No. 11-55479

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

__________________________________________________________________

TAMER SALAMEH, et al.,

Plaintiffs-Appellants,

v.

TARSADIA HOTEL, et al.,

Defendants-Appellees. __________________________________________________________________

On Appeal from the United States District Court for the Southern District of California

__________________________________________________________________

BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION, AMICUS CURIAE

__________________________________________________________________ MARK D. CAHN General Counsel JACOB H. STILLMAN Solicitor RANDALL W. QUINN Assistant General Counsel WILLIAM K. SHIREY Senior Litigation Counsel

Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 (202) 551-5043 (Shirey)

i

TABLE OF CONTENTS

STATEMENT OF THE ISSUE ................................................................................. 1

INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION AND SUMMARY OF ITS POSITION ..................................................................... 2

STATEMENT OF THE CASE .................................................................................. 5

A. FACTS ............................................................................................................... 5

B. DISTRICT COURT PROCEEDINGS........................................................................ 8

ARGUMENT ........................................................................................................... 10

I. THE UNIT SALES AND RENTAL MANAGEMENT PROGRAM COMPRISE A SINGLE TRANSACTION FOR PURPOSES OF THE FEDERAL SECURITIES LAW. ................ 11

II. CONTRARY TO THE DISTRICT COURTS CONCLUSION, TARSADIA OFFERED AND SOLD INVESTMENT CONTRACTS. . .......................................................... 13

CONCLUSION ....................................................................................................... 18

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TABLE OF AUTHORITIES

Cases Page

In re Abbondante, 1934 Act Rel. No. 53055, 2006 WL 42393 (Jan. 6, 2003) .......................................................................................................... 15 Bailey v. J.W.K. Properties, Inc., 904 F.2d 918 (4th Cir. 1990) ........................ 17-18 In re Barkate, 57 S.E.C. 488 (April 8, 2004) ........................................................... 15 Buie v. United States, 420 F.2d 1207 (5th Cir. 1969) ............................................... 17 Davis v. Metro Productions, Inc., 885 F.2d 515 (9th Cir. 1989) .............................. 17 Demarco v. LaPay, 2009 WL 3855704, No. 2:09-CV-190 (D. Utah Nov. 17, 2009) ........................................................................................ 16 Garcia v. Santa Maria Resort, Inc., 528 F. Supp.2d 1283 S.D. Fla. 2007) ...................................................................................................... 16 Hocking v. Dubois, 885 F.2d 1449 (9th Cir. 1989)............................................passim SEC v. Eurobond Exchange, Ltd., 13 F. 3d 1334 (9th Cir. 1993) ............................ 15 SEC v. Glenn W. Turner Enters., 474 F.2d 476 (9th Cir. 1973) ............................... 15 SEC v. Rubera, 350 F.3d 1084 (9th Cir. 2003) ..................................................passim SEC v. W.J. Howey Co., 328 U.S. 293 (1946) ..................................................passim Tcherepnin v. Knight, 389 U.S. 332 (1967) ............................................................. 11 Timmreck v. Munn, 433 F. Supp. 396, 401 (N.D. Ill. 1977) ................................... 17 Warfield v. Alaniz, 569 F.3d 1015 (9th Cir. 2009) ............................................. 14-15

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TABLE OF AUTHORITIES (CONTINUED)

Commission Release Page

Guidelines as to the Applicability of the Federal Securities Law to Offers and Sales of Condominiums or Units in a Real Estate Development, Securities Act Release No. 33-5347, 1973 WL 158443 (Jan. 4, 1973) ....... 2, 13-14 Statutes and Rules

Securities Act of 1933, 15 U.S.C. 77a, et seq.

Section 2(1), 15 U.S.C. 77b(1) ...................................................................... 10

Section 12(a)(2), 15 U.S.C. 77l(a)(2) .............................................................. 8

Securities Exchange Act of 1934, 15 U.S.C. 78a, et seq.

Section 3(a)(10), 15 U.S.C. 78c(a)(10) ......................................................... 10

Section 10(b), 15 U.S.C. 78j(b) ....................................................................... 8

Rules Under the Securities Exchange Act of 1934, 17 C.F.R. 240.01, et seq.

Rule 10b-5, 17 C.F.R. 240.10b-5 .................................................................... 8

Federal Rules of Civil Procedure

Rule 12(b)(6) ................................................................................................... 8

Miscellaneous

S.E.C. No-Action Letter to MarcoPolo Hotel, Inc., 1987 WL 108553 (Sept. 30, 1987) ....................................................................................................... 12 S.E.C. No-Action Letter to Intrawest Corp., 2002 WL 31626919 (Nov. 8, 2002) ........................................................................................................ 12

No. 11-55479

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

__________________________________________________________________

TAMER SALAMEH, et al.,

Plaintiffs-Appellants,

v.

TARSADIA HOTEL, et al.,

Defendants-Appellees. __________________________________________________________________

On Appeal from the United States District Court for the Southern District of California

__________________________________________________________________

BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION, AMICUS CURIAE

__________________________________________________________________

STATEMENT OF THE ISSUE

Whether a series of related contracts offered by the defendants involving the

sale and rental management of hotel rooms in a hotel that the defendants were

constructing constituted investment contracts under the federal securities laws

where, from the time the sales commenced, the purchasers had so little use or

control of the rooms that they had no practical alternative but to rely on the

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defendants to rent the rooms and obtain profits, which were shared between the

purchasers and the defendants.

INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION AND SUMMARY OF ITS POSITION

The Securities and Exchange Commission the agency principally

responsible for the administration of the federal securities laws submits this brief

as amicus curiae to address a question concerning the applicability of the securities

laws to real-estate developments, an issue that has been of importance to the

Commission for many decades. See generally Guidelines as to the Applicability of

the Federal Securities Laws to Offers and Sales of Condominiums or Units in a

Real Estate Development, Securities Act Release No. 33-5347, 1973 WL 158443

(Jan. 4, 1973). The Commission believes that the district court, in determining that

the hotel-room sales did not involve sales of investment contracts, failed to give

effect to the economic and practical realities of the transactions as required by

Supreme Court and Ninth Circuit precedent.

The Commission is concerned that the district courts holding on the

investment contract issue, unless reversed, would seriously erode the investor

protections of the securities laws. It would impermissibly allow a promoter to

avoid the coverage of these laws by (1) artificially dividing a single investment

transaction into ostensibly separate parts, and (2) including written disclaimers that

falsely state that there is no investment expectation.

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This case involves the offer and sale of hotel rooms, and related rental-

management agreements, in a large-scale luxury hotel venture that the defendants

undertook to develop, construct, and operate in San Diego, California. Early

during the hotels construction phase, the defendants sold the hotel rooms to the

public, including the plaintiffs, by requiring that the purchasers execute two

agreements that, collectively, denied the purchasers the effective use and control of

the units and substantially reserved that control for the defendants. Approximately

a year later but still prior to the hotels opening, the defendants offered a rental

management arrangement whereby the defendants became the exclusive agent to

manage, promote, and rent each room as part of the hotel. Plaintiffs brought suit

against the hotel developer asserting that the hotel rooms and the rental

management program, together, comprise an investment contract covered by the

federal securities laws. The district court determined that the plaintiffs

allegations do not sufficiently set forth facts indicating they were offered [the

rooms and the rental management program] as part of a single package (ER14),1

1 ER__ refers to the page number in the plaintiffs