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SEC v. TALLEY INDUS.

June 24, 1968

SEC, Plaintiff
v.
Talley Industries, Inc., et al., Defendants


Wyatt, District Judge.


The opinion of the court was delivered by: WYATT

WYATT, District Judge:

This is the decision after trial to the Court without a jury.

 There was a motion for plaintiff Securities and Exchange Commission (SEC) for a preliminary injunction restraining in certain respects defendants Talley Industries, Inc. (Talley), American Investors Fund, Inc. (Fund) and Chestnutt Corporation. The principal relief sought by SEC was to require Talley and Fund to withdraw votes cast by them at the April 22, 1968 annual meeting of shareholders of General Time Corporation (Time).

 Between December 26, 1967 and April 22, 1968, Talley bought in the open market 257,937 shares of common stock of Time; Fund in the same period bought 210,000 such shares.

 The claim of SEC is that these shares were bought in violation of Section 17(d) of the Investment Company Act of 1940 (the Act; 15 U.S.C. § 80a-1 and following; Section 17(d) of the Act is 15 U.S.C. § 80a-17(d)) and of Rule 17d-1 (17 CFR § 270.17d-1) issued thereunder.

 The action is brought under Section 42(e) of the Act (15 U.S.C. § 80a-41(e)) to enjoin alleged violations of that Act.

 At the beginning of the hearing of the application for a preliminary injunction, the parties agreed that the Court should order the trial of the action on the merits to be advanced and consolidated with the application; this was done.

 There must be judgment for defendants.

 Section 17(d) of the Act makes it unlawful for "any affiliated person of . . . a registered investment company . . . acting as principal to effect any transaction in which such registered company . . . is a joint or a joint and several participant with such person . . . in contravention of such rules and regulations as the Commission may prescribe for the purpose of limiting or preventing participation by such registered . . . company on a basis different from or less advantageous than that of such other participant ".

 It will be noted that conduct, to be "unlawful" under Section 17(d), must be in contravention of some rule or regulation of SEC issued under the authority of Section 17(d).

 The SEC has issued Rule 17d-1 (17 CFR § 270.17d-1) which reads in part as follows:

 
"(a) No affiliated person of . . . any registered investment company . . . acting as principal, shall participate in, or effect any transaction in connection with, any joint enterprise or other joint arrangement or profit sharing plan in which any such registered company . . . is a participant . . . unless an application regarding such joint enterprise, arrangement or profit sharing plan has been filed with the Commission and has been granted . . . ."

 The SEC has also in the same Rule (17 CFR § 270.17d-1(c)) broadly defined "joint enterprise or other joint arrangement or profit-sharing plan ".

 It seems clear that it is within the power of the SEC to require by Regulation under Section 17(d) of the Act that, unless application in advance has been made to the SEC and granted, no affiliated person of a registered investment company acting as principal shall effect any transaction in which such registered company is a joint or a joint and several participant. On the other hand, it is also clear that by the use of such expressions as "joint enterprise or other joint arrangement or profit-sharing plan" the SEC cannot widen the reach of the statute.

 The effect of the Rule 17d-1 in the case at bar, therefore, is to raise the issue of the legality of the stock purchases by Fund and by Talley.

 Fund is a "registered investment company" under the Act.

 Talley is an "affiliated person" of Fund because at all relevant times Fund has owned between 9% and 10% of the outstanding voting securities of Talley. 15 U.S.C. § 80a-2(a) (3) (B).

 The issue in this action, therefore, is whether the purchase of Time shares by Talley or Fund or both was a "transaction" effected by Talley as "principal" in which Fund was a "joint or joint and several participant ".

 Talley is a Delaware corporation with its principal office in Mesa, Arizona, some twenty miles from Phoenix. Its shares are publicly held and listed on the American Stock Exchange. Talley makes products for use as parts of jet aircraft and other space age systems and devices. Franz G. Talley (Franz) is president and the chief figure for Talley in the events in suit.

 Fund is a New York corporation with its principal office in Greenwich, Connecticut. It is an investment company (a so-called "mutual fund") with assets, consisting of investments in portfolio companies, having a market value of some 270 million dollars. George A. Chestnutt, Jr. (George) is president and the chief figure for Fund in the events in suit.

 No officer or director of Fund is an officer or director of Talley and no officer or director of Talley is an officer or director of Fund. Talley owns no shares of Fund. The shares of Talley owned by Fund were bought in the open market; there have never been any transactions between Talley and Fund.

 Time is also a Delaware corporation, the common stock of which is listed on the New York Stock Exchange. The principal office of Time is in Connecticut. It makes all kinds of clocks, timing devices and related equipment.

 In about April 1967, Fund sent a representative to look over the Talley plant in Arizona; later in 1967 Franz and his daughter visited the Fund offices in Greenwich and had lunch with George.

 Talley has been interested in acquiring other companies; it has had "a very active acquisition program" and in this connection has consulted M. Kimelman & Company (Kimelman), a brokerage firm in New York. The chief figure for Kimelman in the events in suit was Michael Kimelman (Mike), a partner.

 Franz, as custodian for his two children, had an account with Kimelman.

 Mike in December 1967 became interested in Time as an investment and exercising his discretion bought for the Franz custodian account on December 22, 1967, 400 shares of Time at about $23 per share.

 Franz learned of this purchase only from the confirmation slips but about the same time Mike telephoned him, discussed Time as an investment, and sent Franz a report on Time. Mike also suggested Time as a potential acquisition or merger candidate for Talley.

 After studying the report, Franz gave Mike an order to buy for Talley about half to three quarter million dollars in purchase price of Time stock. Franz was seriously considering Time as a merger candidate. Mike executed the order by buying 24,800 shares on December 26 and 27, 1967.

 On December 29, Franz talked to George and brought to his attention the advantages of Time as an investment for Fund, stating that Talley had bought shares of Time and that it was a possible acquisition for Talley. Undoubtedly a motive for Franz was that if acquisition or merger were attempted, shares in the hands of Fund could be presumed friendly to Talley. George broke off the conversation in order to consult counsel to Fund and did so. George then talked to Franz again and said there was no legal reason why Fund should not buy shares of Time, provided that there was no agreement with Talley as to how the shares would ...


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