Securities & Exchange Commission v. Harrison

• Decision Date: 18 October 1948
• Docket Number: Civ. No. 2617-48.
• Parties: SECURITIES & EXCHANGE COMMISSION v. HARRISON et al.
• Court: U.S. District Court — District of Columbia

80 F. Supp. 226

SECURITIES & EXCHANGE COMMISSION v. HARRISON et al.

Civ. No. 2617-48.

United States District Court District of Columbia.

October 18, 1948.

COPYRIGHT MATERIAL OMITTED

Louis Loss, Associate Gen. Counsel, Edward H. Cashion, Chief Counsel, Division of Corporation Finance, and E. Russell Kelly, all of Washington, D. C., and C. J. Odenweller, Jr., of Cleveland, Ohio, for plaintiff.

Arnold, Fortas & Porter, Thurman Arnold, Abe Fortas and Milton V. Freeman, all of Washington, D. C., and Joseph L. Weiner, and Lawrence R. Eno, both of New York City, for defendants and intervenors.

MORRIS, District Judge.

This is a proceeding in which the Securities and Exchange Commission has applied to this Court, pursuant to Section 21(c) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78u(c), for an order requiring the defendants to appear before a duly designated officer of the Commission and give testimony concerning the matters referred to in subpoenas duces tecum and ad testificandum issued by such an officer. It is alleged that the subpoenas were issued in a proceeding conducted by the Commission to investigate certain matters relating to an offering of the common stock of the Kaiser-Frazer Corporation. The defendants refused to give certain testimony upon the ground that the same was within the attorney-client privilege, and even failed to disclose the name of the client on whose behalf they claimed such privilege. Proceedings were then had in the United States District Court for the Eastern District of Michigan, Southern Division, to require the disclosure of the name of the client, or clients, for whom they were acting. This they were required to do, disclosing the name of their client as Cyrus S. Eaton, who, with his family, is the majority stockholder of Otis & Company, which was one of three underwriters of the Kaiser-Frazer Corporation's stock offering being investigated. Pursuant to an adjournment, the defendants appeared at a subsequent time and place designated and gave certain additional testimony under oath, but again declined to answer certain questions on the claim of attorney-client privilege. One of the issues which has been raised in the pending investigation by the Commission is whether the defendants' client, Cyrus S. Eaton, caused the filing of an alleged collusive lawsuit by one James F. Masterson on February 9, 1948, in the Circuit Court of Wayne County, Michigan, against Kaiser-Frazer Corporation, its officers and directors, Graham-Paige Motor Company, a large stockholder of Kaiser-Frazer Corporation, and the underwriting firms of Otis & Company, First California Corporation, and Allen & Company. This lawsuit sought an accounting and a permanent injunction against the pending distribution of Kaiser-Frazer Corporation's common stock, which is the subject of the Commission's investigation. It was a condition precedent of an underwriting contract, entered into between Kaiser-Frazer Corporation and the three underwriters on February 3, 1948, that no material legal proceedings be pending against Kaiser-Frazer Corporation as of February 9, 1948, the settlement date. Pursuant to this provision of the contract (and upon other grounds), Otis & Company refused to perform. The questions which the defendants declined to answer related, among other things, to communications between Eaton and the defendants and work performed by them on his behalf in alleged connection with the said Masterson suit. It is the position of the Commission that, if Eaton induced and inspired the filing of the Masterson suit for the purpose of affording a basis upon which Otis & Company could refuse to perform the underwriting contract with Kaiser-Frazer Corporation, such action is fraudulent, and, upon a prima facie showing that such fraud had been perpetrated, the defendants could not decline upon the ground of attorney-client privilege to give the testimony sought. The Commission filed an affidavit by one Anthon H. Lund, Assistant Director of the Division of Trading and Exchanges of the Securities and Exchange Commission, which purports to summarize such parts of the record of the proceedings and evidence had in the investigation proceedings upon which the Commission relies to show that there is evidence, other than the testimony sought from the defendants, sufficient to constitute a prima facie showing that the alleged fraud had been perpetrated by Eaton, acting through the defendants and others.

Upon motion Cyrus S. Eaton and Otis & Company were permitted to intervene in these proceedings. The defendants and intervenors, in answer to the complaint, deny the jurisdiction of the Commission to conduct the proceedings in which the subpoenas were issued. They assert that the complaint fails to charge any fraud which would, if shown by prima facie evidence, destroy the attorney-client privilege, and thereupon ask the dismissal of the complaint. They further deny the acts charged in the complaint, which are asserted by the Commission to be fraudulent. They deny that any evidence in the proceedings constitutes a prima facie showing that the alleged fraud was perpetrated. They, therefore, assert that the attorney-client privilege has not been destroyed, and the defendants should not be required to testify concerning privileged communications. The defendants and intervenors insist that the Lund affidavit may not be used in lieu of the record, and, furthermore, that the evidence contained in the record should not be received and relied upon, because of the nature and conduct of the proceedings, and the failure to permit cross-examination of the witnesses. They ask relief in these regards by appropriate motions. By counterclaim the defendants and intervenors complain that the investigation proceedings were not instituted and conducted for the bona fide purpose of enforcement of the Securities Exchange Act, as amended, but for the purpose of giving publicity to the charges of the Kaiser-Frazer Corporation against the intervenor Otis & Company, and to procure information helpful to the said Kaiser-Frazer Corporation in a proceeding now pending in the United States District Court for the Southern District of New York, wherein the Kaiser-Frazer Corporation is plaintiff, seeking damages against said intervenor and others. Whereupon, by said counterclaim, the defendants and intervenors seek injunctive relief against the Commission to prevent further public investigation of the matters set forth in the complaint, futher public statements prejudicial to the reputation of the defendants and intervenors, or any statements purporting to make findings or conclusions on the basis of said investigation, or any further investigation limited to matters in aid of the said Kaiser-Frazer Corporation's suit.

A hearing was had on July 19, 20 and 21, 1948 at which time, following argument, the record, consisting of approximately 6,000 pages, and the exhibits were filed by the Commission, subject to a motion of defendants and intervenors to strike on the grounds heretofore mentioned. Leave was granted to the parties to file briefs and appendices, pursuant to which the Commission filed its supplemental brief on August 3rd, and defendants and intervenors filed supplemental brief on August 31st.

I have no difficulty with the question as to whether or not the Commission has jurisdiction to conduct the investigation in which the subpoenas here sought to be enforced were issued. Underwriting transactions are so intimately related to the sale and purchase of securities, and have such direct effect upon the recognized responsibilities of the Commission, that it cannot be said Congress did not contemplate that the Commission should have power to investigate alleged fraudulent practices relating thereto.

It is a well recognized principle of administrative law that investigations ought to be so conducted that harmful publicity will not be used in lieu of sanctions provided by law, but it must rest in the sound discretion of the agency created by the Congress, and not with the courts, to determine when investigations are to be conducted by open or closed hearings. The limitation placed by the Court, in the case of Bank of America National Trust and Savings Association v. Douglas, et al., 70 U.S.App.D.C. 221, 105 F.2d 100, 123 A.L.R. 1266, was upon the public disclosure of confidential reports of bank examiners made to the Comptroller of the Currency with reference to the bank there involved. The use "in confidence" of such reports was specifically authorized by Congress, and the only statutory reference to publicity is in the Comptroller's qualified authority to publish the report on any bank which fails to comply with his recommendations. In the instant proceedings there is no comparable situation. If an analogy be sought between the reports involved in the Bank of America case and the...