Loans as Securities Investments: Homeowners Are Due Their Share of the Profits. Without them there would be no profits. Without their homes there would be no certificates sold to investors.

Since the first time I seriously looked at what securities brokerage firms on Wall Street talking about derivatives and securitization (around 1970), I have always thought that the consumer contract was a disguised securities scheme and that therefore the “sale” of the financial product sold to consumers and homeowners was in fact a security regulated by SEC laws, rules and regulations.

This makes the buying consumer an investor in the scheme entitled to share in profits and losses. The potential legal signficiance of this view is virtually earth moving: instead of foreclosures, should there instead be an enforceable duty to compute exactly how much homeowners should be paid to execute agreements that were misleading and that resulted in vast profits to the brokers who never appeared anywhere in the chain of title or even the chain of communication?

Just as importantly it casts doubt on whether there was any financial reason or consideration for the issuance of a promise to repay the money received under false pretenses — the main false pretense being that this was a loan transction when in fact it was the main leg of a stool supporting an enormous securities infrastructure — one that never involved sale of the financial product sold to homeowners, but which pretended to do so.

I invite comments on this article. I agree there are trapdoors on both sides but I remain steadfast in my view for very simple and direct reasons.

The sale of certificates to investors was marketed to them as a vehicle to become lenders without exposing themselves to any liability under any regulatory scheme — i.e., lending and securities laws did not apply to them — because they would never be treated or descirbed as lenders and the certificates woudl never be treated as securities — thus dodging any form of disclosure requirements.

The sale of financial products to homeowners was a concealed solicitation to invest in the securities scheme. Neither the investor who bought certificates (falsely masqueraded as “mortgage backed” “securities”) nor the homeowner would have participated if they had been informed through proper disclosure about the incentives and control of the brokerage firm. That is classic securities fraud. In order for the scheme to succeed, both sides needed to swallow the bulls–t.

So the following are some of my notes on the subject for your review and comment. This is not for the faint-heearted. If you are not steeped in legal analysis and preferably securities law, little of what is printed below will make any sense to you.

Notes on Residential Lending as a Hidden Securities Offering to Homeowners:

  1. “we are reminded that, in searching for the meaning and scope of the word “security” in the Act, form should be disregarded for substance and the emphasis should be on economic reality. S.E. C. v. W. J. Howey Co.328 U.S. 293, 298 (1946).” Tcherepnin v. Knight, 389 U.S. 332, 336 (1967)
  2. “As was observed in Howey, “it is immaterial whether the enterprise is speculative or nonspeculative.” 328 U.S., at 301. ” Tcherepnin v. Knight, 389 U.S. 332, 345 (1967)
  3. The SEC, in its brief amicus curiae submitted in this case, points out that it granted a temporary exemption from §§ 7, 8, 12, and 13 of the 1934 Act to passbooks of savings and loan associations, which were being traded on the Cleveland Stock Exchange shortly after the Act’s passage. The SEC also points out that it has repeatedly enforced the Act’s registration provisions against brokers and dealers whose business includes the solicitation of funds for deposit in savings and loan associations. Brief for the SEC 22-24 Tcherepnin v. Knight, 389 U.S. 332, 345 n.34 (1967)
  4. Whether the transaction was disguised as a loan instead of its true nature of being an investment, with attendant risks, into a securities scheme.
  5. Whether the post transaction managerial events (“servicing”), governed strictly under the control of investment banks, constitute “post purchase managerial activities?”
  6. Whether possession and record title constituted sufficient control to render the securities label inapplicable.
  7. Whether the selection of a trustee on a deed of trust mitigates the issue of control by the consumer?
  8. Whether the substance of the transactions was such that the the consumer was entitled to receive a share of the profits.
  9. Whether the instruments issued were a failed attempt to conceal the issuance of a security under false pretenses.
  10. Whether the consumer is entitled to civil damages, attorney fees, punitive damages?
  11. Is the transaction with homeowners similar to the withdrawal of a capital share as a security as stated in Tcherepnin v Knight.
  12. Does concealment of the investment nature eliminate the contract from being categorized as a security?
  13. More specifically does the lack of expectation of a return caused by concealment is a basis for treating and otherwise investment scheme into a loan.
  14. Does the lack of a promise of return eliminate the possibility of categorizing the transaction as an investment? Corollary, is the direct or implied promise of rising real estate process, together with inflated appraisals engineered by investment banks, constitute a sufficient representation of projected profits to constitute the transaction as an investment vehicle, albeit without the knowledge or consent of the homeowner?
  15. What is the product being marketed to the consumer — the property or the transaction?
  16. Since the promoters of the investment scheme expressly and specifically exclude themselves from lending regulations, do they therefore fall under securities regulation under Brockton Savings Bank v Peat Marwick 577 F. Supp 1281, 1284?
  17. Does the contractual duty to make payments to remote creditors constitute “pooling”, thus broadening the contractual understanding to include, by inference and substance the entire securities scheme?
See Florida Bar Journal July/August 2021 P.36 “Turnkey real Estate Investments as Securities”.
As used in both the 1933 and 1934 Acts, security “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”S.E. C. v. W. J. Howey Co., supra, at 299. We have little difficulty fitting the withdrawable capital shares held by the petitioners into that expansive concept of security.
Tcherepnin v. Knight, 389 U.S. 332, 338 (1967)
  1. Does application of the Securities Act of 1933’s protections make sense? Is there a person or entity others are relying on that plays a key role in the profit-making of the enterprise such that disclosure of their activities and plans would be important to investors? Do informational asymmetries exist between the promoters and potential purchasers/investors in the digital asset?
  2. Do persons or entities other than the promoter exercise governance rights or meaningful influence?

The Journey from Security to Non-Security: SEC Director Comments

“The threshold question in any action brought pursuant to the Securities Acts is whether a security exists.” Union Planters National Bank v. Commercial Credit Business Loans, Inc., 651 F.2d 1174, 1179 (6th Cir.), cert. denied, 454 U.S. 1124, 102 S.Ct. 972, 71 L.Ed.2d 111 (1981). The Securities Act of 1933, 15 U.S.C. § 77b(1), provides:
When used in this subchapter, unless the context otherwise requires —
(1) The term “security” means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, floating-trust certificate, certificate of deposit for security, fractional undivided interest in oil, gas, or other mineral rights, . . . or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
The definition of a security under the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(10), is virtually identical. Tcherepnin v. Knight, 389 U.S. 332, 34288 S.Ct. 548, 556
Brockton Sav. Bank v. Peat, Marwick, Mitchell Co., 577 F. Supp. 1281, 1283 (D. Mass. 1983)
Although the certificate of deposit at issue in this case is not included specifically in the statutory definition, the definition is adaptable to the “countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” Securities and Exchange Commission v. Howey Company,328 U.S. 293, 29466 S.Ct. 1100, 110190 L.Ed. 1244 (1946).
Brockton Sav. Bank v. Peat, Marwick, Mitchell Co., 577 F. Supp. 1281, 1283 (D. Mass. 1983)
“In 1982, in Marine Bank v. Weaver, 455 U.S. at 559102 S.Ct. at 1225, the Supreme Court held that a certificate of deposit issued by a federally regulated national bank is not a security under the federal securities laws.” Brockton Sav. Bank v. Peat, Marwick, Mitchell Co., 577 F. Supp. 1281, 1283 (D. Mass. 1983)
“It is unnecessary to subject issuers of bank certificates of deposit to liability under the antifraud provisions of the federal securities laws since the holders of bank certificates of deposit are abundantly protected under the federal banking laws. ( 455 U.S. at 558-59102 S.Ct. at 1224-25)” Brockton Sav. Bank v. Peat, Marwick, Mitchell Co., 577 F. Supp. 1281, 1284 (D. Mass. 1983)
This case arose out of an attempt by the SEC to require Life Partners , Inc. (“LPI”) to register its offerings under the federal securities laws. LPI sells fractional interests in the life insurance policy of terminally ill people to investors, and markets the policies through a network of commissioned licensees. SEC v. Life Partners , Inc., 87 F.3d 536, 537-39 (D.C. Cir. 1996). The majority held that LPI contracts are not securities because they do not meet the Howey test for what constitutes an investment contract. Under the Howey test, “an investment contract is a security subject to the Act if investors purchase with (1) an expectation of profits arising from (2) a common enterprise that (3) depends upon the efforts of others.” Id. at 542; SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). As the SEC notes, the court unanimously agreed that the first two prongs of the Howey test were met here. In particular, the majority noted that “horizontal commonality — defined by the pooling of investment funds, shared profits, and shared losses — is ordinarily sufficient to satisfy the common enterprise requirement” and specifically held that “pooling is in practice an essential element of the LPI program.” Life Partners, Inc., 87 F.3d at 544.
S.E.C. v. Life Partners, 102 F.3d 587, 589 (D.C. Cir. 1996)
interests in mortgage pools or commercial real estate (familiar examples of asset-backed investments) would likely qualify as securities even under their test, because of the post-purchase entrepreneurial and managerial activities required to make these investments succeed, it is not difficult to conjure up instances where their rigid “before-or-after” measuring stick would result in exempting the sale of other risky asset-backed interests from the scope of the securities laws.
S.E.C. v. Life Partners, 102 F.3d 587, 590 (D.C. Cir. 1996)
“the proper course of action for the district court (assuming that the plaintiff’s federal claim is not immaterial and made solely for the purpose of obtaining federal jurisdiction and is not insubstantial and frivolous) is to find that jurisdiction exists and deal with the objection as a direct attack on the merits of the plaintiff’s case.” Williamson v. Tucker,645 F.2d 404, 415 (5th Cir. 1981); see also McGinnis,918 F.2d at 1494.
S.E.C. v. Mutual Benefits Corp., 408 F.3d 737, 741-42 (11th Cir. 2005)
There is no genuine dispute here that there was (1) an investment of money,  (2) in a common enterprise, (3) involving an expectation of profits. The only real dispute concerns whether the investor’s expectation of profits is based “solely on the efforts of the promoter or a third party.” MBC, relying on Securities Exchange Commission v. Life Partners, Inc., 87 F.3d 536 (D.C. Cir. 1996), argues that this element is “a necessarily forward-looking inquiry.” See Appellants’ Br. at 13. MBC asks that we make a distinction between a promoter’s activities prior to his having use of an investor’s money and his activities after he has use of the money.
S.E.C. v. Mutual Benefits Corp.
, 408 F.3d 737, 743-44 (11th Cir. 2005)
Indeed, investment schemes may often involve a combination of both pre- and post-purchase managerial activities, both of which should be taken into consideration in determining whether Howey‘s test is satisfied. Courts have found investment contracts where significant efforts included the pre-purchase exercise of expertise by promoters in selecting or negotiating the price of an asset in which investors would acquire an interest. See Sec. Exch. Comm’n v. Eurobond Exch., Ltd., 13 F.3d 1334 (9th Cir. 1994) (involving interests in foreign treasury bonds); Gary Plastic Packaging Corp. v. Merrill Lynch, Inc., 756 F.2d 230 (2d Cir. 1985) (involving interests in certificate of deposit program); Glen-Arden Commodities, Inc. v. Costantino, 493 F.2d 1027 (2d Cir. 1974) (involving investments in warehouse receipts for whiskey).
This third part of the Howey test, as might be expected, has proved to be the most litigated of the three elements. Under the precedent of this circuit, the crucial inquiry is the amount of control that the investors retain under their written agreements. Williamson v. Tucker, 645 F.2d 404, 423-24 (5th Cir. 1981). If the investor retains the ability to control the profitability of his investment, the agreement is no security. Gordon v. Terry, 684 F.2d 736 (11th Cir. 1982).



3 Responses

  1. Good to see law backing up ideas attacked as internet theories by banksters. Could see as part of negotiation but we are at another level where property records are being manipulated to remove signs of invalid transactions. Just saw an assignment from WaMu to Chase 15 yrs after the fact to start foreclosure. We need to start forcing officials to address the white collar crimes in ’08 crisis and now COVID crisis loans then we can talk settlements.

  2. I am in a strange situation in which I became eligible for the Keep Your Home California program back in 2018 because of a family tragedy that was caused by the local ER. I was told repeatedly if I did not move for five years the 18 months of mortgage payments the program made for me would be forgiven. However, Keep Your Home California took second position lien even though they were paying the first and I was not required to pay them back. Because of the family tragedy I have had to recreate a new home based business and I am almost ready to roll it out. But because Keep Your Home California took second position, I am ineligible for getting any kind of FDIC or bank back equity loan or line of credit.
    The private money lenders want 10.99% and at least $10,000 dollars in up front costs, and, because it is not a line of credit, I am paying high interest on the full amount from day one.
    What makes this situation even more beguiling is I could do a reverse mortgage, BUT, they want to pay off the second even though in another 25 months it disappears and I don’t have to pay it back.
    Every which way I turn I have no options unless I want to pay back Keep Your Home California, even though the program was a make good for the 2008 and 2009 crash and is the only thing I have as an acknowledgment that my Mother’s demise was a preventable tragedy.
    I decided to share what I would save if I could get the KYHCA second to roll off and am offering 8% annual return to up to 3 investors., the banks are paying 0.5% AND are offering investment opportunities that are NOT insured. I can do a reverse mortgage in 2 years to pay everyone off if my home based business is not profitable.

  3. Correction: without borrowers IDENTITIES used without their permission; and hard work without any compensation here would be no sales of certificates to investors.

    Here are no mortgage-backed securities because mortgages in last 20 years are just a reference point to the very first securitization which likely happened around 1995-2002.

    Borrowers without their knowledge pay for INFORMATION about someone’s loan which does not exists .

    After the original loan was eliminated via securitization scheme and all following “loans” are merely differently dressed with new terms and “interest” INFORMATION about transaction happened in the past to back a new string of securities with information about events which may or not may happen in the future, at Wall Street Banks discretion.

    This is why here are so many “default debt buyers” – without ANY assets. Every prior string of securitization” was not retired but rather secretly defaulted and re-assinged in Black Knight database to various sham conduits who claim to be “buyers” of non-existing debt.

    Black Knight , acting under glimpse of “servicers” does everything possible to push current owners (who think they repay “mortgage”) into defaults with fabricated “delinquencies” “misplaced payments” and other tricks – just to refuse payments to investors and steal homes as additional revenue since this is the only way how to cover for this fraud.

    Blame homeowners/investors for Wall Street fraud against Pension Funds and steal homes and investors’ money.

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