Thursday, November 7, 2013

Steinhardt Group Inc. v. Citicorp case brief

Steinhardt Group Inc. v. Citicorp case brief summary
126 F.3d 144 (1997)

Plaintiff investor appealed a judgment from the United States District Court for the District of Delaware, which granted defendant promoter's motion to dismiss plaintiff's complaint, which alleged fraud in the securitization of a pool of delinquent residential mortgage loans and real estate, on the ground that the investment vehicle was not an investment contract within the meaning of 15 U.S.C.S. § 78c of the Securities Exchange Act of 1934.

Plaintiff investor alleged that defendant promoter concocted a fraudulent scheme to pawn off on plaintiff a pile of delinquent mortgage loans and properties defendant owned.

  • While the scheme may have been fraudulent, the court affirmed the judgment that the court held that the vehicle through which plaintiff invested in the assets was not an investment contract, within the meaning of 15 U.S.C.S. § 78c of the Securities Exchange Act of 1934 (Exchange Act).
  • Therefore plaintiff failed to state a claim under §§ 10(b) and 20(a) of the Exchange Act, 15 U.S.C.S. §§ 78j(b), 78t(a), and 78t(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. 
  • The court held that the vehicle, a limited partnership interest, flunked the control prong of the test for determining whether an investment was an investment contract.
  • Under the limited partnership agreement, plaintiff's nearly 99 percent limited partnership interest gave it such pervasive control of the enterprise, principally through approval and veto rights, as to negate the notion that its investment return depended solely on the efforts of others. 
  • That its rights were insufficient to expose it to the partnership's liability under state law was irrelevant.

The court affirmed the judgment that dismissed plaintiff investor's complaint. The court held that plaintiff had such significant authority over the conduct of the securitization scheme, via the limited partnership that comprised plaintiff's investment, that plaintiff directly affected the profits it received from the investment, and therefore the investment did not constitute an investment contract.

Suggested Study Aids For Securities Regulation Law
Securities Regulation in a Nutshell, 10th (Nutshell Series)
Securities Regulation: Examples & Explanations, 5th Edition
Securities Regulations: The Essentials

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