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Barbara J. Fried, Mark Fried Altitude Partners, LLC v. Lehman Brothers Real Estate Associates Iii

December 20, 2012

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.
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.



Appeal from the United States District Court for the Southern District of New York (Jones, J.).

11-1774

Fried v. Lehman Bros. Real Estate Associates III, L.P.

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.

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.

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.

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 ...


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