MG Davis & Co. v. Cohen

• Decision Date: 24 June 1966
• Docket Number: 66 Civ. 799.
• Parties: M. G. DAVIS & CO., Inc., Lawrence Levine, Walter Wax and Morris Kopel, Plaintiffs, v. Manuel F. COHEN, as Chairman, Bryan D. Woodside, Hugh F. Owens, Hamer H. Budge and Francis M. Wheat, as members and Commissioners of the Securities and Exchange Commission, Defendants.
• Court: U.S. District Court — Southern District of New York

256 F. Supp. 128

M. G. DAVIS & CO., Inc., Lawrence Levine, Walter Wax and Morris Kopel, Plaintiffs, v. Manuel F. COHEN, as Chairman, Bryan D. Woodside, Hugh F. Owens, Hamer H. Budge and Francis M. Wheat, as members and Commissioners of the Securities and Exchange Commission, Defendants.

66 Civ. 799.

United States District Court S. D. New York.

June 24, 1966.

COPYRIGHT MATERIAL OMITTED

Kreutzer, Heller, Selman & Galt, New York City, for plaintiffs; Irving Galt, Arnold I. Burns, Erwin Cherovsky, New York City, of counsel.

Philip A. Loomis, Jr., Gen. Counsel, Ellwood L. Englander, Asst. Gen. Counsel, Richard E. Nathan, Atty., for Securities and Exchange Commission; Joseph C. Daley, Chief Enforcement Atty., Securities and Exchange Commission, of counsel.

FREDERICK van PELT BRYAN, District Judge:

This is an action pursuant to 28 U.S.C. §§ 1361 and 2201 for a declaratory judgment and relief in the nature of mandamus. Plaintiffs are presently respondents in two administrative proceedings now pending before the Securities and Exchange Commission. They have moved in this court for a preliminary injunction restraining the members of the S.E.C. from conducting these proceedings. Rule 65, F.R.Civ.P. Defendants have cross-moved for a summary judgment dismissing the complaint. Rule 56, F.R.Civ.P.

Plaintiff M. G. Davis & Co., Inc. (Davis & Co.) is a New York corporation with its principal place of business in that state. Plaintiffs Levine and Wax are officers and since May 1, 1964 have been the sole stockholders of Davis & Co. Plaintiff Kopel formerly was employed as a salesman by Davis. The five individuals named as defendants are the present commissioners of the S.E.C.

FACTS

On March 18, 1961, Davis & Co. registered with the Commission as a broker and dealer in securities. 15 U.S.C. § 78o (b). In November 1963 the staff of the Commission commenced an investigation pursuant to § 21(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u(a), to determine whether there had been violations of the securities acts by persons associated with Davis & Co. On May 4, 1964, however, the Commission received a letter from Davis & Co. giving notice of its withdrawal from registration as a broker-dealer. 15 U.S.C. § 78o (b). Under Commission Rule 15b-6¹ this notice would have become automatically effective within 30 days unless the S.E.C. initiated a proceeding to revoke or suspend registration. Accordingly, on June 2 the Commission issued an order instituting a "private" proceeding against Davis & Co. to determine whether "remedial action" would be "appropriate in the public interest pursuant to Section 15(b) and 15A of the Exchange Act." 15 U.S.C. § 78o(b), 78o-3. On June 3 the Secretary of the Commission sent a telegram to Davis & Co., Wax, and a third party Rosenberg who is not a party here, notifying them of the commencement of the proceeding. On the following day copies of the order were sent by registered mail to the three respondents.

On June 22 Davis & Co. filed an answer generally denying the allegations of the order and asserting that it was entitled to have "its application for withdrawal of registration granted forthwith." In the following two years the only step taken by the Commission in pursuit of the private proceeding has been to appoint a hearing examiner charged with general responsibility for ruling on pre-trial matters.

On August 4, 1965, as a result of further investigation the Commission by order also initiated a "public" proceeding against plaintiffs and others. The matters complained of in the order initiating this second proceeding involve additional parties and different facts than those in the private proceeding. On August 18, 1965, Davis & Co., Wax and Levine filed their respective answers. Kopel filed his answer on the 23rd. These four are the plaintiffs in the present action.

On January 10, 1966, plaintiffs commenced an action in this court against the Commission without naming its members individually. They sought to enjoin it from continuing the public proceeding and to obtain an order dismissing the private proceeding. Upon motion of the Commission Judge Levet on March 4 dismissed the complaint without prejudice on the ground that the agency as such was immune from suit.

On March 21 the plaintiffs instituted the instant action against the individual Commissioners of the S.E.C. The complaint seeks a declaration that the withdrawal of Davis & Co. as a registered broker-dealer became unconditionally effective on June 3, 1964, and that therefore the S.E.C. is without authority to continue prosecution of the private proceeding. It also seeks a permanent injunction restraining the members of the Commission from continuing the public proceeding. The motions before me were argued on June 7.

I.

As is conceded, preliminary determinations by the S.E.C. will ordinarily be reviewable in the courts of appeal only when they have become the basis of a "final" order. 5 U.S.C. § 1009(c); 15 U.S.C. § 78y. On the other hand, a district court under its general federal question equity jurisdiction, 28 U.S.C. § 1331, is empowered to correct agency conduct "in excess of its delegated powers and contrary to a specific prohibition of the Act." Leedom v. Kyne, 358 U.S. 184, 188, 79 S.Ct. 180, 184, 3 L.Ed.2d 210 (1958). See also 28 U.S.C. §§ 1337, 1361. The test to be applied in determining whether this "narrow" exception to the customary avenues of review may be invoked, see Boire v. Greyhound Corp., 376 U.S. 473, 481, 84 S.Ct. 894, 11 L.Ed.2d 849 (1964), is "whether the Commission has stepped plainly beyond the bounds of its statutory authority, or has acted in clear defiance of plaintiffs' constitutional rights to their irreparable damage."² Accordingly, the courts have shown "extreme circumspection" when a party seeks injunctive interference with preliminary agency decisions. Local 130, Intern. Union of Electrical, etc., Workers v. McCulloch, 345 F.2d 90, 96 (D.C.Cir. 1965). Thus, the only serious³ issue presented in this case is whether the S.E.C. exceeded its statutory authority and threatened plaintiffs with irreparable damage by initiating the two administrative proceedings complained of here.

Plaintiffs' argument takes this course: the private proceeding against Davis & Co. was not initiated within the 30-day period prescribed by Commission Rule 15b-6; in any event, the proceeding was not of the kind contemplated by the Rule and did not relate to any conduct on the part of Davis & Co. itself; accordingly, this private proceeding could not operate to suspend Davis & Co.'s withdrawal as a registered broker-dealer; for this reason the public proceeding instituted more than a year later must also fall.

The argument, however, is hyper-technical and based on a false premise.

II. Davis & Co.

First, the private proceeding against Davis & Co. was timely commenced. The notice of withdrawal was not deemed filed until it was received by the Commission on May 4, 1964. 17 C.F. R. § 240.0-3. Twenty-nine days later, on June 2, the Commission instituted the private proceeding by issuing a proper order.⁴ Compare Rule 3, F.R.Civ.P. And Rule 15b-6 of the Commission indicates that "issuance of a Commission order instituting proceedings" operates to suspend the effective date of the notice of withdrawal.

I cannot agree with plaintiffs' contention that the proceeding was untimely because Davis & Co. received no notice until June 4. Rule 6 of the Commission's Rules, 17 C.F.R. § 201.6, upon which plaintiffs place primary reliance, provides simply that "whenever an order for proceeding is issued by the Commission, appropriate notice thereof shall be given" to all interested persons.⁵ Notice within two days is plainly "appropriate" within the meaning of this provision.

Second, under the terms of order it cannot be said that the private proceeding was not designed "to revoke or suspend the registration of the broker or dealer" within the meaning of Rule 15b-6. The order stated generally that its purpose was to determine "what, if any, remedial action is appropriate in the public interest pursuant to Section 15(b) and 15A of the Exchange Act." The only "remedial action" which the Commission could have then taken against a registered broker-dealer under those provisions was to revoke its registration or suspend its membership in a national association of securities dealers. See 15 U.S.C. §§ 78o, 78o-3 (1958). In addition, the order alleged unlawful acts of individual wrongdoers which, if proven, would be the basis of revocation of registration pursuant to Section 15(b).⁶ Thus there is nothing before this court indicating that the order is improper in any respect. Much less has there been a showing of a patently excessive exercise of authority on the part of the agency, which would justify judicial interference at this interlocutory stage.

Accordingly, I hold that the commencement of the private proceeding within the 30 days prescribed by Rule 15b-6 effectively operated to suspend the Davis & Co. notice of withdrawal from registration. Therefore under the broad mandate of the rule "the notice to withdraw does not become effective except at such time and upon such terms and conditions as the Commission deems necessary or appropriate in the public interest or for the protection of investors." Since Davis & Co. remained registered, the initiation of the public proceeding appears to be a "necessary and appropriate" measure for determining the "terms and conditions" governing the notice of withdrawal.⁷

Plaintiffs' broad-based attack upon several facets of the Commission's orders initiating the two proceedings does not meet the issues before this court. The inquiry here is confined to determining whether the S.E.C. has,

"stepped so plainly beyond the bounds of the Act, or acted so clearly in defiance of it, as to warrant the immediate intervention of an equity court even before the Commission's own processes have run their

...