Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-08-07095/USCOURTS-caDC-08-07095-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 12, 2009 Decided August 21, 2009

No. 08-7095

LIBERTY PROPERTY TRUST AND LIBERTY PROPERTY LIMITED

PARTNERSHIP,

APPELLANTS

v.

REPUBLIC PROPERTIES CORPORATION ET AL.,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 1:07-cv-00595)

J. David Dantzler argued the cause for appellants. With

him on the briefs was Mark E. Nagle.

George A. Borden argued the cause for appellees. With him

on the brief were Paul Martin Wolff, William T. Burke, Seymour

Glanzer, and Leslie R. Cohen.

Before: SENTELLE, Chief Judge, GINSBURG, Circuit Judge,

and RANDOLPH, Senior Circuit Judge.

Opinion for the Court filed by Chief Judge SENTELLE.

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Dissenting opinion filed by Senior Circuit Judge

RANDOLPH.

SENTELLE, Chief Judge: Plaintiffs-appellants Liberty

Property Trust and Liberty Property Limited Partnership

(successors in interest to Republic Property Trust and Republic

Property Limited Partnership, respectively) appeal from a

judgment of the district court dismissing their claims under the

Securities Exchange Act of 1934 and SEC Rule 10b-5 for failure

to state a claim upon which relief could be granted. The district

court dismissed their federal securities claims on the basis that

the limited partnership interests they sold were not “investment

contracts,” and therefore were not securities, under the test of

SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946).

Declining jurisdiction over the remaining state law claims, the

district court granted the defendants’ motion to dismiss. We

reverse the district court’s order and remand the case for further

proceedings.

I. Background

Because this case comes to us on appeal from judgment

granting a motion to dismiss, our statement of the facts adopts

the allegations of the complaint. For the purpose of reviewing

the granting of the motion, “the material allegations of the

complaint are taken as admitted,” Jenkins v. McKeithen, 395

U.S. 411, 421 (1969), and are “construed favorably to the

pleader,” Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).

Defendants-appellees Richard Kramer and Steven Grigg are real

estate developers who own and control defendant-appellee

Republic Properties Corporation. Republic Property Trust v.

Republic Properties Corp., 540 F. Supp. 2d 144, 149-50 (D.D.C.

2008). Kramer owns 85% of the corporation and Grigg 15%.

Id. at 150.

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Kramer and Grigg, together with a third developer Mark

Keller, formed Republic Property Trust in July 2005. Id. at 149.

Kramer served as chairman of the trust’s board of trustees;

Grigg was vice chairman, president, and chief development

officer. Id. (citing Am. Compl. ¶¶ 4-5, 11). The trust was

structured as a real estate investment trust, or REIT, under

Section 856 of the Internal Revenue Code, 26 U.S.C. § 856.

REITs permit diversified investment in real estate. Before its

initial public offering in December 2005, the trust established

Republic Property Limited Partnership. Republic Property, 540

F. Supp. 2d at 150. The limited partnership was “own[ed]

approximately 88%” by the trust, which was also its “sole

general partner.” Am. Compl. ¶ 2. REITs with affiliated limited

partnerships are a common device for tax planning and are

called Umbrella Partnership REITs or UPREITs. See generally

Russell J. Singer, Understanding REITs, UPREITs, and DownREITs, and the Tax and Business Decisions Surrounding Them,

16 Va. Tax Rev. 329, 334 (1996). Investors may contribute

appreciated property to the limited partnership without

recognizing taxable income. See id.

In October 2004, Republic Properties Corporation agreed

“to provide fee-based services to the City of West Palm Beach

to design, develop and construct” “a $100 million urban mixeduse development in West Palm Beach.” Am. Compl. ¶ 15; see

Republic Property, 540 F. Supp. 2d at 150. The contract

between the corporation and the West Palm Beach Community

Redevelopment Agency, styled a “Professional Services

Agreement,” contained representations from the corporation that

it would “at all times conduct business in a reputable manner”

and that it “ha[d] not employed or retained any company or

person . . . and ha[d] not agreed to pay any person, company,

corporation, individual, or firm . . . any fee, commission,

percentage, gift, or any other consideration contingent upon or

resulting from the award or making of this Agreement.” Am.

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Compl. ¶ 90 (modifications in original).

A month later, the defendants hired Raymond Liberti, a

commissioner of West Palm Beach and member of the

Community Redevelopment Agency, as a consultant to help win

a “construction contract for an academic pre-med undergraduate

building and teaching hospital at Florida Atlantic University.”

Am. Compl. Ex. B; see Republic Property, 540 F. Supp. 2d at

151. The corporation paid Liberti $5000 a month, and later

$8000 a month, for a period extending from November 15, 2004

through May 2006. Liberti’s services—“business development,

government relations, lobbying, planning,” and so forth—were

limited to projects “outside the city limits of the City of West

Palm Beach.” Am. Compl. Ex. B. Nevertheless, as part of his

role as a voting member of the Community Redevelopment

Agency, Liberti voted in favor of approving and amending the

Professional Services Agreement, which benefitted the

defendants. See Am. Compl. ¶¶ 45, 60, 63.

In December 2005, the REIT was formed as part of a series

of transactions, including an initial public offering of trust stock.

In one such transaction, included in a “Contribution Agreement”

signed in September 2005, the corporation sold its rights in the

Professional Services Agreement to the limited partnership in

exchange for 100,234 limited partnership units. The value of

those units at the time of the corporation’s initial public offering

was approximately $1.2 million. Am. Compl. ¶ 21. Through an

amendment to the Professional Services Agreement at its closing

in December 2005, the corporation’s rights were transferred to

“Republic WPB LLC . . . , an indirectly wholly owned

subsidiary of” the limited partnership. Am. Compl. ¶¶ 20, 53.

On May 5, 2006, “plaintiffs received an unwelcome

surprise.” Republic Property, 540 F. Supp at 151. That day,

“[t]he United States Attorney for the Southern District of Florida

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charged” Liberti “with accepting bribes and otherwise abusing

his elected position,” in carrying out transactions that do not

involve the corporation or trust in this case. Id. (citing Am.

Compl. ¶ 71); see Am. Compl. ¶ 72. Eventually, “Liberti pled

guilty to the charges against him.” Am. Compl. ¶ 79. Soon

after the West Palm Beach press began covering the story, the

city “notified” the corporation “that it intended to terminate the

[Professional] Services Agreement.” Republic Property, 540 F.

Supp. 2d at 151 (citing Am. Compl. ¶ 77). In an apparent effort

to minimize its losses, the limited partnership entered into an

“assignment agreement with mutual releases,” “terminat[ing] the

Professional Services Agreement” and ending all involvement

of the developers with the West Palm Beach project. Am.

Compl. ¶ 80.

The plaintiffs asserted nine causes of action before the

district court, alleging securities fraud under Rule 10b-5, control

person liability, and various infractions of state law. See

Republic Property, 540 F. Supp. 2d at 152, 154-64. The essence

of the plaintiffs’ securities law claims is that the relationship

between the corporation and Liberti was material information

affecting the value of the Contribution Agreement; the

corporation, Kramer, and Grigg failed to disclose that

relationship before assigning the Contribution Agreement to the

limited partnership in exchange for limited partnership units.

Granting a motion to dismiss, the district court held that the

units were not securities under the Securities Exchange Act, so

there could be no liability under Rule 10b-5. In a footnote, the

district court suggested that the plaintiffs may not have

adequately pleaded economic loss and loss causation. Republic

Property, 540 F. Supp. 2d at 162-63 n.6. But because the

district court held that “no purchase or sale of securities [had]

occurred,” it did not need to “resolve” the question “at present.”

Id. at 163 n.6.

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1

 Because the limited partnership has standing to maintain the

action and a remedial award to the partnership would also make the

trust whole, in the limited circumstances of this case we need not

determine whether the trust independently has standing. As the

plaintiffs themselves maintain, the trust and the limited partnership

“both are pieces of a single operating business.” 

We now hold that the limited partnership units were

securities within the meaning of the Securities Exchange Act

and reverse the order granting the motion to dismiss.

II. Analysis

Our task is to determine whether the limited partnership

units in this case fit within the definition of “securit[ies]” in

Section 10(b) of the Securities Exchange Act. 15 U.S.C.

§ 78j(b). As relevant to this case, that section makes it

“unlawful for any person . . . [t]o use or employ . . . any

manipulative or deceptive device or contrivance in

contravention of” rules promulgated by the Securities and

Exchange Commission “in connection with the purchase or sale

of any security . . . not . . . registered” on a national securities

exchange. Id. SEC Rule 10b-5 makes it unlawful “to omit to

state a material fact necessary in order to make . . . statements

made . . . not misleading . . . in connection with the purchase or

sale of any security.” 17 C.F.R. § 240.10b-5. The Supreme

Court inferred a private cause of action from this regulation in

Superintendent of Insurance v. Bankers Life & Casualty Co.,

404 U.S. 6, 13 n.9 (1971). Only buyers and sellers of securities

have standing to bring suit under Rule 10b-5. See Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723, 731 (1975). We

agree with and adopt the standing analysis of the district court,

which held that the limited partnership, as seller of the units, had

standing to bring suit under the Rule. See Republic Property,

540 F. Supp. 2d at 154-56.1

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A. Analyzing the Nature of the Limited Partnership Units

In defining “security” for purposes of the Exchange Act, 15

U.S.C. § 78c(a)(10) provides a list of terms including

“investment contract,” that describe different types of securities.

To determine whether the limited partnership units in this case

are “investment contract[s],” we apply the test of SEC v. W.J.

Howey Co., 328 U.S. at 298-99. In Howey, the Supreme Court

held an investment contract to be “a contract, transaction, or

scheme whereby a person invests his money in a common

enterprise and is led to expect profits solely from the efforts of

the promoter or a third party.” Id. This court has repeatedly

treated this test as met when profits are generated

“predominantly” from the efforts of others. SEC v. Life

Partners, Inc., 87 F.3d 536, 547 (D.C. Cir. 1996) (“If the

investor’s profits depend . . . predominantly upon the promoter’s

efforts, then the investor may benefit from the disclosure . . .

requirements of the federal securities laws.”); SEC v. Banner

Fund Int’l, 211 F.3d 602, 615 (D.C. Cir. 2000) (quoting Life

Partners, 87 F.3d at 545).

Whether limited partnership units are securities is an issue

of first impression in our Circuit. Other courts have considered

this issue in different circumstances. In Mayer v. Oil Field

Systems Corp., 721 F.2d 59 (2d Cir. 1983), the Second Circuit

noted that a limited partnership interest “generally is a security

because such an interest involves investment ‘in a common

enterprise with profits to come solely from the efforts of

others.’” Id. at 65 (quoting Howey, 328 U.S. at 301). The Third

Circuit held limited partnership interests not to be securities

when the limited partner owned 98.79% of the enterprise and

therefore could exercise “pervasive control over the

management of the Partnership.” Steinhardt Group, Inc. v.

Citigroup, 126 F.3d 144, 154 (3d Cir. 1997). In a case from the

Southern District of New York predating both these decisions,

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limited partnership interests were held to be securities when

bought by plaintiffs who simultaneously bought general

partnership interests because the plaintiffs were not general

partners prior to the purchase. Hirsch v. duPont, 396 F. Supp.

1214, 1228 (S.D.N.Y. 1975), aff’d 553 F.2d 750 (2d Cir. 1977)

(holding “plaintiffs’ limited partnership interests may be

considered separately from their general partnership interests

purchased at the same time”). As we elaborate below, the

principles courts have applied in these cases lead us to conclude

that the limited partnership units in this case were securities.

In deciding the nature of the units in this case, we keep in

mind the guidance of the Steinhardt court that “the legal rights

and powers enjoyed by the investor” should be the touchstone

of our analysis. 126 F.3d at 153 (quoting Goodwin v. Elkins &

Co., 730 F.2d 99, 107 (3d Cir. 1984)). Neither party argues that

the limited partnership units purchased by the corporation

granted legal rights to control the limited partnership. 

Rather, the appellees argue that the partnership interests

should not be considered securities because, in the words of the

district court, “the same parties stand on both sides of the

transaction.” Republic Property, 540 F. Supp. 2d at 162.

According to SEC filings, Kramer and Grigg owned over 9% of

the trust, were trustees, and held executive positions within the

trust. Therefore, the appellees argue, Kramer and Grigg

controlled the trust, which was the general partner of the limited

partnership, and so controlled the limited partnership as well.

They argue that they should not be held liable for failing to

disclose information to themselves. In urging us to disregard the

formalities of corporate structure, the appellees stress Howey’s

language that it was announcing a “flexible rather than a static

principle,” 328 U.S. at 299, and that its “emphasis should be on

economic reality,” United Housing Found., Inc. v. Forman, 421

U.S. 837, 848 (1975) (quoting Tcherepnin v. Knight, 389 U.S.

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2

 Our dissenting colleague, like the appellees, points to cases

in which “[f]orm was disregarded for substance and emphasis was

332, 336 (1967)). 

The appellants reply that in accepting the appellees’

analysis, the district court “effectively pierced two corporate

veils.” In so doing, the court disregarded the organizational

forms of both the corporation and the limited partnership to view

the transaction as between the same parties. Piercing the

corporate veil “is a step to be taken cautiously,” Quinn v. Butz,

510 F.2d 743, 759 (D.C. Cir. 1975), and it is typically at issue in

cases of common-law liability, not in a case, such as this, in

which the court must determine whether it is dealing with an

“investment contract” under the securities laws. Having taken

advantage of the corporate form to purchase the limited

partnership units, the defendants may not disregard that form to

avoid liability for the same transaction. See generally McCarthy

v. Azure, 22 F.3d 351, 362-63 (1st Cir. 1994) (“The alter ego

doctrine is equitable in nature [and accordingly] can be invoked

‘only where equity requires the action to assist a third party’”);

PayPhone LLC v. Brooks Fiber Commc’ns., 126 F. Supp. 2d

175, 179 (D.R.I. 2001) (“[A] corporation may not pierce its own

corporate veil for its own benefit.”). In this case, the defendants

did not even allege that the corporate form was “a sham.”

United States v. Andrews, 146 F.3d 933, 939-40 (D.C. Cir.

1998); see also United States ex rel. Siewick v. Jamieson Science

and Engineering, Inc., 322 F.3d 738, 741 (D.C. Cir. 2003)

(finding it inappropriate to pierce a corporate veil when the

“complaint did not even allege that [the] corporate form was a

sham”). And the appellees point to no cases where defendants

have avoided liability—under the securities laws or

elsewhere—on the basis of their own control, pervasive or

otherwise. We see no reason to pioneer a new application of

that limited doctrine on the facts before us.2

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placed upon economic reality.” Howey, 328 U.S. at 298. Those cases,

however, address situations in which courts, rather than simply

accepting the label attached to an instrument by the issuer, are to

inquire into the actual substance of the transaction. See id. at 300

(declining to be bound by “the legal terminology in which such

contracts are clothed”); United Housing Found., 421 U.S. at 850

(holding “the name given to an instrument is not dispositive”);

Tcherepnin, 389 U.S. at 339 (examining “withdrawable capital shares”

and concluding such interests “have the essential attributes of

investment contracts”); SEC v. Aqua-Sonic Products Corp., 687 F.2d

577, 584 (2d Cir. 1982) (looking behind the formal rights of investors

and asking whether “it was reasonable to expect investors to exercise

their retained rights under the sales agency agreement in a nontrivial

manner”). Looking to economic reality, however, does not warrant a

departure from the general rule that the corporate form “[may be

disregarded only where equity requires the action to assist a third

party.” 1 W. Fletcher, Cyclopedia of Corporations § 41.10, at 615

(1990). Our dissenting colleague is quite correct that the doctrine of

piercing the corporate veil has no application to this case.

Accordingly, we refuse to apply it to allow the defendants to escape

liability by prevailing on a motion to dismiss. Our conclusion is

reinforced by the Supreme Court's instruction that the Securities Act

“should be construed broadly to effectuate its purpose[] ... to protect

investors through the requirement of full disclosure.” Tcherepnin, 389

U.S. at 336. Viewed favorably to the plaintiffs, the facts here indicate

the partnership and the corporation were distinct entities, which served

independent purposes, and between which a transaction could occur

that benefited the corporation at the expense of the partnership. It was

inappropriate, on a motion to dismiss, for the district court to disregard

the corporate form without a factual determination that each

corporation was “simply the alter ego of its owners.” Valley Finance

Inc. v. United States, 629 F.2d 162, 172 (D.C. Cir. 1980). In this case

the defendants did not even allege, much less prove, that proposition.

Even assuming it were proper to disregard the corporate

form, Kramer and Grigg did not exercise sufficient control of

the limited partnership to disqualify their units as securities.

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Republic Property Trust had six trustees and ten executive

officers. Kramer and Grigg’s two votes were a minority of the

board. Cf. Kravco Inc. v. Rodamco N. America, N.V., No. 00-

0272, 2000 WL 1839735, *5-6 (E.D. Pa. Dec. 13, 2000) (when

investors held three of six seats on the board, their limited

partnership units were not securities). Nor does the analysis

change if we consider the trust at the time the Contribution

Agreement was signed in September 2005, when Kramer and

Grigg were two of three trustees. Although they then

constituted a majority of the board, the Howey test turns on

“whether profits are expected to arise from the efforts of others.”

Life Partners, 87 F.3d at 545. If Kramer and Grigg signed the

agreement expecting additional trustees to come aboard before

the deal was closed, then they “expected” to profit from the

efforts of the independent trustees added before the exchange

was completed. Disregarding the corporate form, Kramer and

Grigg still appear to have been dealing in securities.

B. Other Issues

Even if the limited partnership units were investment

contracts, and thus securities, the district court may still have

been correct in granting the defendants’ motion to dismiss if the

plaintiffs’ claims would fail for legally independent reasons.

Although we review all questions of law de novo and “have the

discretion to consider questions of law that were . . . no[t] passed

upon by the District Court,” this court’s “normal rule” is to

avoid such consideration. District of Columbia v. Air Florida,

Inc., 750 F.2d 1077, 1085 (D.C. Cir. 1984); see Eltayib v. United

States Coast Guard, 53 F. App’x 127, 127 (D.C. Cir. 2002)

(citing same).

In a footnote, the district court noted that it found the

plaintiffs’ pleading of economic loss and loss causation to be

“problematic.” Republic Property, 540 F. Supp. 2d at 162 n.6.

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The district court wondered whether the limited partnership’s

assignment of the Professional Services Agreement to a

subsidiary broke the chain of causation. Id. The plaintiffs,

however, alleged the subsidiary was a mere instrumentality of

the parent, see, e.g., Bellomo v. Pennsylvania Life Co., 488 F.

Supp. 744, 746 (S.D.N.Y. 1980) (“Where . . . the subsidiaries

are created by the parent, for tax or corporate finance purposes,

to carry on business on its behalf, there is no basis for

distinguishing between the business of the parent and the

business of the subsidiaries.”), and they may be able to prove as

much at trial. On remand, and on a more developed record, the

district court may determine the relationships among the trust,

the limited partnership, and the subsidiary entities through

which they conducted business. See Am. Compl. ¶ 20

(describing “Republic WPB LLC” as “an indirectly wholly

owned subsidiary of” the limited partnership).

With respect to loss causation, the plaintiffs’ complaint

alleges that West Palm Beach and the Community

Redevelopment Agency cancelled the Professional Services

Agreement as a direct result of the relationship between the

corporation and Liberti. Am. Compl. ¶¶ 77, 90-91. This is a

pleading of loss causation, and it was adequate to survive a

motion to dismiss.

Finally, the appellees argue that the district court’s

judgment may be affirmed on the alternative ground that the

plaintiffs failed to adequately plead scienter under the Private

Securities Litigation Reform Act of 1995; that is, the plaintiffs

must plead “with particularity facts giving rise to a strong

inference that the defendant acted with the required state of

mind,” 15 U.S.C. § 78u-4(b)(2), namely an “intent to deceive,

manipulate, or defraud,” Ernst & Ernst v. Hochfelder, 425 U.S.

185, 193 (1976). Either intentional wrongdoing or “extreme

recklessness” satisfies the standard. SEC v. Steadman, 967 F.2d

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636, 641 (D.C. Cir. 1992). The appellees argue that the

plaintiffs’ allegations “most readily give rise to an innocent

inference,” but the district court found a “credible inference of

fraudulent intent as to Grigg and Kramer.” Republic Property,

540 F. Supp. 2d at 159. On this issue, we adopt the reasoning of

the district court. See id. at 159-60.

III. Conclusion

We therefore reverse the district court’s order granting the

motion to dismiss, and remand for further proceedings.

So ordered.

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RANDOLPH, Senior Circuit Judge, dissenting: I believe the

district court correctly ruled that the limited partnership units

sold to the Republic Property Corporation in the September

2005 transaction did not qualify as “securit[ies]” under the

Securities and Exchange Act, 15 U.S.C. § 77b(a)(1). Republic

Property Trust v. Republic Properties Corp., 540 F. Supp. 2d

144, 160–62 (D.D.C. 2008). As the majority points out, some

courts have held that limited partnership units are “investment

contracts,” and thus “securities” under § 77b(a)(1). See Louis

Loss, Securities Regulation 971 & n.213 (4th ed. 2007). Other

courts have held that limited partnership units do not meet the

definition. See id. at 983 & n.215. The critical consideration is,

as the Supreme Court held in SEC v. W.J. Howey Co., 328 U.S.

293, 301 (1946), “whether the scheme involves an investment of

money in a common enterprise with profits to come solely from

the efforts of others.” 

In later cases, Howey’s “solely from the efforts of others”

has come to mean “predominantly” from the efforts of others.

SEC v. Life Partners, Inc., 87 F.3d 536, 545, 548 (D.C. Cir.

1996). Judge Friendly, a judge with deep experience in

securities law, held that courts making that assessment should

not “attach decisive significance to mere legal formality” and

should “disregard[] form for substance . . . , placing emphasis

upon economic reality.” SEC v. Aqua-Sonic Prods. Corp., 687

F.2d 577, 584 (2d Cir. 1982) (Friendly, J.). Howey itself said as

much, 328 U.S. at 299, as have later Supreme Court opinions.

See, e.g., United Housing Found., Inc. v. Forman, 421 U.S. 837,

848 (1975); Tcherepnin v. Knight, 389 U.S. 332, 336 (1967).

Here, defendants Kramer and Grigg, experienced

commercial real estate investors, were on both sides of the

transaction. See Republic Property, 540 F.Supp. 2d at 161. On

one side was the Republic Property Corporation. Kramer owned

85 percent of the Corporation; Grigg owned the remaining 15

percent. One the other side of the transaction was the real estate

investment trust or “REIT,” which had formed the limited

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2

*

 Plaintiffs admit that the relevant transaction for purposes of

their securities fraud claim was the Development Contribution

Agreement executed on September 23, 2005, when Kramer and Grigg

were two of only three trustees. Am. Compl. ¶¶ 18, 88–90.

partnership and managed it as its sole general partner. Kramer

and Grigg, with one other colleague, established the REIT. And

when the parties executed the sales agreement in September

2005,*

 Kramer and Grigg served as two of its three trustees.

Grigg was President, Chief Development Officer, and ViceChairman of the board of trustees; Kramer was Chairman of the

board of trustees. The Limited Partnership Agreement provided

that “No Limited Partner . . . (other than . . . any officer,

director, . . . or trustee of the general Partner . . .) shall take part

in the operation, management or control . . . of the Partnership’s

business . . . .” Partnership Agreement § 8.2 (emphasis added).

In short, the profitability of the limited partnership

depended on the efforts of Kramer and Grigg, and Kramer and

Grigg were the sole owners of the corporation who sold the

West Palm Beach contract to the limited partnership. The

limited partnership units therefore cannot possibly be

“securities” under Howey test. The Supreme Court formulated

its test in light of one of the main purposes of the securities laws

– to ensure that investors who will rely on a company’s

management receive “full and fair disclosure” regarding the

securities they are purchasing. Howey, 328 U.S. at 299; see

Tcherepnin, 389 U.S. at 336. The majority’s conclusion

disregards this essential premise. To hold – as the majority does

– that Kramer and Grigg had a legal obligation to provide

information to themselves is to render the securities laws

senseless.

The majority’s only justification for its result is that the

court should not “pierce the corporate veil.” Why this common

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3

law concept has anything to do with this case is a mystery. This

is a federal action under Rule 10b-5, and never in the long

history of that provision has the definition of security depended

on the “corporate veil” concept. If the majority has a reason,

any reason, for now departing from this line of authority, one

would have expected it to be shared with us. Yet nothing

emerges.

The majority has severed the corporate veil doctrine from

its foundation. To refuse to pierce the corporate veil is to refuse

to impose liability on corporate officers and directors for

corporate wrongdoing. Yet Rule 10b-5 itself does the opposite.

The securities laws subject individual officers to liability for

misstatements of material facts. Plaintiffs here know that full

well, which is why they sued not only the corporation but also

Kramer and Grigg.

I can see no reason – and the majority offers none – for

using the corporate veil concept, developed in a different

context, to hold that “others” in the Howey test means only the

corporation, not the owners and managers of the corporation. If

the selling corporation is owned and managed by two

individuals – as it was here – and if those same individuals

control and manage the entity investing in that corporation – as

here – the investor cannot be relying on the efforts of “others”

to make a profit. That, in Judge Friendly’s words, is the

economic reality. The transaction at issue in this case therefore

did not involve securities and the district court correctly

dismissed the complaint.

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