CAN AN INSTRUMENT REFERRED TO AS A GENERAL PARTNERSHIP INTEREST BE A SECURITY?
This court answered the question with a "yes" answer?
This court answered the question with a "yes" answer?
SEC v. Louis v. Schooler and First Financial Planning Corporation, 12-cv-2164 (S.D. Cal. July 1, 2013).
The SEC filed a complaint against Schooler and the other Defendants alleging that they violated the anti fraud provisions of the Federal Securities Laws. The SEC also sought a temporary restraining order freezing assets and the appointment of a temporary receiver. The complaint alleges that defendants defrauded thousands of investors by selling 50 million dollars worth of general partnership units. The SEC alleged that the defendants sold $50 million of worth of general partnership interests "without disclosing material facts regarding the true value of the underlying land, the mortgages encumbering the properties, and when ownership of the underlying land was transferred from Defendants to the general partnerships."
The district court granted the ex parte request for a temporary restraining order.
The district court granted the ex parte request for a temporary restraining order.
The SEC contended that the Schooler and the other defendants violated Section 5 of the Securities Act and Section 10(b) of the Exchange Act by failing to register the general partnership as a security.
The defendants then filed a motion to dissolve the TRO.
Over the years, there have been many attempts to avoid labeling an investment a security and therefore not subject to the remedies available to an investment under the Securities Laws.
In the Schooler case, the district court rejected Schooler’s arguments that the partnership interest was not a security. The court ruled:
The so called general partnership agreement leaves “so little in the hands of the investor that the investment is in fact a limited partnership interest. The court concluded that the partners are so inexperienced and unknowledgeable in the general partnership business affairs that they are incapable of intelligently exercising their partnership powers; or the partners are so dependent on some unique entrepreneurial or managerial experience of the promoter or manager that they cannot replace the manager of the enterprise or otherwise exercise meaningful partnership or venture powers.
According to the Court, the SEC pleaded sufficient facts to establish the second and third factors, the Court reasoned that, having already obtained a preliminary injunction, the SEC has presumptively met its burden to state a claim.
The court also noted that the SEC alleged that the general partnership investors included a retired school teacher, a water filter salesman and a pharmacist. The court concluded that these investors were not likely to be sophisticated investors.
The motion to dismiss the TRO was denied. The writer predicts that there is little doubt that the SEC will prevail on the merits.
There have been numerous efforts to dodge the securities laws to avoid the remedies that the securities laws provide. Such efforts frequently fail. The purpose of the securities law is to protect investors by requiring promoters to register the securities or to comply with one of the exceptions, such as Regulation D.
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