S.E.C. v. Kirkland
| Decision Date | 25 September 2007 |
| Docket Number | No. 6:06-cv-183-Orl-28KRS.,6:06-cv-183-Orl-28KRS. |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Patrick KIRKLAND, Tropical Village, Inc., Clarity Development Corporation, and Senior Adult Living Corporation, Defendants, Sunset Bay Club, Inc., Summerhill Ventures, Inc., Pelican Bay Club, Inc., and Isleworth Adult Community, Inc., Relief Defendants. |
| Court | U.S. District Court — Middle District of Florida |
Robert K. Levenson, Brian P. Knight, Elizabeth Fatovich, Raynette Nicoleau, Securities & Exchange Commission, Miami, FL, for Plaintiff.
Patrick Kirkland, Windermere, FL, Pro se.
Before the Court are cross-motions for summary judgment filed by the SEC (Doc. 188) and Defendant Patrick Kirkland (Doc. 304) and the parties' respective responses (Does. 2031 & 312) and replies (Does. 271 & 320). The matter is ripe for resolution.
If it sounds too good to be true; you may be listening to Patrick Kirkland. While to investors he boasted thirty years' experience in the real estate development business and seven years' experience developing senior triplexes — a dormitory-style, shared living concept for senior citizens — he failed to mention investors' class action and individual lawsuits, two Desist and Refrain Orders and a Temporary Restraining Order issued by the state of California against him and his companies, falsified leases, inflated appraisal values, and relatively nonexistent leasing patterns in the units he was selling as a "sure thing" investment opportunity. His investors, who were assured an estimated annual net cash profit of, in some cases, $31,000, were losing money quickly because the little rental income taken In was insufficient to cover the expenses of operating the developments, much less cover the mortgages on the properties. As his investors were sinking, Kirkland was buying houses, apartments, and two engagement rings, each of which cost as much as a luxury car. He was traveling in a "corporate plane" flown by a private pilot; driving a Rolls Royce, a Porsche, and three Lexuses; and living in a home worth more than $4 million. His lavish lifestyle was funded by his investors' initial deposits in his "sure thing" investment concept.
On February 16, 2006, the SEC filed the instant Complaint against Kirkland and his companies — Tropical Village, Inc., Clarity Development Corporation, and Senior Adult Living Corporation, naming, as Relief Defendants, Sunset Bay Club, Inc., Summerhill Ventures, Inc., Pelican Bay Club, Inc., and Isleworth Adult Community, Inc.2 (Compl., Doc. 1.) The SEC brings four counts against Kirkland. In Count I, the SEC alleges that Kirkland sold unregistered securities in violation of sections 5(a) and 5(c) of the Securities Act of 1933 ("the Securities Act"), 15 U.S.C. §§ 77e(a) and (b). In Counts II-IV, the SEC alleges that Kirkland committed securities fraud in violation of section 17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a)(1); sections 17(a)(2) and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77q(a)(2) and (a)(3); and section 10b of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. § 78j(b), and its subsequently promulgated Rule 10b-5, 17 C.F.R. § 240.10b-5.
Summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any. show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party bears the burden of establishing that no genuine issues of material fact remain. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265(1986).
When faced with a "properly supported motion for summary judgment, [the nonmoving party] must come forward with specific factual evidence, presenting more than mere allegations." Gargiulo v. G.M. Sales, Inc., 131 F.3d 995, 999 (11th Cir. 1997). "A nonmoving party, opposing a motion for summary judgment supported by affidavits [or other relevant evidence] cannot meet the burden of coming forth with relevant competent evidence by simply relying on legal conclusions or evidence which would be inadmissible at trial." Avirgan v. Hull, 932 F.2d 1572, 1577 (11th Cir.1991); see also Fed.R.Civ.P. 56(e) ().
In ruling on a motion for summary judgment, the Court construes the facts and all reasonable inferences therefrom in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "[A]t the summary judgment stage the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Id. at 249, 106 S.Ct. 2505. Some degree of factual dispute is expected, but to defeat a motion for summary judgment the factual dispute must be material and genuine. That is, the factual evidence must "affect the outcome of the suit" and must be "such that a reasonable jury could return a verdict for the nonmoving party." Id. at 248, 106 S.Ct. 2505.
The primary legal issue and threshold matter for each of the counts asserted against Kirkland is whether his senior triplex offerings constitute an offer or sale of securities within the meaning of the Securities Act. Kirkland admits that he did not register his triplex investments with the SEC, and he has not claimed that he is entitled to any exemption of the registration requirement. (Am. Answer ¶¶ 33 & 59.) Thus, if the offerings are securities, Kirkland violated sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a) and (b).3 Kirkland argues that the triplex offerings were not securities but instead were fee simple real estate transfers that are not regulated by the SEC. For the following reasons, the Court determines that Kirkland was engaged in the offering and sale of unregistered securities and that summary judgment must be entered as to Count I.
The definition of a security includes stock, of course, and, among other things, investment contracts. 15 U.S.C. § 77b(a)(1). Congress intentionally defined "the term `security' in sufficiently broad and general terms so as to include within the definition the many types of instruments that in our commercial world fall within the ordinary concept of a security." United Hous. Found., Inc. v. Forman, 421 U.S. 837, 847-48, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975) (quoting H.R.Rep. No. 85, at 11, 73d Cong. (1st Sess.1933)). This broad construction was designed "to afford the investing public a full measure of protection." SEC v. W.J. Howey Co., 328 U.S. 293, 298, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). Courts are therefore called upon to look at the substance and "economic realit[ies]" of the underlying transaction rather than its label or form. Id. at 298-99, 66 S.Ct. 1100; see also Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967).
The Securities Act does not define 'investment contract,' but the United States Supreme Court has defined it as:
a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.
Howey, 328 U.S. at 298-99, 66 S.Ct. 1100. "It embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." Id. at 299, 66 S.Ct. 1100. It reaches "[n]ovel, uncommon, or irregular devices, whatever they appear to be." SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351, 64 S.Ct. 120, 88 L.Ed. 88 (1943). An investment contract may be present even "where the tangible interest which is sold has intrinsic value independent of the success of the enterprise as a whole." Howey, 328 U.S. at 301, 66 S.Ct. 1100.
Real estate transactions do not typically constitute investment contracts or securities, particularly when the purchaser is "interested in acquiring housing rather than making an investment for profit." Forman, 421 U.S. at 860, 95 S.Ct. 2051. Certain real estate investments may constitute securities that must be registered, however, when the sale itself is tied to a collateral rental or service agreement, when the purchase is motivated by economic inducements and expected profits, when the purchaser expects to participate in a profit-sharing or rental pooling arrangement upon completing the transaction, or when the transaction includes restrictions limiting the owner's control over the property. 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, 1973 WL 158443, Release No. 33-5347, 1 Fed. Sec. L. Rep. (CCH) ¶ 1049 (Jan. 4, 1973), available at 1973 WL 158443 (hereinafter Release, 1973 WL 158443); see also Howey, 328 U.S. 293, 299-301, 66 S.Ct. 1100. The SEC has advised that "the offering of [real estate] units in Conjunction with any one of the following will cause the offering to be viewed as an offering of securities in the form of investment contracts":
1. The condominiums, with any rental arrangement or other similar service, are offered and sold with emphasis on the economic benefits to the purchaser to be derived from the managerial efforts of the promoter, or a third party designated or...
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