Ludlow Corp. v. S.E.C., 77-1417

• Decision Date: 10 August 1979
• Docket Number: No. 77-1417,77-1417
• Citation: 604 F.2d 704
• Parties: , Fed. Sec. L. Rep. P 96,946 LUDLOW CORPORATION, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, Boston Stock Exchange, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 704

604 F.2d 704

196 U.S.App.D.C. 40, Fed. Sec. L. Rep. P 96,946

LUDLOW CORPORATION, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, Boston Stock Exchange, Intervenor.

No. 77-1417.

United States Court of Appeals, District of Columbia Circuit.

Argued Oct. 12, 1978.

Decided Aug. 9, 1979.

As Amended Aug. 10, 1979.

Petition for Review of an Order of the Securities and Exchange commission.

George B. Reid, Jr., Washington, D. C., with whom W. Crosby Roper, Jr., Bate C. Toms, III, and Cyril V. Smith, Jr., Washington, D. C., were on brief, for petitioner.

Robert C. Pozen, Asst. Gen. Counsel, Washington, D. C., with whom Harvey L. Pitt, Gen. Counsel, Paul Gonson, Alan Rosenblat and Vernon I. Zvoleff, Associate Gen. Counsel, Securities and Exchange Commission, Washington, D. C., were on brief, for respondent.

Arthur D. Mason, Ira H. Polon, and Roslyn A. Mazer, Washington, D. C., were on brief, for intervenor.

Before BAZELON, Senior Circuit Judge, and McGOWAN and ROBINSON, Circuit Judges.

Opinion for the Court filed by McGOWAN, Circuit Judge.

McGOWAN, Circuit Judge:

This is a petition for review of a Securities and Exchange Commission order approving the application of the Boston Stock Exchange (BSE) for unlisted trading privileges in petitioner's common stock. The Commission held, based on facts developed in a hearing before an Administrative Law Judge (ALJ), that approval of the application would be "consistent with the maintenance of fair and orderly markets and the protection of investors." Section 12(f)(2) of the Securities Exchange Act of 1934, As amended (the Act), 15 U.S.C. § 78L (f)(2) (1976). We affirm.

I

The facts, as found by the ALJ, are not disputed. Ludlow is a diversified manufacturer of home furnishings, manufactured housing, and papers and packaging. It is incorporated and has its principal offices in Massachusetts; approximately 40% Of its shareholders, holding about one-third of its outstanding shares, live in New England. Ludlow's common stock is listed on the New York Stock Exchange (NYSE), where in 1974 it ranked 912th out of 1,543 stocks in trading volume. ¹ The shares are neither listed nor traded on any other national securities exchange.

BSE is a securities exchange registered with the Commission pursuant to section 6 of the Act, 15 U.S.C. § 78f (1976). BSE offers trading in both listed and unlisted securities. Unlisted securities comprised approximately 85% Of the tradeable issues and 90% Of the shares traded on the BSE; trading in these issues contributed 32% Of BSE's total operating revenue in 1974, and a somewhat larger percentage in 1975. BSE uses the services of specialists who are obligated to make a market in securities assigned to them. Approximately half of the unlisted issues have assigned specialists. The BSE president testified before the ALJ that he was unable to predict whether a specialist would be provided for Ludlow.

BSE applied to the Commission for unlisted trading privileges in Ludlow common stock on April 23, 1974. ² Ludlow objected to the application and obtained a public hearing thereon. On May 6, 1976, the ALJ entered an initial decision granting BSE's application. The Commission affirmed the ALJ and granted the application on March 11, 1977, and Ludlow petitioned this court for review.

II

We hold, as a threshold matter, that Ludlow is properly before this court under section 25(a)(1) of the Act, 15 U.S.C. § 78y(a)(1) (1976), ³ notwithstanding several jurisdictional arguments advanced by the Commission.

A.

We find first that Ludlow has standing to seek review of the Commission's section 12(f)(2) order.

Ludlow established its "injury in fact," as required by Article III of the Constitution, by alleging an interest in maintaining access to the nation's equity capital markets. The possibility that unlisted trading on the BSE might destabilize trading in Ludlow shares on either the NYSE or the BSE, leading to impairment of Ludlow's ability to raise capital, is not so speculative as to render the case nonjusticiable. ⁴

The Commission argues, nevertheless, that Ludlow lacks standing because it is not within the "zone of interests" protected by section 12(f)(2). ⁵ The Commission correctly points out that section 12(f)(2) does not explicitly mention that the issuer is entitled to judicial review. See note 2 Supra. We do not believe that this excludes issuers from the zone of interests of section 12(f)(2). ⁶ We find it significant that under section 12(f)(5), 15 U.S.C. § 78L (f)(5) (1976), the issuer must be given notice of, and an opportunity to be heard on, a section 12(f)(2) application. ⁷ Section 12(f)(5) explicitly recognizes that "the issuer . . . ha(s) a bona fide interest" in the decision to grant unlisted trading privileges. This provision recognizes that unlisted trading might destabilize the market, See also S.Rep.No.75, 94th Cong., 1st Sess. 18-19 (1975), and that this would harm the issuer. Ludlow therefore falls within the "zone of interests" protected by section 12(f)(2).

B.

We find also that Ludlow has exhausted its requisite administrative remedies and that its claim is ripe for judicial review. Under these general headings, the Commission makes alternative, but related, assertions: first, that Congress specifically forbade review of a section 12(f)(2) order; and, second, that as a matter of discretion we should decline review at this time.

Each argument depends heavily on the existence of section 12(f)(4) of the Act, 15 U.S.C. § 78L (f)(4) (1976), ⁸ which provides a procedure for petitioning the Commission to suspend or terminate unlisted trading in a security after the Commission in a 12(f)(2) proceeding has authorized such trading. The issuer of a security (among others) is explicitly granted the right to petition for such review. Judicial review exists, we are told, only when the Commission denies a 12(f)(4) petition; the decision initially to authorize unlisted trading under section 12(f)(2) is said to be an interim, nonfinal, order.

We disagree. The granting of a section 12(f)(2) application does not become a provisional or tentative agency action merely because a Related inquiry may occur in a section 12(f)(4) proceeding once unlisted trading begins. A 12(f) (2) proceeding is independent of a 12(f)(4) proceeding because a different inquiry is made in each. In the 12(f)(2) hearing, the burden of proof is on the applicant for unlisted trading privileges to show that such privileges are "Consistent with the maintenance of fair and orderly markets and the protection of investors" (emphasis added). In a 12(f)(4) proceeding, on the other hand, the person objecting to unlisted trading has the burden of proving that terminating or suspending unlisted trading is "Necessary or appropriate in the public interest or for the protection of investors" (emphasis added).

The differences in the inquiry to be undertaken and the allocation of the burden of proof make it clear that judicial review of a section 12(f)(4) order is not the proper mechanism for determining whether the standards of section 12(f)(2) were properly applied when unlisted trading was initially authorized.

Congress, had it wished, could have permitted the issuer to intervene in the Commission's 12(f)(2) hearing and at the same time withheld the opportunity for judicial review of that decision. There is, however, nothing on the face of the statute that suggests this. The legislative history of section 12(f)(2) does indicate that Congress did not want an issuer to have exclusive power to control which markets may trade the issuer's stock. See S.Rep.No.75, 94th Cong., 1st Sess. 19 (1975). This does not mean, however, that an issuer is to have no role in the 12(f)(2) decision, ⁹ or that it is not free to appeal from an adverse Commission decision.

The order from which review is sought here was made after a formal hearing, an initial decision by an ALJ, and an appeal to the full Commission. The decision permitted unlisted trading in Ludlow shares to begin.

We hold for all the reasons stated above that the 12(f)(2) decision is a final order subject to review here under section 25(a)(1) of the Act, 15 U.S.C. § 78y(a)(1) (1976). ¹⁰

The Commission argues nevertheless that, as a matter of discretion, we should decline to review at this time its decision to grant unlisted trading privileges. Declining review is appropriate, we are told, because Ludlow is free to file a 12(f)(4) petition to suspend or terminate unlisted trading. The 12(f)(4) inquiry is preferable, according to the Commission, because at that time the record will reflect what actually has happened to the markets for Ludlow stock since unlisted trading began.

In light of the foregoing discussion, this argument must fail. We have held above that a 12(f)(2) order is a final order from which a party may seek judicial review. Section 25(a)(1) of the Act, 15 U.S.C. § 78y(a)(1) (1976). See note 3 Supra. To deny judicial review of the 12(f)(2) order, whether because of an alleged congressional prohibition or by reason of a discretion attributed to this court, equally deprives Ludlow of the opportunity to ensure that the Commission adhered to the standard and burden of proof peculiar to section 12(f)(2). The court does not have discretion to decline judicial review of an order under these circumstances. We therefore turn to the merits of Ludlow's petition.

III

The standard contained in section 12(f)(2) directs the Commission are to grant the application unless it finds the extension of unlisted trading privileges to be "consistent with the maintenance of fair and orderly markets and the protection of investors." Congress adopted this standard in the Securities Acts Amendments of 1975 (1975 Amendments), Pub.L. 94-29, § 8, 89 Stat. 97, 117-18. This language replaced the standard that had been in effect since 1964, under which the Commission was required to find that extending unlisted trading privileges...