D.C. Circuit: Partnership Interests in "Family Feud" Were Securities

In a complex case involving various affiliated business entities, a D.C. Circuit panel found over a dissent that certain limited partnership interests were "securities" under the Howey test. The thorny issue in this case is that the same individuals were associated with both the plaintiff and defendant entities. In assessing the panel's findings, the concern may be not whether they reached the right answer but rather if they asked the correct questions (Liberty Property Trust v. Republic Properties Corp.).

Richard Kramer and Steven Grigg were real estate developers who owned and controlled Republic Properties Corp. The two, along with a third (non-party) developer, formed a public REIT, Republic Property Trust. The trust subsequently established a limited partnership, owning approximately 88 percent of the partnership and serving as its sole general partner.

The transaction that spawned the litigation amidst this intertwined family tree involved a development contract between the corporation and the city of West Palm Beach, Florida. The corporation also subsequently hired Raymond Liberti, a city official as a "consultant," paying him up to $8,000 a month. The corporation then assigned the contract to the limited partnership in exchange for $1.2 million worth of partnership interests.

The deal imploded when the federal government charged Mr. Liberti with official corruption. The city notified the corporation that it intended to terminate the agreement, and the limited partnership ended all involvement with the developers. The trust and the partnership then sued the developers and the corporation.

The district court found that the complaint adequately alleged fraud but that the interests involved were not "securities." According to the lower court, "one can extract a general principal from these various results: when the same parties stand on both sides of the transaction-no matter how many nominally distinct legal entities lie in between, and no matter how convoluted their interrelationships-the transaction is not an investment contract under Howey because the buyers necessarily have power to control their investment's outcome."

The majority of the appellate panel disagreed. Initially, the majority criticized the district court for disregarding the separate legal entities of the parties to the transaction. In addition, the court ruled that Kramer and Grigg did not exercise sufficient control of the limited partnership to disqualify their units as securities under a Howey analysis.

It appears that both the district court and the appellate majority failed to ask some very significant questions. While the district court emphasized that the same parties stood on both sides of the transaction in its Howey discussion, the trial judge did not address that issue in a rather formulaic finding of reliance and causation. The appellate majority did not address the issue at all, as it adopted the district court's reasoning. Both courts wrote at length on the debate over whether these instruments were investment contracts while largely ignoring the question of whether the securities laws should apply to the statements in question given the relationship between the parties.

Senior Circuit Judge Randolph dissented, primarily on the majority's Howey conclusion. He stated that to hold "that Kramer and Grigg had a legal obligation to provide information to themselves is to render the securities laws senseless." While he seems to suggest that there may be no underlying fraud given the parties' interrelationship, he does not address this specifically in terms of disclosures, reliance or loss causation.

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