766 F.2d 770 (3rd Cir. 1985), 84-1214, Eisenberg v. Gagnon
|Docket Nº:||84-1214 & 84-1225.|
|Citation:||766 F.2d 770|
|Party Name:||, 2 Fed.R.Serv.3d 980, 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 Lieberman, Edward Hershenhorn, David Weinstein, John W. Pelino, Morris L. Chucas, Tom P. Monteverde, Wasserstrom & Chucas, and Pelino, Wasserstrom, Chucas & Mon|
|Case Date:||June 28, 1985|
|Court:||United States Courts of Appeals, Court of Appeals for the Third Circuit|
Argued Feb. 4, 1985.
Rehearing and Rehearing In Banc Denied July 26, 1985.
As Amended July 26, 1985.
[Copyrighted Material Omitted]
Michael R. Needle, Lawrence E. Feldman, Needle, Feldman & Herman, Philadelphia, Pa., Richard D. Greenfield, David B. Zlotnick (Argued), Greenfield, Chimicles & Lewis, Haverford, Pa., for appellants and cross-appellees Martin Eisenberg and Arthur Nissen.
Edward C. Mengel, Jr. (Argued), Margaret A. Skelly, White and Williams, Philadelphia, Pa., for appellee and cross-appellant David E. Wasserstrom.
James M. Marsh (Argued), Daniel J. Ryan, Daniel P. Lynch, LaBrum and Doak, Philadelphia, Pa., for appellee Pelino, Wasserstrom, Chucas & Monteverde, P.C.
Richard M. Meltzer, Kenneth S. Siegel (Argued), Mesirov, Gelman, Jaffe, Cramer & Jamieson, Philadelphia, Pa., for appellee Clarence Rainess & Co.
Wilbur Greenberg (Argued), Philadelphia, Pa., for appellees Charles Lieberman and David Weinstein.
Before SEITZ, GIBBONS and SLOVITER, Circuit Judges.
SLOVITER, Circuit Judge.
FACTS AND PROCEDURAL HISTORY
Plaintiffs Martin Eisenberg and Arthur Nissen were investors in two limited partnerships, Bar Associates (Bar) and Cay Associates (Cay), which were part of a series of limited partnerships designed as tax shelters. Their investment proved worthless and, moreover, the Internal Revenue Service eventually disallowed any deductions beyond their actual monetary loss. Plaintiffs' principal allegation has been that defendant David Wasserstrom, an attorney, together with Frederick Gagnon and Bernard Boyers, orchestrated a scheme to sell securities in worthless coal rights as purported tax shelters while concealing that they themselves would take the lion's share of the proceeds. As further developed in discovery and at trial, plaintiffs contended that Wasserstrom had, prior to the organization of the limited partnerships, negotiated the purchase of Cannon Coal Company (Cannon) by the Seah Corporation, of which Wasserstrom was president and a director, for $400,000 in late 1975. Cannon's principal asset was its leasehold on 3,200 acres of West Virginia coal property. Wasserstrom, Gagnon and Boyers then allegedly conspired in establishing six virtually identical limited partnerships that would each sublease 400 acre parcels of this property from Cannon for an "advanced royalty" from each of $2,225,000, of which $475,000 was payable in cash and $1,750,000 in non-recourse notes. Thus, the bulk of the property purchased for $400,000 was resold within a few months for a total of $2,850,000 in cash and $10,500,000 in non-recourse notes.
Wasserstrom, Gagnon and Boyers were alleged to have recruited as nominal general partners for three such limited partnerships, Ark Associates (Ark), Bar and Cay, defendants Charles Lieberman, Edward Hershenhorn and David Weinstein who distributed offering memoranda for the partnerships without revealing that those partnerships were in fact controlled by and benefitted Wasserstrom, Gagnon and Boyers. Plaintiffs claim that the offering memoranda, allegedly composed by Wasserstrom, Gagnon and Boyers, were false and misleading as to the coal reserves and feasibility of coal recovery.
The offering memoranda included a tax opinion written by Wasserstrom and issued under the name of Wasserstrom's law firm, Pelino, Wasserstrom, Chucas & Monteverde (PWC & M), that allegedly misrepresented that the IRS would allow the deduction of large advanced royalty payments by non-recourse notes. The memoranda also contained a statement by the defendant accounting firm of Clarence Rainess & Co. (Rainess) that the assumptions underlying the partnerships' projections were "not unreasonable." Plaintiffs claimed that Wasserstrom and the accountants knew there was no reasonable basis for these assumptions.
Wasserstrom, Gagnon and Boyers allegedly concealed from investors their own interests and those of general partners Lieberman, Hershenhorn and Weinstein in the sale of the partnerships and also concealed that Wasserstrom's law firm received what are claimed to be excessive legal fees for the preparation of the partnerships.
The complaint alleges that plaintiffs and those similarly situated were fraudulently induced to invest more than $1,400,000 in Ark, Bar and Cay, which money was in fact divided by some defendants, resulting in a complete loss on the investments and the disallowance of deductions by the IRS. Plaintiffs claimed these facts demonstrated intentional misrepresentations and omissions in connection with the sale of securities in violation of Section 10(b) of the Securities and Exchange Act of 1934, 15
U.S.C. Sec. 78j(b) (1982), and Rule 10b-5 promulgated thereunder, 17 C.F.R. Sec. 240.10b-5 (1985), and constituted a pattern of racketeering activity and a conspiracy to commit such activity in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1962(c) and 1962(d) (1982). Finally, plaintiffs alleged counts under state common law, including one for defendants' negligent misrepresentations in recommending and soliciting investments in enterprises in which they had an interest.
In the period before trial, the district court denied defendants' motions to dismiss the first amended complaint, see Eisenberg v. Gagnon, 564 F.Supp. 1347 (E.D.Pa.1983), denied plaintiffs' motion for class certification, and gave plaintiffs leave to file a third amended complaint stating claims against Rainess and its alleged successor in interest, Seidman & Seidman (Seidman). At the trial, defendants were attorney Wasserstrom, his former law firm PWC & M, general partners Lieberman and Weinstein, and the Rainess and Seidman accounting firms. Defendants Gagnon and Boyers were not served and were therefore dismissed. A default judgment was entered against Edward Hershenhorn, general partner of Bar.
The jury was presented with a special verdict form asking it to decide the securities law, RICO, and negligence claims separately as to each plaintiff and defendant. The jury found for plaintiff Eisenberg and against defendants Wasserstrom and Weinstein on the state law negligence claim; for plaintiff Nissen and against defendant Wasserstrom on the same theory; but for defendants on all other claims. After a separate damages trial, the same jury awarded damages to Eisenberg of $12,200 against Wasserstrom and $6,100 against Weinstein, and to Nissen of $23,000 against Wasserstrom.
The parties, following the court's instruction, had filed post-trial motions prior to the damages trial which it ruled on thereafter. The district court granted Wasserstrom's and Weinstein's motion for judgment n.o.v. on liability, concluding that there was insufficient evidence upon which a jury could find reliance by plaintiffs on the offering materials.
Plaintiffs appeal from the district court's orders entering judgment for all defendants on jury verdicts under federal securities laws, entering judgment on the jury verdict for defendant PWC & M under Pennsylvania common law of negligent misrepresentation, and entering judgment n.o.v. for Wasserstrom and Weinstein on the common law claim of negligent misrepresentation. Appellants also seek reversal of the district court's orders denying class certification and denying their motion to compel production of certain documents. Wasserstrom, as a protective matter, cross-appeals from the court's denial of his motion for a new trial. 1
FEDERAL SECURITIES CLAIMS
We consider first the plaintiffs' claim that defendants violated Sec. 10(b) of the Securities and Exchange Act of 1933, 15 U.S.C. Sec. 78j (1982), and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1985), promulgated thereunder, which prohibit misrepresentations and misleading omissions in connection with the sale of securities. The jury found for defendants on these claims. Appellants argue that the district court erroneously
refused to instruct the jury that fraudulent projections were actionable and that the district court gave misleading instructions on the requisite state of mind.
Plaintiffs requested that the district court instruct the jury that fraudulent financial projections used in the sale of securities are actionable under Section 10(b). The proposed instruction, derived from 3 E. Devitt & C. Blackmar, Federal Jury Practice and Instructions Sec. 98.11 (3d ed. 1977), was as follows:
Projections and financial forecasts made with a reasonable basis are not made misleading merely because they may ultimately be proven incorrect.
A projection or a forecast may constitute a basis for plaintiffs' verdict if, but only if, it be proved by a preponderance of the evidence that at the time the forecast or projection was made, the defendants either
(1) did not believe that the forecast or projection was reliable, or
(2) had reason to believe that the forecast or projections...
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