Riedel v. Acutote of Colorado, No. C2-88-1194.

• Decision Date: 05 September 1991
• Docket Number: No. C2-88-1194.
• Citation: 773 F. Supp. 1055
• Parties: Daniel P. RIEDEL, et al., Plaintiffs, v. ACUTOTE OF COLORADO, a Limited Partnership, et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

773 F. Supp. 1055

Daniel P. RIEDEL, et al., Plaintiffs, v. ACUTOTE OF COLORADO, a Limited Partnership, et al., Defendants.

No. C2-88-1194.

United States District Court, S.D. Ohio, E.D.

September 5, 1991.

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Randall W. Knutti and Robert W. Trafford, Porter Wright Morris & Arthur, Columbus, Ohio, for plaintiffs.

Luigia Tenuta, Dublin, Ohio, for Acutote of Colorado, Acutote Inc., and David Westin.

William K. Root and Frederick Resch, Resch & Root, Dublin, Ohio, for Versatile Inv., David Cohen and Lyle Preest.

OPINION AND ORDER

GEORGE C. SMITH, District Judge.

This matter is before the Court on the motion of plaintiffs Daniel P. Riedel and Richard Zborowski for partial summary judgment against defendants Versatile Investment Planners, Inc. (hereinafter VIP), I. David Cohen, and Lyle W. Preest. (Plaintiff Barry J. Greenberg, whose suit # C2-89-324 was consolidated with the present suit, has not joined in seeking partial summary judgment). Plaintiffs made this motion in accordance with Federal Rules of Civil Procedure 56(a) and 56(d). This motion was filed October 31, 1990.

FACTS

Plaintiffs Riedel and Zborowski brought this action against defendants VIP, Cohen, and Preest, as well as defendants Acutote, Inc., Acutote of Colorado Limited Partnership (hereinafter Partnership) and Davis A. Westin. Plaintiffs allege that the defendants violated the following statutes:

(1) Section 12(1) of the Securities Act of 1933 (15 U.S.C. § 77l(1)) (by selling unregistered securities which are not exempt from registration requirements);

(2) Ohio Revised Code sections 1707.43 and 1707.44 (by selling unregistered securities which are not exempt from registration requirements);

(3) Section 12(2) of the Securities Act of 1933 (15 U.S.C. § 77l(2)) (by material misstatements and omissions in prospectus); and

(4) Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and corresponding rule 10b-5 (17 C.F.R. § 240.10b-5) (by using modes of interstate commerce or the mails to commit securities fraud). Plaintiffs seek partial summary judgment on these claims.

In addition, plaintiffs allege the following violations, for which partial summary judgment is not being sought:

(1) Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a));

(2) Federal Racketeer Influenced and Corrupt Organizations Act (RICO) (18 U.S.C. § 1961 et seq.) (re. defendants Acutote and Westin);

(3) Conspiracy to violate RICO (re. defendants Acutote and Westin); and

(4) Common law fraud.

Acutote had a number of contracts with racetracks to handle their parimutuel betting operations. The Acutote Limited Partnership was to acquire these contracts and distribute the income to the partners. In June 1987, Acutote (managing general partner) and Westin (general partner) proposed sales of ten units of limited partnership interest in the Partnership for $27,000 each.

That same month the Partnership prepared a "Confidential Memorandum" offering these ten units for sale starting June, 1987 and closing September 8, 1987. All ten units were to be sold; if not, none of the units would be sold. Seven racing contracts to be assigned to the Partnership were indicated. However, two of the contracts were canceled during July and August and a third contract was in default, no payments having been made by the closing date. These adverse developments were never reflected in the Confidential Memorandum.

After the offering had closed, the Partnership repurchased the four units of Akilla Misali, an investor who had changed his mind as to purchasing limited partnership interests. The Partnership then sought new investors for these units. In February and March of 1988, plaintiffs purchased three of these units. The Confidential Memorandum given to plaintiffs, though, did not mention the canceled/defaulted contracts. It also did not mention the Partnership's heavy borrowing from VIP and VIP-related entities nor the intended use of the new investors' funds. Subsequently, plaintiffs demanded a refund of their money, but defendants refused. Plaintiffs filed their complaint November 10, 1988, and their amended complaint December 15, 1989. They filed their motion for partial summary judgment on October 31, 1990.

Regarding their conduct concerning the sales of the units of limited partnership interest, Preest and Cohen admit the following in their answer to the amended complaint: (1) They did not disclose the Partnership's loans from VIP & VIP-related entitles (Answer to Amended Complaint, para. 12); (2) They did not disclose the "specific disposition of investor funds" (Answer to Amended Complaint, para. 13); (3) The contract cancellations and breach were "material adverse developments" of which defendants were legally obligated to inform potential investors (Answer to Amended Complaint, para. 10; see also Amended Complaint, para. 23); (4) Information on the contract cancellations and breach was never incorporated into the Confidential Memorandum (Answer to Amended Complaint, para. 10; see also Amended Complaint, para. 23); and (5) Neither VIP nor Preest is a licensed securities dealer or salesman in Ohio (Answer to Amended Complaint, para. 9).

In their response to plaintiffs' motion for partial summary judgment, (hereinafter Defendants' Response) Preest and Cohen make two arguments: (1) They did not know about the contracts' cancellations and, hence, did not know that the Partnership's income would fall short of the projections in the Memorandum (Defendants' Response, pp. 5-6); (2) The loans from VIP & VIP-related entities were used in the same manner as investor funds and did not change the Partnership's financial position, so failure to disclose that investor funds would be used to repay the loans is not misrepresentation (Defendants' Response, pp. 4-5). In addition, defendants mention that the law firm of Baker and Hostetler prepared the Confidential Memorandum, although they make no arguments as to attorney liability (Defendants' Response, pp. 2-3).

STANDARD OF REVIEW

In considering this motion, the Court is mindful that the standard for summary judgment "mirrors the standard for a directed verdict under Rule 50(a), which is that the trial judge must direct a verdict if, under the governing law, there can be but one reasonable conclusion as to the verdict." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986) (citing Brady v. Southern Ry. Co., 320 U.S. 476, 479-80, 64 S.Ct. 232, 234, 88 L.Ed. 239 (1943)). Thus, the Supreme Court concluded in Anderson that a judge considering a motion for summary judgment must "ask himself not whether he thinks the evidence unmistakably favors one side or the other but whether a fair minded jury could return a verdict for the plaintiff on the evidence presented." 477 U.S. at 252, 106 S.Ct. at 2512.

Rule 56(c) of the Federal Rules of Civil Procedure provides in pertinent part:

The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.

In essence, the inquiry is whether the evidence presented a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law. Anderson, 477 U.S. at 251-52, 106 S.Ct. at 2511-12.

Such an inquiry necessarily implicates the evidentiary standard of proof that would apply at the trial on the merits. As a result, the Court must view the evidence presented through the prism of the substantive evidentiary burden. Rule 56(e) therefore "requires the nonmoving party to go beyond the pleadings and by his own affidavits, or by the `depositions, answers to interrogatories, and admissions on file', designate `specific facts showing that there is a genuine issue for trial.'" Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). "The plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322, 106 S.Ct. at 2550.

In Banks v. Rockwell International North American Aircraft Operations, 666 F.Supp. 1053 (S.D.Ohio 1987) (Graham, J.), this district enunciated the importance of granting summary judgments in appropriate situations by stating as follows: "Although summary judgment should be cautiously invoked, it is an integral part of the Federal Rules which are designed `to secure the just, speedy and inexpensive determination of every action.'" Id. at 1056 (citing Celotex, 477 U.S. at 327, 106 S.Ct. at 2555 (quoting Fed.R.Civ.P. 1); Anderson, 477 U.S. at 252, 106 S.Ct. at 2512).

Thus, the mere existence of a scintilla of evidence in support of a plaintiff's claim is insufficient — there must be evidence upon which a jury could reasonably find for the plaintiff. Anderson, 477 U.S. at 252, 106 S.Ct. at 2512. Having discussed the Rule 56 standard of review, the Court now turns to the merits.

LAW AND ANALYSIS

I. Section 12 of the Securities Act of 1933

The main purpose of the Securities Act of 1933 consists of protecting investors by requiring sellers to publish "material information" necessary for buyers to make "informed investment decisions." Pinter v. Dahl, 486 U.S. 622, 638, 108 S.Ct. 2063, 2074, 100 L.Ed.2d 658 (1988) (citing SEC v. Ralston Purina Co., 346 U.S. 119, 124, 73 S.Ct. 981, 984, 97 L.Ed. 1494 (1953); A.C. Frost & Co. v. Coeur D'Alene Mines Corp., 312 U.S. 38, 43 & n. 2, 61 S.Ct. 414, 417 & n. 2, 85 L.Ed. 500 (1941)). Section 12 (15 U.S.C. § 77l) reads as follows:

Any person who —

(1)

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