SEC v. American Bd. of Trade, Inc.

• Decision Date: 05 September 1984
• Docket Number: No. 83 Civ. 6213 (SWK).,83 Civ. 6213 (SWK).
• Citation: 593 F. Supp. 335
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. The AMERICAN BOARD OF TRADE, INC., Arthur N. Economou, Phyllis H. Economou, and the American Board of Trade Service Corp., Defendants.
• Court: U.S. District Court — Southern District of New York

593 F. Supp. 335

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. The AMERICAN BOARD OF TRADE, INC., Arthur N. Economou, Phyllis H. Economou, and the American Board of Trade Service Corp., Defendants.

No. 83 Civ. 6213 (SWK).

United States District Court, S.D. New York.

September 5, 1984.

COPYRIGHT MATERIAL OMITTED

Charles E.D. Padgett, New York City, for plaintiff S.E.C.

H. Spencer Kupferman, Brooklyn, N.Y., for American Bd. of Trade.

Jeffrey Tucker, New York City, for American Bd. of Trade and Mrs. Economou.

Arthur Economou pro se.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

Plaintiff, the Securities and Exchange Commission ("SEC"), has applied to this Court for a preliminary injunction enjoining the defendants from violating the securities laws. Specifically, the SEC alleges that the defendants, the American Board of Trade, Inc. ("ABT"), the American Board of Trade Service Corp. ("Service"), Arthur N. Economou ("Economou"), and Phyllis H. Economou ("P. Economou"), violated sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a) and 77e(c); sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77q(a)(1), 77q(a)(2) and 77q(a)(3); section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder; and section 7(a) of the Investment Company Act ("ICA"), 15 U.S.C. § 80a-7(a). For the reasons discussed below, the application is GRANTED.

BACKGROUND

The defendants, respectively, are a self-described alternative securities exchange, the service company which provides administrative service to the exchange, and two of the officers and controlling persons of the corporate defendants. The defendants have marketed two investment programs which are the focus of this action. The first program, the ABT U.S. Treasury Bill Program ("Bill Program"), offered investors the opportunity to invest in a pool of United States Treasury Bills by purchasing Safekeeping Receipts. The second program, the ABT Service Corporation Commercial Paper Program ("Commercial Paper Program"), offered investors the opportunity to purchase, at a discount from face value, short-term commercial paper issued in small denominations by Service to finance its operations.

The complaint alleges that both of these programs represented public offerings of securities, that neither program was registered as required by the Securities Act, that ABT was acting as an unregistered Investment Company, and that the solicitations of purchases for both programs were materially false and misleading in violation of the applicable provisions of the Securities Act, the Exchange Act and the Investment Company Act. I will deal with each of these allegations in the above order, after first outlining the requirements for issuance of a preliminary injunction on application of the SEC.

DISCUSSION

For a preliminary injunction to issue in a securities case, the SEC must demonstrate (a) a prima facie case that a violation of the securities law has occurred, and (b) a strong likelihood that a violation will occur again in the future. Securities and Exchange Commission v. Commonwealth Chemical Securities, Inc., 574 F.2d 90 (2d Cir.1978).

The SEC is empowered by section 20(b) of the Securities Act of 1933, 15 U.S.C. § 77t(b), Sections 21(d) and 21(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78u(d) and 78u(e), and section 42(e) of the Investment Company Act, 15 U.S.C. § 80a-41(e), in its discretion and "whenever it shall appear ... that any person is engaged or is about to engage in acts constituting a violation of any provision of (these) title(s) ..." to "bring an action in the proper district court of the United States ... to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond."

Before a preliminary injunction can issue, the SEC must demonstrate (a) a "strong prima facie case" of previous violations, and (b) "reasonable likelihood that the wrong will be repeated." Securities and Exchange Commission v. Management Dynamics, Inc., 515 F.2d 801, 807 (2d Cir.1975); Securities and Exchange Commission v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1100 (2d Cir.1972); Securities and Exchange Commission v. Keller Corp., 323 F.2d 397 (7th Cir.1963); Securities and Exchange Commission v. S & P National Corp., 360 F.2d 741, 747 (2d Cir.1966); Securities and Exchange Commission v. Keller Corp., 323 F.2d 397 (7th Cir.1963); Securities and Exchange Commission v. Boren, 283 F.2d 312, 313 (2d Cir.1960).

This Court has jurisdiction over such suits pursuant to section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a), sections 21(e) and 27 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78u(e) and 78aa, and section 44 of the Investment Company Act, 15 U.S.C. § 80a-43.

Venue is found in this court based on the fact that various of the acts which are alleged to constitute violations of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act occurred and are occurring within the Southern District of New York. 28 U.S.C. § 1391.

For purposes of the Securities Act, a "security" is defined in section 2(1), and has been expansively interpreted to include investment contracts where a person invests money in a common enterprise and is led to expect profits solely from the efforts of a third party, and evidences of indebtedness from one party to another. Securities and Exchange Commission v. W.J. Howey Co., 328 U.S. 293, 298-299, 66 S.Ct. 1100, 1102-1103, 90 L.Ed. 1244 (1946); Movielab, Inc. v. Berkey Photo, Inc., 452 F.2d 662 (2d Cir.1971). Specifically exempted from the definition of a security is "any security issued or guaranteed by the United States." Section 3(a)(2) of the Securities Act, 15 U.S.C. § 77c.

With respect to the registration of the two investment programs in question here, the SEC contends initially that both programs represent the offering of securities to the public. This argument has particular merit when applied to the Bill Program. That program is structured so that the actual owner of the Treasury Bills in question is ABT, not the investor. Rather, the investor receives a Safekeeping Receipt, which is little more than evidence that money has been remitted to ABT for a specific purpose. As such, the offerings under the Bill Program do not come within the ambit of the section 3(a)(2) exemption, and are clearly within the section 2(1) definition of a security.

Instruments which come within the section 2(1) definition of a security and are not otherwise exempted are required to be registered pursuant to section 6 of the Securities Act, 15 U.S.C. § 77f. Failure to register in and of itself is not a violation of the Securities Act. However, section 5, 15 U.S.C. § 77e, prohibits use of the mails or any "instruments of transportation or communication in interstate commerce" to promote or buy or sell any security which is not duly registered. It is uncontested that the interests of the investors in the Bill Program were not registered and were promoted and bought and sold using the mails and other means of transportation and communication in interstate commerce. Therefore, the SEC has made a prima facie showing that the Bill program violates sections 5(a) and 5(c).

With respect to the Commercial Paper Program, the determination whether the notes are securities is considerably less clear. Section 2(1) defines security to include any note. However, Section 3(a)(3), 15 U.S.C. § 77c(a)(3), exempts from the registration requirement of section 6,

any note, draft, bill of exchange, or banker's acceptance which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, of any renewal thereof the maturity of which is likewise limited.

Taken on its face, this exemption appears to cover any commercial paper issued for current transactions. However, the House of Representatives, in reporting on this section, which was ultimately enacted without amendment, explained that the section "exempts short-term paper of the type available for discount at a Federal Reserve Bank and of a type which rarely is bought by private investors." H.R.Rep. No. 85, 73d Cong., 1st Sess. 15 (1933).

This same House Report was also relied upon by the SEC in promulgating Securities Act Release No. 4412 (September 20, 1961) ("Release 4412"). Release 4412 further narrows the applicability of section 3(a)(3) to commercial paper which satisfies four criteria: (1) is of "prime" quality; (2) is used to finance current transactions; (3) is not offered to the public; and, (4) is discountable at a Federal Reserve Bank. There is no question that the ABT Commercial Paper is offered to the public, and therefore fails to meet one of the criteria of Release 4412. This Court is obliged to accord substantial weight to the interpretations by the SEC of section 3(a)(3). Zeller v. Bogue Electric Manufacturing Corp., 476 F.2d 795, 800 (2d Cir.), cert. denied, 414 U.S. 908, 94 S.Ct. 217, 38 L.Ed.2d 146 (1973).^*

However, "deference is not to be a device that emasculates the significance of judicial review. Judicial deference to an agency's interpretation of a statute only sets the framework for judicial analysis; it does not displace it" Securities Industry Association v. Board of Governors of the Federal Reserve System, ___ U.S. ___, ___, 104 S.Ct. 2979, 2983, 82 L.Ed.2d 107 (1984), citing United States v. Vogel Fertilizer Co., 455 U.S. 16, 24, 102 S.Ct. 821, 827, 70 L.Ed.2d 792 (1982), quoting United States v. Cartwright, 411 U.S. 546, 550, 93 S.Ct. 1713, 1716, 36 L.Ed.2d 528 (1973). Such judicial review of an agency interpretation must assess whether...