denied. A hearing therein is scheduled for October 8, 1956, in the Commission's Seattle Regional Office.

First Idaho's application for registration as a broker-dealer was filed on August 13, 1956. It names Charles J. Thornton as president, treasurer and a director of the applicant.

According to the Commission's order, Thornton was formerly associated with Thornton & Co., of New York, whose broker-dealer registration was revoked by the Commission on July 14, 1948, and which firm also was expelled from membership in the National Association of Securities Dealers, Inc. In its decision in that case, the Commission found that Thornton & Co. had wilfully violated Sections 9(a) (1), 9(a)(2), 10(b) and 15 (c) (1) of the Securities Exchange Act of 1934 and certain rules thereunder; and it further found, on the basis of the record in such proceedings, that Thornton was the only active partner in and controlled the activities of Thornton & Co.

At the October 8th hearing, inquiry will be conducted into the question whether it is in the public interest to deny the application of First Idaho for registration of a broker-dealer.

Securities Exchange Act of 1934.
Release No. 4246.

SECURITIES AND EXCHANGE COMMISSION,
Washington, D.C., April 26, 1949.

The Securities and Exchange Commission today reported that its order of July 14, 1948, which revoked the registration of Thornton & Co., 60 Wall St., New York City, New York, as a securities broker and dealer, and expelled it from membership in the National Association of Securities Dealers, Inc., pursuant to Sections 15 (b) and 15A (1) (2) of the Securities Exchange Act of 1934, became fully effective on April 21, 1949.

The Commission's order was based on findings that Thornton & Co. had willfully violated the anti-manipulation provisions of Sections 9 (a) (1) and (2) of the Securities Exchange Act of 1934 in effecting, during designated periods, 116 "wash sales" in two stocks traded on the Chicago Stock Exchange, for the purpose of creating a false and misleading appearance of active trading in these stocks and in the market for them, and in effecting, during the same periods, a series of transactions in these stocks which created actual and apparent trading activity and raised the price of these securities, for the purpose of inducing purchases by others. The Commission also found that Thornton & Co. had willfully violated the anti-fraud provisions of Sections 10 (b) and 15 (c) (1) of the Securities Exchange Act of 1934 and Rules X-10B-3 and X-15C1-2 (a) and (b) thereunder, in selling these stocks in the over-the-counter market at prices based on the exchange market prices without disclosure of the material facts related to its manipulation of the exchange market. For further details, see Securities Exchange Release No. 4115.

On January 19, 1949, the United States Court of Appeals for the Second Circuit, located in New York City, affirmed the Commission's order, but, upon application by Thornton & Co., further stayed the effectiveness of the Commission's order pending disposition of a petition for a writ for certiorari which Thornton & Co. represented that it planned to file in the United States Supreme Court. The stay order, however, enjoined Thornton & Co. "from effecting any securities transactions whatesoever" during the period of the stay.

On April 21, 1949, two days after the expiration of the 90-day period for filing a petition for a writ of certiorari, Thornton & Co. applied for an extension of time within which to file a petition for a writ of certiorari, but the application was denied that day by a Justice of the Supreme Court. The Commission thereupon advised Thornton & Co. that, in its view, the litigation was terminated, the stay order was no longer operative, and the Commission's order of July 14, 1948 was fully effective.

[Securities Exchange Act of 1934, Release No. 4115]

SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C.

In the Matter of Thornton & Co. Box 203, Wall Street Station, New York 5, N.Y. (Securities Exchange Act of 1934-Sections 15(b), 15(A) (1) (2)

FINDINGS AND OPIONION OF THE COMMISSION

REVOCATION OF BROKER-DEALER REGISTRATION-EXPULSION FROM NATIONAL SECURITIES ASSOCIATION-GROUNDS FOR REVOCATION AND EXPULSION

Manipulation of Market on Securities Exchange-Wash Sales-Matched Orders-Purpose of Transactions

Where registered broker-dealer's transactions on national securities exchange, including purchases from others and wash sales and matched orders in great volume, raised and maintained the prices of securities and where registrant's sold said securities at levels artificially attained and where registrant's defense that its sole purpose in effecting wash transactions was to delay payment is rebutted by the evidence which shows a manipulative purpose, held, registrant willfully violated Section 9(a) (1) and (2) of the Securities Exchange Act of 1934.

Manipulation of Market on Securities Exchange-Non-disclosure in Sales Over the Counter

Where, without disclosure, registered broker-dealer's sales over the counter were made at prices geared to prices artificially raised and maintained by its activities on national securities exchange, held, registrant willfully violated Sections 10(b) and 15(c)(1) of the Securities Exchange Act of 1934 and Rules X-10B-3 and X-15C1-2 adopted thereunder.

Public Interest—Revocation of Registration—Expulsion from National Securities

Association

Where registered broker-dealer engaged in a series of transactions on national securities exchange artifically raising and maintaining the prices of securities traded thereon and where without disclosure it sold securities over the counter on the basis of the manipulated exchange prices, held, in the public interest to revoke the firm's registration and to expel it from membership in national securities association.

Appearances:

John I. Prendergast and William D. Moran, of the New York Regional Office for the Division of Trading and Exchanges.

Joseph Brandwen and Max P. Kaplan for the registrant.

This is a proceeding to determine whether Thornton & Co. ("registrant") willfully violated the anti-manipulation and anti-fraud provisions of the Securities Exchange Act of 1934 ("the Act") and, if so, whether the public interest requires the revocation of its registration as a broker and dealer pursuant to Section 15 (b) of the Act and its suspension or expulsion from membership in the National

1 Section 15(b) provides in part as follows:

The Commission shall, after appropriate notice and opportunity for hearing, by order... revoke the registration of any broker or dealer if it finds that such revocation is in the public interest and that (1) such broker or dealer whether prior or subsequent to becoming such, or (2) any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), or any person directly or indirectly controlling or controlled by such broker or dealer, whether prior or subsequent to becoming such, has willfully violated any provision . . . of this title, or of any rule or regulation

thereunder

...

Association of Securities Dealers, Inc. (“NASD”), pursuant to Section 15A (1) (2) of the Act."

After appropriate notice, hearings were held before a hearing officer. Proposed findings of fact and supporting briefs were filed. The registrant also filed a motion to dismiss the proceeding contending that there was not substantial evidence to support the charges made in the order for proceedings. A recommended decision by the hearing officer was waived, and we heard oral argument. On the basis of the record we make the following findings.

Registrant is a partnership consisting of Charles J. Thornton and his wife, Patricia Thornton. Thornton, who has been connected with the securities business in various capacities for approximately 33 years, is the only active partner in and controls registrant's activities. Registrant employs no traders and no salesmen. It is not a mmeber o fany securities exchange, it exchange transactions men. It is not a member of any securities exchange, its exchange transactions being effected through member firms.

The order for hearing alleged that (1) registrant willfully violated Section 9(a)(1) of the Act in entering matched orders and effecting wash transactions on the Chicago Stock Exchange ("the Exchange") in the common stock of Lindsay Light & Chemical Co. ("Lindsay common") from June 1, 1946, to July 31, 1946, and in the 7% cumulative, preferred $100 par value stock of Northwest Utilities Co. ("Northwest preferred") from February 9, 1946, to July 2, 1946, for the purpose of creating a false and misleading appearance of active trading in these stocks and the market for them; (2) registrant willfully violated Section 9(a)(2) of the Act in effecting the series of transactions just referred to and thereby creating actual and apparent active trading in these securities and raising the price of the Lindsay common from approximately $32 to approximately $35.50 per share and the price of the Northwest preferred

7

2 Section 15A(1) (2) provides in part as follows:

"(1) The Commission is authorized, if such action appears to it to be necessary or appropriate in the public interest or for the protection of investors or to carry out the purposes of this section

"(2) after appropriate notice and opportunity for hearing, by order to suspend for a period not exceeding 12 months or to expel from a registered securities association any member thereof who the Commission finds (A) has violated any provision of this title or any rule or regulation thereunder

After the Division of Trading and Exchanges had completed the presentation of its evidence and prior to registrant's submission of its evidence, registrant moved to dismiss the proceeding on the ground that the evidence adduced did not support the violations alleged in the order for hearings. We concluded that it would be more consistent with orderly and expeditious procedure to entertain such a motion at the conclusion of the hearings; accordingly, we denied the motion but without prejudice to registrant's renewing it at the close of the hearings. Thornton & Co., S.E.C. (1947). Securities Exchange Act Release No. 4023.

4 Section 9 (a) (1) provides: "It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, or for any member of a national securities exchange

"(1) For the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange, or a false or misleading appearance with respect to the market for any such security, (A) to effect any transaction in such security which involves no change in the beneficial ownership thereof, or (B) to enter an order or orders for the purchase of such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties, or (C) to enter any order or orders for the sale of any such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the purchase of such security, has been or will be entered by or for the same or different parties." A matched order is the type of transaction described in clauses (B) and (C) of Section 9(a)(1).

A wash sale is the type of transaction described in clause (A) of Section 9(a)(1). 7 Section 9 (a) (2) provides:

"It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, or for any member of a national securities exchange

"(2) To effect, alone or with one or more other persons, a series of transactions in any security registered on a national securities exchange creating actual or apparent active trading in such security or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others."

from approximately $152 to approximately $184 per share, for the purpose of inducing the purchase of these securities by others; and (3) registrant willfully violated Sections 10(b) and 15 (c) (1) and Rules X-10B-3 and X-15C1-2 adopted thereunder in that it sold, without disclosure of its stock exchange activities, the Lindsay common and Northwest preferred in the over-the-counter market at or about the prices to which it had raised these securities on the Exchange.

Registrant has stipulated and we find that during the periods under consideration it entered matched orders and effected wash sales, as hereafter detailed, on the Exchange and that it used the mails and means and instrumentalities of interstate commerce in connection with such transactions. However, registrant disclaims any purpose of violating the statute. Briefly, it contends that, in entering these orders and effecting these sales its purpose was not to manipulate the price of the stocks but rather to effect, what is, in substance, a "kiting" operation so that it would be able to finance purchases of the stocks, which it asserts it was interested in accumulating. In other words, the only issue in dispute is whether registrant possessed the unlawful purposes procribed by the statute.

We shall, in turn, discuss registrant's trading activities in Lindsay common and Northwest preferred, its purpose in engaging in such trading, and what action, if any, is necessary in the public interest.

REGISTRANT'S TRADING ACTIVITIES

Trading in Lindsay Common

On June 1, 1946, after a period of active trading that began on November 7, 1945, registrant had an inventory of 225 shares of Lindsay common. It devoted itself during the month of June primarily to building up its position, purchasing at 32, in 24 transactions, 2,050 of the 2,500 shares traded on the Exchange during the month." Of the purchases five were wash transactions involving 750 shares so that, in reality, registrant's actual purchases aggregated only 1,300 shares. In the process of accumulating this inventory, registrant dominated the market in the

Section 10 (b) provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange

"(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Rule X-10B-3 provides:

"It shall be unlawful for any broker or dealer, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, to use or employ, in connection with the purchase or sale of any security otherwise than on a national securities exchange, any act, practice, or course of business defined by the Commission to be included within the term 'manipulative, deceptive, or other fraudulent device or contrivance,' as such term is used in section 15 (c) (1) of the Act."

Section 15 (c) (1) provides:

"No broker or dealer shall make use of the mails or of any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security (other than commercial paper, bankers' acceptance, or commercial bills) otherwise than on a national securities exchange, by means of any manipulative, deceptive, or other fraudulent device or contrivance. The Commission shall, for the purposes of this subsection, by rules and regulations' define such devices or contrivances as are manipulative, deceptive, or otherwise fraudulent." Rule X-15C 1-2 provides in part:

"(a) The term 'manipulative, deceptive, or other fraudulent device or contrivance,' as used in section 15 (c) (1) of the Act, is hereby defined to include any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

"(b) The term 'manipulative, deceptive, or other fraudulent device or contrivance,' as used in section 15 (c) (1) of the Act, is hereby defined to include any untrue statement of a material fact and any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, which statement or omission is made with knowledge or reasonable grounds to believe that it is untrue or misleading.”

The unit of trading in Lindsay common was 50 shares. There were 60,000 shares of Lindsay common outstanding.

57-426 0-71- -29

security. It accounted for 100% of the purchases on one-half of the fourteen days in June when transactions occurred on the Exchange and it participated in the market on all but three days and was a party to all but 7 of the 32 transactions effected during the month. Registrant effected only one actual sale during the month, selling 100 shares at 324 after executing three consecutive wash trans actions at 32. As a consequence of its Exchange purchases, which were supplemented by over-the-counter purchases of 680 shares, registrant held 2,105 shares at the end of June.

An analysis of the trading in Lindsay common from July 1 to July 10, 1946, on which date the stock reached its peak of 352, discloses execution by registrant of wash sales at a level above the previous transaction price, the sale of some of its holdings to public investors at the artifically created and raised price, and then a show of interest and activity by public investors carrying the price of the stock still higher, with further sales by the registrant at the prices then achieved. On July 1, 1946, registrant opened the market with two wash sales involving 150 shares which raised the price of Lindsay at 322, one-half point above the closing price on the previous day. Then registrant effected three sales on the Exchange to others totaling 350 shares at 322, which were interspersed with three additional wash sales covering 250 shares at 321⁄2. These eight transactions, to each of which the registrant was a party either as both seller and purchaser or as seller alone, constituted the only trading in the security on July 1, and of the 750 shares which appeared to have changed hands in these eight transactions, 400 represented wash sales effected by registrant in five transactions. In effecting these transactions on July 1, registrant employed five different brokers, two on the purchase side and three on the sell side.10

On the following day, July 2, after the ostensibly active trading created by registrant on the previous day and the price increase artificially created and maintained by it, others opened the trading in Lindsay with a 50-share transaction at 34. Immediately after this sale, registrant effected two sales, each for 100 shares, at 34, which were followed by two 50-share transactions by others at 332.

On July 3, there was only one sale on the Exchange; this was effected by some one other than the registrant and involved 100 shares at 344. Although registrant did not participate in any Exchange transactions on July 3, it sold 200 shares over the counter at 344 and 344.

On July 5, the next trading day, no activity occurred until 1:18 P.M. when registrant entered an order to sell 150 shares at 344. Ten minutes later, at 1: 28 P.M. it entered a buy order for 100 shares at 344 and a wash sale of that number of shares was effected at 1:30 P.M. Three minutes later registrant sold the remaining 50 shares at 344. Five minutes later others effected a 50-share transaction at 342, and the market closed with another public transaction at the same price.

On July 8, the next trading day, registrant entered a buy order for 100 shares at 344 and then a sell order for 50 shares at the same price. A wash sale was effected, and registrant still had outstanding an order to buy 50 shares at 344. With this order in the market, the next trade was effected by others at 34% and the market closed with another transaction at 344.

On July 10, the next trading day, the public continued its activity, and, in six transactions effected in the course of 28 minutes and involving 350 shares, the market price rose to 352. After the market reached that point, registrant at 12:50 P.M. sold 100 shares at 352. With no transactions being effected for over one hour, at 2:03 P.M. registrant entered an order to sell 100 shares at 35, of which 50 were sold at 2:06 P.M. For the rest of the day registrant dominated the market and was a party to every transaction. With 50 shares still unsold from

10 The details of registrant's trading on July 1, 1946, are as follows:

At 11:58 A.M. registrant entered a purchase order for 200 shares at 321⁄2-1 point above the previous day's closing price. At 12:45 P.M. registrant entered a sell order with a second broker for 150 shares at 32%, which resulted in two wash transactions at 321⁄2 in lots of 100 and 50 shares each. With 50 shares of the buy order remaining unexecuted, at 1:42 P.M. registrant entered a sell order for 200 shares at 324 with a third broker and at 1:57 P.M. a purchase order for 200 shares with a fourth broker. and at 2:08 P.M. a sell order for 200 shares at 32% with a fifth broker. At this point registrant had sell orders in the market for 400 shares and buy orders for 250 shares. At 2:12 P.M. registrant sold 100 of these shares at 32%, and at the same time an additional 100 shares were washed at the same price leaving registrant with orders in the market to buy 150 shares and sell 200 shares. Then at 2:13 P.M. registrant entered another order to sell 200 shares at 32%. At 2:16 P.M. registrant sold 100 of these shares and it washed 100 shares. Now registrant had in effect orders to sell 200 shares and to buy 50 shares. At 2:17 P.M. registrant effected a wash transaction for 50 shares and at 2:20 P.M. it sold the remaining 150 shares.