Sauer v. Hays, 73--315

• Decision Date: 24 June 1975
• Docket Number: No. 73--315,73--315
• Citation: 36 Colo.App. 190,539 P.2d 1343
• Parties: , Blue Sky L. Rep. P 71,218 John R. SAUER and Master Industries, Inc., a Colorado Corporation, Plaintiffs-Appellants, v. Stanley R. HAYS, Securities Commissioner of State of Colorado, et al., Defendants-Appellees. . III
• Court: Colorado Court of Appeals

Page 1343

539 P.2d 1343

36 Colo.App. 190, Blue Sky L. Rep. P 71,218

John R. SAUER and Master Industries, Inc., a Colorado Corporation, Plaintiffs-Appellants, v. Stanley R. HAYS, Securities Commissioner of State of Colorado, et al., Defendants-Appellees.

No. 73--315.

Colorado Court of Appeals, Div. III.

June 24, 1975.

Rehearing Denied July 29, 1975.

Morrato, Gueck & Colantuno, P.C., Jay L. Gueck, Denver, for plaintiffs-appellants.

John P. Moore, Atty. Gen., Irvin M. Kent, Asst. Atty. Gen., Andrew A. Markus, Asst. Atty. Gen., Denver, for defendants-appellees.

BERMAN, Judge.

Master Industries and its president, John R. Sauer, commenced this action in the Denver District Court against defendants, the State of Colorado Division of Securities and its commissioner, Stanley R. Hays (Commissioner), seeking a declaratory judgment that the plaintiffs' activities did not violate the Colorado Securities Act, § 11--51--101 et seq., C.R.S.1973 (C.R.S.1963, 125--1--1 et seq.), and further to enjoin the Commissioner from making detrimental statements to the public regarding their activities. The Commissioner filed a cross-complaint and motion seeking a preliminary and a permanent injunction prohibiting Master Industries from selling or offering to sell its distributorships in the State of Colorado until such time as the company complied with the registration and other provisions of the Colorado Securities Act.

After an extensive evidentiary hearing, a judgment was entered permanently enjoining Master Industries, Inc., and its officers and agents from selling or offering to sell Master Industries' distributorships in Colorado until such time as the company may have complied with the registration and other provisions of the Colorado Securities Act or until further order of the court. This appeal followed.

The sole issue for determination is whether the trial court erred, as a matter of law, in holding that Master Industries' sale of its distributorships constituted the sale of a security as that term is defined in § 11--51--102(12), C.R.S.1973 (C.R.S.1963, 125--1--12(12)). We affirm the judgment.

In holding that Master Industries was engaged in the sale of a security, the trial court made numerous findings of fact based on voluminous testimony and numerous exhibits. We will not present a detailed recapitulation of these findings since we are not at liberty to disturb the trial court's findings, inferences, and factual conclusions when, as here, they are supported by the evidence. Broncucia v. McGee, 173 Colo. 22, 475 P.2d 336; Aetna Casualty & Surety Co. v. Kornbluth, 28 Colo.App. 194, 471 P.2d 609.

Master Industries, Inc., is engaged in the production and sale of motivational courses consisting of printed material, tape recordings, and, in some instances, visual aids. The courses are marketed to the public through the sale of distributorships. In order to attract potential distributors, various ads are placed in local and national newspapers and magazines requesting interested persons to return a prepared questionnaire for 'further facts' to the company's home office in Englewood, Colorado. After the questionnaire is received at the home office, contact is made with the inquirer by a salesman of the home office staff whose primary task is to secure the inquirer's attendance at a seminar in Denver, at the inquirer's own expense, in order to learn of opportunities to go into business for himself. To induce persons to attend the seminar, the salesman from the home office is provided with a company manual detailing proper techniques and, in some instances, providing model conversations.

When the inquirer, now a guest, arrives in Denver, he is met at the airport by the salesman whose task then becomes that of making a 'good impression.' The salesman is admonished, by the company manual, to 'look sharp,' to 'program (his) mind with the fantastic opportunity and the exciting events' about to take place for the guest, and immediately to take and 'maintain control' of the guest by emphasizing to the guest that he was 'born to be great.' The salesman is given tips on shaking hands, taking luggage, and seating the guest in the car or limousine for transportation via 'the most scenic route' to the seminar.

Upon arrival at the seminar, the guest is registered and given a name tag and ushered to the main auditorium. The salesman is admonished to 'smile,' 'be outgoing,' and to 'ask closing questions all day long!' The seminar itself consists initially of the guest completing an application answering specific questions about financial status and monies available for investment. The guest then views slides showing examples of the prestige and wealth which may become his, and he is subjected to a barrage of prepared testimonials from salesmen and distributors stressing the great personal and financial rewards obtained from their experiences with the company. The president, John Sauer, also makes a presentation on income projection, using the multiple ten as a base.

Upon completing the seminar, the guest is escorted to the salesman's office for closing the sale of a distributorship. By the purchase of a distributorship, the guest becomes a 'market distributor,' that is, he obtains the right to sell at retail to the public only. Alternatively, the guest may be recruited directly to the home office staff as a 'market development director.' The primary duty of a 'market development director' is the recruiting of persons for distributorships and for the home office staff. When the sale of a distributorship is made, the guest signs a 'wholesale merchandise distribution agreement' and pays $2,500 for the marketing right, I.e., the right to buy any one of our product lines at wholesale from the company and to sell at retail to he public. In addition, the guest completes a purchase order form for the inventory of the products for which he has purchased the marketing right, at a cost of an additional $2,500. For $2,500 more, the 'Manpower Training Academy' program can be purchased. This program is designed to teach distributors how to effectively market the material purchased. After payment of the necessary money, which often involves financing arranged with the help of the company, the guest, now a 'market distributor,' is entitled to sell the materials purchased directly to the public at retail at 50% Above the wholesale price paid by the distributor.

After closing the sale, the salesman receives a commission of 7% Of the amount collected from the now-enrolled distributor, or if assistance was required in closing the sale, the commission becomes 'back-to-back,' that is, an equal division of the commission to the salesman and the person assisting him.

Those persons who join the home office staff, either from the distributor ranks or as a new recruit, become part of the 'Expansion Department.' At the lowest level are the 'Expansion Directors' or 'Market Development Directors' who receive a commission of 14% On the price of the distributorships sold. At the next level are 'Group Vice Presidents,' who manage one to seven expansion directors and receive a 17% Commission on distributorships sold and, in addition, a 3% 'override' on their team's production on a monthly basis; at the next level are the 'Vice Presidents of Expansion,' who receive a 20% Commission and an additional 3% Override. Advancement from one level to the next is based on quota sales in dollar amounts. Demotions are based on nonproduction of sales of distributorships.

The executive hierarchy consists of the president, John Sauer, the senior vice president, who is also vice president of the 'Marketing Department,' and the executive vice president. These three executives as employees of the company receive commissions of 19% Of all marketing rights plus 19% Of the initial inventory acquired by a new distributor. They are entitled to a monthly 'draw' of $2,500 against commissions and overrides, not to exceed $5,000 at any one time. The management and control of the company is the sole responsibility of the president.

The Colorado Securities Act provides in relevant part as follows:

'It is unlawful for any person to offer or sell any security in this state unless it is registered under this article or unless the security or transaction is exempted under section 11--51--114.' Section 11--51--106, C.R.S.1973.

"Security' means any note; stock; treasury stock; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement; collateral-trust certificate; preorganization certificate of subscription; transferable share; investment contract . . . or, in general, any interest or instrument commonly known as a 'security' . . ..' Section 11--51--102(12), C.R.S.1973.

The trial court did not specifically find that Master Industries' activities constituted any of these forms of security; it found only that 'the sale of Master Industries, Inc., of its distributorships constitutes the sale of a security as that term is defined in (§ 11--51--102(12), C.R.S.1973) C.R.S.1963, 125--1--12(12).' Our analysis below leads us to the conclusion that plaintiffs' sales scheme constituted an 'investment contract.'

The Colorado Securities Act parallels the federal Securities Act of 1933 and the Securities and Exchange Act of 1934, as do the acts of most states. While there is no precedent in our jurisdiction construing Colorado's Act, there are numerous state and federal decisions which have interpreted the term 'security' as defined in the federal acts. We are guided, therefore, in our determination here by the letter and spirit of these cases.

In S.E.C. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244, the Supreme Court defined the term investment contract as follows:

'(A)n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise...