delayed." On July 12, 1965, Justice Harlan denied Doyle's application for bail pending his petition for certiorari. On July 15, 1965, Doyle fled to Canada to avoid serving the prison sentence. In April 1965, Paul R. Casavina and Horace J. Parisi were convicted in the United States District Court for New Jersey of violating Sections 5 and 17 of the Securities Act and the Mail Fraud Statute. Casavina was sentenced to 8 years imprisonment and Parisi received a suspended sentence and was placed on probation for 2 years. Evidence adduced during the trial showed that in excess of 600,000 shares of stock of Casavan Industries, Inc., a corporation controlled by Casavina, were sold by or through him by means of false and fraudulent representations. To justify the issuance of stock to Casavina and also to increase Casavan's purported assets from $100,000 to approximately $5 million, Casavina caused the corporation to acquire assets of little or no value from a number of other corporations. In this manner over 1.5 million shares of Casavan stock were issued, Casavina receiving more than 1 million of these shares, for which he paid no consideration. During the fiscal year, 17 convictions were affirmed by appellate courts in 9 cases. In United States v. McDaniel,25 the conviction of Paul E. McDaniel was affirmed by the Court of Appeals for the Fifth Circuit. McDaniel was convicted in 1963 for violating and conspiring to violate the registration and anti-fraud provisions of the Securities Act in connection with the offer and sale of the stock of Ambrosia Minerals, Inc. Together with George A. Mellon (presently a fugitive), he had arranged to have the stock of Ambrosia listed on the San Francisco Mining Exchange and had caused large blocks to be issued in the names of nominees. McDaniel and Mellon had manipulated the price of the stock on the exchange so that it rose from $1 to over $6 per share and had then proceeded to distribute approximately $1 million worth of stock in the over-the-counter market during 1956 and 1957. They had not only issued false and misleading information to the public and filed false and misleading materials with the exchange and the Commission, but had also caused Ambrosia to pay two dividends in late 1956 and early 1957, although it never had any earnings. McDaniel was sentenced to serve 18 months in prison and to pay a fine of $14,100. On appeal McDaniel contended that he was not shown to have used the mails and that the mails were not used until after the sales had been made. In passing on this contention the court said: "It may not have been clearly shown that appellant knew that the confirmations and stock certificates were to be mailed but the mailings were such an integral part of the transactions that 25 343 F.2d 785 (C.A. 5, 1965). the use of the mails for the delivery should have been foreseen and contemplated. The evil at which the Securities Act is directed is the fraud in the sale of securities. ... In other words, a scheme to defraud in relation to a sale of securities and the use of the mails in consummation thereof is the gist of the crime. The use of the mails need not be central to the scheme to defraud." The court further stated that: "[i]t matters not whether McDaniel himself did the mailing; the use of the mails by his broker must have been fully contemplated by him and attributed to him." On October 27, 1964, the Court of Appeals for the Seventh Circuit affirmed the convictions of Walter E. Herr and William Gillentine for violating the Securities Act and the Mail Fraud Statute.26 The defendants made fraudulent sales of "inactive" distributorships to some 72 investors from March 1960, through February 1961. American Sales Training Research Association, Inc., of which the defendants were the promoters, was allegedly in the business of selling sales training material such as phonograph records, projectors and film. The defendants represented to investors that they could become "inactive" distributors by purchasing sales training material which, in turn, would be disposed of by a sales force maintained by the corporation. After a deduction for expenses, the "inactive" distributors were to receive the remaining profits, which the defendants represented to be as high as 6 percent a month. On appeal the defendants contended that the distributorships were not "securities" within the meaning of the 1933 Act, and that only sales of merchandise were involved. In rejecting this contention, the court said: [T]he facts "we construe it to be an investment contract. Shortly after the close of the fiscal year the Court of Appeals for the Second Circuit affirmed the convictions of Roy B. Kelly and Cecil V. Hagen for violating and conspiring to violate the anti-fraud and registration provisions of the Securities Act and the Mail Fraud Statute in connection with the offer and sale to the public of Gulf Coast Leaseholds, Inc. stock, as well as conspiring to commit fraud upon the Commission in its function of protecting the investing United States v. Herr, 338 F.2d 607 (C.A. 7, 1964). public.27 Kelly and Hagen had each been sentenced to 3 years in prison. The court, however, reversed the conviction of Milton J. Shuck. At the outset of its opinion the court noted: "It is a sad commentary upon the morals of our stock market places in general, and the over-the-counter market in particular, that at this late date in the history of federal securities regulation we are called upon once again to 'memorialize the rapacity of the perpetrators and gullibility, and perhaps also the cupidity of the victims'." In a lengthy statement of facts the court noted that the Commission's insistence on full and accurate disclosure prevented Gulf Coast Leaseholds from obtaining a listing on the American Stock Exchange after the Board of Governors of that Exchange had approved the listing and certified such action to the Commission. Noting the impact on the market of the false information about the company disseminated by the conspirators, the court said: "But not even this stream of false information could budge the SEC into approving Gulf Coast's application for listing on the American Stock Exchange." The court also complimented the prosecution team, which included Commission personnel, for its handling of the case. 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 coordinates the investigative activities 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 "United States v. Kelly, et al., 349 F.2d 720 (1965). See the 30th Annual Report, pp. 133-134, for further details regarding the violations involved and the mammoth nature of the case. Markets and the regional offices give careful consideration to such complaints 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 carrying out its enforcement responsibilities are the national securities exchanges, the National Association of Securities Dealers, Inc., brokerage firms, state and Canadian securities authorities, better business bureaus, and various law enforcement agencies. It is the Commission's general policy to conduct its investigations on a confidential basis. Such a policy is necessary to effective law enforcement and to protect persons against whom unfounded or unconfirmed charges might be made. The Commission investigates many complaints where no violation is ultimately found to have occurred. To conduct such investigations publicly would ordinarily result in hardship or embarrassment to many interested persons and might affect the market for the securities in question, resulting in injury to investors with no countervailing public benefits. Moreover, members of the public would tend to be reluctant to furnish information concerning violations if they thought their personal affairs would be made public. Another advantage of confidential investigations is that persons suspected of violations are not made aware that their activities are under surveillance, since such awareness might result in frustration or obstruction of the investigation. Accordingly, the Commission does not generally divulge the result of a non-public investigation unless it is made a matter of public record in proceedings brought before the Commission or in the courts. When it appears that a serious violation of the Federal securities laws has occurred or is occurring, a "case" is opened and a full investigation is conducted. Under certain circumstances it becomes necessary for the Commission to issue a formal order of investigation which appoints members of its staff as officers to issue subpoenas, to take testimony under oath and to require the production of documents. Usually this procedure is resorted to only when the subjects of the investigation and others involved are uncooperative and it becomes necessary to invoke the subpoena power to complete the investigation. During the fiscal year ended June 30, 1965, the following formal orders were issued by the Commission upon recommendation of the staff divisions indicated: Division of Trading and Markets_-_. 146 26 14 When an investigation has reached the stage at which enforcement action appears appropriate, the Commission may proceed in one of several ways, although the use of one procedure may not necessarily preclude the use of another. The Commission may: (1) refer the case to the Department of Justice or appropriate local enforcement authorities for criminal prosecution, (2) institute through its own staff, in the appropriate U.S. district court, civil proceedings for injunctive relief to halt further violations of law, and, (3) institute administrative proceedings if the case is one where it has the power to do so. The following table reflects in summarized form the investigative activities of the Commission during fiscal 1965: Investigations of possible violations of the Acts administered by the Commission The unlawful offer and sale of Canadian securities in the United States remained at a fairly low level in fiscal 1965. The cooperation of Canadian officials and segments of the Canadian securities industry with the Commission has been very good. The Commission assisted the Ontario Royal Commission on Windfall Oils and Mines Limited in its exhaustive investigation into the wild gyrations of Windfall shares on the Toronto Stock Exchange. The most serious foreign securities problem confronting the Commission continues to be the increase in fraudulent promotions from countries other than Canada, particularly the Bahamas. In dealing with many of these promotions, the Commission is experiencing considerable success with the new, simplified procedures for obtaining foreign postal fraud orders, with the continuing cooperation of the Post Office Department. In addition to obtaining injunctive relief against a Bahamian bank, the Commission issued a public warning release in June of 1965, concerning the public offering of unregistered time deposit certificates and other securities by various organizations holding bank charters in the Bahamas. Although the named organizations designate themselves as "banks", they do not carry on normal banking operations. In its warning release, the Commission pointed out that these so-called "banks" should not be confused with the recognized banks and financial institutions conducting business in the Bahamas.28 28 Securities Act Release No. 4785 (June 16, 1965). |