U.S. Sec. & Exch. Comm'n v. Benger

• Decision Date: 28 March 2013
• Docket Number: No. 09 C 676.,09 C 676.
• Parties: UNITED STATES SECURITIES and EXCHANGE COMMISSION, Plaintiff, v. Stefan H. BENGER, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

934 F.Supp.2d 1008

UNITED STATES SECURITIES and EXCHANGE COMMISSION, Plaintiff,

v.Stefan H. BENGER, et al., Defendants.

No. 09 C 676.

United States District Court,

N.D. Illinois,

Eastern Division.

March 28, 2013.

Jonathan Stephen Polish, Daniel J. Hayes, Eric A. Celauro, John E. Birkenheier, John J. Sikora, Jr., Kent W. McAllister, U.S. Securities and Exchange Commission, Chicago, IL, for Plaintiff.

Howard J. Stein, Attorney at Law, Peter B. Shaeffer, Attorney at Law, Nancy L. Hendrickson, Hendrickson Law Firm, Philip Thomas Powers, Greenberg Traurig, LLP, James Arthur McGurk, Law Offices of James A. McGurk, P.C., Chicago, IL, for Defendant.

Jason B. Meyers, Chicago, IL, pro se.

Philip T. Powers, Chicago, IL, pro se.

MEMORANDUM OPINION AND ORDER

JEFFREY COLE, United States Magistrate Judge.

In an earlier Opinion, the motion of certain defendants for partial summary judgment was granted. U.S. S.E.C. v. Benger, 2013 WL 593952 (N.D.Ill.2013). This opinion will deal with Count V, which charges certain defendants with having acted as brokers or dealers in connection with the foreign sales of IBI stock, Benger, supra, without having been registered with the SEC pursuant to Section 15(a)(1) of the Securities and Exchange Act of 1934. 15 U.S.C. § 78 o(a)(1).¹ It is the defendants' contention that since their activities did not involve domestic sales of stock, they were not required to register under Section 15(a) of the Act. The argument is based on Morrison v. National Australia Bank Ltd., 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010), which held that § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b–5 were not intended to have extraterritorial effect to provide a cause of action in federal courts for fraudulent conduct in connection with the sale of foreign securities on foreign exchanges, even if part of the fraudulent activities occurred in the United States.²

The holding was based on the “ ‘longstanding principle of American law’ ” that, “unless a contrary intent appears, legislation of Congress is meant to apply only within the territorial jurisdiction of the United States.”:

This principle ... rests on the perception that Congress ordinarily legislates with respect to domestic, not foreign matters. Thus, ‘unless there is the affirmative intention of the Congress clearly expressed’ to give a statute extraterritorial effect, ‘we must presume it is primarily concerned with domestic conditions.’ The canon or presumption applies regardless of whether there is a risk of conflict between the American statute and a foreign law. Since Section 10(b) contained no clear indication of an extraterritorial application, it has none.³

130 S.Ct. at 2878 (citations omitted).

The Court held that the Exchange Act gave no indication that Congress intended it to have extraterritorial effect. Whether a transaction was subject to Section 10(b) depended on whether it was a domestic or foreign transaction since domestic securities transactions were the focus of Congress' regulatory objectives.⁴ Here is how the Court put it:

... the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States. Section 10(b) does not punish deceptive conduct, but only deceptive conduct “in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered.” 15 U.S.C. § 78j(b). Those purchase-and-sale transactions are the objects of the statute's solicitude. It is those transactions that the statute seeks to “regulate”; it is parties or prospective parties to those transactions that the statute seeks to “protec[t].” And it is ... only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies.

Morrison, 130 S.Ct. at 2884 (citations omitted).

In the defendants' view, there is no evident intent by Congress in Section 15(a) to override the presumption of non-extraterritoriality of statutes. Since, the defendants argue, the regulatory purpose of Section 15(a) is “virtually the same” as that of Section 10(b), registration is only required where a broker or dealer is engaged in or induces others to engage in a domestic transaction. Not surprisingly, the SEC has a very different view. It contends that unlike Section 10b, Section 15 focuses on the “registration and regulation of brokers” and thus does not implicate Morrison and the principle of non-extraterritorial reach of statutes absent a clear intent by Congress. (SEC Brief at 14).

For the SEC, it is inconsequential that a securities transaction is classified as foreign under Morrison. In its view, anyone who facilitates any stock transaction through conduct in the United States must register with the SEC under Section 15(a) even if, as occurred in this case, the transaction is not domestic and does not occur on a national securities exchange. To support its oceanic reading of Section 15(a), the SEC argues that statutory titles have value in “divin[ing]” the meaning and purpose of a statute, and twice quotes the title of Section 15: “Registration and Regulation of Brokers and Dealers.” (SEC Brief at 12–13)(Boldface in original). While that is a correct rendition of Section 15's title, it is significant that the SEC's brief ignores Section 15(a), the specific provision involved in this case. Section 15(a) is captioned: “Registration of all persons utilizing exchange facilities to effect transactions; exemptions.” 15 U.S.C. § 78 o(a)(1)(Boldface in original).

The Congress' focus on national exchanges in Section 15(a) is apparent from the text of the section, which provides:

It shall be unlawful for any broker or dealer ... (other than such a broker or dealer whose business is exclusively intrastate and who does not make use of any facility of a national securities exchange ) to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security other than an exempted security or commercial paper, bankers' acceptances, or commercial bills unless such broker or dealer is registered in accordance with subsection (b) of this section.(parenthesis in original)(emphasis supplied).

It has long been held that while express provisions in the body of an act cannot be controlled or restrained by the title or preamble, the latter are relevant to the court's construction of the statute. Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 619 (7th Cir.2012). See also United States v. Fisher, 2 Cranch, 358, 386, 2 L.Ed. 304 (1805)(Marshall, C.J.); Coosaw Mining Co. v. State of South Carolina, 144 U.S. 550, 563, 12 S.Ct. 689, 36 L.Ed. 537 (1892); United States. v. Thompson, 484 F.3d 877, 881 (7th Cir.2007) (Easterbrook, C.J.)(caption of a statute can properly be used “for guidance.”); S.E.C. v. Gruss, 859 F.Supp.2d 653, 663 (S.D.N.Y.2012). Thus, guided by this hoary principle and the SEC's insistence that titles of statutes are important, ( SEC brief at 13), we look to the title of Section 15(a), which evidences Congress' concern with registration of those utilizing the facilities of national exchanges. The Section's focus on national exchanges and transactions on them is consistent with the primacy of the domestic exchanges under the Act's comprehensive statutory scheme.

“The primacy of the domestic exchange is suggested by the very prologue of the Exchange Act, which sets forth as its object” to provide for the regulation of security exchanges operating in interstate and foreign commerce. Morrison, 130 S.Ct. at 2884. Thus, § 78b, which is titled “Necessity For Regulation,” states that transactions in securities “as commonly conducted upon securities exchanges and over the counter markets are affected with a national public interest which makes it necessary to provide for regulation and control of such transactions ... and perfect the mechanisms of a national market system for securities ...” 15 U.S.C. § 78b. See also Morrison, 130 S.Ct. at 2884–85. The same focus on domestic transaction is evident in the Securities Act of 1933, which was enacted by the same Congress as the Exchange Act, and formed part of the same comprehensive regulation of securities trading. Morrison, 130 S.Ct. at 2885. There is nothing in § 78b which remotely suggests that the Act was concerned with or intended to require registration to regulate brokers involved in foreign transactions on foreign exchanges.⁵

The SEC's basic argument is that the “primary purpose” of Section 15 is the registration and regulation of brokers, not the underlying security transactions that may occur overseas. (SEC Brief at 13). Even if one ignores the title of Section 15(a) in contravention of the SEC's insistencethat titles are of value in answering the interpretative question in this case, that is the beginning and not the end of what must be a more discerning analysis. The SEC's argument mistakenly overlooks the fact that the requirement of registration is not an end in itself, standing in splendid isolation. Rather, registration is merely a subordinate component of the Exchange Act's broader statutory scheme and exists to achieve the overarching purpose of the Act. See Regional Properties, Inc. v. Financial and Real Estate Consulting Co., 678 F.2d 552, 561–62 (5th Cir.1982)(Section 15(a)'s registration requirement is “of the utmost importance in effecting the purposes of the Act.”)(emphasis supplied). Accord, S.E.C. v. Kramer, 778 F.Supp.2d 1320, 1334 (M.D.Fla.2011); U.S. S.E.C. v. Benger, 697 F.Supp.2d 932, 943–44 (N.D.Ill.2010); Celsion Corp. v. Stearns Management Corp. 157 F.Supp.2d 942, 947 (N.D.Ill.2001); 15 U.S.C. § 78 o(b) (Commission is empowered to require such information and documents concerning the broker or dealer as “necessary or appropriate in the public interest or for the protection of...