Plaintiffs, customers of defendant StellarOne Bank (StellarOne), brought an action against StellarOne and two individuals, alleging that defendants violated the Securities Act of 1933 and the Securities Exchange Act of 1934 by defrauding them into purchasing condominium units. Plaintiffs claimed that defendants represented that the purchases were “sound investment[s], that no money would actually be required..., that the [plaintiffs] would simply sign a credit application for a non-recourse loan..., that the loans so funded would be used to pay off and prepare the condos for sale, and that [the plaintiffs] would realize a profit on the sale.” In reality, plaintiffs signed recourse loans that exceeded the value of the condominiums purchased, virtually guaranteeing that the condominiums would sell for a considerable loss, and leaving plaintiffs personally liable for large deficiency judgments.  

Defendants moved to dismiss the claims, arguing, among other things, that the purchases of the condominiums were not securities as defined by the Securities Act and Securities Exchange Act. In response, plaintiffs asserted that because they purchased the condominiums for investment purposes, their purchases were “investment contracts,” and therefore included in the definition of securities under the Securities Act and Securities Exchange Act.  

The court granted defendants’ motion to dismiss, holding that plaintiffs had failed to show that the purchase of the condominiums were “investment contracts.” The court pointed out that in interpreting the securities laws, the Supreme Court has defined the term “investment contract” as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” The court ruled that the investments in the condominiums did not fit within this definition because any profits plaintiffs may have derived from the investments would be the result of the potential appreciation in value of the condominiums, which “depended not on the efforts of the [defendants] and the developer, but on the vagaries of the real estate market at the time Plaintiffs attempted to resell their condominiums.” (Inman v. Hall, No. 7:08cv00567, 2009 WL 960474 (W.D. Va. April 7, 2009))