COM/S-86-047-JL

8-1005-698-2

STATE OF MINNESOTA

OFFICE OF ADMINISTRATIVE HEARINGS

FOR THE MINNESOTA DEPARTMENT OF COMMERCE

In the Matter of Caucus Distributors, Inc.,

and Campaigner Publications, Inc., New

York Corporations, Independent Democrats DISCOVERY ORDER

for LaRouche, an Unincorporated Association,

Ron Fredman, Ronald R. Bettag, Paul Greenberg,

and all other Persons and Organizations acting

in Concert with the Named Respondents.

The above-captioned matter is pending before the undersigned

Administrative Law Judge pursuant to hearing Orders issued by the Commissioner

of the Minnesota Department of Commerce. Patrick J. Moran, Moran & Pilger,

P.A., Attorneys at Law, 1221 Lamar, Suite 517, Houston, Texas 77010, has

appeared on behalf of the above-named Respondents. Jerome L. Getz, Special

Assistant Attorney General, 1100 Bremer Tower, 7th Place and Minnesota Street,

St. Paul, Minnesota 55101, has appeared on behalf of the Commissioner.

Based upon the arguments and briefs of counsel and upon all the files,

records and proceedings herein, and for the reasons set forth in the

Memorandum accompanying this Order,

IT IS HEREBY ORDERED:

1. That each organizational Respondent shall forthwith provide the

Commissioner with a list of all the persons identified in Item I who since

September 1, 1983, made loans to them which are represented by a note, or

other promise of repayment by any Respondent (including all persons who

purchased a note), and ther other information specified in Item 1, provided

that no persons must be disclosed who are officers, directors, employees,

independent contractors, members or volunteer workers for the organzational

Respondents, unless the required listing for any Respondent is less than 25

persons.

2. In the alternative, each said Respondent shall forthwith provide the

Judge, under seal, with a list of all the persons identified in Item I who,

since September 1, 1983, made loans to them which are represented by a note,

or other promise of repayment by any Respondent (including all persons who

purchased a note). The Judge shall then provide the Commissioner with the

names of 30 persons from each list which are chosen at random (exclusive the

names already provided). Upon receipt of notice of the persons selected, the

Respondents shall provide the Commissioner with the other information

specified in Item 1.

3. The information specified in Item 2 shall be submitted to the

Commiss I oner when the Respondents submit the inf ormation requi red under

paragraph 1, or when notified of the random selection made by the Judge under

paragraph 2.

4. That this Order is stayed for Independent Democrats for LaRouche until

Its Di smi Ss a I MotIon on preemption grounds is decided.

5. That the information gained through discovery in this case is subject

to the fol lowing PROTECTIVE ORDER:

a. That the Commissioner and his employees, investigators

and counsel shall make no use of any information gained

through discovery in this case other than such use as is

necessary to prepare, try and deci de the issues in this

case. Any other disclosure, publication, or dissemination

is prohi bited In the absence of further order of the

Adm in istrative Law Judge or a court of law.

b. This Protective Order applies to all discovery

previously obtained by the Commissioner and to any future

inf ormat I on obtained th rough d iscovery which is c I a Imed to

be conf I den t i a I under the F irs t Ame ndmen t , and applies to

any document in this proceeding which refers to or restates

information gained through discovery.

C. The Commissioner shall retain all confidential

information gained through discovery in a separate file

that is not generally accessible except to his counsel and

which is clearly identified as containing confidential data.

d. Before any confidential data is revealed to any person

by the Commissioner's counsel, that person shall be advised

of the terms of this Order.

e. The names of all persons who are given access to

confidential data for the purposes set out in a. shall be

entered on a log retained by the Commissioner's counsel.

f. When a final decision is reached in this case. all

confidential information and copies thereof and a copy of

the Commissioner's log shall be returned to the party which

produced them.

Dated this 6th day of October, 1986.

JON L. LUNDE

Administrative Law Judge

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MEMORANDUM

In this proceeding, the Respondents have been charged with numerous

violations of Minn . Stat. 80A.01 et seg., which govern the s a I e of

securities in this state. Generally speaking , the Comm i Ss I oner has alleged

that the Respondents sold unregiste red secur iti es wi thou t a license and in

ConnectIon with those sal es acted in a fraudulent , deceptive or misleading

manner. The Respondents have denied the charges made. In their view, the

promissory notes they Issued in return for loans made by Minnesota resi dents

are not secur Iti es governed by the statutes, and even if they are, that they

are exempt from registration.

In or der to pr e par e f or hearing , the Comm I s s I oner ha s r eque s t e d an Or der

compelling the Respondents to provide the following information:

Item 1. The names and addresses of all persons residing in, or

whose mail ing addresses are located within the State of

Minnesota to whom offers or sales of promissory notes or

any other securities have been made; the dates of said

offers or sales, the amounts thereof, the type or types of

promissory notes or any other securities involved, if there

are more than one, and the name of the person making such

offer or sale. (Interrogatory No. 10).

Item 2 . All writings of every kind and description, including

handwritten notes, in the possession of Respondents

concerning loans by Minnesota residents to any of the

Respondents during the period from September 1, 1983, to

April 30, 1986. (Subpoena Request).

item 3. The names of the shareholders of Campaigner Publications,

Inc. (CPI). (Interrogatory No. 13).

The Respondents argue that the discovery sought by the Commissioner is

protected under the First Amendment and that no order requiring disclosure

should be issued. The Respondents' objections raise important issues which

require careful consideration.

Freedom of association for the purpose of advancing ideas and airing

grievances is protected from encroachment by the states under the First and

Fourteenth Amendments. Sates v. City of Little Rock, 361 U.S. S16, S22-23

( 1 960) - Since the compelled disclosure of a person's affiliation with groups

engaged in the advocacy of ideas may have a chilling effect upon that person's

freedom of association, the courts have recognized that a vital relationship

exists between the freedom of association and privacy in one's associations.

NAACP v. State of Alabama, 357 U.S. 449, 462 (1958). In that case the court

stated t at the inviolability of a person's privacy in group associations may

be indispensable to the preservation of the freedom of association granted by

the First Amendment, "particularly where a group espouses dissident beliefs."

Hence, membership lists are entitled to protection under the First Amendment.

See also Buckley v. Valeo, , 424 U..S. 1 (1975); Pollard v. Roberts, 283 F.Supp.

248 (E.D. Ark.), aff'd, 393 U.S. 14 (1968); United States v. Citizen State

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Bank, 612 F.2d 1091 (8th Cir. 1980). Under the First Amendment, the greatest

soi i c ituce must be pa id to those thre at s aimed at suppress ing an attempted

exercise of political rights. U.S. v. Carolene Products Co., 304 U.S. 144,

152-53, n.4 (1938).

The right to privacy in one's political associations and beliefs is not

absolute. It will yield to a subordinating interest of the state that is

compelling in nature. NAACP v. Alabama, 357 U.S. at 464. A significant

encroachment on First Amendment rights cannot be justified by a mere showing

of some legitimate governmental interests or a mere suspicion that a law has

been violated. Adolph Coors Co. v. Wallace, 570 F.Supp. 202, 209 (N.D.Cal.

1983); Buckley v. Valeo supra; Pollard v. Roberts, supra. For a state agency

to require disclosure, in addition to establishing a compelling interest, the

state must show that the disclosure sought bears a substantial relation to the

state's interests and represents the least restrictive means for accomplishing

the state's objectives. NAACP v. Alabama, 357 U.S. at 464; Adolph Coors v.

Wallace, 570 F.Supp. at 208. It is also necessary to weigh the government's

interest in disclosure against the likelihood of injury to an association or

its members if the desired information is released. Adolph Coors Co. v.

Wallace, 570 F.Supp. at 208. See also, Matter of Agerter, 353 N.W.2d 908, 913

(Minn. 1984).

The First Amendment rights discussed above apply when the state is seeking

to subpoena information during the course of an investigation or when it seeks

to obtain that information in the discovery process. Adolph Coors Co. v.

Wallace, supra; Marrese v. American Academy of Orthopaedic Surgeons, 706 F.2d,

1488 (7th Cir. 1983); Savola v. Webster, 644 F.2d 743 (8th Cir. 1981).

State's Interest in obtaining Disclosure

The state's securities laws have several interrelated purposes. One is to

regulate the merits of securities offered for sale in the state. State v.

Investors Security Corporation, 209 N.W.2d 405 (Minn. 1973). Another is to

investments and trading. The laws are also designed to

assure confidence in

prevent deception and save credulity and ignorance from imposition. Northwest

Bancorporation v. Benson 6 F.Supp. 704 (D.Minn. 1934), aff'd. 292 U.S. 606.

Hence, the securities laws of this state have been broadly construed to

protect Minnesota citizens from an endless variety of get-rich-quick schemes

calculated to despoil credulous individuals of their savings. State v. Gopher

Tire & Rubber- Co., 146 Minn. 52, 177 N.W. 937 (1920).

In Local 1814 v. Waterfront Commission of New York Harbor, 667 F.2d 267

(2nd. Cir. 1981), the court found that the Waterfront Commission investigating

accusations that certain members of a union had been coerced into making

donations to the union's Political Action Committee had a compelling interest

in obtaining the names of employees who had recently authorized such payroll

deductions from their employers. The compelling interest being its interest

in fighting crime on the waterfront and preventing the extraction of money by

coercive means. The state's interest in regulating securities is no less

compelling than the Commission's interest in that case. Since the state has a

compelling interest in regulating securities, it must be determined whether

the precise materials sought in this case are relevant to the charges made.

If they are, the rights and interests of the parties must be balanced to

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determine whe ther the pub I I c interest over r I des the F irSt Amendment rights of

the Respondents a;: ot hers, and whe the r the di s covery request is framed In the

least inc Ius Ive a-: intrusive manner possi b I e . Adolph Coors Co. v. Wallace,

570 F.2d at 208. -cf Savola v. Webster, 644 F.2d at 746-747.

Relevancy

Wh en F i r s t Amendment r i gh t s a r e a s s e r t e d , th e s t a t e' s in t e r e s t In

d I s c Io s u r e w I 1 1 t e r e 1 a t I v e Iy we ak un I e s s t h e in f orma t I on I t s s e ek s to ob t a In

goe s to t h e h e a r t of t h e ma t t e r or I s c r u c I a I to t h e c a s e . Adolph Coors Co.

v . Wallance , 5 7 0 F 2 d a t 2 08. ln such cases the state must demonstrate a high

degree of relevancy of the information sought. Official curiosity is

insufficient. Id. Thus, in Pollard v. Roberts, 283 F.Supp. at 57, the court

refused to require the Republican Party to disclose the identities of party

contributors and the amounts of their contributions in connection with an

investigation of suspected vote buying by a state prosecuting attorney. The

court found that the identity of party contributors was not reasonably

relevant to the state's investigation and concluded that the disclosure of the

information was not sufficiently cogent and compelling to outweigh the

legitimate and constitutionally protected interests of the Republican party

and its contributors in having that information remain private.

In this case, the state has alleged that Respondents have failed to

Minnesota Law. In addition, it has alleged that the sales were made by

persons having no license to sell securities, contrary to the state securities

laws, and that various fraudulent, misleading or untruthful acts or omissions

were made by the Respondents in connect with the sales that were made. The

Respondents' position is that the notes they issued are not securities, or if

they are, they are exempted from the provisions of Chapter 80A as commercial

paper arising out of current transactions or as isolated sales for purposes of

Minn. Stat. 80A.15, subd. l(g) and subd. 2(a). There are no Minnesota cases

which have discussed the circumstances when a note is not a security for

purposes of Minn. Stat. 80A.14, subd. 18. However, other courts have

considered the issue. They have usually adopted a commercial-investment test

or a risk-capital test to make that determination. Those tests require a

consideration of a number of factors, including:

I . Whether the transaction involved consumer financing.

2. Whether the note is secured by a mortgage on a home.

3. Whether the note is a short-term note secured by a lien on

small business.

4. How a reasonable businessman in the commercial world would

characterize the instrument.

5. The use to which the proceeds of the note are put.

6. Whether profits come from the efforts of others.

7 The number of notes issued, the number of payees to whom

they were issued, and the dollar amounts of the

transactions.

8. Whether they are demand notes or other long-term notes.

9, How the parties characterize the notes.

10. How the notes were marketed or characterized by the persons

issuing them.

I I . Whether the person making the loan is within the class of

persons the Legislature was trying to protect under the law.

12. The investors who were solicited by the issuers of the

notes.

13. Whether the investor has contributed risk capital subject

to the entrepreneurial or managerial efforts of the seller

or issuer.

14. The existence and extent of collateralization.

In Item 1, the Commissioner seeks to obtain the names and addresses of all

persons in Minnesota who were offered or sold promissory notes or other

securities by the Respondents, the dates of the offers or sales, the amounts,

and the types of promissory notes or other securities involved, and the name

of the person making the offer or sale. That Interrogatory goes to the heart

of this case and the isolated sales exemption claimed by the Respondents. In

order to determine if the notes are securities and if that exemption is

applicable, the Department must, at a minimum, know how many securities

(notes) were issued or sold to Minnesota residents and whether those notes

were commercial in nature or involved an investment, using the criteria set

forth above.

Prior to August 1. 1985, the isolated sales of securities were excluded

from the statutory registration requirements under section 80A.15, subd.

2 ( a ) . The exemption applied only if no more than five securities were sold

'during any period of 12. consecutive months', and where the sales were made

by the issuer, the exemption applied only if the issuer reasonably believed

that al I buyers were purchasing the securities for investment and the

securities were not advertised for sale to the general public or through a

program of general solicitation by various means including mail or

telephone. Since the Respondent is claiming that the sales it made, if any,

were isolated sales, it will be necessary to determine the number of sales

that were made during any period of 12 consecutive months, whether the sellers

reasonably believed that all buyers were purchasing for investment (rather

than resale) and whether the securities sold were advertised for sale to the

general public or through a program of general solicitation by means of mail

or telephone. Moreover, the circumstances surrounding the sale or issuance of

each note must be considered to determine if it is a security. Al I these

factors are highly relevant. Indeed, information regarding them is crucial to

ter Augus t I 1 985, the statute was amended to permit no more than

ten isolated sales.

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the state's case. Therefore, the Judge Is persuaded that the Department has

demonstrated a compe I 1 Ing need to obta in the names and addresses of those

persons in Minnesota to whom notes or other securities have been sold since

August 31 , 1983. Likewise, during the same period of time, the Department

must be able to obtain the business records, notes and correspondence in the

Respondents' possession which pertain to those loans.

Injury Caused by-the Discovery Requested

The Respondents have argued that their First Amendment rights, as well as

the rights of their members and contributors, wi I I be substantially burdened

by the disclosures sought by the department. When a party claims that it will

suffer injury due to the compelled disclosure of membership information or the

identities of its "contributors", its claims must be carefully scrutinized to

determine whether disclosure will have a chilling affect on the freedom of

association. The party objecting to discovery on First Amendment grounds is

not required to establish a "chil I" with certainty, but need only show some

probability that harassment might fol low from the disclosure. Adolph Coors

Co. v. Wallace, supra at 208, n. 18, and 209-10. Thus, in Buckley v. Valeo,

supra, the United States Supreme Court said that unduly strict requirements of

proof of potential harassment could impose a heavy burden on small

organizations and they must be allowed sufficient flexibility in proving an

Injury. In this case, Respondents have shown that Lyndon LaRouche and his

followers have been the subject of a substantial amount of criticism and

adverse publicity from the Democratic Party. Respondents have not submitted

Affidavits showing the experiences of their members or contributors in

professional and social setting when their association has become known, and

there is little evidence of specific incidents of past or present harassment

of members or contributors resulting from their associational ties. However,

a serious claim of infringement has been made. The persons who have made

loans to the Respondents will undoubtedly be contacted by departmental

investigators or its counsel , and those persons may be summoned to depositions

or to the hearing. This could breed apprehension in the minds of those

contributors that their support of the Respondents will be the subject of

public inquiry, investigation and litigation. As a result, they may cease to

provide financial assistance, and if their experience becomes known, others

may choose not to provide financial assistance or support to the Respondents.

Moreover, the policies of tAe LaRouche organizations are not popular ones and

the disclosure of the identities of their supporters could have an effect on

the supporters future employment or appointment to public office. Therefore,

the Judge is persuaded that the claims of a chilling effect are sufficient to

require that the Department establish a compelling need to obtain the

information sought.

Balance of Interests

Although the First Amendment privacy rights of the Respondent

organizations and their members and supporters may be burdened by the

disclosure sought, the state's interest in obtaining disclosure outweighs

those privacy interests. If the state cannot obtain the requested

information, its ability to regulate the securities of political associations

generally will be severely crippled if not destroyed, and in this case, it is

likely that the charges will have to be dismissed. Therefore, it is concluded

that the state's interests outweigh those asserted by the Respondents.

Although there is some reason to question the extent to whi ch the Po I it I c a!

representations of any group should be reviewed for accuracy, it has not been

argued t hat pol It I c a I assoc I atIons are exempt from the secur it I es act, and the

on Iy de c ision bear Ing on that Issue suggests that no such exempti on exists.

cf. SEC v. World Radio Mission Inc. 544 F. 2d 535 (1st Ci r . 1 976) . The

ormation sought goes to the essence of the charges In this case and must be

disclosed if the state is to carry out Its statutory responsibilities.

Moreover, the states action is not based on a mere suspicion of impropriety or

official curiosity, On the contrary. it is based on a bona fide complaint.

Therefore, it is concluded that the interests of the state outweigh those

asserted by Respondents. This Is most true as to those persons who have made

loans to the Respondent primarily as an investment or for profit motives, but

is less true for members and supporters of the principles espoused by Lyndon

LaRouche whose loans may have been made primarily for political purposes.

Nonetheless, the states interests, in balance, also outweigh those of the

latter group.

Least inclusive and Intrusive Discovery

When the state has a compelling interest in obtaining discovery of

information that is protected under the First Amendment, the only discovery

authorized is the least inclusive and narrowest inquiry necessary to

accommodate that interest. Adolph Coors Co. v. Wallace, supra, and Savola v.

Webster, supra. Moreover, it has been suggested that discovery proceed in

stages, where possible, to avoid unnecessary disclosures. Marrese v. American

Academy of orthopaedic Surgeons, supra. Thus in Local 1814 v. The Waterfront

of Commission of New York Harbor, supra, the court modified the Waterfront

Commission subpoena of the names of all longshoremen who had recently

authorized payroll deductions to a union's Political Action Committee to

permit only a ten percent random sampling. Initially, a similar approach was

taken by the Judge in this case and the Respondents were ordered to disclose a

limited number of names of individuals who loaned money to the Respondents.

The Department argues that obtaining the names of Minnesota residents making

loans to the Respondents in a piecemeal fashion is unworkable because the

Respondent may produce the names of activists whose factual situations are

least likely to fit the profile of an investor and who, it was implied, might

be hostile toward him. Although the discovery originally ordered by the Judge

did not result in identifying any individuals in the same position as Mrs.

Mitchell, the Judge is not persuaded that a wholesale disclosure of all the

contributors should be ordered at this time. Instead, disclosure options

should be fashioned which identify persons 1 like Mrs. Mitchell, rather than

political activists who work for or who are members of the Respondent

organizations. The Respondents themselves have not made any suggestions on

how that should be accomplished and have not indicated, even in general terms,

the numbers of loans that may have been made by Minnesota residents.

Since the Commissioner is most directly concerned with the persons who

have made loans evidenced by notes and who are not political activists; and

since the privacy interests of those activists are more compelling than those

of persons like Mrs. Mitchell, who are more concerned with a return on their

investment, the Judge believes that the following Order is appropriate:

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I Th at each organizat Iona I Respondent s ha II prov I de the Commiss I one r

with a list of all the persons identified in Item I who, since

September I, 1 983, made loans to them whi ch are rep re s ented by a

note, or other promise of repayment by any Respondent ( IncIuding a II

persons who purchased a note) and the other information specified In

Item 1 , provided t hat no persons must be disc lose d who are officers ,

directors . employees , Independent contr a ctors , members or volunteer

workers for the organzational Respondents , un Ies s the requi red

listing for any Respondent is less than 25 persons.

2 In the a I ternative, each Respondent sha II prov I de the Judge, under

sea I, wi th a list of a I I the persons I dent I f ied in Item I who, since

September 1 , 1 983, made loans to them whi ch are represented by a note

or other promise of repayment by any Respondent (including all

persons who purchased a note) . The Judge shall then provide the

Commissioner with the names of 30 persons from each list which are

chosen at random (exclusive the names al ready provided) . Upon

receipt of noti C2 Of the persons selected , the Respondents shal 1

provide the Commissioner wi th the other information specified In Item

I .

3. The information specified in Item 2 shal I be submitted to the

Commissioner when the Respondents submi t the Inforn. ation supplied

under paragraph 1 , or when noti f ied of the random selection made by

the Judge under paragraph 2 .

The Respondents CPI shal I not be requi red to d I sclose the names of Its

shareholders at this time. Although the Department has argued that all the

Respondent organizations are under common control such that the notes they

have issued should be aggregated for purposes of determining whether or not

the statutory mi ni mum number of sal es was exceeded at any t i me , I t wi I 1 not be

necessary to di sclose those names unless I t later appears that no violation

existed apart from aggregation.

Protective Order

Under the Rul es of Ci vi I Procedure for Di str ict Courts , Rul e 26. 03 , an

order may be issued to protect a person or party from annoyance,

embarrassment , or oppress ion , whi ch might fol low from the disclosure of

information. Those rules may be applied in administrative proceedings under

Minn. Rule 1400.6600 ( 1 985) and Minn . Stat . 1 4. 60 , subd . 2 ( 1 984) . The

privacy interests of a party include the privacy of the i r pol i tical

associations, and is a proper subject of a Protective Order under the civil

rule and the statute ci ted above. Settle Times Co. v. Rhinehart, 104 S.Ct.

2199 2208, n21 81 , L.Ed.2d. 17 (1986). Based on the holding in that case

and the discussion in this Memorandum, it is concluded that a Protective Order

must be issued in this case to avoid dissemination or publication of the

identities of persons who have made loans to the Respondents and the

identities of persons who are employees, workers, activists, founders,

directors, or owners of the Respondent organizations. The Protective Order

should cover all information gained by the Complainant through the discovery

process and may be modified only upon further order.

J . L . L

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