Source: https://law.justia.com/cases/federal/appellate-courts/F2/461/974/400491/
Timestamp: 2020-08-14 09:01:53
Document Index: 778587326

Matched Legal Cases: ['§ 78', '§ 78', '§ 78', '§ 78', '§ 78', '§ 78', '§ 78', '§ 78', '§ 78', '§ 78']

Securities and Exchange Commission, Plaintiff-appellee, Andsecurities Investor Protection Corporation,applicant-appellee, v. Alan F. Hughes, Inc. and Alan F. Hughes, Defendants-appellants, 461 F.2d 974 (2d Cir. 1972) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Second Circuit › 1972 › Securities and Exchange Commission, Plaintiff-appellee, Andsecurities Investor Protection Corporatio...
Securities and Exchange Commission, Plaintiff-appellee, Andsecurities Investor Protection Corporation,applicant-appellee, v. Alan F. Hughes, Inc. and Alan F. Hughes, Defendants-appellants, 461 F.2d 974 (2d Cir. 1972)
US Court of Appeals for the Second Circuit - 461 F.2d 974 (2d Cir. 1972) Argued March 10, 1972. Decided April 21, 1972
There are two appellants, Alan F. Hughes, Inc. and Alan F. Hughes; the latter is the principal stockholder, a director and president of the former. They appeal from two orders of the District Court for the Northern District of New York, James T. Foley, Chief Judge. On December 13, 1971, upon application of the SEC, the district court appointed an equity receiver for Hughes, Inc. On January 17, 1972, acting pursuant to Sec. 5(b) (1) and (3) of the 1970 Act, 15 U.S.C. § 78eee(b) (1) and (3) (1970), the district court made an adjudication that the customers of Hughes, Inc. were in need of the protection afforded by the 1970 Act and appointed a trustee for the liquidation of the broker-dealer. While appellants challenge the appointment of both the receiver and the trustee, these appeals primarily concern the appointment of the the trustee pursuant to the 1970 Act, the trustee having superseded the receiver in control of the assets and affairs of Hughes, Inc. For the reasons stated below, we affirm both orders of the district court.
On October 27, 1971, the Special Fiscal Agent, William J. Quinlan, Esq., of Schenectady, filed his report with the court. Fully supported by documentary evidence, the report concluded that "defendant's books and records are so unreliable, inaccurate, incomplete and misleading that they are unusable." The Special Fiscal Agent also advised the court that Hughes, Inc. had engaged in acts and practices which "reflect [ed] on defendant's integrity as a broker" and which were more than mere technical violations of law.
Appellants argue, however, that Sec. 5(b) (1) of the 1970 Act precludes a district court from making its own finding as to whether a broker-dealer is in danger of failing to meet its obligations to its customers. Under Sec. 5(b) (1) (A), the district court to which SIPC applies "shall grant the application and issue a decree adjudicating that customers of the member named in the application are in need of protection under this [Act]" if it finds that one or more of the conditions set forth in Sec. 5(b) (1) (A) exists. Appellants point out that a literal reading of this section may be said to require a district court to grant SIPC's application if one of the five enumerated conditions is present, even though the broker-dealer is not in danger of failing to meet its obligations to its customers. Such a literal reading of course would raise a most serious question as to the statute's constitutionality. So read, it would provide for no hearing and no judicial determination of the broker-dealer's ability to meet its obligations. Cf. Ewing v. Mytinger & Casselberry, Inc., supra, 339 U.S. at 598-99. There is no need, however, for us to decide whether such a literal interpretation would violate due process. It is a cardinal principle of statutory construction that " [w]hen . . . a serious doubt of constitutionality is raised, . . . this Court will first ascertain whether a construction of the statute is fairly possible by which the question may be avoided." Crowell v. Benson, 285 U.S. 22, 62 (1932); accord, Long Island Vietnam Moratorium Committee v. Cahn, 437 F.2d 344, 348 (2 Cir. 1970); United States v. Witkovich, 353 U.S. 194, 201-02 (1957).
We believe that the 1970 Act reasonably can be construed to avoid possible constitutional infirmity. As Learned Hand said in his much quoted observation, " [t]here is no surer way to misread any document than to read it literally." Guiseppi v. Walling, 144 F.2d 608, 624 (2 Cir. 1944) (concurring opinion), aff'd sub nom. Gemsco, Inc. v. Walling, 324 U.S. 244 (1945); accord, Diskin v. Lomasney & Co., 452 F.2d 871, 874 (2 Cir. 1971). Here the most reasonable construction is that SIPC's initial determination under Sec. 5(a) (2) is subject to judicial determination-after notice, hearing and appropriate findings-by the district court under Sec. 5(b). See Note, 24 Vand. L. Rev. 586, 610 (1971). This interpretation of the statute is buttressed by the legislative history indicating that the primary purpose of the 1970 Act is the protection of customers of financially disabled broker-dealers; the Act does not contemplate action by SIPC unless there is a danger that the broker-dealer may not meet its obligations to its customers.9 The literal interpretation of the statute which appellants urge upon us could result in the district court's appointing a trustee when one of the five conditions in Sec. 5(b) (1) (A) exists, even though the broker-dealer is not in danger of failing to meet its obligations. It also is significant that SIPC consistently has interpreted Sec. 5(b) to mean that the district court should review the validity of SIPC's determination under Sec. 5(a) (2). We hold that the statutory scheme whereby customers of a broker-dealer are adjudicated to be in need of the 1970 Act's protection is consistent with due process.
The hearing before Chief Judge Foley on January 17, 1972 provided appellants with ample opportunity to present such evidence regarding Hughes, Inc. if they had wanted to do so. During that hearing, in response to the court's question about appellants' claim that they had been denied a hearing on SIPC's determination under Sec. 5(a) (2), counsel for SIPC replied:
Appellants argue, however, that the court did not realize that it was obligated to make its own finding with respect to the validity of SIPC's determination under Sec. 5(a) (2). This claim also is not supported by the record.
We likewise reject appellants' argument that the court never actually made a finding that Hughes, Inc. was in danger of failing to meet its obligations to its customers. This argument overlooks the fact that the court, in its order appointing the trustee under the 1970 Act, specifically stated that "the customers of Alan F. Hughes, Inc., are in need of the protection afforded by the Securities Investor Protection Act of 1970 . . . ." In view of our interpretation of Sec. 5(b) (1), we believe that implicit in this statement is the court's finding that Hughes, Inc. had failed or was in danger of failing to meet its obligations to its customers. Moreover, while his remarks from the bench on January 17 are not conclusive, we believe that the following suffices to show that Chief Judge Foley made the requisite determination that Hughes, Inc. was in danger of failing to meet its obligations to its customers:
In addition to determining that Hughes, Inc. was in danger of failing to meet its obligations to its customers, the court also correctly found that two of the conditions set forth in Sec. 5(b) (1) (A) existed. Specifically, the court found that Hughes, Inc. "is unable to make such computations as may be necessary to establish compliance with such financial responsibility or hypothecation rules or regulations." Sec. 5(b) (1) (A) (v), 15 U.S.C. § 78eee(b) (1) (A) (v) (1970). This finding was supported by the Special Fiscal Agent's report, which concluded that "defendant's books and records are so unreliable, inaccurate, incomplete and misleading that they are unusable." The Special Fiscal Agent's report was corroborated by a letter from the accounting firm of Charles L. Marvin and Company, whom the Special Fiscal Agent had hired to audit the books and records of Hughes, Inc. Furthermore, in his Memorandum-Decision and Order of December 13, 1971, Chief Judge Foley adopted the findings and conclusions of the Special Fiscal Agent and stated that:
While the appointment of the trustee is sustainable on the basis of a finding of the existence of one of the conditions enumerated under Sec. 5(b) (1) (A), the court also correctly found that Hughes, Inc. was "the subject of a proceeding pending in any court . . . in which a receiver . . . for such member has been appointed." Sec. 5(b) (1) (A) (iii), 15 U.S.C. § 78eee(b) (1) (A) (iii) (1970). In his order of December 13, 1971, Chief Judge Foley himself appointed a receiver for Hughes, Inc.
15 U.S.C. § 78aaa et seq. (1970) (hereinafter, "the 1970 Act")
Section 17(a) of the 1934 Act, 15 U.S.C. § 78q(a) (1970), and Rules 17a-3 and 17a-4 promulgated thereunder, 17 CFR Secs. 240.17a-3 and 240.17a-4 (1971)
Section 15(c) (3) of the 1934 Act, 15 U.S.C. § 78o(c) (3) (1970), and Rule 15c3-1 promulgated thereunder, 17 CFR Sec. 240.15c3-1 (1971)
Section 15(c) (2) of the 1934 Act, 15 U.S.C. § 78o(c) (2) (1970), and Rule 15c2-1 promulgated thereunder, 17 CFR Sec. 240.15c2-1 (1971)
Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b) (1970), and Rule 10b-5 promulgated thereunder, 17 CFR Sec. 240.10b-5 (1971)
Section 5 of the 1970 Act, 15 U.S.C. § 78eee (1970), provides in pertinent part:
Hughes, Inc. is a member of SIPC by virtue of its being a broker-dealer registered with the SEC. See Sec. 3(a) (2) (A) of the 1970 Act, 15 U.S.C. § 78ccc (a) (2) (A) (1970), which provides, with some inapplicable exceptions, that all persons registered as brokers or dealers under Sec. 15(b) of the 1934 Act are members of SIPC
H.R.Rep.No.91-1613, 91st Cong., 2d Sess. 2 (1970); S.Rep.No.91-1218, 91st Cong., 2d Sess. 3-4 (1970). On legislative history generally, see 3 U.S. Code, Cong. & Admin.News 5254-5285 (1970). See also Note, 24 Vand. L. Rev. 586 (1971)