ORAL ARGUMENT HELD MAY 12, 2009
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ORAL ARGUMENT HELD MAY 12, 2009
UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
________________________________
No. 08-7095
________________________________
LIBERTY PROPERTY TRUST and LIBERTY PROPERTY
LIMITED PARTNERSHIP,
Plaintiffs-Appellants,
v.
REPUBLIC PROPERTIES CORPORATION, STEVEN A. GRIGG and
RICHARD L. KRAMER,
Defendants-Appellees.
________________________________
On Appeal From the
United States District Court for the District of Columbia
________________________________
BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION,
AMICUS CURIAE, ON ISSUES ADDRESSED
________________________________
DAVID M. BECKER
General Counsel
MARK D. CAHN
Deputy General Counsel
JACOB H. STILLMAN
Solicitor
SUSAN S. McDONALD
Senior Litigation Counsel
BENJAMIN L. SCHIFFRIN
Senior Counsel
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
(202) 551-5003 (Schiffrin)
schiffrinb@sec.gov
CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES
Parties and Amici
All parties, intervenors, and amici appearing before the district court and in
this Court are listed in the Defendants-Appellees’ Petition for Rehearing or
Rehearing En Banc and the Response of Plaintiffs-Appellants to DefendantsAppellees’ Petition for Rehearing or Rehearing En Banc.
Rulings Under Review
References to the rulings at issue appear in the Brief of Appellees.
Related Cases
This case is before the Court on Defendants-Appellees’ Petition for
Rehearing and Rehearing En Banc of an August 21, 2009 decision of a panel of
the Court. Liberty Prop. Trust v. Republic Props. Corp., 577 F.3d 335 (D.C. Cir.
2009). A related case, Grigg v. Liberty Prop. Trust, No. 2006 CA 9051 B (JoseyHerring, J.), is pending before the Superior Court of the District of Columbia.
ii
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
GLOSSARY OF ABBREVIATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION . . . . . 1
STATUTES AND REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A.
REITS and UPREITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B.
Relevant Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
I.
The Limited Partnership Units are Securities Because They are Options or
Rights to Purchase or Otherwise Acquire Securities or the Cash Value of
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
II.
Under the Majority’s View of the Facts, the Limited Partnership Units are
Securities Because They are Investment Contracts . . . . . . . . . . . . . . . . . . 9
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
CERTIFICATE OF COMPLIANCE
STATUTORY ADDENDUM
CERTIFICATE OF SERVICE
iii
TABLE OF AUTHORITIES
Cases
Page
Caiola v. Citibank, N.A., 295 F.3d 312 (2d Cir. 2002) . . . . . . . . . . . . . . . . . . 7, 8
Lawrence v. Cohn, 932 F. Supp. 564 (S.D.N.Y. 1996) . . . . . . . . . . . . . . . . . . . . 6
Liberty Prop. Trust v. Republic Props. Corp.,
570 F. Supp. 2d 95 (D.D.C. 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Liberty Prop. Trust v. Republic Props. Corp.,
577 F.3d 335 (D.C. Cir. 2009) . . . . . . . . . . . . . . . . . . . . 4, 9, 10, 11, 13, 14
*One-O-One Enters., Inc. v. Caruso, 848 F.2d 1283 (D.C. Cir. 1988) . . . . . . . . 6
SEC v. Aqua-Sonic Prods. Corp., 687 F.2d 577 (2d Cir. 1982) . . . . . . . . . . 13-14
SEC v. Edwards, 540 U.S. 389 (2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 14
SEC v. Int’l Loan Network, Inc., 968 F.2d 1304 (D.C. Cir. 1992) . . . . . . . . . 9-10
SEC v. Merchant Capital LLC, 483 F.3d 747 (11th Cir. 2007) . . . . . . . . . . . . . 13
SEC v. SG Ltd., 265 F.3d 42 (1st Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SEC v. W.J. Howey Co., 328 U.S. 293 (1946) . . . . . . . . . . . . . . . . . . . 5, 9, 13, 14
Steinhardt Group, Inc. v. Citicorp., 126 F.3d 144 (3d Cir. 1997) . . . . . . . . . . . 13
United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975) . . . . . . 11, 14
Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981) . . . . . . . . . . . . . . . . . . . . . 10
___________________________
*/
Authorities on which we chiefly rely are marked with asterisks.
iv
TABLE OF AUTHORITIES (CONTINUED)
Statutes and Rules
Page
Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq.
Section 3(a)(10), 15 U.S.C. § 78c(a)(10) . . . . . . . . . . . . . . . . . . . . . . . 5-6, 7
Section 3(a)(13), 15 U.S.C. § 78c(a)(13) . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 10(b), 15 U.S.C. § 78j(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Rules under the Securities Exchange Act of 1934, 17 C.F.R. 240.0-1, et seq.
Rule 10b-5, 17 C.F.R. § 240.10b-5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Miscellaneous
Alvin L. Arnold, Real Estate Investor’s Deskbook,
REINVESTOR (Westlaw) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Harold S. Bloomenthal, Securities & Federal Corporate Law (2001) . . . . . . . 10
David M. Einhorn, et al., REIT M&A Transactions: Peculiarities and
Complications, 55 Bus. Law. 693 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . 2
*Peter M. Fass, et al., Real Estate Investment Trusts Handbook
(2006 ed.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 2, 8, 9
Limited Partnership Roll-Up Transactions,
Exchange Act Rel. No. 35036 (Dec. 1, 1994), 1994 WL 669982 . . . . . . . 8
Michael T. Madison, et al., Law of Real Estate Financing,
REFINLAW (Westlaw) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
M. Guy Maisnik, Basic Issues in Exchanging Property Interests for
UPREIT OP Units, 468 PLI/Real 401 (2001) . . . . . . . . . . . . . . . . . . . . . . 9
v
TABLE OF AUTHORITIES (CONTINUED)
Miscellaneous (continued)
Page
Jack H. McCall, A Primer on Real Estate Trusts: The Legal Basics of REITS,
2 Transactions: Tenn. J. Bus. L. 1 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . 9
Stuart M. Saft, Commercial Real Estate Transactions,
CRETRANS (Westlaw) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Russell J. Singer, Note, Understanding REITS, UPREITs, and DOWN-REITs,
and the Tax and Business Decisions Surrounding Them,
16 Va. Tax. Rev. 329 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
vi
GLOSSARY OF ABBREVIATIONS
Contribution
Agreement
Agreement between RPC and RPLP whereby RPC
contracted to contribute the Professional Services
Agreement to RPLP in exchange for 100,234 limited
partnership units in RPLP
IPO
Initial Public Offering of REIT stock
Partnership
Agreement
First Amended and Restated Agreement of Limited
Partnership of Republic Property Limited Partnership
Professional Services
Agreement
Agreement between RPC and a municipality under
which RPC would be paid to provide real estate
development services to the municipality
REIT
Real Estate Investment Trust
RPC
Defendant-Appellee Republic Properties Corporation
RPT
Republic Property Trust, predecessor in interest to
Plaintiff-Appellant Liberty Property Trust
RPLP
Republic Property Limited Partnership, predecessor in
interest to Plaintiff-Appellant Liberty Property Limited
Partnership
UPREIT
Umbrella Partnership Real Estate Investment Trust
vii
INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission is the agency principally
responsible for the administration and enforcement of the federal securities laws.
This amicus curiae brief is filed pursuant to the Court’s invitation to respond to
the defendants’ petition for rehearing or rehearing en banc. The brief addresses
questions relating to the definition of a “security.”
STATUTES AND REGULATIONS
The pertinent statutes and regulations are set forth in this brief’s Addendum.
BACKGROUND
A.
REITS and UPREITS
This case involves a real estate investment trust, or “REIT,” and associated
umbrella limited partnership. A REIT is a “corporation or business trust
combining the capital of many investors to own and, in most cases, operate
income-producing real estate.” Peter M. Fass, et al., Real Estate Investment Trusts
Handbook § 1:1, at 3 (2006 ed.) (“Handbook”). In a conventional REIT, private
investors transfer their real estate and other property directly to the REIT in
exchange for shares. 1 Michael T. Madison, et al., Law of Real Estate Financing,
REFINLAW § 4:29 (Westlaw). Such a transfer, however, may trigger tax
liabilities for the transferors. Stuart M. Saft, Commercial Real Estate
Transactions, CRETRANS § 4:36 (Westlaw). “The problem of immediate
1
taxation of property owners from a transfer of property to a REIT is solved by
using an ‘UPREIT.’” Handbook § 7:1, at 989.
In a typical UPREIT, the REIT holds all of its assets and conducts all of its
business through an umbrella, or operating, limited partnership. David M.
Einhorn, et al., REIT M&A Transactions: Peculiarities and Complications, 55
Bus. Law. 693, 695 (2000). Private investors contribute property to the operating
partnership in exchange for limited partnership units, and, contemporaneously, the
REIT sells stock to the public and contributes the proceeds of the offering to the
partnership in exchange for a general partnership interest. Russell J. Singer, Note,
Understanding REITS, UPREITs, and DOWN-REITs, and the Tax and Business
Decisions Surrounding Them, 16 Va. Tax. Rev. 329, 334 (1996). The transfers of
property in exchange for units occur simultaneously with the initial public offering
of REIT stock. Alvin L. Arnold, Real Estate Investor’s Deskbook, REINVESTOR
§ 6.56 (Westlaw). Typically, each limited partnership unit is convertible after one
year into a share of REIT stock or, at the REIT’s option, into the cash value of a
share of REIT stock. Handbook § 2:272, at 476-77, and § 7.1, at 990-91.
B.
Relevant Facts
In this action under Section 10(b) of the Securities Exchange Act of 1934
(“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, a
REIT, together with its umbrella limited partnership that privately sold limited
2
partnership units, sued a corporation that purchased units, and that corporation’s
two owners, for alleged fraud. Defendants Richard L. Kramer and Steven A.
Grigg and a third individual formed Republic Property Trust (“RPT”), predecessor
in interest to plaintiff Liberty Property Trust, in anticipation of creating an
UPREIT. See JA 9 ¶1, JA 11-12 ¶¶11-14. Before its initial public offering
(“IPO”) in December 2005, RPT established Republic Property Limited
Partnership (“RPLP”), predecessor in interest to plaintiff Liberty Property Limited
Partnership, as the operating partnership through which RPT (the REIT) would
conduct the business (JA 9 ¶2). As is typical in the creation of an UPREIT, prior
to the IPO for RPT’s stock in December 2005, RPT, through RPLP, entered into a
number of transactions whereby RPT contracted to acquire property and contracts
in exchange for shares of RPT and units in RPLP (JA 12 ¶¶12-13).
In one of those transactions, in September 2005, defendant Republic
Properties Corporation (“RPC”), which was wholly owned by Kramer and Grigg,
entered into a “Development Services Rights Contribution Agreement” with RPLP
(JA 13 ¶18). This “Contribution Agreement” provided that, “in connection with
the IPO Transactions,” RPC would contribute to RPLP, in exchange for 100,234
limited partnership units in RPLP (valued at $1.2 million), a preexisting
“Professional Services Agreement” between RPC and a municipality under which
RPC was paid to provide real estate development services to the municipality (JA
3
12-13 ¶15, JA 43-44). The Contribution Agreement conditioned the exchange on
the closing of the IPO and provided that the units were to be issued simultaneously
with the closing (JA 50, JA 51-52). When RPT completed its IPO on December
20, 2005, RPC contributed the Professional Services Agreement to RPLP and
RPLP issued the limited partnership units to RPC (JA 14 ¶21).
RPLP’s Partnership Agreement contained the provision—standard in
UPREITs (see supra page 2)—entitling the limited partners, including RPC, to
have each limited partnership unit converted after one year into either one share of
REIT stock or the cash equivalent (at the REIT’s option). See Liberty Prop. Trust
v. Republic Props. Corp., 570 F. Supp. 2d 95, 99 (D.D.C. 2008); First Amended
and Restated Agreement of Limited Partnership of Republic Property Limited
Partnership (“Partnership Agreement”) art. I and § 8.6, available at
http://www.sec.gov/Archives/edgar/data/1335686/000110465905058095/a05
16242_1ex10d1.htm. Also, the Partnership Agreement was a traditional limited
partnership agreement that gave limited partners no managerial authority, while
the sole general partner, RPT, would manage the partnership (and the business).
Liberty Prop. Trust v. Republic Props. Corp., 577 F.3d 335, 339 (D.C. Cir. 2009);
Partnership Agreement §§ 7.1 and 8.2.
After facts surfaced that caused the municipality to terminate the
Professional Services Agreement in October 2006, RPT and RPLP filed this action
4
alleging that RPC, Kramer, and Grigg committed securities fraud by failing to
disclose those facts, which affected the Professional Services Agreement’s value,
at the time of the Contribution Agreement (JA 29 ¶¶103-105). The district court
dismissed the complaint on the ground that the limited partnership units were not
securities; a panel of this Court, with one judge dissenting, reversed.
SUMMARY OF ARGUMENT
The limited partnership units are securities because they are options or
rights to purchase stock or the cash value of stock—items identified in the
Exchange Act definition of a security. The units satisfy this part of the definition
because they are convertible into REIT stock or the cash value of REIT stock.
Under the majority’s view of the facts, the limited partnership units are also
investment contracts under the test of SEC v. W.J. Howey Co., 328 U.S. 293, 298
99 (1946), which is whether an investment involves “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.
ARGUMENT
I.
The Limited Partnership Units are Securities Because They are Options or
Rights to Purchase or Otherwise Acquire Securities or the Cash Value of
Securities.
Section 3(a)(10) of the Exchange Act defines “security” to include any
“stock,” “any . . . option, or privilege on any security . . . (including any interest
5
therein or based on the value thereof),” and any “warrant or right to subscribe to or
purchase, any of the foregoing.” 15 U.S.C. § 78c(a)(10). In One-O-One Enters.,
Inc. v. Caruso, 848 F.2d 1283 (D.C. Cir. 1988) (R.B. Ginsburg, J.), this Court held
that an “option to purchase stock” “is such a traditional securities instrument that
its existence may be shown ‘by proving the document itself’ without any need ‘to
look beyond the characteristics of the instruments’ and, specifically, without any
need to apply the Howey test.” Id. at 1288. The Court reached this conclusion by
“attend[ing] to the presence in the [Exchange Act] definition of ‘security’ not only
of the term ‘option’ but also of the phrase ‘any . . . right to . . . purchase, any of the
foregoing,’ where ‘the foregoing’ includes ‘stock.’” Id.
In Caruso, the Court held that a “contractual option to buy all of [a
company’s] stock established defendants’ ‘right to purchase’ that stock,” and that
therefore the “option to purchase [the] stock was a security.” Id. Similarly, the
Partnership Agreement in this case, as is typical for an UPREIT, gave holders of
limited partnership units the right to acquire REIT stock by redeeming their units
for shares. The limited partnership unit is a security, therefore, because it contains
a contractual option to acquire a security. See also Lawrence v. Cohn, 932 F.
Supp. 564, 578 (S.D.N.Y. 1996).
Caruso cannot be distinguished on the ground that the option in that case
gave the holder the right to purchase stock and the limited partnership units here
6
give limited partners the right to redeem the units for stock. Section 3(a)(13) of
the Exchange Act provides that the “terms ‘buy’ and ‘purchase’ each include any
contract to buy, purchase, or otherwise acquire.” 15 U.S.C. § 78c(a)(13)
(emphasis added). The right to acquire stock, therefore, satisfies the definition of
a security in Section 3(a)(10) of the Exchange Act.
The fact that here, as is typical in UPREITs, the REIT had the choice to give
holders of the units the cash value of the REIT stock, rather than the stock itself,
does not undermine the conclusion that the limited partnership units are securities.
An option on the value of a security is also itself a security. In Caiola v. Citibank,
N.A., 295 F.3d 312 (2d Cir. 2002), the Second Circuit, agreeing with the view
expressed by the Commission in an amicus brief filed in that case, held that “cash
settled over-the-counter options on the value of a security are covered by Section
10(b).” Id. at 325. Section 3(a)(10) of the Exchange Act provides that the term
“security” includes an “option . . . on any security, certificate of deposit, or group
or index of securities (including any interest therein or based on the value
thereof).” 15 U.S.C. § 78c(a)(10). Therefore, “the right to take possession does
not define an ‘option’ under Section 3(a)(10), which covers options that can be
physically delivered as well as those that cannot,” 295 F.3d at 326, and there is
“no textual basis for reading section 3(a)(10) to define ‘option’ as including only
transactions that give the holder the right to receive the underlying securities,” id.
7
at 327. Accordingly, “options based on the value of a security are . . . securities.”
Id. at 327 n.7.
In sum, the limited partnership units in this case are securities because they
give unit holders the right to acquire either REIT stock, which renders each unit an
option to acquire a security, or the cash value of REIT stock, which renders each
unit an option based on the value of a security.
This conclusion comports with the Commission’s historical treatment of
limited partnership units in the operating partnership of an UPREIT as securities.
For example, in adopting rules regarding limited partnership roll-up transactions,
“the SEC, by way of footnote, made it clear that the typical UPREIT transaction
could not avail itself of the exclusion from the definition of a rollup” for
transactions that “involve[] only issuers . . . that are not required to register or
report under Section 12 of the 1934 Act both before and after the transaction.”
Handbook § 2:260, at 464 (citing Limited Partnership Roll-Up Transactions,
Exchange Act Rel. No. 35036 (Dec. 1, 1994), 1994 WL 669982, at *3 n.33). In
the footnote, the Commission stated that “if a transaction involves the issuance of
a security that, after the transaction, would be convertible into a security of an
issuer that is required to register or report under Section 12, this exclusion would
not be available since the transaction would not involve only non-Section 12
issuers.” 1994 WL 669982, at *3 n.33. The footnote’s reasoning demonstrates
8
that the Commission considers the issuance of limited partnership units in the
operating partnership of an UPREIT, which may be converted into REIT stock, to
“involve[] the issuance of a security.” 1/
II.
Under the Majority’s View of the Facts, the Limited Partnership Units are
Securities Because They are Investment Contracts.
The panel majority, noting that Section 3(a)(10) of the Exchange Act
defines “security” to include an “investment contract,” analyzed “whether the
limited partnership units in this case are investment contract[s]” under “the test of
SEC v. W.J. Howey Co., 328 U.S. at 298-99.” 577 F.3d at 339. As the majority
opinion stated, the Supreme Court, in Howey, 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. (quoting Howey, 328 U.S. at 298-99). “The courts of appeals
have been unanimous in declining to give literal meaning to the word ‘solely’ in
this context,” SEC v. SG Ltd., 265 F.3d 42, 55 (1st Cir. 2001), and, as the majority
stated, 577 F.3d at 339, this Court has repeatedly treated this test as met when
profits are generated predominantly from the efforts of others, e.g., SEC v. Int’l
1/
Leading commentators also recognize that UPREIT limited partnership
units are securities. See Handbook § 2:260, at 462; Jack H. McCall, A
Primer on Real Estate Trusts: The Legal Basics of REITS, 2 Transactions:
Tenn. J. Bus. L. 1, 11 (2001); M. Guy Maisnik, Basic Issues in Exchanging
Property Interests for UPREIT OP Units, 468 PLI/Real 401, 406 (2001).
9
Loan Network, Inc., 968 F.2d 1304, 1308 (D.C. Cir. 1992). In this case, the only
aspect of the Howey analysis the dissent argues is lacking is the expectation that
profits will come predominantly from the efforts of others, because, the dissent
contends, Kramer and Grigg, who owned purchaser RPC, also controlled RPT, the
general partner that would manage the business.
As the majority recognized here, a traditional limited partnership interest (in
a limited partnership not associated with a REIT and without a redemption-for
shares feature) “generally is a security” in the form of an investment contract
“because such an interest involves an investment in a common enterprise with
profits to come primarily from the efforts of others.” 577 F.3d at 339 (internal
quotation marks and citations omitted). 2/ The majority held that profits from the
limited partnership units in this case were expected to come predominantly from
the efforts of others because after its IPO in December 2005, RPT, which
controlled RPLP, had additional trustees and executive officers, and Kramer’s and
Grigg’s votes were a minority of the board. Id. at 341. The majority opinion
2/
Accord Williamson v. Tucker, 645 F.2d 404, 423 (5th Cir. 1981) (observing
that “a limited partnership [interest] . . . has long been held to be an
investment contract”); 3 Harold S. Bloomenthal, Securities & Federal
Corporate Law § 2:38, at 2-92 (2001) (“Since, in order to achieve limited
liability for the limited partners, it is essential that they not participate in
management, the investment contract approach ordinarily results in
classification [of a limited partnership interest] as a security. These interests
have generally been regarded by the Commission and courts as securities.”)
10
concluded, based on this economic reality analysis, that after the IPO “Kramer and
Grigg did not exercise sufficient control of the limited partnership to disqualify
their units as securities.” Id. at 340-41.
The dissent focused on control of RPT at the time the “Contribution
Agreement [was] executed on September 23, 2005, when Kramer and Grigg were
two of only three trustees.” Id. at 343 n.*. The majority held in the alternative,
however, that “the analysis does not change if we consider the trust at the time the
Contribution Agreement was signed in September 2005” because even at that
earlier time Kramer and Grigg expected that the business would operate with the
additional trustees to be added at the time of the IPO in December 2005. Id. at
341.
The Commission agrees with the majority that, whether one looks at
September or December, determining whether the purchaser of the units, RPC,
expected its financial return to come primarily from the efforts of others must
focus on managerial control of the business as it was expected to operate. SEC v.
Edwards, 540 U.S. 389, 395 (2004) (stating that the “‘touchstone’” of an
investment contract is “‘an investment in a common venture premised on a
reasonable expectation of profits to be derived from the entrepreneurial or
managerial efforts of others’”) (emphasis added) (quoting United Housing
Foundation, Inc. v. Forman, 421 U.S. 837, 852 (1975)). In the case of an
11
UPREIT, this means the expectations as to how the business will operate after the
completion of the IPO because, in an UPREIT, limited partnership units are not
issued, and the business does not begin operating, until after the IPO’s closing.
The closing of the IPO is a condition of the issuance of the units and the time at
which the proceeds of the offering are contributed to the partnership to enable the
business to operate. In this case, the Contribution Agreement expressly provided
(as is typical in such agreements in anticipation of creating an UPREIT) that the
parties’ obligations under the agreement were subject to the closing of the IPO,
and that if the IPO did not close the agreement would be terminated and would be
“of no further force and effect” (JA 50, JA 52). Any profits to be generated from
the limited partnership units were expected to come only from operation of the
business after the IPO.
As noted above, the majority held that the presence of the independent
trustees and executive officers demonstrated that Kramer and Grigg did not
exercise sufficient control after the IPO to exclude their limited partnership units
from the scope of an investment contract. The Commission assumes the
correctness of the majority’s conclusion that Kramer and Grigg did not exercise
sufficient control at this time and takes no position on whether or not that was a
correct reading of the allegations of the complaint.
12
Earlier in its opinion, the majority appears to have held that the limited
partnership units were investment contracts based on the Partnership Agreement’s
legal rights alone, without regard to the economic reality regarding control of the
business. 577 F.3d at 339-40. The Commission disagrees with the majority’s
statement that, in deciding whether an interest is an investment contract, “‘the
legal rights and powers enjoyed by the investor’ should be the touchstone of [the]
analysis.” 577 F.3d at 339 (quoting Steinhardt Group, Inc. v. Citicorp., 126 F.3d
144, 153 (3d Cir. 1997)). That approach is inconsistent with Howey. In Howey, a
contract to purchase a fee simple interest in land and a service contract to grow
crops on the land—documents that alone gave investors control of their property
and its use—nonetheless were held to be an investment contract when viewed
together and in the context of surrounding circumstances, including the promoter’s
representations. In cases where, as in Howey but unlike here, formal documents
purport to give investors legal control of the enterprise—while in fact investors’
powers are illusory and the promoters retain practical control—the Commission
and the courts have long recognized that the formal documents are not the focus of
the analysis. See, e.g., SEC v. Merchant Capital LLC, 483 F.3d 747, 756-57 (11th
Cir. 2007) (agreeing with the Commission that the Howey analysis is not limited to
partnership documents); SEC v. Aqua-Sonic Prods. Corp., 687 F.2d 577, 584 (2d
Cir. 1982) (stating that “it would be incongruous to attach decisive significance to
13
mere legal formality when the Court [in Howey] explicitly refused to be bound by
‘the legal terminology in which such contracts are clothed’”) (quoting Howey, 328
U.S. at 300); see also Edwards, 540 U.S. at 393 (stating that the definition of
investment contract “embodies a flexible rather than a static principle, one that is
capable of adaptation to meet the countless and variable schemes devised by those
who seek the use of the money of others on the promise of profits”); Forman, 421
U.S. at 848 (stating that “‘form should be disregarded for substance and the
emphasis should be on economic reality’”) (citation omitted).
The majority’s reference to legal rights under the documents being the
“touchstone” of the investment contract analysis can be read, however, as limited
to cases like this one where the limited partnership agreement itself gives unit
holders no managerial authority. 577 F.3d at 340-41 n.2. According to the
majority opinion, “[n]either party argues that the limited partnership units
purchased by the corporation granted legal rights to control the limited
partnership.” 577 F.3d at 339. Partnership agreements for operating partnerships
of UPREITs ordinarily, as here, are traditional limited partnership agreements that
give limited partners no managerial authority—such authority is given to the REIT
itself, the general partner of the limited partnership. Arguably, in such cases,
where the documents give limited partners no managerial authority, an analysis
that looks only to the legal rights of the parties could be appropriate. It is
14
unnecessary, however, to decide whether the majority’s analysis based on the
Partnership Agreement alone is correct under Howey and other Supreme Court
decisions, and the Commission takes no position on that issue, because the
majority also held, as noted above, that the limited partnership units were
investment contracts based on the economic reality of the transaction.
CONCLUSION
For the foregoing reasons, the Court should rule in accordance with the
positions urged in this brief.
Respectfully submitted,
DAVID M. BECKER
General Counsel
MARK D. CAHN
Deputy General Counsel
JACOB H. STILLMAN
Solicitor
SUSAN S. McDONALD
Senior Litigation Counsel
/s/ Benjamin L. Schiffrin
BENJAMIN L. SCHIFFRIN
Senior Counsel
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
(202) 551-5003 (Schiffrin)
schiffrinb@sec.gov
December 2009
15
CERTIFICATE OF COMPLIANCE
In compliance with the Court’s October 5, 2009 order, I certify that the
Brief of the Securities and Exchange Commission, Amicus Curiae, on Issues
Addressed, does not exceed fifteen pages.
/s/ Benjamin L. Schiffrin
BENJAMIN L. SCHIFFRIN
STATUTORY ADDENDUM
TABLE OF CONTENTS
Section 3(a)(10) of the Securities Exchange Act of 1934,
15 U.S.C. § 78c(a)(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1A
Section 3(a)(13) of the Securities Exchange Act of 1934,
15 U.S.C. § 78c(a)(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1A
Section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2A
Rule 10b-5 under the Securities Exchange Act of 1934,
17 C.F.R. § 240.10b-5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3A
Section 3(a)(10) of the Securities Exchange Act of 1934,
15 U.S.C. § 78c(a)(10)
(a) When used in this title, unless the context otherwise requires—
(10) The term “security” means any note, stock, treasury stock, security
future, bond, debenture, certificate of interest or participation in any profit-sharing
agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust
certificate, preorganization certificate or subscription, transferable share,
investment contract, voting-trust certificate, certificate of deposit for a security,
any put, call, straddle, option, or privilege on any security, certificate of deposit, or
group or index of securities (including any interest therein or based on the value
thereof), or any put, call, straddle, option, or privilege entered into on a national
security exchange relating to foreign currency, or in general, any instrument
commonly known as a ‘security’; or any certificate of interest or participation in,
temporary or interim certificate for, receipt for, or warrant or right to subscribe to
or purchase, any of the foregoing; but shall not include currency or any note, draft,
bill of exchange, or banker’s acceptance which has a maturity at the time of
issuance of not exceeding nine months, exclusive of days of grace, or any renewal
thereof the maturity of which is likewise limited.
Section 3(a)(13) of the Securities Exchange Act of 1934,
15 U.S.C. § 78c(a)(13)
(a) When used in this title, unless the context otherwise requires—
(13) The terms “buy” and “purchase” each include any contract to buy,
purchase, or otherwise acquire. For securities futures products, such term includes
any contract, agreement, or transaction for future delivery.
1A
Section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b)
It shall be unlawful for any person, directly or indirectly, by the use of any means
or instrumentality of interstate commerce or of the mails, or of any facility of any
national securities exchange—
(b) To use or employ, in connection with the purchase or sale of any
security registered on a national securities exchange or any security not so
registered, or any securities-based swap agreement (as defined in section 206B of
the Gramm-Leach-Bliley Act), any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for the protection of
investors.
Rules promulgated under subsection (b) that prohibit fraud, manipulation, or
insider trading (but not rules imposing or specifying reporting or recordkeeping
requirements, procedures, or standards as prophylactic measures against fraud,
manipulation, or insider trading), and judicial precedents decided under subsection
(b) and rules promulgated thereunder that prohibit fraud, manipulation, or insider
trading, shall apply to security-based swap agreements (as defined in section 206B
of the Gramm-Leach-Bliley Act) to the same extent as they apply to securities.
Judicial precedents decided under section 17(a) of the Securities Act of 1933 and
sections 9, 15, 16, 20, and 21A of this title, and judicial precedents decided under
applicable rules promulgated under such sections, shall apply to security-based
swap agreements (as defined in section 206B of the Gramm-Leach-Bliley Act) to
the same extent as they apply to securities.
2A
Rule 10b-5 under the Securities Exchange Act of 1934,
17 C.F.R. § 240.10b-5
It shall be unlawful for any person, directly or indirectly, by the use of any means
or instrumentality of interstate commerce, or of the mails or of any facility of any
national securities exchange,
(a) To employ any device, scheme, or artifice to defraud
(b) To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
3A
CERTIFICATE OF SERVICE
I hereby certify that on December 22, 2009, I caused a copy of the Brief of
the Securities and Exchange Commission, Amicus Curiae, on Issues Addressed to
be served via e-mail on George A. Borden, counsel for Appellees Republic
Properties Corporation and Richard L. Kramer; Leslie R. Cohen, counsel for
Appellee Steven A. Grigg; and Mark Earl Nagle, counsel for Appellants Liberty
Property Trust and Liberty Property Limited Partnership, by filing the brief with
the Clerk of Court using the CM/ECF system.
/s/ Benjamin L. Schiffrin
BENJAMIN L. SCHIFFRIN
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.