Eickhorst v. American Completion and Development

• Decision Date: 01 February 1989
• Docket Number: No. 88 Civ. 3002(RJW).,88 Civ. 3002(RJW).
• Parties: Charmaine S. EICKHORST, et al., Plaintiffs, v. AMERICAN COMPLETION AND DEVELOPMENT CORPORATION, a Delaware corporation; American Completion Program—1983-3; a Texas Limited Partnership; The E.F. Hutton Group, Inc., a Delaware corporation; John P. Holmes; and Howard W. Phillips, Defendants.
• Court: U.S. District Court — Southern District of New York

706 F. Supp. 1087

Charmaine S. EICKHORST, et al., Plaintiffs, v. AMERICAN COMPLETION AND DEVELOPMENT CORPORATION, a Delaware corporation; American Completion Program—1983-3; a Texas Limited Partnership; The E.F. Hutton Group, Inc., a Delaware corporation; John P. Holmes; and Howard W. Phillips, Defendants.

No. 88 Civ. 3002(RJW).

United States District Court, S.D. New York.

February 1, 1989.

COPYRIGHT MATERIAL OMITTED

Beigel & Sandler, New York City, for plaintiffs; Herbert Beigel, Lewis S. Sandler, Bruce Rose, of counsel.

Myerson & Kuhn, New York City, for defendant E.F. Hutton Group, Inc.; Harvey D. Myerson, Lloyd S. Clareman, Neil P. Forrest, Samuel P. Israel, of counsel.

Christy & Viener, New York City, for defendants American Completion and Development Corporation, American Completion Program-1983-3 and Howard W. Phillips; Franklin B. Velie, Janis G. White, Conrad Jordan, of counsel.

OPINION

ROBERT J. WARD, District Judge.

Defendant, the E.F. Hutton Group, Inc. ("Hutton"), has moved to dismiss the complaint against it pursuant to Rules 9(b) and 12(b)(6), Fed.R.Civ.P. Defendants American Completion and Development Corporation, American Completion Program 1983-3 and Howard W. Phillips (the "American Completion Defendants") have also jointly moved to dismiss the complaint on these same grounds. For the reasons that follow, the motions to dismiss the complaint are granted. Plaintiffs are given leave to replead the fraud claims dismissed for failure to satisfy the requirements of Rule 9(b) within thirty (30) days from the date of this decision, in accordance with Rules 9(b) and 11, Fed.R.Civ.P.

BACKGROUND

Plaintiffs consist of one hundred-eighty-one (181) investors who purchased interests in defendant American Completion Program 1983-3 ("ACP-1983-3"), an oil and gas limited partnership. Plaintiffs assert that ACP-1983-3 was ostensibly formed to provide funding for the completion of proven commercially productive oil and gas wells, but in reality was a scheme to defraud plaintiffs into investing where there was no reasonable possibility of economic gain. Complaint at ¶¶ 8, 16. Defendant American Completion Development Corporation ("ACDC"), was the general partner for the ACP-1983-3 limited partnership. Id. at ¶ 5.3. John P. Holmes¹ and Howard W. Phillips allegedly were directors of ACDC and the sole owners of American Completion Securities, Inc. ("ACS"), a corporation formed to distribute units of the ACP-1983-3 limited partnership. Complaint at ¶¶ 5.4, 14. ACS contacted selling agents, including Hutton, to sell the limited partnership interests to the public, and Hutton used its nationwide network of security dealers to sell these interests. Complaint at ¶ 14. Plaintiffs apparently purchased their interests in ACP-1983-3 during the last quarter of 1983. Id. at ¶ 9.

Plaintiffs claim that they purchased the ACP-1983-3 interests in reasonable reliance on the prospectus, a brochure describing ACP-1983-3, and a broker's letter known as a Blue Top, all of which were false and misleading. Id. Plaintiffs maintain that the prospectus was created by ACDC, the brochure was created by ACS, Holmes and Phillips and the Blue Top, which included projections of future cash flow furnished by ACDC, was itself created by Hutton. Id. at ¶ 22. According to plaintiffs, these materials either characterized the investment as low risk or failed to adequately disclose the extent of the risk involved and the true likelihood of plaintiffs ever realizing a profit. Id. at ¶¶ 16-17, 19.

Plaintiffs presented four separate grounds for relief in their complaint against each of the defendants based on the alleged fraud in the sale of the ACP-1983-3 interests: the first under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5; the second under section 17(a) of the Securities Act of 1933 (the "1933 Act"), 15 U.S.C. 77q(a); the third under common law fraud; and the fourth under the Racketeer Influenced and Corrupt Organizations Act ("R.I.C.O."), 18 U.S.C. §§ 1962(a), (c) and (d).

DISCUSSION

A. Rule 9(b)—Pleading Fraud With Particularity

Rule 9(b)² states that:

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 may be averred generally.

In a motion to dismiss a complaint for failure to plead fraud with particularity as required by Rule 9(b), the plaintiffs' allegations must be taken as true. E.g., Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir.1986). Rule 9(b) must be read in conjunction with Rule 8(a), Fed.R.Civ.P., which requires a plaintiff to plead only a short, plain statement of the grounds upon which he is entitled to relief. Ross v. A.H. Robbins Co., 607 F.2d 545, 557 n. 20 (2d Cir.1979) cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980). The serious nature of a charge of fraud, however, renders mere conclusory allegations that defendants acted fraudulently insufficient to satisfy Rule 9(b). Segal v. Gordon, 467 F.2d 602, 607 (2d Cir.1972); Center Savings & Loan Assoc. v. Prudential-Bache Securities, Inc., 679 F.Supp. 274, 276 (S.D.N.Y. 1988).

Rule 9(b) is designed to provide a defendant with fair notice of a plaintiff's claim in order to enable defendant to prepare a defense, protect defendant's reputation or goodwill from harm, and reduce the number of strike suits. DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d Cir.1987). Rule 9(b) is satisfied if the complaint sets forth:

(1) precisely what statements were made in what documents or oral representations or what omissions were made, and

(2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making the same),

(3) the content of such statements and the manner in which they misled the plaintiff, and

(4) what the defendants "obtained as a consequence of the fraud."

Conan Properties, Inc. v. Mattel, Inc., 619 F.Supp. 1167, 1172 (S.D.N.Y.1985) (quoting Todd v. Oppenheimer & Co., Inc., et al., 78 F.R.D. 415, 420-21 (S.D.N.Y.1978); See also, Crystal v. Foy, 562 F.Supp. 422, 425 (S.D.N.Y.1983) (Rule 9(b) requires a complaint to contain allegations of: "(1) specific facts; (2) sources that support the alleged facts; and (3) a basis from which an inference of fraud may fairly be drawn.")

Where there are multiple defendants, the complaint must disclose the specific nature of each defendant's participation in the alleged fraud. DiVittorio v. Equidyne Extractive Industries, Inc., supra 822 F.2d at 1247. Furthermore, the allegations of fraud ordinarily may not be based upon information and belief. Luce v. Edelstein, supra, 802 F.2d at 54; Segal v. Gordon, supra, 467 F.2d at 608; Leslie v. Minson, 679 F.Supp. 280, 282 (S.D.N.Y. 1988). This pleading restriction may be relaxed however, where the matter is peculiarly within the knowledge of defendant. DiVittorio v. Equidyne Extractive Industries, Inc., supra, 822 F.2d at 1247. When pleading upon information and belief is appropriate, plaintiffs are required to include a statement of the facts upon which the allegations of fraud are based. Stern v. Leucadia National Corp., 844 F.2d 997, 1004 (2d Cir.), cert. denied, ___ U.S. ___, 109 S.Ct. 137, 102 L.Ed.2d 109 (1988). Similarly, while Rule 9(b) allows "condition of mind" to be averred generally, plaintiffs must at least present those circumstances that provide a minimal factual basis for the allegations of scienter. E.g., Connecticut National Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir.1987). In other words, plaintiffs must "`specifically plead those events' which `give rise to a strong inference' that defendants had an intent to defraud, knowledge of the falsity, or a reckless disregard for the truth." Connecticut National Bank v. Fluor Corp., supra, 808 F.2d at 962 (citing Ross v. A.H. Robbins, supra, 607 F.2d at 558).

1. Hutton

The Court begins by noting that the complaint is characterized by the type of vague, conclusory allegations that Rule 9(b) was designed to discourage. Plaintiffs have clearly failed to meet the requirements of Rule 9(b) with regard to Hutton. Most notably, the complaint fails to adequately apprise Hutton of its alleged role in the fraud and fails to specifically plead facts to support an inference of fraudulent intent, a necessary element of plaintiffs' fraud claims.³

Plaintiffs seek to lump Hutton together with those defendants responsible for producing the offering materials in which the alleged misrepresentations and omissions occurred.⁴ In securities fraud claims posited on misrepresentations and omissions contained in offering memoranda, the memoranda themselves may satisfy the particularity requirements for pleading the time, place and content of the alleged fraudulent acts. Luce v. Edelstein, supra, 802 F.2d at 55. Furthermore, it is unnecessary to allege a specific connection between fraudulent representations in an offering memorandum and particular defendants where such defendants are insiders or affiliates participating in the offer of the securities in question. Id. at 55; DiVittorio v. Equidyne Extractive Industries, Inc., supra, 822 F.2d at 1247. Mere conclusory allegations of insider status, however, without accompanying facts which tie a defendant to the offering materials in a specific way, will not suffice to obviate the need to specify each defendant's connection with the alleged fraudulent acts. See DiVittorio v. Equidyne Extractive Industries, Inc., supra, 822 F.2d at 1247-49; Stevens v. Equidyne Extractive Industries 1980, 694 F.Supp. 1057, Current Binder Fed. Sec.L.Rep. (CCH) ¶ 93,959, at 90,453 (S.D. N.Y.1988).

Plaintiffs assert that Hutton is an insider, and as such is presumptively connected with any misrepresentations or omissions contained in the offering...