SEC v. W.J. Howey Co.
   HOME

TheInfoList



OR:

''Securities and Exchange Commission v. W. J. Howey Co.'', 328 U.S. 293 (1946), was a case in which the
Supreme Court of the United States The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...
held that the offer of a land sales and service
contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
was an "investment contract" within the meaning of the
Securities Act of 1933 The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and after ...
() and that the use of the
mail The mail or post is a system for physically transporting postcards, letter (message), letters, and parcel (package), parcels. A postal service can be private or public, though many governments place restrictions on private systems. Since the mid ...
s and
interstate commerce The Commerce Clause describes an enumerated power listed in the United States Constitution ( Article I, Section 8, Clause 3). The clause states that the United States Congress shall have power "to regulate Commerce with foreign Nations, and among ...
in the offer and sale of these
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
was a violation of §5 of the Act, .. It was an important case in determining the general applicability of the federal securities laws. The case resulted in a test, known as the Howey test, to determine whether an instrument qualifies as an "investment contract" for the purposes of the Securities Act: "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."


Facts

The
defendant In court proceedings, a defendant is a person or object who is the party either accused of committing a crime in criminal prosecution or against whom some type of civil relief is being sought in a civil case. Terminology varies from one jurisdic ...
s, W. J. Howey Co. and Howey-in-the-Hills Service, Inc., were
corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
s organized under the laws of the state of
Florida Florida is a state located in the Southeastern region of the United States. Florida is bordered to the west by the Gulf of Mexico, to the northwest by Alabama, to the north by Georgia, to the east by the Bahamas and Atlantic Ocean, and to ...
.
William John Howey William John Howey (January 19, 1876 – June 7, 1938) was an American real-estate developer, citrus grower and Republican politician from Florida. He founded and served as mayor for the town of Howey-in-the-Hills, Florida. He developed and ...
owned large tracts of
citrus ''Citrus'' is a genus of flowering plant, flowering trees and shrubs in the rue family, Rutaceae. Plants in the genus produce citrus fruits, including important crops such as Orange (fruit), oranges, Lemon, lemons, grapefruits, pomelos, and lim ...
groves in Florida. Howey kept half of the groves for its own use and sold
real estate contract A real estate contract is a contract between parties for the purchase and sale, exchange, or other conveyance of real estate. The sale of land is governed by the laws and practices of the jurisdiction in which the land is located. Real estate ca ...
s for the other half to finance its future developments. Howey would sell the land for a uniform price per
acre The acre is a unit of land area used in the imperial Imperial is that which relates to an empire, emperor, or imperialism. Imperial or The Imperial may also refer to: Places United States * Imperial, California * Imperial, Missouri * Imp ...
(or per fraction of an acre for smaller parcels) and convey to the purchaser a
warranty deed A warranty deed is a type of deed where the grantor (seller) guarantees that they hold clear title to a piece of real estate and has a right to sell it to the grantee (buyer), in contrast to a quitclaim deed, where the seller does not guarantee ...
upon payment in full of the purchase price. The purchaser of the land could then lease it back to the service company Howey-in-the-Hills, via a service contract, which would tend to the land, and harvest, pool, and market the produce. The service contract gave Howey-in-the-Hills "full and complete" possession of the land specified in the contract and left no
right of entry Right of entry refers to one's right to take or resume possession of land, or the right of a person to go onto another's real property without committing trespass. It also refers to a grantor's power to retake real estate from a grantee in the cas ...
or any right to the produce harvested. Purchasers of the land had the option of making other service arrangements, but W. J. Howey, in its advertising materials, stressed the superiority of Howey-in-the-Hills's service. Howey marketed the land through a
resort A resort (North American English) is a self-contained commercial establishment that tries to provide most of a vacationer's wants, such as food, drink, swimming, lodging, sports, entertainment, and shopping, on the premises. The term ''resort ...
hotel A hotel is an establishment that provides paid lodging on a short-term basis. Facilities provided inside a hotel room may range from a modest-quality mattress in a small room to large suites with bigger, higher-quality beds, a dresser, a ref ...
it owned in the area and promised significant profits in the sales pitch it provided to those who expressed interest in the groves. Most purchasers of the land were not Florida residents or
farmer A farmer is a person engaged in agriculture, raising living organisms for food or raw materials. The term usually applies to people who do some combination of raising field crops, orchards, vineyards, poultry, or other livestock. A farmer mig ...
s. Rather, they were business and professional people inexperienced in
agriculture Agriculture or farming is the practice of cultivating plants and livestock. Agriculture was the key development in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that enabled people to ...
and lacking the skill or equipment to tend to the land by themselves.


Procedural history

Howey had not filed any
registration statement In the United States, a registration statement is a set of documents, including a prospectus, which a company must file with the U.S. Securities and Exchange Commission before it proceeds with a public offering. See also *Securities Act of 1933 *F ...
with the
Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
. The SEC filed
suit A suit, lounge suit, or business suit is a set of clothes comprising a suit jacket and trousers of identical textiles worn with a collared dress shirt, necktie, and dress shoes. A skirt suit is similar, but with a matching skirt instead of tr ...
to obtain an
injunction An injunction is a legal and equitable remedy in the form of a special court order that compels a party to do or refrain from specific acts. ("The court of appeals ... has exclusive jurisdiction to enjoin, set aside, suspend (in whole or in pa ...
forbidding the defendants from using the mails and instrumentalities of interstate commerce in the offer and the sale of unregistered and nonexempt securities, in violation of 5(a) of the
Securities Act of 1933 The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and after ...
. The
United States District Court for the Southern District of Florida The United States District Court for the Southern District of Florida (in case citations, S.D. Fla. or S.D. Fl.) is the federal United States district court with territorial jurisdiction over the southern part of the state of Florida.. Appeals ...
denied the injunction, and the
United States Court of Appeals for the Fifth Circuit The United States Court of Appeals for the Fifth Circuit (in case citations, 5th Cir.) is a federal court with appellate jurisdiction over the district courts in the following federal judicial districts: * Eastern District of Louisiana * M ...
affirmed. The US Supreme Court then granted
certiorari In law, ''certiorari'' is a court process to seek judicial review of a decision of a lower court or government agency. ''Certiorari'' comes from the name of an English prerogative writ, issued by a superior court to direct that the record of ...
.


Majority opinion

Justice
Frank Murphy William Francis Murphy (April 13, 1890July 19, 1949) was an American politician, lawyer and jurist from Michigan. He was a Democrat who was named to the Supreme Court of the United States in 1940 after a political career that included serving ...
, writing for the majority, identified the major legal issue in this case as whether or not the contracts that Howey was selling (which were basically
leaseback Leaseback, short for "sale-and-leaseback", is a financial transaction in which one sells an asset and leases it back for the long term; therefore, one continues to be able to use the asset but no longer owns it. The transaction is generally done f ...
agreements) constituted an "investment contract" within the meaning of § 2(a)(1) of the Securities Act of 1933. Murphy reasoned that while the term "investment contract" was left undefined by the Act, it had been used in state
blue sky laws A blue sky law is a state law in the United States that regulates the offering and sale of securities to protect the public from fraud. Though the specific provisions of these laws vary among states, they all require the registration of all se ...
to cover a broad array of contracts and other schemes to raise
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used f ...
in a way to secure some
income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
or
profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory intere ...
from the use thereof. Thus, the Court concluded that Congress had written the term into the statute in recognition of its previously adopted
common law In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipresen ...
meaning. Murphy then formulated one of the US Supreme Court's earliest tests to determine whether an instrument qualifies as an "investment contract" for the purposes of the Securities Act (which later came to be referred to as the ''Howey'' test): "In other words, an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise." "The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value." Murphy determined that the contracts in issue met all four prongs of this test and so W. J. Howey could be held liable for violating § 5 of the Securities Act of 1933. Furthermore, Murphy held that the fact that some of the investors chose to use services other than those of Howey-in-the-Hills to tend to the groves was irrelevant because §5 forbids the offer of unregistered securities as well as the sale of them.


Dissenting opinion

Justice Frankfurter wrote a brief
dissenting opinion A dissenting opinion (or dissent) is an opinion in a legal case in certain legal systems written by one or more judges expressing disagreement with the majority opinion of the court which gives rise to its judgment. Dissenting opinions are no ...
. He first suggested the Supreme Court to defer to the findings of both lower courts, particularly the District Court, as it was the finder of fact in this case. He also noted that the purchasers were permitted to inspect the land before they bought it, and they were allowed the option of using their own agricultural services.


See also

* List of United States Supreme Court cases, volume 328 *
William John Howey William John Howey (January 19, 1876 – June 7, 1938) was an American real-estate developer, citrus grower and Republican politician from Florida. He founded and served as mayor for the town of Howey-in-the-Hills, Florida. He developed and ...


References


External links

* * {{caselaw source , case = ''Securities and Exchange Commission v. W. J. Howey Co.'', {{ussc, 328, 293, 1946, el=no , cornell =https://www.law.cornell.edu/supremecourt/text/328/293 , courtlistener =https://www.courtlistener.com/opinion/104302/securities-and-exchange-commission-v-w-j-howey-co/ , findlaw = https://caselaw.findlaw.com/us-supreme-court/328/293.html , googlescholar = https://scholar.google.com/scholar_case?case=12975052269830471754 , justia =https://supreme.justia.com/cases/federal/us/328/293/case.html , loc =http://cdn.loc.gov/service/ll/usrep/usrep328/usrep328293/usrep328293.pdf 1946 in United States case law United States Supreme Court cases United States Supreme Court cases of the Stone Court United States securities case law W. J. Howey Co. William John Howey