## Facts

- Thomas W. Glynn organized GeoPhone to commercialize a telecommunications system allegedly based on Convolutional Ambiguity Multiple Access (CAMA) technology.
- James G. Robinson, a wealthy businessman with no telecommunications background, was solicited to provide capital for GeoPhone.
- Robinson initially agreed to loan $1 million to finance a CAMA field test, with a contemplated larger, staged investment totaling $25 million.
- Engineers conducted the field test without using CAMA; Robinson alleged Glynn nevertheless represented the test as successful and as having used CAMA.
- Relying on those representations, Robinson converted the $1 million loan and added $14 million into equity in GeoPhone Company, LLC, and agreed in principle to an additional $10 million investment.
- The parties memorialized the arrangement in a purchase agreement for membership interests and an amended operating agreement.
- The operating agreement gave Robinson significant governance and information rights, including:
  - serving as GeoPhone’s treasurer;
  - appointing two of three board members and occupying one seat;
  - serving on an executive committee with authority over all significant decisions;
  - having rights to inspect books and records and consult with management.
- After learning CAMA was not used in the field test, Robinson sued alleging federal securities fraud, asserting his LLC interest was either “stock” or an “investment contract.”

## Issues

1. Whether Robinson’s membership interest in GeoPhone Company, LLC was a “security” under the Securities Act of 1933 and the Securities Exchange Act of 1934, either as “stock” or as an “investment contract.”

## Decision

- The Fourth Circuit affirmed summary judgment for Glynn.
- The court held Robinson’s GeoPhone LLC membership interest was not a “security.”
- The interest was not “stock” because it did not bear the traditional characteristics of stock and could not be treated as stock based on labels in documents.
- The interest was not an “investment contract” because Robinson was not a passive investor dependent on the managerial efforts of others; he possessed substantial contractual control and meaningful participation rights.
- Because the interest was not a security, the federal securities antifraud provisions did not apply, and the court did not reach the merits of the alleged misrepresentations.

## Legal Principles

- Whether an instrument is a “security” turns on the transaction’s economic reality, not the parties’ labels.
- Under the Howey test, an “investment contract” requires an expectation of profits from the efforts of others; substantial managerial control and participation rights weigh against security status.
- A person’s lack of technical or industry knowledge does not, by itself, establish reliance on others where the investor retains legal power and practical ability to protect the investment (including through advisors).
- LLC membership interests are not categorically securities; classification depends on the allocation of governance rights, access to information, and the investor’s ability to exercise control.
- An interest described as “stock” is not treated as stock for federal securities purposes unless it has stock’s conventional attributes (including profit-based distributions, negotiability, pledgability, voting proportionality, and capacity to appreciate).

## Conclusion

The court held that a heavily negotiated LLC membership interest conferring substantial governance and information rights to the investor is neither “stock” nor an “investment contract,” so federal securities fraud claims fail absent a qualifying “security.”


Robinson v. Glynn, 349 F.3d 166 (4th Cir. 2003)