Securities & Exch. Com'n v. Wall Street Transcript Corp.

Decision Date22 November 1968
Docket NumberNo. M18-304.,M18-304.
PartiesIn the Matter of an Application to Enforce Administrative Subpoena Duces Tecum of the SECURITIES AND EXCHANGE COMMISSION, Applicant, v. WALL STREET TRANSCRIPT CORPORATION by Richard A. Holman, Respondent.
CourtU.S. District Court — Southern District of New York

Securities and Exchange Commission by Maylon M. Frankhauser, New York Regional Administrator, Richard V. Bandler, Associate Regional Administrator, Edward H. Nordlinger and Murray L. Finebaum, New York City, Attorneys.

Pollack, Greenspoon & Singer, by Samuel N. Greenspoon, New York City, for respondent.

OPINION

TYLER, District Judge.

This is a motion by the Securities and Exchange Commission ("SEC") for an order pursuant to Section 209(c) of the Investment Advisers Act of 1940, 15 U. S.C. § 80b-9(c), requiring the respondent to appear and testify and to produce certain documents to be described hereinafter.

Since this motion raises interesting and troublesome questions concerning the comparatively broad powers of the SEC to investigate under the Investment Advisers Act of 1940, it is desirable that the background of the issuance of the subpoena in question, the arguments of the parties and the facts adduced for and against the motion be set forth in some detail.

The Order of Investigation and the Resultant Subpoena

Pursuant to the relevant provisions of the Act and in order to determine whether violations of the Act had occurred, the SEC on July 27, 1967 issued a formal order directing that an investigation be made into the matter of the Wall Street Transcript Corporation ("Transcript"). The order designated certain named agents and officers of the SEC to conduct the investigation and empowered them to "administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence and require the production of any books, papers, correspondence, memoranda, contracts, agreements, or other materials deemed relevant and material to the inquiry". Pursuant to this order, one of the officers of the SEC named therein, Richard V. Bandler, issued a subpoena duces tecum to the respondent on March 18, 1968 requiring respondent by its president, Holman, to appear in the Commission offices in New York on April 1, 1968.1 A few days prior to the return date, counsel for respondent by correspondence and perhaps oral communications as well, endeavored to persuade the SEC to withdraw the subpoena and to drop the investigation. These efforts continued through the month of April and apparently into May and June of this year. Finally, the return date for the subpoena was rescheduled for July 29, 1968, on which day Holman appeared and refused to answer any questions or to give any information other than his name, business and home addresses and telephone numbers. Thereafter, the SEC, accepting that respondent effectively refused to honor the subpoena, brought on this motion which, as the statute makes clear, is permissible in order to invoke the contempt powers of this court.

Parenthetically, it should be noted that the formal order of the SEC heretofore mentioned recites that, according to the SEC's public official files, in September, 1958 a firm known as R. A. Holman & Co., Inc. was registered with the Commission as a broker and dealer, that Richard A. Holman, the same man who is president of the respondent here, was the president of Holman & Co. and that thereafter on December 15, 1965 the Commission revoked the registration of Holman & Co., expelled it from membership in the National Association of Securities Dealers, made permanent a temporary suspension of a Regulation A exemption and found that Holman, among others, was a cause for its order with respect to Holman & Co.

The Applicable Statutory Provisions

Section 209(b) of the Act provides:

"For the purposes of any investigation or any proceeding under this title, any member of the Commission or any officer thereunder designated by it is empowered to administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers, correspondence, memoranda, contracts, agreements or other records which are relevant or material to the inquiry."

Section 209(a) of the Act further states:

"Whenever it shall appear to the Commission, either upon complaint or otherwise, that the provisions of this title or of any rule or regulation prescribed under the authority thereunder, have been or are about to be violated by any person, it may in its discretion require, and in any event shall permit, such person to file with it a statement in writing, under oath or otherwise, as to all the facts and circumstances relevant to such violation, and may otherwise investigate all such facts and circumstances."

As previously stated in brief, Section 209(c) of the Act makes provision for the SEC to enforce its subpoenas by applying to a federal court:

"In case of contumacy by, or refusal to obey a subpoena issued to, any person, the Commission may invoke the aid of any court of the United States within the jurisdiction of which such investigation or proceeding is carried on, or where such person resides or carries on business, in requiring the attendance and testimony of witnesses and the production of * * * records. * * *"

This particular section goes on to provide that the court may issue an order requiring such person to appear, produce records and testify on the matter under investigation and that the failure to obey any such order of the court may be punished by the court as a contempt thereof.

Of importance to the issues here, Section 202 of the Act defines those persons who are deemed investment advisers thereunder as follows:

"`Investment adviser' means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include * * (D) the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation; * * *."
The Contentions of the Parties

In support of its motion, the SEC submits that its subpoena and investigation are valid and clearly within the scope of its authority as conferred by Section 209(c) of the Act, see Oklahoma Press Publishing Company v. Walling, 327 U. S. 186, 208-216, 66 S.Ct. 494, 90 L.Ed. 614 (1946), that production of the records called for in this particular subpoena is reasonable and necessary and that the subpoena requirements are not unduly oppressive and burdensome. More particularly, the SEC asserts that it is premature for respondent to contend that it is a bona fide newspaper or financial publication specifically excluded by the provisions of Section 202 of the Act. Put differently, the SEC contends that even though its investigation may develop that respondent is a bona fide newspaper or financial publication, that is a question to be determined in the first instance by the Commission and not by this court. Finally, the Commission opposes respondent's argument that if this investigative subpoena be deemed valid on the face of the Act, then the Act insofar as it pertains to respondent is unconstitutional in that it deprives respondent of its First Amendment freedoms.

It is germane to consider the submission of the SEC and its affidavits in support of this motion. The Commission does not recite that it has any complaints or specific information to the effect that the respondent is acting or may be acting as an investment adviser without registering as such as required by the Act. Rather, the SEC restricts itself to the following rather limited factual submissions:

1. In a supplemental affidavit filed by a Commission attorney, various advertisements of the respondent which have appeared in other newspapers are set forth, along with allegations of the affiant to the effect that these advertisements indicate that the Transcript has held itself out to the public as an investment advisory publication.

2. The SEC suggests that the contents of various issues of the Transcript handed up to the court and made part of the record on this motion indicate on their face that the Transcript holds itself out as an investment adviser.

3. Admitting that the Transcript devotes a major portion of each issue to reprinting market comments by clearly identified broker-dealer firms and their analysts, the SEC submits that the Transcript exercises "some selectivity in determining what material will be presented to its readers". Thus, the Commission expresses concern that selectivity may mean that the respondent is seeking to advise more than it is to inform.

For its part, respondent has submitted affidavits and a brief in opposition to the subpoena and investigation. In substance, respondent urges that the SEC has no jurisdiction to investigate its affairs or to issue the subpoena; that the subpoena was and is not authorized by the Act; that the investigation and issuance of the subpoena are not within the power of Congress to authorize; and that the subpoena in any case is unnecessarily broad, coercive, harassing and in derogation of the First and Fourth Amendment rights of the respondent.

Discussion, Findings and Conclusions

The broad question presented by this enforcement motion of the SEC is whether or not the inquiry is lawful. I assume that, as the SEC argues, the burden of proving that the investigation is unlawful is upon the respondent. See Mississippi Road Supply Co. v. Walling, 136 F.2d 391 (5th Cir. 1943). Historically, the courts have been reluctant to interfere with agency investigations where the inquiry is reasonably within the statutory powers and scope of the agency as set out by Congress. In Oklahoma Press...

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