Registered Limited Liability Partnerships Interests Investment Contracts Are Within Federal Securities Laws’ Meaning, Says U.S. Court of Appeals for the 11th Circuit

Interests involving registered limited liability partnerships (RLLPs) are contracts within the federal securities laws’ meaning, according to the U.S. Court of Appeals for the 11th Circuit. The court reversed a ruling made against the Securities and Exchange Commission (SEC) for its enforcement action against two promoters and their company, Merchant Capital LLC.

According to the appeals court, the SEC filed an enforcement action against Merchant Capital LLC, Steven Wyer, and Kurt Beasley. The commission had alleged violations of the federal securities laws’ registration and antifraud provisions. Beasley and Wyre had established Merchant to take part in buying, reselling, and collecting charged-off consumer debt from financial institutions.

Merchant started raising money in 2001 by soliciting individuals to become partners in Colorado RLLPs that were eventually sold as freestanding entities. Although Merchant had organized 28 RLLPs with 485 partners, it did not reveal that the different partnerships existed. Its RLLPs ended up with more than $26 million in total capitalization.

Merchant was the managing partner of every RLLP. According to the court, even though the partnership materials indicated that partners would be able to actively participate in the business, they did not have much control over the partnerships. The court said that Merchant did not run the business successfully and knew that the partnerships were not performing well.

The SEC filed its action in November 2002, and Merchant agreed to a temporary restraining order that prevented it from selling more RLLP interests. The district court denied the SEC’s request for injunctive relief, civil penalties, and disgorgement, and ruled in favor of the defendants. The district court said that because RLLP interests were not investments, they were not securities. The court also said that securities fraud had not taken place.

The SEC appealed the decision, and the court partially reversed its ruling, while remanding and vacating further proceedings. The appeals court decided that the RLLP interests were investment contracts and therefore securities subject to federal securities laws. The court said the partners did not have the ability to “remove Merchant,” nor did they actually have the authority to approve purchases. In addition, the investors had no experience in debt purchasing and there would have been no alternative manager to Merchant-even if they were able to remove Merchant.

Regarding fraud claims by the SEC, the court found that the district court didn’t clearly err” when it found that the defendants’ return projections before June 2002 were not materially misleading. It also said the district court did not make a mistake by finding that the projections were made reasonably and in good faith. The appeals court, however, did find that the district court did err when it ruled that the projections made after June 2002 weren’t materially misleading.

The court also said that defendants made certain omissions and misrepresentations when marketing certain interests and that the district court made a mistake by reaching a different conclusion. The court therefore concluded that the case must be remanded.

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