Weiss v. Lehman

United States District Court for the District of Columbia · Federal Courts

Federal CourtsSecuritiesCommon Law FraudFiduciary DutyRICOJurisdictionSection 10(b)Rule 10b-5

Facts

Plaintiffs bought interests in twelve Baltimore joint ventures in Phase I and later, in Phase II, bought twenty-five Baltimore properties through A & M and bought out the remaining 20% minority interests in BJVs XVI and XXI. The court found the Phase I investments were profitable for plaintiffs, but that in Phase II Lehman set arbitrary prices for the properties and interests at roughly two to two-and-a-half times fair market value without appraisals and without disclosing that the prices bore no relationship to market value. Lehman and the Alperts were general partners in the ventures and thus owed fiduciary duties to plaintiffs in the ventures where they shared ownership. Plaintiffs relied on defendants' pricing and disclosures in making the Phase II purchases and buyout.

Issue

Whether plaintiffs' Phase I and Phase II transactions involved securities claims actionable under the federal securities laws, and whether defendants were liable under common law fraud and fiduciary-duty principles for the Phase II transactions. The court also had to decide whether plaintiffs stated a viable RICO claim and whether Lehman's counterclaims had merit.

Rule

An investment contract exists only when a person invests money in a common enterprise and expects profits principally from the efforts of a promoter or third party. Under Maryland law, common law fraud requires: (1) a false material representation or a duty to disclose with failure to disclose when required to speak; (2) knowledge of falsity; (3) intent to defraud; (4) justified reliance; and (5) damages. General partners owe coventurers a fiduciary duty of fair dealing and disclosure, including a duty not to sell partnership interests or assets at arbitrary inflated prices without disclosing that those prices do not reflect fair market value.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Detroit, Nina Patel buys three rowhouses outright from a redevelopment promoter through her own LLC. She is free to hire any manager, pays the taxes and mortgages herself, and expects tax depreciation and neighborhood appreciation rather than returns generated by the promoter’s ongoing work.

Are Nina’s purchases most likely securities in the form of investment contracts?

Explanation. The majority applied Howey by asking whether the buyer expected profits principally from the efforts of others. Where the buyer purchases real estate outright, can choose management, and handles ownership obligations herself, the transaction is not an investment contract merely because she hopes for appreciation or tax benefits. The court did not say real estate can never be a security; it held these kinds of direct property purchases were not. (Derived from Weiss v. Lehman (n.d.).)