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March 11, 1968

Collateral Lenders Committee, et al., Plaintiffs,
Board of Governors of the Federal Reserve System, Defendants

Herlands, District Judge.

The opinion of the court was delivered by: HERLANDS

HERLANDS, District Judge.

The matters before the Court in this case affect immediately and importantly the national economy and the plaintiffs' business interests. The plaintiffs' expressed desire is to have any decision herein adverse to them reviewed as soon as practicable by the Court of Appeals. Accordingly, the Court will dictate its decision from the bench instead of following the customary, but less expeditious, procedure of filing a formal written opinion.

 This decision sets forth the findings of fact and conclusions of law which constitute the grounds of the Court's action, in accordance with Federal Rules of Civil Procedure, Rule 52(a).

 Both sides have taken the position that they did not desire to call witnesses and that it is agreeable to them to have this Court decide the pending motion solely on the basis of the oral argument and the affidavits and briefs that have been submitted by counsel. (Stenographer's minutes of March 5, 1968, pages 3-10.)

 The motion at bar brought on by order to show cause is for a preliminary injunction suspending and restraining the effectiveness, operation, enforcement, and execution of the regulation of the Board of Governors of the Federal Reserve System, dated February 8, 1968, known as Regulation G, 12 CFR, Part 207, 33 Federal Register 2691, pending the final hearing and determination of the action.

 The order to show cause herein dated March 1, 1968 was signed by District Judge John M. Cannella and made returnable before this Court on March 5, 1968.

 The parties appeared before Judge Cannella on March 1, 1968, 2:15 p.m., and he granted a temporary restraining order effective through March 5, 1968. The plaintiffs were required to, and did, post a $100,000 bond in connection with the granting of a temporary restraining order.

 Upon the argument of the motion for a preliminary injunction on March 5, 1968, before this Court, the Court did not renew or extend the temporary restraining order, which therefore expired on midnight, March 5, 1968. Upon application of plaintiffs the Court vacated the plaintiffs' bond.

 The action, commenced by the filing of a complaint verified and filed on March 1, 1968, seeks a declaratory judgment that Regulation G is invalid and unconstitutional as to the plaintiffs, and seeks a permanent injunction enjoining the effective date of enforcement and execution of Regulation G as to plaintiffs. The complaint, being verified, was submitted in support of the preliminary injunction application.

 The complaint brought on behalf of the plaintiffs who are engaged in the collateral lending business is directed against the defendant, The Board of Governors of the Federal Reserve System (hereinafter sometimes referred to as The Federal Reserve).

 In substance, the complaint attacks Regulation G on various grounds that are spelled out at length in the complaint and also in the motion papers, the chief grounds being that the defendant improperly, invalidly, and unconstitutionally prescribed Regulation G; that the defendant in considering and promulgating Regulation G acted arbitrarily and in excess of its lawful powers and contrary to the requirements of the Administrative Procedure Act, 5 U.S.C.A. §§ 556-57; that the plaintiffs, as a consequence of the promulgation and operation of Regulation G, will suffer immediate and irreparable loss and damage if Regulation G becomes effective on March 11, 1968, which is today. The complaint spells out, in numbered paragraphs such as paragraphs 21 to 26 thereof, various grounds for the invalidity and unconstitutionality of Regulation G. These grounds are mirrored and reflected in comparable language and form in the motion papers.

 The defendant, by order to show cause dated March 4, 1968, moved to dismiss the complaint under Federal Rules of Civil Procedure, Rule 12(b) (6). However, by formal notice of withdrawal dated March 6, 1968, the defendant withdrew without prejudice its motion attacking the complaint. The Court permits the defendant to withdraw its motion attacking the complaint without prejudice to either party. This Court will not consider and adjudicate the issue raised by the withdrawn motion, though various aspects of the plaintiffs' claim must be considered as they are inextricably interwoven with the merits of the motion for a preliminary injunction.

 On Sunday, March 10, 1968, yesterday, Circuit Judge Paul R. Hays heard plaintiffs' application for a temporary restraining order and plaintiffs' petition for a writ of mandamus directed to this Court. Judge Hays denied the application and the petition.

 At the threshold of this decision -

 Mr. FINN: Your Honor, may I interrupt you to note that Judge Hays did that without prejudice to its renewal this morning, and it was renewed this morning before the full panel, and upon the opening of the Second Circuit Court this morning we withdrew those motions since we felt it would be a burden to the Second Circuit in view of the fact that we learned, after filing the motions today, you would rule today.

 THE COURT: That statement will be noted on the record, Mr. Finn.

 At the threshold of this decision and opinion the Court wishes to point out that the plaintiffs had ample time during the month of February, 1968, to bring on a motion for a preliminary injunction and to apply, if so advised, for a temporary restraining order, but failed to do so. Actually, the application for a temporary restraining order and the motion for a preliminary injunction were not made until March 1, 1968, and the moving affidavits in support of the motion for preliminary injunction appear to be sworn to on March 1, 1968.

 The chronology, so far as it bears upon the plaintiffs' delay in seeking the drastic remedy of a preliminary injunction that would suspend the operation of a far-reaching regulation such as Regulation G, is as follows:

 On February 1st, 1968, the Federal Reserve Board announced its adoption of Regulation G and issued to the press a statement in this regard. Simultaneously the Board transmitted for publication in the Federal Register a copy of the Regulation. This appeared in the Federal Register on February 8, 1968.

 The record before this Court further reflects that the Board initiated, as of February 1, reproduction in printed form of the Regulation and transmitted to all Federal Reserve banks printer's copies of the same. On request of counsel for plaintiffs a full and complete copy of the press release and regulation was transmitted by mail to him on February 6, 1968.

 The Court denies plaintiffs' motion for a preliminary injunction in all respects for the reasons now to be set forth.

 As indicated already, on February 1, 1968, The Board of Governors of the Federal Reserve System adopted a number of changes to its proposed new and amended regulations to become effective today, March 11, 1968.

 Stated in general terms, these changes broadened the coverage of, and tightened the regulations for, the use of credit in stock market transactions. In particular, as noted, plaintiffs challenge the validity of the new regulation, commonly referred to as Regulation G, which is entitled "Credit By Persons Other Than Banks, Brokers, Or Dealers For Purpose of Purchasing Or Carrying Registered Equity Securities," 12 CFR, Part 207, 33 Federal Register 2691. This regulation extends to other lenders margin requirements which the Court finds and concludes are substantially the same as those long applicable to broker-dealers and banks on credit extended for the purpose of purchasing or carrying registered equity securities.

 In view of the fact that time is of the essence so far as processing an appeal herein is concerned, the Court will forego an extensive excursion into the well-known legislative history of the statutory provisions that are of controlling importance in this case. However, in order to furnish necessary context and perspective even in skeleton form for the Court's decision, it may be pointed out, as is well known, that the Securities and Exchange Act of 1934 (sometimes hereinafter referred to as the 1934 Act) originated out of a sweeping and comprehensive investigation into stock market practices by the Senate Committee on Banking and Currency. The report of that committee, Senate Report No. 1455, 73rd Congress, Second Session (1934) delineated certain abuses in the securities market to which it attributed a considerable share of responsibility for the 1929 stock market crash.

 Among the causes singled out by the investigators was the excessive use of credit in the stock market involving speculation upon thin margins which led to the sale of securities on a mass scale to meet margin calls upon any decline in the stock market.

 The 1934 Act addressed itself, in part, to the control of credit in the securities markets, and by its provisions the 1934 Act, Sections 7 and 8, authorized the Federal Reserve Board to regulate the use of credit for the purchasing and carrying of securities, that is, to establish margin requirements.

 The Federal Reserve Board was the preferred agency selected to exercise the power to set margin requirements because the Congress reasoned that the Board was the most experienced and best equipped credit agency of the government and had already been vested with cognate and related powers.

 It will be recalled that, effective December 23, 1913, the Federal Reserve System had been established pursuant to the Federal Reserve Act, and that the principal purpose in establishing the Federal Reserve System was to foster a flow of credit and money that would facilitate orderly economic growth, a stable monetary system, and a long-run balance in international payments. The organization of the Federal Reserve System, including its Board of Governors, the 12 Federal Reserve Banks, the Federal Open Market Committee, numerous advisory bodies and similar consultative groups, is a matter of record and need not be detailed in this opinion.

 The organizational setup of the Federal Reserve System and its operations over many years have demonstrated that the Federal Reserve Board helps to administer nationwide bank and credit policies; that there has been accomplished a systematic coordination in the administration of monetary policy including credit control; that there is a continuing communication between the Federal Reserve Board and the banking and business communities through the various techniques of the system, and in sum, the Federal Reserve Board, the defendant herein, possesses unique and outstanding expertise and corresponding responsibility in the fields that have been indicated. The expertise is the end-product of continuous study and contact on a daily basis with all of the manifold aspects of our securities and banking, monetary and financial systems and operations, public and private. The expertise represents the cumulative knowledge gained over many years and on many fronts. It is thus obvious why the Congress, in enacting the 1934 Act, placed with the Board of Governors, the defendant, the responsibility for effective control of the aggregate amount of credit resources which can be directed into the stock market, with particular regard to the potentially destabilizing effect of such credit on the national economy.

 The Senate Committee on Banking and Currency was concerned with the prevention of the undue diversion of the credit resources of the country into the stock market as was believed to have occurred in the period prior to the 1929 crash, and the Senate Committee was also concerned with deterring excessive speculation based upon too thin a margin. Senate Report No. 1455, supra, at 11; Remar v. Clayton SEC Corp., 81 F. Supp. 1014, 1017 (D. Mass. 1949).

 This profound concern of the progenitors of the 1934 Act is reflected in the provisions of the 1934 Act, 15 U.S.C.A. Section 78g(a), empowering the defendant to prescribe rules and regulations with respect to the amount of credit that may be initially extended and subsequently maintained on any security (other than an exempted security) registered on a national securities exchange for the purpose of preventing the excessive use of credit for the purchase or carrying of such securities.

 Similarly, Section 7(b) of the 1934 Act, 15 U.S.C.A. Section 78g(b), allows the Board to prescribe margin rates lower than those set for it in Section 7(a) as it deems necessary or appropriate for the accommodation of commerce and industry, having due regard to the general credit situation of the country, and to prescribe margin rates higher than those fixed in Section 7(a) as it may deem necessary or appropriate to prevent the excessive use of credit to finance transactions in securities.

 Section 7(c) of the 1934 Act, 15 U.S.C.A. Section 78g(c), makes it unlawful for members of the security exchanges and brokers and dealers who do business through the medium of such members (which means the great majority of broker-dealers in the country), to extend credit on registered securities (other than an exempted security) in contravention of the margin rules promulgated by the defendant pursuant to Section 7(a) and Section 7(b) of the Act, and to extend any credit at all on collateral other than registered securities or exempt securities or without collateral.

 Section 7(d), 15 U.S.C.A. Section 78g(d), prohibits the extension of credit by any person in the ordinary course of that person's business for the purpose of purchasing or carrying a security registered on an exchange in contravention of such rules and regulations as the defendant shall prescribe to prevent the excessive use of credit for the purchasing or carrying of or trading in securities in circumvention of the other provisions of Section 7.

 Section 7(d) further states that any rules or regulations (promulgated pursuant to the authority contained in Section 7(a) and Section 7(b)) may impose upon all loans made for the purpose of purchasing or carrying securities registered on national securities exchanges limitations similar to those imposed upon members, brokers or dealers by Section 7(c) and the rules and regulations thereunder.

 Among the various arguments advanced by plaintiffs (see complaint, paragraph 21) is the contention that Regulation G is invalid for the reason that the term "excessive credit" as ...

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