Source: https://casetext.com/case/gary-plastic-packaging-v-merrill-lynchpierce?ref=Sjd!BkuL9M
Timestamp: 2019-06-19 11:08:59
Document Index: 716643654

Matched Legal Cases: ['§ 1404', '§ 5', '§ 10', '§ 1962', '§ 217', '§ 2001', '§ 77', '§ 78', '§ 240', '§ 227', '§ 77', '§ 78', '§ 5', '§ 77', '§ 77']

Gary Plastic Packaging v. Merrill Lynch, Pierce, Fenner & Smith, Inc, 756 F.2d 230 | Casetext
Gary Plastic Packaging v. Merrill Lynch, Pierce, Fenner & Smith, Inc.
756 F.2d 230 (2d Cir. 1985)
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Gary Plastic Packagingv.Merrill Lynch, Pierce, Fenner & Smith, Inc.
United States Court of Appeals, Second CircuitFeb 21, 1985
Guy B. Bailey, Jr., Miami, Fla. (Mercedes C. Busto, Bailey Dawes, Miami, Fla., of counsel), for plaintiff-appellant.
Henry F. Minnerop, New York City (Brown, Wood, Ivey, Mitchell Petty, of counsel), for defendants-appellees.
On this appeal we must determine whether a program devised by defendants Merrill, Lynch, Pierce, Fenner Smith, Inc. (Merrill Lynch) and its wholly-owned subsidiary, Merrill Lynch Money Markets, Inc. (Money Markets), to sell bank certificates of deposit (CDs) is within the compass of the federal securities law. In Marine Bank v. Weaver, 455 U.S. 551, 102 S.Ct. 1220, 1221, 71 L.Ed.2d 409 (1982), the Supreme Court held that a conventional CD purchased from an issuing bank is not a security under the antifraud provisions of the federal securities laws. Nonetheless, the Court stated that each transaction must be analyzed on the content of the particular instrument involved and the factual setting as a whole. The possibility that in certain circumstances a CD might be a security within the scope of the federal securities laws was specifically left open. Id. at 560 n. 11, 102 S.Ct. at 1225 n. 11.
Plaintiff Gary Plastic Packaging Corporation (Gary Plastic) brought this action in the United States District Court for the Southern District of Florida, for itself and for all others similarly situated, against defendants Merrill Lynch and Money Markets. The action was transferred, pursuant to 28 U.S.C. § 1404(a), to the Southern District of New York (Brieant, J.) in December 1983. The complaint contains four counts that allege violations of §§ 5(a) and 17 of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, and the SEC's Rule 10b-5. One count alleges a civil RICO violation, 18 U.S.C. § 1962(c). All allegations stem from the same transactions between Gary Plastic and Merrill Lynch. In its Money Market Information Bulletin, Merrill Lynch described its CD Program involving bank certificates of deposit issued by both commercial and savings and loan institutions (referred to as banks) as follows:
12 C.F.R. § 217.1(c) (1951).
INSURANCE COVERAGE This opportunity, for individuals or corporate investors with $100,000 or more to invest, has been made possible as a result of recent changes in Federal Deposit Insurance Corporation (FDIC) and Federal Savings and Loan Insurance Corporation (FSLIC) regulations dealing with deposit insurance coverage. In essence, both the FDIC and FSLIC have raised their deposit insurance coverage to $100,000 from $40,000 per depositor per institution.
SIGNIFICANCE The extended coverage will enable an investor to purchase a $100,000 certificate of deposit from an FDIC or FSLIC insured commercial bank or savings and loan association and have the total principal amount of the investment covered by Federal deposit insurance. Carrying this a step further, one could distribute investible funds in $100,000 increments among a number of banks to ensure Federal deposit insurance coverage of the total amount. Investors can now purchase $100,000 negotiable certificates of deposit and enjoy the benefits of having their entire deposit insured by a Federal agency and at the same time take advantage of the exemption from interest rate ceilings that Regulation Q provides for certificates of deposit that are $100,000 or larger.
A NEW OPPORTUNITY MLMMI will provide its investors with an opportunity to take advantage of this regulatory change by offering, on a daily basis, a broad selection of fully insured $100,000 certificates of deposit issued by domestic commercial banks and savings and loan associations in a range of maturities. Each of the issuers whose certificates of deposit are offered has been reviewed and approved by the MLPF S Corporate Credit Department and is monitored on a regular basis. Credit reports that provide an historical analysis of each issuer will be readily available through your MLPF S Account Executive.
LIQUIDITY The $100,000 certificates of deposit that MLMMI is offering enjoy a high degree of liquidity since they are in negotiable bearer form and are fully insured by a Federal agency. In addition, MLMMI fully intends to maintain a secondary market for its customers which would enable them to sell their certificates of deposit back to MLMMI at prevailing market rates without the significant interest rate penalties Federal banking regulations require banks to impose on the early redemption of their certificates of deposit.
ALTERNATIVES The more popular alternatives would include Treasury Bills, Federal Agency Securities and Money Market Funds. With the increase in deposit insurance coverage, an investor now has the opportunity to purchase Federally insured certificates of deposit, an investment which usually carries higher yields than Treasury Bills and Federal Agency Securities. While money market funds do enjoy liquidity, they are not Federally insured and cannot guarantee a future rate of return.
WHY MLMMI Some investors may seek to purchase $100,000 certificates of deposit directly from a bank or savings and loan association. However, they can only call a few local banks at most, their alternatives are critically limited. You have no way of knowing if the banks you are calling are in the market trying to raise money at a competitive rate or if they are quoting a rate just to accommodate a depositor. Our specialized bank liability trading staff talks to a large group of prescreened, quality banks daily before offering certificates of deposit to investors enabling MLMMI to provide the investor with certificates of deposit with competitive yields from a variety of issuers. The interest rate penalties for early redemption imposed under Federal Banking regulations do not apply to certificates of deposit sold back to MLMMI. They do apply if you redeem your certificates of deposit prior to maturity at the issuing bank.
In addition to the safety factor of having Federal insurance for these deposits, the highly professional MLPF S Corporate Credit Department is monitoring, on a regular basis, those issuers whose certificates of deposit MLMMI offers and will provide a written credit analysis on each. For additional information on this new program, contact your local Merrill Lynch Account Executive.
When, in 1982, plaintiff ordered 12 CDs from Merrill Lynch, Money Markets contacted financial institutions in various parts of the country, and purchased the CDs. For each certificate of deposit purchased, Gary Plastic received an order ticket and a confirmation slip from Merrill Lynch. The actual CDs were held by the "delivery agent," Manufacturers Hanover Trust Company, and when they matured Gary Plastic received all principal and interest due it under the terms of the confirmation slips.
Trade Date Issuer Amount Rate Maturity
Fifteen days later, before plaintiff had submitted answering papers, the district court granted summary judgment to defendants. The court concluded that the complaint was based on unfounded allegations and that the transaction did not involve a "security" within the meaning of the 1933 and 1934 Acts. [Current] Fed.Sec.L.Rep. (CCH) ¶ 91,490 (S.D.N.Y. May 15, 1984). In July plaintiff moved to set aside the judgment under Fed.R.Civ.P. 59(e) or 60(b), and to amend its complaint under Rule 15. Plaintiff's proposed amended complaint alleged the same four counts as its initial complaint, but was based on the information plaintiff had obtained one week prior to the April 24 hearing. The court denied the Rule 59(e) motion because it was untimely. See Fed.R.Civ.P. 59(e) ("A motion to alter or amend the judgment shall be served not later than 10 days after entry of the judgment"). The Rule 60 motion was also denied because plaintiff did not present "newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b)." Fed.R.Civ.P. 60(b)(2).
While summary judgment is a valuable procedural device for promptly disposing of actions in which there is no genuine issue as to any material fact, it is also a drastic remedy that cuts off the right to have one's day in court. Heyman v. Commerce and Industry Insurance Co., 524 F.2d 1317, 1320 (2d Cir. 1975). The harshness of the remedy is exacerbated when the trial court refuses to allow plaintiff to conduct discovery. Discovery serves important purposes, such as avoiding surprise, fully disclosing the nature and scope of the controversy, narrowing, simplifying, and framing the issues involved, and enabling parties to obtain the factual information needed to prepare for trial. 8 C. Wright A. Miller, Federal Practice and Procedure § 2001 (1970). Rules governing discovery should be interpreted broadly to achieve those purposes. See, e.g., Schlesinger Investment Partnership v. Fluor Corp., 671 F.2d 739, 742 (2d Cir. 1982) ("The federal rules evince a liberal policy with regard to discovery in order to allow litigants to secure helpful evidence from the hands of their adversaries"). It follows that summary judgment should be sparingly granted in securities fraud cases when discovery is incomplete and under circumstances where, as here, defendants have exclusive possession of the material facts. See Schlesinger Investment Partnership, 671 F.2d at 743; George C. Frey ReadyMixed Concrete, Inc. v. Pine Hill Concrete Mix Corp., 554 F.2d 551, 555 (2d Cir. 1977); Schoenbaum v. Firstbrook, 405 F.2d 215, 218 (2d Cir. 1968) (in banc), cert. denied, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969). Rather, in the preliminary stages of the lawsuit, the trial court should permit discovery and freely grant leave to amend the complaint under Rule 15. Fed.R.Civ.P. 15(a) ("leave [to amend] shall be freely given when justice so requires"). See Foman v. Davis, 371 U.S. 178, 181, 83 S.Ct. 227, 229, 9 L.Ed.2d 222 (1962); Goldberg v. Meridor, 567 F.2d 209, 213 (2d Cir. 1977), cert. denied, 434 U.S. 1069, 98 S.Ct. 1249, 55 L.Ed.2d 771 (1978) ("the undesirability of granting summary judgment to defendants in a stockholder's derivative suit before discovery has been completed ... dictate[s] liberality in allowing such complaints to be amended to reflect facts already discovered").
In dismissing the complaint, the trial court concluded that the factual predicate of the complaint — that the interest rates stated on the confirmation slips were less than the interest rates stated on the certificates of deposit — was not correct. Merrill Lynch's unrefuted evidence showed that the interest rates stated on the certificates of deposit purchased by Gary Plastic were identical to the rates shown on the corresponding confirmations. Plaintiff had learned at the April 17 meeting that this factual predicate was incorrect. Instead of continuing to argue plaintiff's initial position, counsel informed the district court that new facts had come to light and sought leave to amend the complaint.
In its amended complaint plaintiff will charge that defendants have violated Sections 5(a) and 17 of the 1933 Act, 15 U.S.C. §§ 77e(a), 77q, and Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1984). Section 5 of the 1933 Act prohibits the sale of a "security" unless a registration statement is in effect. Section 17(a) of the 1933 Act and Section 10(b) of the 1934 Act are the antifraud provisions of the securities acts, prohibiting the use of any scheme to obtain money by means of an untrue statement or omission to state a material fact or of any manipulative or deceptive device in connection with the purchase or sale of any "security." Hence, as a threshold matter, in the application of both federal acts, plaintiff must show that the transactions involved a "security." Plaintiff argues that the CDs sold through the CD Program are "securities" within the meaning of the Acts. We undertake now to resolve that important issue.
In 1933 and 1934, in the wake of the 1929 stock market crash, Congress enacted a comprehensive regulatory scheme to eliminate abuses in the nation's financial markets. The two Acts passed in those years were designed to provide investors with material information and to protect the investing public from the sale of worthless securities through misrepresentation. H.R.Rep. No. 85, 73d Cong., 1st Sess. 1-5 (1933); United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 849, 95 S.Ct. 2051, 2059, 44 L.Ed.2d 621 (1975); Ernst Ernst v. Hochfelder, 425 U.S. 185, 195, 96 S.Ct. 1375, 1382, 47 L.Ed.2d 668 (1976). The legislation was intended to encourage "honest dealing in securities and thereby bring back public confidence" in the investment markets and to eliminate the "unethical and unsafe practices of bank and corporate officers." Letter from President Franklin D. Roosevelt to Congress (March 29, 1933), reprinted in 77 Cong.Rec. 937 (1933). As part of the regulatory reformation, Congress enacted the Banking (Glass-Steagall) Act of 1933, 12 U.S.C. §§ 227 et seq., which separated investment banking and deposit banking. The Glass-Steagall Act created the Federal Deposit Insurance Corporation (FDIC) to insure bank depositors against loss and created a thorough plan that regulated virtually all aspects of deposit banking institutions. The financial transactions at issue, which involve both an investment marketing firm and instruments issued by banking institutions must be analyzed in light of this regulatory design.
The securities acts define "security" in Section 2(1) of the 1933 Act, 15 U.S.C. § 77b(1), and Section 3(a)(10) of the 1934 Act, 15 U.S.C. § 78c(a)(10). Although the precise wording of the two definitional sections differs, the Supreme Court has consistently held that the definitions are virtually identical and the coverage of the two Acts may be considered the same. See Marine Bank, 455 U.S. at 555 n. 3, 102 S.Ct. at 1223 n. 3; United Housing Foundation, 421 U.S. at 847 n. 12, 95 S.Ct. at 2058 n. 12; Tcherepnin v. Knight, 389 U.S. 332, 342, 88 S.Ct. 548, 556, 19 L.Ed.2d 564 (1967). The definitions of "security" are broad and ambiguous; they allow courts to use a flexible approach "to meet the countless and variable schemes devised by those who seek the use of money of others on the promise of profits." SEC v. W.J. Howey Co., 328 U.S. 293, 299, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946); see United Housing Foundation, 421 U.S. at 847-48, 95 S.Ct. at 2057-59 (Congress "sought to define `the term security in sufficiently broad and general terms so as to include within that definition the many types of instruments that in our commercial world fall within the ordinary concept of a security.'") (quoting H.R.Rep. No. 85, 73d Cong., 1st Sess. 11 (1933)). Although courts should construe the statutes broadly, because they are remedial, they should keep in mind that to afford the securities laws too wide a reach over banking institutions could overburden that already extensively regulated industry.
When used in this subchapter, unless the context otherwise requires —
When used in this chapter, unless the context otherwise requires —
Numerous tests have been applied to determine whether various instruments described as "notes" or "stock" fall within the scope of the definition, such as the "economic reality" test, see W.J. Howey Co., 328 U.S. at 299, 66 S.Ct. at 1103, the "commercial/investment" test, see McClure v. First National Bank, 497 F.2d 490, 493 (5th Cir. 1974), and the "risk capital" test, Landreth Timber Co. v. Landreth, 731 F.2d 1348, 1352 (9th Cir. 1984). Our circuit stands alone in applying a more literal approach, see Exchange National Bank v. Touche Ross Co., 544 F.2d 1126, 1137-38 (2d Cir. 1976); Seagrave Corp. v. Vista Resources, Inc., 696 F.2d 227, 229 (2d Cir. 1982). We need not address the continued applicability of these tests because in Marine Bank the Supreme Court applied the definition of security to facts so similar to those in the present case that we are bound by its reasoning to the exclusion of criteria articulated in other contexts. See Wolf v. Banco Nacional de Mexico, S.A., 739 F.2d 1458, 1461 (9th Cir. 1984), cert. denied, ___ U.S. ___, 104 S.Ct. 784, 83 L.Ed.2d 778 (1985) (court relied on Marine Bank criteria to find that Certificate of Deposit issued by a Mexican bank was not a security).
Of the several types of instruments defined as securities, the financial instruments here most closely resemble "investment contracts." The Supreme Court first interpreted the definition of "investment contract" in SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943). See Note, The Definition of Security: Marine Bank v. Weaver, 24 B.C.L.Rev. 1053 (1983) (overview of the Supreme Court's decisions defining investment contract). Joiner involved a widely circulated offer to sell assignments of oil leases. In holding that the contracts to sell those lease assignments were investment contracts, the Court focused on whether they were "widely offered or dealt in under terms or courses of dealing which established their character in commerce as `investment contracts,' or as `any interest or instrument commonly known as a "security."'" 320 U.S. at 351, 64 S.Ct. at 124. The Court stated that the test is "what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect." Id. at 352-53, 64 S.Ct. at 124-25 ( quoted in Marine Bank, 455 U.S. at 556, 102 S.Ct. at 1223). See Glen-Arden Commodities, Inc. v. Costantino, 493 F.2d 1027 (2d Cir. 1974) (where defendants sold whisky warehouse receipts, and stored, insured, marketed, and sold the whisky for the purchasers, the whisky warehouse receipts were found to be "investment contracts").
In W.J. Howey Co., the Supreme Court narrowed the Joiner "character in commerce" test, stating specific requirements that continue to be the analytical foundation for determining what constitutes an investment contract. In that case defendants sold acreage in its citrus grove under a contract pursuant to which a W.J. Howey Co. subsidiary cultivated, harvested, and marketed the citrus crops. The Court held that the contracts were investment contracts within the meaning of the 1933 Act. The Howey Court stated: "[A]n investment contract ... means a contract, transaction or scheme whereby a person [1] invests his money [2] in a common enterprise and [3] is led to expect profits [4] solely from the efforts of the promotor or a third party . . . ." 328 U.S. at 298-99, 66 S.Ct. at 1102-03.
Finally, investors rely on Merrill Lynch's ongoing monitoring of the issuing banks. If an issuing bank becomes insolvent, the FDIC or FSLIC will pay the investor the principal due under the terms of the certificate of deposit. Here investors are buying something more than an individual certificate of deposit. They are buying an opportunity to participate in the CD Program and its secondary market. And, they are paying for the security of knowing that they may liquidate at a moment's notice free from concern as to loss of income or capital, while awaiting for FDIC or FSLIC insurance proceeds.
We note that two of the CDs purchased by plaintiffs apparently had a face value above $100,000 — $10,000 in one instance and $2,000 in the other. Federal insurance is unavailable for amounts above $100,000 in the event of insolvency.
Plaintiff's decision to invest is obviously made in reliance upon the efforts, knowledge and skill of Merrill Lynch. This is a significant factor that sets this case apart from Marine Bank. At the outset Marine Bank acknowledges that it is dealing with a "conventional certificate of deposit," 455 U.S. at 552, 102 S.Ct. at 1221. In the present case, defendant's executive vice-president is alleged to have characterized the CD created and sold through the CD Program as wholly different from an ordinary certificate of deposit. The Weavers dealt with the issuing bank. As a result, the FDIC protected them fully against any risk of loss due to the insolvency of the bank from which they expected to derive their profits. The CD Program investor relies not only on the future solvency of the issuing bank, but also on the future solvency of Merrill Lynch to enjoy the unique benefits of this investment opportunity. The federal banking laws, including the FDIC, do not eliminate the risk to the CD Program investor. These investors are not "abundantly protected" under the federal banking laws. Like the holder of an ordinary long-term debt obligation, the CD Program investor assumes the risk of insolvency of defendants as unregulated borrowers. Unlike Marine Bank, federal securities fraud protection in this case is not a double-coating. Rather, absent the securities laws, plaintiff has no federal protection against fraud and misrepresentation by the defendants in the marketplace.
In Marine Bank, the reason for exempting certificates of deposit from the securities acts was to eliminate double coverage when the Glass-Steagall Act and the securities acts overlap. Were we to find the CDs sold through this CD Program not to be covered by the federal securities laws, a gap would exist in the regulatory scheme that would strip the investor of needed federal protection. The "content of the instruments in question, the purposes intended to be served, and the factual setting as a whole" make this an appropriate case for finding these instruments to be within the definitions of "security." See Marine Bank, 455 U.S. at 560 n. 11, 102 S.Ct. at 1225 n. 11. See also H.R. No. 626(I), 97th Cong., 2d Sess. 9-10, reprinted in 1982 U.S.Code Cong. Ad.News 2780, 2788 ( Marine Bank left "open the question of whether a certificate of deposit could be a security in another context"). Therefore, we hold that the certificates of deposit issued and sold pursuant to defendant Merrill Lynch's CD Program are "securities" for purposes of the antifraud provisions of both Acts.
Commissions that defendants receive on the CDs they sell to the public are relevant and must be disclosed. It is not clear from the record the extent of defendants' commissions, although several are mentioned. For example, in addition to the interest it earned on the flow of funds through its hands, Merrill Lynch received commissions at the end of each month from issuing banks for the funds placed with it. It also may have received all or a portion of the differential in the interest rate the bank would have paid on a given day and the claimed lesser amount the bank paid on CDs created for defendants. Plaintiff argues that if this is the case, then it was actually paying Merrill Lynch an undisclosed commission.
We do not address plaintiff's claim under § 5(a) of the 1933 Act, 15 U.S.C. § 77e(a). On remand, the district court should determine the Act's registration requirements on the CDs sold through the CD Program and the applicability of any exemptions from registration. See 15 U.S.C. § 77c(a)(2), (a)(5). See also SEC No Action Letter, Merrill Lynch, Pierce, Fenner Smith, Inc., 14 Sec.Reg. L.Rep. (BNA) No. 46, at 2053-54 (Nov. 26, 1982); Management Corp. of America, 14 Sec.Reg. L.Rep. (BNA) No. 16 (April 23, 1982). Nor do we address the RICO claim alleged in plaintiff's complaint. The district court will have further opportunity to rule upon this claim in light of existing law when this matter is again before it.
5/20/82 Imperial Bank of Los Angeles $100,000 13.70% 6/21 5/20/82 Home Savings Loan 100,000 13.80% 6/21 5/20/82 Northern California Savings 100,000 13.80% 6/21 Loan 5/20/82 Pacific First Federal Savings 100,000 13.80% 6/21 Loan 5/25/82 World Savings Loan 100,000 13.35% 6/25 5/28/82 Imperial Savings Loan 100,000 13.35% 6/25 6/18/82 Northern California Savings 100,000 14.50% 7/21 6/18/82 State Savings Stockton, CA 100,000 14.50% 7/21 6/24/84 Sumitoma Bank of California 100,000 14.60% 8/24 6/24/82 World Savings Loan 100,000 14.60% 8/24 6/30/82 Great Western Savings 100,000 14.50% 8/2 7/20/82 Imperial Savings Loan 100,000 12.55% 10/19