SECURITIES & EXCH. COM'N v. GUARANTY BOND & SECUR. CORP.

• Decision Date: 23 April 1974
• Docket Number: No. 73-1451.,73-1451.
• Citation: 496 F.2d 145
• Parties: SECURITIES AND EXCHANGE COMMISSION, Appellee, v. GUARANTY BOND AND SECURITIES CORP. et al., Defendants, James C. Barbour, Receiver, Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

496 F.2d 145 (1974)

SECURITIES AND EXCHANGE COMMISSION, Appellee, v. GUARANTY BOND AND SECURITIES CORP. et al., Defendants James C. Barbour, Receiver, Appellant.

No. 73-1451.

United States Court of Appeals, Sixth Circuit.

Argued December 12, 1973.

Decided April 23, 1974.

W. Ovid Collins, Jr., Cornelius, Collins, Higgins & White, Nashville, Tenn., on brief, for defendant-appellant James C. Barbour.

Michael A. Macchiaroli, Washington, D. C., for plaintiff-appellee S.E.C.; Lawrence E. Nerheim, Gen. Counsel, David Ferber, Solicitor, Securities and Exchange Comm., Washington, D. C., on brief.

Wilfred R. Caron, Associate Gen. Counsel, Securities Investor Protection Corp., Washington, D. C., for appellee S.I.P.C., Theodore H. Focht, Gen. Counsel, Securities Investor Protection Corp., Washington, D. C., on brief.

Before PHILLIPS, Chief Judge, CELEBREZZE and MILLER, Circuit Judges.

WILLIAM E. MILLER, Circuit Judge.

Guaranty Bond and Securities Corporation was registered with the S.E.C. as a broker and dealer in securities as required by Section 15(b) of the Securities Exchange Act of 1934. As part of its business, it promoted the sale of church bonds. On December 22, 1970, the S.E.C. filed in the court below a complaint against Guaranty alleging net capital violations contrary to the federal securities laws including Section 15(c)(3) of the Securities Exchange Act, 15 U.S.C. 78o(c)(3). Injunctive relief was sought against the alleged violations.

The district court, finding that Guaranty had violated the S.E.C.'s net capital rule and that such violation had existed for a substantial period of time prior to the filing of the complaint by the S.E.C., granted a preliminary injunction. The court further found that between the filing of the complaint on December 22, 1970 and the granting of the injunction on January 6, 1971, Guaranty had continued to engage in substantial business, handling 101 transactions after the effective date of the Act creating the Security Investor Protection Corporation. On application of S.E.C., a receiver was appointed for Guaranty to take charge of all of its assets subject to the further orders of the court.

On March 31, 1972, the receiver filed a petition for an order directed to the S.E.C. and the Securities Investor Protection Corporation requiring each of them to show cause why S.I.P.C. should not be required to intervene in the action and afford to the customers of Guaranty the benefits of the Act. The show cause order was issued accordingly and both S. E.C. and S.I.P.C. responded. The court, without an evidentiary hearing, filed its memorandum opinion in which it found that the Act (S.I.P.A.) was inapplicable to customers of Guaranty for the reason that Guaranty was insolvent and in financial difficulties before the effective date of S.I.P.A. To hold otherwise, it was said, would be to give the Act a forbidden retroactive effect. The court accordingly ordered that S.I.P.C. should be dismissed from the action. This order was certified as a final judgment for purposes of appeal.

The Securities Investor Protection Act was enacted in response to the need to protect the customers of securities brokers and dealers which might fail, thereby jeopardizing the cash and securities that customers had left on deposit with the firm.¹ S.I.P.A. accordingly created the Securities Investor Protection Corporation as a "non-profit corporation," not designed to "be an agency or establishment of the United States Government," but rather to be "a membership corporation,"² consistent with the self-regulatory nature of the securities industry. 15 U.S.C. 78ccc(a). The S.I.P.C.'s role is primarily one of consultation and cooperation with the self-regulatory organizations which remain subject to the federal securities laws and the rules of the S.E.C. By mandating membership in the S.I.P.C. for certain members of the securities industry and by granting the S.I.P.C. general assessment authority over the members in order to establish an S.I.P.C. fund, Congress accomplished its intention that the cost of providing protection to customers under S.I.P.C. was to be borne by the securities industry itself.³

Under 15 U.S.C. Sec. 78 eee(a)(1), if the S.E.C. or any self-regulatory organization believes that a broker or dealer subject to its regulation is in, or approaching, financial difficulty, it must notify immediately the S.I.P.C. If the S.I.P.C. determines that a member broker or dealer has failed or is in danger of failing to meet its obligations to customers, it is authorized to seek a decree in an appropriate court adjudicating that the customers of a member of S.I. P.C. are in need of the protection of the Act. 15 U.S.C. Sec. 78 eee(a)(2). Upon so finding, the district court shall grant the decree and appoint a trustee for the liquidation of the business and an attorney for the trustee. The objectives of the proceeding, in addition to operating the business for a limited purpose, completing the open contractual commitments of the dealer, enforcing rights of subrogation and liquidating the business of the dealer, are "as promptly as possible" (1) to return specifically identifiable property to the customers of a firm, (2) to distribute the "single and separate fund," and (3) to pay to customers monies advanced by S. I.P.C. 15 U.S.C. 78 fff(a). To provide for prompt satisfaction of the net equities of the dealer's customers, S.I.P.C. must advance to the trustee such monies as may be required to satisfy the full claims of each customer not to exceed $50,000. 15 U.S.C. 78 fff(f).

If S.I.P.C. refuses to act, the S.E.C. is authorized by 15 U.S.C. 78 ggg(b),⁴ to apply to the court for an order requiring the S.I.P.C. to discharge its obligations under the Act.

The present appeal involves a unique situation. The appellant, as mentioned earlier, urges, contrary to the district court's decision, that the Act is applicable to Guaranty Bond. The S.E. C. agrees with the appellant's contention that the Act is applicable, but challenges the court's decision that the receiver has standing to petition the court to apply the Act. The S.I.P.C. agrees with the district court as to the inapplicability of the Act but challenges, along with the S.E.C., the receiver-appellant's standing to obtain compliance with the Act.

The S.I.P.A. was effective on December 30, 1970. In two cases, Lohf v. Casey, 330 F.Supp. 356 (D.Colo.1971), aff'd. 466 F.2d 618 (10th Cir. 1972) and Bohart-McCaslin Ventures, Inc. v. Midwestern Securities Corp., 352 F.Supp. 937 (N.D.Texas 1973), courts have held that S.I.P.A. was not intended to apply to a broker-dealer who had failed prior to that date. The district court in Lohf, supra 330 F.Supp. at 358 stated:

". . . it is equally clear that Congress expressed an intention of refusing to make the Act retroactive. The record is replete with comments to that effect, the most cogent example being the report of the Committee on Interstate and Foreign Commerce:

`It is the clear intention of your committee that SIPC assume no liability for firms either in net capital violation, in liquidation, or in bankruptcy at the time of creation of SIPC. H.R.Rep.No.1613, 91st Cong., 2nd Sess. 14 (Oct. 21, 1970), reprinted in 3 U.S.Code Cong. & Admin.News \'70 at 5268.\'

This language is frequently echoed in the debates on this bill, and it seems clear that Congress did not intend the bill to operate retroactively."

Congress seemed to be concerned that S.I.P.C. not be used to compensate customers of member firms of the New York Stock Exchange which "have closed their doors and begun liquidation," when the Exchange had not advanced money from its existing trust fund to protect the customers of those firms. As mentioned earlier in the Lohf quote, the Committee Report did use very broad language when it stated that coverage be withheld from firms "either in net capital violation, in liquidation, or in bankruptcy at the time of creation of S.I.P.C." H.R.Rep.No.91-1613, 91st Cong., 2d Sess. p. 14 (1970). The meaning of this broad language was subsequently clarified by Representative Moss, sponsor of the Bill, on the floor of the House, when he stated:

"Finally, we have been concerned all along with the problem of providing protection to the customers of firms that might fail before enactment of the bill into law. We early anticipated this possibility but we have specifically declined to make the bill retroactive in its application. The bill is prospective from the date of its enactment." emphasis supplied 116 Cong.Rec. 39350-39351, 12-1-70.

Congress, lacking precise information on the condition of the industry, was concerned with the impact that S.I.P.C. coverage might have on the Treasury. The losses that had already been experienced by the industry were regarded by Congress as the industry's responsibility. S.Rep.No.1218, 91st Cong.2d Sess. 6 (1970); H.R.Rep.No.91-1613, 91st Cong., 2d Sess. 14 (1970).

Clearly to apply S.I.P.C. to a firm that was bankrupt prior to the Act would be to give the Act a retroactive application that runs counter to the Act's clear purpose as reflected by its legislative history. However, application of the Act to Guaranty would not be in our view a retroactive application. "A statute is not rendered retroactive merely because the facts or requisites upon which its subsequent action depends are drawn from a time antecedent to its enactment." Benjamin v. Hunter, 10 Cir., 176 F.2d 269 at 272. The time period of the financial difficulties of the broker-dealer bears more on the status of the broker within the meaning of the Act than upon the issue of retroactivity.

The court in Lohf found the absence of business activity subsequent to the effective date of the Act as determinative of the non-coverage issue when it stated:

However, it is apparent that plaintiff was not conducting its business as a broker or dealer at the effective date of the Act. The business was in the jurisdiction of the

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