(CN) - General partnerships sold in Colorado that do not extend real control to the partners are investment contracts and those selling them subject to state securities law, the Colorado Court of Appeals ruled.
     The decision affirms a cease and desist order issued by the Colorado securities commissioner prohibiting the Mieka Corporation and two of its employees from violating state securities laws in the future.
     Mieka representatives called on investors offering them partnerships in a joint venture to develop oil and gas wells. One of the investors they called was an employee at the Colorado Division of Securities who discovered that Mieka had not registered the interests they were selling as securities with the division.
     A hearings panel determined that the interests were investment contracts, equivalent to securities and should have been registered with the division and recommended that the commissioner issue a cease and desist order.
     Mieka objected that neither the hearings panel nor the commissioner gave the presumption that general partnerships are not securities under the 5th Circuit Court precedent in Williamson v. Tucker.
     The commissioner explicitly said that the Williamson presumption did not apply in Colorado as it had never been used as precedent by its state courts.
     Neither the hearings panel nor the commissioner applied the presumption but both said even if they had they still would have concluded that the general partnerships were actually securities.
     The hearings panel relied on a three part test found in SEC v. W.J. Howey Co. which defines an investment contract, and thus a security, as a contract transaction where a person invests money in a common enterprise and expects a profit based on the actions of the seller of the transaction or a third party.
     Mieka said that panel did not show that the investors in its joint venture were relying on a third party to turn a profit, even though its investors were not given management oversight of the venture nor were they recruited on the basis of their experience in oil and gas extractions.
     Writing for the three judge panel, Judge Daniel M. Taubman said arguments over the Williamson presumption were irrelevant because the commissioner's legal conclusions relied upon the administrative record of the hearings panel and appeals courts can affirm those conclusions on any grounds supported by the record.
     "The Commissioner's rejection of the Williamson presumption was unnecessary to resolve whether the Joint Venture interests were securities because he adopted the Panel's conclusion that the Joint Venture interests were securities, and the Panel explained that its conclusion would have been the same if the presumption had applied," Taubman wrote.
     "Thus," Taubman said, "the application of the Williamson presumption was not dispositive of the administrative proceeding and the Commissioner's statement of law concerning it is not ripe for judicial resolution."
     Turning back to Mieka's objections about the evidentiary record, Taubman noted that the panel had relied on the only evidence available, Mieka's contract and the terms and conditions of the partnership agreement.
     Mieka said that the panel and the court should look beyond the contracts to how the venture would actually operate. Given that no wells had actually been drilled and the venture was in the pre-formation stage, Taubman found agreed that the evidence reviewed by the panel was sufficient.
     "Although the respondents also urge us to review other factors negating that the Joint Venture was an illusory general partnership, our review is limited to determining whether enough evidence exists to support the agency's conclusion without regard 'to the existence of conflicting evidence,'" Taubman wrote, quoting the court in Westmark Asset Mgmt. Corp. v. Joseph.
     "Accordingly," he said, "we conclude that substantial evidence exists in the record as a whole to support the Commissioner's decisions that the Joint Venture was an illusory general partnership and therefore interests in it were investment contracts."