who were widely solicited by interstate advertisement. There was a total lack of regulatory supervision or control over the operation. The fraudulent scheme, which was devised by LIC's founders, some of whom are defendants in this action, represented LIC to be an investment opportunity; and the defendants therefore must be held accountable consistent with the economic realities of the scheme.
Despite the fact that LIC often called itself a bank and even purported to adopt such conventions as a savings passbook, the organization was clearly a business venture established to raise money for investment. LIC held itself out as an investment concern, as its middle name indicates, and advertised in the phone book as "Latin Investments and Savings." In actual practice as well, LIC functioned as an investment business. Its customers were guaranteed a rate of return higher than that offered by banks and savings and loan companies; and even more tellingly, LIC offered its customers the prospect of earning dividends from investment of their pooled funds. LIC customers were also given the option of placing their funds in accounts that would be invested in local Hispanic-owned businesses. All of these factors suggest that LIC was issuing its customers securities. Reves, 494 U.S. 67 at 67-70; United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 44 L. Ed. 2d 621, 95 S. Ct. 2051 (1975); SEC v. R.G. Reynolds Enterprises, Inc., 952 F.2d 1125, 1130-33 (9th Cir. 1991); Holloway v. Peat, Marwick, Mitchell & Co., 900 F.2d 1485, 1487-88 (10th Cir.), cert. denied, 112 L. Ed. 2d 396, 111 S. Ct. 386 (1990).
LIC did not function as a bank and it had no authority to do so. There was no supervision or control over its affairs by either local or national banking authorities. On the contrary, the form investment agreement issued to its customers included very few of the provisions characteristic of those categories of notes and banking instruments that have been judicially excepted from the definition of security. See Reves, 494 U.S. at 67-70. LIC simply misrepresented itself as a bank in order to defraud unsophisticated investors. To suggest that because of its having misrepresented itself as a bank, LIC should have been able to avoid the banking regulations while it was in business, and should now be able to avoid the securities regulations by invoking the exceptions applicable to banks, flies in the face of Congress' intent, in enacting the securities laws, to regulate investment instruments not otherwise covered by the banking laws. See Reves, 494 U.S. at 67; Marine Bank v. Weaver, 455 U.S. 551, 557-59, 71 L. Ed. 2d 409, 102 S. Ct. 1220 (1982). Moreover, such a suggestion would foolishly ignore the economic reality of what was taking place. See Tcherepnin, 399 U.S. at 336. As amicus Mr. Pitt notes, the SEC has in the past -- in cases similar to the related case to this action -- brought actions for violations of the federal securities laws based on a party's issuance of passbook accounts. See Brief of Harvey Pitt as Amicus Curiae at 14 n.54. But rather than developing a blanket rule, the SEC has apparently left each situation to be judged on its own underlying facts and circumstances. No clearer case than the present one can be imagined for recognizing that a passbook and related customer agreements like those issued by LIC meet the definition of "security" under both the 1933 and 1934 Acts. A security was offered and purchased by deposit, and enforcement of the Acts is therefore consistent with Congress's intent in enacting those statutes.
Conclusions of Law
Each of the defendants Fernando Leonzo, Leonel Salinas, and Jose Cortes was a controlling person within the meaning of 15 U.S.C. §§ 77o and 78t(a), both by reason of his power to control LIC and his active participation in developing and carrying out the fraudulent scheme.
Each of those defendants sold securities, as defined in Section 2(1) of the Securities Act and Section 3(a)(10) of the Securities Exchange Act, in the form of notes and investment contracts, and in so doing used the mail and instrumentalities of interstate commerce by advertising investment services across state lines through radio, telephone listings, and otherwise.
Members of the class, in purchasing those securities, acted in reliance on misrepresentations and material omissions, which were made with the knowledge and approval of each of those defendants in connection with the sale of the securities. Plaintiffs thereby suffered monetary damage in the total amount of $ 6,461,266.91.
Accordingly, partial summary judgment is granted the class action plaintiffs as to Counts One and Two of the second amended complaint against defendants Fernando Leonzo, Leonel Salinas, and Jose Cortes. An appropriate Order is filed herewith.
ORDER - April 10, 1992, Filed
For reasons stated in a Memorandum filed this day, after considering class action plaintiffs' Motion for Partial Summary Judgment on Counts One and Two of their Second Amended Complaint, which allege that defendants Fernando Leonzo, Leonel Salinas, and Jose Cortes violated Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder), and Section 12(2) of the Securities Act of 1933, it is hereby
ORDERED that class action plaintiffs are granted partial summary judgment on Counts One and Two of their Second Amended Complaint in accordance with Rule 56 of the Federal Rules of Civil Procedure; and it is further
ORDERED that money judgments are entered against defendants Fernando Leonzo, Leonel Salinas and Jose Cortes individually in the amount of $ 6,461,266.91, representing the amount invested with Latin Investment Corporation by class action plaintiffs that has not been repaid; and it is further
ORDERED that defendants Fernando Leonzo, Leonel Salinas and Jose Cortes are deemed to be constructive trustees for and on behalf of the class action plaintiffs for all funds acquired from class action plaintiffs and funds or property acquired from the use of those funds.
Gerhard A. Gesell
UNITED STATES DISTRICT JUDGE
April 10, 1992.