Mendelsohn v. Capital Underwriters, Inc.

• Citation: 490 F. Supp. 1069
• Decision Date: 24 October 1979
• Docket Number: No. C-75-1259,C-76-1492 WHO.,C-75-1259
• Court: U.S. District Court — Northern District of California
• Parties: Paul MENDELSOHN, on behalf of himself and all others similarly situated, v. CAPITAL UNDERWRITERS, INC.; Gary L. Di Girolamo; Gery Gomez; John L. Susott, Durwood Boeglen; California Hawaii Development, Inc.; and Dewey O. Chapman. George S. McDONALD; Jordan B. Dell'Era; James R. Casarotti; Alfred J. Thorington; Deloss Winkler; Paul Mendelsohn; Raymond Rediske, George Grossi; Alfred Gross, on behalf of themselves and all others similarly situated, v. CAPITAL UNDERWRITERS, INC.; Gary L. Di Girolamo; Gery Gomez; John L. Susott; Durwood Boeglen; California Hawaii Development, Inc.; Dewey O. Chapman, Edward C. Kemper III; Mattoch, Edmunds & Kemper; Mattoch, Jember & Brown; Kemper & Watts; George G. Grubb; Carlsmith, Carlsmith, Wichman & Case; David Latham; Harris, Kerr, Foerster & Co.; James W. Boyle; Hart Wood.

490 F. Supp. 1069

Paul MENDELSOHN, on behalf of himself and all others similarly situated, v. CAPITAL UNDERWRITERS, INC.; Gary L. Di Girolamo; Gery Gomez; John L. Susott, Durwood Boeglen; California Hawaii Development, Inc.; and Dewey O. Chapman.

George S. McDONALD; Jordan B. Dell'Era; James R. Casarotti; Alfred J. Thorington; Deloss Winkler; Paul Mendelsohn; Raymond Rediske, George Grossi; Alfred Gross, on behalf of themselves and all others similarly situated, v. CAPITAL UNDERWRITERS, INC.; Gary L. Di Girolamo; Gery Gomez; John L. Susott; Durwood Boeglen; California Hawaii Development, Inc.; Dewey O. Chapman, Edward C. Kemper III; Mattoch, Edmunds & Kemper; Mattoch, Jember & Brown; Kemper & Watts; George G. Grubb; Carlsmith, Carlsmith, Wichman & Case; David Latham; Harris, Kerr, Foerster & Co.; James W. Boyle; Hart Wood.

Nos. C-75-1259, C-76-1492 WHO.

United States District Court, N. D. California.

October 24, 1979.

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James E. Cooke, Brian P. Lewis, Cooke & Mack, San Francisco, Cal., for plaintiffs.

Humphreys, Berger & Pitto, San Jose, Cal., for defendant Capital Underwriters.

John Marshall Collins, Decker & Collins, San Jose, Cal., for defendants DiGirolamo and Boeglen.

Kenneth M. Christison, San Francisco, Cal., for defendant Gomez.

Jerome Sapiro, Jr., Tobin & Tobin, San Francisco, Cal., for defendant Susott.

George P. Eshoo, Redwood City, Cal., for defendants Chapman & California Hawaii.

Samuel A. Keesal, Jr., Long Beach, Cal., James W. Boyle, Carlsmith, Carlsmith, Wichman & Case, Honolulu, Hawaii, for defendant Carlsmith, etc.

Petty, Andrews, Tufts & Jackson, San Francisco, Cal., for all Kemper defendants.

OPINION

ORRICK, District Judge.

On April 20, 1979, following extended discovery and briefing and lengthy oral argument, and after reviewing the numerous affidavits, pleadings, documents, answers to interrogatories, depositions, and other papers filed in the above-captioned cases, this Court granted three motions for summary judgment brought by defendants Harris, Kerr, Forster & Co., an accounting firm, and David Latham, the manager of its Honolulu office (hereinafter collectively referred to as "HKF"), defendants Carlsmith, Carlsmith, Wichman & Case, a law firm, and George Grubb and James Boyle, partners with that firm (hereinafter collectively referred to as "Carlsmith") and defendants Edward Kemper and three law firms¹ in which he had been a named partner (hereinafter collectively referred to as "Kemper"). The Court, finding no genuine issue of any material fact, held that the plaintiffs could not sustain their charges that HKF, Carlsmith, and Kemper had violated certain provisions of the federal securities laws, and granted summary judgment in favor of all three moving defendants on those counts, dismissing the pendent state claims against the three, which claims the Court noted in passing could not be supported against the moving defendants on the available facts. The Court denied plaintiffs' motion for a continuance,² rendered a brief oral opinion in open court summarizing its reasons for the decision, and then announced it would file in due course this Memorandum Opinion setting forth in more detail its reasons for the decision and affirming the granting of the motions for summary judgment.

I.

A.

These cases trace their genesis to the allegedly fraudulent conduct of one Gary DiGirolamo who was president of Capital Underwriters, Inc. (hereinafter referred to as "CU"), and who sold and arranged for the sale of interests in limited partnerships to finance real estate developments in Hawaii. These interests were marketed both by DiGirolamo and officers of CU and by a network of brokers in California and New Jersey who acted as CU's agents in privately placing the securities.

The allegedly fraudulent conduct took two forms. First, CU marketed interests in property which was actually being developed, but not by CU. The corporation actually financing the project, California-Hawaii Development Corporation (hereinafter referred to as "CHD"), of which CU was a fifty-percent owner, had raised enough money to finance the initial costs of the project through the sale of limited partnerships of which it was general partner. CHD solicited limited partners by means of private placement memoranda or offering circulars given to interested investors.

DiGirolamo, having access to the private placement memoranda and being familiar with the CHD projects through his ownership interest in CHD, copied the CHD private placement memoranda, substituted the names of his own personnel for those of CHD, and solicited investors to purchase interests in limited partnerships to develop what he represented to be CU projects. The money raised from these investors did not go into the projects but was commingled with the corporate funds of CU and used partly for DiGirolamo's personal expenses, partly to return capital and profit to earlier investors.

Second, CU sold interests in actual CU projects, raising more money than was required to fund them. DiGirolamo solicited initial funding by means of private placement memoranda.

Plaintiffs are purchasers of interests in seven limited partnerships formed by Gary DiGirolamo and marketed by CU for the ostensible purpose of developing real estate in Hawaii. The named plaintiffs purchased their partnership interests from DiGirolamo and CU from October, 1972, through October, 1973. DiGirolamo has at various times engaged the three moving defendants, HKF, Carlsmith, and Kemper, to do, respectively, the accounting and legal work for CU. Plaintiffs contend that these three defendants aided and abetted defendant CU and DiGirolamo in a fraudulent course of conduct by which the latter two defendants:

1. collected monies from the sale of limited partnership interests and applied the proceeds to previously established partnerships and to other unrelated and unauthorized corporate and personal purposes;

2. commingled the proceeds from the sale of interests in other limited partnerships;

3. utilized the proceeds from the sale of limited partnership interests to return capital and profit on other limited partnership investments and to pay certain expenses thereof;

4. promised investors in certain limited partnerships a return of capital within a prescribed time period at a specified rate of profit which was unrealistic, not warranted by the facts, and could not have been made without recourse to capital contributions made by investors in other limited partnerships; and

5. sold limited partnership interests pursuant to a public offering without filing a registration statement.

Based on these allegations, plaintiffs³ allege that the defendants have violated Section 10(b) of the Securities Exchange Act of 1934 and Sections 17(a), 12(2), and 5 of the Securities Act of 1933. The remaining six nonfederal claims asserted against defendants on the basis of pendent jurisdiction charge violations of state law.⁴

B.

From the pleadings, affidavits, answers to interrogatories, and depositions, the Court has summarized the facts which follow concerning the involvement of the moving defendants in the allegedly fraudulent CU scheme. None of these facts are controverted and there is no genuine issue as to any material fact. The Court will first summarize these facts as they apply to each moving defendant seriatim.

1.

As manager of HKF's Hawaii office, defendant David Latham first met DiGirolamo in August, 1972, at which time DiGirolamo told Latham that he was engaged in the business of forming limited partnership interests that would invest in and develop real estate projects in Hawaii. DiGirolamo, acting for CU, retained HKF to assist him in setting up bookkeeping records and preparing corporate tax returns for CU. Latham outlined the intended scope of the CU assignment in a memorandum dated December 20, 1972. HKF set up books for CU and maintained them until DiGirolamo obtained a bookkeeper. HKF knew from the outset that CU was without a set of accounting books or records, that DiGirolamo and CU had been receiving funds without adequate documentation, and that funds had been commingled. According to the Latham memorandum HKF's task was to determine the status of the various partnership accounts in terms of the amount of money taken in, the amount of money expended for construction, and the remaining liability DiGirolamo had to the investors. The stated goal was to "clean up" all the accounting prior to the year's end so that HKF could prepare the limited partnership financial statements and tax returns. HKF had access to CU records, including investor lists and receipts, and was asked to prepare a set of books from that information. The documents prepared in accordance with DiGirolamo's request recorded that DiGirolamo owed $301,526.46 to CU in "officer advances" as of December 31, 1972.

Neither Latham nor anyone else at HKF ever met with or spoke to any of the named plaintiffs or anyone else contemplating an investment in CU or in any related entities. Latham made no representations to anyone concerning such investments. Neither HKF nor Latham did work in connection with, or prepared material knowingly for inclusion in, any prospectus or offering circular issued by CU or by any limited partnership affiliated with it. Without authorization from HKF, CU did incorporate two tax letters written by HKF in July, 1974, into a CU prospectus for Makiki Cliffs, an entity in which no plaintiff invested.

The services performed by HKF for CU are detailed as follows:

a. From August, 1972, through February, 1973, HKF set up certain bookkeeping records, in particular a general ledger and a cash receipts and disbursements journal based on the information provided it by CU. Using this same information, HKF prepared tax returns for CU during March and April, 1973.

b. In November, 1972, HKF prepared a projection of...