Appendix — A. S. Goldmen & Co. v. New Jersey Bureau of Securities
Supreme Court brief1999
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Index to Appendix
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Opinion of the United States Court of Appeals
for the Third Circuit dated Jan. 7, 1999....... la
Opinion of the United States District Court
(D.N.J.) (Debevoise, J.) dated Aug. 22, 1997 .. . 32a
Order to Show Cause dated Nov. 14, 1996. .... 4la
Transcript of Proceedings in the United States
District Court (D.N.J.) dated Nov. 20, 1996... . 44a
Order of the United States Court of Appeals
for the Third Circuit Sur Petition for Rehearing,
Re UO BP hose ae os eae biden s. 89a
Constitutional Provision and Statute Involved in
oi EET SET Te eee eee 9la
Consent Order Denying Specific Exemptions in
the matter of Imatec, Ltd. dated Oct. 23, 1996. . 93a
Order to Cease and Desist in the matter of A.S.
Goldmen & Co. et al. dated Nov. 12, 1996... .99a
Complaint in the United States District Court
(D.N.J.) dated Nov. 11,1996............ 105a
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Index to Appendix (continued)
Page
Notice of Motion in the United States District
Court (D.N.J.) dated January 17, 1997. ...... 118a
Notice of Cross-Motion in the United States
District Court (D.N.J.) dated April 7, 1997... .. 12la
Affidavit of Marlene Reed dated Nov. 18,
BOO «ao 0 on 0 8 oe eee ee 123a
Defendant’s Rule 12(g) Statement dated
Sh. Fy SRF vn 0b ba 0 ee ee ae 135a
Plaintiff's Rule 12(g) Statement and Response
to Defendant’s Rule 12(g) Statement, dated
Agta, TOOl sic ind eeeweaee caw 148a
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Filed January 7, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 97-5618
AS. GOLDMEN & COMPANY, INC.
v.
NEW JERSEY BUREAU OF SECURITIES,
Appellant
On Appeal] from the United States District Court
for the District of New Jersey
(D.C. Civil No. 96-cv-05280)
District Judge: Honorable Dickinson R. Debevoise
Argued Thursday, May 21, 1998
BEFORE: ROTH’, McKEE and GARTH, Circuit Judges .
Reargued Friday, December 4, 1998
BEFORE: ALITO, McKEE and GARTH, Circuit Judges
(Opinion filed January 7, 1999)
la
1, Judge Roth was obliged to recuse herself afier argument but before
clearance of this Opinion. Judge Alito took Judge Roth's place upon
reconsUtution of the pane] and reargument
Peter Vernicro, Attorney General
Office of the Attorney General of
New Jersey
Andrea M. Silkowitz, Assistant
Attorney Gencral
Division of Law
Hughes Justice Complex
CN-112
Trenton, New Jersey 08625
Gail M. Cookson (argued)
Deputy Attorney Genera]
Tracy Thayer
Deputy Attorney Gencral)
Office of the Attorney Gencral of
New Jersey
124 Halsey Street
P.O. Box 45029
Newark, New Jersey 07101
Attomeys for Appellant
New Jersey Bureau of Securities
fartin Flumenbaum (argued)
Brad S. Karp
Paul, Weiss, Rifkind, Wharton &
Garrison
1285 Avenuc of the Amcricas
New York, New York 10019-6064
fichae] A. Lampert
Saul, Ewing. Remick & Saul
214 Carnegie Center, Suite 202
Princeton, New Jersey 08540
Attomeys for Appellee
A.S. Goldmen & Company, Inc.
2a
3
Karen M. O'Brien, Genera] Counsel
North American Securities
Administrators Association, Inc.
‘ 10G Street, NE
Suite 710
Washington, D.C. 20002
Attomeys for Amicus-Appellant
North American Securities
Administrators Association, Inc.
Richard E. Walker
Eric Summergrad
Luise de la Torre
Paul Gonson
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attomeys for Amicus -Appellant
Securities & Exchange Commission
OPINION OF THE COURT
GARTH, Circuit Judge.
This case raises a dormant commerce clause challenge to
one aspect of the New Jersey Uniform Securities Law. The
appellee, A.S. Goldmen & Co., Inc. (“Goldmen’), claims that
Clause insofar as it authorizes the appellant New Jersey
Bureau of Securities to prevent Goldmen from selling
Securities from New Jersey to buyers in other States where
purchase of the. securities was authorized by state
regulators. The dis’ .. -1t agreed, and granted summ
judgment in favor of Gol%imen. We hold that § 60 does not
run afoul of the dormant commerce clause, and therefore
reverse.
A.
Because of the noted potential for fraud and deception in
the buying and selling of securities, securities markets are
among the most heavily regulated markets in the United
States.’ Regulation of securities first flourished at the state
level in the 1910s, when states began enacting laws that
required the registration of a seCurities offering before the
sale of the security was permitted. The purpose of these so-
called “blue sky” laws was to allow state authorities to
prevent unknowing buyers from being defrauded into
buying securities that appeared valuable but in fact were
worthless.* By 1933, all but one state had passed blue sky
laws; today, all fifty states, the District of Columbia, Guam,
and Puerto Rico have blue sky laws in force. See Louis Loss
& Joe] Seligman, 1 Securities Regulation 40-4] (3d ed. Rev.
1998) (hereinafter, “Loss & Seligman’).
Aggressive federa] regulation of securities markets began
in the early 1930s with the passage of the Securities Act of
1933 and the Securities Exchange Act of 1934. Today, the
Securities and Exchange Commission ("SEC") administers
these and five other federa) statutes, which altogether form
a complex web of federa] regulations. See id at 224-8}.
Despite this complex federa] scheme, Congress, the courts,
and the SEC have made explicit that federal] regulation was
not designed to displace state blue sky laws that regulate
interstate securities transactions. See, eg. 15 U.S.C.
§ 77r(c) (1997) (preserving state jurisdiction “to investigate
and bring enforcement actions with respect to... unlawful
conduct by a broker or dealer”) (Nationa) Securities Markets
Improvement Act of 1996); Merrill Lynch, Pierce, Fenner &
Smith, Inc. v. Ware, 414 U.S. 117, 137 (1973) ("Congress
2. Securities are the collective term. used tu describe documents that
represent ownership in a company ¢. ~ 4ebt. Common examples include
stocks, bonds, notes, converUbie cebentures, snd warrants. See Black's
Law DicUonary 1215 (5th ed. 1979); Joseph ~. Long. 12 Blue Sky Law
§ 2.0) (1997).
3. See generally Jonathan R. Macey & Geoffrey P. Miller, Origin of the
Blue Sky Laws, 70 Tex. L. Rev. 347 (199)).
4a
“/
intended to subject {securities} exchanges to state
regulation that is not inconsistent with the federal] [laws)].”);
Loss & Seligman at 275-281. Although the enactment of
the Nationa) Securities Markets Improvement Act of 1996
narrowed the role of-state blue sky laws by expanding the
range of federal preemption, federal and state regulations
each continue to play a vital role in eliminating securities
fraud and abuse. See Loss & Seligman at 60-62; Manning
G. Warren Ill, Reflections on Dual Regulation of Securities
Regulation: A Case Against Preemption, 25 B.C. L. Rev. 495,
497, 501-27 (1984) (describing how Congress, the courts,
and the SEC have expressly authorized the enforcement of
state blue sky laws).
B.
Among blue sky laws, the most common regulatory
approach is the mixed disclosure and merit regulation
scheme offered by the Uniform Securities Act (“Uniform Act*).‘
Drafted in large part by the late Professor Louis Loss, the
Uniform Act has been adopted with some modification in
nearly forty states, including New Jersey. See N.J.S.A.
§ 49:3-47 to 76. The Act contains three essentia) parts:
provisions requiring the registrations of securities sold
within the state; provisions requiring the registration of
persons involved in the securities industry; and various
antifraud provisions. See id; see also Joseph C. Long. 12
Blue Sky Law § 1.07 (1997) (hereinafter, “Long”).
This case raises a constitutiona] challenge to N.J.S.A.
§ 49:3-60 (“§ 60°), which is New Jersey's codification of the
portion of the Uniform Act that makes it “unlawful for any
security to be offered or sold in this State” unless the
security is either registered by state authorities, is exempt
4. The various state and federa) securities regulations reflect two broad
regulatory philosophies: merit regulation and disclosure. Regulations
based on disclosure principles. such as the federal] Securities Act of
1933, seek to provide investors with al) uw crial) and relevant
information about the securities and the company offer‘ng them. In
contrast, merit regulations seek to protect investors by prohibiting
transactions that authorities deem unfair or unjust. See Joseph C. Long.
12 Blue Sky Law § 1.05 (1997).
5a
ae oe PO i
‘@ os.” edned ad: nde about ad J3@
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under N.J.S.A § 49:3-50, or is a federally covered security.
When read in conjunction with N.J.S.A § 49:3-51(c), which
States that “an offer to sel] or buy is made in this State...
when the offer . . . originates in this State,” § 60 grants New
Jersey regulatory authorities the power to regulate the offer
or sale of all non-exempt, non-covered securities whenever
the offer is made within the state of New Jersey. Under
N.J.S.A. § 49:3-64 and the 1985 amendments to the New
Jersey statute, this authority permits the chief of the New
Jersey Bureau of Securities (“Bureau”) to exercise broad
powers to regulate sale of such securities in New Jersey
when it is deemed in the public interest and various
Statutory requirements have been met.
I].
A.
A.S. Goldmen & Co. is a securities broker-dealer with its
sole office located in Iselin, New Jersey.® At the time of
proceedings before the District Court, Goldmen’s sole office
was located in New Jersey. Since that time, it has opened
at least one other office out of state.
Goldmen specializes in underwriting the public offerings
of low priced, over-the-counter securities, and then selling
those securities in the secondary market. During the first
severa] months of 1996, Goldmen planned the initia] public
5. In its current form, N.J.SA. § 49:3-60 (1997) states:
Mt is unlawfu) for any security to be offered or sold in th's Atate
unless:
(a) The security or transaction is exempt under section 3 of
P.L.1967, c. 93 (C.49:3-50);
(ec) The security is registered under this act; or
() 11 is a federal covered secunty for which a nouce filing and fees
have been submitted as required by section 14 of this act (C.49:3-
60.)}).
6.A “broker-dealer” is defined by the Act as “any person engaged in the
business of eflecting or atlemptng to effect transactions in securities for
the accounts of others or for his own account.” N.J.SA § 49:3-49ic).
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a a
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offering of Imatec, Ltd. ("Imatec”). Imatec is a Delaware
corporation, located:in New York, that was formed in 1988
to develop, design, market, and license image enhancement
technologies. Goldmen planned for the Imatec securities to
be traded as a NASDAQ Small Cap stock because such
Stocks are exempt from initial federal registration
requirements, see 15 U.S.C. §77(d) (1997). The rimary
regulation of the Imatec security during the frst 25
endar days of the offering would occur at the state level.
See 17 C.F.R. §230.174(d) (1992). Accordingly, in May
1996, Goldmen concurrently filed registration statements
with the SEC, and also attempted to register the offering
“by qualification” with state regulatory authorities in over a
dozen states, including New Jersey.’
The prospectus filed by Goldmen with the New Jersey
Bureau of Securities (“the Bureau’) listed Goldmen as the
sole underwriter, and also indicated that Goldmen would
own the shares to be offered to the public. Reviewing
Goldmen's application, the Bureau expressed various
concems regarding the Imatec offering to Goldmen's
counsel. Although the Bureau was not prepared to make
allegations of fraud, it had already been investigating
Goldmen's business practices at that time, and was
concemed that the combination of Goldmen's practices and
the bleak financial prospects of Imatec made the Offering a
high-risk investment that was likely to be associated with
abusive and manipulative sales practices.
On August 7, 1996, the Bureau informed Goldmen's
counsel that it was considering the issuance of a stop order
that would block the Imatec offering from being: registered
in New Jersey. Goldmen's counsel and the Bureau then
entered into negotiations concerning the future of the
Imatec offering. On October 23, 1996, these negotiations
7. Registration “by qualification” is the most comprehensive form of blue
sky registration, and is generally necessary when the security ts exempt
from initia) federal registration requirements. The other types of
registralion, registration “by notification” and registration “by
coordinaion,” are much simpler and are reserved for securities that
carry a higher indicia of reliability than securities that must be
registered by qualification. See NJ.SA. §49:3-6) (describing
requirements for registration by qualification).
Ta
. 7
resulted in a Consent Order signed by the CEO of Imatec
and the Bureau chief. According to the Consent Order,
Goldmen withdrew its application to register the Imatec
offering in New Jersey, and agreed that the Imatec offering
did not qualify for N.J.S.A. § 49:3-50(b) exemptions to the
registration rule of §60. Goldmen was permitted to make
unsolicited sales from New Jersey or to sell to certain
financia] institutions or to other broker-dealers. However,
the Consent Order specifically denied Goldmen exemptions
that would have allowed it to solicit members of the public
to purchase Imatec stock in the secondary market. App.
38-41; App. 156-57.
Five days after Goldmen entered into the Consent Order,
on October 28, 1996, the registration statement that
Goldmen had filed with the SEC became effective.* As of
that date, Goldmen had managed to register the Imatec
offering in sixteen states, but had been forced to withdraw
iis registration in severa] others, including New Jersey.
On the morming of October 29, 1996, Goldmen
commenced the initia] public offering from its office in
Iselin, New Jersey. By telephone, Goldmen solicited sales to
individuals outside of New Jersey, but did not solicit any
sales to individuals within New Jersey. By 3 p.m. of that
day, Goldmen had sold the entire public offering.®
Subsequently, Goldmen continued to buy and sel) Imatec
securities in the interdealer market from its New Jersey
office.
8. Registration with the SEC does not imply SEC approval of the offering.
See 15 U.S.C. § 77w (1997) ("[Thhe fact that the registration statement for
a security has been filed or is in effect . . . shal] [not] be deemed a
finding by the Commission that the registration statement fs true and
accurate on its face... , or be held to mean that the Commission has
in any way passed upon the merits of, or given approva) to, such
security.”)
9.We do noi regard this case as moot despite the fact that the Imatec
offerings are concluded. We are concerned that this kind of case
presents a problem that may be capable of repetition but avoiding review
with respect to Goldmen. Weinstein v. Bradford, 423 U.S. 147 (1975).
Due to the nature of Goldmen’s business. this same problem may be
confronted in the future.
8a
9
The Bureau learned of Goldmen’s sales on November 7,
1996. Because the window for state regulation of the
Imatec offering closed 25 days after the offering began.” the
Bureau acted immediately, notifying Goldmen that it
believed that the sales violated the Securities Act and the
Consent Order. Goldmen took the position that its sales
violated neither state law nor the consent order. and
informed the Bureau that it intended to continue to buy
and sel] securities from its New Jersey office. The Bureau
responded by issuing a Cease and Desist Order dated
November 12, 1996, which ordered Goldmen to “cease and
desist from the solicitation of customers, offer and sale of
Imatec in or from the State of New Jersey to any members
of the public.” App. 91.
B.
On the same day that the Bureau issued the Cease and
Desist Order, Goldmen filed this declaratory judgment
action against the Bureau in federal] district court.
Goldmen's complaint claimed that. “the New Jersey
Securities Act. as applied to securities that were not
registered or exempt from registration in New Jersey and
were sold by brokers located in New Jersey to residents of
states (other than New Jersey) in which the securities were
qualified for sale, violates the Commerce Clause of the
United States Constitution.” The complaint also alleged that
even if the Securities Act was constitutional, the Act and
the Consent Order did not apply to block Goldmen’s sales
of Imatec securities from New Jersey. According to
Goldmen, the sole legal effect of the Act and the Consent
Order was to prohibit Goldmen from selling the securities
to buyers located in New Jersey.
The district court issued an Order to Show Cause. and
held a hearing on November 20, 1996." The district court
10. Under 15 U.S.C. § 77r(b){4)(A) and 17 C.F.R. §230.174(d), the Imatec
security became a “covered security” 25 days after the initial public
offering. At that time. state regulation was preempted. See 15 U.S.C.
§ 77rla)(1 (A) (1997).
11.At the hearing. the Bureau argued that Goldmen’s federal action
should be stayed under the abstention principles enunciated in Younger
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issued a preliminary injunction the same day, enjoining the
Bureau from taking any action that would prohibit
Goldmen from “soliciting, offering or selling securities that
are not registered or exempt from registration in New Jersey
to residents of states (other than New Jersey) in which the
securities are qualified for sale.” App. 402-03.
The case then proceeded to cross-motions for summary
judgment. On August 21], 1997, the district court granted
Goldmen’s motion for summary judgment and denied the
Bureau's summary judgment motion. The sole issue
addressed was whether the New Jersey Uniform Securities
Law violated the dormant commerce clause by authorizing
the Bureau to block the sale of securities from New Jersey
to buyers in other states where the security was registered.
The district court concluded that it did. According to the
district court, the law directly regulated interstate
commerce because it effectively allowed the Bureau “to
impose New Jersey securities regulations onto other states.”
The district court argued that “[tlo allow the Bureau to
preclude consumers in other states from receiving
solicitations to purchase securities which their own state
regulators have deemed appropriate for purchase is, in
essence, to allow the Bureau to substitute its own
regulatory judgment for that of other states.” Further, the
district court argued that absent allegations of fraud, the
Bureau had no interest in regulating such transaction.
Accordingly, the New Jersey Uniform Securities Law
imposed an excessive burden on interstate commerce in
relation to New Jersey's loca] benefits. App. 581 (citing Pike
v. Bruce Church, 397 U.S. 137 (1970)).
The Bureau filed a timely appeal.
v. Harris, 401 U.S. 37, 9) S.Ct. 746 (197}). The district court rejected
this argument. App. 446. Because the Bureau has chosen not to raise
this issue On 2ppea), we will not address it further. Compare Ohio Bureau
of Employment Services v. Hodory, 43] U.S. 47), 477-80, 97 S.Ct 1898,
1904 (1977).
10a
Ill.
A. Legal Framework
The Supreme Court has long construed the Commerce
Clause as implying a judicial power to invalidate state laws
that interfere improperly with interstate commerce. See,
e.g., Cooley v. Board of Wardens, 53 U.S. (12 How.) 299
(1851). One consistent strain of these cases authorizes
courts to invalidate state regulations when their
extraterritorial impact is so great that their “practical effect
. - . fs to control conduct beyond the boundaries of the
state.” Healy v. The Beer Institute, 491 U.S. 324, AL. 109
S.Ct. 2491, 2499 (1989). As Justice Cardozo explained in
Baldwin v. G.A.F. Seelig, 294 U.S. 511, 523. 55 &.Ct. 497.
500 (1935), such a power is necessary to prevent states
from applying “parochia]” laws that can bring about “a
speedy end of our national solidarity.” “The Constitution.”
Justice Cardozo stated, “was framed upon the theory that
the peoples of the several states must sink or swim
together, and that in the long run prosperity and salvation
are in union and not division.” Id
According to these “extraterritorial effects” cases, a state
may not attempt to regulate commerce that takes place
“wholly outside” of its borders: such a “projection of one
State regulatory regime into the jurisdiction of another
State” is impermissible. Healy, 491 U.S. at 336-37: 109
S.Ct. at 2499. Under this rubric, the Supreme Court has
invalidated state laws that restricted interstate movement of
goods based on the price paid for them in out-of-state
transactions. See, e.g., Baldwin, 294 U.S. at 521, 55 S. Ct.
at 499 (invalidating New York law that banned the
importation of milk into New York when the price paid
outside of New York to the out-of-state producer was lower
than that permitted under then-existing laws regulating
milk purchases from New York producers): Lemke ov.
Farmers Grain Co., 258 U.S. 50, 61, 42 S.Ct. 244, 248
(1922) (invalidating North Dakota law requiring exported
wheat to be sold outside of North Dakota at price set by
North Dakota state inspector). Similarly, the Court has
struck down state laws that prohibited the importation of
out-of-state goods unless the importer guaranteed that its
lla
in-state prices were no higher than elsewhere. See, e.g.,
Healy, 491 U.S. at 337, 109 S.Ct. at 2499 [invalidating
Connecticut law prohibiting beer imports unless seller
guaranteed that prices offered in Connecticut were no
higher than in neighboring states); Brown-Forman Distillers
Corp. v. New York State Liquor Auth, 476 U.S. 573, 579,
106 S.Ct. 2080, 2084 (1986) (invalidating New York law
requiring liquor importers to affirm that prices offered to
New York wholesalers were lowest nationwide). Finally, the
Court has invalidated laws granting officials in one state
the authority to block multistate transactions that only
marginally involve in-state interests. See Edgar v. MITE
Corp., 457 U.S. 624, 643-46, 102 S.Ct. 2629, 2641-42
(1982) (invalidating Nlinois law that authorized Illinois
officials to block substantively unfair takeovers of
multistate companies that had connections to Illinois and
also other states).
Of course, these cases do not establish that the states
are forbidden categorically to regulate transactions that
involve interstate commerce. See H.P. Hood & Sons v. Du
Mond, 336 U.S. 525, 532-33, 69 S.Ct. 657, 662 (1949)
(Jackson, J.) (recognizing that States have “broad power...
to protect its inhabitants against... fraudulent traders...
even by use of measures which bear adversely upon
interstate commerce’). Rather, states are permitted to
regulate in-state components of interstate transactions so
long as the regulation furthers legitimate in-state interests.
A particularly relevant example of this is Hall v. Geiger-
Jones Co., 242 U.S. 539, 37 S.Ct 217 (1917), and its
companion cases, Caldwell v. Sioux Falls Stock Yards Co.,
242 U.S. 559, 37 S.Ct 224 (1917) and Merrick v. N.W.
Halsey & Co. 242 U.S. 568, 37 S.Ct. 227 (1917)
(collectively, the “Blue Sky Cases"). In the Blue Sky Cases,
the Court considered dormant commerce clause challenges
to then-recently enacted Blue Sky laws in Ohio, South
Dakota, and Michigan. Although the three statutes differed
somewhat, each granted state securities commissions the
authority to block the in-state sale or purchase of
unlicensed securities. The laws were challenged both by
unlicensed in-state securities sellers and the out-of-state
purchasers who had traveled in-state to make their
purchases, but the Court rejected their claims that the laws
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violated the dormant commerce clause. The key to the laws’
consututionality, the Court held, was that “[tjhe provisions
of the law . . . apply to dispositions of securities within the
State.” Hall, 242 U.S. at 557, 37 S.Ct. at 223 (emphasis in
original). By limiting the scope of the statute to dispositions
of securities “within the State,” the Court announced, the
States had merely enacted “police Tegulation|s),” that
“affect[ed] interstate commerce... only incidentally.” Jd at
558, 37 S.Ct. at 223; see also CTS Corp. v. Dynamics
Corp., 481 U.S. 69, 93, 107 S.Ct. 1637, 1651-52 (1987)
(rejecting challenge by out-of-state company to Indiana law
conditioning acquisition of corporate control of Indiana
corporation on approval of a majority of the pre-existing
disinterested shareholders, reasoning that law regulated in-
State corporations); cf. Shafer v. Farmers’ Grain Co, 268
U.S. 189, 200, 45 S. Ct. 481, 485 (1925) (invalidating North
Dakota law that regulated in-state handling of wheat
headed for interstate commerce that served no legitimate
in-state interests).
B. Territoriality
As these cases indicate, the constitutionality of state
regulations of interstate commerce depends largely on the
territoria] scope of the transaction that the state law seeks
to regulate. If the transaction to be regulated occurs “wholly
outside” the boundaries of the state. the regulation is
unconsututiona]l. MITE Corp, 457 U.S. at 642. If the
transaction: occurs “within” the boundaries of the state. it is
constitutional so long as the regulation furthers legitimate
in-state interests. See id at 643-46: CTS Corp, 481 U.S. at
93.
Therefore, the first issue we must address is the
ter torial scope of the transaction that New Jersey has
attempted to regulate. The question is, what is the
territorial basis of a contract entered into by telephone
between a New Jersey broker soliciting sales of Imatec
securities from New Jersey, and an out-of-state buyer who
agrees to purchase them outside of New Jersey? More
particularly, can it fairly be said that such a transaction
occurs “wholly outside” New Jersey? As this is a legal
question, our review is plenary. See Ciarlante v. Brown &.
l3a
Williamson Tobacco Corp., 143 F.3d 139, 145 (3d Cir.
1998).
Goldmen and the Bureau offer divergent views of § 60's
territorial scope. Goldmen argues that §60 permits New
Jersey to reach out beyond its borders and block willing
buyers from completing transactions authorized by their
home states. According to Goldmen, “the effects of the
Bureau's application of Section 60 is not to regulate in-
state brokers, but to preclude out-of-state residents from
purchasing a product deemed appropriate for sale by their
own regulators.” Br. at 20. Goldmen suggests that the
Offers origin in New Jersey is not relevant to the
transaction's territoriality, because “the ‘practica] effect’ of
permitting New Jersey to bar the sale of securities from
New Jersey into states where those securities have been
qualified for sale is that those out-of-state residents will be
precluded altogether from receiving the opportunity to
purchase these securities.” Jd at 16.
The Bureau's position is that § 60 regulates the offering
of securities entirely within the state of New Jersey.
According to the Bureau,
Section 60 simply regulates how brokers located in
New Jersey conduct business from thcir New Jersey
offices. In this instance, these were Imatec securities
Offered for sale by the underwriter through
solicitations of the public from New Jersey. The offer
and sale arose in New Jersey. Goldmen chose to
ucmicile its highly-regulated business in New Jersey
and to_conduct that business from within the State.
Br. a’ 27.? The Bureau concedes that §60 may affect
interstate commerce, to the extent that sellers such as
Goldmen try to sell securities to buyers in other states.
However, the Bureau contends that this is merely an
indirect effect of what is essentially New Jersey's regulation
of New Jersey parties seeking to sel) securities in New
Jersey. .
12. Both amici. North American Securities Aministrators Association and
the Securities and Exchange Commission, support the position taken by
the New Jersey Bureau of Securities that §60 does not violate the
dormant commerce clause.
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In resolving this question, we begin by noting that
notions of the territorial scope of contracts between citizens
of different states have evolved in the past century. At one
time, it was fashionable to conceive of contracts between
diverse parties as being rooted in a single geographical
location, such as the place the offer was accepted. See, e.g.,
Joseph H. Beale, What Law Governs Validity of a Contract,
23 Harv. L. Rev. 260, 270-7] (1910). Under this traditional
approach, it was believed that when a contract offer made
in New Jersey was accepted in New York. the contract was
“made” in New York, and thus implicated New York's
sovereignty. See id: cf. Perrin v. Pearlstein, 314 F.2d 863,
867 (2d Cir. 1963).
The contrasting modern approach is to recognize that
contracts formed between citizens in different states
implicate the regulatory interests of both states. Thus,
when an offer is made in one state and accepted in another,
we now recognize that elements of the transaction have
occurred in each state, and that both states have an
interest in regulating the terms and performance of the
contract. See, e.g., General Ceramics Inc. v. Fireman's Fund
Ins. Co., 66 F.3d 647, 656-59 (3d Cir. 1995) (comparing the
regulatory interests of New Jersey and Pennsylvania to a
contract formed between a New Jersey company and a
Pennsylvania company in the course of determining
applicable law). See generally Joseph W. Singer, A
Pragmatic Guide to Conflicts, 70 B.U. L. Rev. 731, 785-802
(1990) (describing the regulatory interests of states in
contract disputes between :<ilverse parties).
This notion ‘iiat the sov: ceignty of both the state of the
offeror and offeree are implicated by contracts entered into
by citizens in different states is the key to understanding
the territorial scope of the contract between Goldmen and
the prospective buyers of Imatec in another state such as
New York. A contract between Goldmen in New Jersey and
a buyer in New York does not occur “wholly outside” New
Jersey, just as it does not occur “wholly outside” New York.
Rather, elements of the transaction occur in each State,
15a
and each state has an interest in regulating the aspect of
the transaction that occurs within its boundaries.”
Accordingly, § 60 simply allows the Bureau to regulate its
“half of the transaction— the offer that occurs entirely
within the state of New Jersey— and thus its territorial
scope is indistiguishable from that in Hall v. Geiger-Jones
Co., 242 U.S. 539, 37 S.Ct. 217 (1917), Caldwell v. Sioux
Falls Stock Yards Co., 242 U.S. 559, 37 S.Ct. 224 (1917)
and Merrick v. N.W. Halsey & Co., 242 U.S. 568, 37 S.Ct
227 (1917).
Viewed in this light, Goldmen's view that § 60 violates the
dormant commerce clause because it projects its ban into
jurisdictions that would allow the transaction is logically
flawed and simply proves too much. If New Jersey seeks to
block Goldmen's offering but the buyer's state (say, New
York) would allow it, one state must prevail. One state can
in effect “force its judgment” upon the other. Under New
Jersey's Blue Sky law, New Jersey can block the
transaction even if New York would permit it.
Goldmen's alternative is no better, however: under its
view of the dormant commerce clause, New York's approval
would permit the transaction, over New Jersey's objection.
Thus, the difference between New Jersey's Blue Sky law
and Goldmen’s proposal is simply the market's default rule:
should the transaction be allowed if either state permits, or
blocked if either side objects? Such questions of the
market's “structure” and its “method of operation” are quite
simply beyond the concern of the Commerce Clause, as
they “relate to the wisdom of the statute, not to its burden
on commerce.” Exxon Corp. v. Goi:eror of Maryland, 437
U.S. 117, 127-28 (1978).
C. Legitimate Interests
Having concluded that §60 regulates the in-state
component of an interstate transaction, we next consider
whether the statute reasonably furthers a “legitimate
interest” within the boundaries of New Jersey. MITE Corp.,
13.A discussion of New Jersey's interests in this transacUon appears in
subsection C.
16a
‘
a
17
457 U.S. at 644, 102 S. Ct. at 2641; CTS Corp., 481 U.S. at
93, 107 S.Ct. at 1651-52.
Goldmen claims that New Jersey has no legitimate
interest in regulating Goldmen's non-fraudulent sales to
out-of-state residents. If Goldmen’s business practices are
manipulative, Goldmen argues, the harm will be suffered
entirely by out-of-state consumers. Br. at 29. Because the
protection of out-of-state consumers from potentially
manipulative sales practices is not New Jersey's legitimate
concern, Goldmen contends, its regulation of Goldmen’s
non-fraudulent sales to out-of-state consumers does not
implicate any legitimate regulatory interests within the
state of New Jersey.
The Bureau responds by arguing that its regulation of in-
state sales of securities to out-of-state purchasers furthers
important New Jersey interests. We agree. In particular, we
consider two legitimate state interests to be particularly
strong ones. First, preventing New Jersey companies from
offering suspect securities to out-of-state buyers helps
preserve the reputation of New Jersey's legitimate securities
issuers. States that have failed to monitor out-of-state sales
by in-state broker-dealers have suffered in the past, as
their legitimate broker-dealers suffered from association
with suspect firms offering questionable securities. See
Long. § 3.04[3}[a] at 3-51 to 3-52 (providing examples); see
also Stevens v. Wrigley Pharma Co., 154 A. 403, 403 (N.J.
Ch. Div. 1931) (noting that New Jersey's interest in
regulating in-state offers to out-of-state buyers is “not so
much to protect the citizens of other states, as to prevent
this state from being used as a base of operations for
crooks marauding outside the state.”); Simms Inv. Co. v.
E.F. Hutton & Co., 699 F. Supp. 543, 545 (!.D.N.C. 1988)
("The laws protect legitimate resident isswers ty *xposing
illegitimate resident issuers.”). Althoue’ ' fate anerest
is heightened when the state can prove tnat u.. in-state
firm has engaged in outright fraud, the interest Is
nonetheless legitimate when the state seeks to block sales
of securities that it believes might be associated with
dubious or manipulative sales practices. The difference
between a state's (i.e., New Jersey's) interest in preventing
fraud and preventing questionable practices is a difference
in degree, not a difference in kind.
17a
‘we
A
18
The dissent contends that absent proof of actual fraud,
New Jersey has an insufficient interest in regulating
securities dealers who sell to out-of-state buyers. It is
undisputed that the purpose of securities registration laws
is to prevent fraud before it happens, and § 60 serves such
a prophylactic purpose. Merrick v. N.W. Halsey & Co., 242
U.S. 568, 587 (1917); Caldwell v. Sioux Falls Stock Yards
Co., 242 U.S. 559, 564 (1917) (upholding Blue Sky Law
designed “to prevent fraud in the sale and disposition of
stocks, bonds or other securities sold or offered for sale
within the state”); Hall v. GeigerJones Co., 242 U.S. 539,
551 (1917) (upholding Blue Sky Law designed to “prevent
deception and save credulity and ignorance from
imposition"); Cola v. Terzano, 322 A.2d 195, 198 (N.J.
Super. Ct. Law Div. 1974) (providing that the New Jersey
Uniform Securities Law is intended to protect the
uninitiated and to prevent frauds upon the public at large).
aff'd sub nom. Cola v. Packer, 383 A.2d 460 (N.J. Super. Ct.
App. Div. 1974); New Jersey v. Russell, 291 A.2d 583, 587
(N.J. Super. Ct. App. Div. 1972) (recognizing that the sale
of securities is a specialized field of activity in which the
potential for abuse and financial] injury is great); Enntex Oil
& Gas Co. (of Nevada) v. Texas, 560 S.W.2d 494 (Tex. Civ.
App. 1977, writ refd n.r.e.), appeal dismissed for want of a
substantial federal question, 439 U.S. 961 (1978). New
Jersey's regulation of sales by in-state brokers to out-of-
State buyers serves the legitimate purpose of preventing
fraudulent transactions.
Regulating in-state offers to out-of-state buyers also
serves New Jersey interests by protecting New Jersey
residents from dubious securities that enter the state in the
secondary market. This risk is particularly great beca1se a
14. [Wie think the [securiies registration] statute under review {fs within
the power of the state. It burdens honest business, t is true, bul
burdens i only that under its forms dishones{ business may not be
done. This manifesUy cannot be accomplished by mere declaration;
there must be conditions imposed and provision made for their
performance. Expense may thereby be caused and inconvenience,
but to arrest the power of the state by such considerations would
make it impotent to discharge its function.
Id. at 587 (emphasis added).
. 18a
a
— or AS
19
broker-dealer such as Goldmen could otherwise delay or
even avoid the Bureau's scrutiny through an initia] sale to
& cooperative party outside New Jersey. Because there is no
filing requirement for secondary transactions, Goldmen
could arrange to “sell” a Security to a friendly out-of-state
party, immediately buy back the security, and then sell it
freely to New Jersey residents using possibly questionable
Sales practices. App. 77-78." New Jersey's most effective
means of preventing such an undesirable result would be to
block the initia] public offering. See Long, § 3.04[3}|b-c] at
3-52 to 3-53.
In conclusion, the Bureau's application of §60 to
Goldmen's Imatec offering furthers two legitimate state
interests: preserving the reputation of New Jersey broker-
dealers, and protecting New Jersey buyers in the secondary
market.
IV.
Because the Bureau's application of § 60 regulates the in-
State portion of an interstate transaction and furthers
legitimate in-state interests, the application of §60 to
regulate the Imatec offering does not violate the dormant
commerce clause. In so holding. we note that our
conclusion is in accordance with the overwhelming majority
of courts that have considered dormant commerce clause
challenges to blue sky laws. See, €.9., Hall, 242 U.S. at 557;
Enntex Oil & Gas Co. v. Texas, 560 S.W.2d 494 (Tex. Ct.
App. 1977), appeal dismissed Sor lack of a substantial
federal question, 439 U.S. 96] (1978); Chrysler Capital
Corp. v. Century Power Corp., 800 F. Supp. 1189, 1194
(S.D.N.Y. 1992); Upton v. Trinidad Petroleum Corp., 468 F.
Supp. 330, 336 (N.D.Ala. 1979), aff'd on other grounds, 652
F.2d 424 (5th Cir. 1981): Oil Resources v. Florida, 583 F.
Supp. 1027 (S.D.Fla. 1984), affd without op., 746 F.2d 814
(11th Cir. 1984); see also Loss & Seligman at 39-40 (“On
the whole, it seems fair to Say that there no longer need be
15. Notably, there is evidence in the record that Goldmen had engaged in
such practices before. App. 196-98.
19a
20
any substantial constitutional doubts about blue sky
provisions.”).’®
Indeed, the established heritage and near universality of
the provision that Goldmen has challenged itself
underscores its constitutionality. See Healy, 49] U.S. at
336-37, 109 S. Ct. at 2499. Goldmen has challenged a state
provision that is an established strand in the legal fabric of
securities regulation. The power that Goldmen claims would
unduly burden interstate commerce js one that most states
have long exercised, and that Congress has for decades
expressly allowed to continue. This is not the sort of
“parochial” state power that Justice Cardozo warned of in
Baldwin, the broad exercise of which “would. . . invite a
speedy end of our national solidarity.” Baldwin, 294 U.S. at
523, 55 S.Ct. at 500.
We will therefore reverse the order of the district court
dated August 2], 1997, and remand for proceedings
consistent with this opinion.
16. Goldmen relies heavily on Arizona Corp. Comm'n v. Media Products,
Inc., 158 Ariz. 463, 763 P.2d 527 (Ariz. App. 1988), the one case that
runs counter to the many upholding state blue sky laws against dormant
commerce clause challenges. Media Products is distinguishable, however,
because in that case Arizona sought to bar an Arizona company from
selling a security outside of Arizona through an agent outside of Arizona
to a buyer who was also outside of Arizona. In other words, the only
connection the transaction had with Arizona was that the principal place
of business of the seller was located there. See id at 464-65; 763 P.2d
at 528-29. (“Sales of the entre issue were negotlated out-of-state].] solely
by [an] out-of-state underwriter... . No sales or offers of sale were made
in Arizona.”). Because the offer and acceptance took place enurely
outside of Arizona. Arizona's atiempt to block the transaction was not an
cflort to regulate the in-slate component of an interstate transaction, as
is the case here.
20a
21
McKEE, Circuit Judge, dissenting.
I respectfully dissent from the opinion of my colleagues.
The majority recognizes New Jersey's right to regulate that
portion of a multi-state transaction occurring within its
borders because “one state must prevail” in a dispute that
extends beyond its borders and involves residents of other
States. Maj. Op. at 16. The approach the majority uses
would be helpful to resolving a choice of law dispute, but it
is of only limited assistance in adjudicating this dispute
under the Commerce Clause. New Jersey does not allege
that Goldmen’s sale of Imatec stock involved fraud, and the
district court concluded that fraud was not involved. See
Dist. Ct. Op. at 7 (The Bureau does not advance a single
allegation of fraud”). Thus, the issue is not which state will
win, but whether New Jersey's interest here is sufficient to
allow it to prevent Goldmen from soliciting residents of
other states. The district court concluded, “the Bureau is
reaching out to prohibit a sale, not made to New Jersey
residents, which takes place in a national securities
market, and which is regulated by each state to protect its
own citizens.” Id The district court concluded that New
Jersey's interest was not sufficient to allow that result. |
agree, and would affirm the well reasoned decision of the
district court.
Il.
My colleagues cite General Ceramics Inc. v. Firemen's
Fund Ins. Co., 66 F.3d 647, 656-59 (3rd Cir.) to justify the
conclusion that New Jersey's interest in regulating offers
made from within its borders justifies preventing Goldmen
from offering shares of Imatec to buyers residing in states
where that security is properly registered. Maj. Op. at 15.
In Firemen's Fund, the issue was
whether New Jersey or Pennsylvania law controls the
interpretation of an exception to a pollution-exclusion
clause when New Jersey has Significant contacts with
the insurance contract and the insured but
Pennsylvania is the site of the hazardous waste site
giving rise to the liability for which coverage is sought.
2la
22
Id., at 649. The dispute arose in a diversity case where we
applied New Jersey's choice of law rules to determine if the
law of New Jersey or Pennsylvania governed the
interpretation of an exception to a pollution-exclusion
clause in a comprehensive lability insurance policy. The
loss that gave rise to the dispute resulted from costs
incurred under the Comprehensive Environmental
Response Compensation and Liability Act ("CERCLA"). Our
analysis focused upon which state's law controlled “whether
the phrase ‘sudden and accidental’ extended coverage for
the gradual discharge of pollution.” Id, at 652. We held
that New Jersey law applied. Id (“Based on the strong
public policy that underlies New Jersey's broad
interpretation of the pollution-exclusion exception, .. . New
Jersey law governs.”). We reached that result because the
interests of Pennsylvania would not have been furthered by
applying its law to that particular dispute, whereas the
interests of New Jersey were furthered by applying the law
of New Jersey. Id, at 657.
That does not assist us here. The controversy here is not
merely between the conflicting regulations of two or more
states. Rather, this dispute focuses upon the impact of that
conflict upon interstate commerce. Nor, do | believe that the
Blue Sky Cases’ support the majority's conclusion.
Although those cases do address the scope of the
restrictions imposed on states under the Commerce Clause,
they do not address the precise issue that Goldmen raises.
In Merrick, (one of the Blue Sky Cases) the Court did not
even address whether the Blue Sky Law at issue violated
the Commerce Clause. Instead, the Court reserved that
question for decision in Geiger-Jones v. Hall - a companion
case to Merrick. See Merrick, 242 U.S. at 590. In Hall, the
Court reviewed an Ohio law that required sellers of
securities to obtain a license before offering any securities
for sale within the state. An Ohio securities broker with
clients in severa] states including Ohio (Geiger-Jones)
brought a multi-faceted challenge to the legality of Ohio's
licensing requirement. The primary assertion was that
1. Hall v. GeigerJones Co., 242 U.S. 539, 37 S.Ct 217 (1917), Caldwell
v. Sioux Falls Stock Yards Co., 242 U.S. 559, 37 S.Ct 224 (1917) and
Merrick v. N.W. Halsey & Co., 242 U.S. 568, 37 S.Ct 227 (1917).
22a 7
rr
aN AA i ae tag af es Sgt Fa gg «eg SCT
23
Ohio's licensing requirement was an improper exercise of
the state's police power. 242 U.S. at 548. The Court
concluded that the requirement was a valid means of
protecting against fraud, and noted that the
Commissioner's ability to deny or revoke a license was
qualified by a duty of good faith, and subject to judicial
review. Id, at 553. The Court reasoned:
The provisions . . . apply to dispositions . . . within the
State, and while information of those issued in other
States . . . is required to be filed, they are only affected
by the requirement of a license of one who deals in
them within the state. Upon their transportation into
the state there is no impediment, — no regulation of
them or interference with them after they get there.
There is the exaction only that he who disposes of
them there shall be licensed to do so, and this only
that they may not appear in false character... and
this certainly is only an indirect burden upon thern as
objects of interstate commerce, if they may be regarded
as such. It is a police regulation strictly, not affecting
them until there is an attempt to make disposition of
them within the state. Such regulations affect interstate
commerce in them only incidentally.
242 U.S. at 557-8 (emphasis added). Here. the regulation in
question has a far greater impact upon commerce outside
of the state. It prevents solicitation of residents of other
States and thereby has the practical effect of halting sales
to individua] purchasers unless those purchasers know of
the securities and make Goldmen an unsolicited offer to
buy. In fact, the Bureau's entire justification for § 60 rests
upon its admitted desire to stop such solicitations, and |
thereby stop solicited sales. Therefore, it is as misleading as
it is inaccurate to conclude that the extraterritorial affect of
§60 is “incidental” and to uphold the prohibition as a
regulation of New Jersey's “hal™ of an interstate |
transaction. See Maj. Op. at 16. Themajority states:
lf New Jersey seeks to block Goldmen's offering but the
buyer's state (say, New York) would allow it, one state ;
must prevail. One state can in effect “force its
Judgment”.upon the other. . . . block the transaction
even if New York would permit it.
23a
24
Goldmen's alternative is no better, however: under its
view of the dormant commerce clause, New York's
approval would permit the transaction, over New
Jersey's objection. Thus, the difference between New
Jersey's Blue Sky law and Goldmen's proposal is simply
the market's default rule: should the transaction be
allowed if either state permits, or blocked if either side
objects? Such questions of the market's “structure” and
its “method of operation” are quite simply beyond the
concern of the Commerce Clause, as they “relate to the
wisdom of the statute, not to its burden on commerce.”
Exxon Corp. v. Governor of Maryland, 437 U.S. 117,
127-28 (1978).
Maj. Op. at 16. However, applying § 60 to bar solicitation
where a security could otherwise be sold goes to the very
heart of the Commerce Clause. The question is not which
state's regulations will prevail, but whether either state has
an interest of sufficient gravity to allow it to enforce its
regulations in a manner that so effects interstate
commerce. The majority's analysis focuses only upon the
interest of the inconsistent regulatory schemes in the
relevant “competing” states. That approach fails to afford
proper recognition of the overriding federal interest that
must contro] under a Commerce Clause analysis. See
Kassell et al v. Consolidated Freightways Corp. 450 U.S.
662 (198)).
In Kassel, an interstate trucking company sought to
strike down an Jowa law that limited the size of trucks on
interstate highways in lowa to 50 feet. Consolidated
Freightways sought to invalidate the restriction arguing it
burdened interstate commerce. Neighboring states, and
nearly all other states in the west, and midwest allowed
trucks up to 65 feet in length on the portion of interstate
highways within their borders. Accordingly, interstate |
trucking companies had to either use shorter trucks to !
transport cargo through the midwest, route cargo around
lowa, or switch trailers at the lowa border in order to insure
that they did not exceed Iowa's length restriction. The Court
concluded that Iowa's proffered justification of safety was
tenuous at best because the record did not establish that
reducing trailer size had as direct an impact on the safety
of an interstate highway as lowa claimed.
24a
en eeennenree ein
ee ee ee em ER
_—-— e« ‘- ee ee
25
Regulations designed for |safety] nevertheless may
further the purpose so marginally, and interfere with
commerce so substantially, as to be invalid under the
Commerce Clause. . . . In [Raymond Motor
Transportation, Inc. v. Rice, 434 U.S. 429, (1978)] we
declined to accept the State’s contention that the
inquiry under the Commerce Clause is ended without
a weighing of the asserted safety purpose against the
degree of interference with interstate commerce. 434
U.S., at 443, 98 S.Ct., at 795. This “weighing” by a
court requires— and indeed the constitutionality of the
state regulation depends on— a sensitive consideration
of the weight and nature of the state regulatory
concern in light of the extent of the burden imposed on
the course of interstate commerce.
Id. at 670 (imterna] quotation marks omitted).
Although ft appears at first that Kassell can easily be
distinguished from the facts before us, I believe the ease
with which Kassell can be dismissed is somewhat illusory.
The distinction stems from the tangible nature of the
commerce involved in Kassel! rather than the quality of its
relationship to interstate commerce. The impact of a
regulation upon trucks moving on interstate highways is
readily apparent. The impact of §60 upon commerce
outside of New Jersey is intangible, but nevertheless real.
New Jersey's interest here is not prevention of fraud
because fraud is not alleged. Thus, | disagree with the
weight the majority attaches to New Jersey's claimed
interest in protecting the reputation of securities dealers
‘that sell from offices in New Jersey. Maj. Op. at 17. New
Jérsey’s attempt to preserve §60 by pointing to its
legitimate interest in preventing fraud is not unlike Iowa's
attempt to preserve its regulation by arguing that it
furthered the safety of its interstate highways in Kassell.
That argument was not supported by the record there, and
the fraud argument is not supported by the record here.
New Jersey can not prevent the sale of a security in a state
where the sale is proper merely by alleging a concern for
the speculative nature of Imatec, and alleging concerns
regarding Goldmen's business practices. If Goldmen (or any
other broker) engages in misleading and improper business
25a
26
practices in the sale of Imatec stock (or any other stock or
commodity for that matter) New Jersey can certainly
investigate and remedy the situation under its police
powers. See Merrick, supra. The Bureau can prohibit fraud
in the offer, sale and purchase of securities, N.J.S.A. 49:3-
52; it can prohibit misleading filings, N.J.S.A 49:3-54; it
can prohibit unlawful representations concerning
registration, N.J.S.A. 49:3-55; it can conduct investigations,
subpoena witnesses and require the production of evidence,
N.J.S.A. 49:3-68; and it can enjoin iegal conduct, N.J.S.A.
49:3-69.
Accordingly, the majority's citation to Stevens v. Wrigley
Pharma. Co., 154 A. 403, 403 (N.J. Ch. Div. 1931) (noting
that New Jersey's interest in regulating in-state offers to
out-of-state buyers is “not so much to protect the citizens
of other states, as to prevent this state from being used as
a base of operations for crooks marauding outside the
state.”), and Simms Inv. Co. v. E.F. Hutton & Co., 699 F.
Supp. 543, 545 (M.D.N.C. 1988) (“[T]he laws protect
legitimate resident issuers by exposing illegitimate resident
issuers.”), is misplaced. See Maj. Op. at 17. If that is New
Jersey's interest here, let the Bureau allege and prove
fraud. We are far too quick to allow New Jersey to proceed
as though it had established a fraud it is not even alleging.
We ought not rest our decision here upon concems that
arise from insinuations and implications about unproven,
and unalleged, conduct on the part of Goldmen.
The majority also relies upon New Jersey's ability to
regulcte “uz-state offers to out-of-state buyers” stating that
such .- interest- “also serves New Jersey interests by
Proteclu.g Nev’ Jersey residents from dubious securities
that enter the state in the secondary market.” Maj. Op. at
18. Yet. §60 does not do that. Goldmen can solicit sales of
Imatec shares to institutional buyers, and other broker-
dealers no matter where they are located. Similarly, he can
sell these shares to individuals in New Jersey and
elsewhere so long as he does not solicit the buyer. Once
any such sales occur, the shares are in the secondary
market and Goldmen is no longer restrained by § 60.”
2.The Bureau takes the posilion that individuals who make an
unsolicited offer to buy from Goldmen. and institutiona] buyers and
26a
Se
Il.
The Supreme Court “has adopted what amounts to a two-
tiered approach to analyzing state economic regulation
under the Commerce Clause.” Brown-Forman Distillers
clearly exceeds the local benefits.” Id. (citing Pike v. Bruce
Church, Inc., 397 U.S. 137, 142 (1970)).
Although | believe a Strong case can be made that § 60
falls within the first tier of inquiry and therefore could be
Struck down as a per se violation of the Commerce Clause,
1 think our inquiry should, more appropriately, be
conducted under the Pike balancing test that guides inquiry
under the second tier.?
Although the majority does not directly refer to Pike v,
Bruce Church, it is obvious that. by discussing New Jersey's
other broker-dealers are better informed. The Bureau reasons that
extremely risky securives will, therefore. not enter New Jersey via the
secondary market zs they won't be sold in the first place. However, these
better informed buyers may wel) purchase shares of even the riskiest
Stock based upon. belief unat the nsk is offsei by the selling price, and
the potential for greater profit. For a discussion of the various theories
of how risk. information abcut an issuer, and potential profit are
factored into the selling price of shares of stock. see Robert G. Newkirk,
Comment. Sufficient Efficiency: Fraud on the Market in the Initial Public
Offering. 58 U. Chi. L. Rev. 1393 (199}).
3.The Supreme Court has “recognized that there is no clear line
separating the category of state regulation that is virtually per se invalid
under the Commerce Clause, and the Category subject to the Pike v.
Bruce Church balancing approach.” Brown-Forman Distillers Corp. v. New
York State Liquor Authority, 476 U.S. at 578-79. “In either situation the
crilca] consideration js the overall] effect of the statute on both local and
interstate activity.” Id
28
loca] interests, it is engaging in a balancing of interests as
required by Pike. In Pike, the Court wrote:
Where the statute regulates even-handedly to
effectuate a legitimate local public interest, and its
effects on interstate commerce are only incidental, it
will be upheld unless the burden imposed on such
commerce {is clearly excessive in relation to the local
putative benefits. If a legitimate loca] purpose is found,
then the question becomes one of degree. And the
extent of the burden that will be tolerated will of course
depend on the nature of the local] interest involved, and
on whether it could be promoted as well with a lesser
impact on interstate activities. Occasionally the Court
has candidly undertaken a balancing approach in
resolving these issues, but more frequently it has
spoken in terms of “direct” and “indirect” effects and
burdens.
397 U.S. 137, 142 (1970).
Moreover, a state cannot impose its regulatory scheme on
another state in an effort to “control conduct beyond the
boundaries of the state.” Healy v. Beer Instinute, 49] U.S.
324, 326 (1989). This prohibition against extraterritoriality
“reflect[s) the Constitution's special concern both with the
maintenance of a national economic union unfettered by
state-imposed limitations on interstate commerce and with
the autonomy of the individual] states with their respective
spheres.” Id. The Supreme Court has summarized the
application of the limitations inherent in the Commerce
Clause as follows:
[OJur cases concerning the extraterritorial effects of
state economic regulation stand at a minimum for the
following propositions: First, the Commerce Clause...
precludes the application of a state statute to
commerce that takes place wholly outside of the State's
borders, whether or not the commerce has effects
within the State. . . . Second, a statute that directly
controls commerce occurring wholly outside the
boundaries of a State exceeds the inherent limits of the
enacting State’s authority and is invalid regardless of
whether the statute’s extraterritorial reach was
28a
————
29
intended by the legislature. The critical inguiry is
whether the practical effect of the regulation is to
control conduct beyond the boundaries of the State.
Third, the practica) effect of the statute must be
evaluated not only by considering the consequences of
the statute itself, but also by considering how the
challenged statute may interact with the legitimate
regulatory regimes of other States and what effect
would arise if not one, but many or every, State
adopted similar legislation. Generally speaking, the
Commerce Clause protects against inconsistent
legislation arising from the projection of one state
regulatory regime into the jurisdiction of another.
Id. at 336-37 (citations and internal quotations omitted).
1 agree that Goldmen’s telephone solicitation of out-of-
State buyers for shares of Imatec would not be a
transaction occurring “wholly outside” of New Jersey.
However, the majority's view that the Bureau is only
regulating its “half of a transaction by prohibiting Goldmen
from soliciting out-of-state buyers, see Maj. Opn. at 16, is
accurate in theory, but not accurate in the jurisprudential
reality of the Commerce Clause. Goldmen is not the issuer
of these securities. It is only the underwriter. Imatec. a
Delaware corporation whose main office is in New York. is
the issuer. Imatec’s only connection with New Jersey is that
its offering was underwritten by a broker-dealer who
happens to be located there, and that broker dealer
planned to solicit out-of-state sales irom its New Jersey
office. It may be reasonably assurd that out of state
buyers would purchase these shwres {rom funds held in
financial] institutions outside of New Jersey, and that any
profits would be deposited into those same financial
institutions. Moreover, the growth and fiscal strength of
Imatec, the Delaware corporation, is related to the value of
its shares. Thus, New Jersey's only connection with this
interstate transaction lies in the fortuitous circumstance
that a broker-dealer would be sitting at a desk somewhere
in New Jersey making telephone calls to residents of the 16
States where Imatec securities are appropriately registered
and authorized for purchase.
29a
ee
30
Goldmen has satisfied the registration requirements of 16
States and those states allow their residents to be solicited
to purchase shares of Imatec. Each of those states could
have enacted a regulatory scheme that only allowed the
sale of securities properly registered in the state where the
seller maintains its principal office. None of the 16 states
have chosen to do so. Our holding has the practical effect
of reading § 60 into the regulations of each of those states
despite the absence of such a restriction in the regulatory
schemes of the 16 states. The majority concludes that this
result is consistent with the Commerce Clause because it
furthers two “particularly strong” loca] interests, viz.,
preserving the reputation of New Jersey broker-dealers and
protecting New Jersey buyers in the secondary market. Maj.
Opn. at 17-19. My colleagues can reach this conclusion by
viewing §60 as having only an “incidental” impact on
interstate commerce. As I state above, §60 imposes an
absolute ban on interstate commerce that consists of
soliciting individual] buyers of Imatec stock from New
Jersey. If we analyzed the regulation from the perspective of
that absolute ban on the solicited sale of Imatec securities
to residents of the states where the securities have been
approved for sale, the burden on interstate commerce
would be far more substantial than the majority suggests. |
However, even assuming arguendo that the regulations at
issue here have only an “incidenta)” effect on interstate
commerce, New Jersey's interest is stil) not sufficient to
justify prohibiting solicitations in 16 states where these
securities are registered. I believe that finding such an
interest requires more than the asserted necd to , .cicct
potentia]) purchasers residing elsewhere from the risks of
penny stocks and sellers such as Goldmen. It requires
some showing that the interests New Jersey seeks to
further would be advanced by applying § 60 to solicitations
of Imatec. If the Bureau can establish that Goldmen is
engaging in false and misleading sales practices or fraud,
Z New Jersey has an interest sufficient to survive scrutiny
under the Commerce Clause. But, the Bureau concedes
that “|t)his is not a fraud case.” App. at.558. Therefore, |
am at a loss to understand how the majority can conclude
on the record before us that New Jersey has shown a
“particularly strong” interest.
30a
ee
NEE EE ate Ng Ae at Reena ON SEG Tt mee ie, eg SN
-
-
3)
Since New Jersey's interest absent fraudulent business
activilies is minimal] at least, the federal interests are
paramount. It is not a question of allowing one state's
regulatory scheme to prevail over that of another state. “The
balance here must be struck in favor of the federal
interests.” Kassell. 450 U.S. at 667. Accordingly, I believe
we should affirm the decision of the district court.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
Jor the Third Circuit
3la
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
A.S. GOLDMEN &
COMPANY, INC.,
Plaintiff,
Civ. No. 96-5280
: (DRD)
NEW JERSEY BUREAU OF OPINION
SECURITIES,
Defendant.
Appearances:
Martin Flumenbaum, Esq.
Brad S.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
Attorneys at Law
1285 Avenue of the Americas
New York, New York 10019-6064
Attorneys for Plaintiff
PETER VERNIERO
ATTORNEY GENERAL OF NEW JERSEY
by
Joshua T. Rabinowitz
Tracey Thayer
Gail M. Lambert
Deputies Attorney General
124 Halsey Street - Sth Floor
P.O. Box 45029
Newark, New Jersey 07101
Attorneys for Defendant
32a
DEBEVOISE, Senior District Judge.
This is an action for a declaratory judgment holding,
inter alia, that the New Jersey Securities Act, N.J.S.A. 49:3-
47, et seq., a8 applied to securities that were not registered or
exempt from registration and were sold by brokers located in
New Jersey to residents of states (other than New Jersey) in
which the securities were qualified for sale, violates the
‘Commerce Clause of the United States Constitution.
Defendant moves, and plaintiff cross moves, for summary
judgment pursuant to Fed. R. Civ. P. 56. For the reasons set
forth below, plaintiff's motion is granted and defendant's
motion is denied.
BACKGROUND
The underlying facts relevant to the motions for
summary judgment are set forth in the bench opinion of
November 20, 1996. See Affidavit of Brad S. Karp,
Exhibit B, at 36-40. Pursuant to an Order entered on that
date, the court preliminarily enjoined Defendant New Jersey
Bureau of Securities (“Bureau”) from taking any action that
would prohibit Plaintiff A.S. Goldmen & Co., Inc., and its
employees and agents from soliciting, offering, or selling
securities that are not registered or exempt from registration
in New Jersey to residents of states (other than New Jersey)
in which the securities are qualified for sale. Karp Aff.,
Ex. A.
STANDARD OF REVIEW
Summary judgment is appropriate where the moving
party establishes that “there is no genuine issue as to any
material fact and that [it] in entitled to a judgment as a matter
of law.” Fed. R. Civ. P. 56(c). The moving party must show
that if the evidentiary material of record were reduced to
33a
admissible evidence in court, it would be insufficient to
permit the non-moving party to carry its burden of proof.
Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
Once the moving party has carried its burden under
Rule 56, “its opponent must do more than simply show that
there is some metaphysical doubt as to the material facts in
question.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp..,
475 U.S. 574, 586-87 (1986), rev’g, 723 F.2d 238 (3d Cir.
1983). The opposing party must set forth specific facts
showing a genuine issue for trial and may not rest upon the
mere allegations or denials of its pleadings. Sound Ship Bidg,
Corp. v. Bethlehem Steel Co., 533 F.2d 96, 99 (3d Cir.
1974), cert. denied, 429 U.S. 860 (1976).
At the summary judgment stage the court’s function is
not to weigh the evidence and determine the truth of the
matter, but rather to determine whether there is a genuine
issue for trial. Anderson v. Liberty Lobby. Inc., 477 U.S.
242, 249 (1986). The mere existence of some alleged factual
dispute between the parties, however, will not defeat an
otherwise properly supported motion for summary judgment.
Id. at 247-248.
ANALYSIS
The Commerce Clause, Art. I, § 8, cl. 3, gives
Congress the power to regulate commerce among the States.
It also “includes an implicit or ‘dormant’ limitation on the
authority of the States to enact legislation affecting interstate
commerce.” Healy v. Beer Institute, 491 U.S. 324, 326 n.1
(1989). This dormant aspect of the Commerce Clause is at
issue in this case. The resolution of the motions for summary
judgment hinges upon a determination of whether New Jersey
has exceeded its authority under the dormant Commerce
Clause by seeking to apply Section 60 to a local broker who
34a
sells securities that do not qualify for sale in New Jersey to
customers in states where the securities do qualify for sale.
“When conducting a dormant Commerce Clause
analysis, [courts] seek to balance the national interest in
vibrant interstate commerce with the local interests promoted
by the state regulation.” Tolchin v. Supreme Court of the
State of New Jersey, 111 F.3d 1099, 1106 (3d Cir. 1997); see
General Motors Corp. v. Tracy, 117 S.Ct. 811, 824 n.12
(1997). In Brown-Forman Distillers Corp. v. New York State
Liquor Authority, 476 U.S. 573 (1986), the United States
Supreme Court set forth two standards for reviewing state
statutes that affect interstate commerce. The Court stated:
When a state statute directly regulates or discriminates
against interstate commerce, or when its affect is to
favor in-state economic interests over out-of-state
interests, we have generally struck down the statute
without any further inquiry. When, however, a statute
only has an indirect effect on interstate commerce and
regulates evenhandedly, we have examined whether
the State’s interest is legitimate and whether the
burden on interstate commerce clearly exceeds the
local benefits.
Id. at 579. (citations omitted).
Plaintiff argues that the first standard is the most
pertinent here. It contends that the Bureau’s application of
N.J.S.A. 49:3-60 (“Section 60”) constitutes a direct burden
on interstate commerce because it seeks to regulate the ability
of out-of-state residents to purchase securities approved by
their home state’s securities regulators. The Bureau, on the
other hand, contends that its application of Section 60 does
not impose any such direct burden, within the meaning of the
Commerce Clause, because it does not attempt to regulate
35a
commerce occurring “wholly outside of New Jersey.” The
Bureau notes, for example, that its application of Section 60
does not prevent plaintiff from selling Imatec securities from
offices located outside of New Jersey to customers located
outside of New Jersey, and it does not prevent persons in
other states from purchasing IMATEC securities from
plaintiff. Plaintiff is only prevented from soliciting such
persons.
In considering whether a state statute “directly
regulates” commerce the “critical inquiry is whether the
practical effect of the regulation is to control conduct beyond
the boundaries of the State.” Healy v. The Beer Institute, 491
U.S. 324, 336 (1989)); see also Brown-Forman Distillers
Corp. v. New York State Liquor Authority, 476 U.S. 573, 582
(1986) (requiring an individual “to seek regulatory approval
in one State before undertaking a transaction in another
directly regulates interstate commerce”); /nstructional
Systems, Inc. v. Computer Curriculum Corp., 35 F.3d 813,
824 (3d Cir. 1994). The Supreme Court has consistently
struck down on Commerce Clause grounds state statutes that
apply one state’s standards to another state’s residents. See,
e.g., Brown-Forman Distillers Corp. 476 U.S. at 583-84;
Edgar v. Mite Corp., 457 U.S. 624, 640-44 (1982); Kassel v.
Consolidated Freightways Corp., 450 U.S. 662, 677 (1981);
Old Bridge Chemicals, Inc. v. New Jersey Department of
Environmental Protection, 965 F.2d 1287, 1293 (3d Cir.
1992). Indeed, the Supreme Court made manifest in CTS
Corp v. Dynamics Corp. of America, 481 U.S. 69 (1987),
that “the Commerce Clause protects against inconsistent
legislation arising from the projection of one state’s regulatory
regime into the jurisdiction of another.” /d. at 88-89.
In the instant case, by way of its application of
Section 60, the Bureau effectively seeks to impose New
Jersey securities regulations onto other states. The sales which
36a
Se
the Bureau purports to regulate are those of a security which
has been registered with the SEC, approved by NASDAQ,
and approved by each of the other states in which the
securities are to be sold. To allow the Bureau to preclude
consumers in other states from receiving solicitations to
purchase securities which their own state regulators have
deemed appropriate for purchase is, in essence, to allow the
Bureau to substitute its own regulatory judgment for that of
other states. The Supreme Court has made clear that such an
application of state law constitutes a direct burden on
interstate commerce. See e.g., CTS Corporation, 481 U.S. at
88-89; Brown-Forman Distillers Corp., 476 U.S. at 583-84.
Even if it is assumed that the Bureau’s application of
Section 60 does not directly burden interstate commerce, the
Statute still violates the dormant Commerce Clause because
the burden it imposes on interstate commerce is clearly
excessive in relation to the putative local benefits. Pike v.
Brice Church, Inc., 397 U.S. 137 (1970). The Bureau asserts
that New Jersey’s interests are in protecting its commercial
reputation from fraud and in protecting in-state consumers
from securities fraud. Although both of these interests are
legitimate, New Jersey’s interest in this particular application
of Section 60 is insubstantial. The Bureau does not advance
a single allegation of fraud against plaintiff. Moreover, the
Bureau is reaching out to prohibit a sale, which wil! not be
made to New Jersey residents, which takes place in a national
securities market, and which in regulated by each state to
protect its own citizens.
In addition, there are less intrusive measures available
to the Bureau to accomplish its goals. The Court in Pike held
that:
If a legitimate local purpose is found, then the
question becomes one of degree. And the extent of the
37a
burden that will be tolerated will of course depend on
the nature of the local interest involved, and on
whether it could be promoted with a lesser impact on
interstate activities.
Pike, 397 U.S. at 142. Here, if the Bureau wishes to monitor
the sale of securities to New Jersey residents in the secondary
market, the Bureau can take several measures short of
prohibiting the solicitation of residents of states in which they
are qualified for sale. For example, the Bureau could require
local brokers that intend to sell securities from Now Jersey to
residents of states other than Now Jersey to inform the Bureau
of such sales. The Bureau also has the ability to monitor the
sale of securities to residents of New Jersey in the secondary
market pursuant to its authority as a state regulatory and
investigating agency. The Bureau can subpoena witnesses,
demand and inspect records, and utilize the arsenal of other
investigative tools at its disposal. In short, because the
burden it imposes On interstate commerce clearly exceeds the
benefits to New Jersey, the Bureau’s application of Section 60
of the New Jersey Uniform Securities Law to the sale of
Imatec securities violates the Commerce Clause.
CONCLUSION
For the foregoing reasons, plaintiff’s cross motion for
summary judgment is granted, and defendant’s motion for
summary judgment is denied. An appropriate order follows.
/s/ Dicki ; Voi
Dickinson R. Debevoise, U.S.S.D.J.
Dated: August 21, 1997
38a
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY —
A.S. GOLDMEN &
COMPANY, INC.,
Plaintiff, Civ. No. 96-5280
(DRD)
Vv.
NEW JERSEY BUREAU OF ss
SECURITIES,
Defendant.
This matter having been opened to the Court by Peter
Verniero, Attorney General of New Jersey, and Joshua T.
Rabinowitz, Deputy Attorney General of New Jersey,
attorneys for the defendant, on a motion for summary
judgment, and by Martin Flumenbaum, Esq., and Brad S.
Karp, Esq., attorneys for the plaintiff, on a cross motion for
summary judgment, notice having been given to all parties, in
consideration of the papers submitted, for good cause shown,
and for the reasons set forth in the Court’s opinion of even
date,
IT IS, on this 21st day of August 1997,
ORDERED as follows:
1. Defendant’s motion for summary judgment is
DENIED. 7
he Plaintiff's cross motion for summary judgment
is GRANTED.
39a
3. It is adjudged and declared that absent
allegations of fraud, application of the New Jersey Securities
Act, N.J.S.A. 49:3-47, et seq., to prohibit out-of-state
solicitations from offices in New Jersey of Imatec, Ltd.,
securities that were not registered or exempt from registration
in New Jersey when such securities are qualified for sale in
the states in which the solicitations are made, violates the
Commerce Clause of the United States Constitution.
/s/ Dicki voi
Dickinson R. Debevoise, U.S.S.D.J.
SAUL, EWING, REMICK & SAUL
214 Carnegie Center, Suite 202
Princeton, New Jersey 08540
(609) 452-3100
Michael A. Lampert (ML-1064)
-and-
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 Avenue of the Americas
New York, New York 10019-6064
(212) 373-3000
Martin Flumenbaum (MF-9067)
Brad S. Karp (BK-3702)
Attorneys for Plaintiff A.S. Goldmen & Co., Inc.
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
A.S. GOLDMEN &
COMPANY, INC.,
Plaintiff, Civ. No. 96-5280
! (DRD) |
v.
ORDER TO SHOW
NEW JERSEY BUREAU OF | CAUSE
SECURITIES,
Defendant.
Upon the complaint herein; the affidavit of Foster
Gibbons, sworn to on November 13, 1996; the affidavit of ’
4la
Jay K. Musoff, sworn to November 13, 1996; the
accompanying memorandum of law; and ail other pleadings
and papers filed in this action, it is hereby:
ORDERED that defendant show cause at a hearing to
be held in this Court before the Honorable Dickinson R.
Debevoise, United States District Judge, in courtroom 5B of
the United States Courthouse, 50 Walnut Street, Newark,
New Jersey, on November 20, 1996, at 8:15 a.m., or as soon
thereafter as counsel may be heard, why an order should not
be granted declaring that:
(i) the New Jersey Securities Act, as applied to
securities that were not registered or exempt from registration
in New Jersey and were sold by brokers located in New
Jersey to residents of states (other than New Jersey) in which
the securities were qualified for sale, violates the Commerce
Clause of the United States Constitution;
(ii) | the New Jersey Securities Act does not apply
to securities that were not registered or exempt from
registration in New Jersey and were sold by brokers located
in New Jersey to residents of states (other than New Jersey)
in which the securities were qualified for sale; and it is
FURTHER ORDERED that, _ pending full
consideration of this matter, any action by the New Jersey
Securities Bureau that prohibits A.S. Goldmen and its
employees and agents from the solicitation, offer and sale of
Imatec Securities to or from persons residing outside of New
Jersey is stayed; and it is
FURTHER ORDERED that any papers in opposition
to plaintiff's application for the above relief be served on
plaintiff’s counsel by hand delivery no later than noon on
November 19, 1996, and that any reply papers in further
42a
support of plaintiff's motion by served on defendant’s counsel
by hand no later than 8:00 a.m. on November 20, 1996.
Dated: Newark, New Jersey
November 14, 1996
s/_Dicki R. Debevoi
. U.S.D.J.
43a
IN THE UNITED STATES DISTRICT COURT
FOR THE-DISTRICT OF NEW JERSEY
Civil No. 96-5280
A.S. GOLDMEN &
COMPANY, INC.,
Plaintiff,
TRANSCRIPT
Vv. OF
PROCEEDINGS
NEW JERSEY BUREAU OF
SECURITIES,
Defendant.
Newark, New Jersey
November 20, 1996
BEFORE: HONORABLE DICKINSON R.
DEBEVOISE,
SENIOR UNITED STATES DISTRICT
JUDGE
APPEARANCES:
SAUL, EWING, REMICK & SAUL,
BY: MICHAEL A. LAMPERT,
CARL E. AILARA, JR.,
and
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
BY: MARTIN FLUMENBAUM,
BRAD S. KARP,
Attorneys for the Plaintiff
PETER VENIERO, Attorney General of New Jersey
BY: JOSHUA T. RABINOWITZ,
TRACEY THAYER, Deputies Attorney General
For the State of New Jersey
Pursuant to Section 753 Title 28 United States Code, the
following transcript is certified to be an accurate record as
taken stenographically in the above entitled proceedings.
HOWARD A. RAPPAPORT
Official Court Reporter
45a
THE COURT: Good morning.
I have the original affidavits from the plaintiff.
Have they been filed, or shall I file these with the
original papers I got from the state? Have these gone to the
clerk's office yet?
MR. RABINOWITZ: No. I delivered two copies as
directed to your chambers in Newark yesterday.
THE COURT: All right. Let me — I'm going to add
those to the affidavits of Miss Thayer, Mr. Lane and
Mr. Barry, I think I have the originals of those and I have the
Original of yours, and we'll file all of them in the clerk’s
office. They will be part of the full record.
Could I have the appearances again? For the plaintiff?
MR. FLUMENBAUM: For the plaintiffs, Martin
Flumenbaum and my partner Brad Karp, Paul, Weiss,
Rifkind, Wharton and Garrison.
MR. LAMPERT: And Michael Lampert from Saul,
Ewing, Remick and Saul.
MS. THAYER: Tracey Thayer, Deputy Attorney
General, and with me today is Joshua Rabinowitz, also a
Deputy Attorney General.
THE COURT: All right.
I’ve read all the papers. So what would you wish to
add?
MR. FLUMENBAUM: Your Honor, just so that the
record is clear, we served this morning a copy of a reply
brief and two additional affidavits, one from Marlene Reed of
Orick, Herrington and one from Dr. Hanoch Shalit, who is
the chief executive officer of Imatec.
THE COURT: Yes, I've received those through a fax,
and I guess the state received its copy.
Mr. Flumenbaum, go ahead.
MR. FLUMENBAUM: Your Honor, on Tuesday,
November 12th at nine o'clock in the morning A.S. Goldmen
commenced suit in this court seeking a declaration that it was
lawful for A.S. Goldmen to sell Imatec securities to
customers outside of New Jersey in states which have
specifically approved Imatec’s stock for sale.
The day after we filed the suit, and that suit sought in
specific an expedited hearing before your Honor, the bureau
chief of the New Jersey Bureau of Securities issued an ex
parte cease and desist order without notice.
THE COURT: He issued it the day before and it was
served —
MR. FLUMENBAUM: Right. We didn’t know until
the next day, the 13th. — prohibiting Goldmen from soliciting
Customers outside New Jersey for sale of Imatec securities.
As you know, last Thursday we were before you and
your Honor entered an order maintaining the status quo, thus
avoiding what we maintain is serious and irreparable injury to
not only A.S. Goldmen, but also Imatec and thousands of
shareholders of Imatec.
47a
We believe the issue before the Court is fairly
Straightforward and does not require the Court to do any
substantial interference or disruption of New Jersey's
regulation of securities.
The issue is, can the New Jersey securities bureau
prevent Goldmen from selling in a nonfraudulent manner a
security which has been registered with the SEC, approved by
NASDAQ, to customers in other states which have
specifically approved those securities for sale in that state?
We respectfully submit that New Jersey’s ban on such
transactions directly burdens interstate commerce and violates
the commerce clause. It projects New Jersey regulatory
scheme into that of other states.
I think it’s significant that in the entire brief submitted
by the New Jersey securities board they have not cited a
singie case, either in New Jersey or elsewhere, where the
position taken by New Jersey has been upheld in a nationally
traded security.
Let me first address the attempt by the securities
bureau to urge this Court to abstain. We believe that the
Younger abstention, which is the only ground urged upon
your Honor, does not apply at all in this case. None of the
requirements for the Younger abstention are met.
First, there was no pending state judicial proceeding
or even administrative proceeding at the time we commenced
this litigation.
THE COURT: Well, who is — under the New Jersey
procedure, who is the first hearing officer or agency in the
litigation process?
48a
MR. FLUMENBAUM: Well, the Bureau of Securities
had the option under, I believe, Section 369, to go into a
court with notice and seek an order similar to the one that
was issued.
THE COURT: Had it done that, then Younger
abstention might well be applicable?
MR. FLUMENBAUM: Absolutely correct. They
waited until after we filed suit here, and then the agency
chief, under 367 of the New Jersey statutes, issued a cease
and desist order by himself. And the procedure for us to
Challenge that at this point would be to go back to him to ask
him to stay his own order, not the kind of procedure that one
would expect to use in terms of constitutional challenges to
the authority of the agency which is issuing the order and is
in charge of the interpretation of the statute we are in fact wae
challenging here today.
THE COURT: In its brief the state, as I recall it,
referred to either a statutory or regulatory provision which
permitted it, or which would have permitted you to obtain
immediate relief.
MR. FLUMENBAUM: You have to first go to the
agency chief himself. There is no provision, as I can read it,
as I read the statute, and Mr. Lampert has confirmed that for
me in terms of the intricacies of New Jersey administrative
law that sets a specific time for that bureau chief to determine
the issue or to issue the stay. You cannot go to a court until
after the agency has first ruled.
In any event, we were before this Court already
seeking an expedited hearing. There was no need to issue that
cease and desist order. The New Jersey authorities could have
come right before your Honor on the very issue which was
49a
already before your Honor, or they could have gone into
court in New Jersey.
What they are trying to do is sort of the reverse of
Younger, which is to take a state administrative ex parte
order and try to divest this Court of jurisdiction on a purely
constitutional issue which this Court clearly has the authority
and right and obligation, I submit, to decide.
The second Younger point obviously is that the state
proceedings must implicate important state interests.
THE COURT: It can’t be questioned the regulation of
securities is an important state issue.
MR. FLUMENBAUM: We don’t disagree with that,
your Honor. But the issue before your Honor is really one of
greater federal interest than it is of greater state interest.
We are not here dealing with the regulation of fraud
within the state. We are dealing here with the federal interest,
promoting uniformity of sales, uniformity of registration, and
I respectfully submit that in this case the federal interest is far
more important.
If you look at the O’Neal case which the bureau relies
on, you are dealing with a Philadelphia parking regulatory
system. The Court said in that case where they upheld the
Younger abstention, the federal court really had no interest in
that proceeding. The state court had a much greater interest.
I think in this case it is the reverse. The federal court
has the greater interest in making sure about — that New
Jersey regulations don’t burden interstate commerce.
50a
The third issue is the state proceedings must afford an
adequate opportunity to raise the constitutional issues.
I’ve already alluded to that. We believe that the
procedures which require us to go back to the agency at a
time when irreparable harm is clear and can’t be avoided is
a circumstance that prevents an adequate remedy within the
State administrative system.
For those three reasons I think Younger doesn’t apply,
but even, your Honor, if Younger did apply, if all those
factors were, there is an exception to Younger which the
courts are very clear about, I believe your Honor has written
about that himself, that even if all those elements are
Satisfied, abstention is not appropriate where the federal
claimants make a showing of some extraordinary circumstance
such as irreparable harm, such as the policies of the new
federal securities statute which we believe plays a very
important role in this proceeding and, unbelievably, it’s not
even mentioned by the state.
THE COURT: You didn’t mention it in your opening
brief either.
MR. FLUMENBAUM: We did discuss it during our
argument last week, your Honor. We had — we put that brief
together very quickly, as you know, because the cease and
desist order was served that morning and we came in to you,
you know, that afternoon. We did discuss that statute last
Thursday, and we indicated last Thursday during oral
argument that we intended to rely on that, and we feel —
THE COURT: What is your position with respect to
that statute? That after the time period has gone by, three or
four days from now, then everything is moot?
Sla
MR. FLUMENBAUM: Well, I think everything is
moot, that’s with respect to the sale of — to nonresidents
outside of New Jersey, but I think it is — the statute has an
importance beyond that. It shows where the policy
considerations are. It shows where the balance is. It shows
what the real interest that the state is setting forth what the
real value of those interests are.
What that statute shows is that the federal interest is
preeminent here, not the state interest, much like the old
Discounts case where the Court said we are not going to
exercise the Younger abstention because of the federal policy
in favor of arbitration. I think that that statute gives your
Honor another reason not to exercise Younger abstention in
this case.
Obviously the issue of irreparable harm, on which |
think we made an overwhelming showing what the impact of
this order would be on, on Goldmen, on Imatec, the affidavit
of Dr. Shalit’s talks about how this young company, which
has just begun trading, would — could be destroyed by this
cease and desist orde”.
THE COURT: Let me clarify what actually happened.
There has been — the original issue is all out. That
was sold out within a matter of days.
MR. FLUMENBAUM: Within one day, your Honor.
THE COURT: Now it is simply dealing in the
secondary market.
MR. FLUMENBAUM: Correct.
THE COURT: In this market do you still just offer
securities to persons outside of New Jersey in states where
you're registered?
MR. FLUMENBAUM: Yes. As of now we are
soliciting sales only in those states, only to nonresidents at
this point.
After November 23 we will be able to solicit sales
within New Jersey under the new National Securities Act.
THE COURT: Notwithstanding that other people will
be offering these same securities in New Jersey. The
purchasers of the original issues, there is nothing to bar them
from —
MR. FLUMENBAUM: There are several other market
makers. Goldmen happens to be the principal market maker
in this security right now. Its inability to transact business,
even for a day, would impact this stock.
THE COURT: You say there are other market
makers?
MR. FLUMENBAUM: There are other market
makers, but Goldmen is the principal market maker.
THE COURT: If you were knocked out, why would
the other market makers takeover have any impact on the
company?
MR. FLUMENBAUM: In the NASDAQ small market
it’s not quite so easy. Goldmen was the underwriter. It is the
most knowledgeable. It is the entity to which the other dealers
look to do the transactions, and it is the principal person
soliciting and making the markets in the securities.
53a
THE COURT: Wouldn’t New Jersey have an interest
in the secondary market where the market maker may not be
implicated in the sale? Other people are selling securities back
and forth to New Jersey residents as well as to residents of
other states?
MR. FLUMENBAUM: I do not believe there is any
indication that these securities are being sold improperly to
New Jersey residents.
THE COURT: It’s not improperly. They are being
sold. New Jersey residents will be purchasing these securities.
MR. FLUMENBAUM: Not during this period, it is
my understanding.
THE COURT: Why not?
MR. FLUMENBAUM: Because I think the other
people, the other broker/dealers who are selling Imatec
securities cannot sell in New Jersey because it is not
registered in New Jersey.
THE COURT: Yes, but people who buy the securities,
they may effect sales into people in New Jersey.
MR. FLUMENBAUM: Not on the NASDAQ market.
It wouldn’t work that way.
THE COURT: There would be no —
MR. FLUMENBAUM: You're hypothesizing a private
sale between, and that’s just highly unusual —
THE COURT: Might there not be brokers who were
well, other brokers, why wouldn’t they come into possession
of these securities and sell them to a New Jersey resident?
MR. FLUMENBAUM: I believe they wouldn’t be
permitted since the stock is not registered in New Jersey.
That could happen today from — that could hanpen
today from brokers outside of New Jersey who could try to
sell to New Jersey residents. I believe the New Jersey
securities bureau would take the position that is improper and
then the attack those brokers.
THE COURT: How would they know about it? Some
broker firm in San Francisco acquires these securities, or a
customer of theirs may have acquired the securities, they sell
them, what would — how would they know that there is an
order?
MR. FLUMENBAUM: They would find out about
that in the way they find out about other areas of violation,
through informants, through complaints from customers,
through their monitoring of securities, through their
interaction with other states.
I think your Honor’s concern doesn’t relate to the
specific issue here because there is no indication that anything
that we are doing or any result from what we are doing is
causing any harm to the State of New Jersey. It is very
theoretical.
THE COURT: Well, I just find it difficult to picture
why, just in the normal course of purchasing and selling these
securities to the secondary market, they wouldn’t come into
the possession of New Jersey purchasers?
55a
MR. FLUMENBAUM: New Jersey purchasers can
purchase those securities if it is an unsolicited transaction.
There is nothing improper about a New Jersey resident
seeking to purchase those securities on his own.
~ What New Jersey doesn’t allow is the solicitation of
those to New Jersey residents.
THE COURT: Then you will have to bring me up to
date on the law.
A broker cannot sell any security which isn’t
authorized or registered in a particular state to a person in
that state?
MR. FLUMENBAUM: Right, depending on the
security and depending on what market it trades. The law
right now is if, for example, it was a New York Stock
Exchange security, there would be no restrictions. They could
sell it — you wouldn't have to get specific registration from
New Jersey.
THE COURT: We are dealing now with over the
counter?
MR. FLUMENBAUM: Right, for NASDAQ small
cap, which are approved by NASDAQ and registered with the
SEC, there is a 25-day period in which the broker/dealer can
sell that security only to residents of states which have
approved that security for sale.
THE COURT: All right.
So then the method which —
56a
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MR. FLUMENBAUM: And that only relates
excuse me, your Honor. That only relates to solicitation of sales.
THE COURT: Yes.
MR. FLUMENBAUM: They can sell it to anyplace if
it is an unsolicited sale.
THE COURT: All right.
MR. FLUMENBAUM: That goes to the issue of what
is the New Jersey interest here.
New Jersey concedes in its brief that Goldmen can sell
to New Jersey residents in nonsolicited transactions, can seli
to broker/dealers, can sell to financial institutions, can put
brokers outside of New Jersey and sell to customers located
in other states, and all we are talking about is a situation
where in two days, two business days from today they are
going to be preempted by federal law from any restriction,
both within New Jersey and outside of New Jersey.
THE COURT: All right. We are talking about this
interval between the original issue and the cutoff date of the
new statute. But from the —
MR. FLUMENBAUM: The new statute —
THE COURT: I let you talk, let me talk a second.
From New Jersey’s perspective they can envision these
securities coming into the possession of New Jersey residents,
and has some interest in protecting New Jersey residents.
Whether or not it is solicited by brokers, New Jersey
residents may have read about it someplace and say I would
like to buy some of those securities, and then from day one
57a
they could purchase those securities if they went and
requested the broker to sell it to them.
So you could have securities coming into the
possession of New Jersey residents.
MR. FLUMENBAUM: That would be perfectly
lawful.
THE COURT: But that’s not the point. It’s lawful, but
they, nevertheless, New Jersey residents, will be holding
these securities. Lawfully.
MR. FLUMENBAUM: Lawfully.
THE COURT: But as the state has an interest in
protecting them, and sometimes you can take a bath even
lawfully when you buy securities.
All right, go ahead.
MR. FLUMENBAUM: But the issue here, remember,
I think is very important to emphasize, there is no claim that
these sales are being done in any fraudulent manner. And the
issue that we have sought a declaration on has to do with
sales to residents outside of New Jersey, in states in which
those states have specifically approved those transactions.
So what we have here is New Jersey imposing its
regulatory will on nonresidents and saying to those
nonresidents, you have to pass two regulatory hurdles. You
have to be not only approved in the state in which you reside,
but you have to also be approved by the New Jersey
regulatory scheme.
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That is inappropriate. I thi-* it’s a direct burden on
interstate commerce, and I think it _ « liscriminatory burden.
So under any of the standards used by the Supreme
Court and the Third Circuit, I think that that violates the
commerce clause.
Then when you impose on that the balancing tests in
which you talk about what are the interests involved, and you
superimpose on that balancing the fact that the key here is the
sales to nonresidents, outside of the state where New Jersey
really does not have a primary interest in protecting those
residents, and then you superimpose federal regulation which
encourages market efficiency and uniformity and diminishes
the role of the state in terms of the registration process, not
in terms of the regulation of fraud, and I think that the state
ignores the fact that it has significant responsibilities with
respect to any sales that go on in New Jersey if they are done
fraudulently, and we are not suggesting that they don’t.
The only issue here has to be — is the issue of selling
in a nonfraudulent way to residents outside of New Jersey. It
is a very narrow issue.
As applied in this case, I think the commerce clause
analysis just dooms what the securities bureau is attempting
to do.
THE COURT: All right, let me hear from the state,
Ms. Thayer or Mr. Rabinowitz.
MS. THAYER: If it is satisfactory with you,
Mr. Rabinowitz will speak to the commerce clause issues and
I will handle the others, and I don’t know if you prefer one
or the other of us to go first.
59a
ee :
THE COURT: Why don’t we take abstention first and
get to the commerce clause issue if I have to abstain.
MS. THAYER: We obviously feel the Younger
abstention doctrine does apply in this case.
Cease and desist was issued. It is not specifically ex
parte as they claim, because that’s the way they are always
issued. The bureau chief has the authority to issue an order
such as that to stop behavior that the bureau feels is
potentially damaging.
THE COURT: What immediate relief could the person
get, the entity get, which would present the constitutional
issue and could be decided by the state in an authoritative
manner in time to prevent all the injury which the state claims
it might have?
MS. THAYER: They can seek relief through the
bureau chief. It can be done on an expedited basis. If they are
not happy with what the bureau chief decides, they have all
the regular rights of appeal from that point.
THE COURT: But how long would that take?
MS. THAYER: It could be done as quickly and as
expeditiously as this was. They can seek emergency relief.
It is set out clearly in the regulations and in the statute.
THE COURT: You cited something in your brief, but
I forget what it was, give me the — you Say it is a statutory
provision?
MS. THAYER: New Jersey Administrative Code
provision.
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THE COURT: Would you tell me what that says?
MS. THAYER: That is the one that gives that
procedure for emergent relief.
THE COURT: Give me a copy. Let me see what it
says.
MS. THAYER: It is 1:1-12.6.
MR. FLUMENBAUM: The relevant provisions would
be B and C of that statute, your Honor.
THE COURT: I’ve only read A. I’m a slow reader.
(Pause. )
THE COURT: All right. Thank you. Yes, go ahead.
MS. THAYER: Given that, your Honor, it is the
state’s contention that Goldmen has sufficient remedies to not
pursue the Younger abstention doctrine.
We think the cease and desist order was considered
coercive. We think it was issued with a substantial basis and
they have the right to appeal that.
They were on notice that a cease and desist was
potentially going to be issued, I believe as early as Friday,
November 8.
THE COURT: But that was long after they had
already sold the stocks.
MS. THAYER: That’s true. We did not find out that
they sold the stock until November 7.
6la
THE COURT: According to their affidavit, they
informed you during the negotiation of the consent decree that
that’s what they planned to do, they planned to withdraw the
New Jersey application and consent to the fact that they were
not exempt under certain provisions of the New Jersey statute
and that they would sell just to out of state people.
MS. THAYER: I’m not aware that the bureau
representatives were told that, but even if they were, it says
nowhere in the affidavit that they were told it was going to be
sold from New Jersey.
Goldmen had an office in New York for quite awhile.
It did close during the summer. There is no reason to believe
they couldn’t have opened another office in another state to
sell these securities.
The fact they may have been going ahead to sell it
doesn’t necessarily mean they were going to sell it from the
State of New Jersey.
THE COURT: All right.
Yes, that’s it on abstention?
MS. THAYER: I can go on.
THE COURT: Yes, go on. Give me more.
MS. THAYER: I think that certainly important state
interests are implicated in this matter, and that would hit on
the second prong often Younger abstention test.
As we pointed out and as has been agreed, the
regulation of securities is an important issue for the State of
SERGE PEI TET LIER TO REL LAER CIN ISLE RIE S PRTETRE RE I AI Ee ATT 9 SMe NE a
New Jersey to deal with, and there are certainly interests to
protect the public that need to be considered here.
In terms of — Mr. Flumenbaum’s argument that in
order to get proper relief he would have had to use Section 69
of the New Jersey Securities Act, I disagree. That is usable
when we want to go to Superior Court to seek an injunction.
The bureau chief has the power to issue cease and
desist orders as well as many other remedies against possible
violations of the law and if it is decided at that point the
bureau chief is going to do that, the cease and desist at that
time.
The option of us waiting the 20 days in response to
their filing the complaint for declaratory judgment would have
rendered some of our action moot because sales would have
continued during that entire 20-day period if we waited the
20 days to answer, even if we came to you with an answer on
the declaratory judgment within the 20 days.
THE COURT: Why couldn’t you have gone into state
court for immediate relief?
MS. THAYER: We could have, but we can also issue
the cease and desist, which is a very quick way to tell
Goldmen that we didn’t think they should be selling that stock
from New Jersey.
THE COURT: This is quite different from Williams
against Red Bank Board of Education. There you had an
ongoing administrative proceeding. It would have been
referred to the commissioner of higher — the commissioner
of education would have referred it to an administrative law
judge. You had a regular judicial kind of proceeding
underway.
63a
MS. THAYER: I agree with that. I also believe the
issuance of a cease and desist began the administrative
proceeding.
THE COURT: That was after the complaint was filed
here.
MS. THAYER: They were served after the complaint
was served in our office. I believe the complaint was filed
8:30 Tuesday morning and was delivered to us at 4:30 or so
in the afternoon. The cease and desist had been signed.
As I said, they were put on notice that the cease and
desist was very likely to occur.
THE COURT: All right.
MS. THAYER: As to the third prong, that state
proceedings must afford an adequate opportunity to deal with
their issues, the cases I cited in the brief that state courts will
handle constitutional issues and that in fact it is often a
priority and a preference to have to go through the
administrative process so the administrative agency can use its
expertise and knowledge of the field to set out, at least, the
basic positions of that agency.
They have a better knowledge of the subject matter
and they are more experienced with that topic.
I would also like to point out, as plaintiff mentioned,
that there are several other market makers in this stock right
now. So I believe that their irreparable injury claim is
softened considerably by that fact.
Goldmen is not prevented from doing any other
business in that time if it is not the Imatec securities.
64a
Goldmen can also sell to dealers and people can buy and sell
if they are soliciting Goldmen. They can buy and sell the
shares of Imaiec.
THE COURT: All right, good. Thank you.
Mr. Rabinowitz, what about the commerce clause?
MR. RABINOWITZ: Yes.
I think the Supreme Court precedence and from this
Court’s holding in cases like CCC Franchising, it’s clear that
there is no direct burden on interstate commerce here.
Those cases all involve where you — a state regulation
regulates conduct that occurs wholly outside of the state.
One thing is obvious here, what we are regulating is
active teams of broker/dealers located in New Jersey. All
that’s going on here is that the state is extending to
nonresidents the same protection it extends to residents.
THE COURT: What business is that of this state if the
other states say we have given you the protection we think
you need? Why should New Jersey come and say we think
you need more protection than California thinks you need?
MR. RABINOWITZ: I'll answer that in two
responses. It relates to the commercial reputation of New
Jersey. New Jersey has been known as a place where there
are penny stock manipulators. As a result of that —
THE COURT: There is no allegation of that here.
MR. RABINOWITZ: No, but you don’t need that.
65a
THE COURT: You don’t like their income flow of the
last couple of years, and maybe it’s a blind issue. I don’t
know whether that is part of your thinking or not.
MR. RABINOWITZ: The question is whether New
Jersey can take prophylactic measures to insure the business
reputation of New Jersey.
The business reputation of New Jersey is certainly
affected if as a general matter people —
THE COURT: I like your phrase, prophylactic
measure, because that would permit you to do practically
anything, on the bare possibility that something wrong might
be going on.
There is nothing practically that couldn’t be justified
under the theory that this is a prophylactic measure. I think
that is a very apt phrase to describe what’s happening here.
MR. RABINOWITZ: No, and that was clearly upheld
by the Court in the N-Tex case, the case we cited which was
directly on point, where Texas — the Texas appeals court
upheld the identical regulation with respect —
THE COURT: But in a different context.
MR. RABINOWITZ: In the only — the only — it was
a security in Texas. They basically said Texas has an interest
-let me read from — “interest preventing fraudulent conduct
within its borders, which includes interests in taking
precaution as to prevent fraud.”
That was a case where the exact regulation at issue
here was at stake, whether or not someone within Texas could
Sell to out of state residents a security that was not registered
in Texas.
The Court held that Texas has sufficient interest in
protecting its reputation and protecting Texas residents to
uphold that regulation.
If you look at the other two cases which are not
directly on point, which would be the Resource Oil case and
the Newsome case, where the issue was whether or not a state
can regulate broker/dealers who can — require registration of
broker/dealers who claim they only sell out of state
customers. In that case both courts had no problem Saying
yes.
Now, basically the people out of state who want to
buy that security. In fact, one of the cases, the evidence is
quite clear in the — Court decision was quite clear, I’m
sorry, and that the — they are only selling securities which
qualified for registration in the other states.
They said that doesn’t matter. You're selling from our
state. You have to be registered here even if all you're selling
is what goes out of state.
THE COURT: What about the effects of the new
statute?
MR. RABINOWITZ: I don’t see —
THE COURT: I guess that would not affect the
original issue. That would affect the secondary market.
MR. RABINOWITZ: Indeed, when we leave federal
court we can bring civil charges. Purchasers during this
period can seek rescission for whatever occurred while it was
67a
legal in New Jersey because there was no preemption by
federal law.
I don’t see how the federal government’s change of the
law has any effect on this, except whether at some point, you
know, the injunction, our injunction has to dissolve because
of preemption issues.
If we look at the issue of direct regulation, which I
wanted to go through the three steps here, if you look at
direct regulation, there is no basis for saying there is direct
regulation of commerce.
THE COURT: Let me just tell you, I have trouble
with the word “direct.” I know some Courts use it. To me it
states a conclusion. After going through the analytical process
in some circumstances, you say this is direct, the other is
indirect, therefore it can’t go.
You've got to go beyond direct and indirect.
MR. RABINOWITZ: There is no basis — well, when
relying on — what I’m relying on are the cases which discuss
direct. It has to be regulation of commerce that occurs wholly
outside of the state.
This is a case where we are regulating commerce that
occurs within New Jersey. There is no dispute.
This is not where New Jersey is trying to say in any
way that because we have registered in New Jersey, people in
Pennsylvania can’t buy from Pennsylvania brokers. They
certainly can.
This is not in any sense a case where we are claiming
we have a vote to power over what happens in other states.
68a
It is not like we have in some of the takeover cases. That is
the point I want to make.
There is no case anywhere that I’m aware of which
Says that this is the type of statute which requires per se
invalidation because it is a direct regulation.
We do not try to affect what happens in other states.
We are affecting transactions between New Jersey brokers
and out of state people.
What we are all really doing here is extending the
same protection to nonresidents that we have extended to
residents. Indeed, that is a standard feature of the law.
It is not as if New Jersey has a thing that certain
products are deemed dangerous to New Jersey residents. They
are not protected if they come into New Jersey courts.
That raises, as we suggested, I haven’t looked into the
detail, the privilege and immunity problem, to Say we cannot
do what we are trying to do here.
THE COURT: You can put it the other way. You are
preventing residents of other states from having the
Opportunity to receive offers with respect to this New
Jersey —
MR. RABINOWITZ: And when New Jersey — when
New Jersey extends to other states, the residents of other
States who purchase dangerous products in New Jersey —
THE COURT: There is nothing to establish this
product is dangerous. It is only established that they haven’t
registered in New Jersey.
69a
MR. RABINOWITZ: The reason that New Jersey
denies registration is basically the judgment by the New
Jersey bureau that these products don’t seem to be the types
of products that should be put into commerce in New Jersey.
It is not like —
THE COURT: You are preventing it from being put
in commerce outside New Jersey.
MR. RABINOWITZ: We have no effect on that.
THE COURT: Oh, sure you do. It’s been approved in
California, and here somebody in New Jersey can’t sell to
California people. That’s outside New Jersey.
MR. RABINOWITZ: In Pike, the Supreme Court
there said that Arizona clearly has legitimate interest from
preventing unfit produce. It didn’t necessarily mean
contaminated, from leaving Arizona to protect its commercial
reputation.
I don’t see that what New Jersey is doing is preventing
the same type —
THE COURT: This isn’t forbidden fruit, as far as we
know.
MR. RABINOWITZ: I’m saying the state can take no
measures to determine or to qualify what it thinks is a proper
security.
It is quite clear the merits review, which to some
extent is at issue here, has been up held by the federal courts.
sei ne
The federal securities law clearly gives states the
rights to impose higher standards on the securities that they
are allowing in their states.
The North Star case, which I cited, which did that. In
North Star the precise issue did not come up because there is
no allegation of sales to other states. The case did uphold
merits review.
This is simply an incidental effect of merit review. It
is extending New Jersey had to determine that certain security
upon looking at them and upon other facts are not fit for New
Jersey residents.
THE COURT: You haven’t made such a finding here.
All you made was a finding that they have withdrawn their
application for registration. Therefore we are going to
prohibit sales to people outside of New Jersey where the sale
has been approved.
MR. RABINOWITZ: But in that case anyone who is
afraid of such a finding can simply withdraw their registration
and start selling out of state. That would be too easy for
people who want to sell the commercial reputation of New
Jersey.
I would like to say something about the Media
Products which they rely on. First of all, I would like to say
I misspoke about Media Products in my brief, because I said
the Court should have held it was a direct regulation of
interstate commerce. It did hold that.
It then went to the Pike balancing test as an alternative
holding. There the Court was only willing to find that
Arizona’s commercial reputation is not at stake in a case
where the relationship to commercial reputation is far more
tenuous than here.
In that case you have an Arizona corporation who had
a public offering which was being distributed solely by out of
state brokers.
There the Court would only say that there was no
threat to New Jersey commercial reputation based on the fact
that the company disclosed its special prospectus, that Arizona
did not qualify the security and, further, that Arizona was
going to bring a lawsuit about this sale.
Here there is nothing in their prospectus which
discloses that. New Jersey’s reputation is clearly on the line
here.
Furthermore, in cases like this, the Supreme Court has
warned the Courts, and the Third Circuit to some extent has
gone further, that this Court should not second guess state’s
views of the purposes of their legislation, whether it would
satisfy the purpose of the legislation.
That was in CTS commenting on Edgar, which to
some extent was based on Professor Fischel’s shells views of
how good takeovers were. They said if states don’t accept
Professor Fischel's shells views, that’s the state.
In the Third Circuit there are three standards of
review. One is highly deferential review, which occurs where
the state has important interests at stake. The regulation of the
securities market is an important interest of the state. They
have just conceded that point. That point is, you know, is not
in dispute. ;
72a
It is New Jersey’s view that in order to protect that
reputation it has to make certain that securities which it does
not think are fit, that it will not register, cannot be sold
through New Jersey. If you want to sell to New Jersey you
have to go through the registration process, and they simply
did not do that.
I mean, there is no case anywhere which begins to
support their view of the commerce clause. There is no case
anywhere. I gave the triumvirate of Newsome, N-Tex and
The Resources, which was directly on point.
The only possible basis for distinguishing it, which |
don’t think is really right, is that the securities included land
in Texas. That had nothing to do with the interest in fraud,
which is what the real holding was in the case. And the other
Cases were right on point in terms of broker/dealers have to
be registered even when they want to sell securities that
qualify for sales in other states.
All those cases held that a state has a legitimate
interest in extending — in extending those laws to sales from
the state outside of the state.
Again there is nothing here about a veto power on
anything. Goldmen can, it has offices in other states, sell in
another state. It just doesn’t happen to have an office there.
There is hardly any effect on interstate commerce at
all, let alone a discriminatory one. There are other market
makers in this security.
Even if — it is just hard to see where there is anything
which begins to prop up their claim. I'll be glad to answer
any questions the Court has.
73a
THE COURT: I have a question for Mr. Flumenbaum.
The argument here is, as I understand it, that
regulations of securities industry is an important state interest,
and I think it clearly is.
In order to determine whether or not a sale of
securities is fraudulent or improvident in some other respect,
there has to be registration, and New Jersey has an interest in
not permitting fraudulent or otherwise improper sales by
people selling securities from New Jersey.
Why isn’t that an important interest which requires
that anybody who wishes to sell securities or an original issue
from New Jersey be required to register?
MR. FLUMENBAUM: Well, what we have here is
not that stark an issue, because as we talked about before,
New Jersey allows sales to New Jersey of unsolicited
transactions. There is nothing that prevents it.
What we have here is New Jersey — and I think
Mr. Rabinowitz made the argument against the state’s position
more effectively than I may have done, because he talked
about how they keep extending their own protections, their
own regulations to nonresidents. That’s precisely what the
commerce clause —
THE COURT: They are only regulating the
New Jersey broker.
MR. FLUMENBAUM: What they are doing is
preventing the New Jersey broker from selling the securities
in which there is no allegations of fraud, that’s been
registered with the SEC and NASDAQ —
A ears ee ry
THE COURT: They don’t know that there is no fraud.
There is no allegation of fraud.
But under your theory the most fraudulent dealer could
start selling securities out of New Jersey all over the United
States and there is no way that the Bureau of Securities will
know about it unless they are required to register.
MR. FLUMENBAUM: No. They would have the
authority under their own regulations, because of their
regulation of the broker/dealer within the state, and gives
them the authority to go after that broker/dealer for fraudulent
sales practices. That they always have, whether the securities
are being sold outside or inside the state.
THE COURT: That is closing the door after the horse
escaped.
MR. FLUMENBAUM: I don’t think so, your Honor.
That’s the way most security regulations occur.
What you have here is they are using the registration
process improperly in order to impose its views of the
security on a national market, and that’s precisely what the
interstate commerce provision, you know, prevents.
We are only involved with securities that are
registered by the SEC. We are talking about a security that is
on NASDAQ, that has been approved and qualified in
16 states and is being sold to those 16 states.
If they believe these transactions are occurring to
nonresidents, I believe they have authority under their
regulation of the broker/dealer to seek to deal with that. We
are not challenging that.
75a
What we are challenging is the per se ban that they
have in trying to sell a lawful item to a nonresident and
imposing a New Jersey registration requirement on states
which have their own registration requirements and which
permit their own residents to purchase that security. What we
are saying is that is improper.
This is a very different situation than N-Tex and those
oil and gas lease cases that Mr. Rabinowitz relies on. All of
those cases involve securities that were not nationally sold.
These are oil and gas lease interests that are being called
securities and are defined as securities. There is no indication
that the states in which they were being sold had approved
those transactions in any of those cases. Fraud is clearly the
concern in each of those decisions.
The Florida case doesn’t even involve the issue of sale
to nonresidents. It involves whether a Florida seller has to be
registered.
There is no dispute in this case that Goldmen is
properly registered.
Newsome was a jurisdictional case. In those cases,
they are fraud cases involving oil and gas leases within the
state which has regulated it. Very different from this kind of
case.
The Arizona Media Products case is directly on point.
Despite Mr. Rabinowiz’ attempt to suggest it is wholly
outside Arizona, the Court there specifically found that the
offering of the stock and the sale of the stock was, quote,
from Arizona. The contacts were sufficient. Just the same
position that New Jersey is taking.
It then went on to find that having determined it was
from Arizona it violated the interstate commerce clause, and
it violated it as a direct burden and under the Pike balancing
test.
With respect to abstention, there was no ongoing
proceeding. If you look at the O’Neal case or Red Bank, the
people were using federal lawsuits as a means of appealing or
interrupting ongoing state proceedings. That is not our
position here today.
The adequacy of the agency had appealed. If you look
at the section Miss Thayer handed up to you, there are no
time limits in that section. There is no procedure for
expedition. There is no requirement as to timing.
It is totally within his discretion and he is — in a
situation where there is irreparable harm that can occur, this
effectively diminishes the act to protect the constitutional
interest.
THE COURT: All right, let me put an opinion on the
record.
Mr. Rabinowitz, do you have something to say?
MR. RABINOWITZ: Just two quick things.
In Newsome the District Court reached the conclusion
that despite the defenses assertion that they only often sold
securities to nonresidents in accordance with the laws of their
respective states, with respect to Media Products, what the
Court — there are two important points to notice.
The Courts found that was a sale from Arizona, that’s
correct. That was important because in later cases, Chrysler
77a
ae ee eee ee TE A Ee nN SD A TT
Credit Corporation case in the Southern District of New
York, they were able to use that from fraud, distinguish it
from fraud.
If all the agents are outside the state, Arizona still has
the power to regulate the fraud because it is from their person
in Arizona. The links to interstate commerce, I mean, the
links to the state’s reputation were far more tenuous there,
and the Court did not say there was no link to notice that this
company had fully disclosed all of Arizona’s opposition to the
offer. Thank you.
THE COURT: I'll put an opinion on the record,
reserving the opportunity to make any nonsubstantive
corrections after I have received the original copy of the
transcript.
Plaintiff A.S. Goldmen is a securities broker
dealership and investment bank organized under the laws of
New York and has its principal place of business at 99 Wood
Avenue South, Iselin, New Jersey. Defendant New Jersey
Bureau of Securities is a regulatory agency that administers
the Uniform Securities Law, and is an agency of the New
Jersey Department of law, Division of Consumer Affairs.
This action arises out of the initial public offering of
securities of Imatec, Ltd., for which A.S. Goldmen serves as
underwriter. Imatec is incorporated in the State of New York
and is located at 150 East 58th Street, New York City. It
develops, designs, markets and licenses image reproduction
and enhancement technology.
Imatec, Ltd. filed a registration statement and
subsequent amendment with the Securities and Exchange
Commission on May 13, 1996 and on May 21, 1996 filed an
78a
application with the Bureau for registration by coordination
pursuant to N.J.S.A. 49:3-61.1.
During its investigation the Bureau issued a comment
letter dated June 26, 1996 seeking additional information.
Underwriter’s counsel, the firm of Orrick, Herrington and
Sutcliffe, responded by letter dated July 9, 1996.
Because of a concern about the financial conditions of
Imatec, among other things, the Bureau notified the
underwriter’s counsel that it was considering the issuance of
a stop order pursuant to N.J.S.A. 49:3-64. By way of letter
dated August 7, 1996, the Orrick firm asked that the Bureau
not enter such an order. By letter dated August 8, 1996, it
requested permission from the Bureau to withdraw Imatec’s
application for registration in New Jersey, simultaneously
agreeing to the entry of a consent order which denied certain
specific exemptions under the New Jersey statute.
A formal notice of withdrawal was issued by the
Bureau dated August 13th, 1996 granting Imatec’s request for
withdrawal. The consent order was entered on October 23,
1996, denying specific exemptions. The registration filed with
the SEC for Imatec became effective at 4 p.m. October 28,
1996. The consent order did not, as the Bureau originally
contended, bar plaintiff from selling or offering Imatec’s
securities from plaintiff's office in New Jersey to residents in
other states where such securities are qualified. During
discussions with the Bureau concerning the consent order,
plaintiff's attorneys advised the Bureau that it intended to
make such sales. Plaintiff's attorneys were not advised of the
Bureau’s position until November 7, 1996, 15 days after the
consent order was entered into and nine days after plaintiffs
began making such sales.
79a
In any event, Orrick submitted a final Blue Sky
memorandum on October 29, 1996 stating that sales of Imatec
could be made subject to certain conditions in the following
states: California, Colorado, Connecticut, Maryland, Nevada,
New York, Rhode Island, Utah and Wyoming. Goldmen
began selling Imatec stock at 9:30 a.m. on October 29, 1996
with the initial offering sold fully by 2:49 p.m. that
afternoon. Goldmen then began trading in the after-market.
When A.S. Goldmen began selling the Imatec offering
at 9:30 a.m. on October 29, 1996, it programmed its trading
computers to block sales of Imatec securities to residents of
States, including New Jersey, in which Imatec was not
qualified for sale. A.S. Goldmen brokers also were told by
the firm’s compliance department that Imatec’s securities
could not be sold to New Jersey residents or to residents from
any other state where the securities had not been qualified for
sale.
After the Imatec offering was fully sold, A.S.
Goldmen began trading in the Imatec after-market. As a
NASDAQ market maker, A.S. Goldmen stands willing to
make a market in Imatec along with certain other brokerage
concerns and continues to buy and sell its securities. If the
Bureau’s cease and desist order is given effect, it will no
longer be able to fill the role of principal market maker. The
absence of this principal market maker would most likely
have a substantially adverse effect upon the purchases of the
Imatec stock and most likely would have a severe adverse
effect on Imatec, if not having the effect of destroying its
business. ;
Plaintiff's counsel were informed on the afternoon of
Friday, November 8, 1996 that the issuance of a cease and
desist order was likely. Such an order was issued by the Chief
of the Bureau of Securities pursuant to N.J.S.A. 49:3-67(a)
80a
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at 4:15 in the afternoon of Tuesday, November 12. It was
served upon plaintiff the following day, November 13.
On November 12 plaintiff filed its complaint and
sought an order requiring the Bureau to show cause why an
order should not be granted declaring that (i) the New Jersey
Securities Act, as applied to securities that were not registered
or exempt from in registration in New Jersey and were sold
by brokers located New Jersey to residents of states (other
than New Jersey) in which the securities were qualified for
sale, violates the commerce clause of the United States
Constitution; and (ii) that the New Jersey Securities Act does
not apply to securities that were not registered or exempt
from registration in New Jersey and were sold by brokers
located in New Jersey to residents of states other than New
Jersey in which the securities were qualified for sale.
An emergency hearing was held on November 14, at
which time I issued temporary restraints against the Bureau
and scheduled a hearing on plaintiff's application for
preliminary injunctive relief on November 20, 1996.
It is plaintiff's contention that the Bureau’s order,
which forbids it to sell securities from New Jersey to
residents of states in which the securities are qualified for sale
violates the commerce clause of the United States
Constitution. Plaintiff relies principally upon Edgar v. Mite
Corp., 457 U.S. 624 (1982).
The Bureau contends the Court should abstain from
hearing this case on Younger abstention grounds, see Younger
v. Harris, 401 U.S. 37 (1971) and its many progeny; and that
in any event, upon application of proper balancing principles,
the action of the Bureau did not violate the commerce clause,
relying principally upon Pike v. Bruce Church, Inc., 397 U.S.
137 (1970).
8la
As to the Younger abstention contention, the doctrine
is currently recognized as being fully applicable to civil
proceedings in which important state interests are involved.
Middlesex County Ethics Committee v. Garden State Bar
Association, 457 U.S. 423 (1982).
In that case the Court enunciated the three
requirements for the application of the Younger abstention
doctrine: 1) the existence of an ongoing state proceeding
which is judicial in nature; 2) the implication of important
State interests; and 3) an adequate opportunity to raise
constitutional challenges in the state court proceedings.
I conclude that only one of these criteria is applicable
in this case. As to the first, the existence of an ongoing state
proceeding which is judicial in nature, such a proceeding was
not ongoing at the time that the complaint was filed. A cease
and desist order was issued shortly after the complaint was
filed, but even the issuance of that order in my judgment
would not constitute an ongoing proceeding which is judicial
in nature. ‘
It is totally unlike the situation which prevailed in
Williams v. Red Bank Board of Education where formal
proceedings were underway and in which the plaintiff could
have asserted her federal contentions.
I conclude that there are important state interests
involved in the case. Broadly speaking, this concerns the
regulation of securities sales, and that is a subject in which
obviously the state has an important interest.
As to an adequate opportunity to raise constitutional
challenges in the state proceedings, ultimately the plaintiff
here could have raised constitutional issues following the
proceedings proscribed in the statute and the regulations.
82a
Ultimately it might have gone to an administrative law judge
and ultimately an appeal would be available through the
courts of New Jersey up to the New Jersey Supreme Court.
However, the time that would have been required to
accomplish that purpose would have made it all academic and
any federal contention would not be raised in time to do the
plaintiff any good whatsoever, that is, if there were an
adequate opportunity to raise constitutional challenges, which
I think there were not. The case is also within an exception
to the abstention doctrine.
As I stated in New Jersey Philadelphia Presbyteria v.
New Jersey State Board of Education, 482 F. Supp. 968,
(1980), “The United States Supreme Court has consistently
recognized that the Younger doctrine of abstention will not be
applied in extraordinary circumstances where there will be
great, immediate and irreparable harm if the federal court
does not intervene.”
That case was affirmed in a citation which I don’t have
with me at the moment. The ruling on abstention was
affirmed in a majority opinion on the ground that all parties
in the federal proceedings were not before the Court in the
state proceedings, and the concurring opinion agreed that the
Younger exception was applicable. Clearly, the Younger
exception, if we get that far even, would be applicable in this
case.
I have examined the Administrative Regulations to
which counsel for the Bureau had referred me, namely,
N.J.A.C. 1:1-12.6, and it is quite clear that the emergent
relief required in this case would not be available under the
proceedings defined in that Administrative Code.
83a
There is no assurance that timely actions could be
obtained. Initially application would have to be to the Bureau
Chief who would be most unlikely to grant it having just
issued a cease and desist order, and relief from his ruling
could not conceivably proceed with the alacrity that would be
required to avoid injury which the cease and desist order
would impose.
Consequently, I conclude that the Younger abstention
is not applicable and I am required to proceed to the other
issue, the principal issue in the case, which is whether the
imposition of the New Jersey cease and desist order in the
circumstances of this case would violate the commerce clause.
The general rule of law is set forth in Edgar v. Mite
Corp., 457 U.S. 624 (1982). There the Court restated the
Pike v. Bruce Church, Inc. standard, which is that not every
exercise of state power with some impact on interstate
commerce is invalid. A state statute must be upheld if it
regulates evenhandedly to effectuate a legitimate local public
interest, and its effects on interstate commerce are only
incidental unless the burden imposed upon such commerce is
clearly excessive in relation to the putative local benefits.
The commerce clause, however, permits only
incidental regulation of interstate commerce by the states,
direct regulation is prohibited, and therefore the balancing test
is required in each case.
It is clear to me in this case that the regulation
imposes an undue burden on interstate commerce utilizing the
Pike v. Bruce Church criteria. The statute here purports to
regulate the sale of securities by a New Jersey broker. The
sales which it purports to regulate are those which are of a
security which had been registered with the SEC, approved by
NASDAQ and approved by each of the other states in which
the securities are to be sold.
In this situation where no sale will be made to New
Jersey residents, New Jersey is reaching out to prohibit a sale
which takes place in a national securities market, one which
is regulated by each state to protect its own citizens, and one
which is initiated by registration with the SEC.
The state’s overall interest in securities regulation is
substantial. Its interest in this particular application of its
regulation is highly insubstantial. It purports to be concerned
by the reputation of the State of New Jersey as a boiler shop
pouring fraudulent securities into a national market, but there
are no allegations of fraud here. The securities have been
examined by the jurisdictions in which they are to be sold,
and the effect simply is not to prevent fraud. It is simply to
prevent the consummation of sales of securities in a national
market.
Thus the interest of the state is minimal in these
circumstances and the impact upon the national securities
market is very substantial indeed. Consequently, I think it is
an impermissible application of the New Jersey Securities
Act.
That brings us to the question of whether injunctive
relief should be granted. Injunctive relief is granted when four
criteria are met. There must be irreparable injury. The
interests of other persons and the defendant must be weighed,
the interest of the public must be weighed, and there must be
a likelihood of success on the merits.
I have concluded that there is a likelihood of success
an the merits as I have just stated. There would be irreparable
injury to the market maker, the plaintiff in this case, because
85a
it would remove it from the critical role it is playing in the
sale and distribution of these securities.
The impact upon the Bureau is negligible. These are
not securities which are being sold to New Jersey residents in
whom it has a primary interest. It has minimal interest in
giving added protection to purchasers in states where the
purchasers are already protected by those state’s regulatory
mechanism and where a national agency, the SEC, and where
NASDAQ have previously been vehicles for registration of
the securities.
Consequently, the injury to the Bureau I would say is
nonexistent. Weighing the interest of other parties, the
company involved here, Imatec, would likely suffer very
substantial injury if the sale and distribution of the securities
were impaired, interfered with. These injuries are spelled out
in more detail in the affidavit of Dr. Hanoch Shalit which was
filed with the Court this morning. That affidavit details the
business circumstances of Imatec, Incorporated, the
consequences of implementation of the cease and desist order,
and I accept those representations as being correct.
The public interest is also implicated. The public
interest here is preserving the free flow of commerce under
the Constitution of the United States, and consequently the
public interest points in the direction of granting injunctive
relief.
Consequently, a preliminary injunction will be entered
and the further development of the case can await motions or
other applications by any of the parties.
Do you have an order?
86a
MR. FLUMENBAUM: We do not, your Honor, but
I will — we do, I’m sorry, we do.
THE COURT: I don’t know what would be required
by way of a bond. I don’t see any particular damages, but
technically I have to require a bond.
Why don’t I order a $10,000 bond.
Mr. Rabinowitz, do you see any likelihood of
monetary loss to the state? I can’t see that you’re going to--
MR. RABINOWITZ: Let me speak to my client.
THE COURT: Yes, all right. (Pause. )
MR. RABINOWITZ: A $10,000 bond will be
acceptable.
THE COURT: All right, that will cover any expenses
or costs.
MS. THAYER: I have a question.
I haven’t read through the preliminary injunction shun.
We do have an ongoing investigation of Goldmen.
Pursuant to that we scheduled some depositions of agents and
some of the principals.
Do you believe that the injunction will prohibit those
depositions from going forward?
THE COURT: No, I wouldn’t think so. Would you?
MR. FLUMENBAUM: No.
87a
THE COURT: You are free to make any irivestigation,
and if something turns up, come back.
I’ve changed the first paragraph to read, “Plaintiff is
likely to succeed on the merits of its contention that the
application,” et cetera. -
I’m not making a final determination in this regard.
That can await any further hearings.
I put in a provision for a bond in the amount of
$10,000.
All right, here it is, and, Miss Thayer, I can return —
MS. THAYER: I'll come up after we are done. Thank
you.
THE COURT: All right. Good. Thank you very
much.
88a
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
97-5618
A.S. GOLDMEN & COMPANY, INC.
v.
NEW JERSEY BUREAU OF SECURITIES,
Appellant
SUR PETITION FOR REHEARING
) Present: BECKER, Chief Judge, SLOVITER,
) STAPLETON, MANSMANN, GREENBERG, SCIRICA,
NYGAARD, ALITO, ROTH, LEWIS, McKEE,
and RENDELL, Circuit Judges, and
GARTH, Senior Circuit Judge”
The petition for rehearing filed by appellant in the
above entitled case having been submitted to the judges who
participated in the decision of this court and to all the other
available circuit judges of the circuit in regular active service,
and no judge who concurred in the decision having asked for
rehearing, and a majority of the circuit judges of the circuit
EE
’ As to panel rehearing only.
89a
in regular active service not having voted for rehearing by the
court en banc, the petition for rehearing is denied. Judge
McKee would have granted rehearing.
By the Court,
/s/__ Samuel A. Alito, Jr.
Circuit Judge
DATED: February 9, 1999
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CONSTITUTIONAL PROVISION AND STATUTE
INVOLVED IN THE CASE
U.S. Const. art. I, § 8, cl. 3.
The Congress shall have power ...
Pe To regulate Commerce with foreign nations, and
among the several States, and with the Indian Tribes;
N.J. STAT. ANN. § 49:3-60 (West 1998)
(text as of 1996)
49:3-60 Offer or sale; registration requirement;
exemptions
It is unlawful for any security to be offered or sold in this
State unless:
(a) The security or transaction is exempt under section 3 of
this act;
(b) The security or transaction is not subject to, or is exempt
from, the registration requirements of the Securities Act of
1933 and the rules and regulations thereunder, other than by
reason of section 3(a) or 3(b) of such act and the rules and
regulations under said section 3(a) or 3(b), and a report of the
offering is filed with the bureau within 30 days of the
completion date of the offering, setting forth the name and
address of the issuer, the total amount of the securities sold,
the price at which the securities were sold, the total number
of purchasers of the securities, and the names and addresses
of the purchasers of the securities, indicating the number and
amount of the securities each purchased. The fee for filing
the report with the bureau shall be $250.00. The information
in the report of sale shall be deemed confidential and shall not
be disclosed to the public except by order of the court in
9la
Oe
court proceedings; [subsequently deleted by amendment, P.L.
1997, c. 276.]
(c) [deleted by amendment, P.L. 1985, c. 405.]
(d) [deleted by amendment, P.L. 1985, c. 405.] or
(e) The security is registered under this act.
92a
STATE OF NEW JERSEY
BUREAU OF SECURITIES
P.O. Box 47029
Newark, New Jersey 07101
(201) 504-3600
IN THE MATTER OF:
N RDER
IMATEC, LTD. : ENYIN
' SPECIFIC
SR-9277 : EXEMPTIONS
Respondent. :
eweeeeeeceaeeaeneeneeece x
Dr. Hanoch Shalit, Chief Executive Officer
Imatec, Ltd.
150 E. 58th Street
New York, New York 10155
Clifford A. Brandeis, Esq.
Zuckerman Gore & Brandeis, LLP
900 Third Avenue
New York, New York 10022
Attorney for Issuer
A.S. Goldmen & Co., Inc.
ATTN: Foster Gibbons, General Counsel
99 Wood Avenue
Suite 902
Iselin, New Jersey 08830
93a
Marlene Reed, Esq.
Orrick, Herrington & Sutcliffe
666 Fifth Avenue
New York, New York 10103
Attorney for Underwriter
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
Transfer Agent & Registrar
1. Imatec Ltd. (“Imatec”), located at 150 East
58th Street, New York, New York 10155, was incorporated
in the State of New York on November 17, 1988.
On or about May 21, 1996, Imatec filed with
the Bureau of Securities (“Bureau”) an application to register
an offering by coordination, (the “Offering”), pursuant to
N.J.S.A. 49:3-61.1, under registration number SR-9277. The
registration statement, Form SB-2, was filed with the United
States Securities and Exchange Commission (“S.E.C.”) on
May 13, 1996, under the registration number 333-3589. On
or about June 24, 1996, Imatec filed, with the Bureau, an
Amendment No. | to its Form SB-2. On or about July 19,
1996 Imatec, filed with the Bureau, an Amendment No. 2 to
its Form SB-2.
3. The Offering is comprised of 1,000,000 shares
of Common Stock, 4,000,000 Class A Redeemable Warrants,
and 4,000,000 Class B Redeemable Warrants. Each Class A
Reddemable Warrant and Class B Redeemable Warrant
entitles the holder to purchase one share of Common Stock.
94a
nat Sie, eh RANE BAL
SLR AME) citar iabariie Wo ie acs teen ON al
ey
The registration statement also covers an aggregate of
551,785 shares of Common Stock and 4,000,000 Class A
Redeemable Warrants which may be sold by the bridge selling
security holders. An additional 150,000 shares of Common
Stock are being registered and may be sold by the founding
selling security holders. By letter dated October 7, 1996,
counsel for the underwriter informed the Bureau that the
securities to be offered, as of October 7, 1996, will be as
follows: 1,000,000 shares of Common Stock (150,000 shares
to cover over-allotments, if any), and 4,000,000 Redeemable
Warrants (600,000 Warrants to cover over-allotments, if any).
A.S. Goldmen & Co., Inc. (“Goldmen”), located at 99 Wood
Avenue, Suite 902, Iselin, New Jersey 08830 is the
underwriter for this Offering.
4. As part of the Bureau’s review of Imatec’s
registration statement, the Bureau issued a comment letter,
dated June 26, 1996, with requests for information. Counsel
for the underwriter responded by letter dated July 9, 1996.
+ During the course of the review, Bureau staff
expressed various concerns regarding the Offering to counsel
for the underwriter. Counsel for the underwriter was
informed that the Bureau was considering the issuance of a
stop order, based on, among other things, the insolvency of
Imatec. Counsel for the underwriter responded by letter
dated August 7, 1996, asking that a stop order not be entered.
6. After further discussions, counsel for the
underwriter orally requested permission to withdraw Imatec’s
application for registration in New Jersey, and orally agreed
to the entry of a consent order denying specific exemptions,
as more fully set forth below. By letter dated August 8,
1996, which letter was faxed to the Bureau on August 12,
1996, and received by FedEx on August 13, 1996, counsel
for the underwriter requested withdrawal of Imatec’s
95a
application from the State of New Jersey. By Notice Of
Withdrawal, included herewith, the Bureau granted Imatec’s
request for withdrawal.
7. The Bureau and Imatec are desirous of
resolving this matter without the expense and delay that
further proceedings would incur.
NOW THEREFORE, it is on this 23rd day of October
1996 ORDERED that the use of the specific exemptions in
N.J.S.A. 49:3-50(b)(2), (9), (11) and (12) for the securities of
Imatec, Ltd. are DENIED effective upon entry of this
Consent Order.
We consent to the form and
entry of this Consent Order
NEW JERSEY BUREAU
OF SECURITIES
DATED: October 23, 1991 By: /s/ J. Gaynor
Thomas J. Gaynor
Bureau Chief
IMATEC, LTD
DATED: October 21, 1991 By: /s/ och Shalit
Hanoch Shalit
Chief Executive Officer
You are further advised that the entry of this Order
does not preclude the Bureau Chief from seeking and
obtaining other enforcement remedies against you in
connection with the claims made against you in this action.
NOTICE OF RIGHT TO HEARING
Pursuant to N.J.S.A. 49:3-67(a), this matter will be set
down for a hearing, if a written request for such a hearing is
filed with the Bureau Chief within thirty (30) days after the
applicant receives this Order. A request for hearing must be
accompanied by a written response, which addresses
specifically each of the reasons set forth in the Order, which
formed the basis for its entry. A general denial is
unacceptable.
At any hearing involving this matter, an individual
may appear on his/her own behalf or be represented by an
attorney. If no hearing is requested, the Order shall remain
in effect until modified or vacated. If a hearing is held, the
Bureau Chief shall affirm, vacate or modify the Order in
accordance with the findings made at the hearing.
NOTICE OF OTHER ENFORCEMENT REMEDIES
You are advised that the Uniform Securities Law
(1967), N.J.S.A. 49:3-47 et seqg., provides several
enforcement remedies which are available to be exercised by
the Bureau Chief, either alone, or in combination. These
remedies include, in addition to this action, the right to
revoke your registration, seek and obtain injunctive and
ancillary relief in a _ civil enforcement action,
N.J.S.A. 49:3-69, and the right to seek and obtain civil
penalties in an administrative or civil action
N.J.S.A. 49:3-70(b).
98a
STATE OF NEW JERSEY
BUREAU OF SECURITIES
P.O. Box 47029
Newark, New Jersey 07101
(201) 504-3600
IN THE MATTER OF:
A.S. GOLDMEN & CO., INC.,:
STUART WINKLER, : aoeae aan
STEPHEN KAPLAN, : oe
ANTHONY MARCHIANO, — :
AND FOSTER GIBBONS,
Pursuant to the authority granted to the Chief of the
New Jersey Bureau of Securities (“Bureau”) by the Uniform
Securities Law (1967), N.J.S.A. 49:3-47 et seq., (the “Law”),
more specifically N.J.S.A. 49:3-60, the Bureau Chief has
determined that an Order to Cease and Desist should be
issued against the named Defendants for the reasons that
follow.
BACKGROUND
l. Defendant A.S. Goldmen & Co., Inc.
(“Goldmen”) has been registered with the Bureau as a broker-
dealer since November 1989. Goldmen has a sole business
address of 99 Wood Avenue South, Suite 902, Iselin, New
Jersey 08830.
, Defendant Stuart Winkler (“Winkler”) has been
registered with the Bureau as an agent of Goldmen since
99a
approximately January 1990. He serves as vice-president and
secretary of Goldmen, and has supervisory authority over its
agents.
3. Defendant Stephen Kaplan (“Kaplan”) has been
registered with the Bureau as an agent of Goldmen since
approximately August 1991. He serves as a branch manger
of Goldmen, and has supervisory authority over its agents.
4. Defendant Anthony Marchiano (“Marchiano”)
has been registered with the Bureau as an agent of Goldmen
since approximately February 1990. He serves as president,
chief executive officer, and is an owner of Goldmen, and has
supervisory authority over its agents.
5. Defendant Foster Gibbons (“Gibbons”) has
been registered with the Bureau as an agent of Goldmen since
approximately September 1996. He serves as vice-president
and general counsel of Goldmen, and has supervisory
authority over its agents.
6. On or about May 21, 1996, Imatec Lid.,
(“Imatec”) filed an application with the Bureau to register an
offering in New Jersey. Goldmen was listed as the sole
underwriter for Imatec on this offering. On or about
October 23, 1996, the Bureau and Imatec, through counsel for
the underwriter, entered into a Consent Order Denying
Specific Exemptions (“Consent Order”). Pursuant to the
Consent Order, Imatec withdrew its registration statement
from New Jersey, and agreed to denial of secondary trading
as more fully set forth in the Consent Order. (A true copy is
attached hereto as Exhibit “A”).
7. On or about November 7, 1996, Bureau
investigators learned that Goldmen may have acted as the
underwriter for the Imatec offering, and may have offered and
100a
sold Imatec securities from Goldmen’ s New Jersey office.
Bureau investigators immediately contacted counsel for the
underwriter, as well as outside counsel to Goldmen, in order
to determine whether Goldmen, in fact, acted as the
underwriter for the Imatec offering. Thereafter, outside
counsel to Goldmen informed the Bureau that Goldmen had
acted as the underwriter and it was continuing the offer and
sale of Imatec from New Jersey.
8. Additionally, on November 7, 1996, the
Bureau's supervisor of enforcement gave telephone notice to
Goldmen, through its outside counsel, that any further attempt
to offer or sell Imatec securities from Goldmen’s New Jersey
office would be deemed a willful violation of the Law subject
to criminal, civil, and administrative penalties.
9. At about 3:45 p.m., Friday, November 8,
1996, Bureau investigators met with Goldmen’s outside
counsel, Stephen Sax! (“Saxl”), and with Goldmen’s vice-
president and general counsel, Foster Gibbons (“Gibbons”) at
Goldmen’s New Jersey office. At that time, the Bureau's
supervisor of enforcement again gave notice to Saxl and
Gibbons that any further attempt to offer or sell the securities
of Imatec would constitute a willful violation of the Law
subject to criminal, civil and administrative sanctions.
Despite this notice, Saxl and Gibbons responded that Goldmen
was continuing and intended to continue selling Imatec.
Thereafter, Bureau investigators put Goldmen, through
Gibbons and Saxl, on personal notice, that the continued offer
and sale of Imatec from New Jersey was a willful violation of
the Law. Gibbons responded that he understood the Bureau's
position, but that Goldmen would continue to offer and sell
Imatec.
10. Additionally, at the November 8, 1996 meeting
at Goldmen, Bureau investigators obtained documents
10la
previously orally requested from Goldmen’s outside counsel.
These documents relate to the offer and sale of Imatec.
Additionally, Bureau investigators served Subpoena
Nos. 2110, 2111, and 2112 on Winkler, Kaplan, and
Marchiano, respectively.
ll. The Imatec stock and warrants, offered and
sold by Defendants, are securities as, that term is defined
under the Law.
OFFER AND SALE OF UNREGISTERED
SECURITIES N.J.S.A. 49:3-60
12. Defendants have directly solicited customers,
offered, and sold Imatec stock and warrants from the State of
New Jersey despite the fact that the securities of Imatec were
neither registered with the Bureau, nor exempt from
registration. N.J.S.A. 49:3-60 makes it unlawful for any
person to offer or sell a security in New Jersey unless that
security is registered or exempt. N.J.S.A. 49:3-51 states that
an offer or sale in New Jersey occurs when it originates in
this State regardless of whether either party is in this State.
Every attempt by Goldmen to solicit customers, offer and sell
the securities of Imatec to the public constitutes a separate and
distinct violation of the Law and is cause pursuant to
N.J.S.A. 49:3-67(a), and in the public interest, and for the
protection of investors, for an entry of an order directing
Defendants to cease and desist soliciting customers, offering
and selling the securities of Imatec to members of the public.
THEREFORE, it is on this 12th day of November,
1996 hereby
ORDERED, effective IMMEDIATELY, that A.S.
GOLDMEN & CO., INC., STUART WINKLER, STEPHEN
KAPLAN, ANTHONY MARCHIANO, FOSTER GIBBONS,
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AND EMPLOYEES AND AGENTS THEREOF, CEASE
AND DESIST from the solicitation of customers, offer and
sale of Imatec in or from the State of New Jersey to any
members of the public.
By:_/s/ Thomas J. Gaynor
Thomas J. Gaynor
Bureau Chief
103a
NOTICE OF RIGHT TO HEARING
Pursuant to N.J.S.A. 49:3-67(a), this matter will be set
down for a hearing, if a written request for such a hearing is
filed with the Bureau Chief within thirty (30) days after the
applicant receives this Order. A request for hearing must be
accompanied by a written response, which addresses
specifically each of the reasons set forth in the Order, which
formed the basis for its entry. A general denial is
unacceptable.
At any hearing involving this matter, an individual
may appear on his/her own behalf or be represented by an
attorney. If no hearing is requested, the Order shall remain in
effect until modified or vacated. if a hearing is held, the
Bureau Chief shall affirm, vacate or modify the order in
accordance with the findings made at the hearing.
NOTICE OF OTHER ENFORCEMENT REMEDIES
You are advised that the Uniform Securities Law
(1967), N.J.S.A. 49:3-47 et seq., provides several
enforcement remedies which are available to be exercised by
the Bureau Chief, either alone, or in combination. These
remedies include, in addition to this action, the right to
revoke your registration, seek and obtain injunctive and
ancillary relief in a _ civil enforcement action,
N.J.S.A. 49:3-69, and the right to seek and obtain civil
penalties in an administrative oor civil action
N.J.S.A. 49:3-70(b).
You are further advised that the entry of this Order
does not preclude the Bureau Chief from seeking and
obtaining other enforcement remedies against you in
connection with the claims made against you in this action.
104a
SAUL, EWING, REMICK & SAUL
214 Carnegie Center, Suite 202
Princeton, New Jersey 08540
(609) 452-3100
Michael A. Lampert (ML-1064)
-and-
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 Avenue of the Americas
New York, New York 10019-6064
(212) 373-3000
Martin Flumenbaum (MF-9067)
Brad S. Karp (BK-3702)
Attorneys for Plaintiff A.S. Goldmen & Co., Inc.
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
A.S. GOLDMEN & COMPANY,
INC.,
99 Wood Avenue South, Iselin, : Civil Action No.
New Jersey, 96-5280 (DRD)
Plaintiff,
COMPLAINT
- against -
(For Declaratory
NEW JERSEY BUREAU OF : Judgment)
SECURITIES,
153 Halsey Street, Newark, New
Jersey,
Defendant.
105a
Plaintiff A.S. Goldmen & Company, Inc. (“A.S.
Goldmen”), by its attorneys, Saul, Ewing, Remick & Saul,
and Paul, Weiss, Rifkind, Wharton & Garrison, for its
complaint, alleges as follows:
NATURE OF THE ACTION
l. This is an action for a decla
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