11-1774 

Fried v. Lehman Bros. Real Estate Associates III, L.P.

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SUMMARY ORDER

Rulings by summary order do not have precedential effect. Citation to a summary order filed on or

after January 1, 2007, is permitted and is governed by Federal Rule of Appellate Procedure 32.1 and

this court’s Local Rule 32.1.1. When citing a summary order in a document filed with this court, a

party must cite either the Federal Appendix or an electronic database (with the notation “summary

order”). A party citing a summary order must serve a copy of it on any party not represented by

counsel.

At a stated Term of the United States Court of Appeals for the Second Circuit, held at the

Daniel Patrick Moynihan United States Courthouse, at 500 Pearl Street, in the City of New York,

on the 20th day of December, two thousand twelve.

Present: ROBERT A. KATZMANN,

BARRINGTON D. PARKER,

RICHARD C. WESLEY,

Circuit Judges.

____________________________________________________________

BARBARA J. FRIED, MARK FRIED ALTITUDE PARTNERS, LLC, RICHARD D.

MALTZMAN, as Trustee for the Richard D. & Charlene Maltzman Family Trust U/A/D

3/23/88, JEFFOREED PARTNERS, L.P., ZELFAM LLC, on behalf of limited partners listed on

Annex A., B. MARK FRIED, ALTITUDE PARTNERS, LLC, JEFFOREED MANAGEMENT

COMPANY INC., ALEX KHOWAYLO, BARRY ARONOFF, BILL NEWLIN, BILL

SCHNUHL, BUKFENC LLC, CATLIN FAMILY TRUST, CHARCO VENTURES, L.P.,

DANIEL R PFAU, ELISABETH S. PFAU, DREW PERKINS TRUST U/A/D 12/21/99, ELI

BARKAT HOLDING LTD., ERIK SCULTE, FRANK KEENER, FRANK RUTAN, GEORGE

EVANS, GSB HOLDING, INC., IRACINI L.P., JAMES J. VAN STONE, SUSAN E. VAN

STONE, JAMES R. DOUGLAS, MARGARET W. DOUGLAS, JEFF MOSTER, JOHN

ARGUE, JEFFREY HECKTMAN TRUST, JOHN DRAGHI, JOHN ROSEKRANZ, KAREN A.

UBELHART, LOUISE E. COHEN, MARTIN BURGER, MICHAEL & DIANE BRANON

REVOCABLE TRUST, MICHAEL SHER, BILLIE GELB, NIR BARKAT HOLDING LTD.,

PAUL DEKTOR, PEACHBLOW PARTNERS, L.P., PROVIDENT HOLDINGS, INC., PSERD

TRUST, RFLP GROUP, LLC, RICHARD LANDGARTEN, ROBERT T. FRALEY TRUST,

ROSS C. HARTLEY, RUSSELL AND JUDITH FRADIN, TIC, SANFORD H. ROBBINS,

SHLOMO SHMELZER, ATALYA SHMELZER, SIMON FAMILY INVESTMENT

PARTNERSHIP, STEPHANIE BORYNACK, STEPHEN GUERINO, KATHLEEN GUERINO,

STEVEN HOLDER, TAD LOWREY, THE GOLD/SHERMAN-GOLD FAMILY TRUST,

THOMAS G. MACEY, THREE HORSE INVESTMENTS, VAHID MANIAN, WAITE

FAMILY TRUST, WILLIAM C. SCOTT, JULIEN DE SLABERRY, GLICKENHAUS AND
2

CO., REAL ESTATE PRIVATE EQUITY, INC., 

Plaintiffs,

and

ALAN GERBER LEWIS MARITAL IRR. TRUST, RICHARD SHUSTER, RICKEL

SHUSTER,

Plaintiffs-Appellants,

- v - No. 11-1774-cv

LEHMAN BROTHERS REAL ESTATE ASSOCIATES III, L.P., LEHMAN BROTHERS

PRIVATE EQUITY ADVISERS, LLC, MARK A. WALSH, MARK H. NEWMAN, BRETT

BOSSUNG, MICHAEL J. ODRICH, CHRISTOPHER M. O’MEARA, RICHARD S. FULD,

JR., JOSEPH M. GREGORY, ERIN CALLAN, IAN LOWITT, THOMAS RUSSO, DOES 1

THROUGH 50, REAL ESTATE PRIVATE EQUITY, INC., SILVERPEAK REAL ESTATE

PARTNERS L.P., REPE CP MANAGECO LLC, 

Defendants-Appellees.

____________________________________________________________

For Plaintiffs-Appellants: ROBERT TED PARKER, Parker Law Firm, Orinda, CA (Arthur

Russell, New York, NY, on the brief).

For Defendants-Appellees: JONATHAN D. POLKES, Weil, Gotshal & Manges LLP, New

York, NY (William A. Burck, Robert V. Spake, Jr., and Adam

B. Banks, Weil, Gotshal & Manges LLP, New York, NY, for

Defendants-Appellees Lehman Brothers Real Estate Associates

III, L.P., Lehman Brothers Private Equity Advisers, LLC, and

Real Estate Private Equity, Inc.; Richard A. Rosen, Paul,

Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for

Defendants-Appellees Mark A. Walsh, Mark H. Newman, Brett

Bossung, Silverpeak Real Estate Partners, L.P., and REPE CP

ManageCo, LLC; Patricia M. Hynes and Todd. S. Fishman,

Allen & Overy, LLP, New York, NY, for Defendant-Appellee

Richard S. Fuld, Jr.; Michael J. Chepiga and Mary Elizabeth

McGarry, Simpson Thacher & Bartlett LLP, New York, NY,

for Defendants-Appellees Michael J. Odrich, Christopher M.

O’Meara, and Thomas Russo; Martin J. Auerbach, New York,

NY, for Defendant-Appellee Ian Lowitt; Robert J. Cleary,

Dietrich L. Snell, Mark E. Davidson, and Seth D. Fier,

Proskauer Rose LLP, New York, NY, for Defendant-Appellee
3

Erin Callan; Israel David and Audrey Strauss, Fried Frank

Harris Shriver & Jacobson LLP, New York, NY, for

Defendant-Appellee Joseph M. Gregory, on the brief) for

Defendants-Appellees Lehman Brothers Real Estate Associates

III, L.P., Lehman Brothers Private Equity Advisers, LLC, and

Real Estate Private Equity, Inc. 

Appeal from the United States District Court for the Southern District of New York

(Jones, J.).

ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,

AND DECREED that the judgment of the district court be and hereby is AFFIRMED.

Plaintiffs-Appellants Alan Gerber Lewis Marital Irrevocable Trust and Richard and

Rickel Shuster (collectively, “plaintiffs”) appeal from a March 29, 2011, memorandum and order

of the United States District Court for the Southern District of New York (Jones, J.) dismissing

their case in its entirety for failure to state a claim upon which relief may be granted. The

plaintiffs are limited partners in one or more of four real estate investment partnerships: Lehman

Brothers Real Estate Partners III, L.P.; Lehman Brothers Real Estate Fund III, L.P.; Lehman

Brothers Offshore Real Estate Fund III; and Lehman Brothers Real Estate Capital Partners III

(collectively, the “Partnerships”). The defendants, affiliates of Lehman Brothers Holdings Inc.

(collectively, “Lehman”), formed the Partnerships on June 25, 2007, for the purpose of investing

in commercial real estate both domestically and abroad. The plaintiffs allege that the defendants

knowingly or recklessly omitted material information in connection with the sale of the limited

partnerships to the plaintiffs, causing the plaintiffs to rely on the omission and consequently to

suffer economic loss. We assume the parties’ familiarity with the underlying facts and

procedural history of the case. 
4

The plaintiffs principally contend that they have alleged sufficient facts to support a

claim of securities fraud pursuant to Section 10(b) of the Securities and Exchange Act of 1934,

15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5(b). More

specifically, the plaintiffs contend that the complaint alleges sufficient facts to support a claim

that the defendants knew or should have known (1) that certain property interests being held by

Lehman for sale to the Partnerships had depreciated in value since their acquisition by Lehman

and (2) that the Partnerships’ purchase of those property interests at the prices paid by Lehman

plus carrying costs would consequently cause the Partnerships to incur immediate losses.

The district court held that the plaintiffs did not allege sufficient facts to support an

allegation of scienter. With respect to the element of scienter, the Public Securities Litigation

Reform Act provides: 

[I]n any private action arising under this chapter in which the plaintiff may recover

money damages only on proof that the defendant acted with a particular state of mind, the

complaint shall, with respect to each act or omission alleged to violate this chapter, state

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)(A). “To meet the ‘strong inference’ standard, it is not sufficient to set

out ‘facts from which, if true, a reasonable person could infer that the defendant acted with the

required intent,’ for that gauge ‘does not capture the stricter demand Congress sought to

convey . . . .’” S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 110-11 (2d Cir. 2009)

(emphasis in original) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314

(2007)). Instead, “[t]o qualify as ‘strong’ within the intendment of § 21D(b)(2) . . . an inference

of scienter must be more than merely plausible or reasonable—it must be cogent and at least as

compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314.
5

It is undisputed that the presence or absence of scienter on the part of the defendants is

determined with respect to the date that the plaintiffs committed to invest in the Partnerships. 

See Vacold LLC v. Cerami, 545 F.3d 114, 122 (2d Cir. 2008). The plaintiffs argue that they

committed to invest in May 2008; the defendants argue that the plaintiffs committed to invest on

November 30, 2007. Neither party points to record support indicating when the Alan Gerber

Lewis Marital Irrevocable Trust or Richard and Rickel Shuster committed to invest in the

Partnerships. However, the complaint states that some of the plaintiffs made that commitment as

late as February of 2008. We consequently consider whether the complaint alleges sufficient

facts to give rise to a strong inference of scienter on the part of the defendants on or before

February 29, 2008. 

We must determine whether the entire collection of facts alleged gives rise to a strong

inference of scienter as of that date. Tellabs, 551 U.S. at 322-23. The complaint alleges that

(1) during a November 2007, presentation to Lehman Chairman and CEO Richard Fuld,

Lehman’s commercial real estate group recommended reducing its global balance sheet by $15

billion; (2) a preliminary and unaudited table attached to Lehman’s Securities and Exchange

Commission Form 8-K indicated that Lehman’s portfolio of “[r]eal estate held for sale” had

incurred $300 million in both gross and net losses in the three months ending on February 29,

2008; (3) the defendants did not form an Investor Advisory Committee for any of the

Partnerships until after May 28, 2008, when the Partnerships acquired the property interests at

issue; and (4) the defendants failed to issue a required financial report to the limited partners for

the second quarter of 2008. The district court correctly held that, in light of the entire complaint
6

and the incorporated documents, these allegations are insufficient to support a strong inference

of scienter. 

The plaintiffs principally rely on the table titled “Lehman Brothers Holdings Inc. Mark to

Market Adjustments Gain/(Loss) (Preliminary and Unaudited)” included in a press release

attached to Lehman’s S.E.C. Form 8-K quarterly report. Specifically, they rely on the fact that

the line item in the table for “[r]eal estate held for sale” shows a gross loss and a net loss of $300

million for the three months ending on February 29, 2008, and again for the three months ending

on May 31, 2008. However, even if we assume, as the plaintiffs do, that the property interests

being held for sale to the Partnerships were included within the category of Lehman’s “[r]eal

estate held for sale,” the table does not give rise to a strong inference that the defendants knew

that those particular property interests had depreciated in value. The table does not address

specific properties or groups of property, and it does not indicate whether the losses were evenly

distributed across the category of “[r]eal estate held for sale.” 

By contrast, other contemporaneous documents attached to the complaint address the

particular property interests bound for the Partnerships, and those documents support the

inference that the defendants did not think that the property interests had depreciated in value. 

An internal Lehman document lists the appreciation or depreciation of each of the Partnershipbound investments and indicates that as of December 31, 2007, the investments, in aggregate,

had appreciated $300,000 in value since their acquisition. A second internal Lehman document

comprises line items indicating the increase, decrease, or lack of change in value of each of the

Partnership investments as of June 30, 2008. The June 2008 document indicates that the

investments, in aggregate, had increased in net value by 2.4% relative to their acquisition prices. 
7

The plaintiffs argue that the figures in the June 2008 document reflect only changes in

discount rates and not an attempt to calculate the “fair value” of the property interests. However,

the “Comments” in the document, which explain the valuation of each property interest, refer to

factors other than discount rate adjustments; moreover, the document refers multiple times to the

calculation of “fair value.” The plaintiffs also argue that the June 2008 figures are implausible

because the appreciation in value that they document is inconsistent with real estate indicators

worldwide from the same time period. However, those real estate indicators do not address the

particular property interests at issue in this case. The plaintiffs do not successfully undermine

the strong inference arising from the December 2007 and June 2008 internal documents that as

of February 29, 2008, the defendants did not believe that the property interests being held for

transfer to the Partnerships (as opposed to the general category of “[r]eal estate held for sale”)

had depreciated in value. 

The remainder of the allegations asserted by the plaintiffs do not substantially increase

the strength of the inference of scienter on the part of the defendants. First, with respect to the

November 2007 presentation to Fuld, the plaintiffs do not allege facts specifying whether the

recommendation to reduce the commercial real estate group’s global balance sheet was a

suggestion to mark down the value of properties on the balance sheet or to reduce the balance

sheet by other means, such as by disposing of some of the investments. Even if we assume that

the recommendation was to mark down the value of the properties on the balance sheet, the

plaintiffs do not allege facts indicating that the recommendation referred to the particular

property interests bound for the Partnerships. 
8

Second, with respect to the defendants’ failure to appoint an Investor Advisory

Committee for any of the Partnerships until after May 28, 2008, the date that the property

interests at issue were transferred to the Partnerships, this allegation does not carry much weight. 

The partnership agreements contained no deadline for the appointment of the Investor Advisory

Committees. Moreover, the partnership agreements did not require the defendants to consult

with the Investor Advisory Committees regarding purchases of property interests from Lehman. 

Consequently, even if the Committees had already been appointed, the defendants could have

entirely avoided the Committees’ participation in the May 28, 2008, transaction. 

Finally, with respect to the defendants’ failure to prepare and mail a financial report for

the second financial quarter of 2008, the plaintiffs do not make clear how the failure to issue

financial statements required by August 29, 2008, demonstrates that as of February 29, 2008, the

defendants knew that the properties had depreciated in value. All of the plaintiffs had already

committed to the funds by the end of February 2008; the failure to issue the report months later

was not a ploy to induce investment. Moreover, the failure to issue the report only delayed the

inevitable disclosure of the information in a later report. The plaintiffs do not explain how the

defendants would benefit from such a delay.

Considering the complaint in its entirety, we hold that the plaintiffs have not alleged facts

sufficient to support a strong inference of scienter on the part of the defendants. Because the

claims against the institutional defendants fail here, the claims against the individual defendants

fail as well. See SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996) (“In order to

establish a prima facie case of controlling-person liability, a plaintiff must show a primary

violation by the controlled person . . . .”).
9

We have considered the appellants’ remaining arguments and find them to be without

merit. For the reasons stated herein, the judgment of the district court is AFFIRMED. 

FOR THE COURT:

CATHERINE O’HAGAN WOLFE, CLERK