Griffin v. McNiff

• Decision Date: 17 August 1990
• Docket Number: No. 88 Civ. 554(RJW).,88 Civ. 554(RJW).
• Citation: 744 F. Supp. 1237
• Parties: Robert J. GRIFFIN, et al., Plaintiffs, v. John A. McNIFF, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

744 F. Supp. 1237

Robert J. GRIFFIN, et al., Plaintiffs, v. John A. McNIFF, et al., Defendants.

No. 88 Civ. 554(RJW).

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

August 17, 1990.

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Beigel & Sandler, Ltd., P.C., New York City (Lewis S. Sandler, of counsel), for plaintiffs.

Solin & Breindel, P.C., New York City (Andrew Dash, of counsel), Green, Hoffman & Dankenbring, Clayton, Mo. (Martin M. Green, H. Todd Iverson, of counsel), for defendant Crown Energy, Inc.

Wilson, Elser, Moskowitz, Edelman & Dicker, New York City (James M. Kaplan, Pamela E. Kulsrud, of counsel), for defendant Wiener, Zuckerbrot, Weiss & Brecher.

D'Amato & Lynch, New York City (Robert E. Meshel, Gregg A. Willinger, of counsel), for defendant Ruffa & Hanover, P.C.

Debevoise & Plimpton, New York City (Mary Jo White, Edwin G. Schallert, Marian W. Payson, of counsel), Rodman W. Benedict, Associate Gen. Counsel, New York City, for defendant Price Waterhouse.

Parker Chapin Flattau & Klimpl, New York City (Alvin M. Stein, Mark I. Schlesinger, of counsel), for defendant J.H. Cohn & Co.

Stroock & Stroock & Lavan, New York City (Alvin K. Hellerstein, Elizabeth A. Mullins, Alyssa Walden, of counsel), for defendant Grant Thornton.

WARD, District Judge.

Plaintiffs seek to recover for losses sustained as a result of their investment in certain oil and gas limited partnerships. Defendants Crown Energy, Inc. ("Crown"), Wiener, Zuckerbrot, Weiss & Brecher ("Wiener"), Ruffa & Hanover, P.C. ("Ruffa & Hanover"), Price Waterhouse, J.H. Cohn & Company ("J.H. Cohn"), and Grant Thornton ("Thornton") move to dismiss the First Amended Consolidated Complaint (the "Second Amended Complaint" or "S.A. C.")¹ pursuant to Rules 9(b), 12(b)(6), and/or 12(b)(1), Fed.R.Civ.P. For the reasons that follow, the motions of Price Waterhouse, J.H. Cohn and Thornton are granted, the motions of Crown and Wiener are granted in part and denied in part, and the motion of Ruffa & Hanover is denied.

BACKGROUND

The general background of this action is recounted in this Court's March 13, 1989 Decision, familiarity with which is presumed.² Because the Second Amended Complaint differs in certain respects from the previous pleading considered by the Court, the basic facts currently alleged by plaintiffs are summarized below.

The Second Amended Complaint alleges that plaintiffs, who now consist of forty-five (45) investors, purchased interests in one or more of eleven (11) oil and gas limited partnerships (the "partnerships") as they were created in 1982 and 1983.³ Plaintiffs contend that the partnerships were ostensibly formed to acquire, own and operate certain oil and gas producing properties located in Texas and Oklahoma, but actually were part of a scheme by defendants to defraud the limited partners of their investments.

Plaintiffs assert that they invested in the partnerships with the dual expectations of earning a profit from the operation of the oil and gas properties and deriving a tax benefit from the ownership of the partnership interests. S.A.C. ¶¶ 4, 76. These two goals were linked in more than just plaintiffs' expectations, as the partnerships needed to be able to earn a profit in order to generate tax deductions for the investors which would withstand scrutiny by the Internal Revenue Service.

In making their decisions to invest in the partnerships, plaintiffs maintain that they relied upon private placement memoranda ("PPMs"), prepared, issued, and distributed by certain defendants in connection with each partnership. According to plaintiffs, these PPMs contained material misrepresentations and omissions concerning the future profitability of the partnerships and the tax benefits available to the limited partners. S.A.C. ¶ 9. It is also alleged that the tax opinions, financial projections, geology reports, and production evaluations regarding the oil and gas reserves contained in the drilling properties, all attached as exhibits to the PPMs, were materially misleading.

The crux of the Second Amended Complaint is that defendants knew it was not reasonable to expect the partnerships to be commercially profitable in producing oil or to generate legitimate tax deductions, given the properties on which they were drilling, the manner in which they were organized, and the expenses they were to incur. Plaintiffs maintain the partnerships were in fact not profitable, and that the Internal Revenue Service concluded that each of the partnerships was formed without an actual objective of making a profit and disallowed the tax deductions taken by plaintiffs. S.A.C. ¶¶ 5-8. As a result of the fraudulent scheme, plaintiffs allege that they have lost their initial investment and been subjected to penalties and interest on the disallowed tax deductions. S.A.C. ¶ 9.

The fifteen defendants involved in this lawsuit include seven entities and individuals allegedly involved with creating and managing the partnerships. These defendants, none of whom are involved in the instant motions to dismiss the Second Amended Complaint, include Wycombe Energy Group, Inc. ("Wycombe"), the corporate general partner for each of the partnerships, as well as John A. McNiff II ("McNiff"), Caryl Wilkie, John A. McNiff III, Kristen M. McNiff and Mallory Moore, all reportedly insiders and/or directors of Wycombe (collectively the "McNiff Defendants").

The various entities involved in operating or leasing the oil and gas prospects are also named as defendants. They include (1) Phoenix Oil & Gas, Inc. ("Phoenix"), the successor to Gillham Petroleum, Inc. ("Gillham"), the driller-operator for the 1982 limited partnerships, (2) Crown, the sublessor of the drilling prospects for the 1982 partnerships, and (3) William Kester ("Kester"), the director of Star Dust Mines, Inc., the parent corporation of Trans-Tennessee Energy, Inc. which was the driller-operator for the 1983 Devon Energy, Fairfield Energy, Groton Energy and Harwinton Energy Limited Partnerships.

In addition, plaintiffs named as defendants three law firms, Wiener, Ruffa & Hanover, and Martin & Deacon, which allegedly prepared the PPMs and rendered other services to certain of the limited partnerships at various points in time. The final defendants are three accounting firms, Price Waterhouse, J.H. Cohn, and Thornton⁴, which were involved in reviewing the financial projections and/or approving the tax opinions prepared by the law firm defendants.

Previously, a number of defendants moved to dismiss the First Amended Complaint. On March 13, 1989, this Court granted the motions of Crown, Wiener, Martin & Deacon, Price Waterhouse, J.H. Cohn, and Thornton, dismissing the First Amended Complaint against them for failure to plead fraud with the requisite particularity demanded by Rule 9(b).⁵ The Court found that plaintiffs failed adequately to differentiate among the various defendants, to specify what fraudulent acts each defendant was charged with having committed, and to allege facts which could support an inference of scienter. In accordance with the general practice regarding Rule 9(b) motions, plaintiffs were afforded leave to replead the dismissed fraud claims.

The motions of the McNiff Defendants to dismiss the fraud claims against them were denied.⁶ The Court found that the First Amended Complaint was "rife with the type of generalized, conclusory allegations that Rule 9(b) was designed to discourage," but nonetheless held that the allegations were sufficiently detailed to withstand motions to dismiss by the McNiff Defendants, as they could all be fairly characterized as insiders participating in the offer of the securities in question. Griffin I, ¶ 94,389 at 92,531.

Plaintiffs filed their Second Amended Complaint on May 19, 1989. The Second Amended Complaint, consisting of one hundred fifty-one (151) pages and five hundred eighteen (518) numbered paragraphs, as well as over a thousand pages of exhibits, sets forth thirty-seven claims. These claims allege that various defendants are liable for (1) primary violations of 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; (2) secondary violations of section 10(b) and Rule 10b-5, by acting as aiders and abettors; (3) common law fraud; (4) negligence; and/or (5) violations of the Racketeer Influenced and Corrupt Organizations Act ("R.I.C. O."), 18 U.S.C. §§ 1962(a), (c) and (d).

The moving defendants once again argue that plaintiffs have failed to plead fraud with the particularity required by Rule 9(b). They also maintain that the claims in the Second Amended Complaint must be dismissed pursuant to Rules 12(b)(6) and 12(b)(1), Fed.R.Civ.P.

DISCUSSION

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

Rule 9(b) provides 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.⁷

As the Court explained in Griffin I, in a motion to dismiss a complaint for failure to plead fraud with particularity as required by Rule 9(b), plaintiffs' allegations must be taken as true. E.g., Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir.1986). The Court must read the complaint generously, and draw all inferences in favor of plaintiffs. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir.1989). Furthermore, Rule 9(b) must be read in conjunction with Rule 8(a), Fed.R.Civ.P., which requires plaintiffs to plead only a short, plain statement of the grounds upon which they are entitled to relief. Ross v. A.H. Robins 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...