SEC v. W. J. Howey Co.

From Wikipedia, the free encyclopedia

Jump to navigationJump to search

Securities and Exchange Commission v. W. J.

Howey Co.

Supreme Court of the United States

Argued May 2, 1946

Decided May 27, 1946

Full case Securities and Exchange Commission v. W. J.

name Howey Co. et al.

Citations 328 U.S. 293 (more)

66 S. Ct. 1100; 90 L. Ed. 1244; 1946 U.S.

LEXIS 3159; 163 A.L.R. 1043

Case history

Prior U.S. District Court for the Southern District of

Floridadenied injunction, 60 F.Supp.440; Fifth
Circuit Court of Appeals affirmed,
151 F.2d 714; certiorari granted, 327 U.S. 773,
66 S.Ct. 821

Subsequent Rehearing Denied October 14, 1946

Holding

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.

Court membership

Chief Justice
vacant

Associate Justices
Hugo Black · Stanley F. Reed
Felix Frankfurter · William O. Douglas
Frank Murphy · Robert H. Jackson
Wiley B. Rutledge · Harold H. Burton

Case opinions

Majority Murphy, joined by Stone, Black, Reed, Douglas,

Burton, Rutledge

Dissent Frankfurter

Jackson took no part in the consideration or decision of the

case.

Laws applied

Securities Act of 1933

Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946),[1] was a case in
which the Supreme Court of the United States held that the offer of a land sales and
service contract was an "investment contract" within the meaning of the Securities Act of 1933(15
U.S.C. § 77b) and that the use of the mails and interstate commerce in the offer and sale of
these securities was a violation of §5 of the Act, 15 U.S.C. § 77e. 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." [1]

Contents

• 1Facts
• 2Procedural history
• 3Majority opinion
• 4Dissenting opinion
• 5See also
• 6References
• 7External links

Facts[edit]
The defendants, W. J. Howey Co. and Howey-in-the-Hills Service, Inc., were corporations organized
under the laws of the state of Florida. William John Howey owned large tracts of citrus groves in
Florida. Howey kept half of the groves for its own use and sold real estate contracts for the other half
to finance its future developments. Howey would sell the land for a uniform price per acre (or per
fraction of an acre for smaller parcels) and convey to the purchaser a warranty deed 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 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 hotel 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 farmers. Rather, they were business and professional people
inexperienced in agriculture and lacking the skill or equipment to tend to the land by themselves.

Procedural history[edit]
Howey had not filed any registration statement with the Securities and Exchange Commission. The
SEC filed suit to obtain an injunction 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 United States District Court for the
Southern District of Floridadenied the injunction, and the United States Court of Appeals for the Fifth
Circuit affirmed. The US Supreme Court then granted certiorari.

Majority opinion[edit]
Justice Frank Murphy, 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 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 to cover a broad array of contracts and other schemes to raise capital in a way to
secure some income or profit 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 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." [1]
"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." [1]
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[edit]
Justice Frankfurter wrote a brief dissenting opinion. 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.