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.
Abe Fortas: Why not?
Arnold I. Shure: The withdrawal remedy that they talk about the fact they say that we have the right to withdraw, number one, that the practical remedy was nonexistence because since 1959 --
Abe Fortas: But they have a right to sue for Fraud?
Arnold I. Shure: I believe that under the state act, we would not be able to do.
Potter Stewart: Why not?
Arnold I. Shure: Because the --
Abe Fortas: That’s unusual isn’t it?
Arnold I. Shure: The -- your rights are limited for a period of one year first of all. Secondly, we would have to go with the association with a liquidation and we would not be able to proceed in the state without proceeding through the liquidation proceeding. As far as any remedy, there is no policy restricting the federal law against the application. The Section 78 CC I believe, it says that this is not to interfere with regulation by any state -- by the securities department of any state but except to the extent that the state acts are inconsistent with the federal act so if the state act -- there is a definite policy shown for a dual control. The state security laws were well known just the same as they were in connection with the 1933 Act. This is mentioned in the Variable Annuities case that there are state acts. The Variable Annuities case involved a specific situation where they’re running up against the McCarran-Ferguson situation. The McCarran-Ferguson Act which was enacted in 1944 made it quite patent that this -- the recent cases handed down here by this Court and was not to be interpreted to knock out the Paul case which have stood for 90 years as pointed out in the decision of this Court. So that there is a dual system of regulation and there is no policy as there is in the insurance companies for the federal government not to go into areas that the state also covers. There’s one other aspect here and that is throughout the briefs this matter of regulation --
Abe Fortas: That wasn’t quite my question.
Arnold I. Shure: I’m sorry.
Abe Fortas: My question regarded simply the state law provides a remedy here against the person who had committed this and named as a fraud.
Arnold I. Shure: There is a State Securities Act and the Securities Act does provide remedies. There is a recession remedy that was exercised within six months after knowledge. The difficulty here is what constitutes knowledge. Everything under the way of Savings and Loan Association is run under state law. No access maybe hacked to a shareholder, to the books and records of the company. The only way --
Abe Fortas: I don’t want to take a lot of your time. I think I’ve got you’re your answer is.
Arnold I. Shure: All right, the City Savings Association is an Illinois chartered association. It is a corporation under Illinois law. It has -- as a corporation the investors are shareholders which means stockholders. In our brief, we cited the Bowman case of the Supreme Court of Illinois, the Gidwitz case also in the Supreme Court of Illinois defining what the attributes of stocker and what are the rights of stockholders. Our opponents say these cases are irrelevant because they do not involve Savings and Loan Association. It is our opinion that these cases are relevant because the first thing we have to do in defining a term is to find out what the term means and we have to find out what stock is and stock is the investor’s interest of the -- the investor who takes the risk of the success of the enterprise as in this savings of loan association and that’s why they are called shareholders. The definition in the Act provides that the term security means any stock among other things. Certificate of interest or participation in any profit sharing agreement, transferable share, investment contract or in general any instrument commonly known as the security. Now this definition of security is about as carefully drafted definition as the mind conceive see because the terms overlap each other and then you have a secondary defense theory against fraud. You have encompassed within this definition of security and other phrase which is a catchall which is called or in general any instrument commonly known as a security so that if anything can possibly slip through stock which overlaps with share, certainly a share is stock and if the share is transferable as every share is and every stock share is the two terms are certainly to some extent considerably overlapping. Now you can have shares and something which is not stock in the corporation. You can have shares in the partnership enterprise. You can have shares on the trust. There are many situations so therefore you have not only stock which overlaps here that you have transferable share which overlaps investment contract because every share of stock is a contract. It involves the state statute which enables the corporation to exist. It involves the certificate, what is in the certificate, the bylaws of the company and all of these things go together to setup the contract.
Earl Warren: Are these products traded on exchange.
Arnold I. Shure: They are not traded in on exchange. They’re traded on in the over-the-counter market. Section 10(b) of the 1934 Act indicates what the over-the-counter market is although the preamble to the Act says that this Act is for the protection of investors and for other purposes and relates to exchanges and over-the-counter markets. When you get down to Section 10(b) which was the operator provision that we’re suing under here, they don’t use the term over-the-counter market or exchange. Section 10(b) relates to any transaction in any security by any person on any exchange or not on any exchange. Now Professor Loss in his text has pointed out and the case has have indicated that this is a pretty broad statement of what the over-the-counter market is. It means that it pertains to anything -- the over-the-counter market pertains to anything that is not on in exchange. This coverage under 10(b) is as broad as can possibly be conceived. It covers all transactions and security over the door step. There are many transactions where there had been securities not on a market and not through a dealer -- that have actually been between one person and another where the remedy has been supported because that’s what over-the-counter market means. That means not on an exchange. Have I answered your question fully?
Earl Warren: To what extent has it been trading over the market in this type of security?
Arnold I. Shure: Well in 1934, immediately after passage of the Act, the Securities and Exchange Commission was asked to and did grant an exemption to trading in this type of security from the operation of the 1934 Act. It was a limited exemption running for 90 days and they were being traded I believe on the equivalence stock exchange so that they -- the particular exemption that they wanted there was from registration because of the fact that these were clearly securities. So as far as trading during the depression days and during the days whenever --
Earl Warren: We don’t need to go way back there --
Arnold I. Shure: Right now --
Earl Warren: -- to what extent is the trading over-the-counter now?
Arnold I. Shure: Well for seven years, City Savings Association was on a restricted payout phase because ever since they got into trouble back in 1957 up to the date they closed. If someone who was an investor in there couldn’t get his money from the association that he had a dying relative or he needed surgery, they had somebody over their old country that they want to bring over, after all the investors in these savings and loan association involved a lot of little people who put $0.25 together and as the plan shows, they save up a $100.00 and these people have to unload their --
Earl Warren: You got to go very fast and you don’t need to take that much time --
Arnold I. Shure: I’m sorry.
Earl Warren: --you only got to tell me to what extent, to what extent there is trading all over the market and I won’t --
Arnold I. Shure: To the extent is that anybody who has a share who dispose -- who wants to dispose of it and is unable to get his money from the Savings and Loan Association, there’s no alternative but to sell it over-the-counter.
Earl Warren: To what extent has that been done?
Arnold I. Shure: There are no figures on that but it is done necessarily widely in City Savings Association.
Earl Warren: Is it done widely or not, that’s what I want to know.
Arnold I. Shure: It occurs wherever an association does not pay out. The textbooks -- this gets to the situation of the Savings and Loan Association which I was going to go into anyway. A Savings and Loan Association has the right whenever it wants to. Under the Illinois law, there is no mandatory withdrawal probation. The associate -- the individual may demand withdrawal of their shares and the association may pay him. There is no requirement that the association has to pay. After the -- if the association decides not to pay for the reason that it doesn’t have the cash, it may go on a rotation basis. That means that anybody that -- if anybody does want money, they have to get in line and everybody gets a certain amount before they get around with the head with the line again. Now, this is what happened in City Savings Association and the textbooks on Savings and Loan Associations say that this is why Savings and Loan Associations are better than banks to put your money in because there weren’t so many failures of Savings and Loan Associations. There are $38 billion -- 38 million accounts involving $120 billion I believe in the United States and many times in any of these associations goes on withdrawal basis. The insurance on them even in uninsured association does not become effective until there is a default and there is no default until the assets of the association are less than the total of creditors claims plus the claims of all investors so that at any time that investors that an association finds that its investments have become frozen. If you get into an adverse position as occurs from time to time where they’ve used up their money and you get a tight money market and there isn’t much money coming in and the money is out. They find -- they may find themselves in a position and there have been many, many instances where associations have had to go on withdrawal basis to the point where the industry uses this to advertise its claims.
Byron R. White: In a normal liquidation do the holders of this kind of a certificate take after creditors?
Arnold I. Shure: Yes they do.
Byron R. White: In an ordinary liquidation.
Arnold I. Shure: They are -- because they are the shareholders. The risk of the investment is on these investors. Other creditors come ahead of them. They -- and when I say other creditors, I mean the general creditors because these people are not. If we succeed in this case, our people would be declared to be creditors because they would rescind. Now, I had mentioned one of the elements of fraud, one of the other elements of fraud is that this association had at present the man who had become terribly involved in many situations. One of them was the United States government was claiming money from him because they charged him with taking taxes because they said he was taking kickbacks in connection with the associations operations. Pardon me, this goes to the question whether or not there was a fraud involved.
Byron R. White: Alright.
Arnold I. Shure: Well, we’ll assume that there was a material fraud shown in the complaint.
Byron R. White: What was the cause of that?
Arnold I. Shure: Since the court held, there was no cause of action stated and the -- one of the respondents has raised the question as to whether or not we state the cause of action here that’s in night brief. I was addressing myself to that but if the Board wishes, I’ll pass this over. As far as -- we then are getting to the definition of security as set forth here. We have asserted that we do hold stock in a corporation which is clearly within the Act. We claim that we have certificate of interest or participation in a profit sharing agreement, investment contract and a transferable share which brings us down to the question of whether or not this is commonly known as a security which I called the secondary of this case. They -- in examining the authorities and the arguments cited by the respondents, we find that time after time in attempting to prove that this is not stock or this is not a transferable share whatever it may -- one is attempting to prove in particular cases, we find a situation developing where we come head on into a matter of commonly known us, for instance Professor Kerry who was then chairman of the Securities and Exchange Commission testified in 1963 with respect to the 1964 amendments. He was asked why savings and loan shares were exempted from the additional registration probations which were being imposed by the 19 -- by the proposed amendments. His answer was because these are commonly known as shares and it was therefore necessary to provide an exemption for them. The testimony and the report in 1932 which was two years before passage of this Act in connection with amendments to the Bankruptcy Act, the house judiciary committee made a statement that they were not taking on the liquidation of savings and loan association through bankruptcy and this would be left to state regulation which could better liquidate them. In the house report statement, these interests are referred to as securities. They are referred to as securities over and over again in federal sources, in state sources, there are at least five Acts in Illinois that referred to in these securities and the respondents assert that since the Illinois legislature went to pass those acts was not referring for this particular federal legislation. Therefore, those citations to the Illinois acts and to their reference to these as securities were an opposite. However, if we are looking to see what is commonly known as the security, we look into the Illinois legislature, we look into the legislative action of the states throughout the country and we find wherever we go and in the testimony of the representatives of the savings and loan industry in 1933. It connects with the passage of the 1933 Act which contains the statute of the same definition that they said they welcome these antifraud provisions. They did not want to be registered but they welcome the antifraud provisions application for this type of interest. The respondents have raised the point that in connection with the 1933 Act, there was a considerable testimony in opposition to the registration of these securities. They also state that there was opposition to their inclusion generally. They say that nothing appears in the legislative history of the 1934 Act to indicate whether anything in connection with these savings and loan shares. The fact remains that the 1933 hearings did encompass all of the objections that anybody wanted to make and there were hearings and representations by those who favored registration and those who oppose registration. What was the net result? In 1933, they exempted from the registration provision and specifically not -- did not exempt them from the antifraud provisions in ‘33 Act only those savings and loan associations which made loans to their members and which did not charge more than 3% for the privilege of withdrawal so that the net result of all the controversy about what happened in the congressional hearings on the 1933 Act adds up to nothing because they didn’t get the exemptions yet respondents would argue that because these things were discussed, therefore congress must have had in mind in 1934 they want to exclude them. But if we look at the 1934 Act, we find that there are some very significant references when they wanted to exclude any reference or any supervision over insurance company securities, the congress put it in very plainly but when they wanted to -- but when it got down to its savings and loan associations, the only reference to exclusion of any savings and loan associations as the exemption paragraph that I've just mentioned which does not exclude savings and loan associations generally. If we look at the cases cited against the background of that definition and we look at all of the pertinent laws which have been passed not only in Illinois but are represented by the United States Savings and Loan League and its literature which we have cited as covering states throughout the country where they have referred to these securities -- where they advocate these as investments. We come to the inescapable conclusion that this is the type of investment that the Congress was talking about and it doesn’t make any difference whether it was -- it comes from little people who put in very small sums of money and accumulate them over lifetime or when it comes -- where the money is invested by people who have a lot of money and invested in the shares of large companies. The concept of regulation that is objected to by the respondents here is a different kind of regulation and if this -- if the Court holds here as has generally been understood to be the law throughout the years that these are securities and are protected by the antifraud provisions, this does not mean that any Savings and Loan Association has to do one thing as far as registering that you don’t have to register, they need to do nothing. All they need to do is not make misrepresentations to the people. They cannot sell these securities and hold back vital information such as the fact that they are in serious financial trouble with their other investors and that there is a no money that is being taken in, through one door is going out the other door or through another window to make partial payments under your payout plans of the old investors.
Byron R. White: Well, broker, dealers will be regulated by --?
Arnold I. Shure: The broker in these securities? They always have been regulated since the inception of this Act.
Byron R. White: With respect to these securities?
Arnold I. Shure: Those who specialize -- there are specialists who specialize in this type of security and contrary to the statements made by respondent that this just started after this case was filed. The fact remains that the Chicago office of the Securities and Exchange Commission has supervised the brokers who specialize in these securities all the way back. The case of Archer --
Byron R. White: Of course that doesn’t make it --
Arnold I. Shure: It’s an interpretation.
Byron R. White: Well, I know what it is. It may not be right but all I'm saying is that a decision that it is a security will ensure the fact that broker dealers will be covered by the ‘34 Act.
Arnold I. Shure: In the case of S.E.C. versus Archer which went up to the Court of Appeals in the Eight Circuit in the name of Archer -- this Archer’s appeal. We mentioned that in our briefs and I believe the S.E.C. does also. In that case, Mr. Archer had committed various manipulative practices with regard to a number of different securities. Some were common stocks, some were certificates of Pacific Savings and Loan Associations. We made specific inquiry as we stated in our reply to the briefs and opposition, the petition for certiorari and we learned that these were withdrawable certificates. The court -- the Eighth Circuit Court of Appeals specifically found that the manipulative practices in connection with these particular certificates were a violation of the 1934 Act which they couldn’t be unless they were considered to be securities within the 1934 Act definition. They -- as far as -- at the distinctive characteristics, the argument has been made "Oh, well, these are just shares in name alone. They are not really shares if you get down the substance, they’re nothing at all. The Court of Appeals found to support that kind of an idea. Hence, there are either 67 different errors in the Court of Appeals decision where you have upon to graciously find that these are creditor-debtor relationships. The Supreme Court of Illinois, the Supreme Court of the United States, the Court of Appeals in the District of Columbia, the statute all say these are not debtor-creditor relationships. They say that even when you demand the withdrawal of your money, you do not become a creditor of the association but the Court of Appeals found that they are creditors. In one place they find that they are depositors. Under Gordon versus Hodgins in the Supreme Court of Illinois held that you cannot have deposits in an Illinois Bank because that connotes a debtor-creditor relationship which is prohibited on constitutional grounds in Illinois. In the Wisconsin Bankers case was a great dispute between the Wisconsin Bankers Association and the Federal Home Loan Bank in connection with the adoption of some new regulations. That went to the Court of Appeals in the District of Columbia and the Court of Appeals found and there’s a very strong concurring opinion by Judge Burger in which he said, what difference it make what you call them or you call them depositor or anything else, they are still shareholders, not creditors, and that’s exactly what they are here. So the Court of Appeals --
Abe Fortas: The savings account and the savings bank have security?
Arnold I. Shure: Pardon me?
Abe Fortas: Does the savings account and the savings bank has security by your reasoning?
Arnold I. Shure: I would think not for the simple reason that the shareholder here bares the investment risk. He is at the bottom of the pile. He is a shareholder. These Savings and Loan Association advertised you own this association. You own the assets. You have our wonderful management which will pick wonderful investments and do your business for you and so on. In a bank, you have stockholders beneath the depositors and therefore you have a debtor-creditor relationship there, while here you have the shareholder.
Byron R. White: You have a fix interest don’t you?
Arnold I. Shure: In a bank savings account.
Byron R. White: You have dividends?
Arnold I. Shure: Here, we only get dividends if they’re earned. My time is up for this part of the argument.
Earl Warren: Okay, Mr. Loomis.
Philip A. Loomis, Jr.: Mr. Chief Justice may it please the Court. In these associations as Mr. Shure has said, the holders of shares have the equity position. They are corporations consequently the nearest analogy to the position of these people is that of shareholders. As Judge Cummings pointed out in the Illinois statutes expressly provide that they are not creditors. They have a certain unusual characteristics. They are so long as the association is operating normally and profitably redeemable and therefore they are not traded in the markets because the investor who wants to sell instead just redeems and the amounts of which he redeems is fixed so there would really be no point in trading them in the market so long as the association was operating profitably. When the association gets in trouble, trading may develop. They are nonnegotiable for the same reason that they don’t trade because the redeemability features no need to have them traded. Now Mr. Shure referred to four cases in this Court which considered the definition of security under the Securities Act. I think that those cases taking in conjunction not only show that this is a security but refute each of the contentions that the respondents make that they shouldn’t be deemed to be shares because they’re redeemable for example. Well, the variable annuity and flexible fund were both redeemable at the option of the holder during the pay in period that they are not traded in the markets. Well, the orange groves interests and oil leases involved in Howey and Joiner were not traded on any exchange or in any organized market. Further, the cannons of construction used by this Court in those opinions and in other cases such as the Capital Gains case, the effect that these statutes are to be broadly construed that the fact that an instrument falls that this broader features of this definition are not to be used to cut down the specific features and conversely the specific features do not limit the broader features. All of these, I think demonstrate that this is a security at least for purposes of the Securities Act of 1933 with sufficient clarity that I don’t think that is really contested anymore. The Legislative History of the ‘33 Act shows that Congress expressly considered the status of savings and loan shares and determined that they would be exempted from registration but included under the fraud provisions and the savings and loan industry acquiesced. In fact they seemed to think this was a good idea. They didn’t want to be registered because of the expense but they did want federal protections against fraud.
Potter Stewart: Mr. Loomis, can you enlighten me a little bit. You’re speaking as though all savings and loan are organized the same way, is that in fact true?
Philip A. Loomis, Jr.: I don’t believe it is. We are talking about withdrawable shares of a savings and loan which has only one class.
Potter Stewart: Savings and loans, are they sometimes called Building and loan society, that I suppose they are the same or they’re different or were an import from Germany largely or central New York in the 19th century into this country? They originally began if I’m not mistaken. They’ve been quite mistaken as membership organizations in which only the members could borrow and in which the members also share the profits of redounding to the institution because of the mortgage loans given to the members. That was the old fashion conventional building and loan or savings and loan, Bausparvertrag, it’s called in German I think. And this obviously is not that kind of an animal.
Philip A. Loomis, Jr.: That’s right. You’re right. There are quite a number of different types of organizations that are sometimes called savings and loans and they have rather different stocks.
Byron R. White: Speaking as though they’re generically all of them are treated alike --
Philip A. Loomis, Jr.: I’m thinking about this particular type of association, this characteristic is that as far as I know, it didn’t issue any kind of shares except one class of withdrawable shares and maybe certain loans that it made. It didn’t limit itself to making loans to those who had accounts with it but solicited accounts widely all over the country and could invest not only in mortgages but in other things.
Abe Fortas: Mr. Loomis, the various federal insurance available to this type of savings and loan association.
Philip A. Loomis, Jr.: Provided it qualifies where --
Abe Fortas: I understand that and what does that cover in terms of the shareholder? Suppose a shareholder -- suppose somebody advised a $1,000.00 share in this particular savings and loan association and supposed it had qualified and had obtained federal insurance. What would that federal insurance cover?
Philip A. Loomis, Jr.: Well, as I understand it and I’m not an expert in savings and loan insurance and I may be wrong. If the association gets into trouble, the Savings and Loan Insurance Corporation will arranged to work things out for the investor either by giving him shares in another association or giving him some other kind of interest or ultimately, it would have necessary pay him in cash but he doesn’t get his cash right away as I understand it.
Abe Fortas: Pay him what, how much?
Philip A. Loomis, Jr.: The base amount?
Abe Fortas: That’s the interest?
Philip A. Loomis, Jr.: I’m not sure how they handle interest. I think they get something on that too.
Abe Fortas: Well perhaps the Savings and Loan council will tell us.
Philip A. Loomis, Jr.: As I was trying to say, these interests with this particular -- involved in this particular case seemed to me to be so clearly securities for purposes of the securities act that it seems to be almost conceded. Now as to the Securities Exchange Act, respondents attempted --
Potter Stewart: It’s also conceded that if indeed they are securities for purposes of the 1933 Act, they are explicitly exempted from the registration requirements for that statute.
Philip A. Loomis, Jr.: That’s right.
Potter Stewart: Is that true?
Philip A. Loomis, Jr.: That is true and the same is true incidentally as to the registration requirements in the Securities Exchange Act.
Potter Stewart: Of the ‘34?
Philip A. Loomis, Jr.: The ‘34 Act. They are excluded form that also. There seems to be a suggestion, the Securities Exchange Act is somehow different and narrower than the Securities Act and the same broad construction should not be applied to that Act. That seems to be suggested also in the majority opinion below. It seems to me that this suggestion has no basis. These two acts were passed by the same Congress on the same term -- no. Same Congress and basically the basis of the same investigation and in response to the same events, the stock market depression and the words of the definition were impertinent part I think substantially identical. The only difference of which anything has been made is the concept of evidence of indebtedness used in the ‘33 Act and not the Exchange Act to which I ought to return. It seems to me inconceivable under these circumstances that Congress -- if the congress had intended the same words, stock transferable share, investment contract, certificate of interest or participation in a profit sharing agreement and so forth were to mean something different in the Exchange Act that they meant in the Securities Act that there would have been some hint of this somewhere in the statue or on the legislative history. There is none. There is no suggestion that these words somehow mean something different in the act that followed a year later. Incidentally, the Ninth Circuit in the Los Angeles trustee case apparently felt that once it had shown that the real estate interests they are involved which where participations and mortgages were securities, investment contracts for purposes of the Securities Act, it necessarily followed that they were securities for purposes of the Securities Exchange Act and granted the decree accordingly. The structure of the two acts is based -- as here pertinent is basically the same. You will have a broad definition of security including practically all media of investment evidenced by an intangible except the direct ownership of property and even that sometimes is in Howey followed by appropriate exemptions from the right registration or regulatory provisions. The savings and loan shares vary of a certain type were exempted from the registration but not the fraud provisions in the Securities Act and again in the Exchange Act when the coverage of the Exchange Act was broaden to include securities not traded on exchanges. The failure to include evidence of indebtedness in the definition in the Exchange Act is I think irrelevant for two reasons. First because as Judge Cummings had shown, this is not an evidence of indebtedness. There is no debtor-creditor relationship and in any event, it falls within the other terms. I think probably, the significance although the Congress didn’t say of taking out and not putting evidence of indebtedness in is probable that -- it is probable that that term was so broad as to include things that are not investment media at all lik doctor Bill which says you are owed money or an I owe you or a cashier’s check or something like that. In the -- none of the cases which I have referred to, the four cases referred and under the Securities Act which we think govern here involved the term investment contract and none of them -- I mean evidence of indebtedness and non-relied on it. Finally, there is no policy reason to exclude this type of share from the protection of the fraud provisions of the Exchange Act that is not equally applicable to the fraud provisions of the Securities Act which as we have seen the congress expressly did not do. To read these interest out of the fraud provisions of the Exchange Act would have certain anomalous consequences. It would mean that fraud in the sale of such interest would be prohibited by federal law but not fraud in the purchase because the ‘33 Act only reaches fraud in the sale of a security. The Congress brought in the ‘34 Act to include fraud in the sale or in any transaction in connection with the purchase or sale of a security. The commission’s authority to register and regulate broker dealers who deal in these issues would be eliminated and there seems -- it has existed from the beginning for it has been the commission’s consistent administrative construction ever since 1934 that these interests are securities for purposes of Securities Exchange Act as well as for purposes of a Securities Act, Very few courts have had to consider this question. No one has ever seemed to think it required extensive litigation before this case and those instances which are cited in our brief where the Court did have occasion to consider this question. They have all proceeded upon the assumption at least that these are securities for purposes of the Securities Exchange Act. Here, we are dealing both for purposes of the Securities Act and for purposes of the Securities Exchange Act with the fraud provisions and nothing more. No greater federal regulation. Congress has never thought that the existence of state regulation justifies exemption from the fraud provisions. Indeed the fraud provisions of the Securities Act applied by necessary implication to state securities themselves, state bonds. The Congress insofar as fraud is concerned, intended to broaden and improve and provide greater protections in this Exchange Act and to determine that it would have provided in the Securities Act and the contention that somehow the Exchange Act is to be interpreted more narrowly insofar --
Byron R. White: If the state provides (Inaudible)
Philip A. Loomis, Jr.: No. The way both these statutes provide that they don’t eliminate any state remedy conversely. Their remedy is an addition to any state remedy on State remedy doesn’t preempt them either. The two --
Byron R. White: (Inaudible)
Philip A. Loomis, Jr.: It depends on what the state law is.
Byron R. White: (Inaudible)
Philip A. Loomis, Jr.: Well, I haven’t made any great study of the state law. I don’t -- I’m not sure what remedy these people would have had under Illinois State Law.
Byron R. White: But we’re talking about prior to that --
Philip A. Loomis, Jr.: That is right but I don’t think you have to reach all of that question yet because you’re really asked whether this is a security.
Earl Warren: Mr. O'Laughlin.
Charles J. O'Laughlin: Mr. Chief Justice may it please the Court. It is my position that from an inspection of the Act itself, from a consideration of policy and as a matter of history that the particular item we are confronted with is not a security within the meaning of the Securities and Exchange Act of 1934.
Potter Stewart: I’ve had a little trouble gathering just what is this particular animal that we’re dealing with and then how -- and how rare it is or how common it is.
Charles J. O'Laughlin: It’s indeed Your Honor a rare beast. I would say that to characterize it as one, A, B, C or D is something that perhaps is not possible. It’s defined under the Illinois statute as a withdrawable capital account. The statute uses that term throughout and I might say in the consideration of this case, it may be important to note that in savings and loan has chartered under the Illinois law, there is also permanent reserve capital. This association did not have a permanent reserve capital. It had only withdrawable capital account.
Potter Stewart: (Inaudible)
Charles J. O'Laughlin: Certainly would not be binding upon this Court under any consideration. This case as I construed it is a matter of interpretation of the intent of Congress, only this and nothing more.
Potter Stewart: What is the usual savings and loan underlined basic documents.
Charles J. O'Laughlin: The philosophy -- Your Honor, I think this.
Potter Stewart: A very rare bird -- is there any kind of a common bird in the savings and loan business?
Charles J. O'Laughlin: May I address that in a big picture. I would say this. I walk into a savings and loan. I put down my $5.00. The statute says to me that the association must give me either a certificate or a passbook.
Potter Stewart: Passport?
Charles J. O'Laughlin: Passbook. As a practical matter --
Potter Stewart: Which statute?
Charles J. O'Laughlin: The Illinois Savings and Loan Act. As a practical matter, I get only the passbook. I defy anybody in this courtroom to tell me the difference so far as the average investor is concerned between this and the typical savings account passbook issued by --
Potter Stewart: It has no capitol at all (Inaudible)
Charles J. O'Laughlin: That is very correct Your Honor.
Potter Stewart: That is the difference. Did they say that that’s not the difference between savings and loan as to --
Charles J. O'Laughlin: It may have peripheral effects. I might say this. The organizational provisions of the Illinois Savings and Loan Act provide that a certain amount of minimal capital be on hand that I would say that so far as the organizers or developers of a new association is concerned, they may look at it a little but differently. But to answer your question, I question very much ,very, very much indeed that the average investor is aware of 1% difference except the -- what he is talking about is a rate of interest that pays maybe a quarter or a half percent interest more than the bank which is across the street from him. I think since we’ve developed the argument this way, it might be well to point out a few salient characteristics which I think are of vital consideration in the determination to this question and that is savings admittedly bare a vote. The typical association provides one vote for every $100.00 or fraction thereof. But notice this very unique provision in my judgment. There is no limit, no limit whatever to the amount of accounts that can be taken in and therefore no limit to the amount of votes that maybe cast in any given election. What I’m saying is this. You compare this within a corporation in which there is a preemptive right, there is an authorized capital and what have you which is designed to preserve for the individual owner his aliquot portion of the management of that concern. There is nothing like this in the Savings and Loan Association and after this one further provision, on motion of the Board of Directors, any depositor, any withdrawable capital account maybe redeemed. An investor has no right to preserve his management, his equity position or what have you in the Savings and Loan Association.
Potter Stewart: It’s like a callable stock isn’t it?
Charles J. O'Laughlin: Well, callable stock --
Potter Stewart: I mean it is callable, it’s still a stock.
Charles J. O'Laughlin: It’s still a stock but it’s generally a unique type of stock. The equity owner generally, a stock is not provisioned or subject to such call. That is nor it’s a preferred stock or special type of stock, something unique and extraordinary in and of itself. What I’m saying is this Your Honor. I’m really following on Mr. Justice Harlan’s line of thought as to these are the owners. What I’m saying is that they are very unique owners, very selected and very different.
Abe Fortas: Where in this record is there a statement of what the rights and privileges are of a person who buys one of these things whatever they are?
Charles J. O'Laughlin: Your Honor, it’s a matter of the Illinois Savings and Loan Act.
Abe Fortas: Is that set out in any of your briefs or does it appear anywhere in all of these documents we have before us?
Charles J. O'Laughlin: What -- the specific character?
Abe Fortas: Yeah.
Charles J. O'Laughlin: I think Your Honor in the brief we submitted that is on behalf of the City Savings Association and the liquidators we have set out in quite a great detail what the unique provisions of --
Abe Fortas: Well, I could guess -- need very much if you would tell us just exactly what this is. You said this is not like if I correctly understood you. This is not like the usual savings and loan transaction or instrument or whatever.
Charles J. O'Laughlin: I must have missed all. What I meant to say is that it’s not the usual device whereby a person having money imparts to the care of another.
Abe Fortas: Oh, but this is a typical savings and loan transaction.
Charles J. O'Laughlin: I would think it was very typical.
Abe Fortas: Now, what rights does a man – when a man goes out on a -- let’s say pays a $100.00 then he gets a passbook is that right?
Charles J. O'Laughlin: Right.
Abe Fortas: -- which shows that he has paid them a $100.00. Now what are his rights?
Charles J. O'Laughlin: Well --
Abe Fortas: What are his rights with respect to capital or his rights with respect to dividend or participation, what are his voting rights and what are his rights on liquidation?
Charles J. O'Laughlin: Normally speaking he signs a proxy at that moment, the moment he opens his account. And this proxy generally states that it’s good until revoked and then only for the particular meaning it’s revoked. As a practical matter, he never --
Abe Fortas: In a sort of round about way that he has got to vote. That’s what I want to know, it says those ultimate simplicities that unlikely the states calls about his vote, what right he has to -- money and what right he has on liquidation etcetera.
Charles J. O'Laughlin: He has a vote which I’m confessing that he has but I say it’s very limited because it’s normally not exercised because of the nature of the proxy. He has a right to receive what are called on the statute dividends. These are traditionally declared by the Board of Directors out of earnings after the provision is made for reserves and things of that nature. These amounts of dividends are declared routinely. They are usually advertised current rate 4.75 %, 4.5%, I would say determined not so much by the earnings themselves but what in the law of supply and demand is necessary for this Savings and Loan Association to compete with its competitors, the banks. He is entitled --
Potter Stewart: Unlike a bank which pays savings account interest with a guaranteed rate, we people get so called earning at a non-guaranteed rate although there’s an advertisement of the current --
Charles J. O'Laughlin: Right and I would say Your Honor that it need not be earnings for the specific period it’s covered. Not all the earnings need to be paid out. More maybe paid out in earnings --
Abe Fortas: But what are his rights of principle.
Charles J. O'Laughlin: Principle? He is entitled to apply the statute says for immediate withdrawal and that the Savings Association has the cash, he is entitled to have it back immediately even though he deposited only five minutes ago. The statute provides a scheme since these are association --
Abe Fortas: If there are any unpaid dividends when he applies for withdrawal, does he have a right to get that with bonus?
Charles J. O'Laughlin: Yes Your Honor, he does.
Abe Fortas: All right, now upon liquidation what happens?
Charles J. O'Laughlin: Your Honor, the Illinois statute provides for two types of liquidation and I might point out that the Federal Bankruptcy Act specifically provides that the Federal Bankruptcy Act is not applicable. It’s a matter of state liquidation. It may be voluntary or involuntary. This if voluntary it’s by -- under the Director of Financial Institution, the Commissioner of Savings and Loan appointing a receiver. Under the voluntary liquidation which we provided here, it is under liquidators of whom I speak in this Court. It provides for a realization of the assets filing claims, I would say that there are many questions that under state law which re--
Abe Fortas: I understand that but let me try to get at the ultimate simplicity again. A person who has paid a hundred dollars into the Savings and Loan Association, in the event of liquidation would file for a $100.00 plus accumulated an unpaid dividend.
Charles J. O'Laughlin: Yes Your Honor.
Abe Fortas: Is that right?
Charles J. O'Laughlin: Yes Your Honor.
Abe Fortas: And then he’d get --
Charles J. O'Laughlin: I might say he need not apply. The Act provides that he need make no application.
Abe Fortas: All right. Then he gets his aliquot share of the assets after but differed to other creditors for rent, light, heat and whatever else it may have.
Charles J. O'Laughlin: That question Your Honor I think is a matter of state law and I might say has given us pause as to the relationship between the withdrawable share accounts and the creditors.
Abe Fortas: Whether he is on the parity or the insurance --
Charles J. O'Laughlin: Yes Your Honor.
Abe Fortas: -- to coordinate.
Charles J. O'Laughlin: Yes.
Abe Fortas: Alright.
Potter Stewart: Can these shares ever be sold on the market or that’s their value above their base amount?
Charles J. O'Laughlin: My answer to that is unequivocally no Your Honor and may I explain. The Act specifically provides that the withdrawable share account is not negotiable.
Potter Stewart: It is assignable.
Charles J. O'Laughlin: It is assignable which of course means the assignee stands in the shoe and stands the defenses if any which may be urged against the assignor. As a practical matter, I’m aware of not a single assignment.
Potter Stewart: Is that material?
Charles J. O'Laughlin: Yes Your Honor, I think it is particularly when you read the preamble to the 1934 Act, it specifically states that the Act was designed to be passed to meet fluctuations on market – over-the-counter market.
Potter Stewart: On what appropriate deal would that (Inaudible)
Charles J. O'Laughlin: I share that question with Your Honor.
Potter Stewart: But that must be because of someone --
Charles J. O'Laughlin: Your Honor, I might say this that this is one of the SEC in all due difference dips into its file and comes out with -- I believe in the opening brief is said to be 13 or 14 registration statements. I do not know what these registration --
Potter Stewart: No broker would come and register (Inaudible) possibility of trading --
Charles J. O'Laughlin: Your Honor, I --
Potter Stewart: Nobody? Would you as a --
Charles J. O'Laughlin: I’m speculating Your Honor but I would say this, if he were doing other activity subject to the ‘34 Act, he might say also soliciting savings on loan accounts. I would say this that it would be the solicitation not the broker dealing part of that that would be applicable. I know of no dealers as such. There may -- there are persons I’m given to understand although I have never met them never seen their activity who solicit funds for Savings and Loan Association but I might say this that this case comes on an interlocutory appeal from a motion to dismiss and the record is indeed bearing. When you face the individual categories found in the statute, that is note, stock, treasury stock, bond, the venture, certificate of interest or participation in any profit sharing agreement or any instrument commonly known as a security but again excluding note, draft, bill of exchange or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months. I think proper analysis indicates that the withdrawable capital account of the Savings and Loan Association does not comply. I particularly would like to emphasize and particularly in the line of the Howey case, the United Benefit case, the Variable Annuity case, this consideration in a typical situation where a person having funds gives them to another on an equity basis he stands the risk of capital appreciation a return of some consequence in the Savings and Loan Association, not so. If you could conceive of the unusual situation or a bonanza was had where the fruit, the orange groves return large sums of money, the oil lease is profited. There would be a chance that that investor would receive money. In the savings and loan, he will receive “the current rate of interest or current rate of dividend” as the case maybe as it is described. My point is simply this. There is not that likelihood of incremented value which this Court spoke up in the United Benefit case and the Variable Annuity cases which led this Court to characterize those instruments as securities. Because this interest is subject to redemption, because it’s subject to dilution, because the passbook and everything indicates that this man is entitled to a return of its capital, all indicate that there isn’t that chance of capital appreciation which lures an investor.
Earl Warren: You made (Inaudible) --
Charles J. O'Laughlin: Yes Your Honor.
Earl Warren: -- do you think that that more, on this act (Inaudible)?
Charles J. O'Laughlin: Your Honor, the questions which you address to Mr. Loomis and I share some of the same lack of information as to the practice of the industry as a whole. I have a feeling that this case addresses itself the whole savings and loan association industry as such. When I make a statement in open court, the man receives a passbook. This Court must take it as more or less general information because there is nothing in the record which indicates that that specifically is the case. I think that I have done -- the counsel has done -- we have all done a scribe general practice in the industry and things of that nature. I can state unequivocally that so far as this record is concerned, there isn’t a single assignment. There isn’t a single trading that we are aware of in the administration of the essence as the Savings Association.
Byron R. White: Mr. O'Laughlin, what about the jurisdiction of the Federal Home Loan Bank Board, it seems to me they had a rather broad dispensation to -- perhaps to issue rules with respect to the issuance of the shares just like we’re talking about.
Charles J. O'Laughlin: Yes Your Honor.
Byron R. White: Or prescribing reports that a bank may have to make to its non-security holding.
Charles J. O'Laughlin: I wholly agree and not only do they have that right but they have to exercise that right.
Potter Stewart: Did anybody asked them of their view of this case?
Charles J. O'Laughlin: We have talked to them informally. They covered 96%.
Potter Stewart: But they haven’t been represented in any of these proceedings?
Charles J. O'Laughlin: They represent 96% of all the deposits and Your Honor, I know that the -- as a matter of fact do provide for registration of those soliciting accounts. They do provide particular --
Potter Stewart: What about reports to security owners or the interest owners, isn’t that -- that’s covered by the ‘34 Act too isn’t it?
Charles J. O'Laughlin: I can’t answer that question Your Honor.
Potter Stewart: I gather you suggest that there could be dual or conflicting --
Charles J. O'Laughlin: Overlapping, overlapping. Unnecessary to put --
Potter Stewart: Well, I suppose the bank board could prescribe by regulation what it is these that each association must tell its perspective investors.
Charles J. O'Laughlin: Yes under the registers --
Potter Stewart: And then for violation of that, this might still be a 10(b) violation I might admit.
Charles J. O'Laughlin: It could be.
Potter Stewart: Maybe that’s the answer here then that’s why the board isn’t here. No matter what the board may do or has done or hasn’t done, this after all as investors or claimed investors if he has the security.
Charles J. O'Laughlin: Your Honor --
Potter Stewart: Is this a cause of action for fraud?
Charles J. O'Laughlin: I think so far as federal -- so far as regulation is concerned in general, there is a detailed state proceeding of liquidation and I might say this in the trial court, there was a motion made to appoint a federal district court receiver for this association. When that motion was being considered, the SEC petitioned that such a receiver not be appointed. I would take it that this after investigation by the SEC is a vote in favor of the state court liquidation. I would say to answer Your Honor’s question specifically, state administration is adequate -- it is adequate and if there is any area not filled by state administration, it is more than adequately filled by the Federal Home Loan Board.
Potter Stewart: Well, has the Home Loan Board in any way ousted state court --
Charles J. O'Laughlin: You see this was not a state or this was not a federally insured association.
Potter Stewart: Well even so, doesn’t the Federal Home Loan Board have some --
Charles J. O'Laughlin: Only if it were insured Your Honor is my understanding.
Potter Stewart: Well then what’s it got to do with this case?
Charles J. O'Laughlin: What I’m saying is this, 96% viewing the overall position and whether there is need from a policy basis to have the SEC participate in this sort of thing, it would be applicable at most only 3% of the deposits in the Federal Savings and Loan Associations that the field is already preempted substantially by --
Potter Stewart: But your Federal Home Loan Board bank argument I gather is its no good as to your association --
Charles J. O'Laughlin: That’s right.
Potter Stewart: But if it’s a security -- but if this is ought to be a security for purposes of ‘34 Act, it will be a security for those purposes with all the other association.
Charles J. O'Laughlin: Right. It would have assumed that like all the way around. To answer Mr. Justice Fortas’ question as whether there is a state remedy here. Not only is there a state remedy but a state remedy has been invoked. We have filed a chancery litigation in the Circuit Court of Cook County which has been pending almost as long as this case has been seeking to surcharge the persons who administer this administration for their elections.
Hugo L. Black: Do you think that the state remedy takes it out from the jurisdiction of the SEC?
Charles J. O'Laughlin: I think it takes it out from the need.
Hugo L. Black: From the need. Do you think it takes it out from the jurisdiction?
Charles J. O'Laughlin: Well, I think whether this SEC has jurisdiction Your Honor is a matter of Congressional intent and whether or not there is state court jurisdiction as such, I think that in gauging what the intent of Congress is, the availability of state remedy, state procedure, state administration is a factor which this Court might well take into consideration.
Hugo L. Black: Did it not provide something about being maybe in addition to that that the state remedy should not be considered exclusive and it’s something that I get in here.
Charles J. O'Laughlin: I’m not prepared to answer that question --
Hugo L. Black: Well that -- what is the answer Mr. --
Charles J. O'Laughlin: I’m not prepared to answer that question.
Potter Stewart: Well, there is no problem in the VALIC case that there was state administration of the insured --
Charles J. O'Laughlin: That was the question of insurance. There was a state --
Potter Stewart: I know but what’s the difference here? The mere fact that the state regulation doesn’t mean that if appropriate --
Charles J. O'Laughlin: No. I understand Mr. Justice Black’s question right now. In the state insurance provision, there is a specific provision allowing for the presence of state administration and I would take that there would be no provision, there were no conflict so far as the savings and loan association administration by this commissioner savings and loan. I would take that a duplicate administration would be feasible where they’re desirable along with the third agency, the federal home loan bank is my point that the -- we don’t need three, two is enough.
Byron R. White: You don’t concede I take it that this interest as a security even for the fraud provisions of the ‘33 Act?
Charles J. O'Laughlin: No Your Honor, I do not and I join with the court below that the evidence of indebtement omission is significant.
Byron R. White: Well that’s Act ’34.
Charles J. O'Laughlin: Well, the ‘34 or the ‘33 Act has but the ‘34 Act does not.
Byron R. White: That’s right but for the ‘33 Act, do you agree that it’s the security that there’s interest in the security?
Charles J. O'Laughlin: No, I do not. In conclusion, I would like to point out to this Court if I may the paradox which this case, which so far as I can see as unique under the ‘34 Act. If counsel were to prevail here to the extent which he asks to prevail, this would mean roughly that 15 million of depositors took priority over the other 20 million. A result I think under some -- in my judgment highly artificial differentiation. I believe it was Mr. Justice Stewart who asked the question what was the significance of the date and I must confess every time we ask that question, we get a different answer. At one time, the answer was that the date meant something to do with the statute of limitations and other times it meant to put a difference with some changes in the Illinois Act if the Court please, I think that the date is of no significance that these people are depositors. I find no -- if there were a fraud here which led to the additional depositors by the same token -- the same fraud would mean that the depositors are already there maintain their deposits. So to answer your question specifically, I challenge any date and I also challenge that a finding under the -- that this was a security would mean that there was a priority.
Potter Stewart: In other words, that is -- it would mean there was a priority only if these petitioners should succeed in their action for recession, then they would get a hundred cents on every dollar.
Charles J. O'Laughlin: That’s what they contend --
Potter Stewart: If it were available and presumably this would leave less or maybe nothing for the pre-July 1959 depositors.
Charles J. O'Laughlin: Yes Your Honor.
Potter Stewart: And there are 15 million post July 1959 depositors and 20 million pre of that date deposit, is that right?
Charles J. O'Laughlin: Roughly speaking.
Potter Stewart: And how about in terms of amount of deposits, about the same ratio?
Charles J. O'Laughlin: Well, I’m -- when I’m answering that question it is as to amounts.
Potter Stewart: That is to amounts.
Charles J. O'Laughlin: That is to amount. Number I’m not --
Potter Stewart: Right.
Abe Fortas: Do you ever think there hasn’t been (Inaudible)
Charles J. O'Laughlin: When you tie it up Your Honor with the Bankruptcy Act which provides it that the administration should be only under state law. What I'm saying is that provision can only be true when the association is insolvent and I would say that the Court please that tying those two acts you find an act of Congress that if there is a question of priorities that that is committed to state law to be answered under the acquiescence of the Federal Bankruptcy Act. Thank you.
Earl Warren: Mr. Perlman.
Stuart D. Perlman: Mr. Chief Justice may it please the Court. I’m here on behalf of the State Regulatory Agency who regulates the Savings and Loan Associations in the State of Illinois. We are here on behalf of the Commissioner of Savings and Loan to secure an equal treatment and fair treatment of all the depositors in this association and not to have one group prevails over another group. Savings and loan transactions are as common as every debt in our everyday life. They are well known. They weren’t in existence long before the 1933 Act. They existed as Mr. Justice Stewart pointed out in these mutual savings and loan associations or if you wish building and loan association.
William O. Douglas: Mr. Perlman, isn’t it normal to have the defrauded stuff over to occupy different positions from none defrauded stuff over. Let’s assume the same stockholder that had pursued under state law judgments. Would they add the priority?
Stuart D. Perlman: They would sue as the way I see it.
William O. Douglas: Let’s assume they got judgment.
Stuart D. Perlman: If they got judgments they would get it against the ones who defrauded them. This would be the management as they alleged. It wouldn’t be from their fellow depositors who have this identical interest.
Byron R. White: It would be against the association wasn’t it?
Stuart D. Perlman: For the association? Yes, that’s correct. But --
Byron R. White: And then it would be a charge against the assets of the association.
Stuart D. Perlman: They get charge against the assets as well as the directors as you wouldn’t have and other derivative actions where you would have the directors who afre really the primary liable for the acts -- for their acts. The savings and loan account as I said was an existence long before 1933. This distinguishes from the variable schemes that were devised after the 1933 and 1934 acts. It distinguishes it from the Alice and Wonderland variety of situations. These instruments were discussed, debated and thoroughly analyzed in the -- before the Securities Act was enacted into law. As Mr. Loomis pointed out, representatives of the industry of the building and loan industry did come to Congress to ask for an exemption because of the fear that they thought they would be covered under the registration provisions and that there maybe a possibility that these accounts would be covered under that act they ask for their exemption but still maintain that they would desire the antifraud divisions to prevail against it. The Securities Act did provide for an exemption in the final act reported out. And the hearing that Mr. Loomis is talking about is about a bill that was really poorly drafted according to a statement by Dean Landis who was the principal drafter of the Act. He said that Bill was -- have very few exemptions and later many new exemptions were enacted in the final legislation. In 1934, the Congress then enacted a totally new Bill. It did amend the 1933 Act but did provide for a new statutory regulatory scheme for transactions that would not previously regulate it. The Bill was very carefully drawn and the Congressional records state in the debate that there were more than five revisions of this particular Act. It is said in the Congressional record that every word, every line, every sentence in the Bill was thoroughly considered. In 1934, and it is virtually conceded by the silence of the S.E.C and council for the petitioners, there is not any mention of this particular interest. The only thing that you see constantly throughout this -- the debates, the hearings preliminary to the passing of the 1934 Act is that there is a desire to protect the institutions descending alone institution, the bank savings -- the mutual bank savings, the banks, insurance companies, because this institutions invested in securities and bonds that were fluctuating in value due to the problems that were raised at that time. There was a desire to make sure and protect the integrity of the investments of these institutions, not the interest that are involved. In fact, you see and most of the discussions in the Congress at that time where you see that they say people took their money out of the savings and put them into work with securities. They want -- there was no desire to protect the particular savings interest because there is no trading in this and we could see this in the Section 2 of the Act. Section 2 specifically sets forth the purpose and the intention of Congress and we see in that Act that the purpose was to regulate trading and the traders of investments. When there is trading then the regulatory scheme is necessary out of the Securities Exchange Act. When there is no trading as in this case then the regulatory scheme is not proper. In this particular association, it was asked whether there was any trading of this -- in this particular accounts of this association as far as the association which must get knowledge of all assignments, there has been no record of any assignments whatsoever. With regard to savings accounts, there was much discussion in Congress not only of savings and loan accounts, banks, insurance companies were all considered together. This is the way the Congress talked of these institutions not distinguishing between a bank or savings alone association or insurance company. They lumped the consideration of these institutions because by the very nature of them, they were the type of institutions that would come under a similar -- were similar in nature.
Byron R. White: Do you know why there are brokers who trade in this?
Stuart D. Perlman: Your Honor, I’m on the impression that there are solicitors not brokers and by that I mean the solicitor is really a person who writes to an individual and they say that he would like to get you to deposit your money and association where you could get perhaps 5% like in California.
Byron R. White: Well, why does he register with the S.E.C. if --
Stuart D. Perlman: This is beyond me and I believe that the S.E.C. -- there has been no virtually no regulation by the S.E.C. of this broker but there has been excessive regulation by the Federal Home Loan Bank Board of these brokers or whatever you want to call it. In any event, the S.E.C. can’t control these individuals under the Securities Act of 1933. A specific remedy is provided that when a broken or when any -- when there is a violation of Section 17(a) of the Securities Act of 1933, this S.E.C. has power under the 1934 Act to go against that individual and that appears in our brief on page 24 where we state that Section 15 specifically provides for this sort of situation.
Byron R. White: Am I correct -- your argument on behalf of the state that one reason these are not securities as if they’re not tradable.
Stuart D. Perlman: That’s exactly right Your Honor.
Byron R. White: But in fact we know there are brokers who do register as trading.
Stuart D. Perlman: They don’t trade in it. There is no trading. What they do Your Honor is they -- at the issuance which is specifically a ‘33 situation. They only seek to have you put money in a bank or saving’s association at the inception. They never take that particular account and transfer to another individual. There is no such thing as a trading. It’s an absurdity in this particular situation because anybody could go into an association and open an account anywhere. He could close out his account and go next door and open up his account in some other association. There is no need to trade these accounts.
Potter Stewart: Well, one of these brokers are dealers -- what do they get out of it even at the issuance, do they get an underwriter’s fee of some kind or underwriter’s commission?
Stuart D. Perlman: They do Your Honor and the Federal Home Loan Bank Board as I cited in my brief has a very restrictive regulation on this particular solicitors and I -- again, this is out of the record but I have been told that there are very little activity after this regulation because it was the Federal Home Loan Bank Board who restricts these people. They say how much money you could put into one institution. They say how much commission you could get. So this is where your true regulation comes as in the Federal Home Loan Bank Board, not the S.E.C. and by the way, the (Inaudible) three form is a mere informational board. This is as the S.E.C. points out, it doesn’t really regulate them, it just tells them that we solicit the particular provision as the solicitor said, it’s loan accounts. Solicitor, that’s all they do. Nothing more, no trading at all Your Honor and I don’t believe that the S.E.C. can point to any specific provision where they do trade them. In fact, they have stated in their brief, they’d only seek to have funds placed in an institution.
Potter Stewart: Well, that’s an original issuance I should --
Stuart D. Perlman: Exactly Your Honor which is under --
Potter Stewart: Under ‘33 Act.
Stuart D. Perlman: Exactly Your Honor. That’s precisely our point. So there’s no real trade in any event if there is a violation under Section 17(a) of the 1933 Act, the Securities Act, they have their remedies under the specific provision on the Exchange Act where they can regulate this type of activity.
Abe Fortas: Well, if there is -- if this is a security and if Mr. A is soliciting persons to purchase this security and it’s not astounding to me that Mr. A is regarded as a broker. Is it to you?
Stuart D. Perlman: He maybe regarded as a broker but not under the terms of this Act because this is not the type of interest that is traded. A broker as I understand --
Abe Fortas: It is traded if bought and sold. He solicits somebody to buy a security, assuming this is a security. So nothing astounding about calling him a broker because there is a trade, the trade being from a --
Stuart D. Perlman: It’s an issuance Your Honor, it’s not a trade.
Abe Fortas: But it’s a trade. It’s a trade on the initial issuance of the -- in order to confine the definition of trade to secondary distribution or to trading on the over-the-counter market what I hear as I gather that these securities if they are not traded in that sense that there is a purchase and a sale, there is if it is an intermediary on some occasions namely this Mr. A who solicits somebody to buy than if that would comes down there.
Stuart D. Perlman: Your Honor, it’s correct and in the sense of the solicitors who seek to have you -- they issue these accounts and this is specifically regulated under the ‘33 Act and as I say, these individuals are really regulated very much so by the Federal Home Loan Bank Board because they’re the ones who really --
Abe Fortas: But do you agree that ‘33 Act -- the fraud provisions in ‘33 Act applies to this kind of instrument, security or whatever you may call it.
Stuart D. Perlman: From the reading of the legislative history, I am inclined to think that it does apply because the legislative history specifically says that these people did come to seek this exemption for these type of transaction.
Abe Fortas: What difference would it make in terms of state interest whether that person had thought he was defrauded, brought action under the ‘33 Act or under the ‘34 Act?
Stuart D. Perlman: We firstly say that the -- we must look to Congressional intent. What the Congress intended.
Abe Fortas: That’s not -- that is not --
Stuart D. Perlman: And then we say that the two --
Abe Fortas: (Voice Overlap) this event so far as the state is concerned. Will the action be brought on the ‘33 Act or ‘34 Act?
Stuart D. Perlman: In this particular case, the fraud provisions of the 1933 Act would come under Section 12(2) and possibly Section 17(a), and in those particular provisions, the Congress has specifically provided certain provisions of that Act relating thereto. In other words, there is a statute limitation. The limit there is when you are from the discovery of the Act or no later than three years from the time of the particular act of defraud is committed. In other words you cut down allegedly on this class. There were fewer people who could come within that particular provision. Secondly, the Act also provides that this concurrent jurisdiction of the federal and state court, and in that case a very possible in the sate insolvency proceeding, we have -- say liquidation proceeding where the court has already taken jurisdiction of the state court in a Savings and Loan Association. The Federal Court may remove it to the state court and join and consolidate the two actions and could hear the claims in one entirety and save on expense and costs in that particular litigation. And thirdly, the accounts in this particular case there would also be -- there’s also provision in the Securities Exchange -- Securities Act of 1933 for security of costs.
Abe Fortas: I could assume that your agency would be happy if there has been fraud here to have people who were the victims of fraud to have a remedy.
Stuart D. Perlman: That’s correct Your Honor, we do.
Abe Fortas: What is the remedy? Do they have a remedy here under the ‘34 Act?
Stuart D. Perlman: Well, as Mr. --
Abe Fortas: Mister -- your preceding counsel said that a suit has been brought in chancery against the person who is responsible for the fraud if that’s not the same thing, that is say these particular individuals claim that they individually were victimized, is that right?
Stuart D. Perlman: Correct Your Honor.
Abe Fortas: And is there something -- is there some other -- some alternative remedy that they have. If I understand you, you’re telling me that you don’t think they got a problem down the ‘33 Act because of statute limitation there in --
Stuart D. Perlman: No, I say they do have it done under the ‘33 Act. They would have possibly an Act. I mean assuming they could prove their case. The allegations that they make insofar as if there is such a cause as it would be under the 10(b)(5) situation, 17(a) and 12(2) of the Securities Act, essentially the cause of action. The elements are essentially the same except for the statute limitations, concurrent jurisdiction and security for cost situation. Now, as far as the state remedy, there is -- as Mr. O'Laughlin says, it would be against the ones who defraud. They are the ones who really have caused the injury to these people and it would be improper the way I see it to seek recovery against a group who were in the same with similar situation because the type of interest that they may have.
Potter Stewart: That state action in chancery as I have understood was on behalf of all the depositors for mismanagement of the institution, am I wrong about that?
Stuart D. Perlman: Excuse me.
Potter Stewart: I thought this action in the state chancery court to which reference has been made and I thought so because I guess so. It was never explained. It was an action on behalf of all the depositors --
Stuart D. Perlman: That’s correct.
Potter Stewart: Alleging mismanagement of this institution --
Stuart D. Perlman: That’s correct Your Honor.
Potter Stewart: -- which is my Brother Fortas points out as quite a different cause of action from one by a purchaser against the seller of a security for fraud and the sale of that security.
Stuart D. Perlman: That’s correct Your Honor. I would say that it would be somewhat distinctive. But as I said that there is a possibility and we have said that in our brief that there maybe a claim under the ‘33 Act if assuming there is the elements of their cause of action provided for. We just like to state that the industry did not come to Congress in 1934 to seek any exemption. Because there was no intent, no consideration to really protect -- really cover this type of transaction. The only indication that you have from any sort of association such as a mutual savings bank or savings and loan association or an insurance company seeking any sort of relief if there were any coverage was by the mutual savings banks and they only ask not for exemption of their interest but for an exemption of municipal bonds because they invested it in municipal bonds which were traded and they felt that they needed to have some exemption because this is one of the investments they make but not for the interest that they were involved. Therefore, there is entirely no intent to include these type of insurance in the ‘34 Act. This is born out by the testimony, by the hearings, by the reports, by the debates that a petition as an S.E.C. has demonstrated nothing to the contrary. In fact, the S.E.C brief in reply to our brief is conspicuous by its remedy and that they virtually concede the Congressional history, the legislative history in this particular act. They do not say anything to the contrary and it is their burden to show that there was an intent to include as particular transaction. And then -- and we have in 1963 the situation where the -- the hearings had conducted and Chairman Cary of the S.E.C. testified and Mr. Milton Cone who was part of a special study testified in regard to savings and loan associations and savings and loan accounts and they said that these account should be exempted. They also said that the savings and loan account should be on parity with bank accounts because this was the same type of transactions that they were -- same type of transactions. They also said that there’s normally no trading in these type of interest, nothing at all and it’s very unlikely that they thought that this type of interest was within the purview of the 1934 Act. Then we have an understanding that these type of associations, building and loan associations as Mr. Justice Stewart pointed out are mutual. They are mutual associations and this is born out by the theory and principle behind it that was necessary for such associations to prevail during the 30’s, this mutuality where you don’t have one group of depositors on the neck of another group of depositors. They all work together and shared together. This was the concept that Mr. Prather in his article that we cite in 15 business law points out that it may cause the building and loan associations to have a very good record during the 30s because of mutuality.
Potter Stewart: Are those early associations unless I’m mistaken also the lenders -- the only people who borrowed from the association were members.
Stuart D. Perlman: Same thing here Your Honor. We have only lenders and borrower --
Potter Stewart: I mean borrowers.
Stuart D. Perlman: Borrowers are members under our statute. Illinois Statute provides that they are members as well as a depositor.
Potter Stewart: Do you have to be a prior member? Do you have to be an investor in it in order to borrow from it?
Stuart D. Perlman: No, no.
Potter Stewart: But that was true about the earlier associations if I’m not mistaken.
Stuart D. Perlman: I believe that -- essentially, not really that much difference, it maybe so that there was this concept that only members who were investors in the association could borrow but under our law, a borrower who may take out a mortgage on this house does not necessarily have to be a depositor.
Potter Stewart: Was this -- are these institutions under Illinois Law and was this institution limited and how it could lend money with limited to mortgage loans on residential real estate?
Stuart D. Perlman: Well, yes Your Honor. There are certain regulations provided within the statute of what type of mortgages they are permitted to make and how much -- what percentage was they are allowed to. This is regulated by the statute Your Honor.
Potter Stewart: Well, now how are they limited?
Stuart D. Perlman: Well, usually, the concept --
Potter Stewart: Mortgage loans on real property?
Stuart D. Perlman: Yes, mortgage loans.
Potter Stewart: That first than the --
Stuart D. Perlman: Normally, it’s set forth in the statute. We cite to these particular investment where these people have been -- what type of loans they are permitted to make. What type of a --?
Potter Stewart: Well, everybody has -- ordinary commercial banks have limitations but what I’m trying to get at is what kind of limitations?
Stuart D. Perlman: Well, the percentages.
Potter Stewart: The kind I’m talking about mortgage loans or residential real property or was it nothing like that?
Stuart D. Perlman: Pardon?
Potter Stewart: Or what is the limitation -- anything like that.
Stuart D. Perlman: Yes there are in the statute -- you say you could only borrow up to 80% of the price value with the property and this is regulated by the Commissioner. He specifically goes into this to make sure that this -- and he has a regulation on this too to be sure that’s carried out that he sends in his auditors and his examiners and makes surprise audits. This is particularly true that --
Potter Stewart: Yes, but may Savings and Loan Association loan money on any property except residential property.
Stuart D. Perlman: No.
Potter Stewart: Not on apartment houses.
Stuart D. Perlman: It may.
Potter Stewart: They may --
Stuart D. Perlman: Yes.
Potter Stewart: I see. But it must be some kind of residential property, is that it?
Stuart D. Perlman: Yes. This is provided in the act that spelled out and these limitations must be -- completely complied with otherwise they’d be violating the statute. That would be inter-election their election of their duties. Therefore, we see in this area that the state regulatory agency is really the ones who do the regulation in the savings loan and that as the concurring opinion by Mr. Justice Brennan in the Variable Annuity case where he said that the Securities Law become much -- less relevant when you have the state regulation. And Congress recognized this as well.
Potter Stewart: Are shares in commercial bank securities under the meaning of the 1934 Securities Exchange Act?
Stuart D. Perlman: As a matter of fact they were traded Your Honor, yes. They are traded. They were in the over-the-counter market shares --
Potter Stewart: And certainly a commercial bank unless it’s a national bank is under the strictest kind of state regulations, is that it?
Stuart D. Perlman: That’s right Your Honor.
Potter Stewart: So this argument for whatever its worth certainly shouldn’t -- isn’t conclusive is it --
Stuart D. Perlman: Not necessarily conclusive although Congress was looking to this in this intent. There were certain limitations put on the trade even the bank chairs although there’s a different type of situation with bank’s stock because it is stock. It is a proprietary interest. They have nothing else -- they are only concern with their equity interest. There is not this concept that you have in the mutual savings and loan association. It’s a distinct type of interest that’s more akin as Congress has said and the debates appearing in the 1934 hearings and in the 1963 hearings, it’s more akin to the savings bank deposit. This is the type of thing or the deposit in the savings account in a commercial bank. In this case, we have this as we said one group against the other and it would be quite unclear for one group to prevail, breaking up this concept of mutuality that’s so important in the savings and loan industry. The S.E.C. as Mr. O’Laughlin pointed out did come in and aside with the state in opposition to petitioner’s motion for the appointment of receiver in the District Court. It would be improper and I think the S.E.C. was correct that this would result if they did support the petitioner’s argument for important receiver. It would result in a strain on the federal state relationships in this area, in this sensitive area. The state really does most of the regulation in this area joined with the federal regulatory agencies over and 96% of the dollar amount of these particular cases. You find that not only the Federal Home Loan Bank Board has an interest in this but you have the federal deposit insurance corporation in banks where they have deposits. In fact, we must look to the instant action to see that it was the state that triggered this entire situation when the state director of financial institutions after a surprise examination on this institution, on this association, took and sees the assets of this particular association. It was this surprise order that focused, that brought this entire situation to life that the petitioners would have any knowledge whatsoever. If we look then to the true intent of Congress and balancing the equities as trying to see that all depositors are treated fairly. That is the state which a role is adjusted to this particular situation and this Court has constantly said that in this situation -- where the state role was adjusted to a situation such as particularly in liquidation preceding, it is then we should leave the state remain to regulate the particular interest involved. Historically and traditionally then in conclusion, it has been proven that in this area, the state regulates and not any specific private remedy that a particular individual may have because it hasn’t been used, there hasn’t been any need for this because the state has done this and because of that concept of mutuality in the savings and loans. In fact, the S.E.C. has done very little in this area even though it may have had the power to regulate the -- in certain areas with regard to the antifraud provisions of the Security Act that has done virtually nothing except possibly in the Maryland’s case where you find that there are very little regulation and now as I understand that there is very strong state regulation. Therefore, whenever you have strong state regulations coupled with federal regulation by the Home Loan Bank Board, by the Federal Savings and Loan Corporation, by the Federal Deposit Insurance Corporation. This in it of itself has made it sufficient in this particular area for the association to survive, for a bank to survive for possibly an insurance company to survive and the Securities Act have become much, much less relevant in this area.
Potter Stewart: Mr. Perlman, are we in this particular case at least talking about regulation by the Securities and Exchange Commission, aren’t we really just talking about a private right of action in the federal court for fraud or for recession for -- based on fraud?
Stuart D. Perlman: That’s correct Your Honor.
Potter Stewart: We’re not talking about regulation by this commission?
Stuart D. Perlman: Well, if there is found that there are these --
Potter Stewart: -- assigned bureaucratic federal commission in competition with the sovereign state of Illinois, we’re not talking about that in this case are we?
Stuart D. Perlman: No Your Honor but its possible if these was found to be a security under the Exchange Act. The S.E.C. would have much broader powers -- would possibly, I don’t conceive of it but it’s possible that they may do certain things that they normally would not have done. Now they have had powers on the Securities Act and then virtually nothing as far as I can see. Now, you’re correct in saying about the specific remedies. Here again, there has been virtually no case. There has been no case law, nothing at all until this case.
Potter Stewart: But what we’re talking about is a right of action in the federal court by a purchaser of one of these things by an investor against this company because he said I was defrauded and I want my money back and that’s all we’re talking about whether or not there is such a right of action in the federal court.
Stuart D. Perlman: That’s correct Your Honor but --
Potter Stewart: By reason of the 1934 Securities Exchange Act --
Stuart D. Perlman: That’s correct. That’s the issue, yes.
Potter Stewart: We’re not talking about regulation by any commission.
Stuart D. Perlman: But Your Honor in the cases before this Court -- in this case, true but the thing is this Court has discussed the concept of Securities Acts and the regulation not only in terms of intent of Congress but has said that in its opinions in Variable Annuity case and the majority opinion, in the concurring opinion and recently it was discussed that the state regulation was of primary importance and that’s when the Securities Act become less relevant.
Potter Stewart: Well, in VALIC -- in those cases, there was an issue as to -- because there, as the case was decided the way in fact it was decided, there was competitive regulation because of the registration requirements of the 1933 Act. You don’t have any such thing as that here, do we?
Stuart D. Perlman: No. But I’m saying that there is a possibility that this could come about and secondly, this private remedy has -- would do create a chaos we think in this particular area because you’d find that there would be many depositors and in this case, petitioners contend 5,000 depositors and savings -- city savings and loan would get 100 cents on a dollar. In other words, approximately 50 --
Potter Stewart: Well, that’s a different point and I understand it.
Stuart D. Perlman: Yeah, but this is why the state is quite concerned about this -- because if they would prevail, they will get this $15 million lump sum as opposed to virtually nothing for the approximately 12,000 depositors, 7,000 depositors will get nothing and constantly our office of the attorney general of the city -- the commissioner of savings and loan receives letters daily crying out for these people to get their money and they would get their money now but for this case. This case has held up the liquidation of this particular matter. The disposition cannot be made until such time as there is and to all cases under the statutory law as well as the federal law. We could not pay out any dividend. They are ready now to pay out a liquidating dividend but cannot until such time as this is concluded. Thank you.
Earl Warren: Mr. Shure.
Arnold I. Shure: I would like to respond to appeal of the unanswered questions and with regard to the regulations that Mr. Perlman is speaking of now. First of all, I see no policy, federal or state which should borrow a man who has been defrauded of his money assuming he has been getting it back again. There is no reason why a shareholder of a corporation which has received moneys through federal officers should have some equity suddenly come up out of nowhere so that he is entitled to participate in his wrongfully secured funds. That’s my first point. The second thing is that one of the reasons our federal remedy is a better one taking it in this particular cases that we have the string of cases going back for a hundred years. We have Case versus Los Angeles, Lumber Company, the Northern Pacific against Boyd that we remember from the reorganization days and those cases held that there is a rule of absolute priorities in equity that you just don’t sit down and do Curbstone equity and let people just keep money or reshuffle the rights and put shareholder ahead of creditors or whatever may be sought. Now with regard to the type of regulation that we have in Illinois that the Attorney General’s office has been speaking of, he says that they can’t buy -- they can’t invest any other money. Justice Stewart asked whether they are limited to investments and homes I believe. The answer is, if we’re going to take what happened here, if we look at page 10 of the brief, we find that they invested a million dollars in a golf course, 806,000 in two golf courses.
Potter Stewart: But you’re complaining about that many of --
Arnold I. Shure: Well, this is -- but the answer is -- the answer he gave was wrong, it’s the reverse of the fact. On page 11 of our brief, we have the detailed facts that Justice Fortas was asking about. He said, what are the rights of shareholders, what are the specific, simple little things here. Here they are at the top page 11. Under certain conditions, management can invest more than 45% of the association’s total assets as follows; 45% certain marketable investment securities, 15% at Section 792.8, initial purchase and development of residential property is 10%, 792.7 direct general obligations and certain political subdivisions. Obligations of urban renewal investment corporations, other investments, these are minimal standards and they’re so broad that they can do almost anything and the result is that they can get into all of these sort of things for periods of years and lend and renew $65 million indicating the total number or renewals here without any interference by the state. Now as far as the attitude of the general counsel of the Federal Home Loan Bank Board, the answer is that the Federal Home Loan Bank Board does approve of this idea that these are violations of the ‘34 Act. And the proof of that is that the Federal Home Loan Bank Board sent out a letter to every savings and loan insured association this country suggesting to them that they better check their advertising about a year ago because they were advertising that they were paying five and three quarter percent on their accounts and they really weren’t. The five and three quarter percent was what the result was as the result of the accumulative interest in the last quarter so that as to all periods prior to that, they were in violation. Well, if they didn’t believe that the Act applied, they wouldn’t have written a letter. As far as the question of Justice Fortas as to where in these briefs does it set out the details as to what the rights, privileges and so forth of an investor are, there are five pages of it. Section by section, we recite them in the brief of the petitioners and we give the section references point after point which has been completely ignored here and anyone who wants to read it can find out exactly what you have voting rights. You cannot give irrevocable proxies. It is not true that these proxies are any different. The section and proxies is identical to the section and proxies for a general business corporation in the state of Illinois. It’s word for word the same. Now the fact that a shareholder in Inland Steel or any other corporation doesn’t choose to vote, they just sends that into management year after year because he has confidence in management, doesn’t take away one with from the nature of the security or the nature of his investment. As far as this question that was asked about the brokers under the -- what would happen about the brokers, why do brokers register. The answer of the Attorney General was that, well, they could be reached through the 1933 Act but if we hold that these are not securities, if these are not securities, I believe it was Mr. Justice White who asked that question, they -- the S.E.C. could not reach them under the ‘33 Act. If they’re not securities, it’s been said that they’re not securities under the ‘33 Act or under the ‘34 Act. Now the --
Thurgood Marshall: Did you see any difference between the coverage under the two Acts?
Arnold I. Shure: Not one I ought to. The statement was made that this is a class action brought on behalf of shareholders. I think that was Justice Stewart’s question. It this a class action brought on behalf of all the shareholders. The answer is it is not. This is an action by the liquidators of the corporation who are suing for the benefit of the corporation not for the benefit of the shareholders. They have taken the position. They are not going to allow us to recover the moneys and assuming we win of which we claim we were defrauded.
Thurgood Marshall: What did you say then?
Arnold I. Shure: I say that the liquidators have brought an action there's these people who claim to be lawful --
Earl Warren: (Inaudible)
Arnold I. Shure: That’s the state chancery action. It has nothing to do with us. If they win there, they will still oppose us getting our money here assuming we’re right.
Potter Stewart: Now what they’re seemed to be in favor of is you’re getting your money ratably with all of the investors in the institution.
Arnold I. Shure: That is what they say they want.
Potter Stewart: They don’t want you to get a 100% on the dollar and the other investors to get zero on the dollar.
Arnold I. Shure: That is correct. Our position is that if this money, 100% of it came out of our pockets to the tune of $18 million which is I believe the amount that was received from this post 1959 people that no part of the money that came from our pocket should go to the shareholders who were shareholders prior to that time regardless of the fact that they may have had suffered and their coffers may have been empty and they were in serious trouble because of the actions of their board directors. They are not entitled to receive our money no differently than in any other corporate or individual situation. We are not on a par with them. As far as what the usual interest is, Justice Fortas asked about that I believe in the Mensik reply brief, they put in a picture of one of the letters and the letters shows on the right is Exhibit 3a or Appendix 3a. It says, 4% on prepaid savings -- on prepaid savings share certificates. Now the suggestion was made that the association may issue a certificate or may issue a savings account book. The Illinois Act makes it mandatory that he insert certificate evidence every share interest. There is no option as far as the right to issue that the association can hold that once that has been prepared and executed and can issue an account book to show what the situation is in this person’s own -- each person own so many shares. The -- as far as the -- I’m sorry.
Earl Warren: That’s all right.
Arnold I. Shure: I’m looking at my papers and not at the light.