Westlake v. Abrams

ORDER

This action was brought by a purchaser of two commodity futures options from Lloyd, Carr & Co. (hereinafter Lloyd, Carr) under the Securities Act of 1933, 15 U.S.C. § 77a et seq. (hereinafter the Securities Act); the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (hereinafter the Exchange Act); the rules and regulations promulgated thereunder by the Securities and Exchange Commission (SEC); the Commodity Exchange Act, 7 U.S.C. § 1 et seq., as amended by the Commodity Futures Trading Commission (CFTC) Act of 1974; the rules and regulations promulgated thereunder by the CFTC; and the common law. The case is currently before the Court on plaintiff Westlake’s motion to vacate and/or reconsider this Court’s May 15,1981, order denying class action. Also before the Court are motion of Bushnell, Gage & Reizen; Mr. Bushnell; Mr. Gage; Mr. Reizen; Ms. Shecter; and Mr. Henry (the aforesaid defendants will be collectively referred to herein as either “the defendants” or the firm of “Bushnell, Gage & Reizen”) for summary judgment.

FACTUAL AND PROCEDURAL BACKGROUND

The complaint, filed March 30, 1978, alleges that the plaintiff purchased on October 14, 1977, and October 31, 1977, from defendant Lloyd, Carr, a commodity futures option broker, certain interests denominated “commodity futures options.” The plaintiff contends that these interests constituted securities within the meaning of section 2(1) of the Securities Act and section 3(a)(10) of the Exchange Act. 1 In ad *1334 dition, the plaintiff claims that Lloyd, Carr did not properly register alleged securities with the SEC as required by section 5 of the Securities Act. It is further alleged that the sale of the aforesaid securities involved fraudulent and misleading statements by Lloyd, Carr to investors within the meaning of sections 12 and 17(a) of the Securities Act and section 10(b) of the Exchange Act and Rule 10b-5 of the SEC rules promulgated thereunder.

In the alternative the plaintiff argues that if the interests which he purchased are not considered securities, then Lloyd, Carr violated the Commodity Exchange Act, as amended, by selling interests in commodity futures options without being properly registered with the CFTC as a futures commission merchant as required by Rule 32.3 of the CFTC and by selling commodity futures options not preceded or accompanied by a disclosure statement meeting the requirements of Rule 32.5 of the CFTC. The plaintiff further alleges that the sale by the defendants of the aforesaid commodity futures options were in violation of section 405 of the CFTC Act of 1974 and Rule 32.9 of the CFTC. Finally, the plaintiff alleges that the activities of the defendants herein amounted to common, law fraud and deceit.

The plaintiff seeks to recover actual and punitive damages for himself and for a class of similarly situated purchasers for losses resulting from their purchases, with interest thereon, together with the costs of this suit and reasonable attorney’s fees. 2

The defendants, whose motions for summary judgment are now before the Court for consideration, were members of the law firm of Busnell, Gage & Reizen and were named as defendants because the plaintiff alleges that they acted as general counsel for Lloyd, Carr and were, by virtue of and through their activities as general counsel, “controlling persons” of Lloyd, Carr within the meaning of section 15 of the Securities Act and Section 20 of the Exchange Act, and in addition were “aiders and abettors” in the illegal acts, practices, and course of business allegedly pursued by Lloyd, Carr.

Originally, defendant Gage moved to dismiss and for summary judgment on May 30, 1978. On July 18, 1979, the Court entered an order denying defendant Gage’s motion to dismiss but granting his motion for summary judgment. In denying defendant Gage’s motion to dismiss, the Court held that the allegations contained in the plaintiff’s complaint were sufficient to withstand a motion to dismiss as to the questions of whether the plaintiff’s interest in commodity futures options were securities and whether the complaint pled fraud with sufficient particularity. The Court reserved judgment on the issue of whether an implied private cause of action was created under the Commodity Exchange Act, as amended. In granting defendant’s motion for summary judgment, the Court held that defendant Gage could not be found legally culpable for the allegedly unlawful activity of Lloyd, Carr.

Subsequently, the plaintiff moved the Court to vacate or reconsider its order granting defendant Gage’s motion for summary judgment, urging that he had not had sufficient opportunity to conduct discovery in order to demonstrate defendant Gage’s involvement in the activities upon which *1335 liability could be based. On September 14, 1979, this Court vacated its order of July 18, 1979, in order to allow the plaintiff time for further discovery so that he might attempt to establish a factual basis to overcome defendant Gage’s motion for summary judgment.

Following the Court’s order vacating summary judgment, both the plaintiff and defendant Gage conducted substantial discovery, including the depositions or sworn statements of defendant Gage, plaintiff Westlake, and Frank Post, former staff counsel to Lloyd, Carr. In addition, documents in defendant Gage’s law offices in Southfield, Michigan, were examined. The plaintiff and defendant Gage briefed the issues in light of the additional discovery and the Clerk resubmitted defendant Gage’s motion for summary judgment to this Court for determination.

By order dated November 26, 1980, published at 504 F.Supp. 337 (N.D.Ga.1980), the Court denied Gage’s motion for summary judgment. Therein, the Court determined that a genuine issue existed as to whether defendant Gage was a “controlling person” of Lloyd, Carr under the federal securities laws. Id. at 350. In addition, the Court determined that there was a genuine issue remaining as to whether the plaintiff’s investment constituted a security under the federal securities laws. 3 Id. at 342. Furthermore, the Court held that Rule 10b-5 of the SEC rules promulgated under section 10(b) of the Exchange Act was inapplicable to the case at bar. Id. at 346. Further, the Court found that sections 12 and 15 of the Securities Act and section 20(a) of the Exchange Act were not applicable to defendant Gage because no jury could reasonably find that defendant Gage caused the plaintiff to purchase the two commodity futures options at issue. Id. at 347. As a consequence of finding defendant Gage not liable to the plaintiff under section 12 of the Securities Act, the Court dismissed any action against defendant Gage as an aider and abettor with respect to Lloyd, Carr’s violation of section 12. Id. at 347-48.

Subsequently, in an order dated December 23, 1980, this Court granted the plaintiff’s motion for leave to file an amended complaint naming additional parties. On February 24, 1981, the plaintiff filed his amended complaint naming as additional defendants: the law firm of Bushnell, Gage & Reizen; Mr. Bushnell, Jr.; Mr. Reizen; Ms. Sheeter; and Mr. Henry. The aforementioned additional defendants were all members of the law firm Bushnell, Gage & Reizen and occupy the same position in relation to the plaintiff in this suit as does defendant Gage. Therefore, the previous rulings by this Court are equally applicable to the additional defendants named above.

The plaintiff submitted a motion for class certification on July 13, 1979, pursuant to Fed.R.Civ.P. 23. Upon consideration of the briefs filed by the parties, the Court focused its attention on the issue of whether this case presents questions of law or fact common to the class as required by Rule 23(a)(2) and, if such common questions are presented, whether they predominate over any questions affecting only individual members as required by Rule 23(b)(3). In denying class certification on May 14, 1981, *1336 the Court found that the plaintiff failed to meet his burden under Rule 23(a)(2) and 23(b)(3) because each of several thousand plaintiffs would have to prove that he relied significantly on the advice of an individual Lloyd, Carr salesman with respect to when to exercise his commodity option in order to state a claim under the Securities Act.

In that May 14,1981 order, the Court also denied class certification of the common law fraud claims on the grounds that proving alleged fraud concerning oral misrepresentation was individual in nature and the plaintiff failed to prove any standardized representations. See Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 482 F.2d 880, 882 (5th Cir.1973). In addition the Court noted that because class certification of claims based on alleged representations would bring into issue various state common law standards, the case is inappropriate for class certification. May 14, 1981 order at p. 8. The Court, furthermore, granted the defendant’s motion for summary judgment on the third and fourth counts of the amended complaint (the Commodity Futures Trading Commission Act claims) and denied class certification on those same claims as well. The CFTC statute and rules forming in part the basis of the plaintiff’s complaint are 7 U.S.C. §§ 6b and 6k and 17 C.F.R. §§ 32.3, 32.5, and 32.9. Basing its decision on Rivers v. Rosenthal & Co., 634 F.2d 774 (5th Cir.1980), the Court found no implied cause of action to exist under the provisions relied on by the plaintiff. However, in light of the recent Supreme Court decision in New York Mercantile Exchange v. Leist, 456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982), holding that an implied private right of action does exist under the CFTC Act, the Court will reconsider herein the plaintiff’s CFTC Act claims with regard to class treatment in this action.

On May 28, 1981, the plaintiff filed the pending motion to vacate and/or reconsider the order denying class action. Thereafter, pursuant to substantial discovery which includes among other things the deposition of Lloyd, Carr’s former “staff counsel” Frank Post and the affidavits of defendants Mr. Bushnell; Mr. Gage; Mr. Reizen; Ms. Shecter; and Mr. Henry, the defendants, filed the pending motions for summary judgment. 4 The motions for summary judgment and class certification are based upon the remaining claims under the Security Act, the CFTC Act, and common law fraud. Consequently, the arguments put forth by the parties in favor of and in opposition to the respective motions are essentially identical; therefore, the Court considers below the motions and arguments concurrently.

PLAINTIFF’S MOTION FOR RECONSIDERATION OF ORDER DENYING CLASS CERTIFICATION AS WELL AS DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT

Before addressing the specific factual and legal arguments put forth by the parties, it is necessary to identify the relevant issues and applicable burdens of proof. With regard to the motion concerning class certification under Fed.R.Civ.P. 23, 5 the basic is *1337 sues to be resolved herein are whether this case presents questions of law or fact common to the class as required by Rule 23(a)(2) and, if such common questions are presented, whether they predominate over questions affecting only individual members as required by Rule 23(b)(3). 6 Should the Court resolve the aforesaid issues in favor of the plaintiff, the Court would then address the issues of whether the plaintiff would be an adequate class representative and whether a class action would be superi- or to other methods of adjudication of this case.

When moving for class certification, the plaintiff bears the burden of demonstrating that the Rule 23 requirements are fulfilled. Payton v. Abbott Labs, 83 F.R.D. 382, 387 (D.Mass.1979); Amswiss International Corp. v. Heublein Inc., 69 F.R.D. 663, 665 (N.D.Ga.1975); Shaw v. Mobil Oil Corp., 60 F.R.D. 566, 568 (D.N.H.1973). If the allegations in the complaint, which must be taken as true for purposes of demonstrating whether a class action should be granted, allege facts which demonstrate a common and interrelated course of fraudulent conduct, any individual issues relative to facts or law are outweighed by common questions. In re Home-Stake Productions Co. Securities Litigation, 76 F.R.D. 351, 369 (N.D.Okl.1977). Further, the determination of whether there is a proper class action does not depend on the existence of a cause of action. Miller v. Mackey International, Inc., 452 F.2d 424 (5th Cir.1971). As stated in Miller, “there is absolutely no support in the history of Rule 23 or legal precedent for turning a motion under Rule 23 into a Rule 12 motion to dismiss or a Rule 56 motion for summary judgment by allowing the district judge to evaluate the possible merits of the plaintiff’s claims at this stage of the proceedings.” Id. at 428. Therefore, the question of whether the plaintiff fails to withstand a motion for summary judgment is distinct from the question of whether the plaintiff fails to state a class action.

The standard for summary judgment, on the other hand, does require an inquiry into the merits of the parties’ claims. Under Rule 56, the party seeking summary judgment bears the exacting burden of demonstrating that there is no actual dispute as to any material fact. Warrior Tombigbee Transportation Co., Inc. v. M/V Nan Fung, 695 F.2d 1294, 1296 (11th Cir.1983). Impossible Electronics Techniques, Inc. v. Wackenhut Protective Systems, Inc., 669 F.2d 1026 (5th Cir.1982). Summary judgment should be granted when the moving party is entitled to judgment as a matter of law, when it is clear what the truth is, and when no genuine issue remains for trial. National Screen Service Corp. v. Poster Exchange, Inc., 305 F.2d 647 (5th Cir.1962). In assessing whether the party moving for summary judgment has borne his burden of demonstrating want of actual dispute as to a material fact, the Court should view all evidence introduced and all factual inferences from that evidence in the *1338 light most favorable to the party opposing the motion, and all reasonable doubts about the facts should be resolved in favor of the nonmoving litigant. Impossible Electronics, supra, 669 F.2d at 1031. However, denials or allegations by the nonmoving party in the form of legal conclusions unsupported by specific facts have no probative value and are thus insufficient to create issues of material fact that would preclude summary judgment. SEC v. Bonastia, 614 F.2d 908, 914 (3rd Cir.1980); Broadway v. City of Montgomery, 530 F.2d 657, 660 (5th Cir.1976); Benton-Volvo-Metaire, Inc. v. Volvo Southwest, Inc., 479 F.2d 135, 139 (5th Cir.1973).

The Court now turns to the arguments of the parties under the Security Act, the CFTC Act, and common law fraud. Each area of the law will be addressed seriatim below.

Securities Act

Under the Securities Act, the plaintiff has alleged that Lloyd, Carr did not properly register with the SEC the alleged securities at issue as required by section 5 of the Securities Act. Further, the plaintiff asserts that the sale of the alleged securities involved fraudulent and misleading statements by Lloyd, Carr to investors within the meaning of section 12 of the Securities Act. Furthermore, the plaintiff asserts that the Lloyd, Carr commodity futures options fall within the definition of a security under section 2(1) of the Securities Act. In addition, the plaintiff asserts that by their activities as general counsel for Lloyd, Carr, the defendants are liable as “controlling persons” of Lloyd, Carr under section 15 of the Securities Act. The plaintiff also asserts that the case should be certified for class action treatment.

Under this Court’s prior ruling, in order for the plaintiff’s interests (which the plaintiff argued were either a “naked options” or under a “discretionary account”) to fall within section 2(1), the interests must meet the definitional test of an investment contract prescribed in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1102-1103, 90 L.Ed. 1244 (1943), where the Supreme Court stated that:

[A]n investment contract for the purposes of the Securities Act means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.

This definition was refined in United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975), in which the Court quoted the definition from Howey and restated it as “an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” 421 U.S. at 852, 95 S.Ct. at 2060. The Fifth Circuit has further interpreted and elaborated the third prong of the Howey test to be “whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.” SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 483 (5th Cir.1974), quoting SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973).

The defendants suggest that this Court should abandon the broad interpretation of the third prong of the Howey test as espoused in SEC v. Koscot Interplanetary, Inc. in favor of a strict or literal interpretation of Howey as expressed in the recent majority opinion of Villeneuve v. Advanced Business Concepts Corp., 698 F.2d 1121 (11th Cir.1983). The Eleventh Circuit has granted rehearing en banc of the Villeneuve decision which in effect vacates the previous opinion and judgment and stays the mandate thereof. Eleventh Circuit Rule 26. The Securities Act, it is emphasized, is remedial in nature and therefore should be broadly construed. Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967). With these principles in mind, the Court rejects the defendants’ suggestion in favor of the Koscot interpre *1339 tation which this Court followed in its previous ruling. 504 F.Supp. at 342. 7

In its November 26, 1980, order, this Court reached the following determination:

Because plaintiff has stated in his deposition that despite the confirmation letter he received from Lloyd, Carr he was in fact relying on Lloyd, Carr to advise him when to exercise his option, the Court finds that a genuine issue of material fact continues to exist as to whether the third Howey [S.E.C. v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946)] element is met and declines to grant Gage’s motion for summary judgment inasmuch as it is based on the ground that no security was sold under the Howey test. If the plaintiff is able to prove at trial that he did rely significantly on the efforts of Lloyd, Carr, he will have proved all three elements required for finding the existence of a security under Howey.

504 F.Supp. at 342-43. Relying on the above quotation, the Court on May 14,1981, denied the plaintiff’s motion for class certification on the Securities Act claim on the ground that in order to prevail under the Securities Act each of the 4,700 putative class members would have to show that he relied significantly on the advice of Lloyd, Carr with respect to when to exercise his commodity option. May 14, 1981, order p. 6. Consequently, the Court concluded that the plaintiff failed to establish (1) that common questions of law or fact existed among the class members as required by Rule 23(a)(2) and (2) that common questions of law or fact predominate over individual questions to be determined as required by Rule 23(b)(3). 8

The plaintiff now moves the Court to reconsider its May 14, 1981, order and to certify the class under Rule 23 on the basis that the Lloyd, Carr option can be shown to be a security under the Securities Act without reference to particular proof of dependency by individual class members. In support of that contention, the plaintiff posits essentially five arguments: (1) Lloyd, Carr sold “de facto” discretionary trading accounts to customers; (2) the underlying commodity option contracts were “essentially” naked; (3) the half-options sold by Lloyd, Carr were by nature investment contracts; (4) the interests sold by Lloyd, Carr were “evidence of indebtedness”; and (5) the Lloyd, Carr scheme is commonly known as a security.

In addition to vigorously opposing each argument put forth by the plaintiff in favor of class certification, the defendants filed motions for summary judgment on the securities claims, among others, arguing on the basis of facts developed through further discovery that no genuine issue of material fact exists with regard to whether the plaintiff’s investment interests with Lloyd, Carr are not securities and that the defendants are not “controlling persons” under the Securities Act. Specifically, the defendants contend that there is no doubt under the facts presented that the plaintiff’s investment interests are not securities because they are neither “naked options” nor are they within the category of “discretionary accounts” under the federal law.

After perusal and consideration of the filed motions and voluminous briefs, the Court concludes that the determinative issue to be resolved with regard to section 2(1) of the Securities Act is whether the Lloyd, Carr scheme constitutes a “discre *1340 tionary account” thus falling within the definition of a “security” under the federal law.

“De Facto” Discretionary Accounts

While it is established that a particular commodity futures contract is not itself a security, Moody v. Bache & Co., 570 F.2d 523, 525 (5th Cir.1978), the Fifth Circuit, along with other courts, has recognized that discretionary accounts in commodity futures contracts may be “investment contracts” and thus “securities” for purposes of the securities acts. 9 This is because such discretionary accounts may contain the Howey elements of (1) investment, (2) common enterprise, and (3) dependence on the essential managerial efforts of others. SEC v. Continental Commodities, Corp., 497 F.2d 516 (5th Cir.1974).

The third criterion of the Howey definition focuses upon the dependency of the investor on the entrepreneurial or managerial skills of a promoter or third party. See SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 483 (5th Cir.1974). An investor who has the ability to control the profitability of his investment is not dependent upon the managerial skills of others. The distinction between a discretionary and a non-discretionary account is whether the broker or the investor has ultimate control over the investment decisions. A non-discretionary account is one in which the investor makes all the trading decisions and issues orders to the broker; whereas, a discretionary account is generally one in which the broker has authority to execute trades without consulting the investor. See Mullis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 492 F.Supp. 1345, 351 n. 687 (D.Nev.1980).

The defendants argue that the instant case does not involve a discretionary account because the plaintiff retained ultimate control over his investment. ' The plaintiff in this case purchased one coffee option and one sugar option. The defendants specifically allege that Lloyd, Carr sent and the plaintiff received a “confirmation and invoice” confirming the plaintiff’s order to purchase the coffee option. When the option was purchased, Lloyd, Carr sent the plaintiff a letter enclosing two copies of the contract and an exercise authorization form. The contract, under the heading “NOTES,” states as follows:

(b) important — to realize any equity that may have accrued in this option you MUST complete, sign and return the accompanying Exercise Authorization so that we receive it BEFORE the termination date. We accept no responsibility for equity in any option that lapses if such Authorization is not so received.

The accompanying letter instructed the plaintiff as to the exercise authorization:

The # 3 copy — Exercise Authorization must be signed by you and returned to us. Unless you specify otherwise, the option will be exercised on the termination date. If you desire an earlier exercise date, indicate you instructions in the space provided.

The exercise authorization form reads in part as follows:

I hereby authorize and request you to exercise this (these) option(s), on _or as soon thereafter as is practical and consistent with your standard procedures, to purchase and sell the underlying futures contract(s).

The plaintiff signed the exercise authorization and returned it to Lloyd, Carr without inserting any date in the blank. As a result, the defendants argue that the plaintiff instructed Lloyd, Carr to exercise his option on the termination date, if profitable. Furthermore, according to the defendants, the coffee option was exercised on the termination date. While the plaintiff’s coffee option appears to have been exercised by Lloyd, Carr, the defendants have neither alleged nor shown that the plaintiff realized money from that exercise or was even informed that the option was exercised. In addition, the defendants failed to controvert the allegation that the plaintiff never *1341 signed an authorization form in connection with the sugar option.

The defendants further argue that the plaintiff’s account with Lloyd, Carr was non-discretionary based on the plaintiff’s second deposition taken on May 14, 1982. In that deposition, the plaintiff admitted that his Lloyd, Carr account was more like his non-discretionary account with his stockbroker than with his discretionary commodities account previously held with a broker other than Lloyd, Carr. Westlake Deposition p. 161, May 14, 1982. However, the plaintiff in that deposition explained: “[i]t was my understanding that what Mr. Bala [a former Lloyd, Carr broker] would do, he would give me information and tell me when the option should be exercised. He would tell me when the options were to be exercised and since I did not have the information, it was a matter of [Mr. Bala’s] going ahead and exercising it.” Id. at 162-3. The plaintiff went on to say that he did not think Mr. Bala would have exercised an option if the plaintiff had told him not to do so. Id. Furthermore, the defendant points out that in that deposition the plaintiff did not deny signing the “coffee” authorization form; rather, the plaintiff indicated that he thought that he signed the authorization form and sent it in to take care of an “administrative detail.” Id., at 160. The defendants argue that because the plaintiff admits to signing and sending to Lloyd, Carr the authorization form that the authorization form is therefore conclusive evidence which shows that the plaintiff retained ultimate authority over the account. Consequently, the defendants assert that the account was nondiscretionary and thus not a security under the federal laws.

The main thrust of the plaintiff’s position is that even if the plaintiff signed the authorization form, the dependency prong of the Howey test is satisfied in this case because it makes no difference what the investors thought or were told because in fact their options were exercised only upon the approval of James Carr. To support his position, the plaintiff relies on the testimony of Mr. Hagen, a former Lloyd, Carr broker, who swore in another suit (the Brien trial) that Mr. Carr was the only one who could authorize the execution of the options. 10 The plaintiff also relies on the sworn statement of Lori Curtis, who was a back office employee involved with the direct operation of Lloyd, Carr. In that statement, Ms. Curtis attests as follows:

Q: Did you ever experience any occasion on which you were directed to exercise the option prior to the termination date?

A: I believe that may have 'occurred once or twice during my time there.

Q: Who was it, what person notified you that the option should be exercised on those one or two occasions?

A: The information would come to me from the branch manager, who would tell me that the client had requested an early exercise date.

Q: Before you took any action to exercise that option, was it necessary for you to contact Jim Carr?

A: Yes

Q: What would Mr. Carr’s input be with respect to the option exercise?

A: It was ultimately his decision whether to proceed with exercising an option prior to its natural termination or not.

Curtis Statement pp. 14 & 15, July 27,1981. The plaintiff, in addition, points out that Mr. Martin, another former Lloyd, Carr broker, also testified in the Brien trial that Mr. Silver, a former Lloyd, Carr customer who invested in Cocoa, requested that his option be exercised because the price was high and the market was unsteady. Mr. Carr refused to sell at that time because he thought the market would go up higher. The market dropped; consequently, Mr. Silver lost $1,000 in profit. 11 Ms. Curtis, in *1342 addition, stated that upon the exercise of options, the profits were not automatically disbursed to the investor as provided by the Lloyd, Carr literature; rather, Mr. Carr had to approve the issuance of any disbursement of funds. Curtis Statement p. 15, July 27, 1981.

The crux of the defendants’ opposition to the plaintiff’s argument is that the contentions are unsupported by record facts. As pointed out by the defendants, with regard to motions for class certification under Rule 23 and for summary judgment under Rule 56, the Court should only rely on facts in the record. As shown above, the plaintiff relies on the testimony given in the Brien trial by David Hagen on January 19 and 22, 1979, and by Douglas Martin on January 30, 1979. 12 Furthermore, the plaintiff relies on the sworn statement of Lori Curtis given on July 27, 1981. A copy of the testimony given at the Brien trial and the Curtis sworn statement have been filed in this Court and therefore have been made a part of the record of the instant action. While the record facts at issue are not settled or judged to be established in this action, they are sufficiently reliable to be considered in determining whether common questions exist among putative class members or whether there remain for trial any genuine issues of material fact. Furthermore, the Court rejects the defendants’ opposition to consideration of the facts in question because the Court determines that the evidence presented could be otherwise usable at trial. See 6 J. Moore & J. Wicker, Moore’s Federal Practice ¶56.15[7] (2d ed. 1982).

Based upon the above record facts, among others, the plaintiff contends that Lloyd, Carr investors were so dependent upon Lloyd, Carr that they were unable to exercise meaningful powers over their investments. While the plaintiff cites the Court to a number of cases to support his argument, the plaintiff relies chiefly upon the recent opinions of Gordon v. Terry, 684 F.2d 736 (11th Cir.), cert. denied,-U.S. -, 103 S.Ct. 1188, 75 L.Ed.2d 434 (1983) and Williamson v. Tucker, 645 F.2d 404 (5th Cir.), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981).

In Gordon, the plaintiff invested in five real estate syndications which proved to be unsuccessful. The plaintiff filed suit alleging violations of the federal securities laws on the grounds that his interests were investment contracts and thus “securities.” The plaintiff argued that he satisfied the third prong of the Howey test because he was forced to rely upon the special skills or expertise of the promoter; hence, he was incapable of meaningfully exercising his retained power to control the investment. While the Eleventh Circuit in Gordon did not find that the facts supported the plaintiff’s claim, the court did recognize and follow the reasoning developed by the Fifth Circuit in the Williamson case.

In Williamson, the court acknowledged the general rule that written agreements which place control of significant decisions of the enterprise in the hands of the investor are not securities. The Court then proceeded to recognize that when an investor is incapable of exercising a power given by a written agreement, he is in a position of dependency with no real means of protecting his investment. Therefore, the investor is forced to rely on others for his anticipated profits thereby satisfying the Howey third element. Couched in terms of partnership agreements according to the facts in Williamson, the court discussed three examples or exceptions of such dependency to the general rule. 13

*1343 Contrary to the interpretation suggested by the defendant, the Court does not read narrowly the three examples or exceptions expressed in Williamson in light of footnote 15 wherein the court explained:

These [examples or exceptions] are only factors relevant to the issue that are all implicated by the facts of this case. But this is not to say that other factors could not also give rise to such a dependence on the promoter or manager that the exercise of partnership powers would be effectively precluded.