Securities & Exchange Commission v. Shields
744 F.3d 633
| 10th Cir. | 2014Background
- SEC alleges Shields, GeoDynamics, and related entities sold four oil and gas JVAs nationwide to ~60 investors across 28 states, raising ~$5M under Turnkey drilling/participation structure.
- JVAs labeled as general partnerships grant investors voting rights but keep management with GeoDynamics as managing venturer; investors had limited ability to influence contracts and information access.
- SEC contends investors relied on promoter-managed ventures for profits, while GeoDynamics claimed JVAs were non-securities because they resemble general partnerships.
- District court dismissed under Rule 12(b)(6) for lack of plausible securities claim; SEC appeals asserting investment contracts under Howey.
- Court conducts Rule 12(b)(6) de novo review of the complaint; Howey framework governs whether an investment is a security; focus on substance over form.
- Court ultimately reverses, holding the allegations plausibly rebut the presumption and show investors relied on others’ efforts to profit.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether JVAs constitute investment contracts under Howey. | SEC argues investors relied on Shields/GeoDynamics for profits. | Shields/GeoDynamics contend JVA is a general partnership not a security. | Yes, allegations plausibly show investment contracts. |
| Whether presumption that general partnership interests are not securities can be rebutted. | SEC should apply Williamson factors to show reliance on others' efforts. | Shields urges recognition of presumption remains controlling. | Presumption rebutted; Williamson framework applied to show potential security. |
| Whether SEC pleaded sufficient facts to state a plausible Howey third prong claim. | SEC alleges lack of meaningful investor control and dependence on promoter. | Defendants argue investors had substantial voting rights and control. | Allegations raise a plausible claim that control was illusory and profits depended on others. |
Key Cases Cited
- Howey Co. v. SEC, 328 U.S. 293 (Supreme Court (1946)) (investment contract test establishes security scope)
- SEC v. Edwards, 540 U.S. 389 (Supreme Court (2004)) (treatment of securities definitions across statutes; substantial similarity to Edwards/Howey)
- Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981) (three Williamson examples to rebut the general partnership presumption)
- Banghart v. Hollywood Gen. P’ship, 902 F.2d 805 (10th Cir. 1990) (presumption can be rebutted by facts showing limited partnership-like control)
- Merchant Capital, LLC v. Merch. Capital, LLC, 483 F.3d 747 (11th Cir. 2007) (discussion of control, information access, and investor reliance under Howey)
- Maritan v. Birmingham Props., 875 F.2d 1451 (10th Cir. 1989) (post-investment conduct informs intent and security analysis)
- Crowley v. Montgomery Ward & Co., 570 F.2d 877 (10th Cir. 1978) (definition of the essential managerial efforts affecting profits)