S.E.C. v. World Radio Mission, Inc.

• Decision Date: 04 November 1976
• Docket Number: No. 76-1285,76-1285
• Citation: 544 F.2d 535
• Parties: Fed. Sec. L. Rep. P 95,751 SECURITIES AND EXCHANGE COMMISSION, Plaintiff, Appellant, v. WORLD RADIO MISSION, INC., et al., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 535

544 F.2d 535

Fed. Sec. L. Rep. P 95,751

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, Appellant, v. WORLD RADIO MISSION, INC., et al., Defendants, Appellees.

No. 76-1285.

United States Court of Appeals, First Circuit.

Argued Oct. 7, 1976.

Decided Nov. 4, 1976.

David Ferber, Sol. to the Com'n, Washington, D. C., with whom David J. Romanski, Asst. Gen. Counsel, and Vernon I. Zvoleff, Atty. S.E.C., Washington, D. C., were on brief, for appellant.

Henry Paul Monaghan, Boston, Mass., with whom Stephen J. Spidelman, John S. Holland and Devine, Millimet, Stahl & Branch, Manchester, N. H., were on brief, for appellees.

Before ALDRICH, McENTEE and CAMPBELL, Circuit Judges.

ALDRICH, Senior Circuit Judge.

Plaintiff Securities and Exchange Commission appeals from the denial of preliminary relief in an action seeking to enjoin a religious organization and its leader from violating the anti-fraud provisions of the 1933 and 1934 Securities Acts. 15 U.S.C. §§ 77q(a), 78j(b); 17 CFR § 240.10b-5. ¹ Although, following a three day evidentiary hearing, the court found that plaintiff had "made a prima facie showing of a violation of the federal security laws and the likelihood that future violations will occur," it declined to issue a preliminary injunction. ² This decision, it stated, was based upon "balancing the interests on the equitable scale . . . (T)he issuance of an injunction will have a direct and substantial adverse impact on a bona fide religious organization. On the other had, there is no evidence that the denial of an injunction now will cause any harm to the public, irreparable or otherwise." Defendants, naturally, support both of these propositions. Alternatively, they assert as defenses that they are not selling "securities," that they have no intent to deceive, and that their activities are protected by the First Amendment.

The court found that defendant World Radio Mission (WRM) "is a religious organization engaged in worldwide evangelical religious activities. It proselytizes its beliefs through a radio program and by the publication and distribution of numerous pamphlets, magazines and books. At present, it is building and establishing a religious community in Lancaster, New Hampshire. Defendant White is an ordained minister, the titular head of WRM and the driving force behind it." In addition, the court found, "There is no dispute over the religious purpose and nature of WRM nor the validity and sincerity of White's religious beliefs," a circumstance which the court found to afford defendants special consideration on the issue of a preliminary injunction.

In addition to soliciting outright donations, a matter with which plaintiff cannot be concerned, ³ defendants raise funds through at least two types of investment plans. The first is the sale of "Loan Plans," interest-bearing notes, originally issued in amounts not less than $1,000, payable in seven years, with interest at 8%, and with a ninety-day notice acceleration clause. Later, there were variations, with increased minimum amounts, and interest as high as 12%, sometimes with no early withdrawal-of-principal feature. The second, the "Land Bonus Loan Plan," is a modification of the first, a five-year $10,000 note, paying 9% interest, with a bonus of an acre of land at defendants' White Mountains headquarters. Defendants have raised nearly $1,400,000 through these investment plans.

Defendants contend that these activities do not constitute offerings of "securities." Insofar as the contention is that, viewed as economic transactions, they do not fall within the purview of the securities acts, it is meritless. The Loan Plans fall squarely within both the literal language of the acts, ⁴ and the interpretive test developed by the Supreme Court. "The touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entreprenurial or managerial efforts of others." United Housing Foundation, Inc. v. Forman, 1975, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621; accord, SEC v. W. J. Howey Co., 1946, 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244. Nor can we accept defendants' special argument as to the "Land Plan," based on Forman, ante, where the Court held that shares in a cooperative apartment building were not "securities," in view of the motives of the purchasers. The case is inapposite. The basis of the opinion was that the purchasers were motivated "solely by the prospect of acquiring a place to live, and not by financial returns on their investments." Id. at 853, 95 S.Ct. at 2061. However interested some of defendants' investors may have been in acquiring one acre of "prime" land, this was accurately described by defendants themselves as a "bonus." Even if more substantial than a bonus, Forman's crucial word was "solely." ⁵

Next, defendants assert that even if their loan plans are securities, special circumstances permit them to claim First Amendment protection. They cannot, of course contend that, like the sale of religious pamphlets by Jehovah's Witnesses, Murdock v. Pennsylvania, 1943, 319 U.S. 105, 63 S.Ct. 870, 87 L.Ed. 1292, the sale of their loan plans is part of their religious creed. However, they seek the same result by their brief's claiming First Amendment application where "the 'investor' also, in effect, subscribes to religious 'articles of faith.' " (Emphasis in orig.) There are two fatal flaws.

In the first place, defendants' solicitations are made to the general public. While they particularly address "believers," the appeals contain no restrictions as to the investor's faith or beliefs, nor is there any requirement of an affirmation thereof upon acceptance. That the secular are intended is made clear even with respect to Land Plan participation, which defendants now seek to regard only in terms of a "religious community." The advertisement speaks of,

"(m)en and women . . . 'fleeing' the frustrating, harried metropolitan life, . . . the mobs and the traffic jams, . . . the crime and the grime, . . . running back to more natural, country living,"

and then goes on to add,

"Of course there are those who want to come for other reasons, . . . to worship in Dayspring Cathedral where (Rev. White) is pastor."

One searches the record in vain for any obligation of conversion on the part of those merely longing for country living. We mention, only to reject as plainly insufficient, Rev. White's oral testimony that on occasion he rejected applications from persons he believed to be speculators. Whatever may have been the religious beliefs of some investors, the only universal "articles of faith" that could be thought common to every subscriber was faith that he was being told the truth.

The inclusion of the general public is a sufficient answer to defendants' attempt to claim the sweep of the First Amendment, but their claim would fail even if defendants, in fact, dealt only with believers. We may accept, for present purposes, their contention, allegedly supported by Scripture, that loans under some circumstances might be considered as essentially contributions. ⁶ Parishioners who are deeply motivated may well "lend" to their church with no real expectation of recovery. However, that is not this case. Defendants' appeals uniformly stress the security of the investment, as well as their recognition of the need of their investors for a steady income. This is not even a case where generous believers lend to their church at nominal, or no, interest a 12% figure suggests defendants' investors are moved by something more than a donative spirit. (Alternatively, if it be said that their need for current income does not permit them to take less, this is an answer to defendants' claim, post, that they are adequately protected, if the venture fails, by their eventual share in liquidation.)

As to the investors' need for regular income, we quote from a Loan Plan advertisement.

"Many Christians longed to help in God's work, but they . . . had to have income from their principal to live! So they left their money in banks or bought stock. . . . (W)e offer . . . an alternative which enables concerned men and women to use their substance in the Lord's work and still draw necessary income." (Emphasis in orig.)

As to security, the same advertisement, bearing the headline "While The World's Economy Staggers Weakly God's Economy Is Stronger Than Ever! " (Emphasis in orig.) points to "Bank References" and "Solid Backing," and states,

"You may be a Christian who has committed his life into the hands of God, but left his funds in the hands of a floundering world economy. Financial experts everywhere are predicting a disaster in the economy. They say it is only a matter of time. . . . God's economy does not sink when the world's economy hits a reef and submerges! Wouldn't it be wise to invest in His economy?"

"Many believers investigated this loan plan opportunity to invest in God's economy. (They thoroughly investigated ), checking into our assets, our bank and credit references and analyzing our ability to meet our obligation. Having been satisfied regarding these matters, a sizable number of practical, level-headed businessmen and women withdrew funds from banks, or sold stocks and invested them in our Christian loan plan." (Emphasis in orig.)

The fact that the investors may also have had religious motives is irrelevant. As the Court said in SEC v. C. M. Joiner Leasing Corp., 1943, 320 U.S. 344, at 352-53, 64 S.Ct. 120, 124, 88 L.Ed. 88, concerning the reach of the term "securities" in the federal acts,

"The test . . . 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."

Manifestly the reader would take ...