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Silver brought an action for damages and injunctive relief alleging violations of the anti-trust laws. The District Court granted Silver's motion for summary judgment, permanently enjoining the Exchange under Section 16 of the Clayton Act from interferring with private wire and telemeter connections between its members and Silver and holding that the Exchange was liable for damages under Section 4 of the Clayton Act. The Exchange appealed from this decision and the Commission, because of language in the opinion of the District Court suggesting that a registered stock exchange has no right or duty to discipline its members on the basis of their transactions in unlisted securities, filed a memorandum as amicus curiae. The Court of Appeals reversed, holding that "the action of the Exchange in bringing about the cancellation of the private wire connections with members of the Exchange was within the general scope of the authority of the Exchange as defined by the 1934 Act and therefore outside the coverage of the Sherman Act," and expressly rejecting the suggestion that the authority of the Exchange in disciplining its members is limited to transactions in securities listed on the Exchange. Silver's petition for a writ of certiorari is pending in the Supreme Court.24

23

In the last Annual Report, the case of Blau v. Lehman was described and it was stated that the Supreme Court had granted certiorari.25 That was a derivative suit by a stockholder of Tidewater Associated Oil Company against an investment banking partnership to recover "short swing" profits realized by the firm through transactions in Tidewater's securities while one of the partners was serving on the company's board of directors. The Supreme Court 26 affirmed the decrees of the Court of Appeals 27 and the District Court 28 which, while awarding the plaintiff a judgment for that portion of the defendant's profits which were chargeable to the partner-director's income account, refused to hold that the firm itself violated Section 16(b) of the Securities Exchange Act, thus permitting the firm to retain over 96 percent of its "short swing" profits. The Court took cognizance of the Commission's position, as advocated in its amicus curiae brief, that while the literal language of Section 16 (b) limited liability to "directors," considerations of policy were present which made it appropriate to expand that Section to cover partnerships of which a director is a member. However, the majority was of the opinion that if Section 16(b) were to be so expanded, it should be

302 F.2d 714 (C.A. 2, 1962).

24 No. 150, 1962 Term.
2527th Annual Report, p. 96.
28 368 U.S. 403 (1962).

286 F. 2d 786 (C.A. 2, 1960).

173 F. Supp. 590 (S.D.N.Y., 1959).

accomplished by remedial legislation, rather than by judicial construction. In a strong dissent, charging that the majority opinion resulted in a ". . . mutilation of the Act," Justice Douglas, with whom Chief Justice Warren concurred, stated that there should be no difficulty in charging the partnership with liability as an "insider" in cases where it is determined, as a factual matter, that the partnership has either "deputed" or informally instructed its partner to represent its interests on the corporate board of directors.

At the request of the United States District Court for the Southern District of New York, the Commission filed a memorandum of law as amicus curiae in Silverman v. Landa and Fruehauf Trailer Co."9 The action was brought by a stockholder of Fruehauf to recover on behalf of Fruehauf the profits realized by defendant Landa, a director of the company, in transactions in Fruehauf common stock. While the beneficial owner of 2000 shares of Fruehauf common stock, Landa had issued simultaneously two "call" options and one "put" option, each for 500 shares. Plaintiff claimed that the issuance by the defendant of a "straddle," i.e. the simultaneous issuance of a put option and a call option, constituted a purchase and sale of the underlying security for the purposes of Section 16(b) of the Securities Exchange Act of 1934, and that the issuance of the unmatched call violated Section 16 (c) of the Act, since the underlying security was not delivered within 20 days of the date of the issuance of the call.

The Commission took the position that the issuance of a straddle constituted a purchase and sale of the underlying security for the purpose of Section 16 (b) of the Act, but that no violation of Section 16 (c) occurred since the defendant at all times owned sufficient shares of the underlying security to deliver in satisfaction of any obligation under the unmatched call. However, the District Court held that no purchase or sale of the underlying security occurs until such time as the options are exercised, and accordingly found no liability under Section 16(b) and no violation of Section 16 (c).

The case was appealed to the Court of Appeals for the Second Circuit and the Commission filed a brief as amicus curiae, taking the same position it took in the District Court. Subsequent to the end of the fiscal year, the Court of Appeals affirmed the decision of the District Court.30

31

The case of Warshow v. H. Hentz & Co., was an action for rescission or damages brought by a customer against a broker who arranged for the purchase of securities in violation of the margin

20 S.D.N.Y., No. 61 Civ. 1115.

30 306 F. 2d 422 (C.A. 2, 1962).
a1 199 F. Supp. 581 (S.D.N.Y., 1961).

requirements of the Securities Exchange Act of 1934. Plaintiff's loss was discovered and suit instituted when the moneylender, with whom plaintiff's shares were pledged, went into receivership and such shares were not among the assets.

Defendant moved to dismiss the complaint, contending that the facts alleged in the complaint failed to set forth a cause of action. The Commission filed a brief amicus curiae urging that the plaintiff was entitled to rescission or to recover damages because the contract for the purchase of securities was in violation of the Act and hence void under Section 29 (b). Alternatively, the Commission argued that the plaintiff had an implied private right of action against the brokerdealer for the latter's violation of the margin requirements where the losses were not caused by fluctuation of the market, but by the insolvency of the moneylender selected by the broker.

The Court denied the motion to dismiss, accepting the positions urged by the Commission, and the suit was subsequently settled by compromise.

The case of S.E.C. v. Capital Gains Research Bureau, Inc., is described in the last Annual Report.32 The Commission had charged an investment adviser and its president with violating Sections 206 (1) and (2) of the Investment Advisers Act. The trial court's denial of a preliminary injunction was affirmed by a divided panel of the Court of Appeals for the Second Circuit, and the Commission petitioned for a rehearing en banc which was granted. The Court of Appeals en banc has affirmed the trial court's decision by 5 to 4 decision,35

34

Sutro Brothers & Co. v. S.E.C.,36 Amos Treat & Co., v. S.E.C.,37 and R. A. Holman & Co. v. S.E.C.38 are three actions brought by broker-dealers to enjoin the Commission from continuing an investigation or administrative proceedings against them. Sutro Brothers sought to enjoin the Commission from continuing an investigation into violations of the Securities Exchange Act during the pendency of broker-dealer revocation proceedings based upon evidence previously developed in the same investigation. In denying plaintiff's motion for a preliminary injunction, the District Court held that neither Section 21 of the Securities Exchange Act, nor any provision of the Administrative Procedure Act, limits the Commission's inves

27th Annual Report, p. 163.

191 F. Supp. 897 (S.D.N.Y., 1961). 300 F. 2d 745 (C.A. 2, 1961).

25 306 F. 2d 666 (C.A. 2, 1962).

199 F. Supp. 438 (S.D.N.Y., 1961).

D.D.C., No. 1340–62.
D.D.C., No. 1888-62.

672175-63-10

tigative power during the pendency of broker-dealer revocation proceedings.

In Amos Treat the plaintiff sought to enjoin the Commission from continuing broker-dealer revocation proceedings, claiming that one of the members of the Commission who had participated in several preliminary rulings was disqualified from adjudicating in the case because he had previously been Director of the Commission's Division of Corporation Finance at a time when that Division had investigated a matter factually related to the administrative proceeding. It was claimed that his participation violated due process and Section 5(c) of the Administrative Procedure Act. The District Court denied plaintiff's motion for a preliminary injunction on the grounds that the administrative remedies had not been exhausted, review of any final decision could be had in a court of appeals, and there was no showing of irreparable injury. The Court of Appeals reversed and remanded the case, holding that there had been a showing of a violation of due process and that the District Court had jurisdiction on this basis alone. The Commission's petition for rehearing en banc was denied.

39

The Commission, following an alternative suggestion of the Court of Appeals, thereafter terminated the proceedings, but without prejudice to the subsequent institution of new proceedings. In its order, the Commission made it clear that this result should not be regarded as a precedent since the Commission disagreed with the Court's decision, but that the Commission was of the view that to seek further court review would entail delay in the determination of the issues in the proceedings and would not be in the public interest.

The Holman case involved the same contention as in Amos Treat, in this instance regarding two members of the Commission, and the additional contention that the hearing examiner who had presided at the administrative hearings was also disqualified because he lacked the requisite independence from the Commission since he had passed the age of mandatory retirement and served at the will of the Commission. The District Court granted plaintiff's motion for a preliminary injunction, basing its order solely upon the participation of one of the members of the Commission and relying entirely upon the Amos Treat case. The Commission's appeal from that order is pending."

40

During the fiscal year, the Commission participated in a number of important cases under the Investment Company Act. In S.E.C. v.

39 306 F. 2d 260 (C.A.D.C., 1962).

40 C.A.D.C., No. 17,202.

Midwest Technical Development Corp., et al.," the Commission brought an injunctive action alleging that the directors and officers of the defendant investment company had caused it to violate various provisions of the Investment Company Act and were committing gross misconduct and gross abuse of trust. The complaint contains detailed charges of simultaneous personal investments by several of the officers and directors in the portfolio companies in which Midwest invested, resulting in large private profits for them to the detriment of the fund's interests.

The Commission seeks not only to enjoin the various violations, but to freeze the private investments of the individual defendants to prevent further deterioration of the situation, to obtain an accounting for profits and to have a receiver appointed to preserve the public interest in Midwest.

All of the individual defendants have entered stipulations agreeing not to change their present investment position in the portfolio companies, pending trial on the merits. Upon the filing of these stipulations, the Commission withdrew its motion for a preliminary injunction. The Commission has dismissed the case against two corporate defendants which have entered final stipulations undertaking not to engage in any transactions with Midwest without first obtaining an exemption under Section 17(a) of the Investment Company Act. The case with respect to the remaining defendants was pending at the close of the fiscal year.

42

In Chabot v. Empire Trust Co. and Schwartz v. National Securities Service, the shareholders of a mutual fund, organized as a common law trust, brought an action against the trustee and others for restoration to the fund of fees paid to the trustee. The trustee moved to stay the proceedings until the plaintiffs had delivered a bond to indemnify it against the cost and expenses of defending the action. The District Court 43 held applicable the provision of the trust agreement to the effect that no shareholder of the fund should have the right to an accounting except upon furnishing indemnity to the trustee against costs and expenses, with such indemnity to be payable unless it should be established that the trustee had been guilty of fraud, misfeasance, or gross negligence. The District Court therefore stayed the action pending the posting of security.

On appeal from that decision, the Court of Appeals for the Second Circuit upheld the right of appeal from the order of the District Court." Subsequently, the Commission filed a brief as amicus

41 D.C. Minn., No. 4–62 Civ. 142.

42 301 F.2d 458 (C.A. 2, 1962).
43 189 F. Supp. 666 (S.D.N.Y., 1960).

290 F. 2d 657 (C.A. 2, 1961).

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