Mordaunt v. Incomco
| Decision Date | 09 September 1982 |
| Docket Number | No. 78-3499,78-3499 |
| Citation | 686 F.2d 815 |
| Parties | Fed. Sec. L. Rep. P 98,805 Monte R. MORDAUNT, an individual, and Dorothy Mordaunt, an individual, Plaintiffs/Appellees, v. INCOMCO, a partnership, and Myron J. Smith and Phillip M. Smith, general partners, Defendants/Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Leonard Toboroff, Toboroff, Gottesman & Lovell, New York City, argued, for defendants/appellants; Donald J. Farley, Paul S. Penland, Moffatt, Thomas, Barrett & Blanton, Boise, Idaho, on brief.
William F. Neilsen, Hamblen, Gilbert & Brooke, Spokane, Wash., for plaintiffs/appellees.
Appeal from the United States District Court for the District of Idaho.
Before SKOPIL and POOLE, Circuit Judges, and HALBERT *, Senior District Judge.
Incomco, a partnership engaged in the brokerage of commodities futures contracts, and its two general partners 1 appeal a judgment of the district court awarding damages, interest and attorneys' fees to Monte and Dorothy Mordaunt.
The Mordaunts opened discretionary commodities trading accounts with Incomco. When their accounts proved unsuccessful, the Mordaunts withdrew their money. They then filed suit alleging violations of federal and state securities laws. After a bench trial, the district judge found that Incomco had violated federal and state securities laws and entered judgment for the Mordaunts. This appeal followed. We reverse.
Incomco first argues that the district court lacked subject matter jurisdiction because the Commodities Exchange Act, 7 U.S.C. §§ 1-24, vests exclusive jurisdiction over actions arising out of "accounts, agreements ... and transactions involving contracts of sale of a commodity for future delivery" in the Commodities Futures Trading Commission. Id. § 2. We disagree. In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, the Supreme Court held that the 1974 amendments to the Commodities Exchange Act did not extinguish a private cause of action for persons injured by a violation of the act, a holding inconsistent with a finding that jurisdiction over the Mordaunts' claims rest exclusively in the Commission. --- U.S. ----, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982). "Securities"
The Mordaunts were entitled to prevail in the district court only if the discretionary comodities trading accounts they opened with Incomco were "investment contracts" and therefore "securities" within the meaning of 15 U.S.C. § 77b. Incomco argues that the district court erred in so holding. We agree. The district court did not have the guidance of our decision in Brodt v. Bache & Co., 595 F.2d 459 (9th Cir. 1978), filed after entry of judgment in this case. Brodt is dispositive and therefore the judgment of the district court must be reversed.
The district court held that discretionary commodities trading accounts are subject to regulation as "investment contracts" under 15 U.S.C. § 77b. An investment contract is defined as a "contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." SEC v. W. J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1102-03, 90 L.Ed. 1244 (1946). See International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 558, 99 S.Ct. 790, 795-96, 58 L.Ed.2d 808 (1979). The element of this definition that will generally be absent from a commodities futures trading account is the requirement of a common enterprise.
A common enterprise is "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.' " Brodt v. Bache & Co., 595 F.2d at 460 (quoting SEC v. Glenn W. Turner Enterprises, 474 F.2d 476, 482 n.7 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973)). Some courts require a pooling of investments, termed horizontal commonality, in order to have a common enterprise. E.g., Hirk v. Agri-Research Council, Inc., 561 F.2d 96, 101 (7th Cir. 1977). This circuit, however, requires only vertical commonality: that the investor and the promoter be engaged in a common enterprise. Brodt v. Bache & Co., 595 F.2d at 460-461; Hector v. Wiens, 533 F.2d 429, 433 (9th Cir. 1976).
In Brodt, this court rejected a claim that a discretionary commodities trading account constituted a common enterprise under circumstances that we find undistinguishable from those of this case. We stated:
(T)he success or failure of Bache as a brokerage house does not correlate with individual investor...
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