TEAMSTERS v. DANIEL
Legal provision: Securities Act of 1933, the Securities and Exchange Act of 1934, or the Williams Act
Argument of Sherman Carmell
Chief Justice Warren E. Burger: We'll hear first this morning, Numbers 77-753 and the consolidated case, International Brotherhood of Teamsters against Daniel.
Mr. Carmell, you may proceed whenever you're ready.
Mr. Sherman Carmell: Mr. Chief Justice, may it please the Court.
In 1950, the respondent, John Daniel began employment under the jurisdiction of Teamsters Local 705.
Five years later, Local 705 negotiated a contract which provided for the first time for a pension fund which is the Local 705 pension fund.
In addition to being structured in accordance with Section 302 (c) (5) of the Labor Management Relations Act of 1947, the basic features of the Local 705 pension fund were and are that it is a defined benefit plan.
It is non-contributory.
It is mandatory.
Between December of 1960 and July of 1961, the fund record show no employment, covered employment for Mr. Daniel.
In 1973, Mr. Daniel applied for a pension.
After two hearings before the Boards of Trustees at which he appeared, the trustees denied his application for a pension based upon the break in service between December of '60 and July of 1961 as not meeting the fund's eligibility rule.
As a result, Mr. Daniel filed and then amended a six-count complaint in the District Court.
Two of the counts, the first two which are before this Court were posited upon the Securities Laws.
Two counts were based upon Section 302 of the LMRA.
One count alleged the breach duty of fair representation under Section 9 (a) of the NLRA and one count was a pendent jurisdiction claim for state common-law fraud.
The Local 705 petitioners moved to dismiss all of the counts.
The District Court denied the motion to dismiss all of the counts.
The case proceeded up on the counts I and II, the Securities Acts counts which are before this Court.
In this posture, your -- may it please the Court, the case does not involve the merits of the Local 705 pension funds service rule.
And although though the respondent in a discussion of ERISA at page 97 of his brief before this Court states, “To allow ERISA to preempt the antifraud provisions of the Federal Securities Laws would be to deny Daniel any relief whatsoever.”
The respondent told the District Court at appendix 152 (a), “That even if the Security counts should be challenged or reversed on appeal, I feel that the other counts would be viable.”
The result of reversal in this case then would be that proceedings would continue in the District Court under the two Section 302 counts, the duty -- the breech of the duty of fair representation and state law common fraud.
Please the Court, I wish to direct my arguments to the differences which may be found between the Securities Acts and the Labor statutes in the area of labor relations.
The labor statutes as I refer to them are the National Labor Relations Act, the LMRA, the Welfare Pension Plan Disclosure Act and ERISA.
And when using the term labor relations, may it please the Court, I am not speaking only of union management or collectively bargain plans.
I am talking of the full spectrum of employer-employee relations that is, those pension plans which involved the relationship between an employer and an employee of which one is a collectively bargained pension plan.
The one consensus which I believe can be found from the mass of briefs among the Courts, the parties and the amici is that the legislative history and the provisions of the Securities Acts do not mention pension plans as such.
On the other hand and this is the point of our argument, the labor statutes beginning in 1935 and consistently through ERISA have discussed, considered, made discreet, cohesive and sometimes very detailed judgments as to the types of disclosure, as to the rights of actions of participants if any and as to the duties and obligations of plan trustees to the beneficiaries.
A review of the National Labor Relations Act, the Wagner Act was undertaken by the National Labor Relations Board in its seminal decision in Inland Steel which at 77 NLRB.
The Board after reviewing both senator -- the 1935 statute and the 1947 Amendments to that statute which would have changed the term other conditions of employment to a more narrow term working conditions stated that it was compelled to the conclusion and we find that matters affecting tenure of employment like the respondents, Inland Steels, retirement rule are within the statutory scope of collective bargaining.
And the National Labor Relations Board found that the debates in 1947 over those proposed Amendments were “compelling evidence” that retirement plans were within the 1935 Acts intent.
The significance of this, may it please the Court, should not be lost because 1935 is the same chronological era that the 1933 and 1934 Security Acts were being put into law.
So in 1935, whereas the Security Acts said nothing, Congress was speaking distinctly to the issue under the National Labor Relations Act.
Justice Potter Stewart: Of course Mr. Carmell, not every retirement plan is a product of collective bargaining.
We had one before us last term in Allied Structural Steel which was not at all a product of collective bargaining and therefore wouldn't have involved any of the rights and liabilities under the National Labor Relations Act or the Labor Management Relations Act of 1947, isn't that correct?
Mr. Sherman Carmell: It is correct to that -- to the extent Your Honor that they all were not necessarily bargained for.
But with due respect, it is not correct to the extent that all pension plans were subjects for a collective bargaining.
That is 8 (5) of the old Act in 1935 Act, an 885 of the present Act, only refers to those -- only encompasses mandatory subjects for bargaining.
Justice Potter Stewart: If there -- but sometimes it's not even a collective bargaining agent.
I mean, if it's a non-unionized plan such as, I guess Allied Structural Steel was, the plaintiffs would not have any of this other four -- wouldn't have three out of these other four causes of action, would they, couldn't have had?
Mr. Sherman Carmell: They would not have had cause of action under Section 302.
That is correct.
There was no cause of action under the WPPDA.
There was no private cause of action under the NLRA or the LMRA.
That is correct Your Honor.
But as I would hope to explain, that was Congress' deliberate choice and is most fully canvassed in this Court's decision in Malone as to the specific choices that Congress made but I would like to address once more your specific point.
I am not saying that the NLRA covered only collectively bargained plans.
I am saying that Congress considered retirement plans and the Inland Steel Plan had been in existence for a long period of time before that as being a subject for collective bargaining.
So whereas the Court of Appeals said that the reason why Congress and the Securities Acts did not consider pension plans or I mention them was that they were rather innocuous in number, the same Congress relatively was considering them to be sufficient importance to be considered within mandatory subjects of bargaining as opposed to permissive subjects of bargaining.
1947 as Your Honor's already pointed out, saw Congress enact Section 302 (c) (5) and I think the significance of Section 302 Your Honors is that Congress made a deliberate choice.
It shows only to regulate collectively bargained pension plan as Mr. Justice Stewart stated.
Although it had before it considerations of other issues and it shows then to only regulate the structure of the plan and certain of the extent of the purposes which the funds could be used.
A very, very limited regulation by Congress but a very deliberate regulation as this Court discussed in Arroyo versus the United States.
But, the Welfare and Pension Plan Disclosure Act, the proceedings from 1954 on which were fully canvassed in this Court's decision in Malone are really the most significant, I believe.
Because Malone stated that Congress entered “a nearly unregulated pension field.”
And Congress heard from numerous witnesses beginning in 1955 including the Securities and Exchange Commission and Commissioner Godwin agreed with Senator Allott in 1955 that “The Securities and Exchange Commission would comment to this particular field only by accident, so to speak, by virtue of the fact that for example in some of these plans stock is offered.”
After Congress heard all of the witnesses including the Commission, it issued a Senate Report which is quoted and I won't go through it all the pages 29 and 30 of our brief stating they just didn't think there was any federal regulation of these plans but shows not to regulate its substantively but as this Court noted just to allow filings.
By 1972 Your Honors, we all know, as this discussion in Manhart indicates, Congress had completely changed its mind and had completely made a complete turnaround as far as the priorities and that therefore under ERISA detailed the timing nature and disclosure that was to be made to plan participants and for the first time under Section 502 (a) granted a limited right of suit by a plan participant and granted a conjunctive right to sue with the Secretary of Labor.
1958, Welfare and Pension Plan Disclosures Acts failure to include a private right of action was not an accident Your Honor because as our brief has shown, it rejected proposals by Professor Metlzer and Cox that would have established the analogous right of action.
ERISA's design was careful, complex, discrete and fraught with a great number of problems.
But in the end, the Court of Appeals was not satisfied with Congress's action in this field.
It felt the plan participants deserve more.
It made value judgments, judgments which the Congress is entrusted to make and which the Congress specifically did not make.
With -- under those circumstances, these case I believe and the courts below stands for the proposition that a court can expand through the province of the Securities Acts to enact that type of legislation which for almost 37 years that Congress deliberately refused to enact to give protection to plan participants that Congress would not give and to posit causes of action with Cong -- which Congress disclaimed.
Justice Potter Stewart: Well, it wouldn't -- you would -- wouldn't you agree that Judge Tone's concurring opinion is evidence of anything but a value of judgment that he instinctively -- his sense of values or his sense of -- his instinctive sense would have led him the other way but he thought he was driven to this conclusion by the language of the statute, isn't that about what he said?
Mr. Sherman Carmell: I don't believe it was -- by the breadth of the statute and by the fact that this Court has not spoken particularly to the issue I believe was another factor.
I don't know why Judge Tone's opinion did not end with our dissent because I believe it was written up to that point so it sounded that way.
So, I cannot define that Your Honor but I don't believe that full consideration was given to the labor statutes, the line, the cohesive line from the labor statutes on one side and the absence of anything definitive on the other side.
As I said Your Honor the reverse -- please the Court, the reversal of this case does not end the case.
It will leave Mr. Daniel and his class of plaintiffs with four causes of action under the federal labor statutes and under state common law fraud.
Justice John Paul Stevens: Mr. Carmell, before you sit down does the record tell us what significance if any there is to the fact that the -- that Daniel took -- a withdraw occurred, is that critical in the -- is ineligibility?
Mr. Sherman Carmell: I don't believe that the issue as framed now that question is critical.
I believe that the appendix does show only a -- the brief does show a statement that was contained in one of the palm booklets that your benefits terminate if you take a withdraw card.
For the purposes of this case, Mr. Justice Stevens, we are accepting the fact that he had a break in service which was involuntary and by a layoff and will -- except for the premise that it was -- should have only run four months.
I don't believe that the question of the application of the break in service rule is relevant to the Securities Acts counts because if it's an arbitrary structural violation, under Section 302 (c) (5) there is a remedy or at least there appear -- the District Court has said that there is a remedy.
Justice John Paul Stevens: I see.
Argument of Sidney Dickstein
Chief Justice Warren E. Burger: Mr. Dickstein.
Mr. Sidney Dickstein: Mr. Chief Justice, may it please the Court.
As Mr. Carmell has indicated, there is no dispute that in the extensive legislative history that preceded the enactment of the Securities Acts of 1933 and 1934 and in the statutes themselves as initially enacted, there was no mention whatever of pension plans.
Certainly the reason for not mentioning pension plans could not have been as the court below suggested that there was such a rare bird that Congress simply ignored them or overlooked them.
At the time of the enactment of the Securities Laws, 3.5 to 4 million United American employees employed by hundreds of large industrial corporations were covered by pension plans.
Moreover, that Congress was legislating with respect to pensions in the Revenue Acts of 1926, 28, 32 and 34 in the Railroad Retirement Act of 1934 and as Mr. Carmell has indicated they played a role in the legislative history of the National Labor Relations Act.
It is not our point that this was a subject for special legislative concern on the collective bargaining area.
It is rather our point that whenever Congress turn to the subject of pensions, it was functioning in the employer-employee area of which collective bargaining, it's, of course, just one aspect.
We believe the reason why one finds no mention whatever of pensions in the Securities Laws is that as this Court said in Forman, the Congress's focus in enacting those laws was to deal with the capital markets of the enterprise system and to regulate the sale of securities to raise capital for profit making purposes.
When we speak of pensions on retirement from employment, we are not dealing with a capital market, we are dealing with the labor market nor are we talking about the raising of capital for profit making purposes.
Certainly pensions are not included within the types of arrangements that again to quote according Forman in our commercial world fall within the ordinary concept to the security.
This short straightforward analysis which occupied but eight pages of our opening brief is we believe the answer here.
But transaction under which someone goes to work for an employer and as thereby covered by a noncontributory pension plan as an incident of his employment is like the transaction in Forman simply not a purchase of securities within the contemplation of the Federal Securities Laws.
There is one type of pension plan which is unarguably covered by the securities laws.
This is a type of voluntary contributory plan where employee contributions are used to purchase the employer stock.
Put it in another way, to add capital to the employer's coffers for profit making purposes.
But this is not covered because it is a pension plan but rather because it is an employee stock purchase plan and the fact that it has pension or retirement features does not alter that basic fact.
The SEC has consistently treated such plans as subject to the Securities Acts, has advised Congress to that effect and no one seriously quarrels with that proposition.
Justice Potter Stewart: And in that case the security is the stock of the employer corporation rather than the participation of the pension plan.
Mr. Sidney Dickstein: Your Honor the Securities and Exchange Commissions position is that that transaction, there were two Securities involved.
One is the interest in the plan under which the stock is purchased and the other is the stock of the employer as well.
Justice Potter Stewart: Well, if one is the interest of the plan, then why isn't this a security?
Mr. Sidney Dickstein: The interest of the plan and the special circumstance in which employer stock is bought with employee money is indivisible with the arrangement of the entire arrangement under which that stock is purchased.
Here, we are not talking about the purchase of employer stock at all in the noncontributory --
Justice Potter Stewart: But we are talking about a dissipating interest in a retirement plan.
Mr. Sidney Dickstein: We're talking about a participating interest in --
Justice Potter Stewart: And if it's a security in one case why isn't it in the other, quite apart from the employer stock.
Mr. Sidney Dickstein: There are several reasons for that Your Honor.
One reason of course is that in the type of plan we are -- in the type of plan that the SEC has always considered to represent a security.
The employee's money is being used to capitalize the employer.
The employer is selling securities to the employer on the vehicle.
The plan through which he does it is simply the wraparound.
In the type of plan that was involved here, that is the noncontributory mandatory plan and for that matter I would add the voluntary contributory plan in which there is no investment in employer's stock of the employee dollars.
This is not used to fund the employer's enterprise and we think in that --
Justice Potter Stewart: I understand that and I understand that the -- that you concede the -- that that one special kind of a retirement plan is subject to SEC jurisdiction under the Securities Laws and I understand the factual difference but I don't understand if the participation -- the participatory interest in the retirement plan itself is a security, in one case, why isn't it in the other?
Mr. Sidney Dickstein: Your Honor the answer again is that in the instance where the employee's money is buying employers stock, that is always been treated as a transaction covered by the Security.
Justice Potter Stewart: I understand that.
Mr. Sidney Dickstein: And if one wraps that basic transaction around the retirement plan in which the stock which is purchased is kept in a fund, it is ultimately given to the employee on retirement or ultimately sold in order to fund his retirement that does not change that basic reality.
Justice Potter Stewart: Well in this --
Mr. Sidney Dickstein: It is still --
Justice Potter Stewart: In this case the funds of the planner, he has to buy what are conceitedly securities.
Mr. Sidney Dickstein: No Your Honor, we do not --
Justice Potter Stewart: Not --
Mr. Sidney Dickstein: Not only do we not concede it to be securities in this case, we are -- we believe the -- not only that Congress has not considered it to be securities and the SEC --
Justice Potter Stewart: But many -- but the funds of no retirement plan entirely is quite --
Mr. Sidney Dickstein: And until quite recently the SEC did not maintain that they have securities.
Justice Potter Stewart: But what are the funds -- what -- how are the funds invested to this plan?
Not in securities?
Mr. Sidney Dickstein: In a --
Justice Potter Stewart: In no securities at all?
Mr. Sidney Dickstein: They -- no, Your Honor, of course they are invested in securities.
Justice Potter Stewart: Well, that was my question.
That was my question.
Mr. Sidney Dickstein: Oh, yes.
But, they are not in this instance -- of course, they're not invested in employer's security.
Justice Potter Stewart: But they are invested in securities.
Mr. Sidney Dickstein: But even -- but they are invested in securities unquestionably and it is quite clear that purports the investment of pension fund -- pension funds in a portfolio of securities.
That is the securities that are purchased with those funds does involve the Securities Acts.
Nobody has ever challenged that.
That's quite clear.
And it's quite consistent with ERISA as a matter of fact because in ERISA when the Congress, in ERISA there is a definition of the term security which utilizes the definition in the said Securities Act of 1933.
And when you read the Act throughout, the -- every time that term is used, it is used in connection with the purchase of securities for the portfolio of the pension fund.
It is not used in connection with the interest of the participant in that fund for that Congress chooses quite different words.
But the fact of the coverage of one that is the portfolio security under the Securities Act does not buy any means mean that the participating interest of the employee is thereby a security.
As a matter of fact in the early --
Justice Potter Stewart: And you concede that it isn't --
Mr. Sidney Dickstein: That the history --
Justice Potter Stewart: -- in the one case?
Mr. Sidney Dickstein: Your Honor, yes, I do, because it is clearly a security.
The SEC has taken the position that it is from the very outset.
It has advised Congress that that is the circumstance, the only circumstance which involves the Securities Acts that is the circumstances pertaining to pension funds and Congress has proceeded on that perception.
Justice Byron R. White: Mr. Dickstein, are you -- I take it you're making the argument that even if there were no Labor Laws at all, no federal labors statutes and only the Securities Laws that this would not be a security.
Mr. Sidney Dickstein: Yes, Your Honor, we are.
Justice Byron R. White: Are you also --
Mr. Sidney Dickstein: But --
Justice Byron R. White: -- arguing that even if it -- otherwise would be a security, the Federal Labor Laws in effect make an exception to the securities or laws, or not.
Mr. Sidney Dickstein: No, Your Honor, we are not arguing exception but what I -- what we are arguing is that --
Justice Byron R. White: You're not arguing that the labor law is -- the labor laws require a different construction of the Securities Laws then otherwise it would be true.
Mr. Sidney Dickstein: Oh, yes, oh, yes.
And the reason why we say that is because we are dealing here with a question of congressional intent and Congress, it is Congress which has acted in the pension area, it has acted expressly with respect to Security Act disclosures and that of course is what we're talking about here in the WPPDA of 1958 and in ERISA in 1974.
Justice Byron R. White: So would you say the impact to the labor laws is equivalent to their being an exception in this Securities Laws that -- is that your argument or not?
Mr. Sidney Dickstein: An exception, an interdiction and inhibition of that construction whichever way -- I think one can fairly put it that way.
Justice Potter Stewart: I'd understood that the principal thrust of your argument not that you don't make the one suggested in your answer to my Brother White but that the principal thrust of your argument with respect to the labor laws and WPPDA and ERISA is that they reflect congressional understanding that pension plans are simply not covered by the Securities Laws.
Mr. Sidney Dickstein: They reflect both congressional understandings and actions based upon those (Voice Overlap) --
Justice Potter Stewart: Based upon that understanding.
Mr. Sidney Dickstein: -- on those understandings, quite correct.
And this is an understanding to which the SEC as a matter of fact made the major contribution and we think that Congress having acted in that fashion even if it were once possible to construe the Securities Laws in a fashion that would cover these type of arrangement that is no longer possible because again we are dealing with the matter of congressional intent.
Justice John Paul Stevens: This is a basic question and I always wonder about, the congressional intent we're really concerned about is back in 1935 isn't it or 33 rather or 33 and 34?
Mr. Sidney Dickstein: That --
Justice John Paul Stevens: And all these stuff comes later.
Mr. Sidney Dickstein: That is certainly true.
And if we deal with congressional intent back in 1933 and 34, an interdicted it at that point, cut it off at that point.
What would the congressional perception have been?
Justice John Paul Stevens: Well, its clear they used --
Mr. Sidney Dickstein: That's really the question.
Justice John Paul Stevens: Its clear they used some broad language that encompass some situations they did not specifically contemplate at that time, that much I think you have to concede.
Mr. Sidney Dickstein: Oh yes, oh yes.
But we're -- in dealing with pensions we're not dealing with some new device, we're not dealing with some recent invention, we're dealing with something which existed then, existed as a significant force and the American labor relations and it is Congress' perception as it then existed as to whether or not pension funds were covered by the Securities Laws which is of course the significant aspect.
Justice John Paul Stevens: The Court of Appeals was apparently influenced by the fact that pension money is a huge percentage of the total capital market today with a very small percentage in 33.
Mr. Sidney Dickstein: No question about it, it was -- as a matter of fact it was because of the growth of pensions in 19 -- in the mid 50's that Congress turned to express concern with the absence of disclosures to pension plan participants, conducted its studies very, very carefully inquired into the subject over a long period of time and enacted the Welfare and Pension Plans Disclosure Act as an expression of concern.
As pension funds became more important, Congress revisited the subject of pension plans and provided for further disclosures, disclosures which is one reads ERISA.
You have to conclude our detailed comprehensive and all embracing.
In addition, to which it enacted substantive regulations with respect to pension plans which up until that time had not been a matter of federal concern and so it was the congressional reaction to this economic reality of the growing importance of pension funds that we're dealing with here.
Justice Potter Stewart: Of course you go back to 1934, there is no private right of action at all under 10 (b) of the 34 Act.
You'd win your case on that basis?
Mr. Sidney Dickstein: That -- a little acorn may have grown into too much of an oak for that Your Honor.
Although I would say that in the context of this case and it's certainly this -- it is in our question present it.
That in determining whether or not there is an implied private right of action under the antifraud provisions of the Securities Laws, one can well consider as this Court has on occasion consider, what the subject matter is and how far one is prepared to go.
What is -- to whether there's an implied right of action on the rather circumstances of course I'd be prepared I suppose to accept at least arguendo for the purpose of this case that such a right of action exists.
There is -- there were several observations to make about the SEC's present position.
One is that when it says, “Oh, we all along knew that these nine contributory pension plans were covered by securities who were covered by the Securities Act.”
We were only talking when we said that there was no sale and hence they were not covered.
We were only talking about the registration provisions and not about the antifraud provisions.
Suffice to say if there were one instance in the extensive legislative history of commission statements, of commission reports, of commission analysis in which the SEC had taken of affirmative position before the Congress or for that matter anywhere else that the antifraud laws are applicable to interest in noncontributory pension plans.
SEC counsel would be trumpeting it here but he will not because there is none.
And, so the SEC is really is a fallback position to as well we've report it.
45 years to make a great deal, a difference in the world of pensions and we now think that when an employee goes to work for an employer and has in mind the pension plan and is influenced in going to work for that employer by the existence of the pension plan, he has purchased a security within the meaning of the Securities Laws.
What's more says the SEC.
When he goes to work each day again so long as he has the pension plan in mind as an inducement, he is purch -- continuing to purchase that security.
Justice Potter Stewart: And when he gets work, he sells it, I suppose.
Mr. Sidney Dickstein: Well, that is precisely one of the points which of course differentiate what we have here from what we had in a conventional security in a commercial sense or even a non-conventional security in a congressional sense.
The employee has no interest to sell.
He has the right under certain circumstances upon the fulfillment of employment requirements to receive a retirement pension and that fact alone I think is a significant differential.
At this point I would like to save the balance of my argument for rebuttal.
Chief Justice Warren E. Burger: Just one question counsel, there's been some comment, questions to you about the difference between the situation that existed 40 odd years ago and today in terms of the amount of investment in pension funds that are within the range of collective bargaining.
I suppose you would concede that if Congress wanted to reexamine the situation today or the next session, that those changes would be a major factor in their approach to the problem and might lead to a different result from what you are arguing now might say that these are Securities in other words.
Mr. Sidney Dickstein: No, I think we have the best evidence of that as what Congress has in fact done Your Honor.
Chief Justice Warren E. Burger: But you mean (Voice Overlap) --
Mr. Sidney Dickstein: Because --
Chief Justice Warren E. Burger: Change them -- they can't change their views on the matter.
Mr. Sidney Dickstein: Oh, of course they can change their views.
Chief Justice Warren E. Burger: That's -- that's all I'm asking.
Mr. Sidney Dickstein: But they have already -- they have already acted at least twice based upon the new evidence of the mounting importance of pensions in this country.
And when they have done so, they have acted in a manner which is inconsistent with the notion that an interest in a noncontributory pension plan is a security and that disclosures are required under the Securities Laws to supplement the risk.
Your Honor, you simply cannot read ERISA and particularly the statements of policies in Section 1 and the disclosure provisions of Sections 101 through 111 without coming away from the -- with the strongest of beliefs that Congress thought that in the disclosure area on pensions it was writing on a blank slate and it wrote on that slate what it wish to have there and that of course is the point.
The legislative history of ERISA totally confirms that and that which the SEC said to the Congress, totally confirmed that belief.
Justice John Paul Stevens: Mr. Dickstein, before you sit, let me ask you one question, I think I understand but I'm not sure.
The benefits under this plan are subject to change by the trustees at all time, aren't they, the plaintiff?
Mr. Sidney Dickstein: Yes, this is a -- this of course is a defying benefit plan.
These trustees may alter the level of benefits.
Justice John Paul Stevens: Without the consent of the union and the employers.
Mr. Sidney Dickstein: It would be an act which would be participated in by the trustees and would be equally designated by the employers and the trustees.
Justice Potter Stewart: That is (Voice Overlap) --
Its -- what kind of a benefit plan, defined?
Mr. Sidney Dickstein: Defined benefit.
Justice Potter Stewart: Defined.
Mr. Sidney Dickstein: Defined benefit.
Justice Potter Stewart: I didn't understand the word.
Argument of Jacob H. Stillman
Chief Justice Warren E. Burger: Mr. Stillman.
Mr. Jacob H. Stillman: Mr. Chief Justice and may it please the Court.
The Solicitor General has requested me to state at the outset that although the Securities and Exchange Commission is participating in this case on a motion may jointly by the Commission and the Solicitor General, I am expressing the views only of the Commission and not of the Solicitor General who takes a different view of the case.
This is a securities case and the issue before this Court is the interpretation of terms in the Securities Laws specifically the term security and sale and it is to that question those legal issues under the Securities Laws that the commission as amicus curiae is addressing its views because the commission believes that the resolution of those issues is important to investors.
Of the two issues, security and sales, we believe that the resolution of the security question has a much greater potential impact on investors and for that reason I would like to address that issue first.
Justice Potter Stewart: The -- going back to what you said at the outset, the Solicitor General does agree with you on the sale issue, does he not?
Mr. Jacob H. Stillman: Yes, Your Honor on that issue he does agree.
In considering whether this is a security, Mr. Daniel for more than 22 years worked for employers who in return for his labor made contributions to his union's pension fund.
I think a very vivid description of why this is a security is contained in the union's own literature that it distributed to its members.
If I may quote two sentences from Page 70 (a) 14 of the appendix in one of the brochures that the union distributed it contains this description of the pension fund and of the members' contribution -- of the contributions that are made on behalf of the members.
It says, “The contributions, earned income by being invested consequently the money originally contributed grows.
Without this income growth the fund could not accumulate enough money to pay the $250.00 monthly pensions provided by the plan.”
That in a nutshell is what an investment contract is.
Outside of the employment context, it is clear that a participation in a fund of this sort which invest its assets and returns more money at a later date as a security and through a series of six decisions of this Court beginning with the Joiner case in 1943 and continuing most recently through the Forman decision in 1975, this Court has construed the term investment contract.
And those decisions demonstrate that so long as there is present the type of relationship found in this case, a relationship in which the investor participates in a common venture with the expectation of profits to be derived from the managerial efforts of others, there is a security.
All the requisite features are present here.
The employee makes an investment by giving value in the form of his labor.
The purpose of the fund is to provide employees with more return than the amounts contributed profits.
Justice Lewis F. Powell: Mr. Stillman, is there any other case in which an investment in the form of labor has been a way of deciding that it's a security?
Mr. Jacob H. Stillman: Not -- not that I am aware of in deciding that it's a security.
In terms of a constituting value for purposes of a sale, yes, Your Honor.
But that involved something which was a security independently.
Justice Lewis F. Powell: Isn't it true that different employees con -- can contribute different amounts -- the labor and have the same amount to be contributed to the pension fund?
Isn't it so many dollars per employee without regard to their salary level, the number of hours worked and so forth?
Mr. Jacob H. Stillman: I believe that is so Your Honor but does not affect the basic relationship which this Court has recognized in a series of six decisions.
Going back many years as giving rise to an investment contract and it is that relationship which is the significant thing because that relationship contains the elements that provide the need for the kind of protections that the Securities Laws afford.
Justice Thurgood Marshall: What contract is --
Justice William H. Rehnquist: When did the SEC Mr. Stillman first have the position that agreement such as this was an investment contract for purposes of the Securities Act?
Mr. Jacob H. Stillman: It is important to differentiate as I think you're doing the question of security versus the question of sale.
On the question of whether it is a security, the commission took the position as far back as 1941 and the testimony that Commissioner Purcell gave that interest in pension plans are securities.
The defendant's dispute the scope of what Commissioner Purcell was referring to.
They say that he was only referring to interest in voluntary contributory plans.
I think an examination of what he said will show that it was not so limited because when he talked about the “no sale” rationale as being applicable to the type of plan involved here, an involuntary noncontributory plan, that was the very same type of plan that he also had in mind as involving the security.
Justice William H. Rehnquist: Well, in the intervening 37 years, why wasn't the commission out seeking injunctions against one or another of these plans that -- presuming, just by the law of averages would have proved fraudulent or failure to disclose?
Mr. Jacob H. Stillman: Your Honor, the question of why at any given point in time or over -- even over a period of years, certain types of activity does not give rise to proceedings whether it be a commission proceeding or even private proceedings is of -- is something that is very difficult.
Justice Byron R. White: (Voice Overlap) --
Why isn't a simple answer that it wasn't until recently that they considered this matter, this to be a sale.
Mr. Jacob H. Stillman: The focus of the statements over the years about no sale --
Justice Byron R. White: Well, what about the sale -- what about the sale issue?
Mr. Jacob H. Stillman: Oh, that's, that's what I was getting to Your Honor.
The focus of the commission's statements over the year is to whether it was a sale.
The focus was in the context of registration and indeed Judge Tone in his concurring opinion, who as you know was critical of the commission, acknowledged that the focus was really in the context of registration.
Now it' s true, the commission did not come out and affirmatively say, “We are only talking about registration and the no sale rationality does not apply for fraud purposes.”
But it was clearly in that context.
Now, as to why the commission did not over the years take enforcement action in the fraud area with respect to pension plans.
First of all, there is no indication that even in the case of the voluntary contributory that the commission took enforcement action based upon the theory that the interest was a security and that there was a sale.
Justice Byron R. White: Well, is the commission's position that it is a sale now for the purpose of registration?
Mr. Jacob H. Stillman: No, Your Honor, that goes back to the fact that --
Justice Byron R. White: Well, when did the commission first assert that an interest -- acquiring an interest in a pension plan is a sale, is a sale, affirmatively said it was.
Mr. Jacob H. Stillman: For purposes of involuntary noncontributory plans of the sort involved this case -- is involved in this case, the commission as far as I'm aware did not even consider the matter until this case arose.
Justice Byron R. White: Yes.
Justice Potter Stewart: Well, in fact despite what Commissioner Purcell may have said, we all know what he said, we -- there's a dispute as to what he meant.
Acting Chairman Andrew D. Orich (ph) in the late 50's testified before a Congressional Committees quite in a contrary way, didn't he?
Mr. Jacob H. Stillman: Your Honor, he did not testify that there was no security and there was no sale.
In terms of the testimony, I think --
Justice Potter Stewart: He testified that the SEC had no business with this and didn't know anything about it and please don't give us any jurisdiction over it.
Mr. Jacob H. Stillman: Your Honor in context I think that has to be judged in terms of the kind of legislation that was then before Congress.
It was a kind of legislation far different from a simple antifraud provision.
It was legislation that would have imposed considerable day to day obligations of a more formal nature on people involved in the pension area, would have required the commission itself to engage in administering those provisions in that context to say that the commission was not the proper agency to administer that kind of legislation is far different from saying that there is no sale of a security.
Congress itself in the Securities Laws in connection with certain types of regulation has recognized that even though there is a sale of a security not all types of regulation under the Securities Laws should apply.
For example, the periodic reporting provisions of the Securities Exchange Act they only apply where there is a market interest.
Larger corporations with securities trade it in the market.
Now, that doesn't mean that if you have a corporation, it doesn't rise to that level, you don't have sales of securities.
It's that when you get in to the more detailed kind of --
Justice John Paul Stevens: On that question of different kinds of regulation, they're imposed, don't have securities, going back to the stock purchase plans for employees which are -- everybody concedes those are covered.
Does the SEC require registration of those?
It does, doesn't it?
Mr. Jacob H. Stillman: In certain types I'm not sure of the details that --
Justice John Paul Stevens: Why would there be a difference if this is security and if this is a sale, what is the policy reason for saying that there is no need for registration if it's this huge segment of the capital market?
Mr. Jacob H. Stillman: The reason that was originally given back in Commissioner Purcell's testimony back in 1941 --
Justice John Paul Stevens: Oh, I'm not interested --
Mr. Jacob H. Stillman: It did not really go to a policy question.
It was based upon the view at that time that it did not involve a sale.
Justice John Paul Stevens: No.
Mr. Jacob H. Stillman: Now, --
Justice John Paul Stevens: But if we say now, it does involve a sale, it does involve a security, should it not and is it not important enough to require the registration as well, I'd understand --
Mr. Jacob H. Stillman: At the present --
Justice John Paul Stevens: -- other than concern about retroactive liability.
Mr. Jacob H. Stillman: At the present time given the enactment of ERISA as a policy matter registration probably would not be a needed thing.
Justice Potter Stewart: You mean registration under the 33 Act?
Mr. Jacob H. Stillman: That's right.
Now -- I was -- I assume (Voice Overlap) --
Justice Potter Stewart: Of the Securities Act (Voice Overlap) -- Yeah.
Mr. Jacob H. Stillman: At the present time given ERISA.
ERISA has requirements for the filing with the Government and the dissemination of a disclosure document.
Justice John Paul Stevens: But prior to the enactment of ERISA, it would seem that the reasons why the antifraud provisions apply, should equally apply -- should equally have applied to the registration statement, didn't they?
Mr. Jacob H. Stillman: If I may refer to this Court's decision on the National Securities case, in a different context that involved a question of whether an exchange of securities by a shareholder in connection with the merger constitutes a sale.
For purposes of the antifraud provisions and the Court held yes that it was a sale.
In the face of a commission interpretation over the years and commission rule saying that for registration purposes, it was not a sale.
At that time the rule was premised to -- to some extent on the same kind of rationale that was originally used by the commission in the case of pensions, lack of individual volition on the part of the shareholder who votes for the merger and therefore not a sale.
And the Court expressly recognized that the term sale can have a different meaning for registration purposes from what it means for sale purposes.
Justice Potter Stewart: From 34, I take it.
Justice William H. Rehnquist: Mr. Still --
Mr. Jacob H. Stillman: Yes sir.
Justice William H. Rehnquist: Do you think the commission is as free after this relative period of quiescence to take the position and now it does in view of the enactment of WPPDA in 1958 and ERISA in 1974 is it would have been prior to the enactments of those laws?
Mr. Jacob H. Stillman: Yes Your Honor, it seems to me that those laws really have -- I cannot see what effect they have on the meaning of the word “security” and the meaning of the world “sale”.
Justice William H. Rehnquist: Well but, Congress has really been proceeding on two different tracks hasn't it since 1958, one for securities and one for pension funds.
Mr. Jacob H. Stillman: But there is really no indication that Congress clearly believe that the antifraud provisions were not applicable.
The kind of legislation that Congress was enacting in the pension area was such that it could have hardly made a difference whether the antifraud provisions were applicable.
In other words, the suggestion is made by the defendants that had Congress realized the antifraud provisions were applicable, it could have a significant effect on whether they would have enacted the kind of pension legislation.
I don't see that.
The pension legislation that we're talking about imposed detailed affirmative disclosure filing requirements, the preparation of documents and as you get into more recent years with ERISA, massive regulatory provisions.
It's hardly likely that because of the presence of an antifraud provision, Congress would have declined to enact that other kind of legislation.
Congress in the Securities Laws didn't decline to enact the registration provisions simply because there was an antifraud provision.
The other legislation stood on its own and was necessary even with the presence of an antifraud provision.
Justice Lewis F. Powell: Mr. Stillman, you've been talking about the definition of security which of course is the threshold issue.
I'm looking at Section 3 (a ) (10) of the 34 Act to which a substantially like 2.1 of the Act of 33, you rely on the term investment contract.
Both of those sections also have as a catchall any instrument commonly known as a security.
I'd like to ask you whether or not do you think in 1933 or 34, a participation on the pension plan would have been considered to be something commonly known as a security?
Mr. Jacob H. Stillman: In terms of the man on the street, the employee if you ask him is your pension, a security; I suppose it would say no.
Justice Lewis F. Powell: Would anybody have said yes?
Mr. Jacob H. Stillman: Pardon?
Justice Lewis F. Powell: Who would have said yes?
Mr. Jacob H. Stillman: That is really irrelevant.
This Court has recognized clearly that that provision does not limit in anyway the other provisions.
Justice Lewis F. Powell: Well let's assume it is irrelevant.
Who would have said yes?
Mr. Jacob H. Stillman: Someone who would have looked at it.
Justice Potter Stewart: I'm not asking Justice Stewart, I'm asking you.
Justice Thurgood Marshall: I mean, (Inaudible).
Mr. Jacob H. Stillman: If I had looked to see how a pension fund actually operates to see as was stated in the few sentences that I read from the union's brochure in this case exactly, exactly how it worked that the money's are invested, the profits are returned that that is -- that those profits are necessary to make the payments.
Yes, that fits this Court's long standing definition.
Justice Lewis F. Powell: Let me ask you -- let me ask you another question about these two sections.
They defined the term security first of all in terms of 18 or 20 different types of securities that are identified.
The ten means note stock, treasure stock, bond debentures and so on but 18 or 20 of those including among other things participation in any profit sharing agreement.
Do you think it might have occurred to somebody in the Congress if they had indeed intended to include pension plans, to have included participation in a pension plan among the 18 to 20 things they did itemized.
Mr. Jacob H. Stillman: No, Your Honor.
The whole --
Justice Lewis F. Powell: You don't think it would've occurred to them?
Mr. Jacob H. Stillman: No, Your Honor I don't believe so.
The whole framework of putting in particularly the provision investment contract was to have a residual provision to see to it that people would not be able to evade the Securities Laws because the instrument or the investment that they had was something they didn't fit one of the more particular provisions, that was a very broad all encompassing provision and this Court has made it very clear that specific provisions in that definition said so in the Joiner case I believe do not limit in any way the other provisions like investment contract.
And the definitions that this Court has developed for -- ever since the Joiner case and has been developed by this Court and the lower courts for over 40 years clearly encompass this kind of an interest.
The defendant's reliance on Forman is somehow having overturned all of this history we think is really misplaced.
The Court itself didn't view Forman as being anything more than application of the preexisting standards basically Forman was a holding that -- substance over form is a two-way street.
And just as in the prior cases, it had been used against defendants.
In the Forman case, it was used against the plaintiff but it really didn't change the law.
And in particular the reliance on Forman is really as a basis for claiming that somehow the United Benefit case is no longer the law wherein United Benefit, the court clearly held that the security element could be separated from the insurance element.
And they also in effect say that Forman has overruled the long line of cases as to whether an instrument in order to be a security has to be something that's traded in the markets.
That is definitely not the law and to say that a decision like Forman with the Court -- which the Court did not view as being any change has somehow eliminated all that to us it seems totally unreasonable.
Chief Justice Warren E. Burger: Your time is expired now Mr. Stillman.
Mr. Jacob H. Stillman: Okay.
May I just say one thing at the end.
Chief Justice Warren E. Burger: Very, very briefly.
Mr. Jacob H. Stillman: Okay.
The commission's concern in this case is not solely with respect to the applicability of the antifraud provisions to pension plans.
The definition of investment contract over the years has served this probably the single most important factor in preventing people from avoiding the Securities Laws through the use of unusual novel devices and the defendant's position if accepted would have far reaching effects beyond the pension plan area and that is of major concern to the commission.
Thank you Your Honor.
Argument of Lawrence Walner
Chief Justice Warren E. Burger: Mr. Walner.
Mr. Lawrence Walner: Mr. Chief Justice, may it please the Court.
I would like to address my remarks to the Doomsday argument advanced by the Teamsters, the denial of any possible remedy to a large group and the questions of sale.
My colleague will take up the question of the definition of security in legislative history and congressional intent.
We would like to emphasize the fallacy of the Doomsday argument created by the Teamsters and some of their amici in this case.
We have alleged that Mr. Daniel was intentionally, fraudulently induced to invest in the Teamster pension fund by materially misleading information.
The Teamsters originally claimed in the Court of Appeals that upholding the Daniel decision would result in pension industry liability of $200 billion.
Now this was reduced by 80% to $40 billion by some of their amici that even this amount is an incredible and absurd claim we suggest.
In fact I wonder if the amici propounding this position really perceive the essence of what they're asserting.
This figure that they suggest assumes that $40 billion of pension funds are sold both with materially misleading information as well as the concurrent scienter requirement and intent to defraud.
There is absolutely nothing to support the allegation that so many funds are sold with that requisite intent.
Justice William H. Rehnquist: Under your argument wouldn't they have to be registered even though not fraudulent.
Mr. Lawrence Walner: No sir.
There's a registration exemption we feel under Section 3 (a) 2 and this only goes to the issue of antifraud we feel registration is expressly exempt -- was expressly exempt in the decision of the Seventh Circuit.
We feel it's expressly covered by an exemption in the statute itself as well as long standing SEC policy.
Justice William H. Rehnquist: Of course the long standing SEC policy would cause you to lose your case, wouldn't it?
Mr. Lawrence Walner: Well --
Chief Justice Warren E. Burger: The Court had no difficulty in Sloan avoiding long standing policy that went back to the same period, I think.
Mr. Lawrence Walner: We feel they're still covered under the expressed exemption of 382 of the 33 Act and we feel that the express terms of the statute otherwise embrace the antifraud provisions, the registration requirement is the provision that's exempted from compliance.
The Teamsters when they tried to bring down the Grob study again reduce their Doomsday argument from a figure of 3.5 to 13.5 billion but the Grob study totally ignored the scienter requirement of the Ernst case and in effect estimated the liability that would result if the vesting and break in service provisions of ERISA were made retroactive and not the liability if antifraud provisions of the Securities Laws were applied to pensions retroactively.
I would like to just read two sentences at the end of the Grob report to show you how far that they'd backed off from their damage claims.
Most terminated non-vested participants have not been led to expect that they were entitled to a pension.
If liability exists only with respect to terminated participants who received information leading them to believe -- leading them to expect the pension, it does not apply to most terminated participants.
In such a case, the potential liability would be of very small fraction of the amounts shown.
Now even in the Shlensky case which followed Daniel in upholding the pension to be a security.
The complaint was dismissed for failure to allege facts establishing scienter.
Now, there is no requirement as we understand that under 10 (b) that anything be told the members but when something is told to them all that is required is a bona fide attempt to truthfully inform the members on whose behalf contributions are made of their rights and risk of loss.
Even if the information is not correct the absence of scienter is required by the Ernst case will bar any claims for liability under the antifraud provisions of the Securities Laws.
Justice Potter Stewart: You mean you're talking generally or just about welfare funds, I'm sure the SEC wouldn't agree with your very loose duty that your language seems to impose upon --
Mr. Lawrence Walner: I think it reports --
Justice Potter Stewart: -- Upon an issue where the right over proxy statement, all that's required is a good faith effort.
Mr. Lawrence Walner: I'm talking only about the antifraud provisions.
Justice Potter Stewart: Yes.
Mr. Lawrence Walner: I think if there's an absence of scienter and under private cause of action, there simply is no cause of action.
Justice Potter Stewart: Well --
Mr. Lawrence Walner: And I think that was made clear in the Ernst case.
Justice Potter Stewart: Scienter or its equivalent.
Mr. Lawrence Walner: Pardon?
Justice Potter Stewart: Scienter or its equivalent?
Mr. Lawrence Walner: The -- yes sir.
Justice Potter Stewart: That's what held in the Ernst case but --
Mr. Lawrence Walner: Yes.
Justice Lewis F. Powell: In your view Mr. Walner is there any difference when the elements of a recovery in a 10 (b) (5) action in the common law fraud action.
Mr. Lawrence Walner: There maybe some differences in the kind and categories of proof and I would like to point out in that connection that since ERISA has been discussed as a -- in effect the preemption type argument although they haven't used the words preemption that ERISA has cut off common law fraud.
Absolutely under Section 514, they've cut off all common law and statutory state remedies.
So at least with respect to the people who must claim after the effect of date of ERISA they're not able to claim any benefit from common law fraud or common law breach of fiduciary obligation or any state statutes in that regard and the Teamsters themselves point that out in the footnote of their brief citing Section 514 of ERISA.
Justice Lewis F. Powell: Is there any claim that ERISA has destroyed your common law claim?
Mr. Lawrence Walner: No sir.
Our -- we were slightly, I think inadvertently misquoted by Mr. Carmell.
Our contention is that we are a pre-ERISA case because Mr. Daniel retired before the effect of date of ERISA.
ERISA has been the subject of so much discussion as it may reflect both the intent of Congress and in what position people find themselves with respect to potential remedies or one of the things I intended to go in later related to the cutoff by ERISA of common law claims.
For example, for an em -- a person in a corporate pension fund, what are his rights, what are his remedies for intentional fraud to induce?
He no longer has a common law or state statutory right of any character under 514.
Now if you deny him, the antifraud provision protection so that if his fraudulently induced to invest in a pension plan, is -- he will have no remedies whatsoever for that activity.
Justice Lewis F. Powell: Well, are you suggesting that Congress deliberately cut off a group of remedies but preserved this one.
Mr. Lawrence Walner: Your Honor, I'm suggesting --
Justice Lewis F. Powell: Why would they preserve --
Mr. Lawrence Walner: -- that Congress never intended to cutoff the antifraud provisions.
They have specific savings clause for all federal remedies and I'm suggesting that the fact that this large group of people would find themselves without a remedy for that wrong is not something Congress intended.
Now, we feel because of the scienter requirement the honest pension manager is shield for a many securities fraud liability.
And if that is not sufficient to reflect, protection of the pension industry, Senator Williams did introduced a Bill that would have the effect of reversing the Daniel case.
So if Congress doesn't like the upholding of this decision, they have before them something they can vote on that would reverse it.
Now if all of these protections --
Justice Potter Stewart: Well, it can't reversely as suggested a few minutes ago by the Chief Justice if they don't like the reversal of this decision they could also change the law.
Mr. Lawrence Walner: Absolutely.
If these protections are discussed so far and not sufficient to alleviate any concern the Court may have about the effect on the industry, it is possible of course for the Court to fashion different forms of perspective relief.
We don't believe perspective relief is appropriate in this case because of the allegation of intentional fraud and the need to prove intentional fraud to establish a cause of action.
In the Manhart case in which this Court allowed prospective relief, the reading indicates it was done so because of the conscientious and intelligent administration of the pension fund and implicitly the good faith of the pension fund administers -- administrators.
We feel that a prospective relief is considered.
It should be fashioned so it was not to deny relief against the defendants in this case and in the consolidated case.
Because in the consolidated case, consolidated with this case in the lower court we do have the Central States Pension Fund as a defendant.
I'm not asking for any relief based on guilt by association but I do feel that's an important element to have before the Court.
Now, although the defendants have really acknowledged in their briefs that we have the equities, we're not asking for relief based on sympathy but on well grounded authority.
It's not the unconscionable rule that we're complaining about in the securities accounts that denied Mr. Daniel a pension.
That's not the gravamen our complaint.
It's the intentional misstatement about his rights, the intentional misrepresentation.
In fact, the rule is so bad just to comment on it.
As in the side, Mr. Daniel could not have gotten a pension if he -- under the terms of his rejection if he had not missed a day in 22 and a half years, because the rejection letter, we discussed it in the footnotes in the brief, the rejection letter says that he has denied a pension for six and a half or seven-month break in service.
He missed three and a half months for the involuntary layoff.
The question is what happened to the other three and a half months.
The other three and a half months resulted from a non payment of the pension contribution by the employer allegedly as a result of an embezzlement by his bookkeeper but the denial in the pension letter suggests that he still would have had a three or three and half-month break which would have been disqualifying if he had never missed a single day.
Now, and speaking about fears of damage to the industry, the Teamsters have really sought the masquerade as being representative of the industry norm in terms of terms of their plans, administration and advise to members.
And they've tried to paint a picture to this Court that if they are found to have securities fraud scienter in the lower court trial, the entire pension industry is doomed.
We want to tell you that's not so.
In reporting a study made by their own agent, the defendants revealed that a comparison with 32 other Teamster Pension Plans, Mr. Daniel would have received the pension and all of them except the Local 705 Pension Plan.
So they are not in any respect representative.
Justice John Paul Stevens: Mr. Walner.
Mr. Lawrence Walner: Yes sir.
Justice John Paul Stevens: What other type of investment contract do you consider to be the closest analogy to this one?
Mr. Lawrence Walner: The closest analogy investment contract Your Honor I would consider to be a mutual fund purchase by an employee through his union or variable annuity purchase through his union.
I see no real difference Your Honor between money contributed directly from the employee to the pension fund or money contributed directly by the employer bypassing the employee.
In each case he is taking a reduction of what would be a wage.
He's in effect buying it whether he's taking that out of his own pocket or the employer's paying it directly.
There are two reasons.
Justice John Paul Stevens: Let's take the purchase of the mutual fund --
Mr. Lawrence Walner: Yes sir.
Justice John Paul Stevens: What happens there?
Does the employee end up with a designated participation in the mutual fund?
Mr. Lawrence Walner: There would be a designated participation he would have.
Justice John Paul Stevens: Right.
Mr. Lawrence Walner: But he also has --
Justice John Paul Stevens: Not -- could you tell me how that could be forfeited, how could the employee lose that outright as in this case?
Mr. Lawrence Walner: If it were a mutual fund that he was buying with those own money --
Justice John Paul Stevens: And he'd paid for it?
Mr. Lawrence Walner: If -- and he pays for it.
Justice John Paul Stevens: Right.
Mr. Lawrence Walner: He would -- he couldn't forfeit it under those terms.
Justice John Paul Stevens: He could -- he couldn't --
Mr. Lawrence Walner: The thing we're complaining about is he's not made aware of the forfeitures opportunities here.
Justice John Paul Stevens: Right, but do you know of any type of investment where one as you suggests has contributed his wages or portions of him over a period of years in the acquisition of that which can be forfeited?
Now, I know you're complaining about that here but under many pension plan situations, the interest is forfeited if this man had just walked away and stayed away for good.
Mr. Lawrence Walner: Well, Your Honor --
Justice John Paul Stevens: Before it had vested, it would have been forfeited, wouldn't it?
Mr. Lawrence Walner: There are other examples where a contingency or an expectation has been considered security and this contingency --
Justice John Paul Stevens: It wipes out if what he's paid all together?
Mr. Lawrence Walner: Pardon?
Justice John Paul Stevens: And wipes out what he has paid over a period of years?
Mr. Lawrence Walner: It would wipe out the interest in the security and the example I have in mind Your Honor specifically is an employee's stock option where the option is granted to the employee who works there providing he remains that a period -- for there for a period of years.
It's an option to buy the stock at a specific price.
Now if the employee leaves --
Justice John Paul Stevens: But you don't pay anything for it until you exercise the option.
Mr. Lawrence Walner: But it's given in partial consideration for his services because if he leaves the employment he doesn't have the option.
Therefore, he's continuing the pay for it with his service.
And if he leaves before the time expires, he loses all interest in that option.
Its further contentions Your Honor on the fact that even when the option right vests when he has an unconditional rights to exercise it, it would still be valueless unless the value of the stock is in excess of the option price.
Justice Lewis F. Powell: Is a stock option deemed to be an investment security within the (Voice Overlap) Act.
Mr. Lawrence Walner: I believe it is a security by definition or by a case decision.
Justice Lewis F. Powell: I'm talking about for an employee of a corporation, does a corporation have to register a stock option before it offset to one of its offices?
I haven't looked at that recently but that's surprises me a little bit.
Mr. Lawrence Walner: If they have to register their securities generally, that registration would cover the offer to the employee.
If they don't have to register --
Justice Lewis F. Powell: If there's a registration statement in effect.
Mr. Lawrence Walner: If there's a registration statement in effect it would cover that employee.
Justice Lewis F. Powell: Right.
Mr. Lawrence Walner: If there's no registration in effect they would not have to make -- file a registration statement merely because of the employee option as I understand it.
Chief Justice Warren E. Burger: Your time has expired now.
Mr. Lawrence Walner: I would just like to make --
Chief Justice Warren E. Burger: I think you've covered your points counsel.
Justice Potter Stewart: Well, Mr. Walner I hope somebody's going to -- there are two issues here.
Mr. Lawrence Walner: Yes sir.
Justice Potter Stewart: Whether this is the security and whether this is a sale.
Mr. Lawrence Walner: Yes.
Justice Potter Stewart: And we've heard on both those issues from the other side, you said you were --
Mr. Lawrence Walner: I was going to cover a little bit of sale --
Justice Potter Stewart: -- cover (Voice Overlap) I hope Mr. Barack will because as Chief Justice --
Mr. Lawrence Walner: All right, I just want to make two remarks on response to Mr. Dickstein's arguments with respect to sale.
He characterized the employees entering into employment at something about which the pension is incidental.
In many cases the pension is the primary motive.
There are many examples of a person who will stay in a job that he doesn't like or not change jobs because he is expecting a pension in the present job.
He may even forgo a job with higher pay because when you count up the benefits of the pension, it amounts to more money.
There are employees who will stay in a job when they're sick, when they're hurt because they want to hang on the last few years to get a pension.
Certainly in those cases the pension is the primary consideration and even for the new employee seeking a career and deciding to make a choice between fields, you can easily discern the value of the pension to him in evaluating comparative salaries and he can easily compute that the value of the pension will have a certain dollar benefit which may be the decision-making factor in choosing between interest.
Argument of Peter J. Barack
Chief Justice Warren E. Burger: Mr. Barack.
Mr. Peter J. Barack: Mr. Chief Justice, may it please the Court.
This whole case revolves around the question of how to characterize the economic interest in the Local 705 pension fund acquired by Mr. Daniel for value rendered.
And this economic interest is an interest in the pool or fund professionally managed investments, stocks, funds, mortgages and the like.
It is in this nature akin to a mutual fund or a variable annuity and I might add an answer to some of the comments made by the petitioner, counsel for petitioners this morning that a variable annuity fund is also a fund, an interest in the variable annuity is a security and is a type of security which provides for the annuitant the payment in the future of an annuity as you will, a retirement benefit.
The economic interest here as in 7441 or United Benefit Life was acquired in a periodic investment program by the giving of services involving the pooling and professional management of other people's money to provide for a benefit, profits if you will at retirement in the form of an annuity.
Justice Potter Stewart: Well, we're concerned here with despite of all the elaborate briefing and argument with two rather precise and fairly technical questions, i.e. whether within the meaning of the 1933 and 1934 Acts and/or those two statutes.
This interest is a security and if so if there was a sale of it.
Those are --
Mr. Peter J. Barack: Well, one can answer the question --
Justice Potter Stewart: Those are precise statutory questions not -- and if you're talking about economic effects you could be talking about insurance or bank savings account or lots of other things that are not covered by the Securities Act.
Mr. Peter J. Barack: Well, I think what we have here is a situation we were not writing on the cleans -- on a clean slate as this Court has expressly recognized in Forman.
There are six prior decisions interpreting the definition of investment contract rendered by this Court.
In these sixth decisions, various points become clear which make it absolutely clear also that we have a security here.
For example, the question has come up whether or not the fact that this might be a novel form of investment means that it is not a security.
For example, (Voice Overlap) --
Justice Potter Stewart: Unless the forms of investment, I mean let's have -- we're not securities.
That's a -- an insurance policy is not a security although it's a savings device and a pooling device.
Mr. Peter J. Barack: However, a variable annuity plan is a security.
Justice Potter Stewart: Yeah, but it's correct.
Mr. Peter J. Barack: Now, why is it a security?
It's a security because it meets the elements of the Howey rule.
Now what are the elements of the Howey rule because this is the rule that has been reiterated by this Court in Forman as defining what a security is.
Now the Howey rule states that you have to have an entrusting a value or money to others to be managed with the reasonable expectation of profits to be managed in a common enterprise.
Justice John Paul Stevens: Right there, Mr. Barack, in the trusting -- what the employee entrusted in order to acquire the interest.
I was interested, Mr. Stillman read part of a paragraph on page 14 of this document but the paragraph starts out, a funded pension is one which requires an employer to make contributions while the employee member works instead of after he retires.
The very paragraph he cites emphasize the fact that the investment and money is made by the employer rather than the laborer.
Mr. Peter J. Barack: Well, I would suggest that the -- a reading of the Howey rule in order not to exult form over substance in order to look at the economic realities involved.
All you need is an investment of money or money's worth.
Now there has been at least I believe one case, a District Court Case in Texas, Sec. B Edison which I think is cited in page 54 of our brief which indicates that an investment of services would constitute the necessary investment of value to meet the first prong of the Howey test.
Justice John Paul Stevens: But it isn't true that in those cases if the person contributing the services were terminated for some reason after a year of work.
He would still have some interest left that here if this man was terminated, he'd have no interest whatsoever.
Mr. Peter J. Barack: That is a question that goes to the issue of contingency an issue already discussed.
What I would suggest the inquiry is whether something otherwise a security is declassified from the definition of security because of the fact that it is contingent.
Now I suggest the example used by Mr. Walner that a stock option acquired by the giving of services which option can only be exercised after a number of years is a security which is not declassified from the definition of security because it is contingent.
Let us look further.
In the Howey rule as reiterated in Forman, what is stressed is that there must be a reasonable expectation of profits.
Not that there'd be immediate profits today or tomorrow or in year one or in year two.
All that is required is that there'd be a reasonable expectation of profits.
Justice John Paul Stevens: If the plan were never subject to amendments, say a defined benefits are always $2.00 or whatever the payment was.
It was not -- never to be amended, would you still be able to make your argument.
Is it --
Mr. Peter J. Barack: But that -- that is the question --
Justice John Paul Stevens: -- in the contingent interest one that depending on the trustees amending the plan to increase the benefits provided there's enough money there that is a means to reduce the claim prior to contributions and so forth.
Mr. Peter J. Barack: That raises a very interesting question which is whether or not a fixed dollar annuity which cannot be amended is also a security.
That question was not presented in Valich (ph) and is not (Voice Overlap) --
Justice John Paul Stevens: So what's your view on that question?
Mr. Peter J. Barack: Pardon?
Justice John Paul Stevens: What's your view on that question for a fixed dollar annuity, would there be -- would have been an investment?
Mr. Peter J. Barack: I would think that it's a very close question and I don't think I have any answers with it.
Justice John Paul Stevens: Well, what interest would there be in profits, I mean how do you --
Mr. Peter J. Barack: However, this is not that case because here we have a situation where the lure to the investor was actually the profit element.
As Mr. Stillman has quoted from the owned brochure, it is the money that has contributed that is growing which is the lure to the investor.
Now indeed in this case, the profits in the form of retirement benefits promised to investors have increased --
Justice John Paul Stevens: But he don't read the whole paragraph, that's what I object to both there.
They say that there's enough money in Arizona to invest that you can be sure the fund will grow so they can pay you the $250.00 monthly that's provided under the plan.
They say there's going to be enough growth to meet the guaranteed benefit.
That's what they say.
Mr. Peter J. Barack: Well, that's not --
Justice John Paul Stevens: They didn't talk about this is going to give you $260.00 or $270.00.
Mr. Peter J. Barack: Well, this is the promise of profits.
They say we're promising profits --
Justice John Paul Stevens: They don't promise profits in that paragraph.
There's a promise that you get your $250.00 a month.
Mr. Peter J. Barack: Well, it -- this is a promise again that you're getting this and they also reiterate throughout their descriptive materials which have been distributed which we alleged are materially misleading that over the course of the period of time the benefits have been increase and indeed this is just the facts here.
The promise -- the profits promised have increased from an initial $75.00 per month for persons retiring in 1955 to $550.00 per month for persons retiring in 1977.
Justice John Paul Stevens: Will you tell us what caused that increase?
How much of it, what percentage of it repels it from the investment efforts of the trustees of the fund as distinguished from additional contributions made by the employer as a result of collective bargaining.
Mr. Peter J. Barack: Well, we don't know the exact answer to that question in terms of the numbers but let me tell you an -- a number that we do know that is analogous to that.
We do know that by the defendant's own computations when there has been an investment along the example they use of approximately $9500.00 in the pension fund that there would be substantial profits returned to the investor and now these substantial profits approximately $5000.00 would represent earnings on that fund were approximately 50% of the amount invested.
Let's look at it from another point of view, the people -- the persons investing in this fund investing $30.00 a week, $1500.00 a year or over $30,000.00 on a 20-year career, if invested risk-free at 7.5% in the savings bank that would amount to $72,000.00 over 22 -- a 20-year career.
So the profit potential is tremendous and this is what induces these people to invest here.
Justice William H. Rehnquist: When Mr. McDaniel signed the pass -- signed on in the pension agreement as recently formulated to prog -- guarantee him on $240.00 or $250.00 a month as Justice Stevens questions you about, was there any promise that he would get more than that if the investments went well?
Mr. Peter J. Barack: We believe that the facts when we get to trial in this case will indicate --
Justice William H. Rehnquist: Well, what -- was there any provision in the agreement to that effect?
Mr. Peter J. Barack: In the agreement?
But I think that the promotional material which is used to induce these people to invest goes over the history of how these benefits have been increased periodically over the period of time.
Justice Byron R. White: You keep emphasizing the motive that it -- and used this people to invest.
What option did this particular individual have, he's going to take the job --
Mr. Peter J. Barack: This is an import -- this is an important --
Justice Byron R. White: If he's going to take this job, he had to become a member of this plan, didn't he?
Mr. Peter J. Barack: This is an important question, the question that we have to recognize that the defendants have conceded a voluntary contributory plan.
An interest in such a plan is a security.
Now they have appended a name to our particular type of invest -- employee plan, involuntary and noncontributory.
Well, what are they saying when they're saying that a plan is involuntary.
They're saying something about the fact that either an employee who makes an employment decision cannot also make an investment decision or that an investment decision undertaken by an employee is secondary to the employment decision undertaken.
Well, it's certainly true in this case as held that the presence of a security cannot be defeated by the fact that the transaction issue involves other substantive dimensions.
For example, this Court in Valich (ph) in the United Benefit Life has found a security, an investment contract there present even though the person there was acquiring other elements of insurance.
Chief Justice Warren E. Burger: Your time has expired for now Mr. Barack.
Mr. Peter J. Barack: Let me just conclude that.
Chief Justice Warren E. Burger: If you can finish your sentence.
Mr. Peter J. Barack: Mr. Justice Harlan thus stated in United Benefit Life that the two promises involved are entirely distinct and maybe separated from one another.
I think -- let me just finally then conclude that this type of security which we have present here meets the definition of investment contract because Mr. Daniel has turned over his retirement funds to others to be managed in the pulled investment program on the promise of profits and that therefore it was within the intent of Congress to protect against by enacting the antifraud rules of the Federal Securities Laws.
Rebuttal of Sidney Dickstein
Chief Justice Warren E. Burger: Thank you gentlemen the case is submitted.
No, excuse me, Mr. Dickstein you have eight minutes.
We've heard so much and gone so much overtime.
I thought they'd used your time up.
Mr. Sidney Dickstein: Thank you Your Honor.
Chief Justice Warren E. Burger: You've got eight minutes left.
Mr. Sidney Dickstein: Mr. Barack, at the end of his argument said that we have conceded that an interest in a voluntary contributory pension fund is a security.
I feel like the man who gave up the tip of his finger and found that his whole arm had been swallowed up.
We've said it again and again and again, we said in our reply brief all that we do say and this is consistent with what the SEC has said, is that where you have a plan where employer stock is purchased with employee money, that is a security, but nothing else is.
And Mr. Stillman and I think with candor in honor to your question Mr. Justice Rehnquist as to whether or not the security, the inaction of the Securities and Exchange Commission can in anyway be attributed to their position with regard to no sale.
Stated with candor that as a matter of fact, the SEC has taken no enforcement action whatever even with respect to voluntary contributory plans.
And we believe that 35 years of quiescence from an agency which is hardly known for its passivity speaks volumes.
There was another question asked of Mr. Barack and that was how much of this increase in pension benefits from $75.00 to $550.00 represent increase in employer contributions.
Mr. Barack actually did have the figures and he stated it although in an inadvertent way.
The initial employer contributions to the 705 fund were $2.00 a week as Mr. Barack says it's now $30.00 a week.
During the period of time in which the pension benefit, the defined benefit has gone from $75.00 to $550.00, an increase of about seven-fold.
The amount of contribution has gone up 15 times.
I think this is really relevant because it does tend to deal with even the isolated factors in this type of arrangement which Mr. Barack shows that under the Howey definition of a security demonstrate that this is a security.
About Howey, I think the first thing to say is that the formulation in that case was designed to ascertain Congress' intent with respect to the use of the word security.
Here we think there are much better indicia of congressional intent.
But even if there were not and even if one looks at the Howey formulation, we think it's simply intends to reinforce the proposition that when you're talking about pensions, you are outside of the realm of the Securities Laws.
They say investment of money, the first Howey criteria or element and I say, well, we have it here because when the employer puts $2.00 in the pension fund that's the same as if he handed the $2.00 to the employee and the employee hand it to the pension fund administrator and said put this away for my retirement.
Well, this Court of course in Alabama Power when it considered the questions of pensions recognized that it is by no means as simple as that.
There are all kinds of reasons why employers have pension plans and why employers make contributions to pension plans including the humanitarian as well as a good labor policy reason that when an employee is too old to work he would have some money in his pocket as he leaves the plant door.
A dollar in the pension fund in a noncontributory pension plan is not fungible with a dollar purchase of a mutual fund.
And as a matter of fact ERISA make sharp distinctions between contributory, between employer dollars and employee dollars, when the employee makes a contribution to a pension plan it by terms of ERISA is non-forfeitable.
When the employer makes a contribution of course it is forfeitable unless and until vesting is achieved.
They talked about the interest income.
Whose income really is this?
In the simple model of a single employer pension plan it's quite clear that the interest income which is earned on the money that that employer places on the fund has to do with the level of funding and how much more the employer has to put in, in order to pay the defined benefit provided by that plan.
I will not go into each of these factors in isolation but when one views them in Howey terms, one has to conclude that they're all somewhat skewed and I think I'm being charitable when I say somewhat.
Because the point is these elements cannot be viewed in isolation.
Along of the other factors pertaining to noncontributory pension plans, the plaintiff and the SEC dismisses their relevancies, break in service, minimum periods of employment, whoever heard of a security where you get paid off if you're disabled and you don't get paid off if you quit your job.
We are talking about an aspect of employment.
I quite agree with Mr. Stillman --
Justice John Paul Stevens: Mr. Dickstein, (Voice Overlap) -- if you look at the -- this thing in a broad sense as you're suggesting now, you supposed that before vesting occurs an employee would have standing to bring a lawsuit to challenge the administration of the fund by the trustees.
Your figure suggests that contributions went out 15 fold when benefits only went up seven or eight fold.
I would have play have it -- standing have raised a question about (Voice Overlap) --
Mr. Sidney Dickstein: Certainly.
Justice John Paul Stevens: So he does have some interest in the fund there?
Mr. Sidney Dickstein: The -- as a -- in that sense just -- I suppose like a contingent remainder in an ordinary trust.
Justice John Paul Stevens: And whether or not it's (Voice Overlap) --
Mr. Sidney Dickstein: Might have the right -- might have the right to bring the suit against the trustee.
Justice John Paul Stevens: And the -- and his specific interest in this -- is whether it's profitable as it ought to be.
Mr. Sidney Dickstein: No.
He's interest I supposed if the trustees were acting as imprudent trustees under ERISA or were embezzling funds for example, I think you would have a sufficient interest.
Justice John Paul Stevens: But if the embezzlement wouldn't prejudice his expectancy of $250.00 a month or whatever the fixed benefit would be.
What interest does he have?
Mr. Sidney Dickstein: It -- in that sense he would have a sufficient interest.
In a security sense he does not have a sufficient interest, we're simply talking in a different area.
Justice William H. Rehnquist: Well, a forfeitability doesn't mean it's not a security does it because then you can have an agreement of sale for cost of land and if you got a bunch of orange groves on it, it can -- could conceivably come within the Howey-Joiner rationale and still the contract might be forfeitable.
Mr. Sidney Dickstein: There is no single aspect which perhaps by itself you cannot find extent in a circums -- in a situation in which you would say that there is a security.
But you put it all together and you examined the totality of the transaction, it's clear that's its not.
Mr. Stillman spoke about the six cases that this -- in which this Court has dealt with the question of security and from Joiner in '43, the Forman in '75, it all comes down to this.
The test is what character the instrument is giving in commerce.
It was setting Joiner that way, we're setting Forman that way.
We think the common understanding here, the common understanding in 33, 34 and today is that it is not a security.
Chief Justice Warren E. Burger: Thank you gentlemen.
The case is submitted.