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and as a combat and special intelligence officer in the Southwest Pacific. He was separated to inactive duty in January 1946 with the rank of captain. In the fall of 1948, he served as an Assistant Attorney General of the State of New York in the Election Frauds Bureau in New York City. From July 1951 to August 1954 he was employed as law assistant to the Appellate Division, First Department, Supreme Court, State of New York. He was associated with the firm of Spence & Hotchkiss, New York City, from August 1954 until November 1955. In November 1955 he was appointed Administrator of the Commission's New York Regional Office. He served in that capacity until June 29, 1956, when he was sworn in as a member of the Commission for a term of office expiring June 5, 1961. He is a Lecturer at Law at the University of Virginia.

PART I

CURRENT PROBLEMS BEFORE THE COMMISSION

The foreword to this report has described the nature of the laws administered by this Commission, the abuses in the securities markets which led to their enactment and some of the problems encountered in administering these laws during the past quarter century. During the 1959 fiscal year these laws were put to their severest test for during that year the nation witnessed the highest level of activity in the securities markets since the organization of the Commission in 1934. This increase in market activity created complex enforcement problems, required the adoption of new regulatory measures and techniques and imposed heavy administrative burdens upon the staff of the Commission. The effects of surging securities markets upon the activities of the Commission are described in detail later in this report. This section briefly sets forth some of the more important problems created by these conditions and the impact of these problems upon the work of the Commission.

The following salient statistics reveal the remarkable increase in activity in the securities markets and the tremendous growth of public interest and participation in those markets:

The total amount of new securities for which registration statements were filed with the Commission in fiscal 1959 totaled $16.6 billion, only $300 million less than the record amount filed in fiscal 1958.

During fiscal 1959 the Commission processed 1,119 registration statements, the largest number of registration statements ever to be processed in a single year in the history of the Commission.

The number of broker-dealers registered with the Commission rose to 4,907, an increase of almost 1,000 registrants since 1951, and the number of representatives registered with the National Association of Securities Dealers, Inc., on June 30, 1959 was 77,917, the largest number in its 20-year history.

The aggregate market value of all stocks on all stock exchanges, which never exceeded $100 billion between 1933 and 1945, reached $337.6 billion on June 30, 1959, almost three times the market value of all stocks on exchanges during the first decade of the Commission's history.

The reported volume of trading on the New York Stock Exchange increased from a daily average of 2 million shares in February 1958, to a peak of 4,100,000 shares in October and November 1958, the highest daily average for any month since June 1933.

The number of holders of shares of publicly owned corporations, according to estimates by the New York Stock Exchange, increased from 6,490,000 in 1952 to 12,500,000 in 1959, the largest number of public shareholders in the nation's history.

The number of registered investment companies increased from 367 in 1952 to 512 in 1959, and the total assets of investment companies increased from $6.8 billion in 1952 to $20 billion in 1959.

A number of factors appear to be responsible for this increase in activity and interest in the securities markets. Among these are the attractiveness of these markets for financing new corporate enterprises and the expansion of old ones, the emphasis upon capital gains in selling equity securities, the fear of inflation, the growing participation in the market of the large institutional investor and an unfortunate tendency among some persons to use the stock market as a medium for gambling. However, the principal concern of the Commission is not with the cause of this activity but with insuring that the securities markets, however active, are fair, orderly and honest, that prices in these markets express the free interplay of supply and demand and that decisions by investors to buy or sell are made in the light of full disclosure of all material facts. The discharge of these statutory responsibilities by the Commission is complicated in present securities markets by the participation of a large number of inexperienced investors and by broker-dealers and promoters unfamiliar with, or contemptuous of, the ethical and legal obligations owed to investors. Fraud in the Sale of Securities

Active and rising markets have raised the expectations of a substantial segment of the public that it is possible for the unsophisticated investor to reap large and quick profits. In this atmosphere opportunities for fraud and manipulation multiply. Investors become less concerned with the facts about the issuer and the investment characteristics of its securities than with the allure of a possible “killing" described to them by an unknown salesman over the telephone. They become more susceptible to baseless tips and rumors, thus facilitating a variety of deceptive and manipulative practices.

This atmosphere has attracted into the business of selling securities not only the confidence man, the petty swindler and the corporate plunger, but also an outright criminal element. These persons have seized upon the technique of selling securities to unsuspecting customers through the use of boiler rooms. The term “boiler room” refers to a firm engaged in the sale of securities primarily over the long distance telephone, to persons with whom the firm has had no previous contact and by high pressure methods ordinarily accompanied by gross misrepresentation and other fraudulent devices.

Boiler rooms may operate not only from the large financial cen

be

ters but also in other locations around the country. There has been a noticeable increase, for example, in migratory operators moving from state to state. In some promotions several boiler rooms may used to sell the spurious issue in widely scattered areas around the country, each boiler room being assigned to saturate its particular region. Not infrequently the long distance telephone salesmen for the boiler room establish themselves in hotel rooms, apartments and alleged business offices.

In many cases, the security sold by a boiler room is unknown and worthless. To create the appearance of an active over-the-counter market for the security, the promoter will place with numerous brokers and dealers, orders for the purchase and sale of small amounts of the security at prices set by him, or arrange to have others do this, with the result that such brokers and dealers will publish quotations for the security at the prices specified in the orders. The salesmen for the boiler room are now able to refer in their sales "pitch" to a market price for the security which the unsuspecting investor can independently verify. When the distribution of the promoter's holdings is completed, however, the orders are withdrawn and the “market” disappears.

In his telephone sales pitch, the boiler room salesman usually promises rapid increases in the market price of the security and no risk of loss in its purchase; he may make numerous misrepresentations concerning the issuer and its future prospects; he may urge purchases notwithstanding statements on the part of the customer that he cannot afford to do so; and he may advise the customer, of whose financial situation he knows nothing, to sell valuable securities in order to purchase the spurious boiler room security being offered.

The Commission has found that resort to the civil injunction and administrative proceeding, no matter how vigorously employed, is not completely effective in halting the operation of boiler rooms. Promoters easily find another worthless issue and either establish or use an existing boiler room as a vehicle for a new fraudulent promotion. The Commission believes that only criminal prosecution will effectively stop those who show such a contemptuous disregard for the law. The Commission has, therefore, placed increased emphasis in its work upon the prosecution of such offenders. In fiscal 1959 the Commission referred to the Department of Justice 45 cases for criminal prosecution, one of the highest number of referrals in the Commission's history, and referrals are continuing at approximately the same rate in fiscal 1960.

A large portion of the Commission's staff is now engaged in investigating, developing, and assisting in the prosecution of criminal actions. Such activity requires careful and painstaking work usually over a period of many months. Investors must be identified and inter

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