Varnberg v. Minnick

• Decision Date: 13 March 1991
• Docket Number: No. 83 Civ. 4577 (RPP).,83 Civ. 4577 (RPP).
• Court: U.S. District Court — Southern District of New York
• Parties: Robert VARNBERG and Gail Varnberg, Plaintiffs, v. F. Wendell MINNICK, Minnick Resources, Inc., Paul L. Hayes, Jr., Hayes Resources, Inc., Martin J. Oppenheimer, James M. Connors and Connors Investors Services, Inc., Defendants.

760 F. Supp. 315

Robert VARNBERG and Gail Varnberg, Plaintiffs, v. F. Wendell MINNICK, Minnick Resources, Inc., Paul L. Hayes, Jr., Hayes Resources, Inc., Martin J. Oppenheimer, James M. Connors and Connors Investors Services, Inc., Defendants.

No. 83 Civ. 4577 (RPP).

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

March 13, 1991.

COPYRIGHT MATERIAL OMITTED

Wormser, Kiely, Galef & Jacobs, New York City by John T. Morin, for plaintiffs.

Pollack & Greene, New York City by Alan M. Pollack, for Connors Investor Services, Inc. and James M. Connors.

Shapiro Spiegel Garfunkel Rubin & Driggin, New York City by Edward Rubin, for F. Wendell Minnick.

OPINION AND ORDER

Jury Trial Demanded

ROBERT P. PATTERSON, Jr., District Judge.

This is an action alleging securities fraud in violation of section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q (1988), section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j (1988), and Rule 10b-5 of the Securities Exchange Commission promulgated thereunder, and alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. (1988), as well as various state law violations. Defendants James M. Connors ("Connors") and Connors Investor Services, Inc. ("CIS"), now move for partial summary judgment dismissing certain counts of plaintiffs' Third Amended Complaint pursuant to Fed.R. Civ.P. 56(a) and 9(b). For the reasons set forth below, defendants' motion is granted in part and denied in part.

BACKGROUND

1. The Parties

It is undisputed that in late 1976, plaintiff Gail Varnberg, a resident of New York, inherited a portfolio of stocks, bonds and cash valued at nearly $6 million as beneficiary of a trust established by her grandparents. Gail Varnberg and her husband Robert, also a New York resident, allege that in July 1977 they met defendant F. Wendell Minnick ("Minnick") of Minnick Resources, Inc. of New York. See Gail Varnberg Aff. ¶ 7. Plaintiffs admit that beginning in 1977 they invested in a number of venture capital and tax shelter investments promoted by Minnick. Defendants' Rule 3(g) Statement filed Sept. 22, 1989 (hereinafter "Def. Rule 3(g) Stmt.") ¶ 13; Plaintiffs' Response to Defendant's Rule 3(g) Statement filed Dec. 1, 1989 (hereinafter "Pl. Rule 3(g) Stmt.") ¶ 13.

Defendant Martin J. Oppenheimer ("Oppenheimer") is a corporate and tax attorney retained by the Varnbergs in November 1977. Plaintiffs deny that they hired Oppenheimer as anything more than a legal advisor, see Pl. Rule 3(g) Stmt. ¶ 12, although defendants claim that plaintiffs hired Oppenheimer upon Minnick's recommendation to represent them in connection with investments particularly tax shelter investments they were beginning to make through Minnick and Hayes. Def. Rule 3(g) Stmt. ¶ 12.

Plaintiffs claim that beginning in 1977 they were fraudulently induced by defendants Minnick, Hayes and Oppenheimer to invest in excess of $1 million of the funds Gail Varnberg had inherited in a number of ventures, none of which plaintiffs allege ever turned a profit.

Defendant CIS is a registered investment company with its principal place of business in Pennsylvania. The parties do not dispute that on November 14, 1977 the Varnbergs signed an "Investment Management Agreement" retaining CIS to manage the portfolio of assets Gail Varnberg had inherited the previous year. Defendant James M. Connors, a registered investment advisor and resident of Pennsylvania, is president of CIS and signed the Investment Management Agreement.

Although the written agreement does not explicitly apply to investments of the type plaintiffs made through Minnick using portfolio assets, plaintiffs claim that Connors and CIS undertook to advise them with respect to all their investments.¹ To support this allegation, plaintiffs rely on a letter on CIS stationery signed by Connors which predates the written agreement and which states:

Connors Investor Services will not manage tax shelter investments but will assist in the analysis of what amounts should be placed in such vehicles and assist in the selection of appropriate holdings.

Pollack Aff., Exh. 44 (Letter from CIS to the Varnbergs dated November 11, 1977). Connors and CIS disclaim any such duties, pointing out that by its terms the November 14, 1977 Investment Management Agreement did not address tax shelter investments.² See Pollack Aff., Exh. 1; Connors Aff. ¶ 17. CIS's primary activities in managing the Varnbergs' portfolio are reflected in 21 quarterly valuation statements mailed to the Varnbergs³ between March 6, 1978 and May 17, 1983.⁴ Those statements on their face make no mention of any of the allegedly fraudulent investments forming the basis of this action. None of the individual statements evaluate the performance of any tax shelter investment.

Gail Varnberg claims that she formed a separate oral agreement with Connors individually on or about November 14, 1977 retaining him as her personal investment advisor and analyst. Gail Varnberg Aff. ¶ 16. She relies at least in part on the existence and contents of an unsigned document entitled, "Gail Varnberg/Suggested Basic Investment Strategy/October 31, 1977" which she alleges was written by Connors and which mentions the selection of investments for the purpose of "sheltering of taxable income." Gail Varnberg Aff., Exh. B. No written agreement retaining Connors as Gail Varnberg's personal advisor existed until April 28, 1979 when the two executed a letter agreement.⁵ Pollack Aff., Exh. 3. Connors denies making any oral agreement with Gail Varnberg prior to April 28, 1979 and the parties dispute the meaning of Connors' written agreement.

Plaintiffs allege that the aforementioned agreements, taken as a whole, created a duty on the part of Connors and CIS to investigate all the investments plaintiffs were making and that because Connors and CIS breached that duty, plaintiffs lost in excess of $1 million.

2. The Investments

It is undisputed that the Varnberg portfolio had a market value of approximately $4,925,683 when CIS was retained in 1977. Gail Varnberg added $960,056 in assets to the portfolio in 1978. Connors and CIS contend, although plaintiffs deny, that from November 1977 until CIS was discharged in June 1983, the Varnbergs' portfolio increased in value by $2,965,166. Connors Aff. ¶ 11. The Varnbergs admit, at paragraph 11 of their response to defendants' Rule 3(g) statement, that between 1978 and 1983 they withdrew $6,071,378 in assets from the portfolio held by CIS for personal use and for certain investment expenditures which are the subject of this action. The investments, described more fully below, can be identified under the following general headings: (1) Jasper Partners; (2) BW Partners; (3) D-M Partners; (4) Annetta Partners; (5) Texas Partners; (6) Marifarms Shrimp; (7) Interex Management; and (8) New Haven Acquirers. The identity, initial date of investment and amounts invested, except for BW Partners' investment in the "Red Shoes" venture, are not controverted. See Def. Rule 3(g) Stmt. ¶ 13; Pl. Rule 3(g) Stmt. ¶ 13.⁶

On November 30, 1977, plaintiffs first invested $200,000 in Jasper Partners '77 which Minnick and Hayes had represented to the Varnbergs to be an oil and gas tax shelter. The Subscription Agreement for Jasper Partners, signed by Gail and Robert Varnberg, asks, "Have you relied or will you rely on an investment advisor with respect to investing in the Partnership?" after which there appears a handwritten "NO". Pollack Aff., Exh. 11 at 11. Plaintiffs deny that the handwriting belongs to either of them and assert that the agreement they signed was blank. Gail Varnberg Aff. ¶ 30; Robert Varnberg Aff. ¶ 17.

Sometime in 1978, Robert Varnberg and Minnick Resources, Inc. formed a general partnership in New York known as BW Partners to identify and invest in a variety of ventures involving theatrical and motion picture productions.⁷ Gail Varnberg provided the necessary funding by making, between June 1978 and September 1980, 48 separate unsecured "loans" to BW Partners totalling $411,766.50. In return for her loans to the partnership, Gail Varnberg received a so-called "note"⁸ from BW Partners payable "upon demand to the order of Gail B. Varnberg," executed on October 31, 1978 by Minnick, general partner of BW, acting for Minnick Resources, Inc., but dated June 7, 1978. Id., Exh. B. The record does not indicate who drafted the note, although the initials "MJO" (apparently designating Martin J. Oppenheimer) appear alongside certain notations in the schedule of borrowings attached to the note. Id. Minnick admitted at his deposition that Gail Varnberg's loans, at least insofar as the money was applied toward Theatre Arts Concepts, Ample Christian Endeavors, Fuel Crisis, Rosa Company and Hot Laps, described infra, were never repaid to her. Pl.Nov.Subm., Exh. E at 72, 76, 79 & 97.

The individual loans to BW Partners by Gail Varnberg listed in the schedule of borrowing can be grouped as follows: (1) $26,000 in March 1978 which BW in turn loaned to an entity called "Rosa Company"⁹ which presented 12 off-Broadway performances of the play "Rosa" in which Minnick's wife starred;¹⁰ (2) approximately $15,000 in December 1978 which BW in turn loaned to an "English company" called "Ample Christian Endeavors" which was assisting farmers in Nigeria;¹¹ (3) $10,000 sometime in 1978 or 1979 for a "musical adaptation of the film, `The Red Shoes'" which Minnick was planning to produce;¹² (4) $40,000 in 1979 which in turn was used by BW Partners and Minnick Resources to make a promotional film for a movie entitled, "Red Right Returning";¹³ (5) $10,000 in 1979 which BW "invested" in a company called Fuel Crisis which was developing a new fuel additive;¹⁴ (6) $50,000 in 1979 which went to an "operation" called Theatre Arts Concepts;¹⁵ (7) $225,000 in and after March 1978 which BW Partners advanced to a company owned by Minnick which was to produce a movie...