The opinion of the court was delivered by: ROBINSON
Plaintiff, the Securities and Exchange Commission, brings this action against Defendant, Wall Street Publishing Institute, Inc., alleging that it has been operating as an unregistered investment adviser and engaging in certain fraudulent practices relating to material misrepresentations published in "Stock Market Magazine" from January 1977 to July 1982. Plaintiff seeks an injunction restraining Defendant from further violations of the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-3, 80b-6, § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and § 17(b) of the Securities Act of 1933, 15 U.S.C. § 77q(b).
The Investment Advisers Act of 1940
The Investment Advisers Act of 1940, 15 U.S.C. § 80b-3(a), makes it unlawful for any investment adviser, unless registered under the Act, to make use of the mails or any means or instrumentality of interstate commerce in connection with his or its business as an investment adviser. The Act defines an investment adviser as:
any person who for compensation, engages in the business of advising others either directly or through publications or writing, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as part of a regular business, issues or promulgates, analyses or reports concerning securities; . . . .
15 U.S.C. § 80b-2(a)(11). The Act excludes from the definition of investment adviser "the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation." 15 U.S.C. § 80b-2(a)(11)(D).
Count I of Plaintiff's complaint alleges that Defendant is in violation of § 80b-3(a) of the Investment Advisers Act because it has used means or instrumentalities of interstate commerce in connection with its operation as an unregistered investment adviser. Plaintiff moves for summary judgment on this count contending that there are no genuine issues of material fact and that it is entitled to judgment as a matter of law with respect to the issue of whether Defendant is an investment adviser and therefore, required to register under the Act.
Defendant also moves for summary judgment on Count I of the complaint contending that it is not an investment adviser within the meaning of the Act. According to Defendant, Stock Market Magazine is a "bona fide business or financial publication of general and regular circulation." Defendant contends further that the SEC has acted unconstitutionally in denying Defendant status within the exclusion.
The following material facts are not in dispute. Defendant is the publisher of a monthly magazine entitled "Stock Market Magazine." Stock Market Magazine is not registered with the SEC as an investment adviser. During the period of this law suit Defendant has been wholly owned and operated by Angelo R. Martinelli. Martinelli has delegated total responsibility regarding the editorial-side of Stock Market Magazine, that is, the management and content of the magazine, to Bernard D. Brown, Editor. During the period of this law suit, Brown has performed all editorial functions for Stock Market Magazine. His duties as Managing Editor include selection, placement and editing of six-to-eight feature stories and approximately five columns published in Stock Market Magazine per issue. He also writes three columns and responds to reader inquiries. As Acting Publisher he is responsible for business inquiries and decisions and maintains overall supervision for circulation and advertising.
Brown handles all editing of copy published in Stock Market Magazine. He edits the draft articles received from feature companies, public relations firms, and contributing editors for such things as typesetting, grammar, spelling, and space requirements. He also writes the story captions and headlines.
Stock Market Magazine's total revenues are based on subscriptions, newsstand sales, sale of reprints, advertising, and rental of its mailing list. Stock Market Magazine is currently delivered to approximately 12,000 paid subscribers and has some newsstand sales. The subscription price for Stock Market Magazine is $15.00 per year. An individual issue sells for $1.50.
In 1977, a major portion of Defendant's total revenue was based on the sale of feature article reprints and advertising to the featured companies. Some of the public relations agents of the featured companies as well as some of the Defendant's contributing editors testified during depositions that there was a generally understood quid pro quo arrangement whereby the company or its agent agrees to purchase reprints of the company feature article for publication in Stock Market Magazine. Further, according to Brown, the featured companies purchase ads for publication in Stock Market Magazine at the rate of $250 to $960 because they are "so grateful at having obtained exposure through favorable stories in the magazine."
Until April 1983, the following objective of Stock Market Magazine appeared in its masthead: "The Stock Market Magazine is published to inform the individual investor at every economic level." The masthead further noted that "feature articles are based on thorough research and first-hand interviews with company officials, economists, security analysts, tax accountants and other experts. Comments from readers are welcomed."
Brown admits, however, that in some instances he conducted no interviews regarding the article drafts supplied by the featured companies, their public relations agents, and the contributing editors other than to telephone company officials to verify company figures. He also admits that in some instances he conducted no research for these articles other than to check the annual report and other background material supplied by the featured company. In many instances, Stock Market Magazine publishes the drafts received from the featured companies or public relations firms verbatim. In deposition, Brown stated that he assumes the public relations firm or contributing editor does the research and interviewing described in the masthead.
According to Brown the purpose of the masthead statement is to reassure Stock Market Magazine readers that its feature stories are authentic, objective and in keeping with high standards of journalism. Prior to July 1980 the masthead also stated that its objective was "to help him [the investor] to make intelligent investment decisions." Until April 1983 the masthead also announced the magazine as the "Voice of the Small Investor."
Stock Market Magazine is 36 pages in length. Articles in each issue are characterized as "Features" or "Departments." There are usually six-to-eight feature stories and eight-to-nine departments. Interspersed among the features and departments to fill out page space are general news items and ads.
In a subscriber profile published in 1982, Stock Market Magazine described its readers as follows: all but 2% own securities, 70% own over $15,000 and 44% own over $25,000 in securities, 97% own common stock, and 34% are aged 45-to-65. Readers have responded to Stock Market Magazine's invitation to write to its editor for more personalized information regarding the stock market in some instances. Some readers also have expressed their displeasure at the tardiness of Stock Market Magazine recommendations due to the late arrival of the magazine. In response to this complaint, Brown advises readers that because "time is of the essence" in order for many of Stock Market Magazine articles and stock suggestions to be "helpful" for reader investment decisions, a subscription at first-class mail rates should be purchased.
Defendant promotes the sale and advertising of Stock Market Magazine through its "Best Picks" column, renewal letters, published advertisements, direct mail campaigns, press releases and unsolicited newspaper publicity. All of these promotion gimmicks tout Stock Market Magazine as a reliable investment guide to investors. For instance, the "Best Picks" column lists 10-to-15 stocks selected by Brown as the best performers of the approximately 50 company stocks analyzed in Stock Market Magazine feature articles during the prior year. The purpose of the list, according to Brown, was to promote Stock Market Magazine to new subscribers, to emphasize to "readers what they are getting from Stock Market Magazine, why they should be reading the magazine." He further noted that the column "merely tells the reader what companies were analyzed, reviewed, written about, in the Stock Market Magazine."
Similarly, renewal letters sent to expiring subscribers promote Stock Market Magazine as a reliable investment guide and encourage subscribers to renew based on the money they can make by following its advice. The following is an example of language found in a renewal letter:
Would you pay 89 cents per month for information from proven and respected authorities on the stock market? . . . . SMM brings you first-hand reports on the nation's most successful small and medium-sized companies and regular columns. . . . Other newsletters charge from $150 to as much as $2,000 for what purports to be similar information. . . . Our overall batting average in forecasts of market behavior is impressively high . . . the value to you will more than justify your modest investment.
An appeal to the "Investor" is also made in Defendant's published advertisements, direct mail campaigns and newspaper publicity.
Given these undisputed material facts, it is clear that Defendant meets the definitional elements of adviser status found in § 80b-2(a)(11) of the Act, i.e., compensation, business and publication. Defendant engages in the business of publishing Stock Market Magazine on a monthly basis. It receives compensation from the sale of Stock Market Magazine at a subscription rate of $15.00/year to approximately 15,000 subscribers. Its contributing editors have also received fees from public relations firms for writing feature company stories. It has limited newsstand sales and also receives consideration from the sale of advertising and reprints of Stock Market Magazine.
The only pivotal question left, therefore, is whether, in conjunction with the foregoing elements, Defendant gives advice as to the value of securities or as to the advisability of investing in securities, or issues or promulgates analyses or reports concerning securities.
Defendant's publication on its face suggests that it provides advice as to the value or advisability of investing in securities. Until April 1983, after this action had been filed and pending for nine months, the title page proclaimed Stock Market Magazine as the "Voice of the Small Investor." Until July 1980, after Plaintiff first notified Defendant to register, its masthead claimed to provide information to the small investor to assist him "to make intelligent investment decisions."
Brown also admits that the Stock Market Magazine columns give advice and/or specific recommendations regarding the value or advisability of investing in securities. A review of the magazine compels such an admission. Allan Marshall's "Green Chips" and Jerry Kass' "Low Priced Stock of the Month" columns analyze and recommend stocks selling at less than $25.00. Dr. Goldstein analyzes, recommends and reviews prior recommendations for approximately 12 New York Stock Exchange Securities in his monthly column "Market Mirror." Grossman's "Off Wall Street Column" analyzes and recommends stocks identified by regional brokers. Dirks' column "Ray Dirks on Stocks" gives pointers on investments in common stocks and the new issues market and insurance stocks.
Given the above facts, it is clear that Defendant gives advice as to the value or advisability of investing in securities. However, even were Defendant not clearly giving advice as to the value or advisability of investing in securities, it meets the second prong of the definition of investment adviser. The second prong defines an investment adviser as any person who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.
Initially, a review of the feature articles and columns devoted to specific publicly held company securities leads to the swift conclusion that these articles constitute analyses or reports concerning securities. A recent SEC no-action letter indicates the type of information not contemplated by the SEC to be included within the second prong of the definition of investment adviser:
It is our view that a provider of information relating to securities will be deemed neither to furnish investment advice nor to issue or promulgate an analyses or report concerning securities when the information provided is readily available in its raw state, the categories of information are not highly selective, and the information provided is not organized or presented in a manner which suggests the purchase, holding, or sale of any security or securities.
Jack Sonner, (pub. avail. March 11, 1983). Defendant's specific company articles and columns profiling specific companies are by their very nature highly selective because they focus on a single company only. Finally, the information presented regarding earnings, stock dividends and price range is presented and organized in such a fashion to suggest purchase of the company security.
The Investment Advisers Act exempts from registration certain investment advisers. Defendant in this action relies on the exemption found in § 80b-2(a)(11)(D) which exempts from registration "a bona fide newspaper, news magazine, or business and financial publication of general and regular circulation." Defendant argues that the SEC has acted unconstitutionally in denying it status within the exclusion because the language of the exclusion on its face provides inadequate standards and the SEC has not promulgated any regulations or guidelines to govern its determination of a publication's status under the exclusion.
The case law construing the "bona fide newspaper, news magazine, or business and financial publication" exclusion is sparse. The leading case is Wall Street Transcript Corp., 422 F.2d 1371 (2d Cir.), cert. denied, 398 U.S. 958, 26 L. Ed. 2d 542, 90 S. Ct. 2170 (1970). In that case, the Court stated that a "bona fide newspaper includes those publications which do not deviate from customary newspaper activities to such an extent that there is a likelihood that the wrongdoing which the Act was designed to prevent has occurred." Id. at 1377. The Court further noted that the determination of whether or not a publication is within the "bona fide newspaper" exclusion must turn on the nature of its practices rather than upon the purely formal "indicia of a newspaper" which it exhibits on its face and in the size and nature of its subscription list. Id.
The Wall Street Transcript case arose in the context of a petition by the Securities and Exchange Commission for enforcement of a subpoena duces tecum issued pursuant to an investigation under the Investment Advisers Act. In reversing and remanding the decision of the trial court to deny the petition, the court pointed to several factors which would be pertinent in deciding whether the publication fits within the "bona fide newspaper" exclusion: (1) whether most of its published material consists of reprinted reports assessing various securities issues; (2) whether the publication places emphasis on particular issues and companies; (3) whether the publication is compensated by brokerage houses whose reports it publishes; (4) whether the publication alone determines the location of the articles that it publishes on the basis of its editor's news judgment alone; and (5) whether the articles are offered as investment advice. Wall Street Transcript Corp., 422 F.2d at 1377-78. "What matters is whether or not a specific publication is engaged in practices which the Act was intended to regulate, such as the offering of professional investment advice without revealing the possibility of personal gain to the publisher from what he reports or how he presents it." Id. at 1378.
In SEC v. Wall Street Transcript Corp., 454 F. Supp. 559 (S.D.N.Y. 1978), the action which was brought by the SEC subsequent to the subpoena enforcement proceeding discussed above, the court found that Defendant could avail itself of the statutory exclusion for "bona fide newspapers." The Court found the following factors important to its decision: (1) a large percentage of each publication was devoted to the reproduction of brokerage house reports or speeches given by financial analysts, either verbatim or in summary form; (2) defendants never received any compensation from any party for publishing or positioning a report or speech; (3) defendants never published any item for the purpose of affecting any security; (4) defendants never traded in any of the securities mentioned in the publication; and (5) the sole determination of what material was published in the publication was the editor's independent judgment as to newsworthiness within the limitations of space. Wall Street Transcript Corp., 454 F. Supp. at ...