Arthur Lipper Corp. v. S.E.C.
| Decision Date | 22 March 1977 |
| Docket Number | No. 165,D,165 |
| Citation | 547 F.2d 171 |
| Parties | Fed. Sec. L. Rep. P 95,796 ARTHUR LIPPER CORPORATION and Arthur Lipper, III, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent. ocket 76-4067. |
| Court | U.S. Court of Appeals — Second Circuit |
John A. Dudley, Washington, D. C. (Howard Sanford Klotz, New York City, of counsel), for petitioners.
Stanley Sporkin, Washington, D. C. (Harvey L. Pitt, Gen. Counsel, S. E. C., Paul Gonson, Associate Gen. Counsel, Alan Rosenblat, Asst. Gen. Counsel, Daniel L. Goelzer, Washington, D. C., of counsel), for respondent.
Before FRIENDLY, HAYS and MULLIGAN, Circuit Judges.
This petition to review a disciplinary order of the Securities and Exchange Commission (SEC), Securities Exchange Act Release No. 11773 (Oct. 24, 1975), is the latest chapter in the extensive litigation resulting from the financial debacle of IOS, Ltd., S.A. (IOS) and the off-shore funds for which it was investment adviser and distributor. See Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2 Cir.), cert. denied, 423 U.S. 1018, 96 S.Ct. 453, 46 L.Ed.2d 389 (1975); IIT v. Vencap, Ltd., 519 F.2d 1001 (2 Cir. 1975). We deal here with an order under § 15 of the Securities and Exchange Act, 15 U.S.C. § 78o, which revoked the broker-dealer registration of Arthur Lipper Corporation (Lipper Corp.) and barred Arthur Lipper III (Lipper), its principal owner, from association with any broker or dealer. The order, dated October 24, 1975, was predicated on violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the Commission's Rule 10b-5, 17 C.F.R. 240.10b-5, during 1967 and 1968. We confirm the decision that a violation occurred but modify the penalty to suspension for a period of 12 months from the effective date of the SEC's order.
The complaint concerns transactions whereby at the direction of Edward M. Cowett, executive vice-president and director of IOS, Lipper Corp. turned over to IOS's 80%-owned subsidiary Investors Planning Corporation (IPC), a registered broker-dealer and a member of the National Association of Securities Dealers, Inc. (NASD), a total of $1,450,000, out of the commissions earned by Lipper Corp. on over-the-counter (OTC) transactions for the account of three off-shore funds for which IOS or one of its affiliates was investment adviser. These were Fund of Funds, Ltd. (FOF), a Canadian corporation which invested chiefly in United States mutual funds and also was the sole owner of another investment company, FOF Proprietary Fund, Ltd. (FOF Prop.); International Investment Trust (IIT), organized under the laws of Luxemburg, which invested in companies throughout the world; and Regent Fund Ltd. (Regent), a Canadian investment company with investments in both Canada and the United States. IIT and Regent had no American shareholders; FOF had some 3,000 of a total of over 100,000, although the shares so owned had been acquired without any registration of FOF shares under § 6 of the Securities Act of 1933, 15 U.S.C. § 77f.
IOS had itself been a registered broker-dealer with its principal place of business in Geneva, Switzerland. In 1965, it acquired IPC, based in New York, apparently with a view to building up IPC, which had been operating at a loss, as a vehicle for IOS's American securities business. This plan was shattered and a revamping of IOS' method of doing business was compelled by a SEC order of May 23, 1967, accepting an offer of settlement of a proceeding it had brought on February 3, 1966 against IOS, Bernard Cornfeld (its organizer), Cowett and others. This order provided, so far as here pertinent, that IOS would withdraw its broker-dealer registration; that IOS, FOF, IIT and any investment company affiliated with any of them should conduct no activity subject to the SEC's jurisdiction except as provided in the order; and, save for qualifications not here material, that within 16 months IOS should dispose of its entire interest in IPC. The effect of the order was to require IOS to devise some method whereby orders for transactions on United States stock exchanges or in the OTC market would have to be placed with exchange or NASD members having offices abroad 1 or with foreign broker-dealers who in turn would refer the orders to American broker-dealers able to execute them. The order also furnished IOS an incentive to build up the value of its equity in IPC in order to increase the price it could obtain upon the required sale.
Anticipating the settlement, Cowett approached Lipper, a partner in the New York Stock Exchange (NYSE) firm of Zuckerman, Smith & Co., to ascertain whether the firm would be interested in opening branch offices in Geneva and London, together with the extensive communications network that would be needed for the purpose of serving as coordinating agent for the flow of IOS brokerage transactions. The other partners in Zuckerman, Smith & Co. declined the proposal although they were willing to have the firm act as clearing agent if Lipper decided to withdraw and form his own company, which would become a registered broker-dealer and member of NYSE and NASD for the purpose desired by IOS. Lipper indicated his interest to Cowett, and proceeded to make the necessary arrangements. His compensation was to be in commissions earned on IOS generated transactions both on and off the exchanges, as to which his company was to be in a favored position.
The Constitution of the New York Stock Exchange required Lipper Corp. to charge the three off-shore funds the fixed commissions then in effect on transactions executed on that exchange and forbade any rebates to them. Until December 5, 1968, NYSE allowed customer-directed give-ups on NYSE transactions to other NYSE members. The record is silent how far IOS directed Lipper Corp. to make such give-ups; in any event the SEC makes no complaint against Lipper Corp. with respect to NYSE transactions. The conduct of which it does complain relates to OTC transactions for the three off-shore funds. As to these also Lipper Corp. charged the commissions provided by the NYSE minimum rate schedule. However, as Lipper anticipated, directions were received from Cowett to give up 50% of these commissions to IPC. 2 Pursuant to these instructions Lipper Corp., during the period from July 10, 1967, to August 5, 1968 remitted to IPC approximately $1,275,000, about 50% of the commissions paid it by FOF Prop., IIT and Regent Fund on OTC transactions. 3 In addition, because cash was required for IPC before September 30, 1968, in order to meet warranties in a subsequently aborted contract for the sale of IPC, Cowett, as president of FOF Prop., by letter dated August 14, 1968, requested that, over and above the "regular" 50% give-up, Lipper Corp. should make additional give-ups to IPC of $175,000 on or before August 30, 1968, and another $175,000 on or before September 30, 1968. Lipper demurred to the size of the request, telling Cowett that no more than an extra $175,000 should be paid. On August 28 Lipper Corp. sent this extra sum, bringing the total give-ups to IPC to some $1,450,000. The Commission found that neither IOS nor IPC rendered services to the funds in return for these give-ups.
No disclosure of the Lipper Corp.-IPC give-ups was made to the shareholders of FOF (the sole owner of FOF Prop.), of IIT or of Regent Fund. No such disclosure was made directly to the directors of IIT or of Regent Fund. Apparently the most nearly complete disclosure occurred at a meeting of the board of directors of FOF held in Acapulco, Mexico, in April 1968, at which Lipper was present, when Allan F. Conwill, Esq., a director of FOF and counsel for it, IOS, Lipper Corp. and Lipper, informed the FOF directors of the arrangements outlined above; he also advised that Lipper Corp. was in effect required to charge the minimum NYSE commissions for OTC transactions; that there was no legal way for Lipper Corp. to refund any part of such commissions to FOF; that the SEC staff took the position that any give-up on OTC business was a fraud per se since there was no fixed rate commission structure on OTC transactions and willingness to give-up a part of the commission showed that the broker would have been willing to take less; but that he considered this position to be unfounded in law. There is no evidence that anyone suggested exploration by outside counsel of the validity of Mr. Conwill's view that Lipper Corp. had to charge the minimum NYSE commission on OTC transactions or that no way could be found whereby the shareholders of FOF would benefit from give-ups to IPC.
Upon these facts and others that will be stated in our discussion, Chief Hearing Examiner, now Administrative Law Judge (ALJ), Blair found on June 11, 1971 that Lipper Corp. and Lipper had willfully violated and willfully aided and abetted violations of § 10(b) of the 1934 Act and Rule 10b-5. Overruling both the assertion of the petitioners that no sanctions should be imposed and the staff's contention that the registration of Lipper Corp. should be cancelled and Lipper should be permanently barred from the securities business, he determined that a suspension of one year from the effective date of the order would be the proper sanction as to both. Lipper and Lipper Corp. and the staff filed petitions for review by the Commission, which heard argument on August 28, 1972. By a decision filed on October 24, 1975, the SEC sustained the ALJ's conclusion with respect to violations but directed the drastic remedies of cancellation of Lipper Corp.'s registration and the permanent barring of Lipper from the securities business urged by the staff. Petitioners sought rehearing on the sole basis that three of the four Commissioners who participated in the decision had not been members at the time of argument. The ...
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