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A similar holding was made in the case of Capital Funds, Inc. v. S.E.C.,12 decided shortly after the end of the fiscal year, where the court ruled that a misstatement in an application for broker-dealer registration as to the identity of the owners of the business is not a “minor” point. The decision also held that the offer or sale of any part of an issue of securities to a nonresident is sufficient to deprive the entire issue of the benefit of the intrastate exemption from reg. istration; that an industrial loan company, though organized under a Banking Statute and subject to supervision by a State Banking Commissioner, is not a banking institution within the meaning of the Securities Act; that the failure of the Commission to take action as to an earlier violation does not mean that it passed upon or approved any transaction; and that the Commission and its agents may not "waive" violations of Federal law, nor may estoppel be raised against the Commission.
In Gearhart & Otis, Inc. v. S.E.C.,13 the court held that objections which were not raised before the Commission could not be raised upon review, even though the objections in question could only have been raised by a petition for rehearing. However, the court added, with respect to one of the objections, that a Commissioner could participate in a decision even though he was appointed and took office subsequent to oral argument before the Commission.
In Tager v. S.E.C.,14 the court refused to modify the sanctions imposed by the Commission, stating that courts should not "substitute their untutored views as to what sanctions will best accord with the regulatory powers of the Commission." In disposing of the petitioner's argument that his manipulation caused little harm to investors, the court observed: "The injury inflicted on the public, the market price inflation accomplished through the rigging, and the amount of profit realized by the broker are not immutable guides to an appropriate sanction as these factors are largely dependent upon market conditions and chance."
In this case as well as in the Gearhart and Capital Funds cases the courts reaffirmed their consistent holdings that willfulness, within the meaning of Section 15(b) of the Securities Exchange Act, means merely that a person intentionally commits the act which constitutes the violation and does not mean that he must know he is breaking the law.
In Nassau Securities Service v. S.E.C.,15 the court sustained Commission action affirming a fine imposed by the National Association
of Securities Dealers on the petitioner. The court rejected an attack on the make-up of the Association's tribunals because of their possible lack of disinterestedness, pointing out that disciplinary action taken by the Association is subject to full review of the Commission. The court also ruled that while it was "puzzled by the imposition of a $1,000 forfeiture, the maximum fine in the NASD arsenal of remedies, for a breach of contract involving a sum less than one-third as large," it could not say that the Commision exceeded its discretion in upholding the Association's assessment.
In Blau v. Max Factor & Co.,18 the Court of Appeals for the Ninth Circuit held that an exchange of Max Factor common stock for Class A stock did not constitute a “purchase” of the Class A stock within the meaning of Section 16(b) of the Exchange Act. The common was exchangeable for Class A at any time, and the only difference between the two classes was that the board of directors had the power to declare lesser dividends on the common than on the Class A. In holding that there was no purchase, the court distinguished Park & Tilford, Inc. v. Schulte,17 where a conversion of convertible preferred into common was held to be a purchase. The court noted that unlike the Max Factor exchange, the preferred and common exchanged in Park & Tilford involved significantly different investment risks.
The plaintiff had challenged the validity of Rule 16b-9, under which the transactions involved were exempt from the operation of Section 16(b), including its retroactive application to the facts of this case, and the Commisison had filed an amicus curiae brief urging that the rule be upheld. In view of its conclusion that there was no purchase, the court found it unnecessary to determine the validity of the rule.
In accordance with a request from the Court of Appeals for the Third Circuit, the Commission participated amicus curiae in a reargument en banc in Heli-Coil Corporation v. Webster.18 This is an appeal from a district court decision holding appellant, a director of Heli-Coil Corporation, liable under Section 16(b) for profits allegedly realized by him from short term dealings in the convertible debentures and common stock of the company. The Commission took the position that the court below correctly held that a voluntary conversion of debentures into common stock constituted a sale of the debentures and a purchase of the common stock within the meaning of Section 16(b), that the stock acquired upon conversion was not exempt from Section 16 (b) as a security "acquired in good faith in connection with a debt previously contracted” and that a conversion was not exempt
from Section 16(b) as an arbitrage transaction. The Commission urged, however, that since under the circumstances of this case no profit was realized by appellant from the disposition of the debentures upon conversion, the judgment against him should have been limited to the profits realized from the sale of the common stock within 6 months of the conversion.
In Western Auto Supply Co. v. Gamble-Skogmo, Inc.,19 the court, as urged by the Commission in an amicus curiae brief filed during the fiscal year, held (1) that the issuer's cause of action under Section 16(b), as a matter of Federal law, survived a subsequent merger by the issuer with another corporation and assignment by the latter of its interest in the issuer to a third corporation; and (2) that shares of stock are fungible so that the purchase of a particular block cannot be matched against a transfer of most of that block to the purchaser's employee pension trust at the purchase price and thus make it unavailable for matching against a subsequent sale of other shares at a higher price within 6 months of the purchase of that block.
Particularly in view of the number of new companies that will be required to file reports with the Commission, increased enforcement of the filing requirements is being emphasized. In Securities and Exchange Commission v. S & P National Corporation, et al.,20 a mandatory injunction was obtained directing the corporation and two named officers to file specified reports within 15 days of the date of the decree. The court further enjoined the defendants from failing to file or cause to be filed future reports which would become due. When the defendants failed to comply with the terms of the mandatory injunction the Commission filed a Petition for Adjudication of Civil Contempt. Pursuant thereto and with defendants' consent, an order was entered providing that the corporation and the officers "shall be in civil contempt of court" unless the required certified financial statements were filed by a specified day.
In Securities and Exchange Commission v. Higashi, 21 the United States District Court for the District of Hawaii held, in a subpoena enforcement action, that the sequestration provisions of Rule 7(b) of the Commission's Rules Relating to Investigations could not be applied to prevent a director of a corporation which was the subject of the Commission's investigation from being represented by the same counsel as that for the corporation. The Commission has appealed to the United States Court of Appeals for the Ninth Circuit, where the case is now pending.
19 348 F.2d 736 (C.A. 8, 1965). 20 S.D.N.Y., No. 65 Civ. 844. a Civil No. 2350, March 24, 1965.
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 U.S. attorney. Commission employees familiar with the case generally assist the U.S. 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 the past fiscal year 52 cases were referred to the Department of Justice for prosecution.22 As a result of these and prior referrals, 34 indictments were returned against 208 defendants. The year also saw 106 convictions in 35 cases and the affirmance of 9 cases. Appeals were still pending in 12 other criminal cases at the close of the year. Of 9 defendants involved in 6 criminal contempt cases handled during the year, 1 was convicted, and 5 cases involving 8 defendants are still pending. From 1934, when the Commission was established, until June 30, 1965, 3,616 defendants have been indicted in the U.S. district courts in 845 cases developed by the Commission and 1,880 convictions have been obtained.23
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. It is obviously not feasible to describe individually each of the many criminal matters pending during the fiscal year; only a few of the more noteworthy ones can be singled out for discussion.
The substantial sentences imposed in two criminal prosecutions involving violations of the registration provisions of the Securities Act of 1933 are significant. On September 17, 1964, Joseph Abrams, who had been found guilty by a jury of violating those provisions by offering and selling the unregistered stock of Automatic Washer Company, was sentenced to a prison term of 5 years. On February 16, 1965, Sidney Albert, who had been convicted of the same charges, was sentenced to 3 years in prison. Abrams and Albert have appealed; these appeals are presently pending in the Court of Ap
2 This figure includes three criminal contempt actions. **This figure does not include convictions in criminal contempt actions.
peals for the Second Circuit. Their convictions and the substantial sentences imposed on them should serve as a warning to unscrupulous promoters that they can not evade the registration requirements of the Securities Act by spurious reliance on exemptions from those requirements, and thereby deprive the investing public of full disclosure concerning the affairs of the issuer and its management.
The conviction of John C. Doyle of delivering unregistered securities of Canadian Javelin, Inc. to the public after sale is also significant. Doyle and three other defendants had been indicted in July 1962, for violating and conspiring to violate the registration and anti-fraud provisions of the Securities Act in connection with the offer and sale of Canadian Javelin. The indictment was initially sealed because two defendants were outside the United States and it was feared that disclosure of the indictment would prevent their return. In August 1962, Doyle represented to the Department of Justice that he had a commitment from an agent of the Commission that he would not be prosecuted. The Department of Justice rejected the claim and the indictment was made public in August 1963.
Thereafter all the defendants moved to dismiss the indictment, claiming that the prosecution was barred by the 5-year statute of limitations and that they had been denied the right to a speedy trial because of the delay in making the indictment public. The district court dismissed the indictment as to the three other defendants because of unnecessary post-indictment delay, but denied Doyle's motion because “the continued sealing was materially contributed to and caused by [Doyle's] own efforts."
On February 3, 1965, in the midst of a hearing, Doyle abandoned his commitment claim and pleaded guilty to a violation of the registration provisions of the Securities Act. He was later sentenced to 3 years imprisonment, with execution suspended as to 33 months, and was fined $5,000. In imposing sentence the district court referred to a massive distribution of unregistered stock and said: "It is not a question of 50 shares of stock alone the court has considered. The lack of registration is the important and paramount factor."
Doyle appealed his sentence to the Court of Appeals for the Second Circuit which affirmed the judgment and sentence saying: “Although Doyle's trial counsel chose to call the failure to register a technical violation, counsel can hardly be unaware of the close connection between a wilful failure to register securities and their fraudulent sale.. The court emphasized that the prison sentence "must be conceded to be modest compared with the 5 year maximum allowed by 15 U.S.C. $ 77x." The court of appeals further ordered its mandate to issue in 5 days because "sentence has already been too long