Warfield v. Bestgen ( 2009 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
LAWRENCE J. WARFIELD, 
Plaintiff-Appellee,
v.
MICHAEL ALANIZ,
Defendant, No. 07-15586
and  D.C. No.
CV-03-02390-JAT
LEONARD BESTGEN; BETTY BESTGEN;
ROBERT CARROLL; CHARLES DAVIS;
PATRICK WEHRLY; ANDREA
WEHRLY,
Defendants-Appellants.

LAWRENCE J. WARFIELD, 
Plaintiff-Appellant,
v.
MICHAEL ALANIZ, No. 07-16377
Defendant,
D.C. No.
and
LEONARD BESTGEN; BETTY BESTGEN;
 CV-03-02390-JAT
ROBERT CARROLL; RUDY
CROSSWELL; MARY CROSSWELL; OPINION
CHARLES DAVIS; PAUL RICHARD
PATRICK WEHRLY; ANDREA
WEHRLY,
Defendants-Appellees.

Appeals from the United States District Court
for the District of Arizona
James A. Teilborg, District Judge, Presiding
7645
7646 WARFIELD v. BESTGEN
Argued and Submitted
October 23, 2008—San Francisco, California
Filed June 24, 2009
Before: J. Clifford Wallace, Sidney R. Thomas and
Susan P. Graber, Circuit Judges.
Opinion by Judge Thomas
WARFIELD v. BESTGEN 7649
COUNSEL
Burton M. Bentley, The Bentley Law Firm, P.C., Phoenix,
Arizona, for the defendants-appellants/appellees.
Alisan M.B. Patten, Guttilla Murphy Anderson, P.C., Phoe-
nix, Arizona, for the plaintiff-appellee/appellant.
OPINION
THOMAS, Circuit Judge:
This appeal presents the question, inter alia, of whether the
charitable gift annuities sold in this case were investment con-
tracts under federal securities law. We conclude they were,
and we affirm the judgment of the district court.
I
Not only did Robert Dillie promise his investors “a gift for
your lifetime and beyond,” he pledged “preservation of the
American way of life,” “preservation of your assets,” and
“preservation of the American family.” Unless Dillie meant to
refer to the way of life perfected by the Boston swindler
Charles Ponzi and his family,1 we can safely say that Dillie’s
claims were a bit overstated.
1
See United States v. Masten, 170 F.3d 790, 797 n.9 (7th Cir. 1999)
(describing the origin of the Ponzi scheme).
7650 WARFIELD v. BESTGEN
The vehicle by which Dillie was to deliver these dreams
was a charitable gift annuity, sold through the Dillie-
controlled Mid-America Foundation (“Foundation”). From
1996 until 2001, the Foundation sold its charitable gift annui-
ties through financial planners, insurance agents, and others,
including the Defendants in this lawsuit.
The Foundation’s marketing literature assured investors
that they would receive a lifetime stream of income, with the
money remaining at their death directed to a charity desig-
nated by the investor. The promotion was initially an enor-
mous success for Dillie; the return for the investors was not.
In all, the Foundation raised $55 million dollars from the sale
of more than 400 charitable gift annuities. Unfortunately, the
business model was simply a Ponzi scheme2 in which, rather
than investing the investors’ funds, the Foundation used the
investors’ funds to make annuity payments to earlier annui-
tants, commission payments to facilitators, and payments to
Dillie and others for personal expenses (including Dillie’s
gambling expenses). Although it collected millions in invest-
ments, the Foundation quickly became insolvent. With a few
minor exceptions, no charitable contributions were ever made,
and the scheme collapsed in 2001.
Shortly after the collapse, the Securities and Exchange
Commission filed a civil complaint against Dillie. The district
court appointed Lawrence Warfield (“Receiver”) as Receiver
for Receivership Assets in order to “prevent waste and dissi-
pation of the assets of the Defendants to the detriment of
investors.” Dillie was subsequently indicted and ultimately
pled guilty to several counts of wire fraud and money launder-
ing. He was sentenced to 121 months in prison.
2
Generically, a Ponzi scheme is a phony investment plan in which
monies paid by later investors are used to pay artificially high returns to
the initial investors, with the goal of attracting more investors.” Alexander
v. Compton (In re Bonham), 229 F.3d 750, 759 n.1 (9th Cir. 2000).
WARFIELD v. BESTGEN 7651
The Receiver filed the instant complaint seeking the return
of commissions paid to agents by the Foundation for the sale
of the charitable gift annuities. The Receiver alleged breach
of fiduciary duty, constructive fraud in confidential relation-
ship, negligence and gross negligence, common law fraud,
federal and state security fraud, actual and constructive fraud-
ulent transfer, conversion, and unjust enrichment.
The district court denied the Receiver’s motion for sum-
mary judgment on the fraudulent transfer claim and denied
Defendants’ motion for summary judgment on all but the
common law fraud claim. Warfield v. Alaniz, 453 F. Supp. 2d
1118 (D. Ariz. 2006). It also denied Defendants’ request to
dismiss the non-resident Defendants for lack of personal juris-
diction, finding that it had personal jurisdiction over them
under 15 U.S.C. § 78aa, which confers nationwide service of
process in suits to enforce liabilities or duties created under
the Securities Exchange Act of 1934. Id. at 1128-29.
After a seven-day jury trial, the jury found for the Receiver
on the federal and state securities law, constructive fraud,
negligence per se, and unjust enrichment claims and for
Defendants on the general negligence, conversion, and fraud-
ulent transfer claims. Defendants were ordered to pay dam-
ages ranging from $31,900 to $109,900 per person.
Defendants timely appealed the judgment, and the Receiver
filed a protective cross-appeal from the district court’s denial
of summary judgment on the fraudulent transfer claim.3
We review de novo the district court’s denial of a motion
for summary judgment, Moreno v. Baca, 431 F.3d 633, 638
(9th Cir. 2005), as well as the district court’s determination
that the charitable gift annuities were investment contracts,4
3
A protective cross-appeal is permissible once an initial appeal is filed,
raising the possibility of reversal. Bryant v. Technical Research Co., 654
F.2d 1337, 1341-42 (9th Cir. 1981).
4
Here, the parties contest the legal significance of undisputed facts.
When a mixed question of fact and law involves undisputed underlying
facts, summary judgment may be appropriate. Union Sch. Dist. v. Smith,
15 F.3d 1519, 1523 (9th Cir. 1994).
7652 WARFIELD v. BESTGEN
see United States v. Carman, 577 F.2d 556, 562 (9th Cir.
1978) (“Although characterization of a transaction raises
questions of both law and fact, the ultimate issue of whether
or not a particular set of facts, as resolved by the factfinder,
constitutes an investment contract is a question of law.”).
II
The district court correctly held that the Foundation’s chari-
table gift annuities were investment contracts subject to regu-
lation as securities under Section 2(a)(1) of the Securities Act
of 1933 (“1933 Act”), 15 U.S.C. § 77b(a)(1), and Section
3(a)(10) of the Securities Exchange Act of 1934 (“1934 Act”)
(collectively with the 1933 Act, “Securities Acts”), 15 U.S.C.
§ 78c(a)(10).5
A
[1] Our analytical framework is governed by the Supreme
Court’s guidance in SEC v. W.J. Howey Co., 328 U.S. 293(1946). Under the Howey test, “an investment contract for
purposes of the Securities Act means a contract, transaction
or scheme whereby a person invests his money in a common
enterprise and is led to expect profits solely from the efforts
of the promoter or a third party.” Id. at 298-99. In Howey, the
Supreme Court found an “investment contract” present where
promoters sold acreage with fruit trees on it as well as “ser-
vice contracts” to cultivate and market the crops, with an allo-
cation of the net profits going to the purchaser. The Howey
Court noted that its definition of investment contract “em-
bodies a flexible rather than a static principle, one that is
capable of adaptation to meet the countless and variable
5
As to the state causes of action, Arizona’s statutory definition of “se-
curity” at Arizona Rev. Stat. section 44-1801(26) mirrors the federal defi-
nition, and Arizona courts “look to federal courts for guidance in
interpreting the statute.” See Nutek Info. Sys., Inc. v. Ariz. Corp. Comm’n.,
977 P.2d 826, 830 (Ariz. Ct. App. 1998).
WARFIELD v. BESTGEN 7653
schemes devised by those who seek the use of the money of
others on the promise of profits.” Id. at 299.
We distilled Howey‘s definition into a three-part test requir-
ing “(1) an investment of money (2) in a common enterprise
(3) with an expectation of profits produced by the efforts of
others.” SEC v. Rubera, 350 F.3d 1084, 1090 (9th Cir. 2003)
(internal quotation marks omitted). The third prong of this
test, requiring “an expectation of profits produced by the
efforts of others,” involves two distinct concepts: whether a
transaction involves any expectation of profit and whether
expected profits are the product of the efforts of a person
other than the investor.6
In applying the Howey test, we are mindful of the remedial
purpose of the Securities Acts, as well as the Supreme Court’s
repeated rejection of a narrow and literal reading of the defini-
tion of securities. See, e.g., Reves v. Ernst & Young, 494 U.S.
56, 60 (1990) (noting that, “[i]n defining the scope of the mar-
ket that it wished to regulate [via the federal securities laws],
Congress painted with a broad brush.”); Tcherepnin v. Knight,
389 U.S. 332, 336 (1967) (“[I]n searching for the meaning
and scope of the word ‘security’ in the Act, form should be
disregarded for substance and the emphasis should be on eco-
nomic reality.”); SEC v. C.M. Joiner Leasing Corp., 320 U.S.
344, 351 (1943) (“Novel, uncommon, or irregular devices,
whatever they appear to be, are also reached if it be proved
as matter of fact that they were widely offered or dealt in
under terms or courses of dealing which established their
character in commerce as ‘investment contracts,’ or as ‘any
interest or instrument commonly known as a ‘security.’ ”).
6
Indeed, at least two of our sister circuits and one authoritative securi-
ties law treatise have identified Howey’s test as a four-part test. See, e.g.,
Great Rivers Coop. of Se. Iowa v. Farmland Indus., Inc., 198 F.3d 685,
700 (8th Cir. 1999); Allen v. Lloyd’s of London, 94 F.3d 923, 930 (4th Cir.
1996); 1 Thomas Lee Hazen, Treatise on the Law of Securities Regulation
§ 1.6[2][A]-[D] (5th ed. 2005).
7654 WARFIELD v. BESTGEN
Applying these principles to the case at hand, we note that
it is undisputed that, as the district court explained:
[T]he investors paid money to Mid-America through
an irrevocable gift of cash, securities, or other assets.
In return, Mid-America promised to pool the money
in investments such as stocks, bonds, and money
market funds, and to periodically pay each of the
investors a fixed sum of money based on their indi-
vidual ages and the date that payment commenced.
In addition to a monthly income stream, the inves-
tors expected to receive substantial tax benefits
resulting from their purchase of the CGAs.
Warfield, 453 F. Supp. 2d at 1123-24. It is also undisputed
that the Foundation’s literature promised that monies remain-
ing after the named annuitants’ lifetime would be directed to
a charity designated by those who purchased the charitable
gift annuities.
Defendants argue that the investors did not make any “in-
vestment of money” within the meaning of Howey because
they lacked the requisite intent to realize financial gain
through the transactions, and intended instead to make chari-
table donations. In addition, and relatedly, Defendants argue
that the investors had no “expectation of profits” because the
anticipated value of the gift annuities at the time of purchase
was always less than the purchase amount. Defendants do not
dispute that there was a “common enterprise” or that any prof-
its were “the product of the efforts of a person other than the
investor,” and we accordingly need not address whether the
Foundation’s charitable gift annuities satisfy these elements
of the Howey test.
B
[2] The “investment of money” prong of the Howey test
“requires that the investor ‘commit his assets to the enterprise
WARFIELD v. BESTGEN 7655
in such a manner as to subject himself to financial loss.’ ”
Rubera, 350 F.3d at 1090 (quoting Hector v. Wiens, 533 F.2d
429, 432 (9th Cir. 1976)(per curiam)). In Rubera, we found
this prong satisfied where investors “turned over substantial
amounts of money . . . with the hope that [the investment
managers’ efforts] would yield financial gains.” Id. It is
undisputed in this case that the purchasers of the Foundation’s
gift annuities “turned over substantial amounts of money” in
exchange for the Foundation’s promise to make annuity pay-
ments and turn funds remaining at the end of the annuitant’s
life over to designated charities. Furthermore, although the
Foundation falsely represented that investors’ accounts were
“secured by the multi-million dollar assets of the Mid-
America Foundation,” the investors risked financial loss due
to the (now realized) possibility that the Foundation would
not be able to honor its promises. Defendants argue, however,
that the purchasers of the Foundation’s gift annuities made no
investment of money because they lacked the intent to realize
a financial gain and were motivated solely to make a charita-
ble donation. We reject this argument.
[3] At the outset, we note that, while the subjective intent
of the purchasers may have some bearing on the issue of
whether they entered into investment contracts, we must focus
our inquiry on what the purchasers were offered or promised.
Under Howey, courts conduct an objective inquiry into the
character of the instrument or transaction offered based on
what the purchasers were “led to expect.” 328 U.S. at 298-99;
see also Joiner, 320 U.S. at 352-53 (“The test [for determin-
ing whether an instrument is a security] . . . is what character
the instrument is given in commerce by the terms of the offer,
the plan of distribution, and the economic inducements held
out to the prospect.” (emphasis added)). Accordingly, courts
have frequently examined the promotional materials associ-
ated with an instrument or transaction in determining whether
an investment contract is present. See, e.g., SEC v. Edwards,
540 U.S. 389, 392 (2004) (observing that the payphone sale
and buyback scheme involved investment contracts where
7656 WARFIELD v. BESTGEN
promotional materials noted “potential for ongoing revenue
generation”); United Housing Foundation, Inc. v. Forman,
421 U.S. 837, 854 (1975) (noting, in the course of finding
investment contract test not met, that the promotional materi-
als “[n]owhere . . . seek to attract investors by the prospect of
profits” and rather “repeatedly emphasize[ ] the ‘nonprofit’
nature of the endeavor”); see also Rice v. Branigar Org., 922
F.2d 788, 791 (11th Cir. 1991) (holding investment contract
definition was not met where promotional materials for hous-
ing development did not emphasize investment value of lots);
SEC v. Goldfield Deep Mines Co. of Nev., 758 F.2d 459, 464-
65 (9th Cir. 1985) (relying in part on brochure’s representa-
tions of profit possibility in finding ore purchase reinvestment
program satisfied Howey test); Aldrich v. McCulloch Props.,
Inc., 627 F.2d 1036, 1039-40 (10th Cir. 1980) (stating that in
determining whether real estate transaction constitutes secur-
ity, “promotional emphasis of the developer” is “[c]entral”);
United States v. Carman, 577 F.2d 556, 564 (9th Cir. 1978)
(holding an investment contract was present where business
“consistently promoted the package it offered as an invest-
ment”).
[4] Our review of the record in this case demonstrates that
the Foundation marketed its gift annuities as investments, and
not merely as vehicles for philanthropy. One promotional bro-
chure entitled “Maximizer Gift Annuity: A Gift that Offers
Lifetime Income . . . and Beyond” states, under the heading
“Attractive Returns,” that “[y]our annuity payment is deter-
mined by your age and the amount you deposit. The older you
are, the more you’ll receive.” The brochure goes on to list the
“current average net-yield” rates. Elsewhere, under a heading
titled “A Gift that Gives to the Donor,” the brochure states:
To get this same return through the stock market,
[the hypothetical investor] would have had to find
investments that pay dividends of 19.3%! (Even the
most profitable companies rarely pay dividends of
WARFIELD v. BESTGEN 7657
more than 5%.) The rate of return on a Mid-America
Foundation “Gift Annuity” is hard to beat!
The brochure also includes a chart comparing the benefits
of a $200,000 commercial annuity with a $200,000 charitable
gift annuity, indicating the superiority of the charitable gift
annuity in such categories as annuity rate, annual income,
income tax savings, federal estate tax savings, and “partial
bypass capital gains.” Although the brochure also notes that
the investor will “make a difference” through the purchase of
the gift annuity, the brochure as a whole emphasizes the
income generation and tax savings aspect of the charitable gift
annuity. Indeed, a bullet point summary of the advantages of
the Foundation’s charitable gift annuities states: “High Rates;
Tax Free Income; Capital Gains Tax Savings; Current Tax
Savings; Estate Tax Free; Safe; Secure; Simple; Flexible;
PAYS YOU NOW!!! HELPS YOU MAKE A DIFFERENCE
LATER.”
[5] Another brochure entitled “The Charitable Gift Annu-
ity: Preserving Your Family Legacy . . . Now and For Genera-
tions to Come” places emphasis on the opportunity for the
investor to designate family members as secondary annuitants
under the scheme, noting that “[y]ou can easily include your
spouse, children, or grandchildren to receive these lifetime
benefits.” This brochure also emphasizes the stability and
security of charitable gift annuities, noting that “[a] gift annu-
ity is one of the OLDEST and SAFEST financial instruments
available.” On the whole, this brochure pitches charitable gift
annuities to an investor whose main concern is to provide a
steady stream of income to dependents after he or she is gone.
The brochure’s emphasis is on the long-term income produc-
tion potential of the charitable gift annuity. The fact that some
purchasers may have been attracted to the gift annuities in
part by the Foundation’s promise to donate funds remaining
after the annuitants’ life to a designated charity does not alter
the outcome. See Forman, 421 U.S. at 853 n.17 (suggesting
that existence of collateral non-investment motive does not
7658 WARFIELD v. BESTGEN
shield transaction from securities laws). In sum, when the pro-
motional materials are examined, the investment component
of the annuity is evident.
In addition to considering the Foundation’s marketing
materials, we note that the gift annuities were marketed and
sold to persons who were likely to be attracted by the Founda-
tion’s promises of periodic payment of income and tax bene-
fits. See, e.g., Howey, 328 U.S. at 300-01 (considering class
of persons to whom investment opportunity was offered in
reaching determination that investment contract was present).
At oral argument, Defendants suggested that the charitable
gift annuities were marketed solely to the elderly, who had lit-
tle interest in a return on their investment. This contention is
belied by the record. Not only were there relatively young
investors, but some purchasers designated a much younger
“second-life annuitant,” often a son or daughter, who stood to
receive the monthly annuity payments for the duration of his
or her life after the death of the primary annuitant. In addition,
to impose a requirement that the elderly must expect person-
ally to see returns on an investment before his or her death
effectively renders the “investment contract” definition inap-
plicable to a large portion of the population. As the Supreme
Court has noted, the particular motives of investors—and the
types of investment vehicles appealing to them—may vary
considerably depending on the investor’s stage of life. See
Edwards, 540 U.S. at 394. That the charitable gift annuity
purchaser preferred a perceived low-risk investment yielding
a stable long-term income for himself and a designated bene-
ficiary rather than a higher risk investment should not bar the
investor from the protection of the securities laws.
[6] In sum, because under the terms of the Foundation’s
offer, the purchasers of the Foundation’s gift annuities com-
mitted their assets in return for promised financial gain, the
transactions involved satisfy the “investment of money”
prong.
WARFIELD v. BESTGEN 7659
C
Defendants also argue that gift annuity transactions fail to
satisfy the “expectation of profits” element of the Howey test.
The Supreme Court addressed the definition of “profits”
under Howey in Forman, 421 U.S. at 852-60, holding that
shares in a non-profit housing development did not constitute
securities because purchasers of the shares had no reasonable
expectation of profits. In reaching its decision, the Court
explained that, “[b]y profits, th[is] Court has meant either
capital appreciation resulting from the development of the ini-
tial investment . . . or a participation in earnings resulting
from the use of investors’ funds.” Id. at 852.
More recently, the Court explained that, in Forman, it had
provided an “illustrative description of prior decisions on
‘profits,’ ” not an “exclusive” definition of “profits.”
Edwards, 540 U.S. at 396. In Edwards, the Court held that a
payphone sale-and-leaseback arrangement involved the offer
of investment contracts. The Court held that the Howey test
was satisfied despite the fact that the scheme promised a fixed
rather than variable rate of return, noting that “investments
pitched as low-risk (such as those offering a ‘guaranteed’
fixed return) are particularly attractive to individuals more
vulnerable to investment fraud, including older and less
sophisticated investors.” Id. at 394. Edwards also noted that,
in Howey, the Court “used ‘profits’ in the sense of income or
return, to include, for example, dividends, other periodic pay-
ments, or the increased value of the investment.” Id.[7] After Edwards, it is clear that fixed periodic payments
of the sort promised in the present case may constitute “prof-
its” for purposes of the Howey test. However, the thrust of
Defendant’s argument is that the “expectation of profits”
prong also requires an expectation of net financial gain lack-
ing in this case. This position finds support in Edwards,
which noted that “Forman supports the commonsense under-
standing of ‘profits’ in the Howey test as simply ‘financial
7660 WARFIELD v. BESTGEN
returns on . . . investments.’ ” 540 U.S. at 396 (quoting For-
man, 421 U.S. at 853). Defendants argue that because the esti-
mated value of the gift annuities at the time of purchase was
always less than the initial payment amount, the purchasers
expected no net gain from the transaction. Indeed, Defendants
argue that it was impossible for purchasers to see returns on
their investment and that accordingly, any payments to Defen-
dants could not constitute “profits.” Defendants’ argument
fails.
[8] Under the terms of the Foundation’s charitable gift
annuity contracts, the fixed rate at which the annuity amount
was to be paid was based on the life expectancy of the pur-
chaser. Of course, the present value of the annuity at the time
of purchase, which was also based on the projected life expec-
tancy of the purchaser, was always less than the purchase
price. That fact, however, does not establish that it was impos-
sible for the purchaser to profit from the charitable gift annu-
ity investment. Indeed, whether or not a particular purchaser
stood to see a return on his or her initial investment depended
entirely on whether the investor (or the designated secondary
beneficiary) lived longer than the actuarial tables predicted.
Furthermore, as we discussed in the preceding section, con-
sideration of the Foundation’s promotional literature, as well
as the annuity contracts themselves, demonstrates that the
Foundation presented its gift annuity as opportunity for finan-
cial gain. The record indicates that for many of the annuitants,
the periodic payments and tax benefits could deliver a return
on the initial payment, especially when the payments paid to
designated “second-life” annuitants are taken into account.
Further, the purchaser may well have anticipated an increase
in investment value that would accrue to the benefit of the
charity. At heart, Defendants’ argument under the “profits”
prong closely mirrors their argument that the purchasers of
gift annuities made no investment of money and fails for the
same reasons discussed in our consideration of that prong.
WARFIELD v. BESTGEN 7661
[9] We conclude that the structure of the charitable gift
annuity contracts included an expectation of profit within the
meaning of Howey.
D
[10] In summary, the district court properly determined that
the Foundation’s charitable gift annuities were, in fact, invest-
ment contracts and therefore subject to federal securities law.
III
We next address Defendants’ argument that they are
exempt from the broker-dealer registration provisions of the
1934 Act.7 The 1934 Act defines a “broker” as “any person
engaged in the business of effecting transactions in securities
for the account of others.” 1934 Act § 3(a)(4)(A), 15 U.S.C.
§ 78c(a)(4)(A). Section 15 of the 1934 Act provides that
securities brokers and dealers must be registered unless they
deal only intrastate or are otherwise specifically exempted
from registration. 1934 Act § 15(a)(1), 15 U.S.C. § 78o(a)(1).
Specifically, Defendants contend that they qualified for
exemptions to the registration requirements under sections
3(a)(12)(A)(v) and 3(e)(1) of the 1934 Act, both of which
were added to the 1934 Act by the Philanthropy Protection
Act of 1995 (“Philanthropy Act”), Pub. L. No. 104-62, 109
Stat. 682 (codified in scattered sections of 15 U.S.C.). Before
7
The district court judge decided the closely related issue of whether the
charitable gift annuities were themselves “exempted securities” under sec-
tion 3 of the 1934 Act. See Warfield, 453 F. Supp. 2d at 1125-26. How-
ever, even if the charitable gift annuities were exempt from the registration
requirements of the Securities Acts under the Philanthropy Act, they
would still be subject to the fraud provisions of the Securities Acts. There-
fore, we need not decide whether the charitable gift annuities themselves
were exempt under the Philanthropy Act. However, because the jury was
instructed that one element of the Receiver’s constructive fraud claim was
satisfied as a matter of law by Defendants’ violation of the broker-dealer
registration laws, we must address the issue in that context.
7662 WARFIELD v. BESTGEN
addressing Defendants’ arguments on this point, we briefly
discuss the background of the Philanthropy Act.
A
[11] The Philanthropy Act was passed to codify certain
long-standing SEC interpretations of existing exemptions
from registration under the Securities Acts for charitable orga-
nizations. See H.R. Rep. 104-333, at 8 (1995), reprinted in
1995 U.S.C.C.A.N. 619, 622. Prior to the passage of the Phi-
lanthropy Act, the federal securities laws exempted charitable
organizations and securities issued by these organizations
from securities registration requirements—provided that no
part of the net earnings of the organizations inured to the ben-
efit of any person, private shareholder, or individual. See
Investment Company Act of 1940 (“Investment Company
Act”) § 3(c)(10), 15 U.S.C. § 80a-3(c)(10) (excluding charita-
ble organizations from the definition of an investment com-
pany); 1933 Act § 3(a)(4), 15 U.S.C. § 77c(a)(4) (exempting
from provisions of 1933 Act, except for anti-fraud provisions,
any security issued by a charitable organization); 1934 Act
§ 12(g)(2)(D), 15 U.S.C. 78l(g)(2)(D) (same with regard to
1934 Act).
The limiting language in all of these provisions left open
the possibility that charitable organizations maintaining chari-
table income funds were ineligible for the exemption because
the “donor” to such a fund (or the purchaser of a gift annuity)
receives part of the net earnings of the organization in the
form of periodic income. However, the SEC specified in a
series of releases and no-action letters that it would take no
enforcement action against organizations maintaining such
funds and issuing such instruments. See Christ Church of
Washington, SEC No-Action Letter, 1974 WL 9979 (May 17,
1974) (stating that staff would not recommend action to Com-
mission if tax exempt church issues gift annuities without reg-
istration); Pooled Income Funds, Release No. 16478, 19 SEC
Docket No. 142, 1980 WL 20766 (Jan. 10, 1980) (stating that
WARFIELD v. BESTGEN 7663
staff would not recommend enforcement against public chari-
ties maintaining pooled income funds in accordance with
specified standards).
Despite these assuring SEC interpretations, Congress was
spurred to enact the Philanthropy Act by litigation alleging
that charitable organizations issuing charitable gift annuities
were operating as unregistered investment companies under
federal securities law. See H.R. Rep. 104-333, at 4-5. The Phi-
lanthropy Act amended the 1933 and 1934 Acts, the Invest-
ment Company Act, and the Investment Advisers Act of 1940
by providing specific exemptions for charitable organizations
maintaining income funds meeting certain specifications. The
upshot of these amendments was to exempt certain funds
maintained by charitable organizations, securities issued by
these funds, and employees of these funds, from the securities
and broker-dealer registration requirements of the Securities
Acts. See generally Timothy L. Horner & Hugh H. Makens,
Securities Regulation of Fundraising Activities of Religious
and Other Non-Profit Organizations, 27 Stetson L. Rev. 473(1997).
Central to our analysis is the Philanthropy Act’s amend-
ment of section 3(c)(10) of the Investment Company Act to
exclude from the definition of an investment company “[a]ny
company organized and operated exclusively for religious,
educational, benevolent, fraternal, charitable, or reformatory
purposes—which is or maintains a fund described in subpara-
graph (B).” Philanthropy Act § 2(a) (codified at 15 U.S.C.
§ 80a-3(c)(10)). Subparagraph (B) states in relevant part:
[A] fund is described in this subparagraph if such
fund is a pooled income fund, collective trust fund,
collective investment fund, or similar fund main-
tained by a charitable organization exclusively for
the collective investment and reinvestment of one or
more of the following . . .
7664 WARFIELD v. BESTGEN
(ii) assets of a pooled income fund;
(iii) assets contributed to a charitable organization in
exchange for the issuance of charitable gift annuities.
...
Id.
The two exemptions to which Defendants contend they are
entitled refer back to this language; we turn to these exemp-
tion provisions next.
B
[12] We first address Defendants’ argument that they are
entitled to the exemption defined at section 4(b) of the Philan-
thropy Act. Relevant for our purposes is the following lan-
guage:
(1) Exemption
Notwithstanding any other provision of this title, but
subject to paragraph (2) of this subsection, a charita-
ble organization, as defined in section 3(c)(10)(D) of
the Investment Company Act of 1940 [15 U.S.C.
§ 80a-3(c)(10)(D)], or any trustee, director, officer,
employee, or volunteer of such a charitable organi-
zation acting within the scope of such person’s
employment or duties with such organization, shall
not be deemed to be a “broker”, “dealer”, “municipal
securities broker”, “municipal securities dealer”,
“government securities broker”, or “government
securities dealer” for purposes of this chapter solely
because such organization or person buys, holds,
sells, or trades in securities for its own account in its
capacity as trustee or administrator of, or otherwise
on behalf of or for the account of—
WARFIELD v. BESTGEN 7665
(A) such a charitable organization;
(B) a fund that is excluded from the definition of an
investment company under section 3(c)(10)(B) of the
Investment Company Act of 1940 [15 U.S.C. § 80a-
3(c)(10)(B)]. . . .
Philanthropy Act § 4(b) (codified at 15 U.S.C. § 78c(e)(1))
(emphasis added).
Defendants argue that this exemption provision applies to
them because they were employees of the Foundation, a chari-
table organization, and sold the charitable gift annuities on
behalf of the Foundation.8 However, this exemption is limited
by under another provision of the Philanthropy Act titled
“Limitation on Compensation.” That provision states:
The exemption provided under paragraph (1) shall
not be available to any charitable organization, or
any trustee, director, officer, employee, or volunteer
of such a charitable organization, unless each person
who . . . solicits donations on behalf of such charita-
ble organization from any donor to a fund that is
excluded from the definition of an investment com-
pany under section 3(c)(10)(B) of the Investment
Company Act of 1940 [15 U.S.C. § 80a-
3(c)(10)(B)], is either a volunteer or is engaged in
the overall fund raising activities of a charitable
organization and receives no commission or other
special compensation based on the number of dona-
tions collected for the fund.
8
At oral argument, the Receiver argued that this exemption was inappli-
cable because the Foundation was not in fact “a charitable organization,
as defined in section 80a-3c(10)(D).” We need not reach this argument
because it is clear that, even assuming the Foundation was a “charitable
organization” under the terms of the statute, both the Foundation and
Defendants were ineligible for the exemption.
7666 WARFIELD v. BESTGEN
Id. § 4(b) (codified at 15 U.S.C. 78c(e)(2)) (emphasis added).
Defendants argue that this limitation on exemption does not
apply to them, because they were independent contractors,
and the term “independent contractor” is not specifically men-
tioned in the provision limiting exemption. However, Defen-
dants’ argument undermines their own position—the
provision that creates the exemption does not mention “inde-
pendent contractors,” either. Under Defendants’ logic, the
Philanthropy Act did not limit their ability to receive commis-
sions, but neither did it exempt them from the broker-dealer
provisions of the 1934 Act in the first place.
[13] Even setting aside Defendants’ illogical reading of the
statute, the legislative history of the Philanthropy Act makes
clear that the limitation on compensation was based on a
broad concern about the risk of abusive sales practices:
The Commission historically has viewed the
receipt of transaction-based compensation as poten-
tially providing the incentive to persons who work
for charitable organizations to engage in high-
pressure or abusive sales practices.
Accordingly, the staff has conditioned its position
that associated persons of charitable organizations
are exempt from the broker-dealer provisions of the
Exchange Act upon the absence of this type of com-
pensation.
H.R. Rep. No. 104-333, at n.4 (citation omitted).
More recently, an SEC No-Action letter stated that the SEC
could not assure that it would not recommend enforcement in
circumstances almost identical to those presented in this case.
See New Life Corporation of America, SEC No-Action Let-
ter, 1999 WL 152895, at 1 (Mar. 16, 1999) (providing no
assurance of no action where 501(c)(3) entity wished to pay
WARFIELD v. BESTGEN 7667
commissions to independent financial professionals unregis-
tered as broker-dealers for the sale of gift annuities).
[14] In sum, Defendants were not exempt from registration
as brokers under 15 U.S.C. § 78c(e)(1). Because Defendants
received commissions for their sale of the Foundation’s chari-
table gift annuities, they were ineligible for the exemption
under § 78c(e)(2).
C
Defendants also argue that, because the charitable gift
annuities constitute “exempted securities” under 15 U.S.C.
§ 78c(a)(12)(A)(v), the 1934 Act’s broker-dealer registration
provisions do not apply to Defendants. The 1934 Act’s regis-
tration provisions state in relevant part:
It shall be unlawful for any broker or dealer . . . to
induce or attempt to induce the purchase or sale of,
any security (other than an exempted security or
commercial paper, bankers’ acceptances, or com-
mercial bills) unless such broker or dealer is regis-
tered in accordance with subsection (b) of this
section.
1934 Act § 15(a)(1), 15 U.S.C. § 78o(a)(1) (emphasis added).
The Philanthropy Act amended section 3 of the 1934 Act to
expand the definition of “exempted securities” at section
3(a)(12)(A) to include “any security issued by or any interest
or participation in any pooled income fund, collective trust
fund, collective investment fund, or similar fund that is
excluded from the definition of an investment company under
section 80a-3(c)(10)(B) of this title.” Philanthropy Act § 4(a)
(codified at 15 U.S.C. § 78c(a)(12)(A)(v)). Defendants sug-
gest, in effect, that § 78c(a)(12)(A)(v), when read in combina-
tion with § 78o(a)(1), exempted them from the registration
requirements of the 1934 Act, even though, as discussed
above, section 4(b) of the Philanthropy Act specifically
7668 WARFIELD v. BESTGEN
amended the 1934 Act to provide that persons selling securi-
ties on behalf of a “fund excluded from the definition of an
investment company under [§ 80a-3(c)(10)(B)]” are exempt
from the 1934 Act’s broker-dealer regulations (including reg-
istration provisions) unless these persons are compensated for
their sale of the securities.
The Commission itself has rejected an identical argument,
stating that “[w]hile Exchange Act Sections 3(a)(12)(A)(v)
and 3(e) may, upon a cursory review, appear to be somewhat
at odds, the legislative history of those Sections makes it clear
that the language contained in Section 3(e) correctly estab-
lishes the relevant exemption.” See New Life Corporation of
America, SEC No-Action Letter, 1999 WL 152895, at 1 (Mar.
16, 1999) (footnote omitted).
[15] We agree with the Commission. If Congress’s intent
in amending the definition of exempted securities at 15 U.S.C.
§ 78c(a)(12)(A) to include securities issued by certain charita-
ble income funds was to exempt all persons selling these
securities from the broker-dealer registration requirement at
15 U.S.C. § 78o(a), the express exemption for employees of
such funds at § 78c(e)(1) would be redundant. More to the
point, the limitation on the exemption at § 78c(e)(2) would be
toothless, a result clearly at odds with the Philanthropy Act’s
purpose, as expressed in the House Report. Finally, the sug-
gestion that the more general registration exemption provision
at § 78o(a)(1) (read in combination with § 78c(a)(12)(A)(V))
trumps the more specific provisions at §§ 78c(e)(1) and (2) is
contrary to established principles of statutory interpretation.
See NLRB v. A-Plus Roofing, Inc., 39 F.3d 1410, 1415 (9th
Cir. 1994) (“It is a well-settled canon of statutory interpreta-
tion that specific provisions prevail over general provi-
sions.”).
[16] In sum, we hold that Defendants were not exempt,
WARFIELD v. BESTGEN 7669
under the Philanthropy Act, from the 1934 Act’s broker-
dealer registration provisions.9
IV
[17] The district court correctly held that it had personal
jurisdiction over the non-resident Defendants. Defendants
argue that, because the charitable gift annuities were not
securities, the district court lacked personal jurisdiction over
the non-resident Defendants Carroll and Davis. This argument
is subsumed in our consideration of whether the Foundation’s
charitable gift annuities were securities as a matter of law.
Given our conclusion that they were, personal jurisdiction
over Carroll and Davis was proper pursuant to the “nation-
wide service of process” provisions in section 27 of the 1934
Act, 15 U.S.C. § 78aa. See Sec. Investor Prot. Corp. v. Vig-
man, 764 F.2d 1309, 1316 (9th Cir. 1985) (“[S]o long as a
defendant has minimum contacts with the United States, Sec-
tion 27 of the Act confers personal jurisdiction over the defen-
dant in any federal district court.”); SEC v. Ross, 504 F.3d
1130, 1140 (9th Cir. 2007) (same true with regard to Section
22 of the 1933 Act).
V
Defendants argue that the district court erred in issuing an
Allen instruction to the deadlocked jury. After deliberating for
almost three days, the jury notified the court on Friday after-
noon that it had reached an impasse. The district court then
issued the Allen instruction, at which point the jurors retired
to deliberate for another hour. After resuming deliberation
Monday morning, the jury reached a verdict after two hours.
The parties disagree as to whether Defendants properly
9
We do not address the district court’s ruling that the charitable gift
annuities were not exempt from securities regulation under 15 U.S.C.
§ 77c(a)(8) because Defendants waived the issue by failing to raise it in
their opening brief.
7670 WARFIELD v. BESTGEN
objected to the Allen instruction at trial and thus whether we
should review for plain error or abuse of discretion. We need
not resolve this dispute because Defendants’ argument fails
under either standard of review.
[18] In determining whether an Allen charge is coercive, we
examine: (1) the form of the instruction; (2) the time the jury
deliberated after receiving the charge in relation to the total
time of deliberation; and (3) any other indicia of coerciveness.
United States v. Daas, 198 F.3d 1167, 1180 (9th Cir. 1999).
Defendants are correct that the deliberation time after the
charge was given (three hours) was short in relation to the
total deliberation time (more than three days). However, the
instructions themselves were of standard form. Furthermore,
the “weekend interval itself probably would have diluted any
coercive effect” of the Allen charge given Friday. See United
States v. Steele, 298 F.3d 906, 911 (9th Cir. 2002). We find
no error in the district court’s Allen instruction.
VI
For the above reasons, we affirm the judgment of the dis-
trict court. The charitable gift annuities sold by Defendants on
behalf of the Foundation were investment contracts, and
hence securities for purposes of federal and state securities
laws. Defendants were not exempt from registration as securi-
ties brokers under the terms of the Philanthropy Act. Because
the charitable gift annuities were securities, the district court
had personal jurisdiction over the non-resident Defendants.
Finally, the district court did not err in giving the jury an
Allen charge. Given our resolution of these questions, we
need not reach any other issue urged by the parties, including
the matters argued by the Receiver in his protective cross-
appeal.
AFFIRMED.