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Securities and Exchange Commission v. Universal Service Ass'n

June 23, 1939


Author: Treanor

Before EVANS, MAJOR, and TREANOR, Circuit Judges .

TREANOR, Circuit Judge .

This is an appeal from the decree of the District Court enjoining violations of Sections 5 and 17 of the Securities Act of 1933*fn2, as amended. The action below was prosecuted by the Securities and Exchange Commission pursuant to authorization of Section 20 (b) of the act, 15 U.S.C.A. ยง 77t (b). The decree enjoined six defendants, C. Fanklin Davis, Justus Chancellor, Universal Service Association, a corporation, Universal Order of Plenocrats, an association, Harry N. Andreasen, and Samuel R. Maxwell. The last two named defendants have not joined in this appeal. All of the defendants have been engaged in the promotion of a concept which they styled "plenocracy." The following statement respecting plenocracy is found in literature distributed in connection with its promotion.

The light breaks through to those who get the vision of plenocracy. Plenocracy is a word to be conjured with. It is a coined word and means the power of plenty, the science of creating abundance for all. It is a word with a halo around it, because it is in the spiritual realm of life; and it is the personification of the nomic law of the Lord, so beautifully portrayed in the Bible.

Representations were made that in applied "plenocracy" contributions of money are coordinated with labor and land in an agricultural enterprise conducted in harmony with "the science of creating abundance for all"; that "increase from Mother Earth is naturally and continually increasing and is, therefore, designated in plenocracy as 'natural increase;'" that in cycles of five years this "natural increase" amounts to 150% of amounts contributed to plenocracy, and that, therefore, there is assured profit of 30% per annum with no chance of risk or loss to the contributor.

Prior to 1933 the defendants-appellants, Davis and Chancellor, promoted plenocracy through a corporate instrumentality, the Citizens Universal Service Company, and an association, the Universal Service Association. Chancellor was president and Davis was secretary-treasurer of the corporation. The Service Company employed representatives to solicit contributions, the representatives being styled "registrars" and the contributors, "members." A prospective "member" was given an application blank to sign which was accepted by the corporation, Davis and Chancellor signing the acceptance. By the terms of this instrument, monetary contributions were to be used by the company to grow and market special crops by "intensive scientific methods"; and at the end of five years there would be returned to each member an amount equal to total contributions plus 30% per annum, such returns to be either in cash or by deed to a "little farm" at the election of the member.

On the reverse side of the application appeared a "little farm ownership table" which contained representations of various forms of return based upon 30% per annum profit. The following statements are contained in the table: "Pay $1.00 per month for five years and receive deed to 'little farm' of not less than 1/2 acre nor more than 3 acres, worth $150 or take your share of the profits in cash from special crops grown by Intensive Farming Methods."

In 1933 the Universal Service Association, a defendant herein, was incorporated under the laws of Illinois as a non-profit corporation. It took over the activities carried on by the two prior organizations and Davis and Chancellor continued to act as president and secretary-treasurer respectively.This corporation used four forms of "applications for enrollment." The conception of plenocracy and the representations connected with the promotion thereof were substantially the same as had been made in connection with the activities of the earlier organizations. The essential appeal to those who were solicited to apply for enrollment was the representation of a gain of 30% to be returned to the enrollee in accordance with the "little farm ownership table" or "the natural increase table." An intensive advertising and soliciting campaign was carried on by the corporation and numerous pamphlets were distributed. Photostatic copies of checks were exhibited as a representation that the originals had been sent to "members" as "natural increase." One item of publicity was a photograph of a group of gentlemen who were represented to be the "faculty and Board of Trustees - Justice Chancellor, President of the Board." There was a list of names of persons who were represented as being members of the faculty in various departments, including Bureau of Social Service, Division of Health and Home Economics, Christian Economics, Metaphysics, Bureau of Technology, Philosophy and Agriculture. C. Franklin Davis was listed as director of finance. Maxwell, a defendant below, who has not appealed, testified that he "was the only one of the faculty that functioned"; and that there was a lecture hall but that he "never used it." The equipment of the University appeared to consist of five books and five lessons on plenocracy written by Maxwell, who was employed by Davis and Chancellor at a time when they were "carrying out the business of rendering service (plenocracy) to the citizens."

On February 14, 1936, a judgment of ouster was entered by the Circuit Court of Cook County on the ground that the corporation was in fact carrying on a business for profit in violation of its corporate powers. The judgment prohibited the corporation from doing anything that might lead any person to believe or expect that by contributing to the corporation it would receive any profit "in money distribution or the natural increase of the soil or natural resources or in anything of value whatsoever." The judgment ousted the corporation from exercising any function other than giving instructions in the economic theory designated by it as plenocracy, and provided that in so instructing "it shall not demonstrate its theories by actually engaging in or supervising on its own behalf or on behalf of any other person any agricultural enterprise." This judgment was affirmed by the Illinois Supreme Court*fn3

On February 22, 1936, a "voluntary association" was formed under the name of "Universal Order of Plenocrats" which continued the promotion of plenocracy by substantially the same methods that had been practiced by Davis and Chancellor in connection with the Citizens Universal Service Company, the Universal Service Association, and in the Universal Service Association, Inc. In short, they continued the activities which had been the basis of the ousting of the Universal Service Association, Inc. Chancellor was chairman and Davis was secretary of the meeting in which the Universal Order of Plenocrats was organized and they attested the minutes of the meeting. The minutes of the meeting consisted of a document which created the association, this instrument being referred to as the "I Am" agreement, and which stated that the purpose of the association was to establish plenocracy. There were numerous signatures to this instrument in addition to those of the defendants; and in respect to the execution of the instrument Andreasen, defendant below, testified as follows:

I recognize among the signatures to Exhibit L (I Am document) * * * signatures of myself, Dr. Maxwell, C. Franklin Davis, and numerous cooperators and registrars. Some registrars were present and many cooperators. They are the people who make the contribution.

This defendant stated that he had been connected with plenocracy since 1932 and a suite of offices at 6 N. Michigan Avenue, Chicago, Illinois was the office of the Universal Service Association and Universal Order of Plenocrats, and that he was employed there. He further testified that there was no difference in the way "the business was run under the different names."

The Universal Order of Plenocrats adopted three forms of application for enrollment which did not differ in substance from the forms used in connection with the earlier organizations. It used the advertising material of the prior enterprises and its activities were unchanged. The accounts of the various enterprises had been kept as those of one continuous business. One ledger card was kept for each "member", but the cards, which show all payments made, do not indicate the payee. Defendants insist that the foregoing is not significant since according to the testimony of Davis the cards were the property of the contributors and kept by the contributors' agent. But Davis produced the cards on subpoena directed to him and the evidence and findings do not support the existence of an agency relationship between Davis and the contributors in respect to the custody of the cards.

On March 14, 1936, approximately a month after the formation of the Universal Order of Plenocrats, the present action was instituted, naming as defendants Davis, the two non-appealing defendants, Maxwell and Andreasen, and the Universal Service Association, Inc. The original bill set out as exhibits the four application forms used by the Universal Service Association. Thereafter, upon leave of court, the plaintiff-appellee filed an amendment (and supplement) to the original bill of complaint adding as parties defendant Justus Chancellor and the Universal Order of Plenocrats. The bill, as amended, alleged, and the court below found, that the individual defendants were performing the acts and practices complained of through the use of the variously styled enterprises. The amendment added the three forms adopted by the Universal Order of Plenocrats. Pending the final decree, a preliminary injunction was issued which enjoined each of the six defendants from using the seven exhibits or "any other securities of substantially like kind and character * * * whether issued in the name of Universal Service Association or in the name of the Universal Order of Plenocrats, or in any other name or ...

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