## Facts

- Purchasers of condominium units in the Hard Rock Hotel San Diego filed a putative class action against the developer, operator, broker, and related entities and individuals involved in marketing and selling the units.
- Plaintiffs alleged the units were marketed as investments and that a rental-management program was offered that would generate profits through the hotel operator’s efforts.
- Purchasers entered into real-estate purchase agreements for the condominium units.
- Plaintiffs alleged that, at some later point, purchasers could enter separate rental-management agreements allowing units to be placed into a rental pool.
- Plaintiffs claimed the combined condominium purchase and rental-management arrangement constituted an “investment contract” and therefore a “security” under federal and state securities laws.
- The district court dismissed the federal securities claims, state securities claims, and related common-law fraud claims for failure to plead the offer or sale of a security.

## Issues

1. Whether plaintiffs plausibly alleged that the condominium sales, combined with the rental-management program, constituted the offer or sale of an “investment contract” (a security) under federal and state securities laws.
2. Whether the complaint sufficiently alleged that the real-estate sale and rental-management agreement were offered as a single packaged transaction and that the rental program induced the purchases.
3. Whether dismissal of the common-law fraud claims was proper based on the allegations pled.

## Decision

- The Ninth Circuit affirmed dismissal of the action.
- The court held plaintiffs did not adequately allege that the condominium purchase and rental-management agreement were offered as a single package.
- The court held plaintiffs did not adequately allege that the rental-management program induced them to buy the condominiums.
- Because no sale of a security was plausibly alleged, the federal and state securities claims failed as a matter of law.
- The court also affirmed dismissal of the common-law fraud claims.

## Legal Principles

- An “investment contract” exists under the Howey test when there is (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits derived predominantly from the efforts of others.
- A condominium sale paired with a rental-management or rental-pool arrangement may qualify as an investment contract only when the real-estate purchase and management component are sufficiently integrated, including being offered as a package and functioning as the inducement to purchase.
- At the pleading stage, generalized investment-themed marketing is insufficient; plaintiffs must allege concrete facts showing packaging/integration and inducement linking the management program to the purchase.
- When the threshold requirement of a security transaction is not plausibly alleged, securities-law claims dependent on that element are properly dismissed.

## Conclusion

The Ninth Circuit concluded that the complaint did not plausibly allege an integrated condominium-plus-rental-management investment scheme or purchase inducement tied to the rental program; without an alleged sale of a security, the securities and related fraud claims were properly dismissed.


Salameh v. Tarsadia Hotel, 726 F.3d 1124 (9th Cir. 2013)