Post Image
Commodity Futures Trader Collects Full Fee From Flinching Friend: Stevens v. S.W.L.H.S. Investment Partners
Posted on Categories Court Decisions, Securities CustomersTags , ,

By Christopher G. Lazarini

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

Futures and Fees

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.

Is Registration Required?

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.

(C. Lazarini: 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.)

(SLC Ref. No. 2017-10-09)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

Like what you see here?

Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.

Read Our Recent Blog