Petition — Carpenter v. Edwards & Warren

Supreme Court brief1979

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Whe 120

Supreme Court of the Unite

OCTOBER TERM, 1979

THOMAS S. CARPENTER, ELLIOTT TAYLOR, ELDO GROGAN,

WILLIAM MILLS, and GENE PATTON,

Petitioners

EDWARDS AND WARREN, PROFESSIONAL ASSOCIATION;

MARK B. EDWARDS; JOSEPH WARREN, III;

GRESHAM NORTHCOTT; BETEX CORPORATION,

a North Carolina Corporation; HARRIS, UPHAM &

COMPANY, INC.; MICHAEL B. ALLRAN; EDWARD R.

ANDERSON; A. J. BEALL, JR.; ANNE C. HAWLEY;

BARBARA MORGAN; ROBERT S. MORGAN; G. F. PARKER;

SAMUEL WHITE; R. W. CANNON; DOMINIC CAPELLI;

PAULINE CAPELLI; FRANK W. CAYCE; JOHN GAYLORD, JR.;

JOHN A. JENKS; and FRANK MANSHIP,

Respondents

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Counsel

Harry C. Hewson, Esq.

Hunter M. Jones, Esq.

JONES, HEWSON & WOOLARD

1000 Law Building

Charlotte, North Carolina 28202

Telephone: 704/372-6541

Attorneys for Carpenter and

Taylor

J. DOUGLAS STEWART, Esq.

TELFORD, STEWART & STEPHENS

Fifth Floor, First Federal Building

Gainesville, Georgia 30501

Telephone: 404/536-0101

Attorney for Grogan, Mills and

Patton

MICHAEL pon ay oo.

weer t 28

INDEX

cc sccssessnscecscceceosees

1. Is the decision of the Court of Appeals, that

liability of a controlling person under

Section 15 of the Securities Act of 1933

requires “something more than negli-

gence,” in conflict with a controlling deci-

sion of this court (“‘We also consider it

significant that each of the express civil

remedies in the 1933 Act allowing recovery

for negligent conduct, see §§11, 12(2), 15,

15 U.S.C. §§77k, 771(2), 770, is subject

to significant and procedural restrictions

***” 425 US. 185 at 208 (emphasis

added ) ) and therefore erroneous’?.............

2. Is control under Section 15 negated as a

matter of law where a brokerage firm

knowingly permitted and failed to pre-

vent continuation of sales by its former

registered representative (proscribed by

Section 5 and actionable under Section

12) of the identical fornt of unregistered

securities that he was selling prior to the

termination of his employment, as dis-

closed to the firm in mail directed to him

at the office and opened and examined by

his supervisor, the details of which were

withheld from the firm’s compliance offi-

cer and from the New York Stock Ex-

change, which was falsely informed in a

required report that the registered repre-

sentative, during his employment, was not

known to have violated the Securities

Laws and when, had the facts been dis-

closed, an investigation would have been

made which would have resulted in the

termination of the sales and have pre-

vented the sales in question to the peti-

tioners through injunction at the instance

of the Securities Exchange Commission or

the voluntary act of the registered repre-

sentative who was ignorant of the illegal-

UF visiptccsrccnbbcsibhcesanderdsiadia iucitadldaaiedbcbidsdelere:

3. Did the Court of Appeals err in holding that

there is no issue of fact upon which to

base a recovery against Harris, Upham

and that Harris, Upham is entitled to

judgment as a matter of law? .....................

| SRRILAD 5 ties AOR ERNE POAT RD RE PN

SPOS SOSSSSSSSETESEESESEEESESESE SEES EE SESE SESE ES ESESES

Reasons for Granting the Writ

POSSESSES EHE SESE SESE EEEEES OSES

I. The Court of Appeals misread Ernst & Ernst

v. Hochfelder as requiring under Section

15 “more than negligence” of the control

person but recognized that evidence of

negligence W@S Present ...............cccccceecsceeees

Ii. Harris Upham had full power and authority

to prevent the illegal sales even though

Northcott was no longer employed, by a

truthful report to the New York Stock

Exchange and to the Securities Exchange

FT REID SCREAM Dan OOOO

II. Harris Upham had full power and authority

to correct Northcott directly during his

employment and this would have pre-

vented the illegal sales after his termina-

tion

Page

a Te ea ns Lk

IV. Whether there was control both before and

after termination of Northcott’s employ-

ment proximately related to the illegal

sales after termination is a question for

the jury on this evidence. In no event did

Harris Upham affirmatively show that no

evidence of such control existed.................

Ce iiss cab isiaibidhininictaanng sina monpeainseens

Having in effect helped set Northcott out on

his illegal course, Harris Upham cannot

escape liability under Section 15 for the

identical conduct continuing after his em-

ployment by terminating it with a false

representation to regulatory authorities.........

Appendix

Opinion Below. ...........:.sscsseessseeseeseeesssesennseneessenes

Pertinent Parts of Statutes.............cccccccceeeeeeeeeees

Rules of New York Stock Exchange .................

One Carpenter Contract (Exhibit 547).............

Warren Letter to McKinney, copy to North-

cott 11/28/73 (Exhibit 754)..........:ccseeeseees

One Contract Enclosed in Exhibit 754 ( Exhibit

RE-4 Form (Exhibit 357 ).........::ccccsseesseeeeeneeees

Jones Letter of January 21, 1974 (Exhibit

Page

TABLE OF CASES

Page

Armstrong v. Ashley, 204 U.S. 272, 27

L.Ed. 482 (1907) Se a ee a 26

Ernst & Ernst v. Hochfelder, 425 US. 185. 96A

S.Ct. 1375 47 L.Ed.2d 668 (1976) sorts: Tom 21

Hawkins, et al. v. Merrill Lynch, Pierce, F. é

Beane, 85 F.Supp. 104, (DCWD rg ~ sully 26

Norburn v. Mackie, 262 N.C. 16, 136 S.E.2d 279

(FSG chicane censeiissipiatinaiiaseienian ai es ee 26

Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880

(CAS WH ; ended hes 26

e985) Lehigh Valley R. Co., 76 F.2d 762, (CA

p SGP 2 winnnenncasnengneisisiginiidiaeahica timate 25

Southern Pac. Co. v. Libbey, 199 F.2d 341 (CA 9

} AACEDMMRTIRE I sO os ; 3

United States v. Aleli, 170 F.2d 18, (CA 3, 1948)... 25

United States v. Tarumianz, 242 F.2d 191, (CA 3,

SDT ) ...<cessencinesseniinnienen aan 25

OTHER AUTHORITIES

31A Corpus Juris Secundum, Evi i

146, pe. SOBER ce ke — 23

Restatement, Agency, Second, Section 275 .............. 26

Wigmore, Evidence, 3rd. Ed. Sections 581 and

TBS .....c.acreresenceseniieubncliieatsianeiienananaa 25

REFERENCES

FT NE I -Appendix to Petition

Pecncitiiiiiniiasa Appendix to Briefs in Court of Appeals

IN THE

Supreme Court of the United States

OCTOBER TERM, 1979

Tuomas S. CARPENTER, ELLIOTT TAYLOR, ELDO GROGAN,

WILLIAM MILLS, and GENE PATTON

Petitioners

EDWARDS AND WARREN, PROFESSIONAL ASSOCIATION;

MarK B. EDWARDS; JOSEPH WARREN, III;

GRESHAM NorTHCOTT; BETEX CORPORATION,

a North Carolina Corporation; HARRIS, UPHAM &

ComPANY, INC.; MICHAEL B. ALLRAN; EDWARD R.

ANDERSON; A. J. BEALL, Jr.; ANNE C. HAWLEY;

BARBARA MorRGAN; ROBERT S. MORGAN; G. F. PARKER;

SAMUEL WHITE; R. W. CANNON; DOMINIC CAPELLI;

PAULINE CAPELLI; FRANK W. CAYCE; JOHN GAYLORD, JR.;

JOHN A. JENKS; and FRANK MANSHIP,

Respondents

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Petitioners pray that a Writ of Certiorari issue to

review the judgment of the United States Court of Ap-

peals for the Fourth Circuit entered on March 13, 1979,

rehearing denied on May 2, 1979.

REFERENCE TO OPINION BELOW

The opinion of the United States Court of Appeals for

the Fourth Circuit is reported at 594 F.2d 388 and is

attached in the Appendix (pp. la to 14a).

JURISDICTION

The judgment sought to be reviewed was entered on

March 13, 1979. The order denying rehearing was

entered on May 2, 1979. The jurisdiction of this Court is

invoked under 28 U.S.C. 1254.

QUESTIONS PRESENTED

A. Is the decision of the Court of Appeals, th

liability of a controlling person under Section 15 of i

Securities Act of 1933 requires “something more than

negligence,” in conflict with a controlling decision of this

court (“We also consider it significant that each of the

express civil remedies in the 1933 Act allowing recovery for

negligent conduct, see §§11, 12(2), 15, 15 U.S.C. §§77k

771(2), 770, is subject to significant and procedural re-

strictions * * * ” 425 U.S. 185 at 208 (emphasis added) )

and therefore erroneous?

2. Is control under Section 15 negated as a matter of

law where a brokerage firm knowingly permitted and

failed to prevent continuation of sales by its former

registered representative (proscribed by Section 5 and

actionable under Section 12) of the identical form of

unregistered securities that he was selling prior to the

termination of his employment, as disclosed to the firm in

mail directed to him at the office and opened and

examined by his supervisor, the details of which were

withheld from the firm’s compliance officer and from the

New York Stock Exchange, which was falsely informed in

a required report that the registered representative, during

his employment, was not known to have violated the

Securities Laws and when, had the facts been disclosed,

an investigation would have been made which would have

resulted in the termination of the sales and have prevented

the sales in question to the petitioners through injunction

at the instance of the Securities Exchange Commission or

the voluntary act of the registered representative who was

ignorant of the illegality?

3. Did the Court of Appeals err in holding that there

is no issue of fact upon which to base a recovery against

Harris, Upham and that Harris, Upham is entitled to

judgment as a matter of law?

STATUTES INVOLVED

The statute involved is Section 15 of the Securities

Act of 1933, 77 U.S.C. 770, reading as follows:

“8770. Liability of controlling persons

Every person who, by or through stock own-

ership, agency, or otherwise, or who, pursuant to

or in connection with an agreement or under-

standing with one or more other persons by or

through stock ownership, agency, or otherwise,

controls any person liable under sections 77k or

771 of this title, shall also be liable jointly and

severally with and to the same extent as such

controlled person to any person to whom such

controlled person is liable, unless the controlling

person had no knowledge of or reasonable ground

to believe in the existence of the facts by reason of

which the liability of the controlled person is

alleged to exist.” (Emphasis added )

Involved in the interpretation of that section

2, 5, 12, 13, 15, 19, 20 and 22 of the 1933 po gator

15 U.S.C. Sections 77b, 77e, 771, 77m, 770, 77s, 77t and

77v; and Sections 2, 3, 4, 5, 6, 15, 1SA and 21 of the 1934

Act, codified as 15 U.S.C. Sections 78b, 78c, 78d, 78e, 78f,

780, 780-3 and 78u. Copy of the pertinent parts of these

is contained in the Appendix hereto (pp. 15a to

a).

STATEMENT OF CASE

The case in the Court of Appeals involved three

actions initiated in the United States District Court for the

Western District of North Carolina, claiming jurisdiction

under Section 23 of the Securities Act of 1933, 15 U.S.C.

Sec. 77v as pertinent here. Plaintiffs sued the alleged

sellers of unregistered securities and joined Harris, Upham

& Company, Inc. alleging its liability as a controlling

person under Section: 15 of the Securities Act of 1933, 15

US.C. 77To, as well as other statutes no longer relied on as

to it. The petitioners herein were plaintiffs in two of the

actions. The actions were consolidated for discovery.

Upon motion of Harris, Upham, the District Court grant-

ed summary judgment in favor of Harris, Upham against

the plaintiffs and also against the defendants Edwards and

Warren, who alleged cross actions for indemnity and

contribution against Harris, Upham. On appeal of the

plaintiffs and Edwards and Warren, the Court of Appeals

affirmed. This petition is filed by Carpenter and Taylor

who were appellants in case number 77-2051 in the Court

of Appeals and by Grogan, Mills and Patton who were

appellants in number 77-2181 in the Court of Appeals.

The respondents consist of the defendants in the three

actions and the plaintiffs in the third action who were the

appellants in case number 77-2182 in the Court of Ap-

peals.

The evidence bearing on the liability of Harris,

Upham, in the light most favorable to the petitioners, is

summarized as follows:

In 1973 and 1974 McKinney Cattle Company, with

headquarters in Hutchison, Kansas, was engaged in the

purchase, fattening and sale of cattle in Kansas and

Oklahoma (A-25).

Gresham Northcott was a registered representative of

Harris, Upham, a brokerage firm which was a member of

the New York Stock Exchange (A-25). Harris, Upham

admits (A-35) that the rules of the Exchange were as set

out in the Fifth Amendment to the complaint (A-9-15).

These rules are copies in the Appendix hereto (pp. 29a to

34a). Under the statutes set out in the Appendix, these

rules had to have the approval of the Securities and

Exchange Commission. Harris, Upham further admits

(A-140) that it is regulated by the Securities Acts of 1933

and 1934 and obligated to abide by the rules of the New

York Stock Exchange.

In the fall of 1973, Northcott discussed with defend-

ants Edwards and Warren, Attorneys, investments in

cattle contracts with McKinney and exhibited to them a

form of letter contract. Edwards and Warren prepared a

revised form which was the form used for the contracts in

suit (A-25-27). Neither the letter contracts nor the

revised contracts were registered as a security (A-26 and

27). The two contracts purchased by the petitioner

Carpenter and sued upon in this action appear at A-750-

755. Copy of one of these contracts is contained in the

Appendix hereto (pp. 35a to 37a). The contracts of the

other petitioners now relied upon were on the identical

form and involve cattle. All petitioners’ contracts were

entered into in 1974, after Northcott left Harris, Upham.

Claims of Patton on grain contracts against Harris, Up-

ham are abandoned. (Northcott did not sell any grain

contracts until after he left Harris, Upham).

Northcott resigned as a representative of Harris,

Upham on January 17, 1974, effective February 1, 1974

(A-745). While still employed, he had been instrumental

in producing many cattle contracts for McKinney on the

same forms as those in suit. Three such contracts dated

November 1, 1973 appear at A-757-765. These three,

with copy of a letter from Joseph Warren, III to

McKinney dated November 28, 1973 (A-756(g) and

756(h)) were sent to Northcott at Harris, Upham’s office

(A-445). Copy of the letter of November 28, 1973 and of

one of the enclosed contracts is contained in the appendix

hereto (pp. 40a to 42a). At that time Claude L. Ives, Jr.

(hereinafter called Ives) was a branch manager of the

Charlotte office of Harris, Upham. As such he was

required to be familiar with the securities laws and the

regulations of the various exchanges and he testified that

he was familiar with all the rules and regulations (A-554).

He had the responsibility of supervising the conduct of

actions of representatives such as Northcott (A-575).

Ives testified as follows (A-588):

“Q What steps did you take to police Mr.

Northcott or his activities from September

of ‘72 until the time he was terminated?

A_ I checked all incoming mail into the office.

It was all opened and read. I checked all

outgoing mail and initiated all correspond-

ence leaving our office. I checked all

monthly statements at least quarterly, usual-

ly monthly. I looked at every daily activity

sheet or blotter with the idea of examining

every trade that was made in the office.

Those are the basic steps.”

——

Northcott testified (A-446 and 447) that whoever

opened the mail and his copy of the letter of November

28, 1973, if he looked at it, could have seen the exact

terms of each of the three agreements, referring to the

letter of November 28, 1973 appearing at A-756(g) and

756(h) and the three agreements appearing at A-757-765.

Other similar correspondence which came to North-

cott and was opened and read by Ives is set out in the

record (A-756 and 757; A-755(a) and 756(b)).

This correspondence disclosed to anyone who read it

that contracts on this form were being offered to the

public, each contract showing on its face that a form, with

blank spaces filled in, was used.

The fact that Northcott was engaged in participation

in the sale of McKinney cattle contracts was common

knowledge in Harris, Upham’s office, to such an extent

that Northcott was called “cattle baron” (A-748).

When Northcott resigned on January 17, 1974, the

rules of the New York Stock Exchange required Harris,

Upham to, and it did, submit a Notice of Discontinuance

of Registered Employee. The form submitted is Exhibit

375 (A-744), known as form RE-4. Copy is contained in

the Appendix hereto (p. 43a). The question “Within your

knowledge and the records of your firm, was he (she) ever

subject of * * * or has he (she) ever * * * (e) violated any

provision of the NYSE Constitution or Rules or of any

securities law or regulation * * * ?” was answered “no”.

The answer to paragraph 8(e) was false in that:

(a) Northcott had violated a rule of the Ex-

change to the knowledge of Harris, Upham in his

activities relating to McKinney cattle contracts;

(b) He had violated provisions of the securities

laws in that he had sold unregistered securities.

There is ample evidence to support a finding of fact

that Harris, Upham through Ives had knowledge of

the exact terms of the cattle contracts Northcott was

engaged in selling. Evidence hereinafter recited

rebuts any finding that Harris, Upham had no know-

ledge of or reasonable ground to believe in the

existence of the facts by reason of which the liability

of Northcott existed.

: After his resignation, Northcott continued to sell the

identical kind of cattle contract to customers of Harris,

Upham and members of the public, including the petition-

ers, one of whom was Carpenter who was known by

Harris, Upham to be so dealing with Northcott.

The following colloquy between Judge Hall of the

Court of Appeals and Mr. Abrams, counsel for Harris,

Upham, quoted from a transcript of the argument in the

Court of Appeals, tends to show that the sufficiency of the

evidence to support a finding of actual knowledge on the

part of Harris, Upham of the facts on which the liability of

Northcott was based was recognized by the Court and

Harris, Upham’s counsel:

“JUDGE HALL: Let me ask you: Could the

evidence have been construed by anybody that

Harris, Upham knew all about Northcott’s acti-

vities?

MR. ABRAMS: At particular points in time,

yes. But that’s the problem with the way this is

set up. I set out in the brief—

JUDGE HALL: But at any time, under any

stretch, could the evidence be construed, any

rationing basis to be construed—

ENE ND eet A Mi eis oe aaa Bese NS ale

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~ Nate a hl WD Ne i a A Be

MR. ABRAMS: Yes, sir, I think so.

JUDGE HALL: You think so?

MR. ABRAMS: Yes, sir, I think so.

JUDGE HALL: If that’s true, I assume they

had an obligation to tell about it? (Inaudible )”

(pp. 35 and 36).

Harris, Upham admitted in its brief in the Court of

Appeals for purposes of the appeal that the contracts sued

upon by the petitioners “were unregistered investment

contracts and ‘securities’ sold in violation of Section 12(1)

and 12(2) of the Securities Act of 1933.” That Northcott

had sold, while employed, or been instrumental in selling,

similar contracts and that these came to the attention of

Ives has already been shown.

Prior to Northcott’s resignation and prior to the

submission of form RE-4, in late 1973, Harris, Upham

began to object to Northcott’s outside activities pertaining

to McKinney cattle contracts. According to Northcott’s

testimony this objection was never related to violation of a

Stock Exchange Rule but was made on the ground that

Northcott was not spending enough time in the business of

Harris, Upham. He testified that he was not advised that

he was violating any rule (A-464, 480, 481, 488). North-

cott testified (A-460 and 461 ) that if Ives had told him his

activities were illegal he would have discontinued them

immediately. Ives reported general dissatisfaction with

Northcott’s performance to his superior, Vice-President

Robert Q. Jones, as a result of which both Ives and Jones

met with Northcott. Jones considered that the outside

activities needed scrutiny by the compliance department

of Harris, Upham (A-601). Jones, by letter, reported to

Ronald J. Veith, Harris, Upham’s compliance officer, only

some of the facts known to Jones and stated “our in-

vestigation is somewhat incomplete, but, on the basis of

the facts presented I would appreciate your advice as tc

whether Northcott should be given a clean release from

Harris, Upham.” Copy of the letter of January 21, 1974,

Ex.ibit 355, A-741 and 742 is contained in the Appendix

hereto (pp. 45a and 46a).

Veith replied on January 24, 1974 (A-743) to the

effect that he saw no reason why Northcott should not be

given a clean release from Harris, Upham, remarking that

if in the future additional facts were obtained regarding

his activities, “we can always forward them to the New

York Stock Exchange.” Harris, Upham admits that no

further investigation was made (A-168 and 196, para-

graphs 117). Veith took the position that any further

investigation was up to Jones and Jones took the position

that it was up to Veith to advise him if any further

investigation should be made.

One element of the incomplete investigation was the

failure of Northcott to furnish a list ef customers of Harris,

Upham referred by him to McKinney. Ives, but not Jones

or Veith, already knew of at least one such customer,

Carpenter.

On deposition, Jones testified that if he had known of

the letters coming across Ives’ desk, he would have

reported them to Mr. Veith who would have told him

what to do (A-602 and 603).

In turn, Veith testified to a chain of facts (not mere

possibilities as found by the District Court and reasserted

by the Court of Appeals) which would have resulted in

preventing the illegal sale of securities to the petitioners if

Veith had been given all the facts known to Ives and

Jones. His essential testimony is set out in the Appendix to

the briefs in the Court of Appeals (A-628-652 ). Pertinent

parts are quoted below:

(A-628 and 629)

“A. If one of our Registered Representatives

engages in an outside activity which is a

kindred business to the securities industries,

the business of Harris, Upham, that is a

violation of an Exchange Rule, yes, it is.

Q. Well, okay, so if you had known that he was

selling these securities, if it’s a fact that he

was, if that had come to your attention,

there would have been a full field in-

spection, isn’t that right?

A. Yes, that is absolutely right.

Q. Not only would Jones have jumped on the

plane to go down to Charlotte, but you’d

have been down here too, isn’t that true?

A. That is true.

Q. And there would have been all kinds ques-

tions asked until you got—you’d find out the

truth, wouldn’t you?

A. I certainly would have.

Q. You would have asked him questions if it

took five weeks until you were satisfied that

you had the truth, isn’t that right?

A. That is correct.”

(A-630)

“Q. Now, did I understand you to tell Mr.

McClure that if you had been in the position

of supervision over Mr. Northcott, and the

investigation was incomplete, as Mr. Jones

said in his letter it was, you would have

made an investigation, you would have

made it complete?

That is correct.”

(A-633-637)

“Q. Now, Mr. Veith, I hate to repeat, but you

> ©

would yourself have made a complete in-

vestigation. Do you still say that or do you

change your testimony about that?

Had I been privileged to the information

that it is alleged that our Manager had and

that our Supervising Officer had, I would

have continued the investigation, yes.

Why?

Because the information they had was a lot

more than I had.

I agree with you, why would you have

continued the investigation?

Because from the information that these

people had, there was a possibility, a greater

possibility of the violation of rules or a

possibility, let me rephrase that, a possibility

of the violation of rules.

You would have made a further in-

vestigation if, on the facts known to you,

there was a possibility of a rules violation,

wouldn’t you?

I certainly would have.

Yes, sir.

Yes.

QO»

Now, what was it that you knew—and you

have sat through the depositions of both Mr.

Jones, and Mr. lves, have you not?

Yes, I have.

So you’ve heard them tell everything that

I’ve heard?

That’s correct.

What was it that they knew, that they did

not, or Mr. Jones did not tell you?

I had no idea that this person that was

being—that our salesman was referring

people to was one of his accounts.”

What difference would that make?

That would have, number one, alerted me

to either a conflict of interest or, number

two, a possible rebate of commissions.

What else was there that they knew, accord-

ing to what they testified to here this week

that you did not know as result of reading

that letter?

I did not know that Mr. Northcott was put

under any pressure at any time. I did not

know that Mr. Northcott was taking extend-

ed leaves from the office. I did not know

that a list of customers had been requested

and not furnished. That’s what I did not

know.

All right, now what difference did it make

that he was being pressed for information

by the Branch Manager and also by the

Supervisor, who is the equivalent of the

>O>O0

Regional Manager in some other firms?

What difference did it make that he was

being pressured by them for information

and wouldn’t give it to them?

Because under his agreement with the New

York Stock Exchange, he has agreed to

cooperate fully with any investigation in-

itiated by us, as well as the regulatory

authorities.

What difference would it make that he was

taking extended leaves of absence?

Because we are paying him to be a salesman

with Harris, Upham and when he is out of

the office, we should know what he is doing

and where he is.

Why?

Why should we know where he is?

Yes.

Because he is not performing his primary

function that we are paying him for—why is

he not performing that function, where is

he?

Would it be interesting to know if he was

performing a function that was hurting

somebody to whom Harris, Upham had a

duty?

Well, it would be interesting to me to know

whether he was performing a function that

was hurting anybody, regardless of whether

Harris, Upham had a duty or not.

A eh Hr Dd ee oR re 2

he ree Pe eS

ek et

——

But you’d be particularly interested if it was

possible that he was hurting somebody who

was a customer of Harris, Upham?

I certainly would.

And you have, of course, an understanding

that a number of these rules are designed

not to protect the financial status of Harris,

Upham but to protect the customers of

Harris, Upham and the public, isn’t that

correct?

That is correct.

Now what difference would it have made

that the list of customers that he was refer-

ring to McKinney was requested and not

furnished as separated from just a general

refusal to give information?

Well, you’re talking about a salesman refer-

ring customers to an account which he han-

dies, the account which he handles produces

commissions and there is a term used in our

industry, such as, the term is, ‘Soft Dollar

Business,’ you may have heard it before, you

may not. It’s mainly directed toward in-

stitutions; it is in essence, to put it in lay-

man’s terms, ‘You scratch my back, I'll

scratch yours.’ If this was the case, I would

have definitely wanted a list of those cus-

tomers, because I would have called those

customers to see if at any point in time Mr.

Northcott ever solicited anything to them

regarding McKinney Cattle Company.

That’s why I would have wanted those lists

of customers.”

(A- 643-645)

“Q. And I’m asking you if an activity, a given

activity, make the assumption, if you will, is

in violation of Rule 346 and it has the

potential of hurting a Harris, Upham cus-

tomer, which you can conceive, can you not?

Yes, I can.

If from Harris, Upham’s point of view and

your point of view one of the reasons why

you enforce that rule, that concept, is to

protect the customer, the person who might

get hurt?

Yes. * * * (L)et’s take this information

right here, let’s assume that I had a conver-

sation with Mr. Jones based on information

in this letter and add to that the name of

McKinney, being an account of the Regis-

tered Representative, at that point, notes

would have been taken and investigation

would have been initiated with or without

Mr. Jones’ consent.

Rule 346 requires that every Registered

Representative devote his entire time during

business hours, in the case of Harris, Up-

ham, to Harris, Upham?

That is correct.

It also requires that he shall not at anytime

be engaged in any other business, doesn’t it?

Unless specifically approved by the New

York Exchange.

Right. And, of course, there is no question in

this case that, with respect to Northcott,

(A-647)

whatever activities he was engaged in, there

was no permission from the New York

Stock Exchange, you’d have a file on that

wouldn’t you?

Well, let me say that I do not know of any

activities that we have approved or that the

New York Stock Exchange has approved

for Mr. Northcott.

And you would be in a position to know if

there had been, would you not?

Yes, I would.”

“A. * * *]’m very pleased with the functions of

the Securities and Exchange Commission. I

think they do a hell of a job. I think they are

what an investigative, an enforcement body

in the securities industry is all about. That’s

why I feel about the New York Stock

Exchange like I do.

All right, now, if I understand the proce-

dures, you, as Compliance Director in

charge of the representatives, representation

department or whatever you call it, Regis-

tration Department, if you have a reportable

thing, you don’t report to the SEC, you

report to the Stock Exchange, and the Stock

Exchange reports to the SEC, if it has a

reportable thing?” * * *

“Well, let me say that is not unlikely. As a

matter of fact, I have in the past and will

continue in the future to report to the SEC

anything that I think is a violation of the ’33

and 34 Act.

{ A

18 | 19

Q. Direct? with an affirmative answer without attach-

anh rtirse ; "7 i ing to it the complete details of what hap-

A. Dhrect, that is correct. | pened.”

(A-648 and 649) (A-650-652)

“Q. In this particular case, the letter which you “Q. * * * If you had made the investigation

had from Mr. Jones did not contain com-

plete information. As a result of that, as a

routine in your office, the RE-4 Form was,

that was exhibited here, was prepared and

sent to Mr. Jones, he signed it and it was

routinely sent to the New York Stock Ex-

change?

That is correct.

Now, had it reflected the results of a full

investigation by you, which would have

been made had you had the facts that Mr.

Ives and Mr. Jones had, had it reflected an

affirmative answer to the question, has he or

she ever violated any provision on New

York Stock Exchange Constitution, Rules or

any securities laws or regulations or violated

any of his or her agreements with the Ex-

change, had either one of those questions or

both of them been answered yes instead of

no, when the RE-4 got to the New York

Stock Exchange, if I understand your testi-

mony, the only thing that would have hap-

pened would be a letter to you, a letter to

Mr. Jones, and a letter to the Branch Man-

ager, is that right? From the New York

Stock Exchange.

Well, that is correct, but I could not submit

a RE-4 to the New York Stock Exchange

Da T A nantirint. Sec toe

that you would have made had you known

what Mr. Ives knew and what Mr. Jones

knew, and had you determined—I’m not

asking you to decide this case—had you

determined that there was a violation of the

laws and had you reported that on RE-4

together with your full investigation so they

wouldn’t have to write you three letters

back, what would they have done? * * *

In all probability, they would have initiated

a hearing with Mr. Northcott if he agreed to

attend.” * * *

* * * T asked you if there was a hearing

and if, as result of the hearing, it was

determined that he was selling unregistered

securities that should be registered in viola-

tion of the ‘33 Act, if as a practical mat-

ter—particularly if the man didn’t know he

was doing that—if it wouldn’t as a practical

matter put an end to his activity in that

respect. :

Well, I think if the New York Stock Ex-

change determined that he, in fact, did

violate the 1933 Act by selling unregistered

securities, it would put an end to his career

in the securities business with a Stock Ex-

change member firm and their investigation

would then be referred over to the SEC to

hopefully put an end to his acting in the

securities business at all.

Q. And if by chance he didn’t really know

before the hearing that what he was doing

was wrong, and he was basically a decent

person, it would put an end to it right there,

wouldn’t it?

A. Of course, you know, I mean don’t do it

anymore, yeah, for sure.

That’s just plain, ordinary common sense,

right?

Yes.

Now, I’m interested in your statement that

you might report something to the SEC

yourself. If your investigation, that you

would have made had you had the informa-

tion that Mr. Ives had and Mr. Jones had,

revealed to you that Mr. Northcott was

selling unregistered securities in violation of

the Act, would you have reported that to the

SEC?

A. Yes.

And you have said, I believe, that the SEC,

upon receipt of information of that sort, was

very efficient and you approved of their

operation in enforcing the law.

A. That is correct.”

The Court of Appeals recognized that the evidence per-

mits a finding that “at best, Harris, Upham was guilty of

simple negligence,” Opinion, appendix p. 12a. Veith’s

testimony alone is sufficient to support such a finding, and

further a finding of proximate cause. “

REASONS FOR GRANTING THE WRIT

Petitioners, Carpenter and Taylor, brought their ac-

tions within the one year provided by the 1933 Act and

asserted liability of Harris, Upham under Section 15 of

that Act in the trial court and the Court of Appeals. They

did not assert liability under Section 20 of the 1934 Act in

the Court of Appeals. The remaining petitioners, Grogan,

Mills and Patton, in addition to reliance on Section 15,

also asserted liability under Section 20 of the 1934 Act in

the Court of Appeals but abandon that assertion in this

court. The Court of Appeals concluded that the standards |

under both Acts were the same and stated “The con-

trolling persons provisions contain a state-of-mind condi-

tion that requires a showing of something more than

negligence to establish liability,” citing Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 207-209, 96A S.Ct. 1375, 47

L.ed.2nd. 668, (1976) n. 27 and 28. It seems clear that the

Court of Appeals thus decided a federal question in a way

in conflict with the very decision of this Court on which

that Court relied. See Opinion attached, at Appendix p.

10a. s

Footnote 28 of the Ernst opinion relied on by the

Court of Appeals deals not with Section 15 of the 1933 Act

but with Section 20 of the 1934 Act. In the body of its

opinion, this Court made it clear that Section 15 of the

1933 Act allows recovery for negligent conduct. We quote

from this Court’s opinion in that case at page 208 as

follows:

“We also consider it significant that each of the

express civil remedies in the 1933 Act allowing

recovery for negligent conduct, see §§11, 12(2),

15, 15 USC §§11, 12(2), 15, 15 USC §§77k.,

771(2), 770, is subject to significant procedural

restrictions not applicable under §10(b).” (Em-

phasis added)

The Court of Appeals decided in effect that control

for the purposes of Section 15 of the Securities Act of 1933

cannot extend to any activities taking place subsequent to

the employment, though of the same kind begun during

employment, notwithstanding knowledge of such activities

both during employment and afterward.

The evidence presents as strong a case of control as

could be made, with respect to after-employment acts,

short of showing active participation by Harris, Upham in

the sales in suit. In view of the statutory scheme of the

securities laws requiring supervision of individual brokers

by brokerage firms and reports of securities laws violations

by brokerage firms to stock exchanges for the purpose of

preventing sales of unregistered securities, an important

question of federal law is presented as to whether liability

of a brokerage firm as a controlling person under Section

15 of the 1933 Securities Act can, in any case, be based on

the practical ability of the brokerage firm, by proper

supervision and accurate reports, to bring about pre-

vention of known illegal actitivies of registered representa-

tives employed by it after leaving its employment which

had their genesis during the employment, and which were

accomplished through the use of this firm’s facilities. This

is a question which has not been, but should be, settled by

this Court. The District Court and the Court of Appeals

avoided meeting this question directly by erroneously

finding that the evidence showed mere possibilities that

proper investigation and reports by Harris, Upham could

have prevented the illegal sales, whereas the evidence

clearly supports a finding of fact that such sales would

have been prevented had Harris, Upham performed its

duties as to supervision and reports. Not only is there

evidence that a proper investigation and report would have

resulted in the illegal activities being reported to the SEC

and that the SEC is efficient in enforcement of the

securities laws but there is also a presumption in law that

the Commission would have performed its duties. 31A

CJS Evidence, Section 146, pp. 318-361. The SEC is

vested by statute with power to prevent violations of

securities laws. 15 USC 77s and 77t, Sections 19 and 20 of

the Securities Act of 1933.

III.

Aside from the control (operative after Northcott

resigned) by means of an accurate report to its own

compliance officer and to the New York Stock Exchange,

Harris, Upham had earlier contro! over its agent, North-

cott, which, if properly exercised, would have put a

permanent end to Northcott’s illegal actitivies while he

was still employed. Northcott testified (A-460 and 461)

that if he had been advised that his activities were illegal,

he would have discontinued them. Clearly, Harris, Up-

ham’s duty of supervision included the duty to advise

Northcott that his outside activities, known to his super-

visor, were illegal. It also had the duty to its own

customers, such as Petitioner Carpenter, to advise them as

to illegality of investments being sold to them by its

representative to its knowledge. The evidence shows that

Ives knew that Carpenter was an investor in McKinney

cattle contracts both before and after Northcott’s resigna-

tion (A-655-657). If Ives had merely suggested to

Carpenter that he take another hard look at these in-

vestments, Carpenter would not have bought the contracts

in suit (A-667). It is also clear from the testimony of

Carpenter (A-670) and that of Taylor (A-678 and 679)

that if Carpenter had been alerted to the true facts, it

would have resulted in Taylor not buying the McKinney

investment in suit. The same may be inferred as to the

other petitioners.

Harris, Upham, through Ives, had full knowledge of

Northcott’s activities while he was employed. If it had

performed its duties of supervisor and its obligation to its

own customers while Northcott was employed, his illegal

activities would have been terminated while he was still

employed.

IV.

There was no showing on motion for summary

judgment that the evidence was insufficient to present an

issue of fact as to liability of Harris, Upham under Section

15 of the Securities Act of 1933 and the questions of law

hereinbefore discussed are clearly presented by the record.

The following issues of fact affecting the liability of

Harris, Upham, arise upon the pleadings and, Petitioners

contend, upon the evidence:

1. Was Harris, Upham a controlling person of

Northcott within Section 15 of the Securities Act of

1933?

2. Did Harris, Upham have knowledge of or

reasonable ground to believe in the existence of the

facts by reason of which the liability of Northcott is

alleged to exist?

The burden of proof on the first issue is on the

Petitioners. It is well settled that the burden of proof on

the second issue is on Harris, Upham. The Court of

Appeals recognized that the evidence would support a

finding of negligence and placed its decision in this respect

on the erroneous holding that more than negligence is

required. The issue of law is then reduced to the question

whether it affirmatively appears that there is no evidence

to support an affirmative answer to the issue of control. In

holding that it does affirmatively so appear, the District

Court treated Veith’s testimony as to what he would have

done if he had been given the facts known to Ives and

Jones as evidence of a mere possibility as distinguished

from a fact and treated Veith’s testimony as to the practice

of the SEC in enforcing the law plus the legal presumption

that the SEC would perform its duties as supporting no

more than a mere possibility. This erroneous position was

adopted by the Court of Appeals.

That Veith’s testimony that he would have reported

any discovered violation to the SEC was competent is

supported by the following authorities:

Wigmore, Evidence, 3rd, Ed. Secs. 581 and 1963

Searfoss v. Rr. 76 F.2nd 762 (CA.3, 1935)

United States v. Aleli 170 F.2d 18 (CA3, 1948)

Southern Pacific v. Libbey 199 F.2d 341 (CA 9,

1952)

The legal presumption that a governmental agency

(here the SEC) will perform its duties applies to antici-

pated action as well as to action already taken, and,

perhaps, with greater force.

United States v. Tarumianz, 242 F.2d 191 (CA3,

1957)

Harris, Upham was charged with the knowledge

which Ives and Jones had and cannot escape the obliga-

tion to act on that knowledge on the ground that these

responsible agents failed to disclose their knowledge to

Harris, Upham’s compliance officer, Veith.

Restatement of Agency, Second, Sec. 275

Armstrong v. Ashley, 204 U.S. 272, 27 S.Ct. 270,

51 L.ed. 482 (1907)

Norburii v. Mackie, 262 N.C. 16, 136 SE 2d 279

(1964)

That liability under Sec. 15 of the Securities Act of

1933 is not dependent upon continuation of a relationship

of master and servant is supported by forceful reasoning

in the District Court case of Hawkins v. Merrill Lynch, 85

F. Supp. 104 (DCWD Ark., 1949). That heavy consid-

eration is to be given to potential power to influence and

control the activities of a person as opposed to the actual

exercise thereof is expounded by the Court of Appeals for

the Third Circuit in Rochez Brothers, Inc. v. Rhoades, 527

F.2d 880, 890 and 891 (CA3, 1975).

In these cases Harris, Upham had duties of super-

vision and reporting under rules of the New York Stock

Exchange, by which it was bound, which rules were

approved by the SEC before the Exchange could be

registered with the Commission. By properly performing

its duties under those rules, Harris, Upham had the ability

to put into operation a series of occurrences which would

have prevented the illega! sales which are the subject of

these actions, either because Northcott would have ceased

his activities voluntarily on being advised of their illegal-

ity, or because he would have been forced to do so by

action of the SEC. This should be held sufficient to

support a finding of control under Sec. 15 of the 1933 Act,

and to preclude dismissal by Summary Judgment.

CONCLUSION

Everyone on the appeal to the Court .of Appeals,

including the court itself, recognized that Harris, Upham

was a controlling person of Northcott prior to the termina-

tion of his employment, and all recognized at least

implicitly, liability of the brokerage firm for his activities

during that time. See opinion, appendix p. lla. The

Court of Appeals said that control ended when his

employment ended, but a brokerage firm that permits,

and furnishes facilities for, illegal sales of unregistered

securities by its representative during his employment with

it ought not to be able to escape liability under Section 15

for his continued illegal sales to its knowledge after

termination of his employment by pressuring him to

resign, by falsely representing to its regulatory agent that

he had not been engaged in such sales and then taking no

steps of its own to prevent such continued sales when it

had the legal means to do so. The writ should be granted.

Counsel

Harry C. Hewson, Esq.

Hunter M. Jones, Esq.

JONES, HEWSON & WOOLARD

1000 Law Building

Charlotte, North Carolina 28202

Telephone: 704/372-6541

Attorneys for Carpenter

and Taylor

J. Douglas Stewart, Esq.

TELFORD, STEWART & STEPHANS

Fifth Floor, First Federal Building

Gainesville, Georgia 30501

Telephone: 404/536-0101

Attorney for Grogan, Mills

and Patton

APPENDIX

Rnited States Cowt of Appeals

For THE FourtH Circuit

No. 77-2051

THOMAS S. CARPENTER and ELLIoTT TAYI.oR,

Appellants,

VS.

Harris, UPHAM & CompPANY, INC.,

Appellee.

No. 77-2052

JOSEPH WARREN, III, Mark B. Epwarops,

and Epwarps & WARREN, PROFESSIONAL ASSOCIATION,

Appellants,

VS.

HARRIS-UPHAM AND COMPANY,

Appellee.

No. 77-2181

ELDO GROGAN, WILLIAM MILLS, AND GENE PATTON,

Appellants,

VS.

Harris, UPHAM & ComPANY, INC.,

Appellee.

No. 77-2182

MICHAEL B. ALLRAN, EDWARD R. ANDERSON,

A. J. BEALL, Jr., ANNE C. HAWLEY,

BARBARA MORGAN, ROBERT S. MORGAN,

G. F. PaRKer, SAMUEL WHITE,

R. W. CANNON, DomINIc CAPELLI,

PAULINE CAPELLI, FRANK W. CAYCE,

JOHN GAYLORD, Jr., JOHN A. JENKS,

FRANK MANSHIP,

Appellants,

Vv.

Harris, UPHAM & COMPANY, INC.,

Appellee.

Appeals from the United States District Court for the

Western District of North Carolina, at Charlotte.

James B. McMillan, District Judge.

Argued June 5, 1978 Decided March 13, 1979

Before WIDENER and HALL, Circuit Judges, and HOFFMAN,*

Senior District Judge.

Harry C. Hewson (Jones, Hewson & Woolard on brief) for

Appellants in No. 77-2051; William G. Underwood, Jr.

(Caudle, Underwood & Kinsey on brief) for Appellants in No.

71-2052; J. Douglas Stewart (Telford, Steward & Stephens on

brief) for Appellants in No. 77-2181; Robert G. McClure, Jr.

(Long, McClure and Dodd on brief) for Appellants in No. 77-

2182; James H. Abrams, Jr. (William K. Diehl, Jr., James,

McElroy & Diehl on brief) for Appellee in Nos. 77-2051, 77-

2052, 77-2181 and 77-2182.

HorFrrMaNn, District Judge:

These cases are appeals from summary judgment granted

in favor of Harris, Upham & Company, Inc. (Harris, Upham),

a securities brokerage firm. The appellants sought to hold

Harris, Upham liable for losses appellants incurred as pur-

chasers of unregistered securities. The scheme involved in-

vestment in cattle and grain contracts purchased from com-

panies operated by Wallace McKinney, a Kansas rancher. A

* Senior United States District Judge for the Eastern District of

Virginia, sitting by designation.

central figure in the sale of the contracts was Gresham North-

cott, a commodities broker employed by Harris, Upham’s

Charlotte, North Carolina, office until February 1, 1974. The

losses which appellants sought to recoup were suffered on

contracts purchased after Northcott left the employ of Harris,

Upham. Appellants attempted to establish that the brokerage

firm was a “controlling person” under Section 15 of the

Securities Act of 1933 (15 U.S.C. § 77 (1 and 0)) and/or

Section 20 of the Securities Exchange Act of 1934, (15 U.S.C.

§ 78 (j and t)). Following extensive discovery, the district

court granted summary judgment, holding that there was no

theory which would support a judgment against Harris, Upham

based on actions taken by Northcott after he left the firm’s

employ.'! We affirm.

he The order granting summary judgment contains n

oe The only pertinent statement is page Pam ates

know of no theory that can support a judgment against

Harris, Upham based on actions taken by rocarayuad North.

cott after he left Harris, Upham’s employ. Plaintiffs

contend that Harris, Upham could have made a report to

the New York Stock Exchange which may have resulted in

the Stock Exchange’s calling Northcott to the attention of

the Securities & Exchange Commission which might have

been able to stop Northcott before he injured plaintiffs.

This tenuous chain is not sufficient to place Harris, Upham

within the definition of a seller (or aider and abetter) or a

controlling person as those terms are used in the relevant

portions of the 1933 or 1934 Securities Acts.

The foregoing order was entered on April 20, 1977. On Ma

1977, a final judgment of dismissal of the claims on which hace

judgment was granted was entered in accordance with Rule 54(b) of

the Federal Rules of Civil Procedure. |

As to No. 77-2052 in which both Edwards and Warren, et al, and

Harris, Upham were defendants, the motion for weidiain judgment

filed by Harris, Upham is to the cross-claim for indemnity and

contribution filed by Edwards and Warren, et al.

Several original plaintiffs did not appeal. It should also be noted

that, in addition to Harris, Upham, there were many other defendants

Pe fis» — does not disclose the disposition of the cases as to the

ants.

Many actions arose from losses suffered from investment in

the McKinney operation and were consolidated for trial.

Appellants (plaintiffs below) in Nos. 77-2051, 77-2181 and 77-

2182 were purchasers of cattle or grain contracts. Appellants in

No. 77-2052 (defendants and third-party plaintiffs below)

sought indemnity and contribution from Harris, Upham for any

liability which they or their law firm might suffer as a result of

Northcott’s actions. Since we hold that Harris, Upham could

not have been liable as a controlling person under the facts of

this case, summary judgment is affirmed as to all appellants.

The McKinney Cattle Company was engaged in feeding

cattle prior to selling them to packing houses. In 1972

Northcott, while employed as a commodities broker for Harris,

Upham, met McKinney in Kansas and solicited commodities

business from him. McKinney became a customer of Harris,

Upham, with Northcott as his registered representative.2 Some-

time in late summer or early fall of 1972, McKinney and

Northcott began feeding cattle by means of subchapter-S cor-

porations.2 Three such corporations were formed. Those

persons who became shareholders in these three corporations

invested no cash, but instead filed financial statements with a

Kansas bank showing a net worth of sufficient amount to allow

‘the bank to loan the money which funded the corporations.

‘ Investors hoped to receive an immediate personal income tax

deduction for the value of the grain purchased to feed the

cattle, and anticipated converting ordinary income into capital

gains upon liquidating the corporations within two years.

Claude L. Ives, Jr., office manager for the Harris, Upham office

in Charlotte, became a shareholder in one of the subchapter-S

corporations, along with Northcott. There is no evidence that

this was ever more than a private investment for Ives, or that he

2 At the time McKinney opened his account, Harris, Upham

investigated McKinney by checking with the Hutchison National

Bank and Trust Company in Hutchinson, Kansas, and determined

that he was a man of substance who was in fact a legitimate cattle

trader who hedged his own cattle.

326 U.S.C. § 1371, et seq.

ever recommended similar investments to Harris, Upham cus-

tomers or anyone else.

In 1973 McKinney began to offer other modes of in-

vestment in cattle feeding. Investors began purchasing cattle on

an oral basis from McKinney. Later in 1973 such purchases

were transacted in the form of letter agreements. Finally,

McKinney began using form contracts which had been revised

by the lawyer defendants involved in this appeal. All of the

above transactions were represented to be purchases of specific

lots of cattle, ostensibly avoiding the registration requirements

of the securities laws. Each contract would provide for the

purchase of a given number of cattle, which were represented to

have been presold to the packing houses at a prearranged price.

Each investor’s profit on the transaction was thus “guaranteed”.

However, by the spring of 1974 the basic plan had changed

from one where McKinney actually held cattle for feeding to

one where he attempted to cover contracts by buying and

selling on the commodities market. New investor money was

used to pay off existing investor contracts which had become

due during the summer of 1974. This variation of the “Ponzi”

scheme collapsed under its own weight in December, 1974,

when McKinney was no longer able to pay contracts as they

became due. According to McKinney’s deposition, investors

were never informed of the change in operation.‘ Investors

discovered in November or December, 1974, that McKinney

did not have enough cattle to meet the requirements of the

outstanding contracts.

In February, 1973, Ives had noticed that margin calls had

been made on hedging accounts for some of Harris, Upham’s

customers. He inquired of Northcott if those people were

buying cattle from McKinney. Northcott admitted that he had

referred to McKinney any customers who inquired about

buying cattle, but stated that he was not receiving any com-

pensation for such referrals. Ives testified in his deposition that

he directed Northcott to stop making such referrals; Northcott

4 Appendix p. 726-28.

denied that he was ever given such instructions. In a large part

appellants’ suits are based on Northcott’s allegations that Ives

must have been aware that Northcott was continuing to refer

individuals to McKinney because of Northcott’s activities in the

office and because of correspondence which Northcott received

at the office.s However, Northcott admitted that he never

discussed the referrals with Ives, that he never showed the

contracts to anyone at Harris, Upham, and that he never sought

an opinion from Ives or the compliance department regarding

the legality of the contracts.¢ Only one piece of correspondence

was received by Northcott at the office prior to November,

1973.7

During 1973 Northcott was out of the office quite often

and his production as a commodities broker declined sharply.

When Ives brought this to his attention, Northcott attributed

the decline to unfavorable conditions in the commodities

market, and stated that he was attempting to obtain new

accounts. It is now apparent that Northcott had begun to

devote a large portion of his efforts to soliciting investors for

McKinney. In early December Ives learned from a chance

comment by a customer that Northcott had recommended that

the customer consider investing in cattle. Ives immediately

confronted Northcott, learned that he was still referring people

to McKinney, and ordered him to stop making such referrals

and to produce a list of those whom he had already introduced

to McKinney. Ives then wrote to Robert Q. Jones, a vice

president of Harris, Upham and Ives’ immediate superior, and

stated that he intended to terminate Northcott because of his

poor production and because his outside activities were inter-

fering with his performance as a broker. At Northcott’s

request, Jones, Ives and Northcott met to discuss the matter.

Northcott again stated that he had merely introduced people to

McKinney, that he had received no commissions from the

5 Correspondence received by registered representatives at their

offices of employment is opened by their employers for the purpose of

supervising their activities pursuant to stock exchange rules.

6 Appendix p. 776-84.

7 See Appendix p. 501-02.

referrals, and that he had made it clear to the people he

referred that Harris, Upham had nothing to do with the cattle

feeding program.® Northcott agreed to produce a list of those

whom he had referred to McKinney.

Two weeks later, on January 17, 1974, Northcott returned

to the Harris, Upham office and voluntarily submitted his

resignation effective February 1, 1974. He parted on generally

amicable terms. When asked by Ives if he had prepared a list

pd ‘ead Northcott stated the information was not avail-

able.?

On January 21, after receipt of Northcott’s letter of resig-

nation, Jones wrote to Ronald Veith, compliance director for

Harris, Upham. Included in the letter was a summary of what

Jones had learned from Ives and Northcott concerning the

reasons for Northcott’s termination. Based on the information

in Jones’ letter, Veith recommended that Northcott be given a

clean release. Thereafter an RE-4 form was submitted to the

New York Stock Exchange which contained no negative com-

ments concerning Northcott. 1°

Following Northcott’s termination, Harris, Upham person-

nel had very little contact with Northcott or McKinney. Early

in 1974 one broker at the Harris, Upham office received several

checks from BeTex Corporation, the entity through which

Northcott began operating upon leaving the brokerage firm.

The checks allege-lly represented finders’ fees which the broker

split with Northcott, but do not involve any of the appellants in

this case. McKinney continued to maintain a commodities

account at Harris, Upham. In October, 1974, Ives received the

proceeds from the liquidation of the subchapter-S corporation

in which he had invested. Incidentally, Ives was replaced as

Office nanager by Cantwell on January 15, 1974.11 Ives, how-

ever, retained his employment.

8 Appendix p. 785.

® Appendix p. 495-97; Appendix p. 544.

10 Appendix p. 744.

11 Appendix p. 529.

It is pertinent to note the relationship of the litigants to

Harris, Upham & Company. Of the twenty plaintiff-appellants

before this court, only three maintained what may be termed

active accounts at Harris, Upham. Three or four others had

either inactive accounts or had at one time conducted an

isolated trade through the firm. The remaining individuals had

no contract whatsoever with Harris, Upham. All of the

contracts involved in this suit were executed after Northcott left

the firm. Appellants argue that all contracts were part of a

series of transactions. However, nine of the appellants herein

did not purchase their first contract until after Northcott’s

termination. Most of the appellants were not directly solicited

by Northcott, but instead learned of the investment opportunity

from three of the appellants who had been solicited by

Northcott.

We have traced the development of the cattle feeding

operation in some detail. The investment program in grain

contracts, involving corn and milo leaseholds, was not created

until at least March of 1974. We note at the outset that there is

no evidence that Harris, Upham had any knowledge what-

soever that Northcott was planning to recommend investments

in grain contracts while he was an employee of the firm.'2

Harris, Upham’s control over Northcott, as well as any duty to

supervise his future activities, terminated upon his separation

from the firm. Summary judgment as to all claims based on

grain contracts is therefore affirmed without further discussion.

Liability as a controlling person for acts committed by

persons in one’s control is found in both the 1933 Act and the

1934 Act. Section 15 of the 1933 Act, as amended, 15 U.S.C.

§ 770, provides:

Every person who, by or through stock own-

ership, agency, or otherwise, or who, pursuant to or

in connection with an agreement or understanding

with one or more other persons by or through stock

12 Appendix p. 769.

ownership, agency, or otherwise, controls any person

liable under sections 77k or 771 of this title, shall also

be liable jointly and severally with and to the same

extent as such controlled person to any person to

whom such controlled person is liable, unless the

controlling person had no knowledge of or reason-

able ground to believe in the existence of the facts by

reason of which the liability of the controlled person

is alleged to exist.

Section 20 of the 1934 Act, 15 U.S.C. § 78t(a), similarly

provides in part:

Every person who, directly or indirectly, controls

any person liable under any provision of this chapter

or of any rule or regulation thereunder shall also be

liable jointly and severally with and to the same

extent as such controlled person to any person to

whom such controlled person is liable, unless the

controlling person acted in good faith and did not

directly or indirectly induce the act or acts con-

stituting the violation or cause of action.

Noteworthy in each provision in the inclusion of a defense

from liability based on “good faith” or lack of knowledge or

reasonable belief. When originally passed by Congress, § 15 of

the 1933 Act held controlling persons absolutely liable for § 11

and § 12 violations by controlled persons.'? Congress, in

passing the 1934 Act, amended § 15 of the earlier Act, adding

the language. beginning at “unless the controlling person had no

knowledge of or reasonable ground to believe in the existence

13 Every person who, by or through stock ownership, agency, or

otherwise, or who, pursuant to or in connection with an agreement or

understanding with one or more other persons by or through stock

ownership, agency, or otherwise, controls any person liable under

section 11 or 12, shall also be liable jointly and severally with and to

the same extent as such controlled person to any person to whom such

controlled person is liable.

1933 Act, ch. 38, § 15, 48 Stat. 84.

10a

of facts by reason of which the liability of the controlled person

is alleged to exist.” Likewise, the controlling person provision in

the new Act, § 20(a), contained the “good faith” defense to

liability. Clearly Congress had rejected an insurer’s liability

standard for controlling persons in favor of a fiduciary stan-

dard—a duty to take due care. Securities and Exchange

Commission v. Lum’s, Inc., 365 F.Supp. 1046, 1063 (S.D.N.Y.

1973); see Annot. 32 A.L.R. Fed. 714, 719. The intent of

Congress reflected 2 desire to impose liability only on those

who fall within its definition of control and who are in some

meaningful sense culpable participants in the acts perpetrated

by the controlled person. Lanza v. Drexel & Co., 479 F.2d

1277, 1299 (2nd Cir. 1973). The Supreme Court has noted

that in each instance where Congress has created express civil

liability in favor of purchasers or sellers of securities, it has

clearly specified whether recovery was to be premised on

knowing or intentional conduct, negligence, or entirely innocent

mistake. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 207-209

(1976). The controlling persons provisions contain a state-of-

mind condition that requires a showing of something more than

negligence to establish liability. Jd. at n. 27-28.

The most obvious manner in which to establish liability as

a controlling person is to prove that a person acted under the

direction of the controlling person. This most commonly occurs

in an employer-employee relationship. The lack of such a

relationship is not determinative, however. Hawkins v. Merrill

Lynch, Pierce, Fenner & Beane, 85 F. Supp. 104 (W.D. Ark.

1949). In order to satisfy the requirement of good faith it is

necessary for the controlling person to show that some pre-

cautionary measures were taken to prevent an injury caused by

an employee. Securities & Exchange Commission v. First

Securities Company of Chicago, 463 F.2d 981, 987 (7th Cir.

1972); Hecht v. Harris, Upham & Co., 430 F.2d 1202, 1210

(9th Cir. 1970). See also, Zweig v. Hearst Corporation, 521

F.2d 1129, 1134-35 (9th Cir. 1975).

lla

The primary duty owned by a broker-dealer to the public

is to supervise its employees in an adequate and reasonable

fashion. While the standards of supervision may be stringent,

this does not create absolute liability for every violation of the

securities laws committed by a supervised individual. SEC v.

Lum’s, Inc., 365 F.Supp. at 1064. It is required of the

controlling person only that he maintain an adequate system of

internal control, and that he maintain the system in a diligent

manner. Hecht v. Harris, Upham & Co., 430 F. 2d at 1210.

There is no evidence in this case that Northcott was acting

at the direction of Harris, Upham at any time that he referred

persons to McKinney. What evidence there is indicates very

strongly that he was told not to make such references. North-

cott never showed the cattle contracts to anyone at Harris,

Upham, he never discussed them with his superiors, and he

admitted that he was not hired to obtain purchasers for such

investments. Thus there is no evidence that Harris, Upham

exercised direct or indirect control over Northcott’s activities

with McKinney. The only possible theory of recovery for these

appellants would require them to allege facts which, if proved,

would establish that Harris, Upham failed to adequately super-

vise Northcott’s dealings while he was employed by the firm.

The only possible theory of recovery for these appellants would

require them to allege facts which, if proved, would establish

that Harris, Upham failed to adequately supervise Northcott’s

dealings while he was employed by the firm.

We find no facts in the record which would support the

allegation that Harris, Upham was negligent in its supervision

of Northcott. The firm properly opened Northcott’s incoming

mail. Viewed without benefit of hindsight, the correspondence

introduced into the record does not indicate any wrong doing

on Northcott’s part concerning possible securities violations.

Northcott’s initial explanation that his loss of production was

due to the commodities market was plausible. His decision to

resign voluntarily in order to go into business for himself was

12a

reasonable in light of his continuing low production. The firm

was careful to ascertain that Northcott was not obtaining

commissions for his referrals to McKinney, and Northcott

denies that he obtained such commissions prior to January,

1974.14

We reiterate that there is no evidence that Harris, Upham

was aware that the McKinney operation entailed possible

securities violations. Without facts indicating such knowledge

on the part of the firm, there is no evidence of “something more

than negligence” on the part of Harris, Upham. Ernst & Ernst

v. Hochfelder, supra, at n. 28.

Appellants have emphasized the failure of Harris, Upham

to submit a more complete RE-4 form entitled “Notice of

Discontinuance of Registered Employee” dated February 1,

1974, the same date that Northcott’s resignation became effec-

tive. They argue that the negative answers given to question 8

prompted the continuation of Northcott as a registered repre-

sentative when, had an investigation been conducted, Northcott

would have been deprived of his privileges as a registered

representative and the losses in dispute might not have oc-

curred. We agree with the district court who described the

situation as a “tenuous chain.” As far as Harris, Upham is

concerned, the record merely discloses knowledge of referrals

of appellee’s customers or other persons to McKinney. Perhaps

a thorough investigation would have revealed more, but Harris,

Upham, at least in December 1973, and perhaps as early as

February 1973, directed Northcott to stop making these refer-

rals. At best, Harris, Upham was guilty of simple negligence

which, as heretofore stated, is not sufficient to establish liability.

Under no circumstances was the RE-4 form a false statement in

fact.

It is difficult to. consider a complex case of multi-party

litigation on appeal from summary judgment without the

benefit of an opinion of the trial court, particularly when the

14 Appendix p. 479; Appendix p. 542-43.

13a

good faith of one of the parties is at issue. After reading over

five thousand pages of depositions taken during the extensive

pretrial discovery in this case, this court can say with conviction

that a prima facie case of bad faith on the part of Harris,

Upham has not been sufficiently alleged. We note with

approval the opinion of Judge Ward in Parsons v. Hornblower

& Weeks-Hemphill, Noyes, 447 F.Supp. 482 (M.D.N.C. 1977),

aff'd per curiam, 571 F.2d 203 (4th Cir. 1978), which granted a

motion for summary judgment in a complex securities case:

The Court fully realizes that summary judgment

is not a device to dispose of factual disputes. How-

ever, if a motion for summary judgment reveals that

there is no genuine issue as to any material fact, then

summary judgment is appropriate even in cases that,

at first blush, appear to involve complex factual and

legal issues. See First National Bank v. Cities Service

Co., 391 U.S. 253, 88 S.Ct. 1575, 20 L.Ed.2d 569

(1968).

The United States Court of Appeals for the

Fourth Circuit has described the function of summary

judgment as follows:

[T]he function of a motion for summary

judgment 1s to smoke out if there is any

case, i.e., amy genuine dispute as to any

material fact, and, if there is no case, to

conserve judicial time and energy by avoid-

ing an unnecessary trial and by providing a

speedy and efficient summary disposition.

Bland v. Norfolk & Southern Ry. Co., 406

F.2d 863, 866 (4th Cir. 1969).

The briefs, affidavits, and other materials filed by the

Parties in connection with the present motions have

served this function.

447 F.Supp. at 487.

l4a

This court is of the opinion that summary judgment is appropri-

ate in this case.

Appellants in No. 77-2182, Allran, et al, have alleged as an

alternative theory of recovery that Harris, Upham is primarily

liable for their losses, and that the firm is liable as an aider and

abettor or under a conspiracy theory. For the reasons stated

above, there are no facts to support any of those theories of

recovery.

The lawyer-appellants seek contribution or indemnification

from Harris-Upham. Since we affirm summary judgment as to

all claims, there is no ground on which to hold the firm liable as

a joint tortfeasor. Summary judgment is therefore affirmed as

to the lawyer-appellants’ claims.

AFFIRMED.

15a

STATUTES

Section 2, 1933 Act

§ 77b. Definitions

When used in this subchapter, unless the context otherwise

requires—

(1) The term “security”' means any * * * investment

contract * * *

Section 5, 1933 Act

§ 77e. Prohibitions relating to interstate commerce and the

mails

(a) Unless a registration statement is in effect as to a

security, it shall be unlawful for any person, directly or in-

directly—

(1) to make use of any means or instruments of

transportation or communication in interstate commerce or

of the mails to sell such security through the use or medium

of any prospectus or otherwise; or

(2) to carry or cause to be carried through the mails -

or in interstate commerce, by any means or instruments of

transportation, any such security for the purpose of sale of

for delivery after sale.

(b) It shall be unlawful for any person, directly or

indirectly — ‘

(1) to make use of any means or instruments of

transp >rtation or communication in interstate commerce or

of the mails to carry or transmit any prospectus relating to

any security with respect to which a registration statement

has been filed under this subchapter, unless such pros-

pectus meets the requirements of section 77j of this title; or

(2) to carry or cause to be carried through the mails

or in interstate commerce any such security for the purpose

l6a

of saie or for delivery after sale, unless accompanied or

preceded by a prospectus that meets the requirements of

subsection (a) of section 77j of this title.

indirectly, to make use of any means or instruments of trans-

portation or communication in interstate commerce or of the

mails to offer to sell or offer to buy through the use or medium

of any prospectus or otherwise any security, unless a registration

statement has been filed as to such security, or while the

registration statement is the subject of a refusal order or stop

order or (prior to the effective date of the registration state-

ment) any public proceeding or examination under Section 77h

of this title.

Section 12, 1933 Act

§ 771. Civil liabilities arising in connection with prospectuses

and communications

Any person who—

(1) offers or sells a security in violation of section 77e

of this title, or

(2) offers or sells a security (whether or not exempted

by the provisions of section 77c of this title, other than

paragraph (2) of subsection (a) of said section), by the

use of any means or instruments of transportation or

communication in interstate commerce or of the mails, by

means of a prospectus or oral communication, which

includes an untrue statement of a material fact or omits to

state a material fact necessary in order to make the

statements, in the light of the circumstances under which

they were made, not misleading (the purchaser not know-

ing of such untruth or omission), and who shall not sustain

the burden of proof that he did not know, and in the

exercise of reasonable care could not have known, of such

untruth or ommission,

17a

shall be liable to the person purchasing such security from him

who may sue either at law or in equity in any court of

competent jurisdiction, to recover the consideration paid for

such security with interest thereon, less the amount of any

income received thereon, upon the tender of such security, or

for damages if he no longer owns the security.

Section 13, 1933 Act

§ 77m. Limitation of actions

No action shall be maintained to enforce any liability

created under section 77k or 771(2) of this title unless brought

within one year after the discovery of the untrue statement or

the omission, or after such discovery should have been made by

the exercise of reasonable diligence, or, if the action is to

enforce a liability created under section 771(1) of this title,

unless brought within one year after the violation upon which it

is based. In no event shall any any such action be brought to

enforce a liability created under section 77k or 771(1) of this

title more than three years after the security was bona fide

offered to the public, or under section 771(2) of this title more

than three years after the sale.

Section 15, 1933 Act

§ 770. Liability of controlling persons

Every person who by or through stock ownership, agency,

or otherwise, or who, pursuant to or in connection with an

agreement or understanding with one or more other persons by

or through stock ownership, agency, or otherwise, controls any

person liable under sections 77k or 771 of this title, shall also be

liable jointly and severally with and to the same extent as such

controlled person to any person to whom such controlled

person is liable, unless the controlling person had no knowledge

of or reasonable ground to believe in the existence of the facts

by reason of which the liability of the controlled persons is

alleged to exist.

18a

Section 19, 1933 Act

§ 77s. Special powers of Commission

(a) The Commission shall have authority from time to

time to make, amend, and rescind such rules and regulations as

may be necessary to carry out the provisions of this subchapter,

including rules and regulations governing registration state-

ments and prospectuses for various classes of securities and

issuers, and defining accounting, technical, and trade terms

used in this subchapter. * * *

(b) For the purpose of all investigations which, in the

opinion of the Commission, are necessary and proper for the

enforcement of this subchapter, any member of the Commis-

sion or any officer or officers designated by it are empowered to

administer oaths and affirmations, subpena witnesses, take

evidence, and require the production of any books, papers, or

other documents which the Commission deems relevant or

material to the inquiry. Such attendance of witnesses and the

production of such documentary evidence may be required

from any place in the United States or any Territory at any

designated place of hearing.

Section 20, 1933 Act

§ 77t. Injunctions and prosecution of offenses

(a) Whenever it shall appear to the Commission, either

upon complaint or otherwise, that the provisions of this

subchapter, or of any rule or regulation prescribed under

authority thereof, have been or are about to be violated, it may,

in its discretion, either require or permit such person to file with

it a statement in writing, under oath, or otherwise, as to all the

facts and circumstances concerning the subject matter which it

believes to be in the public interest to investigate, and may

investigate such facts.

(b) Whenever it shall appear to the Commission that any

person is engaged or about to engage in any acts or practices

which constitute or will constitute a violation of the provisions

PO a ee ee ee

19a

of this subchapter, or of any rule or regulation prescribed under

authority thereof, it may in its discretion, bring an action in any

district court of the United States or United States court of any

Territory, to enjoin such acts or practices, and upon a proper

showing a permanent or temporary injunction or restraining

order shall be granted without bond. The Commission may

transmit such evidence as may be available concerning such

acts or practices to the Attorney General who may, in his

discretion, institute the necessary criminal proceedings under

this subchapter. Any such criminal proceeding may be brought

either in the district wherein the transmittal of the prospectus or

security complained of begins, or in the district wherein such

prospectus or security is received.

of the United States and the United States courts of any

Territory, shall also have jurisdiction to issue writs or man-

damus commanding any person to comply with the provisions

of this subchapter or any order of the Commission made in

pursuance thereof.

Section 22, 1933 Act

§ 77v. Jurisdiction of offenses and suits

(a) The district courts of the United States, and the United

States courts of any Territory, shall have jurisdiction of offenses

and violations under this subchapter and under the rules and

regulations promulgated by the Commission in respect thereto,

and, concurrent with State and Territorial courts, of any suits in

equity and actions at law brought to enforce any liability or

duty created by this subchapter. * * *

Section 2, 1934 Act

§ 78b. Necessity for regulation

For the reasons hereinafter enumerated, transactions in

securities as commonly conducted upon securities exchanges

and over-the-counter markets are affected with a national

public interest which makes it necessary to provide for regu-

20a

lation and control of such transactions and of practices and

matters related thereto, including transactions by officers, direc-

tors, and principal security holders, to require appropriate

reports, and to impose requirements necessary to make such

regulation and control reasonably complete and effective, in

order to protect interstate commerce, the national credit, the

Federal taxing power, to protect and make more effective the

national banking system and Federal Reserve System, and to

insure the maintenance of fair and honest markets in such

transactions: * * *

Section 3, 1934 Act

§ 78c. Definitions and application— Definitions

(a) When used in this chapter, unless the context other-

wise requires—

(1) The term “exchange” means any organization,

association, or group of persons, whether incorporated or

unincorporated, which constitutes, maintains, or provides a

market place or facilities for bringing together purchasers

and sellers of securities or for otherwise performing with

respect to securities the functions commonly performed by

a stock exchange as that term is generally understood, and

includes the market place and the market facilities main-

tained by such exchange.

(3) The term “member” when used with respect to an

exchange means any person who is permitted either to

effect transactions on the exchange without the services of

another person acting as broker, or to make use of the

facilities of an exchange for transactions thereon without

payment of a commission or fee or with the payment of a

commission or fee which is less than that charged the

general public, and includes any firm transacting a busi-

ness as broker or dealer of which a member is a partner,

and any partner of any such firm.

2la

(4) The term “broker” means any person engaged in

the business of effecting transactions in securities for the

account of others, but does not include a bank.

* * *

(10) The term “security” means any * * * investment

contract, * * *

Section 4, 1934 Act

§ 78d. Securities and Exchange Commission

(a) There is hereby established a Securities and Exchange

Commission (hereinafter referred to as the ““Commission”’) to

be composed of five commissioners to be appointed by the

President by and with the advice and consent of the Senate.

* a *

(b) The Commission is authorized to appoint such officers,

attorneys, examiners, and other experts as may be necessary for

carrying out its functions under this chapter,* * *

Section 5, 1934 Act

§ 78e. Transactions on unregistered exchanges

It shall be unlawful for any broker, dealer, or exchange,

directly or indirectly, to make use of the mails or any means or

instrumentality of interstate commerce for the purpose of using

any facility of an exchange within or subject to the jurisdiction

of the United States to effect any transaction in a security, or to

report any such transaction unless such exchange (1) is regis-

tered as a national securities exchange under section 78f of this

title, or (2) is exempted from such registration upon application

by the exchange because, in the opinion of the Commission, by

reason of the limited volume of transactions effected on such

exchange, it is not practicable and not necessary or appropriate

in the public interest or for the protection of investors to require

such registration.

22a

Section 6, 1934 Act

§ 78f. Registration of national securities exchanges

(a) Any exchange may be registered with the Commission

as a national securities exchange under the terms and condi-

tions hereinafter provided in this section, by filing a registration

statement in such form as the Commission may prescribe,

containing the agreements, setting forth the information, and

accompanied by the documents, below specified:

(1) An agreement (which shall not be construed as a

waiver of any constitutional right or any right to contest the

validity of any rule or regulation) to comply, and to

enforce so far as is within its powers compliance by its

members, with the provisions of this chapter, and any

amendment thereto and any rule or regulation made or to

be made thereunder;

(2) Such date as to its organization, rules or proce-

dure, and membership, and such other information as the

Commission may by rules and regulations require as being

necessary or appropriate in the public interest or for the

protection of investors;

(3) Copies of its constitution, articles of incorporation

with all amendments thereto, and of its existing bylaws or

rules or instruments corresponding thereto, whatever the

name, which are hereinafter collectively referred to as the

“rules of the exchange”; and

(4) An agreement to furnish to the Commission

copies of any amendments to the rules of the exchange

forthwith upon their adoption.

(b) No registration shall be granted or remain in force

unless the rules of the exchange include provision for the

expulsion, suspension, or disciplining of a member for conduct

or proceeding inconsistent with just and equitable principles of

trade, and declare that the willful violation of any provisions of

this chapter or any rule or regulation thereunder shall be

23a

considered conduct or proceeding inconsistent with just and

equitable principles of trade.

any exchange from adopting and enforcing any rule not

inconsistent with this chapter and the rules and regulations

thereunder and the applicable laws of the State in which it is

located.

(d) If it appears to the Commission that the exchange

applying for registration is so organized as to be able to comply

with the provisions of this chapter and the rules and regulations

thereunder and that the rules of the exchange are just and

adequate to insure fair dealing and to protect investors, the

Commission shall cause such exchange to be registered as a

national securities exchange.

(e) Within thirty days after the filing of the application,

the Commission shall enter an order either granting or, after

appropriate notice and opportunity for hearing, denying regis-

tration as a national securities exchange, unless the exchange

applying for registration shall withdraw its application or

consent to the Commission’s deferring action on its application

for a stated longer period after the date of filing. The filing with

the Commission of an application for registration by an ex-

change shall be deemed to have taken place upon the receipt

thereof. Amendments to an application may be made upon

such terms as the Commission may prescribe.

(f) An exchange may, upon appropriate application in

accordance with the rules and regulations of the Commission,

and upon such terms as the Commission may deem necessary

for the protection of investors, withdraw its registration.

Section 15, 1934 Act

§ 780. Over-the-counter markets; registration of brokers; infor-

mation and reports

(a) (1) No broker or dealer (other than one whose

business is exclusively intrastate ) shall make use of the mails or

24a

of any means of instrumentality of interstate commerce to effect

any transaction in, or to induce the purchase or sale of, any

security (other than an exempted security or commercial paper,

bankers’ acceptances, or commercial bills) otherwise than on a

national securities exchange, unless such broker or dealer is

registered in accordance with subsection (b) of this section.

+ * *

(b) (1) A broker or dealer may be registered for the

purposes of this section by filing with the Commission an

application for registration, which shall contain such informa-

tion in such detail as to such broker or dealer and any persons

associated with such broker or dealer as the Commission may

by rules and regulations require as necessary or appropriate in

the public interest or for the protection of investors. Except as

hereinafter provided, such registration shall become effective

thirty days after the receipt of such application by the Commis-

sion or within such shorter period of time as the Commission

may determine.

* * *

(5) The Commission shall, after appropriate notice

and opportunity for hearing, by order censure, deny regis-

tration to, suspend for a period not exceeding twelve

months, or revoke the registration of, any broker or dealer

if it finds that such censure, denial, suspension, or revoca-

tion is in the public interest and that such broker or dealer,

whether prior or subsequent to becoming such, or any

person associated with such broker or dealer, whether prior

or subsequent to becoming so associated—

* * *

order, judgment, or decree of any court of competent

jurisdiction from acting as an investment adviser,

underwriter, broker, or dealer, or as an affiliated

person or employee of any investment company,

25a

bank, or insurance company, or from engaging in or

continuing any conduct or practice in connection with

any such activity, or in connection with the purchase

or sale of any security.

(D) has willfully violated any provision of the

Securities Act of 1933, or of the Investment Advisers

Act of 1940, or of the Investment Company Act of

1940, or of this chapter, or of any rule or regulation

under any such statutes.

* + +

Section 15A, 1934 Act

§ 780-3. Over-the-counter brokers’ and dealers’ associations;

registration—Association registration; national or affiliated;

data

(a) Any association of brokers or dealers may be regis-

tered with the Commission as a national securities association

pursuant to subsection (b) of this section, or as an affiliated

securities association pursuant to subsection (d) of this section,

under the .erms and conditions hereinafter provided in this

section, by filing with the Commission a registration statement

in such form as the Commission may prescribe, setting forth the

information, and accompanied by the documents, below speci-

fied:

(1) Such data as to its organization, membership, and

rules of procedure, and such other information as the

Commission may by rules and regulations require as

necessary or appropriate in the public interest or for the

protection of investors; and

(2) Copies of its constitution, charter, or articles of

incorporation or association, with all amendments thereto,

and of its existing bylaws, and of any rules or instruments

corresponding to the foregoing, whatever the name, here-

inafter in this chapter collectively referred to as the “rules

of the association.”

26a

Prerequisites to national registration; association rules

(b) An applicant association shall not be registered as a

national securities association unless it appears to the Commis-

sion that—

* * *

(2) such association is so organized and is of such a

character as to be able to comply with the provisions of this

chapter and the rules and regulations thereunder, and to

carry out the purposes of this section.

* * *

(8) the rules of the association are designed * * * in

general, to protect investors and the public interest, * * *

(9) the rules of the association provide that its

members and persons associated with its members shall be

appropriately disciplined, by expulsion, suspension, fine,

censure, or being suspended or barred from being associ-

ated with all members, or any other fitting penalty, for any

violation of its rules.

* * *

(12) the rules of the association include provisions

governing the form and content of quotations relating to

securities sold otherwise than on a national securities

exchange which may be disseminated by any member or

any person associated with a member, and the persons to

whom such quotations may be supplied. Such rules relating

to quotations shall be designed to produce fair and infor-

mative quotations, both at the wholesale and retail level, to

prevent fictitious or misleading quotations and to promote

orderly procedures for collecting and publishing quota-

tions.

* * *

27a

Section 21, 1934 Act

§ 78u. Investigations; injunctions and prosecution of offenses

(a) The Commission may, in its discretion, make such

investigations as ii deems necessary to determine whether any

person has violated or is about to violate any provision of this

chapter or any rule or regulation thereunder, and may require

or permit any person to file with it a statement in writing, under

oath or otherwise as the Commission shall determine, as to all

the facts and circumstances concerning the matter to be in-

vestigated. The Commission is authorized in its discretion, to

publish information concerning any such violations, and to

investigate any facts, conditions, practices, or matters which it

may deem necessary or proper to aid in the enforcement of the

provisions of this chapter, in the prescribing of rules and

regulations thereunder, or in securing information to serve as a

basis for recommending further legislation concerning the

matters to which this chapter relates.

(b) For the purpose of any such investigation, or any other

proceeding under this chapter, any member of the Commission

or any Officer designated by it is empowered to administer oaths

and affirmations, subpena witnesses, compel their attendance,

take evidence, and require the production of any books, papers,

correspondence, memoranda, or other records which the Com-

mission deems relevant or material to the inquiry. Such

attendance of witnesses and the production of any such records

may be required from any place in the United States or any

State at any designated place of hearing.

issued to, any person, the Commission may invoke the aid of

any court of the United States within the jurisdiction of which

such investigation or proceeding is carried on, or where such

person resides or carries on business, in requiring the atten-

dance and testimony of witnesses and the production of books,

papers, correspondence, memoranda, and other records. And

such court may issue an order requiring such person to appear

before the Commission or member or officer designated by the

28a

Commission, there to produce records, if so ordered, or to give

testimony touching the matter under investigation or in ques-

tion; and any failure to obey such order of the court may be

punished by such court as a contempt thereof. All process in

any such case may be served in the judicial district whereof

such person is an inhabitant or wherever he may be found. Any

person who shall, without just cause, fail or refuse to attend and

testify or to answer any lawful inquiry or to produce books,

papers, correspondence, memoranda, and other records, if in

his power so to do, is obedience to the subpena of the

Commission, shall be guilty of a misdemeanor and, upon

conviction, shall be subject to a fine of not more than $1,000 or

to imprisonment for a term of not more than one year, or both.

(d) Repealed. Pub.L. 91-452, Title II, § 212, Oct. 15,

1970, 84 Stat. 929.

(e) Whenever it shall appear to the Commission that any

person is engaged or about to engage in any acts or practices

which constitute or will constitute a violation of the provisions

of this chapter, or of any rule or regulation thereunder, it may

in its discretion bring an action in the proper district court of the

United States or the United States courts of any Territory or

other place subject to the jurisdiction of the United States, to

enjoin such acts or practices, and upon a proper showing a

permanent or temporary injunction or restraining order shall be

granted without bond. The Commission may transmit such

evidence as may be available concerning such acts or practices

to the Attorney General, who may, in his discretion, institute

the necessary criminal proceedings under this chapter.

(f) Upon application of the Commission the district courts

of the United States, and the United States courts of any

Territory or other place subject to the jurisdiction of the United

States, shall also have jurisdiction to issue writs of mandamus

commanding any person to comply with the provisions of this

chapter or any order of the Commission made in pursuance

thereof or with any undertaking contained in a registration

statement as provided in subsection (d) of section 780 of this

title.

29a

RULES OF NEW YORK STOCK EXCHANGE

Rule 342. “(a) Each office, department or business

activity of a member or member organization (including

foreign incorporated branch offices) shall be under the super-

vision and control of the member or member organization

establishing it and of the personnel delegated such authority

and responsibility.

“The person in charge of a group of employees shall

reasonably discharge his duties and obligations in connection

with supervision and control of the activities of those employees

related to the business of their employer and compliance with

securities laws and regulations.

“(b) The general partners or directors of each member

organization shall provide for appropriate supervisory control

and shall designate a general partner or principal executive

officer to assume overall authority artd responsibility for inter-

nal supervision and eéontrol of the organization and compliance

with securities’ laws and regulations. This person shall:

“(1) delegate to qualified principals, or employees

responsibility and authority for supervision and control of

each office, department or business activity, and provide

for appropriate procedures of supervision and control.

“(2) establish a separate system of followup and

review to determine that the delegated authority and

responsibility is being properly exercised.

* * *

“Supplementary Material ( Rule 342):

* * *

“*.16 Supervision of registered representatives. *** Duties

of supervisors of registered representatives should ordinarily

include at least *** review of correspondence of registered

representatives, transactions, and customer accounts. ***

30a

Rule 345. “‘(a) No member or member organization shall

“(1) permit any person to perform regularly the

duties customarily performed by a registered representa-

tive, unless such person shall have been registered with and

is acceptable to the Exchange, or

“(2) employ any registered representative or other

person in a nominal position because of the business

obtained by such person. ***

“(c) The Exchange may disapprove the employment

of any person.

“(d)(1) If the Exchange determines that any

employee or prospective employee of a member or

member organization (aa) has violeted any provision

of the Constitution or of any rule adopted by the

Board of Directors, (bb) has violated any of his

agreements with the Exchange, (cc) has made any

misstatement to the Exchange, or (dd) has been guilty

of (i) conduct inconsistent with just and equitable

principles of trade, (ii) acts detrimental to the interest

or welfare of the Exchange, or (ili) conduct contrary

to an established practice of the Exchange, the Ex-

change may withhold, suspend or bar such person

from employment by a member or member organiza-

tion; may fine such employee or prospective employee

$5,000 for each such violation, misstatement, or act or

omission for which he has been found guilty; and may

direct that he be censured. The Exchange shall

disclose publicly bars or suspensions of employees and

former employees. The Exchange may in its dis-

cretion, disclose publicly censures and fines which may

be imposed upon any employee or prospective em-

ployee at any one time shall not exceed $25,000.

* * *

“Supplementary Material ( Rule 345):

* * *

3la

“13 Termination of employment.—The discharge or

termination of employment of any registered representative or

officer, together with the reasons therefor, shall Le reported

promptly to the Department of Member Firms on a RE-4 Form

which forms are available at the Mailing Division of the

Exchange.

* * *

“17 Agreements.—Each prospective registered representa-

tive or Officer shall sign the following statements:

“(a) ‘I authorize and request any and all of my

former employers and any other person to furnish to the

Exchange, or any agent acting on its behalf, any informa-

tion they may have concerning my credit worthiness,

character, ability, business activities, general reputation,

mode of living and personal characteristics, together with,

in the case of former employers, a history of my employ-

ment by them and the reasons for the termination thereof.

Moreover, I hereby release each such employer and each

such other person from any and all liability of whatsoever

nature by reason of furnishing such information to the

Exchange or any agent acting on its behalf.

* * *

“Further, each registered representative, in consideration of the

Exchange’s approving his application, shall sign the following

statements:

* * *

“(H) I agree that I will not take, accept, or receive, directly

or indirectly, from any person, firm corporation or association,

other than my employer, compensation of any nature, as a

bonus, commission, fee, gratuity or other consideration, in

connection with any securities, commodities or insurance trans-

action or transactions, except with the prior written consent of

the Exchange.

32a

“(K) If the Exchange, during the period of 90 days

immediately following receipt by the Exchange of written

notice of the termination of my employment gives me written

notice that the Exchange is making inquiry into any specified

matter or matters occurring prior to termination of such em-

ployment, I agree that I will thereafter, comply with any request

of the Exchange for me to appear and testify, submit records,

respond to written requests, attend hearings, and accept dis-

ciplinary charges or penalties with respect to the matter or

matters specified in such notice in every respect in conformance

with the Constitution, Rules and practices of the Exchange in

the same manner and to the same extent as required to do if I

had remained an employee. If I refuse to accept such written

notice or, having been given such notice, refuse or fail to

comply with any such request of the Exchange, I agree that

such refusal or failure may, in the discretion of the Exchange,

act as a bar to future Exchange approval of my employment

until such time as the Exchange has completed investigation

into the matter or matters specified in such notice; has deter-

mined a penalty, if any, to be imposed against me; and until the

penalty, if any, has been carried out.

* * *

Rule 346. “Every registered representative or officer of a

member or member organization shall devote his entire time

during business hours to the business of the member or member

organization employing him, and shall not at any time be

engaged in any other business or be employed by any other

corporation, firm or individual, or serve as an officer or director

of another corporation, or own any stock, or have, directly or

indirectly, any financial interest in any other member organiza-

tion or any non-member organization engaged in any securities,

financial or kindred business without the prior written approval

of the Exchange, or except as otherwise permitted by the Rules

of the Board of Governors.

+ * *

33a

Rule 350. “(a) No member, allied member, member

organization or employee thereof shall:

“(1) employ or compensate for services rendered,

except as specified below or with the prior written consent

of the employer and the Exchange, or

““(2) give any gratuity in excess of $25 per person per

year to any principal officer, or employee of the Exchange

or its subsidiaries, another member or member organiza-

tion, financial institution, news or financial information

media, or non-member broker or dealer in securities,

commodities, or money instruments.

“A gift of any kind is considered a gratuity.

* * *

Rule 351. “Whenever any employee of a member or

member organization who is registered with the Exchange, has

ever been or becomes the subject of:

“a) through g) * ”

“h) any material allegation that he has conducted himself

in a way which may be inconsistent with just and equitable

principles of trade, or detrimental to the interest and welfare of

the Exchange, or contrary to an established practice of the

Exchange; or whenever any such registered employee has

violated or violates any provision of the Constitution or of any

Rule adopted by the Board of Governors or of any securities or

insurance law or regulation or of any agreement with the

Exchange, such employee shall promptly notify his employer

thereof.”

““Whenever a member or member organization has know-

ledge that any of his or its registered employees is required to

give the notice required hereby, such member or member

organization and such employee shall promptly notify the

Exchange of such matter.”

34a

Rule 405. “Every member organization is required

through a generab partner, a principal executive officer or a

person or persons designated under the provisions of Rule

342(b)(1) Sec. 2342 to

“(1) Use due diligence to learn the essential facts

relative to every customer * * *

35a

STATE OF KANSAS 77-2051

AGREEMENT

COUNTY OF RENO

THIS AGREEMENT made and entered into this 17 day of May,

1974, by and between Thomas S. Carpenter of Box 1473, Charlotte. North

Carolina 28232, hereinafter referred to as “Owner,” and

MCKINNEY CATTLE Co., 27 Washington Center, Hutchinson,

Kansas 67501, hereinafter referred to as “McKinney.”

WITNESSETH:

WHEREAS, Owner desires to enter into an agreement with

McKinney for the purchase and maintenance of 200 steers in

order for Owner to obtain a profit from the fattening and sale of

such steers

WHuHerEAS, McKinney will sell steers to Owner and retain

such steers on land owned or leased by McKinney and will care

for and fatten such steers and sell such steers for the profit of

Owner:

WHEREAS, Owner realizes that McKinney can only guaran-

tee his own profit if he is assured of supplies and costs of the

feed utilized in the fattening of the steers of Owner; and

WHEREAS, Owner is willing to pay money in advance for

the acquisition of the feed necessary to fatten his steers, so as to

assure Owner’s maximum cost for fattening his steers.

IT IS THEREFORE AGREED as follows:

1. Amount of Investment. Owner agrees to pay $30,000

to McKinney for the purchase, feed, maintenance and care

of Owner’s steers.

2. Number of Steers. McKinney agrees to purchase,

feed, maintain and care of 200 steers for Owner.

36a

3. Finder's Fee. Owner agrees to pay a finder’s fee of $3.00

per steer for a total of $600 to BeTex Corporation, 320 S. Tryon

Street, Suite 112, Charlotte, North Carolina 28201.

4. Date of Payment. Payment of the amounts set forth in

paragraph | and the amount set forth in paragraph 3 shall be

made to the respective payees on May 18, 1974.

5. Weight and Price of Steers. McKinney agrees that the

steers it shall acquire shall weigh approximately 450 pounds and

shall be purchased for a price of $.39 per pound.

6. Weight Gain. McKinney agrees that it shall cause 350

pounds of weight gain to be added to the steers belonging to

Owner at a cost per pound not to exceed $.35.

7. Selling Price of Steers. McKinney agrees that at the

time of acquisition of the steers for Owner, McKinney shall

contract to sell such steers at a price of 44 cents per pound, and

selling weight shall be acquisition weight set forth in paragraph

5 plus the guaranteed weight gain set forth in paragraph 6,

which total is 800 pounds. The express responsibility for

entering into such contract for sale shall be that of McKinney.

8. Identification of Steers. McKinney agrees that the

steers belonging to Owner shall be placed upon grazing lands or

in the feed yards of McKinney and shall be readily identifiable

and available for inspection at all times by Owners.

9. Insurance. McKinney agrees that all steers of Owner

shall be insured for full mortality, with a deductible limitation

of $1,000 per pen (200 steers).

10. Security Interest. Owner agrees that McKinney shall

be entitled to assign, mortgage or otherwise convey for security

purposes the steers of Owner, such security interest is to be on

notes providing additional funds for acquisition, feeding, care,

or insuring the steers of Owner.

37a

11. Feed. McKinney agrees to physically acquire and to

immediately obtain all feed necessary for the fattening of steers

belonging to Owner, said fee to be sufficient in quantity to

increase the weight of steers of Owner by the amount of weight

increase set forth in paragraph 6.

12. Sales Proceeds. McKinney shall remit the amounts

received, less any loan balances, on account of the sale of the

steers of Owner to Owner on or before Dec. 21, 1974.

13. Additional Pen Space. McKinney agrees to make

available additional pen space to Owner for the continued

feeding of cattle at the desire of Owner.

14. State Law. This agreement shall be deemed to have

been made in the State of Kansas and shall be interpreted in

accordance with the laws of said state.

IN WITNESS WHEREOF, the parties hereto have set their

hands and seals and have bound themselves, their heirs, their

estates and their assigns, the day and year first written above.

THOMAS S. CARPENTER (SEAL)

__WaLiace G. MCKINNEY (SEAL)

McKinney Cattle Co. by Wallace G. McKinney

38a

Mr. WALLACE G. MCKINNEY

McKinney Cattle Co.

27 Washington Center

Hutchinson, Kansas 67501

Dear Mr. McKinney:

Enclosed please find two copies of revised agreements

involving Wayland H. Cato, Jr., Mark B. Edwards and Joseph

Warren III, each agreement being with McKinney Cattle Co.

The figures included herein and the basic thrust of the

language of the agreement are those presented to us by Mr.

Gresham Northcott of Charlotte, North Carolina. I believe that

he has subsequently been in contact with you and has indicated

that Mr. Cato, Mr. Edwards and I were interested in acquiring

400 steers at the prices indicated.

The contract agreement is modified slightly from that

which Mr. Northcott presented in order to buttress the position

of the cattle owner under the terms of Revenue Ruling 73-530

(see copy of my letter addressed to Mr. H. H. Thomason dated

November 14, 1973). The agreement was reviewed with Mr.

Northcott prior to execution of same by the three parties listed

above.

You will note that in each case paragraph 12 contains a

blank. All of us are of the opinion that a date should be inserted

herein for the purpose of requiring a final date for closing out

payment on the sale of the steers. As you can imagine, we are

anxious to make that date as early in 1974 as possible, but are

not anxious to create unreasonable difficulties for you. In view

of the fact that our previous experience has been that a turn-

around period of approximately six months is all that is

required, and since the contract is dated November I, 1973, we

anticipate that a date around June 1, 1974 should be sufficient

time (seven months) for the completion of the transaction.

Accordingly, we could expect you to fill in line 12 and then

return one signed copy of each contract to me. At that time, the

$50,000 which is due McKinney Cattle Co. will be forwarded to

you by return mail.

39a

I have also enclosed one copy of a Power of Attorney for

each of the three investors. It has been modified from the form

in which it was submitted to me by Mr. Northcott so as to

eliminate any individual executing such power from being

made personally liable on or for actions undertaken by you or

Mr. Shaft. We, of course, realize that tremendous latitude still

exists within the Power of Attorney, but we do not believe that

you intend for the power to encompass our being personally

liable for any acts undertaken by either of the attorneys-in-fact.

One other matter which I have discussed with Mr. North-

cott but which I believe must be adequately documented with

you is our right to receive the necessary information for the

filing of our Federal income tax returns. As part of your

acceptance of the agreement, we consider it necessary to have

you warrant to us that we will receive all necessary tax

information by March 15, 1974. Should you be in need of the

information, I have listed the social security numbers of the

three investors at the bottom of this letter.

Although I have discussed all of these matters with Mr.

Northcott, if I have created any unforseen problems for you, I

would be happy to rectify them in whatever way I might.

Please call me collect if any action needs to be taken. Our

telephone number until December | is still (704) 334-9731.

Sincerely yours,

(SIGNED) JOSEPH WARREN III

Joseph Warren III

JW:pj:816

Enclosures

WAYLAND H. Cato, Jr.—259-12-8601

MarRK B. Epwarps—238-54-4188

JOSEP" WARREN III— 142-30-7065

cc: Mr. GRESHAM NoRTHCOTT

Mr. WAYLAND H. Caro, Jr.

Mr. H. H. THOMASON

Mr. Mark B. Epwarps

77-2051

STATE OF KANSAS

COUNTY OF RENO

AGREEMENT

THis AGREEENT made and entered into this Ist day of

November, 1973, by and between WAYLAND H. CATO, JR.

of Charlotte, North Carolina, hereinafter referred to as ““Own-

er,” and McKINNEY CATTLE CO., 27 Washington Center,

Hutchinson, Kansas 67501, hereinafter referred to as

“McKinney.”

WITNESSETH:

WHEREAS, Owner desires to enter into an agreement with

McKinney for the purchase and maintenance of 300 steers in

order for Owner to obtain a profit from the fattening and sale of

such steers;

WHeErEAS, McKinney will sell steers to Owner and retain

such steers on land owned or leased by McKinney and will care

for and fatten such steers and sell such steers for the profit of

Owner;

WHEREAS, Owner realizes that McKinney has guaranteed a

maximum cost to Owner for fattening the steers of Owner;

WHEREAS, Owner realizes that McKinney can only guaran-

tee his own profit if he is assured of supplies and costs of the

feed utilized in the fattening of the steers of Owner; and

WHEREAS, Owner is willing to pay money in advance for

the acquisition of the feed necessary to fatten his steers, so as to

assure Owner’s maximum cost for fattening his steers.

It Is THEREFORE AGREED as follows:

1. Amount of Investment. Owner agrees to pay

$37,500.000 to McKinney for the purchase, feed, maintenance

and care of Owner’s steers.

4la

2. Number of Steers. McKinney agrees to purchase, feed,

maintain and care for 300 steers for Owner.

3. Finder’s Fee. Owner agrees to pay a finder’s fee of $2.00

per steer for a total of $600.000 to BeTex Corporation, Box

2374, Charlotte, North Carolina 28201.

4. Date of Payment. Payment of the amount set forth in

paragraph | and the amount set forth in paragraph 3 shall be

made to the respective payees on December 1, 1973.

5. Weight and Price of Steers. McKinney agrees that the

steers it shall acquire shall weigh approximately 450 pounds

and shall be purchased for a price of $60.00 per cwt.

6. Weight Gain. McKinney agrees that it shall cause 300

pounds of weight gain to be added to the steers belonging to

Owner at a cost per pound not to exceed $0.37.

7. Selling Price of Steers. McKinney agrees that at the

time of acquisition of the steers for Owner, McKinney shall

contract to sell such steers 2 a price of 0.58 cents per pound,

and the selling weight shall be acquisition weight set forth in

paragraph 5 plus the guaranteed weight gain set forth in

paragraph 6, which total is 750 pounds. The express responsi-

bility for entering into such contract for sale shall be that of

McKinney.

8. Identification of Steers. McKinney agrees that the steers

belonging to Owner shall be placed upon grazing lands or in

the feed yards of McKinney and shall be readily identifiable

and available for inspection at all times by Owners.

9. Insurance. McKinney agrees that all steers of Owner

shall be insured for full mortality, with a deductible limitation

of $1,000 per pen (200 steers).

10. Security Interest. Owner agrees that McKinney shall

be entitled to assign, mortgage or otherwise convey for security

purposes the steers of Owner, such security interest to be on

notes providing additional funds for acquisition, feeding, care,

or insuring the steers of Owner.

42a

11. Feed. McKinney agrees to physically acquire and to

immediately obtain all feed necessary for the fattening of steers

belonging to Owner, said fee to be sufficient in quantity to

increase the weight of steers of Owner by the amount of weight

increase set forth in paragraph 6.

12. Sales Proceeds. McKinney shall remit the amounts

received, less any loan balances, on account of the sale of the

steers of Owner to Owner on or before June 15, 1974.

13. Additional Pen Space. McKinney agrees to make

available additional pen space to Owner for the continued

feeding of cattle at the desire of Owner.

14. State Law. This agreement shall be deemed to have

been made in the State of Kansas and shall be interpreted in

accordance with the laws of said state.

IN WITNESS WHEREOF, the parties hereto have set their

hands and seals and have bound themselves, their heirs, their

estates and their assigns, the day and year first written above.

_.... WAYLAND H. CaTo, JR. (SEAL)

Wayland H. Cato, Jr.

WALLACE G. MCKINNEY (SEAL)

McKinney Cattle Co. by Wallace G. McKinney

Soon

43a

New York Stock Exchange, Inc. 55 Water Street New York,

N.Y. 10041

NOTICE OF DISCONTINUANCE

OF REGISTERED EMPLOYEE

l. James G. Northcott Jr.

(Name of Employee )

2. Registered Representative

(Capacity )

3. Harris Upham & Co. Incorporated

(Name of Firm)

4. 100 N. Carolina Natl Bk. Charlotte, North Carolina

( Office of Employment)

5. 1610 Hertford Road, Charlotte, North Carolina

(Present Home Address)

Date of Discontinuance: Feb. 1, 1974

7. Reason for Discontinuance:

Voluntary resignation XXX

*Permitted to resign Asai

*Discharge * (Check One )

Decreased

*Other 7

If known, name of next employer

8. Within your knowledge and the records of your firm was

he (she) ever subject of

YES NO

(a) an investigation or proceeding by

any governmental or securities

industry regulatory body X

YES NO

(b) a refusal of registration censure,

suspension, expulsion or other

discipline by any governmental

or securities industry regulatory

body X

of your firm X

(d) any disciplinary action by your firm X

or has he (she) ever

(e) violated any provision of the NYSE

Constitution or Rules or of any

securities law or regulation X

(f) violated any of his (her) agree-

ments with the Exchange X

(g) conducted himself (herself) in a

way which may be inconsistent

with just and equitable principles

of trade detrimental to the inter-

est and welfare of the Exchange,

or contrary to an established

practice of the Exchange. X

Aside from the foregoing, do you

know of any reason why the sub-

ject should not be employed by

another member or member or-

ganization? X

Give full details on the other side for any “yes” answer above or

for any answer marked by an asterisk (*). If not practicable to

embody information in this form, please communicate otherwise -

with the Department of Member Firms.

Date: 2-1-74 bat _____ ROBERT Q. JONES Sue

Individual signature of Member,

General Partner or Voting Stockholder

45a

(77-2051)

January 21, 1974

Mr. Ronald Veith

New York OFFICE

Dear Ron:

Please refer to the attached unsolicited letter of resignation

from Gresham Northcott of our Charlotte office.

Mr. Ives, our Charlotte manager, advised me in December

that he was considering termination of Northcott since he had

been very unproductive in recent months and was not giving his

best efforts to Harris, Upham.

During my visit in Charlotte on January 3rd and 4th Ives

and I learned that Northcott had been pursuing some private

business affairs in recent months. We advised Northcott to

discontinue these activities and to advise us of their specific

nature prior to our consideration of continuing his employment.

Apparently Northcott had made certain arrangements to in-

troduce various individuals to some cattle feed lot operators in

Kansas. The purpose of these introductions was to enable these

persons to buy cattle in the pens through the offices of the

operator. Northcott advises us that he reccrived no com-

pensation for these introductions, nor did he profit in any

indirect way from them, but that he anticipated the prospects of

commodity futures business at some point in time. Any

business so derived, however, was not to be contingent on these

introductions.

Northcott further advised that he made it clear to the

people involved that he was not acting as a representative of

Harris, Upham. He states that some of the persons introduced

were Harris, Upham customers and some were not.

46a

We have received no complaints from anyone on these

activities and do not believe that we will receive any. Our

investigation is somewhat incomplete, but, on the basis of the

facts presented I would appreciate your advice as to whether

Northcott should be given a clean release from Harris, Upham.

Very truly yours,

Robert Q. Jones

RQJ/vmm

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.