SEC v. National Executive Planners, Ltd.

• Decision Date: 05 December 1980
• Docket Number: No. C-78-590-G.,C-78-590-G.
• Citation: 503 F. Supp. 1066
• Court: U.S. District Court — Middle District of North Carolina
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. NATIONAL EXECUTIVE PLANNERS, LTD., et al., Defendants.

503 F. Supp. 1066

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. NATIONAL EXECUTIVE PLANNERS, LTD., et al., Defendants.

No. C-78-590-G.

United States District Court, M. D. North Carolina, Greensboro Division.

December 5, 1980.

COPYRIGHT MATERIAL OMITTED

Pamela Beghel Threadgill, John M. Kelly and Joseph L. Grant, Atlanta, Ga., for plaintiff.

William L. Daisy and Donald T. Bogan, Greensboro, N. C., for defendants National Executive Planners, Dan King Brainard, Richard O. White and Barry Eugene Weed.

Eric P. Handler, Greensboro, N. C., and Joel A. Haber, Chicago, Ill., for Sheldon Moss, Individually and D/B/A Television Marketing and Correlated Equities Corp.

MEMORANDUM OPINION AND ORDER

GORDON, Chief Judge.

This case was noticed for hearing on October 27, 1980, in the United States Courthouse, Greensboro, North Carolina. Pursuant to the notice, the motion of the plaintiff Securities and Exchange Commission ("SEC") for partial summary judgment against National Executive Planners, Ltd. ("NEP") and five individual defendants was heard. Having considered the oral arguments, the briefs and affidavits thereto, and the discovery materials of record, the Court concludes that the motion should be granted for Count One, Count Two, and Count Four of the Amended Complaint, and denied for Count Three, Count Five, and Count Six.

I. BACKGROUND

On November 27, 1978, the SEC filed a complaint which sought equitable relief against the defendants NEP; Sheldon Moss, individually, and doing business as Television Marketing ("TVM"); Correlated Equities Corporation ("CEC"); Dan King Brainard; Roy Heybrock; William H. Cain; and Richard O. White. On January 22, 1979, the defendants Moss and CEC consented to a permanent injunction and disgorgement order requiring them to pay four million five hundred thousand dollars ($4,500,000.00) into the Registry of this Court.¹ On March 20, 1979, the SEC amended its complaint to include Barry Eugene Weed as a defendant. When the original complaint was filed, the then-named defendants consented, without admitting or denying the allegations, to the entry of preliminary injunctions. By this motion, the SEC seeks permanent injunctive relief and disgorgement orders against all defendants except Moss and CEC. These remaining defendants are NEP, a North Carolina corporation engaged in the business of rendering personal services to clients who seek advice on investment planning, including insurance, avoidance of tax payments, and investment savings; Brainard, the president of NEP; and Heybrock, Cain, White, and Weed, all vice presidents of NEP (all remaining defendants are collectively hereinafter the "NEP defendants").

The plaintiff's motion for partial summary judgment was supported by affidavits, which are supplemented by a voluminous amount of discovery in both this and a companion class action case. See Simkins v. National Executive Planners, Ltd., No. C-78-591-G (filed in the Middle District of North Carolina on the same day as the instant case, November 27, 1978). Moreover, the plaintiff served the NEP defendants with 82 Requests for Admission on August 27, 1979. The NEP defendants have failed to respond to the Requests for Admission in any fashion. Under Fed.R. Civ.P. 36, those matters thus are admitted for the purpose of the pending action, and are deemed to be established conclusively.² The NEP defendants have not supported their response to the SEC's motion for partial summary judgment by affidavits or by citation to the discovery materials of record as required by Fed.R.Civ.P. 56(e). Rather, they resist summary judgment on the grounds that (1) the TVM instruments which investors purchased from the NEP defendants were not "securities"; and (2) the facts considered in the light most favorable to the defendants do not establish scienter on the part of the NEP defendants. The Court first will discuss why it considers the TVM instruments to be securities, and then will discuss the scienter issue as it applies to each of the six counts of the complaint.

II. STATUS OF TVM INSTRUMENTS AS SECURITIES

The TVM instruments were a type of investment, often represented as an investment in commercial paper, for which the NEP salesmen solicited investors from 1974 through 1978. The company known as Television Marketing was represented to be engaged in the business of marketing household specialty products. The products supposedly were sold in Sears and other chain stores. Television Marketing purportedly stimulated sales of its products by saturating the airwaves with television commercials in a given locality. The products then were supposedly delivered to the chain retail outlets, who allegedly did not pay for them promptly. The investors were told that the product they were buying was commercial paper, that Television Marketing was borrowing money from the investor against the money owed to TVM by the chain store, and that TVM assigned to each investor an account receivable from a chain store in an amount twenty per cent greater than the amount of the investment and recorded the assignment pursuant to the Uniform Commercial Code with the Secretary of State of Illinois. These representations were false. The investment also was represented falsely to the investors to be as sound as the corporations buying the products from TVM. The interest rate on the TVM instruments ranged up to 13.5 per cent, and money could be invested in terms from one to three years. Investors received monthly "interest" checks from TVM up until the fall of 1978. In reality, TVM was not a viable corporation engaged in any commercial activity remotely resembling that outlined above. Television Marketing and CEC were entities controlled by Sheldon Moss, both had the same Chicago address at times, during 1978 both entities shared a joint checking account, and at times TVM was represented to be a division of CEC. Some of the money invested by clients of NEP was retained by NEP, and the rest of the money was used by Moss in various corporations and enterprises, including paying the "interest" by checks to prior investors in TVM. Both Moss and CEC had been enjoined on September 27, 1972, from further violating securities registration laws and antifraud provisions of the federal securities laws.

The plaintiff SEC asserts that the TVM instruments are "evidences of indebtedness", and are thus within the definition of a "security" as defined in the Securities Act of 1933 ("1933 Act"). 15 U.S.C. § 77b(1). It is further the SEC's position that though "evidences of indebtedness" does not appear in the definition section of the Securities Exchange Act of 1934 ("1934 Act"), it falls within the ambit of the 1934 Act as well because, by virtue of inclusion in the 1933 Act, evidences of indebtedness were "instruments commonly known as ... `securities'" by the framers of the 1934 Act. 15 U.S.C. § 78c(a)(10). This argument for inclusion within the 1934 Act, though persuasive, is not entirely convincing to the Court because most of the rest of the definition section of "security" in the 1934 Act is a word-for-word repetition of the definition section of "security" in the 1933 Act. Indeed, "evidences of indebtedness" might be said to be conspicuous by its absence in the 1934 Act. See Zeller v. Boque Electric Mfg. Corp., 476 F.2d 795, 800 (2d Cir.), cert. denied, 414 U.S. 908, 94 S.Ct. 217, 38 L.Ed.2d 146 (1973).

The Supreme Court has said, however, that the absence of the term "evidences of indebtedness" from the definition in the 1934 Act does not assume controlling significance when other descriptive terms in the 1934 Act cover the instruments at issue, and when the relationship with the enterprise was an investment relationship, rather than a true debtor-creditor relationship. Tcherepnin v. Knight, 389 U.S. 332, 342-44, 88 S.Ct. 548, 556-557, 19 L.Ed.2d 564 (1967). The Fifth Circuit in SEC v. Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974), pointed out that many courts have found the "commercial-investment dichotomy" in the statutory definition of "notes" in both the 1933 and 1934 Acts to be crucial in determining whether certain short-term notes are exempted from the registration requirements of the 1933 Act and exempted altogether from the 1934 Act. 497 F.2d at 523-24. It is likely that the TVM instruments are "evidences of indebtedness", and that they are covered by both the 1933 and the 1934 Acts. Clearly, however, the "lending" of money from investors to TVM was not an ordinary commercial transaction; it was an investment transaction, and it was characterized that way to prospective investors by the individual NEP defendants. Because it was an investment transaction, the Court bases its holding that the TVM instruments were securities on its conclusion that the transaction of "lending" money to TVM was an investment contract.³

"The Supreme Court has repeatedly reminded that securities legislation is to be construed `not technically and restrictively, but flexibly to effectuate its remedial purposes.'" SEC v. Haffenden-Rimar International, Inc., 496 F.2d 1192, 1193 (4th Cir. 1974). In Haffenden-Rimar, the Fourth Circuit affirmed and adopted the memorandum opinion of Judge Oren R. Lewis in which he stated:

"The Securities Act clearly reaches any novel, uncommon or irregular device, whatever it appears to be, if it be proved as a matter of fact that it was widely offered or dealt in under terms or courses of dealing which established its character in commerce as an investment contract or as any interest or instrument commonly known as a security. The Supreme Court of the United States has so stated in S.E.C. v. C. M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943)."

362 F.Supp. 323, 326 (E.D.Va.1973).

The fraud that was perpetrated on the investors in TVM is one that both the 1933 and 1934 Acts were designed to prevent. If a bank or other commercial lending institution had been "lending" money...