Hughes v. Securities and Exchange Commission

• Citation: 174 F.2d 969
• Decision Date: 09 May 1949
• Docket Number: No. 9853.,9853.
• Parties: HUGHES v. SECURITIES AND EXCHANGE COMMISSION.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

174 F.2d 969 (1949)

HUGHES v. SECURITIES AND EXCHANGE COMMISSION.

No. 9853.

United States Court of Appeals District of Columbia Circuit.

Argued January 14, 1949.

Decided May 9, 1949.

Mr. Donald C. McCreery, Denver, Colo., for petitioner.

Mr. Louis Loss, Associate General Counsel, Securities and Exchange Commission, Washington, D. C., with whom Messrs. Roger S. Foster, General Counsel, Securities and Exchange Commission, Alexander Cohen, Arden L. Andresen and Gerald W. Siegel, Attorneys, Securities and Exchange Commission, Washington, D. C. were on the brief, for respondent.

Mr. George F. Shea, Washington, D. C., with whom Mrs. Bertha V. Perry, Denver, Colo., was on the brief, on behalf of Bertha V. Perry, et al., amici curiae, urging reversal.

Before CLARK, PRETTYMAN, and PROCTOR, Circuit Judges.

CLARK, Circuit Judge.

The case is before this court on petition of Arleen W. Hughes, doing business as E. W. Hughes & Company, to review and set aside an order of respondent Securities and Exchange Commission revoking her registration as a broker and dealer.

Petitioner, referred to below as the registrant, has been engaged in the securities business as a broker and dealer since 1928. She is now the sole proprietor of the above-named business.¹ In 1940, petitioner was registered as a broker and dealer under Section 15 of the Securities Exchange Act of 1934, as amended.² In 1942, she was registered as an investment adviser under Section 203 of the Investment Advisers Act of 1940.³ Petitioner does business with about 175 clients residing in at least nine different states of the United States. The petitioner's place of business is Colorado Springs, Colorado. Following her registration as an investment adviser petitioner entered into a "Memorandum of Agreement" with each of her clients in which it was provided that the "Company petitioner, when acting as investment adviser, shall act as Principal in every such transaction, except as otherwise agreed." This agreement also contained a schedule of rates and charges to be paid by the client to the petitioner. The advice which petitioner sells to her clients is based upon information she gathers and analyzes. The cost to the client for this advice or "service" is slightly higher per transaction than is the ordinary dealer profit where a dealer sells a security to a customer. Mrs. Hughes testified that her clients follow her investment advice "in almost every instance." She has used the United States mails as an instrument of interstate commerce in dealing with some of her clients in other states. Petitioner fills a client's order for the purchase of a security either by supplying it from her own inventory or by purchasing the security for her (petitioner's) own account and then selling it as principal to the client.

In the years 1944, 1945, and 1946, various members of respondent's staff, including individuals in the Commission's regional office in Denver, conducted an investigation of petitioner's business in an effort to determine whether her methods of conducting her business violated any of the anti-fraud provisions of any of the federal statutes administered by the respondent. That investigation was primarily directed toward the adequacy of the disclosure which petitioner, acting as a fiduciary, made to her clients. The investigation was accomplished through numerous oral and written discussions and communications between petitioner and respondent's agents.

On April 17, 1946, the Commission instituted the proceedings here under review by entry of an "Order for Private Proceedings and Notice of Hearing on the Question of Revocation and Suspension of Registration Pursuant to Section 15(b) of the Securities Exchange Act of 1934." This order, drawn in the nature of a complaint, alleged, inter alia, that "registrant sold securities to clients with whom she was in a fiduciary relationship, in that she purported to render to such clients impartial investment advice for compensation under an investment advisory contract, without fully disclosing to such clients the nature and extent of her adverse interest, including, among other things, (1) the best price at which such securities could be purchased for such clients in the open market in the exercise of reasonable diligence, and (2) the cost to registrant of the securities sold to such clients." The order set a time and place for hearing before a trial examiner in order to determine whether or not petitioner had violated any of the specified anti-fraud sections of the various statutes administered by the Commission. Hearing was had before the trial examiner in September, 1946, in Denver, Colorado. The examiner's report, filed with the Commission on October 29, 1946, concluded that petitioner in the conduct of her business had wilfully violated her duty as fiduciary to make full disclosure to her clients. The report also found that petitioner had violated statute and rule with regard to certain minimum audit requirements for required reports of financial condition.⁴ The trial examiner's report was advisatory in nature and recited that it was not binding on the Commission. Exceptions to the examiner's report and requests for oral argument having been filed, a hearing was had before the Commission on May 20, 1947. After making an independent review of the record, the Commission issued an opinion dated February 18, 1948, in which the Commission found that petitioner was a fiduciary, that as such she was under a duty to make full disclosure of her adverse interest, that no such complete disclosure was made, and that her clients had not given their "informed consent" to her taking a position adverse to their interests. The Commission also found that the proceedings were properly based in part upon alleged violations of the Securities Act and the Securities Exchange Act, 15 U.S.C.A. §§ 77a et seq., 78a et seq., and that the violations were wilful. Accordingly, and we think properly, the Commission concluded that the "revocation of the registrant's broker-dealer registration is compelled in the public interest," to which conclusion the Commission added the following lenient and reasonable qualifying phrase, to wit, "unless we can be otherwise assured that such abuses will be immediately discontinued." Upon suggestion of Commission counsel, the Commission in this opinion went further in its effort to protect petitioner's right to continue her business and yet to effect compliance with the law. The Commission expressly withheld entry of the order of revocation for a 30-day period, within which period petitioner was invited to "submit satisfactory proof that she has corrected her methods of business operation to conform to the views expressed herein." If this were done, the Commission expressed its willingness to "enter an order dismissing this proceeding."

On the last day of the 30-day period allowed by the Commission, petitioner filed certain proposed "changes in and re-statement of her method of doing business." These alleged changes were to be incorporated in a "Supplemental Memorandum of Agreement" which petitioner proposed to enter into with each of her clients. On April 1, 1948, the Commission issued a supplemental opinion in which, after discussion of the nature of petitioner's proposed business changes, it concluded that the proposed changes were still inadequate as to the disclosure requirements set out in its original opinion and, consequently, the Commission entered an order of the same date revoking petitioner's registration as a broker and dealer. On motion of petitioner the Commission stayed the effectiveness of the order of revocation for 30 days to permit petitioner to file a petition for rehearing and to seek a further stay pending judicial review. The petition for rehearing was filed with the Commission on April 11, 1948, and denied the following day by an order which allowed a further time extension for the purpose of seeking judicial stay of the revocation order. Petition for review of the above-described Commission orders having been filed in this court, we stayed the effectiveness of the revocation order pending the present decision. Petitioner's business operations thus have not yet been interrupted in any way.

The anti-fraud provisions of the various statutes which the Commission found that petitioner wilfully violated are set forth in pertinent part as follows:

Section 17 (a) of the Securities Act of 1933:

"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."⁵

Section 10 of the Securities Exchange Act of 1934:

"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.⁶

Section 15 (c) (1) of the Securities Exchange Act of 1934:

"No broker or dealer shall make use of the mails or of any means or instrumentality of interstate commerce to effect any transaction...