in sufficient detail to give defendants fair notice of his
claims. Under Rule 9(b), a plaintiff alleging fraud must (1)
identify the statements he or she claims were false or
misleading; (2) state why the plaintiff considers the
statements to be fraudulent; (3) state when and where the
statements were made; and (4) identify the parties responsible
for making the statements. Cosmas, 886 F.2d at 11. Parnes has
(1) identified the fraudulent statements as the offering
memoranda and subsequent partnership-related mailings
(Complaint ¶ 39, 50(b)); (2) indicated that those mailings were
fraudulent because they included false information regarding
the value of the property purchased by the partnerships
(Complaint ¶ 45-46); (3) stated that the false statements were
made at the time the private placement memoranda were initially
mailed, as well as annually, in other partnership-related
mailings; and (4) indicated that defendants were responsible
for those documents.
Defendants claim that Parnes may not rely on the offering
memoranda alone as proof that each of the defendants
participated in the alleged fraud. (Motion at 40). As a general
rule, plaintiffs claiming fraud must draw a specific connection
between the allegedly fraudulent statements and each defendant,
in order that each defendant may be apprised of the particular
nature of their participation in the alleged fraud.
DiVittorio v. Equidyne Extractive Industries, Inc.,
822 F.2d 1242, 1247 (2d Cir. 1987) ("Where multiple defendants are asked
to respond to allegations of fraud, the complaint should inform
each defendant of the nature of his alleged participation in
the fraud."). However, an exception to that rule is made where,
as here, plaintiff alleges that an offering memorandum was
fraudulent and defendants are insiders or affiliates who
participated in the offer of the securities. (Complaint ¶ 43)
(defendants participated in or directed the writing and
distribution of the offering memoranda); Luce v. Edelstein,
802 F.2d 49, 55 (2d Cir. 1986) ("[N]o specific connection between
fraudulent representations in the Offering Memorandum and
particular defendants are insiders or affiliates participating
in the offer of the securities in question.").
Defendants correctly note that the Second Circuit has
emphasized that the exception outlined in Luce does not mean
that "mere reliance on an offering memorandum or similar
document satisfies a pleader's burden under Rule 9(b)." Rather,
plaintiffs must still allege "`particular facts demonstrating
the knowledge of defendants at the time that such statements
were false.'" DiVittorio, 822 F.2d at 1248 (quoting Luce, 802
F.2d at 57).
Parnes has pled sufficient facts to demonstrate that
defendants had knowledge that the property appraisals contained
in the offering memoranda were false. Defendants Greenfield and
Nick were officers of defendant Mast Property Investors, Inc.,
promoter of the limited partnerships. (Complaint ¶ 21-22).
Parnes claims that, as "insiders" and promoters of this
investment, defendants knew or should have known that their
affiliated companies had, only a short time previously,
purchased the properties owned by the limited partnerships for
a much lower price than the partnerships had paid. Thus,
defendants knew or should have known that the price paid by the
partnerships and contained in the property appraisals did not
reflect the fair market value of the property. With these
claims, Parnes goes beyond the mere terms of the offering
memoranda, as required by the Second Circuit. Under these
circumstances, the pleadings regarding defendants' knowledge of
the alleged fraud must be deemed sufficient.
Defendants also claim that Parnes has not pled their intent
to commit fraud with sufficient particularity. (Motion at 37).
Rule 9(b) specifically states that "[m]otive, intent,
knowledge, and other conditions of mind of a person" may be
pled generally. Nonetheless, a plaintiff must allege sufficient
facts to "give rise to a strong inference that the defendants
possessed the requisite fraudulent intent — either intent to
defraud, knowledge of falsity, or reckless disregard for the
truth." Friedman, 730 F. Supp. at 530-31; Beck v. Manufacturers
Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987),
cert. denied, 484 U.S. 1005, 108 S.Ct. 698, 98 L.Ed.2d 650
(1988), overruled on other grounds, United States v.
Indelicato, 865 F.2d 1370 (2d Cir. 1989) (en banc), cert.
denied, 493 U.S. 811, 110 S.Ct. 56, 107 L.Ed.2d 24, 25 (1989).
Contrary to defendants' claims, the complaint here does
suggest that defendants either intended to defraud investors or
knew that the appraisals contained in the offering memoranda
were false. (Complaint ¶ 44). Parnes alleges that the limited
partnerships purchased property at prices substantially higher
than those paid by defendants' affiliates only a short time
previously. (Complaint ¶ 36). Thus, it is likely that
defendants knew that the appraisals contained in the offering
memoranda did not reflect the properties' fair market value.
The only weakness in Parnes' complaint is that he fails to
identify when each of the mailings subsequent to the original
offering were made. (Complaint ¶ 50(b)) (referencing annual
mailings to limited partners). Because complaints must be read
generously, however, we should find that defendants have
received fair notice of Parnes' claims. See Credit & Finance
Corp. Ltd. v. Warner & Swasey Co., 638 F.2d 563, 567 (2d Cir.
1981) (denying motion to dismiss, in part, because defendant
had received fair notice of plaintiff's claims).
b. The § 17(a) Claim
Parnes has alleged that defendants also violated § 17(a) of
the 33 Act. (Complaint ¶ 2). Defendants have moved to dismiss
this claim on the grounds that § 17(a) confers no private right
of action. Despite defendants' emphatic assertion that no
private right of action exists under the statute, the Second
Circuit has not yet decided the issue and the courts in the
Southern District are split on the question.
Section 17(a) states:
It shall be unlawful for any person in the offer
or sale of any securities by the use of any means
or instruments of transportation or communication
in interstate commerce or by the use of the mails,
directly or indirectly —
(1) to employ any device, scheme, or artifice to
(2) to obtain money or property by means of any
untrue statement of a material fact or any
omission to state a material fact necessary in
order to make the statements made, in the light of
the circumstances under which they were made, not
(3) to engage in any transaction, practice, or
course of business which operates or would operate
as a fraud or deceit upon the purchaser.
In 1978, the Second Circuit held that § 17(a) provided an
implied private right of action. Kirshner v. United States,