Peoples Bank of Danville v. Williams

• Decision Date: 24 March 1978
• Docket Number: Civ. A. No. 78-0027(D).
• Citation: 449 F. Supp. 254
• Parties: PEOPLES BANK OF DANVILLE et al., Plaintiffs, v. Harold M. WILLIAMS, Chairman Securities Exchange Commission, et al., Defendants.
• Court: U.S. District Court — Western District of Virginia

449 F. Supp. 254

PEOPLES BANK OF DANVILLE et al., Plaintiffs, v. Harold M. WILLIAMS, Chairman Securities Exchange Commission, et al., Defendants.

Civ. A. No. 78-0027(D).

United States District Court, W. D. Virginia, Danville Division.

March 24, 1978.

Jackson L. Kiser, Martinsville, Va., for plaintiffs.

John R. Kiefner, Jr., Regional Trial Counsel, Arlington, Va., Vernon I. Zvoleff, Sp. Counsel, Robert M. Fusfeld, Atty., Securities and Exchange Commission, Washington, D. C., Paul R. Thomson, Jr., U. S. Atty., Roanoke, Va., for defendants.

OPINION

TURK, Chief Judge.

This is an action brought by three banks and five individuals who have been served with investigative subpoenas issued by defendant Securities Exchange Commissioners and their agents. Plaintiffs seek declaratory and injunctive relief to have the subpoenas quashed or greatly restricted in their scope. This court has jurisdiction over their claims under 28 U.S.C. § 1331(a). The case is before the court upon defendants' motion to dismiss for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6).

I.

Although the facts relating to the formation of Peoples Bank of Danville are complex, the crucial events may be briefly recounted. In 1975, the Virginia Legislature amended § 6.1-231 of Va.Code Ann. (1977 Cumm.Supp.), which governs industrial loan associations. This new legislation required industrial loan associations to secure liability insurance coverage for all certificates of investment they issued. After July 1, 1975, industrial loan associations could not accept new deposits unless they were insured. A one-year grace period was allowed until July 1, 1976, however, if the association had filed an application for insurance before July 1, 1975.

In 1974, Peoples Industrial Loan Corporation (PILC) was a deposit-accepting industrial loan association located in Danville. Although it was prosperous, its continued existence after July 1, 1975, was threatened by the new Act because if it could not secure liability insurance its deposits would cease, effectively destroying it as a lending institution. Because of the difficulty anticipated in gaining insurance, the owners of the corporation decided to convert PILC into a bank. At that time PILC had 3,200 outstanding shares and 250 shareholders.

Initial attempts to gain a state bank charter and approval from the Federal Reserve Board (FED) were unsuccessful. PILC then employed a bank organizer and a second application was filed. At an October, 1975, meeting with representatives from the State Bureau of Banking and the FED, PILC representatives were informed it could not gain a charter and convert into a bank until several problems concerning financial structure and ownership were alleviated. One major problem was the lack of adequate working capital, and the PILC people were told it could not open as a bank until they had raised $1,000,000. The state and federal banking authorities subsequently issued an extensive letter outlining what PILC had to do in order to gain joint approval as a bank. The letter was specific and told PILC what steps it had to undertake to satisfy the banking regulators. PILC complied with these conditions. Bank examiners from both the state and federal agencies visited the institution to inspect its records and evaluate its procedures.

In order to secure the $1,000,000 required for status as a bank, PILC had to raise an additional $744,000. This was done by a public sale of stock. The corporation printed an offering circular and advertised for the sale of shares. When the sale had been completed, the state and federal authorities granted the institution a charter as a state bank and as a member of the Federal Reserve System. The 3,200 outstanding shares of PILC stock were exchanged for shares in the bank, and Peoples opened with total assets of $5,000,000. It now holds assets of $14,000,000 and has returned a 50¢ dividend on an initial investment of $8.00 per share. In short, Peoples Bank of Danville appears to be doing well as a new bank.

II.

On January 31, 1978, defendant SEC Commissioners issued an order initiating a private investigation of the plaintiff Peoples Bank. This order authorized SEC representatives to issue subpoenas for testimony and for the production of documents and records. The order stated the following:

Members of the staff have reported information which tends to show that:

A. In connection with the offer, sale, and conversion of securities of Peoples Bank, Peoples Industrial Loan Corporation, and Peoples Services, Inc., conducted by Peoples Bank during 1976 and thereafter, certain of its officers, directors, and agents, and other persons, made to purchasers and prospective purchasers untrue statements of material facts and omitted to state material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading, concerning, among other things:

1. the offer and sale of Peoples Bank stock subsequent to the closing date of the offering;

2. the purchase of Peoples Bank stock by nominees and persons closely associated with the organizers, management and directors of Peoples Bank;

3. the financial condition of Peoples Industrial Loan Corp. ("PILC") and the nature of the assets and liabilities of PILC which Peoples Bank assumed;

4. the purchase of certain notes by Peoples Bank from banks associated with certain officers, directors and stockholders of Peoples Bank;

5. the circumstances surrounding the conversion of PILC into the Peoples Bank;

6. the extent to which certain persons and families would own or control, directly or indirectly, the stock of Peoples Bank 7. the nature of the business operations and policies of Peoples Bank and its predecessor, PILC;

8. other representations, statements, and omissions of similar purport and object.

The Commissioners felt this information, gained without complaints from shareholders, was sufficient to indicate possible violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933 and of Section 10(b) and Rule 10(b)-5 thereunder of the Securities Exchange Act of 1934 and, therefore, authorized an investigation. Acting under the authority granted by the Commission's order, an SEC representative issued subpoenas to plaintiffs. These subpoenas requested the production of documents and records, and in many cases required appearance of the persons for testimony. The subpoenas were to be returned in late February and early March, 1978. Plaintiffs filed suit February 24, 1978, seeking injunctive relief against the issuance of further subpoenas and to quash the existing subpoenas. An interim moratorium on the issuance of new requests was arranged until the court could rule upon the government's motion to dismiss and argument was held March 16, 1978, in this case. By that date, all the subpoenas were in default, and the SEC had filed a separate enforcement action.

III.

Plaintiffs advance two arguments in support of their motion to quash the outstanding subpoenas. First, they argue the SEC has no jurisdiction, given the facts of this case, to inquire into the formation of the Peoples Bank of Danville for possible violation of the antifraud sections of the securities acts. If there is jurisdiction to subpoena documents and testimony, they next assert, the requests may be challenged as being arbitrary, burdensome and made in bad faith: they will subject the bank to undue damage in the eye of the public, thus damaging its reputation and financial stability.

Plaintiffs' jurisdictional argument is based upon the unique nature of the banking industry, an area heavily regulated by both state and federal laws.¹ Plaintiffs argument, briefly stated, is that this action precludes the SEC from attempting to enforce its antifraud laws unless there is evidence of a fraudulent transaction and resulting injury. In other words, Peoples National Bank of Danville has been thoroughly examined, approved and regulated by both Virginia and federal bank authorities and until the defendant SEC shows some indicia of fraud in the formation of the bank, and actual injury, it is barred in its inquiry by virtue of 12 U.S.C. § 484, which limits visitorial powers to the banking authorities. That section reads, in pertinent part: "No bank shall be subject to any visitorial powers other than such as are authorized by law . . .."

Plaintiffs state the broad-ranging inquiry undertaken by the SEC, covering subject areas already examined in detail by both the Virginia and federal banking regulators, constitutes a form of visitorial powers prohibited by § 484. Plaintiffs argue the SEC may not exercise direct supervision over the bank because of § 484 and may not, by use of its antifraud provisions, accomplish the same result of visitation which is expressly prohibited by § 484 by another, although indirect, means.

This argument is based upon the familiar doctrine that where Congress has enacted two statutory schemes which arguably embrace the same subject matter, the more precise, detailed and narrow legislation should apply to the exclusion of the more general law. See, e. g., Brown v. GSA, 425 U.S. 820, 96 S.Ct. 1961, 48 L.Ed.2d 402 (1976); Bulova Watch Co. v. United States, 365 U.S. 753, 81 S.Ct. 864, 6 L.Ed.2d 72 (1961). Also, "where there is no clear intention otherwise, a specific statute will not be controlled or nullified by a general one, regardless of the priority of enactment." Morton v. Mancari, 417 U.S. 535, 550-51, 94 S.Ct. 2474, 2483, 41 L.Ed.2d 290 (1974). Plaintiffs claim the banking laws should be viewed as narrow, detailed, and specific and, therefore, entitled to precedence over the more general securities regulation laws. As evidence, they cite language from the recent decision in Radzanower v. Touche Ross & Co., 426 U.S. 148, 96 S.Ct. 1989, 48 L.Ed.2d 540 (1976). They rely, in part, upon the following passage:

The primary purpose of

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