Securities and Exchange Commission Historical Society

Wrestling with Reform: Financial Scandals and the Legislation They Inspired

Legislation Ahead of Its Time: Arizona Securities Act of 1951

Arizona Responds

- August 1957 Earl Hastings (standing, left) as SEC Commissioner

While Riccardi was on trial, the Arizona Corporation Commission investigated Southwestern Mines, Inc. since more than $100,000 in investor capital had gone to Riccardi’s pockets rather than the company treasury.  The Commission charged the company’s officers with acting in an “unsafe, inequitable, and unauthorized manner” and asked the state Attorney General to have the firm taken into receivership.  In December, Arizona charged Riccardi with embezzling company funds and swearing false statements before the Corporation Commission. (14)

It was clear that Riccardi had exploited holes in Arizona law.  The first step towards a remedy was creating a securities division within the Corporation Commission.  The Arizona Times believed that creating a new division, specifically oriented to fighting securities fraud, meant “the [Corporation] Commission can no longer plead lack of personnel and finances when a stock swindle like that perpetrated by Constantino Vincent Riccardi is perpetrated.”

In July, Earl Hastings was named director of the new Securities Division.  He knew the scandal-prone mining industry well and realized what was required to bring it within the purview of a new securities law. (15)  His first step was to draft legislation.  Hastings wanted a law strict enough to deter criminals while allowing legitimate firms to raise capital.  He turned to the U.S. Securities and Exchange Commission for help. 

In fall 1949, Hastings asked the SEC’s San Francisco office for copies of the securities laws of other states, believing that examining these laws would inspire “a fair and enforceable code suitable to the conditions existing in this State.”  The regional staff provided them and also referred Hastings to the Rayburn Committee Report, that preceded the enactment of the Securities Act of 1933, and the 1939 Uniform Sale of Securities Act.  Hastings also consulted with Anthon Lund, SEC Director of Trading and Markets, and Milton Kroll, SEC Assistant General Counsel, at the SEC’s headquarters in Washington.

Hastings drafted a bill and dispatched it to the SEC.  He pointed out that Arizona was home to “a preponderance of highly speculative issues,” and “people of highly questionable ability and integrity,” necessitating tough legislation to protect investors and legitimate businesses alike.  As drafted, the law was to be administered by the Director of Securities, who would be responsible for approving stock issues.  Some securities were exempt from review and registration, including those listed on or approved by the New York Stock Exchange, the New York Curb Exchange, the Midwest Stock Exchange or others to be designated later.  The sale of unregistered securities could be punished by a fine of $500 to $5,000, one to ten years in prison, or a combination of both.  Hastings hoped that the combined efforts of the SEC and the Arizona Corporation Commission would succeed in “stamping out securities frauds.” 

This close cooperation of Arizona with the SEC produced legislation ahead of its time.  The Arizona Securities Act was among the first to include exemptions for SEC prospectus materials and securities listed on SEC-regulated exchanges.  The Arizona statute pointedly mirrored federal securities laws in order to ease enforcement cooperation and “achieve maximum uniformity.”  While Hastings’ original bill had only civil remedies for those purchasing securities, the SEC recommended adding a civil liability that would apply to both sides and “track the act’s anti-fraud statute, which made it a crime to defraud either a seller or a purchaser.” (16)  Arizona became the first state to institute such clauses.

The bill included input from other sources, including model legislation prepared by the Investment Bankers Association, although Hastings altered that to allow the Arizona Corporation Commission to retain its ability “to evaluate the merits of proposed offerings” and to bar them on that basis.  Despite the IBA’s opposition to what was called “merit regulation,” Hastings retained it in the bill.  The bill passed the legislature with only one dissenting vote and the governor signed it into law on March 6, 1951. (17)

The Riccardi affair luridly illuminated the need for sweeping securities law reform.  In the decades since the Blue Sky Law, not only had Arizona modernized, but so had the markets.  Now, there were precedents to draw on, and a national securities regulator in the SEC.  The 1951 Arizona law demonstrated an effective combination of state-level activism and national-level expertise to create a workable, enforceable, and palatable law. 


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Footnotes:

(14) New York Times, “Arizona to Inquire into Mining Concern,”  June 13, 1948.  Tucson Daily Citizen, “Riccardi Firm is Condemned,” September 17, 1948.  Tucson Daily Citizen, “Riccardi and Pair Accused by De Concini,” December 14, 1948.

(15) Quoted in Yuma Daily Sun, “What Other Editors Are Saying,” March 3, 1949.  Hearing on the Nomination of Earl Freeman Hastings, February 16, 1956, 3.  Himelrick, Richard, “Turning 60: Bud Jacobson, Earl Hastings, and Arizona’s 1951 Securities Act,” Arizona Attorney, December 2011, 24.

(16) Himelrick, “Turning 60,” 25.  Hearing on the Nomination of Earl Hastings of Arizona, February 16, 1956, 3. 

(17) Himelrick, “Turning 60,” 24-26.  Yuma Daily Sun, “Gov. Pyle Signs Blue Sky Bill,” March 7, 1951.

Related Museum Resources

Papers

September 26, 1949
transcript pdf (Courtesy of the National Archives and Records Administration)
September 28, 1949
transcript pdf (Courtesy of the National Archives and Records Administration)
September 30, 1949
transcript pdf (Courtesy of the National Archives and Records Administration)
October 7, 1949
image pdf (Courtesy of the National Archives and Records Administration)
October 19, 1949
transcript pdf (Courtesy of the National Archives and Records Administration)
November 10, 1949
transcript pdf (Courtesy of the National Archives and Records Administration)
November 10, 1949
transcript pdf (Courtesy of the National Archives and Records Administration)
November 14, 1949
image pdf (Courtesy of the National Archives and Records Administration)
November 14, 1949
transcript pdf (Courtesy of the National Archives and Records Administration)
November 17, 1949
transcript pdf (Courtesy of the National Archives and Records Administration)
August 8, 1950
transcript pdf (Courtesy of the National Archives and Records Administration)
August 3, 1951
image pdf (Courtesy of the National Archives and Records Administration)
April 5, 1954
transcript pdf (Courtesy of the National Archives and Records Administration)
June 12, 1959
transcript pdf (Courtesy of the National Archives and Records Administration)
September 20, 1976
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
April 1987
image pdf (Courtesy of Orestes Mihaly)

Oral Histories

28 April 2008

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Lewis Brothers - Part I

21 October 2008

Lewis Brothers - Part II

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Fireside Chat - SEC Regional Offices

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Made possible through the support of North American Securities Administrators Association

Film, Radio And Television

January 7, 1964

Bradley Heald, South Carolina Deputy Securities Commissioner on stock fraud

with permission of the Newsfilm Library, University of South Carolina

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