In re Franklin, Meyer & Barnett

On February 10, 1955, Holly Uranium Corporation (Holly) filed a registration statement with the Securities and Exchange Commission (SEC) (plaintiff) for a public stock offering. Broker-dealer Franklin, Meyer & Barnett (Franklin) (defendant) was a co-underwriter of the offering. On March 30, Franklin distributed a preliminary prospectus to potential customers, along with a cover letter stating that it could not solicit or accept orders until the registration statement became effective. In addition, a Franklin partner instructed Franklin’s salesmen at meetings attended by two other partners that they could accept only indications of interest—and could not accept sales orders—until the shares were registered. The registration statement became effective on April 23. However, between April 1 and April 22, (1) several customers sold other securities in order to pay for Holly shares, with some doing so at the suggestion of Franklin salesmen; (2) several customers sent checks or postal orders to Franklin in the amounts needed to buy Holly shares, with some bearing notations indicating they were sent for that purpose; and (3) one customer sent other stock he owned to Franklin, with a letter confirming his instructions to a salesman to sell that stock and use the proceeds to buy Holly shares. Franklin’s partners did not ask to see any checks that expressly stated they were to buy Holly shares, nor did they try to determine whether any customers identified as having provided indications of interest in Holly shares had actually sent payment. In addition, one salesman sent his business card to several customers, on which he wrote a note urging them to contact him as soon as possible because his allotment of Holly shares was running low. The SEC brought an administrative proceeding to consider whether Franklin should be disciplined for allegedly selling unregistered securities in violation of § 5 of the Securities Act of 1933 and whether certain Franklin salesmen and partners were the cause of any discipline. Based on the immediate corrective action that Franklin undertook, the supervising partners’ only indirect participation in the violations, and the partners’ clean disciplinary records, Franklin offered to accept a 10-day suspension of its membership in the National Association of Securities Dealers (NASD).