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BRESSON v. THOMSON MCKINNON SECS.

July 23, 1986

JEROME BRESSON and FRANKLIN M. BROWN, on behalf of themselves and all others similarly situated, Plaintiffs,
v.
THOMSON McKINNON SECURITIES, INC., Defendant



The opinion of the court was delivered by: GOETTEL

GOETTEL, D.J.:

This is one of at least six class action suits now pending in the federal district courts against brokerage firms that sold limited partnership interests in the oil and gas income funds of the Petro-Lewis Corporation ("Petro-Lewis").

From 1970 to 1983, Petro-Lewis was the nation's largest seller of oil and gas income funds. Petro-Lewis acquired oil and gas properties, which it packaged and sold as limited partnerships. It managed the partnerships as general partner. In toto, Petro-Lewis sold in excess of $3 billion of partnership interests.

 When the value of the Petro-Lewis partnerships began to weaken, a series of class action suits were instituted against Petro-Lewis, two of its subsidiaries, and seven of its directors. The various plaintiffs raised numerous claims under the securities laws. In particular, they alleged that Petro-Lewis had issued false and misleading prospectuses, shareholder and investor reports, press releases, and other documents. See In re Petro-Lewis Securities Litigation, [1984-85 Transfer Binder]Fed. Sec. L. Rep. (CCH) P 91,899 (D. Colo. 1984). These class actions were settled for more than $100 million. Shortly after the settlement, several actions were commenced against brokerage firms that sold Petro-Lewis partnerships. Plaintiff Jerome Bresson ("Bresson") brought this putative class action against Thomson McKinnon Securities, Inc. ("Thomson McKinnon") on February 13, 1985.

 Thomson McKinnon is a New York corporation that acts as an underwriter, participating distributor, dealer, and broker of, inter alia, corporate securities. It conducts its sales activities through thousands of account executives and branch offices across the United States. Thomson McKinnon marketed Petro-Lewis partnership interests under selling agreements with Petro-Lewis's Securities Corporation subsidiary. It received commissions of up to seven percent on the sale of each limited partnership interest.

 Bresson, a Pennsylvania citizen, purchased a $50,000 limited partnership interest in Petro-Lewis's "Deferred Income Program" from Thomson McKinnon on June 24, 1981. In his complaint, Bresson alleged violations of sections 11 and 12(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k & 771 (2), and section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10 (1985) (collectively "section 10"), as well as pendent state claims for fraud, negligence, and breach of fiduciary duty. After the defendant moved to dismiss the complaint, but before the motion could be heard, an amended complaint was filed adding an additional named plaintiff, Franklin M. Brown ("Brown") and an additional claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-68 (1982). Brown, a California citizen, purchased limited partnerships from Thomson McKinnon on June 18, 1979, June 26, 1980, and January 13, 1983. He also purchased a $50,000 interest in the Deferred Income Program.

 The defendant has now renewed its original motions to dismiss, and both parties have agreed to treat those motions as addressed to the amended complaint. The defendant has also filed a supplemental motion to dismiss. The Court has before it the following panoply of motions: (1) motions to dismiss the plaintiffs' section 11 and 12(2) claims for failure to state a claim on which relief can be granted; (2) motions to dismiss the plaintiffs' section 11 and 12(2) claims as time-barred; (3) a motion to dismiss the section 10, common law fraud, and RICO claims for failure to plead fraud with the particularity that Fed. R. Civ. P. 9(b) demands; (4) a motion to dismiss plaintiff Bresson's section 10 claim as time-barred; (5) a motion to dismiss the plaintiffs' claim for negligent misrepresentation; and (6) a motion to dismiss the state claims for lack of subject matter jurisdiction.

 For the reasons stated below, the motions are granted in part and denied in part.

 I. Discussion

 A. The Section 11 and Section 12(2) Claims

 
1. Motions to Dismiss for Failure to State a Claim Upon Which Relief Can Be Granted

 Section 12(2) provides a private civil cause of action against persons who sell or offer to sell securities on the basis of a misleading prospectus or oral communication. *fn1" The "plaintiffs can sue not only their immediate sellers under section 12(2) but also those who substantially participated in the transaction." Klein v. Computer Devices, Inc., 602 F. Supp. 837, 840 (S.D.N.Y. 1985). Section 11 creates a private civil cause of action in favor of a person who acquires a security pursuant to a misleading registration statement. *fn2" The plaintiffs assert their section 11 claims against Thomson McKinnon both as an underwriter, see 15 U.S.C. § 77k(a)(5) (1982), and as an aider and abettor. The defendant moves, pursuant to Fed. R. Civ. P. 12(b)(6), to dismiss each of the claims under sections 11 and 12(2) for failure to state a claim on which relief can be granted.

 The motion to dismiss the claim for aiding and abetting a section 11 violation is granted. Although it may once have been the law in this district that a plaintiff could state a claim for aiding and abetting a section 11 violation, see In re Caesars Palace Securities Litigation, 360 F. Supp. 366 (S.D.N.Y. 1973), the clear trend and the weight of recent authority in the district courts is to the contrary. See In re Flight Transportation Corp. Securities Litigation, 593 F. Supp. 612, 616 (D. Minn. 1984); Hagert v. Glickman, Lurie, Eiger & Co., 520 F. Supp. 1028, 1034 (D. Minn. 1981); McFarland v. Memorex Corp., 493 F. Supp. 631, 642 (N.D. Cal. 1980); In re Equity Funding Corp. of America Securities Litigation, 416 F. Supp. 161, 181 (C.D. Cal. 1976). We find these opinions well reasoned and adopt their holding as our own.

 The amended complaint also fails to allege several crucial elements of a primary violation of sections 11 or 12(2). The complaint does not specify the particular registration statements that underlay the plaintiffs' purchases. Without such an allegation, a section 11 claim cannot survive a motion to dismiss. Klein v. Computer Devices, Inc., 591 F. Supp. 270, 273 (S.D.N.Y. 1984), modified on other grounds, 602 F. Supp. 837 (S.D.N.Y. 1985); Lorber v. Beebe, 407 F. Supp. 279, 285-86 (S.D.N.Y. 1976). Absent some specification of the particular defective registration statements that formed the basis for the plaintiffs' purchases, the section 12(2) claims must be dismissed as well. Klein, supra, 591 F. Supp. at 277-78. The absence of an offer to tender the securities also dooms this claim. Anisfeld v. Cantor Fitzgerald & Co., 631 F. Supp. 1461, 1464 (S.D.N.Y. 1986). Since the defects in the primary section 11 and 12(2) claims can be corrected by repleading, we proceed to consider the defendant's motion to dismiss those claims as time-barred.

 
2. Motions to Dismiss the Section 11 and Section 12(2) Claims as Time-Barred

 Section 13 of the Securities Exchange Act of 1934, 15 U.S.C. § 77m (1982), supplies the applicable statute of limitations for section 11 and for section 12(2). Section 13 bars actions

 
unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence .... In no event shall any such action be brought to enforce a liability created under section [11] of this title more than three years after the security was bona fide offered to the public ..., or under section [12(2)] ... more than three years after the sale.

 15 U.S.C. § 77m (1982). This statute of limitations is two-pronged, requiring that the claim be brought within three years of the sale or registration and within one year of the actual or constructive discovery of the omission or misrepresentation. Homburger v. Venture Minerals, Inc., [1982 Transfer Binder]Fed. Sec. L. Rep. (CCH) P 98,858, at 94,425-26 (S.D.N.Y. Nov. 3, 1982). Compliance with section 13 is an essential substantive ingredient of a private cause of action under section 11 or section 12(2). Brick v. Dominion Mortgage & Realty Trust, 442 F. Supp. 283, 291 (W.D.N.Y. 1977). Consequently, the "[p]laintiffs must affirmatively plead sufficient facts to demonstrate that the requirements of section 13 have been satisfied; otherwise their claims are subject to dismissal." Id. at 289-90.

 Nowhere in the complaint have the plaintiffs affirmatively pleaded their compliance with section 13. They have not alleged compliance with either the three-year or one-year requirements. Nor have they alleged when they discovered the fraud, how they diligently sought discovery, and why the discovery was not made earlier. Both infirmities provide sufficient grounds for dismissing the section 11 and 12(2) claims with leave to replead. Homburger v. Venture Minerals, Inc., supra, [1982 Transfer Binder]Fed. Sec. L. Rep. (CCH) at 94,427-28. Since, again, repleading is a simple matter, we proceed to consider whether the section 11 and 12(2) claims, viewed in a light most favorable to the plaintiffs, see Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957), are barred by the applicable statute of limitations.

 a) The Three-Year Time Period

 The three-year time limit in section 13 is an absolute outer limit. Brick v. Dominion Mortage, supra, 442 F. Supp. at 289-90 (section 11); Homburger, supra, [1982 Transfer Binder]Fed. Sec. L. Rep. (CCH) at 94,426 (section 12(2)). Only plaintiff Brown's January 1983, purchase, and the corresponding registration statement, were within the three year period. Brown's three other investments and Bresson's June 1981 purchase all occurred at least three years before the complaint was filed on February 13, 1985. *fn3" The corresponding registration statements were, of course, issued outside of the three year window.

 The plaintiffs, nevertheless, maintain that the three year limit does not bar their claims based upon the pre-1982 purchases. They first assert that post-1982 purchases of Petro-Lewis partnerships by certain unidentified class members save the named plaintiffs' claims. This argument is patently ludicrous. The Court cannot now consider the claims of unidentified members of a class not yet certified. The claims of the named plaintiffs must stand or fall on their own. Cf. 3B J. Moore & J. Kennedy, Moore's Federal Practice P 23.90, at 23-557 (1985) ("if the statute of limitations has run on a claim prior to the commencement of suit, it is not revived by the class action").

 The plaintiffs also contend that the partnerships sold before 1982 were part of an "integrated offering," and that the three year limitations period commenced to run upon the conclusion of that offering in 1984. The integrated offering doctrine does not, in our view, bear on section 13.

 The Securities Exchange Commission ("SEC") developed the concept of an "integrated offering" to aid the determination of whether a sale of securities is part of a private offering exempted by section 4(2) of the Securities Act of 1933, 15 U.S.C. § 77(d)(2) (1982), from the registration requirements of that Act. See 17 C.F.R. § 230.447 (1985). The courts have often applied the doctrine in that context to gauge the size and scope of an offering. That determination, in turn, guides the calculation of the number of persons or entities deemed to have been offered a particular security. See, e.g., SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980); Doran v. Petroleum Management Corp., 545 F.2d 893 (5th Cir. 1977); Livens v. William D. Witter, Inc., 374 F. Supp. 1104 (D. Mass. 1974).

 Two courts have applied a somewhat altered version of the SEC's "integrated offering" concept to toll the applicable statute of limitations in a section 10 action. Goodman v. Epstein, 582 F.2d 388, 409-414 (7th Cir. 1978), cert. denied, 440 U.S. 939, 59 L. Ed. 2d 499, 99 S. Ct. 1289 (1979); Hill v. Der, 521 F. Supp. 1370, 1386 (D. Del. 1981). A third decision applying the doctrine in a section 10 action, Kennedy v. Tallant, [1976-77 Transfer Binder]Fed. Sec. L. Rep. (CCH) P 95,779 at 90,823-24 (D. Ga. 1976), was affirmed on other grounds, Kennedy v. Tallant, 710 F.2d 711, 716-17 (11th Cir. 1983), with the Court of Appeals expressly declining to consider the doctrine.

 Although one district judge has held implicitly that the "integrated offering" doctrine applies to claims under section 12(2), Currie v. Cayman Resources Corp., 595 F. Supp. 1364, 1378 (N.D. Ga. 1984), that ipse dixit is directly contrary to Judge Haight's explicit and persuasive finding that the doctrine does not impact upon section 13. Homburger, supra, [1982 Transfer Binder]Fed. Sec. L. Rep. (CCH) at 94,426 & n.3. See also Hayden v. McDonald, 742 F.2d ...


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