Securities & Exch. Com'n v. First American Bank & T. Co.

• Decision Date: 25 June 1973
• Docket Number: 72-1313 (cross appeals).,No. 72-1306,72-1306
• Citation: Securities & Exch. Com'n v. First American Bank & T. Co., 481 F.2d 673 (8th Cir. 1973)
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. FIRST AMERICAN BANK AND TRUST COMPANY et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

481 F.2d 673 (1973)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. FIRST AMERICAN BANK AND TRUST COMPANY et al., Defendants-Appellees.

Nos. 72-1306, 72-1313 (cross appeals).

United States Court of Appeals, Eighth Circuit.

Submitted November 14, 1972.

Decided June 25, 1973.

COPYRIGHT MATERIAL OMITTED

Thomas Boyle and Walter P. North, Attys., S. E. C., Washington, D. C., for S. E. C.

Frederick E. Saefke, Jr., Bismarck, N. D., for First American Bank & Trust Co.

Before MATTHES, Chief Judge, MEHAFFY, Circuit Judge, and VAN PELT, Senior District Judge.^*

VAN PELT, Senior District Judge.

This case involves cross appeals from the judgment and order of the United States District Court for the District of North Dakota denying in all but one respect the request of plaintiff SEC for injunctive relief restraining defendants from violating the anti-fraud provisions of § 17(a) of the Securities Act of 1933.¹ The defendants included First American Bank & Trust Company First American, Bismarck Investment Corp., which controlled First American's Robert M. Hart Hart, First American's president and controlling shareholder, Robert Campbell, vice president of First American, and Larry Sanders, the secretary of First American.²

First American has been involved in a series of legal actions of which this litigation is merely one part.³ This particular action was commenced on July 7, 1971. Due to the pendency of an action in the state court, the federal district court Davies, J., granted defendants' request for a continuance. However, on January 21, 1972, the SEC renewed its motion for preliminary injunction, and on March 24, 1972, the federal district court Van Sickle, J. issued the order which is the subject of these appeals.

The basis of the SEC's allegations⁴ is a brochure distributed by First American entitled "Questions and Answers." Although on several occasions First American has argued that it is a trust company and thus only bound by North Dakota laws concerning such companies and not those concerning banking institutions,⁵ it calls itself a "banking institution," and also compares its services with those of any other bank.⁶

Safety of investment is assured by claims that its funds are invested "carefully and conservatively . . . by highly experienced management," and that there is semi-annual examination and supervision by the State Banking Examiner. The brochure contains statements asserting that "North Dakota laws insure the safety of deposits, trusts and contingent liabilities. Additionally, First American is bonded and insured by major insurance companies." However, the deposits of First American are not insured by a governmental agency or private corporation, and the only other insurance is employee bonding insurance and casualty insurance on First American's furniture. Included in the brochure is the statement that "earnings are guaranteed" although no third party does guarantee the earnings.

The SEC also argued that the brochure omitted material facts, for although it contains a statement to the effect that "semi-annual examinations and supervision by the State Banking Examiner" assure the safety of investments, it fails to point out that the Examiner had issued several highly critical reports concerning the financial condition of First American and certain of its business practices.⁷

The principal types of "securities" involved were capital notes, certificates of investment, and savings accounts. At the time this action was heard First American had ceased selling or offering for sale the capital notes⁸ or the certificates of investment and had removed from its brochure the statements that interest was guaranteed and that deposits were insured by the state of North Dakota.

The lower court made the following findings after a hearing: (1) The statement that "First American is bonded and insured by major insurance companies" is misleading because "to a layman, given the manner or presentation, it would more reasonably mean the funds were protected by something akin to the FDIC." (2) The statement that North Dakota law insures the safety of deposits is true in light of N.D.Cent. Code §§ 6-05-04, -05, and -27 (1959). (3) The statements that First American is a safe place to invest, that management was skilled, and that funds were invested wisely and conservatively were clearly "puffing." (4) The statement that supervision by the Examiner assured adherence to state regulations was not shown to be false. (5) The statement that earnings and interest were "guaranteed" was false in that it implied a third party commitment; however, "on the basis of the evidence presented, the false statement was not material since persons to whom that item was material would normally inquire and discover the correct interpretation of the term," that is, that First American meant "promise." (6) As to nondisclosure, there was no proof that the items to be disclosed were material.⁹ (7) The plaintiff failed to prove insolvency.

The court then held:

"We have carefully reviewed the entire record and the evidence adduced at the hearing and conclude that the plaintiff has failed to show a clear and immediate risk to the investor, including the uninformed, ignorant and gullible.

"Petition for a temporary restraining order is denied, except that defendant is restrained from implying in its advertising that it is bonded and insured for the protection of the depositors."¹⁰

Section 17(a) of the Act¹¹ reads as follows:

"It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly—

(1) to employ any device, scheme, or artifice to defraud, or

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."

It is not disputed that First American did offer to sell or in fact did sell through the use of the facilities of interstate commerce, capital notes, certificates of investment, and passbook savings accounts. It is equally clear that for purposes of the Securities Act, these items are "securities."¹² The parties disagree as to the proper characterization of the various statements in the brochure or any alleged omission therefrom.

We shall first consider the statements alleged by the SEC to be misrepresentations of material facts. The statements comparing First American to a bank and calling it a "banking institution" were correctly held by the lower court not to involve misrepresentations, since under North Dakota law First American was considered a "banking institution" and could provide a wide range of services similar to those of a bank.¹³

The lower court granted limited relief pursuant to its holding that the statement that "First American is bonded and insured by major insurance companies" was misleading. It is claimed that this is in some respects a true representation in that First American had been issued bonds, such as fidelity bonds, and certain types of insurance. However, a statement which is literally true, if susceptible to quite another interpretation by the reasonable investor (in this case, for example, the interpretation that the deposits were insured by the FDIC) may properly, under § 17(a), be considered a material misrepresentation.¹⁴ Here the finding that the statement was misleading was proper in view of the context in which the statement was made.¹⁵

The remaining statements involve, among other things, the concept of materiality. The 1933 Act contains a definition of materiality in a slightly different context: "The term `material' when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters as to which an average prudent investor ought reasonably to be informed before purchasing the security registered."¹⁶

The case law concerning security regulation reflects a similar concept of materiality, generally with a definition taken from common law concepts. As expressed in the Restatement of Torts, a fact is material "if its existence or non-existence is a matter to which a reasonable man would attach importance in determining his choice of action in the transaction in question."¹⁷ This is an objective test¹⁸ and there apparently is no need for a showing, at least insofar as materiality is concerned, that any particular investor relied to his detriment on a misrepresentation, or, in the case of an omission, would have acted differently if there had been no omission.¹⁹

In its complaint the SEC alleged that the following statements in the brochure violated § 17(a):

"First American Bank & Trust Company provides a convenient and safe place for North Dakotans to keep their savings, make investments and handle their trust affairs . . . .

All funds are invested carefully and conservatively in securities backed by the full faith and credit of the United States, and in leases, loans, and other assets prescribed by law . . . .

. . . . . .

First American\'s sound progressive operating policies are established by its Board of Directors, comprised of outstanding leaders in the community, and are administered by highly experienced management . . . ."

In each instance the lower court held that the statements did not violate the statute because they were clearly recognizable as "puffing."

Generally, we can agree with this characterization, although the lower court's holding in regard to the claim that the funds are invested "carefully and conservatively," in view of the subsequent holdings of insolvency, may be one the trial court would alter if...