Legal Document

494 U.S. 56 110 S.Ct. 945 108 L.Ed.2d 47 Bob REVES, et al., Petitionersv.ERNST & YOUNG. No. 88-1480. Argued Nov. 27, 1989. Decided Feb. 21, 1990. Rehearing Denied April 16, See 1092, 1840. Syllabus In order to raise money support its general business operations, the Farmers Cooperative of Arkansas and Oklahoma (Co-Op) sold uncollateralized uninsured promissory notes payable on demand by holder. Offered both Co-Op members nonmembers marketed as an "Investment Program," paid a variable interest rate higher than that local financial institutions. After filed for bankruptcy, petitioners, holders notes, suit in District Court against Co-Op's auditor, respondent's predecessor, alleging, inter alia, it had violated antifraud provisions Securities Exchange Act 1934—which regulates certain specified instruments, including "any note[s]"—and Arkansas' securities laws intentionally failing follow generally accepted accounting principles would have made insolvency apparent potential note purchasers. Petitioners prevailed at trial, but Appeals reversed. Applying test created SEC v. W.J. Howey Co., 328 293, 66 1100, 90 L.Ed. 1244, determine whether instrument is "investment contract" determination instruments were "notes," court held not under 1934 or law, statutes' therefore did apply. Held: The issued fall "note" category are "securities." Pp. 60-76. (a) Congress' purpose enacting was regulate investments, whatever form they name called. However, used variety settings, all which involve investments. Thus, per se, must be defined using "family resemblance" test. Under test, presumed security unless bears strong resemblance, determined examining four factors, one judicially crafted list categories securities. If sufficiently similar listed item, decide another should added same factors. application rejected, since hold "security" meets designed entirely different make 1933 Act's enumeration many types superfluous inconsistent with intent laws. 60-67. (b) family resemblance approach, issue They do resemble any enumerated nonsecurities. Nor does examination relevant factors suggest treated nonsecurities: (1) them capital, purchasers bought earn profit interest, so most naturally conceived investments enterprise; (2) there "common trading" offered broad segment public; (3) public reasonably perceived from advertisements no countervailing led reasonable person question this characterization; (4) risk-reducing factor Acts unnecessary, escape federal regulation if lower court's argument nature very uncharacteristic unpersuasive, instrument's liquidity eliminate risk associated 67-70. (c) Respondent's contention within statutory exception . has maturity time issuance exceeding nine months" rests premise statute limitations suits collect notes—which due immediately—is determinative notes' "maturity," term Acts. "maturity" Congress could intended applied differently transactions depending accident State's law happens 70-72. (d) Since, matter words far plain regard exclusion interpreted accordance exception's purpose. Even assuming create bright-line rule exempting coverage less months' duration ground short-term safe need apply, exemption cover here, necessarily short terms, just easily years decades into future. 72-73. 856 F.2d 52 (CA8 1988), reversed remanded. MARSHALL, J., delivered opinion unanimous respect Part II, Parts I, III, IV, BRENNAN, BLACKMUN, STEVENS, KENNEDY, JJ., joined. concurring opinion, post, p. 73. REHNQUIST, C.J., part dissenting part, WHITE, O'CONNOR, SCALIA, joined, 76. John R. McCambridge, Chicago, Ill., petitioners. Michael Lazerwitz, Washington, D.C. Security Com'n, amicus curiae, special leave Court. Matson respondent. Justice MARSHALL 1 This case presents "securities" meaning § 3(a)(10) 1934. We conclude are. 2 * agricultural cooperative that, approximately 23,000 members. Although uninsured, adjusted monthly keep nonmembers, marketing scheme Program." Advertisements appeared each newsletter, read part: "YOUR CO-OP more $11,000,000 assets stand behind your Investment Federal [sic ] insured Safe Secure available when you it." App. 5 (ellipses original). Despite these assurances, bankruptcy 1984. At filing, over 1,600 people worth total $10 million. 3 class Arthur Young firm audited statements (and predecessor respondent Ernst Young). alleged, failed audit, specifically valuation major assets, gasohol plant. claimed effort inflate net Co-Op. maintained properly plant audits, purchased because been apparent. On basis allegations, petitioners well 4 trial their state claims, receiving $6.1 million judgment. appealed, claiming either A panel Eighth Circuit, agreeing issues, Co. Reves, (1988). granted certiorari address issue, 490 1105, 109 3154, 104 1018 (1989), now reverse judgment Appeals. II A. requires us Act. Section our starting point: 6 "The 'security' means note, stock, treasury bond, debenture, certificate participation profit-sharing agreement oil, gas, other mineral royalty lease, collateral-trust certificate, preorganization subscription, transferable share, investment contract, voting-trust deposit, security, put, call, straddle, option, privilege group index (including therein based value thereof), entered national exchange relating foreign currency, general, commonly known 'security'; in, temporary interim for, receipt warrant right subscribe purchase, foregoing; shall include currency draft, bill exchange, banker's acceptance months, exclusive days grace, renewal thereof likewise limited." 48 Stat. 884, amended, 15 U.S.C. 78c(a)(10). 7 fundamental undergirding "to serious abuses largely unregulated market." United Housing Foundation, Inc. Forman, 421 837, 849, 95 2051, 2059, 44 621 (1975). defining scope market wished regulate, painted brush. It recognized virtually limitless human ingenuity, especially creation "countless schemes devised those who seek use others promise profits," 299, 1103, 1244 (1946), best way achieve goal protecting investors define 'the terms definition commercial world ordinary concept security.' " supra, U.S., 847-848, S.Ct., 2058-2059 (quoting H.R.Rep. 85, 73d Cong., 1st Sess., 11 (1933)). attempt precisely cabin Acts.1 Rather, enacted encompass might investment. 8 not, however, "intend provide remedy fraud." Marine Bank Weaver, 455 551, 556, 102 1220, 1223, 71 409 (1982). Accordingly, "[t]he task fallen Commission (SEC), body charged administering Acts, ultimately courts myriad society come statutes." 848, 2059. discharging duty, we bound legal formalisms, instead take account economics transaction investigation. See, e.g., Tcherepnin Knight, 389 332, 336, 88 548, 553, 19 564 (1967) (in interpreting "security," "form disregarded substance emphasis economic reality"). 9 commitment realities entail case-by-case analysis every instrument, however. Some obviously Landreth Timber Landreth, 471 681, 105 2297, 85 692 (1985), bearing "stock" among things, negotiable, offers possibility capital appreciation, carries dividends contingent profits enterprise plainly cover. signify lack concern reality; rather, signals recognition stock is, practical matter, always characteristics traditionally stock. sparse exceptions generalization can found, perception common paradigm suggests context sold, ambit Id., 687, 693, 2302, 2305. 10 clear case, explicitly limiting holding sort instrument. 694, 2304. refused finally out se intimated such unjustified. Unlike "stock," said, 'note' may viewed relatively encompasses widely varying characteristics, consumer context, paper, some context." Ibid. (citing Industry Assn. Board Governors Reserve System, 468 137, 149-153, 2979, 2985-88, 82 107 (1984)). While quintessence Timber, 2305, justifiably assume sale covered simply cannot said phrase note" mean literally note," understood backdrop what attempting accomplish Acts.2 Because formula sensibly principle developed "note." majority Courts considered adopted, forms, versus commercial" approaches distinguish, circumstances surrounding transactions, (which "securities") not). Futura Development Corp. Centex Corp., 761 33, 40-41 (CA1 1985); McClure First Nat. Lubbock, Texas, 497 490, 492-494 (CA5 1974); Hunssinger Rockford Business Credits, Inc., 745 484, 488 (CA7 1984); Holloway Peat, Marwick, Mitchell 879 772, 778-779 (CA10 1989), cert. pending 89-532. 12 Second Circuit's approach begins presumption months "security." Chicago Touche Ross 544 1126, 1137 (CA2 1976). Recognizing securities, Circuit also decided permits issuer rebut show "bear[s] item exceptions, id., 1137-1138, convinces add new list, see, Chemical Andersen 726 930, 939 1984). 13 contrast, Columbia Circuits apply only evidences "(1) investment; expectation profits; derived entrepreneurial managerial efforts others." F.2d, 54 (case below). Accord, Baurer Planning Group, 215 U.S.App.D.C. 384, 391-393, 669 770, 777-779 (1981). Underhill Royal, 769 1426, 1431 (CA9 1985) (setting forth "risk capital" identical test). 14 reject notes; provides mechanism determining contract." here contracts," "notes." To "would Acts' superfluous," 692, entire see 60-62. two contenders—the tests—are really ways formulating approach. think promising framework analysis, adopt it. language statute; begin security.3 nonetheless recognize irrebuttable. As 61, concerned regulating market, creating cause action fraud. give content dividing line, identified denominated "notes" without category. Bank, 1138 (types "the financing, secured mortgage home, lien small evidencing 'character' loan bank customer, assignment accounts receivable, formalizes open-account debt incurred course (particularly if, customer broker, collateralized)"); (adding "notes loans banks current operations"). 16 agree items More guidance, though, needed. impossible meaningful inquiry "resemblance" specifying about makes non-"securities." Moreover, itself noted, "not graven stone," 939, capable expansion. standards list. 17 An be. applying deciding involves First, examine assess motivations prompt seller buyer enter seller's finance substantial interested primarily expected generate, likely exchanged facilitate purchase minor asset good, correct cash-flow difficulties, advance purpose, hand, described 851, 2060 (share carrying subsidized housing inducement solely acquire low-cost living space; invest profit"). Second, "plan distribution" C.M. Joiner Leasing 320 344, 353, 64 120, 124, (1943), trading speculation investment," 351, 123. Third, expectations investing public: will consider expectations, even where particular transaction. Compare 2305 (relying security), 697-700, 2307-2308 (STEVENS, dissenting) (arguing single informed purchaser through purview reality 2060. Finally, existence regulatory significantly reduces thereby rendering unnecessary. 557-559, n. 7, 1224-1225, 7. 18 conclude, then, version articulated here: rebutted showing identified) decision B little difficulty concluding admits "a closely examples." Brief Respondent 43. being despite similarity categories. interest.4 Indeed, primary inducements constantly revised slightly above savings loans. From sides, rather purely 20 plan distribution, extended period members, bankruptcy. sure, traded exchange. were, public, necessary establish requisite supra (stock corporation "security"); Tcherepnin, 337, 553 (nonnegotiable "withdrawable shares" association Howey, 295, 1101 (units citrus grove maintenance contract although exchange). 21 third factor—the public's perceptions—also supports finding consistently essence character "investment." 65. characterized "investments," 59, characterization. circumstances, prospective word. 22 find fact uninsured. unlike certificates deposit 557-558, Deposit Insurance Corporation subject banking laws, pension Teamsters Daniel, 439 569-570, 99 790, 801-802, 58 808 (1979), comprehensively regulated Employee Retirement Income 1974, 829, 29 1001 seq. (1982 ed.), 23 below found security," 54, theory instant ordinarily unpersuasive. Common readily convertible cash note. true publicly corporate bonds, debentures, number feature permit holder quickly making demand, altogether. liquid eliminates when, payment made, whereas share proceeds usually occur simultaneously. 24 3(a)(10). III 25 Relying months," 78c(a)(10), contends "securities," otherwise qualify. cites cases standing proposition limitations, "[a] immediately." McMahon O'Keefe, 213 Ark. 105, 106, 209 S.W.2d 449, 450 (1948) (statute triggered date first demand). concludes immediate, course, months. thus 26 counter "plain words" govern. cite legislative history provision Act, 76, 77c(a)(3), except paper short-term, high quality fund operations highly sophisticated investors. S.Rep. 47, 3-4 (1933); (1933). emphasize repeatedly (see 60-63) dispositive, argue, force, reading exclude evident desire flexibility ensure manipulated investors' detriment. large scale offering unsophisticated exclusion. 27 decide, petitioners' interpretation correct, literal effect exception, terms. 28 upon law. States' statutes controlling States, others. McMahon, 449 runs note), 42 Pa.Cons.Stat. 5525(7) (1988) "from later principal instrument"). unpersuaded THE CHIEF JUSTICE's partial dissent artful statement contention, suffers defect. JUSTICE becomes due. Post, 77 Black's Law Dictionary 1170 (3d ed. 1933)). "immediately 'due' brought suit," 77, immediately purposes corresponds "becomes due," authority he due" (as opposed made) dispositive source treatise regarding negotiable particularly Uniform Negotiable Instruments Law. M. Bigelow, Bills, Notes, Checks v-vii W. Lile rev. 1928). quotation relies articulating state-law filed. rules governing significant control limitation run precede suit. C.J. Bills Notes 602, 406 (1916). States questions now. short, adds nothing additional contexts. implicit, essential, concerning proper method collecting resolution before us. 30 Neither nor State answer question, "plain" plausible having immediate immediately, excess Given ambiguity, argument's sake incorrect view exempt paper. competing explain why exclusion, imagine duration, are, rule, light broader ensuring descriptions prevent fraud abuse, interpret here. result design suggested parties contemplated period, IV 31 For foregoing reasons, preferred 3(a)(10)'s remand further proceedings consistent opinion. 32 So ordered. 33 concurring. 34 I join Court's important consideration my conclusion notwithstanding statute's 78c(a)(10) (§ 1934). rejecting concluded "when spoke meant securities." Sanders Nuveen 463 1075, 1080 (CA7), denied, 1009, 93 443, 302 (1972). set Judge Sprecher, soon thereafter endorsed Chief Friendly. Zeller Bogue Electric Mfg. 476 795, 800 (CA2), 414 908, 94 217, 38 146 (1973). Others adopted position since. 494-495 1974), 420 1132, 43 402 (1975); 778 1989); App.D.C. 389-391, 775-777 35 settled construction disturbed until decides. "[A]fter construed, judges agencies, acquires judicial gloss drafted itself." Shearson/American Express 482 220, 268, 2332, 2359, 96 185 (1987) part); Chesapeake Ohio Schwalb, 493 40, 51, 381, 387, 278 (1989) judgment). What taxation applies equally regulation: "there enabling" affected predict consequences proposed actions, stronger responsibility changes squarely shoulders Congress." Commissioner Fink, 483 89, 101, 2729, 2736, 97 74 (dissenting opinion). Past errors rare "sufficiently blatant" overcome 'strong continued validity adheres statute,' case. 103, 2737 Square D Niagara Frontier Tariff Bureau, 409, 424, 106 1922, 1930, 413 (1986)). 36 impressive buttressed views Commission. Release 33-4412, Fed.Reg. 9158 (1961) (construing 3(a)(3) 1933, counterpart Act). ourselves referred "commercial paper." 150-152, 2986-87, (1984). Perhaps restriction established, respondents admit argue departure reliable consensus upset justified communities. 37 am satisfied expounded Sprecher Friendly correct. observed, prefatory 1131-1132, nn. 7-10 Pursuant language, definitions "context requires." (1982) (the "broad preceded, mentioned .' "); accord, 697-698, 2312-13, (1985) dissenting). clause harmonizes facially rigid 9-month Congress. 1132-1133. indicates construed Sanders, 1079, 12-13; Zeller, 799-800, 6. agreed, reason construe differently. 1079-1080, 15; 800. Comment, Commercial Paper Market 39 U.Chi.L.Rev. 362, 398 reasons stated Court, whom SCALIA join, part. 40 IV. holds months." Treating recent development says "if purpose." Ante, 41 But spring full blown head vintage. "Note" art profession centuries, maturity, passed construing whose meanings plain, depend understanding creation. Gilbert 370 650, 655, 1399, 1402, 750 (1962) ("[I]n absence anything contrary fair use[s a] word [a] common-law sense"); Roadway Express, Piper, 447 752, 759, 100 2455, 2460, 65 (1980) statute, "we look contemporaneous term"); Standard Oil New Jersey 221 1, 502, 516, 55 619 (1911) (common-law "presumed" intent); Lorillard Pons, 434 575, 583, 98 866, 871, (1978); Spencer, 839 1341, 1344 1988). Contemporaneous editions dictionaries due." 1933); Cyclopedic 649 (2d 1922). dominant "due" 349, 265 1928); 406, 83 According Bigelow: "So maker acceptor concerned, 'on demand' moment delivery, required day, day limitations. words, time, isnec essary thereon." (emphasis added; original deleted; footnote omitted). peculiar dates—one his obligation party liable (e.g. maker), enforcing contracts secondarily drawer indorsers)." 350, 266 respecting makers exemption; "maturity issuance" concerned. compelling indication contrary, possess months."* 45 decisions cited STEVENS rely, exclusively, paper" traders. altogether convinced 3(a)(3), bodily transpose commend construction. 46 Act—under arises—contains restrictive question. asserted limited Though pertinent sources congressional commentary 3(a)(3)—H.R.Rep. (1933) (1933)—do limit 3(a)(3)'s references Reports survive enactment. Senate Report "[n]otes, drafts, bills bankers' acceptances arise commercial, agricultural, industrial exempted. ." added). Yet exempts "[a]ny arises 77c(a)(3) Such broadening relative prototype sprang, dismissed 3(a)(3). fortiori, history's imputed doubt exemptions expansive evidence end, merely subset larger exempted instruments. plausibility imputing weakened imperfect analogy between phraseology nature. lacks cryptic qualifies eligible arising "out transaction[s] transactions. passage somehow strengthen conversely militates placing thereon. 49 excepts covers registration requirements provisions. §§ 77l 77q(c); 151, By encompassed thereunder entirety including, conspicuously, 50 argues "harmonizes" view, harmony clause" beginning seems me, instead, called specific exemption. fairest situation exemption—notes maturities months—is contextual wanted recognize. render superfluous; leaves judiciary flesh exceptions. 51 states previously 76 Assn., 2986-87). dictum, "encompass[ing]" 150-151, 2986. referring assist included securities" Glass-Steagall Banking 1933. sum, justification looking beyond 3(a)(10), save ascertaining notes. That reveals section's affirm Appeals, though reasoning. [to 1933] and, present purposes, same." 847, 12, 2058, (1975) (citations reaffirm founded criticism issued. corresponding advantage, permitting sufficient able determinate definition. One whether, expense clarity, overvalued avoiding manipulation clever dishonest. erred, body, mistake. provided 63. No kind attached duration. refusal extend apparently less. reach how infra, 71, express affect "profit" valuable return undoubtedly includes interest. have, restrictively contracts." 852, ("[P]rofit" "capital appreciation" earnings"). paying keyed earning irrelevant today, 64, decline realm applies. Reference "Congress apply." ante, 71. cf. De Sylva Ballentine, 351 570, 580, 974, 980, 1415 (1956) ("[T]here domestic relations, concern"), alternative discerning applicability dependent nationally uniform "federal question." Mississippi Band Choctaw Indians Holyfield, 30, 1597, 1608, (1989): "That dealing drawing used.' Well-settled inform mind employed define." 2A C. Sutherland Statutory Construction 50.04, pp. 438-439 (4th 1984) (noting "utility" various courts, "examining reference existed enacted"). 1934, enacted, American state-court reporters. evokes minority position. vast (1916), compels constituted "well-settled law" "general principle" enacted.

Classification Label: 7