S.E.C. v. R.G. Reynolds Enterprises, Inc., 90-55185

• Decision Date: 30 December 1991
• Docket Number: No. 90-55185,90-55185
• Citation: 952 F.2d 1125
• Parties: , 60 USLW 2452, Fed. Sec. L. Rep. P 96,464 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. R.G. REYNOLDS ENTERPRISES, INC.; Richard Reynolds, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1125

952 F.2d 1125

119 A.L.R.Fed. 657, 60 USLW 2452, Fed.

Sec. L. Rep. P 96,464

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. R.G. REYNOLDS ENTERPRISES, INC.; Richard Reynolds Defendants-Appellants.

No. 90-55185.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Aug. 12, 1991.

Decided Dec. 30, 1991.

Arthur L. Scovis, Scovis & Scovis, Thousand Oaks, Cal., for defendants-appellants.

Lucinda O. McConathy, S.E.C., Washington, D.C., for plaintiff-appellee.

William R. Bickford, George A. Crawford, Sr. Trial Counsel, Los Angeles, Cal., for Dept. of Corporations, State of Cal.

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

Before NORRIS and THOMPSON, Circuit Judges, and KING, ^* District Judge.

WILLIAM A. NORRIS, Circuit Judge:

This appeal presents the question whether interests in two separate investment programs sold by Richard Reynolds and R.G. Reynolds Enterprises, Inc. are securities. We hold that they are and affirm the district court's award of summary judgment in favor of the Securities and Exchange Commission.

I

Richard Reynolds formed R.G. Reynolds Enterprises, Inc. in January 1985. As president, sole shareholder, and chairman of the board of Reynolds Enterprises, Reynolds directed its operations, which included the sale of the investment programs that are at issue in this appeal, a weekday financial talk show on the radio, "The Reynolds Rap," and a television show on the same subject called "The Reynolds Report." Reynolds also published a monthly financial newsletter, "The Reynolds Report," and offered personal investment advice through consultations with persons who paid the subscription fee.

The Managed Account. Beginning in 1985, Reynolds and Reynolds Enterprises offered and sold an investment program that Reynolds variously called a "Managed Account," a "discretionary account," the "30% Net Investment Program," and the "Loan Program." Whatever name was used, an investment in the program was made in cash and the investor was promised a high rate of return. A typical letter describing the program is set out in the margin. ¹ Investors in this program testified that Reynolds purported to be an expert in the market who had earned very high returns for himself and his clients. He indicated that he would invest their money in the stock and futures markets. Investors in the Managed Account received monthly account statements, always indicating that their investments had appreciated. Reynolds testified that he made up account numbers for investors at random. He said that he kept records of the loan program on little slips of paper and in his head.

Reynolds raised approximately $2 million from at least 148 investors in several states through the Managed Account from early 1985 until at least April, 1987. Much of the money came from small investors who invested $2,000 to $10,000.

Reynolds described the program in his deposition testimony as a "Loan Program," in which he borrowed funds from his clients for six months to two years at varying interest rates. Reynolds deposited the funds in a single account and used a large portion of the funds to pay for air time for his television and radio shows and other business expenses unrelated to the investments. Reynolds also used investors' funds to gamble in Las Vegas and to pay for his then fiancee's rent, car, and other personal expenses. When payment on the investments became due, Reynolds offered to renew the investments, usually at a rate of 20% or 25%. In 1986, Reynolds and Reynolds Enterprises began issuing promissory notes to investors in the Managed Account. These notes promised to pay a sum certain at a stated rate of interest, usually between 20% and 30%, at a specified time in the future, usually 6 or 12 months.

The Moreland Gold Program. In December 1987, Reynolds and Reynolds Enterprises began to sell interests in a gold ore refining venture referred to as the Moreland Gold Program, located in Kern County, California, and operated by William Moreland, who appeared on Reynolds' show to promote the venture. Reynolds and Moreland told investors that the cost of gold to the investor in the program was $250 an ounce. This price was a significant discount from the market price of gold at the time. On his television program, Reynolds pointed to the difference between the offering price of $250 an ounce and the current price for gold at $340 an ounce, stating that there was no fund that could give investors as much growth in four months.

In soliciting investors, Reynolds and Reynolds Enterprises sent out an offering brochure. The introduction explained that Moreland was selling "previously mined gold ore reserves" in order "to raise the capital for a new milling and refinery plant" and concluded that "this project will be a very profitable investment with little or no risk." AER at 22, 24. The remaining 50 pages of the packet contained maps, flow charts showing how the new mill would operate and what processes it would employ, reports of metallurgical work, engineering and geologists' reports, proof of ownership of mining properties, the resume of Joseph Johnson, the consulting geologist, and Moreland's resume, showing his expertise in many areas including mining and milling operations.

Investors received, for a single price, a sales contract, a refining contract and a security agreement. Each sales contract stated that Moreland was conveying a specified amount of gold ore with a gold content of .15 ounces of gold per ton. For each payment of $5000, investors were to receive 133 tons of ore, which were supposed to yield 20 ounces of gold. The contract stated that the ore was ready for shipment and could be removed at the buyer's expense, but there is no evidence that any of the investors took advantage of this option. The refining contract explicitly obligated Moreland to mill the ore and deliver the gold, but stated that milling would only begin at an indefinite time in the future, after 30,000 tons of ore had been sold and up to four months had elapsed. The refining contract provided that Moreland would refine the ore and deliver the gold to a reputable company for hallmarking and certification of the gold's purity. The third contract, a "Security Agreement," purported to guarantee Moreland's performance. It recited that Moreland was the owner of certain dolomite mining claims and that these claims had been transferred to a trust. In the event of his default on the sales and refining contracts, the trustee was to sell the mining claims to reimburse the buyer in the amount of the contract price plus interest.

Reynolds used the information package to sell the Moreland Gold Program, stating on his radio show, "I've checked [Moreland Gold] out so thorough it's not even funny." Appellee's Supplemental Excerpts of Record ("ASER") at 712. On his television show, he assured the public that the Moreland Gold Program was "safe as safe could be," and that there was no risk involved. ASER at 680, 685. However, there is no evidence that Reynolds performed any independent analysis of the Moreland Gold Program.

Reynolds raised approximately $1.8 million from 245 investors in several states for the Moreland Gold Program, between December, 1985 and April, 1986. Reynolds Enterprises received sales commissions of 35%. Only three investors in the Moreland Gold Program received any return of the principal they invested. Nor have investors received any funds from the dolomite that was supposed to be sold in the event of Moreland's default.

The Proceedings Below. The SEC brought this action naming as defendants Reynolds and Reynolds Enterprises. ² The SEC charged that they violated the antifraud provisions of § 17(a) of the Securities Act, 15 U.S.C. § 77q(a), § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5, by making misrepresentations and omissions in offering and selling the Managed Account and the Moreland Gold Program. The SEC charged that they violated the registration provisions of § 5(a) and (c) of the Securities Act, 15 U.S.C. §§ 77e(a) & 77e(c), by offering and selling unregistered securities. The SEC also charged that they violated § 15(a)(1) of the Securities Exchange Act, 15 U.S.C. § 78o (A)(1) by selling securities without registering as a broker-dealer.

The SEC also alleged that Reynolds acted as an investment adviser without registering with the SEC, in violation of § 203(a) of the Investment Advisers Act, 15 U.S.C. § 80b-3(a), and that he defrauded his clients in violation of § 206(1) and (2) of the Act, 15 U.S.C. §§ 80b-6(1) & (2). It further charged that in offering the Managed Account, Reynolds operated an unregistered investment company in violation of § 7(a) of the Investment Company Act, 15 U.S.C. § 80a-7(a).

The district court ruled on summary judgment that appellants had violated the securities laws. On appeal, Reynolds and Reynolds Enterprises argue that the investments at issue were not securities within the meaning of the Securities Acts.

II

First, we consider whether the investors' financial interests in the Managed Account are securities. ³ The Managed Account involves financial interest in two forms: (1) the somewhat ill-defined interest initially offered, in which investors gave Reynolds cash and he promised them a high rate of return; and (2) promissory notes issued to investors who had already entered the program.

We recognize that in passing the Securities Acts, "Congress painted with a broad brush. It recognized the virtually limitless scope of human ingenuity, especially in the creation of 'countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.' " Reves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 949, 108 L.Ed.2d 47 (1990) (quoting SEC v. W.J. Howey Co., 328 U.S. 293, 299, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946)). Thus, Congress "enacted...