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October 26, 1970


The opinion of the court was delivered by: Will, District Judge.


This action presents the apparently novel question of whether or not a discretionary trading account in commodity futures is subject to the registration requirements of Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e. For the reasons stated below, we conclude that it is not and grant defendants' motions to dismiss plaintiffs' complaint for failure to state a claim upon which relief can be granted.

The salient allegations of plaintiffs' complaint, which are presumed true for purposes of this motion, are as follows: 1) the defendant M-S Commodities, Inc. was and is a broker trading in commodity future contracts and defendant David Nelson was its agent; 2) Nelson solicited from the plaintiffs approximately $13,500 which they deposited with him in a discretionary trading account in commodity futures; 3) the money was lost as a result of Nelson's discretionary trading; and 4) Nelson's solicitation was part of a nationwide scheme wherein defendants entered into contracts for discretionary trading accounts with various persons from numerous states. The plaintiffs do not charge defendants with any fraud, "churning" or other improper activity in the conduct of the account. They claim relief solely because of the failure of the defendants to register these discretionary accounts under the provisions of Section 5 of the Securities Act of 1933.

Defendants' motions to dismiss are predicated upon their assertion that commodity future contracts are not securities under the Securities Act, 15 U.S.C. § 77b. Plaintiffs urge in opposition that the securities which they contend were not properly registered were the discretionary accounts in commodity future contracts, not the future contracts themselves. They further note that the word "securities" is defined in the Securities Act of 1933 to include "investment contracts"*fn1 and that Judges Bonsal and Bryan of the Southern District of New York have both concluded*fn2 that, although commodity future contracts themselves are not securities within the ambit of the Securities Act, discretionary trading accounts in commodity futures are investment contracts and thus are subject to the provisions of that Act.*fn3

These two cases present well-reasoned and careful analyses of the definition of "securities" and offer insight into the problems of defining a term so amorphous as "investment contract."*fn4 However, neither of these decisions resolves the specific issue presented in the instant litigation, i. e., the applicability of the registration requirements of the 1933 Act to discretionary accounts. In this connection, we will assume for purposes of decision on defendants' motions that an oral contract creating a discretionary trading account in commodity futures is, as the decisions previously referred to have held, an investment contract and therefore a "security" within the meaning of the 1933 Act.

Once a security is found to be within the purview of the Securities Act, it must be registered pursuant to 15 U.S.C. § 77e prior to any attempt to sell it publicly through use of the means or instrumentalities of interstate commerce. However, 15 U.S.C. § 77d(2) exempts from registration any transaction by an issuer not involving a public offering. We conclude that the creation of the discretionary account at issue here, even if such an account is an investment contract and thus a security, did not involve a transaction constituting a public offering and therefore is not subject to registration.

The nature of a discretionary trading account makes apparent the inapplicability of the criteria generally applied by courts in determining whether or not a securities offering is public. The reported decisions deal almost exclusively with sales of stock or other fractional interests in commercial ventures, even if cloaked in the guise of sales of property, where the criteria for determining whether the offering was public or private in nature have included 1) the number of shares in the offering, 2) their respective amounts, and 3) the manner of offering, as well as the more general determination of whether the persons affected stand in need of the protection and knowledge that would be gained if the offering had been properly registered.*fn5 In the instant case, the "security" with which we are dealing is the "investment contract" between the plaintiffs and Nelson creating the discretionary trading account. The "security" has not been, as in the more typical situation, issued by the defendant and sold to the plaintiff. Rather, the security as we are here defining it, is an oral agency agreement in which the theoretical "seller" becomes the agent of the "buyer." It is arguable that no transaction whatsoever has occurred solely as a result of the creation of the discretionary account since no interest of any kind has been "transferred" or "sold" to the "buyer." All that has happened is that the so-called "buyer" has transferred funds to the so-called "seller" and given him discretionary authority to enter into future transactions on the "buyer's" behalf.

In essence, this contract creates an agency-for-hire rather than constituting the sale of a unit of a larger enterprise. No matter how many different persons Nelson became an agent for under similar or even identical discretionary contracts, his relationship with each would remain as that of agent and principal. Each contract creating this relationship is unitary in nature and each will be a success or failure without regard to the others. Some may show a profit, some a loss, but they are independent of each other. No matter how many discretionary trading accounts Nelson may have had with other principals, the "security" "issued" to the plaintiffs, their discretionary trading account, could not be offered to anyone else. Although this Court recognizes that the registration requirements of Section 5 are for the protection of the public and that any exemption therefrom must be strictly construed against one claiming it, Securities and Exchange Commission v. Ralston Purina Co., supra note 5; Securities and Exchange Commission v. Culpepper, 270 F.2d 241 (2d Cir. 1959), the unitary nature of the contract here involved is not overcome even when the transaction is viewed most strongly against the defendants.

In an effort to avoid the necessary implications of the above facts, plaintiffs attempt to analogize from the many court decisions wherein single sales of property or animals to many individuals were held to be investment contracts between each individual purchaser and the common seller and thus held to be securities.*fn6 The plaintiffs claim that the many individual sales of property by one seller in those cases were grouped together to reveal the public nature of the offerings; they claim that Nelson's contracting individually with many people should be viewed as a whole and thus the public nature of his offering should likewise become apparent.

This analogy fails for two reasons. The basic issue presented and resolved in the many prior decisions to which plaintiffs refer was whether or not a purported sale of property was in fact an investment contract and therefore a "security" and not whether its sale constituted a public offering. Moreover, the basis of these decisions is inconsistent with a finding that the instant discretionary account is part of a public offering. In these purported property sale cases, the courts, in finding the transactions to be investment contracts, relied specifically on the nature of the contracts and the schemes involved.

The courts, in substance, found these schemes to be attempts by promoters or entrepreneurs to create a pool of capital to be used in furthering a common enterprise by dividing up the needed base into units for individual sales. These plans, in other words, were all sales of units of a common enterprise no different in operating reality from the sale of stock by a corporation, only disguised under a veneer of property-sale terminology. Thus, although the sales of units of land in the citrus grove plus operational contracts involved in Howey, supra note 4, purported to be outright sales from one individual to another (and thus no different than the situation here involved), the Supreme Court specifically found that the transfers involved much more than fee simple interest in land. Rather, the Court found a scheme whereby all the individuals "purchasing" the land in fact were contributing money to a common enterprise and were expecting to claim their respective profits from the operations of the entire citrus grove; the resulting transfer of rights in land was considered to be purely technical. 328 U.S. 293, 299-300, 66 S.Ct. 1100, 90 L.Ed. 1244.

This characteristic of common enterprise is completely lacking in the present case. Even assuming that Nelson in fact solicited and collected money from numerous parties, no allegations are made that a common enterprise existed comprised of all people possessing discretionary account contracts with him. No claim is made that Nelson traded in a uniform manner for each of these accounts. Even if he had so uniformly traded, no pooling of funds for a common purpose is alleged. Nelson apparently was simply an agent for a number of separate and distinct principals, the plaintiffs being one such principal. The plaintiffs in no way can be viewed as having invested in a common enterprise with other suppliers of venture capital. Without such common investment, the property sale cases are not analogous.

In this connection, it is also apparent that the creation of the discretionary account was not a public offering under the accepted criteria for determining whether or not a securities offering is a public offering. For purposes of this discussion, we again assume that the discretionary trading account in commodity futures is a security as defined in the 1933 and 1934 Acts, that Nelson "issued" such security to plaintiffs, and that the standard criteria for determining a public offering are applicable. These criteria, as discussed supra, include the number, amount, and manner of the offering, and, finally, whether or not the particular class of persons affected will be beneficially protected by applying the Act to them. Securities and Exchange Commission v. Ralston Purina Co., supra note 5, 346 U.S. at p. 125, 73 S.Ct. 981, 97 L.Ed. 1494. Certainly the number, amount, and manner of the offering of this security to the plaintiffs negate any "public" tenor thereto. Nelson offered the plaintiffs a single agency contract totally unrelated to any other agency contract he might offer to others and the amount involved was only slightly more than $13,500.00. "The whole tenor of the Act indicates a congressional purpose to require an accompanying registration statement with the offer or sale of a conventional issue of securities to the general public or a particular class thereof, and to exempt isolated transactions from the burdens of registration requirements." Woodward v. Wright, 266 F.2d 108, 115 (10 Cir. 1959). While an offering may be public when offered to many or to few, Securities and Exchange Commission v. Ralston Purina Co., supra note 5, at p. 125, 73 S.Ct. 981, 97 L.Ed. 1494, an offering has never been held to be a public offering when it has been extended to only one person.

The most significant single standard criterion in making the public versus private determination is the need of the persons affected for the information contained in a registration statement, i. e., whether there is any practical need for the Act's application. A perusal of the information required in the registration statement, 15 U.S.C. ยง 77aa, Schedule A, demonstrates the inapplicability of a typical registration statement to the instant situation. Required in any such statement, inter alia, are the following: the name of the state under which the issuer is organized; the names and addresses of all persons owning more than ten per cent of the stock of the issuer; a statement of the capitalization of the issuer; the amount of any funded debt to be created by the security offered; the purposes for which the funds received from the issuance of the security will be used; the price at which the security shall be offered to the public; the commissions to be paid to underwriters in respect of the sale of the offered security; a balance sheet showing all of the assets of the issuer; and a profit and loss statement of the issuer. Should this information have been required of Nelson, he would have listed in statement form: where he was organized; who owned stock in him; his capitalization; any funded debt resulting from the discretionary ...

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