Los Angeles Tr. D. & M. Exch. v. Securities & Exch. Com'n

Citation285 F.2d 162
Decision Date10 January 1961
Docket NumberNo. 16995.,16995.
PartiesLOS ANGELES TRUST DEED & MORTGAGE EXCHANGE, Trust Deed & Mortgage Exchange, Trust Deed & Mortgage Markets, David Farrell, Oliver J. Farrell, Roy A. Bonner, Thomas Wolfe, Jr., and Stanley C. Marks, Appellants, v. SECURITIES AND EXCHANGE COMMISSION, Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

COPYRIGHT MATERIAL OMITTED

Morgan Cuthbertson, Laguna, Cal., Paul J. Foley, Washington, D. C., for appellants.

Thomas G. Meeker, Gen. Counsel, David Ferber, Asst. Gen. Counsel, John A. Dudley, Atty., SEC, Washington, D. C., F. E. Kennamer, Jr., Chief Enforcement Atty., San Francisco, Cal., for appellee.

Before CHAMBERS, Chief Judge, and BARNES and JERTBERG, Circuit Judges.

BARNES, Circuit Judge.

The Securities and Exchange Commission (referred to herein as SEC) instituted suit against three corporate defendants1 and five individual officers thereof in the United States District Court for the Southern District of California. Originally the defendants were charged with issuing and selling securities in a fraudulent and deceitful manner, using the mails to effect sales of securities by fraud, and violating certain provisions of the Securities Act of 1933 (15 U.S.C.A. § 77q) and the Securities Exchange Act of 1934 (15 U.S.C.A. § 78o), with respect to the registration of securities. By amended complaint, the defendants were charged with insolvency. While originally seeking merely injunctive compliance with the Securities Acts, the SEC subsequently additionally requested the appointment of a receiver, and liquidation of the defendant corporations.

This matter has been before us previously. Under date of November 17, 1958, this court, after a partial trial below, the granting of a preliminary injunction, and the appointment of a receiver, stayed the operation of such orders pending appeal, issued a substitute restraining order, and expedited the appeal. That appeal was heard on January 23, 1959, and on February 17, 1959, an order was made by this court setting aside the preliminary injunction and order appointing receiver made below for the reasons stated in that opinion and the matter was remanded for a complete trial on the merits. Our restraining order of November 17, 1958, prohibiting and restraining defendants from making any withdrawals of funds save in the ordinary course of business, was continued in full force and effect pending the trial. Cf. 9 Cir., 1959, 264 F.2d 199. For a clearer understanding of the pleadings and issues we refer to that opinion and incorporate it herein by reference. It will not herein be necessary to repeat all the facts.

On May 20, 1960, the court below, after a full trial, appointed a receiver for two of the three named corporate defendants. 186 F.Supp. 830.

By per curiam opinion and order dated June 7, 1960, this court, on defendants' motion to grant a full stay of the district court's order granted a partial stay. We interpreted the order made below as requiring a complete liquidation by the receiver of the defendant corporations. We stayed that order for complete liquidation so that defendants, who had appealed the entire judgment, would not, if successful on their appeal, gain a Pyrrhic victory. We ordered the receiver "to maintain, preserve, and conserve the assets" pending the determination of this appeal.

Thereafter, on June 9, 1960, when appellants sought clarification of our order of June 7, 1960, we referred them to the district court for "interpretation or enforcement" of that court's orders, "together with all details of administration," pending the determination of the second appeal.

Subsequently, on July 6, 1960, the receiver petitioned us for authority to "accomplish orderly liquidation" and bring the third corporate defendant (Trust Deed & Mortgage Exchange) within the provisions of the district court's orders. This petition was denied (without prejudice), because we did not desire to establish "the law of the case" without a full scale hearing of all issues which were to be raised on appeal. We refer to and incorporate by reference our opinion and order in this regard, filed July 14, 1960 (No. 16995, unreported).

The jurisdiction of the court below rests upon section 22(a) of the Securities Act of 1933 (15 U.S.C.A. § 77v(a) as to three counts, and upon section 27 of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78aa) as to two counts. This reliance by the government on such statutes assumes that the subject of the SEC's attack herein is "a security." This assumption is disputed by appellants, and is the principal issue on this appeal, of which this court has jurisdiction. 28 U.S.C. § 1291.

This case comes before us on a large record. The findings are printed, and allegedly contain 42,000 words. The judgment, likewise printed, consists of some 5,000 words. The transcript of testimony covers thirty-nine days of trial, and some 3,600 typewritten pages, exclusive of hundreds of exhibits. We cannot attempt to cover the facts in this opinion. Suffice it to say, the appellants insist they are engaged in selling to the public what they maintain are individual trust deeds or mortgages, and what the SEC maintains constitutes an investment plan or contract, designated and commonly known as the "Secured 10% Earnings Program." Apparently some 9,000 investors have committed some forty million dollars to appellants' care.

There are five questions raised in this case:

I. Are appellants selling securities?
II. If they are, are appellants guilty of violations of the securities laws hereinabove mentioned?
III. Did the appellants have a fair trial of the issues, or was the trial judge prejudiced?
IV. Did the court below err in its rulings with respect to the admission of evidence?
V. Did the court below have jurisdiction (a) to appoint a receiver, and (b) to order liquidation?

We discuss each issue in turn.

I. Was that which was sold a security within the Act? 15 U.S.C.A. § 77b (1), § 2(1) of the Act.

The SEC contends that the sale here, through the "Secured 10% Earnings Program" constituted more than a simple sale of second trust deeds — an interest in real property; that what was really offered here was an investment contract. Under section 2 of the Securities Act, an "investment contract" is specifically mentioned as a "security" subject to the regulatory provisions of the Act.

Two Supreme Court cases must guide us in solving this problem. In S. E. C. v. C. M. Joiner Leasing Corp., 1943, 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88, both the district court and the court of appeals had previously construed § 5(a) and § 17(a) (2) and (3) of the Securities Act so as to exclude from its operation trading in oil and gas leases. Investors purchased assignments of oil leases on small parcels of land; the underlying leases containing an agreement that lessees would drill a test well located somewhere in the large tract. Defendant Joiner agreed to drill the well, and financed its cost by the sale of these small leasehold assignments to "investors" or "purchasers." The following facts were deemed significant by the Supreme Court:

(1) Sales literature nowhere mentioned the drilling conditions a purchaser would meet, or costs the purchaser would incur, if he attempted to drill his own acreage.

(2) Joiner promised to complete the test well, which would constitute a test applicable to all leaseholds sold in common.

(3) The advertising literature emphasized the character of the purchase as an investment, and as a participation in an enterprise.

(4) The leasehold interests were described as "securities * * * believed exempted from registration with * * * the Securities and Exchange Commission." Id., 320 U.S. at page 347, 64 S. Ct. at page 121.

The Supreme Court disagreed with both lower courts, and held that the "defendants were not, as a practical matter offering naked leasehold rights." The "economic inducement" that Joiner would drill a well, "runs through the whole transaction as the thread on which everybody's beads were strung." Id. 320 U.S. at page 348, 64 S.Ct. at page 122. This was "a form of investment contract in which the purchaser was paying both for a lease and for a development project." Id. 320 U.S. at page 349, 64 S.Ct. at page 122.

Instruments may be included within the term "securities" as defined in the Act, "if on their face they answer to the name or description,"2 but:

"The reach of the Act does not stop with the obvious and commonplace. Novel, uncommon, or irregular devices, whatever they appear to be, are also reached if it be proved as matter of fact that they were widely offered or dealt in under terms or courses of dealing which established their character in commerce as `investment contractors\', or as `any interest or instrument commonly knows a "security".\'
* * * * * *
"The test rather is what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect. In the enforcement of an act such as this it is not inappropriate that promoters\' offerings be judged as being what they were represented to be." Id. 320 U.S. at pages 351, 352-353, 64 S.Ct. at page 124.

The Supreme Court thereupon granted the SEC an injunction restraining respondents from further violations of certain sections of the Act.

The second Supreme Court case is S. E. C. v. W. J. Howey Co., 1946, 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244. Investors there also had purchased an interest in real property — a unit of acreage in a citrus grove owned by one defendant. Investors were encouraged to, and most, but not all, of them did enter into a service agreement with a second companion corporation, whereby it was agreed that the management and control of the citrus acreage was in the service company's hands exclusively — "full and complete possession." The annual return to each investor was an allocation...

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