Wright v. Securities and Exchange Commission

• Decision Date: 20 May 1940
• Docket Number: No. 12.,12.
• Citation: 112 F.2d 89
• Parties: WRIGHT v. SECURITIES AND EXCHANGE COMMISSION.
• Court: U.S. Court of Appeals — Second Circuit

112 F.2d 89 (1940)

WRIGHT v. SECURITIES AND EXCHANGE COMMISSION.

No. 12.

Circuit Court of Appeals, Second Circuit.

May 20, 1940.

COPYRIGHT MATERIAL OMITTED

Isidor J. Kresel, Garey & Garey, Morris F. Goldstein, and Julius I. Puente, all of New York City (Isidor J. Kresel, Eugene L. Garey, Milton I. Hauser, Wm. Peyton Marin, and Morris F. Goldstein, all of New York City, of counsel), for petitioner.

Chester T. Lane, Gen. Counsel, Ganson Purcell, Hugh D. Wise, Jr., Francis Thornton Greene, and Bernard Meltzer, all of Washington, D. C., for respondent.

Before SWAN, AUGUSTUS N. HAND, and PATTERSON, Circuit Judges.

SWAN, Circuit Judge.

Pursuant to section 25(a) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78y(a), Charles C. Wright has filed his petition in this court to review and set aside an order of the Commission expelling him from membership in the New York Stock Exchange and other national securities exchanges of which he was a member. The order was entered in proceedings initiated under section 19(a) (3) of the Act, 15 U. S.C.A. § 78s(a) (3), which authorizes the Commission, if in its opinion such action is necessary or appropriate for the protection of investors, to suspend for a period not exceeding twelve months or to expel from a national securities exchange any member thereof whom the Commission finds to have violated any provision of the Act. On February 27, 1936, Wright was directed to show cause why he should not be suspended or expelled from various exchanges for alleged violation of sections 9(a) (1) and 9 (a) (2), 15 U.S.C.A. § 78i(a) (1) and § 78i (a) (2). By a supplemental and amended order additional persons, charged with acting in concert with Wright, were brought into the proceedings. Hearings were had before a trial examiner, commencing in May, 1936, and continuing intermittently until March, 1937, and a vast amount of evidence was taken. The printed record before this court comprises more than 3,500 pages. On February 28, 1938, the Commission published its findings and opinion and entered an order of expulsion against Wright and of suspension against his associates King and Stern. The two latter have not sought review of the order. Wright's petition was filed in this court April 26, 1938. It was not brought on for argument until February 15, 1940.

The petitioner's first point is that there is no substantial evidence to support the Commission's finding that Wright violated section 9(a) (2), 15 U.S.C.A. § 78i(a) (2).¹ The market operations upon which this finding was based began on September 11, 1935, and related to common stock of Kinner Airplane & Motor Corporation, Ltd. This stock was registered pursuant to section 12 of the Act, 15 U.S.C.A. § 78l, and was listed and traded in on the Los Angeles Stock Exchange and the San Francisco Curb Exchange. A few days prior to September 11th, Stern and King had obtained from Robert Porter an option on 160,000 shares of Kinner stock to be taken in blocks of 20,000 shares at prices increasing from 45 to 60 cents per share. Upon Stern's insistence the option ran to King's father, although the latter had no financial interest in it. That a manipulation of the market to boost prices was contemplated by the parties to the option is inferable from its terms and is shown unmistakably by telegrams exchanged between Stern and Porter. Stern had offered Wright an interest in the option but the testimony is that he had declined it. Nevertheless within an hour after Wright began to buy the stock on September 11th, Stern telegraphed to Porter "Have started". During that day Wright purchased 18,500 shares at prices increasing from 46 to 60 cents and sold 9,000 shares at prices ranging from 55 to 60 cents. Wright placed his orders through accounts standing in the names of others. Of the shares purchased 11,500 were allocated to an account which Wright opened in the name of an impecunious friend, Alvin Richmond, who had no knowledge of the account until long afterwards; 2,500 shares were allocated to an account of Wright's wife, and a like number to an account of his secretary. With respect to these accounts Wright held powers of attorney, but in purchasing the Kinner stock he acted without the knowledge of either Mrs. Wright or Miss Mackaill. The remaining 2,000 shares of purchased stock were bought for E. R. Whitehead, a stockbroker, at his request. In some of the transactions Wright knowingly bid more than the current market price. Such "reaching" for the stock tends to substantiate the Commission's contention that he sought to raise the price because of the outstanding option. The 9,000 shares sold on September 11th were allocated to the Richmond account. On the following day 2,500 shares more were sold at 62½ cents, thus closing out the Richmond account with a profit of $640.25. There is testimony that Richmond was paid this profit, but the Commission did not believe it. From September 12 to 16, inclusive, Wright sold 41,300 additional shares at prices ranging from 62½ to 75 cents through an account in the name of Stewart Haddock, another impecunious friend. Forty thousand of these shares were obtained under the Porter option at a price of 45 cents. Thus, between September 11 and 16 the market price of Kinner stock had been boosted from 45 to 75 cents. Wright's purchases represented 79 per cent. of all purchases on the Los Angeles Exchange during the active buying or "mark-up" phase of his operations, and his sales were about 40 per cent. of all sales during the six days. Prior to his entry the market had been thin, the average daily volume of trading for the preceding three months being only about 730 shares.

It is plain that Wright effected a series of transactions in Kinner stock "creating actual or apparent active trading in such security" and "raising the price" thereof. The Commission found that he did so for the purpose of inducing the purchase of Kinner stock by others, that is, of unloading the optioned stock through the Haddock account. Wright had introduced Haddock to Stern and there is testimony that Haddock acquired from Stern and King an interest in the Porter option to the extent of the first 40,000 shares to be taken down. The Commission did not credit this testimony; it made a finding that Haddock was merely a person whose name Wright used. There are numerous circumstances tending to support this conclusion. Wright gave all the orders for the Haddock account. After a sale of 5,000 shares for the Richmond account he ordered it split between Richmond and Haddock. He endorsed checks made out to Haddock by the brokers, delivering one to Stern, apparently as a finder's fee, and cashing the other, as he says, for Haddock. Although Haddock was impecunious, more than $5,000 of the profit realized in the account in his name was allowed to remain there for several months and was not checked out to him until Wright had learned that the Commission was investigating the transactions in Kinner stock. It is true that in his 1935 income tax return Haddock reported as his own the profit made on Kinner sales in his account, but this fact loses much of its significance in the light of Wright's prior knowledge of the investigation. The foregoing are but some of the circumstances from which inferences were drawn adverse to Wright's innocence. Others are recited in detail in the Commission's findings and opinion. It would serve no useful purpose to repeat them here. Suffice it to say that we think there was substantial evidence to support the facts upon which the Commission predicated its finding that Wright manipulated the market in violation of section 9(a) (2) of the Act. If so supported, the findings of fact are conclusive upon this court. Sec. 25(a), 15 U.S.C.A. § 78y(a).

The petitioner also contends that there was no substantial evidence to support the finding that he violated section 9 (a) (1), 15 U.S.C.A. § 78i(a) (1).² This forbids "matching" orders for the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange, or a false and misleading appearance with respect to the market for any such security. The Commission found that Wright had violated the statute in two instances. About 1:30 p. m. on September 11, 1935 he placed an order to sell 10,000 shares at 60 for the Richmond account and about an hour and a half later, he ordered for the Mackaill account the purchase of 2,500 shares at the market, which was then apparently 57½. He was notified by his Los Angeles broker that his buy order would probably be filled in part by his sell order, but replied that the purchase and sale were for different accounts. The buy order was executed by the purchase of 100 shares at 57½ and 2,400 shares at 60, of which 800 were shares that were being offered through the Richmond account. The second instance was similar. About 4 p. m. Wright placed through a different broker an order to buy 2,500 shares at the market for the account of Mrs. Wright. This met and partially crossed (to the extent of 2,200 shares) the unfilled portion of his prior order to sell 10,000 shares at 60. At least literally, what Wright did was not within the terms of the statute; the buy orders were not "of substantially the same size" as the sell order, even if it be assumed that the requirements as to similarity of time and price were satisfied. To make them matched orders the Commission is forced to argue that an order to sell 10,000 shares is by practice of the exchange an order to sell 100 shares and as many additional 100 share lots as possible, up to the total of 10,000 shares, and similarly an order to buy 2,500 shares is an order to buy one or more (up to 25) lots of 100 shares each. Under the rules of the Los Angeles Exchange if an order is not to be executed in board lots, it must be designated "all or none." Despite this practice, with which Wright as an experienced trader may be assumed to have...