Thursday, November 7, 2013

Reves v. Ernst & Young case brief

Reves v. Ernst & Young case brief summary
494 U.S. 56 (1990)

Petitioners sought review of a judgment from the United States Court of Appeals for the Eighth Circuit, which held that demand notes issued by the Farmers Cooperative of Arkansas and Oklahoma were not "securities" within the meaning of § 3(a)(10) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78c(a)(10).

Petitioners, a class of holders of demand notes issued by a farmers' cooperative (the co-op), filed suit against respondent accounting firm. Petitioners alleged that respondent violated the antifraud provisions of the Securities Exchange Act of 1934 (the Act) by failing to follow generally accepted accounting principles in its audit of the co-op.

  • The Supreme Court reversed the judgment of the appellate court, which held that the Act's antifraud provisions did not apply because the demand notes were not "securities" within the meaning of 15 U.S.C.S. § 78c(a)(10). 
  • Using the "family resemblance" approach, the Court concluded the notes were "securities." 
  • The Court considered several factors in making its determination. The co-op sold the notes to raise capital and purchasers bought them to earn a profit in the form of interest. 
  • The co-op offered the notes over an extended period to a broad segment of the public. The advertisements characterized the note as "investments." 
  • Finally, there was no risk-reducing factor to suggest the notes were not securities.

The Court reversed the judgment and remanded the case for further proceedings where the demand notes held by petitioners and issued by a farmers cooperative fell under the "note" category of instruments that were "securities" under the Securities Exchange Act of 1934. The court also concluded the demand notes did not fall within the exclusion for short-term notes.

Suggested Study Aids For Securities Regulation Law
Securities Regulation in a Nutshell, 10th (Nutshell Series)
Securities Regulation: Examples & Explanations, 5th Edition
Securities Regulations: The Essentials

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