Respondents are 57 residents of Co-op City, a massive
cooperative housing project in New York City, organized, financed,
and constructed under the New York Private Housing Finance Law
(Mitchell-Lama Act). They brought this action on behalf of all the
apartment owners and derivatively on behalf of the housing
corporation, alleging,
inter alia, violations of the
antifraud provisions of the Securities Act of 1933 and of the
Securities Exchange Act of 1934 (hereafter collectively Securities
Acts), in connection with the sale to respondents of shares of the
common stock of the cooperative housing corporation. Citing
substantial increases in the tenants' monthly rental charges as a
result of higher construction costs, respondents' claim centered on
a Co-op City Information Bulletin issued in the project's initial
stages, which allegedly misrepresented that the developers would
absorb future cost increases due to such factors as inflation.
Under the Mitchell-Lama Act, which was designed to encourage
private developers to build low-cost cooperative housing, the State
provides large, long-term low-interest mortgage loans and
substantial tax exemptions, conditioned on step-by-step state
supervision of the cooperative's development. Developers must agree
to operate the facilities "on a nonprofit basis," and may lease
apartments to only state-approved lessees whose incomes are below a
certain level. The corporate petitioners in this case built,
promoted, and presently control Co-op City: United Housing
Foundation (UHF), a nonprofit membership corporation, initiated and
sponsored the project; Riverbay, a nonprofit cooperative housing
corporation, was organized by UHF to own and operate the land and
buildings and issue the stock that is the subject of the instant
action; and Community Securities, Inc. (CSI), UHF's wholly owned
subsidiary, was the project's general
Page 421 U. S. 838
contractor and sales agent. To acquire a Co-op City apartment, a
prospective purchaser must buy 18 shares of Riverbay stock for each
room desired at $25 per share. The shares cannot be transferred to
a nontenant, pledged, encumbered, or bequeathed (except to a
surviving spouse), and do not convey voting rights based on the
number owned (each apartment having one vote). On termination of
occupancy, a tenant must offer his stock to Riverbay at $25 per
share, and, in the unlikely event that Riverbay does not
repurchase, the tenant cannot sell his shares for more than their
original price, plus a fraction of the mortgage amortization that
he has paid during his tenancy, and then only to a prospective
tenant satisfying the statutory income eligibility requirements.
Under the Co-op City Lease arrangement, the resident is committed
to make monthly rental payments in accordance with the size,
nature, and location of the apartment. The Securities Acts define a
"security" as "any . . . stock, . . . investment contract, . . .
or, in general, any interest or instrument commonly known as a
security.'" Petitioners moved to dismiss the complaint for lack
of federal jurisdiction, maintaining that the Riverbay stock did
not constitute securities as thus defined. The District Court
granted the motion to dismiss. The Court of Appeals reversed,
holding that (1) since the shares purchased were called "stock,"
the definitional sections of the Securities Acts were literally
applicable, and (2) the transaction was an investment contract
under the Securities Acts, there being a profit expectation from
rental reductions resulting from (i) the income produced by
commercial facilities established for the use of Co-op City
tenants; (ii) tax deductions for the portion of monthly rental
charges allocable to interest payments on the mortgage; and (iii)
savings based on the fact that Co-op City apartments cost
substantially less than comparable nonsubsidized housing.
Held: The shares of stock involved in this Litigation
do not constitute "securities" within the purview of the Securities
Acts, and since respondents' claims are not cognizable in federal
court, the District Court properly dismissed their complaint. Pp.
421 U. S.
847-858.
(a) When viewed, as they must be, in terms of their substance
(the economic realities of the transaction), rather than their
form, the instruments involved here were not shares of stock in the
ordinary sense of conferring the right to receive "dividends
contingent upon an apportionment of profits,"
Tcherepnin v.
Knight, 389 U. S. 332,
389 U. S. 339,
with the traditional characteristics of being
Page 421 U. S. 839
negotiable, subject to pledge or hypothecation, conferring
voting rights proportional to the number of shares owned, and
possibility of appreciating in value. On the contrary, these
instruments were purchased not for making a profit, but for
acquiring subsidized low-cost. housing. Pp.
421 U. S.
848-851.
(b) A share in Riverbay does not constitute an "investment
contract" as defined by the Securities Acts, a term which, like the
term "any . . . instrument commonly known as a
security,'"
involves investment in a common venture premised on a reasonable
expectation of profits to be derived from the entrepreneurial or
managerial efforts of others. Here, neither of the kinds of profits
traditionally associated with securities were offered to
respondents; instead, as indicated in the Information Bulletin,
which stressed the "non-profit" nature of the project, the focus
was upon the acquisition of a place to live. Pp. 421 U. S.
851-854.
(c) Although deductible for tax purposes, the portion of rental
charges applied to interest on the mortgage (benefits generally
available to home mortgagors) does not constitute "profits," and,
in any event, does not derive from the efforts of third parties.
Pp.
421 U. S.
854-855.
(d) Low rent attributable to state financial subsidies no more
embodies income or profit attributes than other types of government
subsidies. P.
421 U. S.
855.
(e) Such income as might derive from Co-op City's leasing of
commercial facilities within the housing project to be used to
reduce tenant rentals (the prospect of which was never mentioned in
the Information Bulletin) is too speculative and insubstantial to
bring the entire transaction within the Securities Acts. These
facilities were established not for profit purposes, but to make
essential services available to residents of the huge complex. Pp.
421 U. S.
855-857.
500 F.2d 1246, reversed.
POWELL, J., delivered the opinion of the Court, in which BURGER,
C.J., and STEWART, MARSHALL, BLACKMUN, and REHNQUIST, JJ., joined.
BRENNAN, J., filed a dissenting opinion, in which DOUGLAS and
WHITE, JJ., joined,
post, p.
421 U. S.
860.
Page 421 U. S. 840
MR. JUSTICE POWELL delivered the opinion of the Court.
The issue in these cases is whether shares of stock entitling a
purchaser to lease an apartment in Co-op City, a state subsidized
and supervised nonprofit housing cooperative, are "securities"
within the purview of the Securities Act of 1933 and the Securities
Exchange Act of 1934.
I
Co-op City is a massive housing cooperative in New York City.
Built between 1965 and 1971, it presently houses approximately
50,000 people on a 200-acre site containing 35 high-rise buildings
and 236 town houses. The project was organized, financed, and
constructed under the New York State Private Housing Finance Law,
commonly known as the Mitchell-Lama Act, enacted to ameliorate a
perceived crisis in the availability of decent low income urban
housing. In order to encourage private
Page 421 U. S. 841
developers to build low-cost cooperative housing, New York
provides them with large long-term, low interest mortgage loans and
substantial tax exemptions. Receipt of such benefits is conditioned
on a willingness to have the State review virtually every step in
the development of the cooperative.
See
N.Y.Priv.Hous.Fin.Law § § 11-37, as amended (1962 and Supp.
1974-1975). The developer also must agree to operate the facility
"on a nonprofit basis," § 11-a(2a), and he may lease apartments
only to people whose incomes fall below a certain level and who
have been approved by the State. [
Footnote 1]
The United Housing Foundation (UHF), a nonprofit membership
corporation established for the purpose of "aiding and encouraging"
the creation of "adequate, safe and sanitary housing accommodations
for wage earners and other persons of low or moderate income,"
[
Footnote 2] Appendix in Court
of Appeals 95a (hereafter App.), was responsible for initiating and
sponsoring the development of Co-op City. Acting under the
Mitchell-Lama Act, UHF organized the Riverbay Corporation
(Riverbay) to own and operate the land and buildings constituting
Co-op City. Riverbay, a nonprofit cooperative housing corporation,
issued the stock that is the subject of this litigation. UHF also
contracted with Community Services, Inc. (CSI), its wholly owned
subsidiary, to serve as the general contractor and sales
Page 421 U. S. 842
agent for the project. [
Footnote
3] As required by the Mitchell-Lama Act, these decisions were
approved by the State Housing Commissioner.
To acquire an apartment in Co-op City, an eligible prospective
purchaser [
Footnote 4] must buy
18 shares of stock in Riverbay for each room desired. The cost per
share is $25, making the total cost $450 per room, or $1,800 for a
four-room apartment. The sole purpose of acquiring these shares is
to enable the purchaser to occupy an apartment in Co-op City; in
effect, their purchase is a recoverable deposit on an apartment.
The shares are explicitly tied to the apartment: they cannot be
transferred to a nontenant; nor can they be pledged or encumbered;
and they descend, along with the apartment, only to a surviving
spouse. No voting rights attach to the shares as such:
participation in the affairs of the cooperative appertains to the
apartment, with the residents of each apartment being entitled to
one vote irrespective of the number of shares owned.
Any tenant who wants to terminate his occupancy, or who is
forced to move out, [
Footnote
5] must offer his stock to Riverbay at its initial selling
price of $25 per share. In the extremely unlikely event that
Riverbay declines to repurchase the stock, [
Footnote 6] the tenant cannot sell it for more than
Page 421 U. S. 843
the initial purchase price plus a fraction of the portion of the
mortgage that he has paid off, and then only to a prospective
tenant satisfying the statutory income eligibility requirements.
See N.Y.Priv.Hous.Fin.Law § 31-a (Supp. 1974-1975).
In May, 1965, subsequent to the completion of the initial
planning, Riverbay circulated an Information Bulletin seeking to
attract tenants for what would someday be apartments in Co-op City.
After describing the nature and advantages of cooperative housing
generally and of Co-op City in particular, the Bulletin informed
prospective tenants that the total estimated cost of the project,
based largely on an anticipated construction contract with CSI, was
$283,695,550. Only a fraction of this sum, $32,795,550, was to be
raised by the sale of shares to tenants. The remaining $250,900,000
was to be financed by a 40-year low-interest mortgage loan from the
New York Private Housing Finance Agency. After construction of the
project the mortgage payments and current operating expenses would
be met by monthly rental charges paid by the tenants. While these
rental charges were to vary, depending on the size, nature, and
location of an apartment, the 1965 Bulletin estimated that the
"average" monthly cost would be $23.02 per room, or $92.08 for a
four-room apartment.
Several times during the construction of Co-op City, Riverbay,
with the approval of the State Housing Commissioner, revised its
contract with CSI to allow for increased construction costs. In
addition, Riverbay incurred other expenses that had not been
reflected in the
Page 421 U. S. 844
1965 Bulletin. To meet these increased expenditures, Riverbay,
with the Commissioner's approval, repeatedly secured increased
mortgage loans from the State Housing Agency. Ultimately the
construction loan was $125 million more than the figure estimated
in the 1965 Bulletin. As a result, while the initial purchasing
price remained at $50 per room, the average monthly rental charges
increased periodically, reaching a figure of $39.68 per room as of
July 1974. [
Footnote 7]
These increases in the rental charges precipitated the present
lawsuit. Respondents, 57 residents of Co-op City, sued in federal
court on behalf of all 15,372 apartment owners, and derivatively on
behalf of Riverbay, seeking upwards of $30 million in damages,
forced rental reductions, and other "appropriate" relief. Named as
defendants (petitioners herein) were UHF, CSI, Riverbay, several
individual directors of these organizations, the State of New York,
and the State Private Housing Finance Agency. The heart of
respondents' claim was that the 1965 Co-op City Information
Bulletin falsely represented that CSI would bear all subsequent
cost increases due to factors such as inflation. Respondents
further alleged that they were misled in their purchases of shares
since the Information Bulletin failed to disclose several critical
facts. [
Footnote 8] On these
bases,
Page 421 U. S. 845
respondents asserted two claims under the fraud provisions of
the federal Securities Act of 1933, as amended, § 17(a), 48 Stat.
84, 15 U.S.C. § 77q(a); the Securities Exchange Act of 1934, as
amended, § 10(b), 48 Stat. 891, 15 U.S.C. § 78j(b); and 17 CFR §
240.10b-5 (1975). They also presented a claim against the State
Financing Agency under the Civil Rights Act of 1871, 42 U.S.C. §
1983, and 10 pendent state law claims.
Petitioners, while denying the substance of these allegations,
[
Footnote 9] moved to dismiss
the complaint on the ground that federal jurisdiction was lacking.
They maintained that shares of stock in Riverbay were not
"securities" within the definitional sections of the federal
Securities Acts. In addition, the state parties moved to dismiss on
sovereign immunity grounds.
The District Court granted the motion to dismiss.
Forman v.
Community Services, Inc., 366 F.
Supp. 1117 (SDNY 1973). It held that the denomination of the
shares in Riverbay as "stock" did not, by itself, make them
securities under the federal Acts. The court further ruled, relying
primarily on this Court's decisions in
SEC v. C. M. Joiner
Leasing Corp., 320 U. S. 344
(1943), and
SEC v. W. J. Howey Co., 328 U.
S. 293 (1946), that the purchase in issue was not a
security transaction, since it was not induced by an offer of
tangible material profits, nor could such profits realistically be
expected. In the District Court's words, it was
Page 421 U. S. 846
"the fundamental nonprofit nature of this transaction" which
presented "the insurmountable barrier to [respondents'] claims in
th[e] federal court."
366 F. Supp.
at 1 128. [
Footnote
10]
The Court of Appeals for the Second Circuit reversed.
Forman
v. Community Services, Inc., 500 F.2d 1246 (1974). It rested
its decision on two alternative grounds. First, the court held
that, since the shares purchased were called "stock" the Securities
Acts, which explicitly include "stock" in their definitional
sections, were literally applicable. Second, the Court of Appeals
concluded that the transaction was an investment contract within
the meaning of the Acts and as defined by Howey, since there was an
expectation of profits from three sources: (i) rental reductions
resulting from the income produced by the commercial facilities
established for the use of tenants at Co-op City; (ii) tax
deductions for the portion of the monthly rental charges allocable
to interest payments on the mortgage; and (iii) savings based on
the fact that apartments at Co-op City cost substantially less than
comparable nonsubsidized housing. The court further ruled that the
immunity claims by the state parties were unavailing. [
Footnote 11] Accordingly, the
Page 421 U. S. 847
case was remanded to the District Court for consideration of
respondents' claims on the merits.
In view of the importance of the issues presented, we granted
certiorari. 419 U.S. 1120 (1975). As we conclude that the disputed
transactions are not purchases of securities within the
contemplation of the federal statutes, we reverse.
II
Section 2(1) of the Securities Act of 1933, 15 U.S.C. § 77b(1),
defines a "security" as
"any note, stock, treasury stock, bond, debenture, evidence of
indebtedness, certificate of interest or participation in any
profit-sharing agreement, collateral trust certificate,
preorganization certificate or subscription, transferable share,
investment contract, voting-trust certificate, certificate of
deposit for a security, fractional undivided interest in oil, gas,
or other mineral rights, or, in general, any interest or instrument
commonly known as a 'security,' or any certificate of interest or
participation in, temporary or interim certificate for, receipt
for, guarantee of, or warrant or right to subscribe to or purchase,
any of the foregoing. [
Footnote
12]"
In providing this definition, Congress did not attempt to
articulate the relevant economic criteria for distinguishing
"securities" from "non-securities." Rather, it sought to define
"the term 'security' in sufficiently broad and general terms so
as to include within that definition the many types of instruments
that, in our commercial world
Page 421 U. S. 848
fall within the ordinary concept of a security."
H.R.Rep. No. 85, 73d Cong., 1st Sess., 11 (1933). The task has
fallen to the Securities and Exchange Commission (SEC), the body
charged with administering the Securities Acts, and ultimately to
the federal courts to decide which of the myriad financial
transactions in our society come within the coverage of thee
statutes.
In making this determination in the present case, we do not
write on a clean slate. Well-settled principles enunciated by this
Court establish that the shares purchased by respondents do not
represent any of the "countless and variable scheme devised by
those who seek the use of the money of others on the promise of
profits,"
Howey, 328 U.S. at
328 U. S. 299,
and therefore do not fall within "the ordinary concept of a
security."
A
We reject at the outset any suggestion that the present
transaction, evidenced by the sale of shares called "stock,"
[
Footnote 13] must be
considered a security transaction simply because the statutory
definition of a security includes the words "any . . . stock."
Rather, we adhere to the basic principle that has guided all of the
Court's decisions in this area:
"[I]n searching for the meaning and scope of the word 'security'
in the Act[s], form should be disregarded for substance and the
emphasis should be on economic reality."
Tcherepnin v. Knight, 389 U. S. 332,
389 U. S. 336
(1967).
See also Howey, supra, at
328 U. S.
298.
Page 421 U. S. 849
The primary purpose of the Acts of 1933 and 1934 was to
eliminate serious abuses in a largely unregulated securities
market. The focus of the Acts is on the capital market of the
enterprise system: the sale of securities to raise capital for
profit-making purposes, the exchanges on which securities are
traded, and the need for regulation to prevent fraud and to protect
the interest of investors. Because securities transactions are
economic in character, Congress intended the application of these
statutes to turn on the economic realities underlying a
transaction, and not on the name appended thereto. Thus, in
construing these Acts against the background of their purpose, we
are guided by a traditional canon of statutory construction:
"[A] thing may be within the letter of the statute and yet not
within the statute, because not within its spirit, nor within the
intention of its makers."
Church of the Holy Trinity v. United States,
143 U. S. 457,
143 U. S. 459
(1892).
See also United States v. American Trucking
Assns., 310 U. S. 534,
310 U. S. 543
(1940). [
Footnote 14]
Respondents' reliance on
Joiner as support for a "literal
approach" to defining a security is misplaced. The issue in
Joiner was whether assignments of interests in oil leases,
coupled with the promoters' offer to drill an exploratory well,
were securities. Looking to the economic
Page 421 U. S. 850
inducement provided by the proposed exploratory well, the Court
concluded that these leases were securities even though "leases" as
such were not included in the list of instruments mentioned in the
statutory definition. In dictum, the Court noted that
"[i]nstruments
may be included within [the definition
of a security], as [a] matter of law, if on their face they answer
to the name or description."
320 U.S. at
320 U. S. 351
(emphasis supplied). And later, again in dictum, the Court stated
that a security "
might" be shown "by proving the document
itself, which, on its face, would be a note, a bond, or a share of
stock."
Id. at
320 U. S. 355
(emphasis supplied). By using the conditional words "may" and
"might" in these dicta the Court made clear that it was not
establishing an inflexible rule barring inquiry into the economic
realities underlying a transaction. On the contrary, the Court
intended only to make the rather obvious point that, in contrast to
the instrument before it which was not included within the explicit
statutory terms, most instruments bearing these traditional titles
are likely to be covered by the statutes. [
Footnote 15]
In holding that the name given to an instrument is not
dispositive, we do not suggest that the name is wholly irrelevant
to the decision whether it is a security. There may be occasions
when the use of a traditional name such as "stocks" or "bonds" will
lead a purchaser justifiably to assume that the federal securities
laws apply.
Page 421 U. S. 851
This would clearly be the case when the underlying transaction
embodies some of the significant characteristics typically
associated with the named instrument.
In the present case, respondents do not contend, nor could they,
that they were misled by use of the word "stock" into believing
that the federal securities laws governed their purchase. Common
sense suggests that people who intend to acquire only a residential
apartment in a state-subsidized cooperative, for their personal
use, are not likely to believe that, in reality they are purchasing
investment securities simply because the transaction is evidenced
by something called a share of stock. These shares have none of the
characteristics "that, in our commercial world fall within the
ordinary concept of a security." H.R.Rep. No. 85,
supra,
at 11. Despite their name, they lack what the Court in
Tcherepnin deemed the most common feature of stock: the
right to receive "dividends contingent upon an apportionment of
profits." 389 U.S. at
389 U. S. 339.
Nor do they possess the other characteristics traditionally
associated with stock: they are not negotiable; they cannot be
pledged or hypothecated; they confer no voting rights in proportion
to the number of shares owned; and they cannot appreciate in value.
In short, the inducement to purchase was solely to acquire
subsidized low-cost living space; it was not to invest for
profit.
B
The Court of Appeals, as an alternative ground for its decision,
concluded that a share in Riverbay was also an "investment
contract" as defined by the Securities Acts. Respondents further
argue that, in any event, what they agreed to purchase is "commonly
known as a
security'" within the meaning of these laws. In
considering these claims, we again must examine the substance --
the economic realities of the transaction -- rather than
the
Page 421 U. S.
852
names that may have been employed by the parties. We
perceive no distinction, for present purposes, between an
"investment contract" and an "instrument commonly known as a
`security.'" In either case, the basic test for distinguishing the
transaction from other commercial dealings is
"whether the scheme involves an investment of money in a common
enterprise with profits to come solely from the efforts of
others."
Howey, 328 U.S. at
328 U. S. 301.
[
Footnote 16] This test, in
shorthand form, embodies the essential attributes that run through
all of the Court's decisions defining a security. The touchstone is
the presence of an investment in a common venture premised on a
reasonable expectation of profits to be derived from the
entrepreneurial or managerial efforts of others. By profits, the
Court has meant either capital appreciation resulting from the
development of the initial investment, as in
Joiner,
supra, (sale of oil leases conditioned on promoters' agreement
to drill exploratory well), or a participation in earnings
resulting from the use of investors' funds, as in
Tcherepnin v.
Knight, supra (dividends on the investment based on savings
and loan association's profits). In such cases, the investor is
"attracted solely by the prospects of a return" on his investment.
Howey, supra, at
328 U. S. 300.
By contrast, when a purchaser is motivated by a
Page 421 U. S. 853
desire to use or consume the item purchased -- "to occupy the
land or to develop it themselves," as the
Howey Court put
it,
ibid. -- the securities laws do not apply. [
Footnote 17]
See also Joiner,
supra. [
Footnote
18]
In the present case, there can be no doubt that investors were
attracted solely by the prospect of acquiring a place to live, and
not by financial returns on their investments. The Information
Bulletin distributed to prospective residents emphasized the
fundamental nature and purpose of the undertaking:
"A cooperative is a non-profit enterprise owned and controlled
democratically by its members -- the people who are using its
services. . . ."
"
* * * *"
"People find living in a cooperative community enjoyable for
more than one reason. Most people join, however, for the simple
reason that it is a way to obtain decent housing at a reasonable
price.
Page 421 U. S. 854
However, there are other advantages. The purpose of a
cooperative is to provide home ownership, not just apartments to
rent. The community is designed to provide a favorable environment
for family and community living. . . ."
"The common bond of collective ownership which you share makes
living in a cooperative different. It is a community of neighbors.
Home ownership, common interest, and the community atmosphere make
living in a cooperative like living in a small town. As a rule,
there is very little turnover in a cooperative."
App. 162a, 166a. Nowhere does the Bulletin seek to attract
investors by the prospect of profits resulting from the efforts of
the promoters or third parties. On the contrary, the Bulletin
repeatedly emphasizes the "nonprofit" nature of the endeavor. It
explains that, if rental charges exceed expenses, the difference
will be returned as a rebate, not invested for profit. It also
informs purchasers that they will be unable to resell their
apartments at a profit, since the apartment must first be offered
back to Riverbay "at the price . . . paid for it." [
Footnote 19]
Id. at 163a. In
short, neither of the kinds of profits traditionally associated
with securities was offered to respondents.
The Court of Appeals recognized that there must be an
expectation of profits for these shares to be securities, and
conceded that there is "no possible profit on a resale of [this]
stock." 500 F.2d at 1254. The court correctly
Page 421 U. S. 855
noted, however, that profit may be derived from the income
yielded by an investment as well as from capital appreciation, and
then proceeded to find "a expectation of
income' in at least
three ways." Ibid. Two of these supposed sources of income
or profits may be disposed of summarily. We turn first to the Court
of Appeals' reliance on the deductibility for tax purposes of the
portion of the monthly rental charge applied to interest on the
mortgage. We know of no basis in law for the view that the payment
of interest, with its consequent deductibility for tax purposes,
constitutes income or profits. [Footnote 20] These tax benefits are nothing more than
that which is available to any homeowner who pays interest on his
mortgage. See § 216 of Internal Revenue Code, 26 U.S.C. §
216; Eckstein v. United States, 196 Ct.Cl. 644, 452 F.2d
1036 (1971).
The Court of Appeals also found support for its concept of
profits in the fact that Co-op City offered space at a cost
substantially below the going rental charges for comparable
housing. Again, this is an inappropriate theory of "profits" that
we cannot accept. The low rent derives from the substantial
financial subsidies provided by the State of New York. This benefit
cannot be liquidated into cash; nor does it result from the
managerial efforts of others. In a real sense, it no more embodies
the attributes of income or profits than do welfare benefits, food
stamps, or other government subsidies.
The final source of profit relied on by the Court of Appeals was
the possibility of net income derived from the leasing by Co-op
City of commercial facilities, professional
Page 421 U. S. 856
offices and parking spaces, and its operation of community
washing machines. The income, if any, from these conveniences, all
located within the common areas of the housing project, is to be
used to reduce tenant rental costs. Conceptually, one might readily
agree that net income from the leasing of commercial and
professional facilities is the kind of profit traditionally
associated with a security investment. [
Footnote 21]
See Tcherepnin v. Knight, supra.
But in the present case, this income -- if indeed there is any --
is far too speculative and insubstantial to bring the entire
transaction within the Securities Acts.
Initially we note that the prospect of such income as a means of
offsetting rental costs is never mentioned in the Information
Bulletin. Thus, it is clear that investors were not attracted to
Co-op City by the offer of these potential rental reductions.
See Joiner, 320 U.S. at
320 U. S. 353.
Moreover, nothing in the record suggests that the facilities, in
fact, return a profit in the sense that the leasing fees are
greater than the actual cost to Co-op City of the space rented.
[
Footnote 22] The short of
the matter is
Page 421 U. S. 857
that the stores and services in question were established not as
a means of returning profits to tenant, but for the purpose of
making essential services available for the residents of this
enormous complex. [
Footnote
23] By statute, these facilities can only be "incidental and
appurtenant" to the housing project. N.Y.Priv.Hous.Fin.Law § 12(5)
(Supp. 1974-1975). Undoubtedly they make Co-op City a more
attractive housing opportunity, but the possibility of some rental
reduction is not an "expectation of profit" in the sense found
necessary in
Howey. [
Footnote 24]
Page 421 U. S. 858
There is no doubt that purchasers in this housing cooperative
sought to obtain a decent home at an attractive price. But that
type of economic interest characterizes every form of commercial
dealing. What distinguishes a security transaction -- and what is
absent here -- is an investment where one parts with his money in
the hope of receiving profits from the efforts of others, and not
where he purchases a commodity for personal consumption or living
quarters for personal use. [
Footnote 25]
Page 421 U. S. 859
III
In holding that there is no federal jurisdiction, we do not
address the merits of respondents' allegations of fraud. Nor do we
indicate any view as to whether the type of claims here involved
should be protected by federal regulation. [
Footnote 26] We decide only that the type of
Page 421 U. S. 860
transaction before us, in which the purchasers were interested
in acquiring housing, rather than making an investment for profit,
is not within the scope of the federal securities laws.
Since respondents' claims are not cognizable in federal court,
the District Court properly dismissed their complaint. [
Footnote 27] The judgment below is
therefore
Reversed.
* Together with No. 74 647,
New York et al. v. Forman et
al., also on certiorari to the same court.
[
Footnote 1]
Eligibility is limited to families whose monthly income does not
exceed six times the monthly rental charge (or for families of four
or more, seven times the rental charge). N.Y.Priv.Hous.Fin.Law §
31(2)(a) (Supp. 1971975). Preference in admission must be given to
veterans, the handicapped, and the elderly. § 31(7)-(9)
[
Footnote 2]
UHF is composed of labor unions, housing cooperatives, and civic
groups. It has sponsored the construction of several major housing
cooperatives in New York City.
[
Footnote 3]
CSI is a business corporation that has acted as the contractor
on several UHF-sponsored housing cooperatives.
[
Footnote 4]
Respondents are referred to herein variously as "purchasers,"
"owners," or "tenants." Respondents do not hold legal title to
their respective apartments, but they are purchasers and owners of
the shares of Riverbay which entitles them to occupy the
apartments. By virtue of their right of occupancy, respondents are
usually described as tenants.
[
Footnote 5]
A tenant can be forced to move out if he violates the provisions
of his "occupancy agreement," which is essentially a lease for the
apartment, or if his income grows to exceed the eligibility
standards.
[
Footnote 6]
To date, every family that has withdrawn from Co-op City has
received back its initial payment in full. Indeed, at the time this
suit was filed there were 7,000 families on the waiting list for
apartments in this cooperative. In addition a special fund of
nearly $1 million had been established by small monthly
contributions from all tenants to insure that those wanting to move
out would receive full compensation for their shares.
[
Footnote 7]
As the rental charges increased, the income eligibility
requirements for residents of Co-op City expanded accordingly.
See n 1,
supra.
[
Footnote 8]
Respondents maintained that the following material facts were
omitted: (i) the original estimated cost had never been adhered to
in any of the previous Mitchell-Lama projects sponsored by UHF and
built by CSI; (ii) petitioners knew that the initial estimate would
not be followed in the present project; (iii) CSI was a wholly
owned subsidiary of UHF; (iv) CSI's net worth was so small that it
could not have been legally held to complete the contract within
the original estimated costs; (v) the State Housing Commissioner
had waived his own rule regarding liquidity requirements in
approving CSI as the contractor; and (vi) there was an additional
undisclosed contract between CSI and Riverbay.
[
Footnote 9]
Petitioners asserted that the Information Bulletin warned
purchasers of the possibility of rental increases, and denied that
it omitted material facts. They also argued that, prior to
occupancy all tenants were informed that rental charges had
increased. In any event, petitioners claimed that respondents have
suffered no damages, since they may move out and retrieve their
initial investments in full.
[
Footnote 10]
The District Court also dismissed the § 1983 claim finding that
the "federal securities allegations represent the only well pleaded
underlying basis for jurisdiction under the Civil Rights Act."
366 F.
Supp. 1117, 1132 (1973). In view of these rulings the court did
not reach the sovereign immunity claims.
[
Footnote 11]
The Court of Appeals held that the state agency was independent
and distinct from the State itself, and therefore was a "person"
for purposes of § 1983, that both the agency and the State had
waived immunity under § 32(5) of the Private Housing Finance Law,
and that the State had also implicitly waived its immunity by
voluntarily participating in the sale of securities, an area
subject to plenary federal regulation.
See Parden v. Terminal
R. Co., 377 U. S. 184
(1964). In view of our disposition of these cases, we do not reach
these issues.
[
Footnote 12]
The definition of a security in § 3(a)(10) of the 1934 Act, 15
U.S.C. § 78c(a)(10), is virtually identical and, for present
purposes, the coverage of the two Acts may be considered the same.
See Tcherepnin v. Knight, 389 U.
S. 332,
389 U. S. 336,
389 U. S. 342
(1967); S.Rep. No. 792, 73d Cong., 2d Sess., 14 (1934).
[
Footnote 13]
While the record does not indicate precisely why the term
"stock" was used for the instant transaction, it appears that this
form is generally used as a matter of tradition and convenience.
See P. Rohan & M. Reskin, Cooperative Housing Law
& Practice § 2.01(4) (1973).
[
Footnote 14]
With the exception of the Second Circuit, every Court of Appeals
recently to consider the issue has rejected the literal approach
urged by respondents.
See C. N. S. Enterprises, Inc. v. G.
& G. Enterprises, Inc., 508 F.2d 1354 (CA7 1975);
McClure v. First National Bank of Lubbock, 497 F.2d 490
(CA5 1974),
cert. denied, 420 U.S. 930 (1975);
Lino v.
City Investing Co., 487 F.2d 689 (CA3 1973).
See also
1 L. Loss, Securities Regulation 493 (2d ed.1961) ("substance
governs, rather than form: . . . just as some things which look
like real estate are securities, some things which look like
securities are real estate").
[
Footnote 15]
Nor can respondents derive any support for a literal approach
from
Tcherepnin v. Knight, supra, which quoted the
Joiner dictum. Indeed, in
Tcherepnin, the Court
explicitly stated that "form should be disregarded for substance,"
389 U.S. at
389 U. S. 336,
and only after analyzing the economic realities of the transaction
at issue did it conclude that an instrument called a "withdrawable
capital share" was, in substance, an "investment contract," a share
of "stock," a "certificate of interest or participation in [a]
profit-sharing agreement," and a "transferable share."
[
Footnote 16]
This test speaks in terms of "profits to come
solely
from the efforts of others." (Emphasis supplied.) Although the
issue is not presented in this case, we note that the Court of
Appeals for the Ninth Circuit has held that
"the word 'solely' should not be read as a strict or literal
limitation on the definition of an investment contract, but rather
must be construed realistically, so as to include within the
definition those schemes which involve in substance, if not form,
securities."
SEC v. Glenn W. Turner Enterprises, 474 F.2d 476, 482,
cert. denied, 414 U.S. 821 (1973). We express no view,
however, as to the holding of this case.
[
Footnote 17]
In some transactions, the investor is offered both a commodity
or real estate for use and an expectation of profits.
See
SEC Release No. 33-5347, 38 Fed.Reg. 1735 (Jan. 18, 1973).
See
generally Rohan, The Securities Law Implications of
Condominium Marketing Programs Which Feature a Rental Agency or
Rental Pool, 2 Conn.L.Rev. 1 (1969). The application of the federal
securities laws to these transactions may raise difficult questions
that are not present in this case.
[
Footnote 18]
In
Joiner, 320 U.S. at
320 U. S. 348,
the Court stated:
"Undisputed facts seem to us, however, to establish the
conclusion that defendants were not, as a practical matter,
offering naked leasehold rights. Had the offer mailed by defendants
omitted the economic inducements of the proposed and promised
exploration well, it would have been a quite different
proposition."
This distinction was critical, because the exploratory drillings
gave the investments "most of their value and all of their lure."
Id. at
320 U. S. 349.
The land itself was purely an incidental consideration in the
transaction.
[
Footnote 19]
This requirement effectively insures that no apartment will be
sold for more than its original cost. Consonant with the purposes
of the Mitchell-Lama Act, whenever there are prospective buyers
willing to pay as much as the initial purchase price for an
apartment in Co-op City, Riverbay will repurchase the apartment and
resell it at its original cost.
See App. 138a. If, for
some reason, Riverbay does not purchase the apartment the tenant
still cannot make a profit on his sale.
See supra at
421 U. S.
842-843.
[
Footnote 20]
Even if these tax deductions were considered profits, they would
not be the type associated with a security investment since they do
not result from the managerial efforts of others.
See
Rosenbaum, The Resort Condominium and the Federal Securities Laws
-- A Case Study in Governmental Inflexibility, 60 Va.L.Rev. 785,
795-796 (1974); Note, 62 Geo.L.J. 1515, 1524-1526 (1974).
[
Footnote 21]
The "income" derived from the rental of parking spaces and the
operation of washing machines clearly was not profit for
respondents, since these facilities were provided exclusively for
the use of tenants. Thus, when the income collected from the use of
these facilities exceeds the cost of their operation the tenants
simply receive the return of the initial overcharge in the form of
a rent rebate. Indeed, it could be argued that the "income" from
the commercial and professional facilities is also, in effect, a
rebate on the cost of goods and services purchased at these
facilities, since it appears likely that they are patronized almost
exclusively by Co-op City residents.
See Note, 53
Tex.L.Rev. 623, 630-631, n. 38 (1975).
[
Footnote 22]
The Court of Appeals quoted the gross rental income received
from these facilities. But such figures by themselves are
irrelevant, since the record does not indicate the cost to Co-op
City of providing and maintaining the rented space.
[
Footnote 23]
See generally Miller, Cooperative Apartments: Real
Estate or Securities?, 45 B.U.L.Rev. 465, 500 (1965).
[
Footnote 24]
Respondents urge us to abandon the element of profits in the
definition of securities and to adopt the "risk capital" approach
articulated by the California Supreme Court in
Silver Hills
Country Club v. Sobieski, 55 Cal. 2d
811, 361 P.2d 906 (1961).
Cf. El Khadem v. Equity
Securities Corp., 494 F.2d 1224 (CA9),
cert. denied,
419 U.S. 900 (1974).
See generally Coffey, The Economic
Realities of a "Security": Is There a More Meaningful Formula?, 18
W.Res.L.Rev. 367 (1967); Long, An Attempt to Return "Investment
Contracts" to the Mainstream of Securities Regulation, 24
Okla.L.Rev. 135 (1971); Hannan & Thomas, The Importance of
Economic Reality and Risk in Defining Federal Securities, 25
Hastings L.J. 219 (1974). Even if we were inclined to adopt such a
"risk capital" approach, we would not apply it in the present case.
Purchasers of apartments in Co-op City take no risk in any
significant sense. If dissatisfied with their apartments, they may
recover their initial investment in full.
See n 5,
supra.
Respondents assert that, if Co-op City becomes bankrupt, they
stand to lose their whole investment. But, in view of the fact that
the State has financed over 92% of the cost of construction and
carefully regulates the development and operation of the project,
bankruptcy in the normal sense is an unrealistic possibility. In
any event, the risk of insolvency of an ongoing housing cooperative
"differ[s] vastly" from the kind of risk of "fluctuating" value
associated with securities investments.
SEC v. Variable Annuity
Co., 359 U. S. 65,
359 U. S. 90-91
(1959) (BRENNAN, J., concurring).
See Hannan & Thomas,
supra at 242-249; Long, Introduction to Symposium:
Interpreting the Statutory Definition of a Security: Some Pragmatic
Considerations, 6 St. Mary's L.J. 96, 126-128 (1974).
[
Footnote 25]
The SEC has filed an
amicus curiae brief urging us to
hold the federal securities laws applicable to this case.
Traditionally, the views of an agency charged with administering
the governing statute would be entitled to considerable weight.
See, e.g., Saxbe v. Bustos, 419 U. S.
65,
419 U. S. 74
(1974);
Investment Company Institute v. Camp, 401 U.
S. 617,
401 U. S.
626-627 (1971). But in this case, the SEC's position
flatly contradicts what appears to be a rather careful statement of
the Commission's views in a recent release. In Release No. 33-5347,
38 Fed.Reg. 1735 (Jan. 18, 1973), applicable to the "sale of
condominium units, or other units in a real estate development,"
the SEC stated its view that only those real estate investments
that are
"offered and sold with emphasis on the economic benefits to the
purchaser to be derived from the managerial efforts of the
promoter, or a third party designated or arranged for by the
promoter,"
are to be considered securities.
Id. at 1736. In
particular, the Commission explained that the Securities Acts do
not apply when "commercial facilities are a part of the common
elements of a residential project" if
"(a) the income from such facilities is used only to offset
common area expenses and (b) the operation of such facilities is
incidental to the project as a whole and are not established as a
primary income source for the individual owners of a condominium or
cooperative unit."
Ibid. See also SEC Real Estate Advisory
Committee Report 74-91 (1972); Dickey & Thorpe, Federal
Security Regulation of Condominium Offerings, 19 N.Y.L.F. 473
(1974).
Several commentators have noted the inconsistency between the
SEC's position in the above release and the decision by the Court
of Appeals in this case, which the SEC now supports.
See
Berman & Stone, Federal Securities Law and the Sale of
Condominiums, Homes, and Homesites, 30 Bus.Law. 411, 420-425
(1975); Comment, Condominium Regulation: Beyond Disclosure, 123
U.Pa.L.Rev. 639, 65655 (1975); Note,
supra, n 20, at 628. In view of this unexplained
contradiction in the Commission's position, we accord no special
weight to its views.
See Reliance Electric Co. v. Emerson
Electric Co., 404 U. S. 418,
404 U. S. 426
(1972);
Blue Chip Stamps v. Manor Drug Stores, ante at
421 U. S.
746-747, n. 10.
[
Footnote 26]
It has been suggested that the sale of housing developments such
as condominiums and cooperatives is in need of federal regulation,
and therefore the securities laws should be construed or amended to
reach these transactions.
See, e.g., Note, Federal
Securities Regulation of Condominiums: A Purchaser's Perspective,
62 Geo.L.J. 1403 (1974); Note, Cooperative Housing Corporations and
the Federal Securities Laws, 71 Col.L.Rev. 118 (1971). Others have
disagreed, claiming that the extensive body of regulation developed
over more than four decades under these Acts would be inappropriate
and unduly costly to the sellers and buyers of residential housing.
See Berman & Stone,
supra, n 24; Note,
supra, n 20. Moreover, extension of the securities
laws to real estate transactions would involve important questions
as to the appropriate balance between state and federal
responsibility. The determination of whether and in what manner
federal regulation may be required for housing transactions, where
the characteristics of an investment in securities are not present,
is better left to the Congress, which can assess both the costs and
benefits of any such regulation. Indeed, only recently Congress
instructed the Secretary of Housing and Urban Development
"to conduct a full and complete investigation and study . . .
with respect to . . . the problems, difficulties, and abuses or
potential abuses applicable to condominium and cooperative
housing."
§ 821, 88 Stat. 740, 42 U.S. c. § 3532 (1970 ed., Supp. IV).
See also Real Estate Settlement Procedures Act of 1974, 88
Stat. 1724, 12 U.S. c. § 2601
et seq. (1970 ed., Supp.
IV); Interstate Land Sales Full Disclosure Act, 82 Stat. 590, 15
U.S. C. §§ 1701-1720.
[
Footnote 27]
Besides the Securities Acts claims, respondents also included a
vague and conclusory allegation under 42 U.S.C. § 1983 against
petitioner New York State Housing Finance Agency. We agree with the
District Court that this count must also be dismissed.
See
n 9,
supra. The
remaining counts in the complaint were all predicated on alleged
violations of state law not independently cognizable in federal
court.
MR JUSTICE BRENNAN, with whom MR. JUSTICE DOUGLAS and MR.
JUSTICE WHITE join, dissenting.
I dissent. The property interests here are "securities," in my
view, both because they are shares of "stock" and because they are
"investment contracts."
I
Both the Securities Act of 1933, 15 U.S.C. § 77b(1), and the
Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(10), define the
term "security" as including, among other things, an "investment
contract." The essential ingredients of an investment contract have
been clear since
SEC v. W. J. Howey Co., 328 U.
S. 293,
328 U. S. 301
(1946), held that "[t]he test is whether the scheme involves an
investment of money in a common enterprise with profits to come
solely from the efforts of others."
See Tcherepnin v.
Knight, 389 U. S. 332,
389 U. S. 338
(1967). There is no doubt that Co-op City residents invested money
in a common enterprise; the only questions involve
Page 421 U. S. 861
whether the investment was to be productive of "profits to come
solely from the efforts of others."
The record discloses little of the activities of Riverbay
Corporation, the owner and operator of Co-op City, as a lessor of
commercial and office space. It does appear, however, that revenues
well in excess of $1 million per year flow into the corporation
from such activities, Appendix in Court of Appeals 361a (hereafter
App.), a fact noted by the Court of Appeals. 500 F.2d 1246, 1254
(CA2 1974). Even after deduction of expense -- taxes alone take
half of the gross -- the residue could hardly be
de
minimis, even for an operation as large as Co-op City. Therein
lies the patent fallacy of the Court's conclusion that this aspect
of the corporation's activities is "speculative and insubstantial."
Ante at
421 U. S. 856.
The District Court rightly recognized that management by third
parties is essential in a project so massive as Co-op City.
366 F.
Supp. 1117, 1128 (SDNY 1973). Co-op City residents as
stockholders were thus necessarily bound to rely on the management
of Riverbay Corporation to produce income in the form of rents from
the commercial and office space made an integral part of the
project.
As stockholders, Co-op City residents also necessarily relied on
corporate management to build and operate the facility efficiently
to the end that monthly charges would be minimized. The Court of
Appeals held that profits were involved partly because Co-op City
offered housing at bargain prices. 500 F.2d at 1254. The Court
substitutes its own judgment in holding that "[t]he low rent
derives from the substantial financial subsidies provided by the
State of New York."
Ante at
421 U. S. 855.
It is simple common sense that management efficiency necessarily
enters into the equation in the determination of the charges
assessed against residents. But even to the extent that the
resident stockholders do benefit in reduced
Page 421 U. S. 862
charges from government subsidies, the benefit is not for this
reason any the less a profit to them. The welfare benefits to which
the Court refers,
ante at
421 U. S. 855,
may also be profits, but those profits lack the essential
ingredient of profits present here that "come solely from the
efforts of others." Here, the resident investors utilize the
efforts of others to obtain government subsidies. Investors in Wall
Street who do this every day will be surprised to learn that the
benefits so obtained are not considered profits.
The Court of Appeals also relied on the tax deductibility
accorded to portions of the monthly carrying charges paid by Co-op
City residents as a source of profit to them. 500 F.2d at 1254. The
Court rejects this argument with the statement that "[t]hese tax
benefits are nothing more than that which is available to any
homeowner. . . ."
Ante at
421 U. S. 855.
This is true but irrelevant to the question whether they constitute
profits that "come solely from the efforts of others." The special
federal tax provision for cooperative owners, 26 U.S.C. § 216, was
intended
"to place the tenant stockholders of a cooperative apartment in
the same position as the owner of a dwelling house so far as
deductions for interest and taxes are concerned."
S.Rep. No. 1631, 77th Cong., 2d Sess., 51 (1942). This tax
benefit constitutes a profit both for the individual homeowners and
for the "tenant stockholders of a cooperative apartment." The
difference is that the profit of the individual homeowner does not
"come solely from the efforts of others," whereas the profit from
this source realized by a resident of Co-op City does. Setting up
and operating a corporation so as to take advantage of special tax
provisions is a project requiring specialized skills. If the
arrangements go awry, the residents can find themselves without the
hoped-for tax advantages.
Page 421 U. S. 863
See, e.g., Eckstein v. United States, 196 Ct.Cl. 644,
452 F.2d 1036 (1971). Thus, the investors must depend upon the
"efforts of others," here Co-op City's management, properly to
organize and operate the project to realize the tax advantage for
them.
In
SEC v. C. M. Joiner Leasing Corp., 320 U.
S. 344 (1943), the investment was in oil leases. In
Howey, it involved citrus groves. Though taxation was not
a factor in the Court's disposition of those cases, each of those
investments was of a type offering tax advantages as a principal
attraction to the investor. Cunnane, Tax Shelter Investments After
the 1969 Tax Reform Act, 49 Taxes 450 (1971). It is no answer that
the individual investor could have obtained the same tax advantages
by purchasing an entire citrus business or by becoming an
independent oil operator. He could, but if he did, his profits from
tax advantages would not then "come solely from the efforts of
others." It is only when he relies on third parties to produce the
profits for him that, as here, the question of investment contract
analysis arises.
Besides its express rejection of each of the forms of profit
found by the Court of Appeals, the Court must surprise
knowledgeable economists with its proposition,
ante at
421 U. S. 852,
that profits cannot assume forms other than appreciation of capital
or participation in earnings. [
Footnote
2/1] All of the varieties of profit involved here accrue to the
resident stockholders in the form of money saved, rather than money
earned. [
Footnote 2/2] Not only
would simple common sense teach that the two are the same, but a
more sophisticated economic analysis also compels the conclusion
that, in a practical world, there is no difference between
Page 421 U. S. 864
the two forms of income. [
Footnote
2/3] The investor finds no reason to distinguish, for example,
between tax savings and after-tax income. Under a statute having as
one of its "central purposes" "to protect investors,"
Tcherepnin, 389 U.S. at
389 U. S. 336,
it is obvious that the Court errs in distinguishing among types of
economic inducements which have no bearing on the motives of
investors. Construction of the statute in terms of economic reality
is more faithful to its "central" purpose "to protect
investors."
There can be no doubt that one of the inducements to the
resident stockholders to purchase a Co-op City apartment was the
prospect of profits in one or more of the forms I have discussed.
The fact that literature encouraging purchase mentioned some is
important, although not conclusive, evidence.
See Joiner,
supra, at
320 U. S. 353.
The Information Bulletins, while not mentioning income from
commercial and office space as an advantage of stock ownership, did
emphasize the "reasonable price" of the housing, App. 166a, 187a,
and they asserted that "every effort" would be made to keep monthly
carrying charges low,
id. at 174a, 194a. Tax benefits were
also discussed as an advantage of ownership, though of course no
guarantee of favorable federal and state tax treatment was made.
Id. at 175a, 195a.
I do not deny that there are some limits to the broad statutory
definition of a security, and the Court's distinction between
securities and consumer goods is not frivolous.
Ante at
421 U. S. 858.
But the distinction is not useful in the resolution of the question
before us. Of course, the purchase of the stock to get an apartment
involves an element of consumption, but it also involves an element
of investment. The variable annuity contract considered
Page 421 U. S. 865
in
SEC v. Variable Annuity Co., 359 U. S.
65 (1959), presented a not irrelevant analogous
situation. What was purchased, after all, was expressly labeled
"stock." In any event, what was purchased constituted an
"investment contract," within
Howey, for resident
stockholders of Co-op City invested "in a common enterprise with
profits to come solely from the efforts of others." They therefore
were purchasing securities within the purview of the Securities Act
of 1933 and the Securities Exchange Act of 1934.
II
Moreover, both statutes define the term "security" to include
"stock." Therefore, coverage under the statutes is clear under the
Court's holding in
Joiner that "[i]nstruments may be
included within any of these definitions, as matter of law if, on
their face, they answer to the name or description." 320 U.S. at
320 U. S. 351;
see Tcherepnin, 389 U.S. at
389 U. S. 339.
"Security" was broadly defined with the explicit object of
including "the many types of instruments that, in our commercial
world fall within the ordinary concept of a security," H.R.Rep. No.
85, 73d Cong., 1st Sess., 11 (1933). Stock is therefore included
because instruments "such as notes, bonds, and stocks, are pretty
much standardized and the name alone carries well settled meaning."
Joiner, 320 U.S. at
320 U. S. 351.
Even if this principle nevertheless allows room for exception of
some instruments labeled "stock," the Court's justification for
excepting the stock involved in this case is singularly
unpersuasive. The Court states that
"[c]ommon sense suggests that people who intend to acquire only
a residential apartment in a state-subsidized cooperative, for
their personal use, are not likely to believe that, in reality,
they are purchasing investment securities simply because the
transaction is
Page 421 U. S. 866
evidenced by something called a share of stock."
Ante at
421 U. S. 851.
But even informed commentators have expressed misgivings about this
question. [
Footnote 2/4] Thus, the
Court's justification departs unacceptably from the principle of
Joiner that,
"[i]n the enforcement of an act such as this, it is not
inappropriate that promoters' offerings be judged as being what
they were represented to be."
320 U.S. at
320 U. S.
353.
While the absence in the case of Co-op City stock of some
features normally associated with stock is a relevant
consideration, the presence of the attributes that led me to
conclude that this stock constitutes an "investment contract,"
leads me also to conclude that it is a "stock" for purposes of the
two statutes.
Cf. Affiliated Ute Citizens v. United
States, 406 U. S. 128
(1972).
In sum, I conclude that the interests purchased by the
stockholders here were "securities" both because they were "stock"
and because they were "investment contracts." [
Footnote 2/5] In my view, therefore the Court of
Appeals correctly held that the District Court erred in dismissing
this suit. [
Footnote 2/6]
Page 421 U. S. 867
III
At oral argument, petitioner United Housing Foundation contended
strenuously that comprehensive state participation and regulation
of the construction and operation of Co-op City constituted
Riverbay Corporation not a capitalistic enterprise, but a
beneficial public housing enterprise, created by a partnership of
public and private groups for the benefit of people of modest
incomes. I need not disagree with this characterization to conclude
that nevertheless there is a role for the federal
Page 421 U. S. 868
statutes to play in avoiding the danger of fraud and other evils
in the raising of the massive sums the project involved.
See
SEC v. Capital Gains Research Bureau, 375 U.
S. 180,
375 U. S. 195
(1963); H.R. Rep.No. 85, 73d Cong., 1st Sess., 2-3 (1933). No doubt
New York's intensive regulation also helps avoid those evils.
See N.Y.Priv.Hous.Fin.Law. But Congress contemplated
concurrent state and federal regulation in enacting the securities
laws.
SEC v. Variable Annuity Co., 359 U.S. at
359 U. S. 75
(concurring opinion), and therefore the existence of state
regulation does not and cannot be a reason for excluding
appropriate application of the federal statutes. Indeed, the
resident stockholder investors of Co-op City are particularly
entitled to the federal protection. The District Court properly
observed:
"[I]f ever there was a group of people who need and deserve full
and careful disclosure in connection with proposals for the use of
their funds, it is this type of group. . . . The housing selection
decision is a critical one in their lives. The cost of housing
demands a good percentage of their incomes. Their savings are most
likely to be minimal, and they probably don't have lawyers or
accountants to guide them. Further, they are people likely to put a
great deal of credence in statements made with respect to an
offering by reputable civic groups and labor unions, particularly
when the proposal is stamped with the imprimatur of the state."
366 F. Supp. at 1125.
I part from the District Court in concluding however that
investors not only should be protected but, under my reading of the
statutes, are protected by the securities laws. A different,
perhaps better, form of redress can and will be devised for this
kind of investment, but until it is, these investors are not to be
denied what the
Page 421 U. S. 869
federal statutes plainly allow them.
See Note,
Cooperative Housing Corporations and the Federal Securities Laws,
71 Col.L.Rev. 118 (1971). The SEC, though perhaps tardily, has come
to the view that these housing corporations fall within its
regulatory authority because the kind of investment involved is a
"security" under the statutes. I wholly agree. I would affirm the
judgment of the Court of Appeals.
[
Footnote 2/1]
See P. Samuelson, Economics 618-626 (9th ed.1973).
[
Footnote 2/2]
Apparently there is at least a possibility that dividends could
be paid to shareholders, but these would really just be partial
refunds of money already paid in which was not needed.
[
Footnote 2/3]
See, e.g., P. Samuelson,
supra, n 1, at 435; Coase, The Problem of Social
Cost, 3 J. Law & Econ. 1 (1960).
[
Footnote 2/4]
See, e.g., 1 L. Loss, Securities Regulation 492-493 (2d
ed.1961).
[
Footnote 2/5]
Accordingly, I have no occasion to examine the "risk capital"
approach of
Silver Hills Country Club v.
Sobieski, 55 Cal. 2d
811, 361 P.2d 906 (1961), to determine whether that would lead
to the same result.
[
Footnote 2/6]
Petitioners in No. 74-647, the State of New York and the New
York State Housing Finance Agency, argue that respondents' suit
against them is barred by the Eleventh Amendment. The Court finds
it unnecessary to deal with this contention, but my conclusion
requires that I answer the Eleventh Amendment defense. The Court of
Appeals found no Eleventh Amendment bar here, and I am in agreement
with this result.
The Housing Finance Agency is a "public benefit corporation"
under New York law, N.Y.Priv.Hous.Fin.Law § 43(1) (1962 and Supp.
1974-1975), empowered "[t]o sue and be sued," § 44(1). The agency
is authorized to accept funds from the State, the Federal
Government, or "any other source," § 44(16), but it also is
empowered to issue notes, bonds, or other obligations to obtain
financing, §§ 44(7) and 46. Significantly, the State is not liable
on the agency's notes or bonds, and such obligations do not
constitute debts of the State. § 46(8). The agency is therefore not
an "alter ego" of the State; rather, it is an independent body not
entitled to assert the Eleventh Amendment.
See Cowles v.
Mercer County, 7 Wall. 118 (1869); P. Bator, p.
Mishin, D. Shapiro & H. Wechsler, Hart & Wechsler's The
Federal Courts and the Federal System 690 (2d ed.1973).
Compare
Matherson v. Long Island State Park Comm'n, 442 F.2d 566 (CA2
1971),
and Zeidner v. Wulforst, 197 F. Supp.
23, 25 (EDNY 1961),
with Whitten v. State University
Construction Fund, 493 F.2d 177 (CA1 1974),
and Charles
Simkin & Sons, Inc. v. State University Construction
Fund, 352 F.
Supp. 177 (SDNY),
aff'd mem., 486 F.2d 1393 (CA2
1973).
The State of New York, unlike the agency, may assert the
Eleventh Amendment, but it has consented to suit.
"With regard to duties and liabilities arising out of this
article, the state, the commissioner or the supervising agency may
be sued
in the same manner as a private person."
N.Y.Priv.Hous.Fin.Law § 32(5) (emphasis added). To be sure,
state waiver statutes are to be strictly construed, and they do not
necessarily indicate consent to suit in federal court.
See
Kennecott Copper Corp. v. State Tax Comm'n, 327 U.
S. 573 (1946);
Ford Motor Co. v. Department of
Treasury, 323 U. S. 459
(1945);
Great Northern Life Ins. Co. v. Read, 322 U. S.
47 (1944). Nevertheless, the language used in § 32(5)
is, in my view, sufficiently broad to permit suit in both state and
federal courts.