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that "it would be an unsound policy, fraught with harm to the shareholders, to have everything done by such a board to carry on the corporation's normal business, especially within the statutory period, declared invalid."

Taussig et al. v. Wellington Fund, Inc. et al.53 is 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, in which the District Court enjoined the advisers and Wellington Equity Fund from employing the name "Wellington" in the investment company field, but denied damages. The District Court ruled that the goodwill attached to the word "Wellington" resulting from the successful operation of Wellington Fund, Inc., was the property of that fund and that the use of the name by Wellington Equity Fund was likely to confuse investors, constituted trading on the success and goodwill of Wellington Fund, Inc., and would hinder that fund should it desire to change its investment policies to those followed by Wellington Equity Fund. Diversity jurisdiction being questionable, the District Court found pendent jurisdiction, stating that Section 35 (d) of the Investment Company Act conferred an implied private right of action, and based its decision on common law principles of unfair competition. Both sides have appealed. The plaintiff's assert that the facts show violations of Sections 15, 20 (a), 34(b), 35(d), 36 and 37 of the Investment Company Act, and claim that implied rights of action and appropriate remedies including damages should flow therefrom. The defendants urge that the goodwill resulting from the successful operation of the investment company is the property of the adviser, that the use of "Wellington" by the second investment company does not mislead investors and that neither common law unfair competition nor violations of the prohibitions of the various sections of the Investment Company Act are shown by the facts. The Commission is appearing in this appeal as amicus curiae, and has filed a brief which takes the position that implied rights of action flow from violations of provisions of the Investment Company Act, including Section 36. The brief also points out that no inferences 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 Commission takes no position on the merits of the case.

53 C.A. 3 Nos. 13702, 13703, 13704 and 13705.

54 Taussig v. Wellington Fund, Inc., 187 F. Supp. 179 (Del. 1960).

CRIMINAL PROCEEDINGS

The statutes administered by the Commission provide that the Commission may transmit evidence of violations of these statutes to the Attorney General, who, in turn, may institute criminal proceedings. The regional offices and, at times, the main office of the Commission prepare, after investigation, detailed reports where the facts appear to warrant criminal prosecution. After careful review by the General Counsel's Office, the recommendations of the regional offices 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. The Commission also submits parole reports prepared by its staff relating to convicted offenders.

During fiscal 1962, the Commission referred more cases to the Department of Justice for prosecution than in any other year in the Commission's history. In addition to the 60 cases referred for prosecution, 4 cases were referred for institution of criminal contempt proceedings for violations of injunctive decrees secured by the Commission in civil actions. As a result of these and prior referrals, 42 indictments were returned against 205 defendants during the fiscal year. There were also 67 convictions in 20 cases. Convictions were affirmed in 2 cases, and appeals were still pending in 13 other criminal cases at the close of the period. Of 4 criminal contempt cases handled during the year, 1 case was dismissed and 3 cases are still pending. From 1934, when the Commission was established, until June 30, 1962, 3,187 defendants have been indicted in the United States District Courts in 710 cases developed by the Commission and 1,577 convictions have been obtained. The record of convictions obtained and upheld in completed cases is over 86 percent for the 28-year life of the Commission.55

As in prior years, the majority of the criminal cases prosecuted involved the offer and sales of securities by fraudulent representations and other fraudulent practices. These activities included high-pressure long-distance telephone "boiler-room" frauds, conversion of

A condensed statistical summary of all criminal cases developed by the Commission from the fiscal year 1934 through the fiscal year 1962, is set forth in Appendix Table 25. The status of criminal cases developed by the Commission which were pending at the end of the fiscal year is set forth in Appendix Table 16.

customers' funds and securities by broker-dealers or their salesmen, frauds involving the sale of securities by new as well as established businesses, and fraudulent securities sales relating to the promotion of insurance companies, mortgage companies, oil and gas and other mining ventures, alleged inventions and other spurious investment schemes. Because of the large volume of cases, it is impossible to report in detail all the criminal matters, but some of the more important and novel fraudulent devices and techniques are described in the specific cases discussed below.

The past fiscal year has seen the culmination of the Commission's intensive investigations and prosecutions of a large number of fraudulent mortgage and trust deed promotions. The principal and perhaps the largest of these promotions was the subject of the prosecution in United States v. David Farrell et al, (S.D. Cal.). In that case some 9,000 investors paid in excess of $40 million into an alleged "Secured 10% Earnings Program" by purchasing securities of the Trust Deed & Mortgage Exchange, Los Angeles Trust Deed & Exchange, Trust Deed & Mortgage Markets, and Colorado Trust Deed & Mortgage Markets. David Farrell and Oliver J. Farrell were convicted on 32 counts of violating the anti-fraud provisions of the securities acts and the Mail Fraud Statute by falsely representing that investors were assured of 10% earnings and a degree of liquidity equivalent to that of insured bank deposits or insured savings and loan certificates, and failing to disclose that the issuing companies were insolvent and that funds entrusted to them by investors were in constant jeopardy. David Farrell received a 10 year jail sentence and was fined $86,000; Oliver J. Farrell was sentenced to 4 years in jail and was fined $52,000, 56

Numerous convictions also have been obtained and several indictments are pending in the Southern District of Florida, in similar cases involving the "8% racket," the sale of unregistered mortgage notes to the public by fraudulently guaranteeing interest payments of between 8 and 15 percent. "Interest" was normally paid from capital contributed by purchasers of mortgage notes and not from income derived from operations.

As a result of the extensive prosecutions, this type of promotion seems to have been substantially eliminated. Among the convictions obtained were those of five defendants in United States v. Joseph A. Peel, Jr., who were each sentenced to 18 years' imprisonment for violating the anti-fraud provisions of the Securities Act of 1933 and the Mail Fraud Statute in the sale of 8% notes of Insured Capital Corporation of Orlando, Florida. These defendants had received more 56 Appeals are presently pending.

than a quarter of a million dollars from public investors. In another case, United States v. Gradsky, et al., 10 defendants were convicted shortly after the close of the fiscal year of violating the anti-fraud provisions of the Securities Act and the Mail Fraud Statute in the promotion and sale of 8% and 12% short-term notes of Credit Finance Corporation, and received prison sentences ranging from 6 to 20 years. This past fiscal year has seen a substantial number of cases involving manipulation of securities on national stock exchanges or in the overthe-counter market. In United States v. Talenfeld (W. D. Pa.), Edward H., Maurice A. and Burton M. Talenfeld were adjudged guilty of manipulating the market price of Cornucopia Gold Mines stock on the American Stock Exchange to aid distribution of their own shares of Cornucopia in the over-the-counter market. Maurice and Burton Talenfeld received 1-year sentences and were each fined $10,000. Edward H. Talenfeld was fined $7,500. Charles C. Bales and John C. Buckley, Jr., among others, pleaded guilty and nolo contendere in United States v. Bales (W.D. Ky.), to manipulating the market price of the stock of Cardinal Life Insurance Co., and concealing this and other facts from investors to whom they distributed over 71,000 shares of their own Cardinal stock. The defendants were fined amounts up to $15,000 and placed on probation.

In United States v. Garfield, et al. (S.D.N.Y.), still in progress at the close of the fiscal year, 22 individuals and 7 broker-dealer firms were charged with manipulating the market price of the common stock of United Dye and Chemical Corporation, and with distributing this stock in violation of the registration requirements of the Securities Act. A number of the defendants have entered pleas of guilty during the trial. Sentencing has been deferred until its completion. Some of the same defendants and others are charged, in United States v. Garfield, et al. (S.D.N.Y.), with fraud and market manipulation in connection with the sale of more than 5 million shares of Shawano Development Corporation stock to the public through J. H. Lederer Company, Inc., by means of an intensive telephone sales campaign utilizing false and misleading statements and literature.

Manipulation on the San Francisco Mining Exchange was the basis of two indictments returned near the close of the fiscal year. In United States v. McDaniel (S.D. Tex.), Paul E. McDaniel, George A. Mellen and others are charged with manipulating the market price of Ambrosia Minerals stock to facilitate the fraudulent distribution of their own stock. George J. Flach, president of the Exchange, is named as a co-conspirator but not as a defendant. And in United States v. Carroll (S.D. Calif.), the defendants are charged with manipulation and fraudulent sale of the stock of Comstock, Ltd.

In addition to the Ambrosia Minerals and Comstock promotions noted above, a number of other oil, gas and mining ventures provided, as in past years, a fertile field for fraudulent stock promotions. Among the cases involving such promotions was United States v. Columbus Rexall Consolidated Mine Co. (S.D. Fla.), where Irwin C. Glaser and 12 other defendants were found guilty of merging various corporations with insubstantial or spurious assets into Columbus Rexall, issuing over 12 million shares to themselves or associates, manipulating the price of the stock upwards on the Salt Lake Stock Exchange, and distributing large blocks of the stock to the public through "boiler-room" tactics.

A number of broker-dealers and securities salesmen were convicted in the past year for converting either their customers' securities or funds obtained from the sale of these securities. Thus, in United States v. Pruett, (N.D. Ga.), Carl and Gertrude Pruett were each convicted and sentenced to 9 years imprisonment for converting securities and funds belonging to customers, totaling about one and a half million dollars. In United States v. Ficken (N.D. Ohio), the defendant was sentenced to 18 years imprisonment after pleading guilty to charges of converting clients' funds by "bucketing" their orders.

A number of indictments have been returned in the Southern District of New York against Lowell M. Birrell and his associates charging fraud, manipulation and registration violations. In United States v. Gerardo A. Re (S.D.N.Y.), it is alleged that Birrell and others, including Jerry and Gerard Re in their capacity as specialists on the American Stock Exchange, manipulated the price of Swan-Finch Oil Company stock on that Exchange while distributing large unregistered blocks of the stock to the public through "boiler-rooms" and the Exchange at artificially inflated prices.

In United States v. J. A. Winston & Co., Inc. (S.D.N.Y.), Joel Alfred Winston, Birrell and others are charged with the manipulation and sale of unregistered stock of Jeanette Minerals, Ltd. The indictment alleges that while Birrell and other defendants manipulated the price of Jeanette stock on the Toronto Stock Exchange, Winston distributed 400,000 shares beneficially owned by Birrell to the American public through J. A. Winston & Co. The same defendants are also charged with fraud and registration violations in connection with the sale of the stock of American LeDuc Petroleums, Ltd. in United States v. Albert Bernstein, et al. (S.D.N.Y.). The indictment alleges that Birrell and the other defendants fraudulently distributed to the public, through J. A. Winston & Co., over 3 million unregistered shares of American LeDuc. Winston, J. A. Winston & Co. and others are also charged with violating the registration

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