# Appendix — Securities Investor Protection Corp. v. Barbour > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_0133%3A02 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1975 - **Citation:** 421 U.S. 412 ## Text IN THE | ' Supreme Court of the United States OCTOBER TERM, 1974 No. 73-2055 Securities Investor Protection Corporation, Petitioner, v. JaMes C. Barsour, as Recetver ror Guaranty Bonp anp Securities CorPoRATION AND GuarANTy Bonp Company, INc., Respondent, and SECURITIES AND ExcHaANGE CoMMISSION, Respondent. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT APPENDIX PETITION FOR CERTIORARI—FILED JULY 20, 1974 CERTIORARI GRANTED—-OCTOBER 21, 1974 List of Relevant Docket Entries .0..0000000000000000000c Complaint of the Securities and Exchange Commis- sion, Filed December 22, 1970 ; Application for Appointment of Receiver, Filed Janu- ary 21, 1971 cicenlbscteies Receiver’s Petition No. 22 for an Order to Show Cause, Filed Mareh 31, 1972 . Order No. 49 Requiring SEC and SIPC to Show Cause, Entered April 6, 1972 Answer to Petition No, 22 of Respondent Securities Investor Protection Corporation, Filed May 17, 1972 sis Response of Securities and Exchange Commission to Receiver’s Petition No. 22, Filed May 17, 1972 ........ Memorandum No. 54, Entered January 10, 1978 ........ Order No. 55, Entered February 8, 1973 Opinion of Court of Appeals, Filed April 23, 1974 .... Judgment of Court of Appeals, Filed April 23, 1974 .... Order of the Supreme Court, Filed October 21, 1974 .... 18 19 es $8 vs Hy LIST OF RELEVANT DOCKET ENTRIES December 22, 1970 January 6, 1971 January 21, 1971 January 29, 1971 February 9, 1971 March 31, 1972 April 6, 1972 April 19, 1972 May 17, 1972 May 17, 1972 June 7, 1972 January 10, 1973 February 6, 1973 February 8, 1973 February 9, 1973 April 23, 1974 July 20, 1974 October 21, 1974 —Filed complaint of Securities and Exchange Commission. —Filed Findings of Fact and Conclusions of Law—Mor- ton, J. —Filed application by Securities and Exchange Commission for appointment of receiver. --:ntered agreed order appointing receiver, Morton, J. I:ntered memorandum of court re appointment of receiver, Morton, J. —Filed receiver’s petition no. 22 for a show cause order. —Entered order no. 49 that Securities and Exchange Com- mission and Securities Investor Protection Corporation show cause why Securities Investor Protection Act not available. -—FEntered order no. 50 adjourning return date on show cause order. ~-Filed answer of Securities Investor Protection Corpora- tion (exhibits). Filed response of Securities and Exchange Commission (exhibits). Before Morton, J., hearing on order to show cause. — Entered memorandum no. 54 dismissing Securities Inves- tor Protection Corporation as a party—Morton, J. —Filed receiver’s motion to amend memorandum mo. 54. — Entered order no. 55 stating that memorandum no. 54 constituted the entry of a final judgment as to Securities Investor Protection Corporation. —Filed notice of appeal by receiver. —-Filed opinion and judgment of the Court of Appeals reversing the District Court’s order as to Securities Inves- tor Protection Corporation. ~-Filed petition for writ of certiorari by Securities Investor Protection Corporation with the Supreme Court of the United States. —Filed order of Supreme Court granting petition for writ of certiorari. SEC Complaint IN THE United States Bistrict Court For tHe Mippie District or TENNESSEE NASHVILLE Drvtston Civil Action No. 5989 nn SecuRITIFS AND EXCHANGE COMMISSION vs, GvuaRANTY Bonp anp Securities CorPoRATION, et al. —_—_—_——eell- ieee (Filed December 22, 1970) 1. It appears to the plaintiff that the defendants are en- gaged and are about to engage in acts and practices which constitute and will constitute violations of Sections 10(b), 15(b) (10), 15(e)(1), 15(¢)(3) and 17(a) of the Securities Exchange Act of 1934 (Exchange Act) [15 U.S.C. 780(b), 780(b) (10), 780(e) (1), 780(c)(3) and 78q(a)], Sections 17 (a)(2) and 17(a)(3) of the Securities Act of 1933 (Seeu- rities Act) [15 U.S.C. 77q(a) (2) and 77q(a)(3)] and Rules 10b-5, 15b10-5, 15¢1-2, 151-4, 15¢1-6, 15¢3-1 and 17a-3 [17 CFR 240.10b-5, 15b10-5, 15¢1-2, 15c1-4, 15¢1-6, 15¢3-1 and 17a-3] which rules were promulgated and prescribed by the p!aintiff pursuant to the Exchange Act, were in effect at all times herein alleged and are now in effect. Plaintiff, pur- suant to Section 21(e) of the Exchange Act [15 U.S.C. 2 SEC Complaint 78u(e)] and Section 20(b) of the Securities Act [15 U.S.C. 77t(b) | brings this action to enjoin such acts and practices. 2. This Court has jurisdiction of this action under Sec- tion 27 of the Exchange Act [15 USC 78aa) and Section 22(a) of the Securities Act [15 U.S.C. 77v(a)]. 3. Defendant Guaranty Bond and Securities Corpora- tion (hereinafter sometimes referred to as “registrant”) is a corporation organized under the laws of Tennessee on April 16, 1962, and has its principal place of business at 2312 West End Avenue, Nashville, Tennessee. Since June 20, 1962, registrant has been and is now registered as a broker and dealer in securities pursuant to Section 15(b) of the Exchange Act [15 U.S.C. 780(b)]. Defendant Henry Jere- miah Huey, Jr., hereinafter sometimes referred to as “H. J. Huey”, is President and a director of registrant, and resides at 132 Carnavon Parkway, Nashville, Tennessee. Defendant Brooks Thomas Huey (hereinafter sometimes referred to as “B. T. Huey”) is Secretary, Treasurer and a director of registrant, and resides at 6668 Jocelyn Hollow Road, Nashville, Tennessee. Defendant Guaranty Bond Company, Inc. (hereinafter sometimes referred to as “par- ent”) is a corporation organized under the laws of Ten- nessee, has its principal place of business at 2312 West End Avenue, Nashville, Tennessee, and owns all of the out- standing stock of registrant. Parent is owned principally hy a partnership composed of H. J. Huey and B. T. Huey. Count One 4. During the period from approximately March 31, 1970, to the date hereof, registrant as a broker and dealer in securities, aided and abetted by the other defendants, Ble. on) eclineatlinn 3 SEC Complaint has made and is making use of the mails and of means and instrumentalities of interstate commerce to effect transac- tions in and induce the purchase and sale of securities (other than an exempted security or commercial paper, bankers’ acceptances, or commercial bills) otherwise than on a national securities exchange while and at times when the net capital of registrant was and is less than $5,000 and its aggregate indebtedness to all other persons exceeded and exceeds two thousand (2,000) per centum of its net capital in contravention of Section 15(c)(3) of the Ex- change Act [15 U.S.C. 780(c)(3)] and Rule 15¢3-1 [17 CFR 240.15¢3-1]. Count Two 5. During the period from about May 1, 1969, to che date hereof, registrant, as a securities broker and dealer regis- tered pursuant to Section 15(b) of the Exchange Act [15 U.S.C. 780(b)], aided and abetted by the other defendants, has failed and is failing to make and keep current books and other records relating to its business in contravention of Section 17(a) of the Exchange Act [15 U.S.C. 78q(a) ] and Rule 17a-3 [17 CFR 240.17a-3], in that it did not main- tain a position record for all securities long and short and their locations; it did not maintain ledger accounts for cus- tomers itemizing purchases, sales, receipts and deliveries of securities for such accounts or correctly and accurately reflect the condition of such accounts; its inventory of securities was inaccurate; its income account failed to reflect all income received; its net capital computations were incorrect; and it did not have personnel questionnaires for certain associated persons. 4 SEC Complaint Count Three 6. During the period from approximately May 1, 1969, to the date hereof, registrant, as a securities broker and dealer, aided and abetted by the other defendants, has made and is making use of the mails and means and instruments of interstate commerce to effect transactions in, and to induce the purchase and sale of, securities (other than com- mercial paper, bankers’ acceptances, or commercial bills) otherwise than on a national! securities exchange, by means of manipulative, deceptive and other fraudulent devices and contrivances, practices and courses of business as specified in paragraphs numbered 7 and 8 hereof, in con- travention of Section 15(¢)(1) of the Exchange Act [15 U.S.C. 780(¢)(1)] and Rules 15e1-4 [17 CFR 240.15c1-4 and 15¢c1-6 [17 CFR 240.15c1-6]. 7. Registrant, aided and abetted by the other defendants, has effected and is effecting with or for the accounts of customers transactions in, and has induced and is inducing the purchase and sale by customers of, securities (other than U. S. Tax Savings Notes, U. S. Defense Savings Stamps or U.S. Defense Savings Bonds, Series E, F and G) without at or before the completion of each such transaction giving or sending to such customers written notification disclosing: (a) whether registrant was acting as a broker for such customers, as a dealer for its own account, as a broker for some other person, or as a broker for both such customers and some other person; and (b) in cases where registrant was acting as a broker for such customers or as a broker for both such customers and some other person, either the name of the person from whom the security was purchased or to whom it was sold for such customer and the date and time when such transaction took place or the 5 SEC Complaint fact that such information would be furnished upon the request of such customers, and the source and amount of any commission or other remuneration received or to be received by registrant in connection with the transaction as provided in Rule 15el-4 [17 CFR 240.15c1-4]. 8. Registrant, aided and abetted by the other defendants, as a securities broker acting for customers and for cus- tomers and other persons, has engaged and is engaging in acts designed to effect with or for the accounts of such customers, transactions in and purchases and sales by such customers of securities in the primary or secondary dis- tributions of which registrant was and is participating and was and is financially interested without, at or before the completion of each such transaction, giving or sending to such customers written notification of the existence of such participation or interest as prescribed in Rule 15e1-6 [17 CFR 15cel1-6]. Count Four 9. During the period from approximately May 1, 1969, to the date hereof, registrant, as a securities broker and dealer not a member of a national securities association, aided and abetted by the other defendants, has effected and is effecting securities transactions in contravention of Section 15(b)(10) of the Exchange Act [15 U.S.C. 780(b) (10)] and Rule 15b10-5 [17 CFR 240.15b10-5], in that registrant exercised and is exercising discretionary power or authority for customers without such customers having given their prior written authorization to exercise sneh power or authority to a stated associated person or persons, and having indicated their reasons for giving such authori- zations. 6 SEC Complaint Count Five 10. During the period from approximately May 1, 1966, to the date hereof, registrant has been and is a securities broker and dealer engaged in the business of effecting transactions for the accounts of others and for its own ac- count and, as such, aided and abetted by the other defend- ants, has made and is making use of the mails and of means an instrumentalities of interstate commerce to effect transactions in, and to induce the purchase and sale of, securities (other than commercial paper, bankers’ accep- tances, or commercial bills) otherwise than on a national securities exchange, by means of manipulative, deceptive and other fraudulent devices and contrivances, including the acts, practices and courses of business specified in paragraphs numbered 6 through 14 hereof, in contraven- tion of Section 15(¢)(1) of the Exehange Act [15 U.S.C. 780(¢c)(1)] and Rule 15c1-2 [17 CFR 240.15e1-2]. 11. Defendants solicited and are soliciting churches and other religious institutions to employ registrant as under- writer for the public offering of their bonds under a pro- gram in which registrant guaranteed and guarantees the sale of all the bonds on the representation that registrant was and is able to make such firm commitments for the purchase and/or sale of such securities, was and is able to meet all obligations and liabilities arising in connection therewith and was and is operating within the jurisdiction of the federal and state authorties charged with regulating the securities industry, when in fact registrant was and is unable to meet the net capital requirements of Section 15(¢)(3) of the Exchange Act [15 U.S.C. 780(e)(3)] and Rule 15¢3-1 [17 CFR 240.15¢3-1], registrant’s repert on Form 17A-5 as of March 31, 1970, filed with the Commis- 7 SEC Complaint sion, was misleading in that it failed to accurately reflect registrant’s assets and liabilities and indicated that reg- istrant had sufficient net capital to meet the requirements of said Rule, registrant omitted and is omitting to disclose to, and concealed and is concealing from, issuers for which it acted and is acting as tnderwriter its financial condition and its inability to meet the financial responsibility require- ments of Rule 15¢e3-1 [17 CFR 240.15c3-1] and its failure to comply with applicable federal laws and regulations relating to the securities industry as alleged in paragraphs numbered 4 through 16 hereof. 12. Defendants have induced and are inducing churches and other religious institutions (hereinafter sometimes re- ferred to as “horrowers”) to execute underwriting agree- ments of Rule 15¢3-1 [17 CFR 240.15¢3-1] and its failure their bonds and custodian of funds received from sales thereof and which contain a provision that registrant may invest such funds in religious institutional bonds for such borrowers, as necessary, liquidate such investments, make disbursements and deliver funds for payment of such bor- rowers’ obligations incurred in their construction and other programs, and return to such borrowers 5% simple interest earned on such funds. On the basis of this general au- thority defendants have exercised and are exercising dis- eretionary authority over funds received from sales of bonds issued by such borrowers and over such borrowers’ accounts with registrant, effecting transactions therewith and therein, including sales to such borrowers of bonds issued by other churches and religious institutions having maturities of from one to fourteen years, without sending to such borrowers confirmations advising them of the secu- rities sold to them and placed in their accounts, the date 8 SEC Complaumt and amount of each such transaction and the source and amount of commission and other remuneration received or to be received by defendants in connection with each such transaction. Registrant has credited and is crediting to the accounts of such borrowers only 5% simple interest on the amounts invested for such borrowers in the bonds of other churches and religious institutions even though the inter- est rates on the bonds placed in such borrowers’ accounts have been and are considerably greater and defendants have retained and treated and are retaining and treating as income to registrant the interest differential between the oye vate paid to such borrowers and the substantially higher vields on the bonds placed in their accounts, thus obtaining secret profits from such borrowers while acting in the capacity of their agent, custodian and fiduciary. Registrant has been and is, in some instances, investing funds held as custodian for a particular religious institution in such institution’s own bonds with the result that the institution pays interest on such bonds at a rate in excess of 5% per annum but receives a credit to its account with registrant of only 5% per annum, registrant retaining the interest differential as a secret profit. 15. During the period from about May 1, 1966, to the date hereof, registrant, as a securities broker and dealer, aided and abetted by the other defendants, solicited and is soliciting churches and other religious institutions to em- ploy registrant as underwriter of their bonds and has solic- ited and is soliciting investors to purchase such bonds, on the representations that the sale of all bonds so under- written by registrant is guaranteed by it and that regis- trant will purchase or sell any bonds remaining after the church has put forth its best effort, without disclosing that registrant had placed and is placing a substantial portion 9 SEC Complaint of such bonds in the accounts of other churches and re- ligious institutional issuers for which it was and is acting as underwriter and for which it is holding funds as cus- todian by recording buy and sell transactions in securities on registrant’s books between various of such religious institutions; that availability of funds for a particular issuer’s construction or other program could be dependent upon registrant’s ability to dispose of secarities in which such funds were thus invested; that there is no independ- ent market for such securities; and that issuers whose funds are invested by registrant in securities of other institutions may bear the risk of loss resulting from default or failure of an issuer of a security in which their funds are invested. 14. During the period from about May 1, 1966, to the date hereof, registrant, as a securities broker and dealer, aided and abetted by the other defendants, offered and is offering to sell and sold and is selling religious institutional bonds through the use of prospectuses prepared by regis- trant which are materially false and misleading in that each contained the representation that the proceeds from the sales of the religious institutional bonds described therein shall be disbursed by registrant in accordance with the purposes of the bond issue as set out in the particular prospectus—i.e. for such expenditures as consolidati n and retirement of existing indebtedness, purchase of land for new buildings, and construction, expansion and remodeling of churches, sanctuaries, educational buildings and other facilities—without disclosing: That such proceeds would be turned over to registrant as custodian; that registrant in its diseretion would invest them in other religious institu- tion bonds having extended maturites of from one to four- teen years; the amounts of such proceeds to be paid to 10 SEC Complaint registrant and the other defendants as fees, commissions and other remunerations; and the use by registrant of such proceeds in completing other underwritings in which it and the other defendants would receive substantial fees, com- missions and other remunerations. Count Six 15. During the period from about May 1, 1966, to the date hereof, registrant, as a securities broker and dealer. aided and abetted by the other defendants, by use of means and instrumentalities of interstate commerce and of the mails, direetly and indirectly, used and employed and is using and employing manipulative and deceptive devices and contrivances in contravention of Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Rule 10b-5 [17 CFR 240.10b-5], in that registrant was and is: (a) Engaging in acts, practices and courses of busi- ness which operated and would operate as a fraud and deceit upon customers of registrant as described more particularly in paragraphs 11 through 14 of Count Five hereof! : (b) Making untrue statements of material facts, namely, the statements set forth in paragraphs 11 through 14 of Count Five hereof; and (¢) Omitting to state the facts specified in paragraphs 1] through 14 of Count Five hereof relating to registrant’s financial condition, its lack of suffi- cient capital to meet the requirements of the fed- eral laws and rules relating to financial responsi- bilities of securities brokers and dealers, its mode of operations, its secret profits from transactions in discretionary accounts, and details of transac- owed & Ge sees oe 11 SEC Complaint tions in which funds and securities were trans- ferred between accounts of customers on the books of registrant, which facts were material in order to make the statement made, in the light of the cireumstances under which they were made, not misleading. Count Seven 16. During the period from about May 1, 1966, to the date hereof, in contravention of Sections 17(a)(2) and 17 (a)(3) of the Securities Act of 1933 [15 U.S.C. 77q(a) (2) and (3)], registrant, as a securities broker and dealer, aided and abetted by the other defendants, in offers and sales of securities by use of means and instruments of transportation and communication in interstate commerce and by use of the mails, directly and indirectly: (a) Obtained money and property by means of the untrue statements of material facts as set forth in paragraphs 11 through 14 of Count Five hereof ; (b) Obtained money and property by means of the omissions to state material facts as set forth in paragraphs 11 through 14 of Count Five hereof, which facts were necessary in order to make the statements made, in the light of the circumstances under whic! they were made, not misleading; and (c) Engaged in the transactions, practices and courses of business described in paragraphs 11 through 14 of Count Five hereof, which operated and would operate as a fraud and deceit upon the purchasers of such securities. 12 SEC Complaint 17. Defendants will unless restrained and enjoined con- tinue to engage in the acts and practices set forth in this complaint. Wherefore, the plaintiff demands: A. A preliminary injunction and a final judgment enjoining defendant Guaranty Bond and Securities Corpo- ration, its officers, agents, servants, employees and attor- neys, and each of them, from, and defendants Henry Jeremiah Huey, Jr., Brooks Thomas Huey and Guaranty Bond Co., Ine., their officers, agents, servants, employees and attorneys, and each of them, from aiding and abetting defendant Guaranty Bond and Securities Corporation in: (!) Making use of the mails or any means or instru- mentality of interstate commerce to effect trans- actions in or to induce the purchase or sale of securities (other than an exempted security, or cominereial paper, bankers’ acceptances or ‘com- mercial hills) otherwise than on a national seeuri. ties exchange, while and at a time when the net capital of registrant is less than $5,000 and its aggregate indebtedness to all other persons exceeds two thousand (2,000) per centum of its net capital in contravention of Seetion 15(¢)(3) of the Exchange Act [15 U.S.C. 780(e)(3)] and Rule 15¢3-1 [17CFR 240.15¢3-1] thereunder. (2) Failing to make and keep current books and rec- ords of registrant relating to its business as a securities broker and dealer registered pursuant to Section 15 of the Exchange Act [15 U.S.C. 780] in contravention of Section 17(a) of the Exchange Act [15 U.S.C. 78q(a)] and Rule 17a-3 [17 CFR 240.17a-3] thereunder, ee ee ee ee ee eS eee 13 SEC Complaint (3) Making use of the mails and means and instru- mentalities of interstate commerce to effect trans- actions in, and to induce the purchase and sale of, securities (other than commercial paper, bankers’ acceptances, or commercial bills) otherwise than on a national securities exchange by: (a) Effecting with or for the accounts of custom. ers transactions in and inducing the purchase or sale by customers of securities (other than U.S. Treasury Savings Notes, U.S. Defense Savings Stamps or U.S. Defense Savings Bonds, Series f, F and G), without registrant at or before the completion of each such trans- action giving or sending to the customer a written notification disclosing the information prescribed in Rule l5e1-4 [17 CFR 240.15e1-4] in contravention of Section 15(¢c)(1) of the Exchange Act [15 U.S.C. 780(e)(1) 1]; (b) Engaging in acts designed to effect with or for the accounts of customers for whom regis- trant is acting, any transaction in, or purchase or sale of, a security in the primary or second- ary distribution of which registrant is partici- pating, or is otherwise financially interested, without registrant at or before the completion of each such transaction giving or sending to the customer written notification of the exist- ence of such participation or interest as pre- scribed in Rule 15¢e1-6 [17 CFR 15c1-6] in contravention of Section 15(c)(1) of the Exchange Act [15 U.S.C. 780(e)(1)]. (+) (>) 14 SEC Complaint Effecting transactions in, or inducing the purchase or sale of, any security (otherwise than on a national securities exchange) in which registrant, while a nonmember broker or dealer, shall exereise any discretionary power or authority for any cus- tomer unless such customer has given prior written authorization to exercise such power and authority to a stated associated person or persons. and has indicated the reasons for such authorization as pro- vided in Rule 15b10-5 [17 CFR 15b10-5] in con- travention of Section 15(b)(10) of the Exchange Act [15 U.S.C. 780(b) (10) }. Making use of the mails or of any means or instru- mentalities of interstate commerce while registrant is a securities broker or dealer engaged in the business of effecting transactions in securities for the accounts of others or for its own account, to effect any transaction in, or to induce the purchase or sale of, any security (other than commercial paper, bankers’ acceptances, or commercial bills) otherwise than on a national securities exchange, by means of any manipulative, deceptive or other fraudulent device or contrivance in contravention of Section 15(¢)(1) of the Exchange Act [15 U.S.C. 78o0(e)(6)) and Rule 15e1-2 [17 CFR 240.15e1-2] thereunder, including (a) Any act, practice or course of business which operates or would operate as a fraud or deceit upon any person in connection with: (i) the solicitation or acceptance of under- writing agreements for the purchase and/or sale of securities while registrant id ieee tes 2 eT te (b) (ii) (iii) (i) (ii) 15 SEC Complaint is unable to meet the requirements of the net capital rule, Rule 15¢3-1 [17 CFR 240.15¢3-1] ; the exercise of discretionary authority over the accounts of customers for the purchase and/or sale of securities; the use of monies paid by customers for the purchase of securities or the use of funds received as proceeds from the sale of securities by issuers; (iv) registrant’s use of funds held as custo- dian from sales of securities for which it is acting as underwriter. Any untrue statement of a material fact or omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading concerning: the financial condition of registrant; registrant’s compliance with the require- ments of federal and state laws and rules applicable to the securities industry; (iii) service charges, fees, commissions and interest differentials received by regis- trant and its parent; (iv) the use of monies paid by customers for the purchase of securities; (v) investments of monies received from or through the sale of securities; or 16 SEC Complaint (vi) benefits to registrant and/or its parent from the exercise of discretionary author- itv over the accounts of customers. (§) Directly or indirectly, by use of any means or any instrumentality of interstate commerce or of the mails, to use or employ, in connection with the purchase or sale of any security, any manipu- lative or deceptive device or contrivance in contra- vention of Section 10(b) of the Exchange Decided and Filed April 23, 1974. Before: Pures, Chief Judge CreLeprezze and Mixer, Circuit judges. Mier, Circuit Judge. Guaranty Bond and Securities Corporation was registered with the S.E.C. as a broker and dealer in securities as required by Section 15(b) of the Securities Exchange Act of 1934. As part of its business, it promoted the sale of church bonds. On December 22, 1970, the S.E.C. filed in the court below a complaint against Guaranty alleging net capital violations contrary to the federal securities laws, including Section 15(¢)(3) of the Securities Exchange Act, 15 U.S.C. 780(c)(3). Injunetive relief was sought against the alleged violations. The district court, finding that Guaranty had violated the S.E.C.’s net capital rule and that such violation had existed 81 Court of Appeals Opinion for a substantial period of time prior to the filing of the complaint by the S.E.C., granted a preliminary injunction. The court further found that between the filing of the com- plaint on December 22, 1970 and the granting of the injunc- tion on January 6, 1971, Guaranty had continued to engage in substantial business, handling 101 transactions after the effective date of the Act creating the Security Investor Protection Corporation. On application of S.E.C., a re- ceiver was appointed for Guaranty to take charge of all of its assets subject to the further orders of the court. On March 31, 1972, the receiver filed a petition for an order directed to the S.E.C. and the Securities Investor Pro- tection Corporation requiring each of them to show cause why 8S.I.P.C. should not be required to intervene in the action and afford to the customers of Guaranty the benefits of the Act. The show cause order was issued accordingly and both S.E.C. and S.1.P.C. responded. The court, without an evidentiary hearing. filed its memorandum opinion in which it found the Act (S.1.P.A.) was inapplicable to cus- tomers of Guaranty for the reason that Guaranty was insolvent and in financial difficulties before the effective date of S.I.P.A. To hold otherwise, it was said, would be to give the Act a forbidden retroactive effect. The court accordingly ordered that S.I.P.A. should be dismissed from the action. This order was certified as a final judgment for purposes of appeal. The Security Investor Protection Act was enacted in response to the need to protect the customers of securities brokers and dealers which might fail, thereby jeopardizing the cash and securities that customers had left on deposit with the firm’ S.I.P.A. accordingly created the Securities 1. The legislative history shows the purpose of the S.LP.A. The serious and persistent financial problems besetting the securities industry in recent months have led to the voluntary 82 Court of Appeals Opinion Investor Protection Corporation as a “non-profit corpora- tion,” not designed to “hc an agency or establishment of the United States Government,” but rather to be “a member- ship corporsiion,’? consistent with the self-regulatory naturc of the securities industry. 15 U.S.C. 78 ece (a). The S.L.P.C.’s role is primarily one of consultation and coopera- tion with the self-regulatory organizations which remain subject to the federal securities laws and the rules of the S.E.C. By mandating membership in the 8.1.P.C. for cer- tain members of the securities industry and by granting the S.LP.C. general assessment authority over the members in order to establish an S.1.P.C. fund, Congress accomplished its intention that the cost of providing protection to cus- liquidations, mergers, receiverships or, less f ruptcies of a substantial cumber' of Rides tee "Such failures may lead to loss of customers’ funds and securities with an inevitable weakening of confidence in the U. S. secu- rities markets. Such lessened confidence has an effect on the entire economy. Whatever other steps must be taken to improve these conditions, one objective of the bill, as reported is to provide investors protection against losses caused by the insolvency of their broker-dealer. The need is similar, in roy! respects to that which prompted the establishment of e Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation. 4 U. S. Code Congressional and Administrative News 5255 (1970). ? 2. The members of S.I. (a) (2), are: rs of S.I.P.C., as defined by 15 U.S.C. Sec. 78 cece _ (A) all persons registered as b tion 780(b) of this title, ae as brokers or dealers under sec- ox all persons who are members of a national securities ae 7 edn we say as a broker or dealer consists 1) the distribution of shares of registered o . . . end —— t companies or unit investment trusts, (ii) the a of - " annuities, (iii) the business of insurance, or (iv) the busi- es a! of rendering investment advisory services to one or more regis- tered investment companies or insurance company separate pn 83 Court of Appeals Opinion tomers under S.I.P.C. was to be borne by the securities industry itself.’ Under 15 U.S.C. See. 78 eee (a) (1), if the S.E.C. or any self-regulatory organization believes that a broker or dealer subject to its regulations in, or approaching, financial diffi- culty, it must notify immediately the S.I.P.C. If the S.1.P.C. determines that a member broker or dealer has failed or is in danger of failing to meet its obligations to customers, it is authorized to seek a decree in an appropriate court adjudicating that the customers of a member of S.L.P.C. are in need of the protection of the Act. 15 U.S.C. Sec. 78 eee (a)(2). Upon so finding, the district court shall grant the decree and appoint a trustee for the liquidation of the busi- ness and an attorney for the trustee. The objectives of the proceeding, in addition to operating the business for a limited purpose, completing the open contractual commit- ments of the dealer, enforcing rights of subrogation and liquidecing the business of the dealer, are “as promptly as possible” (1) to return specifically identifiable property to the customers of a firm, (2) to distribute the “single and separate fund,” and (3) to pay to customers monies advanced by S.LP.C. 15 U.S.C. 78 fff(a). To provide for prompt satisfaction of the net equities of the dealer’s cus- tomers, S8.I.P.C. must advance to the trustee such monies as may be required to satisfy the full claims of each customer not to exceed $50,000. 15 U.S.C. 78 fff(f). 3. S.1.P.C.’s first responsibility under the Act was to establish a fund which would consist of all amounts received by S.I.P.C. and from which all expenditures would be paid. 15 U.S.C. Sec. 78 ddd(c). If the fund should become insufficient for the purposes of the Act, the S.E.C. is authorized, i’ necessary for the protection of the customers of brokers and dealers and for the maintenance of confidence in the United States securities markets, to issue notes under certain con- ditions to the Secretary of the Treasury in an amount up to one billion dollars, which then may be lent to S.LP.C. 15 U.S.C. 78 ddd (g). S4 Court of Appeals Opinion If S.LP.C. refuses to act, the S.E.C. is authorized by 15 U.S.C. 78 ggg(b),* to apply to the court for an order requir- ing the S.I.P.C. to discharge its obligations under the Act. The present appeal involves a unique situation. The appellant, as mentioned earlier, urges, contrary to the dis- trict court’s decision, that the Act is applicable to Guaranty Bond. The S.E.C. agrees with the appellant’s contention that the Act is applicable, but challenges the court’s decision that the receiver has standing to petition the court to apply the Act. The S.I.P.C. agrees with the district court as to the inapplicability of the Act but challenges, along with the S.E.C., the receiver-appellant’s standing to obtain compli- ance with the Act. The S.LP.A. was effective on December 30, 1970. In two eases, Lohf v. Casey, 330 F.Supp. 356 (D. Colo. 1971), aff'd. 466 F.2d 618 (10th Cir. 1972) and Bohart-McCaslin Ven. tures, Inc. vy. Midwestern Securities Corp., 352 F.Supp. 937 (N.D. Texas 1973), courts have held that S.LP.A. was not intended to apply to a broker-dealer who had failed prior to that date. The district court in Lohf, supra at 358 stated: “ .. it is equally clear that Congress expressed an intention of refusing to make the Act retroactive. The record is replete with comments to that effect, the most cogent example being the report of the Com- mittee on Interstate and Foreign Commerce: 5 U.S.C. 78 ggg (b) provides that: ~~ in the ont of he stand of SIPC to commit its funds or otherwise to act for the protection of customers of any member of SIPC, the Commission may apply to the district court of the United States in which the principal office of SIPC is located for an order requiring SIPC to discharge its obligations under this chapter and for such other relief as the court may deem appropriate to carry out the purposes of this chapter. mentioned above, this section is hardly couched in terms o PR es ee feat easily accomplished had it been the intent of Congress. 85 Court of Appeals Opinion ‘It is the clear intention of your committee that SIPC assume no liability for firms either in net capital violation, in liquidation, or in bankruptey at the time of creation of SIPC. H.R. Rep. No. 1613, 91st Cong., 2nd Sess. 14 (Oct. 21, 1970), re- printed in 3 U.S. Code Cong. & Admin. News ’70 at 5268.’ This language is frequently echoed in the debates on this bill, and it seems clear that Congress did not intend the bill to operate retroactively.” Congress seemed to be concerned that S.I.P.C. not be used to compensate customers of members firms of the New York Stock Exchange which “have closed their doors and begun liquidation,” when the Exchange had not ad- vanced money from its existing trust fund to protect the customers of those firms. As mentioned earlier in the Lohf quote, the Committee Report did use very broad language when it stated that coverage be withheld from firms “either in net capital violation, in liquidation, or in bankruptcy at the time of the creation of S.I.P.C.” H.R. Rep. No. 91-1613, YIist Cong., 2d Sess. p. 14 (1970). The meaning of this broad language was subsequently clarified by Representa- tive Moss, sponsor of the Bill, on the floor of the House, when he stated: “Finally, we have been concerned all along with the problem of providing protection to the customers of firms that might fail before enactment of the bill into law. We early anticipated this possibility but we have specifically declined to make the bill retroactive in its application. The bill is prospective from the date of its enactment.” [emphasis supplied] 116 Cong. Rec. 39350-39351, 12-1-70. Congress, lacking precise information on the condition of the industry, was concerned with the impact that S.I.P.C. 86 Court of Appeals Opinion coverage might have on the Treasury. The losses that had already been experienced by the industry were regarded by Congress as the industry’s responsibility. 8S. Rep. No. 1218, 91st Cong. 2d Sess. 6 (1970); H.R. Rep. No. 91-1613, 91st Cong., 2d Sess. 14 (1970). Clearly to apply S8.I.P.C. to a firm that was bankrupt prior to the Act would be to give the Act a retroactive ap- plication that runs counter to the Act’s clear purpose as reflected by its legislative history. However, application of the Act to Guaranty would not be in our view a retroactive application. “A statute is not rendered retroactive merely because the facts or requisites upon which its subsequent action depends are drawn from a time antecedent to its enactment.” Coa v. Hart, 260 U.S. 427 (1922). The time period of the financial difficulties of the broker-dealer bears more on the status of the broker within the meaning of the Act than upon the issue of retroactivity. The court in Lohf found the absence of business activity subsequent to the effective date of the Act as determinative of the non-coverage issue when it stated: However, it is apparent that plaintiff was not con- ducting its business as a broker or dealer at the effective date of the Act. The business was in the jurisdiction of the bankruptcy court, and the day to day decisions were being made by the trustee. We cannot consider plaintiff then to be a “broker or dealer,” whether registered or not, as contemplated by the Act. It makes no difference for these pur- poses that plaintiff’s registration had not been of- fically terminated, and thus the automatic member- ship in the Securities Investor Protection Corpora- tion may have continued in form. It could not be expected that the Act could be applied to firms which had already gone out of business. Plaintiff thus did not have the status of a broker or dealer for the pur- poses of the Act. 466 F.2d at 620. 87 Court 0; Appeals Opinion The district court in Bohart-McCaslin Ventures, Inc., supra at 940 made a similar determination when it stated: For purposes of determining coverage under the Act, this Court discerns no legal difference between a firm in bankruptcy and a firm in the financial and legal condition which Midwestern suffered prior to the effective date of the Act. Midwestern, prior to the effective date of the Act, had ceased to be a broker- dealer in any real sense of that terms and has not resumed the normal activities of a broker-dealer even at the present time. These determinations are not applicable to Guaranty since it actually conducted a substantial business after the effective date of the Act. In light of the purposes of the Act, the 101 transactions conducted by Guaranty after the effective date are sufficient, we believe, to qualify Guaranty’s customers for the protection provided by the Act. As the Tenth Cireuit stated in Lohf concerning the coverage of the Act: We must take this to mean firms or persons which were actually in business in the usual sense at the critical date were the “brokers or dealers” referred to. Congress was willing to extend coverage to then financially weak institutions and those of unknown strength, but the line was drawn to exclude those which had failed and were thus in fact not brokers or dealers. Supra at 621. We hold that Guaranty, though financially weak, was, in fact, a broker or dealer at the effective date of the Act. The court below focused on the filing date of the action against Guaranty by the S.E.C. which was prior to the effective date of the Act. However, the S.E.C. did not 88 Court of Appeals Opinion seek to foree (iuaranty into receivership until after the effective date Therefore, the filing of the original S.E.C. action did not prevent Guaranty from conducting normal business after the effective date of the Act and thus quali- fying as a broker-dealer. The S.LP.C. and the S.C. challenge the receiver's standing to bring an action to compel either of them to act under the S.L.P.A. The court below held that the provi- sions of the Act “do not limit this court’s power to adjudi- cate an enforcement action brought by a receiver of an insolvent member of S.LPLCL" We agree. The appellees point to an absence of express language providing for an enforcement action by the customers of a securities com- pany or their representatives as prohibiting such an action. We are persuaded, however, that the lack of express lan- guage of exclusivity in providing for an enforcement action by the S.F.C., coupled with a general provision allowing for suits against the S.1.P.C.. evidences an intent by Con- gress that the statute should not be as narrowly construed as the appellees urge. The customers of Guaranty have a definite interest in the application of the S.1.P.A. to the present litigation. The receiver, the representative of the customers of Guaranty, seeks to have the S.1.P.C. meet its obligations to the eus- tomers under the broad purposes of the S.I.P.A. Appar- ently, the S.I.P.C. has not attempted to obtain an adjudica- tion of the necessity for providing the protections of the S.1.P.A. to the customers of Guaranty. Nor has the S.E.C. moved to compel the S.1.P.C. to meet its obligations. We do not believe that Congress intended under such cireum- 5. 15 U.S.C. 78 cce (b) (1) provides that the S.I.P.C. has the power “to sue and be sued, complain and defend, in its corporate name, through its own counsel, in any court, State or Federal.” tie Rap ties i te Bits wba 89 Court of Appeals Opinion stances to leave the customers of securities firms without remedy under the S.L.P.A. Furthermore, despite the appellees urgings, we find no constitutional® or statutory prohibition’ to the maintenance of an enforcement action by the receiver in this case.* The judgment of the district court holding the S.1L.P.A. inapplicable and dismissing the action as to S.1.P.C. must therefore be reversed for the reasons stated herein. Since we reject the premise on which the S.L.1.C. was dismissed as a party to the action—inapplicability of the S.LP.A. to a company of Guaranty’s status—the action is remanded to the district court for processing consistent with this opin- ion and specifically to determine and enforce any rights of (Giuaranty’s customers under the S.1L.P.A. 6. To meet the “case or controversy” requirement of the Constitu- tion, the Supreme Court has formulated a standard for ascertaining those persons with “standing” for maintaining an action in a federal court. The standard as defined by the Supreme Court in Sierra Club v. Morton, 405 U.S. 727 (1971), is that one must have suffered “injury in fact” and the injury must be an “interest arguably within the zone of interests to be protected.” The customers of Guaranty and their representative clearly meet this broad standard. See also Data Processing Service v. Camp, 397 U.S. 150. 7. As mentioned earlier, there are no terms of exclusivity of enforcement in the statute. 8. The S.I.P.C. also attacks the jurisdiction—both subject mat- ter and in personam—of the district court to entertain this action. We find that the district court sufficiently disposed of these conten- tions in its memorandum opinion. FILED Apnait 23, 1974 James A. Hiccens, Clerk Court of Appeals Judgment UNITED STATES COURT OF APPEALS For THK Sixree Crrevuir No. 73-1451 rl Secuniries AND ExcHaANGe COMMISSION, Plaintiff, ns, Guaranry Boxp anp Securiries Corporation, Mr. Ax, Defendants, James C. Barsnourn, Recriver, Appellant. ee Before: PHituips, Chief Judge, CeLesrezze and MiLuEr, Circuit Judges. JUDGMENT AppraL from the United States District Court for the Middle District of Tennessee. Tuts Cause came on to be heard on the record from the United States District Court for the Middie District of Tennessee and was argued by counsel. On Constveration Wuenreor, It is now here ordered and adjudged by this Court that the judgment of the said Dis- 7 eae el t ate teen 91 Court of Appeals Judgment trict Court in this cause be and the same is hereby reversed and the case is remanded for further proceedings. It is further ordered that Appellant recover from Appel- lee, the costs on appeal, as itemized below, and that execu- tion therefor issue out of said District Court. Enterep By Orper or THE Court J oHuN P. HeHMan Clerk A True Copy. Attest: John P. Hehman, Clerk Issued as Mandate: Costs To be recovered by Appellant Filing fee .................. $25.00 ,.. eee $ — Total 00 92 SUPREME COURT OF THE UNITED STATES No. 73-2055 Er Securities Investor Protection CorPoRATION, Petitioner, v. James C. Barsour, et al. rr ORDER ALLow1ne CrrTIoRaRt. Filed October 21, 1974. The petition herein for a writ of certiorari to the United States Court of Appeals for the Sixth Circuit is granted, limited to the following questions: “1, Whether customers of a Member have an implied private right to action to compel SIPC to meet its alleged obligations to them under the Act, despite Section 7(b) thereof which grants that right only to the Securities and Iixchange Commission? “9. If such a right of action can be implied, whether a receiver of a Member has standing to maintain it?” ee = --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_0133%3A02. Public record. Not legal advice.