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Securities and Exchange Commission v. Investors Security Corp.

argued: March 31, 1977.

SECURITIES AND EXCHANGE COMMISSION
v.
INVESTORS SECURITY CORP., WILLIAM H. BROWN (DISTRICT OF COLUMBIA, CIVIL NO. 75-1036) SECURITIES AND EXCHANGE COMMISSION 500 NORTH CAPITOL STREET WASHINGTON, DISTRICT OF COLUMBIA, 20549 V. INVESTORS SECURITY LEASING CORPORATION, WILLIAM H. BROWN, DALE R. MCDONALD, WILLIAM J. LYNAM (DISTRICT OF COLUMBIA, CIVIL NO. 75-1304) EQUIBANK, N.A., APPELLANT IN NO. 76-2133 HILLIARD KREIMER, RECEIVER FOR INVESTORS SECURITY LEASING CORPORATION, APPELLANT IN NO. 76-2134



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA.

Gibbons, Van Dusen and Garth, Circuit Judges.

Author: Van Dusen

VAN DUSEN, Circuit Judge.

These appeals arise from a June 17, 1976, district court order entered in a proceeding ancillary to a Securities and Exchange Commission (SEC) action brought to permanently enjoin the Investors Security Leasing Corporation (ISLC),*fn1 its president, Dale R. McDonald, its vice-president, William H. Brown, and its treasurer, William J. Lynam, from violating the registration and antifraud provisions of the Securities Act of 1933 (15 U.S.C. § 77a et seq.), the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.), and the rules promulgated thereunder. The ancillary proceeding against Equibank was brought by the court-appointed receiver for ISLC to recover for the corporation certain securities which had been hypothecated to William H. Brown, and pledged by him to Equibank as collateral for personal debts. The district court*fn2 held that ISLC had no right to the securities involved, since the owners had hypothecated them to Brown personally, rather than to Brown as an agent of ISLC, and that Equibank also had no right to the securities because it was not a bona fide purchaser and, therefore, was subject to the defenses of the original owners of the instruments. The court thereupon ordered Equibank to return the instruments to those original owners. Both Equibank and the receiver for ISLC appeal.

We will affirm the June 17, 1976, judgment of the district court insofar as it determined that the receiver for ISLC had no interest in the securities involved here, and vacate that judgment insofar as it determined that Equibank was not a bona fide purchaser as to the investments described in the second and fourth paragraphs of the district court order of June 17, 1976 (see note 7 below). Because the owners of the investments involved in these appeals were neither parties in the district court nor in this court (see slip op. at page 16), we have no jurisdiction to determine the ownership of such investments.

I.

In 1970, William H. Brown began a pattern of personal borrowing from Equibank (then known as Western Pennsylvania National Bank). In February 1970, the Monroeville, Pennsylvania, branch office of Equibank made a personal loan to Brown and Jane Brown (his wife) collateralized by their own securities, securities belonging to Albert and Malkie Debo (Jane Brown's parents), and securities belonging to Margaret Brant (Brown's aunt). The Monroeville branch continued to extend credit to Brown, and by December 1971 his personal indebtedness at that office had reached $45,000.00. In addition to those borrowings, however, Brown had also obtained personal credit of $37,000.00 at the Pittsburgh branch office of Equibank in September 1971.*fn3 As collateral for that loan Brown had proferred corporate debentures with a face value of $56,000.00 registered in the names of James and Helen Thompson, and accompanied by the following document:

"I, James W. Thompson, hereby authorize William H. Brown of 5710 King of Arms Drive, Gibsonia, Pennsylvania 15044 to pledge and hypothecate any and all of the securities listed below for his use or for any business purpose he sees fit. In return for this I understand that I am to receive $250 per month until the expiration date of November 1, 1972, with the first payment to commence on November 1, 1971 with interest to be based on the fair market value of that date.

"This agreement has been entered in the presence of Genevieve Ludwiczak, Dale R. McDonald, William H. Brown and William Lynam this 8th day of September, 1971.

"It is further agreed that at the expiration of this agreement both parties being satisfied the option to continue same agreement shall be renewed.

[Certificate numbers and security descriptions omitted.]

SIGNED: /s/ JAMES W. THOMPSON

James W. Thompson

/s/ HELEN I. THOMPSON

ATTEST: /s/ WILLIAM H. BROWN

WITNESS: /s/ DALE McDONALD

/s/ GENEVIEVE LUDWICZAK

/s/ WILLIAM J. LYNAM"

Before it would accept those bonds as collateral, however, the bank required that its standard form "Letter of Consent to Pledge and Hypothecation" be executed. Soon thereafter Brown did produce that highly technical document, signed by the Thompsons, which authorized him to "pledge or hypothecate . . . for [his] . . . own account or otherwise the collateral."*fn4 The Thompsons also agreed to open a checking account at Equibank in which the interest received on their coupon debentures pledged by Brown would be accumulated. For that purpose they also signed a signature card (Equibank Exhibit 22).

Those, however, were not isolated transactions. Brown maintained an ongoing banking relationship with Equibank, during the course of which the size of his personal debt - and the nature ...


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