SECURITIES & EXCH. COM'N v. Haffenden-Rimar Int'l, Inc.

• Decision Date: 08 August 1973
• Docket Number: Civ. A. No. 108-73-A.
• Citation: 362 F. Supp. 323
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. HAFFENDEN-RIMAR INTERNATIONAL, INC. and Rimar Scotch Whisky Trading Co. et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

362 F. Supp. 323

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. HAFFENDEN-RIMAR INTERNATIONAL, INC. and Rimar Scotch Whisky Trading Co. et al., Defendants.

Civ. A. No. 108-73-A.

United States District Court, E. D. Virginia, Alexandria Division.

August 8, 1973.

William R. Schief, Lionel E. Pashkoff, John R. Kiefner, Jr., and Lloyd F. Ryan, Jr., Arlington, Va., for plaintiff.

Joseph E. Casey, and Edward F. Canfield, Washington, D. C., for defendants.

MEMORANDUM OPINION

OREN R. LEWIS, District Judge.

The Securities and Exchange Commission brought this suit to permanently enjoin the defendants from continuing to violate the registration provisions of § 5 of the Securities Act of 1933, 15 U. S.C. § 77e(a) and (c); the anti-fraud provisions of § 17(a) of that Act, 15 U. S.C. § 77q(a); § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and § 78q(a), and Rule 10b-5 promulgated thereunder.

The defendants claim that they have not violated the Act because what they sold is not a security within the meaning and scope of the registration provisions of the Act, 15 U.S.C. § 77b(1).

Jurisdiction to hear and determine the matter is conceded.

The material facts are not in dispute — Most of the evidence was presented by detailed stipulations and exhibits and by an oral deposition — One witness was brought from Scotland, one from England and one from Baltimore.

This suit involves investments in Scotch whiskey.

The defendants admit their active participation in the sales program in question and admit that they were not registered with the Securities and Exchange Commission, and that they did not hold basic permits or tax stamps as whiskey dealers.

The defendants' newspaper advertisements, brochures and salesmen classified the Scotch whiskey which was being offered for sale to the public as an investment which can be expected to yield twenty to twenty-five per cent per annum.

The sale was evidenced by a paper writing — The plaintiff labels it a warehouse receipt — The defendants say it is a "letter of acknowledgment."

Under British law Scotch whiskey is distilled in Scotland from either grain or malt and aged in casks in Scotland in a bonded warehouse for a period of not less than three years — It may be imported for consumption in the United States as Scotch whiskey providing it is aged for not less than four years. Consumer taste requires most Scotch whiskey to be aged for eight to twelve years — some as much as twenty-five to thirty-five years. The age of blended Scotch is the cask age of the youngest whiskey which is part of the blend.

British law further requires the warehouseman to maintain a complete record of the casks in his bonded warehouse — He records the title and issues the owner a warehouse receipt. Title may be transferred by executing a delivery order — A transferee may record his title by endorsing the delivery order and sending it to the warehouse. When a transfer of ownership is made on the warehouseman's books, he issues a whiskey warehouse receipt acknowledging the transfer of title in the name of the transferee.

Haffenden Brokers are whiskey brokers in England. They have been the main source of warehouse receipts sold by the defendants since 1969.

Prospective purchasers were obtained by the defendants through newspaper ads and from other purchasers. Typical newspaper ads read —

Disgusted With the Stock Market?

Invest in Scotch Whiskey For Information on Capital Growth

Potential Through Fully Insured Scotch Whiskey Investments

Contact

Rimar Corporation

- - - - -

Purchase and Hold Scotch Whiskey For Profit

Maturing in Government Bonded Warehouses in Scotland

All Risks Insurance Through Lloyd's of London

Capital Gains Have Averaged 20% Per Annum For the Past 20 Years

Salesmen were directed to stress "The older the Scotch whiskey becomes, the more valuable it becomes — and that people down through the years were making a profit off of Scotch whiskey — The value of warehouse receipts have doubled in a period of, say, four years."

The salesmen further stressed the advantages of an investment with an annual return of twenty to twenty-five per cent on an investment insured by Lloyd's of London — The nature of the investment was explained in terms of financing the Scotch whiskey industry during the aging period — When aged, Haffenden or other industry members would repurchase the whiskey for blending.

If the subject arose, investors were told that it was impracticable to import their holdings into the United States because of licensing requirements — The salesmen stated that Rimar would select a whiskey and make all the arrangements for insurance against all risks of physical loss and excess ullage, and would provide market information and would later repurchase the whiskey or arrange for its resale.

The whiskey purchased for the investor had a mark-up of thirty-six to seventy per cent. The salesmen were paid a commission on the sale — This information was not furnished the investor.

When a buyer executes his purchase order he is not told what type of Scotch will be selected for him or the type of cask in which it will be aged except that the whiskeys will be selected out of Haffenden's balanced inventory and at the time of resale Haffenden would be one of the principal users purchasers of the investor's underlying Scotch whiskey.

The defendants select the casking and the warehouse — Wood varies greatly in quality and warehouses vary greatly in services performed.

When a sale is made the investor executes a purchase order and makes out a check for ten per cent of the purchase order — The salesman usually fills in the details, that is, the number of casks of grain or malt whiskey of a given age. The executed purchase order and the deposit are then mailed to the head office of the Rimar Company and the money is deposited in the company's bank account — H-R, Trading Company or Rimar then places a covering order for warehouse receipts with Haffenden Brokers in London.

Haffenden then selects the whiskey which lies in casks in a bonded warehouse and arranges for insurance for the investor, if requested — They then execute the delivery orders drawn to the order of the customer and prepare an invoice reflecting the gross price to the investor in pounds sterling, a details delivery order and a statement of the mark-up or commission to be retained by H-R, Trading Company or Rimar — and Haffenden then mails the delivery orders, the insurance certificate, invoices and mark-up or commission statement to H-R, Trading Company or Rimar.

H-R, Trading Company or Rimar retains the commission statement for its files and prepares an invoice on its letterhead for the investor showing the gross price in dollars to the customer of the warehouse receipts and insurance — The company also prepares letters of instruction to the warehouseman for the signature of the investor to...