Kuczynski v. Ragen Corp., 86 Civ. 7194 (SWK).

• Decision Date: 20 November 1989
• Docket Number: No. 86 Civ. 7194 (SWK).,86 Civ. 7194 (SWK).
• Citation: 732 F. Supp. 378
• Parties: Otto KUCZYNSKI, Horst Kuczynski, Roland Kuczynski, Kurt Kuczynski, Thomas L. Foreman, Mildred E. Foreman, and Thomas L. Foreman, Jr., Plaintiffs, v. RAGEN CORPORATION and Ira L. Lopata, Defendants.
• Court: U.S. District Court — Southern District of New York

732 F. Supp. 378

Otto KUCZYNSKI, Horst Kuczynski, Roland Kuczynski, Kurt Kuczynski, Thomas L. Foreman, Mildred E. Foreman, and Thomas L. Foreman, Jr., Plaintiffs, v. RAGEN CORPORATION and Ira L. Lopata, Defendants.

No. 86 Civ. 7194 (SWK).

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

November 20, 1989.

COPYRIGHT MATERIAL OMITTED

Miller & Wrubel P.C., New York City by Joel M. Miller, Charles R. Jacob, III, and Thomas J. Luz, for plaintiffs.

Berlack, Israels & Lieberman, New York City by Steven Greenbaum and Melissa M. Johnson, for defendants.

KRAM, District Judge.

This action is for damages for alleged violations of federal securities law. Plaintiffs initially asserted claims for violation of § 10 b of the Securities Exchange Act of 1934, common law fraud, and breach of the corporate duties of loyalty and due care. By an opinion of April 17, 1989, this Court denied defendants' motion for summary judgment based on the original and first amended complaints. Kuczynski v. Ragen Corp., No. 86-7194 (SWK), slip op. (S.D. N.Y. April 17, 1989). Familiarity with that opinion is assumed. Plaintiffs subsequently amended their complaint twice, most recently to include alleged violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 et seq. Presently before this Court are defendants' motions for dismissal of plaintiffs' second amended complaint and Rule 11 sanctions.

BACKGROUND

Defendant Ragen Corporation manufactures precision machine components and assembles electronic parts. Ragen's electronic image processing business was conducted by Ragen Information Systems, Inc. ("RIS"), a wholly-owned subsidiary. The primary product manufactured by this division was the Ragen 1010 Information Management System ("1010"). Defendant Lopata was at all relevant times chairman of the board and chief executive officer of Ragen and RIS.

The plaintiffs are seven individual investors who began purchasing Ragen stock in 1981 after learning about the 1010 and the potential profit it could earn for the company. Plaintiffs' decision to purchase the stock was based on information from their stockbroker, Ragen's annual reports and press releases. By 1986 plaintiffs had invested a total of over $1,100,000 to acquire 232,440 shares of Ragen stock.

Although defendant corporation made optimistic statements about the 1010 in its annual report, press releases and presentations to the financial community, the product never realized its potential, partly due to Ragen's inability to adapt the product from its original government use to general commercial use. However, plaintiffs reportedly were encouraged by Ragen's press announcement and Form 8-K report in April 1986 that RIS had entered into a contract with Wang Laboratories, a major computer manufacturer, to supply Wang with 1010 image processing equipment. Nevertheless, the 1010 never yielded an operating profit during the period Ragen produced it, between 1979 and 1986.

Three months after the announcement of the Wang contract, on July 25, 1986, Ragen announced that it had agreed to sell RIS to a group of private investors which formed Imnet Corporation. Ragen received $3,000,000 in cash and $4,000,000 in convertible preferred stock. The sale was consummated on September 30, 1986 and plaintiffs commenced this suit shortly thereafter.

The most recent amended complaint, filed on April 28, 1989 by leave of this Court, adds RICO allegations based on the above facts. The RICO claims allege a pattern of securities and mail fraud over a period of six years. Presently before this Court is defendants' motion for dismissal of the RICO claims pursuant to Rules 15(a), 9(b), and 12(b)(6) and for sanctions under Rule 11.

DISCUSSION

I. Leave to Amend Under Rule 15(a)

Plaintiffs' Second Amended Complaint, containing seventeen alleged predicate acts of racketeering over three time periods between 1980 and 1986, was brought pursuant to the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961 et seq. ("RICO"). Defendants have moved under Fed.R.Civ.P. 15(a) to dismiss the RICO claims in the Second Amended Complaint. Defendants oppose the addition of these claims on the grounds that it would prejudice their defense of this action. For the reasons discussed below defendants' motion is denied.

Defendants particularly object to the inclusion in the Second Amended Complaint (hereinafter "SAC") of 14 separate allegations for the period between 1980 and 1983 pertaining to statements made by defendants Ragen and Lopata about the 1010. Defendants contend that this newly-amended complaint contains new material not contained in any of plaintiffs' prior pleadings, and that because discovery has ended, plaintiffs should not be able to add these RICO claims. Defendants claim that the RICO allegations require extensive (and expensive) additional discovery, including new depositions of plaintiffs and non-parties. Defendants' Memorandum in Support of their Motion to Dismiss at 12; Affidavit of Melissa M. Johnson in Support of Defendants' Motion to Dismiss ¶¶ 2-32.

Rule 15(a) states that "leave to amend shall be freely given when justice so requires." See Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962). Whether to grant leave amend is within the sound discretion of the district court. Zenith Radio Corp. v. Hazeltine Research Inc., 401 U.S. 321, 330, 91 S.Ct. 795, 802, 28 L.Ed.2d 77 (1971). Leave to amend should be allowed particularly where "the amended claim was obviously one of the objects of discovery and related closely to the original claim." Tokio Marine and Fire Ins. Co. v. Employers Ins. of Wausau, 786 F.2d 101, 103 (2d Cir.1986) (quoting State Teachers Retirement Board v. Fluor Corp., 654 F.2d 843, 856 (2d Cir.1981)).

On the other hand, pleadings may not be amended to add an entirely new set of operative facts if the original complaint did not provide fair notice to the defendant or if the new pleading will unduly burden or prejudice the defendants' case. Zenith Radio v. Hazeltine Research, supra, 401 U.S. at 330-331, 91 S.Ct. at 802-803; Ansam Assocs., Inc. v. Cola Petroleum, Ltd., 760 F.2d 442, 446 (2d Cir.1985).

The allegations contained in the most recent complaint are very similar to those contained in the earlier ones. The essential elements of plaintiffs' complaints remain. They allege that defendants made fraudulent, overly optimistic statements about the 1010; that they attempted to demonstrate capabilities of the 1010 that did not exist; that they misrepresented a sales agreement with Wang Laboratories as a formalized joint marketing venture and secretly conducted negotiations to sell the 1010 while publicly pledging to actively market it. Compare First Amended Complaint ¶¶ 9, 11, 14-15, 26, with Second Amended Complaint ¶¶ 13a-13n, 23, 26a-b. See also Kuczynski, supra, slip op. at 4-6.

Defense counsel's objections that the new complaint contains "innumerable new factual allegations" forcing them "to basically redo all discovery" sic are unpersuasive. Affidavit of Melissa M. Johnson at ¶ 11. Most of these putatively new allegations merely reformulate the old factual allegations in a way that will state a RICO claim. To the extent that plaintiffs have added new pejorative descriptions to their claims (e.g., "outright lies," id. at ¶ 6; "falsely" stated, id. at ¶ 15), these epithets hardly require a complete revamping of defendants' discovery.

This Court has already found that there is evidence to go to trial on issues of defendants' misrepresentations. In its previous opinion the Court found that, for example, plaintiffs could support a claim that defendants had publicized that "manufacturing status of the 1010 Information management System had been attained." Kuczynski, supra, slip op. at 5 (quoting Ragen 1980 Annual Report).¹ The new complaint contains more detailed information about how Ragen publicized and marketed the 1010 system, but the essential facts which now form the basis for the new RICO claims are "closely related" to those contained in the earlier complaints. The Court initially gave plaintiffs leave to amend at a pre-motion conference required by this Court. The Court originally allowed the amendment because plaintiffs represented that the added claims would be based on the same facts. Nothing in the briefs has since convinced the Court otherwise. Therefore, the new RICO claim does not deprive defendants of fair notice or prejudice their case.

Defendants cite In re Olympia Brewing Co. Securities Litigation, No. 77 C 1206, slip op., 1984 WL 2140 (N.D.Ill. Dec. 18, 1984) (LEXIS, Genfed Library, Dist. file) for the proposition that RICO claims cannot be added late in the litigation even if no new facts are added. That case may be distinguished from the one at bar. Olympia was a highly complex group of securities fraud cases involving numerous plaintiffs and defendants that was consolidated for trial. The amended complaints containing the RICO allegations were filed five years after the original complaints were filed and were much more complex than the original complaint. Despite representations to the contrary that the RICO claim would be based on the same factual bases as those set forth in previous complaints, the plaintiffs added new defendants as well as new claims. The allegations were "conclusory and overcomplicated," id., 1984 WL 2140, slip op., Lexis at 7, requiring a great deal of additional discovery. The claims pursuant to § 1962(c) involved "literally hundreds of possible enterprises," id. 1984 WL 2140, Lexis at 8, and intricate questions of proof. Id. 1984 WL 2140, Lexis at 7.

The circumstances in the present case are different from Olympia Brewing. Plaintiffs' most recent complaint is not substantially more complex than its predecessors. It is based on the same factual allegations as the others. No new defendants have been added. While defendants will need to prepare for the possibility...