The opinion of the court was delivered by: WILLIAM C. CONNER
This is an action for actual and punitive damages and equitable relief arising out of plaintiffs' investments in securities of Polo Club Apartments Associates Limited Partnership ("Polo Club") and other securities issued, underwritten or promoted by defendants.
The following motions are currently before the Court: Motions by Kenneth Leventhal & Co. ("Leventhal") to dismiss the Second and Fifth Claims of the Amended Complaint, for securities fraud and common-law fraud; to dismiss the Seventh Claim, for negligent misrepresentation; and to dismiss the Third Claim, for aiding and abetting violations of the Investment Advisors Act of 1940 ("the Advisors Act"). Also before the Court is the motion of Leventhal, joined by all defendants, to dismiss the securities fraud claim as time-barred; the motion of Leventhal and Primerica Corp. ("Primerica") to dismiss the First Claim, under the Racketeer Influenced and Corrupt Organizations Act, ("RICO"), for failure to state a claim and for failure to meet the specificity requirements of Rule 9(b), Fed. R. Civ. P.; and Leventhal's motion for Rule 11 sanctions.
Plaintiffs Haroutune Mekhjian and his wife Shake Mekhjian ("the Mekhjians") are residents of New Jersey who since 1980 have made numerous large investments in various real estate limited partnerships including Polo Club. In October 1980, the Mekhjians retained Wollin Associates and Lonnie E. Wollin as their investment, tax, and financial advisers, and for accounting and legal advice with respect to their investments, paying a regular monthly fee of approximately $ 1200. Am. Cmplt. para. 17.
In 1982, the Mekhjians discussed with Wollin their desire to invest in real estate, with the goal of receiving current income from such an investment and appreciation in the value of the property. Am. Cmplt. para. 19.
Defendant Berg Harmon, and its predecessors and affiliates, have been in the business of purchasing and managing real estate and syndicating, promoting and selling securities in real estate ventures since the 1970's. Since 1980, Berg Harmon has offered more than fifty real estate limited partnerships to the public, and raised hundreds of millions of dollars. Am. Cmplt. para. 20.
Plaintiffs allege that sometime in 1984, Wollin entered into an agreement with Berg Harmon whereby Berg Harmon agreed to pay Wollin its standard sales commission for all sales of Berg Harmon securities effected by him. Am. Cmplt. para. 22.
In August 1984, on Wollin's advice, the Mekhjians invested $ 375,000 in a real estate limited partnership known as Pine Hollow Associates, Ltd. ("Pine Hollow") and in October, 1984, they invested $ 375,000 in a real estate limited partnership known as The Breakers Apartments, Ltd. ("The Breakers"), both organized and sponsored by Berg Harmon. Am. Cmplt. para. 21. Plaintiffs allege that neither Wollin nor Berg Harmon told the Mekhjians that Berg Harmon had agreed to pay Wollin its standard commissions for selling Berg Harmon securities before Wollin began recommending these investments. Am. Cmplt. para. 26.
Sometime between May and September 1985, Wollin recommended that the Mekhjians invest in securities of another Berg Harmon real estate limited partnership, Polo Club, which owned and operated a residential apartment complex near Atlanta, Georgia (the "Property"). Although Polo Club was originally intended to be syndicated in units to a number of investors, Wollin advised the Mekhjians to purchase the entire limited partnership interest and the offering was restructured accordingly. Am. Cmplt. para. 44.
In mid-September, 1985, after Visiting the Property, the Mekhjians agreed to purchase the entire limited partnership for a total of $ 5,000,000, with an initial cash payment of $ 750,000 and the delivery of an interest-bearing note in the amount of $ 4,250,000 (the "note"). Am Cmplt. para. 49. While the original subscription agreement, note and other documents were signed sometime in September, 1985, it was understood by all parties that the purchase was not then final. After the execution of the original subscription agreement, Wollin was holding the Mekhjians' initial payment and the documents executed in September pending their decision to proceed. Am. Cmplt. para. 51.
By October, 1985, the Mekhjians were expressing serious doubts about the wisdom of the Polo Club Investment. Plaintiffs allege that Wollin gave them repeated assurances as to the soundness of the investment and encouraged them to proceed with the deal. When the Mekhjians continued to express doubts, Wollin assured them by referring to a forecast of operating results for Polo Club allegedly reviewed and issued by defendant Leventhal in October, 1985. The forecast and accompanying report allegedly validated the underlying assumptions of previous forecasts and reports, notwithstanding a plethora of untrue or misleading statements that plaintiffs claim are contained in the earlier forecasts and reports. Am. Cmplt. para. 57. Wollin mailed a copy of the forecast to the plaintiffs. Am. Cmplt. paras. 58, 64, 65.
Plaintiffs contend that Wollin and executives of Berg Harmon persuaded the Mekhjians to consummate the deal based on, among other misleading claims, the assertion that Polo Club was financially sound. Plaintiffs also allege that sometime between December 17, 1985 and March 6, 1986, after the deal was finally consummated, the terms upon which the Mekhjians were to invest were altered. Specifically, plaintiffs allege that a non-interest bearing note in the principal amount of $ 5,449,828.85 was executed and "substituted" for the original interest-bearing note in the principle amount of 4,250,000. Am. Cmplt. para. 72. Although the aggregate payments under the two notes were equal, plaintiffs allege that the Second Note was substantially less favorable to the Mekhjians in the event of prepayment or default by them or bankruptcy by Polo Club.
Plaintiffs also allege that at regular intervals from the closing of the deal until the collapse, Berg Harmon mailed the Mekhjians a regular series of "updates," all falsely reporting that Polo Club was fiscally sound.
Lastly, plaintiffs claim that Primerica is also responsible for the alleged misdeeds of Berg Harmon because Primerica assertedly had the power to elect or appoint directors and officers to Berg Ventures and actually exercised general supervision and control over the business of Berg Harmon. Am. Cmplt. para. 90.
I. Applicable Legal Standard
In considering a motion to dismiss for failure to state a claim, the court "is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974). In order to prevail on a motion to dismiss, the moving party must demonstrate "beyond doubt that the [non-moving party] can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Dahlberg v. Becker, 748 F.2d 85, 88 (2d Cir. 1984), cert. denied, 470 U.S. 1084, 85 L. Ed. 2d 144, 105 ...