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December 11, 1992


The opinion of the court was delivered by: LAMBERTH


 Upon consideration of the representations made by counsel in their briefs, and for the reasons stated below, the court finds that AFSCME has satisfied the criteria necessary for summary judgment on Count I of its complaint.


 Starting in 1984 and continuing through 1990, Washington Bancorporation ("WBC"), a District of Columbia bank holding company, issued commercial paper, largely to raise capital for its subsidiary, Washington Mortgage Group. This commercial paper, with maturities of as little as one day and amounting to as much as approximately $ 55 million, was sold only through another WBC subsidiary, the National Bank of Washington ("NBW"). (NBW comprised approximately 91 percent of WBC's assets at the end of 1989, and many of the directors and officers served both entities.)

 In early 1990, WBC faced dire economic straits. By May 4, 1990 (by which time, WBC had reduced its outstanding commercial paper obligations to around $ 37 million), WBC had no lines of credit with which to back its commercial paper obligations and precious few liquid assets.

 On May 4, 1990, AFSCME purchased $ 1.8 million in WBC commercial paper from the Treasury Services Department of NBW. This commercial paper was set to mature on May 7, 1990 (the next business day). On May 7, however, WBC ceased issuing commercial paper and declared a default on all paper then outstanding. Three months later, WBC filed for protection under Chapter 11 of the Bankruptcy Code, and the FDIC was appointed conservator of NBW; shortly thereafter, the OCC appointed FDIC as receiver.

 This case is one of more than forty brought by purchasers of WBC commercial paper against NBW and the FDIC as receiver for NBW; these cases have been consolidated as In re NBW Commercial Paper Litigation, Master File No. 90-1755 (RCL) (D.D.C.). The parties have designated that AFSCME v. FDIC shall be a "test" case in the litigation.

 Thus far, the court has denied the FDIC's motion to dismiss as to Count I of AFSCME's complaint (Mem. Op., Mar. 10, 1992). (On the same date, the court also denied the FDIC's motion to dismiss as to two other counts and granted the FDIC's motion as to the remaining seven counts.) The remaining claim, Count I, is a claim under §§ 5 and 12(1) of the Securities Act of 1933, 15 U.S.C. §§ 77e and 771 (1), by which AFSCME asserts that NBW, as an alleged seller of an unregistered security, is liable to AFSCME for the value of the security.

 The case now comes before the court on the parties' cross motions for summary judgment as to Count I.


 In order to prove a claim under § 12(1) of the Securities Act of 1933, 15 U.S.C. § 771 (1) *fn1" , the plaintiff must demonstrate that the defendant offered or sold a security in violation of § 5 of the Act (15 U.S.C. § 77e). Thus, AFSCME's prima facie case includes three *fn2" elements:

 1. that the WBC commercial paper falls within the statutory definition of "security;"

 2. that NBW was a "seller" of the WBC commercial paper for purposes of the act; and

 3. that the commercial paper was not registered as required by § 5. *fn3"

 In order to grant summary judgment on Count I, as AFSCME asks, the court must find that there is "no genuine issue as to any material fact." Fed. R. Civ. P. 56. See Lujan v. National Wildlife Federation, 497 U.S. 871, 110 S. Ct. 3177, 3186, 111 L. Ed. 2d 695 (1990).

 Each of the elements will be addressed in turn.

 A. The WBC Commercial Paper Was a "Security."

 In order to recover from the defendant, AFSCME must first demonstrate that the WBC commercial paper *fn4" NBW sold to AFSCME was a "security" for purposes of the Securities Act of 1933. Although the definition of security would appear to be reasonably clear from the act itself, the Supreme Court has never specifically held that commercial paper qualifies as a security under § 12(1) of the Act.

 The parties cite two cases to the court on the issue, Securities Industry Ass'n v. Board of Governors, 468 U.S. 137, 82 L. Ed. 2d 107, 104 S. Ct. 2979 (1984) (referred to as "Bankers Trust I"), and Reves v. Ernst & Young, 494 U.S. 56, 108 L. Ed. 2d 47, 110 S. Ct. 945 (1990). The court holds that the former case, Bankers Trust I, provides the proper context for determining the scope of the term "security" in the present case; under that analysis, the WBC commercial paper is properly termed a security. However, even if the Reves standards describes the appropriate test, the court holds that the WBC commercial paper is nonetheless properly termed a security under the 1933 Act.

 1. Bankers Trust I.

 In Bankers Trust I, the Court faced the issue of whether § 16 of the Banking Act of 1933 (commonly known as the Glass-Steagall Act) prohibited commercial banks from underwriting commercial paper. After examining the language and the purposes of the Act, the Court determined that commercial paper was indeed a security. As the Court stated, there is "considerable evidence to indicate that the ordinary meaning of the term 'security' and 'note' as used by the 1933 Congress encompasses commercial paper." Bankers Trust I, 468 U.S. at 150. For instance, in the definition section of the Act, § 2(1) (77 U.S.C. § 77b(1)), the term "security" is given an open-ended, extremely broad definition: "any note, stock, treasury stock, bond, debenture, etc." Id. In addition, the Court noted that "in each of (the securities and banking] statutes, the definition of the term "security" includes commercial paper, and each statute contains explicit exceptions where Congress meant for the provision of an Act not to apply to commercial paper." 468 U.S. at 150-51. Among the statutes included in the Court's discussion was the Securities Act of 1933 (at issue here today); specifically highlighted was § 12 of that act (15 U.S.C. § 771). Finally, the Court examined the purposes of the Banking Act and determined that Congress' intention of protecting the banks from imprudent underwriting required that commercial paper be included within the definition of security. Although part of the Court's discussion is dicta, it nevertheless demonstrates that, to the 1933 Congress, the common understanding of the term "security" included commercial paper. *fn5" Moreover, this interpretation fulfills the goals of the Securities Act. With this in mind, the court today holds that the WBC commercial paper is a security for purposes of § 12(1).

 2. Reves.

 The defendant claims first that the Court in Bankers Trust I dealt solely with the Glass-Steagall Act and merely held that commercial paper is like any other "note." Moreover, even if the Court adopted a broader definition of the term "security" in Bankers Trust I, the FDIC asserts that the Court narrowed that definition six years later in Reves. The court today concludes that the Supreme Court did not alter its statements in Bankers Trust I concerning the breadth of the definition of "security." Even if the Reves test applies, however, the WBC commercial paper is still a security under the Act.

 In Reves, the Court had to determine whether promissory notes issued by a farmers cooperative qualified as securities under § 3(a)(10) of the 1934 Securities Act. *fn6" Recognizing that Congress "enacted a definition of 'security' sufficiently broad to encompass virtually any instrument that might be sold as an investment," Reves, 494 U.S. 56, 61, and noting that the Securities Acts define "security" to include "any note," the Court determined that analysis of notes must begin with a rebuttable presumption that every note is a security. 494 U.S. at 65.

 The Court then delineated a four-part analysis to determine the characteristics of a note which would rebut the general presumption. 494 U.S. at 66. Those criteria include: first, an examination of the transaction "to assess the motivations that would prompt a reasonable seller and buyer to enter into it[;]" second, an examination of "the 'plan of distribution of the instrument[;]" third, an examination of "the reasonable expectations of the investing public[;]" and fourth, an examination of "whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Acts unnecessary." 494 U.S. 66 at 66-67.

 The application of these standards to the present case sufficiently indicates that the WBC commercial paper qualifies as a "security" for purposes of the 1933 Act. *fn7"

 (1) The first standard looks to the intentions of both parties to the transaction. From the buyer's side, notes are more likely to be considered securities if the buyer is interested in profits or in investment rather than in the financing appurtenant to a sale. As for the seller, securities are more likely found in the raising of money for the general use of a business rather than in advancing "some other commercial or consumer purchase." 494 U.S. at 66. Here, investors were lured to WBC commercial paper, among other ways, by NBW's catalog of Investment Services. There, commercial paper is listed as an investment which offers "a high return for fixed maturities. AFSCME Appendix *fn8" , ex. 7 at 6. Another brochure, this one issued by the Treasury Services Department, noted that commercial paper offered " investment opportunities. " FDIC Appendix *fn9" , ex. 11 at 4 (emphasis added). As for the seller's intentions, the NBW Investment Services catalog stated that commercial paper was used "by a large corporation or finance company to raise working capital." AFSCME Appendix, ex. 7 at 6. The brochure than cites Washington Bancorporation of an example of such a company. Although the FDIC attempts to argue that AFSCME used the commercial paper in cash management, FDIC Motion at 31, that assertion does not preclude a finding that AFSCME's investment in commercial paper was just that: an investment. This comports with Reves, 494 U.S. at 68, in which "one of the primary inducements offered purchasers was an interest rate constantly revised to keep it slightly above the rate paid by local banks much like the slightly elevated rates promised investors here.

 (2) The second criterion examines the plan of distribution "to determine whether it is an instrument in which there is 'common trading for speculation or investment.'" 494 U.S. at 66 (citation omitted). The FDIC asserts that WBC commercial paper was sold to a limited number of sophisticated purchasers, was sold solely in large denominations, and was only available through NBW's Treasury Services department, not through branch offices. FDIC Motion at 31. Thus, it concludes, the plan of distribution is too limited to term the WBC commercial paper a security. However, the commercial paper was offered to the public in NBW's Investment Services brochures and several individuals -- including at least 11 of the 49 holders of WBC commercial paper as of May 7, 1990, FDIC Appendix, Ex. 35, Exhibit YY (see also SEC Brief at 20) -- purchased the commercial paper, often for as little as $ 25,500. See AFSCME Appendix, Ex. 36, Exhibit A-3.l. Although the majority of the purchases may have been for large amounts and may have been made by sophisticated current customers of NBW, the fact that several individuals also purchased the investment indicates that there was common trading for investment: the commercial paper was "offered and sold to a broad segment of the public, and that is all [the Supreme Court has] held to be necessary to establish the requisite 'common trading' in an instrument." 494 U.S. at 68.

 (3) The third prong of this examination looks to the reasonable expectations of the public. Given the brochures mentioned at part (1), above, it is clear that NBW included commercial paper as just one of the many "investments" available to its customers. The FDIC argues that the limited universe of customers precludes any finding of a general "public," FDIC Motion at 31, but that argument is belied by the plain language of the circulars, which is aimed at the general public. Moreover, the circulars apparently were left behind at potential customers' offices after sales calls. FDIC Appendix, ex. 8, pp. 108-111. In short, although the entire investing public of Washington, D.C., might not have been aware of the opportunity to "invest" in WBC commercial paper at NBW, NBW did present commercial paper to its customers, the relevant public, as an investment. Therefore, the court concludes that NBW customers -- potential or actual -- could reasonably conclude that the purchase of commercial paper was an investment, see Reves, 494 U.S. at 69.

 (4) The final factor looks to other regulatory schemes to determine whether application of the Securities Acts is rendered unnecessary. See Marine Bank v. Weaver, 455 U.S. 551, 71 L. Ed. 2d 409, 102 S. Ct. 1220 (1982). The FDIC points to the regulation of WBC by the Federal Reserve Board, the regulation of NBW by OCC, and the public disclosure concomitant with NBW's status as a publicly-traded company as indications that further regulation is unnecessary. FDIC Motion at 32-33. None of these, however, provides sufficient protection to the investor, the goal of the Securities Acts and of this portion of the analysis. For instance, the Federal Reserve Board -- as well as the statutes cited by the FDIC -- is designed to ensure the stability of banks and bank holding companies, not to protect the investor. See 12 U.S.C. § 1844(e). Although it can be argued that Board oversight ultimately will benefit the investor, it does so only indirectly. Moreover, the interests of the banking laws (protecting banks) and the interests of investors often diverge, thus salvaging banks at the expense of investors. See Holloway v. Peat, Marwick, Mitchell & Co., 879 F.2d 772, 788 (10th Cir. 1989), vacated and remanded on other grounds, 494 U.S. 1014, aff'd, 900 F.2d 1485 (10th Cir. 1990). Similarly, in the interest of benefiting NBW, the OCC prevented payment of moneys by NBW to WBC which could have been used to pay off the investors' commercial paper debts; thus, instead of rendering the Securities Acts unnecessary, OCC oversight actually left the Securities Acts as the only protection for holders of WBC commercial paper. Finally, the revelations made by WBC as a publicly-traded entity did not sufficiently apprise potential investors of the risks inherent in investing in WBC commercial paper. The only protection these investors could have had on these "uncollateralized and unsecured" notes, see Reves, 494 U.S. at 69, would have been through regulation under the Securities Act. Pinter v. Dahl, 486 U.S. 622, 638, 100 L. Ed. 2d 658, 108 S. Ct. 2063 (1988).

 Thus, all four criteria point to the conclusion that, even if Reves were to provide the appropriate standard, there is no genuine issue of material fact as to whether WBC commercial paper is a security for purposes of the Securities Act of 1933. It is.

 B. NBW Was a "Seller."

 Section 12(1) imposes strict liability on any person who "offers or sells a security" in violation of the registration requirement of the Securities Act. 15 U.S.C. § 771 (1). Congress did not, however, clearly "delineate who may be regarded as a statutory seller, and the sparse legislative history sheds no light on the issue." Pinter v. Dahl, 486 U.S. 622, 642, 100 L. Ed. 2d 658, 108 S. Ct. 2063 (1988). Nonetheless, the facts in this case make it abundantly clear that, by whatever standard, NBW was a seller of WBC commercial paper for purposes of § 12(1).

 In Pinter, the Court faced the question of whether an investor in unregistered oil securities faced liability under § 12(1) after he solicited other investors into the failed scheme. The Court first examined the language of the statute and determined that ownership or transference of title were not necessary elements for liability to attach. Rather, "a securities vendor's agent who solicited the purchase would commonly be said, and would be thought by the buyer, to be among those 'from' whom the buyer 'purchased,' even though the agent himself did not pass title." Pinter, 486 U.S. at 644. Moreover, the Court concluded that "Congress' express definition of 'sells' in the original Securities Act to include solicitation suggests that the class of those from whom the buyer 'purchases' extended to persons who solicit him." 486 U.S. at 645. The Court explained its ultimate decision thus: "An interpretation of statutory seller ...

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