Roe v. United States

• Decision Date: 23 May 1961
• Docket Number: No. 18162.,18162.
• Citation: 287 F.2d 435
• Parties: D. H. ROE and Stratoray Oil, Inc., Appellants, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

287 F.2d 435 (1961)

D. H. ROE and Stratoray Oil, Inc., Appellants, v. UNITED STATES of America, Appellee.

No. 18162.

United States Court of Appeals Fifth Circuit.

February 17, 1961.

Rehearing Denied May 23, 1961.

Wm. C. Pannell, Leo Brewster, Fort Worth, Tex., for appellants.

W. B. West, III, U. S. Atty., Robert S. Travis, Asst. U. S. Atty., Fort Worth, Tex., for appellee.

Before CAMERON and BROWN, Circuit Judges, and HANNAY, District Judge.

JOHN R. BROWN, Circuit Judge.

As this case percolates to us, it is but a bare shadow of its former self in the trial court. There it was a multi-party, multi-count indictment against Roe individually, the corporation, Stratoray Oil Company, Inc. of which Roe was President, and another, an advertising writer. At the heart of this case as the jury heard the evidence for many, many days was a high-pitched, hard-sell extravagant solicitation campaign to sell through the mail to thousands of persons over the United States oil leases on small tracts in Texas and Utah. Counts 1 through 7 charged each with violation of the Securities Act of 1933, Title 15 U.S.C.A. § 77q (a) (1), by the use of the mails to defraud in the sale of securities. Counts 8 through 14 charged each with mail fraud under 18 U.S.C.A. § 1341 in connection with the sale of the same interests. Counts 15, 16, 17, 18 and 19, which alone remain, charged illegal sale and delivery of securities through the use of the mails without a prior registration with the SEC as required by 15 U.S.C.A. § 77e(a) (1) and (2). Count 20 charged a conspiracy under 18 U.S.C.A. § 371 to violate all of the laws forming the basis of Counts 1 through 19. The advertising writer was acquitted on all counts. Roe, individually, was acquitted on all fraud counts (1 through 14 and 20). The Court entered a like judgment of acquittal as to Stratoray, the corporation. But Roe and Stratoray were each found guilty under Counts 15 through 19. This means that as we review these convictions, we are not, at this stage, permitted to read into any of the transactions any moral overtones of fraud. We must regard them in the posture of nonfraudulent violations of the registration requirements of the Securities Act. What the jury washed out thus has immediate relevance in our approach. It also highlights the prejudicial effect of the error we find in the Court's charge.

For reasons we later point out, we conclude that the case must be reversed and remanded for error in the Court's charge. But since the case ought not to be retried if these facts, if credited by a jury, do not constitute a federal crime, we think it essential that we first discuss the basic contention of the appellants. In a nutshell it is simply this. The sale of the entire (7/8ths) mineral lease in a specific piece of property does not constitute the sale of a "security" under the Act. Consequently, since the registration statement is required only as to "a security," there was no violation of this Act.

On the surface there is a good deal to this position. The mailed advertising solicitation material, extravagantly optimistic as it was, offered to the prospects mineral leases only. In the numerous sales effected through this means, that is all that was sold and delivered. There was not, therefore, any sale, offer of sale, or delivery of a "fractional undivided interest in oil, gas, or other mineral rights" as the definitive section of the Act sets forth. Nor did such oil leases fit within any other specifically itemized interests.¹ If they are to come within the term "security" they must do so as an "investment contract."

At this late date we do not think that there can be any real doubt that offerings of oil leases in this fashion may amount to an "investment contract." This was the heading specifically recognized for such transactions by S. E. C. v. C. M. Joiner Leasing Corp., 1943, 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88, as it reversed this Court's holding that these were sales, not of a security, but an interest in property, real or personal. Because it would be out of keeping with the remedial object of this legislation reflecting a long current of like enactments in the various states, that case also rejected any construction of the Act on the basis of handy Latin aphorisms that would exclude from coverage mineral interests other than those specifically enumerated as "fractional undivided interest in oil, gas, or other mineral rights." 320 U.S. at page 350, 64 S.Ct. at page 123.

Of course it takes something more than a mere "offering of naked leasehold rights," 320 U.S. at page 348, 64 S.Ct. at page 122, or, in a different situation, the mere fee ownership of a piece of land, Blackwell v. Bentsen, 5 Cir., 1953, 203 F.2d 690, certiorari dismissed 347 U.S. 925, 74 S.Ct. 528, 98 L.Ed. 1078. Regarded as relevant and sufficient by Joiner were these factors. The "economic inducements of the proposed and promised exploration well"; submitting a proposition to prospects to sell them "documents which offered the purchaser a chance, without undue delay or additional cost, of sharing in discovery values which might follow a current exploration enterprise"; the "exploration enterprise was woven into the leaseholds, in both an economic and a legal sense." 320 U.S. at page 348, 64 S.Ct. at page 122. Irrelevant, on the other hand, and at least not decisive are other factors such as the nature, real or personal, of the property formally conveyed, or the fact that to appraise its character examination of facts beyond the face of the instrument may be required. For Joiner likewise stated, "The test rather is what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect. In the enforcement of an act such as this it is not inappropriate that promoters' offerings be judged as being what they were represented to be." 320 U.S. at pages 352-353, 64 S.Ct. at page 124. While it is necessary in any case under the Act to prove "that documents being sold were securities under the Act" which sometimes "might be done by proving the document itself," in "others proof must go outside the instruments itself as we do here." 320 U.S. at page 355, 64 S.Ct. at page 125.

All of this was spelled out with more positiveness in S. E. C. v. W. J. Howey Co., 1946, 328 U.S. 293, 298, 66 S.Ct. 1100, 1102, 90 L.Ed. 1244. "Form", that case announces, is to be "disregarded for substance and emphasis" is to be "placed upon economic realities." Following the pattern of state legislation so well known to Congress, the Court declared that "an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise." 328 U.S. at pages 298-299, 66 S.Ct. at page 1103. Expressed somewhat differently, the "test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." 328 U.S. at page 301, 66 S.Ct. at page 1104.

Certainly the facts of this record more than satisfy the Joiner-Howey standard. These sales pitches were more than mere extravagance of the wildest optimism.² Each of them was based upon the economic significance of an existing or proposed test well. It was, so the offering letters stated, these test wells in Utah and in Texas which would suddenly — indeed overnight — give to these small-patch leases sold for as little as $10 an acre a value in excess of $1,000 per acre. Wealth, the blurbs continued, would come to these retired school teachers, cobblers, nurserymen, and others, from the stampede of oil men rushing into the area in a mad scramble to buy leases once the test wells were brought in. This wealth, so it was spelled out in terms which the gullible, young and old, could understand, would come from sales of the leases at these fabulously increased prices together with overriding royalties in future production reserved in such transfers.

In summarizing the hundreds of pages of these exuberant solicitation letters in this fashion, we do not mean to slip obliquely into moral judgments which, at the outset, we emphasized were no longer in the case. We may, as did the Supreme Court in Joiner,³ credit all of these as being made in the best of faith and, indeed, with a substantial factual basis. The significance of them is not in their extravagance nor even their possibly misleading nature. They are significant because, taken at face value, they offer to the prospective purchaser a chance to reap great rewards — indeed get rich quick — not out of the operation of these leases by the purchasers, but solely because of activities of persons other than the purchasers.⁴

The economic inducement, the allure of this stream of liquid gold, as one letter described it, was the spectacular increase in values of the leases without anything but a patient gullibility upon the part of beguiled purchasers. The promoters were selling a chance to make a great deal of money from activities which were then, or would shortly be, carried on by persons other than the purchasers. In that setting it mattered not whether the test wells were to be drilled by the sellers, or by third persons either under, or independent of, their control.⁵ What the purchasers were told was that after they acquired these pieces of property (leases), the activity and energies and expenditures of others — the backers of the test wells — would produce earnings on the investment. That is enough. Price v. United States, 5 Cir., 1953, 200 F.2d 652, 654. All of this is reviewed extensively in the opinion of Chief Judge Murrah for the 10th Circuit in Woodward v. Wright...