Even if it is true, as plaintiffs' allege, that a small percentage of the partnership's capital had been committed for the acquisition of specific properties prior to the issuance of the Prospectus, it would be impossible to attribute to defendants knowledge of flaws in properties that had not yet been acquired. In essence, plaintiffs allegations amount to a claim that defendants knew prior to purchasing or even identifying the vast majority of properties, that these as yet unknown future purchases were destined to be unprofitable -- in other words, that defendants knowingly made losing investments. This would require them to have been not merely dishonest but malicious, indeed stupidly malicious, because loss of the investors' money would foreseeably result in litigation against them. Such allegations are too preposterous to warrant the attention of the court.
Nor is the Court persuaded by plaintiffs' recycled allegations that the experience of the Hutton Defendants in allegedly similar oil and gas ventures and in the securities field is sufficient to support a strong inference that they knew or should have known that the partnership was doomed. These allegations, found in PP7, 27-28, 40-49, 53, and 57 of the Second Amended Complaint, are virtually identical to the allegations found in PP7-8, 13-15, 20, 29, 38-39 of the Amended Complaint. In rejecting these allegations, Judge Walker noted that although in some cases, such as Cosmas and Goldman, allegations of experience have been found sufficient to support a strong inference that defendants knew or should have known some fact, the fact at issue in those cases, unlike the instant case, "was reasonably susceptible of being known." Brown, 735 F. Supp. at 1204. The Court finds Judge Walker's reasoning equally applicable to the Second Amended Complaint.
C. Claims as to Secondary Liability
In the Second Amended Complaint, plaintiffs apparently attempt to state a claim for conspiracy to commit fraud. See Second. Am. Cmplt. P7. At a minimum, a claim for conspiracy to commit fraud requires: (i) an agreement between the conspirator and the wrongdoer and (ii) a wrongful act committed in furtherance of the conspiracy. See Bresson v. Thomson Mckinnon Sec., Inc., 641 F. Supp. 338, 348 (S.D.N.Y. 1986).
Citing Rich-Taubman Associates, Inc. v. Stamford Restaurant Operating Co., 587 F. Supp 875, 879 n.5 (S.D.N.Y. 1984), plaintiffs argue that courts may infer a conspiracy from indirect evidence and that this Court should do so here. However, Rich-Taubman, a case in which the court was able to infer the existence of a conspiracy from evidence of a coordinated scheme of kick backs in the construction industry, is plainly inapplicable here. As the Bresson court noted "a bold-faced allegation of a conspiracy to violate the security law . . . is plainly insufficient." Bresson, 641 F. Supp. at 349. The Second Amended Complaint is so devoid of any substantive allegation concerning what agreements, if any, were made among the defendants that the entire conspiracy allegation appears to have been little more than an afterthought on the part of plaintiffs. Accordingly, their attempt to state a claim for conspiracy is completely inadequate and fails under Rule 9(b).
2. Controlling Person Liability
In an attempt to support their claim for controlling person liability under Section 20 of the 1934 Act, plaintiffs cite this Court's decision in Borden, Inc. v. Spoor Behrins Campbell & Young, Inc., 735 F. Supp. 587 (S.D.N.Y. 1990), which emphasized that a plaintiff need not allege scienter or culpable participation, only control by status, to state a Section 20 claim. However, that decision and numerous others also state the axiomatic proposition that it is impossible to state a claim for secondary liability under Section 20 without first stating a claim for some primary violation of the security laws on the part of the controlled party. See, e.g., id. at 588; Goodman v. Shearson Lehman Bros. Inc., 698 F. Supp. 1078, 1086 (S.D.N.Y. 1988); The Limited, Inc. v. McCrory Corp., 645 F. Supp. 1038, 1046 (S.D.N.Y. 1986). Because plaintiffs have not stated a claim for any primary violation here, the claim for controlling person liability must also fail.
Plaintiffs acknowledge that there is not complete diversity with defendants. Second Amended Complaint P1. Thus, this Court cannot exercise diversity jurisdiction of over plaintiffs' remaining state law claims. Nor does this Court choose to exercise pendent jurisdiction over plaintiffs' remaining claims since the federal-law claims have been dismissed at an early stage of the litigation. See Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350, 98 L. Ed. 2d 720, 108 S. Ct. 614 (1988); United Mine Workers v. Gibbs, 383 U.S. 715, 726, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966); Mayer v. Oil Field Systems Corp., 803 F.2d 749, 756-757 (2d Cir. 1986); Goldman v. McMahan, Brafman, Morgan & Co., 706 F. Supp. 256, 263 (S.D.N.Y. 1989); Goodman v. Shearson Lehman Bros. Inc., 698 F. Supp. 1078, 1087 (S.D.N.Y. 1988); Roebuck v. Guttman, 678 F. Supp. 68, 69 (S.D.N.Y. 1988).
For the reasons stated, defendants' motion to dismiss is granted. Because plaintiffs have already had three opportunities to state their claim in accordance with Rule 9(b), the dismissal is with prejudice.
/s/ William C. Conner
United States District Judge
Dated: June 10, 1992
New York, New York