Source: https://supreme.justia.com/cases/federal/us/441/768/case.html
Timestamp: 2017-07-20 18:37:11
Document Index: 614197761

Matched Legal Cases: ['§ 77', '§ 77', '§ 17', '§ 17', '§ 17', '§ 17', '§ 17', '§ 17', '§ 17']

United States v. Naftalin (full text) :: 441 U.S. 768 (1979) :: Justia US Supreme Court Center Log In
U.S. Supreme CourtUnited States v. Naftalin, 441 U.S. 768 (1979)United States v. NaftalinNo. 78-561Argued March 26, 1979Decided May 21, 1979441 U.S. 768CERTIORARI TO THE UNITED STATES COURT OF APPEALS
Unfortunately for respondent, the market prices of the securities he "sold" did not fall prior to the delivery date, but instead rose sharply. He was unable to make covering purchases, Page 441 U. S. 771 and never delivered the promised securities. Consequently, the five brokers were unable to deliver the stock which they had "sold" to investors, and were forced to borrow stock to keep their delivery promises. Then, in order to return the borrowed stock, the brokers had to purchase replacement shares on the open market at the now higher prices, a process known as "buying in." [Footnote 2] While the investors to whom the stocks were sold were thereby shielded from direct injury, the five brokers suffered substantial financial losses.
Section 17(a) of the Securities Act of 1933, subsection (1) of which respondent was found to have violated, states: Page 441 U. S. 772
An offer and sale clearly occurred here. Respondent placed sell orders with the brokers; the brokers, acting as agents, executed the orders; and the results were contracts of sale, which are within the statutory definition, 15 U.S.C. § 77b(3). Page 441 U. S. 773 Moreover, the fraud occurred "in" the "offer" and "sale." [Footnote 4] The statutory terms, which Congress expressly intended to define broadly, see H.R.Rep. No. 85, 73d Cong., 1st Sess., 11 (1933); 1 Loss 512 n. 163; cf. SEC v. National Securities, Inc., 393 U. S. 453, 393 U. S. 467 n. 8 (1969), are expansive enough to encompass the entire selling process, including the seller/agent transaction. Section 2(3) of the Act, 48 Stat. 74, as amended, 68 Stat. 683, 15 U.S.C. § 77b(3), states:
Thus, nothing in subsection (1) of § 17(a) creates a requirement that injury occur to a purchaser. Respondent nonetheless urges that the phrase, "upon the purchaser," found only in subsection (3) of § 17(a), should be read into all three subsections. The short answer is that Congress did not write the statute that way. Indeed, the fact that it did not provides strong affirmative evidence that, while impact upon a purchaser may be relevant to prosecutions brought Page 441 U. S. 774 under § 17(a)(3), it is not required for those brought under § 17(a)(1). As is indicated by the use of an infinitive to introduce each of the three subsections, and the use of the conjunction "or" at the end of the first two, each subsection proscribes a distinct category of misconduct. [Footnote 5] Each succeeding prohibition is meant to cover additional kinds of illegalities -- not to narrow the reach of the prior sections. See United States v. Birrell, 266 F.Supp. 539, 542-543 (SDNY 1967). There is, therefore, "no warrant for narrowing alternative provisions which the legislature has adopted with the purpose of affording added safeguards." United States v. Gilliland, 312 U. S. 86, 312 U. S. 93 (1941). [Footnote 6]
The court below placed primary reliance for its restrictive interpretation of § 17(a)(1) upon what it perceived to be Congress' purpose in passing the Securities Act. Noting that both this Court and Congress have emphasized the importance of the statute in protecting investors from fraudulent practices in the sale of securities, see Ernst & Ernst v. Hochfelder, 425 U. S. 185, 425 U. S. 195 (1976), the Court of Appeals concluded that "against this backdrop . . . we are constrained to hold that Page 441 U. S. 775 the government must prove some impact of the scheme on an investor." 579 F.2d at 448.
"The purpose of this bill is to protect the investing public and honest business. . . . The aim is to prevent further exploitation of the public by the sale of unsound, fraudulent, and worthless securities through misrepresentation; to place adequate and true information before the investor; to protect honest enterprise, seeking capital by honest presentation, against the competition afforded by dishonest securities offered to the public through crooked promotion; to restore the confidence of the prospective investor in his ability to select sound securities; to bring into productive channels of industry and development capital which has grown timid to the point of hoarding; and to aid in providing employment and Page 441 U. S. 776 restoring buying and consuming power."
Moreover, the welfare of investors and financial intermediaries are inextricably linked -- frauds perpetrated upon either business or investors can redound to the detriment of the other and to the economy as a whole. See generally Securities and Exchange Commission, Report of the Special Study of the Securities Markets, H.R.Doc. No. 95, 88th Cong., 1st Sess., pt. 1, pp. 9-11 (1963). Fraudulent short sales are no exception. [Footnote 7] Although investors suffered no immediate financial injury in this case because the brokers covered the sales by borrowing and then "buying in," the indirect impact upon investors may be substantial. "Buying in" is, in actuality, only a form of insurance for investors and, like all forms of insurance, has its own costs. Losses suffered by brokers increase their cost of doing business, and, in the long run, investors pay at least part of this cost through higher brokerage fees. In addition, unchecked short-sale frauds against brokers would create a level of market uncertainty that could only work to the detriment of both investors and the market as a whole. Finally, while the investors here were shielded from direct injury, that may Page 441 U. S. 777 not always be the case. Had the brokers been insolvent or unable to borrow, the investors might well have failed to receive their promised shares. Entitled to receive shares at one price under the purchase agreement, they would have had to buy substitute shares in the market at a higher price. [Footnote 8] Placing brokers outside the aegis of § 17(a) would create a loophole in the statute that Congress simply did not intend to create.
Although it is true that the 1933 Act was primarily concerned Page 441 U. S. 778 with the regulation of new offerings, respondent's argument fails because the antifraud prohibition of § 17(a) was meant as a major departure from that limitation. Unlike much of the rest of the Act, it was intended to cover any fraudulent scheme in an offer or sale of securities, whether in the course of an initial distribution or in the course of ordinary market trading. 1 Loss 130; Douglas & Bates, The Federal Securities Act of 1933, 43 Yale L J. 171, 182 (1933); V. Brudney & M. Chirelstein, Corporate Finance 740 (1972). This is made abundantly clear both by the statutory language, which makes no distinctions between the two kinds of transactions, and by the Senate Report which stated:
This is a criminal case, and we have long held that "ambiguity concerning the ambit of criminal statutes should be resolved in favor of lenity,'" United States v. Culbert, 435 U. S. 371, 435 U. S. 379 (1978), quoting Rewis v. United States, 401 Page 441 U. S. 779 U.S. 808, 401 U. S. 812 (1971), and that a defendant may not "`be subjected to a penalty unless the words of the statute plainly impose it,'" United States v. Campos-Serrano, 404 U. S. 293, 404 U. S. 297 (1971), quoting Keppel v. Tiffin Savings Bank, 197 U. S. 356, 197 U. S. 362 (1905). In this case, however, the words of the statute do "plainly impose it." Here, "Congress has conveyed its purpose clearly, and we decline to manufacture ambiguity where none exists," United States v. Culbert, supra at 435 U. S. 379. The decision of the Court of Appeals for the Eighth Circuit is