In SEC v. Merchant Capital, LLC, No. 06-10353 (11th Cir. Apr. 4, 2007), the court reversed a judgment against the Securities and Exchange Commission after a bench trial. The SEC alleged that the defendants violated federal securities law by selling "investment contracts" that took the form of interests in "registered limited liability partnerships" or RLLPs. The RLLPs invested in pools of consumer debt that the lenders couldn’t collect within 180 days.
The Eleventh Circuit held that the trial judge clearly erred in finding an absence of the traits that characterize "investment contracts" under SEC v. W. J. Howey Co., 328 U.S. 293 (1946), that the RLLPs constituted investment contracts (and therefore securities) under federal securities law, and that the trial judge clearly erred in finding that the defendants did not make material misstatements and omissions.
The decision illustrates the substance-over-form approach to defining what counts as a security under Howey. It also highlights the inability of general cautionary language about investment risks to excuse failure to disclose information on specific risks that have arisen.