163 F.3d 780 (3rd Cir. 1999), 97-5618, A.S. Goldmen & Co., Inc. v. New Jersey Bureau of Securities

Docket Nº:97-5618.
Citation:163 F.3d 780
Case Date:January 07, 1999
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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163 F.3d 780 (3rd Cir. 1999)

Blue Sky




No. 97-5618.

United States Court of Appeals, Third Circuit

January 7, 1999

Argued May 21, 1998.

Reargued Dec. 4, 1998.

Peter Verniero, Attorney General, Office of the Attorney General of New Jersey. Andrea M. Silkowitz, Assistant Attorney General, Division

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of Law, Trenton, New Jersey. Gail M. Cookson (argued) Deputy Attorney General, Tracy Thayer, Deputy Attorney General, Office of the Attorney General of New Jersey, Newark, New Jersey for Appellant New Jersey Bureau of Securities.

Martin Flumenbaum (argued), Brad S. Karp, Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York. Michael A. Lampert, Saul, Ewing, Remick & Saul, Princeton, New Jersey for Appellee A.S. Goldmen & Company, Inc.

Karen M. O'Brien, General Counsel, North American Securities Administrators Association, Inc., Washington, DC, for Amicus-Appellant North American Securities Administrators Association, Inc.

Richard E. Walker, Eric Summergrad, Luis de la Torre, Paul Gonson, Securities & Exchange Commission, Washington, DC, for Amicus-Appellant Securities & Exchange Commission.

Before: ROTH 1, McKEE and GARTH, Circuit Judges.

Before: ALITO, McKEE and GARTH, Circuit Judges.


GARTH, Circuit Judge.

This case raises a dormant commerce clause challenge to one aspect of the New Jersey Uniform Securities Law. The appellee, A.S. Goldmen & Co., Inc. ("Goldmen"), claims that N.J.S.A. § 49:3-60 (" § 60") violates the dormant commerce clause insofar as it authorizes the appellant New Jersey Bureau of Securities to prevent Goldmen from selling securities from New Jersey to buyers in other states where purchase of the securities was authorized by state regulators. The district court agreed, and granted summary judgment in favor of Goldmen. We hold that § 60 does not run afoul of the dormant commerce clause, and therefore reverse.



Because of the noted potential for fraud and deception in the buying and selling of securities, securities markets are among the most heavily regulated markets in the United States. 2 Regulation of securities first flourished at the state level in the 1910s, when states began enacting laws that required the registration of a securities offering before the sale of the security was permitted. The purpose of these so-called "blue sky" laws was to allow state authorities to prevent unknowing buyers from being defrauded into buying securities that appeared valuable but in fact were worthless. 3 By 1933, all but one state had passed blue sky laws; today, all fifty states, the District of Columbia, Guam, and Puerto Rico have blue sky laws in force. See Louis Loss & Joel Seligman, 1 Securities Regulation 40-41 (3d ed. Rev.1998) (hereinafter, "Loss & Seligman").

Aggressive federal regulation of securities markets began in the early 1930s with the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. Today, the Securities and Exchange Commission ("SEC") administers these and five other federal statutes, which altogether form a complex web of federal regulations. See id. at 224-81. Despite this complex federal scheme, Congress, the courts, and the SEC have made explicit that federal regulation was not designed to displace state blue sky laws that regulate interstate securities transactions. See, e.g., 15 U.S.C. § 77r(c) (1997) (preserving state jurisdiction "to investigate and bring enforcement actions with respect to ... unlawful conduct by a broker or dealer") (National Securities Markets Improvement Act of 1996); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 137, 94 S.Ct. 383, 38 L.Ed.2d 348 (1973) ("Congress intended to subject [securities] exchanges to state regulation that is not inconsistent

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with the federal [laws]."); Loss & Seligman at 275-281. Although the enactment of the National Securities Markets Improvement Act of 1996 narrowed the role of state blue sky laws by expanding the range of federal preemption, federal and state regulations each continue to play a vital role in eliminating securities fraud and abuse. See Loss & Seligman at 60-62; Manning G. Warren III, Reflections on Dual Regulation of Securities Regulation: A Case Against Preemption, 25 B.C. L.Rev. 495, 497, 501-27 (1984) (describing how Congress, the courts, and the SEC have expressly authorized the enforcement of state blue sky laws).


Among blue sky laws, the most common regulatory approach is the mixed disclosure and merit regulation scheme offered by the Uniform Securities Act ("Uniform Act"). 4 Drafted in large part by the late Professor Louis Loss, the Uniform Act has been adopted with some modification in nearly forty states, including New Jersey. See N.J.S.A. § 49:3-47 to 76. The Act contains three essential parts: provisions requiring the registrations of securities sold within the state; provisions requiring the registration of persons involved in the securities industry; and various antifraud provisions. See id; see also Joseph C. Long, 12 Blue Sky Law § 1.07 (1997) (hereinafter, "Long").

This case raises a constitutional challenge to N.J.S.A. § 49:3-60 (" § 60"), which is New Jersey's codification of the portion of the Uniform Act that makes it "unlawful for any security to be offered or sold in this State" unless the security is either registered by state authorities, is exempt under N.J.S.A. § 49:3-50, or is a federally covered security. 5 When read in conjunction with N.J.S.A. § 49:3-51(c), which states that "an offer to sell or buy is made in this State ... when the offer ... originates in this State," § 60 grants New Jersey regulatory authorities the power to regulate the offer or sale of all non-exempt, non-covered securities whenever the offer is made within the state of New Jersey. Under N.J.S.A. § 49:3-64 and the 1985 amendments to the New Jersey statute, this authority permits the chief of the New Jersey Bureau of Securities ("Bureau") to exercise broad powers to regulate sale of such securities in New Jersey when it is deemed in the public interest and various statutory requirements have been met.



A.S. Goldmen & Co. is a securities broker-dealer with its sole office located in Iselin, New Jersey. 6 At the time of proceedings before the District Court, Goldmen's sole office was located in New Jersey. Since that time, it has opened at least one other office out of state.

Goldmen specializes in underwriting the public offerings of low priced, over-the-counter securities, and then selling those securities in the secondary market. During the first several months of 1996, Goldmen planned the initial public offering of Imatec, Ltd. ("Imatec"). Imatec is a Delaware corporation, located in New York, that was formed in 1988 to develop, design, market, and license image enhancement technologies. Goldmen planned for the Imatec securities to be traded as a NASDAQ Small Cap stock

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because such stocks are exempt from initial federal registration requirements, see 15 U.S.C. § 77(d) (1997). The primary regulation of the Imatec security during the first 25 calendar days of the offering would occur at the state level. See 17 C.F.R. § 230.174(d) (1992). Accordingly, in May 1996, Goldmen concurrently filed registration statements with the SEC, and also attempted to register the offering "by qualification" with state regulatory authorities in over a dozen states, including New Jersey. 7

The prospectus filed by Goldmen with the New Jersey Bureau of Securities ("the Bureau") listed Goldmen as the sole underwriter, and also indicated that Goldmen would own the shares to be offered to the public. Reviewing Goldmen's application, the Bureau expressed various concerns regarding the Imatec offering to Goldmen's counsel. Although the Bureau was not prepared to make allegations of fraud, it had already been investigating Goldmen's business practices at that time, and was concerned that the combination of Goldmen's practices and the bleak financial prospects of Imatec made the offering a high-risk investment that was likely to be associated with abusive and manipulative sales practices.

On August 7, 1996, the Bureau informed Goldmen's counsel that it was considering the issuance of a stop order that would block the Imatec offering from being registered in New Jersey. Goldmen's counsel and the Bureau then entered into negotiations concerning the future of the Imatec offering. On October 23, 1996, these negotiations resulted in a Consent Order signed by the CEO of Imatec and the Bureau chief. According to the Consent Order, Goldmen withdrew its application to register the Imatec offering in New Jersey, and agreed that the Imatec offering did not qualify for N.J.S.A. § 49:3-50(b) exemptions to the registration rule of § 60. Goldmen was permitted to make unsolicited sales from New Jersey or to sell to certain financial institutions or to other broker-dealers. However, the Consent Order specifically denied Goldmen exemptions that would have allowed it to solicit members of the public to purchase Imatec stock in the secondary market. App. 38-41; App. 156-57.

Five days after Goldmen entered into the Consent Order, on October 28, 1996, the registration statement that Goldmen had filed with the SEC became effective. 8 As of that date, Goldmen had managed to register the Imatec offering in sixteen states, but had been forced to withdraw its registration in several others, including New Jersey.

On the morning of October 29, 1996, Goldmen commenced the initial public offering from its office in Iselin, New Jersey. By telephone, Goldmen solicited sales to individuals outside of New Jersey, but did not solicit any sales...

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