Mordaunt Et Al. v. Incomco Et Al.

Background

Responding to a magazine advertisement, two investors gave more than $45,000 to a firm to trade commodities futures and gave the firm full discretion to make investment decisions. The accounts lost value, the investors sued claiming the ad was false and that the accounts were securities under federal law, and a District Court agreed. The Ninth Circuit reversed, finding the necessary "common enterprise" was lacking because the firm earned commissions while the investors lost money.

Reasoning

The central question is whether a discretionary commodities futures account is an "investment contract"—meaning an investor puts in money, expects profits, and relies on others to produce those profits. Lower courts disagree on what that requires. Some require pooled investments (called "horizontal commonality"). Others look to the relationship between investor and broker ("vertical commonality"), but differ on whether broker control alone is enough or whether the broker’s gains must correlate with investors’ gains. The Court declined to review the dispute, leaving the Ninth Circuit’s approach in place for now.

Real world impact

Because the Court refused review, appeals-court disagreement remains and no national rule was announced. That leaves investors, brokers, and regulators uncertain about when discretionary futures accounts will be treated as securities and covered by federal investor-protection laws. The ruling is not a final decision on the legal question and could change if the Court later decides to take a similar case.

Dissents or concurrances

Justice White, joined by the Chief Justice and Justice Brennan, dissented from the denial and would have granted review because of the clear and important split among appeals courts.