Source: https://supreme.justia.com/cases/federal/us/421/837/
Timestamp: 2019-04-21 14:08:00+00:00

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contractor and sales agent. To acquire a Co-op City apartment, a prospective purchaser must buy 18 shares of Riverbay stock for each room desired at $25 per share. The shares cannot be transferred to a nontenant, pledged, encumbered, or bequeathed (except to a surviving spouse), and do not convey voting rights based on the number owned (each apartment having one vote). On termination of occupancy, a tenant must offer his stock to Riverbay at $25 per share, and, in the unlikely event that Riverbay does not repurchase, the tenant cannot sell his shares for more than their original price, plus a fraction of the mortgage amortization that he has paid during his tenancy, and then only to a prospective tenant satisfying the statutory income eligibility requirements. Under the Co-op City Lease arrangement, the resident is committed to make monthly rental payments in accordance with the size, nature, and location of the apartment. The Securities Acts define a "security" as "any . . . stock, . . . investment contract, . . . or, in general, any interest or instrument commonly known as a security.'" Petitioners moved to dismiss the complaint for lack of federal jurisdiction, maintaining that the Riverbay stock did not constitute securities as thus defined. The District Court granted the motion to dismiss. The Court of Appeals reversed, holding that (1) since the shares purchased were called "stock," the definitional sections of the Securities Acts were literally applicable, and (2) the transaction was an investment contract under the Securities Acts, there being a profit expectation from rental reductions resulting from (i) the income produced by commercial facilities established for the use of Co-op City tenants; (ii) tax deductions for the portion of monthly rental charges allocable to interest payments on the mortgage; and (iii) savings based on the fact that Co-op City apartments cost substantially less than comparable nonsubsidized housing.
Held: The shares of stock involved in this Litigation do not constitute "securities" within the purview of the Securities Acts, and since respondents' claims are not cognizable in federal court, the District Court properly dismissed their complaint. Pp. 421 U. S. 847-858.
negotiable, subject to pledge or hypothecation, conferring voting rights proportional to the number of shares owned, and possibility of appreciating in value. On the contrary, these instruments were purchased not for making a profit, but for acquiring subsidized low-cost. housing. Pp. 421 U. S. 848-851.
(b) A share in Riverbay does not constitute an "investment contract" as defined by the Securities Acts, a term which, like the term "any . . . instrument commonly known as a security,'" involves investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. Here, neither of the kinds of profits traditionally associated with securities were offered to respondents; instead, as indicated in the Information Bulletin, which stressed the "non-profit" nature of the project, the focus was upon the acquisition of a place to live. Pp. 421 U. S. 851-854.
(c) Although deductible for tax purposes, the portion of rental charges applied to interest on the mortgage (benefits generally available to home mortgagors) does not constitute "profits," and, in any event, does not derive from the efforts of third parties. Pp. 421 U. S. 854-855.
(d) Low rent attributable to state financial subsidies no more embodies income or profit attributes than other types of government subsidies. P. 421 U. S. 855.
(e) Such income as might derive from Co-op City's leasing of commercial facilities within the housing project to be used to reduce tenant rentals (the prospect of which was never mentioned in the Information Bulletin) is too speculative and insubstantial to bring the entire transaction within the Securities Acts. These facilities were established not for profit purposes, but to make essential services available to residents of the huge complex. Pp. 421 U. S. 855-857.
POWELL, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART, MARSHALL, BLACKMUN, and REHNQUIST, JJ., joined. BRENNAN, J., filed a dissenting opinion, in which DOUGLAS and WHITE, JJ., joined, post, p. 421 U. S. 860.
The issue in these cases is whether shares of stock entitling a purchaser to lease an apartment in Co-op City, a state subsidized and supervised nonprofit housing cooperative, are "securities" within the purview of the Securities Act of 1933 and the Securities Exchange Act of 1934.
agent for the project. [Footnote 3] As required by the Mitchell-Lama Act, these decisions were approved by the State Housing Commissioner.
To acquire an apartment in Co-op City, an eligible prospective purchaser [Footnote 4] must buy 18 shares of stock in Riverbay for each room desired. The cost per share is $25, making the total cost $450 per room, or $1,800 for a four-room apartment. The sole purpose of acquiring these shares is to enable the purchaser to occupy an apartment in Co-op City; in effect, their purchase is a recoverable deposit on an apartment. The shares are explicitly tied to the apartment: they cannot be transferred to a nontenant; nor can they be pledged or encumbered; and they descend, along with the apartment, only to a surviving spouse. No voting rights attach to the shares as such: participation in the affairs of the cooperative appertains to the apartment, with the residents of each apartment being entitled to one vote irrespective of the number of shares owned.
the initial purchase price plus a fraction of the portion of the mortgage that he has paid off, and then only to a prospective tenant satisfying the statutory income eligibility requirements. See N.Y.Priv.Hous.Fin.Law § 31-a (Supp. 1974-1975).
In May, 1965, subsequent to the completion of the initial planning, Riverbay circulated an Information Bulletin seeking to attract tenants for what would someday be apartments in Co-op City. After describing the nature and advantages of cooperative housing generally and of Co-op City in particular, the Bulletin informed prospective tenants that the total estimated cost of the project, based largely on an anticipated construction contract with CSI, was $283,695,550. Only a fraction of this sum, $32,795,550, was to be raised by the sale of shares to tenants. The remaining $250,900,000 was to be financed by a 40-year low-interest mortgage loan from the New York Private Housing Finance Agency. After construction of the project the mortgage payments and current operating expenses would be met by monthly rental charges paid by the tenants. While these rental charges were to vary, depending on the size, nature, and location of an apartment, the 1965 Bulletin estimated that the "average" monthly cost would be $23.02 per room, or $92.08 for a four-room apartment.
respondents asserted two claims under the fraud provisions of the federal Securities Act of 1933, as amended, § 17(a), 48 Stat. 84, 15 U.S.C. § 77q(a); the Securities Exchange Act of 1934, as amended, § 10(b), 48 Stat. 891, 15 U.S.C. § 78j(b); and 17 CFR § 240.10b-5 (1975). They also presented a claim against the State Financing Agency under the Civil Rights Act of 1871, 42 U.S.C. § 1983, and 10 pendent state law claims.
Petitioners, while denying the substance of these allegations, [Footnote 9] moved to dismiss the complaint on the ground that federal jurisdiction was lacking. They maintained that shares of stock in Riverbay were not "securities" within the definitional sections of the federal Securities Acts. In addition, the state parties moved to dismiss on sovereign immunity grounds.
case was remanded to the District Court for consideration of respondents' claims on the merits.
In view of the importance of the issues presented, we granted certiorari. 419 U.S. 1120 (1975). As we conclude that the disputed transactions are not purchases of securities within the contemplation of the federal statutes, we reverse.
"any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a 'security,' or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. [Footnote 12]"
fall within the ordinary concept of a security."
H.R.Rep. No. 85, 73d Cong., 1st Sess., 11 (1933). The task has fallen to the Securities and Exchange Commission (SEC), the body charged with administering the Securities Acts, and ultimately to the federal courts to decide which of the myriad financial transactions in our society come within the coverage of thee statutes.
In making this determination in the present case, we do not write on a clean slate. Well-settled principles enunciated by this Court establish that the shares purchased by respondents do not represent any of the "countless and variable scheme devised by those who seek the use of the money of others on the promise of profits," Howey, 328 U.S. at 328 U. S. 299, and therefore do not fall within "the ordinary concept of a security."
"[I]n searching for the meaning and scope of the word 'security' in the Act[s], form should be disregarded for substance and the emphasis should be on economic reality."
Tcherepnin v. Knight, 389 U. S. 332, 389 U. S. 336 (1967). See also Howey, supra, at 328 U. S. 298.
"[A] thing may be within the letter of the statute and yet not within the statute, because not within its spirit, nor within the intention of its makers."
"[i]nstruments may be included within [the definition of a security], as [a] matter of law, if on their face they answer to the name or description."
In holding that the name given to an instrument is not dispositive, we do not suggest that the name is wholly irrelevant to the decision whether it is a security. There may be occasions when the use of a traditional name such as "stocks" or "bonds" will lead a purchaser justifiably to assume that the federal securities laws apply.
This would clearly be the case when the underlying transaction embodies some of the significant characteristics typically associated with the named instrument.
In the present case, respondents do not contend, nor could they, that they were misled by use of the word "stock" into believing that the federal securities laws governed their purchase. Common sense suggests that people who intend to acquire only a residential apartment in a state-subsidized cooperative, for their personal use, are not likely to believe that, in reality they are purchasing investment securities simply because the transaction is evidenced by something called a share of stock. These shares have none of the characteristics "that, in our commercial world fall within the ordinary concept of a security." H.R.Rep. No. 85, supra, at 11. Despite their name, they lack what the Court in Tcherepnin deemed the most common feature of stock: the right to receive "dividends contingent upon an apportionment of profits." 389 U.S. at 389 U. S. 339. Nor do they possess the other characteristics traditionally associated with stock: they are not negotiable; they cannot be pledged or hypothecated; they confer no voting rights in proportion to the number of shares owned; and they cannot appreciate in value. In short, the inducement to purchase was solely to acquire subsidized low-cost living space; it was not to invest for profit.
"whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others."
"A cooperative is a non-profit enterprise owned and controlled democratically by its members -- the people who are using its services. . . ."
"People find living in a cooperative community enjoyable for more than one reason. Most people join, however, for the simple reason that it is a way to obtain decent housing at a reasonable price.
However, there are other advantages. The purpose of a cooperative is to provide home ownership, not just apartments to rent. The community is designed to provide a favorable environment for family and community living. . . ."
"The common bond of collective ownership which you share makes living in a cooperative different. It is a community of neighbors. Home ownership, common interest, and the community atmosphere make living in a cooperative like living in a small town. As a rule, there is very little turnover in a cooperative."
App. 162a, 166a. Nowhere does the Bulletin seek to attract investors by the prospect of profits resulting from the efforts of the promoters or third parties. On the contrary, the Bulletin repeatedly emphasizes the "nonprofit" nature of the endeavor. It explains that, if rental charges exceed expenses, the difference will be returned as a rebate, not invested for profit. It also informs purchasers that they will be unable to resell their apartments at a profit, since the apartment must first be offered back to Riverbay "at the price . . . paid for it." [Footnote 19] Id. at 163a. In short, neither of the kinds of profits traditionally associated with securities was offered to respondents.
noted, however, that profit may be derived from the income yielded by an investment as well as from capital appreciation, and then proceeded to find "a expectation of income' in at least three ways." Ibid. Two of these supposed sources of income or profits may be disposed of summarily. We turn first to the Court of Appeals' reliance on the deductibility for tax purposes of the portion of the monthly rental charge applied to interest on the mortgage. We know of no basis in law for the view that the payment of interest, with its consequent deductibility for tax purposes, constitutes income or profits. [Footnote 20] These tax benefits are nothing more than that which is available to any homeowner who pays interest on his mortgage. See § 216 of Internal Revenue Code, 26 U.S.C. § 216; Eckstein v. United States, 196 Ct.Cl. 644, 452 F.2d 1036 (1971).
The Court of Appeals also found support for its concept of profits in the fact that Co-op City offered space at a cost substantially below the going rental charges for comparable housing. Again, this is an inappropriate theory of "profits" that we cannot accept. The low rent derives from the substantial financial subsidies provided by the State of New York. This benefit cannot be liquidated into cash; nor does it result from the managerial efforts of others. In a real sense, it no more embodies the attributes of income or profits than do welfare benefits, food stamps, or other government subsidies.
offices and parking spaces, and its operation of community washing machines. The income, if any, from these conveniences, all located within the common areas of the housing project, is to be used to reduce tenant rental costs. Conceptually, one might readily agree that net income from the leasing of commercial and professional facilities is the kind of profit traditionally associated with a security investment. [Footnote 21] See Tcherepnin v. Knight, supra. But in the present case, this income -- if indeed there is any -- is far too speculative and insubstantial to bring the entire transaction within the Securities Acts.
transaction before us, in which the purchasers were interested in acquiring housing, rather than making an investment for profit, is not within the scope of the federal securities laws.
* Together with No. 74 647, New York et al. v. Forman et al., also on certiorari to the same court.
UHF is composed of labor unions, housing cooperatives, and civic groups. It has sponsored the construction of several major housing cooperatives in New York City.
CSI is a business corporation that has acted as the contractor on several UHF-sponsored housing cooperatives.
Respondents are referred to herein variously as "purchasers," "owners," or "tenants." Respondents do not hold legal title to their respective apartments, but they are purchasers and owners of the shares of Riverbay which entitles them to occupy the apartments. By virtue of their right of occupancy, respondents are usually described as tenants.
A tenant can be forced to move out if he violates the provisions of his "occupancy agreement," which is essentially a lease for the apartment, or if his income grows to exceed the eligibility standards.
To date, every family that has withdrawn from Co-op City has received back its initial payment in full. Indeed, at the time this suit was filed there were 7,000 families on the waiting list for apartments in this cooperative. In addition a special fund of nearly $1 million had been established by small monthly contributions from all tenants to insure that those wanting to move out would receive full compensation for their shares.
As the rental charges increased, the income eligibility requirements for residents of Co-op City expanded accordingly. See n 1, supra.
Respondents maintained that the following material facts were omitted: (i) the original estimated cost had never been adhered to in any of the previous Mitchell-Lama projects sponsored by UHF and built by CSI; (ii) petitioners knew that the initial estimate would not be followed in the present project; (iii) CSI was a wholly owned subsidiary of UHF; (iv) CSI's net worth was so small that it could not have been legally held to complete the contract within the original estimated costs; (v) the State Housing Commissioner had waived his own rule regarding liquidity requirements in approving CSI as the contractor; and (vi) there was an additional undisclosed contract between CSI and Riverbay.
Petitioners asserted that the Information Bulletin warned purchasers of the possibility of rental increases, and denied that it omitted material facts. They also argued that, prior to occupancy all tenants were informed that rental charges had increased. In any event, petitioners claimed that respondents have suffered no damages, since they may move out and retrieve their initial investments in full.
The District Court also dismissed the § 1983 claim finding that the "federal securities allegations represent the only well pleaded underlying basis for jurisdiction under the Civil Rights Act." 366 F.Supp. 1117, 1132 (1973). In view of these rulings the court did not reach the sovereign immunity claims.
The Court of Appeals held that the state agency was independent and distinct from the State itself, and therefore was a "person" for purposes of § 1983, that both the agency and the State had waived immunity under § 32(5) of the Private Housing Finance Law, and that the State had also implicitly waived its immunity by voluntarily participating in the sale of securities, an area subject to plenary federal regulation. See Parden v. Terminal R. Co., 377 U. S. 184 (1964). In view of our disposition of these cases, we do not reach these issues.
The definition of a security in § 3(a)(10) of the 1934 Act, 15 U.S.C. § 78c(a)(10), is virtually identical and, for present purposes, the coverage of the two Acts may be considered the same. See Tcherepnin v. Knight, 389 U. S. 332, 389 U. S. 336, 389 U. S. 342 (1967); S.Rep. No. 792, 73d Cong., 2d Sess., 14 (1934).
While the record does not indicate precisely why the term "stock" was used for the instant transaction, it appears that this form is generally used as a matter of tradition and convenience. See P. Rohan & M. Reskin, Cooperative Housing Law & Practice § 2.01(4) (1973).
With the exception of the Second Circuit, every Court of Appeals recently to consider the issue has rejected the literal approach urged by respondents. See C. N. S. Enterprises, Inc. v. G. & G. Enterprises, Inc., 508 F.2d 1354 (CA7 1975); McClure v. First National Bank of Lubbock, 497 F.2d 490 (CA5 1974), cert. denied, 420 U.S. 930 (1975); Lino v. City Investing Co., 487 F.2d 689 (CA3 1973). See also 1 L. Loss, Securities Regulation 493 (2d ed.1961) ("substance governs, rather than form: . . . just as some things which look like real estate are securities, some things which look like securities are real estate").
Nor can respondents derive any support for a literal approach from Tcherepnin v. Knight, supra, which quoted the Joiner dictum. Indeed, in Tcherepnin, the Court explicitly stated that "form should be disregarded for substance," 389 U.S. at 389 U. S. 336, and only after analyzing the economic realities of the transaction at issue did it conclude that an instrument called a "withdrawable capital share" was, in substance, an "investment contract," a share of "stock," a "certificate of interest or participation in [a] profit-sharing agreement," and a "transferable share."
"the word 'solely' should not be read as a strict or literal limitation on the definition of an investment contract, but rather must be construed realistically, so as to include within the definition those schemes which involve in substance, if not form, securities."
SEC v. Glenn W. Turner Enterprises, 474 F.2d 476, 482, cert. denied, 414 U.S. 821 (1973). We express no view, however, as to the holding of this case.
In some transactions, the investor is offered both a commodity or real estate for use and an expectation of profits. See SEC Release No. 33-5347, 38 Fed.Reg. 1735 (Jan. 18, 1973). See generally Rohan, The Securities Law Implications of Condominium Marketing Programs Which Feature a Rental Agency or Rental Pool, 2 Conn.L.Rev. 1 (1969). The application of the federal securities laws to these transactions may raise difficult questions that are not present in this case.
"Undisputed facts seem to us, however, to establish the conclusion that defendants were not, as a practical matter, offering naked leasehold rights. Had the offer mailed by defendants omitted the economic inducements of the proposed and promised exploration well, it would have been a quite different proposition."
This distinction was critical, because the exploratory drillings gave the investments "most of their value and all of their lure." Id. at 320 U. S. 349. The land itself was purely an incidental consideration in the transaction.
This requirement effectively insures that no apartment will be sold for more than its original cost. Consonant with the purposes of the Mitchell-Lama Act, whenever there are prospective buyers willing to pay as much as the initial purchase price for an apartment in Co-op City, Riverbay will repurchase the apartment and resell it at its original cost. See App. 138a. If, for some reason, Riverbay does not purchase the apartment the tenant still cannot make a profit on his sale. See supra at 421 U. S. 842-843.
Even if these tax deductions were considered profits, they would not be the type associated with a security investment since they do not result from the managerial efforts of others. See Rosenbaum, The Resort Condominium and the Federal Securities Laws -- A Case Study in Governmental Inflexibility, 60 Va.L.Rev. 785, 795-796 (1974); Note, 62 Geo.L.J. 1515, 1524-1526 (1974).
The "income" derived from the rental of parking spaces and the operation of washing machines clearly was not profit for respondents, since these facilities were provided exclusively for the use of tenants. Thus, when the income collected from the use of these facilities exceeds the cost of their operation the tenants simply receive the return of the initial overcharge in the form of a rent rebate. Indeed, it could be argued that the "income" from the commercial and professional facilities is also, in effect, a rebate on the cost of goods and services purchased at these facilities, since it appears likely that they are patronized almost exclusively by Co-op City residents. See Note, 53 Tex.L.Rev. 623, 630-631, n. 38 (1975).
The Court of Appeals quoted the gross rental income received from these facilities. But such figures by themselves are irrelevant, since the record does not indicate the cost to Co-op City of providing and maintaining the rented space.
See generally Miller, Cooperative Apartments: Real Estate or Securities?, 45 B.U.L.Rev. 465, 500 (1965).
Respondents urge us to abandon the element of profits in the definition of securities and to adopt the "risk capital" approach articulated by the California Supreme Court in Silver Hills Country Club v. Sobieski, 55 Cal.2d 811, 361 P.2d 906 (1961). Cf. El Khadem v. Equity Securities Corp., 494 F.2d 1224 (CA9), cert. denied, 419 U.S. 900 (1974). See generally Coffey, The Economic Realities of a "Security": Is There a More Meaningful Formula?, 18 W.Res.L.Rev. 367 (1967); Long, An Attempt to Return "Investment Contracts" to the Mainstream of Securities Regulation, 24 Okla.L.Rev. 135 (1971); Hannan & Thomas, The Importance of Economic Reality and Risk in Defining Federal Securities, 25 Hastings L.J. 219 (1974). Even if we were inclined to adopt such a "risk capital" approach, we would not apply it in the present case. Purchasers of apartments in Co-op City take no risk in any significant sense. If dissatisfied with their apartments, they may recover their initial investment in full. See n 5, supra.
Respondents assert that, if Co-op City becomes bankrupt, they stand to lose their whole investment. But, in view of the fact that the State has financed over 92% of the cost of construction and carefully regulates the development and operation of the project, bankruptcy in the normal sense is an unrealistic possibility. In any event, the risk of insolvency of an ongoing housing cooperative "differ[s] vastly" from the kind of risk of "fluctuating" value associated with securities investments. SEC v. Variable Annuity Co., 359 U. S. 65, 359 U. S. 90-91 (1959) (BRENNAN, J., concurring). See Hannan & Thomas, supra at 242-249; Long, Introduction to Symposium: Interpreting the Statutory Definition of a Security: Some Pragmatic Considerations, 6 St. Mary's L.J. 96, 126-128 (1974).
"offered and sold with emphasis on the economic benefits to the purchaser to be derived from the managerial efforts of the promoter, or a third party designated or arranged for by the promoter,"
"(a) the income from such facilities is used only to offset common area expenses and (b) the operation of such facilities is incidental to the project as a whole and are not established as a primary income source for the individual owners of a condominium or cooperative unit."
Ibid. See also SEC Real Estate Advisory Committee Report 74-91 (1972); Dickey & Thorpe, Federal Security Regulation of Condominium Offerings, 19 N.Y.L.F. 473 (1974).
Several commentators have noted the inconsistency between the SEC's position in the above release and the decision by the Court of Appeals in this case, which the SEC now supports. See Berman & Stone, Federal Securities Law and the Sale of Condominiums, Homes, and Homesites, 30 Bus.Law. 411, 420-425 (1975); Comment, Condominium Regulation: Beyond Disclosure, 123 U.Pa.L.Rev. 639, 65655 (1975); Note, supra, n 20, at 628. In view of this unexplained contradiction in the Commission's position, we accord no special weight to its views. See Reliance Electric Co. v. Emerson Electric Co., 404 U. S. 418, 404 U. S. 426 (1972); Blue Chip Stamps v. Manor Drug Stores, ante at 421 U. S. 746-747, n. 10.
"to conduct a full and complete investigation and study . . . with respect to . . . the problems, difficulties, and abuses or potential abuses applicable to condominium and cooperative housing."
§ 821, 88 Stat. 740, 42 U.S. c. § 3532 (1970 ed., Supp. IV). See also Real Estate Settlement Procedures Act of 1974, 88 Stat. 1724, 12 U.S. c. § 2601 et seq. (1970 ed., Supp. IV); Interstate Land Sales Full Disclosure Act, 82 Stat. 590, 15 U.S. C. §§ 1701-1720.
Besides the Securities Acts claims, respondents also included a vague and conclusory allegation under 42 U.S.C. § 1983 against petitioner New York State Housing Finance Agency. We agree with the District Court that this count must also be dismissed. See n 9, supra. The remaining counts in the complaint were all predicated on alleged violations of state law not independently cognizable in federal court.
MR JUSTICE BRENNAN, with whom MR. JUSTICE DOUGLAS and MR. JUSTICE WHITE join, dissenting.
I dissent. The property interests here are "securities," in my view, both because they are shares of "stock" and because they are "investment contracts."
whether the investment was to be productive of "profits to come solely from the efforts of others."
The record discloses little of the activities of Riverbay Corporation, the owner and operator of Co-op City, as a lessor of commercial and office space. It does appear, however, that revenues well in excess of $1 million per year flow into the corporation from such activities, Appendix in Court of Appeals 361a (hereafter App.), a fact noted by the Court of Appeals. 500 F.2d 1246, 1254 (CA2 1974). Even after deduction of expense -- taxes alone take half of the gross -- the residue could hardly be de minimis, even for an operation as large as Co-op City. Therein lies the patent fallacy of the Court's conclusion that this aspect of the corporation's activities is "speculative and insubstantial." Ante at 421 U. S. 856. The District Court rightly recognized that management by third parties is essential in a project so massive as Co-op City. 366 F.Supp. 1117, 1128 (SDNY 1973). Co-op City residents as stockholders were thus necessarily bound to rely on the management of Riverbay Corporation to produce income in the form of rents from the commercial and office space made an integral part of the project.
charges from government subsidies, the benefit is not for this reason any the less a profit to them. The welfare benefits to which the Court refers, ante at 421 U. S. 855, may also be profits, but those profits lack the essential ingredient of profits present here that "come solely from the efforts of others." Here, the resident investors utilize the efforts of others to obtain government subsidies. Investors in Wall Street who do this every day will be surprised to learn that the benefits so obtained are not considered profits.
"to place the tenant stockholders of a cooperative apartment in the same position as the owner of a dwelling house so far as deductions for interest and taxes are concerned."
S.Rep. No. 1631, 77th Cong., 2d Sess., 51 (1942). This tax benefit constitutes a profit both for the individual homeowners and for the "tenant stockholders of a cooperative apartment." The difference is that the profit of the individual homeowner does not "come solely from the efforts of others," whereas the profit from this source realized by a resident of Co-op City does. Setting up and operating a corporation so as to take advantage of special tax provisions is a project requiring specialized skills. If the arrangements go awry, the residents can find themselves without the hoped-for tax advantages.
See, e.g., Eckstein v. United States, 196 Ct.Cl. 644, 452 F.2d 1036 (1971). Thus, the investors must depend upon the "efforts of others," here Co-op City's management, properly to organize and operate the project to realize the tax advantage for them.
In SEC v. C. M. Joiner Leasing Corp., 320 U. S. 344 (1943), the investment was in oil leases. In Howey, it involved citrus groves. Though taxation was not a factor in the Court's disposition of those cases, each of those investments was of a type offering tax advantages as a principal attraction to the investor. Cunnane, Tax Shelter Investments After the 1969 Tax Reform Act, 49 Taxes 450 (1971). It is no answer that the individual investor could have obtained the same tax advantages by purchasing an entire citrus business or by becoming an independent oil operator. He could, but if he did, his profits from tax advantages would not then "come solely from the efforts of others." It is only when he relies on third parties to produce the profits for him that, as here, the question of investment contract analysis arises.
the two forms of income. [Footnote 2/3] The investor finds no reason to distinguish, for example, between tax savings and after-tax income. Under a statute having as one of its "central purposes" "to protect investors," Tcherepnin, 389 U.S. at 389 U. S. 336, it is obvious that the Court errs in distinguishing among types of economic inducements which have no bearing on the motives of investors. Construction of the statute in terms of economic reality is more faithful to its "central" purpose "to protect investors."
There can be no doubt that one of the inducements to the resident stockholders to purchase a Co-op City apartment was the prospect of profits in one or more of the forms I have discussed. The fact that literature encouraging purchase mentioned some is important, although not conclusive, evidence. See Joiner, supra, at 320 U. S. 353. The Information Bulletins, while not mentioning income from commercial and office space as an advantage of stock ownership, did emphasize the "reasonable price" of the housing, App. 166a, 187a, and they asserted that "every effort" would be made to keep monthly carrying charges low, id. at 174a, 194a. Tax benefits were also discussed as an advantage of ownership, though of course no guarantee of favorable federal and state tax treatment was made. Id. at 175a, 195a.
in SEC v. Variable Annuity Co., 359 U. S. 65 (1959), presented a not irrelevant analogous situation. What was purchased, after all, was expressly labeled "stock." In any event, what was purchased constituted an "investment contract," within Howey, for resident stockholders of Co-op City invested "in a common enterprise with profits to come solely from the efforts of others." They therefore were purchasing securities within the purview of the Securities Act of 1933 and the Securities Exchange Act of 1934.
evidenced by something called a share of stock."
"[i]n the enforcement of an act such as this, it is not inappropriate that promoters' offerings be judged as being what they were represented to be."
320 U.S. at 320 U. S. 353.
While the absence in the case of Co-op City stock of some features normally associated with stock is a relevant consideration, the presence of the attributes that led me to conclude that this stock constitutes an "investment contract," leads me also to conclude that it is a "stock" for purposes of the two statutes. Cf. Affiliated Ute Citizens v. United States, 406 U. S. 128 (1972).
"[I]f ever there was a group of people who need and deserve full and careful disclosure in connection with proposals for the use of their funds, it is this type of group. . . . The housing selection decision is a critical one in their lives. The cost of housing demands a good percentage of their incomes. Their savings are most likely to be minimal, and they probably don't have lawyers or accountants to guide them. Further, they are people likely to put a great deal of credence in statements made with respect to an offering by reputable civic groups and labor unions, particularly when the proposal is stamped with the imprimatur of the state."
federal statutes plainly allow them. See Note, Cooperative Housing Corporations and the Federal Securities Laws, 71 Col.L.Rev. 118 (1971). The SEC, though perhaps tardily, has come to the view that these housing corporations fall within its regulatory authority because the kind of investment involved is a "security" under the statutes. I wholly agree. I would affirm the judgment of the Court of Appeals.
See P. Samuelson, Economics 618-626 (9th ed.1973).
Apparently there is at least a possibility that dividends could be paid to shareholders, but these would really just be partial refunds of money already paid in which was not needed.
See, e.g., P. Samuelson, supra, n 1, at 435; Coase, The Problem of Social Cost, 3 J. Law & Econ. 1 (1960).
See, e.g., 1 L. Loss, Securities Regulation 492-493 (2d ed.1961).
Accordingly, I have no occasion to examine the "risk capital" approach of Silver Hills Country Club v. Sobieski, 55 Cal.2d 811, 361 P.2d 906 (1961), to determine whether that would lead to the same result.
Petitioners in No. 74-647, the State of New York and the New York State Housing Finance Agency, argue that respondents' suit against them is barred by the Eleventh Amendment. The Court finds it unnecessary to deal with this contention, but my conclusion requires that I answer the Eleventh Amendment defense. The Court of Appeals found no Eleventh Amendment bar here, and I am in agreement with this result.
The Housing Finance Agency is a "public benefit corporation" under New York law, N.Y.Priv.Hous.Fin.Law § 43(1) (1962 and Supp. 1974-1975), empowered "[t]o sue and be sued," § 44(1). The agency is authorized to accept funds from the State, the Federal Government, or "any other source," § 44(16), but it also is empowered to issue notes, bonds, or other obligations to obtain financing, §§ 44(7) and 46. Significantly, the State is not liable on the agency's notes or bonds, and such obligations do not constitute debts of the State. § 46(8). The agency is therefore not an "alter ego" of the State; rather, it is an independent body not entitled to assert the Eleventh Amendment. See Cowles v. Mercer County, 7 Wall. 118 (1869); P. Bator, p. Mishin, D. Shapiro & H. Wechsler, Hart & Wechsler's The Federal Courts and the Federal System 690 (2d ed.1973). Compare Matherson v. Long Island State Park Comm'n, 442 F.2d 566 (CA2 1971), and Zeidner v. Wulforst, 197 F.Supp. 23, 25 (EDNY 1961), with Whitten v. State University Construction Fund, 493 F.2d 177 (CA1 1974), and Charles Simkin & Sons, Inc. v. State University Construction Fund, 352 F.Supp. 177 (SDNY), aff'd mem., 486 F.2d 1393 (CA2 1973).
The State of New York, unlike the agency, may assert the Eleventh Amendment, but it has consented to suit.
"With regard to duties and liabilities arising out of this article, the state, the commissioner or the supervising agency may be sued in the same manner as a private person."
N.Y.Priv.Hous.Fin.Law § 32(5) (emphasis added). To be sure, state waiver statutes are to be strictly construed, and they do not necessarily indicate consent to suit in federal court. See Kennecott Copper Corp. v. State Tax Comm'n, 327 U. S. 573 (1946); Ford Motor Co. v. Department of Treasury, 323 U. S. 459 (1945); Great Northern Life Ins. Co. v. Read, 322 U. S. 47 (1944). Nevertheless, the language used in § 32(5) is, in my view, sufficiently broad to permit suit in both state and federal courts.

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§ 821
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