Oklahoma-Texas Trust v. SECURITIES AND EXCH. COM'N.

• Decision Date: 05 January 1939
• Docket Number: No. 1641.,1641.
• Parties: OKLAHOMA-TEXAS TRUST v. SECURITIES AND EXCHANGE COMMISSION.
• Court: U.S. Court of Appeals — Tenth Circuit

100 F.2d 888 (1939)

OKLAHOMA-TEXAS TRUST v. SECURITIES AND EXCHANGE COMMISSION.

No. 1641.

Circuit Court of Appeals, Tenth Circuit.

January 5, 1939.

Elmer J. Lundy, of Tulsa, Okl. (Rupert F. Bippus, of Chicago, Ill., Poe, Lundy & Morgan, of Tulsa, Okl., and Bippus, Rose, Burt & Pierce, of Chicago, Ill., on the brief), for petitioner.

Lewis M. Dabney, Jr., of Washington, D.C., and O. John Rogge, of Chicago, Ill. (Chester T. Lane, Herbert B. Cohn, and Raoul Berger, all of Washington, D. C., on the brief), for respondent.

Before LEWIS, PHILLIPS, and WILLIAMS, Circuit Judges.

PHILLIPS, Circuit Judge.

On December 7, 1935, the Oklahoma-Texas Trust,¹ an express trust, was organized under the laws of Oklahoma, for the purpose of engaging in the business of acquiring, owning, and operating oil and gas leases. A. J. Diffie, W. E. Brown, H. I. Shanks, and V. H. Van Horn were named as trustees in the declaration of trust. It authorized and directed the trustees to issue 107,000 participating interests or units, to offer such units to the general public at a price of $10 per unit, and to allow a commission or discount of $1.50 per unit to dealers, distributors, or underwriters.

On December 12, 1935, the Trust filed with the Securities and Exchange Commission a registration statement covering the 107,000 units. The statement became effective February 19, 1936, pursuant to Section 8(a) of the Securities Act of 1933, as amended, 15 U.S.C.A. § 77h(a).

The first public offering of the units was made by the issuer on February 24, 1936. On January 30, 1937, approximately 1307 units, being all of the units remaining in the hands of the issuer, were transferred to a dealer. On February 11, 1937, 4318 units remained in the hands of dealers.

On November 18, 1936, the Commission advised the Trust by telegram that a preliminary investigation was being made under Section 8(e) of the Act, 15 U.S.C.A. § 77h(e), to determine whether a stop order should issue under Section 8(d) of the Act, 15 U.S.C.A. § 77h(d). Notwithstanding this notice, the Trust continued to offer its securities to the public. On January 8, 1937, the Commission by telegram notified the Trust of a hearing to be held on February 9, 1937. The hearing was commenced on the latter date. At that time, attorneys for the Trust advised the examiner and the attorneys for the Commission that the entire issue of units had been sold by the issuer. Hearings were completed on February 27, 1937. The examiner filed his report on March 30, 1937.

On April 12, 1937, the Trust filed a motion to dismiss the proceeding, predicated on the ground that the trustees had sold all the units comprising the issue and were no longer using the mails or facilities of interstate commerce in the sale of securities and, therefore, the purposes of the registration statement had been fully served and the Commission had lost jurisdiction to issue a stop order.

On June 11, 1937, the Trust filed its verified application for withdrawal of the registration statement in which it was stated that all the units sold to dealers had been resold by the dealers to investors. The application to withdraw was predicated on the ground that it had fully served its purposes in that all the units had been disposed of by the issuer and the dealers and had acquired an exempt status under the provisions of Section 4 of the Securities Act of 1933, as amended, 15 U.S.C.A. § 77d.

On September 23, 1937, the Commission denied the motion to dismiss and the application to withdraw the registration statement, made its findings of fact, and rendered its opinion on the merits. It found that the registration statement was false and misleading in certain particulars and entered a stop order suspending the effectiveness of the registration statement.

The Trust filed this petition to review the Commission's order under Section 9(a) of the Securities Act of 1933, 15 U.S.C.A. § 77i (a).

I. The Constitutionality of the Act.

The Trust contends that the Securities Act is unconstitutional for the reason that the transportation and sale of securities is not interstate commerce.

In the Lottery Cases, 188 U.S. 321, 345, 23 S.Ct. 321, 322, 47 L.Ed. 492, the Supreme Court said:

"What is the import of the word `commerce' as used in the Constitution? It is not defined by that instrument. Undoubtedly, the carrying from one state to another by independent carriers of things or commodities that are ordinary subjects of traffic, and which have in themselves a recognized value in money, constitutes interstate commerce."

While securities are mere evidences of obligations to pay money or of rights to participate in earnings and distribution of corporate, trust, and other property and are mere choses in action, nevertheless in modern commercial intercourse they are sold, purchased, delivered, and dealt with the same as tangible commodities and other ordinary articles of commerce. The mails and the facilities of interstate commerce are commonly used to effectuate their sale and transfer and we have no doubt that they should be regarded as subjects of interstate commerce and transportation.²

In Electric Bond & Share Co. v. Securities & Exch. Commission, 303 U.S. 419, 442, 58 S.Ct. 678, 686, 82 L.Ed. 936, 115 A. L.R. 105, the court said:

"When Congress lays down a valid rule to govern those engaged in transactions in interstate commerce, Congress may deny to those who violate the rule the right to engage in such transactions. Champion v. Ames, 188 U.S. 321, 23 S.Ct. 321, 47 L.Ed. 492; United States v. Delaware & Hudson Co., 213 U.S. 366, 415, 29 S.Ct. 527, 53 L. Ed. 836; Brooks v. United States, 267 U. S. 432, 436, 437, 45 S.Ct. 345, 69 L.Ed. 699, 37 A.L.R. 1407; Gooch v. United States, 297 U.S. 124, 56 S.Ct. 395, 80 L.Ed. 522; Kentucky Whip & Collar Co. v. Illinois Central R. Co., 299 U.S. 334, 335, 346, 347, 57 S.Ct. 277, 279, 280, 81 L.Ed. 270. And while Congress may not exercise its control over the mails to enforce a requirement which lies outside its constitutional province, when Congress lays down a valid regulation pertinent to the use of the mails, it may withdraw the privilege of that use from those who disobey. Champion v. Ames, supra; Lewis Publishing Co. v. Morgan, 229 U.S. 288, 33 S.Ct. 867, 57 L.Ed. 1190."

The Securities Act of 1933, as amended, 15 U.S.C.A. § 77a et seq., does not attempt to regulate or prohibit the sale of securities in intrastate commerce. It merely provides as a condition precedent to the use of the mails and the facilities of interstate commerce that the issuer file a registration statement containing a true and complete statement of the information required by Section 7 of the Act, 15 U.S. C.A. § 77g, in order to protect the public against imposition and fraud in the sale of securities through the use of the mails or the facilities of interstate commerce; and as a deterrent against the filing of a false or misleading statement, subjects the persons responsible for such a statement or who participate in the making thereof to civil liabilities in favor of any person acquiring the security without knowledge of the false or misleading character thereof. See Section 11 of the Act, 15 U.S.C.A. § 77k. It is well settled that Congress may enact reasonable regulations to prevent the mails and the facilities of interstate commerce from being used as instruments of fraud and imposition. We conclude that the Act is within the constitutional powers of Congress.³

2. The Motion to Dismiss and the Application to Withdraw.

15 U.S.C.A. § 77h(d) reads in part as follows:

"If it appears to the Commission at any time that the registration statement includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, the Commission may, after notice * * * and after opportunity for hearing * * * issue a stop order suspending the effectiveness of the registration statement." (Italics ours.)

A stop order serves two purposes: First, it suspends the effectiveness of the registration statement and the license of the issuer to use the mails and the facilities of interstate commerce for the purposes recognized by the act; second, it operates as a warning to the investing public that the Commission has found that the statement is untrue or misleading and, therefore, unreliable.

Transactions by a dealer within one year after the first date upon which the security was bona fide offered to the public by the issuer are not exempted from the provisions of Section 5 of the Act, 15 U. S.C.A. § 77e. See § 77d(1) and H.R.Rep. 85, 73d Cong. 1st Sess.1933, p. 16. On February 11, 1937, 4318 units were still in the hands of dealers and they did not acquire an exempt status until February 23, 1937. Hence, the ground set up in the motion, that all the securities had passed from the hands of the issuer, was an insufficient basis upon which to challenge the jurisdiction of the Commission to issue a stop order.

The regulation of the Commission with respect to withdrawal of the registration statement reads:

"Any registration statement or any amendment thereto may be withdrawn upon the application of the registrant if the Commission, finding such withdrawal consistent with the public interest and the protection of investors, consents thereto. The application for such consent shall be signed by the registrant and shall state fully the grounds upon which made. The fee paid upon the filing of the registration statement will not be returned to the registrant. The papers comprising the registration statement or amendment thereto shall not be removed from the files of the Commission but shall be plainly marked with the date of the giving of such consent, and in the following manner: `Withdrawn upon the request of the registrant, the Commission consenting thereto.'"

In Jones v. Securities & Exch. Commission, 298 U.S. 1, 22, 56 S.Ct. 654, 660, 80 L....