Unregistered Sales Of Certificates Of Deposit
Last spring, the California Department of Business Oversight warned consumers that two related companies have been offering unlicensed online securities broker-dealer services and “unregistered sales of certificates of deposit (CDs)”. The Department’s announcement raises the question of whether the offer and sale of CDs must be qualified under the Corporate Securities Law of 1968.
Section 25019 of the Corporations Code, like Section 2(a)(1) of the Securities Act, includes “certificate of deposit” in the laundry list of securities. In Reiswig v. Department of Corporations, 144 Cal. App. 4th 327 (2006), the Court of Appeal determined that while the list of securities found in Section 25019 is expansive, it is not to be applied literally. Citing Marine Bank v. Weaver, 455 U.S. 551 (1982), the Court of Appeal found that certificate of deposits insured by the Federal Deposit Insurance Corporation are not securities in the form of an investment contract. Reiswig involved more than the straightforward sale of CDs. The defendants also paid a bonus. However, the Court of Appeal found that CD-plus-bonus package also was not a security.
In relying on Weaver, the Court of Appeal made no mention of the fact that the case predates a 1984 amendment to Section 25019. Cal. Stats. 1984, c. 577, § 1. That amendment added “put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof)” to the list of securities. This amendment followed a similar amendment to Section 2(a)(1) of the Securities Act that was enacted after Weaver. Act of Oct. 13, 1982, Pub. L. No. 97303, 96 Stat. 1409. In Wolf v. Banco Nacional de Mexico, S.A., 739 F.2d 1458 (9th Cir. 1984), cert. denied, 469 U.S. 1108 (1985) the parties disputed whether the 1982 amendment overruled Weaver. Upon review of the legislative history, the Ninth Circuit Court of Appeals found that Congress recognized the validity of the precise holding of Weaver on its facts, but at the same time, it also recognized that a different outcome might result in another context.
Even if certificates of deposit are securities, they still may not be subject to qualification under the CSL. Corporations Code Section 25100(c) exempts any security issued or guaranteed by and representing an interest in or a direct obligation of a national bank or bank or trust company incorporated under the laws of California. This exemption is probably no longer necessary in light of federal preemption of state qualification requirements with respect to “covered securities” pursuant to Section 18 of the Securities Act. Section 18(b)(4)(E) provides that, with certain exceptions, a security is a “covered security” with respect to a transaction that is exempt from registration pursuant to Section 3(a) of the Securities Act. Section 3(a)(2) includes a long list of exempt securities. Buried in this listing is “any security issued or guaranteed by any bank”. The statute further provides that the term “bank” means any national bank, or banking institution organized under the laws of any state, territory, or the District of Columbia, and is supervised by the state or territorial banking commission or similar official. See also Cal. Corp. Code § 25102.1.
“The Rest of the Story“
Although Mr. and Mrs. Reiswig won their fight with the Department of Corporations (now known as the Department of Business Oversight), a more serious battle lay ahead of them. The following year, state and federal law enforcement officers arrested the couple at their home. They were subsequently convicted of three counts of fraud in connection with the sale of a security (not the CD-plus-bonus) in violation of Corporations Code Section 25401. The Reiswig’s criminal violations are detailed in People v. Reiswig (June 3, 2010, Cal. Ct. Appeal Case No. G040459) (nonpub. opn.).