UNITED HOUSING FOUNDATION, INC. v. FORMAN

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Argument of Simon H. Rifkind

Chief Justice Warren E. Burger: We'll hear arguments next in 74-157, United Housing Foundation against Forman and consolidated case, State of New York against Forman.

Mr. Simon H. Rifkind: Mr. Chief Justice.

Chief Justice Warren E. Burger: Defer just a moment Mr. Rifkind.

Very well.

Mr. Simon H. Rifkind: And may it please the Court.

This case is here by way of the petition for certiorari, which brought up for review the decision of the Court of Appeals for the Second Circuit.

That court had reversed a judgment dismissing the complaint filed herein for want of subject matter jurisdiction in the federal court.

The respondents in this case who are the plaintiffs in the court below, are a number of residents of a residential development called Co-op City located in the borough of the Bronx in the City of New York.

These respondents purport to represent a class to wit all of the owners of apartments in Co-op City, which is a giant development and contains more than 15,000 homes.

The suit was generated by the said circumstance to which we've all been recently exposed.

Namely that there was an escalation in the cost of the maintenance of the apartments which the defendants had -- respondents had acquired.

And the proffered basis for federal jurisdiction was the allegation that the petitioners had violated the securities laws to the respondent's detriment.

The complaint itself consisted I believe of 13 counts of which ten were state related claims.

One was a 1933 Act violation and the same facts were alleged as a 1934 violation.

And then there was one claim against the state and the state agency I believe under the Civil Rights law.

And the central question which the case brings up for review is this.

Did the Congress in the securities laws intend to reach the transaction which underlies this case?

And that transaction, I shall of course describe.

We assert the negative of that question.

In other words, that Congress had no such intention.

And our argument will rest on three pedestals and I believe that each of them would support the conclusion we are here to contend.

First that this transaction related to homes not to securities and not to investments.

Secondly that this is a transaction to which commercial considerations and profit possibilities are roughly alien and therefore not within the realm of congressional concern at all.

And lastly, we are dealing here with a state created welfare plan in which the state selected and conferred upon a group of its beneficiaries, a group of its citizens, various benefits.

And as far as I can read the history of congressional intention, I find that Congress has indicated no interest in penetrating this field.

We start therefore in narrating our story with the State of New York.

Acting through its legislature, the State of New York became concerned with the plight of the city.

This was in the early 60s, the flight of the urban middle class, the blight of the inner city slum, the decay of the housing inventory in the big cities, the high cost of replacement of dwellings making safe and clean dwellings unattainable by wage earners and other people of low modest income.

Certainly, an area of governmental concern which I am sure this Court has heard of many times.

And the state determined to make a massive contribution towards the alleviation of the conditions I have described.

Its concern, the state's concern, was with homes and dwelling places for its residents and citizens.

Not securities and not investment opportunities.

New York passed a law called the Mitchell-Lama Law, which contained various provisions for variety of possibilities, but with respect to the subject that we're concerned with, I will say that it created first a regulatory agency which has applied into Co-op City has provided a system of supervision and regulation vastly more pervasive than any system of regulation that we are familiar with say in the utility field or the banking field or the airplane field or any of the normal objects of regulation.

And I believe I state correctly that my learned adversaries agree with me that this was a very pervasive system of control.

And of course there was a very good reason for it.

The state was going to provide massive benefits to those who are going to be the beneficiaries of this law.

It provided the means for the obtaining of the money necessary, or the bulk of the money necessary for the creation of this new housing which it contemplated.

The state was offering to the prospective members of Co-op City whom it selected the following benefits among others.

First, savings regularized from the availability of construction and acquisition costs at very low cost, because the state agency could raise that money by tax exempt obligations of the agency.

I need hardly say that that represents an enormous fraction of the cost of housing, the cost of the money used in construction.

Then there were savings conferred upon the members of this cooperative by the reduction or abatement of real estate taxes to the extent of 80% thereof, again, a very enormous benefit in the maintenance of these properties.

And then, with the collaboration of a philanthropic foundation called the United Housing Foundation, which I shall describe later, savings became possible in Co-op City by the elimination of the promoters' profit, the entrepreneurs' profit, the builders' profit and the managers' profit.

All of those were eliminated.

And then the cost overall was spread over a period of 40 years, thus making the annual burden a very modest one indeed plus other benefits that I mentioned some of which, I mentioned in my brief, but are relatively smaller in proportion.

It was all of these together that made it possible to do what seems like a miracle today to be able to sell apartments at the price of $450.00 per room, a four-room apartment for $1,800.00.

Anyone who has purchased a cooperative apartment knows that that is one of the miracles of the age.

Now, as I have said, Co-op City was sponsored by the United Housing Foundation.

This foundation is composed of a group of labor unions well known for their progressive policies, like the Amalgamated Clothing Workers, the International Ladies Garment Workers Union whose record of performance of this area is well-known.

Housing cooperatives, civic leaders all volunteers who furnished to this project the sense of community involvement who furnished it the enriching advice of knowledgeable, distinguished and dedicated citizen and whose standing in the community was such that they were able to had a little lubrication to the wheels of the bureaucracy.

And perhaps more important than any of these to ensure the generating idea, the idealism behind this entire project, namely the ideal of a community of home owning neighbors democratically managed, nondiscriminatory in style endowed with the humane amenities in the artistic and spiritual fields of community of homes and a community of homes.

Now this was not the first experience of the United Housing Foundation in this field.

It had a long record of success in promoting and creating housing projects similarly endowed with this spiritual concept.

And on my brief, I cite quite a number of famous ones that are extent in the City of New York.

And so it was that a city housing something like 50,000 people was built on what a previously been a playground in the northern part of the Bronx.

And it took a very considerable period to do it, from 1964 to 1972.

And during that period, I need hardly say that costs were climbing.

Every other index of our economy showed a similar climb in the sense of inflationary costs.

Ultimately the project cost $422 million considerably in excess of the original estimates.

And of these $420 million, the state agency furnished 92.26%, and I want to emphasize again that not only did the law specify the classes of members who might live in this cooperative, namely the applicants have to show that their earnings were not in excess of six times the estimated maintenance charges.

But the very individuals who are accepted for membership in this coop have to be approved by the state authorities, certainly not an aspect which is normally found in the sale of investment securities or speculations.

Justice Potter Stewart: What were the criteria for approval by the state authorities in addition to the income levels of the applicants?

Mr. Simon H. Rifkind: There were benefits conferred upon the aged, upon veterans, upon the disabled and things of that kind.

Those were given preference.

Justice Potter Stewart: By regulation or statute?

Mr. Simon H. Rifkind: By the practices of the regulatory agency and under its regulations.

Now, I come to a central feature of this entire transaction.

There was one concept that was excluded from every phase of this enterprise, the concept of commercialism and the corollary concept of profit.

This applied at all stages of the transaction and not only to the one which is most directly relevant to the question before this Court.

For instance, members of Co-op City could receive no dividends.

Now I know that my learned friend says that they could under a Section of the law.

He misreads the law.

That Section deals with rental properties by private builders but who have the right to have limited profit returns, not to Co-op City.

The court below said that there might be a rebate on the rental if the cost of maintenance was less than was estimated.

That is true since the cost of maintenance in a cooperative is shared by all the members of the cooperative, and is based on an estimate if at the end it turned out that the estimate was excessive, the excess is turned back to those who have provided it.

I don't call that a dividend.

They could sell the homes that they had acquired but for no more than the cost at which they paid for it, $450 a room, not a dollar more could they get for their homes no matter how much land values or building values may have escalated in the City of New York.

And not only that, they have to sell their homes if they move from the premises.

It was only a home for their personal residences and that of their surviving spouse.

But if for any reason they wanted to move out of the Co-op City, they had to offer their apartments, their homes for sale to the corporation -- to the coop corporation or to a qualified new buyer at the price at which they bought.

Not only were they not promised any profits, in the literature which announced this project, they were told in words loud and clear that there could not be any.

Now I move up the scale away from the cooperators upward.

The United Housing Foundation, which was the sponsor of the project was formed under a statute in New York called the not for Profit Corporation Law.

It could make no profit because under the statute of its creation, it was forbidden to do so.

The construction was done by a wholly owned subsidiary of United Housing Foundation.

And while that was organized as an ordinary corporation, since its stockholders could make no profit, namely the United Housing Foundation, there would be no point in the subsidiary earning any profits.

The subscribers were not offered tax deduction as an inducement in the sense that tax shelters are marketed around the street as this Court well knows, where tax shelters are offered as a form of investment.

That was not the approach here because there were no such possibilities, except for the modest tax deduction which is available to every homeowner on the interest of his mortgage and on the taxes which he contributes to the -- to his community.

They were not offered any significant outside income.

That is this was not a project where in addition to homes, there was a vast shopping center attached to it from which the people could hope to derive substantial speculative profits, because had that happened the law would not have permitted this project to be financed under the statute at which I have referred.

All they were offered and all that these people received was the opportunity to own a home, and that only so long as they lived in it.

And if they have to part with it, they could enjoy no form of capital appreciation.

Now membership in this cooperation was memorialized in two instruments, two writings.

One, an occupancy agreement, so-called but actually reads very much like an ordinary lease.

And secondly, an instrument which was called a share of stock, but differing in many ways from the conventional one especially in the very fact that it could not be sold, could not be authenticated, couldn't be transferred, couldn't be given away and with which you have would to part once you cease being the occupant of the apartment which you had bought.

Now both the District Court and the Court of Appeals have very meticulously expressed their avoidance of entertaining any opinion on the underlying merits of the controversy between the plaintiffs and the defendants or between the petitioners and respondents.

I have observed that my good learned friends have extensively argued the merits of the case in their briefs, but I shall not do so.

I shall rely on the proposition that the only question before this Court is whether this controversy belongs in a federal forum under the securities laws, or whether it belongs in the state forum under laws adequate for that purpose in the State of New York.

The district judge made this comment.

“It is well to know that the outset of this inquiry that it is the fundamental nonprofit nature of this transaction which in this court's view, is the insurmountable barrier to plaintiffs claim in the federal court.”

And we agree with that expression and hope to win favor for it.

Our claim is a very narrow one actually.

Our central point is that Congress did not intend to bring within the ambit of the securities laws an enterprise devoted to the purchase of homes a state dominated enterprise with philanthropic and community participation to which the notion of profit is utterly foreign.

A project pursued without the profit motive promoted without profit inducement and shared by its beneficiaries without the any expectation of gain, and the history, the legislative history suggests to me that that is not what Congress had in mind.

Because the evils against which these securities laws were written are still sufficiently vivid so that most of us can remember them from actual experience.

Predatory financial practices in the securities markets, stock market price manipulation, luring of small investors by false promises of easy wealth.

In short, I submit that the realm of congressional concern was the speculation and investment realm and its identifying flag was the promise or expectation of profit, and one cannot read in my opinion the legislative history of either the 1933 or the 1934 Act without coming to that conclusion.

The District Court read that history accurately when it concluded that Congress did not intend to sweep into the ambit of the Federal Securities laws.

State encouraged nonprofit transactions made pursuant to a state emergency housing law, all three elements that I've mentioned available only to state residents.

Now, in reaching a contrary conclusion, I believe that the Court of Appeals was in error and I should like to identify its errors into three categories.

First, it was, I will finish this sentence.

It was moved by a literal application.

It misread this court's illumination of the meaning of investment contract, and I believe it misread the securities guidelines.

I'll stop at this moment and if I have some time later I will answer in rebuttal.

Thank you.

Chief Justice Warren E. Burger: Very well.

Mr. Cohen.

Argument of Daniel M. Cohen

Mr. Daniel M. Cohen: Yes, sir.

May it please the Court.

Let me emphasize at the outset that we support completely the position of the petitioners in Number 147 that the Congress did not contemplate, including within the purview of the 1933 and 1933 Securities Acts, shares in the membership of a publicly aided cooperative housing cooperation whose primary objective was the furnishing of housing accommodations to persons of limited income who were prohibited under the general terms of the statute authorizing the construction of Mitchell-Lama housing, from selling those shares for a profit or for the expectation of a profit.

I shall confine my argument however to the point upon which the state and the state's Housing Finance Agency obtain certiorari.

That neither the state nor the state's Housing Finance Agency are subject to suit in the federal courts for the relief demanded in this complaint.

Now, just as a matter of fact that it been references in Judge Rifkind's argument to supervision by the state.

Supervision the state has been through the State Commissioner of Housing.

State Commission of Housing has been the agency of the state that supervised the construction and supervises the management of this project.

The state financing agency is an agency which has supplied the money to the extent of the 92% that was necessary by the sale of bonds to the public.

It is a different agency.

As to the state itself, we submit that its claim of immunity and the same claim would be applicable to the State Commissioner of Housing if that state agent had been made a party of defendant of this litigation, and the State Commissioner of Housing has never been sued or named as a defendant in this litigation.

We submit that this claim of immunity from suit is sustainable and should have been sustained under this Court's decisions in Edelman against Jordan and Employees against the Missouri Public Health Department.

Now this --

Justice Potter Stewart: Mr. Cohen if we should decide that -- if we should be persuaded by Judge Rifkind's arguments, would we get to your point?

Mr. Daniel M. Cohen: I don't think you need to.

You can do what the court did in the District Court.

It did not reach our argument because it was not necessary to do so.

Justice Potter Stewart: And really if Judge Rifkind is correct, there's no federal jurisdiction, is that correct?

Mr. Daniel M. Cohen: Yes, Your Honor.

Justice Potter Stewart: And there being no federal jurisdiction, the Eleventh Amendment argument falls out of the case, because after all the Eleventh Amendment is a jurisdictional statute, is it not?

Mr. Daniel M. Cohen: Yes, Your Honor.

Justice Potter Stewart: Having to do with federal court is it?

Mr. Daniel M. Cohen: Yes, Your Honor.

We have a backup argument as so far as the state is concerned.

But if you are persuaded by Judge Rifkind's argument, you need not reach our portion of the case at all.

Justice William H. Rehnquist: One part of the, well one count of the complaint though was posited not on Securities Act jurisdiction but on Section 1343, wasn't it, which was derived in from 1983?

Mr. Daniel M. Cohen: Yes, the one cause of action directed against the State Housing Finance Agency is so posited.

But the difficulty with that particular complaint is directed against an agency which is purely a financing agency.

An agency which has supplied the money with which this particular project was built, and so far as I can imagine, I don't see how any sort of reasonable construction could lead to a cause of action against an agency, and this is something that goes to the merits and because it goes to the heart of the case as against this agency.

No possible cause of action, it seems to me, could be reasonably predicated against the state agency which furnished the money which made this project feasible.

These plaintiffs would have no place to live in if this money had not been furnished despite the increases in costs that occurred that compelled the furnishing of more money by the State Housing Finance Agency than to have been contemplated or expected in the first instance.

That applies only to this single cause of action against the agency.

Now, the opinion by Judge Rehnquist in the Edelman case came down on a period that was just shortly after the briefs had been submitted in this case by counsel before the Circuit Court of Appeals.

The Edelman opinion was not noticed at all in the opinion by the Circuit Court of Appeals.

And we feel that so far as the state itself is concerned, so far as the state supervising agency is concerned, the Commissioner of Housing, there would be no basis for assuming that there had been either any waiver of immunity or any consent by the action of the state in sponsoring this project.

Housing was a field in which the State of New York was intensely interested long before the Securities and Exchange Act was passed.

Actually one of the limited dividend projects that was connected in some way with this same sponsoring agency, the amalgamated houses was setup on 1928, people were actually living in amalgamated houses in 1927, Christmas of 1927.

There is not here the fact to which was present in the Pardon case.

The state going to a proprietary enterprise, the state was here simply as a regulator.

The state did not own.

These people did not contemplate that they were going into a project that was state owned, or that might be deemed to be state owned.

There is nothing --

Justice Potter Stewart: For the regulator it was --

Mr. Daniel M. Cohen: Pardon?

Justice Potter Stewart: It was a great financial backer as well, was it not?

Mr. Daniel M. Cohen: It was a financial backer and it derived no financial benefit from its financial backing.

It provided -- it did not provide any money except to people who were limited income by way of various types of subsidies.

And it had no proprietary interest in those subsidies at furnished housing, at furnished benefit in the nature of a welfare benefit.

Justice Potter Stewart: No monetary profit?

Mr. Daniel M. Cohen: No monetary profit.

Justice Potter Stewart: Just social profit.

Mr. Daniel M. Cohen: Social profit, yes Your Honor.

Now we have, I think, no need to make any extended argument as to the state's immunity.

As Your Honor has indicated, it's not necessary to reach that portion of the case if you agree with Judge Rifkind's argument.

And I think that I can save the time of the Court by resting here and asking that the judgment of the Court of Appeals be reversed and that the complaint in this action be dismissed.

Chief Justice Warren E. Burger: Very well Mr. Cohen.

Mr. Nizer.

Argument of Louis Nizer

Mr. Louis Nizer: Mr. Chief Justice and may it please the Court.

The sole securities issue on this appeal is whether 1,312,128 shares of common stock publicly offered by wide distribution through the mails to 15,372 separate purchasers for more than $32,800,000.00 in cash paid by these purchasers constitutes securities under the federal laws.

Of the thousands of decisions involving alleged frauds in the sale of stock which have been rendered by the federal courts during the past 40 years, there is not a single case which supports the defendant's contention that common stock does not come under the protection of the anti-fraud provisions of the securities laws.

The reason that the defendants cannot cite a single case in which common stock was held not to be a security is that this Court as far back as 1943 settled this issue in the Joiner case.

It mandated that the specific term “stock as a matter of law is a security”.

And it also held that were as here, the case involved “a share of stock” the plaintiff need only offer “the document itself” to prove that it is a security and thereby establish jurisdiction under the Federal Securities Act.

Now the defendants concede here that the common stock is so designated par value $25.00 a share that appears at the UH brief, page 11.

But they urge that these shares denominated as common stock are something different than what they are represented to be.

And even this, in the Joiner case, this Court disposed of such convoluted reasoning.

This Court held that in the enforcement of the securities laws, offerings “will be judged as being what they were represented to be.”

Justice William H. Rehnquist: Well Mr. Nizer, in Tcherepnin that didn't accord just a later case than Joiner.

The Court does talk about looking at substance rather than form, doesn't it?

Mr. Louis Nizer: Sure, and I will discuss that in full Your Honor, in a moment.

But there, they were talking of an investment contract.

That's the second string to our bow.

When it is stock, you don't have to go to the question of whether it constitutes an investment contract without being a stock.

Justice William H. Rehnquist: Well the language I'm thinking of is this language on page 336 where they say “Finally, we are reminded that in searching for the meaning and scope of the word security in the Act, form should be disregarded for substance and the emphasis should be on economic reality.”

They were not talking of the full definition of a security.

Mr. Louis Nizer: Yes, and I think that the economic reality is here as I shall soon develop clearly indicate that this is a stock transaction, on its face and on the economic realities.

I do not agree with the learned counsel that this is distinguished from other cases.

We have had cases that this Court has decided.

In the Sobieski case for example that a membership in a club is sufficient in --

Justice William H. Rehnquist: That was the Supreme Court California decision.

Mr. Louis Nizer: That's right.

Justice William H. Rehnquist: That's not from this Court.

I thought you said it was decided by this Court.

Mr. Louis Nizer: No I said that the Sobieski case, I was mistaken in referring it to this Court.

In the California Ninth Circuit, there is the case state court by Judge Treanor, I believe of the state court.

Justice William H. Rehnquist: Yes, interpreting of state law.

Mr. Louis Nizer: That's right.

But I think if I, since I have limited time, I would like to come to the economic realities here.

I think that will be better addressed here on this question.

The court below has been chastised by the defendants for being literal, because it followed the instruction of this Court in Joiner case and the statute fortunately is explicit and lucent.

And in this admirable sense, it is literal.

Stock is a security and so it is.

To cavil with such legislative clarity is unwittingly or otherwise to distort the statute's true meaning in order to avoid its clear application to this case.

Now 24 years later, this Court reexamined and reaffirmed the Joiner case, and that was of course in the Tcherepnin case that Your Honor referred to, which provides a rare instance of a case remarkably similar in fact to our case, and at which the court rejected the same contentions as the defendants make here.

In Tcherepnin, the plaintiffs bought shares in a savings or loan association.

And the defendants there contended that the shares purchased were not stock because looking at the realities.

One, they were not publicly traded as here.

They didn't fluctuate in value.

They redeemed a bullet par only.

That the shares represented memberships rather than investment and I notice to this constant use of the word membership here, that the shares like many customary attributes such as preemptive rights, right to inspect the books, although we have that right in our case.

And there were restrictions on the signability.

Those all the same issues.

And these arguments were held by this unanimous court to be irrelevant to the question whether Federal Security laws were applicable.

And this Court held that the shares in that case were includable in the statue to stock because there was a stock certificate, and as the Court pointed out there, also the possibility of surplus, which is of course the dividend.

Even though, mind you, in that case as Your Honors will recall, it was brought in the receivership.

The defendant was neither receiver yet they talked of the potential of surplus, which was sufficient, the very possibility of it.

Now clearly in our case these elements exist.

Above all, this Court in Tcherepnin pronounced the policy consideration and philosophy of these statutes which provides special insight, we submit, and a large view of the present case.

There, the Court pointed out that the purpose of the statute was to protect particularly the many small investors.

I think there was a quotation that they repeated from Joiner; “Remedial legislation should be construed broadly to effectuate its purpose.

The reach of the Act does not stop with the obvious common place”.

In our case, the plaintiffs were eligible to buy the stock which would give them a four-room apartment with a monthly carrying charge of $23.2 as represented in the prospectus.

If they earned more than $6,600.00, they were ineligible, $6,600.00 a year.

So that the class that purchased the stock and put up $32.8 million in this case were the same type of small investors as in the Tcherepnin case, indeed much more.

So, obviously, people living on pensions, old people, welfare and so on.

And yet without these people who collectively put up over $32 million in cash, there could be no Co-op City, because the Mitchell-Lama Act mandated that the venture or risk capital have to come from the public, unlike the other Housing Acts that Section 21, after private housing financed law.

The jurisdictional facts demonstrating that this stock transaction was within the security statutes are spelled out in the complaint.

First we have a prospectus called an information bulletin which was widely distributed through the mail.

That's paragraph 50.

And this bulletin has a heading, appears at 178 A of the record which reads as follows; “Stock and other equity obligations offer.”

And there follows, “The housing company” -- that's the River Bay Corporation who's stock we bought -- “invites offers for shares of its capital stock that all in accordance with the terms of the subscription agreement.”

And that's at 178 A of the record.

Now the subscription agreement which was attached to the prospectus and was intended to be torn out and returned with a check for part payment of the stock read, at 104 A “I hereby subscribe to so many shares of class B capital stock” and the par value is $25.00 a share.

I may say now in answer to a contention made here.

All of the money, all of the $432 million instead of $289 million as was represented in the prospectus upon which these poor people put up their savings, all of that money had to be provided by the public.

The only thing the state did, this is not like the subsidized housing at all.

All that the state gave was the advantage of a low interest mortgage valuable indeed, which had to be paid off in full with interest in the 40 years, and all that the state did otherwise was the tax, the city gave, a tax rebate which is done for other housing projects even commercial projects.

But the 100% of the money to construct this profit -- this enormous structure for 60,000 people, had to be paid by these 60,000 people and they weren't eligible even to own the stock unless they are into only $6,600.00 a year.

And the plain practical situation when friend talks of profits and all these general commercial propositions, the plain fact is that through fraudulent representations, which appear in allegations of the complaint.

I'm not discussing the merits.

I'm showing that there is a proper complaint here under the statute.

In their representations they said that the cost above $289 million to construct this would be born by the contractor, which is the CSI.

And he would take any excess.

That was the basis on which these people put up their money.

And yet when inflation came, and the cost went up, by fraudulent ignoring of the direct representation that the contractor would bear that cost, if there was an inflation not maintenance increase that we have to pay that kind of inflation or operation, but construction.

They increase to $30 million one year, $40 million another year and loaded it on to these people who had taken it on the representation that not one cent of that money would be paid by them but would be paid by the contractor.

And why was this possible?

Because the contractor, the CSI and the UHF, this fine organization and incidentally we have not joined these defendants, the heads of these unions and so on, they were tinker heads.

We've sued the operating company.

They had interlocking directors precisely the same directors and officers as the contractor was in the UHF and even our River Bay Company.

The company whose stock these people bought had the same directors and officers, so that this was an interlocking situation and which even the Commissioner, the State Commissioner, waived a requirement of bonds for the construction of this property.

And he waived the liquidity requirement.

A liquidity requirement in the contract which said that the contractor must have $13 million liquidity, and he waives that and the contractor has $100,000.00 liquidity.

So that it seems to us that not only have we a clear stock transaction sold in the market to these people but that the -- all the elements of a fraud action exist here under the statutes, and it was intended that the people who built that kind of structure should not be immune anymore than the man who invest for large profits as they call it galactic profits in Wall Street.

I don't see why this statute which is remedial should be limited to the large investor.

Legitimate though he be, why should it not apply to these people who put up their life's earnings and probably made the only investment they ever made in stock through their lives.

The River Bay Company, our company was, as the complaint says “The captive of the contractor and the sponsor” and $81 million was loaded on to the River Bay stockholders improperly.

And there is a claim since I will not have a chance to rebut again, that there was notice of this.

We deny the notice.

The notice didn't say -- didn't even refer to all these increases.

Said there will be an increase.

But as Your Honors know, you cannot waive under the Securities Act that provisions and protections of the Act, even if they'd given us notice, it would be ineffectual.

Now it is sufficient for affirmance that in this case we have this widely distributed shares of par value common stock bought for tens of millions of dollars and represented to be stock in a prospectus and the subscription agreement.

Clearly, this alone warrants application of the of the Federal Securities law and jurisdiction in the federal courts.

There are two additional grounds for affirmance.

The shares are also an investment contract.

They qualify as such clearly.

And that they are an instrument commonly known as security, another definition of the Securities Act.

In view of the argument to be made by counsel for the SCC and the time elements, I shall leave these two alternative grounds to our brief at pages 48 to 60.

And I turn to the Eleventh Amendment question because I think I'd like to deal with that.

With respect to the Eleventh Amendment issue, only the State of New York is involved.

The agency is not involved and clearly may be sued into federal court for two reasons.

It is a separate legal entity and it is not a division or department of the State of New York.

Justice William H. Rehnquist: They had be sued under 1983 as well as under the Securities law in view of cases like Monroe against Pape --

Mr. Louis Nizer: Yes.

Justice William H. Rehnquist: -- and Bruno against Kenosha?

Mr. Louis Nizer: Yes, I think it can be.

Justice William H. Rehnquist: Why?

Mr. Louis Nizer: An agency is a person and under the interpretation that the -- this Court has given to the Securities Act, a definition of person includes state, governmental agency of any kind.

Justice William H. Rehnquist: Well I would've thought that 1983 cost of action would've turned on the definition of person in 1983 rather than in the Securities Act.

Mr. Louis Nizer: Well, it's a person under a Civil Rights Act as a I suppose the other aspect of the question.

But under the Securities Act we also have a definition which defines person as any state which is to me one of the reasons why there is an authority to sue here, and the waiver does take effect.

The fact that the -- there is a separate legal entity in the agency is not -- is conceded by the Attorney General of the State of New York in his opinion Number 56, which we've cited.

But second and determinative is the fact that any judgment against the agency is not enforceable against the state.

They are two separate entities and there is no link of liability by statutes or otherwise for each others obligation.

Indeed, Your Honors, there's a specific disclaimer of liability in Section 46, subdivision 8 of the Private Housing Finance Law.

And the bonds of the agency are not the debt of the state.

Therefore, like any other corporation, the agency is subject to federal jurisdiction.

Now with respect to the state, it has waived its immunity in two ways.

First, by special statute quoted at page 67 of our brief, the white document.

It's Section 325 of the Private Housing Finance Law, and by its -- secondly and by its conduct in this very case.

Now first as to the statute, you've been told that the statute waives immunity only in the suit in the state court.

There's nothing in the language of the statute which would justify any such limitation however strict the construction.

On the contrary, the statute reads that the state “may be sued in the same manner as a private person.”

Surely a private person can be sued in a federal court.

Indeed, a private person cannot be sued in the state court of claims.

Furthermore, there is a conclusive indicator in the language of the waiver that it was not intended to limit jurisdiction in the state court.

That language refers to the scope of the waiver.

It reads “With regard to liabilities arising out of the Mitchell-Lama Act, the state may be sued in the same manner as a private person.”

Now what term could be more generic and all inclusive than the word liabilities?

Case law set which we set forth in page 68 of our brief, demonstrates that the unqualified use of the word liabilities encompasses federal as well as state claims.

And the supervisory duties of the state through the Commissioner with respect to cooperative housing are all pervasive.

The Commissioner's charged with responsibility to see that River Bay complies with “the law”.

That's Section 321.

So River Bay stocks sold in violation of the anti-fraud provisions of the security law certainly brings into definition what do we mean by compliance with law, and that has been interpreted even by the New York courts, the laws of the land.

The second sentence of the waiver which prohibits the recovery of costs has been raised in the brief, though not argued orally, prohibits recovery of costs against the state does not alter the right to sue in the federal court.

It merely means that the plaintiff can not recover cost because he has accepted the condition of the waiver.

Now in its reply brief, the state cites five cases all dealing with refunds of state taxes and these cases are not applicable to our case, because there the statute set forth are comprehensive scheme involving procedures before state administrative agencies.

The final step of which was judicial review of the state agencies determination in the state court.

Furthermore, all that was involved there in these five cases were state tax law, not as here federally created right.

I stress the fact that this is not a case of diversity of citizenship.

We belong here under the right of the statute.

In addition to statutory waiver, there is the state's conduct.

This Court set forth a test composed of two elements to determine when the state's conduct constitutes a waiver, the Edelman case.

And incidentally that was argued in the Court of Appeals.

It came down late but was argued there and the court rejected it as I think this Court should.

Did Congress intend the federal statute to apply to the states?

Test one.

Did the state by its conduct, voluntarily enter into a federally regulated area?

Test two.

Now as to Congress' intention to include states, the evidence is undeniable.

The Securities Act of 1933, Section 2 (1) says it includes “Governments and their subdivisions, and the house and Senate reports” which we cite voluminously at pages 71 to 73 of our brief, state emphatically and repeatedly that “Person includes states”.

And incidentally, the 1933 and 1934 Acts has been held in Tcherepnin not to be read in pari materia and therefore wouldn't matter which that statute we took which year.

And at the same time that the statute included states, it provided in Section 27 of the 1934 Act for exclusive, exclusive jurisdiction in the federal court.

Now how significant that combination of provision is to reject any argument by the State of New York.

Thus Congress notified the states that if the states chose to engage in the interstate sale of securities, the price for it was waiver of immunity.

Having shown that Congress has intention to include states, I now turn to whether the State of New York chose to engage in the sale of securities.

This is not, as has been stated in the brief and orally, a matter of regulation.

We admit that's a straw man in these briefs.

We admit that states regulation is not -- doesn't subject it to the federal jurisdiction.

Here we have the state participating pervasively in every fact.

Indeed, under the Mitchell-Lama Act, not a shovel of earth could have been turned until public put up this $32 million.

In other words, the state from the beginning to the end not only supervisors, no regulation merely, it organized the entire construction in every way.

Also, the State of New York in 1955 passed the Mitchell-Lama Act, and this was 20 years after the Security Act, so that the state with full knowledge that it was in the realm of federal regulation went ahead.

And the Mitchell-Lama Act itself represents the decision by the state to furnish housing by obtaining venture or risk capital from the public through sale of Co-op stock.

To be brief, and in conclusion since my time is running out, the state under the statute is the major participant in planning the project, raising the venture capital from the public, construction and operation.

The project for which it received the fee from the plaintiffs of $3,510,000.00 obviously no mere filing fee under the blue sky laws.

And no other state has a statute of waiver of immunity similar to Section 325.

I say this because I don't think we're enlarging, there have been alarms caused in this brief that this will cause interference with state issue, and so financing nothing of the kind, neither -- on neither side of the issue is there an extension here.

We are asking that the Court not delimit the rights that have always existed in this case.

Even as to New York, this would be extremely limited, because this waiver only applies in the Mitchell-Lama Law, not many other provisions of the state.

So we're dealing here with an exceedingly restricted area.

But the rights of these plaintiffs ought to be tested.

We have waited three years, Your Honors, to get a trial in this case.

Why we have been banded around through the courts on this alleged jurisdictional question.

I think it's time that these people had a day in court.

Chief Justice Warren E. Burger: Mr. Gonson.

Argument of Paul Gonson

Mr. Paul Gonson: Mr. Chief Justice and may it please the Court.

In this case we have, as has been noted, 15,000 persons who have paid over $32 million to purchase over $1 million shares of stock in a cooperative housing corporation.

And the funds, those $32 million were utilized by that corporation in the construction of that apartment project.

The Securities and Exchange Commission submits that their allegations are fraud, which are based upon documents that were given to them in connection with that project, should be heard under the Federal Securities laws.

Now these persons executed essentially two documents as I understand.

One was a subscription agreement to buy stock.

The other was an occupancy agreement which was in effect a lease.

Chief Justice Warren E. Burger: You couldn't have one without the other, could you?

Mr. Paul Gonson: That's correct, Your Honor.

But it's important that there were two of them.

And in this case, we wish to emphasize that one of them talks about stock.

And that is very important.

And while it has been noted that of course substance should prevail over form, the fact that stock is involved here is not merely a question of form as perhaps was implicit in that suggestion.

On the other hand, I think that it is fair to say that the fact that there is stock, itself connotes substance.

Stock has certain attributes, and these are the attributes of a security.

And that is what is involved in this case.

Persons who are asked to buy stock may reasonably expect that they're going to be protected by the laws which apply to stock.

And why shouldn't they be?

It was sold to them as stock.

It wasn't sold to them as anything else.

This Court has said on several occasions that it is not unreasonable that a promoters offering be judged on what he represents it to be.

Justice Potter Stewart: The stock has certain attributes, and I assume we're not talking about livestock.

We're talking about shares in the corporation?

Mr. Paul Gonson: Yes sir.

We're talking about --

Justice Potter Stewart: And those attributes generally are the possibility of dividends if the corporation has profits.

They're the possibility of appreciation or depreciation in value depending upon the -- on the -- how well a corporation prospers.

And they're generally with exceptions of freely alienable.

Those are three rarely well-known attributes generally of shares in a corporation, aren't they?

Mr. Paul Gonson: Yes, Your Honor.

But as this Court noted in the Tcherepnin case --

Justice Potter Stewart: Well your point was stock has certain attributes.

Mr. Paul Gonson: Yes, Your Honor.

Justice Potter Stewart: Now which of those attributes does this stock, this so-called stock have?

And if it hasn't any of those, what other attributes does this so-called stock has that stock as generally understood has?

The stock here entitled the purchasers to an interest in a corporation chartered under New York law.

It gave those persons a right to vote on who was going to manage their corporation.

It gave those persons a right to dividends or surplus if there was any.

Justice Lewis F. Powell: Wait just a minute.

Will you amplify on that before you proceed?

What dividends?

Mr. Paul Gonson: Well the Mitchell-Lama Act provides that limited profit housing corporations may issue dividends.

Justice Lewis F. Powell: But does that -- does this corporation come under that provision of that Act?

Mr. Paul Gonson: It is my understanding, Your Honor that it does.

The records at 167 A and 188 A describes this as a limited profit housing corporation.

Justice Lewis F. Powell: Did either one of the courts below recognized the possibility of dividends under that Section or any other Section?

Mr. Paul Gonson: Yes, Your Honor.

The Court of Appeals recognized that possibility.

We refer to that in our brief at page 15.

I believe it's on -- I don't have the -- I believe it's on page 16 of the appendix Your Honor.

Yes, I've been handed the by-laws of the corporation Your Honor, which also indicate that there's a possibility of dividends, Article V, which is found in 138 of the record.

This is the record in the Court of Appeals, Your Honor.

Justice Lewis F. Powell: The Court of Appeals as I read their opinion stated that there were expectations on income in three ways.

And none of the three involved the possibility of any dividends.

Mr. Paul Gonson: Yes, the Court of Appeals I believe spoke of surplus income, Your Honor.

And I believe that one possibility of that surplus income is provided in the Mitchell-Lama Act is the payment of dividends which is --

Justice Lewis F. Powell: Do you understand that those dividends would be paid in cash or --

Mr. Paul Gonson: They presumably --

Justice Lewis F. Powell: -- do people own these shares?

Mr. Paul Gonson: I believe that they could be paid under the New York law in cash.

But I believe that the -- probably would be paid in the form of reduction of rentals.

Justice Lewis F. Powell: If the rental --

Mr. Paul Gonson: But there was a surplus from operations rather than in cash.

Justice Lewis F. Powell: But if the rental were to be used in that way, is it your opinion that that's income?

Mr. Paul Gonson: It is our opinion, Your Honor that that is an economic benefit which when taken with other economic benefits constitute a sufficient inducement purchase a security.

Justice Lewis F. Powell: But we were talking about dividends and profits.

Would you advice anyone of the plaintiffs in this case to pay income taxes on the type of benefit you're talking about?

Mr. Paul Gonson: Possibly not, Your Honor.

I don't know.

I'm not sufficiently familiar with the consequence of the application of the income tax laws to the situation to answer that question fully.

It may very well be the kind of return that a cooperative pays to its members when in effect it collects more from it than it needs for operations.

I suppose essentially theirs not income, although it could very well be in the nature of a dividend.

Justice Thurgood Marshall: Do I understand you to say that the only prospect the dividend is that to operate in cost go down?

Mr. Paul Gonson: In -- I believe --

Justice Thurgood Marshall: Because if that's true, I doubt that anybody assumes that as of today, did it?

That operating cost will go down?

Mr. Paul Gonson: Well, Your Honor you would come from a combination of what is collected as against what it cost to run the project.

The surplus as distinguished from dividend also may come from the rentals which are obtained from commercial properties which I understand in the aggregate came to more than $4 million as price.

Justice Thurgood Marshall: Then we go to the River Bay or whatever it is the corporation?

Mr. Paul Gonson: Yes they do, Your Honor.

And then they're used in effect to offset the monthly accruing charges that these persons have to pay.

In addition, in terms of what attributes were there, the stock also entitled the holder to a right to participate in assets upon liquidation or dissolution.

And finally in response to the question and it is not necessary, this Court has said that stock have all of the attributes that any other kind of stock might possibly have.

There is voting stock and there is nonvoting stock.

There is of course that has cumulative dividends and stock that doesn't.

Nonetheless, they may all still be understood to be stock.

Justice Byron R. White: Well I suppose you'd be here making a perhaps not the same, but a similar argument if some different pieces of paper were issued that weren't called stock but had the attributes that these pieces of paper had?

Mr. Paul Gonson: Your Honor we might be making a somewhat different argument if that were the case.

Justice Byron R. White: Well, I said I mean at the same, but you'd be still be here, wouldn't you?

Justice Potter Stewart: Ultimate argument --

Mr. Paul Gonson: We might still be here.

Justice Potter Stewart: -- how about whether if this was a security, you would still -- you could still be making, couldn't you?

Mr. Paul Gonson: We might still be making that, yes Your Honor.

But I would --

Justice Byron R. White: -- making the investment contract, are you?

Mr. Paul Gonson: Yes but I would like to emphasize once again Your Honor, if I may, that the issue here is not whether an interest which on its face does not purport to be a security, is nevertheless to be a security rather it's the contrary.

It is the issue whether something which purports to be a security, a stock, should nonetheless be held not to be a security.

Justice Lewis F. Powell: Mr.Gonson, do you not take into position are you that any piece of paper that is called a share of stock is necessarily per se a share under the Securities Act, are you?

Mr. Paul Gonson: No, sir.

We're not taking into position that if you received a certificate that said in consideration of the contribution of the Boy's Club, you have a share of stock in the Youth of America that that would be a share of stock But if you received or subscribed to stock which you know is going to be an undivided interest in a corporation and which was going to carry certain benefits, then we say there is a very strong presumption at the outset that what you have received is in fact a security.

Justice Lewis F. Powell: But in the end, you look to the economic realities.

We're on agreement on that, aren't we?

Mr. Paul Gonson: Yes.

I think in the end, you would look to the economic reality.

And as this Court said in the Tcherepnin case in searching for the meaning and scope of the word security, the emphasis should be on the economic reality.

And on this case, the basic economic reality of the transaction here is the coming together of a number of factors; significance, economic inducements, argument to persons.

They make an investment at the outset that --

Justice Thurgood Marshall: Isn't it economic reality that you can't get the lease without the stock?

Mr. Paul Gonson: The economic realities, Your Honor is that the stock is a passkey to the apartment.

But as this Court noted in the United Benefit case, it may be very possible to have both a security and an insurance contract in the same documents.

And there this Court reversed the Court of Appeals which had looked at the transaction as whole found that it was substantially insurance.

And concluded that it was insurance contract and not subject to Federal Securities laws.

When this Court reversed it, it said that the area had been that it was severable.

Even though it was one document, it was -- part of it was a security subject to the Securities laws.

The other part of it was insurance properly subject to the state insurance regulatory laws.

And so here too, you have housing.

We are not contending that housing is subject to the Securities laws whatsoever.

But in order to obtain the housing, one must buy stock, a security, which has certain attributes.

We think that that stock separately ought to be subject to the Federal Securities laws.

Finally, I would note that the dark forebodings of the future which had been uttered here as to what would happen to the real estate industry if the Securities law were to apply is not well taken.

We are not urging that all multiple housing forms be subjected to securities regulation.

On the contrary, we believe that our position here is a modest one.

We are not asking this Court to enlarge the coverage of the securities laws.

We are asking that this Court not diminish it.

Thousands of persons have bought stock on the basis of economic inducements and simply put, we believe that they are entitled to the protection of those laws that apply to stock.

Justice Lewis F. Powell: Mr.Gonson?

Mr. Paul Gonson: Thank you.

Justice Lewis F. Powell: In the section of your brief that argues that this type of housing would not be seriously interfered with if required to comply with the Securities Act.

The first suggestion your brief makes is that Section 3 (a) (11) the provision for intrastate offerings would be available.

Do you suggest seriously that offering to 15,000 people could be accomplished under 3 (a) (11)?

Mr. Paul Gonson: Your Honor, in this very case the subscription agreement stated that it was offered only to residents of the State of New York.

Justice Lewis F. Powell: Correct.

Mr. Paul Gonson: And --

Justice Lewis F. Powell: But suppose, there'd been a single offeree who was not a resident of New York, what would've been the consequences?

Mr. Paul Gonson: There would have been of course some danger that the exemption might not have been available.

But the statute requires, as I understand it Your Honor that the residents be actually residents of the State of New York.

And I suppose when we talk about state supported housing that such housing is going to be constructed essentially, if not exclusively, for the state's own residents.

And so, when we offer the possibility in our brief that the registration requirements of the Securities Act might not be applicable, I think that it is a reasonable suggestion to make.

Justice Lewis F. Powell: There's a difference between the people who buy and the people to whom a security is offered.

And the 3 (a) (11) exemption relates to offeree as well as to buyers, and if you make one mistake in an offer to a person outside of the state, your commission will require a rescission offer.

Mr. Paul Gonson: That is correct Your Honor.

That exemption like other exemptions are strictly construed.

Now we offer that as one of a number of possibilities to indicate that there may be ways available to not to have to comply with registration of prospective requirement of the Act.

Chief Justice Warren E. Burger: I'm not sure what, if any significance there was or is, about the residency requirement.

But under the Shapiro case, wouldn't any person who had come to New York and been there one day, been eligible to get into this enterprise?

Mr. Paul Gonson: I would assume so if the residents were a bona fide one Your Honor.

Chief Justice Warren E. Burger: Well if they could elect welfare, then they could get in to this enterprise.

Mr. Paul Gonson: I would assume so.

Thank you.

Justice William H. Rehnquist: But then frequently, the determination of whether or not that exemption is available will determine -- will turn on the trial of the issue of fact of the residents of a particular offeree?

Mr. Paul Gonson: I suppose that's correct Your Honor.

But I think that that probably is so with respect to the utilization of almost any exemption.

Justice William H. Rehnquist: Well that's why hardly anybody uses that intrastate offering thing, is because if you make one mistake, you're through.

Mr. Paul Gonson: That's correct Your Honor.

We refer however to other possible exemptions that maybe available.

And may I note that even if no exemption were available, we're not talking about an especially onerous burden.

We're not talking about guarantees of any kind.

We're merely saying that then what would be required is that information would have to be filed and a prospectus would have to be given to prospective purchasers.

And in a project of this massive size, we submit that that would not appear to be on this phase an insurmountable obstacle.

Thank you, Your Honor.

Chief Justice Warren E. Burger: Very well.

Mr. Rifkind, you have about ten minutes remaining.

Rebuttal of Simon H. Rifkind

Mr. Simon H. Rifkind: Thank you.

May it please the Court.

My learned friend, Mr. Nizer, opened by an impressive set of figures which were designed I think to impress with their size.

He spoke of the large number of shares, the large number of residents and the large amount of money.

But I take it that questions of jurisdiction are not measured by that kind of a yardstick and the same principles would be applied if this was a two 20-room house only in New York and was financed by a very much smaller transaction.

So I think we can disregard this jury appeal and address ourselves to the question as to whether we're talking about a security.

Of course my learned friend keeps on saying that they bought stock.

And I kept on saying that they bought homes.

And the economic reality which the case which Mr. Justice Rehnquist referred to, compels us to listen to is what was the business transaction that this homeowner -- home buyer was interested in.

Say because it's called a share of stock?

Well, Mr. Justice Stewart referred to livestock, it's also stock, and not all trees are trees.

If some are whiffletrees and some are hat trees.

The mere fact that you hang a label on it of stock because this is the conventional mechanism by which the general public has approached this way, doesn't necessarily lead to the conclusion that it's stock.

I'm not suggesting for a minute that when you call something stock, you shouldn't examine whether it isn't stock.

And of course you start out by saying “He called it stock, maybe it is.”

But the statute doesn't say every security -- every stock is a security.

The statute says every stock is a security unless the context otherwise directs.

And the context takes us back to the purposes of the statute, to the legislative object.

And the legislative object under the securities laws was to control the marketplace's securities, the marketplace and investments, the marketplace in speculations in that kind of money making enterprises, and not in a social welfare scheme of the kind we are talking about here.

Mr. Nizer referred to the cash contribution of 7% which the subscribers here furnished.

Well, it is in the aggregate a very large amount of money.

But the comparison that I would make would be more to the fact that a Medicare participant, an age group to which I now belong, pays a small percentage of his medical bill when he goes to the hospital.

That doesn't mean that it is not a social welfare program that we're talking about.

On the question of rescindability which was mentioned, I should say that every contract here was rescindable.

Thousands of them were rescinded and even the plaintiff below, Mr. Milton Forman rescinded their contracts recently when they moved out of the apartment and got their money back.

On one question I must take issue with my learned friend and that is on the definition of person as given in the Securities Act.

The 1934 Act does not define the state as a person.

The 1934 Act as I read it says the term person means an individual, a corporation, a partnership and association, a joint stock company, a business dress or an incorporated organization.

So it can't be the 1934 Act in which the fraud statute appears.

It's the 1933 Act which deals with registration which includes a Government or political subdivision thereof.

But nobody claims that we should have registered at this case.

We didn't of course and nobody claims we should have.

Justice William H. Rehnquist: The 1933 Act too that expressly confers the right of a purchaser to sue, isn't it?

Mr. Simon H. Rifkind: That may well be.

Now, on the question of dividends, no cooperative pays dividends.

Essentially, a cooperative is ten couples going to the theatre together and contributing $25.00 a piece.

If when they return from the theatre, there's $10.00 left in the kitty, they pay it back to the subscribers.

That doesn't mean that that theatre party declared a dividend in a business venture for which the people invested their $25.00.

Justice Potter Stewart: Dividend in the same sense that a dividend on a life insurance policy might be called a dividend, isn't it?

Mr. Simon H. Rifkind: Even that might be more of a dividend than the actuality.

Of course there at least it's derived from the earnings of the insurance company.

Justice Potter Stewart: But the cost turned out to be lower than the --

Mr. Simon H. Rifkind: Cost turned out to be less.

Now, this Court of Appeals must've been troubled by this very question.

If it weren't troubled by the question as to whether this was really security, they wouldn't have reached out, for what I must most respectfully say the trivia which they identified as the profit features of this transaction.

Just look at them.

They said that there was a reduced carrying charges resulting from the rentals received out of commercial spaces.

Now I think this Court ought to know what we're talking about.

In this community of 15,000 home and 15,000 people, there had to some grocers.

Incidentally, this is quite remote from the center of town.

There had to be some butchers.

There had to be some barbers.

There had to be some people who are rendering that kind of normal neighborhood service.

And naturally, you have to make space available for them and some income was generated that way.

Does that make this a shopping center investment?

It's to me comparable if the management of this cooperative had said “We're going to charge every householder for his bathwater.”

That would generate some money.

But that then would make the housing cooperative a business venture in the sense of earning dividends.

The second thing they said was that these securities were tax -- that these homeowners enjoy tax deductibility for their share of the interest and the mortgage and their share of the taxes that they paid to the city.

And of course that is true.

As this Court well knows, every homeowner is entitled to that deduction.

Every owner of a cooperative apartment is entitled of that deduction.

Every owner of a condominium apartment is entitled to that deduction.

Has nothing to do with the securities business at all, has nothing to do with the investment aspects of this thing at all.

It is an aspect of homeownership, not of security ownership.

And moreover, it doesn't depend upon the efforts of others.

It depends upon the taxpayer's personal status.

If he has no reportable income, this tax deduction doesn't do him any good.

It's only if he has some income against which he can take this deduction that he confers any benefit upon it.

And the third item that really was reaching, they said “Well, this is a bargain.

It's going to cost them less to live.”

That's the benefit that the state conferred upon him.

That's like saying the Medicare is a profitable enterprise.

This just doesn't add up to my -- in my way of thinking of it.

Of course there were cooperative ownership means that the people run the property don't make a profit so you don't have to pay that profit to the man who runs it.

It also imposes some obligations.

It means you got to see that the snow is shoveled, and so on.

But to call this bargain an aspect of a profit aspect of this enterprise goes beyond what I think is rational elucidation of the statute.

Now as far as the FCC is concerned, I can say very little.

Their brief was only delivered to me, all within -- the final brief I didn't get till yesterday I think.

And we've put in a typewritten answer which we will furnish -- printed brief on.

I am baffled by the position of the FCC because until recently, they certainly wanted to keep hands off the sale of cooperatives and the sale of condominiums and all this business and they wrote rules which excluded them, and wrote no action letters which excluded them, and wrote guidelines in the release which is in the record, in which all the identifying marks that attributed to this project exclude them from the field of security regulation.

Justice Byron R. White: Well they just changed their minds, Judge.

Mr. Simon H. Rifkind: If they changed their mind --

Justice Byron R. White: Maybe.

Maybe.

Mr. Simon H. Rifkind: -- all I can say is they've appeared on the scene very, very late.

Indeed, they were not in the District Court.

They were not in the Court of Appeals and didn't get here until a couple of days ago.

I think I've taken all the time I should.

Thank you.

Chief Justice Warren E. Burger: Very well.

Thank you gentlemen.

The case is submitted.