Reves v.

Ernst & Young Case Brief

Reves v. Ernst & Young, 507 U.S. 170 (1993)

*Facts: The Farmer’s Cooperative of Arkansas and Oklahoma, Inc. (Co-op) had members who had
one vote and one share each. Using promissory notes that were payable on demand, the
company raised money in a bid to support its operating expenses. The promissory notes were
referred to as an investment program. Moreover, the notes had no assests as collateral. They
were lucrative because they offered higher interest rates when compared to the local financial
organizations. In 1984, the Co-op filed for bankruptcy. The reasons for bankruptcy were financial
problems relating to ineffective management and use of demand notes as the primary source of
financing. As a result, the demand notes were frozen and were no longer redeemable at the will
of noteholders. The demand note holders therefore sued the co-op directors and management
that contended that the demand notes were a form of security.

*Procedural History: Noteholders from the Farmer’s Cooperative of Arkansas and Oklahoma, Inc.
(Co-op) brought securities fraud and RICO action against the co-op directors and management.
At trial judgement was entered in the noteholders’ favor, which was reversed on appeal in the
accountants’ favor.

*Issue/question presented: Do promissory notes fall under the ambit of the security definition
of the securities exchange act?

*Holding and Rule: No. Promissory notes are financial instruments in which people give written
promises to pay other people in a particular duration of time. For instance, notes delivered in
consumer financing cannot be considered as security. Moreover, notes given by commercial
banks in relation to loans cannot be considered as security.

Discussion: The noteholders claimed that they acquired promissory notes after being presented
with inaccurate reports. The accountants who audited the company should be held responsible
because they made members buy promissory notes using exaggerated company assets.