Brodt v. Bache & Co., Inc.
| Decision Date | 13 November 1978 |
| Docket Number | No. 76-1763,76-1763 |
| Citation | 595 F.2d 459 |
| Parties | Robert T. BRODT and Nancy J. Brodt, his wife, Plaintiffs-Appellants, v. BACHE & CO., INC., a Delaware Corporation, Commonwealth Commodities Corp., an Arizona Corporation, John Bergman and Jane Doe Bergman, his wife, Robert Plenge and Jane Doe Plenge, his wife, Randy Thomas and Jane Doe Thomas, his wife, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Jack E. Evans (argued), Phoenix, Ariz., for plaintiffs-appellants.
Arthur P. Greenfield (argued), Snell & Wilmer, Phoenix, Ariz., for defendants-appellees.
Appeal from the United States District Court for the District of Arizona.
Before CHOY and SNEED, Circuit Judges, and KELLEHER, * District Judge.
This case presents a question of whether a discretionary commodities trading account is an investment contract and therefore a security within the meaning of and subject to the registration requirements of the Securities Act of 1933, 15 U.S.C. § 77a, Et seq. The District Court held that such an account was not an investment contract. We affirm.
During 1974 appellee Bergman, a registered representative of appellee Bache & Co., a national brokerage house, solicited appellants to open a commodities trading account. Although appellants knew little about the commodities market, they were persuaded by Bergman to sell their entire stock portfolio and invest the proceeds in a discretionary commodities account with Bache. Appellants sold the stock at a loss and followed Bergman's instructions to execute a form prepared by Bache to deposit the stock sale proceeds in an account with a local savings and loan association. Registered representatives of Bache were authorized to withdraw funds at their discretion from the account to finance commodities transactions, but were not required to notify the investor prior to the transactions. Notwithstanding Bergman's representations that appellants would reap sizable profits from the investments in commodities futures, appellants discovered after Bergman left Bache's employ that all of their money had been lost, and that Commonwealth Commodities Corporation, the company through which Bache had purchased the commodity option contracts, was insolvent.
On April 28, 1975, appellants filed a four-count complaint in the United States District Court for the District of Arizona, alleging violations of several provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, the Commodity Exchange Act, negligence, breach of warranty, and misrepresentation. Of particular import to the instant appeal is count two, wherein appellants alleged a violation of the registration requirements of the 1933 Act, 15 U.S.C. § 77e(a)(1) and (c).
On December 9, 1975, appellants filed a motion for partial summary judgment as to count two. Appellees opposed this motion and also affirmatively moved to dismiss count two. The District Court denied Brodt's motion for partial summary judgment and granted Bache's motion to dismiss count two. An amended order filed February 19, 1976, clarified the District Court's holding that "a discretionary commodities account is not a security within the meaning of the Securities Act of 1933." Concluding that the order of dismissal "involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation," 28 U.S.C. § 1292(b), the District Court certified the question for an interlocutory appeal. On March 26, 1976, we agreed to hear this interlocutory appeal.
The term "security" is defined in Section 2(1) of the 1933 Securities Act, 15 U.S.C. § 77b(1), to mean, Inter alia, any investment contract. The now-classic definition of an investment contract was formulated by the Supreme Court in SEC v. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244 (1946): "an investment of money in a common enterprise with profits to come solely from the efforts of others." The Supreme Court has recently restated that "the touchstone (of an investment contract) is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others." United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 (1975).
The first and third elements of the investment contract test are met in the instant case. Brodt clearly made an investment of money. Accepting appellants' allegation that the account was totally discretionary, in that Bache could and did make trades without receiving the appellants' specific permission, the element of receiving return solely from the efforts of others is also satisfied. The crucial factor in the instant case is whether a common enterprise exists.
This Court has defined "common enterprise" as one in which the "fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties." SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 n. 7 (9th Cir. 1973) (citations deleted). This definition is inconsistent with the strict pooling requirement imposed by the Seventh Circuit. In Hirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir. 1977) that circuit explicitly interpreted their prior decision in Milnarik v. M-S Commodities, Inc., 457 F.2d 274 (7th Cir. 1972) as requiring a pooling of investments in order to have a common enterprise. Both these cases then rejected the argument that a discretionary commodities account is a security. This pooling of interests, usually combined with a pro-rata sharing of profits, has been characterized as Horizontal commonality.
Our definition rejects any requirement of horizontal commonality in favor of requiring only Vertical commonality. Hector v. Wiens,533 F.2d 429 (9th Cir. 1976). The concept of vertical commonality requires that the investor and the promoter be involved in some common venture without mandating that other investors also be involved in that venture. Id. at 433. In Hector this court found that a factual question existed as to whether a farmer, a feedlot operator and a bank were involved in a common enterprise. The court indicated that if Both the farmer and the bank were dependent upon the success of the feedlot operation for the success of their investments, a common enterprise would exist.
The Fifth Circuit also seems to have adopted the concept of vertical commonality. In SEC v. Koscot Interplanetary,...
To continue reading
Request your trial
-
Christensen Hatch Farms, Inc. v. Peavey Co.
...in the absence of pooling or other horizontal relationship among a broker's customers and, hence, is not a security. Brodt v. Bache & Co., 595 F.2d 459, 461 (9th Cir. 1979). ...
-
Curran v. Merrill Lynch, Pierce, Fenner and Smith, Inc.
...security, as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934." 497 F.2d at 520.7 In Brodt v. Bache & Co., Inc., 595 F.2d 459 (9th Cir. 1979), the Ninth Circuit recognized its prevailing definition of "common enterprise" as one in which the fortunes of the inves......
-
U.S. v. Holtzclaw
..."the fortunes of the investor [are linked] only to the efforts of the promoter." Id. (emphasis added) (citing Brodt v. Bache & Co., 595 F.2d 459, 461 (9th Cir.1978)). 11. See Maura K. Monaghan, Note, An Uncommon State of Confusion: The Common Enterprise Element of Investment Contract Analys......
-
DeWit v. Firstar Corp.
..."Strict vertical commonality" requires that the fortunes of investors be tied to the fortunes of the promoter. See Brodt v. Bache & Co., 595 F.2d 459, 461 (9th Cir.1978). Revak, 18 F.3d at 88. Similarly, in defining a "common enterprise" solely in terms of vertical commonality, the Ninth Ci......
-
Skadden Discusses Digital Asset Insider Trading Case
...and the promoter be engaged in a common enterprise.” Mordaunt v. Incomco, 686 F.2d 815, 817 (9th Cir. 1982) (citing Brodt v. Bache & Co., 595 F.2d 459, 460-61 (9th Cir. 1978)) (citations omitted). 3 See Defendants’ Memorandum of Law in Support of Their Motion for Summary Judgment, SEC v. Ri......
-
Securities Fraud
...1994). 160. See id. 161. See id. 162. SEC v. Goldfield Deep Mines Co., 758 F.2d 459, 463 (9th Cir. 1985) (quoting Brodt v. Bache & Co., 595 F.2d 459, 460 (9th Cir. 1978)). 163. See id. 164. See, e.g. , SEC v. R.G. Reynolds Enters., Inc., 952 F.2d 1125, 1130–31 (9th Cir. 1991). 165. See, e.......
-
Securities Fraud
...need not rise and fall together”). 170. SEC v. Goldfield Deep Mines Co., 758 F.2d 459, 463 (9th Cir. 1985) (quoting Brodt v. Bache & Co., 595 F.2d 459, 460 (9th Cir. 1978)). 171. See id. 2022] S ECURITIES F RAUD 1363 strict vertical approach. 172 The Fifth and Eleventh Circuits have adopte......
-
Table of Cases
...Tube Corp., 853 F.2d 1540 (10th Cir. 1988): 27.3(2) Blitzer v. United States, 684 F.2d 874 (Ct. Cl. 1982): 29.2(2) Brodt v. Bache & Co., 595 F.2d 459 (9th Cir. 1978): 28.2(1) Campbell v. Comm'r, 943 F.2d 815 (8th Cir. 1991): 26.8(1)(b), 29.5(5)(b) Cochise Coll. Park, Inc., In re, 703 F.2d 1......
-
Financial Contracting With the Crowd
...the relationship between the investor and the promoter is enough to satisfy the common enterprise element. See Brodt v. Bache & Co., 595 F.2d 459, 460, 462 (1978). These need not concern us, however.61. In SEC v. Lauer, Judge Richard Posner found that a scheme involving only one investor co......