Document: 375 U.S. 180 84 S.Ct. 275 11 L.Ed.2d 237 SECURITIES AND EXCHANGE COMMISSION, Petitioner,v.CAPITAL GAINS RESEARCH BUREAU, INC., et al. No. 42. Argued Oct. 21, 1963. Decided Dec. 9, David Ferber, Washington, D.C., for petitioner. Leo C. Fennelly, New York City, respondents. Mr. Justice GOLDBERG delivered the opinion of Court. 1 We are called upon in this case to decide whether under Investment Advisers Act 19401 Securities and Exchange Commission may obtain an injunction compelling a registered investment adviser disclose his clients practice purchasing shares security own account shortly before recommending that long-term then immediately selling at profit rise market price following recommendation. The answer question turns on practice—known trade as 'scalping'—'operates fraud or deceit any client prospective client' within meaning Act.2 hold it does 'enforce compliance' with by obtaining requiring make full disclosure clients.3 2 brought action against respondents United States District Court Southern York. At hearing application preliminary injunction, facts were established. Respondents publish two advisory services, one which—'a Capital Gains Report'—is subject proceeding. Report is mailed monthly approximately 5,000 subscribers who each pay annual subscription $18. It carries description: 3 'An Service devoted exclusively (1) protection capital. (2) realization steady attrative income therefrom. (3) accumulation CAPITAL thru timely purchase corporate equities proved be undervalued.' 4 Between March 15, 1960, November 7, respondents, six different occasions, purchased particular investment. On occasion, there was increase volume trading recommended few days after distribution Report. Immediately thereafter, sold their these securities profit.4 They did not aspect transactions clients. 5 basis above facts, requested necessary effectuate purposes 1940. would have required future Report, material concerning, inter alia, 'within very short period prior recommendation * *,' '(t)he intent sell sale said *.'5 6 denied request holding words 'fraud' 'deceit' used 1940 'in technical sense' had failed show injure actual loss money 191 F.Supp. 897. Appeals Second Circuit, sitting en banc, 5-to-4 vote accepted Court's limited construction affirmed denial injunctive relief.6 Cir., 306 F.2d 606. majority concluded no violation could found absent proof 'any misstatements false figures contained bulletins'; 'the advice unsound'; 'defendants being bribed paid tout stock contrary beliefs'; 'these bulletins scheme get rid worthless stock'; recommendations made 'for purpose endeavoring artificially raise so (respondents) might unload (their) holdings profit.' Id., 608—609. four dissenting judges pointed out common-law doctrines grew up business climate from involved securities,' urged broad remedial statute which encompass respondents' conduct. 614. granted certiorari consider statutory because its importance investing public financial community. 371 967, 83 550, 9 538. 7 decision Congress, empowering courts enjoin operates 'as client,' intended require establish sense,' including injury clients, Congress nondisclosure facts. For resolution issue we history I. 8 last series Acts designed eliminate certain abuses industry, contributed crash 1929 depression 1930's.7 preceded 1933,8 1934,9 Public Utility Holding Company 1935,10 Trust Indenture 1939,11 1940.12 A fundamental purpose, common statutes, substitute philosophy caveat emptor thus achieve high standard ethics industry.13 As recently related context, 'It requires but little appreciation what happened country during 1920's 1930's realize how essential highest ethical standards prevail' every facet industry. Silver v. Stock Exchange, 373 341, 366, 1246, 1262, 10 389. 1935 'authorized directed' 'to study functions activities trusts companies *.'14 Pursuant mandate, exhaustive report included consideration counsel services.15 This culminated reflects attitude—shared advisers Commission—that 'completely perform basic function—furnishing personal competent, unbiased, continuous regarding sound management investments—unless all conflicts interest between removed.'16 stressed affiliations bankers corporations 'an impediment disinterested, objective, critical attitude toward *.'17 concern deliberate conscious impediments objectivity. Both well aware whenever result benefit adviser—other than fee 'that some way tinged pecuniary (whether consciously or) subconsciously motivated *.'18 quoted leading he 'would put emphasis subconscious' motivation such situations.19 member staff suggested significant part problem existence 'deliberate intent' advantage, rather 'subconsciously (of) prejudice' favor one's interests.20 incorporated Code Ethics Standards Practice associations, canon: 12 '(An adviser) should continuously occupy impartial disinterested position, free humanly possible subtle influence prejudice, nconscious; scrupulously avoid affiliation, act, subjects position challenge respect.'21 (Emphasis added.) 13 Other canons appended announced guiding principles: compensation 'should consist direct charges services rendered';22 devote time 'exclusively performance' function;23 'share profits' clients;24 'directly indirectly engage activity jeopardize (his) ability render unbiased advice.'25 These adopted end quality rendered counselors measure has right expect demand.'26 14 One specifically mentioned condemned testified 'trading interested *.'27 15 report—authorized directed statute28 preparation introduction Senator Wagner bill which, changes, became 1940.29 In 'declaration policy' original stated 16 'Upon disclosed record hereby declared national investors adversely affected—* (4) when conducted defraud mislead investors, enable relieve themselves fiduciary obligations 17 policy title, accordance provisions title shall interpreted, mitigate and, far presently practicable enumerated section.' S. 3580, 76th Cong., 3d Sess., § 202. 18 Hearings held Committees both Houses Congress.30 describing profession, emphasized relationship 'trust confidence' clients31 'strict limitation (their right) buy normal if chance do seem operate interests public.'32 president Counsel Association America, association, 19 'two principles pioneers new profession undertook meet growing need information guidance were, first, they limit efforts problems investor's standpoint, engaging other activity, brokerage, directly bias judgment; second, remuneration work solely definite, professional fees fully advance.'33 20 Although changes hearings,34 nothing indicate alter legislation. proscription remained beginning end. And Committee Reports desire preserve personalized character advisers,'35 clients36 safeguards 'unsophisticated investors' 'bona fide counsel.'37 congressional recognition 'of delicate nature relationship,'38 eliminate, least expose, incline adviser— unconsciously—to disinterested. defeat manifest us hold, therefore, deceit,' 21 conclusion moreover, derogation law fraud, suggested. To contrary, finds support process adapted commercial our society. true been deemed elements damage suit parties arm's-length transaction.39 But action.40 relief sought is, below characterized it, 'mild prophylactic,' F.2d, 613, holdings, only dealings just issuance recommendations. 22 content static assumed. varied, example, sought, parties, merchandise issue. equitable prophylactic monetary damages. 23 'Law come regard primarily tort, hedged about stringent requirements, chief strong moral, immoral element, while equity regarded along conveniently comprehensive word expression lapse conscientiousness exacted party occupying contractual relation towards another party.'41 24 'Fraud broader (than law) intention misrepresent element.'42 25 'Fraud, indeed, sense court properly includes acts, omissions concealments involve breach legal duty, trust, confidence, justly reposed, injurious another, undue unconscientious advantage taken another.'43 26 Nor fiduciary, recognized be, transaction. Courts imposed affirmative duty 'utmost good faith, fair facts,'44 obligation employ reasonable care misleading'45 There also developed around involving land tangible items wealth ill-suited intangibles securities, that, accordingly, must issue.46 1909 Ridgely Keene, 134 App.Div. 647, 119 N.Y.S. 451, illustrates continuing development. An who, like published service, agreed, compensation, security. He agreement excuse conduct assertin honestly believed, *.' court, 'his belief soundness wholly immaterial,' act 'a palpable fraud.' 27 cannot assume enacting legislation prevent fraudulent practices advisers, unaware developments fraud. Thus, even agree intended, effect, codify 1940, logical conclude codified 'remedially' prevention fiduciaries, 'technically' traditionally applied suits ordinary chattels. 28 foregoing analysis judicial treatment reinforces deceit' client, intend client. construed 'enacted avoiding frauds,'47 technically restrictively, flexibly purposes. II. 29 turn now specific here type reach arguable—indeed argued 'some representatives' *'48 creates potential conflict eliminated. go case, since seeks significantly greater abuse situation described above. secretly trades effect motivated—consciously recommend given long-run (which client), short-run response anticipated adviser).49 investor seeking must, legislative served, permitted evaluate overlapping motivations, through appropriate disclosure, deciding serving masters' one, 'especially masters happens economic self-interest.' Mississippi Valley Generating Co., 364 520, 549, 81 294, 308, 309, 268.50 Accordingly, empowers courts, showing here, frank III. 30 offer three arguments conclusion. argue first made, make, failure unlawful 1933,51 language, assumed include general deceit. considering chronology omission significant. 1933 experiment federal regulation understandable, declaring unlawful, deceptive abundance caution, nondisclosure. soon clear, however, previously outlined merging into treating former, variety latter. & Comm'n Torr, 315 (D.C.S.D.N.Y.1936), rev'd grounds, 87 446, Judge Patterson suppression evaluation disinterestedness 'operated purchasers,' F.Supp., 317. Later cases treated deceit.52 light this, evident emptor, antifraud antideceit impotent more assumption, transpired proscribing surplusage. 31 1960 amendment53 justifies narrow interpretation enactment. amendment relevant here. 'Manipulative' added list those proscribed. suggest, respect requirement 'manipulative' deceptive.54 indication adding scope proscription. authorizes 'by rules regulations (to) define, prescribe means reasonably prevent, practices, courses fraudulent, deceptive, manipulative.' offers indication, 'general flexible' long considered control versatile inventions fraud-doers.'55 Moreover, culled events surrounding passage '(O)pinions attributed twenty years event evidence 1940.' Research Bureau, Inc., 606, 615 (dissenting opinion). See Philadelphia Nat. Bank, 374 321, 348—349, 1715, 1733—1734, 915. 32 argue, finally, 'honest' believed furthering objectives. This, course, putting rejected argument fraud—particularly established ordered. itself, abuse, 'operates suppressed. 'directed dischonor, tempts dishonor.' 268. Failure meaning, for, experience amply reveals, darkness ignorance secrecy conditions predatory best thrive. impose burden dishonesty condition precedent protecting prophylaxis effectively nullify protective statute. Reading background find commanded. Neither nor separate mental urges,' Peterson Greenville, 244, 248, 1119, 1121, 323, adviser, motives man too complex Mosser Darrow, 341 267, 271, 71 680, 682, 95 L.Ed. 927. statute, adviser's insure misconceives confine 'dishonest' opposed motives. Dean Shulman discussing transactions, picture simply window, entire store truth statements volunteered, disclosure.'56 morality laws regulating industry permit without fairly revealing 33 Experience shown situations, onerous needed dealing maintain confidence health country. 34 judgment reversed remanded proceedings consistent opinion. 35 Reversed remanded. 36 DOUGLAS took case. APPENDIX TO OPINION OF THE COURT. 37 none occasion stating overpriced. After publication covered sales. 38 Respondents' summarized follows: 39 Purchased Purchase Recommended Sold Sale Profit 40 41 Continental 47 3/4 - 42 Insurance Co. 3/15/60 7/8 3/18/60 3/29/60 50 1/8 $1,125.00 43 Fruit 5/13, 16, 1/4 6/6, 5/8 10,725.00 44 19, 20/60, 5/27/60 10, 60 1/2 Creole Petroleum 45 Corp 7/5, 7/15/60 7/20, 1,762.50 46 14/60 22/60 Hart, Schaffner Marx 8/8/60 8/12/60 8/18, 837.00 48 Union Pacific 10/28, 3/8 11/1/60 11/7/60 1,757.00 31/60 49 Frank G. Shattuck Co 10/11/60 16.83 (2.53 10/14/60 10/25/60 695.17 (purchased call cost, (exercised 51 calls) plus 14.30 calls 52 option price) sold) 53 Chock Full O'Nuts 68 69 10/24/60 62 2,772.33 54 (sold short). (sale price). (disparaged). 55 (covered 56 sale)(purchase 57 58 relating profits disput ed, substantially contest remaining figures. 59 HARLAN, dissenting. I affirm reasons Moore earlier panel. 300 745. additional observations order. 61 Contrary majority, read Appeals' banc either 206(1) Stat. 847 (prohibiting employment device, scheme, artifice client'), 206(2), transaction, practice, course confined traditional concepts That 'federal broadly purpose.' 608. intimate 'intent clients' (ante, p. 186) sections Rather explicitly observed: 'Nor can serious dispute trust exist advisor advised,' ibid., recognizing required. terms require, least, think clear most expansive principles. nondisclosed personally profited foreseeable reaction advice.1 63 cited 198) wide mark skeletonized statement them will show. 315, defendants stock. apparent lied making recommendations, plain promise reward. us, vestige reason anything given. 64 Charles Hughes Comm'n, 139 434, sales customers' men ignorant value stocks 16% 41% over-the-counter price. Defendant's employees known customers refused 65 defendant Norris Hirshberg, 85 U.S.App.D.C. 268, 177 228, dealt unlisted securities. Most firm acting behalf derived commissions; fact bought customers, received mark-ups mark-downs. not, stated, 'necessarily petitioner violated Acts.' 231. violation; example buying customer higher same day. distinguishes prove grounds sufficient revo ation broker-dealer registration. 273, 233. 66 Arleen 56, 174 969, concerned revocation license gave open she them. Since expressly relied language statutes state fact,' id., 63, 976, hardly stands proposition absent. 67 Speed Transamerica Corp., 235 369, controlling stockholder corporation stock, concealing shareholders insider indicated real considerably set offer. Had concealment, undoubtedly sell; consequence suffered ascertainable Archer 133 795, copartners company concealed name Claude Westfall, business. Westfall thereby enabled brokerage Harris, Upham worked trader. latter defendants' level, prices market. Hughes, turned explicit nondisclosure, concealment clearly reflected dischonest vital consummation transactions. No factors revealed present able reached today construing pure cf. something purport be. 70 lends absolute rule Apart opinions Appeals, seems me especially express provision 17(a)(2) 1933, 84,2 though carry over comparable Act.3 attribute presence 'abundance caution' later inclusion 'surplusage' 199) singularly unconvincing explanation difference statutes.4 However salutary thought fashioned Court, authority duly promulgated thereunder S.E.C. Only Terms ago extend 1934 'policy' considerations cogent Blau Lehman, 368 403, 82 403. exercised wise restraint particularly interlocutory stage litigation. conceivable trial according terms. 72 respectfully dissent. 847, amended, U.S.C. 80b—1 seq. 852, (Supp. IV) 80b—6, provides that: use mails instrumentality interstate commerce, indirectly— '(1) client; '(2) '(3) principal account, knowingly broker person disclosing writing completion transaction capacity consent prohibitions paragraph apply dealer *' 853, 80b—9, '(e) Whenever appear engaged, constituting subchapter, rule, regulation, order hereunder, aided, abetted, counseled, commanded, induced, procured, aiding, abetting, counseling, commanding, inducing, procuring, aid, abet, counsel, command, induce, procure violation, discretion bring proper district States, Territory place jurisdiction acts enforce compliance subchapter hereunder. Upon c mmanding, procuring permanent temporary decree restraining bond.' Appendix, infra, reads 'WHEREFORE plaintiff demands order, final injunction: '1. Enjoining Inc. Harry P. Schwarzmann, agents, servants, employees, at- torneys assigns, them, advisor, indirectly, instrumentalities commerce from: '(a) Employing failing concerning defendant, securities; clients; Effecting dispose '(4) cover sales; '(5) puts forpurchase disposition '(b) Engaging matters forth demand 1(a) hereof.' originally heard panel judge dissenting, Rehearing purported recognize affirming 'technical' 'misstatements,' unsound advice, bribery, 'worthless stock,' generally Douglas Bates, Fe eral Yale L.J. 171 (1933); Loomis, Geo.Wash.L.Rev. 214 (1959); Shulman, Civil Liability Act, 227 (1933). Cf. Galbraith, Great Crash (1955). 74, 77a 881, 78a 838, 79 1149, 77aaa 789, 80a—1 H.R.Rep. 85, 73d 1st Sess. 2, Wilko Swan, 346 427, 430, 74 182, 184, 98 168. 837, 79z—4. While concentrated provide counseling see Trusts Companies, Commission, Section 1935, Counsel, Management, Supervisory, Advisory Services, H.R. Doc. 477, 2d (thereinafter SEC Report) Senate Banking Currency receive communications publishers see, e.g., 3580 Subcommittee Currency, pt. (Exhibits), 1063, covers engages advising others, publications writings 80b—2. 28. 29. 24. Ibid. 66—67. 66. 65. 67. 29—30. text accompanying note 14, supra. (hereinafter Hearings). 10065 House Interstate Foreign Commerce, Hearings, 719. 716. 724. enacted contain section attributing profession. eliminated apparently urging denying occurred, fringe feared indictment irreparable harm fledgling See, 715—716. inferred, repetition future. inference, omitted condemning depends success continued confidence) few. 2639, Report). S.Rep. 1775, 22. 21. Loss, Regulation (2d ed. 1961), 1412. C.J.S. Fraud (1943), 210. Even cause noted misrepresentations gain himself; reliance misrepresentations.' Harper James, Law Torts (1956), 531. '(T)he motives, doing kindness, absolve him liability, mislead.' Prosser, (1955), Restatement, (1938), 531, Comment b, illustration 3. purposeful, claimed service exclusive interests. criminal proceeding 'willfully' violating 857, 80b—17, revoke suspend registration interest,' 850, 80b—3. proceedings. Compare Federal Communications American Broadcasting 347 284, 593, 699. Hanbury, Modern Equity (8th 1962), 643. Letter Lord Hardwicke Kames, dated June 30, 1759, printed Parkes, History Chancery (1828), 508, Snell, Principles (25th 1960), 496: infinite, once lay down rules, go, farther, extending define strictly species cramped, perpetually eluded schemes fertility man's invention contrive.' De Funiak, Handbook 1956), 235. Crawford, 130 122, 128, 447, 448, 878, quoting Story, Jur. 187. 534—535 (citing cases). Keeton, Fraud—Concealment Non-Disclosure, Texas L.Rev. 1. 541. Sutherland, Statutory Construction (3d 1943), 382 Note, N.Y.U.L.Rev. 985; Comment, U. Chi.L.Rev. 121, 131—147. 27, discussion effects Calif.L.Rev. 232, interest, said: 'The rea inhibiting occupies confidential relations assuming antagonistic positions matter sometimes rest policy, justified authoritative declaration serve masters; human with, stop violations relations, removal temptation violate '* Hazelton Sheckells, 202 71, 79, 567, 568, 939, objection rests tendency, done inquire done. If improper probably hidden, appear." n. 14. 84, 77q(a), provides: instruments transportation communication mails, defraud, property untrue circumstances misleading, purchaser.' 795 (C.A.8th Cir.), cert. denied, 319 767, 1330, 1717; 434 (C.A.2d 321 786, 781, 88 1077; 174, 969; Hirshberg 228; 369 (C.A.3d Cir.). 887, 80b—6(4). amendment, adviser: manipulative. shall, 895, 78o(c)(1), refers devices manipulative, otherwise fraudulent.' Stonemets Head, 248 Mo. 243, 263, 154 S.W. 108, 114. 41, 227, 242. According brief (and contested), gross Bureau publishing $570,000. accepting S.E.C.'s figures, somewhat less $20,000. Thus inference tainted self-interest, drawn significant, lacking record. makes misleading 17(a) 206(1), supra, 203. enactment become 'we e (contained Act) fraud' act. Ante, 198. However, pre-1940 ante, 198, 204. prompted 'bribe' equated Such recipient Saying strains credulity came Act. remembered punishable criminally (§ 217 857); constructions statutes.

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