Tcherepnin v. Knight

PETITIONER: Tcherepnin
LOCATION: Alamance County

DECIDED BY: Warren Court (1967-1969)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 389 US 332 (1967)
ARGUED: Nov 13, 1967
DECIDED: Dec 18, 1967

Facts of the case


Media for Tcherepnin v. Knight

Audio Transcription for Oral Argument - November 13, 1967 in Tcherepnin v. Knight

Earl Warren:

Number 104, Alexander Tcherepnin et al., Petitioners, versus Joseph E. Knight et al.

Mr. Shure.

Arnold I. Shure:

Mr. Chief Justice, Justices may it please the Court.

This case is here in certiorari to the Court of Appeals for the Seventh Circuit.

It involves an interpretation of the definition of security in the Securities Exchange Act of 1934.

In connection with this argument that as I state the facts of the case that the Court bare in mind the decisions, many of which are of recent years of this Court dealing on what are securities and what the purpose of the 1933 Securities Act and the Securities Exchange Act of 1934 is although the direct decision of this Court on the 1934 Act was on the recent case of Surowitz versus Hilton Hotels Corporation and this Court set out a strong statement of the fact that the primary aim and purpose of the 1934 Act as well as the 1933 Act is the protection of the general public and investors including the uninformed, the gullible, the ignorant and the little investors.

Judge Cummings dissented on the opinion -- majority opinion of the Court in our matter and his opinion sets forth the aims and purposes of the 1934 Act and that they are served by the application of that Act to the typical savings and loan accounts holder who was a small investor who was just as unwary and in need of protection of the typical and sophisticated holder of corporate stock.

Now the other cases pertaining to the 1933 Act that I think are particularly important here are the Securities and Exchange Commission versus W.J. Howey, 1946.

C.M. Joiner, S.E.C. versus Joiner 1943, the variable annuities case which involved the main opinion or the concurring opinion and dissenting opinion, 1959, the United Benefit Insurance Company, lawyers term of court -- and the Capital Gains Research case which involves another section of the Act but still dealt with the overall purpose.

This action was brought pursuant to Section 10(b) of the 1934 Act and Rule 10(b)(5) promulgated there under.

The respondents here and the defendants below are the City Savings Association which is an insolvent Savings to Loan Association which has closed its doors and is now in the process of liquidations.

Its officers and directors, the liquidators or purported liquidators and certain officials of the State of Illinois who had seized custody of the association at the time the complaint herein was filed.

The petitioners are about 150 investors in the capital shares of City Savings Association pursuing on their own behalf and as a class action on behalf of over 5,000 investors who purchased their shares after July 24, 1959 and prior to the closing on June 26, 1964 just short of five years.

Potter Stewart:

What is the relevance of that date?

Arnold I. Shure:

The only relevance of the date is that all of the investors who were there prior to July 24, 1959 were investors prior to 1957 because in 1957, the association had been closed by the State of Illinois and then reopened.

The accounts were frozen and the people couldn’t withdraw.

So these people were in the plate that they’re still in except for the fact that they’ve been able to realize some recovery of their interest out of the new moneys which we claim were received from our clients in the class we represent, through misrepresentation and fraud.

Now the relevance becomes very important because the defense is based on the theory that this creates a hardship on these earlier investors and I can only suggest this as the natural consequences of that defense.

Here are people who were there prior to 1957 that were frozen and it’s still there in 1959 when the management of the association started in on a program of defrauding new people by selling new securities to outsiders without telling them of the material facts which should have been disclosed to them under the terms of the 1934 Act.

Now what material terms were not disclosed?

For one thing, this association which was soliciting investors through the United States mail sent throughout the country failed to disclose to these new people that in representing how safe this association was as they did that they failed to disclose that the association had applied for federal insurance from the homeowners -- from the Federal Home Loan Bank which is in charge of the FSLIC, the Federal Savings and Loan Insurance Corporation.

And after examination, they rejected the association and the reasons stated for the rejection were the unsafe management and unsafe financial policies of the association.

Well to us, it is quite material that when people are informed that this is a safe association, we believe that at the same time whether they wanted to tell these new investors or not that in representing that it was safe, they have to tell them that that was -- had been held we believe it’s safe but the government thinks it’s not and they won’t give us any insurance.

And particularly when they were soliciting people had their money and insured associations to withdraw and come to this association that was very material to tell them that they have been rejected.

We do not charge that there was a fraud by -- that they told anybody they were insured nor do we charge that the mere non-statement of the fact that they were uninsured would in itself possibly have created a fraud or possibly it might have under the circumstances but when they say how safe they are then I think that they became incumbent upon them to tell the whole story.

This is --

Abe Fortas:

Do you have a remedy under the state law?

Arnold I. Shure:

Pardon me?

Abe Fortas:

Do you have a remedy under the state law?

Arnold I. Shure:

Not at least.