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United States District Court for the District of Massachusetts
March 16, 2020, Decided; March 16, 2020, Filed
CIVIL ACTION NO. 19-11027-WGY
[*280] MEMORANDUM AND ORDER
Do the words "nine months" mean nine months? That is the odd question the Court confronts in deciding whether this plaintiff has stated a claim for relief under the Securities Exchange Act of 1934. See First Am. Compl. Demand Jury ¶¶ 1(a), 31 ("Am. Compl."), ECF No. 12 (citing 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5). The text of the Securities Exchange Act, 15 U.S.C. §§ 78a-78qq, seems straightforward: it exempts notes that mature in nine months or less from regulation as a "security." See 15 U.S.C. § 78c(a)(10) (providing that, although "[t]he term 'security' means any note," it does not encapsulate "any note . . . which has a maturity at the time of issuance of not exceeding nine months") (the "Nine Month Exclusion"). Yet even a seemingly clear statute sometimes reveals hidden meanings after a closer look. See, e.g., Yates v. United States, 574 U.S. 528, 135 S. Ct. 1074, 1079, 191 L. Ed. 2d 64 (2015) (ruling, under the Sarbanes-Oxley Act, that a fish is not a "tangible object," although a fish certainly can be touched). This is such a statute. The Supreme Court instructs courts that "the phrase 'any note' should not be interpreted to mean literally [**2] 'any note,' but must be understood against the backdrop of what Congress was attempting to accomplish" with the Securities Exchange Act and its earlier counterpart, the Securities Act of 1933, 15 U.S.C. §§ 77a-77aa. Reyes v. Ernst & Young, 494 U.S. 56, 63, 110 S. Ct. 945, 108 L. Ed. 2d 47 (1990). Further, while no court in the First Circuit has considered the issue, several courts and the United States Securities and Exchange Commission ("SEC") construe the Nine-Month Exclusion to exempt only certain high-quality debt issued to banks (so-called "commercial paper"). See, e.g., SEC v. R.G. Reynolds Enters., Inc., 952 F.2d 1125, 1132 (9th Cir. 1991) (citing Securities Act Release No. 33-4412, 26 Fed. Reg. 9158 (1961)); see generally Wendy Gerwick Couture, The Securities Acts' Treatment of Notes Maturing in Less than Nine Months: A Solution to the Enigma, 31 Sec. Reg. L.J. 496 (2003).
Yet this approach clashes with the statutory text's plain meaning. See In re Hill, 562 F.3d 29, 32 (1st Cir. 2009). Although the Court agrees that the Nine Month Exclusion exempts commercial paper, nothing in the Securities Exchange Act's [*281] text, purpose, or legislative history cabins the Nine Month Exclusion to commercial paper alone. Instead, a better reading of the Nine Month Exclusion flips the presumption that "any note" is a security under the Securities Exchange Act. That is, though in the usual course courts are to presume that "any note" is a security, notes that mature [**3] in nine months or less (such as the one before the Court, which matures in nine months on the dot) are presumptively not securities. In the Court's eyes, this reading of the statute is more correct.
Full case includes Shepard's, Headnotes, Legal Analytics from Lex Machina, and more.
444 F. Supp. 3d 279 *; 2020 U.S. Dist. LEXIS 45316 **; Fed. Sec. L. Rep. (CCH) P100,763; 2020 WL 1248336
AUCTUS FUND, LLC, Plaintiff, v. SAUER ENERGY, INC., Defendant.
Subsequent History: Appeal terminated, 10/14/2021
Prior History: Auctus Fund, LLC v. Sauer Energy, Inc., 393 F. Supp. 3d 139, 2019 U.S. Dist. LEXIS 121681, 2019 WL 3290541 (D. Mass., July 22, 2019)
Securities Exchange Act, amended complaint, Convertible, commercial paper, promissory note, maturity, courts, exempt, legislative history, show cause, Securities Act, short-term, presume, instruments, issuance, default judgment, misrepresentation, default, federal securities, misleading, exceeding, proceeds, shares
Civil Procedure, Default & Default Judgments, Default Judgments, Entry of Default Judgments, Securities Law, Securities Exchange Act of 1934 Actions, Implied Private Rights of Action, Burdens of Proof, Elements of Proof, Scope of Provisions, Definitions, Covered Securities, Postoffering & Secondary Distributions, Scope of Provisions, Pleadings, Heightened Pleading Requirements, Fraud Claims, Civil Liability Considerations, Securities Litigation Reform & Standards