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DANNENBERG v. DORISON

March 11, 1985

RICHARD B. DANNENBERG, individually: and on behalf of others similarly situated, Plaintiff, against MILTON B. DORISON, RICHARD M. FIRESTONE, MALE, BLOOM, BODNE, KUPERSTEIN & EISENBERG, a professional Association, MALE BODNE, KUPERSTEIN & EISENBERG, a Professional Association, LANCE E. EISENBERG, STANLEY H. KUPERSTEIN MICHAEL H. MALE, MICHAEL D. BODNE, STEVEN W. SIMON, MAJOR MANAGEMENT CORPORATION, ALBERT H. WAHL, AMITY FINANCIAL, a Connecticut limited partnership, AMITY FINANCIAL CORP., DRAKE FINANCIAL, INC., COLUMBO TRUST, N.V., COLUMBUS TRUST COMPANY, LTD., LEISURE TRANSPORTATION INC., ALPHANUMERIC INCORPORATED, MICHAEL SHORE, MITCHELL GOLDSTONE, JEFFREY COHAN, Defendants.


The opinion of the court was delivered by: SPRIZZO

OPINION AND ORDER

SPRIZZO, D.J.:

 Plaintiff, Richard B. Dannenberg, sues to recover damages allegedly sustained as a result of his investment in a fraudulent limited partnership tax shelter, Aquarius Associates ("Aquarius").

 The defendants *fn1" have filed motions to dismiss the amended complaint. *fn2" Plaintiff has moved for certification that the action proceed as a class action pursuant to Fed. R. Civ. P. 23. The Court heard oral argument on the motions on January 25, 1985.

 I. FACTS

 According to the amended complaint, limited partnership interests in Aquarius were sold pursuant to a private placement offering memorandum dated March 21, 1979, and supplemented May 8 and 18, 1979 ("the Offering Memorandum"). See Amended Complaint [P] 5. The Offering Memorandum was prepared by MBBK&E, along with a tax opinion with respect to the offering. Id. at [P] [P] 48, 52. On May 31, 1979, allegedly in reliance on the Offering Memorandum, plaintiff purchased a one-half "unit" of Aquarius for $50,000 -- $12,500 paid by check and $37,5000 paid by way of a recourse note to the order of Drake. Id. at [P] 36. Plaintiff also paid a $500 legal fee to MBBK&E. Id.

 Plaintiff alleges that the Offering Memorandum was false and misleading because it failed to disclose, inter alia, the identities of the "principals and promoters" of Aquarius and how they would profit from Aquarius, and because it represented that Aquarius would engage in coal mining operations when in fact Aquarius was never intended to actually engage in coal mining or any other business, had no legitimate business purpose, and therefore did not qualify for the tax advantages presented to investors. E.g., id. at [P] 38. He further alleges that his interest in Aquarius is worthless. Id. at [P] 60.

 Plaintiff sues for damages pursuant to section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5, 17 C.F.R. § 240.10b-5, section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), common law fraud, and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968.

 II. DISCUSSION

 A. Motions to Dismiss

 1. Claims pursuant to sections 10(b) and 17(a), and common law fraud

 Defendants Leisure, Alphanumeric, Shore, Goldstone, Cohan, Drake, and Wahl move to dismiss the fraud claims for failure to plead fraud with the requisite particularity as required by Fed. R. Civ. P. 9(b). These same defendants, along with the attorney defendants MBBK&E, MBK&E, Eisenberg, Kuperstein, Male, Bodne, and Simon, also move to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) for failure to plead scienter. *fn3"

 To satisfy Rule 9(b) plaintiff must plead facts from which the Court may reasonably infer fraud as to each defendant. See, e.g., Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 115 (2d Cir. 1982), citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 192, 47 L. Ed. 2d 668, 96 S. Ct. 1375 n.7 (1976); Crystal v. Foy, 562 F. Supp. 422, 424-25 (S.D.N.Y. 1983). Tested by these principles the amended complaint is clearly insufficient with respect to the outsider defendants Drake, Wahl, and the attorney defendants.

 While plaintiff alleges that Dorison and Firestone, the alleged insiders, promoted about fifty fraudulent tax shelters, no facts are pleaded from which the Court may infer that the outsider defendants knew or deliberately avoided knowing that Aquarius or any of these other tax shelters were fraudulent. Merely multiplying the number of transactions in which a defendant allegedly participated, either by preparing a tax opinion or providing financing or underwriting services, without pleading facts that would permit an inference of knowledge that any one of these other transactions was fraudulent, does not satisfy the requirement of Rule 9(b). See, e.g., Decker, ...


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