Respondents Brief — McClure v. First National Bank of Lubbock

x Or PIV sare

COUMA CL a Supreme Court, U. S.

FILED

| JAN 28 STS

EMIHSEL ROT 1 0° ORK

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1974

No. 74-829

J JANITA McCLURE, ET AL, Petitioners

v.

FIRST NATIONAL BAi'K AT LUBBOCK, TEXAS,

ET AL, Respondents

Brief of Respondents in Opposition to

Petition for Writ of Certiorari

JAS. H. MILAM

MICHAEL R. WALLER

CHILDS, FORTENBACH, CECIL KUHNE

BECK & GUYTON CRENSHAW, DUPREE & MILAM

402 Pierce Avenue P. O. Box 1499

Houston, Texas 77001 Lubbock, Texas 79408

Attorneys for Respondent, Attorneys for Respondent,

Sterling Emens, Jr. First National Bank at

Lubbock, Texas

—_—*

Fort Worth Brief Printing Co., 610 S. Jennings Street, Phone 332-4970, 886-4524

T

SUBJECT INDEX

Page

GRR Ml a ath Ge AE Sette BURT 8 ier ae a RR 1

TT Ae 1

ss dasbuakiontaiabshivelanmncom 2

Statutory Provisions Involved .2....00....0...........:s-cceseeceeeeceeeeeeees 2

Question Presented for Review. ......0........0...0..::c-ecccecceeeseeeceeeeee 3

a a a a ik celicrctniiboghaninenmbaniaawenesinn 5

Cg TE CR: A) ae D 8

Argument

(1) Statutes are to be construed in accordance

with congressional intent and purpose........................ 10

(2) Clear purpose of the Securities Exchange

a oe eee ee 12

(3) Only fraud in the purchase or sale

of securities is within the purview

of the Securities Exchange Act....000000000000000ceeeeeeeeeeee 15

(4) Construction of the term “Security”

I le A a etstctcesesresantovenorvnnectiosiercnie 16

(5) Courts below correctly held that loan

transaction in this case did not constitute

purchase or sale of securities under

the Securities Exchange Act...........................0c0cccec0eee- 21

(6) Authorities relied upon by Petitioner.......000000000000000... 26

(7) Petitioner’s contention concerning

| eee 28

I riod tau k GUD daslicctncernenserteaosscednicheibiansieniritsincneceanemnnibiansinssi 32

an ia eeGilciebaigntabinontsngedctnsnie 32

Cartaeente of Servic... ee

Appendix ; 34

QEEpRetnaatens eas

ii

INDEX OF AUTHORITIES

Page

Alberto-Culver Company v. Scherk, 484 F.2d 611

(7th Cir., 1973), reversed, 94 S.Ct. 2449... 27

Argosy Limited v. Hennigan,

404 F.2d 14, 20 (6) (5th Cir., 1968)... 10, 11

Beck v. Securities and Exchange Commission,

430 F.2d 673, 674 (Gth Cir, 1970) ............c...ceccc.ccccccsscscesess 13

Beury v. Beury, 127 F.S. 786 (2) (SD W.Va., 1954).............. 23

Brown v. Gilligan, Will & Co., 287 F.S. 766,

Fe ee ee ake Wig i iincesndeonciiiewincinasseiesenacinssnemdenennl 12

Burnham v. Com. of Int. Rev., 86 F.2d 776

PU is: CIE canceiniesusciseckaconactoansiidekioctanaslcnpeinatnniaicouaniesiniminal 24

Campbell v. Carter Foundation Production Co.,

ee ee he Rea nee 24

Campbell v. Degenther, 97 F.S. 975 (1)

SEY kas SEITE.» sci ceentcaepicicin- sesaiotniglosisiensicig ncddaeiuicieimemiscnsdaniaaacat 14

Cecil B. DeMille Productions, Inc. v. Woolery,

ee Fe Gt i ee eee 22

City National Bank of Fort Smith, Arkansas v.

Vanderboom, 290 F.S. 592, 608 (WD Ark., 1968),

affirmed, 422 F.2d 221 (8th Cir., 1970), certiorari

denied, 399 U.S. 905, 26 L.Ed.2d 560.......00...0..0000.... 18, 22

C.I.R. v. Kelley, 293 F.2d 904 (3) (5th Cir., 1961) 00000000... 10

C.LR. v. Morgan, 272 F.2d 936 (1) (9th Cir., 1959) .............. 20

Dinkelspeel v. Lewis, 62 P.2d 294, 299

Re Renee enemies ..20

Eisenberg v. Greene, 346 P.2d 60 (1)

CEP OG, Big Cl, TID nscncceccccsccstnensconeeens 20

Equitable Life A. Soc. v. C.I.R., 321 U.S. 560,

ie I I © eer endetnceeeseesraciorncs egncinie andconameeee 20

Farrell v. United States, 321 F.2d 409, 417

(9th Cir., 1963), certiorari denied, 375 U.S. 992................ 27

FTC v. Meyer, 390 U.S. 341, 19 L.Ed.2d 1222,

EE HEED scecianecycekssk concnonbiekeneeeedenetaicendemnaanaenien 10

Fidelity & Casualty Co. of New York v. Key

Biscayne Bank, 501 F.2d 1322 (5th Cir., 1974)... 29

INDEX OF AUTHORITIES (Continued)

First Trust & Savings Bank v. Fidelity-Philadelphia

Trust Co., 214 F.2d 320, 323 (3rd Cir.,

1954), certiorari denied, 348 U.S. 856..................-.-..----- 24-25

Herren v. United States, 317 F.S. 1198, 1203 (5)

(SD Tex., 1970), affirmed, 443 F.2d 1363

CUGRa Chir, BOTA Panacea isccn cs cacensicerrcrecetnnncivoncenrcsonosonnnne 10, 12

Hirsh v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 311 F.S. 1288 (1) (SD N.Y., 1970)..................--.---+-++ 15

Hoover v. Allen, 241 F.S. 213 (2,3) (SD N.Y., 1965) .............. 15

Investment Company Institute v. Camp, 274 F-.S. 624,

642-643 (D.C., 1967), reversed on other grounds,

420 F.2d 83 (D.C. Cir., 1969), reversed on other

grounds, 401 U.S. 617, 28 L.Ed.2d 367.............-----------:-0+-+ 18

Joseph v. Norman’s Health Club, Inc., 336 F.S.

307, 313 (5) (ED Mo., 1971)........ Giicganiadiows 18, 22, 23, 30, 31

Keers & Company v. American Steel & Pump

Corporation, 234 F.S. 201 (1) (SD N.Y., 1964) ................ 15

Kline v. Robinson, 428 P.2d 190 (6) (S.Ct., Nev., 1967) ........ 20

Lawrence v. Securities and Exchange Commission,

PAE. Fe Ba Le ee | ener 17

Lehigh Valley Trust Co. v. Central National Bank of

Jacksonville, 409 F.2d 989, 991-992 (5th Cir., 1969) ........ 22

Liberty Nat. Bank & Trust Co. v. Travelers Indem.

Co., 295 NYS2d 983, 986 (S.Ct., Erie Co., 1968) ................ 20

Lloyd v. C.LR., 154 F.2d 643 (2) (3rd Cir., 1946) .................. 20

McClure v. First National Bank of Lubbock, Texas,

352 F.S. 454 (ND Tex., 1973), affirmed,

ee Ct ol oe Se | ee 1, 5,8

Milana v. Credit Discount Co., 163 P.2d 869

(3) (B.Cb., Call, 19466) .-...2.....---onee-nesnconnsnnsnverncecssnesnosnses 20

Miller v. Amusement Enterprises, Inc., 394 F.2d

$42, 363 (15) (Sth Cir., 1968) ..............-....2.-...--.seoreseee- 10, 11

Morrow v. Schapiro, 334 F.S. 399 (4) (ED Mo., 1971).......... 15

INDEX OF AUTHORITIES (Continued)

Page

National Bank of Paulding v. Fidelity & Casualty

Co., 131 F.S. 121 (1) (SD Ohio, 1954) 20

Northern Mining Corporation v. Trunz,

124 F.2d 14 (2) (9th Cir., 1941) 20

Otis & Co. v. Securities and Exchange Commission,

106 F.2d 579 (6) (6th Cir., 1£39) .22000 eee 14

In Re Penn Central Securities L: tigation,

ee ee ED | 15

Pinellas Ice & C. 8. Co. v. Com. of Int. Rev.,

287 US. 462, 77 L.Ed. 428 (1982) 2.2... cccccccccceecccccccceceecees 24

Rae v. Cameron, 114 P.2d 1060 (2) S.Ct., Mont., 1941) ........ 20

Rekant v. Desser, 425 F.2d 872, 878

Se a Nc aceiettshsctthaginddicnsnreschdtennerebinasidcsensssiciastiens 17, 22, 26

Richards v. United States, 369 U.S. 1,

pe ES ae ee 10

Richland Development Company v. Staples,

oA Be a) | eee 10

Roe v. United States, 287 F.2d 435 (2)

(5th Cir., 1961), certiorari denied, 368 U.S. 824................ 17

Sanders v. John Nuveen & Co., Inc., 463 F.2d

1075, 1079, 1080 (7th Cir., 1972),

certiorari denied, 409 U.S. 1009 18, 26, 27

Schoenbaum v. Firstbrook, 405 F.2d 200 (2)

(2nd Cir., 1968), certiorari denied, 395 U.S. 906.............. 14

Securities and Exchange Commission v. Briggs,

234 F.S. 618, 622 (ND Ohio, 1964) 13

Securities and Exchange Commission v. Coffey,

493 F.2d 1304 (6th Cir., 1974)... 27

S.E.C. v. Crofters, Inc., 351 F.S. 236 (SD Ohio, 1972) ............ 27

S.E.C. v. Dolnick, 501 F.2d

1279, 1282 (7th Cir., 1974) 28, 29

Securities and Exchange Commission v. Fifth

Avenue Coach Lines, Inc., 289 F.S. 3, 38

a lca icneectchinanbcinigbicinlanioonnonte 23

Vv

INDEX OF AUTHORITIES (Continued)

Page

Securities & Exch. Com’n v. International Chem.

Dev. Corp., 469 F.2d 20, 26 (10th Cir., 1972) 13

Securities & Exch. Com. v. Joiner Leasing

Corp., 320 U.S. 344, 351, 88 L.Ed

88, 93 (1943) 10, 12, 17, 21, 28

Securities and Exchange Commission v. Ralston

Purina Co., 102 F.S. 964 (4) (ED Mo., 1952),

affirmed, 200 F.2d 85 (4) (8th Cir., 1952),

affirmed, 346 U.S. 119, 97 L.Ed. 1494 (3) (1952)............ 14

S.E.C. v. W. J. Howey Co., 328 U.S. 293, 299,

Oe IE I cena teeecipneessinccintanonintscnncnsnensunibecnincesicns 17, 24

Simmons v. Wolfson, 428 F.2d 455 (1,2)

SE ia, PI a cccnantts eo tenictinsnsizainnnenecinenasaaniaindhnonionenmionnseennse 15

Stanga v. McCormick Shipping Corp., 268 F.2d

EL RROD UU EERO ONT OTN NEED 10

State v. Douglas, 16 NW2d 489 (4)

as igs II actin cccensienncpeciontinsniahnsiccnntncenianncnncnnnen 20

Supt. of Insurance v. Bankers L. & C, Co.,

404 U.S. 6, 30 L.Ed.2d 128 (6) (1971)...................2..--.2----- 16

Tcherepnin v. Knight, 389 U.S. 332, 338,

19 L.Ed.2d 564, 570 (1967)...........................222- 16, 21, 24, 28

Thill Securities Corporation v. New York Stock

Exchange, 433 F.2d 264 (5) (7th Cir., 1970).................... 14

United States v. C.I.0., 335 U.S. 106,

92 L.Ed. 1849, 1856 (1947) ................... 10, 11

United States v. Shirey, 359 U.S. 255,

3 L.Ed.2d 789, 793 (6-£) (1959) ve: 10, 11

Vincent v. Moench, 473 F.2d 430, 436 (4)

(10th Cir, 1978) ...............-..c.-ssccerserccecssnsocsensensesceneosensenssoness 18

Weller v. C.LR., 270 F.2d 294, 296 (3rd Cir., 1959) ................ 20

Wilen Mfg. Co. v. Standard Products Co.,

409 F.2d 56 (2,3) (5th Cir., 1969) 10

yprermanenesartenisstee AEN We 2

a vl

: INDEX OF AUTHORITIES (Continued)

Page

Wilko v. Swan, 346 U.S. 427, 98 L.Ed. 168,

173 (1953) 13, 21

Wilshire Holding Corp. v. C.IR., 262 F.2d

51 (2) (9th Cir., 1958) 20

= 12 U.S.C., §§ 24, 377, 378, 78 19

15 U.S.C., §§ 78(a) through 78(u) 5

15 U.S.C., § 78¢. 2

15 U.S.C., § 78j 2,3

15 US.C., § 78j (b) 5, 7, 16, 32

15 U.S.C., § 1603 15

28 U.S.C., § 1254(1) 2

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1974

No. 74-829

JUANITA McCLURE, ET AL, Petitioners

Vv.

FIRST NATIONAL BANK AT LUBBOCK, TEXAS,

ET AL, Respondents

Brief of Respondents in Opposition to

Petition for Writ of Certiorari

TO THE HONORABLE SUPREME COURT

OF THE UNITED STATES:

The First National Bank at Lubbock, Texas, and

Sterling Emens, Jr., Respondents herein, submit this

Brief in reply and in Opposition to Petitioner’s Peti-

tion for Writ of Certiorari to the United States Court

of Appeals for the Fifth Circuit, and would respect-

fully show the following:

OPINIONS OF THE CCURTS BELOW

The Opinion of the District Court appears in 352

F.S. 454 (ND Tex., 1973).

The Opinion of the Court of Civil Appeals affirming

the judgment of the District Court appears in 497

F.2d 490 (5th Cir., 1974).

peers ai AEL PP .

Bas Sd RARE

2

JURISDICTION

Petitioner asserts jurisdiction under 28 U.S.C., §

1254(1).

While this Court has potential jurisdiction of this

case, there is no reason for the Court to grant the Pe-

tition for Certiorari and exercise jurisdiction. As set

forth below, the decisions of the District Court and

Circuit Court in this case are clearly correct, and there

is no material conflict becween these decisions and oth-

er decisions pertinent to the issue presented in this

case.

STATUTORY PROVISIONS INVOLVED

The statutory provision primarily involved is the

Securities Exchange Act of 1934, primarily the pro-

visions of 15 U.S.C., § 78), providing, inter alia:

“Tt shall be unlawful for any person, * * * by

the use of any means or instrumentality of inter-

state commerce or of the mails, or of any facility

of any national securities exchange—

ss

“(b) To use or employ, in connection with the

purchase or sale of any security registered on a

national securities exchange or any security not

so registered, any manipulative or deceptive de-

vice or contrivance in contravention of such rules

and regulations as the Commission may prescribe

as necessary or appropriate in the public interest

or for the protection of investors.”

Also involved are the definitions in such Act as con-

tained in 15 U.S.C., § 78c, which are set forth in the

Appendix hereto.

3

QUESTION PRESENTED FOR REVIEW

The statement in the Petition for Writ of Certiorari

of “Questions Presented” is, in essence, simply a con-

densation of Petitioner’s arguments and contentions.

There is, in essence, only one question in this case.

This is whether Plaintiff’s Complaint states a claim

or cause of action within the purview of the Securities

Exchange Act of 1984, specifically within the provi-

sions of 15 U.S.C., § 787, quoted above.

The District Court and Circuit Court correctly held

that the complaint did not state a claim or cause of

action within the purview of the Securities Exchange

Act.

Subsidiary questions are the two grounds of the Dis-

trict Court’s decision, namely:

(1) Whether the note executed by Gaines County

Developments to the First National Bank at Lubbock

for $200,000.00 evidencing the loan by the Bank to

GCD for such amount (and the deed of trust on iand

and subsequently pledge of stock securing such loan)

constituted a “security” within the purview of the Se-

curities Exchange Act of 1934. Both lower courts held

that the note and deed of trust did not constitute a

security.

(2) Whether such loan transaction did not consti-

tute the “purchase or sale” of a security within the

purview of the Securities Exchange Act of 1934. Again,

both lower courts answered in the negative.

A reading of the Petition for Certiorari leaves one

with the impression that the various allegations of

4

fraud and wrongdoing by the Defendants were un-

equivocaily proven facts. Although such allegations

are to be considered as being true for the purpose of

determining the Motion to Dismiss, it should be kept

in mind that such statements are pleaded allegations

only, not facts; further, it is not fraud which brings a

case within the ambit of the Securities Exchange Act,

but fraud in connection with the purchase or sale of a

“security.”

In order to consider the Petition for Certiorari in

proper perspective, it is also important to note two

significant matters in the decisions of the District

Court and Circuit Court in this case.

First, the courts below clearly did not hold that

a note cannot under any circumstances constitute a

“security” or ti2t a loan transaction involving a

note and/or pledge of stock cannot under any circum-

stances constitute the “purchase or sale” of a security

under the Securities Exchange Act. The courts below

simply held that the facts alleged in Plaintiff’s Com-

plaint in this case did not constitute allegations of the

purchase or sale of a security under the Securities Ex-

change Act.

Second, the decisions of the courts below do not pre-

clude, or purport to preclude, any suit or recovery by

plaintiff against the defendants, either in State or Fed-

eral Court, on any cause of action or claim for relief

except a violation of the Securities Exchange Act. In

this regard, the last sentence of the District Court’s

Memorandum and Order specifically states:

“*** Accordingly, the Court will enter an

5

order of even date herewith dismissing the pres-

ent cause of action for tack of jurisdiction, with

prejudice as to said Act +t without prejudice as

te any futwre eornpledrts beaed wpon wiermaire

theories of law upon which this Court passes no

judgment.” (352 F.S., at p. 462) (emphasis ours)

STATEMENT OF THE CASE

Juanita McClure, as Plaintiff, brought this action

against her former husband, Adolph R. Hanslik, the

First National Bank at Lubbock, et al, as Defendants,

alleging jurisdiction under the Securities Exchange

Act of 1934, 15 U.S.C., §§ 78(a) through 78(u). (A

1-8).

Defendant Hanslik was dismissed for the reason

that he was previously discharged in bankruptcy (A

74).

This suit was originally filed in the Fort Worth Di-

vision of the Norihern District of Texas and was sub-

sequently transferred by the Order of that Court to

the Lubbock Division of the Northern District (A 75-

76).

This appeal by the Plaintiff, Juanita McClure, is

from the Memorandum Opinion of the District Court

(A 80-90) and Order pursuant thereto (A 96) dis-

missing the case for failure to state a cause of action

within the jurisdiction of the District Court in that

the transactions alleged in Plaintiff’s Complaint do not

constitute the “purchase or sale of any security” with-

in the meaning of the Securities Exchange Act, spe-

cifically 15 U.S.C., § 78j(b). 352 F.S. 454 (ND Tex.,

1973).

6

The allegations of Plaintiff’s Complaint are suc-

cinctly summarized in the District Court’s Memoran-

dum Opinion (A 81-83).

Plaintiff, Juanita McClure, and Defendant, Adolph

Hanslik, under the property settlement agreement pur-

suant to divorce, each retained ownership of one-half

of the common stock of Gaines County Development

(GCD), a Texas corporation. Defendant Hanslik was

president or general manager of the corporation and

Plaintiff was secretary.

Plaintiff alleged that on or about August 15, 1964,

Defendant Hanslik represented to Plaintiff that GCD

needed to borrow $200,000.00 in order to pay GCD

business debts, a substantial portion of which were

allegedly owed by GCD to Defendant, First National

Bank at Lubbock. Plaintiff alleged that a similar rep-

resentation was made to Plaintiff by Defendant, Ster-

ling Emens, Jr., who was at that time a vice president

and loan officer of the Defendant, First National Bank.

Plaintiff alleged that on or about August 15, 1964,

she executed a promissory note as secretary of GCD,

that Defendant Hanslik also executed such note as

president of GCD, and on the same date they also exe-

cuted a deed of trust for the benefit of the Defendant

Bank to secure payment of such note, which deed of

trust mortgaged to the Bank a parcel of land in Gaines

County which constituted substantially all of the as-

sets of GCD.

Plaintiff further alleged that by reason of fraud

and conspiracy between Defendant Hanslik and De-

fendant Emens, such $200,000.00, or a substantial

7

part thereof, was not intended by such Defendants

to be, nor was it, in fact, applied to the business debts

of GCD, but such funds were applied to the payment

of a pre-existing unsecured debt owed by Defendant

Hanslik to the Bank.

Plaintiff alleged that on or about April 4, 1967, she

executed a separate collateral agreement pledging to

the Bank a portion of her stock in GCD and in Gaines

County Farm and Ranch Corporation for the purpose

of securing a new note of $202,316.00, renewing and

extending the original note of $200,000.00 made by

GCD, and a new deed of trust was executed pursuant

to this collateral agreement; that on or about Septem-

ber 3, 1968, after the Bank had instituted foreclosure

proceedings, the trustee under the deed of trust sold

all the Gaines County property of GCD to the Bank

for $125,000.00.

Plaintiff sued for actual and exemplary damages,

alleging that the note, deed of trust and other instru-

ments constituted “securities” and the alleged trans-

action constituted the employment or use of manipula-

tive or deceptive devices in connection with the pur-

chase or sale of securities in violation of § 10(b) of

the Securities Exchange Act of 1934 (15 U.S.C., § 78)

(b)) and Rule 10b-5 adopted pursuant thereto.

The District Court dismissed the Complaint on the

ground that the notes and collateral instruments un-

der the facts and circumstances alleged by Plaintiff

in this case are not “securities” within the meaning

of the Securities Exchange Act and on the further

ground that the transactions complained of do not con-

8

stitute the “purchase or sale” of “securities” under the

Act.

The District Court specifically provided in its Mem-

orandum Opinion and in the formal Order entered

pursuant thereto that such dismissal was without prej-

udice to any future complaints based upon alternate

theories of law upon which the Court passes no judg-

ment (A 94-95, 96).

The action of the District Court in dismissing the

Complaint was affirmed by the Fifth Circuit. 497 F.2d

490 (5th Cir., 1974).

SUMMARY OF ARGUMENT

The decision of the District Court, affirmed by the

Circuit Court, dismissing Plaintiff’s Complaint for lack

of jurisdiction in failing to state a claim or cause of

action under the Securities Exchange Act was clearly

correct.

Under the decisions of this Court and various Cir-

cuit Courts, it is clear that the courts are not required

to give a mechanical, literal application to congres-

sional statutes; rather the courts have the duty to con-

strue statutes in such a manner as to give effect to

the congressional purpose ard intent in enacting the

statute.

The clear purpose of the Securities Exchange Act

as determined not only from the Congressional Record

but from various court decisions was to protect inves-

tors, not borrowers.

9

While it is true that a note, either singly or in con-

junction with other instruments, may evidence an in-

vestment transaction within the contemplation and

coverage of the Securities Exchange Act, it is equally

clear that a loan of money by a bank at interest (or,

as stated from the point of view of the borrower, the

borrowing of money at interest) does not constitute a

“security” or the “purchase or sale” of a security un-

der the Securities Exchange Act. The fact that one

of the officers of the corporation to whom the money

was loaned may have been guilty of fraud upon another

officer and stockholder of the corporation does not con-

vert a loan transaction irto a purchase and sale of

securities under the Federal Securities & Exchange

Act.

In cases construing and involving the Securities

Exchange Act, as in cases on any subject matter, it

may be possible to find inconsistent (or, at least, argu-

ably inconsistent) results. However, there is certainly

no inconsistency in the decisions of the courts below

with other decisions involving the Securities Exchange

Act, and the decisions of the courts below are clearly

consistent with and supported by the authorities cited.

10

ARGUMENT

(1) Statutes are to be construed in accordance with

congressional intent and purpose.

{t is fundamental that statutes, and the meaning

of the terms and provisions thereof, are to be deter-

mined and construed in light of the intention and pur-

pose of the Congress in enacting the statute and in

light of the problem at which the statute was direct-

ed. United States v. C.1.0., 335 U.S. 106, 92 L.Ed.

1849 (3) (1947); United States v. Shirey, 359 U.S.

255, 3 L.Ed.2d 789 (6-8) (1959); Richards v. United

States, 369 U.S. 1, 7 L.Ed.2d 492, 499 (1961); FTC

v. Meyer, 390 U.S. 341, 19 L.Ed.2d 1222, 1232-1233

(1967); Richland Development Company v. Staples,

295 F.2d 122 (4) (5th Cir., 1961); Stanga v. McCor-

mick Shipping Corp., 268 F.2d 544 (6) (5th Cir.,

1959) ; Argosy Limited v. Hennigan, 404 F.2d 14 (6)

(5th Cir., 1968); C.1.R. v. Kelley, 293 F.2d 904 (3)

(5th Cir., 1961; Wilen Mfg. Co. v. Standard Products

Co., 409 F.2d 56 (2,3) (5th Cir., 1969); Miller v.

Amusement Enterprises, Inc., 394 F.2d 342 (15) (5th

Cir., 1968); Herren v. United States, 317 F.S. 1198

(5) (SD Tex., 1970), affirmed, 443 F.2d 1363 (5th

Cir., 1971).

In Securities & Exchange Commission v. Joiner

Leasing Corp., 320 U.S. 344, 88 L.Ed. 88, 93 (1943),

this Court stated:

“«* * * However well these rules [of statutory

construction] may serve at times to aid in deci-

phering legislative intent, they long have been

subordinated to the doctrine that courts will con-

11

strue the details of an act in conformity with its

dominating general purpose, will read text in the

light of context and will interpret the text so far

as the meaning of the words fairly permits so as

to carry out in particular cases the generally ex-

pressed legislative policy.”

In United States v. C.I.0., 335 U.S. 106, 92 L.Ed.

1849, this Court said (p. 1856):

“The purpose of Congress is a dominant factor

in determining meaning.”

In United States v. Shirey, 359 U.S. 255, 3 L.Ed.2d

789, 793, this Court stated:

“Statutes, including penal enactments, are not

inert exercises in literary composition. They are

instruments of government, and in construing

them ‘the general purpose is a more important

aid to the meaning than any rule which grammar

or formal logic may lay down.’ ”’

In Argosy Limited v. Hennigan, 404 F.2d 14, 20

(5th Cir., 1968), the Court pointed out that statutory

construction must not occur in a vacuum; that statutes

are contextual as well as textual; their proper inter-

pretation requires more than mere linguistic seriation

and the courts must look to the logic of Congress and

to the broad national policy which prompted the leg-

islation.

In Miller v. Amusement Enterprises, Inc., 394 F.2d

342, 353 (5th Cir., 1968), the Court noted:

“Our system does not favor mechanical juris-

prudence; it seeks to find the purpose and spirit

of a statute and the intention of its makers.”

12

And in Herren v. United States, 317 F.S. 1198,

1203 (SD Tex., 1970), affirmed, 443 F.2d 1363 (5th

Cir., 1971), the Court pointed out that whether or not

the language of the statute is ambiguous, the Court

must look to the legislative history surrounding it.

(2) Clear purpose of the Securities Exchange Act is

to protect “investors.”

Both the Securities Act of 1933 and the Securities

Exchange Act of 1934 are in pari materia (relate to

the same subject matter) and should be read and con-

strued together as one comprehensive scheme of leg-

islation. Brown v. Gilligan, Will & Co., 287 F.S. 766,

775 (11) (SD N.Y., 1968), and authorities cited.

It is abundantly clear that the purpose of Congress

in both the Securities Act of 1933 and the Securities

Exchange Act of 1934 was to protect “investors” from

the abuses in connection with the sale of stocks and

bonds (or substitute instruments serving the same

purpose) which had led to the 1929 stock market

crash. This is manifest from a reading of the Presi-

dential messages, the Congressional debates and dis-

cusion, and the House and Senate Committee reports

pertaining to this legislation. Nothing in this legisla-

tive history reveals any Congressional intent to create

a statutory cause of action applicable to ordinary com-

mercial banking transactions.

In Securities & Exchange Commission v. Joiner

Leasing Corp., 320 U.S. 344, 351, 88 L.Ed. 88 (1943),

the Court pointed out that securities governed by the

Act were defined to cover various documents “* * *

13

in which there is common trading or speculation and

investment.”

In Wilko v. Swan, 346 U.S. 427, 98 L.Ed. 168

(1953), the Supreme Court said (p. 173):

“In response to a Presidential message urging

that there be added to the ancient rule caveat

emptor the further doctrine of ‘Let the seller also

beware,’ Congress passed the Securities Act of

1933. Designed to protect investors, the Act re-

quires issuers, underwriters, and dealers to make

full and fair disclosure of the character of secur-

ities sold in interstate and foreign commerce and

to prevent fraud in their sale.” (emphasis ours)

In Securities & Exch. Com’n. v. International Chem.

Dev. Corp., 469 F.2d 20 (10th Cir., 1972), the Court

said (p. 26):

““* * * The purpose of both provisions is pro-

tection of investors from fraudulent practices.”

In Beck v. Securities and Exchange Commission,

430 F.2d 673 (6th Cir., 1970), the Court said (p.

674):

“The purpose of the Securities Acts is to pro-

tect the investing public, SEC v. Ralston Purina

Co., 346 U.S. 119, 124, 73 SCT 981, 97 L.Ed.

1494 (1953) * * *.” (emphasis ours)

And in Securities and Exchange Commission v.

Briggs, 234 F.S. 618 (ND Ohio, 1964), the Court said

(p. 622):

“It is true, when courts are called upon to con-

strue statutes, that we are ordinarily concerned

we RN CN OTR TTS a ass

14

with the ordinary meaning of words. But we may

not take those words out of the context in which

they were written, nor may we take the entire

legislative act out of the historical context in

which it was written. The securities laws were a

reaction to the cataclysmic collapse of investments

in the period immediately following the great

crash of 1929. Since the passage of these acts,

courts have consistently stated that they are re-

medial in nature and must be liberally construed

in favor of the investing public.” (emphasis ours)

Among numerous cases to the same effect are Se-

curities and Exchange Commission v. Ralston Purina

Co., 102 F.S. 964 (4) (ED Mo., 1952), affirmed, 200

F.2d 85 (4) (8th Cir., 1952), affirmed, 346 U.S. 119,

97 L.Ed. 1494 (3) (1952); Otis & Co. v. Securities

and Exchange Commission, 106 F.2d 579 (6) (6th

Cir., 1939) ; Campbell v. Degenther, 97 F.S. 975 (1)

(WD Pa., 1951) ; Thill Securities Corporation v. New

York Stock Exchange, 433 F.2d 264 (5) (7th Cir.,

1970); Schoenbaum v. Firstbrook, 405 F.2d 200 (2)

(2nd Cir., 1968), certiorari denied, 395 U.S. 906.

It would not be appropriate to attempt to reproduce

for submission with this brief all of the pages in the

Congressional Records recording the legislative his-

tory of these Acts, but all of the Congressional debates

and discussions, all of the Senate and House Commit-

tee reports and Presidential messages to Congress in

connection with these Acts clearly indicate the Con-

gressional purpose to deal with the problem pertaining

to investments. There is not a single reference in any

of these debates, discussions or Committee reports in

any way indicating any intention of Congress in ei-

15

ther of the 1933 or 1934 Acts to protect “borrowers”

to cover or regulate ordinary commercial] loan trans-

actions, as involved in the case at bar.

That such was not the Congressional intent is again

made manifest by the recent action of the Congress in

the passage of the Truth in Lending Act. In Title 15

U.S.C., § 1603, which lists exempted transactions, Sub-

division 1 exempts credit transactions involving ex-

tensions of credit for business or commercial purposes,

and Subdivision 2 of this Section refers to transactions

in securities.

This again clearly evidences Congressional aware-

ness and recognition of the distinction between or-

dinary commercial loan and credit transactions and

transactions involving securities.

(3) Only fraud in the purchase or sale of securities is

within the purview of the Securities Exchange Act.

It is fundamental that the Act only applies to fraud

in connection with purchase or sale of securities and

that only purchasers or sellers of securities may in-

voke the protection of the Act. Simmons v. Wolfson,

428 F.2d 455 (1,2) (6th Cir., 1970) ; Hoover v. Allen,

241 FS. 213 (2,3) (SD N.Y., 1965); Keers & Com-

pany v. American Steel & Pump Corporation, 234 FS.

201 (1) (SD N.Y., 1964); Hirsh v. Merrill Lynch,

Pierce, Fenner & Smith, Inc., 311 F.S. 1283 (1) (SD

N.Y., 1970); Morrow v. Schapiro, 334 F.S. 399 (4)

(ED Mo., 1971).

In In Re Penn Central Securities Litigation, 357

F.S. 869 (8) (ED Pa., 1973), the Court noted that

not every corporate act which happens to involve trans-

16

actions in securities is a “purchase or sale” of securi-

ties within the Securities & Exchange Commission

Act.

Similarly, in Supt. of Insurance v. Bankers L. &

C. Co., 404 U.S. 6, 30 L.Ed.2d 128 (6) (1971), this

Court held that the Securities Exchange Aci is not

intended to regulate transactions which comprise no

more than interna! corporate mismanagement.

(4) Construction of the term “Security” in 15 U.S.C.,

§ 78j(b).

The term “security” was a term of art in the eyes

of Congress when it enacted the Securities Act of 1933

and the Securities Exchange Act of 1934; thus an enu-

meration of those types of instruments which may con-

stitute a “security” where the context makes such ap-

propiate appears in both Acts. Congress desired to pro-

tect “investors,” regardless of the myriad instruments

available as vehicles in schemes to gull the unwary, and

was therefore constrained to make the definition of a

“security” as broad as possible, intending, however, to

regulate the market for investment capital, not ordi-

nary commerce.

In a number of cases the meaning of “security” as

used in the 1933 and 1934 Acts has been before the Su-

preme Court of the United States, and this Court has

consistently defined and delimited the term “security”

in line with the clear purpose of the Act to protect in-

vestors.

In Tcherepnin v. Knight, 389 U.S. 332, 19 L.Ed.2d

564 (1967), this Court, quoting from an earlier deci-

17

sion in S.E.C. v. W. J. Howey Co., 328 U.S. 293, 299,

90 L.Ed. 1244 (1946), said:

“* * * As used in both the 1933 and 1934 Acts,

security ‘embodies a flexible rather than a static

principle, one that is capable of adaptation to

meet the countless °~4 variehle schemes devised

by those who seek the use of the :-cner of others

on the promise of profits.’ ’ 19 L Ed.cd, at page

570.

See, also, Rekant v. Desser, 425 F.2d 872, 878 (5th

Cir., 1970); Lawrence v. Securities and Exchange

Commission, 398 F.2d 276 (2) (1st Cir., 1968).

In Securities & Exch. Com. v. Joiner Leasing Corp.,

320 U.S. 344, 88 L.Ed. 88, 93 (1943), this Court held

that under the Securities Act the term “securities” in-

cludes by name or description many documents “ * * *

in which there is common trading for speculation or

investment.” (emphasis ours)

In Roe v. United States, 287 F.2d 435 (2) (5th Cir.,

1961), certiorari denied, 368 U.S. 824, the Court rec-

ognized that form is to be disregarded for substance,

emphasis is to be placed upon economic realities, and

the test of whether a transaction involves a security

within the Securities Act is whether the transaction is

or is not a part of a scheme involving an investment of

money in a common enterprise with profits to come

solely from the efforts of others. Thus, while Petition-

er asserts that the context in which the term “secur-

ity” is to be defined and construed is that of the Secur-

ities Exchange Act itself, the courts have consistently

looked to the transaction in question as supplying the

18

cont*xt of construction. Sanders v. John Nuveen & Co.,

Inc., 463 F.2d 1075 (7th Cir., 1972), certiorari denied,

409 U.S. 1009; City National Bank of Fort Smith, Ar-

kansas v. Vanderboom, 290 F.S. 592 (WD Ark., 1968),

affirmed, 422 F.2d 221 (8th Cir., 1970), certiorari de-

nied, 399 U.S. 905, 26 L.Ed.2d 560; and Joseph v. Nor-

man’s Health Club, Inc., 336 F.S. 307 (ED Mo., 1971).

In Vincent v. Moench, 473 F.2d 430 (4) (10th Cir.,

1973), the Court said (p. 436) :

; “As the trial court saw it, this situation was

| simply a family partnership, in a state of dissolu-

: tion as a result of the death of one of the part-

ners. During the period of dissolution, one part-

ner sold her family’s interest to the other family

partner, and the interest sold was not a security

within the meaning of Section 10(b). We agree

with the tria! court that it would not be compat-

ible with economic realities to say that in these

circumstances the interest sold or purchased was

a security within the meaning of the Act. We do

not think that federal jurisdiction under Section

10(b) can or should be extended to encompass

j situations of this kind.”

In Investment Company Institute v. Camp, 274 F.S.

; 624 (D.C., 1967), reversed on other grounds, 420 F.2d

: 83 (D.C. Cir., 1969), reversed on other grounds, 401

§ U.S. 617, 28 L.Ed.2d 367, the Court noted the test

set forth by this Court for a security as whether the

scheme involves ar. investment of money in a common

enterprise with profits to come solely from the efforts

of others. The Court also held that the meaning of the

term “securities” in the Securities Act of 1933 was

equivalent in meaning to the term “securities” as used

'. AS ea RAE RATS HOS

19

in the Glass-Steagall Act (governing national banks).

The Court referred to the provisions of such Act in

12 U.S.C., §§ 24, 377, 378 and 78. 274 FS. at p. 642-

643. These provisions of the Glass-Steagall Act, par-

ticularly §§ 377 and 378, provide that no member

bank shail be affiliated with any corporation or organ-

ization engaged principally in the issue, sale, etc., of

stocks, bonds, debentures, notes or other securities,

and make it unlawful for any person, firm or organ-

ization engaged in the business of issuing or selling

stocks, bonds, debentures, notes or other securities to

engage at the same time to any extent whatever in the

business of receiving deposits subject to check or re-

payment upon presentation of a passbook. If the word

“note” as used in the Securities Exchange Act and the

Glass-Steagall Act referred to all notes evidencing obli-

gations in an ordinary loan transaction, national banks

would be prohibited from making loans. Thus, here

again Congress and the courts have clearly recognized

the distinction between the business of issuing securi-

ties and ordinary commercial loans made by banks.

It is clear that the Securities Exchange Act was not

intended to protect a borrower of money from a bank

in an ordinary loan transaction. It is undisputed in

the case at bar that the transaction consisted of a loan

of money by the First National Bank at Lubbock to

GCD with the execution by GCD of a note evidencing

such loan and a deed of trust, and subsequently a

pledge of stock securing payment of such loan.

It is fundamental that a loan transaction is a de-

livery of money by one party to the other under a con-

20

tractual agreement to return or repay such sum, to-

gether with an additional sum as interest. Eisenberg

v. Greene, 346 P.2d 60 (1) (Dist.Ct.App., Cal., 1959) ;

National Bank of Paulding v. Fidelity & Casualty Co.,

131 F.S. 121 (1) (SD Ohio, 1954) ; State v. Douglas,

16 NW2d 489 (4) (S.Ct., S.Dak., 1944); Milana v.

Credit Discount Co., 163 P.2d 869 (3) (S.Ct., Cal.,

1945); Kline v. Robinson, 428 P.2d 190 (6) (S.Ct.,

Nev., 1967); Liberty Nat. Bank & Trust Co. v. Trav-

elers Indem. Co., 295 NYS2d 983, 986 (S.Ct., Erie Co.,

1968).

Interest is the amount which one contracts to pay

for the use of borrowed money (i.e., compensation for

use or forbearance of money). Equitable Life A. Soc.

v. C.1.R., 8321 U.S. 560, 88 L.Ed. 927 (4) (1943);

C.1.R. v. Morgan, 272 F.2d 936 (1) (9th Cir., 1959) ;

Lloyd ». C.1.R., 154 F.2d 643 (2) (8rd Cir., 1946) ;

Wilshire Holding Corp. v. C.I.R., 262 F.2d 51 (2)

(9th Cir., 1958); Weller v. C.I.R., 270 F.2d 294, 296

(3rd Cir., 1959).

As noted above, the purpose of the Securities Ex-

change Act was to protect investors which are those

placing money for the hope of profit, and also involves

trading for speculation. It is clear that an ordinary

loan transaction is not within this classification. It is

well settled that an agreement to pay a sum based

upon a contingency such as profits is not a loan.

Northern Mining Corporation v. Trunz, 124 F.2d 14

(2) (9th Cir., 1941); Dinkelspeel v. Lewis, 62 P.2d

294, 299 (S.Ct., Wyo., 1936); Rae v. Cameron, 114

P.2d 1060 (2) (S.Ct., Mont., 1941).

21

It is clear that a loan does nct fit within the in-

tended coverage of the Securities Acts.

(5) Courts below correctly held that loan transaction

in this case did not constitute purchase or sale of

securities under the Securities Exchange Act.

The decision of the courts below is clearly correct un-

der the decision of this Court in Tcherepnin v. Knight,

389 U.S. 332, 19 L.Ed.2d 564 (1967), and the numer-

ous cases cited and discussed in the District Court and

Circuit Court opinions. The cases cited and relied up-

on by Petitioner are distinguishable and are not con-

trolling of the decision in the case at bar.

As held by this Court in 7'cherepnin, the definition

of “security” under the Securities Exchange Act is not

rigid but refers to countless and variable schemes de-

vised by those who seek the use of money of others on

the promise of profits.

Similarly, as held by this Court in S.E.C. v. C. M.

Joiner Leasing Corp., 320 U.S. 344, 88 L.Ed. 88

(1943), the term “security” refers to documents in

which there is common trading for speculation or in-

vestment.

The purpose of the Securites Exchange Act was to

protect “investors.” Wilko v. Swan, 346 U.S. 427, 98

L.Ed. 168 (1953), and other cases cited pages 12-14

above.

Where a note comes within such meaning and is

used for such purpose, then the note and transaction

come within the purview of the Securities Exchange

Act.

:

SFU Sah MRR RRS PAS

22

Conversely, it is equally clear that every note does

not constitute a “security” within the meaning of the

Securities Exchange Act and that every loan transac-

tion in which a note is given in evidence of the loan

(and collateral instruments providing security for the

repayment of such loan) does not constitute the pur-

chase or sale of a security under the Securities Ex-

change Act. Rekant v. Desser, 425 F.2d 872, 878 (5th

Cir., 1970); Lehigh Valley Trust Co. v. Central Na-

tional Bank of Jacksonville, 409 F.2d 989, 991-992

(5th Cir., 1969); Joseph v. Norman’s Health Club,

Inc., 336 F.S. 307 (5) (ED Mo., 1971) ; City National

Bank of Fort Smith, Arkansas v. Vanderboom, 290

F.S. 592, 608 (WD Ark., 1968), affirmed, 422 F.2d

221 (8th Cir., 1970), certiorari denied, 399 U.S. 905,

26 L.Ed.2d 560.

Even assuming as true Plaintiff’s allegations that

Defendant Hanslik was guilty of fraud in obtaining

the loan and that Hanslik intended to apply, and did

apply, the proceeds of the loan to a personal obliga-

tion, it is clear that such facts (of fraud involved in

the loan transaction) do not convert the loan transac-

tion into a purchase or sale of securities under the Se-

curities Exchange Act.

An analogous question was before the Ninth Circuit

with reference to the California State Securities Act

in Cecil B. DeMille Productions, Inc. v. Woolery, 61

F.2d 45 (9th Cir., 1932), where the Court said (p.

47):

“* * * We concur with this conclusion, but de-

sire to emphasize that an ordinary promissory

note, whether secured or unsecured, not offered

23

to the public or sold to an underwriter for the

purpose of resale, is not such a security as to re-

quire a permit under the Corporate Securities Act

of California.” (emphasis ours)

In Securities and Exchange Commission v. Fifth

Avenue Coach Lines, Inc., 289 F.S. 3 (26) (SD N.Y.,

1968), the Court concluded (p. 38):

“*** This is overreaching on an individual

loan transaction, but it is not fraud in the pur-

chase or sale of securities within the meaning of

the two Acts.”

The loan in that case was made by a corporation to

an individual stockholder which was used by the stock-

holder to pay off personal obligations.

In Beury v. Bewry, 127 F.S. 786 (2) (SD W.Va.,

1954), the Court sustained defendant’s motion to dis-

miss, holding that a loan of $70,000.00 made by the

defendant, as president of the corporation, to himself,

as president of another corporation, was not a pur-

chase or sale of securities within the Securites Ex-

change Act of 1934 or rules and regulations there-

under, and that the petition stated no cause of action

under the Securities Exchange Act.

In Joseph v. Norman’s Health Club, Inc., 336 F.S.

307 (5) (ED Mo., 1971), plaintiffs purchased lifetime

memberships in the defendant health club and gave

promissory notes in payment for such memberships.

The Court stated (p. 313):

“The threshold inquiry in that connection is

whether or not the promissory notes executed by

24

the plaintiffs are ‘securities’ within the meaning

of the 1934 Act.”

The Court discussed the principle stated in Tcherep-

nin v. Knight, 389 U.S. 332, 19 L.Ed.2d 564 (which

cited S.E.C. v. W. J. Howey Co., 328 U.S. 293, 90

L.Ed. 1244), that the term “security” embodies a flex-

ible rather than static principle to meet the countless

and variable schemes devised by those who seek the

use of money of others on the promise of profit. The

Court concluded:

“This Court is of the opinion that the context

of the present case, like the context of the Van-

derboom case, requires that the promissory note

is other than a security within the meaning of

§ 10b.”

The loans and transactions involved in these above

discussed cases much more arguably constitute the

purchase or sale of a “security” than in the case at

bar.

An analogous question has arisen under the income

tax statutes. In Campbell v. Carter Foundation Pro-

duction Co., 322 F.2d 827 (8) (5th Cir., 1963), the

Court had before it the question of whether notes giv-

en in that case by the corporate taxpayer to its sole

stockholder were to be classified as “stock” or “secur-

ities” within income tax statute on tax-free exchanges.

See, also, Pinellas Ice & C. S. Co. v. Com. of Int.

Rev., 287 U.S. 462, 77 L.Ed. 428 (1932); Burnham

v. Com. of Int. Rev., 86 F.2d 776 (7th Cir., 1936).

In First Trust & Savings Bank v. Fidelity-Phila-

25

delphia Trust Co., 214 F.2d 320 (3rd Cir., 1954), cer-

tiorari denied, 348 U.S. 856, there were deposited in

defendant’s bank by one of its customers notes which

were secured by warehouse receipts which were svur-

ious. Subsequently, plaintiff purchased these notes and

warehouse receipts and brought this action against

the bank to recover its losses when the instruments

were discovered to be spurious. The Circuit Court af-

firmed judgment for defendant, holding that the de

fendant was not a seller of securities under the Secur-

ities Act of 1933. The Court observed (p. 323):

“Tf this set of facts constitutes Fidelity a seller

under the Securities Act, it seems to us inevitable

that every bank which advances money to a cus-

tomer upon a side draft and negotiable bill of

lading is also a seller.”

Similarly, in the case at bar, it is clear that if this

alleged commercial loan transaction constitutes the

purchase or sale of securities under the Securities Ex-

change Act of 1934, then every commercial loan by

every bank would come within the purview of the Se-

curities Act and the Securities Exchange Act of 1934.

Clearly, this is not what Congress intended, and it

is not what the Securities Acts provide. Petitioner ar-

gues that the distinction between notes issued in com-

mercial transactions and notes issued in investment

transactions makes the law uncertain and makes legal

advice more tenuous. To this, Respondents say that this

dichotomy comports with reality and with the present

securities law practice; by stating the distinction clear-

ly, the Courts below have actually finally spelled out

26

that which the earlier decisions had inferred, to the

benefit of the public as well as the bar.

(6) Authorities relied upon by Petitioner.

The cases cited and relied upon by Petitioner are

distinguishable and clearly do not compel a contrary

holding in the case at bar.

The case of Rekant v. Desser, 425 F.2d 872 (5th

Cir., 1970), is a prior decision by the Fifth Circuit.

In the Rekant case, there was not involved a loan

transaction, as in the case at bar, and the issuance of

the note in that case, rather than shares of stock, was

simply a matter of form.

The case of Sanders v. John Nuveen & Co., Inc.,

463 F.2d 1075 (7th Cir., 1972), certiorari denied, 409

U.S. 1009, in fact, supports the distinction made by

the District Court in the case at bar. In Sanders, the

Court said (p. 1079) :

“*** The paper was therefore obviously of-

fered and sold to the general public; indeed, it

was characterized in the issuer’s financial state-

ments as ‘short term open market’ paper.”

The Court distinguished between a note given in a

commercial loan transaction and a note involved in an

investment transaction. The Court said (p. 1080) :

“«* * * When a prospective borrower approach-

es a bank for a loan and gives his note in consid-

eration for it, the bank has purchased commercial

paper. But a person who seeks to invest his mon-

ey and receives a note in return for it has not

purchased commercial paper in the usual sense.

He has purchased a security investment.”

27

Thus, it is clear that Sanders, as well as other cases

cited by Petitioner, in fact support the distinction

which Petitioner criticizes the courts below for mak-

ing in the case at bar.

Alberto-Culver Company v. Scherk, 484 F.2d 611

(7th Cir., 1973), reversed, 94 S.Ct. 2449, c'ear'y in-

volved an investment transaction in the purchase and

sale of a security. This was a transaction in which

Alberto-Culver Company was acquiring Scherk’s Euro-

pean cosmetic business, specifically the entities re-

ferred to as SEV, FLS and Lodeva. Under the agree-

ment, inter alia, SEV was to be converted to a stock

corporation, and Alberto was to acquire 100 per cent

of the stock of the new corporation. The assets of SEV,

FLS and Lodeva entities were to be transferred in ex-

change for cash and promissory note. There was cer-

tainly no ordinary loan transaction involved in the

Scherk case.

In Farrell v. United States, 321 F.2d 409, 417 (9th

Cir., 1963), certiorari denied, 375 U.S. 992, there was

involved the purchase and sale of securities within the

meaning of the Securities Exchange Act, and there

was not even any contention to the contrary. This was

a criminal case involving a scheme to defraud inves-

tors in the sale of securities through the mails. It in

no way involved an ordinary commercial loan trans-

action, as in the case at bar.

The case of Securities and Exchange Commission v.

Coffey, 493 F.2d 1304 (6th Cir., 1974), reversing in

part S.E.C. v. Crofters, Inc., 351 F.S. 236 (SD Ohio,

1972), did not involve a commercial loan transaction

28

but involved the question of the validity of investment

of state funds in corporate notes.

(7) Pe.‘tioner’s contention concerning collateral

pledge of stock.

Petitiorer also contends that the collateral pledge

of stock to the Bank to secure the loan upon renewal

of the note constituted a purchase or sale of securities

under the Securities Exchange Act.

This involves the identical question as whether or

not the note evidencing the loan was a purchase or sale

of securities, and all of the cases cited above are equal-

ly applicable to this contention. The purpose of the

Act is to protect investors or, stated differently, to

cover schemes devised by those who seek money of oth-

ers on promise of profits, or documents in which there

is trading for speculation or investment. 7'cherepnin

v. Knight, 389 U.S. 332, 338, 19 L.Ed.2d 564; S.E.C.

v. C. M. Joiner Leasing Corp., 320 U.S. 344, 88 L.Ed.

88.

Certainly, just as in the case of a note, a pledge of

common stock may constitute the purchase or sale of

a security. It is equally clear that every pledge of stock

does not constitute the purchase or sale of a security.

The cases cited by Petitioner are certainly not con-

trolling in the case at bar.

In S.E.C. v. Dolnick, 501 F.2d 1279 (7th Cir., 1974),

the S.E.C. brought an enforcement action against Dol-

nick, a securities salesman with a nationally known

brokerage firm, to enjoin various violations of the se-

curities law.

29

The Court found that Dolnick was selling Pig’N

Whistle stock betw2en November of 1968 and June,

1970. Such stock was not registered nor exempt from

registration. The Court stated that Dolnick pledged as

collateral for bank loans thousands of unregistered

shares of Pig’N Whistle common stock. The Court

stated (p. 1282):

“ * * * Those loans could be repaid only through

the unregistered distribution of the pledged shares

to the public. He subsequently sold over-the-coun-

ter zome of those shares as released by the banks

to reduce the loan balances with the proceeds of

the sales.”

Thus, it appears clear in the Dolnick case that the

pledge of the shares of stock was simply a method of

financing the sale of the stock by Dolnick and was

simply a process by which Dolnick sold securities (i.e.,

Pig’N Whistle common stock) for trading and invest-

ment.

The other case primarily relied upon by Petitioner,

Fidelity & Casualty Co. of New York v. Key Biscayne

Bank, 501 F.2d 1322 (5th Cir., 1974), is by the Fifth

Circuit, the same Court of whose decision Petitioner

is complaining in the case at bar.

This case had nothing whatsoever to do with the

Securities Exchange Act or the question of purchase

or sale of securities under the Act. In this case, 5,000

shares of IBM stock were stolen from the vaults of E.

F. Hutton Company. Prior to the discovery of the

theft, some of the stolen IBM stock was pledged by a

third-party defendant, Charles L. Lewis, to the Key

30

Biscayne Bank as security for a $195,000.00 loan as-

sertedly for the purpose of acquiring an interest in a

Florida airline. When the loan was not repaid, the

Bank sold the stock. Fidelity & Casualty Co., as surety

of E. F. Hutton Company, brought this action against

the Bank to recover the value of the stolen stock cer-

tificates. The Court affirmed the decision of the Dis-

trict Court that under Florida law the Bank estab-

lished prima facie its status as a bona fide purchaser

for value without notice of adverse claims.

The Court’s decision in Joseph v. Norman’s Health

Club, Inc., 336 F.S. 307 (ED Mo., 1971), is appropri-

ate to the case at bar. The Court there said (p. 313):

“*** The allegations in the instant case are

closely analogous to the facts in City National

Bank of Fort Smith, Arkansas v. Vanderboom,

290 F.Supp. 592 (S.D.Ark.1968), aff'd 422 F.2d

221 (8th Cir., 1970), cert. denied 399 U.S. 905,

90 S.Ct. 2196, 26 L.Ed.2d 560. In Vanderboom,

the defendants asserted a counterclaim under Sec-

tion 10(b) and Rule 10b-5 when they were sued

by the Bank on note. The money loaned by the

Bank to the defendants was invested in a corpo-

rate venture. It appeared that certain officers of

the Bank had given some advice with respect to

the investment. The District Court gave judg-

ment for the Bank on the counterclaim, stating at

p. 608:

“*The short answer to defendants’ conten-

tion is that the plaintiff bank did not sell or

offer to sell any security of any kind to the de-

fendants. The defendants approached the bank

and expressed a desire to borrow money which

31

they, of their own volition, intended to use in

the purchase of capital stock of a corporation

... organized by themselves. When the proceeds

of the notes were delivered to the defendants,

the money belonged to them and they could use

it in any manner.’

“This Court is of the opinion that the context

of the present case, like the context of the Van-

derboom case, requires that the promissory note

is other than a security within the meaning of

§ 10b.”

Of course, in the Joseph case, the money was used

by the borrower to purchase stock, and the transaction

much more arguably constituted a purchase of secur-

ities than did the loan transaction in the case at bar.

3

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32

CONCLUSION

We respectfully submit that the District Court and

the Circuit Court were clearly correct in holding that

under the allegations of Plaintiff’s Complaint there

was not involved in this case 2 purchase or sale of a

security, as a matter of law, that the District Court

was clearly correct in dismissing the Complaint for

failure to state a cause of action under 15 U.S.C., §

78j(b), and that the judgments of the courts below

should be in all things affirmed.

WHEREFORE, Respondents pray that the Petition

for Writ of Certiorari be denied.

Respectfully submitted,

CRENSHAW, DUPREE & MILAM

P. O. Box 1499

Lubbock, Texas 79408

’ By

Jas. H. Milam

Cecil Kuhne

Attorneys for Respondent,

First National Bank at Lubbock,

Texas

CHILDS, FORTENBACH, BECK

& GUYTON

402 Pierce Avenue

Houston, Texas 77001

By

Michael R. Waller

Attorneys for Respondent,

Sterling Emens, Jr.

33

CERTIFICATE OF SERVICE

Three copies of the above and foregoing Brief of

Respondents in Opposition to Petition for Writ of Cer-

tiorari have been mailed to Mr. Harold D. Hammett,

of Simon & Simon, 800 Baker Building, Fort Worth,

Texas 76102, attorneys for Plaintiff-Petitioner, on

this ...... day of January, i975.

of Counsel

}

2

:

34

APPENDIX

§ 78. Definitions and application—Definitions

(a) When used in this chapter, unless the context

otherwise requires —

* * * * *

(10) The term “security” means any note, stock,

treasury stock, bond, debenture, certificate of interest

or participation in any profit-sharing agreement or in

any oil, gas, or other mineral royalty or lease, any col-

lateral-trust certificate, preorganization certificate or

subscription, transferable share, investment contract,

voting-trust certificate, certificate of deposit, for a se-

curity, or in general, any instrument commonly known

as a “security;” or any certificate of interest or par-

ticipation in, temporary or interim certificate for, re-

ceipt for, or warrant or right to subscribe to or pur-

chase, any of the foregoing; but shall not include cur-

rency or any note, draft, bill of exchange, or banker’s

acceptance which has a maturity at the time of issu-

ance of not exceeding nine months, exclusive of days of

grace, or any renewal thereof the maturity of which

is likewise limited.

* * * * *

(13) The terms “buy” and “purchase” each include

any contract to buy, purchase, or otherwise acquire.

(14) The terms “sale” and “sell” each include any

contract to sell or otherwise dispose of.