In addition to charging that irreconcilable conflicts of interest resulted from the directors' ownership of portfolio securities, the Commission also alleged in its complaint that the personal securities-trading activities of the directors constituted the effecting of transactions in joint arrangements and joint enterprises with the investment company in violation of Section 17 (d) of the Investment Company Act and Rule 17d-1 thereunder. It was also charged that the defendants caused the investment company to enter into prohibited transactions with affiliated persons in violation of Section 17 (a) of the Investment Company Act, that the company had violated Sections 13 and 21 of the Act in issuing guarantees which in effect were indirect loans contrary to its stated investment policy, and that it had issued senior securities in violation of Section 18 of the Act.

On July 5, 1963, the district court issued its opinion. It agreed with the Commission that the activities of the directors in purchasing securities which were also represented or were intended to be included in the investment company's portfolio constituted joint arrangements in violation of Section 17 (d) of the Act and Rule 17d-1 thereunder. The court held, however, that such conduct alone or together with the other violations alleged did not constitute gross abuse of trust. The court viewed the evidence as showing that the directors did not fully appreciate the conflicts of interest which were involved and that they unintentionally failed to seek approval of the joint transactions from the Commission. The court also held, among other things, that the issuance of the guarantees by the investment company in connection with loans made by third persons to companies in which the investment company had invested, or in which it intended to invest, violated the investment company's investment policy concerning the amount of loans which the company could make without stockholder approval.

Securities and Exchange Commission v. United Benefit Life Ins. Co.21 is an action by the Commission to enjoin the defendant, a Nebraska corporation, from the offering and sale of a contract described by the company as an Annual Flexible Fund Retirement Annuity. In its complaint, the Commission contended that the contracts being sold are securities within the meaning of the Securities Act and that they may not be offered for public sale without prior registration with the Commission under that Act. The Commission further contended that certain guarantees of partial repayment made by the company to the purchasers of the contracts also constituted a security required to be registered with the Commission under the Securities Act.

In addition, the Commission contended that the defendant had created and manages a separate fund for the purpose of investing in

1 D. D.C. No. 3096-62.

securities, and that such fund constitutes an "investment company," as defined in the Investment Company Act, and must be registered under that Act. The defendant has filed an answer controverting the Commission's contentions, and, as of the end of the fiscal year, discovery proceedings were being conducted.

In Prudential Life Insurance Company of America v. Securities and Exchange Commission,22 Prudential petitioned the Court of Appeals for the Third Circuit for review of a Commission order which denied Prudential's request for exemptions from the Investment Company Act of 1940 for the separate variable annuity contract business which Prudential proposes to conduct.23 Following the close of the fiscal year, the Court affirmed the Commission order.

In Taussig, et al. v. Wellington Fund, Inc., et al., a suit by stockholders of an investment company, Wellington Fund, Inc., against its corporate investment adviser and another investment company, Wellington Equity Fund, and its adviser, the district court held that Section 35(d) of the Investment Company Act conferred an implied private right of action, and then relied upon pendent jurisdiction to resolve common law claims of unfair competition.24 It enjoined the advisers and Wellington Equity Fund from employing the name, "Wellington" in the investment company field, but denied damages. On appeal, the Commission, as amicus curiae, filed a brief which urged that implied rights of action flow from violations of provisions of the Investment Company Act, including Section 36. The brief also pointed out that no inference should be drawn from the nonaction of the Commission or from its acceleration of the registration of shares as to whether names, proxy material or other material is deceptive or misleading. The Court of Appeals for the Third Circuit held that there was a "substantial Federal question" whether there can be a private implied right of action under Section 35 (d) in these circumstances and that the existence of this question provided the basis for retaining pendent jurisdiction to decide the case on common law principles of unfair competition.25

26

Securities and Exchange Commission v. The Keller Corporation, et al.,20 involved a fraudulent scheme involving the sale of securities of an unregistered investment company.. The Commission filed a complaint seeking to enjoin the corporate defendants and certain of their principals from further fraudulent sales of Keller securities and to enjoin Keller from continuing certain activities which, under Section

2 C.A. 3, No. 14,370.

23 The Commission's decision is summarized at page 107, supra.

24 187 F. Supp. 179 (Del. 1960).

25 313 F. 2d 472 (C.A. 3, 1963), certiorari denied, 374 U.S. 806 (1963).

20 S.D. Ind. IP62-C-528.

7(a) of the Investment Company Act, unregistered investment companies may not engage in. In view of the fraud practiced upon the public investors in Keller, both through the fraudulent sales of Keller stock and through the fraudulent mismanagement of Keller's portfolio and affairs, the Commission also sought the appointment of a trustee or receiver. The district court entered a preliminary injunction enjoining the corporate defendants and two of the principals from further fraudulent sales of Keller stock and enjoining Keller from continuing any of the prohibited activities. The court also appointed a trustee and receiver for Keller. Subsequent to the close of the fiscal year, the court of appeals affirmed the lower court in all respects.27

The remaining cases discussed in this section include two actions to enforce subpoenas, one in connection with an administrative proceeding, the other in connection with an investigation, and three proceedings instituted against the Commission to enjoin, respectively, the conduct of an investigation, the continuation of administrative proceedings, and the institution of such proceedings.

In Securities and Exchange Commission v. Parrott 28 the Commission sought to enforce subpoenas issued by one of its hearing examiners in the course of an administrative proceeding involving a broker-dealer. The subpoenaed persons, who were to be witnesses in the administrative hearings, contended it was unfair to require them to testify or produce records prior to the trial of two injunctive actions brought by the Commission in which they were named defendants. Upon the Commission's application for enforcement of the subpoenas, the district court delayed enforcement for 90 days. It was expected that one of the trials would be completed within that period. The court indicated that depositions would be permitted if they were taken in Denver, the home of the witnesses. The parties to the administrative proceeding, which was pending in Washington, D.C., would not consent to a transfer of the proceeding to Denver and contended that they were unable to afford the expense of being present at the taking of depositions there. In addition, the hearing examiner ruled in the administrative proceeding that depositions were not appropriate since he desired to hear live testimony. The district court extended the delay period on two occasions and the Commission appealed, contending that the existence of the injunctive actions was not a ground for delaying enforcement of the subpoenas and that the interests of parties to the administrative proceeding were para

27 C.A. 7, No. 14,116.

29 C.A. 10, Nos. 7356-7357.

mount to the interests of witnesses. The court of appeals, without opinion, directed that the subpoenas be enforced.

In Securities and Exchange Commission v. National Bank of Commerce of Seattle,29 the Commission sought enforcement of a subpoena directed to a bank calling for the production of certain bank records relating to the accounts of customers who were being investigated for possible violations of the anti-fraud provisions of the Securities Acts. The court ordered the bank to comply with the subpoena even though the customers who were the subjects of the investigation had directed the bank not to produce the records. The court held not only that the customers of the bank had no privilege with respect to the records, but that they did not have sufficient property rights therein or any other interests sufficient to make them necessary parties to the subpoena enforcement proceeding.

In Howard P. Carroll, et al. v. Securities and Exchange Commission, et al.,30 plaintiffs sought to enjoin the Commission from exercising its subpoena power in aid of an investigation into sales of certain securities by plaintiffs and sought to quash a subpoena issued by a grand jury sitting in California. Plaintiffs alleged that the Commission was exercising its subpoena power to discover evidence for use in prosecution of a criminal indictment then pending in California against certain of the plaintiffs. Similar charges were made concerning the grand jury subpoena. The court granted the Commission's motion to dismiss, holding that it had no jurisdiction to enjoin the Commission in the conduct of its investigation or to quash a subpoena not issued in the court's district.

31

In R. A. Holman & Co., Inc. v. Securities and Exchange Commission, the plaintiff sought to have the Commission enjoined from continuing broker-dealer revocation proceedings against it, claiming that one of the members of the Commission was disqualified from adjudicating the case because he had previously been Director of the Commission's Division of Corporation Finance at a time when that Division had processed a registration statement, which processing ultimately led to the institution of the revocation proceedings. As noted in the last Annual Report, the district court granted plaintiff's motion for a preliminary injunction. During fiscal 1963, the court of appeals reversed the order of the district court, holding that plaintiff had not made a record sufficient to excuse him from exhausting his administrative remedies. Plaintiff has filed a petition for a writ of certiorari in the Supreme Court. 34

216 F. Supp. 932 (W.D. Wash. 1963).

30 D. Colo., Civ. No. 7738.

31 D.D.C. No. 1888-62.

82 28th Annual Report, pp. 129-130.

33 323 F.2d 284 (D.C. Cir., 1963).

34 October Term, 1963, No. 500.

82

The Wolf Corporation v. Securities and Exchange Commission 35 was an action seeking to enjoin the institution of stop-order proceedings against plaintiff's registration statement under the Securities Act of 1933. The complaint alleged irregularities in the taking of evidence during the preliminary investigation conducted pursuant to Section 8(e) of the Act, and plaintiff argued that the order authorizing a public hearing pursuant to Section 8 (d) was rendered unlawful because it was based on the results of that investigation. The District Court for the District of Columbia denied plaintiff's motion for preliminary injunction,36 holding that the issues raised in the complaint were not subject to judicial review until plaintiff had exhausted its administrative remedies. The court of appeals affirmed, holding that the complaint failed to state a cause of action on which relief could be granted. A motion for a stay pending petition for a writ of certiorari was thereafter denied by the court of appeals, and a similar motion was denied by the Chief Justice of the United States Supreme Court.

37

CRIMINAL PROCEEDINGS

The statutes administered by the Commission provide that the Commission may transmit evidence of violations of any provisions of these statutes to the Attorney General, who in turn, may institute criminal proceedings. Where facts ascertained as a result of an investigation by a regional office of the Commission or at times its headquarters office appear to warrant criminal prosecution, a detailed report is prepared. After careful review by the General Counsel's Office, the recommendations of the regional office and the General Counsel's Office are considered by the Commission and, if the Commission believes criminal prosecution is appropriate, the case is referred to the Attorney General and to the appropriate United States Attorney. Commission employees familiar with the case generally assist the United States Attorney in the presentation of the facts to the Grand Jury, the preparation of legal memoranda for use in the trial, the conduct of the trial, and the preparation of briefs on appeal. During fiscal year 1963, the Commission referred 49 cases to the Department of Justice for prosecution. In the course of the year, 40 indictments were returned, in cases referred prior to and during the fiscal year, against 117 defendants and 115 convictions were had in 50 cases, while convictions were affirmed in 11 cases.

From 1934, when the Commission was established, until June 30, 1963, 3,304 defendants have been indicted in the United States Dis

D.D.C. No. 3297-62.

* 209 F. Supp. 481 (D. D.C., 1962). 7317 F. 2d 139 (D.C. Cir., 1963).