Hanly v. SEC

Facts

Sonics was organized in 1958. It engaged in the production and sale of various electronic devices. From its inception, the company operated at a deficit. During the period of the sales of its stock here involved, the company was insolvent. The company had developed a ceramic filter which was said to be far superior to conventional wire filters used in radio circuits. Licenses were granted to a Japanese and to a West German company, each of which made initial payments of $25,000, and to an Argentine company, which made an initial payment of $50,000. License negotiations with domestic companies showed no success. In addition, testing of the filter by prospective customers provided unsatisfactory results. Merger negotiations proved unsuccessful. On December 6, 1963 bankruptcy proceedings were instituted against Sonics, and on December 27, 1963, it was adjudicated a bankrupt. Ps were employed by Richard J. Buck & Co., a partnership registered as a broker-dealer. Gladstone (D) and Fehr (D) were co-managers of the firm's Forest Hills, N.Y., branch office. Hanly (D) was the manager of its Hempstead, N.Y., office. Stutzmann (D) and Paras (D) were salesmen in the Hempstead office. Ds learned about Sonics and were given information about it that was both confirmed and unconfirmed. The confirmed part was the terrible and dire straits Sonic was in and the unconfirmed part was an unidentified confidential report that said it was an amazing opportunity. In spite of the bad confirmed information, Ds made representations to their customers. They made statements that Sonics was a winner and would make money. It had a fabulous potential and would double or triple. It would make Xerox look like a standstill and would revolutionize the space age industry. 

Gladstone (D) himself had purchased the stock for his own account, and he would be able to retire and get rich on it. It had possibilities of skyrocketing and would probably double in price within six months to a year. Although it had not earned money in the past, prospects were good for earnings of $1 in a year. Sonics had signed a contract with General Instrument. The stock would go from 6 to 12 in two weeks and 15 in the near future. The 14-page report had been written by Value Line. The company was not going bankrupt. Its products were perfected, and it was already earning $1 per share. It was about to have a breakthrough on a new product that was fantastic and would revolutionize automobile and home radios. No adverse information was disclosed. Paras (D) said Sonics had a good growth possibility. It should double after three or four weeks (to one customer); it could double, i.e., increase 8 to 10 points, within four to six months (to another customer); and it would rise 10 to 15 points (to still another customer). Paras had bought the stock himself. The company was about to enter into a favorable contract for its filters with Texas Instruments, and Texas Instruments might acquire Sonics. Paras (D) never mentioned Sonics' adverse financial condition; he never provided any literature about the company, and in at least one instance he sent a confirmation to a customer who claims not to have ordered the stock. Stutzmann (D) said Sonics had just acquired a big contract and should reach 15 in a year. Sonics is similar to Ilikon. Although its past earnings were not impressive, they would soon get bright because of licensing royalties. The price would double in six months. Since the price had dropped, this was a good time to buy. It was a hot prospect. Stutzmann (D) did not provide any adverse financial information or any literature, and that he falsely claimed to have bought Sonics stock himself. Fehr (D) stated that Sonics was engaged in negotiations which, if successful, would lead to a price rise of 3 to 4 points; that the company was about to break through on a product he thought would be substantial; and that Sonics stock was an extremely good speculation. Fehr (D) said that its decline was only temporary; and that he had purchased the stock for himself and a member of his family (which he had). Hanly (D) did not disclose any financial information regarding the company but told people that Sonics had a new invention that would rock the world; that it would merge with another company in the near future; and that its stock would rise from 8 to 12 or 15 in a short time.

P concluded that their optimistic representations or recommendations were materially false and misleading. Fraud was found both in affirmative falsehoods and in recommendations made without disclosure of known or reasonably ascertainable adverse information, such as Sonics' deteriorating financial condition, its inability to manufacture the filter, the lack of knowledge regarding the filter's commercial feasibility, and the negative results of pending negotiations. The Commission found that the sophistication of the customers or prior relationships which many of them had enjoyed with the respective petitioners were irrelevant. Ds' privilege of being employed in the securities industry was revoked. Ds appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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