United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 12, 2009 Decided August 21, 2009
No. 08-7095
LIBERTY PROPERTY TRUST AND LIBERTY PROPERTY LIMITED
PARTNERSHIP,
APPELLANTS
v.
REPUBLIC PROPERTIES CORPORATION ET AL.,
APPELLEES
Appeal from the United States District Court
for the District of Columbia
(No. 1:07-cv-00595)
J. David Dantzler argued the cause for appellants. With
him on the briefs was Mark E. Nagle.
George A. Borden argued the cause for appellees. With him
on the brief were Paul Martin Wolff, William T. Burke, Seymour
Glanzer, and Leslie R. Cohen.
Before: SENTELLE, Chief Judge, GINSBURG, Circuit Judge,
and RANDOLPH, Senior Circuit Judge.
Opinion for the Court filed by Chief Judge SENTELLE.
2
Dissenting opinion filed by Senior Circuit Judge
RANDOLPH.
SENTELLE, Chief Judge: Plaintiffs-appellants Liberty
Property Trust and Liberty Property Limited Partnership
(successors in interest to Republic Property Trust and Republic
Property Limited Partnership, respectively) appeal from a
judgment of the district court dismissing their claims under the
Securities Exchange Act of 1934 and SEC Rule 10b-5 for failure
to state a claim upon which relief could be granted. The district
court dismissed their federal securities claims on the basis that
the limited partnership interests they sold were not “investment
contracts,” and therefore were not securities, under the test of
SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946).
Declining jurisdiction over the remaining state law claims, the
district court granted the defendants’ motion to dismiss. We
reverse the district court’s order and remand the case for further
proceedings.
I. Background
Because this case comes to us on appeal from judgment
granting a motion to dismiss, our statement of the facts adopts
the allegations of the complaint. For the purpose of reviewing
the granting of the motion, “the material allegations of the
complaint are taken as admitted,” Jenkins v. McKeithen, 395
U.S. 411, 421 (1969), and are “construed favorably to the
pleader,” Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).
Defendants-appellees Richard Kramer and Steven Grigg are real
estate developers who own and control defendant-appellee
Republic Properties Corporation. Republic Property Trust v.
Republic Properties Corp., 540 F. Supp. 2d 144, 149-50 (D.D.C.
2008). Kramer owns 85% of the corporation and Grigg 15%.
Id. at 150.
3
Kramer and Grigg, together with a third developer Mark
Keller, formed Republic Property Trust in July 2005. Id. at 149.
Kramer served as chairman of the trust’s board of trustees;
Grigg was vice chairman, president, and chief development
officer. Id. (citing Am. Compl. ¶¶ 4-5, 11). The trust was
structured as a real estate investment trust, or REIT, under
Section 856 of the Internal Revenue Code, 26 U.S.C. § 856.
REITs permit diversified investment in real estate. Before its
initial public offering in December 2005, the trust established
Republic Property Limited Partnership. Republic Property, 540
F. Supp. 2d at 150. The limited partnership was “own[ed]
approximately 88%” by the trust, which was also its “sole
general partner.” Am. Compl. ¶ 2. REITs with affiliated limited
partnerships are a common device for tax planning and are
called Umbrella Partnership REITs or UPREITs. See generally
Russell J. Singer, Understanding REITs, UPREITs, and Down-
REITs, and the Tax and Business Decisions Surrounding Them,
16 Va. Tax Rev. 329, 334 (1996). Investors may contribute
appreciated property to the limited partnership without
recognizing taxable income. See id.
In October 2004, Republic Properties Corporation agreed
“to provide fee-based services to the City of West Palm Beach
to design, develop and construct” “a $100 million urban mixed-
use development in West Palm Beach.” Am. Compl. ¶ 15; see
Republic Property, 540 F. Supp. 2d at 150. The contract
between the corporation and the West Palm Beach Community
Redevelopment Agency, styled a “Professional Services
Agreement,” contained representations from the corporation that
it would “at all times conduct business in a reputable manner”
and that it “ha[d] not employed or retained any company or
person . . . and ha[d] not agreed to pay any person, company,
corporation, individual, or firm . . . any fee, commission,
percentage, gift, or any other consideration contingent upon or
resulting from the award or making of this Agreement.” Am.
4
Compl. ¶ 90 (modifications in original).
A month later, the defendants hired Raymond Liberti, a
commissioner of West Palm Beach and member of the
Community Redevelopment Agency, as a consultant to help win
a “construction contract for an academic pre-med undergraduate
building and teaching hospital at Florida Atlantic University.”
Am. Compl. Ex. B; see Republic Property, 540 F. Supp. 2d at
151. The corporation paid Liberti $5000 a month, and later
$8000 a month, for a period extending from November 15, 2004
through May 2006. Liberti’s services—“business development,
government relations, lobbying, planning,” and so forth—were
limited to projects “outside the city limits of the City of West
Palm Beach.” Am. Compl. Ex. B. Nevertheless, as part of his
role as a voting member of the Community Redevelopment
Agency, Liberti voted in favor of approving and amending the
Professional Services Agreement, which benefitted the
defendants. See Am. Compl. ¶¶ 45, 60, 63.
In December 2005, the REIT was formed as part of a series
of transactions, including an initial public offering of trust stock.
In one such transaction, included in a “Contribution Agreement”
signed in September 2005, the corporation sold its rights in the
Professional Services Agreement to the limited partnership in
exchange for 100,234 limited partnership units. The value of
those units at the time of the corporation’s initial public offering
was approximately $1.2 million. Am. Compl. ¶ 21. Through an
amendment to the Professional Services Agreement at its closing
in December 2005, the corporation’s rights were transferred to
“Republic WPB LLC . . . , an indirectly wholly owned
subsidiary of” the limited partnership. Am. Compl. ¶¶ 20, 53.
On May 5, 2006, “plaintiffs received an unwelcome
surprise.” Republic Property, 540 F. Supp at 151. That day,
“[t]he United States Attorney for the Southern District of Florida
5
charged” Liberti “with accepting bribes and otherwise abusing
his elected position,” in carrying out transactions that do not
involve the corporation or trust in this case. Id. (citing Am.
Compl. ¶ 71); see Am. Compl. ¶ 72. Eventually, “Liberti pled
guilty to the charges against him.” Am. Compl. ¶ 79. Soon
after the West Palm Beach press began covering the story, the
city “notified” the corporation “that it intended to terminate the
[Professional] Services Agreement.” Republic Property, 540 F.
Supp. 2d at 151 (citing Am. Compl. ¶ 77). In an apparent effort
to minimize its losses, the limited partnership entered into an
“assignment agreement with mutual releases,” “terminat[ing] the
Professional Services Agreement” and ending all involvement
of the developers with the West Palm Beach project. Am.
Compl. ¶ 80.
The plaintiffs asserted nine causes of action before the
district court, alleging securities fraud under Rule 10b-5, control
person liability, and various infractions of state law. See
Republic Property, 540 F. Supp. 2d at 152, 154-64. The essence
of the plaintiffs’ securities law claims is that the relationship
between the corporation and Liberti was material information
affecting the value of the Contribution Agreement; the
corporation, Kramer, and Grigg failed to disclose that
relationship before assigning the Contribution Agreement to the
limited partnership in exchange for limited partnership units.
Granting a motion to dismiss, the district court held that the
units were not securities under the Securities Exchange Act, so
there could be no liability under Rule 10b-5. In a footnote, the
district court suggested that the plaintiffs may not have
adequately pleaded economic loss and loss causation. Republic
Property, 540 F. Supp. 2d at 162-63 n.6. But because the
district court held that “no purchase or sale of securities [had]
occurred,” it did not need to “resolve” the question “at present.”
Id. at 163 n.6.
6
We now hold that the limited partnership units were
securities within the meaning of the Securities Exchange Act
and reverse the order granting the motion to dismiss.
II. Analysis
Our task is to determine whether the limited partnership
units in this case fit within the definition of “securit[ies]” in
Section 10(b) of the Securities Exchange Act. 15 U.S.C.
§ 78j(b). As relevant to this case, that section makes it
“unlawful for any person . . . [t]o use or employ . . . any
manipulative or deceptive device or contrivance in
contravention of” rules promulgated by the Securities and
Exchange Commission “in connection with the purchase or sale
of any security . . . not . . . registered” on a national securities
exchange. Id. SEC Rule 10b-5 makes it unlawful “to omit to
state a material fact necessary in order to make . . . statements
made . . . not misleading . . . in connection with the purchase or
sale of any security.” 17 C.F.R. § 240.10b-5. The Supreme
Court inferred a private cause of action from this regulation in
Superintendent of Insurance v. Bankers Life & Casualty Co.,
404 U.S. 6, 13 n.9 (1971). Only buyers and sellers of securities
have standing to bring suit under Rule 10b-5. See Blue Chip
Stamps v. Manor Drug Stores, 421 U.S. 723, 731 (1975). We
agree with and adopt the standing analysis of the district court,
which held that the limited partnership, as seller of the units, had
standing to bring suit under the Rule. See Republic Property,
540 F. Supp. 2d at 154-56.1
1
Because the limited partnership has standing to maintain the
action and a remedial award to the partnership would also make the
trust whole, in the limited circumstances of this case we need not
determine whether the trust independently has standing. As the
plaintiffs themselves maintain, the trust and the limited partnership
“both are pieces of a single operating business.”
7
A. Analyzing the Nature of the Limited Partnership Units
In defining “security” for purposes of the Exchange Act, 15
U.S.C. § 78c(a)(10) provides a list of terms including
“investment contract,” that describe different types of securities.
To determine whether the limited partnership units in this case
are “investment contract[s],” we apply the test of SEC v. W.J.
Howey Co., 328 U.S. at 298-99. In Howey, the Supreme Court
held an investment contract to be “a contract, transaction, or
scheme whereby a person invests his money in a common
enterprise and is led to expect profits solely from the efforts of
the promoter or a third party.” Id. This court has repeatedly
treated this test as met when profits are generated
“predominantly” from the efforts of others. SEC v. Life
Partners, Inc., 87 F.3d 536, 547 (D.C. Cir. 1996) (“If the
investor’s profits depend . . . predominantly upon the promoter’s
efforts, then the investor may benefit from the disclosure . . .
requirements of the federal securities laws.”); SEC v. Banner
Fund Int’l, 211 F.3d 602, 615 (D.C. Cir. 2000) (quoting Life
Partners, 87 F.3d at 545).
Whether limited partnership units are securities is an issue
of first impression in our Circuit. Other courts have considered
this issue in different circumstances. In Mayer v. Oil Field
Systems Corp., 721 F.2d 59 (2d Cir. 1983), the Second Circuit
noted that a limited partnership interest “generally is a security
because such an interest involves investment ‘in a common
enterprise with profits to come solely from the efforts of
others.’” Id. at 65 (quoting Howey, 328 U.S. at 301). The Third
Circuit held limited partnership interests not to be securities
when the limited partner owned 98.79% of the enterprise and
therefore could exercise “pervasive control over the
management of the Partnership.” Steinhardt Group, Inc. v.
Citigroup, 126 F.3d 144, 154 (3d Cir. 1997). In a case from the
Southern District of New York predating both these decisions,
8
limited partnership interests were held to be securities when
bought by plaintiffs who simultaneously bought general
partnership interests because the plaintiffs were not general
partners prior to the purchase. Hirsch v. duPont, 396 F. Supp.
1214, 1228 (S.D.N.Y. 1975), aff’d 553 F.2d 750 (2d Cir. 1977)
(holding “plaintiffs’ limited partnership interests may be
considered separately from their general partnership interests
purchased at the same time”). As we elaborate below, the
principles courts have applied in these cases lead us to conclude
that the limited partnership units in this case were securities.
In deciding the nature of the units in this case, we keep in
mind the guidance of the Steinhardt court that “the legal rights
and powers enjoyed by the investor” should be the touchstone
of our analysis. 126 F.3d at 153 (quoting Goodwin v. Elkins &
Co., 730 F.2d 99, 107 (3d Cir. 1984)). Neither party argues that
the limited partnership units purchased by the corporation
granted legal rights to control the limited partnership.
Rather, the appellees argue that the partnership interests
should not be considered securities because, in the words of the
district court, “the same parties stand on both sides of the
transaction.” Republic Property, 540 F. Supp. 2d at 162.
According to SEC filings, Kramer and Grigg owned over 9% of
the trust, were trustees, and held executive positions within the
trust. Therefore, the appellees argue, Kramer and Grigg
controlled the trust, which was the general partner of the limited
partnership, and so controlled the limited partnership as well.
They argue that they should not be held liable for failing to
disclose information to themselves. In urging us to disregard the
formalities of corporate structure, the appellees stress Howey’s
language that it was announcing a “flexible rather than a static
principle,” 328 U.S. at 299, and that its “emphasis should be on
economic reality,” United Housing Found., Inc. v. Forman, 421
U.S. 837, 848 (1975) (quoting Tcherepnin v. Knight, 389 U.S.
9
332, 336 (1967)).
The appellants reply that in accepting the appellees’
analysis, the district court “effectively pierced two corporate
veils.” In so doing, the court disregarded the organizational
forms of both the corporation and the limited partnership to view
the transaction as between the same parties. Piercing the
corporate veil “is a step to be taken cautiously,” Quinn v. Butz,
510 F.2d 743, 759 (D.C. Cir. 1975), and it is typically at issue in
cases of common-law liability, not in a case, such as this, in
which the court must determine whether it is dealing with an
“investment contract” under the securities laws. Having taken
advantage of the corporate form to purchase the limited
partnership units, the defendants may not disregard that form to
avoid liability for the same transaction. See generally McCarthy
v. Azure, 22 F.3d 351, 362-63 (1st Cir. 1994) (“The alter ego
doctrine is equitable in nature [and accordingly] can be invoked
‘only where equity requires the action to assist a third party’”);
PayPhone LLC v. Brooks Fiber Commc’ns., 126 F. Supp. 2d
175, 179 (D.R.I. 2001) (“[A] corporation may not pierce its own
corporate veil for its own benefit.”). In this case, the defendants
did not even allege that the corporate form was “a sham.”
United States v. Andrews, 146 F.3d 933, 939-40 (D.C. Cir.
1998); see also United States ex rel. Siewick v. Jamieson Science
and Engineering, Inc., 322 F.3d 738, 741 (D.C. Cir. 2003)
(finding it inappropriate to pierce a corporate veil when the
“complaint did not even allege that [the] corporate form was a
sham”). And the appellees point to no cases where defendants
have avoided liability—under the securities laws or
elsewhere—on the basis of their own control, pervasive or
otherwise. We see no reason to pioneer a new application of
that limited doctrine on the facts before us.2
2
Our dissenting colleague, like the appellees, points to cases
in which “[f]orm was disregarded for substance and emphasis was
10
Even assuming it were proper to disregard the corporate
form, Kramer and Grigg did not exercise sufficient control of
the limited partnership to disqualify their units as securities.
placed upon economic reality.” Howey, 328 U.S. at 298. Those cases,
however, address situations in which courts, rather than simply
accepting the label attached to an instrument by the issuer, are to
inquire into the actual substance of the transaction. See id. at 300
(declining to be bound by “the legal terminology in which such
contracts are clothed”); United Housing Found., 421 U.S. at 850
(holding “the name given to an instrument is not dispositive”);
Tcherepnin, 389 U.S. at 339 (examining “withdrawable capital shares”
and concluding such interests “have the essential attributes of
investment contracts”); SEC v. Aqua-Sonic Products Corp., 687 F.2d
577, 584 (2d Cir. 1982) (looking behind the formal rights of investors
and asking whether “it was reasonable to expect investors to exercise
their retained rights under the sales agency agreement in a nontrivial
manner”). Looking to economic reality, however, does not warrant a
departure from the general rule that the corporate form “[may be
disregarded only where equity requires the action to assist a third
party.” 1 W. Fletcher, Cyclopedia of Corporations § 41.10, at 615
(1990). Our dissenting colleague is quite correct that the doctrine of
piercing the corporate veil has no application to this case.
Accordingly, we refuse to apply it to allow the defendants to escape
liability by prevailing on a motion to dismiss. Our conclusion is
reinforced by the Supreme Court's instruction that the Securities Act
“should be construed broadly to effectuate its purpose[] ... to protect
investors through the requirement of full disclosure.” Tcherepnin, 389
U.S. at 336. Viewed favorably to the plaintiffs, the facts here indicate
the partnership and the corporation were distinct entities, which served
independent purposes, and between which a transaction could occur
that benefited the corporation at the expense of the partnership. It was
inappropriate, on a motion to dismiss, for the district court to disregard
the corporate form without a factual determination that each
corporation was “simply the alter ego of its owners.” Valley Finance
Inc. v. United States, 629 F.2d 162, 172 (D.C. Cir. 1980). In this case
the defendants did not even allege, much less prove, that proposition.
11
Republic Property Trust had six trustees and ten executive
officers. Kramer and Grigg’s two votes were a minority of the
board. Cf. Kravco Inc. v. Rodamco N. America, N.V., No. 00-
0272, 2000 WL 1839735, *5-6 (E.D. Pa. Dec. 13, 2000) (when
investors held three of six seats on the board, their limited
partnership units were not securities). Nor does the analysis
change if we consider the trust at the time the Contribution
Agreement was signed in September 2005, when Kramer and
Grigg were two of three trustees. Although they then
constituted a majority of the board, the Howey test turns on
“whether profits are expected to arise from the efforts of others.”
Life Partners, 87 F.3d at 545. If Kramer and Grigg signed the
agreement expecting additional trustees to come aboard before
the deal was closed, then they “expected” to profit from the
efforts of the independent trustees added before the exchange
was completed. Disregarding the corporate form, Kramer and
Grigg still appear to have been dealing in securities.
B. Other Issues
Even if the limited partnership units were investment
contracts, and thus securities, the district court may still have
been correct in granting the defendants’ motion to dismiss if the
plaintiffs’ claims would fail for legally independent reasons.
Although we review all questions of law de novo and “have the
discretion to consider questions of law that were . . . no[t] passed
upon by the District Court,” this court’s “normal rule” is to
avoid such consideration. District of Columbia v. Air Florida,
Inc., 750 F.2d 1077, 1085 (D.C. Cir. 1984); see Eltayib v. United
States Coast Guard, 53 F. App’x 127, 127 (D.C. Cir. 2002)
(citing same).
In a footnote, the district court noted that it found the
plaintiffs’ pleading of economic loss and loss causation to be
“problematic.” Republic Property, 540 F. Supp. 2d at 162 n.6.
12
The district court wondered whether the limited partnership’s
assignment of the Professional Services Agreement to a
subsidiary broke the chain of causation. Id. The plaintiffs,
however, alleged the subsidiary was a mere instrumentality of
the parent, see, e.g., Bellomo v. Pennsylvania Life Co., 488 F.
Supp. 744, 746 (S.D.N.Y. 1980) (“Where . . . the subsidiaries
are created by the parent, for tax or corporate finance purposes,
to carry on business on its behalf, there is no basis for
distinguishing between the business of the parent and the
business of the subsidiaries.”), and they may be able to prove as
much at trial. On remand, and on a more developed record, the
district court may determine the relationships among the trust,
the limited partnership, and the subsidiary entities through
which they conducted business. See Am. Compl. ¶ 20
(describing “Republic WPB LLC” as “an indirectly wholly
owned subsidiary of” the limited partnership).
With respect to loss causation, the plaintiffs’ complaint
alleges that West Palm Beach and the Community
Redevelopment Agency cancelled the Professional Services
Agreement as a direct result of the relationship between the
corporation and Liberti. Am. Compl. ¶¶ 77, 90-91. This is a
pleading of loss causation, and it was adequate to survive a
motion to dismiss.
Finally, the appellees argue that the district court’s
judgment may be affirmed on the alternative ground that the
plaintiffs failed to adequately plead scienter under the Private
Securities Litigation Reform Act of 1995; that is, the plaintiffs
must plead “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), namely an “intent to deceive,
manipulate, or defraud,” Ernst & Ernst v. Hochfelder, 425 U.S.
185, 193 (1976). Either intentional wrongdoing or “extreme
recklessness” satisfies the standard. SEC v. Steadman, 967 F.2d
13
636, 641 (D.C. Cir. 1992). The appellees argue that the
plaintiffs’ allegations “most readily give rise to an innocent
inference,” but the district court found a “credible inference of
fraudulent intent as to Grigg and Kramer.” Republic Property,
540 F. Supp. 2d at 159. On this issue, we adopt the reasoning of
the district court. See id. at 159-60.
III. Conclusion
We therefore reverse the district court’s order granting the
motion to dismiss, and remand for further proceedings.
So ordered.
RANDOLPH, Senior Circuit Judge, dissenting: I believe the
district court correctly ruled that the limited partnership units
sold to the Republic Property Corporation in the September
2005 transaction did not qualify as “securit[ies]” under the
Securities and Exchange Act, 15 U.S.C. § 77b(a)(1). Republic
Property Trust v. Republic Properties Corp., 540 F. Supp. 2d
144, 160–62 (D.D.C. 2008). As the majority points out, some
courts have held that limited partnership units are “investment
contracts,” and thus “securities” under § 77b(a)(1). See Louis
Loss, Securities Regulation 971 & n.213 (4th ed. 2007). Other
courts have held that limited partnership units do not meet the
definition. See id. at 983 & n.215. The critical consideration is,
as the Supreme Court held in SEC v. W.J. Howey Co., 328 U.S.
293, 301 (1946), “whether the scheme involves an investment of
money in a common enterprise with profits to come solely from
the efforts of others.”
In later cases, Howey’s “solely from the efforts of others”
has come to mean “predominantly” from the efforts of others.
SEC v. Life Partners, Inc., 87 F.3d 536, 545, 548 (D.C. Cir.
1996). Judge Friendly, a judge with deep experience in
securities law, held that courts making that assessment should
not “attach decisive significance to mere legal formality” and
should “disregard[] form for substance . . . , placing emphasis
upon economic reality.” SEC v. Aqua-Sonic Prods. Corp., 687
F.2d 577, 584 (2d Cir. 1982) (Friendly, J.). Howey itself said as
much, 328 U.S. at 299, as have later Supreme Court opinions.
See, e.g., United Housing Found., Inc. v. Forman, 421 U.S. 837,
848 (1975); Tcherepnin v. Knight, 389 U.S. 332, 336 (1967).
Here, defendants Kramer and Grigg, experienced
commercial real estate investors, were on both sides of the
transaction. See Republic Property, 540 F.Supp. 2d at 161. On
one side was the Republic Property Corporation. Kramer owned
85 percent of the Corporation; Grigg owned the remaining 15
percent. One the other side of the transaction was the real estate
investment trust or “REIT,” which had formed the limited
2
partnership and managed it as its sole general partner. Kramer
and Grigg, with one other colleague, established the REIT. And
when the parties executed the sales agreement in September
2005,* Kramer and Grigg served as two of its three trustees.
Grigg was President, Chief Development Officer, and Vice-
Chairman of the board of trustees; Kramer was Chairman of the
board of trustees. The Limited Partnership Agreement provided
that “No Limited Partner . . . (other than . . . any officer,
director, . . . or trustee of the general Partner . . .) shall take part
in the operation, management or control . . . of the Partnership’s
business . . . .” Partnership Agreement § 8.2 (emphasis added).
In short, the profitability of the limited partnership
depended on the efforts of Kramer and Grigg, and Kramer and
Grigg were the sole owners of the corporation who sold the
West Palm Beach contract to the limited partnership. The
limited partnership units therefore cannot possibly be
“securities” under Howey test. The Supreme Court formulated
its test in light of one of the main purposes of the securities laws
– to ensure that investors who will rely on a company’s
management receive “full and fair disclosure” regarding the
securities they are purchasing. Howey, 328 U.S. at 299; see
Tcherepnin, 389 U.S. at 336. The majority’s conclusion
disregards this essential premise. To hold – as the majority does
– that Kramer and Grigg had a legal obligation to provide
information to themselves is to render the securities laws
senseless.
The majority’s only justification for its result is that the
court should not “pierce the corporate veil.” Why this common
*
Plaintiffs admit that the relevant transaction for purposes of
their securities fraud claim was the Development Contribution
Agreement executed on September 23, 2005, when Kramer and Grigg
were two of only three trustees. Am. Compl. ¶¶ 18, 88–90.
3
law concept has anything to do with this case is a mystery. This
is a federal action under Rule 10b-5, and never in the long
history of that provision has the definition of security depended
on the “corporate veil” concept. If the majority has a reason,
any reason, for now departing from this line of authority, one
would have expected it to be shared with us. Yet nothing
emerges.
The majority has severed the corporate veil doctrine from
its foundation. To refuse to pierce the corporate veil is to refuse
to impose liability on corporate officers and directors for
corporate wrongdoing. Yet Rule 10b-5 itself does the opposite.
The securities laws subject individual officers to liability for
misstatements of material facts. Plaintiffs here know that full
well, which is why they sued not only the corporation but also
Kramer and Grigg.
I can see no reason – and the majority offers none – for
using the corporate veil concept, developed in a different
context, to hold that “others” in the Howey test means only the
corporation, not the owners and managers of the corporation. If
the selling corporation is owned and managed by two
individuals – as it was here – and if those same individuals
control and manage the entity investing in that corporation – as
here – the investor cannot be relying on the efforts of “others”
to make a profit. That, in Judge Friendly’s words, is the
economic reality. The transaction at issue in this case therefore
did not involve securities and the district court correctly
dismissed the complaint.