Stockholders assented to his request; at both the special and annual meetings at which stockholder approval was given to transactions which would aid the distribution, Allen held proxies for over 50 percent of the outstanding shares.

The record facts establish, beyond peradventure, that Allen could direct the policies of the issuer along whatever lines he deemed desirable. He was, therefore, in control of the issuer, and the purchase of shares from him and his wife with a view to public distribution made the registrant an "underwriter" within the meaning of Section 2 (11) of the Act. Accordingly, the shares which registrant sold to the public were not exempt under Section 4 (1)."

SECTION 17 (a) (2)

It is alleged that registrant violated Section 17 (a) (2) of the Securities Act of 1933 in that it obtained money and property by means of omission to disclose that deposit agreements existed which would restrain a free and open market in the issuer's securities, which material fact should have been disclosed in order to make the statement by registrant that the securities were offered "at the market" not misleading. The allegation is, in our opinion, sustained by the record facts.

"Market price" connotes a price which represents the natural interplay of independent individual appraisals as to the value of securities. Artificial restraints or stimuli are foreign to the concept of a "market price." It is materially misleading to represent that securities are being sold at the "market" when the supply of the security is being artificially restrained or the demand artificially stimulated. See Securities and Exchange Commission v. Otis & Co., 106 F. (2d) 579 (C. C. A. 6th, 1939): In the matter of Rickard Ramore Gold Mines Ltd., 2 S. E. C. 377 (1937); In the matter of Canusa Gold Mines Ltd., 2 S. E. C. 548 (1937); In the matter of Potrero Sugar Company, 5 S. E. C. 982 (1939).

Subsequent to March 10, 1937, registrant sold securities through the medium of a prospectus in which the securities were offered for sale “at the market." This representation was made at a time when there were in effect deposit agreements preventing the holders of approximately 60 percent of the outstanding stock from disposing of

" Counsel to the Trading and Exchange Division urges that registrant was an underwriter of the 14,000 shares for the further reason that the purchase of stock from Mr. and Mrs. Allen, the exercise of the option by registrant, and the resale of shares to Mr. and Mrs. Allen were part of a single scheme to distribute the issuer's unissued shares to the public, and, accordingly, registrant must be held to have purchased the shares from the issuer for purposes of public distribution. We need not consider this additional point, for it is clear that even if we treat the purchase from Mr. and Mrs. Allen as separate from the subsequent transactions, registrant was an underwriter, for it purchased from persons in control of the issuer for purposes of public distribution.

their stock. The existence of these agreements, which imposed an artificial restraint upon the supply of securities, should have been disclosed; failure to disclose them rendered the statement that the securities were being sold "at the market" materially misleading. That failure constituted a violation of Section 17 (a) (2) of the Act. See Securities and Exchange Commission v. Otis & Co., supra."

WILLFULLNESS

Registrant strenuously contends that even if its activities were in contravention of the statutory provisions, those activities were undertaken in good faith and it did not, at any time, "willfully" violate the Act. In this connection, reliance is placed upon the fact that the transactions, herein found to involve violations of the Act, were effected only after registrant's counsel had advised it that those transactions would not violate any provision of the Act.

The term "willful" must be construed in its context. What is "willful" in one type of proceeding under a particular statute may not be "willful" under another statute. See United States v. Murdock, 290 U. S. 389 (1933); Townsend v. United States, 95 F. (2d) 352 (Ct. App. D. C., 1938). In our opinion, a "willful" act, as that term is used in Section 15 (b) of the Securities Exchange Act of

12 In the Otis case, the court held that Section 17 (a) (2) was violated where withholding agreements affecting 17,000 out of a total of 60,000 shares, or 28 percent of the total, were not disclosed to purchasers. The court stated:

Appellant's offer of Murray-Ohio stock at the market" was doubtless understood and intended to be understood to refer to current stock exchange quotations and implied a price standard that reflected the operation of a market that was free and open at least as far as appellant was concerned. Appellant bad agreements not to sell for sixty days from five stockholders, who owned 17,000 shares, and a promise from Bernet, who controlled 2,500 shares, that he would not sell except through appellant. It thus had control for the sixty-day period of approximately one-third of all outstanding stock, besides assurance or reason to believe that some 10,000 other shares would not come into the market. That these agreements had some effect in restricting the supply of the stock offered is not a matter of doubt. The Bernet promise enabled appellant to procure the withdrawal of 565 shares from the market. It thus appears that appellant not only had power to control supply, but used it. That such a situation is contrary to the implications of appellant's offer to sell "at the market" when it was stating that "higher earnings for the Company should affect the market price of this stock accordingly" is, we think, obvious.

Appellant has argued that there was no clear indication that it had procured sales of stock "by means of" its omission to reveal the withholding agreements and its purchasing activities. We have held that appellant's offer to sell "at the market" must have been understood to imply a price fixed by supply and demand free from artificial restriction and intentional stimulation, at least as far as appellant was concerned. Since price is of major significance in sales, it, as thus understood, unquestionably was an influential factor in inducing purchasers to buy, and we think it unnecessary to introduce testimony of particular purchasers, as contended by appellant, to show that they would not have purchased had they known of the withholding agreements and appellant's purchasing activities. It is enough that purchasers would understand that the stock was being offered at a price that had not been purposefully influenced by appellant.

The withholding agreements in the instant case covered approximately 60 percent of the total supply, or more than twice the percentage subject to withholding agreements in the Otis case.

1934, does not mean that the registrant must be aware of the fact that he is violating the law; he may willfully violate the law even though he is completely ignorant of the legal consequences of his act. American Surety Co. v. Sullivan, 7 F. (2d) 605 (C. C. A. 2d, 1925). We believe that registrant's violations of Sections 5 (a) and 17 (a) (2) of the Securities Act of 1933 were "willful," within the meaning of Section 15 (b) of the Securities Exchange Act of 1934. Registrant was fully aware of all that it was doing. It voluntarily undertook to sell the shares in question even though it knew that no registration statement was in effect as to those securities. And it voluntarily represented that it was selling shares "at the market," even though it knew of-in fact was partially responsible for-the withholding agreements under which 60 percent of the outstanding stock was kept from the market. United States v. Illinois Central Railroad Co., 303 U. S. 239 (1938).

There remains the question of whether revocation is in the public interest. Even though registrant has been guilty of a "willful" violation of the Securities Act, we may order that its registration be revoked only if revocation is in the public interest.

Revocation is a means of safeguarding the public against the activities of brokers and dealers who have willfully transgressed the law. Its purpose is to prevent a repetition of unlawful activity by terminating the right of a registered broker or dealer to make use of the mails or of any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security, as provided in Section 15 (a).

It is true that registrant has violated the Securities Act. It is likewise true that that violation was "willful" despite registrant's protestations that it had proceeded only after counsel had assured it that its proposed activity was lawful. See Sinclair v. United States, 279 U. S. 263, 299 (1928). However, upon consideration of all the facts, we have concluded that it is not necessary in the public interest to invoke so harsh a remedy as revocation in this case. In this connection, we note that exposure of registrant's illicit conduct. upon publication of this opinion may induce a more careful observance of the laws governing the sale of securities.

An appropriate order will issue.

By the Commission: Commissioner Healy dissenting. (See dissenting statement below.)

Commissioner HEALY dissenting:

With respect to the alleged violation of Section 5 (a) of the Securities Act of 1933, since the company acted upon advice of counsel on

a matter which was then not entirely free from doubt, I doubt whether the violation was willful and so I believe that no penalty should be imposed.

I believe that the registrant is guilty of having willfully violated Section 17 (a) (2) of the Securities Act in failing to disclose the "stand-off" agreements more fully explained in the majority's opinion. The practice of restricting the supply of a security while stimulating the demand therefor artificially increases the price of the security at the expense of unsuspecting investors to whom the security is being distributed. It becomes particularly vicious where the offering is "at the market" for such an offering implies a price fixed by the normal forces of supply and demand free from artificial stimulation. The existence of these agreements was a material fact and the failure to disclose their existence was misleading.

When the registrant commenced negotiating the "stand-off" agreements, it had the benefit of this Commission's earlier rulings to the effect that a failure to disclose such agreements would be considered to be a violation of Section 17 (a) (2) of the Securities Act and the decision of the Federal District Court for the Northern District of Ohio to the same effect in the case of Securities and Exchange Commission v. Otis & Co. Besides the members of the registrant are experienced in their business and must have known what the effect of their conduct would be.

In my opinion, the registration of Thompson Ross Securities Company should be revoked without prejudice to an application for reinstatement after an appropriate period.

118 F. Supp. 100 (D. C. N. D. Ohio 1936), affirmed 106 F. (2d) 579 (C. C. A. 6th, 1939). 6 S. E. C.

Index-Digest

The following digest of decisions presents a consolidated summary of the case headnotes arranged alphabetically according to topic headings. The digest is divided into three parts: Part I, containing decisions under the Securities Act of 1933; Part II, the Securities Exchange Act of 1934; and Part III, the Public Utility Holding Company Act of 1935.

The case headnotes have not been carried over verbatim into this digest. To facilitate the grouping together of decisions standing for a similar proposition under a single digest heading, it has been necessary in some cases to delete from the headnotes matter not pertinent to the general proposition for which the headnote stood, i. e., the names of companies, the principal amounts of security issues, etc. To the same end, certain case headnotes have been entirely redrafted for the digest so as to conform to a uniform statement of the general proposition. In a few instances, case headnotes, which were not considered important for the purposes of this digest, have been omitted from the digest altogether.

68.E. C.

285337-41-72

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