      Case: 18-10510          Document: 00514847021              Page: 1      Date Filed: 02/22/2019




           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT United States Court of Appeals
                                                   Fifth Circuit

                                                                                       FILED
                                                                                 February 22, 2019
                                            No. 18-10510
                                                                                   Lyle W. Cayce
                                                                                        Clerk
In the Matter of: LIVING BENEFITS ASSET MANAGEMENT, L.L.C.,

                 Debtor

------------------------------------------------------------------------------------------


LIVING BENEFITS ASSET MANAGEMENT, L.L.C.,

                 Appellant

v.

KESTREL AIRCRAFT COMPANY, INCORPORATED,

                 Appellee



                      Appeal from the United States District Court
                           for the Northern District of Texas


Before KING, HIGGINSON, and COSTA, Circuit Judges.
KING, Circuit Judge:
        Debtor–plaintiff Living Benefits Asset Management, L.L.C., brought
this adversary proceeding against Kestrel Aircraft Co. for breach of contract.
Living Benefits alleges that Kestrel failed to pay almost $900,000 owed for
services that Living Benefits provided Kestrel to help it collateralize a
corporate debt offering with life settlements. Following a bench trial, the
bankruptcy court held that the contract was voidable because Living Benefits
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                                  No. 18-10510
failed to register as an investment adviser in violation of the Investment
Advisers Act of 1940. The district court affirmed the bankruptcy court’s
judgment. Living Benefits now appeals the district court’s judgment. For the
reasons stated herein, we AFFIRM.
                                        I.
      Much of this dispute centers on the treatment under federal securities
laws of so-called life settlements, which are financial instruments involving
the sale of insureds’ rights under life-insurance policies to third-party
investors. In a typical life settlement, a buyer pays the insured more than the
policy’s surrender value (i.e., the amount of money the insurer would pay the
insured to cancel the policy) but less than the death benefit. Thus, in selling a
life settlement, the insured transfers some of the policy’s value along with the
risk that the value will diminish if the insured lives beyond his or her life
expectancy. To put it bluntly, a life settlement is a bet on the length of the
insured’s life.
      Although life settlements are fairly simple instruments at their core, a
complex market has developed around them over the past three decades.
Generally, the sale of a life settlement involves multiple intermediaries. A
broker identifies and works on behalf of an insured to solicit offers or negotiate
a sale. A provider then locates one or more investors, who buy either
fractionalized or whole interests in the life settlement under terms negotiated
between the provider and broker. The provider will typically arrange for a
third-party agent to pay the policy’s premiums out of escrow. In the event the
insured survives longer than expected, the escrow account could deplete, and
the investor might become responsible to pay the premiums to prevent the
policy from lapsing.
      The return on a life settlement diminishes with each premium payment;
thus, the longer the insured lives, the lower the return on the investment. The
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actuarial estimate of the insured’s lifespan therefore dictates the purchase
value of a life settlement. And the return on investment depends on the
accuracy of that estimate. 1 Accordingly, whether an investment in a life
settlement is successful depends primarily on the provider’s assessment—
usually through a third-party underwriter—of the insured’s life expectancy
and the price the provider negotiates based on that assessment. See Joy D.
Kosiewicz, Death for Sale: A Call to Regulate the Viatical Settlement Industry,
48 Case Western Res. L. Rev. 701, 704 (1998).
       The specifics of this case involve an unfulfilled plan by defendant Kestrel
Aircraft Co. (“Kestrel”) to purchase life settlements to use as collateral in a
corporate debt offering. Kestrel hoped to raise $135 million to develop a
prototype of an aircraft it sought to manufacture and to purchase most of the
assets of a competing aircraft manufacturer. As part of its financing scheme,
Kestrel planned to offer investors the option of taking a security interest in life
settlements that it would purchase. Kestrel retained debtor–plaintiff Living
Benefits Asset Management, L.L.C., (“Living Benefits”) to help develop and
ultimately execute this proposal.
       Living Benefits and Kestrel entered into an engagement letter, which set
out the terms of Living Benefits’ services. Living Benefits promised to provide
Kestrel with “consulting and advisory services” in connection with Kestrel’s
financing plan. These services included helping Kestrel structure its financing
plan, preparing a memorandum for investors, advising Kestrel “in structuring
of the evaluation, acquisition and ownership of the Life Settlements,” and
“selecting and retaining strategic partners for [Kestrel], including a suitable



       1 The other primary risk is the insurer’s refusal to pay the benefit because of the
insured’s failure to pay a premium, the insured’s fraud, a no-assignment clause, or some other
factor that could void the policy. This risk can be all but eliminated through proper
administration and due diligence.
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custodian for the Life Settlements.” Kestrel agreed to pay Living Benefits
$950,000 for these services.
      Kestrel did not commit itself in the engagement letter to purchasing any
life settlements. But it agreed that to the extent it did acquire any life
settlements within the two following years, it would “engage[] [Living Benefits]
to originate such Life Settlements” pursuant to a separate agreement attached
as an exhibit to the engagement letter.
      The attached agreement, which the parties refer to as the “origination
agreement,” specified Living Benefits’ contemplated role in assisting Kestrel
to acquire life settlements. Living Benefits would first identify life settlements
available for purchase and relay certain information to Kestrel about the
insured and the policy, including the value of the death benefit and an estimate
of the insured’s life expectancy. Kestrel would then let Living Benefits know
whether it wanted to purchase the identified life settlement and the price it
was willing to pay. Once Kestrel decided to purchase a specific life settlement,
Living Benefits would, “to the extent requested by [Kestrel],” assist Kestrel in
evaluating the terms of the offer and communicating with the seller. Upon
reaching a sale agreement, Living Benefits would then conduct due diligence
to ensure, among other things, that the policy was valid and transferable, and
the seller was the policy’s lawful owner. In exchange for the services set out in
the origination agreement, Kestrel would pay Living Benefits an initial
$50,000 engagement fee and a commission equal to 1.25% of the aggregate
death benefits of the purchased policies.
      Living Benefits performed its obligations under the engagement letter.
But Kestrel’s fundraising efforts were ultimately unsuccessful; thus, Kestrel
did not purchase any life settlements, and the parties never entered into the
origination agreement. Kestrel subsequently failed to pay almost $900,000
owed to Living Benefits under the engagement letter.
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       Living Benefits subsequently filed for Chapter 11 bankruptcy. It
initiated the present suit against Kestrel as an adversary proceeding in the
bankruptcy court to collect the money owed under the engagement letter.
Following a bench trial, the bankruptcy court found that Kestrel breached the
engagement letter by failing to pay the agreed-upon fee. But it also found that
Living Benefits was required to register as an investment adviser under the
Investment Advisers Act of 1940 (“IAA”) yet failed to do so. Accordingly, it
concluded that the engagement letter was voidable and Living Benefits was
not entitled to collect any of the funds due under the letter. Living Benefits
appealed to the district court. It argued that the bankruptcy court erred in
concluding that it was an investment adviser. The district court affirmed.
Living Benefits now appeals to this court. 2
                                              II.
       In reviewing an appeal from a district court’s review of a bankruptcy
court’s ruling, “this court applies ‘the same standard of review to the
bankruptcy court decision that the district court applied.’” Galaz v. Galaz (In
re Galaz), 765 F.3d 426, 429 (5th Cir. 2014) (quoting Frazin v. Haynes & Boone,
L.L.P. (In re Frazin), 723 F.3d 313, 317 (5th Cir. 2013)). “Thus, this court
reviews factual findings for clear error and legal conclusions de novo.” Id.
       The IAA prohibits unregistered investment advisers from using the
instrumentalities of interstate commerce “in connection with” their businesses.
15 U.S.C. § 80b-3(a). A contract made in violation of the IAA is void as to the
unregistered adviser. Id. § 80b-15(b); see also Transamerica Mortg. Advisors,
Inc. (TAMA) v. Lewis, 444 U.S. 11, 16 (1979) (“At the very least Congress must
have assumed that § [80b-15] could be raised defensively in private litigation


       2 Kestrel failed to file a response brief or otherwise enter an appearance in this appeal.
It participated fully in this litigation in the bankruptcy court and district court, however. We
thus look to its filings below to aid our analysis.
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to preclude the enforcement of an investment advisers [sic] contract.”). Living
Benefits does not dispute that to the extent the bankruptcy court correctly
concluded Living Benefits was an investment adviser, it cannot recover the
balance owed on the engagement letter. The sole question in this appeal is thus
whether Living Benefits was an investment adviser within the meaning of the
IAA.
        Subject to certain exceptions not relevant here, the IAA defines
investment adviser as:
        any person who, for compensation, engages in the business of
        advising others, either directly or through publications or writings,
        as to the value of securities or as to the advisability of investing in,
        purchasing, or selling securities, or who, for compensation and as
        part of a regular business, issues or promulgates analyses or
        reports concerning securities.

15 U.S.C. § 80b-2(a)(11).
        Living Benefits argues that it is not an investment adviser because (1) it
is not in the business of advising others “as to the value of . . . or as to the
advisability of investing in, purchasing, or selling” life settlements and, in any
event, (2) life settlements are not securities. We address each argument in
turn.
                                          A.
        In arguing that it is not in the business of advising others about the value
of life settlements, Living Benefits focuses on the fact that it never entered into
the origination agreement with Kestrel. It asserts that the services it rendered
under the engagement letter did not constitute advice as to the value of life
settlements or the advisability of transacting in life settlements. Living
Benefits concedes that it advised Kestrel about transacting in life settlements
generally, but it insists that it did not render any advice about the value or



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                                  No. 18-10510
advisability of investing in specific life settlements. And it says the IAA only
extends to those rendering advice about specific securities.
      We disagree. Living Benefits cites to no caselaw holding that the IAA
requires advice about a specific security before a person or entity must register
as an investment adviser. Rather, it rests its entire argument on Lowe v. SEC,
472 U.S. 181 (1985). In that case, the Supreme Court held that the publisher
of a newsletter about securities, though meeting the prima facie definition of
an investment adviser, fell within an exception for publishers. Id. at 203-04,
211. In reaching this conclusion, the Court extensively surveyed the IAA’s
legislative history to ascertain the species of advisers and advice Congress
sought to regulate. See id. at 190-201.
      Living Benefits insists that this same legislative history shows Congress
intended to exclude the generalized advice it provided Kestrel under the
engagement letter. But Lowe looked to this legislative history to interpret a
specific exception to the IAA. Living Benefits does not claim the benefit of any
such exception. See id. at 208-09. And even if we were to overlook this
distinction, Living Benefits comes away from Lowe with the wrong lesson. In
Lowe, the Court concluded that Congress did not mean to cover generalized
advice not “attuned to any specific portfolio or to any client’s particular needs.”
Id. at 208 (emphasis added). Living Benefits might not have attuned its advice
to any specific life-settlement portfolio, but it certainly attuned its advice to
Kestrel’s particular needs.
      Living Benefits’ argument directly contradicts the SEC’s position on this
matter. The SEC has interpreted the IAA to cover “persons who advise clients
concerning the relative advantages and disadvantages of investing in
securities in general as compared to other investments.” Applicability of the
Investment Advisers Act, 52 Fed. Reg. 38400, 38402 (Oct. 16, 1987). And it has
said that “a person who, in the course of developing a financial program for a
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client, advises a client as to the desirability of investing in, purchasing or
selling securities, as opposed to, or in relation to, any non-securities
investment or financial vehicle would . . . be ‘advising’ others within the
meaning of” the IAA. Id. Although the SEC’s interpretation does not bind us,
we defer to it here in the absence of contrary authority. See SEC v. Cont’l
Commodities Corp., 497 F.2d 516, 525 (5th Cir. 1974) (holding that an “SEC
release is entitled to great weight” although “it is not dispositive”).
      There is a similar dearth of authority to support Living Benefits’
assertion that Kestrel’s failure to act on its advice somehow carries it beyond
the IAA’s purview. Living Benefits cites a series of out-of-circuit cases in which
courts found IAA violations in situations in which the clients acted upon the
advisers’ suggestions. But none of these cases supports the negative
implication that absent such action, there would have been no IAA violation.
See United States v. Miller, 833 F.3d 274, 282 (3d Cir. 2016); SEC v. Wash. Inv.
Network, 475 F.3d 392, 399-400 (D.C. Cir. 2007); United States v. Elliott, 62
F.3d 1304, 1311 (11th Cir. 1995); Abrahamson v. Fleschner, 568 F.2d 862, 870-
71 (2d Cir. 1977).
      Living Benefits’ argument runs counter to the plain language of the IAA,
which prohibits unregistered agents from “advising others . . . as to the
advisability of investing” in securities. § 80b-2(a)(11) (emphasis added). This
language encompasses both positive and negative advice. See Advisable,
Webster’s New International Dictionary of the English Language (2d ed. 1934)
(“Proper to be advised or done; expedient; prudent.”). Reading it otherwise
would rest the IAA’s application on the fortuity of the client’s actions and would
categorically exclude those who advise against trading in securities, which
would make little policy sense.
      Living Benefits also argues that regardless of whatever advice it might
have provided Kestrel, it falls outside the IAA’s gamut because such advice
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was merely incidental to its business. The bankruptcy court found otherwise,
concluding that “the evidence established that [Living Benefits] was in the
business . . . of advising others, including Kestrel, as to the advisability of
investing in life settlements.” This finding is not clearly erroneous. The
engagement letter makes clear that Kestrel retained Living Benefits for the
specific purpose of receiving advice about investing in life settlements. Indeed,
it lists within the scope of Living Benefits’ services, “advising [Kestrel] in
structuring of the . . . acquisition . . . of the Life Settlements.”
      These findings distinguish this case from Zinn v. Parrish, 644 F.2d 360
(7th Cir. 1981). In that case, the Seventh Circuit held that a sports agent who
provided a client with investment advice was not in the business of being an
investment adviser. Id. at 364. The agent in that case occasionally gave his
client investment advice, but the court held that “isolated transactions with a
client as an incident to the main purpose of his management contract to
negotiate football contracts do not constitute engaging in the business of
advising others on investment securities.” Id. Here, Living Benefits did not
give Kestrel advice about life settlements “as an incident to the main purpose”
of the engagement letter—such advice was the main purpose of the
engagement letter.
      Accordingly, we conclude that Living Benefits contracted with Kestrel to
advise it about life settlements within the meaning of the IAA.
                                         B.
      We now address Living Benefits’ second proposition: that it did not need
to register as an investment adviser because the life settlements at issue were
not securities. The IAA defines security as:
      any note, stock, treasury stock, security future, bond, debenture,
      evidence of indebtedness, certificate of interest or participation in
      any profit-sharing agreement, collateral-trust certificate,
      preorganization certificate or subscription, transferable share,
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      investment contract, voting-trust certificate, certificate of deposit
      for a security, fractional undivided interest in oil, gas, or other
      mineral rights, any put, call, straddle, option, or privilege on any
      security (including a certificate of deposit) or on any group or index
      of securities (including any interest therein or based on the value
      thereof), or any put, call, straddle, option, or privilege entered into
      on a national securities exchange relating to foreign currency, or,
      in general, any interest or instrument commonly known as a
      “security”, or any certificate of interest or participation in,
      temporary or interim certificate for, receipt for, guaranty of, or
      warrant or right to subscribe to or purchase any of the foregoing.


15 U.S.C. § 80b-2(a)(18). This definition is substantively identical to the
definition of security found in the Securities Act of 1933 (the “Securities Act”).
Compare id. § 77b(a)(1), with § 80b-2(a)(18). Accordingly, the parties agree
that caselaw interpreting the Securities Act informs whether an instrument is
a security for purposes of the IAA. Cf. SEC v. Capital Gains Research Bureau,
Inc., 375 U.S. 180, 195 (1963) (“Congress intended the Investment Advisers
Act of 1940 to be construed like other securities legislation . . . .”).
      Further, both parties agree that to the extent the life settlements at issue
are securities under the IAA, it is because they are investment contracts. And
they agree the test that the Supreme Court set forth in SEC v. W.J. Howey Co.,
328 U.S. 293 (1946), governs whether an instrument is an investment contract.
The Court in Howey explained that “an investment contract for purposes of the
Securities Act means 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.” Id. at 298-99. We have
elaborated that “[t]his test subsumes within it three elements: first, that there
is an investment of money; second, that the scheme in which an investment is
made functions as a common enterprise; and third, that under the scheme,
profits are derived solely from the efforts of individuals other than the

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                                       No. 18-10510
investors.” SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 477 (5th Cir.
1974). We interpret the Howey test broadly. See id. at 481.
       This and other courts have clarified two important aspects of the Howey
test. Uncontroversially, “the word ‘solely’ in the third prong of the Howey test
has not been construed literally.” Long v. Shultz Cattle Co., Inc., 881 F.2d 129,
133 (5th Cir. 1989). Rather, we apply “a more realistic test, whether the efforts
made by those other than the investor are the undeniably significant ones,
those essential managerial efforts which affect the failure or success of the
enterprise.” Williamson v. Tucker, 645 F.2d 404, 418 (5th Cir. May 1981) (en
banc) (quoting SEC v. Glen W. Turner Enters., Inc., 474 F.2d 476, 482 (9th Cir.
1973)).
       More controversial is the meaning of “common enterprise” in Howey’s
second prong. This circuit, along with the Eleventh Circuit, applies so-called
broad vertical commonality, under which a common enterprise exists when
“the fortuity of the investments collectively is essentially dependent upon
promoter expertise.” SEC v. Cont’l Commodities Corp., 497 F.2d 516, 522 (5th
Cir. 1974); see also Eberhardt v. Waters, 901 F.2d 1578, 1580-81 (11th Cir.
1990). Other circuits apply one or both of two more restrictive tests: horizontal
commonality, under which a class of investors must share equally in the risk
such that their investments rise and fall together, or strict vertical
commonality, under which the investor and the promoter must share equally
in the risk. 3



       3 Compare Goldberg v. 401 N. Wabash Venture LLC, 755 F.3d 456, 465 (7th Cir. 2014)
(applying horizontal commonality); SEC v. SG Ltd., 265 F.3d 42, 50 (1st Cir. 2001) (same);
SEC v. Infinity Grp. Co., 212 F.3d 180, 187-88 (3d Cir. 2000) (same); SEC v. Banner Fund
Int’l, 211 F.3d 602, 614-15 (D.C. Cir. 2000) (same); Teague v. Bakker, 35 F.3d 978, 986 n.8
(4th Cir. 1994) (same); Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir. 1994) (same);
Hocking v. Dubois, 885 F.2d 1449, 1459 (9th Cir. 1989) (en banc) (same); and Deckebach v.
La Vida Charters, Inc. of Fla., 867 F.2d 278, 281 (6th Cir. 1989) (same), with SEC v. Eurobond
Exch., Ltd., 13 F.3d 1334, 1339-40 (9th Cir. 1994) (applying strict vertical commonality as
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      We developed the strict vertical commonality approach in Koscot. In
finding a pyramid scheme operated as an investment contract, we rejected the
argument that the scheme was not a common enterprise because a
participant’s return from his or her investment in the scheme was independent
of other investors. See Koscot, 497 F.2d at 474, 479. “Rather,” we explained,
“the requisite commonality is evidenced by the fact that the fortunes of all
investors are inextricably tied to the efficacy of the [defendant’s] meetings and
guidelines on recruiting prospects and consummating a sale.” Id. at 479. In
distinguishing the Koscot broad vertical commonality test from the strict
vertical commonality test followed by the Ninth Circuit, we later elaborated:
      While our standard requires interdependence between the
      investors and the promoter, it does not define that
      interdependence narrowly in terms of shared profits or losses.
      Rather, the necessary interdependence may be demonstrated by
      the investors’ collective reliance on the promoter’s expertise even
      where the promoter receives only a flat fee or commission rather
      than a share in the profits of the venture.


Long, 881 F.2d at 140-41.
      Under this circuit’s broad vertical commonality approach, “the second
and third prongs of the Howey test may in some cases overlap to a significant
degree.” Id. at 141; see also Monaghan, supra n.3, at 2161-62 (“Whenever there
is an investment of money with the expectation of profits to come solely from
the efforts of others, the investor probably also relies on the expertise of the
promoter.”). Accordingly, absent the unusual case in which an investor relies
on the promoter’s expertise but does not expect profits to come from the




alternative to horizontal commonality). See generally Maura K. Monaghan, Note, An
Uncommon State of Confusion: The Common Enterprise Element of Investment Contract
Analysis, 63 Fordham L. Rev. 2135, 2152-63 (1995) (discussing circuit split).
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promoter’s efforts, an investment contract exists if there is an investment of
money in reliance on the promoter’s expertise.
                                             1.
       Before turning to the parties’ specific arguments, we survey the existing
cases examining whether life settlements are investment contracts. It is
important to keep in mind that agreements involving sales of life settlements
can have myriad structures; thus, because the Howey analysis is fact
dependent, the question of whether life settlements are investment contracts
is not amenable to a universal answer. Nevertheless, to the extent life
settlements share certain features in common, the caselaw is instructive.
       The D.C. Circuit and the Eleventh Circuit are split on how to analyze life
settlements 4 under the Howey test. In SEC v. Life Partners, Inc., 87 F.3d 536
(D.C. Cir. 1996), the SEC sought to enjoin a firm from arranging life-settlement
transactions without registering the life settlements as securities. Id. at 537-
38. Before locating investors, the defendant in that case would evaluate the
insured’s medical condition, review the insurance policy, and negotiate the
purchase price with the insured. Id. at 539. The defendant would then locate
investors to purchase fractionalized interests in the life settlement. Id. After
the sale, the defendant would continue to administer the policy through a
third-party escrow agent, although the defendant eventually ceased its post-
purchase administrative functions in a fruitless attempt to appease the SEC
and the district court. Id. at 539-40.
       Applying the Howey test, the D.C. Circuit found the presence of an
investment of money and horizontal commonality, satisfying Howey’s first two
prongs. Id. at 543-44. But the court found that the third Howey prong was


       4These cases dealt specifically with viatical settlements, a subset of life settlements
in which the insureds are terminally ill. This distinction makes no difference for present
purposes.
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lacking. In reaching this conclusion, the court divided the efforts that made the
life settlements profitable into categories of managerial or ministerial, and pre-
purchase or post-purchase. Id. at 545. It then opined that the third prong’s
focus was on whether the investment’s profitability depended on post-purchase
managerial efforts of someone other than the investor. Id. at 548. Pre-purchase
managerial efforts, the court explained, were relevant but could not satisfy the
third prong in the absence of post-purchase managerial efforts; ministerial
efforts did not affect the equation. Id. at 546, 548; see also SEC v. Life Partners,
Inc., 102 F.3d 587, 588 (D.C. Cir. 1996) (Ginsburg, J., concurring in denial of
rehearing) (explaining that pre-purchase efforts could be relevant, but are
insufficient on their own, to demonstrate that profits arose primarily from the
efforts of others). Formulated in this manner, the court found that all of the
defendant’s managerial efforts—finding the life settlements, obtaining
actuarial estimates, appraising the life settlements, and negotiating the
purchase price—occurred pre-purchase. Life Partners, 87 F.3d at 547. Its post-
purchase efforts in administering the life settlements were ministerial. Id. at
546. Accordingly, the court concluded that the life settlements did not meet
Howey’s third prong. Id. at 548.
      The dissent rejected the court’s pre- and post-purchase distinction. Id. at
551 (Wald, J., dissenting). The dissent accused the court of elevating form over
substance in violation of the Securities Act’s remedial purpose. See id. The
better inquiry, it insisted, was into “the kind and degree of dependence
between the investors’ profits and the promoter’s activities,” with the third
prong being met “when it is the success of these activities, either entirely or
predominantly, that determines whether profits are eventually realized.” Id.
And the dissent noted that the three variables affecting whether a life
settlement is profitable are the accuracy of the actuarial estimate, the sale


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                                 No. 18-10510
price, and the enforceability of the policy—for each of which investors
depended on the defendant. Id. at 555.
      Faced with a similar dispute, the Eleventh Circuit sided with the Life
Partners dissent. See SEC v. Mut. Benefits Corp., 408 F.3d 737, 743 (11th Cir.
2005). As in Life Partners, the defendant in Mutual Benefits arranged the sales
of life settlements from insureds to investors and performed many of the same
pre-purchase activities, including evaluating the insured’s medical condition,
producing an actuarial estimate, and negotiating a purchase price. Id. at 738.
It also administered the policies after the sale to investors. Id. at 738-39.
Applying the Howey test, the court first found it undisputed that the life
settlements at issue met Howey’s first two prongs. Id. at 742-43. In response
to the defendant’s “passing objection,” it observed in a footnote that broad
vertical commonality existed (satisfying the second prong) because “any profits
were tied to the efforts of the promoters.” Id. at 743 n.4. In finding the third
Howey prong present, the court expressly rejected Life Partners’ analysis and
focused instead on the investors’ reliance on the defendant’s pre-purchase
activities. It explained:
      MBC selected the insurance policies in which the investors’ money
      would be placed. MBC bid on policies and negotiated purchase
      prices with the insureds. MBC determined how much money would
      be placed in escrow to cover payment of future premiums. MBC
      undertook to evaluate the life expectancy of the insureds—
      evaluations critical to the success of the venture. If MBC
      underestimated the insureds’ life expectancy, the chances
      increased that the investors would realize less of a profit, or no
      profit at all. And, investors had no ability to assess the accuracy of
      representations being made by MBC or the accuracy of the life-
      expectancy evaluations. They could not, by reference to market
      trends, independently assess the prospective value of their
      investments in MBC’s viatical settlement contracts.




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Id. at 744. Accordingly, the court concluded, the defendant “offered what
amounts to a classic investment contract. Investors were offered and sold an
investment in a common enterprise in which they were promised profits that
were dependent on the efforts of the promoters.” Id.
       With rare exceptions, federal district courts and state courts 5 have sided
with the Eleventh Circuit’s analysis over the D.C. Circuit’s analysis. See, e.g.,
Giger v. Ahmann, No. 09-c-4060, 2013 WL 6730108, at *4-5 (N.D. Ill. Dec. 20,
2013); SEC v. Life Partners Holdings, Inc., 41 F. Supp. 3d 550, 555-56 (W.D.
Tex. 2013); Wuliger v. Eberle, 414 F. Supp. 2d 814, 821-22 (N.D. Ohio 2006);
Siporin v. Carrington, 23 P.3d 92, 99 (Ariz. Ct. App. 2001); Poyser v. Flora, 780
N.E.2d 1191, 1197 (Ind. Ct. App. 2003); Life Partners, Inc. v. Arnold, 464
S.W.3d 660, 681 (Tex. 2015). But cf. SEC v. Pac. W. Capital Grp., No. 15-cv-
2563, 2015 WL 9694808, at *8 (C.D. Cal. June 16, 2015) (unpublished)
(explaining SEC failed to show life settlements were investment contracts
because record was insufficient to show whether investors relied on
defendant’s significant efforts); Glick v. Sokol, 777 N.E.2d 315, 319 (Ohio Ct.
App. 2002) (finding life-settlement investors were not dependent on promoter’s
efforts without looking to federal law and without considering pre-purchase
activity). Legal commentators have also been critical of the D.C. Circuit’s
approach. See, e.g., Miriam R. Albert, The Death of Death Futures: Why Viatical
Settlements Must Be Classified as Securities, 19 Pace L. Rev. 345, 383-424
(1999) (“The D.C. Circuit had an opportunity to advance the goals of the
Securities Laws, while adhering to sound precedent. Instead, the court chose



       5 To the extent state courts have weighed in, they have done so while interpreting
state statutes analogous to the Securities Act. But these state courts have noted the
similarity between the state and federal statutes and have looked to federal law to interpret
the state statutes. Siporin v. Carrington, 23 P.3d 92, 96 (Ariz. Ct. App. 2001); Poyser v. Flora,
780 N.E.2d 1191, 1194-95 (Ind. Ct. App. 2003); Life Partners, Inc. v. Arnold, 464 S.W.3d 660,
666-67 (Tex. 2015).
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                                       No. 18-10510
to create a new bright-line test, with no explicit precedential support, at the
cost of ignoring over fifty years of thoughtful case law.”).
       There are a few key similarities and differences between the life
settlements at issue in the present case and those discussed in Life Partners
and Mutual Benefits. Perhaps the most significant similarity is that under the
origination agreement, Kestrel would have been dependent upon Living
Benefits to obtain actuarial analyses of the insureds. As even the Life Partners
majority recognized, the accuracy of the actuarial analysis is one of the most
important factors in the success or failure of a life settlement. See 87 F.3d at
548. Also akin to the life settlements discussed in the cases, the origination
agreement here tasks Living Benefits with identifying the life settlements,
appraising them, conducting due diligence, and finding a custodian to
administer the policies upon Kestrel’s purchase. The origination agreement
here is unusual in two respects, however: it grants Kestrel at least nominal
authority to negotiate the life settlements’ purchase price itself, and it
contemplates the purchase of nonfractionalized life settlements. 6
                                              2.
       Turning now to the parties’ specific arguments, we conclude that the life
settlements Living Benefits offered to procure for Kestrel are investment
contracts.
                                              a.
       Initially, Living Benefits argues that the life settlements at issue in this
case do not meet any of Howey’s three prongs because Kestrel never actually
purchased any life settlements and the engagement letter did not require it to



       6  Although the origination agreement does not specify whether the life settlements
would have been fractionalized or nonfractionalized, Living Benefits’ managing director
testified at trial that the life settlements all would have been nonfractionalized. Kestrel has
not disputed this.
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                                  No. 18-10510
do so. Thus, Living Benefits argues there was no investment of money, Kestrel
never relied on its expertise, and Kestrel never expected profits from the efforts
of another. But as explained above, the inquiry is whether Living Benefits
advised Kestrel about an investment contract, and we conclude that it advised
Kestrel about life settlements regardless of whether Kestrel purchased any.
Therefore, we focus on whether the contemplated life settlements were
investment contracts; that Kestrel did not in fact purchase any life settlements
is beside the point.
                                       b.
      Next, Living Benefits argues that the life settlements did not meet
Howey’s second and third prongs because Kestrel was a sophisticated investor
that did not rely on Living Benefits’ expertise. As Life Partners and Mutual
Benefits instruct, the most important factors bearing on life settlements’
profitability are the accuracy of the actuarial estimates and the life
settlements’ purchase prices. See Mut. Benefits, 408 F.3d at 744; Life Partners,
87 F.3d at 548. The bankruptcy court found that Kestrel would have depended
on Living Benefits to ascertain the life settlements’ value. And it found that
although “the duties assigned to Kestrel included the duty to negotiate
. . . Kestrel had no background in life settlements so Kestrel’s negotiations
would rely heavily if not exclusively on [Living Benefits].”
      Living Benefits disputes the bankruptcy courts’ factual conclusions. It
argues that whatever inexperience Kestrel might have had with life
settlements when it first retained Living Benefits, Living Benefits’ consulting
services gave Kestrel the level of expertise it needed to successfully invest in
life settlements without Living Benefits’ continued assistance. As a legal
matter, we have previously rejected a similar argument that “investors may
become knowledgeable within the meaning of Howey through the educative
efforts of the promoters.” Long, 881 F.2d at 135. As a factual matter, the
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                                  No. 18-10510
bankruptcy court did not clearly err in finding that Kestrel would have relied
on Living Benefits for these services, whatever the de novo merit of the
argument to the contrary.
      Living Benefits’ own managing director, Mark Freitag, testified to the
importance of expertise when transacting in life settlements. Freitag also
testified that Living Benefits had proprietary software to model life
settlements. Thus, even if Kestrel attained an exceptional level of
sophistication in life settlements, there is nothing in the record to suggest that
Kestrel could have evaluated life settlements with the same degree of
sophistication as Living Benefits. Nor does it matter, as Living Benefits
suggests, that Kestrel’s executives possessed general business acumen. See
Long, 881 F.2d at 134-35 (“Howey itself establishes that an investor’s
generalized business experience does not preclude a finding that the investor
lacked the knowledge or ability to exercise meaningful control over the
venture.”).
      Moreover, although the bankruptcy court did not make any specific
findings about the extent to which Kestrel would have relied on Living Benefits
for actuarial estimates, it is clear from the record that Kestrel would have
relied on Living Benefits substantially, if not exclusively, for these estimates.
The origination agreement made Living Benefits responsible for obtaining the
actuarial estimates. And although Kestrel would have had access to the
insureds’ medical records underlying these actuarial estimates, Living
Benefits points to no evidence showing—nor is there reason to believe—that
Kestrel would have had the intent or ability to conduct its own analyses.
      Living Benefits also points out that Kestrel retained key decision-
making powers under the origination agreement such as whether to purchase
a particular life settlement and the price it was willing to pay. These powers
do not undermine Kestrel’s reliance on Living Benefits. Even the Life Partners
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                                  No. 18-10510
court found it irrelevant that the investors retained such functions when they
were otherwise reliant on the promoter to evaluate the policy and negotiate a
worthwhile purchase price. See 87 F.3d at 547. Further, even to the extent
Kestrel would have nominally determined the price it was willing to pay, its
determination could not be untethered from the valuation Living Benefits
would have provided it.
      Therefore, under the origination agreement, Kestrel would have relied
on Living Benefits’ substantial pre-purchase efforts for the success of its
investments. Under the Life Partners rule, however, this would not be enough;
Kestrel would have additionally needed to rely on at least some managerial
post-purchase efforts. See 87 F.3d at 548. At most, Kestrel would have relied
on Living Benefits to help it find a custodian to administer the life settlements.
But as even the dissent recognized in Life Partners, the ministerial actions
required to administer a life settlement—typically paying premiums and
monitoring the insured’s health—are insufficient to satisfy Howey. See id. at
550-51, 550 n.1 (Wald, J., dissenting).
      Were we to follow the Life Partners majority, we would thus conclude
that the life settlements at issue here are not investment contracts. But we
believe the Eleventh Circuit’s opinion in Mutual Benefits propounds the better
approach. As alluded to above, the majority opinion in Life Partners has been
widely criticized by both courts and commentators. Those criticisms are well
founded: Life Partners takes an overly rigid approach considering the remedial
aim of federal securities law. See SEC v. Edwards, 540 U.S. 389, 393 (2004)
(discussing Securities Act’s broad reach); Howey, 328 U.S. at 299 (explaining
Securities Act’s definition of security “embodies a flexible rather than a static
principle, one that is capable of adaptation to meet the countless and variable
schemes devised by those who seek the use of the money of others on the
promise of profits”); Long, 881 F.2d at 133 (“It is axiomatic in federal securities
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                                  No. 18-10510
law that in order to give effect to the remedial purposes of the Acts, substantive
‘economic realities’ must govern over form.”). In fact, perhaps realizing Life
Partners’ weakness, Living Benefits does not argue that we should focus solely
on its post-purchase efforts.
      Following Mutual Benefits, we thus conclude that Kestrel would have
relied on Living Benefits’ expertise and managerial efforts to realize a profit
on the life settlements.
                                        c.
      Regardless of whether Kestrel would have relied on Living Benefits’
expertise, Living Benefits argues that there can be no common enterprise here
because the origination agreement contemplated one-to-one transactions with
a single investor. For this argument, Living Benefits relies primarily on the
Supreme Court’s decision in Marine Bank v. Weaver, 455 U.S. 551 (1982), and
this court’s decision in Youmans v. Simon, 791 F.2d 341 (5th Cir. 1986). In
Marine Bank, the Court held that the plaintiff did not enter into an investment
contract by agreeing to provide collateral for the defendants’ business loan in
exchange for 50% of the business’s net profits, $100 per month, use of the
business’s property, and veto rights over the business’s future borrowing. 455
U.S. at 553. In two paragraphs of analysis, the Court held that the
arrangement was not an investment contract because it was “not the type of
instrument that comes to mind when the term ‘security’ is used.” Id. at 559. In
reaching this conclusion, the Court cited the one-on-one nature of the
arrangement, the provisions giving the plaintiff use of the defendants’
property, and the control the defendants gave the plaintiff over future
borrowing. See id. at 560.
      Seizing on Marine Bank’s language about the one-on-one nature of the
transaction, Living Benefits argues that a common enterprise requires
multiple investors. We have not read Marine Bank quite so restrictively. In
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                                  No. 18-10510
Youmans, this court cited Marine Bank for the proposition that “[a]greements
negotiated one-on-one creating enterprises in which investors are actively
involved, knowledgeable, and able to protect their interests are not within the
ambit of the federal securities laws.” 791 F.2d at 346. Accordingly, in that case,
the court found a joint venture was not an investment contract when the
investors exercised significant control over the venture and the promoters
“possessed no unique ability that could not be replaced by the investors.” Id. at
346-47. As already explained, the facts of this case are otherwise.
      Moreover, in Long, we read Marine Bank as a “narrow holding that a
unique agreement, negotiated on a one-on-one basis, is not a security.” Long,
881 F.2d at 140 n.11 (emphasis added). We concluded this narrow holding did
not abrogate our broad vertical commonality test. Id. And in denying rehearing
in Long, we acknowledged that broad vertical commonality was subject to
criticism specifically because it applied to transactions involving lone
investors. See Long v. Shultz Cattle Co., Inc., 896 F.2d 85, 86-87 (5th Cir. 1990)
(per curiam). Marine Bank thus does not prevent a transaction involving a
single investor from being an investment contract. To the extent Living
Benefits asks this panel to depart from Koscot, the rule of orderliness prevents
it from doing so. See, e.g., Mercado v. Lynch, 823 F.3d 276, 279 (5th Cir. 2016).
                                       d.
      Lastly, Living Benefits argues that transactions of nonfractionalized life
settlements are not investment contracts, but it does not explain why this is so
apart from noting that the nonfractionalized life settlements in this case
distinguish it from Mutual Benefits. The Life Partners court speculated that
there may be some distinction between fractionalized and nonfractionalized
life settlements. 87 F.3d at 539. An SEC taskforce likewise noted that no court
has ruled on nonfractionalized life settlements and expressed uncertainty
about how a court would approach such a case. See Life Settlements Task
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                                      No. 18-10510
Force, Staff Report to the United States Securities and Exchange Commission
24 (2010).
      We     agree   there   is   a    distinction   between    fractionalized    and
nonfractionalized life settlements, but it is not one that changes the outcome
of this case. Recall that the decisive fact under Howey’s second and third prongs
(as interpreted by this circuit) is Kestrel’s reliance on Living Benefits to
appraise the life settlements and help Kestrel negotiate a favorable price.
Kestrel’s reliance on Living Benefits is unaffected by whether the life
settlements are fractionalized. Although we do not speculate how our sister
circuits would resolve the issue, there is an argument that nonfractionalized
life settlements would not meet the horizontal commonality test applied in
other circuits: the Life Partners court found horizontal commonality
specifically because the investors relied on sales of the fractionalized
remainder of the life settlement for the transfer to take effect. See 87 F.3d at
310. But this has no bearing on the broad vertical commonality test that we
apply.
      To summarize, the facts of this case show that if it had entered into the
origination agreement, Kestrel would have invested money in life settlements,
satisfying Howey’s first prong. In doing so, it would have relied on Living
Benefits’ substantial expertise and pre-purchase efforts to profit on its
investments in life settlements, satisfying Howey’s second and third prongs.
Accordingly, the life settlements contemplated in the origination agreement
are investment contracts within the meaning of the IAA.
                                          III.
      Under the engagement letter, Living Benefits promised to advise Kestrel
about life settlements. Because the district court did not clearly err in finding
that Living Benefits was in the business of rendering such advice, and because
we conclude that the contemplated life settlements were investment contracts
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                                  No. 18-10510
within the meaning of the IAA, Living Benefits was required to register as an
investment adviser. Having failed to do so, it cannot now collect the balance
Kestrel owes it under the engagement letter. Accordingly, we AFFIRM the
judgment of the district court.




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