Opinion ID: 720633
Heading Depth: 3
Heading Rank: 1

Heading: Expectation of Profits

Text: 29 The SEC argues that the profits test requires only that the investor could lose his investment, or that the value of his return could fluctuate, quoting Guidry v. Bank of LaPlace, 954 F.2d 278, 284 (5th Cir.1992), and that, although the death benefit that an investor gets from a viatical settlement is in a fixed dollar amount, the profitability of the investment can vary because of the uncertain interval of time between the date of investment and the date of the insured's death. The insured's life span affects profitability in two ways: First, the annualized rate of return depends upon the length of the investment. Second, unless there has been a waiver of premiums pursuant to the terms of the insurance policy, the amount of the investor's outlay for premiums depends upon the insured's life span. 30 Arguing against the profits test as set forth in Guidry--which, by the way, is unclear about whether possible loss and fluctuating return are sufficient or merely necessary conditions--LPI maintains that under United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 (1975), profits must be derived from either capital appreciation resulting from the development of the initial investment ... or a participation in earnings resulting from the use of the investors' [318 U.S.App.D.C. 309] funds, neither of which obtains with respect to viatical contracts. At oral argument the SEC asserted that even under this formulation viatical settlements satisfy the profits test of Howey because they appreciate in value--presumably because the insured's death draws nearer with the passage of time, thus increasing the present value of the death benefit. The Commission's reading of Forman, however, starkly omits the requirement that the capital appreciation result from the development of the initial investment. Id. The increased value of a viatical contract requires no development at all; it depends entirely upon the inexorable passage of time and the inevitable death of the insured. 31 On the other hand, the definition in Forman was apparently intended only to summarize the cases that had by then come before the Court--not, as LPI implies, to preempt future development upon the basis of further experience. In full context, this is what the Court said: 32 By profits, the Court has meant either capital appreciation resulting from the development of the initial investment, as in [SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 349, 64 S.Ct. 120, 122, 88 L.Ed. 88 (1943) ] (sale of oil leases conditioned on promoters' agreement to drill exploratory well), or a participation in earnings resulting from the use of investors' funds, as in Tcherepnin v. Knight, [389 U.S. 332, 339, 88 S.Ct. 548, 554-55, 19 L.Ed.2d 564 (1967) ] (dividends on the investment based on savings and loan association's profits). In such cases the investor is attracted solely by the prospects of a return on his investment. Howey, supra, [328 U.S.] at 300 [66 S.Ct. at 1103-04]. By contrast, when a purchaser is motivated by a desire to use or consume the item purchased--to occupy the land or to develop it themselves, as the Howey Court put it, ibid.--the securities laws do not apply. 33 421 U.S. at 852-53, 95 S.Ct. at 2060-61. If the examples of Joiner and Tcherepnin were exhaustive, then the concept of profits would exclude, for example, the return on an investment in a residential mortgage or in any form of consumer loan--neither of which ordinarily involves capital appreciation or earnings resulting from the use of the investors' funds. Both activities are undertaken in the expectation of profits, however, at least as that term is commonly understood. 34 The Court's general principle we think, is only that the expected profits must, in conformity with ordinary usage, be in the form of a financial return on the investment, not in the form of consumption. This principle distinguishes between buying a note secured by a car and buying the car itself. 35 The asset acquired by an LPI investor is a claim on future death benefits. The buyer is obviously purchasing not for consumption--unmatured claims cannot be currently consumed--but rather for the prospect of a return on his investment. As we read the Forman gloss on Howey, that is enough to satisfy the requirement that the investment be made in the expectation of profits.