Securities & Exch. Com'n v. Brigadoon Scotch Dist., Ltd., 74 Civ. 5422.

• Decision Date: 11 January 1975
• Docket Number: No. 74 Civ. 5422.,74 Civ. 5422.
• Citation: 388 F. Supp. 1288
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. BRIGADOON SCOTCH DISTRIBUTORS, LTD., also d/b/a Highland-Dunes Scotch Investors, Ltd., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

388 F. Supp. 1288

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. BRIGADOON SCOTCH DISTRIBUTORS, LTD., also d/b/a Highland-Dunes Scotch Investors, Ltd., et al., Defendants.

No. 74 Civ. 5422.

United States District Court, S. D. New York.

January 11, 1975.

William D. Moran, Regional Administrator, S.E.C., New York City, for plaintiff; William Nortman, Jeffrey Tucker, Steven J. Shore, Barry J. Mandel, New York City, of counsel.

Katz & Lipton, Great Neck, N. Y., for defendants FCR, Mark Rauch and Lawrence Corsa; Harry Katz, Great Neck, N.Y., of counsel.

LASKER, District Judge.

The present motion for a preliminary injunction raises the issue of whether the selling of rare coin portfolios by Federal Coin Reserve, Inc. falls within the terms of Section 2(1) of the Securities Act, 15 U.S.C. § 77b(1).

The Securities and Exchange Commission (SEC) filed a complaint against the Federal Coin Reserve, Inc. (FCR), its principals, Mark Rauch and Larry Corsa, and other defendants, seeking temporary and permanent injunctive relief from alleged violations by defendants of the registration and anti-fraud provisions of the Securities Act of 1933, 15 U.S.C. §§ 77e(a), 77e, and 77q(a), and the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). The SEC seeks the appointment of a receiver for FCR and the disgorgement by FCR and its principals of proceeds received from the sale of rare coin portfolios. A limited temporary restraining order was issued and an evidentiary hearing on the motion for a preliminary injunction has been held.

I.

FCR is in the business of selling rare coin portfolios. It stimulates sales by advertising in such media as airline magazines, journals used in the medical profession and other similar outlets. It does not advertise in publications specifically addressed to amateur or professional coin collectors. In general its customers are those who have responded to its advertisements. Upon a showing of interest by a customer, FCR mails to him an elaborate advertising brochure (Plaintiff's Exhibit 4) which contains a detailed description of the procedures involved in choosing the coins and of the services rendered by FCR to its customers. It is undisputed that FCR has filed no registration statement with the SEC. FCR opposes the issuance of the preliminary injunction and the other requested relief on the ground that its business, the selling of rare coin portfolios, does not constitute an investment contract within the meaning of Section 2(1) of the Securities Act, 15 U.S.C. § 77b(1).¹

II.

At the outset we note that the burden the SEC must meet here is less stringent than that required for the issuance of a preliminary injunction in other civil contexts. The SEC need not make a showing of irreparable injury, SEC v. General Securities Co., 216 F. Supp. 350, 352 (S.D.N.Y.1962); 15 U.S. C. 78u(e), but must demonstrate only a probability of success on the merits, Glen-Arden Commodities, Inc. v. Costantino, 493 F.2d 1027, 1035-1036 (2d Cir. 1974), or "a strong prima facie case." SEC v. Boren, 283 F.2d 312 (2d Cir. 1960); SEC v. Broadwall Securities, Inc., 240 F.Supp. 962, 967 (S.D.N.Y. 1965). Moreover the 1933 and 1934 securities acts "must be construed not technically and restrictively, but flexibly to effectuate their remedial purposes." SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 285, 11 L.Ed.2d 237 (1963); accord, Affiliated Ute Citizens v. United States, 406 U. S. 128, 151, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972); Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967). As Justice Jackson stated in SEC v. C. M. Joiner Leasing Corp., 320 U.S. at 351, 64 S.Ct. at 123:

"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 . . ."

FCR contends that its selling of rare coin portfolios constitutes the offer and sale of commodities, not securities. It maintains that the various services offered by it in its advertising brochure are optional, rarely taken advantage of, and peripheral to its business. According to FCR, it actually sold coins, and only coins. Regardless of the nature of the ultimate sales here, FCR's analysis is not in keeping with the law because an investment contract is determinable not only by the nature of what the sellers actually sell but equally by

"what character the instrument is given . . . by the terms of 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." SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 352-353, 64 S.Ct. 120, 124, 88 L.Ed. 88 (1943). (Emphasis added)

The Court has defined an investment contract more specifically as

"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 promoter or a third party." SEC v. W. J. Howey & Co., 328 U.S. 293, 298-299, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946).

The character of FCR's activities is determinable by the application of the Howey definition.

A. Investment of Money

The defendants do not appear to dispute the Commission's claim that FCR customers purchase their coins as an investment for the purpose of making a profit. In any event, the record establishes and we find that FCR customers in fact do purchase their coins for the purpose and in the expectation of making a profit from later resales. The FCR customers who testified stated that they were not interested in pursuing the hobby of coin collecting. FCR produced no evidence to demonstrate that the motivation of those witnesses was atypical of its customers.

Moreover, it is significant that FCR's advertising brochure (Plaintiff's Exhibit 4, sent to all customers before orders are taken, or sales made) consistently described the collection of rare coins as an "investment". Comparisons of gains in the stock market with returns from coins, analysis of coin appreciation and similar investment information run in a constant and main stream throughout FCR's sales pitch. The placement of advertisements in airline magazines and medical journals rather than in numismatic periodicals bolsters the view that the thrust of FCR's efforts are directed at an investing, rather than a coin-collecting, public.

B. Common Enterprise

Defendants' customers typically telephone an order to an FCR salesperson or fill out an order form for the purchase of rare coins. FCR confirms the order in writing, guaranteeing the coins as to authenticity and grade. Upon receipt of the purchase price, FCR forward the coins to the customer in coin envelopes which contain a description of the coin, its quality and grade. After delivery, customers normally exercise the option to take possession of their coins, and thereafter are free either to sell them to or with the help of FCR, or to any other individual. Once the customer receives the coins, he has no further obligation to deal with FCR.

FCR asserts that on this state of facts its customers are not engaged in a "common enterprise" either with other FCR customers or with FCR itself. The difficulty with FCR's position is that it is based on the assumption that a "common enterprise" is necessarily the equivalent of the purchase of a "share" in a common fund. This is a misreading of the cases. For example, in Howey itself the investors each purchased his own units in the citrus grove development in question, not undivided shares in the orchard. In Joiner the customers did not purchase undivided interests in land but rather leases to specific sections of the property. While it remains true that the most frequent type of common enterprise involves the purchase of shares in a fund, nevertheless the cases establish that the requisite commonality of enterprise may also be achieved when "the fortunes of all investors are inextricably tied to the efficacy of the promoter's efforts." SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 479 (5th Cir. 1974). The crucial inquiry is

"whether the efforts by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise." SEC v. Glenn Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973). (Emphasis added)

Accord, Glen-Arden Commodities, Inc. v. Costantino, supra, 493 F.2d at 1035. As Judge Oakes noted in Glen-Arden, a long line of cases has held purported sales of tangible property, service contracts, or both to be investment contracts. See, e. g., Continental Marketing Corp. v. SEC, 387 F.2d 466 (10th Cir. 1967), cert. denied, 391 U.S. 905, 88 S.Ct. 1655, 20 L. Ed.2d 419 (1968); Blackwell v. Bentsen, 203 F.2d 690 (5th Cir. 1953), cert. dismissed, 347 U.S. 925, 74 S.Ct. 528, 98 L. Ed. 1078 (1954); SEC v. Payne, 35 F. Supp. 873 (S.D.N.Y.1940). The determining factors in those schemes was that

"what was being sold was an investment entrusting the promoters with both the work and the expertise to make the tangible investment pay off." (Emphasis in original) Glen-Arden Commodities, Inc. v. Costantino, supra.

Here the promoters are emphatically entrusted with the work and expertise of producing a pay off. For example, FCR customarily, indeed almost in every case, "selects the coins for investment purposes" (Plaintiff's Exhibit 4, p. 32).

Moreover, FCR's brochure (Plaintiff's Exhibit 4) is replete with promises of services extending beyond the initial purchase of rare coin portfolios. FCR offers assistance in selling the coins (Plaintiff's Exhibit 4, p. 32), accounting services (pp. 15, 18), insurance (p. 17), tax advice (p. 17), a depositary for the portfolios (p. 17), and estate planning (p. 18). While it is true that few of these services are...