Andreo v. FRIEDLANDER, GAINES, COHEN, ETC.

• Decision Date: 23 December 1986
• Docket Number: Civ. No. H-85-551 (MJB).
• Citation: 651 F. Supp. 877
• Court: U.S. District Court — District of Connecticut
• Parties: Loren J. ANDREO, et al. v. FRIEDLANDER, GAINES, COHEN, ROSENTHAL & ROSENBERG, et al.

651 F. Supp. 877

Loren J. ANDREO, et al. v. FRIEDLANDER, GAINES, COHEN, ROSENTHAL & ROSENBERG, et al.

Civ. No. H-85-551 (MJB).

United States District Court, D. Connecticut.

December 23, 1986.

Howard Rosenfield, Plainville, Conn., for plaintiffs.

Dennis M. Laccavole and Arnold Bai, Bridgeport, Conn., Deborah S. Freeman, Joseph F. Skelley, Jr., Joel J. Rottner and Carl F. Yeich, Skelley, Clifford, Vinkels, Williams & Rottner, P.C., Sharon Tisher, John B. Nolan, Robert A. Brooks, Day, Berry & Howard, Hartford, Conn., John A. Redmon and Robert B. Murray, Davis Markel Dwyer & Edwards, New York City, Warren Kaps, Hackensack, N.J., for defendants.

RULING ON MOTION TO DISMISS

BLUMENFELD, Senior District Judge.

This case arises out of transactions relating to the private placement of various limited partnership interests in satellite communications facilities. There are 67 plaintiffs who purchased interests in one or more of three limited partnerships. The defendants, who were involved in the transactions in various different ways, are a law firm, two public accounting firms, a lawyer/promoter, two named corporations, and unknown defendants designated as "John Does 1-25" and "XYZ Corporations 1-25." The plaintiffs claim that the defendants were part of a scheme to defraud them, violating the federal securities laws, 15 U.S.C. §§ 77l, 77q, and 78j, the federal racketeering statute (RICO), 18 U.S.C. §§ 1961 et seq., and state statutes and common law.

Defendants Peat, Marwick & Mitchell ("Peat Marwick") and Zarrow, Zarrow & Klein moved to dismiss the original complaint on a variety of grounds. In a ruling dated April 28, 1986, this court granted that motion and gave plaintiffs leave to amend the complaint within 30 days. On May 28, 1986, plaintiff filed an amended complaint.

Subsequent to the amended complaint, on June 30, 1986, Peat Marwick again moved to dismiss on a variety of grounds including failure to plead fraud with the amount of particularity required by Rule 9(b), lack of a private right of action under section 12(a) of the 1933 Securities Act, and failure to state a claim under RICO. That motion was argued on August 11, 1986.

Allegations

The amended complaint alleges a scheme to defraud the plaintiffs through three limited partnerships: Star Link Associates ("Star Link"), Sky Link Associates ("Sky Link") and Galactic Link Associates ("Galactic"). These limited partnerships were to build and operate ground station links for satellite communications. The partnerships were organized by Benjamin Rabin, who was assisted in various ways by the defendants.

There are numerous general and conclusory allegations as to the unlawful conduct of the defendants. For example, plaintiffs allege that Rabin and defendants "engaged in a plan and scheme to defraud Plaintiffs by inducing them to invest in and acquire units in certain limited partnerships ... based on material misrepresentations of fact and material omissions of fact." (¶ 4; see also ¶¶ 29, 63, 74-75, 77, 84) Plaintiffs also allege in a conclusory fashion that various defendants aided and abetted the fraudulent scheme. (¶¶ 31, 36, 38, 80, 83, 90)

Unlike the original complaint, however, the amended complaint makes an effort to spell out more specifically the role of each defendant in the allegedly fraudulent scheme. Under the heading "Role of Peat Marwick," plaintiffs allege that Rabin met with representatives of Peat Marwick, that partners and associates of Peat Marwick recommended the purchase of Sky Link interests to plaintiffs, and that Peat Marwick sought to obtain reassurances from Rabin and his affiliates that any revenue shortfall would be guaranteed by them. (¶¶ 54, 57-59) In addition, plaintiffs allege on information and belief that Peat Marwick was retained by Rabin to perform an independent review of Sky Link financial projections. (¶ 55)

Various other allegations are contained in other parts of the complaint. Plaintiffs allege that Peat Marwick, in sales presentations and in their review of financial projections, represented that the debt assumption and conversion agreements were solely for tax purposes (¶ 35), and that Peat Marwick breached its duty of care by recommending and soliciting investments in enterprises they knew or should have known were unprofitable (¶ 97). In addition, in a count for breach of contract specifically against Peat Marwick, plaintiffs allege that they were intended third-party beneficiaries of a contract for services between Rabin and Peat Marwick. Plaintiffs claim that they were harmed by Peat Marwick's breach of contract, alleging that Peat Marwick failed to perform in a professional manner by, among other things, disseminating false revenue and income projections and by allocating investment tax credits and depreciation deductions to the limited partners. (¶¶ 115-119)

The sufficiency of these allegations will first be examined under the particularity requirements of Rule 9(b), followed by an examination of the RICO claims and the pendent state law claims.

Discussion

I. Sufficiency of Fraud Allegations

A. Standards for Pleadings

1. Pleading Fraud

Plaintiffs alleging fraud must do so with particularity. Rule 9(b) of the Federal Rules of Civil Procedure requires:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

Failure to plead fraud with particularity justifies dismissing the complaint. Ross v. A.H. Robins Co., 607 F.2d 545 (2d Cir. 1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980). Since Rule 9 is a rule of pleading, allegations made in briefs or affidavits do not satisfy the pleading requirement. See Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1107 (7th Cir.1984) (axiomatic that complaint may not be amended by averments in briefs opposing motion to dismiss), cert. denied, 470 U.S. 1054, 105 S.Ct. 1758, 84 L.Ed.2d 821 (1985); Burns v. Preston Trucking Co., 621 F.Supp. 366, 368 (D.Conn.1985) (complaint to be examined in isolation without consideration of outside matters); Goldberg v. Meridor, 81 F.R.D. 105, 111 (S.D.N.Y.1979) (affidavits cannot cure lack of specificity in fraud complaint). Where the failure to plead fraud with the requisite particularity occurs after a second attempt to do so, the court may, in its discretion, dismiss with prejudice. Denny v. Barber, 576 F.2d 465 (2d Cir.1978) (Friendly, J.).

The case law has elaborated on the requirements of Rule 9(b). In order to state the "circumstances constituting fraud ... with particularity," a complaint must state who made the misrepresentations, when those misrepresentations were made, what the misrepresentations were, and how they were directed to the plaintiffs. Zerman v. Ball, 735 F.2d 15, 22 (2d Cir.1984); see also Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir.1986). In addition, although 9(b) allows general allegations as to knowledge and intent, such allegations must "supply a factual basis for the conclusory allegations" by pleading the specific "events which they assert give rise to a strong inference that the defendants had knowledge." Ross, 607 F.2d at 558; accord Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 115 (2d Cir.1982). Similarly, where allegations are based on information and belief the complaint must set forth the source of the information and the reasons for the belief. Goldberg v. Meridor, 81 F.R.D. 105, 111 (S.D.N.Y.1979); see also Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir.1974), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d 467 (1975). Thus, conclusory allegations that defendants participated in a scheme to defraud are insufficient. Decker, 681 F.2d at 114; Ross, 607 F.2d at 557; Segal v. Gordon, 467 F.2d 602, 607 (2d Cir.1972).

2. Pleading Aiding and Abetting

The particularity requirements of Rule 9(b) also apply to allegations of aiding and abetting securities fraud. In re Cincinnati Gas & Electric Securities Litigation, 594 F.Supp. 233, 237 (S.D.Ohio 1984); see also Decker, 681 F.2d at 119; IIT, An International Investment Trust v. Cornfeld, 619 F.2d 909, 922-27 (2d Cir.1980) (Friendly, J.). The elements for an aiding and abetting claim are (1) that there be a primary fraud, (2) that the aider and abettor have "knowledge" of the fraud, and (3) that aider and abettor provide "substantial assistance" to the achievement of the primary fraud. IIT, 619 F.2d at 922; see also Decker, 681 F.2d at 119. The knowledge element of aiding and abetting may be satisfied by recklessness where the defendant owes a fiduciary duty to the plaintiff. Decker, 681 F.2d at 119; IIT, 619 F.2d at 923. Thus, the circumstances giving rise to an aiding and abetting claim must be pleaded, Fed.R.Civ.P. 9(b); conclusory allegations are insufficient, Decker, 681 F.2d at 119.

B. Application of Standards to Allegations Regarding Peat Marwick

Plaintiffs' amended complaint is not sufficient under these pleading requirements with respect to defendant Peat Marwick. It is clear that the various conclusory allegations about Peat Marwick's participation in a fraudulent scheme do not meet the requirements of Rule 9(b). While the amended complaint has gone much further than the original complaint in specifying the basis for plaintiffs' allegations against Peat Marwick, it only partially meets the Rule 9(b) requirements. For example, even if it is assumed that Peat Marwick allegedly made statements which were material misrepresentations, the amended complaint nonetheless fails to specify when those statements were made. Mere allegations that misrepresentations took place in "sales presentations" do not specify the time or place of those presentations. See Fed.R. Civ.P. 9(f); Decker, 681 F.2d at 117.¹

Moreover, the amended complaint does not contain allegations which provide a factual basis for a strong inference that Peat Marwick...