Investment advisor whose registration under the Investment Advisers Act of 1940 had been revoked for criminal misconduct held not entitled to continue publishing investment advisory newsletters despite First Amendment. Judgment of the United States District Court for the Eastern District of New York, Jack B. Weinstein, Chief Judge.
Oakes and Van Graafeiland, Circuit Judges, and Brieant, District Judge.*fn* Van Graafeiland, Circuit Judge, concurring. Brieant, District Judge, dissenting.
An investment adviser registered under the Investment Advisers Act of 1940 was convicted on three different occasions of serious misconduct in connection with his investment advisory business. Pursuant to the Act, the Securities and Exchange Commission revoked his registration because of his convictions. He has nevertheless continued to publish and sell newsletters containing investment advice, in violation of the Act's requirement of registration. The interesting, if not altogether unique, question presented by this case is whether the publication of such advice is protected by the First Amendment so as to preclude the SEC from seeking to enjoin its continuance.
Christopher L. Lowe is the president of the three corporate entities involved in this case: Lowe Management Corp., Lowe Publishing Corp., and Lowe Stock Chart Service, Inc. Between March, 1974, and May, 1981, Lowe Management was registered with the SEC as an investment adviser pursuant to Section 203(c) of the Investment Advisers Act, 15 U.S.C. § 80b-3(c) (1976). As such it published investment advice and managed and had custody of the funds of its clients on a discretionary basis.
In 1977, Lowe was convicted of two New York misdemeanors relating to his investment advisory business.*fn1 He pleaded guilty to making false representations to a client that $2,200 had been invested for his benefit and a 27% return earned, when in fact Lowe had misappropriated the funds for his own use. He also pleaded guilty to failing to register in New York State as an investment adviser.
In 1978 Lowe was convicted of two New York felonies.*fn2 He pleaded guilty to tampering with physical evidence, involving the alteration of a copy of a $10 money order to have it appear to be for the amount of $10,000. In addition, he pleaded guilty to third degree larceny for fraudulently drawing checks on an account to which worthless checks had been deposited. For these convictions Lowe received a prison sentence and was ordered to make restitution to the client.
As a result of these convictions the SEC instituted administrative proceedings under Section 203 of the Investment Advisers Act, 15 U.S.C. § 80b-3(e) & (f) (1976), against Lowe and Lowe Management. The Commission found that Lowe had aided and abetted willful violations of the antifraud provisions of the Act, violated the reporting provisions of the Act, and failed to amend Lowe Management's investment advisory registration form to report the convictions which related to his conduct as an investment adviser. In assessing sanctions the Commission found that Lowe's conduct "could hardly be more serious[,] . . . reflect[ing] a callous disregard" for the high fiduciary standards required of an investment adviser, and that the criminal conduct "clearly demonstrate[d] his total lack of fitness to remain in 'an occupation which can cause havoc unless engaged in by those with appropriate background standards.'" In re Lowe Management Corp., SEC Investment Advisers Act of 1940 Release No. 759 (May 11, 1981) (quoting Marketlines, Inc. v. SEC, 384 F.2d 264, 267 (2d Cir. 1967), cert. denied, 390 U.S. 947, 88 S. Ct. 1033, 19 L. Ed. 2d 1136 (1968)). The Commission rejected the argument that sanctions were unnecessary because Lowe and his advisory corporation no longer handled clients' funds or securities, but only provided investment advice by publication. Noting that even these activities "afford numerous 'opportunities for dishonesty and self-dealing,'" id. at 5, the Commission revoked the registration of Lowe Management as an investment adviser and barred Lowe from association with any investment adviser. Lowe did not seek judicial review of the Commission's order.
Lowe's criminal activities did not end here, however. In 1982 he pleaded guilty to two charges under New Jersey law of theft by deception in the third degree,*fn3 for fraudulently misrepresenting that checks drawn on his personal and one of Lowe Publishing's accounts were good and negotiable. For these activities he was sentenced to a three-year prison term and probation, and ordered to make restitution of over $27,000 to the defrauded banks.
Despite the Commission's order of May 11, 1981, revoking Lowe's registration as an investment adviser and barring him from association with any investment adviser, Lowe has published and distributed two investment advisory services, the Lowe Investment and Financial Letter and the Lowe Stock Advisory, and solicited subscriptions for a third one, the Lowe Stock Chart Service. He is president, research chairman, and editor of all three services, and his corporations, Lowe Management, Lowe Publishing, and Lowe Service were the publishers of the newsletters. In addition, Lowe has offered a recorded telephone "hot-line" service to subscribers of six months or more. Despite these activites, he has not applied to register either himself or any of the corporations as an investment adviser.
The Lowe Letter has had from 3,000 to 19,000 clients, with an average of about 5,000. Subscriptions cost $39 for one year or $79 for three years. A typical Lowe Investment and Financial Letter gives a short-term and long-term forecast. It offers advice on the relative desirability of investing in, among other things, stocks, Treasury bills, and money market funds, and describes rather generally the state of the market. It recommends particular stocks and groups of stocks for purchase or sale, discusses precious metals, and announces special reports and the telephone hot-line service.
The Lowe Stock Advisory has only a few hundred subscribers and a number of readers who receive complimentary subscriptions. Subscriptions cost the same as do those to the Lowe Investment and Financial Letter. The Stock Advisory is typically somewhat more specific, however, with a brief introductory examination of general market trends followed by specific purchase, sale, and hold recommendations, particularly for low-priced stocks. The Lowe Stock Chart Service has solicited subscriptions, but has never been published.
No contention is made that any of the information published in the advisory services has been false or materially misleading. Nor is it alleged that Lowe himself, unlike the investment adviser in SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 11 L. Ed. 2d 237, 84 S. Ct. 275 (1963), has profited through personal or corporate investments from the investment advice rendered.
THE DECISION OF THE DISTRICT COURT
The United States District Court for the Eastern District of New York, Jack B. Weinstein, Chief Judge, believed that the Investment Advisers Act could not be construed to permit the SEC to revoke Lowe's registration as an investment adviser, and thus to bar him from publishing his newsletters, without violating the First Amendment. The court first analyzed the case on the assumption that the Lowe publications constituted commercial speech and thus were not entitled to the full protection of the First Amendment. See In re R.M.J., 455 U.S. 191, 200-01, 102 S. Ct. 929, 71 L. Ed. 2d 64 (1982) (advertising by lawyers). It found, nevertheless, that "the censorship that the SEC would impose on Lowe is more extreme than necessary to effectuate the congressional goal of a confident and informed investing public," and amounted to an unconstitutional prior restraint on the basis of "speculative assessments." In reaching this conclusion the court apparently thought that the fact of Lowe's past misconduct was not in itself enough to make his future speech "potentially misleading" and consequently subject to restraint. See Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557, 563-64, 65 L. Ed. 2d 341, 100 S. Ct. 2343 (1980).
The court went on to suggest, however, that the case actually fell "outside the rubric of commercial speech." Although recognizing that the Supreme Court had never explicitly so held, Judge Weinstein stated that commercial speech consisted only of advertising, citing Ad World, Inc. v. Township of Doylestown, 672 F.2d 1136, 1140 (3d Cir. 1982) (citing Pittsburgh Press Co. v. Pittsburgh Commission on Human Relations, 413 U.S. 376, 37 L. Ed. 2d 669, 93 S. Ct. 2553 (1973)), cert. denied, 456 U.S. 975, 102 S. Ct. 2240, 72 L. Ed. 2d 850 (1982). As a result, he believed that Lowe's newsletters were fully protected by the First Amendment, and that their "combination of fact, economic and political analyses, conjecture, and recommendation characteristic of investment newsletters . . . raises unanswered questions concerning the conditions, if any, under which an absolute restraint may constitutionally be imposed upon them.
Rather than rule the Act unconstitutional, however, the district court construed the Act's definition of an "investment adviser" so as to avoid possible infringement on freedom of the press. It did so by distinguishing personal or "person-to-person" advice from "impersonal" investment advice given in publications. The court evidently reasoned that "strong sanctions in the way of prior restraints" may be invoked against persons providing "personal" investment advice since that activity involves "delegations of trust and responsibility," but may not be invoked when the investment advice is provided by publication or writing. Accordingly, the court entered a limited injunction enjoining defendants from rendering personal investment advice "by telephone, individual letter or in person." As to "impersonal" advice, the court believed that disclosure, rather than denial or revocation of registration, was the only constitutionally permissible means of protecting the public.
In effect the court construed the Act so as to deny the SEC the authority to revoke a publisher's registration solely on the basis of past misconduct. Under this interpretation, a person whose registration is otherwise revoked may nevertheless remain registered as an investment adviser for the limited purpose of publishing so long as the publication is done "impersonally." A letter to several people rather than to an individual is thus differentiated. Somewhat inconsistently, perhaps, the district court treated Lowe's recorded hot-line telephone message as rendering "personal" rather than "impersonal" advice.
We do not believe that the Investment Advisers Act may be rewritten as the district court would rewrite it. The Act does not distinguish between "personal" and "impersonal" advice, but rather between publications or writings "as to the value of securities or as to the advisability of investing in, purchasing, or selling securities," on the one hand, and "bona fide newspaper[s], news magazine[s], or business or financial publications[s] of general and regular circulation," on the other. 15 U.S.C. § 80b-2(a)(11) (1976). The SEC quite properly determined that the Lowe advisory letters and services were the former, and that Lowe and his corporations were "engag[ing] in the business of advising others, either directly or through [such] publications or writings. . . ." Id.
The statute specifically grants the SEC the power to revoke the registration of any investment adviser convicted of certain crimes, among these the crimes for which Lowe was convicted. 15 U.S.C. § 80b-3(e)(2). Accordingly, we believe that the SEC was well within its statutory authority when it revoked Lowe's registration. Unlike the district court, we do not believe that this statutory authority violates the First Amendment.
The Investment Advisers Act of 1940 was "the last in a series of Acts designed to eliminate certain abuses in the securities industry, abuses which were found to have contributed to the stock market crash of 1929 and the Depression of the 1930's." SEC v. Capital Gains Bureau, 375 U.S. 180, 186, 11 L. Ed. 2d 237, 84 S. Ct. 275 (1963). The Act was the result of a study undertaken by the SEC at the direction of Congress to investigate "the functions and activities of investment trusts and investment companies. . . ." Section 30 of the Public Utility Holding Company Act of 1935, 15 U.S.C. § 79z-4 (1976). The SEC submitted to Congress a memorandum questioning "the good faith of some of the less reputable of these generalized investment services." Hearings on S. 3580 Before a Subcommittee of a Senate Committee on Banking and Currency, 76th Cong., 3d Sess. 47 (1940) at 1008. It emphasized the potential for abuse if persons in the business of publishing investment advice were willing to "lend themselves to the use of stock market promoters and manipulators." Id. (quoting Twentieth Century Fund, Inc., The Security Markets 692 (1935)).
On the basis of the SEC's report and other information before it, Congress found that investment advisers were "of national concern" and that "their advice, counsel, publications, writings, analyses, and reports. . . occur in such volume as substantially to affect interstate commerce, national securities exchanges, and other securities markets, the national banking system and the national economy." Section 201 of the Investment Advisers Act, 15 U.S.C. § 80b-1 (emphasis added). In so finding, Congress hearkened back to Section 17(b) of the Securities Act of 1933, in which it prohibited the publication of any letter or investment service which describes a security without disclosing that the publisher has been compensated for such publicity, and to concerns expressed in the Senate Report accompanying the passage of the Securities Exchange Act of 1934. 15 U.S.C. § 77q(b) (1976) and S. Rep. No. 792, 73d Cong., 2d Sess. 8 (1934).
The Investment Advisers Act makes it unlawful for an unregistered investment adviser to make use of the mails or any means of interstate commerce in connection with his or its business as an investment adviser. 15 U.S.C. § 80b-3(a). The Act defines "investment adviser" broadly to include
any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports containing securities. . . .
15 U.S.C. § 80b-2(a)(11) (emphasis added). The section exempts from the definition of an investment adviser "the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation. . . ." Id. Section 203 provides for registration of investment advisers and gives the SEC powers of censure, denial, or suspension of registration. 15 U.S.C. § 80b-3(e). The SEC can censure an investment adviser, or suspend or revoke his registration if the adviser or any person associated with him has been convicted within ten years of certain felonies or misdemeanors.*fn4 The SEC invoked this statutory scheme to revoke the registration of Lowe Management and bar Christopher Lowe from publishing investment advice or associating with an investment adviser.
The Act's Application to the Lowe Newsletters
The first step in our analysis of this case is determining whether Lowe's newsletters are within the statutory definition of investment adviser and thus subject to the registration requirement, or whether they are "bona fide newspapers" and thus exempt from the requirement. The leading case construing the exclusion for bona fide newspapers is this circuit's SEC v. Wall Street Transcript Corp., 422 F.2d 1371 (2d Cir. 1970), cert. denied, 398 U.S. 958, 26 L. Ed. 2d 542, 90 S. Ct. 2170 (1970). The Wall Street Transcript was a weekly tabloid which sold for $5 an issue or $180 per year. The Transcript consisted primarily of reports on specific securities, each of which was identified with the name and address of a broker/dealer firm. It also printed some management speeches, miscellaneous personnel announcements, editorials, and advertisements. This court held that the Transcript was not per se a "bona fide newspaper" or "financial publication of general and regular circulation" so as to be excluded from the definition of investment adviser. It stated that "the phrase 'bona fide' newspaper . . . means those publications which do not deviate from customary newspaper activities to such an extent that there is a likelihood that the wrongdoing which the Act was designed to prevent has occurred." 422 F.2d at 1377. Rather than looking to the purely formal "indicia" of a newspaper, the court examined the substance and content of the publication and found that "most of its published material consists of reprinted reports assessing various securities issues." 422 F.2d at 1378. It held that "this characteristic emphasis on particular issues and companies at the very least raises doubt about whether the Transcript is outside the exclusion -- a suspicion which we believe that the S.E.C. should be allowed to investigate." Id.
The Wall Street Transcript presented a much closer case for exclusion under the Act than does the Lowe Investment and Financial Letter or the Lowe Stock Advisory. Lowe's newsletters quite clearly are "engage[d] in the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. . . ." 15 U.S.C. § 80b-2(11). Under the test of Wall Street Transcript, it is equally clear that Lowe's publications are not engaged primarily in "customary newspaper activities," but rather in the activities that the Investment Adviser Act ...