Brief Fact Summary. Santa Monica Bank pledged stock as a security for a loan and tried to transfer the stock to it when the loan was in default.
Synopsis of Rule of Law. Banks that accept unregistered securities as collateral for loans are considered underwriters when the bank attempts to sell these securities at a later time.
Issue. Would a bank accepting unregistered securities as collateral, then selling those securities at a later time, be considered an underwriter?
Held. (Moore, J.) Yes. A bank that accepts unregistered securities as collateral then attempts to sell those securities at a later date is considered an underwriter. An underwriter being â€œany person who has purchased from an issuer with a view to, or sells for an issuer in connection with, the distribution of any security.â€ No secrecy is necessary between the parties, with participation being direct or indirect. Guild Films issued unregistered stock to Roach who used it as security with a bank. Allowing banks to sell unregistered stock would establish a loophole in the Act, bypassing registration and consenting to possible stock disposal by permitting the debtor to default or authorizing the bank to dispose of the shares. Congress refused to exempt banks that allow unregistered shares as collateral, defeating the proposed provision. Seeing as the Act was created to protect buyers, and registration was essential for buyers to make informed decisions by having access to pertinent information about the shares. As a result of the bank indirectly selling unregistered shares issued by Guild Films (an issuer) the bank is assuredly an underwriter.
Discussion. This case would not apply to non-issuer transactions, meaning if Roach did not hold a controlling interest in the companies involved that the bank may have not been considered an underwriter. The sale would have then been between two private parties, rendering it exempt.