the blue sky lav/s of texas thesis - tdl
TRANSCRIPT
THE BLUE SKY LAV/S OF TEXAS
THESIS
Presented to the Faculty of the Graduate P- vislon of the Texas Technological College in Partial Fulf 'llT.ent
of the Requirements
"V
iM-9f
For the Decree of
MASTER OF ARTS
. ^ » . ».•«?• jf*. iv'«>jiiiif.•! m y . -.. j». V,.
by
Imogene Joyce Gatlin
Weatherford, Texas
August, 1957
-0-
TFX*S TK!^M0L06!CAL COLLEGE L'JGGC':K, T E X ^
• r^ ^ * r%\ J
9
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A^C'7^5^
'VvO . I &
• Z. T H E B L U E S K Y L A W S
O P T E X A S
THESIS
Approved:
nriiTi f w * » I r ifc—n*aM>i»iJi^*yi^i~ a {A* ^hesi 8/delimit te?
Approved:
Head of the Department of Economiee and Business Administration
Approved:
DesCn fcf tile Divis ion of Arts and Sciences
Approved:
' "' (Sialrman of Graduate Dir ls lon
ACKNOWLEDGEMENT
The wx*iter wlehes to express grateful appreciation for advice, information^ and eourtesi^s extended by the following:
Judge H. C, Shropshire)
Hen« Ward Bahkhead
Judge R« B, Hood
Weatherford, Texas
Hon* Pritz 6. Lanham, Weshington, D. C.
Judge £• J. Milldr, Brownwood, Texas
Professor B. P« Condray) (Deceased)
Professor T, 0. Root
Mrs, llamle W, Jackson (Faculty Advisor)
Dr. E. H« Plank
Department of See-nomics and Basineei Administration, Texas Technologlee^ College, Liibboek,
Texas
Hon. 0. D. Brandidge, Dallas, Texas
— 0 — t
ff
t
THE BLUE SKY LAWS CP TEXAS
COWPEHTS
PART I—INTRODUCTICai Definition of Blue Sky Law, 1 Some early laws and cases •••••• • 1
(1848 - 1923) Need for legielation 9
PART II—"THE BLUE SKY LAW OP TEXAS** (1923- 36)..••..10 Main divisions of law • •••.• .ll Def ini tictos ••..•• 12 Requirement of a permit to s ell s took. • • • • 12 COURT 0ECISIOHS:
Harlan et al v. Sanitary Plooring Co 15 Zerr •• Lawlor• • 17 Coleman v. Miller • •••••••• .IS MeCue •• State • 21 American Surety Co. of N« Y* v, Thaapson. •,23
Adminietratloi • ••27 cotmr jmcisiomt
Davis v« Farmers* Co*ep Equity Co, 28 Violations and Penalties••••••••••••• •• .30 Plnaneing the act•• • 33 SuBo&ary••••••••••••••••••••••••••••••••••••••••934
PART III—THE SECURITIES ACT (MEW) (1936) 36 . Definitions•••.••••••.•.•••• ,37 Slxemptione • .SS Requl2*«nent of a permit to sell or issue stock.,41 COURT DECISIONS:
Hale et al v. Mann... •... •..,.45 Simon V. Craft • • • • • 47
Administration • • 50 Violaticns and Penalties . . • . « 5 3 Financing the new law « ,55
PART IV—THE FEDERAL SECURITIES ACT (NEW) (1933) 57 C^itents • • • . • • • • • . • • • . . • • • . • • . • • • • . • • • 58 %<mpted Securit ies 59 Exempted Transactions 61 Registration Statement. 61 J\ ir i8dicit ion of offenses * 62 Penalties 62
PART V—CCMPARISON OP TEXAS BLUE SKY LAWS WITH LAWS OF OTHER STATES ,.63
CONTENTS COKTIHUED
Mational Conference of onsniesionera on Unifom State Lava,* •••« 65
Blue Sky Lews of other states ( a list ) ,64 Uaoeual requirements of laws of Mew York,
Hew Jersey, Maryland, and Califomie,••••66 The CMo law«.« 66 COURT IffiCISIOKSt
AlbuqpKPqiM v« Ranger«De8d6mona Oil Co* .66 People V, CliBB«,,.« ,066 Merrlek v, Balsey and CoBpeny. • • • «67
^ill Mational M^^eentile Compmoj v. Wet8on»».«68 Gfoodyear v, MeiQx«,»«*.«......«..•••••,•••68
t r State •« Freeer (Qr#gen) ••..•••..68 Kirk •• fkmere* Union Qapmin Ag^Msy,•••••69 State (Mina*) v. He Zaveetare* 8yBdleete«69 HcBw Lumber Conpany v» Hes^cins..,,.. •••••69
Merth I dceta*e definition 1^ "speevletlve" se* euritiee •• ••••• •••.••. .70
PART Vn^^^SUMMAET, RBCOHME^DATXOMS, and GOIfMERTS. • • 73 Pui poe« of Mational Seotirltlee and Exehange
Aet (1934) • • . 73 Summary of a o t l v i t l e e of natioxial Seexiritiee
i ^ Sxehango CcuBBieelon^ • • • • • • • • • « • .75 Reeommendatlena for changes in Tejcas Secxiritiee
A e t . . , * . . • . 76 Commente, •••••••••• ••• ••••••••. .77
BIBLIOORAPHY
THE BLUE S O LAWS OF TEXAS
Part I
IMTHODUCTIOH
If you mention Blue Sky Lavs to the average man,
he will aek, *Vhet are thejt* To him, they connote vague
ideas of legielation controlling airplane travel, Sun
day pleture shows, the dust storms, or sons thing oqaally
fantes tie. But the Blue 3ky Laws were passed to proteet
the average man from investing his money In unsound sehesMi
with no fbundatlon, 1!hm follovlng definition is TTOBL
Baldwin's Century Edition ot Bouvier's Law Dictionary,
published in ViMi
"Lawe that have been enacted In about one«half the states of this eoimtry for the purpose of pre teeting the puablle age ins t the imposition of un* substantial sehemes and the securi* ties based upon them, deriving their name from tbe f^et that they were aimed at speeulatlve schemes iM^eh have no more basis than so many foot of blue sky«*
Texas did not pass her Blue Sky Law imtil 1923,
hut prior to this time, the legislature enaoted numer
ous acts i iieh attempted to regulate speeulation snd to
prevent frauds The first leglslatloa for this purpose
was In 1848, when an act was passed which required cer
tain industries to pay a license to opex*eto in the state.^
!• Aots of 1848^ p ago 154«
Thio law was hold to be oonstltutlonal in the case of
the State •• Stephens.^
Ttm oase originated before a Justice of the Peace of
Harris County when Stephens failed to make a return to
the assessor as roqiilred by the aot of 1848, which was for
the purpose of raising revenue by taxation. The lustieo
gave a Jwdgement against Stoj bens for the penalty, whloh
was |fX)« StophwMi appealed to the Die triet Court and got
a Jiftdgsnont In l^U favor. The State stppoalod to a hl ier
court, which rendered a deelslon in favor of the State
and required Stephens to pay the Judgements In this ease,
the Court uji ield ^h^ right of the State to demand a true
return to the assessor of texee^
The Texas Supremo Court on June 3, 1897 heard the
case of Tabor v« fi&terstate Building and Loan Assoc let ion •**
In this suit the Building n d Leen Assoeiatlon of Columbus«
Georgia was trying to recover ths amount of a note with
foroolosuro of a lien on a lot in Ft* Worth, The state
legislature had paaaed an aet requiring a corporation to
file Its Articles of Incorporation and to obtain a pemlt
before doing business in Texas,^ Ths Building and Loan
Associatlen affirmed that it was doing tesineas under the
state laws of Georgia with a bransh office In Ft, v'orth
and that it had a pexvlt to do business in Texas, But
2, 4 Texas Reports 137, pablishod 1852 •
5, 4» Sir 960| 91 Texas 92,
4m tovlsod Civil statutes 189S, Artlele 745,
the assooia tlon fai led to prove that i t had such £ per
mit, Jodgeswnt (without a Jury) was rendered by the
court in favor of the association, but the case was
appoaled.
The higher oourt stated in i t s opinion that the
Judgeaiwat wae dependent upon the proof of the associat l^i
that i t had a pexnlt to do bueinees in Texas-«>which i t
bad rai led to prove. The court cited other cases upon
i^ileh i t s opinion was based: Halloway v. Railway Con-
panyS am Cumberland Land Company v. Canter Lumber Com-
p^ (Toanos«io Court of Appeals).« An important ruling
was la id down by the court*s decision in th i s case; that
ls« £ ooTPoration doing business in Texae must prove COP-
p l l « a ^ with the state* s requlrem«its in an ootlon brought
Ja US. l a J5SL f U^f f On April 20, 1898, the General EloolM^i Cesqpaay ap«»
pealed a Judgsment for | 4 ,^^«75 , obtained ty ^iShitloy In 7
a Bowie County Court, The Judgement wae originally grant<
ed In Ohio, nearly a year before this suit was brought by
Whitley in Texas,
The Kloetrlo Company alleged that it was a corporetio
doing business in saethcr state, but did not prove that
It had eompllod with the roqulreeients of the Texas Statute
of 1895, The Court of Appeals affirmed the Judgement, but
6, 23 Texas 465,
•« 36 SW 886,
7, Whltloy V. General filectrle Co, ( ld98) | 45 SW 959
ruled that jLt was not neceesary for the corporation to
jroio that it had ccmplied with the Texas law, because
it wae not, at the time the eauee of action arose, doin ^
bualneee In Texay,
The 29th Legislature passed an act requiring opera ton
of oil wells to pay a spoelal t ax l ^ to inako quarterly
reports to the stete.^ This was a xmlfoxm tax of 1^
of the gross produete of oil wells, as shown in tho re-
qtdrod reporte. The Tneastzre inrovided for \miform penalties
also, Flailure to make the reports within thirty days
after the termination of any quarter, constituted a mis-
demeancr^ according to the aet, and was punishable by a
fine of not more ti en $100 nor less than $50.
The oonstitutionality of this law was tested in two
cases before the Texas Court of Civil Appeals durix^
November ai»3t X>ooember, 1906,
In the case of the Producers* Oil Company v. Ste<*
|rib«ii suit was brought by the oil company to restrain
the state officers tpom collecting this privilege tax on
the operation of oil wells. Both the lower and higher
eourts in this action decided in favor of the state and
Stephens, who was tooretary of State, et that time, Tho
court ruled that the tax in question was an occupational
rather thsa an ad valor«» tax and, therefore, did not
violate the state ecmstitution»
8« Aots of the 29th Leglslattire, Chapter 148, pego 558,
9, 99 SW 157,
The court further ruled in this case that it is
within the power of the state to impose an occupational
tax and to require reports from companies engaged in op
erating and producing oil wells within its botindaries,
Stephens et al v. Morning Star Oil Company et al
was another test case In which the oil companies again
sou|^ to prove that the tax on oil wells was unconstitu
tional. The same arguments were introduced as in the
Prodixeers* Oil Ccmpany ease with the same results. Tho
suit was appoaled tram the lower courts, but the Court
of Civil Appeals again ujdaeld the state law as con
stitutional*
In August, 1913, the 33rd Legislature made it ob
ligatory for all private corporations to file with the
Scoretary of State, copies of all contracts, stock,
prloos for which stock was to be sold, and the conmissions
to be paid tfsfv sale of stock, A fee was imposed by this
aot and it further provided that the aggregate expenses
for ox^nlzation and prcBoti<m should not exceed 15^ of
the selling price of the stook«^
By mother measure, passod in 1915, loan brokers
were roqtilred to give $5,000 bond to comply with re-
qulremmxts of state law. This bond was to protect
Judgements against them, Tho loan brokers wore, also,
requlrod to keep a true record of their transactions
and to file an irrevocable power-of-attomey with tho
10, 99 SW 159,
)il^ Itanaen-i-Sayles* Texas Civil Statut^os, Chapter f flsa^wjiiiAe 1174«a,
county olerk, constituting the county Jidge of their
county as their agent to accept service. If a Judge
ment was obtained upon a broker's bond, this law pro
vided that the Judgement must be peid in sixty days and
the broker's license shoiad be suspended until the Judge
ment was paid.^^ An oeeupaticnal tax of $150 per annum
was, also, impoeed.
Thie statute was contested in the case of Sx Parte
Hutsell (Ho. 3677, Texas Court of Criminal Appeals)^
when J. T. Harper sued because the aet was against loan
brokere. He admitted that he had violated each and every
part of the law, but contended thet the measure was un-
ccmstitutional. He quoted the case of Owens v. State^^
to s\i8tain his oontention.
The first court held that the fee of $150 per
year was not a "prohibitive* tax. It, also, ruled that
the requirements for bond and a true record of trans
actions were not unreasonable but valid requleltes, and
the Court of Criminal Appeals upheld these rulings.
The higher oourt stated that the legislature has the
right to rovoke a broker* s lieenee or to suspend it
if he fa lie to pay £ Judgement within sixty days.
12, Aots 34th Legislature, Chapter 28.
13, 182 SW 458; 78 Tex. Crim. Rep. 589.
14, 112 SW 1075; 53 Tox. Crim. Rep. 105.
Tho legislature gradually built up a chain of
laws for the purpoee of controlling the sale of stocks
and the prevention of fraud in the operation of specifio
types of business, such as loan briers and oil well
produeers and operators. Usmally a new law provided
addltlcmal protection rather than revising the previous
legislation. The law enacted by the 33rd Legislature in
1913 was the first general statute affeeting all private
15 corporations.
This act was the basis of a suit for recovery on
contnmct for obtaining stock subscribers in the case
of Tbannish v. Brewtcn Transfer Auto Company (Court of
Civil Appeals, Ft, Worth, February 28, 1920),^*
Boy A. Thannlsh had a contract, executed by R. J.
BrowtoB^ President and General Kanager of the Brewton
Transfer Auto Company (a corporation, organized under tho
laws of Texas) to sell the corporation's sto6k, Than
nlsh was to receive a consnlssion of 10)C of the amount
of eopltal stock sold. He edd some $8,000 worth of
the orlglnsl stock. Later, a similar contract was niade
for the purpose of selling stock to Increase the cap
italisation of the company. Thannlsh sold some $15,000
worth of this.
The corporation paid part of the oonmiissions, but
I5« Soo above, page 5.
16, 220 SW 300; 240 SW 623
8
Thannlsh «»ught to recover a balance due him of
$1,862,50.
The cox*poration offered the usual demurrer and
general denial and denied that Brewton was authorized
to make sueh a contract as that speeified, ^loading
that such a contract was in violation of an aet
passed by the legislature August 21, 1913.
The ease was submitted on a single spscial Issue—
that was, whether or not the corporatiox^ after acquiring
full knowledge of the contract, adopted it.
In the original trial the trimter company had
cited that the contract to pay 10^ for the sale of stock
was unconstitutional. Evidence brought out in the trial
showed that Thannlsh had not deducted his coonisslons
from funds obtained frcm sale of stock, but had been paid
by the corporatloxu
The first court refused to grant a Judgem^it to
Thannlsh against the tranafer company and he appealed.
Tho Court of Civil Appeals decided in favor of Thannlsh
and assessed the Judgement.
Ths coux^ held that the contract was not one for
the sale of stock but for the pa Tnent for performing
serviee in soourlpg subscxdptions for stock,
A eontrsot for ];>rocuring stock subaoribers for £
oorpoapation doos not violate the Texas Statute of 1913,
In this speelal ease, the court ruled that the cor
poration bad adopted the contract made between Brewton
and Thannlsh. It also, xrulod that the law quoted by the
^er pore tlon did not apply in this instance, because the
ecBimlssions were to be paid by the corporation rather
than the buyer of stoejf.
In spite of these attempts by the state legislature
to control and regulate unsound investments, fraudulent
schemes and speoiLlatl<m flourished In Texas, viihen tho
Renger oil field was discovered, eon«men, smooth-tong\iod
promoters, and peddlers of nefarious get-rich»quick
sch^nes headed for Texas on th» run.
People from every walk of life invested, not only
their surplus dollars, but soioetimes, their life savings
in leases, land, or oil stoek« Sane were fortunate—a
few securities were really secure and their owners accumu
lated fortunes from the "black gold" reservoirs of Texas,
But most of these investors were "left holding the pro
verbial sack,"
By 1923, Texas was flooded with worthless secxirlties,
issued and sold by irresponsible persons to the citixons
of this state and others, and resulting in huge losses
to the purchasers, especially the wage earning class—
who were least able to stand such losses. Texas laws
px*ovod Inadequate to cope with the situation and illicit
promoters took advantage of this fact. So the 38th
Legislsturo in Its first, second, ard third called
seselOTS (Maroh 15, 1923 to Juno 14, 1923) afempted to
remedy these evils by passing an act known as THE BLUE
SKY LAW OF TEXAS.
10
Port II
•THI BLUE SKY LAW OP TEXAS"
(1923 - 1935)
In 1923 a bill known as the Blue Sky Law originated
In the House of the Texas Legislature which had for its
purpose the regulation and supervision of tl o sale of
stocks and bonds in order to prevent fraud in the State
of Texas. This was ^ouse Bill Wo. 177. It passod
the House with 107 yoas and only 3 nays. It mis slight
ly amended in the Semite and the House concurred with
a vote of 100 yeas and only 4 nays. The law was approved
Juno 4, 192S and became effective 90 days after the
loglslatore adjourned, S« L. Staples was the Secretary
of State at the time the act was passed.
The reason and need for legislation of this kind Is
sot out as a part of the law itself.^ "The fset that Texas
has in recent years been flooded with worthless securities.
Issued and sold by Irresponsible parties to the people
of this strata, resulting in great loss to investors, espocl
ly wage oamoi*s*-a class least able to stand such losses—
and the fact that many conpanies have organized and made
their domicile or home office in this state and sold worth-
loss securities through the mails and otherwise, to people
In other states by reason of inadequate laws In this state.
1, Cloneral Laws of the State of Texas, Acts 38th Loglsloturo, Chapter 52, beginning on page 114, Section 29,
— — — 11
oalls for enactment of laws to protect the citizens of
Texas from such wastes and impositions and creates an
Texas Jtolsprudenoe^ gives three main divisions in
its sumsnary of the Texas Blue Sky Law:
1, Requirement of a pemit to issue or sell stocks, bonds, and other securities;
2« Limitation of promotion expenses to 20^ of selling price of stock;
3, Concerns subject to the lav,
Tho simimarsi alsq states that the Blue Sky Law was
not intended to prevent a successful business Instituticm
from realising the full benefit of its success in the
business woiKLd, but was enacted to prevent fraudulent
promoters trmt foisting worthless securities upon the
public,
Tho aot inclu4es companlos which may in the future
be incorporated under the laws of the State of Texas
and grants additional authority to the Secretary of State,
placing the administration under his control and super
vision. It defines what shall constitute violations
and fixes punishments and penalties. Also, the aet
makes provisions fbr financing its ttiforosnent out of
fees eollooted and specifies that it shall be known and
dted as the Blue Sky Law of Texas,'
DISFIHITIONS
Tho Blue Sky Law of Texas, passed In 1923, defines
2, Tol. 10, ss 23 and 24.
3, This law is written up under Title 19, Vernon* s ^^m^^W^ril statutes of the State of Texas and Vernon's
12
the toHB stoek4 to include ^certificates of stock of
every oorporatlon or any other written instruments, evi-
dODOlng SMSiborshlp In any Joint stock association, coomion
law tnut, or oth«r organization which soiy own propex*ty
of any character." The t e m person, company, or concern
Is defined as **any such perscn, company, concern, or in
dividual who may Issue stock or whoso stock oortificate
shall ropvoseat ownership or membership which may bo
transferred, as signed, or negotiated by the transfer,
assigmentf or negotiation of such InOtrament."
RBQUIREKS8T OP A FSMIT TO SELL STOCK
All concerns, 02>eated after the passage of this aet,
or existing conceipns wliich att^apt to increase their cap
ital stock, or coEmnenee transaction of business In this
state, are required to file with the Secretary of State
the following:
1. An appljoatioaa for a pearaait to sell securities
and to transact business In this state. Tho
oppllcatlosi must show the firm name, looaticm,
and gonoral purpose of the fixm, the ages, oc-
evpotieaoot Azid general qualifications of its
trustees, or iismging officers, and tho hus-
ixmam which each of these has been engaged in
for the i^pooodlng five ysars}
2. A copy of its Articles of Association,
Partnership Agreesnent, Constitution^ By-laws,
9S^X Laws of the State of Texas, Acta 38th Leg,, <• i- %f a{ $*sh.8)00tlon 1,
13
or amy other contract under which business i s
to bo tr<u:issotod. Also, a l l aaenteents to
any of these Instruments and tho names of
the ooimty or counties where they are, or are
to bo f i led^ saumnt of eapltal stock, par
voluot ssount of stock or other interest
irihlch i s t;o be Issued f cr promotion coMpen-
satloa or other purposes;
5« Goi^os of stock certlTloatos^ bonds, or othor
soeurlt ies offered, or to be offered for sa le ,
A l6^ the price i t which eapltal stock Is to b^
0 ^ 4 jmd ecBs^ssions ^ b£ paid for 1 |£ s a l e ,
4 , A dotallod statement of assets and l i a b i l i
t i e s of the ai^lleant and a stateiswit of profit
ttid l o s s , taken not more than ten days prior
to tho date of f i l ing those.
All documents submitted must be subscribed and
sworn to by a managing off icer or other executive of
the issuer before they are f i l ed with the Secretary of
State,®
If the value of the securit ies to be disposed of
i s dop«idont upon the development of land, mines, o i l ,
or gas we l l s , the Seorotasy of State may inst i tute an In-
v e s t i ^ t l o n of the propoeod project at the oxpsnse of
the a i ^ l o a n t .
5 , Ib id , , Section 3 .
\ , & H , , floetlon 4 ,
14
If tho 8o«POtory of State is satisfied that the
stooks are of value and that ti^ applicant will eon-
dnet his biiolness honestly and in compliance with the
Bine Sky Lev and the general laws of the state, he will
grant a permit, prenrlded that cooBaissiona for the sale of
8took or other ooourities, prsBOtion^ ax^ all othor in
cidental expenses do not in the aggregate exceed 20^ of
the {Vice at which the stock or other securities are to
be sold, iweordli^ to the applloatlon. Stock issued for
property or other things of eqtdvalent ^mlue can not 7
be olassod as prSBsotien sto^.
If a preiooter, or promoters have no assets but
offer a meritorious propositlim, he, or thej may secure
a permit on the condition that he, or they file a bond
and that all moneys received fren the sale of stock be
placed in escrow with the Secretary of State until tho
proposed esMmsit of etoek, neceesary to finance the
undertaking, has boon sold ei^ paid for. The promoters
must execute their bond for the benefit of all prospoe*
tlve holders of stoek and shall be equal to the amount
of stock which is permitted to be sold. In the owst
of failure to dispose of sufficient st oek, tl^ monoy
raised, lees tho aotnal ea^enses of tSo undertaking**
and not more than BOf may be deducted—must be retrimod
by tho Seoretaxy of State to the investors.®
T, Ibid., Section 6.
8. Ibid,, Section 6,
15
iistto iMlsh had boMi golng^ solvent ooneems
M^VlMrtod of two yoors prior to the passage of this
•ot i t # OQoaqpt f!r«B the fsnevol roqttlsononts of tho Blue
iky low tBBlooo the Seorotory of Ststo r«d.os othes"«ioo,^
Usairim oovpoawtloBs end others included in tho
FrtOSto BoiiklBg M l l » ^ rollMods, bolldiog and loss
MMPPoratleno, and their stooks are ezospt f!pem tho pro*
visions of tho Blue Sky Lsw,^
Zf tho Soovotory of Ststo rofteos to gnoit s pop*
sdt, tho opplleont nay toing salt In the Blstrlot Oourt
^ fiovis Ooooty^ Teaws to de^reiino his right to hsvo
tho toovotsry losuo sueh a iNvnit*
aoosf i>scis(iani
Tho ooufto hoiRs goosrollT hold that prosotoro oooo«
py a flduolsry roiotlonshlp to sabseqoont purthssors of
stoek snd are llsblo to thSM fOr frsudolont roprosoai-
totloao* 1h Ite osso of aurlan ot el • • Ssnltory floor*
lUi eORpsny ot ol (Yoxoo Oourt oT Civil AM oolo XI Hoo»
Aysril % 1920)^^ yMJigb. wo triod bofoM tho pooso^ of
tho Bltto aey tey* t^« ooort lold dooa tho foHovfjug
f>«llx^«
mmmmmmtmmmmmmmm
f# tbitf^ SMtlon 9-o«
30« 8omt# lOU I s . n « ^ ^
3 « tMOOoi lows of tto state of ToaBM» Aoto 88th Ohsptor n^ iootloa 80, ^
16
OriESnizers of a corpora tlon who engap;e in the
sale of its stock are considered authroised promoters;
promoters of jt corporation, acting for their own gain
in sellinj^ the corporation's atocjk with fraudulent
repreaentations are personally liable to the buyers;
a corporation is liable for the fraud of its promoters
in selling stock where it receives the benefits by adopt
ing their contract I and the purehaae of stock may be re
scinded for fraudulent representations of the corpora-
tioxls promoters, or agents, even though notes for part
of the purchase price have passed to innocent purchasers,
because status quo may be restored by payment of money.
In this suit Harlan proved that the promoters had
made four false representations which had Induced him
and his partner to purchase sixty shares of the flooring
company stock for which they executed two notes for
$3,000 each. The promoters had said that the company
was legally incorporated with $25,000 fully paid up
stock. Svidence showed that the company was not incor
porated and had no woz^ing capital except what was paid
in by Harlan and his partner. Another false statement
made by the promoters was that the company owned a val
uable secret formula for making sanitary floors. There
was no sueh formula.
The promoters had told Harlan and his jpartner if
they bought sixty shares of stock at |100 per share,
the compoaqr would have $12,000 paid up capital. This
was a fslse stattfaent and of the amounts paid In by
• s:::ij:.:rrjplan, each promoter took #1,000 for his
tf
^'^IM »faiotOfo to this esse orgnod ttet tho ploSa^
i UrVi hid-booosM^offisors in ttm oerpontloD and had
^^btMH^solorioo mad ooro ootoppod f om «ho r l g ^ of
ootiott dgolkoi the oevpsny for this roosmi, Tho sooond
orgiioai Ito their defense vao that tibe notes in ^pootlon
had falloB into tho heads of on turiooonf porstesor^^tho
yriBwNg's bed borrosiod on thtti from the Flret Satloasl m
Bax^ of El flisO» sad status qmo eould not bo ootabliohod ^
SO tho notes should not be esnoolod^
Tho trial eosrt doeldod in Aiver of t^e proootoani
but 1^0 Geort of Oivil A|lpeidlo rendorod i t s deelslon
la flivor ^ the iportasrO^ BKrlm end %lssid«
Tho Blao dky Lsnr ptvfioioa that a oarpora tlon m t
aot pay aovo then Mjt^for oo«aioaloi» sad osigudLsotion
expoaoos was the tasio of two suits which wore appoalod
to tho Ooarto of Civil Ampoolo^
Tho f lMt of thooe woo the 0000 ef 2err v , law
lor (asa AatiOBiOp Sovenber fiS^ 1MT}«^^ The eause of
aotioa was foiltiro to pay for ooatraetod oenidooions.
Zosr» ootiiR^ for the eorpovotioa, sgrood to allow Lswler
to soi l IM OQO oorth of stook ot #100 por shore. Low
lor or his ogsats were to pay tho ooapoarstloa 75)( of tho
sanuat ^IM^lliod frM tte iOlo«
UMTifillod to oypdsr^mt tho f irs t t i t e l sad tho
Iioaior o l«d9«Mat far H^dST iO*
4pt a aov tr ia l on s writ of oarror. Ho
•VUI .
18
set forth ia this the finct that the corporation had failed
to coolly with the Blue >-y Law in cotnining a nermlt to
Issue and sell stock and the contract with Lawlor was
lllogal, because it provided for a commission to be paid
in excess of 20^ of the selling jrice of stock and was
to be deducted from the proceeds of tho sale of 8to<^.
The Court of Civil Appeals decided that the trial
court was in error in granting Lawlor a judgement. Scmie
points of the law as interpreted in this case are listed
below,
1, In action for oaimiisalons on sale of
eapltal stock of domestic corporations,
the plaintiff must allege and prove that
p nait to soil etock was obtained by tho
corporation as required by the Blue Sky
Law, Sections 2 and 5«
2, I>ome8tic corporations are C7*eatures of
the state and imder its dominion s M con
trol.
3, A eommiasion contract for more than
fSOlf of sale of corporate stoek is an
illegal contract aooording to tho Blue
Sky Law of Texas, Soot ion 5«
The sooond ease, which was finally brought before
tho CoBinissicm of Appeals, ^uno 25, 1930, was Coleaan v,
Mlllor,^^ It was tried before tho Court of Civil Appeals
15, 2» 80 (find) 829; 29 SV (2nd) 991.
19
in Dallas on Hay 7, 1929. A r^iosring was denied on
Jhly Of 1929. The basis of this action was an attempt
to enfovoe two contracts—one orel and the other written-^
botwooa H. M. Rogers and F. W, Colenan (portnere) and the
0, P. Vlller Manufacturing Coapeay, a Texas corporatloa,
Tho written ccmtract provided for the purohase and sale
by Coleman and Sogsrs of 14,850 shares of common stock
of the corporation at $100 per share, Tho partners
were to pay $7,500 in cai^ and the remainder on or
before JUy 1, 1926,
Bogors and COleman, a partnership, were to resell
the Bt0A as property of their partnership and not tho
property of the corpcnmtlon. The rest al^t bo paid la
notes which wore to bo turned over to the corporation
until the fall amount of $1^425,000 should be paid to
the cosff ovatleii*
This written eoa^mot was dated Septeoiber 22, 1924.
An addendtai, aado the same day and signed by both portlos,
set out the total capital stock of the corporation to be
$1,750,000^ divided Into shares of $100 each and a pro
posed increase of $1,500,000 in capital stock was to bo
sold at $100 por share* Ho OOBB1SS1<HIS wore to bo paid
for its oalo and all other expenses wore aot to exceed
5^ of the aslllag prioo, lk> asount of stock was to l>o
issnod for proBotlen^
0, H« Kl}lor wrote a letter to Colaaan and Rogers,
ni^?ti
20
authorising than to sell the stook of tfta Baaafacturing
foapowy at $150 per shsre and to rotaia a profit of $50
on the transactions. In the letter. Miller, also,
stated that up<m the oonclusioii of the contract with tho
partners, they should receive $20,000 from the corpora
tion's advertising accouat for the benefits received from
their sdvortislag.
On September 22, 1924, the corporation obtained
an inetroaent from the Soevetary of State which purported
to oxeapt the sale of the 15,000 shares ef incz^ased
eapltal etook«
Tho partners oarried out their part of the bargain
in good falthg tmt the maao|B)aBturing cempany z*efused to
earry out Ite port and contended that $90 was more com
mission than was allowable under the flOtao Sky Lew,
Coloaaa argued that the stock was axesipt from ths
roqairaaonts of the nae Sky Law, because Miller had
cbtainod aa exemption eertifloate from the Secretary ef
State.
The oourt decided th&t tho aasafaeturlng company ehould
pay the ceamloslcns but made it very plain that jjt was not
w th3.n the poaar of the Secretary of State to iasu^ an
fX€Haption oortifleate. The court eotplained its position
as follows:
Tho law In ease official finding is "sworn of record'' will presume that all acts and duties have booa porfosaod.
The findings of the Seoretary of State in this sonaeoticm are entitled to full faith and credit,
FMsumption that an offleor has acted lawfully
21
does not give him the right to certify legal effect or restilt of official act or interpretation of it.
Presumption that an officer acted lawfully can not be "indulged" when he acts outside his official attributes.
The instrument \xnder which a SeorotaOj of State "purported" to exempt a corporation from the Blue Sky Law was merely unauthorised "ex parte statement" and did not exempt the corporation.
If after due investigation, the Secretary of State found that the corporation had been a going, solvent conce3*n for two yMirs prior to the application for sale on stock increase, the stock was exempted under the law.
The Commission of Appeals on June 25, 1950 up
held all theee decisions of the co\a*ts.
The Texas Court of Criminal Appeals decided the
fact i)>hat ^ corporatl^a had not obtained e permit to
operate In the state was not a defense against the charge
of embeszlement of the coi^)oration*s funds. This decision
was rendered in the case of McCue v. State on Kovember
15, 1953.1^
McCue was convicted of embezzlement in the District
Court of KI Paso County and he appealed. He had a con
tract with the Bankers* IMion Life Company to sell bonds
of the company in Texas and Hew Mexico. He sold a number
of these bonds to Mrs. Isabella Fineau, for which ahe
paid him $450. The bonds were to be delivered at a future
date, but no delivery was ever smido. The burden of proof
16. 65 SW (2nd) 314; Cr. R. (Texas) 624,
22
for the stete was to show that MeCuo converted the money
to his own use and benefit and made no report to his com
pany. Tho indictment was bas^ upon his embezzlement of
$100 of the money involved in the transaction.
McCue testified that he had bou|^t bonds from
various people with part of the money given him by
Mrs. Pineau but that he did not aocotmt for the money
to the corporation.
Ho adBiitted drinking "off and on for several days"
and spending pert of the funds in that way.
MeCuo*s attorney raised the question as to whether
his client was llsblo under the law, because the cor
poration for which he was working was illegally aelling
securities in Texas without a permit.
The follcnring decisions were haxided down in this
ease.
1, A foreigpi corporation's failure to have a
permit authorizing the sale of bonds in the state, is
no defense to a charge against a salesman for embezzling
proceeds of the sale of bonds; since the owner's obtaining
money illegally, is no defense to an embezzlement charge,
2, Under criminal law, the fact of corporate
oxist«QOo of the owner of the property involved may be
proved by oral testlaony or witnesses having knowledge
of the fact.
3, Although it was admitted that the Bankers*
tiaion Life Ooapany was a cox^>oration, organized under
the laws of Cdcredo and was operating without a 11-
23
o«iso la this state, the crime was against the stste
and net against the owner of the property.
4. Me0uo*8 contract to sell securities and deliver
all monies, notes, etc. to the sales manager, who was
Sttthorized to pay his commissions, indicates that the
funds collected by McCuo were undoubtedly the property
of the company.
5. Mrs. Fineau paid her money in good faith to a
bona fide representative of the campsinj, itoo had implied
authority to collect for the sale of its sectiritles, and
thus placed the entire responsibility in this case on
the agent who misused the funds.
The hooA roguired of promoters of j coarporation
before 1923 wae held to bg, £ contractual oblige tlon
and in the ease of the American Surety Company of New
York V. Thonps^i,^'^ this fact was the basis of the de
cision of the Ccnmlselon of Appeals, Deoember 18, 1929,
The cause of action was based on fraud of the
promoters and an attempt to recover on iholr bmid. On
Ifoiy 27, 1920, W« L. Morgan filed a permit to promote
and sell stock in a corporation to be organized and IB
clmrtared under the Blue Sky Law of Texas and to bo
Icnown as the Southwestern Tablet Company. This corpo-
17. £5 SW (2nd) 820; 38 SW (2nd) 576.
IS, Mote that this type of legislation was referred to as the BGLue Sky Law before the "Blue Sky Statute was passed in 1923.
24
ration was to hsve a capiUl stock of $125,000, divided
into shares of $100 eech, CommisslMis on sale of stock
were to be lOjC and paid in cash or stock. Incidental
expenses were to be co-fined to the following:
Attorney*8 fees . . . . .$50.00 Charter fees , . • • . .170.00 Pranchiae tax . . . . . . 62.50
Permit fees 20.00
Morgan filed bond for $10,000 with the American Surety
Company of New York as his surety. He was authorized
to sell stock and was voted $12,500 to pay for a list
of nsunea for designs for covers to be furnished by him.
Sometime in June, he sold J. L. Dyer aid his
son-in-law, 0. S. Thompson, fifty shares each of tho
corporation stock. These shares were paid for in four
notes. I>yor and Thomps^i were made directors of the pro
posed corpora ti cm, A building was leased and some machin
ery purchased. During January, 1921, Dyer and Thompson
beosme dissatisTiod with the progress that Morgan was
making in his collections and early in Pebmary, called
on him x*eq nesting to see the list of subscribers, together
with notes and other resources of the company.
Morgan refused to furnish this information and
further refused to refund to Dyer and Thompson the amoimts
they had paid in to t:.e company and to surrender their
\3npald notes. Dyer and Thoeipson then put their case
in the hands of an attonray.
Morgan and the other directors-*Murphy and Carl
ton—without the consent of Dyer and Thompson, filed a
25
doolaratlon of trust, naming theniselves as trustees of
the tablet company. This mis done in the hope of avoid
ing personal liability.
On May 24, 1921, T>^T and Thompson brought suit
against Morgan and the Anerlcan Surety Company of Now
York on the bond executed by Morgan. The% also, joined
as defendants in this case, Carlton and M u n ^ .
Sach plaintiff alleged that Morgan had sdsrop-
resented both ox*ally and in his circulars the amount
of subscribed and paid up stock and, also, the fact that
tho corporation's larmit had been obtained. They, also,
asserted that the bond with the Amerloan ^irety Com
pany had boea executed under the Blue Sky Law and
that there had been a broach of that bond, beoause of
false and fraudulent representations made by Morgan and
beoauso moneys paid in to the proposed corporation had
been used by Morgan and his co-defendants for another
purpose,
M4»|;an pleaded "general and spooial denials" as
well as a discharge In bankruptoy. The trial court
found that the defendant had made false and fraud\ilont
representations and rendered a Judgement in favor of
Thomps^i and Dyer for $3,525 and $3,915, respectively,
Tho Court of Civil Appeals in Texarkana upheld tho
Jadgeaoat of the trial oourt. This body laid down tho
followlzig rule: The organisation of a corporation into
a trust lo conduct business without the consent of tho
26
subsoribers constitutes £ conversion of subscribers*
interests in the ameets of the gropoaed corporation.
On Hay 16, 1931, the Amerloan Surety Company re
ferred the case to the Commission of Appeals of Texas.
The Suroty Company based its ax*gumont3 on the following
fsets 3
First, subscribers can not in the same suit maintain
astlon on the bond of promoters and action for conversion
where different defesidanta are involved.
Second^ the measure of recovery on the bond of
pronotors is the amount paid with 6^ interest from date
of payment. The asiount of recovery for failure to in
corporate within two y i2*a is the amount paid with in
terest from date money should have been refunded. The
recovery of danages for trover and conversion is the
value of subscribers* interest In property of the cor
poration at tho time of conversion with interest Trcm
that date. Thooe aaounts eould not possibly be tho
ssas, yot no distinction was made In the amounts of
the Judgenoats granted by the previous courts.
Tho CoaBBlssloa of Appsals decided that the failure
to submit an issue regarding tho value of the intorasts
of stoek subscribers tor conversion was an ex^or. If
the stock sabsorlbors, knowing tho corporation had no
ehartor and waa not authorised to engage in business
In this state, agreed for the corporation's assets to
be taken and used, they released the original contract
26
o oonvarslon of subscribers^
frtffff tf to Jftft aaaata of the iroposed sorpcratlon.
te May 16, IdSl^ ttie Aawriosa Suroty Qoapaay re-
forrod tte oase to tho CeBBsisalon of Appeals of Taxes,
Iho Boroty. Css^paay based its argoaHints on tho foUoolng
tm^tmt
fivaty sabsorlbors oan not in tho ssae suit aaintala
action on tho bond of pronotors and action for convarslon
shore different dofssidaats are involved^
Seoood^ the aoasure of rooovery on the bond of
proaotors la the omount paid with d^ interest from date
of paymoat* Tho saoaat of roM^vory for XIallare to in-
oespeaato althla two yoars is the amount paid with In-
toroot fras dabs a«soy should hsve booa refunded^ Tho
roooifory of dsaa^es for trover and oonveraion is tho
valtto of sabsorlbors* Intorast la property of ths oor-
poratioa at tho tlao of eonworaloa with latorost f rosi
that dabo# Thooe aaouato eould aot poaslbly bo tho
aaao, yot ao diotinotlsa was aado In tho apiouats of
the iad#aooato giraatod Igr tho prowioao ooorta*
«ha CwBiilsoioii of Aypoala dooldod that tho fallnro
to si^MdLt aa iasao ragopdiag tho aaluo i^ tho Intassats
of stook aubooribors for sonvorslon was an error. If
the ataok aahooribeaa, kaeaiag tho corporatloa had no
ehartor and aaa aot authorised to «w^go in business
in this atatOp sgysod for tho corpora tlon* s assets to
bo tslDsa sad aaod» they roloased the original oontraot
27
which the Anerloaa Saroty Ccsipany bond was made to secure,
The provious Judgcswnts were reversed and the case was
resianded for a new trial in District Court.
Thempoon should have attempted to recover for trover
and conversion, or for broach of the promoter's bond,
bat not for both causes in the same suit.
ADKINISTRATION OP THE BLUE SET LAW
The power and authori^ to carry out the provi
sions of the Blue Sky Law is vested in the Seoz^tary 19
of State, and it is his duty to enforee them.
A fm!^ign concern must file an Instrument in the
offloo of tho Seoretary ot State, appointing hia its
attovaey against whom service of procoes may be served
in any action that may be brought against the foreign
20 oonoenu
This law empoweam the Secretary of State to appoint
sueh assistants as are necessary to perform tho duties 21
imposed upon him by it. All papers, doetmtonts, in-
strumotits, etc., filed with the Seoretary of State
by any person or concern under the IJXH)vis Ions of this
law, are oonslderod public z>eoords of the state, Tho
19« Oonoral Laws of tho State of Texas, Acts 38th Legislature, Chapter 52, Section 15.
80. Ibid,, Section 6.
21, Ibid., Section 16.
i"«H^-,
28
Soorotary is required to give out any information which
is si plied for, eonoeming such records and to furnish
at a small cost, sortifled copies of instruments, etc,
Svery quarter he must publish bulls tins, summarizing
the applications for permits to sell stock under this
act and the concluaions he reached in regard to whether
tho concern was solvent or fraudulent and whs tho* or
net a permit was granted,^
The Seoretary of State has a ri^t to request tho
Attorney (^neral or the District Attorney or any Coun
ty Attorney in this state to aid in any investigation,
trail, or prooooding in the enf oreement of the Blue
Sky Law. The Attorney Oeneral must give the Secretary
of State oplnicms itpon all questi Eis of law relating
to the constructlea or interpretation of. this aet and
atist servo as the attorney for the Seoretary of State
in all actions and proceedings brought by or against
him under the provisions of this lao,^
COUBT DECISIOHS
There has been no oase that mox e clearly defines
the status of a foroiga corporation, operating within
a state, than that of Davis v, Fisrmers* Co-op Bqulty
Cssqpany, which was triad before the thiltod States
Sapreno Court in 1923,^^ This was a Minnesota case and
22« Ibid., Section 21.
23, Ibid., Section 22.
-»im -t.-(i*u Ct, 556-558X 67 L. Bd. 998t 262 US 312
involved a suit against an agent of a railroad who
resided in Minnesota and solicited business in iiiterstato
transportation for his cempany. In a municipal court,
a Judgement was granted against Davis, the railroad's
sgont, for a loos of grain shich was shipped from one
point in Kansas to another in the came stato. The
cause of action was in no way connected with Minnesota
except that the railroad company maintained an agent
in that state to solicit transpos*tation over its lines
In other states. The Minnesota statute provldoo that
a foreign corporation having an agent in Minneeota may
be served with a summons by delivering a copy to the
agent.
Justice Brandeis delivered the opiaioa of the
Supreme Court which was in fkvor of Davis and the
Judgement was rovorsed. Justice Brandeis said thst
the state JurlsdiotiOQ should bo liaitod to suits
arising out of business transacted within the state,
*Tho Mlnnosots statute does not limit its Jurisdiction
in this aay, aad therofore, lapoeos an unreaeonable
burden upon interstate commeroo. Orderly, effective
adksinlstratlon of Justice doee not ro^lre that a
foreign carrier submit to suite in a stato in which
the oauso of aotlon did not arise and in which it does
not operate its linos or la which the plaintiff does
not rosido,*
^ i'x-:v x -\' Pit^iPi
90
dasiaioBs in idiis oaao wore handsd
liy tt» Sapaaao doart,
Haat^ salioitatioa of boaiaoss for railroads in
atatM V0B»ta firaa thoir linoo io part of tho bnsiaoas
of'iatovatato tiaaapertatiea«
4 0i lsoiad» a atatato povaitting eervleo ef proooos
ayoB on a^SBt ate i s naiatalnod la tho stste by s
foaaii^ sailrssd f«r tho pivpooo of so l i c i t i i^ busiaoss
aveor I t s liaoa In oth«p atatas, i s aot valid la saita
OhlM aay aviso oat ot traaaaoticas in othor states la
tKwmt of asapirssidoats of aio otato. This violstoa
tho osaaoroo olaaao of t io fodoial eeaatltution to
aUaa mmik aa tataafaotatiaa of tto statato,
fhiadt latovatato ooaaevoo that i s esrrlod on by
a oor^osatloa whloh i s iatoaatato la ebaraoter doos aot^
raod^p tho oovpovation iaauna ft^ca ordtaarr process of
tho osarta l a the stato in idi l^ i t is feaad,
nCLATIGVS AMD PEMALTIB8
Tho poaalty f ^ iri^latiag tho proviaisas of
tho Blaa dky Law oaaooralng f i l l i p df dooaaaate i s
a ohartt of Mioay Mud, apm oomriotioB, the offoador
a i U ho fSaod aot loao thsa $1^000 aor aaro thaa fSO OOO
aa^ ia sdditlsa, a i l l bo laprisoaod in ttio state p«DitoEa-
t l i ^ ter a $oiai of aot loss thsa oaa nor aero thaa
ftao jmmmJ^ aoatloa t of the Blao Sky Statato askoa
. irilfii I f -, ^
(# dsasaal teas of t t e Stato of TsoBaa, Aota S8th u OUsatar 8£, Sootion 2 ,
31
it illegal to chango an original document under which
a permit has been granted, unless permiesion to do so
is given by the Seorotsry of State.
It is the duty of the Secretary of State to have
a fraud order issued, as provided by the postal laws
of the United Statee, if he finds any person, broker,
agent. Joint stock company^ co-partnership, or other
company—domestic or foreign—sending advertising matter
through the malls, by express, telegram^ or otherwise,
wholly within this state, offering for sale or selling
securities without a permit as provided hy the Blue
Sky Law.26 It is the duty of the Seoretary of State to
cooperate with the If. S, District Attorney, the U. S,
Department of Justice, and the D, S« Postal authorities
in furnishing them with such Information as may come to
his knowledge of the violations of the federal poetal
laws .27
The merger, abeorption, or transfer of property
of any oompanyg association. Joint stock company, etc.
is illegal unless approved by the Secretary of State.
Also, the merger or abaorption must be approved by a
majority (in the amount of outstanding and issued stock)
of tl« stockheldere and notice to the stockholders
must be mailed thirty days in advance of the vote upon
26. Ibid., Section 9.
27. Ibid., Sootion 10.
32
the merger or absorption. Penalty for violation in
this instance is a charge of felony and, upon convic
tion, confinement in the state penitentiary for any
term not exeeoding ten years.^
It is Illegal for any concern, included in this
act, to deelare a cash dividend to its stockholders,
or any of them, out of funds other than the actual
earnings of the company except in case of li<iuldation.^
The penalty for toclerlng an illegal caah dividend
is a felony charge and, upon conviction, imprisoimient
in the state penitentiary for a term not exceeding ten
yeax^.^
Any person who knowingly makes false entries in any
book, record, 5Lnstrument, etc. for the purpose of de
ceiving any authority, authorized to examine the books,
is guilty of a felony and, upon conviction, will be
punished by confinement in the state penitentiary for
any term not exceeding ten years . '
It is illegal for any owner, manager, or execu
tive of any newspaper, or other publication, issued
in this state, to knowingly advertiae the sale of se-
ctiritles within this state, whloh are not authorized
to be sold, according to the provisions of the Blue
28, Ibid., Sections 11 and 12.
29, Ibid., Section 13.
30, Ibid., Section 14,
31, Ibid., Section 17.
33
Sky Law. Xvery issue of such a publication in which the
advertisement appears will constitute a separate offense.^^
Any person who has anything to do with the sale
of stock of any concern which has no permit to sell
will be coneidex ed guilty of a felony and, upon con-
victlon, will be punished by confinement in the state
penitentiary for any term not exceeding ten years.^
Any person who is guilty of violating any provision of
this aet whloh is not covered by a specific penalty,
will be charged with felony and, upon conviction, will
be fined not less than #1,000 nor more than $10,000;
and, in addition, may be imprisoned in the state pen
itentiary for a psriod of not less than one, nor more
than five years} or may be both fined and imprisoned.^^
PIHAHCIKO THE ACT
The logislstaro, at the time the Blue Sky Law
was passed, sot aside $7,500 (in appropriations) for the
purpoee of purehasing office oqaipment and supplies
necessary for the organisation required to carry out
the provlilons of the law.^^ Salariee of officials
and expenses for enforcing the statute were to be paid
32. Ibid,, Section 18.
33. Ibid,, Section 19.
34, Ibid., Section 28.
35, Ibid,, Section 25.
34
by warrants, drawn by the Comptroller on the State
Treasury.^^
SUmiARI
Any ooncem intending to offer any stook for
sale, whether by way of an original iesue or an in
crease of capital, must first obtain a permit from the
Secretary of State. An application permit may be
granted on the condition that the applicant make bond
that all moneys received from tho sale of stock will
be placed in escrow with the Secretary of State until
the Seoretary grants or rejects the permit to operate
and sell securities.
PrcKBOtion expenses can not exceed 20% of the sell
ing pzdce of the stock.
All concerns except bcmklng institutions, rail
roads, building and loan corporations which issue
stoek, or other business tmits, and which are designed
for the purpoee of owning property of any kind are
included within this act.
This aet was effective in Texas for twelve years
(1923 - 1935) and only minor changes were made in tho
manner of drawlzig the warrants for expiwises and of
ficials* salaries and in the omission of the penal
36, Ibid., Section 26. This was the first part of the Blue Sky Law to be repealed. Salary payments wore paid out of a special fund (1934) provided by tho foes collected from applieahts.
35
provisions. But after the federal government passed
its Hew Securities Act in 1933, the 44th Texas Leg
islature repealed the Blue Sky Act and passed a Texas
Securities Act, which is the present Blue Sky Law.
36
PART i n
THE SECURITIES ACT (NEW)
The Texas statute known as the "Securities Act
(Vow)" borrows its name from a similar national law
whidi was passed in 1933—two years before the Texas
law was enacted. A careful study of the nsv state
act reveals few changes from the old Blue Sky Statute.
As one attorney ably phraeed it, "The Texas Securi-
tiee Aot is Just the old Blue Sky Law, masquerading
under a new name,**
The Securities Act provides for the registration
of both the securities and the corporation, broker,
dealer, agen^ or ealesman who sells them. Honorable
0. D. Brundidge, Chairman of the Commereial Law Commit-
too of the Texas Bar Association, in a letter to the
author under date of Hay 25, 1937, says: "Prior to the
passage of this aet, the law afforded little protection
to the purobaser of securities in Texas. It was neces
sary for him to make hie own investigation as to the
value or desirability of the stock or other security
offered to him. The rxile 'caveat emptor' applied.
Under ths Securities Act, the dealer is required to
be registered. The general effect of the act is favor
able to tho purohasor of seetirltios and has met with tho
37
approval of the sellers of legitimate securities.''
TtkB Securities Act originated as ^use Bill
Ho. 521, and was passed by the 44th Legislature. It
became a law on May 23, 1935.^ The last section of
the Securities Act (New) repealed the Blue Sky Statute,
but all pozmita Issued under the old law were to contin<
ue in full force for the period for which they were is
sued, xmless expressly revoked by the Secretary of
State, All money collected for the ack&inistration of
the Blue Sky Law was turned over to the fund for admin-
is tor izig the new aot.
State Jurisdiction in cases of fraudulent aale of
securities is limited to intrastate dealings, but thox e
is a similar fodcural statute to protect the purohaaer
of stock in Interstate transactions.
DEFINITIONS
The New Securities Act of Texas defines secur
ity, company, dealer, salesman, sale, or offer for
sale, fraud, fraudulent practice, etc. in practically
tho same terms as those employed in the Blue Sky Law.
Bx*oker is defined to be the same as dealer; and issuer
means and inoludos every company or person who proposes
to issue, has issued, or will in the future issue any
security.2
1. Title 19-a, Article 600-a, Pocket Part, Vernon's Annotated Revised Civil Statutes of the State of Texas; 1935 Acts, 44th Legislature, Chspter 100,
?- JCfeMrvr Sectiou 2.
38
EXmPTIOHS
The third section of the new law defines the
exemptions to its provisions. There are sixteen of
those.
1, Any sale made by any Judicial executor, ad
ministrator, guardian, conservator sale, or any sale
by a rooelver or trustee in insolvency or bankruptcy,
2« The eale by a pledge holder or mortgagee,
made to liquidate a bona fide debt.
3. The sale of securities, made in the ordinary
course of personal lnvee^ent-*if the seller is not
otherwise engaged in selling securities.
4. The distribution of stock by a corporation
to its stockholders in the form of a stook dividend,
paid out of earnings or of surplus.
5. The sale of an increase of capital stoek of
a corporation to stookholders, only, without tlie payment
of any conraisslon and without incurring any liability
for expenses in the sale.
6. The Issuing in good faith of stock by a
company to its stockholders, cr creditors, in a
boxML fide reor^Lnlzstion of the company.
7. The transfer of stock by one corporation
to another in a permitted consolidation or merger
of the oompanlee or in the hanging of par value stook
to non par value, or vice versa.
M
t^ tho osXo bgr o desMotio oorfssotioo of i t s
OlMk i»tmlUA fiMP s tellsioont sssiss—it^ ooooriii^
to lsw«
0« fho solo of stook to mj bodk^ tr«ot oos*
pony^ loss mad teOtenigo oorpoMtisttp boilding sa4
looa oosodotistt^ Inottranoo company, suroty company,
gaoramlgr ooMpasgr, oowlngs laotitotisn, or to any rog-
isterod AooXoTp provided ho io sot«ally engaged in
bnyiag ooouritios,^
I0« Tho solo by say doBostlo oorj^ormtisn of i t s
stoek or othor ooooritlos» iosuod in good fsaith, so
ISQg as tho total ni oa»or of stookholdors and soourltgr
hol4tao 400S not sacoood tooiity«fiwo ond ths sooorltlos
aro disposed oi vithout the use cf advortiosstents or
sslosastt* ^^.^ ,,
IXm Iho ooXo of on i»tos>oot in any partaersbip
|nol» or othor osMpsay*tiot a corporotlon*«*irtioso total
aesih^rohip doos not snd will not after ocmplotion of
tho solo osoood ton in nwdMr, ani tho total orffudsstien
soqpoBSiM do aot oxsood 2j[ of tho total invoetod oopitol
of tho ocipsfiy»
l t« Si booriptlecMi to oapitsl stook necessary to
qoolif]r for s tmrnm oorpocmtioiit i f tho totol sidH;
soriboro io woX wiiisd fiftoon in numbor,
Jfip tooiUPJtioo ia the fom of notes sr bonis
8* Isswn^s Annotatoi Hswisoi Civil Statutes of tho Stoto of foxoot t U * n ^ Art, XIBf"^ Sootion 9 and Artlolo 8it«jjs MNio tho ooouritios which ore logsl for Invootmonts IV fiioolonr sm^siilss^
40
by o airt0S0O or iMndor*o lion opsB real ostato
or poroonal property when tho mttf^o BM>rtgago le trons-
forrod in a single transastion*
l i« Soouritlss, issued by a phUanthroplo or
oiocatibial corporatloa #3lch are eold without tho pay-
•ont of any oonmlsalon^
16« tho sale by the issuer of any securities
by s hank or building and loan association, oysroting
undor tho lows of Toacos sad oohjsot to tho sopsrvisisn
Of tho isirting OsDBiosiOiMr, aocorilag to S«iate Bill
Bo» 168 of the 42Bd I»ogl s i s tore,
l i « fbo .Oslo of any soooritioo by any farmors*
ooopsamtivo asi^oiotion idilch i s orfanised in aocord
with Tsaoas Low«
n fUULjOM SXlMFTIOISy ths burden of proof i s
i lpoa ths porty olsteii^^ oxsBq tion*
mm i« "Uamux^m Annotstod Boviood Civil Stotutos of
tho Stoto of fono^ ihsptor •« n u o 95^ Artiolos 57S7 • 87M« Wfftkt This sacssiptlsn i s aot sprilicoblo to oMnto obo o i U to non eisrters of ths ooooolstion i f
i s yoi i cr oontrsotod to bo pold in tho Mtlo,
ft, ]Mi« , Titlo lt«o» Artlolo iOO«o, Sootion 4 ,
41
mmvanm or A rmaat fOOU. CBXiin flOEWK
in ofsntp isslor^ or sslosnsn eon not offer mo^
ooritios for solo (oxoopt ss shore l isted undor ox-
snptioM) nntii tho iosuor hos obtsinod a ponslt fron
tho Soomtory of Stoto* This pemlt i s not granted un<
t i l the opplioont' fUos the follovlng infmMtticn with
tho SooroiosT oT Stotoi
n« IHBOO oni oiiroosos of efflooro of
the oosQponyi
h» lioosticn of tho prlncipsl offloo and
o U tho hooa^ ottisoo in thU ototof
o» A copy of i t o Artiolos of Zaoorporo-
tlon ov yortnsrsbip oni oowateonto and, in
tlio oooo of o oowpoMmtion, o oonr of tho
•iMitoo^of s U iirootssHi* nootingsy b3HLos«»
oto«|
d» A otsbonsnt shontas onount of osfltol
Oto* ottthorisoi or oentoopli^od^ mmibnt of
oboroot thoir volno^ oiMwitssion to bo poid
f i r ^ » nolo of otoidrp ond other ospootoi OK*
o« OortMi ^ oovtifiootos of stosk sni
nU othor ooonritioo to bo so l i , tegother with
i^]^liootion blonko for thono, snd s U advortising
prpysoioA for iisrtvUnitlon mr pohliootioni
^ J^otoitod flnsnoiel stotements of tho
1; li
42
V "MS urt noro thsn ten 4syo prior to
tr liMi t s t o thir «M fUoi« Urn osso sool oototo
i s UotoiSBSM^ tho ooootOt tho aotnsl ssount
for tfUMi i t io roniorsi for tmos i s tiio valus*
tfton pinooi npon i t In tho flismoiol t o t w i s n t .
Any sgisnisuto to roporohsso ooooto snd outstoni<
^ing oontlnpsat UoWLlltioo nuot also bo aoiMd*^
A fer^l|^ ismor mnot soouro a eertifloate fros
i t s own fswoi'imioitt not noro thui thirty doys boforo
i to iw^«^ti«ft i s fllod^ showing tho right to tronsaot
booinoos in i t s ovu oou&try sni^ oloo^ shooing that i t
Xm not iolini^nsnt in sny tsxes or ossoosn^ats.
Tho Sooipotory of Ststo aayp i f 1^ thinks i t i s n
(m^0 hold o i l nonsys eollooted fros tho sale of ssouHi
tioo (osEOWt that sUoood for oifOBwos ond s i i i i ss ions)
in s troot f ta i In some boidt or truot oonpony in tho
Stoto of Tozos nntll tho conpmy has sold tho mininni
SBMnnt of otoidr to begin business. In tho event that
tho propoood oosiptty fa l l s to s o i l i t s minianai mmmUt
of otoiac within too yosro, tho bonk «ts t turn the mc»oy
hook to the snbo0rih«po. The totol oxpenoos in^udii^
orfsniaotion snd eonslssiono ns^ not ox Mid Kit of tho
M^a sniont of oopitol ooni^ to bo oi^oTod in tho 8
#
«e Xhii^^ Sootion 8«
•• Xhld^ Sootisn 8«
_8« XMMU. Sootion t»
45
If tho Secretary of State refuses to grant a
permit, the applicant nay ask for a second hearing
within ton days. The Secretary will set a time for
the second hoorlng and notify the applloant.^
TfeLdor tho now Securities Act, a permit is issued
for only one year and is not a guarantee that the stock
is "good." Tho use of a permit to aid in the sale
of seeurltles is forbidden.^ All infomatlon filed
with tho Soorotary of State must be kept available
for public l^poetion.^
Sxoopt as provided in Section Three of this aot
every dealer, ealesman, fim, oorporatlon, or person
who sells securities must register with the Soorotary
of Stato, It is a port of the doty of this official
to keep those registrations up-to«dste and open for
inspeetlon.^
The requirements for information to bo filed
may vary with different types of corporations which seek
to soil securities in Texas, but the dealer must subnit
a sworn applloatlon which statos his place of bueinees
and braneh off icee, if any; and if the application is for
a corporation, it must state the place where it was
9, Ibid,, Sooticn 8, 12. Ibid., Section 11.
10, Ibid,, Sootion 9. 15, Ibid., Section 12.
11. Ibid., Sooticn 10.
44
orgonlsod and the date of organization. Also, a
corporation is required to file a copy of its Articles
of Incox^oration snd its plan for doing business.^*
If the Secretary of State decides that an appli-
oant is trustworthy, he may allow temporaxr permission
to soll,^^ Tho applicant may ask for a second hoorlng
if the Secretary of State refuses to grant Mm a permit
and the time must l>o fixed within thirty days from the
reoelpt of the applloant*s request. If the Secretary
of State is satisfied with the applicant's qualifica
tions after ^ho seoond hearing, he registers the dealer.^
A dealer may apply to the Seoretary of State for
registration of any agent or salesman to sell his
soourlties. If the quallfioatlons of the agent or
salesman are satisfactory, the Secretary registers him
for the calendar year and issues him a certificate to
sell. ''
Any roglstorod dealer, agent, or salesman and any
person or cmspany named in the registration eertifloate
aay sell soourlties in this state.^S jt is Illegal for
14, Ibid., Section 13,
15, Ibid,, Sootion 14.
16, Ibid,, Sootion 16,
17, Ibid*, Section 18.
18, Ibid,, Sootion 20.
48
8^^ • ••
or ofont to dioploy or advortlso tho foot of "'well I . . • . • ' " • '
rogiotvstion other thsn to poot tho oortiflooto in tho
ioolor^s plsAo of booinoos ,^^
A doolor^ ooloonsn^ or ofont my f i l e (wittin
thirty days) o petition i^ainst tho Seorotsry of Stato ' . • • , , * ^ • " i ^ ^ • • • •' '
OS dofondont^ oOking for an order dirootiog ths Soo--»-
rotory to rogioter tho spplioont. The Seerotoxy files hlo snowor with ths District Court of Tx«vls County,
Toxos* If the court roveroos ths decision of the Soo-
rotoxy, it sMy roq:olre hin to roglst^r the spplloant.
An sppool aay bo tslcon fron tho Dlstrlet Court to tho
Oourt of Civil Appeals Iqr olthor porty as In othor
oosos, A Jodgesmnt stsitoinlng tho rofk»ol of the
Soagmtmxj of Stoto dooo not bar tho spplleont (after one
yoor) APOR asking a new sppliostlon for roglstrotien,^
This loglAotion io so rsoont that ohly one oooo
to Hotod whloh hoo boon trlod imdor tho now state low.
This tOM ths oooo of Halo ot ol v, Ksan« Soorotory of
Steto«^ A o plsintiffs ooro partnoro who asro en«
gsgsd in t o bttoinooo of oolllng oil and gas losoos.
-O--"
19, IMUU9 Sootiotto 21 snd 22, m
80» Ibid,, Sootion 85,
tt« Ooorto (lioy 828) 8^ 880t K^ 880, Distrlot Ot,^ m. SW '^m^'MmMMk^ w n ^ wmm m, 2»S8|
46
wori1ii80» ainorsl doo«s» oto* in tho Stoto of Uxmm.
• I l ig t i bnt fhUod to prooo thst thoir rltfit to on-
i » UHg bnolasss noo for in oxoooo ef #8^800.
(Thin nno on ottoapt to shew thot tho Distriot Coort
tiMKOd bowo Invioiiotlon in ths onit.) *.
fho portnoroe >Uo oni iteton^ ollogoi thst their
baoinooo noo of onsh o nstnro tbst i t couli not bo rogis*
totod ^ tho Soooritioo Aot sni.if i t oouli^ thst ths
now not onotaBSonstitutl«3ol# Tho oontrororoy orooo ovor
o rogiotrst&on foo of |S8 whloh Itean woo ottssqpting to
oolloot, Tho psrtnoro r^t»oi to pay booanoo thocf
stojootod to tho foo ond tho rogslotion end oworvision
of tho''8toto oo provlited in the now oteiato,
Tho oourt onggootod thgt i f tho foo aas'tho oolo oonoo
ff ooqpiointe tbo portnoro poy 'ndsr protost* snd
fhr rooofofy in o ooort of propor Jnriodiotion» ^
fho ooart fnrlhor ototod ttot if tho blU oesq^loto^
Ir sapponosod Iho plaintiffs* booinoos^ i t would bo on
idlo fosaslity to rogiotor» bnt the j ^ m t i f f s hod fsilod
to proao thotcthin mo Iho oooo» n o suit ass diooioood^
' i »
iv;. * Aipt oiy ^q^oiatori will go to ttM^troublo ond ox-
of trylns to iroiro oodh oaoooasioo Blno Sky Loa
itSMiUonoA io « i f f i o « t to undoratondp bnt th«y
doing 88 dnoo tho first ototnto ass poosod
i^B ^ilihsaji ths nrr Bias Sky laa io^ aooording to
of loopholeo ond io not being
47
vary oMotXy onforsod^ there is no reason to bellove
||a^ the oourts will ruls it unsonstltutl«Ml, because
tlio osas rofoirsasnts whleb aro embodied in the Texas
statato hsvo booa uphold by the courts in othsr states
snd ^ tho Suprsao Court pf ths Unltsd States,
One of tho nost iaportsnt oaees of its kind to
bo trlod boforo the Supremo Court of the United States
aaoxthot of Siaon v, (haft,^^ The cauae of action was
frond of Frasotors to the corpcrotion. Xsny iaportsnt
points la ths interpretation of the new law were laid down
In this case and it woe reported In Texas I«aw Bovlow for
Booaoiborp 1855 by Zra P. Blldebrand«' The opinion of tho
oourt was writ ton by ^stloo Cardoso*- f .
The proaotors ond thoir wives wore the owners of
pmotlooUy oil cf the stook of four corporstiozis, one of
Aloh ass Purloai sal Cos pony Ino^ This eorporstlon
i^tsinod sftlons on nine gas propertlos in Pennsylvania,
Tho purshaso prioo of theoo ass tl^578^989. In order
to got tho aonoy to pay for thoso propoaptlos, the l>hr«»
load fosipsny oigonisod a otoek corporotion with 1^250,000
Shoroo of no por aslno stoek^ to bo known as ths Dnquosno
Oso Qmr^mmtimn^ *lr^noofa* wore engsgod who plmood.
o f lotitioas aslaotioa of |Tp(KX),0(X) on tho mine prop-
orti88^ fho BagWiao Sss deapony issaod Id^OOO^OOO
Uppth of et^wmt%mv notes,
fboa SaQaooao ogrood wi|h forlaad to take ovor tho
giyp finite far t ^ oorpiirotioa for s consldorstlon of
4ttV-58| 21 Sap* Ot«» 858«88| 48 L« 8i«
|8^iliI8^8e8 (lihiolh ass fSiS^ldS aero thsn Poland ass
oa##Mid to pay to ths grantaps), n i s was to bo paid
07 oorporatlon bonds ond non por imilao stook, Foiasad
ogrood on Iho aoas dsy to toko ovor o i l tho bonds at
o prioo cf 88JK ond tho aortgsgo notes st s prioo of 80)f»
Itbm rosoit df thooe tronoaoti«is ass thst the Du-
4noano Sdiipsny had tho oanorsbip of gas fields worth
ikoat |2^880«800 snd about #288^000 woxOlng oopitol,
Tho beads mad tertgsgs notes outstanding aaonntod to
^ OOOyOOOi i&iorafbra^ tho ooajany was inoolipoat when
i t aao orgsaisod, Xto bonds snd aertgago notoo wore
#2^888^000 in oocooas of i to soaoto snd capital s t o ^
of tho oorporstiaa bad sboolntoly nothlag b a ^ of it«
" tho Snproao Goort ruled tSaat the rooelver should ro«»
oavor froa'tho proaotors the profits they hsd asdo Aroa
tho Oslo of tbo bonds snd tbs stook of tho Daqaooas
JdOtiaoiSutherlon^ VoBoynolte^ snd Batler die-
ssntod i a thio opSnicn, Thoy bold that this ass s ia l l sr
to tho cad PsatnloTi Ooppor Oaspsny oooo wherein the court
hold ttait piOaoisro who bought stook at #80 which aao
esl'rtii at flOO andaold piopsrljf to their own corpora*
t loa at oa saooaoii^ wlvation asrs not l l sb lo to tho
•orporatloa for aot oUoidng ini»osnt ^arohsaorB to 01
in on tho grooad floor*
Si tbo opiaioa of tho » m s o i Court, tho fbUor*
• • • • : * •
49
Promoters of a corporation oeeupy a fiduciary
relation, not only to the future corporation, but to
the stockholders. In this instance, the promoters
violated their luty when they pocketed all the pro-
ooods of the sale of tho stocks and bonds, except tho
pttrohase price of the gas properties anA a amnll wcrk-
Ing capital. It was their duty to give this balance
to tbo company, oopBOlally since they stated in their
prospectus that tho bonds were issusd by th» corpora
tion in oomeotlon with the acquisition of properties
and to provldo cash for dowelopBMnts, extensions, and
other corporate purposes,
^ustiee Cardoso stressed the fact that the corpo
ration was insolvent when It began operations because
the promoters had pocketed so much of the noney, yet
ho mskes it very plsln that ti» court would have reached
tho same ooncluslcn even thoggh the TOmpooy had not
boon insolvwit at the outset. If s recovery of thoso
illicit gains was noodod to pay subsequent creditors.
In tho sooond plaooy the prcaotoro were liable ho*
cause thoy vlolstod the eonstltutlon of Penosylvania,
which h»s tho ftiJLoalng provisions
"Bo corporation shall issue stocks or bonds except for money, labor done. or property aetuslly rooeivodt snd all flstitloas increase of stock indebtedness shall be void,*'
One suthorlty in cosmonting on this case, answered
tho oontention that the corporation should not have boon
allowed to recover befad^^^J^^j^t^holdors should have
fe— LUBBOCK, TEXAS fllv LIBRARY
50
iaasoiigatod boforo buying the otook with the follow*
Ing otatoaaitt *Saeh oontention i s nonsense, Apsrt
m a intrioste''notbeds of bookkooping whloh on aroh^* « r
sngel woald find d l f f l eu l t to unravel, i t i s a trolsa
that kacalodgo of the true f s s t s i s eoaflnod to s vary
snail g i oop Of Insldoro," '* . l<
Mr*mdobrand In his comments on th is case» says
that dooloions l ike Gsrdoso^s a i l l be a deterrent to
the unooiapulous proaotor, bat the legitime to inveet*
nontbeidcoii cr broko^ con s t i l l s e l l bonds ond stooks of
a now oorporotlon for loos than par so long as ho dooo
not podkot port of ^ o pdiMiooo prioo that boloogs to
tho oerporstisn* Xf tho stock^is sold for loss thsn
por^ the stoekholdor msy bs hold l ioblo for the di f fer-
«tioo to fhturo orodltota^ ^te Socurltloo IbKObaqgo Aot
woe pooood to provont a roourreneo of praotioos rovoolod
in the ]3oqooono osso* drokors and invsstaont bozikoro
a i l l hooitoto to organise a *8ouso of losuo" for the pnr-
poio df unloading options snd "floMildg" substantial
SUBS froa obbso^ont stookholdoro'by patting f iot i t louo
vaiuotlctti 00 the oosoto which the Heuso of Issue bays,
AXaiXlIXSTBiTIOS
A Ibroii^ MP non-rosldsnt company fimst agree that
tho Seorotsry of Stato any aot as i t s agent in cases
t r i o i Ogainst i t in ijiy county of the Stato of Texas .^
25e T "*- l^«a* Artlolo 600«a^ Pocket Port, Tomon* m ^ y a j ^ l R i a o d tUW Statatos of the SUto of Tozsst
51
Any changes in the personnel of ft partneraliip, or in
the officers, principals, agents, etc. of any dealer
must bo iinmediately certified under oath to the Secretary
of Stato, who will fill out an amended certificate.^*
The Secretary of State has the authority to require
a dealer to file a list cf the securities which Ve has
offered for aalo or ha a advertised within this state
during the preceding six months. Ko dealer may sell,
or offer for eale, any security which, in the opinion of
the Seoretary of State, contains false or misleading
statements. Notice of this must be given to the dealer
in writing and he may appeal for an immediate bearing
on the validity of the questicmable security.^5
A salesman or agent ma>; also, be called for hearing
and have his certificate revoked for fraudulent practices.^S
The Secretary of State has the authority to sub
poena witnesses, both within the state and out of it, to
appear and give testimony at hearings. Be may, alao, re
quire the production of books, accounts, records, papers,
and oorreapondence to be introduced as evidence at hearings
in which he takes a part. * Certified copies will be
admitted aa evidence unless Just cause is shown to re
quire the production of the originals.
24. Ibid., Section 17.
28. Ibid., Section 24.
26. Ibid., Section 26.
27, Ibid., Sections 29 and 30.
52
Ohonover the Secretary of State decides that the
Issuance, s a l e , or distr ibution of any security within
th i s s tate i s in violat ion of law, or would operate as
a fraud upon the purchaser, he or the Attorney Oeneral
should bring s u i t in the name of the State of Texas to
enjoin the person or company fz om continuing ths fraud
ulent pract i ces . The Dis tr ic t Court of any county
where t h e acts complained of were committed or are
about to be committed has Jurisdict ion in su i t s of
th i s kind, Ko bond for injunction i s required of
the Secretary or the Attorney General.^®
It i s the duty cf the Secretary of State to adminia-
t e r the provisions of t h i s ac t . I t i s the duty of the
Attorney Oeneral t o aid i n the enforcement of these pro
v i s i o n s . The o f f i ce of the Securit ies Ccxmnissionor of
Texaa i s created by Section 34 of th i s new Securit ies
Act and i t i s h i s duty to aid the Secretary of State
in the administration and enforcement of t h i s new law.
The term of o f f i ce of the Securit ies Commissioner i s
co-extensive with that of the Secretary of State, by
whoa he i s appointed. The salary of the forrrer can
not exceed #3,600 per year and hia duties are s imilar
to those of the former Blue Sky Commies loner. 29
S8. Ibid., Section 33.
20. Ibid., Section 34.
53
VI09UTI0NS AHD PBfALTIES
It is unlawful to sell securities without a regis
tration certificate or temporary :^rmit. The name of
the dealer must be printed on all literature, offering
securities for sale in this state and a copy of all
literature must be filed with t^ Secretary of State.
Clippings of advertisements which appear in periodicals
must be sent to the Secretary's office within twenty-
four hours after the first publication.
The following types of securities are exempt from
registrations
1. Securities issued or guaranteed by the TTnited Statee, or its states, or possessions;
2. Securities Issued and guaranteed by any foreign government with which the United States is' maintaining diplomatic relations— thi% also, sppllee to subdivisions of these foreign governments, provided that their securities are on the approved list of the United States Securities and Exchange Commission;
3. Securities issued by a national bank or government agency;
4. Securities issued or guaranteed by a railroad or other public service utility corporation which is regulsted by the Railroad Commission of Texas or by a public commission;
5. Securities issued and sold by a domestic corporation without capital stock and not engaged in business for profit;
6. Securitiee which at the time of sale are listed upon the Hew ^ork Stock Sxchange, the Chicago Stock Exchange, or any other stock exchange approved by the Secretary of State;
7. Securities issued by any banking Inetitution under the supervision of the Banking Commissioner of Texas, or securities issued by insurance companies or build-
54
Ing and loan aasociationa under t^e supervision and control of state departaaats.
8, logotlable promissory notes or other oomnerclal paper, iesued in good faith and in the usual course of bueinees, provided that such notes or paper mature within twelve months after the date of iasue.
9. Notes, bonds, or other evidence of indebtodooss or certificates of ownership which are equally and proportionately secured without reference to prioz^ty and which are secured by the deposit of a trustee (approved by the Secretary of State) of securitiee specified in Subdivisions 1, 2, and 4 of this Section. Those specified in Subdivisions 1 and 2 must have an aggregate par value of 110^ of the par value of the securities which they aeouro and those in Subdivision 4 must have an aggregate par value of not less than 125^ of the par valao^of the aecurities which they secure.^
The Secretory of State may set a time for a
hearing for any dealer whom he believes has violated
the provielons of this act or is about to violate them
and the dealer will be oonaidered non-registered for at
least seven days from the time he recelvee notice until
the actual hearing. In case of revocation, all the
cortifioates of the dealer's agents and sslesmen will,
also, be revoked,*^
The unlawful sale of ooourities, or an offer to sell
unlawful securities, or knowingly making a false rep
resentation concerning any registration made under the
provisions of this aet, or the unlawful declaration or
50. Ibid,, Section 33.
31, Ibid,, Section 25,
55
payment of a dash dividend is a charge of felony.
Punishment, upon conviction, consists of a fine of not
more than $1,000 or Imprisonment in the state peniten
tiary for a tem of not more than two years or both fine
and imprisonment.^^
PIKABCING THE NEW LAW
The flnsneing of the new law is one of the parts
which hss been the most severely criticised. Section
29 provides for the eustonary paymont of ten cents
per mile traveled and $2 for each day's attendance at
proceedings to witnesses. These fees and costs may
be iaposed by the Secretary of State upon any "party
to the record** or may be divided between the parties.
The Secretary of State is empowered to charge and
collect the following fees and turn these over (daily)
to the State Treasury:
1, Por filing or renewing dealer's application. |25
2, For filing or renewing salesman's appllootion. #10
3, Por Issuing registration eertifloate to each salesman. . . . . 1 5
4, POr issuing registration cer-tlflooto to a dealer, or saleman, after the first day cf Jtily one-half of ths regular foo
5, POr filing or renewing Issuer's applloatlon to sell or dispose of stook , . . . «$5
32. Ibid., Section 30; Vernon's Annotated Penal Code, Vol. II, Article 1083-a (1936 publication).
56
6. Por every permit granted to an issuer, one-tenth of one percent of the par value of the securities to be sold in this state or in case of non par value stock, one-tenth of one percent of the price at which the stock is to he offered to the public for sale;
7. Por renewing an issxier's permit. | 5
8. Por copioe of any papers filed in the office of the Secretary of State or for certification of theee, tho Seoretary is authorised to charge the customary or reasonable price.^
The foes paid into the State Treaioiry under the
Securitiee Act are to be kept in a separate fund and
used for the administration of the act. But in no
event aay the expenditurea for the administration of
this law oxooed $20,000 for any ealendar yeor.^ Any
unused portion of these funds at the end of the year
will bo paid into the Oeneral Revenue Pund.^^
33. Ibid,, Section 36,
34. This is the part which authorities claim impose an unreasonable burden upon the administraticn of the act and, since the purpose of the act is to protect the public rather than to raise revenue, it seems this part should be repealed.
35. Vernon's Annotated Revised Civil Statutes of tho State of Texas, Pocket Part, Vol. XI, Title 19-o, Article 600-e, Section 36.
67
PART IV
THE PEDERAL SECURITIES ACT
The nati<mal government passed the federal Secur-
itlos Aot on May 27, 1933.^ In an article in the Texas
Law Bovlow for Deooaber, 1935, Mr. Ira P. Hildebrand
says that the federal law was passed in order to control
"high finance schemes** like those of the Duquaono Oes
Coapsny when the transactions involved residents of
mox*e than one state. The Securities and Exchange Ccm-
mlssion of Wsshington, D. C. with branch offices at
Sow York, Boston, Atlanta, Chicago, Pt. Worth, Denver,
San Prancisoo, and Seattle perform the duties of enforcing
and adEoinlstering the nati<mal law. Their duties in
the federal administration are airailar to those of the
Seoretary of State in the stats administration.
Tho federal Securities Act reqxiires the registra
tion of soctirltios which are issued in Interstate commerce
or sent through the malls,
Tho Courts hsve held that the requirements contained
in this act are not unreasonable and that Congress
possesses tho power to control and regulate interstate
coBmerce, as well a a the power to delegate this authority
1, 0. S, Code, Annotated, Title I, s 1, 48, Ststute 74.
68
to a government agency, such as the Securities and
Bteohange Ceaoission. These decUions were handed down
In two eases tried in 1935. The first was tried in
the District Court of Minnesota and is cited as the
Securities and Exehange Commission v. Wickham. The
other case is still in litigation. It is cited as the
Securitiee and Exchange Commission v. Jones.* The
auprene Court upheld the right of the commiesion to
require the registration of securitiea, but denied
the right of the oomniission to prevent the application
for sregistration being withdrawn.
CGSfTSIfPS
The first port of the federal Securities Act
(Sow) defines security as meaning any stock, bond, evi
dence cf indebtedness, participation in any profit
sharing agreement, collateral trust certificate, or
investment contract. Other definitions are given for
the terms: person, sale, offer for sale, and issuer.
Interstate coirgnerce is defined to mean trade in
securities or anj ecpgnimicatlon relating to them bo*
tweon the states or parts of the United Statee or be-
tween £ part of the United States and a foreign country.
e, 12 PMeral Suppleaont 246,
3, 12 POdoral Supplement 210; 66 Sup. Ct. 497; 79 Pederal (2nd) 617.
69
TTnlike Spain, Mexico, and many of the South Amer
ican Republics, the United States doee not lave to
wait until the fraudulent scheme or schemes have been
actually put into effect hetore bringing suit. If a
person or firm offers to sell or invitee offere to
buy fraudulent or unregistered securitiee (unless exempt
from the provisions of this act), that person or firm is
guilty of breaking the law.
BUaPTSD SSCURITIES
1« Thoee sold sixty days before or after tho
posoage of this aet;
2, Those guaranteed by the U. 3. government or
any of its political subdivisionsi
3, Motes, drafts, bills of exchange, etc. which
flirise out of current transaotlims;
4, Securities issued by religious, charitable,
edueatlonal, or reformatory institutions where no part
of the profits inures to any individual stockholder;
6, Securities issued by building and loan cor
porations, banking institutiona, and farmers* cobperative
associations;
6. Any security issued to a common or contract
carrier which is controlled by the Interstate Commerce
Ccomiission;
7, Cert if lea tea issued by a x*eoelver or trustee
in bankruptoy with the approval of t):ie eourt;
6, Insurance polloies or annuity contracts which
60
are subject to the supervision of the Insurance Ccm-
raissioner or like agent of an> stato, territory, or
the Dietriet of Columbia;
9. Any security exchanged by the issuer with its
existing security holders if no ccm&ission is paid for
the exehange;
10. Any security Issued in exchange for one or
more bona fide outstanding aocuritios, claims, cr prop
erty interests, or partly in exohazige and partly for
caah—if the exehange is approved by any court or offi
cial agency of the United States or any of its political
subdivisions I
11. Any sscurlty which is part of an issue sold
and issued wholly by persons residing within a single
state or political subdivision of the United States.
THE SECURITIES A^D KXCHANGS CQUIISSIOB may exempt
any seourlty if the exemption does not affect public in
terest beoause the amount involved is so small or the
claraoter of the securities so limited that inveators*
proteotlon ia not oonaidered neceasary.
Bo losuo of eecuritios may be easapted under this
aot, howovor» If the aggregate amount at which they are
offerod to the publlo exooods #100,000,
61
EXEVPTED TRAHSACTIONS
1. Transactions by any per a on other than the
Issuer, underwriter, or dealer;
2. Transactions by an issuer irtiich do not involve
any public offering;
3. Brokera* transactions carried out upon custoaoro*
orders or any exchange or in the open or counter market,^
REOISTRATIOH STATEUBHT
The registration statement required by the federal
Soourlties Aot eontalns practloally the same infoxaa-
tlon as the applloatlon for a permit under the Texas
Sooturitios XAW, It must be made out in triplicate and
at least one copy must be signed by an officer or of
ficial representative of the issuer. It is tho duty of
the Securities and I^cha^ge Cosmiisslcm (similar to ths
duty of the Sedretary of State in Texas) to collect a fee
smounting to one-one - hundredth (l/lOO) of one percent
of the maximum aggregate prlee at which the proposed
seouritiee are to be sold. In no case shall the fee bo
less than r S. The information confined In the regis
tration stateswnt shall be availabl'* to the public under
such rogulatloBo as the cesniission may preocribe.
4, The sol lol to tlon cf orders for this kind of tronoootlons is not ox«ipt«
62
It is unlawful to advertise cr transport thrc gh
the mails or through any comTron carrier any unexempt
aecuirity which is not included in a registration state
ment.
If a_ purohaoor finds that _thc rogistration statement
of the issuer of M s aocurity cr tains an untrue state
ment of a material fact, he may r'-:fy ' very p erg on connected
with the control and direction of tho issugr ?it the time
the statement was filed. Even the accountants, engineera.
sjid apprais<»rs who helped make tho statsoent may be sued.
The commission is empowersd to administer oaths,
subpoena witneeses, require the production of books,
records, accounts, etc, for thsir inquiry proceedings.
JURISDICTIOH OF OFFEMSES—SUITS
The District Courts of the Thiited States and the
United States Courts of aiy state or territory and the
Supremo Court shall have jurisdiction of violations of
the provisions of this act. The suit may be brou£^t in
the proper court wherever the defendant ia found, or re
sides, or where the fraudulent sale took place.
FSBALTISa
The penalty for aelling unregistered securities
or for filing an tin true registration ststeaent is, upon
conviction, a fine of not more than $5,000 or imprison
ment for five yosrs or both.
5, Additional legislation is included in Securities ktkt. At IftSA.
62
I t i s imlawful to advertise cr transport through
the mails or through any coniron carrier any unexempt
securi ty which i s not included in a reg is trat ion s t a t o -
Biont.
I f £ purohaoor finds that the regis tret ion statement
of the issuer of h is socurity contains an untrue s t a t e -
ment of a siPiterial f a c t , he may mae gvery person connected
with the control and direct ion of th- l3s^?r at the time
the statement was f i l e d , ' v n the accountants, engineers.
and appraisers who helped make the atateoont may be sued.
The corornlssion i s empowered to administer oatha,
subpoena witnesses , require the production of books,
records, accounts, e t c , for the ir inquiry proceedings,
JURISDICTION OF OFFEMSES—SDITS
Tho D i s t r i c t Courts of the United States and the
Uhlted States Courts of m y s ta te or terr i tory and tho
Supremo Court shal l have Jurisdiction of v io lat ions of
the provisions of t h i s a c t . The s u i t may be brought in
the proper court wherever the defendant ia found, or r e
s i d e s , or where the fraudulent sa l e took place .
PKISALTISS
The penalty for ae l l ing unregistered secur i t i e s
or f o r f i l i n g an untrue reg i s trat ion statement i s , upon
convict ion, a f ine of not more than | 5 ,000 or imprison
ment for f ive years or both.
5 , Additional l e g i s l a t i o n i s Included in Securi t ies
:^"i^*rm^.
by the y
imK>6ni -
Oif *'* v-
Tts
• . . . ,>ir
Ot:>i.'r ;,.
-vt^.ri^-' ••
• ' ' . ' •
u^e
A ^ .
PART T
COtfFARiaOH OF TEXAS
•
— i » .
BLUB
aacr LAWS WITH LAWS <^ onnar
STATES
The typo of logloTotioa known as "Blue Sky Low"
hos boctt odao«od ia alaoot a l l of the states and thou|^
tho ototatao dlCCbr oldaly In AoUil, their general
purpooo io ta j»aaoBt tho iosuoaso and oolo of finnid*
alaot atooka sad aooaattioo*
Xa assM of tho ototoo# i t la nooooooT y to Obtain
o^asaia liaoasoo ta tiraaooot booiaoss and to issue
stooka^r l a t In Tissa^p tho poralt. Issued by the Soo
rotary of fitato, giaato both of thooe prlvHocos,
asat of tho otato loao^ raqalva the fil ing of eortalB
data ragsrdtng soouritioo ahioh ore to be offerod for
oalo^ aad saiifaoi mmm authority or ccoailssion to grent
or rofoaa poaoiooisa to dispose of thai,
llio l lao Bky Loao have rooolvod opeelol ottontion
Aroa tha Istional Coaftevoase of Coaaiflslonors on Unifoia
Stoto iaaa»> Mforo tbo fodaral Soeurlties Aot was passod»
i t waa foaalhio 2mt o f l i a to offer ooourltloe for oolo
i f tJOMiitn aaadittsna aoaa aot in saothor stoto aad i f
Ihofo jUpro aot^ tbo oolo aao oonoldorod to toko plooo
ia t h t a t M o ahsro tho aooavitioo aoro offbaoA* Tho
Of lUNr aalasMTO aahjast to tho loas of only oao
64
atate. In other words, the Blue Sky Lew was governed
by the boundaries of the states. Mow, however, a sale of
fraudulent securities which involves persons living in
different statee ia tried under federal law.
BLUE SET LAWS OF OTHER STATES^
Alabama, Code cf 1923, 1927, 1931
Arisona, Code of 1928
Arkansas, Acta of 1927, 1931
Oeorgla, Acts of 1920, 1922
Illinois, Laws of 1919, 1921, 1925, 1929, 1931
Kansas, 1929, 1930
Essituoky, Acts of 1920^ Statutes of 1932
Michigan, Public Acts of 1929
Mlnnosota, Laws of 1925, 1927
Missouri, Laws of 1929
Mow Mexico, Lai^ of 1921, 1929
Ohio, Laws of 1929, 1930
Oklahona, Lawe of 1919, 1930
Ponaoylvanlo, Laws of 1927
Rhode Island, Oeneral Laws of 1923, 1926, 1929
South Dakota, Laws of 1927, 1929
Utah, Laws of 1925, 1929
Veraont, Acts of 1929
Virginia, Laws of 1928, Code of 1930
1, This is an incomplete list, taken froa Amerloan Law Reports, Volume 67 (published 1933). It was suhnitted by counsel in reviewing a ease.
65
Washington, Lsws of 1923
West Virginia, Acts of 1926; Official Code of 1931
Wyoming, Coaplete Statutes, 1920
F rcB a oomparison of the da tee given in tho above
list, it will be noted that Teacaa was ahead of many of
the states In her legislation, but Oklahona passed her
first ^Blao Sky Law" four yeare before Texas passed hers.
In 1920, the Massachuaetts Commission made a compre
hensive report of the waste and looo resulting from lack
of legielation regulating the sale of stocks and securi
ties and pointed out that thirty-eight other states had
poosod lotfLOlstlcn to roaody this evil. As a result tho
General Court passed a statute to 'oontrol the aale of
securities, to register persons selling same, and to
prevent tho fraudulent proaotion and sale of fraudulent
securities."^
In t UE'oo ststos the acts enjoin the sale of fraud
ulent securities I in two, they provide, only, for 11-
ccnsizsg brokez^ and salesmen. In most of the statee,
however, aa in Texas, the principle of licensing se
curity issues is adopted.
2, Chapter 79, Massachusetts Resolves, 1920, (This
report oas made throe years before the BLUE SKY L A W ^
? S S was passed but it wae Pn^^^^^^^^BlSe S ^ « -ei^t etatos which were reported as having Blue Sky leg-
67
It was, also, deeided In this ease that a person selling
stook for s corporation is its sgent and the corpora
tion can not defend againet claims for oonsnissions on
the ground that the salesman is an imregistered dealer.
Another Michigan case which was referred to the
Stapromo Court was that of Merrick v. Halsey and Company.^
The defendants in this case argued that tho Michigan
statute Imposed a burden upon honest business and was,
therefore, unconstitutional. The court ruled that al
though the act might burden honest bueinees, this was
not its Imrposo. The restrictions and requlroments
were Intended as a safeguai d against fraudulent and dis
honest enterprises, and the court ruled that the statute
was within the power of the state.
Ohio had an important case referred to the Suprano
Court. It is cited as Hall v. Qreiger-Jones Compsny.^
The question Involved was whether or not the Ohio act
sought to regulate transportation of securities from
one state to another and, thus, to impair interstate
commerce. The court ruled that this was not the purpose
of the act whicli merely required anyone idao sold or tried
to sell securities in Ohio to comply with ths Blue Sky
Law of that stato^-tSat is to file certain information,
pay a foo, and obtain a license.
The Supremo Court refused to consider the case of
5, 57 Sup. Ct. Rep, 227 (1917).
6, 37 Sup. Ct, Rop. 217.
Motional MorMintile Coapany v. Watson,*' because it ruled
thst a foreign corporation has no right to attack a law
in a stato in which the corporation is not entitled to do
business and a taxpayer has no right to attack a law
which provides for its expenses of administration to be
paid out of the fees imposed by the act»
A corporatloa, orgeni^ed in another state, undertook
to establish a i iolesale drug business in Tennessee and
to soil securities in that state.^ In the trial, the
fact was brought out that an owner of corporate stock
in selling his own shares, is not ordinarily a dealer
within the Blue Sky Law. But repeated and oontinuoua
transaotiono aay make him otherwise. In thie suit it
was, alsa, brought out that a subscription contract to
the stook of a corporotion is not enforceable if, at the
time It was tsksoe the corporatloa had not complied with
the roqalreaento of the Blue Sky Law. Anyone who fails
to obtain s ponslt before attempting to sell stock is
guilty of a misdemeanor and is punishable according to
the tome of the statute.
An Oregon eourt in the case of the State v. Frasex^
pointed out that the preeld«it of a corporation, whether
ooting individually or in behalf of the corporation, in
7, 2U VMoral 9 9 (1914).
8, Ooodyoor v. Meux, 228 SW 57 (1921).
9, 105 Oregon 589; 209 Pacific 467 (1922),
69
offering shares of stock for sale in violation of the
Blue Sky Statute is gollty as an accessory before the
fbot and can be indicted as acceesory or principal.
In another Oregon c&se,^^ the court ruled that a corpora
tion is capable of violating the Blue Sky Law but as it
Is laposslble to imprison it, a corporation Is subject
to finOt only. However, its officers and directors are
liable to both fine and iaprlsoniftent as provided in the
ststute.
In Minnesota, a revocation of a license to sell se
ouritiee was revereed by the court in the case of the
State V. Re Investors* Syndicate."^^ This syndicate was
in sound financial condition hut the certifieatee which
they were offering for sale provided for the investor
to vaalce anzmal specified payments for ten yoors—ot the
end of which time* the inveetor would reeoive $1,000, In
the event of failure to pay, the su3n:*endor value after
two years was nothing snd after five years it was less
than the amount actually paid in. The oourt stated that
the investaent seosed an iaprovldont one but it was not
the couxH:*8 duty to attempt to super ise investment con
tracts aad the certificates in question did not consti
tute a fraud,
Kansas oourts ruled that a sale of securities by a
foreign busiaoss trust was not **doing business** in ths
10. Kirk V. Farmsrs* Union Orain Agency, ALU,Vol. 15.
U , ALR, Volume 15.
:»• l*— .If—'her Compony v, Hopkins, ALR, Vol. 16,
70
stato and further agreed that the trust was entitled to
mandaane to compel the state charter board to examine
its spplicatlon for a pex-mit under the Blue Sky Law,
In the oase of Sclaioyer v. Van ^en,^^ the court ruled
that a contract for the sale of -a patent right was not
within the Blue Sky Law.
There is a conflict here in tho interpretation of
the law in Texas and in Kansas. In ths case of Hsrlsn
V. Sanitary Flooring Compsny, previously quoted, tho
Texas courts ruled that the contract to sell a non-
^dstont formala for maklog sanitary floors was fraud-
ul«t.^*
Sorth Pakota*s law defines speculative securities
in very definite toxao-***Securities in which the elssieat
of chanoe, speculative profit, or possible loss equal
or predominate oirer the elements of reasonable certainty,
safety, and investanent—or secxu ities whoso value mater
ially depends upon proposed or promised future fromotlon,
or developoont rather than on present tangible assets and
conditions," In the case of the State ex rel Rossen v.
Welch,^ the issue was idiether or not a certain secur
ity fwis speoulatlve under the North Dakota act. The
certificate in question sold for $100 and was to be issued
15, ALR, Volume 67.
14, 240 8W 625,
15« ALR, Volume 15.
71
in the future by a corporation to be organized In the
future for the purpose of operating mines from which
cool was to be extracted and aold in the future. Nat
urally, the court held that the security was speculative.
Kueh bas been said about the variance of the
Blue Sky Laws of the different statea but thoy seem to
oonfom as well as, if not better than, many other state
laws—for eottaple, thooe goveztiing oiarriage and divorce.
Those who have soxight to prove state Blue % y legis
lation unconstitutional have met with poor success in the
Supreme Court. That body has definitely ruled that states
do posses the power and authority to regulate the trans
action of business and the sale of soourlties—both do
mestic and foreign—within their boiindariea.
THE TEXAS BLUE SKI LAW IS NOT TJHIdaE for being out
standingly strict nor lax. It is siallar to the laws of
most of the other states. Maryland, New Jereey, Delaware,
New York, and Foansylvanls have the least stringent Blue
Sky Laws and Sorth Dakota, Ohio, Wisconsin, and Sansaa
have tho most rigid.
73
PART VIT
SBMMAIOr, KK^OMi'EKDATIOHS, AMD COKMEHTS
The preeent status of the Texas Blue Sky law is
a mooted question even among those who are in a posi
tion to know snd understand it,
Fiedoral legislation, contained in the Securitiee
Aet of 1953 and the Securities Krclauige Act of 1934,
seems to be conclusive and sufficient, yet President
Roosevelt, in a statement to the Associsted Press on
lay 25, 1937, recommended incxHiased protection for in
vestors In corporations, especially those reorgsnized
under the bankruptcy act. He wrote Chairffstn Summers
(Texas) of the House ^dieiary Coranittee that investigo-
tions show that further legislation favoring stockheldere
is neoessary.
The purpoee of the federal Securities Act has been
discussed under Part IV. The Securities Hschsnge Act
(1934) hss throe purposes:
1, To prevent the excessive use of credit to finance speoOlation in aecurities;
2« To abolish the abusee which have crept into the market plaees where securities aro exchanged I
3. To furnish the average investor with honest reliable information concerning securities.
The Soc\iritles Sxehange Commission, organized July 2,
1954, le roapooalble for enforcing these two acts. Tho
74
comniaslon has a regional office in Ft. Worth under
the oiteiniatration of Oran H. Allred, a brother of the
preeent Governor of Texas. Since its creation in 1934,
the commission has been involved in 102 civil cases.
Suits for injunction have resulted in 142 firms and in
dividuals being permanently enjoined from the acts and
practices ccaplained of. Two of these were Texas oases.-
Out of 70 cases referred to the Attorney Oeneral for
criminal prosecution, 69 have evidenced willful violations
of the Securities Act and ths other indicated a conspi
racy to violate the Securities Exchange Aot. The Attor
ney Oeneral returned indictments in 33 of these cases.
MXj 11 have been tried and 47 individuals have been o
convicted.
The Securi t ies and Sxchange Cotnmission i s preparing
a f i l e of the records of persons againet whom state and
federal act ion has been taken during the past ten years
in connection with the s a l e of s e c u r i t i e s . On June 30,
1936, th i s f i l e contained 21,775 names. A monthly con
f i d e n t i a l b u l l e t i n i s sent t o approximately 750 agencies
engaged in the prevention and p\mishment of secur i t i e s
frauds.
1 . Carl B. Krog et al—Northern Dis tr i c t of Texas and Walter*TeOTniorgan--a(outSrn Di s t r i c t of Texas.
2 . Second Annual Report of the Securit ies and Exchange Commission, fane 30, 1936.
75
The Securit ies and Sxchange Coomission has examined
the folloidJQg applications for i*egistration with theee
res t i l t s : ^
Issuer
Dairyland Inc., San Antonio
Oil Sxp. and Dov. Trust (P. E, Wlssoap, Trustee)
San Angolo
Amoimt Date
#676,000 6/16/36
Order
Withdrawn
600,000 2/11/36 Stop Order
Sterling Gold Kinlng Corp. 50,000 Houston
Sterling Gold Mining Corp. 300,000 Houston
2A7/36 Withdrawn
Trans-State Oil Company Houston
600,000 5 A / 5 6
CRIfilMAL FROSBCDTIOHS IW TEXAS TJHDKR THE PEDERAL
SBCURITIBS ACT^
Coso
Seourlty Sor-Viee Corp.
El Ore Mines
Date
2/fe0/i6
Irwin Knott 5/ll/S56
Lory T, Oard- 5/6/56 nor A Oo,
Mld-Woot Mort- l A 7 A « gags Company
PullisBi & Co. 6/5/i4
Defendants 7
?
7
20
Disposit ion
4 aeciultted; 3 convicted and sentenced
12 convicted and sentenced
3 dismissed; 2 convicted and sentenced; 2 not yet apprehended
Pending
8 sentenced; pending
4 convicted and sentenced
t. Ihid.
3, Ibid,
76
Tho state Securitiea Act (1935) repealed the old
statute (1923), cocanonly called the "Blue Sky Law/
The new act attempts to rpovlde more protection to the
purchsser of securities in Texaa. Both the dealer and
the securities siust he registered under this new law.
Mr. 0. D. Brundidge, Chairman of the Texaa Bar
Association's Coimnittee on Commez*cial Law, says: "The
gonoral effect of the 1935 act is favorable to the pur
chaser of securities and hos met with the approval of
sellers of legitimste securities."
Mr. Brundidge suggests that the fees of $25 for fil
ing an original application of a dealer and $15 per year
for filing and Issming license to each salesman, as re
quired by the new law, are exceaelve. He recommends that
these should be lowered and espeolally for small corpora
tions and their salesmen who have only a limitdd amount of
seeurltles to ssll. Judge Miller, another member of the
Committee on Commoroial Law, seems to disagree with his
Choi man. The Judge thinks these strict requirements
for registrotlon of dealers, salesmen, and the secur
ities thoBselves are idiat make the new law "full and
c<»nplote."
The writer agrees with Judgs Miller and recoomends
that Texas should make her law more stringent rather than
lenient. She would do well to follow the oxaiq>le of the
Stato of Ohio whose law requires every stock salesman to
ho photogrophod and finger-printed for 1 dentifloa tlon pur-
77
poooo oftd to ho put under a #6,000 bond with |5,000 addi
tional surety.
But, in the writer's opinion, Mr, Brundidge does
suggest two very timely recommendations for changes in
tho present statute.
First, he points out that the feee collected by the
state under the Seouritiee Act are for the purpose of
rogulotimg tho eale of eecuritiee rather than for the pur
poee of raising revenue; so Section 36 (which provides
thst any portion of these fees on hand at the ond of
tho ealendar year ho turned over to the Oeneral Revomo
Fund) should he revoked.
Sooond, Sooticn 36 (which limits the expenditures
for the otelnlstratlon of the aet for any one ealendar
yoor to #fiO,000) Impooos an unwarranted limitation in
onforeing the law. It, also, should be repealed.
Much hss been said by legal commentators sbout tho
Indeflnit^aoss of the statutes shich provide no penalty
for an isolated sale oi worthless or questionable se
ouritiee hy someone other than an issuer, sgent, dealer,
or salownan, Tho question arises as to lather or not
the Blue Skj Statutes are applloable to tronsactions
where stock is purohased by an individual and offerod for
resale hy h1m« Certainly, tho Blue Sky Laws are appll
oable in criminal prooeedinga against the issuer in such
oaseo hot they are not usually applied to transactions
involving rooale toy an Individual Who occasionally buys
78
and sells merely as a pors<mal investment. If the
"isolstod purohaoor* engages in repeated transactions
of this typo, homsver, the eourt nay decide he is a
"dealer" and require his registration.
Texas has been Justly criticised for her insdsquate
Blue Sky Laws, yet the fact that the legislaturs has
attempted to pass more offoetlve legislation in recent
yoors indicates that she may soon cease to be the
"happy hunting ground" of the confidence man.
Mr. C. L. Douglas, feature writer for the Pt. Worth
Press, points out many startling abuses which "chlselers"
aro prsotlelng at the px esent time in the sale of stocks
axid securities. According to Mr. Deoi^as there was s
recent convention held in Ft. Worth Which was not speii-
sored by the local Chmaber of Coomorce. It was a con-
Tontlon of con-oion wh« met for the purpose of discussing
the "groat Amerloan sucker crop of 1937."
Messrs, Prltchott, of the Ft. Worth Better Business
Boroou, and J. L, Patterson, investigator for the Stato
Seeurltloo Commissioner, found out about the meeting and
the plan "for ori^nlzing an association to help farmers
and ranchers obtain BH>re federal aid and to assist them
in establishing foreign msrketa," Dues for this orgsnlsa-
tlon were to be |10 initial charge and $6 annually. The
f^nmAulont enterprise died in infnacy and the convention
broke up suddenly without deciding on the next meeting
place. Meoars, Patterson and Prltchett are to be congratu-
lotod for their timely intervention.
79
Most of the leaders in the fake stock racket are
eventually apprehonded and brought to Juetice, but this
does not oeem to discourage thsm from engaging in the
same old schemes for robbing the public.
Ih>, Frederick A. Cook, of Aretic fame, and Tivlan
Wyeliff Bule filched millions of dollars from the public
boforo tho federal govoxmment sent them to the penitentiary
for usixig the malls to dsfraud. Tot the investors who
furnished ths money for their nefarious enterprloea real-
ixod nothing on their investments except the eatlofactlon
of seeing theee mooter crooks put behind the bars.
Tho weakest part of the Blue Sky Low is its failure
to provide fOP rooovery of fttnds Invested in fraudulent
stosiko or sehemes* Xt is this weakness of the Texas law
whloh has caused such men as wniiem Albright and Arthur
fylor (both o^ Ft. Worth) to take their lives when they
loarnod that thoy had been duped by confidence men.
Tho BXvm 3kj Law ohould not only deteot and prevent
fjroud but also provide for the recovery of invest ore*
funds In frsudtaont schemoo. The case of Harlan v.
Sanltory Flooring Coapany^ illuatraUd how difficult
it is for an Invootor to recover funds from a fraudulent
A study of tho eases which have been tried under
tho Blue Sky Statutoo rovools the fact that it is much
4, 240 SW 623.
80
oasior to get a conviction of criminals who disobey the
law than it is for an "innocent purchaser' to recover his
investment. The "sucker" is usually made a director, or
officer in the propoeed scheme and he basks in the at
mosphere of unaccustomed importance until, finally, he
realizes thst he has been fleeced of his savings and
his chances of recovery, by that thne, are very poor,
indeed,
Under the present law, the Secretary of State
will not issue a registration permit unless certain
roquir«!i«its are fulfilled, yet the law specifically
states in Section 9 that the issuance of a permit is
not a guarantee that the stock Is "good."
Mr. Howard Scott, originator of Technocracy,
makes this statement: "There are only two classes of
people in the world—chlselers and suckero; and it is
the secx*et ambition of every sucker to become a chisoler."
Maybe, Mr. Scott is correct. Certainly, he is if he
considers the average hard-working man a sucker, because
he turns over his few surpltw dollsrs to a smooth-tongued
promoter or ealesman in the hope of realising a slseable
profit. Thie typo of investor does not sxpect to get
something for nothing. He is willing to assume a reason
able amount of risk and if the deal is bona fide but does
not turn out well, he is not apt to "squawk." Sometimes,
the fear of ridicule has caused the victims of the confi
dence men to take thoir losses silently rather than report
the orooks to the officers. They had little hope of re-
81
covering their money and hesitated to acknowledge that
they were so gullibls.
It is almost impossible to write laws so airtight
that a shrewd crook can not devise ways and means to evade
them. But if the legislature would word its lawe in sim
ple terms. It would make the laws easier to enforce. The
ponderoiLS legal phraseology which is employed at present
is difficult to understand and makes it easy for a crooked
lawyer to Interpret the law in the wrong way.
ExperlMaoe has ahown that the passing of laws doee
not prevent crime; the laws oan eoly define tfhat consti
tutes an offense and provide for adequate punlahment.
Strict enforcement of a law will help to prevent the
erisie i iieh that law isrovldes for, however, and when
the State of Texas really indicates that it means to en
force its Securities Act, the con-men will choose some othor
state for their clandestine conventions. However, Just
as long as tire lasts, there will be crooks, charlatana,
swindlers, and chlselers who will defy the law and prey
on a gullible, unsuspecting public and when a momber of
the first fraternity meets a member of the second, the
chancea are that the "sucker" and his money will soon be
parted.
BIBLIOGRAPHY
Anerlcan Law Reports, Annotated
Southwestern Reporter
Southwestern Reporter, 2nd Series
Texas Reports
Texas and Southwestern Digest
Vernon*8 Annotated Penal Code of the State of Texae
Vernon*s Annotated Civil Statutes of the State of Texaa
U. S. Code, Axmotated
Pederal Reporter
Federal Reporter, 2nd Series
Federal Digest
Federal Digest, 2nd Series
U. S, Supreme Court Reports
U, S. Supreme Court Reports Digest
Texas Jurisprudence
Pederal Supplement
Texas Law Review
Oeneral and Special Laws of Texas
First and Second Annual Reports of the Soourlties and Exchange Commission
The Dallaa Timee Herald
The Pt. Worth Press
The Dallas Mews
Tho Weatlvrford Dally Herald
4
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