Lawyers' Letters

Few weeks ago the lawyers for Manhattan's banking house of Lehman Brothers wrote a long letter to John J. Burns, general counsel to the Securities & Exchange Commission. They wanted to know, in effect, whether it would be legal for Lehman clients and certain associated bankers to stabilize the market for stock in Flint-kote Co., control of which Lehman bought from Sir Henri Deterding's Royal Dutch-Shell (TIME, March 30). Lehman was distributing stock in this old U. S. roofing and asphalt concern to the public, and the open market price of the stock had dropped $3 per share below the figure Lehman was asking on its offering ($47.25).

Manipulation of a security is forbidden by law, though just what constitutes manipulation has not yet been defined. Pegging operations ("stabilization"') are subject to SEC rules & regulations, which have not yet been issued. In this legal swamp Lehman wanted to be on ground as solid as possible.

Having mulled over the Lehman letter, SECounsel Burns wrote an answer: 1) pegging was permissible; 2) pegging need not necessarily imply a fixed price, though "activities designed substantially to raise or lower stock exchange prices are clearly manipulative," hence illegal; 3) the prospectus should disclose the fact that the underwriters were engaged in pegging the price of the stock; 4) "this represents my opinion and is not to be taken as an expression of the views of the Commission."

Last week this letter was made public day after Lehman hastily dispatched new prospectuses to its dealers, announcing in a rider that the underwriters were trading in Flintkote and would continue "to make such purchases and to execute such orders in such amounts and at such times for such period or periods as they shall deem advisable." For all bankers and dealers this exchange of lawyers' letters was significant because most of them have been pegging new issues to some extent without admitting it in their prospectuses.

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