VARNBERG v. MINNICK

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.

BACKGROUND

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:

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.

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.

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 ...