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                                                                                                                                                      FOURTH DIVISION

1-00-3102                                                                                                                                     FEBRUARY 7, 2002

JUSTICE HARTMAN delivered the opinion of the court:

Plaintiffs, Integrated Research Services, Inc. (IRS) and JasonJankovsky, sought administrative review of a decision bydefendants, the Illinois Secretary of State, Securities Department,Jesse White, Secretary of State for the State of Illinois, andWilliam L. Houlihan, Chief Deputy Director of the IllinoisSecurities Department (collectively the Secretary), finding thatplaintiffs had offered to the public a security that was notregistered with the Secretary of State and permanently prohibitingplaintiffs from offering or selling any securities in or from theState of Illinois. The circuit court affirmed the Secretary'sorder. On appeal plaintiffs contend that the Secretary erred in:(1) determining that the definition of "security" in the IllinoisSecurities Law of 1953 (the securities law)(815 ILCS 5/1 et seq.(West 1998)) includes investment contracts that involve trading inforeign currencies and (2) concluding that plaintiffs were offering"investment contracts" to their clients.

IRS offers investors the opportunity to participate ininvestments in cash foreign currencies on the interbank foreignexchange market in London, England (the Forex market). Jankovskyis the Director of North American operations for IRS.

On July 8, 1999, the Secretary issued a temporary orderprohibiting plaintiffs from offering or selling any securities inor from the State of Illinois. The order stated that theinvestment opportunity offered on the IRS website was a "security"as defined by the securities law and that plaintiffs had violatedthe securities law by failing to register the offered investment asa security with the Secretary.

An administrative hearing was held on January 13, 2000. Theparties introduced several exhibits including the standard customeraccount agreement and cash commodity trading authorization formssigned by plaintiffs' customers and excerpts from plaintiffs'internet website.

Jankovsky, the only witness, testified that IRS solicitscustomers through direct mailing and its website. IRS hirestraders in London who execute the foreign currency transactions onbehalf of IRS clients. To open an account with IRS a prospectiveinvestor must have an interview during which Jankovsky informs theinvestor of the risks involved with trading in foreign currencies. Each investor must sign a cash commodity trading authorization formwhich grants IRS power of attorney to buy, sell, and trade foreigncurrencies on behalf of the investor. When a customer invests withIRS, his check is initially deposited in a client equity managementaccount at the Canadian Imperial Bank of Commerce in Freeport,Grand Bahama. The funds are then transferred to Lloyd's Bank inLondon where they are held in segregated customer accounts withinthe framework of an omnibus account. IRS funds are not co-mingledwith customer funds.

Customers pay IRS a 20% commission on all profits realizedfrom the trades. Jankovsky admitted that if there is no profitthere is no commission. The customer agreement gives IRS the rightto charge additional fees.

According to Jankovsky, investors can control their individualaccounts by adding or subtracting funds at any time, placing atemporary hold on their account, and limiting the trading of theirfunds to specified currencies. Jankovsky admitted that plaintiffsnever registered with the Secretary.

On December 3, 1999, the Secretary issued his finaladministrative decision finding that the investment opportunityoffered by plaintiffs was an "investment contract" and therefore asecurity under the securities law and that plaintiffs violated thesecurities law by failing to register the investment offering as asecurity. The Secretary permanently prohibited plaintiffs fromoffering or selling any securities in or from the State ofIllinois. On August 4, 2000, the circuit court affirmed theSecretary's decision.

An administrative agency's factual findings are deemed to beprima facie true and correct and may be set aside only if they areagainst the manifest weight of the evidence. City of Belvidere v.Illinois State Labor Relations Board, 181 Ill. 2d 191, 692 N.E.2d295 (1998) (Belvidere). In the present case the issues involvequestions of law entirely; therefore, the standard of review is denovo.⁽¹⁾ Belvidere, 181 Ill. 2d at 205.

Plaintiffs first argue that, under the definition of"security" in section 2.1 of the securities law (815 ILCS 5/2.1(West 1998)(section 2.1)), a foreign currency transaction is a"security" only if it involves a "put, call, straddle, option, orprivilege entered into on a national securities exchange." Becauseit is undisputed that the investment opportunity they offer is notany of these and is not traded on a "national securities exchange",plaintiffs argue that it is not a security. The Secretary respondsthat the definition of "security" also includes "investmentcontracts." Consequently, an investment opportunity involvingforeign currency transactions is a security if it is an investmentcontract.

Section 2.1 defines "security" in pertinent part as "any note,stock, treasury stock, bond, debenture, ***, investment contract,***, or any put, call, straddle, option, or privilege entered intoon 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, guarantee of, orwarrant or right to subscribe to or purchase, any of theforegoing." 815 ILCS 5/2.1 (West 1998).

A court's primary objective in construing a statutoryprovision is to determine and give effect to the legislature'sintent. Kraft, Inc. v. Edgar, 138 Ill. 2d 178, 561 N.E.2d 656(1990). The language of the provision is the best evidence of thatintent and must be given its plain and ordinary meaning. Paris v.Feder, 179 Ill. 2d 173, 688 N.E.2d 137 (1997) (Paris). A de novostandard of review is applied to issues of statutory construction. Paris, 179 Ill. 2d at 177-78.

Relying on DuPage Aviation Corp. v. DuPage Airport Authority,229 Ill. App. 3d 793, 594 N.E.2d 1334 (1992), plaintiffs argue thatthe statutory construction rule of expressio unis est exclusioalterius applies, pursuant to which a court may find that whencertain things are listed or specified in a statute, thelegislative intent to exclude all other things from the statute'soperation may be inferred. According to plaintiffs, becausesection 2.1 defines a security as those foreign currencytransactions involving a "put, call, straddle, option or privilegeentered into on a national securities exchange", all other foreigncurrency transactions including cash transactions are excluded fromthe definition.

The statutory definition of "security" includes many types oftransactions each separated by the disjunctive "or". The word "or"ordinarily is used in the disjunctive sense, meaning that themembers of the sentence that it connects are to be takenseparately. In re C.N., 196 Ill. 2d 181, 752 N.E.2d 1030 (2001)(C.N.); People v. Frieberg, 147 Ill. 2d 326, 589 N.E.2d 508 (1992). Each phrase set off by the word "or" constitutes an independentbasis for finding that a transaction is a security. See C.N., 196Ill. 2d at 210-11; Schweig v. Schacht, 276 Ill. App. 3d 311, 657N.E.2d 1152 (1995). Thus an investment scheme involving cashforeign currency transactions is a security if it is an investmentcontract within the meaning of section 2.1, even though it is nota "put, call, straddle, option, or privilege entered into on anational securities exchange." Because investment contracts arepart of the list in section 2.1 of transactions that constitute asecurity, the rule of expressio unis est exclusio alterius does notapply here.

The issue then becomes whether the investment opportunityoffered by plaintiffs is an "investment contract" within themeaning of section 2.1. Plaintiffs contend that the Secretaryerred in concluding that it was. An investment contract is acontract, transaction, or scheme whereby a person (1) invests money(2) in a common enterprise (3) with profits to come solely from theefforts of others.⁽²⁾ Securities and Exchange Commission v. W.J.Howey Co., 328 U.S. 293, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946)(Howey); Ronnett v. American Breeding Herds, Inc., 124 Ill. App. 3d842, 464 N.E.2d 1201 (1984) (Ronnett).

Plaintiffs first argue that the second element is absentbecause no common enterprise exists between IRS and its clients. A common enterprise is one in which the fortunes of the investorare interwoven with and dependent upon the efforts and success ofthose seeking the investment or of third parties. Anderson v.Grand Bahama Development Co, Ltd., 67 Ill. App. 3d 687, 384 N.E.2d981 (1978). To satisfy the common enterprise requirement, aninvestment must have either horizontal or vertical commonality. Ronnett, 124 Ill. App. 3d at 848. Vertical commonality existswhere the investor's fortunes are interwoven with and dependentupon the success of the promoter. Ronnett, 124 Ill. App. 3d at848.

Relying on Lopez v. Dean Witter Reynolds, Inc., 805 F.2d 880(9th Cir. 1986) (Lopez); Poindexter v. Merrill Lynch, Pierce,Fenner & Smith, Inc., 684 F. Supp. 478 (E.D. Mich. 1988)(Poindexter); Cohen v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,722 F. Supp. 24 (S.D.N.Y. 1989), and Shotto v. Laub, 635 F. Supp.835 (D. Md. 1986) (Shotto), plaintiffs argue that, as a matter oflaw, investment schemes involving discretionary trading accountsare not investment contracts because there is no common enterprise. The Secretary responds that investment schemes involvingdiscretionary trading accounts satisfy the common enterprise prongof the Howey test where, as in the present case, the broker'scommission is a percentage of profits realized by the investorrather than a flat fee based on the number and size of the trades. No Illinois case has addressed the issue of whether a discretionarytrading account is an investment contract.

In Security and Exchange Commission v. R.G. ReynoldsEnterprises, Inc., 952 F.2d 1125 (9th Cir. 1991) (Reynolds), thecourt held that vertical commonality exists where there is anarrangement between the investor and the promoter to share profitson a percentage basis. In that case the agreement that thepromoter would take a management fee based on a percentage of theprofits, thus making his own profit contingent on the profit of hisinvestors, was sufficient to show vertical commonality and satisfythe second prong of the Howey test.

In the present case it is undisputed that IRS received a 20%commission on customer profits, making plaintiffs' profitcontingent on the profit of its investors. Thus, under Howey andReynolds, vertical commonality exists in this case.

The cases cited by plaintiffs are distinguishable. In Shotto,the court found that plaintiffs' discretionary trading accountswere not investment contracts where plaintiffs failed to allege anyinterdependency between defendants' earnings and plaintiffs profitor loss. In considering discretionary trading accounts the courtstated that "where a plaintiff alleges some interdependency betweenthe profits and losses of the investor and those of the broker,i.e., payment made to the broker on a percentage of the profitsbasis, then vertical commonality is present." Lopez does notindicate how the commissions were paid. Poindexter did not discussvertical commonality, finding that in order to have a commonenterprise there must be horizontal commonality.

Because vertical commonality is present here, there is acommon enterprise and the second prong of the Howey test is met. See Ronnett, 124 Ill. App. 3d at 848-49.

Plaintiffs further argue that the third prong of the Howeytest has not been satisfied because IRS customers maintainsignificant control over their individual accounts.

The third prong of the Howey test is an expectation of profits"solely" from the efforts of others. Howey, 328 U.S. at 299, 90 L.Ed. at 1249, 66 S. Ct. at 1103. Courts have rejected a literalinterpretation of "solely" because it would frustrate the remedialpurposes of the securities law. Ronnett, 124 Ill. App. 3d at 850. Federal courts have held that the test is whether "the efforts madeby those other than the investor are the undeniably significantones, those essential managerial efforts which affect the failureor success of the enterprise." Securities and Exchange Commissionv. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir.1973). The third prong is met where the investor has little or nocontrol over the enterprise. Ronnett, 124 Ill. App. 3d at 850.

IRS reserved control of the enterprise to itself. The successof the enterprise depended primarily on the investment decisionsmade by IRS and its London traders. According to

Jankovsky, an investor could limit trading on his account tocertain currencies or place a hold on trading of his account. Thistestimony is inconsistent with the broad authority given to IRS inthe trading authorization form signed by each investor. Moreover,it does not change the fact that IRS and the London traders decidedwhich particular trades to execute. Even if an investor limitstrading on his account to a specific currency, he does not decidewhat particular trades to execute within that currency. Becauseinvestors exercise minimal control over the enterprise, the thirdprong of the Howey test is satisfied.

The Secretary did not err in finding that plaintiffs wereoffering an investment contract where all prongs of the Howey testwere met.

In its order of prohibition, the Secretary permanentlyprohibited plaintiffs from offering or selling any securities inIllinois. Clearly, plaintiffs should be banned from offering orselling the securities involved in this matter; but there is nobasis for nor is it fair to permanently ban Jankovsky from offeringor selling all properly registered securities in Illinois.

Accordingly, for the reasons set forth above, the judgment ofthe circuit court of Cook County is affirmed and remanded withdirections to permanently prohibit Jankovsky from offering orselling only the securities involved in this matter.

Affirmed and remanded with directions.

HOFFMAN, P.J. and THEIS, J., concur.

1. IRS argues alternatively that this case should be remandedbecause the circuit court applied the wrong standard of review. Whatever standard of review the circuit court applied is irrelevantas this court reviews the final decision of the administrativeagency and not the decision of the circuit court. Gounaris v. Cityof Chicago, 321 Ill. App. 3d 487, 747 N.E.2d 1025 (2001).

2. Neither party disputes that the first requirement, aninvestment of money, has been met.