Opposition Brief — Securities Investor Protection Corp. v. Barbour

INDEX

Page

PURMIMUNREY DOONEIE ww one oe hee en ces ce 2

PO Shit is 6 a oe es cae ae es oad 4

I. Customers of an insolvent member of SIPC are en-

titled to demand protection under the act where

both the commission and SIPC have failed or re-

fused to discharge their obligations .......... 4

II. Neither the district court nor the court of appeals

has yet ruled as to specific questions involving im-

OUMACRRRTNOR GT TP BCE he eee 8

III. There is no compelling reason to review the in

personam jurisdiction of the district court ...... 9

Conclusion ............... ss PRATER ES Ee ke eee 10

Table of Cases

Allen v. Board of Elections, 393 U.S. 544, 22 L.Ed.2d

b, Sea. OFF oss eine sees ae Lawes z

J. I. Case Co. v. Borak, 377 U.S. 426, 12 L.Ed.2d 423,

OO BAN Fee CIPO 8 ok hiner einiiesci a 7

Lohf v. Casey, 466 F.2d 618 (10th Cir. 1972) ...... “s 3,3

National RR Passenger Corp. v. National Association of

RR Passengers, 414 U.S. 453, 38 L.Ed.2d 646 (1974) 5,6

Statutes

Securities Exchange Act of 1934

MINN Pe 5 oe i er eee 7

Securities Investors Protection Act of 1970 as U.S.C.)

Be Be te ome ia es nO nen e wGeen ee er 6

D VaR 5s obo ces os oh ea a 9

a. SS 8

"> we ee

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1973

NO. 73-2055

SECURITIES INVESTOR PROTECTION CORPORATION,

Petitioner,

VS.

JAMES C. BARBOUR, RECEIVER and SECURITIES

AND EXCHANGE COMMISSION,

Respondents.

BRIEF IN OPPOSITION

To Petition for Writ of Certiorari-

Respondent, James C. Barbour, Receiver for Guaranty Bond

and Securities Corporation (“Guaranty”) opposes the Petition

for a Writ of Certiorari in this cause because the United States

Court of Appeals for the Sixth Circuit correctly decided the

issues on appeal and there is no compelling reason why its de-

cision! should be reviewed by this Honorable Court.

RE ys Bae es Se ae SAY Seas

s

PRELIMINARY STATEMENT

The principal holding of the Court of Appeals was that the

Securities Investor Protection Act (“SIPA”) is applicable to a

registered broker-dealer conducting normal business operations

on the effective date of the Act even though there was then

pending an injunction action by the Securities and Exchange

Commission and the registrant had been in financial difficulty

and in violation of the Commission’s “Net Capital Rule” for

many months.

Yet, petitioner “reserves” discussion of this issue and bases

its Petition upon the necessity for a pronouncement by this

Court as to whether or not a private enforcement action is

authorized by the Act, whether the United States District Court

for the Middle District of Tennessee had in personam jurisdic-

tion over it and whether its intervention would be feasible at

this stage of the receivership proceeding.

These questions did not appear to be of such paramount

importance in the courts below. While petitioner’s answer in

the District Court raised seven (7) affirmative defenses, the

last of which was

“38. This Court lacks jurisdiction in this proceeding.”

it was not alleged that the Act afforded no private cause of

action and there was some indication that the question as to

the receiver's standing and the in personam jurisdiction of the

Court was being waived:

“We don’t think the receiver has standing, and the rea-

sons are set forth, but for the purpose of resolving the

merits of this problem in this case and only for the pur-

pose of this case, as we stated in our memorandwin, we

are prepared to waive the objection for this case only,

a, oe

x

because we do want to get to the problem and get rid of

it once and for all, as you do, Your Honor, and as they do.

“So, forthe same reasons, while we think there is sub-

stantial objection to the jurisdiction of this Court over

the person of SIPC, since we have the capacity to waive

that objection, we do, provided this matter goes on, and

I mean provided as a normal litigated civil case.

~“What we don’t waive, because we can’t waive, is the

substantial question in our view of this Court's right to

entertain this proceeding at all. If there is a defect in this

Court's jurisdiction, which is other than a defect in terms

of personal jurisdiction, it has to be resolved.”

Statement of Wilfred R. Caron, petitioner's As-

sociate General Counsel, in the United States

District Court on June 7, 1972, page 94 of

Appendix filed in Court of Appeals.

The District Court nevertheless ruled on “Personal Jurisdic-

tion” and “Subject Matter Jurisdiction” adversely to petitioner

but no cross-appeal was taken. While the Court of Appeals

discussed briefly petitioner's challenge to the receiver's stand-

ing, it dealt with the attacks on jurisdiction—both subject mat-

ter and in personam—in a footnote in which it simply adopted

the District Court's disposition of these contentions.

It may also be noted that in Lohf v. Casey, 466 F.2d 618

(10th Cir. 1972), an action instituted by a trustee in bank-

ruptcy, there is no indication in either the opinion of the trial

court (330 F.Supp: 356) or that of the Court of Appeals that

petitioner raised any question as to the standing of the trustee,

the authorization for a private cause of action or either the

subject matter or in personam jurisdiction of the Court.

ARGUMENT

I. Customers of an Insolvent Member of SIPC Are Entitled to

Demand Protection Under the Act Where Both the Com--

mission and SIPC Have Failed or Refused to Discharge

Their Obligations.

On February 2, 1971, only four (4) days after the entry

of the Order appointing James C. Barbour as Receiver for Guar-

anty and certain related companies, the Atlanta Regional Office

of the Commission sent information to its headquarters in Wash-

ington D.C. on the circumstances of Guaranty, but for some

reason this information was not conveyed to SIPC.' The re-

eeiver proceeded to address himself to his obligations to the cus-

tomers of the broker-dealer, conducting an audit to identify and

determine the ownership of securities in the face amount of

some Sixteen Million ($16,000,000.00) Dollars and undertak-

ing to devise and submit to the Court in accordance with its

instructions a recommendation for appropriate steps “to protect

the diversified interests of religious institutions for which said

corporations have been acting as underwriter . . .”

Realizing in early May 1971 that nothing had been heard

from either the Commission or SIPC, the receiver instructed his

attorney to review the Act and take appropriate steps to obtain

its benefits if they were available. On May 27, 1971, the latter

wrote to the Chairman of SIPC which constituted its first notice

of Guaranty’s condition and the pending proceedings.

1 In the District Court, counsel for the Commission stated that

he was not able to determine “whether it got lost . . . or

whether some lower staff official believed that SIPC intervention

wasn’t necessary in this case . . .” SIPC counsel stated that it was

his understanding, “which is imperfect, because I wasn’t at SIPC

at the time, but it is my understanding that there was a conscious

decision made by somebody, whose name I don’t have in my mind

right now, at the Commission to the effect that this Act had no ap-

plication in this.” (App. pp. 88, 92).

— 5 —

During the next several months, petitioner obtained a report

from the Commission and voluminous materials from the re-

ceiver but gave him no indication as to its position with refer-

ence to the applicability of the Act. Finally, on September 23,

1971, the receiver’s attorney wrote again to the Chairman of

SIPC inquiring as to its decision. SIPC’s general counsel replied

on October 5, 1971 that, while it still did not have certain infor-

mation which would be helpful, “based on information presently

available, this Corporation has no plans for filing an application

for the appointment of a Trustee in this proceeding.” After fur-

ther exchanges of correspondence as to SIPC’s reasons for de-

clining to intervene and the investigation of receiver's counsel

into the circumstances of the Commission’s failure to notify

SIPC of the condition of Guaranty and also the manner in

which jurisdiction was invoked in Lohf v. Casey (supra), the

receiver filed his Petition seeking a show cause order to require

both the Commission and SIPC to indicate why the benefits of

the Act should not be made available to Guaranty’s customers.

The very recital of the foregoing circumstances demonstrates

the necessity for a private cause of action in order to achieve the

stated purpose of the Act, i.e. the protection of securities in-

vestors. We still do not know whether the Commission's failure

to notify petitioner of Guaranty’s condition was due to an over-

sight or a deliberate decision. Since the Commission has taken

the position throughout this proceeding that the Act was ap-

plicable to Guaranty, and since it had a statutory duty to notify

petitioner in any event, and since in February 1971, the receiver-

ship proceeding had just been initiated, it must be assumed that

the Commission's failure was inadvertent. Yet it has still taken

no steps to require SIPC to assist Guaranty’s customers.

Petitioner cites numerous cases but relies most heavily upon

the Amtrak decision, National RR Passenger Corp. v. National

Association of RR Passengers, 414 U.S. 453, 38 L.Ed.2d 646

hen

(1974). The distinctions between that case and this one are

conclusive.

There was a sharp difference of opinion among the litigants

and the courts as to whether or not railroad passengers were the

intended beneficiaries of the Amtrak Act. There can be no dis-

pute that Congress enacted the Securities Investor Protection

Act for the primary and virtually exclusive benefit of securities

investors.

The Amtrak Act provided specifically for one type of private

cause of action and the language, by implication excluded any

other private causes of action. The SIPA, on the other hand,

is silent on the subject except that SIPC was granted the power:

“(1) To sue and be sued, complain and defend’ in its

corporate name and through its own counsel, in any court,

state, or federal.”

Section 3(b), 15 U.S.C. § 78ccc(b).

The legislative history of the Amtrak Act indicated Con-

gress’s rejection of a proposal to amend Section 307(a) so as

to permit any aggrieved party to institute legal proceedings for

violations of the law. The legislative history of SIPA con-

tains nothing to suggest that the question of private causes of

action was considered, pro or con, at any time. ©

This Court found that to construe the Amtrak Act to permit

private causes of action, except in cases involving labor agree-

ments, would tend to frustrate one of the principal objectives

of the Act, namely, to provide an efficient means whereby

Amtrak could eliminate uneconomic routes without the neces-

sity of submitting to the time-consuming proceedings of State

regulatory bodies or the Interstate Commerce Commission. We

fail to see how the allowance of a private cause of action by

securities investors can frustrate the principal objective of SIPA,

i.e. the protection of such investors, even though it may cause

inconvenience, annoyance and additional labor for SIPC.

We feel that the decision in J./. Case Co. v. Borak, 377

U.S. 426, 12 L.Ed.2d 423, 84 S.Ct. 1555 (1964) is more apt.

There a unanimous court held that Federal courts have the

power to grant all necessary remedial relief in a stockholders

suit for violation of Section 14(a) of the Securities Exchange

Act of 1934. It was contended that Congress made no specific

reference to a private right of action in Section 14(a) but the

Court replied:

“While this language makes no specific reference to a

private right of action, among its chief purposes is the

‘protection of investors, which certainly implies the avail-

ability of judicial relief when necessary to achieve that re-

sult.”

12 L.Ed.2d 427.

The Court further observed that:

“Private enforcement of the proxy rules provides a

necessary supplement to Commission action.”

12 L.Ed.2d 427.

In the later case of Allen v. Board of Elections, 393 U.S.

544, 22 L.Ed.2d 1, 89 S.Ct. 817, Borak was summarized as

follows:

“We have previously held that a federal statute passed

to protect a class of citizens, although not specificaily au-

thorizing members of the protected class to institute suit,

nevertheless implied a private right of action.”

22 L.Ed.2d 12.

It is interesting to note that in Allen, this Court emphasized

that the statute provided that the attorney general “may in-

stitute . . . an action” or “may .. . file . . . an application for an

~~

—_— gy

order.” (22 L.Ed.2d 12). Section\7(b) of SIPA likewise pro-

vides that “the Commission may apply . . . for an order . .'

(15 U.S.C. § 78ggg) (Emphasis added).

\

We, therefore, respectfully submit that the Court of Appeals

determined this issue in accord with previous decisions of this

Court and its decision need not be reviewed.

II. Neither the District Court Nor the Court of Appeals Has.

Yet Ruled as to Specific Questions involving Implementa-

tion of the Act.

j

Petitioner seems to be preoccupied with the sanctity of the

liquidation procedure prescribed by the Act and to place a

slavish devotion to this procedure above any concern it may

have for the protection of securities investors. Because the

receivership has proceeded to advanced stages and because the

receiver has succeeded in minimizing the losses of Guaranty’s

customers, petitioner argues that it should not be required to

have anything to do with the case.

Of course, if the Creuilesion had notified petitioner in early

February 1971, and if petitioner had acted promptly, the re-

ceivership proceeding could have been succeeded by an SIPC

liquidation at that time. Be that as it may, however, the Court

of Appeals has done no more than to remand this case “to the

district court for processing consistent with (its) opinion and

specifically to determine and enforce any rights of Guaranty’s

customers under the SIPA.”

It remains for the District Court to now determine what rights

the customers have under the Act and in what manner they

may be protected. Petitioner will have a full opportunity to

present its views on these issues in light of its interpretation of

the Act. It will not do-to say, however, that simply because

a pe

the receivership proceeding has progressed to its late stages and

it appears that the loss to customers may not be considerable,

petitioner should be relieved of the statutory obligation to such

customers which Congress placed upon it. The Act authorizes

protection of customers of members of SIPC “notwithstanding

the pendency . . . of any . . . equity receivership proceed-

ing . . .” (Section 5, 15 U.S.C., § 78eee(a)(3)(B)).

We, therefore, respectfully submit that the implementation

of the Act in this case is a matter which has not yet been reached

by the lower courts and, consequently, cannot be reviewed by

this Court.

e

III. There Is No Compelling Reason to Review the Jn Personam

Jurisdiction of the District Court.

It would appear that this issue was effectively waived in the

District Court, that no cross-appeal was perfected as to the

‘Court’s ruling, and no great importance was attached to it in

the Court of Appeals.

The significant question here is the applicability of the Act

and if it was correctly decided by the Court of Appeals, it

would serve no good purpose to require the receiver to rein-

stitute the action in the District of Columbia. Admittedly, there

was no proof introduced in the hearing under the show cause

order as to petitioner’s activities within the Middle District of

Tennessee, but the requirement for such proof was clearly

dispensed with by the statement of petitioner’s counsel in open

court, quoted hereinabove.

The language of Section 3(b) of the Act permitting petitioner

to be sued “in any court, State, or Federal” implies that Congress

did not intend that securities investors from all over the country

would be required to come to Washington in order to seek the

protection of the Act.

nse Rs Das RA ANAK abe Ha OO Baa

—10—

CONCLUSION

For all of the above regsons, Respondent, James C. Barbour.

Receiver, insists that the Petition for Writ of ,Certiorari should

be denied.

Respectfully submitted

W. OVID COLLINS, JR.

18th Floor

Third National Bank Building

Nashville, Tennessee 37219

Attorney for James C.

Barbour, Receiver