## Facts

- Defendants operated independent sales offices that solicited investors by telephone to buy $10,000 “units” in LLCs formed to finance motion pictures, including *Carlo’s Wake* and *The Amati Girls*.
- Investors received written offering materials (including operating and subscription agreements) that described investors as having significant management rights and voting authority in the LLCs.
- In practice, investors generally played a passive role: they rarely voted, had no meaningful ability to negotiate terms, did not obtain practical management control during solicitation and early formation stages, and were not expected to have film-industry experience.
- The sales offices received sizeable commissions when units were sold; the total commissions to the defendants exceeded approximately $242,000.
- The government alleged the offering materials failed to accurately disclose commissions and that the nondisclosure was a material omission in connection with the offer and sale of securities.
- A jury convicted the defendants of securities fraud and conspiracy to commit securities and mail fraud.
- At sentencing, the district court calculated “loss” as the full amount paid by investors for units sold, without crediting any residual value of the interests received.

## Issues

1. Whether the LLC units sold to finance films were “securities” as investment contracts, where formal documents granted investors managerial rights but the practical reality reflected investor passivity and reliance on promoters.
2. Whether the district court erred by giving a “no ultimate harm” instruction on intent to defraud in a securities- and mail-fraud prosecution.
3. Whether the district court erred in calculating sentencing loss as the full purchase price paid by investors without offsetting the value, if any, of the interests investors received.

## Decision

- The court held the LLC units were investment contracts and therefore securities, because economic reality showed investors reasonably expected profits primarily from others’ efforts despite nominal management rights.
- The court affirmed the use of the “no ultimate harm” instruction, concluding it properly explained that a belief investors might ultimately profit does not negate intent to deceive through material misstatements or omissions.
- The court vacated the sentences and remanded for resentencing, holding the loss calculation improperly treated the entire purchase price as loss without accounting for any value of the interests provided to investors.
- The convictions were affirmed; the sentences were vacated and remanded.

## Legal Principles

- Whether an instrument is an investment contract turns on the Howey framework and requires examining economic reality, not merely formal contract language.
- Nominal or illusory managerial rights do not defeat securities status when investors, as a practical matter, are passive and rely on promoters’ efforts for returns.
- In fraud prosecutions, intent to defraud may be found where a defendant knowingly uses material misrepresentations or omissions to obtain money, even if the defendant believes victims will not suffer ultimate harm.
- Sentencing loss for fraud generally must reflect net pecuniary harm and should consider the value of money, property, or services provided to victims; using gross investment amounts without offset can overstate loss.

## Conclusion

The Second Circuit treated film-financing LLC units as securities based on investors’ realistic lack of control, upheld the fraud-intent instruction, and required resentencing because loss could not be equated to total investor payments without considering the value of the interests investors received.


United States v. Leonard, 529 F.3d 83 (2d Cir. 2008)