AMR Realty Co. v. State, Bureau of Securities

• Decision Date: 05 May 1977
• Citation: 149 N.J.Super. 329,373 A.2d 1002
• Parties: , Blue Sky L. Rep. P 71,350 AMR REALTY COMPANY and Harry Lipkin, Appellants, v. STATE of New Jersey, BUREAU OF SECURITIES, Respondent.
• Court: New Jersey Superior Court — Appellate Division

Page 329

149 N.J.Super. 329

373 A.2d 1002, Blue Sky L. Rep. P 71,350

AMR REALTY COMPANY and Harry Lipkin, Appellants, v. STATE of New Jersey, BUREAU OF SECURITIES, Respondent.

Superior Court of New Jersey,

Appellate Division.

Argued Feb. 9, 1977.

Decided May 5, 1977.

Peter J. Calderone, Perth Amboy, for appellants (Wilentz, Goldman & Spitzer, Perth Amboy, attorneys; Norman Tanenbaum, of counsel and on the brief).

Sherman T. Brewer, Jr., Deputy Atty. Gen., for respondent (William F. Hyland, Atty. Gen., attorney; Erminie L. Conley, Deputy Atty. Gen., of counsel).

Before Judges MATTHEWS, SEIDMAN and HORN.

The opinion of the court was delivered by

SEIDMAN, J.A.D.

This appeal is from a final order of the Bureau of Securities which suspended the registration of AMR Realty Company (AMR) as a broker-dealer for a period of 30 days, at the expiration of which the registration was to be revoked unless AMR filed a notice of withdrawal of a principal, or registered an active principal and submitted all necessary forms and fees; and which order directed Harry Lipkin to cease and desist from offering and selling securities except those offered or sold in compliance with the registration or exemption provisions of the New Jersey Uniform Securities Law, N.J.S.A. 49:3--47 Et seq.

The order was issued following a hearing before the Bureau, at the conclusion of which the Chief of the Bureau, sitting as the hearing officer, found, among other things, that AMR (1) offered and sold securities (cooperative apartments) while not registered as a broker-dealer, in violation of N.J.S.A. 49:3--56(a), (2) offered and sold securities through an unregistered agent, in violation of N.J.S.A. 49:3--56(b), and (3) failed and refused to file change of status forms for two of its principals, in violation of N.J.S.A. 49:3--59(c). Harry Lipkin was found to have offered and sold securities while not registered as an agent, in violation of N.J.S.A. 49:3--56(a).

Appellants contend on appeal, as they did below, that (1) the cooperative apartment shares sold by them are not securities within the purview of N.J.S.A. 49:3--49(m) and thus the Bureau had no jurisdiction to require them to register as either a broker-dealer or as a securities agent, and (2) even if the Bureau had jurisdiction over the subject-matter, the sanctions imposed were unwarranted and unreasonable.

The record discloses that during a period of time from and after May 1973, when it was not registered as a securities broker-dealer with the Bureau of Securities, AMR sold shares of Riviera Towers Corp., the owner of a cooperative apartment building in West New York. Harry Lipkin, a real estate salesman licensed as such in New York, but not in New Jersey, had sold cooperative apartments in that building as an employee of AMR's predecessor, J. I. Sopher and Co., and continued to do so for AMR until December 1974 or early January 1975, when AMR ceased making sales because of certain legal difficulties which one of the sponsors of Riviera Towers Corp. was having in New York. Lipkin maintained that he was not aware of any statutory requirement to register as an agent with the Bureau of Securities. He also testified that he personally owned 13 units of Riviera Towers which he had purchased as an investment.

In early 1975, according to the testimony of Edward Gray, who was a registered securities agent in New Jersey at the time, a representative of AMR requested him to become a 'limited partner' in AMR to enable it to register as a broker-dealer with the Bureau of Securities. He agreed and signed the application form which was then filed with the Bureau. He terminated his relationship with AMR in July 1975 when he began working for a securities company and was fearful of a conflict of interest. It appears that although a change of status statement was filed by him with the Bureau to reflect his resignation, AMR itself neglected to notify the Bureau of the termination. The record also indicates that AMR failed to inform the Bureau that one of its parties had been convicted in New York of selling securities there without being registered as a broker-dealer.

The scheme of New Jersey's regulation of the securities business is fully set forth in Mayflower Securities v. Bureau of Securities, 64 N.J. 85, 88--90, 312 A.2d 497 (1973). The law, generally modeled upon the Uniform Securities Act (7 Uniform Laws Annotated, Business and Financial Laws (Master ed. 1970)), requires the registration of all broker-dealers and salesmen (agents) employed by them (N.J.S.A. 49:3--56), in accordance with the procedure contained in N.J.S.A. 49:3--57 and N.J.A.C. 13:47A--1.1 Et seq. Sanctions for violations of the statute or rules range from criminal prosecution for a misdemeanor (N.J.S.A. 49:3--70(a)), to the imposition of civil monetary penalties (N.J.S.A. 49:3--70(b)) or the administrative suspension or revocation of the registration, depending upon the nature and seriousness of the infraction (N.J.S.A. 49:3--58).

As noted earlier, appellants contend that the cooperative apartment units which they sold were not securities within the purview of the statute. The Chief of the Bureau acknowledged below that if the shares representing interests in the cooperative apartment did not constitute securities, then there would be no necessity for broker-dealer and agent registration. He held, however, that they did and that the Uniform Securities Law applied.

The term 'security' is defined in N.J.S.A. 49:3--49(m) as follows:

* * * (a)ny note; stock; treasury stock; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement including but not limited to certificates of interest or participation in real or personal property; collateral-trust certificate preorganization certificate or subscription; transferable share; investment contract; voting-trust certificate; certificate of deposit for a security; certificate of interest in an oil, gas or mining title or lease; or, in general, any interest or instrument commonly known as a 'security,' or any certificate of interest or participation in, temporary or interim certificate for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. * * *

There are no New Jersey cases which consider whether cooperative apartments are securities under our act. However, since N.J.S.A. 49:3--75 provides that

* * * (t)his law shall be so construed as to effectuate its general purpose to make uniform the law of those States which enact similar laws and to co-ordinate the interpretation and administration of this law with related Federal regulations(,)

our resolution of the issue will be aided by a consideration of subparagraph (1) of the Securities Act of 1933, 15 U.S.C.A. § 77b, and reported cases relating thereto. The definition of 'security' contained in it is virtually identical with that in our statute, except that in the latter the item, 'certificate of interest or participation in any profit sharing agreement,' is followed by the words, 'including but not limited to certificate of interest or participation in real or personal property.'

A 'cooperative' generally connotes an apartment building in which the owner holds title to all the premises and grants rights of occupancy to particular apartments by means of proprietary leases or similar arrangements. ¹ 4B Powell, Real Property, § 633.1(3) at 774. The organizational structure most commonly employed is the 'corporate-proprietary lease form,' under which the corporate owner leases specific apartments to the tenant-stockholders of the corporation. While the ownership of corporate shares does not grant one the right of occupancy to an apartment, this being accomplished by a 'proprietary lease,' the obtaining and continuance of the lease depends upon the lessee's ownership of the requisite number of shares. See Powell, op. cit., § 633.4(1) at 781--782. The term 'cooperative' is defined in our statute dealing with the removal of residential tenants as 'a housing corporation or association which entitles the holder of a share or membership interest thereof to possess and occupy for dwelling purposes a house, apartment or other structure owned or leased by said corporation or association * * *.' N.J.S.A. 2A:18--61.7(c).

The question of whether shares or membership interests in such cooperatives are securities within the meaning of the Federal Securities Act of 1933 has been considered by the United States Supreme Court. In the case of United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975), reh. den. 423 U.S. 884, 96 S.Ct. 157, 46 L.Ed.2d 115 (1975), a group of tenants in Co-op City, a huge publicly financed cooperative apartment complex in the Bronx, New York City, asserted claims against various defendants, including the owner of the complex, under the fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 (15 U.S.C.A. § 78a Et seq.), contending that they had been misled by the Co-op City information bulletin in their purchase of shares. The federal District Court dismissed the complaint on the ground that the purchases involved were not security transactions within the contemplation of the federal securities laws. 366 F.Supp. 1117 (S.D.N.Y.1973). The Court of Appeals for the Second Circuit reversed, Forman v. Community Services, Inc., 500 F.2d 1246 (1974), applying the so-called 'literal approach' in holding that a share of stock in a cooperative apartment company was a security within the pertinent federal laws, since it was both 'stock' and an 'investment contract' 500 F.2d at 1252.

The Supreme Court held that those shares were not within the scope of the federal securities laws. It rejected

* * * any suggestion that the present transaction, evidenced by the sale of shares called 'stock,' must be considered a security transaction simply because the statutory...