S.E.C. v. Lowe

• Citation: 725 F.2d 892
• Decision Date: 18 January 1984
• Docket Number: D,Nos. 106,173,s. 106
• Parties: Fed. Sec. L. Rep. P 99,633, 10 Media L. Rep. 1225 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant-Cross-Appellee, v. Christopher L. LOWE et al., Defendants-Appellees-Cross-Appellants. ockets 83-6108, 83-6116.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 892

725 F.2d 892

Fed. Sec. L. Rep. P 99,633, 10 Media L. Rep. 1225

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant-Cross-Appellee, v. Christopher L. LOWE et al., Defendants-Appellees-Cross-Appellants.

Nos. 106, 173, Dockets 83-6108, 83-6116.

United States Court of Appeals,

Second Circuit.

Argued Sept. 19, 1983.

Decided Jan. 18, 1984.

Jacob H. Stillman, Associate Gen. Counsel, S.E.C., Washington, D.C. (Daniel L. Goelzer, Alan Rosenblat, David Sirignano, W. Robert Gray, Paul Gonson, Washington, D.C., of counsel), for plaintiff-appellant-cross-appellee.

Michael E. Schoeman, Schoeman, Marsh, Updike & Welt, New York City (Elizabeth H. Cooper, David A. Newberg, New York City, of counsel), for defendants-appellees-cross-appellants Lowe.

Before OAKES and VAN GRAAFEILAND, Circuit Judges, and BRIEANT, District Judge. ^*

OAKES, Circuit Judge:

An investment adviser registered under the Investment Advisers Act of 1940 was convicted on three different occasions of serious misconduct in connection with his investment advisory business. Pursuant to the Act, the Securities and Exchange Commission revoked his registration because of his convictions. He has nevertheless continued to publish and sell newsletters containing investment advice, in violation of the Act's requirement of registration. The interesting, if not altogether unique, question presented by this case is whether the publication of such advice is protected by the First Amendment so as to preclude the SEC from seeking to enjoin its continuance.

FACTS

Christopher L. Lowe is the president of the three corporate entities involved in this case: Lowe Management Corp., Lowe Publishing Corp., and Lowe Stock Chart Service, Inc. Between March, 1974, and May, 1981, Lowe Management was registered with the SEC as an investment adviser pursuant to Section 203(c) of the Investment Advisers Act, 15 U.S.C. Sec. 80b-3(c) (1976). As such it published investment advice and managed and had custody of the funds of its clients on a discretionary basis.

In 1977, Lowe was convicted of two New York misdemeanors relating to his investment advisory business. ¹ He pleaded guilty to making false representations to a client that $2,200 had been invested for his benefit and a 27% return earned, when in fact Lowe had misappropriated the funds for his own use. He also pleaded guilty to failing to register in New York State as an investment advisor.

In 1978 Lowe was convicted of two New York felonies. ² He pleaded guilty to tampering with physical evidence, involving the alteration of a copy of a $10 money order to have it appear to be for the amount of $10,000. In addition, he pleaded guilty to third degree larceny for fraudulently drawing checks on an account to which worthless checks had been deposited. For these convictions Lowe received a prison sentence and was ordered to make restitution to the client.

As a result of these convictions the SEC instituted administrative proceedings under Section 203 of the Investment Advisers Act, 15 U.S.C. Sec. 80b-3(e) & (f) (1976), against Lowe and Lowe Management. The Commission found that Lowe had aided and abetted willful violations of the antifraud provisions of the Act, violated the reporting provisions of the Act, and failed to amend Lowe Management's investment advisory registration form to report the convictions which related to his conduct as an investment adviser. In assessing sanctions the Commission found that Lowe's conduct "could hardly be more serious[,] ... reflect[ing] a callous disregard" for the high Lowe's criminal activities did not end here, however. In 1982 he pleaded guilty to two charges under New Jersey law of theft by deception in the third degree, ³ for fraudulently misrepresenting that checks drawn on his personal and one of Lowe Publishing's accounts were good and negotiable. For these activities he was sentenced to a three-year prison term and probation, and ordered to make restitution of over $27,000 to the defrauded banks.

                fiduciary standards required of an investment adviser, and that the criminal conduct "clearly demonstrate[d] his total lack of fitness to remain in 'an occupation which can cause havoc unless engaged in by those with appropriate background standards.' "    In re Lowe Management Corp., SEC Investment Advisers Act of 1940 Release No. 759 (May 11, 1981) (quoting Marketlines, Inc. v. SEC, 384 F.2d 264, 267 (2d Cir.1967), cert. denied, 390 U.S. 947, 88 S.Ct. 1033, 19 L.Ed.2d 1137 (1968)).  The Commission rejected the argument that sanctions were unnecessary because Lowe and his advisory corporation no longer handled clients' funds or securities, but only provided investment advice by publication.  Noting that even these activities "afford numerous 'opportunities for dishonesty and self-dealing,' " id. at 5, the Commission revoked the registration of Lowe Management as an investment adviser and barred Lowe from association with any investment adviser.  Lowe did not seek judicial review of the Commission's order
                

Despite the Commission's order of May 11, 1981, revoking Lowe's registration as an investment adviser and barring him from association with any investment adviser, Lowe has published and distributed two investment advisory services, the Lowe Investment and Financial Letter and the Lowe Stock Advisory, and solicited subscriptions for a third one, the Lowe Stock Chart Service. He is president, research chairman, and editor of all three services, and his corporations, Lowe Management, Lowe Publishing, and Lowe Service were the publishers of the newsletters. In addition, Lowe has offered a recorded telephone "hot-line" service to subscribers of six months or more. Despite these activities, he has not applied to register either himself or any of the corporations as an investment adviser.

The Lowe Letter has had from 3,000 to 19,000 clients, with an average of about 5,000. Subscriptions cost $39 for one year or $79 for three years. A typical Lowe Investment and Financial Letter gives a short-term and long-term forecast. It offers advice on the relative desirability of investing in, among other things, stocks, Treasury bills, and money market funds, and describes rather generally the state of the market. It recommends particular stocks and groups of stocks for purchase or sale, discusses precious metals, and announces special reports and the telephone hot-line service.

The Lowe Stock Advisory has only a few hundred subscribers and a number of readers who receive complimentary subscriptions. Subscriptions cost the same as do those to the Lowe Investment and Financial Letter. The Stock Advisory is typically somewhat more specific, however, with a brief introductory examination of general market trends followed by specific purchase, sale, and hold recommendations, particularly for low-priced stocks. The Lowe Stock Chart Service has solicited subscriptions, but has never been published.

No contention is made that any of the information published in the advisory services has been false or materially misleading. Nor is it alleged that Lowe himself, unlike the investment adviser in SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963), has profited through personal or corporate investments from the investment advice rendered.

THE DECISION OF THE DISTRICT COURT

The United States District Court for the Eastern District of New York, Jack B.

                Weinstein, Chief Judge, believed that the Investment Advisers Act could not be construed to permit the SEC to revoke Lowe's registration as an investment adviser, and thus to bar him from publishing his newsletters, without violating the First Amendment.  The court first analyzed the case on the assumption that the Lowe publications constituted commercial speech and thus were not entitled to the full protection of the First Amendment.  See In re R.M.J., 455 U.S. 191, 200-01, 102 S.Ct. 929, 935-936, 71 L.Ed.2d 64 (1982) (advertising by lawyers).  It found, nevertheless, that "the censorship that the SEC would impose on Lowe is more extreme than necessary to effectuate the congressional goal of a confident and informed investing public," and amounted to an unconstitutional prior restraint on the basis of "speculative assessments."    In reaching this conclusion the court apparently thought that the fact of Lowe's past misconduct was not in itself enough to make his future speech "potentially misleading" and consequently subject to restraint.   See Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557, 563-64, 100 S.Ct. 2343, 2350, 65 L.Ed.2d 341 (1980)
                

The court went on to suggest, however, that the case actually fell "outside the rubric of commercial speech." Although recognizing that the Supreme Court had never explicitly so held, Judge Weinstein stated that commercial speech consisted only of advertising, citing Ad World, Inc. v. Township of Doylestown, 672 F.2d 1136, 1140 (3d Cir.1982) (citing Pittsburgh Press Co. v. Pittsburgh Commission on Human Relations, 413 U.S. 376, 93 S.Ct. 2553, 37 L.Ed.2d 669 (1973)), cert. denied, 456 U.S. 975, 102 S.Ct. 2240, 72 L.Ed.2d 850 (1982). As a result, he believed that Lowe's newsletters were fully protected by the First Amendment, and that their "combination of fact, economic and political analyses, conjecture, and recommendation characteristic of investment newsletters ... raises unanswered questions concerning the conditions, if any, under which an absolute restraint may constitutionally be imposed upon them.

Rather than rule the Act unconstitutional, however, the district court construed the Act's definition of an "investment adviser" so as to avoid possible infringement on freedom of the press. It did so by distinguishing personal or "person-to-person" advice from "impersonal" investment advice given in publications. The court evidently reasoned that "strong sanctions in the way of prior restraints" may be invoked against persons...