SECURITIES AND EXCHANGE COM'N v. Electric Bond & S. Co.

• Decision Date: 29 January 1937
• Citation: 18 F. Supp. 131
• Parties: SECURITIES AND EXCHANGE COMMISSION v. ELECTRIC BOND & SHARE CO. et al. (POWER SECURITIES CORPORATION et al., Interveners).
• Court: U.S. District Court — Southern District of New York

18 F. Supp. 131

SECURITIES AND EXCHANGE COMMISSION v. ELECTRIC BOND & SHARE CO. et al. (POWER SECURITIES CORPORATION et al., Interveners).

District Court, S. D. New York.

January 29, 1937.

COPYRIGHT MATERIAL OMITTED

John J. Burns, Gen. Counsel, Securities and Exchange Commission, of Washington, D. C., Robert H. Jackson, Asst. Atty. Gen., and Sp. Counsel, Securities and Exchange Commission, John J. Abt, Sp. Counsel, Securities and Exchange Commission, of Washington, D. C., and Benjamin V. Cohen and Thomas G. Corcoran, Sp. Assts. to Atty. Gen. (David Cobb, Joseph P. Cotton, Jr., of New York City, and Joseph Fanelli, Henry H. Fowler, Henry A. Herman, Norman L. Meyers, Malcolm Monroe, Nathaniel L. Nathanson, and Joseph L. Rauh, Jr., all of Washington, D. C., of counsel), for plaintiff.

Simpson, Thacher & Bartlett, of New York City (Thomas D. Thacher, John F. MacLane, Douglas A. Calkins, Walter E. Beer, Jr., and Richard H. Demuth, all of New York City, of counsel), for all defendants and intervening defendants.

Reid & Murphy and A. J. G. Priest, all of New York City (M. F. Millikan, of New York City, of counsel), for certain defendants.

MACK, Circuit Judge.

This is a suit in equity brought by Securities and Exchange Commission against Electric Bond & Share Company and certain subsidiaries, based upon the Public Utility Holding Company Act of 1935.¹ It seeks to enjoin defendants from violating any provision of section 4 (a) of the act (15 U.S.C.A. § 79d (a) unless they register pursuant to section 5 thereof (15 U.S.C.A. § 79e). While admitting in their answer that they come within the terms of these sections, are doing the acts thereby prohibited to an unregistered company, have not registered, and do not intend voluntarily so to do, defendants attack the constitutionality of the act and of each section thereof. By cross-bill with added cross-defendants, an injunction against the enforcement of the act is sought on like grounds of its unconstitutionality; furthermore, a declaratory judgment is asked for under the Federal Declaratory Judgment Act of 1934 (Jud. Code, § 274d, as amended, 28 U.S.C.A. § 400) of the constitutionality of the act and of each section thereof. Cross-defendants move for the dismissal of the cross-bill.

The action was originally brought against Electric Bond & Share Company (hereinafter called Bond & Share) and five of its intermediary holding companies, American Gas & Electric Company (American Gas), American Power & Light Company (American Company), Electric Power & Light Corporation (Electric Company), National Power & Light Company (National Company), and United Gas Corporation (United Company). These are all immediate subsidiaries of Bond & Share, with the exception of United Company, 7.18 per cent. of whose stock is owned by Bond & Share; but United Company is a subsidiary of Electric Company. Subsequently, leave was given to sixteen other holding companies in the Bond & Share system to intervene as defendants; seven were exempted from all duties and liabilities under the act as holding companies, pursuant to a rule of the commission, and two have ceased to be holding companies, by reason of their acquisition of all of the properties of their subsidiaries. Thus there remain in addition to the original six the following seven defendants, Power Securities Corporation (Power Company), a subsidiary of Electric Company, Lehigh Power Securities Corporation (Lehigh Company), a subsidiary of National Company, Utah Power & Light Company, a subsidiary of Electric Company, United Gas Public Service Company, a subsidiary of United Company, Houston Gulf Gas Company, a subsidiary of United Gas Public Service Company, Nebraska Power Company, a subsidiary of American Company, and Pacific Power & Light Company, a subsidiary of American Company. These last five named defendants are both operating and holding companies.

The cross-defendants who by stipulation were brought in, personally as well as in their official capacities, are Homer S. Cummings, Attorney General of the United States, James M. Landis, Robert E. Healy, George C. Mathews, and James D. Ross, members of the Securities and Exchange Commission, and James A. Farley, Postmaster General.

The facts in the case have been stipulated; where conclusions of fact have not been agreed upon, sufficient facts have been stipulated, wherever material, for the court to draw its own conclusions.

A brief statement of parts of the act will be helpful. Section 1 (15 U.S.C.A. § 79a) sets out the legislative findings upon which the stated policy of the act and the need for federal regulation of holding companies were based; it recites the uses made by them and their subsidiaries of the mails and the means and instrumentalities of interstate commerce, the abuses of holding company operations, and their effect on the interests of investors and consumers.

Section 2 (15 U.S.C.A. § 79b) defines the terms used in the act. Thereunder, "public utility company" is an electric utility company or a gas utility company. "Electric utility company," a company which owns or operates facilities used for the generation, transmission, or distribution of electric energy for sale. "Gas utility company," a company which owns or operates facilities used for the distribution at retail of natural or manufactured gas for heat, light, or power. "Holding Company" is defined as a company which owns, controls, or holds, with power to vote, 10 per cent. or more of the outstanding voting securities of a public utility company or holding company. Such a company may be declared not to be a holding company on a showing to the commission that it does not control and is not a device for controlling a public utility company or holding company. "Subsidiary company" of a holding company is a company, 10 per cent. or more of the outstanding voting securities of which are owned, controlled, or held with power to vote by that holding company or by a company which is a subsidiary of that holding company. "Holding-company system" is defined as a holding company together with all of its subsidiaries. Various exceptions and qualifications not here material are made relating to these and other definitions.

Section 3 (15 U.S.C.A. § 79c) specifies classes of holding companies which, with their subsidiaries, the commission is directed to exempt from the provisions of the act "unless and except insofar as it finds the exemption detrimental to the public interest or the interest of investors or consumers." Among these are holding companies with their subsidiaries, which are predominantly intrastate in character and confined to the one state in which all are organized.

Section 4 (a), 15 U.S.C.A. § 79d (a),² prohibits holding companies, unless registered under section 5 (15 U.S.C.A. § 79e) from making specified uses of the mails and instrumentalities of interstate commerce and from owning, controlling, or holding with power to vote any security of any subsidiary that does any of the specified forbidden acts. Plaintiff does not rely on section 4 (b), 15 U.S.C.A. § 79d (b), that requires any holding company which has publicly distributed by means of the mails or the channels of interstate commerce an issue of securities subsequent to January 1, 1925, to register under section 5 (15 U.S.C.A. § 79e) if such securities are still outstanding among investors in the several states.

Section 5 (a), 15 U.S.C.A. § 79e (a),³ provides for registration by holding companies by a form of notification to the commission, and section 5 (b, c, d), 15 U. S.C.A. § 79e (b, c, d),³ provides for the filing by registered companies of registration statements containing information concerning their capitalization, business, and relations with subsidiaries.

The other sections of the act apply in the main only to registered companies and their subsidiaries. Sections 6 and 7 (15 U.S.C.A. §§ 79f, 79g) provide for the regulation of the issuance and sale of securities of registered companies and the altering of the rights of holders of their outstanding securities. Sections 8, 9, and 10 (15 U.S.C.A. §§ 79h, 79i, 79j) deal with the regulation of the acquisition by registered companies or their subsidiaries of utilities and security assets. Section 11 (15 U.S.C.A. § 79k) provides for the simplification of registered holding company systems by the elimination after a certain date of holding companies above the second degree, and the requirement that each holding company system limit its operation to a single integrated public utility system, with various exceptions and limitations. Sections 12 and 13 (15 U.S.C.A. §§ 79l, 79m) provide for the regulation of intercompany transactions and service, sales, and construction contracts. In the administration of all of these provisions, the commission plays a large part through the requirement of the issuance of rules, and the conduct of administrative hearings. The other provisions of the act are for the most part regulations designed to facilitate the administration of the act in general, such as the keeping of records by registered companies, penalties for violations of the act, and various provisions for the enforcement of the act by the commission.

The first question for determination is whether, as plaintiff contends, the registration provisions, sections 4 (a) and 5 (15 U.S.C.A. §§ 79d (a), 79e), if inherently constitutional, may stand, regardless of the constitutionality of the other sections of the act, including the so-called "death sentence," section 11 (15 U.S.C.A. § 79k), thus obviating any consideration of the constitutionality of such other sections, so far as the bill and answer are concerned.

Defendants urge that the validity of the whole act must be determined before they may be enjoined from doing any of the acts enumerated in section 4 (a), or, practically speaking, before they may be compelled to register, for the alleged reason that the scheme of the act is such that...