Romani v. Shearson Lehman Hutton

• Decision Date: 04 March 1991
• Docket Number: No. 90-2101,90-2101
• Citation: 929 F.2d 875
• Parties: Fed. Sec. L. Rep. P 95,886, 19 Fed.R.Serv.3d 710 Richard ROMANI, Plaintiff, Appellant, v. SHEARSON LEHMAN HUTTON, et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 875

929 F.2d 875

Fed. Sec. L. Rep. P 95,886, 19 Fed.R.Serv.3d 710

Richard ROMANI, Plaintiff, Appellant, v. SHEARSON LEHMAN HUTTON, et al., Defendants, Appellees.

No. 90-2101.

United States Court of Appeals First Circuit.

Heard March 4, 1991.

Decided April 8, 1991.

Edward Manchur with whom David Pastor, Kenneth Gilman, and Gilman and Pastor were on brief, for plaintiff, appellant.

John J. Kenney with whom Jay S. Handlin, Simpson Thacher & Bartlett, Gerald F. Rath, and Bingham Dana & Gould were on brief, for defendants, appellees, Shearson Lehman Hutton, Inc., Shearson Lehman Bros. Partnership Services, Inc. and Lana Lobell Income Partners II.

Richard M. Goldstein, with whom Shea & Gould, Mark A. Michelson, Sarah Chapin Columbia and Choate, Hall & Stewart, were on brief, for Touche Ross & Co.

Before CAMPBELL and CYR, Circuit Judges, and COFFIN, Senior Circuit Judge.

COFFIN, Senior Circuit Judge.

Appellant Richard Romani brought this securities fraud action on behalf of himself and a class of persons consisting of all similarly situated investors in a horsebreeding limited partnership. Romani alleged that the defendants--varied individuals and entities responsible for the partnership's public offering--fraudulently induced investments through misrepresentations and omissions in the offering materials that falsely inflated the partnership's financial potential. The district court dismissed one federal claim on statute of limitations grounds and another for failure to plead with sufficient particularity under Rule 9(b) of the Federal Rules of Civil Procedure. Having rejected both federal claims, the court concluded that the pendent state claims also should be dismissed.

Romani appeals only the Rule 9(b) dismissal of his claim asserted under Sec. 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, and the concomitant dismissal of his state law claims. He further argues that he should have been granted leave to amend his dismissed complaint. We conclude that the district court correctly decided these issues, and therefore affirm.

I. Background

Lana Lobell Income Partners II Limited Partnership ("Lana Lobell II" or the "partnership") was formed in 1986 to allow interested individuals to invest in the standardbred horsebreeding business. The partnership planned to buy standardbred horses with the funds contributed by limited partners and eventually to distribute profits from the later sale of the horses. The partnership was to be directed by two individual managing general partners, defendants Alan J. Leavitt and Jack E. Rosenfeld, and was to conduct business through the facilities of defendant Lana Lobell Farms, Inc., the horse farm owned by Leavitt and Rosenfeld.

On April 24, 1986, Lana Lobell II publicly offered for sale 9,700 limited partnership units pursuant to a Registration Statement and Prospectus. Defendant Shearson Lehman Hutton, Inc., was the exclusive selling agent for the public offering and defendant Shearson Lehman Brothers Partnership Services, Inc. was the associate general partner of the partnership. Defendant Touche Ross & Company, a public accounting firm, prepared a report that was included in the offering materials.

Plaintiff bought five partnership units on May 7, 1986, at $1,000 per unit. In July 1986, a brief prospectus supplement was published stating that as of August 1, 1986, the day after the offering closing date, Rosenfeld would be withdrawing "from ownership and management of the operations of Lana Lobell Farms." The supplement further stated, however, that Rosenfeld would "continue as a Managing General Partner of the Partnership" and that "his departure should not impact the day to day operations" of Lana Lobell Farms or the partnership.

Appellant's return on his investment did not meet the predictions made in the offering materials. Instead of expected cash distributions in excess of 13%, the yields in 1987 and 1988 were approximately 2 1/2 to 3%. In March 1989, the limited partners were told that an affiliate of Lana Lobell Farms (that partially owned some of the partnership horses) recently had filed for protection under Chapter 11 of the Bankruptcy Code following two years of cash flow problems.

As a result of this poor financial performance, on July 31, 1989, Romani filed the instant action. Before defendants responded to the original complaint, he filed an amended version. Count I of that amended complaint alleged that the defendants' false and incomplete statements regarding the partnership constituted intentional securities fraud in violation of section 10(b) of the Securities Exchange Act and its associated regulation, Rule 10b-5. Counts II and III, which are not involved in this appeal, alleged additional violations of federal law. Counts IV through VII alleged pendent state claims for common law fraud and deceit, breach of fiduciary duty and gross negligence.

In numerous paragraphs of the amended complaint, plaintiff refers to statements from the offering materials that depict in glowing terms the goals and financial potential of the partnership and the qualifications of the managing general partners, Leavitt, Rosenfeld and Lana Lobell Farms. According to plaintiff, these statements touting the preeminence of Lana Lobell Farms and its managers in the standardbred breeding industry were false misrepresentations designed to lure investors.

The claim of misrepresentation was linked to four material adverse facts about the partnership that Romani claims were deliberately withheld from him and other class members:

(1) That the poor financial condition of Lana Lobell Farms and their affiliates made Partnership objectives and financial projections unrealistically optimistic and unattainable;

(2) That the departure of Rosenfeld, contrary to the Defendants' misrepresentations, was a major loss to the Partnership, in terms of financial management, expertise, capital and other resources, and although he was listed as a Managing General Partner of the Partnership, he actually had no substantive responsibilities, duties, or participation in its management;

(3) That the standardbred horse industry, in general, and Lana Lobell Farms, in particular, was entering a recessionary period and, thus, representations made to investors which were largely based on past performance which occurred amidst dramatically more favorable operating conditions and markets, were materially false, misleading, and deceptive; and

(4) That the managing general partners, after selling their interests out to the Partnership during the public offering period at extremely favorable prices, had no incentive to produce positive results, meet Partnership objectives, or generate the type of attractive financial returns which were represented to investors in the offering materials.

Complaint at p 47.

Defendants moved for dismissal, arguing, inter alia, that the complaint failed to satisfy the requirement of Fed.R.Civ.P. 9(b) that fraud claims be pleaded with particularity. In granting dismissal of the section 10(b) claim, the district court concluded that the complaint insufficiently specified the nature of the alleged wrongdoing and failed "to delineate the particular part each defendant played in the alleged fraud," making it impossible for the defendants to respond adequately to the charges against them. The court held that plaintiff's " 'shoot for the moon' pleading directly violates the Rule 9(b) requirement that each defendant's role in the alleged fraud be particularized," Opinion at 5 (quoting Konstantinakos v. FDIC, 719 F.Supp. 35, 39 (D.Mass.1989)).

On appeal, Romani argues that his Amended Complaint was sufficiently particular to place the appellees on notice of the conduct with which they were charged and to permit them to frame responsive pleadings, thereby satisfying Rule 9(b). He further claims that, in light of the pre-discovery stage of the case, the court erred in applying an excessively strict particularity standard with respect to the role played by each defendant in the alleged wrongdoing. He also argues that, even if dismissal were proper, the court abused its discretion in failing to grant leave to amend. Finally, appellant contends that dismissal of the pendent state claims was improper because it was based on the erroneous dismissal of his federal claim.

II. Discussion

It is well settled that Rule 9(b) requires the plaintiff in a securities fraud case to specify the time, place and content of an alleged false representation. Wayne Investment v. Gulf Oil Corp., 739 F.2d 11, 13 (1st Cir.1984). Although a plaintiff need not specify the circumstances or evidence from which fraudulent intent could be inferred, the complaint must provide some factual support for the allegations of fraud, id.; New England Data Services, Inc. v. Becher, 829 F.2d 286, 288 (1st Cir.1987). The requirement that supporting facts be pleaded applies even when the fraud relates to matters peculiarly within the knowledge of the opposing party. Wayne Investment, 739 F.2d at 13-14, quoted in New England Data, 829 F.2d at 288.

Romani argues that his complaint satisfies the requirements of Rule 9(b) because it identifies the offering materials as the "time and place" of the allegedly false and misleading representations and provides "significant detail" about the material omissions on which his claim of fraud principally relies. We disagree. It is true that the complaint isolates the offering materials as the source of the alleged fraud, and this reference probably is sufficient to identify the time and place of the alleged misrepresentations. See Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir.1986). Romani also argues with some force that he has identified the "content" of the asserted fraud adequately by pointing to the statements in the offering materials unreservedly extolling the quality and potential of the partnership and to the allegedly undisclosed contrary fact...