Unpublished Disposition, 841 F.2d 1128 (9th Cir. 1967)

MEMORANDUM^* 

Approximately forty plaintiffs brought this action in district court, alleging that the appellant, Michael Gusick, and various other defendants violated both federal and state securities laws. The United States District Court for the District of Oregon granted plaintiffs' motion for summary judgment on the claim that defendants sold them unregistered securities in violation of Oregon law. The court entered a separate judgment pursuant to Fed. R. Civ. P. 54(b).

On appeal, Gusick argues that the district court's grant of summary judgment was improper because (1) material issues of fact exist concerning whether the master-recording leasing program that the plaintiffs invested in was a security; (2) material issues of fact exist concerning whether Gusick was a seller or participated in the sale of the program; (3) material issues of fact exist concerning whether Gusick actually knew that the program was unregistered or that it was necessary to register it in the first instance; (4) the district court lacked personal jurisdiction over Gusick; and (5) the district court abused its discretion in denying Gusick leave to take further discovery. We have jurisdiction to hear Gusick's appeal under 28 U.S.C. § 1291 and we affirm the district court's decision.

DISCUSSION

The plaintiffs in this action claimed that the defendants violated both state and federal securities laws by selling them an unregistered securities investment program. We review the district court's grant of summary judgment de novo. Deutsch Energy Co. v. Mazur, 813 F.2d 1567, 1568 (9th Cir. 1987). Plaintiffs may establish that there is no genuine issue of material fact and that they are entitled to judgment as a matter of law by submitting depositions, admissions on file, affidavits, and any other permitted materials to the district court. Admiralty Fund v. Hugh Johnson & Co., 677 F.2d 1301, 1305 (9th Cir. 1982.¹ 

I. The Audio Leasing Program Is A Security.

Oregon's registration requirement protects the state's interest in ensuring that any information that could aid a purchaser in making an informed investment decision is properly disclosed. Hall v. Johnston, 758 F.2d 421, 423 (9th Cir. 1985). In Hall, we determined that Oregon's Blue Sky laws are meant to protect the public by offering more safeguards than the Uniform Securities Act; we must interpret Oregon's registration requirement accordingly. Id. citing HOUSE JUDICIARY COMMITTEE MINUTES at 6 (February 27, 1967).

Plaintiffs contend that the Audio Leasing Program is an "investment contract" and thus within ORS Sec. 59.015(14)'s broad definition of a security. While investment contracts are not statutorily defined, Oregon courts have adopted the definition of the Federal Securities Act, found in the seminal case of SEC v. W.J. Howey Co., 328 U.S. 293 (1946). See Bergquist v. International Realty, Ltd., 272 Or. 416, 424, 537 P.2d 553, 558-59 (1975). In addition, Oregon appellate courts have interpreted the Oregon Supreme Court's opinion in Pratt v. Kross, 276 Or. 483, 555 P.2d 765 (1976) as approving the use of an alternative, so-called "risk-capital" test to define investment contracts. See Black v. Corporation Division, 54 Or.App. 432, 634 P.2d 1383, 1389 (1981). For the purposes of this case, however, the application of the Pratt test requires the same analysis and yields the same result as does the Howey test.

An investment contract is a contract, transaction, or scheme involving an investor who (1) invests his money, (2) in a common enterprise, (3) with the reasonable expectation of receiving profits derived from the entrepreneurial or managerial efforts of others.²  See United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852 (1975); Jost v. Locke, 65 Or.App. 704, 673 P.2d 545, 549 (1983). It is undisputed that the plaintiffs invested their money in the Audio Leasing Program. Only the last two elements of the investment contract test therefore need be analyzed.

A. The "Common Enterprise" Element.

Gusick argues that the distribution agreement with Accord was not presented to investors as part of the Audio Leasing Program or included in the leasing agreement; therefore, Accord was not part of a "common enterprise" with Audio Leasing Corporation and the investors. A common enterprise occurs when the " 'fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties.' " Lopez v. Dean Witter Reynolds, Inc., 805 F.2d 880, 885 (9th Cir. 1986) (citations omitted). Vertical commonality must exist; the investor and the promoters or third parties must be engaged in a common enterprise. Jost v. Locke, 673 P.2d at 549-50.

A common enterprise exists here between the investors, ALC (Hecht), and Accord (Gusick) because there is a direct correlation between the success or failure of ALC's and Accord's efforts and the success or failure of the investment. See SEC v. Goldfield Deep Mines Co. of Nevada, 758 F.2d 459 (9th Cir. 1985). Plaintiffs' success in this investment was clearly linked with the efforts of Accord in manufacturing and marketing copies of the master recordings. As Gusick acknowledged, the investment was virtually worthless without the profits realized from marketing the recordings. Moreover, it is uncontroverted that under this program, ALC, Accord, and the investors would all profit from the distribution revenues; Accord was to receive 60% of the profits made from the distribution of the copied recordings, the investors were to receive 40%, and ALC was to receive additional rent on the records leased to be taken from the investors share of the distribution profits. If Accord were unsuccessful in its distributing efforts, all parties involved would suffer financial losses. This direct correlation between Accord's potential failure and the investors' losses supports a finding of a common enterprise. See id. at 463.

In addition, the investments were clearly advertised and promoted as a common enterprise. Gusick participated in a videotaped sales presentation designed to educate the program's sales force on the distribution arm of the program. No other distributor took part in this presentation. ALC Salesman Rhinehart participated in the presentation and advised the sales force to include routinely the cost of Accord's distribution in the total investment price. Furthermore, in his deposition, ALC salesman Hendricks testified that the cost of Accord's services and the superiority of Accord as a distributor were regularly presented to potential investors at the initial sales seminar. The record shows that, at least initially, Accord handled the manufacturing, marketing, and distribution of the copied recordings for every investor in the program. Finally, the fact that Accord and ALC shared the same office address and administrative staff underscores the direct link between the two companies. Gusick actively sought to have Accord promoted to the investor as part of the program and the ongoing relationship that followed between the investor, ALC, and Accord supports the finding of a common enterprise. See Jost v. Locke, 673 P.2d at 550.

B. The Requirement of Expected Profits From the Efforts of Others.

For these leasing programs to be an investment contract, the investors must have anticipated receiving profits from the managerial or entrepreneurial efforts of others. See SEC v. Glenn W. Turner Ent., Inc., 474 F.2d 476, 482 (9th Cir.), cert. denied, 414 U.S. 821 (1973). Gusick argues that this element is not satisfied because the plaintiffs were free to select their own distributor and were able to make substantial managerial decisions concerning distribution. Gusick's argument, however, ignores the realities of this transaction. As we have pointed out, the record clearly shows that ALC and Accord's services were sold to the investors as a single package and all of the investors accepted the program as a package. Once a master recording was presented for distribution, the plaintiffs did not advise or assist Accord in any way. It is uncontroverted that the plaintiffs had no experience in the record industry; they necessarily relied on Accord's expertise to manufacture and distribute the copied recordings. Accord had complete control over all aspects of its services and the plaintiffs' expectation of receiving a profit from their investment depended entirely on Accord's efforts. The last prong of the test for investment contract is therefore satisfied. The Audio Leasing Program satisfies all three elements of the investment contract test and no material issue of fact exists to preclude the finding that the program is a security under Oregon Securities Law.

II. Gusick Is Liable as One Who "Participated or Materially Aided" in the Sale of the Audio Leasing Program.

ORS Sec. 59.115(1) provides that any person who "offers or sells" a security in violation of Oregon Securities Law is liable to the person buying the security from him. In addition, ORS Sec. 59.115(3) provides:

Every person who directly or indirectly controls a seller liable under subsection (1) ... and every person who participates or materially aids in the sale is also liable jointly and severally with and to the same extent as the seller, unless the nonseller sustains the burden of proof that the nonseller did not know, and, in the exercise of reasonable care, could not have known, of the existence of the facts on which liability is based.

Gusick argues that he was not a "seller" of the Audio Leasing Program because he had no contact with any of the individual investors prior to their signing lease agreements. Furthermore, he argues that he cannot be found a seller because no proof was introduced to establish that he actually caused or motivated investors to participate in the program. We need not decide whether Gusick is liable as a "seller" of this program, however, because it is clear that he did "participate or materially aid" in the program's sale. See e.g., Black & Co. v. Nova-Tech, Inc., 333 F.Supp 468, 472 (D. Or. 1971) (preparation by attorney of legal papers necessary to complete the sale of unregistered securities is sufficient participation under ORS Sec. 59.115(3)).

Gusick's contribution to the sale of this program occurred both before and after the individual sales to investors were consummated. While it is not clear exactly what role Gusick played, if any, in preparing the offering documents, the record does show that Hecht consulted with Gusick before creating the Audio Leasing Program. Gusick played a key role in providing the services of the program; it was through his company, Edan, that ALC acquired most of the masters leased to the investors. It was also through his company, Accord, that investors were provided with the necessary distribution and marketing services. Finally, Gusick met with the Oregon sales force and gave a videotaped presentation on the function of a distributor in the program. Under Sec. 59.115(3), Gusick participated in the sale of this program and is liable to the same extent as the seller.

Gusick contends that even if he was a "participant" in this sale, he should not be held liable because he "did not know [or], in the exercise of reasonable care, could not have known, of the existence of the facts on which liability is based." He argues that he did not realize that this program was a security requiring registration. He relies on the fact that he sought legal advice and reviewed three opinion letters that advised him that the program was not a security.³ 

The same argument was advanced in Spears v. Lawrence Securities, Inc., 239 Or. 583, 399 P.2d 348 (1965). In Spears, the Oregon Supreme Court construed the language in ORS Sec. 59.250(1), the predecessor to Sec. 59.115(3), requiring that the nonseller have "knowledge of the violation" before he could be held liable for the illegal sale. The court held that if the participant believed the security to have been registered, he could escape liability; however, if he merely believed that the contract was not a security in the first place and thus never attempted to seek registration, he was liable to the same extent as the seller. Id. at 350. The court stated that the burden of determining the necessity of registration should fall upon the participant in the sale and not upon the innocent purchasers. Id. By this reasoning, Gusick's argument that he didn't understand the necessity of registering the program fails. The district court correctly determined that no material fact exists to prevent the imposition of liability.

III. The District Court Had Personal Jurisdiction over Gusick and Discretion to Deny Further Discovery.

Gusick's contention that the district court lacked personal jurisdiction over him can be summarily dismissed. Lack of personal jurisdiction must be argued in a defendant's first appearance to the court, whether that be an answer or a motion, or it is deemed waived. Fed. R. Civ. P. 12(h). Gusick appeared in district court but raises the issue of personal jurisdiction for the first time on this appeal. He is too late.

Finally, Gusick contends that the district court erred in denying him the opportunity to take further discovery after plaintiffs' motion for summary judgment was submitted to the court. The district court's denial of a request to conduct further discovery, made by an opponent to a motion for summary judgment, is reviewed under a deferential abuse of discretion standard. Mission Indians v. Amer. Mgmt. & Amusement, Inc., 824 F.2d 710, 716 (9th Cir. 1987). "Under Rule 56(f), an opposing party must make clear what information is sought and how it would preclude summary judgment." Garrett v. City & County of San Francisco, 818 F.2d 1515, 1518 (9th Cir. 1987). The party seeking a continuance bears the burden of showing what specific facts he hopes to uncover to raise an issue of material fact. Continental Maritime v. Pacific Coast Metal Trades, 817 F.2d 1391, 1395 (9th Cir. 1987).

In this case, Gusick's motion for a continuance stated that he hoped to discover plaintiffs' degree of knowledge regarding alternative methods of distribution and their reliance on any actions of Edan, Accord, or himself in connection with their initial decision to invest in the program. This information, however, is of marginal relevance to Gusick's role as a participant in the sale of the program or to any other issue raised in the summary judgment motion. See e.g., Adams v. American Western Securities, Inc., 265 Or. 514, 510 P.2d 838, 844-45 (1973) (defendant found liable for the illegal sale of unregistered securities even though his participation occurred after the sale). It does not matter what aspect of the program actually convinced the plaintiffs to invest; the district court could properly conclude that Gusick's participation in the videotaped sales meeting was enough to make him a participant in the sale. In addition, after making his first appearance in this case, Gusick had approximately nine months to conduct discovery, yet he did not take any action. On this record, it cannot be said that the district court abused its discretion in denying his request for a continuance.

CONCLUSION

The district court's grant of summary judgment is affirmed.