## Facts

- The Securities and Exchange Commission (SEC) brought a civil enforcement action against Kenton Capital, Ltd. (a Cayman Islands corporation) and its president, Donald C. Wallace, arising from a marketed “prime bank” trading program.
- Defendants offered investors participation interests in purported high-yield bank trading opportunities, representing extraordinary returns and minimal or no risk.
- Promotional materials and investor agreements projected extremely large profits, including claimed annual returns in the tens of thousands to over one million percent and, in some materials, weekly returns over a fixed period.
- Wallace employed an agent to solicit investors and distribute program materials; dozens of investors pledged funds based on the representations.
- Investor funds were collected through the program structure and routed through entities connected to the promoters; the SEC alleged misuse of investor money.
- The SEC alleged the offered interests were securities (investment contracts) sold without a registration statement and without a valid exemption.
- The SEC moved for summary judgment on liability and remedies.

## Issues

1. Whether the interests sold in the “prime bank” trading program were “securities” as investment contracts under the Securities Act of 1933.
2. Whether Kenton Capital and Wallace violated the Securities Act’s registration provisions by offering or selling those securities without registration and without an available exemption.
3. Whether the SEC was entitled to summary judgment because no genuine dispute of material fact existed on liability.
4. What equitable and monetary relief was warranted, including disgorgement, prejudgment interest, and civil penalties.

## Decision

- The court granted the SEC’s motion for summary judgment against Kenton Capital and Wallace.
- The court held the program interests were securities in the form of investment contracts.
- The court held defendants violated the Securities Act by offering and selling unregistered securities without establishing an exemption.
- The court ordered remedies against Wallace including disgorgement (about $265,245.10), prejudgment interest, and a civil penalty (about $1.2 million).

## Legal Principles

- An arrangement constitutes an investment contract when there is (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) to be derived from the efforts of others.
- Labels and marketing terms do not control; the economic reality of the transaction governs whether an instrument is a security.
- Securities Act registration provisions may be enforced without proof of scienter; liability turns on the offer or sale of a security without an effective registration statement and without a valid exemption.
- Summary judgment is appropriate when the evidentiary record establishes the elements of the statutory violation and the defendant fails to raise a genuine dispute of material fact.
- In SEC enforcement actions, courts may order disgorgement, prejudgment interest, and civil penalties to deprive wrongdoers of ill-gotten gains and deter future violations.

## Conclusion

The court treated the marketed “prime bank” participation interests as investment contracts and granted summary judgment for the SEC, finding unregistered offers and sales in violation of the Securities Act and ordering substantial disgorgement, interest, and civil penalties against Wallace.


Securities & Exchange Commission v. Kenton Capital, Ltd., 69 F. Supp. 2d 1 (D.D.C. 1998)