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SECURITIES AND EXCHANGE COMMISSION v. WICK

March 15, 1973

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF, SECURITIES INVESTOR PROTECTION CORPORATION, APPLICANT,
v.
ROBERT E. WICK, D/B/A ROBERT E. WICK COMPANY, DEFENDANT.



The opinion of the court was delivered by: McGARR, District Judge.

  MEMORANDUM OPINION AND ORDER

The Securities and Exchange Commission filed a complaint against Robert E. Wick, charging the defendant with numerous violations of the Securities Acts of 1933 and 1934. The complaint states: "Defendant Robert E. Wick d/b/a Robert E. Wick Company and Robert E. Wick Associates is insolvent and is failing to meet its obligations to customers". Count III of the pleading specifically charges Wick with violation of Section 15(c), Rule B-1 of the Securities Act of 1934. That section and rule declare that the aggregated indebtedness of a broker or dealer cannot exceed 2,000 percentum of his net capital and he must maintain a net capital account of not less than $5,000.

In liquidating the defendant's assets, an assertion has been made to this Court by the Securities Investor Protection Corporation (S.I.P.C.), of which Robert Wick is a member, that since the defendant was engaged in the business of a broker-dealer as a sole proprietor, not only are his business assets subject to liquidation but also his personal assets. The Court-appointed trustee, J. Kirk Windle, contends that the Securities Investor Protection Act (S.I. P.A.) 15 U.S.C. § 78aaa et seq., has changed the basic concepts controlling the liquidation of broker-dealers. Trustee Windle relies on Section 78fff(a)(4) of the Act (15 U.S.C.), which states: "The purposes of any proceeding in which a trustee has been appointed under section 78eee(b)(3) of this title (hereinafter in this section referred to as a liquidation proceeding) shall be: (4) to liquidate the business of the debtor." From this statement, Trustee Windle contends that the liquidation of defendant Wick's business enterprises is limited to the business assets available therein. The trustee further points out a number of objectionable consequences that would result if the S.I.P.A. required a total liquidation of business as well as personal assets.

While the trustee is correct in his reading of Section 78fff(a)(4), the fact that the statute directs the liquidation of a "business" connotes very little in terms of the extent of the liquidation, until the form of the business is ascertained. It is basic business law, discussed later in this opinion, that different business forms invoke different legal consequences, one of which is the differing financial liability of the owner.

Returning to a consideration of the meaning of Section 78fff(a)(4), it is clear from the language, as well as the history and purpose of the Act, that the S.I.P.A. does not supersede the provisions of the Bankruptcy Act which heretofore governed the manner and method by which an insolvent broker-dealer's business was liquidated. Pre-enactment observations dealing with the objective of the Securities Investor Protection legislation point out that:

    "The primary purpose of the reported bill is to provide
  protection for the investors if the broker-dealer with whom
  they are doing business encounters financial troubles.
    "In addition, the legislation mandates a general upgrading of
  the financial responsibility requirements of brokers and
  dealers to eliminate, to the maximum extent possible, the
  risks which lead to customer loss." 3 U.S.Code, Cong. and
  Admin.News, 91st Congress, 2d Session, p. 5254 (1970).

Within the same report, the relationships between new legislation and the practical aspects of liquidation proceedings are discussed:

    "In general, the court in which an application is filed is
  vested with the powers of a court in a chapter X
  reorganization and certain powers of a trustee in
  bankruptcy." ibid at 5264. Section 78fff(c)(1) of the
  S.I.P.A., 15

U.S.C. gives full effect to the legislative comments that accompanied the bill:

    "Except as inconsistent with the provisions of this chapter
  and except that in no event shall a plan of reorganization be
  formulated, a liquidation proceeding shall be conducted in
  accordance with, and as though it were being conducted under,
  the provisions of chapter X and such of the provisions (other
  than section 96(e) of Title 11) of chapters I to VII,
  inclusive, of the Bankruptcy Act as section 502 of Title 11
  would make applicable if an order of the court had been
  entered directing that the bankruptcy be proceeded with
  pursuant to the provisions of such chapters I to VII,
  inclusive."

15 U.S.C. § 78fff(c)(1).

In view of this clear legislative intent, the argument that the S.I.P. A. was intended to supplant the Bankruptcy Act in broker-dealer liquidation proceedings must be rejected. Rather, the effect of the S.I.P.A. upon the Bankruptcy Act is strictly limited. Only those sections which would frustrate the ability of the Securities Investor Protection Corporation to protect the customer's funds in a manner analogous to the similar Federal Savings and Loan Insurance Corporation are superseded by sections of the S.I.P.A. more consistent with this legislative purpose.

Consequently, once a broker-dealer falls below the solvency standards established by the Securities and Exchange Commission, the subsequent liquidation of his assets for the benefit of creditors proceeds under the Bankruptcy Act. Whether the bankrupt's estate is comprised solely of the available business assets or ...


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