494 U.S. 56 (1990)
The Farmers Cooperative of Arkansas and Oklahoma operated as an agricultural cooperative with roughly 23,000 members prior to its 1984 bankruptcy filing.1 To fund its general business operations, the Co-Op issued promissory notes payable on demand by the holder.2 These notes carried no collateral or insurance but featured a variable interest rate reset monthly to remain above rates offered by local banks and savings institutions.3 The Co-Op promoted the notes to both members and nonmembers as part of an "Investment Program," with newsletter advertisements highlighting more than $11 million in assets backing the investments and describing them as safe, secure, and available when needed.4
After the Co-Op filed for bankruptcy in 1984, more than 1,600 holders possessed notes valued at $10 million in total.5 Petitioners, a class of these note holders, brought suit against Arthur Young & Co., the accounting firm that had audited the Co-Op's financial statements and the predecessor to respondent Ernst & Young.6 Petitioners asserted that Arthur Young deliberately deviated from generally accepted accounting principles when valuing one of the Co-Op's principal assets, a gasohol plant, in an effort to overstate the entity's assets and net worth.7 They further claimed that accurate treatment of the plant in the audits would have disclosed the Co-Op's insolvency and deterred their purchases of the notes.8
Petitioners succeeded at trial on both their federal claims under the Securities Exchange Act of 1934 and their state securities claims, resulting in a $6.1 million judgment.9 On appeal, Arthur Young contended that the demand notes did not qualify as securities under either the federal statute or Arkansas law, rendering the antifraud provisions inapplicable.10 The Eighth Circuit agreed and reversed the judgment.11 The Supreme Court granted certiorari to consider the federal issue.12
Whether the demand notes issued by the Co-Op are "securities" within the meaning of section 3(a)(10) of the Securities Exchange Act of 1934?13
The Securities Exchange Act of 1934 defines "security" to include "any note," creating a presumption that every note is a security.14 This presumption may be rebutted only by showing that the note bears a strong family resemblance, based on four factors, to one of the enumerated categories of instruments that are not securities.15 The four factors examine the motivations of seller and buyer, the plan of distribution, the reasonable expectations of the investing public, and the existence of another regulatory scheme that reduces risk.
Yes. The Co-Op sold the demand notes to raise capital for its general business operations while purchasers acquired them to earn a profit through interest payments that were adjusted to exceed local bank rates.16 The notes were distributed to a broad segment of the public, including the Co-Op's 23,000 members and nonmembers, resulting in over 1,600 holders at the time of bankruptcy.17 Advertisements promoted the notes as investments, leading reasonable purchasers to view them as such.18
The notes lacked collateral or insurance and were not subject to any alternative regulatory scheme such as federal banking laws or ERISA.19 These facts demonstrate that the notes do not bear a strong family resemblance to non-security instruments like consumer financing notes or commercial paper.20
The demand notes issued by the Co-Op are securities within the meaning of section 3(a)(10) of the Securities Exchange Act of 1934.21
Whether the notes fall within the statutory exception for any note which has a maturity at the time of issuance of not exceeding nine months?22
Section 3(a)(10) of the Securities Exchange Act of 1934 excepts from the definition of security "any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited."23 The language is ambiguous as applied to demand notes.24 The exception must be interpreted in accordance with its purpose of exempting only commercial paper, not investment securities sold to the public.25
No. The demand notes do not fall within the exception because, as a matter of federal law, their maturity is not limited to nine months since demand could be made many years in the future.26 The notes were marketed as investments to unsophisticated members of the public on a large scale rather than as short-term commercial paper to sophisticated investors.27 Applying the exception to these notes would contradict the purpose of the Securities Acts to regulate investments and prevent fraud and abuse.28
The demand notes do not fall within the statutory exception for notes with a maturity not exceeding nine months.29
Related opinions on this issue
Justice Stevens joined the Court's opinion but wrote separately to emphasize an additional consideration supporting the conclusion that the notes are securities.30 The Courts of Appeals have been unanimous in rejecting a literal reading of the nine-month exclusion.31 They have concluded that when Congress spoke of notes with a maturity not exceeding nine months, it meant commercial paper, not investment securities.32
This settled construction of an important federal statute should not be disturbed unless Congress decides otherwise.33 The legislative history of the 1933 Act and SEC interpretations support limiting the exception to commercial paper.34 The context clause in the statute permits judicial construction to harmonize the exclusion with congressional intent.35
Joined by Justice White, Justice O'connor, And Justice Scalia
Chief Justice Rehnquist joined Part II of the Court's opinion but dissented from Part III and the statements of the judgment in Parts I and IV.36 He argued that under the common law understanding at the time of the Act's enactment, demand notes are immediately due and thus have a maturity not exceeding nine months.37 The terms note and maturity were terms of art with well-settled meanings in 1934.38
Rehnquist contended that the plain terms of the statute should govern and that the legislative history of the 1933 Act should not be transposed to limit the 1934 Act's broader exemption language.39 The expansive language enacted by Congress indicates that commercial paper is merely a subset of a larger class of exempted short-term instruments.40