The plaintiffs, successors in interest to a publicly traded real estate investment trust (REIT) and its affiliated limited partnership (LP), appealed the dismissal of their complaint which asserted claims arising under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The REIT and LP were established by the defendants, who consisted of a real estate development corporation and two of its corporate officers. The two officers collectively “owned over 9% of the [REIT], were trustees, and held executive positions within the [REIT].”

Defendants caused the defendant corporation to transfer its rights in a real estate development “professional services agreement” with a Florida municipality (the Contract) in exchange for a substantial number of limited partnership interests in the LP. Plaintiffs’ securities law claim alleged that defendants wrongfully withheld material information concerning the true value of the Contract in connection with the transaction. Specifically, plaintiffs alleged that defendants failed to disclose that they had engaged a commissioner of the Florida municipality as a consultant notwithstanding provisions in the Contract that appeared to prohibit such an engagement. Plaintiffs filed the lawsuit after the commissioner pled guilty to accepting bribes in unrelated transactions, which led to the municipality providing notice of its intention to terminate the Contract.

The District Court dismissed the federal securities laws claims, ruling that the limited partnership interests issued to the defendant corporation should not be considered securities because “the same parties stand on both sides of the transaction.” The District Court found that (i) the individual defendants, who owned 100% of the defendant corporation, were integrally involved in the REIT’s management and possessed ownership interests in the REIT, and (ii) that the REIT owned 88% of the LP’s limited partnership interests and was its general partner. Based on these findings, the District Court ruled that defendants could not be liable under the federal securities claims because plaintiffs’ claims, in essence, charged defendants with failing to disclose material information to themselves in connection with the exchange of the Contract for limited partnership interests.

The appellate court reversed, ruling that the District Court’s analysis unacceptably “pierced two corporate veils” by disregarding the formal structure of both the defendant corporation and the LP in determining that the defendants themselves were on both sides of the transaction. After finding that the defendants had chosen to take advantage of the corporate form to purchase the LP interests, the appellate court ruled that defendants “may not disregard that form to avoid liability for the same transaction.” Having made that ruling, the appellate court then held that the limited partnership units were “securities” under SEC v. W.J. Howey and its progeny because they were investments in an enterprise in which profits were expected to be generated predominantly by the efforts of others. (Limited Property Trust v. Republic Properties Corp., 2009 WL 2568102 (D.C. Cir. Aug. 21, 2009))