United States v. Leonard

529 F.3d 83 (2d Cir. 2008)

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Nature of the Case

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Facts

Dickau and Silverstein (Ds) each operated an independent sales office selling interests in companies formed to finance the production and distribution of motion pictures. Ds solicited investments in the LLC's Little Giant (for the film Carlo's Wake) and Heritage (for the film he Amati Girls) over the phone to generate interest in the film projects. The film's promoters would then mail potential investors offering materials, including a brochure, operating agreement, subscription agreement, risk disclosure sheet, and instruction sheet. When they sold an interest, Ds would get a commission. Dickau's company received a 42% and 45% commission on sales of Little Giant and Heritage units, respectively. Silverstein's company received a 45% commission on sales of Heritage units. None of the information received by the investors reflected the commission rates. The materials sent to each investor indicated that each investor would play an active role in the LLC management. The documents stated: specific knowledge and expertise in the day to day operation of a film producing and distributing company is not required, Members should have such knowledge and experience in general business, investment and/or financial affairs as to intelligently exercise their management and voting rights . . . . Further, each Member was required to participate in the management of the Company by serving on one or more committees established by the Members. The investors were told they may be chosen to perform certain 'ministerial functions,' such as keeping books and records, keeping the members informed, and circulating ballots to members. The reality was very different. The members voted, at most, 'a couple of times.' Only two committees were formed for each of Heritage and Little Giant--a financial committee and a management committee. Five of the 250-300 investors in Little Giant served on the management committee, and seven served on the financial committee. Of the 350-400 investors in Heritage, ten served on the management committee, and seven served on the finance committee. Thus, the vast majority of investors in both companies did not actively participate in the venture, exercising almost no control. The government charged Dickau with four counts and Silverstein with two counts of securities and mail fraud. All counts centered around the failure to disclose accurately the sales commission that Ds would be taking on the investment units. The jury returned a verdict of guilty on all counts. Ds appealed. Ds claim that the Little Giant and Heritage units cannot constitute securities because investors never expected profits 'solely from the efforts' of the promoters or others.