The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.
This is an action alleging securities fraud in violation of
section 17(a) of the Securities
Act of 1933, 15 U.S.C. § 77q (1988), section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j (1988), and
Rule 10b-5 of the Securities Exchange Commission promulgated
thereunder, and alleging violations of the Racketeer Influenced
and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et
seq. (1988), as well as various state law violations.
Defendants James M. Connors ("Connors") and Connors Investor
Services, Inc. ("CIS"), now move for partial summary judgment
dismissing certain counts of plaintiffs' Third Amended
Complaint pursuant to Fed.R. Civ.P. 56(a) and 9(b). For the
reasons set forth below, defendants' motion is granted in part
and denied in part.
It is undisputed that in late 1976, plaintiff Gail Varnberg,
a resident of New York, inherited a portfolio of stocks, bonds
and cash valued at nearly $6 million as beneficiary of a trust
established by her grandparents. Gail Varnberg and her husband
Robert, also a New York resident, allege that in July 1977 they
met defendant F. Wendell Minnick ("Minnick") of Minnick
Resources, Inc. of New York. See Gail Varnberg Aff. ¶ 7.
Plaintiffs admit that beginning in 1977 they invested in a
number of venture capital and tax shelter investments promoted
by Minnick. Defendants' Rule 3(g) Statement filed Sept. 22,
1989 (hereinafter "Def. Rule 3(g) Stmt.") ¶ 13; Plaintiffs'
Response to Defendant's Rule 3(g) Statement filed Dec. 1, 1989
(hereinafter "Pl. Rule 3(g) Stmt.") ¶ 13.
Defendant Martin J. Oppenheimer ("Oppenheimer") is a
corporate and tax attorney retained by the Varnbergs in
November 1977. Plaintiffs deny that they hired Oppenheimer as
anything more than a legal advisor, see Pl. Rule 3(g) Stmt. ¶
12, although defendants claim that plaintiffs hired Oppenheimer
upon Minnick's recommendation to represent them in connection
with investments particularly tax shelter investments they were
beginning to make through Minnick and Hayes. Def. Rule 3(g)
Stmt. ¶ 12.
Plaintiffs claim that beginning in 1977 they were
fraudulently induced by defendants Minnick, Hayes and
Oppenheimer to invest in excess of $1 million of the funds Gail
Varnberg had inherited in a number of ventures, none of which
plaintiffs allege ever turned a profit.
Defendant CIS is a registered investment company with its
principal place of business in Pennsylvania. The parties do not
dispute that on November 14, 1977 the Varnbergs signed an
"Investment Management Agreement" retaining CIS to manage the
portfolio of assets Gail Varnberg had inherited the previous
year. Defendant James M. Connors, a registered investment
advisor and resident of Pennsylvania, is president of CIS and
signed the Investment Management Agreement.
Although the written agreement does not explicitly apply to
investments of the type plaintiffs made through Minnick using
portfolio assets, plaintiffs claim that Connors and CIS
undertook to advise them with respect to all their
investments.*fn1 To support this allegation, plaintiffs rely
on a letter on CIS stationery signed by Connors which predates
the written agreement and which states:
Connors Investor Services will not manage tax
shelter investments but will assist in the
analysis of what amounts should be placed in such
vehicles and assist in the selection of
Pollack Aff., Exh. 44 (Letter from CIS to the Varnbergs dated
November 11, 1977). Connors and CIS disclaim any such duties,
pointing out that by its terms the November 14, 1977 Investment
Management Agreement did not address tax shelter
investments.*fn2 See Pollack Aff., Exh. 1; Connors Aff. ¶ 17.
CIS's primary activities in managing the Varnbergs' portfolio
are reflected in 21 quarterly valuation statements mailed to
the Varnbergs*fn3 between March 6, 1978 and May 17, 1983.*fn4
Those statements on their face make no mention of any of the
allegedly fraudulent investments forming the basis of this
action. None of the individual statements evaluate the
performance of any tax shelter investment.
Gail Varnberg claims that she formed a separate oral
agreement with Connors individually on or about November 14,
1977 retaining him as her personal investment advisor and
analyst. Gail Varnberg Aff. ¶ 16. She relies at least in part
on the existence and contents of an unsigned document entitled,
"Gail Varnberg/Suggested Basic Investment Strategy/October 31,
1977" which she alleges was written by Connors and which
mentions the selection of investments for the purpose of
"sheltering of taxable income." Gail Varnberg Aff., Exh. B. No
written agreement retaining Connors as Gail Varnberg's personal
advisor existed until April 28, 1979 when the two executed a
letter agreement.*fn5 Pollack Aff., Exh. 3. Connors denies
making any oral agreement with Gail Varnberg prior to April 28,
1979 and the parties dispute the meaning of Connors' written
Plaintiffs allege that the aforementioned agreements, taken
as a whole, created a duty on the part of Connors and CIS to
investigate all the investments plaintiffs were making and that
because Connors and CIS breached that duty, plaintiffs lost in
excess of $1 million.
It is undisputed that the Varnberg portfolio had a market
value of approximately $4,925,683 when CIS was retained in
1977. Gail Varnberg added $960,056 in assets to the portfolio
in 1978. Connors and CIS contend, although plaintiffs deny,
that from November 1977 until CIS was discharged in June 1983,
the Varnbergs' portfolio increased in value by $2,965,166.
Connors Aff. ¶¶ 11. The Varnbergs admit, at paragraph 11 of
their response to defendants' Rule 3(g) statement, that between
1978 and 1983 they withdrew $6,071,378 in assets from the
portfolio held by CIS for personal use and for certain
investment expenditures which are the subject of this action.
The investments, described more fully below, can be identified
under the following general headings: (1) Jasper
Partners; (2) BW Partners; (3) D-M Partners; (4) Annetta
Partners; (5) Texas Partners; (6) Marifarms Shrimp; (7) Interex
Management; and (8) New Haven Acquirers. The identity, initial
date of investment and amounts invested, except for BW
Partners' investment in the "Red Shoes" venture, are not
controverted. See Def. Rule 3(g) Stmt. ¶ 13; Pl. Rule 3(g)
Stmt. ¶ 13.*fn6
On November 30, 1977, plaintiffs first invested $200,000 in
Jasper Partners '77 which Minnick and Hayes had represented to
the Varnbergs to be an oil and gas tax shelter. The
Subscription Agreement for Jasper Partners, signed by Gail and
Robert Varnberg, asks, "Have you relied or will you rely on an
investment advisor with respect to investing in the
Partnership?" after which there appears a handwritten "NO".
Pollack Aff., Exh. 11 at 11. Plaintiffs deny that the
handwriting belongs to either of them and assert that the
agreement they signed was blank. Gail Varnberg Aff. ¶ 30;
Robert Varnberg Aff. ¶ 17.
Sometime in 1978, Robert Varnberg and Minnick Resources, Inc.
formed a general partnership in New York known as BW Partners
to identify and invest in a variety of ventures involving
theatrical and motion picture productions.*fn7 Gail Varnberg
provided the necessary funding by making, between June 1978 and
September 1980, 48 separate unsecured "loans" to BW Partners
totalling $411,766.50. In return for her loans to the
partnership, Gail Varnberg received a so-called "note"*fn8
from BW Partners
payable "upon demand to the order of Gail B. Varnberg,"
executed on October 31, 1978 by Minnick, general partner of BW,
acting for Minnick Resources, Inc., but dated June 7, 1978.
Id., Exh. B. The record does not indicate who drafted the note,
although the initials "MJO" (apparently designating Martin J.
Oppenheimer) appear alongside certain notations in the schedule
of borrowings attached to the note. Id. Minnick admitted at his
deposition that Gail Varnberg's loans, at least insofar as the
money was applied toward Theatre Arts Concepts, Ample Christian
Endeavors, Fuel Crisis, Rosa Company and Hot Laps, described
infra, were never repaid to her. Pl.Nov.Subm., Exh. E at 72,
76, 79 & 97.
The individual loans to BW Partners by Gail Varnberg listed
in the schedule of borrowing can be grouped as follows: (1)
$26,000 in March 1978 which BW in turn loaned to an entity
called "Rosa Company"*fn9 which presented 12 off-Broadway
performances of the play "Rosa" in which Minnick's wife
starred;*fn10 (2) approximately $15,000 in December 1978 which
BW in turn loaned to an "English company" called "Ample
Christian Endeavors" which was assisting farmers in
Nigeria;*fn11 (3) $10,000 sometime in 1978 or 1979 for a
"musical adaptation of the film, 'The Red Shoes'" which Minnick
was planning to produce;*fn12 (4) $40,000 in 1979 which in
turn was used by BW Partners and Minnick Resources to make a
promotional film for a movie entitled, "Red Right
Returning";*fn13 (5) $10,000 in 1979 which BW "invested" in a
company called Fuel Crisis which was developing a new fuel
additive;*fn14 (6) $50,000 in 1979 which went to an
"operation" called Theatre Arts Concepts;*fn15 (7) $225,000 in
and after March 1978 which BW Partners advanced to a company
owned by Minnick which was to produce a movie entitled "Hot
Laps";*fn16 and (8) $10,000 in 1978 or 1979 for "Aviation
Information Services" which Minnick Testified was a "software
systems, management system for executive aircraft based in
Denver, Colorado."*fn17 The record shows that the only loan
for which BW Partners procured some type of promissory note was
the loan to Ample Christian Endeavors. Nov.Subm., Exh. E at 70.
In 1979, Robert and Gail Varnberg formed a partnership
between themselves known as Driftwood Partners which then
joined with Minnick to form D-M Partners. Def. Rule 3(g) Stmt.
¶ 13; Pl. Rule 3(g) Stmt. ¶ 13.*fn18 D-M Partners allegedly
purchased a corporation known as Aiand International in 1979
and sold it in 1982, in connection with which plaintiffs allege
they lost $60,000. Gail Varnberg Aff. ¶¶ 33-34.
The anticipated consequence [of the transfer of
assets from BW Partners to Gail Varnberg] is that
you will then be entitled to a bad debt deduction,
treated as a 1981 capital loss, equal to the
difference between the amounts you have loaned and
the value of BW's assets. The Assignment sets
forth that value as being $1,000, although it is
possible that the IRS might claim a larger value.
Pl.Nov.Subm., Exh. D. Oppenheimer's letter continues by stating
that in fact "one of the assets you will end up with may have
substantial value," referring to "a corporation named Cinema
Resources Inc." based on the "Hot Laps" movie. Id.
Apart from plaintiffs' initial investment in Jasper Partners,
Gail Varnberg's loans to BW Partners, and the D-M Partners
transaction, plaintiffs became involved with certain limited
partnerships which Minnick and Hayes allegedly represented to
be tax shelter investments. Those investments allegedly took
place as follows: (1) in 1978, plaintiffs allegedly loaned
$203,000 to "Annetta Partners" which allegedly then loaned
$53,000 to Texas Partners, also alleged to be a tax
shelter;*fn20 (2) also in 1978, plaintiffs allegedly formed
Gailswell Corporation which between October 1978 and June 1979
invested $75,000 in Texas Partners under a subscription
agreement signed by Robert Varnberg on behalf of Gailswell
Corporation;*fn21 and (3) in 1978 or 1979, Gail Varnberg
invested $76,250 in "Marifarms Shrimp" under a subscription
agreement signed only by her.*fn22 In response to the question
in the subscription agreement for Marifarms Shrimp, "Have you
relied or will you rely on an investment advisor with respect
to investing in the Partnership?" there appears a handwritten
notation "Yes" followed by the answer "Martin Oppenheimer."
Gail Varnberg claims the form was blank when she signed it and
that she did not provide the handwritten responses. Gail
Varnberg Aff. ¶ 30.
For each venture beginning with Jasper Partners in 1977,
plaintiffs allege that Minnick represented a high probability
of success and failed to disclose that there was in fact a high
risk of failure of which he was allegedly aware at the time. It
is undisputed that none of these ventures proved profitable and
that plaintiffs and the other investing entities lost their
entire investment in nearly every case.
Oppenheimer allegedly fraudulently induced plaintiffs to make
two other investments, $175,000 in Interex Management in
1980*fn23 and $123,000 in New Haven Acquirers, a limited
partnership which the Varnbergs entered in 1981.*fn24
Plaintiffs claim that Oppenheimer failed to disclose material
facts indicating that it would be very difficult for either
venture to obtain enough investors to permit plaintiffs to
obtain a return of or profit on their investments. Gail
Varnberg Aff. ¶¶ 35-38.
3. The Claims Against the Moving Defendants (Connors and CIS)
Connors, on the other hand, contends that although plaintiffs
were channeling portfolio profits into various ventures, these
ventures were not considered part of the portfolio of assets
under CIS's management. Connors also contends that he advised
the Varnbergs as early as 1979 to curtail their investments in
certain ventures including BW Partners but that the Varnbergs
ignored his advice. Connors Aff. ¶¶ 19-20. Plaintiffs deny that
Connors rendered any such advice. Gail Varnberg Aff. ¶
53.*fn27 The Varnbergs continued to fund BW Partners and other
ventures through cash withdrawals from their portfolio until at
Plaintiffs commenced this action in June 1983 naming Minnick,
Minnick Resources, Inc., Minnick Resources Management, Inc.,
Hayes, Hayes Resources, Inc. and Oppenheimer as defendants. On
March 28, 1985 plaintiffs filed a Second Amended Complaint
adding Connors and CIS as defendants.*fn28 Plaintiffs allege
that Connors and CIS are liable for aiding and abetting the
allegedly fraudulent activities of Minnick, Hayes and
Oppenheimer by failing to make appropriate investigation of the
ventures or by failing to report to the Varnbergs what they had
discovered. The complaint also charges Connors and CIS with
federal securities and RICO violations, breach of the 1977 and
1979 investment agreements, breach of ...