Opinion ID: 77664
Heading Depth: 1
Heading Rank: 3

Heading: Status of RLLP interests under the federal securities laws

Text: 26 The key issue in this case is whether the RLLP interests marketed by Merchant were investment contracts covered by the federal securities laws. Both the Securities Act and the Exchange Act define securities to include investment contracts. 15 U.S.C. §§ 77b(a)(1), 78c(a)(10). An investment contract is 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, 1103, 90 L.Ed. 1244 (1946). 6 The issue in this case is whether the RLLP partners were led to expect their profits solely from the efforts of Merchant. 27 Under this prong of Howey, solely is not interpreted restrictively. The Supreme Court has repeatedly emphasized that economic reality is to govern over form and that the definitions of the various types of securities should not hinge on exact and literal tests. Williamson v. Tucker, 645 F.2d 404, 418 (5th Cir. May 20, 1981). 7 An interest thus does not fall outside the definition of investment contract merely because the purchaser has some nominal involvement with the operation of the business. Rather, the focus is on the dependency of the investor on the entrepreneurial or managerial skills of a promoter or other party. Gordon v. Terry, 684 F.2d 736, 741 (11th Cir.1982). 28 A general partnership interest is presumed not to be an investment contract because a general partner typically takes an active part in managing the business and therefore does not rely solely on the efforts of others. Williamson, 645 F.2d at 422. But consistent with the substance over form principle of Howey, [a] scheme which sells investments to inexperienced and unknowledgeable members of the general public cannot escape the reach of the securities laws merely by labeling itself a general partnership or joint venture. Williamson, 645 F.2d at 423. A general partnership interest may qualify as an investment contract if the general partner in fact retains little ability to control the profitability of the investment. Williamson recognized three situations where this would be the case: 29 (1) [A]n agreement among the parties leaves so little power in the hands of the partner or venturer that the arrangement in fact distributes power as would a limited partnership, id. at 424; 30 (2) [T]he partner or venturer is so inexperienced and unknowledgeable in business affairs that he is incapable of intelligently exercising his partnership or venture powers, id.; or 31 (3) [T]he partner or venturer is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful partnership or venture powers, id. 32 Under Williamson, the presence of any one of these factors renders a general partnership interest an investment contract. Id. The three factors also are not exhaustive. Id. at 424 n. 15. Williamson is ultimately simply a guide to determining whether the partners expected to depend solely on the efforts of others, thus satisfying the Howey test. 33 The SEC argues that the defendants should not receive the benefit of the Williamson presumption against investment contract status because the RLLP interests are more akin to limited partnership interests, which are routinely treated as investment contracts. See Williamson, 645 F.2d at 423. It is true that an RLLP bears some similarity to a limited partnership. An RLLP partner is liable only for the amount of his or her capital contribution, plus the partner's personal acts, and is not exposed to vicarious liability for the acts of other partners or the acts of the partnership as a whole. See Colo.Rev. Stat. § 7-60-115(2)(a), (b). This limitation on liability means that RLLP partners have less of an incentive to preserve control than general partners do. While general partners normally wish to preserve control because their personal assets are at risk, RLLP partners have only their investment at risk if they remain passive, and risk personal liability only if they become active. 34 On the other hand, it is not invariably true that partners in an RLLP, limited liability company (LLC), or limited liability partnership (LLP) lack the ability to control the profitability of their investments. The powers of partners or members in these forms of business can be altered by agreement, and may assume virtually any shape, despite the limitation on liability. As these business forms represent a hybrid between general and limited partnerships, it is unsurprising that courts, even in jurisdictions that apply Williamson to general partnership interests, have reached mixed results concerning whether the Williamson presumption against investment contract status applies to RLLP, LLP, and LLC interests. See, e.g., Robinson v. Glynn, 349 F.3d 166, 174 (4th Cir. 2003); SEC v. Shiner, 268 F.Supp.2d 1333, 1340 (S.D.Fla.2003); Keith v. Black Diamond Advisors, Inc., 48 F.Supp.2d 326, 333 (S.D.N.Y.1999). 35 It is clear in this circuit, however, that an RLLP interest is an investment contract if one of the Williamson factors is present. That is because the powers available in an RLLP cannot exceed the powers available in a general partnership. If anything, an RLLP is somewhat more likely to be an investment contract because of the incentive against exercising control that is produced by the limited liability shield. Therefore, because the presence of one of the three Williamson factors renders even a general partnership interest an investment contract, a fortiori the presence of one such factor would render an RLLP interest an investment contract. Because we need not decide the general applicability of the Williamson presumption to limited liability interests if one of the Williamson factors is present, we begin by analyzing those. 36 In addition to defining the conditions under which a general partnership interest may qualify as an investment contract, Williamson also defines the scope of the investment contract analysis. We analyze the expectations of control at the time the interest is sold, rather than at some later time after the expectations of control have developed or evolved. Williamson, 645 F.2d at 424 n. 14. A post-sale delegation cannot, for example, convert a general partnership into an investment contract, if the partners had control at the beginning. Id. As an evidentiary matter, however, we may look at how the RLLPs actually operated to answer the question of how control was allocated at the outset. See Albanese v. Fla. Nat'l Bank, 823 F.2d 408, 412 (11th Cir.1987) (looking to reality of partners' control over placement of ice machines as evidence of amount of control present at inception); Rivanna Trawlers Unltd. v. Thompson Trawlers, Inc., 840 F.2d 236, 242 (4th Cir.1988) (noting, as evidence of control at inception, that the managers were in fact replaced on two later occasions). 37 Williamson also defines the kind of evidence that is to be considered in determining the expectations of control. Consistent with Howey 's focus on substance over form, we look at all the representations made by the promoter in marketing the interests, not just at the legal agreements underlying the sale of the interest. SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 353, 64 S.Ct. 120, 124, 88 L.Ed. 88 (1943) (In 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.); Gordon, 684 F.2d at 742 ( Williamson requires an examination of the representations and promises made by promoters . . . to induce reliance upon their entrepreneurial abilities.); Koch v. Hankins, 928 F.2d 1471, 1478 (9th Cir.1991). The ultimate issue under Howey is whether the partners expected to rely solely on the efforts of others, and we may rely on the totality of the circumstances surrounding the offering in making this determination. 38
39 The first Williamson factor requires us to analyze whether an agreement among the parties leaves so little power in the hands of the partner or venturer that the arrangement in fact distributes power as would a limited partnership. Williamson, 645 F.2d at 424. In arguing that the partners did not function as limited partners, Merchant relies primarily on the allegedly substantial powers reserved to the partners through the partnership agreement. The partnership materials informed partners that they were expected to take an active role in the business, and the agreement gave partners certain rights and powers. Partners had the ability to call meetings and hold regular quarterly meetings; the ability to participate in committees; the ability to elect the MGP; the ability to remove the MGP for cause upon a certain vote; the ability to inspect books and records; the ability to approve additional funding; the ability to amend the agreement or to dissolve the partnership upon a two-thirds vote; and the exclusive authority to approve obligations exceeding $5000. 40 In the first place, the power to name the MGP was not a significant one in this case. Partners were required to turn in their ballots with their capital contribution, before their partnerships had even been formed. The power therefore reveals nothing about the partners' ability to control the business after their initial investment. Moreover, Merchant was the only option for MGP. The investors had no independent experience in the debt purchasing industry and no way of knowing about alternative MGPs. And, as a result, Merchant was named on all ballots. This power was not significant. 41 The partners also did not have the practical ability to remove Merchant once it was installed as MGP. First, the agreement provided for removal only for cause. This meant that Merchant could not be removed readily, and even in the case of gross incompetence, the partners would have had to litigate any unconsented removal. We have previously found that where removal is only for cause, and the investors have no other ability to impact management, the interest is an investment contract as a matter of law. Albanese, 823 F.2d at 411. 42 Here there were further barriers to removing Merchant. The partnership agreement required a unanimous vote of the partners. The district court found that Merchant could be removed somewhat more easily, with a two-thirds vote of the partners in an individual partnership. Even if a two-thirds vote were enough, we would likely conclude that removal was practically impossible, when combined with the other factors. But we find that the district court clearly erred. The written materials are somewhat ambiguous: the partnership agreement seems to say that a two-thirds vote is enough, while the partnership application says that a unanimous vote is required. Wyer admitted at trial, however, that he told partners a unanimous vote is required. Williamson makes clear that its test applies to the representations made by promoters, not to the strict legal terms of the partnership agreement. See Williamson, 645 F.2d at 424 n. 14. That approach is necessary because the ultimate test under Howey is whether a person is led to expect profits solely from the efforts of the promoter or a third party. Howey, 328 U.S. at 299, 66 S.Ct. at 1103 (emphasis added). For the purposes of Williamson, then, we hold Wyer's representation against him and conclude that a unanimous vote was required. And it is clear that such a vote, combined with removal only for cause and the factors discussed below, rendered Merchant effectively unremovable. Cf. Gordon, 684 F.2d at 741 (in the absence of other Williamson factors, partners in standard joint venture who control by majority vote do not hold investment contracts); Holden v. Hagopian, 978 F.2d 1115, 1120 (9th Cir.1992) (no investment contract where manager could be removed with simple majority vote). 43 Compounding the legal difficulty in removing Merchant, the investors in an individual partnership were geographically dispersed, with no preexisting relationships. Howey found it significant that the interests in that case were offered to persons who reside in distant localities. Howey, 328 U.S. at 299, 66 S.Ct. at 1103. Similarly, in this case, the lack of face-to-face contact among the partners exacerbated the other difficulties and rendered the supposed power to remove Merchant illusory. 8 44 The district court, in finding that the partners in an individual partnership could remove Merchant, relied in part on the fact that RLLP-19 did succeed in removing Merchant as MGP. That event does not shake our confidence that, at the time of the original investment, the partners did not have the practical ability to remove Merchant. By the time RLLP-19 replaced Merchant, Merchant had no interest in opposing removal. It had already recommended liquidation of the RLLPs, which meant that there would be no more debt transactions and thus no further fees for Merchant. Merchant also at that time had an active interest in encouraging removal; the SEC investigation was in progress, and Merchant's defense hinged upon showing that the partners were in control. The removal of Merchant at that stage therefore shows nothing about whether partners could have overcome the cause, unanimity, and dispersion barriers and removed Merchant as manager of a viable going concern. We conclude that the partners in fact lacked the power to remove Merchant. 45 The next power reserved to the partners was the ability to approve all obligations over $5,000. If this power was real, it was a substantial one. The primary business of each partnership was purchasing fractionalized interests in pools of debt that generally exceeded $5,000 in value. However, as shown by Merchant's tenure as MGP, the ballot right also did not give the partners meaningful control over their investment. 46 First, Merchant controlled how much information appeared in the ballots, and did not submit sufficient information for the partners to be able to make meaningful decisions to approve or disapprove debt purchases. 9 Each ballot indicated only the face value of the debt pool, the price per dollar of debt, and the name of the issuer. This information at most gave the partner the price of the pool and the name of the issuer. But unrebutted testimony at trial established that much more data is necessary to make an informed decision about how much a debt pool is really worth. The SEC's expert testified that many factors go into the price that should be paid for a debt pool, in addition to the name of the issuer: the reputation of the issuer, how the accounts were selected from the issuer's pool, the geographic distribution, the terms of the cardholder agreements, how old the debt is, when the last payment was, and whether a payment was ever made, among many others. A former associate of Wyer's, Mitch Bonilla, who also operates a debt purchasing company, testified to the same effect. Finally, the defendants' own witness, Fred Howard, testified that when he buys debt, he considers the last payment date, when the credit card was issued, the history of the account, and the location of the account. 47 The only testimony supporting the sufficiency of the ballot information came from Wyer, who testified that the information contained in the ballots was enough to allow a partner to make an informed decision. But Wyer, besides being an interested witness, was not an authority on the debt purchasing business. He admitted that New Vision had sole responsibility for purchasing debt pools. New Vision only passed on the name of the issuer and the price of the pool to Merchant. Wyer therefore had limited experience in purchasing debt pools, and his testimony does not call into question the convincing testimony of the industry participants, including that of Howard, head of New Vision. Wyer's testimony is also contradicted by the partnership application itself. In an informational section, the application informed partners that [a]mong the many criteria that may be analyzed before a pool of debt is purchased are the following: the number of times the debt has been placed, the state of residency of the customer, and when the debt was incurred. These factors and others should be taken into account in the RLLP's analysis of the potential future recovery of a debt portfolio. The ballots sent to partners contained none of this information, and therefore did not permit partners to make an informed decision about debt purchases. 48 The defendants nevertheless argue (and the district court found) that the ballot gave partners control over the business because Merchant passed on all the information it received to the partners. That does not, however, establish that the ballot process was meaningful. It may have made business sense for Merchant to outsource the debt purchase decisions to New Vision. New Vision certainly had more experience in the business than any of Merchant's principals or any RLLP partners did. But Merchant, having delegated the power to make debt buying decisions, cannot claim that the partners also possessed that power. Because New Vision was in possession of all the relevant information for making debt buying decisions, it and not the partners was responsible for deciding what debt to purchase. 10 The partners had no information with which to make a meaningful decision. 49 Second, besides the fact that the ballots were completely devoid of meaningful information, the partners had no way to force Merchant to heed the results of the process. The SEC's expert testified, based on a sample of balloting data for five partnerships, that Merchant repeatedly abused the balloting process. Merchant purchased more debt than the ballots authorized thirty times; purchased debt before ballots were sent six times; and purchased before the ten-day return period expired seventy-three times. In part because the partners had no ability to remove Merchant, they also lacked the power to force Merchant to abide by the results of the ballots. 50 Finally, the voting process was tilted in Merchant's favor from the very start. The partnership agreement provided that unreturned and unvoted ballots were voted in favor of management. Until October 2002, the ballots had only a signature line, and no no box. Even after that, the ballots always contained insufficient information for investors to make informed decisions. The levers of the voting process were thus in Merchant's hands from the very beginning. It had control over the information in the ballots, did not have any incentive to heed the results of ballots, and was assured of victory in any balloting anyway because of the default rules. Unsurprisingly, no ballot ever went against Merchant's decisions. We therefore conclude that the voting process was a sham and did not give partners meaningful control over their investment. 51 Merchant insists that we are restricted to the terms of the partnership agreement in applying the first Williamson factor, and argues that because the approval authority was included in the terms, the district court had no choice but to conclude that it was meaningful. Merchant relies on Rivanna Trawlers Unltd. v. Thompson Trawlers, Inc., 840 F.2d 236 (4th Cir.1988). That case followed Williamson in concluding that the relevant scope of the investment contract analysis is the expectation at the time of the agreement, rather than post-investment developments that may constitute a later delegation of power. See id. at 240-41 ([T]he mere choice by a partner to remain passive is not sufficient to create a security interest.). Merchant argues that the way the ballot process turned out in practice is no indication of how much power the partners retained at the inception: the partners might simply have decided that Merchant was doing a good job, and had no desire to rectify the problems with the balloting. 52 Our analysis is, however, fully consistent with Williamson. It is true that we are limited to assessing the expectations of control at the inception of the investment. Williamson, 645 F.2d at 424 n. 14. But we are not limited to the terms of the partnership agreement in assessing those expectations of control. Post-investment events can serve as evidence of how much power partners reserved at the inception. See Albanese, 823 F.2d at 412 (11th Cir.1987) (looking to reality of partners' control over placement of ice machines as evidence of amount of control present at inception); Rivanna Trawlers, 840 F.2d at 242 (using actual post-investment replacement of managers as evidence of degree of control at inception). It is difficult to imagine how a court could determine how much power the partners in fact retained under the agreement without looking to some extent at post-investment events. A focus on the bare terms of the legal agreement would also be inconsistent with the substance over form principle of Howey, and would be an invitation to artful manipulation of business forms to avoid investment contract status. See Williamson, 645 F.2d at 418. 53 Here, the operation of the balloting process revealed that the partners from the very beginning lacked power to control Merchant's actions. The balloting process was a sham because the partnership agreement contained no way to force Merchant to conduct a meaningful ballot. The agreement did not require a particular form of ballot, which meant that Merchant could control the information partners received. And the partners had no other influence over Merchant because they lacked a practical removal power. They therefore could not force Merchant to give them a meaningful amount of information or to respect the results of the ballots. Rivanna Trawlers presented an entirely different case. It dealt with a simple joint venture arrangement ruled by majority vote where, [s]ignificantly, on two separate occasions the external managers were replaced and on one occasion one of the promoters ... was removed as managing partner ... and replaced with a management committee of partners. Rivanna Trawlers, 840 F.2d at 242. The general partners in that case always had the power to remove the manager, had substantial control over the business, and made a decision to temporarily delegate some duties to a manager. Here the RLLP partners lacked the ability to remove or control the manager from the inception of the enterprise. Nor did the RLLP partners ever expect to take an active role in managing the business, as the recruiters represented that the partners' duties would be limited to checking a box on the ballots that were periodically sent to them. 54 The remaining powers—the ability to inspect books and records, participate in committees, and hold meetings—did not on their own give the partners the potential to control Merchant's management of the business, and thus do not contribute to the Williamson analysis. We have previously held that the opportunity to inspect ... records and an obligat[ion] to give periodic accountings of income and expenses did not bear on an investor's ability to control the profitability of the investment, and were therefore irrelevant from the perspective of investment contract analysis. Albanese, 823 F.2d at 411 n. 4. Here, the inspection and meeting rights might have helped the partners make more informed decisions, if the partners also had the ability to effectuate those decisions. But because the appointment, approval, and removal powers were illusory, these other powers had no independent salience. 55 The limited extent of the partners' powers makes this case similar to Albanese v. Fla. Nat'l Bank, 823 F.2d 408 (11th Cir. 1987). There the promoter sold ice machines and service contracts to individual investors. Id. at 411. Even though some of the contracts allowed the investors to specify the location of the ice machine or refuse to consent to the ice machine being moved, we concluded that the instruments were investment contracts. Id. at 412. We found that the ability to affect the placement of the ice machines was too insubstantial to preclude investment contract status because the investors still depended on the promoter for most of the crucial business tasks, including finding the locations, contracting with the hotels and other institutions, servicing the machines, and accounting for the profits. Id. In the case of the RLLPs, the partners' control was even less substantial. There was no analogue to the Albanese partners' limited ability to control the location of the ice machines. Merchant retained responsibility for every business decision of consequence; could not be removed; and was not subject to any other form of control by the partners. 56 In Albanese, it was also easier to remove the manager than it was in this case. Though removal was only for cause, the service contract was between a single investor and the promoter. See id. at 412. In addition to the cause requirement, the RLLP partners also faced the dispersion and unanimity barriers. Because the RLLP partners could not remove or otherwise control Merchant, the arrangement in fact distributed power as would a limited partnership, and the first Williamson factor was satisfied. 11 57 B. Were the RLLP partners so inexperienced and unknowledgeable in business affairs that they were incapable of intelligently exercising partnership or venture powers? 58 The second Williamson factor asks whether the partner or venturer is so inexperienced and unknowledgeable in business affairs that he is incapable of intelligently exercising his partnership or venture powers. Williamson, 645 F.2d at 424. If the partner is inexperienced in business affairs, we will find a relationship of dependency on the promoter supporting a finding of investment contract, even if the partner possesses some powers under the arrangement. 59 The district court erroneously applied this factor by looking to the general business experience of the partners. Howey itself focused on the experience of investors in the particular business, not their general business experience. In finding that the orange grove plus service contract was an investment contract, the Court said, [the investors] are predominantly business and professional people who lack the knowledge, skill and equipment necessary for the care and cultivation of citrus trees. Howey, 328 U.S. at 296, 66 S.Ct. at 1102. Similarly, in Albanese, we found it significant that [e]ven though some plaintiffs were experienced businessmen, none of them had any experience in placing, managing, or servicing ice machines. Albanese, 823 F.2d at 412. Williamson is not to the contrary. There the court held that it was clear that the plaintiffs had the business experience and knowledge adequate to the exercise of partnership powers in a real estate joint venture. Williamson, 645 F.2d at 425. The plaintiffs there not only were high corporate executives in a large business, but also had been involved in other similar real estate ventures. 12 60 A focus on experience in the particular business is also more consistent with the Howey test. The ultimate question is whether the investors were led to expect profits solely from the efforts of others. Regardless of investors' general business experience, where they are inexperienced in the particular business, they are likely to be relying solely on the efforts of the promoters to obtain their profits. See also Long v. Shultz Cattle Co., 881 F.2d 129, 134 n. 3 (5th Cir.1989) (interpreting Williamson to focus on the experience in the particular business, not business in general, and noting that any holding to the contrary would be inconsistent with Howey itself). 61 In this case, the SEC presented uncontradicted evidence that the individual partners had no experience in the debt purchasing business. They were members of the general public, and included a railroad retiree, a housewife, and a nurse. Their possible general business experience is not significant in this case. They were relying solely on Merchant to operate the business, as evidenced by the fact that one-hundred percent of the partners chose Merchant as MGP. In Howey, the Supreme Court found an investment contract upon much less evidence of dependence: where only 85% of the orange grove acreage sold was managed by the promoter. Howey, 328 U.S. at 295, 66 S.Ct. at 1101. 62 Merchant contends that the partners' lack of preexisting experience is irrelevant because anyone with general business experience can easily learn to be successful in the debt purchasing business. That argument is not supported by the record, and to the extent the district court relied on it, the court clearly erred. Bonilla, a former associate of Wyer's who operates a debt purchasing company, testified that someone needs two years of experience to be successful in the business. He and the SEC's expert said that a great deal of sophistication is necessary to participate effectively in the business. Their testimony is supported by the indisputably complicated nature of the business. A successful debt purchaser must make sensitive pricing determinations of financial instruments, based on a multitude of fluctuating factors, and also must cultivate relationships with sophisticated financial institutions. 63 The only person who testified that investors could easily learn the business was Wyer, and his testimony is unavailing for two reasons. First, his experience is atypical. He had extensive prior experience and relationships in the financial services industry. He admitted that his prior business involved building relationships with financial services players, which meant that he was both more likely to understand the business and better suited to cultivate the relationships necessary to operating a successful debt purchasing business. Merchant presented no evidence that RLLP partners had similar experience. Moreover, even with Wyer's head start, he was not a successful participant in the debt purchasing industry. The history of Merchant's operation of a debt purchasing business is one of unmitigated failure. Wyer's experience thus showed nothing about how much time is necessary to develop actual expertise in the debt purchasing industry. The second Williamson factor was also present here. 13 64 C. Were the partners so dependent on Merchant's entrepreneurial or managerial ability that they could not replace it or otherwise exercise meaningful powers? 65 The third factor asks whether the partner or venturer is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful partnership or venture powers. Williamson, 645 F.2d at 424. The first Williamson factor analyzes the powers the partners practically retain under the arrangement with the promoter. The third factor provides that, even if the arrangement gives the partners some practical control, the instrument is an investment contract if the investors have no realistic alternative to the manager. See Albanese, 823 F.2d at 412. 66 The SEC admits that Merchant had no special skill in the debt purchasing business. Instead it argues that each individual RLLP partnership had no reasonable alternative to Merchant because the power to remove Merchant as MGP was illusory, and because of the fact that the twenty-eight partnerships' money was tied up in a common pool. We have already discussed the former, so we now focus on the latter. Merchant took the capital contributed by the twenty-eight partnerships, pooled it, and then pooled it further with capital raised by New Vision. 67 The district court rejected the SEC's position, finding that an RLLP that could break away would have reasonable alternatives for new management. Assuming (counterfactually) that an RLLP could break away, we conclude that the district court did not clearly err with respect to the availability of alternatives for new management. Evidence at trial showed that alternative managers approached Merchant expressing a willingness to manage an RLLP. Merchant also showed that New Vision had pooled RLLP funds of its own. It is not beyond the realm of possibility that a breakaway RLLP could have joined another pool that would have allowed it to recoup the returns that were expected at the investment's inception. 68 For a different reason, however, the RLLP partners did not have any realistic alternative to management by Merchant (in addition to having no practical ability to remove Merchant). That is because Merchant effectively had permanent control over each partnership's assets. Merchant pooled the partnerships' assets and invested them in pools of accounts owned by New Vision. Merchant had a service contract with New Vision that gave Merchant a right to the return of debt accounts only in certain limited circumstances, or upon termination of the entire contract. 14 Beasley admitted at trial that the partnerships had no contractual right to demand the return of the debtor accounts. Thus, even if an individual partnership managed to replace Merchant, it would find that its major assets were tied up in fractional share form in a New Vision debt pool. 69 Merchant asserts that the n-select process developed by Merchant with New Vision and EAM allowed partnerships to obtain their shares in large debt pools, and points to RLLP-19 as an example of the n-select process working. The district court agreed, but clearly erred. In the first place, the n-select process did not exist until well after the SEC's investigation had begun, and long after all of the offerings of RLLP interests. Then, once developed, the n-select process was an available means for partitioning debt pools. But it did not provide the partnerships with the right to obtain their debt pools from New Vision. That right was Merchant's alone, and it was circumscribed by the terms of the service contract. 70 RLLP-19 is not a counterexample. By the time RLLP-19 withdrew in 2004, years after the events relevant here, Merchant's sister company, Merchant Management, had taken over New Vision's role in managing the debt pools. In addition, by that point, Merchant had no interest in resisting repossession of the debt pools: the withdrawal of one of the RLLPs both helped its prospects in the SEC investigation and did not hurt it financially, since it had already recommended liquidation and there were no more transaction fees to earn. 71 To show that the partners could repossess their debt portfolios, Merchant (and the district court) relied on testimony from New Vision's head, Fred Howard, to the effect that he would have been willing to allow an individual RLLP to withdraw its debtor accounts using the n-select process, even though the RLLP might not have had a contractual right to do so. Howard's testimony about withdrawal was, however, relevant only to the period after Merchant, along with New Vision and EAM, developed the n-select process. The n-select process was developed after the SEC investigation began, with the apparent purpose of demonstrating to the SEC that the individual partnerships could remove their assets from the pool (thus bolstering the argument that the partnership interests were not securities). Before that time, it was not even possible for an individual RLLP to withdraw its accounts, because there was no way to convert the RLLP's fractional share in the pool into concrete and portable debtor accounts. And all of the RLLP offerings took place before the development of the n-select process. Thus, even if Howard had been willing to remit the debtor accounts, he had no means by which to do so. Howard's testimony therefore did not establish that the partners had a reasonable alternative to Merchant at the time of the initial investment, and the district court clearly erred in concluding otherwise. 72 Another practical limitation on the partners' ability to find an alternative to Merchant was the fact that EAM was in actual possession of the debtor accounts, and had a contract with New Vision that limited the circumstances under which New Vision could repossess them. This means that, even crediting Howard's testimony that he would have been willing to remit debtor accounts in his possession to an individual RLLP, the defendants produced no evidence that EAM would have been willing to return debtor accounts to New Vision that would have enabled Howard to send them to an RLLP. As a result, Howard's testimony did not establish that individual RLLPs had a practical means of obtaining their accounts from EAM, and thus did not establish that they had a reasonable alternative to management by Merchant. 15 73 The RLLPs' lack of a realistic alternative to Merchant was present from the inception of the arrangement between Merchant and the partners. See Williamson, 645 F.2d at 424 n. 14. Wyer admitted that he and Beasley intended from the beginning to pool capital from multiple partnerships. The partnership agreement also expressly gave Merchant the authority to contract with a third-party service. Therefore, from the beginning, RLLP partners had no realistic alternative to management by Merchant, and the third Williamson factor was also present. 74 D. Conclusion: RLLP interests were investment contracts 75 For all of these reasons, the RLLP interests were investment contracts covered by the federal securities laws. The partners had the powers of limited partners, since they had no ability to remove Merchant and the purported authority to approve purchases was illusory. They were completely inexperienced in the debt purchasing industry. Finally, even if they could have removed Merchant (which they could not), they had no realistic alternative to Merchant as manager because their debt pools were in fractional form with a company whose only contractual relationship was with Merchant. 16 76 Because the RLLP interests were investment contracts, and the defendants sold the interests without filing a registration statement, the defendants violated the registration provisions of the securities laws. See SEC v. Continental Tobacco Co., 463 F.2d 137, 155 (5th Cir.1972).