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November 3, 1977

DAVID and DOROTHY STEINBERG, on behalf of themselves and all others similarly situated, Plaintiffs,

The opinion of the court was delivered by: WEINFELD


 C. I. Realty Investors ("CIRI" or the "Trust") is a real estate investment trust organized under Massachusetts law for the purpose of investing as an equity owner and as a long term mortgage lender with equity participations in income producing properties such as apartment buildings, shopping centers, office buildings, industrial parks, warehouses and hotels. CIRI made its only public offering on April 13, 1972 pursuant to a prospectus and registration statement which became effective that day and continued for a ninety-day period. In all, 2,600,000 units were sold (each unit consisting of one share of beneficial interest and one warrant to purchase one share for $25) at a price of $25 per unit. Upon the public sale of the securities, CIRI realized approximately $65,000,000, which was available and used for its investment purposes.

 Plaintiffs, representing a class defined as all purchasers of CIRI securities between April 13, 1972 and July 12, 1972 (the ninety-day effective period), allege, as set forth hereafter, that the prospectus contained certain untrue statements of material fact and omitted to state others, in violation of section 10(b) of the Securities Exchange Act of 1934 *fn1" and Rule 10b-5 *fn2" promulgated thereunder, and that plaintiffs were damaged thereby. Among other things, the amended complaint alleges a conspiracy among all the defendants with respect to the claimed omissions and misrepresentations in the prospectus.

 In addition to CIRI, the corporate defendants include: (a) the CIRI related entities, City Investing Corporation ("City"), which allegedly controlled CIRI and indirectly wholly owned co-defendant C. I. Planning Corporation ("Planning"), CIRI's investment advisor pursuant to written agreement, and (b) the underwriter's representatives, duPont Glore Forgan, Incorporated ("duPont"), and Reynolds Securities, Inc. Individual defendants are the officers and trustees of CIRI, some of whom were also officers or directors of City or Planning, and others referred to as the "outside" trustees, who had no other relationship to CIRI or its related companies or affiliates.

 The matter is now before the Court on a motion by the outside trustees, William Polk Carey, William S. Renchard, Fred R. Sullivan and James S. Webb, for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure on the ground that there is no genuine issue as to a material fact relating to their intent to deceive plaintiffs and therefore as a matter of law plaintiffs' cause of action is insufficient. The motion is made after plaintiffs have had extensive discovery by way of oral depositions, voluminous interrogatories and document discovery: more than sixty witnesses have been deposed, thousands of pages of testimony have been transcribed, and many thousands of documents have been produced for inspection.

 At the time of the CIRI offering, Carey was employed by defendant duPont as its Director of Corporate Finance. He served on CIRI's Board of Trustees in part as duPont's representative and was coordinator of the offering on behalf of duPont, which participated in analyzing CIRI and in verifying the statements made in the prospectus. He also participated in negotiating CIRI's advisory agreement with Planning. Renchard's only contact with the Trust was as trustee; he was, at the time of the offering, Chairman of Chemical Bank's board and a director of several public companies. Sullivan, also only a trustee, was and is Chairman of the Board and President of Walter Kidde & Co., and also served as a director of several public companies. Webb was similarly a director of a number of companies as well as being Vice President-Finance, a director and member of the executive committee of F. W. Woolworth Co., in addition to his CIRI trusteeship. Each of the outside trustees affirms that prior to accepting the offer to become a CIRI trustee, he satisfied himself as to those persons and entities connected with CIRI (e.g., management, counsel, accountants, etc.), and that the personnel appeared competent and in no way prompted suspicion or gave reason to believe that any of their duties would not be discharged as required by law.

 The prime focus of attention is a meeting held on April 3, 1972, at which the outside trustees were formally elected and during which they and the other trustees, among other things, discussed and approved a draft prospectus which, with minor changes, became the effective prospectus about which plaintiffs' claims center. The lengthy prospectus in its opening pages contains a warning that the securities were subject to a number of "risk factors" described in a section by that name; attention is also directed to possible conflicts of interest among CIRI, Planning and City. Other sections describe "benefits to founders," CIRI's general investment policies, the management and transactions with related parties, the agreement between CIRI and its advisor, Planning, and a summary of the Declaration of Trust. One other section describes the Trust's proposed initial investments and includes audited financial statements concerning the properties in which CIRI proposed to invest.

 Plaintiffs contend, however, that the outside trustees did not legitimately perform their duties relative to the prospectus and other matters at the April 3, 1972 meeting, the only one attended by them prior to the Trust's public offering. Thus, in resisting this motion for summary judgment, plaintiffs urge that issues of fact exist as to whether the outside trustees' membership on the Board of Trustees was a sham and whether that fact was disclosed in the prospectus; whether they, as members of the board, considered or adequately considered the initial investments referred to in the prospectus; whether the risk of leveraging was adequately disclosed; whether the outside trustees made any reasonable effort to investigate the Trust's initial equity investments or their manager, Multicon Properties, Inc.; whether defendant Carey had actual knowledge that an inadequate investigation had been made; and whether defendants adequately disclosed the risks inherent in holding Government National Mortgage Association ("GNMA") securities. *fn3"

 The basic material facts are not in dispute. The April 3, 1972 meeting was admittedly not a long one -- it lasted several hours -- and an agenda of thirty-one items -- including the prospectus and all its contents -- was covered in that time. While some of these items (e.g., changing the Trust's name, approval of the form of corporate seal) are without much import, others (e.g., approval of the Planning/CIRI advisory agreement, approval of the SEC registration statement, approval of the initial investments and their description in the prospectus) are of considerably more substance. From the duration of the meeting, plaintiffs conclude that no meaningful discussions by the trustees could have taken place within that time, infer that the Board of Trustees was a "sham" and a "rubber stamp for management," and accordingly claim a Rule 10b-5 violation because this was not disclosed in the prospectus. The moving defendants argue that the duration of the meeting is irrelevant; that questions were asked by the trustees concerning those matters contained in the draft prospectus (a copy of which each trustee had received prior to the meeting) which in their judgment warranted questions. For purposes of this motion only these outside trustees do not dispute plaintiffs' claim that the CIRI prospectus contained material misrepresentations and omissions, but swear that at no time prior to the dissemination of the prospectus or during the ninety-day period when it was effective did they have any knowledge of any of the alleged misrepresentations or omissions nor were they apprised of any facts which should have put them on notice with respect thereto. They argue that they properly and in good faith relied upon CIRI's management and counsel, Davis Polk and Wardwell, for the preparation, accuracy and completeness of the prospectus and upon the certified public accountants, Peat, Marwick, Mitchell & Co., Haskins and Sells, Lybrand, Ross Bros. & Montgomery and Ernst & Ernst, for the accuracy and completeness of the financial statements included therein, and that there is no evidence, direct or circumstantial, of intentional wrongdoing by the moving defendants. Moreover, these defendants argue that there is neither evidence of knowledge by them of any wrongdoing by other defendants nor, given their justifiable reliance upon CIRI's management and supporting entities, did they have any reason to suspect same; nor was any conduct of the other defendants of such a flagrant nature as to raise suspicion where there otherwise was none.

 The Court is, of course, well aware that a defendant's categorical denials of wrongdoing do not mandate a grant of summary judgment. *fn4" Also, it is recognized that conspiracies are rarely established by direct proof; usually they are spelled out by independent circumstantial evidence and the reasonable inferences to be drawn therefrom. *fn5" Moreover, although no inference of state of mind may be drawn from the mere fact of a false statement -- which for purposes of this motion is not disputed -- one may not deliberately close his eyes to facts he had a duty to see. *fn6" Any inference, however, to be drawn by a fact-finder must be based on common experience and be logical or reasonable. *fn7"

 Plaintiffs make no claim of direct evidence against the outside trustees of wrongful conduct. Indeed they have argued that these trustees were "duped" by the other trustees. *fn8" However, to establish the requisite scienter element *fn9" of their 10b-5 claim against the moving defendants, plaintiffs rely upon the duration of the April 3, 1972 meeting and the number of matters of substance passed upon at that meeting by the trustees in general and the moving defendants in particular. From these facts plaintiffs urge that an inference may be drawn that the outside trustees acted in a reckless manner and consequently with intent to deceive, which plaintiffs contend presents a fact issue foreclosing the granting of the instant motion. Thus plaintiffs press hard upon the fact that one of the thirty-one items considered and passed upon by the trustees was thirty-two separate investments involving millions of dollars and argue that it was not possible to adequately evaluate those initial investments at a two-hour meeting which required consideration of other matters of importance. As stated by plaintiffs' counsel: "The only conclusion that one can reach is that no careful consideration was given these investments by the trustees . . . . It may be permissible for an outside trustee to rely on a detailed, reasonable presentation, but that simply could not have happened in the time alotted [sic] to the organizational meeting." In sum, the argument proceeds that such reckless or indifferent conduct permits the inference of scienter -- intent to deceive, manipulate or defraud.

 In Ernst & Ernst v. Hochfelder,10 the Supreme Court made clear that negligence -- even "inexcusable negligence" -- is insufficient to satisfy the scienter element of a Rule 10b-5 claim. *fn11" The Court, however, expressly left open the question of whether, "in some circumstances, reckless behavior is sufficient for civil liability under § 10(b) and Rule 10b-5." *fn12" Prior to Hochfelder, our Court of Appeals had long held that recklessness was sufficient to establish scienter; *fn13" absent any contrary directive post- Hochfelder, that standard is still binding on this Court. *fn14" Moreover, the Court notes the virtual unanimity of the cases considering the question since Hochfelder, that reckless conduct meets the scienter standard in a Rule 10b-5 claim. *fn15" Thus, if the facts herein can reasonably be said to support an inference of recklessness, the motion would have to be denied.

 Exactly what conduct is covered by the term "recklessness" does not lend itself to ready or easy definition. *fn16" It has been suggested that in light of Hochfelder, "the definition of 'reckless behavior' should not be a liberal one lest any discerning distinction between 'scienter' and 'negligence' be obliterated for these purposes." *fn17" Were this a close question, the issue of whether Hochfelder requires a more stringent standard of what constitutes recklessness than that heretofore applied in this Circuit might have to be determined. Under the facts of this case, however, whatever the proper standard, recklessness cannot reasonably be inferred with respect to at least three of these moving defendants.

 Under facts somewhat similar to these, the Second Circuit in Lanza v. Drexel & Co.,18 held that proof of a wilful or reckless disregard for the truth is necessary to establish ...

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