Securities & Exchange Commission v. Torr

• Decision Date: 10 April 1936
• Parties: SECURITIES & EXCHANGE COMMISSION v. TORR et al.
• Court: U.S. District Court — Southern District of New York

15 F. Supp. 315

SECURITIES & EXCHANGE COMMISSION v. TORR et al.

District Court, S. D. New York.

April 10, 1936.

John J. Burns, of Washington, D. C. (Francis Thornton Greene, William V. Holohan, and Francis Currie, all of Washington, D. C., of counsel), for plaintiff Securities & Exchange Commission.

Gleason, McLanahan, Merritt & Ingraham, of New York City (Scott McLanahan and Robert L. Reed, both of New York City, of counsel), for defendants John M. Torr, Randolph P. Mills, and Ellery W. Mann.

Raymond L. Wise, of New York City, for defendants Bonnell, War-Shauer, Rau, Paul T. Collins, Swords, McIntyre, Morris, Gelderman, Hurst, and Leonard M. Collins.

PATTERSON, District Judge.

The suit is one in equity, brought under the Securities Act of 1933 (48 Stat. 74), as amended (15 U.S.C.A. § 77a et seq.), and the Securities Exchange Act of 1934 (48 Stat. 881 15 U.S.C.A. § 78a et seq.). The Commission alleges that the defendants have violated both of these statutes and asks that certain of their activities be enjoined. The Commission has also applied for an injunction during the pendency of the suit, and it is that phase of the case that is now presented for decision.

Certain facts are disputed. On the papers submitted in support of the application and those in opposition, however, the facts mentioned below are not in serious dispute: The stock of the Translux Daylight Picture Screen Corporation is listed on the New York Curb Exchange and is one of the stocks registered with the Securities & Exchange Commission under the 1934 act. The Curb Exchange is registered as a "national securities exchange" under the 1934 act. The defendant Mann, having acquired 47,700 shares of Translux stock, granted an option on October 24, 1935, to the defendants Torr and Mills, partners in the securities business under the name of Torr & Co., covering the 47,700 shares at prices ranging from $3 to $4 a share; the net profits to be realized on distribution of the optioned shares to be divided, two-thirds to Mann and one-third to Torr & Co.

The market in Translux was quiet at the time. For some weeks the daily trading had averaged 400 shares, with prices between 3 and 3½. It was evident to those interested that if the optioned shares were to be disposed of at a profit, the price would have to go higher. And for the price to go higher, it was essential that there be an increased demand for the stock. To stimulate the necessary demand, Torr & Co. made arrangements with the other defendants, men with acquaintances and connections in the securities business, to recommend the stock for investment to their acquaintances and to the public generally. The recommending defendants were to receive compensation of from $12.50 to $25 per hundred shares for stock purchased by reason of their recommendation. Purchases so induced were to be made on the Curb Exchange through brokers of the purchasers' selection, not directly from Torr & Co. In fact, the compensation was payable whether or not the purchases were filled from Torr & Co.'s supply of the shares.

The recommending defendants set about inducing purchases. Some of them worked in New York; others in Chicago, Philadelphia, and San Francisco. There is nothing to indicate that any of them misrepresented any fact bearing on the intrinsic worth of the stock. For all that appears, the Translux Company is a sound one, and these defendants insist that they recommended the stock solely on its merit. But it is admitted that as a rule they did not disclose the fact that they were to be paid for each purchase brought about by their recommendation. One of them conceded, in the course of examination before an officer of the Commission, that such a disclosure would have injured the chances of success in producing purchases. Several of the recommending defendants were men with headquarters in the offices of securities dealers, but in business on their own account. One was a salaried "customers' man" in a stock exchange house in San Francisco. The principal defendants swear that they were unaware of the nature of his employment; that their instructions were that on no account was any "customers' man" to be subsidized for his recommendations.

These activities produced purchases. The daily average of trading jumped from 400 shares to 2,400 shares; the price rose from 3½ to 4 3/8 . Torr & Co. sold some 16,000 shares between October 24 and December 10, 1935. They paid out substantial sums to compensate the recommending parties; how much is uncertain, as no records of payments were preserved. Much of the buying in the stock unquestionably came from members of the public who were not spoken to but were attracted by the increased activity on rising prices. The mails, as well as the telegraph and telephone between states, were made use of in promoting the distribution that has been described. The facilities of the Curb Exchange were likewise used. The quotation tickers reporting transactions in stocks listed on the Curb Exchange are located in several states.

The Commission makes no claim that the Translux Corporation is not a sound concern, or that the stock is not worth as much as was paid for it by those who bought. The contention is that the method of operation was one tending to defraud and mislead the public, first, because of the failure of the recommending defendants to disclose their financial interest in the matter; second, because the plan was one to create active trading in the stock so as to attract further purchases by others.

1. The Securities Act of 1933, by section 17 (a), 15 U.S.C.A. § 77q (a), provides: "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."

That the defendants have been engaged in "the sale of" a security, and that means of interstate communication, as well as the mails, have been employed in aid of such sale, are facts too plain for discussion. And it is plain enough, I think, that the selling campaign also embodied a feature that operated as a deceit on purchasers. When a person gives advice to buy a stock under circumstances that lead the listener or reader to believe that the advice is disinterested, and suppresses the fact that for giving such advice he is in reality being paid by one anxious to sell the stock, the purchaser acting on the advice is imposed upon and deceived. United States v. Brown, 79 F.(2d) 321 (C.C.A.2). One who had bought property under such conditions would have the right to rescind the purchase, a right long recognized both at common law and in equity. The ground of rescission is that the purchase was brought about by the sharp practice of the seller or of his agent. In principle there is no difference between the method of recommendation pursued here and the hired employment of a tipster sheet that purports to give impartial information. In both cases there is an "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."

It is of no consequence that purchasers may have obtained full value for their money. Section 17 (a) of the 1933 act makes no mention of pecuniary loss to the public. Persons may be deceived and yet suffer no financial loss. We know that under the act making it an offense to use the mails in a scheme to defraud (18 U.S.C.A. § 338), it is not an essential element of the offense that the victims should have incurred pecuniary loss. Linn v. United States, 234 F. 543 (C.C.A.7); Wine v. United States, 260 F. 911 (C.C.A.8); Cowl v. United States, 35 F.(2d) 794 (C.C.A.8). Similarly, we know that under the act denouncing a conspiracy to defraud the United States, the United States may be "defrauded" without suffering loss of money or property. Haas v. Henkel, 216 U.S. 462, 30 S.Ct. 249, 54 L.Ed. 569, 17 Ann. Cas. 1112.

There has been a violation of section 17 (a) of the 1933 act.

2. The Securities Exchange Act of 1934, in section 9 (a), 15 U.S.C.A. § 78i (a), provides:

"It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, * * *

"(2) To effect, alone or with one or more other persons, a series of transactions in any security registered on a national securities exchange creating actual or apparent active trading in such security or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others."

The words used by Congress in this subsection are criticized as too vague to be understood and as so broad as to render unlawful the ordinary conduct of a person desirous of selling securities owned by him. The meaning, however, is tolerably clear and the effect not as broad as claimed. Section 9 (48 Stat. 889 15 U.S.C.A. § 78i) bears the title "Prohibition against manipulation of security prices," and the various subdivisions of the section deal with manipulative practices deemed injurious to the free flow of securities in interstate commerce, such as washed sales, matched orders, circulation of reports of pools, and pegging of prices. Among the manipulating devices reported to the House of Representatives by the House Committee of Interstate and Foreign Commerce, in its report on this bill, was that of designed marking up of...