Petition — Grenader v. Spitz

Supreme Court brief1976

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IN THE

Supreme Court of the

OcTOBER TERM, 1976

No. 76 976-54}

MAX GRENADER et al., ”

Petitioners,

MILTON SPITZ et al.,

Respondents,

and

BERNARD COOPER et al.,

Additional Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

CHARLES MARKS.

286 Fifth Avenue

New York, New York 10001

Attorney for Petitioners

WILLIAM LYON EVERS

Of Counsel

TABLE OF CONTENTS

PAGE

Opinions Below |... SS ct ese eS 5

Jurisdiction of This Court 0. ...... 5

a ccsiciaicaniliigian 5

Statutes and Rules Involved ............................... 6

i icevelonimiusuntnaentenin 7

Reasons for Granting Certiorari ...... ae 13

I- The question of whether stock in privately

sponsored housing corporations is a

“security” under the 1933 Securities Act

and the 1934 Securities Exchange Act,

where the purchase of such stock is

accompanied by profit incentives, is an

important question of federal law which

which should be settled by this Court... 16

II- The Court of Appeals has misconceived

and improperly extended the scope of

Forman, and has defied the intent of

Congress and the policies of the SEC.............. 18

III- The decision undermines established ~

definitions of a “security” .......................--.-.-5 = oF

IV- The decision of the Second Circuit in-

volves important statutory issues and

calls for an exercise of this Court’s power

I callin 27

Conclusion

TABLE OF AUTHORITIES

Cases: PAGE

Continental Marketing Corp. v. SEC, 387 F.2d 466

(10 Cir. 1967), cert. den. 391 U.S. 905 (1968),

fF fe Be 6 OR B&F een 23

Glen-Arden Commodities Inc. v. Constantino,

r §» § ¢f. ge Sy, | een ret PS 23

Grenader v. Spitz, 537 F.2d 612 (2 Cir. 1976)

rev’ g 390 F.Supp. 112 (SDNY 1975) 0.0... 5, Al, Bl

Nor-Tex Agencies, Inc. v. Jones, 482 F.2d 1093

(5 Cir. 1973), cert. den. 415 U.S. 977 (1974).

94 S.Ct. 1563, 39 L.Ed. 2d 873 .................... 5 eas

SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344

(1943), 64 S.Ct. 120, 88 L.Ed. 88.............................. 14, 22

SEC v. Glenn W. Turner Enterprises, Inc.,

I re es I vices senssrsncicecacensiseessscennsncenensele 22

SEC v. Haquenden-Rimar International, Inc.,

ON a BE Oe Ge, I scien cvciseccrcettnstcssnessienions 23

SEC v.Koscot Interplanetary, Inc. 497 F.2d 473

I ean cocci 23

SEC v. Ralston Purina Co., 346 U.S. 119 (1953)

Ie a Se i PI os octvccitssinsniploinnandtnniinaacinaics 15

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

ey Gee, eee 14

ITI

Tcherepnin v. Knight, 389 U.8.332 (1967),

88 S.Ct. 548, 19 L.Ed. 2d 566 ................................. 14, 22

1050 Tenants Corp. v. Jakobson, 365 F.Supp. 1171

(SDNY 1973), 503 F.2d 1375 (2 Cir. 1974)....... 4,11, 20

United Housing Foundation, Inc. v. Forman,

421 U.S. 837 (1975), 95 S.Ct. 2051, 44 L.Ed.2d 621

2, 18, 19, 24

Statutes, Rules and Regulations:

15 U.S.C. §77b(1), §2(1) Securities Act of 1933... 6, D1

15 U.S.C. §77b(2), §2(2) Securities Act of 1933 ...... 6, Dl

15 U.S.C. §77b(4), §2(4) Securities Act of 1933 ...... 6, D1

15 U.S.C. §77c(aX(1}), §3(a)(11) Securities Act of 1933

6, 10, D1, D3

15 U.S.C. §77e, §5 Securities Act of 1933 .. 6, D1, D3

15 U.S.C. §771, §12 Securities Act of 1933 .. 6, D1, D5

15 U.S.C. §770, §15 Securities Act of 1933 .. 6, D1, D6

15 U.S.C. §77q, §17 Securities Act of 1933 .. 6, D1, D6

15 U.S.C. §77v, §22 Securities Act of 1933 6, 7, D1, D7

15 U.S.C. §77x, §24 Securities Act of 1933 .. 6, D1, D8

15 U.S.C. §77z, §26 Securities Act of 1933

6, 12, 15, D1, D9

15 U.S.C. §78c(a)(8), §3(a)(8) Securities

Exchange Act of 1934 2000. 6, D1, D9

15 U.S.C. §78c(a)(10), §3(a)(10) Securities

Exchange Act of 1934.00 6, D1, D9

15 U.S.C. §78c(aX(13), §3(a)(13) Securities

Exchange Act of 1934.00. 6, D1, D10

15 U.S.C. §78}j(b), §10(b) Securities

Exchange Act of 1934.00. 6, D1, D10

15 U.S.C. §780, §15 Securities Exchange

AERC Rea eee OE eae oe MORN 6, D1, Dll

15 U.S.C. §78t, §20 Securities Exchange

Bas CE WEG cnccecasececceeesenees ssclaasl lacus 6, D1, Dll

15 U.S.C. §78aa, §27 Securities Exchange

pe § Bees 6, 7, D1, D12

15 U.S.C. §78cc(b), §29(b)Securities Exchange

p 6 ¢ 0 pocosesiammeneniiiusiamal 6, D1, D13

15 U.S.C. §78gg, §33 Securities Exchange

| F g «ss 6, 12, 15, D1, D14

28 U.S.C. §1254(1)............ aS casitassssadtasmcisteimsisiadiatan 5

New York General Business Law, §352-e.. 6, D1, D15

New York Business Corporation Law §510 6, D1, D17

17 C.F.R. 230.235, Rule 235, General Rules and

Regulations Under the Securities Act of 1933

6, 21, 25, DI

17 C.F.R. 240.10b-5, Rule 10b-5, General Rules

and Regulations Under Securities Exchange

’ ~. ane Se . 6, D119, D21

17 C.F.R. 240.15a-2, Rule 15a-2, General Rules and

Regulations Under the Securities Exchange Act

08 TG ccccececercnesrericsceceaaee 6, 21, D19, D21

New York City Rent Control Regulations, §55

6, 8, 22, D19, D22

New York City Rent Stabilization Code, §61, in

effect in September 1971 ...................... 6, 8, D19, D28

Amendment to New York City Rent Stabilization

Code, §61, in effect on February 25, 1972 ............ D32

Rule 54, Federal Rules of Civil Procedure

6, 11, D19, D32, D33

Articles:

Appeal Certified on Co-Op Stock as Securities,

Oct. 7, 1975 N.Y.L.J. 1

Bloomenthal, The Many Faces of A Security,

March 1, 1976 The Practical Lawyer 29

Brodsky, Corporate and Securities Litigation,

The Securities Laws: Claims Involving Eco-

nomic Forecasts, p. 1 of N.Y.L.J. of November

19, December 3 and 17,1975

Cooperative Housing And The Securities Laws,

August 2, 1976 N.Y.L.J. 1

Cooperative Housing Corporations and The

Federal Securities Laws, Col.L.Rev., January

1971, 118

Cooperative Housing Ruling Reversed, May 2,

1976 N.Y. Times 50L (Main Section)

Federal Role on Co-ops Affirmed by U. S. Judge,

Nov. 4, 1973, N.Y. Times, Sec. 8 Real Estate) 1

Few States Protect Condominium Buyers, June 16

1974 N.Y. Times 1

Hearing Told of Need to Guard Rights of Cooper-

ative Buyers, Feb. 7, 1976 N.Y. Times 24

2d Circuit, Citing Supreme Court, Places Private

Co-op Shares Outside Stock Laws, April 29, 1976

N.Y.L.J. 1

SOTTO EERE HEE EE EEE EEE SESE IEEE EEE SHEE EE EEES EE EEE SESE SESE EEE EEE SEES ESSE

Other Authorities:

I HUD Condominium Cooperative Study ..

U.S. Department of Commerce, Social and Eco-

nomic Statistics Administration, Bureau of the

Census, Subject Reports, Cooperative and

Condominium Housing

IN THE

Supreme Court of the United States

OcTOBER TERM, 1976

No. 76-

MAX GRENADER et ai.,

Petitioners,

MILTON SPITZ et ai.,

Respondents,

—and—

BERNARD COOPER et al.,

Additional Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Petitioners, Max Grenader, Roger W. Ach II, Ann

Fielder, John Gerstad, Lee Gerstad, Celia Gordon, P.

Benjamin Kaufman, Dorothy Kimball, Gertrude Landau,

Horace Mills, Adrienne Minassian, Sylvia Jane Morri-

son, Cora Muller-Thym, H. Victor Schwimmer, Frances

Stein, Marion Terres, John Terres, Masie G. Wilkinson

and Olga Rudnyansky, respectfully pray that a Writ of

Certiorari issue to review the judgment of the United

States Court of Appeals for the Second Circuit which

reversed an order of the United States District Court for

the Southern District of New York and dismissed the

complaint for lack of subject matter jurisdiction*.

In an unprecedented decision going directly against

the latest decision of this Court on the subject and the

unanimous line of prior legal authority, the Second

Circuit has removed from the protection of the federal

securities laws purchasers of stock in all types of

cooperative housing corporations, regardless of whether

they purchase with a view toward resale at a profit and

regardless of any resemblance between such corporations

and conventional business corporations. Previously, in

United Housing Foundation, Inc. v. Forman, 421 U.S.

837 (1975), which was explicitly confined to stock of a

publicly sponsored and subsidized, non-profit coopera-

tive housing corporation (Co-op City), this present Court

had held in unmistakable terms that such stock was nota

“security” under the federal securities laws only because

of the total absence of any possibility of profit arising

from its purchase and of various differences between the

corporation there involved and conventional business

corporations. The Second Circuit - supposedly on the

basis of Forman - has now held that stock in a privately

*Petitioners are plaintiffs in the action in which this Writ of Certiorari

is sought. Plaintiffs originally included P. Benjamin Kaufman, who

has since died without being substituted by his legal representative

although such substitution is intended. They also included Madeline

Schainuck, who has withdrawn from the action. In addition to Milton

Spitz, respondents are Henry Spitz and Jerome Spitz, all d/b/a Three

Forty Five Management Co., and 34557 Corp. (sued herein as "34557

Tenants Corp’) In addition to Bernard Cooper, the additional

respondents are Robert Julius, Jerry V. Shields, Jr., William L. Liv-

ingstone, Joel Key Rice, Frank Moorman, Judith Ann Taft, Gloria

Lister a/k/a Gloria Hahn, Sylvia Spitz, Ernest Borkland, James

Daniel Cotton, Bobby Mitchel and S. Mercer Moorman, who also died

during the pendency of this action.

sponsored cooperative housing corporation, with respect

to which there are substantial incentives and possibil-

ities of profit, is not such a “security”, and this even

though the differences from conventional business

corporations alluded to in Forman are absent and

resemblances to such corporations exist to a marked

degree. Despite the criteriaof Forman, the Second Circuit

has now held that purchasers of such stock are deprived

of protection under the 1933 Securities Act and the 1934

Securities Exchange Act.

The decision is of fundamental importance in regard

to cooperative apartments which are now being offered

for sale and sold in large numbers throughout the

country and which constitute the living accommodations

occupied by approximately one million people*. Wide-

spread fraud and unfair dealing in the sale of interests in

cooperative houding corporations, the inadequacies of

remedies under State law and opportunities which

cooperatives afford for circumventing rent controls

emphasize the need for regulation under the federal

*The Bureau of the Census indicates that in 1970 there were a total

of 416,094 occupied cooperative and condominium housing units in

which the median number of persons per unit was 2.1. U-S.

Department of Commerce, Social and Economic Statistics Adminis-

tration, Bureau of the Census, Subject Reports, Cooperative and

Condominium Housing, Table A-2, p. 2. Nearly 85'% or 351,000 of these

housing units were cooperatives. [| HUD Condominium Cooperative

Study, pp. III-12, 13. From 1970-1974, 70,000 new cooperative housing

units were built; there were 25,000 conversions; and 7,000 cooperative

housing units were removed. As of April 1, 1975, there were a total of

439,000 cooperative housing units throughout the country. Id., p. III-

13. Most were in New York, California, Florida, Illinois, Michigan,

New Jersey and Pennsylvania. Id., p. III-7. Assuming the same

median number of persons per unit as in 1970, there were 439,000 x 2.1

or 921,000 persons occupying cooperatives as of April 1, 1975. These

were mainly in urban areas and privately sponsored. Id., pp. III-43,

60.

securities laws*, which have heretofore been regarded as

the desirable and logical means for affording protection,

at least to purchasers of stock in privately sponsored

cooperative housing corporations. Despite these consid-

erations, the decision of the Second Circuit (i) miscon-

ceives and unwarrantably extends the scope and effect of

Forman so as to exclude from the protection of the federal

securities laws shareholders in all types of cooperative

housing corporations, whether privately sponsored and

profit-oriented or of the Forman type invo:ving publicly

assisted, non-profit cooperatives, thereby causing

confusion and uncertainty as to the Congressional intent

underlying the securities laws and their construction by

the Securities and Exchange Commission; (ii) improperly

applies the tests for a “security” enunciated in Forman

and other authorities, and undermines definitions of

“stock” and “investment contract” established by this

Court and the Circuit Courts for many years; (iii) fails to

give effect to statutory saving clauses in the federal

securities laws whereby Congress intended to protect

such shareholders by providing a federal forum for relief

from violations of the securities laws; (iv) reverses on

improper grounds the previous law of the Second Circuit

(established by another panel) in 1050 Tenants Corp. v.

Jakobson, 503 F.2d 1375 (1974),whereby stock in pri-

vately sponsored cooperative housing corporations

which could be resold at a profit had been deemed a

“security”; and (v) creates troublesome conflicts and

problems of construction respecting the Rules and

policies of the SEC.

*I HUD Condominium Cooperative Study, V-4, 8, 12, 36-39, 48;

Cooperative Housing Corporations and The Federal Securities Laws,

Col. L. Rev., Jan. 1971, 118, 123, 139.

Opinions Below

The opinion of the Court of Appeals is reportea at 537

F.2d 612 and is set forth in Appendix A. Its orders

denying a petition for a rehearing en banc are not yet

reported but are also set forth in Appendix A*. The

opinion of the District Court on petitioners’ original

motion is reported at 390 F.Supp. 112 (SDNY 1975). Its

opinion on renewal and reargument is not officially

reported. Both of these opinions are set forth in Appendix

Jurisdiction of This Cout

The judgment sought to be reviewed vas entered on

April 28, 1976 and is set forth in Appendix C. The petition

for rehearing was denied on July 20, 1976. The iurisdiction

of this Court is invoked under 28 U.S.C.§1254(1).

Questions Presented

1. Is stock in a privately sponsored cooperative

housing corporation a “security” within the purview of

the 1933 Securities Act and the 1934 Securities Exchange

Act, particularly when it arises out of the following

circumstances:

a. It may appreciate in value and be resold at a

profit;

b. Dividends may be declared thereon;

*References to the appendices are prefaced with the appendix letter

followed by the page number, e.g. (A3).

c. Its purchase is accompanied by profit incentives

evidenced by the buyers’ efforts to resell it at substantial

profits immediately or shortly after its purchase;

d. The corporation resembles conventional busi-

ness corporations in the very respects which this Court

deemed important in Forman.

2. Does this Court’s decision in Forman overrule the

law of the Second Circuit embodied in Jakobson and, if

not, should the Second Circuit have reversed Jakobson in

view of the saving clauses in the federal securities laws?

Statutes and Rules involved

This case involves §§2(1),(2),(4), 3(a)(11), 5, 12, 15, 17,

22(a), 24 and 26 of the Securities Act of 1933 (15 U.S.C.

§$77b(1), (2), (4), 77c(a)(11), 77e, 771, 770, 77q, 77v(a), 77x,

77z); §§3(a)(8), (10), (13), 10(b), 15, 20, 27, 29(b) and 33 of

the Securities Exchange Act of 1934, 15 U.S.C. §§78c(8),

(10),(13), 78j(b), 780, 78t, 78aa, 78cc(b) and 78gg); Rule

235, General Rules and Regulations under the Securities

Act of 1933, 17 C.F.R. 230.235; Rules 10b-5, 15a-2, General

Rules and Regulations Under the Securities Exchange

Act of 1934, 17 C.F.R. 240.10b-5, 240.15a-2; New York

General Business Law, §352-e; New York City Rent

‘Control Regulations §55; New York City Rent Stabili-

zation Code, §61; New York Business Corporation Law

§510; and Rule 54(b) and (c) Federal Rules of Civil

Procedure, the texts of which are set forth in pertinent

part in Appendix D.

Statement of the Case

The District Court’s jurisdiction of this case was

invoked under §22 of the 1933 Securities Act(15 U.S.C.

§77v) and §27 of the 1934 Securities Exchange Ace (15

U.S.C. §78aa.) (D7, 12).

The case involves corporate stock which can be

purchased and resold at a substantial profit and which

on various occasions has been resold at such a profit. The

stock is that of respondent 34557 Corp., a corporation

formed pursuant to a conventional, i.e., a privately

sponsored, non-publicly assisted, plan to convert to

cooperative status a 59-family apartment house in New

York City.

Petitioners are tenants of 17 of its apartments, two of

whom, Ann Fielder and Sylvia Jane Morrison, have

purchased stock offered under the plan, the remaining

petitioners having unexpired contractual rights to make

such purchases”.

The building previously belonged to respondent, Three

Forty Five Management Co., a partnership consisting of

four brothers, the respondents, Milton Spitz, Henry Spitz

and Jerome Spitz, and Edward M. Spitz**. In 1971, after

*Under certain conditions less favorable than those initially

available, such tenants are to retain the right to purchase.

**The Spitz brothers were partners in their capacities as trustees for

the benefit of their mother, Minnie Spitz, and one of the brothers,

Jerome Spitz, was also a partner in his individual capacity. Minnie

Spitz died on August 18, 1971. During the cooperative conversion here

involved, the trust was being wound up. Edward Spitz died during the

pendency of the action.

organizing 34557 Corp. under the New York Business

Corporation Law, the partnership filed an offering

statement or prospectus in the New York State Attorney

General’s office and presented it to the tenants. Under

the offering, predetermined quantities of the corporate

stock were allocated to the tenants’ apartments and

offered to them for sale at prices fixed by the partnership.

The proceeds were to be used by the corporation to

purchase the building from the partnership at a price

fixed by the latter.

At the time of the offering, the tenants’ right to

continue tolive in their apartments was protected by the

rent control laws whereby they might continue in

occupancy as long as they paid the required rents and as

long as 35% of the tenants of rent controlled apartments

refrained from subscribing to the purchase of the stock

within 6 months from the date of the offering’.

Purchasing tenants were to have the right to enter into

long-term leases of their apartments. Non-purchasers

were to be subject to eviction by other persons who might

purchase the stock allocated to their apartments**.

On June 6, 1972, claiming that the required subscrip-

tions had been obtained, the plan was declared effec-

tive***. On November 29, 1972, the partnership conveyed

*§55 N.Y.C. Rent Control Regulations. (D22). One petitioner-

aoe was subject to the New York City Rent Stabilization Code

**See first footnote at p. 7, supra.

***The partnership undertook to obtain subscriptions from 51% of

all of the tenants and claimed to have obtained them.

the building to 34557 Corp. for $1,520,000. The stock was

delivered to the purchasing tenants. Unsold shares were

sold to one Eileen Dosik, who thereupon became the

master tenant of the non-purchasing tenants’ apart-

ments.

The Similarity of The Corporation

To Conventional Business Corporations

34557 Corp. was formed under the New New York

Business Corporation Law and has a charter and by-

laws defining its structure and shareholder rights. Its

business, including the management and operation of

the building, is conducted by corporate officers and a

board of directors who can also invest the funds of the

corporation in any manner they see fit and declare

dividends (D17). Shareholders may participate in the

affairs of the corporation through their election of the

directors on the basis of one vote for each share held by

them and are apprised of its affairs by annual financial

reports rendered by the board of directors.

Shareholders have the right at any time to resell

their stock at a profit (subject to a restriction on trans-

fer similar to that in conventional corporations) and,

in fact, they sought to do so immediately or shortly after

making their purchases. Eileen Dosik, who purchased

the unsold shares at $100 per share, immediately

reoffered them for resale at $270 per share. Within less

than a year after purchase, other purchasers reoffered

their stock for sale at prices equal to as much as

300% to 600% of what they had paid; and in some in-

stances succeeded in making such sales.

Proceedings Below

Petitioners have challenged the offering in both the

State and federal courts. In the New York State Supreme

Court, they have instituted a challenge to the offering

based upon allegedly arbitrary procedure and lack of

jurisdiction of the Attorney General to act within

the limits of his authority specified by the provisions of

offering literature in accordance with the requirements of

State law. (D15). As plaintiffs, they also sued respon-

dents*, as defendants, in the District Court, alleging that

they were issuers or underwriters of unregistered

securities sold or offered for sale in interstate commerce

or by the mails, in violation of §5 of the 1933 Act (D3); that

one or more of petitioners were purchasers; that the

prospectus or offering statement was materially false

and misleading; and that they had relied thereon to their

damage. Pendent causes of action, going to the alleged

failure of the offering to comply with the substantive

requirements of New York State law, accompanied by a

claim for declaratory relief, were also asserted. Respon-

dents alleged defenses of lack of subject matter jurisdic-

tion and the intrastate exemption from registration

under §3(a)(11) of the 1933 Act. (D3).

On petitioners’ motion for summary judgment, the

District Court upheld jurisdiction of the subject matter

but sustained the intrastate exemption defense. (BI).

On renewal and reargument, wherein petitioners sought

*Apart from the previously described respondents, they include

Bernard Cooper et al., who comprise various tenants who supported

the plan, purchased thereunder and who are claimed to have actively

assisted in jts promotion.

further declaratory relief pursuant to Rule 54 of the

Federal Rules of Civil Procedure (D32), the District Court

adhered to the same position but, prompted by doubts as

as to the scope and effect of this Court’s decision in

Forman, granted leave to appeal. (B17).

The Second Circuit reversed the order of the District

Court upholding jurisdiction, dismissed the complaint

and held that the question as to the availability of the

intrastate exemption was moot. (Al, 2). Initially noting

that the shares would be deemed “‘securities” under

Jakobson, which until then had been the law of the

Second Circuit, the Court of Appeals construed that case

as being premised solely on the so-called “literal

approach” whereby the label ‘“‘stock” is deemed deter-

minative of whether a “security” is involved. (A8). Then

observing that Forman had rejected the ‘“‘literal

approach” in favor of a test looking to the “economic

reality” of the transaction, the Court of Appeals held that

Jakobson had been overruled by Forman and that the

“economic reality” is that the instant stock is not a

“security” within the purview of the federal securities

laws. (A5, 9-13, D1, 9-10).

The Court of Appeals reached this decision even

though Jakobson relied upon the ’economic reality” test

as well as the "literal approach” (365 F. Supp. at 1176;

and 503 F.2d at 1378), the scope of Forman was expressly

limited to stock in publicly sponsored, non-profit,

cooperative housing corporations and not to stock of the

Jakobson or instant type involving privately sponsored

corporations, where the stock may be resold at a profit

(421 U.S. at 840 and 860), and even though saving clauses

of the federal securities laws provide:

“If any provision of this act, or the application

of such provision to any person or circumstances,

shall be held invalid, the remainder of the act, and

the application of such provision to persons or

circumstances other than those as to which

it is held invalid, shall not be affected thereby.”

§26 of the 1933 Act; §330f the 1934 Act. (D9,

14).

According to the Second Circuit, whether the interests

involved “be in a publicly or privately financed cooperative

residence has no legal significance in [its] view.” (A10)

Although this Court in Forman, emphasized that the

“economic reality” test was primarily concerned with

whether the stock could be resold at a profit, the Second

Circuit chose to disregard that factor and held that the

instant transaction merely involves the acquisition of a

residence which might be resold by the purchaser. The

Second Circuit concluded: there is nothing to show that

the instant investors were motivated by an expectation of

profit; dividends on the stock are “impossible to envisage”

(A11); the directors’ management of the building “is hardly

a factor which would result in the appreciation in the value

of the shares” (A14-15); and that, as a matter of law, the sole

motivation underlying the purchases must have been to

enable purchasers to find a place to live, regardless of the

fact that they were already tenants of the apartments

involved, protected in their occupancy by the rent control

laws (A10). Since the number of shares is supposedly in

proportion to the value of the apartments to which they are

allocated, the fact that voting rights depend upon the

number of shares held was deemed not to distinguish the

case from Forman. The Second Circuit did not mention

the admitted fact that immediately or shortly after the

purchases, all or most the shares were reoffered for sale

and, in various instances, such sales were consummated

at substantial profits. No mention was made of other

resemblances to conventional business corporations

stressed in Forman and Jakobson as being important.

Reasons for Granting Certiorari

1. The Court of Appeals’ unprecedented decision raises

issues of urgent national importance. By removing the

protection of the federal securities laws against fraud

and unfair dealing, the decision will have a direct and

substantial effect upon the issuance and sale of stock

involving new and converted cooperative apartments

which are now occupied by approximately one million

people throughout the nation*. It will affect thousands of

real estate owners who seek to create cooperatives so as to

escape restrictions of rent control laws. It will also affect

the regulation and supervision of cooperative housing

which has been espoused by many as a major remedy for

urban decay.

2. The decision misconceives and misconstrues the

scope and effect of this Court’s determination in

Forman,which was explicitly restricted to transactions

involving stock in publicly sponsored cooperative

housing corporations where the possibility of realizing

profits from the ownership or resale of the stock is

non-existent. The decision unwarrantably applies

* See, footnote, at p. 3, supra

Forman to exactly those interest which this Court

excluded from the scope of Forman,viz., stock in

privately sponsored cooperative housing corporations

where a profit may be realized from the ownership or

resale of the stock and where such corporations resemble

conventional business corporations in their corporate

structure, management by their board of directors and

rights accorded te shareholders. By thus removing such

stock from the ambit of the securities laws, the decision

effectively precludes their operation on stock in all types

of cooperative housing corporations, whether publicly or

privately sponsored, or accompanied by profit incen-

tives, and thereby gives rise to confusion and uncertainty

as to the Congressional intent underlying the enactment

of the securities laws and the validity, scope and effect of

long-standing constructions given them by the SEC,

which is charged with their enforcement.

3. The decision undermines well established defini-

tions of “stock” and “investment contract” settled in

Forman and three other decisions of this Court*, as well

as scores of Circuit Court decisions, all of which hold

the existence of profit incentives to be of paramount

importance in every “stock” or “investment contract”

subject to the federal securities laws. The decision

ignores or misapplies and, indeed, goes directly against

the criteria of a “security’’ enunciated in Forman,

whereby profit incentives and similarities to conven-

tional corporations are deemed of the utmost signifi-

cance.

*SEC v. C. M. Joiner Leasing Corp.. 320 U.S. 344(1943), SEC v. W. J.

Howey Co, 328 U.S. 293 (1946), Tcherepnin v. Knight, 389 U.S. 332

(1967).

4. The decision involves important federal juris-

dictional issues in areas where Congress, legal scholars*

and this Court have previously indicated that jurisdic-

tion ought to be exercised. The 1934 Securities Ex-

change Act provides for exclusive federal court juris-

diction of violations of its anti-fraud provisions (D12-13);

and the 1933 Securities Act provides for concurrent

State and federal court jurisdiction of violations of

its registration and other provisions. (D7-8). Pressures

generated by widespread housing shortages and the

inapplicability of rent controls to cooperatives place

purchasers in unequal bargaining positions and render

them vulnerable to fraud, coercion and other forms of

unfair dealing in such transactions, so that they stand

in particular need of the disclosure and other protec-

tions afforded by the securities laws. This Court has held

that the focus of judicial concern in applying these laws

should pe on persons needing their protection*. The

saving clauses of the securities laws preserve their

applicability “to persons or circumstances other than

those as to which [any of their provisions or the

application thereof] is held invalid” (D9, 14). Thus,

in the very face of these provisions and without Con-

gressional sanction, the Second Circuit has expansively

construed and misapplied this Court's limited holding in

Forman, thereby harshly depriving such purchasers of

the federally pre-empted jurisdiction of securities laws

violations and relegating them to ineffective or non-

existent remedies under State law.

*See, footnote at p. 4, supra.

**SEC v. Ralston Purina Co., 346 U.S. 119, 127 (1953).

I. The question of whether stock in privately

sponsored housing corporations is a “security”

under the 1933 Securities Act and the 1934 Securi-

ties Exchange Act, where the purchase of such

stock is accompanied by profit incentives, is an

important question of federal law which should be

settled by this Court.

The decision applies to interests in all types of coop-

erative housing. The case has evoked considerable

comment and attention in the legal profession and in

lay circles*. Review by this Court is called for because of

the striking impact the decision will have on the nation’s

housing as well as on the federal judiciary and the admin-

istration of the federal securities laws.

The Scope of the Decision

This is the only decision, as far as we can discover,

containing a restrictive definition of a “security”

premised upon a holding that profit incentives are incon-

ceivable in connection with the purchase of stock that

can be and is being resold at a profit within a short time

after its purchase. It is also the only decision since

Forman which ignores the limitations placed upon

that case by this Court and completely misapplies its

explicit tests for a “security” The impact of the

decision is immediate and farreaching.

*See, for example, Nov. 4, 197:3 N.Y. Times, Sec. & (Real Estate), 1, 10,

Federa’ Role on Co-ops Affirmed by U.S. Judge; Oct. 7, 1975 N.Y.L.J. 1,

Appeal! Certified On Co-Op Stock as Securities; Bloomenthal, The

Many Faces of A Security, March 1, 1976 The Practical Lawyer 29, 37;

April 29, 1976 N.Y.L.J. 1, 2d Circuit, Citing Supreme Court, Places

Private Co-op Shares Outside Stock Laws; May 2, 1976 N.Y. Times 50

1. (Main Section) Cooperative Housing Ruling Reversed; August 2,

1976 N.Y.L.J. 1,2, Cooperative Housing And the Securities Laws.

Since Forman removes from the federal securities

laws transactions in shares of all types of publicly

assisted, non-profit cooperatives, and since the only

remaining category of cooperatives comprises hundred

of thousands of privately sponsored, profit-oriented

housing cooperatives throughout the country, the

decision effectively completes the removal of the entire

cooperative housing industry from regulation under the

federal securities laws.

The Impact of the Decision

The impact of this decision promises to be enor-

mous.

1. The most immediate impact will be felt in places

where regulation of private cooperatives is ineffec-

tive or non-existent and where real estate owners and

developers have substantial incentives to offer housing

cooperatives without being subject to restrictions against

unfair dealing imposed by the federal securities laws.

Experience has shown that in such situations, the

temptations of “windfall” profits, escape from rent

controls, presubscription self-dealing and resort to

abuses such as tenant coercion and concealment of

material facts bearing upon the desirability of pur-

chasing cooperative apartments become prevalent*. At

the same time, purchasers have no alternative protection

under State law, especially where interstate offers of

stock in such cooperatives are made, State law either

being absent or notoriously ineffective in coping with

such transactions.

*Cooperative Housing Corporations And The Federal Securities

Laws, 71 Col. L. Rev. 118, 119-126 (Jan. 1971); Hearing Told of Need to

Guard Rights of Cooperative Buyers, Feb. 7, 1976 N.Y. Times 24, c. 2-3.

Cf., June 16, 1974 N.Y. Times 1, Few States Protect Condominium

Buyers.

2. Despite provisions of the securities laws conferring

upon federal courts exclusive and, under the 1933 Act,

concurrent jurisdiction of violations, litigants will be

deprived of the benefits of federal jurisdiction and of

the rights litigable in the federal courts.

3. The long-standing administrative rules, policies,

expertise and guidelines developed by the SEC in regu-

lating and supervising the issuance and sale of stock

in privately sponsored cooperative housing corpora-

tions have been hopelessly confused and frustrated.

II. The Court of Appeals has misconceived and

improperly extended the scope of Forman, and has

defied the intent of Congress and the policies of the

SEC.

In Forman, Mr. Justice Powell, delivering the majority

opinion of this Court, explicitly limited the issue

involved:

‘The issue in these cases is whether shares of

stock entitling a purchaser to lease an apart-

ment in Co-op City, a state subsidized nonprofit

housing cooperative, are securities within the

purview of the Securities Act of 1933 and the

Securities Exchange Act of 1934.” 421 U.S. at

840; emphasis supplied.

Again, in resolving this issue in the negative, he

emphasized the restricted scope of the Forman deci-

sion by stating:

“We decide only that the type of transaction

before us in which the purchasers were inter-

ested in acquiring housing rather than making

an investment for profit, is not within the scope

of the federal securities laws.” 421 U.S. at 860;

emphasis supplied.

It is thus unmistakably clear that the scope of

Forman does not extend to stock in the only remaining

category of cooperatives, such as that with which we are

concerned, viz., privately sponsored cooperatives, the

stock of which can be purchased for resale at a profit by

persons who, at least in part, may be profit-motivated.

Such stock falls exactly within the scope of the saving

clauses of the securities laws: Since Forman invalidates

their application to stock of publicly sponsored, non-profit,

cooperative housing corporations, §26 of the 1933 Act and

§33 of the 1934 Act (D9, 14), by their express terms, |

require the continued applicability of the Act to stock in

7~=_

the aforementioned remaining category of cooperatives

with which we are concerned. 7

It was manifest error for the Court of Appeals to deem

the distinction between the two types of cooperatives of

no significance; and it was equally erroneous to hold

that Forman’s rejection of the “literal approach”

rencered Jakobson “no longer viable” (A5, 10). Exami-

nation of that case immediately confirms that it used not

only the “literal approach” but also the test of “econo-

mic reality” (503 F.2d at 1378, and 365 F. Supp. at 1176).

In applying that test in Jakobson, the Court of Appeals

examined the structure of the cooperative corporation,

the voting rights of its shareholders, their participation

in the corporate decision making process and, after

concluding “that an even more compelling showing had

been made than in Forman [which was then at the

Circuit Court level] for including the cooperative shares

of 1050 Corp. within the ambit of §3(a)(10)” whereby

they would be deemed “securities”, pointed out that:

“there is a ‘profit’ element here that was not-

ably absent in Forman: the shareholder-tenants

of 1050 Corp. have the expectation of capital

appreciation on a resale of their stock” 503 F.2d

at 1377-1378.

The Court added:

“Finally, the requirement that expectations

of profit derive “solely from the efforts of

the promoter(sjor a third party”, 328 U.S. at

299, ia clearly satisfied here.” 503 F.2d at 1378.

Thus, Jakobson remains “viable” because apart from

its “literal approach”, it was directed to the identical

test of “economic reality” imposed in Forman and met

that test precisely because the character of the Jakobson

transaction was exactly the opposite to that of Forman.

The Court of Appeals appears to have overlooked the

obvious when it construed Jakobson as being based

solely on the“ literal approach”.

By thus denying the application of the securities laws

to stock in any type of cooperative housing corporation,

the Second Circuit not only threw into confusion the

significance of this Court’s holding in Forman but

also effectively negated and rendered doubtful the

effect of the saving clauses inthe securities laws and the

Rules and policies of the SEC. SEC Rule 235, General

Rules and Regulations Under the Securities Act of 1933

(D19), which exempts from the registration requirements

of that Act “stock or other securities representing

membership in any cooperative housing corporation

* * * if the terms and conditions of this rule are

met”, would, according to the Court of Appeals’ deci-

sion, have no subject matter upon which to operate -

regardless of whether “the terms and conditions of

this rule are met.” The same is true respecting SEC

Rule 15a-2, General Rules and Regulations Under the

Securities Exchange Act of 1934 (D21), which expressly

exempts from the broker-dealer requirements of that Act

stock in cooperative housing corporations unless it falls

within a specified exception. The decision also throws

into confusion the policies of the SEC whereby it has

been applying the requirements of the securities laws

to privately sponsored cooperatives for many years. *

Significantly, the Court of Appeals did not refer to the

Rules or policies of the SEC in reaching its decision,

which now casts doubt on their viability and, in large

part, defeats their very purpose which is to afford

protection under the securities laws to purchasers of

stock in cooperatives. and other corporations who need

such protection.

*In or about 1954, for example, a privately sponsored cooperative

housing corporation, known as the Carnegie Hill Apartments in New

York City, was required to file with the SEC its offering of stock under

so-called Regulation A of the federal securities laws. Thereafter, the

SEC continued to apply such policies.

Ill. The decision undermines established defi-

nitions of a “security”’.

The Court of Appeals’ unprecedented decision seri-

ously undermines Forman and three other decisions of

this Court, as well as scores of Circuit Court decisions,

which have firmly established the paramount import-

ance of profit incentives in determining the presence of

a “stock” or “investment contract’, and hence of a

“security”, under the federal securities laws.

Thirty years ago, this Court enunciated the control-

ling definition of an investment contract in SEC v.

W. J. Howey Co., 328 U.S. 283, 298-299:

“* * *[A]n investment contract is * * *

a contract, transaction or scheme whereby a

person invests his money in a common enter-

prise and is led to expect profits solely from

the efforts of a promoter or a third party * * *.”

Emphasis supplied.

The possibility of profit is thus a critical element

in an investment contract (and indeed, in every security.)

328 U.S. at 296. Three years earlier, this Court, in

SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344,

at 352-353, pointed to the same element as being criti-

cal - “the economic inducements held out to the pros-

pect”, i.e., to the purchaser.* *

*SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482,

elaborates upon the nature of the required “common enterprise” and

indicates that the “efforts” requirement is satisfied where there are

"essential managerial efforts [by other than the investor] affecting

the success or failure of the enterprise.”

**The Court again adhered to the rule of Joiner and Howey in

Tcherepnin v. Knight, 389 U.S. at 336-338.

The potentiality of substantial monetary profit on

one’s investment is thus a central and highly signi-

ficant element of every investment contract, stock and

security. Numerous decisions in various Circuits have

articulated that principle’.

Its vitality was also reaffirmed by this Court in

Forman. The main “economic reality” of the Forman

situation, which this Court stressed as being deter-

minative of its decision, was that Forman involved no

possibility of profit and was solely directed to securing

apartments for purchasers of the securities in equestion.

As Mr. Justice Powell pointed out in holding that the

shares in Forman were not “stock” governed by the

securities laws although denominated as such:

“Despite their name, they lack what the Court

in Tcherepnin v. Knight, 389 U.S. 332 (1967)

deemed the most common feature of stock: the

*See, e.g., SEC v. Haqgenden-Rimar International, Inc.,496 F.2d

1192 (4 Cir. 1974), aff'g 362 F. Supp. 323 (E.D. Va. 1973) (sales of

interests in scotch whiskey held to be investment contracts, where

there were possible returns of 20 to 25% annually, doubling investment

in four years. The District Court noted that even if defendants were

merely selling an interest in whiskey, when that interest becomes the

subject of speculation, it becomes a security); Nor- Tex Agencies, Inc. v.

Jones, 482 F.2d 1093 (5 Cir. 1973), cert. den. 415 U.S. 977 (1974)

(interest in real estate and mineral rights held to be an investment

contract; Court held that there was possibility of profits in a fractional

oil and gas interest); SEC v. Koscot Interplanetary, Inc., 497 F.2d 473

(5 Cir. 1974), involving the possibility and expectation of “galactic

profits” from a pyramid scheme; Glen-Arden Commodities Inc. v.

Costantino, 493 F.2d 1027 (2 Cir. 1974), involving the possibility of

doubling one’s money from purchases of warehouse receipts and

evidences of ownership of Scotch whiskey; Continental Marketing

Corp. v. SEC, 387 F.2d 468 (10 Cir. 1967), cert. den. 391 U.S. 905 (1968)

(sale of beavers is investment contract where there was a possibility of

“geometric profits”).

right to receive ‘dividends contingent upon an

apportionment of profits.’ 389 U.S., at 339. Nor

do they possess the other characteristics tradition-

ally associated with stock: they are not negotiable;

they cannot be pledged or hypothecated; they

confer no voting right in proportion to the number

of shares owned; and they cannot appreciate in

value. In short, the inducement to purchase was

solely to acquire subsidized low-cost space;

it was not to invest for profit.” 421 U.S. at 851;

emphasis supplied.

Again, in pointing out that the Forman shares did

not meet the test of an investment contract, contemplated

by the securities laws, Mr. Justice Powell reiterated that

profit from the transaction was unavailable or unantici-

pated.

"In the present case there can be no doubt

that investors were attracted solely by the pros-

pect of acquiring a place to live and not by

financial returns on their investments.” 42] U.S.

at 853; emphasis supplied.

Significantly, also,Forman does not require that the

expectation or inducement of profit, as such, be expressly

held out by the offeror or be set forth explicitly in

the offering literature. It is enough if the stock is

negotiable and may appreciate in value, or may be the

subject of dividend declarations, or that the corporate

structure and management are such as to permit or

facilitate the realization of profits from the owner-

ship or sale of the stock. It is sufficient if the cir-

cumstances surrounding a purchase reflect the possi-

bility or expectation of profit; and it is only by virtue

of a consideration of all such circumstances that the

“economic reality” test acquires any significance.

Otherwise there would be no point in Forman or

Jakobson or Rule 235 of the General Rules and Regula-

tions Under the Securities Act of 1933 distinguishing

between the kinds of cooperative securities which are

subject to the securities laws and those which are not.

The wording of any offering literature relating to any

cooperative plan (or indeed, to any security) could readily

be phrased to circumvent application of the securities

laws simply by avoiding any discussion of prospective

profits, and this even though such prospects might be

evident from the surrounding circumstances.*

It was thus clearly erroneous for the Second Circuit to

fail to apply the criteria expressly announced in Forman

to the instant case where profit incentives and the

various factors facilitating the realization of profit were

clea.ily present and resulted in substantial profits to

purchasers. Here, the shares were transferable and

negotiable, could appreciate in value so as to yield a

profit, did yield substantial profits upon resale shortly

after their purchase, and shareholders could receive

dividends when declared. The Second Circuit could not

properly hold, as a matter of law, that the purchasers’

sole motivation was to find a place to live, especially

where rent control laws furnished them significant pro-

*Indeed, the SEC restricts or prohibits projections of profit in

registration statements (which include offering statements) and it is

well known that such projections are usually extrinsic thereto

(Brodsky. Corvorate and Securities Litigation, The Securities Laws:

Claims Involving Economic Forecasts, at p. 1, New York Law

Journals of Nov. 19, Dec. 3 and 17, 1975.

tection against eviction if they refrained from purchas-

ing*. Additionally, it will be seen that the corporate

structure, the management of the corporation by

corporate officers and a board of directors, the right

of shareholders to participate in the corporate decision

making process by electing directors on the basis of one

vote for each share held, and the directors’ obligation

to render annual reports to the shareholders are all

factors stressed by this Court inForman as being

indicative of the presence of a “stock” or “investment

contract” under the securities laws - as was also

emphasized by the Second Circuit in Jakobson.

It is simply and transparently incorrect for the

Second Circuit, under the mantle of Forman, to hold

that such factors, though present, do not indicate the

existence of a “security” or, as a matter of law, that they

are inapplicable to the case at bar. Such a holding

renders the law of the Second Circuit completely

uncertain and irreconcilably opposed to the firmly

established principles enunciated by this Court and by

the other indicated Circuit Courts of Appeals, as well as

the panel of the Second Circuit in Jakobson. Purchasers

and offerees of stock in a privately sponsored cooperative

housing corporation can no longer rely with confidence

upon the criteria announced by this Court in Forman

as indicative of the kind of security they hold or may

acquire and are precluded from any significant know-

ledge of their rights in respect thereto.

*See, Pp. 8, supra.

IV. The decision of the Second Circuit involves

important statutory issues and calls for an exer-

cise of this Court’s power of supervision.

By its obvious failure to adhere to the principles laid

down so recently in Forman, the Court of Appeals has

effectively nullified the statutory saving clauses in the

securities laws, the rules and policies of the SEC relating

to its enforcement of those laws, and has conflicted with

the recent previous holding of another panel of the same

Circuit in Jakobson. Moreover, the decision has

effectively nullified the intent of Congress to provide an

exclusive federal forum for remedying violations of the

1934 Act (D12-13); and has relegated litigants, who need

protection against such violations, to non-existent or

doubtful substitutes for such remedies in the State

Courts. Under these circumstances, the only way that

the situation may be redressed is through review by this

Court or perhaps, through a remand of the case for an en

banc hearing by the Second Circuit.

CONCLUSION

For the foregoing reasons, this petition should be

granted and a writ of certiorari should be issued to review

the decision b ‘ow; orifsuch relief be not afforded so as to

result in review by this Court, the case should be

remanded for a hearing before all of the Judges of the

Second Circuit sitting en banc.

Respectfully submitted,

CHARLES MARKS,

286 Fifth Avenue,

New York, N.Y. 10001

WILLIAM LYON Evers Attorney for Petitioners

Of Counsel

Appendix A

Opinion of the Court of Appeals

UNITED STATES COURT OF APPEALS

For THE Seconp Cigxcuit

Nos. 601, 661—September Term, 1975.

(Argued March 15, 1976 Decided April 28, 1976.)

Docket Nos. 75-7592, 75-7601

Max Grenaper, Rocer W. Aca, II, Ann Frevper, Jonny

Gerstap, Lee Gerstap, Cetza Gorpon, P. Bensamin

Kaurman, Dorotuy Kimsatn, Gertrupe Lanpav, Hor-

ace Mitts, Aprignne Mrnassian, Sytvia Jane Morari-

son, Cora Mutuer-Tuym, H. Vicror Schwimmer, FRan-

ces Srerms, Marion Terres, Jonn Terres, Masie G.

Witxrnson, Ovea Rupnyansky, Mapeuine Scuarnucg,

Plaintiff s-A ppellants-A ppellees,

—against—

Mizton Sprrz, Henry Spitz and Jerome Spirz, d/b/a

Turee Forty Five Manacement Co., 34557 Tenants

Corp.,

Defendants-Appellees-Appellants,

Bernarp Cooper, Rosert Jutirus, Jerry V. SxHrexps, Jr.,

Wi. L. Livinestone, Jozn Key Rice, Frank Moor-

MaN, JupITH Ann Tart, Guorm Lister a/k/a Giorim

Haun, Syivia Sprrz, Exnest Borkuanp, James Danreu

Corrox, Bossy Mircne. and S. Mercer Moorman,

Defendants.

Appendix A

Before:

Muuuican, Gurren, Circuit Judges and

Neauer,” District Judge.

Appeals by permission from an order of the United

States District Court for the Southern District of New

York, Hon. Charles E. Stewart, Jr., Judge, which held

that 1) the intrastate exemption was available for the

shares of stock issued by the defendant corporation, and

2) that the shares were securities within the federal se-

eurities laws, and certified both issues for immediate re-

view pursuant to 28 U.S.C. § 1292(b).

Reversed on the second issue certified, with directions

to dismiss the complaint. The first issue is rendered moot.

Cuartes Marks, New York, New York, for

Plaintiff s-A ppellants-A ppellees.

Dennis J. Brock, Kevin P. Hucues, New York,

New York (Weil, Gotshal & Manges, New

York, New York), for Defendants-Appel-

lees-A ppellants.

—-or

Mu tuican, Circuit Judge:

We are presented here with the question whether the

sale of the stock in a privately owned and operated New

York City apartment house cooperative constitutes the

sale of a “security” within the Securities Act of 1933

(15 U.S.C. § 77a et seq.) and the Securities Exchange

Act of 1934 (15 U.S.C. §78a et seq.). We answer the

question in the negative primarily on the authority of

a Edward R. Neaher, United States District Judge for the Eastern

District of New York, sitting by designation.

Appendix A

United Housing Foundation, Inc. v. Forman, 421 US.

837 (1975).

This action was commenced in the United States Dis-

trict Court for the Southern District of New York by

the tenants of seventeen apartments in an apartment

building located at 345 East 57th Street in the City of

New York (the Building) which has been converted into

a cooperative housing corporation according to the Gen-

eral Business Law of the State of New York (4 352-e et

seq.). The defendants Milton Spitz, Henry Spitz and

Jerome Spitz, former owners of the Building, are sued

individually and as a partnership doing business as Three

Forty Five Management Co., the sponsor of the coopera-

tive conversion plan and managers of the Building. The

defendant 34557 Tenants Corporation (the Corporation) is

a New York corporation organized by the sponsor to

consummate the conversion by issuing its stock to tenants

in return for money to be used to purchase the Building.

The other named defendants are tenants who supported

the conversion plan and purchased stock pursuant to it.

The complaint which was filed on September 6, 1972,

contained four causes of action. The first alleged viola-

tions of sections 5 and 17 of the Securities Act of 1933

(15 U.S.C. §§77e and q), section 10(b) of the Securities

and Exchange Act of 1934 (15 U.S.C. § 78j(b)) and rule

10b-5 on the ground that the shares sold were never regis-

tered with the Securities and Exchange Commission and

that the prospectus through which they were offered con-

tained misleading statements or omissions of material

facts. The second cause of action claimed the commission

of a prima facie tort by the defendants in seeking accep-

tance of the conversion plan. The third cause of action

alleged that there was a failure to comply with the filing

requirements of sections 352-e(1)(a) and (b) of the New

York General Business Law. The fourth cause of action

Appendix A

pleaded that the defendants had failed to obtain the sub-

scription by 51% of the tenants before the May 16, 1972

deadline provided in the prospectus. Plaintiffs sought

damages of $14,600 on the first cause of action and

$500,000 on the second, as well as declaratory relief on

the third and fourth causes. The defendants alleged af-

firmative defenses to the first cause of action, claiming

that there was no subject matter jurisdiction, that the

cooperative plan was exempt from registration under

section 3(a)(11) of the 1933 Act (15 U.S.C. §77 ¢ (11))

(the intrastate exemption), and that therefore the court

also had no jurisdiction of the pendent state claims. The

defendants further claimed that the actions were barred

by a prior pending action in the New York State Supreme

Court based on the same facts.

By notice of motion dated November 17, 1972, plaintiffs

moved for summary judgment on the first, third and

fourth causes of action and to strike the affirmative de-

fenses. In a memorandum decision and order of March

3, 1975 (reported at 390 F. Supp. 1112), District Court

Judge Charles E. Stewart, Jr., in reliance upon this

court’s decision in 1050 Tenants Corp. v. Jakobson, 503

F.2d 1375 (2d Cir. 1974), found that subject matter juris-

diction was properly predicated upon the federal securi-

ties laws. He further held that the issue was exempt from

registration under the intrastate exemption of the 1933

Act. He denied the motion for summary judgment, find-

ing genuine issues of material fact in both the federal

and state causes of action. The Supreme Court decided

United Housing Foundation, Inc. v. Forman, supra, on

June 16, 1975 and the defendants, on June 25, 1975, moved

orally for dismissal of the complaint for lack of subject

matter jurisdiction in light of the Forman holding.

In a memorandum decision and order of September 26,

1975, Judge Stewart reaffirmed his prior holding that no

Appendix A

registration was necessary by reason of the intrastate

exemption. He further held that the shares of stock of

the defendant Corporation were distinguishable from those

considered by the Court in Forman and were securities

and investment contracts within the federal securities laws.

The court then certified two questions for appellate review

in accordance with 28 U.S.C. § 1292(b) :

“(1) Whether the intrastate exemption under § 3(a)

(11) of the Securities Act of 1933 is available in the

ease at bar, and (2) whether the securities here come

within the purview of the federal securities laws . . .”

On October 25, 1975, this court granted leave to appeal

on these two questions. Concluding that our decision in

1050 Tenants Corporation v. Jakobson is no longer viable

by reason of the holding in Forman, we hold that the shares

here involved are neither securities nor investment con-

tracts within the federal securities laws. The question of

exemption is therefore rendered moot. We reverse the

order below on the second question certified and direct

the dismissal of the complaint, including the pendent claims

in the second, third and fourth causes of action.

Facts

The focal] point of this controversy is a residential apart-

ment house constructed in 1929 and containing sixty dwell-

ing units. Forty-two apartments were rent-controlled and

eighteen apartments were rent-stabilized. There are no

commercial units on the premises.

In December 1942, the Building was acquired by Milton

Spitz, Edward Spitz, Henry Spitz and Jerome Spitz, as

trustees for their mother, Minnie Spitz, and by Jerome

Spitz individually. At or about the time of this acquisition,

the family formed a partnership which did business under

Appendix A

the firm name Three Forty Five Management Company.

Thereafter, the Building was managed and operated by

the partnership.

An unsuccessful attempt at converting the Building to a

cooperative was made in 1969. In view of the magnitude

of tenant opposition at that time, the plan was withdrawn

and abandoned. Two years later, on June 3, 1971, the Spitz

brothers entered into an agreement among themselves to

sponsor and promote the instant plan of conversion. ‘They

proposed to form a corporation which would issue its shares

to the tenants, and use the proceeds to purchase the Build-

ing from the sponsoring partnership. In accordance with

this agreement, the Spitz brothers caused the 34557 Cor-

poration (sued herein as “34557 Tenants Corp.”) to be

formed under the New York Business Corporation Law.

This corporation has an authorized capital of 7,000 shares

of stock with a par value of $1.00 per share. The trust

which had been administered by the partnership terminated

with the death of Minnie Spitz on August 18, 1971. On

September 17, 1971, the offering plan was filed by the spon-

sor with the Attorney General of the State of New York

as required by section 352-e of the General Business Law.

It was submitted to the tenants of the Building on the

same date.

The content of the plan was principally devoted to the

real estate interests being conveyed. The purchaser had

to enter into a subscription agreement for the number of

shares allocated to the unit in which he was interested, and

was thereby entitled to a proprietary lease for his apart-

ment. The apartments would be sold for residential use and

the maintenance fees received from the respective owners

would constitute the cooperative’s income. These receipts

would be slightly augmented by rental income of $180 per

month from a laundry concession maintained in the base-

ment for the tenants’ convenience, and by a 5% commission

Appendix A

on gross receipts from tenants who subscribed to Man-

hattan Cable Television. The prospectus set forth the ten-

ants’ respective statutory rights, and included a copy of

the subscription agreement, proposed proprietary lease

and by-laws of the Corporation.

The shares of stock received by tenants are not freely

transferable. The stock cannot be transferred except in

connection with the purchase and delivery by the coopera-

tive of a proprietary lease for the apartment to which the

shares were allocated. Prior approval of such a transfer

was required by either a resolution of the directors of the

Corporation, by written authorization of a majority of the

directors, or by written consent or affirmative vote of lessees

owning 65% of the then-issued shares. A restrictive legend

to this effect was printed on the share certificates.

The actual ownership of the individual apartments was

governed by the proprietary lease, the execution of which

was a condition precedent to tenancy. This document fixed

the arrangement for contributions by apartment owners to

the cash needs of the Building for its common expenses,

and set forth restrictions and requirements for the sub-

letting or transferring of ownership rights. Upon failure

to contribute to common expenses, bankruptcy, improper

transfer of the shares, improper assignment or subletting,

or breach of any other provision of the lease, the Corpora-

tion can give notice of expiration of the tenancy and the

owner was required to surrender his apartment.

Under the offering plan in its original form, the coopera-

tive was to acquire the Building from the sponsor for

$2,140,000; $840,000 was to be realized from the sale of

stock, and the balance of $1,300,000 was in the form of

mortgage indebtedness. A reserve fund for repairs of

$97,500 was to be retained by the cooperative from the

purchase price, reducing the sponsor’s net proceeds to

$2,042,500. As a result of negotiations among the sponsor,

A8&

Appendix A

the tenants, and the Attorney General, a series of amend-

ments was proposed which reduced the purchase price,

increased the cooperative’s reserve fund, increased the

required percentage of subscribing tenants and extended

the plan’s expiration date. The conversion was declared

effective by an amendment dated June 6, 1972, and the

sponsor delivered the deed to the cooperative on November

29, 1972. On December 11, 1972, the shareholders elected

directors and officers to serve until the next annual meeting.

THe Law

There is no doubt that the shares of stock involved

here would be deemed securities within the federal securi-

ties acts’ under the holding of this court in 1050 Tenants

Corp. v. Jakobson, 503 F.2d 1375 (2d Cir. 1974). How-

ever, Judge Timbers’ opinion there was premised upon the

so-called “literal” approach adopted by Judge Oakes in

his opinion in Forman v. Community Services, Inc., 500

F.2d 1246 (2d Cir. 1974) which was reversed by the Su-

preme Court in United Housing Foundation, Inc. v. For-

man, supra. The “literal” approach as defined by Judge

1 Section 2(1) of the Securities Act of 1933, 15 U.S.C. § 77b(1), pro-

vides:

(1) The term “security” means any note, stock, treasury stock,

bond, debenture, evidence of indebtedness, certificate of interest or

participation in any profit-sharing agreement, collateral-trust cer-

tificate, preorganization certificate or subscription, transferable

share, investment contract, voting-trust certificate, certificate of

deposit for a security, fractional undivided interest in oil, gas, or

other mineral rights, or, in general, any interest or instrument

commonly known as a “security”, or any certificate of interest

or participation in, temporary or interim certificate for, receipt for,

guarantee of, or warrant or right to subseribe to or purchase, any

of the foregoing.

This definition is virtually identical to that contained in section 3(a) (10)

of the Securities Exchange Act of 1934, 15 U.S.C. §78¢ (a)(10), and

the two will be considered together for purposes of this discussion.

Tcherepnin v. Knight, 389 U.8. 332, 342 (1967).

Appendix A

Oakes was simply “the fact that ‘stock’ certificates are

used in a ‘stock’ corporation is sufficient in itself to bring

transactions in the ‘stock’ within the literal definition of

the Acts.” 500 F.2d at 1252.

This “literal” approach was explicitly rejected, however,

by the Supreme Court in its reversal of the holding in

Forman. Mr. Justice Powell in his opinion for the Court

stated :

We reject at the outset any suggestion that the

present transaction, evidenced by the sale of shares

ealled “stock,” must be considered a security trans-

action simply because the statutory definition of a

security includes the words “any . . . stock.” Rather

we adhere to the basic principle that has guided all

of the Court’s decisions in this area:

“fI]n searching for the meaning and scope of the

word ‘security’ in the Act[s], form should be dis-

regarded for substance and the emphasis should be

on economic reality.” Tcherepnin v. Knight, 389

U.S. 332, 336 (1967).

421 U.S. at 848.

Looking at the realities, the Court noted that “[c]om-

mon sense suggests that people who intend to acquire only

a residential apartment in a state-subsidized cooperative,

for their personal use, are not likely to believe that in

reality they are purchasing investment securities simply

because the transaction is evidenced by something called

a share of stock.” Id. at 851.

The Court in Forman was considering shares of stock

in “Co-op City,” a New York City public housing coopera-

tive which was publicly subsidized under the Mitchell-

Lama Act, New York Private Housing Finance Law §§ 10-

37. The housing here was privately sponsored and owned

Al10

Appendix A

and the question at issue is whether this fact sufficiently

distinguishes the case from Forman so that Jakobson,

which also involved a private cooperative, remains viable.

We hold that the shares here are not securities under the

federal acts and that Forman effectively overruled Jak-

obson.

Jakobson was, as we have pointed out, explicitly bot-

tomed on the literal approach of our holding in Forman

which is now discredited. See 1050 Tenants Corp. v. Jak-

obson, supra, 503 F.2d at 1378. The Supreme Court’s

opinion in Forman stressed “economic reality” and em-

phasized that the tenants there were seeking residential

housing for their personal use and were not purchasing

investment securities simply because the transaction was

evidenced by shares of stock. We think the same reality

exists here. The tenants were seeking a place to live and

whether their residence be in a publicly or privately

financed cooperative residence has no legal significance in

our view. While the initial offering was made to those

who already occupied apartments in the Building and who

were rent-controlled or rent-stabilized, this is a require-

ment of New York law. (Rent and Eviction Regulations

of the Housing and Development Administration § 55, and

Code of the Real Estate Industry Stabilization Associa-

tion of New York City, Inc. §61, both following N.Y.

Unconsol. Laws § 8617). Once the Building became a co-

operative they were no longer protected by these provi-

sions and could be evicted, so that their obvious motive

in purchasing shares was to retain their residence. A

reading of the offering plan, the proprietary lease and

subscription agreement make it crystal clear that the pur-

chase of stock was completely tied to the lease of the

apartment. The shares cannot be transferred to a non-

tenant; a terminating tenant is required to relinquish his

stock and the purchaser must execute a proprietary lease

All

Appendix A

and be acceptable as a tenant to the board of directors

of the cooperative.

The Court in Forman also pointed out that the most

common feature of stock is “the right to receive ‘dividends

contingent upon an apportionment of profits’.” 421 U.S.

at 851, quoting Tcherepnin v. Knight, supra, 389 U.S. at

331. There is no affirmative provision for the payment of

dividends in the transaction before us. Article III, 410

of the by-laws provides:

Distributions: The shareholders-tenants shall not

be entitled, either conditionally or unconditionally,

except upon a complete or partial liquidation of the

Corporation, to receive any distribution not out of

earnings and profits of the Corporation.

The appellees argue that this clause implies that distri-

bution may be made out of earnings and profits. Under

the economic reality test of Forman, it is indeed impos-

sible to envisage what cash dividends would be reasonably

anticipated from the operation of a cooperative residen-

tial housing venture. The only substantial income of the

Corporation arises from the payment of rent or mainte-

nance charges by the tenants, estimated on the basis of

the cash requirements needed to operate the Building on

an annual basis plus the creation of reserves for contin-

gencies. Unlike Forman, there are no commercial tenants

in the Building. Aside from rental income are the fees

realized from the coin-operated laundry and cable televi-

sion which, of course, are tenant-financed and not signifi-

cant. There is not a scintilla of evidence that any tenant

was indvced to become a purchaser of shares because he

might expect to realize dividends. Whatever profit might

be realized could only result in a reduction of the mainte-

nance charged. Realistically, in view of continuously es-

calating labor, fuel and maintenance costs, all that a ten-

A12

Appendix A

ant could reasonably expect would be escalating monthly

charges. The argument that a share purchaser was in-

duced to acquire his apartment because of an opportunity

to realize cash dividends is altogether frivolous.

As we have already indicated, the shares here were not

negotiable absent a sale of the apartment; they could not

be pledged or hypothecated unless as security for a loan

to purchase the tenancy. In sum, none of the character-

istics of ordinary shares of stock are present here. In fact,

the continuing obligation to pay a monthly rental fee to

maintain the tenancy of the lessee strongly supports the

conclusion that this was basically a real estate transaction

and not an investment in a security.

In Forman, the voting rights of the shareholder were on

the basis of one vote for each apartment irrespective of

the number of shares owned. The Court in Forman pointed

out that in contrast, in the usual corporate venture the

shareholder’s vote does depend upon the number of shares

held, 421 U.S. at 851. Appellees urged that here the share-

holder’s voting power depends upon the number of shares

owned and that Forman is thus distinguished. The argu-

ment is without merit. The number of shares that a tenant

can purchase is fixed by the offering plan and is clearly in

proportion to the size and location of the apartment leased.

Thus the lessee of a first floor, five room apartment is obli-

gated to purchase 100 shares while the lessee of a sixteenth

flbor, six room apartment is required to purchase 159

shares. Thus if anything, the relationship of share pur-

chase here to actual apartment residency is even more

direct than in Co-op City, where the apartments were

fungible as far as voting rights were concerned.

Appellees’ major argument in distinguishing Forman

is that the lessee in Co-op City whose tenancy is ter-

minated, voluntarily or otherwise, is required to offer his

stock to the housing corporation at its initial selling price.

;

Al3

Appendix A

Since he is the beneficiary of a public subsidy, the require-

ment that he make no profit is understandable. In con-

trast, the tenant of the private cooperative Building here

admittedly has the right to dispose of his apartment and

his shares to a new and approved lessee-purchaser at what-

ever price the real estate market then permits. Hence,

there is an opportunity to make a profit and it is urged

that this is a normal characteristic of a security or, more

accurately, an investment contract within the securities

acts. Moreover, the court in Jakobson, supra, 503 F.2d at

1378, so held. Again, we hold that the opinion of Mr.

Justice Powell in Forman is definitive.

As we have already indicated, the transaction here essen-

tially involves the acquisition of a residence. Just as the

purchaser of a private one family residence is not unaware

that he may eventually sell his property at a profit or loss

depending upon the vagaries of the real estate market, so

the proprietary lessee of a privately owned cooperative

cannot be unconscious of the fact that upon its disposal

he will gain or lose depending upon the same market

factors.

More pointedly, the Forman Court (421 U.S. at 852-53)

adopted the definition of an investment contract set forth

in SEC v. W. J. Howey Co., 328 U.S. 293 (1946). That

opinion defines the term as follows:

[A]n investment contract for purposes of the Secu-

rities Act means a contract, transaction or scheme

whereby a person invests his money in a common en-

terprise and is led to expect profits solely from the

efforts of the promoter or a third party...

Id. at 298-99.

We note initially that the Howey test first requires

that the investor be “led to expect profits.” There is

nothing in the record before us to support the conten-

Al4

Appendix A

tion that the investor here was attracted by the prospect

of realizing a profit on his investment. While the court

below found that the tenants were attracted’ by the dual

motives of obtaining housing and realizing a profit on

their investments, the documentary evidence, which is all

that was before the court, would indicate that the profit

motive, if any, was purely incidental. The offering plan,

which includes the subscription agreement, the proprie-

tary lease and the by-laws is barren of any representation

or intimation of anticipated profits. Unlike the hawking

siren song of the promoter, the plan here is a prosaic

recitation of the financial facts underlying the transaction

with an exhaustive recitation of the physical properties

and condition of the Building and the apartments offered

as well as the terms of the tenancy and the obligations of

the lessee. There is no reference to the possibility or

probability of profits. In fact, there is ample warning

that the annual maintenance charges set forth for each

apartment (together with the purchase price of the shares

fixed for each unit) are only estimates. An enclosed let-

ter provides: “It may be expected, based on current trends,

that such items as real estate taxes, fuel costs, mainte-

nance, repairs, labor and other related expenses will change

in the future.” Appellees, apparently aware of the failure

of proof of inducement, include in an addendum to their

brief exhibits outside the record indicating that tenant

meetings were held to discuss the offering plan. What

inducements, if any, were there made are consequently

not before us.

There is a further flaw in appellees’ argument. Howey

requires that the profits arise “solely from the efforts

of the promoter or a third party.” 328 U.S. at 299. While

efficient management of the cooperative will enhance its

desirability as a place of residence, it is hardly a factor

which would result in the appreciation in value of the

Al5

Appendix A

shares of a Corporation operating a Building nearly fifty

years old. Realistically, that will depend upon the gen-

eral housing market, the status of the neighborhood and

the availability of credit. See Berman and Stone, Fed-

eral Securities Law and the Sale of Condominiums, Homes

and Homesites, 30 Bus. Law. 411, 422-24 (1975).

The distinction between the investment contract and the

transaction under scrutiny here becomes apparent when

we examine the cases relied upon in Forman. Thus in

Howey, a Florida corporation owning large citrus acreage

offered small parcels of orchard land to investors along

with a service contract. The purchasers’ tracts were then

jointly cultivated, the company sold the produce and in-

vestors received a portion of the profits based on the

acreage they owned. This was held not to be a purchase

of real estate but rather an investment for profit. “The

resulting transfer of rights in land is purely incidental.”

Id. at 300.

Similarly, in SEC v. C.M. Joiner Leasing Corp., 320

U.S. 344 (1943), lessees of large tracts sold leases of the

property representing that test oil wells would be drilled.

The promotional literature touted the well and the poten-

tial return to the investor. The Court found the trans-

actions were investment contracts and securities within

the 1933 Act.

As the Court in Forman noted, “when a purchaser is

motivated by a desire to use or consume the item pur-

chased—‘to occupy the land or to develop it themselves,’

as the Howey Court put it, [328 U.S. at 300]—the securi-

ties laws do not apply.” 421 U.S. 852-53.

We reiterate that viewing the economic realities, the

purchasers here desired to personally occupy the apart-

ments and were not led to expect bonanza profits anal-

ogous to the oil wells or citrus orchards discussed above.

We therefore conclude that Jakobson’s holding that the

Al16

Appendix A

private cooperative shareholder tenancy is an investment

contract under the federal securities acts cannot survive

the Forman analysis.

While profits may also result from a participation in

earnings resulting from the use of investors’ funds,

Tcherepnin v. Knight, supra, 389 U.S. 332, no serious

argument can be made that funds invested here were

ever intended to be devoted to anything but the pur-

chase of the Building and its maintenance. Whatever

excess might exist would normally be expected to be

placed in interest bearing accounts or secure investments

but this is hardly within the statutes.’

While the holding here deprives the investors of what-

ever protection the federal securities laws provide, this

is, as we have discussed, by virtue of authoritative and

persuasive construction of those acts by the Supreme

Court. Moreover, real estate transactions are tradition-

ally left to state supervision. The transaction here in-

volved is regulated by the Martin Act in New York and

litigation is now pending in the courts of that state in-

volving the very issues raised here.*

The order appealed from is reversed and the complaint

dismissed.

2 In Tcherepnin, an Illinois Savings and Loan Association sold with.

drawable capital shares, the holder becoming a member of the Asso-

ciation. The shares had no fixed rate of return, and dividends were

based on the profits of the Association. In finding this arrangement

to be an investment contract, the Court held: “Petitioners are partici-

pants in a common enterprise—a money-lending operation dependent for

its suecess upon the skill and efforts of the management of City Savings

in making sound loans.” Id. at 338. The case is therefore distinguish-

able.

3 The Martin Act in New York State (N.Y. General Business Law

§ 352-e) requires the filing of the offering plan. Appellees commenced an

action in the state court, charging omissions and deficiencies in the plan

and naming the Attorney General as a defendant. That litigation, com-

menced in 1972, is stili on appeal to the New York Court of Appeals.

In July 1975, the appellees commenced another action in the state

courts alleging common law fraud.

Al7

Appendix A

Order of Kaufman, J., Denying Petition

For Rehearing

UNITED STATES COURT OF APPEALS

SECOND CIRCUIT

At a stated term of the United States Court of

Appeals, in and for the Second Circuit, held

at the United States Court House, in the

City of New York, on the 20th day of July,

one thousand nine hundred and seventy-six

75-7592

Max Grenader, Roger W. Ach II, Ann Fielder, John

Gerstad, Lee Gerstad, Celia Gordon, etc.

Plaintiffs-Appellees-Appellants,

Vv.

Milton Spitz, Henry Spitz and Jerome Spitz, d/b/a Three

Forty Five Management Co., etc.,

Defendants-Appellants-Appellees.

A petition for rehearing containing a suggestion

that the action be rehearden banc having been filed

herein by counsel for the Plaintiffs-Appellees-Appelants,

and no active judge or judge who was a member of the

panel having requested that a vote be taken on said

suggestion.

Upon consideration thereof, it is

Ordered that said petition be and it hereby is denied.

/s/ IRVING R. KAUFMAN,

IRVING R. KAUFMAN, Chief Judge

Als

Appendix A

Order Denying Petition for Rehearing

UNITED STATES COURT OF APPEALS

SECOND CIRCUIT

At a stated term of the United States Court of Appeals,

in and for the Second Circuit, held at the United

States Court House, in the City of New York, on the

2th day of July, one thousand nine hundred and

SEVENLV-SIX.

Present:

Hon. WILLIAM H. MULLIGAN,

Hon. MURRAY I. GURFEIN, Circuit Judges.

Hon. EDWARD R. NEAHER, District Judge.

75-7592

Max Grenader, Roger W. Ach II, Ann Fielder, John

Gerstad, Celia Gordon, etc.,

Plaintiffs-Appellees-Appellants,

Milton Spitz, Henry Spitz and Jerome Spitz,

d/b/a Three Forty Five Management Co., etc.

Defendants-Appellants- Appellees.

A petition for a rehearing having been filed herein

by counsel for the plaintiffs-appellees-appellants

Upon consideration thereof, it is

Ordered that said petition be and hereby is denied.

s/A. DANIEL FUSARO

A. DANIEL FUSARO

CLERK

bad °

ieMtae ie CS ih Toa ~2hy

EAT SMA ee Se

tO OYE DE :

Appendix B

Opinion of the District Court

On Plaintiffs’ Original Motion

MAX GRENADER et. al.,

Plaintiffs,

MILTON SPITZ et al.,

Defendants.

No. 72 Civ. 3784

United States District Court

S. D. New York

March 6, 1975

Charles Marks, New York City, for plaintiffs, Max Grena-

der, Roger W. Ach II, Susanne Buchner, Ann

Fielder, John Gerstad, Lee Gerstad, Celia Gordon,

P. Benjamin Kaufman, Dorothy Kimball, Gertrude

Landau, Horace Mills, Adrienne Minassian, Sylvia

Jane Morrison, Cora Muller-Thym, H. Victor

Schwimmer, Frances Stein, Davidson Taylor,

Marion Terres, John Terres, Masie G. Wilkinson,

Olga Rudnyansky and Madeline Schainuck.

Kevin P. Hughes, Weil, Gotshal & Manges, New York

City, for defendants, Milton Spitz, Henry Spitz and

Jerome Spitz, d/b/a Three Forty Five Management

Co., and 34557 Tenants Corp.

Appendix B

Joel Arnold, Blumenthal, Barandes, Bass, Matson &

Arnold, New York City, for defendants, Bernard

Cooper, Robert Julius, Jerry V. Shields, Jr., William L.

Livingstone, Joel Key Rice, Frank Moorman, Judith

Ann Taft, Gloria Lister a/k/a Gloria Hahn, Sylvia

Sylvia Spitz, Ernest Borkland, James Daniel Cotton,

Bobby Mitchel and S. Mercer Moorman.

STEWART, DISTRICT JUDGE:

This action was brought by various tenants in an

apartment building located at 345 East 57th Street, New

York, New York, which has been converted to a

cooperative housing corporation. Plaintiffs challenge the

offering statement and plan pursuant to which shares in

the apartment were sold. They allege that the defendant

partnership, sponsor and promoter of the cooperative

plan pursuant to which the corporation was organized

and shares offered and sold, violated provisions of

federal! and state? securities laws and regulations by

failing to register the shares sold with the Securities and

Exchange Commission, by making false and misleading

statements and material omissions in connection with

and in the course of issuance of the shares, and by failing

to obtain subscriptions by the necessary number of

1. The first cause of action alleges violations of Sections 5 and 17 of

the Securities Exchange Act of 1933. 15 U.S.C. §77e and q; Section

10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(t) and

Rule 10b-5 (17 C.R.F. §240.10b-5) (“the federal causes of action”)

2. The third cause of action (“the pendént state claime’’) alleges

violation of §352-e(1)(a) and (b) of the New York General Business

Law.

B3 .

Appendix B

tenant participants by the offering’s deadline.®

Defendants Milton Spitz, Henry Spitz, and Jerome

Spitz sued individually and as a partnership doing

business as Three Forty Five Management Co., and

defendant 34557 Corporation, the tenant corporation

formed when the plan became effective, allege as

affirmative defenses that the cooperative plan was

exempt from the registration requirements of the

Securities Act of 1933, and that therefore this court is

without subject matter jurisdiction over the pendent state

claims. Various tenants of the apartment building, who

are also defendants, allege as affirmative defenses that

this court is without subject matter jurisdiction over the

entire action and that this action is further barred by the

pendency of a prior action in the New York State

Supreme Court based on the same set of facts."

Plaintiffs now move for partial summary judgment

contending there are no genuine issues of fact to be

decided as to the first, third and fourth causes of action.

Essentially, plaintiffs argue that as a matter of law the

shares offered by the sponsor constituted securities

required to be registered under §5 of the Securities Act of

1933 and did not constitute an exempt intrastate offering

under §3(a)(11) of the 1933 Act. With respect to the first

and third causes of action, plaintiffs also argue that the

3. The second cause of action, alleging the commission of a common

law tort, is not part of this motion.

4. We dismiss the affirmative defense of the individual defendants

that this action is barred by the pendency of a similar action in the

New York state courts. Atlantic Coast Line R.R. v. Brotherhood of

_ Locomotive Engineers, 398 U.S. 281, 295-96 (1970); Kline v. Burke

Construction Co., 260 U.S. 226 (1922); Friedman v. N.B.C. Motorcycle

Imports Inc., 452 F2d 1215, 1217 (2d Cir. 1971).

Appendix B

purportedly misleading statements and omissions in the

defendant sponsor’s offering statement and amendme:.ts

are so clearly material that summary judgment is

warranted as a matter of federal and state securities law.

The final contention, plaintiffs’ fourth cause of action, is

that the requisite level of tenant participation in the

cooperative plan was not timely obtained, and hence the

whole plan must fail.

This court finds that subject matter jurisdiction over

this controversy is properly predicated upon §22 of the

Securities Act of 19334* and upon §27 of the Securities

Exchange Act of 19345 as construed by the recent Second

Circuit decision in 1050 Tenants Corp. v. Jakobson, 503

F.2d 1375 (2d Cir. 1974). Since there is subject matter

jurisdiction with regard to the federal cause of action, we

may, in our discretion, retain jurisdiction over pendent

state causes of action derived from “a common nucleus of

operative fact.” United Mine Workers v. Gibbs, 383 U.S.

715, 725 (1966). See also Almenares v. Wyman, 453 F.2d

1075, 1083-86 (2d Cir. 1971), cert. denied, 405 U.S. 944

(1972); Drachman v. Harvey, 453 F.2d 722, 737-38 (2d Cir.

1972) (rehearing en banc).

We also find that the moving affidavits submitted in

connection with this motion are sufficient to comply with

the provisions of Rule 56(e) of the Federal Rules of Civil

Procedure, despite defendants’ assertions tothe contrary.

Rule 56(e) states in pertinent part that “[s}upporting and

opposing affidavits shall be made on personal knowl-

edge, shall set forth such facts as would be admissible in

4a. 15 U.S.C. §77v.

5. 15 U.S.C. §78aa

Appendix B

evidence, and shall show affirmatively that the affiant is

competent to testify to the matters stated therein.”

Defendants assert that plaintiffs failed to comply with

this rule in submitting an affidavit by their attorney

allegedly not based on personal knowledge and a second

affidavit by plaintiff H.Victor Schwimmer, who declared

that the attorney’s affidavit is “‘true.’’ Plaintiffs’

attorney responds that his affidavit was based on

personal knowledge of the documents, event, and

admissions in question, although his moving affidavit

did not so state. Furthermore, plaintiffs’ attorney argues

that, in any event, the corroborative affidavit by

Schwimmer passes muster under Rule 56(e), since it was

based on personal knowledge.

We accept plaintiffs’ attorney’s statement that his

affidavit was based on personal knowledge, and thus

distinguish Mercantile Nat. Bank at Dallas v. Franklin

Life Ins. Co., 248 F.2d 57, 59 (5th Cir. 1957), cited by

defendants, since in that case moving affidavits by

attorneys were not based on personal knowledge. Rather

we agree with the court in Inglett & Co. v. Everglade

Fertilizer Co., 255 F.2d 343, 349 (5th Cir. 1958) that it is

permissible, though not advisable, for an attorney to

present his own affidavit in support of a motion for

summary judgment.®

First Cause of Action

Plaintiffs’ first cause of action alleges, inter alia, that

the defendant sponsor was required to register its

6. The inappropriateness of an attorney submitting an affidavit in

support of a summary judgment motion is abundantly clear in the

instant case, where plaintiffs’ attorney’s affidavit occasionally strays

from a recitation of the facts to engage in argumentation and citation

of legal authorities.

B6 .

Appendix B

offering with the Securities and Exchange Comission

pursuant to §5 of the Securities Exchange Act of 1933 and

failed to do so. Defendants Milton, Henry and Jerome

Spitz and defendant 34557 Corporation concede that

their offering was not registered but argue as an

affirmative defense that the offering falls within the

§3(a)(11) exemption from registration since it was made

by a New York “issuer” and shares were sold only to New

York residents. Section 3(a)(11) exempts from registra-

tion and prospectus requirements of the 1933 Act:

Any security which is part of an issue offered and

sold only to persons resident within a single State

or Territory, where the issuer of such security is a

person resident and doing business within, or, if a

corporation, incorporated by and doing business

within, such State or Territory.’

Plaintiffs have moved to strike the defendant spon-

sor’s affirmative defense based on Section 3(a)(11) of the

1933 Act, contending that the issuer partnership is not a

“person” resident within New York, that the issuer does

business outside of New York, and that some of the

purchasers were nonresidents.

Plaintiffs’ contention that this exemption does not

apply is based initially on the conceded California

residence of partner Jerome Spitz. His lack of New York

residence is only dispositive if it is determined that each

partner of the issuer must be a resident of the issuing

state. If the rule is otherwise, however, a partnership

issuer - such as the one here - will be entitled to the

intrastate exemption as long as its principal place of

business is in the issuing state.

7. 15 U.S.C. §77¢{11) (1970)

Appendix B

No federal court has ruled on which theory of partner-

ship residency should be applied for purposes of the §3(a)

(11) exemption and commentators considering the sub-

ject have disagreed. Professor Louis Loss has suggested

that the residence of a general partnership should be that

of it principal place of business.* A former Associate

General Counsel of the Securities and Exchange commis-

sion has suggested, however, that the residence of a

general partnership should be the residences of all of its

general partners.’ While the 1933 Act does not define the

term “resident,” the SEC long construed the term to

mean “domiciliary.”'® More recently, the SEC promul.-

gated Rule 147, effective March 1, 1974, which sought to

clarify the definition of “‘resident” under §3(a)(11). Under

Rule 147, when an issuer is a general partnership, its

residence is that of its principal place of business.''

According to two recent commentators, this definition is

merely declarative of existing law.'

We believe that on the basis of the above authorities,

the better view is that the residence of a general partner-

ship is that of its principal place of business. Applying

that rule to the instant case, it is clear that the defendant

sponsor partnership, Three Forty Five Management Co.,

8. 1 Loss, SECURITIES REGULATION 600 (2d ed. 1961)

{hereinafter cited as Loss].

9. McCauley, Intratstate Securities Transactions under the

Federal Securities Act, 107 U.Pa.L.Rev. 937, 948 (1959).

10. SEC Securities Act Release No. 4434, at 3 (Dec. 7, 196).

11. SEC Securities Act Release No. 5450 (Jan. 7, 1974).

12. Alberg and Lybecker, ‘“‘New SEC Rules 146 and 147: The

Nonpublic and Intrastate Offering Exemptions From Registration for

the Sale of Securities,” 74 Col.L.Rev. 622, 650 (1974).

Appendix B

falls within the residence requirement for a §3(a)(11)

exemption, since it is conceded that its principal place of

business is in New York.

Plaintiffs also challenge the defendants’ claimed

registration exemption on the ground that defendants

were not doing business within New York State, because

three of the subscription agreements for the cooperative

were acknowledged outside of New York. We do not

believe plaintiffs have correctly interpreted the “doing

business” requirement of §3(a)(11). As Professor Loss has

observed, “...the issuer’s business need not be confined to

the state in which it is resident or incorporated.’’'? The

mere acknowledgement of three subscription agreements

outside New York State, without more, is not sufficient to

give rise to the conclusion that the defendant sponsor is

not doing business in New York.!34

Plaintiffs’ third ground for challenging defendants’

right to invoke the intrastate exemption is based on the

contention that several of the purchasers of stock in the

cooperative “were at the time of the offer or sale [of

subscription agreements] or have since become, non-

residents of the State of New York.” (Affidavit of Charles

Marks, p. 20). Whether purchasing residents must be

domiciled in New York, maintain a principal residence

13. Loss, supra, at 60).

13a. Plaintiffs also appear to challenge the out-of-state acknowledg-

ment of these three subscription agreements on the ground that the

intrastate exemption from registration does not apply if securities are

sold to persons not resident in New York. That argument is without

merit, however, since out-of-state acknowledgment of subscription

agreements does not prove that the subscribers are nonresidents,

here, or merely maintain a residence here has not been

decided by any federal court. However, plaintiffs offer no

proof to show that defendants offered any shares to

nonresidents, however “resident” is defined.'* Plaintiffs

present no proof that Judith Ann Taft, who allegedly

sublet her apartment in New York and became a resident

of London, was a nonresident at the time she purchased

her shares in the cooperative. Nor have plaintiffs

demonstrated that Taft’s shares were transferred to a

non-New York resident before the date of the closing of

the sale of the apartment to the cooperative corporation.

Such evidence might demonstrate that upon completion

of ultimate distribution of the shares of the cooperative,

they were not wholly in the hands of New York residents,

in which case the intrastate exemption would not apply.

SEC v. Hillsborough Invest. Corp., 173 F.Supp 86, 88-89

(D. N.H. 1958). In addition, plaintiffs seek to prove that

various tenants are not New York residents because

individuals of the same name are listed in telephone

directories in other states. Obviously, such “evidence” is

insufficient to prove that any tenants are nonresidents of

New York.

14. While defendants have the burden of proof on the issue of

whether they come within the intrastate exemption, SEC v. Ralston-

Purina Co., 346 U.S. 119, 126 (1953); Chapman v. Dunn, 414 F2d 153,

159 (6th Cir. 1969); SEC v. Culpepper, 270 F.2d 241, 246 (2d Cir. 1959);

plaintiffs cannot rebut defendants- prima facie case by mere

allegations. In addition, defendants have submitted affidavits of

various tenants claimed by plaintiffs to be nonresidents; those

affidavits demonstrate that the affiants were either domiciled in New

York or maintained their principal residence here at the time they

purchased shares in the cooperative.

B10

For these reasons, we deny plaintiffs’ request to strike

the defendants’ affirmative defense based on §3(a)(11),

and hold that the defendant sponsor met the require-

ments of that exception and therefore was exempt from

the registration provisions of the 1933 securities act. Our

conclusion is buttressed by the fact that the offering here

was a local financing done by a local business.'5 The

offering was not made to any prospective tenant, but

rather primarily to residents in the apartment. The

partnership’s principal place of doing business was New

York and its sole purpose was to create the cooperative

housing coporation in New York.

Plaintiff's first cause of action also alleges violations

of §17 of the Securities Act of 1933 and §10(b) of the

Securities Exchange Act of 1934.'* Defendants are

subject to liability for rescission of securities sales under

these section even though they are exempt from the

requirements of registration under §5 of the Securities

Act of 1933. Pawgan v. Silverstein, 265 F. Supp. 898, 900

(S.D.N.Y. 1967). See also SEC Securities Act Release No.

4877 (Aug. 8, 1967).

15. The legislative history of the Act supports the SEC’s view that

the intrastate exemption was intended to apply only to local financing

which could practicably be consummated wholly within a single state

where the issuer is doing business and is incorporated. See H.R. Rep.

No. 85, 73d Cong., Ist Sess. 7 (1933); Op. Gen. Counsel, Securities Act

Release No. 1459 (May 29, 1937); SEC Securities Act Release No. 4434

(Dec. 6, 1961).

16. Defendants maintain that it is doubtful whether plaintiffs other

than plaintiff Fielder have standing to allege a claim under either

Section 17(a) of the 1933 Act or Section 10(b) of the 1934 Act. We need

not reach this issue, however, since it is conceded that at least one

plaintiff has standing.

> .

pO PIE PV es

* ‘

Bll

We deny plaintiffs’ motion for summary judgment

with respect to these sections of the federal securities

laws because we find that there are factual issues in

dispute, primarily regarding the materiality of certain

alleged misrepresentations and omissions in the prospec-

tus, offering plan and it amendments. Whether a

misrepresentation or omission in a prospectus is material

depends on whether it is something about which “an

average prudent investor ought reasonably to be

informed before purchasing the security.”” Demarco v.

Edens, 390 F.2d 836, 840 (2d Cir. 1968), citing 17 C.F.R.

230.405(1).’” And generally, the issue of materiality,

“resting as it does upon the reaction of a ‘reasonable

man,’ cannot be decided by summary judgment.” John

Hopkins University v. Hutton, 422 F.2d 1124, 1129 (4th

Cir. 1970).

In the instant case, plaintiffs allege that the sponsor’s

offering statement contains numerous omissions of

patently material facts. Plaintiffs maintian that the

materiality of the alleged omissions is conclusively

demonstrated by the fact that they are purportedly

required to be set forth in an offering statement by §352-e

of the General Business Law of New York State.

Specifically, plaintiffs allege that the sponsor’s

offering statement contained, inter alia, the following

ommissions: (1) failure to state that defendant Jerome

Spitz was a resident of California, thus apprising

17. These cases involve liability under §12(2) of the Securities Act of

1933 based upon the existence of material omissions referred to

therein. The language of §12(2), however, is similar to that of §17(a)(2)

of the Securities Act of 1933 and Rule 10b-5(2) of the General Rules and

Regulations under the Securities Exchange Act of 1934.

B12

prospective purchasers that the provisions of the federal

securities laws would apply to their transaction; (2)

failure to state the profits of each of the partners from the

sale of shares in the cooperative, although §352-e(1)(b) of

the General Business Law allegedly required such

information; (3) failure to state the amount of deprecia-

tion of the apartment building, although the same

section of the General Business Law requires that the

offering statement or prospectus include “the basis, rate

and method of computing depreciation;” and (4) failure to

include in the third amendment to the offering statement

a Letter of Adequacy with respect to the Projected

Schedule of Expenses for the First Year of Operation.

Defendants vigorously dispute the importance of

these omissions. They contend that their failure to state

the residence of Jerome Spitz is immaterial, since the

intrastate exemption from registration applies as long as

the sponsor partnership’s principal place of business is in

New York, They also point out that under the regulation

extablished under §352-e of the General Business Law,

the profits of the sponsors need not be stated where the

promoter has held continuous control of ownership in the

apartment for three years prior to the proposed first

offering of cooperative apartments. They maintain they

they were not obligated to state their profits since they

had continuously controlled the ownership of the

apartment building for the requisite three-year period

before the offering commenced. Defendants also contend

that their failure to state the amount of depreciation was

not material on the ground that they indicated in the

cooperative plan that depreciation was not a tax

deductible item, and was thus of minimal interest to

prospective purchasers of securities. Similarly, defen-

B13

dants concede that a Letter of Adequacy was not

contained in the third amendment to the offering

statement, but maintain that the Letter of Adequacy

accompanying the original cooperative plan was suffi-

cient to apprise tenants of the first year’s schedule of

expenses, and that subsequent amendments reflected

significant changes in projected first-year operating

expenses.

Since the materiality of these omissions is in dispute,

we deny plaintiffs’ motion for summary judgment with

respect to their federal causes of action.'®

Third Cause of Action

Plaintiffs’ third cause of action alleges that the

offering statement, prospectus or plan and amendments

thereto violated §352-e(1)(a) and(b) of New York’s General

Business Law by omitting required material information

and by making material misrepresentations. Section

352-e(1)(a) makes it illegal for persons and partnerships,

inter alia, to make or take part in a sale or offering of

securities in New York State, including cooperative

interests in realty,

unless and until there shall have been filed with the

department of law, prior to such offering, a written

statement or statements, to be known as an

“offering statement” or “prospectus” concerning

the contemplated offering which shall contain the

information and representations required by

paragraph (b) of this subdivision. . .

18. We also note that Justice Harry B. Frank, in denying a similar

motion for summary judgment in a related pending state action, found

that there were numerous factual issues in dispute. It is true, however,

that he focussed on factual issues involving misrepresentations

rather than omissions. Grenader v. Lefkowitz, (N.Y.City Sup.Ct.,

Sept. 25, 1972).

B14

Paragraph (b) then sets forth a comprehensive list of

items to be included in offering statements filed with the

department of law. Those items, as well as additiona!

information which may be required by rules and

regulations prescribed by the attorney general, are

designed to “afford potential investors, purchasers and

participants an adequate basis upon which to found their

judgment and shall not omit any material fact or contain

any untrue statement of a material fact.”

In support of this cause of action, plaintiffs maintain

that the alleged material misrepresentations and

omissions which purportedly violated the federal

securities laws also demonstrate a violation of §352-e

(1)(a) and (b) of the General Business Law. Since we

have denied plaintiffs’ motion for summary judgment on

the federal causes of action - predicated upon violations

of the state securities law -- a fortiori, we must deny their

motion on this pendent state cause of action. As with the

federal causes of action, we conclude that defendants’

alleged misrepresentations and omissions of information

in their prospectus and offering statement were not so

clearly material so as to entitle plaintiffs to judgment as a

matter of law.'9

Fourth Cause of Action

The third amendment to the offering statement

provided that the plan would not be declared effective

unless 51 percent of the tenants had executed subscrip-

tion agreements “by May 16, 1972.” Plaintiffs contend

that this term should be construed to cover the period up

19. See note 18, supra.

B15

to and including May 15, 1972, and, when so construed,

the whole cooperative plan must fail, since the requisite

number of signatures was not obtained until May 16, 1972.

Defendants characterize plaintiffs’ fourth cause of

action as “absurd,” and contend that it is supported only

by argument and statements of belief. In addition, Joel

Arnold, an attorney who heiped draft the disputed

language, states in an affidavit on behalf of the

defendants, that the original expiration date of March 16,

1972 was extended by two months until May 16, 1972.

According to Arnold, the intent of the drafters was to

extend the deadline until May 16, 1972 at 11:59 p.m.

Piaintiffs counter that any ambiguities in language

should be construed against the party which drafted

them. 17 Am.Jur.2d 690. We believe, however, that

defendants, with the Arnold affidavit, have raised a

question of fact regarding the intent of the parties who

drafted the offering statement. This question should be

resolved by evidence adduced at trial, not by construing

any ambiguities in language against the party which

drafted them. Since the question of the intent of the

parties is one of fact, United States v. Kansas Gas and

Electric Co., 287 F.2d 601 (10th Cir. 1961), we deny plain-

tiffs’ motion for summary judgment on their fourth cause

of action.

For the reasons indicated, plaintiffs’ motion for

partial summary judgment is denied in all respects.

B16

We also grant leave to plaintiffs Susanne Buchner and

Davidson Taylor to discontinue their participation in

this action.

SO ORDERED

CHARLES STEWART

United States District Judge

Dated: New York, N.Y.

March 5, 1975.

B17

Appendix B

Opinion of the District Court

On Plaintiffs’ Motion for Renewal and Reargument

MAX GRENADER et al.,

Plaintiffs,

MILTON SPITZ et al.,

Defendants.

No. 72 Civ. 3784

United States District Court

S.D. New York

Sept. 29, 1975

Charles Marks, New York City, for plaintiffs, Max

Grenader, Roger W. Ach II, Ann Fielder, John

Gerstad, Lee Gerstad, Celia Gordon, P. Benjamin

Kaufman, Dorothy Kimball, Gertrude Landau,

Horace Mills, Adrienne Minassian, Sylvia Jane

Morrison, Cora Muller-Thym, H. Victor Schwimmer,

Frances Stein, Marion Terres, John Terres, Masie G.

Wilkinson and Olga Rudnyansky.

Kevin P. Hughes, Weil, Gotshal & Manges, New York City

for defendants, Milton Spitz, Henry Spitz and Jerome

Spitz, d’b/a Three Forty Five Management Co., and

34557 Tenants Corp.

B18

Appendix B

Robert Barandes, Barandes, Rabbino & Arnold, New

York City, for defendants, Bernard Cooper, Robert

Julius, Jerry V. Shields, Jr., William L. Livingstone,

Joel Key Rice, Frank Moorman, Judith Ann Taft,

Gloria Lister a/k/a Gloria Hahn, Sylvia Spitz,

Ernest Borkland, James Daniel Cotton, Bobby

Mitchel and S. Mercer Moorman.

STEWART, DISTRICT JUDGE:

Plaintiffs move for renewal and reargument of part of

their prior motion for partial summary judgment on the

ground that the securities here in issue were not entitled

to an intrastate exemption from registration under

§3(a)(11) of the Securities Act of 1933 because of the

nonresidence of three of the four partners of the

defendant partnership Three Forty Five Management

Co. Plaintiffs also allege various other oversights in this

court’s memorandum decision of March 6, 1975, in which

we held that the residence of a partnership for purposes of

the intrastate exemption was the locus of its principal

place of business, and not the residence of its individual

partners.

While this motion was pending, the Supreme Court

decided United Housing Foundation v. Forman, 43

U.S.L.W. 4742 (U.S. June 16, 1975). The Forman Court

held that the shares of stock in a state-subsidized

nonprofit housing cooperative were not “securities” or

“investment contracts” within the purview of the federal

securities laws. Believing that this decision might be

applicable to the instant case, we requested that the

parties brief the issue of whether shares of stock in the

privately sponsored housing cooperative in the instant

B19

Appendix B

case come within the reach of the federal securities laws.

For the reasons indicated, we reaffirm our initial

decision regarding the entitlement of the defendant

partnership to the intrastate registration exemption. We

also conclude that Forman is distinguishable from the

instant case, and that the shares of stock at issue here fall

under the regulation of the federal securities laws.

1. Motion for reargument

In the memorandum decision of March 6, we concluded

that the residence of the defendant partnership Three

Forty Five Management Co. was that of its principal

place of business - New York - even though several of its

partners were nonresidents. Although our earlier

decision did not expressly so state, we effectively held

that the defendant partnership sponsor was a control

person of 34557 Tenants Corp., the issuer of the stocks of

the cooperative plan. Under §2(11) of the Securities Act of

1933, an issuer is defined to include “any person directly

or indirectly controlling or controlled by the issuer, or

any person under direct or indirect common control with

the issuer.” Since it was clear that the defendant

pertnership exercised a significant degree of control over

the issuer apartment corporation, we considered it as an

issuer also, and accordingly determined that it was a

New York “resident.” We reaffirm that conclusion now.

Plaintiffs have presented no new evidence regarding our

determination that the principal place of business is the

residence of a general partnership for purposes of the

exemption from registration. Plaintiffs now ask us to

conclude that the individual partners were also control

persons. They argue that three of the four Spitz brothers

B20

Appendix B

are out-of-state residents. If they are considered “control

persons,” then we must consider them as issuers. in that

event, one or more of the “‘issuers’’ would be non-

residents, and thus defendants would not be entitled to

the §3(a)(11) intrastate exemption. We cannot agree with

this line of analysis. The individual partners were not

“control persons,” since they did not directly or indirectly

control the issuer. The only plausible argument raised by

plaintiffs is that Milton Spitz was a “control person”

since he was appointed as an “attorney-in-fact” in 1971 to

act on behalf of Three Forty Five Management Company,

a predecessor to defendant Three Forty Five Manage-

ment Co. This appointment is insufficient to convince us

that Milton Spitz was a control person. That he was an

agent for his brothers does not mean he controlled them.

Since plaintiffs have not indicated that Milton Spitz or

any other one brother controlled the defendant partner-

ship or its predecessor, we conclvde that none of them are

control persons.

Plaintiffs also maintain that this court should have

applied the “doing business” requirement in SEC Rule

147(c)(2)iii) with respect to the “issuer” partnership. As

defendants correctly note, plaintiffs’ argument on this

point is entirely misplaced. We cited Rule 147 in our

earlier memorandum only for the conclusion that it was

declarative of existing law with respect to the definition

of the residence of a general partnership for purposes of

the intrastate exemption from registration. Moreover, to

the extent SEC v. McDonald Investment Co., 343 F.Supp.

343 (D. Minn. 1972) and SEC v. Truckee, 157 F.Supp. 824

(S.D. Cal. 1957), cited by plaintiffs, reflect the law on the

2 WUre ke Ser MRR

B21

Appendix B

doing business requirement, they are distinguishable

from the instant case.

Plaintiffs also assert that this court erred in holding

defendants entitled to the intrastate exemption because

defendants did not cross-move for summary judgment.

Nevertheless, since defendants met the requisite burden

of proof by establishing that there were no factual issues

and that they were entitled to prevail as a matter of law,

we found such a cross-motion to be unnecessary. 6 Moore

Federal Practice 156.12 at 2241-2246 (2d ed. 1974).

Plaintiffs’ other contentions on this motion for

reargument are summarily dismissed, since they are

without merit and fail to raise any new issues.

2. The Forman decision

The Forman Court concluded that shares of stock in

the publicly sponsored housing cooperative project

known as Co-op City were neither “stocks” nor “invest

contracts” within the meaning of the federal securities

laws. The Court noted that economic realities - not mere

labels - must determine whether particular shares are

“stocks” or “investment contracts.” The Court then

listed several factors common to most stocks which it

found lacking in the Co-op City shares: voting rights in

proportion to the number of shares owned, appreciation

in value, a right to receive dividends, negotiability, and

the ability to pledge or bypothecate shares. In most of

these respects, the shares in the instant case are more like

traditional shares of stock than those in Forman.

Apartment owners here have voting rights in proportion

to the number of shares they own, and the number of

shares owned is different for each apartment. Unlike the

B22

Appendix B

shares in Co-op City (which must generally be resold at

purchase price), the shares here may be and have been

sold at a profit. For example, one tenant purchaged

shares for $13,700 and resold them for about $40,000,

while two others bought an apartment at $14,500 and

resold it for approximately $60,000. Although the shares

are not freely transferable - transfers are subject to

approval by the Board of Directors or the Managing

Agent - they are more freely transferable than the Co-op

City Shares. The Supreme Court noted in Forman that

the motive for purchase of the Co-op City shares was

housing, not investment for profit. Here, by contrast,

tenants purchased shares with the dual motives of

obtaining housing and realizing a profit on their

investments. Taking these differences into account, we

think that the shares in the privately sponsored coopera-

tive here fall within the reach of the federal securities

laws.

The Forman Court also concluded that the Co-op City

shares were not investment contracts since there was not

“a reasonable expectation of profits to be derived from

the entreprenurial or managerial efforts of others.”

43 U.S.L.W. at 4747. Here the situation is different.

Tenants purchasing shares in the 345 East 57th Street

building sought both housing and profits, the profits to

be derived from the managerial efforts of the sponsor and

the apartment corporation. To the extent that they

utilized their resources and skills in efficiently managing

the building, maintaining it in good condition, and

attracting desirable tenants, they enabled the tenantg to

obtain profits as a result of the appreciation in their

property. Accordingly, we believe that the shares here

B23

Appendix B

also constitute investment contracts under the federal

securities laws.

For the reasons indicated, we think our conclusion in

1050 Tenants Corporation v. Jackobson, 365 F.Supp.

1171 (S.D.N.Y. 1974) aff'd 503 F.2d 1375 that shares in

privately sponsored cooperatives are ‘“‘stocks’’ and

“investment contracts” under the federa! securities laws

is still proper and applies here.

Since we believe there are controlling questions of law

regarding (1) whether the intrastate exemption under

§3(a)(11) of the Securities Act of 1933 is available for the

securities in the case at bar, and (2) whether the securities

here come within the purview of the federal securities

laws and, since we believe an immediate appeal from this

order may materially advance the ultimate termination

of this litigation, we certify these questions to the Court of

Appeals in accordance with 28 U.S.C. §1292(b).

SO ORDERED.

/s/CHARLES STEWART

United States District Judge

Dated: New York, N. Y.

September 26, 1975.

Appendix C

Judgment of the Court of Appeals

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

At a stated Term of the United States Court of

Appeals for the Second Circuit held at the United

States Courthouse in the City of New York, on the

twenty-eighth day of April, one thousand nine hundred

and seventy-six.

Present:

Hon. WILLIAM H. MULLIGAN,

Hon. MURRAY I. GURFEIN, Circuit Judges,

Hon. EDWARD R. NEAHER, District Judge.

75-7592

75-7601

Gerstad, Lee Gerstad, Celia Gordon, P. Benjamin

Kaufman, Dorothy Kimball, Gertrude Landau, Horace

Mills, Adrienne Minassian, Sylvia Jane Morrison, Cora

Muller-Thym, H. Victor Schwimmer, Frances Stein,

Marion Terres, John Terres, Masie G. Wilkinson, Olga

Rudnyansky, Madeline Schainuck.

Plaintiffs-Appellants-Appellees,

Milton Spitz, Henry Spitz and Jerome Spitz, d/b/a Three

Forty Five Management Co.,

Defendants-Appellees-Appellants.

Appendix C

Appeal from the United States District Court for the

Southern District of New York.

This cause came on to be heard on the transcript of

record from the United States District Court for the

Southern District of New York, and was argued by

counsel.

ON CONSIDERATION WHEREOPF, it is now hereby

ordered, adjudged and decreed that the order of said

District Court be and it hereby is reversed and that the

complaint be and it hereby is dismissed in accordance

with the opinion of this Court with costs to be taxed

against plaintiffs-appellants-appellees.

A. DANIEL FUSARO

Clerk

By Vincent A. Carlin

Chief Deputy Clerk

Appendix D

Statutes, Rules and Regulations Involved

The statutes involved in this case are §§2(1),(2),(4),

3(a)(11), 5, 12, 15, 17, 22(a), 24 and 26 of the Securities Act

of 1933 (15 U.S.C. §§77b(1), (2), (4) 77c(a\(1l), 77e, 771 77q,

77v(a), 77x and 77z); §§3(a)(8), (10), (13), 10(b), 15, 20, 27,

29(b) and 33 of the Securities Exchange Act of 1934 (15

U.S.C. §§78c(a)(8), (10), (13), 78)(b), 78t, 78aa, 78xx(b) and

78gg); New York General Business Law, §352-e; and

New York Business Corporation Law §510, which

provide, in pertinent part, as follows:

$2 Securities Act of 1933, 15 U.S.C. §77b

DEFINITIONS

Sec. 2. When used in this title, unless the context

otherwise requires—

(1) The term “security” means any note, stock,

treasury stock, bond, debenture, evidence of indebt-

edness, certificate of interest or participation in any

profit-sharing, agreement, collateral-trust certifi-

cate, preorganization certificate or subscription,

transferable share, investment contract, voting-

trust certificate, certificate of deposit for a security,

fractional undivided interest in oil, gas, or other

mineral rights, or, in general, any interest or

instrument commonly known as a “security” or any

certificate of interest or participation in, temporary

or interim certificate for, receipt for, guarantee of, or

warrant or right to subscribe to or purchase, any of

the foregoing.

Appendix D

(2) The term “person” means an individual, a

corporation, a partnership, an association, a joint-

stock company, a trust, any incorporated organiza-

tion, or a government or political subdivision

thereof. As used in this paragraph the term “trust”

shall include only a trust where the interest or

interests of the beneficiary or beneficiaries are

evidenced by a security.

* * *

(4) The term “issuer” means every person who

issues or proposes to issue any security; except that

with respect to certificates of deposit, voting-trust

certificates, or collateral-trust certificates, or with

respect to certificates of interest or shares in any

unincorporated investmnet trust not having a board

of directors (or persons performing similar func-

tion) or of the fixed, restricted management, or unit

type, the term “issuer’’ mean the person or persons

performing the acts and assuming the duties of

depositor or manager pursuant to the provisions of

the trust or other agreement or instrument under

which such securities are issued; except that in the

case of an unincorporated association which pro-

vides by its articles for limited liability of any or all

of its members, or in the case of a trust, committee, or

other legal entity, the trustees or members thereof

shall not be individually liable as issuers of any

security issued by the association, trust, committee,

or other legal entity; except that with respect to

equipment-trust certificates or like securities, the

term “issuer” means the person by whom the

equipment or property is or is to be used; and excep

that with respect to fractional undivided interests in

2p ae 9

Appendix D

oil, gas, or other mineral rights, the term “issuer”

means the owner of any such right or of any interest

in such right (whether whole of fractional) who

creates fractional inbterests therein for the purpose

of public offering.

§3(a)(11) Securities Act of 1933, 15 U.S.C. §77c

EXEMPTED SECURITIES

Sec. 3. (a) Except as hereinafter expressly provided

the provisions of this title shall not apply to any of

the following classes of securities:

* * &*

(11) Any security which is a part of any issue

offered and sold only to persons resident within a

single State of Territory, where the issuer of such

security is a person resident and doing business

within, or, if a corporation, incorporated by and

doing business within, such State of Territory.

§5 Securities Act of 1933, 15 U.S.C. §77e

PROHIBITIONS RELATING TO INTERSTATE

COMMERCE AND THE MAILS

Sec. 5. (a) Unless a registration statement is in effect as

to a security, it shall be unlawful for any person, directly

or indirectly —

(1)to make use of any means or instruments of

transportation or communication in interstate commerce

or of the mails to sell such security through the use or

medium of any prospectus or otherwise; or

(2) to carry or cause to be carried through the mails or

in interstate commerce, by any means or instruments of

Appendix D

transportation, any such security for the purpose of sale

or for delivery after sale.

(b) It shall be unlawful for any person, directly or

indirectly—

(1) to make use of any means or instruments of

transportation or communication in interstate commerce

or of the mails to carry or transmit any prospectus

relating to any security with respect to which a regis-

tration statement has been field under this title unless

such prospectus meets the requirements of section 10; or

(2) to carry or cause to be carried through the mails or in

interstate commerce any such security for the purpose of

sale or for delivery after sale, unless accompanied or

preceded by a prospectus that meets the requirements of

sub-section (a) of section 10.

indirectly, to make use of any means or instruments of

transportation or communication in interstate commerce

or of the mails to offer to sell or offer to buy through the

use or medium of any prospectus or otherwise any

security, unless a registration statement has been filed as

to such security, or while the registration statement is the

subject of a refusal order or stop order or (prior to the

effective date of the registration statement) any public

proceeding or examination under section 8.

Appendix D

§12 Securities Act of 1933, 15 U.S.C. §771

CIVIL LIABILITIES ARISING IN CONNECTION

WITH PROSPECTUSES AND COMMUNICATIONS

Sec. 12. Any person who—

(1) offers or sells a security in violation of section 5,

(2) offers or sells a security (whether or not

exempted by the provisions of section 3, other than

paragraph (2) of subsection (a) thereof), by the use of

any means or instruments of transportation of

communication in interstate commerce or of the

mails, by means of a prospectus or oral communica-

tion, which includes an untrue statement of a

material fact or omits to state a material fact

necessary in order to make the statements in the

light of the circumstances under which they were

made, not misleading (the purchaser not knowing of

such untruth or omission), and who shall not sustain

the burden of proof that he did not know, and in the

exercise of reas«nable care could not have known, of

~ such untruth or omission

shall be liable to the person purchasing such security

from him, who, may sue either at law or in equity in any

court of competent jurisdiction, to recover the considera-

tion paid for such security with interest thereon, less the

amount of any income received thereon, upon the tender

of such security, or for damages if he no longer owns the

security.

Appendix D

§15 Securities Act of 1933, 15 U.S.C. §770

LIABILITIES OF CONTROLLING PERSONS

Sec. 15. Every person who, by or through stock

ownership, agency, or otherwise, or who pursuant to

or in connection with an agreement or understand-

ing with one or more other persons by or through

stock ownership, agency, or otherwise, controls any

person liable under section 11 or 12, shall also be

liable jointly and severally with and to the same

extent as such controlled person to any person to

whom such controlled person is liable, unless the

controlling person had no knowledge of or reason-

able grounds to believe in the existence of the facts

by reason of which the liability of the controlled

person is alleged to exist.

§17 Securities Act of 1933, 15 U.S.C.§77q

FRAUDULENT INTERSTATE TRANSACTIONS

Sec. 17. (a) It shall be unlawful for any person in

the offer or sale of sany securities by the use of any means

or instruments of transportration or communication in

interstate commerce or by the use of the mails, directly or

indirectly -

(1) to employ any device, scheme, or artifice to

defraud, or

(2) to obtain money or property by means of any

untrue statement of a material fact or any omission to

state a material fact necessary in order to make the

statements made, in the light of the circumstances under

which they were made, not misleading, or

Appendix D

(3) to engage in any transaction, practice, or course

of business which operates or would operate as a fraud or

deceit upon the purchaser.

(b) It shall be unlawful for any person, by the use of

any means or instruments of transportation or communi-

cation in interstate commerce or by the use of the mails,

to publish, give publicity to, or circulate any notice,

circular, advertisement, newspaper, articie, letter, in-

vestment service, or communication which, though not

purporting to offer a security for sale, describes such

security for a consideration received or to be received,

directly or indirectly, from an issuer, underwriter, or

dealer, without fully disclosing the receipt, whether past

or prospective, of such consideration and the amount

thereof.

apply to the provisions of this section.

§22(a) Securities Act of 1933, 15 U.S.C. §77u(a)

JURISDICTION OF OFFENSES AND SUITS

Sec. 22. (a) The district courts of the United

States, the United States courts of any Territory,

and the United States District Court for the District

of Columbia shall have jurisdiction of offenses and

violations under this title and under the rules and

regulations promulgated by the Commission in

respect thereto, and, concurrent with State and

Territorial courts, of all suits in equity and actions

at law brought to enforce any liability or duty created

by this title. Any such suit or action may be brought

in the district wherein the defendant is found or is an

Appendix D

inhabitant or transacts business, or in the district

where the offer or sale took place, if the defendant

participated therein, and process in such cases may

be served in any other district of which the defendant

is an inhabitant or wherever the defendant may be

found. Judgments and decrees so rendered shall be

subject to review as provided in section 128 and 240

of the Judicial Code, as amended (U:S.C., title 28, secs.

225 and 347). No case arising under this title and

brought in any State court of competent jurisdiction shall

be removed to any court of the United States. No costs

shall be assessed for or against the Commission in any

proceeding under this title brought by or against it in

the Supreme Court or such other courts.

§24 Securities Act of 1933, 15 U.S.C. §77x

PENALTIES

Sec. 24. Any person who willfully violates any of the

provisions of this title, or the rules and regulations

promulgated by the Commission under authority thereof,

or any person who willfully, in a registration statement

filed under this title, makes any untrue statement of a

material fact or omits to state any material fact required

to be stated therein or necessary to make the statements

therein not misleading, shall upon conviction be fined

not more than $5,000 or imprisoned not more than five

years, or both.

Appendix D

§26 Securities Act of 1933, 15 U.S.C. §77z

SEPARABILITY OF PROVISIONS

Sec. 26. If any provision of this Act, or the application

of such provision to any person or circumstance, shall be

held invalid, the remainder of this Act, or the application

of such provision to persons or circumstances other than

those as tu which it is held invalid, shall not be affected

thereby.

§3(a) Securities Exchange Act of 1934, 15 U.S.C. §78c(a)

DEFINITIONS AND APPLICATION OF TITLE

Sec. 3. (a) When used in this title, unless the

context otherwise requires—

” * +

(8) The term “issuer” means any person who issues or

proposes to issue any security; except that with respect to

certificates of deposit for securities, voting-trust certifi-

cates, or collateral-trust certificates, or with respect to

certificates of interest or shares in any unincorporated

investment trust not having a board of directors or of the

fixed, restricted management, or unit type, the term

“issuer” means the person or persons performing the acts

and assuming the duties of the depositor or manager

pursuant to the provisions of the trust or other agreement

or instrument under which such securities are issued; and

except that with respect to equipment-trust

* * *

(10) The term ‘“‘security’’ means any note, stock,

treasury stock, bond, debenture, certificate of interest or

D10

Appendix D

participation in any profit-sharing agreement or in any

oil, gas, or other mineral royalty or lease, any collateral-

trust certificate, preorganization certificate or subscrip-

tion, transferable share, investment contract, yoting-

trust certificate, certificate of deposit, for a security, 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 exhange, or banker’s acceptance which has a

maturity at the time of issuance of not exceeding nine

months, exlusive of days of grace, or any renewal thereof

months, exclusive of days of grace, or any rénewal

thereof the maturity of which is likewise limited.

* * *

(13) The terms “buy” and “purchase” each include any

contract to buy, purchase, or otherwise acquire.

§10(b) Securities Exchange Act of 1934, 15 U.S.C. §78j(b)

REGULATION OF THE USE OF MANIPULATIVE

AND DECEPTIVE DEVICES

Sec. 10. It shall be unlawful for any person, directly or

indirectly, by the use of any means 6r instrumentality of

interstate commerce or of the mails, or of any facility of

any national securities exchange—.

* & &

Dil

Appendix D

(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, 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.

$15 Securities Exchange Act of 1934, 15 U.S.C. §780

OVER-THE-COUNTER-MARKETS

Sec. 15. (a)(1) No broker or dealer (other than one whose

business is exclusively intrastate) shall make use of the

mails or of any means or instrumentality of interstate

commerce to effect any transaction in, or to induce the

purchase or sale of, any security (other than an exempted

security or commercial paper, bankers’ acceptances, or

commercial bills) otherwise than on a national securities

exchange, unless such broker or dealer is registered in

accordance with subsection (b) of this section.

(2) The Commission may by such rules and regulations

or orders as it deems necessary or appropriate in the

public interest or for the protection of investors, either

unconditionally or upon specified terms and conditions

or for specified periods, excinpt from paragraph (1) of this

subsection any broker or dealer or class of brokers or

dealers specified in such rules, regulations, or orders.

D12

Appendix D

§20 Securities Exchange Act of 1934, 15 U.S.C. §78t

LIABILITIES OF CONTROLLING PERSONS

Sec. 2 (a) Every person who, directly or indirectly,

controls any person liable under any provision of this

title or of any rule or regulation thereunder shall also be

liable jointly and severally with and to the same extent as

such contlled person to any person to whom such

controlled person is liable, unless the controlling person

acted in good faith and did not directly indirectly

induce the act or acts constituting the violation or cause

of action.

(b) It shall be unlawful for any person, directly or

indirectly, to do any act or thing which it would be

unlawful for such person to do under the provisions of

this title or any rule or regulation thereunder through or

by means of any other person.

any owner of eny securities issued by, any issuer required

to file any document, report, or information under this

title or any rule or regulation thereunder without just

cause to hinder, delay, or obstruct the making or oling of

any such document, report, or information.

§27 Securities Exchange Act of 1934, 15 U.S.C. §78aa

JURISDICTION OF OFFENSES AND SUITS

Sec. 27. The district courts of the United States, the

United States District Court for the District of Columbia,

and the United States courts of any Territory or other

place subject to the jurisdiction of the United States shall

D13

Appendix D

have exclusive jurisdiction of violations of this title or the

rules and regulations thereunder, and of all suits in

equity and actions at law brought to enforce any liability

or duty created by this title or the rules and regulations

thereunder. Any criminal proceeding may be brought in

the district wherein any act or transaction constituting

the violation occurred. Any suit or action to enforce any

liability or duty created by this title or rules and

regulations thereunder, or to enjoin any violation of such

title or rules and regulations, may be brought in any such

district or in the district wherein the defendant is found

or is an inhabitant or transacts business, and process in

such cases may be served in any other district of which

the defendant is an inhabitant or wherever the defendant

may be found. Judgments and decrees so rendered shall

be subject to review as provided in sections 128 and 240 of

the Judicial Code, as amended (U.S.C.., title 28, secs. 225

and 347). No costs shall be assessed for or against the

Commission in any proceeding under this title brought

by or against it in the Supreme Court or such other courts.

§29/b) Securities Exchange Act of 1934, 15 U.S.C. §78cc(b)

VALIDITY OF CONTRACTS

ss. ¢ #

(b) Every contract made in violation of any provision

of this title or of any rule or regulation thereunder, and

every contract (including any contract for listing a

security on an exchange) heretofore or hereafter made

the performance of which involves the violation of, or the

continuance of any relationship or practice in violation

of, any provision of this title or any rule or regulation

thereunder, shal! be void (1) as regards the rights of any

person who, in violation of any such provision, rule, or

D14

Appendix D

regulation, shall have made or engaged in the performance

of any such contract, and (2) as regards the rights of any

person who, not being a party to such contract, shall have

acquired any right thereunder with actual knowledge of

the facts by reason of which the making or performance

of such contract was in violation of any such provision,

rule, or regulation: Provided, (A) that no contract shall

be void by reason of this subsection because of any

violation of any rule or regulation prescribed pursuant to

paragraph (2) or (3) of subsection (c) of section 15 of thia

title, and (B) that no contract shall be deemed to be void

by reason of this subsection in any action maintained in

reliance upon this subsection, by any person to or for

whom any broker or dealer sells, or from or for whom any

broker or dealer purchases, a security in violation of any

rule or regulation prescribed pursuant to paragraph (1)

of subsection (c) of section 15 of this title, unless such

action is brought within one year after the discovery that

such sale or purchase involves such violation and within

three years after such violation.

§33 Securities Exchange Act of 1934, 15 U.S.C. §78gg

SEPARABILITY OF PROVISIONS

Sec. 33. If any provision of this act, or the application of

such provision to any person or circumstances, shall be

held invalid, the remainder of the act, and the application

of such provision to persons or circumstances other than

those as to which it isleld invalid, shall not be affected

those as to which it is held invalid, shall not be

affected thereby.

D15

Appendix D

New York General Business Law, §352-e

§352-e. Real estate syndication offerings

1. (a) It shall be illegal and prohibited for any person,

partnership, corporation, company, trust or association,

or any agent or employee thereof, to make or take part in

a public offering or sale in or trom the state of New York

of securities constituted of participatio interests or

investments in real estate, mortgages or leases, including

stocks, bonds, debentures, evidences of interest or

indebtedness, limited partnership interests or other

security or securities as defined in section three hundred

fifty-two of this article, when such securities consist

primarily of participation interests or investments in one

or more real estate ventures, including cooperative

interests in realty, unless and until there shall have been

filedith the department of law, prior to such offering, a

written statement or statements, to be known as an

“offering statement” or “prospectus” concerning the

contemplated offering which shall contain the informa-

tion and representations required by paragraph (b) of

this subdivision unless the security offering is exempted

hereunder or under section three hundred fifty-nine-f,

subdivision two, of this article by rule or action of the

attorney general. The term “real estate” as used in the

paragraph shall not include mineral, oil or timber leases

or properties, or buildings, structures, land or other realty

housing or containing business offices or industry,

owned or leased by the issuer, where the issuer is not

primarily engaged in the business of buying and selling

such building or other realty or leases or interests therein.

The circulation or dissemination of a non-firm offer

(including circulation or dissemination of a preliminary

D16

Appendix D

prospectus pursuant to section ten (b) of the securities act

of nineteen hundred thirty-three, and the rules thereto

appertaing) shall not constitute making or taking part in

a public offering within the meaning of this section.

(b) The detailed terms of the transaction; a description

of the property, the nature of the interest, and how title

thereto is to be held; the gross and net income for a

reasonable period preceding the offering where appli-

cable and available; the basis, rate and method of

computing depreciation; a description of major current

leases; the essential terms of all mortgages; the names,

addresses and business background of the principals

involved, the nature of their fiduciary relationship and

their financial relationship, past, present and future,

to the property offered to the syndicate and to those who

are to participate in its management; the interests and

profits of the promoters, offerors, syndicate organizers,

officers, directors, trustees or general partners, direct and

indirect, in the promotion and management of the

venture; all restrictions, if any, on transfer of partici-

pants’ interests; a statement as to what stock or other

security involved in the transaction, if any, is non-voting;

a statement as to what disposition will be made of the

funds received and of the transaction if not consum-

mated, which statement shall represent that all moneys

received from the sale of such securities until actually

employed in connection with the consummation of the

transaction as therein described, shall be kept in trust

and that in the event insufficient funds are raised

throug’: the offering or otherwise to effectuate the

purchase or purchases or other consummation of the

contemplated transaction, or that the intended acquisi-

D17

Appendix D

tion shall not be completed for any other reason or rea-

sons, then such moneys, less such amounts actually em-

ployed in connection with the consummation of the

trasaction, shall be fully returned to the investor; which

of the securities offered are unsecured; clearly distin-

guish between leasehold and fee ownership, between fact

and opinion; a commitment to cubmit annual reports to

all participants, including an annual balance sheet and

profit and loss statement certified by an independent

certified public accountant; clearly distinguish between

those portions of promised distributions which are

income and those which are a return of principal or

capital; and such additional information as the attorney

general may prescribe in rules and regulations promul-

gated under subdivision six hereof as will afford

potential investors, purchasers and participants an

adequate basis upon which to found their judgment and

shall not omit any material fact or contain any untrue

statement of a material fact.

New York Business Corporation Law §5l0

§510. Dividends or other distributions in cash

or property

(a) A corporation may declare and pay dividends or

make other distributions in cash or its bonds or its pro-

perty, including the shares or bonds of other corpora-

tions, on its outstanding shares, except when currently

the corporation is insolvent or would thereby be made

insolvent, or when the declaration, payment or distri-

bution would be contrary to any restrictions contained

in the certificate of incorporation.

D18

Appendix D

(b) Dividends may be declared or paid and other distri-

butions may be made out of surplus only, so that the net

assets of the corporation remaining after such declara-

tion, payment or distribution shall at least equal the

amount of its stated capital; except that a corporation

engaged in the exploitation of natural resources or other

wasting assets, including patents, or formed primarily

for the liquidation of specific assets, may declare and

pay dividends or make other distributions in excess of

its surplus, computed after taking due account of deple-

tion and amortization to the extent that the cost of the

wasting or specific assets has been recovered by deple-

tion reserves, amortization or sale, if the net assets

remaining after such dividends or distributions are suffi-

cient to cover the liquidation preferences of shares hav-

ing such preferences in involuntary liquidation.

D19

Appendix D

The Rules and Regulations involved in this case are

Rule 235, General Rules and Regulations Under the

Securities Act of 1933, 17 C.F.R. 230.235; Rules 10b-5

and 15a-2, General Rules and Regulations Under the

Securities Exchange Act of 1934, 17 C.F.R. §§240.10b-5,

240.15a-2; New York City Rent Control Regulations §55;

New York City Rent Stabilization Code, §61; and Rule

54 (b) and (c) Federal Rules of Civil Procedure which pro-

vide, in pertinent part, as follows:

Rule 235, General Rules and Regulations Under the

Securities Act of 1933, 17 C.F.R. 230.235

Rule 235. Exemption of Securities of

Cooperative Housing Corporations

(a) Stock or other securities representing member-

ship in any cooperative housing corporation shall be

exempt from registration under the Act if the terms and

conditions of this rule are met. The term “cooperative

housing corporation” as used herein means a corporation

each of whose members is entitled, solely by reason of

his membership in such corporation-

(1) to occupy for dwelling purposes a house, or an

apartment in a building, owned or leased or to be

owned or leased, by such corporation; or

(2) to purchase a dwelling constructed or to be

constructed by such corporation.

(b) Such corporation shall not be or intend to be

engaged in any business or activity other than the own-

ership, leasing, management or construction of residen-

D20

Appendix D

tial properties for its members, except to the extent

that such business or activity is incidental to the own-

ership, leasing, management or construction of such

residential properties.

with the sale or lease of dwelling units to persons who are

or thereupon become members of the corporation and

shall be transferable by the purchasers only in connec-

tion with the transfer of such dwelling units or leases

to other persons who are or thereupon become such

members.

(d) The aggregate offering price of all securities of the

corporation offered pursuant to this rule during any

twelve-month period shall not exceed $300,000, including

any unsold securities initally offered prior to the

beginning of such period.

(e) The aggregate offering price of securities offered

pursuant to this rule shall be computed upon the basis

of the price at which the securities are to be sold to mem-

bers or, if such price is not separately specified, upon the

basis of the par or stated value of the securities to be

offered.

D21

Appendix D

Rule 10b-5, General Rules and Regulations Under

Securities Exchange Act of 1934, 17 C.F.R. 240.106-5

Rule 10b-5. Employment of Manipulative and

Deceptive Devices

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 faci-

lity of any national securities exchange,

(1) to employ any device, scheme, or artifice to

defraud,

(2) 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 the light of the circum-

stances under which they were made, not misleading, or

(3) 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.

Rule 15a-2, General Rules and Regulations Under the

Securities Exchange Act of 1934, 17 C.F.R. §240.15a-2

Rule l5a-2. Exemption of Certain Securities of

Cooperative Apartment Houses From Section 15(a)

Shares of a corporation which represents ownership,

or entitle the holders thereof to possession and occu-

pancy, of specific apartment units in property owned by

such corporations and organized and operated on a coop-

erative basis are hereby exempted from the operation of

D22

Appendix D

section 15(a) of the Act, when such shares are sold by

or through a real estate broker licensed under the laws

of the political subdivision in which the property is

located. .

New York City Rent Control Regulations, §55

Applicable Provisions of Section 55. Occupancy by

Landlord or immediate family.

a. A certificate shall be issued where the landlord seeks

in good faith to recover possession of a housing accom-

modation because of immediate and compelling neces-

sity for his own personal use and occupancy, or for the

use and occupancy of his immediate family; provided,

however, that (1) where the housing accommodation is

located in a building containing twelve or less housing

accommodations and the landlord does not reside in the

building, or (2) is a housing accommodation located in a

structure or premises owned by a cooperative corporation

or association which is allocated to an individual

proprietary lessee and the landlord does not reside in the

building, or (3) is a housing accommodation or unit ina

property submitted to the provisions of the Condomin-

ium Act and the landlord does not reside in the building

and the landlord seeks in good faith to recover possession

for his own personal use and occupancy, an immediate

and compelling necessity need not be established. As

used in this paragraph, the term “immediate family”

includes only a son, daughter, stepson, stepdaughter,

father, mother, father-in-law, or mother-in-law.

* * *

c. (1) In the case of a housing accommodation in a

structure or permises owned by a cooperative corporation

or association, a certificate shall be issued by the

Administrator to a purchaser of stock where (a) the

tenant originally obteined possession of the housing

accommodation by virtve of a rental agreement with the

D23

Appendix D

tenant-owner; or (b) the stock was acquired by the

purchaser prior to July 1, 1955 and more than two years

prior to the date of filing of the application; or (c) the stock

was acquired by the purchaser on or after July 1, 1955 and

more than two years have expired since the date of filing

of the notice of sale with the Local Rent Office or the

District Rent and Rehabilitation Office, as hereafter

provided in paragraph c(3)(e) of this section; or (d) the

stock was acquired less than two years prior to the date of

filing of the application and on that date stock in the

cooperative has been purchased by persons who are

tenant-owners of at least 80 percent of the housing

accommodations in the structure or premises and are

entitled by reason of stock ownership to proprietary

leases of housing accommodations in the structure or

premises; or (e) the cooperative was organized and

acquired its title or leasehold interest in the structure or

premises before February 17, 1945 and on that date stock

in the cooperative allocated to 50 percent or more of the

housing accommodations in the structure or premises

was held by individual tenant-owners, who are or whose

assignees or sub-tenants are in occupancy of such

housing accommodations in the structure or premises at

the date of the filing of the application.

(2) No certificate of eviction shall be issued under

paragraph c(1) of this Section, unless the applicant shall

establish that he has complied with the requirements of

paragraphs a and d of this section; provided, however, that

where the applicant seeks to recover possession for his

own personal use, he need not establish an immediate

and compelling necessity.

(3) No certificate of eviction shall be issued under

paragraph e(1) of this section, except as provided in

paragraph (c)4 thereof, unless the applicant shall also

establish that the cooperative corporation or association

was complied with the following requirements:

(a) On the date the cooperative plan was first

presented to the tenants, each tenant in occupancy

of a controlled housing accommodation in the

D24

Appendix D

premises was furnished with a copy of the plan and

notifiedin writing that he had the exclusive right for

a period of 60 days to purchase the stock allocated to

his housing accommodation at the specified price,

and that the plan would not be declared effective,

unless on or before December 31, 1955 or within 6

months from the time the cooperative plan was

presented to such tenants, whichever date is later,

stock in the cooperative had been sold in good faith

without fraud or duress, and with no discriminatory

repurchase agreement or other discriminatory

inducement, to at least 35 percent of the tenants in

occupancy of controlled housing accommodation at

the time of the presentation of the plan. Housing

accommodations vacant on the date the plan is

presented, or subsequently vacated, shall not be

included in the computation of the 35 percent

requirement, except when the vacant housing

accommodation is purchased for personal occu-

pancy by a tenant of a controlled housing accom-

modation.

(b) Subsequent to the date the cooperative plan

had been declared effective, the tenants of controlled

housing accommodations had been served with a

written notice that the plan had been declared

effective, setting forth the terms of sale and the

names of the tenants of the controlled housing

accommodations who had purchased the stock

allocated to their own housing accommodations or

to vacant housing accommodations and the names

and addresses of other purchasers of vacant housing

accommodations; and that the tenants of controlled

housing accommodations who had not as yet

purchased still had the exclusive right for a period of

30 days from the date of service of the notice, to

purchase the stock allocated to their housing

accommodations on the terms previously offered to

the tenants; except where (1) the cooperative plan

had been declared effective prior to July 1, 1955, and

(2) prior to that date the tenant of a controlled

D25

Appendix D

housing accommodation in the premises had re-

ceived written notice or notices that for a period of

not less than 30 days he had the right to purchase

the stock allocated to his housing accommodations

at the price and terms specified in said plan, and (3)

on July 1, 1955 such stock was held or was thereafter

reacquired by the cooperative or by a sponsor,

nominee of the cooperative or by any other person

associated with the formulation of the plan, and (4)

such stock was offered after July 1, 1955 for sale for

personal occupancy at the same or different terms

than previously offered to the tenant of such

controlled housing accommodation, the latter was

given a written notice of the offer to sell and the right

for a period of 30 days to purchase the stock on the

terms specified in such offer.

notice provided by paragraph c(3)(b) of this section,

the cooperative has filed with the Local Rent Office

or District Rent and Rehabilitation Office having

jurisdiction at the time, either under the State Rent

or under these Regulations as the case may be, a

copy of the cooperative plan; a copy of the first notice

served upon all tenants of controlled housing

accommodations; a copy of the notice required by

paragraph c(3)(b) of this section, and a statement,

duly verified by an officer of the cooperative and

where the sale was made on or after July 1, 1955, a

statement duly verified by each purchaser, that the

sales had been made in good faith pursuant to the

terms set forth in the cooperative plan without fraud

or duress an:' with no discriminatory repurchase

agreement or other discriminatory inducement or

whether for personal occupany by the purchaser. A

duplicate set of the above specified papers shall also

be kept available in the building for inspection by

any tenant of controlled housing accommodations

or his authorized representative.

(d) In the event that the stock allocated to a

controlled housing accommodation shall be offered

D26

Appendix D

by the cooperative, it sponsor, nominees or

—— etn Ae prone ee with the formulationof the

plan, to a purchaser in good faith for his personal

occupancy at terms more favorable than those

previously offered to the tenant of such controlled

housing accommodation, the latter must first be

given a written notice of the new terms and 15 days

within which to elect to purchase stock at such new

terms.

ithin 10 days after any sale or resale of stock

BD tn to the effective date of the plan, all

tenants who had not yet purchased had been served

with written notice by the cooperative setting forth

the names and addresses of each of the purchasers,

the designation of the housing accommodations,

and in those cases where the stock had been sold ~

personal occupancy of the purchaser, the terms o

the sales. Copies of these notices, together with

proof of service upon each such tenant, must be filed

with such Local Rent Office or District Rent and

Rehabilitation Office, as the case may be, within 5

days of the date of service. Copies of these —

shall also be kept available in the building for

inspection.

the cooperative plan was declared effective

- pay * 1, 1955, the Administrator shall aw A a

certificate of eviction to a purchaser who acquired the

stock prior to July 1, 1955, if he finds that the on gree

ments of the former Section 55(3) of the State Rent an

Eviction Regulations, as in effect immediately ee =

July 1, 1955, have been met and that the purchaser a

served the tenant of the controlled

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