Petition for Writ of Certiorari — Caucus Distributors, Inc. v. Minnesota Commissioner of Commerce
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: } Supreme Court, U.S,
FilLED
SFP 7 1988
NO. 88 JOSEPH F, SPANIOL, UR,
CLERK
In The
Supreme Court of the United
States
September Term, 1988
CAUCUS DISTRIBUTORS, INC., and CAMPAIGNER
PUBLICATIONS, INC., New York Corporations,
INDEPENDENT DEMOCRATS FOR LAROUCHE, an
unincorporated association, RON FREDMAN, RONALD R.
BETTAG, PAUL GREENBERG, and all other parties and
organizations acting in concert with the named Petitioners,
Petitioners,
v
MINNESOTA COMMISSIONER OF COMMERCE,
Respondent.
PETITION FOR WRIT OF CERTIORARI TO THE
MINNESOTA COURT OF APPEALS
OF COUNSEL:
Patrick J. Moran
Moran & Bladen, P.C.
1221 Lamar, Suite 517
Houston, Texas 77010
(713)759-1555
Counsel for Petitioners
Le)
QUESTIONS PRESENTED
May notes evidencing a loan transaction made to a first
amendment political group by a supporter constitute
securities under the Minnesota Securities Act?
Has the regulation of federal election campaign
organizations been preempted by federal law to the extent
that the Minnesota Securities Act does not apply to such
an organization when a supporter makes a loan in
conformity with FEC rules and regulations and receives a
promissory note in return?
Do the first amendment rights of politically oriented
organizations and the individuals who support them
prevent a State from using securities law to inhibit the
fund raising activities of those organizations?
Was the sanction imposed by the Administrative Law
Judge precluding Petitioners from contesting the cease
and desist order improper in view of Petitioner's first
amendment rights?
PARTIES BELOW
The parties in the Minnesota Court of Appeals were
Petitioners, Caucus Distributors, Inc., Campaigner
Publications, Inc., Independent Democrats for LaRouche, Ron
Fredman, Ronald R. Bettag, and Paul Greenberg and all other
parties or organizations acting in concert with the above named
Petitioners, and Appellee, Minnesota Commissioner of
Commerce.
Caucus Distributors, Inc. and Campaign Publications, Inc.
are not owned by any parent companies, have no affiliates or
non-wholly owned subsidiaries.
TABLE OF CONTENTS
Page
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APPENDIX:
Order of the Minnesota Supreme Coutt...................... A-l
Opinion and Order of the Minnesota Court of
Opinion and Order of the Minnesota Commissioner
PRI ca cccsctundicmnendskuakeseknnasindebuamekabiwen C-l
Minnesota Securities Act Section 80A.14.................... D-1
Petition for Review of Decision of Court of
Ur cckannadsuducaascuscnudteandecdsébindunmmiosoeond F-]
Froelich v. Caucus Distributors, et, al..................ee eee G-l
Ansorge v. Kellogg, Michigan Court of Appeals,
Se a ER acorn ceckdesecxeactenbannnssancnsadeses H-1
Minnesota Attorney General Letter...................0eeeeeeees I-]
TABLE OF AUTHORITIES
Aloha Airlines. Inc. v. Director Taxation, 464
U.S. 7, 104 S.Ct 291, 78 L.Ed2d 10 (1985)........... 21
Ansorge v, Kellogg. MI Ct. of Appeals (1988);
Det: He oékcicdccctbackodcaksshaieaanreee eee 11
Australi m A ShioXinX Conference v.
Eh aise SHE WD Ger CRW xctccsankcsdwadacsisansnaces 26
Cornfeldt v. Tongen, 262 N.W.2d 684 (1977) .............. 28
Edgar v. Slaughter, 548 F.2d 770 (8th Cir., 1977).......... 28
Exxon Corn, v. Hunt, 475 U.S. 355 106 S.Ct
RAGS, TP Tie BES CRB icbenictssccsncrabnncsiecctass 21
Feder lection mmission v, Hall-Tvner
Election Campaign Committee, 678 F.2d 416
Cae GRE, Se wanna dkse casa tie 13, 26
Froelich v. Caucus Distributors. Inc, et. al, Ill Cty
Cir. Ct. No. 86L17562, (1988)....... RA eae ee 11
Federal Election mmission v. M h
Citizens for Life, 107 S.Ct 616, 93 L.Ed2d
SFI, Sa SE Se iikikcinssicsiiteieisc 17
w~ In Re Pnmus, 436 U.S. 412, 98 S.Ct 1893, 56
Ln GET CEP FOE cuicsechssccnsskavsnraecadaeneneneonen 12
vi
Landreth Timber Co, v, Ivan K, Landreth, 471
U.S. 681, 105 S.Ct 2297, 85 L.Ed2d 692
(3DGS) ..<000s0rccecqunantniniaainn cane skeneinan aunelmaaanas 10
106 S.Ct 1890, 476 U.S. 355, 90 L.Ed2d
SOR, (1D cccnvssaieigtitcsel eet eee 20
Marine Bank v, Weaver, 455 U.S. 551, 102S.Ct
1221, 7) Le Ge Cine 11
Meyer v. Grant, 108 S.Ct 1886, 56 USLW4516
CUDGED ic occseccacusancaccuimnlicncuatcnaneeanane nanan 18
NAACP y. Alabama, 357 U.S. 449, 78S.Ct 1163,
22 EAE FOE CII ves escsninicrd ordeal 25
NAACP vy, Button, 371 U.S. 415, 83 S.Ct328, 9
LRG GE Gee sascccicicimactnne 19
Vv w 328 U.S. 293, 66
S.Ct 1100, 90 L.Ed 1244 (1946)........0....ccecceceeeee 11
Silkwood v. Kerr-McGee Corp., 104 S.Ct 615.......00..... 21
Socite Internationale v. Rogers, 357 U.S. 197, 78
S.Ct 1087, 2L.Ed2d, 1255 (1958) ...........cccecee cece 28
United Housing Foundation, Inc. v. Forman, 421
U.S. 837, 95 S.Ct 2051, 41L.Ed2d 621
(1973). vassiscnersccsaiavinaiceietee Gee 11
NO. 88
In The
Supreme Court of the United
States
September Term, 1988
CAUCUS DISTRIBUTORS, INC., and CAMPAIGNER
PUBLICATIONS, INC., New York Corporations,
INDEPENDENT DEMOCRATS FOR LAROUCHE, an
unincorporated association, RON FREDMAN, RONALD R.
BETTAG, PAUL GREENBERG, and all other parties and
organizations acting in concert with the named Petitioners,
Petitioners,
Vv.
MINNESOTA COMMISSIONER OF COMMERCE,
Respondent.
PETITION FOR WRIT OF CERTIORARI TO THE
- MINNESOTA COURT OF APPEALS
Petitioners, Caucus Distributors, Inc., Campaigner
Publications, Inc., Independent Democrats for LaRouche, Ron
Fredman, Ronald R. Bettag, and Paul Greenberg pray that a
Writ of Certiorari issue to review the judgment of the
Minnesota Court of Appeals
OPINIONS BELOW
The order of the Minnesota Supreme Court denying
Petitioners petition for further review is attached as Appendix
A. The opinion and order of the State of Minnesota Court of
Appeals is printed as Appendix B. The opinion and order of
nN
the Minnesota Commissioner of Commerce is printed as
Appendix C. The Findings of Fact and Conclusions of the
Administrative Law Judge are printed as Appendix F-1.
JURISDICTION
The judgment of the Commissioner of Commerce, State of
Minnesota was entered September 3, 1987. The judgment of
the Court of Appeals of the State of Minnesota was entered
March 30, 1988. A timely petition for review of the decision
of the Court of Appeals was filed in the State of Minnesota
Supreme Court. That petition was denied on June 10, 1988.
The jurisdiction of this Court is invoked under 28 U.S.C.
Section 1254(1).
STATUTES INVOLVED
Minnesota Securities Act of 1959, Section 80A.14
(Appendix D). Also, Federal Election Campaign Act, 2
U.S.C. 431
STATEMENT OF THE CASE
In December, 1985, the Minnesota Department of
Commerce issued an Order for Report of Sales to Caucus
Distributors, Inc. (Caucus), a New York non-profit
corporation, and/or Campaigner Publications, Inc., also a
New York corporation and to Independent Democrats for
LaRouche, an unincorporated association and federal political
committee recognized by the Federal Election Commission.
On February 10, 1986, counsel for Petitioners replied noting
they would provide limited information due to the First
Amendment nature of the organizations. A second letter was
sent by counsel to the Department dated March 6, 1986, which
reiterated the First Amendment nature of the organization,
provided copies of an acknowledgment of debt and a non-
negotiable document captioned "Unsecured Promissory Note."
On behalf of the corporate Petitioners, counsel asserted the
First Amendment as a bar to further disclosure concerning the
memberships and supporters of the organizations. The
correspondence also noted that, based upon the context of the
transactions, i.e. loans to political/socio-economic
organizations, the loan or loans in question were not
securities. Counsel again reiterated this position by letter dated
May 22, 1986.
The Department, evidently electing not to pursue resolution
of this issue by a Minnesota court, declined to employ the
provisions of the Minnesota laws which permits a court to
enforce the Order for Report of Sales and Subpoenas by the
Department. Minn. Stat. Sec. 80A.20, Subd. 3 (repealed
Laws 1987, Ch. 336, effective July 1, 1987).
On June 4, 1986 a Cease and Desist Order was issued by
the State of Minnesota, Commissioner of Commerce, along
with a Notice of Right of Hearing. On July 17, 1986 an
Amended Cease and Desist Order was issued alleging that
Petitioners had sold unregistered securities through unlicensed
agents in the State of Minnesota.
An initial hearing was held on August 4 and 5, 1986.
Because of the 11th hour (July 31) subpoenas by the
Department, the hearing was continued after testimony by one
witness, Mary Mitchell, who had subscribed to the various
publications disseminated by Petitioners, supported many of
their political and economic viewpoints and who had also
made loans to Petitioners.
The hearing was continued so that the Administrative Law
Judge could read various briefs that were to be re-submitted on
discovery issues and Petitioners objections to discovery. On
October 6, 1986 the Administrative Law Judge reversed an
earlier ruiing and issued an Order for Discovery which
required organizational Petitioners to provide additional
information to the State of Minnesota concerning the identities
of persons who had made loans to Petitioner organizations.
The Administrative Law Judge did find that Petitioners had
shown that their supporters reason to fear disclosure of their
identty and the claims of a chilling effect were reasonable and
realistic. Petitioners had also pointed out, without success, that
the State had never interviewed all of the persons whose
names they had been given by Petitioners earlier in the case
pursuant to an earlier order. On October 24, 1986 the State
moved for an order precluding Petitioners from contesting
certain allegations in the amended cease and desist order
because it was the State's position that Petitioners had not
complied with the Administrative Law Judge's discovery
order. On December 2, 1986 the Judge denied the
Enforcement Division's request for preclusion. On December
15, 1986 the judge issued another Discovery Order. The
Judge directed the organizational Petitioners to provide various
information concerning Minnesota residents who had lent
money to Petitioners. Since Petitioners had submitted John
Doe affidavits from a number of Minnesota citizens requesting
anonymity, the Judge asked for a list of all those who had not
requested anonymity and of the persons who had requested
anonymity, the Judge requested information so that he could
randomly select 25% of those who had asked their names not
be disclosed (a number of Petitioner's supporters had
submitted affidavits alleging fear of retaliation and reprisal if
their support for Petitioners became public knowledge) and
provide it to the Minnesota Department of Commerce and the
Attorney General's office. On December 23, 1986 the
Petitioners respectfully declined to disclose any additional
names of Minnesota residents who had lent money to
Petitioners on First Amendment grounds. Previously, on
November 12, 1986 counsel for Petitioners had sent a letter to
the Administrative Law Judge advising him that the total
number of loans in Minnesota consisted of loans obtained
from 48 people. The Administrative Law Judge was advised
that there was some 54 loans altogether, 24 for Campaigner _
Publications and 30 for Caucus Distributors. On January 13,
1987 the Judge issued an order denying Petitioners request for
an interlocutory appeal of his discovery order. On January 27,
1987 the Administrative Law Judge issued an Order Imposing
Sanctions for Noncompliance with Discovery on all Petitioners
including the individuals. That Order precluded Petitioners
from introducing evidence contesting the last sentence of
paragraph 1 and paragraphs 2 and 7 of the Department's
Amended Cease and Desist Order. The paragraphs in question
dealt with the fact that promissory notes were offered or sold
to persons in the State of Minnesota and that those promissory
notes constituted securities within the meanings of Minnesota
State 80(a).14 and, further, that material facts were omitted in
the course of obtaining the loans upon which promissory notes
were based. The sanction order, for all practical purposes,
constituted imposition of a default judgment against
Petitioners.
On April 20, 1987, the United States of America filed a
petition against Caucus Distributors, Inc. and Campaigner
Publications, Inc. seeking to place them in involuntary
bankruptcy in the United States District Court for Virginia.
Presently, Caucus Distributors, Inc. and Campaigner
Publications, Inc. are under the control of interim trustees. A
hearing on the bankruptcy issues was scheduled for May,
1988, but as yet no decision rendered.
On July 15, 1987 the Administrative Law Judge issued his
Findings of Fact, Conclusions and Recommendations.
(Appendix F) On September 3, 1987 the Commissioner of
Commerce issued his Findings of Fact and Conclusions of
Law and Order (Appendix C), stating that Petitioners shall
cease and desist from offering or selling any security or
promissory notes or other debt instruments in the State of
Minnesota without filing said instrument pursuant to Chapter
80(a) or without obtaining an opinion letter from the
Department of Commerce that exempted such instruments. The
Department has taken the view that any loan to Petitioners by a
Minnesota resident is a security whether or not a note is
issued.
On September 9, 1987 Petitioners filed a Petition for Writ
of Certiorari in the Court of Appeals. On October 6, 1987 the
Wnt was granted. On March 30, 1988 the Court of Appeals,
State of Minnesota, Judge Randall, issued its decision. The
Minnesota Court of Appeals affirmed the Commissioner of
Commerce's holdings stating that the promissory notes
Petitioners issued constituted securities under Minnesota
Statute Section 80A.14; the Federal Election Campaign Act did
not preempt regulation of the issuance of securities by
Petitioner, Independent Democrats for LaRouche, a federal
election campaign committee; Minnesota securities laws as
applied to Petitioner's fund raising activities did not
impermissibly infringe on Petitioner's first amendment rights
of association and the discovery sanctions by the
Adnuinistrative Law Judge were not an impermissible
infringement upon Petitioner's first amendment rights.
Petitioners filed a timely petition for further review to the State
of Minnesota Supreme Court. This petition was denied on
June 10, 1988.
REASONS FOR GRANTING WRIT
I. THE MINNESOTA COURT HAS APPLIED
THE MINNESOTA SECURITIES LAW
INCORRECTLY AND IN CONFLICT WITH
THE FEDERAL CONSTITUTION AND
WITH DECISIONS OF THIS COURT.
This case concerns a Cease & Desist Order issued by the
State of Minnesota, Department of Commerce, Commissioner
of Securities, alleging that Caucus Distributors, Inc.,
Campaigner Publications, Inc., Independent Democrats for
LaRouche, and the individual defendants were selling
unregistered securities.
The alleged securities were non-negotiable promissory
notes issued by the above organizations acknowledging loans
made by political supporters. Caucus Distributors, Inc. is a
non-profit New York corporation, Campaigner Publications,
Inc. is a New York corporation that effectively operates as a
non-profit entity, Independent Democrats for LaRouche is an
unincorporated association and political committee recognized
by the Federal Election Commission. The individual
defendants were volunteers and consultants for the above
entities.
These organizations support and disseminate materials that
discuss political, social and economic issues of interest to the
general public. The State of Minnesota, by its actions in this
case, has treated these organizations as business entities
ignoring the obvious first amendment goals and aims involved
in their activities. This is a case of first impression in
Minnesota. The essence of the Minnesota Court's decision is
that promissory notes are securities regardless of the first
amendment impact of such a decision and the fact that the
Minnesota Statute specifically commands that the context and
circumstances of each case be examined in defining a security.
This Court has never ruled that promissory notes are always
securities within a "plain meaning" approach. See Landreth
Timber Company v. Ivan K. Landreth, 471 U.S. 681, 105
S.Ct 2297, 85 L.Ed2d 696 (1985) where this court stated:
Note’ may now be viewed as a relatively broad
term that encompasses instruments with widely
varying characteristics depending on whether issued
in a Consumer context as commercial paper or in some
other investment context. See id., at __. Wehere
expressly leave until ar other day the question whether
‘notes’ or 'bonds' or some other category and
instrument listed in the definition might be shown by
proving ‘only’ the document itself. (SEC v. C.M,
Joiner Leasing Corporation, supra, at 355.) We hold
only that 'stock' may be viewed as being in a category
by itself for purposes of interpreting the scope of the
Act's definition of securities."
The Minnesota Act is substantially similar to the Federal
Acts in its definitions. In Section 80A.14 definitions, the
Minnesota Act states:
“When used in Section 80A.01 to 80A.31, the
terms defined in this section have the meanings given
them unless the context otherwise requires." The
Minnesota Act then goes on in Subdivision 18 and
defines security as:
"Security (a) "Security" means any note; stock;
treasury stock; bond..."
The first amendment impact of the Minnesota Court's
decision is great and in effect holds that the State's rights to
define what is a security and then to impose a regulation
outweighs a substantial, direct and debilitating impact on
petitioner's first amendment rights.
The weight of precedent makes it clear that in determining
if a promissory note is a security the circumstances and
substance of the transaction must be examined. See United
Housing Foundation, Inc, v, Forman, 421 U.S. 837, 95 S.Ct
2051, 41 L.Ed2d 621 (1975); SEC v. W.J. Howey Company,
328 U.S. 293, 66 S.Ct 1100, 90 L.Ed 1244 (1946); Marine
Bank v. Weaver, 455 U.S. 551, 102 S.Ct 1221, 71 L.Ed2d
409 (1982); and Landreth Timber Company v. Ivan K,
Landreth, 471 U.S. 681, 105 S.Ct 2297, 85 L.Ed2d 692
(1985). See also Ansorge v, Kellog, MI Ct. of App. (1988)
i H); No. 86910 and Froelich v. Caucus
Distributors, Inc., Ill Cty Cir. Ct., No. 86L17562 (1988).
(Appendix G).
In this case the petitioners argue that the first amendment
aspects of the Petitioner organizations are among those
circumstances and must be weighed with great deference in the
initial determination of whether or not a security is involved in
the transaction in question. The ruling by the Minnesota Court
of Appeals is wrong because it classified the promissory notes
in this case as securities without regard to the first amendment
purpose of the Petitioners and the first amendment nature of
the fund raising activity being conducted.
The State of Minnesota has tried to treat these loan
transactions as if they were investments as that term is used in
the context of a security. An examination of the context of the
loans makes the first amendment concerns very clear. The
appellant organizations do not make or distribute profits,
workers are paid minimum amounts or are volunteers. The
money received by the organizations are spent disseminating
books, pamphlets, newspapers and other materials that discuss
issues seen as important to society and the voters.
10
In examining the context of these transactions the State
must regulate carefully with appropriate deference to the first
amendment. See In re Primus, 436 U.S. 412 (1978).
"Where political expression or association is at
issue, this court has not tolerated the degree of
imprecision that often characterizes govern ment
regulation of the conduct of commercial affairs. The
approach we adopt today in Qhralik posts, p.447, 56
L.Ed2d 444, 98 S.Ct 1912, that the state may
proscribe in person solicitation for pecuniary gain
under circumstances likely to result in adverse
consequences cannot be applied to appellant's activity
on behalf of the ACLU." at 437.
The Minnesota Court of Appeals stated in its opinion that
Petitioners were not engaging in first amendment activity in
seeking loans. Fund raising is vital to a political party or
organization, particularly a small one. In the case of Federal
Election C my: Hall-T Electi
Campaign Committee, 678 F.2d 416 (1982, 2 Nd Cir.), Judge
Kaufman stated:
"Acknowledging the importance of fostering the
existence of minority political parties, we must also
recognize that such groups rarely have a firm financial
foundation. If apprehension is bred in the mind of
contributors to fringe organization by fear that their
support of an unpopular ideology will be revealed,
they may cease to provide financial assistance. The
resulting decrease in contribution may threat the
minority parties very existence. Society suffers from
such a consequence because the free flow of ideas, the
life blood of the bodily politic, is necessarilly reduced.
Accordingly, a nation dedicated to free thought, free
expression cannot ignore the grave results of facially
innocuous election requirements."
This is exactly the situation in the instant case. Petitioners
assert that it is not enough in this case to decide, as the lower
11
court did, that the notes are securities and then hold that the
State has a compelling interest in regulating securities.
Therefore, Petitioners first amendment interest are overcome.
It is the position of Petitioners that the first amendment interest
must be considered in determining if there is, in fact, a security
involved in the transaction. This is "the context” in which the
transaction took place. Petitioners concede that the State has
an interest in regulating the sale of securities. Petitioners point
is that in the context of this case, these notes are being used to
raise funds in connection with a political first amendment
purpose and, therefore, should not be considered securities in
the first place.
Further, it is apparent that if notes issued in the context of
this case are considered securities no political organization
could ever comply with the required reporting and disclosure
requirements of a State's Securities Act. Almost all the State's
Securities Acts are based on the Uniform Securities Act and
require that the organizations issuing securities fit criteria
which are completely unrealistic when applied to a political
organization. Political organizations usually do not have large
Capital assets and they do not tend to accumulate capital.
Political organizations do continuous fund raising and most
State's registration requirements would demand that they set
specific times to begin and end fund raising. Political and first
amendment associational organizations differ even from
religious organizations in that they do not, as a rule,
accumulate large items of property or large asset bases.
These organizations would not be able to overcome the
problems presented by state rules which have restrictions on
fund use, required statutory earnings, minimum
capitalizations, and strict rules concerning distribution of non-
factual or inaccurate material. Obviously, many claims made
in the course of a political campaign do not turn out to be
factual. Some 28 states have merit review which gives too
much discretion to the Commissioner of Securities in that State
12
concerning registration. In other words, these commissioners
who are political appointees could determine a loan to a
political group was not a good investment. There are no
criteria for what a "good" investment is.
Moreover, treating political loans as securities requires all
fund raisers to be licensed securities agents working for
licensed securities brokers. Brokers and their agents are >
required, in Minnesota and most other states, to maintain lists
of all "sales" and make them available for inspection by the
Securities Commissioner and to determine if the investment is
"suitable" for the "buyer". Thus, if one is well to do, one may
support a political organization that is "risky" or not a
traditional mainstream Republican or Democratic group. If too
old, too young or not wealthy enough, the "investment" would
likely be found "unsuitable". Those who wished to support a
political group in this manner could not do so with anonymity.
Supporters who wished to fund raise would have to pass
examinations on securities laws to obtain agents licenses, i.e.
face "super literacy" tests more onerous than those employed
in the past to suppress racial and ethnic minorities. As noted
in Petitioner's appeals briefs, the list of debilitating
impairments goes on and on.
When one thinks of the concept of material disclosure
under the securities laws being applied to political candidates,
the mind boggles. Would a candidate have to disclose an extra
marital affair if it might impact the success of his campaign?
Would it be a material misstatement to claim the candidate
would defeat his opponent if that was unlikely. The
ramifications of applying securities concepts to first
amendment organizations and political campaigns are
staggering in their potential impact to core first amendment
rights.
13
The first amendment aspects of this case allow for an
analogy to be drawn from a recent Supreme Court decision
which, although it did not deal with securities regulation,
found that a section of the Federal Election Campaign Act was
unconstitutional under certain circumstances. The case in
question was the Federal Election Commission v.
Massachusetts Citizens for Life, Inc,, 107 S.Ct 616, 93
L.Ed2d 539, 55 U.S. LW 4067. This case concerned Section
316 of the Federal Election Campaign Act which prohibited
corporations from using treasury funds to make an expenditure
in connection with any election to any public office and
required that any expenditure for such purpose be financed by
voluntary contributions to a separate fund.Massachusetts
Citizens for Life, like petitioners, was a non-profit, non-stock
corporation. Its purpose was to foster respect for human life
and defend the right to life of all human beings born and
unborn through educational, political or other forms of
activities (one of the goals of Petitioners herein). To further
this activity it published newsletters that had been distributed
to contributors and to non-contributors who expressed support
for the organization. This court stated that the concern
underlined in the regulation of corporate political activity - that
organizations that amass great wealth in the economic
marketplace not gain unfair advantage in the political
marketplace - was absent with regard to Massachusetts
Citizens for Life. The court opined:
"This rationale for regulation is not compelling
with respect to independent expenditures by appellee.
Individuals who contribute to appellee are fully aware
of its political purposes and, in fact, contribute
precisely because they support those purposes. It is
true that contributors may not be aware of the exact
use to which his or her money ultimately may put or
the specific candidate used to support. However,
individuals contribute to a political organization as a
more effective means of advocacy than spending
money under their own direction..." at 4073.
14
Recently, this Court decided a similar situation involving a
State's overprotective attitude towards its citizens. In the case
of Meyer v. Grant, 108 S.Ct 1886 (1988), the State of
Colorado had forbidden paid solicitors from circulating
political petitions. The State's logic was that such paid
solicitors would have more reason to falsify signatures. This
Court held that such a ban was an infringement on the first
amendment rights of citizens wishing to bring political
questions 1n front of the voters. This Court stated:
"We agree with the Court of Appeals conclusion
that the statute trenches upon an area in which the
importance of the first amendment protections is ‘at its
zenith’. For that reason, the burden that Colorado
must overcome to justify this criminal law is weil nigh
insurmountable.” at pg. 1894.
Petitioners in this case would make the same claim that
because of the nature of their organizations and the purposes
of those organizations that the first amendment protection in
this case is at its highest and the State's actions are subject to
exacting scrutiny.
As is apparent from the letter made part of the record in
this case sent out by the Attorney General for the State of
Minnesota, the ideas and beliefs of the Petitioner organizations
and Lyndon LaRouche are not popular with the Minnesota
Attorney General. He stated: "We must show the Nation that
Minnesota will not tolerate the LaRouche fringe." Nor do
Petitioners seem to be popular with other states.
Notwithstanding that this securities issue is one of first
impression, supporters and fund raisers have been charged
with felony security law violations in Virginia, Missouri and
New York. However, the use of the securities law to censor
those ideas is improper. As this Court stated in NAACP v.
Button, 371 U.S. 415, 83 S.Ct 328, 9 L.Ed2d 405 (1963):
15
"The First Amendment is a value free provision
whose protection is not dependent on the truth,
popularity, or social utility of the ideas and beliefs
which are offered."
It should be noted that supporters dissausfied with
repayment of their loans have other remedies available under
Minnesota law. There are consumer protection statutes
enforceable by the Attorney General and individuals, common
law fraud causes of action, criminal fraud statutes and actions
in debt available to aggrieved persons.
II. THE MINNESOTA COURT OF APPEALS
HAS IMPROPERLY APPLIED
MINNESOTA SECURITIES LAW TO
INDEPENDENT DEMOCRATS FOR
LAROUCHE, A CAMPAIGN
ORGANIZATION REGULATED UNDER
THE FEDERAL ELECTION COMMISSION
IN CONFLICT WITH THE DECISIONS OF
THIS COURT.
Respondent Independent Democrats for LaRouche's (IDL)
loans should not fall within the purview of the Minnesota
Securities Act because this organization was a campaign
organization formed to aid Lyndon LaRouche in his campaign
for the presidency of the United States. The Federal Election
Campaign Act amendments of 1974 are an attempt by
Congress to reform campaign expenditures and political
contributions. This Act evidences a clear intent to preempt any
State law regarding campaign expenditures and political
contributions. To use the Minnesota Securities Law against
Independent Democrats for LaRouche effectively circumvents
the Federal Election scheme.
16
The Supreme Court outlined the various facts of federal
preemption law in Louisiana Public Service Commission v.
F.C.C., 106 S.Ct 1980, 1898-99 (1986):
“The Supremacy Clause of Art. VI of the
Constitution provides Congress with the power to
preempt state law. Preemption occurs when
Congress, in enacting a federal statute, expresses a
clear intent to preempt state law, Jones v
, 430 U.S. 519, 97 S.Ct 1305, 51
L.Ed.2d 604 (1977), when there is outright or actual
conflict between federal and state law, e.g., Free v.
Bland, 369 U.S. 663, 82 S.Ct 1089, 8 L.Ed.2d 180
(1962), where compliance with both federal and state
law is in effect physically impossible, m
Avocado Growers, Inc. v. Paul, 373 U.S. 132, 83
S.Ct 1210, 10 L.Ed.2d 248 (1963), where there is
implicit in federal law a barrier to state regulation,
Shaw v. Delta Air Lines, Inc., 463 U.S. 85 103 S.Ct
2890, 77 L.Ed.2d 490 (1983), where Congress has
legislated comprehensively, thus, occupying an entire
field of regulation and leaving no room for the states
to supplement federal law, Rice v. Sante Fe Elevator
Corp,, 331 U.S. 218, 67 S.Ct 1146, 91 L.Ed. 1447
(1947), or wi.-ze the state law stands as an obstacle to
the accomplishment and execution of the full
objectives of Congress. Hines v. Davidwitz, 312
U.S. 52, 61 S.Ct 399 85 L.Ed. 581 (1941).
Preemption may result not only from action taken by
Congress itself; a federal agency acting within the
scope of its congressionally delegated authority may
preempt state regulation. Fideli
Vv , 458 U.S. 141, 102 S.Ct
3014, 73 L.Ed.2d 664 (1982); Capi
Inc, v. Crisp, 467 U.S. 691 (1984)."
The Federal Election Campaign Act Amendments of 1974
present an express preemption issue. As the Supreme Court
stated in Silkwood v. Kerr-McGee Corp.,, 104 S.Ct 615, 621
(1984): "if Congress evidences an intent to occupy a given
field, any state law falling within that field is preempted."
Further, when a federal statute unambiguously preempts
certain state legislation, the statutory language is controlling
and preemption takes place. Exxon Corp. v. Hunt, 106 S.Ct
1103, 1109 (1986); Aloha Airlines, Inc, v, Director of
Taxation, 464 U.S. 7, 12 (1983).
The Federal Election Campaign Act Amendments of 1974,
public law 93-443, 88 Stat. 1263, reprinted in 1974 U.S.
Code Congressional and Administrative News, p. 1436, et.
seq,, contain three different provisions regarding preemption
of state law. The first provision is contained in Section 104 of
the Act. Section 104 reads as follows:
"Sec. 104
(a) The provisions of Chapter 29 of Title 18 United
States Code, relating to elections and political
activities, supersede and preempt any provision of
state law with respect to election of federal office.
(b) For purposes of this section, the terms
"election", "federal office", and "state" have the
meanings given them by section 591 of Title 18
United States Code."
The legislative history explaining this provision states:
"Conference Substitute - The conference substitute
is the same as the House amendment. The provisions
of the conference substitute make it clear that the
federal law occupies the field with respect to criminal
sanctions relating to limitations on campaign
expenditures, the sources of campaign funds used in
federal races, the conduct of federal campaigns, and
similar offenses, but does not affect the state's rights
to prohibit false registration, voting fraud, theft of
ballots, and similar offenses under state law."
Senate Report no. 93-689, reprinted in 1974 U.S. Code
Congressional and Administrative News 5587, 5638.
———ee_
18
There is a second preempting provision. Section 301 of
the Federal Election Campaign Act Amendments of 1974,
codified at 2 U.S.C. Section 453 provides:
"The provisions of this Act, and of rules prescribed
under this Act, supersede and preempt any provision
of state law with respect to election to federal office."
This is very broad language. Its breadth is confirmed by
the legislative history. The legislative history concerning this
section of the law states:
"Senate Biull:
Section 213 of the Senate bill amended Section 403
of the Act, relating to effects on state law, to provide
that the provisions of the Act preempt any provision
of state law with respect to campaign for election to
federal office.
House Amendment:
Section 301 of the House amendment amended
Section 403 of the Act, relating to effect on state law,
in essentially the same manner as the amendment
made by Section 213 of the Senate Bill.
Conference substitute:
The conference substitute follows the House
amendment. It is clear that the federal law occupies
the field with respect to reporting and disclosure of
political contributions to and expenditures by federal
candidates and political committees, but does not
affect state laws as to the manner of qualifying as a
candidate, or the dates and places of elections."
Senate report #93-689, reprinted at 1974 U.S. Code
Congressional and Administrative News 5587, 5668.
Both the plain meaning of the statute and the legislative
history makes Congress’ intent to preempt very clear. As
19
noted above, in such a case, preemption must be deemed to
occur.
An attempt by the State of Minnesota to use their securities
law to regulate an organization such as IDL which was formed
to deal with the election of an individual to federal office, is a
use of the law directly in contradiction to the Federal Act. The
hearings officer in this matter has attempted to rule that the
federal preemption only applies to election laws. The Federal
Act specifically regulates loans to campaign committees. 2
U.S.C. Section 431(8); 11 CFR Section 100.7. Clearly,
under these circumstances, the Minnesota Securities Act is
operating as an election law and addresses an area specifically
regulated by the Federal Act.
Ill. THE SANCTION IMPOSED BY THE
ADMINISTRATIVE LAW JUDGE
PRECLUDED THE PETITIONERS FROM
CONTESTING A CEASE AND DESIST
ORDER AND WAS IMPROPER IN THAT
IT DEPRIVED PETITIONERS OF A FAIR
AND IMPARTIAL HEARING AND
INFRINGED UPON THEIR FIRST
AMENDMENT RIGHTS.
On January 27, 1987 the Administrative Law Judge issued
an order precluding Petitioners from introducing evidence
contesting the last sentence of paragraphs 1, 2 and 7 of the
State's Amended Cease and Desist Order. Paragraph 2 was
the ultimate issue of the contested case in that it alleged that the
promissory notes offered by Petitioners constituted securities
within the meaning of the Minnesota Securities Act. Thus,
Appellants were not able to present witnesses or evidence at a
hearing to contest the State's allegations that the transactions
involved in this matter constituted a sale of securities. The
sanction order was based on the fact that the corporate
20
Petitioners had resisted throughout the course of the
proceeding the States attempts to obtain a list of Petitioner's
supporters, contributors and lenders. Petitioners resisted these
attempts on the part of the State on firstamendment and
privacy grounds. Petitioners contended that the orders and
subpoenas of the Minnesota Division of Securities inhibited
Petitioners and their supporters respective rights of
association, belief and freedom of speech as guaranteed by the
United States Constitution under the First and Fourteenth
Amendments. Further, Petitioners contended that supporters
and contributors right of privacy under the United States and
Minnesota Constitutions were being violated. Petitioners
submitted John Doe and other affidavits from or addressing
approximately 19 persons who had made loans to Petitioner's
organizations. These affidavits indicated that these lenders and
supporters did not wish their names revealed to government
agencies for fear of harassment or retaliation. In the October
6th discovery order, the Administrative Law Judge recognized
this fear on the part of Petitioner's supporters and
acknowledged that a chilling effect caused by this fear was
probable. At the beginning of the case, Petitioners had
revealed seven names to the State (with the permission of
those supporters) and the State had not even taken the trouble
to interview all of those individuals.
First amendment rights are to be interpreted liberally.
They are fundamental and occupy a preferred place in society.
As this Court stated in NAACP v. Alabama, 357 U.S. 449,
78 S.Ct 1163, 2 L.Ed2d 1488 (1958):
"Inviobility of privacy in group association may in
many circumstances be indispensable to preservation
of freedom of association, particularly where a group
espouses dissident beliefs." at page 462.
There is no doubt that the overwhelming weight of
authorities is to the effect that forced disclosure of first
21
amendment activities creates a chilling effect which must be
balanced against the State's interest in obtaining that
information. Australia/Eastern U.S.A. Shipping Conference
v. US., 537 F.Supp 807 (1982). The State of Minnesota had
received some seven names from Petitioners and had not
bothered to contact even all of those individuals to make its
case. Further, the State attempted to argue that a list of all
Petitioner's supporters and lenders was needed in order to
determine whether Petitioners could claim a limited offering
exemption. Petitioners at all times during this case made it
clear to the State that it did not wish to claim a limited offering
exemption. The State's interest could not be compelling under
these circumstances.
In the case of Federal Election Commission v, Hall-Tyner
Election Campaign Committee, 678 F.2d 416 (2nd Cir.,
1982), Judge Kaufman stated:
“Anonymity has long been essential to uninhibited
political activity in a democratic society. The secret
ballot insures that no one must answer for the vote he
cast. Confidentiality prevents the apprehension of
reprisal that threatens to suppress the robust
interchange of ideas at the core of the First
Amendment's guarantee of free speech and protection
of privacy and association. A society confident in its
stability does not fear the voice of opposition.
Indeed, unafraid of dissent, we recognize our ability
to exhibit special indulgence to nurture the free
expression of minority views. Realizing that mere
identification with certain disfavored ideologies can
result in harassment which may silence those voices,
the Constitution protects private support of political
associations."
Also,
"Acknowledging the importance of fostering the
existence of minority political parties, we must also
recognize that such groups rarely have a firm financial
foundation. If apprehension is bred in the mind of
22
contnbutors to fringe organizations by fear that their
support of an unpopular ideology will be revealed,
they may cease to provide financial assistance. The
resulting decrease in contributions may threaten the
minority parties very existence. Society suffers from
such a consequence because the free flow of ideas, the
life blood of the body politic, is necesarily reduced.
Accordingly, a nation dedicated to free thought and
free expression cannot ignore the grave results of
facially innocuous election requirements.
The power of the government to repress dissent is
substantial and can be exercised in a myriad of subtle
ways. Privacy is an essential element of the night of
association and the ability to express dissent
effectively. As a result, removing the cloak of
anonymity from a political committee by requiring it to
disclose the names of those who purchase its
publications, threatens important first amendment
values. Such forced revelations would likely lead to
‘vexatious inquiries’ which consequently could insull
in the public an unremitting fear of becoming linked
with the unpopular or the unorthodox."
The view of the Minnesota Attorney General's Office
concerning organizations associated actually or reputedly with
Lyndon LaRouche is illustrated by the attached Appendix I.
The State in this case had sufficient facts available through the
testimony of parties to the transactions at issue and would have
had further facts available had it taken the trouble to interview
all seven of the people whose names were given to them by
Petitioners. The further discovery of contributors and lenders
was merely official curiosity and would expose Petitioner's
sympathizers unnecessarily.
It is clear that in a situation such as this Petitioners could
not comply with the State's discovery orders without waiving
important constitutional rights. Such a refusal by Petitioners is
not willful, nor is it done in bad faith. See Edgar v. Slaughter,
548 F.2d 770 (8th Cir., 1977) and Socite Internationale v.
23
Rogers, 357 U.S. 197, 78 S.Ct 1087, 2L.Ed2d, 1255 (1958).
Petitioners even requested an interlocutory appeal. The State
of Minnesota decisions have consistently held the factors to be
considered in a sanctions manner are (1) the wilfullness of the
failure to disclose; (2) the resulting prejudice; and (3) the harm
to the truth seeking process if severe sanctions are imposed.
Cornfeldt v. Tongen, 262 N.W.2d 684 (1977). It is clear in
this case that the Petitioners tried to comply with the State's
orders as best they could and still be consistent with the
constitutional restraints they felt were present. Further, the
harm imposed by the sanction was great. It, in effect,
deprived Petitioners of the ability to present their case in front
of the Hearings Officer. The State of Minnesota was in no
way prejudiced by Petitioner's failure to reveal all of the
names.
CONCLUSION
This writ request should be granted because this case presents
a classic constitutional confrontation between the core freedom
of individuals and groups whose viewpoints are not traditional
and the more traditional mainstream political governmental
authorities seeking to suppress dissident viewpoints. Treating
loans to political associations as securities opens a veritable
pandora's box of debilitating blows to the sanctity of the First
Amendment. Numerous less restrictive alternatives are
available to police areas of legitimate concern. These
alternatives include a variety of civil and criminal remedies
which do not intrude on the First Amendment yet effectively
and fully address state interests. See Meyer v. Grant, 108
S.Ct 1886, 56 USLW 5616 (1988).
Permitting the states (there are 14 states with cease and
desist orders pending against some or all of Petitioners) to
impose securities regulation requirements on political
associations and federal campaign committees creates an
impermissible opportunity for of politically motivated
suppression of both dissident and opposing political
viewpoints. While efforts of securities commissioners are
24
confined to suppressing these Petitioners at the moment,
history demonstrates that the temptation to use this power will
prove irresistible. The practice will spread if not ended now.
In this day and age, fund raising is critical to effective
dissemination of viewpoints. Publication of newspapers,
magazines, books and flyers on a national basis is expensive.
Use of loans is a traditional method of political fund raising.
That is why it was addressed by the Federal Act and by
Federal Election Commission regulations. If it is a "security"
for these Petitioners, it is one for all campaign committees. A
loan could not issue unless registered as a security. A loan
could only be solicited by a licensed agent who worked under
the supervision of a licensed broker. If fund raising exceeded
certain limits ($100,000 to $500,000), a prospectus or
offering memorandum would be required in many states. The
devastating impact of this ruling in the Minnesota Supreme
Court is likely to be followed in Alaska, Maryland,
Washington, Virginia, Missouri, Indiana, Illinois, New York,
Massachusetts and elsewhere. There is a clear need to address
this issue now.
The granting of this writ would be an important step
towards clarifying the law as to the circumstances under which
promissory notes constitute securities subject to regulation
under state or federal securities acts.
Respectfully submitted,
a & we, P.
tab Ue
Patrick 1M
1221 “pr sing Suite 517
Houston, Texas 77010
(713)759-1555
Le ee ee. hes ay: see a ee
APPENDIX
STATE OF MINNESOTA
IN SUPREME COURT
C4-87-1952
Caucus Distributors, Inc., et al.,
Relators,
VS.
Commissioner of Commerce,
Respondent.
ORDER
Based upon all the files, records adn proceedings herein,
It is hereby ordered that the petition of Caucus Distributors,
Inc., Campaigner Publications, Inc. and Independent
Democrats for La Rouche for further review be, and the same
is, denied.
Dated 6-10-88
By the Court
(signed)
Chief Justice
B-1
STATE OF MINNESOTA
DEPARTMENT OF COMMERCE
COMMISSIONER OF COMMERCE
In the Matter of Caucus
Distributors, Inc., and
Campaigner Publications, Inc.,
New York Corporations, Independent
Democrats for LaRouche, an Unincorporated
Association, Ron Fredman, Ronald R. Bettag,
Paul Greenberg, and All Other Parties and
Organizations Acting in Concert with the
Named Respondent.
FINDINGS OF FACT, CONCLUSION OF LAW, AND
ORDER
COM/S-86-047-JL
8-1005-698-2
The above-entitled matter came on for hearing before
Administrative Law Judge Jon Lunde, on Monday, August 4,
1986 at the Office of Administrative Hearings in Minneapolis,
Minnesota. Additional proceedings were held the following
day. The hearings were held pursuant to an Order for
Hearing, an Order Suspending Exemption issued by the
undersigned on June 4, 1986, and an amended Cease and
Desist Order, Notice of Right to Hearing and Order
Suspending Exemption issued by Deputy Commissioner of
Commerce James Miller on July 17, 1986.
Jerome Getz, Special Assistant Attorney General, 1100
Bremer Tower, Seventh Place and Minnesota Street, St. Paul,
B-2
Minnesota 55101, appeared on behalf of the Minnesota
Department of Commerce (Department). Patrick Moran,
Moran & Pilger, P.A., Attorneys at Law, 1221 Lamar
Building, Suite 517, Houston, Texas 77010, appeared on
behalf of each of the above-named organizations and
individuals. The record closed on May 20, 1987.
Thereafter, on July 15, 1987 Administrative Law Judge Lunde
issued his Findings of Fact, Conclusions and
Recommendations to the undersigned. On July 20, 1987, the
undersigned sent notice that exceptions and arguments should
be filed with the Department of Commerce no later than
August 12, 1987, and the Attorney General filed exceptions
and argument on August 14, 1987.
Based upon an examination of the transcript and exhibits,
and upon a review of all the briefs and all of the other records,
files and proceedings herein, the undersigned makes the
following:
FINDINGS OF FACT
1. Caucus Distributors, Inc., (Caucus) is a Not-For-
Profit corporation incorporated under the laws of the State of
New York. The Certificate of Incorporations its incorporators
filed with the New York Department of State on April 5, 1982
reads in part as follows:
x***
2. Thecorporation * * * is not formed for pecuniary profit
or financial gain, [and] * * * no part of the assets,
income or profit of the corporation is distributable to, or
inures to the benefit of its members, directors or officers
or any private person except to the extent permissible
under the Not-For-Profit Corporation Law.
—————
B-3
3. The purposes for which the corporation is formed are:
To promote and encourage the political and [sic] ideas and
beliefs fostered by the International Caucus of Labor
Committees and other organizations advocating the same
ideas and beliefs; to distribute to the general public, sell
and obtain subscriptions to publications specifically
dedicated to the political ideas and beliefs fostered by the
International Caucus of Labor Committees and other
organizations; to solicit membership for certain
membership organizations associated with the
publications distributed by the corporation consonant with
the goals, purposes and programs of those organizations;
to advertise and promote the publications distributed by
the corporation; to engage the services of writers,
reporters, editors, distributors, corporations,
associations, partnerships and new agencies in
furtherance of these purposes; ***
2. Campaigner Publications, Inc. (Campaigner) is a New
York corporation.
3. Independent Democrats for LaRouche (IDL) is an
unincorporated association and a political committee apparently
recognized by the Federal Election Commission. Paul
Greenberg is an authorized representative of IDL and is
empowered to sign notes on its behaif.
4. Atall times material to this case, Ron Fredman and
Ronald R. Bettag worked for Caucus and solicited loans to
Caucus, IDL and Campaigner by selling notes for them.
5. Ron Fredman, Ronald R. Bettag and Paul Greenberg
are not and have never been licensed by the Department to sell
——77~
B-4
securities in the State of Minnesota. Likewise, Caucus,
Campaigner, and IDL are not and never have been licensed by
the Department to sell securities in the State of Minnesota.
6. Mary M. Mitchell, an 85-year-old widow, is a resident
of Minneapolis, Minnesota. She has lived there since moving
from Winona in 1938. Mitchell is a retired stenographer who
has a high school education.
7. In July, 1984, while walking on the Mall near.Seventh
and Nicollet in downtown Minneapolis, Mitchell was given a
pamphlet pertaining to the presidential candidacy of Lyndon
LaRouche. She told the man who gave her the pamphlet that
she had seen LaRouche on television and liked what she saw.
The man told her that if she gave him her name and telephone
number someone would call her with more information about
LaRouche. She gave him the information.
8. Approximately one week after her encounter on the
Mall, Ron Fredman telephoned Mitchell from Chicago to talk
to her about LaRouche, Caucus, Campaigner and IDL.
Fredman told Mitchell about corruption in the world and the
need for Americans to clean it up. He specifically mentioned
drug trafficking in the Middle East and South America, the
laundering of Mafia money by banks, the decline in American
culture, and bank failures. He told Mitchell that some banks
were shaky and that if the United States didn't pull together,
everyone would go bankrupt. Fredman told Mitchell that
LaRouche needed her help with these problems and he asked
her for a contribution. She agreed to make a $25 contribution
at that ime, and he made arrangements for her to receive
copies of "New Solidarity" and other publications.
9. During that initial telephone conversation, Fredman
also asked Mitchell to help by making loans. Fredman told her
B-5
that she would receive a promissory note for any loans she
made and that she could specify the interest rate and the term
of the notes. Since she would get a promissory note and could
specify the interest rate, Mitchell concluded that the loans
would be similar to a banking transaction. Moreover, since
LaRouche was "in the limelight", she concluded that she was
not dealing with a fly-by-night operation that would skip the
country, and that her loans would be a good investment.
Therefore, she agreed to make a $15,000 loan at that time. In
return, she was to receive two notes payable at the end of three
years. One was to be made payable to her and her stepson, R.
Keith Mitchell, in the principal amount of $10,000. The other
was to be made payable to her and her sister-in-law, Mozell
Hall, in the principal amount of $5,000. Fredman personally
collected two checks in the aggregate amount of $15,000 from
Mitchell at her home in Minneapolis early in July 1984. Later
that month, two promissory notes were mailed to her in the
aggregate principal sum of $15,000. The notes stated the
payees, amounts, term and interest rate Fredman promised.
10. On September 3, 1984, Fredman called Mitchell again
and asked her to loan $1,000 to IDL. She agreed to make a
$1,000 loan to IDL for one year at ten percent interest.
Following her conversation with Fredman, she mailed him a
$1,000 check payable to IDL's order. A few days later, she
received a promissory note signed by Paul Greenberg, as an
authorized representative of IDL. The note was in the
principal sum of $1,000, bore interest at the rate of ten
percent, and was payable in one year. The note, and
accumulated interest thereon, was paid by IDL in July 1986.
11. On or about September 17, 1984, Fredman telephoned
Mitchell again to give her an update on the activities of the
LaRouche organizations. At that time, he gave her more
information on their efforts to eliminate drug traffic and related
activities in the Middle East. In addition, he talked about a
publication entitled "Dope, Incorporated" which one of the
B-6
organizational Respondents had published. During that
telephone conversation, Mitchell agreed to make an additional
$5,000 loan to Caucus for 90 days with interest at 15 percent.
Immediately after her telephone conversation with Fredman,
Mitchell mailed him a check payable to Caucus in that amount.
A few days later, Mitchell received Caucus’ promissory note
incorporating the loan terms she and Fredman had discussed.
12. On or about November 26, 1984, Fredman called
Mitchell to solicit another loan. During that conversation,
Mitchell expressed regret for having made the initial $15,000
loan for a term of three years. He told her that if she returned
the notes to him, he would issue two new notes which would
mature in a year (on November 26, 1985). At that time,
Fredman persuaded Mitchell to make an additional $10,000
loan to Caucus for six months. When Mitchell told Fredman
she was getting 14 percent on a certificate of deposit with her
bank, he said that Caucus would pay 16 percent on the loan.
13. On or about November 26, 1984, a $10,000
promissory note signed by Fredman for Caucus was mailed to
Mitchell. It reflected a six-month term and a 16 percent
interest rate as she and Fredman had agreed on November 26.
At the same time, Mitchell was mailed two promissory notes
replacing those which she had returned due to her
dissatisfaction with their three-year maturity date. Exhibits 19
and 23. Those notes were signed by Fredman and
Campaigner and reflected a one-year term and a 12 percent
interest rate. The payees were the same as those in the notes
originally issued.
14. Caucus’ September 17, 1984 note -or $5,000 was due
on December 17, 1984. On or about the due date, Fredman
called Mitchell and told her that the note could not be paid
because their assets had been frozen by a bank, and“he asked
her if she would accept a one-third partial payment. Although
B-7
Mitchell agreed that the bank's explanation for freezing
Caucus’ funds was "outlandish", she said she would like half
of the note paid. Fredman said he would see if that could be
done and call her back. Early in January, 1985, after Mitchell
returned from a vacation, Fredman called her and asked if she
would accept a new note covering Caucus’ $5,000 loan to be
payable in five monthly principal installments of $1,000
commencing May 1, 1985 and a lump sum interest payment on
October 1, 1985. She agreed and a short time later received a
promissory note from Caucus in the principal sum of $5,000.
Exhibit 7. That note contained the payment terms she had
agreed to accept and was signed by Fredman for Caucus.
15. In April 1985, Mitchell asked Fredman if the
beneficiaries on Campaigner’s November 26, 1984 notes
could be changed. He said that could be done and they agreed
that Campaigner's two notes (Exhibits 19 and 23) would be
destroyed and that one new note would be issued in the
principal amount of $15,000. Mitchell also agreed that the rate
of interest could be reduced from 12 percent to 10 percent on
the new note. Exhibit A. A short time later, a $15,000 note
payable in one year with interests at 10 percent was mailed to
her. Exhibit 24. Caucus was listed as the payor of that note
and it was signed by Fredman. The note was dated April 16,
1985 rather than November 16, 1984. Mitchell did receive
interest on the $15,000 loan between November 26, 1984 and
April 16, 1985, did not agree to waive interest earned during
that time, and did not authorize a change in the date of the two
notes when they were rolled over and consolidated.
16. During the telephone conversation between Mitchell
and Fredman on April 10, 1985, Mitchell agreed to make an
additional loan to Caucus in the amount of $10,000. The loan
was made in two separate payments to Caucus. A $6,000
payment was made by a check dated April 10, 1985 anda
$4,000 payment was made to Caucus by a check dated April
26, 1985. On or about April 29, 1985, Caucus’ $10,000
B-8
promissory note was mailed to Mitcheil. The note, which was
signed by Fredman, carried an interest rate of 10 percent and
was payable in six months.
17. Apart from her loan to IDL, Mitchell loaned $40,000
to Caucus between July 1984 and April 29, 1985. As of
November 21, 1985, only $2,000 had been repaid to her. A
$1,000 payment was made late in April 1985, a $500 payment
was made on November 6, 1985 and a $500 payment was
made on September 30, 1985 (two checks).
18. During their telephone conversation in 1984 and 1985,
Mitchell and Fredman primarily talked about Caucus, but he
never explained his relationship to Caucus, Campaigner or
IDL. In addition, he never told her how they would repay the
loans, if they had solicited loans from other persons, or if they
had repaid those loans in a timely fashion.
19. All of Mitchell's loans to the Respondents, except the
$1,000 loan made to IDL, were made by check payable to
Caucus. All the checks were presented for payment and paid
by her bank. Mitchell did receive interest on the $15,000 loan
between November 26, 1984 and April 16, 1985, did not
agree to waive interest earned during that time, and did not
authorize a change in the date of the two notes when they were
rolled over and consolidated. All the loans we:- solicited by
Fredman. Mitchell had no direct contact with Greenberg and
had very limited contact with Bettag. Her only contact with
Bettag occurred in 1985 after she became concerned about the
repayment of her notes. Bettag told her that the LaRouche
organizations stand behind their commitments and that notes
were good investments. Bettag explained that money wasn't
coming in as fast as they had expected, but that all their loans
would be repaid and that her money was safe.
20. After the conversation with Bettag, Mitchell advised
B-9
family members about the loans she had made to the
Respondents and the delinquencies that existed. Later, with
their advice and input, she retained counsel and the Department
was eventually informed of the transactions.
21. In later November of 1985, Joyce Rubenstein, a
Caucus representative, telephoned Mitchell from New York to
discuss her loans to Caucus. Rubenstein advised Mitchell that
if she would make an additional $10,000 loan to Caucus she
would be sure to get the rest of her money ($40,000) back.
Based on these representations, Mitchell loaned Caucus
another $10,000 for eight months at 12 percent. On
November 29, 1985, Mitchell received confirmation from
Caucus that the loan had been made under those terms.
Confirmation was in a letter form. No note was issued as had
been done in the past.
22. Mitchell considered all of her loans to the Respondents
as investments, not unlike certificates of deposit that
individuals can purchase from a bank. None of her loans were
intended to be contributions and none of them were
collateralized. Apart from IDL's note, most of the notes
issued were notarized by .Bettag and most specifically stated
that they could not be assigned, transferred or discounted. All
of them were signed by Fredman.
23. In 1984 and 1985, the Respondents solicited loans
from other Minnesota residents and from residents in other
states including Illinois, Maryland, Alaska, Indiana, and
Washington.
24. No individual employed by or representing the
Respondents gave Mitchell any financial information regarding
the organizational Respondents that she could use to determine
their ability to repay the loans she made. She was not told
how the Respondents would be able to repay her loans, where
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the money used to repay her loans would come from, or what
the risks of her investments were. Mitchell was not advised if
Caucus was in default of its obligation to repay principal and
interest to other investors or that one judgment had been
entered against Caucus for failure to repay a loan when due. :
Moreover, Mitchell was never advised that the Respondents
were not licensed to sell securities in the State of Minnesota or
that the notes were not registered as required by law. In fact,
Fredman told Mitchell that the loans were legal.
BASED ON THE FOREGOING FINDINGS OF
FACT, THE UNDERSIGNED MAKES THE
FOLLOWING:
CONCLUSIONS OF LAW
1. That the Minnesota Commissioner of Commerce and the
Administrative Law Judge have authority to consider the
issues raised by the Commissioner's Cease and Desist Order
and Order Suspending Exemption, as amended, under Minn.
Stat. §§ 80A.21, 80A.15, subd. 3, and 14.50 (1984).
2. That the Department has complied with all releyant
substantive and procedural requirements of law and rule and
that the Respondents received proper and timely notice of the
hearing and of the Commissioner's Orders.
3. That under Minn. Rule 1400.7300, subp. 5, the
Department has the burden of proof to establish the Statutory
violations alleged by a preponderance of the evidence.
4. That the loans solicited by Ron Fredman and the notes
issued by the organizational Respondents constituted offers
and sale for purposes of Minn. Stat. § 80A.14, subd. 17
(1984).
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5. That the promissory notes offered and sold by the
Respondents in the state of Minnesota constitute securities for
purposes of Minn. Stat. § 80A.14, subd. 18 (1984).
6. That the promissory notes offered and sold by the
Respondents in the State of Minnesota were not registered
with the Commissioner .prior to :or at the time of their offer of
sale as required by Minn. Stat. § 80A.08 (1984).
7. That the Respondent Ron Fredman violated Minn. Stat.
§ 80A.014, subd. 1, by transacting business in this State as an
agent without a license to do so.
8. That the organizational Respondents violated Minn.
Stat. § 80A.04, subd. 2, by employing Ron Fredman as their
agent.
9. That in connection with the sale of promissory notes to
Mary Mitchell, the Respondents Ron Fredman and Ronald R.
Bettag failed to state material facts necessary in order to make
statements that were made not misleading, contrary to Minn.
Stat. § 80A.04, clause (b) (1984), by failing to disclose
financial information which could have been used to determine
the organizational Respondents. ability to repay the notes
when due and by failing to advise Mitchell that none of the
Respondents were licensed to sell securities in the State of
Minnesota and that the promissory notes were not registered
pursuant to the Minnesota Securities Act.
10. That the Cease and Desist Order proposed by the
Commissioner is in the public interest and should be issued.
11. That under Minn. Stat. § 80A.15, subd. 4, the
Respondents have the burden of proving any exemption
claimed under Minn. Stat. § 80A.Ol to 80A.31 or any
exception from a definition contained therein.
——ee——_e_—
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12. That the Respondents have failed to establish that the
promissory notes they sold are subject to any exemption or
exception.
13. That the Respondent Ron Fredman fraudulently
misdated one of the promissory notes issued to Mitchell in
violation of Minn. Stat. § 80A.Ol, clause (c) (1984).
14. That the Respondent Ron Fredman did not violate
Minn. Stat. § 80A.Ol, clause (c) by telling Mitchell that some
banks were failing. z
BASED UPON THE FOREGOING
CONCLUSIONS OF LAW, THE UNDERSIGNED
MAKES THE FOLLOWING:
ORDER
1. That Respondent shall cease and desist from offering or
selling any security in Minnesota without filing said security
pursuant to Minn. Stat. ch. 80A, or without obtaining an
opinion letter from the Department of Commerce that said
security is exempt from filing.
2. That Respondents shall cease and desist from offering
or selling any promissory notes or other debt instruments
without filing said instruments pursuant to Chapter 80A, or
without obtaining an opinion letter from the Department of
Commerce that the instrument need not be filed.
Dated: Sept. 3, 1987
MICHAEL A..HATCH
Commissioner of Commerce
State of Minnesota
Department of Commerce
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500 Metro Square Building
Seventh & Robert Streets
St. Paul, Minnesota 55101
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State of Minnesota
In Court of Appeals
C4-87-1952
Department of Commerce
Randall, Judge
CAUCUS DISTRIBUTORS, INC.,
STUART L. FINNEY
ET AL..,
FULLER & FINNEY
3300 EDINBOROUGH WAY, SUITE 415
EDINA, MN 55435
PATRICK J. MORAN
MORAN & PILGER
1221 LAMAR,SUITE 517
HOUSTON, TX 77010
Relators,
Vv
COMMISSIONER OF COMMERCE,
HUBERT H. HUMPHREY, III
ATTORNEY GENERAL
JEROME L. GETZ
SPEC. ASST. ATTORNEY GENERAL
1100 BREMER TOWER
7TH PLACE & MINNESOTA STREET
C-2
ST. PAUL, MN 55101
Respondent.
Filed April 5, 1988
Office of Appellate Courts
SYLLABUS
A discovery sanction that precluded relators
from contesting some of respondent's
allegations did not impermissibly deprive
relators of an opportunity to be heard. The
sanction was for good cause and within the
discretion of the Administrative Law Judge
(ALJ).
The factual findings of the Commissioner
were supported by substantial evidence.
The promissory notes relators issued
constituted securities under Minn. Stat. §
80A.14.
The Federal Election Campaign Act does not
preempt regulation of the issuance of securities
by relator Independent Democrats for
LaRouche.
Minnesota Security Laws do not
impermissibly infringe on relators’ first
amendment rights to freedom of association.
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6. Improper portions of relator's brief and
appendix are stricken.
Affirmed.
Heard, considered and decided by Randall,
Presiding Judge, Lansing, Judge, and
Mulally,” Judge.
OPINION
RANDALL, Judge
This matter is before us on writ for certiorari to review a
decision of the Commissioner of Commerce. The
Commissioner found promissory notes relators offered and
sold in exchange for loans were unlicensed securities. The
Commissioner ordered relators to cease offering or selling
unfiled promissory notes or debt instruments without
obtaining an opinion letter from the department of commerce.
This appeal is from the Commissioner's order. We affirm.
FACTS
Relators Caucus Distributors, Inc. (CDI) and Campaigner
Publications, Inc. (CPI) are New York corporations.
Independent Democrats for LaRouche (IDL) is an
unincorporated association.
MM, an 85 year old widow, was the only witness to
testify at the hearing. According to MM's testimony, her first
contact with respondents was in July 1984. MM was
downtown Minneapolis, when she saw an individual passing
* Acting as judge of the Coun of Appels by
appointment pursuant to Minn. Const. Art. 6,§2.
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out pamphlets. MM took a pamphlet and found it discussed
Lyndon LaRouche. She heard LaRouche on television a few
days earlier, and she told the pamphleteer she liked LaRouche
and his views. MM gave the pamphleteer her telephone
number so someone could call her and talk about LaRouche.
About a week later, MM received a telephone call from
Ron Fredman of the Chicago office. Fredman told MM that
the organization could use her help in its efforts to cut down
on dope pushing in the Middle East and other places. He also
mentioned incidents of banks closing, a matter of which MM
was already aware through various newspaper articles.
Fredman asked MM to loan money to the LaRouche
organization. MM testified Fredman told her she would get a
promissory note, specifying the interest rate and maturity date,
and MM said she "thought it was just like something you
would give to a bank." In return for a $15,000 three-year loan,
MM received two notes, one for $10,000 and another for
$5,000.! On September 3, 1984, MM made out a check for
$1000, payable to IDL. On the bottom of the check, MM
made the notation: “l-yr.
April 16, 1985, to replace one note for $5000 and one note
for $10,000, which had been made out for three years loan at
10%."2 Shortly after MM mailed the check, she received a
note from IDL, signed by Paul Greenberg. Relators stipulate
that this was a valid ioan, and that Greenberg was authorized
to sign the note.
1 A 12-month, $15,000 note was issued by
Caucus Distributors
2 The loan was paid off, together with interest.
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After receiving another telephone call from Fredman, MM
made out a check to CDI for $5000. On the bottom of the
check, MM wrote: "90-day loan, 15 percent annual rate." MM
received a note from CDI in early 1985, after Fredman
informed her she could not be repaid within the 90-day period.
About November 26, 1984, MM made another loan to COI
for $10,000, “for the same reason that [she] made the other
ones. [She] thought it was a good investment * * *." MM
received a six-month promissory note dated November 26,
1984, signed by Fredman for CDI in the amount of $10,000,
with interest at 16%. Fredman offered her 16% when she told
him she had a certificate of deposit (CO) at 14%.
In April 1985, Mr. Fredman called MM and asked to
borrow more money from her. MM sent CDI one check for
$4000 and another for $6000. She received a $10,000
promissory note at 10% interest from CDI, signed by
Fredman. In the fall of 1985, appellant received three checks
from CDI, totalling $1000, as partial loan repayment. MM
testified she never believed she would not be timely repaid on
the notes. She testified she was not informed that CDI was
borrowing significant amounts of money from other persons.
She did not know that CDI, CPI or IDL had failed to make
timely payments on notes issued to other persons. MM did
not know that other lenders had not been repaid and had
obtained judgments against CDI.
In November 1985, Joyce Rubenstein, from CDI's New
York office, telephoned MM, informing her that if she made
an additional loan to CDI, the $40,000 total loans would be
repaid. When she sent the check to CDI, MM received a letter
acknowledging receipt of the loan.
On October 6, 1986, the ALJ issued a discovery order,
requiring relators to provide a list of persons who made loans
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to relators after September 1, 1983. Relators resisted on the
grounds that the names of lenders to LaRouche's campaign
were privileged information, and that requirement of their
disclosure would somehow interfere with the first amendment
right of freedom of association of CDI and its lenders.
The ALJ gave relators an alternative solution. Each relator
could provide the ALJ with a comprehensive list of persons
who had made loans. The ALJ would provide respondent
with thirty names, chosen at random from each list, and
respondent could then request additional information about the
individuals chosen. The ALJ indicated that the information
would be subject to a protective order providing for the
confidentiality of the information, and for the return to relators
of all information after a final decision was reached.
Relators deliberately did not comply with either option
offered by the discovery order, continuing to claim the lists
were privileged. Respondents moved for the imposition of
sanctions. The ALJ denied the motion, but reaffirmed its prior
order and again directed relators to comply with discovery.
Relators again informed the ALJ of their decision not to
comply with any discovery order. The ALJ then entered an
order precluding relators from contesting portions of
respondent's amended cease and desist order.
After considering the evidence, and consistent with the
ALJ's recommendation, the Commissioner found that relators
_ _ offered and sold unregistered securities in Minnesota, contrary
to the requirement of Minn. Stat. § 804.08, and ordered
relators to cease and desist selling unfiled securities in
Minnesota without obtaining an opinion letter from the
department of commerce.
ISSUES
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1. Did discovery sanctions improperly deprive
relators of a night to be heard?
2. Were the factual findings of the Commissioner
supported by substantial evidence?
3. Do the promissory notes issued by relators
constitute securities under Minn. Stat. §
80A.14?
4. Does IDL constitute a presidential campaign
organization, the regulation of which is
preempted by the Federal Election Campaign
Act?
5. Are relators' fund-raising activities protected
by the first amendment?
6. Should materials in relators’ brief be stricken?
ANALYSIS
I
DISCOVERY SANCTIONS
Relators contend they had a right to protect their lists of
supporters and contributors on first and fourteenth amendment
and privacy grounds. They assert that the order requiring
disclosure of their membership violated their supporters’ rights
to free association and speech.
The compelled disclosure of an individual's affiliation with
an organization may, standing alone, constitute an intrusion
into the first amendment rights of privacy of association and
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belief. Jones v. Unknown Agents of the Federal Election
Commission, 613 F.2d 864, 874 (D.C. Cir. 1979)(discussing
NAACP vy. Alabama, 357 U.S. 449 (1958)).
[A] court must be particularly mindful of
potential damage to associational interests
when enforcing a subpoena against minor
political parties and their members.
nome ee ™
644 F.Supp. 120, 123 (S.D.N.Y. 1986)(citing Buckley v.
Valeo, 424 U.S. 1, 71 (1976)).
However, governmental interests underlying the disclosure
provisions of the Federal Election Campaign Act may
outweigh the possible harm to the associational rights of
members of minor political parties. See NAACP, 357 U:S. at
463.
The state's security laws are aimed at
speculative schemes having no more basis than so many
feet of blue sky, * * * and * * * [they are] intended to
put a stop to the sale of shares in visionary oil wells,
nonexistent gold mines and other "get-rich-quick"
schemes calculated to despoil credulous individuals of
their savings. It is a proper and needful exercise of the
police power of the state and should not be given a
narrow construction * * *. The commission * * * has
the power, in making its investigation, to compel a full
disclosure of the facts upon which to base an intelligent
judgment.
State v, Gopher Tire & Rubber Co, 146 Minn. 52, 55, 177
N.W. 937, 938 (1920). This governmental interest is
sufficiently compelling to outweigh the claimed infringement
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by relators on their night of association with their contributors.
In LaRouche Campaign, the Federal Election Commission
(FEC) sought information to determine whether the LaRouche
Campaign had reported false information about contributions
and loans. The court concluded that the state's interest was
sufficiently compelling to require disclosure of solicitors and
contributors. LaRouche Campaign, 644 F.Supp. at 122. The
information that could be requested by the FEC included
identification of officers, directors and other members insofar
as they related to persons responsible for soliciting
contributions, and all bank records pertaining to loans and
contributions.
Here, the information requested is even less intrusive. The
discovery order did not require disclosure of the names of
persons soliciting loans, officers, directors, employees and
volunteers unless the lists furnished had fewer than 25 names.
Respondents claim they were prejudiced by relators'
failure to provide the list. We agree. Relators point out they
provided respondent with seven names. However, relators'
disclosure of seven names selected by relators did not
adequately comply with the order. The ALJ correctly found
that relators' failure to provide the required information
deprived respondent of the opportunity to prove its case,
particularly to prove the instruments were securities. The
sanction was appropriate.
II
EVIDENCE TO SUPPORT FINDINGS OF FACT
Decisions of.administrative agencies enjoy a presumption
of correctness, and deference should be shown by courts to
the agency's expertise and special knowledge in its field of
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technical training, education, and experience. Reserve Mining
Co. v. Herbst, 256 N.W.2d 808, 824 (Minn. 1977). This
court must decide whether findings of fact are unsupported by
substantial evidence. Id. at 827; Minnesota Administrative
Procedure Act, Minn. Stat. § 15.0425 (1984).
Relators claim some of the Commissioner's findings of
fact were not supported by the evidence. MM did not testify
that Bettag, a consultant for relators, solicited loans from her.
Relators claim there was no evidence Bettag had any role in
soliciting loans.
However, respondent alleged that Bettag solicited loans.
Relators’ failure to comply with the ALJ's discovery order
deprived respondent of the opportunity to prove this
allegation. The ALJ's sanction for failure to comply with
discovery precluded relators from contesting, among other
things, respondent's claim that Bettag offered or sold
promissory notes to persons in Minnesota. Since we affirm
the discovery sanctions, we hold the Commissioner's finding
was proper.
Relators claim the Commissioner's finding #18 constituted
an abuse of discretion:
During their telephone conversation in 1984 and 1985,
[MM] and Fredman primarily talked about Caucus, but
he never explained his relationship to Caucus,
Campaigner or IOL. In addition, he never told her how
they would repay the loans, if they had solicited loans
from other persons, or if they had repaid those loans in a
timely fashion.
Relators contend that it was unreasonable to assume MM
did not realize that other lenders made loans to relators. The
contested finding was that relators never told MM how the
loans were to be paid, or about other loans or inability to make
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other loan payments. That finding is supported by MM's
testimony that Fredman never discussed with her how CDI
would repay the loans, that COI was borrowing significant
amounts of money from other persons, or that CDI had failed
to make timely repayment on notes CDI had issued to other
persons. She testified no one connected with CPI, IDL or
CDI told her that any of those organizations had failed to make
timely payments on loans to other persons.
Relators contend there was inadequate evidence to support
finding #22, that MM "considered all of her loans to [relators]
as investments, not unlike certificates of deposit * * *." When
asked why she made a particular loan to CDI, MM testified:
"[F]or the same reason that I made the other ones. I thought it
was a good investment on there." MM testified Fredman
offered her a note at 16% when she told him she had money
invested in a CO at 14%. MM testified that she has quite a few
CD's, and thought of them and bank accounts as investments.
MM testified
as long as he told me I could give a promissory note and
specify the interest and when I would get repaid, I
thought it was just like something you would give to a
bank. * * * I said, "Well, if it's just a loan for a year or
so, I could put it in the bank anyhow, so he could have
it."
MM's testimony supports the finding.
Ill
SECURITIES
The Commissioner found that "the promissory notes
offered and sold by [relators] in the State of Minnesota
constitute securities for purposes of Minn. Stat. § 80A.14,
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subd. 18 (1984)." The statute includes in its definition of
"security:”
any note; stock; treasury stock; bond; debenture;
evidence of indebtedness; certificate of interest * * *.
Id. In a judicial or administrative proceeding under Minn.
Stat. §§ 80A.01-.31, the burden of proving an exemption or
an exception from a definition is upon the person ciaiming the
exemption or exception. Minn. Stat. § 80A.15, subd. 4
(1984).
Both parties agree there is no applicable Minnesota caselaw
defining security in a context similar to the notes at issue here.
However, they agree that appropriate analysis would be under
federal law interpreting the Securities Act of 1933, 15 U.S.C.
§§ 77a-77bbbb, and the Securities Exchange Act of 1934, 15
U.S.C. §§ 78a-78kk.
Relators point out that the term "security" has the meaning
given to it in the statute unless the context requires otherwise.
Minn. Stat. § 80A.14, subd. 1 (1984). Relators contend that
viewed in the context of the transaction, its notes are not
securities within the definition of Minn. Stat. § 80A.14.
Respondent agrees that it would be inappropriate to consider
all notes securities, but claims the Commissioner ey
found the notes at issue here to be securities.
Under a literal application of Minn. Stat. 80A.14, subd.
18, which specifically refers to notes as securities, the
promissory notes would be securities. In Landreth Timber
Co. v. Landreth, __ U.S. _, 105 S.Ct. 2297 (1985), the
Supreme Court found instruments bearing the name and the
usual characteristics of stock had to be treated as a security
under the plain meaning of the statutory definition.
A literal interpretation is, however, inappropriate for the
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term "note," which
may now be viewed as a relatively broad term that
encompasses instruments with widely varying
characteristics, depending on whether issued in a
consumer context, as commercial paper, or in some other
investment context.
Id. at __, 105 S.Ct. at 2306.
Some courts have applied an investment contract analysis
to determine whether a document is a security. In Securities &
Exchange Commission v. W.J. Howey Co., 328 U.S. 293
(1946), the Supreme Court defined an investment contract, a
security under the federal act, as:
a contract, transaction or scheme whereby a person
invests his money in a common enterprise and is led to
expect profits solely from the efforts of the promoter or a
third party, it being immaterial whether the shares in the
enterprise are evidenced by formal certificates or by
nominal interests in the physical assets employed by the
enterprise.
Id. at 298-99. See also Gopher Tire, 146 Minn. at 56,
177 N.W. at 938 ("investment contract" found to mean
contract or scheme for "placing of capital or laying out of
money in a way intended to secure income or profit from its
employment").
The Howey test has been applied to documents similar to
the notes issued by relators. See Securities & Exchange
Commission v, World Radio Mission, Inc., 544 F.2d 535 (Ist
Cir. 1976). World Radio Mission was a religious organization
which raised funds by selling interest-bearing notes. The
court found the documents were securities, both within the
plain meaning of the statute and under the investment contract
analysis, as applied in United Housing Foundation, Inc, v,
Forman, 421 U.S. 837 (1975). Id. at 852. Several federal
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courts have rejected the Howey test, however. See Daily v,
Morgan, 701 F.2d 496 (Sth Cir. 1983); Exchange National
Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126 (2d
Cir. 1976).
Relators contend the courts must look for the
characteristics of an investment, i.e. “the expectation of profit
based upon the entrepreneurial or managerial efforts of
others." See Great Western Bank & Trust v, Kotz, 532 F.2d
1252 (9th Cir. 1976).
To determine whether the transaction under review
involves an "investment" in return for "securities" within
the meaning of the securities laws, we analyze the nature
and degree of risk accompanying the transaction to the
party providing the funds. * * * The inquiry is whether
the funding party invested "risk capital.”
Id. at 1256-57 (citations omitted). The Kotz court found the
ultimate inquiry to be whether the lender, a bank that received
an unsecured note in exchange for a loan, contributed "risk
capital” subject to the entrepreneurial or managerial efforts of
the issuer of the note. Id. at 1257.
Relators argue MM made the loans with only an
expectation of a set rate of interest not contingent upon the
managerial or entrepreneurial efforts of relators, and therefore
the loans are not securities. See Union Planters National Bank
of Memphis v. Commercial Credit Business Loans. Inc,, 651
F.2d 1174, 1185 (6th Cir. 1981)(loan participation purchased
by bank did not constitute security, where bank considered
transaction a loan, not an investment, the existence of collateral
strongly suggested a commercial loan, and the interest
payments were to be made from the efforts of a third party).
Here, the notes are securities under the Kotz test. MM's
loans to relators were not collateralized: the loans made to MM
——— eee
a
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and to other individuals were not isolated transactions, but part
of a general offering; and the notes were not short-term
demand notes. This case can be distinguished from Union
Planters, in that the ability to repay the loan and interest was
directly dependent on the fund-raising efforts of relators, and
not upon the managerial or entrepreneurial efforts of some
third party.
Among the factors to consider when determining whether
the notes were purchased as an investment or as a commercial
loan are whether the notes were personal promissory notes
issued by a private party; whether the notes were offered to the
public; whether the issuer is the person bringing the claim; and
whether the notes were procured in the solicitation of venture
capital. See Lino v, City Investing Co,, 487 F.2d 689, 694-
95 (3d Cir. 1973).
Relators contend that MM did not make an investment
because she expected to get back only her principal plus
interest, and did not expect to share in any profits of
enterprises conducted by relators. MM risked the loss of her
capital in return for loans at an interest rate up to two
percentage points above the rate she was receiving on her CD.
The following factors weigh in favor of finding the notes
are securities under the commercial/investment dichotomy test:
1 MMis nota financial institution or commercial
lender in the business of making loans to
private parties;
2 The notes Were not issued in connection with
consumer installment transaction or real estate
purchase;
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3 The notes were not collateralized;
4 The sale took place outside the normal market
for notes and commercial paper,
5 The sales to MM took place as part of a
broader solicitation of loans from members of
the public;
6 MM considered the notes an investment:3
7 The notes are securities within the plain
ING OE Oe CIID ancciinsnsencecinsiinteadenees.cs.......
Relators point out that MM thought of the notes like
certificates of deposit. Certificates of deposit issued by
federally regulated banks are not securities. Marine Bank v.
Weaver, 455 U.S. 551, 559 (1982). However, relators
ignore the Supreme Court's reasoning:
It is unnecessary to subject issuers of bank certificates of
deposit to liability under the antifraud provisions of the
federal securities laws since the holders of bank
certificates of deposit are abundantly protected under the
federal banking laws.
3 She was unwilling to make contributions in excess of
$25 to appellants, but was prevailed upon to make
substantial loans ($40,000), by promises of higher
interest, including at one point interest two percentage
points higher than interest she was currently receiving on
a CD.
| C-17
Id. The certificate of deposit analogy is not applicable
here. MM and other lenders do not benefit from the protection
of federal or state banking laws. An important consideration is
that the purpose of the securities law is to protect members of
the public from fraud and imposition. Gopher Tire, 146
Minn. at 55, 177 N.W. 938: see also State v. Investors
Security Corp,, 297 Minn. i, 8, 209 N.W.2d 405, 409
(1973)(in accordance with an expansive view of our securities
statutes, there has been a consistent broadening of the
coverage of these statutes in Minnesota). We find,
unequivocally, that this policy is furthered by our holding here
that the Commissioner correctly found these notes to be
securities under Minn. Stat. §80A.14 (1984) and subject to
regulation by the State of Minnesota.
IV
FEDERAL PREEMPTION
Relators point out that state law may be preempted where
congress enacts federal statutes with the clear intent of
preempting state law. See Silkwood v, Kerr-McGee Corp.
464 U.S. 238, 248 (1984). Generally, a federal act does not
supersede the police power of the state unless that was the
clear and manifest purpose of Congress. Jones v, Rath
Packing Co., 430 U.S. 519, 525 (1977)(quoting Rice v.
Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)). The
federal-state balance will not be disturbed unintentionally by
Congress or unnecessarily by the courts. See id. The test is
whether, in the relationship between state and federal law as
applied, the state law "stands as an obstacle to the
accomplishment and execution of the full purposes and
objectives of Congress." Hines v. Davidowitz, 312 U.S. 52,
67 (1941).
Respondent argues that Congress did not intend to preempt
laws of general application outside the area of election, that
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there is no conflict between the federal election laws and state
law, and that compliance with one does not preclude
compliance with the other. We agree that Minnesota security
laws, as applied here to protect Minnesota residents, do not
conflict with the intent of the federal election laws.
Relators would have this court hold that the federal laws
relating to elections and political activities supersede and
preempt any state law provision with respect to federal Office,
giving appellants absolute immunity from state law simply
because LaRouche has aspirations to federal office. We
decline to do so.
Vv
FIRST AMENDMENT ARGUMENTS
Relators argue that because they are political organizations,
the first amendment protects them from application of state
regulation. See generally Federal Election Commission v,
M h itizens for Life. In tuna . for ace
616 (1986)(federal statute restricting independent spending
unconsttutionally infringed on free speech without compelling
justification). However, the bare Claim of a first amendment
interest does not insulate behavior from responsible judicial
scrutiny. The state has an interest in protecting citizens from
abusive practices in solicitation of funds for charity, even
when the charitable Organization has a purpose protected by
the first amendment. See Cantwell v, Connecticut, 310 U.S.
296, 306 (1940).
In World Radio Mission, notes made in exchange for loans
to a religious organization were found to be securities. World
Radio Mission asserted first amendment freedom of religion
nights. The First Circuit Court of Appeals found that World
Radio did not solicit contributions, but stressed the security of
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investment. World Radio Mission, 544 F.2d at 538-39. The
court pointed out the 12% interest rate "suggests defendants’
investors were moved by something more than a donative
spirit." Id. at 539. Having solicited funds on economic
grounds, the court found, World Radio could not claim first
amendment protection. MM, by her own uncontradicted
testimony, stated she was induced, not by LaRouche's oratory
or his political platform, but by high interest rates, to lend the
money.
Similarly, relators here were not engaging in an activity
protected by the first amendment when they issued promissory
notes in exchange for loans. As in World Radio Mission, MM
was motivated by "something more than a donative spirit."
MM's testimony supports the Commissioner's finding that
MM considered the loans investments and did not intend to
make contributions. As purveyors of these "investments,"
relators cannot claim first amendment protection shields them
from reasonable state regulation and reasonable scrutiny by the
courts.
VI
STRIKING OF APPENDIX
Respondent requests this court to strike from the appendix
a copy of a loan repayment agreement of the Ronald Reagan
Congressional Victory Fund. Appellant claims this is the sort
of thing to which MM referred when she said
money is lent to Democrats, Republicans right along,
and then they pay it when they get it. Where they get it
from or how they arrange it, I don't know about it.
The record is devoid of evidence that MM had ever seen
the victory fund document, and thus no evidence exists that
she either relied on it or compared the notes in question to that
C-20
“loan repayment agreement.” Additionally, the document was
not introduced at trial. Portions of an appendix that were not
before the trial court are not properly before this court. See
State v. Edmison, 373 N.W.2d 639, 640 (Minn. Ct. App.
1985), reviewed and remanded on other grounds, 379
N.W.2d 85 (Minn. 1985).
Respondent objects to other portions of relators’ brief
containing information not in evidence. For instance, relators'
brief refers to fund-raising activities of Republicans. Relators
argue that such activities were overlooked, and that they are
the victims of selective enforcement against minority political
groups. The record does not support this accusation; this
issue was not briefed, raised and argued to the ALJ, and will
not considered on appeal.
Respondent also challenges a statement in relator's brief
alleging some states received lists of lenders from Virginia or
the federal authorities, and that it was probable Minnesota also
received a list of Minnesota residents who ere lenders.
Relators inferred from this claim that the discovery order they
resisted was therefore unnecessary. Relators admit that this
information was not in evidence, but assert it is common
knowledge, and assert it is common knowledge, and assert
these statements were never refuted. The statement that
Minnesota "may have" received such a list is, by its phrasing,
speculative, and , without more, we do not consider it.
We grant respondent's motion to strike portions of relators'
appendix. We note that our decision to strike these relatively
immaterial portions has no bearing on our disposition of the
issues in this case.
DECISION
The ALJ's discovery sanctions did not impermissibly
deprive relators of the opportunity to present issues and argue
C-21
their case. The factual findings of the ALJ are supported by
substantial evidence. The promissory notes relators issued
constitute securities under Minn. Stat. §80A.14. The Federal
Election Campaign Act does not preempt regulation of the
issuance of securities by relator Independent Democrats for
LaRouche. Minnesota security laws, as applied to relators
fund raising activities, do not impermissibly infringe on
relator’s first amendment right of association. Portions of
relators' brief and appendix are stricken.
Affirmed.
Blue Sky Law
(3) the security registered or sought to be registered is the
subject of an administrative stop order or similar order or a
permanent or temporary injunction of any court of competent
jurisdiction entered under any other federal or state act
applicable to the offering; but (i) the commissioner may not
institute a proceeding against an effective registration statement
under this clause more than one year from the date of the order
or injunction relied on, and (ii) may not enter an order under
this clause on the basis of an order or injunction entered under
any other state act unless that order or injunction was based on
facts which would currently constitute a ground for a stop
order under this section;
(4) the issuer's enterprise or method of business includes
or would include activities which are illegal where performed;
(5) the offering has worked or tended to work a fraud
upon purchasers or would so operate;
(6) excep: with respect to securities which are being
registered by notification, the terms of the securities are unfair ~
and inequitable; provided, however, that the commissioner
may not determine that an offering is unfair and inequitable
solely on the grounds that the securities are to be sold at an
excessive price where the offering price has been determined
by arms length negotiation between nonaffiliated partes. The
selling price of any security being sold by a broker-dealer
licensed in this state shall be presumed to have been
determined by arms length negotiation;
D-2
(7) when a security is sought to be registered by
coordination there has been a failure to comply with the
undertaking required by section 80A.10, subdivision 2, clause
(d);
(8) the applicant or registrant has failed to pay the proper
filing fee; but the commissioner may enter only a denial order
under this clause and he shall vacate any such order when the
deficiency has been corrected; or
(9) the offering of securities sought to be registered is not
firmly underwritten and (i) the minimum amount of proceeds
from the sale of the securities is not more than $500,000, and
(ii) the maximum amount of proceeds is more than 200 percent
of the minimum amount of proceeds required to go forward
with the offering.
The commissioner may not institute a stop order
proceeding against an effective registration statement solely on
the basis of a fact or transaction known to him when the
registration statement became effective unless the proceeding is
instituted within the next 30 days.
Subd. 2. The commissioner may issue an order requiring
the person for whom a registration was made to show cause
why the registration should not be revoked. The order shall
not b calculated to give reasonable notice of the time and place
for hearing thereon, and shall state the reasons for the issuance
of the order. The commissioner may by order summarily
suspend a registration pending final determination of an order
to show cause. a hearing on the merits shall be held within 30
days of the issuance of the order or suspension. All hearings
shall be conducted in accordance with the provisions of
chapter 14 [Administrative Procedure]. After the hearing, the
D-3
commissioner shall enter an order making such disposition of
the matter as the facts require. If the person for whom the
registration was made fails to appear at a hearing of which he
has been duly noufied, such person shall be deemed in default ~
and the proceeding may be determined against the person upon
consideration of the order to show cause, the allegations of
which may be deemed to be true. The commissioner may
adopt rules of procedure concerning all proceedings conducted
pursuant to this subdivision.
[933,114]
Sec.80A14.Definitions. Subdivision 1. Terms. When
used in sections 80A.01 to 80A.31, the terms defined in this
section have the meanings given them unless the context
otherwise requires.
Subd.2 Affiliate. " Affiliate" of another person means any
person directly or indirectly controlling, controlled by, or
under common control with the other person.
Subd. 3 Agent. "Agent" means any individual other than a
broker-dealer who represents a broker-dealer or issuer in
effecting or attempting to effect purchases or sales or
securities. "Agent" does not include an individual who
represents an issuer in:
(1) effecting transactions in a security exempted by section
80A.15, subdivision 1;
(2) effecting transactions exempted by section 80A.15,
subdivision 2;
(3) effecting transactions with existing employees, partners
or directors of the issuer if no commission or other...
D-4
subdivision of a government or any other entity.
Subd. 16 Purchasing for investment. "Purchasing for
investment" means a purchase made for investment and not for
the purpose of resale. In determining whether securities have
been purchased for investment, the length of the period for
which the securities are held will be one of the factors
considered. Securities held fr two years after their purchase
shall be conclusively deemed to have been purchased for
investment.
Subd. 17. Sale, sell. (1) "Sale" or "sell" includes every
contract of sale of , contract to sell, or disposition of , a
security or interest in a security for value.
(2)" Offer" or “offer to sell" includes every attempt or offer
to dispose of, or solicitation of an offer to buy, a security or
interest in a security for value.
(3) Any security given or delivered with, or as a bonus on
account of, any purchase of securities or any other thing is
considered to constitute part of the subject of the purchase and
to have bee offered and sold for value.
(4) A purported gift of assessable stock is considered to
involve an offer and sale.
(5) Every sale or offer of a warrant or right to purchase or
subscribe to another security of the same or another issuer, as
well as every sale or offer of a security which gives the holder
a present or future right or privilege to convert into another
security of the same or another issuer, is considered to include
an offer of the other security.
D-5
(6) The terms defined in this subdivision do not include (i)
any bona fide pledge or loans; (ii) any stock dividend, whether
the corporation distributing the dividend is the issuer of the
stock or not.
Subd. 18. Security. (a) "Security" means any note; stock;
treasury stock; bond; debenture; evidence of indebtedness;
certificate of interest or participation in any profit sharing
agreement; collateral trust certificate; preorganization certificate
or subscription; transferable shares; investment contract;
investment metal contract or investment gem contract, voting
trust certificate; certificate of deposit for a security; certificate
of interest or participation in an oil gas or mining right, title or
lease or in payments out of production under the right, title or
lease; or, in general, any interest or instrument commonly
known as a security, or any certificate of interest or
participation in, temporary or interim certificate for, receipt for
guarantee of , or warrant or right to subscribe to or purchase,
any of the foregoing. "Security" does not include:
(1) any insurance or endowment policy or annuity contract
under which an insurance company promises to pay money
either in a lump sum or periodically for life or for some other
specified period; or
(2) stock of a closely-held corporation offered or sold
pursuant to a transaction in which 100 percent of the stock of
that corporation is sold as a means to effect the sale of the
business of the corporation if the transaction has been
negotiated on behalf of all purchasers, and if all purchasers
have access to inside information regarding the corporation
before consummating the transaction.
(b) A security that is offered and sold pursuant to section
4(5) of the Securities Act of 1933 or that is a "mortgage related
security" (as defined in section 3(a)(41) of the Securities
D-6
Exchange act of 1934) is not a security exempt from
registration under section 80A.15, subdivision 1 paragraph
(a), in the same manner as obligations issued or guaranteed as
to principal and interest by the United States or its agencies or
instrumentalities. This provision specifically overrides the
preemption of state law contained in section 106(c) of the
Secondary Mortgage Market Enhancement Act of 1984, Public
Law Number 98-440.
Subd.19. State. "State" means any state, territory or
possession of the United States, the District of Columbia and
Puerto Rico.
[Sec.80A.14 amended by Laws 1986, Ch. 358,Laws 1987,
Ch.336.]
[933,115]
Sec.80A.15 Exemptions. Subdivision 1. The
following securities are exempted from sections 80A.08 and
80A. 16:
(a) Any security, including a revenue obligation,
guaranteed by the United States, any state, any political
subdivision of a state or any corporate or other instrumentality
of one or more of the foregoing; but this exemption shall not
include any industrial revenue bond. Pursuant to section
106(c) of the Secondary Mortgage Market Enhancement Act of
1984, Public Law Number 98-440, this exemption does not
apply to security that is offered or sold pursuant to section
106(a)(1) or (2) of that act.
(b) Any security issued or guaranteed by Canada, any
Canadian province, any political subdivision of any province,
any agency or corporate or other instrumentality of one or
more of the
E-1
STATE OF MINNESOTA
IN THE SUPREME COURT
CAUCUS DISTRIBUTORS, INC., ET AL
Petitioners
V.
COMMISSIONER OF COMMERCE
Respondent
PETITION FOR REVIEW
OF DECISION OF COURT
OF APPEALS
Appellate Court Case
DATE OF FILING OF COURT OF APPEALS
DECECISION: April 5, 1988
No. C4-87-1952
TO: The Supreme Court of the State of Minnesota
The Petitioners, Caucus Distributors, Inc., Campaigner
Publications, Inc., and Independent Democrats for LaRouche
request a Supreme Court review of the above entitled decision
of the Court of Appeals upon the following grounds:
E-2
I. STATEMENT OF FACTS AND PROCEDURAL
HISTORY
Petitioners are New York corporations. Independent
Democrats for LaRouche is an unincorporated association
organized and qualified under the Federal Election Campaign
Act, 88 Stat. 1263. Martha Mitchell, a Minnesota citizen,
approached by an individual passing out informational
pamphlets took one and purchased a subscription to some
publications supporting viewpoints also supported by Lyndon
R. LaRouche. She had previously heard Mr. LaRouche on
television and was in sympathy with his views.
Subsequently, Martha Mitchell made several loans to
Petitioners, some of which were repaid, some of which were
not. The only loan made to Independent Democrats for
LaRouche in the amount of $1,000.00 was in conformity with
the specific regulations of the Federal Election Commission. It
was duly repaid. In return for the loans, Petitioners gave
notes specifying the amount of the loan and interest rates. The
notes ranged for various periods of time from three months to
three years.
Minnesota issued a Cease & Desist Order on July, 1986
and a hearing was held August 4, 1986; on October 6, 1986
the administrative law judge issued a discovery order requiring
Petitioners to provide a list of persons who made loans to
Petitioners after September 1, 1983. Petitioners resisted on
the grounds that the release of the names of their lenders
would have a chilling effect on the exercise of the first
amendment rights of those lenders. Almost half of the lenders
requested their names not be disclosed to the Attorney
General. The Administrative Law Judge ruled a prima facie
chilling effect showing had been made. The administrative
law judge then imposed sanctions precluding Petitioners from
E-3
contesting portions of the amended cease and desist order,
effectively defaulting Petitioners.
On September 3, 1987, Michael A. Hatch, Commissioner
of Commerce, found that Petitioners had offered and sold
unregistered securities in the State of Minnesota and ordered
Petitioners to cease and desist.
II. STATEMENT OF LEGAL ISSUES AND
THEIR RESOLUTION BY THE COURT OF
APPEALS
Petitioners appealed to the Minnesota Court of Appeals and
the decision of the Court of Appeals was filed April 5, 1988.
The Minnesota Court of Appeals found that:
(1) Discovery sanctions did not impermissibly deprive
Petitioners of a right to be heard;
(2) The factual findings of the Commissioner were
supported by
substantial evidence;
(3) The promissory notes evidencing loans to Petitioners
were securities under Minnesota Statute Section 80A.14;
(4) The Federal Election Campaign Act does not preempt
regulation of securities in reference to Independent Democrats
for LaRouche:
(5) Minnesota securities laws as applied in this matter did
not impermissibly infringe on Petitioner's first amendment
rights of association, and;
(6) Certain materials were stricken from Petitioner's brief.
Specifically, a copy of a loan repayment agreement of the
Ronald Reagan Congressional Victory Fund and other
portions of Petitioner's brief referring to fund raising activities
of Republicans.
Sanctions imposed by the administrative law judge in this
matter for Petitioner's resistance to the State's discovery
orders, were improper and, in fact, resulted in Petitioners
being unable to present their case. Those discovery requests
were for Petitioner's contributor and lender list. Were
Petitioner's contributors and lenders to believe their names
would become a matter of public record and be circulated
among state departments who happened to be politically
opposed to them, this would have a chilling effect on those
contributors and lenders willingness to support Petitioner's
organizations. See Britt v. Superior Court of San Diego
County, 574 P.2d 766 (1978) and FEC v. Hall Tyner
Election Campaign Committee, 678 F.2d 416 (1982). The
State had sufficient facts available through testimony of parties
to the transaction and through their own investigation to
determine whether or not the loan in question was a security.
See also Savika v. Webster. 644 F.2d 743 (1981).
The second issue is that the Commissioner made certain
factual findings that were not supported by the record. There
was no evidence in the record to suggest that Mr. Bettag
solicited loans. The testimony of Mrs. Mitchell was that she
only spoke with Mr. Bettag about payments (Tr. 85) and
these were already after she had made the loans. (Tr. 98) Mrs.
Mitchell testified that the only one who asked her to make
loans was Appellant Fredman. (Tr. 98-99) The Court of
Appeals made a finding that Bettag sold loans based on the
assumption that the evidence which was not produced in
response to the discovery request would have shown this.
This was patently false, as Mrs. Mitchell did testify that
Bettag solicited no loans.
E-5
The third issue is the Gravamen of this case since if the
notes in question were not securities, then the State's intrusion
into the activities of Petitioners would have been improper.
The notes in question are not securities and that the Minnesota
Act itself coupled with applicable case law indicates that the
term security only has the meaning given to it that the context
involved requires. See Landreth Timber Company y. Ivan K.
Landreth, 471 U.S. 681, 105 S.Ct 2297, 85 L.Ed.2d 692
(1985); Lino v. City Investing Company, 487 F.2d 689 (3rd
Cir., 1973). The transaction in question in this case did not
bear the characteristics of an investment. There was no
"expectation of profit based upon the
entrepreneurial/managerial skill of others." Great Western
Bank X Trust v. Kotz, 532 F.2d 1252 (9th Cir., 1976).
Further, these loans were made with only the expectation of a
set rate of interest not contingent upon the managerial or
entrepreneurial efforts of Petitioners. Therefore, the loans are
not securities. Union Planters National Bank of Memphis v.
Commercial Credit Business Loans, Inc, 651 F.2d 1174,
1185 (6th Cir., 1981). The Court of Appeals in this matter
essentially found that these notes in question were securities
because the Minnesota Act must be construed as broadly as
possible in order to protect members of the public.
Petitioners contend that the application of the Minnesota
Securities Law to the Independent Democrats for LaRouche
organization raises a federal preemption issue since the Federal
Election Campaign Act expressed Congress’ intent to preempt
this area. See Silkwood v, Kerr-McGee Corp,, 104 S.Ct
615, 621 (1984). Specifically, Petitioners contend that
Section 301 of the FEC Act Amendments of 1974 at 2 U.S.C.
Section 453 provide:
"The provision of this Act and the rules
prescribed under this Act supersede and
preempt any provision of state law with
E-6
respect to election of federal office."
Finally, Petitioners argue that because they are a political
organization, the First Amendment protects them from a broad
and forced disclosure of information in connection with their
first amendment activities. The First Amendment would
require that the definition of security be made much less broad
due to the first amendment impact on the context of the
transactions involved. There is and should be a distinction
between a transaction for political purposes and one for
commercial purposes. See in re Primus, 436 U.S. 412
(1978) and Ohralik v, Ohio State Bar Association, 436 U.S.
447 (1978).
For these reasons, the Petitioner seeks an order granting
review of the decision of the Court of Appeals.
DATED:
Respectfully submitted,
Patrick J. Moran
Moran & Pilger, P.C. 1221 Lamar, Suite 517
Houston, Texas 77010
Stuart Finney
Fuller & Finney
3300 Edinborough Way,
X415 Edina, MN 55435
COM/S-86-047-JL
8-1005-698-2
STATE OF MINNESOTA
OFFICE OF ADMINISTRATIVE HEARINGS
FOR THE MINNESOTA DEPARTMENT OF
COMMERCE
In the Matter of Caucus Distributors,
Inc., and Campaigner Publications,
Inc., New York Corporations,Independent Democrats For
LaRouche,an Unincorporated Association, RonFredman,
Ronald R. Bettag, Paul
Greenberg, and All Other Persons
and Organizations Acting in Concert
with the Named Respondents.
The above-entitled matter came in for hearing before
Administrative Law Judge Jon L. Lunde commencing at 9:00
a.m. om Monday, August 4. 1986 at the Office of
Adminiistrative hearings in Minneapolis, Minnesota.
Additional proceedings were held the following day. The
hearings were held pursuant to a Cease and Desist Order,
Notice of Right to Hearing and Order Suspending Exemption
issued !by the Commissioner of Commerce on June 4, 1986.
and an Amended Cedse.and Desist Order. Notice of Right to
Hearinjg and Order Suspending Exemption issued by the
Deputy Commissioner of Commerce on July 17, 1986.
Jerome L. Getz, Special Assistant Attorney General, 1100
F-2
Bremer, Seventh Place and Minnesota Street. St. Paul,
Minnesota 55101. appeared on behalf of the Minnesota
Department of Commerce (Department). Patrick J. Moran,
Moran & Pilger, P.A.. Attorneys at Law. 1221 Lamar, Suite
517, Houston, Texas 77010, appeared on behalf of each of the
above-captioned organizations and individuals. The record
closed on May 20. 1987, when the last authorized brief was
filed.
This Report is a recommendation, not a final decision.
The Commissioner of the Minnesota Department of Commerce
will make the final decision after a review of the record which
may adopt, reject or modify the Findings of Fact,
Conclusions, and Recommendations contained herein.
Pursuant to Minn. Stat. § 14.61, the final decision of the
Commissioner shall not be made until this Report has been
made available to the parties to the proceeding for at least ten
days. An opportunity must be afforded to each party
adversely affected by this Report to file exceptions and present
argument to the Commissioner. Parties should contact
Michael A. Hatch, Commissioner of Commerce. State of
Minnesota, Fifth Floor Metro Square Building, St. Paul. -
Minnesota 55101 to ascertain the procedure for filing
exceptions or presenting argument.
STATEMENT OF ISSUES
The issues in this proceeding, as set forth in the Amended
Cease and Desist Order of July 17. 1986, are as follows:
Whether the Respondents offered and sold
unregistered securities consisting of
promissory notes to Minnesota residents and
did so without the requisite licenses.
F-3
Whether all or any one of the Respondents fraudulently
misdated a promissory note issued 10 a Minnesota resident
and fraudulently or deceitfully advised the prospective
purchaser of promissory notes issued by the Respondents that
some banks were failing, contrary to the provisions of Minn.
Stat. § 80A.Ol(c).
Whether the Respondents or any of them failed to state
material facts necessary to make statements made during the
offer and sale of promissory notes not misleading in violation
of Minn. Stat. § 80A.Ol. clauses (b) and (c).
Based upon all of the proceedings herein, the
Administrative Law Judge makes the following:
FINDINGS OF FACT
1. Caucus Distributors, Inc. (Caucus' is a Not-For-Profit
corporation incorporated under the laws of the State of New
York. The Certificate of Incorporation its incorporators filed
with the New York Department of State on April 5, 1982 reads
in part as follows:
2. The corporation * * * is not formed for pecuniary profit
or financial gain, [and] * * * no part of the assets, income or
profit of the corporation is distributable to, or inures to the
benefit of its members, directors or officers or any private
person except to the extent permissible under the Not-For-
Profit Corporation Law.
F-4
3. The purposes for which the corporation is formed are:
To promote and encourage the political.and [sic]
ideas and beliefs fostered by the International
Caucus of Labor Committees and other
organizations advocating the same ideas and
beliefs; to distribute to the general public, sell and
obtain subscriptions to publications specifically
dedicated to the political ideas and beliefs fostered
by che International Caucus of Labor Committees
and other organizations to sclicit membership for
certain membership organizetions associated with
the publications distributed by the corporation
consonant with the goals, purposes and programs
of those organizations;
to advertise and promote thepublications
distributed by the corporation;
to engage the services of wrters, reporters,
editors, distributors. corporétions, associations,
partnerships and news agenaes in furtherance of
these purposes;
2. Campaigner Publications, Inc. (Campaigner) is a New
York corporation.
3. Independent Democrats for LaRoiche (IDL) is an
unincorporated association and a politicalcommittee apparently
recognized by the Federal Election Commission. Paul
Greenberg is an authorized representative of IDL and is
empowered to sign notes on its behalf.
4. At all ames material to this case. Lon Fredman and
Ronald R. Bettag worked for Caucus anc solicited loans to
Caucus, IDL and Campaigner by selling notes for them.
5. Ron Fredman. Ronald R. Bettag and Paul Greenberg
are not and have never been licensed by the Department to sell
securities in the State of Minnesota. Likewise, Caucus, ;
Campaigner and IDL are not and never have been licensed by
the Department to sell securities in the State of Minnesota.
6. Mary M. Mitchell, an 85-year-old widow. is a resident
of Minneapolis. Minnesota. She has lived there since moving
from Winona in 1938. Mitchell is a retired stenographer who
has a high school education.
7. In July, 1984, while walking on the Mall near Seventh
and Nicollet in downtown Minneapolis. Mitchell was given a
pamphlet pertaining to the presidential candidacy of Lyndon
LaRouche. She told the man who gave her the pamphlet that
she had seen LaRouche on television and liked what she saw.
The man told her that if she gave him her name and telephone
number someone would call her with more information about
LaRouche. She gave him that information.
8. Approximately one week after her encounter on the
Mall. Ron Fredman telephoned Mitchell from Chicago to talk
to her about LaRouche, Caucus. Campaigner and IDL.
Fredman told Mitchell about corruption in the world and the
need for Americans to clean it up. He specifically mentioned
drug trafficking in the Middle East and South America. the
laundering of Mafia money by banks, the decline in American
culture, and bank failures. He told Mitchell that some banks
were shaky and that if the United States didn't pull together,
everyone would go bankrupt. Fredman told Mitchell that
LaRouche needed her help with these problems and he asked
her for a contribution. She agreed to make a $25 contribution
F-6
at that time, and he made arrangements for her to receive
copies of "New Solidarity" and other publications.
9. During that initial telephone conversation, Fredman
also asked Mitchell to help by making loans. Fredman told her
that she would receive a promissory note for any loans she
made and that she could specify the interest rate and the term
of the notes. Since she would get a promissory note and could
specify the interest rate, Mitchell concluded that the loans
would be similar to a banking transaction. Moreover, since
LaRouche was "in the limelight", she concluded that she was
not dealing with a fly-by-night operation that would skip the
country, and that her loans would be a good investment.
Therefore, she agreed to make a $15,000 loan at that time. In
return, she was to receive two notes payable at the end of three
years. One was to be made payable to her and her stepson, R.
Keith Mitchell, in the principal amount of $10,000. The other
was to be.made payable to her and her sister-in-law, Mozell
Hall, in the principal amount of $5,000. Fredman personally
collected two checks in the aggregate amount of $15,000 from
Mitchell at her home in Minneapolis early in July 1984. Later
that month. two promissory notes were mailed to her in the
aggregate principal sum of $15.000. The notes stated the
payees, amounts, term and interest rate Fredman promised.
10. On September 3, 1984, Fredman called Mitchell again
and asked her to loan $1.000 to IDL. She agreed to make a
$1,000 loan to IDL for one year at ten percent interest.
Following her conversation with Fredman. she mailed him a
$1.000 check payable to IDL's order. A few days later, she
received a promissory note signed by Paul Greenberg, as an
authorized representative of IDL. The note was in the
principal sum of $1,000. bore interest at the rate cf ten percent,
and was payable in one year. The note, and accumulated
interest thereon, was paid by IDL in July 1986.
F-7
11. On or about September 17, 1984, Fredman
telephoned Mitchell again to give her an update on the activities
of the LaRouche organizations. At that time, he gave her more
information on their efforts to eliminate drug traffic and related
activities in the Middle East. In addition, he talked about a
publication entitled "Dope. Incorporated" which one of the
organizational Respondents had published. During that
telephone conversation, Mitchell agreed to make an additiona!
$5.000 loan to Caucus for 90 days with interest at 15 percent.
Immediately after her telephone conversation with Fredman,
Mitchell mailed him a check payable to Caucus in that amount.
A few days later, Mitchell received Caucus’ promissory note
incorporating the loan terms she and Fredman had discussed.
12. On or about Novemb ¢ 26, 1984. Fredman called
Mitchell to solicit another loan. During that conversation,
Mitchell expressed regret for having made the initial $15,000
loan for a term of three years. He told her that if she returned
the notes to him, he would issue two new notes which would
mature in a year (on November 26, 1985). At that time,
Fredman persuaded Mitchell to make an additional $10,000
loan to Caucus for six months. When Mitchell told Fredman
she was getting 14 percent on a certificate of deposit with her
bank, he said that Caucus would pay 16 percent on the loan.
13. On or about November 26, 1984, a $10,000
promissory note signed by Fredman for Caucus was mailed 10
Mitchell. It reflected a six-month term and a 16 percent
interest rate as she and Fredman had agreed on November 26.
At the same time, Mitchell was mailed two promissory notes
replacing those which she had returned due to her
dissausfaction with their three-year maturity date. Exhibits 19
and 23. Those notes were signed by Fredman for Campaigner
eee ieee
F-8
and reflected a one-year term and a 12 percent interest rate.
The payees were the same as those in the notes originally
issued.
14. Caucus’ September 17, 1984 note for $5,000 was due
on December 17, 1984. On or about the due date, Fredman
called Mitchy:ll and told her that the note could not be paid
because their assets had been frozen by a bank, and he asked
her if she would accept a one-third partial payment. Although
Mitchell agreed that the bank's explanation for freezing
Caucus’ funds was “outlandish”, she said she would like half
cf the note paid. Fredman said he would see if that could be
done and call her back. Early in January, 1985, after Mitchell
returned from a vacation, Fredman called her and asked if she
would accept a new note covering Caucus’ $5,000 loan to be
payable in five monthly principal installments of $1,000
commencing May 1, 1985 and a lump sum interest payment on
October 1, 19B5. She agreed and a short time later received a
new promissory note from Caucus in the principal sum of
$5,000.
Exhibit 17. That note contained the payment terms she had
agreed to accept and was signed by Fredman for Caucus.
15. In April 1985, Mitchell asked Fredman if the
beneficiaries on Campaigner’s November 26, 1984 notes
could be changed. He said that could be done and they agreed
that Campaigner’s two notes (Exhibits 19 and 23) would be
destroyed and that one new note would be issued in the
principal amount of $15,000. Mitchell also agreed that the rate
of interest could be reduced from 12 percent to 10 percent in
the new note. Exhibit A. A short time later, a $15,000 note
payable in one year with interest at 10 percent was mailed to
her. Exhibit 24. Caucus was listed as the payor of that note
eee
F-9
and it was signed by Fredman. The note was dated April 16,
1985 rather thar November 26, 1984. Mitchell did not receive
interest in the $15,000 loan between November 26, 1984 and
April 16, 1985. did not agree to waive interest earned during
that time, and did not authorize a change in the date of the two
notes when they were rolled over and consolidated.
16. During the telephone conversation between Mitchell
and Fredman on April 10, 1985, Mitchell agreed to make an
additional loan to Caucus in the amount of $10,000. The loan
was made in two separate payments to Caucus. A $6,000
payment was made by a check dated April 10, 1985 and a
$4,000 payment was made to Caucus by a check dated April
26, 1985. On or about April 29. 1985. Caucus’ $10,000
promissory note was mailed to Mitchell. The note. which was
signed by Fredman, carried an interest rate of 10 percent and
was payable in six months.
17. Apart from her loan to IDL, Mitchell loaned $40,000
to Caucus between July 1984 and April 29. 1985. As of
November 21, 1985, only $2.000 had been repaid to her. A
$1,000 payment was made late in April 1985, a $500 payment
was made on November 6, 1985 and a $500 payment was
made on September 30, 1985 (two checks).
18. During their telephone conversations in 19B4 and
1985, Mitchell and Fredman primarily talked about Caucus,
but he never explained his relationship to Caucus, Campaigner
or IDL. In addition, he never told her how they would repay
the loans, if they had solicited loans from other persons, or if
they had repaid those loans in a timely fashion.
19. All of Mitchell's loans to the Respondents. except the
F-10
$1,000 loan made to IDL, were made by check payable to
Caucus. All the checks were presented for payment and paid
by her bank. All the loans were solicited by Fredman.
Mitchell had no direct contact with Greenberg and had very
limited contact with Bettag. Her only contact with Bettag
occurred in 1985 after she became concerned about the
repayment of her notes. Bettag told her that the LaRouche
organizations stand behind their commitments and that notes
were good investments. Bettag explained that money wasn't
coming in as fast as they had expected, but that all her loans
would be repaid and that her money was safe.
20. After her conversation with Bettag, Mitchell advised
family members about the loans she had made to the
Respondents and the delinquencies that existed. Later, with
their advice and input, she retained counsel and the Department
was eventually informed of the transactions.
21. In late November of 1985, Joyce Rubenstein. a
Caucus representative, telephoned Mitchell from New York to
discuss her loans to Caucus. Rubenstein advised Mitchell that
if she would make an additional $10,000 loan to Caucus she
would be sure to get the rest if her money ($40,000) back.
Based on these representations, Mitchell loaned Caucus
another $10,000 for eight months at 12 percent. On
November 29, 1985, Mitchell received confirmation from
Caucus that the loan had been made under these terms.
Confirmation was in a letter form. No note was issued as had
been done in the past.
22. Mitchell considered all of her loans to the
Respondents as investments, not unlike certificates of deposit
that individuals can purchase from a bank. None of her loans
were intended to be contmbutions and none of them were
F-11
collateralized. Apart from IDL's note. most of the notes
issued were notarized by Bettag and most specifically stated
that they could not be assigned. transferred or discounted. All
of them were signed by Fredman.
23. In 1984 and 1985, the Respondents solicited loans
from other Minnesota residents and from residents in other
States including Illinois, Maryland, Alaska. Indiana and
Washington.
24. No individual employed by or representing the
Respondents gave Mitchell any financial information regarding
the organizational Respondents that she could use to determine
their ability to repay the loans she made. She was not told
how the Respondents would be able to repay her loans. where
the money used to repay her loans would come from. or what
the risks of her investments were. Mitchell was not advised if
Caucus was in default in its obligation to repay principal and
interest to other investors or that one judgment had been
entered against Caucus for failure to repay a loan when due.
Moreover, Mitchell was never advised that the Respondents
were not licensed to sell securites in the State of Minnesota or
that the notes were not registered as required by law. In fact,
Fredman told Mitchell that the loans were legal.
Based on the foregoing Findings of Fact. the
Admuinistrauve Law Judge makes the following:
CONCLUSIONS
1. That the Minnesota Commissioner of Commerce and
the Admuinistranve Law Judge have authonty to consider the
F-12
issues raised by the Commissioner's Cease and Desist Order
and Order Suspending Exemption, as amended. under Minn.
Stat. §§ BOA.21, 80A.15. subd. 3, and 14.50 (1984).
2. That the Department has complied with all relevant
substantive and procedural requirements of law and rule and
that the Respondents received proper and timely notices Xf the
hearing and of the Commissioner's Orders.
3. That under Minn. Rule 1400.7300, subp. 5, the
Department has the burden of proof to establish the statutory
violations alleged by a preponderance of the evidence.
4. That the loans solicited by Ron Fredman and the notes
issued by the organizational Respondents constituted offers
and sales for purposes of Minn. Stat. § 80A.14, subd. 17
(1984X.
5. That the promissory notes offered and sold by the
Respondents in the State of Minnesota constitute securities for
purposes of Minn. Stat. § 80A.14. subd. 18 (1984)..
6. ‘That the promissory notes offered and sold by the
Respondents in the State of Minnesota were not registered
with the Commissioner prior to or at the time of their offer of
sale as required by Minn. Stat. § 80A.08 (1984).
7. That the Respondent Ron Fredman violated Minn. Stat.
§ 80A.014, subd. 1, by transacting business in this State as an
agent without a license to do so.
F-13
8. That the organizational Respondents violated Minn.
Stat. § BOA.04. subd. 2, by employing Ron Fredman as their
agent.
9. That in connection with the sale of promissory notes to
Mary Mitchell, the Respondents Ron Fredman and Ronald R.
Bettag failed to state material facts necessary in order to make
statements that were made not misleading, contrary to MInn.
Stat. § 80A.04, clause (b) (1984), by failing to disclose
financial information which could have been used to determine
the organizational Respondents’ ability to repay the note$
when due and by failing to advise Mitchell that none of the
Respondents were licensed to sell securities in the State of
Minnesota and that the promissory notes were not registered
pursuant to the Minnesota Securities Act.
10. That the Cease and Desist order proposed by the
Commissioner is in the public interest and should be issued.
11. That under Minn. Stat. § 80A.15, subd. 4, the
Respondents have the burden Xf proving any exemption
claimed under Minn. Stat. § 80A.Ol to 80A.31 or any
exception from a definition contained therein.
12. That the Respondents have failed to establish that the
promissory notes they sold are subject to any exemption or
exception.
13. That the Respondent Ron Fredman fraudulently
misdated one of the promissory notes issued to Mitchell in
violation of Minn. Stat. § 80A.Ol. clause (c) (1984).
F-14 .
14. That the Respondent Ron Fredman did not violate
Minn. Stat. § BOA.OI, clause (c) by telling Mitchell that some
banks were falling.
Based on the foregoing Conclusions of Law, the
Administrative Law Judge makes the following:
RECOMMENDATION
That the Cease and Desist Order and Order Suspending
Exemption be made permanent.
Dated this 15th day of July, 1987,
JON L. LUNDE
Administrative Law Judge
Reported: Transcript Prepared.
MEMORANDUM
BURDEN OF PROOF
The Department argues that its only burden of proof on the
- question whether the Mitchell notes are securities is to show
that the Respondents solicited loans from her and issued
promissory notes reflecting the loans. It argues that the
Respondents then have the burden to establish that the notes
are not securities, citing Minn. Stat. § 80A.15. subd. 4 and
Exchange National Bank v. Touche, Ross & Co., 544 F.2d
F-15
1126 (2d Cir. 1976). Under the cited statute. the burden of
proving an exemption or an exception from a definition is
upon the person claiming it. Hence. to the extent that the
Respondents claim any statutory exemption or exception from
a definition, they have the burden of proof. However, the
Judge is not persuaded that the enforcement division's burden
can be met merely by showing that the Respondents made a
loan in this State and issued a note evidencing that loan. In
Landreth Timber v. Landreth. 471 U.S. 681. 105 S. Ct.
2297, 85 L. Ed. 2d 692 (1985), the United States Supreme
Court refused to hold that one could prove a security (note)
simply by proving the document itself, which is exactly the
result the enforcement division argues is appropriate.
Moreover, under Minn. Rule 1400.7300. subp. 5. the Judge
is persuaded that the Department has the burden of establishing
that the notes were offered and sold as investments rather than
commercial loans.
The definitions in the Minnesota Securities Act, like those
in most securities acts’ , apply "unless the context otherwise
requires" Minn. Stat. § 80A.14, subd. 1. The courts have
frequently cited this language to support departures from the
literal definition of a security when required by the context in
which the instrument alleged to be a security is offered or sold.
See. e.g., Marine Bank v. Weaver, 455 U.S. 551, 556, 102
S. Ct. 1220, 71 L. Ed. 2d 409 (1982); Lino v. City Investing
Co., 487 F.2d 689! 694 (3d Cir. 1973); State v. Hoephner,
574 P.2d 1079, 1081 (Okl. Cr. 1978). Although the courts
have cited the "unless the context otherwise requires" language
to avoid applying the securities definition literally, they
generally have not held that the language was intended to
change the normal burden of proof-in civil or administrative
proceedings and they have not held that that language
1 See 15 U.S.C. §78c(a)(10) and 77b(1) and the Uniform
Securities Act of 1985, § (ULA 1987 Supp.).
F-16
constitutes an "exemption" or an “exception” that the
Respondent has the burden to establish.
In Exchange National Bank, the court held that the
statutory definition of a security should be applied literally and
that persons seeking to avoid the plain language of the statute
have the burden to establish that the context requires a different
result. The literal test adopted in Exchange National Bank has
been implicitly rejected by the United States Supreme Court.
See United Housing Foundation, Inc. v. Forman, 421 U.S.
837, 849, 95 S. Ct. 2051. 2059, 44 L. Ed. 2d 621 (1975)
and Landreth Timber Co, v, Landreth, supra, 105 S. Ct. at
2306 (1985). Moreover, it has apparently been rejected by
every'See 15 U.S.C. § 78c(a)(1O) and 77 b(1) and the
Uniform Securities Act of 1985. § 101 (ULA 1987
Supp.).other federal circuit court of appeals that has
considered the issue. See. e.g., Hunssinger v. Rockford
Business Credits Inc , 745 F.2d 484 (7th Cir. 1984);
McClure v. First National Bank of Lubbock, 497 F.2d 490
(Sth Cir. 1974), cert. den, 420 U.S. 930 (1975); Lino v. City
Investing Co.,, supra. In addition, it has not been adopted in
Minnesota. The Minnesota Supreme Court has always
examined the economic reality of the instrument or transaction.
See, e.g.. State v, Investors Security Corporation, 209
N.W.2d 405 (Minn. 1973). Recently it reaffirmed its
preference for examining the context (economic reality). Rice
County Specialized Tours, Inc. v.Hagen. 292 N.W.2d 520,
535 (Minn. 1986).
For all these reasons, it is concluded that the Department
has the burden of establishing that the notes issued by the
Respondents involved an investment rather than an ordinary
commercial transaction and if such X showing is made. the
note will constitute a security unless the Respondents can point
to a specific statutory exemption or exception that applies to
them.
F-17
The fact that the Respondents were precluded. by order,
from presenting evidence showing that its notes are not
securities is not equivalent to a default on that issue as the
enforcement division has argued. When there is
noncompliance with a discovery order, the Judge may order
that certain facts be taken as established for purposes Xf the
case, refuse to allow a party to support or oppose designated
claims or defenses. or prohibit a party from introducing
designated matters in evidence. Minn. Rule 1400.6700. subp.
3. In this case, the Respondents were precluded from
opposing certain claims made by the Department. However,
the Department was not granted a default judgment on those
issues and it still has a burden of proof to meet.
Consequently, the
Respondents’ notes cannot be deemed to be securities
under the theory that the Respondents are in default.
ARE THE PROMISSORY NOTES SECURITIES?
The first and mosi basic substantive issue that must be
resolved in this case is whether the promissory notes Fredman
sold to Mitchell for the organizational Respondents constitute
securities. Minn. Stat. § 80A.14, subd. 18(a) defines a
security as follows:
"Security" means any note: stock; treasury
stock; bond; debenture; evidence of
indebtedness; certificate of interest or
participation in any profit sharing agreement
In spite of the inclusive scope of the definition of a
F-18
security, the words used, including the words “any note"
cannot be literally applied. United Housing Foundation, Inc.
v. Forman. supra. Instead. substance must prevail over form
and the context in which an instrument is offered or sold must
be examined to determine the economic reality involved.
Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S. Ct. 548,
553, 19 L. Ed. 2d 564 (1967). When the economic reality is
that an investment rather than a commercial transaction is
involved, the instrument will be treated as a security:
otherwise, it won't. See, e.g.. Baurer v, Planning Group,
Inc.. 669 F.2d 770. 775 (D.C. Cir. 1981). The Minnesota
Supreme Court has not addressed the scope of the words "any
note" and it has not adopted a test for determining when a note
is a security. Consequently, the decisions of federal courts
and other state courts and agencies must be consulted. This
follows from the provisions of Minn. Stat. § 80A.31, which
States:
Sections 80A.Ol to 80A.31 shall be so construed as to
effectuateits general purpose to make uniform the law of those
states which enact it and to coordinate the interpretation of
sections 80A.Ol to 80A.31 with the related federal regulation.
See Specialized Tours, Inc. v. Hagen, supra at 535; Hayden
v. McDonald, 742 F.2d 423. 428 (8th Cir. 1984).
Generally speaking, four tests have been adopted for
determining when an instrument is a security: (1) the literal
test. (2) the commercial/investment dichotomy test, (3) the risk
capital test, and (4) the Howey test. However. there are
variations to these tests and some basic principles that are
always considered by the courts in determining what
instruments are securities.
F-19
Although at least four different tests for determining when
an instrument is a security have been adopted by the courts,
the Judge is persuaded that the only appropriate test that
should be used in determining whether a note is a security is
the commercial/investment dichotomy test. The literal test
articulated in Exch National Bank of Chi v. Touche
Ross & Co.. supra, has been implicitly rejected by the United
States Supreme Court. In United Housing Foundation, Inc.
v. Forman, 421 U.S. at 849, the court reiterated the need to
examine the economic realities underlying a transaction and not
the name attached to it, noted (footnote 14) that all but one of
the Federal circuits that had recently considered the scope of
the definition of a security had rejected a literal approach, and
went on to examine the economic realities underlying the
purchase of shares in a cooperative housing project to
determine if they were securities. Subsequently, in Landreth
Timber Co. v, Landreth, supra. the court did adopt a literal
approach where stock is involved. but refused to do so for
notes. The court stated. (105 S. Ct. 2306):
. "note" may now be viewed as a relatively broad
term that encompasses instruments with widely
varying
characteristics, depending on whether issued in a
consumer context, as commercial paper, or in some
other investment context. * * * We here expressly
leave until another day the question whether "notes"
or "bonds" or some other category of instrument
listed in the definition might be shown "by proving
[only] the document itseif." * * * We hold only that
"stock" may be viewed as being in a category by
itself for purposes of interpreting the scope of the
Acts’ definition of "security."
In Landreth, the Supreme Court.said that instruments that
bear both the name and all the usual characteristics. of stock
present the clearest case for coverage by the plain language of
the definition and should be treated as securities. Accordingly,
F-20
the court proceeded to apply the federal acts to the sale of 100
percent of the stock of a business. Although the United States
Supreme Court has moved closer to the literal test generally
applied by the Second Circuit. it strongly implied that the
literal test is inappropriate in many situations and will be
limited to stocks. In Specialized Tours, Inc. v. Hagen. supra.
the Minnesota Supreme Court followed the Landreth decision
but expressed dissatisfaction with it, noting that if it were
writing on a "clean slate", it would have reached a different
result by examining the economic realities xf the transaction.
Since the Second Circuit's literal approach has not been
accepted by the United States Supreme Court except in a
modified version when stock is involved, and since the
Minnesota Supreme Court has expressed dissatisfaction with
it, it is concluded that the Commissioner should not apply that
test in this case, even though it is discussed further below.
Also, the Judge is persuaded that application of the Howey
test is inappropriate. The Howey test was adopted by the
United States Supreme Court in SEC v, W.J, Howey Co.,
328 U.S. 293 (1946) to identify "investment contracts" for
purposes of the securities laws. The court described an
investment contract as a transaction, contract or scheme
whereby a person invests money or value in a common
enterprise and is led to expect profits derived solely from the
efforts xf the promoter or some third party. The First Circuit
applied the Howey test to notes sold by a religious
organization. SEC v. World Radio Mission.. Inc., 544 F.2d
535, 538 (1st Cir. 1976). However, it did not rely
exclusively on Howey or explain why the Howey test was
used. More important, other federal courts have rejected its
use for any securities but investment contracts. In Landreth.
the United States Supreme Court reaffirmed the fact that the
Howey test was designed only to determine whether an
investment contract constitutes a security. stating (105 S. Ct.
at 2305):
F-21
we would note that the Howey economic
reality test was designed to determine whether
a particular instrument is an "investment
contract, not whether it fits within any of the
examples listed in the statutory definition of
“security” Our cases are consistent with this
view. . Moreover, applying the Howey test to
traditional stock and all other types of
instruments listed in the statutory definition
would make the Acts’ enumeration of many
types of instruments superfluous.
The Howey test has also been specifically rejected by several
federal courts of appeals as an analytical tool for determining
whether a note is a security. Hunssinger v, Rockford
Business Credits, Inc., 745 F.2d 484. 492 (7th Cir. 1984);
Exchange National Bank v. Touche Ross & Co.. supra: and
Daily y. Morgan, 70! F.2d 496 (Sth Cir. 19B3). Based in
these cases, the Judge is persuaded that the Howey test is
inappropriate for determining whether a note is a security and
that test will not be discussed further.2
The risk capital test that has been adopted by the Ninth
Circuit Court of Appeals is discussed below. even though the
Judge is not persuaded that it should be used by the
Commissioner in this case. It was rejected in Exchange
National Bank, supra, and the Judge believes that the reasons
2 Even if the Howey test is used. the notes sold by
Respondents would be ,/ securities under W i
Sp World Radio
Mission. See also State v. Weisser, 161 N.W.2d 360 (N.D.
1968).
F-22
stated in that decision for rejecting the risk capital test are
persuasive.
LITERAL TEST
Apart from the literal test for stocks adopted in Landreth.
the literal test adopted in Exchange National Bank of Chicago
v. Touche Ross & Co,, supra, is the most inclusive test for
determining whether a particular instrument is a security. In
that case, the court held that the plain language of the federal
statute should be closely followed and that notes should be
treated as securities unless the context of the transaction clearly
requires a different result. In discussing the kinds of notes
that would not be included. the court referred to:
the note delivered in consumer financing. the
note secured by a mortgage on a home, the
short-term note secured by a lien on a small
business of some cf its assets. the note
evidencing a “character” loan to a bank
customer. short-term notes secured by an
assignment of accounts receivable, or a note
which simply formalizes an open-account debt
incurred in the ordinary course of business
(particularly if, as in the.case of the customer
of a broker, it is collateralized)
Id. at 1138.
The inclusive. literal approach adopted in Exchange
National Bank places a substantial burden on the issuer of
notes to establish that the notes are required to be excluded
from the definition. The burden placed on the issuer would
apparently demand a clear showing that characterizing the
F-23
notes as securities would disrupt the settled expectations of
both parties. interfere with routine transactions, provide
additional protection where no such protection is needed,.or
produce some other clearly undesirable result. See Petitioner's
Post-Hearing Brief, Appendix 2, p. 19).
In this case. the notes Mitchell purchased do not bear any
resemblance to the kinds of notes mentioned in Exchange
National Bank as outside the scope of the securities laws.
They are not the kind of routine loan transactions to which the
securities laws should not apply and there is no evidence that
the parties had any settled expectations regarding the status of
the notes under the securities laws. In fact, Mitchell clearly
regarded her loans as an investment similar to the purchase of
certificates of deposit from a bank. Moreover, the loans
Mitchell made appear to be the kind of transactions the
securities laws were designed to cover and are the kind of
investments that need the protections of the securities laws of
this State. After all. Mitchell was unsophisticated in financial
matters and incurred a significant risk without the ability to
obtain and evaluate the information needed to make an
informed investment decision. For these reasons, it is
concluded that the notes sold to Mitchell constitute securities
under the literal test.
RISK CAPITAL TEST
The "risk capital test" was devised by the California
Supreme Court in Silver Hills Country Club v, Sobieski, 55
Cal. 24 811, 13 Cal. Rptr. 186, 361 P.2d 906 (1961). It is
not an appropriate test for determining the status of an
instrument as a security in all cases. United Housing
Foundation, Inc, v, Format, supra. 421 U.S. 837 at 857 n.
24. However, in Great Western Bank & Trust v. Kotz. 532
F.2d 1252 (9th Cir. 1976). the Ninth Circuit used the risk
F-24
Capital test to determine whether the notes involved in that case
were securities. Generally speaking. the ultimate inquiry
under the risk capital test is whether the lender contributes
"risk capital" that is subject to the entrepreneurial or managerial
efforts of the borrower. In determining if it is, the duration of
the loan, the amount of collateralization, the circumstances of
issuance, the relationship between the amount borrowed and
the size of the borrower's business, and the contemplated use
of the proceeds must all be considered. Because the loans
Mitchell made were not collateralized. because her loans and
the loans other persons made to the Respondents were not
discrete transactions--but part of a general offering made in a
number cf states--and because the notes were not short-term-
demand-notes. it is concluded that the notes are securities
under the Kotz test. Clearly, Mitchell placed her capital at risk
and was totally dependent upon the Respondents’ efforts for
payment.
Commercial/Investment Dichotomy Test
At least four federal circuits have adopted the
commercial/investment dichotomy test for determining what
notes constitute securities. See CNS Enterprises. Inc, v. G x
G Enterprises. 508 F.2d 1354 (7th Cir. 1975): Baurer v.
Planning Group, Inc. supra Lino v, City Investing Co., supra:
and Bellah v, First National Bank, 495 F.2d 1109 (Sth Cir.
1974). Under this test, the protection of the securities laws is
confined to investors and not to borrowers and lenders in
commercial settings. Thus, in determining whether a
particular note is an investment, the courts examine the
economic reality of the note to determine whether it was
offered or sold as an investment. In this case, the Judge is
persuaded that the notes sold by the Respondent to Mitchell
constitute securities. In determining that the Respondents’
notes were purchased as an investment and not as an incident
to a commercial loan, the following factors.were considered:
F-25
a. whether the lender is a bank, financial
institution or commercial lender in the
business of making loans or a private party;
b. whether the notes were issued in connection
with a consumer installment transaction or the
purchase or real estate;
a
c. whether the notes were collateralized;
d. whether the sales took place outside the
normal markets for notes and commercial
paper,
e. whether the sales to Mitchell were an isolated
set of transactions or part of a broader
solicitation of loans from members of the
public;
f. whether the proceeds of the loan were used to
provide capital needed to finance a business or
to purchase consumer goods and services.
g. the fact that notes are within the plain language
of the definition of a security.
Consideration of these factors persuades the Administrative
F-26
Law Judge that the notes Mitchell purchased from the
Respondents were bought as an investment. She considered
her loans to be investments not dissimilar from the purchase of
certificates of deposit from a bank. Moreover, Mitchell is not
a typical commercial lender. Unlike a bank or other financial
institution, she is not in the business of making loans, and the
loans she made were not made in connection with a consumer
installment transaction and they were not secured with any
collateral. Likewise, they took place outside the normal
markets for notes and commercial paper, and they were not an
isolated transaction, but part of a broader solicitation of loans
from members of the public. Although the loans paid a fixed
rate of interest. the rate paid was higher, in some cases. than
the rate Mitchell was receiving from her bank. Given the
purposes of the securities law to protect members cf the public
from fraud and imposition, and due to the lack of any
commercial aspect to the notes. it is concluded that the notes
sold by the Respondents were not of a commercial nature and
that they constitute securities under the commercial/investment
dichotomy test.
Treating the notes the Respondents sold to Mitchell as
securities is consistent with the purposes of the Minnesota
Securities Act, which is to regulate the merits xf securities in
order to protect the public against fraud and imposition. State
v. Investors Security Corporation. 209 N.W.2d 405, 408
(Minn. 1973). The Minnesota courts have consistently held
that the securities laws should not be given a narrow
construction. Sex, e.g.. Donovan v. Dixon, 113 N.W.2d
432. 443 (Minn. 1962). The Minnesota Supreme Court's
expansive view of the securities laws has led to a consistent
broadening of their coverage. State v. Investors Security
Corporation. supra at 409. Treating the notes Respondents
sold to Mitchell and other residents is consistent with the
remedial purposes of the act and is necessary in order to
F-27
protect citizens of this State from fraud and imposition.
In determining when an instrument is a security, it is
appropriate to consider the character given to the instrument in
commerce by the terms of the offer, the plan of distribution
and the economic :..ducements made by the offeror. Marine
Bank v. Weaver. 445 U.S. 551. 556. 102 S. Ct. 1220
(1982). In this case, the Respondents represented its notes as
investments, planned to sell notes throughout the State of
Minnesota and other states in order to accumulate capital for a
variety of unknown purposes. and held out economic
inducements to Mitchell to purchase those notes. Those
inducements included flexible maturity dates and competitive
interest rates. There is no reason why the Respondents’ notes
should not be treated as they were represented to be. The
solicitation of members of the general public seeking a passive
return from their capital and the sale to them of units of a larger
offering are the hallmarks of an investment transaction.
Hunssinger v. Rockford Business Credits, Inc., supra at 492.
In the enforcement of the securities act, it i
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