Opinion ID: 760192
Heading Depth: 2
Heading Rank: 3

Heading: Legitimate Interests

Text: 32 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., 457 U.S. at 644, 102 S.Ct. at 2641; CTS Corp., 481 U.S. at 93, 107 S.Ct. at 1651-52. 33 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. 34 The Bureau responds by arguing that its regulation of instate 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[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 (M.D.N.C.1988) ([T]he laws protect legitimate resident issuers by exposing illegitimate resident issuers.). Although this state interest is heightened when the state can prove that the 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. 35 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, 37 S.Ct. 227, 61 L.Ed. 498 (1917); 14 Caldwell v. Sioux Falls Stock Yards Co., 242 U.S. 559, 564, 37 S.Ct. 224, 61 L.Ed. 493 (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. Geiger-Jones Co., 242 U.S. 539, 551, 37 S.Ct. 217, 61 L.Ed. 480 (1917) (upholding Blue Sky Law designed to prevent deception and save credulity and ignorance from imposition); Cola v. Terzano, 129 N.J.Super. 47, 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, 156 N.J.Super. 77, 383 A.2d 460 (N.J.Super.Ct.App.Div.1977); State v. Russell, 119 N.J.Super. 344, 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 ref'd n.r.e.), appeal dismissed for want of a substantial federal question, 439 U.S. 961, 99 S.Ct. 445, 58 L.Ed.2d 419 (1978). New Jersey's regulation of sales by in-state brokers to out-of-state buyers serves the legitimate purpose of preventing fraudulent transactions. 36 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 because a broker-dealer such as Goldmen could otherwise delay or even avoid the Bureau's scrutiny through an initial sale to a cooperative party outside New Jersey. Because there is no filing requirement for secondary transactions, Goldmen could arrange to sell a security to a friendly outof-state party, immediately buy back the security, and then sell it freely to New Jersey residents using possibly questionable sales practices. App. 77-78. 15 New Jersey's most effective means of preventing such an undesirable result would be to block the initial public offering. See Long, § 3.04[b-c] at 3-52 to 3-53. 37 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.