Cases under the Net Capital Rule The "net capital rule" provides an important protection to investors against loss of securities or monies, due to financial straits of brokerdealers, by requiring every broker-dealer to limit his aggregate indebtedness to all persons to 2,000 per centum of net capital. During the year injunctions were obtained to enjoin broker-dealers from further violations of the net capital rule in S.E.C. v. Trigg,102 S.E.C. v. Wagner,103 S.E.C. v. Sano,104 S.E.C. v. The Christopher Corp.,105 S.E.C. v. Empire State Mutual Sales, Inc.,108 and S.E.C. v. Green.107 In the Empire State and Green cases, and in S.E.C. v. Aronson 108 and S.E.C. v. Carroll 109 the Commission charged defendants with violations of the fraud and record-keeping provisions of the Exchange Act, as well as the net capital rule. M. J. Shuck v. S.E.C., 264 F. 2d 358 (C.A. D.C., 1958), involved a petition for review of a Commission order denying withdrawal and revoking petitioner's registration as a broker-dealer. The Commission's revocation was based on findings that petitioner had been enjoined by a district court from violating the Commission's net capital rule and that revocation would be in the public interest. The Court of Appeals for the District of Columbia, in affirming the Commission's order, held, first, that the Commission had observed the fundamental purposes of section 9(b) of the Administrative Procedure Act and, second, that under the circumstances of this case, the Commission properly found revocation was in the public interest. Service on the petitioner of the temporary restraining order and the Commission's complaint in the action for the preliminary injunction as well as the issuance of the injunction itself met the requirement in 9(b) that written notice of the facts warranting a revocation be sent to the licensee prior to the agency proceeding. The Court stated that the record shows that even prior to the district court proceedings the Commission's staff had discussed with Shuck the matter of compliance. In addition, the court proceedings, the Court held, afforded petitioner a further opportunity to demonstrate compliance. Moving to the merits of the case, the Court concluded that it is not required that the injunction contain an express finding of wilfulness as petitioner had contended where revocation is based on the entry of an injunction. Evidence of wilfulness, however, might be considered by the Commission in applying the public interest criterion. The record of Shuck's action in the past supported the Commission's 102 USDC SD Texas, No. 12,236. 103 USDC SD NY, No. 138-41. 104 USDC SD NY, No. 147-363. 106 USDC SD Fla., No. 8982-M. 108 USDC SD NY, No. 142-295. 107 USDC ND Texas, No. 8060. 108 USDC SD Calif., No. 938-58 HW. 100 USDC D Mass., No. 59–194A. findings that the violation of the net capital rule was not unintentional or inadvertent. This past record coupled with the District Court's finding that Shuck would not maintain the required standards in the future could properly justify the Commission's revocation for the future protection of the investing public. Nor did the Court feel that Shuck's expressed wish to withdraw from the securities business or his alleged satisfaction of creditors precluded the Commission from taking this step. The Court stated that the Commission could hold its hearing which would reflect the facts shortly after they occurred and take prompt and appropriate action without waiting until Shuck re-entered into business. The Court of Appeals restated its ruling in Hughes v. S.E.C.110 that wilfulness means "no more than that the person charged with the duty knows what he is doing." Litigation Involving Broker-Dealer Registration and Reporting Requirements Gilligan, Will & Co., et al. v. S.E.C., 267 F. 2d, 461 (C.A. 2, 1959) involved a petition for review of the Commission's order suspending Gilligan, Will & Co. for 5 days from the National Association of Securities Dealers, Inc. for violations of section 5 of the Securities Act and finding James Gilligan and William Will causes of the order.111 Petitioners challenged the Commission's findings that they were underwriters with respect to 1955 and 1956 transactions in CrowellCollier debentures and stock. The Court upheld the findings and conclusion of the Commission that the resale of securities contemplated and executed by petitioner was a distribution or public offering and hence petitioners were underwriters. The Court rejected petitioners' argument that they took for investment where they intended to retain the stock only if the issuer continued to operate profitably. Some of the cases brought by the Commission involved failure of the defendants to file the reports required by the Exchange Act. In S.E.C. v. Alexander L. Guterma, and F. L. Jacobs Co.112 the complaint sought to enjoin the company and its then president and controlling stockholder, Guterma, from continuing to violate the antifraud and reporting requirements of the 1934 Act and the antifraud and registration requirements of the 1933 act. After Guterma resigned and disposed of his interest in the company, the new management consented to entry of a mandatory injunction ordering the company to prepare and file with the Commission all information, documents and reports required by the act. 110 174 F.2d 969, 977 (1949). For a discussion of the Commission's Findings and Opinion see 24th Annual Report, pp. 83-84. 112 USDC SD NY, No. 144-363. A criminal indictment is also pending against Guterma. See the discussion of criminal litigation, infra, this report. Upon application of the Commission the District Court at New York City appointed receivers for the assets of the company. Immediately thereafter a petition for reorganization under chapter X of the Bankruptcy Act was filed and is now pending in the District Court at Detroit, Mich. The Commission is participating in these proceedings. In S.E.C. v. Interworld T. V. Films, Inc.,113 the court entered a mandatory injunction requiring the filing of reports on Forms 8-K, 9-K, and 10-K and restraining future violations of the reporting requirements. In a companion case, S.E.C. v. Guild Films Co.,114 the court ordered reports to be filed correcting a previously filed Form 10-K and enjoined future violations. 114 A mandatory injunction was entered by consent in S.E.C. v. Peruvian Oil Concessions Co., Inc.,115 requiring the company to file annual reports for fiscal 1955, 1956 and 1957. In S.E.C. v. First Lewis Corporation,116 defendant was charged with failing to make available for examination by representatives of the Commission the books and records required to be kept by the Exchange Act. The Court enjoined the defendant from doing business in securities while failing to make such books and records available. A permanent injunction was also entered in S.E.C. v. Bradford, for failure to make available books and records and for failure to file a report of the financial condition of a brokerage firm. 117 Proxy Litigation The Commission appeared as plaintiff in one case of proxy litigation. In S.E.C. v. Central Foundry Co., et al.,118 the Commission obtained a court order delaying the effect of votes cast by stockholders of the company at the Annual Meeting, charging both management and the opposing Independent Stockholders Protective Committee with violations of the proxy rules. The management filed a notice of appeal from the order and the case was set for hearing on the Commission's complaint. However, before any further action was taken, the next Annual Meeting was held from which the stockholders' faction emerged victorious by a substantial margin. Neither side was charged with illegal practices in connection with the second meeting. The management faction then stipulated to dismissal of its appeal. Thereupon the Commission stipulated to dismissal of its complaint. Contempt Proceedings In S.E.C. v. East Boston Co., Bernard Goldfine, et al.,119 the Com 113 USDC SD NY, No. 145-328. Bradford has filed notice of appeal. mission found it necessary to bring a contempt action to enforce an injunction order previously obtained. The respondents were found in civil contempt for failure to file the semi-annual report of the company required under the Exchange Act. The respondents consented to payment of a $2,500 fine by the individuals. The company had earlier paid $3,000 compensatory damages. Participation as Amicus Curiae As noted in the last annual report, the Commission filed briefs in two cases in which the validity of rule 16b-3, insofar as it exempts the exercise of stock options from section 16(b) of the Exchange Act, was brought into question. In the first of these cases, Perlman v. Timberlake, the judge of the United States District Court for the Southern District of New York declared in dictum that the rule is invalid, but held that the defendants were protected from liability because of their good faith reliance upon the rule. The other case, Van Aalten v. Hurley, now pending before another judge of the same court, has not yet been decided.120 In Taylor, et al. v. Janigan (USDC D. Mass, No. 85-1056), the case arose out of the purchase by the President of Boston Electro Steel Casting, Inc. of substantially all of the outstanding stock from the shareholders. The plaintiffs brought suit under section 10(b) of the Exchange Act and rule 10b-5 thereunder, charging that they were induced to sell by defendant's misrepresentation. The defendant moved to dismiss on the grounds of lack of jurisdiction and failure to state a cause of action. Defendant also argued that 28 U.S.C. § 1331, which requires a $10,000 amount to be in controversy, governs the implied right of action under the Exchange Act and the rules under it. The Commission filed a brief amicus curiae. The court supported the Commission's arguments, denying the motion to dismiss. The court stated that section 10 (b) and rule 10b-5 gave rise to the cause of action and to Federal jurisdiction, and that interveners need not comply with the requirement as to amount in controversy, because section 27 of the Exchange Act grants jurisdiction without reference to amount. 130 After the close of the year the United States District Court for the Southern District of Texas held, in Continental Oil Co. v. Perlitz, that the rule is within the Commission's exemptive authority. The opinion expressly declined to accept the rationale of the Timberlake case. In addition, the Van Aalten case was decided on July 30, 1959, but the trial judge held that it was unnecessary to decide the validity of the rule, and declined to express an opinion. PART VI ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 The Public Utility Holding Company Act of 1935 provides for the regulation by the Commission of interstate public-utility holding company systems engaged in the electric utility business or in the retail distribution of gas. The matters dealt with embrace intricate and complex questions of law and fact, and generally involve one or more of three major areas of regulation. The first of such areas covers those provisions of the act, contained principally in section 11 (b) (1), which require the physical integration of public-utility companies and functionally related properties of holding company systems, and those provisions, contained principally in section 11(b) (2), which require the simplification of intercorporate relationships and financial structures of holding company systems. The second area of regulation covers the financing operations of registered holding companies and their subsidiaries, the acquisition and disposition of securities and properties, and certain accounting practices, servicing arrangements and intercompany transactions. The third area of regulation includes the exemptive provisions of the act, the provisions covering the status under the act of persons and companies, and those regulating the right of a person affiliated with a public-utility company to acquire securities resulting in a second such affiliation. The staff functions under the act are performed in the Branch of Public Utility Regulation of the Division of Corporate Regulation. COMPOSITION OF REGISTERED HOLDING COMPANY SYSTEMS SUMMARY OF CHANGES On June 30, 1959, there were 21 registered holding company systems subject to regulation under the act. Of these, 3 systems, namely, (1) Cities Service Company, (2) Electric Bond and Share Co., and (3) Standard Gas and Electric Co., do not own as much as 10 percent of the voting securities of any public-utility company operating within the United States. The remaining 18 systems are referred to herein as "active registered systems." Included in the 18 active registered systems there were 19 registered holding companies of which 13 function solely as holding companies and 6 function as operating companies as well as holding companies.1 1 In one of these systems there are two registered holding companies. |