## Facts

- Individual investors bought contracts marketed through a Utah cooperative involving the sale, care, breeding, and resale of live beavers at prices up to $1,200 per animal.
- The promoters represented that the beavers were high-quality “domestic” breeding stock and that a ready resale market existed, creating expectations of substantial profits.
- Under the arrangements, investors did not take possession; the promoters retained the animals, managed their care and breeding, and controlled resale, making investor returns dependent on the promoters’ efforts and operations.
- The investors alleged they were induced to purchase by material misrepresentations and omissions about the beavers’ quality, the existence of a genuine resale market, and related operational and financial facts.
- The investors sued under the Securities Act of 1933 and the Securities Exchange Act of 1934, including Rule 10b-5.
- After trial, the district court found the beaver contracts were “investment contracts” (securities), found material misrepresentations and omissions, and entered damages judgments for the investors.
- The cooperative entity was dismissed for lack of jurisdiction due to failure of service; a related corporation was found not liable. The district court found the individual defendants were controlling persons of the cooperative.

## Issues

1. Whether the beaver-breeding contracts were “securities,” specifically “investment contracts,” under the federal securities laws.
2. Whether the sales involved material misrepresentations or omissions in connection with the purchase or sale of securities in violation of Rule 10b-5.
3. Whether individual “controlling persons” could be held liable even though the primary selling entity was dismissed for lack of jurisdiction.
4. Whether the district court’s findings on liability elements and damages were clearly erroneous.

## Decision

- The Seventh Circuit affirmed the judgments for the investors.
- The court agreed that the beaver contracts were investment contracts and therefore securities under the 1934 Act.
- The court upheld findings that defendants made material misrepresentations and omissions and failed to provide full and fair disclosure as required by Rule 10b-5.
- The court affirmed liability against the individual defendants as controlling persons of the cooperative notwithstanding the cooperative’s dismissal for lack of service.
- The court upheld the damage awards, finding no clear error in the district court’s fact-finding or calculations.

## Legal Principles

- An arrangement involving an investment of money in a common enterprise with an expectation of profits predominantly from the efforts of others can qualify as an “investment contract” and thus a security, even if it involves tangible assets.
- Rule 10b-5 prohibits material misstatements and omissions and requires full and fair disclosure in connection with the purchase or sale of securities.
- Control-person liability may attach to individuals who exercise control over the primary violator’s operations and sales practices; such liability can be imposed even when the primary entity is not before the court due to jurisdictional dismissal.
- Appellate review defers to trial-court fact findings unless clearly erroneous, including findings on materiality, reliance, and damages.

## Conclusion

The court treated the beaver-breeding contracts as securities based on the investors’ dependence on the promoters’ managerial efforts and affirmed Rule 10b-5 liability for material misrepresentations and omissions, including holding controlling individuals liable despite the dismissal of the cooperative seller for lack of service.


Kemmerer v. Weaver, 445 F.2d 76 (7th Cir. 1971)