FIRST PRESBYTERIAN v. JOHN KINNARD & CO.

• Citation: 881 F. Supp. 441
• Decision Date: 17 February 1995
• Docket Number: Civ. A. No. 3-94-1024.
• Parties: FIRST PRESBYTERIAN CHURCH OF MANKATO, MINNESOTA, and Kirsten Orvick, Plaintiffs, v. JOHN G. KINNARD & COMPANY, INCORPORATED and Gary Lefkowitz, Defendants.
• Court: U.S. District Court — District of Minnesota

881 F. Supp. 441

FIRST PRESBYTERIAN CHURCH OF MANKATO, MINNESOTA, and Kirsten Orvick, Plaintiffs, v. JOHN G. KINNARD & COMPANY, INCORPORATED and Gary Lefkowitz, Defendants.

Civ. A. No. 3-94-1024.

United States District Court, D. Minnesota, Fourth Division.

February 17, 1995.

Richard A. Lockridge, Gregg M. Fishbein, Jean K. Janes and Schatz, Paquin, Lockridge, Grindal & Holstein, Minneapolis, MN, appeared, for and on behalf of plaintiffs, First Presbyterian Church of Mankato, MN and Kirsten Orvick.

Frank A. Taylor, Steven M. Phillips and Popham, Haik, Schnobrich & Kaufman, Minneapolis, MN, appeared, for and on behalf of defendants, John G. Kinnard & Co., Inc. and Gary Lefkowitz.

MEMORANDUM AND ORDER

DAVIS, District Judge.

This matter came before the Honorable Michael J. Davis on December 7, 1994. Defendants, John G. Kinnard & Company, Incorporated and Gary Lefkowitz ("Defendants") filed a Motion to Dismiss pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure ("Motion") or, in the alternative, a Motion for a More Definite Statement and Striking Allegations. For the reasons set forth below, Defendants' Motions are denied in their entirety.

FACTS

On August 24, 1994, Plaintiffs, First Presbyterian Church of Mankato, Minnesota, and Kirsten Orvick ("Plaintiffs") filed a putative securities class action on behalf of themselves and all others who purchased units of First Secured Mortgage Investors XVI ("FSMI XVI") from or through Defendant John G. Kinnard & Company, Incorporated ("Kinnard"). Plaintiffs have filed this action under section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rule 10b-5; section 12(2) of the Securities Act of 1933 ("Securities Act"); and the Minnesota Securities Act and Minnesota common law because of alleged improprieties in connection with the offer and sale of units in FSMI XVI offered by Citi-Equity Group, Inc. ("Citi-Equity").

In the mid-1980's, Lefkowitz and Citi-Equity solicited developers throughout the United States to construct a series of low-income housing projects which would qualify for tax credits. Lefkowitz and Citi-Equity sought to form general partnerships to purchase the housing complexes and then run them. Additionally, Lefkowitz and Citi-Equity raised approximately $100 million through a number of limited partnerships which the two parties syndicated in order to obtain additional financing for the project.

Lefkowitz and Citi-Equity also marketed FSMI offerings in order to raise capital to build specific housing projects sponsored by Citi-Equity. Through these FSMI offerings, Lefkowitz and Citi-Equity raised over $30 million.

Plaintiffs allege Kinnard was employed by Lefkowitz and Citi-Equity to assist them in promoting and selling FSMI units to investors. Plaintiffs state that they purchased FSMI XVI units based in part on Kinnard's representations of the investment's low risk and high returns. They further allege that Kinnard also told them that all of Citi-Equity's similar offerings were performing well and that all of Citi-Equity's similar offerings had met or exceeded projected returns. Kinnard also allegedly assured Plaintiffs Citi-Equity had secured permanent financing for the housing projects and that the investment would net an annual return of 10.25%/month.

Plaintiffs contend that they later discovered that Kinnard's representations were not true and that the funds they invested were diverted and dissipated by Defendant Gary Lefkowitz and his corporation, Citi-Equity. Specifically, Plaintiffs argue that Kinnard, in its promotion of the FSMI XVI units, failed to reveal to the prospective investors that in late 1992 Kinnard became suspicious of Citi-Equity deals because investors had stopped receiving annual financial reports. Additionally, Plaintiffs allege that Kinnard representatives visited some of the housing sites and discovered that nothing had been built, but failed to communicate this fact to the investors and, in fact, continued to convince investors to purchase FSMI XVI units. The Citi-Equity projects were apparently based on criminal misrepresentations by Lefkowitz and Citi-Equity to procure the much-needed tax credits for the project.

According to Plaintiff's Complaint, the State Bar of California sanctioned Lefkowitz for violations of the California Business and Professions Code and Rules of Professional Conduct and revoked his license to practice law for one year. The State of Minnesota had also revoked Lefkowitz's broker-dealer registration for selling unregistered securities and making fraudulent statements about the Securities and Exchange Commission. Plaintiffs conclude that, despite these warning signs about Citi-Equity and Lefkowitz, Kinnard continued to promote the FSMI XVI units to investors.

In response to Plaintiff's allegations, Defendants argue that these alleged omissions and misrepresentations amount to general statements and opinions which cannot support claims alleging securities violations absent an allegation that Kinnard did not honestly hold the beliefs at the time the statements were made. Additionally, Defendants argue that Plaintiffs have failed to allege the fraudulent misrepresentations and omissions with the particularity required by rule 9(b). On these bases, Defendants have moved this Court to dismiss Plaintiff's Complaint.

DISCUSSION

Rule 12(b)(6) requires dismissal if the allegations in the Complaint fail to state a legally cognizable claim. Dismissal is appropriate if there is no set of facts within Plaintiff's pleadings which would entitled Plaintiffs to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). In reviewing this Motion to Dismiss, the Court must presume "well-pleaded" factual allegations as true and should construe all reasonable inferences from those allegations in favor of Plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974).

A. Section 10(b) Claims

To state a claim under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, a Complaint must allege: (1) a misstatement or omission; (2) of a material fact; (3) made with scienter; (4) upon which the plaintiff relied; and (5) that proximately caused the plaintiff's injury. See 15 U.S.C. § 78j(b); In re Flight Transp. Corp. Sec. Litig., 593 F.Supp. 612, 617 (D.Minn.1984). Under Rule 10b-5, it is unlawful to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made not misleading. 17 C.F.R. § 240.10b-5.

In determining whether a statement is actionable, courts scrutinize the nature of the statement to determine whether it was false when made and look to whether the representation suggested reliability or was made in good faith. In re Synergen, Inc. Securities Litig., 863 F.Supp. 1409, 1415 (D.Colo.1994). Defendants argue that many of the alleged misrepresentations set forth in the Complaint are simply expressions of opinion amounting to mere puffery or sales talk, and thus are not actionable. Examples include: (1) "Earlier partnerships syndicated by Citi-Equity were performing well." Complaint, para. 31(h); (2) "The investment in FSMI XVI was very low risk." Complaint, para. 32(a); (3) "Citi-Equity had no troubled properties." Complaint, para. 32(e); (4) "The investment was safe because it was backed by real estate but was not an investment in the real estate itself." Complaint, para. 32(i).

In support of their assertion, Defendants cite to a number of cases which have held that statements about future events and expressions of opinion are not actionable under the Exchange Act. See e.g., Hershfang v. Citicorp, 767 F.Supp. 1251, 1256 (S.D.N.Y. 1991); Friedman v. Mohasco Corp., 929 F.2d 77, 79 (2nd Cir.1991); Polin v. Conductron Corp., 552 F.2d 797, 805 (8th Cir.), cert. denied, 434 U.S. 857, 98 S.Ct. 178, 54 L.Ed.2d 129 (1977). In Friedman and in Polin, for example, the courts found that the documents offered to shareholders were accompanied by cautionary language that did not guarantee any particular return.

Plaintiff argues that these cases are factually distinguishable from the present action. They argue that Kinnard did not communicate such cautionary language to investors when promoting the FSMI XVI units.

The thrust of the 10b-5 claim turns on what Kinnard knew at the time it marketed the Citi-Equity investments to prospective investors. The thrust of Defendants' arguments are that Kinnard's alleged misrepresentations are not actionable simply because they were merely expressions of opinion, belief or expectation or statements about future events and are therefore not actionable. Contrary to Defendants' allegations, however, the analysis does not end there.

It is certainly true that statements such as "performing well" or "low risk" are plainly expressions of opinion and, standing alone, are not actionable. However, as Plaintiff argues, the court must view the statements in context to determine whether Plaintiffs' claims are sufficient. In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 371 (3d Cir.1993). Defendants merely attack the statement in Plaintiffs' Complaint without revealing how Plaintiffs would know from the context of the statements that they should not rely on them.

In their Complaint, Plaintiffs allege that Kinnard representatives became suspicious of Citi-Equity deals because investors had stopped receiving annual financial reports. Complaint, para. 37. They also allege that Kinnard representatives visited some of the housing sites and discovered that nothing had been built. Complaint, para. 37. Given Kinnard's close working relationship with Citi-Equity and Citi-Equity's employment of a number of Kinnard personnel, Plaintiffs have raised a significant issue of fact as to whether Kinnard knew of the financial and legal difficulties of Citi-Equity. Additionally, the Court is hard-pressed...