S.E.C. v. Belmont Reid & Co., Inc.

• Decision Date: 18 July 1986
• Docket Number: No. 85-2311,85-2311
• Citation: 794 F.2d 1388
• Parties: , Fed. Sec. L. Rep. P 92,836 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. BELMONT REID & COMPANY, INC., et al., Defendants, John Disterdick, Bernard Zahren, and Walter Skrondal, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1388

794 F.2d 1388

55 USLW 2092, Fed. Sec. L. Rep. P 92,836

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. BELMONT REID & COMPANY, INC., et al., Defendants, John Disterdick, Bernard Zahren, and Walter Skrondal,

Defendants-Appellees.

No. 85-2311.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 16, 1986.

Decided July 18, 1986.

Daniel L. Goelzer, General Counsel, Jacob H. Stillman, Assoc. General Counsel, David Sirignano, Stephen M. DeTore, Washington, D.C., for plaintiff-appellant.

Walter E. Skrondal, in pro per.

James W. Mercer, Laura Lingren, Greenberg, Hennigan & Mercer, Beverly Hills, Cal., Peter H. Morrison, Morrison, Cohen & Singer, New York City, for defendants-appellees.

Appeal from the United States District Court for the Northern District of California.

Before CHAMBERS, SNEED, and FARRIS, Circuit Judges.

SNEED, Circuit Judge:

The Securities and Exchange Commission (SEC) appeals from the district court's grant of summary judgment in favor of defendants John Disterdick, Bernard Zahren, and Walter Skrondal. The SEC contends that the defendants' sale of gold coins on a prepayment basis was actually an investment contract, and therefore a security. We affirm.

I. FACTS AND PROCEEDINGS BELOW

The economic conditions out of which this case developed were those of the late 1970s and early 1980s, during which time the inflation rate was high and the demand for gold as a hedge against inflation was strong. In 1980, Continental Minerals Corporation (CMC), a closely-held Nevada corporation that developed natural resources, had assets that included several partially developed leasehold interests in what were allegedly gold-bearing properties. In order to develop some of these properties, CMC tried various means of raising capital. One of its attempts involved raising capital by selling its gold directly to investors. The gold was to be in the form of coins or medallions that it planned to mint from future gold production. The coins consisted of two types. Purchasers could buy a set of twelve one-ounce coins that bore the likenesses of famous Indian chiefs, or they could buy a set of ten one-ounce coins bearing the "universaro" design. CMC offered the sets in either "uncirculated" or "proof" quality. It gave the purchasers the option of two purchase plans: purchasers could pay for each coin separately, thirty days in advance of delivery, or they could prepay for the entire set of coins. The SEC alleges that only the second prepayment plan is a security. The difference in the prices charged by the two plans is significant. Under the thirty-day plan, the world market price of gold determined the price of the coins while, under the prepayment plan, the prices were fixed at $375 or $425 per coin, depending on whether it was of "uncirculated" or "proof" quality. Between June and September of 1980, at the time when CMC was offering the coins to the public, the prepayment price embodied a discount of about 33% to 48% below the prevailing world market price of gold. CMC promised to start delivery on November 15, 1980, and to deliver an additional coin every two months.

While the fixed price provided protection against an increase in the price of gold, CMC's prepayment plan also afforded protection against both a default by CMC on its obligations to deliver coins and a sharp decline in the world price of gold. To protect against default, the deed to the Belleville Mine (owned by CMC) was placed in a trust account. A guarantee that, if the world price of gold fell below $375 an ounce at delivery, CMC would pay purchasers the difference between their prepayment price and the world price secured the buyer against a sharp decline in that price.

As part of its "Background Information" that was provided to the prospective purchaser, CMC noted that "the gold offered for future delivery has not yet been extracted.... Obviously, if sufficient quantities of gold were being mined currently, these would be sold at world market prices and not offered at a substantial discount." Rule 13 Excerpts of Record (E.R.) at 189. The "Background Information" also noted that CMC planned "to use proceeds from sales of gold to provide additional equipment and pay other operating expenses of Belmont Reid & Co (Belmont Reid) became involved with CMC's offering in early 1980, when CMC asked it to administer the offering. Belmont Reid used its own salesmen and recruited outside salesmen to carry out the offering. After soliciting by mail and telephone, appellee John Disterdick, a Belmont Reid salesman, sold or supervised the sale of approximately $406,000 in contracts to about 77 investors. Bernard Zahren, an outside salesman, sold contracts to approximately 49 investors for about $766,000. Walter Skrondal, another outside salesman, sold $23,400 in contracts to four other people.

                the company."    Id. 1  Clearly the greatest risk incurred by the prepayment purchaser was the possible inability of CMC to perform its part of the bargain
                

CMC failed to meet its first delivery date of November 1980. Although it rescheduled delivery several times, these reschedulings were futile. By January 1981, the $3.5 million that CMC had received from net proceeds from the sales had been spent. An involuntary bankruptcy petition eventually was filed against CMC.

The SEC filed its complaint on September 26, 1984, against Belmont Reid, against a former vice-president of CMC, and against twenty-four salesmen. It claimed that the defendants had violated the registration provisions of the Securities Act of 1933 and that they had violated the antifraud provisions of both the 1933 Act and the Securities and Exchange Act of 1934, and it sought injunctive relief. Permanent injunctions were entered by consent against twenty-one of the defendants.

On May 10, 1985, the district court granted Disterdick's, Skrondal's, and Zahren's motion for summary judgment and denied the SEC's cross-motion for summary judgment. It found no common enterprise between the purchasers and CMC and noted that "[t]he profits to the coin buyer depended upon the fluctuations of the gold market, not the managerial efforts of CMC." E.R. at 239 (Conclusion of Law 3). Therefore, the court concluded, the contracts to prepurchase the gold coins were not securities within the meaning of the federal securities laws. Id. at 238. The court did find, however, that "CMC intended and defendants anticipated that the coins would be made from gold to be mined from CMC's Imperial gold mine." Id. at 235 (Finding of Fact 1). The SEC appeals.

II. DISCUSSION

This circuit reviews grants of summary judgment de novo. Moorhead v. United States, 774 F.2d 936, 939-40 (9th Cir.1985). The district court's determination whether a transaction is a security is also reviewed de novo. SEC v. Goldfield Deep Mines Co., 758 F.2d 459, 463 (9th Cir.1985).

The definitions of "security" under section 2 of the Securities Act of 1933, 15 U.S.C. Sec. 77b(1), and under section 3 of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78c(a)(10), are virtually identical, see SEC v. Glenn W. Turner Enterprises, 474 F.2d 476, 480 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973), and both definitions include the phrase "investment contract." The classic test of whether a transaction is an investment contract is found in SEC v. W.J. Howey Co., 328...