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mendation, may be motivated—consciously or unconsciously—to recommend a given security not because of its potential for long-run price increase (which would profit the client), but because of its potential for short-run price increase in response to anticipated activity from the recommendation (which would profit the adviser)." The court rejected the interpretations of the lower courts to the effect that the Act requires the Commission to establish intent to injure and actual injury to the adviser's clients in order to obtain a preliminary injunction requiring disclosure of such practices. It pointed out that “Congress intended the Investment Advisers Act of 1940 to be construed like other securities legislation enacted for the purpose of avoiding frauds, not technically and restrictively, but rather flexibly to effectuate its remedial purposes.” [Footnote omitted.]
Among the numerous actions instituted in the Federal district courts by the Commission, seeking injunctions against continuing or threatened violations of the Securities Act or Securities Exchange Act, and related types of proceedings, the following were of particular interest or significance :
In Securities and Exchange Commission v. Chamberlain Associates, et al., the Commission sought to enjoin an issuing corporation and a person retained as public relations counsel for the issuer from offering and selling securities without registration in violation of Section 5 of the Securities Act and from engaging in practices operating as a fraud upon purchasers in violation of Section 17(a) of that Act. The public relations counsel had prepared a "Report to Stockholders" which was a verbatim copy of a letter by the company's president. The letter contained false and misleading statements concerning the issuer. The public relations counsel displayed the report and other material to various broker-dealers, encouraged them to establish markets at prices he suggested and on one occasion placed a purchase order for 200 shares. In this manner, the broker-dealers were induced to buy and sell some 3,000 shares, most of which emanated from a Canadian source and as to which no registration statement had been filed and no exemption appeared to be available.
The district court concluded that the Commission was entitled to a permanent injunction. It held that the activities of the public relations counsel amounted to a solicitation of offers to buy and thus constituted offers to sell, as defined in Section 2(3) of the Securities Act, and that he was an underwriter as defined in Section 2(11) of that Act. The court concluded that his activities were therefore in violation of Section 5 of that Act. It further held that the counsel also
S.D. N.Y., No. 61 Civ. 2150, CCH Fed. Sec. L. Rep. 1 91,228.
violated the anti-fraud provisions of Section 17(a) of the Act, stating that he could not shirk responsibility for the misleading statements in the Report to Stockholders by claiming that he relied upon the representations of others. The court made it clear that since it was through his efforts that the stock was to pass to the public, he had a duty to investigate further.
In Securities and Exchange Commission v. Tenn-Tex Land and Cattle Co., et al.,' the Commission sought to enjoin a corporation, its president and certain other officers from offering and selling investment contracts and profit-sharing agreements without registration in violation of Section 5 of the Securities Act of 1933. The securities took the form of grazing lease agreements between the corporation and investors who placed cattle with the defendants for care, feeding and breeding. Th investors agreed to pay a stipulated service charge per head of cattle plus one-half the calf crop or a monthly fee. While the defendants neither sold cattle to investors nor purchased from them, defendants offered to arrange purchases and sales for investors. The court entered a preliminary injunction, and a permanent injunction was consented to.
The case of Securities and Exchange Commission v. Electronics Security Corp.,' was an action for injunction against further violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(c)(1) of the Securities Exchange Act and Rules 10b-6 and 15c1-8 thereunder by a registered broker-dealer corporation and its president. The defendants consented to the entry of a preliminary injunction. At the time of the hearing on the permanent injunction the defendants urged that no injunction be entered on the ground of mootness, inasmuch as the defendant corporation had previously surrendered its dealer's license to the state authorities and had ceased to exist as an active corporation. The district court, however, issued an injunction, citing United States v. Parke, Davis & Co., 365 U.S. 125 (1961); 362 U.S. 29 (1960), where the Supreme Court had rejected similar arguments.
In Securities and Exchange Commission v. American Trailer Rentals Company,' the Commission petitioned for leave to intervene in proceedings for an arrangement under Chapter XI of the Bankruptcy Act to show that an offering of securities of Capitol Leasing Corporation, pursuant to the plan of arrangement proposed by the debtor, violated the anti-fraud provisions of Section 17(a) of the Securities Act of 1933. The Commission stated to the bankruptcy court that its
• N.D. Tex., C.A. 3–63–103.
D. Minn., No. 4-61 Civ. 237. • CCH Fed. Sec. L. Rep. 1 91,213. 7 D. Colo., No. 33276.
responsibility for enforcement of the anti-fraud provisions is in no way lessened by the fact that the violator is involved in bankruptcy proceedings or that the sanctions afforded by the statute might be imposed in connection with an arrangement proceeding under Chapter XI. It pointed out that it was confronted with a choice between instituting an independent proceeding in a Federal district court having jurisdiction under Section 20 of the Securities Act or taking steps to bring to the attention of the bankruptcy court that proceedings therein were being employed in a manner violative of the Securities Act. The Commission noted that if it had obtained an injunction against further offerings or sales by Capitol Leasing Corporation through an independent action, the proceedings for arrangement in the bankruptcy court would have been rendered moot. It therefore appeared to the Commission both more seemly and more consonant with the best interests of the arrangement proceeding to apply to the bankruptcy court for relief.
The referee in bankruptcy denied the Commission's petition to intervene on procedural grounds and also decided that the Commission had not shown facts necessary to entitle it to relief. On review, district court held that it was error to deny the Commission leave to intervene but that the referee's holding that there was not adequate evidence in the record to support the Commission's claim could not be set aside as "clearly erroneous.” An appeal has been taken by the Commission to the Court of Appeals for the Tenth Circuit where the matter is now pending:
In Securities and Exchange Commission v. Paul Richter, doing business as Meade & Company, the court had preliminarily enjoined a registered broker-dealer from violating the net capital and bookkeeping requirements under the Securities Exchange Act of 1934 and had appointed a receiver of all of the defendant's assets. A bank moved the court for an order authorizing it to sell certain securities pledged to it by the defendant as collateral for loans. The receiver and the Commission opposed the motion on the grounds that at least certain of the stock certificates held by the bank contained forged endorsements, that many other complaints of forgeries had been received from defendant's customers, and that many customers complained of having bought or sold shares without having received certificates or money therefor. The court held that it appeared there might be a cloud on the bank's title to the certificates and therefore denied the bank's motion but without prejudice to another application on timely notice to all persons whose rights might be affected by a sale.
8 The Commission's application to dismiss the Chapter XI proceeding is discussed on
p. 95, supra.
S.D. N.Y., 63 Civ. 1620.
The decision of the Court of Appeals for the Second Circuit in Berko v. Securities and Exchange Commission 10 is of considerable significance to the Commission in connection with its enforcement activities directed against fraudulent sales of securities, particularly through so-called “boiler-rooms." As described in the last Annual Report,11 Berko had been found a cause of the revocation of the broker-dealer registration of Mac Robbins & Co., Inc. He sought review of that finding and the court had remanded to the Commission, which thereafter issued an Opinion and Order 12 reaffirming its previous finding. In April 1963, the court affirmed that order as being supported by substantial evidence. It stated that Berko worked in an office which was plainly established to be a “boiler-room" and which he knew to be a "boiler-room," and held that these facts justified the Commission in holding him chargeable with knowledge of the contents of brochures utilized by him which he should have known to be misleading. The court accepted the Commission's conclusion that a salesman working in a “boiler-room” has a higher duty to prospective customers than one working out of a legitimate sales operation, and does not meet his obligation when he has no knowledge of the issuer other than opinions and brochures furnished by his employer without an investigation of their correctness.
During the year, the Commission participated as amicus curiae in several cases in which there was an issue regarding the validity or interpretation of provisions of the Securities Acts, or the rules promulgated thereunder by the Commission. Among those cases were the following:
Kornfeld v. Eaton 13 was an action brought by stockholders of the Norwich Pharmacal Company under Section 16(b) of the Securities Exchange Act to recover on behalf of Norwich the profits realized by defendant Eaton, an officer and director of the company, through "short-swing” transactions in Norwich common stock. Although the purchase and sale of the stock by Eaton occurred within a 6-month period, the purchase was made pursuant to the exercise of an option which had been granted to him by the company several years earlier. Following a demand by the plaintiffs that the company institute suit against Eaton to recover the profits from the transactions, Eaton paid to the company a sum computed in accordance with the Commission's Rule 16b-6, which limits the amount of profits that are recoverable from transactions of this type to the market increment occurring within the short-swing period surrounding the sale of the stock, thus excluding the increment arising from the long-term holding of the option. The plaintiffs claimed that the rule is invalid, urging that it is inconsistent with the purpose of Section 16(b) and that it exceeds the Commission's statutory authority to exempt transactions from the operation of that Section. The district court, agreeing with the views expressed in a memorandum which the Commission filed as amicus curiae, rejected the plaintiffs' contentions and upheld the rule as a valid exercise of the Commission's rulemaking authority under the Act. Subsequent to the close of the fiscal year, the Court of Appeals for the Second Circuit affirmed. 14
10 316 F. 2d 137 (C.A. 2, 1963). 11 28th Annual Report, p. 126. 12 Securities Exchange Act Release No. 6846 (July 11, 1962). 13 217 F. Supp. 671 (S.D.N.Y., 1963).
Fuller v. Dilbert, 15 was an action by the guarantors of a purchaser's obligations under a contract for the sale of stock to have the contract declared void as in violation of Section 5 of the Securities Act and Section 16(c) of the Securities Exchange Act. The sellers moved for summary judgment, and the Commission filed a memorandum amicus curiae. The contract was for the sale of a control block of unregistered stock, and it was contemplated that the purchaser would not take all of the stock himself but would designate unidentified other persons as co-purchasers or sub-purchasers. It was expressly provided, however, that purchaser "and his designees” would take only for investment so that the transaction would be exempt from the registration requirements of the Securities Act, under Section 4(1) of that Act, as a transaction not involving an “issuer, underwriter or dealer.” The Commission in its memorandum took the position that the contract could be performed without violating the Securities Act. Since any performances which violated the Securities Act would constitute a breach of the contract, the contract did not have to be declared void.
The other ground advanced by plaintiffs in support of their contention that the contract was void was predicated on the fact that certain shares included in its terms, which had been bequeathed to the sellers by their father, had not as yet been distributed to them at the time the contract was executed. It was urged that the sellers therefore did not "own" the stock which they were purporting to sell and that, since they were insiders, the contract was void as being in violation of Section 16(c) of the Securities Exchange Act, which prohibits any sale by an insider of equity securities of his corporation if he “does not own the security sold." The Commission urged, among other matters, that there is no particular form of legal or equitable title required to satisfy the requirements of ownership within the meaning of this Section, although some property interest is clearly required.
14 Docket No. 28315. 15 32 F.R.D. 60 (S.D. N.Y., 1962).