Eisenberg v. Gagnon

• Decision Date: 22 July 1983
• Docket Number: Civ. A. No. 82-5051.
• Citation: 564 F. Supp. 1347
• Parties: Martin EISENBERG and Arthur Nissen, on behalf of themselves and all others similarly situated v. Frederick M. GAGNON, Bernard A. Boyers, David E. Wasserstrom, Charles Leiberman, Edward Hershenhorn, David Weinstein, Wasserstrom & Chucas, and Pelino, Wasserstrom, Chucas & Monteverde, P.C.
• Court: U.S. District Court — Eastern District of Pennsylvania

564 F. Supp. 1347

Martin EISENBERG and Arthur Nissen, on behalf of themselves and all others similarly situated v. Frederick M. GAGNON, Bernard A. Boyers, David E. Wasserstrom, Charles Leiberman, Edward Hershenhorn, David Weinstein, Wasserstrom & Chucas, and Pelino, Wasserstrom, Chucas & Monteverde, P.C.

Civ. A. No. 82-5051.

United States District Court, E.D. Pennsylvania.

May 26, 1983.

As Amended July 22, 1983.

COPYRIGHT MATERIAL OMITTED

Michael Needle, David Zlotnick, Lawrence Feldman, Philadelphia, Pa., for plaintiffs.

Wilbur Greenberg, Philadelphia, Pa., for defendants.

MEMORANDUM OPINION AND ORDER

WEINER, District Judge.

Plaintiffs Martin Eisenberg ("Eisenberg") and Arthur Nissen ("Nissen") bring this action assertedly on behalf of themselves and a class of purchasers of securities in three limited partnerships. This court has not ruled on the class action motion, but will presently rule on numerous motions by several defendants regarding the amended complaint. Defendant David Weinstein ("Weinstein") has filed a Motion to Dismiss under Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure as well as a Motion to Strike or For a More Definite Statement under Rule 12(e) of the Federal Rules of Civil Procedure. He has also filed a motion to dismiss the class action allegations.

Defendants David E. Wasserstrom ("Wasserstrom"), Wasserstrom & Chucas ("W & C") and Pelino, Wasserstrom, Chucas, & Monteverde, P.C. ("P,W,C, & M") have filed motions under Rules 8(a), 9(b) and 12 of the Federal Rules of Civil Procedure seeking to dismiss the complaint or, in the alternative, seeking to obtain a more definite statement.

The Supreme Court has held that "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff would prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957) (footnote omitted). Bearing in mind this stringent standard, we turn to the arguments.

The plaintiffs contend that from late 1975 or early 1976 through the present "defendants Gagnon, Boyers and Wasserstrom devised and implemented a scheme to place virtually worthless coal rights in a tract in West Virginia known as the Beury Estates into Ark, Bar and Cay Limited Partnerships. ..." (Amended Complaint, ¶ 21.) The plaintiffs further allege that "as part of this scheme, Gagnon, Boyers and Wasserstrom recruited three individuals, defendants Leiberman, Hershenhorn and Weinstein, to act as general partners for Ark, Bar and Cay, respectively, and those persons agreed to and in fact did hold themselves out to investors ... as the general partners of Ark, Bar and Cay...." (Amended Complaint, ¶ 24.) The plaintiffs further allege that "Lieberman sic, Hershenhorn and Weinstein misrepresented that they were the actual organizers and managers of those partnerships, whereas none of them played an operational role, if any, in the formation or operation of Ark, Bar, and Cay and each was at all times little more than an agent and mouthpiece for defendants Wasserstrom, Gagnon, and Boyers." (Amended Complaint, ¶ 24.)

Further, the complaint alleges that "Defendants Wasserstrom, Gagnon, and Boyers composed offering memoranda covering the sale of the securities in the form of limited partnership interests in Ark, Bar and Cay and circulated these memoranda under the names of Leiberman, Hershenhorn, and Weinstein." (Amended Complaint, ¶ 27.) The memoranda allegedly contained several "misleading" or misrepresentative statements. The plaintiffs also contend that defendants Gagnon, Boyers, and Wasserstrom "concealed the fact that Leiberman, Hershenhorn and Weinstein were acting as `fronts' for them." (Amended Complaint ¶ 29c.)

The plaintiffs aver that as purchasers of limited partnership shares, they "have been subjected within the last year to expensive and protracted disputes with the IRS leading to liability for large tax payments and the expenditure of a great deal of time and money on legal and tax counsel to defend against the IRS" as a result of the "foregoing scheme." (Amended Complaint, ¶ 33.) They contend that they "had no reason to suspect wrongdoing until the results of an IRS investigation into Ark, Bar and Cay became known to them in late 1981 or early 1982 and had no reason to suspect that a fraud had been committed until the completion of the investigation conducted by plaintiffs' counsel." (Amended Complaint, ¶ 34.)

The plaintiffs have brought this action under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 as well as under Section 4 of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., in Count III of their amended complaint.¹ They have also included a number of Pennsylvania common law allegations pursuant to this court's pendent jurisdiction.

I. THE RICO CLAIM

Defendant Weinstein² attacks just the plaintiffs' RICO claim. Initially he contends that the activity complained of does not fall within the ambit of RICO, not because RICO is limited to members of organized crime, but because "the Act should be limited to activities which fall within the penumbra of activities engaged in by `organized crime.'" (Motion of Defendant David Weinstein, p. 9.) The plaintiffs have alleged that the defendants "knowingly and willfully transmitted and caused to be transmitted through the mails numerous materials ... in furtherance of their scheme to defraud in violation of 18 U.S.C. § 1341" and "have transmitted sounds and other information by wire communication in interstate commerce in the course of executing the fraudulent scheme ... in violation of 18 U.S.C. § 1343." (Amended Complaint, ¶ 42(b), (c).) They allege that the "Defendants knowingly conducted and participated in the conduct of the affairs of Ark, Bar and Cay through a pattern of racketeering activity, in violation of 18 U.S.C. § 1962(c)." (Amended Complaint, ¶ 43.) They have stated that "Ark, Bar and Cay are enterprises within the meaning of 18 U.S.C. § 1961(4)" (Amended Complaint, ¶ 41) and that "Defendants conspired to conduct the affairs of Ark, Bar and Cay through a pattern of racketeering activity, in violation of 18 U.S.C. § 1962(d)." (Amended Complaint, ¶ 44.)

Defendant Weinstein argues that RICO was not designed as an alternative or cumulative remedy for private plaintiffs alleging securities fraud and thus it "should be applied conservatively beyond organized crime." (Motion of David Weinstein, p. 9). However, the allegations of mail fraud and wire fraud are within the activities defined by the RICO statute as "racketeering activities." 18 U.S.C. § 1961(1). "In determining the scope of a statute, we look just to its language. If the statutory language is unambiguous, in the absence of `a clearly expressed legislative intent to the contrary, that language must ordinarily be regarded as conclusive.'" United States v. Turkette, 452 U.S. 576, 580, 101 S.Ct. 2524, 2527, 69 L.Ed.2d 246 (1981) (interpreting the RICO statute), quoting Consumer Product Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056, 64 L.Ed.2d 766 (1980). Defendant points to no legislative history directing this court to do as he asks. Therefore, because the complained of activity falls within the unambiguous language of the statute, defendant's argument must be rejected.

In so holding this court is aware that other courts have attempted to limit the application of the RICO statute by finding that its intended scope was to reach "`organized crime' or activities within the penumbra of that phrase." Adair v. Hunt International Resources Corp., 526 F.Supp. 736, 747 (N.D.Ill.1981); Barr v. WUI/TAS, Inc., 66 F.R.D. 109 (S.D.N.Y.1975). Such an application does not necessarily avoid the potential constitutional problems that Congress attempted to avoid in its wording of the statute. 116 Cong.Rec. § 5343 (Oct. 7, 1970). This court's concern with using an intuitive response to the question of what is or is not "organized crime" causes us to reject the attempt to so limit the application of the statute. The recently filed opinion of Schacht v. Brown, 711 F.2d 1343 (7th Cir. 1983) supports this court's reading of the RICO statute as does the thorough Memorandum Opinion and Order recently filed in this court, Kimmel v. Peterson, 565 F.Supp. 476 (E.D.Pa.1983).

Defendant Weinstein next contends that the plaintiffs failed to properly allege "a pattern of racketeering activity." The argument is actually directed at the specificity with which the plaintiffs have pleaded the alleged fraud. Rule 9(b) of the Federal Rules of Civil Procedure states that "in all averments of fraud or mistake, circumstances constituting fraud or mistake shall be stated with particularity." Although the plaintiffs have set forth a fairly detailed account of the persons whom they believe participated in the alleged scheme to defraud, other than the approximate dates given as to the initiation of the scheme ("late 1975 or early 1976," Amended Complaint, ¶ 21), the complaint contains no dates as to when the mailings of the allegedly fraudulent offering memoranda occurred. The plaintiffs also assert that fraudulent information was communicated by wire but fail to allege when such communications occurred, the content of the communications, or who made them. The defendant cannot respond to the conclusory allegations set forth in paragraphs 42(b) and (c) of the Amended Complaint. The plaintiffs will be required to plead with greater specificity both as to the mail and wire fraud allegations.

Defendant Weinstein further contends that the plaintiffs failed to properly allege that there was a pattern of racketeering activity. However, repeated acts of mail fraud or wire fraud would constitute a pattern of racketeering activity under the statute and the plaintiffs have alleged at least that much....