SEC v. Pinckney

• Decision Date: 24 April 1996
• Docket Number: No. 7:95-CV-122-BR-1.,7:95-CV-122-BR-1.
• Citation: 923 F. Supp. 76
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Jerome E. PINCKNEY, et al., Defendants.

923 F. Supp. 76

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Jerome E. PINCKNEY, et al., Defendants.

No. 7:95-CV-122-BR-1.

United States District Court, E.D. North Carolina, Southern Division.

April 24, 1996.

COPYRIGHT MATERIAL OMITTED

Edward G. Sullivan, Peter J. Luiso, U.S. Securities & Exchange Commission, Atlanta, GA, for S.E.C.

Auley McRae Crouch, III, Wilmington, NC, for Jerome E. Pinckney.

Robert A. Singer, Brooks, Pierce, McLendon, Humphrey & Leonard, Greensboro, NC, for Richard L. Arnold.

Richard L. Arnold, Raleigh, NC, pro se.

Donald E. Elder, Hilton Head, SC, pro se.

Shaun K.R. Maxwell, Napa, CA, pro se.

Anthony Bukovich, Jr., Tampa, FL, pro se.

ORDER

BRITT, District Judge.

Before the court are the motions to dismiss of defendants Pinckney and Arnold. Plaintiff Securities and Exchange Commission ("SEC") responded, and Pinckney replied. This matter is thus ripe for disposition.

I. FACTS

Two allegedly fraudulent schemes form the basis of the complaint. Each scheme involved purported investment in "prime bank instruments." These instruments are represented as bank letters of credit or bank guarantees, the trading of which generates profits. According to the SEC, "prime bank instruments" are nonexistent, and the investor's money disappears through the use of a limited power of attorney.

The alleged scheme at issue here¹ revolved around a prospective investor, Lanny Wilson of Wilmington. In April 1994, defendant Pinckney, a licensed securities broker at Wheat First Butcher Singer in Wilmington, became aware of an investment program through Ralph Serrapede, the husband of one of his clients; Serrapede placed defendant Arnold, who operates Atlantic Financial Group, Inc. in Raleigh, in contact with Pinckney. Pinckney in turn contacted his neighbor, attorney Gary Shipman, about this program.

With this particular program, the purported investment would yield a 9% return per week, guaranteed by a "top five U.S. bank," resulting in no risk. The investor would submit a letter of intent, indicating sufficient net worth. Then, the investor would travel to New York City to meet with the bank officials, at which time greater details of the program would be revealed. If the investor "found everything in order," the investor would deposit $10 million in the bank and receive the bank's guarantee.

Soon after Pinckney's initial contact with Shipman, Pinckney and Arnold met with Shipman, Shipman's partner Gary Rhine, and Lanny Wilson. The SEC claims that during this meeting Pinckney and Arnold made certain representations about the investment program. Allegedly, Arnold further stated that he had worked for years with defendant Elder, the principal of the company which traded "prime bank instruments." After this meeting, Arnold faxed a description of the program and specimen documents, similar to those Wilson would be required to execute in New York.

Wilson and attorneys Shipman and Rhine thereafter contacted Elder, who has been in the banking business for the past thirty years. Elder made the same representations about the investment program as Pinckney and Arnold and also represented that he had several clients participating in such programs. Elder then referred Wilson, Shipman, and Rhine to defendant Cruz, a certified financial planner in New Jersey. Subsequently, a conference call occurred between Wilson, Shipman, Rhine, Pinckney, and Cruz. During this call, Cruz purportedly made the same representations about the program as the other defendants and later referred Wilson, Shipman, and Rhine to defendant Maxwell, who operates ALP Financial Services in the state of Washington. The SEC argues that Maxwell made the same misrepresentations as the others with two exceptions: that a major U.S. trust, not a bank, would guarantee the investment and that the investor's funds would be at risk forty-eight hours. Ultimately, Wilson chose not to invest in the program after having been informed by the Office of the Comptroller of the Currency that such investment programs were fraudulent or otherwise disreputable.

II. DISCUSSION

Both defendants have moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) and (6). In a situation such as the one before the court, where the existence of a "security" for purposes of the Securities Act of 1933 ("the Act") is contested, dismissal for lack of jurisdiction is not appropriate. See Rivanna Trawlers Unlimited v. Thompson Trawlers, Inc., 840 F.2d 236, 239 (4th Cir.1988). Rather, the court should accept jurisdiction and deal with the objection as an attack on the merits, unless the federal claims asserted by the plaintiff are immaterial or insubstantial. Id. The claimed violations of the Act are neither immaterial nor insubstantial. Accordingly, the court treats the instant motions as motions to dismiss for failure to state a claim. However, as Pinckney has presented matters outside the pleadings and Arnold has referred to matters outside the pleadings, the instant motions are converted to summary judgment motions.² See Fed. R.Civ.P. 12(b).

Summary judgment is appropriate if the court is satisfied that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The Fourth Circuit has articulated the summary judgment standard as follows:

A genuine issue exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). In considering a motion for summary judgment, the court is required to view the facts and draw reasonable inferences in a light most favorable to the nonmoving party. Id. at 255, 106 S.Ct. at 2514. The plaintiff is entitled to have the credibility of all his evidence presumed. Miller v. Leathers, 913 F.2d 1085, 1087 (4th Cir.1990), cert. denied, 498 U.S. 1109, 111 S.Ct. 1018, 112 L.Ed.2d 1100 (1991). The party seeking summary judgment has the initial burden to show the absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986). The opposing party must demonstrate that a triable issue of fact exists; he may not rest on mere allegations or denials. Anderson, 477 U.S. at 248, 106 S.Ct. at 2510. A mere scintilla of evidence supporting the case is insufficient. Id.

Patterson v. McLean Credit Union, 39 F.3d 515, 518 (4th Cir.1994) (quoting Shaw v. Stroud, 13 F.3d 791, 798 (4th Cir.1994)).

The SEC alleges defendants violated § 17(a) of the Act, 15 U.S.C. § 77q(a), which makes its unlawful to use fraudulent practices and misrepresentations or omissions in connection with the offer, sale, or purchase of any security.³ Although this anti-fraud provision "must be construed flexibly to achieve its remedial purposes," Malamphy v. Real-Tex Enters., Inc., 527 F.2d 978, 980 (4th Cir.1975); see also Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967), "it is also important to bear in mind that Congress, in enacting the securities laws, did not intend to provide a federal remedy for all common law fraud," Rivanna Trawlers Unlimited, 840 F.2d at 241.

A. Security

Defendants' primary argument for summary judgment focuses on whether the prime bank instrument allegedly offered to the investor, Wilson, constitutes a security under the Act. The Act's broad definition of "security" includes notes, stocks, bonds, and investment contracts. See 15 U.S.C. § 77b. In determining whether a particular investment falls within this definition, one must look to the substance, rather than the form, of the transaction, and "the emphasis should be on economic reality." Tcherepnin, 389 U.S. at 336, 88 S.Ct. at 553. Also, the court examines the promoters' representations to determine whether the promoters were representing the investor's interest to be a security. See SEC v. United Benefit Life Ins. Co., 387 U.S. 202, 211, 87 S.Ct. 1557, 1562, 18 L.Ed.2d 673 (1967). In this case, the SEC contends that what defendants represented, a prime bank instrument, is an investment contract.

In the seminal case of SEC v. W.J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244 (1946), the Supreme Court defined an investment contract as: "(i) an investment of money (ii) in a common enterprise (iii) with an expectation of profits garnered `solely' from the efforts of others." Teague v. Bakker, 35 F.3d 978, 986 (4th Cir.1994), cert. denied, ___ U.S. ___, 115 S.Ct. 1107, 130 L.Ed.2d 1073 (1995). As defendants dispute whether all prongs are met, the court will examine each prong in turn.

The first prong need not detain the court long. "An `investment of money' means only that the investor must commit his assets to the enterprise in such a manner as to subject himself to financial loss." Hector v. Wiens, 533 F.2d 429, 432 (9th Cir. 1976). Arnold argues that because Wilson's funds would be deposited in a bank account under his sole control and guaranteed by the bank, his funds were not placed at risk and thus he could suffer no loss. In support of this contention, Arnold points to the specimen documents provided to Rhine and Shipman, (see Pl.'s Mem.Supp.Prelim.Inj. Ex. 2 at 8-0005 to 8-0006), and the testimony of Rhine, (see id. Ex. 1). These documents and the testimony do indicate that it was represented that the investor would be in a "no lose" situation. However, the SEC alleges that such representations were false and form the entire basis for the instant action. According to the SEC, the investor's funds would disappear through the use of a limited power of attorney. There is evidence, in the documents that Arnold faxed to Rhine and Shipman, that Wilson would be required to execute a limited power of attorney. (See id. Ex. 2 at 8-0006.) Also, there is evidence that, although Arnold represented Wilson's funds would be under his (Wilson's) control, Arnold stated...