The opinion of the court was delivered by: Haight, District Judge:
MEMORANDUM OPINION AND ORDER
In this action based upon the Securities Exchange Act of
1934 and the civil RICO statute, various defendants move under
Rules 9(b) and 12(b)(6), Fed.R.Civ.P., to dismiss plaintiffs'
second amended complaint.
The amended complaint alleges that plaintiffs invested as
limited partners in E.F. Hutton Southwest Properties II (the
"Partnership" or "Southwest"), a Delaware limited partnership
formed, sponsored, promoted and operated by the defendants.
Plaintiffs allege at one point in the amended complaint that
they made their investments in reasonable reliance on a
Private Placement Memorandum (the "Memorandum"), and
supplemental sales literature accompanying the Memorandum,
prepared, issued and distributed by certain defendants,
although the pleading also contains inconsistent allegations.
There are 44 plaintiffs. They invested amounts ranging from
$7,000 to $120,000, with most investments being in the amount
With respect to the defendants, plaintiffs allege that
Shearson Lehman Hutton, Inc. ("SLH") was at the relevant times
a Delaware corporation maintaining its principal place of
business in New York, New York, and the successor-in-interest
to defendant E.F. Hutton & Company, Inc. ("Hutton") as the
result of a merger. Hutton, a Delaware corporation with its
principal place of business in this district, was at the
relevant times a national brokerage firm in the business of
trading, underwriting and distributing securities. Hutton
acted as the promoter and sponsor of the Partnership, and
additionally acted as promotor and sponsor of numerous "tax
Hutton was also a controlling person of defendant Hutton
Real Estate Services, II, Inc. ("HRES II") within the meaning
of the federal securities laws. HRES II, a Delaware
corporation with its principal place of business in this
district, was the original general partner of the Partnership.
Defendant Continental Real Equities ("ConReal") was a
California general partnership, and the general partner of the
Defendant CR, formed by defendants Bernard W. Baker and Gary
Langendoen, was a California general partnership, and the
general partner of ConReal. CR was a controlling person of
ConReal within the meaning of the federal securities laws.
Defendant Butterfield Venture Corporation ("Butterfield")
was a California corporation, and one of two general partners
of ConReal, CR being the other general partner. Butterfield,
the complaint alleges upon information and belief, held a 50%
interest in ConReal in 1983. Defendant Baker is a California
citizen and at the relevant times was a general partner of CR
and a controlling person of CR, ConReal and the Partnership.
Defendant Langendoen, a California citizen, was a general
partner of CR, and a controlling person of CR, ConReal and the
Partnership. See Complaint at ¶¶ 6-13.
In ¶ 14, plaintiffs allege that "[t]he tightly interconnected
partnership relationships between defendants Baker, Langendoen,
CR, ConReal and Butterfield, were such that knowledge or
information within the ken of any of them was necessarily
within the ken of each of them."
The amended complaint alleges that in 1977 and 1978, Alltex
Construction, Inc., a Texas real estate development
corporation, built 19 apartment complexes, many of them in
Texas. The defendants are alleged to have entered into a
fraudulent scheme pursuant to which limited partnerships were
formed to purchase and operate some of the Alltex properties.
Hutton's role was to promote and sell limited partnership
interests to investors through Hutton's network of retail
brokers. During the 1980's Hutton had a special division which
underwrote, sponsored or sold limited partnership investments
to its customers and others. This was the Tax Shelter/Direct
Investment Department, headed by Bill Turchyn, Jr., a director
of HRES II. Hutton is alleged to have "placed special emphasis
on its ability to satisfy the investment objectives
of conservative investors who were primarily interest in
income or low risk investments," and to have "lured investors
into these investments by creating the false impression,
through advertising and sales hype that the investments would
be safe, profitable and suitable for conservative investors."
¶ 23. The Partnership involved in this action is one of the
limited partnership investments "offered by Hutton and its
affiliates and partners in this manner." ¶ 24.
Plaintiffs allege that ConReal and Hutton formed the
Partnership on or about March 27, 1984. Baker and Langendoen
were the initial limited partners. ConReal was the initial
managing general partner and management agent. HRES II was the
other general partner. ¶ 25, 26. Between January and June 1984,
ConReal acquired a number of apartment complexes from Alltex.
Thereafter the "defendants" caused the Partnership to acquire
from ConReal six apartment complexes during the period from
late March 1984 through June, 1984. These apartment complexes
were named "Peppermill I," "Cross Creek," "Misty Woods,"
"Summertree," "Westcreek," and "Good Life." The Partnership
acquired these six complexes from ConReal for $53,287,760, a
price which plaintiffs allege "was paid without the benefit of
an appraisal and in excess of the market value of the
properties." ¶ 30.
While the amended complaint is far from a model of clarity,
plaintiffs allege in substance that they purchased units in
that partnership named E.F. Hutton Southwest Properties II
("Southwest"). Southwest was alleged to have been formed,
sponsored, promoted and operated by the defendants to purchase
these six apartment complexes for the purpose, in part, of
generating tax advantages for the plaintiffs. The purchase
price per unit of the Partnership was $60,000, $20,500 to be
paid in cash at the time of purchase and the balance of
$57,500 payable over five years in annual installments and
subject to interest. The limited partners executed promissory
notes to evidence those obligations.
¶ 4 of the complaint alleges that each of the plaintiffs
invested in the Partnership "in reasonable reliance on a
private placement memorandum (the "Memorandum"), and the
supplemental sales literature accompanying the Memorandum . .
." ¶ 46 alleges, however, that
Hutton's brokers started selling the offering on
or about May 21, 1984, and the Units were placed
in three days. The offering and placement thus
occurred prior to the effective date of the
Memorandum, dated May 30, 1984. Copies of the
Memorandum were sent to the investors subsequent
to the sale.
It is impossible to reconcile these allegations. If copies
of the Memorandum were not sent to investors until after the
sale, as alleged in § 46, plaintiffs could not have invested in
reliance on its contents, as alleged in § 4. Given the
procedural history of the case, discussed infra, I treat the
allegations of ¶ 46 as controlling.
Hutton brokers are alleged to have engaged in fraudulent
selling practices. ¶¶ 43-46. As for the Memorandum, it is
alleged to contain a number of fraudulent misrepresentations
and omissions. ¶¶ 52-68. Comparable allegations are made in
respect of an inter-office memorandum and a promotional
brochure which accompanied the Memorandum and were intended as
supplemental sales literature. ¶ 69-82.
In addition to the particular misrepresentations and
omissions alleged to be contained in the Memorandum and the
sales documents, plaintiffs allege that two of the properties
contained asbestos, and that defendants failed to exercise due
diligence to discover its presence, which had an adverse
economic impact on the sale price of the two properties
involved. ¶¶ 83-85.
Plaintiffs allege fraudulent concealment by defendants of
these misrepresentations and omissions, and allege that
"[u]ntil shortly before the filing of the complaint,
plaintiffs were unaware of the facts as described above and
could not have reasonably discovered such facts until the
information gathered and determinations made by plaintiffs'
attorneys were first made known to plaintiffs. ¶ 87; see also
In these circumstances, plaintiffs in their amended
complaint assert the following claims for relief: first,
against all defendants for violation of § 10(b) of the
Exchange Act of 1934; second, against all defendants for
violation of § 17(a) of the Securities Act of 1933; third,
against all defendants for common law fraud; fourth, against
defendants Hutton, HRES II, ConReal, Baker, Langendoen and CR,
for breach of fiduciary duty; fifth, against the general
partners of the Partnership for breach of contract, and sixth,
against all defendants under the civil RICO statute for
violations of 18 U.S.C. § 1962(a), (c) and (d).
SLH, Hutton, and HRES II move to dismiss the second claim on
the ground that no private right of action exists under § 17(a)
of the 1933 Act, and the RICO claim for insufficient pleading,
failure to state a claim, and unconstitutionality of the
statute. They move to dismiss the fraud claims for failure to
comply with Rule 9(b), Fed.R.Civ.P. and the claim for breach of
fiduciary duty for failure to state a claim. Lastly, these
defendants move to dismiss the pendent common law and breach of
contract claims for lack of subject matter jurisdiction.
Defendant Butterfield moves to dismiss the complaint as to
it for ...