SEC v. Thompson , 732 F.3d 1151 ( 2013 )

FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS October 4, 2013
Elisabeth A. Shumaker
TENTH CIRCUIT Clerk of Court
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff – Appellee,
v.
RALPH W. THOMPSON, JR.,
Defendant – Appellant,
No. 11-4182
and
ROBERT CASEY HALL; US
VENTURES, a Utah limited liability
company; ROBERT L. HOLLOWAY;
DUANE C. JOHNSON;
ONLINE STRATEGIES GROUP, a
Delaware corporation; RCH2, a Utah
limited liability company; DAVID
STORY; ERIC J. WHEELER;
US VENTURES INTERNATIONAL, a
Utah limited liability company,
Defendants.
Appeal from the United States District Court
for the District of Utah
(D.C. No. 2:07-CV-00235-TC-BCW)
Catherine A. Broderick, Senior Appellate Counsel, Securities and Exchange Commission
(Mark D. Cahn, General Counsel; Michael A. Conley, Deputy General Counsel; Jacob H.
Stillman, Solicitor; and Susan S. McDonald, Senior Litigation Counsel, with her on the
brief), Washington, D.C., for Plaintiff-Appellee.
John J.E. Markham, II, Markham & Read, Boston, Massachusetts, for Defendant-
Appellant.
Before KELLY, BALDOCK, and EBEL, Circuit Judges.
EBEL, Circuit Judge.
This appeal arises 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”). 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 (collectively, the “Securities Acts”).
Thompson’s sole claim on appeal is 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. We conclude, 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. Exercising jurisdiction under 28 U.S.C. § 1291, we AFFIRM.
2
BACKGROUND
I. Factual background1
Sometime in 2000, Appellant Thompson founded Novus as a vehicle for his
business ventures in China and elsewhere across the globe. According to Thompson, by
2005, his connections in China had yielded some lucrative business opportunities.
Thompson’s most promising prospect involved selling a quantity of biodiesel reactors to
a Chinese company at a substantial profit. But before Thompson could cash in, he
needed to raise $12 million to facilitate that transaction. In fact, each of Thompson’s
prospects in China required significant capital, of which Thompson had none.
By 2006, however, Thompson had attracted the attention of a partner, Duane C.
Johnson,2 who “had some borrowing power.” Aplt. App. at 136. They began to “set
about finding ways to obtain money to fund the China office for these projects.” Id. at
137. Their search ultimately led them to the doorstep of Robert Holloway, who told the
pair about a proprietary algorithm he had developed for trading on the S&P 500.
Holloway explained that his algorithm enabled him to guarantee his investors minimum
1
All of the following facts are drawn from Thompson’s deposition, Thompson’s
sworn Declaration in Opposition to the SEC’s Motion for Summary Judgment, transcripts
of seminars Thompson personally delivered, and documents and websites Novus used in
connection with the instruments at issue in this case. That is to say, because this appeal
comes to us from a grant of summary judgment, we include only facts that Thompson, as
the non-movant, does not dispute. See Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670
(10th Cir. 1998).
2
Johnson was also sued by the SEC as a coconspirator in this case, but he does not
join Thompson in this appeal.
3
monthly returns of five percent on their investment, but that his investors sometimes
received as much as forty percent per month. Holloway conducted a real-time
demonstration of the algorithm for Thompson and Johnson, and as they watched the gains
“occurring on his screen,” they became believers. Id. at 141.
Thompson and Johnson’s enthusiasm about Holloway’s program piqued after they
spoke with one of Holloway’s investors, Casey Hall, who told them he had already
successfully invested millions with Holloway. Hall also told Thompson and Johnson
about his own real-estate based investment program, which guaranteed investors an even
more enticing ten percent monthly return. At Hall’s suggestion, Thompson and Johnson
obtained $360,000 in investment capital through Chase Bank’s small business loan
program, and the two began—through Novus—to invest in both ventures. Later, Novus
would also invest in yet another alleged real-estate program, Emma Golding’s “Calypso,”
which promised staggering monthly returns of fifteen percent on investment.3
Attracted by the prospect of such impressive returns, “friends and family” began
to inquire with Thompson and Johnson about participating in these programs, and the two
3
Not surprisingly, each of the eye-popping “programs” run by Holloway, Hall,
and Golding would later be exposed as Ponzi schemes. See generally In re Hedged-
Investments Assocs., Inc., 48 F.3d 470, 471 n.2 (10th Cir. 1995) (describing a “Ponzi”
scheme as “an investment scheme in which returns to investors are not financed through
the success of the underlying business venture, but are taken from principal sums of
newly attracted investments,” and usually attracting investors by promising them “large
returns for their investments”). Thompson insists that he “did believe [making such
impressive returns] was possible at the time,” and he stresses that “large numbers of
persons have been burned like we have been by Ponzi schemes.” Aplt. App. at 166.
4
approached Hall about involving other investors. However, Hall, unwilling to “deal with
a lot of people’s money,” insisted that Thompson acquire “loans” from “anyone
interested” and invest the proceeds with Hall through Novus. Aplt. App. at 167.
Holloway insisted on the same arrangement. Eager to “grow a reserve toward the $12
[m]illion needed to fund the China [b]iodiesel project,” id., Thompson undertook,
through Novus, to borrow money to invest with Hall, Holloway, and later, Calypso, and
by September 2006, Novus had begun transacting in the instruments at the heart of this
appeal.
i. The “loan” instruments
The boilerplate “UNSECURED PROMISSORY NOTE” (the “Instrument”),
which governed the majority of the transactions between Novus and its “lenders” (the
“holders”), stated in relevant part that Novus “promise[d] to [re]pay” the principal
amount (Novus required a minimum “loan” of $100,000) after a term of six months, plus
monthly interest of between three and five percent, depending upon whether the holder
chose monthly payments or a lump sum at maturity. Id. at 246. The Instrument also
stated the following:
It is expressly understood between the parties that the Borrower shall be
using proceeds from the Note for further investments and it may not be
financially prudent because of the market conditions to pay the principal at
the end of the Note term. Therefore, Borrower shall have the option to
extend the term of the Note for a period of 6 months as long as the monthly
interest payments on the unpaid principal are made on a timely basis.
5
Id. (emphasis added). Finally, the Instrument stated on its face that it was not a security,
and it bore features such as acceleration conditions, a waiver-of-presentment clause, a
non-assignment clause, an attorney-fee-collection clause.4
ii. Marketing and selling the Instruments
According to Thompson, the Instrument was “not offered publicly all at once,”
Aplt. Br. at 5, and “what [he] told prospective lenders varied as time passed and as our
4
On the advice of counsel, around February 2007, Novus re-labeled the
Instrument a “JOINT VENTURE AGREEMENT” and altered many of its terms,
including requiring (1) that the party advancing money to Novus was “an accredited
investor, as defined as such by law, or a sophisticated investor,” Aplt. App. at 316, and
(2) that the lending party “ha[d] sufficient business and/or investment experience to enter
into this Agreement as a joint venture participant . . . .” Id. at 313. The joint venture
agreement did not contain the statement that holders’ funds would be used for further
investments, but it repeatedly characterized the transaction’s purpose as generating
opportunities for “return on investment,” albeit through the provision of “additional
working capital” for “expansion of [Novus’s] core business.” Id. at 312-15 (representing
also that Novus would “use . . . the joint venture working capital . . . in a manner that
shall be in full compliance with . . . all banking and securities acts . . .”). The joint
venture agreement contained no “fixed term,” but only a minimum term of six months,
after which the “Agreement shall be ongoing, at the pleasure and agreement of the
Parties.” Id. at 314.
At the summary judgment hearing before the district court, Thompson’s counsel
conceded that “there [was] no difference between the joint venture [agreement] and the
[unsecured promissory] note. . . . [The joint venture agreement is] a note . . . just gussied
up with a different form.” Supp. App. at 424. Throughout his briefs, Thompson refers to
both instruments collectively as the “Novus notes” or “Novus loans,” and offers virtually
no legal argument as to how the change should affect our analysis. Accordingly, and
because Thompson never argues that Novus changed anything about its business
practices (e.g., by actually vetting potential holders’ accreditation status) after moving to
the joint venture agreement, this opinion’s references to the “Instrument” generally
encompass transactions involving both the unsecured promissory note and the joint
venture agreement, unless otherwise indicated.
6
company evolved,” Supp. App. at 321. At first, Thompson simply “ma[de] referrals” to
his “friends and family” so that they could take out small business loans, as he had, from
Chase Bank. Id. at 213. But in so doing, Thompson would “make them aware of the
money they could earn . . . how [Thompson] was earning money.” Id. Eventually, Hall
agreed to accept the proceeds of “loans” between Novus and Instrument holders, and so
early holders “loaned funds to Novus and then [Thompson] loaned them to Casey Hall.”
Id. at 230. Thompson told these early holders “the type of business that [he] was doing
and what the money was used for.” Id. at 231. As “more and more people were
interested in the loan program . . . [Thompson and Johnson] decided to turn [the
Instruments] into more of a business.” Id. at 236.
As Novus grew, Thompson fielded conference sales calls set up by a third party;
he offered existing holders referral fees; he began to advertise the Instruments on
Novus’s web site; and by February 2007, he had begun personally touting the Instruments
at shopping-mall seminars, where he would explain to prospective holders how they
could liquidate equity in their homes and invest in the Instrument, which he
“characterized . . . as low risk,” Supp. App. at 262: he claimed that Novus’s product was
“more conservative than a 401(k) [or a] mortgage,” Aplt. App. at 458, extoled Novus’s
“reserve of cash and assets to cover any money that we borrow for six months,” id. at
479-80, and asserted that “when you put $100,000 into our program, we only use $25,000
of that” for core-business “projects”; “[t]he other $75,000,” he claimed, “we don’t use,”
id. at 479.
7
iii. The SEC intervenes
On April 11, 2007, the SEC curtailed Novus’s activities when it filed a civil
complaint and obtained a temporary restraining order against Novus, Thompson, Hall,
Holloway, and others. All told, before the SEC shut it down, Novus made a total of 138
of its “loans” to around sixty holders.
II. Procedural background
After filing suit against Thompson and others under several civil-enforcement
provisions of the Securities Acts, including 15 U.S.C. §§ 77q(a)(1)-(3), 78j(b), 77e(a) &
(c), and 780(a), the SEC filed a motion for summary judgment, which the district court
granted in part and denied in part. As is relevant here, the district court granted the
SEC’s motion on the issue of whether the Instruments Thompson and Novus sold were
securities as defined under the Securities Acts, holding that they were securities as both
“notes” under Reves v. Earnst & Young, 494 U.S. 56 (1990), and “investment contracts”
under SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Thompson timely filed this appeal,
in which he argues only that the district court erred when it granted summary judgment
on the issue of whether the Instruments Novus sold were securities.
STANDARD OF REVIEW
We review a district court’s grant of summary judgment de novo. Garrison v.
Gambro, Inc., 428 F.3d 933, 935 (10th Cir. 2005). Summary judgment is appropriate
when “there is no genuine dispute as to any material fact and . . . the movant is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(a). In making that determination, a
8
court “view[s] the evidence and draw[s] reasonable inferences therefrom in the light most
favorable to the nonmoving party.” Garrison, 428 F.3d at 935 (quoting Simms v. Okla.
ex rel Dep’t of Mental Health & Substance Abuse Servs., 165 F.3d 1321, 1326 (10th Cir.
1999)).
Even though we view the evidence in the nonmovant’s favor, however, a factual
dispute cannot be said to be “genuine” if the nonmovant can do no more than “simply
show that there is some metaphysical doubt as to the material facts.” Champagne Metals
v. Ken-Mac Metals, Inc., 458 F.3d 1073, 1084 (10th Cir. 2006); accord Rice v. United
States, 166 F.3d 1088, 1092 (10th Cir. 1999) (“To carry his burden, [the non-movant]
must present more than a scintilla of evidence.”). That is to say, we will uphold a district
court’s grant of summary judgment if the evidence is “so one-sided that one party must
prevail as a matter of law.” Simpson v. Univ. of Colo. Boulder, 500 F.3d 1170, 1179
(10th Cir. 2007) (quoting Bingaman v. Kan. City Power & Light Co., 1 F.3d 976, 980-81
(10th Cir. 1993)).
As is especially relevant here, a court’s “genuineness” review “necessarily
implicates the substantive evidentiary standard of proof that would apply at the trial on
the merits.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). In other words,
“an issue of material fact is genuine only if the nonmovant presents facts such that a
reasonable [factfinder] could find in favor of the nonmovant.” Planned Parenthood of the
Rocky Mountains Servs. v. Owens, 287 F.3d 910, 916 (10th Cir. 2002). This means that
once the movant has made a showing that there is no genuine dispute of material fact, the
9
non-moving party must “make a showing sufficient to establish the existence of an
element essential to that party’s case, and on which that party will bear the burden of
proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
“In the absence of a genuine dispute of material fact, we determine whether the
district court correctly applied the substantive law.” Owens, 287 F.3d at 916.
DISCUSSION
A. The broad definition of “security” under the Securities Acts
In response to “serious abuses in a largely unregulated securities market,” Reves,
494 U.S. at 60, Congress enacted the Securities Acts “to restore investors’ confidence in
the financial markets,” Marine Bank v. Weaver, 455 U.S. 551, 555 (1982) (discussing
specifically the ’34 Act). To meet that end, Congress “painted with a broad brush” in
defining “security,” so as to capture under the ambit of the Acts the “countless and
variable schemes devised by those who seek the use of the money of others on the
promise of profits.” Reves, 494 U.S. at 62 (internal quotation marks omitted) (citing W.J.
Howey Co., 328 U.S. at 299). Section 2(1) of the Securities Act of 1933 thus defines
“security” in broad and general terms as:
any note, stock, treasury stock, security future, security-based swap, bond,
debenture, evidence of indebtedness, certificate of interest or participation
in any profit-sharing agreement, collateral-trust certificate, preorganization
certificate or subscription, transferable share, investment contract, voting-
trust certificate, certificate of deposit for a security, fractional undivided
interest in oil, gas, or other mineral rights, any put, call, straddle, option, or
privilege on any security, certificate of deposit, or group or index of
securities (including any interest therein or based on the value thereof), or
any put, call, straddle, option, or privilege entered into on a national
10
securities exchange relating to foreign currency, or, in general, any interest
or instrument commonly known as a “security”, or any certificate of
interest or participation in, temporary or interim certificate for, receipt for,
guarantee of, or warrant or right to subscript to or purchase, any of the
foregoing.
48 Stat. 74, as amended, 15 U.S.C. § 77b(a)(1).5
In line with Congress’s broad regulatory aims, courts inquiring into an
instrument’s status as a “security” are not “bound by legal formalisms,” but instead must
“take account of the economics of the transaction under investigation” in order to capture
and effectuate the regulation of “investments, in whatever form they are made and by
whatever name they are called.” Reves, 494 U.S. at 61 (citing Tcherepnin v. Knight, 389
U.S. 332, 336 (1967)). Indeed, “form should be disregarded for substance and the
emphasis should be on economic reality.” Tcherepnin, 389 U.S. at 336.
However, the Supreme Court has cautioned that, in enacting the securities laws,
“Congress . . . did not intend to provide a broad federal remedy for all fraud.” Marine
Bank, 455 U.S. at 556 (emphasis added). Reflecting that principle, Congress tempered its
broad definition of “security” under the Acts with an exception applicable to short-term
5
The Supreme Court has “repeatedly ruled that the definitions of ‘security’ in §
3(a)(10) of the 1934 Act and § 2(1) of the 1933 Act are virtually identical,” and should be
treated as such in decisions dealing with the scope of the term. Landreth Timber Co. v.
Landreth, 471 U.S. 681, 685 n.1 (1985) (citing Marine Bank, 455 U.S. at 555 n.3 (1982));
compare 15 U.S.C. §§ 77b(a)(1) & 77c(3) with 15 U.S.C. § 78c(a)(10). We “therefore . .
. refer to cases involving the 1933 and 1934 Acts without distinguishing between which
Act each case involved.” Resolution Trust Corp. v. Stone, 998 F.2d 1534, 1538 n.3 (10th
Cir. 1993).
11
notes.6 Similarly, the Supreme Court has held that “the phrase ‘any note’ [as it appears in
the Securities Acts] should not be interpreted to mean literally ‘any note,’ but must be
understood against the backdrop of what Congress was attempting to accomplish in
enacting the Securities Acts.” Reves, 494 U.S. at 63. Accordingly, in Reves, the Court
articulated a test to enable courts to discern “notes issued in an investment context (which
are ‘securities’) from notes issued in a commercial or consumer context (which are not).”
Id. It is to that test that we now turn to determine whether the Instruments issued by
Novus—which are akin to notes in some respects—were securities.
B. Reves’s “family resemblance” test
In Reves v. Ernst & Young, the Supreme Court resolved a circuit split on the
proper approach to ascertaining whether a “note” is a security under the Securities Acts.
494 U.S. at 64-65. The Court adopted a version of the Second Circuit’s “family
resemblance” test, under which
6
The form of the short-term-note exception varies slightly between the two
Securities Acts, although both purport to exclude from coverage “any note, draft, bill of
exchange, or banker’s acceptance . . . which has a maturity at the time of issuance of not
exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of
which is likewise limited.” Compare 15 U.S.C. § 78c(10) (’34 Act) (including that
language within the definition of the term “security” itself), with 15 U.S.C. § 77c(3) (’33
Act) (including that language in a separate registration exemption). We have previously
recognized that the short-term note exceptions are “limited to prime quality negotiable
commercial paper of a type not ordinarily purchased by the general public.” Holloway v.
Peat, Marwick, Mitchell & Co., 900 F.2d 1485, 1489 (10th Cir. 1990). Thompson
appropriately does not argue that the Novus Instruments, which were not “prime quality
commercial paper,” fall outside the Acts’ regulatory ambit on the basis of the short-term-
note exception.
12
[a] note is presumed to be a “security,”7 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
7
The Court in Reves explicitly left open whether the presumption that a note is a
security applies to notes that mature in less than nine months. Reves, 494 U.S. at 65 n.3.
Specifically, the Court recognized that under the Second Circuit’s version of the family
resemblance test,
No presumption of any kind attached to notes of less than nine months’
duration. The Second Circuit’s refusal to extend the presumption to all
notes was apparently founded on its interpretation of the statutory exception
for notes with a maturity of nine months or less. Because we do not reach
the question of how to interpret that exception, . . . we likewise express no
view on how that exception might affect the presumption that a note is a
“security.”
Id. After the Court decided Reves, we suggested in Holloway v. Peat, Marwick, Mitchell
& Co., that the presumption does apply to notes maturing in less than nine months. 900
F.2d 1485, 1488-89 (10th Cir. 1990) (observing that “[e]ven if an issuer cannot rebut the
presumption that a note is a security under the family resemblance test, the note may still
be excluded from coverage of the Acts if it ‘has a maturity at the time of issuance of not
exceeding nine months,’” and reaffirming that the “exception for short-term notes is
limited to prime quality negotiable commercial paper” (emphases added)); accord S.E.C.
v. R.G. Reynolds Enters., Inc., 952 F.2d 1125, 1132 (9th Cir. 1991) (limiting the short-
term note exception to “commercial paper and hold[ing] that the presumption that a note
is a security applies equally to notes of less than nine months maturity that are not
commercial paper”).
In this case, Thompson makes no arguments about how the Instruments’ 6-month
term might affect application of the presumption. See Aplt. Br. at 32 (arguing only that
“courts are generally inclined to look more closely at notes maturing in less than nine
months and are less inclined to automatically label them as securities” (emphasis added)).
Perhaps this is because the Novus Instruments allowed Novus to extend the term for an
additional six months at its own discretion. See 15 U.S.C. § 78c(a)(10) (excluding from
coverage “any note . . . which has a maturity at the time of issuance of not exceeding nine
months, exclusive of days of grace, or any renewal thereof . . . which is likewise
limited”). In any event, because Thompson appears to accept that the presumption
applies to Novus’s Instruments, we address that issue no further.
13
the case of Exchange Nat’l Bank of Chicago v. Touche Ross & Co., 544
F.2d 1126, 1137 (2d Cir. 1976)].
Id. at 67 (emphasis added). The categories of instrument enumerated by the Second
Circuit which are not securities include
the note delivered in consumer financing, the note secured by a mortgage
on a home, the short-term note secured by a lien on a small business or
some of its assets, the note evidencing a ‘character’ loan to a bank
customer, short-term notes secured by an assignment of accounts
receivable, or a note which simply formalizes an open-account debt
incurred in the ordinary course of business (particularly if, as in the case of
the customer of a broker, it is collateralized)[, and] . . . notes evidencing
loans by commercial banks for current operations.
Id. at 65 (quoting Exchange Nat’l Bank of Chicago, 544 F.2d at 1137, and Chemical
Bank v. Arthur Andersen & Co., 726 F.2d 930, 939 (2d Cir. 1984)).
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.” Id. at 66-67 (internal quotation marks omitted). “Failure to satisfy one of
the factors is not dispositive; they are considered as a whole.” S.E.C. v. Wallenbrock,
14
313 F.3d 532, 537 (9th Cir. 2002); accord Stone, 998 F.2d at 1539 (concluding that, “on
balance” of the family-resemblance factors, the notes were not securities).
The Court instructed that if application of Reves’s four factors “leads to the
conclusion that an instrument is not sufficiently similar to an item on the list,” the
analyzing court must then decide “whether another category should be added . . . by
examining the same factors.” Reves, 494 U.S. at 67. As the Court did in Reves, we have
conceived of this analysis as comprised of two separate steps. See Holloway, 900 F.2d at
1487. However, “both inquiries involve the application of the same four-factor test, and
so the two essentially collapse into a single inquiry.” Wallenbrock, 313 F.3d at 537;
accord Stone, 998 F.2d at 1538-39 (treating the two steps as a single inquiry designed to
facilitate the determination of whether the subject instrument’s “‘family resemblance’ to
[the enumerated] notes is sufficiently strong to cause [the subject instrument] to be
included within the categories of notes that are not regarded as securities”). We construct
our family-resemblance inquiry into the “securities” status of the Novus Instruments,
then, around a single balancing of Reves’s four factors, but stressing that those four
factors only are directed toward assisting in a determination whether the Instruments in
question are similar (or bear a family resemblance) to the types of “notes” enumerated by
the Second Circuit in Exchange Nat’l Bank of Chicago, 544 F.2d at 1137, and Chemical
Bank, 726 F.2d at 939.
15
Before we turn to apply the Reves factors in this case, however, we pause to
address two additional points pertaining to the nature of Reves’s family-resemblance
inquiry generally, and at the summary judgment stage in particular.
First, Thompson repeatedly claims that he is entitled to have a jury make the
ultimate determination under the family-resemblance test as to whether the Instruments
were securities under the Acts. In making this claim, however, Thompson all but ignores
authority in this circuit and elsewhere suggesting that the opposite is true: for example,
we have previously held that, in the context of a civil suit, the ultimate question of
whether an instrument is a security is “a question of law and not of fact,” such that
submitting the question to a jury was error. Ahrens v. Am.-Canadian Beaver Co., 428
F.2d 926, 928 (10th Cir. 1970); accord 4–82 Modern Federal Jury Instructions—Civil, ¶
82–3, Comment, n.13 (“[T]he question of whether a security is within the terms of the
Security Act is better viewed as a question of law for the court.”); see also McNabb v.
S.E.C., 298 F.3d 1126, 1130 (9th Cir. 2002) (“Whether a note is a security under the
1934 Act is a question of law, which we review de novo.”); S.E.C. v. Life Partners, Inc.,
87 F.3d 536, 540-41 (D.C. Cir. 1996) (same).
The Supreme Court’s decisions in this area also suggest that, at least in the context
of civil suits, the ultimate determination whether an instrument is a security is one of law.
For example, in SEC v. W.J. Howey Co., 328 U.S. 293 (1946), the Court decided that
interests in orange groves were securities as a matter of law over the dissent of Justice
Frankfurter, who “call[ed] for the Court to uphold the district court’s determination as a
16
reasonable factual finding rather than a freely reversible legal issue.” See U.S. v.
Johnson, 718 F.2d 1317, 1332 (5th Cir. 1983) (en banc) (Williams, J., dissenting)
(emphasis added). Similarly, both the Court’s language in Reves and the complexity of
the test it endorsed there—prescribing a rebuttable presumption, comparison of the
subject instrument to a judicially crafted list of non-security instruments, and an inquiry
into the existence and adequacy of alternate regulatory schemes—strongly suggest that, at
least in the civil context, the ultimate conclusion that a “note” is a security is one for the
court to make as a matter of law. See, e.g., Reves, 494 U.S. at 61 (“[T]he task has fallen
to the Securities and Exchange Commission . . . and ultimately to the federal courts to
decide which of the myriad financial transactions in our society come within the coverage
of these statutes” (emphasis added) (internal quotation marks omitted)); id. at 67
(instructing “courts” to compare the subject instrument to a “judicially crafted” list of
non-securities, and if the subject “instrument is not sufficiently similar to an item on the
list,” to decide “whether another category should be added” by examining the “family
resemblance” factors (emphasis added)).
Of course, none of this is to say that summary judgment will be appropriate where
the parties have identified genuine disputes of material fact that could tip a reviewing
court’s balance of the “family resemblance” factors articulated in Reves. Indeed, as we
observed recently elsewhere in the context of a criminal case, the individual factors of the
“family resemblance” test, which inquire into “motivation, distribution, expectation, and
risk,” lead us to conclude that “the question of whether a note is a security has both
17
factual and legal components.” United States v. McKye, ---F.3d---, No. 12-6108, 2013
WL 4419330, at *4-*5 (10th Cir. Aug. 20, 2013) (holding that, notwithstanding the
complexity of the Reves test, in the context of a criminal case, the ultimate question
whether an instrument is a security must be submitted to the jury when it “implicate[s] an
element of the offense.”). However, following previous Tenth Circuit precedent, see
Ahrens, 428 F.2d at 928, we hold 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; thus, resolution of factual disputes will be necessary only in those rare
instances where the reviewing court is unable to make a proper balancing of the family-
resemblance factors without resolving those factual disputes.8
That leads us to the second, related point: we conduct our analysis today mindful
of the way in which the presumption that all notes are securities, see Reves 494 U.S. at
67, colors, at the summary judgment stage, the evidentiary burden of a non-movant who
argues that a note is not a security. If, as here, the moving party can satisfy its “initial
responsibility of presenting evidence to show the absence of a genuine issue of material
fact,” Hom v. Squire, 81 F.3d 969, 973 (10th Cir. 1996), the non-movant must make “a
showing sufficient to establish” that the note is not a security, because the presumption
that all notes are securities means that the non-movant would ultimately “bear the burden
8
Even if the ultimate “security” determination were one for the jury, as our
subsequent analysis makes clear, the record in this case is sufficient to justify summary
judgment for the SEC on the issue of whether the Instruments were securities.
18
of proof” on that issue at trial. See Celotex, 477 U.S. at 322. This required showing, we
think, means that the non-movant’s evidence that notes are not securities, if believed,
must create a material amount of persuasion above equipoise, because it would have to be
sufficient to overcome the presumption that all notes are securities.
We can now turn to the four factors from Reves to determine whether, as
Thompson alleges, the district court erred when it ruled that the Novus Instruments were
securities as a matter of law.
C. Application of the “family resemblance” test to the Novus Instruments
Thompson claims that he has raised disputes of fact material to whether the
Instruments were securities, so that the district court’s grant of summary judgment on that
issue was error. In the discussion that follows, we limit our consideration to facts
Thompson does not dispute and draw all reasonable inferences in his favor. See Adler v.
Wal-Mart Stores, Inc., 144 F.3d 644, 670 (10th Cir. 1998). Even when viewed in the
light most favorable to Thompson, however, Thompson cannot meet his burden to rebut
the presumption that Novus’s Instruments were securities under Reves’s family-
resemblance test.
1. Motivations of the parties
We first examine the motivations that would prompt a reasonable buyer and seller
of the Instruments to enter into the transaction. Reves, 494 U.S. at 66. “If the seller’s
purpose is to raise money for the general use of a business enterprise or to finance
substantial investments and the buyer is interested primarily in the profit the note is
19
expected to generate, the instrument is likely to be a ‘security.’” Id. On the other hand,
“[i]f the note is exchanged to facilitate the purchase and sale of a minor asset or consumer
good, to correct for the seller’s cash-flow difficulties, or to advance some other
commercial or consumer purpose, . . . the note is less sensibly described as a ‘security.’”
Id.
This factor clearly favors a finding that the Instruments were securities. As to
Novus’s motivation for issuing the Instruments, Thompson’s own sworn statement
reflects that “Novus started borrowing funds from companies owned by our friends and
families and using most of those funds to grow a reserve toward the $12 [m]illion needed
to fund the China Biodiesel project, earning interest by placing them with either Hall or
Holloway.” Aplt. App. at 167; accord id. at 168 (characterizing the Instruments as “a
business-to-business loan to be used for the growth of Novus at our discretion” (emphasis
added)). And on their face, most of the Instruments bore the following: “[i]t is expressly
understood between the parties that the Borrower shall be using the proceeds from the
Note for further investments . . . .” Id. at 246. Thompson does not claim that Novus
issued the Instrument for any other purpose than to “raise money for the general use of
[its] business enterprise [and] finance substantial investments,” Reves, 494 U.S. at 66.
As to the motivation of the holders, the attractive interest rate the Instruments
guaranteed provides strong evidence that holders were “interested primarily in the profit
the note [was] expected to generate,” id. Novus promised investors monthly returns of
between three and five percent (i.e., annual returns of between thirty-six and sixty
20
percent) on the money they “loaned” Novus. See Wallenbrock, 313 F.3d at 538 (“[T]he
promise of a high, stable 20% interest rate likely attracted investors looking for
significant profits.”); Stoiber v. SEC, 161 F.3d 745, 750 (D.C. Cir. 1998) (“[A] favorable
interest rate indicates that profit was the primary goal of the lender.”). Thompson also
acknowledges that early prospective holders “wanted to participate” after he told them of
the returns he was making in Hall and Holloway’s “programs,” and so “they loaned funds
to Novus and then [he] loaned them to Casey Hall.” Supp. App. at 230.
The record also contains substantial evidence that the holders understood that
Novus was investing their money, and not “correct[ing] for [its] cash-flow difficulties, or
. . . advanc[ing] some other commercial or consumer purpose,” Reves, 494 U.S. at 66.
As we have already emphasized, the Instruments themselves stated that “[i]t is expressly
understood between the parties that the Borrower shall be using the proceeds from the
Note for further investments . . . .”9 Aplt. App. at 246 (emphasis added); See Stoiber, 161
9
When it switched to the joint venture agreements, Novus removed the language
indicating that holders’ money would be used for “further investments.” However,
Thompson’s attorney conceded that there was “no difference between the joint venture
and the note,” neither of which required holders of the Instrument to do anything “besides
give the[ir] money.” Supp. App. at 424. The joint venture agreement characterized the
purpose of the venture as providing “working capital,” but it repeatedly referenced
“generat[ing] a return on investment,” and it stated that the holder “expressly represents .
. . that [the holder] has the ability to provide . . . discretionary investment funds,” and that
Novus would use holders’ funds in compliance with, inter alia, “all banking and
securities laws.” Aplt. App. at 312-15 (emphases added). If anything, we think the
changes to the Instrument made more clear to holders that their money was being used
“for the general use of [Novus’s] business enterprise or to finance [Novus’s]
investments,” see Reves, 464 U.S. at 66.
21
F.3d at 749 (holding that information contained in “reaffirmation statements” signed by
customers showed they knew most of the money would be used for commodities trading,
which clearly fell under Reves’s “financing substantial investments” language).
In response, Thompson invokes what he calls a “compendium of declarations from
sixteen persons who each made one or more loan [sic] to Novus,” which Thompson
claims provides enough evidence to create a genuine dispute of material fact as to the
holders’ motivations for entering into the Novus transactions. Aplt. Br. at 24-25. But
this “compendium” does not appear in the record before this court, and so we decline his
invitation to consider it.10 United States v. Stoner, 98 F.3d 527, 530 (10th Cir. 1996)
10
Even if we were to consider this evidence, the holders’ conclusory
characterizations of the transactions as “loans” or “investments” are not relevant to the
“motivation” factor, which, as we have already explained, asks why the holders gave
Novus money, and for what holders believed Novus was using it. Thompson identifies
no evidence in the record suggesting that holders believed their money was to be used “as
stop-gap measures to correct for cash-flow difficulties, loans to facilitate the purchase of
minor assets, or notes grounded in a traditional commercial purpose,” Wallenbrock, 313
F.3d at 538. In fact, the evidence in the record strongly suggests the opposite. See, e.g.,
Aplt. App. at 170 (Thompson’s declaration) (stating that prospective holders “invested
with Novus, not because of any specific representation, [but] because they had heard that
people who had lent us money had been paid as agreed . . .”); id. at 239-40 (Novus’s web
site) (admonishing that the Instruments were “not an investment program,” but then
characterizing them as “Money Technology,” which would allow holders to “[r]ealize
and multiply the value of [their] money by strategically repositioning [their] cashflow and
assets,” and promising to “show companies how to reposition their idle assets and cash
into powerful money generating tools” (emphasis added)).
As to Thompson’s claim that holders loaned Novus money because they “trusted”
him, that evidence does not assist Thompson at all, because trust would be an expected
ingredient in making either a loan or an investment. See Stoiber, 161 F.3d at 750
(considering appellant’s similar claim that customers provided funds “because of the
personal relationships [appellant] had with them,” and admonishing that “[t]his display of
Continued . . .
22
(“The appellant is responsible for insuring that all materials on which he seeks to rely are
part of the record on appeal.”).
In sum, the apparent motivations of the parties to the Novus transactions bear little
resemblance to the motivations of ordinary parties who would enter into the categories of
non-securities instrument listed by the Second Circuit in Exchange Nat’l Bank of
Chicago and Chemical Bank: while the usual “buyers” of those non-securities notes—
sophisticated banks and outfits offering purchase-money loans—may be motivated by
profit, the “sellers,” unlike Novus, are ordinarily consumers or businesses motivated to
correct temporary cash-flow difficulties or to make one-time purchases of items which
will function as direct collateral in case of default. We hold that the “motivation” factor
cuts strongly in favor of Reves’s presumption that the Instruments are securities.
2. The plan of distribution11
The second Reves factor asks the court to determine whether the Instruments were
ones in which there was “common trading for speculation or investment.” Reves, 494
trust . . . does not speak to the note holders’ original motivations in making the loans[,] . .
. [but r]ather . . . to the information available to them when deciding whether the notes
involved a tolerable level of risk”).
11
Thompson’s lawyer conceded this factor at the summary judgment hearing
when he stated that Thompson and Novus “did advertise [the instrument] on the website .
. . [and] if you were to argue to a jury that that’s not public, that would be a waste of your
time and you’d lose credibility doing it.” Supp. App. at 421. Ordinarily, “[w]hen a party
concedes a legal issue in the district court, we will not review the issue on appeal.” Neal
v. Sandia Nat’l Labs., 157 F. App’x 67, 69 (10th Cir. 2005) (unpublished) (citing, e.g.,
Lyons v. Jefferson Bank & Trust, 994 F.2d 716, 722 (10th Cir. 1993)). However, we
nevertheless analyze this factor so as to be able to assign it the proper weight.
23
U.S. at 66. Though it can be a strong indicator that a note is a security, the sale of the
notes on an exchange is not necessary to establish the requisite common trading. Id. The
same is true with respect to other characteristics common to many types of securities,
such as transferability. See Great Rivers Co-op. of Se. Iowa v. Farmland Indus., Inc., 198
F.3d 685, 699-700 (8th Cir. 1999). Ultimately, the Supreme Court has instructed that the
offer and sale of instruments to a “broad segment of the public” is all that is necessary to
establish this element. Reves, 494 U.S. at 68; see also id. at 61 (emphasizing that
Congress “enacted a definition of ‘security’ sufficiently broad to encompass virtually any
instrument that might be sold as an investment”). Importantly, an “evident interest in
widening the scope of distribution,” combined with the “broad availability of the notes”
can tip this factor “strongly in favor” of classifying the note as a security. Wallenbrock,
313 F.3d at 539.
Thompson claims that the “Novus notes, sold mostly by word-of-mouth to sixty
people, many of whom were family and friends, certainly were not ‘sold to a broad
segment of the general public.’” Aplt. Br. at 28. But the record belies this contention.
Instead, Thompson’s own sworn statements leave us with the firm conviction that, while
Novus’s first holders may have been Thompson’s “family and friends,” Novus sought to
expand its distribution to anyone interested who had $100,000 to invest—even if that
meant unsophisticated investors obtaining the money by liquidating home equity—and it
made its Instruments available to anyone willing to pay.
24
According to Thompson, Novus’s “loan program” started off small and ad hoc, but
“when more and more people were interested in the loan program, . . . [Thompson and his
partner Johnson] decided to turn it into more of a business.” Supp. App. at 236. To that
end, between December 2006 and February 2007, Thompson admits that he
“participate[d] in conference calls with people who were interested in placing funds with
Novus.” Id. at 267. These calls were frequently arranged by Carol Dysart, “a highly
motivated marketer” and an agent of Equidigm Financial Group, another company
cofounded by Thompson. Id. at 266-67. By February 2007, Novus was paying referral
fees to existing holders who brought in new prospective holders. Id. at 263. Also by this
time, Thompson had begun delivering shopping-mall seminars promoting Novus’s “loan
program” and maintaining a web site, accessible to the general public, advertising both
the Instruments and the seminars.12 And by April 2007, Novus had engaged Equidigm to
train Equidigm’s agents to sell the Instrument on commission.
Against this background, Thompson nevertheless insists that Novus never targeted
the general public with its Instruments. He claims that Novus always required its holders
to be a “business,” stressing that, from February 2007 on—after Novus converted the
Instruments from unsecured promissory notes to joint venture agreements—Novus
contractually required holders to be “accredited” or “sophisticated” investors. Aplt. App.
12
Although the seminars were advertised as “by invitation only,” Aplt. App. at
489, complimentary tickets could be downloaded by anyone at no cost from Equidigm’s
website, which was accessible to the public at large. Supp. App. at 74-77.
25
at 313. However, these new requirements appear to have been mere formalities designed
specifically to circumvent the Securities Acts while maintaining a broad distribution base.
See Aplt. App. at 176-77 (Thompson’s declaration) (describing how Novus hired an
attorney who informed Thompson that the promissory-note Instruments “could be
considered to be a security . . . because of the number of the promissory notes being used
by Novus,” and advised “Novus to change its documenting method of accepting loans to
a ‘Joint Venture’ Agreement to help stay away from any grey area” (internal quotation
marks omitted)).
Indeed, Thompson offers no evidence that Novus ever sought to verify the
accreditation status of any of its prospective holders, or to change any of its other
business practices, with the adoption of the joint venture agreements. To the contrary,
the record shows that even after adding the new contractual provisions, Thompson
targeted unsophisticated investors with whom he had no prior relationship: at his
seminars, for example, Thompson advised prospective holders on basic investment
concepts, such as how to obtain cash from home equity, and the importance of registering
a company to avoid personal liability.13 Thompson also acknowledges that “[f]or those
13
For example, a characteristic segment of one seminar betrays Thompson’s expectations
about the sophistication of prospective holders:
Now I’m going to tell you two things that I’m asking you to consider doing
regardless if you participate in our program or not. One of those is you
have a company. How many of you have a company right now that you are
Continued . . .
26
the owner or you have a company? Raise your hands high. Okay. So
some of you still don’t have a company.
If you do nothing else I suggest that you register a company, at least an
LLC. It could be a C corp., S corp., it doesn’t matter. All of you that have
different types of companies, great. But you should at least have an LLC.
That let[s] you start operating and putting some of those assets you have
into a company. Separate yourself from that liability, if something
happens, somebody sues you, whatever. Plus give yourself the benefit and
options that the tax world allows you when you’re a corporation versus an
individual.
When you start increasing your cash as an accredited investor or a
sophisticated investor, which you’ve all become tonight, you should have a
company that you put that into so you have that level of separation.
Aplt. App. at 411-12 (emphases added). At another seminar, Thompson’s statements
indicate that Novus had already expanded its scope of distribution beyond “friends and
family”:
Before the first people came in, they all knew me, so they didn’t even need
a contract in most cases. You know, it was a handshake and—you know,
we’ve been making payments on time, a hundred percent track record. . . .
But because so many people don’t know me now, or the company, don’t
know our team, we’re putting together a nice packet of information . . . .
***
Each of you are going to be given a ticket. . . . If you like what you heard
tonight and you’d like to benefit someone else that wasn’t here tonight,
please take one of these tickets. This will allow them to come to our
seminar. And they can go on-line to register—to reserve a seat. So if you
have somebody in mind (inaudible), please share it with them and give
them one of those tickets.
Id. at 494-95, 505-06.
27
who were interested in lending money to Novus, it didn’t matter to me where the funds
came from as long as it was from their business,” and “for those who were interested in
obtaining loans from banks, I was more than willing to give them all the information that
I had had,” which included referring individuals to Eric Wheeler at Chase Bank, who had
facilitated Thompson and Johnson’s first small business loans. Supp. App. at 276-77.
All of this suggests that, as a practical matter, Novus sought to sell its Instruments to
anyone who could come up with $100,000. See also Wallenbrock, 313 F.3d at 539
(finding this factor cut toward “securities” where appellant “put no limitations on who
could purchase the notes, offering them to any member of the general public who would
make the investment”).
Thompson’s remaining two arguments on this factor are equally unavailing. First,
Thompson points us to the case of Banco Espanol de Credito v. Sec. Pac. Nat’l Bank, 973
F.2d 51 (2d Cir. 1992), where the Second Circuit found that the plan of distribution cut
against a finding that the instruments were securities. But that case is inapposite. There,
(1) all parties were sophisticated commercial or financial institutions that received
“detailed individualized presentations” about the product; (2) the instruments were not
offered to the general public; and therefore (3) eligible buyers were limited to
sophisticated entities “with the capacity to acquire information about the debtor.” Banco
Espanol, 973 F.2d at 55. Thus, “Banco Espanol was more analogous to a group of highly
sophisticated commercial entities engaging in short-term commercial financing
arrangements,” Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808, 813 (2d. Cir. 1994), than
28
the Novus transactions, where the record strongly suggests that Thompson recruited
ordinary people to lend Novus money under vague auspices.
Finally, Thompson claims Novus’s final “loan” tally—138 Novus Instruments
sold to around sixty holders—resembles the actual distribution in cases like McNabb and
Stoiber, where the courts found six and thirteen customers, respectively, were not a
“broad segment of the public.” See McNabb, 298 F.3d at 1132; Stoiber, 161 F.3d at 751.
We disagree that the group sizes in those cases are similar enough to the size of the
Novus group to render the cases persuasive on the point. Compare SEC v. R.G.
Reynolds Enters., Inc., 952 F.2d 1125, 1128, 1131 (9th Cir. 1991) (finding the “plan of
distribution” factor met where the buyer “raised approximately $2 million from at least
148 investors in several states”); Wright v. Downs, No. 91-2050, 1992 WL 168104, at *3
(6th Cir. 1992) (unpublished) (finding the “plan of distribution” factor met where the
notes “were offered to all Church members from the pulpit, as well as broadcast
throughout the community on eight local cable television stations,” and where “more than
200 people purchased the notes in which there were no restrictions as to purchasers”).
In sum, even when the evidence is construed in Thompson’s favor, the only
reasonable inference to be drawn is that Novus intended to make, and did make, its
Instruments available to any member of the public who could afford them. We also note
that the plan of distribution of the Novus Instruments bears no similarity to the typical
plan of distribution in the non-security instruments on the Second Circuit’s list: in those
distribution plans, the party receiving the infusion of cash will often transact with only
29
one “lender”; and the “lender,” ordinarily a bank or some other lending institution, will
infuse cash into myriad “borrowers” as part of its ordinary course of business. Novus’s
scheme, on the other hand, involved one “borrower” and myriad “lenders,” which
resembles far more closely the activity of a company selling its own stock on an
exchange. This factor strongly cuts toward finding that the instruments were “securities.”
3. The reasonable perceptions of the investing public
Under Reves’s third factor, “we examine the reasonable expectations of the
investing public,” with the court considering “instruments to be ‘securities’ on the basis
of such public expectations, even where an economic analysis of the circumstances of the
particular transaction might suggest that the instruments are not ‘securities’ as used in
that transaction.” Reves, 494 U.S. at 66. This factor “generally turns on whether [the
notes] are reasonably viewed by purchasers as investments.” Stoiber, 161 F.3d at 751.
Where the instruments are characterized by the originator as “investments” and there are
no “countervailing factors” that would lead a reasonable person to question this
characterization, “it would be reasonable for a prospective purchaser to take the
[originator] at its word.” Reves, 494 U.S. at 69. “Conversely, when note purchasers are
expressly put on notice that a note is not an investment, it is usually reasonable to
conclude that the ‘investing public’ would not expect the notes to be securities.” Stoiber,
161 F.3d at 751.
This factor is a closer call. On the one hand, the Instrument expressly stated that
“[Novus] is not offering a security as defined by the Securities and Exchange
30
Commission.” Aplt. App. at 247; accord id. at 240 (Novus web site) (“This is not an
investment program.”). Additionally, the Instruments bore features not ordinarily
associated with securities, such as acceleration conditions, a waiver-of-presentment
clause, a non-assignment clause, and an attorney-fee-collection clause. And at
Thompson’s seminars, he represented that the Instruments fell outside of the SEC’s
regulatory ambit.14
On the other hand, we can identify some “countervailing factors” that would lead a
reasonable person to question Novus’s characterization of the Instruments as non-
securities. Thompson testified that he employed, from early on, a concept sounding in
investment called “Money Technology,” which he touted to describe the Instrument’s
function to prospective holders.15 Supp. App. at 214; accord Aplt. App. at 244 (“[O]ur
14
Thompson also suggests, again, that we look to the sixteen previously
referenced declarations by investors, who “were not considering the notes to be
investments.” Aplt. Br. at 30. As we have said already, those declarations are not before
us, because neither party has included them in the record on appeal. But even if we were
to consider Thompson’s selected highlights of these declarations, they do little to negate
the possibility that holders viewed the Instruments as investments. In fact, the
declarations mostly cut against Thompson. Compare Aplt. Br. at 25 (alleged excerpt
from deposition of Phil Secrist) (“I understood that it [Novus program] involved
business-to-business loans.” (alteration in Thompson’s brief)), with, e.g., Aplt. Br. at 25
(alleged excerpt from deposition of Jacob Garn) (“I would say that I invested – and if I
were to summarize, I invested based on trust in Ralph Thompson . . . .” (emphases
added)), and Aplt. Br. at 26 (alleged excerpt from deposition of Sharon Garn) (stating
that “[we decided] that this would be an investment that was safe, that we could make”
(alteration in Thompson’s brief) (emphasis added)).
15
Novus’s web site claimed that it could help holders unlock the “[m]ystery of
[m]oney” with “Money Technology,” which would help holders “[r]ealize and multiply
Continued . . .
31
Money Technology Division was made available . . . in August 2006.”). Thompson also
acknowledges that early holders knew “the type of business [he] was doing,” meaning
that they knew he was investing their money with another entity. Supp. App. at 231.
And at the Novus seminars, Thompson talked about the Instrument as though it were an
investment, characterizing it as “more conservative than a 401(k),” and “less risky than
putting money in the banks.” Aplt. App. at 458.
We need not spend too long on this element, however, because, as the D.C. Circuit
recognized in Stoiber, “[t]he Supreme Court itself described this factor as a one-way
ratchet,” allowing “notes that would not be deemed securities under a balancing of the
other three factors nonetheless to be treated as securities if the public has been led to
believe they are,” but not allowing “notes which under the other factors would be deemed
securities to escape the reach of regulatory laws.” Stoiber, 161 F.3d at 751 (citing Reves,
494 U.S. at 66). And we conclude that this Reves factor leans, at least slightly, toward
characterizing the Novus Instruments as securities.
the value of [their] money by strategically repositioning [their] cashflow and assets.”
Aplt. App. at 239-40. On the other hand, the site admonished that “Money Technology”
was “not an investment program,” but instead involved
a company mak[ing] a loan to Novus for a period no longer than 6-months
[sic] at a time. Novus promises to pay the company back their original
principle [sic] with an agreed upon monthly interest rate. The loan is
backed by an unsecured Promissory Note and that note is backed by Novus’
company assets.
Aplt. App. at 240.
32
4. The existence of an alternate regulatory scheme or other risk-reducing
factors
Under the final Reves factor, we look to 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.” Reves, 494 U.S. at 67.
If the instrument “would escape federal regulation entirely if the Acts were held not to
apply,” the fourth factor cuts toward characterizing the instrument as a security. See id.
at 69 (recognizing as adequate risk-reducing factors (1) insurance provided by the Federal
Deposit Insurance Corporation, and (2) comprehensive regulation under the Employee
Retirement Income Security Act, because both ensure that an instrument would not
“escape federal regulation entirely if the Acts were held not to apply”); Wallenbrock, 313
F.3d at 540 (“[A] patch-work of state regulation, which applies to most business entities
in some fashion or another, cannot displace the federal regime. . . . [T]he fact that a
company is subject to regulation by a single state is not nearly enough to remove the
company from the umbrella of the federal securities laws.”); Holloway, 900 F.2d at 1488
(noting Reves’s clear emphasis on federal regulation and “reaffirm[ing] our holding . . .
[that] state regulatory schemes cannot displace the Acts”).
Ignoring the controlling cases cited, Thompson argues, citing no law, that Novus
holders were adequately protected because the Utah State Securities Division (“USSD”),
a state regulatory agency, was “hip-deep” in investigating Novus and its “basically local,
relatively small number of loans,” and because
33
the remedies available under the state and federal laws are the same, the State
agency had already commenced [an] investigation, the investigation was of a
local company [Novus] with no offices outside Utah, most of the small number
of investors were from Utah, and the company was cooperating with the State, as
the State readily admits.
Aplt. Br. at 31. But Thompson offers no argument or authority as to the nature of the
USSD’s state-enforcement mechanisms, how those coexist or interact with the federal
Securities Acts, or how those might have protected out-of-state holders of Novus
instruments. Cf., e.g., 15 U.S.C. § 77r(c) (recognizing state authority to regulate
offerings of securities that are completely intra-state). Indeed, Thompson admits that at
some point in its investigation the USSD “turned the matter . . . over to the SEC.” Aplt.
Br. at 31. Perhaps it did so because it realized that Novus had issued the Instruments to
holders outside of Utah, and consequently that Novus’s program has expanded beyond
the USSD’s jurisdiction. In any event, Thompson’s alternative-regime argument lacks
any support and runs counter to Reves’s clear emphasis on federal regulation, see, e.g.,
Reves, 494 U.S. at 69; Holloway, 900 F.2d at 1488, and we therefore reject it.
Our review of Reves’s fourth factor can also take into account other risk-reducing
features, such as the existence of collateral backing the notes, see Stone, 998 F.2d at 1539
(fact that instruments were collateralized led to finding risk-reducing factor). But
Thompson does not advance any such argument.16 Indeed, the Instruments labeled
16
In his Reply brief, Thompson argues for the first time that “Novus clients could
seek relief through a breach of contract claim if Novus defaulted on the loans.” Aplt.
Reply Br. at 3. We “decline[] to consider arguments that [we]re not raised, or [we]re
Continued . . .
34
“unsecured promissory notes” only vaguely stated that they were “secured only by the
assets of [Novus], its successors and assigns,” Aplt. App. at 247, and the joint venture
agreements made no mention of the issue at all. Thus, Reves’s fourth factor weighs
heavily in favor of the presumption that the Novus Instruments were securities.17
inadequately presented, in an appellant’s opening brief.” Bronson v. Swensen, 500 F.3d
1099, 1104 (10th Cir. 2007). Nor, in any event, would this argument have any force
since in nearly all securities fraud Ponzi schemes the investors would have a potential
contract claim against the issuer.
17
Thompson argues that, “[w]hile not part of the Reves test, the courts are
generally inclined to look more closely at notes maturing in less than nine months and are
less inclined to automatically label them as securities.” Aplt. Br. at 32 (citing SEC v.
R.G. Reynolds Enterprises, Inc., 952 F.2d 1125, 1133 (9th Cir. 1991)). We do not
understand Thompson to argue that the Instruments’ six-month maturity period removes
them entirely from the ambit of the Securities Acts, or that the Reves presumption applies
only to longer-term notes. See Holloway, 900 F.2d at 1488-89 (exception is “limited to
prime quality negotiable commercial paper of a type not ordinarily purchased by the
general public”). And SEC v. R.G. Reynolds Enterprises, Inc. is of no help to Thompson.
The Reynolds court addressed a note’s maturity term under the fourth Reves
factor—as a feature that might “significantly reduce the risk of the instrument, thereby
rendering the application of the Securities Acts unnecessary.” In Reynolds, the appellant
had issued promissory notes to investors and promised to pay between twenty and thirty
percent interest at a specified time in the future, usually between six and twelve months.
Id. at 1128. The court acknowledged that “the longer one’s funds are to be used by
another, the greater the risk of loss,” but continued that “[i]n the instant case, those
investors who were issued six month promissory notes were no less in need of statutory
protection than investors who received twelve month promissory notes,” and “the shorter
term of some of the promissory notes did not materially reduce the risk to investors.” Id.
at 1133 (internal quotation marks omitted). Thompson does not explain how the six-
month term of the Novus Instruments might have materially reduced the risk of loss to
investors so as to remove the need for the protection of the Securities Acts, and as we
have just discussed, Reves’s fourth factor otherwise weighs heavily in favor of finding
the Novus Instruments to be securities.
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5. Conclusion: the Novus Instruments are securities under Reves’s family-
resemblance test
We conclude that Novus’s Instruments are securities under the family-
resemblance test articulated in Reves. Our analysis of the test’s four factors confirms that
the Instruments bear little resemblance to the categories of non-securities instruments on
the Second Circuit’s judicially crafted list. And that same analysis—under which we
concluded that the first, second, and fourth factors cut strongly in favor of classifying the
Instruments as securities, and that the third factor slightly suggests classification as a
security as well—counsels against adding a new category of non-security to the Second
Circuit’s list. In sum, even construing all of the facts and reasonable inferences to be
drawn therefrom in Thompson’s favor, we hold that Thompson cannot rebut the
presumption that the Novus Instruments were securities.
D. The Howey test for “investment contracts
The district court also found that the Instruments were “investment contracts”
under SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946) (making the test for securities
“whether the scheme involves an investment of money in a common enterprise with
profits to come solely from the efforts of others”). In light of our conclusion that the
Novus Instruments were securities as “notes” under Reves, we need not reach whether
they were also securities as “investment contracts” under Howey.
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CONCLUSION
For the foregoing reasons, we conclude that no genuine issues of material fact
exist as to whether the Novus Instruments were securities. As a matter of law, the
Instruments were securities as “notes” under the test articulated in Reves v. Earnst &
Young.
We AFFIRM.
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