Deane v. Thomson McKinnon Securities, Inc.

• Decision Date: 30 April 1984
• Docket Number: Civ. A. No. 83-1114.
• Citation: 586 F. Supp. 44
• Parties: Jack DEANE, et al., Plaintiffs, v. THOMSON McKINNON SECURITIES, INC., et al., Defendants.
• Court: U.S. District Court — District of Columbia

586 F. Supp. 44

Jack DEANE, et al., Plaintiffs, v. THOMSON McKINNON SECURITIES, INC., et al., Defendants.

Civ. A. No. 83-1114.

United States District Court, District of Columbia.

April 30, 1984.

A. Fred Freedman, Washington, D.C., for plaintiffs.

Steven M. Levine, Wilson, Elser, Edelman & Dicker, Washington, D.C., for Thomson McKinnon Securities.

Jerold Oshinsky, Robert H. Shulman, Anderson, Baker, Kill & Olick, Washington, D.C., for New Orleans Hosp. Corp.

William E. Hegarty, Charles A. Gilman, Richard I. Miller, Cahill, Gordon & Reindel, Washington, D.C., for Peat, Marwick, Mitchell & Co.

MEMORANDUM OPINION

BARRINGTON D. PARKER, District Judge:

On April 18, 1983, Jack Deane and Joseph Deane filed a complaint on behalf of themselves and others similarly situated charging the defendants with violations of the federal securities laws — the Securities Act of 1933 and the Securities Exchange Act of 1934. Named as defendants were Thomson McKinnon Securities, Inc. ("McKinnon"), a registered broker-dealer; Peat, Marwick, Mitchell & Co. ("Peat, Marwick"), an accounting firm; and the New Orleans General Hospital Corporation ("Hospital"), an issuer of hospital revenue bonds. The plaintiffs alleged that they sustained losses and damages after purchasing Hospital revenue bonds through McKinnon, the underwriter of the bonds. The complaint also alleged that plaintiffs received "a preliminary official statement dated June 15, 1981, which included ... a feasibility study prepared by Peat, Marwick" for the Hospital (Complaint ¶ 2). As relief the plaintiffs demanded "judgment against the Defendants ... for recission of the offering...." (Complaint p. 4).

Thereafter, the three defendants moved to dismiss the complaint for failure to state a claim upon which relief could be granted, Rule 12(b)(6) Federal Rules of Civil Procedure. On August 11, 1983, an order of dismissal without prejudice was entered. The complaint was dismissed because the plaintiffs failed to state a cognizable claim against the defendants and failed to comply with the basic pleading requirements of civil procedure, Rule 8(a)(2), (e)(1) and Rule 9(b). More specifically, the plaintiffs failed to particularize in the complaint what provisions, if any, of the 1933 and 1934 federal securities acts were relied upon and they failed to note what actions or conduct were taken by any defendant which violated particular provisions of the two statutes. In short, the loosely worded complaint was fatally flawed and fell far short of charging the defendants with any breach of duties or violations of law insofar as the plaintiffs were concerned.

On September 6, 1983, the plaintiffs filed an amended complaint which was also challenged by the defendants. This first amended complaint, while somewhat of an improvement over the original effort, was nonetheless dismissed on February 9, 1984. In dismissing the plaintiffs' second effort, without prejudice, the Court noted at page 3 of the Order of Dismissal that while the new complaint was lengthier than the first, "the only change of significance is that the Amended Complaint now alleges violations of specific subsections of the federal securities acts. In other respects, however, the Amended Complaint is as deficient as the original, and does not meet the requirements of specificity for complaints alleging securities fraud." The Court then pointed to the unresolved problems presented by the plaintiffs' second effort and noted the relevant and controlling case law associated with those problems.

The plaintiffs then filed a Second Amended Complaint on March 1, 1984. Meanwhile on January 31, 1984, the New Orleans General Hospital Corporation filed notice in this proceeding that on January 13, 1984, it had filed a petition for bankruptcy in the United States Bankruptcy Court for the Eastern District of Louisiana. The plaintiffs then named the defendant Medical and Business Facilities ("Business Facilities"), a Louisiana limited partnership, in place of the Hospital.

At this time the Court is again called upon to decide motions to dismiss filed by McKinnon and Peat, Marwick. For the reasons set out below, it is determined that the Second Amended Complaint does not reflect any significant improvement and should be dismissed. This dismissal, however, is with prejudice.

The plaintiffs' third effort alleges: that the Hospital was "controlled" by the defendant, Business Facilities; that in June and July 1981, the two defendants prepared and caused to be issued an Official Statement which was later disseminated to prospective purchasers in connection with the offer and sale of the bonds; that McKinnon was the underwriter for the bonds; and that on August 8, 1981, the plaintiffs purchased the Hospital's bonds through McKinnon. The Second Amended Complaint then presents and tracks in detail language from various provisions of the Official Statement. Attached to and included as part of that document was a Feasibility Study prepared by Peat, Marwick and a July 24, 1981, transmittal letter from those accountants to the Hospital. The Feasibility Study presented an analysis of the Hospital's financial forecast as set out in the Official Statement.

The plaintiffs assert three causes of action against the plaintiffs. Count I of the complaint charges all defendants with "violations of Section 17(a)(1) of the Securities Act of 1933, 15 U.S.C. 77q(a)(1) and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b) and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5." Count II, based on the same allegations, charges all defendants with "violations of Section 17(a)(2) and (3) of the Securities Act of 1933, 15 U.S.C. 77q(a)(2) and (3)." Count III charges only McKinnon with violation of an underwriter's duty of care and skill of his profession toward the plaintiffs and to deal with them in candor.

The plaintiffs' present effort, as was true of the two earlier pleadings, is still lacking and deficient. Most notably, they fail to assert what portions, if any, of the Official Statement are false or misleading and in what manner. They fail to particularize or specify what statements are actionable as to a defendant and fail to provide sufficient factual predicate to support a securities fraud claim as to a defendant. They continue to rely upon conclusory allegations and a mere recitation of the language of the two federal securities statutes in their pleading.

As to the Peat, Marwick Feasibility Study, other than generalizations and ambiguous references and statements as to fraud, there is no claim that the accountants' Feasibility Study contained false and misleading statements. Also Peat, Marwick makes a timely and relevant observation, namely, that nowhere in the Second Amended Complaint do the plaintiffs ever claim or allege that they read and relied upon the Feasibility Study.

The Deanes seek to bolster their latest effort by including and quoting from portions of a later prepared audit report undertaken by Aucoin, Sanchez and Paul, an independent Louisiana accounting firm. The audit was performed at the request of a Louisiana bank serving as the indenture trustee for the bond issue (Complaint ¶¶ 13-16) and covered the Hospital's financial statements and operations over an 11-months period, through December 31, 1981.

The audit report did not discuss, comment, or criticize Peat, Marwick's Feasibility Study or the Hospital's projections referenced therein. Also, the report disclaimed any opinions on the Hospital's financial statements for the 11-month period ending December 31, 1981. "We are not in a position to, nor was the scope of our work sufficient to enable us to express, and we do not express, an opinion on the financial statements referred to above." (Complaint ¶ 15).

Count I charges all defendants with a violation of Section 17(a) of the 1933 Securities Act. The plaintiff's reliance upon that section as to Peat, Marwick is premised upon the theory of an implied private damage...