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Securities Fraud, § 551.41(2) – Promissory Note

State v. Kevin F. McGuire, 2007 WI App 139, PFR filed 6/4/07
For McGuire: Timothy A. Provis

Issue: Whether a promissory note is a “security” within the meaning of § 551.02(13(a).

Holding: The 4-factor test of In Reves v. Ernst & Young, 494 U.S. 56, 66-67 (1990) applies: “1) the motivations of a reasonable seller and buyer; (2) the note’s ‘plan of distribution’; (3) the reasonable expectations of the investing public; and (4) whether other risk-reducing factors exist, making unnecessary the application of the securities laws to protect the public,” ¶11. “The bottom line is that McGuire’s motivation was to raise money for his NASCAR venture and DeLuisa’s motive was to make a profit. This factor weighs against a family resemblance to a nonsecurity.” “(T)he fact that this transaction involved only DeLuisa as an investor [8] is not fatal, because a debt instrument may be distributed to but one investor, yet be a security.” “…McGuire convinced DeLuisa that since NASCAR was “up and coming,” his venture had a promising future and she would realize a return significantly better than likely could have been achieved at a local bank. A reasonable investor would have considered the transaction with its higher-than-commercial interest rate to be an investment. We conclude this factor weighs against a resemblance to the family of non-securities.” “There also is no evidence to indicate that the note was covered by any … regulatory scheme to protect DeLuisa. … We conclude this factor also weighs against resemblance to the family of nonsecurities.”

¶23 On balance, then, the first, third and fourth factors weigh against any resemblance to the family of nonsecurities; only the second factor weighs in favor. The factors are considered as a whole, and failure to satisfy one of the factors is not dispositive. J.T. Wallenbrock & Assocs., 313 F.3d at 537. McGuire’s fraud consisted of his failure to inform DeLuisa of his undischarged bankruptcy, the terms and conditions of the bankruptcy plan which significantly limited McGuire’s ability to incur debt, and his felony conviction and prison time for theft by conversion. The trial court found these omissions and McGuire’s affirmative statements that this was a good, safe investment to be material facts which would influence a reasonable investor’s investing decision. These findings are not clearly erroneous. See Schnuth v. Harrison, 44 Wis. 2d 326, 335, 171 N.W.2d 370 (1969).

¶24 We conclude that McGuire’s note qualifies as a “security” within the meaning of Wis. Stat. § 551.02 and thus his conduct qualified for prosecution pursuant to Wis. Stat. § 551.41.

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