cause of action under the federal securities laws; and that, in the absence of any other basis for subject matter jurisdiction, the pendent claims should be dismissed as well.
In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975), the Supreme Court held that the antifraud provisions of the 1934 Act may only be asserted by purchasers or sellers of securities. That is unquestionably true today with respect to claims for money damages. There is some authority for the proposition that the owner of a security may obtain injunctive relief even if he cannot satisfy the purchaser/seller requirement, see, e.g., Davis v. Davis, 526 F.2d 1286, 1287 (5th Cir. 1976) (plaintiff shareholder had standing to seek injunctive relief for violations of federal securities laws), although other courts have questioned whether the injunction exception survives Blue Chip Stamps, see Cowin v. Bresler, 239 U.S. App. D.C. 188, 741 F.2d 410, 423-25 (D.C.Cir. 1984).
In the case at bar, GBJ seeks equitable relief and money damages. On the latter claim it characterizes itself as a forced seller of a security, under Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir.), cert. denied, 389 U.S. 970, 19 L. Ed. 2d 460, 88 S. Ct. 463 (1967,) and its progeny.
It is apparent that whatever its theory of liability or claim for relief, GBJ must show that it has an ownership interest in a "security." On that aspect of the case, GBJ contends that its consulting agreement with Forsun (later SCC) constitutes an "investment contract" as that term is used in Section 3(a)(10) of the 1934 Act, 15 U.S.C. § 78c(a)(10). That section of the statute, set forth in the margin,
undertakes to define the "security" that falls within the amibt of the 1934 Act.
The case for GBJ is that the consulting agreement "granting plaintiff its interest in the residual value [of the leased equipment] meets all five of the investment contract requirements" articulated by Securities Exchange Commission v. W.J. Howey Co., 328 U.S. 293, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946), and Marine Bank v. Weaver, 455 U.S. 551, 71 L. Ed. 2d 409, 102 S. Ct. 1220 (1982). Plaintiff's brief at 15.
Under the five-part test derived from those cases, an "investment contract" means a contract, transaction, transaction or scheme whereby a person (1) invests his money (2) in a common enterprise and (3) is led to expect profits (4) solely from the efforts of the promoter or third party and (5) risks loss. See Department of Economic Development v. Arthur Andersen & Co. (U.S.A.), 683 F. Supp. 1463, 1472 (S.D.N.Y. 1988).
In the case at bar, GBJ is aware of the "purchaser-seller" limitation upon private damage actions brought under section 10(b) of the 1934 Act. See Blue Chip Stamps, supra; Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952), cert. denied, 343 U.S. 956, 96 L. Ed. 1356, 72 S. Ct. 1051 (1952). As noted, GBJ characterizes itself as a forced seller under the Vine line of cases. However, GBJ must satisfy the threshold requirement that it be regarded as an "investor," who in "the vast majority of cases" arising under § 10(b) "have been owners of rights in identified securities," Niederhoffer, Cross & Zeckhauser v. Telstat Systems, 436 F. Supp. 180, 184 (S.D.N.Y. 1977). While a person's "investment," in order to meet the definition of an investment contract, need not take the form of cash only, but may consist of goods and services, International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 560, 58 L. Ed. 2d 808, 99 S. Ct. 790 n.12 (1979), the purported investment must be viewed within the context of the "total and indivisible compensation package." Id. at 560. Daniel held that the 1934 Act did not apply to Union employees' noncontributory, compulsory pension plan. Consideration of the entire agreement between the parties is necessary because, as the Supreme Court observed in Weaver, "the broad statutory definition [of a 'security'] is preceded, however, by the statement that the terms mentioned are not to be considered securities if 'the context otherwise requires . . .,'" to which the Court added:
Moreover, we are satisfied that Congress, in enacting the securities laws, did not intend to provide a broad federal remedy for all fraud. 455 U.S. at 556.
Consequently, as Judge Conner of this Court said in Neiderhoffer, "the judicial eye must remain focused upon the congressional concerns behind § 10(b) in the determination of the issue of a plaintiff's standing to sue." 436 F. Supp. at 183. A determination that a particular transaction may fall within the literal language of the securities statutes only begins the analysis, it does not end it. In United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 849, 44 L. Ed. 2d 621, 95 S. Ct. 2051 (1975), the Court said:
The primary purpose of the Acts of 1933 and 1934 was to eliminate serious abuses in a largely unregulated securities market. The focus of the Acts is on the capital market of the enterprise system: the sale of securities to raise capital for profit-making purposes, the exchanges on which securities are traded, and the need for regulation to prevent fraud and to protect the interest of investors. Because securities transactions are economic in character Congress intended the application of these statutes to turn on the economic realities underlying a transaction, and not on the name appended thereto. Thus, in construing these Acts against the background of their purpose, we are guided by a traditional canon of statutory construction:
"[A] thing may be within the letter of the statute and yet not within the statute, because not within its spirit, nor within the intention of its makers." Church of the Holy Trinity v. United States, 143 U.S. 457, 459 1892, 36 L. Ed. 226, 12 S. Ct. 511 ).
Consistent with that analysis, the Supreme Court has "emphasized the importance of ascertaining the congressional purposes underlying the statute as a means of defining the scope of the implied private right of action under § 10(b)." Niederhoffer at 183. Thus in Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977), the Court dealt generally with the circumstances justifying an implied cause of action under § 10(b) of the 1934 Act:
Congress did not expressly provide a private cause of action for violations of § 10(b). Although we have recognized an implied cause of action under that section in some circumstances, Superintendent of Insurance v. Bankers Life & Cas. Co., supra, at 13 n.9, we have also recognized that a private cause of action under the antifraud provisions of the Securities Exchange Act should not be implied where it is "unnecessary to ensure the fulfillment of Congress' purpose" in adopting the Act. Piper v. Chris-Craft Industries, ante, at 41. Cf. J.I. Case Co. v. Borak, 377 U.S. 426, 431-433, 12 L. Ed. 2d 423, 84 S. Ct. 1555 (1964).
The court must ask in each case if Congress intended to bring within the ambit of the federal securities anti fraud laws the particular transaction described and grievance asserted in the plaintiff's complaint. Thus the Court said in Green at 477:
No doubt Congress meant to prohibit the full range of ingenious devices that might be used to manipulate securities prices. But we do not think it would have chosen this "term of art" if it had meant to bring within the scope of § 10(b) instances of corporate mismanagement such as this, in which the essence of the complaint is that shareholders were treated unfairly by a fiduciary.
Applying these general principles to the case at bar, I think it plain that GBJ lacks standing to invoke the federal statute or rule. The July 15, 1985 agreement between Forsun and GBJ is a form of employment contract; P 1 provides: "Forsun agrees to hire Consultant [GBJ] as a consultant and Consultant agrees to act as a consultant to Forsun and to provide to Forsun" specified services. P 2, quoted supra, provides that part of GBJ's compensation "shall be made at the closing for the acquisition" of leased equipment, and the balance of its compensation, representing "payments with regard to residual values," shall be made "when received by Forsun." This language is clear and unambiguous. Its terms do not support plaintiff's allegations that it "invested" in the leases or the leased equipment, fended Complaint, P 15, or that plaintiff has an "interest in the residual value of the equipment," id. at P 31. Those characterizations fly in the face of the provisions of P 2, which recite only that Forsun shall pay as deferred compensation to GBJ "an amount equal to 10% of the residual value" of the leased equipment, those payments to be made only when payments from third parties "with regard to residual value" are actually "received by Forsun." If the parties intended the contract to establish a vehicle by which GBJ would invest in the leased equipment and receive a property interest in return, words were available to state that purpose. The words chosen clearly do not.
GBJ contends that the defendants' course of conduct with respect to selling the leases, past and proposed, violates GBJ's rights to compensation under P 2. But neither the transaction between the parties nor GBJ's claims implicate the federal securities laws. In Niederhoffer, a closely analogous case, Judge Conner said:
The allegations of fraud in the present case . . . in no way threatened the integrity of securities transactions or markets as such. They simply bespeak frustrations of a private contractual expectancy. Id. at 186-87.
That is equally true of the case at bar.
The dispute between the parties appears to turn upon the question of whether Sequa may sell the leases prior to their termination free of any obligation to make a "residual value" payment to GBJ. Whatever the answer to that or related disputes may be, and I express no view on them, I conclude without difficulty that Congress did not intend to bring such issues, arising out of such a contract, within the scope of § 10(b).
Indeed, Neiderhoffer applies a fortiori. Plaintiff, a finder in the field of corporate acquisitions, was engaged by defendant to obtain a buyer interested in acquiring the defendant corporation by a purchase of its stock or assets or by a merger or consolidation. Plaintiff alleged, and Judge Conner accepted for Rule 12(b)(1) purposes, that in the event of an acquisition, defendant agreed to transfer to plaintiff, as payment for its services, "a portion of the security" received from the buyer. 436 F. Supp. at 181. That provision for compensation enabled plaintiff, in aid of its federal securities claim, to invoke § 13(a)(13) of the 1934 Act, which provides that the terms "buy" and "purchase" each include "any contract to buy, purchase, or otherwise acquire." Plaintiff in Neiderhoffer argued that his compensation agreement constituted a contract for the purchase of securities: an argument not available to plaintiff at bar. Notwithstanding that additional theory, Judge Conner concluded that the agreement between the parties did not implicate the federal securities laws.
The case at bar presents other questions of substance, including whether the complaint sufficiently alleges a device, scheme, or artiface to defraud, or the omission of a material fact, of which GBJ may complain, and whether GBJ may properly be regarded as a forced seller of securities under the Vine line of cases. Since I conclude that GBJ does not cross the threshold, in that the contractual provisions for its compensation do not give rise to an investment contract or other form of "security," I need not reach those questions.
For the foregoing reasons, the Clerk of the Court is directed to dismiss plaintiff's first cause of action for lack of subject matter jurisdiction. In view of that disposition of the only federal claim, the Clerk is also directed to dismiss the pendent claims alleged in the remaining causes of action without prejudice. See United Mine Workers of America v. Gibbs, 383 U.S. 715, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966).
It is SO ORDERED.
Dated: New York, New York
October 22, 1992
CHARLES S. HAIGHT, JR.
UNITED STATES DISTRICT JUDGE