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obtained by the Commission permanently enjoining defendants from further sales or offers of sales.37
Among other cases in which fraudulent misrepresentations were enjoined were: S.E.C. v. General Associates, Inc., S.E.C. v. The Angelique Co., S.E.C. v. J. P. Lord, Inc., S.E.C. v. Walker-Stevens, Inc., S.E.C. v. Consolidated Enterprises, Inc., S.E.C. v. Kimball Securities, Inc.13 and S.E.C. v. International Corp., et al.**
In S.E.C. v. Arvida Corporation 5 the Commission's complaint charged two broker-dealers with violation of section 5(c) of the Securities Act prohibiting public offerings of securities before the filing of a registration statement. In enjoining any further violation, the court held that the issuance of a press release giving a number of facts concerning the development of Arvida Corporation and the proposed stock offering, and the convening of a press conference at which additional facts were given, including the proposed price, constituted an offer to sell within the meaning of the act and was in violation of the act because a registration statement covering the securities offered had not been filed with the Commission. Judgment was entered upon consent of defendants. In related broker-dealer proceedings (see p. 103, infra) the Commission also concluded that defendants had violated the registration provisions of the 1933 act willfully, but held that no sanction was required in the public interest under the particular circumstances of the case. Securities Exchange Act Release No. 5870 (February 9, 1959). After the institution of these proceedings a registration statement was filed and became effective.
In a case still pending, the Commission has brought suit to enjoin John Addison, Niles White, White, Green & Addison Associates, Inc., Trans-world Mining Corporation, Murchison Ventures, Inc., and numerous individual officers and employees, from further violating the registration provisions of the Securities Act of 1933, and to enjoin the defendants, their banks and depositories from dissipating or disbursing the assets or funds of these defendants, and particularly the sum of $146,625 found in a suitcase left by Addison in a public carrier terminal. The Commission's complaint charges that since 1955 the defendants have been selling securities, namely, notes, evidences of indebtedness, participation in profit-sharing agreements, investment
37 U.S.D.C. W.D. Okla. No. 8452.
38 U.S.D.C. N.D. Wash. No. 4708.
39 U.S.D.C. D. Conn. No. 7726.
40 U.S.D.C. S.D. Fla. No. 9231-M.
41 U.S.D.C. S.D. N.Y. No. 135-313.
42 U.S.D.C. S.D. N.Y. No. 145-7.
43 U.S.D.C. S.D. N.Y. No. 142-153.
44 U.S.D.C. D.C. No. 1518-59.
45 U.S.D.C. S.D. N.Y. No. 136-67.
40 S.E.C. v. Addison et al., U.S.D.C. N.D. Texas No. 8224.
contracts, and fractional undivided interests in oil, gas, and other mineral rights, by use of the mails and in interstate commerce, without having first registered with the Commission. In a supporting affidavit filed with the complaint, it was alleged that Addison and his associates obtained loans from approximately 400 individuals in 23 States, the total of such loans amounting to nearly $1 million. A preliminary injunction has been entered and the sum of $146,625 ordered impounded in the registry of the Court pending a hearing on the merits of the case.
Permanent injunctions restraining sales in violation of the registration provisions were decreed by consent in the following cases: S.E.C. v. Pettyjohn, et al.,* S.E.C. v. Justus, et al., S.E.C. v. Hillsborough Investment Corp., S.E.C. v. Robbins, S.E.C. v. Bonanza Oil Corp., et al., S.E.C. v. Hinsdale Raceway, Inc.,52 S.E.C. v. Vanco, Inc., et al., and S.E.C. v. Mono-Kearsarge Consol. Permanent injunctions were also entered in S.E.C. v. Southwest Securities Inc., et al.,55 and S.E.C. v. Ben Franklin Oil and Gas Corp., et al., both discussed in the 24th Annual Report.57
In the Hillsborough case, supra, the court granted a preliminary injunction against defendants Hillsborough Investment Corporation and Roger Mara, its manager. The defendant corporation, incorporated in New Hampshire, advertised in the newspapers, offering to sell its stock to New Hampshire residents. A few advertisements contained no such limitation. About a dozen sales were made to nonresidents, in some cases after being held in the name of a resident for 30 days. Defendants resisted the motion for a temporary injunction on the ground that a small number of interstate sales, where no future interstate sales were contemplated, should not take the issue out of the intrastate exemption contained in section 3(a) (11) of the 1933 act. The court held that even a single sale to a nonresident, whether directly or through the device of selling to a resident intermediary, destroyed the exemption as to the whole issue, and required registration in order to make future sales to residents.
The Mono-Kearsage Consolidated Mining Company case, supra, was an action by the Commission to enjoin sales of that company's stock without registration by broker-dealers and others who had received the stock from transferees of the company who were in control of the company. The defendants contended that they did not know of the control relationship. The Court, in granting an injunction, held that defendants were underwriters within the meaning of the Securities Act of 1933, that the term "underwriter” includes anyone who purchases from a person directly or indirectly controlling an issuer, or in common control with the issuer, with a view to public distribution of the securities of the issuer, that the defendants were to be held to have knowledge of those facts which they could obtain upon reasonable inquiry. The Court said further:
Probably the facts directly known by them were sufficient to acquaint them with the true situation. If not, they were sufficient to impose upon them the duty of making further inquiry. Under the circumstances, they were not entitled to rely solely on the self-serving statements of Pennington and the other Canadians denying those facts which would have indicated that they were representing controlling persons, or were under common control with an issuer. With all these red flags warning the dealer to go slowly, he cannot with impunity ignore them and rush blindly on to reap a quick profit. He cannot close his eyes to obvious signals which if reasonably heeded would convince him of, or lead him to, the facts and thereafter succeed on the claim that no express notice of those facts was served upon him. 167 F. Supp. 248, 259 (D. Utah, 1958).
Litigation Relating to Stop Order Proceedings
In Columbia General Investment Co. v. S.E.C.,58 the Court of Appeals for the Fifth Circuit affirmed a Commission stop order pursuant to section 8(d) of the Securities Act suspending the effectiveness of Columbia's registration statement and denying Columbia's application for withdrawal prior to the effective date of the registration statement. Relying on Jones v. S.E.C., 298 U.S. 1 (1936), Columbia contended that the request for withdrawal divested the Commission of jurisdiction to issue the stop order. In upholding the Commission's order, the Court distinguished the Jones case on the fact that in the instant case 1,800 members of the public held 63,000 shares of the same class of securities covered by the registration statement. The Court noted that these stockholders and members of the investing public who might trade in these securities are proper subject of the official concern of the Commission. Moreover, the Court stated that since Jones a significant change in the law had taken place and it could no longer be said, as it was in Jones, that withdrawal was the concern of the registrant alone. Under the 1954 amendments to the act a registrant may now make offers to sell after filing but before registration. The Court ruled that, if a registrant has an unfettered right to withdraw under these conditions, then the machinery of the Commission could easily be employed as an instrument of fraud. The Court rejected Columbia's contentions that the filing of a substantive amendment terminates, for the purposes of stop order proceedings, the legal significance of the original registration statement.
55 265 F. 2d 559 (C.A. 5, 1959).
Participation as Amicus Curiae
In Woodward v. Wright, 266 F. 2d 108 (C.A. 10, 1959), the Commission filed a brief amicus curiae in an appeal from a judgment for the defendant-sellers of an undivided interest in oil and gas rights. The action was based on the civil liability provisions of section 12 of the Securities Act, and while the lower court found that the sellers' prospectus contained a material false statement, it barred recovery since the purchasers had failed to show their reliance on the misrepresentation. After concluding that the contract of sale conveyed fractional undivided interests in oil and gas and hence securities, the Court of Appeals reversed and remanded the case to the district court on the ground that the evidence brought the appellants within the liability provisions of section 12(2). The court rejected the district court's ruling and agreed with the Commission's position that Congress did not impose upon a plaintiff the burden of proving reliance as a condition of recovery under section 12(2). The court refused to permit recovery under section 12(1) holding on the particular facts that a public offering had not been made.
In Creswell-Keith, Inc. v. Willingham, 264 F. 2d 76 (C.A. 8, 1959), the Commission also filed a brief as amicus curiae. This was a private suit wherein the plaintiff involved section 12(2) of the act to rescind a commitment for securities claiming fraudulent misrepresentations were made. The defendants filed motions for dismissal for want of jurisdiction stating that neither the misrepresentations nor the delivery of the securities was made by use of the mails or interstate commerce. The trial court upheld this contention; however this holding was overruled on appeal where the court held, as urged by the Commission, that the section 12(2) “remedy is available if the mails or interstate commerce is used in any manner in consummating the sale” and that "payment of the consideration is part of the consummation of the sale."
ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF
The Securities Exchange Act of 1934 provides for the registration and regulation of securities exchanges and the registration of securities listed on such exchanges, and it establishes, for issuers of securities so registered, financial and other reporting requirements, regulation of proxy solicitations and requirements with respect to trading by directors, officers and principal security holders. The act also provides for the registration and regulation of brokers and dealers doing business in the over-the-counter market, contains provisions designed to prevent fraudulent, deceptive and manipulative acts and practices on the exchanges and in the over-the-counter markets and authorizes the Federal Reserve Board to regulate the use of credit in securities transactions. The purpose of these statutory requirements is to ensure the maintenance of fair and honest markets in securities.
REGULATION OF EXCHANGES AND EXCHANGE TRADING
Registration and Exemption of Exchanges
As of June 30, 1959, 14 stock exchanges were registered under the Exchange Act as national securities exchanges: American Stock Exchange
New York Stock Exchange Boston Stock Exchange
Pacific Coast Stock Exchange Chicago Board of Trade
Philadelphia-Baltimore Stock Exchange Cincinnati Stock Exchange
Pittsburgh Stock Exchange Detroit Stock Exchange
Salt Lake Stock Exchange Midwest Stock Exchange
San Francisco Mining Exchange New Orleans Stock Exchange
Spokane Stock Exchange Four exchanges have been exempted from registration by the Com. mission pursuant to section 5 of the act: Colorado Springs Stock Exchange Richmond Stock Exchange Honolulu Stock Exchange
Wheeling Stock Exchange Disciplinary Actions
Each national securities exchange reports to the Commission disciplinary actions taken against its members for violation of the Securities Exchange Act of 1934 or of exchange rules. During the year 4 exchanges reported 23 cases of such disciplinary action, including imposition of fines aggregating $27,550 in 14 cases, the sus