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CAPITAL REAL ESTATE INVESTORS TAX EXEMPT FUND L.P.

April 23, 1996

CAPITAL REAL ESTATE INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP, et al., Plaintiffs, against MARTIN C. SCHWARTZBERG, Defendant.


The opinion of the court was delivered by: KAPLAN

 LEWIS A. KAPLAN, District Judge.

 Plaintiffs Capital Realty Investors Tax Exempt Limited Partnership ("CRITEF") and Capital Realty Investors Tax Exempt Fund III Limited Partnership ("CRITEF III") (collectively the "Funds") are the subjects of proposed mergers with affiliates of Apollo Real Estate Acquisition Corporation ("Apollo"). The Funds and their principals are locked in a battle with defendant Martin C. Schwartzberg, one aspect of which is Schwartzberg's effort to block the mergers and to supplant the current managing general partners of the Funds. Both Schwartzberg and the Funds have filed preliminary proxy statements with the Securities and Exchange Commission ("SEC"), and a proxy fight is imminent.

 On March 18, 1996, this Court granted plaintiffs' motion for a preliminary injunction, holding that two press releases issued by Schwartzberg in prior maneuvering between the parties constituted solicitations within the meaning of the pertinent SEC regulation and that they violated Rule 14a-9, 17 C.F.R. § 240.14a-9; the antifraud provision of the proxy rules. Capital Real Estate Investors Tax Exempt Fund Limited Partnership v. Schwartzberg, No. 96 Civ. 1186 (LAK). 917 F. Supp. 1050, 1996 U.S. Dist. LEXIS 3308, 1996 WL 120754 (S.D.N.Y. Mar. 18, 1996) (hereinafter "CRITEF I"). Schwartzberg now moves for a preliminary injunction against plaintiffs, arguing that press releases issued by the Funds in which they announced the proposed mergers and subsequent related developments were materially misleading solicitations also in violation of Rule 14a-9.

 Facts

 The broad outlines of the dispute are covered in some detail in CRITEF I familiarity with which is assumed, and need not be repeated. Only those facts immediately relevant to the determination of the issues presented by this motion need be sketched.

 The Funds' Press Releases

 The September 11 Release

 The agreements to merge were entered into on September 11, 1995, and the Funds issued a press release announcing the proposed transactions on the same day. The release described the proposed merger terms and then went on as follows:

 
"The merger offers represent substantial premiums of approximately 20 percent over recent market prices for interests in the partnerships. The general partners of the CRITEF partnerships have agreed to sell their own interests in the partnerships to the CAPREIT subsidiary and they recommend that the CRITEF BAC holders approve the transaction with CAPREIT. The CRITEF general partners have concluded that these transactions are in the best interests of the BAC holders. The general partners of the CRITEF partnerships are affiliates of CRI, Inc., a real estate investment firm. CRI chairman William B. Dockser said, 'We believe this is an excellent offer from a real estate company with a proven track record and substantial financial resources. The offering prices are substantially above the current American Stock Exchange trading prices and represent a timely opportunity for the BAC holders to realize today the full value in the CRITEF partnerships.' Dockser also said that the CRITEF general partners had engaged Oppenheimer & Co. to provide an independent opinion as to the merits of the offer." (Schwartzberg Decl. Ex. 3)

 Thus, the release went considerably beyond announcing the proposed transactions and their terms. It promoted the deal to shareholders by (1) focusing on the premium over recent trading prices inherent in the proposed offers, (2) conveying the recommendation of the general partners that the mergers be approved, (3) expressing the general partners' opinion that the transactions were in the best interests of the BAC holders, and (4) announcing Dockser's personal belief that the offer was "excellent" and would permit BAC holders to realize "the full value" in the partnerships.

 As CRITEF I describes, the proposed mergers did not proceed smoothly. Class actions challenging the proposed mergers were filed. See CRITEF I, 1996 U.S. Dist. LEXIS 3308, at *11, 1996 WL 120754, at *4 The buyer did not quickly obtain financing. Moreover, it has come to light since the Court's prior decision that during October 1995, Oppenheimer & Co. ("Oppenheimer") advised plaintiffs that the proposed merger consideration "would not support a fairness determination by Oppenheimer." (Schwartzberg Decl. Ex. 2, at 25)

 Against this background, the Funds issued a second press release on December 13, 1995. The release indicated that conditions to the consummation of the previously announced mergers had not been, and might not be, satisfied. Nevertheless, it stated that the general partners of the Funds were in discussions aimed at improving the terms of the deal. (Id. Ex. 4) No mention was made of Oppenheimer's refusal to render a fairness opinion on the deal as originally announced.

 The February 1, 1996 Release

 On January 31, 1996, the Funds and Apollo reached agreement on revised merger terms. On the following day, the Funds issued the third press release here at issue to announce the new deal. The release was spare, noting only that the new agreement improved the merger terms and that the transactions were subject to obtaining a favorable fairness opinion, review by the SEC of a proxy statement, and approval by the BAC holders at a special meeting. (Id. Ex. 5)

 Discussion

 Schwartzberg contends that the Funds' press releases were materially false and misleading because (1) the insiders knew, contrary to Dockser's statement, that the terms of the mergers as announced in the September 11 release did not yield "full value" to the BAC holders (2) they failed to disclose that Oppenheimer stated that it would not render a fairness opinion on the original merger terms, (3) they understated the extent of the self interest of CRI, Dockser and Willoughby in the proposed mergers, and (4) they falsely represented that the general partners of the Funds recommended approval of the transactions, knowing that Schwartzberg opposed them. Before considering the merits of these claims, it is necessary to deal with plaintiffs' contentions that Schwartzberg lacks standing to sue under the proxy rules and that the Funds' press releases were not "solicitations" subject to Rule 14a-9. *fn1"

 Standing

 Plaintiffs challenge Schwartzberg's standing to bring this claim, arguing that he is not a BAC holder whose proxy is being solicited by the ...


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