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November 17, 1972

John J. WASNOWIC and Keystone Traders, Inc., Plaintiffs,
CHICAGO BOARD OF TRADE et al., Defendants

Nealon, District Judge.

The opinion of the court was delivered by: NEALON

NEALON, District Judge.

 Defendants have requested the court to reconsider its memorandum of December 30, 1970, in which the court denied defendants' motion to dismiss for lack of jurisdiction under the Securities Exchange Act of 1934 and for invalid service of process pursuant to § 27 of that Act. Defendants' motion was denied on the grounds that, in taking the allegations of plaintiffs' complaint as true, jurisdiction was proper in that the discretionary trading account in commodities futures that the plaintiffs had with J. Samuel Sicherman, trading as J. Samuel Sicherman & Co. (hereafter Sicherman), was an "investment contract" and hence a "security" within Section 2(1) of the Securities Act of 1933, 15 U.S.C. § 77b(1) and Section 3(a)(10) of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(10). In so ruling, the court relied on two decisions of the Southern District of New York, Berman v. Orimex Trading, Inc., 291 F. Supp. 701 (S.D.N.Y.1968) and Maheu v. Reynolds & Co., 282 F. Supp. 423 (S.D.N.Y.1967); reargument denied 282 F. Supp. 428 (1968), both apparently holding that a joint account in commodities futures may constitute a "security" even if there was no pooling arrangement or finding of a "common enterprise" as part of the agreement alleged to be a security. See Maheu v. Reynolds & Co., supra at 429. *fn1" See also, I Loss Securities Regulation 489 (2d Ed. 1961).

 Defendants now raise for the first time *fn2" their contention that the "commonality" aspect of the Maheu and Berman decisions conflicts with the Supreme Court's definition of a security as announced in S.E.C. v. W. J. Howey Co., 328 U.S. 293, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946) and Tcherepnin v. Knight, 389 U.S. 332, 88 S. Ct. 548, 19 L. Ed. 2d 564 (1967). In support of their contention, they request the court to reconsider its prior memorandum in light of the recent Seventh Circuit opinion in Milnarik v. M-S Commodities, Inc., 457 F.2d 274 (7th Cir. 1972); cert. denied 409 U.S. 887, 93 S. Ct. 113, 34 L. Ed. 2d 144 (1972), which held, contrary to Berman and Maheu, that absent a finding of a common enterprise among investors, a discretionary account in commodities futures is not a security within the meaning of the federal securities laws. Thus, the above-cited cases represent two divergent lines of authority on this question. Inasmuch as I agree with defendants that the Milnarik court's requirement of finding a common enterprise is more consistent with the Supreme Court's definition of an "investment contract", a review of the facts and the analysis which that court used is in order.

 In Milnarik, plaintiffs had opened a discretionary account with the defendant on the understanding that defendant would use the funds to trade in commodities futures for plaintiffs' benefit. After various trades on plaintiffs' account had resulted in losses, defendant demanded an additional sum to cover the losses. Plaintiffs refused and started an action in the Northern District of Illinois to rescind the agreement and recover their deposit plus interest, arguing that their commodities account was a "security" which should have been registered pursuant to Section 5 of the Securities Act of 1933. The District Court, after assuming the presence of a security, dismissed the complaint holding that the agreement resulted in a private rather than a public offering and, therefore, was not required to be registered. Milnarik v. M-S Commodities, Inc., 320 F. Supp. 1149 (N.D.Ill.1970). Without reaching the question whether the offering was public or private, the Seventh Circuit Court of Appeals agreed that registration was not required, holding that the arrangement between plaintiffs and defendant did not constitute a security. In reaching their decision, the court reviewed both Howey and Tcherepnin and observed that ". . . [judicial] analyses of the question whether particular investment contracts are 'securities' within the statutory definition have repeatedly stressed the significance of finding a common enterprise." Milnarik v. M-S Commodities, Inc., supra 457 F.2d at 276. For example, in Howey, supra, the Supreme Court defined "security" as 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 promotor or a third party. . ." (Emphasis supplied.)

 S.E.C. v. Howey, supra, 328 U.S. at 298, 66 S. Ct. at 1103. And, in Tcherepnin v. Knight, supra, a case arising under the 1934 Act, the Court identified the existence of a common enterprise as an important aspect of their analysis:

"Of the several types of instruments designated as securities by § 3(a)(10) of the 1934 Act, the petitioners' shares most closely resemble investment contracts. 'The test [for an investment contract] is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.' [ S.E.C. v. W. J. Howey Co., 328 U.S. 293, 66 S. Ct. 1100, 90 L. Ed. 1244] at 301 [ 66 S. Ct. at 1104]. Petitioners are participants in a common enterprise -- a money-lending operation dependent for its success upon the skill and efforts of the management of City Savings in making sound loans. Because Illinois law ties the payment of dividends on withdrawable capital shares to an apportionment of profits, the petitioners can expect a return on their investment only if City Savings shows a profit."

 Tcherepnin v. Knight, supra, 389 U.S. at 338-339, 88 S. Ct. at 554. In applying the Howey test in Milnarik, the court found the common enterprise element to be totally lacking:

 Milnarik v. M-S Commodities, Inc. supra, 457 F.2d at 276.

 Further, the court quoted with approval the following excerpts from the district court's opinion describing the arrangement:

"In essence, this contract creates an agency-for-hire rather than constituting the sale of a unit of a larger enterprise. No matter how many different persons Nelson became an agent for under similar or even identical discretionary contracts, his relationship with each would remain as that of agent and principal. Each contract creating this relationship is unitary in nature and each will be a success or failure without regard to the others. Some may show a profit, some a loss, but they are independent of each other. No matter how many discretionary trading accounts Nelson may have had with other principals, the 'security' 'issued' to the plaintiffs, their discretionary trading account, could not be offered to anyone else."
"This characteristic of common enterprise is completely lacking in the present case. Even assuming that Nelson in fact solicited and collected money from numerous parties, no allegations are made that a common enterprise existed comprised of all people possessing discretionary account contracts with him. No claim is made that Nelson traded in a uniform manner for each of these accounts. Even if he had so uniformly traded, no pooling of funds for a common purpose is alleged. Nelson was apparently simply an agent for a number of separate and distinct principals, the plaintiffs ...

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