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ADLER v. BERG HARMON ASSOCS.

April 7, 1992

EDWARD ADLER, et al., Plaintiffs, against BERG HARMON ASSOCIATES, et al., Defendants.

Conner


The opinion of the court was delivered by: WILLIAM C. CONNER

CONNER, D.J.:

 Plaintiffs Edward Adler, et al. bring this action for damages pursuant to the Racketeering and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq, and, under the Court's pendent jurisdiction, for common law fraud, negligence, and breach of fiduciary duty against Berg Harmon Associates, et al. This matter is presently before the Court on the motion of defendants Kenneth Berg, Berg Enterprises, Inc., and Primerica Corporation (the "Berg defendants"), defendants James F. Moscowitz, David T. Smith, David T. Smith Associates, and Johnstown Management Company (the "Smith and Johnstown defendants"), *fn1" and defendants Berg Harmon Associates, Harmon Associates, Harquel Associates II, Robert T. Harmon Corporation, Robert T. Harmon, Charles N. Loccisano, Riveria Partners, Inc., Berg Harmon Lexington Properties, Berg Harmon Properties, III, Berg Harmon Southeast Consulting, Berg Ventures Inc., BH Properties Associates, BH Properties Associates II, BHS Properties, Eastern Realty Consultants, FEC Mortgage Co., First Realty Management, Metro Ventures, Harmon Envicon Associates, Southeast Realty Consultants Company, Southern Realty Consultants, and Southern Ventures Inc. (the "Harmon defendants") to dismiss plaintiffs' Second Amended Complaint pursuant to Rules 9(b) and 12(b)(6), Fed. R. Civ. P.

 BACKGROUND

 Plaintiffs filed their original Complaint on December 7, 1989. Thereafter, defendants moved to dismiss the Complaint under Rules 9(b) and 12(b)(6), Fed. R. Civ. P. Subsequently, defendants moved for partial summary judgment on plaintiffs' Section 10(b) claim based upon the one-year/three-year limitations period adopted by the Second Circuit in Ceres Partners v. GEL Assocs., 918 F.2d 349 (2d Cir. 1990). In Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991), the Supreme Court applied the one-year/three-year limitations period to claims under Section 10(b). As a result of the decision in James B. Beam Distilling Co. v. Georgia, 115 L. Ed. 2d 481, 111 S. Ct. 2439 (1991), decided on the same day as Lampf, the one-year/three-year rule became retroactively applicable to all existing cases, including the present one. In light of Lampf and Beam, plaintiffs amended their Complaint to delete the Section 10(b) claim except to the extent the securities fraud claims served as predicate acts to a RICO action. *fn2"

 For purposes of the pending motion, the Court has assumed the facts alleged in the Second Amended Complaint to be true. *fn3" Berg Harmon, a joint venture consisting of Harmon Associates and Berg Ventures, Inc., was and is a promoter and syndicator of securities in real estate limited partnerships. Kenneth Berg ("Berg") was the President and a director of Berg Ventures, Inc., as well as President and Chairman of the Board of Berg Enterprises, Inc. Robert T. Harmon ("Harmon") and Charles N. Loccisano ("Loccisano") are the general partners of Harmon Associates, as well as the principal shareholders of the Robert T. Harmon Corporation.

 Plaintiffs in this action are 71 investors who purchased securities through investments of cash and notes in certain limited partnerships (the "Berg Harmon partnerships") sponsored by defendants in reliance on Private Placement Memoranda (the "PPMs") and other offering materials prepared, issued and distributed by defendants. *fn4" Cmplt. at P4. These investments were made between 1980 and 1985. The PPMs disclosed, among other things, such matters as the purchase price of the property, the acquisition price paid by the seller, the profit on the purchase to the sponsor, the terms of the mortgages, the tax and economic risks of the investment, the illiquidity of the investment, the basis and infirmity of the financial projections, and the fees and benefits to the sponsor and its affiliates.

 Plaintiffs allege that they made their investments in reasonable reliance on the Private Placement Memoranda and other offering materials issued in connection with the limited partnership offerings, which plaintiffs allege misrepresented or failed to disclose certain material facts. Defendants allegedly created and controlled the Berg Harmon partnerships to purchase real estate at inflated prices through the use of complicated financing and mortgages, excessive fees, and fees for non-existent services. According to plaintiffs, defendants engaged in an elaborate "Ponzi" or pyramid scheme whereby defendants utilized a portion of the fees and profits earned to "prop up" earlier partnerships so that the illusion of successful past performance would allow the promoters to continue in the syndication of new partnerships. Cmplt. at PP13, 14. Plaintiffs assert that the "scheme" allowed the organizers and sponsors to abandon the partnerships when further syndications became impossible or impracticable, leaving the partnerships and limited partners without equity or capital to sustain the partnerships' properties. Cmplt. at P14(e).

 The Complaint includes allegations that the Berg Harmon partnerships' Memoranda and other sales materials misrepresented that substantial economic benefits would flow to the limited partners from an investment in the partnership, when in fact defendants knew that such benefits would either not materialize at all or would inure only to defendants' benefit. Cmplt. at PP25 (a), (b), (e), (g), (i), (j), (k), (q) and 27 (e). The Complaint further alleges that (1) the PPMs were misleading in that the financial projections and risk estimates contained therein were without economic or financial support (Cmplt. at P25 (c), (d), (n), (o), 27(g), (h), and (u)); (2) defendants misrepresented or failed to disclose the fact that the terms of some of the transactions were economically disadvantageous to the partnership (Cmplt. at P27(m), (n), (o), (p), and (t)); (3) the PPMs failed to disclose or misrepresented various information investors needed to evaluate the present and future values of the properties purchased by the partnership (Cmplt. at PP27(i), (j), (k), (l), (q), (r), (s), and 25(p)); and (4) the PPMs failed to disclose the payment of certain commissions and fees to accountants and other financial advisors and that absent such compensation these advisors would not have recommended an investment in the partnership (Cmplt. at P27(a)).

 According to plaintiffs, this is not a case of a high-risk investment going sour due to market forces or unanticipated changes in the tax laws. Rather, it involves a sophisticated, predetermined fraud where defendants knew that investors in the Berg Harmon partnerships had no possibility of realizing a profit from their investments.

 DISCUSSION

 Failure to Plead Fraud with Particularity

 Fed. R. Civ. P. Rule 9(b) states that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." *fn5" The specificity requirement of Rule 9(b) has been found to serve several purposes: "(1) to provide a defendant with fair notice of the plaintiff's claim, (2) to protect a defendant from harm to his or her reputation or goodwill, and (3) to reduce the number of strike suits." Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). While Rule 9(b) allows "conditions of mind" to be averred generally, plaintiffs must nonetheless allege facts which give rise to a strong inference that defendants possessed the requisite fraudulent intent. Cosmas, 886 F.2d at 12-13.

 To be sufficient under Rule 9(b), a complaint must adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiff contends the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements. See Goldman v. Belden, 754 F.2d 1059, 1069-70 (2d Cir. 1985). 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.

 In the instant action, the allegedly fraudulent representations are attributed to the "sponsors of the partnerships." *fn6" The allegedly fraudulent omissions are attributed simply to "defendants." For example, paragraph 25 of the Complaint alleges that the "sponsors of the partnerships" made the following material misrepresentations of fact, including:

 (a) the investor limited partners would receive substantial economic benefits (in addition to tax benefits) from partnership operations and the anticipated sale of the underlying properties when, in fact, defendants knew such benefits were highly unlikely to materialize and that any proceeds from the sale of the properties would be diverted to the defendants . . . .

 There is no indication as to who made this alleged representation, when it was made, to which plaintiffs it was made, or whether it was written or oral. Plaintiffs allege only that the seventeen misrepresentations listed in paragraph 25 of the Complaint "are contained in substance or in fact in all of the offering memoranda or accompanying sales literature." *fn7"

  It is true that if defendants are insiders or affiliates participating in the offer, a reference to the offering memorandum is sufficient to identify the "time, place, content and speaker" requirement of Rule 9(b). Ouaknine v. MacFarlane, 897 F.2d 75, 80 (2d Cir. 1990). "Furthermore, no specific connection between fraudulent representations in the Offering Memorandum and particular defendants is necessary where [] defendants are insiders or affiliates participating in the offer of the securities in question." Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986).

 However, this case involves numerous offering memoranda and numerous defendants, many of whom had no involvement in the offer or sale of limited partnership interests or who were involved with only one of the partnerships. "While it is clear that general partners offering limited partnerships are insiders for purposes of Rule 9(b), the standard is less clear with respect to other types of defendants . . . ." Friedman v. Arizona World Nurseries Ltd. Partnership, 730 F. Supp. 521, 531 (S.D.N.Y. 1990), aff'd, 927 F.2d 594 (2d Cir. 1991); see also DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1248-49 (2d Cir. 1987) (dismissing action against four corporate defendants since they were only affiliates or subsidiaries of the principal defendant, and there was no allegation that they participated in preparing the offering memorandum; dismissing action against some individual defendants because there was no allegation that they were directors or officers when the Offering Memorandum was issued or the specified class of plaintiffs bought their limited partnership interests). Defendants in this case include not only general partners, but also managers of the properties and various affiliates of the general partners. While plaintiffs do allege that "each of the individuals and entities identified above were controlling persons of each other," such an allegation is insufficient to establish that each was an "insider," since there is no allegation that any of them controlled the content of the misrepresentations and omissions in the offering memoranda. Cf. I. Meyer Pincus & Assocs. v. Oppenheimer & Co., 1989 U.S. Dist. LEXIS 3124, 1989 Fed. Sec. L. Rep. (CCH) P94,366, at 92,406 (S.D.N.Y. March 30, 1989) (identification of defendants solely on the basis their corporate affiliation does not sufficiently connect any of them to the issuance of allegedly fraudulent statements in the prospectus); but cf. Kane v. Wichita Oil Income Fund, 1991 WL 233266, at *3 (S.D.N.Y. 1991) ("insider" status found where complaint adequately described the role of each defendant and specifically alleged the controlling role of all defendants in preparing the offering memorandum).

 Accordingly, the Court concludes that the allegations attributing the alleged wrongdoing to "defendants" or to "the sponsors of the partnership" are insufficient under Rule 9(b). "Plaintiffs cannot satisfy Rule 9(b) by masking the lack of factual allegations against each defendant through broad allegations which combine the acts of several defendants to create the impression that all engaged in every aspect of the alleged fraud." O'Brien v. National Property Analysts Partners, 719 F. Supp. 222, 229 (S.D.N.Y. 1989).

 Failure to State a Claim

 In considering a motion to dismiss the complaint under Fed. R. Civ. P. Rule 12(b)(6), 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 S. Ct. 1845 (1985). A court must accept as true the factual allegations accompanying the complaint and draw all reasonable inferences in favor of the non-moving party. See Cosmas v. Hassett, 886 F.2d 8, 12 (2d Cir. 1989).

 A. RICO

 RICO authorizes a private cause of action for "any person injured in his business or property by reason of a violation of Section 1962." 18 U.S.C. § 1964(c). To state a claim for damages based upon a violation of Section 1962, a plaintiff must allege the following elements: "(1) that the defendant (2) through the commission of two or more acts (3) constituting a 'pattern' (4) of 'racketeering activity' (5) directly or indirectly invests in, or maintains an interest in, or participates in (6) an 'enterprise' (7) the activities of which affect interstate or foreign commerce." Moss v. Morgan Stanley Inc., 719 F.2d 5, 17 (2d Cir. 1983), cert. denied, 465 U.S. 1025, 104 S. Ct. 1280, 79 L. Ed. 2d 684 ...


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