Opinion ID: 330580
Heading Depth: 2
Heading Rank: 1

Heading: Were the Interests Securities?

Text: 7 In order for the federal or state securities law to apply to these transactions, the interests involved must have been securities. These interests were fractional interests in oil and gas leases where the seller of the interests would conduct oil exploration operations on the leased land. Both the federal and California statutes include a fractional interest in an oil or gas lease within the definition of a security. 15 U.S.C. § 77(b)(1); Corporations Code § 25008(a). 1 This circuit has not determined under what circumstances such a fractional interest is a security under federal law. Those other circuits which have considered the issue have held such an interest to be a security when the seller or a third party will conduct drilling operations on the land subject to the leases and it is from these operations that the buyer expects to derive his profit. Nor-Tex Agencies, Inc. v. Jones, 482 F.2d 1093 (5th Cir. 1973); Gilbert v. Nixon, 429 F.2d 348 (10th Cir. 1970). 8 Further, this court has established a test for determining when an interest is an investment contract and, therefore, a security. SEC v. Glen W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir. 1973). An interest in an enterprise is an investment contract where the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which effect the success or failure of the enterprise. Applying that test it is clear that the oil interests sold in this case are investment contracts and therefore securities under the law of this circuit. While Parvin and the other investors had some rights with regard to these operations including the right to decide whether to continue drilling past the casing point, the major decisions which would effect success or failure were made by the Davises. They selected the leases to be invested in, the sites to be drilled, and made the decision to commence drilling at any site. In addition they directed the drilling and exploration operations. Under the Turner test it is clear that the degree of control possessed by Parvin was not adequate to make the interest other than an investment contract. 2 9 California law appears equally clear. That state's courts have continually held that fractional interests in oil or gas leases coupled with the seller's obligation to conduct an exploration or drilling operation are securities. Oil Lease Service, Inc. v. Stephenson, 162 Cal.App.2d 100, 327 P.2d 628 (1958). The district court was in error in holding that the interests sold were not securities under federal and California law. 10