Bank of America Nat. Trust & Sav. Ass'n v. Douglas

• Decision Date: 08 May 1939
• Docket Number: No. 7354.,7354.
• Parties: BANK OF AMERICA NAT. TRUST & SAVINGS ASS'N v. DOUGLAS et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

105 F.2d 100 (1939)

BANK OF AMERICA NAT. TRUST & SAVINGS ASS'N v. DOUGLAS et al.

No. 7354.

United States Court of Appeals for the District of Columbia.

Argued March 30, 1939.

Decided May 8, 1939.

William Stanley, of Washington, D. C., T. W. Dahlquist, of San Francisco, Cal., and Charles W. Collins and Donald R. Richberg, both of Washington, D. C., for appellant.

Chester T. Lane, of Washington, D. C., for appellees.

Before GRONER, Chief Justice, and EDGERTON and VINSON, Associate Justices.

GRONER, C. J.

Plaintiff Bank brought this suit against the members of the Securities and Exchange Commission to prevent the public disclosure by the Commission of information claimed to have been illegally obtained and for injunction restraining the Commission from enforcing subpœnas requiring the production of the records of the Bank.

Plaintiff is a national bank, a member of the Federal Reserve System, with deposits insured by the Federal Deposit Insurance Corporation, and has its principal place of business in San Francisco, California. It has outstanding capital stock of $50,000,000, has total capital assets in excess of $114,000,000, and does business in 308 communities in the State of California through its main office and its branches.

Transamerica Corporation (not a party to this suit) owned practically the entire voting stock of the Bank prior to July 15, 1937, but on that date distributed to its own stockholders all but 42%, which it still retains.

None of the Bank's stock is registered on any national securities exchange.

Transamerica in August, 1937, filed with Securities Commission an application for registration of 11,590,784 shares of its own capital stock of the par value of $2 per share. The registration became effective the following September 10. Since Transamerica had owned all of the Bank's capital stock during the years 1934-36, its application included balance sheets, profit and loss statements, and other financial information with respect to the Bank for those years — furnished substantially in the same form as the report of condition of the Bank filed with the Comptroller of the Currency.

In November, 1938, the Commission, in anticipation of proceedings to determine whether Transamerica's registration should be suspended, obtained from the Secretary of the Treasury permission to examine the reports of bank examiners made to the Comptroller of the Currency with reference to the Bank. Subsequently, in response to the Commission's request, the Secretary consented to the public official use of the information.

The Commission then issued an order directing that a public hearing be held in Washington on January 16, 1939. The Bank was not summoned or joined as a party, but the Commission caused a subpœna duces tecum to be served on the Bank's cashier in San Francisco, commanding him to appear within four days and bring with him records relating to numerous banking items and practices from 1929 to date; another subpœna was directed to the Bank's vice-president, commanding him to produce records from 1929 to date relating to nearly two hundred loans made by the Bank. The subpœnas admittedly were based upon information derived from the reports furnished by the Secretary. On the hearing day, the Bank filed this complaint, alleging that the proposed investigation of the Bank's affairs constituted an unlawful exercise of visitorial powers; that the Secretary had unlawfully given access to the bank examiners' reports; and that their publication as proposed by the Commission would irreparably injure the Bank. It prayed for a declaratory judgment and for an injunction.

The Commission answered, challenging the jurisdiction of the court and averring affirmatively that neither the action of the Secretary in furnishing the information nor the act of the Commission in using it was contrary to law.

The trial court heard the cause on the merits and concluded: (1) that although the Commission intends at a public hearing to make its own appraisal and valuation of a substantial portion of the assets of the Bank and to make an investigation of the reserves of the Bank, such action does not constitute the exercise of any visitorial power over the Bank; (2) that even if such action is visitorial, it is within the lawful power of the Commission; (3) that although the evidence does not disclose that the bank examiners' reports have ever been furnished to any officer, agency, or department of the government for use in a public hearing without the consent of the bank involved, except for use in criminal proceedings, the Secretary of the Treasury was authorized to furnish them to the Commission for its public official use; and (4) that the court had jurisdiction and that the suit was not prematurely brought. Judgment was entered dismissing the complaint.

From what has been said, it is apparent that the issues concern: (1) the power of the District Court to grant the relief prayed; (2) the scope of the Commission's investigatory powers; (3) the right of the Commission to demand and receive and thereafter to disclose information contained in the reports of the bank examiners; and (4) the validity of the subpoenas issued by the Commission based on such information.

First. We think the court had jurisdiction. The Bank alleged that disclosure of the information would result in irreparable injury. Since other remedy was entirely lacking, the cause was a proper one for equitable relief. Utah Fuel Co. v. National Bituminous Coal Commission (decided January 30, 1939), 59 S.Ct. 409, 83 L.Ed. 483. If the Bank had prayed solely for an injunction against enforcement of the subpœnas, the question would be different. Federal Trade Com'n. v. Millers' Nat. Federation, 60 App.D.C. 66, 47 F.2d 428; cf. Federal Power Com'n. v. Metropolitan Edison Co., 304 U.S. 375, 386, 58 S.Ct. 963, 82 L.Ed. 1408. But the complaint asks for other relief which a court of equity may grant, as well as for a declaratory judgment. "`A court of equity ought to do justice completely and not by halves,' and to this end, having properly acquired jurisdiction of the cause for any purpose, it will ordinarily retain jurisdiction for all purposes, including the determination of legal rights that otherwise would fall within the exclusive authority of a court of law". Rice & Adams Corp. v. Lathrop, 278 U.S. 509, 515, 49 S.Ct. 220, 222, 73 L.Ed. 480.

And since the case is one arising under the laws of the United States, the court had power to enter a declaratory judgment. Zenie Brothers v. Miskend, D.C., 10 F. Supp. 779.

Second. Sec. 19(a) of the Securities Exchange Act of 1934¹ authorizes the Commission, if in its opinion such action is necessary for the protection of investors — "(2) after appropriate notice and opportunity for hearing, by order to deny, to suspend the effective date of, to suspend for a period not exceeding twelve months, or to withdraw, the registration of a security if the Commission finds that the issuer of such security has failed to comply with any provision of this title or the rules and regulations thereunder."

Sec. 12(b) (1) requires as a condition of the registration of securities the filing with the Commission of — "Such information, in such detail, as to the issuer and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the issuer, * * * as the Commission may by rules and regulations require, as necessary or appropriate in the public interest or for the protection of investors. * * *"

Sec. 21(a) authorizes the Commission in its discretion to make such investigation as it shall deem necessary to determine whether a registrant has violated any provisions of the Act or the rules of the Commission.

The Commission's order alleged that Transamerica had failed to comply with the provisions of Sec. 12(b) and the Commission's regulations, in that it had filed false and misleading statements of material facts, that is to say, a large amount of losses and doubtful accounts had been written off the books of the Bank by pretended sales to other subsidiaries of Transamerica and by write-ups of the value of investment securities; the figures for "loans and discounts" included a large number of worthless and doubtful accounts; the valuation of certain bonds included arbitrary write-ups; the depreciation figures for real estate were inadequate; the "reserve for contingencies" was misleading since there was no indication that it represented not only a self-insurance fund but a reserve for all the losses and doubtful accounts, and was therefore inadequate; the profit and loss statements included the write-ups but made no provision for the losses; as a consequence the Bank had paid out in dividends a large sum in excess of its actual current earnings.

The Act, being primarily for the protection of investors, imposes civil liability² and criminal penalties³ upon any person who knowingly makes false and misleading statements in an application for the registration of a security for sale on a national exchange. The purpose is to require complete and truthful exposure of all matters in relation to the registrant's financial condition. We do not doubt, therefore, that the Commission, in the exercise of its powers to enforce the Act, may inquire into the affairs of a company controlled by a registrant. And on the record in this case we are of opinion that Transamerica's interest in the Bank, past and present, brings the latter within the scope of that power.

Third. The next question turns upon the authority of the Secretary of the Treasury to furnish the Commission copies of the examiners' reports and whether, if there was authority, the information must be held in confidence.

Admittedly, there is no statute of prohibition.

According to a practice of long standing, the reports of bank examiners made to the Comptroller have been considered as private, and access to them for use by other...