Court Opinion

ID: 9633706
Source: CourtListenerOpinion
Date Created: 2023-08-22 11:57:25.857971+00
Date Added: 2024-06-11T18:08:40.161057
License: Public Domain

LANE, Vice Presiding Judge,
concurring in result:
I write to address the issue whether the investment Mrs. Yanda entered into is a security. Winnowing the relevant from the irrelevant facts of this case we are left with a rather simple scenario. As part of the estate planning the appellant performed for Mr. and Mrs. Yanda, he advised them regarding certain investments. Specifically he advised Mrs. Yanda to invest in an apartment project in Edmond, Oklahoma. The appellant told Mrs. Yanda there was no risk to her investment, and she believed him. She gave the appellant a check for $100,000.00 made payable to Alexco and designated for the “Edmond Project”. She also signed, without reading it, a joint-venture agreement which provided in relevant part:
(a) The overall management and control of the business and affairs of the Joint Venture shall be vested in the Venturers, collectively ...
(c) No act shall be taken, sum expended, or obligation incurred by the Joint Venture, Manager or any Venturer with respect to any of the following matters (herein referred to as the “Major Decisions”), unless such Major Decisions have been approved by the Venturers.
This agreement did not correspond to her understanding of the investment as described by the appellant, for she testified as follows:
*287The Court: Were you ever told that you could have any kind of control over the building of the apartments themselves?
Mrs. Yanda: No.
The Court: Were you ever told that you could have some kind of control, or im-put, (sic) into the management or running of Charlestown Associates Limited?
Mrs. Yanda: No ...
The Court: Was it ever your intention to enter into a joint venture with Charles-town Associates Limited? In other words you and your husband would work with Charlestown Associated Limited to Build the Apartments?
Mrs. Yanda: No.
The Court: Was it your understanding that you were investing one hundred thousand dollars in the Edmond project or the Charlestown Apartments?
Mrs. Yanda: Yes. I knew that ...
The Court: Did you ever have any involvement in the input into the filing of a return for Charlestown Associated Limited tax return?
Mrs. Yanda: No.
(Tr. 63-66).
Mrs. Yanda was, according to her own testimony, a woman naive in business matters. Glen Vance, President of Alexco, testified the investors in Charlestown Associates Limited assigned their managerial control to one person who conducted the business of the partnership.
I agree with the majority that Mrs. Yan-da’s investment is a security in the form of an investment contract. However, I prefer a less convoluted analysis to reach this result. Oklahoma applies the definition of an investment contract set forth by the United States Supreme Court in SEC v. Howey, 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946) under its own Securities Act. State ex rel. Day v. Petco Oil & Gas, Inc., 558 P.2d 1163 (Okl.1977). Howey sets forth four elements of an investment contract. There must be an investment, in a common enterprise, with the expectation of profit, solely from the efforts of others. 328 U.S. at 298, 66 S.Ct. at 1103.
As new schemes came before various state and federal courts, the element “solely from the efforts of others” proved to be too limited, for in many schemes the investors performed some minor task which contributed to their expectation of profit. The courts modified the definition of an investment contract by defining what efforts an investor could undertake and still be entitled to the protection of the securities acts.
The majority follows those jurisdictions which adopted a test of “substantially” through the efforts of others. I find this test to raise more questions than it answers. How substantial must “substantial” be? Certainly this question is not answered in the present case, for Mrs. Yan-da put forth no effort in the enterprise beyond her substantial investment. More importantly, I believe the better analysis is to examine the quality of the investor’s efforts rather than the quantity.
I agree with those jurisdictions which look to management efforts or economic reality and hold that an investment is a security if the investor does not have managerial control of the enterprise. See State v. Hawaii Market Center, 52 Haw. 642, 485 P.2d 105 (1971); Sauer v. Hays, 36 Colo.App. 190, 539 P.2d 1343 (1975); Activator Supply Co. v. Wurth, 239 Kan. 610, 722 P.2d 1081 (1986); State v. Duncan, 181 Mont. 382, 593 P.2d 1026 (1979); Prince v. Heritage Oil Co., 109 Mich.App. 189, 311 N.W.2d 741 (1981); Ohio v. George, 50 Ohio App.2d 297, 362 N.E.2d 1223 (1975); Pratt v. Kross, 276 Or. 483, 555 P.2d 765 (1976). Even the Supreme Court suggested it did not disagree with this modification of the Howey test. See United Housing Foundation v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975).
To apply this test I would look to an investor’s actual managerial or entrepreneurial efforts, as well as what managerial or entrepreneurial control was available to the investor if he or she desired to exercise it. Access to information regarding the business involved is a critical factor here since inherent in the ability to exercise managerial control, of course, is the investor’s actual access to necessary facts. See Maritan v. Birmingham Properties, 875 F.2d 1451 (10th Cir.1989).
*288The case before us raises the importance of an additional factor to examine in determining whether to categorize an investment as an investment contract. This is the investor’s practical ability to exercise any managerial control.
When the Fifth Circuit addressed this issue it explained:
[T]he mere fact that an investment takes the form of a general partnership or joint venture does not inevitably insulate it from the reach of ... securities laws. All of these cases presume that the investor-partner is not in fact dependent on the promoter or manager for the effective exercise of his partnership powers. If, for example, the partner has irrevocably delegated his powers, or is incapable of exercising them, or is so dependent on the particular expertise of the promoter or manager that he has no reasonable alternative to reliance on that person, then his partnership powers may be inadequate to protect him from the dependence on others which is implicit in an investment contract.
Williamson v. Tucker, 645 F.2d 404 (5th Cir.1981) cert. denied 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981). I agree whole heartedly with this reasoning and believe strongly that it is essential for this Court to examine the substance in fact as well as the form of an investment in determining whether it is a security in the form of an investment contract.
This analysis squares with the purpose of the State Securities Act which is to protect people from schemes, such as the one considered here, which defraud the public. I intentionally have avoided a strict contractual approach in which the four-corners of the agreement control absent ambiguity, or fraud in the inducement. To impose a strict contractual interpretation would insulate clever schemers from criminal responsibility and fail to provide protection to victims such as Mrs. Yanda. The end result would be a complete emasculation of the securities laws.
Applying this analysis to the facts at hand, the joint-venture agreement indicates the investment is not a security for Mrs. Yanda is granted managerial control of the project. However, in fact she exercised no managerial control for she had no opportunity, no access to essential information, and no personal ability to do so. Therefore, giving weight to the substance of the investment over the form, I would find the investment is a security in the form of an investment contract under 71 O.S.1981, § 71(20)(K).