Davis v. Avco Financial Services, Inc., s. 82-3553

• Decision Date: 07 September 1984
• Docket Number: 82-3572,Nos. 82-3553,s. 82-3553
• Citation: 739 F.2d 1057
• Parties: Fed. Sec. L. Rep. P 91,569, Fed. Sec. L. Rep. P 91,668 Clevester DAVIS; Jimmie Lee King; and Virginia Ann King, Plaintiffs- Appellees, Cross-Appellants, v. AVCO FINANCIAL SERVICES, INC., Defendant-Appellant, Cross-Appellee, Lee McCormick, Defendant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1057

739 F.2d 1057

Fed. Sec. L. Rep. P 91,569, Fed. Sec. L. Rep. P 91,668

Clevester DAVIS; Jimmie Lee King; and Virginia Ann King Plaintiffs- Appellees, Cross-Appellants, v. AVCO FINANCIAL SERVICES, INC., Defendant-Appellant, Cross-Appellee Lee McCormick, Defendant.

Nos. 82-3553, 82-3572.

United States Court of Appeals Sixth Circuit.

Argued Feb. 2, 1984.

Decided July 10, 1984.

Opinion on Denial of Rehearing and Rehearing En Banc Sept. 7, 1984.

Theodore M. Rowen, argued, Richard E. Wolff, Andrew E. Anderson, Spengler, Nathanson, Heyman, McCarthy, & Durfee, Toledo, Ohio, for defendant-appellant, cross-appellee.

Thomas A. Karol, argued, A.B.L.E., Inc., Dale A. Wilker, Glenn G. Galbreath, Toledo, Ohio, for plaintiffs-appellees, cross-appellants.

Before LIVELY, Chief Judge, JONES, Circuit Judge, and BERTELSMAN, District Judge. ^*

BERTELSMAN, District Judge.

This securities case presents this court with an issue of first impression in this circuit, namely, who may be considered a "seller" under Sec. 12(2) of the Securities Act of 1933. Other circuits have expressed diverse views regarding this issue, as have the commentators. The Supreme Court of the United States has never passed on it. Various subsidiary issues are also presented, as will be discussed below.

FACTS

This is a securities fraud class action arising out of the activities of defendants/appellants AVCO Financial Services, Inc. and defendant McCormick, the manager of Avco's Toledo, Ohio office. The plaintiffs/appellees all borrowed money from Avco in order to buy shares of a scheme called "Dare to be Great" (DTBG). DTBG was a pyramidal scheme wherein investors could buy "adventures" at Levels I, II, III or IV. Purchases of adventures Levels III (price: $2,000) and IV (price: $5,000) gave the purchasers the right to sell adventures to other purchasers, and collect a commissin thereon.

The sales of DTBG were based on hard-sell tactics and promises of quick wealth by salespeople who flaunted money and expensive cars, clothing, jewelry, and the like. Because of its inherent "saturation" character, this scheme was apparently doomed to fail, and did so in 1974, causing members of the plaintiff class to lose nearly all of the money they had invested in it. DTBG marketing techniques are described in detail in S.E.C. v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973). The evidence in this case is the same as the evidence described in the Ninth Circuit case. The operation of the DTBG enterprise was described therein as follows:

"II. The Adventures and the Plan in operation.

"It is apparent from the record that what is sold is not of the usual 'business motivation' type of courses. Rather, the purchaser is really buying the possibility of deriving money from the sale of the plans by Dare to individuals whom the purchaser has brought to Dare. The promotional aspects of the plan, such as seminars, films, and records, are aimed at interesting others in the Plans. Their value for any other purpose, is, to put it mildly, minimal.

"Once an individual has purchased a Plan, he turns his efforts toward bringing others into the organization, for which he will receive a part of what they pay. His task is to bring prospective purchasers to 'Adventure Meetings.'

"A. The meetings.

"These meetings are like an old time revival meeting, but directed toward the joys of making easy money rather than salvation. Their purpose is to convince prospective purchasers, or 'prospects', that Dare is a sure route to great riches. At the meetings are employees, officers, and speakers from Dare, as well as purchasers (now 'salesmen') and their prospects. The Dare people, not the purchaser-'salesman', run the meetings and do the selling. They exude great enthusiasm, cheering and chanting; there is exuberant handshaking, standing on chairs, shouting, and 'money-humming'. The Dare people dress in expensive, modern clothes; they display large sums of cash, flaunting it to those present, and even at times throwing it about; they drive new and expensive automobiles, which are conspicuously parked in large numbers outside the meeting place. Dare speakers describe, usually in a frenzied manner, the wealth that awaits the prospects if they will purchase one of the plans. Films are shown, usually involving the 'rags-to-riches' story of Dare founder Glenn W. Turner. The goal of all of this is to persuade the prospect to purchase a plan, especially Adventure IV, so that he may become a 'salesman', and thus grow wealthy as part of the Dare organization. It is intimated that as Glenn W. Turner Enterprises, Inc. expands, high positions in the organization, as well as lucrative opportunities to purchase stock, will be available. After the meeting, pressure is applied to the prospect by Dare people, in an effort to induce him to purchase one of the Adventures of the plan. The sale is sometimes closed by the purchaser who brought the prospect to the meeting, but primarily, by Dare salesmen, specialists in the 'hard sell.'

"The format of the meeting is preordained. A script created by Dare is strictly adhered to. The format applies even to the sale, there being a standard procedure for inducing the prospect to sign his name to the agreement and to part with his money. While no express guarantee of success is made at the meetings, and the statement is made that the purchaser must expect to work, the impression which is fostered is of the near inevitability of success to be achieved by anyone who purchases a plan and follows Dare's instructions.

"Dare also arranges, in addition to the Adventure Meetings, 'GO Tours,' or 'Golden Opportunity Tours.' Prospects are taken by plane or bus to one of Dare's regional centers where further meetings and sales efforts are undertaken.

A significant effort is made during the trip itself to sell the plans to prospects. Much the same atmosphere as at the meetings pervades the trip--exuberant shouting, chanting, handshaking, relating of success stories, and lavish displays of cash.

"In a scheme such as this, the possibility that a market will become 'saturated' is a real one. Saturation has in fact occurred in some markets, but this is not mentioned at the meetings. Few, if any, purchasers of these plans have achieved any success remotely approaching that described by defendants and their agents.

"B. The role of the purchaser-salesman.

"Once he has bought a plan that empowers him to help sell the plans to others, the task of the purchaser is to find prospects and induce them to attend Adventure Meetings. He is not to tell them that Dare To Be Great, Inc. is involved. Rather, he catches their interest by intimating that the result of attendance will be significant wealth for the prospect. It is at the meetings that the sales effort takes place. The 'salesman' is also told that to maximize his chances of success he should impart an aura of affluence, whether spurious or not--to pretend that through his association with Dare he has obtained wealth of no small proportions. The training that he has received at Dare is aimed at educating him on this point. He is told to 'fake it 'til you make it,' or to give the impression of wealth even if it has not been attained. He is urged to go into debt if necessary to purchase a new and expensive automobile and flashy clothes, and to carry with him large sums of money, borrowing if necessary, so that it can be ostentatiously displayed. The purpose of all this is to put the prospect in a more receptive state of mind with respect to the inducements that he will be subject to at the meetings."

Id. 474 F.2d at 478-80.

From about February to July, 1971, Avco provided loans, secured by promissory notes, to persons who wanted to invest in DTBG. After Avco had made some of these loans, DTBG contacted Avco's manager McCormick about further loan business. McCormick attended three meetings (two for DTBG and one for Koscot, an extremely similar venture run by identical organizers) in May through June, 1971. At these meetings, McCormick provided potential DTBG investors with blank Avco loan application forms. He also made a speech concerning obtaining financing through Avco at one of the meetings. Several members of the plaintiff class testified, and the trial court found, that McCormick represented to some plaintiffs that DTBG was a good quality investment. In July, 1971, McCormick's superior, Pok, ordered him to cease making any loans for investment in DTBG. (McCormick also attended a DTBG "go tour" after Pok put a stop to the loans.) Forty-eight people, eventually certified as a class, borrowed $2,000 or more from Avco to buy DTBG shares over an approximately six month period ending in July, 1971.

In the ensuing litigation, the trial court certified the case as a Rule 23(b)(3) class action. After trial, he ruled that both the promissory notes given by the plaintiffs for the loans and the shares of DTBG were "securities" within the meaning of the relevant federal securities statutes. He also found that Avco had solicited the plaintiffs' promissory notes and that the defendants' participation and enthusiasm in the sale of DTBG constituted a "misleading" of the plaintiffs in violation of Secs. 2(3) and 12(2) of the Securities Act of 1933. (15 U.S.C. Secs. 77b(3) and 77l (2), respectively). He entered judgment in favor of the plaintiffs for roughly $167,000, apportioning the judgment among the plaintiff class on the basis of money owed to Avco.

Following a bench trial, findings of fact and conclusions of law were filed in which the trial court did not find the requisite scienter by McCormick for Rule 10b-5 liability. He did conclude, however, that DTBG Adventures III and IV were securities This court has reviewed the entire transcript of the trial and concludes not only that the factual findings of the trial judge with regard to the actions and...