Exch. Act Release No. 5870 (Feb. 9, 1959), 38 S.E.C.
843, 1959 WL 59531
*1 Securities Exchange Act of 1934
IN THE MATTER OF
CARL M. LOEB, RHOADES & CO.
and
DOMINICK & DOMINICK
Files Nos. 8-279 and 8-563.
Promulgated February 9, 1959
(Securities Exchange Act of 1934--Sections 15(b) and 15A)
BROKER-DEALER PROCEEDINGS
Grounds for Revocation of Registration
Grounds for Expulsion from Registered Securities Association
Violations of Securities Act of 1933
Offer to Sell Unregistered Securities
Where registered broker-dealers, prior to the filing of registration statement
with respect to contemplated offering of securities through them as
underwriters, publicized such offering in a manner calculated to arouse and
stimulate dealer and investor interest in the security and, by eliciting
indications of interest from dealers and investors, to set in motion the process
of distribution, held, publicity constituted offer to sell security in violation
of Section 5(c) of Securities Act of 1933.
Public Interest
Where registered broker-dealers willfully violated Section 5(c) of Securities
Act of 1933 by offering to sell security as to which no registration statement
had been filed, held, under all the circumstances, including registrants'
excellent reputation and fact that they acted in reliance on counsel, that no
investors appear to have been injured, and registration statement as to offering
has become effective, no sanction is required in public interest or for
protection of investors.
APPEARANCES:
Philip A. Loomis, Jr., for the Division of Trading and Exchanges of the
Commission.
John T. Cahill, of Cahill, Gordon, Reindel & Ohl for Carl M. Loeb Rhoades & Co.,
Dominick & Dominick and Stanley R. Grant.
FINDINGS AND OPINION OF THE COMMISSION
These are consolidated proceedings pursuant to Sections 15(b) and 15A (l)(2) of
the Securities Exchange Act of 1934 ('Exchange Act') to determine whether to
revoke the registration as a broker and dealer of Carl M. Loeb Rhoades & Co.
('Loeb Rhoades') and of Dominick & Dominick ('Dominick'), whether to suspend or
expel registrants from membership in the National Association of Securities
Dealers, Inc. ('NASD'), a registered securities association, and whether, under
Section 15A(b)(4) of the Exchange Act, Stanley R. Grant, a partner in Loeb
Rhoades, is a cause of any order of revocation, suspension or expulsion which
may be issued as to that firm. [FN1]
The orders for proceedings allege that commencing on September 17, 1958,
registrants and Grant offered to sell shares of stock of Arvida Corporation ('Arvida')
when no registration statement had been filed as to such securities, in willful
violation of Section 5(c) of the Securities Act of 1933 ('Securities Act').
[FN2]
Registrants and Grant waived a hearing, the filing of proposed findings and
briefs, and oral argument before us, consented that any member of the staff
might participate or advise in our decision and opinion and entered into a
stipulation of a record with our Division of Trading and Exchanges. These
waivers and the stipulation were tendered as part of an offer of settlement
pursuant to Section 5(b) of the Administrative Procedure Act, [FN3] and were
conditioned upon a finding by us that no sanctions need be imposed upon the
registrants.
*2
On December 12, 1958, we issued an order
determining that, for reasons to be set forth in a Findings and Opinion to be
issued, registrants and willfully violated Section 5(c) of the Securities Act
but that, under all the circumstances it was not necessary in the public
interest or for the protection of investors that any sanctions be imposed, and
we accordingly discontinued the proceedings. Our findings are based upon a
review of the record.
THE OFFERING OF ARVIDA STOCK
Arvida was incorporated in Florida on July 30, 1958, pursuant to plans developed
over the preceding 4 or 5 months to provide for the financing and development of
the extensive real estate holdings of Arthur Vining Davis ('Davis') in
southeastern Florida. In April 1958 each of the registrants was approached by
representatives of Davis, and thereafter, in May and June 1958, as a result of
discussions a plan was developed under which certain of Davis' properties would
be placed in a new corporation to be financed in large part through a public
offering of securities by an underwriting group proposed to be managed by
registrants.
On July 8, 1958 a meeting was held in Miami to work out various aspects of the
contemplated offering. At this meeting it was noted there was some concern in
Florida real estate circles as to the ultimate disposition of the Davis
properties and the possible effect thereof on real estate values, and it was
decided to issue a press release. [FN4] Grant prepared a draft release which
included some description of the 'great spread' of Davis' lands and mention of a
proposed underwriting of the offering through Loeb Rhoades. This draft was
revised by representatives of Davis so as to state merely that the major portion
of the Davis land holdings was to be transferred to Arvida which would proceed
with orderly development and arrange to obtain a large amount of new capital for
that purpose. No mention was made of a public offering or of an underwriting or
underwriters. The substance of this release appeared during the next few days in
various Florida newspapers.
On September 16 and 17, 1958, meetings were held in New York at which the
proposals of registrants for the financing were placed in final form and
submitted to representatives of Davis for transmission to him. At this time it
was decided to issue an additional press release. Grant drafted such a release
on the evening of September 17 and, on September 18 submitted it to officers of
Arvida, representatives of Davis, Dominick and counsel for the proposed
underwriters, obtaining the approval of all of them. Later that day, Davis
approved registrants' financing proposals, and public relations counsel for Loeb
Rhoades was called in to arrange for distribution of the release in New York.
The release, which was issued on the letterhead of letterhead of Loeb Rhoades,
stated that Arvida, to which Davis was transferring his real estate, would be
provided with $25 million to $30 million of additional capital through an
offering of stock to the public, and that Arvida would have assets of over
$100,000,000 'reflecting Mr. Davis' investment' and the public investment. It
referred to a public offering scheduled within 60 days through a nationwide
investment banking group headed by registrant's and to the transfer from Davis
to Arvida of over 100,000 acres 'in an area of the Gold Coast' in 3 named
Florida counties and contained a brief description of these properties including
reference to undeveloped lands and to 'operating properties.'
*3
The release identified the principal
officers of Arvida and stated that Arvida proposed to undertake a 'comprehensive
program of orderly development,' under which some of the lands would be
developed 'immediately into residential communities' and others would be held
for investment and future development as the area expands. It closed with a
reference to the attraction of new industry and the place Arvida would assume in
the 'further growth of Southeastern Florida.'
Officers of Arvida were anxious to have the release issued promptly. Public
relations counsel advised Loeb Rhoades that, in order to make sure that the
story appeared in 3 prominent New York newspapers, which coverage Loeb Rhoades
wanted, it would be advisable, in view of newspaper deadlines, to call reporters
from these papers to Loeb Rhoades' office. This was done on the afternoon of
Thursday, September 18. The reporters asked certain questions which Grant
undertook to answer. He disclosed that the offering price of the stock would be
in the vicinity of $10 or $11 per share and gave certain information about Davis
and his career but declined to answer questions concerning Davis' reasons for
entering into the transaction, the extent of mortgage indebtedness, the
capitalization of Arvida, its balance sheet, and the control of the corporation.
His stated reason for refusing to answer these questions was that he did not
wish to go beyond the release which had been approved by all interested parties.
Copies of the release were also delivered to other New York newspapers and to
the principal wire services. The substance of the release and the information
supplied by Grant appeared in the 3 New York newspapers on September 19, 1958,
and in numerous other news media throughout the country.
A limited survey by our staff covering the 2 business days, September 19 and 22,
immediately following this publicity disclosed buying interest in Arvida stock
attributable to this publicity on the part of brokers, dealers, and the
investing public to the extent of at least $500,000. It was later ascertained
that during these 2 business days a total of 101 securities firms were recorded
by Loeb Rhoades as expressing an underwriting interest in the offering. Loeb
Rhoades did not accept indications of interest from individuals or prospective
selling dealers during this period, but did make notations of selling group
interest on September 19 and 22 by about 25 securities dealers. In addition,
following the publicity, registrants received, prior to September 30, at least
58 expressions of interest from members of the public, including at least 17
specific offers to buy.
On September 22, 1958, we commended an action in the United States District
Court for the Southern District of New York against Arvida, registrants, Grant
and others, seeking an injunction against further violations of Section 5(c) of
the Securities Act. On October 20, 1958, the Court denied our motion for a
preliminary injunction and defendants' counter motions for dismissal, judgment
on the pleadings, or summary judgment and to enjoin these broker-dealer
proceedings. On December 12, 1958, the Court entered a decree permanently
enjoining violation of Section 5(c) by the defendants. The defendants consented
to the entry of this decree and stipulated to the findings of fact which were
adopted by the Court and formed the basis for the Court's ruling. The Court
concluded that, although the defendants appeared to have acted in good faith and
to have had no intention to violate the Securities Act, and although they
continued to deny that their activities violated the statute, their activities
nevertheless constituted a violation of Section 5(c) of that Act.
*4
Arvida filed a registration statement
under the Securities Act covering its proposed offering of securities on October
27, 1958. A material amendment was filed on November 25, 1958, a further
amendment was filed on December 2, 1958, and the registration statement became
effective on December 10, 1958. Between December 2 and 9, 1958, the registrants
pursuant to our suggestion arranged for each underwriter to furnish a copy of
the November 25 and the December 2 prospectus (which were substantially the
same) to all investors who were known to have expressed to such underwriter
prior to October 27, 1958, any kind of interest in purchasing the securities and
to whom such underwriter proposed to sell the securities. [FN5]
The November 25 and the final prospectuses included in this registration
statement disclosed, among other things, that the properties were encumbered by
mortgage debt in the amount of $30,833,324, of which approximately $20,642,000
falls due within the next 5 years. The equity of Davis in Arvida was stated at
approximately $44,827,000, represented by $6,900,000 of debentures payable to
him and capital stock and surplus of $37,927,000. A substantial part of the
proceeds from the financing may be required to meet mortgage indebtedness
maturing in the next few years and to that extent will be unavailable to develop
the properties. During the first fiscal year only $2,800,000 is budgeted for
such development. Approximately 61% of the 100,650 acres owned by Arvida is
located in rural areas removed from present urban development, and substantial
portions of this acreage are accessible only by unpaved roads and a portion is
inaccessible by automobile. Approximately 50% of the 100.650 acres are below the
'flood criteria' established by local authorities as the minimum elevation at
which land may be developed, and substantial fill and drainage expenses would be
required for the development of this property. The operating properties of
Arvida, in the aggregate, are estimated to have operated at a net loss since
their respective years of acquisition.
THE IMPACT OF SECTION 5(c) OF THE SECURITIES ACT
Section 5(c) of the Securities Act, as here pertinent, prohibits offers to sell
any security, through the medium of a prospectus or otherwise, unless a
registration statement, has been filed. Section 2(3) defines 'offer to sell' to
include 'every attempt or offer to dispose of, or solicitation of an offer to
buy, a security for value.' Section 2(10) defines a 'prospectus' to mean 'any
prospectus, notice, circular, advertisement, letter, or communication . . .
which offers any security for sale . . .' [FN6] These are broad definitions, and
designedly so. It is apparent that they are not limited to communications which
constitute an offer in the common law contract sense, or which on their face
purport to offer a security. Rather, as stated by our General Counsel in 1941,
they include 'any document which is designed to procure orders for a security.'
[FN7]
*5
The broad sweep of these definitions is
necessary to accomplish the statutory purposes in the light of the process of
securities distribution as it exists in the United States. Securities are
distributed in this country by a complex and sensitive machinery geared to
accomplish nationwide distribution of large quantities of securities with great
speed. Multi-million dollar issues are often oversubscribed on the day the
securities are made available for sale. [FN8] This result is accomplished by a
network of prior informal indications of interest or offers to buy between
underwriters and dealers and between dealers and investors based upon mutual
expectations that, at the moment when sales may legally be made, many prior
indications will immediately materialize as purchases. It is wholly unrealistic
to assume in this context that 'offers' must take any particular legal form.
Legal formalities come at the end to record prior understandings, but it is the
procedures by which these prior understandings, embodying investment decisions,
are obtained or generated which the Securities Act was intended to reform.
One of the cardinal purposes of the Securities Act is to slow down this process
of rapid distribution of corporate securities, at least in its earlier and
crucial stages, in order that dealers and investors might have access to, and an
opportunity to consider, the disclosures of the material business and financial
facts of the issuer provided in registration statements and prospectuses. Under
the practices existing prior to the enactment of the statute in 1933, dealers
made blind commitments to purchase securities without adequate information, and
in turn, resold the securities to an equally uninformed investing public. The
entire distribution process was often stimulated by sales literature designed
solely to arouse interest in the securities and not to disclose material facts
about the issuer and its securities. [FN9] It was to correct this situation that
the Securities Act originally prohibited offers to sell and solicitations of
offers to buy as well as sales prior to the effective date of a registration
statement and imposed a 20-day waiting period between the filing and the
effective date. [FN10]
This entire problem was carefully reconsidered by the Congress in 1954. Both the
securities industry and the Commission had been concerned by the fact that
dissemination to investors during the waiting period of the information
contained in a registration statement was impeded by the fear that any such
dissemination might be held to constitute an illegal offer. As a result, wide
dissemination of material facts prior to the time of sale, which was an
important objective of the statute, was to some extent frustrated. We had
attempted to deal with this problem by rules which defined distribution of
preliminary or so-called 'red herring' prospectuses as not constituting an
'offer,' and required such distribution at least to dealers as a prerequisite to
acceleration of the registration statement. However, the convern that Section 5
might be violated persisted despite the permissibility of red herring
prospectuses, and the desired dissemination of information was not obtained.
[FN11] This continuing concern is significant for present purposes and
illustrates the scope and reach attributed to the prohibitions of Section 5(c).
*6
The Congress in 1954 adopted a carefully
worked out procedure to meet the problem. It is essentially as follows: (1) the
strict prohibition of offers prior to the filing of a registration statement was
continued; (2) during the period between the filing of a registration statement
and its effective date offers but not sales may be made but written offers could
be made only by documents prescribed or processed by the Commission; and (3)
sales continued to be prohibited prior to the effective date. [FN12] In
permitting, but limiting the manner in which pre-effective written offers might
be made, the Congress was concerned lest inadequate or misleading information be
used in connection with the distribution of securities. We were directed to
pursue a vigorous enforcement policy to prevent this from happening. [FN13] In
obedience to this mandate we have made clear our position that the statute
prohibits issuers, underwriters and dealers from initiating a public sales
campaign prior to the filing of a registration statement by means of publicity
efforts which, even though not couched in terms of an express offer, condition
the public mind or arouse public interest in the particular securities. [FN14]
Even if there might have been some uncertainty as to Congressional intent with
regard to pre-effective publicity prior to 1954, [FN15] none should have existed
thereafter. The Congress has specified a period during which, and a procedure by
which, information concerning a proposed offering may be disseminated to dealers
and investors. This procedure is exclusive and cannot be nullified by recourse
to public relations techniques to set in motion or further the machinery of
distribution before the statutory disclosures have been made and upon the basis
of whatever information the distributor deems it expedient to supply.
We accordingly conclude that publicity, prior to the filing of a registration
statement by means of public media of communication, with respect to an issuer
or it securities, emanating from brokerdealer firms who as underwriters of
prospective underwriters have negotiated or are negotiating for a public
offering of the securities of such issuer, must be presumed to set in motion or
to be a part of the distribution process and therefore to involve an offer to
sell or a solicitation of an offer to buy such securities prohibited by Section
5(c). Since it is unlawful under the statute for dealers to offer to sell or to
offer to buy a security as to which registration is required, prior to the
filing of a registration statement, dealers who are to participate in a
distribution likewise risk the possibility that employment by them of public
media of communication to give publicity to a forthcoming offering prior to the
filing of a registration statement constitutes a premature sales activity
prohibited by Section 5(c).
Turning to the facts of this case, we find that the September 19, 1958, press
release and resultant publicity concerning Arvida and its securities emanated
from managing underwriters contemplating a distribution of such securities in
the near future as to which a registration statement had not yet been filed. We
also find that the mails and instrumentalities of interstate commerce were used
in the dissemination of this publicity. We further find that such release and
publicity was of a character calculated, by arousing and stimulating investor
and dealer interest in Arvida securities and by eliciting indications of
interest from customers to dealers and from dealer to underwriters, to set in
motion the processes of distribution. In fact it had such an effect. [FN16] It
contained descriptive material concerning the properties, business, plans and
management of Arvida, it included arresting references to 'assets in excess of
$100,000,000,' and 'over 100,000 acres, more than 155 square miles, in an area
of the Gold Coast.' Reporters were furnished with price data, and registrants
were named as the managing underwriters thus permitting, if not inviting,
dealers to register their interest with them. [FN17] We find that such
activities constituted part of a selling effort by the managing underwriters.
*7
The principal justification advanced for
the September 19 release and publicity was the claim that the activities of Mr.
Davis, and specifically his interests in Florida real estate, are 'news' and
that accordingly Section 5(c) should not be construed to restrict the freedom of
the managing underwriters to release such publicity. [FN18] We reject this
contention. Section 5(c) is equally applicable whether or not the issuer or the
surrounding circumstances have, or by astute public relations activities may be
made to appear to have, news value. [FN19]
Brokers and dealers properly and commendably provide their customers with a
substantial amount of information concerning business and financial developments
of interest to investors, including information with respect to particular
securities and issuers. Section 5, nevertheless, prohibits selling efforts in
connection with a proposed public distribution of securities prior to the filing
of a registration statement and, as we have indicated, this prohibition includes
any publicity which is in fact a part of a selling effort. Indeed, the danger to
investors from publicity amounting to a selling effort may be greater in cases
where an issue has 'news value' since it may be easier to whip up a 'speculative
frenzy' concerning the offering by incomplete or misleading publicity and thus
facilitate the distribution of an unsound security at inflated prices. This is
precisely the evil which the Securities Act seeks to prevent.
We realize, of course, that corporations regularly release various types of
information and that a corporation in which there is wide public interest may be
called upon to release more information more frequently about its activities
than would be expected of lesser known or privately held enterprises. In the
normal conduct of its business a corporation may continue to advertise its
products and services without interruption, it may send out its customary
quarterly, annual and other periodic reports to security holders, and it may
publish its proxy statements, send out its dividend notices and make routine
announcements to the press. This flow of normal corporate news, unrelated to a
selling effort for an issue of securities, is natural, disirable and entirely
consistent with the objective of disclosure to the public which underlies the
federal securities laws. However, an issuer who is a party to or collaborates
with underwriters or prospective underwriters in initiating or securing
publicity must be regarded as participating directly or indirectly in an offer
to sell or a solicitation of an offer to buy prohibited by Section 5(c).
Difficult and close questions of fact may arise as to whether a particular item
of publicity by an issuer is part of a selling effort or whether it is an item
of legitimate disclosure to investors unrelated to such an effort. [FN20] Some
of these problems are illustrated in
Securities Act Release No. 3844 above cited. This
case, however, does not present such difficulties. Arvida was a new venture
having, at the date of the September publicity only 1 stockholder--Davis. There
was no occasion to inform existing stockholders or investors in the trading
markets concerning developments in its affairs in order that they might protect
their interests or trade intelligently. We see no basis for concluding that the
purpose of the release was different from its effect--the stimulation of
investor and dealer interest as the first step in a selling effort.
*8
Comparison of the September publicity with
the final prospectus of Arvida illustrates the wisdom of the Congressional
prohibition against pre-filing publicity. Wholly omitted from the release and
withheld from reporters were the essential financial facts of capitalization,
indebtedness and operating results which are so material to any informed
investment dicision. The great acreage owned by Arvida was stressed without
disclosing that the bulk of it was in areas remote in time and distance from the
development which was also stressed. Obscured also was the probable use of much
of the proceeds of the financing, not to develop the properties but rather to
discharge mortgage debt. As is so often the case, the impression conveyed by the
whole is more significant than the individual acts of omission. From the
publicity investors could, and no doubt many did, derive the impression that the
risk and financing requirements of this real estate venture had been
substantially satisfied by Davis and that the public was being invited to
participate in reaping the fruits through early development. In fact, as clearly
appears from the final prospectus, much of the risk remains to be taken and much
of the financing essential to the issuer's business remains to be carried out.
What is presented in this case is no mere technical controversy as to the time
and manner of public disclosure concerning significant business facts. On the
contrary, the issue vitally concerns the basic principle of the Securities Act
that the health of the capital markets requires that new issues be marketed upon
the basis of full disclosure of material facts under statutory standards of
accuracy and adequacy and in accordance with the procedural requirements of
Section 5. If actual investment decisions may be brought about by press
releases, then compliance with the registration requirements may be reduced to
little more than a legal formality having small practical significance in the
marketing of new issues.
We conclude, therefore, that registrants and Grant willfully violated Section
5(c) of the Securities Act. [FN21]
THE PUBLIC INTEREST
Since we have found willful violations of the Securities Act, we must consider
whether it is in the public interest or necessary or appropriate for the
protection of investors to revoke the registration of either registrant or to
suspend or expel either of them from membership in the NASD. In such inquiry our
concern is not only with the gravity of the violations but primarily whether
under all the circumstances the public interest or investor protection calls for
elimination of registrants from the securities business or their permanent or
temporary exclusion from the NASD.
For the reasons discussed above we believe the violations were serious, since
practices such as these may subvert to a substantial degree the essential
objective of the Securities Act that investors and dealers should have the
opportunity to make investment decisions upon the basis of adequate information
fully disclosed under statutory standards and sanctions.
*9
However, we have taken into account a number of mitigating factors.
Registrants bear an excellent general reputation in the securities business and
have never before been the subject of disciplinary proceedings by us. The Court
has found that they acted in good faith and in reliance upon the opinion of
counsel. These proceedings and the judgment of the Court in the injunctive
action we commenced have served to place registrants and the securities industry
upon unmistakable notice of their obligations in the field of publicity and
forcibly to direct the attention of registrants to the consequences of improper
practices in this area. There is no evidence of injury to investors since the
publicity attendant upon our actions and the steps taken to disseminate the
facts disclosed in the registration statement, particularly to those investors
who had previously evidenced an interest, should have been adequate to dispel
the effect of the unlawful release. We therefore conclude that the public
interest and the protection of investors do not require that the registrations
of registrants as brokers and dealers be revoked or that they be suspended or
expelled from membership in the NASD.
By the Commission (Chairman Gadsby and Commissioners Orrick, Patterson Hastings,
and Sargent).
FN1 Section 15(b) of the Exchange Act, as here pertinent, provides that we shall
revoke the registration of a broker or dealer if we find it is in the public
interest and that such broker or dealer, or any partner, controlling or
controlled person of such broker or dealer, has willfully violated any provision
of the Securities Act of 1933.
Section 15A (l)(2) of the Exchange Act provides for the suspension for a maximum
of 12 months or the expulsion from a registered securities association of any
member thereof who has willfully violated any provision of the Securities Act of
1933 if we find such action to be necessary or appropriate in the public
interest or for the protection of investors.
Under Section 15A (b)(4) of the Exchange Act, in the absence of our approval or
direction, no broker or dealer may be admitted to or continued in membership in
a registered securities association if the broker or dealer or any partner,
officer, director, or controlling or controlled person of such broker or dealer,
was a cause of any order of revocation, suspension, or expulsion which is in
effect.
FN2 Section 5(c) of the Securities Act, as applicable here, makes unlawful the
use of the mails or interstate facilities to offer to sell a security unless a
registration statement has been filed as to such security.
FN3 Section 5(b) of the Administrative Procedure Act provides in pertinent part:
'The agency shall afford all interested parties opportunity for (1) the
submission and consideration of facts, arguments, offers of settlement, or
proposals of adjustment where time, the nature of the proceeding, and the public
interest permit . . .'
FN4 Grant took with him to this meeting a draft press release which he had
previously prepared and cleared with certain of his partners.
FN5 Distribution of preliminary prospectuses to prospective investors residing
in Florida, Alabama, and Iowa, and not made because counsel for registrants
advised that this would violate the laws of those States.
FN6 It may be noted that the definition of a 'prospectus' contained in Section
2(10) excludes 'a notice, circular, advertisement, letter or communication in
respect of a security . . . if it states from whom a written prospectus meeting
the requirements of Section 10 may be obtained . . .' and in addition does not
more than contain certain narrowly specified information. It is significant that
Congress here recognized that a communication which merely states from whom a
prospectus may be obtained might nevertheless constitute an offer as defined in
the Securities Act and thus a prospectus unless excluded from this definition.
Pursuant to the rule-making authority granted under Section 2(10)(b), we have
adopted Rule 134 which defines precisely the type of information permitted in a
Section 2(10)(b) communication and the circumstances under which such a
communication can be used. Both Section 2(10)(b) and Rule 134 emphasize that
this type of communication may only be used after the registration statement has
been filed.
FN7
Securities Act Release No. 2623 (July 25, 1941).
FN8 See
Exchange Act Release No. 2446 (March 18, 1940).
FN9 'Despite the fact that [the underwriting] business demands the assumption of
responsibilities of a character fully equivalent to those of trusteeship,
compelling full and fair disclosure not only of the character of the security
but of the charges made in connection with its distribution, the literature on
the faith of which the public was urged to invest its savings was too often
deliberately misleading and illusive. Even dealers through the exertion of
high-pressure tactics by underwriters were forced to take allotments of
securities of an essentially unsound character and without opportunity to
scrutinize their nature. These then would be worked off upon the unsuspecting
public.' House Report No. 85, 73rd Cong., 1st Sess., p. 3 (1933).
FN10 Section 8(a) of the Securities Act. Under the statute as amended in 1940 we
may accelerate the effective date if the conditions specified in Section 8(a)
are, in our judgment, satisfied.
FN11 Senate Report No. 1036, 83rd Cong., 2nd Sess. p. 5 (1954); House Report No.
1542, 83rd Cong., 2nd Sess. pp. 7-14 (1954).
FN12 See House Report No. 1542, 83rd Cong., 2nd Sess. p. 24 (1954).
FN13 'Your committee in recommending that this bill be enacted expects the
Commission to be most vigorous in the enforeement and implementation of the
basis provisions of these acts as amended by the adoption of appropriate rules,
procedures, and other means designed to provide full disclosure and the
dissemination of accurate and adequate information to the investing public. It
also expects that the Commission will be ever vigilant and alert to prevent the
development of any deceptive or 'shady' practices which may have the effect of
defeating the basic purposes of the acts or misleading or inaccurately informing
the investing public in connection with the issuance or distribution of
securities.' Senate Report No. 1036, 83rd Cong., 2nd Sess. p. 2 (1954).
FN14
Securities Act Release No. 3844 (October 8, 1957); Address of Chairman
Edward N. Gadsby before the Central States Group of the Investment Bankers
Association, 'Current Problems under Section 5 of the Securities Act and
Release No 3844' (Chicago, Illinois, March 20, 1958)
FN15 See, however,
Securities Act Release No. 70 (November 6, 1933),
Securities Act Release No. 464 (August 19, 1935) and
Securities Act Release No. 802 (May 23, 1936).
FN16 At least 1 of the news reports following this meeting included a statement
that it was unusual for underwriters to volunteer so much detail prior to
registration, and also a statement that this advance detail would presumably
help to intensify widespread interest in Davis' activities.
FN17 We reject the suggestion that the purpose of the release was merely to
dispel rumors in Florida concerning the ultimate disposition of the Davis
holdings. Had this been the purpose no such elaboration of detail would have
been necessary, nor would there have been need to go to such effort to make sure
that the material appeared in the principal financial newspapers in New York or
to give it nationwide circulation. In any event, the July 8 press release seems
entirely adequate to quiet any apprehension in Florida concerning the fate of
the Davis properties and in fact had that effect. It was then announced that the
properties were to be conveyed to Arvida which proposed to proceed with their
orderly development and was arranging for necessary financing. It is significant
that the July 8 release elicited public response primarily from persons
interested in Florida real estate, while the September 18 release produced a
reaction from investors and securities dealers. This is hardly a coincidence.
FN18 Other explanations, not strongly urged, were that the release was a species
of institutional advertising designed to enhance the 'prestige' of registrants
and that it was intended to forestall competition from other investment bankers
for the Arvida financing. It would seem, however, that registrants could equally
well, or better, obtain any benefits of prestige arising from their connection
with the financing by waiting until the registration statement was on file or
effective, at which time their connection would be publicized. It does not
appear that any competition for the financing was in the field on September 18
and, in any event, prior to dissemination of the release, Davis had indicated
his acceptance of registrants' proposal. The existence of competition would not,
in any event, limit the applicability of Section 5(c).
FN19 It should be clear that our interpretation of Section 5(c) in no way
restricts the freedom of news media to seek out and public financial news.
Reporters presumably have no securities to sell and, absent collusion with
sellers, Section 5(c) has no application to them. Underwriters such as
registrants are in a different position; they are in the business of
distributing securities, not news. Failure to appreciate this distinction
between reporters and securities distributors has given rise to a further
misconception. Instances have arisen in which a proposed financing is of
sufficient public interest that journalists on their own initiative have sought
out and published information concerning it. Since such journalistic enterprise
does not violate Section 5, our failure to question resulting publicity should
not have been taken as any indication that Section 5 is inapplicable to
publicity by underwriters about newsworthy offerings. Similar consideration
apply to publicity by issuers.
FN20 Whether in any particular case publicity is an offer depends upon all the
facts, and the surrounding circumstances including the nature, source,
distribution, timing, and apparent purpose and effect of the published material.
Cf. Securities and Exchange Commission vs. Georgia Pacific Corporation (Civil
Action No. 115-75, S.D.N.Y., 1956). Here a well-known corporation, as to which a
distribution of securities was not quite completed, published what purported to
be a piece of institutional or product advertising but which was so phrased as
apparently to relate also to its securities and to convey a misleading
impression concerning them. We filed an action for injunction against further
violation of Sections 5 and 17 and obtained a temporary restraining order. The
action was later dismissed upon defendant's stipulation to omit the
objectionable material from future advertising.
FN21 This does not mean that we find registrants and Grant to have intentionally
violated the law. They assert that they acted under the mistaken impression that
Section 5(c) is inapplicable to press releases concerning offerings having news
value. But, as is well settled, a finding of willfulness within the meaning of
Sections 15(b) and 15(A)(l)(2) of the Exchange Act does not require a finding of
intention to violate the law. It is sufficient that registrants be shown to have
known what they were doing.
Thompson Ross Securities Co., 6 S.E.C. 1111, 1122-23 (1940);
Hughes vs. S.E.C. 174 F. 2d 969, 977 (C.A.D.C. 1949); The
Whitehall Corporation, Exchange Act Release No. 5667 (April 2, 1958); Shuck
vs. S.E.C. (C.A.D.C. No. 14,208, December 1958). Registrants, of course, knew
that no registration statement had been filed and the release was intentionally
composed and publicized.