The opinion of the court was delivered by: CARTER
Plaintiffs, Marjorie and Robert Abrahamson, are former limited partners of defendant Fleschner Becker Associates ("FBA"), an investment partnership. In addition to suing the limited partnership, plaintiffs also bring this action against three general partners of FBA and the firm of certified public accountants which audited the books of FBA for the fiscal years 1966, 1967, and 1968. Generally, the plaintiffs allege acts of securities fraud. Specifically, they assert violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and of Rule 10b-5 promulgated thereunder, and of Section 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6. Federal jurisdiction is based upon Section 27 of the 1934 Act, 15 U.S.C. § 78aa, and Section 214 of the Investment Advisers Act, 15 U.S.C. § 80b-14.
Plaintiffs' principal claim is that defendants concealed from them that an enormous percentage of FBA's portfolio consisted of unregistered or restricted securities.
Plaintiffs allege that in 1970 they withdrew from FBA as soon as they learned of FBA's disproportionate investment in unregistered securities, but claim they received far less than they would have received had they been informed of the truth earlier and withdrawn at the end of an earlier fiscal year. It is asserted that the concealment of the true facts concerning FBA's investments resulted in damages to them in excess of $1,000,000.
The following facts are not in dispute. On or about July 1, 1965, plaintiffs became limited partners of FBA (then known as The Fleschner Co.) following several conversations with defendant Malcolm Fleschner in late 1964 and in 1965. In those conversations, plaintiffs expressed their concern for financial security and conservatism in investment; Fleschner, in turn, expressed his intent to create an investment partnership with a conservative investment policy.
FBA was started as a small partnership. By April, 1966, it grew to 35 limited partners, and by October, 1968, it had at least 66 limited partners. Defendant Fleschner, the person responsible for FBA's formation, was at all times a general partner of FBA. Defendant William Becker was a general partner at all times after April, 1966; and defendant Ehrlich was a general partner from October, 1968 to September, 1969. The defendant Harry Goodkin & Co. ("Goodkin") was the aforementioned firm of accountants. Year-end financial statements were certified by Goodkin and mailed to plaintiffs. Balance sheets were contained in the financial statements indicating FBA's investment in securities. The securities were not itemized in the statements for fiscal 1967 and 1968. The figure in the balance sheets showing FBA's securities investment was designated "market value." Goodkin sent drafts of the certified financial statements to the general partners of FBA for their review before it mailed them to the limited partners.
The general partners also mailed monthly reports to FBA's limited partners. Those reports were mostly concise, one-page statements setting forth the percentage increase or decrease in the value of FBA's investments for the year to date and comparing this performance with the Standard & Poor's 500 Stock Average activity within the same period. The report also contained comments characterizing FBA's overall approach to investment opportunities as "low risk" or "conservative."
During the period September, 1967, through September, 1968, FBA increased its investment in unregistered securities from approximately 15% to approximately 72%
of its portfolio. During this time the monthly reports sent to plaintiffs and all other limited partners uniformly described the company's "investment posture" as "most conservative."
Between September, 1968, and September, 1969, FBA's investment in unregistered securities fluctuated from about 72% to 88% of its portfolio. The monthly reports made no mention of the unregistered securities. In either December, 1969, or January, 1970, plaintiffs received the year-end financial statements for September, 1969, prepared by a new accounting firm, and a footnote to the statements revealed that approximately 77% of FBA's total investment in securities consisted of unregistered securities. Allegedly learning of this fact for the first time, plaintiffs withdrew at the earliest possible time after receiving the 1969 statements, that is, September, 1970.
It is undisputed that the following figures represent the capital contributions, interim withdrawals and final distributive shares of the plaintiffs:
Date Capital Contributions Withdrawals
July 1, 1965 $150,000.00
Sept. 30, 1967 $ 8,000.00
Sept. 30, 1968 32,500.00
Sept. 30, 1969 70,000.00
Sept. 30, 1970 45,500.00
Distributive share on
withdrawal from the
TOTALS $150,000.00 $306 .097.00
Net Profit $156,097.00
Date Capital Contributions Withdrawals
July 1, 1965 $180,000.00
Oct. 1, 1966 2,652.22
Sept. 30, 1967 $57,015.70
Oct. 1, 1967 266,847.13
Sept. 30, 1968 58,000.00
Sept. 30, 1969 52,500.00
Sept. 30, 1970 73,500.00
Distributive share on
withdrawal from the
TOTALS $449,499.35 $582,580.70
Net Profit $133,081.35
Plaintiffs' claim of damages in excess of $1,000,000 results from comparing what they actually received when they withdrew from FBA, and the amount they would have received if they had withdrawn as of the end of September, 1968. They assert that they would have withdrawn earlier but for defendants' failure to divulge the existence and extent of FBA's investment in unregistered securities and the omission of this information in the year-end and monthly reports mailed to them. They claim reliance on the statements, reports, and personal representations of Fleschner in retaining their investment in FBA until 1970.
All defendants have moved for summary judgment pursuant to Rule 56, F.R. Civ. P., and all defendants have joined in the following contentions: 1) that plaintiffs have suffered no damages; 2) that the FBA agreement of limited partnership signed by plaintiffs authorized the purchase of securities of every kind; 3) that plaintiffs were entitled to inspect FBA's books and records and, therefore, are chargeable with constructive knowledge of the existence of FBA's investment in unregistered securities; and 4) that defendants were not "investment advisers" within the meaning of the Investment Advisers Act of 1940. Additionally, defendant Goodkin claims that there were no material nondisclosures in connection with the purchase or sale of a security within the meaning of Rule 10b-5, and that Goodkin did not act in concert with the other defendants. Defendant Ehrlich contends that if any wrongdoing occurred, it did not take place while he was a general partner of FBA.
Plaintiffs have also moved for summary judgment. They assert: 1) that their withdrawal from FBA constituted a "sale" of a "security"; 2) that the alleged nondisclosure occurred "in connection with" the purchase or sale of a security; 3) that the defendants' nondisclosure of FBA's investment in unregistered securities was a concealment of a material fact; and 4) that "causation" is presumed from the alleged materiality of the nondisclosure.
Defendants' motions for summary judgment must be granted. While summary judgment is not generally favored in this Circuit, and is sparingly granted in complicated securities cases, see, e.g., Schoenbaum v. Firstbrook, 405 F.2d 215 (2d Cir. 1968) (en banc), cert. denied, Manley v. Schoenbaum, 395 U.S. 906, 89 S. Ct. 1747, 23 L. Ed. 2d 219 (1969), this case presents a situation where summary judgment is appropriate. "The motion will be granted when it raises at least one legally sufficient defense that would bar a plaintiff's claim and involves no triable issue of fact." Wright & Miller, Federal Practice and Procedure, Civil § 2734, at 647-48 (3d Ed. 1973). ...