S.E.C. v. Lauer, 94-3210

• Decision Date: 17 May 1995
• Docket Number: No. 94-3210,94-3210
• Citation: 52 F.3d 667
• Parties: , Fed. Sec. L. Rep. P 98,674 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. John D. LAUER and Clifton Capital Investors L.P., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 667

52 F.3d 667

63 USLW 2672, Fed. Sec. L. Rep. P 98,674

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. John D. LAUER and Clifton Capital Investors L.P. Defendants-Appellants.

No. 94-3210.

United States Court of Appeals Seventh Circuit.

Argued Feb. 13, 1995.

Decided April 12, 1995.

Rehearing Denied May 17, 1995.

Jacob H. Stillman, Katharine B. Gresham (argued), Lucinda O. McConathy, Brian F. McNally, Diane V. White, S.E.C., Office of Gen. Counsel, Washington, DC, for S.E.C.

Susan Getzendanner, Donna L. McDevitt (argued), Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, for John D. Lauer and Clifton Capital Investors L.P.

Before POSNER, Chief Judge, and BAUER and RIPPLE, Circuit Judges.

POSNER, Chief Judge.

John D. Lauer and a company controlled by him known as Clifton Capital Investors L.P. (CCI) appeal from the grant of a preliminary injunction sought by the Securities and Exchange Commission in its suit against Lauer, CCI, and others for federal securities fraud. The appellants argue that there is no security and therefore no jurisdiction under the federal securities laws. The case is surprisingly novel, involving as it does a degree of fraud so complete and barefaced that it ordinarily would be dealt with under the mail or wire fraud statutes or other criminal statutes not specialized to the securities market--indeed a fraud so thoroughgoing, pure, and barefaced as to raise the question whether it can be considered to have involved "securities" at all.

Lauer was the director of the Chicago Housing Authority's employee benefits program. In this capacity he administered a defined-benefit pension plan for the Authority's employees and made all decisions concerning the investment of the assets of the plan. The other defendants (besides Lauer's company, CCI) are individuals and entities constituting the "Konex Roll Program," an out-and-out fraud. The program purported to invest in "Prime Bank Instruments," a nonexistent high-yield security. Konex, as we shall refer to these defendants, invited Lauer to invest CHA pension plan assets in the Roll Program, promising an annual return of 60 percent on the minimum investment, which was $10 million. Konex represented that four or five other investors, plus a substantial trust, had already invested in the Roll Program. In fact none had. Lauer bit, and invested $10 million of the pension plan assets in the program. His contract with Konex, however, identified CCI rather than CHA as the investor, and Lauer and Konex agreed that CCI would be the administrator of the entire program and receive a fee for each trade of Prime Bank Instruments that the program made. Lauer later invested further millions in the Roll Program, some or more likely all of which was directly or indirectly the CHA's money. And to increase CCI's fees he wrote letters to prospective investors in the Roll Program (fortunately none bit), full of glowing false reports about how the program was doing. It wasn't doing; it was a fiction, an illusion. Lauer, who has since been fired by the CHA and is under investigation by a federal grand jury, never disclosed to the CHA his personal stake (through CCI) in the Roll Program. The preliminary injunction is designed to freeze the defendants' assets with a view to eventual disbursement to the ultimate victim of the fraud--the Chicago Housing Authority.

The government calls Lauer's $10 million investment of CHA funds in the Konex Roll Program an "investment contract." This is a term of art in the securities laws. It means an interest that is not a conventional security like a bond or a share of common stock but that, having the essential properties of a conventional security--being an undivided, passive (that is, not managed by the investor) financial interest in a pool of assets--is treated as one for purposes of these laws. 15 U.S.C. Sec. 77b(1); Landreth Timber Co. v. Landreth, 471 U.S. 681, 690, 105 S.Ct. 2297, 2304, 85 L.Ed.2d 692 (1985); Wals v. Fox Hills Development Corp., 24 F.3d 1016 (7th Cir.1994). This is a fair description of the Konex Roll Program as it was represented to Lauer--a potentially important qualification, as we shall see. Investors would invest $10 million (or more) with Konex, which would use the money to buy Prime Bank Instruments. So Konex would be the manager, and Lauer and the other investors would have a passive financial interest, just as if they had bought shares of stock in an investment bank. Konex never represented that it would manage each investment separately, as an investment advisor would do. On the contrary, it represented that the investments would be combined to purchase "Prime Bank Instruments" in denominations of $100 million and that each investor would receive a pro rata share of the income of the instrument to the purchase of which his investment had contributed.

Against the conclusion that the interest he acquired was an investment contract and therefore within the scope of the securities laws, Lauer argues that since there was only one investor--namely himself (technically, his company CCI)--there could not be a pooling of investors' assets and without such a pooling there is no investment contract. For we have emphasized, most recently in Wals v. Fox Hills Development Corp., supra, that for an interest to be classified as an investment...