Source: http://www.chanrobles.com/usa/us_supremecourt/439/551/case.php
Timestamp: 2019-12-09 05:34:33
Document Index: 345998435

Matched Legal Cases: ['§ 10', '§ 78', '§ 240', '§ 17', '§ 77', '§ 2', '§ 77', '§ 3', '§ 78', '§ 2', '§ 77', '§ 3', '§ 7', '§ 1292', '§ 1001', '§ 3', '§ 77']

In 1954, multiemployer collective bargaining between Local 705 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America and Chicago trucking firms produced a pension plan for employees represented by the Local. The plan was compulsory and noncontributory. Employees had no choice as to participation in the plan, and did not have the option of demanding that the employer's contribution be paid directly to them as a substitute for pension eligibility. The employees paid nothing to the plan themselves. [Footnote 1] chanroblesvirtualawlibrary
The meaning of "continuous service" is at the center of this dispute. Respondent began working as a truckdriver in the Chicago area in 1950, and joined Local 705 the following year. When the plan first went into effect, respondent automatically received 5 years' credit toward the 20-year service requirement because of his earlier work experience. chanroblesvirtualawlibrary
Respondent's complaint alleged that the Teamsters, the Local, and Peick misrepresented and omitted to state material facts with respect to the value of a covered employee's interest in the pension plan. Count I of the complaint charged that these misstatements and omissions constituted a fraud in connection with the sale of a security in violation of § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. § 78j(b), and the Securities and Exchange Commission's Rule 10b-5, 17 CFR § 240.10b-5 (1978). Count II charged that the same conduct amounted to a violation of § 17(a) of the Securities Act of 1933, 48 Stat. 84, as amended, 15 U.S.C. § 77q. Other counts alleged violations of various labor law and common law duties. [Footnote 5] Respondent sought to proceed on chanroblesvirtualawlibrary
The petitioners moved to dismiss the first two counts of the complaint on the ground that respondent had no cause of action under the Securities Acts. The District Court denied the motion. 410 F.Supp. 541 (ND Ill.1976). It held that respondent's interest in the Pension Fund constituted a security within the meaning of § 2(1) of the Securities Act, 15 U.S.C. § 77b(1), and § 3(a)(10) of the Securities Exchange Act, 15 U.S.C. § 78c(a)(10), [Footnote 7] because the plan created an "investment contract" as that term had been interpreted in SEC v. W. J. Howey Co., 328 U. S. 293 (1946). It also determined that there had been "sale" of this interest to respondent within the meaning of § 2(3) of the Securities Act, as amended, 15 U.S.C. § 77b(3), and § 3(a)(14) of the Securities Exchange Act, 15 U.S.C. § 7&(a)(14). [Footnote 8] It chanroblesvirtualawlibrary
The order denying the motion to dismiss was certified for appeal pursuant to 28 U.S.C. § 1292(b), and the Court of Appeals for the Seventh Circuit affirmed. 561 F.2d 1223 (1977). Relying on its perception of the economic realities of pension plans and various actions of Congress and the SEC with respect to such plans, the court ruled that respondent's interest in the Pension Fund was a "security." According to the court, a "sale" took place either when respondent ratified a collective bargaining agreement embodying the Fund or when he accepted or retained covered employment instead of seeking other work. [Footnote 9] The court did not believe the subsequent enactment of the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 829, 29 U.S.C. § 1001 et seq., affected the application of the Securities Acts to pension plans, as the requirements and purposes of ERISA were perceived to be different from those of the Securities Acts. [Footnote 10] We granted certiorari, 434 U.S. 1061 (1978), and now reverse. chanroblesvirtualawlibrary
To determine whether a particular financial relationship constitutes an investment contract, "[t]he test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." Howey, 328 U.S. at 328 U. S. 301. This test is to be applied in light of "the substance -- the economic realities of the transaction -- rather than the names that may have been employed by the parties." United Housing Foundation, Inc. v. Forman. 421 U. S. 837, 421 U. S. 851-852 (1975). Accord, Tcherepnin v. Knight, 389 U. S. 332, 389 U. S. 336 (1967); Howey, supra, at 328 U. S. 298. Cf. 359 U. S. 80 (1959) (BRENNAN, J., concurring) ("[O]ne must apply a test in terms of the purposes of the Federal Acts . . ."). Looking separately at each element of the [email protected] test, it is apparent that an employee's participation in a noncontributory, compulsory pension plan such as the Teamsters' does not comport with the commonly held understanding of an investment contract.
In order to determine whether respondent invested in the Fund by accepting and remaining in covered employment, it is necessary to look at the entire transaction through which he obtained a chance to receive pension benefits. In every decision of this Court recognizing the presence of a "security" under the Securities Acts, the person found to have been an investor chose to give up a specific consideration in return for a separable financial interest with the characteristics of a security. See Tcherepnin, supra, (money paid for bank capital stock); SEC v. United Benefit Life Ins. Co., 387 U. S. 202 (1967) (portion of premium paid for variable component of mixed variable- and fixed-annuity contract); Variable Annuity life Ins. Co., supra, (premium paid for variable-annuity contract); Howey, supra, (money paid for purchase, maintenance, chanroblesvirtualawlibrary
Respondent also argues that employer contributions on his behalf constituted his investment into the Fund. But it is inaccurate to describe these payments as having been "on behalf" of any employee. The trust agreement used employee man-weeks as a convenient way to measure an employer's chanroblesvirtualawlibrary
As in other parts of its analysis, the court below found an expectation of profit in the pension plan only by focusing on one of its less important aspects to the exclusion of its more significant elements. It is true that the Fund, like other holders of large assets, depends to some extent on earnings chanroblesvirtualawlibrary
The importance of asset earnings in relation to the other benefits received from employment is diminished further by the fact that, where a plan has substantial preconditions to vesting, the principal barrier to an individual employee's realization of pension benefits is not the financial health of the fund. Rather, it is his own ability to meet the fund's eligibility requirements. Thus, even if it were proper to describe the benefits as a "profit" returned on some hypothetical investment by the employee, this profit would depend primarily on the employee's efforts to meet the vesting requirements, rather than the fund's investment success. [Footnote 16] When viewed in light of the total compensation package an employee must receive in order to be eligible for pension benefits, it becomes clear that the possibility of participating in a plan's asset earnings "is far too speculative and insubstantial to bring the entire transaction within the Securities Acts," Forman, 421 U.S. at 421 U. S. 856. chanroblesvirtualawlibrary
The first action cited was the rejection by Congress in 1934 of an amendment to the Securities Act that would have exempted employee stock investment and stock option plans from the Act's registration requirements. [Footnote 17] The amendment passed the Senate, but was eliminated in conference. The legislative history of the defeated proposal indicates it was chanroblesvirtualawlibrary
§ 3(a)(2) of the Securities Act, as amended, 84 Stat. 1434, 1498, 15 U.S.C. § 77c(a)(2). It argues that, in creating a registration exemption, the amendment manifested Congress' understanding that the interests covered by the amendment otherwise were subject to the Securities Acts. [Footnote 18] It interprets "interest or participation in a single . . . trust fund . . . issued in connection with . . . a stock bonus, pension, or profit-sharing plan" as referring to a prospective beneficiary's interest in a pension fund. But this construction of the 1970 chanroblesvirtualawlibrary
The court below believed, and it now is argued to us, that, almost from its inception, the SEC has regarded pension plans as falling within the scope of the Securities Acts. We are asked to defer to what is seen as a longstanding interpretation of these statutes by the agency responsible for their chanroblesvirtualawlibrary
As we have demonstrated above, the type of pension plan at issue in this case bears no resemblance to the kind of financial interests the Securities Acts were designed to regulate. Further, the SEC's present position is flatly contradicted by its past actions. Until the instant litigation arose, the public record reveals no evidence that the SEC had ever considered the Securities Acts to be applicable to noncontributory pension plans. In 1941, the SEC first articulated the position that voluntary, contributory plans had investment characteristics that rendered them "securities" under the Acts. At the same time, however, the SEC recognized that noncontributory chanroblesvirtualawlibrary
plans were not covered by the Securities Acts because such plans did not involve a "sale" within the meaning of the statutes. Opinions of Assistant General Counsel, [1941-1944 Transfer Binder] CCH Fed.Sec.L.Serv. ¦ 75,195 (1941); Hearings before the House Committee on Interstate and Foreign Commerce on Proposed Amendments to the Securities Act of 1933 and to the Securities Exchange Act of 1934, 77th Cong., 1st Sess., 895, 896-897 (1941) (testimony of Commissioner Purcell). [Footnote 21]
In an attempt to reconcile these interpretations of the Securities Acts with its present stand, the SEC now augments its past position with two additional propositions. First, it is argued, noncontributory plans are "securities" even where a "sale" is not involved. Second, the previous concession that noncontributory plans do not involve a "sale" was meant to apply only to the registration and reporting requirements of the Securities Acts; for purposes of the antifraud provisions, a "sale" is involved. As for the first proposition, we observe that none of the SEC opinions, reports, or testimony cited to us address the question. As for the second, the record is unambiguously to the contrary. [Footnote 22] Both in its 1941 statements chanroblesvirtualawlibrary
and repeatedly since then, the SEC has declared that its "no sale" position applied to the Securities Acts as a whole. See opinions of Assistant General Counsel, [1941-1944 Transfer Binder] CCH Fed.Sec.L.Serv. ¦ 75, 195, p. 75,387 (1941); Hearings before the House Committee on Interstate and Foreign Commerce, supra at 888, 896-897; Institutional Investor Study Report of the Securities and Exchange Commission, H.R.Doc. No. 92-14, pt. 3, p. 996 (1971) ("[T]he Securities Act does not apply . . ."); Hearings before the Subcommittee on Welfare and Pension Funds of the Senate Committee on Labor and Public Welfare on Welfare and Pension Plans Investigation, 84th Cong., 1st Sess., pt. 3, pp. 943-946 (1955). Congress acted on this understanding when it proceeded to develop the legislation that became ERISA. See, e.g., Interim Report of Activities of the Private Welfare and Pension Plan Study, 1971, S.Rep. No. 92-634, p. 96 (1972) ("Pension and profit-sharing plans are exempt from coverage under the Securities Act of 1933 . . . unless the plan is a voluntary contributory chanroblesvirtualawlibrary
The existence of this comprehensive legislation governing the use and terms of employee pension plans severely undercuts all arguments for extending the Securities Acts to noncontributory, chanroblesvirtualawlibrary
The Commission argues that the new exemption from the registration requirement of the Act applies to participation in a pension plan, and infers that Congress must have understood that such participation is a security which otherwise would be subject to the Act. It is not necessary to evaluate the Commission's interpretation of the exemption, however, because, even if it is correct, it does not support the conclusion the Commission draws. chanroblesvirtualawlibrary