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GRIFFIN v. MCNIFF
August 17, 1990
ROBERT J. GRIFFIN, ET AL., PLAINTIFFS,
JOHN A. MCNIFF, ET AL., DEFENDANTS.
The opinion of the court was delivered by: Ward, District Judge.
Plaintiffs seek to recover for losses sustained as a result
of their investment in certain oil and gas limited
partnerships. Defendants Crown Energy, Inc. ("Crown"), Wiener,
Zuckerbrot, Weiss & Brecher ("Wiener"), Ruffa & Hanover, P.C.
("Ruffa & Hanover"), Price Waterhouse, J.H. Cohn & Company
("J.H. Cohn"), and Grant Thornton ("Thornton") move to dismiss
the First Amended Consolidated Complaint (the "Second Amended
Complaint" or "S.A.C.")*fn1 pursuant to Rules 9(b), 12(b)(6),
and/or 12(b)(1), Fed.R.Civ.P. For the reasons that follow, the
motions of Price Waterhouse, J.H. Cohn and Thornton are
granted, the motions of Crown and Wiener are granted in part
and denied in part, and the motion of Ruffa & Hanover is
The general background of this action is recounted in this
Court's March 13, 1989 Decision, familiarity with which is
presumed.*fn2 Because the Second Amended Complaint differs in
certain respects from the previous pleading considered by the
Court, the basic facts currently alleged by plaintiffs are
The Second Amended Complaint alleges that plaintiffs, who
now consist of forty-five (45) investors, purchased interests
in one or more of eleven (11) oil and gas limited partnerships
(the "partnerships") as they were created in 1982 and
1983.*fn3 Plaintiffs contend that the partnerships were
ostensibly formed to acquire, own and operate certain oil and
gas producing properties located in Texas and Oklahoma, but
actually were part of a scheme by defendants to defraud the
limited partners of their investments.
Plaintiffs assert that they invested in the partnerships
with the dual expectations of earning a profit from the
operation of the oil and gas properties and deriving a tax
benefit from the ownership of the partnership interests.
S.A.C. ¶¶ 4, 76. These two goals were linked in more than just
plaintiffs' expectations, as the partnerships needed to be able
to earn a profit in order to generate tax deductions for the
investors which would withstand scrutiny by the Internal
In making their decisions to invest in the partnerships,
plaintiffs maintain that they relied upon private placement
memoranda ("PPMs"), prepared, issued, and distributed by
certain defendants in connection with each partnership.
According to plaintiffs, these PPMs contained material
misrepresentations and omissions concerning the future
profitability of the partnerships and the tax benefits
available to the limited partners. S.A.C. ¶ 9. It is also
alleged that the tax opinions, financial projections, geology
reports, and production evaluations regarding the oil and gas
reserves contained in the drilling properties, all attached as
exhibits to the PPMs, were materially misleading.
The fifteen defendants involved in this lawsuit include
seven entities and individuals allegedly involved with
creating and managing the partnerships. These defendants, none
of whom are involved in the instant motions to dismiss the
Second Amended Complaint, include Wycombe Energy Group, Inc.
("Wycombe"), the corporate general partner for each of the
partnerships, as well as John A. McNiff II ("McNiff"), Caryl
Wilkie, John A. McNiff III, Kristen M. McNiff and Mallory
Moore, all reportedly insiders and/or directors of Wycombe
(collectively the "McNiff Defendants").
The various entities involved in operating or leasing the
oil and gas prospects are also named as defendants. They
include (1) Phoenix Oil & Gas, Inc. ("Phoenix"), the successor
to Gillham Petroleum, Inc. ("Gillham"), the driller-operator
for the 1982 limited partnerships, (2) Crown, the sublessor of
the drilling prospects for the 1982 partnerships, and (3)
William Kester ("Kester"), the director of Star Dust Mines,
Inc., the parent corporation of Trans-Tennessee Energy, Inc.
which was the driller-operator for the 1983 Devon Energy,
Fairfield Energy, Groton Energy and Harwinton Energy Limited
In addition, plaintiffs named as defendants three law firms,
Wiener, Ruffa & Hanover, and Martin & Deacon, which allegedly
prepared the PPMs and rendered other services to certain of
the limited partnerships at various points in time. The final
defendants are three accounting firms, Price Waterhouse, J.H.
Cohn, and Thornton*fn4, which were involved in reviewing the
financial projections and/or approving the tax opinions
prepared by the law firm defendants.
Previously, a number of defendants moved to dismiss the
First Amended Complaint. On March 13, 1989, this Court granted
the motions of Crown, Wiener, Martin & Deacon, Price
Waterhouse, J.H. Cohn, and Thornton, dismissing the First
Amended Complaint against them for failure to plead fraud with
the requisite particularity demanded by Rule 9(b).*fn5 The
Court found that plaintiffs failed adequately to differentiate
among the various defendants, to specify what fraudulent acts
each defendant was charged with having committed, and to
allege facts which could support an inference of scienter. In
accordance with the general practice regarding Rule 9(b)
motions, plaintiffs were afforded leave to replead the
dismissed fraud claims.
The motions of the McNiff Defendants to dismiss the fraud
claims against them were denied.*fn6 The Court found that the
First Amended Complaint was "rife with the type of
generalized, conclusory allegations that Rule 9(b) was
designed to discourage," but nonetheless held that the
allegations were sufficiently detailed to withstand motions to
dismiss by the McNiff Defendants, as they could all be fairly
characterized as insiders participating in the offer of the
securities in question. Griffin I, ¶ 94,389 at 92,531.
The moving defendants once again argue that plaintiffs have
failed to plead fraud with the particularity required by Rule
9(b). They also maintain that the claims in the Second Amended
Complaint must be dismissed pursuant to Rules 12(b)(6) and
A. Rule 9(b) — Pleading Fraud With
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 Griffin 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
plaintiffs to plead only a short, plain statement of the
grounds upon which they are 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
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
Griffin I, ¶ 94,389 at 92,531 (citing Conan Properties, Inc. v.
Mattel, Inc., 619 F. Supp. 1167, 1172 (S.D.N.Y. 1985)). Where
there are multiple defendants, the complaint must disclose the
specific nature of each defendant's participation in the
alleged fraud. DiVittorio v. Equidyne Extractive Industries,
Inc., supra, 822 F.2d at 1247. In an action alleging securities
fraud, "reference to an offering memorandum satisfies 9(b)'s
requirement of identifying time, place, speaker and content of
representations where . . . defendants are insiders or
affiliates participating in the offering of securities."
Ouaknine v. MacFarlane, 897 F.2d 75, 80 (2d Cir. 1990); Luce v.
Edelstein, supra, 802 F.2d at 55.
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 for
the truth." Id. at 962 (citing Ross v. A.H. Robbins, supra, 607
F.2d at 558); Wexner v. First Manhattan Co., 902 F.2d 169,
172 (2d Cir. 1990) ("Although scienter need not be alleged with
great specificity, plaintiffs are still required to plead the
factual basis which gives rise to a `strong inference' of
Plaintiffs assert claims against Crown for (1) securities
fraud under section 10(b) and Rule 10b-5, (2) aiding and
abetting securities fraud, (3) common law fraud, and (4) RICO,
predicated on fraud.
In Griffin I, the Court found that the First Amended
Complaint failed to allege adequately Crown's participation in
the fraud. The allegations of fraud which plaintiffs claimed
involved Crown were either framed generally against a group of
defendants, or specifically against defendants other than
Crown. For example, plaintiffs alleged that certain reports,
projections and evaluations were false and misleading, but
failed to identify how Crown was connected to these items. See
Griffin I, ¶ 94,389 at 92,532-33. Such generalized pleading was
clearly insufficient under Rule 9(b).
The Second Amended Complaint responded to the deficiencies
noted by the Court in Griffin I by adding needed particularity
to the allegations concerning Crown. Crown is alleged to have
been the sublessor of the drilling prospects for the 1982
partnerships, S.A.C. ¶¶ 26, 121. These drilling rights had been
acquired by Crown from Gillham. S.A.C. ¶¶ 28-29, 121. The
subleases to the partnerships provided that Crown would receive
sixty percent (60%) of all revenues generated by the
partnerships' oil and gas production, of which it would retain
fourteen percent (14%). S.A.C. ¶¶ 30, 32.
The partnerships also agreed to pay Crown certain Minimum
Annual Royalties ("MARs") as an advance against production
royalties. S.A.C. ¶¶ 33-38. Apparently, a minimum annual
royalty payment could be tax deductible if it met certain
requirements. The MARs paid to Crown, however, were found not
to meet these requirements by the Internal Revenue Service, and
were not deductible. S.A.C. ¶¶ 7, 129-131. Plaintiffs contend
that the explicit structure of the MARs by definition precluded
them from satisfying the criteria necessary for favorable tax
treatment under the prevailing tax regulations. Id.
Crown participated in the preparation of the financial
projections contained in the PPMs. S.A.C. ¶ 50. Plaintiffs
contend that the projections overstated the size and
profitability of the partnerships' oil reserves, and created
the false impression that it was reasonable to assume that the
partnerships would locate and produce commercial quantities of
oil. ¶¶ 51, 55, 126.*fn8
Here, plaintiffs have alleged that Crown had a significant
financial interest in the partnerships and ready access to the
actual condition of the drilling properties as the sublessor
of the drilling prospects. These allegations, combined with
the allegations that Crown participated in the preparation of
the misleading financial projections which were distributed to
the investors as attachments to the PPMs, are sufficient to
satisfy the threshold requirements for pleading scienter under
Rule 9(b). See Cosmas v. Hassett, supra, 886 F.2d at 13.
Accordingly, that aspect of Crown's motion seeking to dismiss
the Second Amended Complaint against it under Rule 9(b) is
2. The Law Firms — Wiener and Ruffa &
Plaintiffs assert claims against Wiener and Ruffa & Hanover
for (1) securities fraud under section 10(b) and Rule 10b-5,
(2) aiding and abetting securities fraud, (3) common law fraud
and (4) RICO, predicated on fraud.
The Second Amended Complaint alleges that Wiener, legal
counsel to the 1982 partnerships, as well as Wycombe and
Crown, prepared the PPMs and tax opinions for the 1982
partnerships. S.A.C. ¶¶ 165, 168-169. Plaintiffs contend that
material misrepresentations were made in both the PPMs and the
tax opinions, and that Wiener knew these representations were
false at the time the documents were distributed to the
investors. It is also alleged that Wiener had a direct
financial interest in the production of the partnership
operations, as it was to receive two percent (2%) of the
production royalties paid to Crown by each partnership. S.A.C.
In a document entitled "Special Report to Limited Partners",
dated February 24, 1983, (the "Special Report") the 1982
limited partners were informed by Wycombe that Price
Waterhouse was withdrawing its report on the financial
projections and its tax opinion letters as a result of an
independent investigation which uncovered that the estimated
oil reserves for the partnerships might be only a small
fraction of what was stated in the offering memorandum and
because of questions which had come to light regarding the
authorship of the original geologist's reports. Exhibit I
annexed to Second Amended Complaint. As a result of Price
Waterhouse's withdrawal, Wiener withdrew its tax opinions,
noting that these opinions had been predicated, in part, on
both Price Waterhouse's projections and the geologist's
In considering the First Amended Complaint, the Court found
that plaintiffs had failed to allege sufficient facts to
support finding an inference that Wiener knew of the alleged
falsity of the representations in the PPMs or the tax
opinions. Indeed, while plaintiffs argued that Wiener's
scienter could be inferred from its financial interest in the
partnerships, they had not even alleged this in the First
Amended Complaint, which the Court concluded was an indication
of plaintiffs' "inadequate treatment of their responsibilities
under Rule 9(b)." Griffin I, ¶ 94,389 at 92,534.
In the mass of allegations contained in the Second Amended
Complaint, Wiener's role in the fraud is only marginally
expanded upon from the allegations of the prior pleading.
Furthermore, the manner in which many of these allegations are
presented, using cross-references to various paragraphs and
exhibits which frequently concern other ...