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Gilligan, Will & Co. v. Securities and Exchange Commission

decided: June 3, 1959.


Author: Lumbard

Before MEDINA, LUMBARD and BURGER,*fn* Circuit Judges.

LUMBARD, Circuit Judge.

The question for decision is whether Gilligan, Will & Co. and its partners, James Gilligan and William Will, were underwriters with respect to the distribution of Crowell-Collier Publishing Company securities and as such wilfully violated the Securities Act of 1933, as amended, 15 U.S.C.A. § 77a et seq., by acquiring and distributing debentures and common stock which were not registered. For reasons which are discussed below, this question turns on whether the issue was a "public offering" as those words are used in the Act, 15 U.S.C.A. § 77d.

For their activities with respect to these debentures and stock the Securities & Exchange Commission, pursuant to § 15 of the Securities Exchange Act of 1934, 15 U.S.C.A. § 780, instituted a proceeding to determine whether the petitioners had violated the 1933 Act and whether Gilligan, Will & Co.'s registration as a broker-dealer under the 1934 Act should be revoked. The facts were stipulated, a hearing was waived, and the Commission heard oral argument. It thereafter ordered that Gilligan, Will & Co. be suspended from membership in the National Association of Securities Dealers, Inc. for five days, and found that James Gilligan and William Will were each a cause of the order.

The partnership and the partners petition for a review of the Commission's order claiming that its action was arbitrary and capricious in four respects: (1) that its finding that petitioners were underwriters with respect to 1955 and 1956 transactions in Crowell-Collier debentures and stock was not supported by substantial evidence; (2) that the findings of wilful violation of the registration provision was unsupported by substantial evidence; (3) that the suspension of Gilligan, Will & Co. was arbitrary, capricious and an abuse of discretion; and (4) that they were denied an impartial hearing because the Commission had predetermined the matter by a press release issued before the hearing.

We hold that there was substantial evidence to justify the findings and conclusions of the Commission that the issue was a public offering and that petitioners were underwriters, and we agree that the registrant's suspension for wilful violation was proper. As the petitioners proceeded to trial without claiming prejudice from the Commission's press release, applying for an adjournment of the hearing and determination, or otherwise presenting their claims of pre-judgment to the Commission, they are foreclosed from complaining of this now. Section 25(a), Securities Exchange Act of 1934, 15 U.S.C.A. § 78y. Accordingly, we affirm the Commission's order.

The principal and essential purpose of the 1933 Act is to protect investors by requiring registration with the Commission of certain information concerning securities offered for sale. A. C. Frost & Co. v. Coeur D'Alene Mines Corp., 1941, 312 U.S. 38, 40, 61 S. Ct. 414, 85 L. Ed. 500. For reasons which will be developed, the crucial provisions of law in this case are § 5 of the 1933 Act, 15 U.S.C.A. § 77e, which makes it unlawful for anyone, by any interstate communication or use of the mails, to sell or deliver any security unless a registration statement is in effect; and § 4(1), 15 U.S.C.A. § 77d(1), which exempts from this prohibition "transactions by any person other than issuer, underwriter, or dealer" and "transactions by an issuer not involving any public offering."*fn1

Since the Commission's proceeding was had on stipulated facts the only question is whether it was justified in drawing from them the inferences and conclusions of which the petitioners complain, principally that the petitioners were underwriters and that the issue was a public offering. To examine these inferences and conclusions we must state in some detail the facts concerning the issuance of the unregistered debentures and common stock of Crowell-Collier Publishing Company.

On July 6, 1955, Elliott & Company agreed with Crowell-Collier to try to sell privately, without registration, $3,000,000 of Crowell-Collier 5% debentures, convertible at any time into common stock at $5 a share, and the Elliott firm received an option on an additional $1,000,000 of debentures. Edward L. Elliott, a partner in Elliott & Company, advised Gilligan, one of the two partners of the registrant, Gilligan, Will & Co., of this agreement. He told Gilligan that Gilligan could purchase, but only for investment, as much of the $3,000,000 as he wished, with the exception of $500,000 which Elliott's wife was taking, and that the debentures not taken by Gilligan would be offered to certain friends of Elliott. Gilligan was told by Elliott that Crowell-Collier had "turned the corner" and was then operating on a profitable basis. Elliott also said that the attorneys for Crowell-Collier and his lawyers had stated that the placement was an exempt transaction. Gilligan agreed to purchase $100,000 of debentures for his own account. It does not appear that Gilligan had any information regarding Crowell-Collier and the debenture issue other than what Elliott told him as summarized above.

On August 10, 1955 the $100,000 debentures were delivered to Gilligan, Will & Co., which sent a letter to Crowell-Collier stating: "that said debentures are being purchased for investment and that the undersigned has no present intention of distributing the same."

Nevertheless, by August 10, 1955, almost half of the $100,000 of debentures had already been resold. Either on July 6 or July 7, 1955, Louis Alter, a member of the American Stock Exchange, agreed to buy $45,000 of the debentures. Gilligan also offered $10,000 to a friend and when this was not accepted he sold $5,000 to Michael D. Mooney, who had previously requested that amount of debentures and had been told that none were available; the remaining $5,000 debentures were placed in the registrant's trading account. In early September, when the securities were distributed, Gilligan, Alter and Mooney each signed a statement reading: "I hereby confirm to you that said debentures are being purchased for investment and that I have no present intention of distributing the same."

In May 1956, after Gilligan noticed that the advertising in Crowell-Collier magazines was not increasing, he decided to convert his debentures into common stock and to sell the stock. He advised Alter of his plans and on May 15, 1956 the registrant, Gilligan and Alter converted their debentures into common stock. Later in May they sold the stock at a profit on the American Stock Exchange. The stock had been listed on that Exchange since October 1955, and Gilligan became the specialist in the stock.

In May 1956 Gilligan, Will & Co. also purchased and participated in the sale of additional debentures by Crowell-Collier. Elliott told Gilligan that he was surrendering to Crowell-Collier his option on the remaining $1,000,000 of debentures, and that these debentures were to be sold at 160% of par, based on the stock's price at that time of $8 per share. The proceeds of the sale, Elliott stated, were to be used by Crowell-Collier in the acquisition of certain television stations which would show a profit of $4,000,000 annually. Elliott also told Gilligan that Crowell-Collier would sell him, Elliott, 100,000 stock purchase warrants at $.01 each, exercisable at $10 per share for five years. Gilligan agreed to take $150,000 face amount debentures and said he would see whether Alter was interested in taking any. After Alter indicated that he wanted $50,000 face amount, Gilligan advised Elliott that the total subscription would be $200,000. Gilligan did not inform Elliott of his and Alter's sales of stock obtained from the conversion of the debentures purchased in 1955.

On May 29, 1956 the registrant subscribed to $200,000 face amount debentures and issued to Alter a confirmation for $50,000 debentures which stated: "we have this day subscribed for your account and risk; over the counter as agents * * *" Alter immediately converted his debentures into stock. On the same day the registrant similarly confirmed $150,000 face amount debentures to a joint specialist's account ...

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