A federal judge has ruled that a managing LLC partner cannot pursue securities claims against his former partners because he exerted “substantial control” over the enterprise.  

Marc Nunez formed Sand Specialties and Aggregates, LLC with five other partners. Four of the partners promised to commit approximately $800,000 to the LLC. Nunez controlled many of the LLC’s financial operations while another operational partner, who was not an investor in the LLC, handled the LLC’s mining and other operational activities. When the four partners failed to contribute the promised $800,000 to the LLC, Nunez sued them and the LLC directly for securities fraud under the Securities Exchange Act of 1934.  

Nunez argued that he was persuaded to purchase an interest in the LLC by four of the partners’ promises of additional contributions. Nunez also argued that he relied on the technical expertise of the operational partner, which should qualify Nunez as a “passive investor” under the Securities Exchange Act.  

The defendants argued that Nunez’s financial contribution to the LLC could not be considered an investment contract because he exercised “substantial control” over the business of the LLC. The U.S. District Court for the Eastern District of Louisiana sided with the defendants, holding that Nunez’s control over the LLC’s finances ensured that he could protect his financial interests in the LLC—a key factor in determining that his contribution could not be considered an investment contract under federal law.  

Nunez v. Robin, 2010 WL 3021618 (E.D. La. July 29, 2010)