Securities and Exchange Commission v. Quing N. Wong, Civ. No. 375-65.

• Decision Date: 31 May 1966
• Docket Number: Civ. No. 375-65.
• Citation: 252 F. Supp. 608
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. QUING N. WONG et al., Defendants, Puerto Rico Capital Corporation, a nominal defendant.
• Court: U.S. District Court — District of Puerto Rico

252 F. Supp. 608

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. QUING N. WONG et al., Defendants, Puerto Rico Capital Corporation, a nominal defendant.

Civ. No. 375-65.

United States District Court D. Puerto Rico.

April 6, 1966.

Motion to Amend Order Denied May 31, 1966.

Philip A. Loomis, Jr., Walter P. North, Meyer Eisenberg, Roy Nerenberg, Edward T. O'Dell, Jr., Washington, D. C., for plaintiff.

Baker & Woods, San Juan, P. R., Raichie, Moore, Banning & Weiss, Buffalo, N. Y., McConnell, Valdés & Kelley, Nachman & Feldstein, A. J. Amadeo Murga, San Juan, P. R., for defendants.

CANCIO, District Judge.

This case is now before the consideration of this Court on a motion by defendant Thomas R. Gómez to dismiss for lack of jurisdiction. This co-defendant contends that the United States District Court for the District of Puerto Rico lacks jurisdiction over the subject matter of this complaint under sections 80a-35, 80a-43 and 78aa, Title 15 U.S.C. This position is predicated on the theory that jurisdiction is granted under the Act to "District Courts of the United States, United States Courts of any Territory, or to a United States Court for any place of district jurisdiction in the United States," and that the United States District Court for the District of Puerto Rico does not fall under any one of these classifications.

Defendant's first argument is to the effect that this Court can not be considered a District Court of the United States created under Article III of the Federal Constitution. He further argues that, since 1952, Puerto Rico is no longer a territory nor a possession of the United States. Lastly defendant takes the position that Puerto Rico is not "a place subject to the jurisdiction of the United States" since Puerto Rico is sovereign in its internal matters and the government is the product of the will of the people.

These arguments can be disposed of readily. Section 2(a) (37) of the Investment Company Act of 1940 declares that "`State' means any state of the United States, the District of Columbia, Puerto Rico, the Canal Zone, the Virgin Islands, or any other possession of the United States." It is also provided in 48 U.S.C. § 734 that "the statutory laws of the United States not locally inapplicable, except as hereinbefore or hereinafter otherwise provided, shall have the same force and effect in Puerto Rico as in the United States * * *."

There can be no doubt that prior to the year 1952 Congress had the power to include Puerto Rico, then an unincorporated territory, under the jurisdiction of the Securities and Exchange Commission. During all of the legislative and constitutional processes of 1950-52 which led to the creation of the Commonwealth of Puerto Rico, there was no indication whatever that the parties to the proposed compact^* intended to divest Congress of this power; nor does defendant Gómez claim that today Congress lacks authority to legislate for Puerto Rico in the manner it did in 1940. Hence what remains before us is not a constitutional problem but a question of legislative will and statutory construction.

When conferring jurisdiction to the courts under this statute, as well as under all statutes administered by the Securities and Exchange Commission, Congress used as all encompassing a term as possible; that is to say, Congress intended to exert all the power to grant jurisdiction that it had under the Constitution. There is no indication that it has changed its mind since.

The legislative record of Law 600 and all that was done in the United States and in Puerto Rico until the Constitution was proclaimed on July 25, 1952 is most clear in this respect. None of the parties to the compact intended to amend or repeal sub silentio the then existing laws of the United States applicable to Puerto Rico when, as in this case, Congress, under the agreement, retained its power to legislate on those matters as theretofore. The Puerto Rican Federal Relations Act does not contradict the applicability of this Act to Puerto Rico. On the contrary, it provides generally for such application. 48 U.S.C. § 863. Thus, there can be no question that this Court has jurisdiction in the matter before it.

The Court being fully advised on the premises, and after having heard the argument of counsel and read the briefs by them submitted, finds that the motion of defendant Thomas R. Gómez to dismiss for lack of jurisdiction is not well taken and should be, and hereby is, dismissed.

It is so ordered.

It is further ordered, adjudged and decreed that the defendant, Thomas R. Gómez, Jr., shall answer the complaint in this action forthwith.

On Defendant's Motions

Plaintiff Securities and Exchange Commission ("Commission") filed a complaint in this Court alleging inter alia, that defendant Scott and other officers or directors of Puerto Rico Capital Corporation ("PRCC") a registered investment company, had violated: (1) the anti-fraud provisions of the Securities Exchange Act (Section 10(b) and Rule 10(b) (5) thereunder, 15 U.S.C. § 78j(b) and 17 CFR 240.10b-5, respectively); and (2) certain provisions of the Investment Company Act which (a) forbid transactions between (or joint ventures involving) a registered investment company and its affiliates (Sections 17(a) and 17(d), 15 U.S.C. § 80a-17(a) and 80a-17(d) and (b) prohibit the conversion of the assets of a registered investment company (Section 37, 15 U.S.C. § 80a-36). The complaint seeks, inter alia, (1) injunctions against "further violations" of these sections of the federal securities laws, (2) an accounting for the losses thereby allegedly incurred by PRCC and restitution to PRCC by the defendants, and (3) an injunction pursuant to Section 36 of the Investment Company Act (15 U.S.C. § 80a-35) prohibiting defendants from serving as officers or directors of a registered investment company because of their alleged "gross abuse of trust."

Defendant Scott has moved to strike the complaint, the captions, and various paragraphs and counts thereof, and also to dismiss the complaint in as much as he is concerned. These motions came on for hearing before this Court, and on the basis of the motions, the oral argument, the pleadings and the memoranda submitted by the parties, defendant Scott's motions are denied except as hereinafter expressly provided and the defendant Scott is ordered to answer the complaint forthwith.

Defendant's motion to strike or dismiss attacks the complaint on grounds of immateriality, prejudice, the failure to state a claim, and lack of standing of plaintiff to sue. As set out below, the Court finds that the allegations of the Commission's complaint state a claim against defendant Scott upon which relief can be granted, that the Commission has standing to assert the claims alleged and to seek the equitable relief requested, that the complaint stands as a unit and that each count and paragraph thereof, when read as a part of the whole, were properly included and, therefore, that no count or paragraph should be stricken.

Defendant Scott contends that the complaint is deficient with respect to the allegations of a violation of Section 10 (b) of the Securities Exchange Act and Rule 10(b) (5) thereunder, since it fails to allege that plaintiff (The Commission) is a defrauded purchaser or seller of the securities. Apparently defendant is confusing the requirements for a private suit involving the fraudulent purchase or sale of securities grounded on Section 10(b) and Rule 10(b) (5)¹ with the right of the Commission under Congressional mandate to enforce the provisions of the statute.

This is the case of a public agency enforcing public policy. The Commission does not have to engage in the purchase or sale of securities. In order to bring suit under the statutes which it has a duty to enforce, a regulatory agency need not be itself the victim. The Commission acts here under the authority of the Securities Exchange Act to protect the public and not to protect itself as an investor. Section 21(e) of the Securities Exchange Act permits the Commission to institute an action to enjoin violations of the provisions such as those allegedly involved here, or, similarly, any provision of the Act or the Rules thereunder, with no further allegations than that the defendants are engaged in acts and practices which have violated Section 10(b) or Rule 10(b) (5).

The complaint also states as a cause of action against the defendant an alleged "gross abuse of trust", in respect to PRCC, in violation of Section 36² of the Investment Company Act, 15 U.S.C. 80a-35. Defendant contends that he can not be enjoined under that Section because he believes that the person so charged must be acting or serving in such office at the time suit is instituted and he had resigned from his position as a director of PRCC prior to the institution of the action.

Defendant's proffered interpretation of Section 36, if adopted, would provide an easy escape from the intent of Congress in enacting this provision. Section 36 must have been intended to implement the policy and purposes of the Investment Company Act set out by the Congress in Section 1(b), 15 U.S.C. 80a-1(b), thereof:

"The policy and purposes of this title, in accordance with which the provisions of this title shall be interpreted, are to mitigate and, so far as is feasible, to eliminate the conditions enumerated in this section which adversely affect the national public interest and the interest of investors."

Section 1(b) (2) enumerates as one of the conditions adversely affecting the national public interest the organization, operation, or management of investment companies, or the selection of portfolio securities therefor in the interest of directors and officers, rather than in the investment company's own best interests. The complaint in the case at bar alleges that very activity. The statutory policy, therefore, does not support defendant's reading of Section 36.³

Moreover, defendant...