Friendly, Chief Judge, Timbers, Circuit Judge, and Jameson, District Judge.*fn*
In this case of first impression under the Securities Investor Protection Act of 1970,*fn1 the essential issue raised on these appeals is the propriety of the district court's adjudication that the customers of Alan F. Hughes, Inc., a registered broker-dealer, were in need of the protection provided by that Act, the primary purpose of which is to afford protection to public customers in the event broker-dealers with whom they transact business encounter financial difficulties and are unable to satisfy their obligations to their public customers.
There are two appellants, Alan F. Hughes, Inc. and Alan F. Hughes; the latter is the principal stockholder, a director and president of the former. They appeal from two orders of the District Court for the Northern District of New York, James T. Foley, Chief Judge. On December 13, 1971, upon application of the SEC, the district court appointed an equity receiver for Hughes, Inc. On January 17, 1972, acting pursuant to § 5(b) (1) and (3) of the 1970 Act, 15 U.S.C. § 78eee(b) (1) and (3) (1970), the district court made an adjudication that the customers of Hughes, Inc. were in need of the protection afforded by the 1970 Act and appointed a trustee for the liquidation of the broker-dealer. While appellants challenge the appointment of both the rreceiver and the trustee, these appeals primarily concern the appointment of the the trustee pursuant to the 1970 Act, the trustee having superseded the receiver in control of the assets and affairs of Hughes, Inc. For the reasons stated below, we affirm both orders of the district court.
Before turning to the issues raised on appeal, a brief statement of the essential facts may be helpful to an understanding of our rulings on those issues.
On August 18, 1971, the SEC filed a complaint in the district court alleging that Hughes, Inc., aided and abetted by its president, Alan F. Hughes, had violated those provisions of the Securities Exchange Act of 1934, and rules promulgated thereunder, requiring proper maintenance of records,*fn2 requiring maintenance of a minimum net capital position,*fn3 prohibiting hypothecation of customers' securities in certain situations*fn4 and prohibiting fraud in connection with the purchase or sale of securities.*fn5 The SEC requested injunctive relief against further violations of these provisions and also requested the appointment of a receiver.
On September 7, 1971, appellants consented to a permanent injunction against further violations of the various provisions of the 1934 Act, and rules promulgated thereunder, without admitting or denying the allegations of the complaint. Appellants, however, did not consent to the appointment of a receiver. Oral argument on the question of a receivership was heard by Chief Judge Foley on September 7. Rather than appointing a receiver at that time, the court proceeded cautiously and appointed a Special Fiscal Agent to make a careful examination of the books and records of Hughes, Inc. and to report back to the court on the need for the appointment of a receiver and the need, if any, for liquidation of the business of Hughes, Inc.
On October 27, 1971, the Special Fiscal Agent, William J. Quinlan, Esq., of Schenectady, filed his report with the court. Fully supported by documentary evidence, the report concluded that "defendant's books and records are so unreliable, inaccurate, incomplete and misleading that they are unusable." The Special Fiscal Agent also advised the court that Hughes, Inc. had engaged in acts and practices which "reflect[ed] on defendant's integrity as a broker" and which were more than mere technical violations of law.
After receiving the report of the Special Fiscal Agent and hearing additional oral argument, the court, in a Memorandum-Decision and Order of December 13, 1971, adopted the findings and conclusions of the Special Fiscal Agent; found clear violations of the SEC's bookkeeping, net capital and hypothecation rules; and appointed William J. Quinlan, Esq. as receiver. While the receiver was directed "to marshal all . . . assets and property, prosecute all claims, choses-in-action and suits in equity on behalf of [Hughes, Inc.]", his appointment extended only "until such time as . . . the Securities Investor Protection Corp. makes a determination whhether to install its own trustee pursuant to Section 5(a) (2) of the [1970 Act], . . . and a trustee is so installed." During the limited period of his appointment the receiver was authorized to liquidate only "if necessary". On December 23, 1971, appellants filed a notice of appeal from the court's order, but did not seek a stay at that time.
Thereafter, the Securities Investor Protection Corporation ("SIPC") determined that Hughes, Inc. was in danger of failing to meet its obligations to its customers and that there existed one or more of the conditions specified in § 5(b) (1) (A) of the 1970 Act.*fn6 Accordingly, SIPC applied to the court for an adjudication that the customers of Hughes, Inc. were in need of the protection provided by the 1970 Act. On January 17, 1972, the court granted SIPC's application and appointed William J.Quinlan, Esq. as trustee for the liquidation of Hughes, Inc., pursuant to § 5(b) (3) of the 1970 Act. The trustee superseded the receiver in control of the assets and affairs of Hughes, Inc.
After the district court denied appellants' motion for reconsideration and for a stay pending appeal, appellants moved in this Court for a stay pending appeal. The parties before us agreed that, pending a decision by this Court on the merits of the appeal, the trustee couuld process customer claims, deliver specifically identifiable property to customers, pay or otherwise satisfy customer claims within the purview of the 1970 Act and complete contractual commitments, but that he should not proceed with the actual liquidation of Hughes, Inc.
Appellants' first contention is that the district court's appointment of the trustee under the 1970 Act denied them due process, as SIPC failed to provide them with notice and a hearing as to SIPC's determination that there was a danger that Hughes, Inc. would fail to meet its ...