Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.


April 5, 1990


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


This is a securities fraud action brought pursuant to §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and 78t(a), § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and common law principles. Defendants*fn1 have moved on various grounds to dismiss the claims against them.


Since the early years of this century, industry has attempted to reclaim used lubricating oils. By removing impurities, including air, gases, and particulates, that accumulate during the lubricating process, the original lubricating properties of the oil can be restored and the oil can be reused. In 1977, defendant Robert Haig Hachadoorian ("Hachadoorian") received a patent for a new oil reclamation process. The process was developed through the auspices of defendant Aquanetics, Inc. ("Aquanetics"), a New York corporation, of which Hachadoorian was president. From 1978 to 1983, when the offerings of the partnerships were prepared, Aquanetics managed to sell only 40 of its oil reclamation systems. Nonetheless, in 1981, defendant Mitchell Petroleum Technology Corporation ("Mitchell") signed an agreement with Aquanetics whereby Mitchell was granted a five year exclusive right to market Aquanetics' products in the United States. The agreement further provided that Mitchell had non-exclusive marketing rights for an additional 20 years after the initial five year period.

Upon signing its agreement with Aquanetics, Mitchell then subdivided its licensing rights geographically, and marketed those rights through partnerships which would be given marketing sublicensing rights for a fee. Mitchell acted as the promoter of the partnerships. Defendant Worldco Service Group ("Worldco") was a broker of interests in the partnerships. Defendant Herman Finesod ("Finesod") was a principal in both Mitchell and Worldco. Defendant Ray Wilson ("Wilson") was allegedly a general partner of the partnerships.*fn4 Defendant Friedman & Shaftan is a New York City law firm that prepared legal opinions, including tax opinions, which appeared in the offering memoranda of the partnerships. Defendants Wilfred T. Friedman and Michael Greene are members of that law firm, and defendant Marcia Shaftan represents the estate of Robert Shaftan, a deceased member of the firm. Defendant Heller & White, apparently a market research firm, prepared a report on the current state of and potential for the oil reclamation industry, and defendant World Information Systems ("WIS") prepared a report on the market potential of the Aquanetics product. Defendant CNA Investor Services ("CNA"), a financial services and brokerage firm, sold units in the partnerships to certain of the plaintiffs.

The purpose of the partnerships is described in detail in the offering memoranda. Each partnership received from Mitchell a sublicense which permitted the partnership to market Aquanetics' product in a specified geographic region. For that right, each partnership was to pay Mitchell a fee far greater than the license fee Mitchell was paying to Aquanetics. Potential investors were repeatedly warned in the offering memoranda that investment in the partnerships was risky, and that the potential for profit was speculative. Indeed, each offering memorandum included on its first page a notice in bold type and all capital letters, set off from the rest of the print on the page by spaces and lines which stated, "These securities involve a high degree of risk (See `Risk Factors')". The body of each offering memorandum contained approximately five pages under the heading "Risk Factors," outlining management risks, transactional risks and tax risks, among others. Further, the offering memoranda indicated that potential investors in the partnership should have a liquid net worth of at least $250,000, and annual income placing the individual in the Federal income tax bracket then taxed at a 49% marginal rate.

It appears from the offering memoranda that the focus of the partnerships was the potential tax advantages that could be reaped from the probable losses to be suffered during at least the first few years of the partnerships. A significant portion of each offering memorandum was dedicated to the potential tax advantages for an investor. Each memorandum included an extensive tax analysis and opinion prepared by defendant Friedman & Shaftan. The analysis opined that it was likely that investors, who would become limited partners, would be able to deduct a portion of the partnership losses for income tax purposes. Further, the second page of the offering memoranda trumpeted the potential tax consequences for an investor, estimating that tax deductions could reach 400%, of initial cash investments.

However, the offering memoranda also were explicit in warning potential investors that the potential tax benefits of the partnerships could not be guaranteed. On the fourth page of each memorandum, investors were warned, "THERE IS ALSO A SUBSTANTIAL RISK THAT THE INTERNAL REVENUE SERVICE WILL SEEK TO SET ASIDE ALL OR A PORTION OF THE DEDUCTIONS CLAIMED BY THE PARTNERS. . . ." This warning was repeated in detail under the heading "Risk Factors," and also in the tax opinion letter prepared by Friedman & Shaftan. Despite this focus on tax losses, the offerings did not state that the partnerships were without profit potential. While the offerings do not indicate great optimism about future profits, it could be implied from the offerings that the promoters expected that profit might be realized, despite the risks.

Irrespective of the explicit references to risk in the offering memoranda, plaintiffs in this action invested in these partnerships. Each investor signed a subscription agreement, describing the obligations of the investor, and certifying that said investor had received and reviewed carefully the offering memorandum, the partnership agreement, and the subscription agreement. The investor further certified by signature that he or she had sufficient financial acumen to understand the offering memorandum and partnership agreement, understood that the investment had a high degree of risk, and understood that the potential tax advantages of the partnership might be disallowed by the Internal Revenue Service.

In July 1986, three years after the formation of the partnerships, the eventuality occurred about which the investors had been forewarned: the Internal Revenue Service disallowed all income tax deductions arising from participation in the partnerships. Eighteen months after the tax disallowance, plaintiffs filed the instant action. Plaintiffs allege that defendants acted individually and in concert to defraud investors, by intentionally misrepresenting the value of the partnerships. In particular, they allege that defendants represented that the partnerships had profit potential when defendants knew or should have known that in fact there was absolutely no possibility of the partnerships ever showing a profit. The gravamen of plaintiffs' amended complaint is that defendants Mitchell, Finesod, Aquanetics, Hachadoorian and the partnerships conspired "to organize limited partnerships involving the sublicense of the [Aquanetics] system which was grossly overvalued, so that significant tax benefits and profits could be promised to investors." Amended Complaint ¶ 10. The other defendants, who supplied supporting data for the offering memoranda or marketed the partnerships, allegedly knew or should have known of the promoters' intent.

All defendants, except Heller, White, have now come before the Court seeking various forms of relief from the Court. All represented defendants have moved for dismissal of the fraud claims in the amended complaint pursuant to Fed.R.Civ.P. 9(b); for dismissal of claims under § 17(a) of the Securities Act of 1933, under § 10(b) of the Securities Exchange Act of 1934, and under RICO pursuant to Fed.R. 12(b)(6); and for the dismissal of pendant state law claims pursuant to Fed.R.Civ.P. 12(b)(1). Further, defendant CNA has moved for summary judgment pursuant to Fed.R.Civ.P. 56, against those plaintiffs who did not purchase their partnership units through CNA.


Defendants have moved jointly and individually to dismiss various portions of plaintiffs' amended complaint pursuant to Fed.R.Civ.P. 9(b), 12(b)(1), 12(b)(6), and 56. The Court will address defendants' various arguments in turn.

A)  Claims Under § 17(a)

Plaintiffs' second claim for relief arises under § 17(a) of the Securities Act of 1933. Until the issue is squarely before it, the Second Circuit has not found it necessary to consider overruling Kirshner v. United States, 603 F.2d 234 (2d Cir. 1978) (there is a private right of action under § 17(a)), cert. denied, 442 U.S. 909, 99 S.Ct. 2821, 61 L.Ed.2d 274 (1979), to be consistent with the holdings of several other circuit courts. See Ronzani v. Sanofi S.A., 899 F.2d 195, 198 (2d Cir. 1990). However, following Judge Friendly's pointed suggestion that there be a reexamination of this question, Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 559 n. 3 (2d Cir. 1985), this Court has repeatedly found there to be no private right of action under § 17(a). See., e.g., O'Brien v. Nat'l Property Analysts Partners, 719 F. Supp. 222, 231 (S.D.N.Y. 1989); Huang v. Sentinel Gov't Securities, 709 F. Supp. 1290, 1294-95 (S.D. N.Y. 1989); Goldman v. McMahan, Brafman, Morgan & Co., 706 F. Supp. 256, 258 (S.D.N.Y. 1989); Dubin v. E.F. Hutton Group, Inc., 695 F. Supp. 138 (S.D.N Y 1988). See also, Eickhorst v. American Completion and Development Corp., 706 F. Supp. 1087, 1098 (S.D.N.Y. 1989) ("[T]he Court is aware of no recent voice substantively arguing the correctness of the conclusion that section 17(a) carries with it an implied private right of action."). The Court finds nothing in plaintiffs' argument to require a change of heart on the justiciability of claims under § 17(a). Accordingly, plaintiffs' second claim for relief under § 17(a) in their amended complaint is dismissed with prejudice.

B)  CNA's Motion For Summary Judgment

Only plaintiffs Joe K. George, Joe David House, M. Stephen Brandon, Thomas J. Welsh, George Sennett and Edith Sennett purchased their investment in the partnerships through CNA. None of the other plaintiffs had any contact with CNA in connection with the partnerships. CNA has moved thus for summary judgment pursuant to Fed.R.Civ.P. 56 against all plaintiffs except those who purchased their interests in the partnership from CNA. Plaintiffs have indicated that they do not oppose CNA's motion for summary judgment against these plaintiffs. Plaintiffs' Memorandum of Law at 1. Accordingly, defendant CNA's motion for summary judgment on all claims against all plaintiffs except Joe K. George, Joe David House, M. Stephen Brandon, Thomas J. Welsh, George Sennett and Edith Sennett, is granted.

C)  Defendant Petro-Tech Partnership IV's Motion to Dismiss

Defendant Petro-Tech Limited Partnership IV ("Petro-Tech IV") has moved for dismissal of all claims against it. By admission, none of the plaintiffs purchased units of Petro-Tech IV. See Amended Complaint, Exhibit A. Accordingly, Petro-Tech IV has moved for dismissal for plaintiffs' lack of standing.

Under the standing doctrine, "a plaintiff must allege that he or she is suffering from an injury directly traceable to the actions of the defendant(s)." Fletcher v. Marino, 882 F.2d 605, 610 (2d Cir. 1989). See also Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 99, 99 S.Ct. 1601, 1607-08, 60 L.Ed.2d 66 (1979) (the injury alleged must be the result of the "putatively illegal conduct of the defendant"). A plaintiff may not rest his or her claim for relief on the legal rights of some third party. Allen v. Wright, 468 U.S. 737, 750-52, 104 S.Ct. 3315., 3324-25, 82 L.Ed.2d 556, reh'g denied, 468 U.S. 1250, 105 S.Ct. 51, 82 L.Ed.2d 942 (1984).

It is abundantly clear that to maintain a securities fraud claim under § 10(b) and Rule 10b-5,*fn5 a plaintiff must be an actual purchaser or seller of the security in question. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730-31, 95 S.Ct. 1917, 1922-23, 44 L.Ed.2d 539 (1975); Birnbaum v. Newport Steel Co., 193 F.2d 461, 463-64 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952); Baum v. Phillips, Appel & Walden, Inc., 648 F. Supp. 1518, 1525 (S.D.N.Y. 1986). Thus, plaintiffs in the instant action do not have standing to assert securities law violations against Petro-Tech IV as they are neither purchasers or sellers of units of that partnership. Further, plaintiffs may not maintain RICO claims against Petro-Tech IV. RICO claims are dependent upon the proper allegation of predicate acts, and plaintiffs have no basis to allege any predicate acts against Petro-Tech IV. As already noted, their securities fraud claim cannot survive, nor can their claims of mail or wire fraud against Petro-Tech IV. Plaintiffs do not allege that they received any correspondence from Petro-Tech IV, or were in any way misled by any materials related to Petro-Tech IV.

Plaintiffs rely on Marshall & Ilsley Trust Co. v. Pate, 819 F.2d 806 (7th Cir. 1987) to challenge this conclusion. However, Pate only stands for the proposition that in a RICO claim, a plaintiff does not have to show that he was individually injured by all the predicate acts alleged. The situation covered by Pate is where a single defendant in a RICO case takes a variety of actions, only some of which affect the plaintiff. Pate states that the plaintiff can allege all of the defendant's actions as predicate acts to the RICO claim, even though the plaintiff was not harmed by every one of those acts. It does not stand for the notion that a plaintiff in a RICO action may allege injury against defendants against whom he or she would normally not have standing. Accordingly, the Court finds that plaintiffs do not have standing to state a claim against Petro-Tech IV. Thus, all claims against Petro-Tech IV are dismissed.

D)  Defendants' Motion to Dismiss the § 10(b)

"Dismissal of a complaint for failure to state a claim is a `drastic step.'" Meyer v. Oppenheimer Management Corp., 764 F.2d 76, 80 (2d Cir. 1985) (citations omitted). "The function of a motion to dismiss is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984) (citations omitted). Thus, a motion to dismiss must be denied "unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974), citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Morales v. N.Y. State Dep't of Corrections, 842 F.2d 27, 30 (2d Cir. 1988). In deciding a motion to dismiss, the Court must accept the plaintiff's allegation of facts as true together with such reasonable inferences as may be drawn in its favor. Murray v. City of Milford, Connecticut, 380 F.2d 468, 470 (2d Cir. 1967). See also Scheuer, supra, 416 U.S. at 236, 94 S.Ct. at 1686. However, the Court is not required to accept a strained interpretation of such allegations. See Ronzani v. Sanofi S.A., supra 899 F.2d at 197.

Defendants first assert that plaintiffs failed to bring their action within the applicable statute of limitation. Defendants allege that the Court must apply a uniform federal statute of limitation to all § 10(b) claims. Traditionally, federal courts have adopted analogous state law statutes of limitation where the federal law at issue does not provide a limitation provision of its own. Such has long been the case with private actions brought under § 10(b). However, recently the Third Circuit adopted a one year statute of limitation for claims arising under § 10(b). In Re Data Access Systems Securities Litigation, 843 F.2d 1537 (3rd Cir.) (en banc), cert. denied, ___ U.S. ___, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988). The Third Circuit acted in response to two Supreme Court decisions which adopted uniform federal statutes of limitation for two specific federal claims. See Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143, 107 S.Ct. 2759, 97 L.Ed.2d 121 (1987) (RICO); Del Costello v. International Brotherhood of Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76 L.Ed.2d 476 (1983) (collective bargaining agreements.). Defendants urge the Court to follow the lead of the Third Circuit and to adopt a uniform one year statute of limitation for actions under § 10(b).

The Second Circuit has long applied the analogous state law statute of limitation to actions brought under § 10(b). Armstrong v. McAlpin, 699 F.2d 79, 86-87 (2d Cir. 1983). This Court and other courts in this District have faced similar requests to adopt the Third Circuit's decision in Data Access, and have repeatedly declined that request. See, e.g., Azurite Corp., Ltd. v. Amster & Co., 730 F. Supp. 571, 582 (S.D.N Y 1990); Matignon Finance, Inc. v. Ameritel Communications Corp., 1989 WL 153282, 1989 U.S.Dist. LEXIS 14937, 15-16 (S.D.N Y 1989); Huang v. Sentinel Government Securities, 709 F. Supp. 1290, 1301 n. 10 (S.D.N.Y. 1989); Eickhorst v. American Completion and Development Corp., 706 F. Supp. 1087, 1102 (S.D.N.Y. 1989); Metropolitan Securities v. Occidental Petroleum Corp., ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.