## Facts

- Citicorp sought to transfer delinquent residential mortgage loans and foreclosed “real estate owned” (REO) into a limited partnership (Bristol Oaks, L.P.) as part of a securitization structure.
- Steinhardt (with affiliated investment entities) invested about $42 million and became a significant limited partner in Bristol Oaks, L.P.
- The transaction was governed by multiple negotiated documents, including a letter agreement, an asset sale agreement, a limited partnership agreement, and a servicing agreement.
- Steinhardt alleged Citicorp overstated the value of the mortgage/REO pool and misrepresented the accuracy and assumptions of a pricing model, including reliance on broker price opinions and allegedly inaccurate appraisals.
- Steinhardt demanded that the general partner sue Citicorp for the alleged wrongdoing; the general partner refused, and Steinhardt filed suit asserting direct and derivative claims.
- The complaint asserted federal securities fraud claims under Exchange Act §§ 10(b) and 20(a) and SEC Rule 10b-5.
- The district court dismissed under Rule 12(b)(6), concluding the transaction did not involve a “security” because Steinhardt’s interest was not an “investment contract.”
- Steinhardt appealed; the Third Circuit reviewed the dismissal de novo and considered authentic transaction documents integral to the claims.

## Issues

1. Whether Steinhardt’s limited partnership interest and related rights in the securitization structure constituted an “investment contract,” and therefore a “security,” under the Howey test.
2. Whether Steinhardt expected profits to come solely (or predominantly) from the efforts of others, given Steinhardt’s contractual control rights.

## Decision

- The Third Circuit affirmed dismissal of the federal securities claims.
- Applying Howey’s “economic reality” inquiry, the court held the securitization interest was not an “investment contract.”
- The court concluded Steinhardt retained pervasive, non-illusory control rights inconsistent with passive reliance on others’ managerial efforts.
- Because no “security” was involved, § 10(b), Rule 10b-5, and derivative control-person liability under § 20(a) did not apply, and the complaint failed to state a federal securities claim.

## Legal Principles

- An “investment contract” exists only when there is (1) an investment of money, (2) in a common enterprise, (3) with profits to come solely from the efforts of others, evaluated based on the economic reality of the transaction.
- Limited partnership interests are often securities, but the label is not determinative; the court examines the investor’s actual, exercisable powers under the governing agreements.
- If an investor retains substantial managerial or governance control—such as meaningful approval rights over major actions, influence over business plans, and the ability to remove or replace the general partner—the investor is not “passive” for Howey’s third prong.
- When a transaction does not involve a “security,” federal antifraud provisions tied to securities transactions do not provide a cause of action.

## Conclusion

The Third Circuit held that a bespoke, institutionally negotiated limited-partnership securitization interest fell outside the federal securities laws because the investor’s extensive governance and removal powers meant expected returns were not dependent solely on others’ efforts under Howey.


Steinhardt Grp. Inc. v. Citicorp, 126 F.3d 144 (3d Cir. 1997)