Opinion ID: 315788
Heading Depth: 1
Heading Rank: 2

Heading: Whether the Plaintiff's Property Interest was in Law a Security

Text: 38 Appellants' contention is that plaintiff's percentage interest in the 1968 real estate venture failed to meet the statutory definitions contained in the Securities Acts, state and federal. The Securities and Exchange Act of 1934 3(a)(10) defines the term broadly and extensively. 7 39 The trial court considered this interest to be plainly an investment contract and we agree, notwithstanding defendants' extensive argument that it is not. 40 The Supreme Court in S.E.C. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1964) considered contracts to sell citrus groves to be investment contracts with management obligations on the seller. It gave effect to prior state court definitions and broadly defined the term as 41 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, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise. 42 328 U.S. at 299, 66 S.Ct. at p. 1103. 43 The Court characterized its definition as a flexible rather than a static principle, one capable of embracing a wide variety of schemes. 328 U.S. at 299, 66 S.Ct. 1100. 44 This Howey definition is now a standard one. The only possible escape for the defendants is the fact that the profits in an investment contract ordinarily originate 'solely from the efforts of others.' Defendants point out that Andrews was to be a consultant in the development. This argument carries little weight. Andrews' role as a consultant was nil. It existed in name only. He had no managerial status. The Blues regarded and treated him as an outsider devoid of management right-- as one who should be satisfied to have his money returned. 45 Our cases in appraising this relationship have had regard for substance rather than form. Continental Marketing Corp. v. S.E.C., 387 F.2d 466 (10th Cir. 1967); Woodward v. Wright, supra. See Vincent v. Moench, 473 F.2d 430 (10 Cir. 1973), and see Commercial Iron & Metal Co. v. Bache & Co., 478 F.2d 39 (10th Cir. 1970); Gilbert v. Nixon, 429 F.2d 348 (10th Cir. 1970). 46 We hold therefore that the contract reference to Andrews as a consultant did not deprive the relationship of its character as an investment contract. The predominant aspect was investment looking to profits rather than management with attendant risk taking. Defendants must now bear the consequences of having relegated Andrews to an insignificant position. 47 We must also reject the defendants' argument that the Rule 10b-5 claim fails for lack of proof of scienter. Certainly intent in the odious or malicious sense is not required. The requisite knowledge of falsity is adequately evidenced. See Mitchell v. Texas Gulf Sulphur Co., 446 F.2d 90 (10th Cir. 1971). 48 Defendants' argument that they made no omissions nor materially false and misleading statements to the plaintiff must also fail. The trial court's finding that 'relevant information repeatedly requested by (plaintiff) was not supplied and, most assuredly, the information concealed from him was material' is sustained by the evidence. The detailed information concerning the nature and effects of the 1971 merger was actionable material non-disclosure. 49