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, 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.

36

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

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

6209 F. Supp. 481 (D. D.C., 1962). 37 317 F. 2d 139 (D.C. Cir., 1963).

trict Courts in 753 cases developed by the Commission and 1,695 convictions have been obtained. The record of convictions obtained and upheld in completed cases is over 85 percent for the 29-year life of the Commission.38

As in prior years, the majority of the criminal cases prosecuted involved the offer and sale of securities by fraudulent representations and other fraudulent practices. These activities included high-pressure long-distance telephone "boiler-room" frauds, conversion of 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 in connection with the promotion of insurance companies, mortgage companies, oil and gas and other mining ventures, and other types of enterprises. It is not feasible to describe individually each of the many criminal matters pending during the year.39 However, two landmark criminal prosecutions which occurred during the fiscal year are discussed below.

On July 14, 1961, an indictment was returned by a Grand Jury sitting in the Southern District of New York charging 33 individuals and corporations with manipulating the market price of United Dye and Chemical Corporation stock on the New York Stock Exchange and with fraudulently distributing to the public unregistered shares of this stock. (United States v. Garfield, et al.)

Certain defendants were severed, and others pleaded guilty before or during the trial, which commenced in March 1962. The trial continued until February 1963, when a jury found the remaining defendants, Virgil D. Dardi, Charles Rosenthal, Charles M. Berman, Robert B. Gravis and R. B. Gravis, Inc. guilty. Sentences which had been imposed as of the close of the fiscal year on individual defendants included imprisonment up to 7 years and fines up to $50,000. The evidence at the trial showed that Alexander Guterma, who was named as a co-conspirator and testified for the Government, and defendants Garfield and Pasternak acquired control of United Dye and Chemical Corporation by purchasing a controlling block of stock from Lowell M. Birrell in 1955. Virgil Dardi, who arranged this purchase, received a percentage of the proceeds. Thereafter, in a series of transactions, Guterma, Garfield and Pasternak caused United Dye and Chemical to issue 575,000 shares of stock to them for Handridge Corporation which they controlled. Thus, without any outlay of cash,

39 Appendix table 25 contains a condensed statistical summary of all criminal cases developed by the Commission from fiscal 1934 through fiscal 1963.

A list of all criminal cases developed by the Commission which were pending during the year and in which indictments have been returned, and the status of each case, are contained in Appendix table 16. Table 13 is a summary of criminal cases developed by the Commission which were pending as of June 30, 1963.

they received United Dye and Chemical stock which had a then market value of over $5 million.

In order to distribute this large block of stock to the public without depressing the market, the services of various "boiler-rooms" were utilized, including Rockwell Securities Corporation, J. H. Lederer Co., Cornelis DeVroedt, Inc., McGrath Securities, Inc., I. F. Stillman & Co., Inc., R. B. Gravis, Inc. and G. F. Rothschild & Co., Inc. These "boiler-rooms" employed the typical fraudulent high-pressure selling practices. Contemporaneously the defendants manipulated the price of the stock upwards on the New York Stock Exchange by purchasing large amounts on the Exchange while, at the same time, selling the stock previously acquired and the stock being purchased on the Exchange to the public through the "boiler-rooms."

The trial of this one complex fraud and manipulation case to a lay jury presented litigation problems of great magnitude. At the conclusion of the trial, which was the longest in the annals of United States criminal prosecutions, Judge Herlands noted:

There never was a case that was presented with such detail, such documentation, letters, books, records, confirmations, witnesses. There never was a case that was proved to the hilt the way this case was proved (emphasis added). [The prosecuting attorneys] have been assisted by two very able representatives of the Securities and Exchange Commission, Mr. Ralph H. Tracy and Allen S. Kilmer. It is evident that they performed Herculean labors by way of investigation and ferreting out the facts, and I think that the Securities and Exchange Commission, Mr. Tracy and Mr. Kilmer, deserve commendation for the way in which they are discharging their function of acting as the financial watchdog for the investment public.

It took years of unremitting labor in the face of all kinds of investigative difficulties to develop the facts that were presented to the jury, and if the case took 11 months to present the evidence, one can only imagine how long it took to dig up the evidence.

I therefore want the Securities and Exchange Commission to know that its efforts have been recognized, and that the Securities and Exchange Commission and its facilities and personnel should be implemented and strengthened so that they could carry on with even greater effectiveness the task of protecting the securities markets and the investing public from frauds and swindles and other sophisticated types of chicanery.

The court emphasized the efficient manner in which the prosecuting attorneys prepared and conducted their case and stated that the length of the trial was not attributable to any inadequacy on their part. On the other hand, the court pointed out, defense counsel's tactics were designed to create delay and to cause the judge to "lose his temper and say something which would be grounds for a mistrial."

The convictions of Gerard and Jerry Re, former specialists on the American Stock Exchange, and the other defendants in United States v. Re, et al., are also of the utmost significance to the Commission's

enforcement program. The Res and others were charged with participating with Lowell M. Birrell, presently a fugitive in Brazil, in manipulating the price of Swan-Finch Oil Corporation stock on the American Stock Exchange and in fraudulently distributing unregistered shares of this stock on the Exchange and through "boilerrooms" which used the manipulated market price as one of the fraudulent selling devices.

The Res themselves distributed at least 578,000 shares of SwanFinch stock over the Exchange at an aggregate sales price of over $3 million. To prepare the market to absorb these large blocks of SwanFinch stock, the Res made short sales from their specialist's accounts over a period of time and later covered them with stock from at least 18 nominee accounts controlled by them. They also, on occasion, prevented others from effecting sales of large blocks of stock on the Exchange, "painted the tape" to show considerable trading in the stock at crucial periods, and so executed sales as to close the market in this stock on the "up tick."

In addition to the large sums realized through the sales of this stock, the Res received approximately one-quarter of a million dollars from Birrell as payment for their services.

The importance of the convictions of the Res can best be appreciated when the specialists' role and function in the securities markets are considered. As stated at page 23 in the Staff Report on Organization, Management, and Regulation of Conduct of Members on the American Stock Exchange:

In his unique capacity the specialist stands at the heart of the exchange market mechanism. He has intimate knowledge of the past market actions of the stock in which he specializes. He also has sole access to the specialist book showing outstanding orders both below and above market, which affords him a great competitive advantage over the public. In addition, he exercises a significant influence on the public appraisal of a security since he is the one who quotes the market. For all these reasons, it is a matter of tremendous importance in the maintenance of a fair and orderly market that a specialist's transactions as principal be only of such kinds and amounts as are consistent with his function of acting as broker at the vital center of the auction market.

These convictions, as well as the many convictions obtained in other cases throughout the country, are of the utmost importance to the Commission in performing its task of protecting the investing public and deterring further violations.

OFFICE OF PROGRAM PLANNING

Pursuant to the recommendations of the Special Study of Securities Markets, a new Office of Program Planning was created subsequent to the close of the fiscal year. The principal function of this Office

is to assist the Commission in establishing policy by analyzing legal, economic and industrial developments affecting the regulation of the securities markets. The Office recommends to the Commission the institution or modification of programs commensurate with the needs and trends of the securities markets.

The initial task of the Office will be to assist and advise the Commission in the implementation of the recommendations of the Special Study of Securities Markets. This work involves, in coordination with other Commission offices and divisions, changes in the rules, regulations and policies of the Commission and self-regulatory agencies; recommendations for legislation; proposals for modifications of industry practices and procedures for gathering and analyzing economic data about the securities markets; and conferring, where appropriate, with the self-regulating agencies and the financial community regarding such proposals.

It is anticipated that, as the recommendations of the Special Study are implemented, the work of this Office will gradually shift in emphasis to the principal function described above.

COMPLAINTS AND INVESTIGATIONS

Each of the Acts administered by the Commission specifically authorizes investigations to determine whether violations of the Federal securities laws have occurred.

The nine regional offices of the Commission, with the assistance of their respective branch offices, are chiefly responsible for the conduct of investigations. In addition, the Office of Enforcement of the Division of Trading and Markets of the Commission's headquarters office conducts investigations dealing with matters of particular interest or urgency, either independently or assisting the regional offices. The Office of Enforcement also exercises general supervision over and coordination of the investigative activities of the regional offices. Its staff examines and analyzes the investigative findings and recommendations of the regional offices and recommends appropriate action to the Commission.

There are available to the Commission several sources of information concerning possible violations of the provisions of the Federal securities laws. The primary source of information is complaints by members of the general public concerning the activities of certain persons in securities transactions. The Division of Trading and Markets and the regional offices give careful consideration to this information and, if it appears that violations of the Federal securities laws may have occurred, an investigation is commenced. Other sources of information which are of assistance to the Commission in