Peoples Securities Co. v. Securities and Exchange Co.

• Decision Date: 20 April 1961
• Docket Number: No. 18300.,18300.
• Citation: 289 F.2d 268
• Parties: PEOPLES SECURITIES COMPANY, L. B. Hartgrove, Sr., Robert Macy Compton, Clifford Bryant Renegar, and Union Trust Company, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

289 F.2d 268 (1961)

PEOPLES SECURITIES COMPANY, L. B. Hartgrove, Sr., Robert Macy Compton, Clifford Bryant Renegar, and Union Trust Company, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 18300.

United States Court of Appeals Fifth Circuit.

April 20, 1961.

Jack Binion, Houston, Tex., Butler, Binion, Rice & Cook, Houston, Tex., of counsel, for petitioners.

Joseph B. Levin, Asst. Gen. Counsel, Thomas G. Meeker, Gen. Counsel, S. E. C., Washington, D. C., Walter P. North, Associate General Counsel, Meyer Eisenberg, Attorney, Securities and Exchange Commission, Washington, D. C., for respondent.

Before RIVES, BROWN and WISDOM, Circuit Judges.

WISDOM, Circuit Judge.

The sole question on this appeal is whether the Securities and Exchange Commission acted properly in denying an applicant's motion for withdrawal of its application for registration as a broker-dealer and for dismissal of the administrative proceeding on the application. The case turns on statutory construction and the applicability of Jones v. Securities and Exchange Commission, 1936, 298 U.S. 1, 56 S.Ct. 654, 80 L.Ed. 1015. We affirm.

The petitioners are (1) Peoples Securities Company, a Texas corporation, (2) L. B. Hartgrove, Sr., Robert Macy Compton, Clifford Bryant Renegar, officers, directors and controlling stockholders of Peoples, and (3) Union Trust Company, a stockholder of Peoples controlled by Hartgrove. Petitioners seek review of an order of the Securities and Exchange Commission, entered under authority of Section 15 of the Securities Exchange Act of 1934, as amended, 15 U.S.C.A. § 78o. The order (1) denied an application of Peoples for registration as a broker and dealer, (2) found Hartgrove, Compton, Renegar, and Union each a cause of the order denying registration, and (3) denied Peoples's motion to cancel or withdraw its application for registration and to dismiss the proceeding.¹ The Commission based its order on findings of willful violation of the statute.² These findings are not challenged.

The petitioners' contention may be broken down into two parts: (1) Peoples has the absolute right to withdraw its application any time before the effective date of the registration statement and, (2) under the language of the Exchange Act, the Commission is required to cancel the application since Peoples had ceased to do business and was dissolved as a corporation. Before discussing these points it is necessary to review the controlling statutory provisions.

I.

The purpose of the Securities Exchange Act of 1934 (Exchange Act),³ as stated in its preamble, is to "provide for the regulation of securities exchanges and of over-the-counter markets * * to prevent inequitable and unfair practices on such exchanges and markets". 48 Stat. 881. Section 15 deals with the regulation of the over-the-counter market. Section 15(a) requires brokers and dealers engaged in securities transactions on the over-the-counter market to register with the Commission. Section 15(b) of the Act provides that the Commission shall deny registration to a broker or dealer if the Commission finds that such denial is in the public interest and that the broker-dealer has willfully violated any provision of the Securities Act of 1933, 15 U.S.C.A. § 77a et seq. or of the Exchange Act of 1934, 15 U.S.C.A. § 78a et seq., or of any rule under them, or has willfully made or caused to be made a false or misleading statement in any application for registration or supplemental document.

Section 15A of the Exchange Act creates a medium for self-regulation of over-the-counter brokers and dealers. This section provides that national securities associations may be formed to supervise the conduct of their members under Commission registration. The only association registered under Section 15A is the National Association of Securities Dealers, Inc. (NASD). It is important here because NASD rules preclude a member from dealing with a non-member. Membership in NASD is therefore necessary for the profitable participation in underwritings and over-the-counter trading, since members may properly grant concessions, discounts, and other allowances only to other members. Under Section 15A(b) (4) of the Exchange Act, in the absence of the Commission's approval or direction, no broker or dealer may be admitted to or continued in membership in a registered securities association (the NASD), if the broker or dealer (or any partner, officer, director or controlling or controlled person of the broker or dealer) was a cause of an order of denial of registration.

The Securities Act of 1933 was an outgrowth of the Pecora investigation of abuses in the investment field. The Act is designed to protect investors against fraud and misrepresentation.⁴ By and large, the statute deals with the initial distribution of securities rather than with subsequent trading. Securities offered to the public through the mails or interstate commerce channels must be registered with the SEC by the issuer, and the registration statement must contain certain information, the disclosure of which is intended to protect the public against fraud. The function of the Commission is to assure that the statement is accurate and complete. The Exchange Act differs from the Securities Act primarily in that it applies to post-distribution trading. The Exchange Act has three basic purposes: to require dealers to disclose certain basic information to the investing public; to regulate the securities markets; and to control the amount of the nation's credit that goes into those markets. All stock exchanges must register with the SEC (unless exempted by the Commission), and no security may be listed on an exchange unless its issuer files an application for registration both with the exchange and with the SEC. The application contains information similar to that required by the Securities Act for new issues. Over-the-counter brokers and dealers must also register with the Commission, maintain records and file statements of financial condition.

The legislation accomplishes its aims by the requirement of registration and by an anti-fraud provision, enforceable by injunction and criminal sanctions. The anti-fraud provision, Section 17, applies whenever a security is sold by use of the mails or interstate commerce channels. The registration provision, Section 5, is designed to give investors adequate and accurate information in the form of a "registration statement" that is a public record for twenty days. Originally, this twenty-day period was to give the public an opportunity to inform itself; there were to be no sales during this time. Underwriters and dealers were to furnish prospective investors with a brochure based on the information in the registration statement. Although the basic pattern of the statute is still the same, the statute was amended in 1954 to permit certain kinds of offers (but not sales) during the twenty-day waiting period.

II.

Petitioners rely on Jones v. Securities and Exchange Commission, 1936, 298 U.S. 1, 56 S.Ct. 654, 663, 80 L.Ed. 1015, as authority for an applicant's absolute right to withdraw a registration application. In Jones the Supreme Court held that as a matter of right a registration statement under the Securities Act of 1933 may be withdrawn before its effective date, at least when no rights of investors are involved. The decision appears to give the registrant the power to terminate the Commission's jurisdiction to investigate the correctness and completeness of a statement.

The Jones case was one of the major defeats of New Deal legislation. In assailing the action of the Commission, Mr. Justice Sutherland, organ of the Supreme Court, compared the Commission's investigation to the `intolerable abuses of the Star Chamber". Mr. Justice Cardozo, dissenting, suggested, "Historians may find hyperbole in the sanguinary simile". The Jones decision has never been overruled. But history — or Congress — has indeed found the simile hyperbolic.⁵

Jones was engaged in selling oil royalties. He filed a registration statement with the Commission covering a proposed issue of participating trust certificates. The statement would have become effective at the end of twenty days. 48 Stat. 74, amended, 48 Stat. 905 (1934), 15 U.S. C.A. § 77a et seq. The Commission questioned the truth and sufficiency of his statement. The day before the registration would have become effective, the Commission instituted stop order proceedings and issued a subpoena duces tecum to Jones commanding him to appear and testify and to produce certain records at the hearing. He then appeared by counsel and attempted to withdraw his statement. The Commission refused to allow him to withdraw, in conformity with its regulation forbidding withdrawal without the Commission's consent and a finding that the withdrawal is "consistent with the public interest and the protection of investors⁶". The Supreme Court held that Jones had the right to withdraw his registration and the Commission had no power to continue with the investigation. The Court based its holding on the ground that the registration was not yet effective; consequently any further inquiry by the SEC would constitute a "fishing expedition". The Court analogized the right to withdraw the registration statement with the rights of plaintiffs in proceedings before the courts. The majority held that a stop order proceeding was analogous to a suit in equity for an injunction. Except where dismissal might prejudice the defendant, a plaintiff has the absolute right to dismiss his bill without prejudice; there was no prejudice, because the withdrawal produced the same result as a stop order. The Court did not decide the validity of the Commission's regulation, but found that public interest in the matter of Jones's withdrawal was non-existent because no investor would be prejudiced.

Knaves in the securities business have found that the shifting sands of legislation and...