Caucus Distributors, Inc. v. Maryland Securities Com'r, 138

• Decision Date: 01 September 1989
• Docket Number: No. 138,138
• Citation: 320 Md. 313,577 A.2d 783
• Parties: CAUCUS DISTRIBUTORS, INC. et al. v. MARYLAND SECURITIES COMMISSIONER. ,
• Court: Maryland Court of Appeals

Page 313

320 Md. 313

577 A.2d 783

CAUCUS DISTRIBUTORS, INC. et al. v. MARYLAND SECURITIES COMMISSIONER.

No. 138, Sept. Term, 1989.

Court of Appeals of Maryland.

Aug. 9, 1990.

Patrick J. Moran, Moran & Bladen, P.C., Houston, Tex. on brief, for appellant.

Kathryn M. Rowe, Asst. Atty. Gen., J. Joseph Curran, Jr., Atty. Gen., Annapolis, on brief, for appellee.

Argued before MURPHY, C.J., and ELDRIDGE, COLE, RODOWSKY, McAULIFFE, ADKINS and CHASANOW, JJ.

MURPHY, Chief Judge.

The principal questions presented are whether certain promissory notes, issued by a nonprofit corporation, are within the definition of a "security" under the Maryland Securities Act (the Act), Maryland Code (1985 Repl.Vol.), §§ 11-101 through 11-805 of the Corporations and Associations Article; and whether, if they are securities, the Act's regulatory provisions constitute an infringement upon the organization's First Amendment rights of political speech and association.

I.

Caucus Distributors, Inc. (Caucus) is a nonprofit publishing and fundraising organization incorporated under the laws of New York, which espouses political viewpoints consistent with those expressed by Lyndon H. LaRouche, Jr. Caucus is not registered or qualified to transact business in Maryland. Acting through unregistered agents, Caucus sold two of its uncollateralized promissory notes totalling $100,000 to Grace Lindeman, a 79-year-old woman living in a retirement community in this State. The notes were to mature in 1 year from their issuance and carried an interest rate of 12% or over. When the issuance of the notes was brought to the attention of the Attorney General of Maryland, these proceedings were initiated pursuant to the provisions of the Act.

(A)

The Act, in § 11-201, creates a Division of Securities in the Office of the Attorney General of Maryland, the principal executive officer of which is the Maryland Securities Commissioner. Section 11-301 makes it unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly, to "(1) Employ any device, scheme, or artifice to defraud;

(2) Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or

(3) Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit on any person."

A "security" is defined by § 11-101(o) to mean, inter alia, "any: (i) Note." ¹ Section 11-501 makes it unlawful for any person to sell any security in Maryland unless it is registered under the Act or is exempt from registration. Section 11-601 sets forth a list of exempt securities which includes, in subsection (9), any security "issued by any person organized and operated: (i) Not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes...." Section 11-603 authorizes the Securities Commissioner to summarily deny or revoke, by order, any exemption specified in § 11-601(9) "pending final determination of any proceeding under this subsection." Upon the entry of such summary order, the Commissioner is required to notify every interested party that it has been entered, the reasons for its entry, and that within 15 days "of the receipt of a written request, the matter will be set down for hearing." Section 11-603(c) provides that if a hearing is not requested, or ordered by the Commissioner, the summary order will remain in effect unless modified or vacated by the Commissioner. If a hearing is requested, the Commissioner is enjoined to afford notice and opportunity for hearing to every interested person, and thereafter may modify or vacate the order, or extend it until final determination.

Section 11-701 authorizes the Commissioner to conduct investigations to determine whether any person has violated, or is about to violate, any provisions of the Act. Section 11-701(a)(4) authorizes the Commissioner to "[i]ssue a cease and desist order as to any practice or act found by the Commissioner to be in violation of this title provided that notice and opportunity for a hearing are given to each person named in the order." Section 11-701(b) authorizes the Commissioner, in the course of any investigation, to take evidence under oath. Section 11-704 provides that any person aggrieved by a final order of the Commissioner may obtain a review of the order "in conformity with the procedure prescribed in the Maryland Rules of Procedure and in the Administrative Procedure Act."

(B)

Following an investigation into the sale by Caucus of promissory notes to Lindeman, the Securities Commissioner issued a cease and desist order on March 11, 1986; it directed that Caucus, and its unlicensed agents, Kathy Wolfe and Paul Gallagher, cease operating in violation of the antifraud provisions of § 11-301. The order further directed that Wolfe and Gallagher cease acting as agents of Caucus and that Caucus cease employing unregistered agents in the State. The Commissioner also summarily revoked the exemption of the sale of securities by Caucus under § 11-602(9) and directed it to show cause why an order permanently revoking its statutory exemption should not be entered. Finally, the cease and desist order provided that a failure by Caucus, Wolfe or Gallagher, to request a hearing within 15 days, as permitted by § 11-603(c), would result in the entry of a final order. In a timely answer, Caucus denied the alleged violations of the Act. It claimed that the cease and desist order unconstitutionally deprived it of its right of political expression without a predeprivation hearing and it requested a hearing before the Securities Commissioner. Neither Wolfe nor Gallagher answered the cease and desist order nor requested a hearing, although each appeared and participated in the administrative hearing on June 6 and 9, 1986.

The evidence at the administrative hearing conducted by a hearing examiner disclosed that Kathy S. Wolfe, a volunteer for Caucus and an employee of a publishing enterprise known as Executive Intelligence Review (EIR), contacted Lindeman on July 22, 1985 by telephone and sold her a subscription to EIR for $250. The unsolicited call and sale were part of a fundraising program for Caucus. Additional fundraising for Caucus was achieved by its issuance of interest-bearing promissory notes to an undetermined number of persons who acquired them in response to solicitation by Wolfe and other representatives of Caucus. Potential patrons of Caucus's fundraising campaigns were identified through lists of thousands of names taken from telephone books for "conservative neighborhoods" and subscribers to conservative publications. Representatives of Caucus called up to three hundred names a day to discuss the teachings of Lyndon LaRouche and world affairs. Lindeman's name and telephone number were discovered in this general manner.

Lindeman's expressed interest in the political activities described by Wolfe during their telephone conversation prompted Wolfe to call her four days later. At this time she told Lindeman of Caucus's need for money to translate into Spanish a book about an alleged connection between the International Monetary Fund and the international drug trade. The book was targeted for distribution in South and Central America. Wolfe told Lindeman that while some funds belonging to Caucus had recently been impounded, investments in Caucus would be safer and pay a higher interest rate than would a bank. During this conversation, Wolfe asked Lindeman if she had money available to make an investment. Lindeman responded that she had a $64,000 certificate of deposit due to mature on November 2, 1985, which paid 10.8% interest.

Wolfe told Lindeman that she could borrow against her certificate of deposit and the greater interest that Caucus would pay her would more than compensate for the interest she would pay on her loan with the bank. Wolfe added that the higher rate of return was an incentive for Lindeman to invest with Caucus rather than a bank, and that she probably would not receive such a high rate if she merely reinvested the certificate of deposit. Wolfe also informed Lindeman that Caucus would generate the money to repay her investment through the sale of its publications. Wolfe did not tell Lindeman that payment of the notes would be made with money raised by the issuance of other promissory notes to other purchasers. Shortly after this telephone conversation, Lindeman sent a check for $10,000 to Caucus and subsequently acquired a loan for $50,000 from her bank, secured by her certificate of deposit, against which she wrote a $50,000 check to Caucus. The 1-year note she received from Caucus was for $60,000 with an interest rate of 12.8%, payable quarterly. The uncollateralized note was due on July 31, 1986.

On August 1, 1985, Wolfe and another volunteer for Caucus, Paul Gallagher, visited Lindeman in her home for the purpose of raising additional funds from her. Gallagher was an employee of the Fusion Energy Foundation, a political organization associated with Caucus. Upon his suggestion, Lindeman contacted her bank and discovered she had $40,000 available in a trust fund drawing almost 8% interest. After Wolfe and Gallagher told Lindeman that Caucus would pay 12% interest on her $40,000 investment, Lindeman wrote Caucus a check for this amount, dated August 5, 1985. Lindeman received a 1-year $40,000promissory note from Caucus, bearing an interest rate of 12%, payable quarterly. This note was also uncollateralized and was due on August 5, 1986.

The evidence disclosed that neither Wolfe nor Gallagher was registered as an agent of Caucus under the Act. There was no evidence that either provided Lindeman with financial information about Caucus or the names of its officers and directors. Nor did Lindeman receive any...