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Stevens v. Liberty Packing Corporation

New Jersey Court of Chancery · 1932 · Corporations
161 A. 193 (1932)
Updated
CorporationsSecurities fraudBlue Sky lawInjunctionsecuritiesfraudinvestment contractspromotional schemes

Facts

Liberty Packing Corporation promoted two rabbit-raising arrangements: an absentee ownership "lease" under which investors paid $175 for four female rabbits and were promised a yearly return from offspring bought back by the company, and a "buy back" contract under which purchasers raised rabbits themselves and the company promised to buy qualifying offspring at $1 each. The company's promotional literature represented large, guaranteed profits and described the venture as sound, safe, and protected against loss. In fact, the company had no packing house or packing facilities, never slaughtered or marketed rabbits, and the proceeds from rabbit sales would fall far short of the promised $1 per rabbit. The contracts also contained conditions allowing the company to avoid buy-back obligations, including weight requirements and cancellation after inspections unsatisfactory to the company's own representatives.

Issue

Whether Liberty Packing Corporation's rabbit lease and buy-back arrangements were securities under the Securities Act and, if so, whether the company's profit guarantees and representations made them fraudulent so that an injunction should issue. The case also presented whether the state could act even though some participants objected to governmental intervention.

Rule

Written assurances that promise investors a return or payment of money are securities within the meaning of the Securities Act. A scheme is fraudulent under the Act when it makes promises or representations as to the future that are beyond reasonable expectation or unwarranted by existing circumstances, and such a scheme may be enjoined at the suit of the state.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.
Prairie Harvest Fur Ventures, a fictional company operating near Des Moines, sells "mink care certificates" for $400 each. In writing, it promises that six months later it will remit $520 to each holder from the proceeds of mink products, even though the holder does nothing after paying the purchase price.

If the state seeks to regulate the certificates under its Securities Act, the strongest argument that the certificates are securities is that they are:

Explanation. The majority treated substance as controlling and held that instruments are securities when they are written assurances for the return or payment of money. Labels such as lease, livestock sale, or another commercial form do not avoid the Act if the writing promises the investor money back or a monetary return.