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

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)

David Ferber:

That is certainly — is certainly not this case and I doubt that would be –we would consider that fraudulent Your Honor if he was purchasing.

The only possibility of fraud in that circumstance is — the circumstance would be that perhaps he is purchasing a little lower than the people to whom he is recommending which does tend to create a sort of conflict it’s that is much more of a borderline case.

I just wanted to emphasize also that we do not contend that the kind of a statement that we may or may not have a position in these securities (Inaudible) several places in the, my opponent’s brief it is urged that we do so contend.

We contend that only a full description of the practice that he was following would prevent it from being fraudulent.

Now —

Byron R. White:

And if he —

Arthur J. Goldberg:

(Inaudible)

David Ferber:

There were affidavits yes Mr. Justice Goldberg, but the essential facts were not in dispute.

It was not in dispute that on the six different occasions in this eight-month period and with respect to seven different securities because one of the pamphlets both recommended one and disparaged another and the trading was in both through a short sale on the disparaged security, this certainly would be sufficient particularly on a motion for preliminary injunction and in view of the fact that this is perhaps in many respects the strongest weapon in the commission’s enforcement arsenal.

If we had to wait for a trial on the merits, the practice could have continued and if the advisees were being defrauded as we contend this would have continued necessarily for many months longer presumably.

So that —

Potter Stewart:

They voluntarily offer for discontinuing practice, isn’t it?

David Ferber:

It is urged that there was a voluntary offer to discontinue.

The record merely shows that they stated that if there were a commission rule they would not continue it, I believe.

There may have been some other very general language, but the — there was certainly no full assurance of the sort that a government agency would have to have I think not to continue with – at this time and it was very important to us.

I mean if we can’t show this kind of thing on a preliminary injunction, we can’t show much on a permanent except perhaps more of the same, more transactions of this sort.

We are not going to find some letter perhaps written by him stating that my state of mind is to sell in such a, such a —

Now you are saying is all the proof that the government (Inaudible)

David Ferber:

I don’t say Mr. Justice Harlan that we might not be able to add additional instances of this.

But —

Would you say this makes out your case?

David Ferber:

I’d say this makes out our case, yes Your Honor.

But suppose there being six transactions (Inaudible)

David Ferber:

At this point if the District Judge had said that in my discretion it seems to me you haven’t showed a course of business or a course of conduct because this is an occasional thing and you have a burden here of showing something more of a pattern I suppose in that area if we were put in terms of discretion that perhaps we would have gone ahead for the permanent injunction and that attempted to appeal as in abuse of discretion, but this case does not involve discretion.

The District Judge made it clear that he just did not believe that this practice was fraudulent.

Arthur J. Goldberg:

(Inaudible)

David Ferber:

It —

Arthur J. Goldberg:

(Inaudible)

David Ferber:

I would think so if it were proved — if we could prove that the intent to sale but short of a pattern it’s rather difficult to assume that a District Judge could not find on a preliminary injunction that two out of eight months was not — we had not proved this intent sufficiently.

Potter Stewart:

The purchase alone violated the statute?

David Ferber:

No Your Honor, I would not say so.

Potter Stewart:

How about a purchase and the sale at a loss, or a half-a-dozen of it?

David Ferber:

If it were — if the practice were followed and by reason of some unusual circumstances each time the market went down instead of going up, which it did invariably in these situations under which it normally does but —

Potter Stewart:

But in a generally falling market it might not?

David Ferber:

Well I can’t concede that because all I know from the record in this case and from the authorities we cite is that there will be a little bump in the particular stock after a recommendation of this sort.

Potter Stewart:

Well how about – what is the answer to my question?

David Ferber:

I think it would still be a fraudulent if this were the attempt whether or not the man actually —

Potter Stewart:

Might be quite another basis, he might be holding himself out as an expert advisor and be a very — and be an incompetent one to the —

David Ferber:

Well, since he is recommending for a long-term gain I am not sure it would be on that basis, but I do think that if we did show this pattern being followed, of course he — in other words if he were trying to get out at the least loss and if you look like the market is something very terrific, it hit the market so that declaration of war or something of this sort so that we are going down quickly I think that would not prevent it from being fraud, the fact that he did not make any profits in the particular.

Potter Stewart:

Who would be defrauded in either case, in either case of profit or a loss who would be the persons – who are the people defrauded, when you have frauds somebody has to be defrauded.

David Ferber:

I agree the people who are defrauded are the persons who are relying upon the investment advice, the people who expect to get —

Potter Stewart:

How are they defrauded?

David Ferber:

They expect to get completely disinterested investment advice that’s what they are paying for, that’s what they are going to put their money into securities on the basis of getting.

Potter Stewart:

Now on this preliminary injunction and the Court of Appeals was very careful to limit the question it was deciding and that was whether or not a preliminary injunction was justified or whether this section had no way to development to approve but a trial on the preliminary injunction I understand that there was no indication of these people were not getting bona fide honest advice.

David Ferber:

Well the only indication was the essential conflict of the position that the advisor put himself here.

Potter Stewart:

What is the conflict?

David Ferber:

Let me give you some illustrations.

I think that we all agree and certainly the Court below did that in the type of case which that you have in Ridgely against Keene situation where a man is paid to give certain advice even though it’s his best advice, I mean he says it was honest advice I would have give it in anyway, I think we all agree that that’s fraudulent because of the possible conflict, what’s he going to do the next time, is he going to look around for a stock that maybe somebody will pay him to recommend.

Similarly here suppose the man purchases his stock, in this case, and one of them the United Fruit transaction he put in a $117,000 of his money buying the security and then he recommended it a few days later.

Now suppose during those few days he heard something that indicated that the earnings were going to fall of the United Fruit, suppose he played golf with the competitor and the competitor told him something about that we have new invention that’s going to put these people out of business then what does he do?

Does he still let his recommendation go out or does he hold it?

Now maybe, maybe he is sufficiently honest, but he won’t send out the recommendation, but shouldn’t the person who is paying for the service knows that – know that he follows that practice, and further more he might have the situation where he, as I said, he generally recommended one stock each month, there might have been three or four stocks that all looked pretty good for a long-term gain.

And in determining which one he would recommend, he decided to take the one that was more volatile that had – that would probably lend itself more to scalp.

Now this maybe even an unconscious choice on his part, but if he is doing that, if his own interests might be different from those of his clients, it is our position that this is a conflict of interest which must be disclosed.

Arthur J. Goldberg:

(Inaudible)

David Ferber:

In effect we are, we’re arguing for a rule that scalping is wrong and is fraudulent.

If —

(Inaudible) Congress passes some of the statutes.

David Ferber:

That’s right Your Honor, I agree and we think that Congress did pass this kind of a statute.

This statute would not have been necessary under the common law of definitions of fraud if — unless Congress intended to go this far.

David Ferber:

The Ridgely against Keene case which we cite in our brief, which was the one where the man is paid by someone trying to form a pool to give the advice was one decided at common law.

And so it is our view that Congress must have intended to go beyond what it had.

Just briefly if I can emphasis the facts in this case —

William J. Brennan, Jr.:

(Inaudible) you told me earlier that you were arguing for (Inaudible).

I understood you to say that on these facts there is a pattern which satisfies the ordinary test with clear and convincing evidence of an intended fraud on the part of this investment advice.

Is that your position or is it that the mere fact that he what if by the time when he was advising people to hold or buy for long-term gain, on a single transaction per se establishes your case?

David Ferber:

Well if — Mr. Justice Brennan I miss understood per se if I gave the latter impression.

The — if we could ever prove that a person was buying first then recommending for a long-term gain and intending to sell, this we call scalping, and this we say however proved whether by a series of transactions or by a —

William J. Brennan, Jr.:

That’s the distinction, isn’t it, that perhaps on a single transaction you would have to prove a case, you have to show something which indicated a specific intent in that particular transaction discussed.

David Ferber:

I think sir —

William J. Brennan, Jr.:

Whereas here not having any evidence, direct evidence and intention, you have to rely on this pattern over six months period as sufficient to establish clear and convincing evidence of a fraudulent (Inaudible)

David Ferber:

Exactly, yes that is the distinction I was trying to make.

Now while there are arguments here in the respondent’s brief as to the facts in this case the basic facts are not disputed.

It is not disputed that about once a month these recommendations were made to purchase a security for long-term gain to 5000 paid subscribers.

Now they point out that they dispute to how many other people this recommendation went out.

There was another service that they supply and sometimes the recommendation went out to the 20,000 subscribers to that service and sometimes even more people, but they point out that in those situations it is argued we give our subscribers to this service a chance to buy first.

In another words, they hold up the service.

The recommendations here are set forth in the record, following Page 34 and at the bottom of the page the print came out so light and so tiny that it might be well to read to you the language at the bottom of 34 which is the respondent’s own characterization of this service.

An investment service devoted exclusively to one the protection of investment capital, two the realization of a steady and attractive income there from, and three the accumulation of capital gains through the timely purchase of corporate equities that are proved to be undervalued.

And it is our position that this is not devoted exclusively to these matters when the service is also used to provide a basis for the scalping activities, the trading activities of the respondent.

The charts dealing with the — what did happen in a market each time are set forth at Pages 15 of the record and thereafter.

And it will be noticed that the you could almost pick what is the mailing date of the report even if it weren’t written on each of these because on every occasion the volume increased greatly generally two, three, or four times that’s what it did and in each case except where a security was disparaged and price went down, the price rose to several points usually.

For example in the United Fruit case which is on Page 15, the closing for the week or two before had ranged from 21 and an 8 to 22 and three 8s and then the week following the close got to 25 and a 8 and then began slowly to get down following the mailing the date the report and this was the security in which a $117,000 was invested.

I mean these were just tiny sums this man was putting in.

In addition as I think I made clear on one occasion where this Chock Full O’Nuts where the security was disparaged instead of buying in advance, he sold short and covered subsequently.

We have a chart on our brief, at Pages 6 and 7 which indicate the purchase price and the dates recommended and the selling price and profits.

Respondents do not dispute the accuracy of this chart except as to the profit figures in one or — in several of the instances and these are generally because they either have additional transactions or in one situation it’s Chock Full O’Nuts where they bought puts that is options to sell, they apparently did not sell quickly enough, but held them until the market had come back.

The fact that an investment advisor is in a confidential relationship with the persons he advises was conceded by the Court below.

The cases in the matter of — seen in the lower Courts, all seem to hold this.

The legislative history of the act shows that the purpose of the legislation was to remove conflicts of interests between the investment counsel and the clients.

David Ferber:

The respondents say only one thing and that is their advice and it’s our view that anything which interferes with the disinterestedness of that advice must be disclosed.

The — certain of the other acts have in addition to these two provisions, an additional provision with respect to permissions to state, it is our position, however, that in circumstances not dissimilar from this the Courts have generally held that the violation was not only of that provision but also of these.

Presumably and there is a nothing we could find in the legislative history that explains it that presumably advisors particularly many who get out of list of best buys and so forth were concerned that they would have to get a – in effect a prospectus out on every security that they were recommending whereas many of their clients merely wanted to know good buys and bad buys or good to sell and so forth.

I would like to and I think that that is the basic reason.

I should say also, however, that this Court in the Joiner case did make the point that the expressio unius doctrine does not apply to the, at least the provisions of the Securities Act there involved, that the Court will treat the statute in accordance with the way it was intended.

Also as Judge Clarke pointed out in his dissenting opinion those sections are tied to obtain money or property without disclosing.

Now these people, expect for the $18 subscription service, are not obtaining money or property in the sense of selling them stock.

The real evil via statute was aimed at I believe was primarily not to have people waste their funds in securities that are recommended which are not upon the basis of the best recommendation of the advisor.

And in that connection I would like to point out that while it is argued in my opponent’s brief that these people had the opportunity to profit and that chart is shown based on post record prices what there is – is in this chart is merely the subsequent high that there ever was.

For example they point out in the United Fruit case that it could have been still bought at twenty two-and-three quarters and sold at thirty-and-a-half, but after the six months had lapsed for which the recommendation was made, the price was around 15 and 17, in other words, a loss of around 35%.

What they are saying is, that if somebody sold at the top of the market the subsequent market from that day till this there might have been a profit, but they never told them when to sell, they don’t claim that they said so at a particular time.

They might also have sold at the low of the subsequent market, and they would not be necessarily well off.

Were there other (Inaudible)

David Ferber:

The record does not show that Justice Harlan, but since this was in eight months period I would assume that there were probably two other, two other recommendations made whether we – our investigation had time to turn up any scalping with respect to them or whether there was none involved I do not know.

Byron R. White:

Did the advisor buy and sell in his own name?

David Ferber:

Actually there is an individual and a corporation of which he owns all the stock.

The corp of the — I believe it was all bought and sold in the name of the corporation through six different brokers.

Byron R. White:

But it wasn’t — at least I mean the corporation was revealed in the (Inaudible) it wasn’t held in discrete name or anything like that?

David Ferber:

That’s right Your Honor so far as I know it was not.

Of course this was not public material.

A person subscribing to the service couldn’t go a broker dealer and say please tell me what capital gain he is doing so to the extent that they are —

Byron R. White:

But other broker dealers might know —

David Ferber:

If the broker dealer talked.

I would assume that is not up to a broker dealer to be talking about who is —

Byron R. White:

That broker dealer would know —

David Ferber:

That broker dealer would know and there were six broker dealers whether they were separate ones for the different transactions or split among the same purchase of the same stock is not clear from the record.

Potter Stewart:

Mr. Ferber, the basic purpose of this Act was to create such condition as would ensure that the clients and investment advisor service was given the best recommendation of the advisor.

Is there any allegation or finding in this case that the best recommendation of the advisor was not given?

David Ferber:

No Your Honor.

Potter Stewart:

With respect to this jury —

David Ferber:

There is not and it only on the basis of the potential conflict that we say that we don’t know you can never know whether it was the best recommendation.

Potter Stewart:

Is there an allegation in this case or any finding of any actual conflict of interest?

David Ferber:

You mean such as the situation I suggested?

Potter Stewart:

You gave us a couple of imaginary cases, is there any allegation of any such data, facts in this case?

David Ferber:

No, Your Honor it would be I think impossible for example pick the situation of the man where — meets the competitor on the golf course I mean this is the type of think we just would not be able to turn up normally in any investigation.

Potter Stewart:

Is there any allegation or finding in this case that the — any of the clients of this respondent suffered any loss?

David Ferber:

There is no, no allegation.

Whether or not they would have done better had he not been in this practice, whether he would have recommended other securities that might have done better is purely speculative.

Potter Stewart:

Of course that is what you said, it’s obviously speculative but whether or not they suffered any loss is a matter of fact.

David Ferber:

Actually at the time our injunction action was brought for six months for which they were to have purchased the security had not expired.

So that presumably there were holding the securities, then it would have been impossible.

Potter Stewart:

A long-term.

David Ferber:

The time it came to the Court below.

Thank you.

Earl Warren:

Mr. Fennelly.

Leo C. Fennelly:

Mr. Justice Warren, Justices of the Court.

This case started in November 1960 on an application for a preliminary injunction and no effort has ever been made to try the case on the merits.

The District Court found that there was no fraud and no intent.

It is undisputed that the recommendations that the investment advisor made were sound and indeed in the instances complained of anyone who had followed his advice for long-term gain has the opportunity to profit from 34% to 84%.

Now what is complained of is that after the investment advisor had investigated a stock and had decided to recommend it to customers, he himself before he sent out his recommendation bought some shares and in the six instances complained of, they are small shares compared to the outstanding stock of the company is involved.

One company Creole has an issue of 77 million shares, the man bought 600.

Nowhere do they claim that his advice was not good.

Now assuming that he had bought no shares, would it not be equally argued by the commission that here is an advisor who recommends stock and does not follow his own advice?

And suppose of buying 600 shares, suppose he bought one is there a conflict of interest created?

Is the integrity of his advice changed?

The real test is whether this man was honest and was giving his subscribers the opportunity to purchase for a long-term gain which on the facts proved to be 100% correct.

Arthur J. Goldberg:

Well, isn’t real problem (Inaudible)

Leo C. Fennelly:

Well Justice Goldberg it would seem to me that where a man studies, and these are the facts of this case, where he studies his stock and decides to ride on it because he buys some shares, it does not change his — make him interested instead of disinterested.

It is not a situation where a — someone owns a big block of stock that they want to get rid of.

Arthur J. Goldberg:

(Inaudible)

Leo C. Fennelly:

I think that’s true and I do not think that because he buys a share and follows his own advice that he alters his disinterestedness because the —

Arthur J. Goldberg:

(Inaudible)

Leo C. Fennelly:

Do I say nominal?

Arthur J. Goldberg:

Dominant.

Leo C. Fennelly:

Dominant position, no.

It would depend — it would depend on his intent.

Certainly if a man owned a block of stock and those are the cases that have been decided and their motive and reason for recommending it is to unload that stock onto the public, I mean I don’t think there is any question about it, but where a man in good faith studies his stock, finds an undervalued, recommends to the public because he too seeks to share on his own work product which I think is the back concept that we must decide whether a man who works on this, whether he hasn’t had a right to use his own work product.

Arthur J. Goldberg:

(Inaudible)

Leo C. Fennelly:

Well, I would think not Your Honor.

These are a (Inaudible) and whether or not he would intend to sell that stock before it goes out one week, two weeks, if the stock went down he might decide to hold it and the ultimate belief that his long-term — his advice for a long-term gain would prove correct and that the stock would rise.

I do not think that he would in a position to say I intend to sell in one week or two weeks.

Byron R. White:

(Inaudible) this case to assume that he does have this intent, are you attacking the findings here that there was an attempt to sell as many times?

Leo C. Fennelly:

I don’t think there is any such finding Your Honor, I think those are facts, that what happened that he did.

Byron R. White:

All right let’s assume that there is intent to sell at an early time and without any questions, if he buys them, plans to sell at an early date, let’s accept that for the moment, do you think that is a matter that should be explored?

Leo C. Fennelly:

No, I would not think so.

I would not think so.

And for the reason — for the reason is that what his advice is that they buy for long-term gain not what he does in fact had they sold for long-term gain, not what he does.

In fact had they sold for long-term gain they would have made a very small profit.

Whereas if they followed his advice, they would have made a profit not with what he was trying to tell them to do.

Byron R. White:

You don’t think the facts that they are going to be early selling operations in the recommended stock, in matter especially by the one advising (Inaudible), would be a subsequent (Inaudible)?

Leo C. Fennelly:

It would — in the facts of this case, it would have done no harm.

It is —

Byron R. White:

Then they might not have harmed.

Leo C. Fennelly:

It was — then they would, they would have been harmed by not buying.

It seems to me exactly like a doctor who recommends that his patient do not smoke at all, and the doctor himself smokes a carton a day.

I would — the doctor’s advice could be a complete good faith having nothing to do with his own preference for tobacco, but he honestly believes that it is bad for his patients.

And I don’t think that a doctor’s integrity should be impugned because something that he himself does having nothing to do really with the patient.

And in this case looking at the advisors transactions wholly apart from a view of integrity they have nothing to do with the subscribers, as subscribers he was telling purchase for long-term gain.

And to be sure if this advice, his judgment was correct sooner or later the stocks should rise, which they did, and of course he elects for one reason or another not to have the profit for the long-term period but sells out at a short period, does not in any way affect either the integrity of the advise nor the intent with which it is given.

Byron R. White:

As a matter of fact it might have an effect of market I suppose to a fellow who recommended the stock and —

Leo C. Fennelly:

Your Honor these —

Byron R. White:

— starts selling what he owns?

Leo C. Fennelly:

Your Honor the shares, these involve — millions of shares there was only one instance where you have less than a million shares out that was Hart, Schaffner & Marx where they was an issue of some 800,000 shares.

And in that issue specifically in his bulletin he told the people do not reach for these stocks, buy them at a level because the buying might tend to increase market.

His advice was completely with integrity, because he specifically told them at that instance not to reach for them to put it out.

So that there was no intention which the District Court found and Circuit Court has found of anything but good intent.

Now the commission admits that if he had purchased the stock and held that for long-term gain himself, there would be no need of disclosure and nothing fraudulent.

Well suppose instead of holding it for six months he purchases the stock and holds it for five months and 29 days then we have a adulteration of integrity or the soundness of advice can it become fraudulent for a difference of a day, suppose he sells it five months, four months.

That is not the test.

The test is what they advise was honest and whether he was giving that advice with good intent and on the affidavit on information and belief submitted in this record there was no basis for a preliminary injunction and I respectfully submit that the writ should be dismissed or a judgment affirmed.

Potter Stewart:

Mr. Fennelly before you sit down, is there any indication in this case what if any other securities the respondent was buying or selling during this period?

Leo C. Fennelly:

No, Your Honor there is a 11-month period set out in the complaint and they have alleged that in six instances both went out every month and that is all that is in the complaint and moving papers.

Potter Stewart:

But this is man, this Capital Gains Research Bureau Incorporated was the — obviously in the business of, as an investment advisor, it was wholly owned by Mr. Schwarzmann I guess, or wholly owned —

Leo C. Fennelly:

It was wholly owned.

Potter Stewart:

Mr. Schwarzmann also an investor on his own behalf in another, in other words I think it’s possible, it occurs to me that we might have one case if these were the only securities he bought and sold and perhaps conceivably quite a different case if he brought and sold a 100 others during over this period of a year which, that the securities which could did figure in any of his investment advice.

There is nothing in the record to show one way or the other, is there?

Leo C. Fennelly:

Yes the affidavit alleges that on certain instances wholly apart in bulletin he had purchased and sold some of the same stock.

It may have nothing to do with any recommendation.

Potter Stewart:

Then shall what — how many other stocks he bought or sold?

Leo C. Fennelly:

No, no it doesn’t do that.

I think two instances in the papers Hart, Schaffner & Marx and I think Chock Full O’Nuts where he alleges in his affidavit that wholly apart from any bulletin he had transactions in the stock.

Potter Stewart:

There is some mentioned in the brief —

Leo C. Fennelly:

Prior to that term.

Potter Stewart:

That other, other investment advisory services were also recommending some or all of these securities in the same period, are those facts developed or just —

Leo C. Fennelly:

They are developed slightly in our papers.

Your Honor, you’ll understand that we had to answer these papers at the time and the facts that we did know was for example Union Pacific has been recommended 10 days before Capital Gains by Standards Statistics which is the largest advisory service in the United States.

Potter Stewart:

That, that recommendation, recommendation had been made before the respondent purchased Union Pacific?

Leo C. Fennelly:

Yes, Your Honor it was 10 days before —

Potter Stewart:

The purchase.

Leo C. Fennelly:

That was 10 days before Capital Gain issued its bulletin recommending it.

Potter Stewart:

And did Capital, and was that one of those which was purchased and later sold?

Leo C. Fennelly:

Yes, yes.

Potter Stewart:

By Capital Gains?

Leo C. Fennelly:

Yes.

Potter Stewart:

Well when did the purchase come with reference to the other advisory services’ recommendation?

Leo C. Fennelly:

I would say five days.

I maybe — I would say about five days after Standard Statistics and about five days before Capital Gains issued its recommendation.

Potter Stewart:

So assuming that there is a short-term immediate rise in a security after a large advisory service recommended that rise presumably would have already occurred at the time that the respondent bought — that rise is attributable to the other advisory services recommendation would have already occurred at the time the respondent bought Union Pacific is that right, that’s your point?

Leo C. Fennelly:

Well my view, I am certain that I understand your question, my view is that that if his advice was correct that the market should raise, I mean over a period of time, I mean not necessarily today, now the record show that Union Pacific did raise, maybe pointed to him and gradually went up, so that ultimately what he had recommended to his people was completely correct.

Potter Stewart:

This service did not purport to advise before when to sell I suppose did it or not?

Leo C. Fennelly:

No, there is nothing in the record on here as to these stocks in the moving papers, this happened in a short period of time in a complaint application for injunction our answering papers, so there is nothing in the record about that whatsoever.

Potter Stewart:

But basically it was a, it was a service covering a recommend purchases for long-term appreciation?

Leo C. Fennelly:

That’s right.

Potter Stewart:

And it didn’t, didn’t make sell recommendations, the acceptance of (Inaudible) comparing one purchase with another purchase.

Leo C. Fennelly:

There is nothing in this record whatsoever about any selling recommendation.

One reason would be that the — it happened at a period when that could not have been possible with relation to these securities.

Potter Stewart:

Let me ask you this from a tax point of view, would it have made any difference to this respondent, whether he held a security from six months or longer or less than six months would he have been taxed, would this not — any profits on this have been taxable and is ordinary income in any event or doesn’t that show in the record?

Leo C. Fennelly:

It does not show in the record.

That would be my belief.

Potter Stewart:

So to him it was a kind of him own point of view of — his own tax consequences as the taxpayers, it didn’t make any difference whether he is on the security for six months or longer, for less than six months.

Leo C. Fennelly:

Well as to him personally I would think not, perhaps the corporation although it is — I don’t think I should be so certain about that, because the business of Capital Gains actually is an advisory service and this was incidental business to it and the Bureau could well hold — it would not in the course of their business and therefore tax —

Potter Stewart:

Well I don’t ask you to make a confession.

I don’t know if there is any internal revenue agent in the room, but it’s just, it’s just one of the things that — I want to know if there is any, if there is any evidence one way or the other on that —

Leo C. Fennelly:

There is no evidence.

Potter Stewart:

— or any of that sort in the record, alright.

Leo C. Fennelly:

No evidence on that.