# Appendix — Securities Investor Protection Corp. v. Barbour > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0415%3A01 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1975 - **Citation:** 421 U.S. 412 ## 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 ll Pee eT ee ey ee ee en ee eee il LIST OF RELEVANT DOCKET ENTRIES December 22, 1970 January 6, 1971 January 21, 1971 January 29, 1971 February 9, 1971 March 31, 1972 April 6, 1972 April 19, 1972 May 17, 1972 May 17, 1972 June 7, 1972 January 10, 1973 February 6, 1973 February 8, 1973 February 9, 1973 April 23, 1974 July 20, 1974 October 21, 1974 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 ee SECURITIES AND EXxcHANGE CoMMISSION VS. GuaRANTY BonpD AND SECURITIES CORPORATION, et al. Se (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. Pi 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, » 3 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 ek Free eS ate Rye eae 4 SEC Complaint Count Three 6. During the period from approximately May 1, 1969, to the date hereof, registrant, as a securities broker and dealer, aided and abetted by the other defendants, has made and is making use of the mails and means and instruments of interstate commerce to effect transactions in, and to induce the purchase and sale of, securities (other than com- mercial paper, bankers’ acceptances, or commercial bills) otherwise than on a national securities exchange, by means of manipulative, deceptive and other fraudulent devices and contrivances, practices and courses of business as specified in paragraphs numbered 7 and 8 hereof, in con- travention of Section 15(¢)(1) of the Exchange Act [15 U.S.C. 780(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 . ‘ nach Scat AR TNO EEO Sit, RELL EAL LONE AD 5 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. ‘ 4 6 SEC Complaint Count Five 10. During the period from approximately May 1, 1966, to the date hereof, registrant has been and is a securities broker and dealer engaged in the business of effecting transactions for the accounts of others and for its own ac- count and, as such, aided and abetted by the other defend- ants, has made and is making use of the mails and of means 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 7 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 AFA A INT 6S ee TCS BS TGS VRE CS ~ a s zB j 5 é a & é K ; = 5 Z = & Ms Fs > Fa sogiat,} Oe 8 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 9 SEC Complaint of such bonds in the accounts of other churches and re- ligious institutional issuers for which it was and is acting as underwriter and for which it is holding funds as cus- todian by recording buy and sell transactions in securities on registrant’s books between various of such religious institutions; that availability of funds for a particular issuer’s construction or other program could be dependent upon registrant’s ability to dispose of 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; OO SR CN ey Ce Ea RRR ie Map NATION ent At Beerresinccse come LL RER NP LVR LY RAE Ne es Deh neh Dic; vita tailed: SANA Ste woe 10 SEC Complaint registrant and the other defendants as fees, commissions and other remunerations; and the use by registrant of such proceeds in completing other underwritings in which it and the other defendants would receive substantial fees, com- missions and other remunerations. Count Six 15. During the period from about May 1, 1966, to the date hereof, registrant, as a securities broker and dealer. aided and 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 (c) Omitting to state the facts specified in paragraphs 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- J LBC RORRRREReteRR IEE aa er recanomertE PERC REE HBAS MP PH NOT SOIR ERS AN BIS: 11 SEC Complaint tions in which funds and securities were trans- ferred between accounts of customers on the books of registrant, which facts were material in order to make the statement made, in the light of the 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. PEEL ce Mile a PT eS a “v Bits, aie 12 SEC Complaint 17. Defendants will unless restrained and enjoined con- tinue to engage in the acts and practices set forth in this complaint. Wherefore, the plaintiff demands: A. A preliminary injunction and a final judgment enjoining defendant Guaranty Bond and Securities Corpo- ration, its officers, agents, servants, employees and attor- neys, and each of them, from, and defendants Henry Jeremiah Huey, Jr., Brooks Thomas Huey and Guaranty Bond Co., 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 13 SEC Complaint (3) Making use of the mails and means and instru- mentalities of interstate commerce to effect trans- actions in, and to induce the purchase and sale of, securities (other than commercial paper, bankers’ acceptances, or commercial bills) otherwise than on a national securities exchange by: (a) (}) 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. Te ke tage ee | aaa aeaer em eacrenarre scart RS PE AIS I GO LE OD OD eg a Pa AN OL CRIES re axe 2 Ng SOR ne te Pe eee Ee 2 (+) 14 SEC Complaint Effecting transactions in, or inducing the purchase or sale of, any security (otherwise than on a national securities exchange) in which registrant. while a nonmember broker or dealer, shall 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 15 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 See | ey me RR ao at PTE a A q Bd - oe 3 @ ¢ P| 16 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 17 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 18 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 19 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. ES Oo ERR NE ERO MACS TREE 20 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 21 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 22 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 y Receiver’s Petition No. 22 ‘> r 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 : 4 * e : BEY (2 15 SOP VSR BO IE LL BY OMT NOON | MEE LESS EARNER I! fe (I eee eet news = nae 24 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 Fe Prteciscnsiicxs: Smo ee wat 26 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 27 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 ~ 28 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. 9; 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. i i q By 30 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, Sle is EN ptr To Te * Sida Fs Sie WR Ge ee Satied: is alia wie — siya Rasch sig ee | QOL AE ABO LBD EL AE AEB ALPE PEE ALDARA AL BAB af 32 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. 4 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 33 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 34 ee 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. oe 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 35 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 36 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 38 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 39 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 4 3 t H ; 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 41 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 4 B 3 RY = 5 2 Zz 2 4 a 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 44 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, 46 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 47 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 48 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 49 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 > 50 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 (c) Engaging. in the transactions, practices 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 56 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 57 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; (c) To enter into any contracts incidential to the preser- 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 — 5 ? $ 3 : of 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 ia : _ 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 i Frank 8. Kixe : Attorney for the Defendants ' Sedna ede aA, ERR TS Weta teense NSF od 4 % t % ; } % * r 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- 61 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 - , - 63 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 | oh 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 64 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 65 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 ili : ne * tare gisd Gy va a adel © eatiz acs Seo Fel ir hie sah A vikag a tht Sil Nn WON i AN aa MMOS Aten oA AB A see 66 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 a 67 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 H @ ~ 4 ; é 3 4 4 9 2 : j , 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 69 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 70 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 71 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. a 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. 74 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. 68 ' 7 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 : | 76 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 peti [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0415%3A01. Public record. Not legal advice.