The Securities and Exchange Commission suffered two major blows in courts in Brooklyn and Switzerland this week that could make the agency's enforcement activities more difficult.
In this country, a federal court ruled that the SEC could not stop a convicted criminal from publishing an investment advice newsletter. In Switzerland, the courts overruled Swiss police and refused to tell the SEC the identity of investors who used secret bank accounts for illegal insider trading.
Brooklyn federal Judge Jack B. Weinstein decided that Christopher L. Lowe could continue to publish an investment newsletter even though he has been convicted three times of crimes, including bank theft.
The SEC had charged that Lowe, whose $200-a-year publication goes to 2,400 subscribers, violated federal law by not telling his readers about his background. It tried to shut down his operations.
The judge ruled that the SEC did not have the power to prevent Lowe from publishing. Nor is Lowe required to disclose his record to anyone except the SEC. However, the judge added that the SEC can stop Lowe from registering as an investment adviser and therefore deny him permission to "give securities information to their subscribers or potential subscribers directly or indirectly by telephone, individual letter or in person."
The ruling was "a tremendous victory for the First Amendment," said Michael McMenamin, a Cleveland lawyer who writes for a conservative think tank, the Reason Foundation. "If the SEC can't shut Christopher Lowe down, they can't shut anyone down," he said.
Lowe was convicted in 1977 for appropriating a client's funds and failing to register as an investment adviser. In 1978 he was convicted of stealing from a bank and tampering with evidence to conceal a fraud. In 1982, he served four months in a New Jersey prison for check kiting.
The SEC has been trying to regulate all financial newsletters, with the exception of newspapers, magazines and general publications, but some publishers have refused to register, citing the First Amendment. In a landmark decision, Judge Weinstein decreed, in effect, that constitutional guarantees outweigh laws designed to protect the public. "The censorship that the SEC would impose on Lowe is more extreme than necessary to effectuate the congressional goal of a confident and informed public," he said.
Last week, Switzerland's Supreme Court denied the SEC access to information about the identity of persons accused of insider trading in 1981 when Santa Fe International Corp. was taken over by the Kuwait Petroleum Corp. Santa Fe is the largest insider trading case in SEC history, involving some $8 million in illegal gains.
At the SEC's request, the Justice Department asked the Swiss Federal Office of Police Matters to identify those investors who anonymously bought stock and options through Swiss banks and American correspondent banks and later made a profit of more than $5 million. The police agreed, but then attorneys representing the unnamed investors challenged the decision and the Supreme Court backed them.