Reves v. Ernst & Young
Supreme Court
494 U.S. 56 (1990)
The Farmer's Cooperative of Arkansas and Oklahoma (Co-op) issued notes to members and non-members at an interest rate above what local banks offered, and Ernst & Young (defendant), which audited the Co-op, certified that its assets were sound enough to support the notes. The Co-op nonetheless filed for bankruptcy in 1984, and noteholders (Reves) (plaintiffs) sued Ernst & Young, claiming its audit violated the antifraud provisions of the Securities Exchange Act of 1934. The district court ruled for Reves, but the Eighth Circuit reversed, and Reves sought certiorari.
Whether a note will be considered a security if its investors are interested in a profit from the note, the note is for common trading for investment, the public expects the note to be a security, and the Securities Acts are necessary to reduce the risk associated with the note.