provisions of the Federal Rules of Civil Procedure. One of the salesman-defendants served interrogatories on the Commission demanding the number and copies of all questionnaires received from investors by the Commission. The Commission disclosed the number of questionnaires it received but refused their production, except as to those of any witnesses it would call at the time of trial. The court sustained the Commission's objection that the questionnaires sought by the defendant were irrelevant and would lead to the discovery of no admissable evidence, and that no good cause was shown to require production. S.E.C. v. Arkansas Business Development Corp.103 was an action for violation of the anti-fraud provisions. It was charged that defendants falsely stated to investors that the entire proceeds of the sale would go to the treasury of the company. Other fraudulent statements concerned the safety and prospects of the investment, and the financial condition of the company. A temporary restraining order was obtained and is still in force pending final disposition by the court. In S.E.C. v. Sherburn J. Dodge 104 and S.E.C. v. Smith Holly Co.,105 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. Injunctions were entered and, in the Dodge case, a receiver was appointed to take charge of the remaining assets. Other cases involving violations of the anti-fraud provisions or of the financial responsibility, net capital, or bookkeeping requirements in which injunctions were obtained included: S.E.C. v. Aldrich Scott & Co.,106 S.E.C. v. Security Adjustment Corp.,107 S.E.C. v. Hayden Securities, Inc.,108 S.E.C. v. Burka,109 S.E.C. v. W. T. Anderson Company, Inc.,110 S.E.C. v. Kevin,111 S.E.C. v. Loewe,112 S.E.C. v. Anaconda Lead & Silver Co.,113 S.E.C v. First Securities Company,114 S.E.C. v. Dayton Co.,115 S.E.C. v. Robert Bialkin,116 S.E.C. Arthur C. Costello and Investment Services, Inc.,117 S.E.C. v. D. Earle Hensley Co.,118 S.E.C. v. Investment Brokers of New Jersey, Inc.,119 S.E.C. v. York 108 U.S.D.C. E.D. Ark. No. 3776. 110 U.S.D.C. E.D. Wash. No. 1517. 114 U.S.D.C. D. Mass. No. 59-819-J. 11 U.S.D.C. S.D. Fla. No. 9481-M. 116 U.S.D.C. S.D. N.Y. No. 152-319. 117 U.S.D.C. E.D. Mo. No. 59 C 226. U.S.D.C. W.D. Wash. No. 4882. U.S.D.C. D. N.J. No. 230-60. Securities, Inc., 120 S.E.C. v. Alan Associates Securities Corp.,121 S.E.C. v. Allen Investment Co.,122 S.E.C. v. Heft, Kahn & Infante, Inc.123 S.E.C. v. Investment Bankers of America,124 S.E.C. v. Luckhurst & Co.,125 S.E.C. v. John P. Angelson,126 S.E.C. v. Williams & A880ciates,127 S.E.C. v. R. G. Williams & Co.,128 S.E.C. v. E. J. Quinn & Co.,129 S.E.C. v. Empire State Mutual Sales, Inc.,130 S.E.C. v. Fred L. Carvalho dba Capital Investment Co.,131 S.E.C. v. First Lewis Corp.,132 S.E.C. v. Sidney Miller, et al.,133 S.E.C. v. T. C. Corwin & Co.,134 S.E.C. v. Read, Evans & Co., 135 S.E.C. v. Harold Gersten, S.E.C. v. William Greenwald, et al.,137 S.E.C. v. Peerless-New York, Inc.,138 S.E.C. v. DiRoma,139 S.E.C. v. Robert H. Davis, dba Colonial Investors,140 S.E.C. v. Pinkser & Co., Inc., and S.E.C. v. American Programming Corp. 142 141 Similar actions now pending include S.E.C. v. C. H. Abrahams & Co., Inc.143 and S.E.C. v. Benjamin Zwang & Co., Inc.144 When a broker-dealer refuses to make his books and records available to the Commission for inspection, the Commission seeks the aid of the courts. Such a mandatory injunction was issued during the past year in S.E.C. v. J. Grant Donahue & Co.145 The action of S.E.C. v. Howard W. McKinney 146 was to enjoin the defendant from engaging in the brokerage business without being registered. A preliminary injunction was entered prohibiting him from doing business as a broker unless and until registered under Section 15 (b) of the Securities Exchange Act. 120 U.S.D.C. S.D. N.Y. No. 60-2228. 141 U.S.D.C. S.D. N.Y. No. 60-339. 142 U.S.D.C. S.D. Calif. No. 350-60 MC. 143 U.S.D.C. S.D. N.Y. No. 60 C 1476. In S.E.C. v. Monte Cristo Uranium Corp.147 and S.E.C. v. Flo Mix Fertilizers Corporation 148 the Commission obtained final orders directing the companies to file delinquent annual reports as required by the Act. Participation as Amicus Curiae As noted in previous annual reports, the Commission had filed briefs amicus curiae in support of the validity of Rule X-16B-3, insofar as it exempts the exercise of certain stock options from the provisions of Section 16 (b) allowing recovery by the issuer of profits realized by officers, directors and 10 percent stockholders in transactions in the securities of the issuer. In Van Aalten v. Hurley 149 the trial judge held that it was unnecessary to decide the validity of the rule and declined to express an opinion. In Cosden Petroleum Corporation v. M. M. Miller 150 and Cosden Petroleum Corporation v. R. L. Tollett 151 the district court granted summary judgment for the defendants upholding the rule and stated that said rule exempts the defendants from liability under Section 16(b). The judge specifically approved the Commission's position in Continental Oil Co. v. Perlitz, 176 F. Supp. 219 and stated his agreement with the position taken by Circuit Judge Lumbard in Greene v. Dietz. In Standard Fruit and Steamship Company v. Midwest Stock Exchange 152 the Commission filed a brief amicus curiae in support of the Midwest Stock Exchange which was defendant in a suit brought by Standard Fruit to enjoin Midwest from trading its stock on an unlisted basis under Section 12 (a) of the Securities Exchange Act. Midwest claimed to have succeeded to the unlisted trading rights of Standard's stock by virtue of the absorption by Midwest of the New Orleans Stock Exchange, where Standard had previously had unlisted trading privileges. Standard objected to the transfer of unlisted trading in its stock from the New Orleans to the Midwest exchange on the ground that such trading would be unauthorized under Section 12(f) (1) of the Securities Exchange Act. The Commission argued that Rule X-12-f-6 supported the continuance of unlisted trading in that Midwest had absorbed the New Orleans exchange. However, the court indicated that if the rule was construed to cover this transaction it might exceed the authority conferred under Section 12(f) (1) of the Securities Exchange Act and granted a preliminary injunction. The Commission filed a brief amicus curiae in Hooper v. Mountain States Securities Corp. which involved an appeal by a trustee in bank 147 U.S.D.C. D. Utah No. C 78 60. 148 U.S.D.C. E.D. La. No. 9678. 149 176 F. Supp. 851 (S.D.N.Y. 1959). 150 U.S.D.C. N.D. Texas No. 1948. 161 U.S.D.C. N.D. Texas No. 1949. 162 178 F. Supp. 669 (D.C. ND. II. 1959). 568987-60- -10 ruptcy from the district court's dismissal of his action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The trustee had brought suit on behalf of a corporation that had been allegedly fraudulently induced to issue its own unissued securities in exchange for worthless assets. The Court of Appeals reversed and remanded,153 holding that a private action may be based upon a violation of Rule 10b-5 and that a corporation which is injured thereby is within the class entitled to seek redress for injury resulting from a violation of the rule. The Court also held that venue for such a suit was proper in the district where representatives of the corporation received an interstate telephone call from the architect of the fraudulent scheme in furtherance thereof. In Dann, et al. v. Studebaker-Packard Corp., et al.15* the plaintiffs appealed from an order dismissing a complaint which sought to set aside past action and enjoin future action pursuant to certain contractual arrangements between the defendant and other corporations. The complaint alleged that defendants had violated the Commission's proxy rules in soliciting the vote of shareholders to approve those arrangements, and sought relief under Section 14(a) of the Securities Exchange Act, and under State law. The Commission filed a brief amicus curiae. The brief took no position on questions of State law raised by the appeal, but argued that (1) a private right of action may flow from a violation of Section 14 of the Securities Exchange Act and the Commission's proxy rules thereunder, and (2) in a "spurious" class action for violation of the federal securities laws, the test of "adequate representation" should be liberally applied. The case was pending at the close of the fiscal year. 153 C.A. 5 July 12, 1960, No. 18218. 154 C.A. 6 No. 13,940. PART VI ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 Under the Public Utility Holding Company Act of 1935 the Commission is charged with the regulation of interstate public-utility holding company systems engaged in the electric utility business or in the retail distribution of gas. The Commission's jurisdiction extends to natural gas pipeline companies and other non-utility companies which are subsidiaries of registered holding companies. Although the matters dealt with embrace a variety of intricate and complex questions of law and fact, there are three principal areas of regulation. The first of such areas covers those provisions of the Act, contained principally in Section 11(b), which require the physical integration of public-utility companies and functionally related properties of holding company systems and 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. Matters embraced within this area of regulation require periodic examination by the Commission and its staff. Many such examinations do not result in formal proceedings and others are reflected in such proceedings only in an indirect manner when they are related to issues principally under one or the other areas of regulation. The staff functions under the Act are performed primarily in the Branch of Public Utility Regulation of the Division of Corporate Regulation. In performing its functions, the Commission's staff observes and examines problems which arise in connection with transactions which are or may be subject to regulation under the Act and discusses such problems with interested persons and companies and advises them as to the applicable Sections of the Act, its Rules and the Commission policy with respect thereto. |