Bass, Berry & Sims attorney Chris Lazarini examined a case in which the appellate court upheld a jury verdict in favor of Plaintiff, finding commodity futures contracts are not “securities” and Plaintiff, who was trading them for defendant’s account, was not required to register as an investment adviser in order to receive fees for his trading activities. 

Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.

Stevens vs. S.W.L.H.S. Investment Partners, No. L-15-1129 (Ohio App., 6Dist., 2/3/17) 

*A commodity futures contract is not a “security” under Ohio law. 

**A commodity pool operator may be exempt from registration if the pool has less than 15 participants and the total gross capital contributions received by the operator for units in the pool do not exceed $400,000. 

Stevens traded commodities futures for his own account online. In 2007, his friend Jim Sun asked Stevens to trade on his behalf. After additional discussions, Sun and members of his family created S.W.L.H.S. Investment Partners (“SWLHS”), opened an online account at TradeStation, and gave trading authority to Stevens. The partnership agreement and a separate agreement between Stevens and Sun both included clauses stating that Stevens’ fee would be 40% of the net trading profits generated each year and that he would not be paid if the account suffered losses. In 2007, SWLHS recorded a $493,000 loss, and Stevens received no compensation. In 2008 and 2009, SWLHS recorded $2.06 million in net profits. After receiving only $288,000 in fees, Stevens filed a breach of contract action. Following a jury trial, Stevens was awarded the remaining $535,000 he claimed he was owed, plus attorneys’ fees and costs. 

SWLHS raised several assignments of error on appeal, including the contention that the trial court erred in denying summary judgment or directing a verdict in its favor because Stevens was not registered as an investment adviser or commodities pool operator. Absent proper licensure, SWLHS claimed, Stevens was not entitled to fees.

Conducting a de novo review, the Court affirms the trial court’s rejection of these arguments. First, under Ohio law, an investment adviser is a person who, for compensation, advises others on the value of securities or on the advisability of purchasing or selling securities. Noting the absence of futures contracts in the definition of “security” under Ohio law, and the “overwhelming” weight of federal case law, the Court finds that the futures contracts traded by Stevens were not “securities” and that Stevens therefore did not have to register as an investment adviser under Ohio law.

Second, the Court agrees with the trial court that genuine issues of material fact existed regarding the commodity pool operator question. Those issues included whether Stevens solicited, accepted, or received funds from SWLHS, essential elements of the commodity pool operator definition. They also included whether Stevens’ operation, even if it met the commodity pool operator definition, was exempt from registration as a “small pool,” having less than 15 participants and less than $400,000 in gross capital contributions. 

The Court reversed the award of attorneys’ fees and costs, finding no contractual provision, statute, or bad faith to justify their award. It also denied SWLHS’ assignments of error challenging several of the trial court’s evidentiary rulings and its request for a reversal on the weight of the evidence.