UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
June 24, 1966
M.G. Davis & Co., Inc., et al.
Cohen, et al.
Bryan, District Judge.
The opinion of the court was delivered by: BRYAN
BRYAN, District Judge:
This is an action pursuant to 28 U.S.C. §§ 1361 and 2201 for a declaratory judgment and relief in the nature of mandamus. Plaintiffs are presently respondents in two administrative proceedings now pending before the Securities and Exchange Commission. They have moved in this court for a preliminary injunction restraining the members of the S.E.C. from conducting these proceedings. Rule 65, F.R.C.P. Defendants have cross-moved for a summary judgment dismissing the complaint. Rule 56, F.R.C.P.
Plaintiff M.G. Davis & Co., Inc. (Davis & Co.) is a New York corporation with its principal place of business in that state. Plaintiffs Levine and Wax are officers and since May 1, 1964 have been the sole stockholders of Davis & Co. Plaintiff Kopel formerly was employed as a salesman by Davis. The five individuals named as defendants are the present commissioners of the S.E.C.
On March 18, 1961, Davis & Co. registered with the Commission as a broker and dealer in securities. 15 U.S.C. § 78 o (b). In November 1963 the staff of the Commission commenced an investigation pursuant to § 21(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u(a), to determine whether there had been violations of the securities acts by persons associated with Davis & Co. On May 4, 1964, however, the Commission received a letter from Davis & Co. giving notice of its withdrawal from registration as a broker-dealer. 15 U.S.C. § 78 o (b). Under Commission Rule 15b-6
this notice would have become automatically effective within 30 days unless the S.E.C. initiated a proceeding to revoke or suspend registration. Accordingly, on June 2 the Commission issued an order instituting a "private" proceeding against Davis & Co. to determine whether "remedial action" would be "appropriate in the public interest pursuant to Section 15(b) and 15A of the Exchange Act." 15 U.S.C. § 78 o (b), 78 o -3. On June 3 the Secretary of the Commission sent a telegram to Davis & Co., Wax, and a third party Rosenberg who is not a party here, notifying them of the commencement of the proceeding. On the following day copies of the order were sent by registered mail to the three respondents.
On June 22 Davis & Co. filed an answer generally denying the allegations of the order and asserting that it was entitled to have "its application for withdrawal of registration granted forthwith." In the following two years the only step taken by the Commission in pursuit of the private proceeding has been to appoint a hearing examiner charged with general responsibility for ruling on pre-trial matters.
On August 4, 1965, as a result of further investigation the Commission by order also initiated a "public" proceeding against plaintiffs and others. The matters complained of in the order initiating this second proceeding involve additional parties and different facts than those in the private proceeding. On August 18, 1965, Davis & Co., Wax and Levine filed their respective answers. Kopel filed his answer on the 23rd. These four are the plaintiffs in the present action.
On January 10, 1966, plaintiffs commenced an action in this court against the Commission without naming its members individually. They sought to enjoin it from continuing the public proceeding and to obtain an order dismissing the private proceeding. Upon motion of the Commission Judge Levet on March 4 dismissed the complaint without prejudice on the ground that the agency as such was immune from suit.
On March 21 the plaintiffs instituted the instant action against the individual Commissioners of the S.E.C. The complaint seeks a declaration that the withdrawal of Davis & Co. as a registered broker-dealer became unconditionally effective on June 3, 1964, and that therefore the S.E.C. is without authority to continue prosecution of the private proceeding. It also seeks a permanent injunction restraining the members of the Commission from continuing the public proceeding. The motions before me were argued on June 7.
As is conceded, preliminary determinations by the S.E.C. will ordinarily be reviewable in the courts of appeal only when they have become the basis of a "final" order. 5 U.S.C. § 1009(c); 15 U.S.C. § 78y. On the other hand, a district court under its general federal question equity jurisdiction, 28 U.S.C. § 1331, is empowered to correct agency conduct "in excess of its delegated powers and contrary to a specific prohibition of the Act." Leedom v. Kyne, 358 U.S. 184, 188, 3 L. Ed. 2d 210, 79 S. Ct. 180 (1958). See also 28 U.S.C. §§ 1337, 1361. The test to be applied in determining whether this "narrow" exception to the customary avenues of review may be invoked, see Boire v. Greyhound Corp., 376 U.S. 473, 481, 11 L. Ed. 2d 849, 84 S. Ct. 894 (1964), is "whether the Commission has stepped plainly beyond the bounds of its statutory authority, or has acted in clear defiance of plaintiffs' constitutional rights to their irreparable damage."
Accordingly, the courts have shown "extreme circumspection" when a party seeks injunctive interference with preliminary agency decisions. Local 130, Electrical Workers v. McCulloch, 120 U.S. App. D.C. 196, 345 F.2d 90, 96 (D.C. Cir. 1965). Thus, the only serious
issue presented in this case is whether the S.E.C. exceeded its statutory authority and threatened plaintiffs with irreparable damage by initiating the two administrative proceedings complained of here.
Plaintiffs' argument takes this course: the private proceeding against Davis & Co. was not initiated within the 30-day period prescribed by Commission Rule 15b-6; in any event, the proceeding was not of the kind contemplated by the Rule and did not relate to any conduct on the part of Davis & Co. itself; accordingly, this private proceeding could not operate to suspend Davis & Co.'s withdrawal as a registered broker-dealer; for this reason the public proceeding instituted more than a year later must also fall.
The argument, however, is hyper-technical and based on a false premise.
II. Davis & Co.
First, the private proceeding against Davis & Co. was timely commenced. The notice of withdrawal was not deemed filed until it was received by the Commission on May 4, 1964. 17 C.F.R. § 240.0-3. Twenty-nine days later, on June 2, the Commission instituted the private proceeding by issuing a proper order.
Compare Rule 3, F.R.C.P. And Rule 15b-6 of the Commission indicates that "issuance of a Commission order instituting proceedings" operates to suspend the effective date of the notice of withdrawal.
I cannot agree with plaintiffs' contention that the proceeding was untimely because Davis & Co. received no notice until June 4. Rule 6 of the Commission's Rules, 17 C.F.R. § 201.6, upon which plaintiffs place primary reliance, provides simply that "whenever an order for proceeding is issued by the Commission, appropriate notice thereof shall be given" to all interested persons.
Notice within two days is plainly "appropriate" within the meaning of this provision.
Second, under the terms of order it cannot be said that the private proceeding was not designed "to revoke or suspend the registration of broker or dealer" within the meaning of Rule 15b-6. The order stated generally that its purpose was to determine "what, if any, remedial action is appropriate in the public interest pursuant to Section 15(b) and 15A of the Exchange Act." The only "remedial action" which the Commission could have then taken against a registered broker-dealer under those provisions was to revoke its registration or suspend its membership in a national association of securities dealers. See 15 U.S.C. §§ 78 o, 78 o -3 (1958). In addition, the order alleged unlawful acts of individual wrongdoers which, if proven, would be the basis of revocation of registration pursuant to Section 15(b).
Thus there is nothing before this court indicating that the order is improper in any respect. Much less has there been a showing of a patently excessive exercise of authority on the part of the agency, which would justify judicial interference at this interlocutory stage.
Accordingly, I hold that the commencement of the private proceeding within the 30 days prescribed by Rule 15b-6 effectively operated to suspend the Davis & Co. notice of withdrawal from registration. Therefore under the broad mandate of the rule "the notice to withdraw does not become effective except at such time and upon such terms and conditions as the Commission deems necessary or appropriate in the public interest or for the protection of investors." Since Davis & Co. remained registered, the initiation of the public proceeding appears to be a "necessary and appropriate" measure for determining the "terms and conditions" governing the notice of withdrawal.
Plaintiffs' broad-based attack upon several facets of the Commission's orders initiating the two proceedings does not meet the issues before this court. The inquiry here is confined to determining whether the S.E.C. has,
"stepped so plainly beyond the bounds of the Act, or acted so clearly in defiance of it, as to warrant the immediate intervention of an equity court even before the own processes have run their course. Infirmities short of this may or may not exist in the order here under attack, but that question is not now before us * * *. Our inquiry * * * touches only tangentially upon the merits of the order as those merits would be appraised in a statutory review proceeding. We are not now functioning as a Court of Appeals reviewing orders in the manner provided by Congress." Local 130, Electrical Workers v. McCulloch, supra at 95.
III. Individual Plaintiffs
There is no question that the literal terms of § 15(b) (7) of the Securities Exchange Act, 15 U.S.C. § 78 o (b) (7) authorize the institution of the public proceeding against the individual respondents (plaintiffs here). The statute provides in pertinent part that
"The Commission may, after appropriate notice and opportunity for hearing, by order censure any person, or bar or suspend for a period not exceeding twelve months any person from being associated with a broker or dealer, if the Commission finds that such censure, barring, or suspension is in the public interest and that such person has committed or omitted any act or omission enumerated in clause (A), (D) or (E) of paragraph (5) of this subsection or has been convicted of any offense specified in clause (B) of said paragraph (5) within ten years of the commencement of the proceedings under this paragraph or is enjoined from any action, conduct, or practice specified in clause (C) of said paragraph (5)."
The order initiating the public proceeding alleges that the respondents violated the provisions "enumerated" in clauses (D) and (E).
However, plaintiffs maintain that since the statute was passed in August 1964, and the allegations relate to occurrences in 1963, any retroactive application of the new provision would be manifestly contrary to congressional intent.
The position is without merit. Prior to the 1964 amendment to the Exchange Act the Commission, when proceeding in disciplinary actions against registered broker-dealers, did not have the statutory authority to compel the joinder of non-registered salesmen employed by the respondents. Wallach v. Securities & Exchange Comm'n, 92 U.S. App. D.C. 108, 202 F.2d 462 (Cir. 1953). All such parties could be compulsorily joined only in a suit in the district court. Ibid.
This procedural handicap was eliminated by the 1964 amendment. As was said in the Report of the Senate Committee on Banking and Currency to Accompany S. 1642, S. Rep. No. 379, 88th Cong., 1st Sess. 78 (1963):
"This new provision would authorize the Commission to proceed directly against a person and to censure or bar (or suspend for a period not to exceed 12 months) the right of such person to be associated with a broker or dealer, if such person is subject to an injunction or conviction or has committed any act or omission which would be a basis for revocation or denial if such person were a broker or dealer, and if the Commission finds it in the public interest so to act * * *."
That is the clear thrust of the legislative history before the House as well. 1964 U.S. Code Cong. & Admin. News 3013, 3035 (House Rep. No. 1418).
The Commission's invocation of this statute against the individuals suing here as plaintiffs is by no means plainly contrary to the directives of Congress. On its face the amendment condemns past violations of the individual salesmen. The Commission may order suspension or censure if it finds "that such person has committed or omitted any act or omission enumerated in clause * * * (D) or (E) of paragraph (5)."
Moreover, § 15(b) (7) does not impose any substantial new obligations on the unregistered salesmen. The acts or omissions "enumerated in clause * * * (D) or (E) of paragraph (5)" embrace sundry securities violations which have been proscribed by law for several decades. The amendment simply provides the Commission with a procedural device for accomplishing the same enforcement objectives which could formerly be achieved only circuitously.
For example, since 1936 the Commission has had authority to revoke or deny a broker-dealer registration on the basis of acts or omissions of a person associated with that broker-dealer. 15 U.S.C. § 78 o. After such a finding, the Commission is empowered to revoke the registration of any other broker-dealer who thereafter employed this person. This is precisely what happened to the plaintiff in Wallach. Compare Wallach v. Securities & Exchange Comm'n, 93 U.S. App. D.C. 41, 206 F.2d 486 (Cir. 1953) (per curiam). This effective, if cumbersome, device for excluding wrong-doers from the securities field has simply been improved by the 1964 amendment authorizing the institution of disciplinary proceedings directly against salesmen.
Moreover, requiring application of the statute only in futuro would delay effective action for many years. See Leedom v. Local 108, Electrical Workers, 107 U.S. App. D.C. 357, 278 F.2d 237 (Cir. 1960). Dual administration under both the new and old procedure - requiring a distinction between past violators of the securities laws and more recent delinquents - would also burden the agency with an "administrative monstrosity." Id. at 242.
Add to this the fact that individual salesmen are likely to be benefitted by the revised procedure,
and I find no occasion for injunctive relief at this stage. Even if the individuals named as respondents in the public proceeding were injuriously affected by the 1964 legislation giving the Commission new authority to institute disciplinary proceedings directly against the salesmen, application of the law would not appear to impair basic rights. As was said in Flemming v. Nestor, 363 U.S. 603, 614, 4 L. Ed. 2d 1435, 80 S. Ct. 1367 (1960):
"The question in each case where unpleasant consequences are brought to bear upon an individual for prior conduct, is whether the legislative aim was to punish that individual for past activity, or whether the restriction of the individual comes about as a relevant incident to a regulation of a present situation, such as the proper qualifications for a profession," quoting DeVeau v. Braisted, 363 U.S. 144, 160, 80 S. Ct. 1146, 4 L. Ed. 2d 1109 (1960).
Thus even if this statute could be deemed to penalize the individual plaintiffs here in their professional lives for past conduct the provision would, in all likelihood, constitute a proper and "relevant incident to a regulation of a present situation." That is to say, salesmen who have committed securities violations in the past could with justification be excluded or suspended from a profession demanding the utmost in probity from its members. See Hawker v. New York, 170 U.S. 189, 42 L. Ed. 1002, 18 S. Ct. 573 (1898). See also Cases v. United States, 131 F.2d 916 (1 Cir. 1942), cert. den. sub nom Velaquez v. United States, 319 U.S. 770, 63 S. Ct. 1431, 87 L. Ed. 1718 (1943).
Thus I find no occasion here for concluding that the Commission's institution of the two proceedings sought to be enjoined was contrary to clear legislative directives. This is not a case where there has been "an attempted exercise of power that had been specifically withheld." Leedom v. Kyne, supra at 189. Like so many other "preliminary, procedural, or intermediate agency [actions]" review here may ultimately be had only "upon the review of the final agency action." 5 U.S.C. § 1009(c); see Stardust, Inc. v. Securities & Exchange Comm'n, 225 F.2d 255 (9 Cir. 1955); Eastern Utilities Assoc. v. Securities & Exchange Comm'n, 162 F.2d 385 (1 Cir. 1947) (per curiam); Resources Corp. Int'l v. Securities & Exchange Comm'n, 97 F.2d 788 (7 Cir. 1938); Jones v. Securities & Exchange Comm'n, 79 F.2d 617 (2 Cir. 1935), cert. den. 297 U.S. 705, 80 L. Ed. 993, 56 S. Ct. 497 (1936).
Plaintiffs have made no case for departing from normal administrative channels, including ultimate review in the court of appeals. This procedure affords them adequate remedy. Whatever onus may attach to plaintiffs as a result of the pendency of the S.E.C. proceedings - which is the only "injury" claimed here - can best be eliminated by pressing for full vindication in defense of the administrative proceedings.
Accordingly, defendants' motion for summary judgment dismissing the complaint is granted - whether for want of subject matter jurisdiction or for failure to state a claim upon which relief can be granted is of no great consequence. E.g., Bell v. Hood, 327 U.S. 678, 90 L. Ed. 939, 66 S. Ct. 773 (1946). It follows that plaintiffs' motion for a preliminary injunction is in all respects denied.
Judgment will be entered accordingly.
The foregoing opinion constitutes my findings of fact and conclusions of law pursuant to Rule 52(a), F.R.C.P.
It is so ordered.