Plaintiffs, the purchasers of all the shares of stock in Chef Vincent, Inc., a corporation created to own, operate and manage Chef Vincent, a restaurant located in Miami, Florida, asserted claims against the defendant-seller under Section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act) and Rule 10(b)-5. Plaintiffs asserted that the defendant made material misrepresentations in connection with the transaction. Defendant moved to dismiss the claim for lack of federal question subject matter jurisdiction.
The court framed the issue regarding whether federal question jurisdiction existed as depending upon whether the transaction involved the sale of stocks in name only or constituted the type of sale to which the 1934 Act was intended to apply. As the court recognized, “the mere fact that the instrument that effectuated the transfer of Chef Vincent was called ‘stock’ does not mean that it falls within the purview of the 1934 Act.”
Applying established precedent, the court determined that the capital-raising and profit-making regulatory purposes of the 1934 Act were not meant to apply to the stock sale underlying the plaintiffs’ claims. In holding that the “stock” in Chef Vincent, Inc. was not a “security” as defined under the 1934 Act, and, thus, that its sale did not support the court’s exercise of federal question jurisdiction, the court noted that the “touchstone” in determining if a stock is a 1934 Act “security” is whether it represents an ownership interest in a common venture based on an expectation of profits derived from the entrepreneurial efforts of others. The court found that the stock in question did not meet that test because it was merely the “vehicle of transfer” for the purchase and sale of an entire business with respect to which the plaintiffs’ expectation of profits would only come from their own efforts. (Vejasi v. Chef Vincent Inc., No. 08-22048-CIV, 2008 WL 4792049 (S.D. Fla. Oct. 31, 2008))