April 21, 2019

Archives for October 7, 2013

Tenth Circuit: Defendant’s Instruments in Ponzi Scheme Met Definition of “Securities” Under Family Resemblence Test

The Tenth Circuit Court of Appeals published its opinion in Sec. Exch. Comm’n v. Thompson on Friday, October 4, 2013.

This appeal arose out of a civil-enforcement action brought by the Securities and Exchange Commission (“SEC”) against Defendant-Appellant Ralph W. Thompson, Jr., in connection with an alleged Ponzi scheme Thompson ran through his company, Novus Technologies, L.L.C. (“Novus”). Novus made a total of 138 of its “loans” to around sixty holders.

The district court granted summary judgment in the SEC’s favor on several issues, including the issue of whether the instruments Novus sold investors were “securities,” as that term is defined under the Securities Act of 1933 and the Securities Exchange Act of 1934.

Thompson’s sole claim on appeal was that the district court ignored genuine disputes of material fact on the issue of whether the Novus instruments were securities, and that he was entitled to have a jury make that determination. The Tenth Circuit concluded, under the test articulated by the Supreme Court in Reves v. Ernst & Young, 494 U.S. 56 (1990), that the district court correctly found that the instruments Thompson sold were securities as a matter of law.

In Reves, the United States Court adopted a version of the Second Circuit’s “family resemblance” test, under which a note is presumed to be a “security,” and that presumption may be rebutted only by a showing that the note bears a strong resemblance to one of the categories of instrument identified by the Second Circuit in Exchange Nat’l Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126, 1137 (2d Cir. 1976).

To provide guidance to courts considering whether an instrument “bears a strong resemblance” to the instruments on the list, the Court prescribed application of the following four factors: (1) the motivations that would prompt a reasonable seller and buyer to enter into the transaction; (2) the ‘plan of distribution’ of the instrument, with an eye on whether it is an instrument in which there is common trading for speculation or investment; (3) the reasonable expectations of the investing public; and (4) whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Acts unnecessary. The factors are to be considered as a whole. The court held that, in the context of a civil case where the “security” status of a “note” is disputed, the ultimate determination of whether the note is a security is one of law.

After applying the four factors, the court held that the instruments Thompson sold were securities.  Thompson could not rebut the presumption that the Novus Instruments were securities.

AFFIRMED.

Tenth Circuit: Unpublished Opinions, 10/4/13

On Friday, October 4, 2013, the Tenth Circuit Court of Appeals issued one published opinion and eleven unpublished opinions.

Cowan v. Standifird

Barnes v. Spirit Aerosystems

United States v. de Loera-Hernandez

United States v. Pena

United States v. Willis

Martinez v. Rocky Mountain Bank

United States v. Peach

United States v. Dale

Allcare Hospice v. Sebelius

Lambros v. Maye

Anita v. United States

No case summaries are provided for unpublished opinions. However, published opinions are summarized and provided by Legal Connection.