The basis of the SEC's allegations4 is a brochure distributed by First American entitled "Questions and Answers." Although on several occasions First American has argued that it is a trust company and thus only bound by North Dakota laws concerning such companies and not those concerning banking institutions,5 it calls itself a "banking institution," and also compares its services with those of any other bank.6

Safety of investment is assured by claims that its funds are invested "carefully and conservatively . . . by highly experienced management," and that there is semi-annual examination and supervision by the State Banking Examiner. The brochure contains statements asserting that "North Dakota laws insure the safety of deposits, trusts and contingent liabilities. Additionally, First American is bonded and insured by major insurance companies." However, the deposits of First American are not insured by a governmental agency or private corporation, and the only other insurance is employee bonding insurance and casualty insurance on First American's furniture. Included in the brochure is the statement that "earnings are guaranteed" although no third party does guarantee the earnings.

The SEC also argued that the brochure omitted material facts, for although it contains a statement to the effect that "[s]emi-annual examinations and supervision by the State Banking Examiner" assure the safety of investments, it fails to point out that the Examiner had issued several highly critical reports concerning the financial condition of First American and certain of its business practices.7

The principal types of "securities" involved were capital notes, certificates of investment, and savings accounts. At the time this action was heard First American had ceased selling or offering for sale the capital notes8 or the certificates of investment and had removed from its brochure the statements that interest was guaranteed and that deposits were insured by the state of North Dakota.

The lower court made the following findings after a hearing: (1) The statement that "First American is bonded and insured by major insurance companies" is misleading because "[t]o a layman, given the manner or presentation, it would more reasonably mean the funds were protected by something akin to the FDIC." (2) The statement that North Dakota law insures the safety of deposits is true in light of N.D.Cent. Code Secs. 6-05-04, -05, and -27 (1959). (3) The statements that First American is a safe place to invest, that management was skilled, and that funds were invested wisely and conservatively were clearly "puffing." (4) The statement that supervision by the Examiner assured adherence to state regulations was not shown to be false. (5) The statement that earnings and interest were "guaranteed" was false in that it implied a third party commitment; however, "on the basis of the evidence presented, the false statement was not material since persons to whom that item was material would normally inquire and discover the correct interpretation of the term," that is, that First American meant "promise." (6) As to nondisclosure, there was no proof that the items to be disclosed were material.9 (7) The plaintiff failed to prove insolvency.

"We have carefully reviewed the entire record and the evidence adduced at the hearing and conclude that the plaintiff has failed to show a clear and immediate risk to the investor, including the uninformed, ignorant and gullible.

"Petition for a temporary restraining order is denied, except that defendant is restrained from implying in its advertising that it is bonded and insured for the protection of the depositors."10

Section 17(a) of the Act11 reads as follows:

"It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly-

(1) to employ any device, scheme, or artifice to defraud, or

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."

It is not disputed that First American did offer to sell or in fact did sell through the use of the facilities of interstate commerce, capital notes, certificates of investment, and passbook savings accounts. It is equally clear that for purposes of the Securities Act, these items are "securities."12 The parties disagree as to the proper characterization of the various statements in the brochure or any alleged omission therefrom.

We shall first consider the statements alleged by the SEC to be misrepresentations of material facts. The statements comparing First American to a bank and calling it a "banking institution" were correctly held by the lower court not to involve misrepresentations, since under North Dakota law First American was considered a "banking institution" and could provide a wide range of services similar to those of a bank.13

The lower court granted limited relief pursuant to its holding that the statement that "First American is bonded and insured by major insurance companies" was misleading. It is claimed that this is in some respects a true representation in that First American had been issued bonds, such as fidelity bonds, and certain types of insurance. However, a statement which is literally true, if susceptible to quite another interpretation by the reasonable investor (in this case, for example, the interpretation that the deposits were insured by the FDIC) may properly, under Sec. 17(a), be considered a material misrepresentation.14 Here the finding that the statement was misleading was proper in view of the context in which the statement was made.15

The remaining statements involve, among other things, the concept of materiality. The 1933 Act contains a definition of materiality in a slightly different context: "The term 'material' when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters as to which an average prudent investor ought reasonably to be informed before purchasing the security registered."16

The case law concerning security regulation reflects a similar concept of materiality, generally with a definition taken from common law concepts. As expressed in the Restatement of Torts, a fact is material "if its existence or non-existence is a matter to which a reasonable man would attach importance in determining his choice of action in the transaction in question."17 This is an objective test18 and there apparently is no need for a showing, at least insofar as materiality is concerned, that any particular investor relied to his detriment on a misrepresentation, or, in the case of an omission, would have acted differently if there had been no omission.19

In its complaint the SEC alleged that the following statements in the brochure violated Sec. 17(a):

"First American Bank & Trust Company provides a convenient and safe place for North Dakotans to keep their savings, make investments and handle their trust affairs . . . .

* * *

First American's sound progressive operating policies are established by its Board of Directors, comprised of outstanding leaders in the community, and are administered by highly experienced management . . . ."

In each instance the lower court held that the statements did not violate the statute because they were clearly recognizable as "puffing."

Generally, we can agree with this characterization, although the lower court's holding in regard to the claim that the funds are invested "carefully and conservatively," in view of the subsequent holdings of insolvency, may be one the trial court would alter if the issue should again be properly presented.20

In B. Fennekohl & Co., 41 SEC 210, 216 (1962), the Commission stated that

"The concept of 'puffing' is derived from the doctrine of caveat emptor and arises primarily in the sale of tangibles where it appears that examination by the purchaser may offset exaggerated statements and expressions of opinions by the salesman. It can have little application to the merchandising of securities."

In the same vein, the Supreme Court reminds us that theories which support common law fraud doctrines and which "developed around transactions involving land and other tangible items of wealth . . . must be adapted to the merchandise in issue." SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194, 84 S. Ct. 275, 284, 11 L. Ed. 2d 237 (1963). This viewpoint in regard to securities regulation was reiterated in Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972), where the Court noted:

"The Court has said that the 1934 Act and its companion legislative enactments embrace a 'fundamental purpose . . . to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus achieve a high standard of business ethics in the securities industry."'

However, if this were the only finding complained of we would not reverse and would let the trial court's conclusion of "puffing" stand.

In regard to the use of the phrase "guaranteed interest," the lower court held that although the manner in which the defendants used the phrase falsely implied a third party commitment, the statement was not material "since persons to whom that item was material would normally inquire and discover the correct interpretation of the term."21 Thus, there are two questions of fact here, whether the phrase falsely implies a third party commitment and whether the fact is material.22 As to these questions, we are bound by the substantial evidence rule.23 However, it is apparent from the holding below that the court's finding was based at least in part on a misapprehension of the concept of materiality,24 and on this issue we are not so bound. The holding can be interpreted in three ways: (1) the SEC failed to prove detrimental reliance on the part of any paticular investor; (2) the original misrepresentation was or would be cured by the investors' later inquiries; (3) the misrepresentation was not, in fact, one involving a material fact. Only the last interpretation is consistent with a contemporary understanding of "materiality" in Sec. 17(a). In view of the fact that materiality is normally a question of fact to be determined by the court below in the first instance, we reverse and remand for reconsideration of the factual question.25

In considering the SEC's non-disclosure allegations, the trial court raised two questions: (1) Whether First American had a duty of disclosure; (2) whether the facts allegedly not disclosed were material.

It would seem beyond dispute that the defendants had an affirmative duty under the Act to disclose material facts about the "securities" in question, because the defendants were actively engaged in the promotion and sale of these securities.26 The question of materiality is more difficult. The standard in omission or non-disclosure cases should be whether a reasonable man in the position of an investor might well decide not to purchase the security if the fact or facts were disclosed. Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972); Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970). In its opinion, the lower court, in holding that, if there was a failure to disclose, the facts involved were not material, stated: "Where is the evidence that a failure to disclose materially affected the conduct of the investor? We conclude that if there was a failure to disclose, its materiality is not proved." This holding indicates that the lower court injected into the analysis of materiality the issue of reliance. The question of reliance simply has no part in the consideration of whether the materiality standard of Sec. 17(a) has been met,27 and so as to this holding also we reverse and remand to the lower court for reconsideration of the factual question.

The final question to which we must turn our attention is the propriety of injunctive relief. As we have seen, the lower court denied the requested relief except in regard to the claim in the brochure that First American was bonded and insured for the protection of depositors.

The Commission has the authority to bring an action for injunctive relief against violation of the Securities Act pursuant to Sec. 20(b) of the Act:

"Whenever it shall appear to the Commission that any person is engaged or about to engage in any acts or practices which constitute or will constitute a violation of the provisions of this subchapter, or of any rule or regulation prescribed under authority thereof, it may in its discretion, bring an action in any district court of the United States . . . to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond."28

Since the authority to secure an injunction is granted by statute, the "proper showing" of need would be based on the requirements of the statute and not with reference to the normal requirements for injunctive relief.29 Once a prima facie case is presented that past violations have occurred, it becomes necessary for the lower court to determine the likelihood of future violations.30 Injunctive relief may be proper even if there has been no showing that any particular investor has been harmed,31 and the very existence of improper conduct in the past raises an inference that such conduct will continue in the future32 even though the improper conduct has been discontinued.33 This inference is even stronger when the wrongdoers insist that their actions are legitimate and do not violate the Act. Therefore, we hold that the relief granted by the trial court was proper. It only remains on a rehearing to determine, in event the case is not mooted, whether the scope of relief should be broadened.

The action is affirmed in part and reversed in part, and remanded.