On the basis of the foregoing, we find that Hammill, in the sale of his personal note to Mrs. G, willfully violated Section 17 (a) of the Securities Act and Section 10 (b) of the Exchange Act and Rule X-10B-5 adopted thereunder.' 2. Acquisition of Mrs. G's Securities As has been noted, the original Hammill & Company partnership was organized in October 1941 by Hammill and Ahrnke. Ahrnke contributed securities of an assigned value of $10,000, which constituted all of the firm's capital. Ahrnke was to receive interest of 5% annually on his investment, and, in addition, 20% of the net earnings of the firm; the remaining 80% of earnings was to be received by Hammill, who was also to draw a salary of $275 per month. From 1942 to 1946, Ahrnke realized an annual return of approximately $1,500. In July 1947, however, after receiving no return during 1947 a result of the diminishing earnings of the firm, Ahrnke as 3Section 17 (a) provides: "It shall be unlawful for any person in the sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly- (1) to employ any device, scheme, or artifice to defraud, or (2) to obtain money or property, by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser." Section 10 (b) provides: ''It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange- (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." Rule X-10B-5 provides: "It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, (1) to employ any device, scheme, or artifice to defraud, (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." decided to withdraw his investment and dissolve the partnership, to which Hammill consented. An accountant, whom Ahrnke retained to examine the firm's accounts, received from Hammill a trial balance as of June 30, 1947, which showed that the firm's liabilities exceeded its assets by $2,618 and, on the basis of this trial balance, the accountant advised Ahrnke to withdraw from the firm. The distressed financial condition of the firm stemmed principally from the impairment of capital caused by Hammill's drawings in excess of his $275 monthly salary. Such overdrawings aggregated $13,342.11 at June 30, 1947. The securities Ahrnke had invested in the firm and which he desired to withdraw had been pledged as collateral for a bank loan of $7,000 made to the firm. In order to return Ahrnke's securities, it was necessary for Hammill to substitute new securities. To achieve this purpose, about August 7, 1947, Hammill telephoned Mrs. G advising her that his partner was retiring from the firm because of ill health, that he wanted to have her as a partner, and that he was motivated by a desire to help her recoup the losses she had previously suffered in certain securities transactions, which she apparently effected on Hammill's recommendation. Hammill asked Mrs. G to invest all of her security holdings in the firm, for which she was to receive interest annually at 4% on an assigned value of $15,000, the dividends paid on her securities, and 20% of the firm's earnings. Hammill was to receive a salary of $400 per month. Hammill guaranteed Mrs. G against loss and advised her that her securities would be deposited with a bank where they would be safe. In response to a direct question, Hammill assured Mrs. G's daughter that her mother's securities could be withdrawn at any time. On August 8, 1947, Hammill mailed a partnership agreement to Mrs. G dated August 11, 1947, which she signed and mailed back to him, accompanied by her securities. Hammill's representation that Ahrnke was withdrawing from the firm because of illness was an outright falsehood. Had the true reason been disclosed, namely, that Ahrnke was withdrawing because of his dissatisfaction with the return he was receiving as a result of the diminishing earnings of the firm and because of the firm's financial condition, it seems highly unlikely that Mrs. G would have turned over her securities. Although Hammill informed Mrs. G that her securities would be deposited with a bank and used as "collateral in the business," he did not advise her that by such deposit her securities were to be hypothecated, as they were, for a loan in the amount of $7,000 in order to accomplish the withdrawal of Ahrnke's securities from the lien of the pledge to which they were subject. In fact, his representation that the securities could be withdrawn at any time contained an inference directly to the contrary. Hammill did not inform Mrs. G that when Ahrnke's securities were returned to him, the firm had liabilities of $22,198 and assets of $8,488 (exclusive of the securities deposited by Mrs. G) or a capital deficit of $13,710 and that her capital contribution would immediately be impaired in that amount. Including Mrs. G's securities, which had a current market value of $16,109, the net worth of the firm was only $2,399. Nor did Hammill inform Mrs. G that he had no property other than his home (which was subject to the protection of the homestead laws) and that as a general partner in the firm Mrs. G assumed personal liability for its obligations. Finally, it appears that Hammill did not intend to limit himself to the $400 monthly salary which he stipulated. He had been drawing $1000 monthly while associated with Ahrnke, although his agreement with Ahrnke provided that his monthly salary would be $275. And the record discloses that after Mrs. G became associated with him, Hammill continued his practice of overdrawing on even a larger scale. The financial condition of the firm continued to deteriorate after Mrs. G had been induced to join it. By November 8, 1947, its bank indebtedness increased from $7,000 to $11,500, and Mrs. G's securities served as collateral for the increased loan. On February 16, 1948, after an unsuccessful effort to obtain additional collateral of $5,000 to secure the firm's indebtedness, the bank applied $500 of the balance of $3,608 in the firm's commercial account to liquidate an unsecured personal note of Hammill's and it applied the remainder of $3,108 as part payment on a note of the firm. A few days later, the bank sold some of Mrs. G's pledged securities and realized proceeds of $8,879, almost all of which it applied in payment of the remaining indebtedness of the firm. Thereafter, on February 21, 1948, the firm discontinued operations. While the record does not disclose the exact losses of Mrs. G, it is clear that they represent either all or almost all of her "investment.' 194 That only six months elapsed between Hammill's acquisition of Mrs. G's securities and cessation of the firm's operations underscores the extent of Hammill & Company's financial distress at the time of the acquisition and hence the gravity of Hammill's fraud in inducing Mrs. G to become a partner. It is also pertinent to note that from August 11, 1947, when Mrs. G became associated with the firm, until January 24, 1948, Hammill drew $5,541 in excess of the $400 monthly salary to which he had agreed and, at the latter date, his aggregate overdrawings, including those taken while Ahrnke was a partner, amounted to $19,758. In brief, Hammill used Mrs. G's investment to pay Ahrnke and thus release himself from liability to Ahrnke for dissipating the firm's capital through overdrawings and thereafter he used her investment as a fund from which to continue his overdrawings. In effecting this scheme, as has been shown, Hammill misrepresented the purpose motivating Ahrnke's withdrawal from the firm and he concealed the firm's precarious financial 4 The firm is still indebted to one customer in the amount of $3,311, due on a credit balance in the customer's account. position and the use to which he planned to devote Mrs. G's securities. Accordingly, we find that Hammill willfully violated Section 10 (b) of the Exchange Act and Rule X-10B-5 adopted thereunder in acquiring Mrs. G's securities. 3. Net Capital Requirements Rule X-15C3-1 promulgated under Section 15 (c) (3) of the Exchange Act provides, with certain exemptions not applicable here, that no broker or dealer shall permit his aggregate indebtedness to all other persons to exceed 2,000 per centum of his net capital." As early as October 25, 1946, the registrant had a net capital deficiency of approximately $3,100 to meet the requirements of the rule. On November 15, 1946, after being informed by our staff of the necessity to remedy this deficiency, Hammill made a contribution to the firm which temporarily rectified the situation. However, Hammill continued his practice of overdrawing, and, as a consequence, the firm's capital was dissipated and reduced to a deficit. Thus the record discloses that the firm had a capital deficit from July 31, 1947 to January 14, 1948. At July 31, 1947, the net capital of the firm was deficient in the amount of $5,905 to meet the requirements of the rule; at August 11, 1947, the deficiency was $4,734; at November 30, 1947, it was $2,464 and at January 24, 1948, it was $4,022. Accordingly, we find that Hammill & Company willfully violated Rule X-15C3-1. 4. Failure to Register As has been stated, in August 1947, Ahrnke withdrew from the registrant and the new partnership of Hammill and Mrs. G was created. Under these circumstances, the new partnership was required to execute registration Form 4-M, entitled "Application For Registration Of Partnership Formed Upon Death, Withdrawal, Or Admission Of One Or More Parties In Partnership Registered As Broker Or Dealer." Instead of executing Form 4-M, however, Hammill & Company, on September 16, 1947, filed a Form 6-M, entitled "Supplemental Statement To Application For Registration," in which it disclosed the replacement of Ahrnke by Mrs. G as a general partner. The firm also used the latter form in filing certain supplementary material concerning the new partnership. The instructions accompanying Form 6-M, which was used by the firm, state that it is to be used to report the withdrawal or admission of a partner "if such withdrawal or admission does not, as a matter of law, create a new partnership," and the same information was conveyed in two letters sent to Hammill by our staff. In other words, the new partnership did not follow the appropriate procedure for securing registration and was never actually registered. Hammill 5 Hammill obtained the funds for the contribution by increasing the mortgage loan on his home. testified that he did not recall reading the instructions accompanying Form 6-M and that he regarded the staff's letters only as routine acknowledgments of his filings, and, as a consequence, gave them only a cursory reading. Following the filing of his first supplemental statement, our staff requested Hammill to furnish additional information with respect to Mrs. G, which he furnished promptly and fully. His conduct in doing so, together with his original act in giving notification of the withdrawal of Ahrnke and the substitution of Mrs. G are not consistent with an intention to evade the registration requirements of Section 15 (a) of the Exchange Act. Hammill's conduct in this respect, while careless, discloses no motive of concealment, and, under the circumstances, we would not take any disciplinary action on the basis of such violation of Section 15 (a). 5. Failure to File Financial Statement Hammill & Company's financial report for the calandar year 1947, required by Rule X-17A-5 promulgated under Section 17 (a) of the Exchange Act, was not filed on January 15, 1948, the extended date for submitting the report. On January 19, 1948, the firm's books and records were furnished to our staff for use in connection with the present proceeding, and the report has never been filed. Hammill testified that he ordinarily did not concern himself with the preparation of financial statements and that early in December 1947 he turned over the firm's books and records to its accountants, who did not commence preparing the reports until some time after Hammill's return from a trip on January 4, 1948. Counsel for the Division of Trading and Exchanges contend that Hammill's failure to communicate with the accountants on his return and to cooperate in the preparation of the statement was responsible for the failure to complete the work in time. It appears that Hammill notified the accountants on about December 19, 1947, that he planned to be away on a trip until January 4, 1948, and that he authorized them to proceed during his absence. However, the accountants were caught in the midst of the year-end rush and had not even commenced the work when Hammill returned. It therefore appears that the principal factor in causing the delay was not Hammill's failure to cooperate, but rather the year-end press of business of the accountants he retained. Accordingly, here again in view of the circumstances noted, we would not be inclined to take any action against the firm merely on the basis of the violation of Section 17 (a) and Rule X-17A-5. 6. Public Interest As we have noted, after the institution of this proceeding and after the close of the hearings, Hammill & Company filed an application to withdraw its registration. Since a registered |