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Texas Gulf officials advised other persons to engage in similar purchases, when certain of them received stock options from the company without disclosing the material facts about the ore strike to the board of directors and when the company itself, on April 13, 1964, issued a false and misleading press release concerning its activities in Timmins 3 days prior to its issuance of a second release which for the first time confirmed the existence of a rich copper and zinc ore body in the Timmins area. In addition to injunctive relief against a repetition of the allegedly unlawful activities, the Commission seeks an order directing rescission of the allegedly unlawful purchases of stock and calls by the defendants, directing cancellation of the stock options in question and directing those defendants who advised others to purchase to make restitution to the sellers.
In a subsequent action, Securities and Exchange Commission v. Golconda Mining Co. and Harry F. Magnuson, it is alleged that Golconda and Magnuson, a substantial stockholder and controlling person of Golconda, violated the rule by purchasing stock of Hecla Mining Co. and selling stock of Lucky Friday Silver-Lead Mines Co., without disclosing to the respective sellers and purchasers a proposed merger between the two companies, known to Magnuson by virtue of his position as a director of each, at an exchange ratio different from the ratio of the market prices of the two stocks prevailing during the period of the alleged purchases and sales. The Commission seeks both an injunction against future violations and an order directing the defendants to make restitution to each person from whom they purchased Hecla stock and to whom they sold Lucky Friday stock during the period covered by the complaint.
During the fiscal year the Commission also agreed to a settlement of the case of Securities and Exchange Commission v. Aldred Investment Trust, et al., which was instituted under Rule 10b-5 in 1961. In this case the Commission alleged that Richard L. Rosenthal, president and majority stockholder of Aldred Investment Trust, an investment company having less than 100 shareholders, had purchased through Birnbaum & Co., a registered broker-dealer, minority shares of Aldred stock at $16 per share without disclosing to the sellers the identity of the purchaser, the purchaser's relationship to Aldred, the details of Aldred's investment portfolio or the fact that the net asset value of the stock had risen from $27 to $90 per share during the period in which the purchases took place. Birnbaum & Co. consented to the entry of a permanent injunction against future violations and the action was dismissed as against Rosenthal, after he offered rescission of their transactions to each of the persons from whom he
2 S.D.N.Y., No. 65 Civ. 1512. * S.D.N.Y., No. 61 Civ. 2885.
purchased, and as against Aldred, after it had been recapitalized to eliminate all minority holdings.
Two private suits under the rule in which the Commission participated amicus curiae were O'Neill v. Maytag, et al.* and List v. Fashion Park, Inc., et al. In O'Neill the plaintiff, suing derivatively on behalf of National Airlines, Inc., alleged that National was defrauded within the meaning of the rule when its controlling directors caused it to acquire a large block of its own stock at an excessive price for the purpose of removing the threat to the directors' control represented by such stock. The district court dismissed plaintiff's complaint and the court of appeals affirmed, holding that while plaintiff did allege a breach of fiduciary duty by the directors, he did not allege a violation of Rule 10b-5 because the complaint failed to allege facts amounting to “deception” on the part of the defendants. The court pointed out, however, that “deception” might not be required under the rule where the fiduciary duty allegedly breached is one that was created "with particular reference to the purchase or sale of securities, as in the case of a broker-dealer or investment adviser. The Commission's brief, urging reversal, had argued that it was clear from a reading of the entire complaint that plaintiff was claiming, although implicitly, that the directors did not fully disclose the conflicting interest which motivated the securities transactions to those entitled to such disclosure.
In the List case, a director of Fashion Park, Inc. and his broker had purchased from the plaintiff 5,100 shares of Fashion Park stock at $18.50 per share without disclosing to him (1) that one of the purchasers was a director or (2) that the board of directors had 1 week earlier resolved to seek to sell or merge the company. The court of appeals affirmed the district court's dismissal of the complaint following trial, holding that although a securities purchaser may violate Rule 10b-5 while maintaining complete silence, the district court was not clearly in error in concluding that the plaintiff would have sold his stock even if he had known that a director was the purchaser, i.e, there was no “reliance” upon this nondisclosure, or in concluding that the corporate resolution was too remote to have influenced the conduct of a reasonable investor, i.e., the adoption of the resolution was not a “material” fact. While the Commission did not participate in this case at the trial or appellate levels, the Solicitor General, subsequent to the close of the fiscal year, submitted to the Supreme Court, at the Court's invitation, a memorandum amicus curiae expressing the Commission's views upon the question of whether the plaintiff's pending petition for a writ of certiorari should be granted. The
*339 F.2d 764 (C.A. 2, 1964). 6 340 F.2d 457 (C.A. 2, 1965).
position taken in this memorandum is that the court of appeals correctly determined that the rule may be violated by maintaining complete silence, but that the court's test of reliance is confusing and inappropriate in cases of complete nondisclosure and that the court erred in failing to evaluate the combined and cumulative impact of the two elements of nondisclosure. It is urged, however, that review by the Supreme Court is not warranted in view of the fact that the case involves primarily factual determinations and the petition does not appear to raise the questions which trouble the Commission.
The Commission's action against James J. Ling, Royce B. McKinley, and Joseph F. McKinney, former officers or directors, and Paul E. Broderick, the present treasurer of Electro-Science Investors, Inc., a registered investment company, was concluded on August 3, 1965, when the court entered final judgment based on stipulation and consent of all the parties.
The complaint alleged, among other things, that Ling, with the assistance of other defendants, took personal advantage of a corporate opportunity of the company to purchase and resell a large block of common stock of Tamar Electronics Industry, Inc., in which the company also had an interest, thus violating Section 17 of the 1940 Act, and that he realized substantial personal benefits from the transaction which rightfully belonged to the company. The complaint sought an accounting for and return of such profits of the company and an injunction pursuant to Section 36 of that Act preventing any of the defendants from serving as officers or directors of a registered investment company.
All defendants filed undertakings not to serve as officers or directors of any registered investment company (except that Mr. Broderick may continue as treasurer of the company). The court also approved a monetary settlement under which defendant Ling is to pay $225,000 to the company in compromise of any claim the company may have against him.
In Hoover v. Allen, a derivative action by shareholders of American-Hawaiian Steamship Co., plaintiffs alleged that Daniel K. Ludwig, the principal shareholder of the company, had made false and misleading statements which were designed to depress the value of American-Hawaiian's stock and to induce other stockholders to sell their stock to the company, in order to enable Ludwig to obtain complete control of the company. Plaintiffs further alleged that Ludwig, after gaining such control, had committed acts of corporate waste. The complaint alleged violations of Sections 14(a) (proxy provisions) and 18(a) (false reports) of the 1934 Act and Sections 7(a) (2) and
N.D. Tex., No. CA-3-447. See discussion in 30th Annual Report, pp. 128–129. * 241 F. Supp. 213 (S.D. N.Y., 1965).
(4) (registration provisions), 20(a) (proxy provisions), 34(b) (reporting provisions) and 36 (gross abuse of trust) of the 1940 Act.
The court dismissed all claims (except those involving Section 36) on the ground that the company suffered no injury directly connected with the purchase or sale of securities, noting that the company in fact benefited from its purchases since they were made at an allegedly depressed price. The court found that the acts of waste complained of were not so connected with the alleged fraud that they were cognizable under Section 10(b) and that no injury was so connected with allegedly misleading proxy material as to state a cause of action under the proxy provisions of either Act.
The Commission's participation as amicus curiae, which was at the request of the court, was limited to the issues (1) whether a dormant nonoperating water carrier which held an ICC certificate was excluded from regulation under the 1940 Act under Section 3 (c) (9) thereof as a company “subject to regulation under the Interstate Commerce Act ..." and (2) whether substantive violations of the 1940 Act were chargeable to a nonregistered company which should have been registered, under sections of the Act which in terms apply to a "registered investment company."
The court held that the Section 3(c) (9) exemption was unavailable to water carriers, whether active or dormant. Further, by refusing to dismiss the Section 36 claims, the court also recognized that an action may be brought for substantive violations of the 1940 Act occurring during a period when an entity was illegally unregistered.
The Commission's action under the Investment Company Act against Continental Growth Fund, Inc., a registered investment company, and certain of its officers and directors, seeking to enjoin the individual defendants from continuing to act as officers and directors on the ground that they had been guilty of gross misconduct and gross abuse of trust, was terminated during the fiscal year with the settlement of the action against J. Dudley Devine, the only remaining defendant, on the basis of a stipulation which recites that Mr. Devine has entered into an undertaking with the Commission.
In August 1963, on the Commission's application, the court had appointed a receiver for the fund's assets and in November 1963, it had entered an order permanently enjoining Richard G. Jacobs, a promoter of the fund and its former president, from further violations of the Investment Company Act. On June 24, 1964, the action was settled and discontinued by order of the court as against the other defendants on the basis of a stipulation which recited, among other things, that certain of the defendants and others had paid to the fund's receiver
& S.D.N.Y., 63 Civ. 2252. See discussion of earlier developments in this action, 30th Annual Report, p. 128.
$220,300 in settlement of losses resulting from the activities charged in the Commission's complaint, and had entered into undertakings similar to the above undertaking by defendant Devine.
In Securities and Exchange Commission v. United Benefit Life Insurance Company,' the Commission sought to enjoin the defendant company from offering and selling, in violation of the registration provisions of the Securities Act, a contract described by the company as an Annual Premium Flexible Fund Retirement Annuity. The Commission contended that the contract, representing a participation in a fund of securities, was a security within the meaning of that Act and also that the fund of securities constituted an investment company required to be registered under the Investment Company Act. At the close of the presentation of the Commission's evidence the district court dismissed the complaint, holding that the contract was an exempt "insurance product" and not a security. An appeal has been taken by the Commission to the Court of Appeals for the District of Columbia Circuit where the matter is now pending.
In a number of cases in which petitions for review were filed during or shortly prior to the fiscal year, various courts of appeals have affirmed Commission orders revoking the registrations of brokerdealers and in their decisions have expressed holdings of considerable significance. In Boruski v. S.E.C.10 the court, in rejecting the contention that the Commission's regulations requiring certified reports of financial condition were unreasonable, remarked that “it is difficult to see how the Commission could carry on its task of protection of the public investor without financial information such as it sought here." In response to Boruski's further contention that the Commission should have appointed counsel to represent him in the administrative proceeding, the court stated: “We know of no requirement that counsel be appointed in these administrative proceedings. The orders, although serious in their effect, are not criminal judgments.”
In a companion case, Financial Counsellors, Inc. v. S.E.C.11 the revocation of the broker-dealer registration of Financial Counsellors, Inc. was based upon its failure to disclose in its registration application that Boruski controlled it. The Act expressly requires disclosure of the identity of any person controlling the applicant and the court concluded that "the registration requirement provisions are of vital importance to the statutory scheme of securities regulations" and that revocation was "fully warranted."
D. D.C., No. C.A. 3096–62. The institution of this action is described in the 29th Annual Report, pp. 119–20.
10 340 F.2d 991 (C.A. 2, 1965). 11 339 F.2d 196 (C.A. 2, 1964).