RUBIN v. UNITED STATES
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
Argued November 12, 1980
Decided January 21, 1981
Section 17 (a) of the Securities Act of 1933 prohibits fraud in the "offer or sale" of any securities. Section 2 (3) of the Act defines "sale" as including "every . . . disposition of a security or interest in a security, for value," and "offer" as including "every attempt or offer to dispose of . . . a security or interest in a security, for value." Petitioner was convicted of conspiracy to violate 17 (a) by making false representations to a bank concerning shares of stock pledged as collateral for loans. The Court of Appeals affirmed, rejecting petitioner's contention that the stock pledges did not constitute "offers" or "sales" under 17 (a).
The pledge of stock to a bank as collateral for a loan is an "offer or sale" of a security under 17 (a). Pp. 428-431.
BURGER, C. J., delivered the opinion of the Court, in which BRENNAN, STEWART, WHITE, MARSHALL, POWELL, REHNQUIST, and STEVENS, JJ., joined. BLACKMUN, J., filed an opinion concurring in the judgment, post, p. 431.
Louis Bender argued the cause for petitioner. With him on the brief was Sandor Frankel.
Stephen M. Shapiro argued the cause for the United States With him on the brief were Solicitor General McCree, Sara Criscitelli, Ralph C. Ferrara, Jacob H. Stillman, and Elisse B. Walter. *
[ Footnote * ] Darrel E. Reed, Jr., and Richard K. Willard filed a brief for Bossier Bank & Trust Co. as amicus curiae urging reversal.
CHIEF JUSTICE BURGER delivered the opinion of the Court.
We granted certiorari in this case to decide whether a pledge of stock to a bank as collateral for a loan is an "offer or sale" of a security under 17 (a) of the Securities Act of 1933, 15 U.S.C. 77q (a).
Late in 1972, petitioner became vice president of Tri-State Energy, Inc., a corporation holding itself out as involved in energy exploration and production. At the time, Tri-State was experiencing serious financial problems. Petitioner approached Bankers Trust Co., a bank with which he had frequently dealt while he had been affiliated with an accounting firm. Bankers Trust initially refused a $5 million loan to Tri-State for operating a mine. Nevertheless, it lent Tri-State $50,000 on October 20, 1972, for 30 days with the understanding that if Tri-State could produce adequate financial information and sufficient collateral, additional financing might be available.
Petitioner assisted other officers of Tri-State in preparing a financial statement for submission to the bank. The balance sheet, which listed a net worth of $7.1 million, was false [449 U.S. 424, 426] and misleading in several respects. 1 Tri-State also submitted inflated projections of future earnings based in large measure on sham contracts and forged documentation. Subsequently, petitioner personally paid the loan officer $4,000 and another official $1,000 as inducements for further loans. Tri-State borrowed an additional $425,000 over a brief period. 2 Ultimately, the loans were consolidated into a single demand note for $475,000, dated February 26, 1973.
Bankers Trust required collateral for each new loan; between October 20, 1972, and January 19, 1973, Tri-State pledged stock in six companies. The stocks were represented as being good, marketable, and unrestricted and valued at a total of approximately $1.7 million; 3 in fact, they were practically worthless. Many shares were issued by "shell" companies. Most were simply "rented" - i. e., borrowed from the owner for a fee - to show to the bank or were otherwise restricted. In one instance, petitioner arranged for fictitious quotations to appear in a service reporting over-the-counter transactions and used by the bank in evaluating pledged [449 U.S. 424, 427] securities; in another, Tri-State planted, through others, a fictitious advertisement in an overseas newspaper and showed it to the bank, representing it to be a quotation. Trading of one issue was suspended shortly after the pledge when the issuing company could not account for 900,000 shares of its stock; Tri-State replaced this collateral before Bankers Trust learned of the difficulty. Petitioner acted as Tri-State's agent for most of these transactions.
A Justice Department request for information about Tri-State received February 28, two days after the consolidated note was signed, prompted Bankers Trust on March 5 to demand payment in full within three days. No payment of this demand was made, and in May another officer of Tri-State met with bank officials and tried to forestall foreclosure. After rejecting Tri-State's request for a further loan, the bank sued on the note.
Bankers Trust also proceeded against petitioner personally as a guarantor of the loans. Petitioner signed a confession of judgment against himself in the amount of the unpaid loans, plus accrued interest, but thereafter filed a petition for bankruptcy. The bank recovered only about $2,500, plus interest and expenses, on its $475,000 loan.
Petitioner was indicted on three counts of violating and conspiring to violate various federal antifraud statutes, including 17 (a) of the Securities Act of 1933, 15 U.S.C. 77q (a). 4 Following a jury trial in the United States District [449 U.S. 424, 428] Court for the Southern District of New York, petitioner was convicted on the conspiracy count. On appeal to the Court of Appeals for the Second Circuit, petitioner raised several grounds, including whether a pledge of stock as collateral for a bank loan is an "offer or sale" under 17 (a). The Court of Appeals affirmed. 609 F.2d 51 (1979). 5 We granted certiorari limited to the question whether such a pledge is an "offer or sale." 445 U.S. 960 (1980).
Section 17 (a) of the Securities Act of 1933 provides:
We begin by looking to the language of the Act. E. g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197 (1976). The terms "offer" and "sale" in 17 (a) are defined in 2 (3) of the Act:
When we find the terms of a statute unambiguous, judicial inquiry is complete, except "in `rare and exceptional circumstances.'" TVA v. Hill, 437 U.S. 153, 187 , n. 33 (1978) (quoting Crooks v. Harrelson, 282 U.S. 55, 60 (1930)). Accord, Aaron v. SEC, 446 U.S. 680, 695 (1980); Ernst & Ernst v. Hochfelder, supra, at 214, n. 33. No such circumstances are present here, for our reading of the statute is wholly consistent with the history and the purposes of the Securities Act of 1933. The Uniform Sale of Securities Act, a model "blue sky" statute adopted in many states, defined "sale" in language almost identical to that now appearing in 2 (3). 7 In Cecil B. De Mille Productions, Inc. v. Woolery, 61 F.2d 45 (1932), the Court of Appeals for the Ninth Circuit construed this provision of the model statute as adopted by California and held that the definition of "sale" embraced a pledge. Congress subsequently enacted the definition from the Uniform Act almost verbatim. See Federal Securities Act: Hearings on H. R. 4314 before the House Committee on Interstate and Foreign Commerce, 73d Cong., 1st Sess., 11 (1933). See generally id., at 13; Securities Act: Hearings on S. 875 before the Senate Committee on Banking and Currency, 73d Cong., 1st Sess., 71 (1933). Petitioner has cited nothing to suggest that Congress did not intend the broad scope that cases arising under the Uniform Act, such as Woolery, supra, had given the definition of "sale." See Lorillard v. Pons, 434 U.S. 575, 581 (1978). [449 U.S. 424, 431]
Treating pledges as included among "offers" and "sales" comports with the purpose of the Act and, specifically, with that of 17 (a). We frequently have observed that these provisions were enacted to protect against fraud and promote the free flow of information in the public dissemination of securities. E. g., United States v. Naftalin, 441 U.S. 768, 774 (1979); Ernst & Ernst v. Hochfelder, supra, at 195. The economic considerations and realities present when a lender parts with value and accepts securities as collateral security for a loan are similar in important respect to the risk an investor undertakes when purchasing shares. Both are relying on the value of the securities themselves, and both must be able to depend on the representations made by the transferor of the securities, regardless of whether the transferor passes full title or only a conditional and defeasible interest to secure repayment of a loan. 8
Petitioner would have us interpret "offer" and "sale" in a way that not only is cramped but conflicts with the plain meaning of the statute and its purpose as well. We therefore hold that the pledges here were "offers" or "sales" under 17 (a); accordingly, the judgment of the Court of Appeals is
[ Footnote 2 ] Subsequent loans were made on November 22 ($50,000), November 30 ($100,000), and December 6 ($275,000).
[ Footnote 3 ] The pledges were 400,000 shares of American Leisure Corp. (October 20 - shell company; shares restricted); 2,000 shares of All States Life Insurance Co. (November 10 - nonmarketable; "rented" to show the bank but not owned by Tri-State); 20,000 shares of Marlin Investment Co. (November 22 - "rented" from a person who was told they would not be used as collateral); 100,000 shares of Management Dynamics, Inc. (December 6 - trading suspended; withdrawn as collateral); 175,000 shares of General Investment Corp. (December 19 - restricted); 50,000 shares of Satellite Systems Corp. (January 19 - restricted and "rented"; fictitious overseas advertisement planted).
[ Footnote 4 ] Count 1 of the indictment charged petitioner and his codefendants with conspiring to violate 18 U.S.C. 1014 (fraud in a bank loan application), 18 U.S.C. 1341 (mail fraud), and 18 U.S.C. 1343 (wire fraud), as well as 17 (a) (securities fraud). Counts 2 and 3 alleged substantive violations of 17 (a) and 18 U.S.C. 1014, respectively, against petitioner and some of the codefendants listed in the conspiracy count. Proceedings against petitioner were severed before trial. The Government agreed to dismiss the substantive charge of fraud in a bank loan application before the jury reached a verdict, and the jury acquitted petitioner of the substantive count of securities fraud.
[ Footnote 5 ] The Court of Appeals divided over an evidentiary issue. It rejected petitioner's argument regarding the scope of 17 (a) without comment. See 609 F.2d, at 66.
[ Footnote 6 ] The misrepresentations at issue in this case related to the stocks themselves; petitioner does not allege that his conviction, insofar as it involved securities fraud under 17 (a), was based on misrepresentations made about the financial condition of Tri-State itself. Thus, we need not decide whether misrepresentations or omissions involved in a securities transaction but not pertaining to the securities themselves can form the basis of a violation of 17 (a).
[ Footnote 7 ] National Conference of Commissioners on Uniform State Laws, Handbook and Proceedings 174 (1929) (Fourth and Final Draft) ("sale" defined to "include every disposition, or attempt to dispose of a security or interest in a security for value").
[ Footnote 8 ] To the extent that petitioner argues there was no need to protect pledgees, the very fact that Congress saw fit to afford such protection under the Commerce Clause, U.S. Const., Art. I, 8, cl. 3, ends our inquiry, absent a contention, not present here, that the Constitution otherwise prohibits the means selected. "Our individual appraisal of the wisdom or unwisdom of a particular course consciously selected by the Congress is to be put aside in the process of interpreting a statute. Once the meaning of an enactment is discerned and its constitutionality determined, the judicial process comes to an end." TVA v. Hill, 437 U.S. 153, 194 (1978).
JUSTICE BLACKMUN, concurring in the judgment.
While I agree that a pledge of stock to a bank as collateral for a loan is an "offer or sale" of a security within the meaning [449 U.S. 424, 432] of 17 (a) of the Securities Act of 1933, 15 U.S.C. 77q (a), I reach that conclusion by a slightly different route than does the Court. The Court holds that a pledge confers an "interest in a security," and that therefore a pledge of shares of stock as collateral for a loan constitutes a "disposition of [an] interest in a security, for value" within the meaning of 2 (3) of the Act, 15 U.S.C. 77b (3). Ante, at 429. I would hold simply that a pledge of stock as collateral is a type of "disposition" within the meaning of 2 (3). See United States v. Gentile, 530 F.2d 461, 466 (CA2), cert. denied, 426 U.S. 936 (1976) (interpreting 2 (3) of the 1933 Act). Cf. 3 (a) (14) of the Securities Exchange Act of 1934, 15 U.S.C. 78c (a) (14) ("[t]he terms `sale' and `sell' each include any contract to sell or otherwise dispose of"); Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1029 (CA6 1979) (interpreting 3 (a) (14) of the 1934 Act). [449 U.S. 424, 433]