Brief in Opposition to Petition for Writ of Certiorari — Roeth v. United States

SUPREME COURT. U, &

In THE

Supreme Court of the Anjteditates cx

Ocroser Term, 1968

Docket No. 821

=e

GeneraL True Corporation,

Petitioner,

—against—

Secvarrms ann Excuance Commyssion, Tattzy Inpusrrres,

Iwo., Amentcan Investors Funp, Lye., and Cuestwurr

Corporation,

nn ne — —— we

BRIEF OF RESPONDENT TALLEY INDUSTRIES, INC.,

IN OPPOSITION TO PETITION FOR

WRIT OF CERTIORARI

Water L. Srratron

Two Wall Street

New York, New York 10005

Counsel for Respondent

Talley Industries, Inc.

Brece P. McAuuster

Bensamin Vian

Roger W. Karr

Donovan Leisurt Newron & Invive

OF Counsel

=

rl

TABLE OF CONTENTS

PAGE

Introductory Statement ... 1

The Pertinent Statutes ....... " 3

Sections 1(a) and 1(b) of the Act

Section 17(d) 4

Counter Statement of the Issue Presented 6

Counter Statement of the Case .... 7

1, The Facts ......... 7

2. The Proceedings Below ..... 12

ARGUMENT

I. Petitioner Has No Standing to Appeal Where

the Judgment Sought to Be Appealed Was Not

Adverse to It 17

II. Petitioner Lacks Standing and the Determina-

tion Below to That Effect Does Not Conflict

With Any Principles Enunciated by This or

Any Other Court 18

III. The Relief Which Petitioner Demands Against

Its Co-Defendants Would Contravene the Basic

Purpose of the Investment Company Act ........ 23

ConcLuUsION .. 26

ii

TABLE OF AUTHORITIES

PAGE

Cases:

A. C. Frost & Co, v. Coeur D’Alene Mines Corp., 312

Fe COED Bikintieictene eatin 24

Allied Artists Pictures Corp. v. D. Kaltman & Co., 283

FN, TER Ci Bi TID sesisnentninensevssinstnritinnnssennion 26

Ambassador, Ine. v. United States 325 U.S. 317 (1945) 18

Armstrong Paint & Varnish Works v. Nu-Enamel

Corp., 305 U.S. 315 (1988) ............. 24

Baker v. Carr, 369 U.S. 186 (1962) ....... 19

Boston Tow Boat Co. v. United States, 321 U.S. 632

STITT" sccnssccinrahstouniccnleeuasasoiniestanlbesasicblcoaiesiaiesimaiabaeliaseniidahias 18

_Brown v. Bullock, 194 F.Supp. 207 (S.D.N.Y. ‘ aff'd,

294 F.2d 415 (2d Cir. 1961) ............... 20

Chicago v. Atchison, T. & S.F. Ry., 357 U.S. 77 (1958) 18

Edward Hines Trustees v. United States, 263 U.S. 143

(1923) | 18

Eisen v. Carlisle & Jacquelin, 391 F.2d 555 (2d Cir.

1968) 22

Flast v. Cohen, 392 U.S. 83 (1968) .. 19, 20

Fuqua v. Bidwell, 281 F.2d 753 (6th Cir. 1960) ........ 17

Greater Iowa Corp. v. McLendon, 378 F.2d 783 (8th

Cir. 1967) .. 18, 21

Hamilton Trust Co. v. Cornucopia Mines Co., 223

Fed. 494 (9th Cir.), cert. denied, 239 U.S. 641 (1915) 19

Hansberry v. Lee, 311 U.S. 32 (1940) oY ae

Hardin v. Kentucky Util. Co., 390 U.S. 1 (1968) ........ 19

iil

PAGE

Hartford Empire Co. v. United States, 323 U.S. 386

MRL ES Reet Disercene onto ee meee ene 25

Hecht Co. v. Bowles, 321 U.S. 321 (1944) ..........- 13, 25, 26

L. Singer & Sons v. Union Pac. R.R., 311 U.S. 295

CRE iihiciihnccesccenconns ” 18

In re Michigan-Ohio Bldg. Corp., 117 F.2d 191 (7th

Che IY crs rciecccseicconngecinosssesiainterianeninatscenmimenannonis 19

Mayer v. National Missile & Electronics, Inc., 326 F.2d

401 (9th Cir. 1964) ...............-..-.-- 19

Milgram v. Loew’s, Inc., 192 F.2d 579 (3d Cir. 1951), |

cert. denied, 343 U.S. 929 (1982) .........-...--ecsceccseceeseeneees 18

Moore Ice Cream Co. v. Rose, 289 U.S. 373 (1933) ..... 19

Pacific Ins. Co. v. Blot, 267 F.Supp. 956 (S.D.N.Y.

VOGT) nesececenssnseorvereenevenorastavenssetecneciineninenauensneene . 2

Parr v. United States, 351 U.S. 513 (1956) ................ 17

Pennsylvania R.R. v. Dillon, 335 F.2d 292 (D.C. Cir.),

cert. denied, 379 U.S. 945 (1964) 18

Puente de Reynosa, S.A. v. City of McAllen, 357 F.2d

43 (5th Cir. 1966) .. 19

SEC v. New England Elec. System, 390 U.S. 207

(1QGB) eseverorsceriseressrarcnesssvarscsesanegedaossvenesonessensennsenscmeonsoesens 25

Sprunt & Son v. United States, 281 U.S. 249 (1930) .... 18

Stark v. Wickard, 321 U.S. 288 (1944) 18

Taussig v. Wellington Fund, Inc., 313 F.2d 472 (3d

Cir.), cert. denied, 374 U.S. 806 (1963) ..............--.--- 20

United States v. Oregon State Med. Soc’y, 343 U.S.

326 (1952) ................ 25

Webb v. Beverly Hills Fed. Sav. & Loan Ass’n, 364

F.2d 146 (9th Cir. 1966) ... = 1S

Bremer eat nereeperant eran ERs ARNE AUR E eet

Cee RR TRS COO IN et ag a2 ORE EEN CRS a TRACER:

ph a ne ay EF

Te? hs eee ee

iv

PAGE

Statutes and Rules:

Investment Company Act of 1940, 15 U.S.C. § 800-1

et seq.

§ 1(a) Sassen eaaniathiiaieidinies ae

renee tell san ntactnbecitenioneioimece 3,4

§ 2(a)(3)(B) -........... owvsennsncsens wvvenssaneenns

§17(a) ...... aie BOLE ATER AAT RRC 4

§17(b) ‘ 7 4

§ 17(d) a ..4-5, 22-24, 26

§ 42(e) 17, 25

SEC Rule 17d-1 ...... 5, 23

Legislative History:

Hearings on S. 3580 before a Subcommittee of the

Senate Committee on Banking and Currency, 76th

Cong., 3d Sess., 1940, p. 1116 23

H.R. Rept. No. 2639, 76th Cong., 3d Sess., 1940, p. 9... 23

Investment Company Act of 1940 Release No. 5128

(October 13, 1967), p. 2 5, 23

Investment Trusts and Investment Companies, Rept.

of the SEC, Part Three, “Abuses and Deficiencies

in the Organization and Operation of Investment

Trusts and Investment Companies” 22 (1939) ........ 23

Public Policy Implications of Investment Company

Growth, H.R. Rept. No. 2337, 89th Cong., 2d Sess.

(1966), p. 307 4

Treatises:

Jaffe, Judicial Control of Administrative Action 475

et seq., 501 et seq. (1965) 19

IN THE

Supreme Court of the United States

OcrosEeR TERM, 19F8

Docket No. 821

——»—

GENERAL TIME CORPORATION,

Petitioner,

—against—

SECURITIES AND ExcHANGE ComMIssION, TALLEY INDUSTRIES,

Inc., AMERICAN InvesToRS Funp, Inc., and CHESTNUTT

CoRPORATION,

Respondents.

—

BRIEF OF RESPONDENT TALLEY INDUSTRIES, INC.,

IN OPPOSITION TO PETITION FOR

_ WRIT OF CERTIORARI

Introductory Statement

The instant petition for certiorari is the last of a series

of efforts by the lame-duck management of General Time

Corporation (“General Time”) to maintain itself in office

despite the fact that it was voted out of office on April 22,

1968 at the annual meeting of its stockholders. This it

now seeks to accomplish in an action which it did not bring,

in which no lawfully protected rights or interests of Gen-

eral Time are involved, and in which the Securities and

Exchange Commission (the “Commission”) which brought

this action has rested content with the decision of the Dis-

Pi caceranisre oes prdee tt 2

04

2

trict Court, sought no appeal therefrom and has not peti-

tioned this Court for review on certiorari.

The petition fails to make clear that the sole aspect of

the judgment below which petitioner seeks reviewed is the

nature of the equitable relief that was awarded in favor

of the Commission against petitioner’s co-defendants,

Talley Industries, Inc. (“Industries”) and American In-

vestors Fund, Inc. (the “Fund”). Indeed, it is simply not

possible to understand the nature of this litigation from

the petition.

The suit below was one brought by the Commission as

plaintiff against respondents Industvies, the Fund and

Chestnutt Corporation. In its complaint, the Commission

charged these defendants with violation of §17(d) of the

Investment Company Act of 1940 (hereinafter the “Act”)

sought broad injunctive relief. Petitioner was only a

nominal defendant below. No relief was sought by or

agaist it in the action. Its presence in the case at all was

simpy to provide a means to permit the court to preserve

dystries’ General Time stock should be granted.

As the Court of Appeals stated below, petitioner is “en-

deavoring on this appeal to vault from its position as a

nominal defendant to that of a plaintiff and to take over

a role which the true plaintiff, the SEC, has abandoned.”

(Pet. App. A, 14a)*

* Refers to pages in the Appendix to the petition herein.

References to pages in the body of the petition are indicated

by “Pet. ——.” References to the Appendix in petitioner’s pre-

vious petition in this case (Docket No. 512) are indicated by

“Pet. App. —— in Docket No. 512.”

roman in Rasa eR

3

The facts have been carefully detailed by the Court of

Appeals below in its first (July 31, 1968) opinion in this

case (reported at 399 F.2d 396). A description of the

salient facts, however, including those leading to the sec-

ond opinion (November 19, 1968) of the Court of Appeals

below ( F.2d ——; unofficially reported at CCH Fed.

See. L. Rep. { 92,303, p. 97,437, and reproduced in Pet. App.

A, la-15a) is presented infra in our Counter Statement of

the case.

The Pertinent Statutes

Sections 1(a) and 1(b) of the Act

The Investment Company Act of 1940 (54 Stat. 815,

15 U.S.C. § 80a-1 et seq.) is introduced by sections 1(a) and

1(b), which are quoted in Pet. App. D, 25a-28a. Although

the petition treats these two sections as though they were

one and the same, the two are quite different. Section 1(a)

lists those factors which describe Congress’ understand-

ing of why “investment companies [were] affected with a

national public interest.” Section 1(b), on the other hand,

enumerates those vices which Congress deemed adversely

affected the national public interest and the interest of

investors and which were meant to be corrected by the Act.

Thus, while §1(a) refers to the fact that investment

companies “customarily invest and trade in securities issued

by, and may dominate and control or otherwise affect the

policies and management of, companies engaged in busi-

ness in interstate commerce,” this condition was not de-

clared adverse and the Act was not designed to regulate

it. The Commission has recently reported to Congress:

4

“(Neither the Commission nor the Congress of 1940

saw any need to preclude investment companies from

acquiring dominant positions—if their managers chose

to do so—in the enterprises in which they invest. Ac-

cordingly, the Act in general imposes no restrictions on

the capacity of investment companies to control the

enterprises in which they invest.” Public Policy Im-

plications of Investment Company Growth, H.R. Rept.

No. 2357, 89'". Cong., 2d Sess. (1966), p. 307.

Among the conditions, however, which were deenied ad-

verse and were listed as such in §1(b) of the Act was

“(2) wher» investment companies are organized, operated,

managed or their portfolio securities are selected, in the

interest of directors, officers, investment advisors, deposi-

tors or other affiliated persons thereof ... rather than in

the interest of all classes of such companies’ [i.e., the in-

vestment companies’] security holders.”

Section 17(d)

As one step toward correcting the abuses referred to in

§1(b)(2) above, Congress passed $17 of the Act. Thus,

§17(a) (with which we are not here concerned) prohibits

sales, purchases or loans between an investment company

and an affiliate, and subsection (b) provides that the Com-

mission shall grant exemptions from such prohibition on

the basis of criteria appearing in that section.

Section 17(d), with which we are concerned in the case

at bar, prohibits transactions participated in jointly by

an investment company and its affiliate in contravention of

such rules and regulations as the Commission might pre-

scribe “for the purposes of limiting or preventing partici-

pation by such registered investment company ... on a

basis different from or less advantageous than that of such

5

other participant.” That section, in pertinent part, reads

as follows:

“Tt shall be unlawful for any affiliated person of...

a registered investment company .. . acting as prin-

cipal to effect any transaction in which such registered

company ... is a joint or a joint and several partic’-

pant with such person . . . in contravention of such

rules and regulations as the Commission may pre-

scribe for the purpose of limiting or preventing par-

ticipation by such registered . . . company on a basis

different from or less advantageous than that of such

other participant ... .” (Emphasis added.)

The SEC recently gave its administrative interpretation

to § 17(d) in a release which it issued in October 1967:

“Section 17(d) and Rule 17d-1, taken together, are

designed to regulate certain situations where persons

making the investment decisions for the registered or

controlled company may have a conflict of interest and

the danger exists that the investment company or. its

controlled company may be overreached by such affili-

ated persons. ...” Investment Company Act of 1940

Release No. 5128 (Oct. 15, 1967), p. 2.

The July 31st opinion below pointed out:

“The objective of §17(d) of the Investment Com-

pany Act is to prevent affiliated persons from injuring

the interests of stockholders of registered investment

companies by causing the company to participate ‘on a

basis different from or less advantageous than that of

such other participant.’” Pet. App. A, 4a.

Counter Statement of the Issue Presented

The issue presented is whether or not General Time has

standing ‘o appeal from a final decree entered by the Dis-

trict Court and affirmed by the Court of Appeals below

in an action brought by the Securities and Exchange Com-

mission a,ainst the Fund and Industries for alleged viola-

tion by the Fund and Industries of §17(d) of the Invest-

ment Company Act (15 U.S.C. § 80a-17(d)) and SEC Rule

i7d-1 thereunder (17 C.F.R. § 270.17d-1), said statute and

rule being designed to protect the Fund from participation

in a joint transaction with ar. affiliate, Industries, “on a

basis different from or less advantageous than” that of its

affiliate, when

(1) General Time, as a portfolio company, that is, a

company in which the Fund and Industries have each

made an investment, is outside the scope and protec-

tive coverage of the provisions of §17(d) of the invest-

ment Company Act of 1940 that were put in issue in

the action below brought by the Securities and Ex-

change Commission and there was no finding below of

any injury to any legal interest of General Time on

the facts of record;

(2) General Time was only a nominal defendant in

said action;

(3) no relief was sought against General Time in

said action and no relief is directed against. it in said

final decree;

(4) plaintiff Securities and Exchange Commission

and defendants Fund and Industries have not sought

review of the final decree entered by the District Court

and affirmed by the Court of Appeals (in fact, plaintiff

Securities and Exchange Commission did not even ap-

peal to the Court of Appeals); and

7

(5) General Time’s s¢!* objective is to seek to have

included in the remedial portion of the final decree

provisions for relief which are inconsistent with the

purpose of §17(d) (i.e., protection of the Fund and its

shareholders) and which were so found to be by the

Court below, petitioner’s aim being to prevent Indus-

tries and Fund from voting the shares of General Time

held by each to oust the management of General Time

from office.

Counter Statement of the Case

1. The Facts

Fund is a registered investment company. Industries

is an “affiliated person” of the Fund within the meaning

of § 2(a)(3)(B) of the Act by virtue of Fund’s ownership

of over 5% (i.e., about 9%) of Industries’ outstanding vot-

ing stock, which Fund had purchased in the open market.

On December 29, 1967, Franz G. Talley (“Talley”), Presi-

dent of Industries, telephoned the Fund’s offices to speak

to Kenneth Haupt, an analyst employed by the Fund

whom Talley had met at the time Fund purchased its

stock in Industries. By reason of the nature of the call,

Haupt referred Talley to George Chestnutt (“Chestnutt”),

President of the Fund. Talley’s telephone call was

prompted by the fact that he believed the Fund had con-

fidence in Talley and in the management of Industries,

as evidenced by Fund’s having accumulated a large amount

of Industries’ outstanding stock. Talley told Chestnutt

that Industries had purchased stock in General Time, that

it intended to buy more and that it had in mind the pos-

sibility of a future merger with General Time. Talley

asked whether Fund might also wish to buy some General

Time stock.

: —_ , we enemas eee et i

8

After consulting with his counsel, Chestnutt reported

back to Talley that the Fund would examine the situation,

but that if the Fund did buy stock in General Time it

would maintain it:s independence and would make no

agreement with Inc.ustries as to voting, disposition of the

stock or whatever. Several days later, after further con-

sideration of the riatter, Chestnutt determined that Fund

should take a posit’on in General Time. He was motivated

both by his study of the company’s earnings and of its

chart performance and by a belief that if Industries sought

a merger the stock would rise as a result of that offer or

of others it might stimulate. Fund subsequently did buy

210,000 shares at an average price of $28.49 per share.

Industries’ 257,937 shares, most of which were acquired

after Fund had completed its purchases, were acquired

at an average cost to Industries of $36.76 per share.

On February 19, 1968, Talley met with members of the

management of General Time and expressed Industries’

desire to negotiate a merger with General Time. General

Time’s management considered the matter but decided to

fight any such proposal and so informed Talley. On Feb-

ruary 25, 1968, General Time sued Industries and Fund

in the Southern District of New York charging, inter alia,

that they had violated $17(d) of the Act. Management

sought injunctive relief which would disfranchise Fund and

Talley.*

*The District Court dismissed General Time’s complaint on

April 17, 1968 on the basis of General Time’s lack of standing to

assert such a cause of action. 283 F. Supp. 400. On appeal, that

decision was affirmed. —— F.2d —— (2d Cir., October 23, 1968,

Docket No. 32300), unofficially reported in CCH Fed. See. L.

eel phat SES Nil U8, “SS A I ll Na Cas

9

On February 29 Industries demanded a copy of General

Time’s list of stockholders, which was not, however, forth-

coming until litigation, brought and won by Industries in

Delaware, eventually forced the list from General Time

several weeks later.*

During March, Industries organized and sponsored an

Independent Stockholders Committee of General Time

Corporation (the “Committee”). The Committee made

preparations to solicit proxies for the election of its nomi-

nees for director of General Time in opposition to the

management’s slate at the annual meeting of stockholders

scheduled to be held on April 22, 1968.

On March 25, following an investigation by the Com-

mission (pursuant to its statutory authority under 4 42(a)

of the Act) into General Time’s charges that Industries

and the Fund had violated §17(d) of the Act, the Com-

mission notified Industries that the Committee’s proxy

solicitation material would not be cleared unless Industries

filed an application with the Commission under Rule 17d-1

for approval of what the staff considered a joint transac-

tion falling within § 17(d) of the Act. Under that co..pul-

sion, Industries did file such an application, seeking a

declaration of non-applicability of §17(d) or, in the alter-

native, retroactive approval, and Fund joined in the

application. Reference to the application was made in the

Rep. {| 92,291, p. 97,389. General Time has announced that it does

not intend to seek certiorari with respect to that §17(d) case,

which it brought as plaintiff (see Pet. 20 n.).

* After time-consuming attempts to conduct oral examination

on issues which the Chancery Court (and subsequently the Su-

preme Court) of Delaware ruled were irrelevant, General Time

defaulted. An order was entered against it and management was

forced to deliver a stockholder list to Industries.

10

Committee’s proxy statement and the statement was

thereupon cleared by the Commission. Fund in no way

participated in the proxy contest, either before or after

the Committee’s proxy statement was cleared.

Neither Fund nor Industries had known or believed that

their actions could be construed as a “joint transaction”

requiring prior SEC approval. As they viewed the situa-

tion, there had been no promises, agreements or arrange-

ments of any kind, as Chestnutt emphasized there would

not be when he told Talley at the outset that the Fund

would reserve full independence as to how it might vote

its General Time stock and as to when and whether it

might dispose of it.

The Commission set Industries’ application down for

hearings to commence on April 16, 1968. In the interim,

the management of General Time negotiated a prospec-

tive “bail-out merger” * with a juke box and vending ma-

chine company from [Illinois (The Seeburg Corporation).

Chestnutt found the terms of that proposal “so shockingly

unattractive that I couldn’t believe that the newspaper re-

port [of April 15, 1968] could be accurate.” On Thursday,

April 18th, the Fund announced that it intended to vote

its stock against the management and in favor of tke

Committee’s slate and the Fund so informed the Commis-

sion on the record in the administrative proceedings.

The hearings, which had begun on April 16th, ended

on April 18th. The following day the Commission heard

oral argument and thereupon filed its Memorandum Opin-

* The plan to merge General Time and Seeburg was announced

as being contingent upon the continuation of General Time’s then

present management.

il

ion and Order Denying Application* reciting the per-

tinent facts and concluding that “Under these circumstances

we think it clear that Industries and AIF [the Fund]

entered into and carried out a joint arrangement within

the meaning of Section 17(d) and Rule 17d-1 to acquire

GTC [General Time] stock by concerted action.” The

Commission’s Memorandum Opinion and Order Denying

Application made no reference to Fund’s intention of vot-

ing its holdings for the candidates supported by Indus-

tries but noted its “continuing jurisdiction under Section

17(d) and Rule 17d-1 over any future transfers by Indus-

tries of the GTC stock it has acquired in violation of these

provisions.”

On April 5, 1968, General Time had filed the second

of its lawsuits against Industries, the Fund and others,

this one charging that the Committee’s proxy solicitation

was false and misleading. General Time again sought an

order disfranchising Industries and the Fund. General

Time applied twice for preliminary injunctive relief but

was twice denied such relief on the facts. The second

application was made on the morning of April 22nd, the

day of the stockholders’ meeting, but when that applica-

tion was denied** the stockholders’ meeting proceeded.

At the stockholders’ meeting the ballots were cast (in-

cluding those of Industries and of the Fund for the Com-

* Reproduced in Pet. App. D, 46a-50a, in Docket No. 512, Oct.

Term 1968.

** On appeal by General Time, these two rulings of the District

Court were affirmed, F.2d —— (2d Cir. Docket 32299, Oc-

tober 23, 1968), unofficially reported at CCH Fed. Sec. L. Rep.

| 92,291, p. 97,889. General Time’s petition for certiorari to re-

view that affirmance bears October Term 1968 Docket No. 716

in this Court.

12

mittee’s slate), and the meeting was adjourned to May 3rd

to permit the inspectors of election to count the votes and

prepare their report. By reason of the litigation which

ensued, however, the stockholders’ meeting was repeatedly

recessed, at first by stipulation and subsequently by court

order, until it was permitted to be completed on December

2, 1968. On that date, the inspectors of election reported

that the Committee’s candidates had received 979,235 votes

against 882,159 votes for the incumbent directors, a margin

in favor of the Committee’s candidates of 97,076 votes.

By reason of the Court of Appeals’ order of November

19, 1968 (see Pet. App. C, 23a-24a), the newly elected

directors of General Time (2.e., the Committee’s candidates)

are stayed from taking office pending final determinations

by this Court in Docket Nos. 512, 716 and 821.

2. The Proceedings Below

On May 1, 1968, while the stockholders’ meeting was in

recess to permit the count of ballots, the Commission

brought the instant litigation seeking an order which

would, inter alia, require Industries and Fund to withdraw

the votes each had cast on April 22nd in favor of the Com-

mittee’s slate, and which would permanently enjoin Indus-

tries and the Fund from voting their shares in the future

for any directors whose names had been or might be pro-

posed by Industries or for any merger or consolidation of

General Time and Industries.*

* The petitioner’s characterization to the contrary notwithstand-

ing, the Commission did not bring suit “to protect its primary

jurisdiction under the Act” (see Pet. 3) by “compel[ling] respon- |

dents to seek Commission approval” of their voting, past or future

(see Pet. 5). The complaint sought a permanent injunction against

any such voting. See Pet. App. A, 9a-10a, in Docket No. 512.

13

After an expedited trial, the District Court dismissed

the Commission’s complaint on the basis that §17(d) had

not been violated. 286 F.Supp. 50 (S.D.N.Y. 1968), re-

produced as Pet. App. B, 19a-38a, in Docket No. 512.

The Commission appealed and the Court of Appeals re-

versed (399 F.2d 396), holding that whatever might be the

Court’s own views as to whether the facts showed a “joint

transaction,” the Commission’s findings, having been sup-

ported by “substantial evidence,” were binding. As to re-

lief, however, the Court of Appeals noted that the Com-

mission had not purported to make any order concerning

remedy. The Court ruled that the case was a suit in

equity and not an action to enforce an administrative order,

and that it was therefore the responsibility of the courts

to “‘do equity and mould [the] decree to the necessities

of the particular case.’ Hecht Co. v. Bowles, 321 U.S. 321,

329 (1944).” (Pet. App. A, 17a, in Docket No. 512)

Finding that the violation had not been deliberate, that

disfranchisement was basically punitive and that (as it

then appeared to the court) an order such as was sought

by the Commission would hurt the Fund and its share-

holders rather than effect the Congressional purpose of

protecting them, the Court of Appeals remanded to the

District Court with instructions to that Court to formulate

an appropriate decree.*

On remand, contrary to Petitioner’s assertions that the

District Court refused to permit an evidentiary hearing

* Apparently anticipating that the Commission would be unable

to marshal further evidence or argument in the District Court that

disfranchisement was appropriate to the statutory purpose, Gen-

eral Time petitioned this Court for review of the July 31, 1968

decision of the Court of Appeals (see Docket No. 512) and sought,

unsuccessfully, in that Court and before Mr. Justice Harlan, to

stay proceedings in the District Court pending such review.

14

(Pet. 7), the District Court invited the Commission to

introduce whatever evidence bearing on relief it chose to

offer. The Commission, however, did not choose to offer

any further evidence at all. The court announced that it

did not intend to hear any evidence from the nominal

defendant, General Time, whose interests were different

from (in fact, obviously antagonistic to) those of the

Fund’s shareholders. However, General Time asked for,

and was granted, time until the following day to prepare

and submit an offer of proof. The offer, when made, was

not so much an offer of proof as an offer to conduct cross-

examination of adverse witnesses to ascertain whether

there might in fact se any evidence from which argument

might be made.*

The Commission persisted in the District Court in its

earlier argument that the final decree ought to contain

provisions forcing Industries and Fund to withdraw the

votes each had cast at the 1968 meeting of stockholders of

General Time. (Such an order would have meant, of

course, a victory by default for management.) The Com-

mission again urged that the wrongdoers should be de-

prived of the “fruits of their wrong” so as to “deter similar

future violations” by others. The Commission argued that

if such relief damaged those whom the Act was meant to

protect, z.e., the stockholders of the Fund, they might seex

redress against the individuals responsible.

* Petitioner asserts that in this endeavor its position was sup-

perted by the Commission (Pet. 7). This statement is not really

true. Counsel for the Commission did suggest that the court re-

ceive evidence from General Time, regardless of General Time’s

status, “if General Time does have evidence that is relevant and

material to the shape of the decree and that might be helpful to

your Honor in that connection. . . .” The court persisted, how-

ever, in its ruling that while it would take any evidence that the

PE 00 Ra Risa 6 cata a Tals VE hte bia ial 2 OD Sh A PARES Aoi Gag g

15

Having in mind the July 31st decision of the Court of

Appeals, and on his own consideration of the matter, Dis-

trict Judge Wyatt ruled that “to the extent that I am

permitted to make an independent finding and determina-

tion, I have made that finding and determination that no

such injunctive relief is appropriate.” (See Pet. App. A,

8a.) Judge Wyatt thereupon declined to include in the

decree any provision that the April 22nd votes of Indus-

tries and the Fund be withdrawn.

In its July 31st opinion the Court of Appeals noted the

nature of one aspect of equitable relief it believed might

be appropriate, z.e., “a prohibition against sale of its shares

by Industries without according Fund a fair opportunity

to participate.” (Pet. App. A, 17a, in Docket No. 512) The

final decree formulated by the District Court did impose

extensive restrictions on any disposition by Industries of

its General Time stock, giving the Fund equal or prefer-

ential treatment with respect to any sale.

The management of General Time was, of course, dis-

appointed that it was unable to pluck victory in the election

out of the ashes of the Commission’s litigation despite the

fact that the stockholders of the Company had voted them

out of office. Management, therefore, caused an appeal

from the final decree to be filed in the name of General

Time Corporation with the Court of Appeals.

The Securities and Exchange Commission did not ap-

peal.*

Commission wanted to present, it would not accept evidence from

General Time. The Commission chose to offer no evidence.

* The Court of Appeals invited the Commission to submit a brief

as amicus curiae and the Commission did so. The Commission’s

brief, however, expressed no opinion on the central question of

Beet ernie nis Ward dace eRe eicuhcraan emai aeED

16

On November 19, 1968, the Court of Appeals affirmed the

final judgment entered by the District Court. In its opinion

(Pet. App. A) the Court of Appeals noted that this was

not an action for the enforcement of a Commission order

providing for specific relief. It was a suit in equity, sub-

ject to judicial concepts of equity. The court found that

the defendants’ violation of §17(d) had not been willful

and held that punitive relief was not warranted. The

Court of Appeals ruled that the relief decreed by the Dis-

trict Court accomplished the purpose of §17(d) of protect-

ing the Fund and its shareholders. In any event, the court

held, General Time—a purely nominal party defendant—

had no standing to assert a claim under §17(d) or to

appeal in the case at bar from the relief awarded in favor

of plaintiff, the Commission, against defendants Fund and

Industries.

whether or not General Time had standing to appeal. In its brief,

the Commission admitted that it took “no particular exception”

to the substantive provisions of the final decree.

RGB CBT RALLIES ADELE LO PONE te AAD REE tio OS

Sa

17

ARGUMENT

I.

Petitioner Has No Standing to Appeal Where the

Judgment Sought to Be Appealed Was Not Adverse to It.

The instant action was brought, not by General Time,

but by the Securities and Exchange Commission in per-

formance of its role of overseeing enforcement of the In-

vestment Company Act under §42(e) thereof, 15 U.S.C.

§41(e). The Commission elected not to appeal from the

final judgment of the District Court, and has not sought

review here of the judgment of the Court of Appeals.

General Time was before the courts below as a nominal

party defendant. No judgment was entered against it.*

Nonetheless, General Time now purports to seek review,

claiming that the courts below did not go far enough with

respect to the relief granted against its co-defendants.

The law is clear that not every party to a judgment is

entitled to appeal from it, but “only one injured by the

judgment sought to be reviewed can appeal ....” Parr v.

United States, 351 U.S. 513, 516 (1956). Accord, Fuqua v.

Bidwell, 281 F.2d 753, 754 (6th Cir. 1960). Since the judg-

ment below was not in any way adverse to General Time,

petitioner has no standing to seek review of it. Ibid.

“It is settled law that even a party cannot appeal from

a decision which is not adverse to him. [Citations

*The District Court did direct that the stockholders’ meeting

reconvene and that the further business thereof (which had been

stayed during the litigation) be completed. General Time has not

objected to those provisions of the final decree. On December 2,

1968, the meeting was reconvened and its business was completed.

18

omitted.] The decree of the district court was not

directed at the intervening defendants. Where an in-

junction is granted, one cannot generally appeal from

the order unless he is directly or indirectly restrained

from the performance of some act.” Milgram v.

Loew’s, Inc., 192 F.2d 579, 586 (3d Cir. 1951), cert. de-

nied, 343 U.S. 929 (1952). °

See also Ambassador, Inc. v. United States, 325 U.S. 317,

325-26 (1945). General Time, having been in no way preju-

diced by the injunctive decree entered against its co-defen-

dants, simply had no standing to appeal from that final

decree and has no standing to seek review in this Court.

Petitioner Lacks Standing and the Determination Be-

low to That Effect Does Not Conflict With Any Prin-

ciples Enunciaicd by This or Any Other Court.

The general rule is well established by dev‘sions of this

Court and Federal courts of appeals that in order to have

standing to maintain an action a party mast be a member

of the class intended to be protected by the statute and

must have suffered the kind of injury against which the

statute was designed to protect. Stark v. Wickard, 32%

U.S. 288, 304 (1944); Boston Tow Boat Co. v. United

States, 321 U.S. 632, 634 (1944) ; L. Singer € Sons v. Union

Pac. R.R., 311 U.S. 295, 301, 364 (1940); Sprunt & Son v.

United States, 281 U.S. 249, 255 (1930); Edward Hines

Trustees v. United States, 263 U.S. 148, 148-49 (1923);

Greater iowa Corp. v. McLendon, 378 F.2d 783, 790, 793-94

(Sth Cir. 1967); Pennsylvania R.R. v. Dillon, 335 F.2d 292,

294-95 (D.C. Cir.), cert. denied, 379 U.S. 945 (1964). Chi-

a

bills as? eth wan se

19

cago v. Atchison, T. @ S.F. Ry., 357 U.S. 77 (1958), is not

to the contrary, see Hardin v. Kentucky Util. Co., 390 U.S.

1,.6-7 (1968). His injury, moreover, “must be immediate

and pecuniary ard not a remote consequence of the judg-

ment,” Hamilton Trust Co. v. Cornucopia Mines Co., 223

Fed, 494, 499 (9th Cir.), cert. denied, 239 U.S. 641 (1915).

Accord, In re Michigan-Ohio Bldg. Corp., 117 F.2d 191,

193 (7th Cir. 1941); Mayer v. National Missile & Electron-

ics, Inc., 326 F.2d 401, 402 (9th Cir. 1964). See Webb v.

Beverly Hills Fed. Sav. & Loan Ass’n, 364 F.2d 146, 149

(9th Cir. 1966). And “a merely nominal party to an action

cannot appeal.” Hamilton Trust Co. v. Cornucopia Mines

Co., supra. Accord, Moore Ice Cream Co. v. Rose, 289

U.S. 373, 383 (1933).

Petitioner cites this Court’s decisions in Baker v. Carr,

369 U.S. 186 (1962), and Flast v. Cohen, 392 U.S. 83 (1968),

as well as the Fifth Circuit’s decision in Puente de Reynosa,

S.A. v. City of McAllen, 357 F.2d 43 (5th Cir. 1966), for

the proposition that traditional principles of standing are

no longer to be applied by courts and that all that is now

required is evidence of a suticiently strong interest on the

part of the plaintiff in the outco:e of the case so that the

courts may rest assured that the issues will be well framed

by the litigants. These cases involved the problem of de-

fining principles of standing to assert the public interest

against alleged violations by a governmental body of a

Constitutional or statutory prohibition. There is a clear-

cut distinction between the problems of standing raised by

such “public actions” and the concern for standing in the

case of private claims, see, e.g., Jaffe, Judicial Control of

Administrative Action 475 et seq., 501 et seq. (1965); and

as this Court noted in Flast v. Cohen, supra, 392 U.S. at

SOE: as bt a nt

20

101-02, there are “various rules of standing applied by

federal courts [which] have not been developed in the

abstract” but rather “have been fashioned with specific

reference to the status asserted by the party whose stand-

ing is challenged and to the type of question he wishes to

have adjudicated.”

In most “public actions,” as in Flast v. Cohen, there is

no one person or class of persons which can be singled out

as the proper person or class of persons entitled to sue.

The problem in these actions is not so much one of stand-

ing as it is one of other aspects of justiciability—.e., either

a suit can be maintained by any citizen to vindicate the

public right or it can be asserted by none. See generally

Flast v. Cohen, 392 U.S. at 98-101 and n.17. As this Court

went on to point out in Flast, even in a public action, where

there is a particular class of persons most clearly affected,

then “the federal standing doctrine would require that

standing be limited to .. . the affected class.” 392 U.S. at

105 n.25.

In the instant case, unlike the situation in Flast v. Cohen

and similar cases, we are concerned only with standing to

assert private rights, and the test is whether the party,

here a nominal party, is within the class that the statute

was designed to protect and suffered the kind of injury

that the statute was designed to protect against. The au-

thorities that support this statement are cited above.

The Investment Company Act has been held to create

private rights of action which are enforceable at the suit

of a person intended to be protected by the Act. Brown v.

Bullock, 194 F.Supp. 207, 228 (S.D.N.Y.), aff'd, 294 F.2d

415 (2d Cir. 1961); Taussig v. Wellington Fumd, Inc., 313

21

F.2d 472, 476 (3d Cir.), cert. denied, 374 U.S. 806 (1963) ;

and the general principles of standing have, of course, been

heid applicable in suits brought thereunder. In Taussig,

supra, the court inferred a private right of action on the

part of the stockholder of an investment company against

the management company under $35 of the Investment

Company Act, and noted that “a breach of statutory duty

which causes injury to one of the class that the statute

serves to protect affords by implication a sufficient basis

for a private civil suit by the injured party.” Conversely,

where plaintiffs are not persons within the class intended

to be protected, they do not have standing to assert a claim

under the Act. Greater Iowa Corp. v. McLendon, 378 F.2d

783, 790, 793-94 (Sth Cir. 1967).

In Greater Iowa, plaintiffs were the issuer corporation

and its directors and the defendants were an insurgent

group of stockholders who had formed a voting trust.

Plaintiffs alleged that defendants’ trust was in reality

an unregistered investment company in violation of the

Investment Company Act, and plaintiffs sued to enjoin

the defendants from proceeding, through the instru-

mentality of that trust, with steps designed to permit

defendants to secure control. The court held that plaintiffs

lacked standing to bring such an action “because they are

not within the class that the statute was designed to pro-

tect.” 378 F.2d at 793. The court ruled that:

“Plaintiffs are merely fellow shareholders and the is-

suer of securities held by this alleged investment com-

pany. We see no basis under this Act that the issuer

company can oversee the trading of its securities or

object to the method in which its shares are acquired

or the persons who acquire them.” Id. at 794.

Ee a

22

Similarly, in the case at bar, General Time, as merely the

“issuer company,” has no standing to oversee joint transac-

tions alleged to violate an Investment Company Act pro-

vision intended to guarantee equal treatment to one of

its stockholders (7.e., the Fund) in a joint transaction

participated in by another of its stockholders (7.e., Indus-

tries). General Time simply is not a member of the class—

the Fund or the Fund’s shareholders—which §17(d) was

designed to protect.

Petitioner’s attempts below to espouse the cause of the

Fund and the Fund’s shareholders (see its offer of proof

below) was a sham. Petitioner cannot be heard to assert

the rights of a class to which not only does it not be-

long, but to whose interests it is plainly antagonistic. See

Hansberry v. Lee, 311 U.S. 32, 44 (1940); Eisen v. Cariisle

& Jacquelin, 391 F.2d 555, 562 (2d Cir. 1968).

23

Hil.

The Relief Which Petitioner Demands Against Its Co-

Defendants Would Contravene the Basic Purpose of the

Investment Company Act.

Congress was explicit as to the purpose of §17(d) in

the language of the statute itself. Thus, joint transactions

are proscribed if they contravene rules and regulations

to be prescribed by the Commission “for the purpose of

limiting or preventing participation by [a registered in-

vestment company] on a basis different from or less ad-

vantageous than that of” its affiliate. The statute was

designed to protect investment companies and their stock-

holders from being taken advantage of by affiliates. Hear-

ings on S. 3580 hefore a Subcommittee of the Senate

Committee on Banking and Currency, 76th Cong., 3d Sess.,

1940, p. 1116; H.R. Rept. No. 2639, 76th Cong., 3d Sess.,

1940, p. 9. Investment Trusts and Investment Companies,

Rept. of the SEC, Part Three, “Abuses and Deficiencies

in the Organization and Operation of Investment Trusts

and Investment Companies” 22 (1939). And see Section

1(b)(2) of the Act, 15 U.S.C. § 80a-1(b)(2). In a recent

release the Commission gave its administrative interpre-

tation:

“Section 17(d) and Rule 17d-1, taken together are de-

signed to regulate certain situations where persons

making the investment decisions for the registered

and controlled company may have a conflict of interest

and the danger exists that the investment company or

its controlled company may be overreached by such

affiliated persons. ...” Investment Company Act of

1940 Release No. 5128 (Oct. 13, 1967), p. 2. (Emphasis

added.)

hs WALA ISAS. .”

24

But the relief petitioner seeks is wholly inconsistent

with the interests of the Fund and its shareholders. Peti-

tioner would ask this Court to ignore the language of

§17(d) and misapply the statute against the explicit pur-

pose for which it was enacted, all for the benefit of peti-

tioner’s management. But “to construe statutes so as to

avoid results glaringly absurd, has long been a judicial

function.” Armstrong Paint & Varnish Works v. Nu-

Enamel Corp., 305 U.S. 315, 333 (1938).

In A. C. Frost & Co. v. Coeur D’Alene Mines Corp., 312

U.S. 38 (1941), this Court refused to interpret the Secur-

ities Act of 1933 to bar the corporate issuer of unregis-

tered stock from recovering the proceeds of the issue from

the underwriter. Forfeiture of the issuing company’s

capital to a third party (the underwriter) would only have

injured the very persons (the purchasers who had become

stockholders of the issuer) whom the violated statutory

provision was designed to protect.

“Although the challenged contract bears no evidence

of criminality and is fair upon its face, we are asked

to apply a sanction beyond that specified by declaring

it null and void because of relationship to a public

offering. The basis for this demand is a supposed

federal public policy which requires such annulment

in order to secure observance, effectuate the legisla-

tive purpose and prevent noxious consequences. 312

U.S. at 42-43.

“....([T]Jo accept the conclusion . . . would probably

seriously hinder rather than aid the real purpose of

the statute. Id. at 43.

“.... And it would be anomalous to rest such an in-

jury to the investors upon the fact that the transaction

in which the securities were distributed violated the

Act, which was designed to protect those investors.”

Id. at 44 n.

General Time’s petition for certiorari passes over the

fact that the subject of this dispute is a final judgment

which determined the appropriate equitable relief to be

awarded on the fact findings below in an action for equita-

ble relief brought by the Commission under ¢ 42(e) of the

Act, 15 U.S. C. § 80a-41(e). It was not error for the court

below not to grant all of the injunctive relief sought by

the Commission. No order of the Commission decreed

such relief.* (See Pet. App. A, 8a.) By invoking equity,

the Commission submitted itself to judicial concepts of

equity. The court below found that the violation was the

result of innocent mistake, that Fund and its shareholders

had not been injured in any way, and that the defendants’

conduct did not therefore justify drastic punitive relief.

This Court has consistently held that purely punitive re-

lief, such as that rejected below, is outside the province

of equity and ought not be allowed in a court of equity.

See, e.g., United States v. Oregon State Med. Soc’y, 348

U.S. 326, 333 (1952); Hartford-Empire Co. v. United

States, 323 U.S. 386, 409 (1945); Hecht Co. v. Bowles, 321

U.S. 321, 329 (1944).** Furthermore, disfranchisement,

* Thus, as the court below noted, such cases as SEC v. New Eng-

land Elec. System, 390 U.S. 207 (1968), are inapposite.

** Indeed, the SEC has gone on record previously to reject as

improper the form of relief which it sought in this case. See Pacific

Ins. Co. v. Blot, 267 F.Supp. 956, 958 (S.D.N.Y. 1967), where

“the Court notes its concurrence with the Commission’s view that

permitting the [issuer] corporation to disable a purchaser from

exercising his rights as a shareholder under state law—even if his

purchase violated Rule 10b-5—‘seems unnecessarily drastic and

potentially unsettling for the securities markets and corporate af-

the court found, would be inconsistent with the purpose

of protecting the Fund and its shareholders. These deter-

minations were entirely within the discretion of the court.

Hecht Co. v. Bowles, 321 U.S. 321, 326-29 (1944).

No case has ever held or suggested that a court of equity

must grant injunctive relief—particularly the kind of dras-

tic relief sought here—where in the opinion of the court

it would be unjust and improper. On the contrary, the

general rule, as stated by this Court in Hecht Co. v. Bowles,

321 U.S. 321 (1944), and quoted by the court below (Pet.

App. A, 8a-9a), is that “The essence of equity jursdiction

has been the power of the Chancellor to do equity and to

mould each decree to the necessities of the particular case.”

321 US. at 329.

The foregoing principles are beyond dispute, and cer-

tainly there is no need for certiorari in the instant case.

CONCLUSION

The delay that has already resulted from this litigation

has doubtless harmed all of the real parties in interest

herein. At this writing, two-thirds of the term to which

the Committee’s candidates for director of General Time

Corporation have been ejected has expired. Whatever

other purpose Section 17(d) of the Investment Company

Act of 1940 may have been designed to serve, it was not

designed to perpetuate in office a management which has

been rejected by those who own the stock of the corpora-

tion.

fairs.” (Memorandum of the Commission, p. 9).” Accord, Allied

Artists Pictures Corp. v. D. Kaltman & Co., 283 F.Supp. 763, 765

(S.D.N.Y. 1967).

i nn RE

27

For that reason, and the reasons stated above, we pray

that the instant petition for certiorari be promptly denied.

Respectfully submitted,

Watter L. Srratron,

Two Wall Street

New York, New York 10005,

Counsel for Respondent

Talley Industries, Inc.

Breck P. McAtuistEr,

BENJAMIN VINAR,

Rocer W. Kapp,

Donovan Leisure Newton & Irvine,

Two Wall Street

New York, New York

Of Counsel.