Case Name: SECURITIES AND EXCHANGE COMMISSION, Appellee, v. LIFE PARTNERS, INCORPORATED and Brian D. Pardo, Appellants
Court: United States Court of Appeals for the District of Columbia Circuit
Jurisdiction: District of Columbia
Decision Date: 1996-12-20
Citations: 322 U.S. App. D.C. 189
Docket Number: Nos. 95-5364, 96-5018 and 96-5090
Parties: SECURITIES AND EXCHANGE COMMISSION, Appellee, v. LIFE PARTNERS, INCORPORATED and Brian D. Pardo, Appellants.
Judges: Before: WALD, GINSBURG, and HENDERSON, Circuit Judges.
Reporter: United States Court of Appeals for the District of Columbia Circuit
Volume: 322
Pages: 189–192

Head Matter:
102 F.3d 587
SECURITIES AND EXCHANGE COMMISSION, Appellee, v. LIFE PARTNERS, INCORPORATED and Brian D. Pardo, Appellants.
Nos. 95-5364, 96-5018 and 96-5090.
United States Court of Appeals, District of Columbia Circuit.
Dec. 20, 1996.
ON APPELLEE’S PETITION FOR REHEARING
Before: WALD, GINSBURG, and HENDERSON, Circuit Judges.

Opinion:
ORDER
PER CURIAM:
Upon consideration of appellee's petition for rehearing, filed on August 19, 1996, and of the response thereto, it is ordered that the petition be denied.
A statement of Circuit Judge GINSBURG, joined by Circuit Judge HENDERSON, is attached.
A statement of Circuit Judge WALD dissenting from the denial of rehearing is also attached.
GINSBURG, Circuit Judge
with whom
Circuit Judge KAREN LeCRAFT HENDERSON joins:
In its petition for rehearing the Securities and Exchange Commission betrays a profoundly, if not a willfully, mistaken understanding of the Court's opinion. We think it appropriate expressly to reject the Commission's misstatement of the case in two respects.
First, the Commission says that the Court declared an "artificial bright-line" rule that an investment is not a security "if the efforts of promoters or others on which investors rely occur just before, rather than after, the investors commit their money." Indeed, according to the Commission, the Court holds that all pre-purchase efforts are "irrelevant." While that position may have been the one originally advanced by Life Partners, Inc., it is not the one taken by the Court.
In order to qualify as a security, an investment must have been made in an enterprise the profits of which are derived from the efforts of others. SEC v. W.J. Howey, 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946). To the extent that we established any rule in applying the "efforts of others" test, we held only "that [1] prepurchase services cannot by themselves suffice to make the profits of an investment arise predominantly from the efforts of others, and that [2] ministerial functions should receive a good deal less weight than entrepreneurial activities." 87 F.3d 536, 548. We examined both "LPI's pre-purchase services as a finder-promoter and its largely ministerial post-purchase services," and we concluded that the two in combination were not enough to establish that the investors' profits flow predominantly from the efforts of others. Id. Nothing in our application of the Howey test can reasonably be construed to suggest that pre-purchase efforts are "irrelevant."
Absent even one entrepreneurial post-purchase service — and the SEC could identify none — there simply is no on-going common enterprise involved in owning an interest in an insurance contract from which the profit depends entirely upon the mortality of the insured. Id. Indeed, the Commission concedes in its petition that "in other cases where pre-purchase efforts were considered, those courts also found significant post-purchase efforts." See, e.g., Rodriguez v. Banco Central Corp., 990 F.2d 7, 10 (1st Cir.1993) (interest in undeveloped land not security without post-purchase managerial efforts by promoter); Noa v. Key Futures, Inc., 638 F.2d 77, 79-80 (9th Cir.1980) (same with respect to silver bars); McCown v. Heidler, 527 F.2d 204, 211 (10th Cir.1975) (interest in undeveloped land would not have been security but for "substantial improvements pledged by" promoters).
The second matter worthy of comment is the totally unsubstantiated assertion in the Commission's petition for rehearing that the Court has "place[d] in question the applicability of the federal securities laws to . certain asset-backed securities," including mortgages and securitized interests in commercial real estate, which account for a vast amount of investment capital. Having leveled this astonishing charge, however, the Commission does not favor us with a single example of a formerly regulated instrument that will now escape SEC scrutiny. In fact, the Commission admits that "many asset-backed securities may be encompassed under other definitional terms in the securities laws . and some might have sufficient post-purchase efforts" to make LPI distinguishable.
In contrast to an LPI viatical settlement, a mortgage pool must be managed on a continuing basis. Among the post-purchase services that should easily meet the "efforts of others" test as we have interpreted it are: collecting late mortgage payments, initiating foreclosures, structuring and monitoring work-outs, negotiating concessions in order to avoid refinancing, and arranging for a secondary market. In the case of commercial real estate, the property must be kept in compliance with an array of tax, safety, and environmental laws; it must be advertised, leased, re-leased, improved, repaired, cleaned, heated, and perhaps resold. It seems fair to say, therefore, that the Commission's concern with the effect of this decision is, at the least, overblown.