Securities and Exchange Commission v. National Securities

PETITIONER: Securities and Exchange Commission
RESPONDENT: National Securities
LOCATION: United States District Court for the Northern District of Illinois, Eastern Division

DOCKET NO.: 41
DECIDED BY: Warren Court (1967-1969)
LOWER COURT: United States Court of Appeals for the Ninth Circuit

CITATION: 393 US 453 (1969)
ARGUED: Nov 18, 1968 / Nov 19, 1968
DECIDED: Jan 27, 1969

Facts of the case

Question

Media for Securities and Exchange Commission v. National Securities

Audio Transcription for Oral Argument - November 19, 1968 in Securities and Exchange Commission v. National Securities

Audio Transcription for Oral Argument - November 18, 1968 in Securities and Exchange Commission v. National Securities

Earl Warren:

Securities and Exchange Commission, Petitioner versus National Securities, Inc.

Mr. Solicitor General.

Erwin N. Griswold:

Mr. Chief Justice and may it please the Court.

This case is here on a writ of certiorari to the Ninth Circuit Court of Appeals.

It involves the construction and application of the McCarran-Ferguson Act and its interrelation with Section 10 (b) of the Securities Exchange Act of 1934.

The text of those two statutes is given on pages 33 and 34 of the Government's brief and this case.

I would call attention to the provision in Section 10 (b) which makes it unlawful for any person to use or employ any connection with the purchase or sale of any security registered on the National Securities Exchange or any security not so registered.

The net result of those two phrases is simply to apply to any security any fraudulent device as defined by the rules of the Securities and Exchange Commission and the relevant Rule 10b-5 is set out at the bottom of page 34 and on page 35.

The text of the McCarran-Ferguson Act is on page 33 of our brief and the relevant portion there although it's all relevant but the part that comes closest is Section 2 (b), no Act of Congress shall be construed to invalidate, impair or supersede any law enacted by any state for the purpose of regulating the business of insurance or which imposes a fee or tax upon such business unless such acts specifically relates to the business of insurance and I would suggest that the keywords in that provision of the McCarran-Ferguson Act are the business of insurance.

The present case began in March 1965 when the Securities and Exchange Commission filed its petition in the District Court for Arizona.

It sought to have that court enjoin the respondent here, the National Securities, Inc. and it subsidiary and certain officers and employees from violating Section 10 (b) and Rule 10b-5 on the ground of asserted fraud in connection with purchase or sale of securities.

In due course the defendants filed a motion for judgment on the pleadings or in the alternative for summary judgment, the motion for judgment on the pleadings was granted by the District Court and this was affirmed by the Court of Appeals.

As the Court of Appeals stated in its opinion in this situation, the allegations and the amended complaint must be presumed to be true.

And these allegations may be summarized this way.

It is alleged that the respondent, National Securities, Inc. is a holding company which owned two-thirds of the slightly more than a million shares outstanding of National Life which was in Arizona insurance company.

Producers Life Insurance Company was another Arizona company.

It had some 881,000 outstanding shares held by approximately 14,000 stockholders in many states.

In other words, it was quite widely distributed.

The allegation is that the defendants formed an illegal scheme contrary to Section 10 (b) under which National Securities would acquire control of Producers Life, National Life, and Producers Life would be consolidated and the consolidated company would pay a large part of National Securities cost of acquiring control of Producers Life.

In carrying out the scheme, National Securities purchased the stock in Producers which was held by four of Producers' directors and agreed to pay them a very large sum for there agreement not to compete with Producers Life or any successor company.

The National Securities also purchased from Producers Life more than 50,000 shares of its treasury stock and assumed some $600,000.00 of liabilities of Producers Life arising out of previous agreements which had been made with other persons not to compete with it.

It was further alleged that National Securities did not disclose to Producers Life or its stockholders that it intended to impose both of this liabilities with respect to agreements not to compete upon the corporation which would result from the plan consolidation of Producers Life and National Life.

After obtaining control, the Producers Life according to the allegations again, National Securities cause the latter to mail to its stockholders materials soliciting them to approve the propose consolidation with National Life.

And it was then alleged that this material was false and misleading on four grounds: (a) That it did not disclose the liability on the agreements not to compete.

(b) That it predicted substantial consolidated earnings without disclosing that Producers Life and National Life had each had losses in the prior year.

(c) It set forth on the pro forma balance sheet for the consolidated company and asset shown as treasury stock in the amount of more than a million dollars that was alleged to be illusory and finally that it did not disclose in its report to the -- that in its report to the Arizona Insurance Commission, the National Life had written down the value of its investment in Producers Life by more than a million dollars.

The court allowed the defendants to submit the proposal to the Arizona Insurance Commission and to the stockholders.

Both approved the plan and that was carried out.

It was then that the Securities and Exchange Commission filed the amended complaint which is now before the Court seeking such relief as might be appropriate under the circumstances.

In its answer to the amended complaint and in its motion for judgment on the pleadings, the defendant contended that the District Court has no jurisdiction because the matters complained of are entirely within state jurisdiction as provided in the McCarran Act, thus, raising the issue which is here.