limit the definition of person says any person who violates the provisions in connection with the purchase or sale of a security can be found liable for so to those provisions now i say that because it's important because you hear from the our police they will argue that simply because one of our directors and our former c e o committed a fraud against the entity that we're not able to sue but remarkably this court's already addressed that issue and rocko a long time ago and that is now the well settled law that says even if our own c directors or whoever misbehaves and they violate tenby five and the rules and the entity issues a security because of that they can pursue that action the arguments to the contrary should therefore be ignored because the law as well settled the reason we're here today is the standing issue the question is whether palm beach my issue in two significant notes for twenty so you're on to to answer a question there's no debate as we can tell from the district court that notes or securities the thirty four dollars act the final notes are usually securities unless you go through the of standard and it's the defendant's burden to prove that a particular note does not fit the standard the supreme court outlined in reeves to say that no it is not a security so the issue of whether to notes or securities pallies never addressed that issue the court below assume that the notes are securities where the court went to straight it said well assuming the notes are securities the seller of those securities would be the authority and that misconstrued a transaction there are two different i think there's confusion on everybody's part it seemed to me in the briefing as to what securities we're talking about by the time we're here it seems to me it's clear that your position is that the notes are the securities not the bonds that is correct so we don't worry about the bonds at all there is we don't get is you're not the seller of them but your suit isn't based on that at all correct that is a conduit argument that we raise below that we've no longer raised at this point so now we're now we're just talking about the notes and my question is i'm just trying to send how these notes operated these notes were provided to the wisconsin public financing authority rect and was there any contemplation that they would be resold to investing public what happened with the notes were notes were assigned to the trustee as security for the payment of the bond proceeds now i understand where the question is coming from because the district court said that the notes were packaged to be sold but you don't have to actually package the notes to be sold for example in real tech what in a sense really was sold or certificates in the remake entity that held the notes so in a similar sense this is what we're dealing with no but one of the factors that is to be considered under the supreme court's tests test is the plan of distribution of the instrument and here the plan of distribution was that it wasn't going to be distributed right and is going to be held as security for the payment you're running that is correct but that is no different in a transaction rail task in real tech there were two bases the court said no it's for security there was this there was a st point where it contemplated that the pla placed into an entity that entity held onto those notes and the entity in essentially what the entity did is it its sole interest in the entity to investors right so that notes weren't contemplated has been sold in that case in real tech to invest in public the substance of the transaction is still a say what happens is the investors buy to fix it and that gives them a right to receive income from the notes that are held by the entity this is no different but this didn't that's that's not what happened in this transaction cell that they were going to get any kind of income from those notes correct their readers to secure the financial transaction no investors actually the notes guaranteed what would happen is the note provided that the revenue from the palm beach academy would then be conveyed to the trustee and that america that came from the revenue of palm beach is what was used to pay the bondholders so yes the notes to contemplate that the investors would receive monies under revenue generated from the notes so the notes are held by the trustee sort of trustee can enforce the right to say well if you haven't paid us the revenue that's contemplated by the snow we can take action they can take action but in terms of the bondholders the bondholders right to receive their principal and interest on the bonds i thought was guaranteed by the full faith and credit of the  wisconsin agency no your honor so if if you defaulted on the notes then the bond holders would not receive payment that is correct that is in fact what happened in this transaction we defaulted on the notes the bond holder came to us to pursue recovery and in the long run we eventually reached a settlement where i agreed to pay a lump sum of a property to the bond of the wisconsin authority their only involvement and no risk they had no risk they just simply made this transaction backed security transaction exactly exactly because the only recourse that the bondholders have for lack of payment for any revenue generated from palm beach the only recourse that is against palm beach that wisconsin a hority is just the conduit to make the transaction for purposes of whatever who came up with the tax code tax exempt i see i'm not there yet so that's the point and this is why we say realtek is is is similar because that's what happened in real tech the notes were pooled into the entity and investors their only recourse is to get whatever it is from their revenue so in that sense the district court below didn't dispute that that you are hear from the our police is they will say well these notes aren't securities and they didn't travel on the test that's required on the reeves they say well the municipal disclosure rules say these notes are not a separate security what's interest in the cases they cite that speak about that they involve two types of actions they involve actions on the ten before i'd be at fault under thirty four dollars out and section twelve of the thirty three dollars at and if you look carefully there are cases what the cases say is well that effects the thirty three act this whole separate security argument or whatever it is and does not  anti fraud act because congress didn't see fit to exempt the securities from the one thousand nine hundred and thirty four anti fraud in fact we know municipal securities before the nine hundred and seventy five amendment you were not able think that's not that would that you would have to have the record there because the defendants it's the defendant's burden to explain why these notes are not the test now if the defendant durned at below in the district court said apply in that tests i conclude that based on reeves this is not a note that fits the profile you're saying they waive the argument that the notes are not secured and they certainly have they could have done it again here they could have analyzed reeves to say here's why this note is not a security but instead what they say they brought a new test they said i wanted a municipal disclosure rules this no is not a security but that's not the test the test is reefs so they had an opportunity below to address reads they did not they had an opportunity here to address reason they chose not to it's not this court's job to do their job for them they had the opportunity to address reads we pointed out reams in the briefing below in the district court so they know reeves exists instead they say under the municipal rules this is not my nd question in relation to that you rely very heavily on realtek which is an out of circuit district court decision is that is there any other authority is there any appellate authority anywhere let alone anything binding on us that says that in a situation where notes are themselves not intended for distribution as in a mortgage backed security transaction that those there can be sued by a buyer or seller of those notes because they can't that kind of know constitutes a security jurado unfortunately the cases in these conduit financing transactions have not reached a point where we are today which we looked and we anticipated we would reach this point but you know what i mean i'm just wondering how far this reaches if i buy a house and give a note for the mortgage and the bank and i know because that's what goes on in the world the bank is going to bundle that mortgage and sell it and sell that note into the market as to back various bonds that are issued or if i'm a student and i take out a student loan and i give a note to the bank that evidence my indebtedness knowing that the bank is going to securitize that and send it out if there's a fraud in next with the loan transaction in the st place then that notes the home mortgage similarly is a consumer type no it's not a note for capital improvements is this a yes so you win on the st factor and and then we have to this entire transaction without the notes the bonds are not in place so this entire transaction if you look at the transaction is it is actually you know correct that's that's why the confusion over is the bonds or is it the notes and i get one point the district court good afternoon may please the court my name is darlene karen and i'm an attorney with eric feinstein and i'm here today on behalf of the defendants mr chan mr gaskell and happily securities which i will probably say each as you sometimes over the course of the argument  i guess i'm going to start at the end because that's where mr least started and just briefly say that the cases on page sixteen of the reply brief that were submitted beginning with the rico case and all of the other cases on page sixteen actually have nothing to do with this case at all it is clear that agency imputation is applied in ten to five securities cases the leading cases the suez case in the nd circuit but there are other cases as well the rico case the cases cited on page sixteen ripped of the reply raef are cases having to do with the ability of a corporation to sue an insider for fraud in other words an insider can't defend a fraud case brought against him by saying well corporation i knew all about the fraud because i'm an insider therefore you knew all about the fraud so you can have an claim against me that's not what happened here none of these defendants are insiders and none of them are looking to impute their own knowledge to the corporation they're looking to impute an insider's knowledge to the corporation so none of those cases apply here moving on to the question that was presented whether or not these notes are securities st the court should be aware that that is not what was played here what was pled in the complaint the only allegations you'll find in the fleet is that the academy issued the bonds there's not even a mention of notes nor is there even a mention of the entity that actually did issue the bonds which was the state of wisconsin so taking judge lynch is example with opposing counsel and he talked about the student loan in the mortgage just because eventuality those securities make it into the marketplace doesn't make the homeowner and the student their seller is that your point that is my point i would i would say it's even more analogous to a mortgage loan mortgage loan on a home if we're going to look at the family resemblance test which i don't think we should be doing by the way but if we did the reason these funds were borrowed was not to run the business it was to buy the school buildings they had very onerous rents they didn't want to they didn't want to be your mentor anymore they wanted to be a homeowner they wanted to buy their school buildings and that was the express purpose of the limited operating memorandum in another place in the record so so actually it is more like that i think than a student loan but those notes are getting out into commerce anyway they're going in a drawer somewhere there to every rd to make it easier to sue when somebody doesn't pay back the loan just like when you have a no no mortgage when you when you buy your home that's not going to be out in commerce it's going to be sold these notes but they never ever said that the notes were a security it's not my burden to prove the notes or security that's their burden and to say that the court below didn't address it ok the court below didn't address it the court below went straight to sale because the st thing she looked at was the bonds because below they argue that they issued bonds they're not arguing that here you but that's what they argued below so judge prescott was obviously the bonds or security so she was in no sale so she did the bonds know sale she looked at the notes no sale never had to decide whether or not they were securities we on the other hand attacked both things we said they are not securities for thirty four act and one hundred and thirty one for the thirty three act and the cases that really and i hope you read these cases because because if i mean ill explain everything back sarg or c and heritage the  in those cases factually identical it wasn't a school it was nursing homes in those cases the nursing homes borrowed proceeds not for profit nursing homes just like not for profit school borrowed proceeds of a municipal bond offering and they didn't pay  are only liable if you are a seller of securities a seller of securities has to cannot put false statements in offering documents right under twelve to a seller may not put false statements into an offering document and in that case the court dismissed the one hundred and twenty two cases against the nonprofit nursing homes why because they didn't sell securities they're not a seller of securities how can the academy there's no question that if the bondholders brought twelve to case against the academy here it would be dismissed why because they have not sold securities how can it be that that section twelve to if they could be excused from section one hundred and twenty two because of the definitions under the rules that say that they are not the seller of securities but for purposes of ten b five they come in the sellers it's curious that just doesn't make any sense frankly you know they didn't even say in the court below that that nowhere did they said that they say it's our burden to to rebut that but they didn't say in the st place they missed it in their opening brief that's why the reply brief is three times longer than their opening brief i would be happy to go through the reeves factors i think that they really do help us to be honest as i said family resemblance is just like a mortgage it's really what it was to buy their school buildings the purpose well the purpose was not the general use of the business enterprise look at what the p l o him says the purpose is to buy the school buildings and the buyer assuming the buyer was the state of wisconsin let's call that the buyer for argument's sake they're not interested in the profit on the notes they don't they get profit o they make their money off the bonds not a lot of money believe me but they get paid based on the bonds not on the notes the nd race factor the plan of distribution these notes were never going to be distributed you know in a drawer somewhere in case they ever have to be sued on  the reasonable expectations of the investing public the investing public i don't even know if they knew about the notes they might have if they read all the offering documentation but they're not buying the notes they're buying the bonds and they're being paid based on the bonds and the fort factor which is some other factor which reduces the risk well we didn't need another we did get another regulatory scheme to reduce the risk has to be if the bondholders ha claim they can bring it they're the investors even if you consider the state of wisconsin to be an investor it can also bring attendee claim because it's all securities so there is no risk here for the investing parties as to the real tech case looked to be to be honest the realtek case involved sixty notes that were pooled so that they could be invested and that's not what happened here there were two notes that were too long so there were so the other case actually that was relied upon the investing public meaning the bondholders who are depending on the notes ultimately you know they're relying on the obligation they're not relying on the notes at all they're relying on the bonds they're sitting on the bonds they're not sitting on the notes they never see the notes the notes aren't theirs they can't sit on the notes the bond is an obligation right that's what a bond is this is why i'm having i'm having trouble with the concept of the transaction here you know i found the plainest briefing frankly somewhat confusing as to are they talking about the bonds or the notes and who sold want and in what capacity are they  the notes are defaulted on well they're not issued on behalf of the academy they're issued with the intention that the proceeds that will be obtained from the bond will be loaned to the academy they have to pay that long back and even i guess i'm wondering you know if there was a if there were misrepresentations that affected the bond holders they would usually this in the case i can see are sure honestly other than the three cases i told about which were not in the circuit by the end they're all district court davison's and they're all district court decisions they are all this are court decisions i couldn't find anything council said in our briefing we didn't address the reeves test we didn't need to because the district court said assuming the notes for security so the district court to take in a position that the notes are security where the district court want to stray was the debate about whether the notes that are there is a different it's different to take a position that the notes are a security and to say i don't need to reach that in effect because the opportunity to raise the reeves issue which they didn't raise below and i want to ride and they raise that is you don't you have to establish standing you're on actually in our brief and counselor said we didn't raise the issue about reeves in the family resemblance securities and what we said it was their burden to address it they didn't move to dismiss on that basis in their motion to dismiss but we said nonetheless despite their failure to raise it below in their motion to dismiss we pointed out that if you look at the reefs tests those notes are security so we did raise it below the district court chose to say i assume the notes are securities without addressing it but we did in fact raise that reeves does say it's their burden to show that the notes are not security now counsel mention that these notes were not for the business yes they were not they were for capital improvements which is what drives those types of notes into the category of to adopt the secret plan to issue two bonds instead of one bond i have a note to address that point your honor what the ad police did below is they pointed out they said ok we're going to attach to loan transactions and they said to the district court you are now allowed to can to construe this transaction and getting a full understanding of what this transaction is what your rule and we point out in our reply did based on the documents they asked the court to consider in a ruling that the essence of the transaction was the notes which is why we raised the argument that even assuming ok the conduit argument that we are really the issues through the conduit the notes themselves are still a security because we point to the documents they attached in their motion to dismiss and we say if you look at this trend look at the preliminary often memo if you look at the final offer memo that they've attached and they've asked the court to consider that describes a transaction which your honor pointed out those notes security obligation to the bondholders and if the academy failed to generate revenue the only recourse was against the academy now we asked the question or the court asked the question why is this a novel issue it's interesting because counsel mention in the garci cases that they congress elected to limit the twelve to remedy in the one thousand nine hundred and thirty three act only against sellers right which is why you see in the cases they cite you have a distinction between i think in one of the cases and back sarge says unfortunately that the axes drafted at thirty three and thirty four create a loophole where sometimes the bondholders of the investors can't sue the non for profit and they recognize well that's something that unfortunately congress must change not the courts your reliance on review or the suggestion that you had in fact involved review you cases you're on to but dancy are your question it's not our burden to dispute the notes it is you are securities reams makes it very very very clear that the person the notes are presumed on to the thirty four act is fine if it's not clear why did you lie on your honor we point out that the test is reeves in our in our reply we said they've never addressed trees right what we mention is that the family resemblance test which is the reeves test i believe that actually reeves adopted the tests from this circuit which put forte the test that eventually became the reeves test and trying to see right they had the ability it's their burden to prove that the notes are not the type of notes that would generally be security they had the opportunity to say look at reeves and instead they say