Petition for Writ of Certiorari — Beggs v. Ellis

2 ee Ee er

IN THE

Supreme Court of the United States

OCTOBER TERM, 1961

No. 585

™

> a

N. Straus Organ & Co. TNe. and N. Sivs Onaan,

Petitioners,

V.

— SECURITIES AND EXCHANGE COMMISSION,

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Harotp UNTERBERG,

Attorney for Petitioners,

92 Broadway.

New York 4. N.Y.

UNTERBERG and UNTERBERG,

‘Davip UNTERBERG,

ABBIE. GOLDSTEIN,

Of Counsel,

PAGI

a shook bese cae ese ees esse 1

ie ea kd oa ay bo a a 4s aoe oe 68 =

Er are an ee 3

a er Ae re >

A SAS SD ae a ’

Reasons for Granting the Writ ................ 8

I a leg eo Gao ya's sas vs bs so eee |

eli Saw eh the voeake nbc ee uk ens

Opinion of the Court of Appeals .......... A-1

Findings and Opinion of the Seeurites and

Exchange Commission .................. 13-1

Order of the Commission ................ B-13

Judgment of the Court of Appeals ........ (‘-1

TABLE OF CASES

Angel v. Buallinton, 330 U.S. 188, 190-1 ........ 12

Bank of America Nat'l Trust & Sav. Ass'n Vv.

Douglas, 105 F. 2d 100, 105 (C.A., D.C.) .... °° 14

C. A. B. v. Delta Air Lines, Inc., 367 U.S. 315,

affg. 280 F. 2d 424 (C.A., 2d) ........ 8, 9, 10, 11

Columbia Research Corp. v. Schaffer, 256 F. 2d

a eS) ee ee 15

Commissioner ¥. Sunnen, 333 U. S. 591, 597-601 12

Estevez v. Nabers, 219 F. 2d 321, 323 (C.A., 5th) 12

PAGE

Frost v. Corporation Commission, 278 UL S.515 2.0 11

Gilligan, Will & Co. ve S. BE. C., 267 F. 2d 461

(CA. 2d), Cert. den. 361 ULS. 896 00.0000... 13

International Union, ete. vo Eagl-Picher Mining

d& Smelting Co., 3825 U.S. 3855, 341 000 ee. 11

Jones Vv. Securities and Exchange Commission,

ee ee Wee a i awe hee 9,10

Lowsville & NLR. Co. vy. Ohio Valley Tie Co.,

SN es eg oe eg a ee ee ee wy 12

Lubliner v. Board of Alcoholic Bev. Cout., 33

N. J. 428, 435, 165, Atl. 2d 163, 167 ........ 12

N.L.R.B. vy. Phelps, 138 F. Md) 562, 563 (CLA,

|} ae pe eemtace aaath eat ee er rear ae 15

Owensboro VN. Cumberland Telephone Co., 230

SG Mh es Tae ee eect kh ek he 11

People ex rel. Finnegan v. McBride, 226 N.Y. 252

Se a an ec Ry OO cs ech eee ee shed ees 12

Smith Bros., Revocation of Certificate, 33 M,C. C.

Sg RE et PO aS Pre TT eee Te ee 11

Sunshine Anthracite Coal Co. vy. Adkins, 310 U.S.

<a: re Ae ee nc Opty rs aces eg em Pe 12

Tait v. Western Maryland R. Co., 289 U.S. 626,

Rar ape ok Mire oy os ember aaa ees er nee 12

United States er rel. Accardi ve Shaughnessy,

ee es ee I oo 05 Sk Gey a chee oes 15

United States v. Int. Bldg. Co., 345 U.S. 502,

NS 5 5a bre ik 6 Ee aco es ee ak ON LS 12

ili

STATUTES

Administrative Procedure Act, See. 5.5 UUS.c,

| SPECT ere ye eer ea ee re eee eer 4.15

Securities Exchange Act. See. 150). 15 ULS..

Sy A Seah Ri SPM A ee el BS REGR T

Securities Exchange Act. Sec. 21(a). 15 U.S.C.

CaS WE eet ap era Fare ry mae fp tS Were ero tee

OTHER AUTHORITIES

2 Davis. Administrative Law Treatise, Ch. 18, pp.

ee oo i aN eae nanan e baee ee 4

Davis, Res Judicata in Administrative Law, 25

NG, a Se er ee oS re en

Griswold, Res Judicata in Federal Tax Cases, 46

a a ea A eee ae eee

Tobias, Administrative Reconsideration, 28 N.Y.

ge Me Og ipa caren ph a mare, Oe ae ce

IN THE

Supreme Court of the United States

OCTOBER TERM, 1961

No.

>

——

N. Sims OrGan & Co., INc. and N. Sims Oncan,

Petitioners,

v.

SECURITIES AND EXCHANGE COMMISSION.

»

— >

hae nine FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOx THE SECOND CIRCUIT

N. Sims Organ & Co., Inc. and N. Sims Organ pe-

tition for a writ of certiorari to review the judgment

of the United States Court of Appeals for the Second

Circuit, entered in this case on September 19, 1961.

Opinions Below

The opinion of the Court of Appeals (Appendix A,

infra, pp. A-1-8) is reported 295 F. 2d 7s.

The opinion of the Securities and Exchange Com-

mission, — SEC —, ix not vet reported (Appendix B,.

infra, pp. B-1-14).

Jurisdiction

The judgment of the Court of Appeals was entered

on September 19, 1961 (Appendix C, infra, pp. C-1-2).

The jurisdiction of this Court is invoked under Sec-

tion 25(a) of the Securities Exchange Act of 1934 and

28 U.S. C. 1254. /

Questions Presented

1. Whether the Securities and Exchange Commis-

sion, after hearing all the evidence in a denial pro-

ceeding of a broker-dealer registration and permit-

ting the registration to become effective, has the

power, in a revocation proceeding commenced after

the effective date, to revoke the broker-dealer regis-

tration on the same evidence used in the abortive

denml proceeding.

2. Was there a denial of fair hearing under the

due process clause of the Constitution in that the Se-

eurities and Exchang. Commission had prejudged the

matter when it had published a release asserting that

members of its staff have reported information tend-

ing to show that the individual petitioner had violated

anti-fraudulent provisions ?

Statutes Involved

Securities Exchange Act of 1934 (15 U.S.C. 780, 781)

See. 15. (b) A broker or dealer may be rey istered

for the purposes of this seetion by filing with the

Commission an application for registration, which

shall contain such information in such detail as to

”

-such- broker or dealerjand any person directiy or indi-

rectly controlling or controlled by, or under direct or

indirect common control with, such broker or dealer,

as the Commission may by rules and regulations re-

quire as necessary or appropriate in’ the public

incerest or for the protection of investors. Exeept as

hereinafter provided, such registration shall become

effective thirty days after the receipt of such appli-

eation by the Commission or within such shorter

period of time as the Commission may determine.

* * * oa

The Commission shall, after appropriate notice and

opportunity for hearing, by order deny registration

if it finds that such denial ix in the publie interest

** * Pending final determination whether any such

registration shall be denied, the Commission may by

order postpone the effective date of such registration

for a period not to exceed fifteen days, but if, after

appropriate notice and epportunity for hearing, it

shall appear to the Commission to be necessary or

approvriate in the public interest or for the protee-

tion of investors to postpone the effective date of such

registration until final determination, the Commission

shall so order. Pending final determination whether

any such registration shall be revoked, the Commuiis-

sion shall by order suspend such registration if, after

appropriate notice and opportunity for hearing, such

suspension shall appear to the Commission to be nec-

essary or appropriate in the public interest or for the

protection of investors.

See. 21. (a) The Commission may. in its disere-

tion, make such. investigations as it deems necessary

to determine whether any person has violated or is

4

about to violate any provision of this title 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 investigated. The Conmnission is author-

ized, in its discretion, to publish information concern-

ing any such violations, and to investigate any facts,

conditions, practices, or matters which it may deem

hecessary or proper to aid in the enforcement of the

provisions of this title, in the prescribing of rales and

regulations thereunder, or in securing information to

serve as a basis for recommending further legislation

concerning the matters to which this title relates,

Administrative Procedure Act (5 U.S.C. 1004)

See. 5 (¢) Separation of Functions.—The same

ofticers who preside at the reception of evidence pur-

suant to section 7 shall make the recommended deci-

sion or initial decision required by seciuon 8 except

where such officers become unavailable to the agency.

Save to the extent required for the disposition of

ex parte matters as authorized by law. no such officer

shall consult any person or party on any fact in issue

unless Upon notice and opportunity for all parties to

participate; nor shall such officer be responsible to or

subject to the supervision or direction of any officer,

echiplovee, or agent engaged in the performance of

investigative or prosecuting functions for any agency.

No officer, employee, or agent engaged in the per-

formance of investigative or prosecuting functions for

any ageney in any case shall, in that or a factually

related case, participate or advise in the decision,

reconmnended decision, or agency review pursuant to

mY

section 8 except as witness or counsel in publie pro-

ceedings. This subsection shall not apply in deter-

mining applications for initial licenses or to proceed-

ings involving the validity or appleation of rates,

facilities, or practices of public utilities or carriers ;

nor shall it be applicable in any manner to the agency

or any member or members of the body comprising the

agency.

Statement

J. H. Lederer Co., Inc. had been registered with the

SEC as a broker-dealer. Its registration was revoked

on December 28, 1958. Organ, the individual peti-

tioner, was a salesman employed by Lederer in 1958,

during which period Lederer had) sold) Continental

Mining stock. The petitioner was xof named. the

cause for this revocation, althongh it is customary,

where an individual salesman has violated any provi-

sion of the Securities Law, resulting in the revocation

of his employee registration, to name such salesman

as the cause—this, despite the fact that the Staff of

the SEC had full knowledge of the facts.

N. Sims Organ & Co., Inc., the corporate petitioner

(hereinafter called “Organ & Co.""), was organized in

January 1959. Its application fur registration as a

broker-dealer was received by the SEC on October

19, 1959. On November 17, 1959, the SEC instituted

a proceeding to determine whether Organ, while em-

ployed by Lederer, had violated certain provisions of

the Federal Securities Acts.

ate

In the SEC’s Daily News Digest of November 23

6

1959, a release was entitled ‘*Fravp CHARGED To N.

Sims OrGan Co.’’, and recited:

**The SEC has issued an order under the Securi-

ties Exchange Act of 1934 postponing the effec-

tive date of registration of N. Sims Organ &

Co., Inc. * * * as a broker-dealer, and ordering a

hearing on whether such registration should be

denied * * *, The order of the Commission

asserts that members of its staff have reported

information obtained as a result of an investiga-

tion which tends to show that * * *"

Organ had violated certain statutes.

Of course, Organ & Co. had not even been in exist-

ence when the claimed vielations occurred. At the

hearing (R. 30a-3la), appropriate exception was

taken.

The SEC postponed the effective date of Organ &

Co.’s application for fifteen days, to December 21,

1959, and directed a hearing to determine whether the

effective date of registration should be further post-

poved pending denial proceedings (R. 16a-18a).

The hearing was held on December 2, 1959, but the

SEC did not reach a determination on this question

prior to the date on which the application became ef-

fective by lapse of time on December 22, 1959. At no

time did the Staff of the SEC apply fcv, nor did the

Commission issue, an order postponing the effective

date of the registration, to await the recommended

decision and final determination of the Commission,

as provided for in Section 15(b) of the Securities Ex-

change Act of 1934. |

7

On December 22, 1959, Organ & Co. became a duly

registered broker-dealer.

On January 28, 1960, the SEC dismissed the denial

proceeding on the ground that it had become moot.

Of course, the registration had become **effective’’ on

December 22, 1959, by force of the statute (R. 20a),

and that part of the order dismissing the proceeding

as “*moot’’ neither added to nor subtracted from the

fact that the registration was effective. 4

The order of January 28, 1960 (R. 19a-22a) insti-

tuted a revocation proceeding which was heard on

March 28, 1960, before the same Examiner who heard

the denial proceeding. The staff of the SEC. stipu-

jated that it would rely on the same orgl testimony

which was before the Examiner on the’ denial pro-

ceeding (R. 54a).

The Examiner held for the petitioners on the merits,

rejecting the staff*s evidence as insufficient in law and

in fact (R. 24a-29a ; 60a-62a ).

The SEC reversed the Hearing Examiner's Recom-

mended Decision (R. 22a-29a) and made an order re-

voking Organ & Co.’s registration as a broker-dealer

in securities, and recited that Organ was the cause of

the revocation (App. p. B-14). The SEC and the

court below relied heavily on the fact that Organ did

not take the stand to deny certain hearsay evidence

(App. pp. A-5, B-8). Organ was called to the stand

by the Staff; he was available for questioning, but the

Staff did not see fit to interrogate him as to the dis-

puted issues (R.50a-52a). The Court of Appeals for

the Second Circuit affirmed. On the issue of the effect

8

of the denial proceeding on the revocation proceeding,

it held (App. pp. A-7-8) that ‘tthe dismissal of a case

because it is meot does not lay a basis for the applica-

tion of the dogtrine of res judicata,”

It is slicctind that the court below gave no effect to

the clear wording of the statute that the registration

became ‘‘effective’’ on December 22, 1959, irrespeec-

tive of whether the SEC had made an order dismissing

the proceeding as moot or not.

Subsequent to the argument, but before the opinion

was handed down, this Court on June 12, 1961, decided

C. A. B. vy. Delta Air Lines, Inc., 367 U. S. 316. Pe-

titioners urged that the cited case is coutrolling. Pe-

titioners contend that Delta controls the case at bar,

even though the court below attempted to distinguish

it.

REASONS FOR GRANTING THE WRIT

I.

The court below, we submit, has misconstrued perti-

nent sections of the Securities Exchange Act of 1934,

and has misapplied controlling decisions of this Court

dealing with parallel problems in administrative law.

Thus, it has approved the action of the SEC in exceed-

ing the authority granted to it by Congress with refer-

ence to revocation of broker-dealer registrations.

Congress has always been aware of the propensity of

administrative bodies to defer action on license appli-

eations. In broker-dealer registrations, it evolved an

equitable procedure whereby a ‘tregistration shall be-

9

come effective thirty days after the receipt of such

application’; and if ‘tit shall appear to the Conmmis-

sion to be necessary or appropriate in the publie inter-

est or for the protection of investors to postpone the

effective date of such registration until final determi-

nation, the Commission shall so order”.

We believe that the decision of the court below is

contrary to the decisions of this Court in C. A. B. v.

Delta Lines, Inc., 367 U.S. 316, and in Uuited States

v. Sea Train Lines, 329 U.S. 424.

Delta was an affirmance of the decision of the See-

ond Circuit in 280 F.2d 43. This Court granted the

Government's petition for certiorari on the question of

whether an administrative body, once it has entered an

order permitting a certificate to become effective, is

Without power to modify the certificate on a petition

for reconsideration. In that case, the petition for

reconsideration was filed prior to the effective date; in

the case at bar, the broker-dealer registration had be-

come effective before the revocation proceeding was

commenced,

The opinion by the Chief Justice analyzes the con-

flict between two opposing policies—finality on the one

hand and the right result on the other, Ultimately, it

is Congress who must show which path is to be fol-

lowed. While the statute applicable to each adminis-

trative body is ‘tenacted in an attempt to tailor the

ageney's discretion to the particular problems in the

area’’, vet, the use of similar language and similar pro-

cedures often give aid in settling the basie principles

involved. Congress was concerned with the possibility

that an application might be pigeonholed forever. In

the related area of the issuance of securities, Jones Vv.

; 10

Securities and Exchange Commission, 298 U.S. 1, 18,

this Court has defined the word *‘effective’’ as connot-

ing ‘‘completeness of operative force and freedom to

act’. Congress has given the SEC an arsenal of reme-

dies to postpone the effective date, but the onus and

burden are on the SEC to take these steps.

This is especially true when a denial proceeding has

actually been commenced. Then, it is incumbent upon

the SEC to finish what it starts. This is not the case

where no denial proceedings had ever been com-

menced ; nor is this a case where a revocation proceed-

ing had been commenced on evidence that had come to

the SEC’s attention after the broker-dealer registra-

tion had become effective. In the situation at bar, the

evidence was not only in the SEC's file, but was used

in the denial proceeding, and subsequently used as the

ouly evidence in the revocation proceeding.

It is evident that the ** power the [SEC asked] for in

this case seems nothing more or less than the power to

do indirectly what it cannot do directly’’. Delta, at

page 328. ‘*All we hold is that if the [SEC] wishes

to do so, it must proceed in the manner authorized by

statute. * * * if it feels uncertain about the decision

prior to its effective date, it may postpone the effective

date until all decisions have been resolved; * * *".

Delta, at page 329. “Indeed, with all these weapons

at its hand, it is difficult to follow the argument that

the [SEC] should be allowed to improvise on the

powers granted by Congress in order to preserve ad-

ministrative flexibility’. Delta, at page 330.

Decvia relied heavily on United States vo Sea Train

Lines, 329 U.S. 424, aftirming 64 F. Supp. 156. The

11

lower court's opinion (that of a three judge statutory

court), relying upon the Fifth Amendment, was cited

with approval in Delta at page 332.

Circuit Judge Biggs (p. 160) cites Frost v. Cor-

poration Commission, 208 U.S. 515, and Owcus-

boro V. Cumberland Telephone Co, 230 U.S. 98, for

the proposition that a certificate allowed to become ef-

fective was a franchise because it granted rights to

engage in business of a publie nature and was thus

protected by the Constitution. He, ax well as this

Court. in affirming, cited Smith Bros., Revocation of

Certificate, 33 M,C. C, 465, 472, to the effect that once

a certificate becomes effective, the administrative body

or the courts are without power to cancel, That case

has been cited with approval by this Court: several

times, and was cited by the Second Cireuit in Delta,

Judge Biggs also relies on the decision of this Court

in International Union, cle. v. Bagle-Pichor Mining &

Smelting Co., 325 US. 335, 541, where it was said:

** Administrative flexibility and judicial certainty

are not contradictory ; there must be an end to dis-

putes which arise between administrative bodies

and those over whom they have jurisdiction.”

Even if thix ease is viewed in the aspect of res

judicata (or more accurately estoppel by judgment )

we submit that the doctrine has been tortured bhe-

yond reality.

Of course, Res Judicata is applicable in administra-

tive law. See Tobias, Administrative Reconsideration,

YS NOY. ULL. Rev. 1262, cited at p. 321, and Davis,

Res Judicata in Administrative Law, 25 Texas L. Rev.

199, cited at p. 327 of Delta, The former, at p. 1272,

IZ

quotes with approval from People er rel. Finnegan Vv.

McBride, 226 N. Y. 252, 259, 123 N. E. 374, 376. See

also the opinion in Lubliner vy. Board of Alcoholic Bev.

Cont., 33. N. J. 428, 435, 165 Atl. 2d 163, 167 (1960),

and Griswold, Res Judicata in Federal Tar Cases, 46

Yale L. J. 1320, 1326.

Soundly considered cases by this Court hold that

the principles of Res Judicata apply in administrative

law. Tait v. Western Maryland R. Co., 289 U.S. 620,

623-4; Sunshine Anthracite Coal. Co, vy. Adkins, 310

U.S. 381, 403; Louisville & N. RB. Co. v. Ohio Valley

Tie Co., 242 U.S. 288; Commissioner v. Sunnen, 333

U.S. 591, 597-601; United States v. Int. Bldg. Co.,

345 U.S. 502, 504-5. See also 2 Davis, Administrative

Law Treatise, Chapt. 18, pp. 545, et seq.

Res Judicata is often difficult to apply. In Esterez

v. Nabers, 219 F. 2d 321, 323 (C. A.. 5th), the test was

laid down as to whether the two proceedings are

merely the same and not the question of whether the

tirst was ‘ton the merits’. In Angel v. Bullinton, 330

U.S. 183, 190-1, it was held that it was a misconcep-

tion to assume that the doctrine does not come into

operation after the first court had not passed on the

**merits in the sense of the ultimate substantive issues

of a litigation’. Adjudication declining te reach

these ultimate issues bars a second attempt to reach

them again.

The situation at bar is one example of a situation

where the administrative process reaches a palpably

bad resiit with terrific consequences to the citizen in-

volved. Organ had worked all his life in the securities

business. He has no other occupation. After having

been a salesman all these vears, he decided to form his

13

own firm. On the questionable testimony of a hard-

of-hearing, disgruntled customer (R. 37a) of a for-

mer employer (Lederer), not only has petitioner's

firm, Organ & Co., been put out of business, but Organ

himself, because he is called a ‘teause™ of the revoca-

tion, is unable to be employed in any eapacity by any

broker-dealer licensed by the SEC. Vis-a-vis him and

his government, such a result should not be condoned,

Under the principle sustained by the Court below,

a broker-dealer revocation proceeding could be com-

menced years after his registration had become effee-

tive on grounds known from the beginning and inves-

tigated by the SEC. If this can he so, a lawyer could

he disbarred for matters that had been thoroughly

aired by the Character Committee before his admis-

sion. No citizen should be subject to such peril. We

say that the Constitution and Congress never intended

these consequences,

The question of whether the SEC is acting fairly

by participating in pre-.earing releases is squarely

raised in this case.

The point was raised in Gilligan, Will d& Co. Vv.

S. E. C., 267 F. 2d 461, 468 (2d Cir., 1959), cert. den.

361 U.S. 896. The Court of Appeals affirmed because

petitioners had failed to assert the defect of pre-judg-

ment before the SEC. It was held to be a waiver

under Section 25(a) of the Securities Exchange Act

of 1934. Inthe ease at bar (R. 30a-31a), there was no

Walver.

14

The Court below cogently remarked: ‘But we do

not think the notice was a very good kind of notice

for a government body to issue’? (App. p. A-7).

Administrative agencies have a propensity to try

their cases in newspapers. They publicize complaints,

but do not give equivalent publicity to ultimate dis-

missals by the administrative bodies themselves or by

the courts. Some years ago a prime offender was the

Federal Trade Commission. Its practice was the sub-

ject of editorials and correspondence in the New York

Times.

The difficulty is that once the financial community,

close-knit and sensitive as it is, is directly advised

through administrative release that its Staff has ad-

vised the SEC of a possible violation, tentative though

it may be, the damage is done. This is particularly

true of a broker-dealer application for registration.

The business is doomed before it is launched, even

though ultimately the complaint is dismissed.

The use of publicity by the SEC to effectuate its

policies is well know. While, under Section 21(a)

of the Securities Exchange Act, the SEC has discre-

tionary power to publicize violations, it should only be

used to effectuate the ends for which it was author-

ized,

Bank of America Nat'l Trust & Sav. Ass'n v. Doug-

las, 105 F. 2d 100, 105 (C.A., Dist. Col.), in dealing

with this problem, noted that ‘tsuch a power might

easily be made an instrument of oppression.”’ It was

- suggested that ‘pre-trial publication of evidence—

labeled as believed to be true—oughit, we think, to be

avoided, especially as emanating from the tribunal

es

charged with the judicial responsibility of weighing it

and assuring the accused a fair hearing”’.

Section 5 of the Administrative Procedure Act was

expressly designed to maintain separation of prosecu-

tor and judge in administrative proceedings. Section

4(¢) expressly prohibits any officer, agent or employee

engaged in investigative or prosecuting functions to

participate or advise in the decision. Won Yang Sung

Vv. McGrath, 339 U.S. 33; Columbia Research Corp. v.

Schaffer, 256 F. 2d 677, 680 (2d Cir, 1958).

While agency heads are exempt, by the very nature

of administrative agencies, they should follow the un-

derlying policy.

We submit the decision below conflicts with the ra-

tionale in United States or rel. Accardi v. Shaugh-

nessy, 347 U.S. 260, 266-8, where it was held that a

new trial was required if petitioner could prove that

the Board of Lnmigration Appeals was influenced by a

published list of undesirable aliens.

The opportunity to have an impartial and objective

hearing is of the essence of the administrative as well

as the judicial process. NV.L.RB. v. Phelps, 136 F. 2d

962, 563 (Sth Cir.). No statute or regulation is re-

quired to give this right, since it is inherent in due

process, The whole basis of the Administrative Pro-

cedure Act, with its detailed attempts to formulate fair

procedure in administrative hearings, is seriously un-

dermined when agency heads act in such a way that

the slightest suspicion of irregularity taints the pro-

ceedings. It is unrealistic to think that the Commis-

sioners can completely divorce themselves from the in-

vestigative function as to remain open-minded wheir

16

they review the record, especially when they are not

bound by the Examiner's findings.

This case gives this Court an opportunity to estab-

lish the principle that the Commissioners word pre-

hearing releases so as to avoid what appears to be pub-

lic pronouncement of judgment before the actual trial

of the matter. In that way, unfavorable implications

and irreparable damage can be avoided.

Conclusion

The decision below raises important questions of ad-

ministrative procedure which bear directly upon the

powers of the agencies generally, and more particu-

larly of the Securities and Exchange Commission, and

op the constitutional rights of those dealing with

agencies,

Ve believe the decision is in error and conflicts with

the views expressed by this Court and by other courts

of appeals.

The petition for certiorari should be granted.

7 Respectfully submitted,

Hanrotpy UNTERBERG,

Attorney for Petitioners.

UNTERPERG and UNTERBERG,

Davip UNTERBERG,

ABBIE GOLDSTEIN,

Of Counsel,

App. A-1

Appendix A

293 F.2d 78

UNITED STATES COURT OF APPEALS

For THE SECOND Cinevir

No. 407—Orctober Terms. 1960.

(Argued June 7, 1961 Decided Jiily 24. 1961.)

Docket No, 26876

N. SIMS OnGan & Co., INc. and N. Sims Onagan,

Petitioners,

-—V~/.—

SECURITIES AND EXCHANGE COMMISSION,

Respoudeut.

,efore;:

Luaparp. Chicf Judge, and

(OODRICH*® and Frenpiy. Cireait Judycs.

Petition to review an order of the Securities and Ex-

change Commission, 15 U.S.C. AL 878 (Ca). revoking

wroker-dealer registration and listing individual ap-

pellant as a cause.

Affirmed,

Davi Ferner, Assistant General Counsel Se-

curities and Exchange Conunission Wash-

ington, D.C. (Walter P. North, General

Counsel, and John A. Dudley, Attorney

Securities and Exchange Conmuteission,

Washington, D. ©. on the brief), for

appellec,

* Of the Third Circuit. sitting by designation.

Ap). A-2

Davin Untersernc. New York, N.Y. (Unterberg

and Unterberg, New York, N.Y.. on the

brief), for appellant,

———

dioopRricH, Circeail Judge:

This is a petition to review an order of the Seeuri-

ties and Exchange Commission which revoked Organ

& Cows registration with the Commission as a broker

and dealer in securities and recites that Organ is the —

‘ause of the revocation. The review is sought under

Section 20(a) of the Sceurities (xchange Act of 1934,

Ib UL S.C. AL S78¥ (a).

The background of the case may be summarized as

follows :

J. H. Lederer Co. Inc. had been registered with the

Commission as a broker and dealer. Its registration

was revoked on December 28, 1958, for violation of

fraud provisions of the statute. Organ was a sales-

man emploved by Lederer in 1958, a period during

which Lederer was conducting a selling campaign of

stock of a company named Continental Mining Ex-

ploration, Ltd. Organ & Co. was organized in January,

1959, and its application for registration as a broker

and dealer was received by the Commission on Octo-

ber 19, 1959. The Commission instituted proceedings

to determine whether Organ, while employed by Led-

erer, had violated fraud provisions of the federal secur-

ities acts. The Commission postponed the effective

date of Organ & Co.'s application for 15 days and

directed a hearing to determine whether the effective

date of registration should be further postponed pend-

ing denial proceedings. The hearing was held. but

the Commission did not reach a determination on this

question prior to the date on which the application

————

App. A-3

hecame effeetive by lapse of time.’ The Commission,

on January 28th, dismissed the denial proceeding on

the ground that it had become moot and in the same

order instituted a revocation proceeding Which resulted

in the revocation order under review here. The record

developed in the preliminary hearing on postponement

Was Incorporated into the record of the revocation pro-

ceeding. Petitioners make four points.

The first point is that the Commission's order is not

supported by substantial evidence, Chieth concerned

in the consideration of this objection is the (Ceormais-

sion’s ¢laim that certain representations made over

the telephone and which were fraudulent? were mide

PSection 15(b) of the Securities Exchange Act of 1934) pro-

vides, In part:

“(bi A broker or dealer may be registered for the pur-

poses of this section by filing with the Commission an

application for registration. * * © Except as hereinafter

provided, such registration shall become effective thirty days

after the receipt of such application by the Commission or

Within such shorter period of time as the Comanission mays

determine.”") 15 U.S.C. AL $70 Cho,

=Section 17(a) of the Securities Act of 1933 > provides:

(a) It shall be unlawful for any person in the sale of

any securities by the use of any means or instruments of

transportation or communication ino interstate commerce or

by the use of the mails, directly or indirectly —

(1) to employ any device, scheme, or artifice to de-

fraud, or

(2) to obtain money or property by means of anv

untrue statement of a material fact or any omission te

state a material fact necessary in order to make the state-

ments made, in the iight of the circumstances under which

they were made, not misleading. or

(3) to engage in any transaction, practice, or eourse

of business which operates or would operate as a fraud or

deveit upon the purchaser.”" 15 UL S.C. AL S77q (ay.

Section 10 of the Securities Exchange Act of 1934 provides. in

part.

“Tt shall be unlawful for any person, directly or indirectly,

App. A-4

by Organ. There were two of these telephone conver-

sations going to the same prospective customer. ‘The

ealler identified himself as Organ. The recipient, who

subsequently bought stock? did not know Organ but

identified the caller’s voice as the same on the two

oceasions. Although this evidence might not be

enough by itself to justify a conelusion that Organ

was the ealler, there was considerably more. The

written confirmations of the sale received by the

purehaser bore the initials **N. O.’* which were Or-

gan’s initials and Hallen, the purchaser, cancelled one

vf his purehases by notice addressed to Lederer

marked to the attention of Organ. Further, Hallen

Was given a telephone number to eall in order to get

in touch with the salesman who identified himself as

Organ, and this telephone number was used by Organ

in ealling other customers. The trial examiner did

not think that this was enough to identify Organ as

the ealler on the telephone; the Commission thought

otherwise. It is the Commission’s responsibility to

by the use of any means or instrumentality of interstate

commerce or of the mails, or of any facility of any national

securities exchange—

ss 8 ¢

‘*(b) To use or employ, in connection with the purehase

or ‘sale of any security registered on a national securities

exchange or any security not so registered, any manipula-

tive or deceptive device or contrivance in contravention of

such rules and regulations as the Commission may pre-

seribe as necessary or appropriate in the public interest or

for the protection of investors.”” 15 U.S. C. A. $78).

The purchaser cancelied the first sale and testified that he

personally followed the market activity of the stock not relying

on the salesman’s statements. The Commission is quite correct in

its conclusion that reliance is not an element of the violation

eharged. 15 U.S. C. A. S877q (a), 78j. See Hughes vo SEC,

174 F. 2d 969, 973-4 (D.C. Cir, 1949).

App. A-)

decide the question and the fact that it differed with

the examiner dees not matter.

The Commission pointed out correctly that this is a

non-eriminal case and that Organ’s failure to testify

is significant. He did rot deny the evidence just: re-

cited and the accepted rale is that failure to explain

facets and cireumstanees warrants the inference that

his testimony would have been adverse.?

We agree with the Comission that the faetors cure

sufficient to establish Organ as the maker of the eoi-

miuinication.®

The second point is that the proceedings fell under

the prineiples set out in Jencks vo United States, 303

U.S. 657 (1957).

4 Section 15 of the Securities Exchange Act of 1934 provides,

in part:

**The Commission shall, after appropriate notice and op-

portunity for hearing, by order deny registration to or revoke

the registration of any broker or dealer if it finds that such

denial or revovation is in the publie interest and that (1)

such broker or dealer whether prior or subsequent to becom-

ing such, * * * has willfully violated any provision of the

Securities Aet of 1933, or of this chapter, or of any rule or

regulation thereunder.”’ 15 U.S. C. A. §7aso.

See Pierce v. SEC, 239 F. 2d 160, 162-3 (9th Cir, 196). Cf.

FCC .. Allentown Broadcasting Corp., 349 US. 359, 864 (1955).

The only significant difference between the examiner's Recom-

mended Decision and the Findings and Opinion of the Commis-

sion is the ultimate conclusion to be attached to all of the evidence

presented. The Commission is fully as eapable of drawing that

conclusion as is the examiner.

> Wigmore, Evidence $2589 (3d ed. 1940) ; MeCormick, Evidence

$249 (1954). But see, U.S. ve Costello, 275 F.2d 355 (2d Cir.

1960), aff’d, 365 U.S. 265 (1961).

6 While rigid evidentiary rules are not to be applied to admini-

_Strative agencies, FTC v. Cement Institute, 333 U.S. 683, 705-6

(1948). the evidence of surrounding circumstances in this case

was sufficient to conclude that Organ was the caller even under

the more stringent rutes applicable in criminal proceedings. See

Jarvis v. United States, 9) FB. 2d 248 (Ast Cir). cert. denied, 202

U.S. 705 (1937).

App. A-6

An investigator for the Commission interviewed

Hallen and made notes for the purpose of preparing

an affidavit to be signed by Hallen. He did prepare

such an affidavit and destroyed the notes. Hallen did

not see the notes which, it was testified, were simply

to serve as cues for the preparation of the affidavits

by the investigator. In the hearing Hallen was shown

the affidavit to refresh his recollection. Petitioners’

counsel had opportunity before Hallen testified to

read the affidavit, and it was in the hands of petition-

ers’ counsel for cross-exami 1 of Hallen.

There was no suggestion ese notes were

destroyed with any intent to suppress evidence. See

United States v. Thomas, 282 F. 2d 191 (2d Cir. 1960).

There was no refusal by the Government to produce a

statement within the meaning of the so-called

* Jencks” statute. 18 U. S. C. 93000. The only state-

ment that Hallen signed was shown to Organ’s coun-

sel as stated above. There was no violation of any

right of Organ involved here.

Third, petitioners charge that the Commission's

publication of the notice of the proceedings consti-

tuted a prejudgment against them and was a denial

of due process. This Court had oceasion to comment

on this subject in Gilligan, Will & Co. v. SEC, 267

F. 2d 461 (2d Cir.), cert. denied 361 U.S. 896 (1959).

It was there said:

“Apart from 95 [of the Administrative Proce-

dure Act] and the restrictions it may impose, the

Commission's reputation for objectivity and im-

partiality is opened to challenge by the adoption

of a procedure from which a distinterested ob-

server Inay conelude that it has in some measure

adjudged the facts as well as the law of a par-

oT]

App. A-7

ticular case in advance of hearing it. There

would appear to be no such conflict: between the

Comniission’s duty to inform the publie and its

duty to prosecute as would necessitate the use of

press releases of the kind here questioned.” 267

F. 2d at 468-9.

We reiterate that statement. It is not the business

of this or any other court to write publicity notices

for the Commission. But we think it should be borne

in mind that when the body which is the investigator,

the prosecutor and the judge starts a proceeding by

saving that the order of the Commission asserts that

members of its staff have reported information tend-

ing to show that Organ has violated anti-fraudulent

provisions, it creates an impression whieh could be

interpreted as tending to indicate that the Commiis-

sion had already made up its mind. We do not think

the Commission intended such a result; we certainly

do not indicate that due process of law was denied to

the petitioners. But we do not think the notiee was

a very good kind of notice for a government body to

issue.

Fourth, petitioners claim that res judicata operates

to prevent the order under attack from being valid.

They base this, of course, on the dismissal of the

denial proceedings, but those proceedings did not de-

cide anything. They were dismissed as moot because

action of the Commission was not taken until the

application for registration had become effective by

lapse of time under the provisions of the statute? It

is well settled that the dismissal of a case because it

7See note 1 supra.

App. A-&8

is moot does not lay a basis for the application of the

doctrine of res judicata

The petitioners in a letter submitted after argument

urge that CAB v. Delia Air Lines, Ine., 367 U.S. 316,

decided June 12, 1961, is controlling here. We think

not. In that case the Aeronautics Board allowed a

certificate of convenience and necessity to beeome

effective by lapse of time despite pending petitions

for reconsideration of the award. Subsequently the

Board imposed restrictions on the certificate without

formal notice or hearing. The precise holding of the

Supreme Court was that the statutory mandate of

notice and hearing must be complied with before an

existing certificate can be amended or modified. There

was no discussion of or reliance upon the fact that

the evidence on which the restrictions were based was

hefore the Board when the certificate became effective

by lapse of time. In the instant case after the cerfi-

cate became effective by lapse of time the Commission

instituted a revocation proceeding, as authorized by

statute,® and conducted a hearing. The record devel-

oped in the earlier proceeding was incorporated into

the record of the revocation proceeding. Petitioners

had full opportunity to rebut any damaging evidc nee

before the Commission at the revocation hearing.

That they failed successfully to do so does not in any

way reflect any improper action by the Commission.

The decision of the Commission will be affirmed.

8('f. Restatement, Judgments §69(2) and Comment ¢. It has

also been held that the doctrine of estoppel is not available against

the SEC. SEC vy. Culpepper, 270 F. 2d 24) (2d Cir. 1959); SEC

v. Morgan, Lewis & Bockius, 209 F. 2d 44 (3d Cir. 1953).

9 See note 4 supra.

App. B-1

Appendix B

FINDINGS AND OPINION

OF THE COMMISSION

(Securities Exchange Act Release No. 6495)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

March 14, 1961

—>

In the Matter of

N. Sims Oncan & Co... TNxe.

400 East Park Street

Long Beach, L. 1. New York

File No. 8-7919

Securities Exchange Act of 1934

Sections 1o(b) and LoACh)(4)

- =

a

Broker-DEALER REGISTRATION

Grounds for Revocation of Registration

Fraud in Offer and Sale of Securities

Where president and principal stockholder of reg-

istered broker-dealer. while salesman for another

broker-dealer, made false and misleading statements

in offer and sale of securities concerning, among

other things, future market price, prospective earn-

ings, and length of time his emplover had been in

business, Weld under all the circumstances public

interest requires revocation of registration,

App. B-2

Estoppel P

Where, in previous revocation proceeding against

registered broker-dealer firm, Commission did not

place a salesman's activities in issue, held, Commis-

sion not estopped from doing so in subsequent revo-

cation proceeding against another registered broker-

dealer firm of which he is president and principal

stockholder.

Res Judicata

Double Jeopardy

Where Commission, after hearing on question

whether effective date of application for broker-

dealer registration should) be postponed pending

tinal determination whether such registrati 1 should

he denied, permitted registration to become effec-

tive by lapse of time and dismissed denial proceed-

ing ax moot, and thereafter instituted revocation

proceeding based on same allegations as in denial

proceeding, held, issues in prior proceeding were

not determined on the merits and doctrine of res

judicata is not applicable to revocation proceeding ;

further held, double jeopardy not involved in insti-

tution of revocation proceeding.

APPEARANCES:

John J. Devaney, Jr. and Bernard M. Krakower, of

the New York Regional Office of the Commission, for

the Division of Trading and Exchanges.

David Unterberg and Abbie Goldstein, of Unterberg

and Unterberg, for N. Sims Organ & Co., Ine. and N.

Sims Organ.

App. B-3

By Woopstpr, Commissioner :

These are proceedings pursuant to Section 15())

of the Securities Exchange Act of 1934 (Exchange

Act’) to determine whether the registration as a

broker and dealer of N. Sims Organ & Co., Ine. (**reg-

istrant’’) should be revoked, and whether, under See-

tion IbA(b) (4) of the Exchange Act, N. Sims Organ,

president, treasurer, a director and owner of 10°; or

more of the stock of registrant. should be found to be

a cause of an order of revocation if entered

The order for proceedings alleges that between Feb-

ruary and November 1958, Organ, while employed as

a salesman by J. H. Lederer Co., Ine. (** Lederer

(o.""), then a registered broker and dealer made cer-

tain false and misleading statements in the offer and

sale of stock of Continental Mining Exploration Ltd.

(Continental) in willful violation of anti-fraud

provisions of the Securities Act of 1933 (**Securities

Act’) and the Exchange Act

! Section 15(b) of the Exchange Act, as here applicable, pro-

vides that we shall revoke the registration of a broker or dealer

if we find that it is in the public interest and that such broker or

dealer or any officer, director, or controlling person of such

broker or dealer, whether prior or subsequent to becoming such,

has willfully violated any provision of that Act or of the Securities

Act of 1933 or any rule or regulation thereunder.

Under Section 15A(b) (4) of the Exchange Act. in the absence

of our approval or direction, no broker or dealer may be admitted

fo or continued in membership in a registered securities ASSOW la

tion if the broker or dealer or any partner, officer, director or

controlling or controlled person of such broker or dealer was a

cause of an order of revocation which is-in effect.

— 2We revoked the broker-dealer registration of Lederer Co. on

December 28, 1958. 3x S.E.C. 794.

3 The anti-fraud provisions referred to are Section Iva) of the

Securities Act and Section 10(b) of the Exchange Act and Rule

10b-5 (17 CFR 240.10b-5) thereunder. The composite effect of

these provisions, as applicable here, is to make unlawful the use

of the mails or interstate facilities in connection with the offer or

App. B-4

After appropriate notice, a hearing was held before

a hearing examiner. Thereafter, our Division of

Trading and Exchanges (**Division’’) filed proposed

findings and a supporting brief, and registrant filed a

brief. The hearing examiner submitted a recom-

mended decision in which he found that fraudulent

representations had been made by a salesman for

Lederer & Co., but that the evidence did not establish

that the salesman was Organ, and he recommended

that the proceedings be dismissed. Exceptions were

filed by the Division and by registrant. Our findings

are based upon an independent review of the record.

Registrant, a New York corporation organized in

January 1959, became registered as a broker and

dealer in December 1959.

The evidence shows that a Mr. H received two long-

distance telephone calls, in March and April 1958,

from a salesman of Lederer Co. who identified himself

as Organ and solicited the purchase of Continental

stuck. This salesman represented that the = stock,

which was selling for about $3.50 per share in March

1958, was a **fabulous’’ stock, was going to be a **tre-

mendous money-maker,”’ was a “‘tremendous buy,”’

was going up ‘‘steadily,”’ should go up to $4 within a

few days, and would reach $6 **shortly”’ or within 60

days, and that Lederer Co. had been in business 27 or

28 vears. Mr. H purchased 300 shares at $3.45 per

share in March, and 1,000 shares at $3.65 per share

in April 1958, and he received confirmations of the

sales through the mails which did vot contain Organ’'s

name, but bore a number followed by the letters **NO,”’

sale of any security by means of a device to defraud, an untrue

or misleading statement of a material fact, or any act, practice ar

course of business which operates or would operate as a fraud or

deceit upon a customer, or by means of any other manipulative

or fraudulent device.

App. B-5

Which are the initials of Organ's first and last names.

Mr. H cancelled his Mareh purchase by letter which

he testified he believed he addressed to Organ‘s at-

tention.

During one of the telephone calls, the salesman

gave Mr. H a telephone number in case he wished to

eall, which number was different from the telephone

number printed on the confirmations, and the record

shows that a salesman named Organ, no first initial

being given, used the telephone number given to Mr.

Hin making long distance calls to other customers in

behalf of Lederer Co,

On the basis of the foregoing, the hearing examiner

found that the representations made to Mr. He were

materially false and misleading, but that, as urged by

registrant, the identity of the salesman as N. Sims

Organ had not been established by the evidence.

We agree with the examiner that the representa-

tions were fraudulent. Continental had suffered net

losses of $82,664 in 1956 and 584.102 in 1957. This

financial information was available to the salesman

but he apparently made no effort to obtain it. In view

of Continental's unfavorable financial condition,

Which was not disclosed to Mr. H, we find that the

optimistic statements concerning the prospects of the

stock had no reasonable basix in fact. and accordingly

were materially false and misleading.*4 Registrant

asserts that the statements regarding the future in-

crease in market price were merely * puffing.“” How-

ever, even assuming that ** puffing’’ may be permissible

in connection with the sale of merchandise other than

#R. RB. Michaels & Co., Securities Exchange Act Release No.

6461 (February 6. 1961); Barnett & Co... Inc., Securities Exchange

Act Release No. 6310, p. 4 (July 5. 1960): Leonard Burton Cor-

poration, Securities Exchange Act Release No. 5978, p. 4 (June

4. 1959).

App. B-6

securities, it is clear that statements in the offer and

sale of securities which are materially false or mis-

leading are proscribed by the securities laws. Regis-

trant also contends that since Mr. H cancelled the first

sale and thereafter personally foiiowed the market ac-

tivity of Continental stock, his second purchase was

not induced by the Lederer Co. salesman. However,

under Section 17(a) of the Securities Act, false and

misleading statements are unlawful in the offer as well

as the sale of securities and in any event, reliance

on such statements need not be shown to establish a

violation under that section or Section 10(b) of the

Exchange Act. Moreover, the statement that Lederer

Co. had been in business for 27 or 28 years, when in

fact it had been registered as a broker or dealer less

than three years, was materially false.?

We reject, however, the examiner's dnding that the

evidence failed to establish that the salesman who

made the fraudulent representations was N. Sims

Organ. Registrant did not deny that Organ was the

salesman involved, but argued that the testimony con-

cerning that salesman’s statements over the telephone

was hearsay and should have been excluded. However,

as we said in A. G. Bellin Securities Corp.8 ** Admini-

-trative agencies are not bound by the technical com-

3See First Maine Corporation, 38 S.E.C. 882, 639 (1959);

Brereton, Rice & Co., Ine., 37 S.E.C. 618, 621 (1957).

6See Hughes v. S.E., 174 F. 2d 869, 973-74 (C_A.D.C. 1949) ;

Speed vy. Transamerica Corp., 99 F. Supp. 808, 831 (D. Del. 1951).

7 We note in this connection that Joseph H. Lederer, who was

Lederer Co.’s president and principal stockholder, had been in

various types of securities activities since 1918. However, the

salesman was referring to Lederer Co., not Lederer, and in any

event the statement was at least materially misleading.

8 Securities Exchange Act Release No. 5966, p. 11 (May 12,

195% ,.

App. B-7

mon law rules concerning the admission of hearsay

evidence, and may make findings based on hearsay if

corroborated by competent evidence."" Moreover,

telephone conversations bave been admitted in judicial

proceedings where there was some evidence, either

direct or circumstantial, of the identity of the person

Whose statements were in issue.® The test of suffi-

ciency of circumstantial evidence is whether there are

“facts in evidene which if wianswered would justify

men or ordinary reason and fairness’? in finding in

favor of the proponent of the evidence. The proof

of identity, as of any other fact in proceedings of this

nature, need only be by a preponderance of evidence

or probability, that is, the evidence should be sufficient

to persuade us that it is more probable that Organ

was the salesman in question than that he was not.!!

Thus, in Andrews y. U.S.," the evidence of the identity

of the defendant as the person who had long-distance

conversations with investors, during which allegedly

fraudulent statements were made, consisted of. the

record of the telephone company which showed that

long-distance calls were placed and conversations had

from defendant's office with the investors at about

the times fixed in their testimony, and of receipts for

9 See Andrews vy. U. 8.,78 F. 2d 274. 275 (C.A. 10. 1935) : Jarvis

v. UL 8., 90 F. 2d 243, 245 (CLA. 1, 1937), vert. denied 302 U.S. 705;

Van Riper v. U. 8., 13 F. 2d 961, 968% (CLA. 2, 1926), cert denied

sub nom. Ackerson v. U. S., 273 US. 702.

109 Wigmore, Evidence (3d Ed., 1949), See. 2494.

MW Wright v. SE... 112 F. 2d 89, 94 (CLA. 2, 1940): Archer vy.

S.EC., 133 F. 2d 795, 799 (CLA. &, 1943), cert. denied 319 U.S.

767. In calculating the probabiliti-s as applied to a question of

identification, the odds against tie appearance of each of the

several circumstances bearing ou the question of identity are

multiplied, not merely added. MeCormick, Evidence (1954), See.

171, 319.

1278 F.2d at 275

App. B-8

money and correspondence subsequently passing be-

tween them. The Court, holding that in order to ren-

der testimony detailing a telephone conversation com-

petent it is necessary to supply some evidence of the

identity of the person with whom the conversation is

alleged to have been had, concluded that the evidence

produced supphed the required foundation for the

introduction of the challenged testimony. The Court

stated that ‘recognition of the voice is not necessary

to such identity. Like any other ordinary fact, it may

be established by direct evidence or by circumstances.’

The hearing examiner, in conciuding that the evi-

dence was not sufficient to establish that Organ was the

salesman who made the fraudulent representations,

failed to take into account registrant’s failure to deny

that the salesman in question was Organ. We consider

such failure to be a factor of substantial significance,

particularly in the present context in which Organ de-

sires to retain a license to engage in business involving

dealings with customers in the face of charges that he

acted improperly with respect to Mr. H. In our opin-

ion, such failure, together with the other circumstances

bearing on the question of identity-including the fact

that Organ was a salesman in the office of Lederer Co.

during the period involved, that the salesman twice

identified himself over the telephone as Organ, the let-

13 The failure of a party to testify, in a non-criminal ease, in

explanation of suspicious facts and circur-stances peculiarily

within his knowledge fairly warrants the inferenve that his testi-

mony, if produced, would have been adverse. See Local 167 v.

PoS., 297 ULS, 293, 298 (1934); Mammoth Oi Company v. U.S...

275 U.S. 13, 52-3 (1927); Kirby v. Tallmadge, 160 U.S. 379, 383

(1895) ; Daniel v. UL S., 234 F. 2d 102, 106 (CLA. 5, 1956) ; Meier v.

Commissioner, 199 F, 2d 392, 396 (CLA. 8, 1952); 2 Wigmor,

Evidence (1940), See. 289 In an action for rescission and

damages brought by Mr. HL against Lederer Co., Lederer, Organ

and another salesman, no denial was made to allegations by Mr.

HI that sales to hin were made by Organ,

App. 1-9

ters “NO” appeared on the contirmations, the notice

of cancellation addressed to Organ to the best of Mr.

IL’s recollection was followed by cancellation of. his

transaction, and the same telephone number as was

given to Mr. Hi by the salesman who identified himself

as Organ was used by a Lederer Co. salesman named

Organ in calling other customers-convinees us that N,

Sims Organ was the salesman who made the fraudulent

representations to Mr. H. We accordingly conclude

that Organ willfully violated Section 17(a) of the Se-

curities Act and Section 10(b) of the Exchange Act

and Rule 10b-5 thereunder.

Other Matters

Registrant contends that since, in the revocation

proceedings against Lederer Co., we did not place Or-

gan’s activities in issue even though we assertedly

were aware of them at that time, we are estopped in

the instant proceedings frem finding any violations by

him while employed by Lederer Co. However, it has

heen held that the- doctrine of estoppel cannot be in-

voked against us so as to prevent us from performing

our statutory functions. and we accordingly reject

registrant's contention.

Registrant further contends that these proceedings

should be dismissed on the ground that, on the basis of

applicable principles of res judicata, the issues herein

had already been decided on the merits in its favor in

denial proceedings instituted by us pursuant to See-

tion 15(b) of the Exchange Act in connection with

registrant’s application for registration, by virtue of

our permitting such application to become effective

MW See SEC. y. Culpepper, 270 F.2d 241, 248 (CLA, 2. 1959):

S.ELC. Vv. Morgan, Lewis & Bockius, 209 F. 2d 44, 49 (CLA, 3,

19533),

App. B-10

after a hearing on the same issues and our dismissal of

the denial proceedings as moot.

The earlier proceedings, which were based on the

same allegations as those in the instant proceedings,

were instituted prior to the effective date of the appii-

cation for registration in order to determine vot only

whether registration should be denied but also whether

the effective date of such registration should be post-

poned until final determination upon the question of

denial. We ordered that a hearing be held before a

hearing examiner on the question whether, pursuant

to Section 15(b) of the Exchange Act, it was necessary

or appropriate in the public interest or for the pro-

tection of investors to postpone the effective date of

registration until final determination on the question

of denial. We directed that the hearing examiner

transmit the record to us, and stated that, after the

parties had an opportunity to file proposed findings

and briefs, we would issue our findings and opinion on

the question of postponement. We further ordered

that, if the effective date were postponed, a further

hearing be held before the examiner on the question of

denial of registration to applicant. A preliminary

hearing was held before the examiner for the limited

purpose of determining the question of postponement

of the effective date of registration, but that question

not having been determined by us prior to the effective

date, the registration became effective by lapse of time.

We accordingly dismissed the denial proceedings as

moot, and instituted the instant revocation proceed-

ings.

Under Section 15(b) of the Exchange Act, registration be-

comes effective 30 days after filine of the application, except that

we may by order postpone the effective day for a period not ex-

ceeding 15 days, and, after notice and opportunity for hearing,

pending final determination whether registration shall be denied,

App. B-11

It is clear that the merits of the allegations of will-

ful violations were not invelved in the preliminary

proceedings, but only the question whether it) was

“necessary or appropriate in the publie miterest or for

the protection of investors to postpone the effective

date” of registration. By failing to issue an order of

postponement, We pertuitted registration to beeome ef-

fective, but we did not thereby detinitively find that

wilful violations were or were not ‘eonmitted as

charged. Nor have we made such detinitive findings in

cases were we have postponed registration”® The will-

ful violations we have found herein were not in issue

in the postponement proceeding, and accordingly the

principles of res judicata are inapplicable to the in-

stant proceedings.!

Registrant also argues that these proceedings vio-

late the double jeopardy and due process provisions of

the Constitution. However, as indicated above, no

consideration of the merits of the issues as to the al-

leged violations was reached until the instant revoca-

tion proceedings and, in any event, the prohibition

against double jeopardy relates to criminal proseeu-

tions and does not apply to remedial proceedings under

1 See Irring Grubman, Securities Exchange Act Release No.

6385 (October 6.1960); Mo Paul Conant and Co., Inc... Securities

Exchange Act Release No. 6118 (November 12, 1959). In eases

Where we have suspended registration in the public interest pend-

ing final determination of revocation proceedings under Section

15'b), we also do not make findings of willful violations . A. G.

Bellm Securities Corp., Securities Exchange Act Release No. 5966

(May 18, 1959); Peerless-New York, Incorporated, Securities Ex-

change Act Release No. 6193 (February 26, 1960); Biltmore Ne-

curitics Corp., Securities Exchange Act Release No. 6394 (Ostober

11, 1960).

17 See Kelaghan v. Industrial Trust Co!, 211 F. 2d 134 (CLA. 1.

1954); Allegheny County. vo Maryland Casualty Co.. 146° F. 2d

655 (CLA. 3, 1944), cert. denied 325 U.S. 855; U.S. v. Erie Forge

(o., 191 F. 2d 627. 629 (CLAL 4. 1951), cert. denied 343 US.

W380; Restatement, Judgments, See. 69(2) (1942),

App. J3-12

Section 15(b) of the Exchange Act.!® Registrant did

not specify the basis for its contention that it was de-

nied due process, but our examination of the record

does not disclose any support for such contention.

Public Interest

In view of the willful violations we have found, we

conclude that it is in the public interest to revoke reg-

istrant’s registration, and we further conclude that Or-

gan is a cause of such revocation.

Rulings on Exceptions

We have considered the recommended decision of

the hearing examiner and the exceptions thereto, and

to the extent such exceptions involve issues which are

relevant and materia] to the decision in this case, we

have by our Findings and Opinion herein already

ruled upon them. We hereby expressly sustain such

exceptions to the extent that they are in accord with

the views set forth herein, and we expressly overrule

them to the extent that they are inconsistent with such

views.

An appropriate order will issue.

Chairman Gadsby and Commissioners Hastings and

McCauley join in the above opinion.

Attest:

OrvaL L. Dt Bots

Orval L. DuBois

Secretary

(Seal)

18See Helvering v. Mitchell, 303 U.S. 391, 398-99 (1938) ;

Pierce v. S.EC., 239 F. 2d 160, 163 (C.A. 9. 1956); Wright v.

S.EC., 112 F. 2d 89, 94 (C.A. 2, 1940).

App. B-13

ORDER REVOKING BROKER-DEALER

REGISTRATION

UNITED States oF AMERICA

before the

SECURITIES AND EXCHANGE COMMISSION

Mareh 14, 1961

In the Matter of

N. SIMs Oncan & Co. INc.

460 East Park Street

Long Beach, L. 1. New York

File No. 8-7919

Securities Exchange Act of 1934—

Sections 15(b) and 1A(h) (4)

<n

a

Proceedings having been instituted pursuant to See-

tions 10(b) and 15A(b) (4) of the Securities Exchange

Act of 1934 to determine whether to revoke the regis-

tration of N. Sims Organ & Co.. Ine., and whether N.

Sims Organ is a cause of an order of revocation if

entered ;

A hearing having been held after appropriate notice,

proposed findings and briefs having been filed. the

App. B-14

hearing examiner having filed a reeommended decis-

ion, and exceptions thereto having been filed ;

The Commission having this day issued its Findings

and Opinion; on the basis of said Findings and Opin-

ion

IT IS ORDERED that the registration of N. Sims Organ

& Co., Inc., as a broker and dealer be, and it hereby is,

revoked, and it is found that N. Sims Organ is a cause

of such revocation.

By the Commission.

Orvar L. De Bots

Orval L. DuBois

Secretary

(Seal)

App. ©-1

Appendix C

DECREE

UNITED STATES COURT OF APPEALS

Pon THE Skoonp Cincurr

No. 26876

in

—~—_

N. Sims Onean & Con PNe sand No Site Onoan,

Pret itientiens,

SECURITIES AND hve PANG COMATISSTION,

[es pomdent,

»™

——

THIS CAUSE came on to be heard pon the petitions

of N. Sims Organ & Co. Tne. and N. Sims Organ for

a review of the order of the Securities and Exchange

Commission, dated Mareh 14, 1961. in a) proceeding

before said Commission in File ne. §-7919, revoking

the broker-dealer registration of N. Sims Organ &

Co... Ine. and finding that N. Sims Organ is a cause

of such registration; upon the transeript of the record

in such proceeding, certified and filed in this Court;

and the matter having been argued and due delibera-

tion having been had.

App. ©-2

ON CONSIDERATION WHEREOF, it ix ordered, adjudged

and decreed by the United States Court of Appeals

for the Second Circuit, that the said order of the Se-

curities and Exchange Commission be, and the same

ix hereby affirmed.

J. Epwarp LeMparp

Judge, United States Court of Appeals

for the Second Circuit

Henry J. Frienpiy

Judge, United States Court of Appeals

for the Second Cireuit

Fitep: September 19, 1961.

/