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FRIEDMAN v. ARIZONA WORLD NURSERIES LTD.

January 24, 1990

SHELDON FRIEDMAN, ET AL., PLAINTIFFS,
v.
ARIZONA WORLD NURSERIES LIMITED PARTNERSHIP, ET AL., DEFENDANTS. ROGER L. FROST, ET AL., PLAINTIFFS, V. ARIZONA WORLD NURSERIES LIMITED PARTNERSHIP, ET AL., DEFENDANTS. F.N. LACORTE, ET AL., PLAINTIFFS, V. ARIZONA WORLD NURSERIES LIMITED PARTNERSHIP, ET AL., DEFENDANTS. K.G. MILLS, ET AL., PLAINTIFFS, V. ARIZONA WORLD NURSERIES LIMITED PARTNERSHIP, ET AL., DEFENDANTS. JOHN CASEY CLARK, PLAINTIFFS, V. ARIZONA WORLD NURSERIES LIMITED PARTNERSHIP, ET AL., DEFENDANTS.



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

        OPINION AND ORDER

I. BACKGROUND

Plaintiffs, seventy in all, have brought this action against the twenty-nine named defendants, claiming that their investment in defendant Arizona World Nurseries Limited Partnership ("AWNLP") was induced by the assertedly misleading Private Placement Memorandum (the "Memorandum" or "Offering Memorandum"), appended to which were the allegedly misleading Tax Opinion Letter and Financial Projections and Compilation Reports (the "Financial Projections"), which documents were prepared by some or all of the defendants. Plaintiffs have alleged violations of the Federal Securities laws, including Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5, Sections 12(2) and 17(a) of the Securities Act of 1933 ("Securities Act"), the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and claims of common law fraud, negligence, and breach of fiduciary responsibility, and seek injunctive as well as declaratory relief in addition to the imposition of a constructive trust.

All of the defendants have moved to dismiss the Consolidated Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.

A.  PROCEDURAL HISTORY

The procedural history of this litigation is long and complex. The action entitled Friedman, et al. v. Arizona World Nurseries Limited Partnership, et al., 86 Civ. 9834(EW) was commenced on or about December 24, 1986 on behalf of 24 plaintiffs. In lieu of responding to various motions to dismiss, plaintiffs in Friedman filed an amended complaint on or about May 24, 1987, adding new plaintiffs and defendants as well as its equitable claims for relief. Various defendants renewed their motions to dismiss. At oral argument before the late Honorable Edward Weinfeld, to whom this matter was assigned prior to his death, plaintiffs' application for leave to file another amended complaint was granted. A Second Amended Complaint, on behalf of fifty-five plaintiffs, was served on or about October 1, 1987, adding another defendant and furnishing additional detail regarding the plaintiffs' claims.

In addition to these actions, four other actions were filed with complaints substantially similar to the Consolidated Complaint herein, with the exception of the naming of additional plaintiffs. Frost, et al. v. Arizona World Nurseries Limited Partnership, et al., 88 Civ. 2212(KC), LaCorte, et al. v. Arizona World Nurseries Limited Partnership, et al., 88 Civ. 6306(KC), Mills, et al. v. Arizona World Nurseries Limited Partnership, et al., 88 Civ. 8795(KC), and Clark v. Arizona World Nurseries Limited Partnership, et al., 89 Civ. 5194(KC). The parties in each of these actions have stipulated that our decision with respect to the Friedman Consolidated Complaint shall be binding upon them.

B.  THE ALLEGATIONS

The voluminous Consolidated Complaint, which we will hereafter refer to simply as the complaint, comprises 93 pages and 171 paragraphs and incorporates by reference the Memorandum and the exhibits that were attached to it, including the tax opinion letter and the financial projections. We will attempt to briefly summarize the allegations, which, for the purposes of the pending Rule 12(b)(6) motions,*fn1 we must accept as true and which must be construed in the light most favorable to the plaintiffs. Airlines Reporting Corp. v. Aero Voyagers, Inc., 721 F. Supp. 579, 581 (S.D.N.Y. 1989); see Scheur v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Dacey v. New York County Lawyers' Assoc., 423 F.2d 188, 191 (2d Cir. 1969), cert. denied, 398 U.S. 929, 90 S.Ct. 1819, 26 L.Ed.2d 92 (1970).

Plaintiffs are individuals who have invested various sums totalling $3,552,500 in defendant Arizona World Nurseries Limited Partnership ("AWNLP"). ¶¶ 3-4.*fn2 We will sometimes refer to the plaintiffs as the limited partners.

The complaint alleges that all twenty-nine defendants participated in a "scheme to defraud" and attempts to categorize the defendants into several groups. First, there are the so-called "Western defendants" which are a number of individuals and entities who were the former owners and/or managers of the nursery business. The plaintiffs allege the "Western defendants" include the following: Beardsley Holdings, Inc., Western United Nurseries, Inc., Sonora Nursery Sales, Inc., Fountainhead Nurseries Inc., Diversified Agronomics, Ltd., Phoenix Sunbelt Nurseries, Ltd., Great western Nurseries Ltd., Arizona United Nurseries, Ltd., Phoenix Sunbelt Nurseries II, Ltd., Phoenix Sunbelt Nurseries III, Ltd., White Tanks Nurseries, Ltd., Western Group Nurseries, Tyrone Kinder, Joseph Tyler, Bryce Corporation and Sonora Nursery Management, Inc. ¶ 6. The defendant Bryce Corporation has filed a motion to dismiss separate from the rest of the Western defendants. Accordingly, for the purposes of this opinion, "Western defendants" refers to all of the Western defendants except Bryce.*fn3 Next, there are the "World defendants" who acquired the nursery business from the Western defendants and sold it two weeks later to the AWNLP. ¶ 5. Counsel representing these defendants have broken down the group further: the "World defendants" are defined as World Nurseries, Inc., Worldco Services Group, Inc., M & J Holding Corp., Herman Finesod and James Haber; and the "Partnership defendants" are defined as AWNLP and its general partner, Harvey Minars. All of these defendants are alleged to be the promoters of AWNLP. ¶ 6.

Finally, there are what have been referred to as the professional defendants. The first of these are the accountants, the accounting firm Arthur Andersen & Co. and one of its partners, Ivan Faggen (the "Andersen defendants"), who prepared the tax opinion letter and certain financial projections for AWNLP. ¶ 7. The other professional defendants are the law firm of Friedman & Shaftan, P.C., and some of the firm's lawyers, Wilfred T. Friedman, Michael E. Greene, and Marcia Shaftan, as the executrix of the Estate of Robert P. Shaftan (the "Friedman & Shaftan defendants"), who are alleged to have been counsel for the AWNLP and to have drafted the Memorandum, including the Federal Income Tax Factors section and the legal opinion. ¶ 8.

The complaint alleges that all of the foregoing parties entered into a "scheme" to sell an unsuccessful nursery business in Arizona to AWNLP at an inflated price. The scheme was purportedly conceived by defendants Tyler and Kindor (who allegedly controlled the Western defendants), as the nursery business which the Western defendants allegedly owned and operated, and in which various limited partnership interests had been sold, was failing, so the investors needed to be "mollif[ied]." ¶ 40. Thus, Kindor and Tyler allegedly arranged for the Andersen defendants to prepare various financial projections and a "favorable tax opinion letter" and to structure a sale to provide apparent tax write-offs that Kindor thought necessary to induce investors to purchase interests in AWNLP. ¶¶ 7B, 19, 44. Kindor gave Harold Schwartz, the president of the defendant Bryce Corporation, a memorandum of selling points that was prepared by Kindor, purportedly on the advice of the Andersen defendants, and Schwartz agreed to try to locate a purchaser, for which service he would receive a finder's fee. ¶¶ 43, 44. Schwartz, in turn, gave the proposal to his son-in-law, defendant Haber, who was employed by defendant Finesod, the asserted "control person" of the World defendants. ¶ 45.

Sometime in November of 1984, the World defendants are alleged to have agreed "to join Tyler, Kindor and Arthur Andersen in endeavoring to sell the nursery business to AWNLP through the intermediary purchaser" World Nurseries. ¶ 46. All allegedly agreed to structure the sale of the nursery business from the Western sellers to AWNLP "at an inflated purchase price through the use of a false appraisal and the use of World Nurseries as a sham intermediary purchaser." ¶ 47. Thus, pursuant to the purported "scheme," the Western defendants, in mid-December, sold the nursery business to World Nurseries for a total purchase price of $22 million, paid in the form of a $3 million "cash note" and a $17 million non-recourse note which was payable only from nursery income. Another $2 million was paid out of net sales of the nursery's "plant materials." ¶ 70. Then, on December 31, 1984, World Nurseries "contemporaneously" sold the business to AWNLP for approximately $33 million — $6.57 million in cash and a $26.43 million partnership note that was "wrapped around" the note given by World nurseries to the Western defendants. ¶ 71. Plaintiffs apparently admit that the offering memorandum provided to each of them fully disclosed the details of this transaction, including the $11 million step-up in purchase price from World Nurseries to AWNLP, as they cite to the offering memorandum itself in the complaint. ¶ 70B.

Plaintiffs purchased their limited partnership interests in AWNLP sometime in December 1984. ¶ 3A. Plaintiffs claim to have done so in reliance on certain misrepresentations in, and omissions from, the Memorandum and the exhibits appended thereto. ¶¶ 88-94. The alleged misrepresentations include (a) the overvaluation of the nursery stock and plant materials; (b) representation of a tax deduction in a year prior to eligibility; (c) unreasonably high sales projections; (d) unreasonably low expense projections; and (e) representation of reliance on an independent inspection. ¶ 88. The alleged omissions include the failure to disclose that the appraisal referred to was "arbitrary" and "unreasonable"; that the purchase price of the nursery stock was "inflated"; that the projections were based on unreasonable assumptions; that the investment in AWNLP had no real economic substance; that the sale was structured so as to leave control and benefits of ownership with the Western defendants; that the nursery business had an unprofitable history; that certain orders recorded in the books and records were fictitious; that much of the inventory was unmarketable; that the Western defendants had a poor reputation; that the business was "in jeopardy of collapse"; that the defendants knew that the projections were improper; that the defendants had falsified records and inflated receivables; that prior businesses run by the Western defendants had failed to meet their obligations to creditors and limited partners; that the defendants had previously structured similar limited partnerships which had been denied deductions by the IRS; that tax opinion letters for the prior partnerships in which the deductions had been disallowed had been prepared by the Friedman & Shaftan defendants; and that AWNLP was controlled not by the designated general partner but by Finesod who had been the promoter of other limited partnerships in which the deductions were disallowed. ¶ 93.

The plaintiffs further allege that the "Western Sellers have contended in various litigation . . . that each limited partner assumed personal liability on AWNLP's note to World Nurseries in proportion to each limited partner's share of interest in AWNLP." ¶ 74. They do not, however, forthrightly concede what some of the defendants allege and what is readily apparent from the offering documents: that each limited partner was required to guarantee a pro rata portion of the partnership's note in order to obtain the tax deductions that were the goal of their investment. See, e.g., Andersen Defendants' Memorandum of Law at 7.

Plaintiffs claim to have been damaged "in the amount of their investments." E.g., ¶¶ 119, 127, 131, 138, 143, 152.

II. ANALYSIS

In their motions, all of the defendants essentially assert that plaintiffs have attempted to charge all 29 defendants with a failure to disclose that the purchase price of the nursery business was too high and, hence, that the business could not make a profit. This "excessive" price was based on a appraisal of the value of the business which the plaintiffs claim all of the defendants should have known was not a true and fair appraisal. ¶ 61. We will proceed to analyze each defendant's liability, first under Section 10(b) and Rule 10b-5, then under Section 12(2), then under Section 17(a), then under RICO, and finally under the common law.

A.  LIABILITY UNDER SECTION 10(B)

It is well settled that in order to state a claim under Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b) (1982) or Rule 10b-5, promulgated thereunder, 17 C.F.R. § 240.10b-5 (1986), the first of plaintiffs' causes of action that we will consider, six elements must be established. These necessary elements are: (1) a material misstatement or omission, (2) indicating an intent to deceive or defraud (scienter), (3) in connection with the purchase or sale of any security, (4) through the use of interstate commerce or a national securities exchange, (5) upon which the plaintiff detrimentally relied, and (6) that the fraud in fact caused the injuries. Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986); Feinman v. Schulman Berlin & Davis, 677 F. Supp. 168, 170 (S.D.N.Y. 1988); First Federal Savings & Loan Ass'n v. Oppenheim, Appel, Dixon & Co., 629 F. Supp. 427, 438 (S.D.N.Y. 1986).

The motions to dismiss the Section 10(b) claims are founded on two grounds. First, the defendants, primarily the Andersen defendants, assert that the plaintiffs cannot state a claim under Section 10(b) because any misrepresentations in the offering materials are negated by the express language of the offering memorandum itself, the tax opinion letter and the report on the projections. While the Western defendants have also moved to dismiss for failure to state a claim,*fn4 they and all of the other groups of defendants have focussed primarily on the second ground for dismissal — that the plaintiffs have not adequately alleged the element of scienter as to each defendant or group of defendants, which will require us to examine the complaint pursuant to Fed.R.Civ.P. 9(b). We will examine the 9(b) arguments first.

1. Rule 9(b) Motions

Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Motive, intent, knowledge, and other conditions of mind of a person may be averred generally." The specificity requirement of Rule 9(b) has been found to serve several purposes: "(1) to provide a defendant with fair notice of the plaintiff[s'] claims, (2) to protect a defendant from harm to his or her reputation or goodwill, and (3) to reduce the number of strike suits." Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989); (quoting Stern v. Leucadia Nat'l Corp., 844 F.2d 997, 1003 (2d Cir.), cert. denied, ___ U.S. ___, 109 S.Ct. 137, 102 L.Ed.2d 109 (1988)). Although each determination of compliance with Rule 9(b) "necessarily rests on its particular facts," Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978), as a general rule, courts in this circuit have required that:

  [P]laintiff must specify: (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 omissions, 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
  fraud.

Todd v. Oppenheimer & Co., Inc., 78 F.R.D. 415, 420-21 (S.D.N.Y. 1978); see also Posner v. Coopers & Lybrand, 92 F.R.D. 765, 769 (S.D.N.Y. 1981), aff'd, 697 F.2d 296 (2d Cir. 1982); Fidenas A.G. v. Honeywell, Inc., 501 F. Supp. 1029 (S.D.N.Y. 1980); Gross v. Diversified Mortg. Investors, 431 F. Supp. 1080, 1087-88 (S.D.N.Y. 1977), aff'd, 636 F.2d 1201 (2d Cir. 1980). A fraud complaint must also apprise each individual defendant of the specific nature of his or her participation in the fraud, Sanderson v. Roethenmund, 682 F. Supp. 205, 207 (S.D.N.Y. 1988), particularly where there are multiple defendants. DiVittorio v. Equidyne Extractive Indus. Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). These requirements have been applied stringently, especially 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). However, the Second Circuit has recently repeated its admonition that "a court must read the complaint generously, and draw all inferences in favor of the pleader." Cosmas v. Hassett, supra, 886 F.2d at 11, 12.

Although under the second sentence of Rule 9(b) a complaint need only aver intent generally, it must nonetheless allege facts which give rise to a strong inference that the defendants possessed the requisite fraudulent intent — either intent to defraud, knowledge of falsity, or reckless disregard for the truth. Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987), cert. denied, 484 U.S. 1005, 108 S.Ct. 698, 98 L.Ed.2d 650 (1988), overruled on other grounds, United States v. Indelicato, 865 F.2d 1370 (2d Cir. 1989) (en banc), cert. denied, ___ U.S. ___, 110 S.Ct. 56, 107 L.Ed.2d 24 (1989). There are essentially two ways to establish a strong inference of scienter. A plaintiff may allege facts showing a motive for committing fraud and a clear opportunity for doing so. Beck, 820 F.2d at 50. Or, "[w]here motive is not apparent, it is possible to plead scienter by identifying circumstances indicating conscious behavior by the defendant, though the strength of the circumstantial allegations must be correspondingly greater." Id.

The specific requirements regarding exactly what statements were made, and when, where and by whom are "somewhat relaxed" when the complaint is based on an offering memorandum. Stevens v. Equidyne Extractive Indus. 1980, 694 F. Supp. 1057, 1061 (S.D.N.Y. 1988). The memorandum "satisfies 9(b)'s requirements as to identification of the time, place, and content of the alleged misrepresentation . . . Furthermore, no specific connection between fraudulent representations in the Offering Memorandum and particular defendants is necessary where . . . defendants are insiders or affiliates participating in the offer of the securities in question." Luce v. Edelstein, supra, 802 F.2d at 55 (citations omitted). While it is clear that general partners offering limited partnerships are considered insiders for purposes of Rule 9(b), the standard is less clear with respect to other types of defendants, particularly professional defendants. Stevens, 694 F. Supp. at 1061.

There is, however, authority for the proposition that where counsel drafted the offering memorandum and were acting on behalf of the general partner, they are not, without more, corporate insiders or affiliates to whom the relaxed pleadings standards are applicable. See DiVittorio, supra, 822 F.2d at 1249; Stevens, 694 F. Supp. at 1062. Thus, they are not ordinarily liable for the general statements in the offering memorandum but rather plaintiffs must specifically attribute misstatements or omissions to them.

(a) The Andersen defendants

Utilizing this as the standard for both groups of professional defendants, see Stevens, 694 F. Supp. at 1062, we determine that plaintiffs have specifically attributed statements to the Andersen defendants such that the time and place elements of 9(b) are satisfied. For example, the Andersen defendants performed two tasks in connection with the AWNLP offering memorandum: they prepared financial projections and compilation reports (based upon assumptions provided by the general partner) as well as a tax opinion letter analyzing the tax implications of the investment. Plaintiffs contend that both the tax opinion letter and the projections were materially false and misleading at the time they were made. The Andersen defendants argue, however, that plaintiffs have failed to allege facts which give rise to a strong inference of scienter, as required in this Circuit. Reading the complaint generously, we agree that plaintiffs have not alleged facts which give rise to a strong inference that the Andersen defendants possessed the requisite fraudulent intent. Taking the allegations as true that the Andersen defendants, in preparing the tax opinion letter and the projections, failed to disclose (1) the falsity of the World Information Systems ("W.I.S.") appraisal of the nursery business sold to AWNLP, ¶ 93(1); (2) the unreasonableness of the assumptions upon which the projections were based, ¶ 93(f); (3) the formulas and methods of calculation of the projections, ¶ 93(g), (4) the fact that the nursery business was failing at the time of the sale to the AWNLP, ¶ 93(r), (t), (u), and (5) the large projected operational expenses for 1985, ¶ 93(cc), we believe that the allegations as to the Andersen defendants' state of mind are merely conclusory and that there are no factual allegations which indicate that they knew of the alleged "unreasonableness" of the assumptions, the "falsity" of the appraisal, and the "fact" that the nursery business was "failing."

There is no indication in the complaint of how or when either the Andersen firm or defendant Faggen supposedly knew that the projections were indeed based upon unreasonable assumptions and that the appraisal was incorrect and misleading. While the complaint repeatedly alleges that all of the defendants knew or should have known that the appraisal of the nursery business was inaccurate "because of each defendant's experience, skill, expertise and training," ¶¶ 61, 62A, 63 and 94, it does not allege that Andersen or Faggen had anything to do with the appraisal, or indeed, that they had any reason to know or believe that it was inaccurate. For example, it is not alleged that they had access to specific information showing that the appraisal was wrong. Nor is it alleged that they conducted an audit from which they should have learned that the appraisal or other documents provided by the general partner were false. Although it is alleged that the accounting firm of Peat Marwick conducted an examination in November of 1983 of the financial condition of the nursery business as of the year ending 1982, which examination was not completed, and that Peat Marwick's work papers show that Peat Marwick found some accounting irregularities, ¶¶ 54, 57, significantly, plaintiffs have not alleged that Andersen ever reviewed Peat Marwick's work papers. Even if the Andersen defendants had conducted a full audit, it is well settled that an inference of fraud does not arise from the mere fact that an auditor reported on allegedly inaccurate data. The Limited, Inc. v. McCrory Corp., 683 F. Supp. 387, 394 (S.D. N.Y. 1988); see Dannenberg v. Dorison, 603 F. Supp. 1238, 1241 (S.D.N.Y. 1985); Ross v. Warner, 480 F. Supp. 268, 272 (S.D. N.Y. 1979). Furthermore, a purported failure to investigate "[does] not rise above the level of negligence, which is legally insufficient." O'Brien v. National Property Analysts Partners, 719 F. Supp. 222, 229 (S.D.N.Y. 1989) (quoting The Limited, Inc., 683 F. Supp. at 394).

Although proof of reckless conduct will satisfy the scienter requirement, see Goldman v. McMahon, Brafman, Morgan & Co., 706 F. Supp. 256, 259 (S.D.N.Y. 1989), and despite the fact that "an egregious refusal to see the obvious, or to investigate the doubtful may, in some cases, give rise to an inference of gross negligence which can be the functional equivalent of recklessness," see id., we do not believe there are any allegations in the complaint from which we can infer either gross negligence or recklessness.

Furthermore, as to the alleged failure to disclose some of the operating expenses, there is no indication that these figures were provided by the general partner to the Andersen defendants in the first place, and thus we cannot infer that the Andersen defendants knowingly failed to disclose them to the limited partners. The same can be said with respect to the allegation that the Andersen defendants knowingly failed to disclose the prior unsuccessful history of the nursery business.

Finally, with respect to the Andersen defendants' intent, we find that the alternative method of demonstrating scienter — motive — has not been established. Plaintiffs contend that the Andersen defendants were motivated to participate in the fraud because of personal gain. However, they have alleged no gain other than the fact that the Andersen firm was compensated for its professional services. It would defy common sense to hold that the motive element of the Beck scienter analysis would be satisfied merely by alleging the receipt of normal compensation for professional services rendered, because to do so would effectively abolish the requirement, as against professional defendants in a securities fraud action, of pleading facts which support a strong inference of scienter. Cf. Wilson v. Saintine Exploration and Drilling Corp., 872 F.2d 1124 (2d Cir. 1989) (holding that professional defendants who merely perform their usual professional functions and receive their normal compensation are not liable under the "draconian" provisions of Section 12(2)). Accordingly, the Section 10(b) claim is dismissed with respect to the Andersen defendants for failure to adequately plead the element of scienter.*fn5

(b) The Friedman & Shaftan defendants

As to the other professional defendants, the attorneys, we conclude that the Section 10(b) claims are also not adequately pled pursuant to Rule 9(b) of the Federal Rules of Civil Procedure.

First, plaintiffs have not satisfied the rule that each of the Friedman & Shaftan defendants be given notice of the specific allegations against him, her or it. DiVittorio, supra, 822 F.2d at 1247. Although plaintiffs have sued the Friedman firm itself (Friedman & Shaftan, P.C.), plaintiffs have also joined the professional services corporations's shareholders, Wilfred T. Friedman, Michael E. Greene and Marcia Shaftan as executrix of the Estate of Robert P. Shaftan. The complaint, however, constantly refers to "Friedman & Shaftan" without indicating who did what and when. Furthermore, where the plaintiffs have attempted to identify acts of the individual defendants, they were unsuccessful in so doing. For example, in paragraph 26, it is alleged that Friedman & Shaftan, through Shaftan and Greene, "engaged in a high degree of individual effort to sell interests in AWNLP" and that they answered plaintiffs' inquiries and assured plaintiffs of the bona fides, inducing them to purchase interests. However, even if we assume that the attorney defendants are "insiders" for Luce purposes, this paragraph alleges misrepresentations and conduct not tied to the offering memorandum, and therefore, specificity as to time, place and the content of the alleged misrepresentations is required. See Tobias v. First City Nat'l Bank and Trust Co., 709 F. Supp. 1266, 1277 (S.D.N. Y. 1989). Since paragraph 26 contains no such specificity, we conclude that these allegations are inadequately pled.

With regard to the allegations concerning the preparation of the offering memorandum itself, as we stated above, counsel who merely draft the memorandum cannot be held liable for the general statements in the offering memorandum not specifically attributed to them. See supra at 531. Thus, plaintiffs must plead the time, place and content requirements of Rule 9(b). Plaintiffs do not attribute any specific misrepresentations to counsel; indeed, with respect to the tax assistance letter and the opinion regarding the legality of the partnership units provided by the law firm, the only parts of the memorandum which arguably contain representations from Friedman & Shaftan to the limited partners, no breach is alleged.

Even if we assume arguendo that the attorneys are insiders for Luce purposes, the allegations are deficient with respect to the scienter element. Plaintiffs have not pled facts which would fairly support a strong inference that any of the attorney defendants, either the firm itself or the named individuals, acted with an intent to defraud, or at least with reckless disregard for the truth. Beck, supra, 820 F.2d at 50. Assuming that the offering memorandum contained false and misleading information, plaintiffs do not allege any specific facts as to how and when any of the Friedman & Shaftan defendants learned that the offering memorandum contained such false and misleading information. Devaney v. Chester, 813 F.2d 566, 568-69 (2d Cir. 1987); Vereins-Und Westbank A G v. Carter, 639 F. Supp. 620, 623 (S.D.N.Y. 1986). There are no allegations that they had any specific communications or that they had met with any specific individuals, which facts would have created the necessary strong inference that each of the attorney defendants had the requisite fraudulent intent. Schwartz v. Novo Industries, A/S, 658 F. Supp. 795, 799 (S.D.N.Y. 1987). We will not assume that clients as a matter of course communicate their allegedly fraudulent schemes, in whole or in part, to their attorneys. Furthermore, the mere fact that the Friedman firm had worked with the defendant Finesod on other offerings in the past does not raise a strong inference of fraud here in that plaintiffs do not allege that the Friedman & Shaftan defendants were ever accused of or determined to have committed any wrongdoing with respect to any of the prior tax shelters. Dannenberg v. Dorison, 603 F. Supp. 1238, 1241 (S.D.N Y 1985).*fn6

In addition, we conclude that the entire complaint does not state a claim against Wilfred Friedman under either New York or federal vicarious liability principles. New York's Business Corporation Law § 1505(a) provides that "[e]ach shareholder, employee or agent of a professional service corporation shall be personally and fully liable and accountable for any negligent or wrongful act or misconduct committed by him or by any person under his direct supervision and control while rendering professional services on behalf of such corporation." (McKinney's 1986). While plaintiffs allege that defendants Shaftan and Greene worked on the offering memorandum and/or participated in the offering, they do not allege any such work by attorney Friedman or any direct supervision or control by him over the others. Accordingly, reading the plain words of the statute, We're Associates v. Cohen, Stracher & Bloom, 65 N Y2d 148, 151, 490 N.Y.S.2d 743, 744, 480 N.E.2d 357 (1985), the complaint does not state a claim under New York law on the part of Wilfred Friedman. Federal law, 15 U.S.C. § 78t(a), dictates the same result, for in order to be held liable as a "control person" there must be facts alleged supporting an inference of knowledge or reckless disregard of the fraud, see Harrison v. Enventure Capital Group, Inc., 666 F. Supp. 473, 478-79 (W.D.N.Y. 1987); O'Connor & Assocs. v. Dean Witter Reynolds, Inc., 529 F. Supp. 1179, 1195 (S.D.N.Y. 1981), and the defendant must "in some meaningful sense" be a culpable participant in the fraud perpetrated. See Lanza v. Drexel & Co., 479 F.2d 1277, 1299 (2d Cir. 1973) (en banc).

To summarize, the Section 10(b) claims are dismissed as to all of the Friedman & Shaftan defendants for failure to plead scienter, and the entire complaint is dismissed as to Wilfred Friedman for ...


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