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Cashion

Cashion

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Published by: unionstatesassembly on Dec 16, 2012
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03/27/2014

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i.
1
"FRAUDONTHESELLESOFSECURITIES"
ADDRESS
of
EDWARDH.CASHION
CounseltotheCorporationFinance
Di
ussson,
SecuritiesandExchange
Comm~ss~on
beforethe
NA~IONALASSOCIATIONOFS!'A~E
SECURITIESCOMMISSIONERS
St.Louis,No.
Wednesday,December1~.1944.
"
 
 
Cashion
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1
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FRAUDON'IRESELLEROFSECUID:'IIFS
Mr.Chairman,membersoftheNationalAssociationofStateSecuritiesCommissioners,LadiesandGentlemen:AttheSt.PaUlmeetingyou~avemetheopportunitytodiscusswithyousomeofthecurrentsecurityfraudsandtheincreaseofourmutualresponsibilitiesandburdensinthatregard.AtthattimetheSecuritiesActwasonlyinitsninthyearofexistenceandyetweobservedthatevenwithinthatshortspaceoftimetheCommissionhadmetawidevarietyoffraudulentschemesdesi~nedtocirClnnventtheAct.Youandwehavefoundinourexperiencethattheingenuityofthosewhoseekto.promoteworthlessventuresfortheirQwnprofitisnotlimitedbyanystatutoryattempttoprohibittheiractivities.AsIrecallit,wefoundthatsomemodernpromoters,superficiallywell-versedinthewordingoftheSecuritiesStatutes.soughtinvariablytodisguisetheirfraudulentsaleofsecurities.AtthattimeIlimitedmyselftoadis-ouse
t
onoffraudinthe
sale
ofasecurity.'Theanti-fraudsectionoftheSecuritiesActproscribesfraud
only
In
thesale
ofsecuritiesthatis.fraudonthe
purchaser.
'!hereisanotherclassofpersons,however.whichneedsprotectionfromthosewhowouldtakeadvantageoftheirposi-tion.This-ctas
s-
con'sistsofthosewhohaveasecllrity-tosell.ItisaboutthosepersonsIwishtotalktoyoutoday:specifically,Iwishtodiscuss"FraUdontheSellerofSecurities".Itisasubjecttowhichenforcementagencieshavegiventhought,butafleldinwhichwehavenothadanopportunitytoexploretothesa~eextentasinthefieldoffrauduponthebuyerofsecurities.Forthatreasonwedonothavethesamewelldevelopedpatternofcorrectiveactionandremediesthatweareac-customedtointheotherfield.AsIseeItyouandwehaveconceivedourdutyasoneofprotectingthepublicfromwastefule~ploitatio~.Istherean~differenceinpro-tectingpeoplefrompurchasing.securitiesfromhi~hlyskill~dpromoters,thanthereisinprotectingpersonswhohaveventuredintothesecuritiesfieldfrom.sellingtheirsecuritiestopersonswhoadoptalmostasViciousatechnigpeinpersuadingthesellerstoQiveuptheirinvestmentbynondisclosureanddeceit?Ithinknot.Consequently,intoday'sdiscussionIwillnomorethanbrieflyrefertoafewprovislonsofthe
1933
and1934Acts,solelyinordertoemphasizerecentdevelopmentsinthecampai~nagainstsecuritiesfrauds.GenerallyspeaJdn~tthe
fl
rstottheAct.s,theSeCllrJtiesActof1933,wasdesignedtobringaboutadequatedisclosureofthenatureofsecuri-tiestobeofferedforsaletothepublicandtopreventfraudintheirdistributionorsale.AlthoughcertainsecuritiesandcertainsecuritytransactionsareexemptedfromtheregistrationprovisionsofthatAct,thereareno.exemptionsfromitsanti-fraudsection,Section
17
(a).TheSecuritiesExchangeActof1934anditssubsequentamendmentsweredesl~nedtoregulatetrading.insecuritiesthepurchaseandsale
 
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Cashion
-
'2
-
ofsecuritiesonnationalsecuritiesexchangesandintheover-tbe-countermarkets,andtor;u]atebrokersanddealers.'IheActanditsamendmentsweredesignedtostrengthenthefraudpreventionanddisclosareprovisionsofthepriorAct.Onestepinthatdirectionwasthepromlll-gationofaRulebytheCommission,nowknownasRuleX-1~Cl-2,.adoptpdpursuan
t,
toSection
15
(c)ofthe1934Act•.ThatRuleprohibitst'ra'.lo
by
brokersanddealersineitherthesaleorpurchaseofsecuritic;s.Anotherloophole,however,wasstilltobeclosedintheprotectionsadministeredbytheCommission.ThesteptoclosethatloopholewastakeninMay1942whentheCommission,actingpursuanttoSE'ctions10(b)and'23(a)of
tlle
Act,adoptedHule
X-10B-5.
ThisRuleembodiesthebroadanti-fr?udpro-visionsofSection
17
(a)ofthe1933Act,andspecific?llyprohicitFfraud
by
anyperson
inconnec
t
Lon
withthe
purchaseorsale
ofsecuritie!=;.TheRulereadsasfollows:"Itshallbeunlawfulforanyperson,directlyorindirectly,bytheuseofanymeansorin~trumentalityofinterstatecom~rce,orofthemails.or01anyfacilit~10fanynationalsecl.lritiesexchange(1)ToemployanydevIce,scheme"or-arti
fi
cetodef'eaud;
(-2)
Tomakean
y
untruestatemento
f
al'la,terialfactort.oomittostateamaterialfactnecessary.inorderto~akethestateF.entsmade.inthelightofthecir~lmstancesunderwhich
theyweremade,notmisleading;or
(3)
Toen@ac::einanyact,practice,orcourseofbusinesswhichoperatesorwouldoperateasafraudordeceituponanyperson,
I
inconnectionwiththepurche.seorsale
'Of
anysec-urity.
It
r
choosetotalkto
~TOU
about,
thlsbecausemany
LnquLr-Le-s
ShOt;linggreatpublicinterestintheapplicationofthisruleh2vebeent'i.ent:totheCommission.1wouldliketopresenttoyouthefactsof'Several:.'_'.cases.'Ihesearenothypotheticalsltuations.1_wanttoemphas
Lz.e,
hpw-ever,thatar-ecit.ationofthefactsofthesecaseeisnotin'any-waytobetakenasdelimitingtheextent..oftherule.Fraudof
i
tsel£'isnotafact.Itisbutaconclusiontobedrawnfromfacts.As.JudgeLalllll1oftheSupremeCourtofthisStatesaid:"Fraudiskaleidoscopic,infinite.
Fr-aud
beinginfiniteand
taking,
PD
proteanformatwill,werecourtstocrampthe~selves
by.
definingitwithahardandfastdefinition,theirjurisdictionwouldbecunn
Lng
Ly
cir-cumvent.edatcnee
by
newschemesbeyondthedefinition.Hessieurs,thefraud-feasors,wO'lldlikenottlingha.l
f
so\'lCllasfor'courtstosaytheywou~d~othusfar,andnofurtherinitspursuit."1/A11ttlemoret:,anayearaftertheadoptionoftherule"theCom-missionpublishedareporton1tsinvestigationconcerning"'l1,eRepurchase
-------~._~--~
-------------
...
~--------'.--"--
---
---
1/
Stonemets
v,
Head,
24-9
Mo.'243;154S.W.108(1913).
 
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