mission that we would charge on every issue. This is known as acting as your agent in which case it is mandatory under the Securities Act that we give you the actual price that we receive for the securities sold and charge you a stated commission." [Emphasis added.] This letter, which represents a fair summary of what the registrant did not do, was initialed by both of the firm's partners, McIntyre and Augustine. This, together with other evidence in the record, makes it clear that both McIntyre and Augustine knew that they were violating their obligations as agent in falsifying execution prices, and taking secret profits. In the recent case of A. G. Scheidel & Company we had occasion to consider whether under the facts there presented revocation of the respondent's registration as a broker-dealer would be in the public interest. In that case we found extenuating circumstances which prompted us to hold that revocation of registration was not necessary in the public interest. Without deciding that any of the circumstances referred to would, in and of itself, be conclusive in any given situation, we point to several significant differences between the Scheidel case and this case. First, although the Scheidel firm had failed to disclose in a great many instances whether it was acting as principal or agent, in all of these instances the profits improperly taken were no more than the firm would have been entitled to had it properly executed the order as broker and added the usual brokerage commission and handling charges. But here the records of Scott McIntyre & Company show that the secret profits realized in agency transactions were taken in addition to regular brokerage fees and handling charges, and that, on occasion, even these fees and charges were overstated. Second, in the Scheidel case, the registrant later offered its customers the choice of confirming or disaffirming improper dealings, with corresponding adjustments involving actual cash refunds in some instances. While it has been stated that this registrant has revised and corrected its methods since this proceeding was started, it has made no attempt or offer to make restitution of any of the profits of its fraud. Third, although there was some reason to believe that the registrant in the Scheidel case was not entirely aware of the difference between agency and dealer transactions and its obligations in such transactions, it is clear from the record before us that both partners of Scott McIntyre & Company knew that secret profits were being taken in transactions in which their firm purported to act as agent and understood that such secret profits were improper. 10 S. E. C. 1032 (1942). Conclusion.-We find that the registrant has willfully violated Section 17 (a) of the Securities Act of 1933, Section 15 (c) (1) of the Securities Exchange Act of 1934 and Rule X-15C1-2 promulgated thereunder. We further find that it is necessary and appropriate in the public interest and for the protection of investors that the registration of Scott McIntyre & Company as an over-the-counter brokerdealer be revoked and that it be expelled from membership in the National Association of Securities Dealers, Inc. An appropriate order will issue. By the Commission: (Chairman Purcell, and Commissioners Healy, Pike, Burke, and O'Brien). 11 S. E. C. [No. 1562] IN THE MATTER OF JACKSONVILLE GAS COMPANY AMERICAN GAS AND POWER COMPANY File Nos. 54-47 and 59-43. Promulgated May 27, 1942 SIMPLIFICATION OF HOLDING COMPANY SYSTEM. Compliance with Section 11 (b) (2) by Operating Company. Where voting power was unfairly and inequitably distributed among security holders of an operating utility company, held that a voluntary plan filed by such company under Section 11 (e) of the Act properly provided for a comprehensive reorganization of such company's structure to effectuate the provisions of Section 11 (b), and that the Commission is not precluded by the third sentence of Section 11 (b) (2) from approving a plan of that character. Application of Standard "Fair and Equitable" in Section 11 (e). Where the total value of all assets of the applicant company was less than the total claim of its first mortgage bondholders, but where certain assets of the company were free of the bondholders' lien, held in proceedings under Section 11 (e) of the Act, that holders of debentures and unsecured notes of the company had a claim against such free assets, on a par with the bondholders' deficiency claim and junior to preferred creditors' claims, and that the plan must give appropriate recognition to claims in respect of such debentures and notes in order to meet the standard "fair and equitable" in Section 11 (e). Further held that distribution of voting power on a "fair and equitable" basis to effectuate the provisions of Section 11 (b) implies that the voting power distributed must carry with it effective and not merely theoretical control on the part of the new security holders, as against a holding company which was to have no financial interest In the reorganized company. APPEARANCES: Myron S. Isaacs, of the Public Utilities Division of the Commission. Humes, Buck, Smith and Stowell, by Albridge C. Smith, for Jacksonville Gas Company and American Gas and Power Company. Pam, Hurd & Reichmann, by Sydney K. Schiff, for City National Bank and Trust Company of Chicago and Arthur T. Leonard, as successor trustees under the indenture and supplemental indentures relating to the first mortgage bonds of Jacksonville Gas Company. Davis, Polk, Wardwell, Gardiner & Reed, by Edgar G. Crossman, for Guaranty Trust Company of New York as trustee under the agree 449 ment, as amended, pursuant to which the income debentures of Jacksonville Gas Company were issued. Lawrence E. Fleischman, for certain holders of debentures and common stock of Jacksonville Gas Company. Samuel A. Mehlman, for Albert L. Sylvester. FINDINGS AND OPINION OF THE COMMISSION Jacksonville Gas Company, a subsidiary of American Gas and Power Company (a registered holding company), has filed an application pursuant to Section 11 (e) of the Public Utility Holding Company Act of 1935 proposing a plan for compliance with Section 11 (b) of the Act. On April 1, 1942, we issued a notice of filing and order for hearing on the application,1 and on April 9 we issued a further order instituting proceedings with respect to the Jacksonville company and its parent, American, under Sections 11 (b) (2) and 15 (f) of the Act.2 The latter order directed consolidation of the two proceedings for the purpose of hearing. After appropriate notice, hearings were held before a trial examiner. Numerous persons filed applications for intervention as parties to the proceedings, briefs were filed by and exchanged among counsel, and we heard argument. On the basis of the record, briefs and argument we make the findings set out below. The Jacksonville company is a public utility company which owns and operates a manufactured gas plant in the city of Jacksonville, Fla., and a manufactured gas transmission and distribution system in Jacksonville, South Jacksonville, and their environs. It was incorporated under the laws of Florida in 1927, as successor to a company of the same name incorporated in 1874. One-half of its capital stock is owned by American and the other half is outstanding in the hands of the public. A contract with Public Utilities Management Corporation, a mutual service company for American's holding company system, provides for certain services in connection with the management and operation of the Jacksonville company's business. The Jacksonville company has been in financial difficulties for many years. Its plant account has been carried on its books at a figure 1 Holding Company Act Release No. 3422, and 7 Fed. Reg. 2607. 2 Holding Company Act Release No. 3434, and 7 Fed. Reg. 2804. $ City National Bank and Trust Company of Chicago and Arthur T. Leonard, as suecessor trustees under the indenture and supplemental indentures relating to the first mortgage bonds issued or assumed by the Jacksonville company, and Guaranty Trust Company of New York, as trustee for the company's debentures, were permitted to intervene. Others, who were permitted to participate in the proceedings insofar as their interests were affected, were accorded the right to introduce evidence, cross-examine witnesses, and make oral argument. Among these were Lawrence E. Fleischman, an attorney representing certain holders of debentures and capital stock of the company; Samuel A. Mehlman, an attorney representing a holder of first mortgage bonds; and others acting either pro se or on behalf of security holders. which has never, as far as can be determined, borne any reasonable relationship to the cost or value of its properties. Its debt structure, erected on the basis of the inflated plant account, has imposed interest requirements far in excess of the earning power of the company. In 1935 the company was reorganized in proceedings under Section 77B of the Bankruptcy Act, in which proceedings, however, the company's debt underwent no reduction. The principal result of this reorganization was to reduce the fixed interest rate on the company's outstanding bonds, and to make payment of a part of its interest requirements conditional upon earnings. Since then the earnings of the company have been insufficient to permit payment of more than a small part of the cumulative conditional interest on the first mortgage bonds.* The corporate structure of Jacksonville at December 31, 1941, together with surplus per books, was as follows: 6, 161, 557 100.00 Total capitalization and book surplus_‒‒‒‒ The capital stock has the entire voting power. Although the capital and surplus accounts, on the basis of the company's books, amount to 10.77 percent of total capitalization and book surplus, both capital and surplus accounts on the basis of any realistic statement of the company's assets would show a substantial deficit. As will be more fully developed later in this opinion, the present value of the company's assets, and its past and prospective earnings, are such that the stock of the company has no possible equity in the enterprise. Thus it is clear that the voting power, held entirely by the holders of such The previous 5% interest rate on these bonds was reduced to 3% fixed interest and 2% conditional interest based on earnings computed in accordance with a formula outlined later on in this opinion. Payments of conditional interest have been: 7 |