Securities and Exchange Commission v. Charles E. Edwards case brief

Securities and Exchange Commission v. Charles E. Edwards case brief summary
540 U.S. 389 (2004)

CASE SYNOPSIS

Petitioner Securities and Exchange Commission (SEC) brought an action against respondent seller of payphones under sale-and-leaseback agreements with a fixed return, alleging that the agreements were investment contracts subject to the securities laws. Upon the grant of a writ of certiorari, the SEC appealed the judgment of the United States Court of Appeals for the Eleventh Circuit which held that the agreements were not investment contracts.

CASE FACTS
Under the sale and leaseback agreements, purchasers of payphones received fixed monthly amounts and the seller operated and maintained the payphones and collected coin revenues from the payphones. The seller contended that the agreements were not investment contracts subject to regulation as securities, since the purchasers did not participate in the earnings of the enterprise, but rather received a fixed rate of return, and had a contractual entitlement to the return which was thus not derived solely from the efforts of others.

DISCUSSION

• The United States Supreme Court held, however, that the provision for a fixed rate of return did not preclude the agreements from being investment contracts and thus securities subject to federal regulation. 
• While an investment contract required profits to come solely from the efforts of others, such profits were the return the purchasers sought on their investments, and not the profits of the scheme in which they invested. 
• Further, the fact that the purchasers bargained for a return on their investments did not mean that the return was not also expected to come solely from the efforts of others.

CONCLUSION
The judgment holding that the payphone sale-and-leaseback agreements were not investment contracts was reversed, and the case was remanded for further proceedings.



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