## Facts

- Gerald M. Hocking, a Nevada resident, sought to buy a Hawaii condominium as an investment to generate rental income.
- Hocking asked Maylee Dubois, a Hawaii-licensed real estate agent employed by Vitousek & Dick Realtors, Inc., to locate a suitable property.
- Dubois located a unit in a resort-style complex in Honolulu that was operated like a hotel and involved centralized rental operations.
- Hocking asserted Dubois assured him he would be purchasing directly from the developer; the unit was actually owned by prior purchasers rather than the developer.
- Hocking was told a rental-pool arrangement would be available under which participating owners would share pooled rental revenues regardless of whether a particular unit rented.
- After the purchase, Hocking executed a rental-management agreement appointing a professional manager (Hotel Corporation of the Pacific) as his agent and entering the rental pool.
- About three years later, after failing to make a balloon payment due on the property, Hocking sued the broker and agent alleging securities fraud based on misrepresentations and omissions tied to the purchase and rental-pool arrangement.

## Issues

1. Whether the condominium purchase, when offered in conjunction with a rental-pool and professional management arrangement, could constitute an “investment contract” and thus a “security” for purposes of § 10(b) and Rule 10b-5.
2. Whether the evidence created a genuine dispute of material fact on the “security” element, making summary judgment improper.

## Decision

- The en banc Ninth Circuit reversed the district court’s summary judgment for defendants and remanded.
- The court held that, viewing the record in the light most favorable to Hocking, a reasonable factfinder could conclude the transaction involved an investment-contract security.
- The court did not decide as a matter of law that the transaction was a security; it held only that triable issues existed as to what was offered and sold.

## Legal Principles

- Under the Howey test, an investment contract exists when there is (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits to be derived from the efforts of others.
- In determining whether a transaction is a security, courts look to the economic reality of the overall scheme rather than the formal label attached to the transaction.
- Ordinary real-estate purchases are not typically securities, but a real-estate sale combined with a rental-pool or similar profit-sharing and management arrangement may qualify as an investment contract.
- A rental pool that shares revenues among participating owners can support the “common enterprise” element through pooling of profits and risks.
- Reliance on a professional manager to operate and market units and generate rental income can support the “efforts of others” element.
- Summary judgment is improper where material factual disputes bear directly on whether the transaction meets the investment-contract elements.

## Conclusion

The en banc Ninth Circuit held that the condominium sale tied to a rental-pool and professional management arrangement presented triable fact questions under Howey, requiring reversal of summary judgment and further proceedings on the federal securities-fraud claims.


Hocking v. Dubois, 885 F.2d 1449 (9th Cir. 1989) (en banc)