Hudson v. Capital Management Intern., Inc.

• Decision Date: 07 June 1983
• Docket Number: No. C-81-1737-MHP.,C-81-1737-MHP.
• Citation: 565 F. Supp. 615
• Court: U.S. District Court — Northern District of California
• Parties: Robert C. and Shirley A. HUDSON, and David Blechman, on behalf of themselves and all others similarly situated, Plaintiffs, v. CAPITAL MANAGEMENT INTERNATIONAL, INC., et al., Defendants.

565 F. Supp. 615

Robert C. and Shirley A. HUDSON, and David Blechman, on behalf of themselves and all others similarly situated, Plaintiffs, v. CAPITAL MANAGEMENT INTERNATIONAL, INC., et al., Defendants.

No. C-81-1737-MHP.

United States District Court, N.D. California.

May 25, 1983.

As Amended June 7, 1983.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

David B. Gold, Paul F. Bennett, George Donaldson, and Godfrey L. Munter, Jr., Martin & Munter, San Francisco, Cal., for Hudsons.

Max W. Berger, Gene Kleinhendler, Kreindler & Kreindler, New York City, for Bernstein, Seawell and Kove.

M. Laurence Popofsky, Scott Fink, Lawrence W. Keeshan, Heller, Ehrman, White & McAuliffe, San Francisco, Cal., for Price Waterhouse & Co.

David Henshaw, James Gansinger, Jones, Bell, Simpson, Gansinger & Abbott, Los Angeles, Cal., for First Affiliated Sees., Birr Wilson & Co. and Independent Fin. Planners.

Douglas B. Hughmaneck, Paul Dawes, Thelen, Marrin, Johnson & Bridges, San Francisco, Cal., for Bronson, Bronson & McKinnon, Thomas Byrne Swartz and Thomas Swartz.

William F. Campbell, Benjamin H. Parkinson, Jr., Ackerman, Johnston, Campbell & Parkinson, San Francisco, Cal., for Robert Adler.

Jackson L. Morris, in pro. per.

Eldon Olson, Price Waterhouse & Co., New York City, Jerry K. Cimmet, San Francisco, Cal., for Wallace Vickery.

Dennis K. Bromley, Pillsbury, Madison & Sutro, San Francisco, Cal., Charles W. Boand, Wilson & McIlvaine, Chicago, Ill., for Arthur Andersen & Co.

Theodore W. Rosenak, Archer, Rosenak & Hanson, San Francisco, Cal., for Simon Adler, Alfred Avery, Dene Orndorf Collins, Shirley Denes, Joseph Bradford Giordano, John Schweiger, Emery Sims, Dan W. Ward, John Adams, Geo. Hochswender, George Wood, Mary Fritze, C. Wm. Ford, M. Fritze, John King, Donald J. Sedam, Jonathan Tobey, Wallace Vikery and Magdy Shebbein.

Ernest J. Getto, Joan T. Hood, Latham & Watkins, Los Angeles, Cal., for Advest, Inc. and Irell & Manella.

Barry L. Bunshoft, Patrick A. Cathcart, Hancock, Rothert & Bunshoft, San Francisco, Cal., for Irell & Manella.

Dale Fredericks, Tod L. Gamlen, Sedgwick, Detert, Moran & Arnold, San Francisco, Cal., for May, Zima & Co.

Steven A. Lewis, Howard M. Garfield, Long & Levit, San Francisco, Cal., for Cherry, Bekaert & Holland.

Nelson C. Barry, Nannette de Lara, G. Kelly Reid, Jr., Bishop, Barry, Howe & Reid, San Francisco, Cal., for Lowenstein, Brause & Hirsch.

Alvin M. Stein, Parker, Chapin, Flattau & Klimpl, New York City, John S. Martel, Douglas Young, Farella, Braun & Martel, San Francisco, Cal., for Alexander Grant & Co.

Sherwin J. Markman, John R. Gerstein, Hogan & Hartson, Washington, D.C., for Robert M. Adler.

George A. Yuhas, Ronald G. Aronovsky, Orrick, Herrington & Sutcliffe, San Francisco, Cal., for Xavier J. Wohner.

Law Offices of Marvyn Gordon, Los Angeles, Cal., for Meyer C. Heller.

Peter B. Atwood, Atwood & Richmond, Boca Raton, Fla., for First Fla. Securities, Inc.

Donald J. Yellon, San Francisco, Cal., for Clariden Bank; Donald Cronson, Geneva, Switzerland, of counsel.

James M. Gansinger, Alan B. Pick, Gansinger & Pick, Los Angeles, Cal., for Independent Fin. Plng. Corp Theodore A. Russell, Pettit & Martin, San Francisco, Cal., for Robert Long and Jonathan S. Tobey.

Peter J. Busch, Howard, Rice, Nemerovski, Canady, Robertson & Falk, San Francisco, Cal., and Michael Nussbaum, Kate A. Martin, Nussbaum, Owen & Webster, Washington, D.C., for Stiller, Adler & Schwartz and Stiller, Schwartz & Kaswell.

OPINION

PATEL, District Judge.

INTRODUCTION

This action is brought pursuant to the Securities and Exchange Acts of 1933 and 1934, 15 U.S. §§ 77a-77bbbb, 15 U.S.C. §§ 78a-78kk, and state law. Plaintiffs Blechman and Robert and Shirley Hudson invested in limited partnerships entitled Delta Greenhouse, Ltd. and California Flowerland '79, respectively. Plaintiffs allege that these limited partnerships were sold as part of a complex fraudulent scheme spanning a period from approximately 1973 to 1980 involving sales of interests in forty-five Flowerland limited partnerships to more than 2,300 investors. Marketed primarily as tax shelters, interests in the partnerships were offered in three series through approximately fifty-nine offering circulars. First, six "cultivating" partnerships, which were to grow foliage products on their own property, were offered. Next, five "equipment-leasing" partnerships, which were to lease horticultural equipment to other Flowerland partnerships, were offered. Finally, between 1976 and 1980, the "distributing" partnerships, which were to buy immature plants, contract with growers to raise them to maturity and then distribute them, were offered through both private placements and intrastate offerings.

Plaintiffs charge that the offering circulars and other documents provided to investors containing various tax opinions, tax returns and financial statements, promised immediate tax deductions in excess of cash contributions and future returns on capital which could not be achieved, and misrepresented the partnerships' actual method of operation. For example, plaintiffs claim that Island Foliage, an entity which acted as "middleman" between some of the limited partnerships and various plant growers, was in fact owned and controlled by defendant Edward Heller, but represented variously as independently owned or closely affiliated, or not mentioned at all. Plaintiffs contend that this information was material to the sales. Plaintiffs further allege that the ostensibly independent offerings of the limited partnership interests were in fact one continuous offering of securities which should have been registered with the Securities and Exchange Commission, but was not.

Plaintiffs have named 128 defendants,¹ including forty-three individuals who were officers and directors of the many different partnerships and related companies, four law and seven accounting firms who prepared tax opinions and financial statements for the partnerships and five broker-dealers who participated in the marketing. The cast of characters involved in each Flowerland entity and each offering varied dramatically. For example, of the forty-three individual officer and director defendants, only two were allegedly involved in the Flowerland operation throughout the period charged. Similarly, the attorneys' participation ranged from one firm's preparation of tax opinions appearing in forty-three of the fifty-nine offering circulars to another's preparation of only one tax opinion for one offering. Despite these and other variations in defendants' roles and levels of participation, plaintiffs alleged initially that each of the defendants was liable for the entire fraud. Two previous memorandum opinions have addressed the adequacy of the pleadings and narrowed the issues somewhat.

This opinion addresses defendants' motions to dismiss the third amended complaint and plaintiffs' motions to certify plaintiff and defendant classes. The court has considered the voluminous briefs of counsel. The motions are granted in part and denied in part, as set forth below. The court has also reconsidered its ruling on § 17(a) of the 1933 Act, 15 U.S.C. §§ 77q(a)(2), (3). The opinion is organized as follows: Part I, failure to allege transactional nexus, substantial assistance and actual knowledge of the fraud as to § 10(b) of the 1934 Act, 15 U.S.C. § 78j(b); Part II, lack of specific allegations as to certain individuals; Part III, absence of a private right of action under § 17(a) of the 1933 Act; Part IV, inadequate allegations of seller status under § 12 of the 1933 Act, 15 U.S.C. § 77l; Part V, insufficient allegations of control status under § 15 of the 1933 Act, 15 U.S.C. § 77o, and § 20 of the 1934 Act, 15 U.S.C. § 78t; Part VI, failure to state a claim and lack of jurisdiction as to the pendent claims; Part VII, miscellaneous motions to dismiss not covered elsewhere; and Part VIII, class certification motions.

I. § 10(b) Claims

A. Professional and Underwriting Defendants

In their third amended complaint, pursuant to the court's previous opinion issued August 24, 1982 ("Opinion"), plaintiffs have finally alleged from whom they purchased their investments and what information about those investments they received prior to purchase. The Hudsons now allege that on December 28, 1979 they purchased 10 units in California Flowerland '79 through Independent Financial Planners ("IFP") by making one payment immediately and executing a promissory note on which they made an additional payment on March 31, 1980. Prior to December 28, 1979, the Hudsons allege they received from IFP, read and relied upon the Offering Circular for California Flowerland '79, which included the tax opinion of Bronson, Bronson and McKinnon ("Bronson") and the financial statements and notes of Alexander Grant ("Grant"). They also claim that they "most likely" received the Subscription Agreement and Signature Page for the Limited Partnership Agreement. Further, they allege that Estates, under the direction of King, Smith and Holmes, supervised the sales activities of IFP and that the issuer was the Flowerland Limited Partnerships and Flowerland entities. After their initial purchase but prior to the March payment, the Hudsons allege they received various letters from California Flowerland '79. Also, at some date of which they are "uncertain," they received and read the tax return for California Flowerland '79 prepared by Bronson for the year ending December 31, 1979. They received no other information in connection with their investment.

Blechman allegedly purchased a limited partnership interest in Delta Greenhouse, Ltd. on December 21, 1976 with a one-time payment. Prior to his purchase, he read the offering circular which contained the tax opinion of Robert Adler and Stiller, Adler and Schwartz dated December 3, 1976. The issuer was the Flowerland limited partnerships and...