Broker-Dealer Litigation - Greenberg Traurig LLP

SECURITIES LITIGATION
A. Definition of a Security
A.
U.S. v. Bowdoin, 770 F. Supp. 2d 142 (D.D.C. 2011).
Defendant challenged his indictment for sale of unregistered securities on ground that the
definition of a security to include an investment contract was unconstitutionally vague. The
court rejected the challenge because the Supreme Court in 1946 had held the term “investment
contract” as used in the Securities Act of 1933 was not vague. Congress had defined securities to
include “investment contracts” based on many years of enforcement of that term by various
States under state laws. The court was bound by precedent and the lineage of the term being
long and well-recognized so it held that the defendant’s challenge was without merit.
Jacquemyns v. Spartan Mullen Et Cie, S.A., 2011 WL 348452 (S.D.N.Y. Feb. 1, 2011).
Defendant argued in support of a motion to dismiss a securities fraud claim under Section
10(b) that the infusion of cash in a fund was a loan and not an investment. The court rejected the
argument because the definition of a security under 15 U.S.C. § 77b(1) included a “note” and the
contributions made were evidenced by a note. In addition, the court held that the investments
were also securities because they were “investment contracts” under the test enunciated by the
Supreme Court in S.E.C. v. Howey, 328 U.S. 293 (1946). The fact that defendants tried to dress
up what is patently a security in the clothing of a loan did not, according to the court, change the
fact that the arrangement they offered to the plaintiffs met every element of the Howey test for a
security.
A.
SEC v. Wyly, 788 F. Supp. 2d 92 (S.D.N.Y. 2011).
A.
The S.E.C. pursued a claim of insider trading against the defendants. The defendants
argued for dismissal of the claim because, when the conduct at issue occurred, a security-based
swap agreement was not included in the 1934 Securities Exchange Act’s definition of a
“security”. The court rejected the argument and held, regardless of whether security-based swap
agreements were included in or are now excluded from the statutory definition of a “security”,
section 10(b) and Rule 10b-5 apply to fraudulent devices undertaken in connection with the
purchase or sale of securities, and the swap transaction at issue touched, coincided with and
induced stock trading. It further held that the swap agreements were fraudulent devices used in
connection with the purchase or sale of securities, and, thus, properly the subject of the S.E.C.’s
claim.
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