S.E.C. v. Goldfield Deep Mines Co. of Nevada

• Decision Date: 19 April 1985
• Docket Number: No. 83-6442,83-6442
• Parties: Fed. Sec. L. Rep. P 92,016 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. GOLDFIELD DEEP MINES COMPANY OF NEVADA, AAA Financial Corporation of Nevada, City Continental Financial, A.G., John C. Rebenstorf, III, C. Orin Swain, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 459

758 F.2d 459

Fed. Sec. L. Rep. P 92,016

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. GOLDFIELD DEEP MINES COMPANY OF NEVADA, AAA Financial

Corporation of Nevada, City Continental Financial,

A.G., John C. Rebenstorf, III, C. Orin

Swain, Defendants-Appellants.

No. 83-6442.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 4, 1985.

Decided April 19, 1985.

David A. Sirignano, S.E.C., Washington, D.C., for defendants-appellants.

Fred M. Cohen, Ontairo, Cal., for plaintiff-appellee.

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

Before PREGERSON and REINHARDT, Circuit Judges, and SCHWARZER ^*.

REINHARDT, Circuit Judge:

Appellants appeal the district court's grant of a permanent injunction enjoining them from engaging in further violations of the registration provisions of the Exchange Act, 15 U.S.C. Sec. 78l (g) and SEC Rule 12b-20; the recordkeeping provisions of the Securities Act, 15 U.S.C. Sec. 78m(b)(2); and the antifraud provisions of the Securities Act and the Exchange Act, 15 U.S.C. Secs. 77q(a)(1)-(a)(3), 15 U.S.C. Sec. 78j(b), and SEC Rule 10b-5. We affirm.

I. FACTUAL BACKGROUND

Appellant Goldfield Deep Mines Company of Nevada ("Goldfield") is a publicly-held Nevada corporation. Since 1920, Goldfield has been in the business of mining minerals and precious metals in Nevada, with the exception of the period from 1959 to 1972, during which Goldfield derived its sole income from sales of land and from transfer fees generated by trading of its stock on the over-the-counter exchange.

In 1981, Goldfield began soliciting investors to participate in its ore purchase program. Goldfield claimed to have developed revolutionary technology which economically rendered ore dump material into marketable quantities of gold, silver, platinum and palladium. The ore program was structured such that investors were required to purchase a minimum of 18 tons of ore dump material at $500/ton. The ore was to be processed, refined, stored and marketed by Goldfield unless the investor could find an independent mining contractor to provide those services, in which case the investor was required to post a $20,000 bond with Goldfield as "security."

Appellant AAA Financial Corporation of Nevada ("AAA Financial"), a wholly-owned subsidiary of Goldfield, served as Goldfield's transfer agent. AAA Financial also served as agent for City Continental Financial ("CCF"), a purported lending institution which offered financing to investors in the ore purchase program. The purchase required a 15% cash down payment while the remaining balance could be financed with CCF, an organization which later proved to be a nonexistent entity. Goldfield's promotional literature projected a dual benefit from investment in the ore purchase program: the prospect of a 100 per cent return on the original cash investment within one to six years, and the availability of significant tax deductions.

In 1981, Goldfield's assets exceeded $5 million. Goldfield therefore became subject to the registration and reporting requirements of the 1934 Securities Exchange Act, 15 U.S.C. Sec. 78l, and Rule 12b-20 promulgated thereunder, 17 C.F.R. 240.12b-20. Pursuant to these provisions, Goldfield filed a Form 10 registration statement with the Securities and Exchange Commission ("SEC"), describing its management, business activities and its 1980 and 1981 audited financial condition. For the year ending 1981, Goldfield reported income of $5.4 million, which represented a five-fold increase from the previous year. Goldfield also reported total assets of $5.5 million as of December 31, 1981, which was eight times the value of its total assets in the previous year. Over $4 million of Goldfield's reported $5.5 million in assets in 1981 consisted of notes receivable issued to Goldfield by CCF.

On April 1, 1983, the SEC filed a complaint alleging violations of the antifraud, registration and recordkeeping provisions of the federal securities laws and seeking to permanently enjoin appellants from offering or selling Goldfield common stock and interests in the ore purchase program. The complaint named as defendants Goldfield, AAA Financial and CCF, along with C. Orin Swain ("Swain"), Chairman of the Board and Director of Goldfield, John C. Rebenstorf, III ("Rebenstorf"), President and Director of Goldfield, and Morton Johnson ("Johnson"), Vice-President of CCF and marketing director of AAA Financial. ¹ After a six-day evidentiary hearing, the district court granted a preliminary injunction enjoining defendants from further violating the charged provisions of the federal securities laws. The district court also froze all of the funds held in the corporate defendants' bank accounts and ordered Rebenstorf and Swain to disgorge certain Goldfield funds to the court-appointed receiver administering Goldfield's bankruptcy proceedings, which had commenced on April 1, 1983. Rebenstorf failed to comply with the disgorgement order and, on May 10, 1983, the district court found him in contempt. Shortly thereafter, Rebenstorf complied with the order.

On September 28, 1983, subsequent to trial, the district court found that appellants had violated the registration provisions of the Exchange Act, Secs. 12(g), 13(b)(2) and Rule 12b-20; the antifraud provisions of the Securities Act, Sec. 17(a), and the Exchange Act, Sec. 10(b), and the recordkeeping provisions of the Securities Act, Sec. 13(b)(2). Accordingly, the court permanently enjoined appellants from any further violations.

II. ISSUES ON APPEAL

Appellants raise three issues on this appeal. First appellants challenge the district court's conclusion that interests in the ore purchase program constituted "investment contracts" as contemplated by section 2(1) of the 1933 Securities Act, 15 U.S.C. Sec. 77b(1), and section 3(a)(10) of the Exchange Act, 15 U.S.C. Sec. 78c(a)(10). Appellants contend that interests in the ore purchase program were not investment contracts and, accordingly, sale of these interests should not have been subject to regulation under the federal securities laws. Second, appellants contend that the district court abused its discretion in granting the permanent injunction. Finally, appellants contend that the district court erred in finding that certain funds transferred to appellant Rebenstorf from Goldfield were, in fact, Goldfield funds. We address each contention separately.

A. The Investment Contract Inquiry

We review de novo the district court's determination that interests in the ore purchase program constituted investment contracts. See, e.g., United States v. Jones, 712 F.2d 1316 (9th Cir.), cert. denied, --- U.S. ----, 104 S.Ct. 434, 78 L.Ed.2d 366 (1983); Mordaunt v. Incomco, 686 F.2d 815 (9th Cir.1982), cert. denied, --- U.S. ----, 105 S.Ct. 801, 83 L.Ed.2d 793 (1985); Brodt v. Bache & Co., Inc., 595 F.2d 459 (9th Cir.1978); see also United States v. McConney, 728 F.2d 1195, 1202 (9th Cir.) (en banc), cert. denied, --- U.S. ----, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984) (application of a rule of law to the established facts is reviewed de novo where the question requires consideration of legal concepts in the mix of fact and law, as distinguished from an essentially factual inquiry).

Whether the interests in the ore purchase program were investment contracts within the meaning of section 2(1) of the Securities Act, 15 U.S.C. 77b(1) and section 3(a)(10) of the Securities Exchange Act, 15 U.S.C. 78c(a)(10), turns upon whether the program satisfies three elements. First, the program must involve an investment of money. Second, the money must have been invested in a common enterprise. Third, the anticipated profit must come solely from the efforts of others. Smith v. Gross, 604 F.2d 639, 642 (9th Cir.1979); Securities and Exchange Commission v. W.J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244 (1946). Appellants concede that their ore program is an investment of money, but contend that it is not a common enterprise with profits to be derived from their efforts. We disagree.

1. Common Enterprise

A common enterprise is a venture "in which the 'fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties.' " Brodt v. Bache & Co., 595 F.2d at 460 (quoting Securities and Exchange Commission v. Glenn W. Turner Enterprises, 474 F.2d 476, 482 n. 7 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973); Mordaunt v. Incomco, 686 F.2d at 817. It is not necessary that the funds of investors are pooled; what must be shown is that the fortunes of the investors are linked with those of the promoters, thereby establishing the requisite element of vertical commonality. United States v. Jones, 712 F.2d at 1321. Thus, a common enterprise exists if a direct correlation has been established between success or failure of Goldfield's efforts and success or failure of the investment. See Brodt v. Bache & Co., 595 F.2d at 461.

Here, the investors' fortunes were clearly linked with those of appellants. The ore program required the sharing of profits, in that Goldfield was to receive a 25% royalty fee for processing the investors' ore. Furthermore, the fortunes of both the investors and appellants were dependent upon the success of appellants' unique ore processing technique. If the processing technique were to prove faulty, then both the investors and appellants would suffer financial losses. This direct correlation between Goldfield's potential failure and the investors' losses supports a finding of a common enterprise. See, e.g., United States v. Carman, 577 F.2d 556 (9th Cir.1978); Los Angeles Trust Deed & Mortgage Exchange v. Securities and Exchange Commission, 285 F.2d 162 (9th Cir.1960), cert. denied, 366 U.S. 919, 81 S.Ct. 1095, 6 L.Ed.2d 241 (1961). Cf. Brodt v. Bache & Co., 595 F.2d at 461-62.

2. Expectation of Profits...