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stituted a black-listing of the company without notice or opportunity to be heard. Plaintiff's complaint also alleged that it had suffered irreparable injury. The Commission moved to dismiss the action on the ground that plaintiff had not exhausted its administrative remedies, that issuance of the List was within the Commission's authority and discretion, that the District Court had no jurisdiction, and that plaintiff had not suffered any injury which entitled it to relief.
The District Court for the District of Columbia granted the Commission's motion to dismiss 10 and subsequent to the end of the fiscal year the Court of Appeals for the District of Columbia affirmed the lower court's action. 11
S.E.C. v. Union Corporation of America 12 is an action by the Commission to compel the filing of annual reports by the corporation pursuant to Section 15(d) of the Securities Exchange Act. In granting a mandatory injunction, the District Court held that once the aggregate value of a company's registered and outstanding stock of the same class exceeds $2 million, its undertaking to file reports becomes and remains operative, and the fact that the value of those shares actually sold plus those previously outstanding never exceeds $1 million does not suspend the duty to file reports in the absence of a deregistration reducing the value of the registered and outstanding shares to less than $1 million. Following the close of the fiscal year, the Court of Appeals affirmed.13
In Stanley E. Henwood, et al. v. S.E.C.,14 the Commission sought to have the court enjoin 17 stockholders of United Industrial Corporation, associated together as the Stockholders' Protective Committee, from making false and misleading statements in material distributed in solicitation of proxies which were to be voted at the 1961 annual stockholders' meeting. After entering orders temporarily enjoining further solicitation, the voting of proxies already obtained and the holding of any stockholders' meeting, the District Court upon trial held that the failure of the Committee to disclose the full extent of the participation of two resigned officers and directors of the corporation in the organization of the Committee and its solicitation of proxies violated Section 14(a) of the Securities Exchange Act of 1934, and the Commission's Rule 14a-9 thereunder. The Court found that the former president and executive vice president, who had resigned following announcement of discrepancies of $7 million in the corporation's accounts, had in fact organized the Committee and participated in the solicitation of proxies. The Court of Appeals for the Ninth Circuit modified and affirmed the order enjoining proxy solicitation by the Committee unless the activities of the two former officers were disclosed and enjoining the voting of proxies already obtained.16 The enjoined defendants petitioned the Supreme Court for a writ of certiorari, asserting that Section 14(a) of the 1934 Act, as applied through the Commission's proxy rules, is constitutionally objectionable as being so vague and ambiguous as to constitute an unauthorized delegation of legislative powers and as invading rights of free speech and contract, and that the District Court could not enjoin the voting of proxies obtained through unlawful solicitation where an opportunity for resolicitation was allowed. The Commission filed a brief in opposition, pointing out that the terms of the statute are comparable to many other statutory provisions which have been held to be sufficiently definite, that the Commission has no power of “censorship” over proxy material and that an injunction against voting proxies obtained through unlawful solicitation is relief traditionally ancillary to the restraint against continued violation of the proxy rules. Subsequent to the close of the fiscal year, the Supreme Court denied certiorari.1
10 198 F. Supp. 508 (1961). 11 309 F. 2d 647 (C.A.D.C., 1962.) 12 205 F. Supp. 518 (E.D. Mo., 1962). 13 C.A. 8, October 19, 1962 (No. 17,048). 11 S.D, Calif., No. 935-61-TC.
In Brown, Barton & Engel v. S.E.C.,17 the Court of Appeals for the Third Circuit denied a motion to stay the enforcement of a Commission order suspending petitioner's registration as a broker and dealer pending final determination of the issue as to whether such registration should be revoked. The suspension order had been issued on the basis of the Commission's findings that petitioner had engaged in a fraudulent course of conduct and was subject to two injunctions. Court review of the Commission's decision was pending at the close of the fiscal year.
In Hansen v. S.E.C.,18 plaintiff sought to enjoin the Commission from taking his testimony in an administrative proceeding against a broker-dealer, in which plaintiff was named as a cause, and to compel the Commission to consider any charges against him in separate proceedings. He also alleged that the Commission wrongfully withheld his papers and that publication of the Commission's order instituting proceedings against the broker-dealer caused him irreparable injury. The Commission moved to dismiss the complaint or alternatively for judgment on the pleadings on the grounds that it had authority to bring public proceedings against the broker-dealer and to name plain
15 CCH Fed. Sec. L. Rep. $ 91, 125. 18 298 F. 2d 641 (C.A. 9, 1962). 16a 371 U.S. 814 (1962). 17 Civil No. 14080, C.A. 3, August 9, 1962. 18 D.D.C. Civil Action No. 3829–61.
tiff a cause therein, that plaintiff had not exhausted his administrative remedies and that the District Court had no jurisdiction over plaintiff's claim. The District Court granted the Commission's motion for judgment on the pleadings.
Two cases, Berko v. S.E.C.,19 and Kahn v. S.E.C.,20 arose from an order issued by the Commission revoking the broker-dealer registration of Mac Robbins & Co., Inc. and finding that nine salesmen, including Berko and Kahn, were each a cause of the revocation.21
Mac Robbins had been co-underwriter of an issue of stock of Sports Arenas, Inc., and after the offering had been completed, its principal business was trading in Sports Arenas stock. The Commission found that Berko and Kahn had made highly optimistic statements about Sports, although they knew that there was no adequate basis for such statements or were "grossly careless or indifferent” in failing to determine whether or not such basis existed.
The Court of Appeals for the Second Circuit remanded the cases to the Commission, on the ground that the factual and legal basis for the Commission's decision was not stated with sufficient clarity. Among other things, it held that the fact that the issuer had sustained initial operating losses did not in and of itself mean that there was no adequate basis for optimistic statements regarding the stock. The Court asked the Commission to express its views, among other things, regarding the significance of participation by salesmen in a so-called "boiler-room" operation, the right of salesmen to rely on information given to them by their employer, and the extent to which the salesmen's specialization in Sports stock created or increased the duty to investigate and disclose.
Judge Clark, concurring in the result, concluded that the Commission had not made clear whether it relied upon the so-called "shingle” theory or some other legal theory.
Shortly after the close of the fiscal year, the Commission issued an Opinion and Order reaffirming its previous findings that Berko and Kahn were each a cause of the revocation Securities Exchange Act Release No. 6846 (July 11, 1962)). In September 1962, Berko filed a petition for review in the Court of Appeals for the Second Circuit. Kahn has not sought such review, and the statutory period for seeking review has expired.
In Silver v. New York Stock Exchange,22 the Exchange, after a confidential investigation, had directed its member firms to discontinue private wire connections with Silver, a securities dealer, and 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,2holding 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
19 297 F. 2d 116 (C.A. 2, 1961). 20 297 F. 2d 112 (C.A. 2, 1961).
2 Securities Exchange Act Release Nos. 6462 (February 6, 1961) and 6498 (March 16, 1961).
* 196 F. Supp. 209 (S.D.N.Y., 1961).
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 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.
23 302 F. 2d 714 (C.A. 2, 1962).
173 F. Supp. 590 (S.D.N.Y., 1959).
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 C0.29 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 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
The case of Warshow v. H. Hentz & Co.,31 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
29 S.D.N.Y., No. 61 Civ. 1115. 30 306 F. 2d 422 (C.A. 2, 1962). 31 199 F. Supp. 581 (S.D.N.Y., 1961).