Securities and Exchange Commission v. Capital Gains Research Bureau, Inc.

PETITIONER: Securities and Exchange Commission
RESPONDENT: Capital Gains Research Bureau, Inc.
LOCATION: New York Times Office

DOCKET NO.: 42
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 375 US 180 (1963)
ARGUED: Oct 21, 1963
DECIDED: Dec 09, 1963

Facts of the case

Question

Media for Securities and Exchange Commission v. Capital Gains Research Bureau, Inc.

Audio Transcription for Oral Argument - October 21, 1963 in Securities and Exchange Commission v. Capital Gains Research Bureau, Inc.

Earl Warren:

Number 42, Securities and Exchange Commission, Petitioner, versus Capital Gains Research Bureau, Incorporated.

Mr. Ferber.

David Ferber:

Mr. Chief Justice, Court please?

This case involves the construction of subsections 1 and 2 of Section 206 of the Investment Advisers Act of 1940 that those sections are set forth in Pages 2 and 3 of our brief and state that it shall be unlawful for any investment advisor by the jurisdictional means, one to employ any device scheme or artifice to defraud any client or a perspective client or two, to engage in any transaction practice or course of business which operates as a fraud or deceit upon any client or perspective client.

The commission contends that this section is violated when an investment advisor who recommends a security to a large number of paying subscribers follows a practice of trading on the market effect of his advice without disclosing to his clients that he doing so.

What he did here, the pattern of his activity, was to purchase particular securities then recommend these securities for a long-term gain and then sell on the market rise that followed his recommendation.

The Court below in a five to four en banc opinion affirmed the District Judge and holding that this was not a fraud within the meaning of the sections that I have just read to you.

How did this case arise, what's the temporary injunction?

David Ferber:

Yes Your Honor on most preliminary injunction in the District Court in the Southern District of New York.

Before going into any detail on the facts I would like emphasize a few matters that we don't believe are involved in this case, but by reason of the characterizations in the brief of the respondent -- some of the commission's contentions I think it is important to note that we don't believe this case involves the question whether an investment advisor may generally buy or sell securities he recommends.

We think that this would not necessarily in all circumstances be fraudulent.

We don't think this involves the question as to whether if an investment advisor buy securities for -- that he is recommending but sells them for a short term gain even though he is recommending for a long-term gain that this would necessarily under every circumstance be fraudulent.

(Inaudible)

David Ferber:

There could well be circumstances where the investment advisor intended to hold for a -- to do exactly what he was recommending for his clients and something subsequently arise whereby it was necessary for him to sell the security.

Certainly if it were a practice as we have here where it occurs time and again we think that we would have to assume that there was an intent to sell at the time he purchased assuming the market reached the price that he hoped it would on the effect of his recommendation, but the mere -- certainly this case does not have a fact which would indicate that -- the mere fact that he should in one instance sell after recommending a long-term buy that would be fraudulent I don't think --

(Inaudible)

David Ferber:

I think --

And it wasn't per se a violation of the statute (Inaudible) what you are referring, isn't it fair?

David Ferber:

I think Mr. Justice Harlan that what the Court of Appeals indicated was that we would have to prove an intent other than by the pattern that we did show here, which was over a period of eight months I believe it was.

We showed that with respect to seven securities and six of these monthly reports there are was this pattern followed, but I don't think that the Court certainly we did not contend to the Court that the mere fact that one occasion a man might have recommended the security for a long-term gain and if he had bought at the same time that it would necessarily be a fraud should he on one occasion by reason should he be able to show other factors that required his selling and that this would necessarily be fraudulent.

(Inaudible) mere non-disclosure without anything more (Inaudible) statue.

David Ferber:

Not certainly under all circumstances and it could necessarily not be a fraud even under those circumstance, but we --

Byron R. White:

If an advisor had owned (Inaudible)

David Ferber:

No, we would not so contend, not in the absence of some general rule or policy and certainly that is not the situation in this case.

William J. Brennan, Jr.:

What is your position here, on these special facts they add up to a sufficient case to prove a violation?

David Ferber:

Yes Your Honor our position is that where a practice is followed this so called scalping, purchasing a security with the necessary intent as is shown by the repeated performance, purchasing it before the recommendation, selling it on the rise following the recommendation and not disclosing this that, that is a clear fraud by reason.

William J. Brennan, Jr.:

Even against the insistence on the part of the investor, agent or whatever that he did this, had no such idea in mind and the finding I gather wasn't it by the Trial Court that his motives were pure?

David Ferber:

No, I don't that goes beyond the finding of the Trial Court, I think that the Trial Court merely stated that the there was no proof that the advice was not honest in a sense that he did not think that it made a good long-term gain.

I would make one another statement as to what we do not contend before going into the facts in somewhat more detail --

Byron R. White:

Let me ask you this before you do if he purchase, he has known the securities for years but he does purchase after he has made up the fact that he has or not even decided on what his advice is going to be or after -- or at least he didn't intend to buy (Inaudible) but after he had made up his mind what his advice is going to be he never does that (Inaudible)