Majors v. South Carolina Securities Commission

• Decision Date: 23 April 2007
• Docket Number: No. 26317.,26317.
• Citation: 644 S.E.2d 710
• Parties: Ned B. MAJORS and Tax Lien Agents, Inc., Appellants, v. SOUTH CAROLINA SECURITIES COMMISSION, Respondent.
• Court: South Carolina Supreme Court

644 S.E.2d 710

Ned B. MAJORS and Tax Lien Agents, Inc., Appellants, v. SOUTH CAROLINA SECURITIES COMMISSION, Respondent.

No. 26317.

Supreme Court of South Carolina.

Heard November 14, 2006.

Decided April 23, 2007.

Rehearing Denied May 23, 2007.

John F. Beach and John J. Pringle, Jr., both of Ellis, Lawhorne & Sims, of Columbia, and Ned Majors, of Myrtle Beach, for Appellant.

Scott E. Hultstrand and Tracy A. Meyers, both of Office of the Attorney General, of Columbia, for Respondent.

Justice WALLER.

We certified this case from the Court of Appeals pursuant to Rule 204(b), SCACR. The South Carolina Securities Exchange Commission ordered Appellants, Ned Majors and Tax Lien Agents, Inc. (collectively TLA), to "Cease and Desist Selling Unregistered Securities and Engaging in Securities Fraud." TLA appeals, contending it is not engaged in the sale of "securities." We disagree and therefore affirm.

FACTUAL BACKGROUND

Ned Majors is President and sole shareholder of TLA, a South Carolina Corporation operating in Myrtle Beach since 1998. TLA's business centers around the purchase of tax lien certificates (TLCs) at city and county tax lien auctions throughout the country. Pursuant to TLA's "Agency Contract," TLA is the purchasing agent for its Principals. TLA Agents make all purchasing decisions, and they bid competitively for purchases at auctions by offering to accept a lower interest rate than the statutory rate to which purchasers would otherwise be entitled. Pursuant to the contract, the Agent bids on tax liens which TLA believes have a reasonable prospect of not being redeemed. The Principal agrees to pay Agent a "non-refundable agency fee" (between 12-25% of the principal's initial tax lien purchase amount) and grants TLA an inchoate interest of 50% ownership in any unredeemed TLCs.

For each TLC purchased on a principal's behalf, the principal gives the Agent a cashiers check (or a Trust directive if using a trust) made payable to the "County Treasurer for Tax Liens." The TLCs purchased are listed in the principal's name. If a TLC is redeemed before its maturity date (usually 1-3 years), the Principal keeps all redemption monies, including interest and penalties; however, if the TLC is not redeemed, the Principal agrees to immediately sign papers to assign, convey and register the property, and to confirm the Agent has a 50% ownership interest in the net profit of the TLC and any resultant deed issued. The Principal is required (unless agreed upon with the Agent) to commence good faith efforts to quiet the title and sell the property. Although Principals have the right to select closing attorneys and quiet title, etc., they very seldom do so as the majority are absentee owners living a considerable distance from the properties; the majority use TLA's services to facilitate both the sale and quieting title. Although TLA represents only one principal for each TLC purchased, an agent represents 15-20 principals (also referred to as "employers") at each tax sale or as many as 200 "employers" over a two week period.

If a Principal wishes to sell TLCs, the Agent has first right of refusal, and if the TLC is sold to any other party, the third party must agree to the same contract terms as the Principal. If either party elects, the underlying property which was not redeemed may be purchased by paying 50% of the average of three appraisals. The agency contract also states that "while there are no risks in owning government sold and issued TLCs that are redeemed (paid off), there are potential down side financial risks if a TLC matures into a property deed as the underlying property market value could substantially drop during the tax lien maturity period."

PROCEDURAL BACKGROUND

In September 2003, the Attorney General, acting as the South Carolina Securities Exchange Commissioner (Commissioner), entered an order for Majors and TLA to "Cease and Desist Selling Unregistered Securities and Engaging in Securities Fraud" and gave them notice of a right to a hearing. The Commissioner appointed G. Marcus Knight as the Administrative Hearing Officer for the matter, and a public hearing was held on Oct 30-31, 2003. Thereafter, Knight issued a detailed report and recommendation concluding that 1) the South Carolina Uniform Securities Act (the Act) applied because TLA was engaged in the sale of "securities" as defined in that Act, S.C.Code Ann. § 35-1-20(15) because its contract constituted an "investment contract." The Hearing Officer also rejected TLA and Majors' contention that the manner of issuance of the cease and desist order deprived them of due process, or that their due process rights were violated by his appointment as Hearing Officer. The Hearing Officer concluded that the Commissioner should order a final Cease and Desist Order, pursuant to S.C.Code Ann. § 35-1-60, due to a violation of the registration requirements § 35-1-810 of the Act. However, the Commissioner opined the Final Order should exclude any reference to TLA making "material misrepresentations and/or omissions" in connection with its sale of TLCs, and should not pursue any criminal or civil penalties.

In February 2004, the Commissioner issued a "Final Order to Cease and Desist Selling Unregistered Securities." The Commissioner found TLA's investment opportunity constituted a "security" under the Act and also found a violation of the registration requirements § 35-1-810. TLA and Majors were ordered to cease and desist from offering or selling the TLC investment opportunity in or from the State of South Carolina. The final order did not find TLA was engaged in securities fraud.

Majors and TLA appealed to the circuit court which ruled 1) the investment opportunity offered was a security, 2) the SEC Commission had authority to issue the original cease and desist order, and 3) Majors and TLA were afforded due process in the underlying administrative proceeding.

ISSUES

1. What is the proper standard of review?

2. Did the SEC have authority to issue the initial cease and desist order?

3. Were Appellants afforded due process in the underlying administrative proceeding?

4. Were Appellants properly ordered to cease and desist from the sale of unregistered securities in violation of the S.C. Uniform Securities Act?

1. STANDARD OF REVIEW

The issue in this case involves a decision of whether TLA's sale of TLCs constitutes the sale of securities. We find this is a novel question of law, such that we are free to decide the issue with no particular deference to the lower court. Baggerly v. CSX Transp. Inc., 370 S.C. 362, 635 S.E.2d 97 (2006), citing I'On, L.L.C. v. Town of Mt. Pleasant, 338 S.C. 406, 411, 526 S.E.2d 716, 719 (2000).

2. INITIAL CEASE AND DESIST ORDER

TLA asserts the Commissioner had no statutory authority to enter the initial Cease and Desist order, such that the whole proceeding should be voided for lack of subject matter jurisdiction. We disagree.

This issue is not one of subject matter jurisdiction. Subject matter jurisdiction is the power to hear and determine cases of the general class to which the proceedings in question belong. Dove v. Gold Kist, Inc., 314 S.C. 235, 236, 442 S.E.2d 598, 600 (1994); State v. Gentry, 363 S.C. 93, 610 S.E.2d 494 (2005).

In any event, S.C.Code Ann. § 35-1-60 (2004 Supp), as it read at the time this matter arose, stated in pertinent part, "The Securities Commissioner may make, amend, and rescind those rules, forms, and orders, including cease and desist orders, as are necessary to carry out the provisions of this chapter ..." (emphasis supplied).

As originally written, S.C.Code Ann. § 35-1-60 did not allow the Commissioner to issue cease and desist orders. It was amended in 1992 to permit the Commissioner to "make, amend, and rescind those rules, forms, and orders, including cease and desist orders ..." 1992 Act No. 451 § 1, eff. June 15, 1992. We find it was within the Commissioner's authority to issue the initial cease and desist order.¹

3. DUE PROCESS

TLA and Majors next assert issuance of the cease and desist order in violated their rights to due process. We disagree.

The initial cease and desist order, prior to a hearing, was permissible. See Ross v. MUSC, 328 S.C. 51, 72, 492 S.E.2d 62, 69 (1997) (Article I, § 22, requires an administrative agency provide notice and an opportunity to be heard, but does not require notice and an opportunity to be heard at each level of the administrative process. It mandates notice and opportunity to be heard at some point before the agency makes its final decision).

Moreover, contrary to TLA's contention, we find no due process violation in the SEC Commissioner's role in this matter.

In Ross v. MUSC, 328 S.C. 51, 492 S.E.2d 62 (1997), we held the purpose of S.C. Const., Art. I, § 22 is to ensure adjudications are conducted by impartial administrative bodies. Partiality exists where an adjudicator either has ex parte information as a result of prior investigation or has developed, by prior involvement with the case, a "will to win." Ross, 328 S.C. at 69, 492 S.E.2d at 72. In Ross, we found no violation of Section 22 where MUSC's president investigated a tenured professor's conduct, terminated the professor, and then testified against him at a committee hearing. We found no due process violation because the president did not later participate as an adjudicator, and he did not improperly consider ex parte information. Id. at 70, 492 S.E.2d at 72.²

In Garris v. Governing Board of S.C. Reinsurance Facility, 333 S.C. 432, 511 S.E.2d 48 (1998), this Court recognized, "the fact that investigative, prosecutorial, and adjudicative functions are performed within the same agency, or even performed by the same persons within an agency, does not, without more, constitute a violation of due process." 333 S.C. at 443, 511 S.E.2d at 54. In that case, Garris was a designated insurance agent for the South Carolina Reinsurance Facility. The Facility began investigating...