The opinion of the court was delivered by: Robert J. Ward, District Judge.
Defendant, the E.F. Hutton Group, Inc. ("Hutton"), has moved
to dismiss the amended complaints against it in the
above-captioned cases pursuant to Rules 9(b) and 12(b)(6),
Fed.R.Civ.P.*fn1 Plaintiffs in the Eickhorst action have moved
to further amend the complaint to add an additional plaintiff.
For the reasons that follow, the motion to dismiss the amended
complaints is granted in part and denied in part, and the
motion to amend the complaint in the Eickhorst action is
Plaintiffs argue that Hutton formulated a scheme to
distribute high risk securities to its conservative customers.
As part of that overall scheme, they maintain that Hutton
management directed the marketing and sale of the, ACP-1983-3
program as a low risk investment by supplying the account
executives responsible for selling the partnership interests
with material, including a sales memorandum called the "Blue
Top," a brochure, and certain financial projections, which
falsely portrayed ACP-1983-3 as a conservative investment. The
misleading information was then passed along to plaintiffs
through the recommendations of the account executives.
The original complaints in these actions named as defendants
the American Completion and Development Corporation,
ACP-1983-3 (collectively the "American Completion
Defendants"), Howard W. Phillips ("Phillips"), John P. Holmes
("Holmes"), and Hutton. The complaints asserted claims against
defendants under (1) Section 10(b) of the Securities Exchange
Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) and Rule
10b-5 promulgated thereunder by the Securities and Exchange
Commission, 17 C.F.R. § 240.10b-5; (2) Section 17(a) of the
Securities Act of 1933 (the "1933 Act"), 15 U.S.C. § 77q(a);
(3) common law fraud; and (4) the Racketeer Influenced and
Corrupt Organizations Act ("R.I.C.O."), 18 U.S.C. § 1962(a),
(c) and (d).
This Court, in an Opinion filed on February 1, 1989,
dismissed the claims under Section 17(a) of the 1933 Act,
holding that Section 17(a) does not provide a private right of
action.*fn3 The remaining claims were dismissed for failure
to plead fraud with particularity as required by Rule 9(b).
Plaintiffs were granted leave to replead their fraud-based
claims against defendants within the parameters set by Rules
9(b) and 11, Fed.R.Civ.P. Eickhorst I, 706 F. Supp. at 1102.
Subsequently, plaintiffs settled their claims with the
American Completion Defendants and with Phillips. On March 31,
1989, plaintiffs filed amended complaints naming as defendants
only Hutton and Holmes. Prior to the instant motions,
plaintiffs settled their claims against Holmes. The amended
complaints allege two Section 10b claims against Hutton, the
first based upon the sale of unsuitable securities, the second
based upon prospectus fraud.*fn4 Plaintiffs also assert state
law claims against Hutton based upon common law fraud and
breach of fiduciary duty.
In 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
As the Court explained in Eickhorst I, in a motion to dismiss
a complaint for failure to plead fraud with particularity as
required by Rule 9(b), plaintiffs' allegations must be taken as
true. E.g., Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir. 1986).
The court must read the complaint generously, and draw all
inferences in favor of
plaintiffs. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989).
Furthermore, Rule 9(b) must be read in conjunction with Rule
8(a), Fed.R.Civ.P., which requires a plaintiff to plead only a
short, plain statement of the grounds upon which he is entitled
to relief. Ross v. A.H. Robins Co., 607 F.2d 545, 557 n. 20 (2d
Cir. 1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64
L.Ed.2d 802 (1980). The serious nature of a charge of fraud,
however, renders mere conclusory allegations that defendants
acted fraudulently insufficient to satisfy Rule 9(b). Segal v.
Gordon, 467 F.2d 602, 607 (2d Cir. 1972); Center Savings & Loan
Assoc. v. Prudential-Bache Securities, Inc., 679 F. Supp. 274,
276 (S.D.N.Y. 1988).
Rule 9(b) is designed to provide a defendant with fair
notice of a plaintiff's claim in order to enable the defendant
to prepare a defense, to protect his or her reputation or
goodwill from harm flowing from baseless allegations of fraud,
and to reduce the number of strike suits. Cosmas v. Hassett,
supra, 886 F.2d at 11; DiVittorio v. Equidyne Extractive
Industries, Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). In order
to satisfy Rule 9(b) "a complaint must adequately specify the
statements it claims were false or misleading, give particulars
as to the respect in which plaintiff contends the statements
were fraudulent, state when and where the statements were made,
and identify those responsible for the statements." Cosmas v.
Hassett, supra, 886 F.2d at 11. See also Eickhorst I, 706
F. Supp. at 1091.
While Rule 9(b) allows "condition of mind" to be averred
generally, plaintiffs must at least present those
circumstances that provide a minimal factual basis for the
allegations of scienter. E.g., Connecticut National Bank v.
Fluor Corp., 808 F.2d 957, 962 (2d Cir. 1987). In other words,
plaintiffs must "`specifically plead those events' which `give
rise to a strong inference' that defendants had an intent to
defraud, knowledge of the falsity, or a reckless disregard ...