Opposition Brief — Kahn v. Kohlberg, Kravis, Roberts & Co.

| =P ES MME SG 6s We

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No. 92-553 | QT <7? 3992

IN THE

Supreme Court of the United Staten

OCTOBER TERM, 1992

PHYLLIS KAHN and STEVEN G. THORNE,

Petitioners,

Ve

KOHLBERG, KRAVIS, ROBERTS & Co., a New York Limited

Partnership, KKR ASSOCIATES, a New York Limited

Partnership, and WHITEHALL ASSOCIATES, L.P., a

Delaware Limited Partnership,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

RESPONDENTS’ BRIEF IN OPPOSITION

FREDRIC J. ZEPP

Counsel of Record

LOUISE M. ZEITZEW

NANCY E. MCDERMOTT

LATHAM & WATKINS

885 Third Avenue

Suite 1000

New York, New York 10022

(212) 906-1200

Counsel for Respondents

WILSON - Epxe Printing Co., Inc. - 789-0086 - WASHINGTON, D.C. 20001

» of the Inv:

of 1940?

QUESTIONS PRESENTED

| ] — 7 if —

f Court oelow property pDpied a initorm

rs m tat ns period TO Tne mm ylied private rigant

. €4a : a ‘ ‘ ad AAA’ Ait 4 - y< * = & |

; . ~ . ,

ion under Nect} n 215 of

Stment Advisers

: ; } = . 1 4hanéd +h,

{ CO ) f ronerty (i¢ ermine Nal ne

: . ™ . ] + + | + +

NuIng’ wrone €0) GQiad not preven ne statute

tions ‘on irvine’ Petitinna mM unde}

P i } | 1 a | 4 i iti) t Ye \ i Cit

91-7 ’ : )

nN 215 of le Investme? \dvisers Act tr 1940

(i)

RULE 29.1 LIST

Pursuant to Rule 29.1 of the Supreme Court Rules, the

corporate parents, subsidiaries (other than wholly-owned

subsidiaries )

and affiliates of Respondents Kohlberg _

Kravis Roberts & Co., KKR Associates and Whitehall

Associates, L.P. are as follows:

KKR PORTFOLIO COMPANIES

American Re Corporation

Auto Zone, Inc.

Duracell International

Inc.

First Interstate Bancorp

Fleet/Norstar Financial

Group

Fred Meyer, Inc.

Homes Holding

Corporation

Idex Corporation

K-III Communications

Corporation

Layne, Inc.

Owens-Illinois, Inc.

Owens-Illinois, Group,

Inc.

Red Lion Properties, Inc.

RJR Nabisco Holdings Corp.

RJR Nabisco Holdings

Group, Inc.

RJR Nabisco, Inc.

Safeway, Inc.

Seaman Furniture Co., Inc.

The Stop-N-Shop Companies,

Ine.

TW Services, Inc.

Union Texas Petroleum

Holdings, Inc.

Walter Industries, Inc.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED i

RULE 29.1 LIST .. ies ii

TABLE OF AUTHORITIES . iv

STATEMENT OF THE CASE l

ARGUMENT . 4

I. NO CONFLICT EXISTS BETWEEN THE

COURT OF APPEALS’ DECISION REGARD-

ING THE APPLICABLE STATUTE OF LIMI-

TATIONS AND THE DECISIONS OF THIS

COURT OR ANY OTHER COURT 1

A. The Second Circuit Is The First And Only

Appellate Court To Determine The Limita-

tions Period Applicable To The Implied Pri-

vate Cause Of Action Under Section 215 Of

The [IAA

B. The Second Circuit’s Decision Was Com-

pletely Consistent With The Standard Artic-

ulated By This Court In Lampf

Il. THE DECISION OF THE COURT OF AP-

PEALS NOT TO APPLY A CONTINUING

WRONG THEORY COMPORTS WITH FED-

ERAL LAW 11

[1l. PETITIONERS’ LACK OF STANDING ALSO

WARRANTS A DENIAL OF CERTIORARI 15

or

~

CONCLUSION ... 18

(iii)

iv

TABLE OF AUTHORITIES

CASES Page

Afshar v. Procon Inc., 442 F. Supp. 887 ¢S.D.N.Y

1977), aff’d without op., 580 F.2d 1044 (2d Cir.

i) + ) eee et Oe AR hed recep Ree 12

Agency Holding Corp. v. Malley-Duff & Asso-

ciates, Inc., 483 U.S. 143, 107 S. Ct. 2759

(1967) ............... FOL UPA ae Sk A A Ue naan 7,8

Arneil v. Ramsey, 550 F.2d 774 (2d Cir. 1977) 12

Association of Data Processing Service Organiza-

tions, Inc. v. Camp, Inc., 397 U.S. 150, 90 S. Ct.

a , Rr eae eit Ree eee _ 16,17

Baker v. Carr, 369 U.S. 186, 82 S. Ct. 691 (1962) .. 16

Braxton v. United States, 111 S. Ct. 1854 (1991) . 4

Brown v. Producers Livestock Loan Co., 469 F.

Supp. 27 (D. Utah 1978) . = 6

DelCostello v. International Brotherhood of Tea am-

sters, 462 U.S. 151, 103 S. Ct. 2281 (1983) ___. 7,11

Derby v. Perschke, No. 88-C3835, 1990 U.S. Dist.

Lexis 15052 (N.D. fll. Nov. 8, 1990) . 6

Flast v. Cohen, 392 U.S. 83, 88 S. Ct. 1942 (1968) . 16

Freschi v. Grand Coal Venture, 551 F. Supp. 1220

(S.D.N.Y. 1982) .......... <cgedici times aaa 14

Gross v. Diversified Mortgage Investors, 431 F.

Supp. 1080 (S.D.N.Y. 1977), aff’d without op.,

636 F.2d 1201 (2d Cir. 1980) “. 16

Helman v. Murry’s Steaks, Inc., 742 F. Supp. 860,

reh’g denied, 743 F. Supp. 289 (D. Del. 1990) 14

Holloway v. Combined Equities, Inc., 628 F. Supp.

59 (M.D. La. 1986) .......... Ee aeeR AL erates 14

Ingenito v. Bermec Corp., 876 F. Supp. 1154

(S.D.N.Y. 1974) . Les 14

In re Taxable Municipal Bond Securities Litiga-

tion, [Current] Fed. Sec. L. Rep. (CCH)

T Wee Simi k. BM BOR) qn gece ccccscceseccececcaces 6

Intre Sport, Ltd. v. Kidder, Peabody & Co., 625

F. Supp. 1303 (S.D.N.Y. 1985), aff'd without

op., 795 F.2d 1004 (2d Cir. 1986), vacated on

other grounds, 482 U.S. 922, 107 S. Ct. 3203

ET rina isin ccnp utecencoeeeie TILE talento eareebgl tee cae 15

Vv

TABLE OF AUTHORITIES

K vy. Mi 1, 403 F. Supp. 377 (S.D.N.Y.

ati’d witl F.2d 310 (2d Cir.

S. Ct. 27 (1991) passin

Ly 1 Wiper Supplu Co. v. Helen Shop, Inc., 235

F. Supp. 640 (S.D.N.Y. 1964) 12

Vaqna Associates v. Torqrove, 585 F. Supp. 585

(D. Colo. 1984) 12

VUeCullough v. Leede Oil & Gas, Inc., 617 F. Supp.

384 (W.D. Okla. 1985) 10

VWouller »v. M.D. Sass Associates, Inc., No. 91-3762,

1992 U.S. Dist. Lexis 5736 (D.N.J. April 22,

1992) 6

Viel ». Professional Financial Management.

Ltd., 682 F. Supp. 429 (D. Minn. 1987) 14

Paul S. Mullin & Associates, Inc. v. Bassett, 632

F. Supp. 532 (D. Del. 1986) 16

Perse v. New York Post Corp., 427 F. Supp.

1297 (E.D.N.Y.), aff'd without op., 573 F.2d

1294 (2d Cir. 1977) 16

Philli ». Levie, 593 F.2d 459 (2d Cir. 1979) 12

Reed v. United Transportation Union, 488 U.S.

319, 109 S. Ct. 621 (1989) 7

Reid v. Walsh, 645 F. Supp. 685 (M.D. La. 1986) 14

RP ”) Vanagqement Corn. wv. Anchor Daily In-

come Fund, Inc., 459 F. Supp. 597 (S.D.N.Y.

1978) 1¢

Royal Air Properties, Inc. v. Smith, 312 F.2d 210

(9th Cir. 1962) 15

SHC ». Capital Gat Research Bureau, Ine.. 375

U.S. 180, 84 8. Ct. 275 (1963) 9

Stewart v. Germany, 631 F. Supp. 236 (S.D. Miss

144 U.S. 11, 100 S. Ct. 242 (1979) 5,10, 12

Ty ited State : } T rad) lea i] Traacle is, R46 F.2d

97 (5th Cir.), cert. denied, 488 U.S. 9438, 109

S. Ct. 869 (1988) 10

vi

TABLE OF AUTHORITIES

Page

Wilson v. Garcia, 471 U.S. 261, 105 S. Ct. 1938

f > SER Rea NRA canoe ee Reet eee REE. Rare Se 7,8

STATUTES AND RULES

15 U.S.C. § 77m (1981) ... Sake eee ee es 10

15 U.S.C. § 78ce (b) (1981 & Supp. 1992) 10

15 U.S.C. § 80a-35 (1981) 2.0002... 5

15 U.S.C. § 80b-2 (a) (11) (1981) | 3

15 U.S.C. § 80b-3 (1981 & Supp. 1992) 3

15 U.S.C. § 80b-3 (b) (3) (1981) _...... 3

15 U.S.C. § S 80b-5 (1981 & Supp. 1992) 3

15 U.S.C. § 80b-6 (1981) ........................ SP enone 3

15 U.S.C. § 80b-14 (1981 & Supp. 1992) . 6,8

15 U.S.C. § 80b-15 (1981) ee eer oo

Investment Advisers Act of 1940, 15 U.S.C.

§$§ 80b-1-80b-21 (1981 & Supp. 1992) ........... 1

Minn. Const. art. II],$1.. . bean 17

Minn. Const. art. XI, § 8 _.......... — 17

Minn. Stat. § 8.06 (1990) Ire 17

Minn. Stat. . LIAS (1000) ..... 17

N.Y. Civ. “a L. & R. § 213.1 (McKinney 1990). 10

Securities Act of 1933, 15 U.S.C. 8$§ 77a-77aa

(1981 & Supp. 1992) .. 7 5

Securities Exchange Act of 1934, 15 US. C. S$ 78a-

78kk (1981 & Supp. 1992) .........000000 0. 5

IN THE

Supreme Court of the United States

OCTOBER TERM, 1992

LIS KAHN and STEVEN G. THORNE,

Pe titione rs,

BERG, KRAVIS, ROBERTS & Co., a New York Limited

rship, KKR ASSOCIATES, a New York Limited

ni and WHITEHALL ASSOCIATES, L.P., a

R. spond nts.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

RESPONDENTS’ BRIEF IN OPPOSITION

len ero Kravis Roberts & Co. (“KKR”

\ ‘ii and Whitehall Associates, L.P.., respect-

Court deny the Petition for a

yf Certiorar eking review of the judgment of

inited Stat Court of Appeals for the Second Circuit

ase entered on June 30, 1992, and reported at

i

Rep CCH) 996,889 (2d Cir.

STATEMENT OF THE CASE

ction purportedly arises under the Investment

isers Act of 1940 ‘the “TAA”).’ The business of

ind its afhliate KKR Associates is entrepreneurial

U.S.C. $$ 80b-1 through 80b-21 (1981 & Sup}

9

p. 1992

2

merchant banking. KKR organizes “funds,” contractual

commitments to provide co-investment capital for the

acquisition of operating companies. (See JA-160-161)

After having participated in the 1984 and 1986 “Funds”

(JA-25; JA-304),7 on October 2, 1987, the Minnesota

State Investment Board (the “Board’”) renewed its com-

mitment to KKR and agreed to provide, on call, approxi-

mately $146,000,000 of Minnesota State pension fund

moneys to the 1987 Fund (the “Commitment Agree-

ment”). (JA-226, 7 9)

In August of 1991, Petitioners, who are strangers to

the Commitment Agreement, brought this action, purport-

edly on behalf of the Board, against KKR and KKR

Associates * to rescind the Commitment Agreement be-

tween the Board and KKR.* (JA-17) As maintained by

Petitioners in the Amended Complaint:

participants in the 1987 Fund] by letter agree-

ment, commit to invest for a six year period with

KKR a specified dollar amount by participating in

a fund. Once they enter into these participation

agreements, KKR’s clients are irrevocably bound, ex-

cept under extremely limited circumstances, to pro-

vide funds for investments to be selected in the sole

discretion of KKR....

* Cites to “JA” are references to the Joint Appendix filed with

the Second Circuit in this action.

% Pursuant to the Commitment Agreement, in the Fall of 1988

the 1987 Fund participants became limited partners in Whitehall

Associates, L.P. (“Whitehall”). (JA-226, ©11) Petiitoners also

purported to assert the Board’s alleged derivative right to bring an

IAA claim against KKR and KER Associates on behalf of Whitehall,

to void “the agreement or agreements pursuant to which KKR

Associates acts as Whitchall’s general partner.” (JA-230, © 16)

* Petitioners did not name the Board as a party in the Complaint.

(JA-3) After Respondents moved to dismiss on the grounds, inter

alia, that Petitioners failed to name an indispensable party (Ptn.

A-4), Petitioners amended the Complaint to add the Board as a

defendant. (JA-217)

coat

leva

) i

Lidice]

resc

» veg?

()1 SS (

OupPp

i

7

Il <

ij» |

17]

LrauU

1 4 ° + ,

failed to registe)

rtoqd « ain

S ANSTI! CG d Clalm

iw ST int < ’ nertory anea_ha va! ’ } 9

receipt or periormance-based compensa-

1981 & Supp. 1992)

,

‘ohibited by Section 205 of the IAA. 15

‘ 17 1

and (3) alleged

ict in violation of Section 206 of the

based upon tTallure QO

; ] —y . L— @ r a = . ‘ : ’

dal arrangements regarding compensation

Respondents moved to dismiss the Complaint in its

entirety ter alia, on the grounds that Petitioners

ction was barred by the statute of limitations and by

laches The Board answered the Amended Complaint

Re rT turtne pou qa ou I tl Di ( rt tha 1]

te |] one) evident lac] f standing ld ich the

! ts of Petitioners’ Amended ( laint, the ' 1 be no merit

etit eC} IAA claim in at ! KKR not ! t

I { er” a defined in Section 202 1] I [AA L5

Us. 80b-2(a) (11 198] and, is therefore not governed b

the IAA; and, even if KKR were deemed to be an investment ad

er, it is clearly exempt from registration a uch pursuant to

Section 203(b 3) of the IAA, 15 U.S.C. § 80b-3(b) (3 1981). as

it | had fewer than fifteen “clients” during the twelve month

preceding the Complaint and has never held itself out generally to

the public as an investment adviser and has never acted as thi

n tment adviser to a registered investment company or busines:

leve m t compan Since KKR was not re¢ red to registe1

tnere eno olati mn of Se ction 205 Furth rmore Re | ndents

yinted out to the District Court that KKR fully lisclosed to the

board and all other interested parties prior to any decision on thei:

rt to participate in the 1987 Fund the structure and nature of

feces to be paid to KKR and its affiliates.

4

and also asserted, among other affirmative defenses, that

the Petitioners’ action was barred by the applicable stat-

ute of limitations and by laches. (JA-387, '" 35, 36) The

Board also supported Respondents’ Motion to Dismiss.

The District Court dismissed the actien on the basis

that the statute of limitations barred Petitioners’ IAA

claim. On appeal to the Court of Appeals, the Second

Circuit, relying upon Lampf, Pleva, Lipkind, Prupis &

Petigrow v. Gilbertson, 111 8. Ct. 2773, 2778-79, reh’g

denied, 112 S. Ct. 27 (1991), affirmed the District Court’s

decision to apply a uniform federal limitations period to

Petitioners’ IAA claim, and also found Petitioners’ claim

barred. The Second Circuit also affirmed the District

Court’s decision that the “continuing wrong” theory does

not apply to Petitioners’ IAA claim. Further, as the Sec-

ond Circuit found, the IAA claim is based entirely upon

matters of public record, and was thus discoverable by

both Petitioners and the Board no later than 1988 1989,

several years before the Petitioners filed the Complaint.

(Ptn. A-25-27)

ARGUMENT

I. NO CONFLICT EXISTS BETWEEN THE COURT

OF APPEALS’ DECISION REGARDING THE AP-

PLICABLE STATUTE OF LIMITATIONS AND THE

DECISIONS OF THIS COURT OR ANY OTHER

COURT

Petitioners improperly seek a further review by this

Court without in any way demonstrating the proper in-

vocation of the certiorari jurisdiction of this Court. Pe-

titioners point to no conflict between the decision of the

Second Circuit to apply a uniform federal limitations

period to the implied private cause of action under Sec-

tion 215 of the IAA and the controlling precedents of this

Court or the precedents of any other federal or state

court. See Braxton v. United States, 111 S. Ct. 1854, 1857

(1991). Furthermore, Petitioners do not identify either

a substantial federal question or a significant inequity

that demands redress. Thus, as discussed herein, a grant

of certiorari is unwarranted.

oO

A. The Second Circuit Is The First And Only Appel-

late Court To Determine The Limitations Period

Applicable To The Implied Private Cause Of Action

Under Section 215 Of The IAA

In Transamerica Mortgage Advisers, Inc. v. Lewis, 444

U.S. 11, 24, 100 S. Ct. 242, 249 (1979), this Court held

that Section 215 of the IAA provides a limited private

cause of action to parties to an investment advisers agree-

ment.” This Court was silent in Transamerica regarding

the applicable statute of limitations.

This case presented to the Second Circuit, inter alia,

a simple question regarding the timeliness of this lawsuit.

In finding a uniform federal limitations period applicable

to an implied private cause of action under Section 215

of the IAA, the Second Circuit rendered the first and only

federal appellate court ruling upon the proper limitations

period, Further, the Second Circuit was not required to

determine which of two potentially applicable uniform

federal limitations periods to apply (the one year period

in Section 36(b) of the Investment Company Act of 1940,

15 U.S.C. § 80a-35 (1981) (the “ICA”) or the one year

three year limitations period that predominates in the

Securities Act of 1983, 15 U.S.C. $$ T7a-77aa (1981 &

Supp. 1992) ‘the “1933 Act”) and the Securities Ex-

change Act of 1934, 15 U.S.C. $$ 78a-78kk (1981 & Supp.

1992) (the “1934 Act’)), because the court found that

Petitioners’ four year old purported claim would be

barred under either limitations period.

The District Courts that have addressed the limitations

issue have unanimously reached the same conclusion as

the Second Circuit’s determination that the most appro-

priate limitations period for an IAA claim is a uniform

limitations period borrowed from the federal securities

laws. These District Courts have each adopted a one

® This Court also held that no legal or equitable remedies other

than an action for rescission of the investment advisers contract

(and related remedies) are available. Jd. at 24 n.14, 100 S. Ct. at

249 n.14. a

co

year three year limitations period from the 1933 and

1934 Acts for actions brought under Section 215 of the

IAA. See In re Taxable Mun. Bond See. Litig., |Current |

Fed. Sec. L. Rep. (CCH) 96,834, 93,327 (E.D. La.

1992) (adopting one year from discovery and three year

period of repose from the 1933 and 1934 Acts for IAA

claims based upon failure to register); Muller v. M.D.

Sass Assocs., Inc., No. 91-3762, 1992 U.S. Dist. Lexis

9736, at “31-32 (D.N.J. April 22, 1992) (applying the one

year from discovery and three year repose period made

applicable to Section 10(b) and Rule 10b-5 in Lampf, to

IAA claim premised upon a violation of Section 206):

Derby v. Perschke, No. 88-C3835, 1990 U.S. Dist. Lexis

15052, at *13 (N.D. Ill. Nov. 8, 1990) (Pre- -Lampf deci-

sion finding one year from the alleged violation and three

year repose period in Section 13 of the 1933 Act appro-

priate for IAA actions premised upon violation of the

registration requirements in Section 203): see also Brown

v. Producers Livestock Loan Co.. 469 F. Supp. 27, 33

(D. Utah 1978) (Pre-Transamerica case applying the

same statute of limitations applicable to claims under Sec-

tion 10(b) of the 1934 Act to an implied private right

of action pursuant to Section 206).

Furthermore, no state court has yet had occasion to

rule upon the limitations issue.*? There is thus no conflict

between the Second Circuit’s decision and the decision of

any other court.*

7 Federal and state courts have concurrent jurisdiction under

Section 214 of the IAA. 15 U.S.C. § 80b-14 (1981 & Supp. 1992).

8 Petitioners challenge the application of a “legal” limitations

period to statutory IAA claims in the first instance, asserting that

only equitable bars to relief should apply. (Petition for a Writ of

Certiorari (“Ptn.”) 33-35) As Respondents explained in their Mo-

tion to Dismiss, Petitioners’ claims, based entirely upon matters of

public record and thus discoverable by both Petitioners and the

Board, are barred by laches in any event. (Ptn. A-4: A-25-27)

7

B. The Second Circuit’s Decision Was Completely Con-

sistent With The Standard Articulated By This

Court In Lampf

Petitioners do not dispute that the Second Circuit ap-

plied the appropriate standard under Supreme Court pre-

cedents to determine the applicable limitations period.

Petitioners merely argue with the result reached by the

Second Circuit in applying that standard.

In Lampf, this Court articulated a three-step “hier-

archical inquiry for ascertaining the appropriate limita-

tions period for a federal cause of action” when the law

is silent. Lampf reaffirmed that the federal courts do not

hesitate to borrow federal limitations periods “ ‘when a

rule from elsewhere in federal law clearly provides a

closer analogy than available state statutes, and when the

federal policies at stake and the practicalities of litigation

make that rule a significantly more eng vehicle

for interstitial lawmaking.’ * Lampf, 111 8S. Ct. at 2778,

quoting Reed v. United Transp. Union, 488 U.S. 319, 324,

109 S$. Ct. 621 (1989), quoting DelCostello v. inte rnae-

tional Bhd. of Teamsters, 462 U.S. 151, 171-72, 103 S

2281, 2294 (1983); (Ptn. A-5); see also Agency Moliing

Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143, 148,

107 S. Ct. 2759, 2763 (1987).

Applying the first step of the Lampf inquiry, the Sec-

ond Circuit determined that the federal interests in pre-

dictability and judicial economy counseled the adoption of

a uniform statute of limitations for IAA claims. The

court found that Section 215 of the IAA “ ‘encompass|es]

numerous and diverse topics and subtopics’ .. . such that

a single state limitations period may not be consistently

applied within a jurisdiction.” (Ptn. A-11, quoting Lampf,

Ans S. Ct. at 2779, quoting Wilson v. Garcia, 471 U.S

61, 273, 105 S. Ct. 1938, 1945 (1985) ).

Petitioners assert that because Transamerica restricts

the private litigant “to one form of action and one form

8

of relief,’ Transamerica indicates that there is no need

for a uniform limitations period. (Ptn. 23) As the Sec-

ond Circuit noted, the Petitioners’ “analysis focuses upon

the single remedy available [to rescind the advisers agree-

ment] and ignores the fact that there are numerous and

varied grounds for invoking it.” (Ptn. A-12 (emphasis

added) ) A cause of action pursuant to Section 215 may

be premised upon a “violation of any provision of the

IAA.” * 15 U.S.C. § 80b-15; (Ptn. A-11). Therefore, a

court focusing on each alleged violation underlying any

given Section 215 claim could well find that the claims

should be analogized to any of several common law claims

(e.g., a violation of state securities regulations or the

state professional code, common law breach of contract,

fraud, or an action in which the relief sought is rescis-

sion). (Ptn. A-11) The decisions of this Court thus favor

adoption of a uniform limitations period. See, e.g.,

Lampf, 111 S. Ct. at 2779; Agency Holding, 483 U.S. at

149, 107 S. Ct. at 2763; Wilson, 471 U.S. at 274, 105

S. Ct. at 1947.

Applying the second step of the Lampf inquiry, the

Second Circuit found IAA controversies to be multi-state

in nature, presenting the possibility of multiple state limi-

tations periods, and the dangers of ferum shopping and

litigation over forum shopping. The Second Circuit there-

fore deemed a uniform federal limitations period more

beneficial than a state limitations period. See Lampf, 111

S. Ct. at 2779; Agency Holding, 483 U.S. at 154, 107 S.

Ct. at 2766. Contrary to Petitioners’ claim, the finding

of a limited remedy for IAA claims in Transamerica does

not diminish the multistate character of IAA claims. In-

deed, the IAA requires interstate conduct as a jurisdic-

tional predicate. 15 U.S.C. § 80b-14; (Ptn. A-13). IAA

“violations could occur in numerous states both with re-

spect to a single plaintiff and with respect to multiple

® As noted, Petitioners alleged three separate bases for their

Section 215 claim.

ee

9

plaintiffs.” '° (Ptn. A-18) Thus, the Second Circuit cor-

rectly concluded, as did this Court in Lampf and Agency

Holding, that it is “preferable to have one uniform period

and to eliminate the uncertainty and excessive litigation

that could ensue if the various states’ limitations periods

could potentially apply.” (Ptn. A-13)

Following the third step of the Lampf inquiry, the

Second Circuit determined that both the one year limita-

tions period in Section 36 of the ICA and the federal one

year/three year limitations period that predominates in

the federal securities laws plainly provide a “closer fit”

for the IAA than state law. (Ptn. A-14); Lampf, 111 S.

Ct. at 2779. As this Court explained in SEC v. Capital

Gains Research Bureau, Inc., 375 U.S. 180, 186, 84 S. Ct.

275, 280 (1963), the IAA “‘was the last in a series of Acts

designed to eliminate certain abuses in the securities in-

dustry.” (See Ptn. A-14) The Second Circuit reasoned

that the right of action described in Section 36(b) of the

ICA and the various rights of action in the 1933 and 1934

Acts which generally regulate the honesty and integrity

e

7

of those who deal commercially on the national securities

markets, balance the same interests as are involved in the

IAA. These interests aiford the same protection as the

cause of action contained in the JAA, and share a com-

10n purpose and similar elements with the IAA. (Ptn.

A-7); Lampf, 111 8. Ct. at 2779. Therefore, the Second

d ie Amended Complaint that KKR en

78 Commitment Agreements for the 1987 Fund alone,

I KR nvestment adviser to over 3 million persons,” and

that “KKR’s clients reside in many different states. ...” (JA-226,

"9; JA-218; JA-229, §14b) While Respondents heartily disput

he accuracy of the Petitioners’ characterizations of KKT, Re-

ndents do not dispute that the participants and their beneficiar-

€s are agencies of, or reside in, numerous different states. Addi

tionally, the instant action, by Minnesota claimants in a New York

yxrum, itself illustrates the need for a uniform federal limitations

10

Circuit found that they were more analogous "' to the IAA

claims than any state source. (Ptn. A-16-17)*

Petitioners’ assertion that this Court suggested in T'rans-

america that state law analogies would be applicable to

the IAA is disingenuous. (Ptn. 82) In Transamerica,

this Court briefly considered whether Congress intended

for Section 215 actions to be brought only in state court.

This Court, however, readily rejected such a construction

of the statute as “anomalous,” finding instead an implied

federal private cause of action. Transamerica, 444 U.S.

at 19 n.8, 100 S. Ct. at 247 n.8."% Additionally, Petition-

ers’ suggestion that DelCostello and Agency Holding re-

1 The Second Circuit also noted the exact parallels between vari-

ous provisions of the IAA and various provisions of other federal

securities laws. (Ptn. A-18)

12 Furthermore, public policy supports the application of the uni-

form federal limitations period selected by the Second Circuit. The

fact that Section 215 actions afford only rescissionary relief sug-

gests that the applicable limitations period be kept to the shortest

permissible length. See McCullough v. Leede Oil & Gas, Inc., 617

F. Supp. 384, 287 (W.D. Okla. 1985); United States v. Texarkana

Trawiers, 846 F.2d 297, 305 n.20 (5th Cir.), cert. denied, 488 U.S.

943, 109 S. Ct. 369 (1988). Additionally, Congress has specifically

deemed one year from the violation to be an appropriate time pe-

riod for claims based on failure to register, because such a claim

cannot be concealed. McCullough, 617 F. Supp. at 387; see 15 U.S.C.

§77m (1981). As the Second Circuit noted, the claims asserted

here are all tied to the failure to register. (Ptn. A-16)

13 Nor is there any merit to Petitioners’ contention that New

York Civil Practice Law & Rules Section 213.1, which is applicable

to an action in which the relief sought is rescission, provides a

“closer fit” with the IAA. Section 213.1 is a default limitations

period for any “action for which no limitation is specifically pro-

vided for by law.” This limitations period reflects none of the in-

terests underlying the IAA. Indeed, if it is appropriate to choose

a limitations period by analogizing solely to the remedy requested,

then Section 29(b) of the 1934 Act, 15 U.S.C. § 78cece(b) (1981 &

Supp. 1992) (containing a one year/three year limitations period),

which parallels Section 215 of the IAA is a far more compelling

analogy.

11

quire that a state limitations period i. o be borrowed un-

less the federal cause of action in question involves an

“anomalous federal statutory action that ha[s] no coun-

terpart at common law”’ (Ptn. 30), simply does not square

with Lampf’s direction to borrow the limitations period

that provides the “closest fit’? and that does not frustrate

9772 OFF

federal policy..* Lampf, 111 S. Ct. at 2778, 2779.

The Second Circuit thus followed the dictates of Lampf

in borrowing a limitations period from the federal securi-

ties laws for IAA claims. Furthermore, no conflict exists

between the controlling precedents of this Court and the

decision of the Second Circuit regarding the applicable

limitations period, or between the decision of the Second

Circuit and any other court. This case simply does not

present an important question of federal law which has

not been, but should be settled by this Court, and which

conflicts with decisions of this Court.

Il. THE DECISION OF THE COURT OF APPEALS

NOT TO APPLY A CONTINUING WRONG THEORY

COMPORTS WITH FEDERAL LAW

The Second Circuit’s determination to reject the “‘con-

tinuing wrong” theory to prevent the expiration of the

limitations period in the present case was wholly consist-

ent with established authorities finding the “continuing

' The Second Circuit properly rejected Petitioners’ argument

that the court is precluded from looking beyond events contempo-

raneous with the statutery enactment at issue to determine the ap-

propriate limitations period for an implied federal cause of action.

Relying on DelCostello, 462 U.S. at 169 n.21, the Second Circuit

noted: “While the court may be influenced by evidence of Congres-

sional intent, there is no need to show that at the time that Con-

gress provided the express federal limitations period it intended that

it would apply to {the implied] cause of action... . Rather a

source should be chosen because it is the most suitable source for

borrowing.” (Ptn. A-11 (citation omitted) (emphasis in original) ) ;

see also Lampf, 111 8. Ct. at 2779 (for purposes of borrowing, it is

{ } +

appropriate to look for analogous limitations period designed to

accommodate a similar balance of interests).

12

wrong” theory inapplicable in federal securities law cases.

There are ro contrary cases regarding the accrual of an

IAA claim, as the Second Circuit’s opinion is the first to

address the issue. Furthermore, the Second Circuit’s deci-

sion furthers the important policy of repose. Conse-

quently, a grant of certiorari to address the Second Cir-

cuit’s decision not to apply the “continuing wrong” theory

is unwarranted.

Federal law does not support the application of a ‘“con-

tinuing wrong” theory to extend the limitations period

in this case.” (See Pin. A-19) If, when the Board en-

tered into the 1987 Commitment Agreement with KKR,

KKR was an unregistered investment adviser and not

exempt from registration under Section 203 of the IAA,

then the Board’s IAA cause of action that Petitioners

seek to assert accrued upon entry into the agreement, and

a cause of action to rescind the agreement '® fully existed

at the moment that the agreement was entered. As the

court noted in Korn v. Merrill, 403 F. Supp. 377, 388

(S.D.N.Y. 1975), aff'd without op., 538 F.2d 310 (2d

Cir. 1976), each payment of investment advisers fees to

an investment adviser pursuant to a wrongful contract

is not an independent and continuing injury giving rise

to a separate cause of action. Rather, the continued pay-

ments merely affect the determination of damages stem-

ming from the alleged wrong (e.7., entry into the wrong-

ful contract). (See Ptn. A-23); see also Magna Assocs.

». Torgrove, 585 F. Supp. 585, 589-90 (D. Colo. 1984) ;

Afshar v. Procon Inc., 442 F. Supp. 887, 890 (S.D.NLY.

1977), affd without op., 580 F.2d 1044 (2d Cir. 1978) ;

Lowell Wiper Supply Co. v. Helen Shop, Inc., 235 F. Supp.

' Federal law governs when a federal cause of action accrues

and when the limitations period commences to run. Phillips v.

Levie, 593 F.2d 459, 462 (2d Cir. 1979); Arneil v. Ramsey, 550

F.2d 774, 780 (2d Cir. 1977). Petitioners’ citations to New York

contract law principles are therefore irrelevant.

16 As this Court explained in Transamerica, 444 U.S. at 18, 100

S. Ct. at 246, under the IAA, an agreement is “voidable,” not void

(or “unlawful’’).

13

640, 644 (S.D.N.Y. 1964).'7 Thus, once the Beard and

KKR entered into the allegedly wrongful 1987 Commit-

ment Agreement, the limitations period was triggered.’

Furthermore, the limitations period must be measured

from the date of the 1987 Commitment Agreement pur-

suant to which the Board became irrevocably bound to

KKR, because the rights and obligations of the parties

were fixed by that agreement and thereafter governed by

that agreement. The federal securities case law is clear

that where, as here, subsequent payments represent the

fulfillment of obligations previously created and not the

17 A claim accrues when the act causing the injury occurs, not

incur more damages. Korn, 403

+

18 Critically, as the Second Circuit found, each of the various IAA

tions alleged by Petitioners is actually premised upon the al-

ation that KKR has wrongfully failed to register under the [AA

Ptn. A-16 That is to say, each of the alleged IAA violations

pra p.3) hinges, directly or indirectly, upon the notion that

KKR is an investment adviser not exempt from registration. The

red violation of Section 203 is that KKR is a non-exempt inve

subject to the IAA’s registration requirements, and

KKR’s entry into the agreement without being registered was

therefore wrongful. Onlv if KKR was required to register could

there have been a violation of Section 205, which is applicable

nvestment advisers subject to the IAA’s registration re-

quirements. Similarly, the sole alleged violation of Section 206 in

case is based upon the failure to disciose the nature of com-

pensation to be received “in the Minnesota Commitment Agree-

ment.”” (JA-228, 13) Petitioners did not allege that complete

disclosure of the fee arrangements was not made; rather they com-

plained only that the disclosure was not made in the Commitment

Agreement. It would appear from their focus on the Commitment

Agreement that Petitioners are claiming that disclosure was re-

quired to have been made in a single source (such as a “Form

ADV,” which is required only of investment advisers registered or

required to be registered). Thus, Petitioners’ focus on the Commit-

ment Agreement as a basis for a Section 206 claim is also appar-

ently linked to their assertion that KKR was required to have regis-

tered as an adviser at or prior to the time the 1987 Commitment

Agreement was entered into.

14

creation or assumption of new obligations, no new cause

of action will arise. (Ptn. A-21) ; Holloway v. Combined

Equities, Inc., 628 F. Supp. 59, 61-62 (M.D. La. 1986)

(Section 12(1) of the 1933 Act); Jngenito v. Bermec

Corp., 376 F. Supp. 1154, 1184 (S.D.N.Y. 1974) (Section

10(b) of the 1934 Act); Reid v. Walsh, 645 F. Supp.

685, 687 (M.D. La. 1986) (‘Section 12/1) of the 1933

Act); Freschi v. Grand Coal Venture, 551 F. Supp. 1220,

1229 (S.D.N.Y. 1982) (Section 10(b) of the 1934 Act);

Nielsen v. Professional Fin. Management, Ltd., 682 F.

Supp. 429, 4837 (D. Minn. 1987) (Section 12(2) of the

1933 Act).'’ Therefore, no capital contributions by the

Board subsequent to the initial entry of the contract can

be viewed as new or independent violations of the IAA.

As the Second Circuit observed, the cases cited by

Petitioners applying the ‘‘continuing wrong” theory out-

side the context of the securities laws (e.g., in antitrust,

patent infringement and civil rights cases) are inap-

posite. (Ptn. A-19-24) Unlike those cases, this case does

not involve a situation where the right to recovery could

be barred before a cause of action arises, because the

right to recovery arises the moment the allegedly wrong-

ful contract is formed. (Ptn. A-19)°° Thus, there is no

inconsistency between the Second Circuit decision and the

cases cited by Petitioners.

'™ The commitment theory “has been consistently applied in the

securities law context,” (Ptn. A-24 (citations omitted) ) and does

not apply only in Rule 10b-5 cases, as Petitioners imply.

“0 Nor does the existence of a continuing relationship between

the parties compe! application of the “continuing wrong” theory

here. (Ptn. A-22-23) Many securities law cases applying the ac

crual rule employed by the Second Circuit involve both continuing

payments and a continuing (and often fiduciary) relationship be-

tween the parties. See. e.g., Korn, 403 F. Supp. 377 (client-invest-

ment adviser); Helman v. Murry’s Steaks, Inc., 742 F. Supp. &60,

reh’g denied, 743 F. Supp. 289 (D. Del. 1990) (minority share-

holder-corporate director, and beneficiary-trustee); Stewart».

Germany, 631 F. Supp. 236 (S.D. Miss. 1986) (general partner-

managing general partner).

15

Additionally, the Second Circuit held that Petitioners’

“argument ignores the whole purpose

behind a statute of limitations and the importance of the

licy of repose.’ (Ptn. A-24) Petitioners’ argument

ld effectively eliminate any limitations period for

the life of an investment advisers agreement, regardless

of the factual situation involved. Under the limitations

period Petitioners suggest, Petitioners could wait not only

until after the entire six year period of the 1987 Commit-

ment Agreement had elapsed ‘(knowing full well the basis

of their claim (see Ptn. A-25-27)), but wait an addi-

tional six years thereafter before asserting a claim to

rescind the contract.

continuing wrong

y

.

VOuid

The IAA provides a limited, narrow form of relief to

private claimants to protect investors from unscrupulous

advisers. Thus, it would make a mockery of the statu-

tory purpose to provide an openended limitations period,

inviting a plaintiff to sit on his rights and speculate risk

free by asserting a rescission claim only if and when any

investment turns out badly. See Intre Sport, Ltd. ».

Kidder, Peabody & Co., 625 F. Supp. 1808, 1812 (S.D.N.Y.

1985), aff'd without Op., 795 F.2d 1004 (2d Cir. 1986),

vacated on other grounds, 182 U.S. 922, 107 S. Ct. 3203

(1987) : SCE also Royal Air Prope rtve Ss, Ine. U. Smith, 312

F.2d 210, 213-14 (9th Cir. 1962).

In sum, Petitioners have asserted no real inconsistency

between the decision of the Second Circuit not to apply

the “continuing wrong” theory and existing case law,

and no inequity meriting this Court’s review.

lil. PETITIONERS’ LACK OF STANDING ALSO WAR-

RANTS A DENIAL OF CERTIORARI

Jecause it is germane to this Court’s exercise of dis-

cretion whether to grant certiorari, we note that such a

vrant is also unwarranted on the grounds that Peti-

tioners lack standing to bring the Board’s IAA claim.

Neither the Second Circuit nor the District Court reached

16

the additional grounds raised by Respondents for dismiss-

ing the Amended Complaint, including Petitioners’ lack

of standing to assert the Board’s IAA claim, if any.

(Ptn. A-41) Respondents submit that, in fact, Petition-

ers lack standing to bring this action on behalf of the

Board *' either in their direct capacity or derivatively.

This Court should therefore decline to exercise certiorari

jurisdiction.

It is fundamental that to have standing a plaintiff must

have “‘a personal stake in the outcome of the contro-

versy,” Flast v. Cohen, 392 U.S. 83, 101, 88 S. Ct. 1942,

1953 (1968), quoting Baker v. Carr, 369 U.S. 186, 204,

82 8. Ct. 691, 703 (1962), and must be able to prove that

“the challenged |conduct] has caused him injury in fact.”

Association of Data Processing Serv. Orgs., Inc. v. Camp,

Inc., 897 U.S. 150, 152, 90 S. Ct. 827, 829 (1970). Stand-

ing under the IAA is thus strictly limited to the clients

or prospective clients of investment advisers. See Paul

S. Mullin & Assocs., Inc. v. Bassett, 682 F. Supp. 532,

5387 (D. Del. 1986); Gross v. Diversified Mortgage In-

vestors, 431 F. Supp. 1080, 1095 (S.D.N.Y. 1977), aff'd

without op., 686 F.2d 1201 (2d Cir. 1980) ; Reserve Man-

agement Corp. v. Anchor Daily Income Fund, Inc., 459

F. Supp. 597, 608 (S.D.N.Y. 1978); Person v. New York

Post Corp., 427 F. Supp. 1297, 1303-04 (E.D.N.Y.), aff’d

without op., 573 F.2d 1294 (2d Cir. 1977).

Accordingly, only the Board, the party to the Commit-

ment Agreement with KKR, has standing to bring this

suit. Neither Petitioner Kahn nor Thorne is alleged to

be a party to the 1987 Commitment Agreement or any

other agreement with any Respondent, nor is either Kahn

or Thorne alleged to be a client or a prospective client

of any of the Respondents, as required for standing under

the IAA.

Additionally, both the Minnesota Constitution and Stat-

utes vest exclusive power to act on behalf of the Board in

*1In its Answer, the Board Also set forth Petitioners’ lack of

standing as an affirmative defense. (JA-387, © 34)

17

the Minnesota Attorney General. The Minnesota Legisla-

ture expressly conferred any right of action on behalf of

the Board, which consists of individually elected officers

of the executive branch, exclusively in the Minnesota At-

torney General.** Minn. Stat. § 8.06 (1990) ; Minn. Const.

art. XI, § 8; Minn. Stat. $114.03 (1990). Article III of

the Minnesota Constitution prohibits one department of

government from exercising powers of another. Minn.

Const. art. III, $1. Thus, only the Attorney General has

authority to act on behalf of the Board.** Consequently,

neither Kahn nor Thorne can have standing to bring the

Board’s IAA claim, whether in Kahn’s capacity as a

legislator or a taxpayer or in Thorne’s alleged capacity

as a trust beneficiary.

[In addition to the judicial inefficiencies which would re-

sult from the exercise of certiorari jurisdiction in a pro-

ceeding commenced by strangers to the matter purportedly

in dispute, there are also compelling policy reasons for

not expanding standing under the IAA to legislators,

citizens, taxpayers and the like. To permit such second-

guessing of the investment decisions of the Board (and

therefore to permit second-guessing of all similarly situ-

ated state boards) is to destroy the ability of investment

boards to make meaningful and final investment deci-

sions, and would thus bring massive uncertainty to public

pension trustees and to those with whom they invest.

Since Petitioners lack standing to bring this action, this

Court should therefore decline to grant certiorari.

*2 Contrary to the implication of Petitioners’ footnote 3 (Ptn. 8

n.3), Minnesota has never recognized the right of anyone to bring

a derivative claim on behalf of the Board

23 Clearly then, under Minnesota law, Petitioners fall outside the

zone of interests” required for standing. See Data Processing, 397

U.S. at 153, 90 S. Ct. at 830

sé

18

CONCLUSION

The issue upon which this case was decided, the statute

of limitations applicable to an IAA claim, is one of first

impression in the Cireuit Courts of Appeals. No conflict-

ing rulings exist there or among the District Courts, all

of which that have decided the issue have been in accord

with the Second Circuit. Similarly, no state court deci-

sions are in conflict with the Second Circuit’s decision.

No reason is advanced why this Court should interfere

in the plainly correct decision of the court below. For

that reason and for reasons of judicial efficiency and pub-

lie policy, Respondents respectfully request that the Peti-

tion for a Writ of Certiorari be denied.

Respectfully submitted,

FREDRIC J. ZEPP

Counsel of Record

LOUISE M. ZEITZEW

NANCY E. MCDERMOTT

LATHAM & WATKINS

885 Third Avenue

Suite 1000

New York, New York 10022

(212) 906-1200

Counsel for Respondents

Dated: New York, New York

October 26, 1992