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United States District Court, Southern District of New York

March 13, 1991


The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.


Jury Trial Demanded

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.


1. The Parties

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
  appropriate holdings.

  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 agreement.

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.

2. The Investments

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.

  On December 29, 1981 BW Partners "for the sum of $1000 . . .
sold, transferred and assigned . . . all of the right, title
and interest of the Partnership, in and to all the assets and
properties of the Partnership" to Gail Varnberg. Nov.Subm.,
SALE").*fn19 In a letter to Gail Varnberg dated December

29, 1981 — apparently the cover letter submitting the
conveyance to Gail Varnberg for her signature — Oppenheimer

    . . [T]he time has come to claim the tax
  benefits resulting from the loans that you have
  made to BW Partners.

    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)

Plaintiffs charge that CIS had undertaken to assist them in analyzing the aforementioned tax shelter investments by virtue of its November 11, 1977 letter and that Connors had agreed orally in 1977, and in writing on April 28, 1979, to advise plaintiffs with respect to all of their investments. Plaintiffs contend that in each case Connors was asked to investigate the advisability of the proposed expenditure of funds but due to alleged relationships with Minnick*fn25 and Oppenheimer, Connors either failed to make the appropriate investigation or failed to report what he had discovered or should have discovered.*fn26

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 least 1980.

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 fiduciary duty and unjust enrichment. Plaintiffs filed a Third Amended Complaint, the subject of this motion, on February 6, 1986 adding another count against defendant Oppenheimer.

Plaintiffs have obtained default judgments against Hayes and Hayes Resources, Inc. and have settled their claims against Oppenheimer.


Summary judgment is appropriate if the evidence offered demonstrates that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The burden rests on the moving party to demonstrate the absence of a genuine issue of material fact, Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970), and the Court must view the facts in the light most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962). As the Supreme Court has observed, summary judgment serves the useful purpose of isolating and disposing of factually unsupported claims. See Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986).

1. The Federal Claims

(a) Securities Fraud

The federal securities fraud charges against the moving defendants in the Third Amended Complaint (¶¶ 302-04) are labelled as Count 25 against Connors and as Count 2 against CIS. Each count charges these defendants with violating § 17(a) of the '33 Act and § 10(b) of the '34 Act.

(1) Private Right of Action under Section 17(a)

As an initial matter, this Court notes the growing body of precedent in this Circuit that no private right of action exists under § 17(a) of the Securities Act of 1933. See, e.g., Seidenberg v. Drexel Assocs., [1990] Fed.Sec.L.Rep. (CCH) ¶ 95,477, 1990 WL 130771 (S.D.N.Y. Sept. 5, 1990); Tobias v. First City Nat'l Bank & Trust Co., 709 F. Supp. 1266, 1274-76 (S.D.N.Y. 1989) (collecting cases); SSH Co. v. Shearson Lehman Bros. Inc., 678 F. Supp. 1055, 1058-1059 (S.D.N.Y. 1987). The Second Circuit has stated that the existence of a private right of action under section 17(a) is in need of reexamination. See Wexner v. First Manhattan Co., 902 F.2d 169, 174 (2d Cir. 1990). Accordingly, partial summary judgment dismissing those portions of Count 25 against Connors and Count 2 against CIS which assert violations of § 17(a) is appropriate and is hereby granted as a matter of law.

(2) Section 10(b) Claims

Count 25 against Connors and Count 2 against CIS charge them with using manipulative and deceptive devices and with making false statements of material facts and material omissions in violation of § 10(b) of the Securities Exchange Act of 1934. Plaintiffs' § 10(b) claim is essentially two-pronged: (1) plaintiffs allege that Connors and/or CIS orally advised them to invest in many risky ventures (i.e., beginning with Jasper Partners) without advising them of the risks, and (2) plaintiffs allege that in managing the portfolio, Connors and/or CIS advised them to engage in allegedly unsuitable option trading, failed to acquire tax free municipal bonds for Gail Varnberg's portfolio, engaged in excessive options trading and sold low-basis stock held by plaintiffs to conceal the trading losses and issued misleading quarterly valuation statements concerning plaintiffs' portfolio. Third Amended Complaint ¶ 297-98.

Defendants seek summary judgment dismissing plaintiffs' § 10(b) claims as a matter of law on three separate grounds: (1) that certain of plaintiffs' investments were not "securities" subject to the antifraud provisions of the 1934 Act; (2) that plaintiffs have failed to plead their allegations of securities fraud with particularity under Rule 9(b); and (3) that the § 10(b) claims are time-barred.

              (a) Meaning of the term "a security"
                         in the 1934 Act

As a first ground, defendants urge partial summary judgment dismissing the § 10(b) claims insofar as they are based on losses associated with BW Partners on the grounds that neither Gail Varnberg's periodic loans to the partnership nor Robert Varnberg's interest as a general partner constitutes a "security" within the meaning of § 3(a)(10) of the '34 Act. The Act provides:

  (a) When used in this chapter, unless the context
  otherwise requires — . . .

  . . . (10) The term "security" means any note,
  stock, treasury stock, bond, debenture,
  certificate of interest or participation in any
  profit-sharing agreement, . . ., investment
  contract, . . . or in general, any instrument
  commonly known as a "security"; or any certificate
  of interest or participation in, temporary or
  interim certificate for, receipt for, or warrant
  or right to subscribe to or purchase, any of the
  foregoing; but shall not include currency

  or any note, draft, bill of exchange, or banker's
  acceptance which has a maturity at the time of
  issuance of not exceeding nine months . . . or any
  renewal thereof the maturity of which is likewise

15 U.S.C. § 78c(a)(10) (1988).

In Reves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990), reh'g denied, ___ U.S. ___, 110 S.Ct. 1840, 108 L.Ed.2d 968 (1990), a case involving uninsured uncollateralized demand notes issued by the Farmer's Cooperative of Arkansas and Oklahoma, the Supreme Court noted that Congress "enacted a definition of 'security' sufficiently broad to encompass virtually any instrument that might be sold as an investment." Id. 110 S.Ct. at 949. The Court cautioned, however, that the phrase "any note" in § 3(a)(10) should not be interpreted to mean literally any note, but instead must be evaluated using the "family resemblance" test, an approach "founded on economic reality." Id. 110 S.Ct. at 950 & n. 2.

Under the family resemblance test there is a presumption that any note with a term greater than nine months is a "security." Id. However, the so-called note Gail Varnberg received from BW Partners was payable on demand so no such presumption applies here.

In this situation, the Second Circuit's approach, adopted by the Supreme Court in Reves, 110 S.Ct. at 951, requires that the "plain terms" of § 3(a)(10) be applied unless "the context otherwise requires." 15 U.S.C. § 78c(a) (1988). Exchange Nat'l Bank v. Touche Ross & Co., 544 F.2d 1126, 1137-38 (2d Cir. 1976) (context required that unsecured subordinated "promissory notes" issued by brokerage firm as part of a large financing operation and payable on certain dates upon written demand be deemed "securities" subject to § 10(b)). See also Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 938 (2d Cir.) (context required that replacement notes evidencing loans by commercial banks to finance current operations of borrower not be deemed "securities"), cert. denied, 469 U.S. 884, 105 S.Ct. 253, 83 L.Ed.2d 190 (1984).*fn29 A party such as Gail or Robert Varnberg asserting that a given note with a maturity of less than nine months is within the 1934 Act has the burden of demonstrating that "the context otherwise requires." Exchange Nat'l Bank, 544 F.2d at 1137-38 (emphasis in original).

Viewing the factual allegations in the light most favorable to plaintiffs, the record indicates that Minnick's purpose in giving the note to Gail Varnberg was to cover a number of loans which Mrs. Varnberg had made to BW Partners for a variety of different business ventures of the partnership. The note given to Gail Varnberg was evidently custom-drafted by Oppenheimer.*fn30 Although the note was convertible into a 15% interest in BW Partners, the interest rate was considerably below the rates prevailing in 1978. There is no indication in the record that a secondary market was contemplated by the parties or that notes of the type given to Gail Varnberg were offered or distributed to other investors. In view of the uniqueness of the note, offering to other investors seems highly unlikely. Even if the note was offered, the investing public would not be likely to regard it as a security since it was payable on demand from a closely-held partnership which Mrs. Varnberg's husband had formed with Minnick Resources and which had no apparent investment strategy.

Deferring to the economic reality implicit in these facts, it appears that the note was drafted as a means of recording open account loans made by Gail Varnberg and for tax purposes. Cf. Chemical Bank v. Arthur Andersen & Co., 726 F.2d at 942 (2d Cir. 1984); Exchange Nat'l Bank v. Touche Ross & Co., 544 F.2d at 1138 (2d Cir. 1976). The loans themselves are not securities and there is no allegation that Connors and CIS were instrumental, involved or that they had fiduciary duties regarding issuance of the note to Gail Varnberg. Accordingly, the Court finds that such a demand note issued by a New York partnership to a New York resident under these circumstances is not a "security" within the meaning of 15 U.S.C. § 78c(a)(10) by means of which § 10(b) may be applied to Connors and CIS. See Singer v. Livoti, 741 F. Supp. 1040, 1050 (S.D.N.Y. 1990) (context of transaction showed that notes were not "securities" because they were intended as a temporary loan to solve cash flow problems and not as a permanent source of capital investment); Equitable Life Assurance Soc'y v. Arthur Andersen & Co., 655 F. Supp. 1225, 1245 (S.D.N.Y. 1987) (notes given in course of independently investigated, privately negotiated unique commercial financing transaction, where no secondary market was contemplated, were not "securities"). Partial summary judgment is granted in favor of defendants on Count 25 against Connors and Count 2 against CIS insofar as these counts assert losses from the BW Partners investments.*fn31

(b) Pleading Fraud with Particularity

Connors and CIS also seek summary judgment dismissing plaintiffs' § 10(b) claims in their entirety on the second grounds of failure to plead the alleged fraud with particularity. Allegations of fraud including securities fraud must specify the time, place and speaker, and content of the alleged fraudulent misrepresentations in order to comply with Rule 9(b) of the Federal Rules of Civil Procedure. See DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). In addition, Rule 9(b) requires that plaintiffs provide particular facts in the pleadings supporting each of the six elements of a § 10(b) violation. See Breard v. Sachnoff & Weaver, Ltd., [1991] Fed.Sec.L.Rep. (CCH) ¶ 95,712, 1991 WL 3041 (S.D.N.Y. Jan. 9, 1991).*fn32

Putting aside the question of whether plaintiffs have pled each of the six elements of a § 10(b) claim with the requisite particularity for each of the relevant investments,*fn33 the only portion of Count 25 against Connors and Count 2 against CIS alleging the misleading statements with the requisite particularity is the allegation in Count 2 against CIS charging it with issuing misleading quarterly valuation statements for the Varnberg portfolio. Third Amended Complaint ¶¶ 295-300, 302. See Pollack Aff., Exhs. 22-33, 35-43. Nowhere in their 78-page complaint or in the evidence presented do plaintiffs allege the time, place and content of any other allegedly misleading investment advice rendered by Connors or CIS.*fn34 Generalized and conclusory allegations that a defendant fraudulently concealed a breach of fiduciary duty in violation of § 10(b) do not satisfy the requirement of Rule 9(b). See Armstrong v. McAlpin, 699 F.2d 79, 90 (2d Cir. 1983). Because plaintiffs have failed to plead facts showing any basis but the quarterly statements for their § 10(b) claim after amending their complaint a third time, see Lowenbraun v. L.F. Rothschild, Unterberg, Towbin, 685 F. Supp. 336, 341-42 (S.D.N.Y. 1988),*fn35 summary judgment is granted as a matter of law dismissing Count 25 against Connors.*fn36 Partial summary judgment is granted in favor of CIS on Count 2 against it except insofar as the § 10(b) claim in Count 2 is based on quarterly valuation statements appearing in the record.

(c) Statute of Limitations

With respect to this remaining portion of plaintiffs' § 10(b) claim in Count 2 against CIS, CIS seeks summary judgment on statute of limitations grounds. Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1988), does not contain an explicit statute of limitations for actions brought by private litigants. The Second Circuit recently held that the "one-year/three-year" limitations period provided in Sections 9(e) and 18(a) of the 1934 Act, rather than a state statute of limitations for common law fraud, applies to claims under Sections 10(b) and 14. See Ceres Partners v. Gel Assocs., 918 F.2d 349 (2d Cir. 1990). Under Ceres, plaintiffs must bring § 10(b) claims within one year of discovery of the conduct alleged to constitute the violation, but no more than three years after the occurrence of such conduct. Id. at 359, 361.*fn37

The Second Circuit in Ceres left open the question of whether the one-year/three-year rule should be applied retroactively to actions filed before the date of the decision. Id. at 364. However, in Welch v. Cadre Capital, 923 F.2d 989 (2d Cir. 1991), rev'g Welch v. Cadre Capital, 735 F. Supp. 467, 482-84 (D.Conn. 1989), the Second Circuit reversed a decision by the lower court dismissing plaintiff's § 10(b) claims as untimely under the one-year/three-year statute of limitations. The lower court had held that the equities tipped in favor of retroactive application of the one-year/three-year rule. The Second Circuit in Welch reached the opposite conclusion using the three-factor analysis announced in Chevron Oil Co. v. Huson, 404 U.S. 97, 106, 92 S.Ct. 349, 355, 30 L.Ed.2d 296 (1971).*fn38

The Second Circuit in Welch held that the new one-year/three-year rule met the threshold requirement for prospectivity because it overruled clear past precedent and because prospective-only application of the new limitations period simultaneously advanced defendants' interests in repose and potential plaintiffs' interest through notice. Welch, 923 F.2d at 994, 995. These two findings are binding on this Court. However, applying the third Chevron factor, the Court finds that the equities in this action tip the balance in favor of applying Ceres' one-year/three-year rule retroactively to the Varnberg's § 10(b) claims.*fn39 Viewing the facts in the light most favorable to plaintiffs, retroactive application will not produce "substantial inequitable results." Chevron Oil Co. v. Huson, 404 U.S. at 107, 92 S.Ct. at 355. It seems clear that even if there was active concealment by the defendants, plaintiffs believed by 1980 or 1981, when BW Partners assigned its partnership assets to Gail Varnberg for only $1000, and no later than by 1982 when Robert Varnberg hotly questioned Minnick on the investments, that there was a good probability that they had been defrauded.*fn40 Plaintiffs filed their claims against Connors and CIS on March 28, 1985. There is no basis in the record for inferring that the delay was in reliance on the six-year/two-year limitations period applicable to a § 10(b) claim at that time.*fn41 Furthermore the difficulty facing Connors and CIS in defending against claims of oral advice allegedly given to plaintiffs in 1977-1981 unsupported by any documentary evidence must be kept in mind.

The one-year prong of the "one-year/three-year" limitations period of Ceres Partners runs from the date upon which the plaintiff actually discovered or could, with reasonable diligence, have discovered the fraud, whichever is earlier. The test for the analogous rule under New York law is whether "the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded." Armstrong v. McAlpin, 699 F.2d 79, 88 (2d Cir. 1983). Where the circumstances suggest such a probability, a duty of inquiry arises and if no inquiry is made, knowledge of the fraud will be imputed. Id. As the Second Circuit has admonished, "commencement of the statutory period [of limitations] does not await a plaintiff's 'leisurely discovery of the full details of the alleged scheme.'" Phillips v. Levie, 593 F.2d 459, 462 (2d Cir. 1979) (quoting Klein v. Bower, 421 F.2d 338, 343 (2d Cir. 1970)).

Having carefully reviewed the quarterly statements at issue, and viewing the facts in a light most favorable to plaintiffs, this Court cannot pinpoint as a matter of law any point at which the circumstances should have suggested to plaintiffs the possibility that the quarterly statements, most of which are optimistic in tone, may have been fraudulent. The uncontroverted figures in paragraphs 9 and 11 of defendants' Rule 3(g) statement show that plaintiffs' portfolio actually increased in value by nearly $3 million under CIS's management. See Farley v. Baird, Patrick & Co., 750 F. Supp. 1209 (S.D.N Y 1990) (district court could not find as a matter of law that plaintiff had a duty to suspect that his brokers were charging unreasonable prices for stocks they recommended).

Under these circumstances, the Court has no choice but to apply the three-year prong of Ceres Partners' "one-year/three-year" limitations period which begins to run when the fraudulent conduct — in this case the issuance of each allegedly misleading quarterly statement — occurred.*fn42 Because the Second Amended Complaint naming CIS as a defendant was filed on March 28, 1985, the plaintiffs' claims in Count 2 against CIS based on the sixteen quarterly valuation statements issued prior to March 28, 1982 are untimely.*fn43 Accordingly, partial summary judgment is granted in favor of CIS as a matter of law insofar as Count 2 against it asserts § 10(b) violations based on the sixteen quarterly statements issued prior to March 28, 1982. The five statements issued thereafter raise triable issues of fact and partial summary judgment is not granted on statute of limitations grounds as to them. Thus Count 2 against CIS — insofar as it rests on the five quarterly valuation statements issued after March 28, 1982 — survives defendants' motion on statute of limitations grounds and, having survived defendants' two other challenges, remains a valid basis for federal jurisdiction over CIS under the securities laws.

(b) RICO

Plaintiffs' RICO claim is asserted against all defendants. Apart from realleging certain prior paragraphs, the Third Amended Complaint states the entire substance of plaintiffs' RICO claim as follows:

    324. Upon information and belief, the defendants
  have engaged in the fraudulent sale of securities
  and "racketeering activity" as that term is
  employed in 18 U.S.C. § 1961 and have been involved
  in a "pattern of racketeering activity". A pattern
  exists in that the defendants have been engaged,
  since as early as 1978 and continuing thereafter
  until at least 1982, in interstate enterprises
  consisting of fraudulent transactions involving
  securities and other forms of property, setting up
  of various business entities, systematically
  draining the assets of such entities and thereby
  causing substantial losses to plaintiffs. The U.S.
  mails have been used by these defendants to
  accomplish the foregoing. The defendants have used
  and invested income acquired from the fraudulent
  sales in the acquisition of interests in business
  entities engaged in interstate commerce.

    325. By reason of the foregoing, defendants have
  violated § 901(a) of the Racketeer Influenced and
  Corrupt Organizations Act.

Third Amended Complaint ¶¶ 324-25.

The elements of a RICO claim are "(1) that the defendant (2) through the commission of two or more [predicate] acts (3) constituting a 'pattern' (4) of 'racketeering activity' (5) directly or indirectly invests in, or maintains an interest in, or participates in (6) an 'enterprise' (7) the activities of which affect interstate or foreign commerce. 18 U.S.C. § 1962(a)-(c) (1976)." Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir. 1983), cert. denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984). See also Morin v. Trupin, 711 F. Supp. 97, 104 (S.D.N.Y. 1989) (quoting Moss). These elements must be pleaded with particularity where the RICO claim alleges predicate acts involving fraud. See Bresson v. Thomson McKinnon Sec., Inc., 641 F. Supp. 338, 348 (S.D.N.Y. 1986). Dismissal of a RICO claim is warranted where the pleadings merely repeat the words of the statute in a conclusory and general fashion. See D'Addio v. L.F. Rothschild Inc., 697 F. Supp. 698, 705-06 (S.D.N.Y. 1988).

Plaintiffs have failed to plead either their RICO claim or the predicate acts of securities fraud with any particularity.*fn44 Allegations of securities fraud involving material misrepresentations are generally insufficient where pleaded "upon information and belief," see Luce v. Edelstein, 802 F.2d 49, 54 n. 1 (2d Cir. 1986), and where the time, place and content of defendants' statements are not specified. See DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). Similarly, plaintiffs have failed to identify the RICO "enterprises" or to plead facts showing its involvement in interstate commerce. Accordingly, summary judgment is granted as a matter of law dismissing plaintiffs' RICO claim with prejudice.

2.  The State Claims

(a) Aiding and Abetting Claims against Connors

Plaintiffs limit their aiding and abetting claims to defendant Connors, charging that he aided and abetted the securities fraud violations committed by Minnick, Hayes and Oppenheimer. The elements of an aiding and abetting claim are: (1) existence of a violation by the primary party; (2) knowledge of the violation on the part of the accused aider and abettor; and (3) substantial assistance by the alleged aider and abettor in accomplishing the underlying violations. See ITT, an Int'l Inv. Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980). Under Rule 9(b), each of the three elements must be pleaded with particularity when the claim involves aiding and abetting fraud. See O'Brien v. National Property Analysts Partners, 719 F. Supp. 222, 229 n. 10 (S.D.N.Y. 1989).

Pleading deficiencies in this action with respect to the first element, existence of securities fraud violations by the primary parties, are significant. Plaintiffs have failed to specify the time, place or content of nearly every alleged misrepresentations by Minnick, Hayes and Oppenheimer constituting the underlying § 10(b) violations. Rather, plaintiffs have merely alleged that Minnick and Oppenheimer variously represented that individual ventures would "make a lot of money" (Third Amended Complaint ¶ 45) (BW Partners), would be profitable enterprises (¶ 113) (Jasper Partners) and (¶ 188) (Marifarms Shrimp) or would be low risk investments with a high probability of substantial return (¶ 131) (Annetta Partners) and (¶ 168) (Texas Partners). See also Pollack Aff., Exh. 9 at 203, 206-07 (Robert Varnberg Dep.). Plaintiffs also allege that Minnick represented that there was a high probability that he would be able to obtain other investors in the ventures in which BW Partners invested and that he would take the necessary steps to make those ventures profitable. The pleading requirements of Rule 9(b) not complied with in this action take on added importance because courts are unwilling to recognize a defendant's puffery as material misstatements giving rise to liability under the securities laws. See Cohen v. Prudential-Bache Sec., Inc., 713 F. Supp. 653, 658 (S.D.N Y 1989); Bowman v. Hartig, 334 F. Supp. 1323, 1328 (S.D.N Y 1971).*fn45

Plaintiffs have similarly failed to plead the scienter element of their aiding and abetting claims against Connors with particularity. Recklessness will satisfy the scienter requirement for aiding and abetting securities fraud where fiduciary duties are involved in the underlying transactions. See ITT, an Int'l Inv. Trust v. Cornfeld, 619 F.2d 909, 923 (2d Cir. 1980); Epstein v. Haas Sec. Corp., 731 F. Supp. 1166, 1176 (S.D.N.Y. 1990). Plaintiffs merely allege that Connors was "asked to investigate" the various investments and either failed to do so or, due to an alleged relationship with the primary violators, failed to disclose the findings of his investigations. See, e.g., Third Amended Complaint ¶ 93; Gail Varnberg Aff. ¶ 11. Although this action was filed in 1983, plaintiffs fail to supply any factual details indicating the time, place or context in which their requests were made or Connors' response thereto. Plaintiffs offer no factual grounds for inferring that some sort of secret arrangement existed between Connors, Minnick, Hayes and Oppenheimer to conceal the alleged fraud. Plaintiffs merely infer the existence of such a relationship by alleging that Connors was rendering advice to Minnick's mother and by alleging that Connors was helping Minnick, Hayes and Oppenheimer put together investment "deals." Third Amended Complaint ¶ 31. By failing to offer supporting facts, plaintiffs have failed to show evidence of scienter on Connors' part with the particularity required by Rule 9(b). Simply establishing a party's expertise is not in itself enough to show recklessness without additional facts that show that defendant acted with scienter. Breard v. Sachnoff & Weaver, Ltd., [1991] Fed.Sec.L.Rep. (CCH) ¶ 95,712 (S.D.N.Y. Jan. 9, 1991).

Finally, plaintiffs have failed to plead with particularity the third element of an aiding and abetting claim, substantial assistance. Where the type of assistance alleged is silence or inaction, aider and abettor liability will attach only (1) where there is "a conscious or reckless violation of an independent duty to act" such as where a fiduciary relationship exists, ITT, an Int'l Inv. Trust v. Cornfeld, 619 F.2d at 927, or (2) where the alleged aider and abettor had "a conscious and specific motivation for not acting." Id. See also Thornock v. Kinderhill Corp., 749 F. Supp. 513, 517 (S.D.N.Y. 1990). Plaintiffs' counsel specified at oral argument that plaintiffs were relying on the first theory of substantial assistance. Although plaintiffs have alleged that the oral and written agreements retaining Connors as their investment advisor created an independent duty to act, the evidence presented includes only the vague allegations in the pleadings which are factually insufficient to show that Connors' alleged violation of duty was either conscious or reckless.*fn46

Accordingly, summary judgment dismissing plaintiffs' aiding and abetting claims against Connors in Counts 1, 4, 7, 10, 13, 20 and 21 is granted as a matter of law. Cf. National Union Fire Ins. Co. v. Turtur, 892 F.2d 199 (2d Cir. 1989) (affirming dismissal of aiding and abetting claim where claimant failed to raise a genuine issue of material fact concerning aider and abettor's participation in the primary fraud or its alleged fiduciary duty).

(b) Breach of Investment Management Agreement Claim

Count 24 against Connors and Count 1 against CIS charge them with breach of the 1977 Investment Management Agreement and Gail Varnberg's oral and written agreements by inter alia advising plaintiffs to invest in many risky ventures without disclosing the risks. Although the Third Amended Complaint is not explicit, the risky ventures were apparently the investments identified by Minnick, Hayes and Oppenheimer beginning with Jasper Partners in 1977.

Connors denies that he personally had any agreement giving rise to liability prior to 1979. Although the Court rejects plaintiffs' reading of the letter agreement dated June 28, 1979 to give it retroactive effect, see Gail Varnberg Aff. ¶ 15 and Exh. D, issues of fact exist as to whether some type of agreement existed between plaintiffs and Connors regarding his role as an individual manager of plaintiffs' investments apart from his duties under CIS's 1977 Investment Management Agreement with the Varnbergs. Gail Varnberg Aff. ¶ 16; Robert Varnberg Aff. ¶ 7. Issues of fact also exist as to the duties CIS assumed and/or performed after the Investment Management Agreement was signed. Accordingly, summary judgment on Count 24 against Connors and Count 1 against CIS is denied.

(c) Breaches of Contract Claims against Connors

Although there are no breach of contract claims against CIS in this action, plaintiffs advance numerous claims for breach of contract against Connors (Counts 2, 5, 8, 11, 14 and 16) for failing to advise plaintiffs of the risks involved in each of their various investments.

Connors seeks to dismiss plaintiffs' breach of contract claims involving Jasper Partners, Annetta Partners, Texas Partners and Marifarms Shrimp (Counts 5, 8, 11 and 14) on statute of limitations grounds. New York law provides for a six-year statute of limitations for breach of contract actions. N YCiv.Prac. L. & R. § 213(2) (McKinney 1990). If defendants committed any breach of contract by failing to advise plaintiffs of the potential risks involved in a proposed investment, such breach must have occurred no later than the date upon which plaintiffs first made the investment. Subsequent investments in the same entity necessarily relate back to the initial decision to invest. Thus any contract claims based on investments commenced prior to March 28, 1979 are untimely. Plaintiffs admit that:

  The investments in which the Varnbergs became
  involved through Minnick, including . . . the
  amount and date when they first invested are
  listed below:

  B. Jasper Partners '77 (oil and gas tax shelter) —
  $200,000; November 30, 1977.

  C. Annetta Partners (loan and guaranty) —
  $628,000; May or June 1978.

  D. Texas Partners '78 (oil and gas tax shelter
  investment made by Gailswell Corporation,
  plaintiffs' Subchapter S corporation) — $75,000;
  October, 1978.

E. Marifarms Shrimp (tax shelter) — $56,250; 1978.

Def. Rule 3(g) Stmt. ¶ 13; Pl. Rule 3(g) Stmt. ¶ 13. Accordingly, summary judgment is granted as a matter of law in favor of Connors on Counts 5, 8, 11 and 14.

Similarly, it is uncontroverted that Gail Varnberg's loans to BW Partners for use in connection with Rosa Company, Hot Laps and Ample Christian Endeavor (totalling $266,000) occurred prior to March 28, 1979. Def. Rule 3(g) Stmt. ¶ 13; Pl. Rule 3(g) Stmt. ¶ 13. Accordingly, partial summary judgment on Count 2 against Connors is granted in favor of Connors as a matter of law.

Summary judgment is denied on Count 16 against Connors. Triable issues of fact exist as to the date of plaintiffs' investment in D-M Partners and/or Aiand International.

(d) Breach of Fiduciary Duty Claims against Connors

Like the breach of contract claims, plaintiffs' breach of fiduciary duty claims are brought solely against Connors individually (Counts 3, 6, 9, 12, 15, 17, 19, 23 and 26). Plaintiffs claim that Connors breached a fiduciary duty which he had assumed toward plaintiffs by failing to apprise them of the substantial risks involved in their various investments. Although it is not at all clear in the complaint, the fiduciary duty apparently arose in connection with the alleged oral investment agreement between Connors and Gail Varnberg dating back to November 1977.

Under New York law, both a three-year and a six-year statute of limitations have been held to apply to claims of breach of fiduciary duty. Compare Loengard v. Santa Fe Indus., Inc., 573 F. Supp. 1355, 1360 (S.D.N.Y. 1983) (action by shareholders after short-form merger closer to injury to property action governed by three-year limitations period of C.P.L.R. § 214(4) than to equity action) with Croce v. Kurnit, 565 F. Supp. 884, 891 (S.D.N.Y. 1982) (action for breach of recording contracts closer to action for fraud governed by six-year statute of limitations), aff'd on other grounds, 737 F.2d 229 (2d Cir. 1984).*fn47 In choosing between the two possible periods of limitations, a court should consider the gravamen of the complaint. See Cohen v. Good-friend, 665 F. Supp. 152, 159 (E.D.N.Y. 1987). In this case, plaintiffs claim that Connors breached a fiduciary duty he owed to plaintiffs by aiding and abetting the securities fraud allegedly committed by the other defendants. Plaintiffs' breach of fiduciary duty claim is thus closer to a claim sounding in contract or fraud, each with a six-year statute of limitations, id. at 160, than to a claim for injury to property.

Under the same reasoning set forth in the preceding section, plaintiffs' claims for breach of fiduciary duty arising out of investments made prior to March 28, 1979 are time-barred because the alleged breach must have occurred prior to the making of each investment. Plaintiffs admit in their response to paragraph 13 of defendants' Rule 3(g) statement, and Minnick's deposition testimony confirms, that loans and advances to BW Partners for Rosa Company, Hot Laps and Ample Christian Endeavor, as well as the investments in Jasper Partners, Annetta Partners, Texas Partners and Marifarms Shrimp occurred prior to March 28, 1979. Accordingly, partial summary judgment is granted as a matter of law in favor of Connors on Count 3 against him. On the same rationale, summary judgment is granted dismissing Counts 6, 9, 12 and 15 against Connors in their entirety.

Count 26 against Connors (Third Amended Complaint ¶¶ 305-07) is an omnibus claim for breach of fiduciary duty resting on the facts alleged in support of plaintiffs' claims against Connors and CIS for breach of agreement. The Court strikes this Count sua sponte pursuant to Rule 12(f) of the Federal Rules of Civil Procedure as redundant of plaintiffs' other claims.

Summary judgment on statute of limitations grounds is denied on Counts 19 and 23 against Connors because the investments were admittedly made in 1980 and 1981 and on Count 17 since the date of plaintiffs' investment in D-M Partners is an issue of fact.

(e) Unjust Enrichment Claims

Plaintiffs have brought claims against Connors (Count 27) and CIS (Count 3) for unjust enrichment for fees paid by plaintiffs under the 1977 and 1979 investment management agreements. Under New York law, claims of unjust enrichment are governed by a six-year statute of limitations. See Natimir Restaurant Supply Ltd. v. London 62 Co., 140 A.D.2d 261, 528 N.Y.S.2d 564 (1988). Thus any claim to recover fees paid to Connors or CIS prior to March 28, 1979 is time-barred. Accordingly, partial summary judgment is granted as a matter of law in favor of Connors on Count 27 and in favor of CIS on Count 3 as to any fees paid prior to March 28, 1979.


Summary judgment is granted as a matter of law in favor of Connors on Counts 1, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 20, 21, 25 and 28 against him and in favor of CIS on Count 4 against it. Partial summary judgment is granted as a matter of law in favor of Connors on Counts 2, 3 and 27 against him and in favor of CIS on Counts 2 and 3 against it. Summary judgment is denied on Counts 16, 17, 19, 23 and 24 against Connors and on Count 1 against CIS. Finally, Count 26 against Connors is stricken by the Court from the Third Amended Complaint.*fn48


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