Source: https://law.justia.com/cases/federal/appellate-courts/F2/564/780/82829/
Timestamp: 2019-09-20 11:41:51
Document Index: 243374800

Matched Legal Cases: ['§ 2', '§ 17', '§ 47', '§ 47', '§ 17', '§ 17', '§ 80', '§ 80', '§ 17', '§ 6']

Fed. Sec. L. Rep. P 96,220mathers Fund, Inc., Plaintiff-appellant, v. the Colwell Company, Defendant-appellee, 564 F.2d 780 (7th Cir. 1977) :: Justia
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Fed. Sec. L. Rep. P 96,220mathers Fund, Inc., Plaintiff-appellant, v. the Colwell Company, Defendant-appellee, 564 F.2d 780 (7th Cir. 1977)
US Court of Appeals for the Seventh Circuit - 564 F.2d 780 (7th Cir. 1977)
Argued May 23, 1977. Decided Nov. 4, 1977
The complaint alleged that Fund's ownership of more than 5 per cent of Colwell's outstanding voting securities made Colwell an "affiliated person," as defined in the Act, § 2(a) (3),3 and that Colwell's November 29, 1974 purchase of its own shares violated § 17(a) (2),4 which prohibits an affiliated person from knowingly purchasing any security from a registered investment company.
Fund based its claim for rescission on § 47(b), which section declares void every contract violating any provision of the Act. The district court, citing the Supreme Court's interpretation of that declaration as rendering a contract voidable by an innocent party in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970), concluded that Fund was not innocent, that the parties were in pari delicto, and that Fund was not entitled to relief under section 47(b) of the Act. The district court felt it proper in such situations to leave the parties where they stood. Accordingly, Colwell's motion under Fed. R. Civ. P. 12(b) (6) was granted.
Section 47(b) of the Act contemplates civil suits for relief by way of rescission and for damages. Cf. Eastside Church of Christ v. National Plan, Inc., 391 F.2d 357 (5th Cir.) cert. denied, 393 U.S. 913, 89 S. Ct. 234, 21 L. Ed. 2d 198 (1968) (Securities Exchange Act of 1934), Goldstein v. Groesbeck, 142 F.2d 422 (2nd Cir.), cert. denied, 323 U.S. 737, 65 S. Ct. 36, 89 L. Ed. 590 (1944) (Public Utility Holding Company Act of 1935). Relief must, however, be fashioned to comport with, and further the policies of, the overall legislative scheme of which the voidability provision, § 47(b), is a part.
The prophylactic nature of the Act is further reflected in § 17(b) (1)-(3), authorizing the Securities & Exchange Commission (S.E.C.) to exempt a transaction otherwise violative of § 17(a) if, inter alia, the terms thereof are reasonable and fair and no overreaching is involved.
A prayer for rescission is founded on equitable concepts and should be granted "only if a court of equity concludes, from all the circumstances, that it would be equitable to do so." Mills v. Electric Auto-Lite Co.,supra, 396 U.S. at 388, 90 S. Ct. at 623. The exhibit attached to the complaint establishes that Fund regarded the price it received from Colwell as "fair and reasonable" and that the price of the stock has now risen. The rescission sought by Fund, some eight months after the sale, would produce a windfall profit for Fund and would be manifestly unjust.
15 U.S.C. § 80a-2(a) (3), in pertinent part, provides:
15 U.S.C. § 80a-17(a) (2), in pertinent part, provides:
Fund also contends that the order is unsustainable because it is based on the premise that the parties are "in pari delicto." It is settled, however, that a correct decision must be affirmed notwithstanding a wrong reason given below. Helvering v. Gowran, 302 U.S. 238, 245, 58 S. Ct. 154, 82 L. Ed. 224 (1937), and cases cited therein; Dann v. Studebaker-Packard Corp., 288 F.2d 201, 205-206 (6th Cir. 1961). A broad "in pari delicto" rationale could render § 17(a) a nullity if it were to preclude suit by any investment company against an affiliate who had purchased securities in apparent violation thereof. Nonetheless, Fund's argument on this point must in this case fail in view of other grounds in the record for concluding that the district court correctly denied the relief sought
Fund also sued American Bakeries Co. (Bakeries) after a similar stock transaction. Mathers Fund, Inc. v. American Bakeries Co., Civil No. 75C2716 (N.D. Ill., filed Aug. 14, 1975). Proceedings were stayed while Bakeries sought from the S.E.C. a retrospective exemption under § 6(c), permitting exemptions consistent with protection of investors and the purposes fairly intended by the policy and provisions of the Act. The S.E.C. has now rendered its decision. American Bakeries Co., S.E.C. Investment Co. Act Release No. 9924 (Sept. 13, 1977). In granting the exemption, the S.E.C. quoted with approval the following observation of its Division of Investment Management: