The opinion of the court was delivered by: SWEET
Defendants Grand Coal Venture ("Grand Coal"), Bandler & Kass ("Bandler & Kass"), Ground Production Corporation ("Ground Production"), William J. Werner ("Werner"), Jack Mitnick, Robert Sylvor ("Sylvor"), Mineral Resources Development, Inc. ("Mineral") and H. Jean Baker ("Baker") (collectively, "defendants")
have once again moved for summary judgment, this time against all claims in the second amended complaint of plaintiff William Freschi, Jr. ("Freschi"), as trustee of the William Freschi Trust. Alternatively, defendants have moved to stay this action because damages are still uncertain, and to disqualify Freschi's counsel, Bowker, Ellmes, Perkins, Mecsas & Gerrard ("Bowker"), if this action proceeds. Freschi has moved for leave to file a third amended complaint that would add a count based on the Organized Crime Control Act of 1970, 18 U.S.C. §§ 1961-1968 ("RICO"). For the reasons given below, defendants' summary judgment is granted to the extent stated herein, the disqualification motion is denied, the motion for a stay is granted to the extent stated herein, and Freschi's motion is denied. The facts and prior proceedings in this action are set forth in decisions dated February 1, 1983, September 18, 1982, May 26, 1982 and August 7, 1981, and familiarity with those decisions is assumed.
Defendants have moved for summary judgment against Freschi's claim under § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), contending that (1) none of the misrepresentations Freschi has alleged are material, (2) even if they are, Freschi did not rely on them, and (3) even if he did, the statute of limitations bars this claim. Freschi has pointed to numerous misrepresentations by defendants which he alleges to create a fact question on his claim under § 10(b). However, in this motion, Freschi has emphasized five of these misrepresentations. Those five are:
(1) The failure to disclose that Werner had been served with a restraining order by the Securities and Exchange Commission ("the injunction") because of his participation in the offerings by Cal-Am Corporation ("Cal-Am") and the Cambridge Corporation.
(2) The failure to disclose that Joseph R. Laird, Jr. ("Laird") who owned a Cal-Am and was named in the Injunction, was to receive 40% of the advance minimum royalty payments made to Ground Production.
(3) The failure to disclose that Baker, who signed the preliminary geologist's report for Grand Coal as president of Mineral, was not a geologist.
(4) The failure to disclose that Grand Coal's coal leases had been supplied by Baker, who had previously supplied Laird companies with coal leases, and that Baker supplied the leases through Tristar Coal Corp. ("Tristar"), which Freschi contends was affiliated with Laird, and that Laird's coal leases had rarely if ever produced coal.
(5) The failure to disclose that the Grand Coal tax opinion was prepared by a former law partner of Werner.
There is a question of fact as to the materiality of items 1 and 2 above. Both items related to a December 8, 1977 temporary restraining order that, in its first part, enjoined Laird, Cal Am, Cambridge Corp. and their "officers, agents . . . attorneys and those persons in active concert or participation with them who receive actual notice of this order by personal service or otherwise" from violating §§ 5(a) or 5(c) of the Securities Act by offering for sale interests in limited partnerships or investment contracts involving the lease of coal property, unless a registration statement has been filed. The first part exempted offerings that came within § 4(2) of the Securities Act, the private placement exemption. In its second part, the order enjoined the same persons from employing any fraudulent scheme to offer for sale any security referred to in the first part. The Injunction was served on Werner and Bandler & Kass.
In December 1977, Freschi learned of a coal tax shelter called Spruce Productions, Inc. ("Spruce"), the principals of which were Werner, Sylvor and others. After sending his agent to briefly investigate Werner, Freschi delivered $1130,000 to Werner to purchase an interest in Spruce. On December 8, 1977, the Injuction was entered, and Bandler & Kass withdrew Spruce and decided to offer Grand Coal, which was designed as a private placement that would therefore not violate the Injunction. The stockholders of Grand Coal were the same as those of Spruce. On December 15, 1977, according to Freschi's affidavit, Werner told Freschi that the Spruce offering was being withdrawn because it did not comport with requirements of the Internal Revenue Service ("IRS").
According to Freschi's affidavit, which defendants have not disputed, Werner told Freschi that Grand Coal was identical to Spruce except for certain modifications to meet IRS objections. In fact, there were other differences between the offerings, including the facts that Spruce involved a lease to each investor of a specific parcel of property, while Grand Coal involved and undivided interest held by all investors, and the fact that Spruce provided that the offeror would represent the investor in a tax audit, while the Grand Coal offering provided that the investor would bear such litigation costs.
The property for Grand Coal was provided by Tristar. Laird has stated that he had no ownership interest in Tristar. However, Richard Knox, an officer of Tristar, stated at his deposition that Laird caused Tristar to be incorporated, that, as an officer of Tristar, he received his salary from Laird; that the Tristar offices were located at the offices of Cal-Am; and that Laird directed Tristar's operations and Laird personally arranged for substitute leases for Grand Coal.
"The basic test of "materiality" . . . is whether "a reasonable man would attach importance [to the fact misrepresented] in determining his choice of action in the transaction in question." List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir.), cert. denied, 382 U.S. 811, 86 S. Ct. 23, 15 L. Ed. 2d 60 (1965). "Account must be taken of all the surrounding circumstances to determine whether the fact under consideration is of such significance that a reasonable investor would weigh it in his decision whether or not to invest." Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 363 (2d Cir.), cert. denied, 414 U.S. 910, 38 L. Ed. 2d 148, 94 S. Ct. 231, 94 S. Ct. 232 (1973).
Defendants' failure to disclose the existence of the Injunction, the fact that it had been served on Werner and Bandler & Kass and Laird's connection to Grand Coal present issues of materiality. In the papers submitted on this motion, defendants have argued that the Grand Coal offering came within the private placement exemption, which is defined in Securities and Exchange Commission Rule 146, and thus did not come within the terms of the Injunction. However, defendants have offered no proof as to, for example, Rule 146(d)'s requirements concerning the nature or identity of the offerees, or Rule 146(c)'s requirement of an absence of general solicitation or advertising. More importantly, even if the Grand Coal offering came within the private placement exemption, the fact that Werner, an offeror of Grand Coal, Werner's law firm, and Laird, who was closely involved with the offering, had been enjoined, just before Freschi invested in Grand Coal, from selling investment contracts involving coal leases might well be sufficiently material to withstand this motion for summary judgment. In this connection, it is worth noting that item 16(e) to Form S-1 ...