The opinion of the court was delivered by: THOMAS P. GRIESA
Diversity of citizenship is not present. Plaintiffs' federal claims are the sole basis for federal jurisdiction.
The court dismissed plaintiffs' initial complaint but granted plaintiffs leave to replead. Plaintiffs have filed an amended complaint.
There are several motions to dismiss the amended complaint. All of the defendants move to dismiss the securities fraud and RICO claims pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6). They also move to dismiss the securities fraud claims on statute of limitations grounds and to dismiss the pendent state law claims for lack of jurisdiction. The Luck defendants and the Hamby defendants also move to dismiss some of the state claims as against them for failure to state a claim.
Defendants have requested that sanctions be imposed against plaintiffs under Fed. R. Civ. P. 11. Plaintiffs have requested sanctions against defendants for making the motion to dismiss.
The securities fraud and RICO claims are dismissed. All state claims are also dismissed. The applications for sanctions are denied.
This action concerns investments in limited partnerships in oil and gas ventures in Ohio and Texas. Since 1981 there have been 13 such ventures. Twelve of the ventures were in Ohio and one was in Texas. The twelve Ohio ventures were designated successively with letters A through L. Only four of the Ohio ventures and the Texas venture are at issue here. The four Ohio ventures are referred to in the amended complaint as the 1983-G partnership, the 1984-J partnership, the 1985-K partnership and the 1985-L partnership. The Texas venture is referred to as the 1986-A partnership. All the partnerships at issue were organized under New York law.
There are five plaintiffs. Three of them acquired interests in Ohio partnerships. Plaintiff Jack Lindner allegedly invested $ 50,000 in the 1983-G partnership. Plaintiff Anneliese Lindner, his wife, invested $ 100,000 in the 1984-J partnership and $ 50,000 in the 1985-K partnership, and it is alleged that she "received" Jack Lindner's interest in the 1983-G partnership. Robyn Lindner, the Lindners' daughter but not a plaintiff, invested $ 25,000 in the 1985-L partnership and "assigned" her interest to plaintiff O & G Carriers, Inc., of which Jack Lindner is president.
Plaintiff O & G Carriers allegedly purchased a "minority working interest" in the Texas oil wells for $ 537,500. Plaintiffs Shirley Bren and Irvin Rothfarb each invested $ 37,500 in the 1986-A partnership.
Defendants Howard Smith and Smith Energy Co. are general partners of all the partnerships at issue. It is alleged that they fraudulently induced plaintiffs to invest in the partnerships. These two defendants, along with defendant Smith Energy Co. Pension Plan, will be referred to as the Smith defendants. It is not alleged that the Pension Plan had any role in getting plaintiffs to invest. Instead, the amended complaint alleges only that the Pension Plan was funded "in whole or in part from funds obtained from the oil and gas ventures."
Defendant Moore, Berson, Lifflander, Eisenberg a Mewhinney is a law firm, and defendant Berson is a member of the firm. These defendants will be referred to as the Berson defendants. The Berson defendants allegedly prepared and mailed the offering memoranda. It is also alleged that the Berson defendants "enabled" Smith to make improper expenditures with funds belonging to the partnerships and then concealed Smith's wrongdoing from plaintiffs.
Defendants Luck petroleum Corp. and John Luck, Jr., the owner and president of Luck Petroleum, will be referred to as the Luck defendants. They were involved only with the Texas venture. Luck allegedly sold working interests in the Texas oil wells to the 1986-A partnership and to O & G Carriers. It is alleged that the Luck defendants obtained a misleading report evaluating the Texas property (the Hamby report), which was included in the offering memorandum for the 1986-A partnership. They also allegedly made improper expenditures in regard to the operation of the Texas wells.
Defendant Hamby Consultant, Inc. is an engineering firm, and defendant W. R. Hamby is a petroleum engineer. These defendants will be referred to as the Hamby defendants. They prepared the Hamby report, which allegedly contained false and misleading statements. There is no allegation that the Hamby defendants made any representations directly to any of the plaintiffs. Instead, it is alleged that the Hamby defendants prepared the report and knew that it would be used in an offering memorandum.
B. The Allegations of the Amended Complaint
In regard to the Ohio partnerships, it is alleged that the offering memoranda for those partnerships each contained several false or misleading statements that induced plaintiffs to invest. It is alleged, for example, that the offering memorandum for the 1983-G partnership stated that investors in a prior Smith partnership received a 56.8% return on their investments; that prior Smith partnerships had drilled 10 to 16 wells; that prospective subscribers were required to pay in advance of the closing and a minimum amount of funds had to be raised for the offering to close; and that Smith would purchase a unit in the partnership and would receive a management fee equal to 6% of the aggregate amount contributed to partnership capital. It is alleged that in various ways these statements were false or misleading.
The allegations regarding the other Ohio offering memoranda are substantially similar to those regarding the 1983-G partnership. The dates when the offering memoranda were disseminated and when the various plaintiffs invested, however, are not provided.
Additional, it is alleged that in the period before Anneliese Lindner invested in the 1984-J and 1985-K partnerships, the Berenson and Smith defendants mailed false income statements regarding the 1983-G partnership to Jack Lindner. These statements allegedly failed to disclose the deferral of expenses for the oil wells in the 1983-G partnership and thus made the 1983-G partnership appear profitable when it was not. It is alleged that these statements were made to induce investors to invest in subsequent Smith partnerships and that Anneliese Lindner relied on the representations made to her husband in the statements.
There are also allegations that the Smith defendants sold the oil wells belonging to the 1983-G partnership and unspecified assets of the 1984-J partnership to an unidentified "affiliated party" without obtaining plaintiffs' consent or an independent appraisal of these assets' value. Berenson allegedly mailed statements to Lindner which made it appear that revenues received from the sale of one of the oil wells was income from operation of the oil wells owned by the 1983-G partnership. The amended complaint does not specify when Berenson sent the statements to Lindner or any other plaintiff.
The Texas venture took place after the Ohio ventures. O & G Carriers, Bren and Rothfarb allegedly made their investments in the Texas venture in May of 1986.
It is alleged that these investors relied upon both the partnership's offering memorandum and the Hamby report. Smith allegedly gave those documents to O & G Carriers on June 13, 1986, and the Berson firm allegedly sent them to Bren and Rothfarb on the same date. That date is after O & G Carriers, Bren and Rothfarb had allegedly invested.
Nevertheless, the amended complaint alleges that both the offering memorandum and the Hamby report contained four identical false and misleading statements: that there were six wells in operation at the Texas field; that Co had converted seven of the wells at the field from gas lift to beam pump operation, and that six of those wells were producing oil; that the Smith defendants intended to continue this conversion program; and that there would be sufficient income from the wells to convert more wells to beam pump operation. The offering memorandum also allegedly stated that the Smith defendants had been successful on 99 of the 108 wells they had previously drilled, although it also disclaimed any intention to drill additional wells at the Texas field. It is alleged that one of the six wells, well B-5, was not producing oil at the time, but otherwise the amended complaint does not explain how these statements are alleged to be false or misleading.
There are also allegations of improper expenditures related to the Texas oil field. It is alleged that the Smith and Luck defendants spent all the income from the operational wells in an unsuccessful attempt to get well B-5 to operate and spent funds belonging to the 1986-A partnership in an attempt to cause another well, well B-2, to operate, although plaintiffs allege that this expense was somehow unjustified. Plaintiffs allege that Luck benefitted from these purportedly improper expenditures because "Luck Petroleum charged a supervisory drilling rate of $ 200.00 for each of the wells, in addition to the sums for reworking wells."
It is also alleged that Luck Petroleum sent falsified or padded bills to "the Berenson firm on behalf of the 1986-A partnership or to O & G Carriers" on various dates. O & G Carriers allegedly requested substantiation of the bills, and the Luck defendants allegedly "remitted falsified American Express receipts." The amended complaint, however, does not disclose which bills were sent to the Berenson firm and which were sent to O & G Carriers, nor does it specify the amount or substance of the bills or how the bills were inflated or false. It is also not alleged that anyone -- plaintiffs, defendants or the 1986-A partnership -- paid these bills, and it is not explained how these bills in any way injured the 1986-A partnership or any of the plaintiffs.
There are allegations regarding "additional acts" by the Berenson and Berson defendants in regard to the 1986-A partnership. It is alleged that Berson and his law firm represented O & G Carriers, as well as the 1986-A partnership and the Smith defendants. In this capacity, Berson and his firm allegedly "permitted the transaction to close" despite the fact that well B-5 was not producing oil, failed to advise Bren and Rothfarb of "the facts," failed to correct the offering memorandum, and failed to disclose all the terms of the deal. It is alleged that Berenson and his accounting firm were the disbursing agent for the 1986-A partnership. Berenson and his firm allegedly approved unspecified false payments to Luck and issued income statements for the 1986-A partnership which falsely inflated the oil field's income.
Finally, there are various allegations of mismanagement of the Texas oil field by the Smith and Luck defendants.
Many of the defendants filed answers to the initial complaint. The Berenson defendants answered on June 23, 1989, the Berson defendants answered on July 10, 1989, and the Smith defendants answered on July 20, 1989.
Two defense motions were made. On October 31, 1989 the Berson defendants moved for summary judgment on all of plaintiffs' claims and for sanctions. On January 10, 1990 the Luck defendants moved to dismiss the complaint pursuant to, inter alia, Rules 9(b) and 12(b)(6).
Following a conference with the parties on March 28, 1990, the court dismissed the complaint. The court granted plaintiffs leave to replead. At the conference, the court advised plaintiffs that the amended complaint should contain specific allegations of what constituted the alleged fraud, clear and concise allegations regarding what each defendant did to commit fraud, and specific allegations of scienter for each defendant.
On May 8, 1990 plaintiffs filed the amended complaint. The amended complaint added the Hamby defendants. It is 75 pages long and contains 201 paragraphs.
Defendants have moved to dismiss the amended complaint on the grounds that, inter alia, it violates Rule 9(b) and fails to state a claim under either the federal securities laws or RICO.
Plaintiffs argue initially that those defendants who answered the initial complaint have waived their right to move against the amended complaint under Rule 9(b). This argument is meritless. The amended complaint is a wholly new document which must comply with Rule 9(b) independently.
A. Securities Fraud Claims
A complaint alleging securities fraud must comply with Rule 9(b)'s requirement that the circumstances constituting fraud be plead with particularity. Rule 9(b) requires that a fraud complaint set forth (1) precisely what statements were made in what documents or oral representations or what omissions were made; (2) the time and place of each such statement, and the person responsible for making it (or, in the case of omissions, not making it); (3) the content of such statements and the manner in which they misled the plaintiff; and (4) what the defendants obtained as a result of the fraud. O'Brien v. National Property Analysts Partners, 719 F. Supp. 222, 225 (S.D.N.Y. 1989). 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. DeVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). Additionally, a fraud complaint must allege facts from which an inference of scienter can be drawn. Gibbons v. Udaras na Gaeltachta, 549 F. Supp. 1094, 1122 (S.D.N.Y. 1982).
Plaintiffs do not specify which of the amended complaint's allegations relate to securities fraud, which relate to RICO and which relate to state law theories. It seems clear, however, that there are two securities fraud claims in regard to the Ohio ventures. First, there is a claim that the offering memorandum for each of the four partnerships contained material misrepresentations and omissions and that plaintiffs relied on the offering memoranda. With minor exceptions, the alleged misrepresentations and omissions in all four memoranda are the same. Second, there is a claim that Anneliese Lindner, when she invested in the 1984-J and 1985-K partnerships, relied upon income ...