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ABRAMS v. OPPENHEIMER GOVERNMENT SECURITIES

August 8, 1984

RICHARD N. ABRAMS, PLAINTIFF,
v.
OPPENHEIMER GOVERNMENT SECURITIES, INC., AND JAMES ZUREK, DEFENDANTS.



The opinion of the court was delivered by: Leighton, District Judge.

Memorandum

Richard Abrams has filed a seven-count amended complaint against defendants James Zurek and Oppenheimer Government Securities, Inc. Count I alleges a violation of the Commodity Exchange Act (CEA), 7 U.S.C. § 1, et seq. Count II alleges violations of Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). Count III claims that defendants violated both Section 10(b) of the 1934 Act and its adjunct, S.E.C. Rule 10b-5. Counts IV through VII, invoking the court's pendent jurisdiction, allege respectively that defendants violated the Illinois Securities Law of 1953, committed common law fraud, acted negligently, and breached their contract with plaintiff. The cause is before the court on defendants' motion to dismiss the separate counts of the complaint on various grounds. For the following reasons, defendants' motion is granted in part and denied in part.

I

On February 6, 1981, plaintiff purchased from Oppenheimer Governmental Securities, Inc. (OGS), a contract for the forward delivery of Government National Mortgage Association (GNMA) securities. GNMA certificates evidence a participation interest in a pool of Government-underwritten residential mortgages. Typically issued by mortgage bankers, GNMA certificates are guaranteed as to payment of principal and interest by the federal government. The forward contract obligated OGS to sell a certain amount of GNMA certificates to plaintiff on May 20, 1981 for a price determined at the time the contract was entered into. Plaintiff was required to make a 10% "good faith" deposit on the agreed purchase price.

Plaintiff alleges that defendant Zurek, an account representative of OGS, induced him to contract for approximately $200,000 worth of the GNMA certificates by making certain misrepresentations. According to the complaint, Zurek told plaintiff that the value of the GNMAs would increase by approximately six points for every one point decline in the prime lending rate. Zurek recommended immediate purchase of the GNMAs because he had never "seen the bonds so low." In addition, Zurek promised plaintiff that he would receive 18% interest on his "good faith" deposit." As fortune would have it, the prime lending rate declined after this transaction; however, to Zurek's surprise and plaintiff's dismay, the value of GNMAs dropped too. Furthermore, plaintiff was paid only 14% to 15% interest on his "good faith" deposit. Confounding matters, Zurek neglected to tell plaintiff that the "good faith" deposit was subject to a margin requirement. Consequently, plaintiff refused to make a supplemental deposit in order to retain his investment when OGS instituted a margin call. On April 13, 1981, OGS sold plaintiff's GNMAs on the open market due to his failure to pay the additional deposit. Defendants since have refused to return $17,500 of the funds that were deposited, claiming that market conditions had dissipated plaintiff's account by that amount. Abrams seeks to recover the $17,500 in this action.

II

In a recent opinion, the Seventh Circuit ruled that GNMA certificates are commodities within the meaning of CEA § 2(a)(1), 7 U.S.C. § 2. Board of Trade of City of Chicago v. S.E.C., 677 F.2d 1137, 1142 (7th Cir.), judgment vacated as moot, 459 U.S. 1026, 103 S.Ct. 434, 74 L.Ed.2d 594 (1982). Defendants validly contend, however, that the "Treasury Amendment" of 1974, 7 U.S.C. § 2, excludes from the coverage of the Commodities Act transactions involving certain financial instruments, even though they are commodities, when trading does not take place on a formally organized futures exchange:

  Nothing in this chapter [the CEA] shall be deemed to
  govern or in any way be applicable to transactions in
  foreign currency, security warrants, security rights,
  resales of installment loan contracts, repurchase
  options, government securities, or mortgages and
  mortgage purchase commitments, unless such
  transactions involve the sale thereof for future
  delivery conducted on a board of trade.

Judge Kocoras of this district recently conducted an exhaustive review of the legislative history of the Treasury Amendment and concluded that transactions involving GNMAs, which are essentially government backed mortgage purchase commitments, clearly are exempt from the ambit of the CEA when trading is "over the counter" rather than through an organized exchange. See ABM Industries, Inc. v. Oppenheimer Government Securities, Inc., 82 C 2018 (October 21, 1982). Here, the pleadings and the submissions of the parties establish that the GNMA forward contract at issue was not a transaction through an exchange; plaintiff and Zurek negotiated face to face, defendants personally were responsible for the delivery of the GNMAs, and no third party was ever to be involved. See ABM Industries, supra; Bache Halsey Stuart v. Affiliated Mortg. Inv., 445 F. Supp. 644, 646 (N.D.Ga. 1977). Therefore, the court concludes that the Treasury Amendment exempts the transaction in this case from the coverage of the CEA. Accordingly, Count I of the amended complaint, which alleges that defendants violated provisions of the CEA, is dismissed.

III

Defendants also urge the court to dismiss the counts of the complaint alleging violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Their primary argument is that GNMA contracts are not securities within the meaning of the 1933 and 1934 Acts; and plaintiff, therefore, is barred from bringing this action. For the following reasons, the court concludes that even though defendants' premise is valid the corollary is not.

A security is defined by statute as "any note, stock, . . . evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, . . . investment contract, . . . or, in general, any interest or instrument commonly known as a `security,' . . . or warrant or right to subscribe to or purchase any of the foregoing." 15 U.S.C. § 77b(1); see also 15 U.S.C. § 78c(a)(10). The basic test for distinguishing transactions involving "investment contracts" or "instruments commonly known as securities" from other commercial dealings is

  whether the scheme involves an investment of money in
  a common enterprise with profits to come solely from
  the efforts of others. . . . The touchstone is the
  presence of an investment in a common venture
  premised on a reasonable expectation of profits to be
  derived from the entrepreneurial or managerial
  efforts of others.

United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 (1975). Defendants persuasively argue that a standard GNMA forward contract is not a "security" within the meaning of the securities laws. It is apparent that plaintiff did not invest in a common business venture with OGS by virtue of contracting with the company for the sale of GNMA certificates at a future date. There was no expectation among the parties that profits would be shared. See LTV Federal Credit Union v. UMIC Government Securities, Inc., 523 F. Supp. 819, 830 (N.D.Tex. 1981). Moreover, it is clear that any profit plaintiff hoped to derive through his investment was to come not from the managerial or entrepreneurial skills of OGS but from fluctuations of the market. The Seventh Circuit recently held that GNMA options, conceptually similar to GNMA forwards, are not "securities" as defined by the securities laws. Board of Trade of City of Chicago v. S.E.C., 677 F.2d 1137, 1155-1159 (7th Cir.), judgment vacated as moot, 459 U.S. 1026, 103 S.Ct. 434, 74 L.Ed.2d 594 (1982). In addition, the Board of Trade court construed the terms "warrants or rights to subscribe or purchase" so narrowly that the standard GNMA forward contract is not subsumed into the definition of security by virtue of these criteria either. Id. Directly addressing the issue in ...


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