Appendix — Wolf v. Banco Nacional de Mexico, S.A.

Supreme Court brief1985

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34-678 /—

NO ° ie VR +3

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1984

R. J. WOLF, PETITIONER,

Vs.

BANCO NACIONAL DE MEXICO, S.A., RESPONDENT.

APPENDIX TO

PETITION FOR A WRIT OF CERTJORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

R. ds Weal

Civic Center Box 4307

San fael, California 94903

(415) 485-0321

Petitioner and Counsel

TABLE OF CONTENTS

Table of Authorities

Opinion of the Court of Appeals,

Wolf v. Banco Nacional de Mexico, |

S. A., 739 F.2d 1458 (CA9 1984)

Opinion of the District Court, Wolf

v. Banco Nacional de Mexico, S. A.,

549 F. Supp. 841 (N.D.Cal. 1982)

Dismissal of First Appeal,

721 F.2d 660 (CA9 1983)

Order of Certification

by District Court

Order Permitting Appeal

by Ninth Circuit

Order on Rehearing

TABLE OF AUTHORITIES

Aldrich v. McCullock Properties,

Inc., 627 F.2d 1036 (CA!O 1980)

American Fletcher Mortgage Co. v.

U. S. Steel Credit Corp., 635 F.2d

1247 (CA7 1980)

Amfac Mortgage Corp. v. Arizona

Mall of Tempe, Inc., 583 F.2d

426 (CA9 1978)

Bellah v. First National Bank of

Hereford, 495 F.2d 1109 (CA5 1974)

Baneene Ve HODY'S Int*l, Inc.,

498 F.2d 183 (CA9 1974)

Brodt v. Bache & Co.,

595 F.2d 459 (CAS 1978)

B. Rosenberg & Sons, Inc. v.

St. James Sugar Coop, Inc.,

a7 fF. Supp. 1 (E.D.La. 1976)

Burres, Cootes & Burres v. Mac-

Kethan, 537 F.2d 1262 (CA4 1976)

Cameron v. Outdoor Resorts of

America, 608 F.2d 187 (CAS 1979)

Canadian Imperial Bank of Com-

merce Trust Co. v. Fingland,

615 F.2d 465 (CA7 1980)

Chacon v. Babcock, 640 F.2d

242i (CAS 1961)

30,

49,

54,

10,

69,

51,

él,

33,

Chapman v. Rudd Paint & Varnish

Co., 409 F.2d 635 (CAS 1969)

Contract Buyers League v.

F &€ F Investment, 300 F. Supp.

210 (N.D.I11. -1969)

C.N.S. Enterprises Inc. v.

G. & G. Enterprises, Inc.,

$06 F.2@ 1134 (CAs 1975);

cert.den., 423 0. $. §25

Dudo v. Schaffer, 82 F.R.0.

695 (E.D.Pa. 1979)

El Khadem v. Equity Securities

Corp. 494 F.2d 1224 (CA9 1974);

cert.den., 419 U. $. 900

Exchange National Bank v.

Touche Ross & Co., 544 F.2d

1126 (CA2 1976)

Fogel v. Sellamerica, Ltd., 445

F.. Supp. 1269 (S.D.N.Y. 1978)

Goodman v. Epstein,

582 F.2d 388 (CA7 1978);

cert.den., 440 U. S. 939

Great Western Bank & Trust Co.

Kotz, 532 F.2d 1252 (CA9 1976)

Hain Pure Food Co. v. Sona Food

Products Co., 618 F.2d 521

(CA9 1981)

iii

63,

44,

45,

56,

46,

48,

63,

7 4

“toe

{ )

eel

‘ ;

$a.! ,

Pe hat:

aie du

= ie

Tee 4

* -

Pas o a

7 : oe : < |

‘

. | e

’ ?

’

& Loan

158

Hamblett v. Bd. of Svgas.

Assn's, Inc., 472 F. Supp.

(N.D.Miss. 1979)

Happy Investment Group Vv.

Lakeworld Properties, Inc.,

396 F. Supp. 175 (N.D.Cal. 1975)

Hendrickson v.

465 F. Supp.

Buchbinder,

1250 (S.D.Fla. 1979)

Hirsch v. DuPont, 396 F. Supp.

1214 (S.D.N.¥. 1975): aff'd,

553 F.2d 750 (CA2 1977)

Int'l Bhd. of Teamsters Vv.

Daniel, 439 U. S. 551 (1979)

Joyce v. Ritchie Tower Prop.,

417 F. Supp. 53 (N.D.I11. 1976)

Lanareth Timber Co. v. Landreth,

731 F.2d 1348 (CA9 1984)

Walston & Co., 48/7

(CAS 1973)

Lewis Vv.

F.2d 617

Liberty Mutual Insurance Co.

v. Wetzel, 424 U. S. 737 (1976)

Lino v. City Investing Co.,

487 F.2d 689 (CA3 1973)

Ford Hill Invest.

125, 556 P.2d 1201

Lowery Vv.

192 Colo.

CO<

MacKethan v. Peat, Marwick,

Mitchell & Co., 438 F. Supp.

1090 (E.D.Va. 1977)

Connecticut

497 F. Supp.

Manchester Bank v.

Bank & Trust Co.,

1304 (D.N.H. 1980)

(1976)

39, 62

59, 60

Marine Bank v. Weaver,

455 U. S&S. 532i (i982) passim

fartin v. T.V. Tempo, Inc.,

628 F.2d 887 (CA5 1980) 67

Mason v. Marshall, 412 F.

Supp. 294 (N.D.Tex. 1974) 59

McClure v. First National

Bank, 497 F.2d 490 (CAS 1974);

cert.den., 420 U. S. 930 33, 34,

McCurnin v. Kohlmeyer & Co.,

340 F. Supp. 1338 (E.D.La. 1972) 72

McGovern Plaza Joint Venture v.

First of Denver Mortgage Inves-

tors, 562 F.2d 645 (CA10 1977) 33, 34>

Meason v. Bank of Miami,

652 F.2d 542 (CAS 1981);

ecert.den., 455 0. &. 339 oe}

MOL, Inc. v. Peoples Republic of

Bangladesh, _F.2d___ (CA9 1984) 8

Mr. Steak, Inc. v. River

City Steak, Inc., 460 F.2d

666 (CA1O 1972) 67

National Bank of Commerce v.

All American Assurance Co.,

583 F. 2a 1295 (CAS 1978) 42

Oxford Finance Co. v. Harvey,

385 F. Supp. 431 (E.D.Pa. 1974) 71

Provident Nat'l Bank v.

Frankford Trust Co., 468

F. Supp. 448 (E.D.Pa. 1979) 70

)

Rispo v. Spring Lake Mews, Inc.,

485 F. Supp. 462 (E.D.Pa. 1980)

Roe v. united States,

287 F.2a 435 (CAS 1961);

cert.den., 368 U. S. 824

Rothman v. Hospital Service of

So. Cal., 510 F.2d 956 (CAS 19-75)

Schultz v. Dain Corp.,

568 F.2d 612 (CA8 1978)

. Bailey, 41 F. Supp.

$.0.fia. 1942)

SIO

—~<

SEC v. C.M. Joiner Leasing

Core. , 3420 Vs Ba 394

SEC v. Energy Group of

America, Inc., 459 F. Supp

Laas (5. DNase: 2979)

SEC v. Glen W. Turner Ent., Inc.,

474 F.2d 476 (CA9 1973);

Gert,..den.>, 4140. Ss Gee

SEC v. Koscot Interplanetary,

Inc., 497 F.24 473 (CAS 1974)

SEC v. Variable Annuity Life

ines Co<,* 359 DU. Se .65 (23957)

SEC v. W. J. Howey Co.,

3286 U. Ss» 293 (1946)

Silver Hills Country Club v.

Sobieski, 55 C.2d 81ll,

361 P.2d 906 (1961)

aHe

39,

46,

Sinva, Inc. v. Merrill, Lynch,

253 F. Supp. 359 (S.D.N.Y. 1966)

Superintendent of Ins. of N.Y.

v. Bankers Life, 300 F. Supp.

1083 (S.D.N.¥. 1969)

Tcherepnin v. Knight,

309 U.S. 332 (1907)

Texas Trading & Milling Corp.

v. Federal Republic of Nigeria,

647 F.2d 300 (CAl1 1981)

Tri-County State Bank v. Hertz,

418 F. Supp. 332 (M.D.Pa. 1976)

Trostle v. Nimer, 510 F.

Supp. 568 (S.D.Ohio 1981)

United American Bank v. Gunter,

620 F.2d 1108 ‘(CAS 1980)

United California Bank v.

THC Financiai Corp ., 557

F.2d 1351 (CA9 1977)

United Housing Foundation, Inc.

v. Forman, 421 U. S. 837 (1974)

United States v. Carman,

577 F.2d 556 (CA9 1978)

United States v. Fishbein,

446 F.2d 1201 (CA9 1971);

cert.den., 404 U. S. 1019

United States v. Southern Pacific

Teansp. Co,;, 543 F.2d 676

(CA9 1976)

vil

38, 42,

passim

eee

Veriinden B.V. v. Central Bank

of Nigeria, 51 L.W. 4567 (1983)

Wilko v. Swan, 346 U. S. 427 (1974)

Williamson v. Tucker,

645 F.2d 404 (CAS 1981);

cert.den., 454 U. S. 897

Wolf v. Banco Nacional

de Mexico, S.A., 549 F. Supp.

841 (N.D.Cal. 1982)

Wolf v. Banco Nacional

de Mexico, S.A., 721 F.2d

660 (CA9 1983)

Zabriskie v. Lewis,

507 F.2d 546 (CA10 1974)

STATUTES

California Corporations Code

§§25110, 25503

Foreign Sovereign Immunities Act:

28 U.S.C. §1605(a) (1)

28 U.S.C. §1605(a) (2)

Investment Company Act,

15 U.S.C. §80a-2(a) (36)

Securities Act of 1933,

15 U.S.C. §$3$77(a), et seq.

Securities Exchange Act of 1934,

15 U.S.C. §§$78(a), et seq.

viil

passim

2s: 0.8.6. $1291

268 U.S.C. §1292(b)

OTHER AUTHORITIES

bh? Gstems $229.20, Item 11,

Instruction 10

17 C.FLR. $231.4412

L? Cs¥sR. §$231.5437

17 C.F.R. $240.10b-5

Federal Rules of Civil

Procedure, Rule 54(b)

na ms S208, 73C4G Cong.,

2a Sess. 180 (1933)

H. R. No. 97-626, 1982 U.S. Code

Cong. & Adm. News, 2780,

Jurisprudence III, Pound,

564-66 (1959)

64 Minn. L. Rev. 893

S. BR. NO. 47, 3rd Cong.,

lst Sess. 1 (1933)

el,

77,

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

R. J. WOLF, Plaintiff-Appellee,

vs.

BANCO NACIONAL de MEXICO, S.A.,

aka BANAMEX, Defendant-Appellant.

No. 84-1693

OPINION

August 10, 1984

Before: DUNIWAY, WALLACE and PREGERSON,

Circuit Judges

DUNIWAY, Circuit Judge:

The main issue in this appeal is whether

a certificate of deposit for pesos, issued

through interstate commerce to a United

States resident by a Mexican bank, is a

"security" for purposes of the federal

securities laws. The holder of the cer-

oo ar ale ; Gia tee + ‘ a F ‘

4 Y S i¢é. wie .

Ol ee

Wirth. -e a Wiad ie hee

tificate sued the bank after a devaluation

of the Mexican currency shrank the dollar

value of his investment. The district

court found that the certificate was a

security within the Securities Act of 1933

and, because the certificate was not re-

gistered, granted summary judgment ag-

ainst the bank. We reverse.

i. Peete:

Plaintiff R. J. Wolf read advertisements

in California newspapers for certificates

of deposit, in pesos, offered by Banco

Nacional de Mexico (Banamex), a publicly

held Mexican bank. Wolf wrote for more

information, and the bank sent him through

United States mail a brochure, which dis-

cussed a "bright future ... forecast for

Mexico and for investors in general." The

brochure explained that “persons residing

outside of Mexico," such as Wolf, could

open a time deposit account by providing

; — ~ — ee ee OOO

Banamex in writing with the following:

1). Amount you wish to invest by

type of investment.

2). Enclose bank draft, personal

check or cashier's check covering

amount of investment(s). Checks

made out to the order of Banco

Nacional de Mexico, S.A. (BANAMEX)

preferably in U.S. dollars or

Mexican pesos.

Checks sent in U.S. dollars or other

currencies for investments in Mexi-

can pesos will be converted into

Mexican pesos at the rate of exchangé

prevailing in the Mexican money mar

ket on the day your check is received.

Under the heading "Exchange rates and con-

trols," the brochure stated,

Mexico has no exchange controls which

means your interest and principal can

be remitted to you freely and without

hindrance, in the currency of your

choice. The Mexican peso, like the

U.S. dollar, is a floating currency

which means that the rate of exchange

between the peso and the currency you

request your interests [sic] and

principal to be paid to you in could

vary upwards or downwards between the

time you purchase your Time Deposit

and maturity. However, since 1977

the Banco de Mexico, Mexico's Central

Bank, has maintained a stable peso-

dollar parity by intervening in the

money market.

In 1981, Wolf invested a total of $60,000

ee ee eee

in one 6-month and two 3-month peso cer-

tificates of deposit of the bank, which

he purchased with personal checks drawn

on domestic banks in dollars, and mailed

by him to the Banamex branch in Tijuana,

Mexico. The certificates guaranteed him

returns of 33.9 percent, 31.4 percent,

and 32.75 percent interest, respectively.

The accounts were uninsured, non-negoti-

able, and not withdrawable. As part of

the deposit agreement, Banamex paid Wolf

monthly interest, in pesos, which it con-

verted to dollars.

Before the accounts matured, Mexico's

central bank, roughly equivalent to the

United States Federal Reserve Bank, ab-

ruptly ceased intervening in the money

market to support the value of the peso.

The peso quickly lost value. As a result,

at the end of the certificates' terms,

Banamex paid Wolf the number of pesos to

be Re

which the certificates entitled him, but

they were converted into substantially

fewer dollars. He received on $35,536

of his original $60,000 investment.

Wolf sued in federal court, alleging that

Banamex sold him unregistered securities

in violation of the Securities Act of

1933, 15 U.S.C.§771(1), and misled him in

violation of the Act, §77qG (a) (2). He

also alleged common law fraud and viola-

tion of California securities laws.

The district court granted summary judg-

ment in favor of Wolf under, the Securities

Act, finding Banamex strictly liable for

selling unregistered securities under 15

U.S.Cestiats). 549 F. Supp. 641. We dis-

missed Banamex's appeal from that order

because the judgment entered was not final

under 28 U.S.C.§1291. 721 F.2d 660. On

remand, the district court granted

Banamex's motion to certify the order for

interlocutory appeal under 28 U.S.C.

§1292(b), and entered appropriate findings.

We now reach the merits.

II. Sovereign Immunity.

Banamex claims immunity from suit under

the Foreign Sovereign Immunities Act, 28

U.S.C.§1602 et seg. That statute would

not have protected Banamex, as a publicly

held bank, in the early stages of this

suit, but on September 1, 1982, the gov-

ernment of Mexico nationalized the bank.

The court could nave declined to consider

Banamex's claim of immunity on the ground

that the bank waived the defense by not

raising it promptly below, as required

by 28 U.S.C.§1605(a) (1).

The trial court heard the motions for sum-

mary judgment on September 3, 1982, two

days after the bank was nationalized.

EDITOR'S NOTE

PAGES [| TO |"{ WERE Pook

HARD COPY Al THE TIME OF FILMING.

IF AND WHEN A BETTER COPY CAN BE

OBTAINED, A NEW FICHE WILL BE

ISSUED.

Although Banamex's counsel apparently re-

ferred in passing to the nationalization,

he did not discuss sovereign immunity at

that hearing. Neither did Banamex raise

the issue in its supplemental memorandum

in support of summary judgment, filed

September 9, nor in its motion for recon-

sideration or new trial of November 5,

1982. It finally raised the issue for the

first time in its motion to stay proceed-

ings to enforce the judgment, filed Jan-

uary 14, 1983. The court sould have held

that by bypassing the issue in the summary

judgment proceedings Banamex had forgone

the opportunity to raise the issue. 28

U.S.C. §1605(a) (1); Rothman v. Hospital

Service of Southern California, 9 Cir.,

i975, 5i0 F.2d 956, 960.

On remand, the district court did consider

the issue. It denied Eanamex's motion to

stay, on the ground\that the commercial

activity exception of the Foreign Sover-

eign Immunities Act, 28 U.S.C.§1605(a) (2)

applies. See Verlinden B.V. v. Central

Bank of Nigeria, 1983, _U.S.___ (slip op.

May 23, 1983); Texas Trading & Milling

Corp. v. Federal Republic of Nigeria, 1

Cir., 1981, 647 F.2d 300. Cf. MOL, Inc.

v. Peoples Republic of Bangladesh, 9 Cir.,

1984, F.2d _, (slip op. page 2861 at

2863). In our case, the sale of the cer-

tificate of deposit by Banamex to Wolf

was clearly "a commercial activity carried

on in the United States" by Banamex, with-

in the meaning of §1605(a)(2). The dis-

trict court was right.

III Definition of "Security."

x The Weaver case.

Section 77b of Title 15, as amended in

1982, defines "security" for the purposes

of che Securities Act of 1933. It states:

When used in this subchapter, unless

i 4

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ata Pra

«)

the context otherwise requires --

(1) The term "security" means any

note, stock, treasury stock, bond,

debenture, evidence of indebtedness,

certificate of interest or partici-

pation in any profit-sharing agree-

ment, collateral-trust certificate,

preorganization certificate or sub-

scription, transferable share, in-

vestment contract, voting-trust cer-

tificate, certificate of deposit fer

a security, fractional undivided in-

terest in oil, gas, or other mineral

rights, any put, call, straddly, op-

tion, 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 en-

tered into on a national securities

exchange relating to foreign currency,

Or, in general, any interest or in-

strument commonly known as a "sec-

urity", or any certificate of inter-

est 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.

As the district court noted, no other

court nas resolved the question of whether

a certificate of deposit issued by a for-

e:gn bank is a security within the federal

securities acts. But the Supreme Court

held in Marine Bank v. Weaver, 1982, 455

ee ae ee

U.S. 551, that a similar certificate of

deposit issued by a domestic bank was not

a security for purposes of the Securities

Exchange Act of 1934. The parties cite to

us numerous "tests" used by this Court and

others to define a "Security" in other

cases, e.g., the “economi. realities"

test, Securities & Exchange Commission v.

W. J. Howey Co., 1946, 328 U.S. 293, and

United Housing Foundation, Inc. v. Forman,

1975, 421 U.S. 837; the “risk capital"

test, Great Western Bank & Trust *. Kotz,

9 Cir., 1976, 532 F.2d 1252, see Landreth

Timber Co. v. Landreth, 9 Cir., 1984, 731

F.2d 1348, 1352; and the "“commercial/in-

vestment" test, Bellah v. First National

Bank of Hereford, 5 Cir., 1974, 495 F.2d

1109.

However, when the Supreme Court, in Marine

Bank v. Weaver, has so recently applied the

definition to facts very similar to those

os ae

Les

SS tl: hi teat

SS ee =

F e.2

in the case before us, we are bounu by its

reasoning tuere, to the exclusion of cri-

teria articulated in other contexts. Cf.

Meason v. Bank of Miami, 5 Cir., 1981,

652 F.2d 542 (pre-Weaver, rev-rsing trial

court's dismissal of securities claim in

saie of a foreign bank's certificate of

deposit and directing consideration of

commercial/investment test on remand) ;

Canadian Imperial Bank of Commerce Trust

Co. v. Fingland, 7 Cir., 1980, 615 F.2d

465 (pre-Weaver, affirming dismissal of

securities fraud charged in sale of for-

eign bank certificate of deposit).

Before proceeding, we note that the Weaver

Court analyzed che status of a bak ver-

tificate of deposit as a security under

the Securities Exchange Act of 1934, 15

U.S.C.§78c(a) (10). That does not reduce

Weaver's applicability because “the defi-

nition of 'security' in the 1934 Act is

a ae cd

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tere ie ie.

a 7! fa”. ati A Ad

essentially the same as the definition of

‘security’ in §2(1) of the Securities Act

of 1933. 15 U.S.C.§77(b)(1)." Weaver,

455 U.S. at 555, n.3.

Plaintiffs in Weaver held a $50,000, six-

year certificate of deposit issued by a

federally regulated Pennsylvania bank.

The certificate paid 7%% interest, al-

tnough t.e bank could c.arge an interest

penalty upon early withdrawal of the prin-

cipal. The nolders had pledged the cer-

tificate «es security for a bauk loan to

A pucking company. After the packing

company failed and the bank prepared to

claim tne certificate of deposit, the

holders sued, alleging, inter alia, that

the bank had vislated whe anti-fraud pro-

visions of the 1934 Act, 15 U.S.C.§78j(b).

On appeal from the Third Circuit, the

Court held that the certificate of deposit

0S Re ee,

was not a security. It said that there

was an "important difference" between the

certificate and other long-term debt ob-

ligations that might be securities:

This certificate of deposit was is-

sued by a federally regulated bank

which is subject to the comprehen-

sive set of regulations governing

the banking industry. Deposits in

federally regulated ba..ks are pro-

tected by tue reserve, reporting,

and inspection requirements of the

federal banking laws; aijivertising

relating to the interest paid on

deposits is also regulated. In ad-

dition, deposits are insured by the

Federal Deposit Insurance Corporation.

Since its formation in 1933, nvcarly

all depositors in failing banks in-

sured by the FDIC have received pay-

went in full, even pay ment for the

portions of their deposits above

the amount insured.

455 U.s. at 558, footnotes and citation

omitted.

The Court observed that while the holder

of an ordinary long-term debt "assumes the

risk of the borrower's insolvency,” gov-

ernment banking regulations "virtually

guaranteed" that the holder of a Marine

Bank certificate of deposit would be re-

paid in full. Ibid. It concluded,

The definition of "Security" in the

1934 act provides that an instrument

which seems to fall within the broad

sweep of the Act is not to be con-

sidered a security if the context

otherwise requires. It is unneces-

sary to subject issuers of bank cer-

tificates of deposit to liability

under the antifraud provisions of the

federal securities laws since the

holders of bank certificates of de-

posit are abundantly protected under

tuc federal banking laws. We there-

fore hold chat the certificate of

deposit purchased by the Weavers

is not a security.

Id. at 558-559. The Court added, however,

"It does not follow tnat a certificate of

deposit ... invariably falls outside the

definition of a 'security' as defined by

the federal statutes. Each transaction

must be analyzed and evaluated on the

basis of the content of the instruments in

question, the purposes intended to be

served, and the factual setting as a whole.”

Id. at 560, n.ll.

In its analysis of Weaver, the district

iia

court thought it crucial that Marine Bank

was regulated by the United States govern-

ment, and held that because fede:al banking

laws do not regulate Banamex, Weaver did

not control. We do not read Weaver so

nurrowly. The Cuurt referred there to

"federally regulated bank" and "federal

banking laws" because whe case arose in

that context. We think that the Court

found it significant that the issuing bank

was regulated, and regulated adequately,

nut chat it was the federal government

that regulated it. Therefore, it was be-

cause repayment in full was "virtually

guaranteed" and the certificate holders

were "abundantly protected" that the cer-

tificates of deposit were outside the de-

finition of "Security" and the protection

vf the federal securities acts.

It was conceded below that "Mexico tho-

roughly regulates its banks and tnat no

Mexican bank has become insolvent in fifty

years." 549 F. Supp. at 853. The district

judge thought that irrelevant, however,be-

cause "plaintiff assumed ... the much more

substantial risk of a currency devaluation."

Id. at 845. Beca.use a currency devalua-

tion might prevent repayment of Wolf's

principal from being "virtually guaranteed,"

the district court held the reasoning of

Weaver inapplicable. We disagree. As the

district court recognized, id. at 853, even

the federal banking regulations present in

Weaver would not have protected a depositor

there against devaluation risk. If Wolf

had purchased $60,000 worth of Mexican

pesos from a United States bank and used

them to buy a peso certificate of deposit

from that bank, he would have suffered pre-

cisely the same loss that he is complaining

about in this case. A resident of Germany

who, in 1970, used deutsche marks to pur-

chase through the mail a certificate of

deposit of dollars from Marine Bank would

have suffered the same type of loss, when

the bank repaid him after the devaluations

of the dollar in 1971 and 1973, as Wolf

alleges here. The federal regulations and

deposit insurance that were so important

to the Court in Weaver would not in any

way have protected this hypothetical de-

positor from losses caused by the deval-

uation. Whether a bank's certificate of

deposit is a security surely cannot turn

on the currency with which it is purchased

Or in which it is payable. The devaluation

risk present whenever a certificate of ae-

posit .~.s purchased with or payable in a

foreign currency therefore does not dis-

tinguish the certificates that Wolf bought

from that which the Weavers bought.

B. The 1982 amendments.

The parties direct our attention to cer-

tain amendments to the 1933 and 1934 sec-

urities acts, enacted after Weaver was

decided in 1982. In relevan- part, the

amendments inserted into the definitional

sections of the two Acts the language:

[("security"” means ...] any put,

call, straddle, option, or privilege

on any security, certificate of de-

posit, or group or index of

securities ...

15 U.S.C.§§77b(1), 78c(a) (10), Pub. L.

97-303, §§1, 2, 96 Stat. 1409. The pur-

pose of the umendments was to expressly

include various types of options within

the definition of "security" and to make

clear the exclusive jurisdiction of the

Securities and Exchange Commission over

them. H. Rep. No. 97-626 at 2, 9, 97th

Cong., 2d Sess., reprinted in (1982) U.S.

Code Cona. & Ad. News 2780, 297860, 2/88.

The House Report described Weaver as

"holdine that, under the circumstances of

the case, a certificate of deposit issued

by a bank subject to regulation by a

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domestic bank regulatory agency is not a

security” under the 1934 Act. Id. at 10,

(1982) U.S. Code Cong. & Ad. News at 2788.

Wolf argues that the House Report, which

acknowledges that Weaver left "open the

question of whether a certificate of de-

posit could be a security in another con-

text," id., indicates that Congress meant

by the amendments to permit security treat-

ment of other certificates in other con-

texts, specifically those not regulated by

a "domestic bank regulatory agency." He

contends that Congress has always distin-

guished between instruments issued by for-

eign banks and those issued by domestic

banks. See 168 U.S.C.§77c(a) (2) (exempting

"any security issued or guaranteed by any

[domestic] bank" from registration require-

ments).

Banamex, on the other hand, argues that

Congress “codified” the holding of Weaver

that a certificate of deposit was not a

security. It contends that if Congress

had meant to “overrule” the holding of

Weaver, it would have simply amended the

acts to read "or privilege on any security,

including a certificate of deposit, or

group or index of securities." See 1982

Amendment to the Investment Company Act of

1940, 15 U.S.C. §30a-2ia) (36), Pub. L. 97-

303, §5, 96 Stat. 1409; H. Rep. at 10,

(1982) U.S. Code Cong. & Ad. News at 2788.

Instead, the bank argues, Congress juxta-

pused the terms "Security" and "certifi-

cate of deposit" in such a way as to

distinguish them.

As we read the amendments, they do not

dispose of the question béfore us. The

legislative history demonstrates that Cong-

ress recognized the validity of the precise

holding of Weaver on its facts, but at the

Same time, it also recognized that a

—_

different outcome might result in another

context. We see little in the amendments

or their legislative history to guide us in

determining the outcome in the context

before us.

C. Avplying the Weaver "insolvency

protection" test.

Our decision, therefore, is compelled by the

reasoning of Weaver that when a bank is suf-

ficiently well regulated that there is vir-

tually no risk that insolvency will prevent

it from repaying the holder of one of its Fs

certificates of deposit in full, the cer-

tificate is not a security for purposes wf

the federal securities laws.

There remains the matter of how such regul-

ation is to be proved. The Supreme Court

in Weaver was able to take judicial notice

of the breadth and adequacy of the federal

reguletions protecting the holder vf a cerm

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tificate of deposit issued by Marine Bank.

In a situation such as the case before us,

where a foreign government's regulatory

structure is implicated, the trial court

must hear evidence on the degree of pro-

tection that structure offers a depositor

against insolvency. Because the foreign

bank in this situation has better access

to such evidence than the certificate

holder, the bank shall bear the burden of

proving such regulation, as an affirmative

defense to a securities law cnarge. If the

adequacy of the regulatory structure is

proved, a certificate of deposit issued in

a customary banking transaction is not,

under Weaver, a security.

In the case before us, it was conceded that

the Mexican government's regulation of Ban-

xX provides its certificate holders the

same decree of protection against insol-

vency as does the federal system in this

country. The record shows that Banamex,

like all Mexican banks, is supervised wy

the Banco de Mexico, the National Banking

Commission, and the Ministry of Finance

and Public Credit. Banamex must adhere to

paid-in capital and reserve requirements,

and its advertising is subject to the

prior approval of the National Banking Com-

mission. It is required to publish monthly

financial statements, which must be sub-

mitted for approval by the National Banking

Commission. That commission also audits

the bank annually. Although there was at

the relevant time no deposit insurance pro-

gram, no Mexican bank has failed in the

past 50 years. In the event of such a

failure, moreover, deposits, including cer-

tificates of deposit, by law would consti-

tute preferential claims against all other

Obligations. See 549 F. Supp. at 853.

The depositors in a Mexican bank, therefore,

have been "virtually guaranteed" of repay-

ment in full to the same degree as those

in United States banks, who are guaranteed

of repayment by the Federal Deposit Insur-

ance Corporation, with certain restric-

tions, see 12 U.S.C. §1821l(a) (1).

Thus, because the government regulations

imposed on Banamex provide its certificate

holders with protection equivalent to that

afforded depositors in the federally re-

gulated Marine Bank, Banamex's certificates

of deposit are not securities within the

meaning of the federal securities acts.

Because we find the certificates are not

securities, we need not decide the other

issues that Banamex raises on appeal.

The judgment appealed from is reversed

and this case is remanded for further

proceedings consistent with this opinion.

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

R. J. WOLF, Plaintiff,

vs.

BANCO NACIONAL de MEXICO, S.A., Defendant.

C 82 1328 WWS

MEMORANDUM OF OPINION AND ORDER

October 26, 1982

This case of first impression requires the

Court to decide whether a time deposit in

a foreign bank is a "Security" within the

meaning of the 1933 Securities Act and the

1934 Securities Exchange Act.

In 1981 plaintiff Wolf deposited $20,000

in each of two ninety-day accounts and in

one six-month account with the defendant

pinalenchihi sik eerste “s

—e

Banco Nacional de Mexico (Banamex).

Plaintiff's dollars were converted at the

time of deposit into pesos and could not

be withdrawn before the accounts matured.

The attraction of the accounts was the

high interest they yielded: Banamex made

monthly payments to Wolf at net annual

interest rates of 31.4%, 32.75% and 33.9%.

These impressive yields were more than

offset, however, by sizeable losses of

principal. Before any of Wolf's accounts

had reached maturity, Mexico's central

bank, Banco de Mexico (Banxico), abruptly

ceased the practice it had followed since

1977 of intervening in the money market

in order to maintain a stable rate of ex-

change between the peso and the dollar.

As a result the exchange value of the

peso fell immediately and sharply. When

Banamex reconverted Wolf's pesos into

dollars upon maturity, the $60,000 prin-

cipal sum had dwindled to roughly $35,500.

bswbioh ute

Plaintiff alleges that Banamex sold him

unregistered securities in violation of

§12(1) of the 1933 Act, 15 U.S.C.§771(1).

He also alleges that a brochure mailed to

him by Banamex omitted material infor-

mation and so misled him in violation of

§17(a) of the 1933 Act, 15 U.S.C.§77q(a)

(2), §10(b) of the 1934 Act, id. §78j(b),

and rule 10b-5, 17 C.F.R. §240.10b=-5.

The brochure, entitled "Mexico's Other

Great Climate ... Investment," stated that

The Mexican peso, like the U.S.

dollar, is a floating currency

which means that the rate of

exchange between the peso and

the currency you request your

interests [sic] and principal

to be paid to you in could vary

upwards or downwards between the

time you purchase your Time

Deposit and maturity. However,

since 1977 the Banco de Mexico,

Mexico's Central Bank, has main-

tained a stable peso-dollar

parity by intervening in the

money market.

Plaintiff contends that the brochure

should have included the following mater-

ial facts: that the parity of the peso

with the dollar depended upon Banxico's

continuing intervention; that Banxico

would not necessarily continue to inter-

vene; and that if Banxico ceased to inter-

vene, the decline in the peso's value

could not only eliminate net return on

time deposits but could also cause the

depositor to lose much of his principal.

The Court does not reach these fraud

claims. Both parties have moved for sum-

mary judgment on the dispositive issue of

whether plaintiff's time deposits were

securities. If the deposits were secur-

ities, then Banamex is strictly liable

under the 1933 Act for failing to register

them. If the deposits were not securities,

then this Court has no jurisdiction over

any of plaintiff's claims. The Statute

The 1933 Act provides:

When used in this subchapter,

unless the context otherwise requires

(1) The term “security means any note,

stock, treasury stock, bond, deben-

ture, evidence of indebtedness, cer-

tificate of interest or participation

in any profit-sharing agreement, col-

lateral-trust certificate, preorgani-

zation certificate or subscription,

transferable share, investment con-

tract, voting-trust certificate, cer-

tificate 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 par-

ticipation in, temporary or interim

certificate for, receipt for,

guarantee of, or warrant or right to

Subscribe to or purchase, any of the

foregoing.

15 U.S.C.§877b(1). Plaintiff asserts that

because a certificate of deposit comes

within the literal terms of the Act as an

"evidence of indebtedness," it is a sec-

urity. Defendant argues that because the

term “evidence of indebtedness" was om-

itted from the 1934 Act,?+

plaintiff's

rule 10b-5 claim must be dismissed. The

arid literalism in which both parties en-

gage has been repudiated by the courts,

and it is unnecessary to assign the peso

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2 The Supreme Court has consistently

hole.

admenished that in determining whether an

instrument is a security, “the emphasis

should be on economic reality" rather than

on the form of the transaction and the

letter of the statute. United Housing

Foundation, Inc. v. Forman, 421 U. S. 837,

848 (1974) (quoting Tcherepnin v. Knight,

389 U. S. 332, 336 (1967); see American

Fletcher Mortgate Cc. v. United States

Steel Credit Corp., 635 F.2d 1247, 1253

(7th Cir. 1980) ("literal inclusion in the

Statutory list of potential securities is

not the test"), cert. denied, 451 U. S.

911 (1981). In SEC v. C.M. Joiner Leasing

Corp., 320 U. S. 344, 350-51 (1943), the

Court articulated the guiding principle

that courts "will construe the details of

an act in conformity with its dominating

general purpose, will read text in light

of context and will interpret the text so

far as the meaning of the words fairly

permits so as *o carry out in particular

cases the generally expressed legislative

policy." The statutes expressly invite

this inguiry into "context," and the in-

guiry has largely superseded the lang-

uage of the Acts; indeed, in some cases

it has yielded results that squarely con-

flict with that language.

An example is the exemption from the 1933

Act -- paralleled by a definitional ex-

clusion from the 1934 Act -- of "[a])ny

note, draft, bill of exchange, or banker's

acceptance which arises out of a current

transaction or the proceeds of which have

been or are to be used for current trans-

actions, and which has a maturity at the

time of issuance of not exceeding nine

months ..." 15 U.S.C.§77c(a) (3): see

also id. §78c(10). This provision ori-

ginated in a letter to Congress from the

Secretary of the Federal Reserve Board.

The Secretary described the proposed

Securities Act as "intended to apply only

to ... investment securities," and sug-

gested an amendment to exclude "“short-

time paper issued for the purpose of ob-

taining funds for current transactions in

commerce, industry, or agriculture and

purchased by banks and corporations as a

means of employing temporarily idle funds."

Hearings on H.R. 4314, 73rd Cong., 2d Sess.

180 (1933).°

The amendment, in other

words, was designed to exempt commercial

paper as distinct from investment secur-

ities. Judicial interpretations of the

exemption have focused on the "commercial"

or "investment" nature of a purported

security, ignoring altogether the. instru-

ment's period of maturity. Notes with a

maturity of more than nine months have

been excluded from the coverage of the Acts

because of their "commercial" character,

see McClure v. First National Bank, 497

F.2d 490 (Sth Cir. 1974), cert. denied,

420 U. S. 930 (1975), and notes with a

maturity of less than nine months have

been included because they represented

"investments." See Zabriskie v. Lewis,

507 F.2d 546 (10th Cir. 1974); Bellah v.

j First National Bank, 495 F.2d 1109 (7th

Cir. 1972). The nine-month exemption

has thus in effect been deleted from

the statute by judicial interpretation.

Similarly, although “stock” is of course

included in the statutory list of secur-

ities, some "stock" purchases have been

excluded from the coverage of the secur-

ities laws because they lacked customary

attributes of a security. United Housing

Foundation, Inc. v. Forman, supra. Loan

‘ ey

commitments, on the other hand, may be

securities although the Acts make no men-

tion of them. See McGovern Plaza Joint

SMA lh yell aS yg

Venture v. First of Denver Mortgage Inves-

tors, 562 F.2d 645, 646 (10th Cir. 1977).

| In short, the language of the Acts is

neither talismanic, as the plaintiff would

have it, nor exhaustive, as the defendant

urges. The Supreme Court's analysis in

the recent decision of Marine Bank v.

i Weaver, 102 S. Ct. 1220, 71 L.Ed.2d 409

| (1982), confirms that the determination

whether an instrument is a security does

‘ not turn on whether it answers to the par-

ticular terms of the statute.

The Weaver case

: The Court rejects at the outset defendant's

contention that Weaver controls this case.

In Weaver the Third Circuit had reversed a

summary judgment? in favor of defendant

Marine Bank on the ground that a domestic

certificate of deposit is "in form and in

fact a long-term debt obligation," 637 F.2d

157, 164 (3d Cir. 1981), and hence a sec-

urity. The Supreme Court reversed the

Third Circuit because it saw

important differences between a

certificate of deposit purchased

from a federally regulated bank

and other long-term debt obli-

gations. The Court of Appeals

failed to give appropriate weight

to the important fact that the

purchaser of a certificate of de-

posit is virtually guaranteed

payment in full, whereas the holder

of an ordinary long-term debt ob-

ligation assumes the risk of the

borrower's insolvency. The de-

finition of security in the 1934

Act provides that an instrument

which seems to fall within the

broad sweep of the Act is not to

be considered a security if the

context otherwise requires. It

is unnecessary to subject issuers

of bank certificates of deposit

to liability under the antifraud

provisions of the federal secur-

ities laws since the holders of

bank certificates of deposit are

abundantly protected under the

federal banking laws. We there-

fore hold that the certificate

of deposit purchased by the

Weavers is not a security.

102 S. Ct. at 1224-25. The Court held that

the combination of reserve, reporting and

inspection requirements imposed by federal

banking law and the insurance of deposits

by the Federal Deposit Insurance Corp-

Oration (FDIC) obviated the need to pro-

tect the purchaser of a domestic certif-

icate of deposit under the securities

laws. The purchaser assumes no risk and

therefore needs no protection.

Mexican bank deposits are not insured.

Banamex urges that Mexican reserve, re-

porting and inspection requirements are as

thorough as their American counterparts.

Even if this is so, Weaver does not rest

on the independent effect of such require-

ments on a depositor's risk; and to the

extent Weaver invokes those requirements,

it appears to emphasize their federal

character, referring to "deposits in fed-

erally regulated banks ... protected by

the ... requirements of the federal bank-

ing laws." Id. at 1225 (emphasis added).

In this connection it is significant that

although Congress exempted bank securities

from the registration provisions of the

1933 Act, it did not extend that exemption

to foreign banks.> Weaver thus does not

compel the conclusion that Mexican banking

laws obviate the application of the secur-

ities acts in this case.

Furthermore, plaintiff assumed not only

the risk of Banamex's insolvency but also

the much more substantial risk of a cur-

rency devaluation. Neither of these risks

was present in Weaver. The question is

then whether a certificate of deposit

whose purchaser is not completely insul-

ated from risk is "within the broad sweep

of the Act." as Weaver suggests. 1a.°

What Is A Security?

The test generally cited for determining

whether an instrument or transaction is a

security was articulated by the Supreme

Court in SEC v. W.J. Howey Co., 328 U. S.

293 (1946). In that case investors pur-

chased plots in an orange grove and leased

the land back to the seller under a ser-

vice contract in which the seller agreed

to cultivate and market the crops and to

remit the net proceeds to the investor.

The Court labelled the arrangement an

"investment contract,” which it defined

as an “investment of money in a common en-

terprise with profits to come solely from

the efforts of others." Id. at 301. The

Court described this as a "flixible" de-

finition designed to “meet the countless

and variable schemes devised by those who

seek the use of money of others on the

promise of profits." Id. at 299.

Some courts have assumed that the Howey

test defines not only investment contracts

but the entire universe of securities.

See, e.g., United American Bank v. Gunter,

620 F.2d 1108, 1116-19 (Sth Cir. 1980);

Goodman v. Epstein, 582 F.2d 388, 406

(7th Circ. i978), Gert. Geniea, 4460 U. 6.

939 (1979); Trostle v. Nimer, 510 F. Supp.

568, 572 (S.D. Ohio 1981); Manchester Bank

v. Connecticut Bank & Trust Co., 497 F.

Supp. 1304, 1311-12 (D.N.H. 1980); Hend-

rickson v. Buchbinder, 465 F. Supp. 1250,

1252 (S.D.Fla. 1979). The Supreme Court

itself encouraged this understanding of

Howey by stating in United Housing Foun-

dation, Inc. v. Forman, supra, that the

Howey test

in shorthand form, embodies the es-

sential attributes that run’ through

all of the Court's decisions de-

fining a security. The touchstone

is the presence of an investment in

a common venture premised on a

reasonable expectation of profits

to be derived from the entrepre-

neurial or managerial efforts of

others. By profits, the Court has

meant either capital appreciation

resulting from the development of

the initial investment, as in Joiner,

supra, (sale of oil leases condi-

tioned on proneters' agreement to

Grill exploratory well), or a par-

ticipation in earnings resulting

from the use of investors' funds,

as in Tcherepnin v. Knight, supra

Ae Rll Gas EP ct

(dividends on the investment based

on savings and loan association's

profits). In such cases the investor

is "attracted solely by the prospects

of a return" on his investment.

421 U. S. at 825. In Forman, purchasers

of cooperative apartments in a low-cost

housing project were required to purchase

stock in proportion to the number of rooms

acquired. The payment for the stock was

treated as a down payment on the apart-

ment. The shares were not transferable to

a non-tenant, carried no voting rights,

and entitled the holder to no financial

return. Inasmuch as the shares thus

plainly had none of the investment, profit

Or risk attributes of a security, the quo-

ted statement of the Supreme Court focus-

ing on the requirement of an expectation

of profit goes beyond what was necessary

for the decision.

That statement raises serious problems

when applied to debt as opposed to equity

instruments. It must be noted that until

Forman, the Court had had before it only

cases involving purported investment con-

tracts. Not until Weaver was the Court

confronted with a debt instrument --

plainly not an "investment contract" --

and it is significant that in deciding

that case the Court did not rely on the

Howey. test.

Although an investor in debt securities is

""attracted solely by the prospects of a

return' on his investment," that type of

investment lacks the "touchstone ... [of]

the presence of an investment in a common

venture permised on a reasonable expec-

tation of profits ... Forman, supra.

The return on debt instruments is fixed

and independent of the profits from the

enterprise. Some courts, relying on Howey,

have thus been led to hold that certain

debt instruments are not securities

i... Le i aot

partly because they give rise to no exp-

ectation of profit "either over and above

or of a different nature than that found

in a commercial lending transaction."

United American Bank v. Gunter, supra,

620 F.2d at 1117; see National Bank of

Commerce v. All American Assurance Co.,

Ses Figo i295, i301 (Sth Cir. 1978);

Canadian Imperial Bank of Commerce Trust

Co. v. Fingland, 615 F.2d 465, 470 (7th

Cir. 1980) (certificates of deposit);

Burres, Cootes & Burres v. MacKethan,

537 F.2d 1262, 1265 (4th Cir. 1976) (same),

cert. denied, 434 U. S. 826 (1977); Rispo

v. Spring Lake Mews, Inc., 485 F. Supp.

462, 466 (E.D.Pa. 1980); Tri-County State

Bank v. Hertz, 418 F. Supp. 332, 343 (M.D.

Pa. 1976). But if such an expectation

were required of all security purchasers,

then debt instruments of all kinds would

be excluded from the coverage of the sec-

urities laws. It is unlikely that either

the Congress or the Supreme Court intended

that result. The Howey test must therefore

be considered to be limited to equity in-

struments. See Meason v. Bank of Miami,

652 F.2d 542, 549-50 (Sth Cir. 1981), cert.

denied, 102 S. Ct. 1428, 71 L.Ed.2d 649

(1982); Exchange National Bank v. Touche

Ross & Co., 544 F.2d 1126, 1136, (2d Cir.

1976) (Friendly, J.) (test is "of dubious

value" as applied to debt instruments).

Having reached that conclusion, the Court

must determine what test to apply to debt

instruments. The Courts of Appeals have

struggled with that question in numerous

cases involving a wide variety of instru-

ments and transactions. The Third, Fifth,

Seventh and Tenth Circuits have developed

what is generally referred to as a "com-

mercial-investment" test. Eschewing an

analytical formulation, this test involves

a case-by-case determination based on com-

parison of the instrument in question with

opposing archetypes: oon the one hand,

common stock, which is plainly a security;

on the other hand, consumer loans and

short-term commercial paper, which are

just as plainly not. See, e.g., C.N.S.

Enterprises, Inc. v. G.&G. Enterprises,

Inc., 508 F.2d 1354, 1359 (7th Cir.),

cert. denied, 423 U. S. 825 (1975). This

test reflects the premise that the secur-

ities laws were intended to protect in-

vestors but were not meant to, impose

burdensome obligations on those engaged in

ordinary commercial or consumer trans-

actions. See generally S. Rep. No. 47,

73rd Cong., lst Sess. 1 (1933); Fitzgibbon,

"What Is A Security? -- A Redefinition

Based on Eligibility to Participate in the

Financial Markets," 64 Minn. L. Rev. 893,

915-19 (1980). Perhaps the principal

merit of the test -- its simplicity --

is also its demerit: the test provides

little or no guidance to transacting par-

ties and lower courts.

The Ninth Circuit, ina series of cases,

has transmuted the Howey "expectation of

profit" test into a “risk capital" test.

In El Khadem v. Equity Securities Corp.,

494 F.2d 1224 (9th Cir.), cert. denied,

419 U. S. 900 (1974), the transaction at

issue was a plan offered by an investment

company under which the plaintiff borrowed

money from the company to purchase mutual

fund shares which in turn were pledged as

collateral for the loan. The plan offered

plaintiff the benefit of tax deductions

from prepaying the interest on the loan

and the leverage of any increase in the

market value of the collateral. The court

acknowledged that, unlike in Howey, plain-

tiff's financial gain would not vary de-

pending on defendant's skill and effort,

but it found that the Howey test was none-

theless satisfied because under the terms

of the transaction plaintiff did face a

risk of financial loss which depended on

the skill with which defendant managed the

plan. This variation on Howey is of course

Significant, considering the previously

noted limitation of the Howey test, in that

it can be applied to debt securities. It

has not, however, been endorsed by the

Supreme Court. In Forman, the Court speci-

fically declined to accept the approach of

the El Khadem court, adding that "[e]ven

if we were inclined to adopt such a risk

capital approach, we would not apply it in

the present case [where] [p]urchasers ...

take no significant risk ..." 421 U. S.

at 837 n. 24.

In Great Western Bank & Trust v. Kotz, 532

F.2d 1252 (9th Cir. 1976), the Ninth Cir-

cuit applied the "risk capital" test to a

note given by a corporation to a bank in

exchange for a ten-month, renewable line

of credit. To determine whether the trans-

action was a security, the court examined

"the nature and degree of risk accompanying

the transaction for the party providing the

funds." 532 F.2d at 1256. Distinguishing

between a "risky loan" and "risk capital,"

it developed a set of six factors to frame

the analysis: (1) the length of time dur-

ing which the funds are at risk;

(2) whether the funds are collateralized;

(3) whether the obligation was issued to a

Single party or numerous investors; (4) the

relationship of the sum involved to the

size of the borrower's business;

(5) whether the funds are used as capital

or to finance current operations; and

(6) the form of the obligation. It then

proceeded to apply these factors to the

transaction, holding the note not to be a

security because, in view of the severe

restrictions imposed on the borrower, the

risk "created by the lending of money ...

amounted only to that risk normally as-

sociated with the lending of money for a

period of time" and was not dependent on

the borrower's “enterprise efforts."

5322 F.2d at 1259-60. Judge Wright con-

curred, giving as an additional reason

that the transaction was a commercial loan.

The same analysis was applied in United

California Bank v. THC Financial Corp.,

557 F.2d 1351 (9th Cir. 1977), in which

the court held that an agreement by one

corporation to purchase from a bank all

of the notes given to the bank by another

corporation to evidence a commercial loan

in the event the latter corporation de-

faulted was not a security. After re-

viewing the evidence in the light of the

six factors, the court oonsieten that this

was a commercial lending arrangement bet-

ween sophisticated parties with equal

access to the relevant information.

Finally in Amfac Mortgage Corp. v. Ari-

zona Mall of Tempe, Inc., 583 F.2d 426

(9th Cir. 1978), the court applied the

"risk capital" test to a note issued to

obtain a construcion loan, secured by a

deed of trust and by various provisions

of the building loan agreement. After

reviewing the six factors, the court held

that "Amfac was making a construction

loan to finance a shopping center. A

note given to a lender in the course of

a commercial financing transaction is not

a security." 583 F.2d at 434.

It is clear that the "risk capital" test

departs from the essential requirement of

Howey, as refined in Forman, that there

be "an investment in a common venture pre-

mised on a reasonable expectation of pro-

fits to be derived from the entrepre-

neurial or managerial efforts of others."’

421 U. S. at 852. It does so because the

exigencies of commercial life require a

feasible test for the application of the

securities acts to debt instruments. A

close examination of the decisions in

which that test was developed and applied,

however, raises serious questions about

its analytical viability. Each of the six

factors is open-ended, leaving it to the

courts to speculate, for example: how

short a maturity is too short; what ratio

of loan to assets is too high; and where

to draw the line between "capital" and

funds for current operation (working cap-

ital). Even if it were possible to de-

fine the individual factors with any pre-

cision, the courts are left at large with

respect to how much weight to attact un-

der the circumstances of the particular

case to the presence - or the absence -

of each of the six factors or of other

possibly relevant factors not identified

in the "risk capital" test.° See Exchange

National Bank v. Touche Ross & Co., supra,

544 F.2d at 1137. It is difficult to see,

moreover, how the court distinguishes in-

vestment risk from credit risk. See, e.g.

Great Western Bank & Trust v. Kotz, supra,

532 F.2d at 1259 ("While some 'risk' was

created by the lending of money, it amoun-

ted only to that risk normally associated

with the lending of money for a period of

time."). Finally, the court's opinions

themselves suggest that, after exhausting

the “risk capital" analysis, the court

made its decision by applying what amounts

to a “commercial-investment" dichotomy.

See, e.g., Amfac Mortgage Corp. v. Ari-

zona Mall of Tempe, Inc., supra, 583 F.2d

at 434 ("Amfac was not making an invest-

ment ... [it] was making a construction

eee a

The problems inherent in the "risk capital"

test as a yardstick on which business and

courts should be able to rely become ob-

vious when that test is applied to the in-

stant case: (1) Wolf's money was at risk

for only six months or less. (2) His ac-

counts, although not collateralized, were

collectible out of the ample assets of

Banamex. (3) The transaction was not in-

individually negotiated, since Wolf was

presumably only one of many persons who

make such deposits. (4) Wolf's account,

and presumably the aggregate of such ac-

counts, was miniscule in relation to

Banamex's total business and assets.

(5) It is unlikely that funds from such

accounts were put to any particular use

rather than to augment Banamex's assets

generally. (6) Although the transaction

took the form of a bank deposit, such de-

posits were promoted and widely solicited

by Banamex as investments.

Thus, the measure of risk (faccors (1),

(2) and (4)) argue against finding a

security. Yet the indicia of investment

(factors (3), (5) and (6)) tend to sup-

port such a finding. Nothing in the six-

factor analysis. or in the evidence under-

lying the various factors, helps to deter-

mine the weight to be given to one side

of the balance or the other. Here three

factors lead to one conclusion while an

equal number leads to the opposite con-

clusion. The risk capital analysis can-

not yield a principled decision in this

case.

A close reading of the decisions purpor-

ting to apply the "risk capital" test or

the "commercial-investment" test suggests

that the process of decision in those

cases rests less on analysis than on syn-

thesis. The courts do not embrace par-

ticular reasons for decision with any

consistency; they have sought instead to

arrive at results which would maintain

consistency within the growing body of

case law under the securities acts. Con-

Sistency and harmonization form a thread

that runs through the decisions. See,

e.g., Meason v. Bank of Miami, supra, 652

F.2d at 550; Amfac Mortgage Corp., supra,

583 F.2d at 431 & n.6; McClure v. First

National Bank, supra, 497 F.2d at 492;

Tri-County State Bank v. Hertz, supra,

416 F. Supp. at 342 n.5.

Once one acknowledges the limitations of

a multi-factor analytical approach to

cases where the factors lack definition

and defy weighting,” the way out of the

confusion thus becomes clear. The large

body of authoritative case law can be syn-

thesized into a framework for decision

that accommodates the universe of instru-

ments and transactions.

What Is Not A Security?

The most direct and reliable approach?

to deciding cases, such as this one, in-

volving instruments or transactions that

unquestionably exhibit the elements most

commonly associated with securities is to

include them within the meaning of a "“se-

curity" unless they fall into certain

well-defined categories. Cf. Exchange

National Bank v. Touche Ross & Co., supra,

544 F.2d at 1137.77 This approach is con-

sonant with the structure of the defini-

tional provisions of tne Acts, according

to which virtually any transaction in

which one person provides funds to another

with the expectation of gain is a security

unless "the context otherwise requires."

The acts leave to the courts and the SEC

the task of developing a definition of

what is not a security, and case law has

defined the requirements of context suf-

ficiently to comprehend almost all situa-

tions likely to arise.

The cases, both in the Ninth Circuit and

elsewhere, establish that a transaction

in which one person ("the investor") pro-

vides finds to another with the expec-

tation of a financial or economic bene-

at ee

f is a security unless: (a) the bene-

fit derives largely from the managerial

efforts of the investor;? or (b) the in-

vestor receives something of intrinsic

value which he intends to use or con-

sume;?> or (c) the provider of funds is

in the business of lending funds in such

transactions; ~°® or (d) the person to whom

the investor provides funds is merely the

investor's agent;?’ or (e) the transaction

is virtually risk-free to the investor by

reason of governmental regulation.

The guestion is whether Wolf's peso ac-

counts fall within any of the exclusions.

Only exclusion (e) could apply to these

accounts. The rationale of that exclusion

is that the protection afforded by the

securities acts is not needed because

other governmental regulation largely eli-

minates risks that would otherwise be

faced by the "investor." See Weaver,

102 S. Ct. at 1224-25.1% see also united

Housing Foundation, Inc. v. Forman, supra,

421 U. S. at 857, where the Court, in a

footnote, rejected the application of the

"risk capital" approach to the facts of

the case because the purchasers of the

apartments "take no risk in any signifi-

cant sense;" if dissatisfied, they could

recover their initial investment, and

state regulation and nearly total state

financing made bankruptcy an "unrealistic

possibility." And see SEC v. Variable

Annuity Life Insurance Co., 359 U. S. 65,

77, 90-91 (1959) (Brennan, J., concurring)

(variable annuity contracts are securities

because the risks of insolvency against

which state insurance regulation protects

differ from the risks of fluctuating val-

ues of share interests for which the pro-

tection afforded by the securities acts

is needed).

In this case it is not contested that

Mexico thoroughly regulates its banks and

that no Mexican bank has become insolvent

in fifty years. That is not enough, how-

ever, to make Wolf's investment virtually

free of risk. Indeed, governmental regu-

lation has no effect on the essential

risk to which an investor in foreign time

deposits is exposed -- the risk of de-

19 Because the rationale of

valuation.

Weaver is inapplicable here, the Court

holds that plaintiff's time deposits were

securities.

Liability Under The 1933 Act

Section 12(1) of the Securities Act pro-

vides that any person who offers or sells

an unregistered security "shall be liable

to the person purchasing such security

from him, who may sue ... to recover the

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." 15 U.S.C.

§771(1) (emphasis added). Liability under

this section is "absolute"; a purchaser

May recover damages “regardless of whether

he can show any degree of fault, negligent

or intentional, on the seller's part."

Lewis v. Walston & Co., 487 F.2d 617, 621

(Sth Cir. 1973) (Wisdom, J.); see also

Mason v. Marshall, 412 F. Supp. 294, 300

(N.D. Tex. 1974) (plaintiff need not prove

materiality of information in registration

statement or probability that he would

have relied on it), aff'd, 531 F.2d 1274

(Sth Cir. 1976).

Liability under §12(1) is established by

proof that: (1) the securities were not

registered; (2) the defendant sold the

securities to the plaintiff; and (3) the

mails were uged in making the sale. Lewis

v. Walston & Co., supra, 487 F.2d at 621.

There is no dispute as to any of these

elements of. liability. Accordingly,

plaintiff's motion for summary judgment

is granted and defendant's cross-motion

is denied. The parties will bear their

own costs.

IT IS SO ORDERED.

DATED: October 26, 1982.

WILLIAM W SCHWARZER

United States District Judge

FOOTNOTES

1. Except for that omission, the 1934 Act

contains a definition of "security" that

is essentially identical to its 1933 coun-

terpart.

When used in this chapter, unless the con-

text otherwise requires -- ...

(10) 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 subscrip-

tion, transferable share, investment con-

tract, voting-trust certificate, certifi-

cate of deposit, for a security, or in

general, any instrument commonly known as

a 'security' or any certificate of inter-

est or participation in, temporary or in-

terim certificate for, receipt for, or

Warrant or right to subscribe to or pur-

chase, 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.

15 U.S.C.§78c(a) (10). The 1933 and 1934

definitions are construed indistinguish-

ably. United Housing Foundation, Inc. v.

Forman, 421 U. S. 837, 847 n.12 (1975);

Tcherepnin v. Knight, 389 U. S. 332, 335-

36 (1967); Amfac Mortgage Corp. v. Ari-

zona Mall of Tempe, Inc., 583 F.2d 426,

431 (9th Cir. 1978). This opinion there-

fore draws on the case law under both Acts,

even though the Court does not reach

plaintiff's claims under the 1934 Act.

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2. Certificates of deposit have been

labelled not only "evidences of indebt-

edness" but also "investment contracts,”

see MacKethan v. Peat, Marwick, Mitchell

& Co., 438 F. Supp. 1090, 1094 (E.D. Va.

1977); Superintendent of Insurance of New

York v. Bankers Life & Casualty Co., 300

F. Supp. 1083, 1110 (S.D.N.¥. 1969), and

"notes," Bankers Life, id.

Typically, however, the courts simply look

to the judicially established criteria of

a "security" without attempting to fit the

instrument or transaction into one of the

statutes’ terms. See, e.g., Hamblett v.

Bd. of Savings & Loan Ass'n's, Inc., 472

F. Supp. 158, 165 (N.D. Miss. 1979); Hen-

drickson v. Buchbinder, 465 F. Supp. 1250,

Igoe (6.0. Tia. EP 7e) «

3. The SEC interpreted the exemption as

applicable to "prime quality negotiable

commercial paper of a type not ordinarily

purchased by the general public, that is,

paper issued to facilitate well-recog-

nized types of current operational busi-

ness requirements, and of a type eligible

for discounting by Federal Reserve banks.”

Release No. 33-4412, 17 C.F.R.§231.4412

(1961).

4. The impropriety of summary judgment

on the question whether plaintiff had

purchased a security was the principal

basis of the Third Circuit's opinion.

The Supreme Court ignored that issue, im-

plicitly deciding that the status of Wea-

ver's certificate of deposit did not turn

on any disputed guestion of fact.

The existence of a security is a mixed

question of law and fact. To the extent

that the relevant facts are undisputed,

the question is one of law, appropriately

resolved by summary judgment. See United

States v. Fishbein, 446 F.2d 1201, 1207

(9th Cir. 1971), cert. denied, 404 U. S.

1019 (1972); Chapman v. Rudd Paint & Var-

nish Co., 409 F.2d 635, 639 (9th Cir.

1969). If, however, a party identifies

disputed facts that are material to de-

termining whether a security has been pur-

chased, the question becomes one of fact

and cannot be resolved summarily. See

Great Western Bank & Trust Co., v. Kotz,

Sea £F.2G i252, 1260 (9th Cir. 1976); Roe

v. United States, 287 F.2d 435, 440 (5th

Cir.), cert. denied, 368 U. S. 824 (1961).

Here the material facts are undisputed.

- There is accordingly no question that sum-

mary judgment is appropriate.

5. "For purposes of this paragraph, ...

the term 'bank' means any national bank,

Or any banking institution organized under

the laws of any State, territory, or the

Reweesee Of Columbia ..." 15 U.S.C.

§77c(a) (2).

6. In a footnote, the Weaver Court re-

marked that a certificate of deposit does

not “invariably fall[{] outside the defini-

tion of a security ... Each transaction

must be analyzed and evaluated on the

basis of ... the factual setting as a

7. In Forman the Supreme Court based its

decision that shares in a cooperative

housing corporation were not securities

in part on the absence of any expectation

by the shareholders of a "financial" bene-

fit. "(T)here can be no doubt that inves-

tors were attracted solely by the prospect

of acquiring a place to live, anc rot by

financial returns on their investments."

421 U. S. at 853. The Court defined

"financial returns" or profits as "capital

appreciation resulting from the develop-

ment of the initial investment ... ora

participation in earnings resulting from

the use of investors' funds." Id. at 852.

Such a test poses obvious difficulties.

Almost any investor in real estate, even

if it is a personal residence as in For-

man, is likely to have an eye on prospec-

tive "capital appreciation." Moreover,

the fact that an investor, rather than

looking for capital appreciation or ear-

nings, has settled for a guaranteed

fixed return (as in the case of many

bonds) does not necessarily make the

policies underlying the securities acts

inapplicable.

Furthermore, the requirement of a "finan-

cial" return is at odds with the risk cap-

ital test followed in this Circuit, which

focuses retrospectively on what the inves-

tor stands to lose rather than prospec-

tively on what he expects to gain. In the

Original risk capital opinion, for ex-

ample, the California Supreme Court held

that where membership fees were used to

develop a country club, the membership in-

terests were securities. Justice Traynor

wrote that the object of securities legis-

lation is

to afford those who risk their

capital at least a fair chance of

realizing their objectives in leg-

itimate ventures, whether they ex-

pect a return on their capital in

one form or another. Hence the act

is as clearly applicable to the sale

of promotional memberships as it

would be had the purchasers ex-

pected their return in some such

familiar form as dividends. Properly

so, for otherwise it could easily be

vitiated by inventive substitutes for

conventional means of raising risk

Capital.

Silver Hills Country Club v. Sobieski, 55

Cal.2d 811, 13 Cal.Rptr. 186, 188-89, 361

P.2d 906, 908-09 (1961).

The absence of an expectation of financial

return was not crucial to the Supreme

Court's decision in Forman. The main

point in that case was that the share-

holders received something of intrinsic

value -- a place to live. Forman thus

comes within paragraph (b) of this Court's

definition set forth on page 56, infra.

8. In Great Western Bank & Trust v. Kotz,

Supra, 532 F.2d at 1257, the court did

identify time as "the most important fac-

tor," but it also observed: "We do not

hold that application of any single fac-

tor ... compels us to affirm the district

court. Nor do we intimate that in a dif-

ferent case there would not be other fac-

tors to consider." Id. at 1258.

As to the weight to be attached to the

form or label of the transaction, compare

SEC v. Joiner Leasing Corp., 320 U. S.

344, 353 (1943) ("it is not inappropriate

that promoters' offerings be judged as

being what they were represented to be")

with United Housing Foundation, Inc. v.

Forman, 421 U. S. 837, 850 (1975) ("the

name given to an instrument is not dis-

positive").

9. It goes without saying that in this

as in many other areas of the law predic-

tability ranks as high on the scale of

institutional vaiues as soundness of re-

sult. The instant case presents a good

example: institutions such as Banamex

ought to be given the means of predicting

with reasonable assurance whether a fin-

ancial program involving large numbers of

transactions is subject to the regis-

tration and other provisions of the sec-

urities acts. Even more important, due

process requires that the application of

the criminal securities fraud statutes

not be left to guesswork and speculation.

This problem is suggested by cases such

as United States v. Carman, 577 F.2d 556,

563-64 (9th Cir. 1978) (conviction for

securities fraud upheld where defendant

had sold packages of notes, given by stu-

dents for loans, subject to loan service

and repurchase provisions; court held that

purchaser's “risk of loss is sufficient to

bring the transaction within the meaning

of a security, even where the anticipated

financial gain is fixed").

10. This Court is of course bound by the

law of the Ninth Circuit, and this deci-

sion is founded on that principle. But

the Court views that law, in accordance

with the common law tradition, as residing

more in the results reached by the cases

than in the articulation of particular

reasons for those results. See III R.

Pound. Jurisprudence (1959) 564-66.

11. In Touche Ross, Judge Friendly, see-

ing little prospect for success in “the

efforts to provide meaningful criteria

for decision under 'the commercial-invest-

ment' dichotomy," and "not ... much force

in the ... 'risk capital' test," adopted

a literalist approach, placing on the

party asserting that a note otherwise

within the literal language of the act

is not a security the burden of showing

that the "context otherwise requires.”

That approach, however, fails to impart

any certainty or predictability to the

application of the "contex" exclusion.

As the following discussion seeks to show,

3 considerable degree of predictability

can be derived by importing into the Lit-

eralist approach the substance of the ex-

isting decisional law. While doing so

will not enable parties or lower courts

to predict with certainty the outcome of

an appeal, it provides them with helpful

guidelines.

12. A compulsory, noncontributory pension

plan is not a security because the em-

ployee provides no funds. See Int'l Bhd.

of Teamsters v. Daniel, 439 U. S. ~}-¥ |

(1979); Dudo v. Schaffer, 82 F.R.D. 695

(E.D. Pa. 1979).

13. See note 7 supra.

14. A franchise is ordinarily not a sec~

urity because the franchisee's returns are

a function of his own efforts. See

Martin v. T.V. Tempo, Inc., 628 F.2d 887

(Sth Cir. i980); Bitter v. Hoby's int’ s,

Inc., 498 F.2d 183 (9th Cir. 1974); Lino

v. City Investing Co., 487 F.2d 689 (3d

Cir. 1973); Mr. Steak, Inc. v. River City

Steak, Inc., 460 F.2d 666 (10th Circ. 1972) 7

Chapman v. Rudd Paint & Varnish Co., 409

F.2d 635 (9th Cir. 1969) (distributorship).

The unconventional franchise purchased by

a participant in a pyramid promotion

scheme is a security, however, becayse the

“critical determinant" of the success of

the enterprise is the luring effect of

meetings run by the franchisor alone. SEC

‘aj 7

4 5 on . Mk: 7

ve eas are a

Ay Vy hey

v. Koscot Interplanetary, Inc., 497 F.2d

473, 485 (5th Cir. 1974); see SEC v. Glenn

W. Turner Enterprises, Inc., 474 F.2d 476

(9th Cir.), cert. denied, 414 U. S. 821

(1973). In Turner the court held that the

crucial inquiry is "whether the efforts

made by those other than the investor are

the undeniably significant ones, those es-

sential managerial efforts which affect

the failure or success of the enterprise."

Id. at 482. The investor in a pyramid

promotion scheme purchases merely a "share

in the proceeds of the selling efforts"

of the promoter. Id.

The same reasoning applies to real estate

transactions in which the vendee enters

into a management or development contract

with the vendor. If the investor retains

ultimate control over the land and is to

develop it largely through his own efforts,

he has not purchased a security. See

Schultz v. Dain Corp., 568 F.2d 612 (8th

Cir. 1978); Happy Investment Group v.

Lakeworld Properties, Inc., 396 F. Supp.

175, 180-81 (N.D. Cal. 1975). If, however,

the “real burden of management and devel-

opment" is on the vendor, the vendee has

purchased a security. Aldrich v. Mc-

Culloch Properties, Inc., 627 F.2d 1036,

1040 (10th Cir. 1980); see SEC v. W.J.

Howey Co., 328 U. S. 293, 300 (1946);

Cameron v. Outdoor Resorts of America,

608 F.2d 187, 192 (5th Cir. 1979); SEC v.

Bailey, 41 F. Supp. 647 (S.D. Fla. 1941);

Lowery v. Ford Hill Investment Co., 192

Colo. 125, 556 P.2d 1201 (1976). The SEC

has outlined the criteria for determining

whether collateral arrangements transform

the purchase of real estate into a sec-

urity transaction. See SEC Rel. No. 33-

5347, 17 C.F.R.§$231.5347, 38 Fed.Reg.

1735 (1973).

15. See note 7 supra; Forman, 421 U. S.

at 852-53; Howey, 328 U. S. at 300; B.

Rosenberg & Sons, Inc. v. St. James Sugar

Cooperative, Inc., 447 F. Supp. 1, 4 (E.D.

La. 1976) ("When a purchaser is motivated

by a desire to use what he has purchased,

the securities laws do not apply."), aff'd,

$65 F.2d 1213 (Sth Cir. 1977); Fogel v.

Sellamerica, Ltd., 445 F. Supp. 1269,

1277-78 (S.D.N.Y. 1978) (residential lots);

Joyce v. Ritchie Tower Properties, 417 F.

Supp. 53 (N.D. Ill. 1976) (condominiums) ;

Contract Buyers League v. F & F Invest-

ment, 300 F. Supp. 210, 224 (N.D. Ill.

1969) (used residential property), aff'd,

420 F.2d 1191 (7th Cir.), cert. denied,

400 U. S. 821 (1970); SEC v. Bailey, 41

F. Supp. 647, 650 (S.D. Fla. 1941) (invest-

ment in tung groves was a security because

purchasers bought land not "for its in-

trinsic value" but "as a source of

income").

16. This accounts for the result in most

cases in which courts have wrestled with

some form of the commercial/investment

dichotomy. See, e.g., American Fletcher

Mortgage Co., Inc. v. U. S. Steel Credit

Corp., 635 F.2d 1247 (7th Cir. 1980);

cert. denied, 451 U. S. 911 (1981); United

American Bank v. Gunter, 620 F.2d 1108

(Sth Cir. 1980); Amfac Mortgage Corp. v.

Arizona Mall of Tempe, Inc., 583 F.2d 426

(9th Cir. 1978); United California Bank

v. THC Financial Corp., 557 F.2d 1352 (9th

Cir. 1977); McGovern Plaza Joint Venture

v. First of Deliver Mortgage Investors, 562

F.2d 645 (10th Cir. 1977); C.N.S. Enter-

prises Inc. v. G. & G. Enterprises, Inc.,

508 F.2d 1354 (7th Cir.), cert. denied,

423 U. S. 825 (1975); McClure v. First

Nat'l Bank, 497 F.2d 4990 (5th Cir. 1974),

cert. denied, 420 U. S. 930 (1975); Bellah

a ee eae -

v. First Nat'l Bank, 495 F.2d 1109 (5th

Cir. 1974); Provident Nat'l Bank v. Frank-

ford Trust co., 468 F. Supp. 448 (E.D. Pa.

1979); Tri-County State Bank v. Hertz, 418

FP. Supp. 332 (M.D. Pa. 1976). Only once,

however, has the business of the provider

of funds been made an explicit basis for

decision. In Great Western Bank & Trust

we eee, Soe Fs2G 1252 (9th Cir. 1976),

the Ninth Circuit held that the plaintiff

bank had made a loan rather than purchased

a security. Judge Wright concurred on the

ground that banks are generally not in-

vestors:

In an investment situation, the is-

suer has superior access to and con-

trol of information material to the

investment decision. Rather than

relying solely on semi-anonymous and

secondhand market information, as do

most investors, the commercial bank

deals "face-to-face" with the pro-

misor. The bank has a superior

bargaining position and can compel

wideranging disclosures and verifi-

cation of issues material to its

decision on the loan application.

Id. at 1262.

The situation described in Kotz is to be

distinguished from that presented in Ex-

change Nat. Bank v. touche ross & Co.,

Supra. Although the transaction there

also involved a bank, it consisted of the

bank's purchase of notes from a brokerage

firm, implemented not through normal len-

ding channels but by its chief adminis-

trative officer in @rder to develop a

closer relationship with the firm. More-

over, the funds were to become a part of

the firm's capital in accordance with

' :

stock exchange requirements. These and

other characteristics led the court to

find that the notes were securities.

17. The concept of agency is relevant in

a number of contexts. One of them has

been discussed already -- the purchase of

real estate attended by collateral mana-

gement agreements. See not 14 supra. If

the landowner retains ultimate control but

"does not wish to manage a property him-

self and delegates the responsibility to

an agent," he does not hold a security.

Schultz v. Dain Corp., 568 F.2d 612, 615

(Sth Cir. 1978).

A general partnership (or a share ina

joint venture) is not a security; the par-

tners are mutual agents. See Williamson

v. Tucker, 645 F.2d 404 (5th Cir.), cert.

denied, 454 U. S. 897 (1981); Hirsch v.

DuPont, 396 F. Supp. 1214 (S.D.N.Y. 1975),

att’ a. 333 Fiaa 130 (2a. Cit. £977)9 Ox-

ford Finance Co. v. Harvey, 385 F. Supp.

431 (E.D. Pa. 1974).

A discretionary trading account in com-

modities is not a security. Brodt v.

Bache & Co., 595 F.2d 459 (9th Cir, 1978).

According to the Ninth Circuit, the in-

vestor in such accounts does not put his

funds into a "common enterprise" as re-

quired by the Howey doctrine because the

investor may lose money while his broker

earns a substantial commission. But there

is no requirement that the holder of a

security gain or lose in proportion to the

enterprise in which he invests; if there

were, the bonds of a faltering company

would not be securities. A commodities

account is indeed an individual enterprise,

but for a different reason: the broker is

a’ mere agent of the investor. His judg-

ment is substituted for that of the pro-

vider of funds on whose behalf he acts.

The investor delegates authority; he does

not invest in the brokerage house. See

also McCurnin v. Kohlmeyer & Co., 340 F.

Supp. 1338 (E.D. La. 1972); Sinva, Inc. Vv.

Merrill, Lynch, Pierce, Fenner & Smith,

In¢., 253 F. Supp. 359 (S.D.N.¥. 1966).

The concept of agency also explains, for

example, the decision in SEC v. Energy

Group of America, Inc., 459 F. Supp. 1234

(S.D.N.Y. 1978) (service assisted customers

in BLM lottery for oil and gas leases).

18. The rationale which appears to under-

lie Weaver is that government regulation

sufficiently mitigates the risks to which

the investor is exposed to obviate the

need to apply the securities acts. That

rationale has validity when applied to the

issuance by the bank of the certificate of

deposit to the Weavers, inasmuch as it is

the risks faced by the Weavers in that

transaction against which government regu-

lation protects. The Weaver case, how-

ever, involved the pledge by the Weavers

to the bank of the certificate as security

for a loan to third parties, and the al-

ledged fraud by the bank to induce that

pledge. It is difficult to see (assuming

the pledge to be a "purchase or sale" with-

in the meaning of the acts) how government

regulation could have protected the Weavers

against the alleged fraud in that trans-

action.

It can of course be argued that once an

instrument is found to be a security with-

in the meaning of the acts, it retains

that character throughout subsequent tran-

actions, including pledges. The converse, /

however, is not necessarily true. But see

Weaver, 102 S. Ct. at 1225 n.9 (rejecting

Summarily "respondent's argument that the

certificate of deposit was somehow trans-

formed into a security when it was pledged

even though it was not a security when

purchased"). That an instrument presump-

tively a security is treated as exempt

when issued because of the protection af-

forded the investor through government

regulation in that transaction does not

necessarily mean that it should also be

exempt in later transactions in which no

such protection is afforded.

Weaver presents the relatively rare case

of a fraud allegedly committed by, rather

than against a person in the business of

lending funds in commercial transactions.

See exclusion (c), supra. It suggests the

need for an independent analysis whenever

the securities acts are invoked not by the

person providing the funds but by another

party to the transaction.

19. That type of risk is specifically

identified in the SEC's Regulation S-K

governing registration statements under

the 1933 Act:

10. Foreign private registrants

should discuss briefly any per-

tinent governmental economic, fiscal,

monetary, or political policies or

factors which have materially af-

fected or could materially affect,

directly or indirectly, company

operations or investments by United

States nationals.

17 C.F.R.§229.20, Item 1l, Instruction 14.

lati

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

R. J. WOLF, Plaintiff-Appellee,

vs.

BANCO NACIONAL de MEXICO, S.A.,

aka BANAMEX, Defendant-Appellant.

NO. S3-i1534

OPINION

December 6, 1983

Before: DUNIWAY, WALLACE and PREGERSON,

Circuit Judges

DUNIWAY, Circuit Judge:

The judgment appealed from does not dispose

of all issues in the case and is therefore

not an appealable judgment. The appeal

must be dismissed.

The second amended complaint alleges three

claims for relief. The first charges

violation of 15 U.S.C.377v and Rule 10b-5

of the Securities and Exchange Commission,

17 C.F.R.§240.10b-5, in the solicitation

of, and obtaining from Wolf, time deposits,

in pesos, by means of the mail, the secur-

ities not being registered. The second

charges that Wolf was defrauded by Banamex

in the transactions. The third charges

violation by Banamex of §25110 of the Cali-

fornia Corporations Code wnich is actionable

under §25503.

On cross motions for summary judgment, the

court granted Wolf's motion and denied

Banamex's motion. In its opinion, the

court considered only the first claim for

relief. Its reason is as follows:

The Court does not reach these fraud

claims. Both parties have moved for

summary judgment on the dispositive

issue of whether plaintiff's time

deposits were securities. If the

deposits were securities, then Banamex

is strictly liable under the 1933 Act

for failing to register them. If the

deposits were not securities, then

this Court has no jurisdiction over

any of plaintiff's claims.

Wolf v. Banco National de Mexico, N.D. Cal.,

1982, 549 F. Supp. 841 at 843. The court

then held that the deposits were securities,

but did not further consider the second and

third claims.

The judgment is a curious document. It

reads, in full:

The matter having come before the

Court on cross-motions for summary

judgment,and the Court having de-

termined that plaintiff R.J. Wolf is

entitled to judgment as a matter of

law,

IT IS ORDERED AND ADJUDGED that judg-

ment be entered for plaintiff, the

parties to bear their own costs.

It does not specify whether judgment is

for Wolf on all three claims, or only the

first. The opinion, however, makes it

clear that the court "did not reach" those

claims, i.e., the second and third. They

are left wandering somewhere in limbo;

this in spite of the fact that the prayer

is for the amount of principal lost, plus

interest, plus ten million dollars “in puni-

tive or exemplary damages for fraud." There

is also a prayer for attorney's fees, al-

though Wolf is himself an attorney and

acting in pro per. The judgment does not

award any damages or attorney's fees.

Because the court's judgment did not con-

Sider claims two and three, they remain live

claims for relief. Therefore the judgment

is a partial summary judgment, now review-

able as a final judgment under 28 U.S.C.

$1291. See Chacon v. Babcock, 9 Cir.,

1981, 640 F.2d 221, 222.

Moreover, a judgment is not final as to one

entire claim under 28 U.S.C. $1291, or under

F.R. Civ. P. 54(b) if it decides only liabi-

lity and leaves open the question of relief.

Liberty Mutual Insurance Co. v. Wetzel,

1976, 424 U.S. 737; Hain Pure Food Co. v.

Sona Food Products Co., 9 Cir., 1980, 618

F.2d 521, 522; United States v. Southern

Pacific Transportation Co., 9 Cir., 1976,

543 F.2d 676, 681 n.5.

[There is no direction for entry of final

judgment on the first claim, and no de-

termination that there is no just reason

for delay under F.R. Civ. P. 54(b). Even

if there were, an appeal would not lie un-

der Rule 54(b), because the judgment does

not dispose of the entire first claim.

There are no findings under 28 U.S.C.

§1292(b).

The appeal is dismissed. If there 1s a

later appeal from a final judgment under

28 U.S.C. $1291 or Rule 54(b), or an inter-

locutory appeal under 28 U.S.C. 1292(b),

the appeal will be assigned to this panel.

If in such an appeal the substantive issues

are the same as those presented in the

briefs in this appeal, the parties may

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

R. J. WOLF, Plaintiff,

vs.

BANCO NACIONAL de MEXICO, S.A., Defendant.

C 82 1328 WWS

ORDER

Janiary 12, 1984

This action is before the Court following

remand by the court of appeals. The parties

have made various motions which will be dis-

posed of as stated below.

1. Defendant's motion to dismiss under the

Foreign Sovereign Immunities Act of 1976

(FSIA) is denied. Plaintiff in this action

does not complain of any action by the

_ -.

Mexican government or defendant's compliance

with governmental regulation. The gravamen .

of his complaint is that defendant sold un-

registered securities and that it sold them

by concealing material facts. Thus the

action is based upon a commercial activity

and falls within the exception in 28 U.S.C.

§1605(a) (2).

Inasmuch as defendant advertised and pro-

moted its accounts within the United States

and dealt with plaintiff through the United

States Postal Service, there is sufficient

nexus for this Court to exercise juris-

diction.

2. For the reasons stated in the preceding

paragraph, defendant's motion based on the

act of state doctrine is also denied.

3. Defendant's contention that plaintiff

waived the protection of the securities laws

by executing a form document prepared by

defendant the reverse side of which c. --

tained a clause in Spanish providing for

litigation of disputes in Mexico has pre-

viously been rejected. On the merits of

the contention, Wilko v. Swan, 346 U. S.

427 (1974), is controlling in the situa-

tion presented here.

4. In all other respects this and the re-

lated actions will remain stayed.

5. Defendant's motion to certify pursuant

to 28 U.S.C. §1292(b) is granted. The is-

sue whether the peso accounts are securities

clearly involves a controlling question of

law as to which there is substantial

ground for difference of opinion. An im-

mediate appeal may materially advance the

ultimate termination of the litigation

Since reversal of this Court's order would

end it. That issue being a pure question

of law ready for decision by the court of

appeals, it appears to the Court to be a

clear case for application of this section.

IT IS SO ORDERED.

DATED: January ll, 1984

WILLIAM W SCHWARZER

United States District Judge

8 3

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

R. J. WOLF, Plaintiff-Appellee,

vs.

BANCO NACIONAL de MEXICO, S.A.,

aka BANAMEX, Defendant-Appellant.

No. 84-8012

ORDER

February 27, 1984

Before: DUNIWAY, WALLACE and PREGERSON,

Circuit Judges

Banco Nacional de Mexico, S.A., has filed a

petition for permission to appeal in this

case, pursuant to 28 U.S.C. §1292(b). The

petition is not opposed and appears to us

to be in order. Accordingly, it is hereby

ordered that permission to appeal is granted.

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

R. J. WOLF, Plaintiff-Appellee,

vs.

BANCO NACIONAL de MEXICO, S.A.,

aka BANAMEX, Defendant-Appellant.

No. 84-1693

ORDER

October 18, 1984

Before: DUNIWAY, WALLACE, and PREGERSON,

Circuit Judges

The panel as constituted in the above case

has voted to deny the petition for a re-

hearing. Judges Wallace and Pregerson have

voted to reject the suggestion of a re-

hearing in banc. The full court has been

advised of the suggestion of a rehearing

in banc, and no judge of the court has

requested a vote on it. Fed. R. App. P.

35(b). The petition for rehearing is

denied, and the suggestion of a rehearing

in banc is rejected.

RESPECTFULLY SUBMITTED,

R J Wolf

Civic Center Box 4307

San Rafael, California 94903

(415) 485-0321

Petitioner and Counsel

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.