Back in August, we filed a post briefly outlining the SEC's policy arguments as to why the purchase of a unit at a San Diego condo-tel constituted an investment contract for purposes of the federal securities laws.  For the reasons outlined here, we found it curious that the SEC would choose to advance its concerns in this particular condo-tel case.   

Last week, Tarsadia Hotels filed its response.  While Tarsadia's statute of limitations argument may ultimately win the day, we were more interested in how the Defendants countered the SEC's policy arguments.

Question #1 - Was There A "Single Transaction"?  

In dismissing Plaintiffs' arguments regarding the existence of a single investment contract, the District Court focused on the 8 month gap between Plaintiffs' execution of the purchase agreements and the rental management agreements.  The SEC argued that, in taking this approach, the District Court "failed to appreciate the broader realities underlying the arrangements between the parties."  

Defendants' response points to the text of the SEC's 1973 Condominium Release, which states that "an owner of a condominium unit may, after purchasing his unit, enter into a non-pooled rental arrangement with an agent not designated or required to be used as a condition to the purchase . . . without causing a sale of a security to be involved in the sale of the unit." In trying to "reposition" its stance, Defendants argue that the SEC is substantially arguing for:

. . . the application of a subjective standard which would provide that, as long as a rental arrangement is offered at any point in time by anyone, every seller, developer, realtor and operator of rental businesses would find themselves in federal court . . . [with the result that] all sales of condominium units [would] be registered as a precaution against the possibility that some kind of rental management program might be offered in the future . . .

Question #2 - How To Treat The Plaintiffs' Disclaiming Any "Expectation of Profit"?

The District Court's dismissal of the Plaintiffs' lawsuit was also based upon the Plaintiffs' express representations in the purchase agreements that there was no investment intent.  The SEC expressed concern with this approach as it "could provide an easy mechanism for those seeking to avoid the protections that the securities laws aford investors."  

Defendants respond by arguing that the SEC's policy concerns are rendered moot by pre-existing case law. In supporting this argument, Defendants again advance their own policy angle, citing an opinion from Justice Ginsburg written while she was sitting as a circuit court judge:

If the court were to permit prior representations to defeat the clear words and purpose of the final agreement's intergration clause, contracts would not be worth the paper on which they are written.