Stevens v. EQUIDYNE EXTRACTIVE INDUSTRIES 1980, 86 Civ. 9173 (RWS).

• Decision Date: 28 July 1988
• Docket Number: No. 86 Civ. 9173 (RWS).,86 Civ. 9173 (RWS).
• Citation: 694 F. Supp. 1057
• Parties: Alan G. STEVENS, Plaintiff, v. EQUIDYNE EXTRACTIVE INDUSTRIES 1980, PETRO/COAL PROGRAM 1, Equidyne 1980 Oil and Gas Associates I, Equidyne 1980 Coal Venture, Equidyne Extractive Industries, Inc., Equidyne Corporation, Eastland Drilling Corporation, Inland Drilling Company, Inc., Eastern Mining Systems, Inc., Eastland Industries, Inc., Stuart R. Ross, Joel I. Beeler, Peter P.R. Rock, Robert H. Liebmann, Robson, Miller & Osserman and Marks Shron and Company, Mark Schwarz and Wofsey Certilman, Haft, Lebow, Balin, Buckley & Kremer, Defendants.
• Court: U.S. District Court — Southern District of New York

694 F. Supp. 1057

Alan G. STEVENS, Plaintiff, v. EQUIDYNE EXTRACTIVE INDUSTRIES 1980, PETRO/COAL PROGRAM 1, Equidyne 1980 Oil and Gas Associates I, Equidyne 1980 Coal Venture, Equidyne Extractive Industries, Inc., Equidyne Corporation, Eastland Drilling Corporation, Inland Drilling Company, Inc., Eastern Mining Systems, Inc., Eastland Industries, Inc., Stuart R. Ross, Joel I. Beeler, Peter P.R. Rock, Robert H. Liebmann, Robson, Miller & Osserman and Marks Shron and Company, Mark Schwarz and Wofsey Certilman, Haft, Lebow, Balin, Buckley & Kremer, Defendants.

No. 86 Civ. 9173 (RWS).

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

July 28, 1988.

COPYRIGHT MATERIAL OMITTED

Jackson & Nash, New York City (Christopher S. Rooney, Robin Gerofsky, of counsel), for plaintiff.

Gordon & Silber, P.C., New York City (Peter T. Neill, of counsel), for defendant Robson, Miller & Osserman.

D'Amato & Lynch, New York City (Alfred A. D'Agostino, Jr., of counsel), for defendants Mark Schwarz and Wofsey, Certilman, Haft, Lebow, Balin & Kremer.

Wilson, Elser, Moskowitz, Edelman & Dicker, New York City (Vincent R. Fontana, Andrew J. Entwistle, of counsel), for defendant Marks Shron.

OPINION

SWEET, District Judge.

Defendants Marks Shron & Company ("Shron"), Robson, Miller & Osserman ("Robson"), Mark Schwarz ("Schwarz"), and Wofsey, Certilman, Haft, Lebow, Balin, Buckley & Kremer ("Wofsey") have moved to dismiss the action filed against them by Alan G. Stevens ("Stevens") for failure to plead fraud with particularity pursuant to Rule 9(b), Fed.R.Civ.P., for failure to state a claim upon which relief may be granted pursuant to Rule 12(b)(6), Fed.R.Civ.P., for lack of subject matter jurisdiction pursuant to Rule 12(b)(1), and for failure to bring an action within the relevant statute of limitations. For the reasons set forth below, the action will be dismissed in part with respect to Robson and will be wholly dismissed with respect to the remaining defendants.

Facts

This action arises out of Stevens' investment in the limited partnership Equidyne Extractive Industries 1980 Petro/Coal Program I ("Equidyne 1980").¹ Equidyne 1980 was described in the Offering Memorandum as a "combined energy program consisting of a coal venture and a gas and oil partnership," whereby each investor received a participating interest in the coal venture and each became a limited partner in the gas and oil partnership. (amended complaint ¶ 5).

According to Stevens, Robson, as counsel to Equidyne, drafted or participated in drafting the discussion of legal tax issues contained in an Opinion Letter attached to the Offering Memorandum and was present as legal tax counsel on the closing of Equidyne 1980 on December 31, 1980. Stevens also asserts that Robson was his personal counsel at the time of the investment.

Shron was accountant to Equidyne 1980. It was responsible for projections for the Pro Forma Statement appended to the Offering Memorandum, and for the preparation of the tax returns and K-1 statements for the partners of Equidyne 1980.

Stevens claims that he was defrauded into investing in a worthless endeavor by his reliance on misrepresentations made by the Equidyne Group and by the defendants herein. He claims that the parties knew at the time the projections were made that they were false in that the quantities of coal in the mine were inflated, that there was no intention to mine or drill, and that there was no intention to purchase equipment for the projects. Additionally, Stevens claims that the tax consequences predicted regarding deductible losses were false and misleading.

Stevens contends that he became aware that the facts had been misrepresented in December 1982 when Joel Beeler ("Beeler"), a representative of Equidyne 1980 and a defendant in this case, informed him that there had been no mining or drilling activity. At that time, according to Stevens, the Equidyne defendants offered to exchange Beeler's interest in another investment vehicle, Equidyne 1979, for Stevens' Equidyne 1980 interest. A general release dated June 15, 1983 releasing all Equidyne defendants, affiliates, and subsidiaries was thus executed.

Stevens allegedly agreed to the exchange in reliance upon representations made by Wofsey and Schwarz, the latter an attorney who was a member of Wofsey. However, he subsequently discovered that the interest in Equidyne 1979 was worthless. Wofsey had been counsel to Equidyne 1979.

Procedural Background

In April of 1985, Stevens, together with Vincent DiVittorio ("DiVittorio"), another investor, filed suit against those involved in Equidyne 1979. That complaint made allegations similar to those asserted here. Stevens withdrew from that suit in response to a Rule 9(b) motion. DeVittorio amended the complaint to eliminate all references to Stevens. However the Honorable Richard Owen dismissed the complaint for failure to plead fraud with particularity. The Second Circuit affirmed the dismissal of the claims against the lawyers, Wofsey, and the accountant, Shron.

Stevens filed a complaint in this action on November 28, 1986 and an amended complaint on September 10, 1987. The instant motions were filed on November 12, 13, and 27, 1987, and oral argument was held on April 22, 1988.

Discussion

I. Section 10(b)

Shron and Robson have moved to dismiss the claims against them under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 for failure to plead fraud with particularity under Rule 9(b), Fed.R.Civ.P., and for failure to state a claim for which relief may be granted under Rule 12(b)(6), Fed.R.Civ.P.

A. Pleading Fraud with Particularity

In order to set forth a claim of fraud, allegations must be pleaded with particularity pursuant to Rule 9(b), Fed.R.Civ.P. Rule 9(b) reads:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind may be averred generally.

See Shemtob v. Shearson, 448 F.2d 442, 444 (2d Cir.1971). This requirement is applicable to claims under section 10(b). See e.g., Luce v. Edelstein, 802 F.2d 49 (2d Cir.1986); Ross v. A.H. Robins, 607 F.2d 545, 557 (2d Cir.1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980).

Rule 9(b) is satisfied if the complaint sets forth:

(1) precisely what statements were made in what documents or oral representations or what omissions were made,

(2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making the same),

(3) the content of such statements and the manner in which they misled the victim, and

(4) what the defendants "obtained" as a consequence of the fraud. (footnote omitted)

Beck v. Manufacturers Hanover Trust Co., 645 F.Supp. 675, 682 (S.D.N.Y.1986), aff'd, 820 F.2d 46 (2d Cir.1987), cert. denied, ___ U.S. ___, 108 S.Ct. 698, 98 L.Ed.2d 650 (1988).

The requirements are somewhat relaxed where, as here, the plaintiff bases his complaint on an offering memorandum or similar document. The memorandum "satisfies 9(b)'s requirements as to identification of the time, place, and content of the alleged misrepresentation ... Furthermore, no specific connection between fraudulent representations in the Offering Memorandum and particular defendants is necessary where ... defendants are insiders or affiliates participating in the offer of the securities in question." Luce, supra, 802 F.2d at 55 (citations omitted).

Although persons such as corporate officials making stock offerings or general partners offering limited partnerships may be considered insiders for the purposes of Rule 9(b), see DiVittorio v. Equidyne Extractive Industries, 822 F.2d 1242, 1247-48 (2d Cir.1987) (partners, subsidiaries of the partnership, affiliates, controlling stockholders, officers or directors of partnerships are insiders); Luce, supra, 802 F.2d 49 (partners and principals in partnerships are insiders); Ohman v. Kahn, 685 F.Supp. 1302 current Fed.Sec.L.Rep. (CCH) ¶ 93,740 (S.D.N.Y.1988) (principals of corporation offering shares), it is less clear whether attorneys or accountants may be held under this relaxed standard of pleading, see DiVittorio, supra, 822 F.2d at 1249 (lawyers and accountants not held when complaint does not sufficiently allege insider status and when not specifically linked to fraudulent misrepresentation or omission); The Limited, Inc. v. McCrory Corp., 683 F.Supp. 387, 394 (S.D.N.Y.1988) (accountant who certified audited balance sheet upon which shareholders equity was based in establishing stock purchase price was not an insider but was held liable on other grounds); Cohen v. Goodfriend, 665 F.Supp. 152, 156-47 (E.D.N.Y.1987) (attorney who prepared offering materials which contain misrepresentations may be held).

Additionally, allegations of fraud in general may not be pleaded on information and belief unless the matters stated are "peculiarly within the opposing party's knowledge." Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir.1974) 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d 467 (1975). If that is the case, then the allegations must be "accompanied by a statement of the facts upon which the belief is founded."

i. Robson

Stevens has alleged that Robson, as tax counsel for Equidyne 1980, drafted the offering memo that contained material falsehoods. He attributes each falsehood to Robson expressly, as well as to the Equidyne defendants, states that the defendants knew the statements in the offering memo were false at the time made, and sets forth his reliance on the statements. Where allegations are made on information and belief, Stevens sets forth his basis for the belief.

Robson contends that this does not meet the requirements of Rule 9(b) because it is lacking in detail. Specifically, Robson claims that Stevens failed to aver the time and place of each fraudulent statement and the person who made it (or in the case of an omission,...