S.E.C. v. Capital Counsellors, Inc., 404

• Decision Date: 03 March 1975
• Docket Number: D,No. 404,404
• Citation: 512 F.2d 654
• Court: U.S. Court of Appeals — Second Circuit
• Parties: Fed. Sec. L. Rep. P 94,999 SECURITIES & EXCHANGE COMMISSION, Plaintiff-Appellee, v. CAPITAL COUNSELLORS, INC., et al., Defendants. CONBOY, HEWITT, O'BRIEN & BOARDMAN, Appellant, v. Sydney B. WERTHEIMER, Receiver-Appellee. ocket 74-2023.

Page 654

512 F.2d 654

Fed. Sec. L. Rep. P 94,999

SECURITIES & EXCHANGE COMMISSION, Plaintiff-Appellee, v. CAPITAL COUNSELLORS, INC., et al., Defendants.

CONBOY, HEWITT, O'BRIEN & BOARDMAN, Appellant, v. Sydney B. WERTHEIMER, Receiver-Appellee.

No. 404, Docket 74-2023.

United States Court of Appeals Second Circuit.

Argued Jan. 15, 1975.

Decided March 3, 1975.

Hobart L. Brinsmade, Conboy, Hewitt, O'Brien & Boardman, and David J. Mountan, Jr., New York City, for appellant pro se.

Leon Leighton, New York City, for receiver-appellee.

Walter P. North, Senior Asst. Gen. Counsel, and Frederick L. White, S. E. C., for plaintiff-appellee.

Before WATERMAN, FRIENDLY and GURFEIN, Circuit Judges.

FRIENDLY, Circuit Judge:

This is an appeal from an order of Judge Cooper of the District Court for the Southern District of New York, denying the application of a law firm, Conboy, Hewitt, O'Brien & Boardman (Conboy, Hewitt), for payment of $20,000 in legal fees for services rendered Capital Counsellors, Inc., a broker-dealer, and Capital Advisors, Inc., an investment adviser, both registered with the Securities and Exchange Commission (SEC). Conboy, Hewitt also asked that its claim be granted a preference out of the assets of the two corporations as an administration expense.

The services in question were rendered between March 25, 1971, and June 17, 1971, in connection with the unsuccessful efforts of the corporate defendants and the individual defendants, J. Irving Weiss, president and director of Capital Counsellors, and his brother, Abraham B. Weiss, vice-president and director of both Capital Counsellors and Capital Advisors, in resisting legal action by the SEC in connection with alleged securities violations. In December 1970, the SEC undertook an investigation to determine whether the corporate defendants had committed any violations of securities laws. Conboy, Hewitt were retained to represent the defendants during the course of the investigation and any subsequent proceedings. Based upon this investigation, the SEC filed a complaint in the Southern District on March 25, 1971, ¹ alleging a number of violations, by both the corporate and the individual defendants, of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisors Act of 1940, and rules and regulations thereunder. The complaint asked for an injunction to prevent the defendants from engaging in the marketing of securities and for the appointment of a receiver. Defendants through their counsel, Conboy, Hewitt, vigorously opposed the requests. On the same date, March 25, Judge Cannella entered a temporary restraining order which, inter alia, froze corporate defendants' assets and restrained the defendants "from ... creating any contractual commitment of or in behalf of ... (the corporate defendants), except as may be directed or approved by any receiver or trustee appointed herein." On April 2, this TRO was modified and continued by consent in an order by Judge Cooper to permit the corporate defendants to continue operations on a limited basis. It provided in part:

The corporate defendants may retain and pay such employees as they deem necessary and disburse such funds as they deem necessary for office and other expenses provided that all expenses so incurred shall be paid for in full by the corporate defendants and shall in no way impair any funds owing to any public customers. All expenses herein shall be indemnified by deposits in the Indemnity Fund (elsewhere described in the order as the "Indemnity Account") by the individual defendants J. Irving Weiss and Abraham B. Weiss.

The order provided that the Indemnity Account was to be established as follows:

An escrow account entitled "Customer Indemnity Account" ("Indemnity Account") shall be established by the individual defendants J. Irving Weiss and Abraham B. Weiss for the benefit of all customers of the corporate defendants; funds deposited in the Indemnity Account under the circumstances herein described shall be obtained exclusively from the personal assets of the individual defendants ... and shall be used to indemnify the customers of the corporate defendants from any depletion of their securities, free credit balances and other assets in the hands of the defendants(,) their officers, directors, agents, servants, employees, attorneys, successors and assigns ....

The individual defendants were required to fund the Indemnity Account initially with $7,000. Thereafter "(e)ach succeeding required deposit shall be made prior to or simultaneous with the related expense item."

Another order of May 7 further modifying and extending the TRO, again by consent, deleted the above quoted provision that "office and other expenses" shall be indemnified by deposits in the Indemnity Fund and substituted the following:

The corporate defendants may retain and pay such employees as they deem necessary, and disburse such funds as they deem necessary for office and other expenses, all provided, however, that (i) no such defendant may incur any expense, or make any disbursement, unless for an activity herein permitted to be conducted by it and in accordance with the conditions and limitations, if any, upon such activity herein contained....

The order specified certain activities in which defendants were permitted to engage, but defendants were not expressly authorized to employ attorneys in connection with the SEC's complaint and they never sought approval of their retention of appellants from the fiscal agent, who was appointed by the court to exercise wide-ranging power over the assets and operations of the corporate defendants, including power over the employment of personnel. The TRO as modified remained in effect until Sydney B. Wertheimer, the fiscal agent, was appointed receiver in Judge Cooper's order of June 17, as was well known by appellants, who participated in the negotiations leading to the two modifications permitting interim operation of some of the corporate defendants' activities. In his opinion of June 11, granting the SEC's application for a preliminary injunction and for appointment of a receiver to administer the corporate defendants' assets, Judge Cooper found that the SEC had made a sufficient showing that defendants had engaged in the offer and sale of unregistered securities and in doing so had "failed to truthfully inform investors of the true costs and substantial risks" involved and had "failed to deal fairly and honestly with their customers," thereby violating §§ 5(a)& (c) and 17(a) of the Securities Act, § 10(b) of the Securities Exchange Act, and Rule 10b-5. SEC v. Capital Counsellors, Inc., 332 F.Supp. 291 (S.D.N.Y.1971).

Appellants applied for the granting of attorneys' fees on a preferred basis on October 25, 1971. In an opinion of May 22, 1974, Judge Cooper denied the application in all respects. He found that he could resolve the issue presented to him "by the application of the reasoning in a recent decision" in this circuit, SEC v. Alan F. Hughes, Inc., 481 F.2d 401 (2 Cir.), cert. denied, 414 U.S. 1092, 94 S.Ct. 722, 38 L.Ed.2d 549 (1973). In that case attorneys for defendant, a registered broker-dealer charged by the SEC with violating provisions of the Securities Exchange Act of 1934, sought to recover, as a first priority, their claim for attorneys' fees in assisting defendant in its unsuccessful effort to resist appointment of a trustee for liquidation under § 5(b)(3) of the Securities Investor Protection Act of 1970, 15 U.S.C. § 78eee(b)(3). Besides noting that the attorneys' claim did not conform with the compensation standards of any provision of the Securities Investor Protection Act, we dismissed appellants' constitutional claims and noted in any event that "the analogy to the Bankruptcy Act is compelling." Id. 481 F.2d at 403. Legal services in resisting a bankruptcy petition are not compensable under that Act. See, e. g., Randolph v. Scruggs, 190 U.S. 533, 539, 23 S.Ct. 710, 47 L.Ed. 1165 (1903); In re Evenrod Perfumer, Inc., 67 F.2d 878 (2 Cir. 1933), cert. denied sub nom. Mintz v. Irving Trust Co., 291 U.S. 671, 54 S.Ct. 455, 78 L.Ed. 1060 (1934); In re Garrett Road Corp., 256 F.Supp. 709, 713 (E.D.Pa.1966). Acknowledging that Hughes involved an interpretation of the Securities Investor Protection Act, § 6(c)(1) of which we held to have incorporated § 64(a) of the Bankruptcy Act, 481 F.2d at 403, the court below nevertheless found the reasoning of Hughes "equally applicable" to the case before it. Indeed, the court considered this reasoning to be a fortiori applicable since, while bankruptcy may be the fate of an individual who simply handles his financial affairs ineptly or is the victim of misfortune, defendants here perpetrated a fraud on investors.

The court therefore refused to permit defendants "to impose the burden of defending themselves upon customers and other creditors who have already suffered losses in excess of 4 million dollars." It acknowledged that "where prosecution or defense of an action under the federal securities laws has been in furtherance of the purpose of those laws-protection of the public investor-then the parties bearing the costs of such prosecution or defense are entitled to reimbursement." In the instant case, however, it found that "defendants' opposition to the SEC application in no way furthered the interests of their public investors." It also acknowledged that "the professional services rendered were of high order and deserving of the legal fees requested," but it found no reason to transfer the burden for payment to the customers when appellants had failed to obtain adequate assurance of payment other than through a successful defense of the action.

Conboy, Hewitt insist that the historical practice of the courts has been to award counsel fees, in the proper exercise of discretion, for services rendered in opposing the appointment of a receiver. They call our attention to a number of...