SW Legal studies in Business

Federal Securities Law Does Not Apply to Transaction, But State Securities Law Might
Description Appeals court held that in a case involving a loan made by an investor to a start-up company, as suggested by a stockbroker, there was no violation of federal securities law since a private loan is not a security. However, the claim of fraud involved may have violated Texas Securities Law and state common law, so the suit may proceed on that basis.
Topic Securities Law
Key Words Security; Application of Law; Loans; State Law
C A S E   S U M M A R Y
Facts Lewis was a customer of Bear Stearns brokerage house for several years. His stockbroker, Fresne, tried to interest him in buying stock in a private placement for Mad Martha's, a start-up ice cream retailer. Lewis declined to buy stock in the planned offering, but, after learning more about the business, loaned $650,000 for 90 days to the business promoter. The business collapsed and went into bankruptcy before a stock offering was made and the loan was never repaid. Lewis sued his stockbroker for securities fraud, contending he gave him misleading information about Mad Martha's, which induced him to make the loan. The district court dismissed the suit, holding that the loan was not a security covered by the securities law. Lewis appealed.

Affirmed in part and reversed in part. The loan was a private transaction outside the scope of the Securities Act of 1933 governing the sale of securities. Hence, Lewis has no cause of action against his stockbroker or brokerage firm under the federal securities law. However, the transaction occurred in Texas, so Lewis may have a cause of action against the stockbroker under the Texas Securities Act, which sets somewhat different standards than the federal law, and under the common law for fraud. The case may proceed on the basis of state law.

Citation Lewis v. Fresne, 252 F.3d 352 (5th Cir., 2001)

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