770 F. Supp. 2d 142
D.D.C.2011Background
- Bowdoin is charged in an indictment with unlawful sale of unregistered securities, wire fraud, and related offenses in connection with AdSurfDaily (ASD).
- ASD described itself as a multi-level marketing online advertising business, operating through ad rotators and related websites, offering rebates and commissions to advertisers.
- ASD purported to pay rebates up to 125% of advertising costs and to distribute commissions on referrals, with payments funded largely by new member money.
- Indictment alleges Bowdoin misrepresented ASD’s legitimacy, revenue streams, and SEC registration status, and concealed prior securities violations.
- Bowdoin moved to dismiss on grounds of statutory vagueness of the securities definition and because ASD’s business model could not be an investment contract under Howey.
- The court denied Bowdoin’s motion, determining Howey’s investment-contract framework is not unconstitutionally vague on its face and ASD’s model could satisfy it.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether 'investment contract' is unconstitutionally vague on its face. | Bowdoin argues Howey is vague and enables ad hoc enforcement. | Bowdoin contends the Howey test is overbroad and uncertain to apply. | Not unconst. vague; Howey controls. |
| Whether the auto-surf (ASD) model could constitute sale of investment-contract securities. | ASD returns are profits from others’ efforts; pooling and profits meet Howey. | ASD provided a service; payments to members were not investment profits. | Indictment could allege investment-contract securities under Howey. |
| Whether the Howey test should be applied to the specific facts to determine sufficiency of the indictment. | Economic reality supports investment contract characterization. | No sufficient showing ASD’s model satisfied Howey. | Court finds the allegations could permit a jury to find an investment contract. |
Key Cases Cited
- Howey v. United States, 328 U.S. 293 (1946) (investment contract test; flexible, substance over form)
- SEC v. Joiner Leasing Corp., 320 U.S. 344 (1943) (substance over form; defines proof in enforcement actions)
- United States v. Sampson, 371 U.S. 75 (1962) (indictment sufficiency; tests for criminal charges)
- United States v. Rybicki, 354 F.3d 124 (2003) ( vagueness review when First Amendment not implicated)
- Teamsters v. Daniel, 439 U.S. 551 (1979) (test applied in light of substance and economic reality)
- Life Partners, Inc. v. SEC, 87 F.3d 536 (D.C. Cir. 1996) (investor profits depend on promoter’s efforts)
- Liberty Property Trust v. Republic Properties Corp., 577 F.3d 335 (D.C. Cir. 2009) (Howey framework treated as applied in circuit context)
- SEC v. Banner Fund International, 211 F.3d 602 (D.C. Cir. 2000) (horizontal commonality; pooling of funds)
- Skilling v. United States, 561 U.S. 358 (2010) (presumption of validity; vagueness not implicated where not core First Amendment)