Thomson & McKinnon v. SECURITIES AND EXCHANGE COM'N

• Decision Date: 25 April 1967
• Docket Number: No. 67 Civ. 1423.,67 Civ. 1423.
• Citation: 268 F. Supp. 11
• Parties: THOMSON & McKINNON, a limited partnership, and Walter T. O'Hara, Plaintiffs, v. SECURITIES AND EXCHANGE COMMISSION, Manuel F. Cohen, Byron D. Woodside, Hugh F. Owens, Hamer H. Budge and Francis M. Wheat, Defendants.
• Court: U.S. District Court — Southern District of New York

268 F. Supp. 11

THOMSON & McKINNON, a limited partnership, and Walter T. O'Hara, Plaintiffs, v. SECURITIES AND EXCHANGE COMMISSION, Manuel F. Cohen, Byron D. Woodside, Hugh F. Owens, Hamer H. Budge and Francis M. Wheat, Defendants.

No. 67 Civ. 1423.

United States District Court S. D. New York.

April 25, 1967.

Hall, Patterson, Taylor, McNicol & Marett, New York City, for plaintiffs; Donald E. McNicol, James J. Marett, Wilmot B. Mitchell, Charles J. Egan, Jr., Peter Siviglia, New York City, of counsel.

Richard M. Phillips, Asst. General Counsel, Securities and Exchange Commission, Washington, D. C., for defendant, Securities and Exchange Commission; Philip A. Loomis, Jr., General Counsel, David Ferber, Sol., Joel J. Rabin, Washington, D. C., of counsel.

OPINION

FRANKEL, District Judge.

Thomson & McKinnon, a securities brokerage partnership, and Walter T. O'Hara, one of the firm's general partners, brought this action against the Securities and Exchange Commission and its five members as individuals seeking to enjoin in part a pending investigation by that agency. The jurisdiction of this court is asserted to rest upon 28 U.S.C. §§ 1331 and 1337; the Declaratory Judgment Act, 28 U.S.C. §§ 2201 and 2202; the Administrative Procedure Act, 5 U. S.C. §§ 702, 704-706; and the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. With the filing of their complaint, plaintiffs moved for a preliminary injunction. The suit is without merit, and the motion must be denied.

The undisputed facts, as plaintiffs allege them, are as follows: On August 9, 1963, the District Business Committee for District No. 12 of the National Association of Securities Dealers (NASD) brought a complaint against the plaintiffs herein charging, inter alia, that, "pursuant to a compensatory arrangement with H. C. Keister & Company, * * * said firm Keister was knowingly and wilfully interposed between Thomson & McKinnon and the best available market to the harm and detriment of their customers." The alleged misconduct was charged as violative of Article III, Sections 1 and 18, of the NASD's Rules of Fair Practice. On the same day the NASD Committee issued its complaint against H. C. Keister, two of its general partners, and one of its employees charging, inter alia, the same course of wrongful inter-positioning. Over the objections of the plaintiffs herein, the two proceedings were consolidated for hearing by the NASD. Upon the 650-page record thus made, the NASD issued a decision on June 30, 1964, sustaining the charges against plaintiffs, fining the firm $2,000, fining O'Hara $2,000, and suspending the latter for 30 days. A separate decision against Keister & Company and the individuals charged with it was issued on July 2, 1964. The Company was expelled from the Association, the registrations of two of the accused individuals were revoked, and the third individual was fined $1,000.

The Keister group sought review, first by the NASD's Board of Governors, then by the S.E.C. pursuant to Section 15A(g) of the Securities Exchange Act of 1934, 15 U.S.C. §78o—3(g).¹ The plaintiffs here did not appeal. Their counsel upon oral argument of the present motion stated that their reason for not appealing the findings that they had violated the Association's Rules of Fair Practice was their unwillingness to bear the additional expense of such further proceedings.

However that may be, the appeal of H. C. Keister & Company and its two partners (Sorneson and Keister) led inevitably to comments by the Commission touching the nonappealing plaintiffs herein. The Keister appellants argued that they had "merely acted at the behest of Thomson & McKinnon and that the public was not harmed by any of Keister's * * * actions." Their contention was that they were in a position to obtain better prices than Thomson & McKinnon could; that the use of them by Thomson & McKinnon caused no increased prices to the latter's customers; "and that in any event it was Thomson & McKinnon's, not the member's responsibility to see to it that the price to the customers was proper." The Commission rejected these arguments upon the record before it and noted that "no evidence was presented by Thomson & McKinnon that it checked market makers for the best price of each security involved, before it effected a transaction with Keister * * * and that Keister's * * * price was equal to or better than such price." It noted, in addition, that Keister had made payments to Thomson & McKinnon employees, observing that this militated against the claim that Keister obtained the best price because "it had access to a more favorable market." In sum, the Commission was

"satisfied that Keister's activities as a middleman in fact operated to increase the price paid by Thomson & McKinnon's customers for the securities purchased by them and to reduce the amount they received for the securities they sold as compared with the prices Thomson & McKinnon might reasonably have expected to realize had it made a bona fide effort to get the best available prices for its customers. * * * Accordingly, Keister * * * could not, as it has argued, treat as of no concern to it the question whether the ultimate price to Thomson & McKinnon's * * * customers was unfair. A finding that a person is an aider or abetter is established by a showing that he performed acts which he knows or has reason to know will contribute to the carrying out of the wrongful conduct."

Keister also argued before the Commission that the penalties imposed upon it "were excessive in comparison to the milder penalties imposed by the NASD in other cases involving serious violations, and particularly in view of the lesser penalties imposed upon Thomson & McKinnon and O'Hara * * * in the companion proceeding." Rejecting this argument, the Commission concluded that it presented no adequate basis for reducing the penalties against the appellants.² The Commission observed, however, that the disparity in penalties suggested a potentially troublesome problem. It said in this connection:

"With respect to the suggestion that the sanctions imposed on the member and Keister are harsh when compared with those imposed on T & M and its partner, it should be noted that we have not had the benefit of arguments made on behalf of the latter since they did not appeal. It would be of considerable assistance to us in reviewing cases such as this to have the benefit of a fuller exposition of the judgments and reasons which entered into the determination to apply different sanctions in a case having more than one respondent involved in the activity under scrutiny. Without appropriate justification, the differences in sanctions for persons with seemingly similar responsibility for violations raise questions as to the adequacy of the existing statutory provisions for the review of NASD decisions by us."

Two of the Commissioners (Budge and Wheat) dissented on this last point. They concluded that the disparate penalties were not justifiable, and would have held that the sanctions imposed upon Keister should be reduced.

As appears just below, the comments of the Commissioners in Keister relating to the present plaintiffs supply the asserted basis for the present lawsuit. The occasion for the litigation is an order dated September 26, 1966, pursuant to § 21(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u(a), by which the Commission directed a private investigation concerning the information in its "public official files" that plaintiff "Thomson & McKinnon, its employees and others":

(1) engaged in the interpositioning of other broker-dealers between Thomson and McKinnon and the primary market for over-the-counter securities;

(2) participated in the payments of money to Thomson & McKinnon employees to promote such interpositioning; and

(3) failed to disclose such activities to Thomson & McKinnon customers.

In their complaint and application for a temporary injunction, the plaintiffs contend that the Commission must be barred in the investigation thus ordered from inquiring into any of the matters which were involved in the joint NASD trial and the resulting appeal by Keister to the Commission. They concede that the general subject of interpositioning may properly be explored by the Commission, but say that the facts involved in the Keister appeal must now be forever sealed from such inquiry. The grounds for this asserted foreclosure center upon alleged violations of plaintiffs' rights to due process unless the Commission's investigation is thus limited. To summarize it as plaintiffs state it, their position comes to this:

(1) While they carefully specify that they are not invoking the privilege against self-incrimination, they claim a "right not to be placed in jeopardy, by investigation or any other proceedings as to the Keister area before a tribunal which has already rejected and prejudged plaintiffs in the Keister area."³ Plaintiffs do not, and obviously could not, claim a threat of "double jeopardy" in any true sense, but their papers repeatedly assert a danger that they are about to be placed "again in jeopardy * * *."⁴

(2) Referring to the Commission's observations in the Keister appeal concerning the disparity in sanctions, the plaintiffs note that the Commission could not have increased the penalties in an appeal from the NASD. The present investigation must not touch the "Keister area," they say, because it is obvious that the Commission has instituted this proceeding "in order to increase the penalties administered by the NASD, that is to say, to accomplish indirectly, what it could not accomplish directly."⁵

(3)

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