The term "underwriter" is defined in § 2(11) of the Securities Act of 1933 to mean any person who has purchased from an issuer with a view to, or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking. 15 U.S.C.S. § 77b(11).
Defendant benevolent association was organized under New York law. Its members were mostly of Chinese descent. On September 1, 1937, the Republic of China authorized the issuance of liberty bonds. The association received subscriptions for the bonds and delivered them to the Chinese government's representative for remittance. Plaintiff Securities and Exchange Commission (SEC) filed suit to enjoin and restrain the association from selling the bonds, which had not been registered in accordance with § 5(a) of the Securities Act of 1933, 15 U.S.C.S. § 77e(a). The parties filed cross-motions for judgment on the pleadings.
Should the Court grant plaintiff SEC's motion for judgment on the pleadings, where the SEC sought to enjoin defendant benevolent association as an "underwriter" from selling to its members purported securities issued by the Republic of China?
The United States District Court granted the association's motion for judgment on the pleadings and denied the SEC's motion. The Court held that the association was entitled to the statutory exemptions provided by § 4(1) of the Securities Act of 1933, which states that the registration requirements of § 5(a) do not apply unless an issuer, underwriter, or dealer was involved in the transaction. The Court rejected the SEC's argument that the association was an underwriter. The Act defined an "underwriter" as any person who purchased from an issuer with a view to the distribution of the security. The Court noted that the association never made a contract of sale and that it did not distribute a security. Rather, the association simply provided a service to its members, who could have brought the bonds in any event.