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January 8, 1990


The opinion of the court was delivered by: Conboy, District Judge.


This case involves allegations of fraud in the solicitation of investors in a real estate partnership. Plaintiff Todd Ruff charges the defendants, Genesis Holding Corporation ("Genesis"), Leo Blank, and Joseph R. Cordaro,*fn1 with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, Section 20(c) of the Exchange Act, Section 17(a) of the Securities Act of 1933, Sections 1961 and 1962 of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), Section 352-e of New York State's General Business Law, common law fraud, and breach of a continuing duty to disclose. Genesis and Blank have moved to dismiss the Complaint under Fed.R.Civ.P. 12(b)(6), for failure to state a claim, and under Fed. R.Civ.P. 9, for failure to plead fraud with particularity. For the reasons set forth below, the motion is granted in part and denied in part, with leave to replead.

The Complaint alleges that Ruff purchased stock in Genesis pursuant to an offering set forth in a Private Placement Memorandum (the "PPM"), and that the stock is now "worthless." Complaint ¶ 23. The PPM disclosed that Genesis, "through wholly-owned subsidiaries, intends to act as co-general partner of public limited partnerships and as joint venturer or principal in the acquisition of land for residential, commercial and industrial real estate developments and projects." PPM (attached to Notice of Motion as Exhibit B)*fn2 at 4-5. According to the complaint, defendants Genesis and Blank, Genesis' President, set out to defraud Ruff and others into purchasing stock in Genesis by disseminating a purportedly misleading PPM, along with certain "Literature."*fn3 The Complaint also alleges that defendants offered to Ruff and other holders of Genesis stock an opportunity to purchase, with their Genesis stock, an interest in a limited partnership called Rolling River Associates, Ltd. ("Rolling River"), which was formed to acquire and develop property. This opportunity was presented to Ruff and other shareholders in Genesis in a so-called "Redemption Offering."*fn4

To set forth a claim of fraud, allegations must be pleaded with particularity pursuant to Rule 9(b), which requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind may be averred generally." This requirement is applicable to claims under Section 10(b). See Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir. 1986); Ross v. A.H. Robins, 607 F.2d 545, 557 (2d Cir. 1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980). Rule 9(b) is satisfied if the complaint sets forth:

  (1) precisely what statements were made in what
  documents or oral misrepresentations or what
  omissions were made, (2) the time and place of
  each such statement and the person responsible for
  making (or, in the case of not making) the same,
  (3) the context of such statements and the manner
  in which they misled the plaintiffs, and (4) what
  the defendants obtained as a consequence of the

Stevens v. Equidyne Extractive Industries 1980, Petro/Coal Program 1, 694 F. Supp. 1057, 1061 (S.D.N.Y. 1988); Bingham v. Zolt, 683 F. Supp. 965, 973 (S.D.N.Y. 1988); Posner v. Coopers & Lybrand, 92 F.R.D. 765, 769 (S.D.N.Y. 1981), aff'd, 697 F.2d 296 (2d Cir. 1982). These requirements have been applied stringently, particularly where allegations of securities fraud are involved. Tobias v. First City Nat'l Bank and Trust Co., 709 F. Supp. 1266, 1276-77 (S.D.N.Y. 1989) (collecting cases).

With respect to those allegations in the Complaint which involve statements made in or omitted from the PPM and the Redemption Offering, "[r]eference to [an] Offering Memorandum satisfies 9(b)'s requirements as to identification of the time, place, and content of the alleged misrepresentations" and "no specific connection be-tween fraudulent representations in the offering memorandum and particular defendants is necessary where, as here, defendants are insiders or affiliates participating in the offer of the securities in question." Luce v. Edelstein, 802 F.2d at 55. Nevertheless, allegations grounded in the offering memorandum must be based on specific facts allegedly misrepresented in that memorandum. Id. Applying these guidelines, we find that Ruff's allegations, in Paragraph 15 of the Complaint, which refer to the PPM, and in Paragraph 43 of the Complaint, which refer to the Redemption Offering, pass muster under Rule 9(b)'s requirements as to identification of the time, place and content of the alleged misrepresentations, even though some of them could have been more detailed.

With respect to those allegations in the Complaint which refer to misstatements in or omissions from the Literature, it is no mystery who prepared the letter, dated June 24, 1986, captioned "TO ALL BOARD MEMBERS," which is signed by Leo Blank, and which was presented to Ruff along with the PPM. With respect to the "Draft for Broker-Dealer Use Only — Not for Distribution," however, it is not clear who prepared this "circular" and when. Nevertheless, we believe that the defendants are on sufficient notice as to the contents of this document, so that Rule 9(b)'s requirements as to identification of time, place and content are satisfied. See Ross v. A.H. Robins, 607 F.2d at 557 (purpose of Rule 9(b) is to give defendant in a fraud action "fair notice of what the plaintiff's claim is and the grounds upon which it rests").

Despite Ruff's success in meeting Rule 9(b)'s requirements as to time, place and content, the fraud allegations in the Complaint suffer from a fatal defect which requires dismissal under Rule 9(b): Ruff has not pleaded a single fact through which an inference of scienter can be made. This defect also requires dismissal of Ruff's securities fraud claims under Rule 12(b)(6), because, "[t]o state a claim under Section 10(b), a complaint must allege material misstatements or omissions indicating an intent to deceive or defraud in connection with the purchase or sale of a security." Luce v. Edelstein, 802 F.2d at 55 (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)). Although Rule 9(b) provides that intent may be averred generally, fraud allegations must also provide a basis for inferring fraudulent intent. Bingham v. Zolt, 683 F. Supp. 965, 973 (S.D.N.Y. 1988) (citing Ross v. A.H. Robins, 607 F.2d at 548)).

Nothing in the Complaint remotely suggests that the defendants acted intentionally or with reckless disregard. Ruff simply states, in a conclusory manner, that "[u]pon information and belief, defendants knew or should have known the falsity of the aforesaid representations," Complaint ¶ 16, and further, "[u]pon information and belief, defendants made the aforesaid representations with intent that plaintiff rely thereon," Complaint ¶ 17. Putting aside for the moment the general inadequacy of claims made "upon information and belief," Posner v. Coopers & Lybrand, 92 F.R.D. at 769, we find that Ruff's pleading of scienter is wholly insufficient. It alleges no "facts showing a motive for committing fraud and a clear opportunity for doing so," Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987) (citing Goldman v. Belden, 754 F.2d at 1070), cert. denied, 484 U.S. 1005, 108 S.Ct. 698, 98 L.Ed.2d 650 (1988); neither does it "plead scienter by identifying circumstances indicating conscious behavior by the defendant," Beck, 820 F.2d at 50 (citations omitted).

To the contrary, the PPM gives the general impression that defendants, rather than fraudulently inducing potential investors, were warning potential investors of the high risks involved in the venture. The PPM is replete with precautionary language, including such statements, in capital letters, as "[T]HESE SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE SUBSTANTIAL RISKS INCLUDING DILUTION, NEW BUSINESS AND ARBITRARILY DETERMINED OFFERING PRICE," PPM at 1, and "[T]HE INVESTMENT DESCRIBED HEREIN INVOLVES A HIGH DEGREE OF RISK, AND ONLY THOSE PERSONS WHO ARE ABLE TO BEAR THE FINANCIAL RISKS REFERRED TO IN THIS PRIVATE PLACEMENT MEMORANDUM SHOULD CONSIDER PARTICIPATION IN THE SHARES. (SEE `RISK FACTORS.')" PPM at 4. An entire section entitled "High Risk Factors" begins with a warning, in bold face and capital letters, which reads: "THE SHARES BEING OFFERED INVOLVE A HIGH DEGREE OF RISK AND THEREFORE, ARE CONSIDERED EXTREMELY SPECULATIVE. THEY SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD TO LOSE ALL FUNDS INVESTED." PPM at 6. With respect to the financial projections in the PPM, the PPM indicates, as the eleventh high risk factor, that

  the projections included in this private placement
  memorandum are for illustrative purposes only. The
  projections are based on assumptions which are
  deemed reasonable however, such assumptions are
  based upon events over which the Company may not
  have control. There is no assurance that actual
  events will correspond with assumptions.
  Accordingly there can be no assurance that
  projections will be met.

PPM at 9-10.

We doubt that liability can be predicated upon statements that clearly "be-speak caution." Luce v. Edelstein, 802 F.2d at 56 (citations omitted). "Reliance on statements which are directly contradicted by the clear language of the offering memorandum through which plaintiffs purchased their securities cannot be a basis for a federal securities fraud claim." Feinman v. Schulman Berlin & Davis, 677 F. Supp. 168, 170 (S.D.N.Y. 1988). Ruff argues, however, that certain projections and statements, particularly in the Literature, were not preceded by precautionary language. Pltf.Mem. at 23-34. It is possible, though unlikely, that Ruff relied primarily on this Literature, even though the precautionary language of the PPM was reiterated in the Subscription Agreement, attached to the PPM, which required the subscriber to have read the PPM carefully. In addition, contentions with respect to specific facts or promises, which the defendants knew or should have known were false at the time they were made, will withstand a motion to ...

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