Securities And Exchange Commission v. Charles C. Liu et al

NOTICE OF MOTION AND MOTION to Dismiss for Lack of Jurisdiction

C.D. Cal.July 12, 2016

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 LIU’S NOTICE OF MOTION AND MOTION TO DISMISS G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S Edward Gartenberg (State Bar No. 102693) Milena Dolukhanyan (State Bar No. 303157) GARTENBERG GELFAND HAYTON LLP 15260 Ventura Blvd., Suite 1920 Sherman Oaks, California 91403 Telephone: (213) 542-2100 Facsimile: (213) 542-2101 Email: egartenberg@gghslaw.com mdolukhanyan@gghslaw.com Hervé Gouraige (pro hac vice) William R. Stuart III (pro hac vice) SILLS CUMMIS & GROSS P.C. One Riverfront Plaza Newark, New Jersey 07102-5400 Telephone: (973) 643-5989 Facsimile: (973) 643-6500 Email: hgouraige@sillscummis.com wstuart@sillscummis.com Attorneys for Defendant CHARLES C. LIU UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA - WESTERN DIVISION SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CHARLES C. LIU; XIN WANG a/k/a LISA WANG; PACIFIC PROTON THERAPY REGIONAL CENTER, LLC; PACIFIC PROTON EB-5 FUND, LLC; and BEVERLY PROTON CENTER, LLC f/k/a LOS ANGELES COUNTY PROTON THERAPY, LLC Defendants. Case No. SACV16-00974CJC (AGRx) Hon. Cormac J. Carney DEFENDANT CHARLES C. LIU’S NOTICE OF MOTION AND MOTION TO DISMISS COMPLAINT Date: August 22, 2016 Time: 1:30 p.m. Ctrm: 9B Complaint Filed: May 26, 2016 PLEASE TAKE NOTICE THAT ON August 8, 2016 at 9:00 a.m., or as soon thereafter as the matter may be heard in the courtroom 9B, located at 411 Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 1 of 16 Page ID #:3218 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2 LIU’S NOTICE OF MOTION AND MOTION TO DISMISS G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S West Fourth Street, Santa Ana, California 92701-4516, Defendant Charles C. Liu (“Liu”), will and hereby does move pursuant to Rules 12(b)(1) and 12(b)(6), Fed. R. Civ. P. to dismiss the Complaint for lack of subject matter jurisdiction and for failure to state a claim upon which relief may be granted. This Motion is based on this Notice of Motion and Motion, the Memorandum of Points and Authorities filed and served herewith and upon the papers, records and pleadings on file herein. Pursuant to Local Rule 7-3, counsel for Liu met and conferred telephonically with John Berry, counsel for Plaintiff Securities and Exchange Commission on July 5, 2016 Dated: July 12, 2016 GARTENBERG GELFAND HAYTON LLP By: /s/Edward Gartenberg Edward Gartenberg Milena Dolukhanyan Attorneys for Defendant Charles C. Liu Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 2 of 16 Page ID #:3219 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS i G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S TABLE OF CONTENTS I. INTRODUCTION ......................................................................................... 1 II. FACTUAL BACKGROUND ........................................................................ 2 III. LEGAL STANDARD .................................................................................... 4 IV. ARGUMENT ................................................................................................. 5 A. THE “INVESTMENTS” IN PPEB5 FUND WERE NOT SUBJECT TO FEDERAL SECURITIES LAW AS “INVESTMENT CONTRACTS” DUE TO A LACK OF PRIMARY PROFIT MOTIVE. ...................................................................... 6 B. IN THE ALTERNATIVE, PPEB5 FUND INVESTORS PURCHASED NOTES THAT FAIL THE REVES TEST FOR SECURITIES. ............................................................... 9 1. Motivations of Buyer ............................................................................ 10 2. Reasonable Expectations of Investors .................................................. 10 3. Existence of Another Regulatory Scheme ............................................ 11 V. CONCLUSION ............................................................................................ 11 Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 3 of 16 Page ID #:3220 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS ii G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S TABLE OF AUTHORITIES CASES Ashcroft v. Iqbal, 556 U.S. 662 (2009) ........................................................................................ 5 Banco Espanol de Credito v. Security Pac. Nat'l Bank, 973 F.2d 51 (2d Cir. 1992) ............................................................................ 10 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007) ................................................................................ 5 Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930 (2d Cir.) ................................................................................... 10 Fox v. Dream Trust, 743 F. Supp. 2d 389 (D.N.J. 2010) .................................................................. 9 Grenader v. Spitz, 537 F. 2d 612 (2d Cir. 1976) ........................................................................... 8 Housing Foundation, Inc. v. Forman, 427 U.S. 837 (1975) ........................................................................................ 1 Penteco Corp. Ltd. Partnership v. Union Gas Sys., Inc., 929 F.2d 1519 (10th Cir. 1991) ........................................................................ 4 Reves v. Ernst & Young, 494 U.S. 56 (1989) ................................................................................ 2, 9, 11 Rice v. Braniger Organization, Inc. 922 F. 2d 788 (11th Cir. 1991) ......................................................................... 8 SEC v. W.J. Howey Co., 328 U.S. 293 (1946) ........................................................................................ 7 Tcherepnin v. Knight, 389 U.S. 332 (1967) ........................................................................................ 7 Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 4 of 16 Page ID #:3221 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS iii G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S TABLE OF AUTHORITIES (cont.) U.S. ex rel. Boothe v. Sun Healthcare Group, Inc., 496 F.3d 1169 (10th Cir. 2007) ........................................................................ 4 United Housing Found., Inc. v. Forman, 421 U.S. 837 (1975) .................................................................................... 6, 7 Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) ........................................................................... 5 STATUTES 15 U.S.C. § 77b ...................................................................................................... 5 15 U.S.C. § 78c ...................................................................................................... 5 Federal Rules of Civil Procedure Rule 12(b)(1). ......................................................................................................... 2 Rule 12(b)(6). ......................................................................................................... 2 Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 5 of 16 Page ID #:3222 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS 1 G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION The Complaint has been brought by the Securities and Exchange Commission (“SEC”) based upon alleged violations of the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). The SEC alleges that defendant Charles C. Liu (“Liu”), his wife, defendant Xin Wang (“Wang”) and three entities, the Pacific Proton EB5 Fund, LLC (the “PPEB5 Fund”), Pacific Proton Therapy Regional Center, LLC (the “Regional Center”), Beverly Proton Center, LLC f/k/a Los Angeles County Proton Therapy, LLC (“Beverly Proton”) engaged in securities fraud in the offer and sale of interests in the PPEB5 Fund. The Complaint alleges that the interests in the PPEB5 Fund were sold in an attempt to utilize the EB-5 Immigrant Investor Program. (Complaint, ¶¶ 14-22, 34). By nature, EB-5 investments are sold to foreigners. The Complaint specifically alleges that the sales were made to investors in China (Complaint, ¶ 34). The Complaint further alleges that the offering was made through China- based marketing firms. (Complaint, ¶ 51). The EB-5 “investments” at issue here do not meet the definition of “securities” in the federal securities statutes alleged to have by violated. EB-5 “investments” that are principally made to obtain visas under the EB-5 programs fail to qualify as “securities” for purposes of the federal securities laws. United Housing Foundation, Inc. v. Forman, 427 U.S. 837 (1975). In United Housing, the Supreme Court held that an investor who buys shares in a housing cooperative for the primary motivation to obtain housing does not buy a “security” within the definition of federal securities laws. Moreover, the “investments” purchased in the PPEB5 Fund were essentially loan participations. The purchasers were all knowingly contributing Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 6 of 16 Page ID #:3223 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS 2 G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S funds to be used as loans to Pacific Proton.1 Reves v. Ernst & Young, 494 U.S. 56 (1989) sets forth the factors to be considered in determining whether a loan constituted a security for purposes of the federal securities laws. Liu respectfully submits that pursuant to the Reves factors to consider on whether a “loan” is a “security,” the interests bought here by the purchasers were not securities. Accordingly, Liu moves to dismiss the Complaint pursuant to Rules 12(b)(1) and 12(b)(6), Fed. R. Civ. P. to dismiss the Complaint for lack of subject matter jurisdiction and for lack of subject matter jurisdiction and for failure to state a claim upon which relief may be granted. II. FACTUAL BACKGROUND Liu formed the PPEB5 Fund to accept foreign investments to fund the construction and development of a proton therapy cancer treatment center in Southern California (the “Project”).2 The foreign investments were made as part of the federal EB-5 Immigrant Investment Program (the “EB-5 Program”).3 The PPEB5 Fund was formed on November 15, 2010.4 As reflected in the PPM for the fund, units of $500,000 were offered to qualified non-U.S. citizens 1 See Private Offering Memorandum attached as Exhibit 5 to the Declaration of J. Regenstreif, dated May 26, 2016, Estimated Use of Proceeds, at 6 (Exhibit 5, Page 456) 2 SEC Brief, 1:8-10. 3 The EB-5 visa for Immigrant Investors is a United States visa created by the Immigration Act of 1990. This visa provides a method of obtaining a green card for foreign nationals who invest money in the United States.http://en.wikipedia.org/wiki/EB-5_visa - cite_note- Green_Card_Through_Investment-1#cite_note- Green_Card_Through_Investment-1 To obtain the visa, individuals must invest $1,000,000 (or at least $500,000 in a "Targeted Employment Area" - high unemployment or rural area), creating or preserving at least 10 jobs for U.S. workers excluding the investor and their immediate family. Initially, under the first EB-5 program, the foreign investor was required to create an entirely new commercial enterprise; however, under the Pilot Program investments can be made directly in a job-generating commercial enterprise (new, or existing - "Troubled Business"), or into a "Regional Center" - a third party-managed investment vehicle (private or public), which assumes the responsibility of creating the requisite jobs. 4 PPM at 2 (Exhibit 5, page 452). Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 7 of 16 Page ID #:3224 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS 3 G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S seeking permanent resident status in the United States.5 The complaint alleged that approximately $ 24.7 million was raised from 50 investors.6 The PPM clearly informed the investors that their funds were to be loaned to Beverly Proton, the company that would build the proton therapy center.7 The PPM provides that the loan will be made to Beverly Proton on the terms set forth in loan documents attached as Appendix F to the PPM.8 Appendix F provides that Beverly Proton would pay interest on the loan at the rate of 0.25% per annum with principal due five years from the date of the last advance under the loan.9 The PPM also provided that the loan was unsecured and that as a result, “any claims by PPEB5 [Fund] against [Beverly Proton]…may be subordinate to the rights of senior lenders and/or other obligations secured by the Borrower’s assets and there is no guaranty of payment or collection.”10 Accordingly, the potential monetary benefit to the “investment” was a total of 1.25% to be paid not sooner than five years after the last amount advanced under pursuant to the loan. That would be $6,125 on a $500,000 investment. However, the Subscription Agreement provides for an Administrative fee of $45,000.11 Thus, even if the investment yielded any return, it would appear that there is no net financial benefit to the investor. Accordingly, the only rational reason for an investor to participate is solely to obtain a visa under the EB-5 Program. As explained further below, this means that these participations in 5 Id. 6 The SEC has calculated that a total of $24.7 million was received from investors. See Declaration of SEC Accountant Lorraine Pearson (“Pearson Decl.”)(Docket No. 6) ¶21. The SEC also asserts that the number of investors is 50. See SEC Brief, 4:28-5:2. 7 PPM, p.6 (Summary of Offering/Estimated Use of Proceeds (Exhibit 5, page 456). 8 Id. 9 Appendix F, attached as Exhibit A to the Declaration of Edward Gartenberg filed concurrently with this motion. See also, Complaint ¶47 stating that according to the PPM, Beverly Proton is to pay the PPEB5 Fund an annual interest rate of 0.25%. 10 PPM, at 13 (Risk Factors/Collateral Security) (Exhibit 5, page 463). 11 Regenstreif Declaration, Exhibit 4, p. 404. Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 8 of 16 Page ID #:3225 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS 4 G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S PPEB5 should not be deemed securities for purposes of the federal securities laws. III. LEGAL STANDARD In a challenge to subject matter jurisdiction pursuant to Rule 12(b)(1), the plaintiff bears the burden of proving subject matter jurisdiction, and there is a presumption against federal jurisdiction. Penteco Corp. Ltd. Partnership v. Union Gas Sys., Inc., 929 F.2d 1519, 1521 (10th Cir. 1991); McCraken v. Dept. of Treasury, 1992 U.S. Dist. LEXIS 14234, *3 (D. Idaho 1992). A court may dismiss a complaint for lack of subject matter jurisdiction based on factual allegations in the complaint, without regard to conclusory or ill-developed allegations. U.S. ex rel. Boothe v. Sun Healthcare Group, Inc., 496 F.3d 1169, 1175 (10th Cir. 2007) (noting that the rule precluding consideration of conclusory allegations “applies with special force to arguments seeking to establish our subject matter jurisdiction, for we are obliged to presume the absence of jurisdiction unless and until convinced otherwise.”); Gentry v. Empire Med. Training, 2013 U.S. Dist. LEXIS 12409, *27-28 (N.D. Cal. Aug. 29, 2013) (conclusory allegation insufficient on a jurisdiction motion to dismiss). Under Federal Rule of Civil Procedure 12(b)(6), a complaint must be dismissed where it fails to allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “[N]aked assertions ‘devoid of further factual enhancement’ will not suffice.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 557). Federal Rule of Civil Procedure 8(a) “requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. In deciding a motion to dismiss, the Court need not accept legal conclusions asserted as “facts.” Iqbal, 556 U.S. at 678-79. Further, the Court must read the complaint as a whole and may consider materials Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 9 of 16 Page ID #:3226 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS 5 G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S incorporated into the complaint by reference and other matters subject to judicial notice. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 989 (9th Cir. 2009). IV. ARGUMENT Both the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”) contain definitions of “security” that include, among other things, notes and investment contracts. See 15 U.S.C. § 77b12 and 15 U.S.C. § 78c.13 12 “(a) Definitions. When used in this title [15 USCS §§ 77a et seq.] unless the context otherwise requires-- (1) The term "security" means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.” 13 “(10) The term "security" means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 10 of 16 Page ID #:3227 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS 6 G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S However, the Supreme Court has identified instances when either type of instrument may not in fact be a ‘security’ for the purpose of federal securities laws. The name given to an instrument is not, on its own, dispositive to whether such instrument is a security. See United Housing Found., Inc. v. Forman, 421 U.S. 837, 848 (1975) (“We reject at the outset any suggestion that the present transaction, evidenced by the sale of shares called "stock," must be considered a security transaction simply because the statutory definition of a security includes the words "any? stock.” [sic]); Tcherepnin v. Knight, 389 U.S. 332, 336 (1967) ("[I]n searching for the meaning and scope of the word 'security' in the [Acts], form should be disregarded for substance and the emphasis should be on economic reality."). In the present case, irrespective of whether the instruments purchased in the PPEB5 Fund offering are considered notes or investment contracts, they should not be considered securities. A. The “Investments” in PPEB5 Fund Were Not Subject to Federal Securities Law as “Investment Contracts” Due to a Lack of Primary Profit Motive. The SEC has argued in its Motion for a Temporary Restraining Order (“TRO”) that the participations by the investors in PPEB5 were “investment contracts.”14 The seminal case defining an investment contract is SEC v. W.J. Howey Co., 328 U.S. 293 (1946). In Howey, the Supreme Court outlined that an investment contract instrument is considered a security only where there is (1) an investment of money; (2) in a common enterprise; (3) with an expectation of profits; and (4) which are derived solely from the efforts of the promoters or third parties. but shall not include currency or any note, draft, bill of exchange, or banker's acceptance, which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.” 14 SEC Memorandum in Support of Its Motion for a TRO, etc. (“SEC Memo re TRO”) (Docket No. 5), 12:12-23. Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 11 of 16 Page ID #:3228 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS 7 G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S Under the particular facts here, there was no expectation of profits. Where there is no reasonable expectation of profits, the “investment” is not a security for purpose of the federal securities law, regardless of the label attached to the “investment.” See United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975). In United Housing, residents of a cooperative housing project sued the developer pursuant to the antifraud provisions of the Securities Act and the Exchange Act. The residents had purchased shares called “stock.” To acquire an apartment in the co-operative, an eligible prospective purchaser had to buy the shares of stock. The Supreme Court found that “there can be no doubt that investors were attracted solely by the prospect of acquiring a place to live, and not by financial returns on their investments.” Id. at 853. The Supreme Court held that under those circumstances, the expectation of profit element was missing and the “stock” did not constitute an investment contract. Accordingly, the Supreme Court held that the federal securities laws did not apply. Justice Powell, writing for the majority, explained: There is no doubt that purchasers in this housing cooperative sought to obtain a decent home at an attractive price. But that type of economic interest characterizes every form of commercial dealing. What distinguishes a security transaction - and what is absent here - is an investment where one parts with his money in the hope of receiving profits from the efforts of others, and not where he purchases a commodity for personal consumption or living quarters for personal use. In holding that there is no federal jurisdiction, we do not address the merits of respondents' allegations of fraud. Nor do we indicate any view as to whether the type of claims here involved should be protected by federal regulation. We decide only that the type of [860] transaction before us, in which the purchasers were interested in acquiring housing rather than making an investment for profit, is not within the scope of the federal securities laws. Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 12 of 16 Page ID #:3229 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS 8 G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S Id. at 859-60 (emphasis added). The same is true here. The “investors” did not have a reasonable expectation of profits. Instead their intent in purchasing these instruments was to obtain a visa under the EB-5 program. Columbia Law Professor John C. Coffee, Jr., has suggested that this analysis applies broadly to many, if not all EB-5 projects. In analyzing the obligations undertaken by foreigners “investing” in EB-5 projects, he has explained: But are the obligations so purchased truly “securities”? Here it should depend on whether the visa seeker thought he was making a long-term investment for profit or whether he was simply buying a visa. Under United Housing Foundation, Inc. v. Forman [421 U.S. 837 (1975)], an investor who buys shares in a housing cooperative does not buy a security if the investors’ primary motivation is to obtain housing. The typical EB-5 structure involves a capital contribution by the investor to a special purpose limited partnership or limited liability company that makes a construction loan to the developer (typically at an interest rate below what a bank would charge, which is why developers avidly seeks such investments.)15 EB-5 participants seek visas, not profit. Even where some profit motive may exist, courts should focus on the primary motive. See Rice v. Braniger Organization, Inc. 922 F. 2d 788 (11th Cir. 1991); Grenader v. Spitz, 537 F. 2d 612 (2d Cir. 1976). Although some profit may accrue, it is not the primary motivation. In the current case, this Court need not decide whether this analysis applies to all EB-5 projects. However, if it applies to any, it does to this project and any investment contract purchased hereunder. The purchasers were participating in an offering for which they received a participation in an 15 Coffee, John “News From California: The 9th Circuit and the SEC Challenge New York,” The CLS Blue Sky Blog (July 20, 2015), Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 13 of 16 Page ID #:3230 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS 9 G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S unsecured loan with a potential “profit” of far less than the administrative fee charged to participate. Accordingly, the participation did not qualify as a “security” under the federal securities laws. B. In the Alternative, PPEB5 Fund Investors Purchased Notes that Fail the Reves Test for Securities. Participants in the PPEB5 Fund offering all knowingly contributed funds to be committed to loans to Beverly Proton.16 Thus, if the SEC argues in the alternative that the interests purchased by the “investors” are “notes” rather than investment contracts, these notes would still not be securities under the analysis offered by the Supreme Court in Reves v. Ernst & Young, 494 U.S. 56 (1989). In Reves, the Supreme Court outlined a framework to determine whether notes are in fact “securities.” Although there is a presumption that notes are securities, at least when they are designated as “notes” (which was not the case here and therefore no presumption should apply), the Court enumerated exceptions to this presumption, and further provided that other notes may bear a sufficient “family resemblance” to these enumerated exceptions to also be excluded from security designation. Id. at 66-67. The Supreme Court allowed that even where there is no finding of sufficient “family resemblance” to an existing exception, a court may enumerate a new exception. Id at 67. The family resemblance and enumerated exception analysis is based on (1) the motivations of the buyer and seller; (2) the plan of distribution of the instrument; (3) the reasonable expectations of the investing public; and (4) whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Acts unnecessary. Id. These elements are “points of comparison” in the analysis; each factor need not be met to find that designation as security is improper. See Fox v. Dream Trust, 743 F. Supp. 2d 389, 399 (D.N.J. 2010). As 16 PPM at 6 (Exhibit 5, Page 456). Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 14 of 16 Page ID #:3231 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS 10 G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S discussed further below, at least three of these factors weigh in favor of the determination that if the units purchased in the PPEB5 Fund offering are deemed notes, these notes are not securities. One enumerated exception to the definition of securities includes "notes evidencing loans by commercial banks for current operations" Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 939 (2d Cir.), cert. denied, 469 U.S. 884 (1984). The PPEB5 Fund’s PPM states that funds will be used as a loan to Pacific Proton to finance construction and operations.17 Liu respectfully submits that under the following elements, the interests sold in the PPEB5 Offering bear a sufficient resemblance to the Chemical Bank exception or, in the alternative, should be considered an exception based on the following elements. 1. Motivations of Buyer The applicability of the securities laws to EB-5 “investments” turns on the motivations of the buyer-specifically, whether the person acquiring the interest was primarily motivated by profit, or by some other purpose. As explained above, purchasers in the PPEB5 Fund offering purchased the units not with hope of profit, but in order to qualify for a visa under the EB-5 program. 2. Reasonable Expectations of Investors In Banco Espanol de Credito v. Security Pac. Nat'l Bank, 973 F.2d 51 (2d Cir. 1992), the Court found that buyers were given ample notice that funds were intended for loans and not investments, and the instruments sufficiently closely resembled non-security notes. Id. at 55. Similarly, the PPEB5 Fund’s PPM states that funds will be used as a loan to Pacific.18 The loan terms were attached to the PPM for reference.19 Potential participants were on ample notice that proceeds from their funds would be for loan, not equity investment purposes. 17 See PPM at 18 (Exhibit 5, Page 468). 18 See PPM at 18 (Exhibit 5 Page 468). 19 See PPM at 6 (Exhibit 5, Page 456). Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 15 of 16 Page ID #:3232 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DEFENDANT CHARLES C. LIU’S MOTION TO DISMISS 11 G A R T E N B E R G G E L F A N D H A Y T O N L L P A L IM IT E D L IA B IL IT Y P A R T N E R S H IP IN C LU D IN G P R O F E S S IO N A L C O R P O R A T IO N S 3. Existence of Another Regulatory Scheme Where some other regulatory scheme applies, regulation under U.S. securities laws may not be necessary. Under the EB-5 program, all investors are non-U.S. citizens. The principal sales and marketing of the instruments occur were through Chinese marketing companies. The SEC alleges in the Complaint that sales were made to 50 investors in China.20 China’s own securities laws accordingly regulate such activity, reducing the risk of investment appropriate for China’s own citizens.21 Taken together, these Reves factors weigh strongly in favor of excepting any notes sold under the PPEB5 Fund offering from designation as securities in the present case. V. CONCLUSION For the foregoing reasons, Liu respectfully requests that this Court grant Liu’s Motion to Dismiss without leave to amend. Dated: July 12, 2016 GARTENBERG GELFAND HAYTON LLP By: /s/Edward Gartenberg Edward Gartenberg Milena Dolukhanyan Attorneys for Defendant Charles C. Liu 20 Complaint, ¶ 34. 21 A comprehensive Securities Law of the People’s Republic of China was passed by the 6th Session of the Standing Committee of the Ninth National People’s Congress (Dec. 29 1998); Revised in accordance with the Decision on Revision of the “Securities Law of the People’s Republic of China” passed by the 11th Session of the Standing Committee of the Tenth National People’s Congress (Aug 28, 2004); and Revised by the 18th Session of the Standing Committee of the Tenth National People’s Congress (Oct. 27, 2005). Case 8:16-cv-00974-CJC-AGR Document 81 Filed 07/12/16 Page 16 of 16 Page ID #:3233