Suit holding that there was no security involved in

suit holding that there was no security involved in the transactions between the
parties.
○ Synopsis of Rule of Law: An investment contract type of security exists when the
scheme involves 1) an investment of money 2) in a common enterprise 3) with
profits to come solely from the efforts of others.
○ Facts: Appellees solicited buyer-investors to raise earthworms claiming that little
work was required and success was guaranteed by an agreement to repurchase
at $2.25 per pound. Appellants allege that the success rate was necessarily

lower than promised, the selling price of $2.25 was inflated, and the only way
Appellees could sell at that price was to sell the worms to new worm farmers at
inflated prices. Appellees claim that this is an investment contract and therefore
Appellees have sold a security. Since the security was not registered under the
Securities Act of 1933, Appellants have the statutory right to rescind under
Section: 12.
○ Issue: Whether the transaction between the parties involved an investment
contract.
○ Held: Yes. The transaction between the parties involved an investment contract.
● US v. O’Hagan
○ {misappropriation, insider trading}
○ Brief Fact Summary: Respondent, James O’Hagan, was an outsider who had
access to confidential information, and he profited from the information at the
expense of the company and other shareholders. The Securities and Exchange
Commission (SEC) accused Respondent of Section:10(b) and Section:14(e)
violations.
○ Synopsis of Rule of Law: An outsider who misappropriates confidential
information to personally benefit violates Section:10(b) because there is
deception in connection with the purchase or sale of a security.
○ Facts: Respondent was a partner in a law firm, Dorsey & Whitney, which was
representing a company that was potentially tendering an offer for common stock
of the Pillsbury Company. Respondent was not personally involved in the
representation, but he was aware of the transaction enough to know that if he
purchased Pillsbury securities now that they would increase in value once the
offer went through. Respondent was going to use the profits from this transaction
to replace money that he embezzled from the firm and its clients. After the offer
went through, he made a $4.3 million profit. The SEC investigated Respondent’s
transactions and claimed he violated Section:10(b) and Section:14(e) for
misappropriating confidential information. A jury convicted Respondent.
○ Issue: There are two issues regarding Section:10(b) and Section:14(e). The first
issue is whether Respondent violated Section:10(b) and Rule 10b-5 when he
misappropriated nonpublic information to personally benefit through the trading of
securities.The second issue is whether Rule 14e-3(a) exceeds the SEC’s rule-
making authority as granted by the Securities and Exchange Act.