## Facts

- A Merrill Lynch program offered customers large-denomination ($100,000) bank certificates of deposit (CDs) marketed as “negotiable, insured, and liquid,” with Merrill Lynch maintaining a secondary market for resale.
- Merrill Lynch represented that it screened many banks for competitive yields, monitored bank creditworthiness, and discouraged customers from dealing directly with issuing banks.
- Gary Plastic bought twelve $100,000 CDs through the program.
- The complaint alleged the CDs sold through Merrill Lynch were specially created for Merrill Lynch customers and were not the banks’ ordinary CDs available directly to the public.
- The complaint alleged the CDs paid lower interest than the banks’ ordinary CDs and that defendants retained the interest-rate differential as an undisclosed commission.
- The complaint alleged defendants’ marketing created a misleading impression of competitive yields, independent selection and monitoring, and meaningful liquidity through the secondary market.
- Gary Plastic alleged it suffered damages from lower yields and risks inconsistent with defendants’ representations.

## Issues

1. Whether the brokered CD program, viewed as a whole, could qualify as a “security,” including an “investment contract,” under the Securities Act of 1933 and the Securities Exchange Act of 1934 despite the rule that a conventional bank CD purchased directly from a bank is generally not a security.
2. Whether the complaint sufficiently stated federal securities-fraud claims (including under Rule 10b-5) and related RICO claims to survive dismissal under Rule 12(b)(6).

## Decision

- The Second Circuit reversed the Rule 12(b)(6) dismissal and remanded for further proceedings.
- The court held the complaint adequately alleged the program was a “security” because the CD product plus Merrill Lynch’s marketing and services could constitute an “investment contract.”
- The court held the pleaded misrepresentations and omissions—including an undisclosed interest-rate spread/commission and misleading claims about competitive yields and liquidity—were sufficient at the pleading stage.
- Because the securities-law claims were adequately pleaded, dismissal of the related RICO theory on the ground that no security was involved was also improper.

## Legal Principles

- Whether an instrument is a “security” depends on the economic reality of the transaction and the factual setting as a whole, not merely the label attached to the instrument.
- A conventional bank CD may fall outside federal securities regulation, but a CD can be part of a broader arrangement that qualifies as an “investment contract.”
- Under the Howey framework, an investment contract may be found when investors commit money with an expectation of financial return and the venture’s value depends substantially on the promoter’s ongoing efforts (e.g., selection, monitoring, and providing liquidity through a secondary market).
- At the Rule 12(b)(6) stage, courts accept well-pleaded factual allegations as true and assess only whether the complaint plausibly states a claim for relief.

## Conclusion

The court held that a brokered CD program marketed with promises of selection, monitoring, and secondary-market liquidity may be treated as an investment contract and therefore a security, and that allegations of undisclosed compensation and misleading marketing were sufficient to proceed beyond the pleading stage.


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