404 U.S. 6 (1971), 70-60, Superintendent of Insurance v. Bankers Life & Casualty Co.

Docket Nº:No. 70-60
Citation:404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128
Party Name:Superintendent of Insurance v. Bankers Life & Casualty Co.
Case Date:November 08, 1971
Court:United States Supreme Court
 
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404 U.S. 6 (1971)

92 S.Ct. 165, 30 L.Ed.2d 128

Superintendent of Insurance

v.

Bankers Life & Casualty Co.

No. 70-60

United States Supreme Court

Nov. 8, 1971

Argued October 13, 1971

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Syllabus

Petitioner, liquidator of Manhattan Casualty Co., alleged that the company was defrauded, in violation of federal securities laws, by a fraudulent sale of securities owned by it. Manhattan's sole stockholder agreed to sell all of its Manhattan stock to one Begole for $5 million. Begole conspired with others to use United States Treasury bonds owned by Manhattan to pay for the shares. Through a deceptive device, the bonds were sold and the proceeds used in the purchase of the stock. The depletion of Manhattan's assets was concealed by the purported transfer to it, in exchange for the proceeds of the bond sale, of a certificate of deposit which, in fact, had been assigned by Manhattan's new president, a coconspirator, to another corporation, and by it used as collateral for a loan. The District Court dismissed the complaint and the Court of Appeals affirmed, finding that "no investor [was] injured" and that the "purity of the security transaction and the purity of the trading process were unsullied."

Held: Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful to use "in connection with the purchase or sale" of any security "any manipulative or deceptive device or contrivance" in contravention of the Securities and Exchange Commission's rules and regulations. Section 10(b) prohibits the use of any deceptive device in the "sale" of any security by "any person," and it is irrelevant that Manhattan was a corporation, rather than an individual investor; that the fraud was perpetrated by a corporate officer and his outside collaborators; that the transaction was not conducted through a securities exchange or an organized market; that the proceeds due the seller were misappropriated; and that the creditors of the defrauded corporate seller may be the ultimate victims. Pp. 9-14.

430 F.2d 355, reversed.

DOUGLAS, J., delivered the opinion for a unanimous Court.

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DOUGLAS, J., lead opinion

MR. JUSTICE DOUGLAS delivered the opinion of the Court.

Manhattan Casualty Co., now represented by petitioner, New York's Superintendent of Insurance, was, it is alleged, defrauded in the sale of certain securities in violation of § 17(a) of the Securities Act of 1933, 48 Stat. 84, 15 U.S.C. § 77q(a), and of § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. § 78j(b). The District Court dismissed the complaint, 300 F.Supp. 1083, and the Court of Appeals affirmed, by a divided bench. 430 F.2d 355. The case is here on a petition for a writ of certiorari which we granted, 401 U.S. 973.

It seems that Bankers Life & Casualty Co., one of the respondents, agreed to sell all of Manhattan's stock to one Begole for $5,000,000. It is alleged that Begole conspired with one Bourne and others to pay for this stock not out of their own funds, but with Manhattan's assets. They were alleged to have arranged, through Garvin,

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Bantel & Co. -- a note brokerage firm -- to obtain a $5,000,000 check from respondent Irving Trust Co., although they had no funds on deposit there at the time. On the same day, they purchased all the stock of Manhattan from Bankers Life for $5,000,000 and, as stockholders and directors, installed one Sweeny as president of Manhattan.

[92 S.Ct. 167] Manhattan then sold its United States Treasury bonds for $4,854,552.67.1 That amount, plus enough cash to bring the total to $5,000,000, was credited to an account of Manhattan at Irving Trust, and the $5,000,000 Irving Trust check was charged against it. As a result, Begole owned all the stock of Manhattan, having used $5,000,000 of Manhattan's assets to purchase it.

To complete the fraudulent scheme, Irving Trust issued a second $5,000,000 check to Manhattan which Sweeny, Manhattan's new president, tendered to Belgian-American Bank & Trust Co., which issued a $5,000,000 certificate of deposit in the name of Manhattan. Sweeny endorsed the certificate of deposit over to New England Note Corp., a company alleged to be controlled by Bourne. Bourne endorsed the certificate over to Belgian-American Banking Corp.2 as collateral for a $5,000,000 loan from Belgian-American Banking to New England. Its proceeds were paid to Irving Trust to cover the latter's second $5,000,000 check.

Though Manhattan's assets had been depleted, its books reflected only the sale of its Government bonds and the purchase of the certificate of deposit, and did

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not show that its assets had been used by Begole to pay for his purchase of Manhattan's shares or that the certificate of deposit had been assigned to New England and then pledged to Belgian-American Banking.

Manhattan was the seller of Treasury bonds and, it seems to us, clearly protected by § 10(b), 15 U.S.C. § 78j(b), of the Securities Exchange Act,3 which makes it unlawful to use "in connection with the purchase or sale" of any security "any manipulative or deceptive device or contrivance" in contravention of the rules and regulations of the Securities and Exchange Commission.4

There certainly was an "act" or "practice" within the meaning of Rule 10b-55 which operated as "a fraud or deceit" on Manhattan, the seller of the Government bonds. To be sure, the full market price was paid for those bonds, but the seller was duped into believing that it, the seller, would receive the proceeds. We cannot

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agree with the Court of Appeals that "no investor [was] injured" and that the "purity of the security transaction and the purity of the trading process were unsullied." 430 F.2d at 361.

[92 S.Ct. 168] Section 10(b) outlaws the use "in connection with the purchase or sale" of any security6 of "any manipulative or deceptive device or contrivance." The Act protects corporations, as well as individuals, who are sellers of a security. Manhattan was injured as an investor through a deceptive device which deprived it of any compensation for the sale of its valuable block of securities.

The fact that the fraud was perpetrated by an officer of Manhattan and his outside collaborators is irrelevant to our problem. For § 10(b) bans the use of any deceptive device in the "sale" of any security by "any person." And the fact that the transaction is not conducted through a securities exchange or an organized over-the-counter market is irrelevant to the coverage of § 10(b). Hooper v. Mountain States Securities Corp., 282 F.2d 195, 201. Likewise irrelevant is the fact that the proceeds of the sale that were due the seller were misappropriated.7 As the Court of Appeals for the Fifth

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Circuit said in the Hooper case,

Considering the purpose of this legislation, it would be unrealistic to say that a corporation having the capacity to acquire $700,000 worth of assets for its 700,000 shares of stock has suffered no loss if what it gave up was $700,000, but what it got was zero.

282 F.2d at 203.

The Congress made clear that "disregard of trust relationships by those whom the law should regard as

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fiduciaries, are all a single seamless web" [92 S.Ct. 169...

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