v. American Completion and Development, supra, 706 F. Supp. at
1092 n. 3.
Howard Jackson's alleged failure to investigate the economic
data on which appraisals of the subject properties were based
does not rise above the level of negligence, and thus fails
the pleading requirements of § 10(b). See Friedman v. Arizona
World Nurseries, supra, 730 F. Supp. 521, [Current]
Fed.Sec.L.Rep. (CCH) at 94,976 (citing O'Brien, supra, 719
F. Supp. at 229); The Limited, Inc. v. McCrory Corp., supra, 683
F. Supp. at 394. The conclusory assertion that Howard Jackson's
failure to investigate the representations of the other
defendants was "in contravention of the standards and codes of
its industry" does not establish that Howard Jackson knowingly
or recklessly participated in a fraud on plaintiffs. See Third
Complaint, ¶ 34. Neither the industry standards, nor the extent
of Howard Jackson's alleged deviation from the standards, is
discussed in detail.
Howard Jackson's appraisals with regard to the stepped-up
price transactions do not create a strong inference of
fraudulent scienter. The complaint alleges that an inference
of fraud is created by the fact that "these artificially
inflated prices were less than the properties' fair market
value by a similar percentage in every case." Third Complaint,
¶ 34; see also id., ¶ 35. However, upon viewing the Memoranda
as a whole, the presentation of Howard Jackson's appraisals and
opinions do not suggest intentional fraud or reckless conduct.
The Memoranda disclose the stepped-up price transactions in
substantial detail, states that they were not arms-length
transactions, and that the Internal Revenue Service may well
consider the values as being overstated. "In short, plaintiffs'
'own source repels [their] claims.'" O'Brien, supra, 719
F. Supp. at 228 (quoting Crystal v. Foy, 562 F. Supp. 422, 427
Finally, plaintiffs claim that Howard Jackson's opinions
relating to the wraparound mortgage and Master Lease
arrangements were fraudulently given, in that Howard Jackson
knew such devices were associated with abusive tax shelters,
and had no basis or expertise to opine that such arrangements
would provide investors with "competitive equity returns."
Third Complaint, ¶ 36. Plaintiffs' allegations that wraparound
mortgages and Master Leases are telltale signs of an abusive
and illegal tax shelter, and that Howard Jackson was on notice
of these facts, is pled in a conclusory fashion, without any
attempts at substantiation. Howard Jackson's opinion that a
fair return on equity would be achieved, and the failure of the
investors to achieve such returns, are insufficient bases to
underpin a claim for knowing or reckless fraud.*fn3
D. Plaintiffs' RICO Allegations
Plaintiffs have alleged as predicate acts of their RICO
claim that Price Waterhouse and Howard Jackson violated § 10(b)
of the Securities Exchange Act of 1934, the mail fraud statute,
18 U.S.C. § 1341, and the wire fraud statute, 18 U.S.C. § 1343.
Third Complaint, ¶ 66. "To allege properly the existence of a
pattern of racketeering activity, a complaint must, at the very
least, include allegations that the defendant has committed . .
. 'predicate acts.'" Sendar Co. v. Megaware Inc., 705 F. Supp. 159,
162 (S.D.N.Y. 1989). Plaintiffs' RICO allegations must
fail as a matter of law, as none of the predicate acts have
been pled in the complaint with requisite particularity.
This Court has clearly held that "predicate actions resting
on fraud [must] be pled with particularity" under Rule 9(b).
Landy v. Mitchell Petroleum Technology Corp., 734 F. Supp. 608,
622 (S.D.N.Y. 1990)
(citing Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 26
n. 4 (2d Cir. 1990)). "'[A]ll of the concerns that dictate that
fraud be pleaded with particularity exist with even greater
urgency in civil RICO actions. . . .'" O'Brien, supra, 719
F. Supp. at 230 (quoting Plount v. American Home Assurance Co.,
668 F. Supp. 204, 206 (S.D.N.Y. 1987)). As the Court has found
that plaintiffs' claims under § 10(b) should be dismissed, the
only remaining consideration is whether plaintiffs' mail and
wire fraud allegations have been pled with the requisite
As with § 10(b), both the mail and wire fraud statutesrequire
a showing of an intent to defraud, or reckless conduct rising
to the level of intentional behavior. See O'Malley v. NYC
Transit Authority, 896 F.2d 704, 706-07 (2d Cir. 1990); Beck v.
Manufacturers Hanover, supra, 820 F.2d at 49-50. Thus,
plaintiffs must adequately allege the fraudulent scienter of
Price Waterhouse and Howard Jackson. As the Court has indicated
in the discussion above, plaintiffs have not alleged facts
which give rise to a strong inference that either Price
Waterhouse or Howard Jackson acted with fraudulent scienter in
their activities related to the limited partnerships.
Plaintiffs' mail and wire fraud claims, and therefore their
RICO claim, must fail as a matter of law.
E. Plaintiffs' State Law Claims
The Court's only basis of jurisdiction over plaintiffs'
state law claims is through pendent jurisdiction. As all of
plaintiffs' federal claims have been dismissed, the Court no
longer has jurisdiction over plaintiffs' state law claims.
See Finley v. United States, ___ U.S. ___, 109 S.Ct. 2003, 104
L.Ed.2d 593 (1989); United Mine Workers of America v. Gibbs,
383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). Plaintiffs'
state law claims are hereby dismissed pursuant to Fed.R.Civ.P.
F. Dismissal of Plaintiffs' Claims With Prejudice
Federal Rule of Civil Procedure 15(a) requires that "leave
[to amend the complaint] shall be freely given when justice so
requires." The Court recognizes that the Second Circuit has
interpreted Rule 15(a) liberally, allowing for amendment
unless circumstances exist such as "'undue delay, bad faith,
futility of the amendment, and perhaps most important, the
resulting prejudice to the opposing party.'" Richardson
Greenshields Securities, Inc. v. Lau, 825 F.2d 647, 653 n. 6
(2d Cir. 1987) (quoting State Teachers Retirement Bd. v. Fluor
Corp., 654 F.2d 843, 856 (2d Cir. 1981)); see also Luce v.
Edelstein, supra, 802 F.2d at 56 ("Complaints dismissed under
Rule 9(b) are 'almost always' dismissed with leave to amend.").
If the district court does exercise its discretion to dismiss
the complaint with prejudice, "refusal to grant leave must be
based on a valid ground." Ronzani v. Sanofi S.A., 899 F.2d 195,
198 (2d Cir. 1990) (citing Foman v. Davis, 371 U.S. 178, 182,
83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962)).
In the case at bar, the Court believes that dismissal of
plaintiffs' federal law claims against Price Waterhouse and
Howard Jackson should be with prejudice. Plaintiffs have
already been granted one opportunity to amend their pleadings,
and they have failed to do so in a satisfactory fashion under
Rule 9(b). More importantly, the nature of plaintiffs'
amendments — mere elaboration and increased verbiage
concerning the same core allegations initially put forward —
suggests to the Court that a third pleading against Price
Waterhouse and Howard Jackson would merely duplicate these
efforts. The Court therefore declines to allow plaintiffs to
file a third pleading in this case, based on the expected
futility of such a pleading and the costs and potential
prejudice which would be caused to defendants. See Posner v.
Coopers & Lybrand, supra, 92 F.R.D. at 770 (dismissal with
prejudice of the amended complaint proper when the Court put
the plaintiff on notice of the deficiencies of the initial
complaint, and the plaintiff failed to correct them in the
Defendants Price Waterhouse and Howard Jackson's motions to
to Fed.R.Civ.P. 9(b) are granted. Plaintiffs' claims brought
pursuant to § 10(b) of the Securities Exchange Act of 1934, and
RICO, 18 U.S.C. § 1961 et seq., are dismissed with prejudice.
Plaintiffs' state law claims are dismissed for lack of subject
matter jurisdiction pursuant to Fed.R. Civ.P. 12(b)(1).
Defendants' motion for sanctions pursuant to Fed.R.Civ.P. 11 is