In re Gas Reclamation, Inc. Securities Litigation
| Decision Date | 09 April 1987 |
| Docket Number | No. M21-41 (LBS),MDL No. 665 (LBS).,M21-41 (LBS) |
| Citation | 659 F. Supp. 493 |
| Parties | In re GAS RECLAMATION, INC. SECURITIES LITIGATION. |
| Court | U.S. District Court — Southern District of New York |
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Geary, Stahl & Spencer, Dallas, Tex., for Allen Investors; Douglas M. Robison, of counsel.
Kantor, Davidoff, Wolfe, Rabbino & Kass, P.C., New York City, for Bard Investors; Robin Nelson Wolfe, William K. Sanders, of counsel.
Sylvor, Schneer, Gold & Morelli, New York City, for Abish Investors; Richard L. Gold, Iris S. Richman, of counsel.
Alvin A. Simon, Yonkers, N.Y., for Michael DeBlasio.
Hirsch & Westheimer, P.C., Houston, Tex., for Ditto and Clarke Investors, June E. Johnson, Fred Parks, and Allibone Investors; Joe C. Holzer, of counsel.
John W. Berkel, P.C., Houston, Tex., for Robert Hudson.
Cadwalader, Wickersham & Taft, New York City, for Intercontinental Monetary Corp., Richard H. Kelly, Edgar R. Eisner, and Laurance H. Friedman; Earl H. Nemser, Rosemary Byrne, of counsel.
Mark B. Brenner, New York City, Morris & Campbell, Houston, Tex., for Haas Securities, Robert A. Spira, Eugene K. Laff, Joe A. Clements, Edward Rotenbury, Don Reel, and G.A. Sumon; Kenneth M. Morris, John R. Knight, Houston, Tex., of counsel.
Owen & Fennell, New York City, for Connecticut Nat. Bank, Morris County Sav. Bank, Ensign Bank FSB, and Privatbanken A/S; Darrell K. Fennell, Robert Owen, of counsel.
Munves, Tanenhaus & Storch, New York City, Sutherland, Asbill & Brennan, Atlanta, Ga., for Financial Guar. Corp. and A. Emmett Barnes IV; Steven G. Storch, New York City, John Chandler, Atlanta, Ga., of counsel.
Adler, Hindy, Turner, Glasser & Weiss, New York City, for Austin Davenport Associates, Inc., Hugh Bell, Howard Reifer, James J. Callahan, and Management Consulting
Group, Inc.; Theodore G. Eppenstein, Lawrence B. Carlson, of counsel.
Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, New York City, for Northwestern Nat. Ins. Co. of Milwaukee, Wis.; Gregor F. Gregorich, Clifford R. Saffron, of counsel.
Cahill, Gordon & Reindel, New York City, for Peat, Marwick, Mitchell & Co.; George Wailand, Kevin J. McKenna, of counsel.
Howard B. Butler, Jr., Houston, Tex., for Gas Reclamation, Inc., G. Hugh Bradbury, Gordon D. Lewis, M.D., Harrison A. Storms, Jr., Michael A.S. Makris, and Bob L. Jordan.
This proceeding, which consists of at least ten separate lawsuits and approximately eighty plaintiffs and fifty defendants, comes before us for purposes of all pretrial matters pursuant to 28 U.S.C. ? 1407 (1982) and an Order of the Judicial Panel on Multidistrict Litigation. Following transfer to this Court, plaintiffs filed a Consolidated Complaint and an Amended Consolidated Complaint, the latter relating to only one of plaintiffs' sixteen causes of action. We consider these two complaints in tandem in deciding the motions to dismiss and for summary judgment now before the Court.
Plaintiffs' ("Investors") claims arise from their purchase of Gas Reclamation Units ("Units") from defendant Gas Reclamation, Inc. ("GRI") pursuant to a Private Placement Memorandum ("PPM") dated April 12, 1984. In addition to GRI and certain of its officers and agents, the defendants named in the Consolidated Complaint include: various brokerage houses and investment advisors; a number of banks that financed Investors' notes; the insurance company that issued bonds to secure the notes and its insurance agent; an accounting firm hired by GRI to conduct certain financial and management services; and a number of individuals associated with these parties. Plaintiffs allege that these defendants perpetrated and aided and abetted a securities fraud that affected approximately 400 investors throughout the United States.
The Units sold by GRI to investors consisted of an agreement to purchase from GRI a gas recovery and refrigeration plant and an agreement that GRI would install and maintain the plant on behalf of each investor. The gas plants attached to natural gas wells and were to condense the natural gas through refrigeration into liquid natural gas. GRI was to market the liquid natural gas, with investors sharing in resulting profits.
The total consideration for each Unit varied between $79,000 and $83,000. Typically, investors paid five percent in cash. The balance was funded pursuant to the terms of certain promissory notes which investors executed concurrently with the purchase of the Units and for which plaintiffs paid a commitment fee. The notes were "payable to or ultimately endorsed" over to one of several banks ?€” either Privatbanken, Intercontinental ("IMC"), Connecticut, Ensign, First City or Morris County (hereinafter collectively referred to as the "Banking Parties"). Consolidated Complaint ? 64. In connection with the execution of these promissory notes, investors were required to execute bonding agreements so that Northwestern National Insurance Company ("Northwestern") would issue bonds securing payment. Peat, Marwick, Mitchell & Co. ("Peat Marwick") is alleged to have rendered accounting services to GRI in connection with the sale of Units.
The Consolidated Complaint alleges that each of the Investors was fraudulently induced to invest in GRI as a result of a securities fraud perpetrated through nineteen misrepresentations and thirty-five omissions made in connection with the offering. These omissions and misrepresentations were allegedly made by the so-called "GRI Parties" and "Broker Parties," the latter consisting of Haas Securities Corp. ("Haas"), Austin Davenport Associates, Inc. ("Austin Davenport"), Management Consulting Group, Inc. ("Management Consulting"), and some of their agents. In addition, the Investors allege that through a variety of acts the Broker Parties, Banking Parties, Northwestern and its agent Financial Guaranty, Peat Marwick, and others "substantially assisted or participated" in the primary securities law violations of GRI and the Broker Parties. The alleged misrepresentations and omissions of material fact involve, inter alia, the production capability of gas plants, their worth, and past performance; GRI's ability to market the natural gas; the expenses associated with the offering; the terms of investors' financing; the need for registration with the Securities and Exchange Commission ("SEC"); and the involvement of certain persons with the offering.
GRI filed for Chapter 11 Bankruptcy in February 1985. The following month, and continuing through February 1986, investors filed suit asserting numerous federal and state statutory and common law claims.
The Broker Parties, Banking Parties, Northwestern, Peat Marwick, and Financial Guaranty have moved to dismiss Investors' Consolidated Complaint. Financial Guaranty's motion to dismiss was converted to a motion for summary judgment by this Court. That motion will be addressed separately, following a discussion of the arguments set forth by the other defendants in support of their motions to dismiss under Rules 12(b)(6) and 9.
In considering these motions to dismiss, the court of course is bound by well established principles: the court should not dismiss the complaint pursuant to Rule 12(b)(6) "unless it appears `beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir.1985). Furthermore, the court is restricted to evaluating the face of the pleading. Id.
Defendant Peat Marwick claims that this Court lacks subject matter jurisdiction over the Investors' claims because in its view, the gas reclamation units purchased by Investors are not "investment contracts" and therefore securities within the purview of the federal securities laws. See 15 U.S. C.A. ? 77b(1) (West Supp.1986). The court in Securities and Exchange Comm'n v. W.J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1102-03, 90 L.Ed. 1244 (1946), held that "an investment contract ... means a contract, transaction or scheme whereby a person 1 invests his money 2 in a common enterprise and 3 is led to expect profits solely from the efforts of the promoter or a third party...." Peat Marwick contends that the reclamation plants do not satisfy the second, "common enterprise" requirement as set forth in Howey. We disagree.
As noted by both parties, this Court recently reviewed the three tests employed in this Circuit to determine whether a "common enterprise" is present ?€” the "broad vertical commonality," "narrow vertical commonality," and "horizontal commonality" tests. We agreed with other courts in this district which rejected the "broad vertical commonality" test as inconsistent with Howey. Cahill v. Contemporary Perspectives, Inc., 1986-87 Fed.Sec.L.Rep. (CCH) ? 92,720 (S.D.N.Y.1986) Available on WESTLAW, DCT database. The Court finds no need to revisit that issue here, particularly in view of the Court's conclusion that the reclamation units meet the requirements for one of the other two applicable standards, that of "narrow vertical commonality."
The standard for narrow vertical commonality as articulated by the court in Mechigian v. Art Capital Corp., 612 F.Supp. 1421, 1426-27 (S.D.N.Y.1985), requires a tie between the fortunes of the investor and the investment's promoter such that these fortunes rise and fall together. See also Cahill 1986-87 Fed.Sec.L.Rep. at 93,491; Savino v. E.F. Hutton & Co., 507 F.Supp. 1225, 1237 (S.D.N.Y.1981). The investment at issue here required that each investor purchase one or more gas reclamation plants, or "Units," from the promoter, GRI. The investor thereafter would receive 62 percent of the gross profit resulting from sales of liquid gas obtained from his particular Unit, with the remaining profit retained by GRI as...
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