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Law School Case Brief

Robinson v. Glynn - 349 F.3d 166 (4th Cir. 2003)


There has been a relaxation of the requirement that an investor rely only on others' efforts in order to meet the definition of investment contract; the word "solely" has been omitted in restatements of the Howey test. And neither the United States Court of Appeals for the Fourth Circuit nor its sister circuits have required that an investor expect profits "solely" from the efforts of others. Requiring investors to rely wholly on the efforts of others would exclude from the protection of the securities laws any agreement that involved even slight efforts from investors themselves. It would also exclude any agreement that offered investors control in theory, but denied it to them in fact. Agreements do not annul the securities laws by retaining nominal powers for investors unable to exercise them. 


Plaintiff James Robinson filed suit in federal district court against Thomas Glynn, Glynn Scientific, Inc., and GeoPhone Company, LLC, alleging that Glynn committed federal securities fraud when he sold Robinson a partial interest in Geophone Company. The district court found that Robinson's membership interest in GeoPhone was not a security within the meaning of the federal securities laws, and it dismissed Robinson's securities fraud claim on a motion for summary judgment. Robinson appealed.


Was Robinson's membership interest a "security" within the meaning of the federal securities laws?




The appellate court affirmed the trial court, holding that Robinson's interest could not be considered a security because Robinson was an active and knowledgeable executive at GeoPhone, rather than a mere passive investor in that company. He had the power to appoint two board members, was a board member himself, and was a member of the executive committee to which extensive responsibility had been delegated. He also served as treasurer and the company had to get his approval to incur any indebtedness outside the normal course of business. Robinson's lack of technological expertise did not prevent him from meaningfully exercising his management rights given that he reviewed the development of GeoPhone's technology and financial records and disapproval of certain disbursements and proposed licenses. His interest was not a stock in that GeoPhone's members did not share in the profits in proportion to the number of shares owned, his interests were not freely negotiable. The parties viewed Robinson's investment as a membership interest. The court held that to rule otherwise would unjustifiably expand the scope of the federal securities laws by treating an ordinary commercial venture as an investment contract.

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