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Supreme Court of the United States
October 21, 1963, Argued ; December 9, 1963, Decided
[*181] [***240] [**277] MR. JUSTICE GOLDBERG delivered the opinion of the Court.
We are called upon in this case to decide whether under the Investment Advisers Act of 1940 1 the Securities and Exchange Commission may obtain an injunction compelling a registered investment adviser to disclose to his clients a practice of purchasing shares of a security for his own account shortly before recommending that security for long-term investment and then immediately selling the shares at a profit upon the rise in the market price following the recommendation. The answer to this question turns on whether the practice -- known in the trade as "scalping" -- "operates as a fraud or deceit upon any client or prospective client" within the meaning of the Act. 2 [****5] We hold that [***241] it does [**278] and that the Commission may "enforce compliance" with the Act by obtaining an [*182] [****4] injunction requiring the adviser to make full disclosure of the practice to his clients. 3
[****6] The Commission brought this action against respondents in the United States District Court for the Southern District of New York. At the hearing on the application for a preliminary injunction, the following facts were established. Respondents publish two investment advisory services, one of which -- "A Capital Gains Report" -- is [*183] the subject of this proceeding. The Report is mailed monthly to approximately 5,000 subscribers who each pay an annual subscription price of $ 18. It carries the following description:
"An Investment Service devoted exclusively to (1) The protection of investment capital. (2) The realization of a steady and attractive income therefrom. (3) The accumulation of CAPITAL GAINS thru the timely purchase of corporate equities that are proved to be undervalued."
Between March 15, 1960, and November 7, 1960, respondents, on six different occasions, purchased shares of a particular security shortly before recommending it in the Report for long-term investment. On each occasion, there was an increase in the market price and the volume of trading of the recommended security within a few days after the distribution of the Report. Immediately [****7] thereafter, respondents sold their shares of these securities at a profit. 4 They did not disclose any aspect of these transactions to their clients or prospective clients.
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375 U.S. 180 *; 84 S. Ct. 275 **; 11 L. Ed. 2d 237 ***; 1963 U.S. LEXIS 2446 ****
SECURITIES AND EXCHANGE COMMISSION v. CAPITAL GAINS RESEARCH BUREAU, INC., ET AL.
Prior History: [****1] CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT.
Disposition: 306 F.2d 606, reversed and remanded.
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