Opinion ID: 184730
Heading Depth: 3
Heading Rank: 1

Heading: The First Reves Factor--Motivation

Text: 17 Reves explains the first factor as follows: 18 First, we examine the transaction to assess the motivations that would prompt a reasonable seller and buyer to enter into it. If the seller's purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a security. If the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller's cashflow difficulties, or to advance some other commercial or consumer purpose, on the other hand, the note is less sensibly described as a security. 19 Reves, 494 U.S. at 66, 110 S.Ct. 945. 20 We have little trouble concluding that Stoiber's main purpose for using the notes points in the direction of their being securities. All but $50,000 of the $495,000 raised from his customers was used for commodities trading in his personal account. Moreover, in reaffirmation statements signed when they declined Stoiber's rescission offers, the customers acknowledged that they knew at the time of the transactions that most of the money would be used for such trading. We think trading in commodities clearly falls under the financ[ing] substantial investments language in Reves. 21 Stoiber predictably disagrees. He argues that he was in the business of selling commodities and that he used the money to purchase inventory which he then attempted to resell at a profit. This he terms a commercial, not an investment purpose. Stoiber's regular business, however, was buying and selling on behalf of his customers; his earnings came not from the difference between the purchase and sale prices of the securities he traded but from commissions. Stoiber's trading in commodities was not part of his brokerage business, and so we cannot say that the commodities trading had a commercial purpose related to that business. 22 But even if we accept the proposition that personal commodities trading was a new business Stoiber planned to operate distinct from his usual brokerage business, use of the note money to buy an inventory of commodities is more akin to rais[ing] money for the general use of a business enterprise than the specific commercial uses cited in Reves such as remedying a cash flow deficit or purchasing a specific asset. Although the line between commercial and investment uses may not always be sharp, Reves' examples appear to distinguish between funding the enterprise generally and funding a discrete component or department of the enterprise. Because the purchase of commodities for reselling was at the core of Stoiber's business of trading in them, his use of the money to buy them is appropriately viewed as a general business use. 23 We also perceive that Stoiber's customers were primarily motivated by the opportunity to earn a profit on their money. The NASD's investigator interviewed the note holders and testified that the customers were providing the money because they knew Mr. Stoiber fairly well and trusted him and were interested in receiving a competitive interest rate. Transcript at 32 (emphasis added). The rates they received--two points over prime--were described by the SEC, possessed of greater expertise than we, as favorable. In re Gerald James Stoiber, 65 S.E.C. Docket at 1100. And the Supreme Court has said a favorable interest rate indicates that profit was the primary goal of the lender. See Reves, 494 U.S. at 67-68, 110 S.Ct. 945 (variable rate designed to stay above rate offered by local financial institutions). The fact that the rates were fixed and not variable does not suggest otherwise. See Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808, 813 (2d Cir.1994) (noting that fixed rate bonds are regulated as securities). 24 Stoiber argues that the customers provided funds because of the personal relationships he had with them. His evidence includes affidavits submitted by the note holders, which state that I believe Mr. Stoiber is an honest and successful business person, and I believe him to be a good risk to repay me the loan; that is the reason why I loaned him this money. This display of trust, however, does not speak to the note holders' original motivations in making the loans. Rather, it speaks to the information available to them when deciding whether the notes involved a tolerable level of risk. The only evidence in the record that sheds light on the customers' motivations indicates that profit in the form of interest was their primary goal. 25 There is also a substantial difference between the goals of the parties in this case and those involved when banks provide character loans or commercial loans for current operations--two types of lending evidenced by notes that are not considered securities under Reves, and which Stoiber argues bear a family resemblance to his notes. Character loans are generally offered in an attempt to cement or maintain an ongoing commercial relationship with the borrower. A loan for current operations allows the borrower to achieve the commercial goal of continuing to operate a business smoothly during a period when cash inflows and outflows do not match up. These purposes do not characterize the notes here. Unlike with a character loan, the note holders were not trying to satisfy a potential or actual customer. Unlike with a loan for current operations, Stoiber was funding his entire endeavor, not just getting past a cash crunch. 26