Respondents Reply Brief — Local 705, Int'L Brotherhood of Teamsters, Chauffeurs, Etc. v. Daniel (1979) (No. 77-754)

| Gyyeme Goel c.s. =|

FILED

OCT 19 i97€

[ome ROOAK, JR..CLERK

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1978

No. 77-754

LOCAL 705, INTERNATIONAL BROTHERHOOD OF

TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN AND

HELPERS OF AMERICA, anpD LOUIS F. PEICK,

Petitioners,

vs.

JOHN DANIEL,

Respondent.

REPLY BRIEF FOR PETITIONERS.

SHERMAN CARMELL,

39 South LaSalle Street,

Chicago, Illinois 60603,

(312) 236-8033,

Attorney for Petitioners.

Of Counsel:

CARMELL & CHARONE, LTD.

Gunthorp-Warren Printing Company, Chicago e Financial 6-6565 _<«

-

ee

I.

Il.

IIT.

IV.

TABLE OF CONTENTS.

PAGE

The Respondent Has Undermined the Decisions

Below vy Now Arguing that the Local 705 Pension

Fund Did Not Violate the Antifraud Provisions When

it Failed to Disclose the Actuarial Basis Upon Which

and the Likelihood that the Respondent Would Receive

DR EE 6'6.6.66-64.4646.000s 0s 00646000060 3

The Respondent Initially Raises in This Court the

Argument that the Security Is a Certificate of or Par-

ticipating Interest in a Profit Sharing Plan .......... 8

The Respondent has Misapplied this Court’s Criteria

SP Gs He EE 6 k.n'né 00-00-6nenescessus )

A. The Investor Must Invest His Money .......... 9

B. The Respondent’s Investment Contract Theory

Is Premised on the Erroneous Conclusion that He

Had an Undivided Interest in the Local 705

I i a i i es ee 12

C. The Lure of Profits Cannot Be Proved Subjectiveiy

and as a Matter of Law that Attraction Is Not

rs SUED a i en eek bbe ueeéceo nua 13

The Compulsory and Collectively Bargained for

Nature of the Local 705 Pension Fund Has Negated

Employee Volition and Thereby a Sale ........... 15

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The results shown in Table 2 for other than the 100 percent

diversion do not take into account any increase in the present

value of benefits earned to date which would represent the

liability for active participants who did not receive a refund and

thus would have a benefit liability. On the other hand, the

calculation of the weekl, contribution rate also does not include

these individuals. We are not able to estimate the effect these

individuals will have on the weekly contribution rate shown in

Table 2 other than to state the rates could be lower.

In addition to the previous calculations, we have also calcu-

lated the potential liability to the Local 705 Pension Fund if the

terminated vested participants were assumed to be 100 percent

vested in an accrued benefit (defined as 3 percent of the normal

retirement benefit in effect on the date of termination for each

year of pian participation) and the present plan were to provide

for immediate and full vesting for all present participants. In this

situation, a liability of approximately $14,356,700 would be

attributable to the terminated non-vested participants and added

directly to the unfunded past service liability of the Local 705

Pension Fund. This amount would have to be amortized over a

40-year period. The annual additional requirement would be

$954,168 for an increase of 4.3 percent over the present mini-

mum contribution requirement. Further, the introduction of

immediate vesting for present plan participants would cause the

annual cost requirement of the present plan to increase by

11.1%.

Diversions of the magnitudes shown could force dissolution of

the Local 705 Pension Fund. At a minimum, massive additional

employer contributions would be required to provide replace-

ment monies in the funds to maintain financial integrity of the

fund for the remaining covered employees.

It should be noted that the potential liabilities shown do not

include legal fees and administrative fees which might be sub-

stantial. The potential liabilities, although based on estimates

discussed in this affidavit, also do not include amounts due to

non-vested terminated participants who terminated prior to 1967.

IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1978

No. 77-754.

LOCAL 705, INTERNATIONAL BROTHERHOOD OF

TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN AND

HELPERS OF AMERICA, anp LOUIS F. PEICK,

Petitioners,

VS.

JOHN DANIEL,

Respondent.

REPLY BRIEF FOR PETITIONERS.

The questions presented in this case, while not necessarily

narrow ones, do “arise in an area where glib generalizations

and unthinking abstractions are major occupational hazards.

Accordingly, in deciding this particular case, remembering what

is not involved is as important as determining what is.” SEC v.

National Securities, Inc., 393 U. S. 453, 465 (1969). The re-

spondent concedes that the issues before this Court do not

involve the merits of the Local 705 Pension Fund service rule.’

And because the district court’s class order limits the case to

present and former participants in the Local 705 Pension Fund,

1. As he advised the district court:

Defendants’ argument [that the respondent’s claims are so unique

or unusual as to preclude a finding of typicality under Fed. R.

Civ. P. 23(a)(3)] consistently ignores the fact that this case

involves violations of the federal securities laws. As such, the

fact that Mr. Daniel worked for 5 years or 25 years with a 1

day or a 1 year break in service is irrelevant. * * * Because the

(Footnote continued on next page.)

nee a eee ee

2

to Local 705, and to the Local 705 Pension Fund, this case does

not involve the claimed misdeeds of others. Nevertheless, a

major occupational hazard to a rational decision in this case is

the respondent's penchant for emphasizing avowed irrelevancies

such as the service rule? and the hearsay charges against the

petitioner IBT and other pension funds.* |

In discussing the relevant issues this reply brief will not travel

all of the old ground for the sake of repeating why the petitioners

were correct and the courts below were wrong. Rather, we shall

focus first on two of the respondent’s arguments made in this

Court which are opposite from those he made in the courts

below; i.e., the nature of the duty of disclosure under the anti-

(Footnote continued from preceding page.)

longer a union member is in covered employment, the larger

his investment in a Teamster — fund, the length of service

of a plaintiff class member only goes to the question of damages

and not the liability of defendants.

Plaintiff's Reply Memorandum in Support of His Motion for Class

Certification at 16.

2. Brief for Respondent at 4-6 & nn.7 & 8, 15, 122 n.100.

3. Brief for Respondent at 8 n.17, 15, 16 n.29, 60, 118 & n.97,

123 n.102, 124 n.103; see also Brief for PROD at 18 n.12, 20

n.14. The respondent attributes to these petitioners positions

which they did not take. For example, we agree that a

security and a sale may exist in a type of unilateral voluntary con-

tributory pension plan where the employee’s contributions are used

to purchase the employer's securities, Brief for Respondent at 71 &

n.59, but not otherwise, id. at 46, 115, based on facts and reasons

inapposite to this case and raising issues not before this Court. We do

not agree that a security exists in this case, id. at 20 n.33; or that a

pension benefit paid by a defined benefit plan is either deferred

wages, id. at 52-53, 86-87, or deferred compensation, id. at 18 n.31,

points explored at 11-12 infra.

Another irrelevant point is raised concerning pension portability.

PROD is wrong in saying that portability of or reciprocity for

pension credits does not exist between the Local 705 Pension Fund

and other pension plans. Brief for PROD at 18 n.12; see also Brief

for Respondent at 15. Since January 1, 1973, the Local 705

Pension Fund has been a party to the Joint Council No. 25 Recip-

rocal Agreement for Teamsters Pension Funds covering fourteen

local unions’ plans, and it has similar agreements with the Central

States Southeast & Southwest Pension Fund and the Chicago Truck

Drivers Union, an independent union. See also Brief for Petitioners

at 9.

3

fraud provisions, and that the security created is a certificate of

or participating interest in a profit sharing plan. We shall then

reply to the respondent’s contentions that to form an investment

contract the investor need not invest his money; that the

respondent’s labor or the employer’s contributions resulted in

the necessary present interest—i.e., an undivided interest—in

the Local 705 Pension Fund; that the lure of traditional profits

can be subjectively proved; and that the commercial world’s

ordinary understanding is that an employee’s participation in a

collectively bargained mandatory noncontributory pension fund

is an investment contract. Finally, we shall show that the absence

of employee volition is fatal to the court of appeals’ finding

of a sale.

L

THE RESPONDENT HAS UNDERMINED THE DECISIONS

BELOW BY NOW ARGUING THAT THE LOCAL 705

PENSION FUND DID NOT VIOLATE THE ANTIFRAUD

PROVISIONS WHEN IT FAILED TO DISCLOSE THE

ACTUARIAL BASIS UPON WHICH AND THE LIKELI-

HOOD THAT THE RESPONDENT WOULD RECEIVE A

PENSION BENEFIT.

The complaint (App. 31a, 33a-34a, 44 17(B)(5),(6) and 18)

says that the Local 705 Pension Fund violated the antifraud

provisions by intentionally not stating (1) the actuarial basis

upon which and the likelihood that the respondent would receive

a pension benefit, and (2) the value of a participant’s interest.

The district court agreed that those allegations stated federal

claim jurisdiction, In the court of appeals the Commission noted

the allegations* and, with the respondent’s other amici,’ fully

4. Specifically, the defendants were alleged * * * to have omitted

material facts . . . including the actuarial basis for and likeli-

hood that pension payments would be made to the plaintiff

** *

Brief for Commission Amicus Curiae at 8.

5. This kind of information, the percentage of currently active

workers who are likely to receive a pension benefit under the

plan, would be necessary under the securities laws disclosure.

(Footnote continued on next page.)

4

supported the district court’s decision that the affirmative disclo-

sure allegations in the amended complaint stated claim

jurisdiction.* The court of appeals affirmed (App. 216a, 258a).

The respondent supported the court of appeals’ decision on

4¢ 17 and 18 when it asked this Court not to hear this case.

Brief for Respondent in Opposition to Petitions for Writs of

Certiorari at 6.

However, before this Court the respondent and his amici

disassociate themselves from the decisions below on that

point. Brief for Respondent at 114 & n.94; Brief for Com-

mission at 4-5, 25 & n.18, 26, 29; Brief for PROD at 21; but see

Brief for The Gray Panthers at 15, 17, 18, 20 & n.10. They now

(Footnote continued from preceding page.)

Brief Amicus Curiae for The Gray Panthers at 21.

The NCCMP and ERIC oppose the district court’s decision be-

cause if affirmed, it will mean that unions and employers can

no longer conceal from employees and prospectiv employees

the critical fact that there is a statistically determinable risk

that many employees covered by private pension plans—per-

haps as many as one-third to one-half—will never receive

pension benefits from those plans.

e

From the pective of these employees the information re-

= disclosed by the district court’s opinion is es-

pen :

Motion of Institute for Public Interest Representation for Leave

to File Amicus Curiae Brief at 4, 5.

6. The registration provisions, which are commonly referred to

as the Securities Act’s “disclosure” provisions, to diffcrentiate

their function from that of the “antifraud” provisions, are de-

signed to assure that investors will be furnished all material in-

formation needed to make an informed investment decision. The

mechanism for meeting that objective is the filing with the Com-

mission of a registration statement, and the delivery to inves-

tors of a prospectus, containing detailed financial and other

information about the security and its issuer. The antifraud

provisions, by contrast, do not establish a system for affirma-

tive disclosure consisting of the preparation or filing of docu-

ments. While they could, under some circumstances, require

that a person make affirmative disclosures (which may be oral

or written) necessary in order not to mislead a securities pur-

chaser, the antifraud provisions are essentially a generalized

prohibition against fraudulent activity.

Brief for Commission Amicus Curiae at 4-5. (Emphasis added.)

5

label as dictum or as erroneous the court of appeals’ affirmance of

claim jurisdiction over the allegations that the Local 705 Pension

Fund was required to make “specific affirmative disclosures,

such as actuarial probabilities. . . .” Brief for Commission at 4:

see also id. at 25, 29; Brief for Respondent at 114; Brief for

PROD at 21; Brief for The Gray Panthers at 18. It cannot be

said that the decisions below were dicta when they sustained

claim jurisdiction for the specific allegations in counts I and II

of the complaint. What can be said is that the respondent and

his amici no longer can support the decisions that 94 17(B)(5),

(6) and 18—and the complaint’s other affirmative disclosure

allegations—state claim jurisdiction, and that the district court

should have granted the motions to dismiss.

The respondent's and his amici’s sudden retreat highlights the

substantial uncertainties as to what are the disclosure obligations;

uncertainties which place plan administrators in great peril. The

Commission attempts to separate the types of disclosure required

by the registration provisions from those required by the antifraud

provisions. It states that “[t]he registration provisions, which are

commonly referred to as the Securities Act’s ‘disclosure’ provi-

sions, are designed to assure that investors will be furnished all

material information needed to make an informed investment

decision.” Brief for Commission at 25; see also note 6 supra.

Yet the nucleus of the respondent’s antifraud complaint is that

the Local 705 Pension Fund failed to make the types of dis-

closures to prospective and present covered employees which,

according to the Commission, are mandated by the registration

provisions.’

7. In the context of an intentionally misleading statement to an

employee contemplating an investment in an employee pension

plan, the employee-investor needs to be told the true facts

relative to the value of his investment—including the risk of

loss—at a time when such information has meaning, at a time

Tene Go employee can Stil decide Sot to make, or not to con-

tinue making, the investment.

@ e e es od

(Footnote continued on next page.)

6

And we know that “[a]t the very least it is safe to assert that

the disclosures which are material in the registration context are

within the same genre of disclosure which are required by the

antifraud provisions of the federal securities laws,” Sonde & Pitt,

Utilizing the Federal Securities Laws to “Clear the Air! Clean

the Sky! Wash the Wind!’”, 16 How. L. J. 831, 853-54 (1971);

or, as put by the respondent, “[t]his need [for disclosure] can be

met under either or both the registration and antifraud provisions

of the federal securities laws,” Brief for Respondent at 43.

Thus the court of appeals’ conclusions—that the petitioners

committed the “quintessential error fof] . . . confus[ing] the

requirements of the 1933 Act’s registration provisions with the

anti-fraud provisions of the 1933 and 1934 Acts” (App. 252a)

and that the Local 705 Pension Fund is not subject to the regis-

tration provisions (App. 258a & n.61)—are non sequiturs.

Whereas the registration provisions—and accompanying rules

and forms—may lend some guidance to a plan administrator,

Brief for Commission at 25, the antifraud provisions are but

a command not to sin—‘“a prohibition of fraudulent conduct,

including the making of false or misleading representations,” id.

at 26—under pain of severe penalty. See 3 Loss, Securities Regu-

lation, 1435-36 (2d Sd. 1961). Because the Commission, with

its “experience and long course of administrative interpretation”

of the securities acts, Motion to Participate In Oral Argument

at 2, cannot say what information must be disclosed under the

antifraud provisions, and therefore the determination of ma-

teriality “requires [the plan administrator to make] delicate

assessments of the inferences a ‘reasonable . . . [employee]

(Footnote continued from preceding page.)

When defendants communicate the details of an emp!oyee

pension plan to an employee and seek to induce his i vest-

ment and participation on the basis of misrepresentations and

omissions, all facts which a reasonable investor would consider

important in the making of an investment decision must be

disclosed under the antifraud rules of the federal securities

laws.

Brief for Respondent at 105. (Partial emphasis added.)

7

would draw from a given set of facts and the significance of

those inferences to him, and these assessments are peculiarly

ones for the trier of fact,” TSC Industries, Inc. v. Northway,

Inc., 426 U.S. 438, 450 (1976) (footnote omitted), the

decision below creates enormous uncertainties and perils for all

plan administrators.

These are persuasive considerations for not requiring plan

administrators to guess at the types of disclosures required by

the securities acts but not by the national iabor laws as urged

by the respondent.* Brief for Respondent at 42, 97. And in

supporting the engrafting of the capital market criteria concern-

ing the nature and timing of plan disclosures onto a collectively

bargained plan, neither the respondent nor the Commission

retracts the Commission’s flat statement that “ ‘the area covered

by a bill on welfare and pension funds does not, as such, deal

with capital-securities markets’”, Brief for Petitioners at 30,

made to a Congress which believed that “ ‘no Federal Statute,

regulation or authority . . . provided protection for pension plan

beneficiaries, ”® id. at 29. It is inconceivable that Congress

believed that plans like the Local 705 Pension Fund were sub-

ject to the uncertainties of and the potentials for protracted liti-

gation and frightful liabilities under the securities acts’ antifraud

provisions when, in the WPPDA and finally in ERISA, Congress

eschewed an analogous private right of action in favor of specific

8. The respondent says that the federal labor statutes do not

reach misrepresentations of the type alleged in this case. Brief for

Respondent at 42, 97. Nevertheless, count VI of the amended com-

plaint, which incorporates the allegations of count I as violations

of § 302(c)(5) of the LMRA, survived these petitioners’ motion to

dismiss (App. 129a-34a). Allegations concerning the nature of and

misrepresentations about plan eligibility rules have been the grist for

§ 302 litigation. See, e.g., Kosty v. Lewis, 319 F. 2d 744 (DC Cir

1963); Burroughs v. Operating Engineers Pension Fund, 542 F. 2d

1128, 1130-31, (9th Cir 1976) (change of eligibility rule without

notice) ; Johnson Vv. Botica, 537 F. 2d 930, 933-34 (7th Cir 1976)

(claim of arbitrary eligibility rule).

9. PROD disingenuously says that “[t}he ‘milieu’ of the securities

acts was simply not under consideration in any of the legislative pro-

ceedings [WPPDA and ERISA] referred to by [the] petitioners.”

Brief for PROD at 30 n.23.

mechanisms and remedies for the timing and the nature of dis-

closure. Compare WPPDA, §§ 5(a), 6 & 7 (publication of plan

description and annual financial report); ERISA, §§ 102-104

(contents of summary plan description and requirement that

description be provided to employee within ninety days of em-

ployment. Content and filing of annual report); Brief for Peti-

tioners at 31-32, 38-40 with App. 254a-56a; Brief for Respond-

ent at 97, 98 n.86, 99, 105, 107 (generalized “self-executing

compulsion” to disclose open end “material information”).

Il.

THE RESPONDENT INITIALLY RAISES IN THIS COURT

THE ARGUMENT THAT THE SECURITY IS A CERTIFI-

CATE OF OR PARTICIPATING INTEREST IN A PROFIT

SHARING PLAN.

In the district court these petitioners read the complaint (App.

29a, § 12) as alleging that the security was a certificate of or

participating interest in a profit sharing plan. Because the re-

spondent “characterize[d] his interest in the Local 705 Pension

Fund as an investment contract” (App. 122a), neither the district

court (App. 124a-25a) nor the court of appeals (App. 220a

n.15) reached the “certificate” issue. That issue is first presented

in the respondent’s brief on the merits. Brief for Respondent

at 38, 83-84. Under these circumstances this Court should not

deviate from its normal policy of not considering this contention.

See Cort v. Ash, 422 U. S. 66, 72 n.6 (1975); Weiner v.

United States, 357 U.S. 349, 351 n.* (1958); cf. Neely v.

Eby Construction Co., 386 U.S. 317, 330 (1967); Ladner v.

United States, 358 U.S. 169, 172-73 (1958). Nevertheless, the

defined nature of the pension promised by the Local 705 Pension

Fund alone distinguishes it from a profit sharing plan. Compare

Treas. Reg § 1.401-1(a)(2)(i) & (b)(1)(i) (1978) (pension

plan) with Treas. Reg. § 1.401-1(a)(2) (ii) & (b)(1) (ii)

(1978) (profit sharing plan).

9

The Commission has seen fit to change its mind con-

cerning the nature of the Local 705 Pension Fund. In the

court of appeals the Commission clearly understood that a

multiemployer plan such as the Local 705 Pensiun Fund is

a defined benefit plan. Brief for Commission Amicus Curiae

at 10. Nevertheless, the Commission tells this Court that such

plans “are not, strictly speaking, either defined benefit or defined

contribution plans.” Brief for Commission at 13. The Commis-

sion’s present posture evidences either another mutable argu-

ment, Brief for Petitioners at 16, 56 n.35, or a total lack of

understanding of pension plans, see Connolly v. PBGC, .......

F. 2d ...., 4 Pens. Plan Guide (CCH) § 22,792 (9th Cir

1978); Brief for Petitioners at 53 n.32. In either case no weight

should be accorded to the Commission’s uninformed views con-

cerning pension plans of the type at issue in this case.

Il.

THE RESPONDENT HAS MISAPPLIED THIS COURT’S

CRITERIA FOR AN INVESTMENT CONTRACT.

A. The Investor Must Invest His Money.

The respondent has changed the first element of an invest-

ment contract—that “a person invests his money”, Howey, 328

U. S. at 299—to “an investment of value,” Brief for Respond-

ent at 18, 51, which may be satisfied either by the employee's

“services direct or [by] an investment of money through the

form of employer contributions made on behalf of the employee

into the Local 705 Pension Fund,” id. at 51-52. This Court has

not said that an employee’s services alone satisfy the first Howey

criterion, the court of appeals did not pass on the issue because

it found the employer contributions to be the employee’s money

(App. 222a, 225a), and the Commission apparently does not

urge that position.’ Nonetheless, the respondent finds support

10. The Commission’s initial broad statement “that the em-

ployee, through his labor, acquires an interest, together with other

(Footnote continued on next page.)

10

from SEC v. Addison, 194 F. Supp. 709 (ND Tex 1961),

Collins v. Rukin, 342 F. Supp. 1282 (Mass 1972), and three

commentators. Brief for Respondent at 53-54.

Collins considered only that the employee’s labor was a dispo-

sition for value for purposes of the statutory definition of a sale.

342 F. Supp. at 1289, 1290. Addison did not say whether the

employees received consideration in addition to, or only the

defendants’ promises “that they too would share and participate

in the millions of dollars of profits . . . by reason of defendants’

extreme gratitude for such non-salaried workers’ extraordinary

friendship in rendering such services,” 194 F. Supp. at 716, or

whether the consideration issue was contested.

The commentators cited by the respondent undermine his

argument. While one paragraph in Long, An Attempt to Return

“Investment Contracts’ to the Mainstream of Securities

Regulation, 24 Oklahoma L. Rev. 135, 161 (1971), Brief for

Respondent at 53-54, deals with services as value for sale pur-

poses, Brief for Commission at 77 n.61, the next paragraph,

which deals with the security question, reveals that it is the

commentator’s wish, rather than a reality, which the respondent

repeats:

An investment contract as a general classification within

the definition of a security also requires that there be an

investment of money or money’s worth. However, none of

the three definitions of investment contract so far con-

sidered have recognized the possibility that such a contract

could result where the investment was at least in part made

by labor performed or for property transferred by the

(Footnote continued from preceding page.)

employees, in a common fund,” Brief for Commission at 31, is iater

" narrowed to mean that the employee’s “interest” is acquired “as

compensation for his labor * * * which takes the form of contribu-

tions to the pension fund,” id. at 40.

11

investor. As a result, certain cases which logically should

have been classified as securities have escaped regulation.

( Footnote omitted. )

The same is true of the quotation from Hannan & Thomas,

The Importance of Economic Reality and Risk in Defining Fed-

eral Securities, 25 Hastings L. J. 219, 236 (1974), which

is prefaced by the cautionary statement that “{t}he following

is an appraisal of the fundamental concepts underlying those

promotional schemes which are likely to involve securities.

These concepts are compared and contrasted with the current

state of the law for the purpose of understanding the direction

the definition may take in the future.” And the roll of citations

urged on this Court, Brief for Respondent at 35-37; Brief for

Commission at 48 nn.32-34, does not contain a single case

where a court decided that the Howey “money” principle was

mict solely by the services rendered by an employee to an

employer.

In seeking to equate the employer’s contributions to a collec-

tively bargained mandatory pension plan with the investor’s

money the respondent inexactly argues that the contributions are

the employee’s wages whether called wages or compensation.

Brief for Respondent at 52, 53-56. Whereas Professor Loss,

Brief for Respondent at 52, and amici, Brief for Commission at

78; Brief for PROD at 14 n.7; Brief for The Gray Panthers at

19 n.2, 11, may read Inland Steel Co., 77 NLRB 1 (1948), as

holding that pension plans are mandatory subjects for bargain-

ing because they are part of the wage structure, the Board does

not. The Board recently interpreted its Inland Steel decision as

the petitioners did, Brief for Petitioners at 49 n.27, to mean

that a pension plan is “‘a term and condition of employment’

within the meaning of the [NLRA] and is thcrefore a mandatory

subject of bargaining.” Elizabethtown Water Co., 234 NLRB

No. 68 (1978), 97 LRRM 1210, 1211 &n.5 (footnote omitted).

AUTHORITIES CITED.

Cases.

Alabama Power Co. v. Davis, 431 U. S. 581 (1977) .... 12

Allied Structural Steel Co. v. Spannaus, 57 L. Ed. 2d

TAP CIGTS) .cccccess is Chto bwanddeanddus sinned 12

Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723

CD one sp nines nee0oen ed 600 6600406600 0080 0% 13

Burroughs v. Operating Engineers Pension Fund, 542 F.

y Bir £ le 2. RRP PrPrETTTeTITTTrTrrree 7

Collins v. Rukin, 342 F. Supp. 1282 (Mass 1972) ...... 10

Connolly v. PBGC, 4 Pens. Plan Guide (CCH) 4 22,792

(9th Cir 1978) ............ Seewhdesenawcunses 9

et ee is, Ge Bs Be Ge Cee oc 6:0. 0:60 06 hn ceseseeds 8

Elizabethtown Water Co., 234 NLRB No. 68 (1968), 97

SRE ED chuwncdcccconsedeonetetecéscuedes il

First National Bank of Boston v. Bellotti, 55 L. Ed. 2d

\ Lt .. | PPUPOeTerTeTTCTerrrirrrrre ere 15-16, 17

Inland Steel Co., 77 NLRB 1 (1948) ................ 11

Johnson v. Botica, 537 F. 2d 930 (7th Cir 1976) ...... 7

Kosty v. Lewis, 319 F. 2d 744 (DC Cir 1963) ........ 7

Ladner v. United States, 358 U.S. 169 (1958)....... 8

Los Angeles Dept. of Water & Power v. Manhart, 55 L. Ed.

ff | eerrrrerrrrTrrTri TTT TTT Te 12

NLRB v. Gissel Packing Co., 395 U. S. 575 (1969) .... 13

Neely v. Eby Construction Co., 386 U. S. 317 (1967) ... 8

Peters v. Missouri-Pacific R. Co., 483 F. 2d 490 (Sth Cir

SD Kéncossnedeeocesenscieasidebus tenses 12

SEC v. Addison, 194 F. Supp. 709 (N D Tex 1961) .... 10

ill

SEC v. National Securities, Inc., 393 U. S. 453 (1969) .. 1

SEC v. W. J. Howey Co., 328 U. S. 293 (1946) ....... 9

TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438

CRUE. 2 sddenkadecdéesuaiieeosseneiSusdeneses 7,13

United Housing Foundation, Inc. v. Forman, 421 U. S.

See SE. ‘eveaweueweseeeianes whee eenesak es 13,14

United States v. Enmons, 410 U. S. 396 (1973) ........ 14

Weiner v. United States, 357 U. S. 349 (1958)........ 8

Statutes and Regulations.

Employee Retirement Income Security Act of 1974, Sec-

tions 102-104, 29 USC §§ 1002-04 .............. 8

Treas. Reg. § 1.401-1(a)&(b) (1978) .............. 8

Welfare and Pension Plan Disclosure Act, 72 Stat. 997, 76

a 2 ET 2. cnc seek dba We ase ee es 8

Miscellaneous.

Hannon & Thomas, The Importance of Economic Reality

and Risk in Defining Federal Securities, 25 Hastings

B,D Bee CRIED ccc cnvccecncdscencs cepeagvess 11

Long, An Attempt to Return “Investment Contracts” to the

Mainstream of Securities Regulation, 24 Oklahoma L.

Bee. BIB CIOTE) occ cdecnvccescccvoscsacssess 10

3 Loss, Securities Regulation, 1435 (2d Ed. 1961) ..... 6

Sonde & Pitt, Utilizing the Federal Securities Laws to “Clear

the Air! Clean the Sky! Wash the Wind!”, 16 How. L. J.

GRE CERGED wcvcdeccdncovincesccsesesecosasnees 6

12

The respondent and his amici fare no better in using compen-

sation and wages as synonyms. Brief for Respondent at 46, 52,

53, 55; Brief for Commission at 78; Brief for PROD at 14;

Brief for The Gray Panthers at 10. Alabama Power Co. v. Davis,

431 U.S. 581 (1977), unlike the court below, did not equate

“compensation” with deferred wages. Brief for Petitioners at 48-

49. In Los Angeles Dept. of Water & Power V. Manhart, 55 L.

Ed. 2d 657 (1978), this Court said that the department's “pen-

sion benefits, and the contributions that maintain them, are ‘com-

pensation’ under Title VII,” citing Peters v. Missouri-Pacific R.

Co., 483 F. 2d 490, 492 n.3 (Sth Cir 1973). 55 L. Ed. 2d at

668 n.23. The court in Peters, as the Board in Inland Steel,

referred to pension plans “as employment conditions under the

[NLRA]J,” 483 F. 2d at 492 n.3, not as deferred compensation

as asserted by amicus, Brief for The Gray Panthers at 10 n.2.

Manhart weakens rather than supports the respondent’s compen-

sation-is-wages contention. Finally, there is nothing in this

Court’s references to the pension benefits as compensation made

in Allied Structural Steel Co. v. Spannaus, 57 L. Ed. 2d 727,

737 (1978), which is at odds with Alabama Power.

B. The Respondent’s investment Contract

Theory Is Premised on the Erroneous

Conclusion That He Had an Undivided

Interest in the Local 705 Pension Fund.

Unless the respondent had an interest in the Local 705 Pen-

sion Fund there was no security. See, e.g., App. 221a, 230a;

Brief for Commission at 18 (“the touchstone of the existence of

an investment contract is whether an interest [exists] . . hag *

30-37. The interest, according to the court of appeals, is an

employee's present undivided interest in the Local 705 Pension

Fund acquired from the employer contributions (App. 230a).

See also Brief for Respondent at 38, 42, 57, 85. Since it is beyond

dispute that the plan’s organic documents specifically denied to

nonvested participating employees any right in or to the trust,

13

any payments from the trust, or the employer contributions,

Brief for Petitioners at 6-7 & nn.2 & 3, the respondent had no

interest—undivided or otherwise—in the Local 705 Pension

Fund." Therefore “the touchstone of the existence of an invest-

ment contract,” Brief for Commission at 18, is missing and the

decision below must fall.

C. The Lare of Profits Cannot Be Proved

Subjectively and as a Matter of Law

That Attraction Is Not Present in

This Case.

The respondent says that the Howey lure of profits criterion,

Brief for Respondent at 47-48 & n.45, and employee volition

for purposes of a sale, id. at 93, may be proved by exploring the

employee’s subjective motivation in taking or keeping the job

covered by the pension plan. Under this theory, when, as in

this case, the employee swears that he was attracted to or

remained on the job by the promise of a pension benefit in an

amount greater than the employer’s contributions on his behalf

the Howey test and volition are proved. The theory, however,

is contrary to Forman, to Blue Chip Stamps, and to Northway.

This Court “reject{[s] any rule that requires a probe of an

employee’s subjective motivations as involving an endless and

unreliable inquiry.” NLRB v. Gissel Packing Co., 395 U. S.

575, 608 (1969); see also Blue Chip Stamps, 421 U. S. at 740-

44. The objective standard of the reasonable investor is to be

applied to each facet of a private antifraud suit. See TSC Indus-

tries v. Northway, 426 U. S. at 450. Forman is a prime example

of this Court’s application of the objective rather than the sub-

jective standard.

11. Neither the respondent nor his amici has refuted the petition-

ers’ authorities which establish that respondent had no “interest”

whatsoever in the Local 705 Pension Fund. Brief for Petitioners

at 25.

12. The court of appeals said the same thing in deciding that the

respondent made a disposition for value (App. 245a, 246a n.41).

14

In Forman, contrary to the courts below in this case, the

inquiry was not whether any of the fifty-seven plaintiffs pur-

chased a cooperative residence based on the thought that he or

she was going to “profit” thereby in the form of tax advantages,

or rental reductions, or savings. Rather, the inquiry was directed

to a “[c]lommon sense” analysis, 421 U.S. at 851, of “the eco-

nomic realities underlying a transaction,” id. at 849, and

resulted in a decision that a security did not exist.

Using the Forman approach, we know objectively that the

Local 705 Pension Fund and similarly constituted pension funds,

which were created in conformity with § 302(c) (5) of the

LMRA and § 401 of the Code, were not created for the purpose

of raising capital for profit-making purposes and do not represent

any of the “ ‘countless and variable schemes’ ” to which the anti-

fraud provisions are directed, Forman, 421 U.S. at 848. As dis-

cussed more fully at 15-18 infra, we know that a participant in a

collectively bargained mandatory noncontributory pension plan

cannot be analogized to a capital market investor. We know

objectively that the respondent entered and remained in covered

employment before the Local 705 Pension Fund existed but at

a time when at least 9.8 million workers were covered by pension

plans (App. 232a). See also Brief for Petitioners at 41 n.22.

And we know that this is the first case to raise, let alone to

decide, the issues presented to this Court. This last point is

persuasive that the Local 705 Pension Fund does not “ ‘in our

commercial world fall within the ordinary concept of a secur-

ity,’ ”” Forman, 421 U. S. 847-48 (emphasis added), for “ijt is

unlikely that if Congress has indeed wrought such a major expan-

sion of federal . . . jurisdiction in enacting the... . [securities

acts], its action would have so long passed unobserved,” United

States v. Enmons, 410 U. S. 396, 410 (1973).

These petitioners do not argue that as a subjective matter

each and every employee entered or remained in covered employ-

ment without regard to the Local 705 Pension Fund plan. Our

arguments are, however, that the commercial world does not

15

ordinarily conceive of the Local 705 Pension Fund as a security,

and that a common sense analysis of the economic realities

underlying the Local 705 Pension Fund results in the conclusion

that the Local 705 Pension Fund defined benefit plan is not

traditional capital market profits which are the motivation for a

reasonable employee to enter or remain in covered employ-

ment. Based upon this Court’s precedents, the type of transaction

before this Court—in which the employee becomes a participant

in a collectively bargained pension plan as a mandatory incident

to the employee’s employment—is not within the scope of the

federal securities laws.

IV.

THE COMPULSORY AND COLLECTIVELY BARGAINED

FOR NATURE OF THE LOCAL 705 PENSION FUND HAS

NEGATED EMPLOYEE VOLITION AND THEREBY A

SALE.

The respondent and the Commission submit that to find a

sale this Court need not find employee volition, but, in any

event, that volition is garnered from the employee’s right to vote

on the negotiated coniract or his decision to accept or remain on

the job. Brief for Respondent at 118 n.97; Brief for Commission

at 21, 85, 86 n.75. The employee is thereby analogized to a

shareholder in a corporation. Brief for Respondent at 44-45,

110. We have previously discussed the “ratification” argument.

Brief for Petitioners at 57-58. The compulsory nature of the

Local 705 Pension Fund negates employee volition, the analogy

to a shareholder, and the finding of a sale.

First Nat. Bank of Boston v. Bellotti, ——.... fs

L. Ed. 2d 707 (1978), considered the constitutionality of a

state statute which barred certain expenditures by banks and

specified corporations made for the purpose of influencing the

vote on referendum proposals which did not materially affect

16

their businesses, properties, or assets. This Court, in discussing

the statute’s effect on the corporate shareholders’ right to “decide,

through the procedur<s of corporate democracy, whether their

corporation should engage in debate on public issues,” id. at

729, appended a most instructive note:

The critical distinction here is that no shareholder has

been “compelled” to contribute anything. Apart from the

fact, noted by the dissent, that compulsion by the State is

wholly absent, the shareholder invests in a corporation of

his own volition and is free to withdraw his investment at

any time and for any reason. A more relevant analogy,

therefore, is to the situation where an employee voluntarily

joins a union, or an individual voluntarily joins an associa-

tion, and later finds himself in disagreement with its stance

on a political issue. The Street and Abood Courts did not

address the question whether, in such « situation, the union

or association must refund a portion of the dissenter’s dues

or, more drastically, refrain from expressing the majority’s

views. In addition, even apart from the substantive differ-

ences between compelled membership in a union and

voluntary investment in a corporation or voluntary partici-

pation in any collective organization, it is by no means an

automatic step from the remedy in Abood, which honored

the interests of the minority without infringing the

majority’s rights, to the position adopted by the dissent

which would completely silence the majority because a

hypothetical minority might object.

Id. at 729 n.34 (partial emphasis added). The court below did

not have the benefit of Bellotti when it incorrectly analogized

a compelled member in the Local 705 Pension Fund to a

corporate shareholder (App. 244a-45a).

As in Bellotti there exist “substantive differences” between

compelled membership in the Local 705 Pension Fund “and

voluntary investment in a corporation or voluntary participation

in any collective organization,” 55 L. Ed. 2d at 729 n.34. First,

the collective bargaining agreement compels the dissenting

employee’s participation in the pension plan. Second, the collec-

tive agreement is negotiated by Local 705 who the employee

17

may not have selected and, as an individual matter, may not

want as his representative. Third, the employee’s relationship to

the plan is determined not by the employee’s majority repre-

sentative or employer but by the plan trustees who are appointed

by Local 705 and the employer associations and who are not

the employee’s “representatives”. Brief for Petitioners at 50 n.28.

Finally, a nonvested employee who leaves the plan by leaving

covered employment cannot withdraw the employer contribu-

tions. Therefore, the employee has no volition whether to join

the plan, or to directly affect the management of the plan,"* or to

“withdraw his investment at any time and for any reason,”

Bellotti, 55 L. Ed. 2d at 729 n.34: By leaving his job the non-

vested employee has no claim at all against the pension plan, let

alone one which is analogous to that of a dissatisfied shareholder.

Brief for Petitioners at 56-57.

The Commission’s no sale position was based on the lack of

employee volition, a valid position as shown by Bellotti, and

not on the theory that pensions were gifts. Brief for Petitioners

at 56 n.35. The Commission’s new arguments that the pension

benefits “represent a major element of the compensation pack-

age,” and that the fall of the pensions-are-gifts theory invalidated

its no sale rule, Brief for the Commission at 83, just do not

stand scrutiny. In the first place, there is no empirical proof that

pension benefits paid by every plan constituted as is the Local

705 Pension Fund are a “major element” as claimed. And anti-

fraud coverage would therefore apply only to those plans where

a trier of facts would—if at all possible—decide whether the

pension was a “major element” and what is a “compensation

package.” The Commission's unworkable scheme will generate

more uncertainties and undoubtedly more litigation.

In the second place, according to the Commission, the

pensions-are-gifts concept died at the latest in 1948 when Inland

Steel was decided. Brief for Commission at 78. However, the no

13. The corporate shareholder elects his board of directors. The

trustees are designated by the trust agreement and selected by the

parties to the collective bargaining agreement.

18

sale position remained in effect with respect to mandatory pen-

sion plans for another thirty years until the Commission’s brief~

to the court of appeals in this case.

Nonetheless, the gifts versus wages debate goes not to volition

but to only that part of the sale issue concerning the evistence of

a disposition for value. A finding that employer contributions to

a plan in return for the employee’s labor result in a disposition

for value between the employee and the plan does not touch the

volitional element of a sale. There can be no sale unless—in

addition to value—the employee made a voluntary investment

act analogous to the act of a shareholder who purchases or

retains stock in a corporation. The volitional element is absent

in this case.

Respectfully submitted,

SHERMAN CARMELL,

39 South LaSalle Street,

Chicago, Illinois 60603,

(312) 236-8033,

Attorney for Petitioners.

Of Counsel:

CARMELL & CHARONE, LTD.

Dated: October, 1978.