Securities and Exchange Commission v. McGarry
| Decision Date | 27 July 1944 |
| Docket Number | No. 11800.,11800. |
| Citation | 56 F. Supp. 791 |
| Parties | SECURITIES AND EXCHANGE COMMISSION v. McGARRY et al. |
| Court | U.S. District Court — District of Colorado |
Edward H. Cashion, of Philadelphia, Pa., John L. Geraghty and Alec J. Keller, both of Denver, Colo., and Ellwood L. Englander, of Philadelphia, Pa., for plaintiff.
Charles T. Mahoney and William H. Scofield, both of Denver, Colo., for W. E. McGarry and Industrial Loan Corporation, respondents.
John R. Wolff, of Boulder, Colo., for Commonwealth Industrial Bank.
The Securities and Exchange Commission on April 27, 1944, during the progress of an investigation pursuant to its powers under § 20(a) of the Securities Act of 1933, 15 U.S.C.A. § 77t(a), and the power conferred upon it by § 19(b) of the said Act, 15 U.S.C.A. § 77s(b), entered an order which set forth (par. 2 thereof), that information received tended to show that respondents W. E. McGarry and Industrial Loan Corporation from May, 1941, to June, 1943, sold and delivered to members of the investing public certain securities issued by the respondent corporations; that in the sale of these securities certain false and misleading statements had been made, and that the mails and means and instruments of transportation or communication in interstate commerce had been used; and such acts if true tended to show that W. E. McGarry and Industrial Loan Corporation violated §§ 5(a) and 17(a) of the Securities Act of 1933, 15 U.S.C.A. §§ 77e(a) and 77q(a). The order further designated and empowered certain of its officers and employees named therein to subpoena witnesses, compel their attendance, take evidence and require the production of any books, papers, correspondence or other records deemed relevant or material to the inquiry, and to perform all duties in connection therewith as authorized by law.
In accordance therewith subpoenas duces tecum were issued and served, directing the respondents to produce certain designated books and records. This the respondents failed to do and advised the Commission that it would not do so unless required by court order. Thereafter this court issued an order directing respondents to show cause why they should not comply with said subpoenas, to which respondents filed response. The respondent McGarry now states he will comply with any lawful order of the court. The Industrial Loan Corporation raises the sole objection that a corporation cannot be subpoenaed as a witness. The Commonwealth Industrial Bank makes the same objection, and in addition that:
"said application states insufficient facts to authorize applicant to conduct an inquisition into the books and affairs and records of said respondent corporation and that * * * said subpoena * * * is unauthorized by the Securities Act of 1933 * * * and beyond the power and jurisdiction of said applicant".
The record discloses that the two corporations are required only to produce certain records and documents. The respondents argue this cannot be done. This question can be quickly disposed of. Essgee Company v. United States, 262 U.S. 151, 43 S.Ct. 514, 67 L.Ed. 917, holds a corporation is not protected by the Fourth and Fifth Amendments from producing its books and records before a Federal grand jury engaged in investigating its conduct in relation to Federal criminal laws, the Court citing Wilson v. United States, 221 U.S. 361, at page 382, 31 S.Ct. 538, at page 545, 55 L.Ed. 771, Ann.Cas.1912D, 558, in which case the Supreme Court points out that books and papers of a corporation which has not been created as a mere instrumentality of government, but by voluntary agreement by and for the benefit of a group of individuals taking advantage of the corporate form of organization permitted, that when the Government demands the examination of its books —
Further, the Essgee case, supra, 262 U. S. at page 155, 43 S.Ct. at page 516, 67 L. Ed. 917, says:
"`This is involved in the reservation of the visitorial power of the state, and in the authority of the national government where the corporate activities are in the domain subject to the powers of Congress.'"
Citing Hale v. Henkel, 201 U.S. 43, 26 S.Ct. 370, 50 L.Ed. 652—the leading case cited by the respondents.
Turning to the Henkel case, supra, 201 U.S. at page 75, 26 S.Ct. at page 379, 50 L.Ed. 652, we find this statement:
"It would be a strange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not, in the exercise of its sovereignty, inquire how these franchises had been employed, and whether they had been abused, and demand the production of the corporate books and papers for that purpose."
Further at page 75 of 201 U.S., at page 379 of 26 S.Ct., 50 L.Ed. 652, the Court says the corporation having been chartered under the law of New Jersey, such a franchise "* * * must also be exercised in subordination to the power of Congress to regulate such commerce interstate, and in respect to this the general government may also assert a sovereign authority to ascertain whether such franchises have been exercised in a lawful manner, with a due regard to its own laws." The Court then points out (201 U.S. at page 75, 26 S.Ct. at page 379, 50 L.Ed. 652), that the corporation being subject to a duel sovereignty, the Federal Government possesses the same right to see that its own laws are respected as the state would have with respect to the special franchises vested in it by the laws of the state, saying:
"The powers of the general government in this particular in the vindication of its own laws are the same as if the corporation had been created by an act of Congress."
On the general question involved Endicott Johnson Corp. v. Perkins, 317 U. S. 501, 63 S.Ct. 339, 87 L.Ed. 424, is decisive, the Court there holding that the subpoena power delegated by the Walsh-Healey Public Contracts Act is clearly within the limits of congressional authority. The subpoena power there discussed is similar to that found in the Act in question here and that granted by Congress to and exercised by many administrative tribunals.
It appears in the Commission's application that it ordered this investigation to determine whether the Industrial Loan Corporation and W. E. McGarry had violated certain provisions of the Securities Act of 1933 set out in the Commission's order. It further appears that the Commission's staff have information which tends to show that McGarry and the Industrial Loan Corporation sold securities including "$20 par value stock of Commonwealth Industrial Bank" to members of the public.
The Commission's order further discloses that in the sale of said stock the said parties made certain misrepresentations as to the value of the Commonwealth Industrial Bank stock.
By analogy with the Endicott Johnson case, supra, the matter which the Commission here is investigating is an alleged violation of the Securities Act, which...
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