Set forth below are statistics on administrative proceedings instituted during fiscal 1963 to deny and revoke registration and to suspend and expel from membership in an exchange or the NASD. Proceedings pending at start of fiscal year to: Revoke registration____ Revoke registration and suspend or expel from NASD or exchanges.. 92 Deny registration... Total proceedings pending at start of fiscal year... Proceedings instituted during fiscal year to: 162 Revoke registration__- 34 Revoke registration and suspend or expel from NASD or exchanges-- 58 5 Proceedings terminated without prejudice to subsequent institution of new proceedings based on same or other charges. 2 Total.. 43 Proceedings to revoke registration and suspend or expel from NASD or exchanges: Registration revoked... Registration revoked and firm expelled from NASD.. Dismissed on withdrawal of registration.. Registration cancelled...... Suspended for a period of time from NASD.... Proceedings terminated without prejudice to subsequent institution of new proceedings based on same or other charges. Proceedings dismissed and registration continued in effect. Total___. Proceedings to deny registration: Registration denied..... Dismissed on withdrawal of application... Proceedings dismissed and registration permitted to become effective.. Total... Total proceedings disposed of.. Proceedings pending at end of fiscal year to: Revoke registration___. Revoke registration and suspend or expel from NASD or exchanges-- Total proceedings pending at end of fiscal year___ Total proceedings accounted for. Revocation or Denial of Registration 41 87 11 139 259 A summary of the cases in which the Commission revoked or denied broker-dealer registrations during the 1963 fiscal year appears at the end of this section. However, a few cases of unusual interest or significance are set forth in some detail in the following paragraphs: Mac Robbins & Co., Inc.-On remand to this Commission from the Court of Appeals for the Second Circuit, the Commission reaffirmed its previous determination that two salesmen for the firm of Mac Robbins & Co., Inc., had engaged in fraudulent acts and practices and were each a cause of the revocation of the broker-dealer registration of the firm. The Commission found that these two salesmen were aware of and participated in that firm's "boiler-room" selling activities and had themselves made unwarranted representations to customers." 3 The salesmen, Irwin Berko and Arnold Leonard Kahn, had been named as causes of the February 1961 revocation order against Mac Robbins & Co., Inc. along with seven other salesmen, but neither the firm nor the other salesmen joined in the appeal. In remanding the case to the Commission, the Court asked the Commission to reexamine the participation by Berko and Kahn in the illegal operations of the firm, including the right of the salesmen to rely on information provided by their employer. In its subsequent decision the Commission stated that "participation in a high-pressure sales effort involving the use of misleading sales materials, and the making of extravagant predictions and projections, without basis in factual information and without adequate disclosure of material adverse information, is inconsistent with the duty of brokers, dealers, and their salesmen to deal fairly with their customers" and a violation of the anti-fraud provisions of the Securities Acts. On the right of salesmen to rely upon information furnished by their employer the Commission declared, "Whatever may be a salesman's obligation of inquiry, or his right to rely on information provided by his employer, where securities of an established issuer are 2 Securities Exchange Act Release No. 6846 (July 11, 1962). 840 S.E.C. 497, 586. being recommended to customers by a broker-dealer who is not engaged in misleading and deceptive high-pressure selling practices, that situation is not presented here. Certainly, there can be little, if any, justification for a claim of reliance on literature furnished by an employer who is engaged in a fraudulent sales campaign. In our view, a black letter rule providing exculpation of a salesman in such circumstances, because of reliance on his employer, would place a premium on indifference to responsibilities at the point most directly and intimately affecting the investor." The Commission's position was then affirmed on a subsequent appeal to the Court of Appeals, whose decision, sub nom. Berko v. Securities and Exchange Commission, is discussed on page 116 infra. A. J. Caradean & Co., Inc.-In this proceeding the Commission denied an application for broker-dealer registration by A. J. Caradean & Co., Inc. and named Jerome H. Truen and Jack Cohen, co-owners and principal officers of the applicant, as causes of the denial order. The Commission found that Truen and Cohen, while employed as salesmen by N. Pinsker & Co., Inc., during 1957-59, had made false and misleading statements in the offer and sale of securities of Tyrex Drug & Chemical Corporation and Seaford-Mar Marina, Inc., in willful violation of the anti-fraud provisions of the Federal securities laws. Pinsker's registration had been revoked in 1960, for fraud in the sale of Tyrex stock. "It seems clear," the Commission stated in summarizing its findings, "that both salesmen engaged in an intensive high-pressure telephone campaign to sell highly speculative and promotional securities to customers irrespective of their investment needs and objectives. Their sales techniques of highly colored representations and predictions of rapid and substantial market price rises without disclosure of adverse information and the lack of adequate information were calculated not to inform but to mislead. We do not believe that the investing public should be exposed to further risk of fraudulent conduct by individuals such as Truen and Cohen who have demonstrated their gross indifference to the basic duty of fair dealing required of securities salesmen." Alexander Reid & Co., Inc.-In this proceeding, the Commission revoked the registration of the firm and named as causes Alexander Silberman, its president and sole stockholder, and the firm's salesmen, for the fraudulent offer and sale of the stock of Woodland Electronics Co., Inc. The Commission found that representations made by the respondents regarding Woodland's contracts and production and anticipated appreciation in the price of its stock were false or Securities Exchange Act Release No. 6903 (October 1, 1962). 640 S.E.C. 285. Securities Exchange Act Release No. 7016 (February 7, 1963). misleading. It stated that optimistic representations, even if couched in terms of opinion and expectation, were fraudulent when they lacked a reasonable basis. Respondents contended that the salesmen honestly and reasonably believed that a machine produced by Woodland would become a success, that the company had bright prospects and that the stock would rise in price. They argued that they had observed a demonstration of the machine, that the company had received many letters of interest, and that its balance sheet showed working capital of about $50,000. The Commission held, however, that these asserted facts could not afford a basis for predictions of specific and substantial price rises and offered no reasonable basis for enthusiastic predictions of business success. Heft, Kahn & Infante, Inc.-This case, in which the Commission revoked the firm's registration for fraud in the sale of stock of United States Communications, Inc., presented the novel question of the responsibility of a research analyst who, pursuant to his employer's instruction, prepared fraudulent sales literature. The Commission found, among other things, that the analyst knew or had good reason to suspect that the key points conveyed by the "message" in the market letters prepared by him were completely unreliable. The Commission, in concluding that the analyst participated in and aided and abetted the firm's willful violations of the anti-fraud provisions of the Securities Acts, stated: "A member of the research staff of a brokerdealer may well be entitled to rely, so far as he personally is concerned, upon materials concerning a going business supplied by an issuer or by his employer absent facts and circumstances which would raise doubts in the mind of a careful and responsible analyst as to the reliability of the materials or the propriety of their use for a particular purpose. In the circumstances of this case, however, we think Binday's defense that he followed the instructions of his employer is unavailing. By proceeding with the preparation of the false and misleading market letter notwithstanding his knowledge of the absence of supporting facts and in light of the all-too-evident warnings of irregularities and the indicated irresponsibility and lack of diligence on the part of the principals of the registrant and USC [the issuer], he became an important part of an apparatus perpetrating a fraud. Under these facts, if a salesman had made these statements orally to his customer, we would have no hesitancy in finding him a cause of our order of revocation. In his fabulist role, Binday's activities were no less reprehensible and no less willful; indeed, the market letter was designed to reach a much wider audience than the oral statements of a salesman."7 7 Securities Exchange Act Release No. 7020 (February 11, 1963). The following summary, covering the cases in which broker-dealer registrations were revoked or denied other than those already discussed, reflects the principal basis or bases upon which such action was taken : Number of brokerdealers False and misleading statements in offer or sale of securities – – False and misleading statements and/or other fraudulent activities, Violations of credit extension regulations, and in most instances also of net capital rule_____. 7 Violations of books and records requirements___ 3 False and misleading statements in registration application or financial statements filed therewith... 4 Other Sanctions 8 During the fiscal year, the Commission suspended the following broker-dealers from membership in the National Association of Securities Dealers, Inc.: Amos Treat & Co., Inc., for 12 months; D. F. Bernheimer & Co., Inc., for 6 months; ° C. A. Benson & Co., Inc., for 30 days; 10 and Sutro Bros. & Co., for 15 days.1 9 11 In Sutro Bros. & Co.,12 the Commission suspended the registrant from membership in the National Association of Securities Dealers, Inc., for 15 days, finding that registrant and its salesmen had "arranged" for the extension of credit in violation of Section 7(a) of Regulation T.13 A number of registrants' customers and salesmen had financed securities transactions through First Discount Corp., a factoring firm which made credit available in amounts greater than those which registrant itself could have lawfully extended under the margin requirements of Regulation T. The illegal arrangements consisted of the conduct of salesmen who acted as intermediaries between customers and First Discount Corp., conveyed customers' communications to the factor or vice versa, and responded to requests or directives of the factor concerning customers' transactions. The Commission said that through these activities of its salesmen, the broker had become "so involved in the extension or maintenance of credit for the customer by the lender as to be held to be arranging. Securities Exchange Act Release No. 6971 (December 17, 1962). Securities Exchange Act Release No. 7000 (January 23, 1963). 10 Securities Exchange Act Release No. 7044 (March 26, 1963). 11 Securities Exchange Act Release No. 7053 (April 10, 1963). (April 10, 1963). 12 Securities Exchange Act Release No. 7052 13 12 CFR 220.7(a). |