Enforcing The Rights of Limited Partners: Jury Awards $185 Million in Landmark Securities Class Action
The REAL Partnerships were a series of limited partnerships created to acquire interests in affordable housing projects (for which the government offered lower mortgage rates and guaranteed payment of a portion of the monthly rent). The General Partners raised hundreds of millions of dollars from investors in exchange for limited partnership interests. In the late 1990s, the General Partners of the REAL Partnerships sought to create a real estate investment trust which would include the limited partnership interests of the public investors. In acquiring those interests, the General Partners were required to obtain the informed consent of limited partners to the sale and the price to be paid. On behalf of the 18,000 limited partners, the complaint alleged that, contrary to U.S. federal securities laws and common law principles of fiduciary duty, the General Partners of the REAL Partnerships made false and misleading statements in the Consent Solicitation Statements sent to the limited partners to obtain their approval of the proposed transaction. Based on this misinformation, the limited partners were convinced to transfer their limited partnership interests to the Trust and the General Partners for substantially less than their true and fair value.
Jury Award Exceeds Damages Sought by Investors:
In 2002, following four years of intense litigation, the investors achieved total victory after a five-week federal trial and six days of jury deliberations. The jury reached an unanimous verdict for the plaintiffs on liability and damages. Finding that the defendants violated federal proxy laws, the jury determined that the Solicitation Statements were materially false and misleading. The jury verdict exceeded $185 million, which included more than $92 million in compensatory damages and more than $92 million in punitive damages. The punitive damage award was later reduced by the court to $2.2 million, which represented 10 percent of the corporate defendants' net worth—the maximum punitive damage award allowable under California law. The action was settled following the defendants' appeal of the jury verdict. The final settlement figure of $83 million represented 118 percent of the total damages claimed.
This landmark case was the first securities class action to be tried to a successful jury verdict in the United States since the enactment of the Private Securities Litigation Reform Act (PSLRA) of 1995.