Petition for Writ of Certiorari — Safir v. Blackwell

<= fl vit Lo: $

. atic FILED

ey Ue : -

MAR 20 i7A

MICHAEL RODAK

IN THE

Supreme Court of the United States

October Term, 1973.

No. €3-~ 1409

JOHN J. WASNOWIC and KEYSTONE TRADERS, INC.,

Petitioners,

v.

CHICAGO BOARD OF TRADE,

CHICAGO MERCANTILE EXCHANGE,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT.

Of Counsel: Davin BERGER,

Davin Bercer, P. A., GeraLtp J. Ropos,

. Attorneys-at-Law. Davi Bercer, P. A.,

1622 Locust Street,

Philadelphia, Pa. 19103

J. Juuius Levy,

Levy, Preate & Purce.,

Scranton Electric Building,

Scranton, Pa. 18503

Warren, Hitt, HENKELMAN

& McMenamin,

Scranton Electric Building,

Scranton, Pa. 18503

Counsel for Petitioners.

Dated: March 20, 1974

International Printing Co., 711 So. 0th St., Phila., Pa. 19143 — Tel. (215) 727-8711

2

:

t

TABLE OF CONTENTS.

Page

exe seven seman kems's ox ken 2

el ia cay henae ah ekeuaewaschsexnses ats 2

re Ue ee ens ey vaweneeeeee 3

i cena vant as eed euseweedus es 5 5

OP GU ois nds ck cin wn cen ceecacwssecses 6

REASONS FOR GRANTING THE WRIT .............2.eeceeees 10

rare iN a er red aa a uly cs 10

I. The Courts Below Have Erroneously Interpreted the

Meaning of the Term “Common Enterprise” as

Used in the Test of an Investment Contract Set

Forth by the Supreme Court in Securities and Ex-

change Commission v. W. J. Howey Co., 328 U. S.

ME Ss Gn au gd ers 664 aha aeae Nene estes 11

II. There Is a Conflict Among the Circuits on the Issue

of Whether a Discretionary Commodity Account

Constitutes a Security for Purposes of the Federal

ED ar ccet ay cin cas wax vsaeekes cus 17

III. Even Under the Overly-Stringent Milnarik Standard

the Amendments Offered by Plaintiffs Would Have

Supplied the Element of Commonality and Leave to

Amend the Complaint Thus Should Have Been

Granted by the Courts Below ................. 23

SE cca dirneaccebvaeuadeseaduesanacauvanda vives 27

APPENDIX:

Judgment Order of the Court of Appeals ............... Al

District Court Memorandum Opinion of December 31,

Dc iieh Caaths Renewed eawnaaaw ae eae a adweedos A3

Bisreceetin cto siitiones i arte bs

POS ROE DRIP

TABLE OF CONTENTS (Continued).

District Court Memorandum Opinion of November 17,

as kacdvevesexves eres e Weta eee Al0

District Court Order of November 17, 1972 ............ Al9

District Court Memorandum Opinion of December 15,

Ra te AR a ota ey ere PE erry A20

TABLE OF CASES CITED.

Page

Anderson v. Francis I. duPont & Co., 291 F. Supp. 705 (D.

PE SEE. ib sive GaN veVkenketavenucdacnceavees 18, 19, 20

Ballow v. General Electric Company, 393 F. 2d 398 (1st Cir.

Berman vy. Orimex Trading, Inc., 291 F. Supp. 701 (S. D.

Bi MEE 5-6 xe ceeeVerecsnceneseusuasens 4 18, 19, 20, 21, 22

Blackwell v. Bentsen, 203 F. 2d 690 (5th Cir. 1953), certiorari

dismissed 347 U. S. 925 (1954) .......... 2. eee ee ees 14,15

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

ee Els SE wad dncectvatseewsce teen 10, 11, 17, 19, 21

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

Se Ce a, OE + 8 cksa ta ekauwanes bekees 10, 17, 18, 20, 21

Cox v. Livingston, 407 F. 2d 392 (2nd Cir. 1969) ......... 26

Foman vy. Davis, 371 U. S. 178, 83 S. Ct. 227 (1962) ..... 26

Hanraty v. Ostertag, 470 F. 2d 1096 (10th Cir. 1972) ...... 26

Hughes v. Dempsey-Tegeler & Co., Inc., CCH Fed. Sec. L.

a Bee a Be eS err ee er errs 21

John Birch Society v. NBC, 377 F. 2d 194 (2nd Cir. 1967) 26

Johnson vy. Arthur Espey, Shearson, Hammill & Co., 341 F.

eee Fee Eh, Oe Oe OD hoses venkavixnsauads 18, 20

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

I eu Wiaat Nite oe ke Vie aebaneea beter 18, 19, 20, 21, 22

PER ae cee al Y

oe

See

TABLE OF CASES CITED (Continued).

Page

Marshall v. Lamson Bros. & Co., 368 F. Supp. 486 (S. D. Iowa

ME naa arcu yi aces gam de Soar PER ADE oye 12, 18, 19, 20

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

SPUR 24 Kates gee bia eeoa ene es 5,8, 10, 19, 20, 21, 22, 23, 26

Mitzner v. Cordet International, Inc., 358 F. Supp. 1262 (N. D.

Pe SE: ciceGeniecsueuvenreccas en kew eee aenedaeans 21

Moore v. Coats Co., 270 F. 2d 410 (3rd Cir. 1959) .......... 26

Negrich v. Hohn, 379 F. 2d 213 (3rd Cir. 1967) ........... 26

Nolen v. Fitzharris, 450 F. 2d 958 (9th Cir. 1971) ......... 26

People v. White, 124 Cal. App. 548, 12 P. 2d 1078 (1932) ... 14

Prohaska v. Hemmer-Miller Development Co., 256 Ill. App.

BE RR he aie etna ae, ee eee 14

Securities and Exchange Commission v. Glenn W. Turner En-

terprises, Inc., 474 F. 2d 476 (9th Cir. 1973) ......... 15

Securities and Exchange Commission v. Haffenden-Rimar In-

ternational, Inc., 362 F. Supp. 323 (E. D. Virginia, 1973) 21

Securities and Exchange Commission v. W. J]. Howey Co., 328

U. S. 293, 66 S. Ct. 1100 (1946) ..... 10, 11, 12, 13, 14, 15, 16,

17, 18, 19, 20, 21, 22, 23, 25, 27

Securities and Exchange Commission v. C. M. Joiner Leasing

Corporation, 320 U. S. 344, 64 S. Ct. 120 (1943) ..... 12

Securities and Exchange Commission v. M. A. Lundy Asso-

ciates, 362 F. Supp. 226 (D. R. I. 1973) .............. 21

Securities and Exchange Commission vy. Payne, 35 F. Supp. 873

te f Se ae err ree Terr ree 14

Sinva, Inc. v. Merrill, Lynch, Pierce, Fenner and Smith, Inc.,

253 F. Sep: Soe (S. OW. YW. BOB): ww nov cccccceccnss 17

State v. Evans, 154 Minn. 95, 191 N. W. 425 (1922) ........ 14

State v. Gopher Tire and Rubber Co., 146 Minn. 52, 177 N. W.

ee GOED Gi sauce as wccwnael ches te sawneeweaens aes 13, 14

Tcherepnin v. Knight, 389 U. S. 332, 88 S. Ct. 548 (1967) ..11, 12

United Steel Workers of America, AFL-CIO vy. Mesker Bros.

Industries, 457 F. 2d 91 (Sth Cir. 1972) .............. 26

RET MAC Re EERO ene

1I5 U.

15 U.

15 U.

28 Uz

28 U.

nunn

vz

TABLE OF STATUTES CITED.

Page

INR tobe tcc valudd savy easav ewan ds 3,11

EET aie catins gis Kae don hh by ad eee eee xe 3,11

EN wa ch niet wae 4b oa Ke baa aoe aeNeeceNeon 4,5,7

ED, Ndr 8.0b 5 d50:9 sue xc entrees vaswanewen 2

C. §$ 1653

a

IN THE

Supreme Court of the United States

Ocroser TerRM, 1973.

JOHN J. WASNOWIC anv

KEYSTONi. TRADERS, INC.,

Petitioners,

v.

CHICAGO BOARD OF TRADE, CHICAGO

MERCANTILE EXCHANGE,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT.

Petitioners, Plaintiffs in the proceedings below, re-

spectfully pray that a writ of certiorari issue to review

the judgment of the Court of Appeals entered on December

21, 1973.

CPL ARNO UE RL, TER NET om te

to

Petition for Writ of Certiorari

OPINIONS BELOW.

The Court of Appeals affirmed the District Court below

without opinion. The judgment Order to this effect is re-

printed in the Appendix, infra, pp. Al-A2.

Three memorandum opinions were issued by the Dis-

trict Court. The first unreported opinion denied Respond-

ents’ Motion to dismiss and is reprinted in the Appendix,

infra, pp. A3-A9. The second opinion, reported at 352 F.

Supp. 1066 (M. D. Fa. 1972), vacated the earlier Order

and granted Resp: ncents’ Motion to Dismiss. It appears

in the Appendis, infra. r >. A10-A19. The third opinion, un-

reported, denied Petitioners’ Motion to vacate the Court’s

prior order and amend their Complaint, and is reprinted

in the Appendix, infra, pp. A20-A26.

JURISDICTION.

The judgment of the court of appeals was entered ou

December 21, 1973. The jurisdiction of this Court is in-

voked pursuant to 28 U. S. C. § 1254(1).

aa Otome §

VONMN LE sea cettNa

Petition for Writ of Certiorari 3

STATUTES INVOLVED.

Section 77b(1) of the Securities Act of 1933, 15

U.S. C. § 77b(1), 48 Stat. 74 (1933), as amended, 48 Stat.

905, 908 (1934), provides:

‘‘The term ‘security’ means any note, stock, treasury

stock, bond, debenture, evidence of indebtedness, cer-

tificate of interest or participation in any profit-shar-

ing agreement, collaterai-trust certificate, preorganiza-

tion certificate or subscription, transferable share, in-

vestment contract, voting-trust certificate, ertificate

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 ‘security’,

or any certificate of interest or participation in, tem-

porary or interim certificate for, receipt for, guaran-

tee of, or warrant or right to subscribe to or purchase,

any of the foregoing.”’

Section 78c(10) of the Securities Exchange Act of

1934, 15 U. S. C. § 78e(10), 48 Stat. 882 (1934) provides:

‘‘The term ‘security’ means any note, stock, treasury

stock, bond, debenture, certificate of interest or partici-

pation in any profit-sharing agreement or in any oil,

gas, or other mineral royalty or lease, any collateral-

trust certificate, preorganization certificate or sub-

scription, transferable share, investment contract,

voting-trust certificate, certificate of deposit, for a

security, or in general, any instrument commonly

known as a ‘security’: or any certificate of interest or

participation in, temporary or interim certificate for,

receipt for, or warrant or right to subscribe to or pur-

chase, any of the foregoing; but shall not include cur-

rency or any note, draft, bill of exchange, or banker’s

eeeeEEEeEeEeEeE———————E———EEEYE

Re = WE OS wee SAE a ONS SE eR NEE

4 Petition for Writ of Certiorari

acceptance which has a maturity at the time of issu-

ance of not exceeding nine months, exclusive of days

of grace, or any renewal thereof the maturity of which

is likewise limited.’’

Section 78aa of the Securities Exchange Act of 1934,

15 U. S. C. § 78aa, 48 Stat. 902 (1934) provides:

‘‘The district courts of the United States, and the

United States courts of any Territory or other place

subject to the jurisdiction of the United States shall

have exclusive jurisdiction of violations of this chapter

or the rules and regulations thereunder, and of all

suits in equity and actions at law brought to enforce

any liability or duty created by this chapter or the rules

and regulations thereunder. Any criminal proceeding

may be brought in the district wherein any act or

transaction constituting the violation occurred. Any

suit or action to enforce any liability or duty created

by this chapter or rules and regulations thereunder,

or to enjoin any violation of such chapter or rules

and regulations, may be brought in any such district

or in the district wherein the defendant is found or

is an inhabitant or transacts business, and process in

such cases may be served in any other district of which

the defendant is an inhabitant or wherever the defend-

ant may be found. Judgments and decrees so rendered

shall be subject to review as provided in sections 225

and 347 of Title 28. No costs shall be assessed for or

against the Commission in any proceeding under this

chapter brought by or against it in the Supreme Court

or such other courts.’’

+

Petition for Writ of Certiorari 5

QUESTIONS PRESENTED.

This action was brought by Petitioners as investors in

discretionary commodity trading accounts to recover dam-

ages for alleged violations of the Securities Act of 1933, the

Securities Exchange Act of 1934 and the Commodity Ex-

change Act. Extraterritorial service of process was ef-

fected upon the defendants pursuant to Section 27 of the

1934 Act, 15 U.S. C. §78aa. Defendants moved to dismiss

the action for invalid service of process on the grounds that

the discretionary commodity trading account as described

in the Complaint did not constitute a security as defined in

the 1933 and 1934 Acts, and thus extraterritorial service of

process was improper. The District Court eventually

granted this motion and denied Petitioners leave to amend

their complaint.

The important question presented for review is as

follows:

Does a discretionary commodity trading account,

in which all investment decisions are made solely by

the commodity broker, constitute an investment con-

tract, and hence a security, for purposes of the federal

securities laws which this Court has decreed must be

interpreted liberally not technically and restrictively?

Additionally, a subsidiary question is presented:

Would the amendments to the complaint proposed

by Plaintiffs have added the element of ‘‘commonality’’

to the transaction in question so as to bring it within

the definition of an investment contract as that term is

construed in Milnarik v. M-S Commodities, Inc., 457

F. 2d 274 (7th Cir. 1972)? If so, did the Courts below

err in refusing Petitioners leave to amend their com-

plaint?

Sarre

ee

PO re ra ts

Pr itrisresiirci we

Ce EDIT PRIS eee

6 Petition for Writ of Certiorari

STATEMENT OF THE CASE.

This case was instituted as a class action with the

filing of a complaint on August 25, 1969 by plaintiffs John

J. Wasnowie and Keystone Traders, Inc. (Keystone).

Named as defendants were J. Samuel Sicherman, trading

as J. San.uel Sicherman & Co., the Chicago Board of Trade

and the Chicago Mercantile Exchange. It was alleged that

Sicherman,' in his dealings with plaintiffs, violated certain

sections of the Securities Act of 1933, 15 U. S. C. 477 et seq.,

the Securities Exchange Act of 1934, 15 U.S. C. § 78 et seq.,

and the Commodity Exchange Act, 7 U.S.C. 4 1et seq. The

Exchanges were accused of aiding and abetting Sicherman

in his violations of the Securities laws. Subsequent to the

filing of the complaint, Commodity Fund, Inc. was added

as an additional party-plaintiff.

The Complaint alleged that discretionary commodity

accounts were opened by the plaintiffs with Sicherman.

Sicherman then proceeded to invest the funds of plaintiffs

in the commodities market. All investment decisions were

made solely by Sicherman, as agreed by the parties. Sub-

sequently, on April 1, 1969, a petition in bankruptey was

filed against Sicherman in the Middle District of Pennsyl-

vania, and on May 6, 1969 he was adjudicated a bankrupt.

At that time Sicherman held funds in the accounts of plain-

tiffs Wasnowie and Keystone, respectively, of over $42,000

and $521,000.

Plaintiffs alleged that during the period of January 1,

1960 to April 1, 1968 Sicherman violated the Commodity

Exchange Act by neglecting to keep sufficient funds in his

customers’ segregated accounts to pay all equities and

credits due them and by failing to keep prover records and

1. References to Sicherman will hereafter include both Mr.

Sicherman and his firm.

A ENN ES

Petition for Writ of Certiorari 7

accountings of customer margin funds. They also alleged

that Sicherman violated the Securities Act of 1933 and the

Securities Exchange Act of 1934 by converting to his own

use money and securities which properly belonged to his

customers and by concealing this fraudulent misuse of

funds through false and misleading statements.

The Exchanges were charged with aiding and abetting

the wrongdoing of Sicherman in the following ways: by

failing to enforce their rules requiring annual and semi-

annual financial statements from its members, and accept-

ing instead the false statemerts of Sicherman; by failing

to audit the Sicherman books; by accepting an audit of the

Sicherman records by the Agricultural Authority as ade-

quate ts protect the investing public; by failing to regulate

the business activity of its member Sicherman; and by fail-

ing to expel and discipline Sicherman for the illegal activi-

ties carried on by him for many years. The District Court

concluded in its Memorandum of December 31, 1970 that

the allegations of aiding and .ictting were sufficient to

state a cause of action against the Exchanges (App.,

pp. A6-A7).

Because the defendant Exchanges could not be phys-

ically served within the Middle District of Pennsylvania

where the suit was brought, plaintiffs sought, and were

granted, a special order from the District Court authoriz-

ing service of process upon the Exchanges at their respec-

tive headquarters in Chicago pursuant to Section 27 of the

1934 Act, 15 U.S. C. §78aa. Service of process was subse-

quently accepted by both Exchanges.

Motions to dismiss and to quash service of process

were made separately by the Exchanges on the ground,

inter alia, that the complaint did not state a cause of action

under the 1934 Act for the reason that discretionary com-

modities trading accounts are not ‘‘securities’’ under the

Act, and therefore extraterritorial service permitted by the

wile sob DeKMe ESTE

+ abo itera

Battin ccssiseiss stein icssmtorwrian

8 Petition for Writ of Certiorart

1934 Act is not afforded to plaintiffs herein. The District

Court denied these motions, reasoning that the discretion-

ary commodity accounts as described by plaintiffs consti-

tuted ‘‘investment contracts’’ and thus securities under the

Act. Subsequently, the Exchanges urged the Court to re-

consider its ruling, arguing that the complaint failed to

allege facts sufficient to support the claim that the Ex-

changes had ‘‘aided or abetted’’ Sicherman. The Court

refused to reconsider its prior ruling.

In July, 1972 the Exchanges renewed their motions to

dismiss for improper service of process, in reliance on a

recent decision, Wilnarik v. M-S Commodities, Inc., 457 F.

2d 274 (7th Cir. 1972), in which a discretionary commodity

account was judged not to constitute a security under the

1933 or 1934 Acts because the element of a ‘‘common enter-

prise entered into for mutual profit’? was not present. In

their response to this motion, plaintiffs asserted that the

element of commonality was present in the pooling of in-

vestor funds in Keystone, and informally requested leave

to amend their complaint by adding the corporate charter

of Keystone to clarify its operation as an ‘‘open end’”’ in-

vestment company.

Persuaded by the reasoning of Milnarik, the Court

granted the motion to dismiss. While not expressly grant-

ing plaintiffs’ request to amend, the opinion of the Court

nevertheless considered the proposed amendment and held

that the amendment would add an element of commonality

only to the relationship between Keystone and its share-

holders but would not change the nature of the account be-

tween Keystone and Sicherman. Therefore, the common-

ality element would still not be satisfied.

Following the dismissal, plaintiffs moved the Court on

December 13, 1972 for leave to amend the complaint, and

to set aside the dismissal. Plaintiffs’ proposed amended

Fe SE ERI RS NERO TT |

POTS GRRE

Petition for Writ of Certiorari 9

complaint set forth the relevant portion of the Keystone

charter, alleged that Sicherman had promoted the sale of

Keystone stock to potential investors, alleged that Sicher-

man had represented to plaintiffs that the Keystone funds

would be invested in commodity futures under his direction,

and alleged that Sicherman misappropriated the Keystone

funds after they were deposited with his firm. Reasoning

that these amendments affected only the agreement be-

tween Keystone and its shareholders, and that the ‘‘invest-

ment contract’’ relied on by plaintiffs in the complaint was

between Keystone and Sicherman, the Court concluded that

the amendments would not cure the jurisdictional defects

in the complaint and the motion to amend was denied.

Plaintiffs appealed the dismissal of the action by the

District Court, and also filed a motion with the Third Cir-

cuit Court of Appeals for leave to file an amended com-

plaint under 28 U. S. C. § 1653. In essence, the proposed

amendments alleged that Sicherman had organized plain-

tiffs Keystone and Commodity Fund, Inc.; that he had

managed the funds invested in these corporations; that he

had participated in the sale of Keystone stock to the pub-

lic; and that he had made various material misrepresenta-

tions concerning the stock to actual and potential investors.

The Court of Appeals affirmed the decision of the District

Court without opinion, (App., p. A2), apparently denying

leave to amend under 28 U. S. C. § 1653.

hi Ae Nei i tlle hoc 9 58 Ph

10 Petition for Writ of Certiorari

REASONS FOR GRANTING THE WRIT.

Introduction.

The opinion of the District Court below reflects one

of a number of conflicting interpretations of the meaning

of the term ‘‘investment contract’’ as used in the federal

securities laws and as applied to discretionary commodity

trading accounts. While the Supreme Court has never

passed directly upon the issue of whether a discretionary

commodity trading account is an ‘‘investment contract,”’

the meaning of that term has been extensively discussed in

Securities €& Exchange Commission v. W. J. Howey Co.,

328 U. S. 293, 66 S. Ct. 1100 (1946). The test of ‘‘invest-

ment contract’’ as set forth in that opinion has been widely

utilized by the federal courts in subsequent cases involving

a myriad of factual circumstances.

As set forth in more detail, infra, the District Court

below construed one of the elements of the Howey test, the

requirement that the investor be engaged in a ‘‘common

enterprise,’’ as necessitating a ‘‘pooling’’ or ‘‘commin-

gling’’ of investor capital. It is submitted that such a

construction of the Howey test is erroneous and has serious

implications for the administration and enforcement of the

securities laws.

The District Court’s interpretation of the ‘‘common

enterprise’’ element, and the acquiescence in it by the

Third Circuit, is based on an opinion of the Seventh Cir-

cuit in Milnartk v. M-S Commodities, Inc., 457 F. 2d 274

(7th Cir. 1972). This interpretation is in direct conflict

with other federal cases applying Howey to discretionary

commodity trading accounts, including two cases arising

out of the Eighth and Tenth Circuits. Commercial Iron and

Metal Co. v. Bache & Co., 478 F. 2d 39 (10th Cir. 1973) ;

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

132 (8th Cir., 1970). This conflict among the Circuits over

LEED L ED I ECIOS iN ALTE GE Fi

“

Petition for Writ of Certiorart ll

the meaning of the ‘‘common enterprise’? element of the

Howey test has resulted in a pervasive uncertainty as to

the applicability of the federal securities laws to discre-

tionary commodity trading, and should be resolved by this

Court.

I. The Courts Below Have Erroneously Interpreted the

Meaning of the Term “Common Enterprise” as Used in

the Test of an Investment Contract Set Forth by the

Supreme Court in Securities and Exchange Commis-

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

In granting respondents’ motion to dismiss, the Dis-

trict Court decided that the discretionary commodity ac-

count established between petitioners and Sicherman as

described in the original complaint did not constitute a

security within Section 2(1) of the Securities Act of 1933,

15 U. S. C. § 77b(1) and Section 3(a) (10) of the Securities

Exchange Act of 1934, 15 U. S. C. §78e(a) (10). Con-

sequently, the extraterritorial service of process upon

respondents was found to have no validity under either of

these securities laws and the case was dismissed for im-

proper service of process. Petitioners contend that the

investment relationship between themselves and Sicher-

man, as described in the complaint, did constitute a se-

curity and that extraterritorial service of process was

therefore proper.

The term ‘‘security’’ under both the 1933 and 1934

Acts is defined so as to include the term ‘‘investment con-

tract’’ in its definition.” While the term ‘‘investment con-

tract’’ is defined in neither of these Acts, this Court has

several times in the past had occasion to expound on the

2. These definitions are set forth verbatim in the “Statutes In-

volved” section of this Petition. They are virtually identical and

will be treated as interchangeable for purposes of this Petition. See

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

aa!

setae sich ccna sits pws Math neh ind cn be AH ASSES IR eA BE in ella nalts: itch D oBiaors bn."

12 Petition for Writ of Certiorart

meaning to be given this term. Securities and Exchange

Commission v. C. M. Joiner Leasing Corporation, 320 U.S.

344, 64 S. Ct. 120 (1943) ; Securities and Exchange Commis-

sion v. W. J. Howey Co., 328 U. S. 293, 66 S. Ct. 1100

(1946); Tcherepnin v. Knight, 389 U. S. 332, 88 S. Ct.

548 (1967). The principles laid down in these cases

clearly indicate that a discretionary commodity account

constitutes an investment contract.

In Howey, this Court discussed at length the definition

of an ‘‘investment contract’’. That case dealt with the sale

of identifiable parcels of land in a citrus grove development.

The parcels were conveyed to the purchaser under a war-

ranty deed, each parcel containing a number of growing

citrus fruit trees. Each purchaser was also offered a

‘service contract’’ under which the seller, through its own

service company, would obtain a leasehold interest in the

land and ‘‘full and complete’’ possession of the acreage.

For a specified fee, plus the cost of labor and harvesting

and marketing of the crops, the service company would

harvest and sell the fruit and account to each purchaser

for profits made on his own trees. Each purchaser was free

to contract with the defendant company or any other com-

pany for the servicing of his parcel. The Court concluded

that this arrangement constituted the offering of an ‘‘in-

vestment contract’’ under the 1933 Act.

As set forth by the Howey court, the test of an invest-

ment contract is ‘‘whether the scheme involves an invest-

ment of money in a common enterprise with profits to come

solely from the effort of others’’. 328 U.S. at 301, 66 S. Ct.

at 1104. The District Court below held that to satisfy the

‘‘common enterprise’’ requirement there must be more

than one investor and a ‘‘pooling’’ or ‘‘commingling’’ of

investor funds. However, this theory finds no basis in

Howey. See Marshall v. Lamson Bros., Inc., 368 F. Supp.

486 (S. D. Iowa, 1974).

PR ee ERI RE Mo hac

Petition for Writ of Certiorari 13

The stipulated facts upon which Howey rests reveal

that there was no sale of a right to share with others in the

profits of land held in common with the defendant com-

panies or others. In the case of each grove, as in the yield

of the fruit, the cost of the care and the proceeds of the

fruit were definitely and distinctly accounted for with re-

spect to the specific property owned by the individual.

Securities and Exchange Commission v. W. J. Howey Co.,

151 F. 2d 714, 715-16 (Sth Cir. 1945). In this respect, the

Howey arrangement was similar to that in which a com-

modity broker simultaneously supervises the accounts of

a number of individual clients. Furthermore, the Howey

purchasers were permitted to enter into service contracts

with companies other than the seller’s service company

and the existence of this option implies that the fruit of

each individual parcel was cared for, cultivated and

marketed without any pooling of either costs or profits.

‘“‘Thus all the elements of a profit seeking business

venture are present here. The investors provide the

capital and share in the earnings and profits; the pro-

moters manage, control and operate the enterprise. It

follows that the arrangements whereby the investors’

interests are made manifest involve investment con-

tracts, regardless of the legal terminology in which

such contracts are clothed.’’ Securities and Exchange

Commission v. W. J. Howey Co., 328 U. S. 293, 300,

66 S. Ct. 1100, 1104 (1946).

An examination of the authorities relied upon by the

Howey Court further supports the position that a ‘‘pooling

of funds’’ was not essential to the Court’s definition of

‘common enterprise.’” In discussing the development of

the meaning of ‘‘investment contract’’ in state courts, the

Court cited State v. Gopher Tire and Rubber Co., 146 Minn.

Makat «

Mts wale et Mth TI A.A BGR ILO. Bm ph ae

Dietetics ti ticins ssn. Send

Se AR De meNs me Dy

14 Petition for Writ of Certiorari

52, 177 N. W. 937 (1920) in which there was admittedly a

pooling of investor funds. However, an inspection of that

opinion reveals that nowhere did the Minnesota court re-

quire ‘‘pooling’’ as a necessary element of an investment

contract; on the contrary, all that state court required was

‘*a placing of capital or laying out of money in a way in-

tended to secure income or profit from its employment.’’

Id., at 56, 177 N. W. at 988. See State v. Evans, 154 Minn.

95, 191 N. W. 425 (1922). Similarly, in Prohaska v.

Hemmer-Miller Development Co., 256 Ill. App. 331 (1930),

the purchase of farm land for a fractional down payment

with the remainder of the purchase price to come from the

proceeds of crops grown on the land by the promoter was

held to be an investment contract despite the absence of any

commingling of crops and the distinct separate nature of

the parcels of land. In addition, there were no pooling ar-

rangements in People v. White, 124 Cal. App. 548, 12 P. 2d

1078 (1932) and Securities and Exchange Commission v.

Payne, 35 F. Supp. 873 (S. D. N. Y. 1940).

If any doubt remained after Howey that pooling or

commingling of investor capital was not a necessary element

of a ‘‘common enterprise,’’ that doubt was laid to rest in

Blackwell v. Bentsen, 203 F. 2d 690 (Sth Cir. 1953), certio-

rari dismissed 347 U. S. 925 (1954). There the facts of the

case were almost identical to Howey, with a few exceptions:

the tracts of land sold were considerably larger (20 to 40

acres as opposed to an average lot size of 1.33 acres in

Howey), more definitely identified and separated, and each

owner was permitted to enter his land to harvest and sell

his own fruit. As in Howey, the proceeds to each owner

were based on the sale of his own fruit, and no pooling took

place. The Court in Blackwell emphasizes that com-

mingling of funds is not the essence of a ‘‘common

enterprise.’’

Petition for Writ of Certiorari 15

‘*Instead of a stock certificate evidencing a share in

a common ownership of capital assets, these purchasers

receive a deed evidencing an ownership in severalty.

But the paramount emphasis is upon the income to ac-

crue, which is the chief, if not the sole, attraction to

the purchaser.’’ 203 F. 2d at 693 (Emphasis supplied)

What, then, is the meaning of ‘‘common enterprise?’’

In Securities and Exchange Commission v. Glenn W.

Turner Enterprises, Inc., 474 F. 2d 476, 482 (9th Cir. 1973)

the court defined a common enterprise as ‘‘one in which

the fortunes of the investor are interwoven with and de-

pendent upon the efforts and success of those seeking the

investment or of third parties.’’ Under this interpretation

of Howey, the common enterprise can be between either a

group of investors or a single investor and the promoter

himself, so long as the fortunes of one are dependent upon

the efforts of the other. Thus, in Howey and Blackwell

each investor was entirely independent of the other in-

vestors; but for those who chose the promoter’s service

contract, their degree of success was entirely dependent

upon the skill and amount of effort shown by the promoter.

Thus was established a common enterprise.

A close examination of Howey and Blackwell reveal

that interweaving of fortunes of the investor and the pro-

moter does not even require that the profits of the promoter

be a direct function of the profits of the investor, i.e., cal-

culated as a percentage of the investor’s profits. In Howey

the promoter received a fixed fee plus the costs of labor

and materials for his services. In Blackwell, the promoter

received 5% of the proceeds of sale, not the profits. Thus,

in either case the investor could actually sustain a loss and

the promoter would nonetheless receive some income.

There is little, if any, difference in principle between such

7

}

|

16 Petition for Writ of Certiorari

an arrangement and a discretionary commodity account in

which the broker bases his fee on a percentage of the ab-

solute amount of the purchase or sale irrespective of

whether it resulted in a profit or loss. The element of

‘‘common enterprise’’ is nevertheless present; the investor

supplies the capital, the broker supplies the expertise, and

the fortunes of both lie solely in the hands of the broker.

In light of the foregoing analysis, it would appear that

the District Court and the Third Circuit have erroneously

construed and applied the Howey test in the instant case.

The District Court reasoned that the commonality element

of Howey was not present because there was no commin-

gling or pooling of investor funds, nor a consequent pro-

portionate sharing of profits among investors. In its

Memorandum of November 17, 1972 the Court stated:

‘*Thus it is clear that plaintiffs did not enter into dis-

eretionary trading agreements with Sicherman with

the understanding that their customers would share

ratably in the profits. Without the presence of this ele-

ment of the Howey test, plaintiffs’ individual discre-

tionary trading account with Sicherman cannot be

considered as a security within the meaning of the Se-

curities laws.’’ See App., p. Al5, (Emphasis sup-

plied.)

As the above quotation clearly indicates, the District

Court failed even to consider the possibility that the rela-

tionship between plaintiffs as individual investors and

Sicherman could suffice to satisfy the ‘‘common enterprise’’

element of Howey. To correct this erroneous interpreta-

tion of a decision of this Supreme Court, and the subse-

quent acquiescence of the Third Circuit, this Court should

grant certiorari.

PA DP RE RINT 9 MS OS a UREN

Petition for Writ of Certiorari 17

II. There Is a Conflict Among the Circuits on the Issue of

Whether a Discretionary Commodity Account Con-

stitutes a Security for Purposes of the Federal Se-

curities Laws.

Until recently, the lower federal courts had almost

universally applied the Howey test of investment contract

in such a way as to emphasize its ‘‘reliance’’ aspect (re-

liance for profits solely on the skill or expertise of another)

and had generally ignored the ‘‘commonality’’ element

when dealing with discretionary commodity accounts. The

reason for this attitude of the courts is necessarily attribu-

table either to their belief that the ‘‘common enterprise’’

element of the Howey test is mere surplusage, or that the

interpretation of ‘‘common enterprise’’ set forth in the

preceeding section is essentially correct. In either case,

the requirement of the Courts below that there be a ‘‘pool-

ing or commingling ’’ of investor capital and a ratable shar-

ing of profits prior to a finding of commonality is dis-

tinctly at odds with the approach taken by most federal

courts.

Admittedly, the traditional commodity account was

universally held not to constitute an investment contract,

for the obvious reason that trading discretion is lodged

either entirely with the client or jointly with the client

and broker and thus the ‘‘reliance’’ element of the Howey

test is not satisfied. Sinva, Inc. v. Merrill, Lynch, Pierce,

Fenner and Smith, Inc., 253 F. Supp. 359 (S. D. N. Y. 1966).

However, many cases following Howey have held, in con-

flict with the decisions of the District Court and Third

Circuit herein, expressly or impliedly, that a discretionary

commodity account constituted an investment contract un-

der the 1933 and 1934 Acts. Commercial Iron and Metal

Co. v. Bache & Co., 478 F. 2d 39 (10th Cir. 1973); Booth

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

18 Petition for Writ of Certiorari

(Sth Cir. 1970); Marshall v. Lamson Bros. € Co., 368

F. Supp. 486 (S. D. Iowa 1974); Johnson v. Arthur

Espey, Shearson, Hammill € Co., 341 F. Supp. 764

(S. D. N. Y. 1972); Anderson v. Francis I. duPont € Co.,

291 F. Supp. 705 (D. Minn. 1968) ; Berman v. Orimex Trad-

ing, Inc., 291 F. Supp. 701 (S. D. N. Y. 1968); Mahue v.

Reynolds ¢ Co., 282 F. Supp. 423 (S. D. N. Y. 1967).

In Commercial Iron & Metal Co., supra, the Tenth Cir-

cuit was faced with the question of whether a discretionary

commodity account constituted a security in deciding

whether summary judgment had been properly granted

below. The Court concluded that there was a factual ques-

tion concerning the reliance of the customer on the exper-

tise of the broker and pointedly ignored the issue of

whether there was any ‘‘pooling or commingling’’ of in-

vestor funds in a common enterprise. ‘

‘‘In our case the issue is whether the investment

scheme of Louis constitutes an investment contract. If

Louis’s statements to Duman, as alleged in appellant’s

complaint, implied that all investment decisions would

be made by Louis, while promising Commercial large

profits, we might have a discretionary account con-

stituting an investment contract even though the cop-

per contracts which lay behind the arrangements are

not themselves securities.’’ 478 F. 2d at 42.

The fact that this Court cited Mahue and Berman,

supra, as support for its position conclusively demonstrates

that in the Tenth Circuit a discretionary commodity ac-

count will be viewed as possessing all the elements neces-

sary to satisfy the Howey test of an investment contract

without inquiry into any ‘‘pooling or commingling’’ of

investor funds.

Petition for Writ of Certiorari 19

In Booth v. Peavey Company Commodity Services,

supra, the Eighth Circuit stated categorically that allega-

tions that a defendant ‘‘churned’’ a discretionary commo-

dity account states a cause of action under the Commodity

Exchange Act, the Securities Act of 1933, and the Securities

Exchange Act of 1934. The facts in Booth clearly indicate

that only a single discretionary commodity account was

involved and no ‘‘pooling or commingling’’ of investor

funds took place. Since a cause of action under both the

1933 and 1934 Acts requires the involvement of a ‘‘secu-

rity’’ as defined by those Acts, the conclusion is inescapable

that in the Eighth Circuit a single discretionary commodity

account constitutes a security. Again, this Court cited

Mahue, Berman, and Anderson as support for its conclu-

sion.

A very recent District Court decision from the South-

ern District of Iowa, Marshall v. Lamson Bros. & Co.,

368 F. Supp. 486 (S. D. Iowa 1974), indicates - that

Court’s opinion that Booth accurately states the position

of the Eighth Circuit on this question. However, feeling

that the Booth court was not called upon to discuss exten-

sively the Howey meaning of ‘‘common enterprise,’’ the

Court cogently discussed the facts and background of

Howey and concluded that a ‘‘common enterprise’’ did not

require any ‘‘pooling of funds.’’ In effect, the Marshall

Court was faced with the exact issue petitioners now seek

this Court to decide. Marshall considered the conflicting

interpretations of the Howey test represented by Vilnarik

and the instant case in the Courts below on one hand, and

the Berman, Mahue, and Booth line of cases on the other

hand. Concluding that the facts in Howey and subsequent

administrative interpretations by the S. E. C. demonstrated

that the meaning given to ‘‘common enterprise’’ by the

Milnarik court was overly restrictive, Marshall held that

20 Petition for Writ of Certiorari

a discretionary commodity account does, indeed, constitute

an investment contract even in the absence of a ‘‘pooling’’

of investor funds.

The Marshall case is important in several ways. First,

it is the only decision other than Vilnarik, up to the present

time which has analyzed this problem of the meaning of

‘‘ecommon enterprise,’’ and, in a well-reasoned opinion, con-

cluded that the Wilnarik standard simply cannot be recon-

ciled with the facts of Howey. Secondly, Marshall points

out explicitly the existence of what promises to be a con-

tinually widening conflict among the Circuits as more and

more dissatisfied commodity investors seek relief under

the federal securities laws. It frankly acknowledges the

fact that the Supreme Cvourt has left in a judicial limbo

the meaning of the term ‘‘common enerprise’’ as applied

to the test of an investment contract, and, that the lower

courts, left to their own devices, have set out in at ieart

two widely divergent directions in supplying this meaning.

In addition to Commercial Iron and Metal Co. and Booth,

a number of District Court opinions have reached the con-

clusion that a discretionary commodity account constitutes

an investment contract irrespective of any ‘‘pooling or

commingling’’ of investor capital. Johnson v. Arthur

Espey, Shearson, Hammill € Co., 341 F. Supp. 764 (S. D.

N. Y. 1972); Anderson v. Francis I. duPont € Co., 291 F.

Supp. 705 (D. Minn. 1968); Berman v. Orimer Trading,

Inc., 291 F. Supp. 701 (S. D. N. Y. 1968); VWahue v. Rey-

nolds & Co., 282 F. Supp. 423 (S. D. N. Y. 1967). Two

of these cases, Wahue and Orimer, were expressly relied

upon by the District Court below when it originally denied

respondents’ motion to dismiss. In Mahuwe, the Court

considered the contention of the defendants that the ab-

sence of ‘‘pooling or commingling’’ of funds in a disere-

tionary commodity account precluded a finding that such an

Petition for Writ of Certiorari 21

account could constitute an investment contract under

Howey. Relying on the fact that the Howey court reversed

the decision of the Court of Appeals which refused to find

a security because of the absence of a common enterprise,

the Mahue court concluded that a single discretionary

commodity account is a security even in the absence of a

‘‘pooling or commingling’’ of investor funds. 282 F. Supp.

at 429. Orimezx reached a similar conclusion on the basis

of the reasoning of the Mahue court. 291 F. Supp. at 702.

The fact that both Commercial Iron and Metal Co. and

Booth cited these two lower court opinions as support for

their respective decisions strongly indicates that the inter-

pretation of Howey in the Eighth and Tenth Circuits con-

flicts fundamentally with that of the Third Circuit in the

instant case and the Seventh Circuit in Milnarik v. M-S

Commodities, Inc., 457 F. 2d 274 (7th Cir. 1972), as ex-

panded below.

In addition to the cases concerned directly with dis-

cretionary commodity accounts, other recent decisions in-

volving other types of investments support the conclusion

that ‘‘pooling or commingling’’ of funds is not the essence

of a common enterprise as used in the Howey test. Hughes

v. Dempsey-Tegeler & Co., Inc., CCH Fed. Sec. L. Rep.

{ 94,133 (C. D. Cal. 1973) (subordination agreement be-

tween single customer and broker is an investment con-

tract) ; Securities and Exchange Commission v. Haff enden-

Rimar International, Inc., 362 F. Supp. 323 (E. D. Virginia,

1973) (seotch whisky warehouse receipts are securities) ;

Securities and Exchange Commission v. M. A. Lundy As-

sociates, 362 F. Supp. 226 (D. R. I. 1973) (scotch whisky

warehouse receipts are securities) ; Witzner v. Cordet Inter-

national, Inc., 358 F. Supp. 1262 (N. D. Ill. 1973) (sale of

area distributorship held to be a security). In effect,

these cases indicate that ‘‘pooling or commingling”’ of in-

——————————— Cr r:—‘C;7; }PRC;~™*”

ea

22 Petition for Writ of Certiorari

vestor capital has generally not been considered a sine qua

non by the courts for a determination that a particular in-

vestment scheme constitutes a security. In that respect

these cases add support to the view that a discretionary

commodity account, where investment decisions are made

soleiy by the broker, does constitute a security even absent

any ‘‘pooling or commingling’’ of investor funds.

As mentioned, the District Court in the instant case

was at first persuaded that the allegations of the complaint

adequately supported the existence of a discretionary com-

modity account, and that under Wahue and Orimex, supra,

such an account was an investment contract for purposes

of the federal securities law (App., p. A6). However,

on a renewed motion to dismiss, the Court reversed itself in

light of Wilnarik v. M-S Commodities, Inc., 457 F. 2d 274

(7th Cir. 1972), concluding that Mahue and Orimez erro-

neously interpreted the Howey standard as set forth by the

Supreme Court and that Milnarik’s requirement of a

‘*pooling or commingling’’ of investor funds comported

more closely with that test of an investment contract (App.,

pp. Al4-A15).

In Milnarik, the Court purported to apply the Howey

test to a discretionary commodity account in determining

whether it constituted an investment contract. The Court

applied Howey without an analysis of its factual back-

ground and concluded that the element of common enter-

prise required some ‘‘pooling or commingling’’ of investor

funds. Absent such pooling or commingling of investor

funds, a discretionary commodity account constituted no

more than an agency relationship between the broker and

his customer and was thus beyond the statutory definition

of a security. As noted, the Trial Court below and the

Third Circuit, in its somewhat cryptic affirmance, found

Milnarik persuasive.

Petition for Writ of Certiorart 23

It is thus clear that there is a conflict among the Cir-

cuits as to the proper application of the Howey test of an

investment contract to a discretionary commodity account.

In the Third and Seventh Circuits the state of the law ap-

pears to be that a discretionary commodity account is not

an investment contract unless there is some ‘‘pooling or

commingling’’ of investor funds. In the Eighth and Tenth

Circuits such an account will be treated as an investment

contract whether any pooling takes place or not, so long as

the investor relies solely on the broker for his profit. This

latter approach also reflect the prevailing view of the Dis-

trict Courts. In order to resolve this conflict over an im-

portant question in the administration and enforcement of

the federal securities laws, the Court should grant

certiorari.

III. Even Under the Overly-Stringent Milnarik Standard

the Amendments Offered by Plaintiffs Would Have

Supplied the Element of Commonality and Leave to

Amend the Complaint Thus Should Have Been Granted

by the Courts Below.

Petitioners are convinced that a correct interpretation

of the Howey test must invariably lead to the conclusion

that a discretionary commodity account does constitute an

investment contract. In this respect, the Courts below were

incorrect. However, even under the erroneous test of

‘‘ecommon enterprise’’ which was set forth in Wilnarik and

accepted by the Court below, petitioners submit that the

amendments offered in the District Court and to the Court

of Appeals alleged sufficient pooling of investor funds by

Sicherman in his capacity as a commodities broker to sat-

isfy the Milnarik test. Consequently, the Courts below

should have allowed the amendments to the complaint

offered by Petitioners.

24 Petition for Writ of Certiorant

In its Memorandum and Order of December 15, 1972

the District Court denied plaintiffs’ motion to amend their

complaint on the grounds that the proffered amendments

would not cure the defects in the complaint.’ Briefly, the

argument of the Court was that the ‘‘investment contracts’’

upon which the plaintiffs relied to establish jurisdiction

were the separate commodity accounts between the plain-

tiffs as individual investors and Sicherman. The amend-

ments, however, according to the court, would have done

nothing more than implicate Sicherman in the organization

of Keystone and the offering and sale of Keystone stock,

and such amendments would in no way alter the discre-

tionary account between Keystone and Sicherman. The

relationship would still be that between a single investor

(Keystone) and a single broker, and no ‘‘pooling or com-

mingling’ of investor funds would be alleged in this

relationship. It is submitted that such reasoning entirely

misses the thrust of plaintiffs’ argument.

Whast plaintiffs were attempting to clarify by their

proposed amendments was that Sicherman had utilized

Keystone Corporation as a vehicle through which he soli-

cited funds of individual investors for the purpose of pool-

ing these funds and investing in the commodities market.

It must be emphasized that one cannot separate the role

of Sicherman as an organizer of Keystone from his role as

a commpdities broker, for to do so would exalt form over

substanre. As a broker, Sicherman needed accounts, and

the larger the account the more profitable to him would be

its management. In order to tap the vast reservoir of

investors whose funds available for speculation are too

small ir isolation to compete profitably in the commodities

market, Sicherman organized Keystone and touted it as a

3. The essence of these proposed amendments is set forth., supra,

pp. 8-9.

Petition for Writ of Certiorart 25

corporation in which these small investors could combine

their funds into a significant investing body, under his

direction, and share ratably in its profits. In reality, if not

in form, he was offering an investment contract.

Had the District Court reflected on the implications of

its decision to treat Sicherman as wearifig an ‘‘organizer’s

hat’’ and a ‘“‘broker’s hat,’’ it might have realized the dis-

astrous potential it had unleashed. Essentially, the Court

has concluded that what a commodities broker could not do

under Howey without establishing an investment contract,

he can do now if he merely incorporates the pooled assets

he has solicited prior to investing them. Surely the Court

would agree that if Sicherman had approached a number

of investors and persuaded them to open discretionary ac-

counts with him with the understanding that the accounts

would be pooled, the funds invested as a unit, and the

profits or losses shared ratably by the participants, an in-

vestment contract would exist under Howey. Yet that

arrangement differs from Sicherman’s arrangement with

the Keystone investors only in the fact that Sicherman in-

corporated Keystone to represent the ‘‘pool’’ of funds.

In discussing the proper construction to be given the

term ‘‘investment contract’’, the Supreme Court has stated

that form should be disregarded for substance and em-

phasis placed upon economic reality. Securities and Exr-

change Commission v. W. J. Howey Co., 328 U. S. 293, 298

(1946). The term ‘‘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.’

Id., at 299. Had the District Court actually placed em-

phasis on the economic reality described by plaintiffs’ pro-

posed amendments, it would have been constrained to con-

clude that the ‘‘pooling or commingling’’ of funds required

by Milnarik was adequately alleged by these amendments.

WA all hota eat IS LPN eS a NL I a ce tw

26 Petition for Writ of Certiorari

With the defect cured, there remained no reason why

the District Court should not have granted plaintiffs leave

to amend. In fact, under the cases cited by the Court itself,

amendment should have been permitted once it was estab-

lished that the defect was cured. John Birch Society v.

NBC, 377 F. 2d 194 (2nd Cir. 1967) ; Moore v. Coats Co., 270

F. 2d 410 (3rd Cir. 1959). Furthermore, this Court in the

past has vigorously supported the mandate of the Federal

Rules of Civil Procedure that leave to amend should be

freely granted where justice so requires. Foman v. Davis,

371 U. S. 178, 83 S. Ct. 227 (1962).

The fact that the case had been dismissed should be no

bar to the amendments, since under Rule 15(a) the Court,

in its discretion, may grant leave to amend even after the

original complaint has been dismissed. United Steel

Workers of America, AFL-CIO v. Mesker Bros. Industries,

457 F. 2d 91 (8th Cir. 1972); Ballow v. General Electric

Company, 393 F. 2d 398 (1st Cir. 1968); Negrich v. Hohn,

379 F. 2d 213 (3rd Cir. 1967). In fact, it has been held that

a complaint may be amended as of right even after the

filing and granting of a motion to dismiss, since such a

motion is not a ‘‘responsive pleading’’ within the meaning

of Rule 15. Hanraty v. Ostertag, 470 F. 2d 1096 (10th Cir.

1972); Nolen v. Fitzharris, 450 F. 2d 958 (9th Cir. 1971).

It should be noted that either the District Court or the

Court of Appeals could have permitted the proposed

amendments to be made under 28 U. S. C. § 1653 since the

defect asserted in the original complaint was jurisdictional

in nature.* This section is to be construed liberally to

permit the action to be maintained, Coz v. Livingston, 407

F. 2d 392 (2nd Cir. 1969); John Birch Society v. NBC,

supra, and leave to amend is to be denied only if the amend-

4. “Defective allegations of jurisdiction may be amended, upon

terms, in the trial or appellate courts.”

Petition for Writ of Certiorari 27

ments would not cure the defects in the pleadings. There-

fore, since plaintiffs proposed amendments would have sup-

plied the element of ‘‘commonality’’ even as required by

Milnarik, the Courts below should have permitted the

amendments to be made and the trial to proceed on the

merits.

CONCLUSION.

Petitioners respectfully urge that the writ issue in

order to resolve a serious conflict among the Circuits and

correct the erroneous interpretation of Securities and Ex-

change Commission v. W. J. Howey Co., 328 U. S. 293, 66

S. Ct. 1100 (1946) rendered by the Courts below.

_Respectfully submitted,

Of Counsel: Davip BERGER,

Davip Bercer, P. A., GERALD J. Ropos,

Attorneys-at-Law. Davip Bercer, P. A.,

1622 Locust Street,

Philadelphia, Pa. 19103

J. Juuivs Levy,

Levy, Preate & PvurRcELL,

Seranton Electric Building,

Scranton, Pa. 18503

Warren, Hitt, HENKELMAN

& McMenamin,

Scranton Electric Building,

Scranton, Pa. 18503

Counsel for Petitioners.

Dated: March 20, 1974.

APPENDIX.

UNITED STATES COURT OF APPEALS

FOR THE THIRD Crecult.

No. 73-1072.

JOHN J. WASNOWIC and KEYSTONE

TRADERS, INC.,

Appellants,

v.

CHICAGO BOARD OF TRADE, CHICAGO

MERCANTILE EXCHANGE,

Appellees.

AppgeaL From THE Unitep Srates District Court FOR THE

Mouppte District oF PENNSYLVANIA.

Submitted Under Third Circuit Rule 12(6)

on December 13, 1973.

Before Forman, Hunter and Gartn, Circuit Judges.

Levy, Preate and Purcell

Warren, Hill, Henkelman &

McMenamin

Attorneys for Appellants

Philip F. Joh:.son

John H. Stassen

James W. Scanlon, Sr.

Lee A. Freeman, Jr.

Albert H. Aston

Kirkland & Ellis

Freeman, Freeman & Salzman

Attorneys for Appellees

(Al)

A2 Court of Appeals Judgment Order

Judgment Order.

After consideration of all the contentions raised by the

appellants, it is

ADJUDGED and OrpereEpD that the judgment of the district

court be and is hereby affirmed. See Judge Nealon’s Memo-

randum and Order of November 17, 1972.

Costs taxed against appellants.

By the Court,

James Hunter, III,

James Hunter, III, Circuit Judge

Date: Dec. 21, 1973

Attest:

Tuomas F, Quinn,

Thomas F, Quinn, Clerk

District Court Memorandum (12/31/70) A3

District Court Memorandum.

Filed Dee. 31, 1970

This class action arises under the Securities Act of

1933, the Securities Exchange Act of 1934, the Commodi-

ties Exchange Act of 1936, and the Rules and Regulations

of the Board of Trade of the City of Chicago, the Chicago

Mercantile Exchange, the Commodities Exchange Commis-

sion, the Commodities Exchange Authority, and the Se-

curities Exchange Commission. Presently before the Court

for determination are motions to dismiss the plaintiffs’

complaint for lack of jurisdiction and venue filed by de-

fendants Board of Trade of the City of Chicago (hereafter

Board of Trade) and Chicago Mercantile Exchange (here-

after Exchange). Supporting affidavits have been filed by

all parties.

Plaintiffs were customers of J. Samuel Sicherman,'

trading as J. Samuel Sicherman & Co. (hereafter Sicher-

man), a stockbroker and member of the Board of Trade

and the Exchange. Plaintiffs seek to recover damages

from the Board of Trade and the Exchange for aiding and

abetting Sicherman in his alleged violations of the afore-

said Acts of Congress and pertinent Agency Rules and

Regulations. From January, 1960, to April, 1968, Sicher-

man is alleged to have had insufficient funds in customers’

segregated accounts to pay all amounts due his customers

and to have falsely informed them of investments made on

their behalf with the Board of Trade and the Exchange.

$1.5 million dollars is sought in damages for the benefit of

the class, which exceeds 250.

At the time of the filing of the complaint, plaintiffs

secured a special order for the extraterritorial service of

process of the summons and complaint pursuant to Sec-

tion 27 of the Securities Exchange Act of 1934, 15 U.S. C.

1. Sicherman was adjudicated a bankrupt on May 6, 1969.

A4 District Court Memorandum (12/31/70)

§ 78aa.2 Defendant immediately challenged this service of

process and, in addition, objected to the venue of this ac-

tion in the Middle District of Pennsylvania.

I. Service or Process.

Plaintiffs contend that service of process perfected

upon defendants is valid under the Securities Act of 1933

and the Securities Act of 1934 because the investment ac-

counts they had with Sicherman were discretionary com-

modities accounts, a type of investment contract within the

means of the term ‘‘securities’’ as defined in the aforesaid

Acts. Securities is defined in the Securities Exchange Act

of 1934, 15 U. S. C. §78e(10),* as follows:

‘‘The term ‘security’ means any note, stock, treasury

stock, bond, debenture . . . investment contract . . .

(Emphasis supplied.)

‘‘The test (for an investment contract) is whether the

scheme involves as investment of money in the common

enterprise with profits to come solely from the efforts of

others.’’ S. E. C. v. W. J. Howey Co., 328 U. S. 293 (1946),

saa 2. Section 27 of the Securities Exchange Act of 1934 states as

ollows :

“The district courts of the United States . . . shall have exclu-

sive jurisdiction of violations of this chapter or the rules and

regulations thereunder, and of all suits in equity and actions of

law brought to enforce any liability or duty created by this

chapter or the rules and regulations thereunder. * * * Any suit

or action to enforce any liability or duty created by this chapter

or rules and regulations thereunder . . . may be brought in any

such district or in the district wherein the defendant is found

or is an inhabitant or transacts business, and process in such

cases may be served in any other district of which the defendant

is an inhabitant or wherever the defendant may be found * * *”

3. The Securities Act of 1933 contains = definition of security

virtually identical to that contained in the 1934 Act and, therefore,

it will not be treated separately.

District Court Memorandum (12/31/70) A5

quoted in Tcherepnin v. Knight, 389 U. S. 332 (1967). In

contending that their arrangement with Sicherman com-

plies with this test, plaintiffs claim that:

‘*. . . Sicherman made all the investment decisions

with respect to plaintiffs’ accounts. He managed,

supervised and invested at his discretion in the com-

modities markets with their money. He fraudulently

misrepresented to them that he would make a profit

with their money and in fact he even sent to them false

and fictitious confirmation slips of investments made on

their behalf and statements of accounts falsely showing

a ‘profit,’ thereby inducing them to invest even more

money with him. Plaintiffs at no times relied upon

their own judgments as to their investments, but relied

solely on the efforts and discretion of a promoter, i.e.,

J. Samuel Sicherman, to bring about their expected

return.’’

Defendants argue that plaintiffs were simply dealers in

commodity futures contracts, jurisdiction over which is

within the exclusive purview of the Commodities Exchange

Act of 1936 and not the Securities Act of 1933 nor the Secu-

rities Exchange Act of 1934.4.

Generally, contracts for the delivery of commodities in

the future do not constitute ‘‘investment contracts’’ within

the meaning of the term security in the Securities Exchange

Act of 1934. Berman v. Orimex Trading, Inc., 291 F. Supp.

701 (S. D. N. Y. 1968) (cocoa futures contracts) ; Sinva, Inc.

v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 253 F. Supp.

359 (S. D. N. Y. 1966) (sugar futures contracts). However,

a special type of commodity investment account known as a

discretionary commodities account can be an investment

4. The Commodities Exchange Act of 1936 contains no provision

for extraterritorial service of process as do the two Securities Acts.

Seon ae

A6 District Court Memorandum (12/31/70)

contract within the meaning of the term security whenever

the agreement between the customer and the broker in-

volves investments by the broker of his customers’ funds in

commodities futures contracts selected by the broker and

the investor relies solely on his broker for his profits.

Anderson v. Francis I. du Pont & Co., 291 F. Supp. 705 (D.

Minn. 1968); Berman v. Orimex Trading, Inc., supra;

Maheu v. Reynolds & Co., 292 F. Supp. 423 (S. D. N. Y.

1967).

Reviewing the allegations of the plaintiffs with respect

to their arrangements with their broker Sicherman in the

case at bar, I find that they are sufficient to establish that

a discretionary commodities account existed between Sicher-

man and plaintiffs and, hence, an investment contract ex-

isted as that term is used in the Securities Exchange Act

of 1934. For this reason, the service of process accom-

plished under Section 27 of the Securities Exchange Act

of 1934 is valid and therefore jurisdiction in this Court is

proper.®

Finally, although the central figure in the scheme which

caused plaintiff to suffer their losses was J. Samuel Sicher-

man, the plaintiffs have alleged that the Board of Trade and

the Exchange aided and abetted Sicherman in accomplishing

his fraudulent scheme. At some future point in this pro-

ceeding the merits of these allegations will be tested, but

for the purposes of the present motion, they must be as-

sumed to be true. Accordingly, I conclude that plaintiffs’

allegations that defendants aided and abetted Sicherman

5. Defendants’ argument on Congressional intent is without

merit. See Maheu v. Reynolds & Co., 282 F. Supp. 423 n.2 (S. D.

N. Y. 1967). Moreover, its now accepted that defrauded commodi-

ties investors, as plaintiffs allege to be in the present action, have a

federal civil remedy under the Commodities Exchange Act of 1936,

notwithstanding the absence of specific mention of such a remedy in

Ege Goodman v. J. Hertz & Co., 265 F. Supp. 440 (N. D. IIl.

1967).

District Court Memorandum (12/31/70) A7

through their negligent failure to act when they had reason-

able cause to suspect that their rules were being violated

are sufficient to state a claim against the “oard of Trade

and the Exchange. Anderson v. Francis I. du Pont & Co.,

supra; Pettit v. American Stock Exchange, 217 F. Supp. 21

(S. D. N. Y. 1963).

II. Venve.

Plaintiffs invoke the venue provisions of Section 22 of

the Securities Act of 1933 °® and Section 27 of the Securities

Exchange Act of 1934.7. They contend that the Board of

Trade and the Exchange (1) have transacted business in

the Middle District of Pennsylvania, and (2) have com-

mitted viclations of the Securities Laws in the Middle Dis-

trict. The Board of Trade asserts (1) that it is not an

inhabitant of the Middle District, (2) that it is not found

here, (3) that it does not transact business here, and (4)

that it did not commit any Securities Law violations here.

The Exchange makes the same points as the Board of Trade

and also adds that it has no connection at all with this Dis-

strict. Affidavits have been submitted by all parties, al-

though plaintiffs’ affidavits were only in the nature of ‘‘an-

swering”’ affidavits containing little or no affirmative facts.

The principal points to which the parties have ad-

dressed themselves in their briefs are whether the defend-

ants have transacted business within the Middle District

and whether violations of the Securities Laws have been

committed here. On the first issue, the parties have relied

upon the venue test as stated by the Delaware District

Court in United Industrial Corp. v. Nuclear Corp. of

America, 237 F. Supp. 971 (D. Del. 1964). The test re-

quires ‘‘. . . that the activities constitute a substantial part

6. 15 U. S. C. §77v(a), which contans a venue provision simi-

lar to the Securities Exchange Act of 1934. For this reason, venue

under the Securities Act of 1933 will not be discussed separately.

7. 15 U. S.C. § 78aa. See note 6.

Ca nbee Sith SP Sw

Peisrteds cswrtinvie 4 Lait SPO ARTs be

a

A8 District Court Memorandum (12/31/70)

of a defendant’s ordinary business, that they be continuous,

and at least of some duration.’’ 273 F. Supp. at 978. Al-

though some cases hold that this test may not be the proper

one for venue under the Securities Exchange Act, see Liv-

ingston v. Weis, Viosin, Cannon, Inc., 294 F. Supp. (D. N. J.

1968), we need not concern ourselves with the applicable

test issue at the present time for I am satisfied that the

course of action required by elementary principles of justice

is to allow plaintiffs a reasonable time in which to establish

with greater specificity that venue does exist in the Middle

District. Ferraioli v. Cantor, 259 F. Supp. 842 (S. D. N. Y.

1966). All that is currently before the Court on transact-

ing business are eleven contracts by defendants with the

Middle District which plaintiffs contend are ‘‘arguably

possible.’’ There has been no resort to even the most rudi-

mentary forms of discovery, i.e., written interrogatories,

and, as a result, the record is just too uncertain to accom-

modate a reasoned judgment on the venue issue in a case

of this importance.* Accordingly, the motion to dismiss for

improper venue will be denied at the present time without

prejudice for renewal on a later occasion. Plaintiffs will be

allowed sixty days in which to undertake whatever dis-

covery they believe necessary to establish that venue exists.°®

/s/ Wruu1am J. NEALON,

United States District Judge.

December 31, 1970.

8. For the same reason, the issue as to whether defendants have

committed any Securities Laws violations in the Middle District will

not be decided.

9. See Fed. R. Civ. P. 26, 30, 31, 33, 34 and 36. Under these

rules, for example, the plaintiffs may desire to explore Board of Trade

business operations for years other than 1968, which was the only

year discussed in an affidavit filed on behalf of the Board of Trade,

or the plaintiffs may wish to further delve into the relationship be-

tween the Exchange and their member firms who maintain branch

offices in the Middle District.

District Court Order (12/31/70) AQ

Order.

Now, December 31, 1970 in accordance with the Memo-

randum this day filed, it is Ordered that the motions of

defendants to dismiss the complaint for invalid service of

process be and the same are hereby denied. It is further

Ordered that the motions of defendants to dismiss for im-

proper venue be and the same are hereby denied without

prejudice for subsequent renewal. Plaintiffs are granted

sixty (60) days in which to undertake and complete dis-

covery to establish that venue exists in the Middle District

of Pennsylvania.

/s/ Wruu1aM J. NEALon,

United States District Judge.

ee ee Ee —EEeEEeEyTyt

» be WE Ot Ae tshtin el!

Besannaeonw aie abseil a's.

Al0 | District Court Memorandum Opinion (11/17/72)

District Court Memorandum and Order.

I Defendants have requested the court to reconsider its

meMOorandum of December 30, 1970, in which the court

denieieg defendants’ motion to dismiss for lack of jurisdic-

tion . under the Securities Exchange Act of 1934 and for

inval,jid service of process pursuant to §27 of that Act.

Deferendants’ motion was denied on the grounds thei, m

takinny the allegations of plaintiffs’ complaint as true, juris-

dictiGion was proper in that the discretionary trading account

iN CGommodities futures that the plaintiffs had with J.

Samjye] Sicherman, trading as J. Samuel Sicherman & Co.

(her¢eafter Sicherman), was an ‘‘investment contract*’ and

hencee a ‘‘security’’ within Section 2(1) of the Securities

Act ‘ of 1933, 15 U. S. C. §77b(1) and Section 3(a)(10) of

the ' Securities Exchange Act of 1934, 15 U. S. C. §78e

(a) (( 10). In so ruling, the court relied on two decisions of

the Southern District of New York, Berman v. Orimex

Traqding, Inc., 291 F. Supp. 701 (S. D. N. ¥. 1968) and

Mabheu v. Reynolds & Co., 282 F. Supp. 423 (S. D. N. Y.

19677); reargument denied 282 F. Supp. 428 (1968), both

apPdarently holding that a joint account in commodities

futuyres may constitute a ‘‘security’’ even if there was no

poohling arrangement or finding of a ‘‘common enterprise’’

as [part of the agreement alleged to be a security. See

Matheu v. Reynolds & Co., supra at 429.1. See also, I Loss

Secvurities Regulation 489, (2d Ed. 1961).

_ 1. In its memorandum, the court also cited a decision from the

Disttrict of Minnesota, Anderson v. Francis I. duPont & Co., 291

F. Supp. 705 (1968). However, unlike Maheu, supra, Anderson

did not involve a separate discretionary trading agreement between

numerous customers, but rather, in that court’s words “. . . an in-

vesttment pool . . . where individual contributions to the investment

fund] would enable him (defendant) to increase profits for all members

of thhe fund.” Anderson v. Francis I. duPont & Co., supra at 708.

District Court Memorandum Opinion (11/17/72) All

Defendants now raise for the first time? their conten-

tion that the ‘‘commonality’’ aspect of the Waheu & Ber-

man decisions conflicts with the Supreme Court’s definition

of a security as announced in S. E. C. v. W. J. Howey Co.,

328 U. S. 293 (1946) and Tcherepnin v. Knight, 389 U. S.

332 (1967). In support of their contention, they request

the court to reconsider its prior memorandum in light of

the recent Seventh Cireuit opinion in Milnarik v. M-S Com-

modities, Inc., 457 F. 2d 274 (7th Cir. 1972); cert. denied

41 U. S. L. W. 3188 (Oct. 10, 1972), which held, contrary to

Berman & Maheu, that absent a finding of a common enter-

prise among investors, a discretionary account in com-

modities futures is not a security within the meaning of the

federal securities laws. Thus, the above-cited cases repre-

sent two divergent lines of authority on this question. In-

asmuch as I agree with defendants that the Wilnarik court’s

requirement of finding a common enterprise is more con-

sistent with the Supreme Court's definition of an ‘‘invest-

ment contract’’, a review of the facts and the analysis which

that court used is in order.

In Milnarik, plaintitfs had opened a discretionary ac-

count with the defendant on the understanding that defend-

ant would use the funds to trade in commodities futures for

plaintiffs’ benefit. After varions trades on plaintiffs’ ac-

count had resulted in losses, defendant demanded an addi-

tional sum to cover the losses. Plaintiffs refused and

started an action in the Northern District of Illinois to re-

secind the agreement and recover their deposit plus interest,

arguing that their commodities account was a ‘‘security’’

2. Defendants’ first motion to dismiss was based on their con-

tention (1) that plaintiffs were simply dealers in commodities futures

contracts and that jurisdiction over commodities futures is within the

exclusive purview of the Commodities Exchange Act of 1936 and

not the Securities laws, and (2) venue was not proper here in that

the defendant Exchanges were not present here, nor did they transact

any business here.

LE OB Ne PAUL AES PE ONT FRE TMS RE

Al2 District Court Memorandum Opinion (11/17/72)

which should have been registered pursuant to Section 5 of

the Securities Act of 1933. The District Court, after as-

suming the presence of a security, dismissed the complaint

holding that the agreement resulted in a private rather

than a public offering and, therefore, was not required to

be registered. Milnarik v. M-S Commodities, Inc., 320 F.

Supp. 1149 (N. D. Ill. 1970). Without reaching the ques-

tion whether the offering was public or private, the Seventh

Circuit Court of Appeals agreed that registration was not

required, holding that the arrangement between plaintiffs

and defendant did not constitute a security. In reaching

their decision, the court reviewed both Howey and

Tcherepnin and observed that ‘‘. . . [j]udicial analyses of

the question whether particular investment contracts are

‘securities’ within the statutory definition have repeatedly

stressed the significance of finding a common enterprise.’’

Milnarik v. M-S Commodities, Inc., supra at 276. For

example, in Howey, supra, the Supreme Court defined

‘*security’’ asa

‘‘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 promotor

orathird party . . .’’ (Emphasis supplied.)

S. E. C. v. Howey, supra at 299. And, in Tcherepnin v.

Knight, supra, a case arising under the 1934 Act, the Court

identified the existence of a common — as an im-

portant aspect of their analysis:

‘‘Of the several types of instruments designated as

securities by 4 3(a)(10) of the 1934 Act, the petition-

ers’ shares most closely resemble investment con-

tracts. ‘The test [for an investment contract] is

whether the scheme involves an investment of money

in a common enterprise with profits to come solely

District Court Memorandum Opinion (11/17/72) A13

from the efforts of others.’ [S. E. C. v. W. J. Howey

Co., 328 U. S. 293, 66 S. Ct. 1100, 90 L. Ed. 1244] at

301 [66 S. Ct. at 1104]. Petitioners are participants in

a common enterprise—a money-lending operation de-

pendent for its success upon the skill and efforts of

the management of City Savings in making sound

loans. Because Illinois law ties the payment of

dividends on withdrawable capital shares to an oppor-

tionment of profits, the petitioners can expect a return

on their investment only if City Savings shows a

profit.’’

Tcherepnin v. Knight, supra at 338-339. In applying the

Howey test in Milnarik, the court found the common enter-

prise element to be totally lacking:

‘‘We find the element of commonality absent here.

Although the complaint does allege that Nelson entered

into similar discretionary arrangements with other

customers, the success or failure of those other con-

tracts had no direct impact on the profitabiltiy of

plaintiffs’ contract. Nelson’s various customers were

represented by a c.mmon agent, but they were not

joint participants in the same investment interprise.’’

Milmarik v. M-S Commodities, Inc., supra, at 276.

Further, the court quoted with approval the follow-

ing excerpts from the district court’s opinion describing

the arrangement: .

‘‘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

Al4 District Court Memorandum Opinion (11/17/72)

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 principals, the ‘secu-

rity’ ‘issued’ to the plaintiffs, their discretionary

trading account, could not be offered to anyone else.’’

‘‘This characteristic of common enterprise is com-

pletely lacking in the present case. Even assuming

that Nelson in fact solicited and collected money from

numerous parties, no allegations are made that a com-

mon enterprise existed comprised of all people pos-

sessing discretionary account contracts with him. No

claim is made that Nelson traded in a uniform manner

for each of these accounts. Even if he had so uni-

formly traded, no pooling of funds for a common pur-

pose is alleged. Nelson was apparently simply an

agent for a number of separate and distinct principals,

the plaintiffs being one such principal. The plaintiffs

in no way can be viewed as having invested in a com-

mon enterprise with other suppliers of venture capi-

tal.’* Milnarik v. M-S Commodities, Inc., 320 F. Supp.

supra at 1151-53.

This characterization of the agreement between the

parties in Milnarik could equally be used to describe the

arrangement between plaintiffs and Sicherman here. As

in Milnarik, nothing in the instant complaint suggests the

type common enterprise or pooling of funds for a common

purpose required to convert the discretionary account

plaintiffs had with Sicherman into a statutory security.

The complaint simply alleges that plaintiff Keystone

District Court Memorandum Opinion (11/17/72) Ald

Traders, Inc. engaged in ‘‘investment transactions man-

eged and supervised by J. Samuel Sicherman & Co. as a

‘discretionary commodity account’ in the commodities

market. ..’’ Plaintiffs’ complaint, para. 1(d). Although,

as in Milnarik, it is alleged that Sicherman had opened

similar accounts with numerous customers, no claim is

made ‘hat a joint enterprise existed comprised of a group

of investors holding discretionary accounts with him. In-

deed, the opposite appears to be the case. At various parts

in the complaint, plaintiffs allege that Sicherman violated

his duty to segregate and separately account for the funds

in plaintiffs’ account from other discretionary accounts.

Plaintiffs’ complaint, para. 3,10. And in plaintiffs’ answer

to defendants’ renewed motion to dismiss, plaintiffs

claimed that Sicherman failed to segregate customer’s

funds and had illegally placed them into ‘‘one big pot’’.

Thus, it is clear that plaintiffs did not enter into discre-

tionary trading agreements with Sicherman with the under-

standing that their customers would share ratably in the

profits. Without the presence of this element of the Howey

test, plaintiffs’ individual discretionary trading account

with Sicherman cannot be considered as a security within

the meaning of the Securities laws.

Plaintiffs seek to avoid this result in several ways.

First, they seek to distinguish Wilnarik by arguing that

the issues in the two cases differ greatly, inasmuch as

Milnarik dealt with whether the discretionary trading

agreements had to be registered under Section 5 of the

1933 Act, whereas the instant action is based on the de-

fendants’ allegedly aiding and abetting Sicherman’s frau-

dulent scheme in violation of the anti-fraud provisions of

the 1934 Act. While the issues in the two cases do ob-

viously differ, the ultimate question to be decided is the

same. That question is whether discretionary trading

Al6 District Court Memorandum Opinion (11/17/72)

agreements in commodities futures fit the definition of an

‘‘investment contract’’ within the meannig of the Securi-

ties Acts. As noted earlier, the Supreme Court in S. E. C.

v. Howey, supra defined the term ‘‘investment contract”’

for purposes of the registration requirements of the 1933

Act. Later, in Tcherepnin v. Knight, supra, a case arising

under the 1934 Act, the Court pointed out that the defini-

tion of a security in §2(1) of the 1933 Act is virtually

identical to the 1934 Act definition. For this reason the

Court applied the Howey definition and referred io deci-

sions under the 1933 Act for aid in construing the 1934

Act. Thus, whether the question of what is a security

arises under the 1933 Act or the 1934 Act, the test to be

applied is identical. See Milnarik v. M-S Commodities, 320

F. Supp. supra at 1150; Anderson v. Francis I. duPont &

Co., 291 F. Supp. supra at 707.

Next, plaintiffs contend that even assuming that a

finding of a common enterprise is an essential element in

the definition of a security, that this element is present

here. They seek to find the existence of a common enter-

prise in the relationship between plaintiff Keystone Trad-

ers, described as an open-ended investment company * and

3. The purpose or purposes of the corporation are:

“To be and operate as an open-end investment company; to buy,

sell, sell short, and in any other manner deal in commodities and

commodity futures, including, but not limited to, soybeans, wheat,

corn, rye, oats, lard, barley, flaxseed, cotton, cottonseed oil, crude

soybean oil, soybean meal, wool tops, wool, burlap, sugar, coffee,

cocoa, eggs, potatoes, hides, rubber, copper, zinc, lead, tin, plati-

num, silver and gold; to buy, sell, invest in, and in any manner

deal in, stocks, bonds, mortgages, debentures, trust receipts, notes,

and other securities and personal property of any sort, provided

that the value of investment securities held by the coporation

shall not equal or exceed forty percent (40%) of the corpora-

tion’s total assets (exclusive of Government securities and cash

items) on an unconsolidated basis; and to borrow money with

or without security for any of the foregoing purposes.” (Em-

phasis supplied)

District Court Memorandum Opinion (11/17/72) A17

its more than 200 stockholders. However, the agreement

which plaintiffs have alleged to constitute an ‘‘investment

contract’’ is the discretionary account which Keystone

Traders, as an individual customer, opened with Sicher-

man and not the agreement between Keystone Traders and

its stockholders. The nature of the relationship between

Keystone Traders and its own stockholders is totally un-

related to the nature of the discretionary commodity agree-

ments between each plaintiff and Sicherman. Conse-

quently, plaintiffs’ attempt to find the existence of a

common enterprise in the agreement between Keystone

Traders and its stockholders is without merit.

Finally, plaintiffs allege that, unlike Milnarik where

defendant had segregated the funds of his customers,

Sicherman’s fraudulent commingling of his customers’

funds when it was his duty to treat each discretionary ac-

count separately, provided the element of common enter-

prise lacking in Wilnarik. What plaintiffs are arguing, in

effect, is that an agreement which is not an ‘‘investment

contract’? can be transformed into an investment contract

by the unilateral fraud of one party in violation of the

original understanding. Whether an ‘investment contract’’

exists depends, like any other contract, upon the original

intention of the parties to the arrangement. As noted

earlier, plaintiffs’ complaint makes it clear that it was not

part of the original agreement for Sicherman to commingle

the funds of his customers into ‘‘one big pot’’, or that each

would share proportionately in the profits from the com-

mon fund. Hence, while Sicherman’s handling of plaintiffs’

account may amount to a fraud upon them and a breach of

his contract with them, it does not amount to the creation

of an ‘‘investment contract’’ within the meaning of the

federal securities laws. Accordingly, since jurisdiction does

not exist under either the Securities Act of 1933 or the

Al18 District Court Memorandum Opinion (11/17/72)

Securities Exchange Act of 1934, defendants’ motion to dis-

miss must be granted and the complaint dismissed.

Wriuus J. Nealon,

United States District Judge.

Dated: November 17, 1972

District Court Order (11/17/72) Al1g

Order.

Now, this 17th day of November, 1972, upon reconsid-

eration of the Court’s prior Memorandum and Order of

December 30, 1970, it is hereby ordered that the prior Order

is vacated and defendants’ motion to dismiss is granted.

Wriuum J. Neavos,

United States District Judge.

A20 District Court Memorandum Opinion (12/15/72)

District Court Memorandum and Order.

Plaintiffs have moved the court under Rule 60(b) to

vacate its order of November 17, 1972' dismissing plain-

tiffs’ complaint for lack of subject matter jurisdiction and

request permission to amend their complaint by adding the

following allegations to paragraph 20:

**20(b) Keystone Traders, Inc., with approxi-

maiely 200 stockholders is a Pennsylvania corporation

organized as aforesaid in January, 1968 ‘as an open-

end investment company,’ as shown by the publicly

published Articles of Incorporation filed with the

Commonwealth of Pennsylvania.

‘3. The purpose or purposes of the corporation

are: ‘To be and operate as an open-end investment

company: to buy, sell, sell short, and in any other

manner deal in commodities and commodity

futures, including, but not limited to, soybeans,

wheat, corn, rye, oats, lard, barley, flaxseed, cotton,

cottonseed oil, crude soybean oil, soybean meal,

wool tops, wool, burlap, sugar, coffee, cocoa, eggs,

potatoes, hides, rubber, copper, zinc, lead, tin,

platinum, silver and gold; to buy, sell, invest in,

and in any manner Jeal in, stocks, bonds, mort-

gages, debentures, trust receipts, notes, and other

securities and personal property of any sort, pro-

vided that the value of inrestment securities held

by the corporation shall not equal or exceed forty

percent (40%) of the corporations’s total assets

(exclusive of Government securities and cash

items) on an unconsolidated basis; and to borrow

1. Inasmuch as a motion under Rule 60(b) does not terminate

the ing of the tme for a . Muhs v. Acme-Hamilton Mig. Co.,

319 F. 2d (3d Cir. 1963) ; 9 Moore’s Federal Practice, © 12

UT and the time for appeal in this case expires December 18th,

the court has moved with some urgency im this matter.

District Court Memorandum Opinion (12/15/72) A21

money with or without security for any of the fore-

going purposes.” (Emphasis supplied.) Filed in

the Dept. of State, Corporation Bureau, Common-

wealth of Pa. to No. 3-1-65. 25 1348.

**21(a) Other Plaintiffs in this class action are

stockholders of Commodity Fund, Inc., also ‘an open-

end investment company,’ incorporated in Pennsyl-

vania on August 18, 1959, as shown by its Charter from

the Commonwealth of Pennsylvania.

‘3. The purpose or purposes of the corporation

are: ‘To be and operate as an open-end investment

company: to buy, sell, sell short, and in any other

manner deal in commodities and commodity fu-

tures, including but not limited to, soybeans, wheat,

corn, rye, oats, lard, barley, flaxseed, cotton, cotton-

seed oil, crude soybean oil, soybean meal, wool tops,

wool, burlap, sugar, coffee, cocoa, eggs, potatoes,

hides, rubber, copper zinc, lead, tin, platinum,

silver and gold; to buy, sell, invest in, and in any

mann:r deal in, stocks, bonds, mortgages, deben-

tures, trust receipts, notes, and other securities and

personal property of any sort, provided that the

value of investment securities held by the corpora-

tion shall not equal or exceed forty percent (40%)

of the corporation’s total assets (exclusive of

Government securities and cash items) on an un-

consolidated basis; and to borrow money, with or

without security, for any of the foregoing pur-

poses.’ (Emphasis supplied.) Filed in the Dept.

of State, Corporation Bureau, Commonwealth of

Pa. to No.

‘*20(c) The paid-in capital of the Keystone

Traders, Inc., amounted to approximately $500,000.00

A22 District Court Memorandum Opinion (12/15/72)

with over 200 stockholders who invested their monies

in this common enterprise upon sales of the capital

stock thereof to them by J. S. Sicherman and/or his

agents upon the understanding that the capital funds

so raised would be invested by the corporation in

trading in the Commodities markets and the profits

from which were to be paid over to the respective

stockholders, the said profits, if any, were to come

solely from the investment skill of Sicherman.

**20(d) $315,000 in corporate funds were there-

after fraudulently transferred by J. S. Sicherman, De-

fendant, to J. S. Sicherman & Co., and this money was

expended by Defendant Sicherman for fraudulent pur-

poses to the detriment of the stockholders of, and the

Keystone Traders, Inc.”’

Plaintiffs contend that these proposed amendments

supply the commonality element which the court found to

be lacking in its memorandum of November 17, 1972. They

also claim that the judgment should be set aside because

the court erred in not ruling on three issues allegedly raised

in plaintiffs’ complaint.2, Defendants oppose any leave to

2. Ordinarily a motion under Rule 60(b) is not the proper man-

ner in which to challenge a supposed legal error of the court or to

assert errors that are correctible on appeal. 3 Barron & Holtzoff,

Wright Ed. § 1323 n. 21. Yet this general rule may not have appli-

cation where the time for appeal has not yet expired. Under these

circumstances, the court should allow a motion to vacate in order

to correct an erroneous judgment. However, inasmuch as none of the

three issues which plaintiffs claim the court should have ruled on

were necessary to decide, no error has been made. The first two

issues dealt with alleged causes of action for morey damages which

plaintiffs claim they had against defendants under the Commodities

Exchange Act. 7 U. S. C. $1 et seq. Cf. Goodman v. H. Hentz &

Co., 265 F. Supp. 440 (N. D. Ill. 1967). Since there is no provi-

sion for extraterritorial service of process under the Exchange Act

and hence this court could not assert jurisdiction over these defend-

ants, a ruling on whether plaintiffs have stated a cause of action under

District Court Memorandum Opinion (12/15/72) A23

amend the complaint contending that (1) the reasons as-

serted by plaintiffs for vacating the court’s order are not

among those contemplated by Rule 60(b) and (2) even if

allowed to amend, plaintiffs have not cured the deficiencies

present in the original complaint.

While it is true that a party seeking to amend a com-

plaint after judgment has been entered will be successful

only if he first demonstrates that the judgment should be

set aside for one of the six reasons specified in Rule 60(b),

Swam v. United States, 327 F. 2d 4381 (7th Cir.), Cert.

denied 379 U. S. 852 (1964); 6 Wright and Miller, Federal

Practice and Procedure, Sec. 1489, and that the reasons

advanced by plaintiffs here are arguably not within the

scope of Rule 60(b), a party may, independently of Rule

60(b), amend defective allegations of jurisdiction under 28

U. S. C. See. 1653* even after judgment has been entered.

Eklund v. Mora, 410 F. 2d 731 (5th Cir. 1969).

Section 1653 provides that ‘‘[d]Jefective allegations of

jurisdiction may be amended, upon terms, in the trial or

appellate courts.’ An application under Sec. 1653 is ad-

dressed to the sound discretion of the court and is to be

construed liberally to allow amendment if it is possible to

determine from the record that jurisdiction does exist.

John Birch Society v. NBC, 377 F. 2d 194 (2d Cir. 1967) ;

Moore v. Coats Co., 270 F. 2d 410, 412 (3rd Cir. 1959).

However, where as here, the proposed amendment would

not cure the defect in the original pleading, the motion to

2. (Cont’d.)

the Commodities Exchange Act would serve no legal purpose. Simi-

larly, the third issue, which dealt with plaintiffs’ legal theory under

the Securities Exchange Act, was also not necessary to decide in view

of the court’s disposition of the jurisdictional issue.

3. This section permits amendment of all jurisdictional allega-

tions rather than merely allegations of diversity of citizenship as pro-

vided by the former section. Revisers Notes of 1948 Code.

A24 District Court Memorandum Opinion (12/15/72)

amend should be denied. Cox v. Livingston, 407 F. 2d 392

(2d Cir. 1969) ; John Birch Society v. NBC, supra.

Plaintiffs argue that the amended complaint would

show that the element of a common enterprise exists in the

relaiionship between Keystone Traders, Inc., and its more

than 200 stockholders. They claim that Sicherman and/or

his «gents sold stock of Keystone Traders, Inc. to the share-

holders with the understanding that the corporation would

in furn invest the funds so raised in the commodities

marxet, thus establishing a common enterprise. This may

wel] be true, but as pointed out in the prior memorandum,

thisis not the ‘‘investment contract’’ upon which plaintiffs

hav: relied to establish jurisdiction. Plaintiffs’ original

conPlaint, which would still be intact except for the pro-

posid amendment to paragraph 20, clearly points out that

the agreements which plaintiffs have alleged constitute an

««jprestment contract’’ are the separate discretionary ac-

eoults which Keystone Traders, as well as other customers,

hadWith J. Samuel Sicherman & Co. and not the agreement

betveen Keystone Traders and its stockholders. The theory

up@ which plaintiffs have based their cause of action is

tha 2 class of investors and customers of Sicherman, of

whim Keystone Traders was one, opened discretionary ac-

couts with Sicherman on the understanding that Sicher-

ma! Would use the funds to trade in commodities futures.

Hovever, instead of investing his customers’ funds, Sicher-

ma! fraudulently converted these funds to his own use.

It 3 J- S. Sicherman & Co. that is charged, as a defendant,

wi? Such fraud and the co-defendants are sought to be held

lia'le under the Act on the theory that they aided and

abtted Sicherman in the fraudulent scheme. It was on the

is of these discretionary accounts which the class of

;,ntiffs had with Sicherman that plaintiffs asserted juris-

gion under the federal securities laws. The court has

District Court Memorandum Opinion (12/15/72) A25

already ruled that these separate discretionary accounts

did not constitute an investment contract within the mean-

ing of the securities laws. To allow the amendment sought

here would not change the result. Consequently, plaintiffs’

motion to vacate the court’s order of November 17, 1972,

will be denied. .

Wriuuuam J. NEALoN,

United States District Judge.

Dated: December 15, 1972

Filed: Same Date.

OR OE IE RSI A

A26 District Court Order (12/15/72)

Order.

Now, this 15th day of December, 1972, in accordance

with the memorandum filed this day, it is ordered that

plaintiffs’ motion to vacate the court’s order of November

17, 1972, and their motion to amend their complaint are

hereby denied.

Wri J. NEALoN,

United States District Judge.