Petition — Morsey v. Green

Supreme Court, U.S.

PELE D

Aue 7 = 1980

eben ICHAEL RODAK, JR., CLERK

CASE No. 80-20

in the

Supreme Court

of the

United States

October Term, 1979

CHASE MORSEY, JR.,

Petitioner,

US.

ELMER G. GREEN and FIRST NATIONAL

BANK IN PALM BEACH,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE FIFTH CIRCUIT

August 7, 1980 Guy B. Bailey, Jr.,

Bailey & Dawes, a

professional association

Attorney for Petitioner

Suite 1820 One Biscayne Tower

Two South Biscayne Boulevard

Miami, Florida 33131

(305) 374-5505

Of Counsel:

Jesse C. Jones

QUESTIONS PRESENTED FOR REVIEW

I.

WHETHER FACT QUESTIONS

NECESSARY TO DETERMINE THE

EXISTENCE OF A SECURITY ARE FOR

THE JURY

II.

WHERE THE PROMOTER PROMISED TO

MANAGE INCOME STREAMS AND TO

USE HIS EXPERTISE, REPUTATION, AND

MARKET POSITION TO SELL THE LAND

AT A PROFIT, WHETHER A

PARTICIPATION IN A_ LAND

SYNDICATION IS A SECURITY

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED FOR REVIEW ....... i

Beads OF AUTHORITING 6... ccciccccstccccvennce ili

es SRIRAM ereverps of 3 1

REPORTS OF OPINIONS BELOW .............. 2

SIRENS BP LIN VOLVED occ cae dccvccdedevcveces 3

STATEMENT OF THE CASE ..............0008- 9

REASONS FOR ALLOWANCE OF THE WRIT... 12

NE nx 5.9. 0:4 40a pu'ss004 chs ccenane eee tean A-1

ii

TABLE OF AUTHORITIES

Ahrens v. American-Canadian Beaver Co.,

428 F.2d 926 (10th Cir. 1970) .......censeces

Altshuler v. Cohen,

471 F.Supp. 1372 (S.D. Tex. 1979) .........

Bartels v. Algonquin Properties Ltd.,

471 F.Supp. 1132 (D. Vt. 1979) .............

Beacon Theatres v. Westover,

GOP Ass SUPA ENOOD sic cccdevecdanssdccstcens

Cameron v. Outdoor Resorts of America, Inc.,

608 F.2d 187, modified on other grounds,

611 F.2d 106 (5th Cir. 1979) .........se000-

Commander’s Palace Park Assoc. v. Girard &

Pastel Corp.,

572 F.2d 1084 (5th Cir. 1978) .............4.

Ferland v. Orange Groves of Florida, Inc.,

377 F.Supp. 690 (M.D.Fla. 1974) ..........

Goodman v. Epstein,

582 F.2d 388 (7th Cir. 1978) ..........ee008.

Great Western Bank and Trust v. Kotz,

§32 F.2d 1252 (9th Cir. 1976) ............64.

Page

TABLE OF AUTHORITIES (Cont.)

Page

Happy Investment Group v. Lake World

Properties, Inc.,

396 F.Supp 175 (N.D.Cal. 1975) ............. 18, 21

Johnson vu. Nationwide Industries, Inc., -

450 F.Supp. 948 (N.D.IIl. 1978) ............... 21

Kroungold v. Treister,

407 F.Supp. 414 (E.D.Pa. 1975) ............... 20

McCown v Heidler,

527 F.2d 204 (10th Cir. 1975) ......sccccccscecs 20

Owners of ‘SW 8” Real Estate v. McQuaid,

513 F.2d 668 (9th Cir. 1975) .......cccccccscecs 21

Oxford Finance Co. v. Harvey,

385 F.Supp. 431 (E.D.Pa. 1974) ............... 21

Roe v. United States,

287 F.2d 435 (Sth Cir. 1961) .........cccececees 13

Sandusky Land, Ltd. v. Uniplan Groups, Inc.,

400 F.Supp. 440 (N.D. Ohio 1975) .......... a

Schultz v. Dain Corp.,

568 F.2d 612 (8th Cir. 1978) ........ccececececs 21

iv

TABLE OF AUTHORITIES (Cont.)

Page

SEC vu. W.J. Howey Co.,

fee eft. rrr 13, 15, 16, 17, 20

SEC v. C.M. Joiner Leasing Corp.,

320 U.S. 344. (1943) ....cccccccess 12, 13, 14, 17, 20

SEC v. Lake Mavasu Estates, .

340 F.Supp. 1318 (D.Minn. 1972) ............. 20

Tarvestad v. United States,

418 F.2d 1043 (8th Cir. 1969), cert. denied, 397

Ri PC Haya ncédciusy tedauacaeeeieel 13, 14

Tcherepnin v. Knight,

ls OD vn. bese kkncncucscceunces 17

Timmreck v. Munn,

433 F.Supp. 396 (N.D.IIl. 1977) ............... 20

United Housing Foundation, Inc. v. Forman,

GRE RI. Fe CRE enka datnsivesscshens 17, 18, 20

United States v. Carman,

577 F.2d 566 (9th Cir. 1978) ........ccccccccees 14

Van Arsdale v. Claxton,

391 F.Supp. 538 (S.D. Cal. 1979) .............. 18

Woodward v. Terracor,

574 F.2d 1023 (10th Cir. 1978) ..............06. 20

CASE NO. ___

in the

Supreme Court

of the

United States

October Term, 1979

CHASE MORSEY, JR.,

Petitioner,

US.

ELMER G. GREEN and FIRST NATIONAL

BANK IN PALM BEACH,

: Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE FIFTH CIRCUIT

JURISDICTION

The United States Court of Appeals for the Fifth

Circuit affirmed without opinion on April 11, 1980, and

denied rehearing on May 9, 1980.

Jurisdiction is invoked under 28 U.S.C. §1254(1)

(1976).

REPORTS OF OPINIONS BELOW

The United States Court of Appeals for the Fifth

Circuit affirmed without opinion. Morsey v. Green, 615

F.2d 917 (5th Cir. 1980). The opinion of the United

States District Court, Southern District of Florida, is

unreported.

STATUTES INVOLVED

The Securities Act of 1933 §2(1), 15 U.S.C. §77b(1)

(1976):

The term “security”? means any note, stock,

treasury stock, bond, debenture, evidence of

indebtedness, certificate of interest or

participation in any profit-sharing agreement,

collateral-trust certificate, pre-organization

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, 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 subscribe to

or purchase, any of the foregoing.

The Securities Act of 1933 §5(a), 15 U.S.C. §77e(a)

(1976):

(a) Unless a registration statement is in effect

as to a security, it shall be unlawful for any

person, directly or indirectly —

(1) to make use of any means or

instruments of transportation or

communication in interstate commerce or of

the mails to sell such security through the use

or medium of any prospectus or otherwise; or

(2) to carry or cause to be carried through

the mails or in interstate commerce, by any

means or instruments of transportation, any

such security for the purpose of sale or for

delivery after sale.

The Securities Act of 1933 $12, 15 U.S.C. §771

(1976):

Civil liabilities arising in connection with

prospectuses and communications

Any person who —

(1) offers or sells a security in violation of

section 5, or

(2) offers or sells a security (whether or not

exempted by the provisions of section 3, other

than paragraph (2) of subsection (a) thereof),

by the use of any means or instruments of

transportation or communication in interstate

commerce or of the mails, by means of a

prospectus or oral communication,» which

includes an untrue statement of a material fact

or omits to state a material fact necessary in

order to make the statements, in the light of

the circumstances under which they were

made, not misleading (the purchaser not

knowing of such untruth or omission), and who

shall not sustain the burden of proof that he

did not know, and in the exercise of reasonable

care could not have known, of such untruth or

omission, shall be liable to the person

purchasing such security from him, who may

sue either at law or in equity in any court of

competent jurisdiction, to recover the

af

consideration paid for such security with

interest thereon, less the amount of any income

received thereon, upon the tender of such

security, or for damages if he no longer owns

the security.

The Securities Act of 1933 §17(a), 15 U.S.C.

§77q(a) (1976):

It shall be unlawful for any person in the offer

or sale of any securities by the use of any means

or instruments of transportation or

communication in interstate commerce or by

the use of the mails, directly or indirectly —-

(1) to employ any device, scheme, or

artifice to defraud, or

(2) to obtain money or property by means

of any untrue statement of a material fact or

any omission to state a material fact necessary

in order to make the statements made, in the

light of the circumstances under which they

were made, not misleading, or

(3) to engage in any transaction, practice,

or course of business which operates or would

operate as a fraud or deceit upon the purchaser.

The Securities Exchange Act of 1934 §3(a)(10), 15

U.S.C. §78c(a)(10) (1976):

The term “security” means any note, stock,

treasury stock, bond, debenture, certificate of

interest or participation in any profit-sharing

agreement or in any oil, gas, or other mineral

royalty or lease, any collateral-trust certificate,

preorganization certificate or subscription,

transferable share, investment contract,

voting-trust certificate, certificate of deposit,

for a security, or in general, any instrument

commonly known as a “security”, or any

certificate of interest or participation in,

temporary or interim certificate for, receipt for,

or warrant or right to subscribe to or purchase,

any of the foregoing; but shall not include

currency or 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.

The Securities Act of 1933 §15, 15 U.S.C. §770

(1976):

Liability of controlling persons

Every person who, by or through stock

ownership, agency, or otherwise, or who,

pursuant to or in connection with an agreement

or understanding with one or more other

persons by or through stock ownership, agency,

or otherwise, controls any person liable under

section 11 or 12, shall also be liable jointly and

severally with and to the same extent as such

controlled person to any person to whom such

controlled person is liable, unless the

controlling person had no knowledge of or

reasonable ground to believe in the existence of

the facts by reason of which the liability of the

controlled person is alleged to exist.

The Securities Exchange Act of 1934 §10, 15 U.S.C.

§78) (1976):

Manipulative and decentive devices

It shall be unlawful for any person, directly or

indirectly, by the use of any means or

instrumentality of interstate commerce or of

the mails, or of any facility of any national

securities exchange —

(a) To effect a short sale, or to use or

employ any stop-loss order in connection with

the purchase or sale, of any security registered

on a national securities exchange, in

contravention of such rules and regulations as

the Commission may prescribe as necessary or

appropriate in the public interest or for the

protection of investors.

(b) To use or employ, in connection with

the purchase or sale of any security registered

on a national securities exchange or any

security not so registered, any manipulative or

deceptive device or contrivance in

contravention of such rules and regulations as

the Commission may prescribe as necessary or

appropriate in the public interest or for the

protection of investors.

United States Constitution Amend. VII:

Trial by jury in civil cases.

In Suits at common law, where the value in

controversy shall exceed twenty dollars, the

right of trial by jurv shall be preserved, and no

fact tried by a jury shall be otherwise re-

examined in any Court of the United States,

than according to the rules of the common law.

’

STATEMENT OF THE CASE

Proceedings Below

Petitioner, Chase Morsey, Jr. (‘“Morsey’’), sued

Respondents, Elmer G. Green (“Green’’) and First

National Bank in Palm Beach (the ‘‘Bank’’), for the sale

of unregistered securities and for deceptive acts and

practices in violation of federal securities law.

Green and the Bank moved to dismiss for lack of

subject matter jurisdiction. The district court, without

receiving evidence, granted the motion, holding that, on

the face of the complaint, Morsey’s investment was not

a security.

Then the district court granted Morsey’s motion for

rehearing. However, in spite of Morsey’s timely jury

demand, the district judge received evidence

(purportedly under Fed.R.Civ.P. 42), entered findings of

fact and conclusions of law, and adhered to the earlier

dismissal. '

The Fifth Circuit affirmed without opinion.’

Statement of the Facts

The suit arose from Morsey’s purchase of a 20%

participation in a real estate syndicate.°

‘App. pp. 28-32. The case proceeded to trial on Morsey’s

pendent state claims.

*App. p. 33.

‘App. p. 29 49.

Morsey disputes much of the district court’s fact

findings, as well as the court’s right to make them.

However, the district court correctly found that

Green proposed the purchase of a 16,000 acre operating

ranch, in undivided shares, through a land title trust

managed by the Bank. with a plan for a quick profitable

resale.‘ And, the court correctly found, Green

represented that income streams on the ranch would

partially offset mortgage payments,» making it feasible

for the syndicate to hold the ranch through the requisite

capital gains tax period.

Green chose the property, purchased it through a

shell corporation, and structured the syndicate.’ He

boasted of his expertise, reputation, and market

position as a speculator. He told Morsey that the

property could be developed, and could be sold to a

developer at a handsome profit.

Green told Morsey he would (and he did) take

exclusive control of the investment. The written land

title trust agreement (which Morsey did not even see

until after he parted with his money) purported to give

Morsey pro rata authority to control the syndicate. The

district court, relying on that instrument, incorrectly

found Morsey himself had substantial control.

‘App. p. 29.

‘App. p. 29 43.

‘App. p. 29 96.

10

The district court further found that Morsey’s

expectation of profit was based on an anticipated rise in

value on resale’ — i.e., capital appreciation rather than

operating income. But the income streams were in fact a

material part of the investment, and Green promised to

manage those income streams, to offset a portion of the

mortgage expense. And, in fact, the expectation of a

profitable resale was based solely on Green’s unique

expertise, reputation, and market position. The

expectation was, therefore, not based on a rising market.

It was based on Green.

7App. p. 29 94.

11

REASONS FOR ALLOWANCE OF THE WRIT

The issues presented go to the heart not only of the

fundamental right to a jury trial, but also of the scope of

federal securities laws.

Morsey submits that the questions presented

should plainly be answered affirmatively. And because

of the fundamental importance of these issues and the

absence in the case law of express, definitive answers,

this Court should grant the writ of certiorari.

I.

WHETHER FACT QUESTIONS

NECESSARY TO DETERMINE THE

EXISTENCE OF A SECURITY ARE FOR

THE JURY

In making the crucial (and disputed) factual

determinations necessary to determine whether

Morsey’s syndicate participation was an “investment

contract,’ the trial judge improperly preempted the

jury.§

In SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344

(1943), this Court indicated that factual questions

necessary to determine the existence of a security are for

the jury. The Court stated that the existence of a

security could be proven either by the document itself,

or by extraneous circumstances. And, the Court clearly

"The legal determination was necessarily and expressly based

on the factual determinations (1) that Morsey shared control of the

enterprise and (2) that the expectation of profit was based on

market appreciation rather than on Green’s entrepreneurial efforts.

There was ample evidence for a jury to find otherwise.

12

indicated the obvious: extraneous circumstances

present factual questions (which necessarily are for the

jury):

In some cases it might be done by proving the

document itself, which on its face would be a

note, a bond, or a share of stock. In others proof

must go outside the instrument itself as we do

here. Where this proof is offered in a civil

action, as here, a preponderance of the

evidence will establish the case; if it were

offered in a criminal case, it would have to

meet the stricter requirement of satisfying the

jury beyond reasonable doubt.

320 U.S. at 355.

In Roe v. United States, 287 F.2d 435 (5th Cir.

1961), the court held that factual questions necessary for

determining the existence of a security were properly for

the jury. The district court had instructed the jury that

the particular mineral leases were securities. Citing the

language quoted above from Joiner and the emphasis in

SEC v. W.J. Howey Co., 328 U.S. 293 (1946), on

substance and economic realities, the court reversed:

By its very nature, it is the peculiar facts of the

setting which turns the offer from a mere sale of

property into a sale of a security. That means

that the trier of fact, here a jury, must

determine the issue.

In Tarvestad v. United States, 418 F.2d 1043, 1048

(8th Cir. 1969), cert. denied, 397 U.S. 935 (1970), the

13

court affirmed a jury instruction reciting the /:atut “ty

language to determine the existence of a security:

Y

Under the circumstances surrounding their

sale, we have no difficulty in. approving the

submission of the question to the jury.

Great Western Bank and Trust v. Kotz, 532 F.2d

1252 (9th Cir. 1976) followed Joiner and Tarvestad. The

district court, on a finding that the promissory note in

question was not a security, dismissed the case for lack

of subject matter jurisdiction. The court of appeals

stated that the dismissal was erroneous, and, noting

that the district court had considered evidentiary

material, reviewed the dismissal as a defense summary

judgment. The court affirmed only by concluding that

there was no genuine issue of fact: .

Viewing all the evidence in a light most

favorable to GWB, we conclude that the

promissory note given by Artco bears no

economic resemblance to the “securities”

defined by the 1933 and 1934 acts.

532 F.2d at 1260.

The court recognized that while “the issue raised is

ultimately one of law,” 532 F.2d at 1255, unless the

standards for summary judgment or directed verdict are

met, the factual questions necessary to make that legal

determination are for the jury.

In United States v. Carman, 577 F.2d 556, 563 (9th

Cir. 1978), the court (while reversing on other grounds)

14

approved a jtry verdict finding an investment contract,

where the jury instruction was based on the statutory

language and on Howey:

Finding that the court’s statement of the

applicable law was correct and complete, our

review becomes limited to the sufficiency of the

evidence to support the jury’s verdict.

In Goodman v. Epstein, 582 F.2d 388 (7th Cir.

1978), the court reversed the trial judge’s denial of a

directed verdict finding a security. However, the court

implicitly recognized that the factual questions can be

taken from the jury only on the standards for summary

judgment or directed verdict. Noting that the existence

of an investment contract “‘must be determined from

the actual facts and circumstances,’’ 582 F.2d at 406,

the court held:

We do not accept defendant’s assertion that

they raised sufficient factual questions to

necessitate the trial judge’s sending this issue

to the jury. A summary perusal of the evidence

adduced at trial reveals no debatable question

of the plaintiff's interests meeting all three of

the Howey/Forman tests.

582 F.2d at 407.

These decisions all indicate an affirmative answer

to the question presented here — i.e., that the factual

questions necessary to determine the existence of a

security are for the jury. However, in Ahrens v.

American-Canadian Beaver Co., 428 F.2d 926, 928 (10th

Cir. 1970), the court suggested a contrary rule:

15

The nature of the contracts here concerned and

the application of the securities acts as the

issue here arose before the trial court was a

question of law and not of fact. Since the

question whether the beaver contracts were

“investment contracts” within the acts were

submitted to the jury by the trial court, we

must reverse.

Morsey submits that the result is clear: the factual

questions necessary to determine the existence of a

security are for the jury. However, the result in this case

itself demonstrates that the case law permits some

ambiguity. The district judge here took it upon himself

to make factual determinations, in clear derogation of

Morsey’s fundamental right to a jury trial. See Beacon

Theatres v. Westover, 359 U.S. 500, 501 (1959):

Maintenance of the jury as a fact-finding body

is of such importance and occupies so firm a

place in our history and jurisprudence that any

seeming curtailment of the right to a jury trial

should be scrutinized with the utmost care.

This Court should grant the petition, to clarify the

application of Howey and its progeny, and to insure the

fundamental right to a jury trial.

16

Il.

WHERE THE PROMOTER PROMISED

TO MANAGE INCOME STREAMS AND

TO USE HIS EXPERTISE, REPUTATION,

AND MARKET POSITION TO SELL THE

LAND AT A PROFIT, WHETHER A

PARTICIPATION IN A LAND

SYNDICATION IS A SECURITY

Even apart from the fundamental jury issue, this

Court should grant the petition to determine the

applicability of the securities laws to land syndications.

Morsey purchased a 20% participation in a

syndicate Green formed to purchase, operate, and resell

a 16,000 acre operating ranch.

Morsey plainly invested in a common enterprise

with the expectation of profits solely from the efforts of

others. The district court’s contrary conclusion

misconstrued the nature of profits and efforts cognizable

under Howey and its progeny.®

The district court in finding no security relied

heavily on the fact that the expected profit was

principally from a resale of the property.'!° However, in

United Housing Foundation, Inc. v. Forman, 421 U.S.

837, 852, this Court stated that “profit’? means either

%See generally United Housing Foundation, Inc. v. Forman, 421

U.S. 837 (1975); Tcherepnin v. Knight, 389 U.S. 332 (1967); SEC v.

W.J. Howey Co., 328 U.S. 293 (1946); SEC v. C.M. Joiner Leasing

Corp., 320 U.S. 344 (1943).

“App. p. 29 94.

17

“capital appreciation” or income. See also Cameron v.

Outdoor Resorts of America, Inc., 608 F.2d 187,

modified on other grounds, 611 F.2d 105 (5th Cir. 1979):

It is irrelevant that their investment purpose

might have been profit from appreciation

rather than from rent. ‘By profits, the court has

meant either capital appreciation resulting

from the development of the initial investment

. or a participation in earnings resulting

from the use of the investors’ funds. . . .”

But see Happy Investment Group v. Lake World

Properties, Inc., 396 F.Supp. 175, 180 (N.D. Cal. 1975)

(emphasizing that ‘“‘at no time until sale of the land will

plaintiffs realize any actual monetary profit’’).

The district court’s limiting “profits” to income is

unwarranted and is contrary to Forman.

The district court also relied on the fact that Green

did not propose physically to develop the property.!!

Green’s promised efforts were to manage the income

streams (partially to offset mortgage payments),

structure the syndicate, and find a buyer, using his

reputation, market position, and expertise. The district

court held that these efforts are not cognizable under the

securities laws, relying on Van Arsdale v. Claxton, 391

F.Supp. 538, 541 (S.D. Cal. 1979): 12

''App. p. 29 96.

"Quoting Loss, Securities Regulation, 491-492 (2d ed. 1961). .

18

For example, no investment contract is

involved when a person invests in real estate,

with the hope perhaps of earning a profit as a

result of a general increase in values concurrent

with the development of the neighborhood, as

long as he does not do so as part of an

enterprise whereby it is expressly or impliedly

understood that the property will be developed

or operated by others.

But see Altshuler v. Cohen, 471 F.Supp. 1372, 1380

(S.D. Tex. 1979)!3 and Bartels v. Algonquin Properties

Ltd., 471 F.Supp. 1132 (D. Vt. 1979) (holding interests

in speculative real estate ventures to be securities,

notwithstanding the absence of any physical

development).

The district court’s limiting cognizable efforts in

real estate syndications to physical development is

unwarranted. Morsey did not invest in a piece of real

estate. He invested in Green. Green structured this deal

and told Morsey that he would manage the income and

find a quick buyer — not because of any inherent value

in the property, but because, as he boasted to Morsey,

1 Although the plaintiffs were primarily dependent for success

upon economic trends, it is also true that they were primarily

passive, and were to some degree dependent upon management

skills of the syndicators. Investors in any enterprise, are, to varying

degrees, subject to economic trends and the success of their

investment is dependent upon, in part, economic trends. It was not

contemplated that plaintiffs themselves would actively participate

in the management of the affairs of the venture. Plaintiffs invested

for the purpose of creating profits through the efforts of the

defendant in conjunction with what was hoped to be favorable

economic trends. Defendant’s skill in marketing the property was a

material factor in the success of the enterprise.”

19

he was “‘Florida’s Master Real Estate Sleuth.” The fact

that Green was master-minding a speculative venture

rather than building houses in no way diminishes the

crucial importance of his efforts.

Applicability of the securities laws plainly does not

depend on “the nature of the assets back of a particular

document or offering.” Joiner, 320 U.S. at 352.4 A

‘'Real estate cases commonly turn on issues of control or an

investment/consumption dichotomy. See generally, SEC v. Wa.

Howey Co., 328 U.S. 293 (1946) (sales of orange grove tracts held

securities); Cameron v. Outdoor Resorts of America, Inc., 608 F.2d

187, modified on other grounds, 611 F.2d 105 (5th Cir. 1979)

(condominium campsite sales held securities); McCown v. Heidler,

527 F.2d 204 (10th Cir. 1975) (dismissal of complaint by purchasers

of undeveloped lots in real estate development project reversed

where purchase depended on promised improvements and purchase

price was used for improvements); Altshuler v. Cohen, 471 F.Supp.

1372, 1380 (S.D. Tex. 1979) (real estate joint venture, formed for

speculation and not for development of tract, held a security);

Bartels v. Algonquin Properties, Ltd., 471 F.Supp. 1132 (D. Vt.

1979) (limited partnership interest in speculative real estate

venture held a security); Timmreck v. Munn, 433 F.Supp. 396, 402-

404 (N.D. Ill. 1977) (motion to dismiss security claim denied where

plaintiffs purchased lots with expectation of profitable resale based

on developers’ efforts); Kroungold v. Treister, 407 F.Supp. 414

(E.D. Pa. 1975) (limited partnership interest in apartment

development held a security); Sandusky Land, Ltd. v. Uniplan

Groups, Inc., 400 F.Supp. 440 (N.D. Ohio 1975) (limited

partnership in housing development as a security); Ferland uv.

Orange Groves of Florida, Inc., 377 F.Supp 690 (M.D. Fla. 1974)

(orange grove tracts held securities); SEC v. Lake Mavasu Estates,

340 F.Supp. 1318 (D. Minn 1972) (purchase of land purchase

contracts held a security). But see United Housing Foundation, Inc.

v. Forman, 421 U.S. 837 (1975) (housing cooperative sales held not

securities, where primary inducement was consumption, not

investment); Woodward v. Terracor, 574 F.2d 1023 (10th Cir. 1978)

20

volatile market and profits deferred until sale are factors

normally present in any real estate venture. To hold, as

the district court did, that either factor vitiates the

significance of profits based on the efforts of others

defeats Howey and ignores the economic realities of real

estate speculation.

This Court should grant the petition, to resolve the

meaning of “profits” and “efforts” and to clarify the

applicability of the securities laws to real estate

investments.

Footnote 14 (Continued)

(lot purchases in residential development held not securities, where

prospective improvements were not part of a common enterprise);

Commander’s Palace Park Assoc. v. Girard & Pastel Corp., 572

F.2d 1084 (5th Cir. 1978) (mobile home sale-leaseback held not a

security where purchasers retained management control); Schultz

v. Dain Corp., 568 F.2d 612 (8th Cir. 1978) (apartment complex

investment held not a security where purchaser retained

management control); Owners of “SW 8” Real Estate v. McQuaid,

513 F.2d 558 (9th Cir. 1975) (shopping center investment held not a

security where purchaser retained control of his portion); Johnson

v. Nationwide Industries, Inc., 450 F.Supp. 948 (N.D. Ill. 1978)

(condominium sales held not securities): Happy Investment Group

v. Lake World Properties, Inc., 396 F.Supp. 1975 (N.D. Cal. 1975)

(capital appreciation held insufficient to establish expectation of

“profit’’); Oxford Finance Co. v. Harvey, 385 F.Supp. 431 (E.D. Pa.

1974) (real estate joint venture held not a security where investors

retained management authority).

21

CONCLUSION

For these reasons, the Court should grant the

petition for writ of certiorari.

Respectfully submitted,

Guy B. Bailey, Jr.

Bailey & Dawes, a

professional association

Attorney for Petitioner

Suite 1820, One Biscayne Tower

‘T'wo South Biscayne Boulevard

Miami, Florida 33131

(305) 374-5505

Of Counsel:

Jesse C. Jones

22

in the

Supreme Court

of the

United States

October Term, 1979

CASE NO.

CHASE MORSEY, JR.,

Petitioner,

US.

ELMER G. GREEN and FIRST NATIONAL

BANK IN PALM BEACH,

Respondents.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE FIFTH CIRCUIT

TABLE OF CONTENTS

Page

Complaint ..cccccccccecensecdsanssscvuseausnenees A-1

Order of Dismissal .........cccccccccceccseccvvecs A-26

Order Granting Rehearing ...........sseeeeeeeees A-27

Findings of Fact and Conclusions of Law ......... A-28

Order of Affirmance .........cccscccccveceseceees A-33

Order Denying Rehearing ...........:eeeeeeeeeees A-34

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

NO. WPB-76-8044-Civ-CA

SECOND AMENDED COMPLAINT FOR

RESCISSION UNDER THE SECURITIES LAWS

OF FLORIDA AND OF NEW YORK FOUNDED

UPON DIVERSITY OF CITIZENSHIP AND FOR

RESCISSION UNDER THE FEDERAL

SECURITIES LAWS, FOR DAMAGES FOR

FRAUD, BREACH OF CONTRACT, BREACH OF

FIDUCIARY DUTY, BREACH OF TRUST, LEGAL

MALPRACTICE, AND FOR OTHER RELIEF

Plaintiff, Chase Morsey, Jr., sues Elmer G. Green,

individually; First National Bank in Palm Beach, a

National banking association, individually and as

Trustee (‘‘First National”); Gustave T. Broberg, Jr.,

individually; Phillip H. Reid, individually; Coe,

Broberg & Reid, a Florida law partnership; and Legal

Negligence Insurer, a foreign insurance company, jointly

and severally, and alleges:

JURISDICTION

1. This is an action for rescission under Federal,

New York and Florida securities laws, alternatively or

cumulatively for damages under such laws or under

common law fraud, breach of contract, and breach of

trust.

2. Jurisdiction is found on diversity of citizenship

and jurisdictional amount, under Title 28 United States

Code §1332, as well as on the existence of a question

arising under particular Federal statutes [Title 15

United States Code §77a et seq.) (the ‘1933 Act’’), the

Securities Exchange Act of 1934, as amended (Title 15

United States Code §78a et seq.) (the ‘1934 Act’’), the

rules and regulations promulgated under the 1933 Act

and the 1934 Act (the ‘“‘Regulations’’), the Investment

Advisors Act of 1940, as amended (Title 15 United

States Code §806 et seq.) (the “1940 Act’’)].

3. As to diversity of citizenship:

(a) Plaintiff, Chase Morsey, Jr., is a citizen of

the State of Connecticut, residing in Greenwich,

Connecticut.

(b) Defendant Elmer G. (‘“‘Ed’’) Green is a

citizen and resident of the State of Florida.

(c) Defendant First National is a national

banking association having its principal and only place

of business in Palm Beach County, Florida, and is a

citizen of the State of Florida.

| (d) Defendant Gustave T. Broberg, Jr., is a

citizen and resident of the State of Florida.

(e) Defendant Phillip H. Reid is a citizen and

resident of the State of Florida.

(f) Defendant Coe, Broberg & Reid is a Florida

law partnership with its place of business in Palm Beach

A-2

County, Florida, and all of whose partners are citizens

and residents of Palm Beach County, Florida.

(g) Legal Negligence Insurer is a foreign

insurance company, with its principal place of business

not in Florida or in Connecticut.

4, The matter in controversy exceeds, exclusive of

interest and costs, the sum of Ten Thousand Dollars

($10,000.00) by Morsey as against each Defendant.

5. This Court has diversity jurisdiction under

Title 28 United States Code §1332.

6. This Court has jurisdiction over the Federal

claims stated herein under Section 22 of the 1933 Act

and Section 27 of the 1934 Act (Title 15 United States

Code §§77v(a) and 78aa), and over the state claims as

diversity claims, as well as under the doctrine of

pendent jurisdiction.

A-3

FACTUAL BACKGROUND

7. Green represented himself to Morsey and other

investors in the Magnolia Ranch as an expert Florida

real estate syndicator and manager, having successfully

syndicated and managed nearly thirty Florida real

estate promotions.

8. On May 18, 1973, Green, while in Florida,

telephoned Morsey in New York City and offered

Morsey the opportunity to purchase a security interest

in a Florida real estate syndication known as the

Magnolia Ranch, which Green stated he was organizing

and promoting, would operate, manage and resell.

9. Green represented to Morsey that the Magnolia

Ranch was located near Orlando, Florida, and contained

about 16,000 acres, had a hay-drying operation, was

engaged in cattle ranching, the operation of citrus

groves, the operation of hunting concessions, and carried

on farming and other enterprises primarily under the

Terry family. The ranch, said Green, was available for

sale at a sacrifice price due to the illness of Mr. Terry,

Sr. Among other things, Green represented to Morsey

that: |

(a) Green had made substantial profits for

himself and many other investors in the Central Florida

area; he knew the value of the Magnolia Ranch and that

it was far in excess of the $755 per acre he was buying it

for; that, indeed, the Ranch property was worth some

$1100 per acre; and that Green had two prospective

investors already interested in the Ranch;

(b) the Magnolia Ranch had been offered many

times previously to Green at about $1100 per acre;

(c) the Magnolia Ranch was an operating

property;

(i) it was a successful farming and ranching

operation with sales of sod, cattle grazing and pasturage

under a commercial cattle lease, producing citrus

groves, and income from hunting leases and concessions;

(ii) the foregoing activities, tended by a

number of permanent employees, was producing a net

income of some $200,000 a year; this income and other

potential and increased income from the operation

(grove income to increase 20% per year) would

substantially and significantly reduce Morsey’s (and the

other investors’) costs of carrying the investment;

(iii) the commercial cattle grazing lease on

the Ranch utilized some 6700 acres of improved pasture

as well as some 6000 to 7000 acres of unimproved pasture

— 80 to 85% of the Ranch acreage — meant that more

than % of the Ranch was put to commercial,

operational use;

(d) Green had ‘‘a plan’’ to manage the

investment for not more than a year and then to sell it

for $1150 per acre; Green wrote of his intentions

concerning the Ranch: “‘my plan is to sell in less than

one year for about $1,150 per acre.’ He repeated this in

writing on a map.

(e) Green controlled so much land in Central

Florida through a multitude of other syndications that

Green could effectively make his own market price. To

“substantiate” this claim, Green sent to Morsey a copy

of an article about Green contained in “The Floridian”

Sunday supplement to the St. Petersburg (Florida)

Times for May 13, 1973, a copy of which is annexed and

made part of this Second Amended Complaint as

Exhibit ‘‘A’’.

10. Green represented to Morsey that he, Green,

was forming a syndicate to purchase the Magnolia

Ranch, that he would manage the Magnolia Ranch for

Morsey and other investors, that the profits resulting

from Green’s management of the Magnolia Ranch would

help defray some $200,000 of the yearly carrying costs.

11. Green further represented that the Orlando

area, where the Magnolia Ranch was located, was a

growing area, that he, Green, was particularly well-

acquainted and expert in this area, that as a result of his

expertise in operating, managing, and buying and

selling such operating properties and his extraordinary

reputation and following of investors, that he, Green,

had purchasers already available for the Ranch. His

most substantial problem, said Green, was to be able to

keep from reselling the property before his investors

could satisfy the six months’ holding period requisite for

capital gains treatment.

12. Green further represented that he had

successfully managed many other similar syndicates for

other investors, was indeed doing so at the present time,

that all he required or allowed Morsey, as well as the

A-6

other investors, to do was to put up their money, which

Green promised, due to the leverage of the investment,

to multiply within a year.

13. Green represented to Morsey that he, Green,

would take care of full managerial responsibilities for

the operation of the Magnolia Ranch, and that the

investors should “not bother him” about its

management and operation.

14. Green told Morsey that he had other

prominent investors to invest in the Magnolia Ranch

with Morsey.

15. Green told Morsey that the format he had

used in his other real estate syndicates was that of a

trust which would hold title to the property, the trustee

being First National, and that he, Green, would manage

the property for the benefit of all the investors, the

investors to receive a security interest in the trust called

a “Participation.”

16. By letter mailed from Florida, delivered to

Morsey at Morsey’s office in New York City on May 19,

1973, Green repeated his offer; the letter is annexed and

made part of this Second Amended Complaint as

Exhibit “B”’,

17. Green continued to repeat his offer of the

Participation in numerous telephone conversations with

Morsey during the period May 19, 1973, through the

early part of June, 1973.

A-7

——a

18. Green represented that Magnolia Ranch could

be developed — with golf tousses, homes, ranchettes,

condominiums and apartments, and that Magnolia

Ranch was zoned for such development.

19. The investment syndicate proposed by Green

amounted to a common enterprise in which several

investors invested their money, the management and

hopeful expectation of profits being made for them by

Green, who promised effectively to manage and resell

the property for Morsey and the other investors.

20. On June 8, 1973, Morsey accepted Green’s

offer and decided to invest in the Participation offered

by Green by depositing in the mail in New York City

Morsey’s check to Green’s order in the amount of

$250,000, addressed to Green in Florida. The check was

delivered by the U.S. Postal Service, accepted by Green

and First National.

21. In connection with the sale of the

Participation to Morsey, Green told Morsey that Morsey

could and should use Broberg as Morsey’s attorney to

represent Morsey in connection with the trust to be set

up and the acquisition of the Magnolia Ranch. In a

meeting set up by Green, Broberg told Morsey that he

would, on Morsey’s behalf, prepare the documents, that

Morsey need not worry about them, that everything

would be appropriately and properly documented.

22. Morsey relied upon Broberg’s representation

that everything was in proper form and that Morsey

need not worry about the legal technicalities, since

Broberg had taken care of that, and Morsey, relying

A-8

upon “‘his attorney’s” advices and assurances, did not,

until much later, review any of the documents furnished

him.

23. Unknown to Morsey and despite the fact that

Broberg had accepted money from Morsey to act as

Morsey’s attorney, Broberg was operating under a

conflict of interest, in that he was actually acting by and

for Green (as he had on many other previous occasions

in the formation of real estate syndications).

24. The documents which Broberg furnished

Morsey contained many provisions which were not to

Morsey’s best interest, such as a putative forfeiture

clause and other provisions which Broberg never

explained to Morsey.

25. The Participation was not registered for sale

under the Securities Act of 1933, the Florida Blue Sky

Laws or the New York Blue Sky Laws.

26. The offer for sale of the Participation was in

violation of the 1933 Act, the Florida Blue Sky Laws and

the New York Blue Sky Laws.

27. During the course of the communications

referred to in the preceding paragraphs, Green failed to

disclose numerous facts. The facts not disclosed by

Green included, inter alia, (a) the size and schedule of

the mortgage payments with respect to the real estate;

(b) the fact that Morsey would be required to advance

substantial funds to the Trust to enable the Trust to

meet periodic and recurring mortgage payments and

expenses; (c) that there was a provision in the Trust

A-9

Agreement whereby, if Morsey failed to make any such

payment, Morsey would forfeit his Participation; (d)

that Green would receive a substantial real estate

commission in connection with the transaction; (e) that

there were additional fees and expenses which Morsey

would be required to pay over and above the $250,000

purchase price of the Participation in connection with

the consummation of the purchase of the real estate,

including a substantial legal fee to Broberg; (f) that

commercial exploitation of this real estate was highly

improbable because almost the entire area was (and still

is) zoned for agricultural use only and the Orange

County Planning Department had in 1972 officially

classified the real estate as “Agriculture” and “Flood

Plains.”’

28. In the latter part of June, 1973, Morsey

received numerous documents from Broberg, who was

Green’s attorney and agent. Broberg requested that

Morsey execute and return the Trust Agreement.

29. These documents comprised only a portion of

the closing documents (the “Closing Documents”’)

generated in connection with the purchase of the real

estate and included a Trust Agreement dated as of June

20, 1973 (the “Trust Agreement’) between First

_ National and the beneficiaries named therein.

30. Neither Green nor his agent Broberg disclosed

to Morsey the contents of the Closing Documents and

particularly the contents of the Trust Agreement. In

fact, Green assured Morsey that there was nothing out

of the ordinary in the documents.

A-10

31. Relying thereon, Morsey executed the Trust

Agreement and mailed it in New York City to Broberg in

Florida.

32. Green and Broberg’s statements contained

misstatements of material facts and omitted to state

material facts necessary to make their statements not

misleading.

33. The representations that Green directly and

through his agent and attorney Broberg indirectly made

to Morsey were materially false in that, among other

things,

(a) the price for the Magnolia Ranch was not

favorable; the Ranch property was not worth $1100 per

acre;

(b) Green did not have prospective investors

ready to purchase the property and in fact, as of the

time of this Second Amended Complaint, Green has

never found a purchaser for the Magnolia Ranch, and

the Ranch is now being foreclosed against Morsey and

the other investors in Green’s syndication;

(c) Green had no plan and in fact had only

briefly visited the area of the Ranch on one occasion

subsequent to conceiving the idea of purchasing it;

(d) although Green apparently was involved in

many other syndications and therefore was uniquely

involved in the market for Central Florida syndications,

Green was not able to and did not use his position to

—

effect an increase in the market price and to find any

other purchaser for the property;

(e) although Green did for all of the period of

time from Morsey’s investment to the commencement of

this lawsuit engage in management of the Magnolia

Ranch, both directly and indirectly through the sellers

of the said Ranch, and among other things, effected an

increase in the operating income of one of the portions of

the ranch operations, Green was not able to make the

Magnolia Ranch operations sufficiently profitable or to

sell the Ranch in a sufficiently short period of time to

avoid the heavy encumbrances of the federal land bank

mortgage or the second mortgage due to the sellers;

(f) contrary to the apparent terms of the Trust

Agreement, Morsey and the other investors did not have

any voice in the management or have any right to affect

or change any decisions being made by Green. By

prearrangement and based upon the history of Green’s

dealing with First National, First National yielded all

management decisions to Green and became and was

Green’s agent to manage the Magnolia Ranch;

(g) Green had no expertise in operation or

management of operating properties such as the

Magnolia Ranch;

(h) Green had no “plan” for developing

Magnolia Ranch with golf courses, homes, ranchettes,

and the like, and knew that the appropriate

governmental authorities had in fact zoned and planned

the area of the Magnolia Ranch as “Agricultural Flood

Plains” and did not permit the Terrys or Green to

develop the property in question in accordance with

Green’s putative “plan.”

34. Among the other omissions to state material

facts to Morsey, Green failed to disclose to him that:

(a) the zoning history and the true development

potential of the Magnolia Ranch contradicted Green’s

“plan”;

(b) Green’s prior repeated use and control both

of First National and of Broberg as his agents in

operating such syndications for all practical purposes as

if Morsey and the other investors were limited partners;

(c) neither Broberg nor First National would,

nor had they in other syndications in the past, question

or dispute any actions by Green with reference to the

investment;

(d) Green had committed himself to purchase

the Magnolia Ranch real estate before he sold the

Participation to Morsey;

(e) Green had an additional pecuniary interest

in the promotion of the real estate venture in that he

would receive a substantial commission in connection

therewith;

(f) further, Green’s pecuniary interests in the

venture’s promotion placed him in a conflict of interest

with Morsey;

(g) Green did not disclose this conflict of

interest to Morsey prior to selling Morsey the

Participation.

35. At the time of the purchase of the

Participation, the transmittal, execution and delivery of

the Trust Agreement and on numerous occasions

thereafter, up to and including August of 1975,

Defendants repeated and reaffirmed the

misrepresentations referred to above and continued to

conceal the omissions referred to above.

36. At the time of the offer for sale and sale of the

Participation and at the times of the subsequent

misrepresentations and omissions referred to above,

Green knew or should have known (a) that the

representations made to Morsey were false, and (b) of

the existence of the material omissions and Morsey’s

ignorance thereof.

37. Prior to the purchase of the Participation,

Morsey advised Green that Morsey did not have

sufficient liquid resources to purchase the Participation

and that he would have to borrow the funds from his

bank in order to consummate the purchase.

38. Green knew that it was improper and

imprudent for Morsey to borrow the funds to purchase

the Participation and remained silent.

39. Green made the foregoing misrepresentations

and omissions in order to induce Morsey to purchase the

Participation and to borrow the funds required.

A-14

40. First National knew or should have known of

Green’s misrepresentations and omissions and failed to

inform Morsey thereof.

41. Morsey relied upon the misrepresentations

and omissions in purchasing the Participation and

borrowing the necessary funds.

42. For some time prior to the offer for sale and

sale of the Participation and thereafter, Green

cultivated a close personal relationship with Morsey and

held himself out to Morsey as an expert in Florida real

estate transactions.

43. Green solicitated and obtained Morsey’s trust

and confidence as an advisor to Morsey in connection

with Florida real estate matters. As a consequence,

Green placed himself in a fiduciary relationship vis-a-

vis Morsey.

44. Asaconsequence of the aforesaid relationship,

Green owed a duty to Morsey of full and fair disclosure

concerning the real estate transaction and the

Participation.

45. Green breached his duty as Morsey’s fiduciary

and agent.

46. Additionally, upon information and belief,

Green held himself out as an advisor to numerous other

individuals with respect to Florida real estate matters

and the investment merits of participations similar to

Morsey’s participation.

A-15

47. Upon information and belief, Green was not

and is not registered as an “investment advisor” under

the 1940 Act or the Florida Blue Sky Laws.

48. First National executed and delivered the

Trust Agreement as Trustee for the benefit of Plaintiff

and the other beneficiaries named in the Trust

Agreement.

49. By virtue of its execution and delivery of the

Trust Agreement and its undertaking to Act as Trustee

for the beneficiaries named herein, First National

entered into a fiduciary relationship vis-a-vis Morsey

and the other beneficiaries.

50. First National knew or should have known of

the misrepresentations and omissions referred to above

and failed to make full and fair disclosure thereof to

Morsey.

51. As a consequence, First National breached its

fiduciary duties to Morsey.

52. The Trust Agreement provides, in part, as

follows: ‘“‘that in transacting any business relative to the

property ... the Trustee shall be governed and

controlled by a majority consent of the Beneficiaries in

accordance with his percentage of ownership. .. . . a

53. Upon information and belief, on several

occasions during the period June, 1973, through and

including the date hereof, First National failed to solicit

and obtain the Beneficiaries’ consent to various material

transactions involving the assets of the Trust and, in

A-16

particular, disbursements to Green. Over $100,000 of

funds were expended without the investors’ approval.

54. First National, contrary to the provisions of

the Trust Agreement and in violation of its duties as

Trustee, followed Green’s directions with respect to the

Trust.

55. As Trustee, First National was required to

provide Morsey and other beneficiaries of the Trust with

regular periodic accountings and with the information

necessary to prepare their tax returns on a timely basis.

56. First National failed to do so. In the Spring of

1974, First National failed to provide Morsey with the

information required for his tax return in a timely

fashion and stated to Morsey that it had been instructed

by its accountant to withhold such information.

57. The withholding of such information was in

furtherance of Green’s scheme to violate the 1933 Act,

the 1934 Act, the Florida Blue Sky Laws and the New

York Blue Sky Laws and to defraud Morsey.

58. In 1975, when Morsey advised Green that he

could not continue to advance funds to the Trust, Green

assured Morsey that he would not lose the Participation.

59. Green had previously advised, represented

and promised to Morsey that Morsey could not and

would not lose his Participation and, in this regard,

caused Broberg to send Morsey papers showing that

Green and Green’s wife had in fact entered into a

guarantee of the payment of the second mortgage to the

Terrys. By so doing, in addition to his other obligations

A-17

to Morsey, Green entered into a contract of which

Morsey was the third party beneficiary. Green has

subsequently failed to honor that guarantee, breaching

his contractual as well as his disclosure duties to

Plaintiff, for he had represented in the delivery of the

article annexed to this Second Amended Complaint that

he, Green, had assets in excess of $50 million.

60. In July, 1975, Green, through his agent

Broberg, sought to obtain Morsey’s agreement to

relinquish all of Morsey’s right, title and interest in and

to the Participation.

61. In connection therewith, Green failed to make

full and fair disclosure to Morsey of all of the facts and

circumstances relevant thereto.

62. Green’s efforts to induce Morsey to relinquish

his interest in the Participation were wrongful and were

made with the intent to further defraud Morsey.

63. The solicitation of Morsey’s consent to

relinquish his interest in the Participation was made in

violation of the 1933 Act, the 1934 Act, the Florida Blue

Sky Laws and the New York Blue Sky Laws, and

constituted a continuing attempt to cover up the prior

‘misstatements and omissions to make statements to

Morsey.

FACTUAL BACKGROUND WITH

REFERENCE TO BROBERG

64. As part and parcel of the series of transactions

described above, Broberg, Reid, and Coe, Broberg &

Reid undertook to provide competent legal services in a

manner commensurate with the standards of legal

practice in the community or in like communities on

behalf of Morsey.

65. Specifically, Broberg, on behalf of himself and

of the defendant partnership and its partners, undertook

to represent Morsey in the acquisition of the Magnolia

Ranch and sought and received substantial attorneys’

fees from Morsey for said undertaking.

66. Contrary to their undertaking and in violation

of their contractual duties and their duty of due care

under all circumstances, defendant attorneys breached

their contract of representation and failed to perform

their undertaking with the requisite due care and/or in

the alternative, committed gross negligence in their

representation of Morsey, initially and throughout the

course of the still on-going transaction.

67. As a result of their said breach of contract,

negligence and/or gross negligence, defendant attorneys,

jointly and severally, caused Morsey to suffer damages

in amounts in excess of $500,000.

68. In addition thereto, defendant attorneys’

activities caused Morsey to be required to expend sums

of money for attorneys’ fees and costs.

A-19

69. Defendant attorneys are therefore jointly and

severally liable to Morsey for compensatory damages in

excess of $500,000, for punitive damages for their gross

negligence, and for attorneys’ fees, pre-judgment

interest and costs.

COUNT I

CLAIM AGAINST GREEN, FIRST NATIONAL

AND BROBERG FOR VIOLATION OF

SECURITIES LAWS

70. Plaintiff realleges Paragraphs 1 through 69,

inclusive.

71. The Participations were “securities’’ and were

not registered.

72. The actions of Green, First National, and

Broberg were fraudulent and deceptive.

73. Green offered the investment to an unknown

number of investors in New York, Florida, Illinois and

Minnesota. “a

74. The actions of Green, First National, and

Broberg constituted violations of the Federal, New

York, and Florida securities laws.

75. Morsey was damaged thereby.

A-20

COUNT II

CLAIM AGAINST GREEN, FIRST NATIONAL,

BROBERG, REID, AND COE, BROBERG

& REID FOR VIOLATION OF

FLORIDA STATUTES §§517.21(1)

76. Plaintiff realleges Paragraphs 1 through 69,

inclusive.

77. First National, Broberg, Reid, and Coe,

Broberg & Reid, were agents of and for Green and

personally participated and aided and abetted Green in

making the sale of the Participation to Morsey and

perpetrating this scheme to defraud Morsey and the

other investors, all in violation of Florida Statutes

Chapter 517.

78. Morsey was damaged thereby.

COUNT III

CLAIM AGAINST GREEN FOR VIOLATION

OF 1940 ACT |

79. Plaintiff realleges Paragraphs 1 through 69,

inclusive.

80. Green was not a registered investment advisor

under the 1940 Act.

81. Green’s actions therefore violated the 1940

Act.

82. Morsey was damaged thereby.

A-21

COUNT IV

CLAIM AGAINST GREEN, FIRST NATIONAL,

BROBERG, REID, AND COE, BROBERG & REID,

FOR FRAUD

83. Plaintiff realleges Paragraphs 1 through 69,

inclusive.

84. Defendants Green, First National, Broberg,

Reid, and Coe, Broberg & Reid, were therefore guilty of

fraud against Morsey under the securities laws and

under common law.

85. Morsey was damaged thereby.

COUNT V

CLAIM AGAINST GREEN AND FIRST

NATIONAL FOR BREACH OF FIDUCIARY DUTY

AND BREACH OF CONTRACT

86. Plaintiff realleges Paragraphs 1 through 69,

inclusive.

87. Defendants Green and First National

_ therefore violated their fiduciary duties to Morsey.

88. Morsey was damaged thereby.

A-22

COUNT VI

CLAIM AGAINST GREEN FOR BREACH OF

REAL ESTATE BROKER’S DUTIES

89. Plaintiff realleges Paragraphs 1 through 69,

inclusive.

90. Such conduct violated Green’s duties to

Morsey as a licensed Florida realtor.

91. Morsey was damaged thereby.

COUNT VII

CLAIM AGAINST BROBERG, REID AND COE,

BROBERG & REID FOR BREACH OF DUTY OF

LEGAL REPRESENTATION

92. Plaintiff realleges Paragraphs 1 through 69,

inclusive.

93. Defendant attorneys’ actions fall below the

standard of legal care required of attorneys in the

community.

94. Morsey was damaged thereby.

COUNT VIII

CLAIM AGAINST LEGAL NEGLIGENCE

INSURER AS DIRECT ACTION

95. Plaintiff realleges Paragraphs 1 through 69,

inclusive.

A-23

96. On information and belief, at all times

material to this Second Amended Complaint, defendant

attorneys were covered by a contract of liability

insurance for matters arising out of incidents such as

those set forth above; such insurance company, under

Shingleton v. Bussie, is a real party in interest in this

suit, amenable to a direct action by Morsey in this

cause, and upon the discovery of the identity of said

insurance company, Morsey will seek to amend to join

said insurance company as a party defendant.

WHEREFORE, Plaintiff demands judgment

against Defendants and each of them as follows:

A. Rescission of the sale of the Participation and a

return of all consideration paid therefor plus interest

thereon.

B. Damages in an amount in excess of Five

Hundred Thirty Thousand Dollars ($530,000.00), plus

interest from December 31, 1975, for the loss sustained

by Plaintiff as alleged herein in connection with

Plaintiff's purchase of the Participation.

C. Damages in an amount as yet undetermined

for such future losses as the evidence may show to have

_been sustained by Plaintiff after December 31, 1975.

D. Interest on the amounts referred to in

Paragraphs A and B above.

EK. Punitive damages in the sum of One Million

Dollars ($1,000,000.00).

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F. The cost and disbursements of this action,

including reasonable attorneys’ fees.

G. Such other and further relief of an equitable or

legal nature, or both, as the Court may deem just and

proper.

/s/ Guy B. Bailey, Jr.

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

NO. WPB 76-8044-Civ-CA

ORDER

THIS CAUSE having come before the Court on

motion of defendants to dismiss for lack of subject

matter jurisdiction, and the Court having considered

the record in this cause, and being otherwise duly

advised, it is

ORDERED AND ADJUDGED that said motion is

GRANTED. The transactions herein are similar to those

in Gordon v. Green, et al, WPM 76-8151-8155-Civ-CA,

the Order of Dismissal of which is attached. There, this

Court ruled that the transactions did not constitute a

securities transaction under Federal law (to wit, Section

2(1) of the 1933 Act), thereby divesting the Court of

Jurisdiction.

ACCORDINGLY, this cause is dismissed. The state

claims averred under the doctrine of pendent

jurisdiction are dismissed without prejudice to refiling

before a court of competent jurisdiction.

DONE AND ORDERED at Miami, Florida, this

28th day of October, 1976.

/s/ C. Clyde Atkins

UNITED STATES DISTRICT

JUDGE

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

CASE NO. WPB 76-8044-Civ-CA

ORDER

Plaintiff's motion for a rehearing is granted. An

evidentiary hearing on the question of whether or not a

security transaction was involved is set for December 14,

1976, at 8:30 A.M. The Court will enter findings of fact

and conclusions of law, and thus the parties should file

proposed findings and conclusions.

DONE AND ORDERED at Miami, Florida, this

30th day of November, 1976.

/s/C. Clyde Atkins

United States District Judge

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

CASE NO. WPB 76-8044-Civ-CA

FINDINGS OF FACTS &

CONCLUSIONS OF LAW

RE: Rule 42(b) Hearing on the Issue of Whether A

Security was Transacted

THIS MATTER is before the Court on a Rule 42(b)

hearing to determine whether or not a securities

transaction occurred in the case sub Judice. Upon

reviewing the testimony from the witness Morsey, the

exhibits received in evidence (to the extent they are

relevant), the parties’ extensive memoranda of law, and

the relevant authorities, the Court herby enters the

following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

1. On or about May 18, 1973, defendant Elmer G.

Green (hereinafter referred to as “Green”) while in

Florida telephoned plaintiff, Chasey Morsey, Jr.

(hereinafter referred to as ““Morsey”’) in New York City

and offered Morsey the opportunity to purchase an

interest in certain Florida real estate.

2. At or about the same time, or thereafter, Green

represented to Morsey the possibility that the described

real estate had certain income-producing assets.

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3. Green represented to Morsey the possibility

that such income-producing assets on the property

could be used to partially offset mortgage payment

obligations and other expenses incurred by the

purchasers of such property,

4. Green’s plan and Morsey’s reason for

purchasing was the expectation of profit and a rise in its

value and resale, and the realization of income

generated by on-going business thereon.

5. Pursuant to the trust agreement (defendants’

Exhibit 2), Morsey had substantial pro rata control over

the operation of said businesses.

6. Green did not make any representations to

Morsey that Green will undertake the responsibility of

developing the land.

7. Green represented to Morsey that the property

would be purchased by The Heminway Corporation and

thereafter transferred to a bank, as trustee, under a trust

agreement for the purposes of holding title and to

provide anonymity for the initial investors who would

become beneficiaries under the trust.

8. By letter delivered May 19, 1973, Green

provided Morsey with certain financial details of the

proposed investment.

9. On June 8, 1973, Morsey accepted Green’s offer

and mailed to Green in Florida a check payable to

Green.

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10. During June, 1973, the subject property was

purchased in the name of The Heminway Corporation.

11. During June, 1973, Morsey received certain

documents from Attorney Gustav Broberg (hereinafter

referred to as “Broberg’’), chat is, closing documents

relating to the purchase of the property. In addition,

Morsey received a proposed trust agreement between

Morsey and others as beneficiaries, and the First

National Bank in Palm Beach, as Trustee.

12. Morsey executed the trust agreement

(defendants’ Exhibit 2) and mailed it to Broberg in

Florida.

13. In June, 1973, the subject property was

transferred to the Bank, as Trustee.

14. Any resale of the property was governed by the

terms of the trust agreement entered into by Morsey,

which provided that he and the other investors would be

governed by a majority consent of the beneficiaries

regarding the sale and the terms under which the sale of

the property would be made, and in accordance with

their percentage of ownership.

15. As indicated in Findings 5 and 6 supra,

Morsey was not led to expect profit solely from the

efforts of Green or any other third party.

CONCLUSIONS OF LAW

1. An investment contract is, within the meaning

of the Securities Act of 1933 (15 U.S.C. §77b(1)) and the

Securities Act of 1934 (15 U.S.C. §78c(a)(10)), “‘a

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_

contract, transaction or scheme whereby (1) a person

invests his money (2) in a common enterprise and (3) is

led to expect profits (4) solely from the efforts to the

promoters or a third party.” SEC v. Howey, 328 U.S.

293, 298-299 (1946).

2. The “solely” aspect of the fourth prong of the

Howey test means “[T]hose essential managerial efforts

which affect the failure and success of the enterprise.”’

SEC v. Glenn W. Turner Enterprises, Inc., 474 F.24 476,

482 (9th Cir. 1973), accord SEC v. Koscot

Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974).

3. Whether a particular investment scheme may

be characterized as a securities transaction depends

upon the facts and circumstances of each case, and the

Court must focus upon the ‘“‘economic reality” of the

transaction. SEC v. Joiner Corp., 320 U.S. 344 (1943).

See also Continental Marketing Corp. v. SEC, 387 F.2d

466 (10th Cir. 1967).

4, In determining whether an instrument partakes

of the nature of a §2(1) “security,” the court must

consider “‘the methods used in selling’”’ the instrument.

Gringer v. State Security Life Insurance Co., Slip. Op.

No. 75-301, p. 1620, 1623 (5th Cir., Feb. 18, 1977).

5. Morsey’s investment and involvement in a joint

venture with the expectation he would profit from a rise

in the value of the property upon his decision and that of

the other beneficiaries to sell or the expectation of

profits from on-going business of which he had

substantial control did not constitute the acquisition or

sale of a security under federal law. Van-Arsdale v.

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Claxton, 391 F.Supp. 538 (S.D. Cal. 1975); Oxford

Financial Corp., Inc. v. Harvey, 385 F “Supp. 431 (E.D.

Pa. 1974).

6. The sale of an interest in real estate is not a

security under the New York Blue Sky Laws. Reiter v.

Greenburg, 288 N.Y.S. 2d 57 (N.Y. App. 1968; Maxine

Gerard, Inc. v. Fisher, 314 N.Y.S. 2d 688 (S.Ct. N.Y.

1970).

To the extent that the above Findings of Fact

constitute Conclusions of Law, they are adopted as

such. To the extent that the above Conclusions of Law

constitute Findings of Fact, they are adopted as such.

The Court will enter an Order in conformance with

the foregoing Findings of Fact and Conclusions of Law.

ENTERED at Miami, Florida, this 23rd day of

March, 1977.

/s/ C. Clyde Atkins

United States District Judge

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IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

NO. 78-1973

CHASE MORSEY, JR.,

Plaintiff-Appellant,

versus

ELMER G. GREEN and FIRST

NATIONAL BANK IN PALM BEACH,

individually and as Trustee

u/a dates as of June 20, 1973,

Defendants-Appellees.

Appeal from the United States District Court

for the Southern District of Florida

(APRIL 11, 1980)

Before VANCE and SAM D. JOHNSON, Circuit

Judges and THOMAS‘, District Judge.

PER CURIAM: AFFIRMED. See Local Rule 21.!

‘See N.L.R.B. v. Amalgamated Clothing Workers of America,

1970, 430 F.2d 966.

*District Judge of the Southern District of Alabama, sitting by

designation.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

NO. 78-1973

Appeal from the United States District Court

for the Southern District of Florida

ON PETITION FOR REHEARING

(May 9, 1980)

Before VANCE and SAM D. JOHNSON, Circuit

Judges and DANIEL H. THOMAS‘, District

Judge.

PER CURIAM:

IT IS ORDERED that the petition for rehearing

filed in the above entitled and numbered cause be and

the same is hereby Denied.

sm

*District Judge of the Southern District of Alabama, sitting by

designation.

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