dissenting. This case was tried to the trial court without a jury. To reverse, this court must determine that the trial court erred as a matter of law or its findings were clearly against the preponderance of the evidence. See ARCP Rule 52; see also Taylor v. Richardson, 266 Ark. 447, 585 S.W.2d 934 (1979). In my opinion, this court’s holding violates Rule 52.
The single and controlling issue to be decided is whether the interest the appellant (and his other general partners) purchased in KGS Partners constituted a “security transaction.” If so, appellant is entitled to pursue his action to rescind the so-called security unit he purchased in KGS since KGS neither registered nor exempted any such security transactions under the Arkansas Securities Act. Of course, if the appellant’s interest in KGS Partners was not a “security” (as the trial judge so found), the appellant’s action against the appellees must fail.
In our earlier case of Schultz & Watkins v. Rector-Phillips-Morse, Inc., 261 Ark. 769, 552 S.W.2d 4 (1977), we fully discussed the term “security” and what constitutes one under the provisions of the Arkansas Securities Act. We held that, to determine whether a sale or transaction constitutes a security, we must look to more than how the transaction is labeled. On this point, I agree with the majority opinion where it holds that the underlying substance of a security—as defined in Schultz—is an arrangement where the investor is a mere passive contributor of risk capital to a venture in which he has no direct or managerial control. In Schultz, we held that certain interests purchased in a joint venture constituted securities, because the investors there were strictly passive investors who were buying an interest in a tax shelter. We hastened to add that by no means are all general partnerships or joint venture units securities within the meaning of the Arkansas Securities Act.
The Schultz holding is clearly controlling here, and the only issue is whether the record supports the trial court’s decision that the appellant’s interests purchased in KGS are not securities. As the majority opinion indicates, the underlying and pertinent factual issue is whether the appellant was a passive contributor or investor of risk capital to the KGS partnership. The following summarized testimony supports the trial court’s holding that the appellant and his other general partners were active, not passive, investors in KGS.
Westbrook Testimony
Dr. Kent Westbrook contacted the appellant and other doctors about forming an investment group to be involved in the bond, real estate development and leasing business. Westbrook’s role was one of the three managing partners and was to keep the other partners informed. Westbrook said that when the doctors-investors were initially contacted, they specifically stated they did not want a limited partnership but instead wanted a general partnership in which everyone had a participation in the management. Eventually, an advisory committee was formed comprised of five of these general partners, plus Westbrook and both appellees. That committee met on a monthly basis—other general partners were invited and appellee Schultz sent minutes and a newsletter concerning the meetings to the partners. The general partners met and agreed to buy stock in Park, Ryan, Inc., a New York investment banking firm. Most of the board meetings of Park, Ryan, Inc. were held in conjunction with partnership meetings and all partners were notified of the partnership meetings.
Johnson Testimony
Sam Johnson was a general partner in KGS and attended the first organizational meeting. At that meeting, the attendees-investors, by consensus, agreed to form a partnership so that they would be “involved in the management of the partnership and have a say-so, because a lot of the people voiced that they had been in limited partnerships where they felt they had no control.” Johnson said that partnership meetings were held and appellant attended those meetings. KGS’s progress and policies were discussed and decisions were made and voted on by the partnership members. All of the partners participated in the decision to purchase Park, Ryan, Inc. and to invest in Greenbelt Properties.
Price Testimony
Charles Price said that his law firm was employed to assist in the acquisition of the stock in the broker-dealer firm, Park, Ryan, Inc. He attended the first organizational meeting when the investors said they did not want a limited partnership because “they wanted to have a voice in how the operation ran.” Price expressed his opinion that the partnership interest in KGS would not be a security. He related that the KGS partnership agreement “specifically says that each of the partners will have a voice in the partnership.”* He said the partners had control over Park, Ryan, Inc. through their voting control of KGS.
Downing Testimony
Richard Downing, appellant’s witness and attorney specializing in securities law, offered an opinion that the KGS partnership interest was a security, but conceded that the general partners could have removed the appellees “without either [appellee] voting on it.” On cross-examination, Downing conceded that, if it could be established that the partners in KGS attended partnership meetings held in conjunction with director meetings of Park, Ryan, Inc. and those partners participated in the meetings, those facts—with some additional factors—would change his mind when determining whether a passive investor had become an active one.
McEntire and Schultz Testimonies
J.A. McEntire, III said that the partners participated in the partnership and that Dr. Westbrook came to the offices at least once a week and reported back to all the investors-partners. He stated the partners, through monthly partnership meetings and board of directors meetings, were kept advised. McEntire testified he received an oral legal opinion that the partnership interest in KGS was not a security, and understood no need existed for filing anything with the securities department.
Glenn Schultz related that he and McEntire were involved in the day-to-day management of Park, Ryan, Inc., but were getting overall direction from the partners. The doctors, he said, were to give direction as to the management of the firm. He said he had been legally advised that the KGS partnership interests were not securities.
The trial court, relying upon evidence such as that set out above, could have readily and reasonably inferred that the appellant and his other general partners retained control of KGS and, in fact, participated in and directed the affairs of that partnership. Dr. Westbrook undisputably was a managing partner, and he served as the other general partners’ link to the weekly business affairs of KGS. In addition, the appellant, and other investors-partners like him, actively participated in the decision making of the business at the monthly partnership and board of directors meetings.
Admittedly, the majority has recited testimony which, if believed, could support the decision it reached. That, however, is not our function on review. We should all be able to agree, I think, that it was within the trial court’s province to weigh the evidence and to observe and to determine the credibility of the witnesses in this matter. Once done, this court reverses only if the trial court was clearly erroneous in discharging its duty under Rule 52. Given the strong evidence that supports the trial court’s decision here, I cannot say it was clearly wrong. This case should be affirmed.
Hickman and Hays, JJ., join in this dissent.NOTE: Price referred to the KGS Partners Partnership Agreement, which reflects the partners’ initial interests in the partnership were:
Schultz.................................. 12.8%
Westbrook................................. 8.5%
McEntire.................................. 4.3%
Other partners............................ 74.4%