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.,  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,
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.
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.