Gilligan, Will & Co. v. Securities And Exchange Commission

267 F.2d 461 (2nd Cir. 1959)

Purchase the Printed Copy at bsmsphd.com

Nature of the Case

To access this section all you need to do is click here and register.

Facts

On July 6, 1955, Elliott & Company agreed with Crowell-Collier to try to sell privately, without registration, $3,000,000 of Crowell-Collier 5% debentures, convertible at any time into common stock at $5 a share. Elliott also received an option on an additional $1,000,000 of debentures. Elliott advised Gilligan, one of the two partners of the registrant, D, of this agreement. He told Gilligan that Gilligan could purchase, but only for investment, as much of the $3,000,000 as he wished, with the exception of $500,000 which Elliott's wife was taking, and that the debentures not taken by Gilligan would be offered to certain friends of Elliott. Gilligan was told by Elliott that Crowell-Collier had 'turned the corner' and was then operating on a profitable basis. Elliott stated that the placement was an exempt transaction. Gilligan agreed to purchase $ 100,000 of debentures for his own account. Gilligan did not have any information regarding Crowell-Collier and the debenture issue other than what Elliott told him. On August 10, 1955, the $100,000 debentures were delivered to D which sent a letter to Crowell-Collier stating: 'that said debentures are being purchased for investment and that the undersigned has no present intention of distributing the same.' By August 10, 1955, almost half of the $ 100,000 of debentures had already been resold. Either on July 6 or July 7, 1955, Louis Alter, a member of the American Stock Exchange, agreed to buy $45,000 of the debentures. Gilligan also offered $10,000 to a friend and when this was not accepted he sold $5,000 to Michael D. Mooney, who had previously requested that amount of debentures and had been told that none were available; the remaining $5,000 debentures were placed in D's trading account. In early September, when the securities were distributed, Gilligan, Alter, and Mooney each signed a statement reading: 'I hereby confirm to you that said debentures are being purchased for investment and that I have no present intention of distributing the same.' Gilligan noticed that the advertising in Crowell-Collier magazines was not increasing. , He decided to convert his debentures into common stock and to sell the stock. Gilligan and Alter converted their debentures into common stock. They sold the stock at a profit on the American Stock Exchange. The stock had been listed on that Exchange since October 1955, and Gilligan became the specialist in the stock. In May 1956 D also purchased and participated in the sale of additional debentures by Crowell-Collier. These debentures were to be sold at 160% of par, based on the stock's price at that time of $8 per share. Gilligan agreed to take $150,000 face amount debentures and said he would see whether Alter was interested in taking any. After Alter indicated that he wanted a $50,000 face amount, Gilligan advised Elliott that the total subscription would be $200,000. Gilligan did not inform Elliott of his and Alter's sales of stock obtained from the conversion of the debentures purchased in 1955. Alter immediately converted his debentures into stock. On the same day, D similarly confirmed $150,000 face amount debentures to a joint specialist's account maintained by it and one Lloyd E. Howard, which debentures were immediately converted into common stock. A letter confirmed that $200,000 of debentures were purchased for investment with no present intention to distribute. More transactions occurred beyond those detailed. P instituted a proceeding to determine whether the parties had violated the 1933 Act and whether D's registration as a broker-dealer under the 1934 Act should be revoked. D was suspended from membership in the National Association of Securities Dealers, Inc. for five days. P found that James Gilligan and William Will were each a cause of the order. D appealed claiming that P action was arbitrary and capricious in four respects: (1) that its finding that Ds were underwriters with respect to 1955 and 1956 transactions in Crowell-Collier debentures and stock was not supported by substantial evidence; (2) that the findings of wilful violation of the registration provision were unsupported by substantial evidence; (3) that the suspension of D was arbitrary, capricious and an abuse of discretion; and (4) that they were denied an impartial hearing because the Commission had predetermined the matter by a press release issued before the hearing.