In re Prudential Sec. Inc. Ltd. Partner. Lit., MDL Dkt No. 1005. No. M-21-67 (MP).

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Citation930 F. Supp. 68
Docket NumberMDL Dkt No. 1005. No. M-21-67 (MP).
Decision Date10 June 1996


Goodkind Labaton Rudoff & Sucharow L.L.P. by Joel H. Bernstein, Lawrence A. Sucharow, New York City, Finkelstein, Thompson & Loughran by William P. Butterfield, Washington, D.C., Milberg, Weiss, Bershad, Hynes & Lerach by Melvyn I. Weiss, Kevin P. Roddy, New York City, Krislov & Associates, Ltd. by Clint Krislov, Chicago, Illinois, for Plaintiffs.

Weil, Gotshal & Manges L.L.P. by Dennis J. Block, Joseph Allerhand, New York City, for Defendants, Polaris Holding Company, Polaris Aircraft Leasing Corp., Polaris Investment Management Corp. and Polaris Securities Corp., Peter G. Pfendler.


The "Polaris defendants" moved pursuant to Fed.R.Civ.P. 12(b)(6), to dismiss the claims asserted against Polaris in the plaintiffs' Consolidated Complaint. The Court has converted this motion into a motion for summary judgment on behalf of the moving parties pursuant to Fed.R.Civ.P. 56. The motion rests on two primary grounds: (1) the alleged disclosure in the Polaris prospectuses of the very risks which plaintiffs claim were omitted or misrepresented; and (2) the statute of limitations.

I. Background

This class suit is set in the context of an alleged scheme during the 1990's undertaken by Prudential Securities International ("PSI") and its affiliates to mislead a multitude of investors, by alleged fraud, into purchasing units of interest in limited partnerships sold through PSI's Direct Investment Group ("DIG"). Plaintiffs filed a Consolidated Complaint on June 8, 1994, listing 37 named representative plaintiffs as members of a putative class action. The intended class consists of "all persons or entities, acting in their own capacity or in a representative capacity, who purchased Units in any of the Partnerships between January 1, 1980 and December 31, 1991, inclusive ... and were damaged thereby." (Consolidated Complaint at ¶ 22.) Excluded from the class are, inter alia, persons who have availed themselves of the fund created by Prudential's October 21, 1993 settlement with the Securities Exchange Commission.

Polaris was one of the sponsoring organizations that sold units in limited partnerships through PSI. The Consolidated Complaint implicates eleven partnerships for which Polaris was the sponsoring organization. These include Polaris Aircraft Investors I and II(a-d) ("PAI"), sold from 1982 until 1984, and Polaris Aircraft Investment Funds I-VI ("PAIF"), sold from 1985 until 1991.1 The business plan for these partnerships was to purchase used commercial jet aircraft, lease the aircraft to third parties under short-term operating leases and sell the aircraft after several years. The stated investment objectives were to generate substantial cash from leasing operations to distribute the income thereof to investors quarterly; provide cash distributions to investors upon specific sales of aircraft; and preserve investors' capital.

Plaintiffs charge Polaris with violating 18 U.S.C. § 1962(a), (c), and (d) in connection with PAIFs I-VI. As predicate acts for these RICO violations, the plaintiffs allege three types of securities fraud: § 10(b) and Rule 10b-5 of the 1934 Securities and Exchange Act and § 11 and 12(2) of the 1933 Securities Act, as amended. They also allege mail fraud and wire fraud. The mail fraud allegedly consists of both the mailing of sales materials with misleading information or fraudulent omissions, and the mailing of false and misleading account statements. The wire fraud includes transmissions on PSI's nationwide computer system of false or misleading data to be used in the monthly account statements.

II. Summary Judgment Standard

Under Fed.R.Civ.P. 12(b), if "matters outside the pleading are presented to, and not excluded by the Court," the Court must convert defendants' 12(b)(6) motion to dismiss into a Rule 56 motion for summary judgment. Fonte v. Board of Managers of Continental Towers Condominium, 848 F.2d 24, 25 (2d Cir.1988); Ellis v. The Civil Service Employees Assoc., Inc., 913 F.Supp. 684, 688-689 (N.D.N.Y.1996). Rule 12(b) instructs that prior to such conversion, courts should give parties "reasonable opportunity to present all material made pertinent" to a summary judgment motion by Rule 56. However, the Court need not provide formal notice of conversion to the parties where, as here, it has already accepted from both sides, materials other than pleadings. In re G. & A. Books, Inc., 770 F.2d 288, 295 (2d Cir. 1985), cert. denied, 475 U.S. 1015, 106 S.Ct. 1195, 89 L.Ed.2d 310 (1986); Goyette v. DCA Advertising Inc., 830 F.Supp. 737, 741 (S.D.N.Y.1993).

A motion for summary judgment may not be granted unless the Court determines that there is no genuine issue of material fact to be tried. See Fed.R.Civ.P. 56; Donahue v. Windsor Locks Bd. of Fire Commissioners, 834 F.2d 54, 57 (2d Cir.1987). The burden of showing that no genuine factual disputes exist is on the parties seeking summary judgment, and "the court is not required to resolve all ambiguities and draw all factual inferences in favor of the party against whom summary judgment is sought." Cronin v. Aetna Life Ins. Co., 46 F.3d 196, 202 (2d Cir.1995). If no reasonable trier of fact could find for the non-moving party, the court may grant relief on a motion for summary judgment. Taggart v. Time, Inc., 924 F.2d 43, 46 (2d Cir.1991).

III. Bespeaks Caution

The Consolidated Complaint alleges RICO claims which rely on a scheme to sell investments in 6 limited partnerships from 1985-1991 through the selective use of both misrepresentations in sales materials and prospectuses and knowingly fraudulent material omissions, particularly with respect to the residual value of aircraft purchased by Polaris. The moving defendants contend that prospectuses "bespoke caution" by disclosing all of the relevant risks; that the prospectuses addressed market demand for and residual values of the partnerships' aircraft. In response to the charge in the complaint that defendants knew but did not disclose that resale values of aircraft were forecast to decline and to be practically nonexistent in the future, the defendants argue that plaintiffs seek unjustifiably to impose a duty of clairvoyance on defendants. Defendants contend that they did not have a duty to speculate in the prospectuses as to the future market conditions, e.g., "fraud by hindsight," because the decline in residual values only became apparent, they say, "years after" the partnerships were sold.

The plaintiffs responded initially that the issues could not properly be determined on the pending motion; that even their limited discovery heretofore, which was suspended initially but then was recently resumed, evidenced material issues of triable facts. Plaintiffs assert that the alleged risk disclosures made by the defendants were generalized, deliberately uninformative and falsified, incomplete, and were wholly inadequate to apprise investors of the actual risks they faced. Plaintiffs argue that defendants fraudulently concealed and intentionally and knowingly suppressed these risks, so that no reasonable inquiry would have revealed the true facts on any obligatory inquiry.

The bespeaks caution doctrine allows courts to rule that a defendant's forward-looking representations contain enough cautionary language or risk disclosures to protect against claims of securities fraud. It has been applied at the pleading stage to dismiss securities fraud claims when prospectuses have contained extensive and specific warnings about the riskiness of investments. See In re Donald J. Trump Casino Securities Litigation, 7 F.3d 357 (3d Cir.1993), cert. denied, 510 U.S. 1178, 114 S.Ct. 1219, 127 L.Ed.2d 565 (1994). However, some courts have refused to apply the doctrine at the pleading stage where defendants are alleged to have information that makes even the asserted cautionary statements fraudulent. See In re Marion Merrell Dow Inc. Securities Litigation, 1993 WL 393810, *8 (W.D.Mo.); Rubinstein v. Collins, 20 F.3d 160 (5th Cir.1994).

Those cases have held that while cautionary language is relevant in assessing the materiality of predictive statements, it is not dispositive. Rubinstein, 20 F.3d at 167-168. The bespeaks caution doctrine involves an examination of statements in the context in which they were made. It is thus not a per se bar to recovery in all cases where, as here, disclosure is accompanied by some cautionary language.

Several significant limitations on the bespeaks caution doctrine appear relevant. Cautionary language cited to justify application of the doctrine must precisely address the substance of the specific statement or omission that is challenged. Trump, 7 F.3d at 371-372. In addition, cautionary language does not protect material misrepresentations or omissions when defendants knew they were false when made. Huddleston v. Herman & MacLean, 640 F.2d 534 (5th Cir.1981), rev'd in part on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983); Rubinstein, 20 F.3d at 171.

Plaintiffs' allegations and discovery data obtained to date have raised issues of material fact with respect to these limitations on the bespeaks caution doctrine. The Consolidated Complaint alleges that Polaris knew, but did not disclose, at the time the prospectus and sales pitches were designed, that it had purchased aircraft with evanescent residual values that would decline dramatically to the point of virtual non-existence as a practical matter.2 Plaintiffs cite evidence gleaned during the limited discovery to date that experts retained by Polaris predicted and warned the marketeers of the limited partnerships that residual values of its aircraft would decline radically. This information contradicted both the residual value information provided in...

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