Opinion ID: 672857
Heading Depth: 3
Heading Rank: 4

Heading: Risk-Reducing Factor

Text: 31 In applying the final Reves factor, the district court held that federal securities regulation is unnecessary here because collateralized mortgages are regulated under New York State law. The district judge relied on Singer v. Livoti, 741 F.Supp. 1040 (S.D.N.Y.1990), for the proposition that Congress regarded real property transactions as essentially local in nature and did not intend[ ] to sweep them into the statutory scheme for the regulation of securities transactions. Id. at 1051. 32 Appellants take issue with this analysis on a number of grounds. They point out that the amended complaint specifically alleges that the mortgage participations were not secured and were uncollateralized. Moreover, Singer involved allegations of federal securities fraud on the part of an attorney who helped to arrange financing for a real estate development that later failed. 741 F.Supp. at 1041. In Singer, the judge pointed out: 33 [Mortgage] instruments are ordinarily generated, as this one was, through the intermediary of a licensed professional, such as an attorney, real estate broker or mortgage broker. New York maintains a complete statutory scheme to assure fidelity of these professionals to their clients and customers.... Furthermore, all states provide for public recordation of mortgages, an opportunity for mortgage lenders to search out prior liens and defects in title in the public record before investing, and give statutory protection by such recordation against subsequent encumbrancers of the collateral. 34 Id. at 1050 (citations omitted). Appellants argue that whatever protections might have been provided in the situation described in Singer, they were of little if any use in reducing the risk in the situation before us. Appellants perhaps could have taken discretion from their adviser's hands, conducted face-to-face negotiations with borrowers, inspected the properties involved, checked the records for liens, obtained title insurance and used the services of a lawyer, as persons lending money through mortgages generally do. But, appellants argue, that is not what happened here. Invocation of protections that might apply to the more usual mortgage loan distorts the character of these transactions. 35 Finally, appellants claim that the fourth Reves factor does not contemplate protections under state law, but refers only to protection under federal law that would render application of the securities laws unnecessary. 36 We agree with appellants that the district court erred in concluding that New York State regulations concerning mortgages afforded protection sufficient to render unnecessary the application of the federal securities laws to these mortgage participations. In doing so, we do not decide whether state law can be the source of such alternative protection, although it is true that the cases on which Reves relied in discussing this factor, 494 U.S. at 69, 110 S.Ct. at 953, did involve alternative schemes of federal regulation. See Marine Bank v. Weaver, 455 U.S. 551, 558, 102 S.Ct. 1220, 1224, 71 L.Ed.2d 409 (1982) (federal regulation of banks and FDIC insurance); International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 569-70, 99 S.Ct. 790, 801-02, 58 L.Ed.2d 808 (1979) (ERISA); see also 2 Loss & Seligman at 877 & n. 27. Our holding is limited to the facts as alleged in the complaint, according to which appellants held uncollateralized, speculative participations in mortgages and had not engaged in the usual process for extending such a loan. 37 Appellees argue that appellants did have the protection of federal law, namely the Investment Advisers Act of 1940, 15 U.S.C. Sec. 80b-1 et seq., and ERISA. However, we agree with appellants that the former statute was intended to complement, rather than substitute for, the 1933 and 1934 Acts. Laird v. Integrated Resources, Inc., 897 F.2d 826, 834-35 (5th Cir.1990). With regard to ERISA, it is true that appellants seek to add an ERISA claim in their second amended complaint, but they point out that ERISA would apply to only a small percentage of the participations. Under the circumstances, we need not decide whether appellants are correct in arguing that in this case ERISA cannot come close to serving as a comprehensive replacement for the federal securities laws. 38 Thus, on the limited record before us, we conclude that the district court misapplied the Reves analysis, and that the mortgage participations as alleged in the complaint are notes within the scope of the federal securities laws. 39 We reverse the January 1993 order of the district court, and remand the case for further proceedings consistent with this opinion.