Appendix — Securities Investor Protection Corp. v. Barbour

Supreme Court brief1975

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Text

James C. Banpour,. as Reczrver %on iidaieey Bown: AND

‘Sxovarrms Conronation axp Guaranty Bowp Company, Inxc.,

INDEX

List of Relevant Docket Entries -.............0....022.0022222...---

Complaint of the Securities and Exchange Comnis-

sion, Filed December 22, 1970 .20......2..2..22..2-.20-20---0-

Application for Appointment of Receiver, Filed Janu-

BR Ug Tone psec eng ers erences

Reeeiver’s Petition No. 22 for an Order to Show

Cause, Filed March 31, 1972 -0000000.00.2.0....222222- eee eee

Order No. 49 Requiring SEC and SIPC to Show

Cause, Entered April 6, 1972 0.002...22.2..2-2.e- eee

Answer to Petition No, 22 of Respondent Securities

Investor Protection Corporation, Filed May 17,

We Sones sonia Geensevhasntecenceetsssencet ceva:

Response of Securities and Exchange Commission to

Receiver’s Petition No. 22, Filed May 17, 1972 ........

Memorandum No. 54, Entered Fanuary 10, 1978 ........

Order No. 55, Entered February 8, 1973 _.......-----.--------

Opinion of Court of Appeals, Filed April 23, 1974 ....

Judgment of Court of Appeals, Filed April 23, 1974 ....

Order of the Supreme Court, Filed October 21, 1974 ....

PAGE

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LIST OF RELEVANT DOCKET ENTRIES

December 22, 1970

January 6, 1971

January 21, 1971

January 29, 1971

February 9, 1971

March 31, 1972

April 6, 1972

April 19, 1972

May 17, 1972

June 7, 1972

January 10, 1973

February 6, 1973

February 8, 1973

February 9, 1973

April 23, 1974

July 20, 1974

October 21, 1974

FEDORAS EBAY LEA IE VOD GS I ENCE IS.

—Filed complaint of Securities and Exchange Commission.

Filed Findings of Fact and Conclusions of Law—Mor-

ton, J.

—Filed application by Securities and Exchange Commission

for appointment of receiver.

__Entered agreed order appointing receiver, Morton, J.

__Entered memorandum of court re appointment of receiver,

Morton, J.

__Filed receiver’s petition no. 22 for a show cause order.

_Entered order no. 49 that Securities and Exchange Com-

mission and Securities Investor Protection Corporation

show cause why Securities Investor Protection Act not

available.

__Entered order no. 50 adjourning return date on show

cause order.

__Filed answer of Securities Investor Protection Corpora.

tion (exhibits).

Filed response of Securities and Iexchange Commission

(exhibits).

—Ddefore Morton, J., hearing on order to show cause.

—Entered memorandum no. 54 dismissing Securities Inves-

tor Protection Corporation as a party—Morton, J.

_Filed receiver’s motion to amend memorandum no. 54.

—Entered order no. 55 stating that memorandum no. 54

constituted the entry of a final judgment as to Securities

Investor Protection Corporation.

—Filed notice of appeal by receiver.

—Filed opinion and judgment of the Court of Appeals

reversing the District Court’s order as to Securities Inves-

tor Protection Corporation.

—Filed petition for writ of certiorari by Securities Investor

Protection Corporation with the Supreme Court of the

United States.

—Filed order of Supreme Court granting petition for writ

of certiorari.

ERIS OY

SEC Complaint

IN THE

United States Bistrict Court

For THE MippLe District or TENNESSEE

NASHVILLE Division

Civil Action No. 5989

SECURITIES AND EXxcHANGE CoMMISSION

VS.

GuaRANTY BonpD AND SECURITIES CORPORATION, et al.

(Filed December 22, 1970)

1. It appears to the plaintiff that the defendants are en-

gaged and are about to engage in acts and practices which

constitute and will constitute violations of Sections 10(b),

15(b) (10), 15(e)(1), 15(¢)(3) and 17(a) of the Securities

Exchange Act of 1934 (Exchange Act) [15 U.S.C. 780(b).

780(b) (10), 780(c) (1), 780(c) (3) and 78q(a)], Sections 17

- (a)(2) and 17(a)(3) of the Securities Act of 1933 (Secu-

rities Act) [15 U.S.C. 77q(a) (2) and 77q(a)(3)] and Rules

10b-5, 15b10-5, 151-2, 15¢1-4, 15¢1-6, 15¢3-1 and 17a-3 [17

CFR 240.10b-5, 15b10-5, 15c¢1-2, 15¢1-4, 15¢1-6, 15¢3-1 and

17a-3] which rules were promulgated and prescribed by the

plaintiff pursuant to the Exchange Act, were in effect at all

times herein alleged and are now in effect. Plaintiff, pur-

suant to Section 21(e) of the Exchange Act [15 U.S.C.

SEC Complaint

78u(e)] and Section 20(b) of the Securities Act [15 U.S.C.

77t(b)] brings this action to enjoin such acts and practices.

2. This Court has jurisdiction of this action under See-

tion 27 of the Exchange Act [15 USC 78aa) and Section

22(a) of the Securities Act [15 U.S.C. 77v(a)]. #

3. Defendant Guaranty Bond and-Securities Corpora-

tion (hereinafter sometimes referred to as “registrant”) is a

corporation organized under the laws of Tennessee on April

16, 1962, and has its principal place of business at 2312

West End Avenue, Nashville, Tennessee. Since June 20,

1962, registrant has been and is now registered as a broker

and dealer in seéurities pursuant to Section 15(h) of the

Exchange Act [15 U.S.C. 780(b)]. Defendant Henry Jere-

miah Huey, Jr., hereinafter sometimes referred to as “H.

J. Huey”, is President and ‘a director of registrant, and

resides at 132 Carnavon Parkway, Nashville, Tennessee.

Defendant Brooks Thomas Huey (hereinafter sometimes

referred to as “B. T. Huey”) is Secretary, Treasurer and

a director of registrant, and resides at 6668 Jocelyn Hollow

Road, Nashville, Tennessee. Defendant Guaranty Bond

Company, Inc. (hereinafter sometimes referred to as “par-

ent”) is a corporation organized under the laws of Ten-

nessee, has its principal place of business at 2312 West End

Avenue, Nashville, Tennessee, and owns all of the out-

standing stock of registrant. ~Parent is owned principally

by a partnership composed of H. J. Huey and B. T. Huey.

Count One

4, During the period from approximately March 31,

1970, to the date hereof, registrant as a broker and dealer

in securities, aided and abetted by the other defendants,

SEC Complaint

has made and is making use of the mails and of means and

instrunentalities of interstate commerce to effect transac-

tions in and induce the purchase and sale of securities

(other than an exempted security or commercial paper,

bankers’ acceptances, or commercial bills) otherwise than

on a national securities exchange while and at times when

the net capital of registrant was and is less than $5,000 and

its aggregate indebtedness to all other persons exceeded

and exceeds two thousand (2,000) per centum of its net

capital in contravention of Section 15(c)(3) of the Ex-

change Act [15 U.S.C. 780(c) (3) ] and Rule 15¢3-1 [17

CFR 240.15¢3-1)].

Count Two

5. During the period from about May 1, 1969, to the date

hereof, registrant, as a securities broker and dealer regis-

tered pursuant to Section 15(b) of the Exchange Act [15

U.S.C. 780(b)], aided and abetted by the other defendants,

‘has failed and is failing to make and keep current books

and other records relating to its business in contravention

of Section 17(a) of the Exchange Act [15 U.S.C. 78q(a) ]

and Rule 17a-3 [17 CFR 240.17a-3], in that it did not main-

tain a position record for all securities long and short and

their locations; it did not maintain ledger accounts for cus-

tomers itemizing purchases, sales, receipts and deliveries

of securities for such accounts or correctly and accurately

reflect the condition of such accounts; its inventory of

securities was inaccurate; its income account failed to

reflect all income received; its net capital computations were

incorrect; and it did not have personnel questionnaires for

certain associated persons.

Janab es Bras

Free eS ate Rye eae

SEC Complaint

Count Three

6. During the period from approximately May 1, 1969,

to the date hereof, registrant, as a securities broker and

dealer, aided and abetted by the other defendants, has made

and is making use of the mails and means and instruments

of interstate commerce to effect transactions in, and to

induce the purchase and sale of, securities (other than com-

mercial paper, bankers’ acceptances, or commercial bills)

otherwise than on a national securities exchange, by means

of manipulative, deceptive and other fraudulent devices

and contrivances, practices and courses of business as

specified in paragraphs numbered 7 and 8 hereof, in con-

travention of Section 15(¢)(1) of the Exchange Act [15

U.S.C. 780(e)(1)] and Rules 15cl-4 [17 CFR: 240.1 5¢1-4)

and 1521-6 [17 CFR 240.15¢1-6].

7. Registrant, aided and abetted by the other defendants,

has effected and is effecting with or for the accounts of

customers transactions in, and has induced and is inducing

the purchase and sale by customers of, securities (other

than U. 8S. Tax Savings Notes, U. 5. Defense Savings

Stamps or U.S. Defense Savings Bonds, Series E, F and G)

-without at or before the completion of each such transaction

giving or sending to such customers written notification

- disclosing: (a) whether registrant was acting as a broker

for such customers, as a dealer for its own account, as a

broker for some other person, or as a broker for both sueh

customers and some other person; and (b) in cases where

registrant was acting as a broker for such customers or as

a broker for both such customers and some other person,

either the name of the person from whom the security was

purchased or to whom it was sold for such customer and

the date and time when such transaction took place or the

‘

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SEC Complaint :

facet that-such information would be furnished upon the

request of such customers, and the source and amount of

any commission or other remuneration received or to be

received by registrant in connection with the transaction

as provided in Rule 15el-4 [17 CFR 240.15cl-4).

8. Registrant, aided and abetted by the other defendants,

as a securities broker acting for customers and for cus-_

tomers and other persons, has engaged and is engaging in

acts: designed to effect with or for the accounts of such

customers, transactions in and purchases and sales by such

customers of securities in the primary oF secondary dis-

tributions of which registrant was and is participating and

was and is finaneially interested without, at or before the

completion of each such transaction, giving or sending to

such customers written notification of the existence of such

participation or interest as preseribed in Rule 15¢1-6

[17 CFR 15c1-6].

Count Four

9, During the period from approximately May 1, 1969,

to the date hereof, registrant, as a securities broker and.

dealer not a member of a national securities association,

aided and abetted by the othe: defendants. has effected

and is effecting securities transactions in contravention of

Section 15(b)(10) of the Exchange Act [15 U.S.C. 7T80(b)

(10)] and Rule 15b10-5 [17 CFR 240.15b10-5]. in that

registrant exercised and is exercising discretionary power

or authority for customers without such customers having

given their prior written authorization to exercise such

power or authority to a stated associated person or persons,

and having ‘ndiecated their reasons for giving such authori-

zations.

‘

SEC Complaint

Count Five

10. During the period from approximately May 1, 1966,

to the date hereof, registrant has been and is a securities

broker and dealer engaged in the business of effecting

transactions for the accounts of others and for its own ac-

count and, as such, aided and abetted by the other defend-

ants, has made and is making use of the mails and of means

and instrumentalities of interstate commerce to effect

transactions in, and to induce the purchase and sale of,

securities (other than commercial paper, bankers’ accep-

tances, or commercial bills) otherwise than on a national

securities exchange, by means of manipulative, deceptive

and other fraudulent devices and contrivances, including

the acts, practices and courses of business specified in

paragraphs numbered 6 through 14 hereof, in contraven-

tion of Section 15(e)(1) of the Exehange Act [15 U.S.C.

780(c)(1)] and Rule 15e1-2 [17 CFR 240.15e1-2].

11. Defendants solicited and are soliciting churches and

other religious institutions to employ registrant as under-

writer for the public offering of their bonds under a pro-

gram in whieh registrant guaranteed and guarantees the

sale of all the bonds on the representation that registrant

was and is able to make such firm commitments for the

purchase and/or sale of such securities, was and is able to

meet all obligations and hahilities arising in connection

therewith and was and is operating within the jurisdiction

of the federal and state authorties charged with regulating

the securities industry. when in fact registrant was and

is unable to meet the net capital requirements of Section

15(e)(3) of the Exchange Act [15 U.S.C. 78o0(e)(3)] and

Rule 15¢3-1 [17 CFR 240.15¢3-1], registrant’s repert on

Form 17A-5 as of March 31, 1970, filed with the Commis-

Qittiese

SEC Complaint

sion, Was misleading in that it failed to accurately reflect

registrant’s assets and lighilities and indicated that reg-

istrant had sufficient net capital to meet the requirements

of said Rule, registrant omitted and is omitting to disclose

to, and concealed and is concealing from, issuers for which

it acted and is acting as underwriter its financial condition

and its inability to meet the financial responsibility require-

ments of Rule 15¢3-1 [17 CFR 240.15¢3-1] and its failure

to comply with applicable federal laws and regulations

relating to the securities industry as alleged in paragraphs

numbered 4 through 16 hereof.

12.) Defendants have induced and are inducing churches

and other religious institutions (hereinafter sometimes re-

ferred to as “horrowers”) to execute underwriting agree-

ments of Rule 15¢3-1 [17 CFR 240.15¢3-1] and its failure

their bonds and custodian of funds received from sales

thereof and which contain a provision that registrant may

invest such funds in religious institutional bonds for sueli

horrowers, as necessary, liquidate such investments. make

disbursements and deliver funds for payment of sueh bor-

rowers’ obligations incurred in their construction and other

programs, and return to such borrowers 5% simple interest

earned on such funds. On the basis of this general au-

thority defendants have exercised and are exercising dis-

cretionary authority over funds received from sales of

bonds issued by such borrowers end over such borrowers’

accounts with registrant, effecting transactions therewith

and therein, including sales to sneh borrowers of bonds

issued by other churches and religious institutions having

maturities of from one to fourteen years, without sending

to such borrowers confirmations advising them of the secu-

rities sold to them and placed in their accounts, the date

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SEC Complaint

and amount of each such transaction and the source and

amount of commission and other remuneration received or

to be received by defendants in connection with each such

transaction. Registrant has credited and is crediting to the

accounts of such borrowers only 5% simple interest on the

amounts invested for such borrowers in the bonds of other

ehurehes and religious institutions even though the inter-

est rates on the bonds placed in ‘such borrowers’ accounts

have been and are considerably greater and defendants

have retained and treated and are retaining and treating

as income to registrant the interest differential between the

5S rate paid to such borrowers and the substantially

higher vields on the bonds placed in their accounts, thus

oLtaining secret profits from such borrowers while acting

in the eapacity of their agent, custodian and _ fiduciary.

Registrant has been and is, in some instances, investing

funds held as custodian for a particular religious institution

in such institution’s own bonds with the result that the

institution pays interest on such bonds at a rate in excess

of 5% per annum but receives a credit to its account with

registrant of only 5% per annum, registrant retaining the

interest differential as a secret profit.

13. During the period from about May 1, 1966, to the

date hereof, registrant, as a securities broker and dealer,

aided and abetted by the other defendants, solicited and is

soliciting churches and other religious institutions to em-

ploy registrant as underwriter of their bonds and has solie-

ited and is soliciting investors to purchase such bonds, on

the representations that the sale of all bonds so under-

written by registrant is guaranteed by it and that regis-

trant will purchase or sell any bonds remaining after the

church has put forth its best effort, without disclosing that

registrant had placed and is placing a substantial portion

Sd REIN ane

SEC Complaint

of such bonds in the accounts of other churches and re-

ligious institutional issuers for which it was and is acting

as underwriter and for which it is holding funds as cus-

todian by recording buy and sell transactions in securities

on registrant’s books between various of such religious

institutions; that availability of funds for a particular

issuer’s construction or other program could be dependent

upon registrant’s ability to dispose of securities in which

such funus were thus invested; that there is no independ-

ent market for such securities; and that issuers whose

funds are invested by registrant in securities of other

institutions may hear the risk of loss resulting from default

or failure of an issuer of a security in which their funds

are invested.

I4. During the period from about May 1, 1966, to the

date hereof, registrant, as a securities broker and dealer.

aided and abetted by the other defendants, offered and is

offering to sell and sold and is selling religious institutional

bonds through the use of prospectuses prepared by regis-

trant which are materially false and misleading in that

each contained the representation that the proceeds from

the sales of the religious institutional bonds described

therein shall he disbursed by registrant in accordance with

the purposes of the bond issue as set out in the particular

prospectus—i.e. for such expenditures as consolidation and

retirement of existing indebtedness, purchase of land for

new huildings, and construction, expansion and remodeling

of churches, sanctuaries, educational buildings and other

facilities—without disclosing: That such proceeds would he

turned over to registrant as custodian; that registrant in

its diseretion would invest them in other religious institu. °

tion bonds having extended maturites of from one to four-

teen years; the amounts of such proceeds to be paid to

as;

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SEC Complaint

registrant and the other defendants as fees, commissions

and other remunerations; and the use by registrant of such

proceeds in completing other underwritings in which it and

the other defendants would receive substantial fees, com-

missions and other remunerations.

Count Six

15. During the period from about May 1, 1966, to the

date hereof, registrant, as a securities broker and dealer.

aided and ahetted by the other defendants, by use of means

and instrumentalities of interstate commerce and of the

mails, dircetly and indirectly, used and employed and is

using and employing manipulative and deceptive devices

and contrivances in contravention of Section 10(b) of the

Exchange Act [15 U.S.C. 78j(b)] and Rule 10b-5 [17 CFR

240.10b-5], in that registrant was and is:

(a) Engaging in acts, practices and courses of busi-

ness which operated and would operate as a fraud

and deceit upon customers of registrant as

described more particularly in paragraphs 11

through 14 of Count Five hereof:

(b) Making untrue statements of material facts,

namely, the statements set forth in paragraphs 11

through 14 of Count Five hereof; and

11 through 14 of Count Five hereof relating to

registrant’s financial condition, its lack of suffi-

cient capital to meet the requirements of the fed-

eral laws and rules relating to financial responsi-

bilities of securities brokers and dealers, its mode

of operations, its secret profits from transactions

in discretionary accounts, and details of transac-

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SEC Complaint

tions in which funds and securities were trans-

ferred between accounts of customers on the books

of registrant, which facts were material in order

to make the statement made, in the light of the

circumstances under which they were made, not

misleading.

Count Seven

16. During the period from about May 1, 1966, to the

date hereof, in contravention of Sections 17(a)(2) and 17

(a)(3) of the Securities Act of 1933 [15 U.S.C. 77q(a) (2)

and (3)], registrant, as a securities broker and dealer.

aided and abetted by the other defendants, in offers and

sales of securities by use of means and instruments of

transportation and communication in interstate commerce

and by use of the mails, directly and indirectly:

(a)

(h)

(c)

Obtained money and property by means of the

untrue statements of material facts as set forth in

paragraphs 11 through 14 of Count Five hereof:

Obtained money and property by means of the

omissions to state material facts as set forth in

paragraphs 11 through 14 of Count Five hereof,

which facts were necessary in order to make the

statements made, in the light of the circumstances

under which they were made, not misleading; and

Engaged in the transactions, practices and courses

of business described in paragraphs 11 through 14

of Count Five hereof, which operated and would

operate as a fraud and deceit upon the purchasers

of such securities.

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Bits, aie

SEC Complaint

17. Defendants will unless restrained and enjoined con-

tinue to engage in the acts and practices set forth in this

complaint.

Wherefore, the plaintiff demands:

A. A preliminary injunction and a final judgment

enjoining defendant Guaranty Bond and Securities Corpo-

ration, its officers, agents, servants, employees and attor-

neys, and each of them, from, and defendants Henry

Jeremiah Huey, Jr., Brooks Thomas Huey and Guaranty

Bond Co., Inc., their officers, agents, servants, employees

and attorneys, and each of them, from aiding and abetting

defendant Guaranty Bond and Securities Corporation in:

(1) Making use of the mails or any means or instru-

mentality of interstate commerce to effeet trans-

actions in or to induce the purchase or sale of

securities (other than an exempted security, or

commercial paper, bankers’ acceptances or eom-

mereial bills) otherwise than on a national securi-

ties exchange, while and at a time when the net

‘apital of registrant is less than $5,000 and its

aggregate indebtedness to all other persons exceeds

two thousand (2,000) per centum of its net capital

in contravention of Seetion 15(e)(3) of the

Ixchange Aet [15. U.S.C. 7So0(e)(3)] and Rule

15e8-1 [ITCER 240.1503-1 | thereunder,

(2) Failing to make and. keep current books and ree-

ords of registrant relating to its business as a

securities broker and dealer registered pursuant te

Seetion 15 of the Exehange Act [15.U.S.C. 780] in

contravention of Seetion 17(a) of the FExehange

Act [15 U.S.C. 78q(a)] and Rule 17a-3 [17 CFR

940.17a-3] thereunder.

i SERRA MI OA EPIL DIAS LAO OS ERC ER SS ee OKA

SEC Complaint

(3) Making use of the mails and means and instru-

mentalities of interstate commerce to effect trans-

actions in, and to induce the purchase and sale of,

securities (other than commercial paper, bankers’

acceptances, or commercial bills) otherwise than

on a national securities exchange by:

(a)

(})

Kffecting with or for the accounts of custom.

ers transactions in and inducing the purchase

or sale by customers of securities (other than

U.S. ‘Treasury Savings Notes, U.S. Defense

Savings Stamps or ULS. Defense Savings

Bonds, Series I, F and G), without registrant

at or before the completion of each such trans-

action giving or sending to the customer a

written notification disclosing the information

preseribed in Rule 15e1-4 [17 CFR 240.15e1-4 ]

in eontravention of Section 15(¢)(1) of the

Exchange Aet 115 U.S.C. 78o0(e)(1) 1:

Engaging in acts designed to effeet with or

for the accounts of customers for whom regis-

trant is acting, any transaction in, or purchase

or sale of, a security in the primary or seeond-

ary distribution of which registrant is partici-

pating, or is otkerwise financially interested,

without registrant at or before the completion

of each such transaction giving or sending to

the enstomer written notification of the exist-

ence of such participation or interest as pre-

seribed in Rule 15e1-6 [17 CFR 1501-6] in

contravention of Section 15(e)(1) of the

Exchange Act [15 U.S.C. 780(e)(1)1.

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SEC Complaint

Effecting transactions in, or inducing the purchase

or sale of, any security (otherwise than on a

national securities exchange) in which registrant.

while a nonmember broker or dealer, shall exercise

any discretionary power or authority for any cus-

tomer unless such customer has given prior written

authorization to exercise such power and authority

to a stated associated person or persons and has

indicated the reasons for such authorization as pro-

vided in Rale 15b10-5 [17 CFR 15b10-5] in con-

travention of Section 15(b)(10) of the Exchange

Act [15 U.S.C. 780(h) (10) ].

Making use of the mails or of any means or instru-

mentalities of interstate commerce while registrant

is a securities broker or dealer engaged in the

business of effecting transactions in securities for

the accounts of others or for its own account, to

effect any transaction in, or to induce the purchase

or sale of, any security (other than commercial

paper, bankers’ acceptances, or commercial bills)

otherwise than on a national securities exchange,

by means of any manipulative, deceptive or other

fraudulent device or contrivance in contravention

of Seetion 15(¢)(1) of the Exchange Act [15 U.S.C.

7S0(e)(6)] and Rule Met-2 [17 CFR 240.15¢1-2)]

thereunder, including

(a) Any act, practice or course of business which

operates or would operate as a fraud or deceit

upon any person in connection with:

(i) the solicitation or acceptance of under-

writing agreements for the purchase

and/or sale of securities while registrant

eaten

SEC Complaint

is unable to meet the requirements of the

net capital rule, Rule 15¢3-1 [17 CFR

240.1503-1] :

(ii) the exercise of diseretionary authority

over the accounts of customers for the

purchase and/or sale of securities;

(iii) the use of monies paid by customers for

the purchase of securities or the use of

funds received as proceeds from the sale

of securities by issuers;

(iv) registrant’s use of funds held as custo-.

dian from sales of securities for which it

is acting as underwriter.

(b) Any untrue statement of a material fact or

omission to state a material fact necessary in

order to make the statements made, in the

light of the cireumstances under which they

are made, not misleading concerning:

(i) the financial condition of registrant;

(ii) registrant’s compliance with the require-

ments of federal and state laws and rules

applicable to the securities industry ;

(iii) service charges, fees, commissions and

interest differentials received by regis- “a

trant and its parent;

(iv) the use of monies paid by customers for

the purchase of securities; 4

(v) investments of monies received from or

through the sale of securities; or

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SEC Complaint

(vi) benefits to registrant and/or its parent

from the exercise of discretionary author-

itv over the accounts of customers.

(6) Directly or indirectly, by use of any means. or

any instrumentality of interstate commerce or of

the mails, to use or employ, in connection with

the purchase or sale of any security, any manipu-

lative or deceptive device or contrivance in contra-

vention of Seetion 10(b) of the Exehange Act

[15 U.S.C. 78)(b)] and Rule 10b-5 [17 CFR 240.10

b-5], more particularly:

(a) Engaging in any act, practice or course of

(I)

business which operates or would operate as

a fraud or deceit upon any person in conneec-

tion with the matters described in paragraphs

(a)(i) through (iv) of Demand A(5) hereof,

or engaging in any other aet, practice or

course of business of similar purport or object

which operates or would operate as a fraud

or deceit upon any person:

Making any untrue statement of:a material

fact or omitting to state a material fact neces-

sary in order to make the statements made,

in the light of the cireumstances under which

they were made, not misleading concerning

the matters described in paragraphs (b)(i)

through (b)(vi) of Demand A({5) hereof, or

making any other untrue statement of a

material fact or omission to state a material

fact necessary in order to make the statements

made, in the light of the circumstances under

which they were made, not misleading similar

to those specifically referred to herein above

or of similar purport or object.

a i

SEC Complaint

(7) Making use of any means or instruments of trans-

portation or communication in interstate com-

inerce or of the mails, in the offer or sale of any

security, directly or indirectly:

(a) To obtain money or property by means of any

untrue statement of a material fact or any

omission to state a material fact necessary in

order to make the statements made, in the

light of the circumstances under which they

were made, not misleading concerning the

matters specified in paragraphs (b) (i) through

(b)(v), inclusive, of Demand A(5), hereof, or

any other untrue statement or omission of

similar purport or object;

(b) To engage in any transaction, practice or

course of business which operates or would

operate as a fraud or deceit upon any pur-

chaser in connection with the matters de-

scribed in paragraphs (a) (i) through (a) (iv),

inclusive, of Demand A(5) hereof, or to en-

gage in any other transaction, practice or

course of business of similar purport or object

whieh operates or would operate as a fraud

or deceit upon the purchaser.

B. Sueh other and further relief as the nature of the

case nay require and as this Court may deem proper.

JuLE B. GREENE

J. Ceca PENLAND

Jennie H. RanpoLtpH

Joun M. Keuiy

Attorneys for the Securities and

Exchange Commission .

Suite 138. 1371 Peachtree Street, N.E.

Atlanta, Georgia 30309

aS Saamaaiien |

Prise crccsise steer seedl

a LO DATE GOLD 98.4 IDIR LAME © 1. UO LADO ES agit PrSes EAE ar

Application for Appointment of Receiver

IN THE

UNITED STATES DISTRICT COURT

For tHe Mippie District or ‘l'ENNESSEF

NASHVILLE DrvIsIon

[Carrion Omuirren |

(Filed January 21, 1971)

Plaintiff applies to the Court for an order appointing a

receiver for defendant Guaranty Bond and Securities Cor-

poration (registrant) and all funds, securities and other

assets and property of, belonging to, or in possession of it

and authorizing, empowering and directing such receiver to

collect, take possession of and take charge of all and singu-

lar thereof, to hold the same subject to the further order of

the Court. to obtain an accounting of all funds and seeuri-

ties entrusted by customers and other persons to registrant

and with the usual powers of receivers.

As grounds therefor plaintiff states that receivership of

registrant is apparently the only remedy that will ade-

quately protect the interests of the churches and other

religious institutions for which registrant has been acting

as underwriter and the interests of the other customers

and creditors of registrant.

Jute B, Greene

J. Cec, PenLanp

Jennie H. Ranpotpx

Attorneys for Securities and

Exchange Commission

Suite 140

1371 Peachtree Street N.E.

_ Atlanta, Georgia 30309

_ PGBS VODPOD BIE NE, ORLA ILA LLLP PLA Ae PY

Receiver’s Petition No. 22

IN THE

UNITED STATES DISTRICT COURT

Kor tHE Mippie District or TEN NESSEK

Nas#vitte Division

[Carrion Omirrep]

(Filed March 31, 1972) |

Petitioner, James C. Barbour, Receiver, would respect-

fully show to the Court that:

1. Shortly after his appointment, he was advised by a

representative of the Atlanta Regional Office of plaintiff,

Securities and Exchange Commission, that customers of

Guaranty Bond and Securities Corporation might be

entitled to protection under the provisions of the Securities |

Investor Protection Act of 1970 (15 USCA 9978 aaa, et |

seq.). |

2. On or about May 5, 1971, plaintiff’s representative |

mentioned the matter to petitioner again and stated that

the Atlanta Regional Office had transmitted to its Wash-

ington Office the required notice under the statute but that

if might have been delayed in’ reaching the Securities

Investors Protection Corporation (hereinafter referred to

as SIPC).

3. Thereupon petitioner instructed his attorney to make

inquiry of SIPC and to demand protection under the Act.

A copy of the letter addressed to Honorable Byron D.

Woodside, Chairman, with copy to Mr. Jule B. Greene and

we.

Oo ERR NE ERO MACS TREE

Receivers Petition No. 22

Mr. J. Cecil Penland, Securities and Exchange Commission

in Atlanta, Georgia is made Exhibit No. 1 hereto.

4. During the next several months the Receiver and his

attorney supplied voluminous information and a long list

of documents requested by the corporation, including an

opinion of petitioner's attorney with respect to application

of the Act to the instant proceeding. A copy of the letter

to Mr. Theodore Focht, General Counsel of SIPC dated

June 24, 1971 is made Exhibit No. 2 hereto.

5. By letter dated October 5, 1971, the General Counsel

indicated that while SIPC required certain additional

information, “based on the information presently available,

this corporation has no plans for filing an application for

the appointment of a trustee in this proceeding.”

6. On November 1, 1971, in response to an inquiry from

petitioner’s counsel as to the basis for this determination

the General Counsel advised that it involved “the question

of retroactive application of the statute and the question

of the ability of a SIPC trustee to carry out the purposes

of the 1970 Act at this point in the liquidation of this com-

pany.”

7. On November 24, 1971, the Chairman of SIPC advised

that the “protections provided by that Act are not un-

limited, however, and we are of the present opinion that

the limitations contained in the Act make it necessary for

this Corporation to decline to intervene in the Guaranty

Bond and Securities case.”

8. Petitioner’s counsel then wrote to plaintiff’s Regional

Office in Atlanta in an effort to determine the date upon

which it had advised its Washington Office of the possible

application of the Act to Guaranty Bond and Securities

eres

Recetver's Petition No, 22

Corporation but the letter was forwarded to the Washing-

ton Office for reply and petitioner has been unable to obtain

any information as to whether or not and on what date

notice was given by plaintiff to SIPC as required by the

statute.

9. Petitioner is advised and believes that the customers

of Guaranty Bond and Securities Corporation are entitled

to the protection of the Act. Guaranty Bond and Securities

Corporation was a registered broker dealer when the Act

took effect on December 30, 1970 end engaged in the invest-

ment and securities business until at Jeast January 6, 1971

when a temporary injunction was entered herein at the

request of plaintiff.

“10; Plaintiff had a statutory duty under § 5(a)(1) of the

Net to notify SIPC that Guaranty Bond and Securities Cor-

ppration was in or was approaching financial difficulty on

on about December 30, 1970 when the Act took effect since

it hac already filed the Complaint in the instant action on

December 22, 1970 alleging among other things that the

broker dealer was in violation of net capital requirements

established under SEC regulations.

11. If so notified, SIPC had an opportunity to intervene

in the present proceeding before the injunction was issued

and before the appointment of a Receiver. Even after

the appointment of petitioner as Receiver, SIPC had the

opportunity to intervene and seek the appointment of a

Trustee under the Act as it has done in other proceedings,

including one action pending in this Court.

12. If SIPC was not notified of the financial difficulties

of Guaranty Bond and Securities Corporation, it was

hecause of the failure of plaintiff to discharge its statutory

Receiver's Petition No. 22

duty and not because of any neglect on the part of peti-

tioner.

13. While the Receiver has done everything within his

power to protect the interests of the customers of Guaranty

Bond and Securities Corporation, including the return of

their bonds and excess credit balances, it appears that such

customers will sustain a loss at least equal to that portion

of the 5% reserve fund established under Order No. 22

herein which may be required in order to defray part of

the costs, fees and expenses of this receivership.

14. SIPC is subject to the jurisdiction of this Court

because it is engaged in business in the Middle District of

Tennessee in that it collects assessments under the Act

from broker dealers operating in the District.

Wherefore, Premises Considered, Petitioner Prays:

1. That a copy of this Petition be served upon plaintiff

and SIPC and that an Order be entered requiring respond-

ents to show cause on or before a day certain why SIPC

should not be required to intervene herein and afford to

the customers of Guaranty Bond and Securities Corpora-

tion the benefits of the Act.

2. For general relief.

JAMES C. BarBour

Receiver

W. Ovip Cotuins, JR.

Attorney for the Receiver

Receiver’s Petition No. 22 ‘>

State of Tennessee

County of Davidson

James C. Barbour, being first duly sworn, makes oath

that the statements contained in his foregoing Petition are

true to the best of his knowledge, information and belief.

James C. Barsour

Sworn to and subscribed before me this 30th day of

March, 1972. a

Patricia R. Sruys

Notary Public

My Commission Expires: November 24, 1974

BEY (2 15 SOP VSR BO IE LL BY OMT NOON | MEE LESS EARNER I! fe

(I eee eet news = nae

Receivers Petition No. 22

EXHIBIT NO. 1

May 27, 1971

Honorable Byron D. Woodside, Chairman

Securities Investors Protection Commission

200 North Capitol Street

Washington, D. C. 20549

Re: Guaranty Bond and Securities Corporation

Dear Sir:

The undersigned is attorney for James C. Barbour,

Receiver for the above named registered dealer pursuant

to appointment on January 29, 1971 by the United States

District Court for the Middle District of Tennessee,

Nashville Division, in the cause styled Securities and

Exchange Commission v. Guaranty Bond and Securities

Corporation, et al., Civil Action No. 5989.

lt appears that the registrant qualifies as a member of

the Securities Investor Protection Corporation under See-

tion 3(a) (2) (A) of the Securities Investor Protection Act

of 1970. While the District Court proceeding was filed

without reference to the Act, there has been a finding of

insolvency by the District Judge and the cause has pursued

a course very similar to that contemplated by the Act,

including the distribution of identifiable securities to their

owners.

It further appears, however, that investors will lose some

portion of their net equities in money credit balances and

this letter is to make application to the Commission for

assistance and such advances to the Receiver as may be

required to satisfy the claims of each customer within the

limitations of the Act.

25 =

Receiwer's Petition No. 22

We will, of course, be happy to supply such additional

information as you may request and we will appreciate

your acknowledging receipt of this letter as a claim on

behalf of the Receiver.

Yours very truly

W. Ovid Collins, Jr.

WOC :ke

ce: Mr. James C. Barbour, Receiver

Guaranty Bond and Securities Corporation

2312 West End Avenue

Nashville, Tennessee 37203

Mr. Jule B. Greene

Mr. J. Ceeil Penland

Securities and Exchange Commission

Suite 138

1371 Peachtree Street, N.E.

Atlanta, Georgia 30809

Grrr stirs msi Has

Prteciscnsiicxs: Smo ee wat

Receiver’s Petition No. 22

EXHIBIT NO, 2 —

TO . June 24, 1971

Mr. Theodore Focht \

Securities Investor Prottection Corporation

Suite 104 Astral Building

955 North L’Enfant Plaza, S.W.

Washington, D. C. 20@2!4

Re: Guaranty Bond and Securities Corporation

Civil Action No. 5989

Dear Mr. Focht:

In accordance with your telephone conversation on June

21, 1971 with Mr. James C. Barbour, Receiver for Guaranty

Bond and Securities Corporation, | am writing this letter

as a statement of facts which in my opinion justifies the

conclusion that the Securities Investor Protection Act of

1970 is applicable to the above proceeding.

(Guaranty Bond and Securities Corporation is a registered

broker-dealer and therefore automatically a member of the

Securities Investor Protection Corporation.

It has been declared insolvent and is in receivership in

the United States District Court for the Middle District of

Tennessee, Nashville Division.

While all securities on hand have been delivered or

tendered to the registrant's investors and customers, they

were required to deposit 56 of the face amount of the

securities in a reserve fund, some part of which will neces-

sarily be utilized for the payment of the costs of the

receivership since the assets of the insolvent corporation

are not sufficient. .

Tt thus appears that the investors and customers will

lose a portion of their equity in cash and it is my under,

® Ae ore Saesy ’ See ee eA FOREST es “ MD tte ae pra

Receivers Petition No. 22 el

_______-standing-of the Act that it is designed to protect them

against such a loss. The Receiver can be designated as

Trustee and given the powers, duties and responsibilities

set forth in the Act. If the necessary funds are advanced

to the Trustee, reimbursement may be made to the

investors and customers at this time of the 5% deposit

made by each and at the conclusion of the receivership

proceeding, the Securities Investor Protection Corporation

will be reimbursed by that portion of the reserve fund

remaining unexpended.

T trust that the foregoing is in compliance with your

request but if further information or statements are

required, lease advise.

Yours very truly

W. Ovid Collins, Jr.

WOC :ke

ce: Mr. James C. Barbour, Receiver

Gas een cps 1060 AIDE AOI AE OME ADEE ARIS RAINES ERG AN ER Od en PS

Order No. 49

IN THE

UNITED STATES DISTRICT COURT

For THE Mipp_e District oF TENNESSEE

NASHVILLE DIvIsION

Civil Action No. 5989

SECURITIES AND EXCHANGE COMMISSION

vs.

({UARANTY BOND AND SECURITIES CoRPORATION, et al.

(Entered April 6, 1972)

This cause came on to be heard under the Receiver's

Petition No. 22 alleging that the customers of Guaranty

Bond and Securities Corporation are entitled to the pro-

tection and benefits 2orded by the Securities Investor

Protection Act of 1970 (15 USCA §§ 78aaa, et seq.) when,

it appearing to the Court that the question as to the appli-

eability of the Act should be adjudicated without undue

delay.

It is Ordered that plaintiff, Securities and Exchange Com-

mission, and the Securities Investors Protection Corpora-

tion he served with a copy of the Petition and that they

show cause, if any they have, on or before the 20th day

of April, 1972 at 9:00 o’clock A.M. why the remedies

afforded by the Act should not be made available in this

proceeding. .

/s/ lL. CLure Morton

United States District Judge

Approved for Entry:

W. Ovip Couns, JR.

Attorney for the Receiver

Z a aie PA OE PARSE A ALD SE EIRENE AE! LLL ELE ES tes 1a

Re el

Answer of the

Securities Investor Protection Corporation

IN THE

UNITED STATES DISTRICT COURT

For THE MippLe District or TENNESSEE

NASHVILLE DIVISION

[Caprion OMITTED |

(Filed: May 17, 1972)

Respondent, Securities Investor Protection Corporation

(hereinafter sometimes referred to as “SIPC”), for answer

to Petition No. 22 herein, respectfully alleges and shows

to the Court as follows:

1. Alleges that it is without knowledge or information

sufficient to form a belief as to the truth of the allegations

contained in paragraphs “1,” “2,” “8” and “13” of the peti-

tion herein.

2. Alleges that it is without knowledge or information

sufficient to form a belief as to the truth of the allegations

contained in paragraph “3” of the petition herein, except

adiits that it received the letter referred to therein, a

copy of which is attached thereto as Exhibit No. 1.

3. Denies each and every allegation contained in para-

graph “4” of the petition herein, except admits that it

received certain information and papers from the petitioner

or his attorney, and further admits that it received the

letter referred to therein, a copy of which it attached there-

to as Exhibit No. 2.

Answer of the

Securities Investor Protection Corporation

4. Answering the allegations contained in paragraph “5”

of the petition herein, admits that its General Counsel sent

a letter dated October 5, 1971 to the attorney for the peti-

tioner herein, a copy of which is hereto annexed as Exhibit

A, but otherwise denies each and every allegation contained

in said paragraph “5.”

» Answering the allegations contained in paragraph “6”

of the petition herein, admits that its General Counsel sent

a letter dated November 1, 1971 to the attorney for the

petitioner herein, a copy of which is hereto annexed as

exhibit B, but otherwise denies each and every allegation

contained in said paragraph “6.”

6. Answering the allegations contained in paragraph “7”

of the petition herein, admits that its Chairman sent a let-

ter dated November 24, 1971 to the Honorable William E.

Brock, Jr., a copy of which is hereto annexed as Exhibit

C, but otherwise denies each and every allegation contained

in said paragraph “7.”

«. Answering the allegations contained in paragraph “9”

of the petition herein, admits that a temporary injunction

against the defendants was entered herein at the plain-

tiff’s request on or about January 6, 1971, but otherwise

denies it has knowledge or information sufficient to form a

belief with respect to the truth of the remaining allega-

tions contained in said paragraph “9,” including the peti-

tioner’s,alleged advice and belief regarding the protection

available to customers of Guaranty Bond and Securities

Corporation (hereinafter referred to as “Guaranty Bond”).

8. Admits each and every allegation contained in para-

graph "10" of the petition herein, except alleges that

Hg | a A ARN it BIRR ARLES DE SACL OLELROALE LLDCS

Answer of the

Securities Investor Protection Corporation

Guaranty Bond was in or was approaching financial diff-

eulty on a date substantially prior to December 30, 1970.

9, Denies each and every allegation contained in para-

graph “11" of the petition herein. .

10, Admits each and every allegation contained in para-

graph “12” of the petition herein, except denies that SIPC's

lack of timely knowledge or notice of the financial diffieul-

ties of Guaranty Bond wax not attributable to the neglect

or other act or omission on the part of petitioner.

11. Denies each and every allegation contained in para-

graph “14" of the petition herein, except admits that! it

receives payments upon assessments, from certain broker-

dealers doing business in the Middle District of Tennessee.

First Defense

12. The petition fails to state a claim against SIPC

upon which relief can be granted.

Second Defense

13. Upon information and belief, on December 30, 1970

and prior thereto Guaranty Bond was guilty of numerpus

substantial violations of the Securities Exchange i of

1934 (“Exchange Act”) and the Securities Act of 1933:

(“Securities Act”), and rules promulgated thereunder,

more particularly violations of sections 10(b), 15(b) (10), 15

(c)(1), 15(¢)(3) and 17(a) of the Exchange Act, sections

17(a)(2) and 17(a)(3) of the Securities Act, and Rules

10b-b° 1bb10-5, 1501-2, 1501-4, 1501-6, 15¢3-1 and 17a-3

promulgated thereunder,

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QOL AE ABO LBD EL AE AEB ALPE PEE ALDARA AL BAB

Answer of the

Securities Investor Protection Corporation

14.° Upon information and belief, as a result of the vio-

lations aforesaid on or about December 22, 1970 the plain-

tiff herein commenced an action to enjoin (iuaranty Bond

from the commission of further violations, and to enjoin

the other defendants herein from aiding or abetting Guar-

anty Bond in the commission thereof. On or about Janu-

ary 6, 1971 this Court granted a preliminary injunction as

prayed for in the plaintiff's complaint.

15. Upon information and belief, in granting the afore-

said preliminary injunction this Court made and filed its

Findings of Fact and Conclusions of Law, a copy of which

is hereto annexed as Exhibit D, which Findings of Facet

and Conclusions of Law are hereby incorporated herein by

reference.

16. Upon information and belief, on December 30, 1970

and prior thereto Guaranty Bond's violation of Section

15(¢)(3) of the Exehange Act, and Rule 15¢3-1 promul-

gated thereunder, was substantial and impossible of cor-

rection by Guaranty: Bond, and its capital deficiency ex-

‘ceeded three million dollars.

17. Upon information and belief, on December 30, 1970

and prior thereto Guaranty Bond was in or was approach-

ing serious financial difficulty, and had failed or was in dan-

ger of failing to meet its obligations to its customers.

18. By reason of the foregoing, the Securities Investor

Protection Act of 1970 (S4 Stat. 1636; Publie Law 91-598,

Ist Congress, H. R. 19333) (hereinafter referred to as the

“1970 Act”) does not apply to Guaranty Bond, and the

remedies and benefits provided therein may not he invoked

by, or for the benefit of, its customers or any other person,

eon en eee al

Answer of the

Securities Investor Protection Corporation

Third Defense

19, Repeats and realleges each and every allegation

hereinabove contained in paragraph Td.

20, Upon information and belief, on January 27, 1971

this Court made an order appointing the petitioner as re-

ceiver for Guaranty Bond and its parent, Ginaranty Bond

Co., Inc. (hereinafter referred to as “Guaranty Bond's

Parent”), and conferring upon said receiver the powers,

authority, rights and obligations thereim contained, = In

that order the court found, in part, that receivership Was

the only remedy that would adequately protect. the inter-

ests of churches and other religious institutions for which

Guaranty Bond had been acting as underwriter, and the

interests of other customers and creditors of both corpora-

tions. A copy of that order ix hereto annexed as Exhibit

and incorporated herein by reference.

>}. Upon information and belief, in making the aforesaid

order the Court handed down its Memorandum Decision

dated January 27. 1971, a copy of which is hereto annexed

as Exhibit F and incorporated herein by reference, In that

decision the Court found as facts, among other things. that

both defendant corporations could not pay their obligations

as they matured, could not pay their current obligations.

and further found that their liabilities far exceeded their

realizable assets. As that decision recites, in the course of

the hearing the corporate defendants unsuecessfully sought

leave to proceed under Chapter X of the Bankruptey Act.

and in that connection admitted that no new capital could

he obtained by them, that their bank accounts had already

been applied to outstanding debts due their hank. that they

had no funds with which to pay their obligations, current

Feet g ibs

Answer of the

Sectrities Investor Protection Corporation

or otherwise, and that there were no lawful methods to

obtain other funds.

22. Upon information and belief, on December 30, 1970

and prior thereto Guaranty Bond was insolvent within the

meaning of Section 1(19) of the Bankruptey Act, or was

unable to meet its obligations as they matured, or both.

25. By reason of the foregoing, the 1970 Act does not

apply to Guaranty Bond, and the remedies and benefits pro-

vided therein may not be invoked by, or. for the benefit of.

its customers or any other person.

Fourth Defense

24. Repeats and realleges each and every allegation

hereinabove contained in paragraphs “15” through “25”

inclusive.

25. By reason of the foregoing, the 1970 Act does not

apply to Guaranty Bond, and the remedies and benefits pro-

vided therein may not be invoked by, or for the benefit of, |

its customers or any other person. 7

Fifth Defense

26. Repeats and realleges each and every allegation here

inabove contained in paragraphs “13” through “17” inelu-

sive, and paragraphs “20” through “22” inclusive.

27. Upon information and helief, at or about the time of

his appointment as receiver herein on or about January 27,

1971, the petitioner knew of the existence and provisions

of the 1970 Act, as admitted by him in paragraph “1” of the

petition herein, and had full opportunity to make a prompt

determination respecting the applicability em in the

A A OT AN UT TIS Doe aI 1 eA CCL A NE OD

Answer of the

Securities Investor Protection Corporation

circumstances of this case and take appropriate legal or

other action to invoke the 1970 Act procedures and remedies.

28. Despite his aforesaid knowledge or notice of the 1970

Act, the petitioner herein elected to execute the duties of

his office as receiver and to proceed with the administration

and liquidation of Guaranty Bond and Guaranty Bond’s

Parent.

299. Upon information and belief, the receivership herein

embraces both Guaranty Bond and Guaranty Bond's Par-

ent, and the proceedings taken herein relate to the assets

and liabilities of both corporations and the liquidation

thereof although Guaranty Bond’s Parent was not at any

time material herein a broker or dealer within the meaning

of the 1970 Act or the Exchange Act.

30. On or about May 31, 1971 SLPC received a letter

dated May 27, 1971 from the attorney for the receiver

herein, a copy of which is hereto annexed as Exhibit G and

incorporated herein by reference. Prior thereto SIPC had

no knowledge or notice of any of the facts, matters or pro-

ceedings hereinabove alleged in paragraphs “13” through

“99” inclusive, or any other matters relating to the financial

condition of Guaranty Bond or its ability to meet its obliga-

tions to its customers or other creditors, or any other mat-

ters relating to the administration and proceedings by the

petitioner as receiver herein.

31. STIPC’s lack of notice or knowledge as aforesaid

was not the result of any act or omission on its part, but

was caused solely. by the failure of others having knowl-

edge of the facts, including the receiver herein, to give

STPC timely notice thereof.

pm womesmaratcomne Re ARO BOM Ne PEM CR TRE ERM CAE ERI ALAA NRPS

Answer of the

Securities Investor Protection Corporation

32. Prior to the time SIPC acquired its first notice or

knowledge of the circumstances and proceedings herein

and had an opportunity to determine its responsibilities,

if any, in the circumstances, the receivership herein had

progressed to a point of substantial completion, including

but not limited to the disposition of various assets belong-

ing to the defendant corporations or certain principals

thereof, the return of all or substantially all of the secur-

ities in the possession or under the control of the corporate

defendants, the resolution of certain claims made against

the estates herein, the establishment of a reserve fund to

be applied in payment of the expenses of administration,

and the approval of a plan for partial liquidation. SIPC

begs leave to refer to all of the petitions, orders, decisions,

findings of fact and conclusions of law, and other docu-

ments and other matters and proceedings which are a

matter of record in this Court establishing the status of

the receiver’s proceedings at a time or at times material

to this defense.

33. At no times were the acts, transactions, pow ers, lia-

bilities or responsibilities of the receiver herein governed

or controlled by the 1970 Act.

34. By reason of the foregoing, subsequent to its aequi-

sition of knowledge or notice of the financial difficulties of

Guaranty Bond or of the proceedings heretofore had

herein, SIPC had no legal right to take any action under

the 1970 Act for the protection of customers or other

creditors of Guaranty Bond because of the impossibility

of accomplishing the purposes of the 1970 Act ineluding

the proper liquidation of Guaranty Bond only by a duly

appointed trustee in accordance with the terms and provi-

sions of the 1970 Act.

ase Tee Raney haba RL TIS SEE BS ARAM RST

Answer of the

Securities Investor Protection Corporation

Sixth Defense

35. Repeats and realleges each and every allegation

hereinabove contained or realleged in paragraphs "26"

through “34” inclusive.

36. Under the 1970 Act SIPC is vested with discretion

to determine whether, in a particular case, it shall make

an application for a decree adjudicating that customers of

a broker-dealer, which is a member of SIPC, are in need of

the protection provided by the 1970 Act, and upon such

adjudication apply for the appointment of a trustee to

liquidate such broker-dealer in accordance with the terms

of the 1970 Act.

37. Kven if SIPC had the legal authority under the

1970 Act, in the circumstances of this ease, to invoke the

provisions of the said Act and initiate the procedures

therein provided for the protection of customers, which it

denies as hereinabove alleged, nevertheless its decision not

to do so was a fully justified, proper and required exercise

of the discretion vested in SIPC under the 1970 Act as

aforesaid, and may not be lawfully superseded or set aside

in the circumstances of this case by an order or decree

compelling it now to proceed under the 1970 Act.

Seventh Defense

38. This Court lacks jurisdiction in this proceeding.

Wherefore, respondent Securities Investor Protection

Corporation demands judgment dismissing the petition

herein.

Turopore H. Focut

General Counsel

Securities Investor Protection Corporation

485 L’Enfant Plaza, S. W.

Washington, D. C. 20024

x Telephone: 202—484-5400

Dated: Washington, D. C., May 15, 1972.

Hectic Lacie Bt nS Ppa PS Bebe a

ett e a owe fee

Answer of the

Securities Investor Protection Corporation

EXHIBIT A

October 5, 1971

W. Ovid Collins, Jr., Esquire

Cornelius, Collins, Higgins & White

Third National Bank Building

Nashville, Tennessee 37219

Re: Guaranty Bond and Securities Corporation,

Your File No. 5989

Dear Mr. Collins:

This is in response to your letter of September 25, 171,

addressed to Chairman Woodside with regard to Guaranty

Bond and Securities Corporation.

As you are aware, the staff of this Corporation has been

reviewing this matter for some time. and we have at-

tempted to gather together pertinent information and

data. Although we still do not have certain information

which would be very helpful to us, for example, informa-

tion with respect to investigations of the activities of the

principals of this company and any reports made by the

Receiver on those matters, we can understand vour inter-

est in learning the intentions of this Corporation with

respect to this company.

Based on the information presently available, this Corpo-

ration has no plans for filing an application for the

appointment of a Trustee in this proceeding.

Very truly vours

Theodore H. Focht

General Counsel

THF :py

Answer of the

Securities Investor Protection Corporation

EXHIBIT B

November 1, 1971

W. Ovid Collins, Jr., Esquire .

Cornelius, Collins, Higgins & White

Third National Bank Building

Nashville, Tennessee 37218

Dear Mr. Collins:

This is in response to your recent letter inquiring as to

the basis for this Corporation's determination that it should

not intervene in the matter of Guaranty Bond and Securi-

ties Corporation.

There are a number of reasons for our determination,

and they are complex and interrelated. Briefly, | would

say they involve the question of retroactive application of

the statute and the question of the ability of a SIPC trustee

to carry out the purposes of the 1970 Act at this point in

the liquidation of this company.

- Very truly yours

, }

Theodore H. Focht

General Counsel

THF :py

Carbon copy to Mr. James C. Barbour

936 J. C. Bradford Building

Nashville, Tennessee 37219

QP ae ction

Slash Be

Shite

;

40)

Answer of the

Securities Investor Protection Corporation

ENHIBIT C

November 24, 1971

The Honorable William i. Brock, Jr.

United States Senate

304 Old Senate Office Building:

Washington, D.C. 20510

Re: LEG:1

Dear Senator Brock:

This is in response to your recent letter concerning

(Gruaranty Bond and Securities Corporation,

As you are aware, the Counsel to the Receiver and the

General Counsel of this Corporation have been in com-

munication with cach other concerning this matter. 1

believe that the intentions of this Corporation are set forth

in two recent letters addressed to W. Ovid Collins, Jr., Esq.,

Counsel to the Receiver, from Theodore H. Focht, General

Counsel for SIPC. These letters are dated October 5 and

November 1, 1971, and I enclose copies of them for your

information.

I note, of course, the comments contained in the last para-

graph on page two of Mr. Barbour’s letter. I assure you

that the Directors and staff of this Corporation have made

every attempt to provide protection to public customers

of brokeralealer firms consistent with the provisions of the

Securities Investor Protection Act of 1970. The protections

provided by that Act are not unlimited, however, and we.

are of the present opinion that the limitations contained

in the Act make it necessary for this Corporation to decline

to intervene in the ( iuaranty Bond and Securities case.

Sincerely

Byron D. Woodside

THF :py Chairman

Enclosures

Answer of the

Securities Investor Protection Corporation

EXHIBIT D

In the U.S. District Court for the Middle District

of Tennessee, Nashville Division

Securities & Exchange Comission

Plaintiff,

Guaranty Bond and Securities Cor-

poration, Henry Jeremiah Huey. Civil Action File

Jr. Brooks Thomas Huey and No. 5989

Guaranty Bond Co. Ine. 2312

West) End Avenue, Nashville.

Tennessee 37203,

Defendants.

Findings of Fact and Conclusions of Law

(Entered January 6, 1971)

This cause coming on to be heard upon plaintiff’s motion

for a preliminary injunction, and upon consideration of

said motion, the complaint, affidavits, other evidence ad-

dueed and argunents of counsel, the Court makes the fol-

lowing Findings of. Fact and Conclusions of Law:

° Findings of Fact

1. That defendant Guaranty Bond & Securities Corpora-

tion, a ‘Tennessee corporation, is engaged in business as

a broker and a dealer in securities and for this purpose

maintains an office in Davidson County, Tennessee.

2 That since June 20, 1962, defendant Guaranty Bond &

Securities Corporation (hereinafter sometimes referred to

00. 8 OM ADAP AD. PENRITH PERE Rh LN RE Be ERE ALND ons

Answer of the

Securities Investor Protection Corporation

as “registrant’) has been and is now registered with the

Securities and Exchange Commission as a broker and a

dealer in securities pursuant to Section 15(b) of the Secu-

rities exchange Act of 1934 [15 U.S.C. 780(b) J.

3. That registrant is a wholly owned subsidiary of

defendant Guaranty Bond Company, Inc., a Tennessee cor-

poration (hereinafter sometimes referred to as “parent”)

with an office in Davidson County, Tennessee; and that

defendant Henry Jeremiah Huey, Jr. (H. J. Huey) is Presi-

dent and a director and Brooks Thomas Huey (B. T. Huey)

is Secretary, Treasurer and a director of both registrant

and parent, and they reside in Davidson County, Tennessee.

4+. That since March 31, 1970, registrant has made use of

the mails and of means and instrumentalities of interstate

commerce to effect transactions in and to induce the pur-

chase and sale of securities (other than an exempted

security or commercial paper, bankers’ acceptances, or

commercial bills) otherwise than on a national securities

exchange while and at times when the net capital of reg-

istrant was less than $5,000 and its aggregate indebted-

ness to all other persons exceeded two thousand (2,000)

per centum of its net capital in contravention of Section

15(c)(3) of the Exchange Act [15 U.S.C. 780(c)(3)] and

Rule 15¢3-1 [17 CFR 240.15¢3-1].

3. That since about May 1, 1969, registrant has failed to

take: and keep current books and other records relating

to its business as a broker and dealer in contravention of

Section 17(a) of the Exchange Act [15 U.S.C. 78q(a)] and

Rule 17a-3 [17 CFR 240.17a-3], in that it has not main-

tained a position record for all securities long and short

and their locations except for the period since November

ree FO RA AE ELSES A BIB NR LOE ARH a DRIES LR

Answer of the

Securities Investor Protection Corporation

17, 1970; it has not maintained ledger accounts for custom-

ers itemizing purchases, sales, receipts and deliveries of

securities, all receipts and disbursements of cash and all

other debits and credits; its inventory of securities has

heen inaccurate; its income account has failed to reflect all

income received; its net capital computations have been

incorrect; and it has not had personnel questionnaires for

certain associated persons.

G. That since about May 1, 1969, registrant has made use

of the mails and means and instruments of interstate com-

merce to effect transactions in, and to induce the purchase

and sale of, securities (other than commercial paper, bank-

_ ers’ acceptances, or commercial bills) otherwise than on

a national securities exchange, by means of manipulative,

deceptive and other fraudulent devices and contrivances,

practices and courses of business as specified in paragraphs

numbered 7 and 8 hereof, in contravention of Section 15

(c)(1) of the Exchange Act [15 U.S.C. 780(c)(1)] and

Rules 15¢e1-4 [17 CFR 240.15e1-4] and 15c1-6 [17 CFR

240.15¢1-6].

7. That since about May 1, 1969, registrant has effected

with and for the-accounts of customers, transactions in, and

has induced the purchase and sale’ by customers of, securi-

ties (other than U. S. Tax Savings Notes, U. S. Defense

Savings Stamps or U. S. Defense Savings Bonds, Series

FE, F and. G@) without at or before the completion of each

such transaction giving or sending to such customers writ-

ten notification disclosing, in cases where registrant was

acting as a broker for such customers or as a broker for

both such customers and some other person, either the

name of the person from whom the security was purchased

Answer of the

Securities Investor Protection Corporation

or to whom it was sold for such customers and the date

and time when such transaction took place or the fact that

4 such information would be furnished upon the request of

such customers, and the source and amount of any com-

: mission or other remuneration received or to be received

4 by registrant in connection with the transaction as pre-

seribed in Rule 15e1-4 [17 CFR 240.15¢e1-4].

5 fishes ORG aay Cie |

8. That since about May 1, 1969, registrant, as a broker

; acting for customers and for customers and other persons,

i has engaged in acts designed to effect with or for the —

accounts of such customers, transactions in, and purchases

4 and sales by such customers of, securities in the primary

or secondary distributions of which registrant was par-

ticipating and was financially interested without, at or

: before the completion of each such transaction, giving or

4 sending to such customers written notification of the exist-

ence of such participation or interest as prescribed in Rule

15¢e1-6 [17 CFR 15c1-6].

9. That since about May 1, 1969, registrant, as a broker

and dealer not a member of a national securities associa-

tion, has effected securities transactions in contravention

of Section 15(b)(10) of the Exchange Act [15 U.S.C. 780

(b)(10)] and Rule 15b10-5 [17 CFR 240.15b10-5], in that

registrant has exercised discretionary power or authority

for customers without such customers having given their

prior written authorizations to exercise such power or

authority to a stated associated person or persons, and

having indicated their reasons for giving such authoriza-

tions.

airlaneninerkdit ape acenceng rgANY

(ihbiiachdoabisns Sows age rk:

10. That since about May 1, 1966, registrant has been

a broker and dealer engaged in the business of effecting

IRAE NAA AE el SEO EA 5

45.

Answer of the

Securities Investor Protection Corporation

securities transactions for the accounts of others and for

its own account, has been making use of the mails and of

means and instrumentalities of interstate commerce to

effect transactions in, and to induce the purchase and sale

of, securities (other than commercial paper, bankers’

acceptances, or commercial bills) otherwise than on a

national securities exchange, by means of manipulative,

deceptive and other fraudulent devices and contrivances,

including the acts, practices and courses of business speci-

fied in paragraphs numbered 6 through 14 hereof, in con-

travention of Section 15(¢)(1) of the Exchange Act, [15

U.S.C. 780(e)(1)] and Rule 15e1-2 [17 CFR 240.15¢1-2].

11. That since about May 1, 1966, defendants have been

soliciting churches and other religious institutions to

employ registrant as underwriter for the sale of their bonds

under a program in which registrant guarantees the sale

of such bonds on the representation that registrant is

able to make such a firm commitment for the purchase

and sale of such securities, is able to meet all obligations

and liabilities arising in connection therewith and in oper-

ating within the jurisdiction of the federal and _ state

. authorities charged with regulating the securities industry,

while and at times when registrant was unable to meet

the net capital requirements of Section 15(c)(3) of the

Exchange Act [15 U.S.C. 780(c)(3)] and Rule 15c3-1

[17 CFR 240.15c3-1], registrant’s report on Form 17A-5

as of March. 31, 1970, as filed with the Commission, inac-

curately reflected registrant’s assets and liabilities and

inaccurately indicated that’ registrant had sufficient net

capital to meet the requirements of said Rule, and regis-

trant omitted to disclose to such churches and other reli-

gious institutions its financial condition and its inability

pre's

DCD 80 NI Re HG -E ERR,

Answer of the

Securities Investor Protection Corporation

to meet the financial responsibility requirements of said

Rule and its failure to comply with applicable federal laws

and regulations relating to the securities industry as found

in paragraphs numbered 4 through 16 hereof.

12. That since about May 1, 1966, defendants have been

inducing churches and other religious institutions (here-

inafter sometimes referred to as “borrowers”) to execute

undervriting agreements in which registrant is desig-

nated underwriter of. their bonds and custodian of funds

received from sales thereof and which contain a provision

that registrant may invest such funds in religious insti-

tutional bonds for such borrowers, as necessary liquidate

such investments, make disbursements and deliver funds

for payment of such borrowers’ obligations incurred in

their construction and other programs, and return to such

borrowers 5% simple interest earned on such funds. On

the basis of this authority defendants have been exer-

cising discretionary authority over funds received from

sales of bonds issued by such borrowers and over such

borrowers’ accounts with registrant, effecting transactions

therewith and therein, including sales to such borrowers of

bonds issued by other churches and religious institutions’

having extended maturities without sending to such bor-

rowers confirmations advising them of the securities sold

to them and placed in their accounts, the date and amount

of each such transaction:and the source and amount of com-

mission and other remuneration received or to be received

by defendants in connection with each such transaction.

Registrant has been crediting to the accounts of such bor-

rowers 5% simple interest on the amounts invested for

such borrowers in the bonds of other churches and religious

institutions even though the interest rates on the bonds

eee eee

Answer of the

Securities Investor Protection Corporation

placed in such borrowers’ accounts have been substantially

higher and defendants have retained and treated as income

to registrant the interest differential between the 5% rate

paid to such borrowers and the substantially higher yields

on the bonds placed in their accounts, thus obtaining secret

profits from such borrowers while acting in the capacity

of their agent, custodian and fiduciary. Registrant has

been, in some instances, investing funds held as custodian

for a particular religious institution in such institution's

own bonds with the result that such institution has heen

paying interest on such bonds at a rate in excess of 5%

per annum while receiving a credit to its account with

registrant of only 5% per annum, registrant retaining the

interest differential as a secret profit.

13. That since about May 1, 1966, registrant, as a broker

and dealer, has been soliciting churches and other religious

institutions to employ it as underwriter of their bonds and

has solicited investors to purchase such bonds on the rep-

resentations that the sale of all bonds so underwritten

by registrant is guaranteed by it and that registrant will

purchase or sell any such bonds remaining after the church

has put forth its best effort, without disclosing that regis-

trant has been placing a substantial portion of sueh bonds

in the accounts of other churches end religious institutional

issuers for which it has been acting as underwriter and for

which it has been holding funds as custodian by recording

buy and sell transactions in securities on registrant’s books

among various of such churches and other religious insti-

tutional issuers; that availability of funds for a par-

ticular such issuer’s construction or other program could

be dependent upon registrant’s ability to dispose of the

Answer of the

Securities Investor Protection Corporation

securities in which such funds were thus invested; that

there is no independent market for such securities; and

that such issuers whose funds are invested by registrant

in securities of other churches and religious institutions

may suffer the loss resulting from any default on the part

of an issuer of a security in which their funds are invested.

14. That since about May 1, 1966, registrant, as a broker

and dealer, has been offering to sell and selling religious

institutional bonds through the use of prospectuses pre-

pared by registrant which are materially false and mis-

leading in that such prospectuses contained the represen-

tation that the proceeds from the sale of the religious

institutional bonds described in such prospectus would be

disbursed by registrant in accordance with the purposes

of the bond issue as set out in such prospectus—i.e., for

such expenditures as consolidation and retirement of exist-

ing indebtedness, purchase of land for new buildings and

construction, expansion and remodeling of churches, sanc-

tuaries, educational buildings and other facilities—with-

out disclosing: that registrant in its discretion would

invest portions of such proceeds in other religious institu-

tional bonds having extended maturities of from one to

more than eleven years; the amounts of such proceeds to

he received by registrant and the other defendants as fees,

commissions and other remunerations; and that registrant

would use such proceeds in completing other underwrit-

ings in which it and the other defendants would receive

substantial fees, commissions and other remuneration.

15. That since about May 1, 1966, registrant, as a broker

and dealer, by use of means and instrumentalities of inter-

state commerce and of the mails, directly and indirectly,

has been employing manipulative and deceptive devices

[a ene rte toe

NR LORLN LSI Aa GT AIM Se Been BES i coe

Answer of the

Securities Investor Protection Corporation

and contrivances in contravention of Section 10(b) of the

Exchange Act [15 U.S.C. 78j(b)] and Rule 10b-5 [17 CFR

940,10b1-5], in that registrant has been:

(a)

(b)

(c)

Engaging in acts, practices and courses of busi-

ness which operate and would operate as a fraud

and deceit upon customers of registrant as

deseribed more particularly in paragraphs 11

through 14 hereof;

Making untrue statements of material facts,

namely, the statements set forth in paragraphs 11

through 14 hereof; and

Omitting to state the facts specified in para-

graphs 11 through 14 hereof relating to regis-

trant’s financial condition, its lack of sufficient

capital to meet the requirements of the federal

laws and rules relating to financial responsibili-

ties of securities brokers and dealers, its mode of

operations, its secret profits from transactions in

discretionary accounts, and details of transactions

in which funds and securities are transferred

among accounts of customers on the books of reg-

istrant, which facts are material in order to make

the statements made, in the light of the cir-

cumstances under which they are made, not mis-

leading.

16. That since about May 1, 1966, registrant, as a broker

and dealer, in offers and sales of securities by use of means

and instruments of transportation and communication in

interstate commerce and by use of the mails, directly-and

indirectly has been: BS ‘|

Bee oe _

WE EAD el EF >

Answer of the

Securities Investor Protection Corporation

(a) Obtaining money and property by means of the

untrue statements of material facts as set forth

in paragraphs 11 through 14 hereof;

(b) Obaining money and prope¥ty by means of the

omissions to state material facts as set forth in

paragraphs 11 through 14 hereof, which facts are

necessary in order to make the statements made,

in the light of the circumstances under which they

are made, not misleading ; and

courses of business described in paragraphs 11

through 14 hereof, which operate and would op-

erate as a fraud and deceit upon the purchasers of

such securities.

17. That in a letter dated September 24, 1970, from the

Atlanta Regional Office of the Securities and Exchange

Commission, defendants were advised of the net capital

requirements of Rule 153-1, the bookkeeping requirements

of Rule 17a-3 and the confirmation requirement of Rule

15¢e1-4 and were further advised that according to an ex-

amination’ made of registrant’s business, it was apparently

violating these rules; but that subsequent to receipt of such

letter, registrant continued to effect transactions without

complying with the requirements of said rules.

12. That defendants Guaranty Bond Company, Inc.

H. J. Huey and B. T. Huey aided and abetted registrant in

the acts, practices and transactions set forth in paragraphs

4 through.17 hereof.

19. It was of interest to the Court that the defendants

admitted all of the enumerated violations except they

Answer of the

Securities Investor Protection Corporation

stated their disagreement with the method of computation

of the 20 to 1 capital requirement rule but submitted no

alternate method of computation even though they called

as a witness a certified public accountant who claimed to

have expertise in the field of compliance with the require-

nents of the law and those of the regulations of the Secu-

rities and Exchange Commission. The defendants admitted

that by corporate resolutions the earnings of Guaranty

Bond and Securities Corporation were diverted to its par-

ent and sole stockholders, Guaranty Bond Co., Inc. They

admitted taking secret profits as a fiduciary but had no

plans to make any restitution.

The principal defenses of the defendants were that they

were not vicious persons and that the security investigators

for the Securities and Exchange Commission should have

furnished more help to defendants in their attempt to com-

ply with the law and regulations.

Furthermore, as late as January 2, 1971, the defendants

withdrew from circulation certain advertising matter. At

the same time it solicited from its customers a discretion-

ary account authorization. The defendants did not advise

its customers as a part of said solicitation that this injune-

tion suit was pending nor that its illegal representations

previously made to them were not effective.

The defendants contend that they are entitled to another

chance. However, they admit that they cannot comply with

the capital requirements.

In addition, the defendants have as of January 2, 1971

prepared a confirmation form to be sent to their customers

confirming a sale. This form will not show, and the de-

fendants so admit, the dollar amount of the commission

charged by the defendants. Their excuse is that it is too

wai ee

Aa AGA MARRS LS ee eth DIN Bid Dik gS aS essa

o2.

Answer of the

Securities Investor Protection Corporation

difficult to compute the amount of commission. Further-

more, they contend that the confirmation form is coded

so as to refer to 33 separate formulas printed in numerical

order on the reverse side of the confirmation form. The

defendants do not attempt to explain how a layman can

determine, from the applicable formula, the amount to the

commission when it is difficult for the defendants to com-

pute same, ‘

It is obvious that the defendants cannot and will not

comply with the applicable laws and regulations. Further-

more, defendants will, unless restrained and enjoined, con-

tinue to engage in the acts and practices described here-

inbefore.

Conclusions of Law

1. That the acts and practices set forth in the preceding

Findings of Fact constitute violations of Sections 10(b),

15(b) (10), 15(e) (1), 15(e)(3) and 17(a) of the Securities

Exchange Act of 1934 [15 U.S.C. 78j(b), 780(b) (10), 780

(c)(1), 780(e)(3) and 78q(a)], Sections 17(a)(2) and 17

(a)(3) of the Securities Act of 1933 [15 U.S.C. 77q(a) (2)

and 77q(a)(3)] and Rules 10b-5, 15b10-5, 15c1-2, 15c1-4,

15e1-6, 15¢3-1 and 17a-3 [17 CFR 240.10b-5, 15b10-5, 15e1-2,

15¢1-4, 15¢1-6, 15¢3-1 and 17a-3].

2. That plaintiff is entitled to a preliminary injunction

against defendant Guaranty Bond and Securities Corpora-

tion, its officers, agents, servants, employees and attorneys,

and each of them, restraining and enjoining them from fur-

ther violations of Sections 10(b), 15(b) (10), 15(c) (1), 15(¢)

* (3) and 17(a) of the Securities Exchange Act of 1934 [15

U.S.C. 78j(b), 780(b)(10), 780(ce)(1), 780(¢e)(3) and 78q

(a)], Sections 17(a)(2) and 17(a)(3) of the Securities Act

OIE RAE SES LL MLA STORET ED NNN a PON

Dv :

Answer of the

Securities Investor Protection Corporation

of 1933 [15 U.S.C. 77q(a)(2) and 77q(a)(3)] and Rules

10b-5, 15b10-5, 15e1-2, 15c1-4, 15¢1-6, 15¢3-1 and 17a-3 (17

CFR 240.10b-5, 15b10-5, 15¢1-2, 15¢1-4, 151-6, 15¢3-1 and

17a-3], and against defendants Henry Jeremiah Huey, Jr.,

Brooks Thomas Huey and Guaranty Bond Co., Ine., their

officers, agents, servants, employees and attorneys, and each

of them, restraining and enjoining them from aiding and

abetting defendant Guaranty Bond and Securities Corpora-

tion in any further violations of said sections and rules.

/s/ lu. CLURE Morton

United States District Judge

° Answer of the

Securities Investor Protectton Corporation

EXHIBIT E

In the U. S. District Court for the

Middle District of Tennessee

Nashville Division

Securities and Exchange Commis-

mission a

Guaranty Bond and Securities Cor-

poration; Henry Jeremiah Huey, No. 5989

Jr.; Brooks Thomas Huey; and

Guaranty Bond Co., Ine., 2312

West End Avenue, Nashville,

Tennessee 37203

Agreed Order

(Entered January 29, 1971)

This cause came on to be heard on January 27, 1971,

upon defendants’ motion to amend the preliminary injunc-

tion entered herein on January 6, 1971, and plaintiffs’ appli-

cations for appointment of a Receiver for Guaranty

Bond and Securities Corporation and Guaranty Bond Co.,

Ine.; and upon consideration of said motion and applica-

tions, the record made in this cause, and arguments of

counsel; and the Court being fully advised in the premises:

1. It is ordered, adjudged and decreed that defendants’

motion be and it hereby is denied.

Answer of the

Securities Tnvestor Protection Corporation

2. It appearing to the Court that Receivership is the

only remedy that Will adequately protect the interests

of churches and other religious institutions for which

Guaranty Bond and Securities Corporation has been act-

ing as underwriter and the interests of other customers

and creditors of the aforesaid corporations, and the said

corporations concurring in the request for and agreeing

to the appointment of.a Receiver, it is ordered, adjudged

and decreed that James C. Barbour of Nashville, Tennes-

see is appointed Receiver of said corporations subject to

the submission of a good and sufficient bond in the amount

of One Hundred Thousand Dollars ($100,000.00), con-

ditioned upon the faithful performance of his duties as

said Receiver, having taken the oath required by law, and

being otherwise qualified. |

2 It is further ordered, adjudged and decreed that the

said Receiver shall take immediate custody, control and

possession of all funds, property, premises and other assets

of or in the possession or under the control of said

corporations, wherever constituted, with full power to

collect, receive, and take into possession all goods, chat-

tels, rights, credits, monies, effects, securities, lands, books

and records of account, and other papers and documents

of said corporations; to preserve and protect all such assets,

pending further order of this Court, in order to pre-

vent the irreparable loss, damage and injury to customers

and other creditors, to conserve and prevent withdrawal

and misapplication of funds and other properties entrusted

to said cotporations; and upon the Court’s approval,

to determine, adjust and protect the equities of creditors,

customers and investors whose funds and other properties

have been entrusted to or invested with said corporations.

i NE 8s I LEE BRE BES 1 Td Sorta NE OP IE OL I OY ERE RENE * OBOE GE OL LE te

titttrciievncraetaidiaaseccsrsincindd sndsric Siagbeatasissesitas

Answer of the

Securities Investor Protection Corporation

4. It is further ordered, adjudged and decreed that the

Receiver shall not surrender, sell, or otherwise dispose

of any of the assets within his care, custody, and control

or properties entrusted to him, including but not limited

to the right to sell securities for cash to meet construction

requirements, except upon notice to all parties of record

and the opportunity to be heard thereon, unless such imme-

diate disposition be required in order to prevent irrepar- .

able damage, and then only upon prior approval of the

Court.

5d. It is further ordered, adjudged and decreed that the

corporations, their officers, agents, managers and employees

be and they hereby are commanded and required to

deliver over to said Receiver possession and custody of all

funds, securities, property, premises and other assets, and

all books and records of accounts, title, documents and

other papers of said corporations, and that its officers,

agents, managers and employees be and they hereby are

enjoined and restrained from interfering with said Receiver

taking such custody, control and possession, and from inter-

fering in any manner, directly or indirectly, with such cus-

tody, possession and control by said Receiver.

6. It is further Ordered. Adjudged and Decreed that

General Insurance Underwriters, a division of Guaranty

Bond Co., Ine., be and the same hereby is enjoined from

making any disbursements except for weekly payroll checks

to those employees of General Insurance Underwriters who

are now employees of said insurance business, except that

no such payments are to be made to the defendants, Henry

Jeremiah Huey, Jr. and Brooks Thomas Huey.

— semen Tie

Answer of the

Securities Investor Protection Corporation

7. It is further Ordered, Adjudged and Decreed by the

Court that said Receiver shall have full power and author-

ity until further order of this Court:

(a) To employ, discharge and fix the compensation of

such employees as he may deem necessary and advisable

for the preservation and protection of the within estate;

(b) To acquire for cash or on credit such supplies, ser-

vices or other property as he may deem necessary aud

advisable in connection with the preservation and protection

of the said estate;

vation and protection of the said estate;

(d) To collect and receive all monies or other properties

due or to become due to the said estate, and to hold and

retain the same, subject to further orders of Court.

(e) To do such things and to incur such expenses as may

be necessary and advisable in the preservation and pro-

tection of the said estate.

(f) To institute and maintain legal action for the preser-

vation and protection of said estate upon prior Court

approval.

8 It is further ordered, adjudged, and decreed that upon

prior approval of the Court, the Receiver is authorized to

retain counsel for the purpose of representing him in this

cause.

9. It is further ordered, adjudged and decreed that all

parties, firms, corporations, partnerships and other per-

sons are hereby enjoined and restrained from instituting

or maintaining any action of any kind or character, includ-

REY —

Answer of the

Securities Investor Protection Corporation

ing but not limited to any action that might impose a lien

on the assets of the corporations, against the said corpora-

tions and the said Receiver, until further order of Court;

provided, however, that any action presently pending in

state courts is hereby restrained for sixty (60) days, after

which time judgement may be obtained if proper, but the

enforcement of said judgment is enjoined and said judg-

ment creditor is required to come in and file his claim in

this Court.

10. It is further ordered, adjudged and decreed that the

Receiver, after making an investigation of the affairs of

the said estate shall submit a recommendation to this Court

for appropriate steps to be taken to protect the diversified

interests of religious institutions for which said corpora-

tions have been acting as underwriter, and the interests of

creditors and other persons dealing with the said corpora-

tions.

11. It is further ordered, adjudged and decreed that the

defendants, Henry Jeremiah Huey,.Jr. and Brooks Thomas

Huey; without objection by them, be and they are hereby

enjoined from disposing of any of their assets without

obtaining the Court’s prior approval except for reasonable

living expense.

12. It is further ordered, adjudged and decreed that the

Receiver make publication in a newspaper of general cir-

j eulation in Davidson County, Tennessee, notifying all

) the creditors of said corporations of this Receivership, and

requiring them to file and prove their respective claims

against the corporations on or before September 1, 1971, or

they may be excluded from the benefits of this proceeding.

SL eh SRE NER SOE Not PR Rae ot

: _ 59

Answer of the

Securities Investor Protection Corporation

13. It is further ordered, adjudged and decreed that the

Court reserves the right to make and enter such further

orders or decrees, upon application of said Receiver or

otherwise, that may be necessary for the guidance of said

Receiver in his administration of the Receivership herein

established.

Entered this the 27th day of January, 1971.

/s/ lL. CLture Morton

United States District Judge

Approved for Entry

J. Cecm Pentanp

Jexnie H. Raxpo._rH

Attorneys for Securities and

Exchange Commission

Bouut, CumMines, Conners & Berry

By EpR. Davies

By Roserr P. (Tllegible)

Attorneys for Intervenors

Frank 8. Kixe :

Attorney for the Defendants '

Sedna ede aA, ERR TS

Weta teense NSF od

;

}

60:

Answer of the

Securities Investor Protection Corporation

EXHIBIT F

Tn the United States District Court for the

Middle Distriet of Tennessee

Nashville Division

Securities & Exchange Commission,

vs. Civil Action

No, 5989

Guaranty Bond and Seeurities Cor-

poration, et al.

Memorandum

(Entered February 9, 1971)

This cause came on to be heard upon the petition of the

Securities & Exchange Commission for the appointment of

a receiver for the corporations Guaranty Bond and Securi-

ties Corporation and Guaranty Bon®Co., Inc. The defend-

ants made an oral application for permission to proceed

‘r Chapter X of the Bankruptcy Act. However, they

admjtted that (1) no new capital could be obtained: (2)

their bank accounts had been applied to outstanding debts

due their bank; (5) they had no funds to pay their obliga-

tions, current or otherwise; and (4) there were no lawful

methods to obtain other funds. i

_ On denial of ‘their request for leave to proceed under

Chapter X of the Bankruptey Act, and the denial of their

motion of January 13, 1971, the corporate defendants

orally joined in the petition of the plaintiffs for the appoint-

Answer of the

Securities Investor Protection Corporation

ment of the receiver to take possession of the assets of the

defendant corporations and to wind up their affairs. These

defendants asserted to the Court that any delay in such ap-

pointment and administration would severely prejudice the

defendants and their creditors. to

The intervenors requested that the individual defendants,

Huey, be enjoined from disposing of any of their personal

“assets pending the outcome of this litigation. These defend-

ants, through their attorney, orally agreed for such injune-

tion to issue.

The testimony of the witnesses and the records of the

defendant corporations filed in this case clearly reflect that

the defendant corporations cannot pay their obligations

as they mature, cannot pay their current obligations and

that their liabilities far exceed their realizable assets and

this Court so holds.

A receiver will be appointed and, absent any bankruptey

proceedings, he will conserve, administer and liquidate the

affairs and assets of the defendant corporations. An

injunction will issue restraining the individual defendants,

Huey, from disposing of their personal assets. All creditors

and parties having elaims will be permitted, without fur-

ther order, to intervene.

An appropriate order will be prepared and entered.

This the 27th day of January, 1971.

/s/ WL. Ciure Morton

United States District Judge

= SAR IAI AR NAAN UI NS kDa AR TORRY SUE LAR a NSD ee re eae

Af ents:

Response of the

Securities and Exchange Commission

IN THE

_ UNITED STATES DISTRICT COURT

For THE Mippte District or TENNESSEE

NASHVILLE Division

: [Caption Omrttep]

(Filed: May 17, 1972)

The Securities and Exchange Commission files this

Response to Receiver’s Petition No. 22:

1. The Commission admits the allegations of Paragraph

1 of the Petition, in that the Atlanta Regional Office wrote

a letter dated February 4, 1971, to the Receiver, advising

him of the possible applicability of the Securities Investor

Protection Act (“SIPA”).

2. The Commission admits the allegations of Paragraph

~ of the Petition, in that the Atlanta Regional Office sent

information on February 2, 1971, to the Commission’s head-

quarters in Washington, D. C., on the cireumstances of

Guaranty Bond and Securities Corporation, except that it

4 denies that the Atlanta Regional Office purported to send

; “required notice” to Washington, D. C., under SIP A, and

except that the Atlanta Regional Office did not state on

; May 5, 1971, that the information might have been delayed

: in reaching the Securities Investor Protection Corporation

(“SIPC”) but mentioned the possibility to the Receiver at

a later date, perhaps as late as October 1971.

3. The Commission admits the allegations of Para-

graphs 3 and 4 of the Petition, except that it is without

(Dati oe

—e - , -

Response of the

Securities and Eachange Commission

)

knowledge or information sufficient to form any belief as to

the nature and extent of the information supplied to SIPC,

as alleged in the first sentence of Paragraph 4 of the Peti-

"tion.

- 4. The Commission admits the allegations of Para-

graphs 5 through 7 of the Petition.

5. The Commission admits the allegations of the first

five lines of Paragraph 8 of the Petition. The Commission

denies the last three lines ofthe Paragraph, in that a let-

ter dated February 10, 1972, from David Ferber, Solicitor

of the Commission, was sent to Receiver’s counsel, enclos-

ing a copy of a letter dated July 1, 1971 from Sheldon

Rappaport, Associate Director of the Division of Trading

and Markets, to Mr. Woodside, Chairman of SIPC, together

with a memorandum attached to the letter, describing the

circumstances of Guaranty Bond and Securities Corpora-

tion. Copies of this correspondence are attached hereto

as Exhibit A. The letter dated July 1, 1971 did not purport

to be the statutory notice required by Section 5(a)(1) of

SIPA and was sent at SIPC’s request following an inquiry

which Receiver’s counsel made to SIPC.

6. The Commission, as to the allegations contained in

Paragraph 9 of the Petition, admits that Guaranty Bond

and Securities Corporation was a registered broker-dealer

when SIPA took effect on December 30, 1970, and appears

to have continued to be engaged in the securities business

until at least January 5, 1971.

As to the allegations thet SIPA coverage should be

extended to customers of .uaranty Bond and Securities

Corporation, the Comn.‘ssion is of the view that SIPA-- ,

coverage should not he withheld merely because the Com-

Sivan aoe |

Se iA eee BANG EI BN LIE AD AB LE REPOS LA SE:

Didi OTA A Bhs cole BAN

ane te RS

ici ai Mame BOB E

Response of the

Securities and Exchange Commission

mission filed this action prior to the effective date of SIPA,

or because the firm was in net capital violation in 1970,

since it appears that the firm continued to engage in the

securities business until at least January 5, 1971. Action

by SIPC is necessary, however, only if it appears that the

firm will otherwise fail to meet its obligations to customers.

There has been no demonstration that the customers of

Guaranty Bond and Securities Corporation will in fact

sustain any losses. In this connection, from information

obtained from SIPC, it appears that the Receiver, as

Receivers of Guaranty Bond and Securities Corporation,

may have causes of action for damages or restitution

against either the parent, Guaranty Bond Co., Inc., or

against individual principals of the parent, which could

redound to the benefit of the customers of Guaranty Bond

‘and Securities Corporation.

7. The Commission admits as to the allegations of Para-

graphs 10 through 12 of the Petition that it has a duty

under Section 5(a)(1) of SIPA to notify SIPC that a mem-

ber of SIPC is in or approaching financial difficulty. The

Commission, however, is of the view that it is irrelevant

to whether SIPA coverage is applicable whether the Com-

mission formally advised SIPC under Section 5(a)(1) of

the Act. The Commission is of the view that notification is

not a condition precedent to coverage under SIPA and does

not constitute either authorization to or compulsion on

STPC to bring action.

8. The Commission is without knowledge or information

sufficient to form a belief as to the — of Paragraph

13 of the Petition.

sae

Response of the

Securities and Exchange Commission

9, Paragraph 14 of the Petition states a legal conclusion,

as to which the Commission takes no position at this time.

Respectifully submitted

Davip FERBER

Solicitor

Rosert E. KusHNER

Assistant General Counsel

MicuageL A. MaccHIAROLI

Attorney

Securities and Exchange Commission

500 North Capital Street

Washington, D.C. 20549

(202) 755-1170

J. Crom PENLAND

Assistant Regional Administrator

Securities Exchange Commission

Atlanta Regional Office

Suite 138

1371 Peachtree Street, N.E.

Atlanta, Georgia 30309

May 15, 1972

OLB RAY LOGIE, AE OREO IN AI

y WAT

sah A vikag a tht Sil Nn WON i AN aa MMOS Aten oA AB A see

Response of the

Securities and Exchange Commission

EXHIBIT A

February 10, 1972

W. Ovid Collins, Jr. Esq.

Cornelius, Collins, Higgins & White, Esqs.

18th Floor, Third National Bank Building

Nashville, Tennessee 37219

Re: Guaranty Bond & Securities Corporation

Dear Mr. Collins :

This is in reply to your letter of January 31, 1972.

I am enclosing a copy of a letter dated July 1, 1971, from

Sheldon Rappaport to Mr. Woodside, chairman of STPC,

together with the memorandum attached to the letter. The

letter and memorandum constitute the only reference to

the condition of Guaranty Bond & Securities Corporation

made by the Commission to STPC. As you will note from

the letter, it was sent at SIPC’s request following an

inquiry which you made to SIPC.

You ask our advice as to the proper venue of a proceed-

ing to raise the issues regarding STPC. I am sorry, but

we have not researched this question.

In considering the merits of the issues you raise, we

would appreciate your advice as to whether Guaranty

Bond and Securities Corporation did business with eus-

tomers subsequent to December 30, 1970. If so, could you

furnish us a schedule showing the customers’ names and

addresses, the securities purchased or sold, the dollar

amounts of the purchases or sales, and the present indebt-

edness owed to such customers?

Thank you very much.

Your truly

David Ferber, Solicitor

Office of General Counsel

Response of the

Securities and Exchange Commission

| July 1, 1971

Mr. Byron D. Woodside, Chairman

Securities Investor Protection

Corporation

Suite 104

955 North L’Enfant Plaza

Washington, D.C. 20004

Dear Mr. Woodside:

—Enelosed_is_the-data—you-requested concerning Guaranty

Bond and Securities Corp. (“Registrant”), a registered

broker-dealer and member of SECO. Pursuant to Com-

mission authorization the Atlanta Regional Office, on Jan-

uary 6, 1971, obtained an order in the United States

District Court for the Middle District of Tennessee enjoin-

ing the Registrant from violations of applicable financial

responsibility and bookkeeping requirements. On January

99, 1971 a receiver was appointed by the court. The Com-

mission has authorized me to notify you of these facts.

We are advised that you are already in contact with the

receiver. If we can be of further help in this matter, please

let us know.

Sincerely

Sheldon Rappaport

Associate Director

Enclosure

SUM HY

Pinta RMR

;

ne ed ee ee Se

Response of the

Securities and Exchange Commission

MEMORANDUM

Re Guaranty Bonp & Securities Corp. (8-10785)

This is a case in which a church bond dealer was operating

in violation of the net capital, bookkeeping, -confirmation

and other rules. As an underwriter of religious institu-

tional bonds, it acted in a fiduciary capacity for churches

as custodian of funds raised and made investments for

them on a discretionary basis in other securities being

underwritten by Registrant without making required dis-

closures of its adverse interests and its secret profits. It

did not disclose to churches what securities were placed

in their accounts under its discretionary authority. It

entered into firm commitments: for underwritings of large

amounts of church bonds at a time when it had insufficient

capital to meet the requirements of the net capital rule.

Guaranty Bond and Securities Corp. (“Registrant”) has

been registered with the Commission as‘a broker-dealer

since June 20, 1962. It is a SECO broker-dealer, not being

a member of a national securities association registered

with the Commission.

Registrant was primarily engaged in underwriting such

bonds through a program, referred to as Plan ITI, “which

guarantees churches the complete sale of all bonds.” Gen-

erally, under this plan, Registrant first supervises a 30

day solicitation of the church membership. Upon comple-

tion of the initial drive among members of the church, a

report was submitted to Registrant together with all the

proceeds of the bonds to be issued and the unsold portion

of the bonds. Registrant, in its underwriting contract,

agreed to sell the remaining bonds and to deliver funds

to the church for the institution’s obligations incurred in

its construction or other programs. In the meantime, Reg-

istrant acted as custodian of all funds raised through sale

of bonds, both those sold by the church and through Reg-

pe Sis ART RST AR A, - ie

- 7

Response of the

Securities and Exchange Commission

istrant’s separate efforts. Registrant’s usual form of under-

writing contract contained a clause to the effect that “the

underwriter as custodian will invest such funds in religious

institutional, bonds for the borrower (church) and, as nec-

essary, liquidate investments, make disbursements, and

deliver funds in accordance with” the agreement to pay the

churehs’ obligations under their construction programs,

ete. On the basis of this general authority, Registrant

exercised complete discretionary authority over all‘funds

received from sales of such bonds and over the churchs’

accounts, effecting transactions therein at will including

purchases and sales of bonds between the various religious

institutions’ accounts for whom it acted as underwriter.

The church customers usually were credited with only

56 interest on the funds invested by Registrant in honds

for their accounts even though many of such bonds yield

G5 to TAG, or more, and Registrant retained the interest

ne em as ineome to itself without advising the cus-

tomerschurech of the amount thereof.

Registrant received a basic service charge and cominis-

sions on transactions which were transferred immediately

to Registrant’s parent, Guaranty Bond Company, Inc.,

through a transfer account without such fees being taken

into the income account of Registrant. Parent is owned

principally by a partnership made up of H. J. Huey, T. B.

Huey and the estate of their deceased brother FE. F. Huey.

At times Registrant placed bonds in the account of its par-

ent and resold church bonds for its parent.

Registrant was licensed in 16 states, employed over 50

people and had a large volume of business including 80

underwritings of bonds having a face value of over

$15,000,000 for the year ended in May 1970.

Se ee re

hidiaic aaneehadl seni starnsininaiuaaisesn CANO OST aN

ee PON So ARN a ATER AS

Response of the

Securities and Exchange Commission

A financial inspection of Registrant as of September 30,

1970 disclosed Registrant’s financial position to be as

follows:

—

Aggregate Indebtedness $ 782,531.54

Required Minimum Net Capital 39,126.58

Under Rule 15c3-1(a) (1)

Net Capital Before Deduction on (—359,531.72)

Proprietary Securities (Deficit)

Deduction of Unrealized Loss on Open 3,127,700.00

Contractual Commitments

Net Capital (Deficit) (—3,481,231.72)

Net Capital Required 39,126.58

Additional Capital Required 3,526,350.30

Excess of Total Assets Over 116,857.35

Total Liabilities

The amount of open contractual commitments, $3,127,700.00

included in these calculations represent 100% of the

amounts of securities having no migrket value taken

by Registrant as underwriter on con ent in which it

“agrees to underwrite the purchase and/or placement” of

all bonds of the particular issue, which remained unsold and

unplaced. It does not include any amount for the addi-

tional obligation Registrant has to eventually resell bonds

it has placed in church accounts so as to provide them with

funds as needed to meet their construction projects. As of

September 30, 1970, bonds with a face amount of $8,948,200

had been placed in and were being held by Registrant for

the accounts of such issuer-customers.

On September 24, 1970, a letter from the Atlanta Regional

Office sent to Registrant and each of its officers and direc-

RLSM AAAI RE

Response of the

Securities and Exchange Commission

tors advised them of the net capital and bookkeeping

requirements of Rules 15¢3-1 and 17a-3 as well as various

other rules and of the firm’s failure to comply with such

requirements as indicated by an inspection of its records.

A written response to the Atlanta Regional Office’s letter

of September 24 was requested. A telegram, dated October

1, 1970, was later received from Registrant stating that the

firm had employed a national accounting firm to upgrade

its accounting system and in the interim the deficiencies

called to its attention were being corrected. Even though

the letter of September 24 advising the Registrant that

any further business might be deemed willful violations,

Registrant effected numerous transactions.

” On the basis of these facts the Commission’ obtained an

injunction, and a receiver.

SERRE

Dat DAE ie Ah MLE ME FAI EERO NI AME ANNE RNB Das: ey ON

District Court Opinion

IN THE

UNITED STATES DISTRICT COURT

_ For THE Mippie District or TENNESSEE

NASHVILLE Division

Civil Action No, 5989

$$$

SECURITIES AND ExCHANGE COMMISSION

vs.

Givaranty Bonp anv Securities Corporation, et al.

MrmoranpuM—No. 54

On December 22, 1970, the Securities and Exchange Com-

mission (hereinafter the ““Commission”) filed a complaint

and moved for a preliminary injunction against Guaranty

Bond and Securities Corporation (hereinafter “Guaranty”)

on the basis of alleged violations of the Securities Exchange

Act of 1934 and of the Securities Exchange Act of 1933. On

January 6, 1971, the injunction was granted, and this court

found, among other things, that Guaranty had violated the

Commission’s net capital rule by doing business (1) while

its net capital was less than $5,000, and (2) while its aggre-

gate indebtedness exceeded 2,000 per centum of it net capi-

tal, see § 15(¢)(3) of the xxchange Act, 15 U.S.C. § 780(c)

(3) and Rule 15¢3-1, 17 C.F.R. 240.15¢3-1, and that the net

capital violation had existed for a substantial period of time

prior to the filing of the complaint by the Commission. In

the period from December 22, 1970, to January 6, 1971,

Guaranty continued to do business, and prior to January 6,

handled 101 transactions during 1971. Then, pursuant to

AD Nae MPC Moai

‘ —— »

_ relief requested should be denied : (1) lack of personal juris-

73:

District Court Opinion

the Commission’s motion, a receiver was appointed by

agreed ordef entered on J anuary 29, 1971.

On May 27, 1971, the receiver made demand upon the |

Securities Investor Protection Corporation (hereinafter

“SIPC”) for protection of Guaranty’s customers under the

Securities Investor Protection Act of 1970, 15 U.S.C.

§ 78aaa, ct seq. (hereinafter the “Act”), but SIPC refused.

The Commission had not given SIPC a formal notice as

provided by §5(a)(1) of the Act that Guaranty was

approaching financial difficulty, and had taken no other

action to see that'SIPC intervened. On April 6, 1972, pur- —

suant to the receiver’s petition, an order was entered requir-

ing the Commission and SIPC to show cause why the

remedies afforded by the Act should not be made available |

in this situation. Guaranty has been registered with the

Commission as a broker-dealer under § 15 of the Securities

Exchange Act, 15 U.S.C. § 780, since June 20, 1962, and was

therefore a member of SIPC on December, 30, 1970, the date

the Act hecame effective. See § 3(a) of the Act, 15 U.S.C.

§ 78ece(a). The case’ is now before the court upon SIPC’s

response, which asserts three principal reasons why the

diction over STPC; (2) lack of ‘subject matter jurisdiction;

and (3) exclusion of Guaranty by the terms of the Act.

PERSONAL JURISDICTION

SIPC alleges that it is a non-resident foreign corporation

created by Congress and that effective service of process

van only be achieved in accordance with Rule 4(d) (7), 4(e)

and 4(f) of the Federal Rules of Civil Procedure, which in

turn would require application of Tennessee law governing

service of process on foreign corporations. SIPC asserts

that since it is not doing business in Tennessee, it is not

subject to service of process issued in Tennessee.

District Court Opinion

This contention niust he rejected. ‘The Act plainly pro-

vides that SIPC will impose assessments on its members,

collect these assessments through its collection agent, and

/ ’ Pee .

_extend protection to customers of its members. Since many

members of SIPC are located within the state of Tennessee, it

necessarily follows that the execution of these statutory ac-

tivities anticipates a continuing relationship between SIPC

and its members and customers, and the doing of these acts

within the state of Tennessee necessary to achieve the pur-

poses ‘for which the Act was conceived. The nature of this.

relationship and the protection which SIPC affords Ten-

nessee investors is sufficient in this court’s opinion to war-

rant the exereise of in personam jurisdiction consistent with

‘due process, and to be“... such that maintenance of the

suit does not offend traditional notions of fair play and

substantial justice.” International Shoe vy. State of Wash-

‘ington, 326 U.S. 310, 316 (1945). See also, McGhee v. Inter-

national Life Insurance Co., 355 U.S. 220 (1957).

The court finds this holding to be consistent with the

Tennessee long-arm statute, T.C.A. § 20-235, et seq., which

has been construed by the Tennessee courts as conferring

“ . . . jurisdiction over non-resident defendants to the

extent permitted by the due process clause,” Darby—v.

Superior Supply Co., 224 Tenn. 540, 458 S.W.2d 423, 426

(1970), and in accord with this circuit’s interpretation of

that statute’s permissible breadth under the due process

clause of the Fourteenth Amendment. See King v. Hailey

‘Chevrolet, 462 F.2d 63 (6th Cir. 1972); Southern Machine

Company v: Mohasco Industries, Inc., 401 F.2d 374 (6th

Cir. 1968). Certainly it can be said that “. . . Tennessee

has an—interest in resolving the conflict at issue... .”

Southern Machine,Company v. Mohasco Industries, Inc.,

supra, at 384.

District Court Opinion

Suspsect MatTrer JURISDICTION

SIPC asserts that although by §3 of the Act it is made

subject to and granted all the powers conferred upon a non-

public corporation by the District of Columbia Non-Profit

‘Corporation Act, and is granted additional powers under

subsection (b) to sue and be sued in any court, state or fed-

eral, there is a clear congressional mandate that enforce-

ment actions against SIPC must be brought where its

principal office is located. This assertion is based upon

the fact that §7(b) provides that in the event of the refusal

of SIPC to commit its funds or otherwise to act for the

protection of customers of any member, the Commission

may apply to the district court of the United States in which

the principal office of SIPC is located for an order requir-

ing SIPC to discharge its obligation under the Act, and

that had the Commission elected to seek enforcement in this

case, the action would have to have been brought in Wash-

ington, D. C., the location of the principal and only office of

SIPC.

For this reason, SIPC ‘asserts that the court lacks sub-

ject matter jurisdiction to adjudicate the relief sought. The

court finds this contention without merit, for the effect of

such a proposition would not only be to substantially frus-

trate a principal goal of the Act—protection of publie

investors, but would also render meaningless the language

of §3(b)(1) which confers upon SIPC the right to sue and

be sued in any court, state or federal. Had the instant

proceeding been instituted in this court by the Commission

rather than the receiver, then under §7(b) of the Act dis-

missal of the action for improper venue if not lack of sub-

ject matter jurisdiction might logically be required. How-

ever, the fact that the receiver's enforcement action here is

of the same type which, under §7(b), the Commission may

“7

District Court Opinion

institute in the district court coterminous with the locale of |

SIPC’s principal office does not compel the conclusion that

the receiver must do likewise, nor that district courts other

thant those of the District of Columbia lack subject matter

jurisdiction over claims arising under the Act. If substance

and meaning are to be given to the Act and to the legisla-

tive goal of investor protection, then the default or neglect

of the Commission to institute enforcement proceedings

under §7(b) should give rise to a similar cause of action

by a receiver in behalf of a member’s customers. When

such an occasion arises, § 7(b) must be read in pari materia

with §{3(b)(1) so as to provide a forum of practical utility

to the parties involved and which can give meaningful effect

to the Act as a whole in the protection of SIPC’s members

and their customers located throughout the country.

Since the jurisdictional interpretation sought by SIPC

would, in severely limiting access to the courts; run counter

to these considerations, the court finds that tlie provisions

of §7(b) do not limit this court’s power to adjudicate an

enforcement action brought by a receiver of an insolvent

member of SIPC.

Exc.usion oF GuARANTY UNDER THE AcT

._ SIPC contends that the application of the Act to this

ease ‘would be to give it an unlawful retroactive effect.

There is no dispute that. the Act was intended to operate

prospectively only. As stated by the court in Lohf v. Casey,

330 F. Supp. 356, 358 (D. Colo. 1971), aff’d. 446 F.2d 618

(10th Cir. 1972):

: “... it is equally clear that Congress expressed an

intention of refusing to make the Act retroactive.

The record is replete with comments to that effect,

; the most cogent example being the report of the

Committee on Interstate and Foreign Commerce:

DPA NG SAE ROTO OS SA ER RTE ales LIE Et

, nd

17 :

District Court Opinion

“Tt is the clear intention of your committee that

SIPC assume no liability for firms either in net

capital violation, in liquidation, or in bankruptcy

at the time of creation of SIPC. H. R. Rep. No.

1613, 91st Cong., 2nd Sess. 4 (Oct. 21, 1970), re-

printed in 3 U.S. Code Cong. & Admin. News ‘70

at 5268.’

“This language is frequently echoed in the debates

on this bill, and it seems clear that Congress did

not intend the bill to operate retroactively.”

As further evidence of the scope of coverage envisioned

by Congress, Representative Moss, one of the proponents of

the Act and a member of the Conference Committee stated:

“This is not anticipated as bailing out those firms

or their customers. This would be outside the scope

of this bill. This bill does not cover retroactively.”

116 Cong. Ree. 39,362 (1970).

Notwithstanding the prospective provisions of the Act, .

there remains the problem of whether the relief sought

here would constitute a retroactive application. The Act

provides that the rights of claimants are fixed as of the

“filing date”. In explanation of this term, §5(b) (4) (B)

provides:

“(B) Filing date—The term ‘filing date’ means

the date on which an application with respect to any

debtor is filed under subsection (a)(2); except that

if—

(i) a petition was filed before such date by or

against the debtor under the Bankruptey Act, or

(ii) the debtor is the subject of a proceeding

pending in any court or before any agency of the

United States or any State in which a receiver,

trustee, or liquidator for such debtor was

appointed which proceeding was commenced

before the date on which such application was filed,

vi thee aaa a as ee. |

A RN oe

;

District Court Opinion

then the term ‘filing date’ means the date on

which such petition was filed or such proceeding

commenced.”

In terms of the instant proceeding, a receiver was not

appointed until January 29, 1971. SIPC contends, however,

that this receivership was merely an ancillary action taken

pursuant to the injunction proceeding which was com-

menced on December 22, 1970, eight days prior to the Act’s

effective date. Although § 5(b) (4) (B) (ii) is rather equivo-

eal, the court is inclined to agree with SIPC that the

injunction proceeding commenced on December 22, 1970,

determined the filing date by reason of the receiver subse-

quently appointed. Furthermore, there is another per-

suasive factor present which compels the same conclusion.

The injunction sought by the Commission was based in part

upon the failure of Guaranty to meet the net capital

requirements of Rule 15¢3-1, 17 C.F.R. 240.15¢3-1. As pre-

viously reflected by the legislative history, the Act was not

intended to cover firms in such violation prior to December

30, 1970. . This fact, coupled with the inescapable conclu-

sion, drawn from evidence precipitated by the injunction

proceeding, that Guaranty was hopelessly insolvent prior

to December 30, 1970, persuades the court that to grant the

requested relief would be a retroactive application of the

Act and a clear frustration of legislative intent. Therefore,

the court holds that customers of Guaranty are not entitled

to protection under the Act, and it is hereby ORDERED

that STPC be dismissed as a party to this cause.

L. Ciure Morton

L. Clure Morton

United States District Judge

Order No. 55

IN THE

UNITED STATES DISTRICT COURT

For tHE Mipp.e District OF TENNESSEE

NASHVILLE Division

Civil Action No. 5989

SECURITIES AND EXCHANGE ComMMISSION

vs.

Guaranty Bonp AND SecuritiEs CoRPORATION, et al.

(Entered February 8, 1973)

The Memorandum filed in this cause on January 10,

1974, dismissing Securities Investor Protection Corpora-

tion (hereinafter “SIPC”) as a party is amended as

follows:

Said Memorandum constitutes the entry of a final judg-

ment as to SIPC in view of the fact that the court spe-

cifically finds that there is no just reason for delay for

the entry of a judgment as to this defendant. In view of

the fact that the Memorandum is serving both as a memo-

randum and as an order, this amendment constitutes both

a determination of the fact that there is no just reason

for delay and an express direction for entry of the judg-

ment as provided in Rule 54(b), Federal Rules of Civil

Procedure,

; Js/ L. CLURE MORTON

United States District Judge

Ye Se

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nah is ise Smal AS Se

PRO a Saale saad 8 BPE DS at E08

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Pre

- 8&0

Court of Appeals Opinion

No. 73-1451

UNITED STATES COURT OF APPEALS

For THe Sixtu Circuit

> Eee

Securities ann ExcHANGE CoMmMIssIon,

Appellee,

vs.

Guaranty Bonp anp Securitirs CorP., FT AL.,

Defendants,

James C. Barsour, Receiver,

Appellant.

AppeaL from the United States District Court for the

Middle District of Tennessee, Nashville Division.

—SEE- a

Decided and Filed April 23, 1974.

Before: Pamutrs, Chief Judge CeLeprezze and MILLER,

Circuit judges.

Mner, Circuit Judge. Guaranty Bond and Securities

Corporation was registered with the S.E.C. as a broker and

dealer in securities as required by Section 15(b) of the

Securities Exchange Act of 1934. As part of its business,

it promoted the sale of church bonds. On December 22,

1970, the S.E.C. filed in the court below a complaint against

Guaranty alleging net capital violations contrary to the

federal securities laws, including Section 15(c)(3) of the

Securities Exchange Act, 15 U.S.C. 780(c)(3). Injunctive

relief was sought against the alleged Violations.

The district court, finding that Guaranty had tiolated the

S.E.C.’s net capital rule and that such violation had existed

--—

Court of Appeals Opinion

for a substantial period of time prior to the filing of the

complaint by the S.E.C., granted a preliminary injunction.

The court further found that between the filing of the com-

plaint on December 22, 1970 and the granting of the injunc-

tion on January 6, 1971, Guaranty had continued to engage

in substantial business, handling 101 transactions after the

effective date of the Act creating the Security Investor

Protection Corporation. On application of S.E.C., a re-

ceiver was appointed for Guaranty to take charge of all of

its assets subject to the further orders of the court.

On March 31, 1972, the receiver filed a petition for an

order directed to the S.E.C. and the Securities Investor Pro-

tection Corporation requiring each of them to show cause

why S§.I.P.C. should not .be required to intervene in the

action and afford to the customers of Guaranty the benefits

of the Act. The show cause order was issued accordingly

and both S.E.C. and S.I.P.C. responded. The court, without

an evidentiary hearing, filed its memorandum opinion in

which it found the Act (S.I.P.A.) was inapplicable to cus-

tomers of Guaranty for the reason that Guaranty was

insolvent and in financial difficulties before the effective

date of S.I.P.A. To hold otherwise, it was said, would be

to give the Act a forbidden retroactive effect. The court

accordingly ordered that S.I.P.A. should be dismissed from

the action. This order was certified as a final judgment for

purposes of appeal.

The Security Investor Protection Act was enacted in

response to the need to protect the customers of securities

brokers and dealers which might fail, thereby jeopardizing

the cash and securities that customers had left on deposit

with the firm! S.1.P.A. accordingly created the Securities

1. The legislative history shows the purpose of the S.I.P.A. ,

The serious and persistent financial problems besetting the

securities industry in recent months have led to the voluntary

ene P Me rarmneniemonetsenios hist vmsiiiissce, 0

eles Ree Se Ce ee ed eas %

82 .

Court of Appeals Opinion

ee ere. oe th Cer Seetat |

Investor Protection. Corporation as a “non-profit corpora-

tion,” not designed tto “be an agency or establishment of the

United States Government,” but rather to be “a member-

} ship corporation,’” consistent with the self-regulatory

: nature of the securitties industry. 15 U.S.C. 78 eee (a). The

‘ S.LP.C.’s role is primarily one of consultation and coopera-

: tion with the self-regulatory organizations which remain

subject to the feder-al securities laws and the rules of the

S.E.C. By mandatimg membership in the S.I.P.C. for cer-

tain members of the: securities industry and by granting the

S.I.P.C. general asscessment authority over the members in

order to establish am S.1.P.C. fund, Congress accomplished

its intention that the cost of providing protection to cus-

liquidations, merrgers, receiverships or, less frequently, bank-

ruptcies of a sutbstantial number of brokerage houses. Such

: failures may leaid to loss of customers’ funds and securities

; with an inevitablle weakening of confidence in the U. S. secu-

rities markets. ‘Such lessened confidence has an effect on the

entire economy... Whatever other steps must be taken to

improve these coonditions, one objective of the bill, as reported,

3 is to provide inwestors protection against losses caused by the

y insolvency of their broker-dealer. The need is similar, in

< many respects tco that which prompted the establishment of

the Federal Deposit Insurance Corporation and the Federal

Savings and Lozan Insurance Corporation.

4 U. S. Code Congressiional and Administrative News 5255 (1970).

paksanrakrdlcs

2. The members of S.I.P.C., as defined by 15 U.S.C. Sec. 78 ccc

(a) (2), are:

(A) all persorns registered as brokers or dealers under sec-

tion 780(b) of tthis title, and

(B) all persons who are members of a national securities

exchange,

ed tM P 5d as MR TIN aL 8 MPH adc

other than persons whose business as a broker or dealer consists

exclusively of (i) the distribution of shares of registered open end

investment companies ‘or unit investment trusts, (ii) the sale of

variable annuities, (iii)) the business of insurance, or (iv) the busi-

ness of rendering investtment advisory services to one or more regis-

tered investment compainies or insurance company separate accounts;

Court of Appeals Opinion

tomers under S.1.P.C. was to be borne by the securities

industry itseif.'

Under 15 U.S.C. See. 78 eee (a)(1), if the S.E.C. or any

self-regulatory organization believes that a broker or dealer

subject to its regulations in, or approaching, financial diffi-

culty, it must notify immediately the S.I-P.C. If the S.LP.C.

determines that a member broker or dealer has failed or is

in danger of failing to meet its obligations to customers, it

is authorized to seek a decree in an appropriate court

adjudicating that the customers of a member of §.1.P.C. are

in need of the protection of the Act. 15 U.S.C. See. 78 eee

(a)(2). Upon so finding, the district court shall grant the

decree and appoint a trustee for the liquidation of the busi-

ness and an attorney for the trustee. The objectives of the

proceeding, in addition to operating the business for a

limited purpose, completing the open contractual commit-

ments of the dealer, enforcing rights of subrogation and

liquidating the business of the dealer, are “as promptly as

possible” (1) to return specifically identifiable property to

the customers of a firm, (2) to distribute the “single and

separate fund,” and (3) to pay to customers monies

advanced by S.LP.C. 15 U.S.C. 78 fff(a). To provide for

prompt satisfaction of the net equities of the dealer’s cus-

tomers, 8.I.P.C. must advance to the trustee such monies as

may be required to satisfy the full claims of each customer

not to exceed $50,000. 15 U.S.C. 78 fff(f).

3. S.LP.C.’s first responsibility under the Act was to establish a

fund which would consist of all amounts received by S.1.P.C. and from

which all expenditures would be paid. 15 U.S.C. Sec. 78 ddd(c). If

the fund should become insufficient for the purposes of the Act, the

S.E.C. is authorized, if necessary for the protection of the customers

of brokers and dealers and for the maintenance of confidence in the

United States securities markets, to issue notes under certain con-

- ditions to the Secretary of the Treasury in an amount up to one

billion dollars, which then may be lent to S.I-P.C. 15 U.S.C. 78

ddd (g).

eT. |

Ie etal ink SARE AIA NEES Foo Ee Ste

Dice bea CLR Be

Court of Appeals Opinion

If S.L.P.C. refuses to act, the S.E.C. is authorized by 15

U.S.C. 78 ggg(b),* to apply to the court for an order requir-

ing the 8.1.P.C. to discharge its obligations under the Act.

The present appeal involves a unique situation. The

appellant, as mentioned earlier, urges, contrary to the dis-

trict court’s decision, that the Act is applicable to Guaranty

Bond. The S.E.C. agrees with the appellant’s contention

that the Act is applicable, but challenges the court’s decision

that the receiver has standing to petition the court to apply

the Act. The S.L.P.C. agrees with the district court as to

the inapplicability of the Act but challenges, along with the

S.K.C., the receiver-appellant’s stendile to obtain compli-

ance with the Act.

The S.1.P.A. was effective on December 30, 1970. In two

cases, Lohf v. Casey, 330 F.Supp. 356 (D. Colo. 1971), aff’d.

466 F.2d 618 (10th Cir. 1972) and Bohart-McCaslin Ven-

tures, Inc. v. Midwestern Securities Corp., 352 F.Supp. 937

(N.D. Texas 1973), courts have held that S.I.P.A. was not

intended to apply to a broker-dealer who had failed prior

to that date. The district court in Lohf, supra at 358 stated:

“.. it is equally clear that Congress expressed an

intention of refusing to make the Act retroactive:

The record is replete with comments to that effect,

the most cogent example being the report of the Com-

mittee on Interstate and Foreign Commerce:

4. 15 U.S.C. 78 ggg (b) provides that:

In the event of the refusal of SIPC to commit its funds

or otherwise to act for the protection of customers of any

member of SIFC, the Commission may apply to the district

court of the United States in which the principal office of

SIPC is located for an order requiring SIPC to discharge its

obligations under this chapter and for such other relief as the

court may deem appropriate to carry out the purposes of this

chapter.

As mentioned above, this section is hardly couched in terms of

exclusivity—a feat easily accomplished had it been the intent of

Court of Appeals Opinion

‘It is the clear.intention of your committee that

SIPC assume no liability for firms either in net

capital violation, in liquidation, or in bankruptcy

at the time of creation of SIPC. H.R. Rep. No.

1613, 91st Cong., 2nd Sess. 14 (Ovt. 21, 1970), re-

printed in 3 U.S. Code Cong. & Admin. News ’70

at 5268.’

This language is frequently echoed in the debates on

this bill, and it seems clear ghat Congress did not

intend the bill to operate retroactively.”

Congress seemed to be concerned that S.1.P.C. not be

used to compensate customers of members firms of the

New York Stock Exchange which “have closed their doors

and begun liquidation,” when the Exchange had not ad-

vanced money from its existing trust fund to. protect the

customers of those firms. As mentioned earlier in the Lohf

quote, the Committee Report did use very broad language

when it stated that coverage be withheld from firms “either

in net capital violation, in liquidation, or in bankruptcy at

the time of the creation of S.I.P.C.” H.R. Rep. No. 91-1613,

91st Cong., 2d Sess. p. 14 (1970). The meaning of this

broad language was subsequently clarified by Representa-

tive Moss, sponsor of the Bill, on the floor of the House,

when he stated:

“Finally, we have been concerned all along with the

problem of providing protection to the customers of

firms that might fail before enactment of the bill into

law. We early 5 this possibility but we

have specifically eclined to make the bill retroactive

in its application. The bill is prospective from the

date of its enactment.” [emphasis supplied] 116°

Cong. Ree. 39350-39351, 12-1-70.

Congress, lacking.precise information on the condition of

the industry, was concerned with the impact that S.LP.C.

pitaeReadi nd Mt Ee RTS

Court of Appeals Opinion

coverage might have on the Treasury. The losses that had

already been experienced by the industry were regarded by

Congress as the industry’s responsibility. S. Rep. No. 1218,

9ist Cong. 2d Sess. 6 (1970); H.R. Rep. No. 91-1613, 91st

Cong., 2d Sess. 14 (1970).

Clearly to apply S.I.P.C. to a firm that was bankrupt

prior to the Act would be to give the Act a retroactive ap-

plication that runs counter to the Act’s clear purpose as

reflected by its legislative history. However, application of

the Act to Guaranty would not be in our view a retroactive

application. “A statute is not rendered retroactive merely

because the facts or requisites upon which its subsequent

action depends are drawn from a time antecedent to its

enactment.” Cox v. Hart, 260 U.S. 427 (1922). The time

period of the financial difficulties of the broker-dealer bears

more on the status of the broker within the meaning of the

Act than upon the issue of retroactivity.

The court in Lohf found the absence of business activity

subsequent to the effective date of the Act as determinative

of the non-coverage issue when it stated: :

However, it is apparent that plaintiff was not con-

ducting its business as a broker or dealer at the

effective date of the Act. The business was in the

jurisdiction of the bankruptcy court, and the day to

day decisions were being made by the trustee. We

cannot consider plaintiff then to be a “broker or

dealer,” whether registered or not, as contemplated

by the Act. It makes no difference for these pur-

poses that plaintiff’s registration had not been of-

fically terminated, and thus the automatic member-

ship in the Securities Investor Protection Corpora-

tion may have continued in form. It could not be

expected that the Act could be applied to firms which ~

had already gone out of business. Plaintiff thus did

not have the status of a broker or dealer for the pur-

poses of the Act. 466 F.2d at 620.

Lb iM pana bobo ANT a OD OTS A NEL

Court o; Appeals Opinion

The district court in Bohart-McCaslin Ventures, Inc.,

supra at 940 made a similar determination when it stated:

For purposes of determining coverage under the

Act, this Court discerns no legal difference between

a firm in bankruptcy and a firm in the financial and

legal condition which Midwestern suffered prior to

the effective date of the Act. Midwestern, prior to the

effective date of the Act, had ceased to be a broker-

‘dealer in\any real sense of that terms and has not

resumed the normal activities of a broker-dealer even

at the present time.

hese determinations are not applicable to Guaranty

since it actually conducted a substantial business after the

effective date of the Act. In light of the purposes of the

Act, the 101 transactions conducted by Guaranty after

the effective date are sufficient, we believe, to qualify

Guaranty’s customers for the protection provided by the

Act. As the Tenth Circuit stated in Lohf concerning the

coverage of the Act:

We must take this to mean firms or persons which

were actually in business in the usual sense at the

critical date were the “brokers or dealers” referred

to. Congress was willing to extend coverage to then

financially weak institutions and those of unknown

strength, but the line was drawn to exclude those

which had failed and were thus in fact not brokers

or dealers. Supra. at 621.

We hold that Guaranty, though financially weak, was, in

fact, a broker or dealer at the effective date of the Act.

The court below focused on the filing date of the action

against Guaranty by the S.E.C. which was prior to the

effective date of the Act. However, the S.E.C. did not

, oa

a wm id

sia ha

7 P00 Risen SAG" ON Pe le

ws i

’ ~

y / 88

Court of Appeals Opinion

seek’ to force (iuaranty into receivership until after the

effective date Therefore, the filing of the original S.E.C.

action did not prevent Guaranty from conducting normal

business after the effective date of the Act and thus quali-

fying as a broker-dealer.

The S.LP.C. and the S.E.C. challenge the receiver's

standing to bring an action to compel either of them to act

under the 8.1.P.A. The court below held that the provi-

sions of the Act “do not limit this ¢ourt’s power to adjudi-

cate an enforcement action brought by a receiver of an

insolvent member of S.LP.C.” We agree. The appellees

point to an absence of OXPTeSS, language providing for an

enforcement action by the customers of a securities com-

pany or their representatives as prohibiting such an action.

We are persuaded, however, ‘i the lack of express lan-

guage of exclusivity in prov iding for an enforcement action

by the S.F.C., coupled with a general provision allowing

for suits against the S.1.P.C.,° evidences an intent by Con-

gress that the statute should not be 4 narrowly construed

as the appellees urge.

The customers of Guaranty have a definite interest in

the application of the S.I.P.A. to the present litigation. The

receiver, the representative of the customers of Guaranty,

seeks to have the S.I.P.C. meet its obligations to the eus-

tomers under the broad purposes of the S.I.P.A. Appar-

ently, the S.I.P.C. has not attempted to obtain an adjudiea-

tion of the necessity for providing the protections of the

S/T.P.A. to the customers of Guaranty. Nor has the S.E.C.

moved to compel the S.1.P.C. to meet its obligations. We

i not believe that Congress intended under such cireum- .

5-15 U.S.C. 78 cce (b) (1) provides that the S.LP.C. has the

power “to sue and be sued, complain and defend, in its corporate

namé, through its own counsel, in any _— ‘State or Federal.”

ENOL 104 E PR, A ALU PG ELMO HE

ee . er nis ean

Court of Appeals Opinton

stances to leave the customers of securities firms without

remedy under the S.LPLA. Furthermore, despite the

appellees urgings, we find no constitutional® or statutory

prohibition’ to the maintenance of an enforcement action

by the receiver in this case." ee

The judgment of the district court holding the S.LP.A.

inapplicable and dismissing the action as to S.LP.C. must

therefore be reversed for the reasons stated herein. Since

we reject the premise on which the S.LP.C. was dismissed

as a party to the action—inapplicability of the S.T.P.A. to

a company of Guaranty’s status—the action is remanded to

the district court for processing consistent with this opin-

ionvand specifically to determine and enforce any rights of

Guaranty’s customers under the 8.1.2.4.

6. To meet the “case or controversy” requirement of the Constitu

tion, the Supreme Court has formulated a standard for ascertaining

those persons with “standing” for maintaining am action in a federal

court. The standard as defined by the Supreme Court in Sierra

Club y. Morton, 405 U.S. 727 (1971), is that one must have suffered

“injury in fact” and the injury must be an “interest arguably within

the zone of interests to be protected.” ‘The customers of Guaranty

and their representative clearly. meet this broad standard. See also

Data Processing Service vy. Camp, 397. U.S. 150.

7. As mentioned earlier, there are no terms of exclusivity of

enforcement in the statute. :

8. The S.LP.C. also attacks the jurisdiction-—both subject mat-

ter and in personam—of the district court to entertain this action.

We find that the district court sufficiently disposed of these conten-

tions in its memorandum opinion.

H a EOE I presses area vise RL RPO ELIE MS LTE LIE IL OL, CIEE ELE AES, PPT n > Eg Do ANTS ENT i A IE Ole EM I eR,

FILED

. ApriL 23, 1974

James wA. HiagGens, Clerk

Court of Appeals Judgment

UNITPED STATES COURT OF APPEALS

For THE SixtH Circuir

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

vs.

GuARANTY Bonp anp Securtriks Corporation, Mr. Ax.,

Defendants,

JaMes C. Barpoun, ReEcEIVER,

Appellant.

EE ee

Before: Prucuips, Chief Judge, CeLepRezze and MULLER,

Circuit Judges.

JUDGMENT

AppreaL from the United States District Court for the

Middle District of Tennessee.

THis CausE came on to be heard on the record from the

United States District Court for the Middle Distriet of

Tennessee and was argued by counsel.

On ConsivErRATION WHeEREOF, It is now here ordered and

adjudged by this Court that the judgment of the said Dis-

acne eee Y

Court of Appeals Judgment

trict Court in this cause be and the same is hereby reversed

and the case is remanded for further proceedings.

It is further ordered that Appellant recover from Appel-

lee, the costs on appeal, as itemized below, and that exeeu-

tion therefor issue out of said District Court.

Entered By Orper oF THE CourT

Jonn P. HEHMAN

Clerk

A True Copy.

Attest:

John P. Hehman, Clerk

Issued as Mandate:

Costs To be recovered by

Appellant

Filing fee .2..0...02... $25.00

Printing... $ —

Total $25.00

SUPREME COURT OF THE UNITED STATES

No. 73-2055

EEL — ae

Securitirs Investor Protection Corporation,

Petitioner,

James C. Barsour, et al.

—_—EE ee

OrpeR ALLow1NG CerTIorARI. Filed October 21, 1974.

The petition herein for a writ of certiorari to the United

States Court of Appeals for the Sixth Circuit is granted,

limited to the following questions:

“1. Whether customers of a Member have an implied

private right to action to compel SIPC to meet its alleged

obligations to them under the Act, despite Section 7(b)

thereof which grants that right only to the Securities and

Exehange Commission?

“2. If such a right of action can be implied, whether a

receiver of a Member has standing to maintain it?”

wee

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