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Investment Adviser Registrations—1962 Fiscal Year
2, 194 338
4 1, 836
ADMINISTRATIVE PROCEEDINGS During fiscal 1962, the Commission instituted revocation proceedings against six registered investment advisers and in another instance instituted proceedings to determine whether an application for registration should be denied. These proceedings, and four revocation proceedings previously instituted, were pending at the close of the year. The proceedings instituted during the year included the following:
Carrol Tillman and John Francis Ryan, Jr. each doing business as The Tillman Survey—The Commission instituted proceedings to determine whether the registrants had engaged in fraudulent and deceptive acts including the distribution of advertising material which was "lurid and flamboyant" contrary to Rule 206(4)-1 under the Act and whether the public interest required that their registrations as investment advisers be revoked. The Commission's staff charged that Tillman, aided and abetted by Ryan, published and distributed advertising material which contained untrue statements and was false and misleading. The alleged misrepresentations in the advertisements involved comparisons between the securities recommended by Tillman and other securities without adequately disclosing the material differences between the securities, and representations that a list of 10 stocks which Tillman offered was selected in accordance with 7 tests prescribed by him and that these tests could "dig up” securities which eventually could be enormously profitable. The staff charged that the advertising material created false and misleading impressions by referring to 25%, 50% and 100% increases in market values, by falsely representing that certain subscription offers were available only to a selected group and by guaranteeing that a refund would be made to subscribers unless a group of 10 stocks rose 175 points before September 7, 1962, while omitting to disclose Tillman's complex and misleading method of determining the dates and figures used in ascertaining the availability of such guarantee."
5 Investment Advisers Act Release No. 128 (June 20, 1962).
OTHER ACTIVITIES OF THE COMMISSION
The several statutes administered by the Commission authorize the Commission to seek injunctions against continuing or threatened violations of such statutes. Such violations may involve a wide range of illegal practices, including the purchase or sale of securities by fraud, and the sale of securities without compliance with the registration requirements of the Securities Act. The Commission also par in various other types of proceedings, including appearances as amicus curiae in litigation between private parties where it deems important that its views regarding the interpretation of the statutes be furnished to the court.
At the beginning of the fiscal year 1962 there were pending in the courts 96 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 89 additional proceedings were instituted and 80 cases were disposed of, leaving 105 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 9 proceedings in the District Courts under Section 11(e) of the Public Utility Holding Company Act, and in 9 miscellaneous actions. The Commission also participated in 50 civil appeals in the United States Courts of Appeals. Of these, 14 came before the courts on petition for review of an administrative order, 9 arose out of corporate reorganizations in which the Commission had taken an active part, 11 were appeals in actions brought by or against the Commission, 2 were appeals from orders entered pursuant to Section 11(e) of the Public Utility Holding Company Act, and 10 were appeals in cases in which the Commission appeared as amicus curiae. The Commission also participated in 6 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 during the fiscal year, either as a party or as amicus curiae, and the status of such cases at the close of the year are contained in the appendix tables. This section describes a few of the more noteworthy cases, not including, however, any cases arising
under the Public Utility Holding Company Act or Chapter X of the Bankruptcy Act; cases arising under those statutes are discussed in the sections of this report dealing with such statutes.
In S.E.C. v. Herbert Rapp, et al.,the Commission sought a permanent injunction against Rapp, a registered broker-dealer, and certain of his salesmen for violating Section 17(a) of the Securities Act, by making false and misleading statements in the offer and sale of the stock of an aircraft manufacturing company. The District Court, after trial, dismissed the complaint for failure of proof, finding, among other things, that expressions of opinion by salesmen that the stock would soon increase significantly in value did not constitute a material misrepresentation. The Court made no reference to the distribution of misleading sales literature, and it further apparently exonerated Rapp because he had made no oral representations. It also denied the Commission's motion at the end of the trial, pursuant to Rule 15(b) of the Federal Rules of Civil Procedure, to conform the pleadings to the proof.
The Court of Appeals for the Second Circuit reversed the District Court, ordering that a permanent injunction issue as to Rapp and remanding as to the salesman involved in the appeal.* The Appellate Court held that where the defendants failed to object to the trial of issues not raised by the pleadings, the District Court was required to grant the Commission's motion to conform the pleadings. It further held that since the salesmen had no knowledge of the securities business and their statements were in accord with the sales literature which Rapp instructed them to follow, the District Court erred in stating that the latter was not responsible for the misrepresentations made by them. Furthermore, it held that Rapp was responsible for misrepresentations in a brochure mailed to prospective investors, and that he also violated Section 17 (a) by leading customers to believe he was acting as agent in the sale of the stock, when in fact he was acting as principal. The action as to the salesman was remanded for further proceedings since the findings of fact were insufficient to determine whether his predictions of future value were opinions without basis in fact.
In S.E.C. v. Custer Channel Wing Corporation, et al.: the Commission sought to enjoin an issuing corporation, its president and a trustee from offering and selling securities without registration in violation of Section 5 of the Securities Act, and from engaging in practices operating as a fraud upon purchasers in violation of Sec
1 S.D.N.Y. No. 132-344.
tion 17(a) of that Act. Defendants had represented that treasury shares of the corporation were available for sale. However, as to those treasury shares which were sold, no registration statement was in effect, and other shares sold were not treasury shares but shares which had been placed in a trust by the president. By the terms of the trust, the shares were to be returned to the president within 1 year or, if the shares were sold, the proceeds were to be paid over to him within 2 years and in the interim they were to be loaned to the corporation. These shares were also unregistered. Rejecting the defendants' contention that the shares sold were exempt from registration because they had at one time been sold as part of an intrastate distribution exempt from the registration requirements by Section 3(a) (11) of the Act, or as part of a small issue exempt under Section 3(b) and Regulation A thereunder, the District Court declared that the exempt status of the securities did not continue indefinitely or, as claimed by the defendants, until such time as there was a fundamental change in the corporate structure. The Court stated that once such stock came into the hands of the issuer or persons controlling the issuer, its subsequent offering constituted a new issuance as to which the registration requirements again became applicable. The District Court also found violations of Section 17(a) of the Act, in the sale of the trust shares to investors accepting the offer of treasury shares, holding that disclosure should have been made regarding the existence of the trust and the fact that under its terms the money received for the shares was to be loaned to the corporation, such loan to be secured by a chattel mortgage on airplanes manufactured by it.
In S.E.C. v. Federal Shopping Way, Inc., where the Commission charged numerous defendants with violations of the registration and anti-fraud provisions, the defendants sought leave to file a counterclaim against the Commission and to join seven named Commission employees as parties to such proposed counterclaim. The proposed counterclaim alleged that defendants had been defamed and tortiously aggrieved by statements contained in Commission litigation releases and statements made by Commission employees during their conduct of investigations, and sought damages and injunctive relief. The Court denied defendants such leave, holding that "Federal officials are privileged against suit for acts done within the scope of their official duties,” and “(e)xamination of the record and the proposed crosscomplaint clearly shows that the alleged misconduct . . . . (of defendants to the counterclaim) entirely consists of actions wholly within the course and scope of their official duties.”
* W.D. Wash. No. 2671.
In S.E.C. v. Bloomberg,' which arose out of the reorganization of Bettinger Corporation under Chapter X of the Bankruptcy Act, the trustees proposed as part of their plan of reorganization to issue at stated ratios new common stock for the old stock of the company plus a certain amount of cash. They took the position that the issuance of the new stock was exempt from the registration provisions of Section 5 of the Securities Act by virtue of Section 264(a) (2) of Chapter X, which provides an exemption for "any transaction in any security issued pursuant to a plan in exchange for securities of or claims against the debtor or partly in such exchange and partly for cash and/or property.” It was the Commission's view, on the other hand, that since the company was insolvent, the old stock was worthless and there could be no true "exchange” within the meaning and spirit of Section 264(a) (2), and that accordingly the new stock could not be lawfully distributed without registration.
However, the Commission's attempts to raise the issue were unsuccessful. The Commission first moved to intervene in the Chapter X proceedings, but the District Court denied the motion. Thereafter, it sought to enjoin the proposed distribution, but the Court dismissed the injunctive action. In an opinion issued later, the Court assigned as one ground for its orders that the Commission's actions were not timely. It also indicated that it considered the distribution of the new stock to be exempt.
On appeal by the Commission, the Court of Appeals for the First Circuit, without reaching the substantive issue, affirmed solely on the ground that the trial court had not abused its discretion in ruling that the Commission's actions were not timely. The Appellate Court's opinion did expressly reject the intimation of the District Court that the nonregistration of stock could be excused on the basis that the time requirements of registration would be inimical to a proposed plan of reorganization. Of significance in the opinion, also, is the Appellate Court's implicit agreement that an application to intervene by the Commission as the agency administering the Securities Act was the proper method of raising the issue of registration, wholly apart from the Commission's role as Chapter X adviser, in which latter capacity its right of appeal is expressly circumscribed by statute.
In Kukatush Mining Corp. v. S.E.C., plaintiff sought to enjoin the Commission from continuing its name on the Canadian Restricted List, alleging that the Commission's action was arbitrary and con
7 D.C. Mass. No. 61-729-5. 8 299 F. 2d 315 (1962).
This list and a description of its purposes will be found elsewhere in this report, pages 144-146, infra,