Auctus Fund, LLC v. Sauer Energy, Inc.

Auctus Fund, LLC v. Sauer Energy, Inc.

Opinion

 [*280]  MEMORANDUM AND ORDER

I. INTRODUCTION

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.

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