Securities and Exchange Com'n v. Sunbeam Gold M. Co.

• Decision Date: 21 March 1938
• Docket Number: No. 8637.,8637.
• Citation: 95 F.2d 699
• Parties: SECURITIES AND EXCHANGE COMMISSION v. SUNBEAM GOLD MINES CO. et al.
• Court: U.S. Court of Appeals — Ninth Circuit

95 F.2d 699 (1938)

SECURITIES AND EXCHANGE COMMISSION v. SUNBEAM GOLD MINES CO. et al.

No. 8637.

Circuit Court of Appeals, Ninth Circuit.

March 21, 1938.

Allen E. Throop, Gen. Counsel, and Thomas J. Lynch and Chester T. Lane, Assts. Gen. Counsel, all of Washington, D.C., and Day Karr, and James E. Newton, both of Seattle, Wash. (Francis Thornton Greene, of Washington, D. C., and Samuel H. Levy, of counsel), for appellant.

Frank Hale, of Tacoma, Wash., for appellees.

Before DENMAN, MATHEWS, and HEALY, Circuit Judges.

DENMAN, Circuit Judge.

This is an appeal by the Securities and Exchange Commission from an order denying a temporary injunction. The Commission brought a suit in equity against the defendant corporation seeking to enjoin it from an intended issue of securities without disclosing their character and registering them with the Commission pursuant to section 6 et seq., of the Securities Act of 1933, as amended, 15 U.S.C.A. § 77f et seq.

The facts are as alleged in the complaint and affidavits filed. They are not in dispute. The defendant Sunbeam Gold Mines Company is a Nevada corporation with stockholders in various states of the Union. Sometime prior to April, 1937, it entered into an agreement with another company, the Golden West Consolidated Mines, to purchase all the assets of the latter, subject to the approval of the stockholders of both companies.

This deal was subsequently approved by the stockholders of both companies. They gave their powers of attorney for the consolidation of the two companies, but this had not been accomplished when the bill was filed.

While the agreement was pending this approval, and on April 26, 1937, the defendant company issued through the mails a number of letters, 530 to be exact. Of the 530 recipients, 115 were stockholders of the defendant Sunbeam Company; 207 were stockholders of the Golden West Mines, and 208 were stockholders of both companies. These 530 people were scattered through various states.

The letters solicited pledge loan agreements from the stockholders for the purposes of completing the purchase by Sunbeam Company of the assets of the Golden West Mines and of raising enough money to register a contemplated new issue of stock with the Securities and Exchange Commission.

Upon signing the pledge loan agreement, the stockholder was to receive a "shareholder's receipt" — in effect a promissory note of Sunbeam Company — promising to repay the sum loaned with interest. The complaint alleges that the defendant proposes to send through the mails these shareholders' loan receipts to the 530 mixed stockholders of Sunbeam Company and Golden West Mines; that such a shareholders' loan receipt is a security within the meaning of the Securities Act, and hence is subject to registration with the Commission. The Commission brought this suit under section 20(a) of the act, 15 U.S.C.A. § 77t(a), authorizing injunctions against issuance of securities in violation of the act.

The court below, in denying an interlocutory injunction, held that the shareholders' loan receipt was a security within the meaning of the act, and that its distribution through the mails over state lines would make it subject to the required registration proceedings unless it came within the following exception stated in section 4(1) of the act, 15 U.S.C.A. § 77d(1), that the provisions of section 5, as amended, 15 U.S.C.A. § 77e, making unlawful the distribution of securities without registration:

"Shall not apply to any of the following transactions: * * *

"Transactions by an issuer not involving any public offering."

The court denied the injunction on the sole ground of its interpretation of this exception as meaning that such a distribution to stockholders did not involve a public offering. The language of its conclusion of law is: "The transactions by the defendants herein being solely with stockholders of Sunbeam Gold Mines Company and Golden West Consolidated Mines, all of said stockholders being stockholders of respondent company through merger of said corporations do not, irrespective of the number of said stockholders, involve a public offering within the meaning of section 4(1) of the Securities Act of 1933, as amended, and the plaintiff's application for preliminary injunction is therefore denied."

At the hearing here both parties agreed that the correctness of the conclusion of law last stated is the sole question involved in the appeal. They also agree that it is the sole question involved in the case itself, and that its decision will dispose of the entire litigation. Since the findings of fact are unquestioned and agreed to be a full statement of the case, and since they show no ground for the exercise of discretion, no presumption arises that the court otherwise properly exercised it in denying the injunction. We are therefore warranted in considering and disposing of the appellant's challenge of the lower court's conclusion of law. Cumberland Telephone & Telegraph Co. v. City of Memphis et al., 6 Cir., 200 F. 657, 658; Winchester Repeating Arms Co. v. Olmsted, 7 Cir., 203 F. 493, 494; National Picture Theatres, Inc. v. Foundation Film Corp., 2 Cir., 266 F. 208, 210; Wheeling & L. E. R. Co. v. Pittsburgh & W. V. R. Co., 6 Cir., 33 F.2d 390, 393, certiorari denied 280 U.S. 593, 50 S.Ct. 40, 74 L.Ed. 640. See, also, Hanover Star Mill Co. v. Allen & Wheeler Co., 7 Cir., 208 F. 513, 523, L.R.A.1916D, 136, and City of Covington, Ky. v. Cincinnati, N. & C. R. Co., 6 Cir., 71 F.2d 117, 119, certiorari denied 293 U.S. 612, 55 S.Ct. 142, 79 L.Ed. 702.

The purpose of the Securities Act is stated in its title to be: "To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof and for other purposes." 48 Stat. 74.

Sections 6, 7 and 8, 15 U.S.C.A. §§ 77f to 77h, contain the provisions for the "disclosure" of information as to the security to be offered which shall be available to those to whom the offer is to be made. Section 4(1) makes an exception of those "transactions by an issuer not involving any public offering." Being an exception from the general policy of the act, anyone claiming to be within its terms has the burden of proof that he belongs to the excepted class — that is, that his offer is not to the public. Schlemmer v. Buffalo R. & P. R. Co., 205 U.S. 1, 27 S.Ct. 407, 51 L.Ed. 681, and cases there cited.

Furthermore, the terms of such an exception to the "general policy" of the act must be "strictly construed" against the claimant of its benefit. Spokane & Inland R. Co. v. U. S., 241 U.S. 344, 350, 36 S.Ct. 668, 60 L.Ed. 1037.

The question here is, What was the Congress' intent when it required that the detailed information concerning the security should be made available to everyone considering its purchase, and then excepted transactions by an issuer not involving any "public" offering?

Appellees contend that the phrase "public offering" has but a single clear meaning, and that is in effect equivalent to an offer to everyone. Hence, it is claimed, a restriction of an offer to a particular group of persons, such as here the 323 stockholders of the...