In re Investors Funding Corp., Etc.

Decision Date19 November 1980
Docket NumberMDL No. 290 (WCC),No. 76 Civ. 4679 (WCC).,76 Civ. 4679 (WCC).
Citation523 F. Supp. 533
PartiesIn re INVESTORS FUNDING CORPORATION OF NEW YORK SECURITIES LITIGATION. James BLOOR, as Trustee Pursuant to Chapter X of Title 11 of the United States Code of the Estates of Investors Funding Corporation of New York, etc., Plaintiff, v. Jerome DANSKER, et al., Defendants.
CourtU.S. District Court — Southern District of New York

COPYRIGHT MATERIAL OMITTED

Anderson, Russell, Kill & Olick, P. C., New York City, for plaintiff, James Bloor, as Trustee; Eugene R. Anderson, John H. Gross, Nicholas J. Zoogman, New York City, of counsel.

Cahill, Gordon & Reindel, New York City, for defendants, Peat, Marwick, Mitchell & Co. and Jerome Lowengrub; R. Anthony Zeiger, John H. de Boisblanc, George Wailand, Kenneth J. Berman and Leonard P. Novello, Associate Gen. Counsel, New York City, of counsel.

Proskauer, Rose, Goetz & Mendelsohn, New York City, for defendants, Ernst & Whinney, as successor to S. D. Leidesdorf & Co., and Robert Saltzman; David I. Goldblatt, David Aronson, Gary B. Bettman, New York City, of counsel.

OPINION AND ORDER

CONNER, District Judge:

This action is before the Court on objections filed by defendants Peat, Marwick, Mitchell & Co. and Jerome Lowengrub, a partner in Peat, Marwick, Mitchell & Co. purportedly named as representative of a defendant class of all Peat Marwick partners (collectively "PMM"), pursuant to 28 U.S.C. § 636(b)(1), to the Recommended Decision of Magistrate Harold J. Raby, Report No. 19 submitted April 20, 1979, on PMM's motion for partial judgment of dismissal on the pleadings or for partial summary judgment.

Plaintiff James Bloor ("Trustee"), Chapter X Trustee for Investors Funding Corporation of New York ("IFC"), has instituted this suit against a multitude of defendants alleging fraud in connection with the insolvency of IFC. The complaint alleges that PMM was retained by IFC to audit certain of its books and report upon its financial statements for the years 1968-1971, and asserts the following claims against PMM which are at issue in this motion:

"(a) violations of Sections 10(b), 20, 18 and 14 of the Securities Exchange Act of 1934 (the "1934 Act") (15 U.S.C. §§ 78j(b); 78t; 78r; and 78n) (fourth through sixth claims);
"(b) state law claims for violations of Sections 352-c and 339-a of the New York General Business Law (seventh and eighth claims);
"(c) a state law claim of aiding and abetting common law fraud (third claim);
"(d) a state law claim for breach of contract in performing accounting services (nineteenth claim);
"(e) state law claims for negligence in performing such services (twentieth and twenty-second claims); and
"(f) a bankruptcy claim for fraudulent transfer (twenty-seventh claim)."

In his Report 19 ("Report"), Magistrate Raby recommends the granting of PMM's motion as to the Trustee's Sixth Claim against PMM, alleging violation of Section 14 of the 1934 Act. The Trustee has not objected to this recommendation. This portion of the Report is accordingly approved.

The Report also recommends denial of PMM's motion as to the Trustee's Third, Fourth, Fifth, Seventh, Eighth, Nineteenth, Twentieth, Twenty-Second and Twenty-Seventh Claims. PMM has objected to these recommendations, and accordingly the Court must make a de novo determination as to these issues, 28 U.S.C. § 636(b).

Background

The principal actors in the drama described in the Trustee's complaint are Jerome, Norman and Raphael Dansker ("Danskers"), "the principal officers, controlling directors, controlling stockholders and the dominant force of IFC until some time prior to October 21, 1974" (105.)1 IFC allegedly suffered massive damages at the direction of the Danskers, in part as a result of certain management decisions and in part as a result of transactions by which the Danskers misappropriated IFC funds for the personal benefit of themselves and others (103 et passim.). Characterizing these actions by the Danskers as "the Fraud" (100), the Trustee asserts that "as the Fraud progressed, larger and larger amounts of money were required and were obtained in order (i) to cover up past fraudulent activities, management malfeasance, and business reverses, (ii) to give IFC the false and misleading appearance of legitimacy and success and (iii) to continue the Fraud" (104). Consequently the Fraud is said to have included multiple secret and sham transactions resulting in artificial profits and concealed losses (101). On the basis of this false image of financial health, the Danskers were allegedly able to obtain for IFC huge quantities of funds from creditors, debenture holders, stockholders and other sources (102), monies purportedly utilized in perpetuating and concealing "the Fraud."

The alleged role of PMM in this scenario consisted of its certification of IFC financial statements which, according to the Trustee, materially overstated the income and assets of IFC while materially understating its losses and liabilities (223). PMM is alleged to have breached its contractual obligation to render accounting services in a "thorough, skillful and diligent manner" (228); to have failed "to employ generally accepted auditing standards" (228); to have performed "in reckless disregard of the facts, and in a reckless, careless, unskilled and grossly negligent manner" (229); and to have failed to discover IFC's true financial condition and adequately to prepare and examine IFC's financial statements (229). The complaint concludes that since such inaccurate financial statements were necessary to the continued ability of IFC to obtain funds, and further, since the acquisition of funds by IFC was necessary to the continued vitality of "the Fraud," but for PMM's failure to perform properly its accounting services "the Fraud" would not have continued throughout PMM's tenure as IFC's independent auditor (230). The complaint contains specific allegations that inaccurate financial statements certified by PMM were included in prospectuses and other SEC filings in connection with the issuance and sale of securities (236), and that such sales "were an integral part of the Fraud since they generated the money which was necessary to perpetrate and maintain the Fraud" (234).

Discussion
I. GENERAL ISSUES

Among the many arguments advanced by PMM in support of its motion, two legal issues have repeating significance, and will accordingly be addressed here preliminarily to a discussion of the Trustee's nine specific claims for relief. These two general issues are (a) whether IFC suffered damages in connection with the purchase or sale of securities and, if so, whether the alleged conduct of PMM proximately caused such damages, and (b) whether the conduct and knowledge of the Danskers and other IFC management may be imputed to IFC.

A. The "In Connection With" and Causation Requirements

The thrust of the Trustee's allegations regarding securities transactions is that the Danskers, as a result of IFC's artificial appearance of financial health, were able to induce investors to purchase IFC's securities at prices in excess of their true value. If this is so, argues PMM, then IFC received more than fair value in its securities transactions. Any damage suffered by IFC,2 PMM's argument continues, resulted from subsequent misappropriations or investment misjudgments as to the proceeds from such securities transactions, and such damages were thus not suffered in connection with the purchase or sale of a security, the requisite element of a private action for damages under Sections 10(b) and 18, see Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975); Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952).3

The Trustee in response has relied upon the decision of the Supreme Court in Supt. of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971). In Bankers Life, the plaintiff brought suit under Section 17(a) of the Securities Act of 1933 (the "1933 Act") and Section 10(b) of the 1934 Act on behalf of Manhattan Casualty Co. Manhattan was caused by one of its officers to sell its United States Treasury bonds and to deposit the proceeds from such sale in an account at Irving Trust, against which account the officer and his outside collaborators had fraudulently drawn a check for their personal use in purchasing stock of Manhattan. Despite the fact that "the full market price was paid for those bonds," id. at 9, 92 S.Ct. at 167, the Court concluded that fraud was committed in connection with the sale of these Treasury bonds because "the seller was duped into believing that it, the seller, would receive the proceeds." Id. The Court concluded:

"The crux of the present case is that Manhattan suffered an injury as a result of deceptive practices touching its sale of securities as an investor."
Id. at 12-13, 92 S.Ct. at 169.

The Trustee contends that Bankers Life broadly establishes that transactions "touching" the purchase or sale of securities fall within the ambit of the federal securities laws. Specifically, the Trustee construes Bankers Life as holding that damages suffered by a corporation as a result of the misappropriation or misuse of its funds can be the basis for a securities laws claim if: (1) the funds had been acquired by the corporation in exchange for securities, and (2) the sale of the securities by the corporation and the misdirection of the receipts therefor were both accomplished as parts of an integral scheme to defraud the corporation.

PMM has offered an alternative construction of Bankers Life. According to PMM, the Court found the claim in Bankers Life to be cognizable under the federal securities laws because the sale of the Treasury bonds was a necessary and inseparable element of the arrangement by which Manhattan was defrauded, i. e., the deposit of the proceeds in an account against which def...

To continue reading

Request your trial
80 cases
  • In re Revco DS, Inc.
    • United States
    • United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio
    • July 24, 1990
    ...to the debtor, no fraudulent conveyance exists. See In re Burbank Generators, 48 Bankr. at 206-207; Bloor v. Dansker (In re Investors Funding Corp.), 523 F.Supp. 533 (S.D.N.Y. 1980) (issue of whether a professional failed to meet professional standards in rendering services involved a claim......
  • Teltronics Services, Inc. v. Anaconda-Ericsson, Inc.
    • United States
    • U.S. District Court — Eastern District of New York
    • May 11, 1984
    ...the Court must also dismiss the State claims pursuant to N.Y.Gen.Bus.Law §§ 339-a, 339-b, and 352-c. See In re Investors Funding Corp., etc., 523 F.Supp. 533, 544 (S.D.N.Y.1980). The Court additionally dismisses the claim pursuant to 15 U.S.C. § 77(1)(2) as time barred under 15 U.S.C. § 77m......
  • In re Gas Reclamation, Inc. Securities Litigation
    • United States
    • U.S. District Court — Southern District of New York
    • April 9, 1987
    ...of the fraud, and (3) defendant's knowing rendition of substantial assistance thereto." In re Investors Funding Corp. of New York Securities Litigation, 523 F.Supp. 533, 545 (S.D.N.Y.1980). As was previously discussed in connection with section 10(b), the Investors have adequately pled the ......
  • FMC Corp. v. Boesky
    • United States
    • U.S. District Court — Northern District of Illinois
    • November 7, 1989
    ...of a security. See Tully v. Mott Supermarkets, Inc., 540 F.2d 187, 194 (3d Cir.1976); In re Investors Funding Corp. of New York Securities Litigation v. Dansker, 523 F.Supp. 533, 539 (S.D.N.Y.1980) (citing to Rochelle v. Marine Midland Grace Trust Co., 535 F.2d 523 (9th Cir.1976)). In Dansk......
  • Request a trial to view additional results
1 books & journal articles
  • Lawyers' potential exposure to liability in fraudulent business transactions.
    • United States
    • Defense Counsel Journal Vol. 63 No. 4, October 1996
    • October 1, 1996
    ...U.S. 880 (1982). (8.) 969 F.2d at 750, quoting Meyer v. Glenmoor Homes Inc., 54 Cal.Rptr. 786, 800-01 (Cal.App. 1967). (9.) Id. (10.) 523 F. Supp. 533 (S.D.N.Y. 1988). (11.) See FDIC v. Clark, 978 F.2d 1541, 1549 (10th Cir. 1992); Kempe v. Monitor Intermediaries Inc. 785 F.2d 1443 (9th Cir.......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT