🎆 Cases cited in Robinhood fractional share critique from staff

[JFWooten4]

I know these two quite well and sure as hell wouldn't mind starting off the docs with 'em:

Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 756 F.2d 230 (2d Cir. 1985)

This case involved securities law and the definition of an investment contract. Gary Plastic sued Merrill Lynch, alleging that Merrill Lynch's program of selling bank-issued certificates of deposit (CDs) on the secondary market constituted an unregistered securities offering.

The Second Circuit held that Merrill Lynch’s activities in repackaging and reselling CDs, along with its marketing efforts, transformed what would normally be a simple banking product into a potential investment contract under securities laws. This decision expanded the scope of what could be considered a "security" under federal securities laws, particularly when a financial institution actively markets and manages a product with investment-like features.

Abrahamson v. Fleschner, 586 F.2d 862 (2d Cir. 1977)

This case focused on securities fraud and liability under the Investment Advisers Act of 1940. The plaintiffs, limited partners in an investment advisory firm, sued the general partners (Fleschner and others), alleging fraud, breach of fiduciary duty, and misrepresentation.

The Second Circuit held that the general partners were liable under Rule 10b-5 of the Securities Exchange Act and the Investment Advisers Act. The court found that investment advisers could be held liable for fraudulent conduct, even in the absence of direct privity with investors, because they owed a fiduciary duty. This case reinforced the broad reach of antifraud provisions in securities laws, particularly in investment advisory relationships.

[JFWooten4]

Here's a quote on the intermediated side:

Although the Company believes that the Abrahamson line of case law unequivocally supports its conclusion that the fractional shares offered through its platform do not constitute separate securities, the Company also has analyzed whether fractional shares could be deemed "investment contracts" under the federal securities laws. As set forth in greater detail below, the Company does not believe that a fractional share constitutes an “investment contract” separate and apart from the underlying whole share. A fractional share does not represent a common enterprise and does not depend in any material respect upon the managerial efforts or expertise of the Company or the Robinhood Subsidiaries, thus lacking essential attributes of an investment contract security under the leading judicial precedent, SEC v. W.J.Howey Co. (“Howey”) and its progeny.

[JFWooten4]

There are good cases incl Howey in a DEX study around notes 24 and 34. It has all the classics as well. We should have some upcoming suits from the fractional location in dark pools.