Record and brief — Monte R. Mordaunt and Dorothy Mordaunt v. Incomco

DOCKET

PROCEEDINGS AND ORDER

CASE NBR I

ERT TITLE Mordaunt,

VERSLIS Incomeo, et

OPOoOls rey

Mente R., 2@t wu

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Jun 11 19784 Petition for writ of

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Ort 14 1984 Response reques

RECEIVED)

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Nov 20 1754 REDISTRIGUTED. December

Der 10 1784 REDISTRIBUTED. January 4, 1°

Jan 7 i?ss Petition DENIED. Dissenting

with whom The Chief

(Detached opinion.)

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Pinion by histinme White

and clustice Brenpan Join

PETITION

FOR WRIT OF

CERTIORARI

p! RS - 2 p25 Office Supreme Court, U.S

FILED

JUN 11 1984

ALEXANDER L. STEVAS.

CLERK

——

No.

In The

Supreme Court of the United States

October Term 1984

MONTE R. MORDAUNT and DOROTHY MORDAUNT,

PETITIONERS,

vs.

INCOMCO, a partnership, and MYRON J. SMITH and

PHILLIP M. SMITH, general partners

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

John R. Quinlan

PAINE, HAMBLEN, COFFIN & BROOKE

1200 Washington Trust Bidg.

Spokane, Washington 99204

QUESTION PRESENTED

1.Whether a discretionary commodities trading account,

where there is indicia of pooling, is an investment contract

thus falling under the definition of a “Security” for purposes of

the Securities Act of 1933 and the Securities Exchange Act of

1934.

PARTIES TO THE PROCEEDING

The parties here listed are all of the parties to this action.

TABLE OF CONTENTS

Page(s)

een oeck idee esbeesccccccoecocces l

es Cen ededdecadeescescccccescess l

STATUTORY PROVISIONS INVOLVED ................... 2

Ee 3

REASONS FOR GRANTING CERTIORARI ................ 6

Sp MEE occ cc cccccccccccccccs 6

2. Split of Authority Among

Circuit Courts of Appeal ....................45. 7

a) 6th, 7th and 9th Circuit, Horizontal

EEE DS i)

i en cebbagateseiseseceetecs 10

TT UA isinehedeabesesdccecabecicscoccescncce: 14

iv

Page(s)

APPENDIX A Order [U.S. Court of Appeals, 9th Circuit, filed

SENN, dina dp neinihidbiliehs ends dcmalaeeratenteaeen Ai

_ APPENDIX B Judgment [U.S. Court of Appeals, 9th Circuit,

filed 3/27/BA] .....ccccccccccccccccccccccscvccccccccees Bl

APPENDIX C Opinion [U. S. Court Appeals, 9th Circuit, filed

9/16/84] .... cc cece cece cece ee cencceccnceeneeccecceens Cl

APPENDIX D Judgment [U.S.D.C. Idaho,

IES. . ocak’, saieitincsuenteeioneisaiaisandl D1

APPENDIX E Findings of Fact and Conclusions of Law,

[US.D.C. Idaho, filed 9/8/78] ..........++eeeeeeeeeeeeees El

APPENDIX F Order Denying Motion to Amend Findings of

Fact or Conclusions of Law, or for a New Trial, (US.D.C.

Sate MO OVERITE) ic ceccccccccccccccscccscccceseses Fl

TABLE OF AUTHORITIES

Cases: Page(s)

Alvord v. Shearson Hayden Stone, Inc., 485 F. Supp.848, 853.

SR IE stn readies tenncsecestnnenkeseckiansn 12

Berman v. Bache, Halsey, Stuart, Shields, Inc. 467 F. Supp.

ns nik ci ucbuléhsnkabameeksans 10

Booth v. Peavey Company Commodity Services, 430 F.2d 132,

I ds du Sod codcds ckccatadursnanaanie ll

Brodt v. Brache & Co., Inc, 595 F.2d 459 (9th Cir. 1978) reh gm

i iat ncn eachdeningesenisusonine 5, 9, 10

In Re Carlson (1977 SEC) Release No. 14246 Dec. 27, 1977,

SEC Docket Vol 13, No. 15 p.1104 ...............005. 13

Commercial Iron & Metal Co. v. Bache and Co., nc., 478 F.2d

39 (10th Cir. 1973), cert. denied, 440 U.S. 914

SE hid adddiniedintedideisientieatséwonebeuna 11

Ernst and Ernst v. Hochfelder, 425 US. 185, (1976), reh'g

denied 425 US. 986 (1976) .............ccceeeeeees 3, 6

Glazer v. Nat'l Commodity Research & Statistical Servs., 388

B.S 9

Hirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir.

DED didichinchebidebdinnbentes opeckiecscéeseiunes? 10

Johnson v. Arthur Espey, Shearson Hammill & Co., 34l

Pe EE, MED ccd c caconccecvesesesencete 11

Mahue v. Reynolds & Co., 282 F.Supp. 423

TD tid desteeeenteeceessaethscntdssacee ll

Marshal v. Lamson Bros. and Co., 368 F Supp. 486 (S.D. lowa

DE dhsiddidedacchescheqdeksebdbodebiceccencetses 11

Merrill Lymch, Pierce, Fenner & Smith, Inc. v. Curran, 456

SEE bbb edn crdcneesveedbasseseeeseeee 5, 10

Miller v. Central Chinchilla Group, Inc., 494 F.2d 414 (8th

BG EE Bddodtenhincddodadaasaddacosnescencctadees 11

Milnarik v. M.S. Commodities, Inic., 457 F.2d 274 (7th Cir.

1972), cert. denied, 409 U.S. 887 (1972) ....... 9, 10, 11

Page(s)

Savino v. E.F. Hutton Co., Inc., 507 F.Supp. 1225 (S.D.N.Y.

NE dics seta barenecdtntdcendavecsscevdesudsecuved 11

Securities & Exchange Commission:

S.E.C. v. Continental Commodities Corp., 497 F.2d 516 (5th

GE, EE dap condicenewesetesascocsescosconcees 7,11,12

S.E.C. v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir.

SED dncavencnenshAsenennabnescebseveccovessecss 11,12

S.E.C. v. W. J. Howey Co., 328 US. 293 (1946) .... 5,6,8,13

S.E.C. v. Culpepper, 270 F.2d 241 (2d Cir. 1959) ......... 9

S.E.C. v. Kaplan, 397 F.Supp. 564 (E.D.N.Y. 1975) ......... 6

S.E.C. v. Ralston Purina Co., 346 U.S. 119 (1953) ......... 9

S.E.C. v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th

Cir.1973) cert. denied 414 US. 821 (1974) ... 3, 6,7, 10

Taylor v. Bear Stearns & Co., 572 ¥ Supp. 667 (N.D. Georgia

DEED cvcdadececeeseceees cobesetsceesenceneccsccone 12

Tcherepin v. Knight, 1389 U.S. 3382 (1967) «0.02.6. 62 0000s: 2

Texas-Arizona Mining Co., [1971-1972 Transfer

Binder] C.C.H. 978, 626 (Feb. 18, 1972) .............. 7

Troyer v. Karcagi., 476 F Supp. 1142 (S.D.N.Y. 1979) ..... 11

United Housing Foundation, Inc. v. Forman 421 US. 837

(1975) reh'g denied, 423 US. 884 (1976) ............ 8

Wasowic v. Chicago Board of Trade, 352 F.Supp. 1066

(M.D.Pa. 1972) aff'd without opinion 49) F.2d 752 (3rd

Cir.) cert. denied, 416 U.S. 994 (1974) ...........45. 10

Federal Statutes:

The Securities Exchange Act of 1934, Act of June 6, 1934,

c.404, Title I, §1, 48 Stat. 881, codified at 15 U.S.C. §78, et

PE SE abavdedecbebedeecsdesucervsccecicocceterces 2

i i ei eed ee eaideen 4

EE a a ee 2,3

The Securities Act of 1933, Act of May 27, 1933, c.38, Title I,

§1, 48 Stat. 74, codified at 15 U.S.C. 877, et seg. ...... 3

RRR ASR SSE NERO pelt nae tees a NC pat 3, 10

RI RE SN a ee 2

i tsceeclidcieudduel chgddscecndakeke 3,4

NS SES a NS ae os fa RR A A Oe 3

Ne kk oc beta ec es oueece 5

FS EE NE SE oo 4

The Idaho Securities Act, 1967,

Ch. 394, §1, p.1127, and codified at Idaho Code §§30-1401, et

Ty. SOUSbU UN ede nek nsebeesk64060n00dedesinecdveedecces 2

Idaho Code, §30-1402 and §30-1408 .................... 3,4

Miscellaneous Provisions:

ee Pa, Oe, PIE CRUE) ccc ccccccccccccecencoccs 8

DS FA amere Wey PUINEE, CRUD onc cccccccrccccceccvcccecss 8

Russo, Regulation of Brokers, Dealers & Securities Markets,

§1.1 5, p.1-30, 1983 Supp. §1.15, p.1-13 .............. 8

No.

In The

Supreme Court of the United States

October Term 1984

MONTE R. MORDAUNT and DOROTHY MORDAUNT,

PETITIONERS,

vs.

INCOMCO, a partnership, and MYRON J. SMITH and

PHILLIP M. SMITH, general partners

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

John R. Quinlan, attorney at law, on behalf of Monte R.

Mordaunt, and Dorothy Mordaunt petitions for a writ of cer-

tiorari to review the judgment of the United States Court of

Appeals for the Ninth Circuit in this cause.

OPINIONS BELOW

The opinion of the Court of Appeals (App C, infra) is re-

ported at 686 F.2d 815. The decision of the District Court

(App E, infra) is not rep orted.

JURISDICTION

The judgment of the Court of Appeals was entered on

March 21, 1984. (App D, infra). The jurisdiction of this Court

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

STATUTORY PROVISIONS INVOLVED

1. §2(1) of The Securities Act of 1933. Act of May 27, 1933,

c. 38, Title I, §2(1), 48 Stat. 74, as amended by Pub. L. 97-303,

§1, 96 Stat. 1409, and codified at 15 U.S.C. §77b(1):

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 certi-

ficate, preorganization certificate or subscription,

transferable share, investment contract, voting-

trust certificate, certificate of deposit for a security,

fractional undivided interest in oil, gas, or other

mineral rights, or, in general, any interest or in-

strument 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.

15 USC. 77b(1) at 10.

The definition of a “security” under Idaho Code §30-1402(12)

is substantially the same as the Federal definition.

2. §3(a)(10) of The Securities Exchange Act of 1934, Act of

June 6, 1934, c. 404, Title I, §3(a)(10), 48 Stat. 883-4, as

amended by Pub. L 97-303, §2, 96 Stat. 1409, and codified at

15 USC. §878c(10):

(10) The term “security” means any note, stock,

treasury stock, bond, debenture, certificate of inter-

est or participation in any profit-sharing agreement

or in any oil, gas, or other mineral royalty or lease,

any collateral-trust certificate, preorganization cer-

tificate or subscription, transferable share, invest-

ment 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;

banker's acceptance which has a maturity at the

time of issuance of not exceeding nine months, ex-

clusive of days of grace, or any renewal thereof the

maturity of which is likewise limited.

15 U.S.C. §78c(10) at 385.

STATEMENT OF THE CASE

1.The Securities Act of 1933 and the Securities Exchange

Act of 1934 were implemented to protect the investing public

from fraud and to promote fair dealing and ethical standards

of honesty in public offerings of securities in commerce. Ernst

and Ernst v. Hochfelder, 425 US. 185 (1976), reh’g denied

425 US. 986 (1976).

Whether something is a “security” for purposes of falling

under the purview of these Acts is a question of federal law.

The definition of a “security” under these Acts is broad and

has been liberally construed by the courts in order to imple-

ment the Acts’ remedial purpose of protecting the investing

public. S.E.C. v. Glenn W. Turner Enterprises, Inc., 474 F.2d

476 (9th Cir.1973), cert. denied, 414 US. 821 (1974). 15 US.C.

77b; 15 U.S.C. 78c(10) provides the definition of a “security”

which includes an investment contract.

2. Plaintiffs Dorothy Mordaunt and Monte B. Mordaunt,

mother and son, filed suit in the United States District Court

for the District of Idaho against Incoraco, a partnership, and

its general partners, Myron J. Smith and Philip M. Smith (here-

in Incomco). The Mordaunts prayed for damages based upon

the use of false, inaccurate, misleading, and deceptive infor-

mation by Incomco to sell the Mordaunts certain securities in

violation of 15 U.S.C. §77e, 15 U.S.C. §77q and Idaho Code

§30-1403,' which were not registered as required by The Se-

1/ The term ‘securities’ is defined by the Securities Act of 1933, The Securi-

ties Exchange Act of 1934, and The Idaho Securities Act. 15 U.S.C. §77b; 15

US.C §78c(a); Idaho Code §§30-1403, ei seg. The term in the federal acts is

to be constructed and interpreted in the same manner. Tcherepin v.

Knight, 389 U.S. 332 (1967).

curities Act of 1933 and The Idaho Securities Act. 15 U.S.C.

§77e and Idaho Code §§ 30-1403, et seg. Jurisdiction of the

District Court was premised upon 15 U.S.C. §78aa and 28

U.S.C. §1331(a) regarding elaims arising under The Securities

Act of 1933 and Phe Securities Exchange Act of 1934 and

upon pendent jurisdiction regarding claims arising under the

Idaho Securities Act.? The District Court entered its decision

and judgment on September 8, 1978.(App. D, infra).

The District Court found that the Mordaunts relied upon

advertisements published on behalf of Incomco and repres-

entations by an employee of Incomco and Mr. Philip Smith,

which were false, misleading, deceptive, inaccurate, or in vary-

ing combinations thereof, in entering into discretionary

commodities contracts with Incomco (App E at E6, infra).

Under this arrangement the Mordaunts invested their money

($14,349.00 and $32,610.00, respectively) and Incomco had

the discretion to utilize the funds to trade in the commodities

market, which it did. Incomco had a large number of such

accounts.and purchased a number of commodity ‘contracts’

at one time which were then specifically assigned to the ac-

count of an individual investor and so reported to the inves-

tor. (App E at E2, E3, infra). In essence, the funds supplied by

investors were pooled by Incomco. Profits to investors and

consequent additional commissions earned by incomco de-

pended solely upon the skill of Incomco in predicting the

market.(App E at E3, infra).

The District Court concluded that:

1) The transactions between the parties constituted in-

vestment contracts for the purchase of securities under both

the federal and state securities acts;

2) Incomco sold to the Mordaunts unregistered securities

in violation of the said federal and state securities acts;

3) The information contained in the advertising sales doc-

uments sent by Incomco to the Mordaunts contained false

and misleading statement as to material facts in violation of

2/ There is no issue before the Court concerning that portion of the judg-

ment relating to state law. The opinion of the Court of Appeals did not

address that aspect of the District Court's judgment.

(App C, infra).

the said federal and state securities acts and Rule 10b-5 of the

Securities and Exchange Commission; and,

4) The Mordaunts reasonably relied upon these false

statements to their detriment. (App E at E6, infra).

Incomco thereafter sought review in the United States

Court of Appeals for the Ninth Circuit with the jurisdiction of

that court being based upon 28 U.S.C. §1291. The cause was

argued and submitted on October 14, 1980. The submission

was withdrawn on March 25, 1981 and reinstated on June 2,

1982. The Court of Appeals issued its decision on September

9, 1982, reversing the judgment of the District Court that the

discretionary commodities contracts between the Mordaunts

and Incomco were investment contracts under federal law.

(App C, infra). The Mordaunts moved for rehearing, which

was denied. The judgment of the Court of Appeals was issued

on March 21, 1984. (App B, infra). The Court of Appeals held

that the discretionary commodities contracts between the

Mordaunts and Incomco were not investment contracts be-

cause the element of “common enterprise”, as required by the

test enunciated by this Court in S.E.C. v. W. J. Howey Co., 328

US. 293, 298-9 (1946), was absent.* (App C, at C4, infra). The

opinion of the Court of Appeals was based entirely upon its

prior opinion in Brodt v. Brache & Co., Inc., 595 F.2d 459 (9th

Cir. 1978), reh'g denied (1979), where it rejected a claim that

a discretionary commodities trading account constituted a

“common enterprise” on the basis that there was no direct

relation between the success or failure of the promoter and

that of the investors. (App C, at C4, infra).

3/ The Court of Appeals rejected the argument by Incomco that the Dis-

trict Court lacked subject matter jurisdiction because exclusive jurisdic-

tion over transactions and accounts involving contracts for the sale of

commodities for future delivery is vested with Commodities Trading

Commission pursuant to 7 U.S.C. §2. The Court of Appeals felt such a

holding would be inconsistent with the opinion of the Court in Merrill

Lymch Pierce Fenner & Smith, Inc. v. Curran, 456 U.S. 353 (1983).

REASONS FOR GRANTING CERTIORARI

This case presents important public policy questions by

seeking further explication of the application of the test this

Court laid down in S.E.C. v. W. J. Howey, supra, concerning

the definition of an investment contract as a “security” for

purposes of The Securities Act of 1933 and The Securities

Exchange Act of 1934. These questions arise because the

purpose of these Acts is to protect the investing public from

fraud and misrepresentation upon the public offering of a

“security”. Ernest and Ernest v. Hochfelder, supra.

This case specifically seeks a resolution of the distinct split

between the various Circuit Courts on the issue of whether a

discretionary commodity trading account, where there is in-

dicia of pooling, is an investment contract within the defini-

tion of a “security”.

1. PUBLIC POLICY CONCERNS.

Both the Securities Act of 1933 and the Securities Ex-

change Act of 1934 have as their essential purpose the pro-

tection of the investing public. S.E.C. v. Glenn W. Turner En-

terprises, supra; S.E.C. v. Kaplan, 397 F Supp. 564 (E.D. NY.

1975). Both investors and promoters, whether large or small,

need to be certain of whether or not their actions are covered

by the Securities Acts. Presently, either investors or promo-

ters can only predict the outcome of this question, as it re-

lates to the definition of an investment contract, by what

Circuit any litigation would happen to come in. Because of the

current unsettled state of the law, it is impossible to effective-

ly make important factual determinations regarding either

the purchase or sale of a security. The Circuits are split and

there is conflict between decisions of regulatory agencies and

Courts of Appeals and District Court.

2. SPLIT OF AUTHORITY AMONG

CIRCUIT COURTS OF APPEAL.

The petitioner’s primary objective is to get his money bac}.

In pursuing that goal, petitioner seeks resolution of the split

of authority between the Circuit Courts of Appeal.

The 6th, 7th, and 9th Circuits hold that discretionary

commodities futures trading accounts are not investment

contracts and hence are not securities. The 2nd, 5th, 8th, and

,l0th Circuits hold that such accounts are investment con-

tracts and thus are securities.

Further illustration of confusion in this area is given in

cases where the S.E.C. has brought the action. See S.E.C. v.

Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974),

and S.E.C. v. Glenn W. Turner Enterprises, supra. In both

cases the “vertical commonality’ test was applied. Yet in

Texas-Arizona Mining Co., {1971-1972 Transfer Binder]

C.C.H. 978, 626 (Feb. 2018, 1972), the S.E.C. seemed to ac-

quiesce in the doctrine that a commodity futures contract

(vertical commonality) was not a security.‘

The S.E.C. regulates all of the stock exchanges in the United

States. However, because of this vertical-horizontal commo-

nality conflict in the different Circuits, it is forced to use two

sets of rules. What is a security in one circuit may not be a

security in another, even though a “security” is defined by

federal legislation and regulated by a federal agency. The

4/ The importance of having the question settled for the public is further

illustrated by Congress's establishment of the Commodity Futures Trading

Commission. The General Counsel for the Commission issued an opinion,

(CFTC Interpretative Letter No. 77-2 (1975-1977 Transfer Binder) CCH

Comm. Fut. L. Rep. 20, 257 at 21, 371 (1977)) that the commission had

exclusive jurisdiction over both discretionary and nondiscretionary com-

modities futures contract. The Securities Exchange Commission attemp-

ted to limit the jurisdiction of the Commodity Futures Trading Commis-

sion. The two commissions reached agreement whereby the SEC would

regulate options on securities, certificates of deposit and foreign curren-

cies traded on national securities exchanges and the CFTC would regulate

futures contracts on exempted securities and broad-based indices of stock

prices, as well as options on such futures contracts and options on foreign

currencies in the commodity markets.

commentators and annotators have the same problem. See

58 ALRFed. 616, Annot. (1967); 3 ALR Fed. 592, Annot.

(1982); Wolfson, Phillips, Russo, Regulation of Brokers,

Dealers & Securities Markets, §1.1 5, p.1-30, 1983 Supp.

§ 1.15, p.1-13. As a result, this controversy among the various

circuits needs a final clarification by this Court.

The source of the authoritative definition of an investment

contract is found in the opinion S_E.C. v. W.J. Howey, supra,

where this Court defined it as a

... contract, transaction or scheme whereby the

person invests his money in a common enterprise

and is led to expect profits solely from the efforts of

the promoter or a third party.

An equally significant holding of Howey, is that form is to be

disregarded for substance and that the investment contract

[e}mbodies a flexible rather than static principle,

one that is capable of adaptation to meet the count-

less and variable schemes devised by those who

seek the use of money of others on the promise of

profits. Howey, supra at 299.

In the United Housing Foundation, Inc. v. Forman 421 US.

837 (1975), reh 'g denied, 422 U.S. 884 (1976), the court re-

stated the Howey formula and reiterated earlier statements

that a determination of securities characterization should be

based not on the literal terms of the statute but on “the eco-

nomic realities underlying a transaction.” Jd. at 849.

Two distinct lines of authority have emerged on the issue of

whether a discretionary trading account in commodities fu-

tures is a security. This split among the Circuit's results prim-

arily from a disagreement over what meaning to give the

words “common enterprise” for the purposes of the “Howey”

test. One line of cases maintains that there must be a pooling

of funds, or pro-rata sharing of profits in order for a “common

enterprise” to exist. The other line of cases, however, )as

construed “common enterprise” to mean that the investor

must provide the capital for a mutual venture controlled by

the promoter.

a) 6th, 7th, and 9th Circuits: “Horizontal Commonality”’.

In Milnarik v. M.S. Commodities, Inc., 457 F.2d 274 (7th

Cir. 1972), cert. denied, 409 U.S. 887 (1972), the court held

that a discretionary trading account in commodity futures

was not a security. This conclusion was based on a finding

that a common enterprise was lacking despite the fact that

the defendants had entered into similar arrangements with

other investors. The court viewed the defendants’ relation-

ship with each investor as that of agent and principal because

each account was unitary in nature and the success or failure

of one account had no direct impact on the others.' The Sev-

enth Circuit reaffirmed Milnarik in Hirk v. Agri-Research

Council, Inc., 561 F.2d 96 (7th Cir. 1977) and held, on similar

facts, that a pooling of the investors’ funds or sharing of prof-

its was required for a common enterprise to exist. See also,

Glazer v. Nat'l Commodity Research & Statistical Servs., 388

F.Supp. 1241 (N.D.IIL 1977).

The Ninth Circuit followed Hirk v. Agri-Research Council,

Inc., supra, in Brodt v. Bache, supra, where it stated:

This Court has defined ‘common enterprise’ as one

in which the ‘fortunes of the investor are interwov-

5/ All that has happened is that the so-called “buyer” has transferred

funds to the so-called “seller” and given his discretionary authority to enter

into future transactions on the “buyer's” behalf. In essence, this contract

creates an agency-for-hire rather than constituting the sale of a unit of a

larger enterprise. No matter how many different persons Nelson became

an agent for under similar or even identical discretionary contracts, his

relationship with each would remain as that of agent and principal. Each

contract creating this relationship is unitary in nature and each will be a

success or failure without regard to the others. Some may show a profit,

some a loss, but they are independent of each other. No matter how many

discretionary trading accounts Nelson may have had with other princi-

pals, the “security” “issued” to the plaintiffs, their discretionary trading

account, could not be offered to anyone else. Although this Court recog-

nizes that the registration requirements of Section 5 are for the protection

of the public and that any exemption therefrom must be strictly construed

against one claiming it, S.E.C. v. Ralston Purina Co., 346 US. 119, (1953);

S.E.C. v. Culpepper, 270 F.2d 241 (2d Cir. 1959), the unitary nature of the

contract here involved is not overcome even when the transaction is

viewed most strongly against the defendants. Citing, Milnarik, at 276-277.

10

en with and dependent upon the efforts and suc-

cess of those seeking the investment or of third par-

ties. S.E.C. v. Glen W. Turner Enterprises, Inc., 474

F2d 476, 482 (9th Cir. 1973)

The Ninth Circuit went on to explain that it required a

“strict pooling requirement” which was consistent with the

Seventh Circuit in Milnarik v. M-S Commodities, Inc., supra,

Hirk v. Agri-Research Council, Inc., supra. The Court also

said:

This pooling of interests, usually combined with a

pro-rata sharing of profits, has been characterized

as “horizontal commonality.” Brodit v. Bache and

Co., Inc., supra at 460.

The Ninth Circuit in the instant case followed Brodt v.

Bache and Co., Inc., supra, and added:

In sum, these discretionary commodities trading

accounts do not constitute common enterprise,and

therefore are not securities under 15 U.S.C. §77b.

(App C, at C4, infra).

The Sixth Circuit in Curran v. Merrill Lynch Pierce Fenner

& Smith, Inc., supra, cert. granted, 415 US. 906 (1980)

adopted tne Milnarik, supra, “horizontal commonality” ap-

proach and concluded that a “discretionary commodity ac-

count is not a security.”

b) 2nd, 5th, 8th & 10th Circuits: “Vertical Commonality ”’.

The other side of this split of authority is represented by

those courts which have found that a discretionary commod-

6/ Other courts adopting the “horizontal commonality” approach are Wa

sowic v. Chicago Board of Trade, 352 F Supp. 1066 (M.D.Pa. 1972) aff'd

without opinion 491 F.2d 752 (3rd Cir.) cert. denied, 416 US. 994, (1974),

Berman v. Bache, Halsey, Stuart, Shields Inc., 467 F Supp. 311 (S.D. Ohio,

1979).

1]

ities trading account does possess the requisite commonality

for an investment contract.’

In S.E.C. v. Continental Commodities Corp., supra, the

Fifth Circuit specifically rejected the Milnarik view, (7th Cir-

cuit’s “horizontal commonality”) and warned against “eleva-

tion of a pooling agreement to exalted status in inquiries

concerning a common enterprise, and reiterated the Ninth

Circuit definition of “common enterprise.” The Court stated:

Were this view compatible with pronouncements of

the Supreme Court and this Circuit, then the dis-

trict court’s reasoning would be compelling. How-

ever, we cannot accept the Milnarik view. In S.E.C.

v. Koscot Interplanetary, Inc., supra, this court

decried a limitus application of the Howey test and

expressed its preference for a resilient standard

which could comport with the uniformly acclaimed

remedial purposes of The Securities Act of 1933 and

The Securities Exchange Act of 1934. While primari-

ly concerned with explicating the contours of the

“solely from the efforts of others” element, we had

occasion to consider the parameters of the com-

mon enterprise element as well. There, we endorsed

the Ninth Circuit’s formulation that “‘[a] common

enterprise is one in which the fortunes of the inves-

tor are interwoven with and dependent upon the

efforts and success of third parties’.” supra at 278,

S.E.C. v. Koscot Interplanetary, Inc., supra at 2'78,

quoting S.E.C. v. Glen W. Turner Enterprises, 474

F.2d 476, 482 n. 7 (9th Cir.), cert. denied, 414 US.

7/ Booth v. Peavey Co. Commodities Services, 430 F.2d 132, 133 (8th Cir.

1970); Commercial Iron & Metal Co. v. Bache and Co., 478 F.2d 39 (10th

Cir. 1973), cert. denied, 440 U.S. 914 (1979); Miller v. Central Chinchilla

Group, Inc., 494 F.2d 414 (8th Cir. 1974); S.E.C. v. Continental Commodi-

ties Corp., supra; Johnson v. Arthur Espey, Shearson Hammill & Co., 341

F.Supp. 764 (S.D.N.Y. 1972); Mahue v. Reynolds & Co., 282 F Supp. 423

(S.D.lowa 1967); Marshal v. Lamson Bros. and Co., 368 F Supp. 486

(S.D.N.Y.1968),Savino v. EF. Hutton Co., Inc., 507 F Supp. 1225 (S.D.N.Y.

1981); Troyer v. Karcagi., 476 F Supp. 1142 (S.D.N.Y. 1979).

12

821, (1974), “(t]he critical factor is not the simili-

tude or coincidence of investor input, but rather the

uniformity of impact of the promoter’s efforts.”

S.E.C. v. Koscot, supra at 478 ...

[T]he critical inquiry is confined to whether the for-

tuity of the investments collectively is essentially

dependent upon promoter expertise. Continental

Commodities renders investment counseling con-

cerning which option on commodities futures to in-

vest in, when to sell or exercise the option, and if

the option is exercised, when to sell the specific

futures contract. Lacking the business acumen pos-

sessed by promoters, investors inexorably rely on

Continental Commodities’ guidance for the success

of their investment. This guidance, like the efficacy

of Koscot meetings and guidelines on recruiting

prospects and consummating a sale, is uniformly

extended to all its investors. That it may bear more

productive fruits in the case of some options than it

does in cases of others should not vitiate the essen-

tial fact that the success of the trading enterprise as

a whole and customer investments individually is

contingent upon the sagacious investment counsel-

ing of Continental Commodities. Jd.

13

Shearson Hayden Stone, Inc., 485 F.Supp. 848, 853.

(D. Conn.1980). The reasoning of the Savino,

supra, court is persuasive.

The Court agrees that a ‘common enterprise’ should

be found to exist within the meaning of Howey

where there is vertical commonality as described in

Turner and Brodt. The test set forth in Howey, as

the Court itself there stated, embodies a flexible

rather than a static principle, one that is capable of

adaptation to meet the countless and variable

schemes devised by those who seek the use of the

money of others on the promise of profits. SEC v.

W.J. Howey, supra, 328 US. at 299. By its terms, the

common enterprise component of the Howey test

states merely that the financial relationship that is

to be labeled an ‘investment contract’ must include

two or more parties whose profits or losses are in-

terdependent to a certain extent. The Securities

Exchange Commission has stated:

(A) These ‘naked options’ were ‘securities within the

meaning of that term as used in The Securities Act

of 1933. ..*‘A common enterprise is one in which the

fortunes of the investor are interwoven with and

dependent on the efforts and success of those with

The common enterprise language is not necessary under whom he invests.’ In Re Carlson (1977 SEC) Release

Howey, supra. In Taylor v. Bear Stearns & Co., 572 F.Supp. No. 14246 Dec. 27, 1977, SEC Docket Vol 13, No. 15

667 (N.D. Ga. 1983) the court states: | p. 1104,

Here allegations of defendant's dominance of the

relationship exists. Such a dominance provides

commonality. See SEC v. Continental Commodities

Corp., 497 F.2d at 522-23 (5th Cir. 1974). Given

plaintiffs expectation that defendants were his in-

vestment managers, there exists a one-to-one rela-

tionship or a vertical commonality. (Emphasis

added). Surino(sic) v. EF. Hutton and Co. Inc.,

507 F.Supp 1225, 1237 (S.D.N.Y. 1981); Alvord v.

14

CONCLUSION

For the foregoing reasons, the opinion of the Court of Ap-

peals should be reviewed to resolve the split of authority be-

tween the Circuit Courts, District Courts, and Securities &

Exchange Commission as to whether a discretionary com-

modities futures account is an investment contract. There-

fore, this petition for certiorari should be granted.

Al

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MONTY R. MORDAUNT, an individual, and No. 78-3499

Dorothy Mordaunt, an individual,

Plaintiffs-Appellees, ORDER

= FILED

United States

INCOMCO, a partnership, MYRON J. Court of Appeals

SMITH and PHILIP M. SMITH, general for the

Defendants-Appellants. MAR 13, 1984

AP Phillip B.

Windberry

Clerk

Before: SKOPIL and POOLE, Circuit Judges, and HALBERT,*

District Judge

The panel as constituted in the above case has unanimous-

ly voted to deny the petition for rehearing.

The petition for rehearing is denied.

*The Honorable Sherrill Halbert, Senior United States District

Judge, for the Eastern District of California, sitting by desig-

nation.

Bl

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MONTY R. MORDAUNT, an individual, and No. 78-3499

Dorothy Mordaunt, an individual, DC CV 03-75-

Plaintiffs-Appellees 9068 RM

vs. JUDGMENT

INCOMCO, a partnership, MYRON J. ho

SMITH and PHILIP M. SMITH, general ,

part Court District of

Idaho

Defendants- Appellants. MAR 27. 1984

Jerry L. Clapp,

Clerk

APPEAL from the United States District Court for the Dis-

trict of Idaho (Moscow).

THIS CAUSE came on to be heard on the Transcript of the

Record from the United States District Court for the District

of Idaho (Moscow) and was duly submitted.

ON CONSIDERATION WHEREOF, It is now here ordered

and adjudged by this Court, that the judgment of the said

District Court in this Cause be, and hereby is, reversed.

Filed and entered September 9, 1982

Cl

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MONTE R. MORDAUNT, an individual, —_No. 78-3499

and Dorothy Mordaunt, an individual, DC #CV3-75-

Plaintiffs/Appellees, 68-RM Idaho

OPINION

“iy FILED

INCOMCO, a partnership, MYRON J. _United States

SMITH and PHILIP M. SMITH, general Court of

— wanth Oircal

ae ae

Philip B.

Winberry

Clerk

Appeal from the United States District Court

for the District of Idaho

Honorable Ray McNichols,

Chief District Judge, Presiding

Argued and submitted October 14, 1980

Submission withdrawn March 25, 1981

Resubmitted June 2, 1982

Before: SKOPIL and POOLE, Circuit Judges, and HALBERT,

District Judge.*

POOLE, Circuit Judge.

Incomco, a partnership engaged in the brokerage of com-

modities futures contracts, and its two general partners' ap-

pea! a judgment of the district court awarding damages, in-

terest and attorneys’ fees to Monte and Dorothy Mordaunt.

*The Honorable Sherrill Halbert, Senior United States District Judge for the

Eastern District of California, sitting by designation.

The Mordaunts opened discretionary commodities trading

accounts with Incomco. When their accounts proved unsuc-

cessful, the Mordaunts withdrew their money. They then filed

suit alleging violations of federal and state securities laws.

After a bench trial; the district judge found that Incomco had

violated federal and state securities laws and entered judg-

ment for the Mordaunts. This appeal followed. We reverse.

Jurisdiction

Incomco first argues that the district court lacked subject

matter jurisdiction because the Commodities Exchange Act, 7

U.S.C. §§1-24, vests exclusive jurisdiction over actions arising

out of “accounts, agreements . . . and transactions involving

contracts of sale of a commodity for future delivery’ in the

Commodities Futures Trading Commission. /d. §2. We dis-

agree. In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cur-

ran, the Supreme Court held that the 1974 amendments to

the Commodities Exchange Act did not extinguish a private

cause of action for persons injured by a violation of the act, a

holding inconsistent with a finding that jurisdiction over the

Mordaunts’ claims rest exclusively in the Commission.

US. , 102 S.Ct. 1825 (1982).

“Securities”

The Mordaunts were entitled to prevail in the district court

only if the discretionary commodities trading accounts they

opened with Incomco were “investment contracts” and there-

fore “securities” within the meaning of 15 U.S.C. § 77(b). In-

comco argues that the district court erred in so holding. We

agree. The district court did not have the guidance of our

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

filed after entry of judgment in this case. Brodt is dispositive

and therefore the judgment of the district court must be rev-

ersed.

The district court held that discretionary commodities

trading accounts are subject to regulation as “investment

contracts” under 15 U.S.C. §77(b). An investment contract is

defined as a “contract, transaction or scheme whereby a per-

son invests his money in a common enterprise and is led to

expect profits solely from the efforts of the promoter or a

third party.” SEC v. W. J. Howey Co., 328 US. 293, 298-99

(1946). See International Brotherhood of Teamsters v. Da-

niel, 439 U.S. 551, 558 (1979). The element of this definition

that will generally be absent from a commodities futures trad-

ing account is the requirement of a common enterprise.

A common enterprise is “one in which the fortunes of the

investor are interwoven with and dependent upon the efforts

and success of those seeking the investment or of third par-

ties.” Brodt v. Bache & Co., 595 F.2d at 460 (quoting SEC v.

Glenn W. Turner Enterprises, 474 F.2d 476, 482 n.7 (9th Cir.),

cert. denied, 414 U.S. 821 (1973)). Some courts require a pool-

ing of investments, termed horizontal commonality, in order

to have a common enterprise. E.g., Hirk v. Agri-Research

Council, Inc., 561 F.2d 96, 101 (7th Cir. 1977). This circuit,

however, requires only vertical commonality: that the inves-

tor and the promoter be engaged in a common enterprise.

Brodt v. Bache & Co., 595 F.2d at 460-461; Hector v. Wiens,

533 F.2d 429, 433 (9th Cir. 1976).

In Brodt, this court rejected a claim that a discretionary

commodities trading account constituted a common enter-

prise under circumstances that we find undistinguishable

from those of this case. We stated:

[T}he success or failure of Bache as a brokerage

house does not correlate with individual investor

profit or loss. On the contrary, Bache could reap

large commissions for itself and be characterized as

successful, while the individual accounts could be

wiped out. Here, strong efforts by Bache will not

guarantee a return nor will Bache's success neces-

sarily mean a corresponding success for Brodt.

Weak efforts or failure by Bache will deprive Brodt

of potential gains but will not necessarily mean that

he will suffer serious losses. Thus, since there is no

direct correlation on either the success or failure

side, we hold that there is no common enterprise

between Bache and Brodt.

595 F.2d at 461. “Merely furnishing investment counsel to

another for a commission, even when done by way of a discre-

tionary commodities account, does not amount to a ‘common

enterprise.” Jd. at 462.

The Mordaunts argue that vertical commonality exists by

reason of the fact that the success or failure of the invest-

ments collectively is essentially dependent upon promoter

expertise. This contention, based on the reasoning in SEC v.

Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974),

was considered and rejected in Brodit. Under Brodt, there is

no common enterprise unless there is some direct relation

between the success or failure of the promoter and th: . of his

investors. In this case, as in Brodt, such direct r iation is

lacking. Incomco earned commissions totalling $2’ ,190.00 on

the Mordaunts’ accounts during the period in which the Mor-

daunts’ collect‘ve losses amounted to $27,385.03. In sum,

these discretionary commodities trading accounts do not

constitute common enterprises, and therefore are not securi-

ties under 15 U.S.C. § 77(b). Accordingly, the judgment of the

district court is REVERSED.

FOOTNOTE

1/ Hereinafter, all appellants will be referred to as “Incomco.”

Di

APPENDIX D

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF IDAHO

MONTE R. MORDAUNT, an individual, No. 3-75-68

and Dorothy Mordaunt, an individual,

Plaintiffs/Appellees, . JUDGMENT

vs. FILED

US. District

Court District

INCOMCO, a partnership, MYROM J. of Idaho

SMITH and PHILIP M. SMITH, general SEP 8, 1978

partners, Jerry L. Clapp,

Defendants/ Appellants. Gerk

This cause came on for bench trial on July 20, 1978, at

Moscow, Idaho. A jury was waived by stipulation. The parties

were present and represented by counsel of record. Docu-

mentary and oral evidence was received, and at the close

thereof oral argument was heard. The Court has entered

formal Findings of Fact and Conclusions of Law in favor of

, the plaintiffs and against the defendants.

IT IS ORDERED, ADJUDGED, AND DECREED:

1. That judgment is entered in favor of the plaintiff Monte

R. Mordaunt and against the defendants, jointly and severally,

in the sum of $17,160.00, with simple interest at the rate of six

percent per annum thereon in the sum of $4,447.54, plus

attorneys’ fees in the sum of $3,600.00, together with his costs

reasonably incurred herein.

2. That judgment is entered in favor of the plaintiff Dorothy

Mordaunt and against the defendants, jointly and severally, in

the sum of $9,775.03, with simple interest thereon at the rate

of six percent per annum in the sum of $2,287.31, plus attor-

neys’ fees in the sufn of $2,000.00, together with her reasona-

ble costs incurred herein.

3. The Counterclaim of the defendants is dismissed with

prejudice.

DATED this 8th day of September, 1978.

/s/ Ray McNichols

Ray McNichols, Chief

Judge

United States District

Court

El

UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF IDAHO

MONTE R. MORDAUNT, an individual, No. 3-75-68

and Dorothy Mordaunt, an individual,

Plaintiffs/Appellees, | FINDINGS OF

: FACT AND

Vs. CONCLUSIONS

OF LAW

INCOMCO, a partnership, MYRON J.

SMITH and PHILIP M. SMITH, general FILED

partners, US. District

Defendants/Appellants. Court District of

Idaho

SEP 8, 1978

Jerry L. Clapp,

Clerk

This cause came on for bench trial on July 20, 1978, at

Moscow, Idaho. The parties were present and represented by

counsel of record. Documentary and oral evidence was re-

ceived and at the close thereof oral argument was heard.

Proposed Findings of Fact and Conclusions of Law were soli-

cited by the Court.

Parties have supplied the Court with Proposed Findings of

Fact and Conclusions of Law which have been carefully con-

sidered and found by the Court to be most helpful. The mat-

ter is now fully submitted and ripe for determination. The

Court, being fully advised, finds and concludes as follows:

FINDINGS OF FACT

The Court enters the following Findings of Fact:

1. The controversy arises under the provisions of:15 U.S.C.

§ 77a, et seq.; 15 U.S.C. § 78a et seg.; Rule 10b-5, Rules of the

Securities & Exchange Commission; and the provisions of the

Idaho Securities Act, Idaho Code 30-1402, et seg.

2. 7 US.C. § 18 adopted by Congress on October 23, 1974,

providing a procedure for bringing complaints before the

Commodities Futures Trading Commission, has a delayed ef-

fective date to January 23, 1976. The instant case was filed on

October 16, 1975.

3. Plaintiffs, Monte R. Mordaunt and Dorothy Mordaunt,

son and mother, respectively, are residents and citizens of the

State of Idaho. Defendant Incomco was at all times relevant

to this matter a partnership with its principal place of busi-

ness in the State of New York. The individual defendants,

Myron J. Smith and Philip M. Smith, father and son, respec-

tively, were at all times here relevant the only partners in

Incomco and were residents and citizens of the State of New

York.

4. In May or June of 1974 plaintiff received, via U. S. mails,

a copy of the May 1974 issue of REASON Magazine and read a

paid advertisement therein concerning Incomco and its brok-

erage services which advertisement was placed therein by the

defendants.

5. At sometime in the summer of 1974, plaintiff Monte

Mordaunt received a mailing from a third party recommend-

ing Incomco as a brokerage firm utilizing a computer design

method of commodities trading which method had been test-

ed over a 15-year history of such trading. Enclosed in the

letter was a printed card designed to be filled out and mailed

to one Dennis Turner, an employee of the defendants, in order

to request additional information about Incomco.

6. Plaintiff Monte Mordaunt completed and mailed the

card to Turner. Shortly thereafter plaintiff Monte Mordaunt

received, through the mail, a number of advertising brochures

admittedly prepared by the defendants. These brochures

were admitted into evidence.

7. Plaintiff Monte Mordaunt talked on the long distance

telephone with the defendant Philip M. Smith on several oc-

casions in the early fall of 1974, on which occasions Smith

urged him to enter a contract and send in money to Incomco.

8. Plaintiff Dorothy Mordaunt read the advertising sent by

the defendants to her son and was by him advised as to the

context of the telephone conversations.

9. In reliance upon the representations of the defendants

and the advertising brochures and phone calls, plaintiff

Monte Mordaunt in November and December of 1974 sent

checks through the mail payable & the defendants in the

total sum of $32,610.00.

10. In reliance upon the representations of the defendants

in the advertising brochures, the plaintiff Dorothy Mordaunt,

in January 1975, sent a check through the mails payable to

the defendants in the sum of $14,349.00.

11. At the time each plaintiff forwarded his or her check to

the defendants, each executed and forwarded a form of con-

tract furnished by the defendants. Copies of these agreements

were received in evidence.

12. Under the arrangement between the parties, as it ex-

isted at the time plaintiffs delivered their money to the de-

fendants, plaintiffs invested their funds and defendant had

the discretion to utilize the funds to trade in the commodities

market. Defendants had a large number of such accounts and

purchased a number of commodity “contracts” at one time

which were then specifically assigned to the account of an

individual investor and so reported to the investor. Profits to

investors and consequent additional commissions to the de-

fendants depended solely upon the skill and efforts of the

defendants in predicting the market.

13. Some substantial profits were initially reported on

plaintiff Monte Mordaunt’s account, but by the spring of 1975

both accounts had balances less than the original investment.

On May 31, 1975 plaintiffs canceled the agreement. Defend-

ants refunded to the plaintiff Monte Mordaunt the sum of

$15,000.00, being $17,610.00 less than his investment. De-

fendants refunded to the plaintiff Dorothy Mordaunt the sum

of $4,573.97, being $9,775.03 less than her investment.

14. Defendants were not at any time relevant hereto regis-

tered security dealers or agents under the Securities Acts of

the United States or of the State of Idaho. The Incomco In-

vestment Program was not regist ed as a security.

15. Defendant Philip Smith tes:ified that the large majority

of investors in commodity trading lost money and that a rela-

tively minor number of investors incurred profits, often of a

very substantial nature.

16. The advertising material sent by the defendants to the

plaintiffs and admitted into evidence in this case contained,

among others, the following false and misieading information:

(a) it was broadly implied that Incomco had been in busi-

ness as a registered commission merchant trading in

commodities for a period of fifteen years;

(b) it was clearly stated that Incomco had developed and

tested a unique computerized management program

which had produced highly successful results in

commodity trading; and

(c) it was implied that, by the use of Incomco computer-

ized trading methods, profits from 100% to 200% an-

nually might be expected.

17. The evidence discloses, relative to the above:

(a) that Incomco was first formed and registered as a

commissioned merchant in December 1973, about six

months before the advertising brochures were re-

ceived and read by the plaintiffs;

(b) that Incomco had no computer of its own and the only

computerized information utilized by Incomco was by

way of a subscription to a reporting service generally

available to anyone willing to pay a relatively modest

fee; and

(c) that most of the people investing in commodity trad-

ing could expect to lose money.

18. A reasonably prudent investor would consider infor-

mation as to: (1) the length of time a commission agent had

been in business; (2) the claimed successful and unique com-

puterized trading method; and (3) the expectation of high

profits as important considerations in making a determina-

tion as to whether or not to invest.

FINDING

19. Interest, if allowed at 6% per annum, computed as sim-

ple interest is to be computed as follows:

Plaintiff Monte Mordaunt:

$29,610.00 from 1/7/74 to 6/2/75

(187 days or 51% of 1 year) at 6% $906.06

$3,000.00 from 12/10/74 to 6/2/75

(174 days or 48% of 1 year) at 6% 86.40

$17,610 from 6/2/75 to 9/8/78

(date of judgment) (1194 days or

3.27 years) at 6% 3,455.08

Total simple interest $4,447.54

$14,349.00 from 1/3/75 to 6/24/75

(172 days or 47% of year) at 6% $404.64

$9,775.03 from 6/24/75 to 9/8/78

(date of judgment)(1172 days or

3.21 years at 6% 1,882.67

Total simple interest $2,287.31

20. In considering what amount is reasonable as and for

attorneys’ fees, if the same are to be allowed in this case, I

have taken into account the complexity of the case, the usual

time and effort necessary to prepare for and try a case of this

kind, the customary fees charged by attorneys in the area, the

competence of counsel, and the successful result. I find, based

upon my experience in this jurisdiction and in the trial of

such cases, and after a careful review of the entire file, that a

reasonable sum to ‘ ~ allowed to the plaintiff Monte R. Mor-

daunt is the sum of $3,600.00, and that a reasonable sum for

attorneys’ fees to be allowed to the plaintiff Dorothy Mor-

daunt is the sum of $2,000.00.

21. Defendaris have failed to prove a right to relief under

their Counterclaim.

From the foregoing facts found, the Court concludes as a

matter of law, as follows:

CONCLUSIONS OF LAW

1. That the Court has jurisdiction over the controversy and

that venue in this Court is proper.

2. That the transactions between the parties constituted

investment contracts for the purchase of securities under the

federal and State of Idaho securities acts.

3. That the defendants sold to the plaintiffs unregistered

securities in violation of the said federal and state security

acts.

4. That the information contained in the advertising sales

documents sent by the defendants to the plaintiffs contained

false and misleading statements as to material facts in viola-

tion of the said federal and state security acts and Rule 10b-5

of the Securities & Exchange Commission.

5. That plaintiffs reasonably relied upon said false and mis-

leading statements of material facts to their damage.

6. That plaintiffs are entitled to have the aforementioned

investment contract rescinded and judgment entered for

them for the balance of their investment.

7. Defendants’ Counterclaim must be dismissed.

8. Plaintiffs are entitled to an allowance of attorneys’ fees

as follows:

Plaintiff Monte R. Mordaunt the sum of

$3,600.00,

Plaintiff Dorothy Mordaunt the sum of

$2,000.00.

9. The plaintiff Monte R. Mordaunt is entitled to judgment

against the defendants, jointly and severally, in the sum of

$17,610.00, with simple interest at the rate of six percent per

annum thereon in the sum of $4,447.54, plus attorneys’ fees in

the sum of $3,600.00, together with his costs reasonably in-

curred herein.

10. Plaintiff Dorothy Mordaunt is entitled to judgment

against the defendants, jointly and severally, in the sum of

$9,775.03, witi: simple interest thereon at the rate of six per-

cent per annum in the sum of $2,287.31, plus attorneys’ fees in

the sum of $2,000.00, together with her reasonable costs in-

curred herein.

DATED this 8th day of September, 1978.

/s/ Ray McNichols

Ray McNichols, Chief

Judge

United States District

Court

APPENDIX F

UNITED STATES DISTRICT

COURT FOR THE DISTRICT OF IDAHO

MONTE R. MORDAUNT, an individual, No. 3-75-68

and Dorothy Mordaunt, an individual,

Plaintifis/Appellees, § ORDER DENY-

ING MOTION

we. TO AMEND

FINDINGS OF

FACT OR CON-

INCOMCO, a partnership, MYRON J. CLUSIONS OF

SMITH and PHILIP M. SMITH, general LAW OR, IN

Defendants/Appellan NATIVE, FOR

“e A NEW TRIAL

FILED

US. District

Court District

of Idaho

SEP 22, 1978

Jerry L. Clapp,

Clerk

The Court having entered the Findings of Fact and Con-

clusions of Law and a Judgment adverse to the defendants,-

defendants have now moved for an amendment to the Find-

ings of Fact and Conclusions of Law. The purpose of these

amendments is to raise a question of the Court's jurisdiction

which has been heretofore fully determined by the Court

adversely to the defendant’ No new matter is raised.

Additionally, a new trial is requested on the basis that the

evidence is insufficient to support the Judgment. Again, this

matter has been previously seriously considered by the

Court.

Neither of the alternative motions has merit

IT IS THEREFORE ORDERED:

That the Motion of the Defendants to Amend the Find-

ings of Fact and Conclusions of Law, or in the Alternative,

for New Trial, are, and each is, DENIED.

/s/ Ray McNichols

Ray McNichols, Chief

Judge

United States District

Court

SUPREME COURT OF THE UNITED STATES

7 1 if ell i

E HE Hi

ALTE

ahah

Se deat!

PR Gn a

ajaet be

fit i

aH

2(1) of the

include an “investment contract.” 15 U. S. C.

Forty years ago this Court held that an “investment con-

tract” is a “contract, transaction or scheme whereby a person

invests his money in a common enterprise and is led to expect

profits solely from the efforts of the premoter or a third party

..+.” §. B.C. v. Howey Co., 328 U.S. 298, 298-299

if /

i

MORDAUNT « INCOMCO 3

quires a correlation between the success of the promoter and

that of the accounts themselves. See 686 F. 2d, at 817;

Brodt v. Bache & Co., supra, at 462.

The importance of this conflict is not limited to the classifi-

cation of discretionary commodities futures contracts. In re-

lated areas the lower courts are similarly divided as to

whether Howey requires vertical or horizontal commonality.

For example, the Ninth Circuit relied on its decision in this

In light of the clear and significant split in the Circuits, |

would grant certiorari.