The opinion of the court was delivered by: Justice Hartman
Appeal from the Circuit Court of Cook County. Honorable Dorothy Kirie Kinnaird, Judge Presiding.
Plaintiffs, Integrated Research Services, Inc. (IRS) and Jason Jankovsky, sought administrative review of a decision by defendants, the Illinois Secretary of State, Securities Department, Jesse White, Secretary of State for the State of Illinois, and William L. Houlihan, Chief Deputy Director of the Illinois Securities Department (collectively the Secretary), finding that plaintiffs had offered to the public a security that was not registered with the Secretary of State and permanently prohibiting plaintiffs from offering or selling any securities in or from the State of Illinois. The circuit court affirmed the Secretary's order. On appeal plaintiffs contend that the Secretary erred in: (1) determining that the definition of "security" in the Illinois Securities Law of 1953 (the securities law)(815 ILCS 5/1 et seq. (West 1998)) includes investment contracts that involve trading in foreign currencies and (2) concluding that plaintiffs were offering "investment contracts" to their clients.
IRS offers investors the opportunity to participate in investments in cash foreign currencies on the interbank foreign exchange market in London, England (the Forex market). Jankovsky is the Director of North American operations for IRS.
On July 8, 1999, the Secretary issued a temporary order prohibiting plaintiffs from offering or selling any securities in or from the State of Illinois. The order stated that the investment opportunity offered on the IRS website was a "security" as defined by the securities law and that plaintiffs had violated the securities law by failing to register the offered investment as a security with the Secretary.
An administrative hearing was held on January 13, 2000. The parties introduced several exhibits including the standard customer account agreement and cash commodity trading authorization forms signed by plaintiffs' customers and excerpts from plaintiffs' internet website.
Jankovsky, the only witness, testified that IRS solicits customers through direct mailing and its website. IRS hires traders in London who execute the foreign currency transactions on behalf of IRS clients. To open an account with IRS a prospective investor must have an interview during which Jankovsky informs the investor of the risks involved with trading in foreign currencies. Each investor must sign a cash commodity trading authorization form which grants IRS power of attorney to buy, sell, and trade foreign currencies on behalf of the investor. When a customer invests with IRS, his check is initially deposited in a client equity management account at the Canadian Imperial Bank of Commerce in Freeport, Grand Bahama. The funds are then transferred to Lloyd's Bank in London where they are held in segregated customer accounts within the framework of an omnibus account. IRS funds are not co-mingled with customer funds.
Customers pay IRS a 20% commission on all profits realized from the trades. Jankovsky admitted that if there is no profit there is no commission. The customer agreement gives IRS the right to charge additional fees.
According to Jankovsky, investors can control their individual accounts by adding or subtracting funds at any time, placing a temporary hold on their account, and limiting the trading of their funds to specified currencies. Jankovsky admitted that plaintiffs never registered with the Secretary.
On December 3, 1999, the Secretary issued his final administrative decision finding that the investment opportunity offered by plaintiffs was an "investment contract" and therefore a security under the securities law and that plaintiffs violated the securities law by failing to register the investment offering as a security. The Secretary permanently prohibited plaintiffs from offering or selling any securities in or from the State of Illinois. On August 4, 2000, the circuit court affirmed the Secretary's decision.
An administrative agency's factual findings are deemed to be prima facie true and correct and may be set aside only if they are against the manifest weight of the evidence. City of Belvidere v. Illinois State Labor Relations Board, 181 Ill. 2d 191, 692 N.E.2d 295 (1998) (Belvidere). In the present case the issues involve questions of law entirely; therefore, the standard of review is de novo. *fn1 Belvidere, 181 Ill. 2d at 205.
Plaintiffs first argue that, under the definition of "security" in section 2.1 of the securities law (815 ILCS 5/2.1 (West 1998)(section 2.1)), a foreign currency transaction is a "security" only if it involves a "put, call, straddle, option, or privilege entered into on a national securities exchange." Because it is undisputed that the investment opportunity they offer is not any of these and is not traded on a "national securities exchange", plaintiffs argue that it is not a security. The Secretary responds that the definition of "security" also includes "investment contracts." Consequently, an investment opportunity involving foreign currency transactions is a security if it is an investment contract.
Section 2.1 defines "security" in pertinent part as "any note, stock, treasury stock, bond, debenture, ***, investment contract, ***, or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a `security', or any certificate of interest or participation in, temporary or interim certificate for, receipt for, ...