SEC v. NATIONAL SECURITIES, INC.

Decision: 8 votes for SEC, 1 vote(s) against
Legal provision: Securities Act of 1933, the Securities and Exchange Act of 1934, or the Williams Act

None

Print this transcript Transcript:

Argument of John P. Frank

Chief Justice Earl Warren: Securities and Exchange Commission, Petitioner, versus National Securities, Inc., et al.

Mr. Frank.

Mr. John P. Frank: Mr. Chief Justice, may it please the Court.

We heard the Solicitor General yesterday expressed his concern that the decision of the Ninth Circuit in this matter has somehow exempted all securities and securities transactions of insurance companies from regulation under the applicable Securities Act.

It is our belief and our argument to you that the Government gives this case an overbreadth that the Solicitor General may not be so concerned over the extreme range which he reads in the opinion which in our view is not truly there.

May we make perfectly clear that we have never -- I’ve been on this case for over four years and presented all of its arguments with my partners here, we have never doubted the general powers of the SEC over insurance company securities nor suggested making of the sort nor have the opinions.

We have no doubt at all that the registration of a public offering of an insurance company is required by law.

Indeed, these very briefs give citations of the manners in which this very company has had its public offering subject to registration.

We have no doubt that the insider disclosure provisions in connection with purchaser sale of company securities apply fully to insurance companies.

We have no doubt that all of the regulations as to the daily trading by insurance companies are fully applicable or that registration under the Investment Company Act of 1940 as well as the 1933 Act in connection with the sale of variable annuities is required.

It is our view that this is a decision which was accurately described by, let’s take an independent reader, Judge Harlan’s in the Southern District of New York recently had occasion to apply this Ninth Circuit case in a wholly different manner.

And he says, speaking of this case in that case, the one we’re talking about, the Securities and Exchange Commission sought to invalidate the merger of two stock life insurance companies on the ground that the antifraud provisions of the Securities Exchange Act of 1934 were violated.

What National Securities this case held was that the federal statute did not govern because it impaired a detailed state regulatory scheme specifically and directly aimed at the business of insurance.

Now let me give you briefly the account as we see it of what happened and what the issue is and how it comes here.

What it happened was that in late 19 or in the year 1964, an Arizona Company National Life was largely owned by another concerned National Securities.

National Securities people bought in on a second Arizona company.

It bought stock in a company called Producers Life.

And late in the year 1964, a merger proposal was made to merge these two companies.

Now let me say a word about the Arizona laws to insurance company mergers, what happens just as under our statutes is that first there must be approval by the directors of the two companies.

Then the matter is put up to shareholder vote in each company.

Thereafter, if it is approved by the shareholders, the matter then goes to the Director of Insurance and he must review the legality of the proposal and specifically under our code must consider it from the standpoint of general legality under our laws and in terms of the interest of shareholders specifically as well as the policyholders, and the merger becomes effective on his approval.

Now, what happened was this.

The directors did approve.

The matter went to the national shareholders they approved without question.

The matter then went to the producer shareholders and there, there was a considerable contest.

And there was a minority group which filed lawsuits and contested and there was ripsnorting good proxy fight to determine how those shareholders would vote on the question of this merger.

Thereupon, the SEC early in 1965 filed this action.

And the action which was filed was filed exclusively under Section 10 (b) of the 1934 Act.

And under Rule 10b-5 which I will be speaking about principally and the action at that time I should mention and this point may be important in view of what the Solicitor General said yesterday.

The action was brought against our clients, the people who were promoting the merger.

But it was also brought against the original sellers, the people from whom we have bought.

The so-called selling directors and I asked that that be held in mind for just a moment.

The action was brought but the thrust of the action as brought was that it was to enjoin the merger and to the shareholders meeting and to enjoin letting the matter be presented to the Arizona Director of Insurance.

Now, what happened was that an ex parte order was issued which we have no notice that is to say which did restrain these things.

And thereupon, we filed the usual motions.

And the matter came on before Federal District Judge Mathes and at that point, the court dismissed as to the selling directors.

And the selling directors are not in the case.

They’re not in the case now in any way and there has never been an appeal from the order in that respect.

And the matter which was turned was simply the question of whether our clients could be enjoined from going forward with this merger and specifically could be enjoin from presenting the matter that the shareholders whose meeting was in suspense waiting for the order of the Court as to whether they can vote on the merger whether they could.

Now in those circumstances, the essence of the complaint as made by the SEC as fairly summarize in the Government’s brief was that there was objection to four elements of the proxy solicitation which had been going forward in connection with this merger in connection with the shareholders meeting.

And there were, as I said there had been minority shareholders suit and you can see from the record that the matter came on and the crowded courtroom before Judge Mathes with the minority shareholders present, the SEC present and Judge Mathes said “No, I believe that this is a matter as to whether this merger can go forward which properly has to be taken up with the Director of Insurance in this state.”

If the shareholders approved of it then Judge Mathes turned to us.

We asked that you stipulate that there will be a fair period of time and that you’ll give notice to the SEC so that the SEC can present to the Arizona Insurance Commissioner any facts which it regards as relevant or important in connection with this merger.

And he broadly admonished the shareholders present if any of them are dissatisfied and the SEC that they should take their problem to the Arizona Director of Insurance.

Thereupon, he vacated substantially all of the term of the operative portions of the temporary restraining order.

And at that point, the matter did come on before the stockholders who overwhelmingly approved the proposed merger.

And the matter went over to the Arizona Director of Insurance.

And at that point we did as we have agreed we would serve notice on the SEC that it was being presented to the Director of Insurance.

And the SEC thereupon presented to the Director of Insurance all of the papers that are in this case, its pleadings, its affidavits, and all other matters.

And sent them down with the suggestion that Director of Insurance should take these things into account in deciding whether to permit the merger or not.

Thereupon, after a reasonable period, of time, the Arizona Insurance Director did approve the merger.

And at that point, the Commission which had sought no stay there had not gone to other circuit had not come here, thereupon amended its complaint.

I got leave to amend and did amend.

And it then presented and amended complaint and in the light of the comments of the Solicitor General, I think that perhaps would be worthy of noting that the amended complaint and its operative portions of course contained in the appendix and all I wish to say is that what the amended complaint asked for was that the merger be nullified.

Unknown Speaker: Where is that in the record?

Mr. John P. Frank: That is at page 99, Mr. Justice.

And you’ll see there that what they asked at the top of the page was that, no steps be taken toward the merger while the merger was already done.

That it become obsolete.

The next paragraph is that the merger should be nullified and that the whole thing should be set aside.

Then in the remaining paragraph, there is a passage which relates to the original contract of purchase but that was of no consequence because that was directed at our clients and their actions and the actions of the selling directors.

But the selling directors weren’t parties.

The SEC moved to rejoin them as parties but that motion was denied and they never appealed it.

And what they asked for in the remainder was in effect steps which would further nullify the merger and undo the action that was taken.

Now, really the precise question which is here is not some broad issue about the relationship of the securities laws in the insurance industry.

What is before this Court, what has been before the parks below is simply this question.

Does Rule 10 (b) 5 give the SEC power to stop or reverse a merger of insurance companies on the ground of asserted misleading proxy solicitations.

And we say the answer to that question is no.

And we say no on three independent grounds. Anyone of which is sufficient for the purpose.

We say no first of all on the ground that the McCarran Act in the light of the Arizona statute bars this intervention by Federal Court and by the SEC and the Ninth Circuit and the District Court took that point of view.

Second, we say as a wholly independent ground that the whole thrust of what the SEC was seeking to do is here is to enjoin the merger or set it aside on the ground of some alleged improprieties to the proxies.

But they bring this action under Section 10 under Rule 10 (b) 5.

And Section 10 and Rule 10 (b) 5 don’t deal with proxies.

There’s a wholly different Section.

A Section 14 which does deal with proxies.

And this is important because that I’m going to develop it in a moment.

The proxy rules and provisions did not apply to this particular insurance company at this time at all.

That would not take effect until the year 1966 and more than that.

Congress had expressly provided that by a different Act which was not mentioned yesterday but which is discussed in the briefs into which I’ll come back has expressly provided that insurance company proxy solicitations are to be subject to state control.

And the Ninth Circuit in general took our position on that point.

Then there was a third ground which we advanced and I’d like to have that clearly in focus.

Rule 10 (b) 5 applies only to the purchased and sale of securities and if therefore there wasn’t any purchase or sale then there is no scope, no place of operation for the rule.

And the real question in the case therefore at the Lower Court stage was whether a so called statutory merger was a sale of securities at all, and hence, whether it was within the scoped of the statute in this rule.

And as I will develop in just a moment when Mr. Justice Douglas was at the Commission, when Justice Fortas was at the Commission, the Commission took the view that a statutory merger was not a purchase or sale and the Ninth Circuit had expressly so held on the basis of a recommendation of the Commission.

And so on, and in more recent years the Commission has reversed itself, and abandon that position.

And now seems to extend Rule 10 (b) 5 to mergers.

So one of the questions what the SEC said in the Ninth Circuit was the most important question in the case was whether the Ninth Circuit would overrule its earlier opinion on this point.

The Ninth Circuit did not need to decide that particular question having decided the McCarran Act question.

Now, one problem which is before this Court is, how many of these independent grounds will it consider?

And we respectfully submit that it should consider them all.

The Government says no, it should not consider the Rule 10 (b) 5 or this purchase on sale problem because it was not expressly decided by the Ninth Circuit citing to an opinion of Justice White which typically holds that where there are complex factual issues, which were not considered at the Circuit, then this Court may in its discretion remand to permit those complex factual questions to be considered rather than consider them here.

But the purchase and sale problem is not accomplished factual question.

It is a pure question of law.

There is no factual record.

The matter went off on affidavits and a motion.

And we submit therefore that in your discretion this is an independent ground for decision which it may properly consider.

Unknown Speaker: Well, Mr. Frank.

Mr. John P. Frank: Yes.

Unknown Speaker: I mistakenly don’t reach that if we agree with the Ninth Circuit about the McCarran Act point, is that correct?

Mr. John P. Frank: Your Honor, these are truly independent and then you can rest it on any of them but the most obvious thing to do --

Unknown Speaker: So when you say, when you’re urging us to consider them all.

Mr. John P. Frank: The most obvious thing to do --

Unknown Speaker: Well you say your urging us to consider them all.

Mr. John P. Frank: Only if you --

Unknown Speaker: Of course only if we decided against you on McCarran act wouldn’t that be?

Mr. John P. Frank: That is right.

And Your Honor, let me now address myself to the proposition.

Such a misfortune should not occur.

Unknown Speaker: You’re not confessing judgment on the McCarran Act point?

Mr. John P. Frank: We are not Your Honor.

Though I must say that if I thought that this opinion was as broad as the SG, Solicitor General has had, I would confess there, we have never made any contention of this broad scale sort has been the concern of the Government.

Unknown Speaker: Mr. Frank, may I ask you, one question.

Suppose a stockholder of one of the merging companies when in the Federal Court on the basis of diversity of federal law and brought an action for injunctions, suppose he prove that material misrepresentations or fraud -- fraudulent statements and representations had occur in the solicitation of the exchange of securities.

As a technical matter, would that be a basis for the grant of injunctive relief?

Mr. John P. Frank: Your Honor, it might very possibly be the basis for a grant of injunctive relief if he went in on diversity grounds and not under Rule 10 (b) you’re claiming under the statute and that is exactly what happened, Your Honor.

Unknown Speaker: You spoke, yes, I understand that but you spoke earlier about the SEC enjoining the merger of what has happened is that the SEC has resorted to a court and has said that there is a violation of a provision of federal law that prohibits the use of manipulative or deceptive devices in connection with the sale or exchange of a security.

Now forgetting all your other points, the SEC is going in there as a litigant.

And it is asserting a point of law based upon a specific provision in the federal act.

Now you have to take it that your first task is to persuade as that that is a regulation of the business of insurance. And therefore the McCarran Act applies, is that right?

Mr. John P. Frank: That’s right Your Honor.

And we, in other words have this been a diversity action based on state law then none of these problems would be here.

We had such a thing.

We did litigate it, it was disposed of.

Our problem now is whether the rule and I’ll turn directly to your point under the McCarran Act reaches can be allowed to reach a statutory merger of insurance companies.

Unknown Speaker: Suppose in the consummation of this merger there had been a violation of the postal laws.

You’re not suggesting that the McCarran Act would preclude criminal prosecution under the postal laws?

Mr. John P. Frank: Your --

Unknown Speaker: What you’re saying is that the remedy sought here, the remedy rather than the cause of action is precluded by the McCarran Act, is that it?

In other words or let’s take it another way, Mr. Frank.

Let’s suppose that the SEC through the Department of Justice started a criminal prosecution against the company or against the company and some of its employees for fraud committed in effecting this merger.

You would not argue that that’s precluded by the McCarran Act, would you?

Mr. John P. Frank: Your Honor, it would depend upon whether there was a state law dealing truly and effectively with the very same subject.

Unknown Speaker: Take this precise situation.

Are you saying or are you not that the McCarran Act would preclude a criminal prosecution or a fraud in connection with the exchange of securities and this merger which fraud was by my hypothesis a violation of the criminal statute, its federal criminal statutes and would you say that the McCarran Act precludes that?

Mr. John P. Frank: Your Honor, I could -- I would have to answer that I believe that the answer is no because the State of Arizona has no direct or equivalent criminal law dealing with that exact subject.

Unknown Speaker: They said it?

Mr. John P. Frank: The test and the reason I put it in alternative fashion, Your Honor is that your question takes me by surprise and I would have to look back to the Code Criminal Provisions to be absolutely certain.

Unknown Speaker: I don’t think it takes you by surprise, Mr. Frank but the problem point that I’m trying to which I’m asking you to address yourself because it seems a little inevitably involved in this case.

You objected to the Solicitor General’s argument because you said it’s too broad and that there is an area which is not foreclosed by the McCarran Act.

Well, I suggest to you that perhaps i dare you include on the base of sided cases, criminal prosecution and the federal statute for fraud in connection with sale of securities.

Mr. John P. Frank: And Mr. Justice there is the case which probably is in your mind.

At least it’s well known to circuit court cases.

The case of Salvanas from the Seventh Circuit.

Salvanas holds that a postal --

Unknown Speaker: And what you’re -- so that what you’re objecting to here, what you’re saying here as I follow your argument may be that the McCarran Act precludes the remedy here.

What the SEC seeks --

Mr. John P. Frank: Your Honor, --

Unknown Speaker: Following the course rather than the application of 10 (b) 5 and if I’m wrong I want you to tell me.

Mr. John P. Frank: Alright.

And your answer, we do say that this is wrong.

This basis that the pleadings here taken as a whole if you read the whole complaint and the whole amended complaint.

Taking the complaint and the documentation and the remedy portions altogether are solely and exclusively directed to the object of offsetting an Arizona Insurance Company merger and that we say cannot be done under the McCarran Act whether you call it a cause of action or a remedy or a merger of the two of them.

And this is because Mr. Justice we have a very express code.

Our code provisions are set forth in our own brief if perhaps you had a chance to look at them earlier but as you will see, we have page 49 gives the provision express language right in the heart of our insurance code.

As to what is the function of the insurance department and connection with a merger of insurance companies and against this must be balance the fact that the McCarran Act expressly says that no state law shall be allowed to invalidate, impair, or supersede, I’m sorry, that no federal law will be allowed to invalidate, impair or supersede a state law which deals with the business of insurance.

And I have put this question to the Government and I put it again, and I put it with the utmost urgency.

I cannot concede of how it would be possible more totally to supersede the Arizona Code 20-731.

And to sustain a position of the SEC in this action because the entire method that they are saying is that there shall be no merger in the entire method that the state is saying under this provision is that there shall be a merger.

Now the Government in its brief, impression arises is the merger and thus the existence of an insurance company to be regarded as part of the business of insurance.

The Government in its brief says expressly at page 17, historically such matter as the chartering and licensing of insurance companies are matters for the state.

That is exactly what we are dealing with here.

The question which was presented to the Arizona Insurance Director was whether the merge of these insurance companies was to be allowed to give birth of what is for all practical functioning purposes a new insurance company.

Justice Byron R. White: Well, Mr. Frank doesn’t Arizona also where the Commissioner or some regulatory body there have some proxy rules?

Mr. John P. Frank: Your Honor, may I answer that in terms of how it was done and how it is now.

Unknown Speaker: How about now?

Mr. John P. Frank: At the present time, there is comprehensive regulation because Your Honor, in 1964, Congress passed what are known as the 1964 Amendments of which I assume you’re familiar.

Those Amendments expressly provided that the states should have proxy control and insurance companies if they would adopt regulations of the National Association of Insurance Commissions.

And the State of Arizona, like all the other 50 -- the other 49 states have adopted some regulations.

So that we now have a compressive regulatory code over proxies, at the time however, --

Justice Byron R. White: Which apply in the proxy rules that the Commission don’t apply?

Mr. John P. Frank: That is right.

It is now clear that proxy rules of the Commission do not apply and that brings me to the other aspect of the matter Mr. Justice White.

The situation is that Congress has expressly by the clear language of the 1964 Act.

Expressly and precisely provided that the proxy rules of the SEC should not apply to the insurance companies.

Justice Byron R. White: This case had would never happen again?

Mr. John P. Frank: That is the whole point, Your Honor.

Frankly, we suggest it originally.

I make bold to suggest now that this is a case in which the certiorari has been improvidently granted because this is the last, conceivable case in the United States in which this question could possibly come up.

Because now, all of the states have full scale proxy regulations but Your Honor, I want to make clear that we have had a good long a subject then because Arizona had adopted what is called a little McCarran Act earlier and we had it as statutes expressly said in order to comply and me to require the McCarran Act and so on.

And this included numerous though less comprehensive restrictions which would relate to illegalities as to any financial statements.

Unknown Speaker: Well what -- Alright, what about then if Arizona then had some rules where you’re applying the proxies and the SEC had some rules applying the proxies and under the federal law that those statement was there.

Under the state law it was good.

Mr. John P. Frank: And the answer Your Honor is this.

That the McCarran Act, this I think is the most fundamental single error Mr. Justice that we believe the Government makes.

The Government takes the position in its brief that there must have been no errors on the law in point because it disagreed with the Commission.

As for the consequences of these particular statements, our position is to the contrary, Your Honor.

Your decisions under the McCarran Act do not provide, do not require that the state must automatically agree with the Federal Government.

Under your decisions, it is sufficient.

Unknown Speaker: Was --so your answer -- your answer is there is there is really a conflict between there and if there was a conflict then between Arizona and the federal law, Arizona law would control?

Mr. John P. Frank: The conflict was not in the law so much as in its application, Mr. Justice.

Unknown Speaker: Let's assume there was.

Assume there was.

Mr. John P. Frank: Yes, our position is --

Unknown Speaker: That Arizona would control?

Mr. John P. Frank: Our position would be that the Arizona law would control as to the weight to be given to the significance of one of the proxy statements.

Unknown Speaker: Which I think is certainly part of the Government’s point here that it’s the securities laws are going to apply at all here.

They -- certainly they should be able to apply the extent of being able to save and to enjoin it and to enjoin the use of a proxy statement which violates the federal law.

Mr. John P. Frank: Your Honor, yes and I’d like to --

Unknown Speaker: Even if under Arizona law that proxy statement is good.

Mr. John P. Frank: That is correct and the whole point we make is Your Honor, what your cases have said repeatedly is that the states need not simply automatically echo or rubberstamp the Government.

It is enough if there is legislation which fairly is directed to the same general matters.

Let me be precise about this.

In this instance, there is for example as the problem whether a given financial fact was not disclose but it is possible to argue that the fact was adequately disclose on some other page of some other document.

Now that kind of a determination has to be made by somebody and our point is that it is a decision which could be made by the Arizona Director.

These are none of the great mammoth points of departure.

They are simply questions of who is going to determine what weight is to be attached to one detail or another.

Unknown Speaker: Mr. Frank, the 1964 Amendments don’t apply to this case, do they?

Mr. John P. Frank: No, they do not Your Honor.

Unknown Speaker: Right.

Now, second, it’s been -- it was my understanding that this 1964 Amendments which became effective in 1966.

Applied or intended so far as irrelevant to displace the federal act by the state, by appropriate state acts only with respect to regulatory provisions and not to displace the manipulate or entire manipulation on antifraud provisions such as 10 (b) 5.

Mr. John P. Frank: Well --

Unknown Speaker: Do you disagree with that?

Mr. John P. Frank: Your Honor, I simply approach it differently.

And it is our position that what was intended if I may meet that very squarely, what was intended at least was to determine whether proxy solicitations in connection with mergers would or would not be subject to federal state law.

And --

Unknown Speaker: Well, yes, whether you have to break the maybe, what I’m suggesting to you is that you have to break that down now.

That is to say that there is, there are regulatory provisions and their entire fraud provisions.

And the question in this case seems to me at the moment anyway is whether and -- whether the McCarran Act was intended to displace the antifraud provisions.

Number one, certainly it doesn’t displace Postal Act.

And number two, does the McCarran Act have an effect or have some impact upon the relief that the SEC can obtain in court with respect to merger which has been approved by state commissioners.

Mr. John P. Frank: Yes.

Mr. Chief Justice, I’d like to -- I see my time is --

Justice Abe Fortas: Yes you may go ahead.

Mr. John P. Frank: May I take a moment or two to wind up.

Mr. Justice Fortas, all I can say is that if that was the Commission’s point of view now, it was not the Commission’s point of view when it presented the 1964 Act to Congress.

Because in the 1964 hearings, they went in and they said, we need this legislation for the purpose of controlling.

Proxy solicitations in connection with mergers and they expressly said so.

And at no point did they say now we already have this power in some respects.

Or we have it for regulatory purposes.

We have it for any purpose rather they went to Congress saying that they needed this power.

And now in this case they tell us that they had it all the time.

I have not, I’d like if I may to mention, only to wined up Mr. Chief Justice because my time is done.

I bring to your attention expressly that Congress has repeatedly had before it the question of whether it ought to take hold of insurance mergers and has decided to the contrary.

We quote a report of the Senate Judiciary Committee in which that committee expressly takes up the subject to mergers and says, “This is clearly an area where amendments to the McCarran Act may be needed.”

But none such have been passed.

I will not have the opportunity of discussing with you Your Honors, the sale problem because of the expiration of time.

But I commend that to your consideration in the briefs which we have presented to you.

I repeat, when Mr. Justice Douglas and Mr. Justice Fortas were with the Commission, their position was that these provisions of law did not apply to mergers at all.

It is our position that if it is to be applied to mergers such it certainly not be retroactive as against the company such as ours which could not possibly reasonably been expected to know that that was the law when it faced these problems, I would leave the matter, Your Honors with simply these questions.

How could the SEC more totally supersede our law by doing what is it doing here and the answer is, I think it would be impossible.

It runs a snowplow straight to it.

The real question is who has the power to decide whether two insurance companies may merge or not the most fundamental conceivable question in the business of insurance.

But with special attention to the mattes which Justice Fortas has raised.

Why did the SEC tell Congress in 1964 that it needed the proxy amendment to reach mergers it already have that power?

And finally, I think the most serious question of all under the McCarran Act.

Why did Congress, and this relates to the colloquy with Justice White, why did Congress expressly provide in the 1964 Act that insurance proxy solicitation should be under state control if intended insurance proxy solicitations to be under federal control.

Thank you very much.

Print this transcript Transcript:

Argument of Griswold

Chief Justice Earl Warren: Securities and Exchange Commission, Petitioner versus National Securities, Inc.

Mr. Solicitor General.

Mr. Griswold: Mr. Chief Justice and may it please the Court.

This case is here on a writ of certiorari to the Ninth Circuit Court of Appeals.

It involves the construction and application of the McCarran-Ferguson Act and its interrelation with Section 10 (b) of the Securities Exchange Act of 1934.

The text of those two statutes is given on pages 33 and 34 of the Government's brief and this case.

I would call attention to the provision in Section 10 (b) which makes it unlawful for any person to use or employ any connection with the purchase or sale of any security registered on the National Securities Exchange or any security not so registered.

The net result of those two phrases is simply to apply to any security any fraudulent device as defined by the rules of the Securities and Exchange Commission and the relevant Rule 10b-5 is set out at the bottom of page 34 and on page 35.

The text of the McCarran-Ferguson Act is on page 33 of our brief and the relevant portion there although it's all relevant but the part that comes closest is Section 2 (b), no Act of Congress shall be construed to invalidate, impair or supersede any law enacted by any state for the purpose of regulating the business of insurance or which imposes a fee or tax upon such business unless such acts specifically relates to the business of insurance and I would suggest that the keywords in that provision of the McCarran-Ferguson Act are the business of insurance.

The present case began in March 1965 when the Securities and Exchange Commission filed its petition in the District Court for Arizona.

It sought to have that court enjoin the respondent here, the National Securities, Inc. and it subsidiary and certain officers and employees from violating Section 10 (b) and Rule 10b-5 on the ground of asserted fraud in connection with purchase or sale of securities.

In due course the defendants filed a motion for judgment on the pleadings or in the alternative for summary judgment, the motion for judgment on the pleadings was granted by the District Court and this was affirmed by the Court of Appeals.

As the Court of Appeals stated in its opinion in this situation, the allegations and the amended complaint must be presumed to be true.

And these allegations may be summarized this way.

It is alleged that the respondent, National Securities, Inc. is a holding company which owned two-thirds of the slightly more than a million shares outstanding of National Life which was in Arizona insurance company.

Producers Life Insurance Company was another Arizona company.

It had some 881,000 outstanding shares held by approximately 14,000 stockholders in many states.

In other words, it was quite widely distributed.

The allegation is that the defendants formed an illegal scheme contrary to Section 10 (b) under which National Securities would acquire control of Producers Life, National Life, and Producers Life would be consolidated and the consolidated company would pay a large part of National Securities cost of acquiring control of Producers Life.

In carrying out the scheme, National Securities purchased the stock in Producers which was held by four of Producers' directors and agreed to pay them a very large sum for there agreement not to compete with Producers Life or any successor company.

The National Securities also purchased from Producers Life more than 50,000 shares of its treasury stock and assumed some $600,000.00 of liabilities of Producers Life arising out of previous agreements which had been made with other persons not to compete with it.

It was further alleged that National Securities did not disclose to Producers Life or its stockholders that it intended to impose both of this liabilities with respect to agreements not to compete upon the corporation which would result from the plan consolidation of Producers Life and National Life.

After obtaining control, the Producers Life according to the allegations again, National Securities cause the latter to mail to its stockholders materials soliciting them to approve the propose consolidation with National Life.

And it was then alleged that this material was false and misleading on four grounds: (a) That it did not disclose the liability on the agreements not to compete.

(b) That it predicted substantial consolidated earnings without disclosing that Producers Life and National Life had each had losses in the prior year.

(c) It set forth on the pro forma balance sheet for the consolidated company and asset shown as treasury stock in the amount of more than a million dollars that was alleged to be illusory and finally that it did not disclose in its report to the -- that in its report to the Arizona Insurance Commission, the National Life had written down the value of its investment in Producers Life by more than a million dollars.

The court allowed the defendants to submit the proposal to the Arizona Insurance Commission and to the stockholders.

Both approved the plan and that was carried out.

It was then that the Securities and Exchange Commission filed the amended complaint which is now before the Court seeking such relief as might be appropriate under the circumstances.

In its answer to the amended complaint and in its motion for judgment on the pleadings, the defendant contended that the District Court has no jurisdiction because the matters complained of are entirely within state jurisdiction as provided in the McCarran Act, thus, raising the issue which is here.

The District Court accepted this contention as one of its grounds of decision and the Court of Appeals affirmed the District Court's judgment on this ground alone.

The opinion of the Court of Appeals is in rather sweeping terms.

The relevant portion for this part of my argument appears on pages 156 and 157 of the appendix near the bottom of page 156, we are left then with a general intention to set the insurance business outside the scope of all existing and future legislation regulating interstate commerce without any more direct evidence that Congress had in mind in the Securities Exchange Act.

However, Congress was apparently seeking to define an exemption for insurance and then the word is conterminous but I supposed we usually say co-terminus with its power to regulate interstate commerce.

The Court is there saying that with respect to insurance in so far as Congress would have power to regulate any aspect of it under its commerce power, the effect of the McCarran Act is to say that that power is not being exercised.

And over on page 157, just above the middle, the court said and equally vital purpose of the McCarran Act was to preserve intact from any federal intrusion based on the Commerce Clause existing and future state regulation of the insurance industry.

Thus the sole issue is here whether this construction of the McCarran-Ferguson Act and determination of its effect are correct.

Or whether the facts alleged are sufficient state of cause of action under Section 10 (b) of the Securities Exchange Act of 1934 despite the provisions of the McCarran-Ferguson Act which was passed in 1946.

I will now turn to the legal questions involved in the case.

It maybe that I have a somewhat narrow alleged stand on but I think the footing is firm.

When Section10 (b) was enacted in 1934, there was no doubt that it applied to fraud and the purchase and sale of all securities, you'll recall the phrase in the statute is any security including those in insurance companies.

This was true despite the fact that it was the common understanding at that time that the federal government had no power to regulate “the business of insurance.”

A clear distinction was evident between the business of insurance on the one hand and securities of a company which is engaged in conducting the insurance business.

In 1944, the South-Eastern Underwriters case was decided followed in 1946 part of the enactment of the McCarran-Ferguson Act.

The South-Eastern Underwriters case undoubtedly involved the conduct of the business of insurance the way in which insurance companies operate together in fixing their rates and had nothing to do with transactions in securities of an insurance company.

The distinction was explicitly made in the McCarran-Ferguson Act itself for it said that no Act of Congress should supersede any law enacted by any state for the purpose of regulating the business of insurance.

Now these was emphasized in the report of the House Committee set forth on page 24 of our brief where the Committee said, it is not the intention of Congress in the enactment of this legislation the closest states with any power to regulate or tax the business of insurance beyond that which they had been held to possess prior to the decision of the United States Supreme Court in the South-Eastern Underwriters Association case.

In short, the function of the McCarran-Ferguson Act was to restore the status quo to put things back where they were before the South-Eastern Underwriters case was decided except that it was made explicit that the Sherman Act, the Clayton Act, and the Federal Trade Commission Act should apply to the business of insurance to the extent that such business is not regulated by state law.

It was only with respect to these three statutes that there is any indication that federal law should apply only if there was not an applicable provision in state law.

Throughout their history, both before and after the enactment of the McCarran-Ferguson Act, the provisions of the securities law relating to securities and the security's law don't relate to the business of insurance.

The provisions of the securities law is relating to securities have been regarded as applicable to securities and insurance companies.

We have listed many of these instances in the footnotes on pages 16 and 17 of our brief.

Thus, issues of insurance company securities have been registered under Section 6 of the Securities Act of 1933.

Securities of insurance companies listed on National Exchanges have been registered with the Commission under Section 12 of the Securities Exchange Act of 1934.

Persons who buy and sell insurance company securities have been registered under Sections 15 (b) of the Securities Exchange Act.

Investment companies with portfolios consisting of insurance company securities have been registered under Section 8 of the Investment Company Act and persons selling insurance company securities and a fraudulent manner have been enjoined and convicted in a considerable number of cases.

The decision of the court below which fails to recognize the distinction between the business of insurance to which the McCarran-Ferguson Act applies and dealings in securities which happen to be stocks and insurance companies would sweep all these away and broadly exempt all dealings and insurance securities from application of the federal laws.

This is the effect of the decision below where the court said Congress was apparently seeking to define an exemption for insurance conterminous with its power to regulate interstate commerce.

If Congress was intending to do that, obviously it swept away all applications of the insurance -- of the securities laws to dealings and insurance securities.

Justice Potter Stewart: Mr. Solicitor General, one of my difficulties in reading the briefs and advanced argument in this case which continues now is that you and your adversary don't really seem to argue as to what this case is about.

Is that fair to say?

Mr. Griswold: Well, I think there is something about that.

Mr. Frank weighs a lot of other questions which present some difficulties which were not decided by the --

Justice Potter Stewart: Well, I'm not referring to the purchase and sale difficulties.

I'm talking really about the if not the broad question to which you are now addressing yourself and you are quoting to us some very broad language of the Ninth Circuit Court of Appeals but the decision was not part of the District Court as affirm by the Court of Appeals simply that the McCarran Act foreclosed the undoing of a merger that had been approved by the Arizona Commission.

That's the holding in these cases, isn't it?

Mr. Griswold: Not exactly Mr. Justice Stewart.

Justice Potter Stewart: Tell me why.

Mr. Griswold: We didn't ask for the undoing of the merger in the exclusively as our only relief in the amended complaint.

We ask for such relief as would be appropriated under the circumstances and it may well be that the merger should be left merged.

But that individuals who have profited by the transaction should be required in some way to account either by disgorging to the merged company or by making payments to the shareholders who did not participate from it, all the questions of relief are left undecided both by the District Court and the Court of Appeals because they didn't get to them having held that the McCarran-Ferguson Act eliminated the whole matter.

Justice Potter Stewart: I didn't understand the District Court or the Court of Appeals really to have held that the neither the 1933 Act or the 1934 Act was completely inapplicable, or completely inapplicable to the dealings and securities of insurance companies.

Mr. Griswold: Well Mr. Justice, I can't read that language on page 157 or the Court of Appeals in any other way, and equally by it on purpose of the McCarran Act was to preserve intact from any federal intrusion based on the Commerce Clause existing and future state regulation of the insurance industry.

And that would apply to any fraudulent sale of insurance stocks.

Now it is true that this case does involve a merger of an insurance company and Mr. Frank argues that approving a merger is in some way analogous to the question of chartering and insurance company.

I find it difficult even with that is fine anything in the McCarran-Ferguson Act which says that when this is done in a fraudulent way, that the provisions of the Securities and Exchange Act are superseded, are written off, are in effect repealed.

I pointed out that the practice has been consistently to the contrary.

Both before the McCarran-Ferguson Act was passed and I think that is very relevant before the South-Eastern Underwriters case was decided.

It was then regarded as the appropriate construction of the Securities Acts that they were applicable to transactions of purchases and sales as the language of the statute with respect to insurance companies as to any other securities and we think that the effect of the decision of the Ninth Circuit is to make the insurance -- is to make the security statutes inapplicable to transactions to dealings, to actions with respect to securities in insurance companies and it is our contention that that is not the proper construction of the McCarran-Ferguson Act which relates to the business of insurance to the things done by insurance companies with respect to their policyholders but not to transactions done by other persons with respect to securities in insurance companies.

There are obviously other federal statutes of general application which were applicable to insurance before the McCarran-Ferguson Act was passed and which continued to be applicable to insurance thereafter.

This includes the copyright and patent laws and insurance company is not exempt from the telephone tax or the social security tax.

It's not free to issue counterfeit money if it doesn't have enough to meet its legitimate claims.

It's subject to the postal laws including those making at a crime to use the mails for the purposes of fraud.

And I would point out that Section 10 (b) is based on the postal laws as well as on interstate commerce and that the mails were so used.

And that there are a sizeable number of prosecutions both before and after the McCarran-Ferguson Act for using the mails to defraud with respect to the sale of insurance securities.

These matters are not referred to in the McCarran-Ferguson Act but it cannot be supposed that Congress contemplated any change in the law with respect to them.

As I've said, we're dealing here with the statute which is based in part on the postal power.

There's no reason to think that Congress in passing the McCarran-Ferguson Act intended to allow an insurance company to use the mails to defraud stockholders.

Justice Byron R. White: Mr. Solicitor General, I take it then you would say because this is a -- this is not a matter of regulating insurance but neglecting stock transactions that if there are federal regulations as to which should be in a proxy statement in connection with the merger conflict between the federal regulation, the state regulation.

The state regulation approves a proxy statement and the federal authorities disapprove that Federal Act govern.

Mr. Griswold: At this particular time, there was no --

Justice Byron R. White: Yes.

Mr. Griswold: -- federal provision with respect to --

Justice Byron R. White: But you would say that the federal law would?

Mr. Griswold: The federal law would govern to the extent that the fraud was proved and found by the court.

Justice Byron R. White: That it was a stock formed by the insurance.

Mr. Griswold: Yes, Mr. Justice.

Justice Hugo L. Black: Oh!

There had been no northeast -- southeastern case?

None at all?

Is it your belief that under the law there's a then existent Congress could have passed bill regulating this very thing under the Commerce Clause?

Mr. Griswold: Yes, Mr. Justice.

It is our view that that's just what Congress did do in 1933 and 1934, that it passed a law regulating transactions of purchase and sale of any security and that that included securities in insurance companies and was so construed by the Commission and in a very few cases by the courts between 1933, 1934, and 1944 when the South-Eastern Underwriters case was decided.

Justice Hugo L. Black: I asked you that question because I have been under the impression having some little addresses in South-Eastern Underwriters case that was the purpose of Congress to do away and time they would expect so long as relying on the Commerce Clause's concern and in insurance business, I admit that I agree with that, and would you not have to if that was the case.

Would you not have to show that even without that will, if that case had never been decided would not change the rule.

That Congress could have and would have passed this Act.

Mr. Griswold: Yes, Mr. Justice that's exactly the argument we do make that Congress had this power and exercise it before 1944 and that for that reason, the enactment of the McCarran-Ferguson Act which was intended to restore the status quo did not and was not intended to take away the effect of the statute which Congress had previously passed with respect to securities.

Justice Hugo L. Black: Had there been any cases before the South-Eastern which so held?

Mr. Griswold: No cases in this Court.

Certainly, there was a modestly considerable amount of practical experience in the Securities and Exchange Commission including registration of securities and things of that sort.

Justice Hugo L. Black: It had not been challenged on that ground?

Mr. Griswold: Never had been challenged on that ground that I'm aware of.

Now, --

Justice Abe Fortas: But Mr. Solicitor General, I'd like to direct your attention again in this line of thought.

As I understand your adversary, it says that the merger, the merger itself of these companies was proved by the insurance commissions.

Now, arguably I supposed he would say that the merger is certainly insurance company talking about the merger of two insurance companies here.

Now then along comes the SEC and says that this aspect of that merger is subject to federal law namely the terms of the offer of exchange the solicitation of the stockholders.

It says that therefore it's in conflict with the McCarran Act because this is something, the merger that is insurance business.

It's a merger of two insurance companies.

I don't profess to state --

Mr. Griswold: Mr. Justice, I think you stated --

Justice Abe Fortas: -- that's my understanding of it?

Mr. Griswold: I think you stated the issue and very clearly and very precisely.

There is of course some overlap here.

I think a considerable part of our concern is with the sweeping nature of the opinion of the Court of Appeals which says that the McCarran-Ferguson Act wiped out completely all aspects of the securities regulation with respect to insurance.

When you come to the question of a merger, I think it is a nice question as to what is meant by the business of insurance and I think an argument can be made which is the one we stand on that the business of insurance relates to the internal operations of insurance and not to dealings in securities which Congress has so clearly taken over for a federal authority.

Justice Abe Fortas: Let me see if I understand it because I do believe that this is where the argument of the two parties comes in collision.

What you're saying is perhaps a merger of two insurance companies is the business of insurance for signs in some respects.

But to the extent that it involves a solicitation of stockholders consent that a security holder's consent said that that is not.

That aspect of it is not the business of insurance.

Mr. Griswold: The dealing with the security holders we would contend is not “the business of insurance” as was meant by Congress when it used those words in the McCarran-Ferguson Act.

Let me -- there is one decision of this Court which is pretty close in many ways which is the United Benefit Life Insurance Company case decided only a short while ago.

There the company was undoubtedly an insurance company and the decision of the Court that it could not sell variable annuity policies without registering them with the SEC is directly that the securities of an insurance company are subject to the securities laws and are not taken out of the provisions of the securities laws by the McCarran-Ferguson Act.

In that case the --

Justice Potter Stewart: But the holding of that case was that that company was engaging in selling securities not insurance policies.

Suppose, if an insurance company went to the telephone business, they have to pay the tax on telephones.

Mr. Griswold: Mr. Justice that would be applicable to the Variable Annuity Life Insurance Company which sold nothing but variable annuities.

But the United Benefit Life Insurance Company was undoubtedly an insurance company.

It sold large quantities of what everybody would agree was insurance.

It also sought to sell variable annuities.

And this Court held that it couldn't do it without registering them with the SEC and that it seems to me is inevitably a direct decision that the securities of an insurance company are subject to the registration provisions of the securities laws despite the fact that Congress has passed the McCarran-Ferguson Act or to put it in other way that dealings in the securities of an insurance company are not “the business of insurance” within in the McCarran-Ferguson Act.

That there are other cases which are close but I think that the United Benefit case comes very close to supporting our position.

The decision of the court below would wipe out every application of the securities laws to securities and insurance companies.

This is contrary to the long continued understanding in this area.

It's not required by the language of the McCarran-Ferguson Act and it's inconsistent with that Act's purposes.

Accordingly, the judgment below should be reversed and the case remanded for consideration there of the other questions involved in the case.

Justice Potter Stewart: Good many insurance companies particularly life insurance companies these days are owned not by stockholders not by shareholders but are owned by the policyholders.

I suppose the merger of two mutual companies would be I suppose these policyholders as owners would happen there.

I guess there specifically _ on the --

Mr. Griswold: We would have to find something Mr. Justice if we constitute securities in such companies before Section 10 (b) would apply because it applies only to purchases and sales of any security.

Now, conceivably in a mutual company, you could say that the policyholders are security holders --

Justice Potter Stewart: Except I believe they are expressed exemptions in the Securities Acts, aren't they?

Mr. Griswold: With respect to mutual companies?

There may be, I'm not sure.

Justice Potter Stewart: There may be I'm not sure either.

Chief Justice Earl Warren: You may start your argument tomorrow Mr. Frank.

We'll adjourn now.

Argument of John P. Frank

Mr. John P. Frank: Thank you Mr. Chief Justice.