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MORIN v. TRUPIN

January 6, 1993

SIMEON MORIN, et al., Plaintiffs,
v.
BARRY H. TRUPIN, et al., Defendants. NORMAN E. GAAR, Plaintiff, v. BARRY H. TRUPIN, et al., Defendants. MICHAEL P. ALBERTI, M.D., et al., Plaintiffs, v. BARRY E. TRUPIN, et al., Defendants.



The opinion of the court was delivered by: ROBERT W. SWEET

 Sweet D. J.

 Plaintiffs in the Alberti action (the "Alberti Plaintiffs") have moved for the court to reconsider its order of November 18, 1991 ( Morin v. Trupin, 778 F. Supp. 711, (S.D.N.Y. 1991)), dismissing Robert Abrams, Stuart Becker and Stuart Becker & Co., P.C. (the "Becker Defendants" or "Becker"), and Mintz, Fraade, and Zeiger, P.C., Frederick M. Mintz and Alan Fraade (the "Mintz Fraade Defendants") with prejudice, and for leave to amend their Second Amended Complaint by filing their proposed Third Amended Complaint. Plaintiffs in the consolidated Morin action (the "Morin Plaintiffs") also have moved for leave to amend their Second Amended Consolidated Complaint, filed December 21, 1990, dismissing Robert Abrams, Stuart Becker and Stuart Becker, P.C., with prejudice, and dismissing the Mintz Fraade defendants without prejudice. The Morin Plaintiffs have also moved for leave to file their proposed Third Amended Consolidated Complaint, pursuant to Federal Rules of Civil Procedure, Rules 15(a) and 60(b). The motion to reconsider is granted, as is the motion to amend as set forth below.

 The underlying disputes and principal parties which are the subject of these actions are recounted in prior opinions of the court, familiarity with which is assumed. See, e.g., Morin v. Trupin, 711 F. Supp. 97 (S.D.N.Y. 1989) (filed April 13, 1989); Morin v. Trupin, 728 F. Supp. 952 (S.D.N.Y. 1989) (filed December 13, 1989); Morin v. Trupin, 738 F. Supp. 98 (S.D.N.Y. 1990) (filed May 4, 1990); Morin v. Trupin, 747 F. Supp. 1051 (S.D.N.Y. 1990) (filed September 29, 1990); Morin v. Trupin, 778 F. Supp. 711 (S.D.N.Y. 1991) (filed November 18, 1991); and Morin v. Trupin, 799 F. Supp. 342 (filed July 28, 1992).

 I. THE ALBERTI ACTION

 Prior Proceedings

 The Alberti Plaintiffs filed their original complaint in May, 1990. Additional Plaintiffs were added by Amended Complaint on June 28, 1990. The Becker defendants moved to dismiss the Alberti Amended Complaint pursuant to Federal Rules of Civil Procedure, Rules 9(b) and 12(b)(6)., which motion was considered together with the complaint in Morin on September 29, 1990 ( Morin v. Trupin, 747 F. Supp. 1051 (S.D.N.Y. 1990)), and granted with leave to replead. The Alberti Plaintiffs' motion to strike Continental and Organek from the caption of their complaint and to amend their complaint was granted by order dated February 1, 1991.

 Oral argument was heard on July 1, 1992. Plaintiffs submitted reply papers after oral argument, on July 2, and defendants filed additional papers on July 10, July 13, and July 20, 1992. The motion was considered fully submitted at that time.

 Facts

 The Alberti Plaintiffs are fifty-three investors in a New York limited partnership known as the Sacramento Office Park Associates ("Sacramento Associates"), organized for the stated purpose of acquiring, owning, operating and leasing a two-building office park complex known as the Butano Buildings in Sacramento, California (the "Butano Property" or the "Sacramento Property").

 Plaintiffs allege that in making their investments in Sacramento Associates, they relied upon false and misleading representations contained in the Sacramento Office Park Associates Series Private Placement Memorandum (the "Sacramento PPM"), solicitation letters, and sales and promotional literature (collectively the "Sacramento Offering Materials") and on oral representations by various defendants. The Sacramento Offering Materials allegedly contained misrepresentations regarding the manner in which the Butano Property was acquired for syndication, the value and commercial viability of the Butano Property, the application of the proceeds of the offering of limited partnership interests in Sacramento Associates, and the basis for and availability of the tax benefits described in the Sacramento PPM. All of the Plaintiffs in the Alberti action are alleged to have purchased their limited partnership interests in Sacramento Associates by February of 1985. They allege they only discovered the fraud despite their reasonable diligence when creditors of Sacramento Associates foreclosed on the Butano Property.

 The Alberti Plaintiffs' Third Amended Complaint (hereinafter "Complaint") alleges that Barry Trupin ("Trupin"), the Rothschild Group ("Rothschild Group"), and numerous other defendants fraudulently induced the Plaintiffs to invest in the limited partnerships through allegedly unlawful securities offerings. The Rothschild Group consisted of a multitude of interconnected companies which bought and structured the syndication of interests in real estate and offered it to investors through private placement memoranda. The Plaintiffs allege, inter alia, that the value of these real estate interests was falsely inflated by transferring the properties to an ostensibly unaffiliated tax-exempt company at an inflated price and then transferring them back into the holdings of the Rothschild Group such that the properties would carry too much debt to earn a profit, as the inevitable result of the fraudulently inflated acquisition price and the mortgages designed to pay for it. Moreover, the Plaintiffs allege, the defendants knew that the promised tax deductions (based on interest payments for secondary mortgages incurred in the transfers of the Properties) would be disallowed by the I.R.S. because these mortgages were not incurred in a transfer from an unaffiliated entity and therefore would not be considered a legitimate partnership debt. Plaintiffs further allege that the I.R.S. was "wise" to Trupin and his schemes since it had already audited and disallowed several tax shelters previously offered by Trupin and Trupin-controlled companies.

 Discussion

 Standard for the Action

 Rule 15(a) states that while leave to amend a complaint after twenty days requires permission of the court, "leave shall be freely given when justice so requires." Since the prior Amended Complaint in the Alberti action was dismissed with prejudice (778 F. Supp. at 737), Mintz, Fraade and Becker state that leave should be denied here and ask for sanctions. They argue that leave to amend should be denied, chiefly on the grounds that to the extent that Plaintiffs' affidavits add new evidence, the Plaintiffs' delay in waiting until now to question the witnesses amounts to prejudicial delay.

 Plaintiffs respond by alleging that they need do not rely on either the newness or the sufficiency of the evidence to justify repleading under Rule 60(b). Instead, they argue, since this Court's November 1991 decision was a partial, nonfinal judgment under Rule 54(b), it "is subject to revision at any time before the entry of judgment adjudicating all the claims and rights and liabilities of all the parties," id., and leave to replead under Rule 54 is governed solely by the Court's discretion.

 The two rules are not as far apart as Plaintiff's Memorandum in Further Support make them seem. All dismissals in the Alberti action were with prejudice, but even if the dismissals are considered nonfinal, the standards under Rule 60(b) still apply:

 Where a party seeks to avoid the [law of the case] by reopening factual issues based upon new evidence, it is appropriate for the court to apply the standards of Rule 60(b)(2), notwithstanding that rule's inapplicability to interlocutory judgments . . . . The Court must be satisfied that the evidence 1. is in fact newly discovered; 2. could not with due diligence have been discovered earlier; 3. is not merely cumulative of impeaching; 4. is material to the issues; 5. is such that upon retrial it would probably produce a different result.

 Johns-Manville Corp. v. Guardian Industries Corp., 116 F.R.D. 97 (E.D. Mich. 1987). Regardless, therefore, of whether adjudication of the Alberti Plaintiffs' claims was final or not, the information in the Affidavits should rise to the level of "newly discovered evidence" within the meaning of Rule 60(b) before this Court will grant leave to replead a third time.

 The affidavits were executed after the defendants were ordered to answer or to otherwise plead in regard to the Second Amended Complaint in Morin. Notices to take depositions were sent (and followed by a request for default judgment) and certain defendants sought to settle.

 This delay was not due to neglect or bad faith and is appropriately based on newly discovered evidence. Leave to replead should be denied only if granting it appears futile. "If the plaintiff has at least colorable grounds for relief, justice does so require unless the plaintiff is guilty of undue delay or bad faith or unless permission to amend would unduly prejudice the other party," S.S. Silberblatt, Inc. v. East Harlem Pilot Block, 608 F.2d 28, 42 (2d Cir. 1979). Delay alone is not prejudicial to the defendants, provided they have suffered no lack of notice from it. Since all the defendants were named in the First Amended Complaint, all have been on notice of the nature of the claims against them since then. There is no allegation that the delay has foreclosed them from any action or remedy they might have. Cf Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 331, 28 L. Ed. 2d 77, 91 S. Ct. 795 (1971). "If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits. In the absence of any apparent or declared reasons . . . the leave sought should, as the rules require, by 'freely given.'" Foman v. Davis, 371 U.S. 178, 182, 83 S. Ct. 227, 230, 9 L. Ed. 2d 222 (1962).

 Plaintiffs Have Adequately Alleged All Defendants Are Insiders

 Since the Third Amended Complaint alleges fraud (violations of § 10(b) of the '34 Act and mail fraud), it must meet the particularity requirements of FRCP Rule 9(b). Rule 9(b) provides: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other condition of mind of a person may be averred generally." The rule is designed to assure defendants of "fair notice of the what the plaintiff's claim is and the grounds upon which it rests," Denny v. Barber, 576 F.2d 465, 469 (2d Cir. 1978), to enable them to protect their reputation from unjustified strike suits, and to organize their defense against justified causes of action. Plaintiffs, therefore, have an obligation to set forth precisely what statements or omissions were made in what documents or oral representations, the time and place of each such statement and the person responsible for making it, the content of such statements and the manner in which they were misleading, and what the defendants "obtained" as a result of the fraud. Beck v. Manufacturers Hanover Trust Co., 645 F. Supp. 675, 682 (S.D.N.Y. 1986), aff'd, 820 F.2d 46 (2d Cir. 1987), cert. denied, 484 U.S. 1005, 98 L. Ed. 2d 650, 108 S. Ct. 698 (1988).

 References to the Offering Materials will satisfy Rule 9(b)'s requirements as to identification of the time, place, and content of the alleged misrepresentations. Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986). If the defendants are insiders or affiliates participating in the offer of securities, the particularity requirements are somewhat relaxed. Stevens v. Equidyne Extractive Ind. 1980, 694 F. Supp. 1057, 1062 (S.D.N.Y 1988). Although partners and principals in partnerships are insiders ( Luce, supra, at 49), and affiliates, controlling stockholders, officers and directors of partnerships are insiders, "it is less clear whether attorneys or accountants may be held under this relaxed standard of pleading." DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247-49 (2d Cir. 1987). Outside attorneys and accountants will not be considered controlling persons unless they have influence over the day-to-day operations of the offering entity. See Morin, 778 F. Supp. at 718, and cases cited therein.

 Here, in contrast to earlier pleadings, the Plaintiffs allege that the professional defendants are insiders, who knowingly and consciously participated in the scheme to defraud. The Plaintiffs must therefore allege some form of immediate control over operations, or else plead sufficient connections between these defendants and the certain allegedly misleading statements which can be ascribed specifically to them to meet the particularity requirements of Rule 9(b). See Morin, 778 F. Supp. at 718. They have succeeded here only in pleading the latter.

 The Becker Defendants

 The Alberti Complaint once more states that the Becker Defendants committed primary violations of § 10(b) and Rule 10b-5 by (1) making false and misleading statements in the Sacramento PPM regarding prospective financial information and (2) soliciting prospective investors by preparing a letter reviewing the prospective financial information contained in the Sacramento Associates Private Placement Memorandum in which they failed to disclose that Barry Trupin was responsible for the Sacramento Associates Offering and that Stuart Becker & Co. had received illegal bribes and sales commissions from the Rothschild Group for each investor they successfully solicited to participate. The Alberti Complaint also alleges that the Becker Defendants aided and abetted the primary 10(b) violations of the other defendants through their solicitation of prospective investors.

 The relevant paragraphs of the Third Amended Complaint have now added:

 189. Gnesin has testified that Becker made changes in the Assumptions used in compiling the Financial Projections in order to make the Sacramento Associates Offering more marketable to his clients. Therefore, Stuart Becker & Co. and Becker knew that the Financial Projections and the Assumptions did not accurately reflect the judgment and knowledge of MHT Properties but instead (i) that the Financial Projections were false and not based on the Assumptions or Notes and (ii) that the Assumptions and Notes were likewise false.

 196. Gnesin has testified . . . [that] Becker knew that the representation that North American was unaffiliated with the Rothschild Group was false because material assumptions used in the financial projection could be changed without the consent or approval of Stuart Stern [president of North American] or North American.

 Without alleging precisely how Becker knew these assumptions were false, however, this states only a claim of negligence. The Plaintiffs merely allege that Gnesin discussed the assumptions with Stuart Becker "at length." No dates, times, or specific details which would indicate fraud instead of negligence are given. The Alberti Complaint still fails to plead any facts demonstrating that MHT Corp. did not supply the Becker Defendants with the information or that the review by the Becker Defendants did not compare the Notes and Assumptions with other information supplied by MHT Corp. that verified the accuracy of the Notes and Assumptions.

 188. The October 15, 1984 review letter represented that Stuart Becker & Co. and Becker had selected from the information and assumptions that had been provided to them by MHT Properties, the information and those assumptions they deemed significant for inclusion in the Assumptions and the Notes set forth in the Sacramento Associates Private Placement Memorandum.

 189. Gnesin has testified that Becker made changes in the Assumptions used in compiling the Financial Projections in order to make the Sacramento Associates Offering more marketable to his clients. Therefore, Stuart Becker & Co. and Becker knew that the Financial Projections and the Assumptions did not accurately reflect the judgment and knowledge of MHT Properties but instead (i) that the Financial Projections were false and not based on the Assumptions or Notes and (ii) that the Assumptions and Notes were likewise false.

 190. Specifically, the Financial Projections were based on unreasonable assumptions regarding annual increases in future income which were contradicted by the short term nature of the leases in place at the Butano Property and provided to Becker as part of the draft private placement memorandum. As disclosed by the Sacramento Associates Private Placement Memorandum, ninety percent of the tenant leases expired within two years of the offering and as local real estate surveys show, the current market place vacancy rate was over twenty percent and yet Becker projected eight percent per year revenue increases through the year 2002.

 Plaintiffs merely state that the Becker defendants "made changes" in the assumptions by forecasting a better rate of occupancy than turned out to be the case. This by itself would not be fraudulent if the Becker defendants had any reason to know that Butano Property would do either worse or better than the market vacancy rate, or thought it probable that the short-terms tenants would renew their leases. Such conclusory allegations still fail to allow an inference of scienter to be drawn, for an inference of fraud does not arise from the mere fact that an auditor reported on allegedly inaccurate data. See O'Brien v. National Property Analysts Partners, 719 F. Supp. 222, 228 (S.D.N.Y. 1989); The Limited v. McCrory Corp., 683 F. Supp. 387, 394 (S.D.N.Y. 1988).

 However, other portions of the Complaint do allege details sufficient to impute fraud to the Becker defendants. The Complaint now states:

 160. . . . Gnesin has testified that Becker employed Jeffrey Zukoff ("Zukoff") an accountant who had previously been employed by Cornick Garber & Sandler to prepare projections for Rothschild Group private placement memoranda which disclosed the audit of those earlier offerings. Gnesin testifies that Zukoff also knew at the time of his employment at Becker that Stern and North American were not "independent" of the Rothschild Group. . . .

 197. . . . Gnesin testified that Becker employed at the time of the Sacramento Offering Zukoff who knew Stern and North American were not "independent" of Trupin and the Rothschild Group, Becker knew that the transactions involving North American in the purchase and sale of the Sacramento Property were not the result of fully negotiated arms-length transactions and were not between unaffiliated parties and therefore the Wrap Around Note payable to North American did not represent a genuine obligation of Sacramento Associates and as such, the depreciation and interest deductions taken by taxpayers resulting from such debt would most likely be disallowed by the IRS. . . .

 198. . . . Gnesin testified that at or before the time of the Sacramento Offering, he discussed with Becker the negative tax audit results of prior private placements sponsored by the Rothschild Group. Further, Gnesin testified that Zukoff was fully aware of the Rothschild Group audit problems. . . .

 200. . . . Further, there was no disclosure of the fact that Becker and his affiliates, as testified to by Gnesin and Schaffer, had received commissions for selling interest in Sacramento Associates to Becker's clients and that such payments render Stuart Becker & Co. not 'independent' under accounting rules and therefore incapable of rendering the 1984 audit opinion. As a result, the 1984 audit was conducted in a manner ...


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