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. 33 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 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 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,39 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. 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 43 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 3 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). 44 290 F. 2d 657 (C.A. 2, 1961). curiae expressing the view that the provision of the trust agreement requiring the posting of the security before the shareholders could commence their action was void under Section 17 (h) of the Investment Company Act, which prohibits an investment company from operating under any instrument which contains "any provision which protects or purports to protect any director. . . The Court of Appeals agreed with the Commission's position and reversed the District Court, holding that the indemnity provision was violative of Section 17(h) and further stating that "any provision that renders litigation substantially less likely 'protects or purports to protect' directors and officers from liability under the Act," and is therefore invalid.45 During the year progress was made in another case involving implied private rights of action under the Investment Company Act. At the time of the last Annual Report, the Commission had filed a brief supporting the petition for certiorari in Brouk v. Managed Funds, contending that the Court of Appeals decision in that case was in conflict with numerous court of appeals and district court decisions holding that the Investment Company Act gives rise to implied private rights of action.46 Subsequently the Supreme Court granted certiorari," and the Commission filed a brief on the merits. However, before oral argument in the Supreme Court, the companion state court case 48 was settled by, among others, the respondents before the Supreme Court, for an amount in excess of $1 million. The Supreme Court, in a per curiam opinion, mooted the case, vacated the judgment of the Court of Appeals for the Eighth Circuit (whose reversal the Commission had urged), and remanded the case to the District Court for dismissal as to the respondents who were before the Supreme Court on certiorari.49 While no final Supreme Court decision on the existence of implied rights of action was obtained, the opinion of the Court of Appeals to the contrary was vacated, and its value as contrary precedent nullified. Willheim v. Murchison 50 was a case brought both derivatively and representatively by two stockholders of Investors Mutual, Inc., a registered investment company, seeking to enjoin Investors Diversified Services, Inc. (IDS) from acting as principal underwriter and investment adviser to Investors Mutual pursuant to written contracts. The plaintiff's contended that these contracts were "assigned" 45 301 F. 2d at 461. 46 27th Annual Report, pp. 156-157. 47 366 U.S. 958 (1961). 48 Lutz V. Boas, 171 A. 2d 381 (Del. 1961). 49 369 U.S. 424 (1962). 50 203 F. Supp. 478 (S.D.N.Y.), aff'd sub nom. Willheim v. Investors Diversified Services, Inc., 303 F. 2d 276 (C.A. 2, 1962). within the meaning of the Investment Company Act and therefore automatically terminated when control of Alleghany Corporation, which held approximately 47.6 percent of the voting stock of IDS, passed from Allan P. Kirby to John D. Murchison and his associates as a result of a proxy contest. The District Court, in denying the request for a preliminary injunction, rejected this contention and, while not grounding its decision on this point, indicated that a transfer of a controlling block of Alleghany voting stock would be insufficient to cause termination of the contracts. Plaintiffs took an appeal from this decision, and the Commission. filed a brief amicus curiae urging the Court of Appeals, if it should reach the merits, to hold that an investment advisory contract is automatically terminated whenever a controlling block of stock of the investment adviser or of a corporation which controls the investment adviser is transferred. The Court of Appeals affirmed the denial of the preliminary injunction, holding that neither the plantiff nor the corporation would suffer irreparable injury by delay until a hearing on the merits, but that a sudden termination of the service contracts would precipitate corporate chaos. Since the merits were not reached, the Court reserved its decision with respect to the position urged by the Commission. In Nadler v. S.E.C., the earlier history of which is discussed in the 1961 Annual Report, the Court of Appeals for the Second Circuit 52 affirmed in a per curiam opinion the Commission's order refusing to revoke a previous order granting an exemption pursuant to Section 17(b) of the Investment Company Act for transactions between a registered investment company and certain affiliates and permitting it to acquire its own preferred stock pursuant to Section 23(c)(3) of the Act. A stockholder had sought review of the Commission's second order on the ground that the investment company's directors who had authorized the filing of the application for the exemption had not been elected in accordance with the provisions of Section 16(a) of the Act, contending that this made the application and the Commission order void. The Commission had held that the acts of the directors were voidable only and that under all the circumstances the order should not be revoked. The Court, in affirming, held that there is no basis for declaring void all acts by a board not chosen as required by Section 16(a), and 51 27th Annual Report, p. 156. 62 296 F. 2d 63 (1961), certiorari denied, 369 U.S. 849 (1962). |