# Opposition Brief — Kahn v. Kohlberg, Kravis, Roberts & Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_1375%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Opposition Brief - **Published:** January 1, 1992 - **Citation:** 506 U.S. 986 ## Text | =P ES MME SG 6s We ~~ be ge AB ae n g 1 No. 92-553 | QT 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_1375%3A2. Public record. Not legal advice.