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Robinson v.

Glynn Case Brief - Quimbee

https://www.quimbee.com/cases/robinson-v-glynn

Robinson v. Glynn
United States Court of Appeals for the Fourth Circuit
349 F.3d 166 (4th Cir. 2003)

Rule of Law
To qualify as a security, the economic reality of a membership interest in an LLC must be
that the interest holder is a passive investor relying on the efforts of others.

Facts
Thomas Glynn (defendant) was the chairman of GeoPhone Company, LLC (GeoPhone). James
Robinson (plaintiff) agreed to loan Glynn $1 million so that Glynn could test a technology he
had developed called Convolutional Ambiguity Multiple Access (CAMA). Robinson agreed to
a letter of intent to invest an additional $24 million if the CAMA technology worked in the field
test. Glynn then performed the field test without the CAMA technology, and told Robinson that
the test had been a success. Robinson then invested the rest of the money according to the letter
of intent. Under the ensuing contract, Robinson appointed two members of the GeoPhone board
and assumed one of the seats himself, in addition to assuming the role of treasurer. Eventually,
Robinson found out that the CAMA technology had not been used in the initial test and he filed
suit, alleging that Glynn had committed federal securities fraud, in that Robinsons interest in
GeoPhone was an investment contract, stock, or both. The district court dismissed the claim on
the grounds that Robinsons membership interest in GeoPhone did not constitute a security
under the Securities Exchange Act of 1934, which defines security as any note, stock, security
future, bond, debenture, investment contract, or any instrument or interest commonly known as a
security. Robinson appealed.

Issue
Does a membership interest in an LLC where the individual holding the interest maintains active
control over the interest qualify as a security?

Holding and Reasoning (Wilkinson, J.)


No. To qualify as a security, the economic reality of a membership interest in an LLC must be that
the interest holder is a passive investor relying on the efforts of others. Thus, where the individual
holding the interest maintains active control over the interest, the membership interest does not
qualify as a security. In the case at bar, Robinson was on the board of directors and was the

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Robinson v. Glynn Case Brief - Quimbee

https://www.quimbee.com/cases/robinson-v-glynn

treasurer of GeoPhone. The economic reality of Robinsons membership interest then was that
he was not a passive investor relying on the efforts of others. However, he clearly maintained a
certain level of control over the business of GeoPhone and thus his interest in the LLC.
Accordingly, Robinsons interest may not be classified as a security and so he may not maintain
a claim for securities fraud. The district courts dismissal of the complaint is affirmed.

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