Securities and Exchange Commission v. Murphy

Stephen Murphy (defendant) founded Intertie in December 1972. Intertie typically purchased cable systems, with respect to which it entered into sales and lease-back transactions with limited partnerships pursuant to which Intertie operated the systems. With the help of a securities broker, Intertie sold interests in these limited partnerships to investors for cash and promissory notes. Intertie’s ability to meet its financial obligations to the limited partnerships and their investors depended on the success of the Intertie-operated cable systems and Intertie’s ability to sell new limited-partnership interests. According to Murphy, the purpose of this program was to raise money for the cable systems at a reasonable cost. In 1975, the Securities and Exchange Commission (SEC) sued Murphy and others alleging they violated § 5(a) of the Securities Act of 1933 by not registering the limited partnerships. Murphy responded, among other things, that the limited partnerships were exempt from registration pursuant to the private-offering exemption in § 4(2) of the act and the private-placement exemption in SEC Rule 146. Murphy’s exemption arguments depended on treating each of the roughly 30 limited partnerships as separate entities whose sales of limited-partnership interests constituted relatively small individual offerings. However, the SEC contended that Intertie’s program—from which Intertie received roughly $7.5 million from more than 400 investors—should be considered as a single integrated offering. Relatedly, the SEC contended that Intertie, rather than the individual limited partnerships, should be considered the issuer of the limited-partnership interests. The SEC asserted that Intertie’s scheme thus did not meet several requirements for exemption as a private offering or private placement because (1) Murphy did not disclose Intertie’s financial information to the offerees, (2) there were too many offerees, and (3) the offering was large in dollar terms. The district court granted summary judgment to the SEC with respect to Murphy’s failure to register the limited partnerships.