United States District Court, Southern District of New York
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 crux of the Second Amended Complaint is that defendants
knew it was not reasonable to expect the partnerships to be
commercially profitable in producing oil or to generate
legitimate tax deductions, given the properties on which they
were drilling, the manner in which they were organized, and
the expenses they were to incur. Plaintiffs maintain the
partnerships were in fact not profitable, and that the
Internal Revenue Service concluded that each of the
partnerships was formed without an actual objective of making
a profit and disallowed the tax deductions taken by
plaintiffs. S.A.C. ¶¶ 5-8. As a result of the fraudulent
scheme, plaintiffs allege that they have lost their initial
investment and been subjected to penalties and interest on the
disallowed tax deductions. S.A.C. ¶ 9.
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.
Plaintiffs filed their Second Amended Complaint on May 19,
1989. The Second Amended Complaint, consisting of one hundred
fifty-one (151) pages and five hundred eighteen (518) numbered
paragraphs, as well as over a thousand pages of exhibits, sets
forth thirty-seven claims. These claims allege that various
liable for (1) primary violations of section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"),
15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder by the
Securities and Exchange Commission, 17 C.F.R. § 240.10b-5; (2)
secondary violations of section 10(b) and Rule 10b-5, by acting
as aiders and abettors; (3) common law fraud; (4) negligence;
and/or (5) violations of the Racketeer Influenced and Corrupt
Organizations Act ("R.I.C.O."), 18 U.S.C. § 1962(a), (c) and
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
Rule 9(b) provides that:
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
Despite the added particularity in the Second Amended
Complaint regarding it, Crown argues that plaintiffs have
failed adequately to plead scienter. Plaintiffs, however, can
plead scienter by alleging facts "showing a motive for
committing fraud and a clear opportunity for doing
so." Beck v. Manufacturers Hanover, supra, 820 F.2d at 50.
Indeed, the lenient standard for pleading scienter will be
satisfied even if plaintiffs do not allege facts which
demonstrate that defendants had a motive for committing fraud,
so long as plaintiffs adequately identify circumstances
indicating conscious behavior by defendants. Cosmas v. Hassett,
supra, 886 F.2d at 13.
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 defendants, often
works to create a muddled picture of Wiener's alleged role in
Nevertheless, while acknowledging that this question
presents a close call and that a charge of fraud against a law
firm should not lightly be inferred, see Securities
and Exchange Commission v. Frank, 388 F.2d 486, 489 (2d Cir.
1968), the Court concludes that the Second Amended Complaint
meets the threshold requirements for pleading fraud against
Wiener. In addition to linking specific misrepresentations and
omissions in the PPMs and the tax opinions to Wiener,
plaintiffs have specified Wiener's involvement as counsel to
the various entities involved in subleasing the partnership
properties and identified Wiener's financial interests in the
operation of the partnerships. These circumstances support
inferring that the facts concerning the limited supplies of
commercially obtainable oil in these properties may have been
known to Wiener, and that Wiener may have known of the alleged
fraudulent scheme. Accordingly, that aspect of Wiener's motion
seeking dismissal of the fraud claims under Rule 9(b) is
b. Ruffa & Hanover
Ruffa and Hanover is alleged to have been the law firm
involved in preparing the PPMs and tax opinions contained in
four 1983 partnerships: Devon Energy, Ltd.; Fairfield Energy,
Ltd.; Groton Energy, Ltd.; and Harwinton Energy, Ltd.
(collectively the "Panhandle partnerships"). Plaintiffs
maintain that the PPMs and tax opinions contained
misrepresentations and omissions concerning the extent of the
oil reserves in the properties, the potential profitability of
the partnerships, and the legitimacy of investor tax
deductions, akin to those alleged in the 1982 partnerships.
In addition, plaintiffs assert that a scheme existed among
Kester, McNiff and William Ruffa ("Ruffa"), the senior partner
of Ruffa & Hanover, to defraud the investors of their
partnership interests. S.A.C. ¶ 322. Pursuant to this scheme,
plaintiffs allege that Star Dust was to reacquire the
partnerships' working interests in the oil prospects with the
wells on those prospects already drilled and operating, or
equipped to operate, at the partnerships' expense. Defendants
were to achieve this goal by having Kester, who would oversee
the drilling, stop the drilling a number of feet above the oil
bearing strata. S.A.C. ¶ 326-27. The result of this method of
drilling would be to "Rubenize" the wells, resulting in the
pumping of evaporated crude oil and natural gas above the oil
bearing strata out of the wells, leaving behind the oil in the
fields. S.A.C. ¶ 328.
Plaintiffs maintain that Kester was to reduce the flow of
gas by closing the valves of the well heads and then notify
the investors that the partnerships' wells were no longer
commercially viable and were being closed down. S.A.C. ¶¶
329-330. After a lack of production from the partnerships'
wells for a twelve month period, the original lessor would have
the right to initiate reversion proceedings under provisions in
Star Dust's lease. S.A.C. ¶ 331. Once the property had reverted
to the original lessor, Star Dust was to reacquire the leases,
complete with the wells drilled and equipment in place, and
with oil remaining only a few feet from the end of the
Rubenized well holes. S.A.C. ¶ 332. Ruffa and McNiff were then
to exercise an option they held to acquire 66.66% of the stock
of Star Dust. S.A.C. ¶¶ 323, 333. Only Kester's removal from
his position with Star Dust prevented the completion of this
fraudulent scheme. S.A.C. ¶¶ 335, 351-52.*fn9
These allegations are sufficient to give rise to a strong
inference of scienter on the part of Ruffa & Hanover and
satisfy the requirement of Rule 9(b). The option Ruffa held in
Star Dust, as well as the alleged scheme to appropriate the
drilling leases after the partnerships had paid for the
drilling costs and equipment, allege a sufficient motive for
Ruffa to conceal his knowledge of the fraud. Inasmuch as Ruffa
was a senior partner of Ruffa & Hanover, that knowledge may be
imputed to the law firm. See Shumate v. McNiff, 1990 WL 6549,
1990 U.S. Dist LEXIS 547 (S.D.N.Y. January 22, 1990) (court
rejected 9(b) challenge by Ruffa & Hanover to similar fraud
claims based on other oil and gas limited partnerships formed
by McNiff). Indeed, the reasoning applied by the court in
in holding that the plaintiffs had sufficiently alleged a
securities fraud violation against Ruffa & Hanover is equally
applicable to this case.
Plaintiffs allege that the misrepresentations in
the PPMs, prepared by defendants, caused their
economic harm in that plaintiffs would not have
invested in the [limited partnerships] had
Ruffa's true involvement in the [limited
partnerships] been revealed, along with other
omissions and misrepresentations. In addition,
plaintiffs properly allege that they were assured
of the reliability of the PPMs due to [Ruffa &
Hanover's] preparation and their reputation in
the legal and investment community. Plaintiffs
having sufficiently alleged a securities fraud
violation, the motion . . . to dismiss the
securities fraud claim is denied.
Id. at 7. Accordingly, that aspect of Ruffa & Hanover's motion
to dismiss the fraud claims under Rule 9(b) is denied.*fn10
3. The Accounting Firms — Price Waterhouse, J.H. Cohn
As the Court explained in Griffin I, Rule 9(b) is especially
designed to protect the reputation of accountants and other
professionals from injury caused by unsubstantiated charges of
fraud. See In re Union Carbide Corp. Consumer Products Business
Sec. Litigation, 666 F. Supp. 547, 557 (S.D.N.Y. 1987).
a. Price Waterhouse
Plaintiffs assert claims against Price Waterhouse for (1)
securities fraud under section 10(b) and Rule 10b-5, (2)
aiding and abetting securities fraud, (3) common law fraud,
(4) RICO, predicated on fraud, and (5) negligence.
Price Waterhouse is alleged to have participated in the
fraud concerning the 1982 partnerships by reviewing
management's financial projections and by reviewing and
approving tax opinions prepared by Wiener. S.A.C. ¶¶ 50, 58,
189. The reports prepared by Price Waterhouse as a consequence
of its review are alleged to contain misrepresentations and
omissions concerning the profit potential of the partnerships.
In addition, the reports as to the financial projections are
alleged to have falsely indicated that they contained all
significant disclosures necessary for understanding
management's projections. S.A.C. ¶ 73. The tax opinion letters,
which indicate that Price Waterhouse had reviewed Wiener's tax
opinions and agreed with their substance and that Price
Waterhouse's policy was to prepare the tax returns for the
partnerships on the basis of the tax opinions, are alleged to
be fraudulent because they failed to indicate that the tax
deductions would not be realized.
In Griffin I, the Court concluded that plaintiffs had failed
to plead adequately the scienter element of the fraud charges
against Price Waterhouse. Plaintiffs had argued that a strong
inference of scienter could be found because Price Waterhouse
had withdrawn its reports and tax opinion letters, but the
Court concluded that plaintiffs had failed to set forth any
facts to indicate that, prior to the closing of the offerings,
Price Waterhouse knew of, or recklessly disregarded, the
information which caused it to withdraw its reports. Griffin I,
¶ 94,389 at 92,535.
Once again Price Waterhouse argues that the claims against
it must be dismissed under Rule 9(b) because plaintiffs have
failed to plead facts which give rise to a strong inference of
scienter, while plaintiffs, in essence, ask the Court to find
a strong inference of scienter from the circumstances alleged
surrounding Price Waterhouse's withdrawal of its reports and
tax opinion letters.*fn11
On February 2, 1982 Price Waterhouse advised the general
partner of each of the partnerships by letter that it was
withdrawing its reports on the financial projections and its
tax opinion letters. Exhibit N annexed to S.A.C. In the
February 2, 1983 letter, Price Waterhouse explained that it
had hired an independent petroleum consulting firm to review
the projected reserves in the partnership properties, and that
the firm estimated that the reserves were likely to be only a
small fraction of the reserves set forth in the PPMs.
Id. As a result of this review, and due to questions concerning
the authorship of the original geologist's reports for certain
of the partnerships, Price Waterhouse stated that there were
substantial questions regarding the overall economics of the
programs and that significant tax deductions would not likely
be allowed. Id. Thus, the letter informed the general partners
that Price Waterhouse had decided to withdraw it reports and
would not prepare the tax returns for the partnerships. Id.
Price Waterhouse requested that management notify the investors
of its withdrawal, and the reasons behind its withdrawal.
Id. The letter also stated that Price Waterhouse believed it
was obligated to inform the limited partners itself, should
management refuse to do so. Id.
On February 24, 1983, Wycombe issued the Special Report to
the limited partners notifying them of Price Waterhouse's
withdrawal and the consequent withdrawal of Wiener's tax
opinions. Exhibit I annexed to S.A.C. The Special Report
quoted verbatim the portion of Price Waterhouse's letters
announcing the withdrawal and explaining the reasons behind
it, and also expressed management's criticism and disagreement
with Price Waterhouse's position.
In the Special Report, Wycombe stated that, in December of
1982, it had heard from unidentified third parties that Price
Waterhouse had made a decision not to participate further in
MAR programs. Plaintiffs allege that Price Waterhouse decided
to withdraw from 21 MAR programs, of which six involved
Wycombe, because it determined that the MAR programs, as
structured, did not satisfy the IRS requirements or because it
determined that the projections for these programs were
unreasonable. S.A.C. ¶ 200. They principally argue that this
allegation, coupled with Wycombe's statement, provide the
factual predicate for inferring that Price Waterhouse knew of
the deficiencies in the oil reserves and/or overall partnership
structure at or about the time of the close of the final 1982
partnership, Hastings Energy, Ltd.*fn12
The Court disagrees, as this factually unsupported
allegation cannot sustain a strong inference of scienter.
Plaintiffs, rather than providing facts to buttress their
allegations of scienter, allege facts which substantially
undercut the strength of any inference of scienter that might
be drawn from Price Waterhouse's conduct.
Plaintiffs allege that Price Waterhouse did not hire the
engineering firm which reviewed the partnership reserves until
January 1983. S.A.C. ¶ 203. On January 20, 1983, Price
Waterhouse and representatives of the engineering firm met with
Wiener, Gillham and Crown to discuss the engineering firm's
determinations and Price Waterhouse's concern with the
structure of the partnerships. S.A.C. ¶¶ 88, 203. Price
Waterhouse explicitly premised its withdrawal upon the
engineering firm's findings that the oil reserves were
significantly overstated in the PPMs. Exhibit N annexed to
S.A.C. These findings indicated that the partnerships might not
be economically viable, and therefore, that the tax deductions
might not be sustained — the same allegations which form the
gravamen of plaintiffs' fraud claims. Moreover, these findings
necessarily occurred after Price Waterhouse had prepared its
reports and tax opinion letters, and after the offerings for
the various partnerships had closed.
There is no factual support to infer that other aspects of
the alleged fraud were known to Price Waterhouse prior to the
close of the partnership offerings. While plaintiffs rely on
Wycombe's statement in the Special Report of what it had heard
to argue that Price Waterhouse had decided to withdraw from
the partnerships in December of 1982, Wycombe, also in the
Special Report, stated that Price Waterhouse based its
decision to withdraw from all 21 partnerships because of a
concern over the possible reserves to be produced which arose
as a result of evaluations performed by the engineering firm
it had hired. Exhibit I annexed to S.A.C. While plaintiffs
ignore this latter statement in the Special Report, they offer
no other factual allegations to connect Price Waterhouse with
knowledge of any misrepresentations or omissions concerning
the 1982 partnerships prior to the engineering firm's review
of the partnerships' oil reserves.
Thus, at best, the Second Amended Complaint alleges that
Price Waterhouse became aware of these deficiencies in January
of 1983. Subsequently, Price Waterhouse acted to inform the
general partners of its concern, withdraw its reports and tax
opinion letters, and ensure that the investors were notified
of the reasons behind its withdrawal. These allegations simply
do not support a strong inference of scienter. If anything,
they indicate exactly the opposite: that Price Waterhouse did
not know of the alleged wrongdoing during the offerings of the
While the Court recognizes the difficulties inherent in
pleading a defendant's actual state of mind, factual
allegations to support a strong inference of scienter must be
supplied to satisfy Rule 9(b) in light of the serious harm
that baseless accusations of fraud can cause to the reputation
of a professional firm. Plaintiffs have failed to muster the
bare minimum of facts necessary to support finding an
inference that Price Waterhouse had the requisite scienter.
Accordingly, the fraud claims against Price Waterhouse must be
b. J.H. Cohn
Plaintiffs assert claims against J.H. Cohn for (1)
securities fraud, (2) aiding and abetting securities fraud,
(3) common law fraud, and (4) RICO, predicated on fraud.
It is alleged that J.H. Cohn prepared the financial
projections for the Panhandle partnerships which were formed
by Wycombe in the last half of 1983. S.A.C. ¶¶ 284-85, 378.
These projections, included in the PPMs, were prepared by J.H.
Cohn based upon information supplied by representatives of the
partnerships. S.A.C. ¶ 310. The projections are alleged to have
been based upon unreasonable assumptions regarding the
potential profitability of the partnerships. J.H. Cohn is not
alleged to have had any role in preparing the PPMs or the tax
opinions for the Panhandle partnerships.
The allegations pertinent to J.H. Cohn have not
substantially changed in the Second Amended Complaint from
those considered and found to be lacking by the Court in
Griffin I. At that time, the Court concluded that plaintiffs
no factual allegations to support an inference
that J.H. Cohn contemporaneously knew that the
information it used to prepare the financial
projections was false or that the projections
themselves were misleading. Plaintiffs assert
that [J.H. Cohn's] failure to disclose the
withdrawal of Wiener and Price Waterhouse
provides a strong inference of scienter. They
also argue that J.H. Cohn must have known of the
fraud because it would have inquired about it
before preparing the projections. Neither of
these arguments is factually supported by any
allegation in the Complaint.
Griffin I, ¶ 94,389 at 92,535.
To a large extent, J.H. Cohn and plaintiffs repeat the same
arguments previously considered by the Court. Plaintiffs argue
that a strong inference of scienter can be found because J.H.
Cohn must have inquired of the prior activities of Wycombe,
uncovered the previous partnerships, the withdrawal of the
reports and tax opinion letters by Price Waterhouse and the
tax opinions by Wiener, and the reasons given for these
withdrawals. S.A.C. ¶¶ 379-80. The information about the 1982
partnerships, plaintiffs contend, put J.H. Cohn on notice that
a further inquiry was necessary before it relied on the
information and assumptions supplied by Wycombe in preparing
the projections. S.A.C. ¶ 381. In addition, plaintiffs argue
that as an accounting firm, familiar with the tax laws, J.H.
Cohn had no reasonable basis for concluding that the MARs as
structured would yield sustainable tax deductions. S.A.C. ¶
383. These arguments, presented without any further factual
basis, are insufficient to raise the necessary inference of
Plaintiffs' contentions regarding J.H. Cohn boil down to the
assertion that J.H. Cohn had a duty to investigate the
activities of the prior unrelated partnerships. In and of
itself, however, a failure to investigate does not rise above
the level of negligence unless there are factual allegations
which tend to establish knowledge of the alleged fraudulent
acts. See Eickhorst v. American Completion and Development
Corp., 706 F. Supp. 1087, 1093-94 (S.D.N.Y. 1989); O'Brien v.
Price Waterhouse, 740 F. Supp. 276 (S.D.N.Y. 1990); The Limited,
Inc. v. McCrory Corp., supra, 683 F. Supp. at 394. No such
factual allegations have been provided by plaintiffs.*fn13
On their face, the Panhandle partnerships had no connection
with the prior 1982 partnerships. Indeed, plaintiffs'
allegations do not demonstrate that J.H. Cohn had any duty to
undertake an investigation designed to uncover the history of
prior, unrelated partnerships, given the limited function it
was retained to perform for the Panhandle partnerships.
Accordingly, that aspect of J.H. Cohn's motion seeking to
dismiss the fraud claims against it under Rule 9(b) is
B. Thornton — Failure to State A Claim for
Plaintiffs assert claims against Thornton for (1) aiding and
abetting securities fraud, (2) common law fraud, (3) RICO,
predicated on fraud, and (4) negligence.
Following the withdrawal of Price Waterhouse and Wiener,
Thornton is alleged to have met with Wycombe and been apprised
of all the relevant events that occurred after the closing of
the partnerships, including the reasons for the withdrawals.
S.A.C. ¶ 251. Despite being informed of these developments,
alleged to have approved Wiener's withdrawn tax opinions and
agreed to prepare the K-1 tax forms for the partnerships.
Id. The K-1's prepared by Thornton claimed deductions based on
the MARs and the intangible drilling costs which plaintiffs
allegedly relied upon in preparing their own individual tax
returns, only to have these deductions disallowed by the
Internal Revenue Service. Id.
Plaintiffs' aiding and abetting a securities fraud claim
does not satisfy the requirements of Rule 12(b)(6), despite
the allegation that Thornton knew of the misrepresentations
concerning the oil reserves as a consequence of the
withdrawals of Price Waterhouse and Wiener, because plaintiffs
have not alleged any misrepresentations or omissions on the
part of Thornton which could support such a claim.
To maintain a claim for aider and abettor liability under
section 10(b), plaintiffs must plead: (1) a primary securities
violation; (2) knowledge of that violation; and (3)
substantial assistance by the defendant in furtherance of the
primary violation.*fn15 See Decker v. Massey-Ferguson, Ltd.,
681 F.2d 111, 119 (2d Cir. 1982); IIT, International Investment
Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980). While
plaintiffs have adequately pleaded the existence of a primary
violation by certain defendants, their allegations concerning
Thornton's role in the alleged fraud cannot support an
inference that Thornton substantially assisted the furtherance
of any primary violation.
Plaintiffs allege that Thornton became involved with the
partnerships only after Price Waterhouse and Wiener had
withdrawn. S.A.C. ¶ 251. In the Special Report, Wycombe
notified the limited partners that Thornton had been retained
to prepare the partnership tax returns and that Thornton had
approved Wiener's tax opinion. The Special Report, however, was
issued after the close of the partnerships, and after the final
installment payment was made on the purchase of the partnership
interests. At no time prior to the Special Report is it alleged
that plaintiffs were made aware that Thornton was to have any
involvement with the partnerships.
Section 10(b) and Rule 10b-5 apply to fraud "in connection
with the sale or purchase" of securities. 15 U.S.C. § 78j(b);
17 C.F.R. 240.10b-5. While the "in connection with" phrase is
construed broadly by the courts, United States v. Newman,
664 F.2d 12, 18 (2d Cir. 1981), cert. denied, 464 U.S. 863, 104
S.Ct. 193, 78 L.Ed.2d 170 (1983), allegations of post-purchase
activities alone are insufficient to establish liability as
either a primary violator or an aider and abettor. E.g. Huang
v. Sentinel Government Securities, 709 F. Supp. 1290, 1295
(S.D.N.Y. 1989). See also Schwartz v. Duckett, 1989 WL 16054,
1989 U.S.Dist. LEXIS 1569 (S.D.N.Y. February 21, 1989) (bank's
involvement in alleged fraud months after plaintiff initially
invested did not meet "purchase or sale" requirement of section
Plaintiffs have failed adequately to tie Thornton's
activities to any primary violation of the securities laws.
Substantial assistance in furtherance of the primary violation
requires a showing that the aider and abettor was a causal
factor of the primary violation. See Edwards & Hanly v. Wells
Fargo Securities Clearance Corp., 602 F.2d 478, 484 (2d Cir.
1979), cert. denied, 444 U.S. 1045, 100 S.Ct. 734, 62 L.Ed.2d
731 (1980). In order to state a primary violation under section
10(b) in this Circuit, plaintiffs must plead loss causation and
transaction causation. See Wilson v. Ruffa & Hanover, P.C.,
844 F.2d 81, 85 (1988.), aff'd on reconsideration, 872 F.2d 1124
(2d Cir. 1989). Loss causation concerns whether the
misrepresentations or omissions the defendant allegedly
committed caused the plaintiffs' economic harm, and transaction
causation refers to whether the defendant's alleged violations
caused the plaintiff to engage in the transaction in question.
Id.; Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 380 (2d
1974), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d
467 (1975). Inasmuch as plaintiffs had already completed their
purchase of the limited partnership interests prior to
Thornton's involvement with the partnerships, plaintiffs cannot
allege that Thornton's activities "substantially assisted"
defendants in perpetrating the primary fraud. See Chemical Bank
v. Arthur Andersen & Co., 726 F.2d 930, 943, n. 23 (2d Cir.),
cert. denied, 469 U.S. 884, 105 S.Ct. 253, 83 L.Ed.2d 190
(1984): Department of Economic Development v. Arthur Andersen &
Co., 683 F. Supp. 1463, 1474-76 (S.D.N.Y. 1988). See also Beck
v. Cantor, Fitzgerald & Co., 621 F. Supp. 1547, 1555 (N.D. Ill.
1985) (accounting firm not liable as aider and abettor for
misrepresentations and omissions which occurred after plaintiff
Notwithstanding the completion of the sale of the limited
partnership interests prior to Thornton's alleged involvement,
plaintiffs claim that, as a result of Thornton's actions, they
did not seek to rescind their agreements. This assertion,
however, is insufficient to support a claim for aiding and
abetting under the securities laws. Department of Economic
Development v. Arthur Andersen & Co., supra, 683 F. Supp. at
1475-76 (the possibility of rescission, a latent remedy in any
contract, does not determine when the purchase or sale of the
Accordingly, plaintiffs have failed to state the elements of
an aiding and abetting claim under the securities laws against
Thornton, and this claim must be dismissed.
C. Cautionary Language in the PPMs, Projections and Tax
"To state a claim under Section 10(b), a complaint must
allege material misstatements or omissions indicating an
intent to deceive or defraud in connection with the purchase
or sale of a security." Luce v. Edelstein, supra, 802 F.2d at
55. The moving defendants, with the exception of Thornton,
argue that, as a matter of law, the PPMs, tax opinions, and
financial projections cannot support a claim of fraud because
they contain cautionary language which warns the investors that
the anticipated profits and tax benefits might not be achieved.
In Luce v. Edelstein, supra, 802 F.2d at 56, the Second
Circuit stated that it "was not inclined to impose liability"
on the basis of statements in offering materials regarding
financial projections of future cash flow and expected tax
benefits, where the statements "clearly `bespeak caution.'"
Consequently, warnings and disclaimers may limit the extent to
which an investor can rely on the offering documents as a
forecast of future events. Friedman v. Arizona World Nurseries,
Ltd. Partnership, 730 F. Supp. 521, 541 (S.D.N.Y. 1990).
Dismissal of securities fraud claims may be appropriate where
the offering documents specifically warn plaintiffs not to rely
on the alleged misrepresentations made by defendants, thus
making any subsequent reliance unjustified. Id. at 536-41;
Feinman v. Schulman Berlin & Davis, 677 F. Supp. 168, 171
(S.D.N.Y. 1988); Stevens v. Equidyne Extractive Industries
1980, Petro/Coal Program 1, 694 F. Supp. 1057, 1066 (S.D.N Y
The moving defendants contend that the offering materials
contain explicit disclaimers which warned that the
partnerships might not be profitable, that the anticipated tax
benefits might not be realized and that the assumptions upon
which the offering materials relied might fail to occur. They
maintain that, as a matter of law, these disclaimers negate
any inference of fraud.
Plaintiffs, however, challenge more than just the future
forecasts and predictions in the offering materials.*fn16
They argue that the underlying assumptions of the PPMs, tax
opinions and projections were designed to mislead the
into believing that the partnership investments offered them
the opportunity to achieve a profit and a tax benefit from
their investment, when in reality defendants knew that these
possibilities did not exist because, among other things, of
the nature of the properties upon which the partnerships were
to drill, the expenses they would incur, and the financial
structure of the operations. Inasmuch as certain of these
allegations go to the misleading nature of the statements when
made, the existence of cautionary language regarding the
general unpredictability of, inter alia, oil and gas
operations, economic trends, and the interpretation of the tax
laws, will not bar plaintiffs from maintaining their claims
against the remaining defendants. See Jameson v.
Prudential-Bache Securities, 1990 WL 52197, 1990 U.S.Dist.
LEXIS 4635 (S.D.N.Y. April 18, 1990). See also CL-Alexanders
Laing & Cruickshank v. Goldfeld, 739 F. Supp. 158 (S.D.N Y
D. The RICO Claim
In plaintiffs' thirty-seventh claim for relief, they allege
that all of the defendants participated in the conduct of an
enterprise through a pattern of racketeering activity in
violation of 18 U.S.C. § 1962(c), and conspired to violate
section 1962(c) in violation of 18 U.S.C. § 1962(d). S.A.C. ¶¶
506-518; see also RICO Case Statement, filed May 22, 1989
(limiting relief sought to that under §§ 1962(c) and (d)).
Section 1962(c) makes it unlawful
for any person employed by or associated with any
enterprise engaged in, or the activities of which
affect, interstate or foreign commerce, to
conduct or participate, directly or indirectly,
in the conduct of such enterprise's affairs
through a pattern of racketeering activity. . . .
To state a cause of action under section 1962(c) a plaintiff
must allege (1) conduct (2) of an enterprise (3) through a
pattern (4) of racketeering activity. Sedima, S.P.R.L. v. Imrex
Co. Inc., 473 U.S. 479
, 496, 105 S.Ct. 3275, 3285, 87 L.Ed.2d
346 (1985); Procter and Gamble Co. v. Big Apple Industrial
Bldgs., Inc., 879 F.2d 10
, 14-15 (2d Cir. 1989), cert. denied,
___ U.S. ___, 110 S.Ct. 723
, 107 L.Ed.2d 743 (1990).
Under the RICO statute, an enterprise is defined as
including "any individual, partnership, corporation,
association, or other legal entity, and any union or group of
individuals associated in fact although not a legal entity."
18 U.S.C. § 1961(4). Racketeering activity is the commission of
certain predicate acts, defined to include, inter alia, fraud
in the sale of securities, mail fraud, and wire fraud,
18 U.S.C. § 1961(1), and a pattern of racketeering activity
requires "at least two acts of racketeering activity, . . . the
last of which occurred within ten years . . . after the
commission of a prior act of racketeering activity."
18 U.S.C. § 1961(5).
Various defendants have attacked the adequacy of plaintiffs'
RICO claims, arguing that (1) the Second Amended Complaint
fails to allege predicate acts to support a RICO violation,
(2) the RICO claims are barred by the statute of limitations,
and (3) plaintiffs have failed to allege an enterprise or a
pattern of racketeering activity cognizable under the statute.
1. Predicate Acts of Racketeering
Plaintiffs allege each defendants committed two or more
predicate acts of securities fraud, mail fraud, or wire
fraud.*fn17 With respect to Crown, Wiener and Ruffa &
Hanover, the Court has found that plaintiffs adequately
asserted claims under the securities laws. Thus, they have
pled a number of predicate acts of securities violations for
these defendants sufficient to satisfy this initial
requirement under RICO. See United States v. Kaplan,
886 F.2d 536, 541-42 (2d Cir. 1989) (bribes offered to two persons in
the same conversation stated two predicate acts); Beauford v.
Helmsley, 865 F.2d 1386, 1391-92 (2d Cir. 1989) (en banc),
vacated for further consideration in light of H.J. Inc.,
___ U.S. ___, 109 S.Ct. 3236, 106 L.Ed.2d 584 (1989),
aff'd on reconsideration, 893 F.2d 1433 (2d Cir. 1989), cert.
denied, ___ U.S. ___, 110 S.Ct. 539, 107 L.Ed.2d 537 (1989).
The RICO claims against Price Waterhouse and J.H. Cohn must
be dismissed, however, as the Court has concluded that
plaintiffs have failed to state adequately a claim for fraud,
including securities fraud, mail fraud and wire fraud, see Beck
v. Manufacturers Hanover Trust Co., supra, 820 F.2d at 49-50,
and they have similarly failed to allege any agreement
involving these defendants to support a conspiracy accusation.
See Friedman v. Arizona World Nurseries Ltd. Partnership,
supra, 730 F. Supp. at 548-49; Department of Economic
Development v. Arthur Andersen & Co., supra, 683 F. Supp. at
The RICO claim against Thornton stands on a different
footing, however, to the extent the Court, in concluding that
plaintiffs had failed to allege any security fraud violations,
did not consider whether plaintiffs had alleged predicate acts
of mail fraud. In order to state a claim of mail fraud,
plaintiffs must allege (1) the existence of a scheme to
defraud, (2) defendant's knowing or intentional participation
in that scheme, and (3) use of the interstate mails in
furtherance of the scheme. See Beck v. Manufacturers Hanover
Trust Co., supra, 820 F.2d at 49. The Court need not decide
whether plaintiffs have adequately alleged predicate acts of
mail fraud by Thornton, however, as the RICO claim asserted
against it is, in any event, barred by the statute of
2. Statute of Limitations
In Agency Holding Corp. v. Malley-Duff & Associates, Inc.,
483 U.S. 143, 107 S.Ct. 2759, 97 L.Ed.2d 121 (1987), the
Supreme Court determined that a four year limitations period is
applicable to civil RICO claims. The statute of limitations
begins to run from the time plaintiffs discovered, or should
have discovered, their injury. E.g. Bankers Trust Co. v.
Rhoades, 859 F.2d 1096, 1102 (2d Cir. 1988), cert. denied, ___
U.S. ___, 109 S.Ct. 1642, 104 L.Ed.2d 158 (1989). On a motion
to dismiss, when the facts alleged in the complaint indicate
that, with reasonable diligence, plaintiffs should have
uncovered the alleged fraud prior to the limitations period,
the claim will be time-barred. See Armstrong v. McAlpin,
699 F.2d 79, 88 (2d Cir. 1983).
Plaintiffs who invested in the 1982 partnerships purchased
their interests during the course of 1982. Likewise, the
investments in the 1983 partnerships all occurred during 1983.
The original complaint in this action was not filed until
January 26, 1988, more than four years after the transactions
in question. Still, plaintiffs argue that the RICO claim is
timely because they could not have uncovered the fraud prior
to receiving reports from the Internal Revenue Service in 1987
advising them that the tax deductions would be denied in large
measure because the partnerships had not been organized to
generate a profit.
With respect to the 1983 partnerships, the Second Amended
Complaint does not indicate that plaintiffs should have
discovered the fraudulent acts prior to the end of January
1984. Therefore, the Court cannot conclude, on the basis of
the pleading alone, that these claims are time-barred.
As for the 1982 partnerships, plaintiffs conveniently ignore
their own arguments, put forth forcefully in connection with
their allegations of Thornton's involvement with the fraud,
that the withdrawal of the reports and tax opinions by Price
Waterhouse and Wiener in February 1983 was at least sufficient
to provide notice that a further investigation into the
activities of the partnerships was necessary.
In February 1983, the plaintiffs in the 1982 partnerships
were informed that there was a possibility that (1) the
original geology reports had significantly overstated the oil
reserves, (2) there were questions as to the authorship of the
geologist's reports, and (3) the Internal Revenue Service was
likely to find that the tax deductions were improper. Exhibit
I annexed to S.A.C. At that time, plaintiffs were made aware
that the unfavorable estimates regarding the oil reserves were
based on the findings of an independent engineering firm, and
that the concerns over the economics of the partnerships were
serious enough to have resulted in the withdrawal of Price
Waterhouse and Wiener.*fn19 Thus, plaintiffs were on inquiry
notice of the alleged fraud upon being informed of the
withdrawals in February 1983, more than four years prior to
filing their complaint. See Volk v. D.A. Davidson & Co.,
816 F.2d 1406, 1411, 1415-16 (9th Cir. 1987) (notice to plaintiffs
of deficiency in coal reserves and questions by IRS as to the
commercial viability of partnership's business and, therefore,
the validity of the certain tax deductions, was sufficient to
put plaintiffs on inquiry notice of the alleged fraudulent
acts, notwithstanding that the IRS did not disallow the
deductions for a number of years).
Plaintiffs maintain that they did not discover the fraud due
to the fraudulent concealment of certain defendants, namely
Wycombe and McNiff, who criticized the reasons behind the
withdrawals in the Special Report and informed them that
Thornton had agreed to replace Price Waterhouse and prepare
the partnerships' tax returns.
In seeking to toll the statute of limitations through
allegations of fraudulent concealment, plaintiffs bear the
burden to plead with particularity "(1) the wrongful
concealment by the defendant of its actions, (2) the failure
by the plaintiff to discover the operative facts underlying
the action within the limitations period, and (3) the
plaintiff's due diligence to discover the facts." Donahue v.
Pendleton Woolen Mills, Inc., 633 F. Supp. 1423, 1443 (S.D.N Y
1986). The limitations period will not be tolled if plaintiffs
had a reasonable basis to suspect a wrong, yet failed to
exercise due diligence to investigate the matter. Id.
Just as plaintiffs argue that the notification of the facts
concerning the withdrawal required Thornton to further
investigate the partnerships, notwithstanding the assurances
from the general partners, so too did these facts require
plaintiffs to further investigate the acts they now claim
constitute fraud. Inasmuch as plaintiffs were put on inquiry
notice from the withdrawals, they may not rely on allegations
of fraudulent concealment to avoid the limitations bar unless
they exercised due diligence in attempting to ascertain the
facts related to the alleged fraud, but were nevertheless
unable or prevented from discovering the nature of their
claim. See Volk v. D.A. Davidson & Co., supra, 816 F.2d at
1415-16. Accord Freschi v. Grand Coal Venture, 767 F.2d 1041,
1046 n. 7 (2d Cir. 1985), vacated on other grounds,
478 U.S. 1015, 106 S.Ct. 3325, 92 L.Ed.2d 731 (1986); Bender v. Rocky
Mountain Drilling Associates, 648 F. Supp. 330, 334-35 (D.D.C.
1986). Plaintiffs have wholly failed to allege that they did
anything to investigate the possibility of fraud.*fn20
Accordingly, the RICO claim concerning the 1982 partnerships is
barred by the four year statute of limitations.
Ruffa & Hanover, the remaining movant involved in the 1983
partnerships, argues that the RICO claim relating to the 1983
partnerships fails to state an enterprise or a pattern of
3. The "Enterprise" Element
A RICO enterprise is generally a group of persons associated
together for a common purpose of engaging in a course of
conduct. Procter & Gamble Co. v. Big Apple Industrial Bldgs.,
Inc., supra, 879 F.2d at 15. Evidence of an ongoing
organization, the associates of which function as a continuing
unit, suffices to prove an enterprise. United States v.
Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 2528, 69 L.Ed.2d
246 (1981). Plaintiffs have alleged that defendants, in various
combinations, associated in an ongoing organization to sell
interests in an unlimited series of limited partnerships. This
association was "engaged in the business of oil and gas
exploration, the drilling and operation of oil and gas fields
and the promotion, sale and distribution of interests in the
limited partnerships which developed, drilled and operated the
oil and gas fields." RICO Case Statement, supra, at ¶ 9. Ruffa
and Hanover is alleged to be part of the enterprise as a result
of its preparation of the fraudulent PPMs and the financial
interest in the partnerships held by Ruffa, its senior partner.
These allegations are sufficient to satisfy the "enterprise"
element under RICO. See Shumate v. McNiff, supra, 1990 WL
6549, 1990 U.S.Dist. LEXIS 547 at 12.
4. The "Pattern" Element
In H.J. Inc. v. Northwestern Bell Telephone Co., ___ U.S.
___, 109 S.Ct. 2893, 2897, 106 L.Ed.2d 195 (1989), the Supreme
Court attempted to clarify RICO's pattern requirement and
resolve at least some of the discrepancies in interpretation of
the pattern element among the Circuit Courts.
In order to prove a pattern of racketeering activity a
plaintiff must show that the racketeering predicates are
related, and that they amount to or pose a threat of continued
criminal activity. Id. 109 S.Ct. at 2900. Multiple illegal
schemes are not necessary to form a pattern. Id. at 2899. See
also Beauford v. Helmsley, supra, 865 F.2d at 1391 (the Second
Circuit, foreshadowing H.J. Inc., rejected its prior practice
of requiring "relatedness" and "continuity" in the enterprise
element, shifting these requirements to the pattern
The relationship component of a pattern of racketeering
activity is satisfied by "`criminal conduct . . . [which]
embraces criminal acts that have the same or similar purposes,
results, participants, victims, or methods of commission, or
otherwise are interrelated by distinguishing characteristics
and are not isolated events.'" H.J. Inc. v. Northwestern Bell
Telephone Co., supra, 109 S.Ct. at 2901 (quoting 18 U.S.C. § 3575(e)
The continuity component of a pattern of racketeering
activity is satisfied by plaintiff proving "continuity of
racketeering activity, or its threat, simpliciter." Id. at
`Continuity' is both a closed and open-ended
concept, referring either to a closed period of
repeated conduct, or to past conduct that by its
nature projects into the future with a threat of
repetition . . . A party alleging a RICO
violation may demonstrate continuity over a
closed period by proving a series of closed
predicates extending over a substantial period of
time. Predicate acts extending over a few weeks
or months and threatening no future criminal
conduct do not satisfy this requirement. Congress
was concerned in RICO with long-term criminal
Id. at 2902.
In order to state a RICO claim, a plaintiff must plead a
basis from which to infer that the alleged acts of
racketeering activity were neither isolated nor sporadic.
Procter & Gamble v. Big Apple Industrial Bldgs., Inc., supra,
879 F.2d at 18; Beauford v. Helmsley, supra, 865 F.2d at 1391.
Plaintiffs have alleged that defendants carried out the
affairs of the enterprise through a scheme to defraud
which continued, in one form or another, over a number of
years. During this period, plaintiffs have alleged that
defendants committed various acts of securities fraud and mail
fraud, and that these fraudulent acts were defendants' regular
way of forming and issuing interests in the partnerships. At
this preliminary stage in the litigation, such allegations
suffice to state a pattern of racketeering activity, and the
Court declines to dismiss the remaining RICO claims involving
Ruffa & Hanover. See Shumate v. McNiff, supra, 1990 WL 6549,
1990 U.S.Dist. LEXIS 547 at 12. See also Friedman v. Arizona
World Nurseries Ltd., supra, 730 F. Supp. at 548.
E. Leave to Replead the Fraud Claims Dismissed Under Rule
In Griffin I, after the Court had found plaintiffs
allegations of fraud insufficient, they were given leave to
replead as is customary in an initial dismissal for failure to
comply with Rule 9(b). See Luce v. Edelstein, supra, 802 F.2d
at 56. The Court, in its prior decision, highlighted the
numerous inadequacies of the First Amended Complaint and
specified that plaintiffs replead only if they believed in good
faith that they could cure these deficiencies. Nevertheless,
plaintiffs' third attempt to plead fraud against Price
Waterhouse and J.H. Cohn suffers from the same absence of
factual allegations as the previous pleadings.*fn22 Moreover,
plaintiffs' approach in repleading the claims against these
defendants, including misleading cross-references and
overwhelming verbiage, suggest to the Court that any additional
pleading would not be fruitful. Inasmuch as plaintiffs have
been given ample opportunity to plead their claims properly,
yet have failed to do so, dismissal with prejudice is
justified. See Armstrong v. McAlpin, supra, 699 F.2d at 93-94
(fourth attempt to replead claims denied); Decker v.
Massey-Ferguson, Ltd, supra, 681 F.2d at 114-15 (third attempt
to replead claims denied); Denny v. Barber, 576 F.2d 465,
470-71 (2d Cir. 1978) (same); Friedman v. Arizona World
Nurseries Ltd., supra, 730 F. Supp. at 551 (same). Accordingly,
the fraud claims against Price Waterhouse and J.H. Cohn are
dismissed with prejudice.
F. The State Law Claims Against the Accounting Firms
The dismissal of the federal claims against Price
Waterhouse, J.H. Cohn and Thornton removes the basis for
federal jurisdiction over the remaining pendant state law
claim for negligence. See United Mine Workers v. Gibbs,
383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966);
Finley v. United States, 490 U.S. 545, 109 S.Ct. 2003, 2009-10,
104 L.Ed.2d 593 (1989) (pendent party jurisdiction not
permissible in cases arising under the Federal Tort Claims
Act). See also Staffer v. Bouchard Transportation Co.,
878 F.2d 638, 643 n. 5 (2d Cir. 1989) (expressing doubts about the
continued validity of pendent party jurisdiction after Finley).
In the Court's view, the dismissal of the claims supplying the
basis for jurisdiction at this early point in the litigation
warrants dismissal of the remaining state law claims.
Therefore, the claims for negligence and, to the extent it
remains viable, the claim for common law fraud against
Thornton, are dismissed for lack of subject matter
The motions of Price Waterhouse, J.H. Cohn, and Thornton to
dismiss are granted and the Second Amended Complaint is
dismissed against them. The motions of Crown and Wiener to
dismiss are granted in part and denied in part, to the extent
that the RICO claims asserted concerning the 1982 partnerships
are dismissed as being barred by the statute of limitations.
The motion of Ruffa & Hanover is denied in its entirety. The
parties are directed to
complete discovery by February 14, 1991 and file a pre-trial
order by March 14, 1991.
It is so ordered.