State v. Terry’s Tips, No. 560-9-05 Wncv (Toor, J., Nov. 16, 2005)

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S TATE OF V ERMONT W ASHINGTON C OUNTY , SS

│ STATE OF VERMONT, │ Plaintiff │ │ S UPERIOR C OURT v. │ Docket No. 560-9-05 Wncv │ TERRY'S TIPS, INC. and │ TERRY F. ALLEN, │ Defendants │ │

RULING ON MOTION TO ENFORCE, MOTION

TO STAY AND MOTION FOR HEARING This action was filed by the Commissioner of Banki ng, Insurance, Securities and Health Care (the Commissioner) to enforce an administrativ e subpoena issued by the Commissioner in connection with an investigation of an alleged unre gistered internet investment advisor. In response to the Commissioner’s motion, Defendants h ave filed a motion to stay this proceeding until resolution of a related federal proceeding, a nd have requested a hearing for the purpose of cross-examining the Commissioner’s investigator. Background Facts The subpoenas in question are directed to Terry’s Tips, Inc., and Terry Allen (jointly “Allen”). They operate a website, TerrysTips.com. T hey concede that they “publish newsletters,2

commentary and trading recommendations for option t ransactions” on the website. Motion to Stay Proceedings, p. 1. In addition, their website reflects menu options for, among other things, “Sign Up For Paid Services” and “Auto-Trade.” Affi davit of Tanya Durkee, Exhibit C. There are also obviously questionable claims made on the website for returns such as “196.5% profit” in a single year. Id

. The Commissioner has served the subpoenas in connec tion with its power to investigate possible violations of the Vermont Securities Act, 9 V.S.A. §§ 4201- 4241. It is a violation of the Act to provide investment advice without being registered with the State. Id . § 4213(f)(1). One who “for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value o f securities, or as to the advisability of investing in, purchasing, or selling securities,” i s an investment advisor. Id . § 4202a(7)(A). The Act excludes from this definition “a publisher of a ny bona fide newspaper, news column, newsletter, news magazine, or business or financial publication or service, whether communicated in hard copy form, by electronic means , or otherwise, that does not consist of the rendering of advice on the basis of the specific in vestment situation of each client.” Id . § 4202a(B)(v). The Act does more than require registration by inve stment advisors. It also prohibits fraud by registered or unregistered persons who mak e misleading statements in the course of providing paid advice as to the value of securities . Id . § 4224a(a) and (e). The Commissioner is given the power to investigate possible violations of the Act, including issuing subpoenas the Commissioner “consi ders to be relevant and material to the investigation or proceeding.” Id . § 4232(b). When a person fails to comply with a p roperly issued3

subpoena, this court is directed to “issue an order compelling compliance with the agency subpoena.” 3 V.S.A. § 809a(d). The subpoenas in question contain twenty-nine req uests for information, including such things as lists of subscribers, the amounts they e ach invested in the specific “Strategies” offered by Allen, the income received from auto-trading cli ents, and documentation backing up some of

the claims made on the website about investment ret urns. Affidavit of Tanya Durkee, Exhibits A

and B. The only information provided by Allen as to the w ork involved in responding to the subpoenas is the conclusory statement that complian ce “would be extremely onerous and burdensome” and would require “substantial time and resources.” Affidavit of Terry Allen, ¶ 5. 1. The Motion to Stay The basis for the motion to stay is as follows. Al len argues that the Commissioner lacks jurisdiction because Allen is a publisher rather th an an investment advisor, and that this issue is also being litigated in pending federal proceedings brought by the federal Securities and Exchange Commission (SEC). Allen argues that this c ourt should therefore wait for the federal court to rule on the jurisdictional issue before pr oceeding. This court declines the suggestion. Despite this co urt’s respect for its colleagues on the federal bench, the federal court and this court cou ld well reach different conclusions in interpreting the law. The federal court’s decision would not be controlling in this court. There is no reason to stay this case to await a decision in that case. The motion to stay is therefore denied.

2. The Jurisdictional Issue Allen argues that the Commissioner lacks jurisdicti on over Allen because Allen is a newsletter publisher as opposed to an investment ad visor, and the Vermont Securities Act4

excludes such newsletter publishers from its reach. 9 V.S.A. § 4202a(B)(v). That, however, is an issue for another day. While there might be cases t hat could be easily resolved at this stage of the proceedings -- for example, if the subpoena in this case were directed to what was clearly a grocery store or some other business that on its fa ce was not within the scope of the statute. On its face, the excerpts from the website raise a fai r inference that this case is within the realm addressed by the statute. For example, the menu cho ices at the website include “Sign Up For Paid Services” and “Auto-Trade.” Affidavit of Tanya Durkee, Exhibit C. The merits of any case the Commissioner later chooses to file may turn on developing the facts further, but at this stage in the process, the court will not delve into the f act-bound determination of whether any such case may ultimately succeed. 1 Accord , United States v. Construction Products Research, Inc. , 73 F.3d 464, 470 (2d Cir. 1996)(“at the subpoena enfor cement stage, courts need not determine whether the subpoenaed party is within the agency’s jurisdiction or covered by the statute it administers; rather the coverage determination shou ld wait until an enforcement action is brought against the subpoenaed party.”); Federal Trade Comm ission v. Ernstthal , 607 F. 2d 488, 490 (D.C. Cir. 1979)(where jurisdictional question “tur ns on issues of fact, the agency is not obliged to prove its jurisdiction in a subpoena enforcement proceeding”). Although Allen argues that First Amendment consider ations require the court to step in at this stage, the court finds the cited cases inappos ite because they relate to political association rights, not commercial situations. See Federal Election Commission v. Larouche Campaign , 817 F.2d 233 (2 nd Cir. 1987); Federal Election Commission v. Machini sts Non-Partisan Political League , 655 F.2d 380 (D.C. Cir. 1981); Federal Election C ommission v. Philips Publishing, Inc ., 517 F.Supp. 1308 (D.D.C. 1981). As the D.C. Circuit noted in Machinists , the political activities

1 If the issue were to be litigated at this stage, t he Commissioner would be entitled to discovery on t he issue. That discovery would likely mirror the requests in the s ubpoenas.5

overseen by the Federal Election Commission “differ in terms of their constitutional significance

from those which are of concern to other federal ad ministrative agencies whose authority relates to the regulation of corporate, commercial or labor activities.” 655 F.2d at 387. There is no need for heightened scrutiny of administrative subpoenas in the realm of commercial activities alone. The court will grant the Commissioner the deference that administrative subpoenas are generally accorded. See, e.g. , United States v. Morton Salt Co. , 338 U.S. 632, 652 (1950)(subpoenas will be upheld if within the agenc y’s authority, “not too indefinite,” and reasonably relevant); In re McVane , 44 F.3d 1127, 1134-1136 (2 nd Cir. 1995)(same). The investigation of potential unregistered investment advice, and of fraudulent investment information, are clearly within the general scope o f the Commissioner’s authority. The subpoenas contain specific, definite requests for i nformation. Allen has not even argued that they are not relevant to the Commissioner’s investi gation. Thus, the subpoenas are entitled to

deference. 3. The Scope of the Subpoenas Allen argues that the subpoenas in this case are o verbroad: “They consist of three and a half pages of single spaced requests, and seek virt ually every piece of paper and computer file for [Allen’s] business, and in some cases cover a p eriod of five years. The subpoenas are thus burdensome, oppressive and unreasonable, and are in valid for this reason alone.” Opposition to Motion to Enforce, p. 7. The court disagrees. The m ere fact that the subpoenas are several pages long and ask for many records does not make them un reasonable. Allen gives no estimate of the number of pages of responsive records, the number o f hours responses will take, or any other specific information that might affect the reasonab leness of the request. It could be that many of6

the twenty-nine requests could be answered by the p roduction of merely a few pages, for example. Nothing on the face of the subpoenas makes them patently unreasonable. Allen goes on to argue that the subpoenas are also unreasonable because they are “extremely intrusive with respect to [Allen’s] righ t to publish, as well as on their subscribers’ rights to read the publications without being subje cted to government scrutiny.” Opposition at 7. The only authority offered for this argument is Low e v. Securities and Exchange Commission , 472 U.S. 181 (1985). However, Lowe merely addresses the distinction between a publish er and

an investment advisor. The case involved whether en forcement action could be taken against a particular entity – it did not involve the issuance of an administrative subpoena . Lowe does not require that a court make the determination of a st atute’s applicability to a particular entity at the investigation stage. As noted above, whether Allen fits within the “inve stment advisor” definition is an issue for another day. The web site itself suggests that Allen does provide investment advice, and that impossible claims are being made as to investment r eturns. These are sufficient grounds for the

Commissioner to seek further information. Lowe did not say that by merely claiming the status of publisher, a party may insulate itself from inve stigation. 2 4. The Request for a Hearing Allen argues that a hearing is necessary so that A llen can cross-examine the Commissioner’s investigator. The reasons stated for doing so are to determine whether the Commissioner has issued the subpoenas for an “impro per purpose.” Opposition at 8. Allen

2 Moreover, to the extent that Allen is suggesting t hat the court should be concerned with the privacy rights of subscribers or investors, this court agrees with th e following comment by another court: “It is common knowledge that securities transactions are heavily regulated by both the state and federal governments. An inves tor in regulated securities has no reasonable expectation that his o r her identity will be withheld from the state and federal agencies responsible for enforcing securities laws.” Tom v. Schoolhouse Coins, Inc ., 236 Cal. Rptr. 541, 542 (Cal. Ct. App. 1987).7

argues that the timing and content of the subpoenas suggests an improper motive. The “timing” to which Allen refers is that the subpoenas were i ssued after Allen filed a motion to dismiss in

the federal case. The “content” to which Allen refe rs is not explained, although the suggestion apparently is that because the federal government is also investigating similar issues, there is something fishy about the State also doing so. The court finds the argument unconvincing. There i s nothing inappropriate about both federal and state entities investigating similar is sues under their respective laws, nor is there any evidence proffered that the Commissioner is somehow providing to the SEC information the SEC would not be able to obtain itself. Nor is any authority cited to suggest that sharing such information would be improper. Allen offers no legi timate basis for inferring that the Commissioner is doing anything inappropriate. The c ourt will not grant an evidentiary hearing based on Allen’s mere speculation.

Order The Commissioner’s motion to enforce is granted. T he respondents’ motions to stay and motion for an evidentiary hearing are denied.

Dated at Montpelier this 15th day of November, 2005

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_____________________________ Helen M. Toor Superior Court Judge