Can Concert Tickets Be Securities?

WFAN morning show co-host Craig Carton was arrested for scamming investors out of $5.6 million. His ploy was a fraudulent ticket resale business. He promised the ability to deliver face-value tickets to concerts by Katy Perry, Justin Bieber, Metallica and Barbra Streisand. According to the Securities and Exchange Commission, he used the investors’ money to repay gambling debts.

The case has attracted attention because of the high-profile of Mr. Carton. It attracted my attention because I was curious if it was a securities law violation.

Mr. Carton has not responded to the SEC charges and is also subject to parallel criminal charges. I looked at the SEC complaint to see how it handled the threshold question of whether securities were involved, accepting the charges as true for educational purposes.

Using the Howey test to determine if there is an investment contract, we look at the four factors:

  1. an investment of money,
  2. a common enterprise,
  3. a reasonable expectation of profits, and
  4. a reliance on the entrepreneurial or managerial efforts of others.

As usual, 1 and 4 are the easy prongs. Investors gave Mr. Carton money with promises of getting more back. The SEC cites a presentation with a per deal average of 2.2X and 187% IRR.

The investors were just putting up money and relying on Mr. Carton to execute on the acquisition and resale of tickets. That should leave the fourth prong satisfied.

The complaint points to two separate schemes, one with an individual and a second with a hedge fund.

According to the SEC’s complaint, the scheme with the individual investor involved only that individual investor and not a pooling of money. There is a split among the courts about the “common enterprise” prong of the test. Some courts look toward a pooling of money. Some are just satisfied if the success of the investor depends on the promoter’s expertise. The complaint is in the Second Circuit which places a heavy reliance on a pooling of money to meet the common enterprise prong.

As to the individual investor, there may be some grounds to argue that it was not a securities transaction and therefore outside the scope of the SEC. That would still leave Mr. Carton with the criminal charges of wire fraud, etc.

As to the hedge fund scheme, the investment document was, at least in name, structured as a loan. The operative document was a Revolving Loan Agreement. There is little to discern in the complaint about whether it was a loan in name only and a was really a “security” that would give the SEC jurisdiction. If it’s a loan, that may be outside the definition of “security” and we never get to “investment contract” test in Howey. Again, the scheme would still subject Mr. Carton to criminal charges of wire fraud and bank fraud.

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