SECURITIES & EXCHANGE COM'N v. Chinese Consol. Benev.
| Decision Date | 06 June 1941 |
| Docket Number | No. 232.,232. |
| Citation | 120 F.2d 738 |
| Parties | SECURITIES & EXCHANGE COMMISSION v. CHINESE CONSOL. BENEV. ASS'N, Inc. |
| Court | U.S. Court of Appeals — Second Circuit |
Chester T. Lane, of Washington, D. C., Gen. Counsel, Christopher M. Jenks and John F. Davis, Asst. Gen. Counsel, Milton V. Freeman, and Orrin C. Knudsen, all of Washington, D. C., for Securities and Exchange Commission, complainant-appellant.
Chadbourne, Hunt, Jaeckel & Brown and Gerald B. O'Neill, all of New York City (William M. Chadbourne and John Holbrook, both of New York City, of counsel), for Chinese Consol. Benev. Ass'n Inc., defendant-appellee.
Before SWAN, AUGUSTUS N. HAND, and CLARK, Circuit Judges.
The Securities and Exchange Commission seeks to enjoin the defendant from the use of any instruments of interstate commerce or of the mails in disposing, or attempting to dispose, of Chinese Government bonds for which no registration statement has ever been made.
The defendant is a New York corporation organized for benevolent purposes having a membership of 25,000 Chinese. On September 1, 1937, the Republic of China authorized the issuance of $500,000,000 in 4% Liberty Bonds, and on May 1, 1938 authorized a further issue of $50,000,000 in 5% bonds. In October, 1937, the defendant set up a committee which has had no official or contractual relation with the Chinese government for the purpose of:
(a) Uniting the Chinese in aiding the Chinese people and government in their difficulties.
(b) Soliciting and receiving funds from members of Chinese communities in New York, New Jersey and Connecticut, as well as from the general public in those states, for transmission to China for general relief.
All the members of the committee were Chinese and resided in New York City. Through mass meetings, advertising in newspapers distributed through the mails, and personal appeals, the committee urged the members of Chinese communities in New York, New Jersey and Connecticut to purchase the Chinese government bonds referred to and offered to accept funds from prospective purchasers for delivery to the Bank of China in New York as agent for the purchasers. At the request of individual purchasers and for their convenience the committee received some $600,000 to be used for acquiring the bonds, and delivered the moneys to the New York agency of the Bank of China, together with written applications by the respective purchasers for the bonds which they desired to buy. The New York agency transmitted the funds to its branch in Hong Kong with instructions to make the purchases for the account of the various customers. The Hong Kong bank returned the bonds by mail to the New York branch which in turn forwarded them by mail to the purchasers at their mailing addresses, which, in some cases, were in care of the defendant at its headquarters in New York. Neither the committee, nor any of its members, has ever made a charge for their activities or received any compensation from any source. The Bank of China has acted as an agent in the transactions and has not solicited the purchase of bonds or the business involved in transmitting the funds for that purpose.
No registration statement under the Securities Act, 15 U.S.C.A. § 77a et seq., has ever been made covering any of the Chinese bonds advertised for sale. Nevertheless the defendant has been a medium through which over $600,000 has been collected from would-be purchasers and through which bonds in that amount have been sold to residents of New York, New Jersey and Connecticut.
Motions for judgment were made by both parties upon pleadings setting forth the foregoing facts. As a result the court below entered a decree denying complainant's motion, granting defendant's motion and dismissing the complaint. The Commission has taken an appeal from the decree, which, in our opinion, ought to be reversed.
It should be observed at the outset that the Commission is not engaged in preventing the solicitation of contributions to the Chinese government, or its citizens. Its effort is only to prevent the sale of Chinese securities through the mails without registry. If that can not be prevented there is nothing to stop Germany, Italy, Japan, or any other nation, as well as China, from flooding our markets with securities without affording purchasers the information which the Securities Act intends to render available for investors in foreign bond issues.
Section 5 of the Act provides as follows:
Section 2(2) of the Act defines a "person" as including both a private corporation and a government.
Section 2(3) of the Act defines a "sale" or "offer to sell" as including: "every contract of sale or disposition of, attempt or offer to dispose of, or solicitation of an offer to buy, a security * * *, for value; except that such terms shall not include preliminary negotiations or agreements between an issuer and any underwriter."
Section 4 provides the following exemptions from the requirements of Section 5 supra:
Under Section 2(11) an "underwriter" is defined as: "any person who has purchased from an issuer with a view to, or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking; * * *".
We think that the defendant has violated Section 5(a) of the Securities Act when read in connection with Section 2(3) because it engaged in selling unregistered securities issued by the Chinese government when it solicited offers to buy the securities "for value". The solicitation of offers to buy the unregistered bonds, either with or without compensation, brought defendant's activities literally within the prohibition of the statute. Whether the Chinese government as issuer authorized the solicitation, or merely availed itself of gratuitous and even unknown acts on the part of the defendant whereby written offers to buy, and the funds collected for payment, were transmitted to the Chinese banks does not affect the meaning of the statutory provisions which are quite explicit. In either case the solicitation was equally for the benefit of the Chinese government and broadly speaking was for the issuer in connection with the distribution of the bonds.
The decisions in Securities and Exchange Commission v. Starmont, D.C. Wash., 31 F.Supp. 264, and Securities and Exchange Commission v. Torr, D.C.S.D. N.Y., 15 F.Supp. 315 (reversed on another ground in 2 Cir., 87 F.2d 446), throw some light on the situation before us. In the first case it was held that to create trading in a stock by advertising in a newspaper was selling within the meaning of the Securities Act. In the second case it was held that to recommend purchases through brokers was likewise "selling." In Link, Petter & Co. v. Pollie, 241 Mich. 356, 217 N.W. 60, 61, the Supreme Court of Michigan decided that a broker who recommended to a customer purchases of a stock which had not been qualified under the Michigan Securities Law was a seller within the provision of that law defining a sale as ...
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