The opinion of the court was delivered by: Keenan, District Judge:
Defendant Touche Ross & Co. ("Touche")*fn1 seeks an Order
dismissing plaintiffs' complaint on the grounds that it fails
to state a claim upon which relief can be granted and that it
fails to plead fraud with sufficient particularity.
Fed.R.Civ.P. 12(b)(6) and 9(b). Oral argument was heard on
March 11, 1991, and decision was reserved.
The Complaint in this action originally was filed in the
United States District Court for the Eastern District of
Illinois on December 22, 1989. On August 1, 1990, the court
granted defendant's motion to transfer the action to the
Southern District of New York pursuant to 28 U.S.C. § 1404(a).
See Certified Record Transferred to the United States District
Court Southern District of New York. Plaintiffs subsequently
filed an amended complaint, adding additional plaintiffs.
Plaintiffs are eighty individual investors who are domiciled
in many different states. Touche is a general partnership of
certified public accountants with offices throughout the United
Plaintiffs allege that the promoters of the Limited
Partnerships engaged in fraudulent schemes. Acting through
affiliates, the promoters purchased nursery stock and plant
materials (the "nursery stock") from existing nursery
operations in serious financial difficulties, paying in cash
and notes. The nursery stock then was resold to the Limited
Partnerships, with significant step-ups in the prices.
The PPMs represented that investors were likely to receive
tax deductions and economic profit, and plaintiffs contend that
the PPMs contained false or misleading representations of the
value of the nursery stock and did not disclose certain
material facts. Plaintiffs allege that Touche failed to
disclose that there was no reasonable possibility of economic
gain for the limited partners; it was almost impossible for the
limited partners to recoup their cash investment or any portion
of it; the purchase prices paid by the Limited Partnerships
were inflated; and it was unlikely that the revenue generated
ever would be sufficient to satisfy the notes for the balance
due the original sellers.
Touche prepared two of the documents that are included in the
PPMs: a favorable tax opinion (the "tax opinion"); and a
financial projections review and report (the "review report")
(collectively the "Touche documents"). The complaint states,
"Touche knew that the Touche documents would be included in the
[PPMs] and would be used to induce investors to purchase
limited partnership interests." (Complaint ¶ 8).
Touche is alleged to have practiced before the Internal
Revenue Service (the "IRS") at all relevant times. As a
practitioner before the IRS, Touche had a duty to comply with
regulations governing the conduct of certified public
accountants. Treasury Department regulations require
practitioners to exercise due diligence with respect to
financial forecasts or projections included in offering
materials. Touche allegedly did not comply with those
regulations. (Complaint ¶ 11).
Plaintiffs allege that Touche knew the following facts: (a)
affiliates of the promoters were on an IRS watch list of likely
promoters of "abusive" tax shelters; (b) a similar 1984 nursery
deal promoted by an affiliate of the promoters was already
under examination by the IRS; and (c) an affiliate of the
promoters had previously been enjoined from promoting a tax
shelter on the ground that it had overvalued the products by
more than 200 percent. (Complaint ¶ 12).
Plaintiffs list the reasons that Touche should have known,
through the exercise of due diligence, that the sales and
earnings projections and assumptions for the Limited
Partnerships were unreasonable. (Complaint ¶ 13(a)(i)-(iii)).
Further, Touche should have known that the prices paid by the
Limited Partnerships and the valuations placed on the nursery
stock were unrealistic. (Complaint ¶ 13(b)(i)-(iii)).
Nonetheless, Touche adopted the projections prepared by the
general partners in their review report. Not only did Touche
adopt the projections of the general partners, but it "vouched
for the promoters' good faith." (Complaint ¶ 16). Touche
failed, however, "to disclose the unreasonableness of the
projections, assumptions and valuations." (Complaint ¶ 17).
Plaintiffs allege that the Limited Partnerships each failed
and that their investments now are worthless. Further, Touche
solicited persons to invest in one or both of the Limited
Partnerships. Finally, plaintiffs claim that they did not know
and could not have discovered the true facts concerning the
nondisclosures prior to December of 1987.
In Count I of their complaint, plaintiffs allege that Touche
violated Section 10(b) of the Securities Exchange Act of 1934
(the "Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated
thereunder. Count II alleges a violation of the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c)
or (d). Count III alleges a common law claim of
Defendants contend that plaintiffs knew they were investing
in speculative limited partnerships, and that the PPMs
described at length the risks involved. Touche's involvement in
the offering was limited to expressing an opinion on the tax
disclosures in the PPMs and reporting on the promoters'
financial projections contained in the PPMs. Defendants contend
that plaintiffs' complaint should be dismissed because it is
barred by the statute of limitations. In any event, defendants
argue that the complaint fails to state a claim under Section
10(b) or RICO and it fails to state a claim for negligent
In considering a motion to dismiss, the Court must view the
complaint in the light most favorable to the plaintiff. See
Scheuer v. Rhodes, 416 U.S. 232, 237, 94 S.Ct. 1683, 1686-87,
40 L.Ed.2d 90 (1974); Yoder v. Orthomolecular Nutrition Inst.,
Inc., 751 F.2d 555, 562 (2d Cir. 1985). Moreover, the
allegations set forth in the complaint must be accepted as
true. Cooper v. Pate, 378 U.S. 546, 84 S.Ct. 1733, 12 L.Ed.2d
1030 (1964). In addition, in considering a motion to dismiss
for failure to state a claim upon which relief can be granted,
dismissal should result only if it appears beyond doubt that
plaintiff can prove no set of facts in support of his claim
that would entitle him to relief. Conley v. Gibson,
355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). It has
been stated that "[h]owever great the odds against a
plaintiff's ultimate success, if the complaint states a claim,
he is entitled to his day in Court." Ballan v. Wilfred Am.
Educ. Corp., 720 F. Supp. 241, 247 (E.D.N.Y. 1989) (citing Index
Fund, Inc. v. Hagopian, 609 F. Supp. 499, 510 (S.D.N.Y. 1985)).
Plaintiffs make minor references to the actual language of
the PPMs at issue, and defendant contends that this inclusion
therefore incorporates the PPMs by reference. Defendant has
submitted the PPMs in support of its motion to dismiss the
complaint, and plaintiffs oppose this submission. In Cosmas v.
Hassett, 886 F.2d 8, 13 (2d Cir. 1989), the Second Circuit
found that the District Court had erred by finding
incorporation by reference when the documents discussed in the
complaint were not attached as exhibits and were not
extensively cited. The Court adhered to the rule that "limited
quotation does not constitute incorporation by reference" and
faulted the district court with relying in its analysis upon
statements from the documents that did not appear in the
complaint. The Court finds that in the instant complaint the
offering materials are not incorporated by reference, and will
not consider the documents attached to defendant's motion in
deciding this motion.
I. Statute of Limitations
Defendants first argue that plaintiffs' Section 10(b) claim
is barred by the statute of limitations. Plaintiffs allege that
they each invested in the Limited Partnerships in 1985. The
original complaint was filed on December 22, 1989.
Section 10(b) does not contain a statute of limitations, and
most courts have looked to the forum state's cause of action
that is most analogous to Section 10(b) in order to borrow the
statute of limitations applicable to that state's cause of
action. See IIT v. Cornfeld, 619 F.2d 909, 928 (2d Cir. 1980).
Because this action originally was filed in Illinois and was
transferred pursuant to 28 U.S.C. § 1404(a), defendants argue
that the law of the ...