U.S. Securities & Exch. Comm'n v. The Infinity Group Co.
| Citation | 212 F.3d 180 |
| Decision Date | 02 March 1999 |
| Docket Number | 98-1216,Nos. 98-1215,THIRD-PARTY,98-1217,s. 98-1215 |
| Parties | (3rd Cir. 2000) UNITED STATES SECURITIES AND EXCHANGE COMMISSION, v. THE INFINITY GROUP COMPANY; GEOFFREY P. BENSON; GEOFFREY J. O'CONNOR; FUTURES HOLDING COMPANY; SLB CHARITABLE TRUST; SUSAN L. BENSON; JGS TRUST; LINDSEY SPRINGER; BONDAGE BREAKER MINISTRIES LINDSEY SPRINGER; BONDAGE BREAKER MINISTRIES,PLAINTIFFS v. THE UNION STATES OF THE CONSTITUTION, i.e.; ALASKA; ALABAMA; ARKANSAS; ARIZONA; CALIFORNIA; COLORADO; CONNECTICUT; DELAWARE; FLORIDA; GEORGIA; HAWAII; IOWA; ILLINOIS; INDIANA; KANSAS; KENTUCKY; LOUISIANA; MASSACHUSETTS; MARYLAND; MAINE; MICHIGAN; MINNESOTA; MISSOURI; MISSISSIPPI; MONTANA; NORTH CAROLINA; NORTH DAKOTA; NEBRASKA; NEW HAMPSHIRE; NEW JERSEY; NEW MEXICO; NEVADA; NEW YORK; OHIO; OKLAHOMA; OREGON; PENNSYLVANIA; RHODE ISLAND; SOUTH CAROLINA; SOUTH DAKOTA; TENNESSEE; TEXAS; UTAH; VIRGINIA; VERMONT; WISCONSIN; WEST VIRGINIA; WYOMING; WASHINGTON; FEDERAL DISTRICT OF COLUMBIA,DEFENDANTS Geoffrey J. O'Connor (98-1215), Geoffrey P. Benson (98-1216), Susan L. Benson, Pro Se on behalf of herself in her representative capacity on behalf of SLB Charitable Trust, Futures Holding Company and JGS Trust (98-1217), Appellants Argued: |
| Court | U.S. Court of Appeals — Third Circuit |
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA Civil No.: 97-CV-05458 District Court Judge: Honorable Stewart Dalzell
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Richard L. Scheff, Esq. (Argued) Montgomery, McCraken, Walker & Rhoads, LLP 123 South Broad Street Philadelphia, PA 19109 Attorney for Appellants
Harvey J. Goldschmid, Esq. Richard M. Humes, Esq. Samuel M. Forstein, Esq. Timothy N. McGarey, Esq. (Argued) Securities and Exchange Commission 450 Fifth Street, N.W., Stop 2-7 Washington, DC 20549 Attorney for Appellee United States Securities and Exchange Commission
J. Bradford McIlvain, Esq. Dilworth, Paxson, Kalish & Kauffman 1735 Market Street 3200 The Mellon Bank Center Philadelphia, PA 19103 Attorney for Appellee Robert F. Sanville
Mr. Lindsey K. Springer, Pro Se (Argued) 5147 South Harvard Suite 116 Tulsa, OK 74135
Before: ALITO and MCKEE, Circuit Judges, and SCHWARTZ, District Judge*
Defendants appeal the grant of a permanent injunction in this civil action for securities fraud. The defendants argue that the instruments that they offered to investors were not "securities" under federal law, and that the district court therefore lacked subject matter jurisdiction. The defendants also challenge certain evidentiary and procedural rulings that the district court made during the hearing on the motion for a permanent injunction. For the reasons that follow, we will affirm.
In November 1995, defendants Geoffrey Benson and Geoffrey O'Connor formed the Infinity Group Company Trust (the "Trust" or "TIGC").1 Thereafter, the Trust unveiled an "Asset Enhancement Program" that offered investors an opportunity to invest with the expectation of exceedingly high return and minimal risk. Investors in TIGC were asked to execute "property transfer contracts" pursuant to which the investors contributed substantial sums of money to the Trust for the Trust to invest. TIGC guaranteed investors that they would receive an annual rate of return ranging from 138% to 181% depending on the amount of the participant's principal investment.2 The guarantees were based upon the Trust's purported performance experience, financial connections, and the ability to pool large amounts of money. Participants were promised that their principal would be repaid upon demand. Once the property transfer contracts were executed, the transferred funds became assets of the Trust and were subject to investment at the sole discretion of the Board of TIGC.
TIGC's solicitation was successful. It raised approximately $26.6 million from over 10,000 investors nationwide. However, TIGC only invested $12 million of the funds it received pursuant to the property transfer contracts, and it never earned a profit on the funds it did invest.3 Rather, the Trust sustained mounting loses that it failed to disclose to investors. The district court described what happened as follows:
TIGC also used over $2 million in so-called downline commissions to keep the engine of this enterprise humming like a new Mercedes on the autobahn. In the time-dishonored tradition of Charles Ponzi, TIGC substituted new investors' money for real investment return on old investors' funds.
The rest of TIGC's expenditures were even less investment-related. More than $816,000 was spent on real estate, a significant portion of which went to the purchase and development of a personal residence for Geoffrey and Susan Benson . . . the purchase or lease of cars for their garage, . . . a $6,133.46 spending spree at Circuit City; more than $2,000 spent at television retailers; over $50,000 in `household expenses'; $5,000 to pay off a home mortgage; $10,000 to pay off personal credit card bills; $10,000 for school tuition for the Bensons' son; as well as hundreds for jewelry, bowling equipment and membership fees, [sic] groceries. In short, the Bensons used TIGC as their personal checking account.
In addition, Geoffrey Benson made an undisclosed donation of $1.265 million of investor funds to Lindsey K. Springer, d/b/a Bondage Breaker Ministries.
In addition to all this, defendants Geoffrey Benson and Geoffrey O'Connor paid themselves nearly $300,000 in cash from TIGC's funds, none of it reported to the Internal Revenue Service or even documented on TIGC's books-which did not exist. Lastly, more than $1.9 million remains unaccounted for, . . . .4
SEC v. Infinity Group Co., 993 F.Supp. 324, 325-26 (E.D.Pa. 1998) (original footnote omitted).
On August 27, 1997, the SEC filed the instant complaint in the United States District Court for the Eastern District of Pennsylvania charging "an ongoing scheme, directed by Benson and O'Connor, to defraud public investors through the offer and sale of TIGC securities, in the form of investment contracts," App. 41a, in violation of Section 22 of the Securities Act of 1933, 15 U.S.C. 77v, and Sections 21 and 27 of the Securities Exchange Act of 1934, 15 U.S.C. 78u & 78aa. The Commission sought a permanent injunction, a freeze of the assets of TIGC, appointment of a Trustee to manage the affairs of TIGC, and an order requiring defendants, and certain third parties (the "relief defendants") to disgorge assets of TIGC that had been improperly transferred.5
On September 5, 1997, after a hearing, the district court issued an Order for Preliminary Injunction, Appointment of Trustee, and Freeze of Assets and Other Relief. Although the Trust's funds and assets were frozen, the September 5 Order provided for the release of funds to pay legal expenses and fees, as well as defendants' living expenses. On February 6, 1998, the district court entered a final judgment against the defendants enjoining them from further violations of the securities laws and ordering disgorgement of all amounts contributed to the Trust by the Trust participants. This appeal followed.
Defendants raise four issues on appeal. First, they argue that the property transfer contracts that were used as an "investment" vehicle here were not "securities" under federal securities laws, and therefore that the district court lacked subject matter jurisdiction. Second, they argue that inasmuch as they sincerely believed in the investments that TIGC made, there can be no liability for securities fraud. Third, they allege that the district court erred in denying their concededly untimely demand for a jury trial. Lastly, they contend that several allegedly erroneous procedural and evidentiary rulings constitute reversible cumulative error even though the rulings were harmless when considered separately. We will discuss each argument in turn.
We must first address the defendants' claim that the district court lacked subject matter jurisdiction because the "property transfer contracts" were not "securities" under federal securities laws. Inasmuch as this is an appeal from a final judgment, we have jurisdiction to review the district court's decision under 28 U.S.C. S 1291. We exercise plenary review over a district's ruling on a motion to dismiss for lack of subject matter jurisdiction. Delaware Valley Citizens Council v. Davis, 932 F.2d 256, 264 (3d Cir. 1991).6
It is well established that federal securities laws only apply to the purchase or sale of "securities" as defined therein. Steinhardt Group Inc. v. Citicorp, 126 F.3d 144, 150 (3d Cir. 1997).
`[S]ecurity' means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, . . . investment contract, voting-trust certificate, . . . any interest or instrument commonly known as a `security', or any certificate of interest or participation in, . . . or right to subscribe to or purchase, any of the foregoing.
15 U.S.C. S 77b(a)(1) (emphasis added). The property transfer agreements that TIGC's investors executed certainly appear to be "investment contract[s]," however "[t]he term investment contract has not been defined by Congress, nor does the legislative history to the 1933 and 1934 Acts illuminate what Congress intended by the term investment contract." Steinhardt, 126 F.3d at 150-51. In SEC v. W.J. Howey Co., 328 U.S. 293 (1946), the Supreme Court provided a framework for determining when such agreements are subject to federal law. The Court stated:
[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the...
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