Opinion ID: 578328
Heading Depth: 2
Heading Rank: 2

Heading: Application of the Securities Laws

Text: 24 The appellees rely on Marine Bank v. Weaver, 455 U.S. 551, 102 S.Ct. 1220, 71 L.Ed.2d 409 (1982) in contending that CD's are not securities within the meaning of the securities laws. 9 In Marine Bank, the Court conceded that the certificate of deposit is not expressly excluded from the definition [of a security] since it is not currency and it has a maturity exceeding nine months. Id. at 557, 102 S.Ct. at 1224 (footnote omitted). However, the Court found that special circumstances warranted excluding the CD's at issue from the securities laws' protections. Specifically, extensive regulation of the banking industry virtually guaranteed repayment of any lost investment; hence, the investors were already protected and there was no need to offer additional protection by allowing a cause of action under the securities laws. Id. at 558-59, 102 S.Ct. at 1224-25. 25 Though Marine Bank is certainly germane to this case, it does not, as the appellees contend, conclusively hold that all CDs are beyond the purview of the securities laws. The Court expressly limited its holding when it said: 26 It does not follow that a certificate of deposit ... invariably falls outside the definition of a security as defined by the federal statutes. Each transaction must be analyzed and evaluated on the basis of the content of the instruments in question, the purposes intended to be served, and the factual setting as a whole. 27 Id. at 560 n. 11, 102 S.Ct. at 1225 n. 11. This opportunity for a given CD to qualify as a security has been recognized and endorsed by Congress. See H.R.Rep. No. 97-626, Part I, 97th Cong., 2d Sess. 10 (1982), reprinted in 1982 U.S.C.C.A.N. 2780, 2788. 28 In determining whether Marine Bank removes a given investment from the protection of the securities laws, courts have focused on whether existing regulations guarantee a return of the investment. E.g., Christison v. Groen, 740 F.2d 593, 596 & n. 2 (7th Cir.1984). Where such guarantees exist, the securities laws provide no added protection. E.g., Wolf v. Banco Nacional de Mexico, S.A., 739 F.2d 1458, 1462 (9th Cir.1984) (holding that Mexican banks were sufficiently regulated to prevent any risk of the investment's devaluation), cert. denied, 469 U.S. 1108, 105 S.Ct. 784, 83 L.Ed.2d 778 (1985). However, when the investment is not guaranteed, Marine Bank does not bar application of the securities laws to what would otherwise qualify as a security. E.g., Reves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 953, 108 L.Ed.2d 47 (1990) (we find no risk-reducing factor to suggest that these instruments are not in fact securities.); Gary Plastic Packaging Corp. v. Merril Lynch, Pierce, Fenner & Smith, Inc., 756 F.2d 230, 239-40 (2d Cir.1985). 29 The trustees claim that Bayliss churned the CD accounts. Churning occurs when a securities broker buys and sells securities for a customer's account, without regard to the customer's investment interests, for the purpose of generating commissions. Thompson v. Smith Barney, Harris Upham & Co., 709 F.2d 1413, 1416 (11th Cir.1983). The trustees further claim they were not adequately informed of the amount of commissions incurred due to this excessive trading. The appellees counter by alleging that the sale of CDs prior to maturity can be a valid investment strategy. Thus, though the parties disagree as to whether the CDs were sold with a good or evil intent, the parties do agree the CDs were sold prior to maturity. Regardless of whether the trading in CDs was approved by the trustees, and regardless of whether the trading of CDs prior to maturity constituted sound investment strategy or impermissible churning, we believe the securities laws extend their protection to the facts of this case. By selling and purchasing CDs in order to obtain gains due to the changing interest rates, the trustees relied (willingly or not) upon Bayliss' expertise. The banking laws do not protect against lost value in such circumstances, thus the trustees are left unprotected. Consequently, in those unusual circumstances in which CDs are sold prior to maturity in order to generate revenue from changes in the interest rate instead of being held to maturity (as is the customary investment practice with regard to CDs), the securities laws may be invoked in order to protect investors from the harms of impermissible churning. Cf. Gary Plastic, 756 F.2d at 241 (absent the securities laws, plaintiff has no federal protection against fraud and misrepresentation by the defendants in the marketplace.). Similarly, because the banking laws may not address the need for disclosure of a broker's commission or offer redress for the trustees' claim that the CDs were traded without permission; other gaps in protection may exist. Therefore, the court should examine the extent of the banking laws' protections and, where such gaps in protection exist, allow the trustees to allege a securities law claim. 30 The district court also granted judgment in favor of the appellees on the trustees' state securities law claims. In so doing, the court relied on Caucus Distributors v. Commissioner of Commerce, 422 N.W.2d 264, 272 (Minn.Ct.App.1988), cert. denied, 488 U.S. 1006, 109 S.Ct. 786, 102 L.Ed.2d 778 (1989), which in turn cited Marine Bank. For the same reasons we vacate and remand with regard to the trustees' claims under the federal securities laws, we also vacate and remand with regard to the state securities laws claims.