The Association reported to the Commission during the year the disposition of 31 complaints pursuant to Minor Violation Procedure. In 20 cases fines were imposed in amounts ranging from $25 to $100 and aggregating $1,325 and in 8 other cases the only penalty imposed was censure. In another case after the member admitted alleged violations and paid a fine of $100 under Minor Violation Procedure, the Board of Governors remanded the case to the appropriate committee for formal complaint treatment on the grounds that minor violation treatment was inappropriate where a member was charged with the repetition of acts for which it had previously been disciplined. The remand resulted in the filing of a formal complaint and a finding of violations for which a fine of $200 was imposed. In two other cases members rejected Minor Violation Procedure and required the filing of formal complaints. In one such case, the member demonstrated to the committee's satisfaction at a hearing that it had not acted improperly and the committee dismissed the complaint. In the remaining case, the member rejected an offer to admit alleged violations and to pay a fine of $25. A formal complaint was then filed and the district committee found violations and imposed a $25 fine. The member appealed this decision to the Board of Governors which affirmed the findings of violations and increased the penalty to a fine of $300 plus costs. Commission Review of NASD Disciplinary Action Section 15A (g) of the act provides that disciplinary actions by the NASD are subject to review by the Commission on its own motion or on the timely application of any aggrieved person. The effectiveness of any penalty imposed by the NASD is automatically stayed pending determination in any matter which comes before the Commission for review. At the beginning of the fiscal year, two such review cases had been pending before the Commission. During the year eight other such petitions were filed and three cases were disposed of, leaving seven petitions pending at the year end.81 The Commission dismissed an application filed by Samuel B. Franklin & Company seeking review of disciplinary action by the Association which had found that the firm had violated the Association's Rules of Fair Practice by selling securities to, and purchasing securities from, customers at prices which were not fair in view of all the relevant circumstances.82 An NASD District Committee had censured the firm, fined it $1,000 and assessed costs amounting to $773.80. The "The pending cases concerned applications filed by Sterling Securities Co., Marc Sterling, et al. (File 16-1A77); Raymond G. Chalikian (File 16-1A79); A. J. Grayson & Co., Inc. and Albert J. Grayson (File 16-1A80); Gerald M. Greenburg and Robert Leopold (File 16-1A81); L. C. Fisher Co. (File 16-1A82); Whitney & Co., Inc. (File 16-1A83); and Franz Bachmann (File 16-1A85). After the close of the fiscal year, the L. C. Fisher application was remanded to the NASD for reconsideration on the joint request of the NASD and Fisher. Securities Exchange Act Release No. 5915 (Mar. 24, 1959) and File 16-1A72. NASD Board of Governors on appeal affirmed this action and assessed an additional $153.29 in connection with the costs of the appeal. According to the Commission's decision, the basic facts were not in dispute. Out of 731 transactions in which Franklin & Co. as principal sold securities to customers during the period between January and May 1956, not including sales of investment company shares and other securities sold in a public offering pursuant to a prospectus, 642 transactions involved markups in excess of 5 percent. The company, as principal, purchased securities from customers in 428 transactions and in 159 of these transactions its markdown exceeded 5 percent. In the 642 sales transactions the markups were more than 10 percent in 549 instances, more than 15 percent in 402 cases, more than 20 percent in 260 transactions, and ranged from 30 to 62 percent in 99 cases. On its 159 purchases from customers, the markdown in 68 transactions exceeded 10 percent, in 32 it exceeded 15 percent, in 20 it exceeded 20 percent, and in 6 cases it ranged from 30 to 37 percent. In discussing the gross dollar amount of transactions, the Commission pointed out that of the 731 sales, 498 were in the $100-$500 category, and 108 each involved more than $500, and that of these 606 transactions, the markups were 30 percent or more in 55 cases and in excess of 20 percent in 184 cases. The price range of the securities sold was less than 10 cents per share in 127 transactions, less than 50 cents in 477 transactions, and less than $1 in 499 transactions. These markups were computed on the basis of the firm's own cost on same day or contemporaneous purchases of shares of the same securities except that, in a relatively small number of instances where such information was not available, the computations were made on the basis of quotations obtained from the National Daily Quotation Service. The markdowns on the firm's purchases from customers were computed on the basis of same day or contemporaneous sales by the firm of shares of the same securities for its own account. The applicant urged, among other things, that most of the transactions involved purchases or sales of so-called "penny" stocks selling for less than $1 per share; that in most cases the dollar value of a transaction was small; that the NASD 5 percent markup policy should not be applied to low priced securities sold in small dollar transactions; that it was justified in charging an amount over cost sufficient to cover expenses; and that its markups over cost were not greater than the differences between the published bid and asked quotations on typical penny stocks. In its findings and opinion the Commission concluded that Franklin & Co.'s pricing practices clearly were unreasonable, at least in those transactions where the markups or markdowns were greater than 20 percent, as there was no showing of special circumstances such as unusual expenses, extraordinary services to customers or acquisition of inventory at special concessions. The Commission sustained the NASD finding that the firm had purchased and sold securities at prices which were not fair under all the relevant circumstances and which were not reasonably related to current market prices, that such conduct was inconsistent with just and equitable principles of trade and that the penalties imposed were not excessive, having due regard to the public interest.83 Two other applications for review of Association disciplinary action were dismissed by the Commission, consideration having been stayed pending determination of administrative proceedings against the parties concerned. These petitions had been filed by Batkin & Co. and Churchill Securities Corp.85 Dismissal of the petitions as moot followed action by the Commission revoking the broker-dealer registration of Batkin & Co. and expelling it from the Association 86 and similar action as to Churchill Securities Corp.87 Commission Review of NASD Action on Membership Section 15A (b) of the act and the by-laws of the NASD provide that, except where the Commission finds it appropriate in the public interest to approve or direct to the contrary, no broker or dealer may be admitted to or continued in membership if he, or any controlling or controlled person, is under any of the several disabilities specified in the statute or the by-laws. By these provisions Commission approval is a condition to the continuance in Association membership of any broker-dealer who, among other things, controls a person whose registration as a broker-dealer has been revoked or who was found to have been a cause of a Commission order of revocation. A Commission order approving or directing admission to or continuance in Association membership, notwithstanding a disqualification under section 15A (b) (4) of the act or under an effective Association rule adopted under that section or section 15A (b) (3), is generally entered only after the matter has been submitted to the Association by the member or applicant for membership. Where, after consideration, the Association is favorably inclined, it ordinarily files with the Commission an application on behalf of the petitioner. A brokerdealer whose application is refused Association sponsorship, however, may file an application directly with the Commission. The Commission reviews the record and documents filed in support of the application and, where appropriate, obtains additional evidence. At the beginning of the fiscal year one such petition was pending before the After the close of the fiscal year the firm filed a petition for review of the Commission's decision with the Court of Appeals for the Ninth Circuit. * Securities Exchange Act Release No. 5763 (Aug. 22, 1958) and File 16-1A67. Commission; during the year six petitions were filed and three were disposed of; and four were pending at the year end. 91 The three disqualified individuals whose employment was thus approved were: William A. Spanier,ss formerly president of Bennett, Spanier & Co., Inc., a firm revoked as a broker-dealer and expelled from the NASD by the Commission on May 28, 1952, on findings that, among other things, it had engaged in manipulative activities and had sold unregistered securities; " Kenneth E. Goodman," formerly sole stockholder of Kenneth E. Goodman & Co., a firm similarly revoked and expelled by the Commission on April 23, 1958, on findings that it had falsely stated its bank balance on its books and had effected securities transactions in violation of the Commission's net capital rule; "1 and Leonard H. Whitaker," whose registration as a broker-dealer had been revoked by the Commission in 1952 because of certain securities violations, including, among other things, the sale of unregistered securities and conversion to his own use of a payment from a customer for securities.93 Whitaker's employment by another NASD member firm had earlier been approved by the Commission under specified conditions. This second approval petition was necessary because Whitaker had changed employers. In each case the Commission found it appropriate in the public interest to approve the NASD applications in view of all the circumstances, including the lapse of time and supervision of the representatives. LITIGATION UNDER THE SECURITIES EXCHANGE ACT OF 1934 In order to protect the public, the Commission is authorized to institute actions to enjoin broker-dealers and other persons from engaging in activities which violate the provisions of the Securities Exchange Act of 1934. Some of these activities also violated provisions of the Securities Act of 1933 and are discussed above. Anti-Fraud Litigation In discharging its obligation to prevent frauds upon the public, the Commission filed a number of complaints during the past year. Final judgment enjoining Louis E. Wolfson from further violating the antifraud and antimanipulative provisions of the Exchange Act was obtained. This case is discussed at length in the 24th Annual report." The complaint alleged that Wolfson and others had attempted to 88 Securities Exchange Act Release No. 5778 (Sept. 25, 1958) and File 16-1A46. 92 Securities Exchange Act Release No. 5989 (June 16, 1959) and File 16-1A78. 4 Securities Exchange Act Release No. 5581 (Sept. 3, 1957) and File 16-1A64. 95 USDC SD NY No. 135-30. 06 At p. 100. defraud the public and to manipulate the market of American Motors stock; that he and his associates caused to be published in a financial newspaper an article stating that they owned 460,000 shares of that stock at a time when they had disposed of 200,000 shares, and that they later caused an article to be published stating that Wolfson had disposed of one-quarter of his 400,000 shares and would sell the rest during the coming months. Wolfson, according to the complaint, omitted to disclose that he had disposed of all his holdings in American Motors, had in fact sold short, and was attempting to buy stock to cover his short position. Judgment against Wolfson was entered by consent. In S.E.C. v. Wilkes," the Commission's complaint charged violations of the short selling and antifraud provisions of the Exchange Act and the Commission's rules in that defendant caused four brokerdealers to sell for his account on the American Stock Exchange an aggregate of 29,100 shares of Hazel Bishop, Inc. common stock, by falsely representing to the brokers that he owned such stock. A final decree enjoining further violations of the act was entered on consent of defendant.98 Three cases involved violations of the Exchange Act with regard to over-the-counter sales. In S.E.C. v. McDonald 9 the complaint alleged that the corporate defendant broker-dealer accepted moneys and securities and represented that it would fulfill its obligation to deliver securities or moneys due when in fact it could not and did not intend to do so. Affidavits filed in support of a motion for a temporary restraining order alleged, among other things, that a broker-dealer firm had paid defendant $50,000 for the purchase of securities which were never delivered, that employees of defendant stated that members of the public had paid more than $250,000 for securities which were not delivered, and that the Dayton Aviation and Radio Equipment Corp., which had engaged defendant as underwriter for its offering of some 500,000 shares of common stock, had received proceeds from the sale of only 274,200 shares although in fact the whole issue had been sold. A permanent injunction was obtained by default against the firm and its president. In S.E.C. v. Campbell 100 and in S.E.C. v. Rosen 101 the Commission charged defendant brokerage firms with accepting customers' orders and deposits of money and securities upon the representation that they were ready and able to meet all obligations, when in fact they were insolvent and unable to meet current liabilities. Permanent injunctions were entered in both cases. USDC SD NY No. 145-163. In a companion case, S.E.C. v. Brown, USDC SD NY, No. 145-236, the defendant was permanently enjoined from further short-sales of Hazel Bishop, Inc. stock. *USDC SD NY, No. 139-190. 10USDC SD Texas, No. 12,347. USDC D Mass., No. 58-869-A. 529523-59—11 |