11-1774
Fried v. Lehman Bros. Real Estate Associates III, L.P.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
Rulings by summary order do not have precedential effect. Citation to a summary order filed on or
after January 1, 2007, is permitted and is governed by Federal Rule of Appellate Procedure 32.1 and
this court’s Local Rule 32.1.1. When citing a summary order in a document filed with this court, a
party must cite either the Federal Appendix or an electronic database (with the notation “summary
order”). A party citing a summary order must serve a copy of it on any party not represented by
counsel.
At a stated Term of the United States Court of Appeals for the Second Circuit, held at the
Daniel Patrick Moynihan United States Courthouse, at 500 Pearl Street, in the City of New York,
on the 20th day of December, two thousand twelve.
Present: ROBERT A. KATZMANN,
BARRINGTON D. PARKER,
RICHARD C. WESLEY,
Circuit Judges.
____________________________________________________________
BARBARA J. FRIED, MARK FRIED ALTITUDE PARTNERS, LLC, RICHARD D.
MALTZMAN, as Trustee for the Richard D. & Charlene Maltzman Family Trust U/A/D
3/23/88, JEFFOREED PARTNERS, L.P., ZELFAM LLC, on behalf of limited partners listed on
Annex A., B. MARK FRIED, ALTITUDE PARTNERS, LLC, JEFFOREED MANAGEMENT
COMPANY INC., ALEX KHOWAYLO, BARRY ARONOFF, BILL NEWLIN, BILL
SCHNUHL, BUKFENC LLC, CATLIN FAMILY TRUST, CHARCO VENTURES, L.P.,
DANIEL R PFAU, ELISABETH S. PFAU, DREW PERKINS TRUST U/A/D 12/21/99, ELI
BARKAT HOLDING LTD., ERIK SCULTE, FRANK KEENER, FRANK RUTAN, GEORGE
EVANS, GSB HOLDING, INC., IRACINI L.P., JAMES J. VAN STONE, SUSAN E. VAN
STONE, JAMES R. DOUGLAS, MARGARET W. DOUGLAS, JEFF MOSTER, JOHN
ARGUE, JEFFREY HECKTMAN TRUST, JOHN DRAGHI, JOHN ROSEKRANZ, KAREN A.
UBELHART, LOUISE E. COHEN, MARTIN BURGER, MICHAEL & DIANE BRANON
REVOCABLE TRUST, MICHAEL SHER, BILLIE GELB, NIR BARKAT HOLDING LTD.,
PAUL DEKTOR, PEACHBLOW PARTNERS, L.P., PROVIDENT HOLDINGS, INC., PSERD
TRUST, RFLP GROUP, LLC, RICHARD LANDGARTEN, ROBERT T. FRALEY TRUST,
ROSS C. HARTLEY, RUSSELL AND JUDITH FRADIN, TIC, SANFORD H. ROBBINS,
SHLOMO SHMELZER, ATALYA SHMELZER, SIMON FAMILY INVESTMENT
PARTNERSHIP, STEPHANIE BORYNACK, STEPHEN GUERINO, KATHLEEN GUERINO,
STEVEN HOLDER, TAD LOWREY, THE GOLD/SHERMAN-GOLD FAMILY TRUST,
THOMAS G. MACEY, THREE HORSE INVESTMENTS, VAHID MANIAN, WAITE
FAMILY TRUST, WILLIAM C. SCOTT, JULIEN DE SLABERRY, GLICKENHAUS AND
CO., REAL ESTATE PRIVATE EQUITY, INC.,
Plaintiffs,
and
ALAN GERBER LEWIS MARITAL IRR. TRUST, RICHARD SHUSTER, RICKEL
SHUSTER,
Plaintiffs-Appellants,
-v- No. 11-1774-cv
LEHMAN BROTHERS REAL ESTATE ASSOCIATES III, L.P., LEHMAN BROTHERS
PRIVATE EQUITY ADVISERS, LLC, MARK A. WALSH, MARK H. NEWMAN, BRETT
BOSSUNG, MICHAEL J. ODRICH, CHRISTOPHER M. O’MEARA, RICHARD S. FULD,
JR., JOSEPH M. GREGORY, ERIN CALLAN, IAN LOWITT, THOMAS RUSSO, DOES 1
THROUGH 50, REAL ESTATE PRIVATE EQUITY, INC., SILVERPEAK REAL ESTATE
PARTNERS L.P., REPE CP MANAGECO LLC,
Defendants-Appellees.
____________________________________________________________
For Plaintiffs-Appellants: ROBERT TED PARKER, Parker Law Firm, Orinda, CA (Arthur
Russell, New York, NY, on the brief).
For Defendants-Appellees: JONATHAN D. POLKES, Weil, Gotshal & Manges LLP, New
York, NY (William A. Burck, Robert V. Spake, Jr., and Adam
B. Banks, Weil, Gotshal & Manges LLP, New York, NY, for
Defendants-Appellees Lehman Brothers Real Estate Associates
III, L.P., Lehman Brothers Private Equity Advisers, LLC, and
Real Estate Private Equity, Inc.; Richard A. Rosen, Paul,
Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for
Defendants-Appellees Mark A. Walsh, Mark H. Newman, Brett
Bossung, Silverpeak Real Estate Partners, L.P., and REPE CP
ManageCo, LLC; Patricia M. Hynes and Todd. S. Fishman,
Allen & Overy, LLP, New York, NY, for Defendant-Appellee
Richard S. Fuld, Jr.; Michael J. Chepiga and Mary Elizabeth
McGarry, Simpson Thacher & Bartlett LLP, New York, NY,
for Defendants-Appellees Michael J. Odrich, Christopher M.
O’Meara, and Thomas Russo; Martin J. Auerbach, New York,
NY, for Defendant-Appellee Ian Lowitt; Robert J. Cleary,
Dietrich L. Snell, Mark E. Davidson, and Seth D. Fier,
Proskauer Rose LLP, New York, NY, for Defendant-Appellee
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Erin Callan; Israel David and Audrey Strauss, Fried Frank
Harris Shriver & Jacobson LLP, New York, NY, for
Defendant-Appellee Joseph M. Gregory, on the brief) for
Defendants-Appellees Lehman Brothers Real Estate Associates
III, L.P., Lehman Brothers Private Equity Advisers, LLC, and
Real Estate Private Equity, Inc.
Appeal from the United States District Court for the Southern District of New York
(Jones, J.).
ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment of the district court be and hereby is AFFIRMED.
Plaintiffs-Appellants Alan Gerber Lewis Marital Irrevocable Trust and Richard and
Rickel Shuster (collectively, “plaintiffs”) appeal from a March 29, 2011, memorandum and order
of the United States District Court for the Southern District of New York (Jones, J.) dismissing
their case in its entirety for failure to state a claim upon which relief may be granted. The
plaintiffs are limited partners in one or more of four real estate investment partnerships: Lehman
Brothers Real Estate Partners III, L.P.; Lehman Brothers Real Estate Fund III, L.P.; Lehman
Brothers Offshore Real Estate Fund III; and Lehman Brothers Real Estate Capital Partners III
(collectively, the “Partnerships”). The defendants, affiliates of Lehman Brothers Holdings Inc.
(collectively, “Lehman”), formed the Partnerships on June 25, 2007, for the purpose of investing
in commercial real estate both domestically and abroad. The plaintiffs allege that the defendants
knowingly or recklessly omitted material information in connection with the sale of the limited
partnerships to the plaintiffs, causing the plaintiffs to rely on the omission and consequently to
suffer economic loss. We assume the parties’ familiarity with the underlying facts and
procedural history of the case.
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The plaintiffs principally contend that they have alleged sufficient facts to support a
claim of securities fraud pursuant to Section 10(b) of the Securities and Exchange Act of 1934,
15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5(b). More
specifically, the plaintiffs contend that the complaint alleges sufficient facts to support a claim
that the defendants knew or should have known (1) that certain property interests being held by
Lehman for sale to the Partnerships had depreciated in value since their acquisition by Lehman
and (2) that the Partnerships’ purchase of those property interests at the prices paid by Lehman
plus carrying costs would consequently cause the Partnerships to incur immediate losses.
The district court held that the plaintiffs did not allege sufficient facts to support an
allegation of scienter. With respect to the element of scienter, the Public Securities Litigation
Reform Act provides:
[I]n any private action arising under this chapter in which the plaintiff may recover
money damages only on proof that the defendant acted with a particular state of mind, the
complaint shall, with respect to each act or omission alleged to violate this chapter, state
with particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind.
15 U.S.C. § 78u-4(b)(2)(A). “To meet the ‘strong inference’ standard, it is not sufficient to set
out ‘facts from which, if true, a reasonable person could infer that the defendant acted with the
required intent,’ for that gauge ‘does not capture the stricter demand Congress sought to
convey . . . .’” S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 110-11 (2d Cir. 2009)
(emphasis in original) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314
(2007)). Instead, “[t]o qualify as ‘strong’ within the intendment of § 21D(b)(2) . . . an inference
of scienter must be more than merely plausible or reasonable—it must be cogent and at least as
compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314.
4
It is undisputed that the presence or absence of scienter on the part of the defendants is
determined with respect to the date that the plaintiffs committed to invest in the Partnerships.
See Vacold LLC v. Cerami, 545 F.3d 114, 122 (2d Cir. 2008). The plaintiffs argue that they
committed to invest in May 2008; the defendants argue that the plaintiffs committed to invest on
November 30, 2007. Neither party points to record support indicating when the Alan Gerber
Lewis Marital Irrevocable Trust or Richard and Rickel Shuster committed to invest in the
Partnerships. However, the complaint states that some of the plaintiffs made that commitment as
late as February of 2008. We consequently consider whether the complaint alleges sufficient
facts to give rise to a strong inference of scienter on the part of the defendants on or before
February 29, 2008.
We must determine whether the entire collection of facts alleged gives rise to a strong
inference of scienter as of that date. Tellabs, 551 U.S. at 322-23. The complaint alleges that
(1) during a November 2007, presentation to Lehman Chairman and CEO Richard Fuld,
Lehman’s commercial real estate group recommended reducing its global balance sheet by $15
billion; (2) a preliminary and unaudited table attached to Lehman’s Securities and Exchange
Commission Form 8-K indicated that Lehman’s portfolio of “[r]eal estate held for sale” had
incurred $300 million in both gross and net losses in the three months ending on February 29,
2008; (3) the defendants did not form an Investor Advisory Committee for any of the
Partnerships until after May 28, 2008, when the Partnerships acquired the property interests at
issue; and (4) the defendants failed to issue a required financial report to the limited partners for
the second quarter of 2008. The district court correctly held that, in light of the entire complaint
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and the incorporated documents, these allegations are insufficient to support a strong inference
of scienter.
The plaintiffs principally rely on the table titled “Lehman Brothers Holdings Inc. Mark to
Market Adjustments Gain/(Loss) (Preliminary and Unaudited)” included in a press release
attached to Lehman’s S.E.C. Form 8-K quarterly report. Specifically, they rely on the fact that
the line item in the table for “[r]eal estate held for sale” shows a gross loss and a net loss of $300
million for the three months ending on February 29, 2008, and again for the three months ending
on May 31, 2008. However, even if we assume, as the plaintiffs do, that the property interests
being held for sale to the Partnerships were included within the category of Lehman’s “[r]eal
estate held for sale,” the table does not give rise to a strong inference that the defendants knew
that those particular property interests had depreciated in value. The table does not address
specific properties or groups of property, and it does not indicate whether the losses were evenly
distributed across the category of “[r]eal estate held for sale.”
By contrast, other contemporaneous documents attached to the complaint address the
particular property interests bound for the Partnerships, and those documents support the
inference that the defendants did not think that the property interests had depreciated in value.
An internal Lehman document lists the appreciation or depreciation of each of the Partnership-
bound investments and indicates that as of December 31, 2007, the investments, in aggregate,
had appreciated $300,000 in value since their acquisition. A second internal Lehman document
comprises line items indicating the increase, decrease, or lack of change in value of each of the
Partnership investments as of June 30, 2008. The June 2008 document indicates that the
investments, in aggregate, had increased in net value by 2.4% relative to their acquisition prices.
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The plaintiffs argue that the figures in the June 2008 document reflect only changes in
discount rates and not an attempt to calculate the “fair value” of the property interests. However,
the “Comments” in the document, which explain the valuation of each property interest, refer to
factors other than discount rate adjustments; moreover, the document refers multiple times to the
calculation of “fair value.” The plaintiffs also argue that the June 2008 figures are implausible
because the appreciation in value that they document is inconsistent with real estate indicators
worldwide from the same time period. However, those real estate indicators do not address the
particular property interests at issue in this case. The plaintiffs do not successfully undermine
the strong inference arising from the December 2007 and June 2008 internal documents that as
of February 29, 2008, the defendants did not believe that the property interests being held for
transfer to the Partnerships (as opposed to the general category of “[r]eal estate held for sale”)
had depreciated in value.
The remainder of the allegations asserted by the plaintiffs do not substantially increase
the strength of the inference of scienter on the part of the defendants. First, with respect to the
November 2007 presentation to Fuld, the plaintiffs do not allege facts specifying whether the
recommendation to reduce the commercial real estate group’s global balance sheet was a
suggestion to mark down the value of properties on the balance sheet or to reduce the balance
sheet by other means, such as by disposing of some of the investments. Even if we assume that
the recommendation was to mark down the value of the properties on the balance sheet, the
plaintiffs do not allege facts indicating that the recommendation referred to the particular
property interests bound for the Partnerships.
7
Second, with respect to the defendants’ failure to appoint an Investor Advisory
Committee for any of the Partnerships until after May 28, 2008, the date that the property
interests at issue were transferred to the Partnerships, this allegation does not carry much weight.
The partnership agreements contained no deadline for the appointment of the Investor Advisory
Committees. Moreover, the partnership agreements did not require the defendants to consult
with the Investor Advisory Committees regarding purchases of property interests from Lehman.
Consequently, even if the Committees had already been appointed, the defendants could have
entirely avoided the Committees’ participation in the May 28, 2008, transaction.
Finally, with respect to the defendants’ failure to prepare and mail a financial report for
the second financial quarter of 2008, the plaintiffs do not make clear how the failure to issue
financial statements required by August 29, 2008, demonstrates that as of February 29, 2008, the
defendants knew that the properties had depreciated in value. All of the plaintiffs had already
committed to the funds by the end of February 2008; the failure to issue the report months later
was not a ploy to induce investment. Moreover, the failure to issue the report only delayed the
inevitable disclosure of the information in a later report. The plaintiffs do not explain how the
defendants would benefit from such a delay.
Considering the complaint in its entirety, we hold that the plaintiffs have not alleged facts
sufficient to support a strong inference of scienter on the part of the defendants. Because the
claims against the institutional defendants fail here, the claims against the individual defendants
fail as well. See SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996) (“In order to
establish a prima facie case of controlling-person liability, a plaintiff must show a primary
violation by the controlled person . . . .”).
8
We have considered the appellants’ remaining arguments and find them to be without
merit. For the reasons stated herein, the judgment of the district court is AFFIRMED.
FOR THE COURT:
CATHERINE O’HAGAN WOLFE, CLERK
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