The opinion of the court was delivered by: Sweet, District Judge.
The original complaint in this action was filed on November
17, 1986. Following various discovery proceedings and
pretrial conferences, on July 9, 1987 a previous motion on
behalf of defendants Andrew Vajna ("Vajna"), Mario Kassar
("Kassar"), Carolco Pictures, Inc. ("Carolco") and Anabasis
Investments, N.V. ("Anabasis") to dismiss the complaint was
On July 6, 1988 a further motion to dismiss on behalf of
Vajna and Kassar was granted, a motion by Block for class
certification was denied, a motion to retransfer the action
to the United States District Court for the Central District
of California was denied, and motions for summary judgment
On July 14, 1989 the complaint was amended to include
claims against Touche and against Goldschmidt, Fredericks &
Oshatz and its partners Barry I. Fredericks, Henry J.
Goldschmidt, Lawrence E. Goldschmidt, Michael P. Oshatz,
Leonard A. Messinger, Sanford J. Schlesinger, Edward I.
Sussman and Mark A. Meyer for violation of § 10(b) of the
Securities Exchange Act of 1934 (the "Act") and Rule 10b-5
promulgated thereunder; common law fraud and deceit; negligence
and malpractice; negligent misrepresentation; breach of
contract against Anabasis and Carolco; and breach of fiduciary
duty against the Partnership and the Greenbergs.
These motions followed in the fall of 1989 and by agreement
of the parties were argued and submitted on March 16, 1990.
According to the amended complaint, defendant First Blood,
a limited partnership, was formed in July 1981 under the laws
of the State of New York for the purported purpose of
acquiring all right, title and interest in the Sylvester
Stallone film, "First Blood," i.e., "Rambo I." Complaint ¶ 6.
In September 1982, First Blood agreed to acquire the motion
picture from Anabasis. Soon after, First Blood and other
defendants offered to investors twenty-eight units of limited
partnership interests at $200,000 per unit, with fractional
units available, by means of a private placement offering
memorandum (the "Memorandum"). Complaint ¶¶ 12-13. According to
the Memorandum, the limited partnerships were to share in
ninety-eight percent of the net profits, losses and cash flow
of First Blood. Complaint ¶ 13.
The complaint alleges that First Blood did not in fact
acquire all of the rights to the film and indeed failed to
acquire the rights necessary for the limited partnership to
earn a profit from the distribution and other uses of the
film. Complaint ¶¶ 14-23. Block claims that because of the
undisclosed failure to acquire all of the rights to the film,
First Blood could under no circumstances earn a profit, thus
prompting the Internal Revenue Service to disallow the tax
deductions claimed by the plaintiff, which occurred in October
1987 on grounds that the Partnership investment was a
tax-motivated rather than profit-motivated transaction.
Complaint ¶¶ 24-25.
Although the film was a "huge success," plaintiffs claim to
have spent an additional $41,669 in interest and expenses and
received less than $11,000 in distributions on each $200,000
limited partnership unit. Complaint ¶ 21. Plaintiffs seek
recovery from some or all defendants of the amounts invested in
and expended on account of the investment in First Blood, the
amount of additional taxes, interest and penalties due, monies
due and owing as a result of revenues generated by the film and
The Touche Report Allegations
The complaint alleges that (1) the Touche Report was false
and misleading because Touche did not analyze the projections
in the manner represented in the report, i.e., that it did not
read the Memorandum, check the computation of the projections,
challenge the internal consistency of the projections and
inquire into factors that might influence the financial
results, (2) the Report failed to disclose that there was
virtually no possibility that the investors would realize a
profit no matter how successful the movie was, that the
assumption that investors would realize a profit was
unreasonable and not objective, and that due to the
unlikelihood of ever achieving a profit, the tax benefits in
the projection would be disallowed, (3) the projections
contained in the Report were inherently false because they were
not based upon the most likely results, and (4) the Report and
engagement violated professional ethical rules and Touche
internal guidelines. Complaint ¶¶ ...