Fed. Sec. L. Rep. P 95,331jim Long, et al., Plaintiffs-appellants, v. Shultz Cattle Company, Incorporated, an Oklahomacorporation, and William B. Shultz, Defendants-appellees, 896 F.2d 85 (5th Cir. 1990)

We deny the petition for panel rehearing, but write to express our reasons for doing so.

The sole issue in this appeal was whether the plaintiffs-appellants Jim Long, Jerome Atchley, and Jon and Linda Coleman (collectively "plaintiffs") were entitled to a directed verdict or a judgment n.o.v. holding that, as a matter of law, certain cattle feeding consulting agreements offered by defendants-appellees William Shultz and Shultz Cattle Company, Inc. (collectively "SCCI") constituted investment contracts, and thus securities, under the Securities Act of 1933 and the Securities Exchange Act of 1934 (the "Securities Acts"). In a unanimous panel opinion, we reversed the judgment of the district court, which was entered in favor of SCCI based on a jury finding that the agreements were not investment contracts. We held that the evidence presented at trial was so overwhelmingly in favor of the plaintiffs that no reasonable jury could have arrived at this verdict.

In determining that SCCI's consulting agreements were securities, the panel applied the seminal test for an investment contract set forth in SEC v. W.J. Howey Co., 328 U.S. 293, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946). Our analysis of the second prong, or "common enterprise" element, of the Howey test relied, in part, on principles developed in SEC v. Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974), a case in which the Fifth Circuit held that trading in individual discretionary trading accounts fell within the ambit of the term investment contract under the Securities Acts.

SCCI now requests an en banc rehearing to allow the Fifth Circuit to reconsider Continental Commodities and its approach to the "common enterprise" component of the Howey test for an investment contract. SCCI characterizes our circuit's approach as a broad form of "vertical commonality" that "effectively eliminates entirely the second prong of the Supreme Court's three-part Howey test."

The Fifth Circuit's approach to determining the existence of a common enterprise is at odds with the stricter approaches taken in other circuits that have addressed the common enterprise issue.¹  We recognized in our panel opinion that under the commonality theory adopted in Continental Commodities, "the second and third prongs of the Howey test may in some cases overlap to a significant degree and ... our standard has been criticized for that reason." 881 F.2d at 141. In our view, however, this case is not the appropriate vehicle by which to reconsider the path we chose in Continental Commodities.

Criticisms aimed at Continental Commodities inevitably revolve around the wisdom of applying the full weight of federal securities laws to situations, such as the typical trading account cases, that involve stand-alone transactions between an adviser and an investor for a flat commission--a factual context in which circuit courts disagree as to whether the common enterprise element of the Howey test is satisfied. The economics and federal securities law policies of Continental Commodities are simply not present in the case at bar.

In its suggestion for rehearing, SCCI attempts to distinguish the facts of this case from a typical Howey common enterprise by characterizing its consulting agreements as individual service contracts for the rendering of professional advice to sophisticated, actively involved investors for an upfront flat fee. Although the relationship between the plaintiffs and SCCI certainly included the rendition of professional investment advice for a flat fee,²  the investment package offered by SCCI was far more encompassing, involving hundreds of investors in a cattle raising operation that SCCI actively supervised, pooling of assets to purchase the cattle (resulting in the ownership by each investor of an undivided interest in the cattle poundage in one or more pens), and sharing among investors of the risks of cattle loss and of various feeding expenses. Moreover, as we concluded in the panel opinion, " [d]espite the formal representations [in the consulting agreements] that investors would actively manage their own cattle-feeding businesses, the evidence was undisputed that in reality, SCCI's clients did not have the wherewithal to manage a cattle-feeding business and relied instead on SCCI to make all essential managerial decisions."³  881 F.2d at 139.

Focusing on the economic realities underlying SCCI's investment scheme, rather than on the legal jargon SCCI used to clothe the deal, the common enterprise in this case is closely analogous to the one found by the Supreme Court in Howey. Like Howey, investors here were business and professional people who resided in locales far removed from their nominally owned cattle, and who possessed neither the knowledge nor the desire to buy, raise, and market cattle on an individual basis. SCCI investors were attracted by the "10 to 1 write off potential" of their investment and looked to SCCI's touted experience in the cattle business and commodity market to manage their cattle purchases. Only a large-scale cattle feeding operation could provide SCCI with the shopping list of variables--the geographic location and proven economic efficiency of feedlots, the amount, type and price of feed, and the age, size, price, and projected slaughter-readiness dates for cattle--necessary for realization of its advertised investment scheme, which centered on accurate tax deferral of income and adequate control over the risk of loss critical to effective hedging.

In the conventional commodity futures trading case, an individual investor's expectations as to the profitability of his discretionary trading account may well be unaffected by the scale of the brokerage operation or, indeed, by whether there are any other investors at all. By contrast, the economics of a broadly marketed, large-scale cattle feeding operation, in which investors' expectations of profitability are dependent upon the managerial and cattle raising expertise of others and on the economies of scale offered by the underlying cattle feeding venture, are fundamental Howey economics.

We recognize the importance of a workable definition of the term "investment contract," one that fully implements the remedial purposes of the Securities Acts without unduly burdening commercial enterprises that Congress never intended to be covered under the federal securities laws. The instant case, however, does not lie in that shadowy region of investment contracts where--until Congress or the Supreme Court acts to further define the term--circuit court guidance is needed to refine the Howey test. On the contrary, because the investment schemes SCCI offered to its investors were quintessential Howey security transactions, the common enterprise gloss that circuit courts, including our own, have placed on the Howey test cannot affect the conclusion that SCCI's consulting agreements were subject to the federal securities laws. Under any circuit's definition of common enterprise, the result in this case would remain unchanged. Thus, any attempt to use the facts of this case to overhaul our circuit's definition of common enterprise would only further confound an already perplexing and controversial area of securities law.

Because we are not compelled by this case to reevaluate Continental Commodities, we refrain from doing so. In a factual context more analogous to that of Continental Commodities, and subject to the requirements of our en banc procedure, we would consider taking a fresh look at the policy issues raised in that case.

No member of the panel nor Judge in regular active service of this Court having requested that the Court be polled on rehearing en banc (Federal Rules of Appellate Procedure and Local Rule 35), the Suggestion for Rehearing En Banc is DENIED.