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avoided those that presented too great danger of criminal prosecutions.64 Moreover, "Few commissions even record the prosecutions undertaken by their offices and, in all States, county or district attorneys prosecute independently.”65

Such records as have become available, however, show conclusively the beneficial results of this type of legislation.66 As might be expected, enforcement officers have found that the greatest activity occurs within a comparatively short period after the law becomes effective. During the first year of the operation of the blue-sky law in Pennsylvania (1923–24), 1,436 applications for dealers' registrations were filed, of which only 761 were in effect at the end of the period.67 The Railroad Commission of Wisconsin charged with the enforcement of that State's securities act, reported in 1926 that the total number of dealers in low-grade securities was only 50 percent of the number operating in 1919, when the law became effective, and that the amount of money invested in their wares had decreased 75 percent, although the number of dealers in highgrade securities had increased.68 The chief of the securities division of the State of Ohio reported in 1924 that “During the past 2 years (1923–24)

hundreds of hearings have been called as a result of which hundreds of thousands of dollars have been restored to defrauded purchasers of stocks and bonds." During the same period permits to sell issues valued at $95,000,000 were granted and refused for issues valued at $898,000,000.68

Where State laws fail.Similar reports are available from many other States showing that this type of legislation has saved or recovered for American investors millions of dollars that would otherwise have been lost in worthless securities yet, notwithstanding these protective State laws, there has never been a period in history when the public has been so grossly mulcted of accumulated savings by shrewd and conscienceless “securities” manipulators as during recent years.

The failure of State laws to cover all situations arises from a number of factors which may be summarized as follows:

(a) Lack of protective securities legislation in one State and in all the Territories, including the District of Columbia, and inadequate legislation in others.

(b) Lack of uniformity in the laws of the various States. (c) Willingness of victims to "compound” the offense or accept a compromise. (d) Evasions possible by conducting sales on an interstate basis.

The lack of adequate protective laws and the existence of too liberal corporation legislation in some jurisdictions not only furnishes fertile fields for promoters and dealers but, what is far more important, offers the fraudulent promoter a legal haven from which to direct his operations in other States. The seriousness of this factor has been emphasized in numerous proceedings both before the courts and in hearings before Congress where the methods of organizing corporations with no tangible prospects in one State and selling its stock to a credulous public in other States are explained in detail.69 The fraudulent promoter first decides upon the branch of industry in which his embryo corporation shall ostensibly engage and the choice, if well made, will depend on the public fancy at the moment. Just after the war oil and mining companies were the most popular, but industrial projects later came into favor. More recently, investment trust companies and major real-estate operations have been the most successful from the promoter's viewpoint. The World's Work in its March 1919 issue published a list of more than 1,000 so-called "oil, mining, and industrial companies” that had no legitimate prospects and that were organized solely for the purpose of selling stock. After having decided on the basis for his appeal to the public, the promoter selects for incorporation a State in which it is possible to organize a company with nothing or little more substantial than a large authorized issue of capital stock.

64 Before the enactment of blue-sky legislation in Massachusetts in 1921 a special commission appointed to investigate sales of securities, submitted a report which included the following statement: “* cannot be said that the Massachusetts policy of allowing anyone to deal in securities subject only to the restraint of the criminal statutes is either efficient or tolerable.

Fraudulent promoters driven out o other States and countries, flock to Massachusetts.”. H.R. 7215, 67th Cong., 1st sess. 65 Economic Effects of Blue Sky Laws. F. B. Ashby, p. 39. 68 “Forty-one States have enacted securities laws, and it has resulted in a wonderful saving to the people. If you could confer with the securities officials of those States that have enacted comprehensive laws on the subject, you would find that in the course of a short time they have driven from those States any number of these itinerant, fraudulent promoters, and they have saved the people of those States millions of dollars." Hon. Edward E. Denison, Congressman from Illinois before Committee on Interstate and Foreign Commerce, Hearings on H. R. 7215, 66th Cong. Ist sess. 67 Economic Effects of Blue Sky Laws. F. B. Ashby, p. 36. 68 Idem.

69 Pandolfo v. U.W., 286 U.S. 8; Congressman Denison, of Illinois, in hearing on H.R. 7215, 67th Cong., 1st sess.; Hon. Huston Thompson, Federal Trade Commission in hearings on H.R. 188, 66th Cong., 1st sess.; Paul V. Keyser, attorney for Investment Bankers Association, in hearing before Committee Interstate and Foreign Commerce on H.R. 7215.

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A high-powered selling campaign is then begun in other States, either through the mails or by agents, or both, care usually being taken to avoid violating the “blue sky” laws of those States having effective statutes. Often such States are avoided altogether. It is a comparatively easy matter, as will be explained hereafter, to arrange that the sale, as a matter of law, actually takes place outside the State where the customer resides and for this reason outside the jurisdiction of its laws.70

In several States, however, such subterfuges are not necessary inasmuch as there is no securities legislation whatever or such legislation as exists is inadequate. There is no legislation covering the sale of securities in the District of Columbia, for example, and a report of the District Committee of the Senate covering an investigation made early in 1932 shows an unrestrained sale of millions of dollars, worth of securities on the basis of gross misrepresentation by the issuers.71 Similar situations exist in all of the Territories and, through ineffective legislation, in many of the States.

The varying requirements of the statutes of different States also interfere with the full effectiveness of State legislation. Each State, naturally, desires to attract capital and to persuade industries to locate within its borders. For this reason the legislatures of some States deliberately enact lenient statutes as an inducement to outside industry while others fear that strict laws governing flotations of capital stock and securities will drive industry to more liberal States.

The pressing need of uniform “blue sky” legislation throughout the States has been appreciated by the legal profession for a number of years and in 1922 the National Conference of Commissioners on Uniform State Laws began the preparation of such an act, the fourth draft of which was finally adopted at the association's fortieth annual conference, August 11-16, 1930. This proposed uniform law was also approved by the American Bar Association at its meeting in Chicago, August 20–22, 1930.72 None of the States has yet adopted this act, but it largely follows the precedent of the typical “blue sky” legislation already existing in many jurisdictions. If_this proposed draft could be enacted in each of the 48 States and all Federal Territories it would do much to correct some of the evils that exist at present, but such concerted action is highly improbable and the refusal of a single State to adopt the measure would substantially offset the action of the other 47 by leaving open to the promoter a base of operations.

One of the greatest obstacles in the way of more effective enforcement of protective security laws is the willingness of victims to foreign prosecution upon the promoter or dealer agreeing to refund part of the purchase price. It often happens that after the prosecuting attorney has prepared a satisfactory case against a fraudulent promoter or dealer, the prosecuting witness accepts a refund and the case fails for lack of sufficient evidence.73 This is known as compounding” and the practice is so prevalent that many of the more cautious and syste matic of the fraudulent manipulators set aside insurance funds for placating the more dangerous of the defrauded investors. Maj. Morgan K. Harris, of the bureau for the investigation of financial frauds of New York City, has stated that many “swindlers put aside from one tenth to one third of the money they get to reimburse persons who demand an adjustment.”74 Although this practice greatly interferes with the effective enforcement of the “blue sky laws and both prosecuting attorneys and the courts object to being used as collection agencies, many believe it more practical to accept the situation philosophically and endeavor to force the promoters to return to their victims the largest amounts possible.

“In the Chicago district alone $3,626,990 was recovered for investors during 1930, according to the report of L. P. Holt and H. S. Weinberg, assistant State's attorneys. And during the same period the fraud prevention bureau of the attorney general's office of the State of New York obtained restitution of approximately $3,250,000 for the victims of bucketeers.75

These statistics from only two States serve to indicate that many thousands of fraudulent promoters and dealers escape well-deserved criminal prosecutions annually through refunding a small part of their loot to a few of the more indignant or insistent victims.

70 Duke v. Olson, 240 II. App. 198; in re Suchow's estate (Wis.), 212 N.W. 280. 71 Report No. 412 on hearing before Senate Committee on the District of Columbia, 720 Cong., Ist sess.

79 Uniform Sales of Securities Act. Published by National Conference of Commissioners on Uniform State Laws, John H. Voorhees, secretary, Sioux Falls, S.Dak.

73 Economic Effect of Blue Sky Laws, F. B. Ashby, p. 47. Mitchell Dawson in American Mercury, March 1932, p. 353.

74 Mitchell Dawson in American Mercury, March 1932, p. 354. 76 Idem.

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The most effective and widely used method of evading the provisions of State “blue sky” laws consists in operating across State lines. The Supreme Court definitely established the constitutionality of this type of legislation in the three cases already cited 78 on January 22, 1917, and the study of methods for avoiding its provisions was begun almost immediately.77

Since that date, the technique of the methods employed has greatly improved and their legal position has been assured. The procedure is not complicated and the legal immunities are beyond question. A sale of securities, just as any other contract, must consist of an offer and acceptance; until an offer is accepted there is no sale 78 and the sale is legally made at the place where acceptance is given. These principles have long been undisputed law. It is a simple matter for promoters in New York selling their securities in other States to provide that sales are not to become effective until acceptance by mail or telegram from their office. Their literature merely advertises their wares and makes no offer to sell, in fact usually it states that:

A sale upon an offer made to us to purchase securities is effective upon our acceptance by mail or telegram sent by our office.” 80

In this manner the sale by mail, telegraph, or telephone to a customer in Illinois, for example, is actually made in New York and violates no law of Illinois or of any other outside State where the promoter or dealer has been able to obtain clients.81 The act is committed in New York and is, for this reason, not subject to the jurisdiction of any other State. Even if the dealer in New York offers securities by mail to the customer in Illinois who completes the contract in the latter State by accepting by a letter deposited in the mails there, the dealer could not be extradited to Illinois inasmuch as he has not “fled” from the justice of that State although he has committed an offense against it.82 This and similar methods of taking advantage of State boundaries are constantly being extensively and successfully used to evade the provisions of State blue sky laws.

Many States have endeavored to correct this evil by including various regulations in their statutes, but statements from the majority of the State security commissions indicate that they are powerless or nearly so in the matter of interstate transactions and that a supplemental Federal law is needed to stop this gap through which is being wasted hundreds of millions of dollars of public savings-our soundest reserves—that might otherwise be diverted to substantial industrial development.83

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FEDERAL LEGISLATION HERETOFORE PROPOSED The need of Federal legislation relating to the sale of investment securities to supplement and strengthen State laws has long been widely recognized by those who have given the subject more than casual consideration. Immediately after the termination of the World War, and inspired by a deluge of fraudulent promoters and their success in exchanging the worthless securities of resourceless projects for Liberty bonds and the public's savings, a number of bills were introduced in Congress, particularly between 1918 and 1921.84 Of these, three are of special interest, both because of the exhaustive consideration they received

76 Hall v. Geiger-Jones, Caldwell v. Sioux Falls Stock Yards Co., and Merrick v. Halsey, supra.

77 On the following 6th of February, or 15 days later, Reed and McCook. attorneys for the Investment Bankers Association, wrote their clients concerning the possibility of evading the effect of these laws by making their sales of securities between States. The following comments appear in that letter:

The only safe interpretation to put upon this phase of the opinion (interstate sales) is that the State may prohibit and make criminal a particular act, i.e., an offering or sale, effected within the State' whether or not it is initiated outside of the State

We should also repeat, for such comfort as it may carry, what the writer said in the opinion of his former firm:

"'On this question we should also add parenthetically that, under the peculiar language of our Federal Constitution and statute, a person outside of the State who commits a crime within the State cannot be extradited for the purpose of prosecution and punishment within the State where the crime was committed. Only “a person charged with crime who shall flee from justice” is subject to extradition.""

Blue Sky Laws, Reed & Washburn, p. 265a, citing I.B.A. Bulletin of July 31, 1913; Wharton on Criminal Law and Procedure, ninth ed., sec. 31; Jones v. Leonard, 50 Iowa, 106; Hyatt v. People, 188 U.S. 691, affirm. ing 172 N.Y. 176; Et parte Hoffstot, 180 Fed. 240, affirmed 218 U.S. 665.

78 Corpus Juris-Contracts, sec. 52 and cases there cited. 78 Corpus Juris-Contracts, sec. 581 and cases there cited. 80 Blue Sky Laws, Reed & Washburn, p. XXII.

81 Hearings before the Judiciary Committee on H.R. 188, 66th Cong., 1st sess. Hearings before Commit. tee on Interstate and Foreign Commerce on H.R. 7215, 67th Cong., 1st sess. Blue Sky Laws, Reed & Washburn, p. XXII; In re Suchow's estate, 212 N.W. 280 (Wis.); Duke v. Olsen, 240 Ill. App. 198.

82 Wharton on Criminal Law and Procedure, ninth ed., sec. 31; Hyatt v. People, 188 U.S. 691, affirming 172 U.S. 176; ex parte Hoffstot, 180 Fed. 240, affirmed 218 U.S. 666.

83 See letters from State securities officials pp. 50–62, hearings before Committee on Interstate and Foreign Commerce on A.R. 7215, 67th Cong., 1st sess., and those appearing pp. 8-12, hearings before the Committee on the Judiciary on H.R. 188, 66th Cong., ist sess.

84 Paul V. Keyser, attorney for Investment Bankers Association in hearing before Committee on Interstate and Foreign Commerce on H.R. 7215, 67th Cong., 1st sess.

and because they represent three distinct proposals for accomplishing the desired results.

The Denison bill.The so-called Denison bill, introduced on various occasions by the Honorable Edward E. Denison of Illinois, was referred to the Committee on Interstate and Foreign Commerce of the House which held extensive hearings during the first session of the Sixty-seventh Congress.85 This bill, in substance, provided that it should be unlawful to use the United States mails or the agencies of interstate commerce to defeat the purpose of the various State blue sky laws. Under this proposed statute, the sale in any State of securities through the mails or in interstate commerce, not in accordance with the laws of that State would constitute a Federal offense. In the words of the author:

“They (the States) now find themselves up against a serious proposition, because the promoters go over States lines and organize companies, or they go wherever they can safely and conveniently operate and organize companies and get out lurid circulars promising tremendous returns. They literally flood the mails with them and send them into the States where they cannot go themselves, because they cannot qualify. They take advantage of the United States mails and of the agencies of interstate commerce, such as the telephone or telegraph companies, and flood the people of those States with ingenious and plausible promises of fabulous wealth. They are getting the people's money notwithstanding the State laws, and the States are powerless because they cannot extradite for that offense. The result of it is that the State laws are being evaded and nullified. The laws of the States are being violated, but the States are powerless to reach the guilty ones.

“Now I think that the Federal Government ought to cooperate with the State to the extent of not permitting those agencies over which the Federal Government has exclusive control to be used to nullify the State laws and that is what this bill does. If you will read the bill you will find that it complements and fits in with the State laws. It simply provides that the United States mails, of which, of course, Congress has exclusive control, and the agencies of interstate commerce, over which Congress has exclusive control under the Constitution, shall not be lawfully used to violate the State laws or to circumvent, evade, or nullify the State laws." 86

Representatives of private interests 87 did not question in this hearing the power of Congress to regulate the interstate sale of securities under the Interstate Commerce clause of the Constitution. They did, however, question the authority of Congress to delegate, in effect, its authority to regulate interstate commerce to the States by a law declaring that whatever securities the States designated as unlawful should be unlawful in the mails or in interstate commerce,88 and cited the Supreme Court's decision in the Knickerbocker Ice Co. case in support of their contention.89 That case tested the validity of a Federal law providing that State workmen's compensation acts could be enforced in suits in connection with admiralty matters before the Federal courts. The court held that the act was unconstitutional as an authorized delegation of the Federal Government's jurisdiction in admiralty matters, but the opinion expressly distinguished this decision from the court's ruling under the Webb-Kenyon Act 90 and under the National Bankruptcy Act.91

In the Ice Co. case the court held that Congress did not have authority to delegate to the States its exclusive power to enact admiralty legislation, because of the peculiar character of admiralty jurisdiction which from earliest times has been a part of the law of nations. In the Rahrer case arising under the WebbKenyon Act, the court upheld the constitutionality of an act of Congress, commonly known as the "original package” law, providing that intoxicating beverages should not be exempt from State prohibition laws by reason of the fact that they entered the State in interstate commerce. In the Hanover Bank case, the Supreme Court upheld the validity of an act which had been attacked on the ground that Congress had inserted in the National Bankruptcy Act a provision that the exemptions of State bankruptcy laws should be recognized in bankruptcy proceedings under the national law.

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Mr. Denison submitted letters from the appropriate officials of 38 States | recommending the enactment of Federal blue sky legislation and the bill, after

86 Idem.
$6 Idem, pp. 27-28.
87 Attorneys for the Investment Bankers Association.
88 Idem, p. 8.
80 Idem, p. 12; Knickerbocker Ice Co. v. Stewart, 253, U.S., 149.
* In re Rahrer, 140 U.S. 545.
91 Hanover National Bank v. Moyses, 186 U.S., 181.

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being favorably reported by the committee, was passed almost unanimously by the House. In the Senate, however, it was referred to the Committee on the Judiciary and never reported out.

The Volstead bill.The so-called Volstead Act was introduced by the Hon. Andrew Volstead during the Sixty-sixth Congress and referred to the House Committee on the Judiciary: 92 This act followed the precedent of the “fraud" laws enacted by New York, New Jersey, and Maryland. It proposed to empower the Attorney General to investigate, whenever evidence should be submitted that fraudulent practices in the sale of securities had been engaged in or were about to be engaged in, and to issue a stop order if the result of the investigation justified such action. This type of laws has been described as one that locks the door after the horse is gone. The bill, which was favored by the attorneys for the Investment Bankers' Association,94 was referred to the Committee on the Judiciary but not reported out.

The Taylor bill.The Taylor bill, introduced by the Honorable Edward T. Taylor of Colorado, was a distinct departure from other American legislation on this subject.95 It developed as a result of the activities of the Capital Issues Committee, an emergency body appointed to mobilize the country's financial resources for war purposes. 96 This committee, before it was dissolved in August 1919, submitted two reports which pointed out the vast sums being lost by the public and diverted away from legitimate enterprises through the sale of fraudulent or worthless securities and recommended the enactment of Federal legislation to correct the evil. The bill was drawn, in part, by the Hon. Bradley W. Palmer, counsel of that committee and had the approval of President Wilson, Secretary of the Treasury Glass, and the Federal Trade Commission.97

This act followed to a large extent the same general principles of control employed in the Consolidated British Companies Act of 1929 98 and the corresponding legislation of the Dominions, France, Germany, Belgium, Japan, and some of the South American countries. 99 It proposed that the promoters, chief officers, and directors of companies offering their stock to the public in interstate transactions should be required to file with the Secretary of the Treasury signed statements containing detailed information concerning their organization and prospects, this information to be at all times available to the public. The act further provided that purchasers would be assumed to rely upon the information filed and that in the event of material misrepresentation they would be entitled to recover the purchase price from those signing the statement. A penal clause was also included prescribing a fine or imprisonment or both for willful violations of the act.

A number of questions were raised at the hearing, chiefly concerning the wording of details that did not affect the substance of the bill and several minor amendments were suggested. Whether or not the sale or transportation of securities across State lines consituted interstate commerce and, as such, came within the power of Congress to regulate, was also discussed and the Hon. Huston Thompson, of the Federal Trade Commission, submitted a brief which reviewed the decisions at considerable length and concluded that there was ample authority to support its decisions that such traffic does constitute interstate commerce.1 He explained that the brief was prepared as a result of a request from the Capital Issues Committee, at the time of its dissolution, concurred in by the Secretary of the Treasury and the Federal Reserve Board, that the Federal Trade Commission investigate and prohibit the sale of fraudulent securities in interstate commerce. Inasmuch as the Commission's authority depended upon the interstate character of these transactions, the question was carefully studied and determined in the affirmative after the review of the authorities mentioned. The Commission then began to investigate, so far as its limited facilities would permit, and to forbid the sale in interstate commerce of the fraudulent securities investigated. Its decision on this point has never been reversed by the courts. The bill was not reported out of the Committee.3 92 H.R. 12603, 66th Cong., 2d. sess. 91 Hon. Clarence F. Lea, of California. Hearings on H.R. 7215, supra, p. 16. 94 Idem, p. 19.

08 Hearing before the Committee on the Judiciary on H.R. 188, 66th Cong., 1st sess. Colorado subse. quently passed a somewhat similar law. Session Laws of Colorado, 1923, ch. 168.

96 Committee consisted of C. S. Hamlin, John Skelton Williams, F. H. Goff, Henry C. Flower, John S. Drum. Public Documents 1485 and 1836, 65th Cong.

67 Hearing before the Judiciary Committee on H.R. 188, 66th Cong., 1st sess., pp. 11, 12, 25. 08 Consolidated Companies Act of 1929, 19 and 20 George V. Chittys Annual Statutes, 1928–29, p. 557, " Regulation of the sale of Securities in Interstate Commerce, Hon. Huston Thompson, Federal Trade Commissioner, A.B.A. Jour. 9:57, March 1923. Hearings on H.R. 188, supra., p. 19. 1 Idem, p. 50.

Idem, pp. 26, 63. • Idem, p. 124.

pt. II.

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