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DUKE v. TOUCHE ROSS & CO.

May 21, 1991

STEPHEN E. DUKE, ET AL., PLAINTIFFS,
v.
TOUCHE ROSS & CO., DEFENDANT.



The opinion of the court was delivered by: Keenan, District Judge:

OPINION AND ORDER

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.

FACTS

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 States.

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 negligent misrepresentation.

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 misrepresentation.

DISCUSSION

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. ยง 1404(a), defendants argue that the law of the ...


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