Matter of Shearson, Hammill & Company

42 S.E.C. 811 (1965)

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Matter of Shearson, Hammill & Company

Securities and Exchange Commission
42 S.E.C. 811 (1965)

Facts

Shearson, Hammill & Company (Shearson) (defendant) was the de facto underwriter for an offering of 290,000 USA Managed Care Organization (USAMCO) shares of common stock at $1 per share pursuant to Securities and Exchange Commission (SEC) (plaintiff) Regulation A. On November 14, 1960, Shearson began trading the stock and became the stock’s main or only market maker. Shearson’s initial bid price was $3 per share, but its bid and ask prices progressively increased to the mid-to-high teens per share into June 1961. During this period Shearson and USAMCO insiders sold shares from the Regulation A offering at prices significantly higher than the offering price. On June 12 (shortly after the Shearson and USAMCO insiders completed or were completing the sale of much of their USAMCO holdings), Shearson imposed a work-out market by which a customer sell order would be accepted only if Shearson could match it with an actual or expected buy order. This work-out market was necessitated by Shearson’s fear that public demand to buy USAMCO stock was insufficient to meet the demand to sell it. Nevertheless, Shearson continued to quote bid and ask prices. During this work-out period, Shearson (1) sold 8,752 USAMCO shares that had been held by Shearson or USAMCO insiders, (2) induced customers to buy USAMCO stock at prices between $13.75 and $16 per share, and (3) purchased only 210 USAMCO shares from the public. Shearson did not disclose the work-out status of the market while entering into these transactions. On September 11, Shearson decided to stop soliciting buy orders for USAMCO stock, causing the market to collapse. The SEC brought an administrative proceeding against Shearson and certain of its insiders (defendants), alleging they violated the federal securities laws in connection with the USAMCO offering.

Rule of Law

Issue

Holding and Reasoning ()

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