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Law School Case Brief

United States v. Leonard - 529 F.3d 83 (2d Cir. 2008)


In applying the factors for determining whether a given financial instrument or transaction constitutes an investment contract -- and, therefore, a security -- for purposes of the federal securities laws, courts can (and should) look beyond the formal terms of a relationship to the reality of the parties' positions to evaluate whether the reasonable expectation was one of significant investor control.


Defendants were indicted for selling investment interests in limited liability companies (LLCs) that were formed to finance the production and distribution of motion pictures. All the charges centered on defendants' failure to disclose accurately the sales commissions they received for selling investment units. The jury found defendants guilty of conspiracy to commit securities and mail fraud, in violation of 18 U.S.C.S. § 371, and securities fraud, in violation of 15 U.S.C.S. §§ 78j and 78ff. Defendants appealed.


Was there sufficient evidence to prove that the investment units were securities within the meaning of 15 U.S.C.S. § 78c(a)(10)?




The court affirmed the convictions and held that an investment contract was the only type of security that potentially applied to the case. Although the LLCs' organizational documents suggested otherwise, the court held that the finding that there was no reasonable expectation of investor control was supported by evidence showing that the investors' managerial rights did not accrue until the LLCs were fully organized, that the investors did not negotiate any terms of the LLC agreements, that the investors had no experience in film or entertainment, and that the investors were particularly dependent on centralized management.

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