Due diligence

“ Cary, 82 N. Y. 65, 71, which involved the question of the degree of diligence to be exercised by directors of a savings bank, Judge EARL, speaking for the whole court, said: 'Few persons would be willing to deposit money in savings banks, or to take stock in corporations, with the understanding that the trustees or directors were bound only to exercise slight care, such as inattentive persons would give to their own business, in the management of the large and important interests committed to their hands. ”

“ It is their duty to use ordinary diligence in ascertaining the condition of its business and to exercise reasonable control and supervision of its officers. They have something more to do than from time to time, to elect officers of the bank, and to make declaration of dividends. ”

“ letting them know that diligence and application have their due encouragement, even in the remotest parts of the world, and that no case can be so low, so despicable, or so empty of prospect, but that an unwearied industry will go a great way to deliver us from it, will in time raise the meanest creature to appear again in the world, and give him a new case for his life. ”

“ There is nothing in the banking act, as we read it, which limits a shareholder or shareholders, seeking knowledge for a lawful purpose of an institution in which they have a proprietary interest, to an application to the Comptroller for an examination by a public officer of the affairs of their company. A director need only own 10 shares of the stock. ”

“ If in the one case it is competent to assess to the corporation all of the property held by it, and to the individual stockholders the respective interest owned by each therein, so must it be competent to assess to every partnership the property held by the firm, and to each individual partner his interest therein. It is clear to our minds that in the one case the partner, and in the other the stockholder, would be compelled to pay twice on the same property, which is neither required nor permitted by the Constitution. ”

“ Access to inside information or strategic position in a corporate reorganization renders the temptation to profit by trading in the Debtor's stock particularly pernicious. The particular dangers may take two forms: On the one hand, an insider is in a position to conceal from other stockholders vital information concerning the Debtor's financial condition or prospects, which may affect the value of its securities, until after he has reaped a private profit from the use of that information. ”

“ A promoter may sell his property to the company, but he must first see that the company is furnished with an independent board of directors to protect its interests and he must make full and fair disclosure of his interest in order that the company may determine whether it will or will not authorize its trustee or agent (for such the promoter in equity is) to make a profit out of the sale. It is not a sufficient disclosure in such a case for the promoter merely to refer in the prospectus to a contract which, if read by the shareholders, would inform them of his interest. ”

“ After payment of the costs of administration it is his duty to distribute the estate in dividends as speedily as possible. He may also, and with the sanction of the committee, or, where there is none, with that of the Board of Trade, carry on the business so far as is necessary to a beneficial winding-up, institute or defend legal proceedings, employ a solicitor to do any business previously sanctioned by the same authority, compromise debts and claims, raise money on mortgage, sell property on credit, or divide the estate where practicable among the creditors in its existing form. ”

“ The agent may not buy on credit unless so authorized, or it is the custom of the trade; but a principal's direction to purchase, without supplying the agent with funds, will imply authority to purchase on credit. The agent must purchase precisely as directed. An agent to manage has an authority co-extensive in scope with the business, and possesses the same power and authority as the principal, so far as management goes, but the agent may not sell or dispose of a business, nor mortgage the property used in carrying it on, nor engage in new and different enterprises. ”

“ Until the time of settlement arrives, the client enjoys credit. Although he is not really the holder of the stock until he has paid for it at settlement time and received the certificate, he could sell it if the price rose and pocket the profit—by the way, his broker would charge him only one commission, for both buying and selling, if he sold the stock, which he had bought, before the settlement day arrived. ”

“ But when a corporation or natural person receives from another person, for discount, bills of exchange or promissory notes belonging to that other, he is acting as a banker; and when a customer brings bonds, bullion, or stocks for sale, and they are received for the purpose for which they are brought, that is, to be sold, the case is presented which we think was contemplated by the statute. In common understanding, he who receives goods for sale is one who receives them as an agent for a principal who is the owner. He is not one who buys and sells on his own account. ”

“ The trust was adopted merely as a convenient means of making effective the sales of the agent under the contract. The duties of the trustee were purely ministerial, with no power to control, direct, or participate in, the conduct of the selling enterprise contemplated by the contract. There is to be found in the operation of the business no essential characteristic of corporate control-nothing analogous to a board of directors or shareholders, no exemption from personal liability, no issue of transferrable certificates of interest. ”

“ The lands were the only valuable asset owned by the company. Under these circumstances, and before the negotiations for the sale were completed, the defendant employs an agent to purchase the stock, and conceals from the plaintiff's agent his own identity and his knowledge of the state of the negotiations and their probable result, with which he was familiar as the agent of the shareholders, and much of which knowledge he obtained while acting as such agent, and by reason thereof. ”

“ This so-called consideration was stated by the District Court in substance as follows:
1. It will be an asset of value to the new company to retain the old stockholders in the business because of 'their familiarity with the operation' of the business and their 'financial standing and influence in the community'; and because they can provide a 'continuity of management.'
2. If the bondholders were able to foreclose now and liquidate the debtor's assets, they would receive 'substantially less than the present appraised value' of the assets. ”

“ Thus, unlike two competing cash transactions or transaction in which widely traded securities are offered, the alternatives that plaintiff poses are rich with legitimate, indeed unavoidable, occasions for the exercise of good faith business judgment. Where judgment is inescapably required, all that the law may sensibly ask of corporate directors is that they exercise independent, good faith and attentive judgment, both with respect to the quantum of information necessary or appropriate in the circumstances and with respect to the substantive decision to be made. ”

“ To complete the purchase he advances from his own funds, for the benefit of the customer, 90 per cent of the purchase money. Quite as clearly he does not, in this, act as an agent, but assumes a new position. He also holds or carries the stock for the benefit of the purchaser until a sale is made by the order of the purchaser or upon his own action. In thus holding or carring he stands also upon a different ground from that of a broker or agent whose office is simply to buy and sell. To advance money for the purchase, and to hold and carry stocks, is not the act of a broker as such. ”

“ Ten large investment firms settled with the SEC, the New York State attorney general, and other regulators for permitting improper influence of their research analysts by their investment banking interests. ”

“ The big industrial combinations in America have contributed to the business of the trust companies as registrars or transfer agents for capital stock, agents for the issue of bonds and payment of interest thereon, agents for underwriting and distributing new securities, and depositories of securities and cash under plans of reorganization or while held in escrow. ”

“ 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. ”

“ So, when the lender is a director, charged, with others, with the control and management of the affairs of the corporation, representing in this regard the aggregated interest of all the stockholders, his obligation, if he becomes a party to a contract with the company, to candor and fair dealing, is increased in the precise degree that his representative character has given him power and control derived from the confidence reposed in him by the stockholders who appointed him their agent. ”

“ Instruments of the kind are commercial paper in the strictest sense, and must ever be regarded as favored securities, on account of their universal convenience in mercantile transactions and the settled rule is that transferees of the same hold the instrument clothed with the presumption that it was negotiated for value, in the usual course of business, at the time of its execution, and without notice of any equities between the antecedent parties to the instrument. ”

“ A trustworthy appraisal; an account showing the result of recent operations of the business; an accurate determination of the number of creditors, the amounts of their respective claims, and the extent to which collateral given or payments made to them might be deemed preferences; these were facts which might have influenced the court in deciding whether the plan should be approved or should be approved only upon a public sale. ”

“ All features of the business not connected with persons are looked upon as being under the direct hand of the owner and subject to his control. But uncompleted transactions with persons, whether customers or creditors, are not capable of such oversight without the aid of individual, classified records. ”

“ Each member of a partnership is the agent of all, and all the others are the agents of each, and all or each would have authority to settle debts by the assignment of property of the firm. If, then, one becomes indebted to the firm on an open account, the firm, on the principles before mentioned, could assign or negotiate the debt, and so give the assignee a right of action in his own name. ”

“ The meaning of 'dealer in securities,' as defined in the controlling regulation, has been considered many times by the courts, and this Board. It is limited to one who, as a merchant, buys and sells securities to customers for the profit thereon.'
The evidence adequately supports these findings. ”

“ Bond & Share's exchange of its securities for the new securities was a 'sale' under the Act, for 'sale' includes 'exchange.' § 2 (a) (23) . Bond & Share is a registered holding company. No 'sale' of securities can be made by a registered holding company without Commission approval. That is the command of § 12 of the Act. [2] That approval is obtained, as § 12 shows, [3] by a procedure which submits the fees in connection with the sale to the scrutiny and approval of the Commission. ”

“ Any person having a demand against the corporation is authorized to sue any stockholder in any court, etc., 'provided that no stockholder shall be obliged to pay more in the whole than the amount of the stock he may hold in said company at the time the debt accrued;' thereby clearly qualifying the enlarged meaning of the word 'demand,' and showing satisfactorily that it was used by the legislature to denote a demand arising upon contract. ”

“ The term 'dealer,' it is provided, shall not include an owner nor issuer of securities when the sale of them is not made in the course of continued and successive transactions of a similar nature, nor one who, in a trust capacity created by law, lawfully sells securities 'impressed with such trust.' A 'dealer' is required to furnish practically the same information as that required of corporations. ”

“ The background of stockholder litigation with which this statute deals requires no more than general notice. As business enterprise increasingly sought the advantages of incorporation, management became vested with almost uncontrolled discretion in handling other people's money. The vast aggregate of funds committed to corporate control came to be drawn to a considerable extent from numerous and scattered holders of small interests. ”

“ When any corporation acquires the shares or certificates of stock, franchise, or other rights, or the physical properties or any part thereof of any other corporation for the purpose of preventing or lessening, or where the effect of such acquisition tends to affect or lessen, competition, whether such acquisition is accomplished directly or through the instrumentality of trustees or otherwise. ”

“ In making investments, including venture capital investments, the board of trustees shall exercise the judgment and care under the circumstances then prevailing that persons of ordinary prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of the capital of the fund. ”

“ There is no evidence that stockholders or investors, in furtherance of enhancing and conserving their estates, ordinarily or frequently lend such assistance to employee stock purchase plans of their corporations. And in absence of such evidence there is no basis for an assumption, in experience or common knowledge, that these payments are to be placed in the same category as typically ordinary expenses of such activities, e.g., rental of safe deposit boxes, cost of investment counsel or of investment services, salaries of secretaries and the like. ”