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Commodities And The Corporate Securities Law of 1968 (CSL)

A recent unpublished opinion by Justice William W. Bedsworth set me to cogitating on the status of commodities under the Corporate Securities Law of 1968.  In Kelly v. Monex Co., 2013 Cal. App. Unpub. LEXIS 5903 (Aug. 21, 2013), the plaintiff had lost substantial amounts in trading gold and silver through the defendant.  She sued and the jury returned a verdict in favor of the defendant.  On appeal, she argued that the trial court had erred in not giving California Civil Jury Instruction (CACI) No. 4105 with a few changes:

“Duties of a Stockbroker – Speculative Securities. Stockbrokers who trade in speculative securities and advise clients have a fiduciary duty to those clients: 1. To make sure that the client understands the investment risks in light of his or her financial situation; 2. To inform the client that speculative investments are not suitable if the stockbroker believes that the client is unable to bear the financial risks involved; and 3. Not to solicit the client’s purchase of speculative securities that the stockbroker considers to be beyond the client’s risk threshold.”

I find the instruction itself to be odd because the CSL doesn’t actually use the term “stockbroker” – the statutory terms is “broker-dealer” (Section 25004).  In any event, the plaintiff wanted to change “stockbroker” to “financial advisor” and “securities” to “investments”.

Justice Bedsworth found that the plaintiff bought and sold metals and that physical objects do not meet the definition of a “security” in Section 25019.  Indeed, the statute, which lists a wide variety of financial arrangements, does not mention gold, silver or the general term “commodity”.  California has a separate law governing commodities – the California Commodity Law of 1990 (Cal. Corp. Sections 29500 et seq.).  Finally, Justice Bedsworth noted that Rule 260.019 excludes from the definition “any discretionary account maintained by a customer with a commodity broker for trading in commodities or commodity futures”.

It may be possible to sell a physical object in a financial arrangement such that the purchaser is offered an “investment contract” or places capital at risk.  In Hamilton Jewelers v. Dept. of Corps.,  37 Cal. App. 3d 330 (1974), the Department of Corporations unsuccessfully argued that the sale of a diamond coupled with a money back (with interest) return guarantee constituted a “security”.  The Department was also unsuccessful in Moreland v. Dept. of Corps. 37 Cal. App. 3d 330 (1987) in which the Department argued that contracts for the purchase of gold ore that was to be milled and delivered by the seller were securities.  The Court of Appeal concluded that these contracts were not securities under either the investment contract test enunciated by the United States Supreme Court in S.E.C. v. Howey, 328 U.S. 293 (1946) or the risk capital test adopted in Silver Hills Country Club v. Sobieski, 55 Cal. 2d 811 (1961).  A few years later, however, the Ninth Circuit Court of Appeals criticized Moreland’s interpretation of the Howey test in SEC v. R.G. Reynolds Enters., 952 F.2d 1125 (9th Cir. 1991).

I find it interesting that the trial court in Kelly did give an instruction to the jury that the defendants had fiduciary duties to the plaintiff.  The source of this fiduciary duty is not explained.

Finally, it should be noted that Kelly is an unpublished decision.  Check out Rule 8.1115 of the California Rules of Court concerning citing or relying on opinions not certified for publication.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...