Securities and Exchange Com'n v. Timetrust, Inc.

• Citation: 28 F. Supp. 34
• Decision Date: 10 June 1939
• Docket Number: No. 21180.,21180.
• Parties: SECURITIES AND EXCHANGE COMMISSION v. TIMETRUST, Inc., et al.
• Court: U.S. District Court — Northern District of California

28 F. Supp. 34

SECURITIES AND EXCHANGE COMMISSION v. TIMETRUST, Inc., et al.

No. 21180.

District Court, N. D. California, S. D.

June 10, 1939.

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Chester T. Lane and O. John Rogge, both of Washington, D. C., Howard A. Judy and E. Forrest Tancer, both of San Francisco, Cal., Sam Harris, of Washington, D. C., John G. Sobieski and Roger Kent, both of San Francisco, Cal., and Herbert B. Cohn, of Washington, D. C., for plaintiff.

John L. McNab, of San Francisco, Cal., for defendant John M. Grant.

Dreher, McClellan & McCarthy, of San Francisco, Cal., for defendant A. P. Giannini.

Theodore M. Stuart, of San Francisco, Cal., for defendant L. Mario Giannini.

Keyes & Erskine, of San Francisco, Cal., for defendant Bank of America Nat. Trust & Savings Ass'n.

Gumpert & Mazzera, of Stockton, Cal., and Bacigalupi, Elkus & Salinger, of San Francisco, Cal., for defendants Timetrust, Inc., Meredith Parker, Ralph W. Wood, and H. E. Blanchett.

ST. SURE, District Judge.

Plaintiff seeks to enjoin defendants from violating Sec. 17(a) of the Securities Act of 1933, as amended.¹ The complaint is filed pursuant to Sec. 20(b),² and jurisdiction is conferred by Sec. 22(a) of the Act.³

The theory of the Commission's complaint is that defendants Timetrust, Incorporated, Meredith Parker, Ralph W. Wood, and H. E. Blanchett have engaged, and unless enjoined, will continue to engage in activities which are in violation of Sec. 17(a), paragraph (2),⁴ an antifraud provision of the Act, and that defendants Bank of America, A. P. Giannini, L. Mario Giannini, and John M. Grant have aided and abetted and participated in, and unless restrained, will continue to aid and abet and participate in such violations by Timetrust, Parker, Wood, and Blanchett. The complaint does not seek to enjoin any further sale of securities by the defendants; the prayer is that the defendants, in the sale of securities by the use of the mails, be enjoined from engaging in acts and practices which constitute a violation of Sec. 17(a).

The complaint alleges that Timetrust was organized in the state of California for the following purposes, among others: To aid in the widespread sale and distribution of Bank of America stock owned or to be acquired by Transamerica Corporation and its subsidiaries and affiliates; to create a constant and ever-increasing interest in and demand for Bank of America stock, thereby stimulating market activity and supporting and increasing the market price of the stock; to effect the placement of Bank of America stock among members of the public.⁵

On July 26, 1938, Timetrust applied to the California Division of Corporations for permission to issue to defendant Parker 250 shares of common stock at $200 per share, and to offer $5,000,000 face amount of Timetrust certificates to the public, which was granted. Such applications are required only when the applicant desires to sell "securities" as that term is defined in the California Securities Act.⁶

Paragraph VII of the complaint charges that, to effect the purposes set out in Paragraph VI, the defendants, in the sale of Timetrust certificates and Bank of America stock by use of the mails, "employed and now are employing a device, scheme, and artifice to defraud the purchasers of such securities." Further allegations give in some detail the manner in which the mechanics of the Timetrust plan have been designed to resemble as closely as possible the operation of a savings bank account "in furtherance of said device, scheme, and artifice to defraud, and to delude and deceive unwary and financially inexperienced persons."

Paragraph VIII charges that the defendants, in the sale of Timetrust certificates and Bank of America stock by the use of the mails, have obtained money and property by means of material misstatements and omissions, and sets out fifteen specific and material representations which defendants are charged with having made or caused to be made in the sale of such securities, and which representations, it is alleged, were false and fraudulent.

The complaint further alleges that the advantages to the investor of this somewhat complicated investment plan are represented by Timetrust, Incorporated, to be: That by "dollar averaging" purchasers can be assured that their payments of equal sums invested periodically in a security with a fluctuating price will buy more shares at lower prices than at higher prices, with the result that the average per share cost of acquisition over a period of years will be lower than the average market price of the securities during the same period; that greater investment efficiency results from a large fund, created by intermingling the funds of many people; that it will enable the purchase of Bank of America stock by the trustee at lower prices than those obtainable by an individual investor; and that there is the prospect of large dividend returns and market appreciation from Bank of America stock.

Each of the several defendants has moved to dismiss, for a more definite statement or bill of particulars, and to strike from the complaint redundant and immaterial matter.

First. The initial contention of defendants is that Timetrust certificates are not securities within the definition of the Securities Act of 1933.⁷ Defendants cite but a single case as supporting their contention,⁸ a documentary stamp case arising under a statute unrelated to any securities legislation, which is not in point.

Defendants concede that "If a Timetrust certificate constitutes a security, the transactions complained of would involve sales of such security within the meaning of the act."⁹

As shown by the exhibit attached to the complaint, Timetrust certificates¹⁰ are engraved and printed by a banknote company, in form and appearance of stocks, bonds, and other securities.

Courts have refused to lay down a hard and fast rule as to what constitutes a security.¹¹ "It is better to determine in each instance whether a security is in fact of such a character as fairly to fall within the scope of the statute."¹²

Stripped to its essentials, Timetrust plan is the familiar one of selling bank stock with a promise of future income or profits. Or, as the Commission says, the plan is one "whereby through the device of what is called a `trust' and the issuance of a `trust' certificate the purchaser acquires the certificate and the interest it represents, i. e., Bank of America stock, on a periodic payment basis." The addition of the feature of a "separate and individual trust" under a "trust agreement," which defendants think removes the plan from the statutory definition of security is an attempt at camouflage which fails to hide the real purpose of the plan. "In determining whether or not a transaction involves the issuance of a security, the courts have repeatedly announced that it will look to the substance and not the form of the transaction."¹³

As the Commission points out, the instrument bears all of the indicia of a security.¹⁴ There is the relationship between a person receiving money and a person providing it, conferring upon the latter "a present right to a present or a future participation in either the income, profits or assets of a business carried on for profit"; the physical form and appearance of the instrument; general distribution in a common form to a comparatively large number of persons; transferability; limitations upon transferability or negotiability will not defeat identification of the instrument as security, but some provision for alienation is usually found therein; compliance with state securities laws; commingling of payments made, where contributions of many persons are pooled in the operation of the enterprise and administered as a unit by the issuer.

The administrative construction placed upon the Act by the Commission is entitled to great weight.¹⁵ "The ingenuity and fertility of resources of those dealers in securities who deliberately attempted to avoid" the application of the state blue-sky laws "supplied the background of experience against which this legislation was written"¹⁶ and has been administered. Since its organization, the Securities and Exchange Commission, and the Federal Trade Commission before it, provided for the registration of interests by appropriate rules and forms. Approximately seventeen issuers have availed themselves of the opportunity to issue several hundred interests similar to those represented by Timetrust Certificates.

The Commission points out that the Timetrust certificates fall squarely within several of the categories included in the definition of security,¹⁷ but it is necessary to notice only that of "investment contract." Obviously the instrument is a contract, and the laying out of money in a way intended to secure income or profit from its employment is an "investment" as that word is commonly used and understood.¹⁸

From what has been said it follows that Timetrust certificates are securities as defined by Sec. 2 of the Securities Act.

Second. Defendants next say that "the only attempt that the complaint makes to bring Timetrust, Inc., or any of the defendants within the operation of the Securities Act of 1933 is the allegation that the acts complained of involved `the use of the mails,'" and contend that Sec. 17 does not apply to the fraudulent sale of securities by use of the mails wholly within one state. They earnestly urge that in passing the Securities Act, Congress intended only to deal with interstate transactions; that when the Act of 1933 was passed, Sec. 5(c) granted free use of the mails to unregistered state corporations in intrastate business; that the provisions of Sec. 17 did not apply to such transactions; that Sec. 5(c) was repealed in 1934, Act June 6, 1934, § 204, 48 Stat. 906, when Sec. 3 was amended and there was added thereto paragraph (a) (11), 15 U.S.C.A. § 77c (a) (11); that since corporations like Timetrust were exempted from the provisions of ...