Opinion ID: 1485429
Heading Depth: 1
Heading Rank: 2

Heading: The Motion to Dismiss and the Application to Withdraw.

Text: 15 U.S.C.A. § 77h(d) reads in part as follows: If it appears to the Commission at any time that the registration statement includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, the Commission may, after notice    and after opportunity for hearing    issue a stop order suspending the effectiveness of the registration statement. (Italics ours.) A stop order serves two purposes: First, it suspends the effectiveness of the registration statement and the license of the issuer to use the mails and the facilities of interstate commerce for the purposes recognized by the act; second, it operates as a warning to the investing public that the Commission has found that the statement is untrue or misleading and, therefore, unreliable. Transactions by a dealer within one year after the first date upon which the security was bona fide offered to the public by the issuer are not exempted from the provisions of Section 5 of the Act, 15 U. S.C.A. § 77e. See § 77d(1) and H.R.Rep. 85, 73d Cong. 1st Sess.1933, p. 16. On February 11, 1937, 4318 units were still in the hands of dealers and they did not acquire an exempt status until February 23, 1937. Hence, the ground set up in the motion, that all the securities had passed from the hands of the issuer, was an insufficient basis upon which to challenge the jurisdiction of the Commission to issue a stop order. The regulation of the Commission with respect to withdrawal of the registration statement reads: Any registration statement or any amendment thereto may be withdrawn upon the application of the registrant if the Commission, finding such withdrawal consistent with the public interest and the protection of investors, consents thereto. The application for such consent shall be signed by the registrant and shall state fully the grounds upon which made. The fee paid upon the filing of the registration statement will not be returned to the registrant. The papers comprising the registration statement or amendment thereto shall not be removed from the files of the Commission but shall be plainly marked with the date of the giving of such consent, and in the following manner: `Withdrawn upon the request of the registrant, the Commission consenting thereto.' In Jones v. Securities & Exch. Commission, 298 U.S. 1, 22, 56 S.Ct. 654, 660, 80 L. Ed. 1015, the court said: The question under the regulation is whether due regard to the public interest and the protection of investors requires that the withdrawal be denied. The test is the absence or presence of prejudice to the public or investors;   . The manifest purpose of the Act is to protect the public against imposition and fraud in the sale of securities through the use of the mails or the facilities of interstate commerce. Section 7 of the Act, 15 U.S.C.A. § 77g, requires the issuer to file a true and complete statement of the information specified in Schedule A, 15 U.S.C.A. § 77aa, in order to make available to the investing public pertinent and reliable information relating to the security and thereby effectuate the purpose of the Act. Section 6(d) of the Act, 15 U.S.C.A. § 77f(d), expressly provides that the information contained in the registration statement shall be available to the public; and the filing of an untrue or misleading registration statement subjects to civil liabilities every person who signed the registration statement, every person who was a director of, or person performing similar functions, or partner in, the issuer at the time of the filing of the registration statement, every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions, or partner, every accountant, engineer, or appraiser who participated in making the registration statement, and every underwriter with respect to such security. See Section 11 of the Act, 15 U.S.C.A. § 77k. We do not agree with the contention that when all the securities had been disposed of by the issuer and its dealers the purpose of the registration statement was fully served and hence there was no need for a stop order. It does not follow when the securities pass out of the hands of the issuer and the dealers that they cease to be the subject-matter of sales in interstate commerce, and that the mails and facilities of interstate commerce cease to be used to effectuate their sales. In fact, the opposite is obviously true. Furthermore, members of the investing public might acquire the information contained in the registration statement during the time the securities are being sold by the issuer and its dealers, and might place reliance thereon in purchasing such securities from third persons after they have all passed out of the hands of the issuer and its dealers. Obviously, so long as the securities are outstanding, purchases thereof will continue to be made in reliance on the registration statement, unless notice of its unreliability is given by a stop order. Moreover, because of the provisions of Section 77k, supra, the registration statement continues to serve a purpose after the securities have passed out of the hands of the issuer and its dealers. That section is not limited to purchases from the issuer or its underwriter or dealer, but broadly covers all persons who purchase the security in reliance on the registration statement. [4] And when the issuer files its registration statement, sells its securities, and places them in the channels of trade and commerce where they are likely to be sold by purchasers from the issuer or its dealers to third persons, the registration statement must remain on file for the benefit of such third persons. The issuer cannot file a false and misleading registration statement, issue and sell all its securities, place them in the channels of trade and commerce, and then withdraw the statement and avoid the liabilities imposed by Section 77k, supra. It follows that even where the securities have all passed from the hands of the issuer and its dealers and have reached an exempt status with respect to Section 5 of the Act, 15 U.S.C.A. § 77e, it is important with respect to the second purpose of a stop order that the Commission have power to issue its order as the Act provides at any time it appears to the Commission that the statement is untrue or misleading. An unavoidable defect in this type of security regulation flows from the fact that certain members of the public attribute higher value and greater soundness to the security merely because it has been subjected to governmental scrutiny and the issuer has complied with the provisions of the regulatory act. [5] This fact makes it all the more important that the Commission, when it finds that the registration statement is untrue or misleading, be empowered to issue a stop order as a warning to the investing public. We have said that Congress, as a condition precedent to the use of the mails and the facilities of interstate commerce, has power to require the filing of the registration statement, and in order to prevent imposition and fraud in the use of the mails and the facilities of interstate commerce, to make the statement available to the investing public. A registration statement that has been filed and become effective and available to the public, if untruthful or misleading, is likely to result in prejudice to the investing public; and we have no doubt that Congress, as an incident to its general power, may provide for a stop order to warn the investing public against an untrue or misleading registration statement. Certainly, it has power to guard against the harm that is likely to flow from the untruthfulness or misleading character of an official document required to be filed in the exercise of its legitimate power. Mere withdrawal of an untrue or misleading statement would not be enough. The positive effect of a stop order is essential to the full protection of the public. Finally, there can be no doubt that the registration statement was effective when the Commission initiated the proceeding. The purpose of the motion to dismiss and of the application to withdraw was to stifle the inquiry and avoid the stop order. What the late Mr. Justice Cardozo said in his dissenting opinion in Jones v. Securities & Exch. Commission, 298 U.S. 1, 32, 56 S.Ct. 654, 664, 80 L.Ed. 1015, is apposite: To permit an offending registrant to stifle an inquiry by precipitate retreat on the eve of his exposure is to give immunity to guilt; to encourage falsehood and evasion; to invite the cunning and unscrupulous to gamble with detection. We accordingly conclude that the motion to dismiss and the application for withdrawal were properly denied.