Continental Marketing Corp. v. Securities & Exchange Com'n, 9199.
| Citation | 387 F.2d 466 |
| Decision Date | 26 December 1967 |
| Docket Number | No. 9199.,9199. |
| Parties | CONTINENTAL MARKETING CORPORATION, Appellant, v. SECURITIES AND EXCHANGE COMMISSION, Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (10th Circuit) |
Lewis B. Kean and Earl Hightower, Los Angeles, Cal. (H. Byron Mock, Salt Lake City, Utah, on the brief), for appellant.
Richard M. Phillips, Assistant General Counsel (Philip A. Loomis, Jr., General Counsel, David Ferber, Solicitor, and Janet G. Feldman, Attorney, Securities and Exchange Commission, Washington, D. C., and Robert H. Davenport, Attorney, Securities and Exchange Commission, Denver, Colo., on the brief), for appellee.
Before MURRAH, Chief Judge, and PHILLIPS and LEWIS, Circuit Judges.
Continental Marketing Corporation appeals from an order entered by the District Court for the District of Utah preliminarily enjoining the company from offering for sale and selling investment contracts for the "sale, care, management, replacement or resale of live beaver for breeding purposes," in violation of the anti-fraud provisions contained in Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5. Continental is the sole appellant although the injunction was entered against seven business organizations and three named individuals found by the court to be acting in concert in the promotion and sale of unregistered securities. Noncompliance with the registration provisions of the Act is admitted and matters pertaining to fraudulent representations and use of the mails to effectuate sales are not in issue. The form of the injunction is not attacked. Continental's appeal questions only the finding that the company was engaged in the offer and sale of securities within the meaning of applicable federal laws.
Continental asserts that it is engaged exclusively in the brokerage of live beavers, organized for such purpose independently from all other defendants and in direct competition with some; that its contracts and services begin and end with the sale and delivery of live, specific and identified animals and that purchasers' reliance on the company extends no further. The company's formal contractual documents are in accord with this contention. Consequently, if the test of compliance with the compulsion of the Securities Act goes no further than an examination of organization and formal activity the subject injunction has been improvidently entered. Manifestly, the simple sale and delivery of live beavers do not, when viewed in isolation, constitute the sale of a security under the Act.
Appellant, however, does and must recognize that its vulnerability to the injunction allows judicial consideration of the overall concept of its contracts from inducement to formal consummation and beyond. S. E. C. v. C. M. Joiner Leasing Corp., 320 U.S. 344 at 352-353, 64 S.Ct. 120, at 124, 88 L.Ed. 88.
Appellant was organized in 1965 as a Colorado corporation and thereafter represented itself as an integral part of the organized domestic beaver industry. Its sales literature, couched in such glowing terms as "fabulous possibilities" and the "road to riches," presented to the prospective purchaser a history of the development of the beaver industry with specific reference to the activities, both past and present, of co-defendants and illustrated for the benefit of the purchaser a charted explanation of what was available in service after purchase of the beaver from appellant. The chart lines a sale of beaver from appellant (or either of two other defendant sales companies) to the owner purchaser. Thereafter the owner may care for his own animals with each pair of beaver requiring a private swimming pool, patio, den and nesting box together with the services of a veterinarian, dental technician, breeding specialist, etc. or the owner may choose to place his animals (at a cost of $6 per month per animal) with a professional rancher who is a member of the defendant North American Beaver Association which in turn has available the technical assistance of two ranchers' service companies, also named defendants. All purchasers of beaver were encouraged not to take possession of the animals and although Continental made over two hundred sales in sixteen states, grossing over a million dollars, all who purchased from appellant elected not to take possession of their beavers and each contracted with one of the ranchers as suggested by appellant.
The history of the domestic beaver industry as represented to prospects by Continental and as revealed by the evidence taken at trial need only be briefly summarized. Prior to 1950, Mark Weaver, one of the defendants below, had successfully developed a small herd of domestic beavers and purportedly was "the first in the world to learn the secrets of the beaver" by discovering "the feed formula, the mating process, the pen design, and the other factors necessary to induce the beaver to reproduce in captivity." In an attempt to broaden the industry sufficient to establish a market for domestic beaver fur, a program was developed whereby members of the public were invited to invest in beavers. The investor could take up beaver ranching or ranch his beavers with Weaver or someone whom Weaver had induced to take up ranching. In any event the ranching was done under Weaver's expert supervision and Weaver provided many services incident to the domestic raising of beavers.
From an organization standpoint, the business was originally conducted through a sole proprietorship, next a partnership, and then through two corporations, one of which was, generally speaking, responsible for the selling activities and the other for providing the various services. Originally investors signed a single contract which contained the purchase terms, terms for care and breeding and a guarantee that there would be a 100 percent increase of the beavers during the first year. After entry of a "cease and refrain order" with respect to the sale of investment contracts entered in November 1963, by the California Securities Commission, the purchasers of beavers entered into separate contracts for purchasing and ranching.
In 1965 three new companies, including appellant, were organized to take over the sales activities. This change came in the...
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