Decision on Motion For Summary Judgement

This is the Court's Decision on the Matters Presented 8/2. It was given to me in a PDF format, which I had changed to a text document. In this transformation, there are some misspelled words...sorry...

DECISION ON MOTION FOR SUMMARY JUDGMENT

This is a civil action brought by the Vermont Department of Banking, Insurance, and

Health Administration (BISHCA) seeking injunctive relief. restitution, and civil penalties

against Malcolm Parker for offering and selling unregistered securities and failing to

register as an investment advisor, all in violation of the Vermont Unifonn Securitics Act

9 V.S.A. § 5101 et seq. In an amended complaint, BlSHCA has added one count of

securities fraud and one count of offering improper investment advice.

Plaintiff has moved for summary judgment on the ground that the promissory notes

issued by Mr. Parker to his investors are not securities within the meaning of 9 V.S.A. §

5101(28).

FACTS

The essential facts necessary to a decision in this case are undisputed. Malcolm Parker is

a Vermont resident who has earned his living as a storyteller and producer of children's

videos with themes of farm life. Since 1999 be has been engaged in producing a feature length

movie called "Birth of Innocence." The movie is inspirational in nature and

encourages people to reconnect with their simpler and sincere inner natures.

Over the last ten years, Mr. Parker has raised approximately $10,000,000 to support this

venture. The movie remains unfinished. The money has been raised from friends,

neighbors, and through the Intemet. Working from his home in Addison, Vermont. Mr.

Parker has sent out hundreds of "Investment Agreements" to people who are willing to

lend him money. The Investment Agreements acknowledge the amount of the initial

investment and provide for an above-market interest rate. Some investors have received

their money back; approximately 790 people are presently Owed several million dollars.

Since this case was filed in November 2009, investigators from BISHCA and defense

counsel and staff have been compiling a detailed accounting of the amounts invested by

individuals. In the absence of clear records, this has been an arduous task. To date the

parties have worked alphabetically through the list of investors and have reached the

letter "E."

BISHCA's favor. In making this decision, factual disputes must be resolved in favor of

the non-moving party (BISHCA) and inferences which may be in dispute at trial must be

drawn in favor of BISHCA's favor.

In plain English, the issue to be decided is whether BISHCA has presented enough

evidence to go forward to trial or, altematively, whether the case is so deficient that Mr..

Parker is entitled to a final ruling in his favor without a trial.

1. Are the "Investment Agreements" securities which are subject to

regulation by BISHC A '?

The "Investment Agreements" are promissory notes. They are evidence of loans as

opposed to equity investments like shares of stock. They provide for interest rates and a

schedule of repayment. They are unsecured (except in the event of the borrower's death).

The court starts with the language of the statute. 9 V.S.A. ~ 5102)(28) provides in

relevant part:

"Security" means a note; stock; treasury stock; security future; bond ... "

This does not mean that all notes automatically qualify as securities. Some promissory

notes are subject to state regulation as securities; others are not. A personal loan by a

relative or friend is not subject to regulation. A broader sale of notes to investors may

qualify for regulation. Commercial loans by banks and finance companies are typically

excluded from the definition of securities. The court rejects BISHCA's initial argument

that the inclusion of the word "note" in section 5102(28) is sufficient on its face to extend

state regulation to all promissory notes.

In Vermont law, cases involving the definition of "security" are few. In Northern

Terminals, Inc. v. Lena, 136 Vt. 369 (1978), the Vermont Supreme Court rejected a claim

that the lease for a service station was an unregistered security. The court adopted the

decision of the U.S. Supreme Court in S.E.C v. ~Y.J Howey Co., 328 U.S. 293 (1946)

which had announced a three-pari test for determining whether an investment was a

security for purposes of federal securities regulation. i

The Howey test ,vas adopted by the Vermont legislature as part of the definition of a

security. See 9 V.S.A. § 51 02(28)(D): a security "includes an investment in a common

enterprise with the expectation of profits to be derived primarily from the efforts of a

person other than the investor and a 'common enterprise' means an enterprise in which

the fortunes of the investor are interwoven with those of either the person offering the

investment, a third party, or other investors." The Howey test was rejected as irrelevant

to the determination of whether a note was a security in Reves v. Ernst & Young, 494

U.S. 56 (1990), and for that reason this COLlJi does not seek to apply the Howe)' criteria to

the facts of this case.

3

"Motivation" in this context means the purpose of the transaction 2 Both sides agree

that the purpose of the "Investment Agreements" was to raise money for the movie

project. They disagree about whether the investors were primarily interested in financial

retum. Mr. Parker relies upon affidavits from a number of enthusiastic supporters who

state that they wished to support his creative venture and were unconcerned about making

money. On the other hand, the "lnvestment Agreement" itself is exclusively about

making money· in theory, at least, quite a lot of it at interest rates of 15 .. 20 percent or

more.

The question of "motivation" is primarily directed at distinguishing betweeen notes issued

to support a purchase such as an auto loan or for some other limited purpose and notes

issued to raise capital for an entelvrise. On this issue, it is clear that the purpose or

motivation of the "Investment Agreements" was to raise funds generally for the movie

project. This is a factor which tends to identitfy, the "Investment Agreements" as

securities.

2. Plan of distribution of the notes

The Reves analysis requires the court to consider the plan of distribution of the notes. In

this case, as in Reves, the notes were offered to the public through advertisement and then

held only by the original investors. There is no evidence that they were sold to third

parties or where in any other way traded on an investment exchange.

Whether a promissory note trades on an exchange is not dispositive. The wide offering

of the notes to hundreds of people is a factor which makes it less likely that the notes wil1

be found to resemble one of the "family resemblance" exceptions. In addition, there is

some evidence, particularly in the "Investor Update # 9" issued by Mr. Parker in the

"Summer, 2008," that existing investors were invited to locate additional investors

willing to contribute money in a pyramid structure.3 This invitation to provide leads to

2 "If the seller's purpose is to raise money for the general use of a business enterpnse or to finance

substantial investments and the buyer is interested primarily lJ1 the profit the note is expected to generate,

the instrument is likely to be a 'security'. If the note is exchanged to facilitate the purchase and sale of a

minor asset or consumer good, to correct for the seller's cash· flow diffIculties, or to advance some other

commercial or consumer purpose. on the other hand, the note is les sensibly described as a 'security. '"

Reves. 494 U.S at 66.

] Mr Parker wrote:

One of the most time-consuming parts of fundraismg has always been finding new investors, and

here IS where I am asking for the favor.

lf you feel good about your experience investing in  Birth a/Innocence, would you be willing to

brainstorm a list of peop1c you know who might also be mterested'? Some of you have done this

already, and it is a big help to me. I am happy to do the follow-up work - to have the

conversations with people, to send them information. even to invite them to a screening - but it will

save me a lot of time and energy to simply' have the names and numbers of people who might be

receptive to a call.

Another way to approach this 1S for you to invite a group of friends/potential investors to a

screening at the studio. Most of you invested "slght unseen," but at this pomt. the film IS  very...

the definition. To the extent that some of the factors are in doubt. a trial is the

appropriate way to develop the factual record and resolve factual disputes.

II. Is there evidence that Mr. Parker could be found to be an "investment

adviser" within the meaning of Vermont securities law.

Mr. Parker makes two arguments in support of his claim that he was not required to

register as an investment adviser within the meaning of 9 V.S.A. ~ 5403. The first is that

since the "Investment Agreements" were not '·securities." the sale of these instruments

does not require registration. The court has already dealt with this issue.

The second argument is that there is no evidence that he provided advice for

compensation. To put it mildly, this is a factually disputed issue. There is evidence that

his wife received approximately $60,000 and that he supplied his family for a decade

through the sale of the notes. This is clearly an issue for trial.

m Issues related to Counts IV and V

Mr. Parker also argues that he is entitled to summary judgment with respect to Counts IV

(Securities Fraud) and Count V (Prohibited Conduct in Providing Investment Advice).

These are the counts added in the amended complaint.

With respect to the fraud count, he argues that there is no evidence of false statements of

material fact. BISHCA points to the apparent lapse of the life insurance policy, the use

of funds for personal use, and the transfer of $3.6million to a "silent partner" as potential

omissions or false statements. If  true, anyone of these issues is a potential basis for a

finding of false statement. These are factual issues for trial.

With respect to Count V, Mr. Parker raises the issue of compensation again. He argues

that he cannot be termed a person who "advises others for compensation" within the

meaning; of 9 V.S.A ~ 5502 because he charged no fees and rendered no advice in ~, ~

exchange for compensation.

BISHCA points to evidence of significant economic benefit to Mr. Parker. This is an

issue for trial.

CONCLUSION

The court denies the defendant's motion for summary judgment. The case shall be set for

trial during the first two weeks of November 2010.

Dated: 8/4/1 0

Geoffrey Crawford,

Superior Court Judge