In re Integrated Resources Real Estate Sec. Lit.

• Decision Date: 11 February 1993
• Docket Number: MDL No. 897,No. MISC. 21-61 (RWS).,MISC. 21-61 (RWS).
• Citation: 815 F. Supp. 620
• Parties: In re INTEGRATED RESOURCES REAL ESTATE LIMITED PARTNERSHIPS SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of New York

815 F. Supp. 620

In re INTEGRATED RESOURCES REAL ESTATE LIMITED PARTNERSHIPS SECURITIES LITIGATION.

MDL No. 897, No. MISC. 21-61 (RWS).

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

January 8, 1993.

As Amended February 11, 1993.

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Anderson Kill Olick & Oshinsky, P.C. (Steven M. Pesner, Robert H. Pees, David M. Zensky, of counsel), Camhy Karlinsky & Stein (Kenneth A. Lapatine, Mark H. Budoff, of counsel), Townley & Updike (Jonathan M. Herman, of counsel), New York City, for defendants.

Arnold & Porter (Stephen M. Sacks, Larry Rector, of counsel), Washington, DC, for defendant Deloitte & Touche.

Arent Fox McGarrahan & Heard (Ronald Weiner, of counsel), New York City, for defendant GA Partners Inc.

Cahill Gordon & Reindel (Susan Buckley, Thomas J. Kavaler, of counsel), New York City, for defendant Prudential Bache Securities, Inc.

Carter, Ledyard & Milburn (Beth D. Jacob, Jonathan F. Mack, of counsel), New York City, for defendant Landauer Associates.

Hunton & Williams (Christopher M. Mason, Scott J. McKay Wolas, Joseph J. Salturelli, of counsel), New York City, for defendant Mfrs. Hanover Trust.

Jones, Day, Reavis & Pogue (Elaine H. Mandelbaum, Jeffrey S. Tolk, of counsel), New York City, for defendant Cushman & Wakefield of Pennsylvania, Inc.

Kornstein Veisz & Wexler (David S. Douglas, Howard Levi, of counsel), New York City, for Ameritrust Co. Nat. Assoc., First Interstate Bank of California, Morgan Guar. Trust Co. of New York, Sec. Pacific Nat. Bank, Signet Bank/Virginia.

Robert J. Mannix, Deputy General Counsel, Deloitte & Touche, New York City.

Morrison & Foerster (Carroll Neesemann, of counsel), New York City, for defendant Kidder Peabody & Co., Inc.

Proskauer Rose Goetz & Mendelsohn (David I. Goldblatt, Lawrence P. Eagel, of counsel), New York City, for Richard H. Ader and Alan H. Weiner.

Ross & Hardies (Peter I. Livingston, Michelle J. d'Arcambal, of counsel), New York City, for defendants Hunter Pub. Co., Inc., Elliot Stein, Jr., I. Martin Pompadur.

Beigel & Sandler (Bijan Amini, Elizabeth Toll, Marilyn Neiman, Alexander T. Moore, of counsel), New York City, for plaintiffs.

Martin Mushkin, New York City, Waite, Schneider, Bayless & Chesley Co., L.P.A. (Stanley M. Chesley, Terrence L. Goodman, of counsel), Cincinnati, OH, for plaintiffs in Ellingson v. Kanzar Assocs.

OPINION

SWEET, District Judge.

The Judicial Panel on Multidistrict Litigation ("MDL") consolidated and transferred to this Court on October 10, 1991, a number of actions arising out of the demise of partnerships affiliated with Integrated Resources, Inc. ("Integrated"), which filed for relief under chapter 11 of the bankruptcy code, 11 U.S.C. ?? 101, et seq., in 1990. See In re Integrated Resources, Inc., 135 B.R. 746, 748 (Bankr.S.D.N.Y.1992). Since the transfer of the original actions, several others have been filed in the Southern District of New York or transferred by the Multidistrict Panel to this Court and consolidated with these proceedings ("Later Filed Actions").

In general, the Plaintiffs in each of these actions bought limited partnership interests in ventures sponsored by Integrated or an entity associated with Integrated. The ventures were investment vehicles which bought, owned, operated, and leased residential and commercial real estate and equipment. The offer and sale of these interests was conducted in compliance with the requirements of Regulation D ("Reg. D"), Rules 501-08, 17 C.R.F. 230.501-230.508, of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. ?? 77a, et seq., thereby exempting the transactions from the registration requirements of the 1933 Act. Since these transactions are not registered with the Securities and Exchange Commission, the 1933 Act limits purchasers to those who qualify as "accredited investors."

To qualify as a Reg. D accredited investor, a "natural person" must have "an individual net worth, or joint net worth with that person's spouse, at the time of his purchase in excess of $1,000,000"; or he must have:

had an individual income in excess of $200,000 in each of the two most recent years or joint income with the person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

Rule 501(a)(5) & (6). A trust qualifies for accredited-investor status if it has "total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person ...," Rule 501(a)(7), to wit, one who "has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment ...," Rule 506(b)(2)(ii).

The purpose of these requirements is to facilitate and expedite specially designed offerings, while at the same time offsetting the danger posed by the lack of SEC scrutiny of the offer and sale by precluding those from participating in the offering who are inexperienced purchasers of securities and unable to afford professional advice regarding the merits and risks of purchasing the offered securities. Each of the investors in the Integrated partnerships was required to represent in writing that he qualified for Reg. D accredited-investor status and that he met the additional financial criteria set forth in the "Who May Invest" section of the confidential private placement memorandum ("PPM") issued for each partnership.

The investors were also warned in the respective partnership PPMs of various financial risks involved with each partnership investment. The following statement from the first paragraph of the Clovine Associates Limited Partnership PPM is typical:

The tax consequences of an investment in the Partnership, the absence of Cash Flow from such investment for at least the first four years of the operation of the Partnership and the illiquidity of such investment make the purchase of Interests suitable only for investors who have substantial net worth and substantial taxable income, and an Interest should be purchased only as a long-term investment.

Clovine PPM at 1.

Additionally, each PPM contained a section entitled "Risk Factors," in which the various risk factors of the investment were explicated at length, including, for example, restrictions on transferability and the possible lack of a market for the investment interests; the possible unavailability of tax benefits and changes in the tax law; risks arising from the terms and conditions of purchase money notes, mortgages, and leases; the possible inability to refinance the project; the possible lack of available sources of funds for the operating partnership; risks arising from leveraged financing and the ownership of the specific property; the possible inability to sell the project; and the possible adverse effects of technological developments in competing equipment.

The limited partnerships were highly leveraged, and the Plaintiffs allege they were promised considerable tax savings through debt financing and, after the initial debt was paid off, considerable profits from rental income from the buildings and equipment. The Plaintiffs further allege that the investments had no prospects for success from their inception and served no other economic purpose than to provide the Defendants with millions of dollars of profit in sales proceeds, fees, and other commissions.

On February 3, 1992, this Court signed "Pre-Trial Order No. 1" ("Pre-Trial Order") which, among other things, established an initial motion and discovery schedule for all actions subject to the MDL Order. The Pre-Trial Order created four separate global motion categories: (I) statutes of limitations governing the federal securities claims ("Global Motion I"), (II) the legal sufficiency of the federal securities claims ("Global Motion II"), (III) the legal sufficiency of the federal RICO claims ("Global Motion III"), and (IV) all Global Motion I, II, III motions applicable to the Later Filed Actions ("Global Motion IV"). The Pre-Trial Order also consolidated the briefing and hearing schedules for Global Motions I and II and Global Motions III and IV.

The actions subject to the present motion are:

Byrne v. Research Triangle Associates Limited Partnership, 91 Civ. 6966 ("Research Triangle") (filed January 3, 1991 in the Arizona District, Phoenix Division);

Reagan v. 600 Grant Street Associates Limited Partnership, 91 Civ. 5498 ("600 Grant Street/Reagan") (filed April 12, 1991 in the Central District of California);

Schoonmaker Homes v. 600 Grant Street Associates Limited Partnership, 91 Civ. 8528 ("600 Grant Street/Schoonmaker") (filed December 18, 1991 in the Southern District of New York);

Standefer v. Clovine Associates Limited Partnership, 91 Civ. 6968 ("Clovine/Standefer") (filed April 9, 1991, in the Southern District of Ohio, Western Division);

Ellingson v. Kanzar Associates, 91 Civ. 6967 ("Clovine/Ellingson") (filed March 14, 1991, in the Southern District of Ohio, Western Division);

Baird v. EVP Fourth Corp., 91 Civ. 1063 ("West Palm/Baird") (filed February 12, 1991, in the Southern District of New York);

Coleman v. EVP Fourth Corp., 91 Civ. 0678 ("West Palm/Coleman") (filed January 23, 1991, in the Southern District of New York);

Coolspring Dental Clinic v. EVP Seventh Avenue Corp., 91 Civ. 6905 ("Rittenhouse") (filed October 15, 1991, in the Southern District of New York);

Martin v. EVP Second Corp., 90 Civ. 7074 ("Lenox Towers") (filed November 2, 1990, in the Southern District of New York; dismissed with leave to replead to add additional plaintiffs by this Court on August 26, 1992);

Gorman v. Sevzar Associates, 90 Civ. 6979 ("Southern Inns") (filed October 19, 1990 in the Southern District of New York);

Greene's Ready Mixed Concrete Co. v. Fillmore Pacific Associates Limited

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