Opinion ID: 437476
Heading Depth: 2
Heading Rank: 2

Heading: Recent Supreme Court Authority

Text: 70 In United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975), the Supreme Court held that stock held by a tenant in a cooperative apartment building is not a security under the federal Acts. The Court's analysis of the term stock admonished us to attend to substance over form: 71 We reject at the outset any suggestion that the present transaction, evidenced by the sale of shares called stock, must be considered a security transaction simply because the statutory definition of a security includes the words any ... stock. Rather we adhere to the basic principle that has guided all of the Court's decisions in this area: 72 [I]n searching for the meaning and scope of the word 'security' in the Act[s], form should be disregarded for substance and the emphasis should be on economic reality. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967). 73 See also Howey, supra, at 298, 66 S.Ct. at 1102. 74 421 U.S. at 848, 95 S.Ct. at 2058 (footnote omitted). The instruments held by the tenants, the Court concluded, lacked the attributes commonly associated with stock: the right to participate in dividends, negotiability, capacity to serve as collateral, voting rights in proportion to the number of shares owned, and appreciation in value. Consequently, the Court concluded, as a matter of economic reality the shares in issue were not stock within the meaning of the Acts. Id. at 851, 95 S.Ct. at 2060. As we noted earlier, the Supreme Court acknowledged that occasions may arise when the use of a particular name would lead a purchaser justifiably to assume that the federal securities laws apply, adding that [t]his would clearly be the case when the underlying transaction embodies some of the significant characteristics typically associated with the named instrument. Id. at 850-51, 95 S.Ct. at 2059-60. 75 The Court then addressed whether the tenants' shares constituted an investment contract under the Howey test, concluding that they did not. Id. at 851-58, 95 S.Ct. at 2060-63. In the course of its investment contract analysis, the Court observed: 76 In considering these [investment contract] claims we again must examine the substance--the economic realities of the transaction--rather than the names that may have been employed by the parties. We perceive no distinction, for present purposes, between an investment contract and an instrument commonly known as a 'security.'  In either case, the basic test for distinguishing the transaction from other commercial dealings is 77 whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. Howey, 328 U.S. at 301, 66 S.Ct. at 1104. 78 This test, in shorthand form, embodies the essential attributes that run through all of the Court's decisions defining a security. The touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. 79 421 U.S. at 851-52, 95 S.Ct. at 2060 (footnote omitted). 80 The defendants now maintain that the foregoing passages direct that the Howey test is to be applied to all of the defined terms in the Act, including the definition of stock. We do not agree. In its discussion of stock, the Court's admonition to attend to economic reality simply instructed that the label stock is not dispositive if the instrument lacks the traditional elements associated with stock ownership. The Court's analysis was clearly not intended to, and did not, apply the Howey test to stock. Nor did the Court direct that an economic reality test be applied to stock other than to determine whether, as a matter of economic reality, the instrument was in fact stock as that term has historically been understood. The label of the instrument may be pierced in order to determine whether it indeed bears the indicia of stock ownership. In this case the district court has done so, holding that the stock which Ruefenacht received contains all the attributes mentioned by the Forman Court as indicating that the transaction did involve a security. App. at 220. 81 In the second portion of the Forman Court's analysis--addressing the definition of investment contract--the Court's reference to economic reality prefaced the application of the Howey test. That analysis was entirely proper: the Howey test has for some 40 years been the appropriate metric for gauging whether, as a matter of economic reality, a business relationship constitutes an investment contract. In no sense was the Court instructing that the Howey test also be applied to stock. Had the Court intended that result, of course, it would have done so. Nor was the Court holding that the same economic reality test applies to the definitions of stock and investment contract. To the contrary, in assessing the economic reality of a stock transaction, we pierce the label and look to the underlying attributes of the instrument. In evaluating an investment contract, we apply the Howey test. Thus, Forman undermines rather than supports the defendants' position. 82 Subsequent Supreme Court authority is also unavailing. In International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1981), the Court held that a non-contributory, compulsory pension plan was not an investment contract. In part the Court reasoned that ERISA supplanted any necessity for coverage by the securities Acts. 439 U.S. at 569-70, 99 S.Ct. at 801-02. The Court expanded on this theme in Marine Bank v. Weaver, 455 U.S. 551, 102 S.Ct. 1220, 71 L.Ed.2d 409 (1982), holding that a certificate of deposit insured by the FDIC did not constitute a security. Again the Court reasoned that the FDIC supplanted any necessity for coverage under the securities laws. 455 U.S. at 558, 102 S.Ct. at 1224. No such regulatory schemes apply in the sale-of-business context. Nor does the language in those opinions speak in favor of applying the investment-contract test to stock. Indeed, the Court's analysis in Weaver paralleled that of Forman: the Court first ascertained that a certificate of deposit is not a note or withdrawable capital share, and only then turned to whether the separate agreement was an investment contract under the Howey test. 455 U.S. at 556-60, 102 S.Ct. at 1223-25. Weaver therefore reinforces our interpretation of Forman.