## Facts

- Fifth Avenue Coach Lines, Inc. (Fifth Avenue) and its subsidiaries operated bus lines in New York City until New York City acquired the bus lines through condemnation.
- Fifth Avenue ultimately received a condemnation award of about $11.5 million, leaving it with substantial liquid assets after its operating transit business was taken.
- Before the award was received, Fifth Avenue’s president made general public statements indicating the company would use the proceeds for investments.
- After receiving the award, Fifth Avenue initially placed the funds into several interest-bearing accounts.
- Fifth Avenue then began purchasing publicly traded securities while also attempting (mostly unsuccessfully) to acquire operating companies.
- Over time, Fifth Avenue’s cash position declined and its holdings of securities grew; securities purchases became its main outlay and securities-related returns became its main source of income.
- The SEC filed an enforcement action seeking injunctive relief (and a receiver) alleging that Fifth Avenue had become an “investment company” under § 3(a)(1) of the Investment Company Act of 1940, was operating without registering in violation of § 7(a), and that certain individuals were responsible.
- The SEC also alleged that certain individual defendants engaged in a fraudulent affiliated transaction involving Gray Line Corporation, violating Exchange Act § 10(b) and Rule 10b-5.

## Issues

1. Whether Fifth Avenue, by virtue of how it held and used the condemnation proceeds (cash, interest-bearing deposits, and securities purchases), became an “investment company” within § 3(a)(1) of the Investment Company Act by June 30, 1967.
2. If so, whether Fifth Avenue’s continued operation without registering violated § 7(a) of the Investment Company Act and warranted injunctive relief and appointment of a receiver.
3. Whether individual defendants could be enjoined based on their responsibility for Fifth Avenue’s failure to register as required by the Investment Company Act.
4. Whether the transaction between Fifth Avenue and affiliated Gray Line Corporation involved fraud or deception in connection with the purchase or sale of securities, violating Exchange Act § 10(b) and Rule 10b-5, and justified injunctive relief against the individuals involved.

## Decision

- The court held that Fifth Avenue was an investment company within the meaning of § 3(a)(1) of the Investment Company Act by June 30, 1967.
- The court held that Fifth Avenue’s continued business activities without registering violated § 7(a) of the Investment Company Act.
- The court granted injunctive relief against Fifth Avenue and entered relief against the individual defendants based on their roles in the company’s unregistered investment company status.
- The court found that Muscat, Cohn, and Krock violated Exchange Act § 10(b) and Rule 10b-5 in connection with a transaction between Fifth Avenue and Gray Line Corporation and enjoined further violations.
- The court appointed a receiver for Fifth Avenue as part of the equitable relief.

## Legal Principles

- A company’s status as an “investment company” under Investment Company Act § 3(a)(1) depends on what it is actually doing—whether it is engaged mainly in investing, reinvesting, or trading in securities—rather than its stated plans or labels.
- A company can become an investment company even without setting out to do so, including after a major cash event (such as a condemnation award) when its assets and income shift to securities and securities-related returns.
- Operating as an investment company without registering, once required, violates Investment Company Act § 7(a) and may be restrained by injunction in an SEC enforcement action.
- Courts may impose broad equitable relief, including appointment of a receiver, where necessary to protect investors and bring the company into compliance with the Investment Company Act.
- Exchange Act § 10(b) and Rule 10b-5 apply to deceptive conduct in connection with securities transactions, including misleading affiliated transactions that harm the issuer and its shareholders, and can support injunctive relief against responsible individuals.

## Conclusion

The court concluded that Fifth Avenue’s post-condemnation operations and asset mix made it an investment company by June 30, 1967, requiring registration under the Investment Company Act; because it continued without registering, the SEC was entitled to injunctive relief and a receiver, and the court also enjoined individual defendants for their roles in the failure to register and for a separate affiliated transaction found to violate § 10(b) and Rule 10b-5.


SEC v. Fifth Avenue Coach Lines, Inc., 289 F. Supp. 3 (1968)