Huang v. Sentinel Government Securities

• Citation: 709 F. Supp. 1290
• Decision Date: 28 March 1989
• Docket Number: No. 85 Civ. 8607 (PKL),86 Civ. 3370 (PKL).,85 Civ. 8607 (PKL)
• Parties: Peter HUANG, et al., Plaintiffs, v. SENTINEL GOVERNMENT SECURITIES, et al., Defendants. George SCHARFFENBERGER, et al., Plaintiffs, v. SENTINEL GOVERNMENT SECURITIES, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

709 F. Supp. 1290

Peter HUANG, et al., Plaintiffs, v. SENTINEL GOVERNMENT SECURITIES, et al., Defendants.

George SCHARFFENBERGER, et al., Plaintiffs, v. SENTINEL GOVERNMENT SECURITIES, et al., Defendants.

Nos. 85 Civ. 8607 (PKL), 86 Civ. 3370 (PKL).

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

March 28, 1989.

Chadbourne & Parke, Laurence Jackson, Los Angeles, Cal., for plaintiffs.

Lord Day & Lord, Barrett Smith, Warren H. Colodner, Sandra J. Mullings, New York City, for defendant Lasser Marshall Inc.

Ernest H. Hammer, New York City, for defendant William Allen.

Paul, Weiss, Rifkind, Wharton & Garrison, Mark H. Alcott, David G. Bookbinder, New York City, for defendant Gill & Duffus Securities, Inc.

Herrick, Feinstein, Susan T. Dwyer, New York City, for defendant Joseph J. Vitrella.

OPINION AND ORDER

LEISURE, District Judge.

Plaintiffs in these consolidated actions are former owners of limited partnership interests ("units") in defendant Sentinel Government Securities ("SGS"). The action is presently before the Court on the motions of defendants Lasser Marshall Inc. ("LMI"), Gill & Duffus Securities, Inc. ("Gill & Duffus"), William Allen ("Allen"), and Joseph J. Vitrella ("Vitrella") (collectively "the moving defendants") to dismiss The First Amended Consolidated Complaint (the "Complaint"), or in the alternative, for summary judgment under Fed.R.Civ.P. 56.¹

These actions arise out of the defendants' allegedly fraudulent and criminal sham trading of government securities, and a variety of related fraudulent bookkeeping transactions. The activities are said to violate the Securities Act of 1933 ("'33 Act"), the Securities Exchange Act of 1934 ("'34 Act"), the Racketeer Influenced and Corrupt Organizations Act ("RICO"), and to constitute fraud and negligence under state law. The moving defendants raise a variety of challenges to the sufficiency and timeliness of the claims made in the Complaint.

BACKGROUND

The plaintiffs in these actions purchased SGS units in November, 1980. A private placement memorandum and related offering materials (collectively the "Offering Memorandum") was prepared by SGS and certain of its officers, employees and agents, and distributed to plaintiffs prior to the November, 1980 purchases. That Offering Memorandum included discussion of possible tax benefits associated with the SGS investments, and described SGS's prospective trading activities in the secondary market for interest sensitive instruments such as Treasury bills, bonds and notes. Complaint ¶ 19. The profits and potential tax savings would be accomplished through the use of "hedging" techniques, and arbitrage agreements involving repurchase and reverse purchase agreements.

Plaintiffs assert that the tax-advantage trading described in the Offering Memorandum never occurred, and the trading activity purportedly undertaken by SGS was not bona fide. It is alleged that, at the time the Offering Memorandum was made, the defendants did not ever intend to conduct legitimate trading at all, but knew of, and planned, the fake trading scheme. SGS is alleged to have made these sham transactions, after the plaintiffs' purchase of the partnership interests, with the assistance of LMI and Gill & Duffus. Complaint ¶ 21.

On November 17, 1981, agents acting on behalf of the United States Attorney for the Southern District of New York (the "government") seized virtually all of the business documents of SGS pursuant to a search warrant. The warrant was issued in connection with a criminal investigation of SGS and related entities. The managing general partner of SGS, Michael Senft ("Senft"), was a major participant in the alleged activities, and a primary target of those Government investigations. Throughout the continuing investigation of SGS and its related entities, Senft issued communications and made representations to the plaintiffs and the other limited partners. Complaint ¶ 23. SGS initially stated to the limited partners that the government was "reviewing" the papers, apparently in relation to "tax consequences of transactions" undertaken by SGS. Affidavit of Eric W. Berry, Esq., sworn to on December 19, 1986 ("Berry Affidavit"), Exhibit B. The stated position of SGS was that it was attempting to secure the return of seized records. Berry Affidavit, Exhibit E. As late as June of 1982, SGS informed the plaintiffs that it was "making efforts ... to recover the documents seized by the government." Berry Affidavit, Exhibit F at 004175.

In the ensuing weeks, SGS unsuccessfully attacked the legality of the search and seizure of its records. After oral argument, the challenge to that warrant was rejected in a January 5, 1982 opinion issued by Honorable Charles S. Haight, United States District Judge of this Court. That opinion noted probable extensive criminal activities by SGS and a related company, Sentinel Financial Instruments ("SFI"). The opinion did not mention any of the moving defendants, or any other possibly involved parties. Berry Affidavit, Exhibit C. Subsequent challenges to the seizure were similarly rejected by the Court. The position of SGS continued to be that the criminal investigation was unfounded, and that the transactions of SGS had been bona fide and legitimate. See, Berry Affidavit, Exhibits B, D, E, and F.

On or about June 17, 1982, SGS sent a Redemption Offer Proposal to its limited partners, including plaintiffs, by which it offered to redeem all SGS limited partnership units for 10% of the original cash invested per unit, plus cancellation of all SGS Notes (the "Redemption Offer"). Complaint ¶ 25. The transmittal letter and memorandum that accompanied the redemption offer included various acknowledgments of the criminal actions apparently being instituted against SGS, and noted that a "government securities firm which was one of the Partnership's trading counterparts" was unwilling to confirm or deny substantial transactions with SGS. Berry Affidavit, Exhibit F at 004158. The present plaintiffs eventually redeemed their partnership units.

In November, 1983, Senft and other individuals involved with SGS and SFI were indicted for tax fraud and related offenses. The charges encompassed the business transactions of SGS enumerated in the present Complaint, and LMI and Gill & Duffus were identified in an "overt acts" section of the indictment. Declaration of Ellen J. Gleberman, Esq., sworn to on March 5, 1987 ("Gleberman Decl."), Exhibit D. Convictions on certain of those charges were obtained against various of the criminal defendants, but none were obtained or sought against the moving defendants herein. The jury hung on the specific counts involving SGS. Vitrella and Allen, former officers of LMI, testified at trial in exchange for grants of immunity from the government.

The Internal Revenue Service subsequently determined that the SGS transactions challenged in the indictment were not sufficient to allow the plaintiffs the tax benefits, namely claimed losses and offsetting capital gains, that they had asserted for 1980, 1981 and 1982.

Plaintiffs commenced the instant action, Huang, et al. v. SGS et al., No. 85 Civ. 8607 (PKL), in this Court on October 31, 1985. The California plaintiffs originally filed their complaints, Scharffenberger, et al. v. SGS et al., and Cowling, et al. v. SGS, et al., in the United States District Court for the Central District of California, on September 23, 1985 and November 22, 1985. The California actions were transferred to this Court, and the Scharffenberger and Huang actions were consolidated in the Complaint that is the subject of these motions. The Cowling action was subsequently consolidated with the other actions by stipulation and order filed on March 2, 1987.

DISCUSSION

The present motions raise a variety of challenges to the plaintiffs' actions. Generally, these include: 1) the sufficiency of the federal securities law claims stated in the complaint, including both Section 10(b) of the '34 Act and Section 17(a) of the '33 Act, 2) the sufficiency of the stated RICO claims, 3) the sufficiency of the state law claims for negligent misrepresentation, 4) statute of limitations issues on the federal and state law claims, and 5) this Court's jurisdiction over the state common law claims.²

STANDARDS

The defendants have moved for dismissal under Fed.R.Civ.P. 12, or alternatively for summary judgment under Fed.R.Civ.P. 56(c). On a motion to dismiss, the complaint must be read generously, and every favorable inference drawn in favor of the plaintiffs. Pross v. Katz, 784 F.2d 455, 457 (2d Cir.1986); Metzner v. D.H. Blair & Co., Inc., 663 F.Supp. 716, 719 (S.D.N.Y.1987). The complaint should only be dismissed if it is "beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Stone v. Chung Pei Chemical Industry Co., Ltd, 790 F.2d 20, 22 (2d Cir.1986). The Court must, in fact, "determine whether the facts set forth justify taking jurisdiction on grounds other than those most artistically pleaded." Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555, 558 (2d Cir.1985) (citations omitted).

Summary judgment may be granted pursuant to Fed.R.Civ.P. 56(c) where "there are no unresolved factual disputes as to issues material to the outcome of the litigation." The King Service, Inc. v. Gulf Oil Corp., 834 F.2d 290, 295 (2d Cir.1987).

The substantive law governing the case will determine those facts which are material, and "only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.... it is the substantive law's identification of which facts are critical and which facts are irrelevant that governs." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The Court's function in a summary judgment...