Petition for Writ of Certiorari — Securities Investor Protection Corp. v. Barbour

Petitioner,

v.

JAMES C. Barspour, as RECEIVER FOR Guaranty Bonp AND

SECURITIES CORPORATION AND GUARANTY Bonp Company, INC.,

Respondent,

and

SECURITIES AND EXCHANGE CoMMISSION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SIXTH CIRCUIT

TuHeoporE H. Focut

General Counsel

Securities Investor Protection

Corporation

900 Seventeenth Street, N.W.

Washington, D.C. 20006

Attorney for Petitioner

Of Counsel:

Wirrep R. Caron

Associate General Counsel

Kevin H. Bett

ECO — st

P+ ieDe

SE Jot 2

IX THE ao

Supreme Court of the United States |

OCTOBER TERM, 1973 :

No. ,

* 73-2055 :

Securities Investor Protection Corporation, ;

SEER URE RS re Met eae ter eas

athens oe aha acta

PIES BR

RAEN Vays

Bs

: ny ne eT es Bee

INDEX

Opinions Below

Jurisdiction

Questions Presented .................

Constitutional and Statutory Provisions Involved

woeeee

Statement of the Case 20.........c.eeeeeeeeeeeeceeeeceeeeeeeeeceeeeeeeees

Prior Critical Proceedings —...000000.000.-22 eee eee

Receiver’s Enforcement Proceeding

District Court’s Opinion

Court of Appeals’ Opinion -2.0.0.222...2.ee eee eeeeeeeeeeeeees

Summary of the Act

Reasons for Granting the Writ ..

I—The Proper Construction of Section 7(b) of the

Act is an Important Novel Federal Question

Which Should be Settled by this Court and

Which the Court of Appeals Decided in a Way

in Conflict With Controlling Principles Estab-

lished by Decisions of this Court

A. Section 7(b) is Critically Important to the

Proper Implementation of the Act, to the

Securities Industry, and to the Commission’s

Responsibility to Enforce the Federal Securi-

ties Laws

B. The Court of Appeals Seriously Miscon-

strued Section 7(b) by Failing to Apply

Principles of Construction Firmly Estab-

lished by this Court

oo w~anncsct wo er

—

w

13

13

16

PAGE

11—The Court of Appeals’ Summary Rejection of

SIPC’s Defenses Based Upon. the Impossibility

of Fulfilling the Act's Purposes as a Result of the

Receivership Raises Questions of Critical lm-

portance to SIPC’s Authority and the Proper

Linplementation of the Act ..0.20000000000 eee 20

111—The Exercise of Jn Personam Jurisdiction Over

SIPC Raises an Important Question of Due Pro-

cess of Law Which the Court of Appeals Decided

« ina Way in Conflict With Controlling Decisions

Or CRE A IR soars rence scrsepterencsctvennes rs etsseneeicencnne 24

Conclusion .......... soueunpiaieieetseoneuvepscesasbeanevieaiesaeaveve 26

Appendix

Table of Cases

Association of Data Processing Service Organiza-

tions, Inc. v. Camp, 397 U.S. 150 (1970) ....0.02222202... 9

Ash vy. Cort, 496 F.2d 416 (3d Cir. 1974), petition for

cert. filed, 42 U.S.L.W. 3703 (U.S. June 20, 1974)

(ES: ) RMPRREnnenr DaRONECRT SENEDEIID- Cn sES anne EIEN CSTE Sa an 16

Bass Anglers Sportsman's Soc. v. U.S. Plywood-

Champion Papers, Inc., 324 F. Supp. 302 (8.D. Tex.

TTA Y: Srcescalpeccs eects erodes ernest cece 16

Bass Anglers Sportsman’s Soc. vy. U.S. Steel Corp.,

324 F. Supp. 412 (S.D., M.D. & N.D. Ala.), ajf’d, 447

Br Dh TOE COs i, TTY ) csc ace tseesenencsnerccscsenas 16

Bohart-McCaslin Ventures, Inc. v. Midwestern Secu-

rities Corp., 352 F. Supp. 937 (N.D. Tex. 1973) ....8, 13, 20

Botany Worsted Mills vy. United States, 278 U.S. 282

(TOTO) is 16

J. 1. Case v. Borak, 377 U.S. 426 (1964) oe. 17

Connecticut Action Now, Inc. v. Roberts Plating Co.,

Inc., 457 F. 2d 81 (2d Cir. 1972) 16

Continental Cas. Co. v. United States, 314 U.S. 527

(1942) ; 17

iil

PAGE

Ginsherg & Sons vy. Popkin, 285 U.S, 204 (1982) 222... 17

Hanson v. Denckla, 357 ULS. 235 (A998) oc 24, 25

Holloway v. Bristol-Myers Corp., 485 F. 2d 986 (D.C.

| A |. (2S 2 en ee 16

Alan F. Hughes, Inc. v. Securities & Exchange Com-

misston, 414 US. 1092 C19TS) oe eee senberen 9

International Shoe Co. vy. State of Washington, 326

U.S. 310 (1949) once ceeee cece eeeceeeeeteceesenecees 7, 24, 25

Jacklovich vy. Interlake, Inc., 458 F. 2d 923 (7th Cir.

MEL aescrnpereavsnereiinesenesurserastientereenegunsesrounannobiunnsicnntonsiestceds 16

Landy v. Federal Deposit Insurance Corporation, 486

IK. 2d 139 (ord Cir. 1973), cert. denied, 94S. Ct. 1979

CURES cncendedyrgrsstenenesnctpcpenedecdaweeseerstrenvicscueiesestdeoticeninenens 22

Massachusetts Trustees of Eastern Gas & Fuel Asso-

clates v. United States, 312 F. 2d 214 (1st Cir. 1963) 17

McGee vy. International Lite Insurance Co., 355 US.

Be EY aiptensnrccsaonspateesinstevusioeesxnipeeteimaieornestineesinroenets 7, 24

Natl RR. Passenger Corp. v. Nat'l Ass'n of R.R. Pas-

sengers, 414 U.S. 453 (1974) 2. 16, 17, 18, 20

Perry v. Commerce Loan Co., 383 U.S. 392 (1966) ........ 22

SEC y. Long Island Lighting Co., 148 F. 2d 252 (2d

OFT a EL: 55) 17

Seligsohn vy. Securities & Exchange Commission, 414

Rie BEER EAE) saseepeceiect ue rereetncieeinceste esti ntaseatsenciods 9

Service Life Insurance Company v. United States, 293

F.2d 72 (Sth Cir, 1961) nee cece eeee ee eeeeeeee 17

Sterra Club vy. Morton, 405 U.S. 727 (1971) we. 9

Switchmen’s Union of North America vy. Nat'l Media-

tion Board, 320 U.S. 297 (19438) -............ 16, 18

United States v. Constantine, 296 U.S. 287 (1935) ........ 13

United States v. Giordano, 469 F. 2d 522 (4th Cir.

1972), aff'd, 94S. Ct. 1820 (1974) oo 17

United States v. Sisson, 399 U.S. 267 (1970) .................- 22

MEAP APOE MEET

” bad ai a cs ~

iv

Statutes

PAGE

Securities Investors Protection Act of 1970 (15 U.S.C.)

Ry AMINE CE SO sosccccs sh hcoscasecat tata cialaiantesdeeanansonas cena Z

SS (Se0e(@) end (0) C1). niceties cecccncspeasieateeercnnese 3, 11,18

NS TOCCOCED aecccectes eect eter het ee eee ets 11

SP feos cc (0 4 [nena en nae 11

§ T8cee(b) (1) -..eeeeeeeseeeseeteeseeeeeceeeeee 16

§ T8ece(e) (2)-(3) nn. eeseceeseceececceseeeeeceeee 11

§ TBA nacccncsececesesnscnsusicceiceccesincuysaensonssanchasbceudedeesnsbaddaness 11

§ TSddd(a)-(A) eeeeeeeeeeceeeeececeececesecececeseceeeeeeeececererees 3

§ T8ddd(e@) woe. Heese ea evlestevastavarsddpeeveciocye et cuyeccies 4,11

§ T8ddd(d)(2)(B) ...cccceecececeeecesecescececeeeececeeeeeceececeees 11

Nols (6 C0 C2) © ee 11

§ T8ddd (£)-( 2) .n...-eceseeecececeeceeceeeesesesecececeeeseeceearererereeees 11

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No 6:0 © © en oy 12,15

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§ T8eee(a)(3) (A) oceeeeceeceeccccececeeecesececeeeseseeeseeeees 13

§ T8eee(b) (1) (By eceeeeececeeceeccececececececseseceseeeceeceneeeeeees 13

§ TSeee(D) (3) once ceceeceeceececeeececececesesessessescasseseaee 13

§ T8eee(C) eeeeeceeceeceecececcececceccacececeececcececeeceeeceseseeeecereceee 13

§ TSEFE(C) (1) eeeeceeeeeeeceeeceeeeeeeeeeee 13

§ 78fff(¢) (2) (C) (iii) 11

§§7S8FFF(A) (1) amd (2) eee eeeeececeeccececececeeeeeeceseeeeeeees 11

§ 78ggg(b) ...... sndyeeerqieneneeoetaenes 2, 3, 4, 13, 14,

16, 18, 19, 20

Rts -4 (| 0) eee ee eee 11

NI tele e-d C6 ) rr eee ae 10

§§ TS8ili(a) aM (0) once eceececcecececccceeseceseeseeeeseceeeeeeeseees 3, 4

§ TEUT(C) .n.neeeececcccesesccsnsesessesesecececccccneecececesecaeseacsesce cases 10

S16 | eee aeeeee 10

Wi fol <4 C1) ne eee re ne UOT nN ne nO 11

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TENN. Cope Ann. § 20-235 4, 7, 24

gee OL) ace ented tees eee 1

Oy ey Petco eee 17

Unrrep States Const., amend. V ....,............cececcecsseesceeees 4

Other Authorities

Duffy, “Reforming SIPC”, 7 Tue Rev. or Sec. Lee. 985

CLL) Reece nen nie aneoe a KER SPE Tea NiE sree eC Nena ante

Hearings on H.R. 13308, H.R. 17585, H.R. 18081, H.R.

18109, H.R. 18458 Before the Subcomm. on Com-

merce and Finance of the House Comm. on Inter-

state and Foreign Commerce, 91st Cong., 2d Sess.

EOP 26, BOM BO nctieestreegheisaneee nse tees alsin 10, 11, 12, 19

H.R. Rep. No. 91-1613, 91st Cong., 2d Sess. 1

0 i / (|) [REE or sO nT SPD Ese Ore ee 10, 11, 19, 21

deaviners on S. 2348, S. 3988, S. 3989 Before the Sub-

comm. on Securities of the Senate Comm. on Bank-

ing and Currency, 91st Cong., 2d Sess. 231-233, 271-

ya p-AE GL | ) een rene ea oC 10, 11, 12, 19, 21

S. Rep. No. 91-1218, 91st Cong., 2d Sess. 4 (1970} ....10, 12, 19

Securities and Exchange Commission Rule 15c3-1 ...... 5

13

EY TLE RR IRE ALTRI

UPBEAT AN RE nage mem

IN THE

Supreme Court of the United States

OCTOBER TERM, 1973

No.

i

SeEcurRITIES INvesTOR PROTECTION CORPORATION,

Petitioner,

v.

James C. Barpour, as Receiver vor Guaranty Bonp anp

SECURITIES CORPORATION AND GUARANTY Bonp Company, INc.,

Respondent,

and

SrcvrRITIES AND EXCHANGE CoMMISSION,

Respondent,

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SIXTH CIRCUIT

Petitioner Securities Investor Protection Corporation

respectfully prays that a writ of certiorari issue to review

the opinion and judgment of the Court of Appeals for the

Sixth Cireuit entered on April 23, 1974.

Opinions Below

The opinion of the Court of Appeals, reported at 496 F.2d

145 (6th Cir. 1974), is printed as Appendix A hereto. The

unreported opinion of the District Court is printed as

Appendix C hereto.

Jurisdiction

The judgment of the Court of Appeals was entered on

April 28, 1974 (Appendix B hereto). By agreement of the

parties, with the District Court’s concurrence, no further

proceedings will be taken pursuant to the mandate until

this petition is determined. The jurisdiction of this Court

is invoked under 28 U.S.C. § 1254(1).

NI EN GLE Ge Ee

ELEVEN DS IEE SELENE ES EVERIO IE 4A

_—

2

Questions Presented

The Securities Investor Protection Act of 1970 (“Act”)

became effective December 30, 1970 (“Effective Date’’).!. In

part it created the Securities Investor Protection Corpora-

tion (“SIPC”), a non-profit membership corporation con-

sisting of most broker-dealers (“Members”). The Act

requires Members to pay assessments to SIPC. It also gives

limited protection from SIPC’s funds to Members’ cus-

tomers in the course of a liquidation proceeding which

SIPC may commence against Members in appropriate cases

(e.g. insolvency). The questions presented are:

1. Whether customers of a Member? have an im-

plied private right of action to compel SIPC to meet

its alleged obligations to them under the Act, despite

Section 7(b) thereof which grants that right only to

the Securities and Exchange Commission (*““Commis-

sion’”’) ?

2. If such a right of action can be implied,

whether a receiver of a Member has standing to

maintain it?

3. Whether SIPC can be compelled to initiate a

liquidation proceeding under the Act where the

broker-dealer has already been substantially liqui-

dated in a receivership which involved several

affliated enterprises (not broker-dealers) ; where it is

no longer possible to implement the Act substantially

as Congress intended; where there is no demonstra-

tion that customers will ultimately suffer any loss;

and where any possible loss would result from the

imposition upon customers of some of the receiver-

ship expenses.

4. Whether the United States Constitution and the

Tennessee long-arm statute permit iv personam juris-

1. 15 U.S.C. § 78aaa et seq.

2. Whether the broker-dealer involved here was a member is also

an issue.

3. This question and those designated as number 5 are not dis-

cussed as Reasons For Granting the Writ. They are stated to pre-

serve them if this petition is granted.

diction over SIPC by the mailing of process to. its

offices in Washington, D.C., solely because the Act

exacts assessments from Tennessee broker-dealers

and protects Tennessee residents, without any proof

that SIPC has any place of business or is actually

engaged in activities in Tennessee.

5. Whether a broker-dealer which, prior to the

Act’s Effective Date, was hopelessly insolvent and

subject to the Commission's injunction action based

on federal securities laws violations, is covered by

the provisions of the Act if it engaged (although un-

lawfully) in securities transactions hetween the

Effective Date and a few days subsequent when an

injunction issued? If so, whether SIPC was denied

due process when the Court of Appeals held the Act

applies without affording SIPC an evidentiary hear-

ing in the District Court upon its pleaded denial of

such transaction of business.

Constitutional and Statutory

Provisions Involved

Because of their length the following provisions of the

Act which are involved are set forth in Appendix D hereto:

Sections 3(a) and (b) (1), 4(a)-(d), 5, 6, 7(b), 9(a) and (e),

and 12(1) and (3). However, excerpts or summaries of

some principal provisions are set forth below to facilitate

the review of this petition.

“Notice To SIPC.—If the Commission or any self-

regulatory organization is aware of facts which lead

it to believe that any broker or dealer subject to its

regulation is in or is approaching financial difficulty,

it shall immediately notify SIPC, and, if such notifi-

cation is by a self-regulatory organization, the Com-

mission.” Section 5(a)(1)

“Action By SIPC—If SIPC determines that any

member has failed or is in danger of failing to meet

its obligations to customers and that there exists one

or more of the conditions specified in subsection

4. 15 U.S.C. §§78ccc(a) and (b)(1), 78ddd(a)-(d), 78eee,

78fff, 78ggg(b), 78iii(a) and (c), and 78/ll(1) and(3).

PENANG teed ee

Boren ROTEL IR tp 94854

4

(b)(1)(A) of this section, SIPC ... may apply...

for a decree adjudicating that customers of such

member are in need of the protection provided by

this chapter.” Section 5(a) (2)

LiquipaTIoN Prockeprncs.—Section 6 provides that a

proceeding commenced by SIPC is a liquidation pro-

ceeding. It states the purposes of the proceeding

and in great detail sets forth the powers and duties

of the liquidating trustee, the extent to which the

Bankruptey Act applies, SIPC’s obligations and

rights of subrogation and recoupment, monetary

limits upon the protection available to customers

from SIPC's funds, definitions of persons entitled

and not entitled to that protection, and numerous

other procedural and substantive provisions.

“ENFORCEMENT OF ACTIONS.—In the event of the re-

fusal of SIPC to commit its funds or otherwise to act

for the protection of customers of any member of

SIPC, the Commission may apply to the district

eourt of the United States in which the principal

office of SIPC is located for an order requiring SIPC

to discharge its obligations under this chapter and for

such other relief as the Court may deem apprepriate

to carry out the purposes of this chapter.” Section

7(b) :

“GENERAL ASSESSMENT AUTHORITY.—SIPC shall . .

impose upon its members such assessments as .

SIPC may deem necessary and appropriate.

Section 4(¢) (2)

“COLLECTING AGENT.—Each self-regulatory organiza-

tion shall act as collection agent for SIPC to collect

the assessments ... and members of .31PC who are

not members of any self-regulatory organization shall

make payment direct to SIPC.” Section 9(a)

Also involved are the Tennessee long-arm statute (Tenn.

Cope Any. § 20-235), and the due process claus» of the Fifth

Amendment to the United States Constitution. U.S. Const.

amend. V. These are set forth in Appendix E hereto.

4)

Statement of the Case \

Prior Critical Proceedings

Guaranty Bond and Securities Corporation (“Guaranty

Bond”) was registered with the Commission as a broker-

dealer on the Act’s Effective Date. Prior thereto the Com-

mission had commenced an injunction action in the District

Court, Middle District of Tennessee, against Guaranty

Bond, its principals, and its parent Guaranty Bond Com-

pany, Ine. (“Parent”). The Commission’s allegations

included Guaranty Bond’s longstanding violations of the

Commission’s Rule 15¢3-1 (“Net Capital Rule”).5 On

January 6, 1971 the District Court granted a preliminary

injunction, and on January 27, 1971 it appointed James C.

Barbour as Receiver for Guaranty Bond and its Parent.

Guaranty Bond’s 1970 Insolvency. Guaranty Bond’s

hopeless insolvency and substantial violations of the Net

Capital Rule before the Act’s Effective Date are adjqdi-

eated and uncontrovertible facts.

The Receivership. Subsequent orders of the District

Court establish among other things that by the end of May

1971, when SIPC first learned of the Guaranty Bond situa-

tion, the receivership had been expanded to include various

other enterprises (not broker-dealers) affiliated with Guar.~

anty Bond and its Parent; the Receiver’s liquidation of

Guaranty Bond and affiliates was substantially completed;

the insurance business of one affiliate had been sold off to

the wife of one of Guaranty Bond’s principals: and all

securities (more than 15 million dollars worth) had been

returned to their owners.

5. The Commission had calculated that as of September 30, 1970

Guaranty Bond had a net capital deficit of almost 314 million dollars.

6. General Insurance Underwriters, Inc. (a division of Guaranty

Bond’s Parent), Church Building Associates, Inc., Religious Institu-

tional Finance Corporation of America, and two partnerships of

Guaranty Bond’s principals known as Huey & Huey, and Huey

Brothers Joint Tenants. Guaranty Bond’s principal business was

arranging financing for church construction via underwritings of

church bonds.

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6

Liability of Principals. The District Court made exten-

sive findings of fraudulent, dishonest and manipulative con-

duct by Guaranty Bond’s principals and cited their admis-

sions of siphoning earnings from Guaranty Bond to its

Parent and wrongfully taking secret profils. To date the

Receiver has taken no action against them.

STIPC’s Decision Not To Intervene. SIPC first learned of

the Guaranty Bond situation when it received a letter dated

May 27, 1971 from the Receiver’s counsel requesting “pro-

tection under the Act”? SIPC declined to intervene

because of the status, scope and progress of the receiver-

ship, and because both Guaranty Bond’s hopeless insolvency

and the Commission’s action occurred before the Act’s

Effective Date.

Receiver’s Enforcement Proceeding

The Receiver’s instant proceeding was commenced in

April 1972 by petition and an order of the District Court

directing the Commission and SIPC to show cause “... why

the remedies afforded by the Act should not be made avail-

able in this proceeding.” A copy of that order was mailed

to SIPC at its offices in Washington, D. C. The Receiver

alleged no basis for the Distriet Court’s jurisdiction except

one intended to support tn personam jurisdiction over

SIPC’ which had not been a party to the Commission’s

action or the receivership. SIPC and the Commission

served answers to the Receiver’s Petition.

7. The Receiver admits his awareness of the Act “shortly after

his appointment” four months earlier. His order of appointment

directed him to recommend to the Court “. . . appropriate steps to be

taken to protect . . . creditors and other persons dealing with”

Guaranty Bond and its Parent.

8. The Petition alleged: “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 this District.”

2s = a ee eueenenien 2 |

Receiver’s Petition. The Receiver alleged generally that

CGiuaranty Bond transacted a securities business until Janu-

ary 6, 1971, and that its customers were “entitled to the pro-

tection of the Act”. He acknowledged, however, that cus-

tomers had received their bonds and credit balances and

that their losses (if any) would result from a court-ordered

deposit by customers equal to five percent of the principal

ainount of their bonds in order to defray part of the

receivership expenses. <A portion of that deposit has since

been refunded.

SIPC’s Answer. SIPC denied that Guaranty Bond trans-

acted business until January 6, 1971 or that its customers

were in need of the Act’s protection. It also alleged seven

affirmative defenses which, in substance, denied that the

petition stated a claim upon which relief could be granted;

challenged the District Court’s jurisdiction over SIPC;

denied that the Act applied to Guaranty Bond, as a result

of the Commission’s action and the insolvency and Net

Capital Rule violations before the Act’s Effective Date ;°

and further alleged that SIPC’s refusal to intervene under

the circumstances of the receivership was either required

by the Act or was a proper exercise of its discretion.

District Court’s Opinion

The District Court rendered its decision solely on the

basis of the pleadings. It first held that the exercise of

mm personam jurisdiction over SIPC was consistent with

due process of law [citing International Shoe Co. v. State

of Washington, 326 U.S. 310 (1945) and McGee v. Inter-

national Life Insurance Co., 355 U.S. 226 (1957)] and the

single-act Tennessee long-arm statute (Tenn. Cope ANN.

9. The Commission’s answer stated the view that the Act should

be applied to Guaranty Lond it it transacted business after the Act’s

Effective Date. However it also stated, in substance, that SIPC’s

intervention would be needed only if customers actually sustained

losses, which had not been demonstrated since the Receiver might

have causes of action against Guaranty Bond’s principals which

would benefit customers.

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8

§ 20-235). Based solely on the Act’s provisions the Court

reasoned that “the execution of these statutory activities

[protection of customers and receipt of assessments] antici-

pates a continuing relationship between SIPC and its mem-

bers and customers” in Tennessee. The District Court

also sustained its subject matter jurisdiction and the

Receiver’s standing to maintain this “enforcement action”

stating, in part, that “. .. 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.”!® However,

the Court dismissed the Receiver’s proceeding on the

ground that the Act was not intended to apply to broker-

dealers such as Guaranty Bond who were hopelessly insol-

vent or in substantial violation of the Net Capital Rule

before the Act’s ffective Date.

Court of Appeals’ Opinion

The Court of Appeals sustained in personam jurisdiction

over SIPC on the opinion of the District Court. It also

inferred from the Act that customers of a Member have a

right to bring an “enforcement action” against SIPC. It did

so by a process of construction based solely on “the lack of

express language of exclusivity in providing for an enforce-

ment action by the S.E.C., coupled with a general provision

allowing for suits against the S.I.P.C.” The Court cited no

supporting legislative history or rule of construction. No

other Court of Appeals has decided this point but a con-

trary result was reached in Bohart-McCaslin Ventures, Inc.

v. Midwestern Securities Corp., 352 F. Supp. 937 (N.D.

Tex. 1973).

The Court further held that the Receiver has standing to

maintain an “enforcement action” in light of (i) the afore-

said “lack of express language of exclusivity” and (ii) its

conclusiongtWat the Receiver meets the tests enunciated in

10. There was no proof of default or neglect by the Commission.

9

Sierra Club y. Morton, 405 U.S. 727 (1971), and Association

of Data Processing Service Organizations, Inc. v. Camp,

397 U.S. 150 (1970).

The Court of Appeals reversed the District Court and

held that despite its financial collapse in 1970 the Act

applied to Guaranty Bond because it was allegedly “. . . in

fact, a broker or dealer at the effective date of the Act.”

This conclusion was premised on a statement by the District

Court that Guaranty Bond “handled 101 transactions” in

1971 before it was enjoined on January 6th. Whether it

did was denied by SIPC and has not been established by

evidence in this proceeding.

The Court of Appeals remanded “for proceedings con-

sistent with this opinion and specifically to determine and

enforce any rights of Guaranty’s customers under the

S.I.P.A.” It did not specify how the Act should be. imple-

mented, but its mandate must be viewed as a’ summary rejec-

tion of SIPC’s affirmative defenses and arguments based

upon the impossibilty of applving the Act in this case as the

Act provides and as Congress intended. The District Court

did not reach that question.

Summary of the Act

The Act has not yet been reviewed by this Court." An

understanding of the purposes and general operation of the

Act is essential to an appreciation of the issues and their

importance which leads SIPC to seek this Court’s

consideration.

The securities industry encountered serious financial

difficulties in the late 1960’s. Public investor confidence

waned. To bolster that confidence Congress adopted the

Act which created a new federal program with these pur-

poses:

11. Petitions for certiorari by parties other than SIPC were

denied in -llan F. Hughes, Inc. v. Securities & xchange Commis-

sion, 414 U.S. 1092 (1973), and Seligsohn v. Securitics & Exchange

Commission, 414 U.S. 1111 (1973).

GETS OE Ee LY OF

ta ONL ee me

SSK.

009 08 ANA ete PAE. BOE ALEC NDA IB PAL BON REALE ARE

Piseaatekcciccioin:

1

10

/

“ .. to protect individual investors from financial

hardship; to insulate the economy from the disrup-

tion which ean follow the failure of major financial

institutions; and to achieve a general upgrading of

financial responsibility requirements of brokers and

dealers to eliminate, to the maximum extent possible,

the risks which lead to customer loxss.”!”

The Act accomplished these purposes essentially by two

methods. First, it enhanced the Commission’s powers to

establish financial responsibility rules for broker-dealers"

and to impose on the self-regulatory organizations" require-

ments for the financial examination of their members.’* As

the Court knows the securities industry is self-regulated,

subject to the Commission's rulemaking. and enforcement

powers. Second, it created SIPC which it empowered to

commence proceedings for the liquidation of’ its members

whose financial condition poses the threat of loss to their

customers (“Liquidation Proceeding”). Congress placed

responsibility for its new program on the Commission,

SIPC and the industry’s self-regulatory organizations.

SIPC is not an insurance company. It was conceived’

and created as a private, non-profit, industry-funded mem-

12. -S.Rep. No. 91-1218, 91st Cong., ‘2d Sess. + (1970) (“Senate

Report”), see also H.R.Rep. No, 91-1613, 91st Cong., 2d Sess. 1

(1970) (“House Report”).

13. Section 7(d), 15- U.S C. $ 78ggg(d). Citations to the Act as

reported in the United States Code will not repeat 15 U.S.C.

14. Defined in Section 12(1), § 78///(1), “self-regulatory organi-

zations” currently consist of national securities exchanges and the

National Association of Securities Dealers, Inc.

15. Section 9(f), § 78iii(f). Similarly SIPC is given responsi-

bility t@ work with the self-regulatory organizations toward the

standardization of their examining procedures and the development

of procedures for the early detection of approaching financial diffi-

culty of SIPC members. Section 9(e), § 78iii(e).

16. Hearings on S. 2348, S. 3988, S. 3989 Before the Subcomm.

on Securities of the Senate Comm. on Banking and Currency, Ist

Cong., 2d Sess., 231-233, 271-272 (1970). Hearings on H.R.

13308, H.R. 17585, H.R. 18081, H.R. 18109, H.R. 18458 Before the

Subcomm. on Commerce and Finance of the House Comm. on Inter-

state and Foreign Commerce, 91st Cong., 2d Sess., 199 et seq., 365

I

11

bership corporation’ which would work within the self-

regulatory structure. Its Board consists of five persons

appointed by the President and confirmed by the Senate,

and two designated respectively by the Federal Reserve

Board and the Secretary of the Treasury.'* As earlier noted

most broker-dealers are required to be SIPC members and

to pay assessments to SIPC.” If SIPC’s funds should be

inadequate to carry out its purposes the Act authorizes a

loan of up to one billion dollars from the United States

Treasury.

Prompted in part by the availability of United

States funds,”? the Congress granted the Commission exten-

sive supervisory power over SIPC. Those powers include

approval of SIPC’s bylaws and rules, certain financial

decisions involving SIPC's eredit and funds, and effective

control over matters relating to the borrowing and repay-

ment of United States funds.*! Additionally the Commis-

sion is empowered to adopt rules adjusting certain provi-

sions of the Act relating to the protection of customers, and

to determine the Act's applicability to the foreign opera-

tions of SIPC members.*?- SIPC is required to make annual

reports of its operations to the Commission which the Com-

mission is obliged to transmit to the President and the

Congress with such comments as it deems appropriate.”

SIPC’s authority to commence a Liquidation Proceeding

for the protection of customers is an important segment of

(1970). These hearings will hereinafter be cited as ‘Senate Hear-

ings” and “House Hearings.” See also House Report at 11-13.

17. Sections ne igh 4, $$ 78ccec(a) and 7&ddd.

18. Section 3(¢), $ 78cce(c).

19. Sections 3(a)(2) and 4(c), §§ 78cece(a)(2) and 7&ddd(c).

20. Senate Hearings at 243; House Hearings at 219-220, 345.

21.) Sections 3¢e)¢2)-13), 4¢d) (2) (BY), 46e)¢1) and 4(¢£)-( 2);

ss 78cecc(e)(2)-(3), 78ddd(d)(2)(B), 7&ddd(e)(1), and 7Bddd

(f)-(g).

22. Sections 6(c)(2)(C) (ili), 6(d)(1) and (2), and 11(b);

§§ 78EEE(c) (2) (C) (iii), 78fff(d)(1) and (2), and 78kkk(b).

23. Section 7(c)(2), § 78ggg(c)(2).

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12

the Act’s program.** This potent responsibility also has

aspects of enforcement. Thus, the Act authorizes liquida-

tion of a SIPC Member which is not in compliance with ap-

plicable requirements under the Securities Exchange Act of

1934, or rules of the Commission or a self-regulatory organi-

zation, with respect to financial responsibility or hypotheca-

tion of customer's securities.> It is even permitted if a

Member cannot make the computations necessary to estab-

lish such compliance.*° If these or other specified conditions

exist (e.g., insolvency),?” and if SIPC determines that a

Member “has failed or is in danger of failing to meet its

obligations to its customers,” SIPC “may” commence a

Liquidation Proceeding.** Whether it does depends upon

ifs exercise of the broad discretion granted it.°° At this

writing 105 SIPC Members have been placed in liquidation

under the Act and their customers have been protected.

SIPC has no authority to examine its Members. It

depends for its information on the self-regulatory organiza-

tions and the Commission. The Act requires them to notify

SIPC immediately when they believe that any broker-dealer

subject to their regulation is in, or is approaching, financial

difficulty..° Because violations of the federal securities laws

are invariably involved, in most cases SIPC commences its

proceeding simultaneously with, or immediately after, an

injunction action commenced by the Commission against the

Member. The Act permits SIPC to combine its Liquidation

Proceeding with any action brought by the Commission, and

24. House Hearings at 219-220.

25. Sections 5(a)(2), 3(b)(1)(A); S$ 78cee(a) (2), 78eee(b)

(1)(A).

26. Id.

27. Id.

28. Note 25, supra:

29. Senate Report at 11; House Hearings at 200, 236-237, 331-

333; 340-341; Senate Hearings at 259-260.

30. Section 5(a)(1), § 78eee(a) (1).

13

it also authorizes the Commission to appear and participate

as a party in a Liquidation Proceeding.”!

SIPS does not itself liquidate its members. It is merely

authorized to commence a Liquidation Proceeding in the

appropriate federal district court. The Member involved

is entitled to contest SIPC’s allegations.’ Where the Mem-

ber consents or SIPC prevails, the court is required to

appoint persons designated by SIPC to serve as trustee

and counsel® to carry out the purposes of the Liquidation

Proceeding which is governed by the Act and certain pro-

visions of the Bankruptey Act.“ A Liquidation Proceeding

is exceedingly complex.*> In the course thereof SIPC’s

funds provide limited protection to the Member’s customers

(discussed infra, p. 21).

Reasons for Granting the Writ

I.

The Proper Construction of Section 7(b) of the Act is an

Important Novel Federal Question Which Should be Settled

by this Court and Which the Court of Appeals Decided in

a Way in Conflict With Controlling Principles Established

by Decisions of this Court.*°

A. Section 7(b) is Critically Important to the Proper

Implementation of the Act, to the Securities Indus-

try, and to the Commission’s Responsibility to En-

force the Federal Securities Laws.

There is only one means whereby SIPC’s funds may be

used to protect the investing public, namely, a Liquidation

31. Sections 5(a) (3) (A), 5(c); §§ 78eee(a) (3) (A), 78eee(c).

32. Section 5(b)(1)(B); § 78eee(b) (1) (B).

33. Section 5(b)(3); § 78eee(b) (3).

34. Section 6(c)(1); § 78fff(c) (1).

35. Duffy, “Reforming SIPC,” 7 THE Rev. or Sec. Lec. 985,

990 (1974).

36. A further consideration is the conflict between the decision

below and Bohart-McCaslin Ventures, Inc. v. M idwestern Securities

Corp., 352 F.Supp. 937, 940 (N.D. Tex. 1973). See United States v.

Constantine, 296 U.S. 287, 290-291 (1935).

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Proceeding commenced by SIPC. By enacting Section 7(b)

the Congress granted the Coinmission the extraordinary

discretionary right to bring a mandatory injunction action

to require SIPC to ecommence.a Liquidation Proceeding,

notwithstanding the contrary exercise of SIPC’s judgment.

That right is extraordinary for two reasons. First, it per-

mits judicial review of a discretionary corporate decision.

Second, it entitles a party to compel the commencement of

a legal proceeding by another. That enforcement action is

a powerful supervisory instrument which the Congress

entrusted to the Commission’s expertise, discretion and

sense of public responsibility. Section 7(b) is a consistent

extension of the Commission’s supervisory role over SIPC

in other important matters.

The decision to commence a Liquidation Proceeding fre-

quently involves sophisticated judgments upon complex

financial facts and applicable rules and regulations. SIPC

necessarily makes such determinations in close cooperation

with the Commission and the self-regulatory organizations.

In many cases it is immediately clear that a Liquidation

Proceeding is necessary. In many others forebearance

allows time for other viable solutions such as the infusion

of new capital, the transfer of accounts to a healthy firm,

or the self-liquidation, merger or acquisition of the troubled

firm. Despite the existence of bases upon which a Liquida-

tion Proceeding could be commenced such solutions, not

uncommon in this troubled economy, are decidedly in the

public interest and are encouraged by the self-regulatory

organizations, the Commission and SIPC.

To infer that the investing public possesses an enforce-

ment right parallel to the Commission’s, where the Commis-

sion in its discretion does not sue SIPC, would add another

extraordinary layer of supervision of even broader scope.

Did Congress intend sub silentio to give the general public

the right to substitute its judgment for SIPC’s and the

Commission’s, and to obtain judicial review of the impor-

/

ro)

15

tant and delicate determinations which the Congress spe-

cifically entrusted to them alone? Did Congress intend sub

silentio to vest the general public with the unique right to

compel a corporation to commence a judicial proceeding,

particularly one with the impact of a Liquidation Proceed-

ing, or to compel the commitment of funds of SIPC and the

United States despite contrary determinations by SIPC

and the Commission? Recognition of such rights is incon-

sistent with the clear design of the Act, and further would

open the door to other serious adverse consequences.

It is, of course, impossible to measure the impact of

an implied private right of enforcement in terms of the

number of actions which might be commenced. Much

would depend upon the state of the economy. But should

the door be opened at all to private actions which (i)

could frustrate the viable alternatives to a Liquidation Pro-

ceeding mentioned above; (ii) could be enough, by reason

alone of the allegations made, to start a fatal run on a firm

in a fragile but not terminal financial condition; (iii) might

very well interfere with the Commission's inyestigative or

enforcement activities in a given case; (iv) could he com-

imeneced on grounds other than those for involuntary peti-

tions under the Bankruptey Act; (v) could be commenced

by a bad faith customer, including a competitor of the sub-

ject firm; (vi) might compel a firm, perhaps in marginal

financial circumstances, to devote resources to a defense

or at least a burdensome involvement in the action against

SIPC; and (vii) could take the form of a class action with

all its attendant difficulties? Recognition of a private right

of action is pregnant with far more hazards, not susceptible

of precise forecasting, than any benefit likely to result.

The decision of the Court of Appeals, if allowed to stand

and if followed by other Courts, paves the way for incal-

culable damage to the orderly plan of the Act, members of

2 cme Ie

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16

the securities industry, and even the enforcement activities

of the Commission. It presents a question which is appro-

priate for review by this Court.

B. The Court of Appeals Seriously Misconstrued Sec-

tion 7(b) by Failing to Apply Principles of Con-

struction Firmly Established by this Court.

Because Congress did not add words of exclusivity to

Section 7(b), the Court of Appeals inferred a congres-

sional intent to imply a private enforcement action from

SIPC’s right, included among SIPC’s enumerated general

powers, to sue and be sued, complain and defend, in

its own name and through its own counsel in any federal or

state court.’ In so holding the Court of Appeals failed to

follow the clearly applicable rule of construction expressto

unius est exclusio alterius and the well-settled principle of

exclusivity where a federal statute protects a publie right

by granting a specific remedy to an independent agency of

the federal zovernment. Nat'l R.R. Passenger Corp. v. Nat'l

-lss'n of R.R. Passengers, 414 U.S. 453 (1974) ; Switchmen’s

Union of North America v. Nat'l Mediation Board, 320 U.S.

297 (1943); Botany Worsted Mills v. United States, 278

U.S. 282, 289 (1929); Holloway v. Bristol-Myers Corp., 485

F.2d 986 (D.C. Cir. 1973); Ash v. Cort, 496 F.2d 416

(3d Cir. 1974) (dictum), petition for cert. filed, 42 U.S.L.W.

3703 (U.S. June 20, 1974) (73-1908).28 The Court of

Appeals also failed to apply the equally well-settled

rule that a statutory provision which deals specifically

with a matter will not be enlarged by reason of a gen-

37. Section 3(b) (1), § 78ccc(b) (1).

38. See also Bass Anglers Sportsman’s Soc. v. U.S. Steel Corp.,

324 F.Supp. 412, 415 (S.D., M.D. & N.D. Ala.), aff'd, 447

F.2d 1304 (Sth Cir. 1971); Jacklovich v. Interlake, Inc., 458 F.2d

923 (7th Cir. 1972); Connecticut Action Now, Inc. v. Roberts Plat-

ing Co., Inc., 457 F.2d 81 (2d Cir. 1972); Bass Anglers Sports-

man’s Soc. v. U.S. Plywood-Champion Papers, Inc., 324 F. Supp.

302 (S.D. Tex. 1971).

17

eral provision in the same statute. Continental Cas. Co. v.

United States, 314 U.S. 527, 533 (1942); Ginsberg & Sons

v. Popkin, 285 U.S. 204, 208 (1932).°° Of the numerous

applicable precedents it seems necessary only to discuss

this Court’s decision in the Natl R.R. Passenger Corp.

ease, supra (the “Amtrak” case) which, especially in light

of its facts, seems controlling.

In Amtrak this Court reviewed Section 307(a) of the

Amtrak Act which authorizes the federal district courts,

upon petition of the Attorney General, to restrain viola-

tions of duty by Amtrak in its administration of the

Amtrak Act. Section 307(a) uses no words of exclusivity.

Amtrak was made subject to the Distriet of Columbia Busi-

ness Corporation Act,*® Section 29-904(b) of which makes

Amtrak geferally amenable to suit. Nevertheless, this

Court refused to infer a private right of action to restrain

Amtrak’s violation of its very broad statutory responsi-

bilities. Viewing Section 307(a) as creating “a public cause

of action” maintainable by the Attorney General, this Court

held that the maxim expressio wnius est exclusio alterius

required the conclusion that the Attorney General’s remedy

is exclusive in the absence of “clear contrary evidence of

legislative intent.” In reaching its determination this

Court noted with some emphasis that to infer a private

right of action would produce results inconsonant with

Congress’ plan to provide an “efficient apparatus” to carry

out the purposes of the Amtrak Act.*! It also noted (at

39. See also United States v. Giordano, 469 F.2d 522, 529 (4th

Cir. 1972), aff'd, 94 S.Ct. 1820 (1974); Massachusetts Trustees of

Eastern Gas & Fuel Associates v. United States, 312 F.2d 214, 220

(1st Cir. 1963); Service Life Insurance Company v. United States,

293 F.2d 72, 76, 77 (8th Cir. 1961); SEC v. Long Island Lighting

Co., 148 F.2d 252 (2d Cir. 1945).

40. 45 U.S.C. § 541.

41. Referring to the line of cases which have inferred a private

right of action [citing J. J. Case v. Borak, 377 U. S. 426 (1964) ],

this Court emphasized that a private right could not be inferred

unless “‘. . . consistent with the evident legislative intent and . . . the

effectuation of the purposes intended to be served by the Act.” (at

457-458).

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464 n. 12) Amtrak’s statutory duty to make periodic reports

of its operations to the Congress and the President, a factor

which it thought enabled Congress to believe that the

exclusive remedy given the Attorney General would be

effective.

The Amtrak rational would seem a fortior? to require ¢

reversal in this ease. The Act vests the exclusive enforee-

ment right in a government agency upon which Congress

conferred other important supervisory powers over SIPC.

In further contrast to the Attorney Genera#'s less proxi-

mate involvement with Amtrak’s operations, the Commis-

sion by reason of its enforcement activities is preforce

privy to every situation in which SIPC might have a respon-

sibility. Indeed, the Commission is obliged to notify SIPC

of the possible failure of a broker-dealer, and the self-regu-

latory organizations must make such reports to the Com-

mission as well as SIPC.*?) Unlike Amtrak, SIPC is a non-

profit corporation whose duty to the public cannot be

affected by a profit motive. Like Amtrak, STPC’s annual

reports of its operations are transmitted to the President

and to Congress. Indeed they are accompanied by the

Commission’s comments. SIPC’s board of seven includes

two representatives of the federal government whereas

Amtrak’s board of seventeen includes only one. Like the

Amtrak Act, express words of exclusivity do not appear

in Section 7(b) and SIPC is generally amenable to suit.

And finally, it is clear that recognition of a private enforce-

ment action would be inconsistent with the scheme and

purposes of the Act. It should be observed that even the

reasons given by Mr. Justice Douglas in his dissent in

Amtrak appear inapplicable to the Act, and that the grounds

upon which he distinguished the Siitchmen’s Union of

North America case, supra, do not obtain here.

To the foregoing may be added these comments. Section

7(b) is entitled “Enforcement of Actions” and Section 7

42. Section 5(a)(1), § 78eee(a) (1).

19

itself is entitled “SEC FUNCTIONS”. Although not con-

trolling, these titles tend to support the ¢Gonclusion of

exclusivity. In addition, Section 7(b) requires the Commis-

sion to sue in the District Court where SIPC’s principal

office is located, a requirement that could require suit in

Los Angeles if SIPC thought it appropriate to locate there.

Designed for SIPC’s convenience, this provision tends to

negate a congressional intent to imply a private right of

action which might be brought anywhere if jurisdictional

bases existed. There is no legislative history which would

require the applicable rules of construction to yield. Ex-

amination of the congressional hearings, reports and floor

remarks fails to reveal any specific comments on the exclu-

sivity of Section 7(b) or any counterpart in predecessor

bills.*3 What can be gleaned, as noted earlier, is a Congres-

sional insistence on substantial Commission supervision

over SIPC.

The Court of Appeals clearly erred when it inferred a

private right of action from a provision which at most

makes SIPC amenable to suit but does not purport to

43. The following portions of legislative history support exclu-

sivity. First, the House Report stated (at 22): “Section 7(b) of the

bill provides that, should SIPC refuse to commit its funds or other-

wise act for the protection of customers of any member, the Com-

mission could apply to a court for an order requiring SIPC to

discharge its obligations under this legislation or for such other relief

as the court may deem appropriate to carry out the purposes of the

legislation—for example, requiring STPC to file an application under

section 5.”

Second, the Senate Report stated (at 15): “Section 35(p) [Senate

counterpart of Section 7(b)] accords the Commission the power to

apply to a District Court for an order in the nature of a mandatory

injunction in the unlikely event that the Corporation refuses to carry

out its duties.”

Third, the Act evolved from a bill prepared jointly by the Commis-

sion and representatives of the securities industry. Each had pre-

viously submitted separate bills. The bill submitted by the industry

contained no provision for an enforcement action by the Commission

or anyone (House Hearings at 57). The Commission’s bill provided

for enforcement by the Commission in a section which also granted

the Commission the power to approve SIPC’s bylaws (House Hear-

ings at 35, 53).

ISN ORT ean, Y

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Bevery LLB LEE LIGIER ELLIE LS IEE IN IS

20

establish any substantive rights which might be asserted

against it. The lack of words of exclusivity in Section 7(b)

was erroneously regarded as a sufficient indicator of a pri-

vate right of action. The decision below is in direct conflict

with the Amtrak case and numerous other applicable pre-

eedents. It should be reversed. The holding in Bohart-

McCaslin Ventures, Inc. v. Midwestern Corp., 352 F.Supp.

937 (N.D. Tex. 1973) was correct.

II.

The Court of Appeals’ Summary Rejection of SIPC’s

Defenses Based Upon the Impossibility of Fulfilling the

Act’s Purposes as a Result of the Receivership Raises Ques-

tions of Critical Importance to SIPC’s Authority and the

Proper Implementation of the Act.

The Court of Appeals directed the District Court “to

determine and enforce any rights of Guaranty’s customers

under the S.1.P.A.” (Appendix-10).44 Under the cireum-

stances that determination amounts to making SIPC a mere

indemnitor of the customers’ share of the Receiver’s fee and

expenses. The Court’s action constituted a summary dis-

missal, without benefit of proof, of SIPC’s two affirmative

defenses based on the substantially completed status of the

receivership and the resulting impossibility of implementat-

ing the Act even substantially as Congress intended.*> That

determination substitutes the judicial apparatus and discre-

tion for the plain design of the Act and STPC’s discretion

and role thereunder. Whatever may be the appeal of such a

pragmatic result, it raises fundamental questions of vital

importance to the administration of the Act.

44. The Court of Appeals discussed only the threshold question

of the Act’s applicability (Question 5, supra at 3) which this petition

reserves (n. 3 supra).

45. The first defense alleged that under the circumstances SIPC

lacked authority under the Act to take any action thereunder. The

second alleged that SIPC’s refusal to take action was a proper exer-

cise of its corporate discretion which should not be superseded by

judicial action.

21

The Act provides for “... the prompt and orderly liqui-

dation of SIPC members when required.’*¢ Section 6 con-

tains detailed procedural and substantive provisions which

determine the rights of customers and SIPC. Some are

summarized below’ but there are many others (Appendix

D-9 et seq.). As that summary shows, the Act does not

attempt to make all customers whole. It established a

plan of limited protection via a carefully delineated liqui-

dation proceeding. It contemplates that customers’ claims

will be satisfied to the maximum extent possible from the

assets already on hand with the Member. SIPC’s funds

merely supplement those assets within the limits and in the

manner provided by the Act. The scope of customer pro-

tection and SIPC’s exposure depend upon adherence to the

statutory scheme which includes correct identification of

protected customers, the proper determination of their net

equities, the valuation of their securities as of the “filing

date” regardless of subsequent changes in value, the pro-

rata distribution of securities when required, the enforce-

ment of SIPC’s rights of recoupment and subrogation,

the avoidance of preferential transfers and the vigorous

46. House Report at 9; see also Senate Hearings at 303.

47. The term “customer” is defined in great detail [Section

6(c) (2) (A) (ii); §78fff(c) (2) (A) (ii)]. Such customers are

entitled to the return of their specifically identifiable property. as

defined [Sections 6(c) (2) (C), 6(c) (2) (A) (1); 8878fff(c) (2) (C),

SS§78fff(C)(2)(A)(1)]. All customers’ property (except spe-

cifically identifiable property) constitutes a single and_ separate

fund (the “Fund”) for the benefit of customers [Section

6(c)(2)(B); §78fff(c)(2)(B)]. Customers are entitled to share

prorata in the Fund, based on the value of the “net equity” of their

accounts (excluding specifically identifiable property) as of the “filing

date” [Sections 6(c)(2)(A) (iv), 5(b)(4)(B); §§78fff(c) (2)

(A) (iv), 78eee(b) (4)(B)]. If the Fund is insufficient to satisfy

- all customers’ net equities the balance of their claims share in the

general estate with general creditors [Section 6(c)(2)(B);

§78fff(c)(2)(B)]. Customers are protected by SIPC’s funds only

to the extent their net equities cannot be satisfied from the “Fund”

and the general estate, and then only up to $50,000 per customer of

which only $20,000 is available for cash claims [Section 6(f) (1);

§78fff(f)(1)]. In determining the unsatisfied amount of net equities,

eee

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SESE LOR USE HR $I Bae pe

PRES ER TMI TS

Beers:

22

pursuit of recoveries against a Member’s principals and

employees as well as third parties.

In short, Congress established a definitive method

through which it authorized and limited the protection of

customers as well as the use, for that purpose, of funds of

SIPC and the United States Treasury. In doing so it speci-

fically granted SIPC the discretion to determine when those

funds should be committed, subject to a possible enforce-

ment action by the Commission. The decision of the Court

of Appeals substantially defeats the manifest intent of Con-

gress. It violates the fundamental principle that legislation

may not be made to operate in a manner substantially dif-

ferent than prescribed by Congress [United States v. Sis-

son, 399. U.S. 267, 298 (1970) ; Perry v. Commerce Loan Co.,

383 U.S. 392, 400 (1966) ] as well as the most rudimentary

principles limiting judicial review of corporate action.

SIPC’s defenses involve more than allegations. They are

predicated upon the District Court’s record of the receiver-

ship, including that Court’s orders, which may be judicially

noticed. See Landy v. Federal Deposit Insurance Corpora-

tion, 486 F.2d 139, 151 (3d Cir. 1973), cert. denied, 94 S. Ct.

1979 (1974). Moreover, there is no serious dispute that

those defenses arose from a situation which SIPC was un-

able to alter or prevent. Neither the receiver nor the

Commission has countered SIPC’s documented allegation

that it had no notice or knowledge of the Guaranty Bond

securities returned in partial satisfaction of securities claims are

valued as of the “filing date” regardless of actual value at time of

distribution [Section 6(c)(2)(B); §78fff(c)(2)(B)]. Certain

customers (specified insiders of the Member, banks and broker-

dealers) are entirely excluded from SIPC protection [Sections

6(£)(1)(C) & (D); §§78fff(f)(1)(C) & (D)]. SIPC’s funds

are intended only to augment the Member’s estate within prescribed

limits. Thus SIPC’s advance of funds to customers subrogates it

to their rigt hts against the Fund and the general estate [Section

6(f)(1); § BEffCt) (1)}. Although SIPC is authorized to advance

funds for administrative expenses it enjoys a priority right of recoup-

ment from the Member’s estate [Sections 6(c)(2)(B), 6(f)(2);

§§78fff(c)(2)(B), 78fff(£) (2).

23

difficulties until the end of May, 1971. The action of the

Court of Appeals in rejecting these defenses without dis-

cussion so thoroughly eviscerates the Act and SIPC’s cor-

porate role thereunder as to present a question of the ut-

most importance to the proper implementation of the Act.

The implications of the decision below reach beyond its

effect as precedent. It is likely that the Court’s error

resulted from its desire to supply some sort of financial

help to make Guaranty Bond's customers whole. That is a

phenomenon which frequently occurs when a source of

funds seems available to relieve persons of the burden of

financial loss. It cannot be gainsaid that other courts,

particularly in light of the decision below, may respond to

the same sympathies and reach for solutions at considerable

variance from the Act. The Act is new and unfamiliar to

many lawyers and judges. It would be an understatement

to say there are many misconceptions concerning the nature

of the protection provided by the Act. Many mistakenly

equate it with insurance. It is respectfully submitted that

this case, even recognizing its unusual factual character-

istics, offers a vehicle which could be utilized by this Court

to make an appropriate helpful expression upon the pur-

poses of the Act and the manner in which it is intended by

Congress to work. The uncertainties created by the

decision below on the fundamental questions of the scope

of SIPC’s discretion under the Act, the scope of judicial

review and the proper implementation of the Act plainly

carry the potential for serious disruption of the program

expressed in the Act. Those questions should not be left

unsettled.

I ee is ar eet 100A TIN Na NI NEE TAL AO ORL LP APOLLON NL Ma

ORI SES

Brains: a ne

24

’

The Exercise of In Personam Jurisdiction Over SIPC

Raises an Important Question of Due Process of Law Which

the Court of Appeals Decided in a Way in Conflict With

Controlling Decisions of this Court.

The courts below sustained in personam jurisdiction over

SIPC upon a novel theory.4s There was no evidentiary

hearing or proof by affidavit. On the basis of the Act alone,

it was reasoned that a “relationship” existed between SIPC

and Guaranty Bond’s customers arising from the Act’s

general remedial purposes and its imposition of mandatory

assessments upon Members as a funding device. That

rationale conflicts with this Court's decisions in Interna-

tional Shoe Co. v. State of Washington, 326 U.S. 310 (1945),

McGee v. International Life Ins. Co., 355 U.S. 220 (1957),

and Hanson v. Denckla, 357 U.S. 235 (1958).

The cited cases establish that in personam jurisdiction

cannot constitutionally be exercised over a non-resident

foreign corporation unless it has “minimum contacts” or

“activities” in the forum state. The critical test enunciated

in International Shoe was restated as follows in Hanson v.

Denckla (at 253):

“The application of that rule will vary with the

quality and nature of the defendant's activity, but it

is essential in each case that there be some act by

which the defendant purpose fully avails itself of the

privilege of conducting activities within the forum

State, thus invoking the benefits and protections of

its laws.”

International Shoe emphasized that whether due process is

satisfied turns on qualitative rather than quantitative or

mechanical evaluations of activity (at 319), and that the

48. Jurisdiction, was based on the Tennessee long-arm statute.

TENN. Cope Ann. § 20-235. As a result of a 1972 amendment, it

permits the exercise of jurisdiction over non-residents “. . . as to any

action or claim for relief arising from: ... (f) Any basis not incon-

sistent with the Constitution of this state or of the United States.”

‘

required seope and quality of activity depends upon

whether the liability asserted arises therefrom or is “un-

ages

related” thereto (at 317-518). More substantial activity is

required to establish sufficient “presence” in the forum state

to support jurisdiction for a cause of action not arising

from an act committed in the forum state (at 318). Hanson

v. Denckla stressed that due process limitations not only

guarantee immunity from distant litigation but “are a con-

sequence of territorial limitations on the power of the rep-

spective States” (at 251).*°

There is no proof whatever that SIPC was engaged in

any activities in Tennessee, substantial or otherwise, within

the meaning of this Court’s decisions. It is undisputed that

SIPC’s sole offices are located in Washington, D.C. SIPC

is not a Tennessee corporation. Activity in Tennessee,

in the sense of the cited cases, can hardly be deduced from

the Act itself which places the collection of assessments

primarily with the self-regulatory organizations whose

oflice locations and collection procedures are clearly a

matter of proof. The cause of action asserted by the

Receiver obviously did not arise from the collection of

assessments, nor did the Courts below so hold. Therefore

jurisdiction could only be supported by proof of activity by

SIPC in Tennessee, directly or through agents, which was

so substantial as to establish a presence sufficient to render

it generally amenable to sit in Tennessee.

The “relationship” to which the Distriet Court referred,

adopted by the Court of Appeals, can only be character-

ized as amorphous and inchoate. Tf such theories can be

used to sustain in personam jurisdiction, then even the

admitted elasticity of due process has no meaningful

bounds. This Court’s cautions against excesses in Hanson

49. In this connection the court observed that jurisdiction is not

acquired because the forum is “... the ‘center of gravity’ of the con-

troversy or the most convenient location for litigation.” (at 254).

I re eet reer eet ent ae SN a AS ERIS SY 2 NARA RERUN AC ta SA Co ne Sa

ee ae oe ot ee

26

v. Denckla have gone unheeded by the Courts below whose

rationale portends serious consequences for SIPC. By

operation of the Act assessments are received from Mem-

bers throughout the Nation. If the views below should

stand, they are sufficiently potent to expose SIPC to suit in

most federal district courts. Moreover, the abandonment

in this case of the requirement of “presence”, “activity” or

“eontact” with the forum carries broad implications for

litigants generally. The decision below conflicts with this

Court’s decisions and hasie due process. Review by this

court would appear most appropriate.

CONCLUSION

For the reasons set forth above, it is respectfully sub-

mitted that this petition for certiorari should be granted to

review the opinion and judgment of the Court of Appeals.

Respectfully submitted,

THeropore H. Focut

General Counsel

Securities Investor Protection

Corporation

900 Seventeenth Street, N.W.

Suite 800

Washington, D.C. 20006

Attorney for Petitioner

Of Counsel:

Witrrep R. Caron

Associate General Counsel ~

Kevin H. Bei