Wolf Corporation v. Securities and Exchange Commission

• Decision Date: 14 February 1963
• Docket Number: No. 17355.,17355.
• Citation: 115 US App. DC 75,317 F.2d 139
• Parties: The WOLF CORPORATION, Appellant, v. SECURITIES AND EXCHANGE COMMISSION et al., Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

115 US App. DC 75, 317 F.2d 139 (1963)

The WOLF CORPORATION, Appellant, v. SECURITIES AND EXCHANGE COMMISSION et al., Appellees.

No. 17355.

United States Court of Appeals District of Columbia Circuit.

Argued December 21, 1962.

Decided February 14, 1963.

Mr. Arnold I. Burns, New York City, of the bar of the Court of Appeals of New York, pro hac vice, by special leave of court, with whom Mr. Milton E. Mermelstein, New York City, was on the brief, for appellant. Mr. Max Tendler, Washington, D. C., also entered an appearance for appellant.

Mr. Walter P. North, Associate General Counsel, Securities and Exchange Commission, of the bar of the Supreme Court of Michigan, pro hac vice, by leave of court, with whom Mr. Elwood L. Englander, Asst. General Counsel, Securities and Exchange Commission, was on the brief, for appellees. Mr. Robert L. McCloskey, Attorney, Securities and Exchange Commission, also entered an appearance for appellees.

Before WILBUR K. MILLER, DANAHER and BURGER, Circuit Judges.

BURGER, Circuit Judge.

The District Court denied a preliminary injunction sought by appellant to restrain the Securities and Exchange Commission from conducting a hearing growing out of a registration statement filed by appellant under the Securities Act of 1933, 15 U.S.C. § 77a et seq. The registration statement covered a proposed offering of stock and convertible debentures. More than seven hundred thousand shares of the same stock were and are now held by the public.

Appellant filed its registration statement with the Securities and Exchange Commission on January 26, 1962; it included a reservation, the consequence of which was to defer the effective date of registration.¹ Conversations between appellant's counsel and the Commission staff led to an amendment of the registration statement which was filed June 1, 1962.

On July 13, the Commission entered an order directing its staff to proceed with an investigation of the registration. Securities Act of 1933, §§ 8(e) and 20(a), 15 U.S.C. §§ 77h(e), 77t(a) and Securities Exchange Act of 1934, § 21(a), 15 U.S.C. § 78u(a). The investigation began on July 16 and continued until July 27, 1962. During the course of the investigation, on July 25, counsel for the Wolf Corporation orally informed the Commission of its intention to withdraw its registration statement and on August 6 submitted written notice of withdrawal. The Commission denied appellant's application to withdraw the registration statement.²

On September 24, 1962, the Commission ordered a hearing to be held to determine whether a stop order should issue against appellant's registration statement.³ The hearing which was scheduled to begin on October 8, was postponed to October 22, by agreement of the parties. On October 20, before any hearing began, appellant brought this suit to enjoin the Commission from holding the stop order hearing scheduled for October 22. Its motion for a temporary restraining order was denied the same day and on October 24, its motion for preliminary injunction was denied by the District Court. Appellant sought a stay of the order of the District Court pending appeal, which was denied by this court on November 2, 1962. At the suggestion of the Commission the argument of this appeal from the District Court was expedited and is now before us on the merits. The Commission volunteered to suspend the hearing until the appeal was decided.

The primary contention of the Commission in the District Court and on appeal is that the District Court lacks jurisdiction to enjoin the Commission from conducting stop order hearings not yet begun.

Appellant contends that absent judicial review until after the agency hearing on the merits irreparable injury would result. It points to the effect that a stop order proceeding would have on appellant's ability to secure capital and claims that the stop order would have to be set aside on appeal because of a denial of due process by the Commission. This allegation would seem to be sufficient to invoke the equity jurisdiction of the District Court under 28 U.S.C. § 1337.⁴

The District Court denied the petition for preliminary injunction not because of lack of jurisdiction of the subject matter but for failure to state a claim for relief. Fed.R.Civ.P. 12(b) (6).⁵ Examination of the record before the District Court satisfies us that the District Court's action was correct. Appellant's complaint for injunctive relief, in the context in which this case arises, can be read in no other way than an attempt to have the courts review the validity of the Commission's interlocutory order initiating the stop order hearing which appellant seeks to enjoin.⁶ A brief consideration of appellant's contentions will demonstrate why the District Court was correct in holding that the complaint did not assert a claim for relief cognizable by the District Court.

First, appellant argues that the Commission has no power to issue a stop order against a pre-effective registration statement once the registrant has filed notice of his intention to withdraw the statement. This contention is jurisdictional insofar as it challenges the validity of SEC Rule 477, 17 C.F.R. 230.477 (1949), which provides that the consent of the Commission is a prerequisite for the withdrawal of a registration statement. To preclude the Commission from enforcing a rule such as this would be to say that even a false statement in a registration statement is beyond the reach of the law if the registrant recalls his statement before inquiry can evaluate its truth, falsity or significance. Broad considerations of public policy, in addition to the need to protect investors, support the validity of Rule 477. We hold that Rule 477, as applied in this case, is valid. Resources Corporation International v. Securities and Exchange Commission, 70 App.D.C. 58, 103 F.2d 929 (1939); Columbia General Investment Corp. v. Securities and Exchange Commission, 265 F.2d 559 (5th Cir., 1959); Peoples Securities Co. v. Securities and Exchange Commission, 289 F.2d 268 (5th Cir., 1961). See Jones v. Securities and Exchange Commission, 298 U.S. 1, 56 S.Ct. 654, 80 L.Ed. 1015 (1936).

Second, appellant contends that the Commission's failure to comply with Administrative Procedure Act, § 9(b), 5 U.S.C. § 1008(b), makes any further proceeding vulnerable to jurisdictional attack. The Administrative Procedure Act, § 9(b), relates to the revocation of licenses. Appellant's position is that a stop order proceeding against a pre-effective registration statement is in legal effect a revocation of a license within the statutory contemplation. Proceeding from that premise, appellant argues that the Commission failed to afford it an opportunity to achieve compliance prior to the institution of stop order proceedings. We express no opinion now as to the applicability of the Administrative Procedure Act, § 9, to stop order proceedings against pre-effective registration statements. However, assuming the applicability of that section, the Commission could still establish, at the hearing, that appellant's activity was willful conduct or that it jeopardized the public interest, in which case there would be no requirement that appellant be given an opportunity to comply prior to proceedings.

Appellant's attack on the Commission's conduct of its preliminary investigation is irrelevant for appellant seeks an injunction to terminate the stop order hearing, not the preliminary investigation which ended on July 27, 1962.

Appellant's claims relating to evidence allegedly seized in violation of the Fourth Amendment and the challenge to the authority of the Commission to order a combined proceeding under the authority of Securities Act of 1933, § 8(e), 15 U.S.C. § 77h(e), and Securities Exchange Act § 21(a), 15 U.S.C. § 78u(a), neither of which is jurisdictional in nature, must first be made to the Commission before they are ripe for judicial examination. R. A. Holman & Co. v. Securities and Exchange Commission, 112 U.S.App.D.C. 43, 299 F.2d 127, 130, cert. denied, 370 U.S. 911, 82 S.Ct. 1257, 8 L. Ed.2d 404 (1962). See also Montana-Dakota Utilities Co. v. Northwestern Public Service Co., 341 U.S. 246, 251, 71 S.Ct. 692, 95 L.Ed. 912 (1951); Neisloss v. Bush, 110 U.S.App.D.C. 396, 293 F.2d 873 (1961).

We are not unmindful that a stop order proceeding is a drastic regulatory measure but it is equally clear that Congress intended to vest broad power in the Commission. The Commission has evolved many informal devices to aid applicants to fulfill the registration requirements of the Act. One for example is the letter...