949, Inland filed a Notification pursuant to Regulation A under the Securities Act of 1933 covering an offering of 600,000 shares of common stock at 50 cents a share. Registrant was named as underwriter and the underwriting commissions were fixed at 25%, or 121⁄2 cents a share. After sales of approximately 46,000 shares had been effected in 1949, the underwriting agreement was amended and a revised prospectus, dated April 15, 1950, was filed.

The revised prospectus stated that, pursuant to the new underwriting arrangements, Inland agreed to pay the expenses of the sale of the balance of the issue, including the cost of preparing and printing the prospectus, additional printing and advertising in an amount not in excess of $10,000 and fees of geologists, counsel and accountants. It also stated: "Expenses of issue, including professional fees, printing and advertising, travelling expenses, and administrative costs in the preliminary stages, are estimated at $15,000 to $17,500 leaving a maximum of approximately $190,000, available to the Company when, as and if the entire issue is sold."

Between April 22, 1950, and September 1, 1951, registrant as underwriter sold 531,900 shares of Inland stock for $265,950, of which it retained $66,468.65 as commissions and remitted the balance of $199,481.35 to Inland. Throughout this period the prospectus dated April 15, 1950, containing the statements mentioned above, was used in effecting sales. However, amounts were expended by Inland which were greatly in excess of those estimated in the prospectus and part

shall, for the purposes of this subsection, by rules and regulations define such devices or contrivances as are manipulative, deceptive, or otherwise fraudulent. Rule X-15C1-2 provides in part:

"(a) The term 'manipulative, deceptive, or other fraudulent device or contrivance,' as used in section 15 (c) (1) of the Act, is hereby defined to include any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

"(b) The term 'manipulative, deceptive, or other fraudulent device or contrivance,' as used in section 15 (c) (1) of the Act, is hereby defined to include any untrue statement of a material fact and any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, which statement or omission is made with knowledge or reasonable grounds to believe that it is untrue or misleading."

of which had no relationship to the cost of selling the stock and were solely for registrant's benefit.

Inland occupied a small room in registrant's suite of offices. Between April 15, 1950, and July 1, 1951, Inland expended $62,773.69 for various items described as payroll, postage and mailing, office expense, travel and entertainment, furniture and fixtures, telephone and advertising and sales promotion. The record shows that payments were made by Inland for furniture and typewriters which were used by registrant and not by Inland, and for the cost of printing and mimeographing under registrant's letterheads of reports and analyses of companies engaged in the production of sugar, merchandising and other businesses, reprints from newspapers, forms of sales confirmations, form letters and other material for use in registrant's business. The postage and mailing items also included expenditures for registrant's benefit, and Inland's payroll included salaries paid to employees hired by registrant whose work was done for registrant and not for Inland.

Registrant asserts that the financial transactions between him and Inland were to be the subject of a future accounting and that any diversion of funds from Inland was not the fault of registrant but of Inland's treasurer. The record does not support these assertions. There was no resolution of Inland's Board of Directors or other written evidence of any arrangement for a later accounting. Registrant personally presented bills for amounts covering items not incurred for Inland's benefit to Inland. He has not shown any justification for including items of his own expenses, many of which were paid to him directly by Inland, nor did he maintain any records identifying the amounts attributable to him as distinguished from Inland. We find that registrant caused the improper diversion of funds from Inland and that his failure to disclose such diversion and the amounts paid out as expenses when he sold Inland stock on the basis of the April 15, 1950 prospectus which contained much lower estimates of expenses, constituted fraudulent conduct under the provisions cited above.

Inland participated at various times in drilling operations and other exploratory work in Michigan, Kansas and Louisiana, all of which was unsuccessful. On July 1, 1951, as a result of the unsuccessful drilling and the payment of large amounts of expenses, Inland's cash balance had been reduced to $1,825.48 and it owned some pipe which was later sold for $7,500. Nevertheless, between July 1 and September 1, 1951, registrant sold 23,285 shares of Inland for $11,642.50 on the basis of the April 15, 1950 prospectus without disclosing that

Inland had theretofore secured through the sale of the major part of its stock offering approximately $190,000 and that such funds had been virtually exhausted. This omission also constituted a fraud on the purchasers of the shares.

In addition, the record shows that registrant's salesmen made affirmative false representations to prospective purchasers as to the success of Inland's drilling operations, the amount of oil being produced, the realization of profits by the company, and the likelihood of the stock being traded on a securities exchange or the over-thecounter market at increased prices.

MAGMA KING STOCK TRANSACTIONS

Between December 1, 1952, and January 22, 1953, registrant purchased 40,600 shares of Magma King stock from other brokers and dealers at an average price of 27 cents a share or a total cost to registrant of $10,972, and purchased 46,350 shares from members of the public at an average price of 28.6 cents a share or a total cost of $13,264, making a total of 86,950 shares acquired at a cost of $24,236. During this period registrant sold to the public 87,700 shares at a price, in the case of almost all of the transactions, of 40 cents a share, or a total of $35,170. Registrant's gross profit on the 86,950 shares amounted to $10,544, representing an average markup over cost of 432%.

During this period Magma King stock was quoted in the daily sheets published by the National Quotation Bureau, which give the prices bid and asked by interested dealers for securities traded in the overthe-counter market. At various times during the period eight firms, exclusive of one firm which acted on behalf of registrant, placed quotations in the daily sheets ranging from 21 cents to 29 cents a share for bids and from 25 cents to 35 cents for offers, and the record shows that these firms effected purchases and sales, including transactions for and with customers, within the price ranges reflected by the quotations. Registrant's sales to customers were made at prices which exceeded the high offers in the sheets by a total of $9,852, which represented an average markup over such quotations of 11.2 cents per share or 38.9%.

Notwithstanding the prevailing market prices and the fact that registrant was concurrently acquiring shares at prices ranging from

3 Registrant objected to the admission of these sheets in evidence on the ground that they are circulated primarily among dealers and the quotations therein, while they may afford some indication as to the prices which dealers may trade among themselves, do not give any indication of market prices at which dealers will buy from or sell to the general public. This objection is overruled. We have held, with judicial approval, that

such quotations are admissible as evidence of market prices. Charles Hughes & Co., Inc., 13 S. E. C. 676 (1943), affirmed 139 F. 2d 434 (C. A. 2, 1943); Allender & Company, Incorporated, 9 S. E. C. 1043 (1941).

388606-57-44

25 to 30 cents a share, registrant's salesmen recommended the stock to purchasers at 40 cents a share without disclosing that the market price was substantially below this amount. In a number of instances registrant's salesmen expressly misrepresented to such purchasers that the current market price was 40 cents, and in one case told a customer that such price was 50 cents but that registrant was able to secure the stock for the customer for 40 cents. Both the failure to reveal that the price at which it sold the stock was substantially above the prevailing market price and the express misrepresentations constituted fraudulent conduct within the meaning of the anti-fraud provisions cited.

4

CONCLUSIONS AS TO VIOLATIONS AND PUBLIC INTEREST

In effecting both the sales of Inland and Magma King stock, registrant used the mails and instrumentalities of interstate commerce, and on the basis of the facts set forth above we find that registrant willfully violated Section 17 (a) of the Securities Act of 1933 and Section 15 (c) (1) of the Securities Exchange Act of 1934.

The public interest requires the revocation of registrant's registration as a broker and dealer and his expulsion from the NASD. The violations in connection with the sale of both the Inland and Magma King stocks, in connection with which substantial losses have been incurred by numerous investors, are clear. In our opinion the violations with respect to either the Inland or the Magma King stock would by themselves require the imposition of this sanction in the public interest, and we cannot accept registrant's contention that the circumstances call for a lesser sanction."

An appropriate order will issue.

By the Commission (Chairman Demmler and Commissioners Rowen, Adams, Armstrong and Goodwin).

It has been held that it is a fraudulent device for a dealer to charge prices not reasonably related to the prevailing market price without disclosing that fact. Charles Hughes & Co., 139 F. 2d 434 (C. A. 2, 1943).

Registrant asserts that he was interested in making Inland a success and points to the fact that he made trips to inspect Inland's operations and invested some of his personal funds in the company. We regard these facts as of little significance in view of the na

ture of the violations we have found.

INDEX DIGEST

The following digest of decisions presents a consolidated summary of the case headnotes arranged alphabetically according to topic headings. The digest is divided into three parts:* Part I, containing decisions under the Securities Exchange Act of 1934; Part II, the Public Utility Holding Company Act of 1935; and Part III, the Investment Company Act of 1940.

The case headnotes have not been carried over verbatim into this digest. To facilitate the grouping together of decisions standing for a similar proposition under a single digest heading, it has been necessary in some cases to delete from the headnotes all matter not pertinent to the general proposition for which the headnote stood, i. e., the names of companies, the principal amounts of security issues, etc. To the same end, certain case headnotes have been entirely redrafted for the digest so as to conform to a uniform statement of the general proposition. In a few instances, case headnotes, which were not considered important for the purposes of this digest, have been omitted from the digest altogether.

During the period covered by this volume there were no opinions containing case headnotes under the Securities Act of 1933, the Trust Indenture Act of 1939, or the Investment Advisers Act of 1940.

35 S. E. C.

669