The opinion of the court was delivered by: Freeh, District Judge.
In this action, plaintiff Irving Parnes ("Parnes") seeks to
recover on behalf of himself and all others similarly situated
for losses incurred in real estate limited partnerships
organized and sold by defendants.*fn1 Parnes has moved for
class certification pursuant to Fed.R.Civ.P. 23. Defendants
Mast Property Investors, Inc., Mast Capital Investors, Ltd.
(collectively "Mast"), Marvin Greenfield ("Greenfield") and
Norman Nick ("Nick") oppose that motion and have moved to
dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) and
9(b). For the reasons stated at oral argument on October 28,
1991 and set out below, both motions are denied.
In 1982, Parnes purchased interests in three limited
partnerships promoted by Mast and the individual defendants.
(Complaint ¶ 4). Parnes alleges that those limited
partnerships, as well as the 27 other such partnerships
established by defendants, were created as a sham. According to
Parnes, companies affiliated with defendants would purchase
real estate and then, after holding the property for a brief
period, sell it at highly inflated prices to the limited
partnerships, earning substantial profits. Based on this
scheme, Parnes alleges that: (1) the property appraisals
contained in the private placement memoranda were fraudulent
because those appraisals stated falsely that the partnerships
were paying fair market value for the properties (e.g.,
Complaint ¶¶ 39-40); and (2) the offering memoranda failed to
disclose that the properties would not appreciate in value
because the high interest rate "wrap" mortgages on the
properties decreased their value below appraised rates
(Complaint ¶ 45). (Opposition at 13). More specifically,
Parnes claims defendants issued fraudulent private placement
memoranda in violation of (1) §§ 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the "34 Act"); (2) Rule 10b-5;
(3) §§ 15 and 17(a) of the Securities Act of 1933 (the "33
Act"); (4) the Racketeer Influenced and Corrupt Organizations
Act ("RICO"); and (5) various common law doctrines.
Parnes seeks relief here on behalf of himself and all other
investors similarly situated. Accordingly, he has moved for
class certification pursuant to Fed.R.Civ.P. 23. The class
proposed by Parnes would include investors in all the limited
partnerships sponsored by defendants. (Complaint ¶ 4).
Defendants have moved to dismiss all claims grounded on §
10(b) and Rule 10b-5, claiming that Parnes has not stated a
cause of action under the federal securities laws and that
Parnes has not pled fraud with sufficient particularity.
(Motion at 23-42). Defendants have also moved to dismiss all
claims under § 17(a) of the 33 Act and RICO. Defendants assert
that dismissal of the allegations under federal law requires
dismissal of all pendent state law claims as well. In addition,
defendants assert that because Parnes signed a release
precluding any legal action against one of the three limited
partnerships in which he invested, he may not sue that entity
In evaluating a motion to dismiss on the pleadings, a court
must read the allegations in the complaint "generously" and
draw all inferences in favor of the party opposing the motion.
Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). A complaint
should be dismissed under Rule 12(b)(6) only if "it appears
`beyond a reasonable doubt that the plaintiff can prove no set
of facts in support of his claim which would entitle him to
relief.'" Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir.
a. The Securities Fraud/State Law Fraud Claims
Under § 10(b) and Rule 10b-5, a plaintiff must allege that
"the defendant has misrepresented or omitted to state material
facts in connection with the purchase or sale of a security,
that the plaintiff relied upon such misrepresentation or
omissions to his detriment, and that the misrepresentations or
omissions were made with scienter." In re Gas Reclamation, Inc.
Securities Litigation, 659 F. Supp. 493, 502 (S.D.N.Y. 1987)
(citations omitted). Consistent with this standard, Parnes has
alleged that (1) defendants omitted material facts and
affirmatively misrepresented the appraised value of the
properties purchased by the partnerships (Complaint ¶¶ 45-46);
(2) Parnes and other investors relied on those
misrepresentations in purchasing interests in the partnerships
(Complaint ¶¶ 44, 47); and (3) defendants knew or should have
known that the appraisals contained in the offering memoranda
were false. (Complaint ¶ 44). Defendants now argue that Parnes'
securities fraud claims are insufficient as a matter of law
because he could not have reasonably relied on the allegedly
false statements because the offering memoranda contained
substantial disclaimers and warnings. (Motion at 23-24).
These allegations are sufficient to state a securities fraud
claim. Disclaimers may not absolve a defendant of liability for
securities fraud if those disclaimers relate only to the
financial projections for the proposed investment, and do not
discuss the appraisals for property owned by the company or
partnership. See Friedman v. Arizona World Nurseries, Ltd.,
730 F. Supp. 521, 541 (S.D.N.Y. 1990) (specifically stating that
cautionary language may be insufficient to disclaim liability
where plaintiffs alleged that defendants misrepresented the
then-existing value of property purchased by limited
partnership; motion to dismiss denied as to those counts),
aff'd, 927 F.2d 594 (2d Cir. 1991). Accordingly, defendants'
motion to dismiss under Rule 12(b)(6) must be denied.
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 ...