A year ago, I discussed the question of whether an issuer could prevent unauthorized trading in options with respect to its own securities. See “Options Trading Without the Issuer’s Consent“. In fact, one issuer tried, without success, to stop trading in options on its own securities. Golden Nugget, Inc. v. American Stock Exchange, Inc., 828 F.2d 586 (9th Cir. 1987).
At least one category of issuer has succeeded in preventing the unauthorized creation and sale of derivative securities. In 1991, the County of Los Angeles was forced to delay a proposed securities offering when it learned that a private company was offering fractional interests in securities previously issued by the County with a higher yield. The County responded by sponsoring legislation, AB 1160, that added a provision to the Corporate Securities Law making it unlawful, with specified exceptions, for any person to offer or sell in this state any security constituting a fractional interest in a lease, installment sale, or other obligation of a city, county, city and county, school district, special district, or other local agency of this state without obtaining the prior written consent of that city, county, city and county, school district, special district, or other local agency to that offer or sale.
The Commissioner quickly decided that he didn’t want the responsibility of enforcing the new law. The following year, the legislature obliged by moving the law to the Government Code (Sections 5950 – 5955). Coincidentally, the current Commissioner, Jan Owen, was then serving as a consultant to the Senate Banking, Commerce and International Trade Committee for which she wrote this analysis of the bill.
In refusing to allow a private issuer to stop the creation of options on its securities, the Ninth Circuit Court of Appeals in Golden Nugget, Inc. reasoned:
[The defendants] deal only in the property of Golden Nugget’s shareholders, not in property owned by the corporation. Plaintiff does not suggest that it has retained any proprietary rights in the shares of its stock that would allow it to control the manner or means of resale of its shares. We find it impossible to conceptualize a property right of the plaintiff that has been misappropriated.
The same reasoning should apply to local agencies. Once they have sold a security, what property rights do they retain in that security? By forbidding the creation of derivative securities, one wonders if the legislature has in effect taken private property and transferred it to local agencies without just compensation.
