Today Izabella flags the SEC's announcements of the creation of a Cyber Unit and the concurrent establishment of a retail strategy task force:
How dare they?
Well, it goes back to a bunch of beavers and 445 F. 2d 76 - Kemmerer v. ML Weaver.
Via
Preston Byrne's Back of the Envelope blog:
Beaver Fever
The beaver case was the big one.
The beaver case was a case called SEC
versus Weaver’s Beaver Association. One defendant appealed to the U.S.
Supreme Court, which denied cert. A fellow in the Salt Lake area started
a company called Weaver’s Beaver Association. They sold pairs of
beaver, all over the United States and in foreign countries. These were
purportedly domesticated beaver. You would buy a pair of beaver for
several thousand dollars, and these beaver would have little beavers,
called kits. Then these little kits would grow up, and they’d have more
kits. And you would end up with this large herd of beaver. The beaver
were to be sold to other purchasers. They had a marketing arm, where
they would sell your pairs of beaver. There was going to be a tremendous
demand for beaver pelts in coats, beaver hats, and everything—it’s
coming back. So they sold millions and millions of dollars of these
beaver. The salesmen represented that you could take possession of your
beaver, and you can raise them in your own backyard, but if you don’t
have the capabilities, we have beaver ranches all through the
West—Montana, Wyoming, et cetera.
At these beaver ranches we have little
pens for each pair of beaver, they have nesting boxes, they have little
swimming pools, and they’re fed a special diet. We’ll take care of your
beaver for you for a hundred and fifty or a hundred seventy-five dollars
per beaver per year, until you can sell it. Nobody could take care of
beaver; you can’t put it in your bathtub. The purchasers would have to
leave the beaver on the ranches. What happened was that all these beaver
and their kits that was being sold to people could not be re-sold,
because the Association was too busy selling their own beaver to take
time to sell your beaver.
So these people ended up with a large
number of beaver, and they’re paying all these ranching fees. It was
just a disaster. They really weren’t selling domesticated beaver;
instead they were flying the beaver down from Canada and purchasing them
from trappers in Canada at approximately twenty dollars a beaver.
They’d fly them into Salt Lake, put tattoos in their back foot, in the
web, and start selling them. They’d sell them for three thousand a pair
and up.
…What happened was: all the congressmen
started leaning on the SEC. “What are you doing? You know, suing people
that raise animals.” The SEC position was that it was an investment contract.
You put your money in, you bought the beaver, they kept the beaver;
they raised the beaver, they were to sell the beaver, and all the
profits were supposed to come from a third person. The courts had no
trouble finding an investment contract, and the Supreme Court denied
cert. The SEC got a tremendous amount of pressure from the public. Hamer
Budge came out to Denver in the middle of the case. I was in the office
one day and he walked in and asked me if we have any more animal cases
out here? I said, “No. We have no more animal cases. ” I learned a
lesson then. I’ll go back to the more traditional securities frauds.
H/T to Peter van Valkenburgh for sending
this my way. This interview is possibly the funniest securities
law-related document I’ve ever read.
Read the whole thing.
Here's Open Jurist with the judgement of the 7th Circuit Court of Appeals:
445 F.2d 76
Fed. Sec. L. Rep. P 93,095
Harold KEMMERER et al., Plaintiffs-Appellees,
v.
Mark L. WEAVER et al., Defendants-Appellants.
No. 18640.
United States Court of Appeals, Seventh Circuit.
June 22, 1971.
1 This suit was brought under the Securities and
Exchange Act of 1933 (Title 15 U.S.C. 77a et seq.) and the Securities
and Exchange Act of 1934 (Title 15 U.S.C. 78j) and Rule 10B-5
promulgated pursuant thereto (17 C.F.R. 240.10B-5). Plaintiffs claimed
defendants offered for sale certain investment contracts wherein there
was not a full, complete and fair disclosure of all the material facts.
2 Plaintiffs filed their complaint against the
individual defendants together with defendant Weavers' Beaver
Association, an agricultural cooperative, and American-Canadian Beavers
Company, Inc., a Utah corporation, alleging that the plaintiffs were
sold their investment contracts involving live, breeding beaver as a
result of certain material misrepresentations and omissions upon which
the plaintiffs relied.
3 Plaintiffs allege that by virtue of the individual
defendants' control of the Association, and the direction of the said
Association, the individual appellants were liable to plaintiffs for
having violated Rule 10B-5.
4 The trial court made findings of fact and conclusions
of law and entered judgment holding that the Beaver contracts were
investment contracts as defined by Section 3(a)(10) of the Securities
and Exchange Act of 1934, and that material misrepresentations and
omissions of fact were made in the sale of these securities to
plaintiffs.
5 Defendants Mark Weaver, Ted Weaver, Van Weaver,
Elizabeth Weaver Milligan, Jerry Milligan and Sally Weaver were judged
to be liable to plaintiff Harold Kemmerer in the amount of $50,675.00
and to plaintiff Gordon Gregory in the amount of $9,300.00. Defendants
Mark Weaver and Lawrence Milligan were judged to be liable to plaintiff
Robert Albrecht in the amount of $12,200.00.
6 The record herein is voluminous consisting of five
volumes of transcript plus many exhibits. A summary discloses that the
Weavers' Beaver Association was organized as a Utah non-profit
agricultural cooperative in 1957. Until late in 1964, the Weaver family
had a majority of the directors of the Association. The Court dismissed
this Association for lack of jurisdiction in that service of process had
never been obtained. The trial court also found that defendant,
American-Canadian Beaver Co., Inc., had no liability to plaintiffs and
held that the individual appellants were the controlling persons of
Weavers' Beaver Association.
7 The investment contracts were for the sale, care and
resale of domestic breeding beaver which were claimed to have a large
value in the fur industry. Defendants sold these beaver to plaintiffs
and others for prices up to $1200 each, representing that they were
seventh generation domestic beaver, and further, representing that there
existed a ready market for the resale of these animals.
8 Pursuant to the terms of the agreement, defendants
were to have complete control in the care and feeding of the beaver, and
were to select an appropriate market for resale. Due to the hoped for
reproduction of the beaver, a 100% Return within one year was
guaranteed.
9 Instead of selling exclusively domestic beaver,
defendants actually sold to plaintiffs and others, certain wild-trapped
beaver which ranged in actual market value of from $20 to $75 each.
Furthermore, there was no immediate market for resale as had been
promised by defendants. Many purchasers were placed upon a one-year
waiting list.
10 The appellants claim that there are four principal
issues on this appeal: 1) Can defendants be charged with liability as
controlling persons? 2) Is Lawrence Milligan a controlling person? 3) Is
the sale of live beaver under the contracts a 'security' under the Act
of 1934? and 4) Were there material misrepresentations? Appellants
contend that all of these question should be answered in the negative.
We disagree on all four points....
