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Ave. Capital Mgmt. II, Ltd. P'ship v. Schaden - 843 F.3d 876 (10th Cir. 2016)

Rule:

When considering whether investors' investments in a limited liability company (LLC) are investment contracts, so long as the investors retain ultimate control, they have the power over the investment and the access to information about it which is necessary to protect against any unwilling dependence on managers. It is not enough, therefore, that the investors in fact rely on others for the management of their investment. The interests could constitute investment contracts only if the LLC's managers and officers are irreplaceable or otherwise insulated from the investors' ultimate control. 

Facts:

This securities-fraud case arises out of a transaction to restructure Quiznos's debt. In this transaction, multiple investment funds ("Avenue" and "Fortress") purchased equity in Quiznos. After Quiznos's financial condition plummeted, Avenue and Fortress sued former Quiznos’ managers and officers, claiming that they had fraudulently misrepresented Quiznos's financial condition and invoking § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.

Issue:

Did the district court err when it dismissed the securities-fraud causes of action concluding that plaintiff failed to identify facts showing their newly acquired interest in Quiznos constituted investment contracts?

Answer:

No

Conclusion:

The transaction did not involve investment contracts, and Avenue and Fortress failed to properly preserve their current arguments characterizing the interests as stock or instruments commonly known as securities. An investor who has the ability to control the profitability of his investment, either by his own efforts or by majority vote in group ventures, is not dependent upon the managerial skills of others. The greater the control acquired by Avenue and Fortress, the weaker the justification to characterize their investments as investment contracts. Avenue and Fortress are sophisticated and informed investors that could make informed investment decisions and intelligently exercise their control over Quiznos's operations; thus, Avenue and Fortress controlled the profitability of their investments. What Avenue and Fortress purchased was not an investment contract.

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