Case Briefs (3) Bus. Law 5530

Case Briefs (3) Bus. Law 5530

Reeves v. Ernest & Young

a- Statement of the facts

The cooperative was held accountable to antifraud provisions of securities laws.

b- Issues

Note holders and the cooperative's bankruptcy trustee sued individuals of decision-making authority in the cooperative and the cooperative's accounting firm. The result was personal liability of directors, accountants, lawyers, and other individuals, in addition to the decision that demand notes were in fact “securities”.

c- Decision by the court

In Reeves v. Ernst & Young ( U.S. Sup. Ct. 1990) the Supreme Court explained that while common stock can be considered to be the "quintessence" of a security, the same cannot be said about notes, which are used in a variety of settings, not all of which involve investments. Accordingly, an approach based on the "economic reality" of the transaction rather than a strict definition of a security under Federal securities laws was utilized.

d- Reasoning used by the court in reaching its decision

The Court determined that the Howey test for determining whether investment contracts are securities was inappropriate. Instead, the Court utilized the so-called "family resemblance" test that begins with a presumption that a note is a security. That presumption, however, may be rebutted by a showing that the note has a strong resemblance to any of a number of categories of instruments that are not considered securities.

Securities and Exchange Commission v. Edwards's pp. 886-890

a- Statement of the facts

The Securities and Exchange Commission (SEC) sued Edwards for selling securities in violation of federal securities laws.

b- Issues

The district court granted a preliminary injunction against Edwards and froze his assets. The court of appeals held that the district court did not have subject matter jurisdiction to act because the SEC could not show that Edwards' sale of pay telephones constituted an investment contract and, ...