November 28, 2014

Tenth Circuit: Whether a Note is a Security in Securities Fraud case is for Jury to Decide

The Tenth Circuit Court of Appeals published its opinion in United States v. McKye on Tuesday, August 20, 2013.

Defendant-Appellant, Brian William McKye, was charged with eight counts of securities fraud, in violation of 15 U.S.C. § 78j(b), and one count of conspiracy to commit money laundering. At trial, McKye tendered an instruction that would have permitted the jury to decide whether the investment notes at issue were securities under the federal securities laws. The district court refused to give McKye’s instruction, instead instructing the jury that the “term ‘security’ includes a note.” The jury convicted McKye on the conspiracy charge and seven of the fraud charges.

McKye argued the jury instruction was an incorrect statement of law because not all notes are securities, according to Supreme Court precedent holding notes are only presumed to be securities. Certain notes are not securities and a note “bearing a family resemblance” to those notes are also not securities. McKye also argued the jury should have decided whether the notes were securities, not the judge.

The Tenth Circuit held that “because the question of whether a note is a security is a mixed question of fact and law and because this jury was instructed that the Government was required to prove the instruments issued by Global West were securities as an element of its case, the district court erred when it instructed the jury that notes are securities.” The court found that the error was not harmless and reversed McKye’s conviction.

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