Nature of the Case
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Facts
Wyer and Beasley formed D to participate in the business of buying, collecting, and reselling charged-off consumer debt from financial institutions such as banks and credit card companies. The appropriate price for a pool of debt depends on the many factors that determine how likely it is that the debt in the pool will be collected. The wholesaler makes its profit by buying pools that seem profitable; outsourcing the collection for a certain period of time; and then reselling the debt on the secondary market for an even lower price than it paid for the debt. Wyer and Beasley planned to raise funds through D and then buy fractional shares in debt pools ultimately purchased by New Vision. New Vision would aggregate money from D and other sources, purchase debt pools through auction and forward-flow contracts and then outsource the collection of the debt to Enhanced Asset Management (EAM), a collection company. D raised money by soliciting members of the general public to become partners in Colorado Registered Limited Liability Partnerships (RLLPs). D's recruiters used scripts. Potential partners would be expected to participate in the operation of the partnership, but their actual duties would be limited to checking a box on ballots that would be periodically sent to them. Offering materials also represented that the RLLP interests were not securities and that the federal securities laws did not apply to the interests. D organized twenty-eight RLLPs, containing 485 partners, with a total capitalization of over $26 million. The partners had no demonstrated expertise in the debt purchasing business and included a nurse, a housewife, and a railroad retiree. Each partner had a net worth of at least $250,000, and more than seventy-five percent had a net worth exceeding $500,000. Ninety percent of the partners self-reported business experience between 'average' and 'excellent.' Two-thirds of the investors invested through their IRA accounts. D did not disclose the existence of the other partnerships or the relationship with New Vision to the RLLP partners. D planned from the beginning to pool the money collected from the RLLPs in order to purchase fractional interests in debt pools owned by New Vision. Each partnership was to last for three years. The managing general partner (MGP) would be the operational head of the partnership, with sole authority to bind the partnership. Partners could elect to receive returns on capital equal to 3.6 percent of their contribution per quarter for three years, or else a 16.5 percent annual return on capital payable at the end of the three years. The MGP would collect fees on each transaction. The MGP would participate in any profits over and above the 14.4 or 16.5 percent annual return. Partners would receive fifty percent of profits, and the MGP would get the other half. Partners had the ability to select the MGP. They had the exclusive right to approve any act obligating the partnership in an amount exceeding $5000. They could remove the MGP upon a unanimous vote, for cause. They could inspect books and records and participate in various committee meetings. D made the key business decisions. Ballots contained only the name of the issuer, the face value of the pool, and the price per dollar of debt and had only a signature line. D purchased more debt than the partners authorized thirty times; purchased debt before the ballots had been sent six times, and purchased debt before the 10-day return period had expired seventy-three times. P brought this action after D had already received a cease and desist order from the State of California enjoining the sale of unregistered securities and precluding it from selling the interests in that state. The district court concluded that the RLLP interests were not investment contracts and therefore not securities. The district court concluded that Ds had not committed securities fraud. P appealed.
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