SECURITIES AND EXCHANGE COM'N v. National Securities, Inc.

• Citation: 252 F. Supp. 623
• Decision Date: 14 February 1966
• Docket Number: Civ. No. 5466 Phx.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. NATIONAL SECURITIES, INC., a corporation, National Life & Casualty Insurance Company, a corporation, Robert H. Wallace, Robert C. Bohannan, Jr., Arthur W. Saffert, Ted Wilkins, John S. Barrett, Joseph B. Setter, Breeferd W. Large, Jr. and Producers Life Insurance Company, a corporation (also known as National Producers Life Insurance Company), Defendants.
• Court: U.S. District Court — District of Arizona

252 F. Supp. 623

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. NATIONAL SECURITIES, INC., a corporation, National Life & Casualty Insurance Company, a corporation, Robert H. Wallace, Robert C. Bohannan, Jr., Arthur W. Saffert, Ted Wilkins, John S. Barrett, Joseph B. Setter, Breeferd W. Large, Jr. and Producers Life Insurance Company, a corporation (also known as National Producers Life Insurance Company), Defendants.

Civ. No. 5466 Phx.

United States District Court D. Arizona.

February 14, 1966.

Arthur E. Pennekamp, W. Stevens Tucker and F. E. Kennamer, Jr., Attorneys, SEC, San Francisco, Cal., for plaintiff.

Lewis, Roca, Scoville, Beauchamp & Linton, by John P. Frank, Phoenix, Ariz., for defendants National Securities, Inc. and National Life & Casualty Ins. Co., Wallace, Bohannan, Saffert, Wilkins, Barrett, Setter, Large and Producers Life Ins. Co.

MATHES, District Judge.

The cause having come before the Court upon defendants' motion for judgment on the pleadings or, in the alternative, for summary judgment; and the motion having been submitted for decision upon the record and briefs on file; and it appearing to the Court that:

1. A motion for judgment on the pleadings under Rule 12(c) of the Federal Rules of Civil Procedure raises the identical issue posed by a motion under Rule 12(b) (6), namely, whether the complaint states a claim upon which relief can be granted see: Friedman v. Washburn Co., 145 F.2d 715 (7th Cir. 1944); Art Metal Construction Co. for Use of McCloskey & Co. v. Lehigh Structural Steel Co., 116 F.2d 57 (3rd Cir. 1940); 1A Barron & Holtzoff, Federal Practice & Procedure § 359, p. 398;

2. Plaintiff's Amended and Supplemental Complaint alleges violations of § 10(b) of the Securities Exchange Act of 1934 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder 17 CFR 240.10b-5, arising from defendants' use of the mails in the solicitation of proxies for a proposed consolidation and reorganization of two stock insurance companies; the gist of the charge being that the solicitation material so mailed allegedly contained positive misrepresentations of material facts, and also failed to state material facts necessary to make the statements therein not misleading in light of the circumstances under which they were made;

3. The complaint prays for injunctive relief, and also demands:

"That the Court enter a decree requiring and compelling the defendants and each of them to take all actions and measures which are necessary to rectify and correct the consequences of the wrongful and unlawful conduct of defendants as specified above and to restore Producers Life, National Life, their stockholders and the defendants to the status and economic condition which they occupied prior to April 27, 1964.

"That the Court enter a decree requiring and compelling the defendants and each of them to make an accounting of the extent to which their actions and the actions of the selling directors in violation of Section 10(b) of the Act, 15 U.S.C. § 78j(b), and Rule 17 CFR 240.10b-5, and in derogation of the rights and interest of the stockholders of Producers Life, have resulted in damage to such stockholders, and the extent to which the defendants have been unjustly enriched at the expense of such stockholders; and that, by suitable decree of the Court, the respective equities of the defendants and the stockholders of Producers Life be arranged and adjusted on a fair and equitable basis, including, if warranted on the basis of the accounting made by the defendants, the subordination of the stock interests and other equities of National Securities in National Producers to the interests of those stockholders whose equities have been diminished by reason of the unlawful and wrongful conduct of the defendants.

"That the Commission may have all further relief that the Court may deem just, equitable, and necessary in the circumstances";

4. The acts complained of would fall within the prohibitions of the proxy-solicitation-anti-fraud provision of § 14 of the 1934 Act 15 U.S.C. § 78n, as implemented by Rule 14-9 17 CFR 240. 14a-9, but for the fact that the stock of the insurance companies involved has never been registered on any national securities exchange;

5. Not until sometime during 1966 will the coverage of § 14 be extended, by virtue of the act of August 20, 1964 78 Stat. 569, to any corporation similarly situated to the insurance companies involved in this action; and then only if not exempted by new § 12(g)(2)(G) of the 1934 Act 15 U.S.C. § 78l(g)(2)(G) which excludes "any security issued by an insurance company" provided the insurance company is subject to certain defined State regulation;

6. The legislative history of this new § 12(g)(2)(G) exemption includes, inter alia, the following:

"This * * * amendment was adopted following testimony by a number of State insurance commissioners and representatives of stock insurance companies who unanimously opposed the subjecting of these insurance companies to the jurisdiction of the Securities and Exchange Commission in addition to the jurisdictions of the various State commissioners. Further, these witnesses opposed departure by the bill from the doctrine embodied in the McCarran Act that the regulation of insurance companies be left to the States." House Report No. 1418, May 19, 1964; 1964 U.S. Code Cong. and Admin.News 3022;

7. Even if it be assumed that § 10(b) would otherwise be applicable to proxy solicitations but see Borak v. J. I. Case Co., unreported in the District Court, 317 F.2d 838, 846-847 (7th Cir. 1963), aff'd on other grounds, sub nom. J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), and that a shareholder-approved corporate consolidation and reorganization is a "purchase or sale" of securities within the meaning of § 10(b) and Rule 10b-5 compare H. L. Green Co. v. Childree, 185 F.Supp. 95 (S.D.N.Y.1960), and Voege v. American Sumatra Tobacco Corp., 241 F.Supp. 369 (D.Dela.1965), with National Supply Co. v. Leland Stanford Jr. University, 134 F.2d 689 (9th Cir. 1943), and Sawyer v. Pioneer Mill Co., 190 F.Supp. 21 (D.Hawaii 1960), remanded 300 F.2d 200 (9th Cir. 1962), cert. den., 371 U.S. 814, 83 S.Ct. 24, 9 L.Ed.2d 55 (1962), there still remains the question of whether the McCarran Act 59 Stat. 33, 15 U.S.C. §§ 1011-1015 does not preclude the application in this case of § 10(b), as implemented by Rule 10b-5;

8. 15 U.S.C. § 1012(b) states, in part:

"No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance * * *.";

9. The law of Arizona requires that any proposed merger of stock insurance companies be submitted to the Director of Insurance for his approval in accordance with the criteria set forth in A.R.S. § 20-731, which reads as follows:

"A. A domestic stock insurer of any kind may merge or consolidate with another domestic or foreign stock insurer by complying with the provisions of general law governing the merger or consolidation of stock corporations formed for profit, but subject to subsection B

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