Smith v. Gross

Gerald and Mary Smith (plaintiffs) responded to a promotional newsletter from Gross (defendant) soliciting investors to raise earthworms for sale. Gross told the Smiths that very little work was required in raising earthworms, that earthworms double in quantity every 60 days, that Gross needed the Smiths’ help in the common enterprise of supplying earthworms to the bait industry, and that success was guaranteed because Gross would repurchase any earthworms produced by the Smiths for $2.25 per pound. The Smiths brought suit against Gross and other corporate defendants for violation of federal securities laws. The Smiths claim they would not have purchased any earthworms without Gross’s promise to repurchase worms at $2.25 per pound, and that earthworms multiply at a much slower rate than that promised by Gross. The Smiths allege that they could achieve the profits promised by Gross only if the multiplication rate was as fast as promised, and if Gross purchased that product at $2.25 per pound. The Smiths allege that the promised $2.25 per pound is ten times greater than the true market price for earthworms, and that Gross could pay the promised price only by selling their product to new investors at inflated prices. The district court dismissed the suit for lack of subject matter jurisdiction, finding that there was no security involved in the transaction.