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