Page - 119 - in Austrian Law Journal, Volume 1/2015

ALJ 1/2015 Observations on Judicial Approaches to Discerning Investment Adviser Status 119 1. The Purpose of the Partnership In Wang v. Gordon,136 a private action, the defendant was a general partner to a limited partnership formed to own and operate an apartment building. The terms of the partnership agreement entitled the defendant to a five percent brokerage commission upon the sale of the apartment building, which he eventually received. The plaintiff was unsatisfied with the sale and sought relief under the Advisers Act. Plaintiff argued, among other things, that the defendant acted as an investment advis- er in arranging for the sale of the apartment building. As part of the transaction, the defendant sent a letter to limited partnership investors outlining the terms of the sale. Because the apartment building was held by a limited partnership, plaintiff reasoned, the sale of the building would require the sale of securities, the limited partnership interests held by the limited partners. Plaintiff argued that the defendant’s letter constituted investment advice concerning the sale of the building and, concomitantly, the securities (the limited partnership interests) required to transact the sale. Plain- tiff contended that the defendant was compensated to this advice by receiving the five percent commission payment. In rejecting plaintiff’s argument, the Wang court found that the defendant was compensated for his advice concerning the sale of the apartment building, not the sale of the limited partnership inter- ests. In making this determination, the court looked to the “purpose of the partnership”137 to decide whether the advice satisfied the investment advice element. It distinguished the purpose of the real estate partnership at issue from the investment partnership discussed in Abrahamson. The Wang court viewed the “purpose of the partnership” in Abrahamson as advising on purchasing or selling securities for a limited partnership, which constituted investment advice. In contrast, the “purpose of the partnership” in Wang was to own and operate a building, not securities. The defendant had arranged the sale of a partnership asset, an apartment building, not a security, and therefore was not compensated for providing investment advice. Under Wang, the “purpose of the partnership” dictated the purpose of the compensation paid to the defendant. In creating this “purpose of the partnership” approach to resolve the intertwined purposes issue, the court in Wang provides no guidance on how to determine this purpose or how to resolve com- peting purposes. For example, though investment partnerships typically state their purpose in lim- ited partnership offering documents,138 the activities of the partnership may diverge substantially from its stated purpose. In its simplest form, an investment partnership may state that its purpose is to invest in commodities, which are not a security, but instead it may invest in securities, ultimate- ly satisfying the definition of an investment adviser. Indeed, courts have emphasized that it is not the description of a business that determines whether it falls within the definition of an investment adviser, but the actual business conduct.139 On balance, the “purpose of the partnership” has gained no judicial support. 136 715 F.2d 1187 (7th Cir. 1983). 137 Id. at 1192. 138 Generally, in a non-public securities offering under Securities Act § 4(a)(2), 15 U.S.C. 77a(d)(a)(2), the issuer of the securities may circulate privately among qualified, prospective investors offering documents explaining, inter alia, the securities offering, including the nature of the investment opportunity. These documents are known as a Private Placement Memorandum, Private Offering Memorandum, or some other non-public offering document. These doc- uments, however, are generally the responsibility of the general partner, who may be a legal entity separate from the investment adviser. 139 See, e.g., U.S. v. Onsa, 523 Fed. App’x 63, 65 (2d Cir. 2013) (in upholding enhanced sentence based on investment adviser status, court held that defendant having “explicitly told investors that he was not an ‘investment adviser’ un- der the [Advisers] Act” did not affect defendant’s investment adviser status); see also Fresenius Medical Care Hold- ings v. U.S., 763 F.3d 64, 70 (1st Cir. 2014) (In tax cases, courts “look to the substance – that is, the economic reality of the particular transaction, objectively viewed – rather than to the form chosen by the parties.”).