Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, October 14, 2007

Eleventh Circuit's Application of Blue Chip and Reves Tests

In a recent opinion, the Eleventh Circuit offers some observations on both the Blue Chip standing test and the definition of a security under the Reves test.  In Financial Security Assurance , Inc. v. Stephens, Inc., (11th Cir. Sept. 18, 2007), 2007 WL 2700280,  an insurer of municipal bonds that became the owner upon default by the issuer brought Rule 10b-5 claims against the underwriter of the bonds and a civil engineering firm.  The district court had dismissed the claims, but the appeals court initially affirmed in part and reversed in part and remanded the case.  On rehearing, however, in a per curiam opinion, the appeals court affirmed the district court completely and dismissed the case.  It found that the insurer had no standing to bring the Rule 10b-5 claims.  It rejected the plaintiff's arguments that, as guarantor of the bonds, it was the real party in interest and interpreted the Blue Chip standing test as rejecting any functional test.  In addition, the court rejected the plaintiff's argument that after default it had purchased the bonds under the terms of the insurance policy because, it said, that under the Reves test, the bonds were not securities because when the plaintiff purchased them they did not have the potential to generate any profit.  So apparently the bonds could be securities when owned by the initial purchasers, but became non-securities when held by the insurer.

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