## Facts

- In 1974, Bache & Co.’s registered representative, John Bergman, solicited Robert and Nancy Brodt to open a discretionary commodities trading account.
- The Brodts, with limited commodities experience, sold their stock portfolio and placed the proceeds into a savings-and-loan account in their names using a form prepared by Bache.
- Under the arrangement, Bache representatives had authority to withdraw funds at their discretion to finance commodities futures/options transactions without advance notice to the Brodts.
- After Bergman left Bache, the Brodts learned they had lost all invested funds and that Commonwealth Commodities Corporation (through which the commodity option contracts were purchased) was insolvent.
- The Brodts sued in federal district court alleging, among other claims, violations of federal securities laws and the Commodity Exchange Act, plus negligence and misrepresentation.
- Count two alleged the discretionary commodities account was an unregistered “investment contract” (and thus a “security”) sold in violation of the Securities Act of 1933 registration provisions.

## Issues

1. Whether a discretionary commodities trading account constitutes an “investment contract,” and therefore a “security,” subject to the Securities Act of 1933 registration requirements.

## Decision

- The Ninth Circuit affirmed the district court.
- A discretionary commodities trading account is not an “investment contract” and therefore not a “security” under the Securities Act of 1933.
- Because the account was not a security, the registration-based claim under 15 U.S.C. § 77e(a)(1) and (c) was properly dismissed, and partial summary judgment for plaintiffs was properly denied.

## Legal Principles

- Whether an arrangement is an “investment contract” is analyzed under the Howey framework, including whether there is an investment of money in a common enterprise with profits expected primarily from the efforts of others.
- A discretionary trading account that authorizes a broker to place commodities trades using customer funds is a brokerage/trading mechanism, not a separate security.
- The Securities Act of 1933 registration provisions apply only to the offer or sale of a “security”; absent a qualifying security, a § 77e registration claim fails as a matter of law.

## Conclusion

The court held that discretionary commodities trading accounts are not securities under the Securities Act of 1933, so the plaintiffs could not proceed on a federal registration-violation theory based solely on the existence and operation of such an account.


Brodt v. Bache & Co., 595 F.2d 459 (9th Cir. 1978)