PART XI OTHER ACTIVITIES OF THE COMMISSION Civil Proceedings COURT PROCEEDINGS At the beginning of the fiscal year 1959 there were pending in the courts 54 injunctive and related enforcement proceedings instituted by the Commission to prevent fraudulent and other illegal practices in the sale or purchase of securities. During the year 60 additional proceedings were instituted and 58 cases were disposed of, leaving 56 such proceedings pending at the end of the year. In addition the Commission participated in a number of corporate reorganization cases under chapter X of the Bankruptcy Act, in 7 proceedings in United States District Courts under section 11(e) of the Public Utility Holding Company Act and in 18 miscellaneous actions. The Commission also participated in 59 civil appeals in the United States Courts of Appeals. Of these, 20 came before the courts on petition for review of an administrative order, 17 arose out of corporate reorganizations in which the Commission had taken an active part, 17 were appeals in actions brought by or against the Commission, 1 was an appeal from an order entered pursuant to section 11(e) of the Public Utility Holding Company Act, and 4 were appeals in cases in which the Commission appeared as amicus curiae. The Commission also participated in 4 appeals or petitions for certiorari before the United States Supreme Court resulting from these or similar actions. Complete lists of all cases in which the Commission appeared before a Federal or State court, either as a party or as amicus curiae, during the fiscal year, and the status of such cases at the close of the contained in the appendix tables. year, are Certain significant aspects of the Commission's litigation during the year are discussed in the sections of this report relating to the statutes under which the litigation arose. Criminal Proceedings The statutes administered by the Commission provide for the transmission of evidence of violations to the Attorney General, who may institute criminal proceedings. The regional offices of the Commission prepare detailed reports in cases where the facts appear to warrant criminal prosecution. After careful review by the General Counsel's Office, these reports are considered by the Commission, and if it believes criminal prosecution is appropriate they are forwarded to the Attorney General. Commission employees familiar with the case often assist the United States attorneys in the presentation to the grand jury, the conduct of the trial, and the preparation of briefs on appeal. The Commission also submits parole reports prepared by its investigators relating to convicted offenders. During the past fiscal year, 45 new cases were referred to the Department of Justice for prosecution. This represents the highest number of criminal referrals in the past 17 years and the 5th highest in the Commission's history. Also during the fiscal year 27 indictments were returned against 111 defendants, the highest number since fiscal year 1943, and there were 24 convictions in 13 cases. There were six appeals in criminal cases during the fiscal year. In three instances the appeals were dismissed. The conviction was affirmed in the only appeal decided on the merits. The remaining two cases were still pending at the close of the period. Two criminal contempt proceedings were instituted during 1959, which were still pending at the end of the year.1 From 1934 to June 30, 1959, 2,487 defendants have been indicted in the United States District Courts in 602 cases developed by the Commission and 1,319 convictions obtained in 555 cases. Thus, over the past 25 years, convictions have been obtained and upheld in over 85 percent of the cases completed.2 As in past years, the criminal cases developed and prosecuted during the year covered a wide variety of fraudulent practices. They included frauds in the sale of securities of established as well as new businesses, frauds on the part of securities broker-dealers and their representatives, frauds in the sale of securities relating to oil and gas promotions and mining ventures, and fraudulent securities promotions of alleged inventions. In addition, defendants in a number of cases also were charged with violating the registration provisions of the Securities Act. The filing of a false registration statement under the Securities Act and the failure to file reports required under the Securities Exchange Act also were charged in certain of the cases. The "Ponzi" technique whereby promoters pay back to investors out of the investors' own funds monies which are falsely represented to be profits or interest on their investments was a part of the fraud alleged in a number of the cases in which convictions were obtained during the year. In U.S. v. Selected Investment Corporation et al., (W.D. Okla.), after 3 weeks of trial, Hugh A. Carroll was convicted and sentenced to 1 See Criminal Contempt Proceedings, appendix table 30, Part II. 2 A condensed statistical summary of all criminal cases developed by the Commission from the fiscal year 1934 through the fiscal year 1959 is set forth in appendix table 37. The status of criminal cases developed by the Commission which were pending at the end of the fiscal year is set forth in appendix table 38. 3 a term of 7 years on all counts of a 31-count indictment which charged violations of the antifraud provisions of the Securities Act of 1933, violations of the Mail Fraud Statute and conspiracy to violate both statutes. Three other defendants received sentences ranging from a suspended sentence with 5 years probation to 5 years imprisonment. The two corporate defendants were each fined $1,500 and one defendant was acquitted. The indictment alleged that the defendants employed a scheme to defraud in connection with the sale of certificate bonds of Selected Investments Trust Fund by means of false and misleading representations and by concealment of material facts. It was charged that the defendants paid dividends out of capital while representing to investors and prospective investors that such dividends were paid from profits earned by the trust fund created and managed by defendant Selected Investments Corporation; that false financial statements of the trust fund were distributed to investors; that the defendants illegally converted to their own use properties of the trust fund; that the defendants falsely represented that there were adequate safeguards to protect investors from loss and that their funds were invested in sound income producing securities." Convictions also were obtained after trial against two defendants in U.S. v. Monarch Radio and Television Corporation et al. (S.D. N.Y.). Prior to trial one defendant pleaded guilty. Two defendants were acquitted and the case dismissed as to the four remaining defendants. This indictment charged the defendants with making various misrepresentations in the sale of Monarch stock and with issuing false financial statements and paying dividends out of stock sale proceeds while representing that such dividends came from company earnings when the company had no earnings. A sentence of 18 months imprisonment was imposed upon Roy W. Adams (N.D. Texas) following his conviction of charges arising out of the fraudulent sale of stock of Central Finance Service, Inc. A codefendant, Council Mayo Forsyth, had previously been sentenced to 2 years imprisonment for the fraudulent sale of the same stock. The indictment charged that the defendants falsely represented to investors that the Central stock being offered was unissued stock and that the money received from the sale of such stock would be used by Central in its business operations; that Central was realizing substantial profits from its business operations and would pay substantial dividends and that investors would receive a return of all money invested in Central stock upon request. The promotion of alleged inventions resulted in convictions in U.S. v. Arnold E. Vandersee et al. (D.N.J.) and U.S. v. Gailon A. Bell * Sentence was later reduced to 5 years and notice of appeal was withdrawn. • Appeal pending by one defendant. The Commission is participating in reorganization proceedings of Selected Investment Corporation under chapter X of the Bankruptcy Act. (S.D. Calif.). After 6 weeks of trial in the Vandersee case defendants Vandersee and the Vandersee Corporation were found guilty on 11 counts of a 15-count indictment charging fraud in the offer and sale of common stock of the Vandersee Corporation The indictment alleged that as part of a scheme and artifice to defraud purchasers the defendants falsely represented, among other things, that the Vandersee Corporation had contracts with General Motors, General Electric, Ford Motor Company and other large corporations; that the corporation was producing equipment used in the manufacture and production of atomic energy, radio tubes, aircraft engines, printed circuits, and other electrical equipment; that the corporation had an order for $1 million from Bell Telephone and General Electric; and that the corporation had obtained title to two patents issued to Arnold E. Vandersee. The indictment also charged that the defendants failed to advise the public investors that some of the shares being offered by Vandersee were his personally owned shares, or the personally owned shares of other defendants. Vandersee was sentenced to a total term of 8 years and fined $5,000. The defendant corporation was fined $5,500. Two remaining defendants were found not guilty. In the Bell case defendant was found guilty on three counts charg ing violations of the antifraud provisions of the Securities Act, and two counts charging violations of the registration requirements of that act in connection with the sale of stock of Nu-Form Batteries, Inc. A sentence of 5 years probation was imposed upon Bell who was also ordered to make restitution. The indictment charged that Bell falsely represented that funds invested in Nu-Form Batteries stock would be used to acquire additional production facilities when, in fact, the defendant intended to and did appropriate such funds to his own use and benefit; that Bell had invented the Nu-Form Battery: that the battery would soon be distributed nationwide; that an affiliate of Nu-Form Batteries was equipped to assemble 2,000 batteries per day; and that Nu-Form stock would be listed on a national securities exchange. The indictment further charged that defendant failed to disclose that earlier attempts to manufacture and market the Nu-Form Batteries on a commercial basis had been unsuccessful and that earlier experience had indicated that the company could not generate sufficient revenue to cover operating expenses. In U.S. v. Albert Hefferan (W.D. Mich.) the defendant was sentenced to a prison term of 3 years following his plea of guilty to various counts of an indictment charging violations of the antifraud provisions of the Securities Act in connection with the sale of promissory notes purportedly secured by shares of stock. The indictment. alleged that as part of a scheme and artifice to defraud, the defendant placed a series of newspaper advertisements soliciting investors to advance him sums of money. It was represented in these advertise ments that the defendant would furnish collateral variously described as "listed, highgrade securities" and "grade A negotiable listed securities," having values substantially in excess of the amounts of the investments solicited. The indictment charged that the defendant did not intend to and did not pledge genuine securities as collateral for his promissory notes issued to investors, but delivered to them forged certificates which he falsely represented to be genuine. In addition, the indictment alleged that Hefferan falsely represented to investors that investments in his notes collateralized by purported shares of stock would be absolutely safe and involve no risk of loss; and that he had ample income from his business and investments to pay the monthly instalments of principal and interest provided in his notes. In U.S. v. Paul H. Collins (S.D. Ill.) the defendant, who was the representative of a broker-dealer, pleaded guilty to ten counts of a twenty count indictment charging him with violations of the Securities Act and the Mail Fraud Statute. Collins' sentence was suspended and he was placed on probation for 3 years. Hugh C. Van Valkenburgh (D. Neb.) entered a plea of nolo contendere to four counts of an indictment charging fraud in the sale of securities of Instant Beverages, Inc. The defendant was fined $11,500 and placed on probation for 3 years. The other defendant, Abraham Schapiro, had previously pleaded guilty to eight counts of the indictment and had been placed on probation for 30 months and fined $2,000. The indictment charged that the defendants employed a scheme to defraud purchasers of the securities of Instant Beverages, Inc. by misrepresenting that the proceeds from the sale of defendants' shares of stock would be used by Instant Beverage, Inc. to begin production, whereas the defendants converted the proceeds to their own use; and that formulae held by the company for an effervescent soft drink were perfected and that Instant Beverage, Inc. would soon cause to be produced a stable product in marketable quantities, whereas the defendants knew that the formulae and processes were incomplete and not perfected and that a stable product could not be produced therefrom. In addition, it was charged that the defendants sold stock to the public at $5 a share for which they had paid 1 cent per share, without disclosing to the investors the original cost of the shares. In U.S. v. Harold W. Danser Jr., et al (D. Mass.) the defendants are charged with violations of the antifraud provisions of the Securities Act in the sale of the common stock and warrants of Ultrasonic Corporation, and with conspiracy to file false registration statements under the Securities Act pursuant to which the stock offering was made and to defraud the United States by impeding and obstructing |