Securities-Investment Advisers Act of 1940-Antifraud Provisions Interpreted
Defendant, Capital Gains Research Bureau, Inc., an investment advisory service, published a bulletin entitled "A Capital Gains Report," each issue of which advised approximately 5,000 subscribers as to the investment potential of a particular corporation's stock. On at least five occasions Capital Gains, and its president and sole stockholder, also a defendant, acquired some shares of a stock and, without revealing their interest therein, recommended its purchase in the bulletin. Following each recommendation, trading in the stock increased, the price rose, and, within a few days, defendants sold their shares at a profit. The Securities and Exchange Commission, alleging that defendants, by failing to disclose their individual interests in the stocks, had violated section 206, clauses (1) and (2), of the Investment Advisers Act of 1940, sought a temporary restraining order, preliminary injunction, and final injunction against defendants. Clauses (1) and (2) provide: "It shall be unlawful for any investment adviser • • • (1) to employ any device, scheme, or artifice to defraud any client or prospective client; (2) to engage in any transaction, practice, or course of business, which operates as a fraud or deceit upon any client or prospective client." The district court denied the motion for a preliminary injunction. A three-judge panel of the Court of Appeals for the Second Circuit affirmed, one judge dissenting. Upon rehearing en bane, held, affirmed, four judges dissenting. Under clauses (1) and (2), an investment adviser is under no affirmative duty to those advised to disclose information regarding his personal holdings in a recommended stock. SEC v. Capital Gains Research Bureau, Inc., 306 F.2d 606 (2d Cir. 1962), cert. granted, 371 U.S. 967 (1963).