Downing v. Securities and Exchange Commission

• Decision Date: 31 March 1953
• Docket Number: No. 11158.,11158.
• Parties: DOWNING et al. v. SECURITIES AND EXCHANGE COMMISSION et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

92 US App. DC 172, 203 F.2d 611 (1953)

DOWNING et al. v. SECURITIES AND EXCHANGE COMMISSION et al.

No. 11158.

United States Court of Appeals District of Columbia Circuit.

Argued February 12, 1952.

Decided March 31, 1953.

Rehearing Denied April 22, 1953.

Mr. Randolph Phillips, pro se, with whom Messrs. Seymour Krieger and Norman E. Jorgensen, Washington, D. C., were on the brief, for petitioners Randolph Phillips and 22,081 Stockholders of The United Corp. Messrs. Seymour Krieger and Norman E. Jorgensen, Washington, D. C., were on the brief for petitioner Edward R. Downing.

Mr. Roger S. Foster, General Counsel, Securities and Exchange Commission, Washington, D. C., with whom Mr. Aaron Levy, Attorney, Securities and Exchange Commission, Washington, D. C., was on the brief, for respondent. Mr. Louis Loss, Washington, D. C., also entered an appearance in behalf of the respondent.

Mr. Richard Joyce Smith, New York City, of the bar of the Court of Appeals of the State of New York, pro hac vice, by special leave of Court, with whom Mr. Harold F. Noneman, Washington, D. C., was on the brief, for The United Corp., intervenor. Mr. James K. Polk, New York City also entered an appearance in behalf of The United Corp., intervenor.

Mr. John Mulford, Philadelphia, Pa., with whom Mr. M. Quinn Shaughnessy, Washington, D. C., was on the brief, for The General Protective Committee for Holders of Option Warrants of The United Corp., intervenor.

Before WILBUR K. MILLER, PRETTYMAN and BAZELON, Circuit Judges.

WILBUR K. MILLER, Circuit Judge.

The Securities and Exchange Commission, after hearings in a proceeding theretofore duly instituted, entered an order August 14, 1943, requiring United Corporation, registered under the Public Utility Holding Company Act of 1935,¹ to reduce its capitalization to one class of stock, to cease to be a holding company, and to comply with the order with due diligence. The order was entered pursuant to § 11(b) of the Act.

Thereafter United simplified its capital structure by retiring its preferred stock and since April 30, 1949, has had only common stock outstanding. By that date, United also had divested itself of its subsidiaries, except that it still held more than 10 per cent of the voting securities of South Jersey Gas Company, and 2,818,397 shares of Niagara Hudson, constituting approximately 28½ per cent of the total voting stock of that corporation. United filed with the Commission a proposal to distribute to its stockholders one share of Niagara Hudson for each ten shares of United held by them. The SEC approved by an order of October 20, 1949, pursuant to which United distributed to its stockholders 1,442,973 shares of Niagara Hudson and paid them $158,401 in cash, thus reducing its holdings to about 14 per cent of the total voting securities of Niagara Hudson.

One Randolph Phillips, a stockholder of United, filed with us a petition to modify the Commission's order of October 20, 1949, so as to require United immediately to distribute to its stockholders all its Niagara Hudson common stock and to sell within three months all its remaining investments in its subsidiaries. This we refused to do. Phillips v. Securities & Exchange Commission, 1950, 87 U.S.App.D.C. 380, 185 F.2d 746. We held the Commission had not abused its discretion in authorizing a partial distribution of United's holdings of Niagara Hudson common. We pointed out that under the Act the company's management has primary responsibility for the preparation of a plan of compliance therewith, and that Phillips could suggest his plan for the dissolution of United when the company submitted a plan of reorganization.

United later proposed, pursuant to § 11 (e) of the Act, a plan designed to comply with § 11(b) and with the Commission's order thereunder. It provided for a limited offer permitting United's stockholders to withdraw and, depending on the number of shares held, to receive either cash or a specified number of shares of the common stock of Niagara Mohawk Power Corporation,² then owned by United. The plan also provided for the cancellation of United's outstanding option warrants, the sale of all its South Jersey common stock, the amendment of its certificate of incorporation to provide for cumulative voting for the election of directors, the amendment of its by-laws to increase the quorum requirement at stockholders' meetings, and for the reduction by United of all its holdings of voting securities of public utilities companies to an amount not to exceed 4.9 per cent of the outstanding voting stock of those companies, with a view to transforming United into an investment company.

The Commission held extensive hearings with respect to the proposal and on June 15, 1951, delivered an exhaustive opinion which analyzed the plan and approved it in the main, but pointed out that full approval could not be given unless the plan were amended in accordance with its views. Immediately thereafter United filed amendments designed to meet the requirements of the Commission's opinion, and apparently asked that enforcement be sought in a district court.

After considering the amendments, the Commission found the plan for the reorganization of United, as so amended, necessary to effectuate the provisions of § 11(b) of the Act, and fair and equitable to the persons affected by it. It therefore approved the plan by an order dated June 26, 1951, subject to terms and conditions concerning the consummation thereof and the retention of jurisdiction with respect thereto, all of which were carefully spelled out, and subject also to this condition:

"1. The order entered herein shall not be operative to authorize the consummation of the provisions of the plan as amended relating to the cancellation of United\'s option warrants or to the amendment of United\'s Certificate of Incorporation or By-Laws until an appropriate United States District Court shall, upon application thereto, enter an order enforcing said provisions."

On August 23, 1951, Edward R. Downing, a stockholder of United, and Randolph Phillips, also a stockholder and attorney in fact for 22,081 other stockholders, filed with us a petition to review the Commission's order of June 26, 1951, which approved the plan, and also certain orders entered by the Commission February 7 and February 25, 1947.³ They prayed that we enter an order forthwith enforcing the provisions of the plan concerning cumulative voting and the quorum requirements, and that in other respects we "modify or set aside in whole" the three orders; that we permanently enjoin United and the SEC from seeking to enforce in any other court the order of June 26, 1951.

The petitioners further prayed that we grant them leave to adduce additional evidence to sustain charges contained in the petition for review that the members of the Commission and its staff from April, 1943, through 1950 engaged in private conversations with officials of United, and made private and secret arrangements under which the Commission and its staff agreed not to seek dissolution of United, and also agreed prior to hearing to decide in United's favor "certain applications * * * relating to the present proceedings." Petitioners did not describe the applications to which they referred. They prayed also for the immediate entry of an order enforcing the uncontested provisions of United's plan of reorganization.

We denied, on November 5, 1951, petitioners' motion for entry of an order enforcing uncontested provisions of the plan and their motion for leave to adduce additional evidence, without prejudice to renewal at the hearing on the merits; and we denied petitioners' motion for a stay of the Commission's order of June 26, 1951, except we stayed the order insofar as it approved the portion of the plan which provides for disposition of United's common stock in Niagara Mohawk.

The motion of the General Protective Committee for Holders of Option Warrants of United for leave to intervene, heretofore deferred until submission of the case on the merits, will be granted. On January 2, 1952, that committee filed a "Motion for Leave to File a Motion" for leave to adduce additional testimony, which was denied January 30, 1952. The motion was renewed July 23, 1952, by the General Protective Committee and on August 26, 1952, it moved for leave to file a statement of points and authorities in support of the renewed motion. Both motions will be denied.

The petitioners have renewed their motion for an order enforcing the uncontested provisions of the plan and the provision relating to the option warrants. This motion will be denied as, for the reasons hereinafter set out, we do not have power to enforce a plan of compliance which has been approved by the Commission. The petitioners have also renewed their motion for leave to adduce additional evidence, as they were permitted to do by our previous order, and have filed an additional memorandum in support thereof. A brief discussion of the background is necessary to an understanding of the motion. As we have noted, the Commission on August 14, 1943, ordered United to cease to be a holding company but did not direct dissolution. Some four months theretofore one William M. Hickey, formerly a member of the Commission's staff, had become president of United. In a subsequent phase of the proceeding, in 1944, Hickey testified, and in the course of cross-examination indicated that after he became president of United and before the decision and order of August 14, 1943, he had talked privately with members of the Commission and that those conversations had influenced the decision. Petitioners say that after that much had been said, counsel for United objected to the line of questioning, the trial examiner sustained the objection, and further development of the subject was not permitted. It is with respect to this matter that petitioners have moved for leave to adduce additional evidence.

Were the order of ...