Bache Halsey Stuart v. Affiliated Mortg. Inv.

• Decision Date: 20 December 1977
• Docket Number: No. C76-272A.,C76-272A.
• Citation: 445 F. Supp. 644
• Parties: BACHE HALSEY STUART, INC. v. AFFILIATED MORTGAGE INVESTMENTS, INC., et al.
• Court: U.S. District Court — Northern District of Georgia

445 F. Supp. 644

BACHE HALSEY STUART, INC. v. AFFILIATED MORTGAGE INVESTMENTS, INC., et al.

No. C76-272A.

United States District Court, N. D. Georgia, Atlanta Division.

December 20, 1977.

Thomas Shelton and Thomas Harney, Atlanta, Ga., Kilpatrick, Cody, Rogers, McClatchey & Regenstein, for plaintiff.

Foy R. Devine, Fierer & Devine, Atlanta, Ga., for defendants.

ORDER

MOYE, District Judge.

This is an action for violation of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 promulgated thereunder. The case is before the Court for the second time on the plaintiff's motion for judgment on the pleadings as to Count IV of the defendant's counterclaim.

The issue presented for resolution at this time is whether or not certain contracts entered into by the parties for the purchase of mortgage-backed certificates guaranteed by the Government National Mortgage Association (GNMA certificates) for delivery at a stated time in the future were securities required to be registered by section 5 of the Securities Act of 1933, 15 U.S.C. § 77e. When the issue was first presented, the Court requested briefs from the parties and from the Securities and Exchange Commission (SEC) concerning the issue at hand. The GNMA Mortgage-Backed Securities Dealers Association (Dealers Association) requested and was granted leave to file a brief amicus curiae on the issue as well. The Court now has before it the briefs of the parties and the Dealers Association. The SEC has declined to file an amicus brief.

The instruments in question are certificates, each representing a share in a pool of mortgages insured by various federal agencies, payable at a fixed rate of interest. The certificates are transferable, and those instruments bearing the same interest rate are fully fungible. The certificates are issued in a minimum denomination of $25,000 and are sold in amounts of not less than $1 million. The certificates sold in the transactions at issue are modified pass-through securities issued in pools of single family home mortgages, meaning that the issuer is obliged to transmit a pro rata share of monthly interest and principal payments to the security holder, whether or not such payments have been made. The interest and principal payments are guaranteed by GNMA and are backed by the full faith and credit of the United States government. The securities are issued by mortgage bankers who assemble the pools of mortgages for sale to broker-dealers such as the plaintiff, banks, savings and loan associations, credit unions, and other thrift institutions. Purchase by an individual investor is rare.

The usual sale of a modified pass-through GNMA security provides for delivery of the certificate and payment on a specified date some 30 to 180 days after the negotiation of the sale. The purchaser may elect to take delivery of the security and make payment for it on the specified date or may sell it at any time prior to delivery. No payment is required until the date of delivery. The time lag between negotiation of the price and date of delivery and the actual delivery of the certificate is a necessary result of the mortgage broker's unwillingness to advance the large sums of money required to originate mortgages without the assurance of a ready market for the mortgage pools.

The risks of entering into a sale for future delivery are, first, that a purchaser may speculate without having the present ability to pay the cash price or deliver the security; and second, that the purchaser bears a risk that the value of the security may decline substantially between the time the sale is entered into and the date of delivery. This latter risk of decrease in value, however, would be borne equally by a purchaser who took immediate delivery of the certificate.

The defendants contend that the delayed delivery aspect of the transactions in question transforms each agreement into a contract which falls within the definition of an investment contract as established in S.E.C. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). The defendants claim that the risks assumed by the parties to the delayed delivery contracts necessitate the protection afforded by registration. The defendants also urge that for the purposes of the motion, its allegation that the delayed delivery aspect of the transactions constituted a separate contract must be taken as true, and the Court may not look behind the defendants' answer and counterclaim.

The plaintiff argues that the forward delivery aspect of the GNMA certificate sales is not a separate contract and need not be registered. Bache states further that even if a separate contract is found, the test set out under the Howey case, supra, leads to the conclusion that the contract is not an investment contract which must be registered. Finally, Bache and the amicus Dealers Association argue strenuously that the requirement of registration would impose a ponderous burden on the sales of GNMA certificates, would result in the issuance and sale of fewer certificates, and would therefore have a deleterious effect on the entire housing industry.

The Court notes first that it is not bound by the defendants' assertion that two contracts were involved in each sale of the GNMA certificates—one contract for the sale of the certificate itself, which all parties agree is a transaction exempt from the registration requirement under section 3(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(2), and the second contract providing for delayed delivery. The defendants' bare assertion that the agreement of delayed delivery is a contract is a legal...