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SEC v. GLEN-ARDEN COMMODITIES

January 17, 1974

SEC
v.
Glen-Arden Commodities, Inc., et al., Defendants


Costantino, District Judge.


The opinion of the court was delivered by: COSTANTINO

COSTANTINO, District Judge:

In this action the plaintiff seeks injunctive relief, both temporary and permanent, against the eight defendants named in its complaint, based upon certain alleged violations by them of the Securities Act of 1933, 15 U.S.C. §§ 77a et seq. and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq. In its first cause of action the Securities and Exchange Commission (S.E.C.) alleges that the defendants have violated and are violating Sections 5(a) and (c) of the Securities Act of 1933, in that they offered and sold unregistered securities in the form of Scotch whisky warehouse receipts. The second cause of action alleges that defendants have been and are employing devices, schemes and artifices in connection with the sales of the warehouse receipts to defraud, in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The S.E.C. charges in its third cause of action that the corporate defendants Glen-Arden Commodities, Inc. (Glen-Arden) and Milbank Trading Co. Inc. (Milbank) have been and are unlawfully acting as broker-dealers in securities, in violation of Sections 15(a) and (b) of the Securities Exchange Act of 1934.

 The court has subject matter jurisdiction pursuant to Section 22(a) of the Securities Act of 1933, as amended, 15 U.S.C. § 77v(a) and Section 27 of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78aa; or in the alternative pursuant to Section 1345 of Title 28 of the United States Code. *fn1"

 The essential issue in this litigation is whether the warehouse receipts offered by the defendants are securities as defined by Section 2(1) of the Securities Act of 1933. The Supreme Court in S.E.C. v. C.M. Joiner Leasing Corp., 320 U.S. 344, 88 L. Ed. 88, 64 S. Ct. 120 (1943), stated that the test for determining whether an offering is a security under the securities law 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. In the enforcement of an act such as this it is not inappropriate that promotors' offerings be judged as being what they were represented to be. Id. at 352-353.

 The Court gave additional guidelines in S.E.C. v. W.J. Howey Co., 328 U.S. 293, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946), when it stated:

 
[An] investment contract for purposes of the Securities Act means a contract, transaction or scheme, whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promotor or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise. Id. at 298-299.

 Later in its opinion the Supreme Court stated further that:

 
The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value. . . . The statutory policy of affording broad protection to investors is not to be thwarted by unrealistic and irrelevant formulae. Id. at 301.

 It is clear then that the manner in which the Scotch whisky warehouse receipts were sold -- the information given, profits predicted, services promised and the obligations to be assumed by the purchasers -- were at all times relevant to the proceedings before the court. *fn2"

 The action was commenced on August 23, 1973. With the consent of all parties defendants' time to answer was extended until September 28, 1973. On September 12 the S.E.C. filed a motion for an order granting a preliminary injunction, enjoining the defendants from further violations of the Securities Acts. Fed. R. Civ. P. 65. On September 19, counsel for the defendants filed an Order to Show Cause which sought, inter alia, to further extend defendants' time to answer to October 24, to postpone the return date of the S.E.C.'s motion for a preliminary injunction and to hold the return date in abeyance pending a hearing on defendants' motion to dismiss. The court extended defendants' time to answer and postponed the return date of the hearing to October 4, 1973. Further extensions and delays were tolerated by the court because of the complexity of the issues and the problems encountered by defense counsel in preparing for the hearing. Finally, November 15 was set down as the date for the hearing on the preliminary injunction. However, on the eve of the hearing, defense counsel moved to empanel a three-judge court to determine the "jurisdictional" question and for an order enjoining the court from conducting the hearing. After the court denied his motion, defense counsel sought a writ of mandamus from the United States Court of Appeals for the Second Circuit. This was denied, and following further delays occasioned by the illness of defense counsel, the hearing on the preliminary injunction commenced on November 16, 1973.

 At the conclusion of the proceedings on that day, the court, confronted by significant evidence tending to show that the defendants were in violation of the securities laws, that they were engaged in fraudulent activities and that there was a need to prevent further exploitation of the investing public, granted a temporary restraining order for one week until the hearing could be continued. At that juncture the court had before it the testimony of Randall Hanes, a customer of Milbank, in addition to the following documents:

 
1. The verified complaint of William D. Moran, Regional Administrator of the Securities ...

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