Court Opinion

ID: 8916394
Source: CourtListenerOpinion
Date Created: 2022-11-27 05:14:16.871754+00
Date Added: 2024-06-11T17:09:01.836794
License: Public Domain

KRAVITCH, Circuit Judge,
dissenting:
The majority reaches its decision by applying the “solely” test first enunciated by the Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946) in order to determine whether the scheme here at issue is an “investment contract” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Since its decision in SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir.1974), however, the law of the former Fifth Circuit, and consequently this circuit, has been to apply a broader form of the Howey test, one that requires the expectation of profit to derive from the “essential managerial efforts” of others. Id. at 483. Because I believe the majority applies the incorrect legal standard when it relies upon Howey, I dissent.
In Howey the Supreme Court established a three-part test to determine if a particular transaction is an “investment contract” subject to the securities laws. At issue is the third element of that test, a requirement that the expectation of profits derive “solely from the efforts of the promoter or a third party, ...” 328 U.S. at 299, 66 S.Ct. at 1103 (emphasis supplied). Although the test enunciated in Howey “exactly fitted the circumstances” presented in that case, the Ninth Circuit in SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 481 (9th Cir.1973), found the word “solely” to be a “sticking point.” Id. The Ninth
*1126Circuit therefore adopted a broader interpretation of the Howey test, albeit one it believed involved no major departure from Howey. Id. at 483. The test enunciated by Turner was not whether the expectation of profit derived “solely” from the efforts of others, but whether the “essential managerial efforts which affect the failure or success of the enterprise” are those of a third party. Id. at 483.
The Fifth Circuit adopted the Turner test in a case factually similar. SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir.1974). In Koscot the court was asked to determine whether a pyramid promotion enterprise was a security. The enterprise had two elements: the sale of cosmetics, and the recruitment of others to become “Kosmetic” distributors. Id. at 475-76. This latter aspect was the primary subject of the litigation:
Many if not all of the persons, seeking to become Koscot distributors are attracted by the lure of money to be earned by high-pressure recruiting of other persons into the Koscot program, rather than the sale of the cosmetics themselves.
Id. at 476, quoting SEC v. Koscot Interplanetary, Inc., 365 F.Supp. 588, 590 (N.D.Ga.1973). The task of the investor in Koscot was not a small one. Besides luring a prospect to Koscot’s Opportunity Meetings additional effort often was required, “the amount of which [was] contingent upon the degree of reluctance of the prospect.” Id. (emphasis supplied).
Despite this effort required by the investor the court found that the success or failure of a given sale was dependent upon “the scenario created” by Koscot and that any individual investor “would invariably be powerless to realize any return on his investment.” The significant factor was that the “act of consummating a sale is essentially a ministerial not managerial one.” Id. at 485.
On these facts the Howey test would have barred liability as the expectation of profits did not derive “solely from the efforts” of others. The Koscot court examined the rationale of Howey, however, and determined that the underlying purpose of the securities laws would not be fulfilled by an application of the “solely” test. Rather it adopted the test set out in Turner: “whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.” Koscot, 497 F.2d at 483 (quoting Turner).
Despite this long-standing precedent, the majority mechanically applies the “solely” test enunciated in Howey, and denies appellants’ claims. As support for its test the majority relies on two intervening decisions, United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975) and Piambino v. Bailey, 610 F.2d 1306 (5th Cir.1980). In my judgment neither of those cases requires the rule relied upon by the majority, nor do they overrule Koscot.
In Forman the Supreme Court faced a claim by members of a low-cost housing cooperative (co-op) that their co-op shares were securities. The Court held against the members, primarily on the ground that there is no expectation of profit in a co-op share. Beginning its analysis of the security issue the Supreme Court restated its “Howey” test, including the “solely” language, but noted the Ninth Circuit’s modification of that test, stating: “[w]e express no view, however, as to the holding of [the Turner] case.” 421 U.S. 852, n 16, 95 S.Ct. 2060, n 16. Forman, therefore, did not involve, and does not decide, the “solely” issue.
Admittedly, Piambino confuses the issue in stating that Forman “reaffirmed the test first enunciated in Howey, ...” 610 F.2d 1306, 1317. Yet, the Piambino court did not apply a “solely” test. Rather, it restated the investment contract test relying on language in Forman that closely mirrors the Koscot test: “[t]he touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from entrepreneurial or managerial efforts of others.” Id. at 1317-18, quoting Forman, 421 U.S. at 852, 95 S.Ct. at 2060 (emphasis added in Piambino ). Further, I am convinced by what the court in Piambino did: it reversed a grant of summary judgment and remanded for a factual determination of whether “reasonable investors did (or did not) believe they were buying into an enterprise whose profits would be determined by Bestline managerial and entrepreneurial methods with no substantial effort by the investor.” Id. at 1320. “Solely,” allows no help from the investor. Hence, if Piambino stands for the proposition that the “solely” test enunciated in Howey is the law, it is curious the Piam*1127bino court would have remanded to determine the substantiality of investors’ efforts.
Koscot is the law. Despite Forman and Piambino this circuit consistently has adhered to the Turner test enunciated in Koscot. The most recent statement of the test appears in Williamson v. Tucker, 645 F.2d 404 (5th Cir.), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981), which the Second Circuit considered to support the proposition that the “solely” test is not viable in this circuit. See SEC v. Aqua-Sonic Products Corp., 687 F.2d 577 (2d Cir.1982). See also Martin v. T.V. Tempo, Inc., 628 F.2d 887, 889-90 (5th Cir.1980) (Forman declined to express view on Turner standard; “evidence demonstrates that the agreement fails to meet the Koscot test); United American Bank of Nashville v. Gunter, 620 F.2d 1108, 1116 (5th Cir.1980) (restates “Howey-Forman” test in four parts; “solely” is not a factor, “entrepreneurial or managerial efforts” is). Cf. Gordon v. Terry, 684 F.2d 736, 741-742 (11th Cir.1982) (focus not on sole efforts, but on who has power to control significant decisions).
Once the Turner/Koscot test is applied to the facts of this case, it seems apparent that the opposite result obtains. The effort required of the investors in the enterprise at issue is far less than that required in Koscot itself, 497 F.2d at 476. Further, the emphasis in our later cases is not so much on substantiality of the investors’ activities as it is on the issue of whose “entrepreneurial” and “managerial” skills are necessary for the venture to succeed. See Williamson v. Tucker, 645 F.2d 404, 423 (5th Cir.1981) (real estate investment partnership; question of whether partners must rely on particular skills of one partner or whether they all hold real control); Martin v. T.V. Tempo, Inc., 628 F.2d 887, 889-91 (5th Cir.1980) (magazine advertisement franchise; plaintiffs undeniably in control of own profits and could succeed as independent entity despite any failure of T.V. Tempo Inc.); Piambino v. Bailey, 610 F.2d 1306, 1318-20 (5th Cir.1980) (“Bestline” distributorship; issue on remand whether investors believed profits would be determined by Bestline managerial and entrepreneurial methods). This conforms to the Supreme Court’s and our own mandate in securities cases to disregard form and focus on economic realities, Forman, supra, 421 U.S. at 851-52, 95 S.Ct. at 2060; King v. Winkler, 673 F.2d 342, 344-45 (11th Cir.1982). Logically, the concern is whether the investor believes he is investing in someone else’s ability to make a profit, in which case the transaction may be a security, or whether he believes he is investing in his own abilities, in which it may not.
Here, the investors answered advertisements that promised “no selling.” As the majority opinion describes them their responsibilities were purely “ministerial,” Koscot, supra, 497 F.2d at 485, requiring nothing more than visiting the display, counting the number of planters sold, and replacing the sold planters. On the other hand the responsibilities of ABC were those calculated to ensure the venture’s success. ABC was responsible for advertising, for providing a unique patented product, for protecting the product’s uniqueness, for finding advantageous locations, for protecting those locations, and even for “provid[ing] a 100% return of initial investment” (provided of course that one read the small print). Admittedly, if plaintiffs never visited a sight or collected a cent no money would be made. But, this was true in Koscot, where no money would be made if no prospects were brought to meetings. It was also irrelevant. What was relevant in Koscot, and is determinative here, is that defendant’s efforts were those essential managerial and entrepreneurial efforts upon which a profit would be won or lost.